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V. Lending — TILA


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  • 1. V. Lending — TILA Truth in Lending Act1 regulation and provide guidance on the electronic delivery of disclosures consistent with the E-Sign Act.3 Introduction Format of Regulation Z The Truth in Lending Act (TILA), 15 USC 1601 et seq., was enacted on May 29, 1968, as title I of the Consumer Credit The disclosure rules creditors must follow differ depending on Protection Act (Pub. L. 90-321). The TILA, implemented by whether the creditor is offering open-end credit, such as credit Regulation Z (12 CFR 226), became effective July 1, 1969. cards or home-equity lines, or closed-end credit, such as car loans or mortgages. The TILA was first amended in 1970 to prohibit unsolicited credit cards. Additional major amendments to the TILA and Subpart A (§226.1 through §226.4) of the regulation provides Regulation Z were made by the Fair Credit Billing Act of general information that applies to open-end and closed-end 1974, the Consumer Leasing Act of 1976, the Truth in Lending credit transactions. It sets forth definitions and stipulates Simplification and Reform Act of 1980, the Fair Credit and which transactions are covered and which are exempt from the Charge Card Disclosure Act of 1988, the Home Equity Loan regulation. It also contains the rules for determining which Consumer Protection Act of 1988. fees are finance charges. Regulation Z also was amended to implement §1204 of the Subpart B (§226.5 through §226.16) of the regulation contains Competitive Equality Banking Act of 1987, and in 1988, to rules for disclosures for home-equity loans, credit and charge include adjustable rate mortgage loan disclosure requirements. card accounts, and other open-end credit. All consumer leasing provisions were deleted from Regulation Subpart B also covers rules for resolving billing errors, Z in 1981 and transferred to Regulation M (12 CFR 213). calculating annual percentage rates, credit balances, and The Home Ownership and Equity Protection Act of 1994 advertising open-end credit. Special rules apply to credit amended TILA. The law imposed new disclosure requirements card transactions only, such as certain prohibitions on the and substantive limitations on certain closed-end mortgage issuance of credit cards and restrictions on the right to offset loans bearing rates or fees above a certain percentage or a cardholder’s indebtedness. Additional special rules apply amount. The law also included new disclosure requirements to home-equity lines of credit, such as certain prohibitions to assist consumers in comparing the costs and other material against closing accounts or changing account terms. considerations involved in a reverse mortgage transaction Subpart C (§226.17 through §226.24) includes provisions for and authorized the Federal Reserve Board to prohibit specific closed-end credit. Residential mortgage transactions, demand acts and practices in connection with mortgage transactions. loans, and installment credit contracts, including direct loans Regulation Z was amended2 to implement these legislative by banks and purchased dealer paper, are included in the changes to TILA. closed-end credit category. Subpart C also contains disclosure The TILA amendments of 1995 dealt primarily with tolerances rules for regular and variable rate loans, refinancings and for real estate secured credit. Regulation Z was amended assumptions, credit balances, calculating annual percentage on September 14, 1996, to incorporate changes to the TILA. rates, and advertising closed-end credit. Specifically, the revisions limit lenders’ liability for disclosure Subpart D (§226.25 through §226.30), which applies to both errors in real estate secured loans consummated after open-end and closed-end credit, sets forth the duty of creditors September 30, 1995. The Economic Growth and Regulatory to retain evidence of compliance with the regulation. It also Paperwork Reduction Act of 1996 further amended TILA. The clarifies the relationship between the regulation and state law, amendments were made to simplify and improve disclosures and requires creditors to set a cap for variable rate transactions related to credit transactions. secured by a consumer’s dwelling. The Electronic Signatures in Global and National Commerce Subpart E (§226.31 through §226.34) applies to certain Act (the E-Sign Act), 15 U.S.C. 7001 et seq., was enacted home mortgage transactions including high-cost, closed-end in 2000 and did not require implementing regulations. On mortgages and reverse mortgages. It requires additional November 9, 2007, the amendments to Regulation Z and disclosures and provides limitations for certain home mortgage the official staff commentary were issued to simplify the transactions having rates or fees above a certain percentage or amount, and prohibits specific acts and practices in connection 1 This section fully incorporates the examination procedures issued under with those loans. Subpart E also includes disclosure DSC RD Memo 08-030: Regulation Z and M: Amended Interagancy 3 Examination Procedures. 72 FR 63462, November 9, 2007. These amendments took effect December 10, 2007, with a mandatory compliance date of October 1, 2 2008. Further technical amendments were issued December 14, 2007, 60 FR 15463, March 24, 1995, and 66 FR 65604, December 20, 2001 with a January 14, 2008 effective date and an October 1, 2008 mandatory compliance date: 72 FR 71058. FDIC Compliance Manual — June 2009 V-1.1
  • 2. V. Lending — TILA requirements for reverse mortgage transactions (open-end and considerations under Regulation Z are addressed in more closed-end credit). detail in the commentary to Regulation Z. For example, broad coverage considerations are included under §226.1(c) of the The appendices to the regulation set forth model forms and regulation and relevant definitions appear in §226.2. clauses that creditors may use when providing open-end and closed-end disclosures. The appendices contain detailed Exempt Transactions §226.3 rules for calculating the APR for open-end credit (appendix The following transactions are exempt from Regulation Z: F) and closed-end credit (appendixes D and J). The last two appendixes (appendixes K and L) provide total annual loan • Credit extended primarily for a business, commercial, or cost rate computations and assumed loan periods for reverse agricultural purpose; mortgage transactions. • Credit extended to other than a natural person (including credit to government agencies or instrumentalities); Official staff interpretations of the regulation are published in a commentary that is normally updated annually in March. • Credit in excess of $25 thousand not secured by real or Good faith compliance with the commentary protects creditors personal property used as the principal dwelling of the from civil liability under the act. In addition, the commentary consumer; includes mandates, which are not necessarily explicit in • Public utility credit; Regulation Z, on disclosures or other actions required of • Credit extended by a broker-dealer registered with the creditors. It is virtually impossible to comply with Regulation Securities and Exchange Commission (SEC) or the Z without reference to and reliance on the commentary. Commodity Futures Trading Commission (CFTC), involving securities or commodities accounts; NOTE: The following narrative does not encompass all the sections of Regulation Z, but rather highlights areas that have • Home fuel budget plans; and caused the most problems with the calculation of the finance • Certain student loan programs. charge and the calculation of the annual percentage rate. NOTE: If a credit card is involved, generally exempt credit Subpart A—General (e.g., business or agricultural purpose credit) is still subject to requirements that govern issuance of credit cards and liability Purpose of the TILA and Regulation Z for their unauthorized use. Credit cards must not be issued on The Truth in Lending Act is intended to ensure that credit an unsolicited basis and, if a credit card is lost or stolen, the terms are disclosed in a meaningful way so consumers can card holder must not be held liable for more than $50.00 for compare credit terms more readily and knowledgeably. Before the unauthorized use of the card. its enactment, consumers were faced with a bewildering array of credit terms and rates. It was difficult to compare loans When determining whether credit is for consumer purposes, because they were seldom presented in the same format. the creditor must evaluate all of the following: Now, all creditors must use the same credit terminology and expressions of rates. In addition to providing a uniform system • Any statement obtained from the consumer describing the for disclosures, the act is designed to: purpose of the proceeds. ° For example, a statement that the proceeds will be used • Protect consumers against inaccurate and unfair credit for a vacation trip would indicate a consumer purpose. billing and credit card practices; ° If the loan has a mixed-purpose (e.g., proceeds will • Provide consumers with rescission rights; be used to buy a car that will be used for personal and • Provide for rate caps on certain dwelling-secured loans; business purposes), the lender must look to the primary and purpose of the loan to decide whether disclosures are • Impose limitations on home equity lines of credit and necessary. A statement of purpose from the consumer certain closed-end home mortgages. will help the lender make that decision. ° A checked box indicating that the loan is for a business The TILA and Regulation Z do not, however, tell financial purpose, absent any documentation showing the institutions how much interest they may charge or whether intended use of the proceeds, could be insufficient they must grant a consumer a loan. evidence that the loan did not have a consumer purpose. Summary of Coverage Considerations • The consumer's primary occupation and how it relates to §226.1 & §226.2 the use of the proceeds. The higher the correlation between Lenders must carefully consider several factors when deciding the consumer's occupation and the property purchased whether a loan requires Truth in Lending disclosures or is from the loan proceeds, the greater the likelihood that the subject to other Regulation Z requirements. The coverage V-1.2 FDIC Compliance Manual — June 2009
  • 3. V. Lending — TILA Coverage Considerations Under Regulation Z Is the Regulation Z does not apply, except for the rules of issuance and unauthorized use purpose of liability for credit cards. (Exempt credit includes loans with a business or agricultural the credit for personal, No purpose, and certain student loans. Credit extended to acquire or improve rental family, or household property that is not owner-occupied is considered business-purpose credit.) use? Yes Is the consumer credit No Regulation Z does not apply. (Credit extended to a land trust is deemed to be credit extended to a extended to a consumer.) consumer? The institution is not a “creditor” and Regulation Z does not apply unless at least one of the following tests is met: Yes 1. The institution extends consumer credit regularly, and a. The obligation is initially payable to the institution and b. The obligation is either payable by written agreement in more than four Is the installments or is subject to a finance charge consumer credit No 2. The insitution is a card issuer that extends closed-end credit that is either payable extended by a by written agreement in more than four installments or is subject to a finance creditor? charge 3. The institution is not a card issuer, but it imposes a finance charge at the time of honoring a credit card. (Note: All persons, including non-creditors, must comply with the advertising provisions of Regulation Z.) Yes Is the loan or credit plan secured by real property Is the amount financed Regulation Z does not apply, but may apply later if the loan is No No or by the consumer’s or credit limit $25,000 or refinanced for $25,000 or less. If the principal dwelling is taken as principal dwelling? less? collateral after consummation, recission rights will apply, and in the case of open-end credit, billing disclosures and other provisions of Regulation Z will apply. Yes Yes Regulation Z applies FDIC Compliance Manual — June 2009 V-1.3
  • 4. V. Lending — TILA loan has a business purpose. For example, proceeds used of what must, must not, or need not be included in the to purchase dental supplies for a dentist would indicate a disclosed finance charge (§226.4(b)). business purpose. Accuracy Tolerances (Closed-End Credit) • Personal management of the assets purchased from §226.18(d) & §226.23(h) proceeds. The lower the degree of the borrower's personal involvement in the management of the investment or Regulation Z provides finance charge tolerances for legal enterprise purchased by the loan proceeds, the less likely accuracy that should not be confused with those provided in the loan will have a business purpose. For example, money the TILA for reimbursement under regulatory agency orders. borrowed to purchase stock in an automobile company by As with disclosed APRs, if a disclosed finance charge were an individual who does not work for that company would legally accurate, it would not be subject to reimbursement. indicate a personal investment and a consumer purpose. Under TILA and Regulation Z, finance charge disclosures for • The size of the transaction. The larger the size of the open-end credit must be accurate since there is no tolerance transaction, the more likely the loan will have a business for finance charge errors. However, both TILA and Regulation purpose. For example, if the loan is for a $5,000,000 real Z permit various finance charge accuracy tolerances for estate transaction, that might indicate a business purpose. closed-end credit. • The amount of income derived from the property acquired by the loan proceeds relative to the borrower's total income. Tolerances for the finance charge in a closed-end transaction The lesser the income derived from the acquired property, are generally $5 if the amount financed is less than or equal the more likely the loan will have a consumer purpose. For to $1,000 and $10 if the amount financed exceeds $1,000. example, if the borrower has an annual salary of $100,000 Tolerances for certain transactions consummated on or after and receives about $500 in annual dividends from the September 30, 1995 are noted below. acquired property, that would indicate a consumer purpose. • Credit secured by real property or a dwelling (closed-end All five factors must be evaluated before the lender can credit only): conclude that disclosures are not necessary. Normally, no ° The disclosed finance charge is considered accurate if one factor, by itself, is sufficient reason to determine the it does not vary from the actual finance charge by more applicability of Regulation Z. In any event, the financial than $100. institution may routinely furnish disclosures to the consumer. Disclosure under such circumstances does not control whether ° Overstatements are not violations. the transaction is covered, but can assure protection to the • Rescission rights after the three-business-day rescission financial institution and compliance with the law. period (closed-end credit only): ° The disclosed finance charge is considered accurate if Determination of Finance Charge and APR it does not vary from the actual finance charge by more Finance Charge (Open-End and Closed-End Credit) than one-half of 1 percent of the credit extended. §226.4 ° The disclosed finance charge is considered accurate The finance charge is a measure of the cost of consumer credit if it does not vary from the actual finance charge by represented in dollars and cents. Along with APR disclosures, more than 1 percent of the credit extended for the initial the disclosure of the finance charge is central to the uniform and subsequent refinancings of residential mortgage credit cost disclosure envisioned by the TILA. transactions when the new loan is made at a different financial institution. (This excludes high cost mortgage The finance charge does not include any charge of a type loans subject to §226.32, transactions in which there are payable in a comparable cash transaction. Examples of charges new advances, and new consolidations.) payable in a comparable cash transaction may include taxes, title, license fees, or registration fees paid in connection with • Rescission rights in foreclosure: an automobile purchase. ° The disclosed finance charge is considered accurate if it does not vary from the actual finance charge by more Finance charges include any charges or fees payable directly than $35. or indirectly by the consumer and imposed directly or ° Overstatements are not considered violations. indirectly by the financial institution either as an incident to or as a condition of an extension of consumer credit. The ° The consumer can rescind if a mortgage broker fee is finance charge on a loan always includes any interest charges not included as a finance charge. and often, other charges. Regulation Z includes examples, NOTE: Normally, the finance charge tolerance for a applicable both to open-end and closed-end credit transactions, rescindable transaction is either 0.5 percent of the credit V-1.4 FDIC Compliance Manual — June 2009
  • 5. V. Lending — TILA transaction or, for certain refinancings, 1 percent of the Instructions for the Finance Charge Chart (page V-1.6) credit transaction. However, in the event of a foreclosure, the The finance charge initially includes any charge that is, or will consumer may exercise the right of rescission if the disclosed be, connected with a specific loan. Charges imposed by third finance charge is understated by more than $35. parties are finance charges if the creditor requires use of the third party. Charges imposed on the consumer by a settlement See the “Finance Charge Tolerances” charts within these agent are finance charges only if the creditor requires the examination procedures for help in determining appropriate particular services for which the settlement agent is charging finance charge tolerances. the borrower and the charge is not otherwise excluded from Calculating the Finance Charge (Closed-End Credit) the finance charge. One of the more complex tasks under Regulation Z is Immediately below the finance charge definition, the chart determining whether a charge associated with an extension presents five captions applicable to determining whether a loan of credit must be included in, or excluded from, the disclosed related charge is a finance charge. finance charge. The finance charge initially includes any charge that is, or will be, connected with a specific loan. The first caption is charges always included. This category Charges imposed by third parties are finance charges if the focuses on specific charges given in the regulation or financial institution requires use of the third party. Charges commentary as examples of finance charges. imposed by settlement or closing agents are finance charges if the bank requires the specific service that gave rise to the The second caption, charges included unless conditions are charge and the charge is not otherwise excluded. The “Finance met, focuses on charges that must be included in the finance Charge Tolerances” charts (pages V-1.14 to V-1.16) briefly charge unless the creditor meets specific disclosure or other summarize the rules that must be considered. conditions to exclude the charges from the finance charge. Prepaid Finance Charges §226.18(b) The third caption, conditions, focuses on the conditions that need to be met if the charges identified to the left of the A prepaid finance charge is any finance charge paid separately conditions are permitted to be excluded from the finance to the financial institution or to a third party, in cash or by charge. Although most charges under the second caption may check before or at closing, settlement, or consummation of a be included in the finance charge at the creditor’s option, transaction, or withheld from the proceeds of the credit at any third party charges and application fees (listed last under the time. third caption) must be excluded from the finance charge if the Prepaid finance charges effectively reduce the amount of funds relevant conditions are met. However, inclusion of appraisal available for the consumer’s use, usually before or at the time and credit report charges as part of the application fee is the transaction is consummated. optional. Examples of finance charges frequently prepaid by consumers The fourth caption, charges not included, identifies fees or are borrower’s points, loan origination fees, real estate charges that are not included in the finance charge under construction inspection fees, odd days’ interest (interest conditions identified by the caption. If the credit transaction is attributable to part of the first payment period when that period secured by real property or the loan is a residential mortgage is longer than a regular payment period), mortgage guarantee transaction, the charges identified in the column, if they are insurance fees paid to the Federal Housing Administration, bona fide and reasonable in amount, must be excluded from private mortgage insurance (PMI) paid to such companies the finance charge. For example, if a consumer loan is secured as the Mortgage Guaranty Insurance Company (MGIC), in by a vacant lot or commercial real estate, any appraisal fees non-real-estate transactions, and credit report fees. connected with the loan must not be included in the finance charge. Precomputed Finance Charges The fifth caption, charges never included, lists specific A precomputed finance charge includes, for example, interest charges provided by the regulation as examples of those added to the note amount that is computed by the add-on, that automatically are not finance charges (e.g., fees for discount, or simple interest methods. If reflected in the face unanticipated late payments). amount of the debt instrument as part of the consumer’s obligation, finance charges that are not viewed as prepaid Annual Percentage Rate Definition §226.22 (Closed-End finance charges are treated as precomputed finance charges Credit) that are earned over the life of the loan. Credit costs may vary depending on the interest rate, the amount of the loan and other charges, the timing and amounts of advances, and the repayment schedule. The APR, which FDIC Compliance Manual — June 2009 V-1.5
