"Consummation" and Timing of Closed-End Disclosures under Securian's Single-Signature Blended Multi-Featured Plan (Whitepaper)
 

Like this? Share it with your network

Share

"Consummation" and Timing of Closed-End Disclosures under Securian's Single-Signature Blended Multi-Featured Plan (Whitepaper)

on

  • 852 views

One of the legal implications to consider when developing a blended, single-signature multi-featured lending plan is whether the closed-end Fed Box disclosures can be given timely under Reg Z and ...

One of the legal implications to consider when developing a blended, single-signature multi-featured lending plan is whether the closed-end Fed Box disclosures can be given timely under Reg Z and applicable state contract law. The answer is yes, they can. By providing the disclosures at the time of advance, prior to or with the disbursement of funds, credit unions satisfy the timing requirements under Reg Z and state law. This paper will explain in greater detail the legal definition of “consummation”, the state law interpreting it, and how it applies to blended multi-featured plans. For more info: www.nafcu.org/securian

Statistics

Views

Total Views
852
Views on SlideShare
718
Embed Views
134

Actions

Likes
1
Downloads
3
Comments
0

2 Embeds 134

http://www.nafcu.org 133
http://www.google.com 1

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

"Consummation" and Timing of Closed-End Disclosures under Securian's Single-Signature Blended Multi-Featured Plan (Whitepaper) Document Transcript

