[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2018 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 12
Banks and Banking
________________________
Parts 1026 to 1099
Revised as of January 1, 2018
Containing a codification of documents of general
applicability and future effect
As of January 1, 2018
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
[[Page ii]]
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[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 12:
Chapter X--Bureau of Consumer Financial Protection
(Continued) 3
Finding Aids:
Table of CFR Titles and Chapters........................ 1177
Alphabetical List of Agencies Appearing in the CFR...... 1197
List of CFR Sections Affected........................... 1207
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 12 CFR 1026.1 refers
to title 12, part 1026,
section 1.
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[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
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name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
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LEGAL STATUS
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HOW TO USE THE CODE OF FEDERAL REGULATIONS
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To determine whether a Code volume has been amended since its
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OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
Federal agencies to display an OMB control number with their information
collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
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PAST PROVISIONS OF THE CODE
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(a) The incorporation will substantially reduce the volume of
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(b) The matter incorporated is in fact available to the extent
necessary to afford fairness and uniformity in the administrative
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(c) The incorporating document is drafted and submitted for
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What if the material incorporated by reference cannot be found? If
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CFR INDEXES AND TABULAR GUIDES
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this volume.
[[Page vii]]
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Oliver A. Potts,
Director,
Office of the Federal Register.
January 1, 2018.
[[Page ix]]
THIS TITLE
Title 12--Banks and Banking is composed of ten volumes. The parts in
these volumes are arranged in the following order: Parts 1-199, 200-219,
220-229, 230-299, 300-499, 500-599, 600-899, 900-1025, 1026-1099, and
1100-end. The contents of these volumes represent all current
regulations codified under this title of the CFR as of January 1, 2018.
For this volume, Ann Worley was Chief Editor. The Code of Federal
Regulations publication program is under the direction of John Hyrum
Martinez, assisted by Stephen J. Frattini.
[[Page 1]]
TITLE 12--BANKS AND BANKING
(This book contains parts 1026 to 1099)
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Part
chapter x--Bureau of Consumer Financial Protection
(Continued)............................................... 1026
[[Page 3]]
CHAPTER X--BUREAU OF CONSUMER FINANCIAL PROTECTION (CONTINUED)
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Part Page
1026 Truth in lending (Regulation Z)............. 5
1030 Truth in savings (Regulation DD)............ 945
1041 Payday, vehicle title, and certain high-cost
installment loans (Eff. 1-16-18)........ 984
1070 Disclosure of records and information....... 1056
1071 Rule implementing Equal Access to Justice
Act..................................... 1087
1072 Enforcement of nondiscrimination on the
basis of disability in programs and
activities conducted by the Bureau of
Consumer Financial Protection........... 1093
1073 Procedures for bureau debt collection....... 1099
1074 Procedure relating to rulemaking............ 1109
1075 Consumer financial civil penalty fund rule.. 1109
1076 Claims against the United States............ 1114
1080 Rules relating to investigations............ 1114
1081 Rules of practice for adjudication
proceedings............................. 1121
1082 State official notification rules........... 1155
1083 Civil penalty adjustments................... 1157
1090 Defining larger participants of certain
consumer financial product and service
markets................................. 1157
1091 Procedural rule to establish supervisory
authority over certain nonbank covered
persons based on risk determination..... 1165
1092-1099 [Reserved]
[[Page 5]]
PART 1026_TRUTH IN LENDING (REGULATION Z)--Table of Contents
Subpart A_General
Sec.
1026.1 Authority, purpose, coverage, organization, enforcement, and
liability.
1026.2 Definitions and rules of construction.
1026.3 Exempt transactions.
1026.4 Finance charge.
Subpart B_Open-End Credit
1026.5 General disclosure requirements.
1026.6 Account-opening disclosures.
1026.7 Periodic statement.
1026.8 Identifying transactions on periodic statements.
1026.9 Subsequent disclosure requirements.
1026.10 Payments.
1026.11 Treatment of credit balances; account termination.
1026.12 Special credit card provisions.
1026.13 Billing error resolution.
1026.14 Determination of annual percentage rate.
1026.15 Right of rescission.
1026.16 Advertising.
Subpart C_Closed-End Credit
1026.17 General disclosure requirements.
1026.18 Content of disclosures.
1026.19 Certain mortgage and variable-rate transactions.
1026.20 Disclosure requirements regarding post-consummation events.
1026.21 Treatment of credit balances.
1026.22 Determination of annual percentage rate.
1026.23 Right of rescission.
1026.24 Advertising.
Subpart D_Miscellaneous
1026.25 Record retention.
1026.26 Use of annual percentage rate in oral disclosures.
1026.27 Language of disclosures.
1026.28 Effect on state laws.
1026.29 State exemptions.
1026.30 Limitation on rates.
Subpart E_Special Rules for Certain Home Mortgage Transactions
1026.31 General rules.
1026.32 Requirements for high-cost mortgages.
1026.33 Requirements for reverse mortgages.
1026.34 Prohibited acts or practices in connection with high-cost
mortgages.
1026.35 Requirements for higher-priced mortgage loans.
1026.36 Prohibited acts or practices and certain requirements for credit
secured by a dwelling.
1026.37 Content of disclosures for certain mortgage transactions (Loan
Estimate).
1026.38 Content of disclosures for certain mortgage transactions
(Closing Disclosure).
1026.39 Mortgage transfer disclosures.
1026.40 Requirements for home equity plans.
1026.41 Periodic statements for residential mortgage loans.
1026.42 Valuation independence.
1026.43 Minimum standards for transactions secured by a dwelling.
1026.44-1026.45 [Reserved]
Subpart F_Special Rules for Private Education Loans
1026.46 Special disclosure requirements for private education loans.
1026.47 Content of disclosures.
1026.48 Limitations on private education loans.
Subpart G_Special Rules Applicable to Credit Card Accounts and Open-End
Credit Offered to College Students
1026.51 Ability to Pay.
1026.52 Limitations on fees.
1026.53 Allocation of payments.
1026.54 Limitations on the imposition of finance charges.
1026.55 Limitations on increasing annual percentage rates, fees, and
charges.
1026.56 Requirements for over-the-limit transactions.
1026.57 Reporting and marketing rules for college student open-end
credit.
1026.58 Internet posting of credit card agreements.
1026.59 Reevaluation of rate increases.
1026.60 Credit and charge card applications and solicitations.
1026.61 Hybrid prepaid-credit cards.
Appendix A to Part 1026--Effect on State Laws
Appendix B to Part 1026--State Exemptions
Appendix C to Part 1026--Issuance of Official Interpretations
Appendix D to Part 1026--Multiple Advance Construction Loans
Appendix E to Part 1026--Rules for Card Issuers That Bill on a
Transaction-by-Transaction Basis
Appendix F to Part 1026--Optional Annual Percentage Rate Computations
for Creditors Offering Open-End Credit Plans Secured by a
Consumer's Dwelling
Appendix G to Part 1026--Open-End Model Forms and Clauses
Appendix H to Part 1026-- Closed-End Model Forms and Clauses
[[Page 6]]
Appendix I to Part 1026 [Reserved]
Appendix J to Part 1026--Annual Percentage Rate Computations for Closed-
End Credit Transactions
Appendix K to Part 1026--Total Annual Loan Cost Rate Computations for
Reverse Mortgage Transactions
Appendix L to Part 1026--Assumed Loan Periods for Computations of Total
Annual Loan Cost Rates
Appendix M1 to Part 1026--Repayment Disclosures
Appendix M2 to Part 1026--Sample Calculations of Repayment Disclosures
Appendix N to Part 1026--Higher-Priced Mortgage Loan Appraisal Safe
Harbor Review
Appendixes O-P to Part 1026 [Reserved]
Appendix Q to Part 1026--Standards for Determining Monthly Debt and
Income
Supplement I to Part 1026--Official Interpretations
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353, 5511,
5512, 5532, 5581; 15 U.S.C. 1601 et seq.''
Source: 76 FR 79772, Dec. 22, 2011, unless otherwise noted.
Subpart A_General
Sec. 1026.1 Authority, purpose, coverage, organization, enforcement,
and liability.
(a) Authority. This part, known as Regulation Z, is issued by the
Bureau of Consumer Financial Protection to implement the Federal Truth
in Lending Act, which is contained in title I of the Consumer Credit
Protection Act, as amended (15 U.S.C. 1601 et seq.). This part also
implements title XII, section 1204 of the Competitive Equality Banking
Act of 1987 (Pub. L. 100-86, 101 Stat. 552). Furthermore, this part
implements certain provisions of the Real Estate Settlement Procedures
Act of 1974, as amended (12 U.S.C. 2601 et seq.). In addition, this part
implements certain provisions of the Financial Institutions Reform,
Recovery, and Enforcement Act, as amended (12 U.S.C. 3331 et seq.). The
Bureau's information-collection requirements contained in this part have
been approved by the Office of Management and Budget (OMB) under the
provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB No.
3170-0015 (Truth in Lending).
(b) Purpose. The purpose of this part is to promote the informed use
of consumer credit by requiring disclosures about its terms and cost, to
ensure that consumers are provided with greater and more timely
information on the nature and costs of the residential real estate
settlement process, and to effect certain changes in the settlement
process for residential real estate that will result in more effective
advance disclosure to home buyers and sellers of settlement costs. The
regulation also includes substantive protections. It gives consumers the
right to cancel certain credit transactions that involve a lien on a
consumer's principal dwelling, regulates certain credit card practices,
and provides a means for fair and timely resolution of credit billing
disputes. The regulation does not generally govern charges for consumer
credit, except that several provisions in subpart G set forth special
rules addressing certain charges applicable to credit card accounts
under an open-end (not home-secured) consumer credit plan. The
regulation requires a maximum interest rate to be stated in variable-
rate contracts secured by the consumer's dwelling. It also imposes
limitations on home-equity plans that are subject to the requirements of
Sec. 1026.40 and mortgages that are subject to the requirements of
Sec. 1026.32. The regulation prohibits certain acts or practices in
connection with credit secured by a dwelling in Sec. 1026.36, and
credit secured by a consumer's principal dwelling in Sec. 1026.35. The
regulation also regulates certain practices of creditors who extend
private education loans as defined in Sec. 1026.46(b)(5). In addition,
it imposes certain limitations on increases in costs for mortgage
transactions subject to Sec. 1026.19(e) and (f).
(c) Coverage. (1) In general, this part applies to each individual
or business that offers or extends credit, other than a person excluded
from coverage of this part by section 1029 of the Consumer Financial
Protection Act of 2010, title X of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, when four
conditions are met:
(i) The credit is offered or extended to consumers;
(ii) The offering or extension of credit is done regularly;
[[Page 7]]
(iii) The credit is subject to a finance charge or is payable by a
written agreement in more than four installments; and
(iv) The credit is primarily for personal, family, or household
purposes.
(2) If a credit card is involved, however, certain provisions apply
even if the credit is not subject to a finance charge, or is not payable
by a written agreement in more than four installments, or if the credit
card is to be used for business purposes.
(3) In addition, certain requirements of Sec. 1026.40 apply to
persons who are not creditors but who provide applications for home-
equity plans to consumers.
(4) Furthermore, certain requirements of Sec. 1026.57 apply to
institutions of higher education.
(5) Except in transactions subject to Sec. 1026.19(e) and (f), no
person is required to provide the disclosures required by sections
128(a)(16) through (19), 128(b)(4), 129C(f)(1), 129C(g)(2) and (3),
129D(h), or 129D(j)(1)(A) of the Truth in Lending Act, section 4(c) of
the Real Estate Settlement Procedures Act, or the disclosure required
prior to settlement by section 129C(h) of the Truth in Lending Act.
Except in transactions subject to Sec. 1026.20(e), no person is
required to provide the disclosure required by section 129D(j)(1)(B) of
the Truth in Lending Act. Except in transactions subject to Sec.
1026.39(d)(5), no person becoming a creditor with respect to an existing
residential mortgage loan is required to provide the disclosure required
by section 129C(h) of the Truth in Lending Act.
(d) Organization. The regulation is divided into subparts and
appendices as follows:
(1) Subpart A contains general information. It sets forth:
(i) The authority, purpose, coverage, and organization of the
regulation;
(ii) The definitions of basic terms;
(iii) The transactions that are exempt from coverage; and
(iv) The method of determining the finance charge.
(2) Subpart B contains the rules for open-end credit. It requires
that account-opening disclosures and periodic statements be provided, as
well as additional disclosures for credit and charge card applications
and solicitations and for home-equity plans subject to the requirements
of Sec. 1026.60 and Sec. 1026.40, respectively. It also describes
special rules that apply to credit card transactions, treatment of
payments and credit balances, procedures for resolving credit billing
errors, annual percentage rate calculations, rescission requirements,
and advertising.
(3) Subpart C relates to closed-end credit. It contains rules on
disclosures, treatment of credit balances, annual percentage rate
calculations, rescission requirements, and advertising.
(4) Subpart D contains rules on oral disclosures, disclosures in
languages other than English, record retention, effect on state laws,
state exemptions, and rate limitations.
(5) Subpart E contains special rules for mortgage transactions.
Section 1026.32 requires certain disclosures and provides limitations
for closed-end credit transactions and open-end credit plans that have
rates or fees above specified amounts or certain prepayment penalties.
Section 1026.33 requires special disclosures, including the total annual
loan cost rate, for reverse mortgage transactions. Section 1026.34
prohibits specific acts and practices in connection with high-cost
mortgages, as defined in Sec. 1026.32(a). Section 1026.35 prohibits
specific acts and practices in connection with closed-end higher-priced
mortgage loans, as defined in Sec. 1026.35(a). Section 1026.36
prohibits specific acts and practices in connection with an extension of
credit secured by a dwelling. Sections 1026.37 and 1026.38 set forth
special disclosure requirements for certain closed-end transactions
secured by real property or a cooperative unit, as required by Sec.
1026.19(e) and (f).
(6) Subpart F relates to private education loans. It contains rules
on disclosures, limitations on changes in terms after approval, the
right to cancel the loan, and limitations on co-branding in the
marketing of private education loans.
(7) Subpart G relates to credit card accounts under an open-end (not
home-secured) consumer credit plan (except for Sec. 1026.57(c), which
applies to all open-end credit plans). Section 1026.51 contains rules on
evaluation of a consumer's ability to make the required
[[Page 8]]
payments under the terms of an account. Section 1026.52 limits the fees
that a consumer can be required to pay with respect to an open-end (not
home-secured) consumer credit plan during the first year after account
opening. Section 1026.53 contains rules on allocation of payments in
excess of the minimum payment. Section 1026.54 sets forth certain
limitations on the imposition of finance charges as the result of a loss
of a grace period. Section 1026.55 contains limitations on increases in
annual percentage rates, fees, and charges for credit card accounts.
Section 1026.56 prohibits the assessment of fees or charges for over-
the-limit transactions unless the consumer affirmatively consents to the
creditor's payment of over-the-limit transactions. Section 1026.57 sets
forth rules for reporting and marketing of college student open-end
credit. Section 1026.58 sets forth requirements for the Internet posting
of credit card accounts under an open-end (not home-secured) consumer
credit plan.
(8) Several appendices contain information such as the procedures
for determinations about state laws, state exemptions and issuance of
official interpretations, special rules for certain kinds of credit
plans, and the rules for computing annual percentage rates in closed-end
credit transactions and total-annual-loan-cost rates for reverse
mortgage transactions.
(e) Enforcement and liability. Section 108 of the Truth in Lending
Act contains the administrative enforcement provisions for that Act.
Sections 112, 113, 130, 131, and 134 contain provisions relating to
liability for failure to comply with the requirements of the Truth in
Lending Act and the regulation. Section 1204(c) of title XII of the
Competitive Equality Banking Act of 1987, Public Law 100-86, 101 Stat.
552, incorporates by reference administrative enforcement and civil
liability provisions of sections 108 and 130 of the Truth in Lending
Act. Section 19 of the Real Estate Settlement Procedures Act contains
the administrative enforcement provisions for that Act.
[76 FR 79772, Dec. 22, 2011, as amended at 77 FR 70114, Nov. 23, 2012;
78 FR 6962, Jan. 31, 2013; 78 FR 80106, Dec. 31, 2013; 80 FR 32687, June
9, 2015; 82 FR 37768, Aug. 11, 2017]
Sec. 1026.2 Definitions and rules of construction.
(a) Definitions. For purposes of this part, the following
definitions apply:
(1) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.).
(2) Advertisement means a commercial message in any medium that
promotes, directly or indirectly, a credit transaction.
(3)(i) Application means the submission of a consumer's financial
information for the purposes of obtaining an extension of credit.
(ii) For transactions subject to Sec. 1026.19(e), (f), or (g) of
this part, an application consists of the submission of the consumer's
name, the consumer's income, the consumer's social security number to
obtain a credit report, the property address, an estimate of the value
of the property, and the mortgage loan amount sought.
(4) Billing cycle or cycle means the interval between the days or
dates of regular periodic statements. These intervals shall be equal and
no longer than a quarter of a year. An interval will be considered equal
if the number of days in the cycle does not vary more than four days
from the regular day or date of the periodic statement.
(5) Bureau means the Bureau of Consumer Financial Protection.
(6) Business day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However, for purposes of rescission under Sec. Sec. 1026.15
and 1026.23, and for purposes of Sec. Sec. 1026.19(a)(1)(ii),
1026.19(a)(2), 1026.19(e)(1)(iii)(B), 1026.19(e)(1)(iv),
1026.19(e)(2)(i)(A), 1026.19(e)(4)(ii), 1026.19(f)(1)(ii),
1026.19(f)(1)(iii), 1026.20(e)(5), 1026.31, and 1026.46(d)(4), the term
means all calendar days except Sundays and the legal public holidays
specified in 5 U.S.C. 6103(a), such as New Year's Day, the Birthday of
Martin Luther King, Jr., Washington's Birthday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving
Day, and Christmas Day.
(7) Card issuer means a person that issues a credit card or that
person's agent with respect to the card.
[[Page 9]]
(8) Cardholder means a natural person to whom a credit card is
issued for consumer credit purposes, or a natural person who has agreed
with the card issuer to pay consumer credit obligations arising from the
issuance of a credit card to another natural person. For purposes of
Sec. 1026.12(a) and (b), the term includes any person to whom a credit
card is issued for any purpose, including business, commercial or
agricultural use, or a person who has agreed with the card issuer to pay
obligations arising from the issuance of such a credit card to another
person.
(9) Cash price means the price at which a creditor, in the ordinary
course of business, offers to sell for cash property or service that is
the subject of the transaction. At the creditor's option, the term may
include the price of accessories, services related to the sale, service
contracts and taxes and fees for license, title, and registration. The
term does not include any finance charge.
(10) Closed-end credit means consumer credit other than ``open-end
credit'' as defined in this section.
(11) Consumer means a cardholder or natural person to whom consumer
credit is offered or extended. However, for purposes of rescission under
Sec. Sec. 1026.15 and 1026.23, the term also includes a natural person
in whose principal dwelling a security interest is or will be retained
or acquired, if that person's ownership interest in the dwelling is or
will be subject to the security interest.
(12) Consumer credit means credit offered or extended to a consumer
primarily for personal, family, or household purposes.
(13) Consummation means the time that a consumer becomes
contractually obligated on a credit transaction.
(14) Credit means the right to defer payment of debt or to incur
debt and defer its payment.
(15)(i) Credit card means any card, plate, or other single credit
device that may be used from time to time to obtain credit.
(ii) Credit card account under an open-end (not home-secured)
consumer credit plan means any open-end credit account that is accessed
by a credit card, except:
(A) A home-equity plan subject to the requirements of Sec. 1026.40
that is accessed by a credit card; or
(B) An overdraft line of credit that is accessed by a debit card or
an account number.
(iii) Charge card means a credit card on an account for which no
periodic rate is used to compute a finance charge.
(16) Credit sale means a sale in which the seller is a creditor. The
term includes a bailment or lease (unless terminable without penalty at
any time by the consumer) under which the consumer:
(i) Agrees to pay as compensation for use a sum substantially
equivalent to, or in excess of, the total value of the property and
service involved; and
(ii) Will become (or has the option to become), for no additional
consideration or for nominal consideration, the owner of the property
upon compliance with the agreement.
(17) Creditor means:
(i) A person who regularly extends consumer credit that is subject
to a finance charge or is payable by written agreement in more than four
installments (not including a down payment), and to whom the obligation
is initially payable, either on the face of the note or contract, or by
agreement when there is no note or contract.
(ii) For purposes of Sec. Sec. 1026.4(c)(8) (Discounts), 1026.9(d)
(Finance charge imposed at time of transaction), and 1026.12(e) (Prompt
notification of returns and crediting of refunds), a person that honors
a credit card.
(iii) For purposes of subpart B, any card issuer that extends either
open-end credit or credit that is not subject to a finance charge and is
not payable by written agreement in more than four installments.
(iv) For purposes of subpart B (except for the credit and charge
card disclosures contained in Sec. Sec. 1026.60 and 1026.9(e) and (f),
the finance charge disclosures contained in Sec. 1026.6(a)(1) and
(b)(3)(i) and Sec. 1026.7(a)(4) through (7) and (b)(4) through (6) and
the right of rescission set forth in Sec. 1026.15) and subpart C, any
card issuer that extends closed-end credit that is subject to a finance
charge or is payable by written
[[Page 10]]
agreement in more than four installments.
(v) A person regularly extends consumer credit only if it extended
credit (other than credit subject to the requirements of Sec. 1026.32)
more than 25 times (or more than 5 times for transactions secured by a
dwelling) in the preceding calendar year. If a person did not meet these
numerical standards in the preceding calendar year, the numerical
standards shall be applied to the current calendar year. A person
regularly extends consumer credit if, in any 12-month period, the person
originates more than one credit extension that is subject to the
requirements of Sec. 1026.32 or one or more such credit extensions
through a mortgage broker.
(18) Downpayment means an amount, including the value of property
used as a trade-in, paid to a seller to reduce the cash price of goods
or services purchased in a credit sale transaction. A deferred portion
of a downpayment may be treated as part of the downpayment if it is
payable not later than the due date of the second otherwise regularly
scheduled payment and is not subject to a finance charge.
(19) Dwelling means a residential structure that contains one to
four units, whether or not that structure is attached to real property.
The term includes an individual condominium unit, cooperative unit,
mobile home, and trailer, if it is used as a residence.
(20) Open-end credit means consumer credit extended by a creditor
under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;
(ii) The creditor may impose a finance charge from time to time on
an outstanding unpaid balance; and
(iii) The amount of credit that may be extended to the consumer
during the term of the plan (up to any limit set by the creditor) is
generally made available to the extent that any outstanding balance is
repaid.
(21) Periodic rate means a rate of finance charge that is or may be
imposed by a creditor on a balance for a day, week, month, or other
subdivision of a year.
(22) Person means a natural person or an organization, including a
corporation, partnership, proprietorship, association, cooperative,
estate, trust, or government unit.
(23) Prepaid finance charge means any finance charge paid separately
in cash or by check before or at consummation of a transaction, or
withheld from the proceeds of the credit at any time.
(24) Residential mortgage transaction means a transaction in which a
mortgage, deed of trust, purchase money security interest arising under
an installment sales contract, or equivalent consensual security
interest is created or retained in the consumer's principal dwelling to
finance the acquisition or initial construction of that dwelling.
(25) Security interest means an interest in property that secures
performance of a consumer credit obligation and that is recognized by
State or Federal law. It does not include incidental interests such as
interests in proceeds, accessions, additions, fixtures, insurance
proceeds (whether or not the creditor is a loss payee or beneficiary),
premium rebates, or interests in after-acquired property. For purposes
of disclosures under Sec. Sec. 1026.6, 1026.18, 1026.19(e) and (f), and
1026.38(l)(6), the term does not include an interest that arises solely
by operation of law. However, for purposes of the right of rescission
under Sec. Sec. 1026.15 and 1026.23, the term does include interests
that arise solely by operation of law.
(26) State means any state, the District of Columbia, the
Commonwealth of Puerto Rico, and any territory or possession of the
United States.
(b) Rules of construction. For purposes of this part, the following
rules of construction apply:
(1) Where appropriate, the singular form of a word includes the
plural form and plural includes singular.
(2) Where the words obligation and transaction are used in the
regulation, they refer to a consumer credit obligation or transaction,
depending upon the context. Where the word credit is used in the
regulation, it means consumer credit unless the context clearly
indicates otherwise.
(3) Unless defined in this part, the words used have the meanings
given to them by state law or contract.
[[Page 11]]
(4) Where the word amount is used in this part to describe
disclosure requirements, it refers to a numerical amount.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 80106, Dec. 31, 2013]
Effective Date Notes: 1. At 81 FR 84369, Nov. 22, 2016, Sec. 1026.2
was amended by revising paragraphs (a)(15)(i), (a)(15)(ii)(A), and
(a)(15)(ii)(B), and by adding paragraphs (a)(15)(ii)(C) and (a)(15)(iv),
effective Oct. 1, 2017. At 82 FR 18975, Apr. 25, 2017, the effective
date was delayed to Apr. 1, 2018. For the convenience of the user, the
added and revised text is set forth as follows:
Sec. 1026.2 Definitions and rules of construction.
(a) * * *
(15)(i) Credit card means any card, plate, or other single credit
device that may be used from time to time to obtain credit. The term
credit card includes a hybrid prepaid-credit card as defined in Sec.
1026.61.
(ii) * * *
(A) A home-equity plan subject to the requirements of Sec. 1026.40
that is accessed by a credit card;
(B) An overdraft line of credit that is accessed by a debit card; or
(C) An overdraft line of credit that is accessed by an account
number, except if the account number is a hybrid prepaid-credit card
that can access a covered separate credit feature as defined in Sec.
1026.61.
* * * * *
(iv) Debit card means any card, plate, or other single device that
may be used from time to time to access an asset account other than a
prepaid account as defined in Sec. 1026.61. The term debit card does
not include a prepaid card as defined in Sec. 1026.61.
* * * * *
Effective Date Notes: 2. At 81 FR 72388, Oct. 19, 2016, Sec. 1026.2
was amended by revising paragraph (a)(11) and adding paragraph (a)(27),
effective Apr. 19, 2018. For the convenience of the user, the added and
revised text is set forth as follows:
Sec. 1026.2 Definitions and rules of construction.
* * * * *
(a) * * *
(11) Consumer means a cardholder or natural person to whom consumer
credit is offered or extended. However, for purposes of rescission under
Sec. Sec. 1026.15 and 1026.23, the term also includes a natural person
in whose principal dwelling a security interest is or will be retained
or acquired, if that person's ownership interest in the dwelling is or
will be subject to the security interest. For purposes of Sec. Sec.
1026.20(c) through (e), 1026.36(c), 1026.39, and 1026.41, the term
includes a confirmed successor in interest.