  • 6. V. Lending — TILA Finance Charge Chart Finance Charge – Dollar cost of Consumer Credit: It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as a condition of or incident to the extension of credit. Charges Not Included Charges Included Charges Always Conditions (Residential Mortgage Charges Never Unless Conditions are included (Any loan) transactions and loans Included Met secured by real estate) Premiums for credit life, Insurance not required, Fees for title insurance, Charges payable in a Interest A&H, or loss of income disclosures are made, title examinations, comparable cash insurance and consumer authorizes property survey, etc. transaction Fees for preparing loan Coverage not required, documents, mortgages, Fees for unanticiparted Transaction fees Debt cancellation fees disclosures are made, and other settlement late payments and consumer authorizes documents Amounts required to be Consumer selects Loan origination fees Premiums for property or payed into escrow, if not Overdraft fees not agreed insurance company and Consumer points liability insurance otherwise included in the to in writing disclosures are made finance charge Insurer waives right of Premiums for vendor’s Credit guarantee subrogation, consumer single interest (VSI) Notary fees Seller’s points insurance premiums selects insurance company insurance and disclosures are made Charges imposed on the Security interest charges The fee is for lien purposes, creditor for purchasing the (filing fees), insurance in prescribed by law, payable Pre-consummation flood Participation in loan, which are passed on lieu of filing fees and to a third public official and and pest inspection fees membership fees to the consumer certain notary fees is itemized and disclosed Use of the third party is Discount offered by seller to Discounts for inducing Charges imposed by third not required to obtain Appraisal and credit induce payment by cash or payment by means other parties loan and creditor does report fees other means not involving than credit not retain the charge the use of a credit card Creditor does not require Interest forfeited as a Charges imposed by third and does not retain the Mortgage broker fees result of interest party closing agents fee for the particular reduction required by law service Other examples: Fee for Application fees, if charged preparing TILA disclosures, Charges absorbed by the Appraisal and credit to all applicants, are not real estate construction loan creditor as a cost of doing inspection fees, fees for report fees finance charges. Application business post-consummation tax or fees may include appraisal flood service policy, required or credit report fees. credit life insurance charges V-1.6 FDIC Compliance Manual — June 2009
  • 7. V. Lending — TILA must be disclosed in nearly all consumer credit transactions, amount is $100,000, but the amount financed would be is designed to take into account all relevant factors and to $100,000 less the $1,000 loan fee, or $99,000. provide a uniform measure for comparing the cost of various • The finance charge, which is not necessarily equivalent to credit transactions. the total interest amount. The APR is a measure of the cost of credit, expressed as ° If the consumer must pay a $25 credit report fee for a nominal yearly rate. It relates the amount and timing of an auto loan, the fee must be included in the finance value received by the consumer to the amount and timing of charge. The finance charge in that case is the sum payments made. The disclosure of the APR is central to the of the interest on the loan (i.e., interest generated by uniform credit cost disclosure envisioned by the TILA. the application of a percentage rate against the loan amount) plus the $25 credit report fee. The value of a closed-end credit APR must be disclosed as ° If the consumer must pay a $25 credit report fee for a single rate only, whether the loan has a single interest rate, a home improvement loan secured by real property, a variable interest rate, a discounted variable interest rate, the credit report fee may be excluded from the finance or graduated payments based on separate interest rates (step charge. The finance charge in that case would be only rates), and it must appear with the segregated disclosures. the interest on the loan. Segregated disclosures are grouped together and do not ° Interest, which is defined by state or other federal law, contain any information not directly related to the disclosures is not defined by Regulation Z. required under §226.18. • The payment schedule, which does not necessarily include Since an APR measures the total cost of credit, including costs only principal and interest (P + I) payments. such as transaction charges or premiums for credit guarantee ° If the consumer borrows $2,500 for a vacation trip at insurance, it is not an “interest” rate, as that term is generally 14 percent simple interest per annum and repays that used. APR calculations do not rely on definitions of interest amount with 25 equal monthly payments beginning in state law and often include charges, such as a commitment one month from consummation of the transaction, the fee paid by the consumer, that are not viewed by some state monthly P + I payment will be $115.87, if all months usury statutes as interest. Conversely, an APR might not are considered equal, and the amount financed would include a charge, such as a credit report fee in a real property be $2,500. If the consumer’s payments are increased transaction, which some state laws might view as interest by $2.00 a month to pay a non-financed $50 loan fee for usury purposes. Furthermore, measuring the timing of during the life of the loan, the amount financed would value received and of payments made, which is essential if remain at $2,500 but the payment schedule would be APR calculations are to be accurate, must be consistent with increased to $117.87 a month, the finance charge would parameters under Regulation Z. increase by $50, and there would be a corresponding increase in the APR. This would be the case whether or The APR is often considered to be the finance charge not state law defines the $50 loan fee as interest. expressed as a percentage. However, two loans could require the same finance charge and still have different APRs because ° If the loan above has 55 days to the first payment and of differing values of the amount financed or of payment the consumer prepays interest at consummation ($24.31 schedules. For example, the APR is 12 percent on a loan with to cover the first 25 days), the amount financed would an amount financed of $5,000 and 36 equal monthly payments be $2,500 - $24.31, or $2,475.69. Although the amount of $166.07 each. It is 13.26 percent on a loan with an amount financed has been reduced to reflect the consumer’s financed of $4,500 and 35 equal monthly payments of $152.18 reduced use of available funds at consummation, the each and final payment of $152.22. In both cases the finance time interval during which the consumer has use of charge is $978.52. The APRs on these example loans are not the $2,475.69, 55 days to the first payment, has not the same because an APR does not only reflect the finance changed. Since the first payment period exceeds the charge. It relates the amount and timing of value received by limitations of the regulation’s minor irregularities the consumer to the amount and timing of payments made. provisions (see §226.17(c)(4)), it may not be treated as regular. In calculating the APR, the first payment period The APR is a function of: must not be reduced by 25 days (i.e., the first payment period may not be treated as one month). • The amount financed, which is not necessarily equivalent Financial institutions may, if permitted by state or other law, to the loan amount. If the consumer must pay at closing precompute interest by applying a rate against a loan balance a separate 1 percent loan origination fee (prepaid finance using a simple interest, add-on, discount or some other charge) on a $100,000 residential mortgage loan, the loan method, and may earn interest using a simple interest accrual system, the Rule of 78’s (if permitted by law) or some other FDIC Compliance Manual — June 2009 V-1.7
  • 8. V. Lending — TILA method. Unless the financial institution’s internal interest Subpart B—Open-End Credit earnings and accrual methods involve a simple interest rate The following is not a complete discussion of the open-end based on a 360-day year that is applied over actual days (even credit requirements in the Truth in Lending Act. Instead, the that is important only for determining the accuracy of the information provided below is offered to clarify otherwise payment schedule), it is not relevant in calculating an APR, confusing terms and requirements. Refer to §226.5 through since an APR is not an interest rate (as that term is commonly §226.16 and related commentary for a more thorough used under state or other law). Since the APR normally needs understanding of the Act. not rely on the internal accrual systems of a bank, it always may be computed after the loan terms have been agreed upon Finance Charge (Open-End Credit) §226.6(a) (as long as it is disclosed before actual consummation of the Each finance charge imposed must be individually itemized. transaction). The aggregate total amount of the finance charge need not be Special Requirements for Calculating the Finance Charge disclosed. and APR Determining the Balance and Computing the Proper calculation of the finance charge and APR are of Finance Charge primary importance. The regulation requires that the terms The examiner must know how to compute the balance to “finance charge” and “annual percentage rate” be disclosed which the periodic rate is applied. Common methods used more conspicuously than any other required disclosure. The are the previous balance method, the daily balance method, finance charge and APR, more than any other disclosures, and the average daily balance method, which are described as enable consumers to understand the cost of the credit and to follows: comparison shop for credit. A creditor’s failure to disclose those values accurately can result in significant monetary • Previous balance method. The balance on which the damages to the creditor, either from a class action lawsuit or periodic finance charge is computed is based on the balance from a regulatory agency’s order to reimburse consumers for outstanding at the start of the billing cycle. The periodic violations of law. rate is multiplied by this balance to compute the finance charge. NOTE: If an annual percentage rate or finance charge is disclosed incorrectly, the error is not, in itself, a violation of • Daily balance method. A daily periodic rate is applied to the regulation if: either the balance on each day in the cycle or the sum of the balances on each of the days in the cycle. If a daily • The error resulted from a corresponding error in a periodic rate is multiplied by the balance on each day in the calculation tool used in good faith by the financial billing cycle, the finance charge is the sum of the products. institution. If the daily periodic rate is multiplied by the sum of all the • Upon discovery of the error, the financial institution daily balances, the result is the finance charge. promptly discontinues use of that calculation tool for • Average daily balance method. The average daily balance is disclosure purposes. the sum of the daily balances (either including or excluding • The financial institution notifies the Federal Reserve Board current transactions) divided by the number of days in in writing of the error in the calculation tool. the billing cycle. A periodic rate is then multiplied by the average daily balance to determine the finance charge. If When a financial institution claims a calculation tool was used the periodic rate is a daily one, the product of the rate in good faith, the financial institution assumes a reasonable multiplied by the average balance is multiplied by the degree of responsibility for ensuring that the tool in question number of days in the cycle. provides the accuracy required by the regulation. For example, the financial institution might verify the results obtained using In addition to those common methods, financial institutions the tool by comparing those results to the figures obtained by have other ways of calculating the balance to which the using another calculation tool. The financial institution might periodic rate is applied. By reading the financial institution's also verify that the tool, if it is designed to operate under the explanation, the examiner should be able to calculate the actuarial method, produces figures similar to those provided by balance to which the periodic rate was applied. In some cases, the examples in appendix J to the regulation. The calculation the examiner may need to obtain additional information from tool should be checked for accuracy before it is first used and the financial institution to verify the explanation disclosed. periodically thereafter. Any inability to understand the disclosed explanation should be discussed with management, who should be reminded of Regulation Z's requirement that disclosures be clear and conspicuous. V-1.8 FDIC Compliance Manual — June 2009
  • 9. V. Lending — TILA When a balance is determined without first deducting all Finance Charge Resulting from credits and payments made during the billing cycle, that fact Two or More Periodic Rates and the amount of the credits and payments must be disclosed. Some financial institutions use more than one periodic rate in computing the finance charge. For example, one rate may If the financial institution uses the daily balance method and apply to balances up to a certain amount and another rate applies a single daily periodic rate, disclosure of the balance to balances more than that amount. If two or more periodic to which the rate was applied may be stated as any of the rates apply, the financial institution must disclose all rates and following: conditions. The range of balances to which each rate applies • A balance for each day in the billing cycle. The daily also must be disclosed. It is not necessary, however, to break periodic rate is multiplied by the balance on each day and the finance charge into separate components based on the the sum of the products is the finance charge. different rates. • A balance for each day in the billing cycle on which the Annual Percentage Rate (Open-End Credit) balance in the account changes. The finance charge is Accuracy Tolerance §226.14 figured by the same method as discussed previously, but the statement shows the balance only for those days on which The disclosed annual percentage rate (APR) on an open-end the balance changed. credit account is accurate if it is within one-eighth of 1 percentage point of the APR calculated under Regulation Z. • The sum of the daily balances during the billing cycle. The balance on which the finance charge is computed is the Determination of APR sum of all the daily balances in the billing cycle. The daily The regulation states two basic methods for determining periodic rate is multiplied by that balance to determine the the APR in open-end credit transactions. The first involves finance charge. multiplying each periodic rate by the number of periods in a • The average daily balance during the billing cycle. If year. This method is used for disclosing: this is stated, however, the financial institution must explain somewhere on the periodic statement or in an • The corresponding APR in the initial disclosures; accompanying document that the finance charge is or may • The corresponding APR on periodic statements; be determined by multiplying the average daily balance by the number of days in the billing cycle, rather than by • The APR in early disclosures for credit card accounts; multiplying the product by the daily periodic rate. • The APR in early disclosures for home-equity plans; If the financial institution uses the daily balance method, but • The APR in advertising; and applies two or more daily periodic rates, the sum of the daily • The APR in oral disclosures. balances may not be used. Acceptable ways of disclosing the The corresponding APR is prospective. In other words, it does balances include: not involve any particular finance charge or periodic balance. • A balance for each day in the billing cycle; The second method is the quotient method, used in computing • A balance for each day in the billing cycle on which the the APR for periodic statements. The quotient method reflects balance in the account changes; or the annualized equivalent of the rate that was actually applied • Two or more average daily balances. If the average during a cycle. This rate, also known as the historical rate, daily balances are stated, the financial institution shall will differ from the corresponding APR if the creditor applies indicate on the periodic statement or in an accompanying minimum, fixed, or transaction charges to the account during document that the finance charge is or may be determined the cycle. by multiplying each of the average daily balances by the number of days in the billing cycle (or if the daily If the finance charge is determined by applying one or more rate varies, by multiplying the number of days that the periodic rates to a balance, and does not include any of the applicable rate was in effect), multiplying each of the charges just mentioned, the financial institution may compute results by the applicable daily periodic rate, and adding the the historical rate using the quotient method. In that method, products together. the financial institution divides the total finance charge for the cycle by the sum of the balances to which the periodic In explaining the method used to find the balance on which the rates were applied and multiplies the quotient (expressed as a finance charge is computed, the financial institution need not percentage) by the number of cycles in a year. reveal how it allocates payments or credits. That information may be disclosed as additional information, but all required Alternatively, the financial institution may use the method information must be clear and conspicuous. for computing the corresponding APR. In that method, the FDIC Compliance Manual — June 2009 V-1.9