  • 1. hij abc“Consummation” and timing Catherine Klimek Senior Counsel Securian Financial Groupof closed-end disclosuresunder Securian’ssingle-signature blendedmulti-featured plan July 2012
  • 2. Executive summary One of the legal implications to consider when developing a blended, single-signature multi-featured lending plan is whether the closed-end Fed Box disclosures can be given timely under Reg Z and applicable state contract law. The answer is yes, they can. By providing the disclosures at the time of advance, prior to or with the disbursement of funds, credit unions satisfy the timing requirements under Reg Z and state law. This paper will explain in greater detail the legal definition of “consummation”, the state law interpreting it, and how it applies to blended multi-featured plans.Consummation – July 2012Securian.com/financialinstitutions
  • 3. Background When Reg Z’s open-end rules were changed in 2009, Securian knew that a blended approach to multi-featured lending would be permissible. All that was needed was to provide closed-end disclosures for closed-end advances. For it to work, however, credit unions would need to be able to deliver the closed-end disclosures in a timely manner to comply with Reg Z. So, one of the first steps we took when we created our blended plan We carefully read Reg Z’s was to complete the legal research necessary to determine when definitions of “consummation” consummation occurs under a blended plan. We carefully read Reg Z’s and “credit” and analyzed the definitions of “consummation” and “credit” and analyzed the state court state court cases regarding cases regarding when a consumer becomes contractually obligated on when a consumer becomes a credit transaction. We determined that consummation occurs under contractually obligated a blended plan at the time of the advance, not when the plan is first on a credit transaction. established, and have structured our plan documents accordingly. Our We determined that clients have been able to build the delivery of the closed-end disclosures consummation occurs under seamlessly into their lending procedures. a blended plan at the time of the advance, not when the plan is first established, and have structured our plan documents accordingly.Consummation – July 2012Securian.com/financialinstitutions
  • 4. The Consumer Lending Plan The Consumer Lending Plan document reserves the credit Under Securian’s multi-featured blended plan, the member establishes union’s right to refuse any the plan by signing the Consumer Lending Plan document. The plan advance, and the member is document reserves the credit union’s right to refuse any advance, and not obligated on the terms of the member is not obligated on the terms of the plan until he accepts the the plan unless and until he advance proceeds. When a member requests a closed-end advance, the takes an advance. credit union will fully underwrite the advance before approving it. If the credit union approves the request, the credit union will set the terms of the loan, and the member may accept the loan or refuse the loan. In other words, neither party is obligated on any particular advance request until they agree on the terms of that loan, and the credit union issues, and the member accepts, the loan proceeds. This is set forth in the language of the plan documents. The closed-end Fed Box disclosures are given on our Advance Receipt document, which is not signed by the member. The Advance Receipt does not need to be signed in order to “consummate” the closed-end transaction under a blended plan. We instruct our credit union clients to provide the closed-end Fed Box disclosures at the time of the advance, prior to or at the time the funds are disbursed, because that is the point at which the member becomes obligated on the advance. For example, the Fed Box can be handed to a member with the proceeds check, or mailed with the proceeds check, or provided electronically.Consummation – July 2012Securian.com/financialinstitutions 4
  • 5. The law To determine when consummation occurs, one must look to Reg Z, as well as state contract law as determined by the pertinent court cases. Reg Z Under Reg Z, creditors must make the required disclosures “before consummation of the transaction.” 1 “Consummation” under Reg Z means Under Reg Z, creditors must “the time that a consumer becomes contractually obligated on a credit make the required disclosures transaction.”2 The term, “credit” under Reg Z is defined as “the right to “before consummation of the defer payment of a debt or to incur debt and defer its payment.”3 So, in transaction.” “Consummation” the case of a multi-featured lending plan, consummation occurs at the under Reg Z means “the time time the consumer has the right to incur debt and to defer its payment, that a consumer becomes and becomes legally obligated on that debt (i.e., when the consumer contractually obligated on a becomes obligated on a loan). ‘credit’ transaction.” When that obligation occurs is not determined by Reg Z; rather, it’s determined based on state contract law.4 Reg Z’s Official Commentary states: 1. State law governs. When a contractual obligation on the consumer’s part is created is a matter to be determined under applicable law; Regulation Z does not make this determination. A contractual commitment agreement, for example, that under applicable law binds the consumer to the credit terms would be consummation. Consummation, however, does not occur merely because the consumer has made some financial investment in the transaction (for example, by paying a nonrefundable fee) unless, of course, applicable law holds otherwise. 5 1 12 CFR 1026.17(b) 2 12 CFR 1026.2(a)(13) 3 12 CFR 1026.2(a)(14) 4 12 CFR 1026.2(a)(13), Comment 1. 5 Comment 1026.2(a)(13) -1Consummation – July 2012Securian.com/financialinstitutions 5