* * * * *
(27)(i) Successor in interest means a person to whom an ownership
interest in a dwelling securing a closed-end consumer credit transaction
is transferred from a consumer, provided that the transfer is:
(A) A transfer by devise, descent, or operation of law on the death
of a joint tenant or tenant by the entirety;
(B) A transfer to a relative resulting from the death of the
consumer;
(C) A transfer where the spouse or children of the consumer become
an owner of the property;
(D) A transfer resulting from a decree of a dissolution of marriage,
legal separation agreement, or from an incidental property settlement
agreement, by which the spouse of the consumer becomes an owner of the
property; or
(E) A transfer into an inter vivos trust in which the consumer is
and remains a beneficiary and which does not relate to a transfer of
rights of occupancy in the property.
(ii) Confirmed successor in interest means a successor in interest
once a servicer has confirmed the successor in interest's identity and
ownership interest in the dwelling.
* * * * *
Sec. 1026.3 Exempt transactions.
The following transactions are not subject to this part or, if the
exemption is limited to specified provisions of this part, are not
subject to those provisions:
(a) Business, commercial, agricultural, or organizational credit.
(1) An extension of credit primarily for a business, commercial or
agricultural purpose.
(2) An extension of credit to other than a natural person, including
credit to government agencies or instrumentalities.
(b) Credit over applicable threshold amount--(1) Exemption--(i)
Requirements. An extension of credit in which the amount of credit
extended exceeds the applicable threshold amount or in which there is an
express written commitment to extend credit in excess of the applicable
threshold amount, unless the extension of credit is:
[[Page 12]]
(A) Secured by any real property, or by personal property used or
expected to be used as the principal dwelling of the consumer; or
(B) A private education loan as defined in Sec. 1026.46(b)(5).
(ii) Annual adjustments. The threshold amount in paragraph (b)(1)(i)
of this section is adjusted annually to reflect increases in the
Consumer Price Index for Urban Wage Earners and Clerical Workers, as
applicable. See the official commentary to this paragraph (b) for the
threshold amount applicable to a specific extension of credit or express
written commitment to extend credit.
(2) Transition rule for open-end accounts exempt prior to July 21,
2011. An open-end account that is exempt on July 20, 2011 based on an
express written commitment to extend credit in excess of $25,000 remains
exempt until December 31, 2011 unless:
(i) The creditor takes a security interest in any real property, or
in personal property used or expected to be used as the principal
dwelling of the consumer; or
(ii) The creditor reduces the express written commitment to extend
credit to $25,000 or less.
(c) Public utility credit. An extension of credit that involves
public utility services provided through pipe, wire, other connected
facilities, or radio or similar transmission (including extensions of
such facilities), if the charges for service, delayed payment, or any
discounts for prompt payment are filed with or regulated by any
government unit. The financing of durable goods or home improvements by
a public utility is not exempt.
(d) Securities or commodities accounts. Transactions in securities
or commodities accounts in which credit is extended by a broker-dealer
registered with the Securities and Exchange Commission or the Commodity
Futures Trading Commission.
(e) Home fuel budget plans. An installment agreement for the
purchase of home fuels in which no finance charge is imposed.
(f) Student loan programs. Loans made, insured, or guaranteed
pursuant to a program authorized by title IV of the Higher Education Act
of 1965 (20 U.S.C. 1070 et ).
(g) Employer-sponsored retirement plans. An extension of credit to a
participant in an employer-sponsored retirement plan qualified under
section 401(a) of the Internal Revenue Code, a tax-sheltered annuity
under section 403(b) of the Internal Revenue Code, or an eligible
governmental deferred compensation plan under section 457(b) of the
Internal Revenue Code (26 U.S.C. 401(a); 26 U.S.C. 403(b); 26 U.S.C.
457(b)), provided that the extension of credit is comprised of fully
vested funds from such participant's account and is made in compliance
with the Internal Revenue Code (26 U.S.C. 1 et seq.).
(h) Partial exemption for certain mortgage loans. The special
disclosure requirements in Sec. 1026.19(g) and, unless the creditor
chooses to provide the disclosures described in Sec. 1026.19(e) and
(f), in Sec. 1026.19(e) and (f) do not apply to a transaction that
satisfies all of the following criteria:
(1) The transaction is secured by a subordinate lien;
(2) The transaction is for the purpose of:
(i) Downpayment, closing costs, or other similar home buyer
assistance, such as principal or interest subsidies;
(ii) Property rehabilitation assistance;
(iii) Energy efficiency assistance; or
(iv) Foreclosure avoidance or prevention;
(3) The credit contract does not require the payment of interest;
(4) The credit contract provides that repayment of the amount of
credit extended is:
(i) Forgiven either incrementally or in whole, at a date certain,
and subject only to specified ownership and occupancy conditions, such
as a requirement that the consumer maintain the property as the
consumer's principal dwelling for five years;
(ii) Deferred for a minimum of 20 years after consummation of the
transaction;
(iii) Deferred until sale of the property securing the transaction;
or
(iv) Deferred until the property securing the transaction is no
longer the principal dwelling of the consumer;
(5)(i) The costs payable by the consumer in connection with the
transaction at consummation are limited to:
[[Page 13]]
(A) Recording fees;
(B) Transfer taxes;
(C) A bona fide and reasonable application fee; and
(D) A bona fide and reasonable fee for housing counseling services;
and
(ii) The total of costs payable by the consumer under paragraph
(h)(5)(i)(C) and (D) of this section is less than 1 percent of the
amount of credit extended; and
(6) The following disclosures are provided:
(i) Disclosures described in Sec. 1026.18 that comply with this
part; or
(ii) Alternatively, disclosures described in Sec. 1026.19(e) and
(f) that comply with this part.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 80107, Dec. 31, 2013;
82 FR 37768, Aug. 11, 2017]
Sec. 1026.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit as
a dollar amount. It includes any charge payable directly or indirectly
by the consumer and imposed directly or indirectly by the creditor as an
incident to or a condition of the extension of credit. It does not
include any charge of a type payable in a comparable cash transaction.
(1) Charges by third parties. The finance charge includes fees and
amounts charged by someone other than the creditor, unless otherwise
excluded under this section, if the creditor:
(i) Requires the use of a third party as a condition of or an
incident to the extension of credit, even if the consumer can choose the
third party; or
(ii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(2) Special rule; closing agent charges. Fees charged by a third
party that conducts the loan closing (such as a settlement agent,
attorney, or escrow or title company) are finance charges only if the
creditor:
(i) Requires the particular services for which the consumer is
charged;
(ii) Requires the imposition of the charge; or
(iii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(3) Special rule; mortgage broker fees. Fees charged by a mortgage
broker (including fees paid by the consumer directly to the broker or to
the creditor for delivery to the broker) are finance charges even if the
creditor does not require the consumer to use a mortgage broker and even
if the creditor does not retain any portion of the charge.
(b) Examples of finance charges. The finance charge includes the
following types of charges, except for charges specifically excluded by
paragraphs (c) through (e) of this section:
(1) Interest, time price differential, and any amount payable under
an add-on or discount system of additional charges.
(2) Service, transaction, activity, and carrying charges, including
any charge imposed on a checking or other transaction account to the
extent that the charge exceeds the charge for a similar account without
a credit feature.
(3) Points, loan fees, assumption fees, finder's fees, and similar
charges.
(4) Appraisal, investigation, and credit report fees.
(5) Premiums or other charges for any guarantee or insurance
protecting the creditor against the consumer's default or other credit
loss.
(6) Charges imposed on a creditor by another person for purchasing
or accepting a consumer's obligation, if the consumer is required to pay
the charges in cash, as an addition to the obligation, or as a deduction
from the proceeds of the obligation.
(7) Premiums or other charges for credit life, accident, health, or
loss-of-income insurance, written in connection with a credit
transaction.
(8) Premiums or other charges for insurance against loss of or
damage to property, or against liability arising out of the ownership or
use of property, written in connection with a credit transaction.
(9) Discounts for the purpose of inducing payment by a means other
than the use of credit.
(10) Charges or premiums paid for debt cancellation or debt
suspension coverage written in connection with a credit transaction,
whether or not the coverage is insurance under applicable law.
[[Page 14]]
(c) Charges excluded from the finance charge. The following charges
are not finance charges:
(1) Application fees charged to all applicants for credit, whether
or not credit is actually extended.
(2) Charges for actual unanticipated late payment, for exceeding a
credit limit, or for delinquency, default, or a similar occurrence.
(3) Charges imposed by a financial institution for paying items that
overdraw an account, unless the payment of such items and the imposition
of the charge were previously agreed upon in writing.
(4) Fees charged for participation in a credit plan, whether
assessed on an annual or other periodic basis.
(5) Seller's points.
(6) Interest forfeited as a result of an interest reduction required
by law on a time deposit used as security for an extension of credit.
(7) Real-estate related fees. The following fees in a transaction
secured by real property or in a residential mortgage transaction, if
the fees are bona fide and reasonable in amount:
(i) Fees for title examination, abstract of title, title insurance,
property survey, and similar purposes.
(ii) Fees for preparing loan-related documents, such as deeds,
mortgages, and reconveyance or settlement documents.
(iii) Notary and credit-report fees.
(iv) Property appraisal fees or fees for inspections to assess the
value or condition of the property if the service is performed prior to
closing, including fees related to pest-infestation or flood-hazard
determinations.
(v) Amounts required to be paid into escrow or trustee accounts if
the amounts would not otherwise be included in the finance charge.
(8) Discounts offered to induce payment for a purchase by cash,
check, or other means, as provided in section 167(b) of the Act.
(d) Insurance and debt cancellation and debt suspension coverage--
(1) Voluntary credit insurance premiums. Premiums for credit life,
accident, health, or loss-of-income insurance may be excluded from the
finance charge if the following conditions are met:
(i) The insurance coverage is not required by the creditor, and this
fact is disclosed in writing.
(ii) The premium for the initial term of insurance coverage is
disclosed in writing. If the term of insurance is less than the term of
the transaction, the term of insurance also shall be disclosed. The
premium may be disclosed on a unit-cost basis only in open-end credit
transactions, closed-end credit transactions by mail or telephone under
Sec. 1026.17(g), and certain closed-end credit transactions involving
an insurance plan that limits the total amount of indebtedness subject
to coverage.
(iii) The consumer signs or initials an affirmative written request
for the insurance after receiving the disclosures specified in this
paragraph, except as provided in paragraph (d)(4) of this section. Any
consumer in the transaction may sign or initial the request.
(2) Property insurance premiums. Premiums for insurance against loss
of or damage to property, or against liability arising out of the
ownership or use of property, including single interest insurance if the
insurer waives all right of subrogation against the consumer, may be
excluded from the finance charge if the following conditions are met:
(i) The insurance coverage may be obtained from a person of the
consumer's choice, and this fact is disclosed. (A creditor may reserve
the right to refuse to accept, for reasonable cause, an insurer offered
by the consumer.)
(ii) If the coverage is obtained from or through the creditor, the
premium for the initial term of insurance coverage shall be disclosed.
If the term of insurance is less than the term of the transaction, the
term of insurance shall also be disclosed. The premium may be disclosed
on a unit-cost basis only in open-end credit transactions, closed-end
credit transactions by mail or telephone under Sec. 1026.17(g), and
certain closed-end credit transactions involving an insurance plan that
limits the total amount of indebtedness subject to coverage.
(3) Voluntary debt cancellation or debt suspension fees. Charges or
premiums paid for debt cancellation coverage for
[[Page 15]]
amounts exceeding the value of the collateral securing the obligation or
for debt cancellation or debt suspension coverage in the event of the
loss of life, health, or income or in case of accident may be excluded
from the finance charge, whether or not the coverage is insurance, if
the following conditions are met:
(i) The debt cancellation or debt suspension agreement or coverage
is not required by the creditor, and this fact is disclosed in writing;
(ii) The fee or premium for the initial term of coverage is
disclosed in writing. If the term of coverage is less than the term of
the credit transaction, the term of coverage also shall be disclosed.
The fee or premium may be disclosed on a unit-cost basis only in open-
end credit transactions, closed-end credit transactions by mail or
telephone under Sec. 1026.17(g), and certain closed-end credit
transactions involving a debt cancellation agreement that limits the
total amount of indebtedness subject to coverage;
(iii) The following are disclosed, as applicable, for debt
suspension coverage: That the obligation to pay loan principal and
interest is only suspended, and that interest will continue to accrue
during the period of suspension.
(iv) The consumer signs or initials an affirmative written request
for coverage after receiving the disclosures specified in this
paragraph, except as provided in paragraph (d)(4) of this section. Any
consumer in the transaction may sign or initial the request.
(4) Telephone purchases. If a consumer purchases credit insurance or
debt cancellation or debt suspension coverage for an open-end (not home-
secured) plan by telephone, the creditor must make the disclosures under
paragraphs (d)(1)(i) and (ii) or (d)(3)(i) through (iii) of this
section, as applicable, orally. In such a case, the creditor shall:
(i) Maintain evidence that the consumer, after being provided the
disclosures orally, affirmatively elected to purchase the insurance or
coverage; and(ii) Mail the disclosures under paragraphs (d)(1)(i) and
(ii) or (d)(3)(i) through (iii) of this section, as applicable, within
three business days after the telephone purchase.
(e) Certain security interest charges. If itemized and disclosed,
the following charges may be excluded from the finance charge:
(1) Taxes and fees prescribed by law that actually are or will be
paid to public officials for determining the existence of or for
perfecting, releasing, or satisfying a security interest.
(2) The premium for insurance in lieu of perfecting a security
interest to the extent that the premium does not exceed the fees
described in paragraph (e)(1) of this section that otherwise would be
payable.
(3) Taxes on security instruments. Any tax levied on security
instruments or on documents evidencing indebtedness if the payment of
such taxes is a requirement for recording the instrument securing the
evidence of indebtedness.
(f) Prohibited offsets. Interest, dividends, or other income
received or to be received by the consumer on deposits or investments
shall not be deducted in computing the finance charge.
Effective Date Note: At 81 FR 84369, Nov. 22, 2016, Sec. 1026.4 was
amended by revising paragraphs (b)(2), (c)(3), and (c)(4), and by adding
paragraph (b)(11), effective Oct. 1, 2017. At 82 FR 18975, Apr. 25,
2017, the effective date was delayed to Apr. 1, 2018. For the
convenience of the user, the added and revised text is set forth as
follows:
Sec. 1026.4 Finance charge.
* * * * *
(b) * * *
(2) Service, transaction, activity, and carrying charges, including
any charge imposed on a checking or other transaction account (except a
prepaid account as defined in Sec. 1026.61) to the extent that the
charge exceeds the charge for a similar account without a credit
feature.
* * * * *
(11) With regard to a covered separate credit feature and an asset
feature on a prepaid account that are both accessible by a hybrid
prepaid-credit card as defined in Sec. 1026.61:
(i) Any fee or charge described in paragraphs (b)(1) through (10) of
this section imposed on the covered separate credit feature, whether it
is structured as a credit subaccount of the prepaid account or a
separate credit account.
[[Page 16]]
(ii) Any fee or charge imposed on the asset feature of the prepaid
account to the extent that the amount of the fee or charge exceeds
comparable fees or charges imposed on prepaid accounts in the same
prepaid account program that do not have a covered separate credit
feature accessible by a hybrid prepaid-credit card.
(c) * * *
(3) Charges imposed by a financial institution for paying items that
overdraw an account, unless the payment of such items and the imposition
of the charge were previously agreed upon in writing. This paragraph
does not apply to credit offered in connection with a prepaid account as
defined in Sec. 1026.61.
(4) Fees charged for participation in a credit plan, whether
assessed on an annual or other periodic basis. This paragraph does not
apply to a fee to participate in a covered separate credit feature
accessible by a hybrid prepaid-credit card as defined in Sec. 1026.61,
regardless of whether this fee is imposed on the credit feature or on
the asset feature of the prepaid account.
* * * * *
Subpart B_Open-End Credit
Sec. 1026.5 General disclosure requirements.
(a) Form of disclosures--(1) General. (i) The creditor shall make
the disclosures required by this subpart clearly and conspicuously.
(ii) The creditor shall make the disclosures required by this
subpart in writing, in a form that the consumer may keep, except that:
(A) The following disclosures need not be written: Disclosures under
Sec. 1026.6(b)(3) of charges that are imposed as part of an open-end
(not home-secured) plan that are not required to be disclosed under
Sec. 1026.6(b)(2) and related disclosures of charges under Sec.
1026.9(c)(2)(iii)(B); disclosures under Sec. 1026.9(c)(2)(vi);
disclosures under Sec. 1026.9(d) when a finance charge is imposed at
the time of the transaction; and disclosures under Sec.
1026.56(b)(1)(i).
(B) The following disclosures need not be in a retainable form:
Disclosures that need not be written under paragraph (a)(1)(ii)(A) of
this section; disclosures for credit and charge card applications and
solicitations under Sec. 1026.60; home-equity disclosures under Sec.
1026.40(d); the alternative summary billing-rights statement under Sec.
1026.9(a)(2); the credit and charge card renewal disclosures required
under Sec. 1026.9(e); and the payment requirements under Sec.
1026.10(b), except as provided in Sec. 1026.7(b)(13).
(iii) The disclosures required by this subpart may be provided to
the consumer in electronic form, subject to compliance with the consumer
consent and other applicable provisions of the Electronic Signatures in
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
The disclosures required by Sec. Sec. 1026.60, 1026.40, and 1026.16 may
be provided to the consumer in electronic form without regard to the
consumer consent or other provisions of the E-Sign Act in the
circumstances set forth in those sections.
(2) Terminology. (i) Terminology used in providing the disclosures
required by this subpart shall be consistent.
(ii) For home-equity plans subject to Sec. 1026.40, the terms
finance charge and annual percentage rate, when required to be disclosed
with a corresponding amount or percentage rate, shall be more
conspicuous than any other required disclosure. The terms need not be
more conspicuous when used for periodic statement disclosures under
Sec. 1026.7(a)(4) and for advertisements under Sec. 1026.16.
(iii) If disclosures are required to be presented in a tabular
format pursuant to paragraph (a)(3) of this section, the term penalty
APR shall be used, as applicable. The term penalty APR need not be used
in reference to the annual percentage rate that applies with the loss of
a promotional rate, assuming the annual percentage rate that applies is
not greater than the annual percentage rate that would have applied at
the end of the promotional period; or if the annual percentage rate that
applies with the loss of a promotional rate is a variable rate, the
annual percentage rate is calculated using the same index and margin as
would have been used to calculate the annual percentage rate that would
have applied at the end of the promotional period. If credit insurance
or debt cancellation or debt suspension coverage is required as part of
the plan, the term required shall be used and the program shall be
identified by its name. If an annual percentage rate is required to be
presented in
[[Page 17]]
a tabular format pursuant to paragraph (a)(3)(i) or (a)(3)(iii) of this
section, the term fixed, or a similar term, may not be used to describe
such rate unless the creditor also specifies a time period that the rate
will be fixed and the rate will not increase during that period, or if
no such time period is provided, the rate will not increase while the
plan is open.
(3) Specific formats. (i) Certain disclosures for credit and charge
card applications and solicitations must be provided in a tabular format
in accordance with the requirements of Sec. 1026.60(a)(2).
(ii) Certain disclosures for home-equity plans must precede other
disclosures and must be given in accordance with the requirements of
Sec. 1026.40(a).
(iii) Certain account-opening disclosures must be provided in a
tabular format in accordance with the requirements of Sec.
1026.6(b)(1).
(iv) Certain disclosures provided on periodic statements must be
grouped together in accordance with the requirements of Sec.
1026.7(b)(6) and (b)(13).
(v) Certain disclosures provided on periodic statements must be
given in accordance with the requirements of Sec. 1026.7(b)(12).
(vi) Certain disclosures accompanying checks that access a credit
card account must be provided in a tabular format in accordance with the
requirements of Sec. 1026.9(b)(3).
(vii) Certain disclosures provided in a change-in-terms notice must
be provided in a tabular format in accordance with the requirements of
Sec. 1026.9(c)(2)(iv)(D).
(viii) Certain disclosures provided when a rate is increased due to
delinquency, default or as a penalty must be provided in a tabular
format in accordance with the requirements of Sec. 1026.9(g)(3)(ii).
(b) Time of disclosures--(1) Account-opening disclosures--(i)
General rule. The creditor shall furnish account-opening disclosures
required by Sec. 1026.6 before the first transaction is made under the
plan.
(ii) Charges imposed as part of an open-end (not home-secured) plan.
Charges that are imposed as part of an open-end (not home-secured) plan
and are not required to be disclosed under Sec. 1026.6(b)(2) may be
disclosed after account opening but before the consumer agrees to pay or
becomes obligated to pay for the charge, provided they are disclosed at
a time and in a manner that a consumer would be likely to notice them.
This provision does not apply to charges imposed as part of a home-
equity plan subject to the requirements of Sec. 1026.40.
(iii) Telephone purchases. Disclosures required by Sec. 1026.6 may
be provided as soon as reasonably practicable after the first
transaction if:
(A) The first transaction occurs when a consumer contacts a merchant
by telephone to purchase goods and at the same time the consumer accepts
an offer to finance the purchase by establishing an open-end plan with
the merchant or third-party creditor;
(B) The merchant or third-party creditor permits consumers to return
any goods financed under the plan and provides consumers with a
sufficient time to reject the plan and return the goods free of cost
after the merchant or third-party creditor has provided the written
disclosures required by Sec. 1026.6; and
(C) The consumer's right to reject the plan and return the goods is
disclosed to the consumer as a part of the offer to finance the
purchase.
(iv) Membership fees--(A) General. In general, a creditor may not
collect any fee before account-opening disclosures are provided. A
creditor may collect, or obtain the consumer's agreement to pay,
membership fees, including application fees excludable from the finance
charge under Sec. 1026.4(c)(1), before providing account-opening
disclosures if, after receiving the disclosures, the consumer may reject
the plan and have no obligation to pay these fees (including application
fees) or any other fee or charge. A membership fee for purposes of this
paragraph has the same meaning as a fee for the issuance or availability
of credit described in Sec. 1026.60(b)(2). If the consumer rejects the
plan, the creditor must promptly refund the membership fee if it has
been paid, or take other action necessary to ensure the consumer is not
obligated to pay that fee or any other fee or charge.
(B) Home-equity plans. Creditors offering home-equity plans subject
to the
[[Page 18]]
requirements of Sec. 1026.40 are not subject to the requirements of
paragraph (b)(1)(iv)(A) of this section.
(v) Application fees. A creditor may collect an application fee
excludable from the finance charge under Sec. 1026.4(c)(1) before
providing account-opening disclosures. However, if a consumer rejects
the plan after receiving account-opening disclosures, the consumer must
have no obligation to pay such an application fee, or if the fee was
paid, it must be refunded. See Sec. 1026.5(b)(1)(iv)(A).
(2) Periodic statements--(i) Statement required. The creditor shall
mail or deliver a periodic statement as required by Sec. 1026.7 for
each billing cycle at the end of which an account has a debit or credit
balance of more than $1 or on which a finance charge has been imposed. A
periodic statement need not be sent for an account if the creditor deems
it uncollectible, if delinquency collection proceedings have been
instituted, if the creditor has charged off the account in accordance
with loan-loss provisions and will not charge any additional fees or
interest on the account, or if furnishing the statement would violate
Federal law.
(ii) Timing requirements--(A) Credit card accounts under an open-end
(not home-secured) consumer credit plan. For credit card accounts under
an open-end (not home-secured) consumer credit plan, a card issuer must
adopt reasonable procedures designed to ensure that:
(1) Periodic statements are mailed or delivered at least 21 days
prior to the payment due date disclosed on the statement pursuant to
Sec. 1026.7(b)(11)(i)(A); and
(2) The card issuer does not treat as late for any purpose a
required minimum periodic payment received by the card issuer within 21
days after mailing or delivery of the periodic statement disclosing the
due date for that payment.
(B) Open-end consumer credit plans. For accounts under an open-end
consumer credit plan, a creditor must adopt reasonable procedures
designed to ensure that:
(1) If a grace period applies to the account:
(i) Periodic statements are mailed or delivered at least 21 days
prior to the date on which the grace period expires; and
(ii) The creditor does not impose finance charges as a result of the
loss of the grace period if a payment that satisfies the terms of the
grace period is received by the creditor within 21 days after mailing or
delivery of the periodic statement.
(2) Regardless of whether a grace period applies to the account:
(i) Periodic statements are mailed or delivered at least 14 days
prior to the date on which the required minimum periodic payment must be
received in order to avoid being treated as late for any purpose; and
(ii) The creditor does not treat as late for any purpose a required
minimum periodic payment received by the creditor within 14 days after
mailing or delivery of the periodic statement.
(3) For purposes of paragraph (b)(2)(ii)(B) of this section, ``grace
period'' means a period within which any credit extended may be repaid
without incurring a finance charge due to a periodic interest rate.
(3) Credit and charge card application and solicitation disclosures.
The card issuer shall furnish the disclosures for credit and charge card
applications and solicitations in accordance with the timing
requirements of Sec. 1026.60.
(4) Home-equity plans. Disclosures for home-equity plans shall be
made in accordance with the timing requirements of Sec. 1026.40(b).
(c) Basis of disclosures and use of estimates. Disclosures shall
reflect the terms of the legal obligation between the parties. If any
information necessary for accurate disclosure is unknown to the
creditor, it shall make the disclosure based on the best information
reasonably available and shall state clearly that the disclosure is an
estimate.
(d) Multiple creditors; multiple consumers. If the credit plan
involves more than one creditor, only one set of disclosures shall be
given, and the creditors shall agree among themselves which creditor
must comply with the requirements that this part imposes on any or all
of them. If there is more than one consumer, the disclosures
[[Page 19]]
may be made to any consumer who is primarily liable on the account. If
the right of rescission under Sec. 1026.15 is applicable, however, the
disclosures required by Sec. Sec. 1026.6 and 1026.15(b) shall be made
to each consumer having the right to rescind.
(e) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor mails or delivers the
disclosures, the resulting inaccuracy is not a violation of this part,
although new disclosures may be required under Sec. 1026.9(c).
Sec. 1026.6 Account-opening disclosures.
(a) Rules affecting home-equity plans. The requirements of this
paragraph (a) apply only to home-equity plans subject to the
requirements of Sec. 1026.40. A creditor shall disclose the items in
this section, to the extent applicable:
(1) Finance charge. The circumstances under which a finance charge
will be imposed and an explanation of how it will be determined, as
follows:
(i) A statement of when finance charges begin to accrue, including
an explanation of whether or not any time period exists within which any
credit extended may be repaid without incurring a finance charge. If
such a time period is provided, a creditor may, at its option and
without disclosure, impose no finance charge when payment is received
after the time period's expiration.