  • 10. V. Lending — TILA financial institution multiplies each periodic rate by the 1. (Total finance charge / amount of applicable number of periods in one year. If the finance charge includes a balance)5 x 12 = APR6 minimum, fixed, or transaction charge, the financial institution B. Daily periodic rates must use the appropriate variation of the quotient method. 1. (Total finance charge / amount of applicable When transaction charges are imposed, the financial institution balance)7 X 365 = APR8 should refer to appendix F for computational examples. 2. The following may be used if at least a portion of the The regulation also contains a computation rule for small finance charge is determined by the application of a finance charges. If the finance charge includes a minimum, daily periodic rate. If not, use the formula above. fixed, or transaction charge, and the total finance charge for a. (Total finance charge / average daily balance) x the cycle does not exceed 50 cents, the financial institution 12 = APR9 may multiply each applicable periodic rate by the number of or periods in a year to compute the APR. b. (Total finance charge / sum of balances) x 365 = Optional calculation methods also are provided for accounts APR10 involving daily periodic rates. (§226.14(d)) C. Monthly and daily periodic rates 1. If the finance charge imposed during the billing Brief Outline for Open-End Credit APR Calculations on cycle does not exceed $.50 for a monthly or longer Periodic Statements billing cycles (or pro rata part of $.50 for a billing NOTE: Assume monthly billing cycles for each of the cycle shorter than monthly), the APR may be calculations below. calculated by multiplying the monthly rate by 12 or the daily rate by 365. I. APR when finance charge is determined solely by applying one or more periodic rates: III. If the total finance charge included a charge related to a A. Monthly periodic rates: specific transaction (such as a cash advance fee), even if 1. Monthly rate x 12 = APR the total finance charge also included any other minimum, or fixed, or other charge not calculated using a periodic rate, then the monthly and daily APRs are calculated as follows: 2. (Total finance charge / applicable balance4) x 12 = (total finance charge / the greater of: the transaction APR amounts that created the transaction fees or the sum of This calculation may be used when different rates the balances and other amounts on which a finance charge apply to different balances. was imposed during the billing cycle11) X number of billing B. Daily periodic rates: cycles in a year (12) = APR12 1. Daily rate x 365 = APR or 2. (Total finance charge / average daily balance) x 12 = APR 5 If zero, no APR can be determined. The amount of applicable balance is or the balance calculation method and may include the average daily balance, adjusted balance, or previous balance method. 3. (Total finance charge / sum of balances) x 365 = 6 APR Loan fees, points, or similar finance charges that related to the opening of the account must not be included in the calculation of the APR. II. APR when finance charge includes a minimum, fixed, or 7 If zero, no APR can be determined. The amount of applicable balance is other charge that is not calculated using a periodic rate (and the balance calculation method and may include the average daily balance, does not include charges related to a specific transaction, adjusted balance, or previous balance method. like cash advance fees): 8 Loan fees, points, or similar finance charges that related to the opening of A. Monthly periodic rates: the account must not be included in the calculation of the APR. 9 Loan fees, points, or similar finance charges that related to the opening of the account must not be included in the calculation of the APR. 10 Loan fees, points, or similar finance charges that related to the opening of the account must not be included in the calculation of the APR. 11 The sum of the balances may include the average daily balance, adjusted balance, or previous balance method. Where a portion of the finance 4 If zero, no APR can be determined. The amount of applicable balance is charge is determined by application of one or more daily periodic rates, the balance calculation method and may include the average daily balance, sum of the balances also means the average of daily balances. adjusted balance, or previous balance method. 12 Cannot be less than the highest periodic rate applied, expressed as an APR. V-1.10 FDIC Compliance Manual — June 2009
  • 11. V. Lending — TILA Subpart C—Closed-End Credit or dates of advances are unknown (even if some of them The following is not a complete discussion of the closed-end are known), the financial institution may, at its option, use credit requirements in the Truth in Lending Act. Instead, the appendix D to the regulation to make calculations and information provided below is offered to clarify otherwise disclosures. The finance charge and payment schedule confusing terms and requirements. Refer to §226.17 through obtained through appendix D may be used with volume §226.24 and related commentary for a more thorough one of the Federal Reserve Board’s APR tables or with any understanding of the Act. other appropriate computation tool to determine the APR. If the financial institution elects not to use appendix D, or if Finance Charge (Closed-End Credit) §226.17(a) appendix D cannot be applied to a loan (e.g., appendix D does not apply to a combined construction-permanent loan if the The aggregate total amount of the finance charge must payments for the permanent loan begin during the construction be disclosed. Each finance charge imposed need not be period), the financial institution must make its estimates under individually itemized and must not be itemized with the §226.17(c)(2) and calculate the APR using multiple advance segregated disclosures. formulas. Annual Percentage Rate (Closed-End Credit) §226.22 On loans involving a series of advances under an agreement Accuracy Tolerances to extend credit up to a certain amount, a financial institution The disclosed APR on a closed-end transaction is accurate for: may treat all of the advances as a single transaction or disclose each advance as a separate transaction. If advances • Regular transactions (which include any single advance are disclosed separately, disclosures must be provided before transaction with equal payments and equal payment each advance occurs, with the disclosures for the first advance periods, or an irregular first payment period and/or a first provided before consummation. or last irregular payment), if it is within one-eighth of 1 percentage point of the APR calculated under Regulation Z In a transaction that finances the construction of a dwelling (§226.22(a)(2)). that may or will be permanently financed by the same financial • Irregular transactions (which include multiple advance institution, the construction-permanent financing phases may transactions and other transactions not considered regular), be disclosed in one of three ways listed below. if it is within one-quarter of 1 percentage point of the APR • As a single transaction, with one disclosure combining calculated under Regulation Z (§226.22(a)(3)). both phases. • Mortgage transactions, if it is within one-eighth of 1 • As two separate transactions, with one disclosure for each percentage point for regular transactions or one-quarter phase. of 1 percentage point for irregular transactions and: • As more than two transactions, with one disclosure for each 1. The rate results from the disclosed finance charge; and advance and one for the permanent financing phase. 2. The disclosed finance charge would be considered If two or more disclosures are furnished, buyer's points or accurate under §226.18(d)(1) or §226.23(g) or (h) similar amounts imposed on the consumer may be allocated (§226.22(a)(4)). among the transactions in any manner the financial institution NOTE: There is an additional tolerance for mortgage loans chooses, as long as the charges are not applied more than when the disclosed finance charge is calculated incorrectly but once. In addition, if the financial institution chooses to give is considered accurate under §226.18(d)(1) or §226.23(g) or two sets of disclosures and the consumer is obligated for both (h) (§226.22(a)(5)). construction and permanent phases at the outset, both sets of disclosures must be given to the consumer initially, before Construction Loans §226.17(c)(6) and Appendix D consummation of each transaction occurs. Construction and certain other multiple advance loans pose special problems in computing the finance charge and APR. If the creditor requires interest reserves for construction loans, In many instances, the amount and dates of advances are not special appendix D rules apply that can make the disclosure predictable with certainty since they depend on the progress calculations quite complicated. The amount of interest reserves of the work. Regulation Z provides that the APR and finance included in the commitment amount must not be treated as a charge for such loans may be estimated for disclosure. prepaid finance charge. At its option, the financial institution may rely on the If the lender uses appendix D for construction-only loans representations of other parties to acquire necessary with required interest reserves, the lender must estimate information (for example, it might look to the consumer for construction interest using the interest reserve formula in the dates of advances). In addition, if either the amounts FDIC Compliance Manual — June 2009 V-1.11
  • 12. V. Lending — TILA appendix D. The lender's own interest reserve values must be For example, a financial institution may calculate disclosures completely disregarded for disclosure purposes. using a financial calculator based on a 360-day year with 30-day months, when, in fact, it collects interest by applying a If the lender uses appendix D for combination construction- factor of 1/365 of the annual interest rate to actual days. permanent loans, the calculations can be much more complex. Appendix D is used to estimate the construction interest, Disclosure violations may occur, however, when a financial which is then measured against the lender's contractual interest institution applies a daily interest factor based on a 360-day reserves. year to the actual number of days between payments. In those situations, the financial institution must disclose the higher If the interest reserve portion of the lender's contractual values of the finance charge, the APR, and the payment commitment amount exceeds the amount of construction schedule resulting from this practice. interest estimated under appendix D, the excess value is considered part of the amount financed if the lender has For example, a 12 percent simple interest rate divided by contracted to disburse those amounts whether they ultimately 360 days results in a daily rate of .033333 percent. If no are needed to pay for accrued construction interest. If the charges are imposed except interest, and the amount financed lender will not disburse the excess amount if it is not needed to is the same as the loan amount, applying the daily rate on pay for accrued construction interest, the excess amount must a daily basis for a 365-day year on a $10,000 one year, be ignored for disclosure purposes. single payment, unsecured loan results in an APR of 12.17 percent (.033333% x 365 = 12.17%), and a finance charge Calculating the Annual Percentage Rate §226.22 of $1,216.67. There would be a violation if the APR were The APR must be determined under one of the following: disclosed as 12 percent or if the finance charge were disclosed as $1,200 (12% x $10,000). • The actuarial method, which is defined by Regulation Z and explained in appendix J to the regulation. However, if there are no other charges except interest, the • The U.S. Rule, which is permitted by Regulation Z and application of a 360-day year daily rate over 365 days on a briefly explained in appendix J to the regulation. The U.S. regular loan would not result in an APR in excess of the one Rule is an accrual method that seems to have first surfaced eighth of one percentage point APR tolerance unless the officially in an early nineteenth century United States nominal interest rate is greater than 9 percent. For irregular Supreme Court case, Story v. Livingston (38 U.S. 359). loans, with one-quarter of 1 percentage point APR tolerance, the nominal interest rate would have to be greater than 18 Whichever method is used by the financial institution, the percent to exceed the tolerance. rate calculated will be accurate if it is able to "amortize" the amount financed while it generates the finance charge Variable Rate Information §226.18(f) under the accrual method selected. Financial institutions also If the terms of the legal obligation allow the financial may rely on minor irregularities and accuracy tolerances in institution, after consummation of the transaction, to increase the regulation, both of which effectively permit somewhat the APR, the financial institution must furnish the consumer imprecise, but still legal, APRs to be disclosed. with certain information on variable rates. Graduated payment mortgages and step-rate transactions without a variable 360-Day and 365-Day Years §226.17(c)(3) rate feature are not considered variable rate transactions. In Confusion often arises over whether to use the 360-day or addition, variable rate disclosures are not applicable to rate 365-day year in computing interest, particularly when the increases resulting from delinquency, default, assumption, finance charge is computed by applying a daily rate to an acceleration, or transfer of the collateral. unpaid balance. Many single payment loans or loans payable on demand are in this category. There are also loans in this Some of the more important transaction-specific variable rate category that call for periodic installment payments. disclosure requirements under §226.18 follow. Regulation Z does not require the use of one method of • Disclosures for variable rate loans must be given for the interest computation in preference to another (although state full term of the transaction and must be based on the terms law may). It does, however, permit financial institutions to in effect at the time of consummation. disregard the fact that months have different numbers of days • If the variable rate transaction includes either a seller when calculating and making disclosures. This means financial buydown that is reflected in a contract or a consumer institutions may base their disclosures on calculation tools buydown, the disclosed APR should be a composite rate that assume all months have an equal number of days, even if based on the lower rate for the buydown period and the their practice is to take account of the variations in months to rate that is the basis for the variable rate feature for the collect interest. remainder of the term. V-1.12 FDIC Compliance Manual — June 2009
  • 13. V. Lending — TILA • If the initial rate is not determined by the index or formula payment schedule. It is a prepaid finance charge that must be used to make later interest rate adjustments, as in a reflected as a reduction in the value of the amount financed. discounted variable rate transaction, the disclosed APR must reflect a composite rate based on the initial rate for At the creditor’s option, the payment schedule may include as long as it is applied and, for the remainder of the term, amounts beyond the amount financed and finance charge (e.g., the rate that would have been applied using the index or certain insurance premiums or real estate escrow amounts such formula at the time of consummation (i.e., the fully indexed as taxes added to payments). However, when calculating the rate). APR, the creditor must disregard such amounts. ° If a loan contains a rate or payment cap that would If the obligation is a renewable balloon payment instrument prevent the initial rate or payment, at the time of the that unconditionally obligates the financial institution to renew adjustment, from changing to the fully indexed rate, the the short-term loan at the consumer’s option or to renew the effect of that rate or payment cap needs to be reflected loan subject to conditions within the consumer’s control, the in the disclosures. payment schedule must be disclosed using the longer term of ° The index at consummation need not be used if the the renewal period or periods. The long-term loan must be contract provides a delay in the implementation of disclosed with a variable rate feature. changes in an index value (e.g., the contract indicates that future rate changes are based on the index value If there are no renewal conditions or if the financial institution in effect for some specified period, like 45 days before guarantees to renew the obligation in a refinancing, the the change date). Instead, the financial institution may payment schedule must be disclosed using the shorter balloon use any rate from the date of consummation back to payment term. The short-term loan must be disclosed as a the beginning of the specified period (e.g., during the fixed rate loan, unless it contains a variable rate feature during previous 45-day period). the initial loan term. • If the initial interest rate is set according to the index or Amount Financed §226.18(b) formula used for later adjustments, but is set at a value as of a date before consummation, disclosures should be Definition based on the initial interest rate, even though the index may The amount financed is the net amount of credit extended for have changed by the consummation date. the consumer’s use. It should not be assumed that the amount financed under the regulation is equivalent to the note amount, For variable-rate loans that are not secured by the consumer’s proceeds, or principal amount of the loan. The amount principal dwelling or that are secured by the consumer’s financed normally equals the total of payments less the finance principal dwelling but have a term of one year or less, charge. creditors must disclose the circumstances under which the rate may increase, any limitations on the increase, the effect of To calculate the amount financed, all amounts and charges an increase, and an example of the payment terms that would connected with the transaction, either paid separately or result from an increase. §226.18(f)(1). included in the note amount, must first be identified. Any prepaid, precomputed, or other finance charge must then be For variable-rate consumer loans secured by the consumer’s determined. principal dwelling and having a maturity of more than one year, creditors must state that the loan has a variable-rate The amount financed must not include any finance charges. feature and that disclosures were previously given. If finance charges have been included in the obligation (either (§226.18(f)(2)) Extensive disclosures about the loan program prepaid or precomputed), they must be subtracted from the are provided when consumers apply for such a loan face amount of the obligation when determining the amount (§226.19(b), and throughout the loan term when the rate or financed. The resulting value must be reduced further by an payment amount is changed (§226.20(c)). amount equal to any prepaid finance charge paid separately. The final resulting value is the amount financed. Payment Schedule §226.18(g) The disclosed payment schedule must reflect all components When calculating the amount financed, finance charges of the finance charge. It includes all payments scheduled to (whether in the note amount or paid separately) should not repay loan principal, interest on the loan, and any other finance be subtracted more than once from the total amount of an charge payable by the consumer after consummation of the obligation. Charges not in the note amount and not included transaction. in the finance charge (e.g., an appraisal fee paid separately in cash on a real estate loan) are not required to be disclosed However, any finance charge paid separately before or at under Regulation Z and must not be included in the amount consummation (e.g., odd days’ interest) is not part of the financed. FDIC Compliance Manual — June 2009 V-1.13