  • 6. Reg Z does provide some general guidance and contemplates a two-step approach similar to that used by Securian’s Consumer Lending Plan: 2. Credit v. sale. Consummation does not occur when the consumer becomes contractually committed to a sale transaction, unless the consumer also becomes legally obligated to accept a particular credit arrangement. For example, when a consumer pays a nonrefundable deposit to purchase an automobile, a purchase contract may be created, but consummation for purposes of the regulation does not occur unless the consumer also contracts for financing at that time.6 This Comment 2 addresses a structure similar to the two-step approach of the Consumer Lending Plan. First is when the member commits to the contractual arrangement; the second is when he commits to the terms of the financing. It is the second step at which the Reg Z disclosures must be given. Court cases We must look to court cases to determine when a credit transaction has been consummated and, therefore, when the closed-end Fed Box disclosures must be given. There are many cases across the country which support the fact that our Consumer Lending Plan does conform to the Reg Z timing requirements. The essential question is: at what point did the consumer become obligated on the credit transaction? That is, at what point did the parties agree to the essential terms of the particular loan at issue, and when did they commit to providing, or accepting, that loan? Most court cases address confusion or debate that comes when the transaction is completed in more than one step. Vehicle financing cases For example, vehicle purchases often have a two-part contractual arrangement: a purchase agreement or delivery sheet outlining the basic parameters of the sale is signed (e.g., purchase price, description of the vehicle, etc.), and then the dealer searches for a particular financing arrangement with set loan terms (e.g., $25,000 at 4.99 percent). If the consumer is approved for, and accepts, that financing on those terms, Comment 1026.2(a)(13) -2 6Consummation – July 2012Securian.com/financialinstitutions 6
  • 7. then the closing takes place. Courts have held in such cases that the credit transaction did not occur until closing (even though the first agreement may be a legally binding contract to purchase the vehicle) because the consumer did not accept, or agree to, the particular terms of credit until later, when the particular financing arrangement was approved. As such, the Reg Z disclosure requirements are not triggered until that second step, when the set terms are agreed upon. Example: Liabo v. Wayzata Nissan, LLC, 707 N.W.2d 715 (Minn. Ct. App. 2006) held that a delivery sheet alone did not trigger the disclosure requirements of TILA because no particular financing had been agreed upon at that time. In that case, Ms. Liabo went to the dealership and wanted to buy a vehicle at the dealer’s advertised promotional rate of 2.9 percent. Once Ms. Liabo picked the vehicle she wanted, a Delivery Sheet was prepared. The Delivery Sheet set forth the basic parameters of the purchase, including a $1200 deposit, but did not set forth the terms of the financing. The Delivery Sheet stated that it was a binding contract. However, both parties understood that the financing (rather than the purchase) was contingent on Ms. Liabo qualifying for the 2.9 percent interest rate. After the Delivery Sheet was signed, and the deposit paid, Ms. Liabo completed a loan application. It took the dealer some time to find a lender willing to provide the loan at 2.9 percent. In the meantime, Ms. Liabo decided she wanted a more expensive car (which would not qualify for the 2.9 percent rate) and tried to cancel the purchase. The dealer refused to refund the $1200 deposit, and the lawsuit ensued. Ms. Liabo, among other things, alleged that the dealer violated Reg Z because the disclosures were not given at the time the Delivery Sheet was signed. The Court held that the Reg Z disclosures were not required at the time the Delivery Sheet was signed. Rather, had the sale continued, the Reg Z disclosures should have (and would have) been disclosed on the retail installment contract that the borrower would have received. Relying on the Reg Z Commentary, the court noted that consummation did not occur merely because Ms. Liabo became obligated on the purchaseConsummation – July 2012Securian.com/financialinstitutions 7