(ii) A disclosure of each periodic rate that may be used to compute
the finance charge, the range of balances to which it is applicable, and
the corresponding annual percentage rate. If a creditor offers a
variable-rate plan, the creditor shall also disclose: The circumstances
under which the rate(s) may increase; any limitations on the increase;
and the effect(s) of an increase. When different periodic rates apply to
different types of transactions, the types of transactions to which the
periodic rates shall apply shall also be disclosed. A creditor is not
required to adjust the range of balances disclosure to reflect the
balance below which only a minimum charge applies.
(iii) An explanation of the method used to determine the balance on
which the finance charge may be computed.
(iv) An explanation of how the amount of any finance charge will be
determined, including a description of how any finance charge other than
the periodic rate will be determined.
(2) Other charges. The amount of any charge other than a finance
charge that may be imposed as part of the plan, or an explanation of how
the charge will be determined.
(3) Home-equity plan information. The following disclosures
described in Sec. 1026.40(d), as applicable:
(i) A statement of the conditions under which the creditor may take
certain action, as described in Sec. 1026.40(d)(4)(i), such as
terminating the plan or changing the terms.
(ii) The payment information described in Sec. 1026.40(d)(5)(i) and
(ii) for both the draw period and any repayment period.
(iii) A statement that negative amortization may occur as described
in Sec. 1026.40(d)(9).
(iv) A statement of any transaction requirements as described in
Sec. 1026.40(d)(10).
(v) A statement regarding the tax implications as described in Sec.
1026.40(d)(11).
(vi) A statement that the annual percentage rate imposed under the
plan does not include costs other than interest as described in Sec.
1026.40(d)(6) and (d)(12)(ii).
(vii) The variable-rate disclosures described in Sec.
1026.40(d)(12)(viii), (d)(12)(x), (d)(12)(xi), and (d)(12)(xii), as well
as the disclosure described in Sec. 1026.40(d)(5)(iii), unless the
disclosures provided with the application were in a form the consumer
could keep and included a representative payment example for the
category of payment option chosen by the consumer.
(4) Security interests. The fact that the creditor has or will
acquire a security interest in the property purchased under the plan, or
in other property identified by item or type.
(5) Statement of billing rights. A statement that outlines the
consumer's rights and the creditor's responsibilities under Sec. Sec.
1026.12(c) and 1026.13 and that is substantially similar to the
statement found in Model Form G-3 or, at the creditor's option, G-3(A),
in appendix G to this part.
[[Page 20]]
(b) Rules affecting open-end (not home-secured) plans. The
requirements of paragraph (b) of this section apply to plans other than
home-equity plans subject to the requirements of Sec. 1026.40.
(1) Form of disclosures; tabular format for open-end (not home-
secured) plans. Creditors must provide the account-opening disclosures
specified in paragraph (b)(2)(i) through (b)(2)(v) (except for
(b)(2)(i)(D)(2)) and (b)(2)(vii) through (b)(2)(xiv) of this section in
the form of a table with the headings, content, and format substantially
similar to any of the applicable tables in G-17 in appendix G.
(i) Highlighting. In the table, any annual percentage rate required
to be disclosed pursuant to paragraph (b)(2)(i) of this section; any
introductory rate permitted to be disclosed pursuant to paragraph
(b)(2)(i)(B) or required to be disclosed under paragraph (b)(2)(i)(F) of
this section, any rate that will apply after a premium initial rate
expires permitted to be disclosed pursuant to paragraph (b)(2)(i)(C) or
required to be disclosed pursuant to paragraph (b)(2)(i)(F), and any fee
or percentage amounts or maximum limits on fee amounts disclosed
pursuant to paragraphs (b)(2)(ii), (b)(2)(iv), (b)(2)(vii) through
(b)(2)(xii) of this section must be disclosed in bold text. However,
bold text shall not be used for: The amount of any periodic fee
disclosed pursuant to paragraph (b)(2) of this section that is not an
annualized amount; and other annual percentage rates or fee amounts
disclosed in the table.
(ii) Location. Only the information required or permitted by
paragraphs (b)(2)(i) through (v) (except for (b)(2)(i)(D)(2)) and
(b)(2)(vii) through (xiv) of this section shall be in the table.
Disclosures required by paragraphs (b)(2)(i)(D)(2), (b)(2)(i)(D)(3),
(b)(2)(vi), and (b)(2)(xv) of this section shall be placed directly
below the table. Disclosures required by paragraphs (b)(3) through (5)
of this section that are not otherwise required to be in the table and
other information may be presented with the account agreement or
account-opening disclosure statement, provided such information appears
outside the required table.
(iii) Fees that vary by state. Creditors that impose fees referred
to in paragraphs (b)(2)(vii) through (b)(2)(xi) of this section that
vary by state and that provide the disclosures required by paragraph (b)
of this section in person at the time the open-end (not home-secured)
plan is established in connection with financing the purchase of goods
or services may, at the creditor's option, disclose in the account-
opening table the specific fee applicable to the consumer's account, or
the range of the fees, if the disclosure includes a statement that the
amount of the fee varies by state and refers the consumer to the account
agreement or other disclosure provided with the account-opening table
where the amount of the fee applicable to the consumer's account is
disclosed. A creditor may not list fees for multiple states in the
account-opening summary table.
(iv) Fees based on a percentage. If the amount of any fee required
to be disclosed under this section is determined on the basis of a
percentage of another amount, the percentage used and the identification
of the amount against which the percentage is applied may be disclosed
instead of the amount of the fee.
(2) Required disclosures for account-opening table for open-end (not
home-secured) plans. A creditor shall disclose the items in this
section, to the extent applicable:
(i) Annual percentage rate. Each periodic rate that may be used to
compute the finance charge on an outstanding balance for purchases, a
cash advance, or a balance transfer, expressed as an annual percentage
rate (as determined by Sec. 1026.14(b)). When more than one rate
applies for a category of transactions, the range of balances to which
each rate is applicable shall also be disclosed. The annual percentage
rate for purchases disclosed pursuant to this paragraph shall be in at
least 16-point type, except for the following: A penalty rate that may
apply upon the occurrence of one or more specific events.
(A) Variable-rate information. If a rate disclosed under paragraph
(b)(2)(i) of this section is a variable rate, the creditor shall also
disclose the fact that the rate may vary and how the rate is determined.
In describing how the applicable rate will be determined, the creditor
must identify the type of index or
[[Page 21]]
formula that is used in setting the rate. The value of the index and the
amount of the margin that are used to calculate the variable rate shall
not be disclosed in the table. A disclosure of any applicable
limitations on rate increases or decreases shall not be included in the
table.
(B) Discounted initial rates. If the initial rate is an introductory
rate, as that term is defined in Sec. 1026.16(g)(2)(ii), the creditor
must disclose the rate that would otherwise apply to the account
pursuant to paragraph (b)(2)(i) of this section. Where the rate is not
tied to an index or formula, the creditor must disclose the rate that
will apply after the introductory rate expires. In a variable-rate
account, the creditor must disclose a rate based on the applicable index
or formula in accordance with the accuracy requirements of paragraph
(b)(4)(ii)(G) of this section. Except as provided in paragraph
(b)(2)(i)(F) of this section, the creditor is not required to, but may
disclose in the table the introductory rate along with the rate that
would otherwise apply to the account if the creditor also discloses the
time period during which the introductory rate will remain in effect,
and uses the term ``introductory'' or ``intro'' in immediate proximity
to the introductory rate.
(C) Premium initial rate. If the initial rate is temporary and is
higher than the rate that will apply after the temporary rate expires,
the creditor must disclose the premium initial rate pursuant to
paragraph (b)(2)(i) of this section. Consistent with paragraph (b)(2)(i)
of this section, the premium initial rate for purchases must be in at
least 16-point type. Except as provided in paragraph (b)(2)(i)(F) of
this section, the creditor is not required to, but may disclose in the
table the rate that will apply after the premium initial rate expires if
the creditor also discloses the time period during which the premium
initial rate will remain in effect. If the creditor also discloses in
the table the rate that will apply after the premium initial rate for
purchases expires, that rate also must be in at least 16-point type.
(D) Penalty rates--(1) In general. Except as provided in paragraph
(b)(2)(i)(D)(2) and (b)(2)(i)(D)(3) of this section, if a rate may
increase as a penalty for one or more events specified in the account
agreement, such as a late payment or an extension of credit that exceeds
the credit limit, the creditor must disclose pursuant to paragraph
(b)(2)(i) of this section the increased rate that may apply, a brief
description of the event or events that may result in the increased
rate, and a brief description of how long the increased rate will remain
in effect. If more than one penalty rate may apply, the creditor at its
option may disclose the highest rate that could apply, instead of
disclosing the specific rates or the range of rates that could apply.
(2) Introductory rates. If the creditor discloses in the table an
introductory rate, as that term is defined in Sec. 1026.16(g)(2)(ii),
creditors must briefly disclose directly beneath the table the
circumstances under which the introductory rate may be revoked, and the
rate that will apply after the introductory rate is revoked.
(3) Employee preferential rates. If a creditor discloses in the
table a preferential annual percentage rate for which only employees of
the creditor, employees of a third party, or other individuals with
similar affiliations with the creditor or third party, such as executive
officers, directors, or principal shareholders are eligible, the
creditor must briefly disclose directly beneath the table the
circumstances under which such preferential rate may be revoked, and the
rate that will apply after such preferential rate is revoked.
(E) Point of sale where APRs vary by state or based on
creditworthiness. Creditors imposing annual percentage rates that vary
by state or based on the consumer's creditworthiness and providing the
disclosures required by paragraph (b) of this section in person at the
time the open-end (not home-secured) plan is established in connection
with financing the purchase of goods or services may, at the creditor's
option, disclose pursuant to paragraph (b)(2)(i) of this section in the
account-opening table:
(1) The specific annual percentage rate applicable to the consumer's
account; or
(2) The range of the annual percentage rates, if the disclosure
includes a
[[Page 22]]
statement that the annual percentage rate varies by state or will be
determined based on the consumer's creditworthiness and refers the
consumer to the account agreement or other disclosure provided with the
account-opening table where the annual percentage rate applicable to the
consumer's account is disclosed. A creditor may not list annual
percentage rates for multiple states in the account-opening table.
(F) Credit card accounts under an open-end (not home-secured)
consumer credit plan. Notwithstanding paragraphs (b)(2)(i)(B) and
(b)(2)(i)(C) of this section, for credit card accounts under an open-end
(not home-secured) plan, issuers must disclose in the table:
(1) Any introductory rate as that term is defined in Sec.
1026.16(g)(2)(ii) that would apply to the account, consistent with the
requirements of paragraph (b)(2)(i)(B) of this section, and
(2) Any rate that would apply upon the expiration of a premium
initial rate, consistent with the requirements of paragraph (b)(2)(i)(C)
of this section.
(ii) Fees for issuance or availability. (A) Any annual or other
periodic fee that may be imposed for the issuance or availability of an
open-end plan, including any fee based on account activity or
inactivity; how frequently it will be imposed; and the annualized amount
of the fee.
(B) Any non-periodic fee that relates to opening the plan. A
creditor must disclose that the fee is a one-time fee.
(iii) Fixed finance charge; minimum interest charge. Any fixed
finance charge and a brief description of the charge. Any minimum
interest charge if it exceeds $1.00 that could be imposed during a
billing cycle, and a brief description of the charge. The $1.00
threshold amount shall be adjusted periodically by the Bureau to reflect
changes in the Consumer Price Index. The Bureau shall calculate each
year a price level adjusted minimum interest charge using the Consumer
Price Index in effect on the June 1 of that year. When the cumulative
change in the adjusted minimum value derived from applying the annual
Consumer Price level to the current minimum interest charge threshold
has risen by a whole dollar, the minimum interest charge will be
increased by $1.00. The creditor may, at its option, disclose in the
table minimum interest charges below this threshold.
(iv) Transaction charges. Any transaction charge imposed by the
creditor for use of the open-end plan for purchases.
(v) Grace period. The date by which or the period within which any
credit extended may be repaid without incurring a finance charge due to
a periodic interest rate and any conditions on the availability of the
grace period. If no grace period is provided, that fact must be
disclosed. If the length of the grace period varies, the creditor may
disclose the range of days, the minimum number of days, or the average
number of the days in the grace period, if the disclosure is identified
as a range, minimum, or average. In disclosing in the tabular format a
grace period that applies to all features on the account, the phrase
``How to Avoid Paying Interest'' shall be used as the heading for the
row describing the grace period. If a grace period is not offered on all
features of the account, in disclosing this fact in the tabular format,
the phrase ``Paying Interest'' shall be used as the heading for the row
describing this fact.
(vi) Balance computation method. The name of the balance computation
method listed in Sec. 1026.60(g) that is used to determine the balance
on which the finance charge is computed for each feature, or an
explanation of the method used if it is not listed, along with a
statement that an explanation of the method(s) required by paragraph
(b)(4)(i)(D) of this section is provided with the account-opening
disclosures. In determining which balance computation method to
disclose, the creditor shall assume that credit extended will not be
repaid within any grace period, if any.
(vii) Cash advance fee. Any fee imposed for an extension of credit
in the form of cash or its equivalent.
(viii) Late payment fee. Any fee imposed for a late payment.
(ix) Over-the-limit fee. Any fee imposed for exceeding a credit
limit.
(x) Balance transfer fee. Any fee imposed to transfer an outstanding
balance.
[[Page 23]]
(xi) Returned-payment fee. Any fee imposed by the creditor for a
returned payment.
(xii) Required insurance, debt cancellation or debt suspension
coverage. (A) A fee for insurance described in Sec. 1026.4(b)(7) or
debt cancellation or suspension coverage described in Sec.
1026.4(b)(10), if the insurance, or debt cancellation or suspension
coverage is required as part of the plan; and
(B) A cross reference to any additional information provided about
the insurance or coverage, as applicable.
(xiii) Available credit. If a creditor requires fees for the
issuance or availability of credit described in paragraph (b)(2)(ii) of
this section, or requires a security deposit for such credit, and the
total amount of those required fees and/or security deposit that will be
imposed and charged to the account when the account is opened is 15
percent or more of the minimum credit limit for the plan, a creditor
must disclose the available credit remaining after these fees or
security deposit are debited to the account. The determination whether
the 15 percent threshold is met must be based on the minimum credit
limit for the plan. However, the disclosure provided under this
paragraph must be based on the actual initial credit limit provided on
the account. In determining whether the 15 percent threshold test is
met, the creditor must only consider fees for issuance or availability
of credit, or a security deposit, that are required. If fees for
issuance or availability are optional, these fees should not be
considered in determining whether the disclosure must be given.
Nonetheless, if the 15 percent threshold test is met, the creditor in
providing the disclosure must disclose the amount of available credit
calculated by excluding those optional fees, and the available credit
including those optional fees. The creditor shall also disclose that the
consumer has the right to reject the plan and not be obligated to pay
those fees or any other fee or charges until the consumer has used the
account or made a payment on the account after receiving a periodic
statement. This paragraph does not apply with respect to fees or
security deposits that are not debited to the account.
(xiv) Web site reference. For issuers of credit cards that are not
charge cards, a reference to the Web site established by the Bureau and
a statement that consumers may obtain on the Web site information about
shopping for and using credit cards. Until January 1, 2013, issuers may
substitute for this reference a reference to the Web site established by
the Board of Governors of the Federal Reserve System.
(xv) Billing error rights reference. A statement that information
about consumers' right to dispute transactions is included in the
account-opening disclosures.
(3) Disclosure of charges imposed as part of open-end (not home-
secured) plans. A creditor shall disclose, to the extent applicable:
(i) For charges imposed as part of an open-end (not home-secured)
plan, the circumstances under which the charge may be imposed, including
the amount of the charge or an explanation of how the charge is
determined. For finance charges, a statement of when the charge begins
to accrue and an explanation of whether or not any time period exists
within which any credit that has been extended may be repaid without
incurring the charge. If such a time period is provided, a creditor may,
at its option and without disclosure, elect not to impose a finance
charge when payment is received after the time period expires.
(ii) Charges imposed as part of the plan are:
(A) Finance charges identified under Sec. 1026.4(a) and Sec.
1026.4(b).
(B) Charges resulting from the consumer's failure to use the plan as
agreed, except amounts payable for collection activity after default,
attorney's fees whether or not automatically imposed, and post-judgment
interest rates permitted by law.
(C) Taxes imposed on the credit transaction by a state or other
governmental body, such as documentary stamp taxes on cash advances.
(D) Charges for which the payment, or nonpayment, affect the
consumer's access to the plan, the duration of the plan, the amount of
credit extended, the period for which credit is extended, or the timing
or method of billing or payment.
[[Page 24]]
(E) Charges imposed for terminating a plan.
(F) Charges for voluntary credit insurance, debt cancellation or
debt suspension.
(iii) Charges that are not imposed as part of the plan include:
(A) Charges imposed on a cardholder by an institution other than the
card issuer for the use of the other institution's ATM in a shared or
interchange system.
(B) A charge for a package of services that includes an open-end
credit feature, if the fee is required whether or not the open-end
credit feature is included and the non-credit services are not merely
incidental to the credit feature.
(C) Charges under Sec. 1026.4(e) disclosed as specified.
(4) Disclosure of rates for open-end (not home-secured) plans. A
creditor shall disclose, to the extent applicable:
(i) For each periodic rate that may be used to calculate interest:
(A) Rates. The rate, expressed as a periodic rate and a
corresponding annual percentage rate.
(B) Range of balances. The range of balances to which the rate is
applicable; however, a creditor is not required to adjust the range of
balances disclosure to reflect the balance below which only a minimum
charge applies.
(C) Type of transaction. The type of transaction to which the rate
applies, if different rates apply to different types of transactions.
(D) Balance computation method. An explanation of the method used to
determine the balance to which the rate is applied.
(ii) Variable-rate accounts. For interest rate changes that are tied
to increases in an index or formula (variable-rate accounts)
specifically set forth in the account agreement:
(A) The fact that the annual percentage rate may increase.
(B) How the rate is determined, including the margin.
(C) The circumstances under which the rate may increase.
(D) The frequency with which the rate may increase.
(E) Any limitation on the amount the rate may change.
(F) The effect(s) of an increase.
(G) Except as specified in paragraph (b)(4)(ii)(H) of this section,
a rate is accurate if it is a rate as of a specified date and this rate
was in effect within the last 30 days before the disclosures are
provided.
(H) Creditors imposing annual percentage rates that vary according
to an index that is not under the creditor's control that provide the
disclosures required by paragraph (b) of this section in person at the
time the open-end (not home-secured) plan is established in connection
with financing the purchase of goods or services may disclose in the
table a rate, or range of rates to the extent permitted by Sec.
1026.6(b)(2)(i)(E), that was in effect within the last 90 days before
the disclosures are provided, along with a reference directing the
consumer to the account agreement or other disclosure provided with the
account-opening table where an annual percentage rate applicable to the
consumer's account in effect within the last 30 days before the
disclosures are provided is disclosed.
(iii) Rate changes not due to index or formula. For interest rate
changes that are specifically set forth in the account agreement and not
tied to increases in an index or formula:
(A) The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate) required under paragraph
(b)(4)(i)(A) of this section.
(B) How long the initial rate will remain in effect and the specific
events that cause the initial rate to change.
(C) The rate (expressed as a periodic rate and a corresponding
annual percentage rate) that will apply when the initial rate is no
longer in effect and any limitation on the time period the new rate will
remain in effect.
(D) The balances to which the new rate will apply.
(E) The balances to which the current rate at the time of the change
will apply.
(5) Additional disclosures for open-end (not home-secured) plans. A
creditor shall disclose, to the extent applicable:
(i) Voluntary credit insurance, debt cancellation or debt
suspension. The disclosures in Sec. Sec. 1026.4(d)(1)(i) and (d)(1)(ii)
and (d)(3)(i) through (d)(3)(iii) if the
[[Page 25]]
creditor offers optional credit insurance or debt cancellation or debt
suspension coverage that is identified in Sec. 1026.4(b)(7) or (b)(10).
(ii) Security interests. The fact that the creditor has or will
acquire a security interest in the property purchased under the plan, or
in other property identified by item or type.
(iii) Statement of billing rights. A statement that outlines the
consumer's rights and the creditor's responsibilities under Sec. Sec.
1026.12(c) and 1026.13 and that is substantially similar to the
statement found in Model Form G-3(A) in appendix G to this part.
Effective Date Note: At 81 FR 84369, Nov. 22, 2016, Sec. 1026.6 was
amended by adding paragraphs (b)(3)(iii)(D) and (E), effective Oct. 1,
2017. At 82 FR 18975, Apr. 25, 2017, the effective date was delayed to
Apr. 1, 2018. For the convenience of the user, the added text is set
forth as follows:
Sec. 1026.6 Account-opening disclosures.
* * * * *
(b) * * *
(3) * * *
(iii) * * *
(D) With regard to a covered separate credit feature and an asset
feature on a prepaid account that are both accessible by a hybrid
prepaid-credit card as defined in Sec. 1026.61, any fee or charge
imposed on the asset feature of the prepaid account to the extent that
the amount of the fee or charge does not exceed comparable fees or
charges imposed on prepaid accounts in the same prepaid account program
that do not have a covered separate credit feature accessible by a
hybrid prepaid-credit card.
(E) With regard to a non-covered separate credit feature accessible
by a prepaid card as defined in Sec. 1026.61, any fee or charge imposed
on the asset feature of the prepaid account.
* * * * *
Sec. 1026.7 Periodic statement.
The creditor shall furnish the consumer with a periodic statement
that discloses the following items, to the extent applicable:
(a) Rules affecting home-equity plans. The requirements of paragraph
(a) of this section apply only to home-equity plans subject to the
requirements of Sec. 1026.40. Alternatively, a creditor subject to this
paragraph may, at its option, comply with any of the requirements of
paragraph (b) of this section; however, any creditor that chooses not to
provide a disclosure under paragraph (a)(7) of this section must comply
with paragraph (b)(6) of this section.
(1) Previous balance. The account balance outstanding at the
beginning of the billing cycle.
(2) Identification of transactions. An identification of each credit
transaction in accordance with Sec. 1026.8.
(3) Credits. Any credit to the account during the billing cycle,
including the amount and the date of crediting. The date need not be
provided if a delay in accounting does not result in any finance or
other charge.
(4) Periodic rates. (i) Except as provided in paragraph (a)(4)(ii)
of this section, each periodic rate that may be used to compute the
finance charge, the range of balances to which it is applicable, and the
corresponding annual percentage rate. If no finance charge is imposed
when the outstanding balance is less than a certain amount, the creditor
is not required to disclose that fact, or the balance below which no
finance charge will be imposed. If different periodic rates apply to
different types of transactions, the types of transactions to which the
periodic rates apply shall also be disclosed. For variable-rate plans,
the fact that the periodic rate(s) may vary.
(ii) Exception. An annual percentage rate that differs from the rate
that would otherwise apply and is offered only for a promotional period
need not be disclosed except in periods in which the offered rate is
actually applied.
(5) Balance on which finance charge computed. The amount of the
balance to which a periodic rate was applied and an explanation of how
that balance was determined. When a balance is determined without first
deducting all credits and payments made during the billing cycle, the
fact and the amount of the credits and payments shall be disclosed.
(6) Amount of finance charge and other charges. Creditors may comply
with paragraphs (a)(6) of this section, or with paragraph (b)(6) of this
section, at their option.
(i) Finance charges. The amount of any finance charge debited or
added to the account during the billing cycle,
[[Page 26]]
using the term finance charge. The components of the finance charge
shall be individually itemized and identified to show the amount(s) due
to the application of any periodic rates and the amounts(s) of any other
type of finance charge. If there is more than one periodic rate, the
amount of the finance charge attributable to each rate need not be
separately itemized and identified.
(ii) Other charges. The amounts, itemized and identified by type, of
any charges other than finance charges debited to the account during the
billing cycle.
(7) Annual percentage rate. At a creditor's option, when a finance
charge is imposed during the billing cycle, the annual percentage
rate(s) determined under Sec. 1026.14(c) using the term annual
percentage rate.
(8) Grace period. The date by which or the time period within which
the new balance or any portion of the new balance must be paid to avoid
additional finance charges. If such a time period is provided, a
creditor may, at its option and without disclosure, impose no finance
charge if payment is received after the time period's expiration.
(9) Address for notice of billing errors. The address to be used for
notice of billing errors. Alternatively, the address may be provided on
the billing rights statement permitted by Sec. 1026.9(a)(2).
(10) Closing date of billing cycle; new balance. The closing date of
the billing cycle and the account balance outstanding on that date.
(b) Rules affecting open-end (not home-secured) plans. The
requirements of paragraph (b) of this section apply only to plans other
than home-equity plans subject to the requirements of Sec. 1026.40.
(1) Previous balance. The account balance outstanding at the
beginning of the billing cycle.
(2) Identification of transactions. An identification of each credit
transaction in accordance with Sec. 1026.8.
(3) Credits. Any credit to the account during the billing cycle,
including the amount and the date of crediting. The date need not be
provided if a delay in crediting does not result in any finance or other
charge.
(4) Periodic rates. (i) Except as provided in paragraph (b)(4)(ii)
of this section, each periodic rate that may be used to compute the
interest charge expressed as an annual percentage rate and using the
term Annual Percentage Rate, along with the range of balances to which
it is applicable. If no interest charge is imposed when the outstanding
balance is less than a certain amount, the creditor is not required to
disclose that fact, or the balance below which no interest charge will
be imposed. The types of transactions to which the periodic rates apply
shall also be disclosed. For variable-rate plans, the fact that the
annual percentage rate may vary.
(ii) Exception. A promotional rate, as that term is defined in Sec.
1026.16(g)(2)(i), is required to be disclosed only in periods in which
the offered rate is actually applied.
(5) Balance on which finance charge computed. The amount of the
balance to which a periodic rate was applied and an explanation of how
that balance was determined, using the term Balance Subject to Interest
Rate. When a balance is determined without first deducting all credits
and payments made during the billing cycle, the fact and the amount of
the credits and payments shall be disclosed. As an alternative to
providing an explanation of how the balance was determined, a creditor
that uses a balance computation method identified in Sec. 1026.60(g)
may, at the creditor's option, identify the name of the balance
computation method and provide a toll-free telephone number where
consumers may obtain from the creditor more information about the
balance computation method and how resulting interest charges were
determined. If the method used is not identified in Sec. 1026.60(g),
the creditor shall provide a brief explanation of the method used.
(6) Charges imposed. (i) The amounts of any charges imposed as part
of a plan as stated in Sec. 1026.6(b)(3), grouped together, in
proximity to transactions identified under paragraph (b)(2) of this
section, substantially similar to Sample G-18(A) in appendix G to this
part.