  • 14. V. Lending — TILA Closed-End Credit: Finance Charge Accuracy Tolerances Is this a closed-end Yes credit TILA No claim asserting recission rights? Finance charge tolerance is $35. An Is the Is the Did the overstated finance recission claim transaction transaction No Yes Yes charge is not a defense to foreclosure secured by real estate or originate before considered a action? dwelling? 9/30/1995? violation. No Yes No Finance charge Is the tolerance is $200 for No transaction a understatements. refinancing? Overstatements are not considered a violation. Yes Finance charge tolerance is one-half of one percent of the Finance charge Is the loan amount or tolerance is $100 for transaction a $100, whichever is Yes understatements. An high-cost greater. An overstated finance mortgage overstated finance charge is not loan?* charge is not considered a considered a violation. violation. No Does the Yes refinancing involve a consolidation or new advance? The finance charge shall be considered accurate if it is not more than $5 above or below the exact finance charge in a No transaction involving an amount Finance charge tolerance financed of $1,000 or less, or not more is one percent of the than $10 above or below the exact loan amount or $100, finance charge in a transaction involving whichever is greater. an amount financed of more than An overstated finance charge $1,000. is not considered a violation. *See 15 USC 160 (aa) and 12 CFR 226.32 V-1.14 FDIC Compliance Manual — June 2009
  • 15. V. Lending — TILA Closed-End Credit: Accuracy and Reimbursement Tolerances for Understated Finance Charges Is the loan secured by real estate or a dwelling? No Yes Is the amount financed greater than $1,000? Is the disclosed finance charge No Yes understated by more than $100 (or $200 if the loan Is the disclosed finance Is the disclosed finance originated before 9/30/1995)? charge understated by charge understated by more than $5? more than $10? No Yes Yes No No Yes FC violation No violation FC violation No violation FC violation Is the loan term greater than 10 years? No Yes Is the loan a regular loan? No Yes Is the disclosed FC plus the FC Is the disclosed FC plus the FC reimbursement tolerance reimbursement tolerance (based on a one-quarter of one (based on a one-eighth of one percentage point APR tolerance) percentage point APR tolerance) less than the correct FC? less than the correct FC? Yes No No Yes No reimbursement Subject to reimbursement FDIC Compliance Manual — June 2009 V-1.15
  • 16. V. Lending — TILA Closed-End Credit: Overstated Finance Charge Accuracy Tolerances Is the loan secured by real estate or a dwelling? No Yes Is the amount financed No violation greater than $1,000? No Yes Is the disclosed FC less $5 Is the disclosed FC less greater than the correct $10 greater than the FC? correct FC? No Yes No Yes No violation FC violation No violation FC violation V-1.16 FDIC Compliance Manual — June 2009
  • 17. V. Lending — TILA Closed-End Credit: Accuracy Tolerances for Overstated APRs Is this a “regular’ loan? (12 CFR 226, footnote 46) No Yes Is the disclosed APR greater than the correct APR by more Is the disclosed APR greater than the correct APR by more than one-quarter of one percentafge point? than one-eighth of one percentafge point? Yes No No Yes No violation Is the loan secured by real estate or a dwelling? No Yes APR violation Is the finance charge disclosed greater than the correct finance charge? Yes No Was the finance charge disclosure error the APR violation cause of the APR disclosure error? No Yes APR violation No violation FDIC Compliance Manual — June 2009 V-1.17
  • 18. V. Lending — TILA Closed-End Credit: Accuracy and Reimbursement Tolerances for Understated APRs Is the loan a “regular’ loan? No Yes Is the disclosed APR understated by more than Is the disclosed APR understated by more than one-quarter of one percentage point? one-eighth of one percentage point? Yes No No Yes No violation Is the loan secured by real estate or a dwelling? No Yes APR violation Is the finance charge understated by more than • $100 (if the loan originated on or after • 9/30/1995) $200 (if the loan originated before 9/30/1995)? No Yes Was the finance charge disclosure error the APR violation cause of the APR disclosure error? No Yes APR violation No violation Is the loan term greater than 10 years? No Yes Is the loan a “regular’ loan? No Yes Is the disclosed APR understated by more than Is the disclosed APR understated by more than one-quarter of one percentage point? one-eighth of one percentage point? Yes No No Yes No reimbursement Subject to reimbursement V-1.18 FDIC Compliance Manual — June 2009
  • 19. V. Lending — TILA In a multiple advance construction loan, proceeds placed $5,010. The $5,010 loan principal does not include the $400 in a temporary escrow account and awaiting disbursement precomputed finance charge. The loan principal is increased in draws to the developer are not considered part of the by other amounts that are financed which are not part of the amount financed until actually disbursed. Thus, if the finance charge (the $25 credit report fee) and reduced by any entire commitment amount is disbursed into the lender’s prepaid finance charges (the $50 loan fee and the $10 service escrow account, the lender must not base disclosures on the charge withheld from loan proceeds) to arrive at the same assumption that all funds were disbursed immediately, even if amount financed of $5,010 + $25 - $50- $10 = $4,975. the lender pays interest on the escrowed funds. Refinancings §226.20 Required Deposit §226.18(r) When an obligation is satisfied and replaced by a new A required deposit, with certain exceptions, is one that the obligation to the original financial institution (or a holder financial institution requires the consumer to maintain as a or servicer of the original obligation) and is undertaken by condition of the specific credit transaction. It can include a the same consumer, it must be treated as a refinancing for compensating balance or a deposit balance that secures the which a complete set of new disclosures must be furnished. A loan. The effect of a required deposit is not reflected in the refinancing may involve the consolidation of several existing APR. Also, a required deposit is not a finance charge since it obligations, disbursement of new money to the consumer, or is eventually released to the consumer. A deposit that earns the rescheduling of payments under an existing obligation. at least 5 percent per year need not be considered a required In any form, the new obligation must completely replace the deposit. earlier one to be considered a refinancing under the regulation. The finance charge on the new disclosure must include any Calculating the Amount Financed unearned portion of the old finance charge that is not credited A consumer signs a note secured by real property in the to the existing obligation. (§226.20(a)) amount of $5,435. The note amount includes $5,000 in proceeds disbursed to the consumer, $400 in precomputed The following transactions are not considered refinancings interest, $25 paid to a credit reporting agency for a credit even if the existing obligation is satisfied and replaced by a report, and a $10 service charge. Additionally, the consumer new obligation undertaken by the same consumer: pays a $50 loan fee separately in cash at consummation. The • A renewal of an obligation with a single payment of consumer has no other debt with the financial institution. The principal and interest or with periodic interest payments amount financed is $4,975. and a final payment of principal with no change in the The amount financed may be calculated by first subtracting all original terms. finance charges included in the note amount ($5,435 - $400 - • An APR reduction with a corresponding change in the $10 = $5,025). The $25 credit report fee is not a finance charge payment schedule. because the loan is secured by real property. The $5,025 is • An agreement involving a court proceeding. further reduced by the amount of prepaid finance charges paid • Changes in credit terms arising from the consumer's default separately, for an amount financed of $5,025 - $50 = $4,975. or delinquency. The answer is the same whether finance charges included in the obligation are considered prepaid or precomputed finance • The renewal of optional insurance purchased by the charges. consumer and added to an existing transaction, if required disclosures were provided for the initial purchase of the The financial institution may treat the $10 service charge as insurance. an addition to the loan amount and not as a prepaid finance However, even if it is not accomplished by the cancellation charge. If it does, the loan principal would be $5,000. The of the old obligation and substitution of a new one, a new $5,000 loan principal does not include either the $400 or transaction subject to new disclosures results if the financial the $10 precomputed finance charge in the note. The loan institution: principal is increased by other amounts that are financed which are not part of the finance charge (the $25 credit report fee) • Increases the rate based on a variable rate feature that was and reduced by any prepaid finance charges (the $50 loan fee, not previously disclosed; or not the $10 service charge) to arrive at the amount financed of $5,000 + $25 - $50 = $4,975. • Adds a variable rate feature to the obligation. If, at the time a loan is renewed, the rate is increased, the Other Calculations increase is not considered a variable rate feature. It is the cost The financial institution may treat the $10 service charge as a of renewal, similar to a flat fee, as long as the new rate remains prepaid finance charge. If it does, the loan principal would be fixed during the remaining life of the loan. If the original FDIC Compliance Manual — June 2009 V-1.19
  • 20. V. Lending — TILA debt is not canceled in connection with such a renewal, the than a specified accuracy tolerance. That authorization extends regulation does not require new disclosures. Also, changing to unintentional errors, including isolated violations (e.g., the index of a variable rate transaction to a comparable an error that occurred only once or errors, often without a index is not considered adding a variable rate feature to the common cause, that occurred infrequently and randomly). obligation. Under certain circumstances, the TILA requires federal Subpart D—Miscellaneous regulatory agencies to order financial institutions to reimburse Civil Liability §130 consumers when understatement of the APR or finance charge involves: If a creditor fails to comply with any requirements of the TILA, other than with the advertising provisions of chapter 3, • Patterns or practices of violations (e.g., errors that it may be held liable to the consumer for: occurred, often with a common cause, consistently or frequently, reflecting a pattern with a specific type or types • Actual damage, and of consumer credit). • The cost of any legal action together with reasonable • Gross negligence. attorney's fees in a successful action. • Willful noncompliance intended to mislead the person to If it violates certain requirements of the TILA, the creditor whom the credit was extended. also may be held liable for either of the following: Any proceeding that may be brought by a regulatory agency • In an individual action, twice the amount of the finance against a creditor may be maintained against any assignee charge involved, but not less than $100 or more than of the creditor if the violation is apparent on the face of the $1,000. However, in an individual action relating to a disclosure statement or other documents assigned, except closed-end credit transaction secured by real property or a where the assignment was involuntary. (§131) dwelling, twice the amount of the finance charge involved, but not less than $200 or more than $2,000. Relationship to State Law §111 • In a class action, such amount as the court may allow. The State laws providing rights, responsibilities, or procedures total amount of recovery, however, cannot be more than for consumers or financial institutions for consumer credit $500,000 or 1 percent of the creditor's net worth, whichever contracts may be: is less. • Preempted by federal law; Civil actions that may be brought against a creditor also • Appropriate under state law and not preempted by federal may be maintained against any assignee of the creditor if the law; or violation is apparent on the face of the disclosure statement or • Substituted in lieu of TILA and Regulation Z requirements. other documents assigned, except where the assignment was involuntary. State law provisions are preempted to the extent that they contradict the requirements in the following chapters of the A creditor that fails to comply with TILA’s requirements for TILA and the implementing sections of Regulation Z: high-cost mortgage loans may be held liable to the consumer for all finance charges and fees paid to the creditor. Any • Chapter 1, "General Provisions," which contains definitions subsequent assignee is subject to all claims and defenses and acceptable methods for determining finance charges that the consumer could assert against the creditor, unless and annual percentage rates. For example, a state law the assignee demonstrates that it could not reasonably have would be preempted if it required a bank to include in the determined that the loan was subject to §226.32. finance charge any fees that the federal law excludes, such as seller's points. Criminal Liability §112 • Chapter 2, "Credit Transactions," which contains disclosure Anyone who willingly and knowingly fails to comply with any requirements, rescission rights, and certain credit card requirement of the TILA will be fined not more than $5,000 or provisions. For example, a state law would be preempted if imprisoned not more than one year, or both. it required a bank to use the terms "nominal annual interest rate" in lieu of "annual percentage rate." Administrative Actions §108 • Chapter 3, "Credit Advertising," which contains consumer The TILA authorizes federal regulatory agencies to require credit advertising rules and annual percentage rate oral financial institutions to make monetary and other adjustments disclosure requirements. to the consumers’ accounts when the true finance charge or APR exceeds the disclosed finance charge or APR by more Conversely, state law provisions may be appropriate and are not preempted under federal law if they call for, V-1.20 FDIC Compliance Manual — June 2009
  • 21. V. Lending — TILA without contradicting chapters 1, 2, or 3 of the TILA or Subpart E—Special Rules for Certain Home the implementing sections of Regulation Z, either of the Mortgage Transactions following: General Rules §226.31 • Disclosure of information not otherwise required. A state The requirements and limitations of this subpart are in law that requires disclosure of the minimum periodic addition to and not in lieu of those contained in other subparts payment for open-end credit, for example, would not be of Regulation Z. The disclosures for high cost and reverse preempted because it does not contradict federal law. mortgage transactions must be made clearly and conspicuously in writing, in a form that the consumer may keep. • Disclosures more detailed than those required. A state law that requires itemization of the amount financed, for Certain Closed-End Home Mortgages §226.32 example, would not be preempted, unless it contradicts federal law by requiring the itemization to appear with The requirements of this section apply to a consumer credit the disclosure of the amount financed in the segregated transaction secured by the consumer’s principal dwelling, in closed-end credit disclosures. which either: The relationship between state law and chapter 4 of the • The APR at consummation will exceed by more than 8 TILA ("Credit Billing") involves two parts. The first part percentage points for first-lien mortgage loans, or by more is concerned with §161 (correction of billing errors) and than 10 percentage points for subordinate-lien mortgage §162 (regulation of credit reports) of the act; the second part loans, the yield on Treasury securities having comparable addresses the remaining sections of chapter 4. periods of maturity to the loan’s maturity (as of the 15th day of the month immediately preceding the month in State law provisions are preempted if they differ from the which the application for the extension of credit is received rights, responsibilities, or procedures contained in §161 or by the creditor); or §162. An exception is made, however, for state law that allows • The total points and fees (see definition below) payable a consumer to inquire about an account and requires the bank by the consumer at or before loan closing will exceed the to respond to such inquiry beyond the time limits provided by greater of eight percent of the total loan amount or $480 federal law. Such a state law would not be preempted for the for the calendar year 2002. (This dollar amount is adjusted extra time period. annually based on changes in the Consumer Price Index. See staff commentary to 32(a)(1)(ii) for a historical list of State law provisions are preempted if they result in violations dollar amount adjustments.) (§226.32(a)(1)) of §163 through §171 of chapter 4. For example, a state law that allows the card issuer to offset the consumer's credit-card Exemptions: indebtedness against funds held by the card issuer would be preempted, since it would violate 12 CFR 226.12(d). • Residential mortgage transactions (generally purchase Conversely, a state law that requires periodic statements to be money mortgages), sent more than 14 days before the end of a free-ride period • Reverse mortgage transactions subject to §226.33, or would not be preempted, since no violation of federal law is • Open-end credit plans subject to Subpart B of Regulation involved. Z. A bank, state, or other interested party may ask the Federal Points and Fees include the following: Reserve Board to determine whether state law contradicts chapters 1 through 3 of the TILA or Regulation Z. They also • All items required to be disclosed under §226.4(a) and (b), may ask if the state law is different from, or would result in except interest or the time-price differential; violations of, chapter 4 of the TILA and the implementing • All compensation paid to mortgage brokers; and provisions of Regulation Z. If the board determines that a • All items listed in §226.4(c)(7), other than amounts held disclosure required by state law (other than a requirement for future taxes, unless all of the following conditions are relating to the finance charge, annual percentage rate, or met: the disclosures required under §226.32) is substantially the same in meaning as a disclosure required under the act or ° The charge is reasonable Regulation Z, generally creditors in that state may make the ° The creditor receives no direct or indirect compensation state disclosure in lieu of the federal disclosure. in connection with the charge, and ° The charge is not paid to an affiliate of the creditor; and • Premiums or other charges, paid at or before closing whether paid in cash or financed, for optional credit life, FDIC Compliance Manual — June 2009 V-1.21