  • 8. transaction, because at that time she had not become contractually obligated to accept a particular credit arrangement.7 Securian’s Consumer Lending Plan, and others like it, is directly comparable to the Liabo situation. When consumers sign the plan document, they are not becoming contractually obligated to accept a particular credit arrangement. As such, Reg Z disclosures are not required at that time. It’s not until later, when a particular advance is requested, approved, and accepted, that a credit transaction occurs and the disclosures must be given. Unfunded financing arrangements Unfunded financing arrangements are contracts in which a consumer is obligated to accept future funds. Blended plans are not unfunded financing arrangements. But these cases are instructive because they can be legally contrasted. Example: The case of Gibson v. LTD, Inc., 434 F.3d 275 (4th Cir. 2006)8 is instructive as well. In that case, the consumer signed retail financing agreements in order to purchase two trucks. The purchase agreements, however, conditioned the loan on the dealer’s ability to secure third-party financing for the loans. The court held that, even though this condition precedent was set forth in the documents, the court would not impose such a requirement on the consumer because that condition was solely within the dealer’s control. The court held that the consumer, when he signed the documents, could no longer alter the terms of credit, and therefore he became contractually obligated on the credit transaction when he signed the documents. Since the disclosures were not provided prior to that time, the dealer violated Reg Z. In so holding, the Court stated, “consummation occurs when a consumer has done all he can to be committed to the terms of a credit transaction”. 434 F.3d at 281 (quoting Nigh v. Koons Buick Pontiac GMC, Inc., 319 F.3d 119 (4th Cir.2003) (reversed in part on other grounds). The court went on to state: 707 N.W.2d at 723. 7 The Fourth Circuit covers Maryland, North Carolina, South Carolina, Virginia and West Virginia. 8Consummation – July 2012Securian.com/financialinstitutions 8
  • 9. Applying Nigh, we conclude that when the purchaser of a motor vehicle signs a retail installment sales contract after which he no longer can alter the terms of credit and after which the dealer retains the exclusive right to decide when the financing arrangement takes effect, the transaction is “consummated” for TILA purposes. Following this reasoning, under Securian’s Consumer Lending Plan, consummation occurs at the time of the advance, rather than at the time the Plan document is signed. Under the terms of the Plan, the consumer “has done all he can to be committed to the terms of the credit transaction” and can “no longer alter the terms” at the point in time he accepts the closed-end advance proceeds. When the member signs the Plan document, he has not committed to any particular terms of financing or even agreed to take any particular loan yet. Therefore, disclosures are timely given at the time of the advance. A very similar case is Bragg v. Bill Heard Chevrolet, 374 F.3d 1060 (11th Cir. 2004).9 In that case, the purchase agreement and retail installment contracts were signed and the vehicle was delivered to the consumer. However, because of the dealer’s process, financing was not secured and title did not pass until a later date. The dispute arose as to whether consummation occurred at the time the documents were signed, or later at the time the title passed. The court held that it occurred at the time the documents were signed, because that was the point at which the consumer became obligated on the transaction. This was because the conditions of consummating the loan were in the sole control of the lender. The Court stated: “We hold that in a financing agreement containing a condition precedent where the condition of obtaining financing is within the exclusive control of the seller and third-party lender, consummation occurs when the consumer signs the contract. 374 F.3d at 1067.” Cases such as this and Nigh involve “unfunded financing arrangements”, in which the consumer, when signing the document, gives up the right to refuse future advances under the contract. Therefore, “consummation” occurs at the time the document is signed. The 11th Circuit covers Alabama, Georgia and Florida. 9Consummation – July 2012Securian.com/financialinstitutions 9
  • 10. Blended plans are not unfunded financing arrangements. Under the terms of the blended plan contract, the condition consummating the loan is not “within the exclusive control” of the lender, because the member has not given up his right to refuse future advances. Therefore a member under Securian’s Plan does not consummate the closed-end advance until he accepts the advance proceeds. Up until that point, he has the power to determine whether he is obligated on that advance. Mortgage cases Mortgage cases involving rescission are also instructive because the cases must determine when consummation occurred for the purpose of determining whether the rescission notice was timely given. Example: Jackson v. Grant, 890 F.2d 118 (C.A. 9 (Cal) 1989)10 was a case in which the borrower sought to rescind a real estate loan transaction. The issue became one of consummation in order to determine whether the rescission notice was timely given. Loan documents were signed in February giving many of the truth-in-lending disclosures as well as the contractual terms governing the loan. However, those documents were executed with a broker, Union Home Loans, and no lender had been selected yet. The documents clearly stated that Ms. Jackson was not guaranteed a loan, and the name of the lender was left blank on the promissory note and the deed of trust. Finally, in April, when no lender could be found, the broker informed Ms. Jackson that it would be the lender. The promissory note and deed were then completed with the broker’s name, and the loan closed in April. A dispute ensued and Ms. Jackson alleged that the rescission notice should have been given in February when she signed the documents, rather than April, when the loan was funded. The court found that, if an essential element of the contract is reserved for the future agreement of both parties, there is no legal obligation created until such an agreement is entered into. The court stated, “While it is not necessary to decide what, if any, binding agreement was created by and between Jackson and Union on The 9th Circuit covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington. 10Consummation – July 2012Securian.com/financialinstitutions 10