(ii) Interest. Finance charges attributable to periodic interest
rates, using the term Interest Charge, must be
[[Page 27]]
grouped together under the heading Interest Charged, itemized and
totaled by type of transaction, and a total of finance charges
attributable to periodic interest rates, using the term Total Interest,
must be disclosed for the statement period and calendar year to date,
using a format substantially similar to Sample G-18(A) in appendix G to
this part.
(iii) Fees. Charges imposed as part of the plan other than charges
attributable to periodic interest rates must be grouped together under
the heading Fees, identified consistent with the feature or type, and
itemized, and a total of charges, using the term Fees, must be disclosed
for the statement period and calendar year to date, using a format
substantially similar to Sample G-18(A) in appendix G to this part.
(7) Change-in-terms and increased penalty rate summary for open-end
(not home-secured) plans. Creditors that provide a change-in-terms
notice required by Sec. 1026.9(c), or a rate increase notice required
by Sec. 1026.9(g), on or with the periodic statement, must disclose the
information in Sec. 1026.9(c)(2)(iv)(A) and (c)(2)(iv)(B) (if
applicable) or Sec. 1026.9(g)(3)(i) on the periodic statement in
accordance with the format requirements in Sec. 1026.9(c)(2)(iv)(D),
and Sec. 1026.9(g)(3)(ii). See Forms G-18(F) and G-18(G) in appendix G
to this part.
(8) Grace period. The date by which or the time period within which
the new balance or any portion of the new balance must be paid to avoid
additional finance charges. If such a time period is provided, a
creditor may, at its option and without disclosure, impose no finance
charge if payment is received after the time period's expiration.
(9) Address for notice of billing errors. The address to be used for
notice of billing errors. Alternatively, the address may be provided on
the billing rights statement permitted by Sec. 1026.9(a)(2).
(10) Closing date of billing cycle; new balance. The closing date of
the billing cycle and the account balance outstanding on that date. The
new balance must be disclosed in accordance with the format requirements
of paragraph (b)(13) of this section.
(11) Due date; late payment costs. (i) Except as provided in
paragraph (b)(11)(ii) of this section and in accordance with the format
requirements in paragraph (b)(13) of this section, for a credit card
account under an open-end (not home-secured) consumer credit plan, a
card issuer must provide on each periodic statement:
(A) The due date for a payment. The due date disclosed pursuant to
this paragraph shall be the same day of the month for each billing
cycle.
(B) The amount of any late payment fee and any increased periodic
rate(s) (expressed as an annual percentage rate(s)) that may be imposed
on the account as a result of a late payment. If a range of late payment
fees may be assessed, the card issuer may state the range of fees, or
the highest fee and an indication that the fee imposed could be lower.
If the rate may be increased for more than one feature or balance, the
card issuer may state the range of rates or the highest rate that could
apply and at the issuer's option an indication that the rate imposed
could be lower.
(ii) Exception. The requirements of paragraph (b)(11)(i) of this
section do not apply to the following:
(A) Periodic statements provided solely for charge card accounts;
and
(B) Periodic statements provided for a charged-off account where
payment of the entire account balance is due immediately.
(12) Repayment disclosures--(i) In general. Except as provided in
paragraphs (b)(12)(ii) and (b)(12)(v) of this section, for a credit card
account under an open-end (not home-secured) consumer credit plan, a
card issuer must provide the following disclosures on each periodic
statement:
(A) The following statement with a bold heading: ``Minimum Payment
Warning: If you make only the minimum payment each period, you will pay
more in interest and it will take you longer to pay off your balance;''
(B) The minimum payment repayment estimate, as described in appendix
M1 to this part. If the minimum payment repayment estimate is less than
2 years, the card issuer must disclose the estimate in months.
Otherwise, the estimate must be disclosed in years and rounded to the
nearest whole year;
[[Page 28]]
(C) The minimum payment total cost estimate, as described in
appendix M1 to this part. The minimum payment total cost estimate must
be rounded either to the nearest whole dollar or to the nearest cent, at
the card issuer's option;
(D) A statement that the minimum payment repayment estimate and the
minimum payment total cost estimate are based on the current outstanding
balance shown on the periodic statement. A statement that the minimum
payment repayment estimate and the minimum payment total cost estimate
are based on the assumption that only minimum payments are made and no
other amounts are added to the balance;
(E) A toll-free telephone number where the consumer may obtain from
the card issuer information about credit counseling services consistent
with paragraph (b)(12)(iv) of this section; and
(F)(1) Except as provided in paragraph (b)(12)(i)(F)(2) of this
section, the following disclosures:
(i) The estimated monthly payment for repayment in 36 months, as
described in appendix M1 to this part. The estimated monthly payment for
repayment in 36 months must be rounded either to the nearest whole
dollar or to the nearest cent, at the card issuer's option;
(ii) A statement that the card issuer estimates that the consumer
will repay the outstanding balance shown on the periodic statement in 3
years if the consumer pays the estimated monthly payment each month for
3 years;
(iii) The total cost estimate for repayment in 36 months, as
described in appendix M1 to this part. The total cost estimate for
repayment in 36 months must be rounded either to the nearest whole
dollar or to the nearest cent, at the card issuer's option; and
(iv) The savings estimate for repayment in 36 months, as described
in appendix M1 to this part. The savings estimate for repayment in 36
months must be rounded either to the nearest whole dollar or to the
nearest cent, at the card issuer's option.
(2) The requirements of paragraph (b)(12)(i)(F)(1) of this section
do not apply to a periodic statement in any of the following
circumstances:
(i) The minimum payment repayment estimate that is disclosed on the
periodic statement pursuant to paragraph (b)(12)(i)(B) of this section
after rounding is three years or less;
(ii) The estimated monthly payment for repayment in 36 months, as
described in appendix M1 to this part, after rounding as set forth in
paragraph (b)(12)(i)(F)(1)(i) of this section that is calculated for a
particular billing cycle is less than the minimum payment required for
the plan for that billing cycle; and
(iii) A billing cycle where an account has both a balance in a
revolving feature where the required minimum payments for this feature
will not amortize that balance in a fixed amount of time specified in
the account agreement and a balance in a fixed repayment feature where
the required minimum payment for this fixed repayment feature will
amortize that balance in a fixed amount of time specified in the account
agreement which is less than 36 months.
(ii) Negative or no amortization. If negative or no amortization
occurs when calculating the minimum payment repayment estimate as
described in appendix M1 of this part, a card issuer must provide the
following disclosures on the periodic statement instead of the
disclosures set forth in paragraph (b)(12)(i) of this section:
(A) The following statement: ``Minimum Payment Warning: Even if you
make no more charges using this card, if you make only the minimum
payment each month we estimate you will never pay off the balance shown
on this statement because your payment will be less than the interest
charged each month'';
(B) The following statement: ``If you make more than the minimum
payment each period, you will pay less in interest and pay off your
balance sooner'';
(C) The estimated monthly payment for repayment in 36 months, as
described in appendix M1 to this part. The estimated monthly payment for
repayment in 36 months must be rounded either to the nearest whole
[[Page 29]]
dollar or to the nearest cent, at the issuer's option;
(D) A statement that the card issuer estimates that the consumer
will repay the outstanding balance shown on the periodic statement in 3
years if the consumer pays the estimated monthly payment each month for
3 years; and
(E) A toll-free telephone number where the consumer may obtain from
the card issuer information about credit counseling services consistent
with paragraph (b)(12)(iv) of this section.
(iii) Format requirements. A card issuer must provide the
disclosures required by paragraph (b)(12)(i) or (b)(12)(ii) of this
section in accordance with the format requirements of paragraph (b)(13)
of this section, and in a format substantially similar to Samples G-
18(C)(1), G-18(C)(2) and G-18(C)(3) in appendix G to this part, as
applicable.
(iv) Provision of information about credit counseling services--(A)
Required information. To the extent available from the United States
Trustee or a bankruptcy administrator, a card issuer must provide
through the toll-free telephone number disclosed pursuant to paragraphs
(b)(12)(i) or (b)(12)(ii) of this section the name, street address,
telephone number, and Web site address for at least three organizations
that have been approved by the United States Trustee or a bankruptcy
administrator pursuant to 11 U.S.C. 111(a)(1) to provide credit
counseling services in, at the card issuer's option, either the state in
which the billing address for the account is located or the state
specified by the consumer.
(B) Updating required information. At least annually, a card issuer
must update the information provided pursuant to paragraph
(b)(12)(iv)(A) of this section for consistency with the information
available from the United States Trustee or a bankruptcy administrator.
(v) Exemptions. Paragraph (b)(12) of this section does not apply to:
(A) Charge card accounts that require payment of outstanding
balances in full at the end of each billing cycle;
(B) A billing cycle immediately following two consecutive billing
cycles in which the consumer paid the entire balance in full, had a zero
outstanding balance or had a credit balance; and
(C) A billing cycle where paying the minimum payment due for that
billing cycle will pay the entire outstanding balance on the account for
that billing cycle.
(13) Format requirements. The due date required by paragraph (b)(11)
of this section shall be disclosed on the front of the first page of the
periodic statement. The amount of the late payment fee and the annual
percentage rate(s) required by paragraph (b)(11) of this section shall
be stated in close proximity to the due date. The ending balance
required by paragraph (b)(10) of this section and the disclosures
required by paragraph (b)(12) of this section shall be disclosed closely
proximate to the minimum payment due. The due date, late payment fee and
annual percentage rate, ending balance, minimum payment due, and
disclosures required by paragraph (b)(12) of this section shall be
grouped together. Sample G-18(D) in appendix G to this part sets forth
an example of how these terms may be grouped.
(14) Deferred interest or similar transactions. For accounts with an
outstanding balance subject to a deferred interest or similar program,
the date by which that outstanding balance must be paid in full in order
to avoid the obligation to pay finance charges on such balance must be
disclosed on the front of any page of each periodic statement issued
during the deferred interest period beginning with the first periodic
statement issued during the deferred interest period that reflects the
deferred interest or similar transaction. The disclosure provided
pursuant to this paragraph must be substantially similar to Sample G-
18(H) in appendix G to this part.
Effective Date Note: At 81 FR 84369, Nov. 22, 2016, Sec. 1026.7 was
amended by revising paragraph (b)(11)(ii)(A), effective Oct. 1, 2017. At
82 FR 18975, Apr. 25, 2017, the effective date was delayed to Apr. 1,
2018. For the convenience of the user, the revised text is set forth as
follows:
Sec. 1026.7 Periodic statement.
* * * * *
(b) * * *
[[Page 30]]
(11) * * *
(ii) * * *
(A) Periodic statements provided solely for charge card accounts,
other than covered separate credit features that are charge card
accounts accessible by hybrid prepaid-credit cards as defined in Sec.
1026.61; and
* * * * *
Sec. 1026.8 Identifying transactions on periodic statements.
The creditor shall identify credit transactions on or with the first
periodic statement that reflects the transaction by furnishing the
following information, as applicable:
(a) Sale credit. (1) Except as provided in paragraph (a)(2) of this
section, for each credit transaction involving the sale of property or
services, the creditor must disclose the amount and date of the
transaction, and either:
(i) A brief identification of the property or services purchased,
for creditors and sellers that are the same or related; or
(ii) The seller's name; and the city and state or foreign country
where the transaction took place. The creditor may omit the address or
provide any suitable designation that helps the consumer to identify the
transaction when the transaction took place at a location that is not
fixed; took place in the consumer's home; or was a mail, Internet, or
telephone order.
(2) Creditors need not comply with paragraph (a)(1) of this section
if an actual copy of the receipt or other credit document is provided
with the first periodic statement reflecting the transaction, and the
amount of the transaction and either the date of the transaction to the
consumer's account or the date of debiting the transaction are disclosed
on the copy or on the periodic statement.
(b) Nonsale credit. For each credit transaction not involving the
sale of property or services, the creditor must disclose a brief
identification of the transaction; the amount of the transaction; and at
least one of the following dates: The date of the transaction, the date
the transaction was debited to the consumer's account, or, if the
consumer signed the credit document, the date appearing on the document.
If an actual copy of the receipt or other credit document is provided
and that copy shows the amount and at least one of the specified dates,
the brief identification may be omitted.
(c) Alternative creditor procedures; consumer inquiries for
clarification or documentation. The following procedures apply to
creditors that treat an inquiry for clarification or documentation as a
notice of a billing error, including correcting the account in
accordance with Sec. 1026.13(e):
(1) Failure to disclose the information required by paragraphs (a)
and (b) of this section is not a failure to comply with the regulation,
provided that the creditor also maintains procedures reasonably designed
to obtain and provide the information. This applies to transactions that
take place outside a state, as defined in Sec. 1026.2(a)(26), whether
or not the creditor maintains procedures reasonably adapted to obtain
the required information.
(2) As an alternative to the brief identification for sale or
nonsale credit, the creditor may disclose a number or symbol that also
appears on the receipt or other credit document given to the consumer,
if the number or symbol reasonably identifies that transaction with that
creditor.
Sec. 1026.9 Subsequent disclosure requirements.
(a) Furnishing statement of billing rights--(1) Annual statement.
The creditor shall mail or deliver the billing rights statement required
by Sec. 1026.6(a)(5) and (b)(5)(iii) at least once per calendar year,
at intervals of not less than 6 months nor more than 18 months, either
to all consumers or to each consumer entitled to receive a periodic
statement under Sec. 1026.5(b)(2) for any one billing cycle.
(2) Alternative summary statement. As an alternative to paragraph
(a)(1) of this section, the creditor may mail or deliver, on or with
each periodic statement, a statement substantially similar to Model Form
G-4 or Model Form G-4(A) in appendix G to this part, as applicable.
Creditors offering home-equity plans subject to the requirements of
Sec. 1026.40 may use either Model Form, at their option.
(b) Disclosures for supplemental credit access devices and
additional features. (1)
[[Page 31]]
If a creditor, within 30 days after mailing or delivering the account-
opening disclosures under Sec. 1026.6(a)(1) or (b)(3)(ii)(A), as
applicable, adds a credit feature to the consumer's account or mails or
delivers to the consumer a credit access device, including but not
limited to checks that access a credit card account, for which the
finance charge terms are the same as those previously disclosed, no
additional disclosures are necessary. Except as provided in paragraph
(b)(3) of this section, after 30 days, if the creditor adds a credit
feature or furnishes a credit access device (other than as a renewal,
resupply, or the original issuance of a credit card) on the same finance
charge terms, the creditor shall disclose, before the consumer uses the
feature or device for the first time, that it is for use in obtaining
credit under the terms previously disclosed.
(2) Except as provided in paragraph (b)(3) of this section, whenever
a credit feature is added or a credit access device is mailed or
delivered to the consumer, and the finance charge terms for the feature
or device differ from disclosures previously given, the disclosures
required by Sec. 1026.6(a)(1) or (b)(3)(ii)(A), as applicable, that are
applicable to the added feature or device shall be given before the
consumer uses the feature or device for the first time.
(3) Checks that access a credit card account. (i) Disclosures. For
open-end plans not subject to the requirements of Sec. 1026.40, if
checks that can be used to access a credit card account are provided
more than 30 days after account-opening disclosures under Sec.
1026.6(b) are mailed or delivered, or are provided within 30 days of the
account-opening disclosures and the finance charge terms for the checks
differ from the finance charge terms previously disclosed, the creditor
shall disclose on the front of the page containing the checks the
following terms in the form of a table with the headings, content, and
form substantially similar to Sample G-19 in appendix G to this part:
(A) If a promotional rate, as that term is defined in Sec.
1026.16(g)(2)(i) applies to the checks:
(1) The promotional rate and the time period during which the
promotional rate will remain in effect;
(2) The type of rate that will apply (such as whether the purchase
or cash advance rate applies) after the promotional rate expires, and
the annual percentage rate that will apply after the promotional rate
expires. For a variable-rate account, a creditor must disclose an annual
percentage rate based on the applicable index or formula in accordance
with the accuracy requirements set forth in paragraph (b)(3)(ii) of this
section; and
(3) The date, if any, by which the consumer must use the checks in
order to qualify for the promotional rate. If the creditor will honor
checks used after such date but will apply an annual percentage rate
other than the promotional rate, the creditor must disclose this fact
and the type of annual percentage rate that will apply if the consumer
uses the checks after such date.
(B) If no promotional rate applies to the checks:
(1) The type of rate that will apply to the checks and the
applicable annual percentage rate. For a variable-rate account, a
creditor must disclose an annual percentage rate based on the applicable
index or formula in accordance with the accuracy requirements set forth
in paragraph (b)(3)(ii) of this section.
(2) [Reserved]
(C) Any transaction fees applicable to the checks disclosed under
Sec. 1026.6(b)(2)(iv); and
(D) Whether or not a grace period is given within which any credit
extended by use of the checks may be repaid without incurring a finance
charge due to a periodic interest rate. When disclosing whether there is
a grace period, the phrase ``How to Avoid Paying Interest on Check
Transactions'' shall be used as the row heading when a grace period
applies to credit extended by the use of the checks. When disclosing the
fact that no grace period exists for credit extended by use of the
checks, the phrase ``Paying Interest'' shall be used as the row heading.
(ii) Accuracy. The disclosures in paragraph (b)(3)(i) of this
section must be accurate as of the time the disclosures are mailed or
delivered. A variable annual percentage rate is accurate if it
[[Page 32]]
was in effect within 60 days of when the disclosures are mailed or
delivered.
(iii) Variable rates. If any annual percentage rate required to be
disclosed pursuant to paragraph (b)(3)(i) of this section is a variable
rate, the card issuer shall also disclose the fact that the rate may
vary and how the rate is determined. In describing how the applicable
rate will be determined, the card issuer must identify the type of index
or formula that is used in setting the rate. The value of the index and
the amount of the margin that are used to calculate the variable rate
shall not be disclosed in the table. A disclosure of any applicable
limitations on rate increases shall not be included in the table.
(c) Change in terms--(1) Rules affecting home-equity plans--(i)
Written notice required. For home-equity plans subject to the
requirements of Sec. 1026.40, whenever any term required to be
disclosed under Sec. 1026.6(a) is changed or the required minimum
periodic payment is increased, the creditor shall mail or deliver
written notice of the change to each consumer who may be affected. The
notice shall be mailed or delivered at least 15 days prior to the
effective date of the change. The 15-day timing requirement does not
apply if the change has been agreed to by the consumer; the notice shall
be given, however, before the effective date of the change.
(ii) Notice not required. For home-equity plans subject to the
requirements of Sec. 1026.40, a creditor is not required to provide
notice under this section when the change involves a reduction of any
component of a finance or other charge or when the change results from
an agreement involving a court proceeding.
(iii) Notice to restrict credit. For home-equity plans subject to
the requirements of Sec. 1026.40, if the creditor prohibits additional
extensions of credit or reduces the credit limit pursuant to Sec.
1026.40(f)(3)(i) or (f)(3)(vi), the creditor shall mail or deliver
written notice of the action to each consumer who will be affected. The
notice must be provided not later than three business days after the
action is taken and shall contain specific reasons for the action. If
the creditor requires the consumer to request reinstatement of credit
privileges, the notice also shall state that fact.
(2) Rules affecting open-end (not home-secured) plans--(i) Changes
where written advance notice is required--(A) General. For plans other
than home-equity plans subject to the requirements of Sec. 1026.40,
except as provided in paragraphs (c)(2)(i)(B), (c)(2)(iii) and (c)(2)(v)
of this section, when a significant change in account terms as described
in paragraph (c)(2)(ii) of this section is made, a creditor must provide
a written notice of the change at least 45 days prior to the effective
date of the change to each consumer who may be affected. The 45-day
timing requirement does not apply if the consumer has agreed to a
particular change as described in paragraph (c)(2)(i)(B) of this
section; for such changes, notice must be given in accordance with the
timing requirements of paragraph (c)(2)(i)(B) of this section. Increases
in the rate applicable to a consumer's account due to delinquency,
default or as a penalty described in paragraph (g) of this section that
are not due to a change in the contractual terms of the consumer's
account must be disclosed pursuant to paragraph (g) of this section
instead of paragraph (c)(2) of this section.
(B) Changes agreed to by the consumer. A notice of change in terms
is required, but it may be mailed or delivered as late as the effective
date of the change if the consumer agrees to the particular change. This
paragraph (c)(2)(i)(B) applies only when a consumer substitutes
collateral or when the creditor can advance additional credit only if a
change relatively unique to that consumer is made, such as the
consumer's providing additional security or paying an increased minimum
payment amount. The following are not considered agreements between the
consumer and the creditor for purposes of this paragraph (c)(2)(i)(B):
The consumer's general acceptance of the creditor's contract reservation
of the right to change terms; the consumer's use of the account (which
might imply acceptance of its terms under state law); the consumer's
acceptance of a unilateral term change that is not particular to that
consumer, but rather is
[[Page 33]]
of general applicability to consumers with that type of account; and the
consumer's request to reopen a closed account or to upgrade an existing
account to another account offered by the creditor with different credit
or other features.
(ii) Significant changes in account terms. For purposes of this
section, a ``significant change in account terms'' means a change to a
term required to be disclosed under Sec. 1026.6(b)(1) and (b)(2), an
increase in the required minimum periodic payment, a change to a term
required to be disclosed under Sec. 1026.6(b)(4), or the acquisition of
a security interest.
(iii) Charges not covered by Sec. 1026.6(b)(1) and (b)(2). Except
as provided in paragraph (c)(2)(vi) of this section, if a creditor
increases any component of a charge, or introduces a new charge,
required to be disclosed under Sec. 1026.6(b)(3) that is not a
significant change in account terms as described in paragraph (c)(2)(ii)
of this section, a creditor must either, at its option:
(A) Comply with the requirements of paragraph (c)(2)(i) of this
section; or
(B) Provide notice of the amount of the charge before the consumer
agrees to or becomes obligated to pay the charge, at a time and in a
manner that a consumer would be likely to notice the disclosure of the
charge. The notice may be provided orally or in writing.
(iv) Disclosure requirements--(A) Significant changes in account
terms. If a creditor makes a significant change in account terms as
described in paragraph (c)(2)(ii) of this section, the notice provided
pursuant to paragraph (c)(2)(i) of this section must provide the
following information:
(1) A summary of the changes made to terms required by Sec.
1026.6(b)(1) and (b)(2) or Sec. 1026.6(b)(4), a description of any
increase in the required minimum periodic payment, and a description of
any security interest being acquired by the creditor;
(2) A statement that changes are being made to the account;
(3) For accounts other than credit card accounts under an open-end
(not home-secured) consumer credit plan subject to Sec.
1026.9(c)(2)(iv)(B), a statement indicating the consumer has the right
to opt out of these changes, if applicable, and a reference to
additional information describing the opt-out right provided in the
notice, if applicable;
(4) The date the changes will become effective;
(5) If applicable, a statement that the consumer may find additional
information about the summarized changes, and other changes to the
account, in the notice;
(6) If the creditor is changing a rate on the account, other than a
penalty rate, a statement that if a penalty rate currently applies to
the consumer's account, the new rate described in the notice will not
apply to the consumer's account until the consumer's account balances
are no longer subject to the penalty rate;
(7) If the change in terms being disclosed is an increase in an
annual percentage rate, the balances to which the increased rate will be
applied. If applicable, a statement identifying the balances to which
the current rate will continue to apply as of the effective date of the
change in terms; and
(8) If the change in terms being disclosed is an increase in an
annual percentage rate for a credit card account under an open-end (not
home-secured) consumer credit plan, a statement of no more than four
principal reasons for the rate increase, listed in their order of
importance.
(B) Right to reject for credit card accounts under an open-end (not
home-secured) consumer credit plan. In addition to the disclosures in
paragraph (c)(2)(iv)(A) of this section, if a card issuer makes a
significant change in account terms on a credit card account under an
open-end (not home-secured) consumer credit plan, the creditor must
generally provide the following information on the notice provided
pursuant to paragraph (c)(2)(i) of this section. This information is not
required to be provided in the case of an increase in the required
minimum periodic payment, an increase in a fee as a result of a
reevaluation of a determination made under Sec. 1026.52(b)(1)(i) or an
adjustment to the safe harbors in Sec. 1026.52(b)(1)(ii) to reflect
changes in the Consumer Price Index, a change in an annual percentage
rate applicable to a consumer's account, an increase in a
[[Page 34]]
fee previously reduced consistent with 50 U.S.C. app. 527 or a similar
Federal or state statute or regulation if the amount of the increased
fee does not exceed the amount of that fee prior to the reduction, or
when the change results from the creditor not receiving the consumer's
required minimum periodic payment within 60 days after the due date for
that payment:
(1) A statement that the consumer has the right to reject the change
or changes prior to the effective date of the changes, unless the
consumer fails to make a required minimum periodic payment within 60
days after the due date for that payment;
(2) Instructions for rejecting the change or changes, and a toll-
free telephone number that the consumer may use to notify the creditor
of the rejection; and
(3) If applicable, a statement that if the consumer rejects the
change or changes, the consumer's ability to use the account for further
advances will be terminated or suspended.
(C) Changes resulting from failure to make minimum periodic payment
within 60 days from due date for credit card accounts under an open-end
(not home-secured) consumer credit plan. For a credit card account under
an open-end (not home-secured) consumer credit plan:
(1) If the significant change required to be disclosed pursuant to
paragraph (c)(2)(i) of this section is an increase in an annual
percentage rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) based on the consumer's
failure to make a minimum periodic payment within 60 days from the due
date for that payment, the notice provided pursuant to paragraph
(c)(2)(i) of this section must state that the increase will cease to
apply to transactions that occurred prior to or within 14 days of
provision of the notice, if the creditor receives six consecutive
required minimum periodic payments on or before the payment due date,
beginning with the first payment due following the effective date of the
increase.
(2) If the significant change required to be disclosed pursuant to
paragraph (c)(2)(i) of this section is an increase in a fee or charge
required to be disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) based on the consumer's failure to make a minimum periodic
payment within 60 days from the due date for that payment, the notice
provided pursuant to paragraph (c)(2)(i) of this section must also state
the reason for the increase.
(D) Format requirements--(1) Tabular format. The summary of changes
described in paragraph (c)(2)(iv)(A)(1) of this section must be in a
tabular format (except for a summary of any increase in the required
minimum periodic payment, a summary of a term required to be disclosed
under Sec. 1026.6(b)(4) that is not required to be disclosed under
Sec. 1026.6(b)(1) and (b)(2), or a description of any security interest
being acquired by the creditor), with headings and format substantially
similar to any of the account-opening tables found in G-17 in appendix G
to this part. The table must disclose the changed term and information
relevant to the change, if that relevant information is required by
Sec. 1026.6(b)(1) and (b)(2). The new terms shall be described in the
same level of detail as required when disclosing the terms under Sec.