  • 22. V. Lending — TILA accident, health, or loss-of-income insurance, and other Additional Defenses Against Civil Actions debt-protection or debt cancellation products written in The financial institution may avoid liability in a civil action connection with the credit transaction. (§226.32(b)(1)) if it shows by a preponderance of evidence that the violation Reverse Mortgages §226.33 was not intentional and resulted from a bona fide error that occurred despite the maintenance of procedures to avoid the A reverse mortgage is a non-recourse transaction secured by error. the consumer’s principal dwelling which ties repayment (other than upon default) to the homeowner’s death or permanent A bona fide error may include a clerical, calculation, computer move from, or transfer of the title of, the home. malfunction, programming, or printing error. It does not include an error of legal judgment. Specific Defenses §108 Defense Against Civil, Criminal, and Showing that a violation occurred unintentionally could Administrative Actions be difficult if the financial institution is unable to produce A financial institution in violation of TILA may avoid liability evidence that explicitly indicates it has an internal controls by: program designed to ensure compliance. The financial institution’s demonstrated commitment to compliance and its • Discovering the error before an action is brought against adoption of policies and procedures to detect errors before the financial institution, or before the consumer notifies the disclosures are furnished to consumers could strengthen its financial institution, in writing, of the error. defense. • Notifying the consumer of the error within 60 days of Statute of Limitations §108 and §130 discovery. Civil actions may be brought within one year after the • Making the necessary adjustments to the consumer's violation occurred. After that time, and if allowed by state account, also within 60 days of discovery. (The consumer law, the consumer may still assert the violation as a defense will pay no more than the lesser of the finance charge if a financial institution were to bring an action to collect the actually disclosed or the dollar equivalent of the APR consumer’s debt. actually disclosed.) The above three actions also may allow the financial institution Criminal actions are not subject to the TILA one-year statute to avoid a regulatory order to reimburse the customer. of limitations. An error is "discovered" if it is: Regulatory administrative enforcement actions also are not subject to the one-year statute of limitations. However, • Discussed in a final, written report of examination. enforcement actions under the policy guide involving • Identified through the financial institution's own erroneously disclosed APRs and finance charges are subject procedures. to time limitations by the TILA. Those limitations range from the date of the last regulatory examination of the financial • An inaccurately disclosed APR or finance charge included institution, to as far back as 1969, depending on when loans in a regulatory agency notification to the financial were made, when violations were identified, whether the institution. violations were repeat violations, and other factors. When a disclosure error occurs, the financial institution is not required to re-disclose after a loan has been consummated There is no time limitation on willful violations intended or an account has been opened. If the financial institution to mislead the consumer. A summary of the various time corrects a disclosure error by merely re-disclosing required limitations follows. information accurately, without adjusting the consumer's • For open-end credit, reimbursement applies to violations account, the financial institution may still be subject to civil not older than two years. liability and an order to reimburse from its regulator. • For closed-end credit, reimbursement is generally directed The circumstances under which a financial institution may for loans with violations occurring since the immediately avoid liability under the TILA do not apply to violations of the preceding examination. Fair Credit Billing Act (chapter 4 of the TILA). Rescission Rights (Open-End and Closed-End Credit) §226.15 and §226.23 TILA provides that for certain transactions secured by the consumer’s principal dwelling, a consumer has three business V-1.22 FDIC Compliance Manual — June 2009
  • 23. V. Lending — TILA days after becoming obligated on the debt to rescind the to rescind may be extended from three days after becoming transaction. The right of rescission allows consumer(s) time obligated on a loan to up to three years. to reexamine their credit agreements and cost disclosures and to reconsider whether they want to place their homes at risk by Examination Objectives offering it/them as security for the credit. Transactions exempt 1. To appraise the quality of the financial institution’s from the right of rescission include residential mortgage compliance management system for the Truth in Lending transactions (§226.2(a)(24)) and refinancings or consolidations Act and Regulation Z. with the original creditor where no “new money” is advanced. 2. To determine the reliance that can be placed on the financial institution’s compliance management system, If a transaction is rescindable, consumers must be given a including internal controls and procedures performed notice explaining that the creditor has a security interest in by the person(s) responsible for monitoring the financial the consumer’s home, that the consumer may rescind, how the institution’s compliance review function for the Truth In consumer may rescind, the effects of rescission, and the date Lending Act and Regulation Z. the rescission period expires. 3. To determine the financial institution’s compliance with the To rescind a transaction, a consumer must notify the creditor Truth In Lending Act and Regulation Z. in writing by midnight of the third business day after the 4. To initiate corrective action when policies or internal latest of three events: (1) consummation of the transaction, controls are deficient, or when violations of law or (2) delivery of material TILA disclosures, or (3) receipt13 of regulation are identified. the required notice of the right to rescind. For purposes of 5. To determine whether the institution will be required rescission, business day means every calendar day except to make adjustments to consumer accounts under the Sundays and the legal public holidays (§226.2(a)(6)). The restitution provisions of the Act. term “material disclosures” is defined in §226.23(a)(3) to mean the required disclosures of the annual percentage rate, Examination Procedures the finance charge, the amount financed, the total of payments, General Procedures the payment schedule, and the disclosures and limitations referred to in §226.32(c) and (d). 1. Obtain information pertinent to the area of examination from the financial institution’s compliance management The creditor may not disburse any monies (except into an system program (historical examination findings, complaint escrow account) and may not provide services or materials information, and significant findings from compliance until the three-day rescission period has elapsed and the review and audit). creditor is reasonably satisfied that the consumer has not 2. Through discussions with management and review of the rescinded. If the consumer rescinds the transaction, the following documents, determine whether the financial creditor must refund all amounts paid by the consumer (even institution’s internal controls are adequate to ensure amounts disbursed to third parties) and terminate its security compliance in the area under review. Identify procedures interest in the consumer’s home. used daily to detect errors/violations promptly. Also, review the procedures used to ensure compliance when changes A consumer may waive the three-day rescission period and occur (e.g., changes in interest rates, service charges, receive immediate access to loan proceeds if the consumer has computation methods, and software programs). a “bona fide personal financial emergency.” The consumer • Organizational charts. must give the creditor a signed and dated waiver statement that describes the emergency, specifically waives the right, • Process flowcharts. and bears the signatures of all consumers entitled to rescind • Policies and procedures. the transaction. The consumer provides the explanation for • Loan documentation and disclosures. the bona fide personal financial emergency, but the creditor decides the sufficiency of the emergency. • Checklists/worksheets and review documents. • Computer programs. If the required rescission notice or material TILA disclosures 3. Review compliance review and audit work papers and are not delivered or if they are inaccurate, the consumer’s right determine whether: 13 12 CFR 226.15(b) and 226.23(b)(1) were amended to include the a. The procedures used address all regulatory provisions electronic delivery of the notice of the right to rescind. If a paper notice (see Transactional Testing section on page V-1.27). of the right to rescind is used, a creditor must deliver two copies of the notice to each consumer entitled to rescind. However, under the final rule b. Steps are taken to follow up on previously identified on electronic delivery of disclosures if the notice is in electronic form, in deficiencies. accordance with the consumer consent and other applicable provisions of the E-Sign Act, only one copy to each customer is required. FDIC Compliance Manual — June 2009 V-1.23
  • 24. V. Lending — TILA c. The procedures used include samples that cover all 8. Description of total sales price in a credit sale; product types and decision centers. 9. Prepayment penalty’s or rebates; d. The work performed is accurate (through a review of 10. Late payment amount or percentage; some transactions). 11. Description for security interest; e. Significant deficiencies, and the root cause of the 12. Various insurance verbiage (§226.4(d)); deficiencies, are included in reports to management/ board. 13. Statement referring to the contract; f. Corrective actions are timely and appropriate. 14. Statement regarding assumption of the note; and g. The area is reviewed at an appropriate interval. 15. Statement regarding required deposits. c. Determine all variable rate loans with a maturity greater Disclosure Forms than one year secured by a principal dwelling are given 4. Determine if the financial institution has changed any the following disclosures at the time of application. preprinted TILA disclosure forms or if there are forms that (§226.19) have not been previously reviewed for accuracy. If so: 1. Consumer handbook on adjustable rate mortgages or • Verify the accuracy of each preprinted disclosure by substitute; reviewing the following: 2. Statement that interest rate payments and or terms ° Note and/or contract forms (including those can change; furnished to dealers). 3. The index/formula and a source of information; ° Standard closed-end credit disclosures (§226.17(a) 4. Explanation of the interest rate/payment and §226.18). determination and margin; ° ARM disclosures (§226.19(b)). 5. Statement that the consumer should ask for the ° High cost mortgage disclosures (§226.32(c)). current interest rate and margin; ° Initial disclosures (§226.6(a)-(d)) and, if applicable, 6. Statement that the interest rate is discounted, if additional HELOC disclosures (§226.6(e)). applicable; ° Credit card application/solicitation disclosures 7. Frequency of interest rate and payment changes; (§226.5a(b)-(e)). 8. Rules relating to all changes; ° HELOC disclosures (§226.5b(d) and (e)). 9. Either a historical example based on 15 years, or ° Statement of billing rights and change in terms the initial rate and payment with a statement that notice (§226.9(a)). the periodic payment may substantially increase or ° Reverse mortgage disclosures (§226.33(b)). decrease together with a maximum interest rate and ° Notice of Right to Rescind (§§ 226.15(b) and payment; 226.23(b)(1)) 10. Explanation of how to compute the loan payment, giving an example; Closed-End Credit Forms Review Procedures 11. Demand feature, if applicable; a. Determine the disclosures are clear, conspicuous, 12. Statement of content and timing of adjustment grouped, and segregated. The terms Finance Charge notices; and and APR should be more conspicuous than other terms. 13. Statement that other variable rate loan program (§226.17(a)) disclosures are available, if applicable. b. Determine the disclosures include the following as d. Determine that the disclosures required for high-cost applicable. (§226.18) mortgage transactions clearly and conspicuously 1. Identity of the creditor; include the items below. [§226.32(c), see Form H-16 in 2. Brief description of the finance charge; Appendix H.] 3. Brief description of the APR; 1. The required statement “you are not required to 4. Variable rate verbiage (§226.18(f)(1) or (2)); complete this agreement merely because you have received these disclosures or have signed a loan 5. Payment schedule; application. If you obtain this loan, the lender will 6. Brief description of the total of payments; have a mortgage on your home. You could lose your 7. Demand feature; home, and any money you have put into it, if you do not meet your obligations under the loan”. V-1.24 FDIC Compliance Manual — June 2009
  • 25. V. Lending — TILA 2. Annual percentage rate. 1. APR for purchases, cash advances, and balance 3. Amount of the regular monthly (or other periodic) transfers, including penalty rates that may apply. If payment and the amount of any balloon payment. the rate is variable, the index or formula, and margin The regular payment should include amounts for must be identified; voluntary items, such as credit life insurance or 2. Fee for issuance of the card; debt-cancellation coverage, only if the consumer 3. Minimum finance charge; has previously agreed to the amount. [See staff 4. Transaction fees; commentary to 32(c)(3)] 5. Length of the “grace period”; 4. Statement that the interest rate may increase, and the amount of the single maximum monthly payment, 6. Balance computation method; based on the maximum interest rate allowed under 7. Statement that charges incurred by use of the charge the contract, if applicable. card are due when the periodic statement is received 5. For a mortgage refinancing, the total amount NOTE: The above items must be provided in a borrowed, as reflected by the face amount of the prominent location in the form of a table. The note; and where the amount borrowed includes remaining items may be included in the same table premiums or other charges for optional credit or clearly and conspicuously elsewhere on the same insurance or debt-cancellation coverage, that fact document. An explanation of specific events that may shall be stated (grouped together with the amount result in the imposition of a penalty rate must be placed borrowed). outside the table with an asterisk inside the table (or other means) directing the consumer to the additional Open-End Credit Forms Review Procedures information. a. Determine the initial disclosure statement is provided 8. Cash advance fees; before the first transaction under the account and ensure 9. Late payment fees; and the disclosure includes the items below as applicable. (§226.6) 10. Fees for exceeding the credit limit. 1. Statement of when the finance charge is to accrue c. Determine that disclosure of items 1-7 in “b” above are and if a grace period exists; made orally for creditor-initiated telephone applications and pre-approved solicitations. Also, determine for 2. Statement of periodic rates used and the applications or solicitations made to the general corresponding APR; public that the card issuer makes one of the optional 3. Explanation of the method of determining the disclosures. (§226.5a(d) and (e)) balance on which the finance charge may be d. Determine the following home equity disclosures computed; were made clearly and conspicuously, at the time of 4. Explanation of how the finance charge would be application. (§226.5b) determined; 1. Home equity brochure; 5. Statement of the amount of any other charges; 2. Statement that the consumer should retain a copy of 6. Statement of creditor’s security interest in the the disclosure; property; 3. Statement of the time the specific terms are 7. Statement of billing rights (§226.12 and §226.13); available; and 4. Statement that terms are subject to change before the 8. Certain home equity plan information if not plan opens; provided with the application in a form the consumer 5. Statement that the consumer may receive a full could keep. [§226.6(e)(7)] refund of all fees; b. Determine the following credit card disclosures 6. Statement that the consumer’s dwelling secures the were made clearly and conspicuously on or with a credit; solicitation or an application. Disclosures in 12-point type are deemed to comply with the requirements. See 7. Statement that the consumer could loose the staff comment 5a(a)(2)-1. The APR for purchases dwelling; (other than an introductory rate that is lower than the 8. Creditors right to change, freeze, or terminate the rate that will apply after the introductory rate expires) account; must be in at least 18-point type. [§226.5a] FDIC Compliance Manual — June 2009 V-1.25
  • 26. V. Lending — TILA 9. Statement that information about conditions for g. Determine that disclosure of items 1-7 in “b” above are adverse action are available upon request; provided if the account is renewed. Additionally, the 10. Payment terms including the length of the draw and disclosure provided upon renewal must disclose how repayment periods, how the minimum payment is and when the cardholder may terminate the credit to determined, the timing of payments, and an example avoid paying the renewal fee. (§226.9(e)) based on $10,000 and a recent APR; h. Determine that a statement of the maximum interest 11. A recent APR imposed under the plan and a rate that may be imposed during the term of the statement that the rate does not include costs other obligation is made for any loan in which the APR may than interest (fixed rate plans only); increase during the plan. (§226.30(b)) 12. Itemization of all fees paid to creditor; Reverse Mortgage Forms Review Procedures (Both open 13. Estimate of any fees payable to third parties to open and closed-end) the account and a statement that the consumer may a. Determine that the disclosures required for reverse receive a good faith itemization of third party fees; mortgage transactions are substantially similar to the 14. Statement regarding negative amortization, as model form in Appendix K and include the items below. applicable; 1. A statement that the consumer is not obligated to 15. Transaction requirements; complete the reverse mortgage transaction merely 16. Statement that the consumer should consult a tax because he or she has received the disclosures or advisor regarding the deductibility of interest and signed an application. charges under the plan; and 2. A good faith projection of the total cost of the credit 17. For variable rate home equity plans, disclose the expressed as a table of “total annual loan cost rates” following: including payments to the consumer, additional i. That the APR, payment, or term may change; creditor compensation, limitations on consumer liability, assumed annual appreciation, and the ii. The APR excludes costs other than interest; assumed loan period. iii. Identify the index and its source; 3. An itemization of loan terms, charges, the age of the iv. How the rate will be determined; youngest borrower, and the appraised property value. v. Statement that the consumer should request 4. An explanation of the table of total annual loan costs information on the current index value, margin, rates. discount, premium, or APR; NOTE: Forms that include or involve current vi. Statement that the initial rate is discounted and transactions, such as change in terms notices, periodic the duration of the discount, if applicable; billing statements, rescission notices, and billing error vii. Frequency of APR changes; communications, are verified for accuracy when the file review worksheets are completed. viii.Rules relating to changes in the index, APR, and payment amount; Timing of Disclosures ix. Lifetime rate cap and any annual caps, or a 5. Review financial institution policies, procedures, statement that there is no annual limitation; and systems to determine, either separately, or x. The minimum payment requirement, using the when completing the actual file review, whether the maximum APR, and when the maximum APR applicable disclosures listed below are furnished may be imposed; when required by Regulation Z. Take into account xi. A table, based on a $10,000 balance, reflecting products that have different features, such as all significant plan terms; and closed-end loans or credit card accounts that are xii. Statement that rate information will be provided fixed or variable rate. on or with each periodic statement. a. Credit card application and solicitation e. Determine when the last statement of billing rights was disclosures—On or with the application. furnished to customers and whether the institution used [§226.5a(b)] the short form notice with each periodic statement. b. HELOC disclosures--At the time the application (§226.9(a)) is provided or within three business days under f. Determine that the notice of any change in terms was certain circumstances. (§226.5b(b)) provided 15 days prior to the effective date of the change. (§226.9(b)) V-1.26 FDIC Compliance Manual — June 2009