  • 11. February 18, one conclusion is inescapable. No one, including Union, had agreed to extend credit to Jackson as of that date and no loan transaction was consummated.” In a footnote, the court also noted that the regulations at 1026.2(a)(14) define “credit’ as “the right to defer payment of debt or to incur debt and defer its payment,” and that Jackson received no such right in February. The court determined that the broker made an offer in February, which was not accepted until April. As such, consummation did not occur until April. The same can be said of the Consumer Lending Plan. At the time the plan is signed, an offer to make a loan (or series of loans) is extended by the credit union. That offer is not accepted, however, until later, when the consumer requests, and accepts, an advance. Consummation, then, occurs at that later point. Other cases follow the same tenant. For example, in re: Vickers, 275 B.R. 401 (Bkrtcy.M.D. Fla., 2001), was a similar rescission case resting on the issue of when consummation occurred. On February 21, the debtors signed the note, mortgage, and related closing documents. One of those documents stated that the documents did not constitute a loan commitment and that the requested loan was “conditioned” on review and investigation of all facts and representations including the consumer’s credit history. The lender then conducted the credit review, approved the loan, and distributed the funds on March 3. Because the lender had no obligation to lend money on February 21, the court held, the loan was not consummated until funds were disbursed on March 3. Like Jackson, the court determined that the February 21 transaction was an offer to accept a loan by the debtor, which offer was only accepted by lender when lender funded the loan on March 3. This is consistent with Reg Z’s Official Commentary, as well as Securian’s Consumer Lending Plan. The signing of the Plan initially is not enough to trigger the disclosure requirements, because no particular credit terms were agreed upon at that time. As such, while a contract may be signed at that time, no credit transaction has occurred. It is not until the time of the advance that a credit transaction occurs and the disclosure requirementsConsummation – July 2012Securian.com/financialinstitutions 11
  • 12. are triggered - because that is when the credit union and the member agree to make, and accept, a loan on specific and essential agreed-upon terms. Other cases There are other court cases that can be contrasted. Example: In Murphy v. Empire of America, 746 F.2d 931 (2nd Cir. (NY) 1984)11, the Murphys applied for a second mortgage with Empire. On November 15, 1982, Empire, after reviewing the application, issued to them a commitment letter for a $27,000 loan at a 15½ percent interest rate, to be secured by a second mortgage on the premises. The letter provided that upon the Murphy’s execution and return of the letter before November 24, 1982, together with their payment of a $715 commitment fee, the commitment letter would constitute a contract, to be interpreted according to New York law, for a loan to be closed on or before December 31, 1982. In the event that the loan is not closed, the Murphys would be liable for any damages suffered by Empire. The Murphys executed the commitment letter and returned it with their $715 commitment fee to Empire on or about November 18, 1982. Eight days later, Empire sent the Notice of Right to Rescind required by Reg Z. Within the three day rescission period, the Murphys signed and returned the notice electing NOT to rescind. However, in December, prior to the funding of the loan, the Murphys had a change of heart and tried cancelling the loan. The Court held that the loan commitment constituted consummation of the transaction, stating: Under New York law the consumer’s acceptance of a lender’s commitment offer constitutes a binding contract. For such a commitment contract to exist it is only necessary that the borrower and lender concur as to the essential terms of the future mortgage transaction. Thus, consummation can occur before the loan is funded if the first set of documents sets forth terms specific enough to constitute a commitment 11 The Second Circuit covers Connecticut, New York and Vermont.Consummation – July 2012Securian.com/financialinstitutions 12