1026.6(b)(2).
(2) Notice included with periodic statement. If a notice required by
paragraph (c)(2)(i) of this section is included on or with a periodic
statement, the information described in paragraph (c)(2)(iv)(A)(1) of
this section must be disclosed on the front of any page of the
statement. The summary of changes described in paragraph
(c)(2)(iv)(A)(1) of this section must immediately follow the information
described in paragraph (c)(2)(iv)(A)(2) through (c)(2)(iv)(A)(7) and, if
applicable, paragraphs (c)(2)(iv)(A)(8), (c)(2)(iv)(B), and
(c)(2)(iv)(C) of this section, and be substantially similar to the
format shown in Sample G-20 or G-21 in appendix G to this part.
(3) Notice provided separately from periodic statement. If a notice
required by paragraph (c)(2)(i) of this section is not included on or
with a periodic statement, the information described in paragraph
(c)(2)(iv)(A)(1) of this section must, at the creditor's option, be
disclosed on the front of the first page of the notice or segregated on
a separate page from other information given with the notice. The
summary of
[[Page 35]]
changes required to be in a table pursuant to paragraph (c)(2)(iv)(A)(1)
of this section may be on more than one page, and may use both the front
and reverse sides, so long as the table begins on the front of the first
page of the notice and there is a reference on the first page indicating
that the table continues on the following page. The summary of changes
described in paragraph (c)(2)(iv)(A)(1) of this section must immediately
follow the information described in paragraph (c)(2)(iv)(A)(2) through
(c)(2)(iv)(A)(7) and, if applicable, paragraphs (c)(2)(iv)(A)(8),
(c)(2)(iv)(B), and (c)(2)(iv)(C), of this section, substantially similar
to the format shown in Sample G-20 or G-21 in appendix G to this part.
(v) Notice not required. For open-end plans (other than home equity
plans subject to the requirements of Sec. 1026.40) a creditor is not
required to provide notice under this section:
(A) When the change involves charges for documentary evidence; a
reduction of any component of a finance or other charge; suspension of
future credit privileges (except as provided in paragraph (c)(2)(vi) of
this section) or termination of an account or plan; when the change
results from an agreement involving a court proceeding; when the change
is an extension of the grace period; or if the change is applicable only
to checks that access a credit card account and the changed terms are
disclosed on or with the checks in accordance with paragraph (b)(3) of
this section;
(B) When the change is an increase in an annual percentage rate or
fee upon the expiration of a specified period of time, provided that:
(1) Prior to commencement of that period, the creditor disclosed in
writing to the consumer, in a clear and conspicuous manner, the length
of the period and the annual percentage rate or fee that would apply
after expiration of the period;
(2) The disclosure of the length of the period and the annual
percentage rate or fee that would apply after expiration of the period
are set forth in close proximity and in equal prominence to the first
listing of the disclosure of the rate or fee that applies during the
specified period of time; and
(3) The annual percentage rate or fee that applies after that period
does not exceed the rate or fee disclosed pursuant to paragraph
(c)(2)(v)(B)(1) of this paragraph or, if the rate disclosed pursuant to
paragraph (c)(2)(v)(B)(1) of this section was a variable rate, the rate
following any such increase is a variable rate determined by the same
formula (index and margin) that was used to calculate the variable rate
disclosed pursuant to paragraph (c)(2)(v)(B)(1);
(C) When the change is an increase in a variable annual percentage
rate in accordance with a credit card or other account agreement that
provides for changes in the rate according to operation of an index that
is not under the control of the creditor and is available to the general
public; or
(D) When the change is an increase in an annual percentage rate, a
fee or charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), (b)(2)(viii), (b)(2)(ix), (b)(2)(ix) or (b)(2)(xii), or the
required minimum periodic payment due to the completion of a workout or
temporary hardship arrangement by the consumer or the consumer's failure
to comply with the terms of such an arrangement, provided that:
(1) The annual percentage rate or fee or charge applicable to a
category of transactions or the required minimum periodic payment
following any such increase does not exceed the rate or fee or charge or
required minimum periodic payment that applied to that category of
transactions prior to commencement of the arrangement or, if the rate
that applied to a category of transactions prior to the commencement of
the workout or temporary hardship arrangement was a variable rate, the
rate following any such increase is a variable rate determined by the
same formula (index and margin) that applied to the category of
transactions prior to commencement of the workout or temporary hardship
arrangement; and
(2) The creditor has provided the consumer, prior to the
commencement of such arrangement, with a clear and conspicuous
disclosure of the terms of the arrangement (including any increases due
to such completion or failure). This disclosure must generally be
[[Page 36]]
provided in writing. However, a creditor may provide the disclosure of
the terms of the arrangement orally by telephone, provided that the
creditor mails or delivers a written disclosure of the terms of the
arrangement to the consumer as soon as reasonably practicable after the
oral disclosure is provided.
(vi) Reduction of the credit limit. For open-end plans that are not
subject to the requirements of Sec. 1026.40, if a creditor decreases
the credit limit on an account, advance notice of the decrease must be
provided before an over-the-limit fee or a penalty rate can be imposed
solely as a result of the consumer exceeding the newly decreased credit
limit. Notice shall be provided in writing or orally at least 45 days
prior to imposing the over-the-limit fee or penalty rate and shall state
that the credit limit on the account has been or will be decreased.
(d) Finance charge imposed at time of transaction. (1) Any person,
other than the card issuer, who imposes a finance charge at the time of
honoring a consumer's credit card, shall disclose the amount of that
finance charge prior to its imposition.
(2) The card issuer, other than the person honoring the consumer's
credit card, shall have no responsibility for the disclosure required by
paragraph (d)(1) of this section, and shall not consider any such charge
for the purposes of Sec. Sec. 1026.60, 1026.6 and 1026.7.
(e) Disclosures upon renewal of credit or charge card--(1) Notice
prior to renewal. A card issuer that imposes any annual or other
periodic fee to renew a credit or charge card account of the type
subject to Sec. 1026.60, including any fee based on account activity or
inactivity or any card issuer that has changed or amended any term of a
cardholder's account required to be disclosed under Sec. 1026.6(b)(1)
and (b)(2) that has not previously been disclosed to the consumer, shall
mail or deliver written notice of the renewal to the cardholder. If the
card issuer imposes any annual or other periodic fee for renewal, the
notice shall be provided at least 30 days or one billing cycle,
whichever is less, before the mailing or the delivery of the periodic
statement on which any renewal fee is initially charged to the account.
If the card issuer has changed or amended any term required to be
disclosed under Sec. 1026.6(b)(1) and (b)(2) and such changed or
amended term has not previously been disclosed to the consumer, the
notice shall be provided at least 30 days prior to the scheduled renewal
date of the consumer's credit or charge card. The notice shall contain
the following information:
(i) The disclosures contained in Sec. 1026.60(b)(1) through (b)(7)
that would apply if the account were renewed; and
(ii) How and when the cardholder may terminate credit availability
under the account to avoid paying the renewal fee, if applicable.
(2) Notification on periodic statements. The disclosures required by
this paragraph may be made on or with a periodic statement. If any of
the disclosures are provided on the back of a periodic statement, the
card issuer shall include a reference to those disclosures on the front
of the statement.
(f) Change in credit card account insurance provider--(1) Notice
prior to change. If a credit card issuer plans to change the provider of
insurance for repayment of all or part of the outstanding balance of an
open-end credit card account of the type subject to Sec. 1026.60, the
card issuer shall mail or deliver to the cardholder written notice of
the change not less than 30 days before the change in provider occurs.
The notice shall also include the following items, to the extent
applicable:
(i) Any increase in the rate that will result from the change;
(ii) Any substantial decrease in coverage that will result from the
change; and
(iii) A statement that the cardholder may discontinue the insurance.
(2) Notice when change in provider occurs. If a change described in
paragraph (f)(1) of this section occurs, the card issuer shall provide
the cardholder with a written notice no later than 30 days after the
change, including the following items, to the extent applicable:
(i) The name and address of the new insurance provider;
(ii) A copy of the new policy or group certificate containing the
basic terms
[[Page 37]]
of the insurance, including the rate to be charged; and
(iii) A statement that the cardholder may discontinue the insurance.
(3) Substantial decrease in coverage. For purposes of this
paragraph, a substantial decrease in coverage is a decrease in a
significant term of coverage that might reasonably be expected to affect
the cardholder's decision to continue the insurance. Significant terms
of coverage include, for example, the following:
(i) Type of coverage provided;
(ii) Age at which coverage terminates or becomes more restrictive;
(iii) Maximum insurable loan balance, maximum periodic benefit
payment, maximum number of payments, or other term affecting the dollar
amount of coverage or benefits provided;
(iv) Eligibility requirements and number and identity of persons
covered;
(v) Definition of a key term of coverage such as disability;
(vi) Exclusions from or limitations on coverage; and
(vii) Waiting periods and whether coverage is retroactive.
(4) Combined notification. The notices required by paragraph (f)(1)
and (2) of this section may be combined provided the timing requirement
of paragraph (f)(1) of this section is met. The notices may be provided
on or with a periodic statement.
(g) Increase in rates due to delinquency or default or as a
penalty--(1) Increases subject to this section. For plans other than
home-equity plans subject to the requirements of Sec. 1026.40, except
as provided in paragraph (g)(4) of this section, a creditor must provide
a written notice to each consumer who may be affected when:
(i) A rate is increased due to the consumer's delinquency or
default; or
(ii) A rate is increased as a penalty for one or more events
specified in the account agreement, such as making a late payment or
obtaining an extension of credit that exceeds the credit limit.
(2) Timing of written notice. Whenever any notice is required to be
given pursuant to paragraph (g)(1) of this section, the creditor shall
provide written notice of the increase in rates at least 45 days prior
to the effective date of the increase. The notice must be provided after
the occurrence of the events described in paragraphs (g)(1)(i) and
(g)(1)(ii) of this section that trigger the imposition of the rate
increase.
(3)(i) Disclosure requirements for rate increases--(A) General. If a
creditor is increasing the rate due to delinquency or default or as a
penalty, the creditor must provide the following information on the
notice sent pursuant to paragraph (g)(1) of this section:
(1) A statement that the delinquency or default rate or penalty
rate, as applicable, has been triggered;
(2) The date on which the delinquency or default rate or penalty
rate will apply;
(3) The circumstances under which the delinquency or default rate or
penalty rate, as applicable, will cease to apply to the consumer's
account, or that the delinquency or default rate or penalty rate will
remain in effect for a potentially indefinite time period;
(4) A statement indicating to which balances the delinquency or
default rate or penalty rate will be applied;
(5) If applicable, a description of any balances to which the
current rate will continue to apply as of the effective date of the rate
increase, unless a consumer fails to make a minimum periodic payment
within 60 days from the due date for that payment; and
(6) For a credit card account under an open-end (not home-secured)
consumer credit plan, a statement of no more than four principal reasons
for the rate increase, listed in their order of importance.
(B) Rate increases resulting from failure to make minimum periodic
payment within 60 days from due date. For a credit card account under an
open-end (not home-secured) consumer credit plan, if the rate increase
required to be disclosed pursuant to paragraph (g)(1) of this section is
an increase pursuant to Sec. 1026.55(b)(4) based on the consumer's
failure to make a minimum periodic payment within 60 days from the due
date for that payment, the notice provided pursuant to paragraph (g)(1)
of this section must also state that the increase will cease to apply to
transactions that occurred prior to or within 14 days of provision of
the notice, if
[[Page 38]]
the creditor receives six consecutive required minimum periodic payments
on or before the payment due date, beginning with the first payment due
following the effective date of the increase.
(ii) Format requirements. (A) If a notice required by paragraph
(g)(1) of this section is included on or with a periodic statement, the
information described in paragraph (g)(3)(i) of this section must be in
the form of a table and provided on the front of any page of the
periodic statement, above the notice described in paragraph (c)(2)(iv)
of this section if that notice is provided on the same statement.
(B) If a notice required by paragraph (g)(1) of this section is not
included on or with a periodic statement, the information described in
paragraph (g)(3)(i) of this section must be disclosed on the front of
the first page of the notice. Only information related to the increase
in the rate to a penalty rate may be included with the notice, except
that this notice may be combined with a notice described in paragraph
(c)(2)(iv) or (g)(4) of this section.
(4) Exception for decrease in credit limit. A creditor is not
required to provide a notice pursuant to paragraph (g)(1) of this
section prior to increasing the rate for obtaining an extension of
credit that exceeds the credit limit, provided that:
(i) The creditor provides at least 45 days in advance of imposing
the penalty rate a notice, in writing, that includes:
(A) A statement that the credit limit on the account has been or
will be decreased.
(B) A statement indicating the date on which the penalty rate will
apply, if the outstanding balance exceeds the credit limit as of that
date;
(C) A statement that the penalty rate will not be imposed on the
date specified in paragraph (g)(4)(i)(B) of this section, if the
outstanding balance does not exceed the credit limit as of that date;
(D) The circumstances under which the penalty rate, if applied, will
cease to apply to the account, or that the penalty rate, if applied,
will remain in effect for a potentially indefinite time period;
(E) A statement indicating to which balances the penalty rate may be
applied; and
(F) If applicable, a description of any balances to which the
current rate will continue to apply as of the effective date of the rate
increase, unless the consumer fails to make a minimum periodic payment
within 60 days from the due date for that payment; and
(ii) The creditor does not increase the rate applicable to the
consumer's account to the penalty rate if the outstanding balance does
not exceed the credit limit on the date set forth in the notice and
described in paragraph (g)(4)(i)(B) of this section.
(iii)(A) If a notice provided pursuant to paragraph (g)(4)(i) of
this section is included on or with a periodic statement, the
information described in paragraph (g)(4)(i) of this section must be in
the form of a table and provided on the front of any page of the
periodic statement; or
(B) If a notice required by paragraph (g)(4)(i) of this section is
not included on or with a periodic statement, the information described
in paragraph (g)(4)(i) of this section must be disclosed on the front of
the first page of the notice. Only information related to the reduction
in credit limit may be included with the notice, except that this notice
may be combined with a notice described in paragraph (c)(2)(iv) or
(g)(1) of this section.
(h) Consumer rejection of certain significant changes in terms--(1)
Right to reject. If paragraph (c)(2)(iv)(B) of this section requires
disclosure of the consumer's right to reject a significant change to an
account term, the consumer may reject that change by notifying the
creditor of the rejection before the effective date of the change.
(2) Effect of rejection. If a creditor is notified of a rejection of
a significant change to an account term as provided in paragraph (h)(1)
of this section, the creditor must not:
(i) Apply the change to the account;
(ii) Impose a fee or charge or treat the account as in default
solely as a result of the rejection; or
(iii) Require repayment of the balance on the account using a method
that is less beneficial to the consumer
[[Page 39]]
than one of the methods listed in Sec. 1026.55(c)(2).
(3) Exception. Section 1026.9(h) does not apply when the creditor
has not received the consumer's required minimum periodic payment within
60 days after the due date for that payment.
Sec. 1026.10 Payments.
(a) General rule. A creditor shall credit a payment to the
consumer's account as of the date of receipt, except when a delay in
crediting does not result in a finance or other charge or except as
provided in paragraph (b) of this section.
(b) Specific requirements for payments--(1) General rule. A creditor
may specify reasonable requirements for payments that enable most
consumers to make conforming payments.
(2) Examples of reasonable requirements for payments. Reasonable
requirements for making payment may include:
(i) Requiring that payments be accompanied by the account number or
payment stub;
(ii) Setting reasonable cut-off times for payments to be received by
mail, by electronic means, by telephone, and in person (except as
provided in paragraph (b)(3) of this section), provided that such cut-
off times shall be no earlier than 5 p.m. on the payment due date at the
location specified by the creditor for the receipt of such payments;
(iii) Specifying that only checks or money orders should be sent by
mail;
(iv) Specifying that payment is to be made in U.S. dollars; or
(v) Specifying one particular address for receiving payments, such
as a post office box.
(3) In-person payments on credit card accounts--(i) General.
Notwithstanding Sec. 1026.10(b), payments on a credit card account
under an open-end (not home-secured) consumer credit plan made in person
at a branch or office of a card issuer that is a financial institution
prior to the close of business of that branch or office shall be
considered received on the date on which the consumer makes the payment.
A card issuer that is a financial institution shall not impose a cut-off
time earlier than the close of business for any such payments made in
person at any branch or office of the card issuer at which such payments
are accepted. Notwithstanding Sec. 1026.10(b)(2)(ii), a card issuer may
impose a cut-off time earlier than 5 p.m. for such payments, if the
close of business of the branch or office is earlier than 5 p.m.
(ii) Financial institution. For purposes of paragraph (b)(3) of this
section, ``financial institution'' shall mean a bank, savings
association, or credit union.
(4) Nonconforming payments--(i) In general. Except as provided in
paragraph (b)(4)(ii) of this section, if a creditor specifies, on or
with the periodic statement, requirements for the consumer to follow in
making payments as permitted under this Sec. 1026.10, but accepts a
payment that does not conform to the requirements, the creditor shall
credit the payment within five days of receipt.
(ii) Payment methods promoted by creditor. If a creditor promotes a
method for making payments, such payments shall be considered conforming
payments in accordance with this paragraph (b) and shall be credited to
the consumer's account as of the date of receipt, except when a delay in
crediting does not result in a finance or other charge.
(c) Adjustment of account. If a creditor fails to credit a payment,
as required by paragraphs (a) or (b) of this section, in time to avoid
the imposition of finance or other charges, the creditor shall adjust
the consumer's account so that the charges imposed are credited to the
consumer's account during the next billing cycle.
(d) Crediting of payments when creditor does not receive or accept
payments on due date--(1) General. Except as provided in paragraph
(d)(2) of this section, if a creditor does not receive or accept
payments by mail on the due date for payments, the creditor may
generally not treat a payment received the next business day as late for
any purpose. For purposes of this paragraph (d), the ``next business
day'' means the next day on which the creditor accepts or receives
payments by mail.
(2) Payments accepted or received other than by mail. If a creditor
accepts or receives payments made on the due date by a method other than
mail, such as electronic or telephone payments, the
[[Page 40]]
creditor is not required to treat a payment made by that method on the
next business day as timely, even if it does not accept mailed payments
on the due date.
(e) Limitations on fees related to method of payment. For credit
card accounts under an open-end (not home-secured) consumer credit plan,
a creditor may not impose a separate fee to allow consumers to make a
payment by any method, such as mail, electronic, or telephone payments,
unless such payment method involves an expedited service by a customer
service representative of the creditor. For purposes of paragraph (e) of
this section, the term ``creditor'' includes a third party that
collects, receives, or processes payments on behalf of a creditor.
(f) Changes by card issuer. If a card issuer makes a material change
in the address for receiving payments or procedures for handling
payments, and such change causes a material delay in the crediting of a
payment to the consumer's account during the 60-day period following the
date on which such change took effect, the card issuer may not impose
any late fee or finance charge for a late payment on the credit card
account during the 60-day period following the date on which the change
took effect.
Sec. 1026.11 Treatment of credit balances; account termination.
(a) Credit balances. When a credit balance in excess of $1 is
created on a credit account (through transmittal of funds to a creditor
in excess of the total balance due on an account, through rebates of
unearned finance charges or insurance premiums, or through amounts
otherwise owed to or held for the benefit of the consumer), the creditor
shall:
(1) Credit the amount of the credit balance to the consumer's
account;
(2) Refund any part of the remaining credit balance within seven
business days from receipt of a written request from the consumer;
(3) Make a good faith effort to refund to the consumer by cash,
check, or money order, or credit to a deposit account of the consumer,
any part of the credit balance remaining in the account for more than
six months. No further action is required if the consumer's current
location is not known to the creditor and cannot be traced through the
consumer's last known address or telephone number.
(b) Account termination. (1) A creditor shall not terminate an
account prior to its expiration date solely because the consumer does
not incur a finance charge.
(2) Nothing in paragraph (b)(1) of this section prohibits a creditor
from terminating an account that is inactive for three or more
consecutive months. An account is inactive for purposes of this
paragraph if no credit has been extended (such as by purchase, cash
advance or balance transfer) and if the account has no outstanding
balance.
(c) Timely settlement of estate debts--(1) General rule. (i)
Reasonable policies and procedures required. For credit card accounts
under an open-end (not home-secured) consumer credit plan, card issuers
must adopt reasonable written policies and procedures designed to ensure
that an administrator of an estate of a deceased accountholder can
determine the amount of and pay any balance on the account in a timely
manner.
(ii) Application to joint accounts. Paragraph (c) of this section
does not apply to the account of a deceased consumer if a joint
accountholder remains on the account.
(2) Timely statement of balance--(i) Requirement. Upon request by
the administrator of an estate, a card issuer must provide the
administrator with the amount of the balance on a deceased consumer's
account in a timely manner.
(ii) Safe harbor. For purposes of paragraph (c)(2)(i) of this
section, providing the amount of the balance on the account within 30
days of receiving the request is deemed to be timely.
(3) Limitations after receipt of request from administrator--(i)
Limitation on fees and increases in annual percentage rates. After
receiving a request from the administrator of an estate for the amount
of the balance on a deceased consumer's account, a card issuer must not
impose any fees on the account (such as a late fee, annual fee, or over-
the-limit fee) or increase any annual
[[Page 41]]
percentage rate, except as provided by Sec. 1026.55(b)(2).
(ii) Limitation on trailing or residual interest. A card issuer must
waive or rebate any additional finance charge due to a periodic interest
rate if payment in full of the balance disclosed pursuant to paragraph
(c)(2) of this section is received within 30 days after disclosure.
Sec. 1026.12 Special credit card provisions.
(a) Issuance of credit cards. Regardless of the purpose for which a
credit card is to be used, including business, commercial, or
agricultural use, no credit card shall be issued to any person except:
(1) In response to an oral or written request or application for the
card; or
(2) As a renewal of, or substitute for, an accepted credit card.
(b) Liability of cardholder for unauthorized use--(1)(i) Definition
of unauthorized use. For purposes of this section, the term
``unauthorized use'' means the use of a credit card by a person, other
than the cardholder, who does not have actual, implied, or apparent
authority for such use, and from which the cardholder receives no
benefit.
(ii) Limitation on amount. The liability of a cardholder for
unauthorized use of a credit card shall not exceed the lesser of $50 or
the amount of money, property, labor, or services obtained by the
unauthorized use before notification to the card issuer under paragraph
(b)(3) of this section.
(2) Conditions of liability. A cardholder shall be liable for
unauthorized use of a credit card only if:
(i) The credit card is an accepted credit card;
(ii) The card issuer has provided adequate notice of the
cardholder's maximum potential liability and of means by which the card
issuer may be notified of loss or theft of the card. The notice shall
state that the cardholder's liability shall not exceed $50 (or any
lesser amount) and that the cardholder may give oral or written
notification, and shall describe a means of notification (for example, a
telephone number, an address, or both); and
(iii) The card issuer has provided a means to identify the
cardholder on the account or the authorized user of the card.
(3) Notification to card issuer. Notification to a card issuer is
given when steps have been taken as may be reasonably required in the
ordinary course of business to provide the card issuer with the
pertinent information about the loss, theft, or possible unauthorized
use of a credit card, regardless of whether any particular officer,
employee, or agent of the card issuer does, in fact, receive the
information. Notification may be given, at the option of the person
giving it, in person, by telephone, or in writing. Notification in
writing is considered given at the time of receipt or, whether or not
received, at the expiration of the time ordinarily required for
transmission, whichever is earlier.
(4) Effect of other applicable law or agreement. If state law or an
agreement between a cardholder and the card issuer imposes lesser
liability than that provided in this paragraph, the lesser liability
shall govern.
(5) Business use of credit cards. If 10 or more credit cards are
issued by one card issuer for use by the employees of an organization,
this section does not prohibit the card issuer and the organization from
agreeing to liability for unauthorized use without regard to this
section. However, liability for unauthorized use may be imposed on an
employee of the organization, by either the card issuer or the
organization, only in accordance with this section.
(c) Right of cardholder to assert claims or defenses against card
issuer--(1) General rule. When a person who honors a credit card fails
to resolve satisfactorily a dispute as to property or services purchased
with the credit card in a consumer credit transaction, the cardholder
may assert against the card issuer all claims (other than tort claims)
and defenses arising out of the transaction and relating to the failure
to resolve the dispute. The cardholder may withhold payment up to the
amount of credit outstanding for the property or services that gave rise
to the dispute and any finance or other charges imposed on that amount.
[[Page 42]]
(2) Adverse credit reports prohibited. If, in accordance with
paragraph (c)(1) of this section, the cardholder withholds payment of
the amount of credit outstanding for the disputed transaction, the card
issuer shall not report that amount as delinquent until the dispute is
settled or judgment is rendered.
(3) Limitations--(i) General. The rights stated in paragraphs (c)(1)
and (c)(2) of this section apply only if:
(A) The cardholder has made a good faith attempt to resolve the
dispute with the person honoring the credit card; and
(B) The amount of credit extended to obtain the property or services
that result in the assertion of the claim or defense by the cardholder
exceeds $50, and the disputed transaction occurred in the same state as
the cardholder's current designated address or, if not within the same
state, within 100 miles from that address.
(ii) Exclusion. The limitations stated in paragraph (c)(3)(i)(B) of
this section shall not apply when the person honoring the credit card:
(A) Is the same person as the card issuer;
(B) Is controlled by the card issuer directly or indirectly;
(C) Is under the direct or indirect control of a third person that
also directly or indirectly controls the card issuer;
(D) Controls the card issuer directly or indirectly;
(E) Is a franchised dealer in the card issuer's products or
services; or
(F) Has obtained the order for the disputed transaction through a
mail solicitation made or participated in by the card issuer.
(d) Offsets by card issuer prohibited. (1) A card issuer may not
take any action, either before or after termination of credit card
privileges, to offset a cardholder's indebtedness arising from a
consumer credit transaction under the relevant credit card plan against
funds of the cardholder held on deposit with the card issuer.
(2) This paragraph does not alter or affect the right of a card
issuer acting under state or Federal law to do any of the following with
regard to funds of a cardholder held on deposit with the card issuer if
the same procedure is constitutionally available to creditors generally:
Obtain or enforce a consensual security interest in the funds; attach or
otherwise levy upon the funds; or obtain or enforce a court order
relating to the funds.
(3) This paragraph does not prohibit a plan, if authorized in
writing by the cardholder, under which the card issuer may periodically
deduct all or part of the cardholder's credit card debt from a deposit
account held with the card issuer (subject to the limitations in Sec.
1026.13(d)(1)).