  • 27. V. Lending — TILA c. Open-end credit initial disclosures --Before Electronic Disclosures the first transaction is made under the plan. NOTE: Disclosures may be provided to the consumer in (§226.5(b)(1)) electronic form, subject to compliance with the consumer d. Periodic disclosures--At the end of a billing cycle consent and other applicable provisions of the Electronic if the account has a debit or credit balance of $1 Signatures in Global and National Commerce Act (E-Sign Act) or more or if a finance charge has been imposed. (15 U.S.C. 7001 et seq.). The E-Sign Act does not mandate (§226.5(b)(2)) that institutions or consumers use or accept electronic records e. Statement of billing rights--At least once per or signatures. It permits institutions to satisfy any statutory year. (§226.9(a)) or regulatory requirements by providing the information electronically after obtaining the consumer’s affirmative f. Supplemental credit devices-- Before the first consent. Before consent can be given, consumers must be transaction under the plan. (§226.9(b)) provided with the following information: g. Open-end credit change in terms-- 15 days prior to the effective change date. (§226.9(c)) • any right or option to have the information provided in h. Finance charge imposed at time of paper or nonelectronic form; transaction--Prior to imposing any fee. • the right to withdraw the consent to receive information (§226.9(d)) electronically and the consequences, including fees, of i. Disclosures upon renewal of credit or charge doing so card--30 days or one billing cycle, whichever • the scope of the consent (for example, whether the is less before the delivery of the periodic consent applies only to a particular transaction or to statement on which the renewal fee is charged. identified categories of records that may be provided Alternatively, notice may be delayed until the during the course of the parties’ relationship) mailing or delivery of the periodic statement • the procedures to withdraw consent and to update on which the renewal fee is charged to the information needed to contact the consumer accounts if the notice meets certain requirements. electronically; and (§226.9(e)) • the methods by which a consumer may obtain, upon j. Change in credit account insurance request, a paper copy of an electronic record after provider--Certain information 30 days before consent has been given to receive the information the change in provider occurs and certain electronically and whether any fee will charged information 30 days after the change in provider occurs. The institution may provide a combined The consumer must consent electronically or confirm consent disclosure 30 days before the change in provider electronically in a manner that “reasonably demonstrates that occurs. (§226.9(f)) the consumer can access information in the electronic form that will be used to provide the information that is the subject k. Closed-end credit disclosures-- Before of the consent.” After the consent, if an institution changes consummation. (§226.17(b)) the hardware or software requirements such that a consumer l. Disclosures for certain closed-end home may be prevented from accessing and retaining information mortgages--Three business days prior to electronically, the institution must notify the consumer of the consummation. (§226.31(c)(1)) new requirements and must allow the consumer to withdraw m. Disclosures for reverse mortgages --Three days consent without charge. prior to consummation of a closed-end credit transaction or prior to the first transaction under 6. If the financial institution makes its disclosures available an open-end credit plan. (§226.31(c)(2)) to consumers in electronic form, determine that the forms comply with the appropriate sections – 226.5(a) n. Disclosures for adjustable-rate mortgages—At (1); 226.5a(a)(2)(v); 226.5b(a)(3); 226.15(b); 226.16(c); least once each year during which an interest 226.17(a)(1); 226.17(g); 226.19(c); 226.23(b)(1); 226.24(d) rate adjustment is implemented without an and 226.31(b) accompanying payment change, and at least 25, but no more than 120 calendar days before a Record Retention new payment amount is due, or in accordance 7. Review the financial institution’s record retention practices with other variable-rate subsequent-disclosure to determine whether evidence of compliance (for other regulations issued by a supervisory agency. than the advertising requirements) is retained for at least (§226.20(c)) two years after the disclosures was required to be made or other action was required to be taken. (§226.25) FDIC Compliance Manual — June 2009 V-1.27
  • 28. V. Lending — TILA Transactional Testing k. Property insurance available from the creditor excluded NOTE: When verifying APR accuracies, use the OCC’s APR from the finance charge if the premium for the initial calculation model or other calculation tool acceptable to your term of the insurance is disclosed. regulatory agency. l. Required deposit. 11. Determine for adjustable rate mortgage loans secured Advertising by the borrower's principal dwelling with maturities of 8. Sample advertising copy, including any Internet more than one year that the required early and subsequent advertising, since the previous examination and verify that disclosures are complete, accurate, and timely. Early the terms of credit are specific. If triggering terms are used, disclosures required by §226.19(a) are verified during the determine the required disclosures are made. (§226.16 and closed-end credit forms review. Subsequent disclosures §226.24) should include the items below, as applicable. (§226.20(c)) For advertisements for closed-end credit, determine: a. Current and prior interest rates; ° if a rate of finance charge was stated, that it was stated b. Index values used to determine current and prior as an APR. interest rates; ° if an APR will increase after consummation, a c. Extent to which the creditor has foregone an increase in statement to that fact is made. the interest rate; Closed-End Credit d. Contractual effects of the adjustment (new payment and loan balance); and 9. For each type of closed-end loan being tested, determine the accuracy of the disclosures by comparing the e. Payment required to avoid negative amortization. disclosures to the contract and other financial institution NOTE: The accuracy of the adjusted interest rates and documents. (§226.17) indexes should be verified by comparing them with the 10. Determine whether the required disclosures were made contract and early disclosures. Refer to the Additional before consummation of the transaction and ensure the Variable Rate Testing section of these examination presence and accuracy of the items below, as applicable. procedures on page V-1.29. (§226.18) 12. Determine, for each type of closed-end rescindable loan a. Amount financed; being tested, two copies of the rescission notice are provided to each person whose ownership interest is or will b. Itemization of the amount financed (RESPA GFE may be subject to the security interest. The rescission notice substitute); must disclose the items below. (§226.23(b)(1)) c. Finance charge; a. Security interest taken in the consumer’s principal d. APR; dwelling; e. Variable rate verbiage as follows for loans not secured b. Consumer’s right to rescind the transaction; by a principal dwelling or with terms of one year or c. How to exercise the right to rescind, with a form for less: that purpose, designating the address of the creditor’s 1. Circumstances which permit rate increase; place of business; 2. Limitations on the increase (periodic or lifetime); d. Effects of rescission; and 3. Effects of the increase; e. Date the rescission period expires. 4. Hypothetical example of new payment terms; 13. Ensure funding was delayed until the rescission period f. Payment schedule including amount, timing and expired. (§226.23(c)) number of payments. 14. Determine if the institution has waived the three-day right g. Total of payments. to rescind since the previous examination. If applicable, h. Total sales price (credit sale). test rescission waivers. (§226.23(e)) i. Description of security interest. 15. Determine whether the maximum interest rate in the contract is disclosed for any adjustable rate consumer credit j. Credit life insurance premium included in the finance contract secured by a dwelling. (§226.30(a)) charge unless: 1. Insurance is not required; Open-End Credit 2. Premium for the initial term is disclosed; and 16. For each open-end credit product tested, determine the accuracy of the disclosures by comparing the disclosure 3. Consumer signs or initials an affirmative written with the contract and other financial institution documents. request for the insurance. (§226.5(c)) V-1.28 FDIC Compliance Manual — June 2009
  • 29. V. Lending — TILA 17. Review the financial institution’s policies, procedures, and b. Refund any part of the remaining credit balance within practices to determine whether it provides appropriate seven business days from receiving a written request disclosures for creditor-initiated direct mail applications from the consumer; and and solicitations to open charge card accounts, telephone c. Make a good faith effort to refund the amount of the applications and solicitations to open charge card accounts, credit to a deposit account of the consumer if the credit and applications and solicitations made available to the remains for more than six months. general public to open charge card accounts. (§226.5a(b), 23. Review a sample of billing error resolution files and a (c), and (d)) sample of consumers who have asserted a claim or defense 18. Determine for all home equity plans with a variable rate against the financial institution for a credit card dispute that the APR is based on an independent index. Further, regarding property or services. Verify the following. ensure home equity plans are terminated or terms changed (§226.12 and §226.13) only if certain conditions exist. (§226.5b(f)) a. Credit cards are issued only upon request; 18. Determine that, if any consumer rejected a home equity b. Liability for unauthorized credit card use is limited to plan because a disclosed term changed before the plan was $50; opened, all fees were refunded. Verify that non-refundable fees were not imposed until three business days after the c. Disputed amounts are not reported delinquent unless consumer received the required disclosures and brochure. remaining unpaid after the dispute has been settled; (§226.5b(g) and (h)) d. Offsetting credit card indebtedness is prohibited; and 20. Review consecutive periodic billing statements for each e. Errors are resolved within two complete billing cycles. major type of open-end credit activity offered (overdraft 24. Determine, for each type of open-end rescindable loan and home-equity lines of credit, credit card programs, being tested, two copies of the rescission notice are etc.). Determine whether disclosures were calculated provided to each person whose ownership interest is or will accurately and are consistent with the initial disclosure be subject to the security interest and perform items 11, 12, statement furnished in connection with the accounts (or and 13 under Closed-End Credit. (§226.15(b), (c), and (e)) any subsequent change in terms notice) and the underlying contractual terms governing the plan(s). The periodic Additional Variable Rate Testing statement must disclose the items below, as applicable. 25. Verify that when accounts were opened or loans were (§226.7) consummated that loan contract terms were recorded a. Previous balance; correctly in the financial institution’s calculation systems b. Identification of transactions; (e.g., its computer). Determine the accuracy of the following recorded information: c. Dates and amounts of any credits; a. Index value; d. Periodic rates and corresponding APRs, if variable rate plan, must disclose that the periodic rates may vary; b. Margin and method of calculating rate changes; e. Balance on which the finance charge is computed and c. Rounding method; and an explanation of how the balance is determined; d. Adjustment caps (periodic and lifetime). f. Amount of finance charge with an itemization of each 26. Using a sample of periodic disclosures for open-end of the components of the finance charge; variable rate accounts (e.g., home equity accounts) and g. Annual percentage rate; closed-end rate change notices for adjustable rate mortgage loans: h. Itemization of other charges; a. Compare the rate-change date and rate on the credit i. Closing date and balance; obligation to the actual rate-change date and rate j. Payment date, if there is a “free ride” period; and imposed. k. Address for notice of billing errors. b. Determine that the index disclosed and imposed is 21. Verify the institution credits a payment to the open-end based on the terms of the contract (example: the weekly account as of the date of receipt. (§226.10) average of one-year Treasury constant maturities, taken as of 45 days before the change date.). (§226.7(g) and 22. Determine institution’s treatment of credit balances. §226.20(c)(2)) Specifically, if the account’s credit balance is in excess of $1, the institution must disclose the items below. (§226.11) c. Determine that the new interest rate is correctly disclosed by adding the correct index value with the a. Credit the amount to the consumer’s account; margin stated in the note, plus or minus any contractual fractional adjustment. (§226.7(g) and §226.20 (c)(1)) FDIC Compliance Manual — June 2009 V-1.29
  • 30. V. Lending — TILA d. Determine that the new payment disclosed amount of the single maximum monthly payment (§226.20(c)(4)) was based on an interest rate and loan allowed under the contract. (§226.32(c)(4)) balance in effect at least 25 days before the payment 5. For a mortgage refinancing, the total amount the change date (consistent with the contract). (§226.20(c)) consumer will borrow (the face amount) and if Certain Home Mortgage Transactions this amount includes premiums or other charges for optional credit insurance or debt-cancellation 27. Determine whether the financial institution originates coverage, that fact is stated. This disclosure shall be consumer credit transactions subject to Subpart E of treated as accurate if within $100. (§226.32(c)(5)) Regulation Z; specifically, certain closed-end home mortgages (high-cost mortgages (§226.32) and reverse 6. A new disclosure is required if, subsequent to mortgages (§226.33). providing the additional disclosure but prior to consummation, there are changes in any terms that 28. Examiners may use the attached worksheet as an aid for make the disclosures inaccurate. For example, if identifying and reviewing high-cost mortgages. (Page a consumer purchases optional credit insurance V-1.32) and, as a result, the monthly payment differs from 29. Review both high-cost and reverse mortgages to ensure the the payment previously disclosed, redisclosure is following: required and a new three-day waiting period applies. a. Required disclosures are provided to consumers in (§226.31(c)(1)(i)) addition to, not in lieu of, the disclosures contained in 7. If a creditor provides new disclosures by telephone other subparts of Regulation Z. (§226.31(a)) when the consumer initiates a change in terms, then b. Disclosures are clear and conspicuous, in writing, and at consummation: (§226.31(c)(1)(ii)) in a form that the consumer may keep. (§226.31(b)) The creditor must provide new written c. Disclosures are furnished at least three business days disclosures and both parties must sign a prior to consummation of a mortgage transaction statement that these new disclosures were covered by §226.32 or a closed-end reverse mortgage provided by telephone at least three days prior to transaction (or at least three business days prior to the consummation. first transaction under an open-end reverse mortgage). 8. If a consumer waives the right to a three-day (§226.31(c)) waiting period to meet a bona fide personal financial d. Disclosures reflect the terms of the legal obligation emergency, the consumer’s waiver must be a dated between the parties. (§226.31(d)) written statement (not a pre-printed form) describing e. If the transaction involves more than one creditor, only the emergency and bearing the signature of all one creditor shall provide the disclosures. Where the entitled to the waiting period (a consumer can waive obligation involves multiple consumers, the disclosures only after receiving the required disclosures and may be provided to any consumer who is primarily prior to consummation). (§226.31(c)(1)(iii)) liable on the obligation. However, for rescindable b. High-cost mortgage transactions do not provide for any transactions, the disclosures must be provided to each of the following loan terms: consumer who has the right to rescind. (§226.31(e)) 1. Balloon payment (if term is less than 5 years, with f. The APR is accurately calculated and disclosed in exceptions). (§226.32(d)(1)(i) and (ii)) accordance with the requirements and within the 2. Negative amortization. (§226.32(d)(2)) tolerances allowed in §226.22. (§226.31(g)) 3. Advance payments from the proceeds of more than 2 30. For high-cost mortgages (§226.32), ensure that: periodic payments. (§226.32(d)(3)) a. In addition to other required disclosures, the creditor 4. Increased interest rate after default. (§226.32(d)(4)) discloses the following at least three business days prior 5. A rebate of interest, arising from a loan acceleration to consummation: [See model disclosure at App. H-16] due to default, calculated by a method less favorable 1. Notice containing the prescribed than the actuarial method. (§226.32(d)(5)) language.(§226.32(c)(1)) 6. Prepayment penalties (but permitted in the first five 2. Annual percentage rate. (§226.32(c)(2)) years if certain conditions are met). (§226.32(d)(6) 3. Amount of regular loan payment and the amount of and (7)) any balloon payment. (§226.32(c)(3)) 7. A due-on-demand clause permitting the creditor 4. For variable rate loans, a statement that the interest to terminate the loan in advance of maturity and rate and monthly payment may increase, and the V-1.30 FDIC Compliance Manual — June 2009
  • 31. V. Lending — TILA accelerate the balance, with certain exceptions. D. If a loan transaction includes a discounted (§226.32(d)(8)) introductory rate, the creditor must consider the c. The creditor is not engaged in the following acts and consumer’s ability to repay based on the non- practices for high-cost mortgages: discounted or fully indexed rate. 1. Home improvement contracts – paying a contractor NOTE: Commentary to 34(a)(4) contains guidance on under a home improvement contract from the income that may be considered, on “pattern or practice,” and proceeds of a mortgage unless certain conditions are on “verifying and documenting” income and obligations. met. (§226.34(a)(1)) (§226.34(a)(4)) 2. Notice to assignee – selling or otherwise assigning 31. Ensure that the creditor does not structure a home-secured a high-cost mortgage without furnishing the loan as an open-end plan (“spurious open-end credit”) required statement to the purchaser or assignee. to evade the requirements of Regulation Z. See staff (§226.34(a)(2)) commentary to 34(b) for factors to be considered. 3. Refinancing within one year of extending credit (§226.34(b)) – within one year of making a high-cost mortgage Administrative Enforcement loan, a creditor may not refinance any high-cost mortgage loan to the same borrower into another 32. If there is noncompliance involving understated finance high-cost mortgage loan that is not in the borrower’s charges or understated APRs subject to reimbursement interest. This also applies to assignees that hold or under the FFIEC Policy Guide on Reimbursement (policy service the high-cost mortgage loan. Commentary guide), continue with step 33. to 34(a)(3) has examples applying the refinancing 33. Document the date on which the administrative prohibition and addressing “borrower’s interest.” enforcement of the TILA policy statement would apply for (§226.34(a)(3)) reimbursement purposes by determining the date of the 4. Consumers’ ability to repay – engaging in a pattern preceding examination. or practice of extending high-cost mortgages based 34. If the noncompliance involves indirect (third-party paper) on the consumer’s collateral without regard to disclosure errors and affected consumers have not been repayment ability, including the consumer’s current reimbursed: and expected income, current obligations, and a. Prepare comments, discussing the need for improved employment. A violation is presumed if there is a internal controls to be included in the report of pattern or practice of making such mortgage loans examination. without verifying and documenting consumers’ repayment ability. b. Notify your supervisory office for follow up with the regulator that has primary responsibility for the original A. A creditor may consider any expected income of creditor. the consumer, including: If the noncompliance involves direct credit: i. Regular salary or wages; c. Make an initial determination whether the violation is a ii. Gifts; pattern or practice. iii. Expected retirement payments; and d. Calculate the reimbursement for the loans or accounts iv. Income from self-employment. in an expanded sample of the identified population. B. Equity income that would be realized from the e. Estimate the total impact on the population based on collateral may not be considered. the expanded sample. C. Creditors may verify and document a consumer’s f. Inform management that reimbursement may be income and obligations through any reliable necessary under the law and the policy guide, and source that provides the creditor with a discuss all substantive facts including the sample loans reasonable basis for believing that there are and calculations. sufficient funds to support the loan. Reliable g. Inform management of the financial institution’s options sources include: under §130 of the TILA for avoiding civil liability and i. Credit reports; of its option under the policy guide and §108 (e)(6) of ii. Tax return; the TILA for avoiding a regulatory agency’s order to reimburse affected borrowers. iii. Pension statements; or iv. Payment records for employment income. FDIC Compliance Manual — June 2009 V-1.31