  • 13. letter. This is not the case with Securian’s Consumer Lending Plan, because no loan terms are determined or guaranteed at the time the plan document is signed, nor does the plan document contain the terms of the particular advance. This same rule would apply if a purchase agreement sets forth a promise to make the loan from a particular lender at set terms and the borrower signed that document, agreeing to those terms. Example: In Graves v. Tru-Link Fence Company, 905 F. Supp 515 (N.D. Illinois 1995), Ms. Graves entered into an agreement to purchase, and finance, a fence to be constructed around her home. The Proposal signed by both parties contained the agreement to build the fence and the financing terms of the agreement. It did not state that the contract or financing terms were “subject to” the fence company’s approval. As such, the credit transaction was consummated at the time the proposal was signed, and Reg Z disclosures should have been given at that time, rather than when the fence company later attempted to sell the contract to a finance company. Clark v. Troy & Nichols, Inc., 864 F.2d 1261 (5th Cir. 1989)12 is also instructive. In that case, the consumer was attempting to purchase a home and signed a “Rate & Discount Agreement” prior to the lender approving the loan. The consumer contended that by signing this agreement, the lender was obligated to lend, and the consumer was obligated to borrow, the funds. Therefore, the consumer alleged, the disclosures should have been given at that time, rather than at closing. The court disagreed. It noted that the Rate & Discount Agreement stated that if the loan does not occur by a stated date, the loan is open and can be re-negotiated, “unless the loan is approved on or before the 25th day of the agreement.” The loan was not approved by the 25th day, and the court stated that because of this, the consumer was not obligated on the transaction when he signed the Rate & Discount Agreement. Therefore, consummation did not occur at that 12 The Fifth Circuit covers Louisiana, Mississippi and Texas.Consummation – July 2012Securian.com/financialinstitutions 13
  • 14. time, and the disclosures did not need to be given at that time. Rather, the disclosures were given timely at closing. This is consistent with Securian’s blended plan. The member is not obligated on any given transaction until he accepts the proceeds of that transaction. Therefore, disclosures are required at the time of the advance, not at the time the plan document was signed. Merely establishing the plan does not create a credit transaction; therefore, Reg Z disclosure requirements are not triggered at that time As we’ve explained already, the plan document signed by the consumer sets forth no set loan terms such as loan amount, APR, collateral, or payment schedule. Moreover, it specifically states that the credit union can refuse any advance request, and that by accepting, using, or accessing the advance proceeds, the consumer is agreeing to the terms of the disclosures and the credit contract. As such, the Plan document is not a loan commitment and does not have sufficient details to obligate either party to any particular credit transaction at the time the Plan document is signed. Thus, the Reg Z disclosures do not need to be given at that time. Rather, it is not until the time of the advance, when the parties accept the particular (and essential) terms of a particular loan, that the disclosures must be given. Not only is this position justified under the law, but it is readily apparent by using common sense and logic. When the consumer signs the plan document, no loan is being agreed upon.13 If there is no loan, there can be no disclosure requirement. Even if the consumer signs a plan document, there are no obligations unless and until an advance is requested, approved, and accepted by the consumer. Therefore, the proper time to provide disclosures is at the time of the advance, prior to or with disbursement of the funds. Blank note cases It’s been suggested that the Consumer Lending Plan can be likened to the “blank note cases.” Blank note cases are those cases in which a consumer Often the first advance under the plan is requested at the same time the plan is established. In such a case, the 13 Advance Receipt with Fed Box is given at the same time the consumer signs the plan document. However, that occurs because the advance was granted, not because the plan was established.Consummation – July 2012Securian.com/financialinstitutions 14
  • 15. signs a blank promissory note containing the Fed Box, and the lender fills in the disclosures later, long after the consumer has accepted the loan proceeds and began using the collateral. Or, an unscrupulous lender never fills them in at all. Example: In Lacey v. William Chrysler Plymouth, 2004 WL 415972 (N.D. Ill. 2004), Ms. Lacey went to the dealership on June 8 and was interested in buying a certain vehicle. The dealership ran her credit report and told her she did not qualify for that vehicle, but said she could purchase a less expensive vehicle if she put $750 down. Ms. Lacey did not have the down payment with her and went home to gather the down payment. She came back to the dealer that day with a partial down payment. The dealer at that point had Ms. Lacey sign a blank retail installment contract and told her they would try to get a monthly payment about the same as her current payment on her current car. Ms. Lacey left her current vehicle at the lot as a trade-in and drove the new vehicle home. About two weeks later, the dealer finally sent Ms. Lacey a completed retail installment contract, which did not reflect the trade-in. When Ms. Lacey asked why the trade-in wasn’t a part of the disclosure, a dispute ensued. Ms. Lacey never made any payments and the dealer eventually repossessed the vehicle. Ms. Lacy sued for, among other things, violation of Reg Z for making her sign a blank note and not receiving the disclosures until after the loan was made. The court noted that Ms. Lacey clearly did not understand the terms of the financing agreement because those terms had not been determined, nor disclosed, at the time of the transaction (in this case, when the dealer accepted her cash and trade-in, and allowed her to drive the vehicle home). The Court held that the dealership violated Reg Z. Such a situation is clearly distinguishable from that of the Consumer Lending Plan. There is no “blank note” or blank disclosures being signed. The contract document is signed at the time the plan is established. It does not contain, and is not meant to contain, any particular terms of a particular credit transaction. Instead, the contract is signed with the intention of the parties that if, and when, the consumer requests a loanConsummation – July 2012Securian.com/financialinstitutions 15