(e) Prompt notification of returns and crediting of refunds. (1)
When a creditor other than the card issuer accepts the return of
property or forgives a debt for services that is to be reflected as a
credit to the consumer's credit card account, that creditor shall,
within 7 business days from accepting the return or forgiving the debt,
transmit a credit statement to the card issuer through the card issuer's
normal channels for credit statements.
(2) The card issuer shall, within 3 business days from receipt of a
credit statement, credit the consumer's account with the amount of the
refund.
(3) If a creditor other than a card issuer routinely gives cash
refunds to consumers paying in cash, the creditor shall also give credit
or cash refunds to consumers using credit cards, unless it discloses at
the time the transaction is consummated that credit or cash refunds for
returns are not given. This section does not require refunds for returns
nor does it prohibit refunds in kind.
(f) Discounts; tie-in arrangements. No card issuer may, by contract
or otherwise:
(1) Prohibit any person who honors a credit card from offering a
discount to a consumer to induce the consumer to pay by cash, check, or
similar means rather than by use of a credit card or its underlying
account for the purchase of property or services; or
(2) Require any person who honors the card issuer's credit card to
open or maintain any account or obtain any other service not essential
to the operation of the credit card plan from the card issuer or any
other person, as a condition of participation in a credit
[[Page 43]]
card plan. If maintenance of an account for clearing purposes is
determined to be essential to the operation of the credit card plan, it
may be required only if no service charges or minimum balance
requirements are imposed.
(g) Relation to Electronic Fund Transfer Act and Regulation E. For
guidance on whether Regulation Z (12 CFR part 1026) or Regulation E (12
CFR part 1005) applies in instances involving both credit and electronic
fund transfer aspects, refer to Regulation E, 12 CFR 1005.12(a)
regarding issuance and liability for unauthorized use. On matters other
than issuance and liability, this section applies to the credit aspects
of combined credit/electronic fund transfer transactions, as applicable.
Effective Date Note: At 81 FR 84369, Nov. 22, 2016, Sec. 1026.12
was amended by revising paragraph (d), effective Oct. 1, 2017. At 82 FR
18975, Apr. 25, 2017, the effective date was delayed to Apr. 1, 2018.
For the convenience of the user, the revised text is set forth as
follows:
Sec. 1026.12 Special credit card provisions.
* * * * *
(d) Offsets by card issuer prohibited--(1) General rule. A card
issuer may not take any action, either before or after termination of
credit card privileges, to offset a cardholder's indebtedness arising
from a consumer credit transaction under the relevant credit card plan
against funds of the cardholder held on deposit with the card issuer.
(2) Rights of the card issuer. This paragraph (d) does not alter or
affect the right of a card issuer acting under state or Federal law to
do any of the following with regard to funds of a cardholder held on
deposit with the card issuer if the same procedure is constitutionally
available to creditors generally: Obtain or enforce a consensual
security interest in the funds; attach or otherwise levy upon the funds;
or obtain or enforce a court order relating to the funds.
(3) Periodic deductions. (i) This paragraph (d) does not prohibit a
plan, if authorized in writing by the cardholder, under which the card
issuer may periodically deduct all or part of the cardholder's credit
card debt from a deposit account held with the card issuer (subject to
the limitations in Sec. 1026.13(d)(1)).
(ii) With respect to a covered separate credit feature accessible by
a hybrid prepaid-credit card as defined in Sec. 1026.61, for purposes
of this paragraph (d)(3), ``periodically'' means no more frequently than
once per calendar month, such as on a monthly due date disclosed on the
applicable periodic statement in accordance with the requirements of
Sec. 1026.7(b)(11)(i)(A) or on an earlier date in each calendar month
in accordance with a written authorization signed by the consumer.
* * * * *
Sec. 1026.13 Billing error resolution.
(a) Definition of billing error. For purposes of this section, the
term billing error means:
(1) A reflection on or with a periodic statement of an extension of
credit that is not made to the consumer or to a person who has actual,
implied, or apparent authority to use the consumer's credit card or
open-end credit plan.
(2) A reflection on or with a periodic statement of an extension of
credit that is not identified in accordance with the requirements of
Sec. Sec. 1026.7(a)(2) or (b)(2), as applicable, and 1026.8.
(3) A reflection on or with a periodic statement of an extension of
credit for property or services not accepted by the consumer or the
consumer's designee, or not delivered to the consumer or the consumer's
designee as agreed.
(4) A reflection on a periodic statement of the creditor's failure
to credit properly a payment or other credit issued to the consumer's
account.
(5) A reflection on a periodic statement of a computational or
similar error of an accounting nature that is made by the creditor.
(6) A reflection on a periodic statement of an extension of credit
for which the consumer requests additional clarification, including
documentary evidence.
(7) The creditor's failure to mail or deliver a periodic statement
to the consumer's last known address if that address was received by the
creditor, in writing, at least 20 days before the end of the billing
cycle for which the statement was required.
(b) Billing error notice. A billing error notice is a written notice
from a consumer that:
(1) Is received by a creditor at the address disclosed under Sec.
1026.7(a)(9) or (b)(9), as applicable, no later than 60 days after the
creditor transmitted the first periodic statement that reflects the
alleged billing error;
[[Page 44]]
(2) Enables the creditor to identify the consumer's name and account
number; and
(3) To the extent possible, indicates the consumer's belief and the
reasons for the belief that a billing error exists, and the type, date,
and amount of the error.
(c) Time for resolution; general procedures. (1) The creditor shall
mail or deliver written acknowledgment to the consumer within 30 days of
receiving a billing error notice, unless the creditor has complied with
the appropriate resolution procedures of paragraphs (e) and (f) of this
section, as applicable, within the 30-day period; and
(2) The creditor shall comply with the appropriate resolution
procedures of paragraphs (e) and (f) of this section, as applicable,
within 2 complete billing cycles (but in no event later than 90 days)
after receiving a billing error notice.
(d) Rules pending resolution. Until a billing error is resolved
under paragraph (e) or (f) of this section, the following rules apply:
(1) Consumer's right to withhold disputed amount; collection action
prohibited. The consumer need not pay (and the creditor may not try to
collect) any portion of any required payment that the consumer believes
is related to the disputed amount (including related finance or other
charges). If the cardholder has enrolled in an automatic payment plan
offered by the card issuer and has agreed to pay the credit card
indebtedness by periodic deductions from the cardholder's deposit
account, the card issuer shall not deduct any part of the disputed
amount or related finance or other charges if a billing error notice is
received any time up to 3 business days before the scheduled payment
date.
(2) Adverse credit reports prohibited. The creditor or its agent
shall not (directly or indirectly) make or threaten to make an adverse
report to any person about the consumer's credit standing, or report
that an amount or account is delinquent, because the consumer failed to
pay the disputed amount or related finance or other charges.
(3) Acceleration of debt and restriction of account prohibited. A
creditor shall not accelerate any part of the consumer's indebtedness or
restrict or close a consumer's account solely because the consumer has
exercised in good faith rights provided by this section. A creditor may
be subject to the forfeiture penalty under 15 U.S.C. 1666(e) for failure
to comply with any of the requirements of this section.
(4) Permitted creditor actions. A creditor is not prohibited from
taking action to collect any undisputed portion of the item or bill;
from deducting any disputed amount and related finance or other charges
from the consumer's credit limit on the account; or from reflecting a
disputed amount and related finance or other charges on a periodic
statement, provided that the creditor indicates on or with the periodic
statement that payment of any disputed amount and related finance or
other charges is not required pending the creditor's compliance with
this section.
(e) Procedures if billing error occurred as asserted. If a creditor
determines that a billing error occurred as asserted, it shall within
the time limits in paragraph (c)(2) of this section:
(1) Correct the billing error and credit the consumer's account with
any disputed amount and related finance or other charges, as applicable;
and
(2) Mail or deliver a correction notice to the consumer.
(f) Procedures if different billing error or no billing error
occurred. If, after conducting a reasonable investigation, a creditor
determines that no billing error occurred or that a different billing
error occurred from that asserted, the creditor shall within the time
limits in paragraph (c)(2) of this section:
(1) Mail or deliver to the consumer an explanation that sets forth
the reasons for the creditor's belief that the billing error alleged by
the consumer is incorrect in whole or in part;
(2) Furnish copies of documentary evidence of the consumer's
indebtedness, if the consumer so requests; and
(3) If a different billing error occurred, correct the billing error
and credit the consumer's account with any disputed amount and related
finance or other charges, as applicable.
(g) Creditor's rights and duties after resolution. If a creditor,
after complying with all of the requirements of
[[Page 45]]
this section, determines that a consumer owes all or part of the
disputed amount and related finance or other charges, the creditor:
(1) Shall promptly notify the consumer in writing of the time when
payment is due and the portion of the disputed amount and related
finance or other charges that the consumer still owes;
(2) Shall allow any time period disclosed under Sec. 1026.6(a)(1)
or (b)(2)(v), as applicable, and Sec. 1026.7(a)(8) or (b)(8), as
applicable, during which the consumer can pay the amount due under
paragraph (g)(1) of this section without incurring additional finance or
other charges;
(3) May report an account or amount as delinquent because the amount
due under paragraph (g)(1) of this section remains unpaid after the
creditor has allowed any time period disclosed under Sec. 1026.6(a)(1)
or (b)(2)(v), as applicable, and Sec. 1026.7(a)(8) or (b)(8), as
applicable or 10 days (whichever is longer) during which the consumer
can pay the amount; but
(4) May not report that an amount or account is delinquent because
the amount due under paragraph (g)(1) of the section remains unpaid, if
the creditor receives (within the time allowed for payment in paragraph
(g)(3) of this section) further written notice from the consumer that
any portion of the billing error is still in dispute, unless the
creditor also:
(i) Promptly reports that the amount or account is in dispute;
(ii) Mails or delivers to the consumer (at the same time the report
is made) a written notice of the name and address of each person to whom
the creditor makes a report; and
(iii) Promptly reports any subsequent resolution of the reported
delinquency to all persons to whom the creditor has made a report.
(h) Reassertion of billing error. A creditor that has fully complied
with the requirements of this section has no further responsibilities
under this section (other than as provided in paragraph (g)(4) of this
section) if a consumer reasserts substantially the same billing error.
(i) Relation to Electronic Fund Transfer Act and Regulation E. If an
extension of credit is incident to an electronic fund transfer, under an
agreement between a consumer and a financial institution to extend
credit when the consumer's account is overdrawn or to maintain a
specified minimum balance in the consumer's account, the creditor shall
comply with the requirements of Regulation E, 12 CFR 1005.11 governing
error resolution rather than those of paragraphs (a), (b), (c), (e),
(f), and (h) of this section.
Effective Date Note: At 81 FR 84369, Nov. 22, 2016, Sec. 1026.13
was amended by revising paragraph (i), effective Oct. 1, 2017. At 82 FR
18975, Apr. 25, 2017, the effective date was delayed to Apr. 1, 2018.
For the convenience of the user, the revised text is set forth as
follows:
Sec. 1026.13 Billing error resolution.
* * * * *
(i) Relation to Electronic Fund Transfer Act and Regulation E. A
creditor shall comply with the requirements of Regulation E, 12 CFR
1005.11, and 1005.18(e) as applicable, governing error resolution rather
than those of paragraphs (a), (b), (c), (e), (f), and (h) of this
section if:
(1) Except with respect to a prepaid account as defined in Sec.
1026.61, an extension of credit that is incident to an electronic fund
transfer occurs under an agreement between the consumer and a financial
institution to extend credit when the consumer's account is overdrawn or
to maintain a specified minimum balance in the consumer's account; or
(2) With regard to a covered separate credit feature and an asset
feature of a prepaid account where both are accessible by a hybrid
prepaid-credit card as defined in Sec. 1026.61, an extension of credit
that is incident to an electronic fund transfer occurs when the hybrid
prepaid-credit card accesses both funds in the asset feature of the
prepaid account and a credit extension from the credit feature with
respect to a particular transaction.
* * * * *
Sec. 1026.14 Determination of annual percentage rate.
(a) General rule. The annual percentage rate is a measure of the
cost of credit, expressed as a yearly rate. An annual percentage rate
shall be considered accurate if it is not more than \1/8\th of 1
percentage point above or
[[Page 46]]
below the annual percentage rate determined in accordance with this
section. An error in disclosure of the annual percentage rate or finance
charge shall not, in itself, be considered a violation of this part if:
(1) The error resulted from a corresponding error in a calculation
tool used in good faith by the creditor; and
(2) Upon discovery of the error, the creditor promptly discontinues
use of that calculation tool for disclosure purposes, and notifies the
Bureau in writing of the error in the calculation tool.
(b) Annual percentage rate--in general. Where one or more periodic
rates may be used to compute the finance charge, the annual percentage
rate(s) to be disclosed for purposes of Sec. Sec. 1026.60, 1026.40,
1026.6, 1026.7(a)(4) or (b)(4), 1026.9, 1026.15, 1026.16, 1026.26,
1026.55, and 1026.56 shall be computed by multiplying each periodic rate
by the number of periods in a year.
(c) Optional effective annual percentage rate for periodic
statements for creditors offering open-end credit plans secured by a
consumer's dwelling. A creditor offering an open-end plan subject to the
requirements of Sec. 1026.40 need not disclose an effective annual
percentage rate. Such a creditor may, at its option, disclose an
effective annual percentage rate(s) pursuant to Sec. 1026.7(a)(7) and
compute the effective annual percentage rate as follows:
(1) Solely periodic rates imposed. If the finance charge is
determined solely by applying one or more periodic rates, at the
creditor's option, either:
(i) By multiplying each periodic rate by the number of periods in a
year; or
(ii) By dividing the total finance charge for the billing cycle by
the sum of the balances to which the periodic rates were applied and
multiplying the quotient (expressed as a percentage) by the number of
billing cycles in a year.
(2) Minimum or fixed charge, but not transaction charge, imposed. If
the finance charge imposed during the billing cycle is or includes a
minimum, fixed, or other charge not due to the application of a periodic
rate, other than a charge with respect to any specific transaction
during the billing cycle, by dividing the total finance charge for the
billing cycle by the amount of the balance(s) to which it is applicable
and multiplying the quotient (expressed as a percentage) by the number
of billing cycles in a year. If there is no balance to which the finance
charge is applicable, an annual percentage rate cannot be determined
under this section. Where the finance charge imposed during the billing
cycle is or includes a loan fee, points, or similar charge that relates
to opening, renewing, or continuing an account, the amount of such
charge shall not be included in the calculation of the annual percentage
rate.
(3) Transaction charge imposed. If the finance charge imposed during
the billing cycle is or includes a charge relating to a specific
transaction during the billing cycle (even if the total finance charge
also includes any other minimum, fixed, or other charge not due to the
application of a periodic rate), by dividing the total finance charge
imposed during the billing cycle by the total of all balances and other
amounts on which a finance charge was imposed during the billing cycle
without duplication, and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a year, except that the
annual percentage rate shall not be less than the largest rate
determined by multiplying each periodic rate imposed during the billing
cycle by the number of periods in a year. Where the finance charge
imposed during the billing cycle is or includes a loan fee, points, or
similar charge that relates to the opening, renewing, or continuing an
account, the amount of such charge shall not be included in the
calculation of the annual percentage rate. See appendix F to this part
regarding determination of the denominator of the fraction under this
paragraph.
(4) If the finance charge imposed during the billing cycle is or
includes a minimum, fixed, or other charge not due to the application of
a periodic rate and the total finance charge imposed during the billing
cycle does not exceed 50 cents for a monthly or longer billing cycle, or
the pro rata part of 50 cents for a billing cycle shorter than monthly,
at the creditor's option, by multiplying each applicable periodic rate
by the number of periods in a
[[Page 47]]
year, notwithstanding the provisions of paragraphs (c)(2) and (c)(3) of
this section.
(d) Calculations where daily periodic rate applied. If the
provisions of paragraph (c)(1)(ii) or (c)(2) of this section apply and
all or a portion of the finance charge is determined by the application
of one or more daily periodic rates, the annual percentage rate may be
determined either:
(1) By dividing the total finance charge by the average of the daily
balances and multiplying the quotient by the number of billing cycles in
a year; or
(2) By dividing the total finance charge by the sum of the daily
balances and multiplying the quotient by 365.
Sec. 1026.15 Right of rescission.
(a) Consumer's right to rescind. (1)(i) Except as provided in
paragraph (a)(1)(ii) of this section, in a credit plan in which a
security interest is or will be retained or acquired in a consumer's
principal dwelling, each consumer whose ownership interest is or will be
subject to the security interest shall have the right to rescind: each
credit extension made under the plan; the plan when the plan is opened;
a security interest when added or increased to secure an existing plan;
and the increase when a credit limit on the plan is increased.
(ii) As provided in section 125(e) of the Act, the consumer does not
have the right to rescind each credit extension made under the plan if
such extension is made in accordance with a previously established
credit limit for the plan.
(2) To exercise the right to rescind, the consumer shall notify the
creditor of the rescission by mail, telegram, or other means of written
communication. Notice is considered given when mailed, or when filed for
telegraphic transmission, or, if sent by other means, when delivered to
the creditor's designated place of business.
(3) The consumer may exercise the right to rescind until midnight of
the third business day following the occurrence described in paragraph
(a)(1) of this section that gave rise to the right of rescission,
delivery of the notice required by paragraph (b) of this section, or
delivery of all material disclosures, whichever occurs last. If the
required notice and material disclosures are not delivered, the right to
rescind shall expire 3 years after the occurrence giving rise to the
right of rescission, or upon transfer of all of the consumer's interest
in the property, or upon sale of the property, whichever occurs first.
In the case of certain administrative proceedings, the rescission period
shall be extended in accordance with section 125(f) of the Act. The term
material disclosures means the information that must be provided to
satisfy the requirements in Sec. 1026.6 with regard to the method of
determining the finance charge and the balance upon which a finance
charge will be imposed, the annual percentage rate, the amount or method
of determining the amount of any membership or participation fee that
may be imposed as part of the plan, and the payment information
described in Sec. 1026.40(d)(5)(i) and (ii) that is required under
Sec. 1026.6(e)(2).
(4) When more than one consumer has the right to rescind, the
exercise of the right by one consumer shall be effective as to all
consumers.
(b) Notice of right to rescind. In any transaction or occurrence
subject to rescission, a creditor shall deliver two copies of the notice
of the right to rescind to each consumer entitled to rescind (one copy
to each if the notice is delivered in electronic form in accordance with
the consumer consent and other applicable provisions of the E-Sign Act).
The notice shall identify the transaction or occurrence and clearly and
conspicuously disclose the following:
(1) The retention or acquisition of a security interest in the
consumer's principal dwelling.
(2) The consumer's right to rescind, as described in paragraph
(a)(1) of this section.
(3) How to exercise the right to rescind, with a form for that
purpose, designating the address of the creditor's place of business.
(4) The effects of rescission, as described in paragraph (d) of this
section.
(5) The date the rescission period expires.
[[Page 48]]
(c) Delay of creditor's performance. Unless a consumer waives the
right to rescind under paragraph (e) of this section, no money shall be
disbursed other than in escrow, no services shall be performed, and no
materials delivered until after the rescission period has expired and
the creditor is reasonably satisfied that the consumer has not
rescinded. A creditor does not violate this section if a third party
with no knowledge of the event activating the rescission right does not
delay in providing materials or services, as long as the debt incurred
for those materials or services is not secured by the property subject
to rescission.
(d) Effects of rescission. (1) When a consumer rescinds a
transaction, the security interest giving rise to the right of
rescission becomes void, and the consumer shall not be liable for any
amount, including any finance charge.
(2) Within 20 calendar days after receipt of a notice of rescission,
the creditor shall return any money or property that has been given to
anyone in connection with the transaction and shall take any action
necessary to reflect the termination of the security interest.
(3) If the creditor has delivered any money or property, the
consumer may retain possession until the creditor has met its obligation
under paragraph (d)(2) of this section. When the creditor has complied
with that paragraph, the consumer shall tender the money or property to
the creditor or, where the latter would be impracticable or inequitable,
tender its reasonable value. At the consumer's option, tender of
property may be made at the location of the property or at the
consumer's residence. Tender of money must be made at the creditor's
designated place of business. If the creditor does not take possession
of the money or property within 20 calendar days after the consumer's
tender, the consumer may keep it without further obligation.
(4) The procedures outlined in paragraphs (d)(2) and (3) of this
section may be modified by court order.
(e) Consumer's waiver of right to rescind. The consumer may modify
or waive the right to rescind if the consumer determines that the
extension of credit is needed to meet a bona fide personal financial
emergency. To modify or waive the right, the consumer shall give the
creditor a dated written statement that describes the emergency,
specifically modifies or waives the right to rescind, and bears the
signature of all the consumers entitled to rescind. Printed forms for
this purpose are prohibited.
(f) Exempt transactions. The right to rescind does not apply to the
following:
(1) A residential mortgage transaction.
(2) A credit plan in which a state agency is a creditor.
Sec. 1026.16 Advertising.
(a) Actually available terms. If an advertisement for credit states
specific credit terms, it shall state only those terms that actually are
or will be arranged or offered by the creditor.
(b) Advertisement of terms that require additional disclosures. (1)
Any term required to be disclosed under Sec. 1026.6(b)(3) set forth
affirmatively or negatively in an advertisement for an open-end (not
home-secured) credit plan triggers additional disclosures under this
section. Any term required to be disclosed under Sec. 1026.6(a)(1) or
(a)(2) set forth affirmatively or negatively in an advertisement for a
home-equity plan subject to the requirements of Sec. 1026.40 triggers
additional disclosures under this section. If any of the terms that
trigger additional disclosures under this paragraph is set forth in an
advertisement, the advertisement shall also clearly and conspicuously
set forth the following:
(i) Any minimum, fixed, transaction, activity or similar charge that
is a finance charge under Sec. 1026.4 that could be imposed.
(ii) Any periodic rate that may be applied expressed as an annual
percentage rate as determined under Sec. 1026.14(b). If the plan
provides for a variable periodic rate, that fact shall be disclosed.
(iii) Any membership or participation fee that could be imposed.
(2) If an advertisement for credit to finance the purchase of goods
or services specified in the advertisement states a periodic payment
amount, the advertisement shall also state the total
[[Page 49]]
of payments and the time period to repay the obligation, assuming that
the consumer pays only the periodic payment amount advertised. The
disclosure of the total of payments and the time period to repay the
obligation must be equally prominent to the statement of the periodic
payment amount.
(c) Catalogs or other multiple-page advertisements; electronic
advertisements. (1) If a catalog or other multiple-page advertisement,
or an electronic advertisement (such as an advertisement appearing on an
Internet Web site), gives information in a table or schedule in
sufficient detail to permit determination of the disclosures required by
paragraph (b) of this section, it shall be considered a single
advertisement if:
(i) The table or schedule is clearly and conspicuously set forth;
and
(ii) Any statement of terms set forth in Sec. 1026.6 appearing
anywhere else in the catalog or advertisement clearly refers to the page
or location where the table or schedule begins.
(2) A catalog or other multiple-page advertisement or an electronic
advertisement (such as an advertisement appearing on an Internet Web
site) complies with this paragraph if the table or schedule of terms
includes all appropriate disclosures for a representative scale of
amounts up to the level of the more commonly sold higher-priced property
or services offered.
(d) Additional requirements for home-equity plans--(1) Advertisement
of terms that require additional disclosures. If any of the terms
required to be disclosed under Sec. 1026.6(a)(1) or (a)(2) or the
payment terms of the plan are set forth, affirmatively or negatively, in
an advertisement for a home-equity plan subject to the requirements of
Sec. 1026.40, the advertisement also shall clearly and conspicuously
set forth the following:
(i) Any loan fee that is a percentage of the credit limit under the
plan and an estimate of any other fees imposed for opening the plan,
stated as a single dollar amount or a reasonable range.
(ii) Any periodic rate used to compute the finance charge, expressed
as an annual percentage rate as determined under Sec. 1026.14(b).
(iii) The maximum annual percentage rate that may be imposed in a
variable-rate plan.
(2) Discounted and premium rates. If an advertisement states an
initial annual percentage rate that is not based on the index and margin
used to make later rate adjustments in a variable-rate plan, the
advertisement also shall state with equal prominence and in close
proximity to the initial rate:
(i) The period of time such initial rate will be in effect; and
(ii) A reasonably current annual percentage rate that would have
been in effect using the index and margin.
(3) Balloon payment. If an advertisement contains a statement of any
minimum periodic payment and a balloon payment may result if only the
minimum periodic payments are made, even if such a payment is uncertain
or unlikely, the advertisement also shall state with equal prominence
and in close proximity to the minimum periodic payment statement that a
balloon payment may result, if applicable. A balloon payment results if
paying the minimum periodic payments does not fully amortize the
outstanding balance by a specified date or time, and the consumer is
required to repay the entire outstanding balance at such time. If a
balloon payment will occur when the consumer makes only the minimum
payments required under the plan, an advertisement for such a program
which contains any statement of any minimum periodic payment shall also
state with equal prominence and in close proximity to the minimum
periodic payment statement:
(i) That a balloon payment will result; and
(ii) The amount and timing of the balloon payment that will result
if the consumer makes only the minimum payments for the maximum period
of time that the consumer is permitted to make such payments.
(4) Tax implications. An advertisement that states that any interest
expense incurred under the home-equity plan is or may be tax deductible
may not be misleading in this regard. If an advertisement distributed in
paper form or through the Internet (rather than by radio or television)
is for a home-equity plan secured by the consumer's
[[Page 50]]
principal dwelling, and the advertisement states that the advertised
extension of credit may exceed the fair market value of the dwelling,
the advertisement shall clearly and conspicuously state that:
(i) The interest on the portion of the credit extension that is
greater than the fair market value of the dwelling is not tax deductible
for Federal income tax purposes; and
(ii) The consumer should consult a tax adviser for further
information regarding the deductibility of interest and charges.
(5) Misleading terms. An advertisement may not refer to a home-
equity plan as ``free money'' or contain a similarly misleading term.
(6) Promotional rates and payments. (i) Definitions. The following
definitions apply for purposes of paragraph (d)(6) of this section:
(A) Promotional rate. The term ``promotional rate'' means, in a
variable-rate plan, any annual percentage rate that is not based on the
index and margin that will be used to make rate adjustments under the
plan, if that rate is less than a reasonably current annual percentage
rate that would be in effect under the index and margin that will be
used to make rate adjustments under the plan.
(B) Promotional payment. The term ``promotional payment'' means:
(1) For a variable-rate plan, any minimum payment applicable for a
promotional period that:
(i) Is not derived by applying the index and margin to the
outstanding balance when such index and margin will be used to determine
other minimum payments under the plan; and
(ii) Is less than other minimum payments under the plan derived by
applying a reasonably current index and margin that will be used to
determine the amount of such payments, given an assumed balance.