  • 32. V. Lending — TILA High-Cost Mortgage (§226.32) Worksheet Borrower’s Name: Loan Number: Coverage Yes No Is the loan secured by the consumer’s principal dwelling? [§226.2(a), §226.32(a)(1)] If the answer is No, STOP HERE Is the loan for the following purpose? 1. Residential Mortgage Transaction—[§226.2(a)(24)] 3. Open-End Credit Plan—Subpart B 3. Open-End Credit Plan—Subpart B [note prohibition against structuring loans as open-end plans to evade §226.32—[§226.34(b)] If the answer is yes to Box 1, 2, or 3, STOP HERE. If No, continue to Test 1. Test 1—Calculation of APR A. Disclosed APR B. Treasury Security Yield of Comparable Maturity Obtain the Treasury Constant Maturities Yield from the FRB’s Statistical Release, H-15—Selected Interest Rates (the “Business” links will display daily yields). Use the yield that has the most comparable maturity to the loan term and is from the 15th day of the month that immediately precedes the month of the application. If the 15th is not a business day, use the yield for the business day immediately preceding the 15th. If the loan term is exactly halfway between two published security maturities, use the lower of the two yields.) Note: Creditors may use the FRB’s Selected Interest Rates or the actual auction results. See Staff Commentary to Regulation Z for further details. [§226.32(a)(1)(i)] C. Treasury Security Yield of Comparable Maturity (Box B) Plus: 8 percentage points for first-lien loan; or 10 percentage points for subordinate-lien loan Yes No D. Is Box A greater than Box C? If Yes, the transaction is a High-Cost Mortgage. If no, continue to Test 2, Points and Fees. V-1.32 FDIC Compliance Manual — June 2009
  • 33. V. Lending — TILA Test 2—Calculation of Points and Fees STEP 1: Identify all Charges Paid by the Consumer at or before Loan Closing A. Finance Charges - §226.4(a) and (b)—(Interest, including per-diem interest, and time price differential are excluded from these amounts.) Fee Subtotals Loan Points Mortgage Broker Fee Loan Service Fees Required Closing Agent/3rd Party Fees Required Credit Insurance Private Mortgage Insurance Life of Loan Charges (flood, taxes, etc.) Any Other Fees Considered Finance Charges Subtotal B. Certain Non-Finance Charges Under §226.4(c)(7)—Include fees paid by consumers only if the amount of the fee is unreasonable or if the creditor receives direct or indirect compensation from the charge or the charge is paid to an affiliate of the bank. (See the example in §226.32(b)(1)(ii) of the commentary for further explanation.) Title Examination Title Insurance Property Survey Document Preparation Charge Credit Report Appraisal Fee for “Initial” Flood Hazard Determination Pest Inspection Any Other Fees Not Considered Finance Charges Subtotal C. Premiums or Other Charges for Optional Credit Life, Accident, Health, or Loss-of-Income Insurance, or Debt-Cancellation Coverage D. Total Points & Fees: Add Subtotals for A, B, C FDIC Compliance Manual — June 2009 V-1.33
  • 34. V. Lending — TILA Test 2—Calculation of Points and Fees STEP 2: Determine the Total Loan Amount for Cost Calculation [226.32(a)(1)(ii)] A. Determine the Amount Financed [§226.18(b)] Principal Loan Amount Plus: Other Amounts Financed by the Lender (not already included in the principal and not part of the finance charge) Less: Prepaid Finance Charges [§226.2(a)(23)] Equals: Amount Financed B. Deduct costs included in the points and fees under §226.32(b)(1)(iii) and (iv) (Step 1, Box B and Box C) that are financed by the creditor C. Total Loan Amount (Step 2, Box A minus Box B) STEP 3: Perform High-Fee Cost Calculation A. Eight Percent of the Total Loan Amount (Step 2, Box C) B. Annual Adjustment Amount - [§226.32(a)(1)(ii)] The Federal Reserve sets a new threshold for each year. Refer to the FRB website for approppriate years’ amounts and use the dollar amount corresponding to the year of the loan’s origination. C. Total Points & Fees (Step 1, Box D) Yes No In Step 3, does Box C exceed the greater of Box A or Box B? If Yes, the transaction is a High-Cost Mortgage. If No, the transaction is not a High-Cost Mortgage under Test 2, Points and Fees. V-1.34 FDIC Compliance Manual — June 2009
  • 35. V. Lending — TILA References 12 CFR 226: Truth in Lending—Regulation Z (FRB’s regulation and official staff commentary) Joint Statement of Policy: Administrative Enforcement of the Truth in Lending Act—Restitution 15 USC 1601 et seq., Truth in Lending Act 15 USC 1666 et seq., Fair Credit Billing Act 15 USC 7001 et seq., Electronic Signatures in Global and National Commerce Act FDIC Compliance Manual — June 2009 V-1.35
  • 36. (This page intentionally left blank.) V-1.36 FDIC Compliance Manual — June 2009
  • 37. V. Lending — TILA Questions and Answers Regarding Joint Interagency adjustments to those loans found to be in violation and Statement Of Policy for Administrative Enforcement consummated since the prior examination? of the Truth In Lending Act—Reimbursement1 A.TILA does not limit the agencies’ authority to require correction of violations detected in earlier examinations General and that have not been corrected as of the date of the 1. Q. Do the enforcement standards and accuracy tolerances current examination [see §108(e)(3)(C)(i) of the Act, in the Policy Guide supersede the requirements of the Truth found at 15 USC 1607(e)(3)(c)(i)]. In addition, if the in Lending Act (Act) and Regulation Z? practice giving rise to the violations identified in the earlier examination has not been corrected, the institution will be A.No, the Policy Guide applies only to agency enforcement required to make adjustments on any loans containing the procedures. It does not alter a creditor’s responsibility violation that were consummated since the date it was first to comply fully with all the requirements of the Act notified in writing of the violation and comply with the and Regulation Z, including finance charge and annual corrective action already ordered. percentage rate (APR) accuracy requirements. Understated APR 2. Q. When violations are discovered in purchased or assigned loans that are initially payable to a person other than the 1. Q. What is meant by “actual APR” and “annual percentage financial institution, will the financial institution be ordered rate calculated in accordance with the Act,” as used in the to make the necessary adjustments to the accounts of Policy Guide? affected customers? A.Those terms mean the lowest permissible APR that A.No, the financial institution is not the creditor, even if the can be computed, applying all applicable provisions of obligation by its terms is initially payable to a third party Regulation Z. and simultaneously assigned to the financial institution. De Minimis Rule The violations will be refe rred to the creditor’s enforcing agency. 1. Q. How should the de minimis rule be applied in closed-end credit transactions? 3. Q. If the creditor must itemize the amount financed but fails to disclose or understates the prepaid finance charge, A.The de minimis rule should always be applied to the will reimbursement be required? amount of the adjustment calculated under the “lump sum method” of reimbursement as of the maturity date of the A.No, this violation of Regulation Z will require transaction, regardless of which reimbursement method is prospective corrective action only, assuming the prepaid ultimately used by the creditor. finance charges are properly included in the computation of the APR and finance charge. 2. Q. How should the de minimis rule be applied in open-end credit transactions? 4. Q. If APR or finance charge disclosures not required by Regulation Z have been made, will reimbursement be A.The de minimis rule should be applied to the total required when such optional disclosures are understated? amount of the adjustment calculated for each consumer’s account under the “lump sum method” for the period of A.No, however, errors in disclosures not required by time from the date of the current examination back to the Regulation Z for a particular transaction are violations of date of the first occurrence of the violation. However, the either 12 CFR 226.5(a)(1) or 12 CFR 226.17(a)(1), both of total time period may not exceed the two-year period prior which require that credit disclosures be made clearly and to the date of the current examination. conspicuously. Corrective Action Period Definitions 1. Q. Have the agencies changed their position on the time Current examination period required for taking corrective action for violations 1. Q. How should the Policy Guide apply to a situation where involving closed-end credit? an examiner, in an examination in progress discovers that A.Yes. Prior to 1997, the agencies took the position that reimbursement had not been undertaken as requested by the statutory phrase “immediately preceding examination” the enforcement agency following the prior examination? (which serves as the cutoff date for retroactive application What if the institution states that this examination is the of a reimbursement requirement) referred to the most “current examination” thereby requiring it to only make recent examination (prior to the current examination) in which compliance with Regulation Z and the Act was 1 reviewed. Because of decisions reached by the Eighth Issued by The FFIEC On July 11, 1980 And Revised September 1998. FDIC Compliance Manual — June 2009 V-1.37
  • 38. V. Lending — TILA and Eleventh Circuits of the United States Courts of For purposes of applying the policy change regarding Appeal, the agencies have adopted a new policy. The the corrective action time period, the agencies consider agencies by policy now interpret the phrase “immediately a concurrent examination to be one event. Assume, for preceding examination” to mean an examination of any example, the situation where a safety and soundness type conducted for any purpose by a federal regulatory examination begins on Monday, a trust examination begins agency with designated administrative enforcement on Tuesday, and the compliance examination starts on responsibility under the TILA.However, supervisory Wednesday. Assume further that the compliance team visitations, inspections, or other reviews that are not identifies a pattern or practice of violations triggering considered examinations by the agencies are not considered the restitution provisions of the Act. The agencies will examinations for purposes of applying retroactivity consider the immediately preceding examination to be the limitation. In addition, an examination of an affiliated last completed examination, not the trust examination that entity, such as an operating subsidiary or an institution’s began on Tuesday, or the safety and soundness examination holding company, is not considered an examination for that began on Monday. purposes of determining the corrective action time period Similarly, assume an institution’s examination is to be under the Act. conducted in succession, meaning that the compliance 2. Q. What is the effective date of the new policy change examination would begin after the safety and soundness regarding the time period for corrective action for and/or trust examination on site work in the institution is violations involving closed-end credit? completed, which could be several months after the start date of the concurrent examination. The agencies will A.The policy change regarding the corrective action time consider those concurrent examinations to be part of the period was effective as of August 7, 1997. same examination cycle for purposes of the policy. 3. Q. Can an institution terminate the remainder of its 5. Q. Does the policy change limit or otherwise affect the restitution obligation to a borrower in light of this change corrective action time period where a practice identified in policy? at a prior examination is not corrected by the date of the A.No. The policy change applies to future and pending current examination? cases as of the effective date. A.No. The Policy Guide and statute provide that if a There will be no change in reimbursement obligations practice is identified during a current examination and the arising in connection with restitution cases that have been examiner determines that the same practice was identified previously resolved. Once the institution makes its decision during a prior examination but is not corrected by the about the restitution method that it will pursue, it is date of the current examination, the corrective action time expected to complete its obligations to affected borrowers period is retroactive to the date of the prior examination in as agreed. which the violation was identified. This will be true even For example, under the “Lump Sum/Payment Reduction” if there have been intervening examinations that did not method of reimbursement, an institution remits to the review for compliance with the Act and Regulation Z. [see borrower a lump sum covering excess money paid to the § 108(e)(3)(c)(I) found at 15 USC 1107(e)(3)(c)(I)] point that restitution is made, and then reduces future 6. Q. Are there any differences in application of the policy payments to cover the remaining restitution obligation. change when restitution situations involve open-end credit Under the new policy, the agencies will not permit the rather than closed-end credit? institution to terminate its remaining restitution obligation by increasing the borrower’s payments to the level they A.Yes. The Act provides different corrective action were prior to the restitution action. time periods for open-end and closed-end credit. The policy change applies to restitution situations involving 4. Q. How will the agencies apply the policy change when closed-end credit. The corrective action time period for “concurrent” examinations are being conducted at a open-end credit covers the 24-month period preceding financial institution? the date of the current examination, regardless of whether A.Concurrent examinations occur when several different another examination intervenes during that period. types of examinations begin on the same day or when 7. Q. What is the corrective action period with respect to examinations begin in succession. Concurrent examinations terminated closed-end loans if an institution elects to may also begin several weeks or months apart but within comply voluntarily with the restitution provisions of the the same examination cycle, based on factors such as the Policy Guide, absent a current examination? availability of working space for the examination teams, or the expressed preferences of the institution’s management. V-1.38 FDIC Compliance Manual — June 2009
  • 39. V. Lending — TILA Q&A A.The Policy Guide states that “for terminated loans ... an first reimburses the customer with a lump sum payment to adjustment will not be ordered if the violation occurred cover the period up to the date of the reimbursement? in a transaction consummated more than two years prior A.The creditor may elect to cancel the insurance if to the date of the current examination.” If an institution applicable laws and regulations are not violated. The effect elects to comply voluntarily with the Policy Guide absent of canceling the insurance will be to reduce the amount of a current examination, the financial institution will have the customer’s future payments, as permitted by the “lump the option of either: (1) Deferring reimbursement on any sum-payment reduction” method of reimbursement. terminated loans until its regulatory agency conducts a current examination, or (2) Reimbursing on any terminated 3. Q. If a creditor has failed to reflect private mortgage loans falling within the period prior to the discovery of insurance premiums in the APR or finance charge the violation up to the date of the immediately preceding disclosures and restitution is required, but the loan has been examination. If that time frame is in excess of two years, sold into the secondary market, how should reimbursement then reimbursement may be limited to the two-year period be made? prior to the date of discovery of the violation. A.The creditor is responsible for reimbursement, even if 8. Q. How will the Policy Guide apply when loans subject the loan has been sold. If its ability to cancel the insurance to reimbursement are acquired through a merger, is limited by terms of the loan sales agreement, the creditor consolidation, or in exchange for the assumption of deposit may make payments either to the consumer directly or liabilities? (if it is agreeable to all parties) to the new owner of the loan. The new owner of the loan would make appropriate A.In the case of a merger or consolidation, the receiving adjustments to the account so that the consumer receives institution or the consolidated institution is liable for all the full benefit of the reimbursement. liabilities of the merged or consolidating institutions, and the Policy Guide will apply. 4. Q. If the creditor failed to include any component of the finance charge (e.g., a loan origination fee) in the In the case of loans acquired in exchange for the APR or finance charge disclosures, may the amount of assumption of deposit liabilities, the Policy Guide will reimbursement be reduced to account for fees excludable apply to the original creditor. from the finance charge under 12 CFR 226.4(c) which are Calculating the Adjustment paid for by such finance charge components? 1. Q. How will disclosures containing information properly A.If the borrower has not otherwise paid such excludable estimated under 12 CFR 226.5(c), 12 CFR 226.17(c), and fees (e.g., title insurance fees) to the creditor or to a third Appendix D be treated for reimbursement determinations party, reimbursement may be computed after first deducting and computations? from the finance charge those fees qualifying under 12 A.If an APR or finance charge is in error for any reason CFR 226.4(c). other than a properly made estimate, the determination of 5. Q. A transaction involves a loan with a term of 36 months, whether the error constitutes a reimbursable overcharge a payment schedule where the first 35 payments are will be made using the estimated information as disclosed. calculated using a 30-year amortization and a balloon At the creditor’s option, reimbursement will be based on amount for the final payment. What tolerance should be either: used when applying the Policy Guide? One eighth of (1) The actual amount of loan advances, with consideration onepercent or one quarter of one-percent? given to the amount and dates payments were actually A.The applicable tolerance is based on the amortization of made by the borrower; or the loan. Since the loan is completely amortized within a (2) The disclosed amounts of time intervals between three-year period (i.e., the 36-month payment schedule), advances and between payments. The basis selected a tolerance of one quarter of one-percent should be used shall be applied, using the lump sum or lump because the amortization period is less than ten years (15 sum-payment reduction method (at the creditor’s USC 1607(e)(1)). discretion), to all loans of the same type subject to 6. Q. How will the Policy Guide apply if a credit transaction reimbursement. has an interest rate or APR subject to increase and the 2. Q. If a creditor has failed to reflect private mortgage variable rate feature was not provided on the disclosure insurance premiums in the APR or finance charge statement? disclosures, may the institution cancel the insurance after it A.If the disclosure statement did not state that the rate would be subject to change, the borrower may be charged FDIC Compliance Manual — June 2009 V-1.39