  • 16. advance, the credit union will determine if the consumer qualifies for the Consummation occurs when loan. If the consumer qualifies, the terms of the advance (e.g., amount, the consumer becomes legally APR, etc.) are agreed upon, the disclosures and advance receipt is obligated on a loan. A loan provided, and then the funds are disbursed. The credit union is not filling occurs when debt is incurred in or providing the disclosures after disbursement. Nor is the consumer with the right to defer it. obligated on the loan unless and until he accepts the proceeds. Such a situation is clearly distinguishable from a blank note case. States in which the exact issue of Reg Z timing requirements have not been addressed It is commonplace in the law to find that not all fifty states have addressed a particular issue. When this occurs, state courts will first look to other states in its district, and then other states outside its district. So, in the states in which this particular issue has not been addressed, the courts have plenty of law to follow from the other states. The state courts will also look to the basic tenants of contract law in its state to confirm when the consumer becomes obligated on the transaction. While different states will use different terminology, all states require the three basic elements of a contract: acceptance, offer, and consideration. A consumer is not obligated on a transaction until those three elements are present. Under a blended plan, this occurs at the time of the advance, not when the plan is first established - at the time of the advance is when the credit union will offer a particular loan on particular terms, the member accepts that loan, and consideration (i.e., the loan proceeds) is paid. Therefore, it is valid to conclude that any court in the country would find consummation to occur at the time of the advance. If the Fed Box disclosures are provided at that time, then the credit union complies with Reg Z and state law. Legal conclusion Many different cases across all fifty states can be examined, compared, contrasted, etc. Such is the nature of state contract law. But the general contract rules are consistent in the above cases: if, under the terms of the documents and the circumstances of the case, neither the credit union nor the consumer has agreed to the essential terms of the advance, and the member has not accepted the loan proceeds, then the credit transactionConsummation – July 2012Securian.com/financialinstitutions 16
  • 17. has not been “consummated” and the Reg Z disclosures do not need to be given. As such, the establishment of the plan by the signing of the contract does not trigger the Reg Z disclosures. It is a two step-process, and the disclosure requirement is not triggered until the two parties agree on the essential terms of a particular advance, and the funds are disbursed by the credit union and accepted by the consumer. Thus, if a consumer opens a plan but never takes an advance, there is no loan, no obligation, and no Reg Z requirements. And if a consumer does take an advance, that is when the obligation is incurred, and that’s when the disclosures must be given. Conclusion Consummation occurs when the consumer becomes legally obligated on a loan. A loan occurs when debt is incurred with the right to defer it. Under the various states’ court cases, this occurs when the credit union and the member agree on the essential terms of the advance and the member accepts the loan proceeds. This is because it is not until that time that the member becomes obligated on the advance. A single-signature multi-featured blended plan is not a closed-end note, not a loan commitment, and not an unfunded financing arrangement. In those cases, the member is obligated to accept all funds under the terms of the contract. By contrast, under a blended plan, the consumer is not obligated to accept any advance proceeds when he signs the plan document. Rather, he becomes obligated on a particular advance when he accepts the proceeds of that advance. Therefore, consummation occurs at the time of advance, and delivering the closed-end disclosures at that time complies with Reg Z.Consummation – July 2012Securian.com/financialinstitutions 17
  • 18. About Securian Financial Group, Inc.Since 1880, Securian Financial Group and its affiliates have provided financial security for individuals and businesses in the form of insurance,investments and retirement plans. Now one of the nation’s largest financial services providers, it is the holding company parent of a group ofcompanies that include Minnesota Life Insurance Company. Securian Financial Group, Inc.www.securian.com400 Robert Street North, St. Paul, MN 55101-2098©2012 Securian Financial Group, Inc. All rights reserved.F76814-6 9-2012 DOFU 9-2012A03220-0812