(2) For a plan other than a variable-rate plan, any minimum payment
applicable for a promotional period if that payment is less than other
payments required under the plan given an assumed balance.
(C) Promotional period. A ``promotional period'' means a period of
time, less than the full term of the loan, that the promotional rate or
promotional payment may be applicable.
(ii) Stating the promotional period and post-promotional rate or
payments. If any annual percentage rate that may be applied to a plan is
a promotional rate, or if any payment applicable to a plan is a
promotional payment, the following must be disclosed in any
advertisement, other than television or radio advertisements, in a clear
and conspicuous manner with equal prominence and in close proximity to
each listing of the promotional rate or payment:
(A) The period of time during which the promotional rate or
promotional payment will apply;
(B) In the case of a promotional rate, any annual percentage rate
that will apply under the plan. If such rate is variable, the annual
percentage rate must be disclosed in accordance with the accuracy
standards in Sec. Sec. 1026.40 or 1026.16(b)(1)(ii) as applicable; and
(C) In the case of a promotional payment, the amounts and time
periods of any payments that will apply under the plan. In variable-rate
transactions, payments that will be determined based on application of
an index and margin shall be disclosed based on a reasonably current
index and margin.
(iii) Envelope excluded. The requirements in paragraph (d)(6)(ii) of
this section do not apply to an envelope in which an application or
solicitation is mailed, or to a banner advertisement or pop-up
advertisement linked to an application or solicitation provided
electronically.
(e) Alternative disclosures--television or radio advertisements. An
advertisement made through television or radio stating any of the terms
requiring additional disclosures under paragraphs (b)(1) or (d)(1) of
this section may alternatively comply with paragraphs (b)(1) or (d)(1)
of this section by stating the information required by paragraphs
(b)(1)(ii) or (d)(1)(ii) of this section, as applicable, and listing a
toll-free telephone number, or any telephone number that allows a
consumer to reverse the phone charges when calling for information,
along with a reference that such number may be used by consumers to
obtain the additional cost information.
[[Page 51]]
(f) Misleading terms. An advertisement may not refer to an annual
percentage rate as ``fixed,'' or use a similar term, unless the
advertisement also specifies a time period that the rate will be fixed
and the rate will not increase during that period, or if no such time
period is provided, the rate will not increase while the plan is open.
(g) Promotional rates and fees--(1) Scope. The requirements of this
paragraph apply to any advertisement of an open-end (not home-secured)
plan, including promotional materials accompanying applications or
solicitations subject to Sec. 1026.60(c) or accompanying applications
or solicitations subject to Sec. 1026.60(e).
(2) Definitions. (i) Promotional rate means any annual percentage
rate applicable to one or more balances or transactions on an open-end
(not home-secured) plan for a specified period of time that is lower
than the annual percentage rate that will be in effect at the end of
that period on such balances or transactions.
(ii) Introductory rate means a promotional rate offered in
connection with the opening of an account.
(iii) Promotional period means the maximum time period for which a
promotional rate or promotional fee may be applicable.
(iv) Promotional fee means a fee required to be disclosed under
Sec. 1026.6(b)(1) and (2) applicable to an open-end (not home-secured)
plan, or to one or more balances or transactions on an open-end (not
home-secured) plan, for a specified period of time that is lower than
the fee that will be in effect at the end of that period for such plan
or types of balances or transactions.
(v) Introductory fee means a promotional fee offered in connection
with the opening of an account.
(3) Stating the term ``introductory''. If any annual percentage rate
or fee that may be applied to the account is an introductory rate or
introductory fee, the term introductory or intro must be in immediate
proximity to each listing of the introductory rate or introductory fee
in a written or electronic advertisement.
(4) Stating the promotional period and post-promotional rate or fee.
If any annual percentage rate that may be applied to the account is a
promotional rate under paragraph (g)(2)(i) of this section or any fee
that may be applied to the account is a promotional fee under paragraph
(g)(2)(iv) of this section, the information in paragraphs (g)(4)(i) and,
as applicable, (g)(4)(ii) or (iii) of this section must be stated in a
clear and conspicuous manner in the advertisement. If the rate or fee is
stated in a written or electronic advertisement, the information in
paragraphs (g)(4)(i) and, as applicable, (g)(4)(ii) or (iii) of this
section must also be stated in a prominent location closely proximate to
the first listing of the promotional rate or promotional fee.
(i) When the promotional rate or promotional fee will end;
(ii) The annual percentage rate that will apply after the end of the
promotional period. If such rate is variable, the annual percentage rate
must comply with the accuracy standards in Sec. 1026.60(c)(2), Sec.
1026.60(d)(3), Sec. 1026.60(e)(4), or Sec. 1026.16(b)(1)(ii), as
applicable. If such rate cannot be determined at the time disclosures
are given because the rate depends at least in part on a later
determination of the consumer's creditworthiness, the advertisement must
disclose the specific rates or the range of rates that might apply; and
(iii) The fee that will apply after the end of the promotional
period.
(5) Envelope excluded. The requirements in paragraph (g)(4) of this
section do not apply to an envelope or other enclosure in which an
application or solicitation is mailed, or to a banner advertisement or
pop-up advertisement, linked to an application or solicitation provided
electronically.
(h) Deferred interest or similar offers--(1) Scope. The requirements
of this paragraph apply to any advertisement of an open-end credit plan
not subject to Sec. 1026.40, including promotional materials
accompanying applications or solicitations subject to Sec. 1026.60(c)
or accompanying applications or solicitations subject to Sec.
1026.60(e).
(2) Definitions. ``Deferred interest'' means finance charges,
accrued on balances or transactions, that a consumer is not obligated to
pay or that will be
[[Page 52]]
waived or refunded to a consumer if those balances or transactions are
paid in full by a specified date. The maximum period from the date the
consumer becomes obligated for the balance or transaction until the
specified date by which the consumer must pay the balance or transaction
in full in order to avoid finance charges, or receive a waiver or refund
of finance charges, is the ``deferred interest period.'' ``Deferred
interest'' does not include any finance charges the consumer avoids
paying in connection with any recurring grace period.
(3) Stating the deferred interest period. If a deferred interest
offer is advertised, the deferred interest period must be stated in a
clear and conspicuous manner in the advertisement. If the phrase ``no
interest'' or similar term regarding the possible avoidance of interest
obligations under the deferred interest program is stated, the term ``if
paid in full'' must also be stated in a clear and conspicuous manner
preceding the disclosure of the deferred interest period in the
advertisement. If the deferred interest offer is included in a written
or electronic advertisement, the deferred interest period and, if
applicable, the term ``if paid in full'' must also be stated in
immediate proximity to each statement of ``no interest,'' ``no
payments,'' ``deferred interest,'' ``same as cash,'' or similar term
regarding interest or payments during the deferred interest period.
(4) Stating the terms of the deferred interest or similar offer. If
any deferred interest offer is advertised, the information in paragraphs
(h)(4)(i) and (h)(4)(ii) of this section must be stated in the
advertisement, in language similar to Sample G-24 in appendix G to this
part. If the deferred interest offer is included in a written or
electronic advertisement, the information in paragraphs (h)(4)(i) and
(h)(4)(ii) of this section must also be stated in a prominent location
closely proximate to the first statement of ``no interest,'' ``no
payments,'' ``deferred interest,'' ``same as cash,'' or similar term
regarding interest or payments during the deferred interest period.
(i) A statement that interest will be charged from the date the
consumer becomes obligated for the balance or transaction subject to the
deferred interest offer if the balance or transaction is not paid in
full within the deferred interest period; and
(ii) A statement, if applicable, that interest will be charged from
the date the consumer incurs the balance or transaction subject to the
deferred interest offer if the account is in default before the end of
the deferred interest period.
(5) Envelope excluded. The requirements in paragraph (h)(4) of this
section do not apply to an envelope or other enclosure in which an
application or solicitation is mailed, or to a banner advertisement or
pop-up advertisement linked to an application or solicitation provided
electronically.
Subpart C_Closed-End Credit
Sec. 1026.17 General disclosure requirements.
(a) Form of disclosures. Except for the disclosures required by
Sec. 1026.19(e), (f), and (g):
(1) The creditor shall make the disclosures required by this subpart
clearly and conspicuously in writing, in a form that the consumer may
keep. The disclosures required by this subpart may be provided to the
consumer in electronic form, subject to compliance with the consumer
consent and other applicable provisions of the Electronic Signatures in
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
The disclosures required by Sec. Sec. 1026.17(g), 1026.19(b), and
1026.24 may be provided to the consumer in electronic form without
regard to the consumer consent or other provisions of the E-Sign Act in
the circumstances set forth in those sections. The disclosures shall be
grouped together, shall be segregated from everything else, and shall
not contain any information not directly related to the disclosures
required under Sec. 1026.18, Sec. 1026.20(c) and (d), or Sec.
1026.47. The disclosures required by Sec. 1026.20(d) shall be provided
as a separate document from all other written materials. The disclosures
may include an acknowledgment of receipt, the date of the transaction,
and the consumer's name, address, and account number. The following
disclosures may be made together with or separately
[[Page 53]]
from other required disclosures: The creditor's identity under Sec.
1026.18(a), the variable rate example under Sec. 1026.18(f)(1)(iv),
insurance or debt cancellation under Sec. 1026.18(n), and certain
security interest charges under Sec. 1026.18(o). The itemization of the
amount financed under Sec. 1026.18(c)(1) must be separate from the
other disclosures under Sec. 1026.18, except for private education loan
disclosures made in compliance with Sec. 1026.47.
(2) Except for private education loan disclosures made in compliance
with Sec. 1026.47, the terms ``finance charge'' and ``annual percentage
rate,'' when required to be disclosed under Sec. 1026.18(d) and (e)
together with a corresponding amount or percentage rate, shall be more
conspicuous than any other disclosure, except the creditor's identity
under Sec. 1026.18(a). For private education loan disclosures made in
compliance with Sec. 1026.47, the term ``annual percentage rate,'' and
the corresponding percentage rate must be less conspicuous than the term
``finance charge'' and corresponding amount under Sec. 1026.18(d), the
interest rate under Sec. Sec. 1026.47(b)(1)(i) and (c)(1), and the
notice of the right to cancel under Sec. 1026.47(c)(4).
(b) Time of disclosures. The creditor shall make disclosures before
consummation of the transaction. In certain residential mortgage
transactions, special timing requirements are set forth in Sec.
1026.19(a). In certain variable-rate transactions, special timing
requirements for variable-rate disclosures are set forth in Sec. Sec.
1026.19(b) and 1026.20(c) and (d). For private education loan
disclosures made in compliance with Sec. 1026.47, special timing
requirements are set forth in Sec. 1026.46(d). In certain transactions
involving mail or telephone orders or a series of sales, the timing of
disclosures may be delayed in accordance with paragraphs (g) and (h) of
this section. This paragraph (b) does not apply to the disclosures
required by Sec. Sec. 1026.19(e), (f), and (g) and 1026.20(e).
(c) Basis of disclosures and use of estimates. (1) The disclosures
shall reflect the terms of the legal obligation between the parties.
(2)(i) If any information necessary for an accurate disclosure is
unknown to the creditor, the creditor shall make the disclosure based on
the best information reasonably available at the time the disclosure is
provided to the consumer, and shall state clearly that the disclosure is
an estimate.
(ii) For a transaction in which a portion of the interest is
determined on a per-diem basis and collected at consummation, any
disclosure affected by the per-diem interest shall be considered
accurate if the disclosure is based on the information known to the
creditor at the time that the disclosure documents are prepared for
consummation of the transaction.
(3) The creditor may disregard the effects of the following in
making calculations and disclosures.
(i) That payments must be collected in whole cents.
(ii) That dates of scheduled payments and advances may be changed
because the scheduled date is not a business day.
(iii) That months have different numbers of days.
(iv) The occurrence of leap year.
(4) In making calculations and disclosures, the creditor may
disregard any irregularity in the first period that falls within the
limits described below and any payment schedule irregularity that
results from the irregular first period:
(i) For transactions in which the term is less than 1 year, a first
period not more than 6 days shorter or 13 days longer than a regular
period;
(ii) For transactions in which the term is at least 1 year and less
than 10 years, a first period not more than 11 days shorter or 21 days
longer than a regular period; and
(iii) For transactions in which the term is at least 10 years, a
first period shorter than or not more than 32 days longer than a regular
period.
(5) If an obligation is payable on demand, the creditor shall make
the disclosures based on an assumed maturity of 1 year. If an alternate
maturity date is stated in the legal obligation between the parties, the
disclosures shall be based on that date.
(6)(i) A series of advances under an agreement to extend credit up
to a certain amount may be considered as one transaction.
[[Page 54]]
(ii) When a multiple-advance loan to finance the construction of a
dwelling may be permanently financed by the same creditor, the
construction phase and the permanent phase may be treated as either one
transaction or more than one transaction.
(d) Multiple creditors; multiple consumers. If a transaction
involves more than one creditor, only one set of disclosures shall be
given and the creditors shall agree among themselves which creditor must
comply with the requirements that this part imposes on any or all of
them. If there is more than one consumer, the disclosures may be made to
any consumer who is primarily liable on the obligation. If the
transaction is rescindable under Sec. 1026.23, however, the disclosures
shall be made to each consumer who has the right to rescind.
(e) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor delivers the required
disclosures, the inaccuracy is not a violation of this part, although
new disclosures may be required under paragraph (f) of this section,
Sec. 1026.19, Sec. 1026.20, or Sec. 1026.48(c)(4).
(f) Early disclosures. Except for private education loan disclosures
made in compliance with Sec. 1026.47, if disclosures required by this
subpart are given before the date of consummation of a transaction and a
subsequent event makes them inaccurate, the creditor shall disclose
before consummation (subject to the provisions of Sec. 1026.19(a)(2),
(e), and (f)):
(1) Any changed term unless the term was based on an estimate in
accordance with Sec. 1026.17(c)(2) and was labeled an estimate;
(2) All changed terms, if the annual percentage rate at the time of
consummation varies from the annual percentage rate disclosed earlier by
more than \1/8\ of 1 percentage point in a regular transaction, or more
than \1/4\ of 1 percentage point in an irregular transaction, as defined
in Sec. 1026.22(a).
(g) Mail or telephone orders--delay in disclosures. Except for
private education loan disclosures made in compliance with Sec. 1026.47
and mortgage disclosures made in compliance with Sec. 1026.19(a) or
(e), (f), and (g), if a creditor receives a purchase order or a request
for an extension of credit by mail, telephone, or facsimile machine
without face-to-face or direct telephone solicitation, the creditor may
delay the disclosures until the due date of the first payment, if the
following information for representative amounts or ranges of credit is
made available in written form or in electronic form to the consumer or
to the public before the actual purchase order or request:
(1) The cash price or the principal loan amount.
(2) The total sale price.
(3) The finance charge.
(4) The annual percentage rate, and if the rate may increase after
consummation, the following disclosures:
(i) The circumstances under which the rate may increase.
(ii) Any limitations on the increase.
(iii) The effect of an increase.
(5) The terms of repayment.
(h) Series of sales--delay in disclosures. Except for mortgage
disclosures made in compliance with Sec. 1026.19(a) or (e), (f), and
(g), if a credit sale is one of a series made under an agreement
providing that subsequent sales may be added to an outstanding balance,
the creditor may delay the required disclosures until the due date of
the first payment for the current sale, if the following two conditions
are met:
(1) The consumer has approved in writing the annual percentage rate
or rates, the range of balances to which they apply, and the method of
treating any unearned finance charge on an existing balance.
(2) The creditor retains no security interest in any property after
the creditor has received payments equal to the cash price and any
finance charge attributable to the sale of that property. For purposes
of this provision, in the case of items purchased on different dates,
the first purchased is deemed the first item paid for; in the case of
items purchased on the same date, the lowest priced is deemed the first
item paid for.
(i) Interim student credit extensions. For transactions involving an
interim credit extension under a student credit program for which an
application is received prior to the mandatory compliance date of
Sec. Sec. 1026.46, 47, and 48, the
[[Page 55]]
creditor need not make the following disclosures: the finance charge
under Sec. 1026.18(d), the payment schedule under Sec. 1026.18(g), the
total of payments under Sec. 1026.18(h), or the total sale price under
Sec. 1026.18(j) at the time the credit is actually extended. The
creditor must make complete disclosures at the time the creditor and
consumer agree upon the repayment schedule for the total obligation. At
that time, a new set of disclosures must be made of all applicable items
under Sec. 1026.18.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 11004, Feb. 14, 2013;
78 FR 80107, Dec. 31, 2013]
Sec. 1026.18 Content of disclosures.
For each transaction other than a mortgage transaction subject to
Sec. 1026.19(e) and (f), the creditor shall disclose the following
information as applicable:
(a) Creditor. The identity of the creditor making the disclosures.
(b) Amount financed. The amount financed, using that term, and a
brief description such as the amount of credit provided to you or on
your behalf. The amount financed is calculated by:
(1) Determining the principal loan amount or the cash price
(subtracting any downpayment);
(2) Adding any other amounts that are financed by the creditor and
are not part of the finance charge; and
(3) Subtracting any prepaid finance charge.
(c) Itemization of amount financed. (1) Except as provided in
paragraphs (c)(2) and (c)(3) of this section, a separate written
itemization of the amount financed, including:
(i) The amount of any proceeds distributed directly to the consumer.
(ii) The amount credited to the consumer's account with the
creditor.
(iii) Any amounts paid to other persons by the creditor on the
consumer's behalf. The creditor shall identify those persons. The
following payees may be described using generic or other general terms
and need not be further identified: public officials or government
agencies, credit reporting agencies, appraisers, and insurance
companies.
(iv) The prepaid finance charge.
(2) The creditor need not comply with paragraph (c)(1) of this
section if the creditor provides a statement that the consumer has the
right to receive a written itemization of the amount financed, together
with a space for the consumer to indicate whether it is desired, and the
consumer does not request it.
(3) Good faith estimates of settlement costs provided for
transactions subject to the Real Estate Settlement Procedures Act (12
U.S.C. 2601 et seq.) may be substituted for the disclosures required by
paragraph (c)(1) of this section.
(d) Finance charge. The finance charge, using that term, and a brief
description such as ``the dollar amount the credit will cost you.''
(1) Mortgage loans. In a transaction secured by real property or a
dwelling, the disclosed finance charge and other disclosures affected by
the disclosed finance charge (including the amount financed and the
annual percentage rate) shall be treated as accurate if the amount
disclosed as the finance charge:
(i) Is understated by no more than $100; or
(ii) Is greater than the amount required to be disclosed.
(2) Other credit. In any other transaction, the amount disclosed as
the finance charge shall be treated as accurate if, in a transaction
involving an amount financed of $1,000 or less, it is not more than $5
above or below the amount required to be disclosed; or, in a transaction
involving an amount financed of more than $1,000, it is not more than
$10 above or below the amount required to be disclosed.
(e) Annual percentage rate. The annual percentage rate, using that
term, and a brief description such as ``the cost of your credit as a
yearly rate.'' For any transaction involving a finance charge of $5 or
less on an amount financed of $75 or less, or a finance charge of $7.50
or less on an amount financed of more than $75, the creditor need not
disclose the annual percentage rate.
(f) Variable rate. (1) Except as provided in paragraph (f)(3) of
this section, if the annual percentage rate may increase after
consummation in a transaction not secured by the consumer's
[[Page 56]]
principal dwelling or in a transaction secured by the consumer's
principal dwelling with a term of one year or less, the following
disclosures:
(i) The circumstances under which the rate may increase.
(ii) Any limitations on the increase.
(iii) The effect of an increase.
(iv) An example of the payment terms that would result from an
increase.
(2) If the annual percentage rate may increase after consummation in
a transaction secured by the consumer's principal dwelling with a term
greater than one year, the following disclosures:
(i) The fact that the transaction contains a variable-rate feature.
(ii) A statement that variable-rate disclosures have been provided
earlier.
(3) Information provided in accordance with Sec. Sec. 1026.18(f)(2)
and 1026.19(b) may be substituted for the disclosures required by
paragraph (f)(1) of this section.
(g) Payment schedule. Other than for a transaction that is subject
to paragraph (s) of this section, the number, amounts, and timing of
payments scheduled to repay the obligation.
(1) In a demand obligation with no alternate maturity date, the
creditor may comply with this paragraph by disclosing the due dates or
payment periods of any scheduled interest payments for the first year.
(2) In a transaction in which a series of payments varies because a
finance charge is applied to the unpaid principal balance, the creditor
may comply with this paragraph by disclosing the following information:
(i) The dollar amounts of the largest and smallest payments in the
series.
(ii) A reference to the variations in the other payments in the
series.
(h) Total of payments. The total of payments, using that term, and a
descriptive explanation such as ``the amount you will have paid when you
have made all scheduled payments.'' In any transaction involving a
single payment, the creditor need not disclose the total of payments.
(i) Demand feature. If the obligation has a demand feature, that
fact shall be disclosed. When the disclosures are based on an assumed
maturity of 1 year as provided in Sec. 1026.17(c)(5), that fact shall
also be disclosed.
(j) Total sale price. In a credit sale, the total sale price, using
that term, and a descriptive explanation (including the amount of any
downpayment) such as ``the total price of your purchase on credit,
including your downpayment of $__.'' The total sale price is the sum of
the cash price, the items described in paragraph (b)(2), and the finance
charge disclosed under paragraph (d) of this section.
(k) Prepayment. (1) When an obligation includes a finance charge
computed from time to time by application of a rate to the unpaid
principal balance, a statement indicating whether or not a charge may be
imposed for paying all or part of a loan's principal balance before the
date on which the principal is due.
(2) When an obligation includes a finance charge other than the
finance charge described in paragraph (k)(1) of this section, a
statement indicating whether or not the consumer is entitled to a rebate
of any finance charge if the obligation is prepaid in full or in part.
(l) Late payment. Any dollar or percentage charge that may be
imposed before maturity due to a late payment, other than a deferral or
extension charge.
(m) Security interest. The fact that the creditor has or will
acquire a security interest in the property purchased as part of the
transaction, or in other property identified by item or type.
(n) Insurance and debt cancellation. The items required by Sec.
1026.4(d) in order to exclude certain insurance premiums and debt
cancellation fees from the finance charge.
(o) Certain security interest charges. The disclosures required by
Sec. 1026.4(e) in order to exclude from the finance charge certain fees
prescribed by law or certain premiums for insurance in lieu of
perfecting a security interest.
(p) Contract reference. A statement that the consumer should refer
to the appropriate contract document for information about nonpayment,
default, the right to accelerate the maturity of the obligation, and
prepayment rebates and penalties. At the creditor's option,
[[Page 57]]
the statement may also include a reference to the contract for further
information about security interests and, in a residential mortgage
transaction, about the creditor's policy regarding assumption of the
obligation.
(q) Assumption policy. In a residential mortgage transaction, a
statement whether or not a subsequent purchaser of the dwelling from the
consumer may be permitted to assume the remaining obligation on its
original terms.
(r) Required deposit. If the creditor requires the consumer to
maintain a deposit as a condition of the specific transaction, a
statement that the annual percentage rate does not reflect the effect of
the required deposit. A required deposit need not include, for example:
(1) An escrow account for items such as taxes, insurance or repairs;
(2) A deposit that earns not less than 5 percent per year; or
(3) Payments under a Morris Plan.
(s) Interest rate and payment summary for mortgage transactions. For
a closed-end transaction secured by real property or a dwelling, other
than a transaction that is subject to Sec. 1026.19(e) and (f), the
creditor shall disclose the following information about the interest
rate and payments:
(1) Form of disclosures. The information in paragraphs (s)(2)-(4) of
this section shall be in the form of a table, with no more than five
columns, with headings and format substantially similar to Model Clause
H-4(E), H-4(F), H-4(G), or H-4(H) in appendix H to this part. The table
shall contain only the information required in paragraphs (s)(2)-(4) of
this section, shall be placed in a prominent location, and shall be in a
minimum 10-point font.
(2) Interest rates--(i) Amortizing loans. (A) For a fixed-rate
mortgage, the interest rate at consummation.
(B) For an adjustable-rate or step-rate mortgage:
(1) The interest rate at consummation and the period of time until
the first interest rate adjustment may occur, labeled as the
``introductory rate and monthly payment'';
(2) The maximum interest rate that may apply during the first five
years after the date on which the first regular periodic payment will be
due and the earliest date on which that rate may apply, labeled as
``maximum during first five years''; and
(3) The maximum interest rate that may apply during the life of the
loan and the earliest date on which that rate may apply, labeled as
``maximum ever.''
(C) If the loan provides for payment increases as described in
paragraph (s)(3)(i)(B) of this section, the interest rate in effect at
the time the first such payment increase is scheduled to occur and the
date on which the increase will occur, labeled as ``first adjustment''
if the loan is an adjustable-rate mortgage or, otherwise, labeled as
``first increase.''
(ii) Negative amortization loans. For a negative amortization loan:
(A) The interest rate at consummation and, if it will adjust after
consummation, the length of time until it will adjust, and the label
``introductory'' or ``intro'';
(B) The maximum interest rate that could apply when the consumer
must begin making fully amortizing payments under the terms of the legal
obligation;
(C) If the minimum required payment will increase before the
consumer must begin making fully amortizing payments, the maximum
interest rate that could apply at the time of the first payment increase
and the date the increase is scheduled to occur; and(D) If a second
increase in the minimum required payment may occur before the consumer
must begin making fully amortizing payments, the maximum interest rate
that could apply at the time of the second payment increase and the date
the increase is scheduled to occur.
(iii) Introductory rate disclosure for amortizing adjustable-rate
mortgages. For an amortizing adjustable-rate mortgage, if the interest
rate at consummation is less than the fully-indexed rate, placed in a
box directly beneath the table required by paragraph (s)(1) of this
section, in a format substantially similar to Model Clause H-4(I) in
appendix H to this part:
(A) The interest rate that applies at consummation and the period of
time for which it applies;
(B) A statement that, even if market rates do not change, the
interest rate
[[Page 58]]
will increase at the first adjustment and a designation of the place in
sequence of the month or year, as applicable, of such rate adjustment;
and
(C) The fully-indexed rate.
(3) Payments for amortizing loans--(i) Principal and interest
payments. If all periodic payments will be applied to accrued interest
and principal, for each interest rate disclosed under paragraph
(s)(2)(i) of this section:
(A) The corresponding periodic principal and interest payment,
labeled as ``principal and interest;''
(B) If the periodic payment may increase without regard to an
interest rate adjustment, the payment that corresponds to the first such
increase and the earliest date on which the increase could occur;
(C) If an escrow account will be established, an estimate of the
amount of taxes and insurance, including any mortgage insurance or any
functional equivalent, payable with each periodic payment; and
(D) The sum of the amounts disclosed under paragraphs (s)(3)(i)(A)
and (C) of this section or (s)(3)(i)(B) and (C) of this section, as
applicable, labeled as ``total estimated monthly payment.''