  • 40. V. Lending — TILA Q&A only the original APR disclosed. Reimbursement under the For example, the interest component of the disclosed Policy Guide will apply only to the period of time in which finance charge might incorrectly reflect only loan interest the borrower made payments at an increased rate. for the first year on a transaction with variable-rate changes scheduled annually. Alternatively, it might incorrectly 7. Q. How will the Policy Guide apply if a creditor disclosed reflect interest calculated only at an initial discounted that a rate will be prospectively subject to increase, but the variable rate for the full term of the loan. In either case, APR disclosed or the finance charge disclosed or both were if the loan terms in the example provide that the variable originally understated? interest rate is subject to change annually, the finance A.The Policy Guide will apply as follows: charge reimbursement will apply only to the initial 12-month period. (1) If only the APR is understated, reimbursement will be required only for the period of time before the The adjustment may be prorated on a straight-line basis first scheduled change in rate under the variable rate over the life of the loan. Reimbursement of prorated feature in the contract. The term “the first scheduled amounts covering the period of time after the first change in rate” refers to a date on which the rate will scheduled change in rate (after month 12 in this example) change to a level that is unknown or unpredictable at would not be required. consummation. It does not include changes, such as (3) If both the APR and finance charge are understated, step-rates, that are agreed upon before consummation. normally the lump sum finance charge adjustment is For example, if the loan terms provide for a 9 percent compared to the lump sum APR adjustment as of the rate for the first year and a 10 percent rate for the loan maturity date and the larger adjustment determines second year, followed by a variable-rate feature which disclosure error is subject to reimbursement. In to be invoked at the beginning of the third year, the case of variable-rate transactions, however, the lump reimbursement will apply only to the initial 24-month sum APR adjustment used for comparison is calculated period. The lump sum-payment reduction adjustment for the period of time before the first scheduled change method may be used, using two payment streams for the in rate in the manner indicated by (1) above and the initial two-year period. Payments after the 24th month finance charge adjustment is calculated in the manner would not be affected by the adjustment. indicated by (2) above. (2) If only the finance charge is understated, reimbursement For example, assume a loan in which both the APR generally will be required for a period covering the and finance charge are understated on a 30- year, entire life of the loan consistent with the following: variable-rate loan that calls for rate changes annually. If both understatements were caused by the same failure · If a prepaid finance charge was not included to take into account a prepaid loan origination fee: in the disclosed finance charge (such as a loan origination fee paid separately by the consumer at · The APR reimbursement amount is the lump sum loan closing), the entire loan fee (less the applicable value for a 12-month period, which is determined by dollar tolerance) must be refunded as a “lump sum” using the lump sum/payment reduction method and payment. appropriate reimbursement tolerances. · If, however, the loan fee was financed (included in · The finance charge reimbursement amount is the the loan amount), the finance charge reimbursement lump sum value for a 360-month period, which may be prorated on a straight-line basis over the is determined by subtracting the appropriate life of the loan and refunded under the lump sum/ reimbursement tolerance from the amount of the payment reduction method. loan fee. However, a finance charge adjustment will be required only The APR adjustment is compared to the finance charge for the period of time before the first scheduled change adjustment to determine the larger of the two. In the in rate if the error occurred solely because the interest example, the finance charge adjustment (and not the APR component of the disclosed finance charge was based on adjustment) would be reimbursable. either: 8. Q. If a creditor uses a simple interest rate, which is (a) The interest to be earned before the first scheduled disclosed as the APR, to compute a monthly payment change in rate, or schedule, and the time interval from the date the finance charge begins to be earned to the date of the first payment (b) The interest to be earned assuming an initial discounted is treated as if it were one month, even though that period rate over the life of the loan. is greater than one month and is not a “minor irregularity” under 12 CFR 226.17(c)(4), will the Policy Guide apply V-1.40 FDIC Compliance Manual — June 2009
  • 41. V. Lending — TILA Q&A if the resulting application of the simple interest rate (2) The demand loan has been on the institution’s books generates a higher finance charge than the one disclosed? past the period for which finance charge disclosures were made. A.The Policy Guide will apply if: Reimbursement will be calculated for the required (1) The creditor’s method used to compute the payment disclosure period only. The amount reimbursed to the schedule, as previously described, is also used to consumer is the difference between the finance charge compute the disclosed finance charge (i.e., the total of actually paid and the finance charge disclosed (which payments less the amount financed); and may be increased by the applicable finance charge (2) The final payment collected or scheduled under the reimbursement tolerance). contract (as generated by the application of the simple If the demand loan has not been on the institution’s books interest rate to the unpaid principal balance over the life past the period for which finance charge disclosures of the loan) is greater than the one disclosed; and were made (e.g., the finance charge was disclosed for (3) The finance charge resulting from the conditions a one-year period, but should have been disclosed for a described under (1) and (2) is understated. five-year period, and only 10 months have elapsed), no reimbursement is required. However, if the institution 9. Q. Will reimbursement be required for demand loans with takes no prospective corrective action (i.e., if it does not at disclosures based on a one-year maturity when the demand least disclose in writing a refinancing of the original loan) loan contract calls for periodic payments that will amortize and the loan remains on the institution’s books past the the loan over a definite time period? period for which the original finance charge disclosures A.Yes. A formal amortization schedule recorded in the were made, reimbursement will be required as previously demand loan contract is, under 12 CFR 226.17(c)(5), indicated. equivalent to an alternate maturity date, and disclosures Those concepts apply both to straight and variable rate based on the amortization schedule should be made, as demand loans whenever the disclosed finance charge is less opposed to the one-year disclosure. than the actual finance charge after considering appropriate 10. Q. Will reimbursement be required on demand loans when: tolerances. (1) An alternate maturity date is disclosed and reflected in 11. Q. How will the Policy Guide apply to violations of the the contract, but the finance charge disclosure is based early disclosure requirements of 12 CFR 226.19(a)? on one year? A.As a general rule, the Policy Guide will not apply to (2) There is no alternate maturity date disclosed or violations involving early Truth in Lending disclosures, reflected in the contract, but the finance charge but will apply to violations of the pre-consummation disclosure is based on a period of time less than one disclosures required by 12 CFR 226.17. However, if the year? creditor has provided erroneous early disclosures and has not made pre-consummation disclosures, the Policy Guide A.In the first case, since there is an alternate maturity will apply to the erroneous early disclosures. date in the contract, which is disclosed, the finance charge disclosure should have been based on that alternate Methods of Adjustment maturity date, as required under 12 CFR 226.17(c)(5), not 1. Q. Must reimbursements resulting from understated finance on the disclosure period to be used when the instrument has charges always be made as a single “lump sum” amount? no alternate maturity date. A.No. Reimbursements resulting from the creditor’s failure In the second case, the actual finance charge disclosure to include prepaid finance charges in the total finance should have been based on a one-year period, as required charge must always be refunded as a “lump sum” payment, by 12 CFR 226.17(c)(5), not on some period less than that but reimbursements resulting from failure to include required when the instrument has no alternate maturity finance charge components that accrue over time may be date. prorated on a straight-line basis (no time value) over the life of the loan and refunded under the lump sum/payment After considering appropriate tolerances, reimbursement reduction method. will be required in both cases if: 2. Q. Must a creditor use one reimbursement method (1) The disclosed finance charge is less than the actual consistently on all affected loans? finance charge for the initial required disclosure period; and FDIC Compliance Manual — June 2009 V-1.41
  • 42. V. Lending — TILA Q&A A.No. The creditor’s right to choose between the two date of the assumption and the rules for application of methods (lump sum or lump sum/payment reduction) the Policy Guide to terminated loans will apply. applies to each transaction. Reimbursement will be made to the original borrower for 3. Q. May a creditor apply a lump sum reimbursement to the the period before the assumption occurred if: consumer’s loan balance on a loan requiring reimbursement (1) A reimbursable violation is found on the original instead of making a cash payment to the consumer? borrower’s disclosure statement; and A.If the loan is a closed-end loan, the creditor must make (2) The original borrower is not released from liability on a cash payment or a deposit into an existing unrestricted the loan. However, in the event the subsequent borrower consumer asset account such as, an unrestricted savings, defaults and the original borrower must again assume NOW, or demand deposit account. However, if the loan is payments on the loan, such payments will be based on delinquent, in default, or has been charged off, the creditor the payment amount which would have been calculated may apply all or part of the reimbursement to the amount under the lump sum-payment reduction method, at the past due, if permissible under law. time of reimbursement, had no assumption occurred. If the reimbursement involves an open-end account, the If a required disclosure to a subsequent borrower contains creditor must make a cash payment or a deposit into an reimbursable violations, that borrower shall be reimbursed existing unrestricted consumer asset account such as an for the period after the assumption occurred, based on the unrestricted savings, NOW, or demand deposit account. new disclosure. However, on a case-by-case basis, the agencies may permit the creditor to credit the consumer’s open account by the Non-Disclosure of the APR or Finance Charge amount of the reimbursement if the consumer consents. 1. Q. How will the Policy Guide apply to loans for which no Creditors should be aware that crediting open-end accounts disclosure statements are on file? might create credit balances subject to the requirements of 12 CFR 226.11. In addition, if the open-end account is A.If there is no evidence that the creditor furnished delinquent, in default, or has been charged off, the creditor disclosures or if there is a preponderance of evidence that may apply all or part of the reimbursement to the amount disclosures containing violations subject to reimbursements past due, if permissible under law. were destroyed before the record retention period expired, either violation will be treated as a failure to disclose 4. Q. If a transaction involves more than one consumer, to the APR. The creditor will be given the opportunity to whom must reimbursement be made? substantiate the claim that an accurate disclosure was made A.The reimbursement is the property of, and is to be made before final action is taken. The absence of compliance to, the primary obligor in the credit transaction. If there documentation will be viewed relative to known practices is more than one primary obligor, reimbursement must of the creditor for record retention and Regulation Z be made jointly. If the primary obligor(s) is deceased, compliance. the payment should be made pursuant to the estate and 2. Q. How will the Policy Guide apply if a creditor did unclaimed property laws of the state. If the creditor is not provide required disclosures to the consumer before unable to locate the primary obligor(s), after having at least consummation, but did supply them after consummation? mailed the reimbursement amount to the consumer’s last known address, the amount of the reimbursement is subject A.If required disclosures were not provided before to the unclaimed property laws of the state. consummation of the transaction, the transaction will be viewed as having no APR disclosed and the Policy Guide 5. Q. How will the Policy Guide apply to residential mortgage will apply. If the creditor’s failure to provide disclosures transactions that have been assumed by a third party? included the credit life, accident, and health insurance A.Reimbursement will be made only to the original disclosures, the insurance premiums must be treated as borrower and only to the extent of overcharges that finance charges. occurred before the assumption if: 3. Q. Will the Policy Guide apply when a creditor has (1) A reimbursable violation is found on the original disclosed the APR as “2% OP” to mean a fluctuating rate borrower’s disclosure statement; and of two percent over the prime rate, or has disclosed similar prime rate terminology instead of the APR? (2) The original borrower is not released from liability on the loan. The original transaction will be considered A.If the disclosure statement (not the note) clearly provides terminated with respect to the original borrower on the the numerical value of the prime rate as it pertains to the credit transaction, as of the time disclosures are given to V-1.42 FDIC Compliance Manual — June 2009
  • 43. V. Lending — TILA Q&A the consumer, that rate (the prime rate or 2% OP) will (3) The creditor has afforded the borrower the option of be considered to be the disclosed APR under the Policy taking or refusing the insurance by checking a block Guide. If the prime rate is not provided on the disclosure or initialing a line opposite a statement similar to the statement, the transaction will be viewed under the Policy following, both of which are disclosed in writing to Guide as if no APR has been disclosed. the borrower: “I desire credit life, accident and health insurance” and “I do not desire credit life, accident and 4. Q. Will reimbursement be required on demand loans when health insurance?” the variable rate feature has not been disclosed and the rate is increased? A.In those cases, the Policy Guide will apply because the creditor has not disclosed to the customer in writing, as A.Yes. If the consumer has not been notified in writing required by 12 CFR 226.4(d)(1)(i), that the credit life, of the rate change on or before the date of the change, accident and health insurance are optional. reimbursement will be required if the financial institution has not made the variable rate disclosures. 4. Q. How will the Policy Guide apply if: Each time the rate is changed and the customer is not (1) The consumer is charged for credit life, accident and given written notification of the new rate, the rate change health insurance premiums; and period(s) will be treated as if no APR had been disclosed, (2) The creditor did not include the premiums in the APR and the Policy Guide will apply. The rate on the most recent or finance charge disclosures; and notification will serve as the contract rate. (3) The creditor disclosed the optional nature and cost of Improper Disclosure of Credit Life, Accident, Health, credit life insurance to the consumer in writing and the or Loss of Income Insurance customer signed or initialed close to those disclosures; 1. Q. Are the credit insurance provisions of the Policy Guide and applicable to terminated loans? (4) Either no affirmative statement indicating a desire to A.Yes. The credit insurance provisions apply if such loans obtain the insurance was provided or the appropriate originated within the Policy Guide’s corrective action box or line was not checked or otherwise marked to period for terminated loans. indicate whether the customer did or did not desire the 2. Q. How will the Policy Guide apply if the cost of credit insurance? insurance premiums is disclosed as a rate (e.g., as a A.If the disclosure provided a choice to the customer percentage or in dollars and cents per hundred per month) through statements such as “I desire the insurance” and “I in a closed-end transaction? do not desire the insurance” and neither choice has been A.Regulation Z permits creditors to disclose credit marked to designate the customer’s selection, the Policy insurance premiums on a unit-cost basis in closed-end Guide will apply because the creditor did not meet the transactions by mail or telephone under 12 CFR 226.17(g), requirements of 12 CFR 226.4(d)(1)(iii). and in certain closed-end transactions involving an If no affirmative statement indicating a desire to purchase insurance plan that limits the total amount of indebtedness the insurance has been provided, and the customer has only subject to coverage. signed or initialed near the optional nature statements or In all other closed-end credit transactions, however, the cost disclosures, the Policy Guide will apply because the dollar amount of insurance premiums must be disclosed. If creditor did not meet the requirements of 12 CFR 226.4(d) the premium cost in those cases is disclosed as dollars or (1)(iii). cents per hundred or as a percentage, it will be treated as 5. Q. How will the Policy Guide apply if: if no disclosure of the cost had been made and the Policy Guide will apply accordingly. (1) The creditor does not include premiums for credit life, accident and health insurance in the APR or finance 3. Q. How will the Policy Guide apply if: charge disclosures; and (1) The creditor does not include premiums for credit life, (2) The creditor provides disclosures stating that the accident and health insurance in the APR or finance insurance is not required; and charge disclosures; and (3) The creditor provides the cost of each type of insurance, (2) The creditor fails to disclose the optional nature of the with a statement that the customer’s signature will insurance; but indicate a desire to purchase the insurance listed below FDIC Compliance Manual — June 2009 V-1.43
  • 44. V. Lending — TILA Q&A and the customer signs once, below the cost disclosure, A.Yes. However, if the insurer has not exercised such right but does not initial each type of insurance desired? of subrogation and agrees to prospectively waive that right for outstanding loans, the Policy Guide will not apply to A.If the disclosures clearly indicate that the customer, by those loans. signing where indicated, elects to purchase each type of insurance for which the cost has been provided, the Policy Obvious Errors Guide will not apply. However, prospectively the creditor 1. Q. What are examples of Obvious Errors described in the shall clarify such disclosures, by obtaining the customer’s Policy Guide? initials for each type of insurance selected, or by changing the manner in which the customer signs for credit insurance A. Consider a situation where the APR is disclosed when more than one type is offered. correctly and the correct finance charge is $600, no adjustment would be required if the amount of the 6. Q. If vendor’s single interest (VSI) insurance is written disclosed finance charge is shown as $60 or less. Likewise, in connection with a credit transaction, the insurance if the finance charge is correctly disclosed and the correct premiums are not included in the finance charge, and APR is 18.568%, no adjustment would be required if the the creditor does not obtain a waiver of the right of disclosed APR is shown as 1.8568% or less. subrogation from the insurer, is the resulting finance charge understatement subject to reimbursement under the Policy Guide? V-1.44 FDIC Compliance Manual — June 2009