(ii) Interest-only payments. If the loan is an interest-only loan,
for each interest rate disclosed under paragraph (s)(2)(i) of this
section, the corresponding periodic payment and:
(A) If the payment will be applied to only accrued interest, the
amount applied to interest, labeled as ``interest payment,'' and a
statement that none of the payment is being applied to principal;
(B) If the payment will be applied to accrued interest and
principal, an itemization of the amount of the first such payment
applied to accrued interest and to principal, labeled as ``interest
payment'' and ``principal payment,'' respectively;
(C) The escrow information described in paragraph (s)(3)(i)(C) of
this section; and
(D) The sum of all amounts required to be disclosed under paragraphs
(s)(3)(ii)(A) and (C) of this section or (s)(3)(ii)(B) and (C) of this
section, as applicable, labeled as ``total estimated monthly payment.''
(4) Payments for negative amortization loans. For negative
amortization loans:
(i)(A) The minimum periodic payment required until the first payment
increase or interest rate increase, corresponding to the interest rate
disclosed under paragraph (s)(2)(ii)(A) of this section;
(B) The minimum periodic payment that would be due at the first
payment increase and the second, if any, corresponding to the interest
rates described in paragraphs (s)(2)(ii)(C) and (D) of this section; and
(C) A statement that the minimum payment pays only some interest,
does not repay any principal, and will cause the loan amount to
increase;
(ii) The fully amortizing periodic payment amount at the earliest
time when such a payment must be made, corresponding to the interest
rate disclosed under paragraph (s)(2)(ii)(B) of this section; and
(iii) If applicable, in addition to the payments in paragraphs
(s)(4)(i) and (ii) of this section, for each interest rate disclosed
under paragraph (s)(2)(ii) of this section, the amount of the fully
amortizing periodic payment, labeled as the ``full payment option,'' and
a statement that these payments pay all principal and all accrued
interest.
(5) Balloon payments. (i) Except as provided in paragraph (s)(5)(ii)
of this section, if the transaction will require a balloon payment,
defined as a payment that is more than two times a regular periodic
payment, the balloon payment shall be disclosed separately from other
periodic payments disclosed in the table under this paragraph (s),
outside the table and in a manner substantially similar to Model Clause
H-4(J) in appendix H to this part.
(ii) If the balloon payment is scheduled to occur at the same time
as another payment required to be disclosed in the table pursuant to
paragraph (s)(3) or (s)(4) of this section, then the balloon payment
must be disclosed in the table.
(6) Special disclosures for loans with negative amortization. For a
negative amortization loan, the following information, in close
proximity to the table required in paragraph (s)(1) of this section,
with headings, content, and format substantially similar to Model
[[Page 59]]
Clause H-4(G) in appendix H to this part:
(i) The maximum interest rate, the shortest period of time in which
such interest rate could be reached, the amount of estimated taxes and
insurance included in each payment disclosed, and a statement that the
loan offers payment options, two of which are shown.
(ii) The dollar amount of the increase in the loan's principal
balance if the consumer makes only the minimum required payments for the
maximum possible time and the earliest date on which the consumer must
begin making fully amortizing payments, assuming that the maximum
interest rate is reached at the earliest possible time.
(7) Definitions. For purposes of this Sec. 1026.18(s):
(i) The term ``adjustable-rate mortgage'' means a transaction
secured by real property or a dwelling for which the annual percentage
rate may increase after consummation.
(ii) The term ``step-rate mortgage'' means a transaction secured by
real property or a dwelling for which the interest rate will change
after consummation, and the rates that will apply and the periods for
which they will apply are known at consummation.
(iii) The term ``fixed-rate mortgage'' means a transaction secured
by real property or a dwelling that is not an adjustable-rate mortgage
or a step-rate mortgage.
(iv) The term ``interest-only'' means that, under the terms of the
legal obligation, one or more of the periodic payments may be applied
solely to accrued interest and not to loan principal; an ``interest-only
loan'' is a loan that permits interest-only payments.
(v) The term ``amortizing loan'' means a loan in which payment of
the periodic payments does not result in an increase in the principal
balance under the terms of the legal obligation; the term ``negative
amortization'' means payment of periodic payments that will result in an
increase in the principal balance under the terms of the legal
obligation; the term ``negative amortization loan'' means a loan, other
than a reverse mortgage subject to Sec. 1026.33, that provides for a
minimum periodic payment that covers only a portion of the accrued
interest, resulting in negative amortization.
(vi) The term ``fully-indexed rate'' means the interest rate
calculated using the index value and margin at the time of consummation.
(t) ``No-guarantee-to-refinance'' statement--(1) Disclosure. For a
closed-end transaction secured by real property or a dwelling, other
than a transaction that is subject to Sec. 1026.19(e) and (f), the
creditor shall disclose a statement that there is no guarantee the
consumer can refinance the transaction to lower the interest rate or
periodic payments.
(2) Format. The statement required by paragraph (t)(1) of this
section must be in a form substantially similar to Model Clause H-4(K)
in appendix H to this part.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 80108, Dec. 31, 2013]
Sec. 1026.19 Certain mortgage and variable-rate transactions.
(a) Mortgage transactions subject to RESPA--(1)(i) Time of
disclosures. In a reverse mortgage transaction subject to both Sec.
1026.33 and the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et
seq.) that is secured by the consumer's dwelling, the creditor shall
provide the consumer with good faith estimates of the disclosures
required by Sec. 1026.18 and shall deliver or place them in the mail
not later than the third business day after the creditor receives the
consumer's written application.
(ii) Imposition of fees. Except as provided in paragraph (a)(1)(iii)
of this section, neither a creditor nor any other person may impose a
fee on a consumer in connection with the consumer's application for a
reverse mortgage transaction subject to paragraph (a)(1)(i) of this
section before the consumer has received the disclosures required by
paragraph (a)(1)(i) of this section. If the disclosures are mailed to
the consumer, the consumer is considered to have received them three
business days after they are mailed.
(iii) Exception to fee restriction. A creditor or other person may
impose a fee for obtaining the consumer's credit
[[Page 60]]
history before the consumer has received the disclosures required by
paragraph (a)(1)(i) of this section, provided the fee is bona fide and
reasonable in amount.
(2) Waiting periods for early disclosures and corrected disclosures.
(i) The creditor shall deliver or place in the mail the good faith
estimates required by paragraph (a)(1)(i) of this section not later than
the seventh business day before consummation of the transaction.
(ii) If the annual percentage rate disclosed under paragraph
(a)(1)(i) of this section becomes inaccurate, as defined in Sec.
1026.22, the creditor shall provide corrected disclosures with all
changed terms. The consumer must receive the corrected disclosures no
later than three business days before consummation. If the corrected
disclosures are mailed to the consumer or delivered to the consumer by
means other than delivery in person, the consumer is deemed to have
received the corrected disclosures three business days after they are
mailed or delivered.
(3) Consumer's waiver of waiting period before consummation. If the
consumer determines that the extension of credit is needed to meet a
bona fide personal financial emergency, the consumer may modify or waive
the seven-business-day waiting period or the three-business-day waiting
period required by paragraph (a)(2) of this section, after receiving the
disclosures required by Sec. 1026.18. To modify or waive a waiting
period, the consumer shall give the creditor a dated written statement
that describes the emergency, specifically modifies or waives the
waiting period, and bears the signature of all the consumers who are
primarily liable on the legal obligation. Printed forms for this purpose
are prohibited.
(4) Notice. Disclosures made pursuant to paragraph (a)(1) or
paragraph (a)(2) of this section shall contain the following statement:
``You are not required to complete this agreement merely because you
have received these disclosures or signed a loan application.'' The
disclosure required by this paragraph shall be grouped together with the
disclosures required by paragraphs (a)(1) or (a)(2) of this section.
(b) Certain variable-rate transactions. Except as provided in
paragraph (d) of this section, if the annual percentage rate may
increase after consummation in a transaction secured by the consumer's
principal dwelling with a term greater than one year, the following
disclosures must be provided at the time an application form is provided
or before the consumer pays a non-refundable fee, whichever is earlier
(except that the disclosures may be delivered or placed in the mail not
later than three business days following receipt of a consumer's
application when the application reaches the creditor by telephone, or
through an intermediary agent or broker):
(1) The booklet titled Consumer Handbook on Adjustable Rate
Mortgages, or a suitable substitute.
(2) A loan program disclosure for each variable-rate program in
which the consumer expresses an interest. The following disclosures, as
applicable, shall be provided:
(i) The fact that the interest rate, payment, or term of the loan
can change.
(ii) The index or formula used in making adjustments, and a source
of information about the index or formula.
(iii) An explanation of how the interest rate and payment will be
determined, including an explanation of how the index is adjusted, such
as by the addition of a margin.
(iv) A statement that the consumer should ask about the current
margin value and current interest rate.
(v) The fact that the interest rate will be discounted, and a
statement that the consumer should ask about the amount of the interest
rate discount.
(vi) The frequency of interest rate and payment changes.
(vii) Any rules relating to changes in the index, interest rate,
payment amount, and outstanding loan balance including, for example, an
explanation of interest rate or payment limitations, negative
amortization, and interest rate carryover.
(viii) At the option of the creditor, either of the following:
(A) A historical example, based on a $10,000 loan amount,
illustrating how
[[Page 61]]
payments and the loan balance would have been affected by interest rate
changes implemented according to the terms of the loan program
disclosure. The example shall reflect the most recent 15 years of index
values. The example shall reflect all significant loan program terms,
such as negative amortization, interest rate carryover, interest rate
discounts, and interest rate and payment limitations, that would have
been affected by the index movement during the period.
(B) The maximum interest rate and payment for a $10,000 loan
originated at the initial interest rate (index value plus margin,
adjusted by the amount of any discount or premium) in effect as of an
identified month and year for the loan program disclosure assuming the
maximum periodic increases in rates and payments under the program; and
the initial interest rate and payment for that loan and a statement that
the periodic payment may increase or decrease substantially depending on
changes in the rate.
(ix) An explanation of how the consumer may calculate the payments
for the loan amount to be borrowed based on either:
(A) The most recent payment shown in the historical example in
paragraph (b)(2)(viii)(A) of this section; or
(B) The initial interest rate used to calculate the maximum interest
rate and payment in paragraph (b)(2)(viii)(B) of this section.
(x) The fact that the loan program contains a demand feature.
(xi) The type of information that will be provided in notices of
adjustments and the timing of such notices.
(xii) A statement that disclosure forms are available for the
creditor's other variable-rate loan programs.
(c) Electronic disclosures. For an application that is accessed by
the consumer in electronic form, the disclosures required by paragraph
(b) of this section may be provided to the consumer in electronic form
on or with the application.
(d) Information provided in accordance with variable-rate
regulations of other Federal agencies may be substituted for the
disclosures required by paragraph (b) of this section.
(e) Mortgage loans--early disclosures--(1) Provision of
disclosures--(i) Creditor. In a closed-end consumer credit transaction
secured by real property or a cooperative unit, other than a reverse
mortgage subject to Sec. 1026.33, the creditor shall provide the
consumer with good faith estimates of the disclosures in Sec. 1026.37.
(ii) Mortgage broker. (A) If a mortgage broker receives a consumer's
application, either the creditor or the mortgage broker shall provide a
consumer with the disclosures required under paragraph (e)(1)(i) of this
section in accordance with paragraph (e)(1)(iii) of this section. If the
mortgage broker provides the required disclosures, the mortgage broker
shall comply with all relevant requirements of this paragraph (e). The
creditor shall ensure that such disclosures are provided in accordance
with all requirements of this paragraph (e). Disclosures provided by a
mortgage broker in accordance with the requirements of this paragraph
(e) satisfy the creditor's obligation under this paragraph (e).
(B) If a mortgage broker provides any disclosure under Sec.
1026.19(e), the mortgage broker shall also comply with the requirements
of Sec. 1026.25(c).
(iii) Timing. (A) The creditor shall deliver or place in the mail
the disclosures required under paragraph (e)(1)(i) of this section not
later than the third business day after the creditor receives the
consumer's application, as defined in Sec. 1026.2(a)(3).
(B) Except as set forth in paragraph (e)(1)(iii)(C) of this section,
the creditor shall deliver or place in the mail the disclosures required
under paragraph (e)(1)(i) of this section not later than the seventh
business day before consummation of the transaction.
(C) For a transaction secured by a consumer's interest in a
timeshare plan described in 11 U.S.C. 101(53D), paragraph (e)(1)(iii)(B)
of this section does not apply.
(iv) Receipt of early disclosures. If any disclosures required under
paragraph (e)(1)(i) of this section are not provided to the consumer in
person, the consumer is considered to have received the disclosures
three business days after they are delivered or placed in the mail.
[[Page 62]]
(v) Consumer's waiver of waiting period before consummation. If the
consumer determines that the extension of credit is needed to meet a
bona fide personal financial emergency, the consumer may modify or waive
the seven-business-day waiting period for early disclosures required
under paragraph (e)(1)(iii)(B) of this section, after receiving the
disclosures required under paragraph (e)(1)(i) of this section. To
modify or waive the waiting period, the consumer shall give the creditor
a dated written statement that describes the emergency, specifically
modifies or waives the waiting period, and bears the signature of all
the consumers who are primarily liable on the legal obligation. Printed
forms for this purpose are prohibited.
(vi) Shopping for settlement service providers--(A) Shopping
permitted. A creditor permits a consumer to shop for a settlement
service if the creditor permits the consumer to select the provider of
that service, subject to reasonable requirements.
(B) Disclosure of services. The creditor shall identify the
settlement services for which the consumer is permitted to shop in the
disclosures required under paragraph (e)(1)(i) of this section.
(C) Written list of providers. If the consumer is permitted to shop
for a settlement service, the creditor shall provide the consumer with a
written list identifying available providers of that settlement service
and stating that the consumer may choose a different provider for that
service. The creditor must identify at least one available provider for
each settlement service for which the consumer is permitted to shop. The
creditor shall provide this written list of settlement service providers
separately from the disclosures required by paragraph (e)(1)(i) of this
section but in accordance with the timing requirements in paragraph
(e)(1)(iii) of this section.
(2) Predisclosure activity--(i) Imposition of fees on consumer--(A)
Fee restriction. Except as provided in paragraph (e)(2)(i)(B) of this
section, neither a creditor nor any other person may impose a fee on a
consumer in connection with the consumer's application for a mortgage
transaction subject to paragraph (e)(1)(i) of this section before the
consumer has received the disclosures required under paragraph (e)(1)(i)
of this section and indicated to the creditor an intent to proceed with
the transaction described by those disclosures. A consumer may indicate
an intent to proceed with a transaction in any manner the consumer
chooses, unless a particular manner of communication is required by the
creditor. The creditor must document this communication to satisfy the
requirements of Sec. 1026.25.
(B) Exception to fee restriction. A creditor or other person may
impose a bona fide and reasonable fee for obtaining the consumer's
credit report before the consumer has received the disclosures required
under paragraph (e)(1)(i) of this section.
(ii) Written information provided to consumer. If a creditor or
other person provides a consumer with a written estimate of terms or
costs specific to that consumer before the consumer receives the
disclosures required under paragraph (e)(1)(i) of this section, the
creditor or such person shall clearly and conspicuously state at the top
of the front of the first page of the estimate in a font size that is no
smaller than 12-point font: ``Your actual rate, payment, and costs could
be higher. Get an official Loan Estimate before choosing a loan.'' The
written estimate of terms or costs may not be made with headings,
content, and format substantially similar to form H-24 or H-25 of
appendix H to this part.
(iii) Verification of information. The creditor or other person
shall not require a consumer to submit documents verifying information
related to the consumer's application before providing the disclosures
required by paragraph (e)(1)(i) of this section.
(3) Good faith determination for estimates of closing costs--(i)
General rule. An estimated closing cost disclosed pursuant to paragraph
(e) of this section is in good faith if the charge paid by or imposed on
the consumer does not exceed the amount originally disclosed under
paragraph (e)(1)(i) of this section, except as otherwise provided in
paragraphs (e)(3)(ii) through (iv) of this section.
(ii) Limited increases permitted for certain charges. An estimate of
a charge
[[Page 63]]
for a third-party service or a recording fee is in good faith if:
(A) The aggregate amount of charges for third-party services and
recording fees paid by or imposed on the consumer does not exceed the
aggregate amount of such charges disclosed under paragraph (e)(1)(i) of
this section by more than 10 percent;
(B) The charge for the third-party service is not paid to the
creditor or an affiliate of the creditor; and
(C) The creditor permits the consumer to shop for the third-party
service, consistent with paragraph (e)(1)(vi) of this section.
(iii) Variations permitted for certain charges. An estimate of any
of the charges specified in this paragraph (e)(3)(iii) is in good faith
if it is consistent with the best information reasonably available to
the creditor at the time it is disclosed, regardless of whether the
amount paid by the consumer exceeds the amount disclosed under paragraph
(e)(1)(i) of this section. For purposes of paragraph (e)(1)(i) of this
section, good faith is determined under this paragraph (e)(3)(iii) even
if such charges are paid to the creditor or affiliates of the creditor,
so long as the charges are bona fide:
(A) Prepaid interest;
(B) Property insurance premiums;
(C) Amounts placed into an escrow, impound, reserve, or similar
account;
(D) Charges paid to third-party service providers selected by the
consumer consistent with paragraph (e)(1)(vi)(A) of this section that
are not on the list provided under paragraph (e)(1)(vi)(C) of this
section; and
(E) Property taxes and other charges paid for third-party services
not required by the creditor.
(iv) Revised estimates. For the purpose of determining good faith
under paragraph (e)(3)(i) and (ii) of this section, a creditor may use a
revised estimate of a charge instead of the estimate of the charge
originally disclosed under paragraph (e)(1)(i) of this section if the
revision is due to any of the following reasons:
(A) Changed circumstance affecting settlement charges. Changed
circumstances cause the estimated charges to increase or, in the case of
estimated charges identified in paragraph (e)(3)(ii) of this section,
cause the aggregate amount of such charges to increase by more than 10
percent. For purposes of this paragraph, ``changed circumstance'' means:
(1) An extraordinary event beyond the control of any interested
party or other unexpected event specific to the consumer or transaction;
(2) Information specific to the consumer or transaction that the
creditor relied upon when providing the disclosures required under
paragraph (e)(1)(i) of this section and that was inaccurate or changed
after the disclosures were provided; or
(3) New information specific to the consumer or transaction that the
creditor did not rely on when providing the original disclosures
required under paragraph (e)(1)(i) of this section.
(B) Changed circumstance affecting eligibility. The consumer is
ineligible for an estimated charge previously disclosed because a
changed circumstance, as defined under paragraph (e)(3)(iv)(A) of this
section, affected the consumer's creditworthiness or the value of the
security for the loan.
(C) Revisions requested by the consumer. The consumer requests
revisions to the credit terms or the settlement that cause an estimated
charge to increase.
(D) Interest rate dependent charges. The points or lender credits
change because the interest rate was not locked when the disclosures
required under paragraph (e)(1)(i) of this section were provided. No
later than three business days after the date the interest rate is
locked, the creditor shall provide a revised version of the disclosures
required under paragraph (e)(1)(i) of this section to the consumer with
the revised interest rate, the points disclosed pursuant to Sec.
1026.37(f)(1), lender credits, and any other interest rate dependent
charges and terms.
(E) Expiration. The consumer indicates an intent to proceed with the
transaction more than 10 business days, or more than any additional
number of days specified by the creditor before the offer expires, after
the disclosures required under paragraph (e)(1)(i) of this section are
provided pursuant to paragraph (e)(1)(iii) of this section.
[[Page 64]]
(F) Delayed settlement date on a construction loan. In transactions
involving new construction, where the creditor reasonably expects that
settlement will occur more than 60 days after the disclosures required
under paragraph (e)(1)(i) of this section are provided pursuant to
paragraph (e)(1)(iii) of this section, the creditor may provide revised
disclosures to the consumer if the original disclosures required under
paragraph (e)(1)(i) of this section state clearly and conspicuously that
at any time prior to 60 days before consummation, the creditor may issue
revised disclosures. If no such statement is provided, the creditor may
not issue revised disclosures, except as otherwise provided in paragraph
(e)(3)(iv) of this section.
(4) Provision and receipt of revised disclosures--(i) General rule.
Subject to the requirements of paragraph (e)(4)(ii) of this section, if
a creditor uses a revised estimate pursuant to paragraph (e)(3)(iv) of
this section for the purpose of determining good faith under paragraphs
(e)(3)(i) and (ii) of this section, the creditor shall provide a revised
version of the disclosures required under paragraph (e)(1)(i) of this
section reflecting the revised estimate within three business days of
receiving information sufficient to establish that one of the reasons
for revision provided under paragraphs (e)(3)(iv)(A) through (C), (E)
and (F) of this section applies.
(ii) Relationship to disclosures required under Sec.
1026.19(f)(1)(i). The creditor shall not provide a revised version of
the disclosures required under paragraph (e)(1)(i) of this section on or
after the date on which the creditor provides the disclosures required
under paragraph (f)(1)(i) of this section. The consumer must receive a
revised version of the disclosures required under paragraph (e)(1)(i) of
this section not later than four business days prior to consummation. If
the revised version of the disclosures required under paragraph
(e)(1)(i) of this section is not provided to the consumer in person, the
consumer is considered to have received such version three business days
after the creditor delivers or places such version in the mail.
(f) Mortgage loans--final disclosures--(1) Provision of
disclosures--(i) Scope. In a transaction subject to paragraph (e)(1)(i)
of this section, the creditor shall provide the consumer with the
disclosures required under Sec. 1026.38 reflecting the actual terms of
the transaction.
(ii) Timing--(A) In general. Except as provided in paragraphs
(f)(1)(ii)(B), (f)(2)(i), (f)(2)(iii), (f)(2)(iv), and (f)(2)(v) of this
section, the creditor shall ensure that the consumer receives the
disclosures required under paragraph (f)(1)(i) of this section no later
than three business days before consummation.
(B) Timeshares. For transactions secured by a consumer's interest in
a timeshare plan described in 11 U.S.C. 101(53D), the creditor shall
ensure that the consumer receives the disclosures required under
paragraph (f)(1)(i) of this section no later than consummation.
(iii) Receipt of disclosures. If any disclosures required under
paragraph (f)(1)(i) of this section are not provided to the consumer in
person, the consumer is considered to have received the disclosures
three business days after they are delivered or placed in the mail.
(iv) Consumer's waiver of waiting period before consummation. If the
consumer determines that the extension of credit is needed to meet a
bona fide personal financial emergency, the consumer may modify or waive
the three-business-day waiting period under paragraph (f)(1)(ii)(A) or
(f)(2)(ii) of this section, after receiving the disclosures required
under paragraph (f)(1)(i) of this section. To modify or waive the
waiting period, the consumer shall give the creditor a dated written
statement that describes the emergency, specifically modifies or waives
the waiting period, and bears the signature of all consumers who are
primarily liable on the legal obligation. Printed forms for this purpose
are prohibited.
(v) Settlement agent. A settlement agent may provide a consumer with
the disclosures required under paragraph (f)(1)(i) of this section,
provided the settlement agent complies with all relevant requirements of
this paragraph (f). The creditor shall ensure that such disclosures are
provided in accordance with all requirements of this paragraph
[[Page 65]]
(f). Disclosures provided by a settlement agent in accordance with the
requirements of this paragraph (f) satisfy the creditor's obligation
under this paragraph (f).
(2) Subsequent changes--(i) Changes before consummation not
requiring a new waiting period. Except as provided in paragraph
(f)(2)(ii), if the disclosures provided under paragraph (f)(1)(i) of
this section become inaccurate before consummation, the creditor shall
provide corrected disclosures reflecting any changed terms to the
consumer so that the consumer receives the corrected disclosures at or
before consummation. Notwithstanding the requirement to provide
corrected disclosures at or before consummation, the creditor shall
permit the consumer to inspect the disclosures provided under this
paragraph, completed to set forth those items that are known to the
creditor at the time of inspection, during the business day immediately
preceding consummation, but the creditor may omit from inspection items
related only to the seller's transaction.
(ii) Changes before consummation requiring a new waiting period. If
one of the following disclosures provided under paragraph (f)(1)(i) of
this section becomes inaccurate in the following manner before
consummation, the creditor shall ensure that the consumer receives
corrected disclosures containing all changed terms in accordance with
the requirements of paragraph (f)(1)(ii)(A) of this section:
(A) The annual percentage rate disclosed under Sec. 1026.38(o)(4)
becomes inaccurate, as defined in Sec. 1026.22.
(B) The loan product is changed, causing the information disclosed
under Sec. 1026.38(a)(5)(iii) to become inaccurate.
(C) A prepayment penalty is added, causing the statement regarding a
prepayment penalty required under Sec. 1026.38(b) to become inaccurate.
(iii) Changes due to events occurring after consummation. If during
the 30-day period following consummation, an event in connection with
the settlement of the transaction occurs that causes the disclosures
required under paragraph (f)(1)(i) of this section to become inaccurate,
and such inaccuracy results in a change to an amount actually paid by
the consumer from that amount disclosed under paragraph (f)(1)(i) of
this section, the creditor shall deliver or place in the mail corrected
disclosures not later than 30 days after receiving information
sufficient to establish that such event has occurred.
(iv) Changes due to clerical errors. A creditor does not violate
paragraph (f)(1)(i) of this section if the disclosures provided under
paragraph (f)(1)(i) contain non-numeric clerical errors, provided the
creditor delivers or places in the mail corrected disclosures no later
than 60 days after consummation.
(v) Refunds related to the good faith analysis. If amounts paid by
the consumer exceed the amounts specified under paragraph (e)(3)(i) or
(ii) of this section, the creditor complies with paragraph (e)(1)(i) of
this section if the creditor refunds the excess to the consumer no later
than 60 days after consummation, and the creditor complies with
paragraph (f)(1)(i) of this section if the creditor delivers or places
in the mail corrected disclosures that reflect such refund no later than
60 days after consummation.
(3) Charges disclosed--(i) Actual charge. The amount imposed upon
the consumer for any settlement service shall not exceed the amount
actually received by the settlement service provider for that service,
except as otherwise provided in paragraph (f)(3)(ii) of this section.
(ii) Average charge. A creditor or settlement service provider may
charge a consumer or seller the average charge for a settlement service
if the following conditions are satisfied:
(A) The average charge is no more than the average amount paid for
that service by or on behalf of all consumers and sellers for a class of
transactions;
(B) The creditor or settlement service provider defines the class of
transactions based on an appropriate period of time, geographic area,
and type of loan;
(C) The creditor or settlement service provider uses the same
average charge for every transaction within the defined class; and
(D) The creditor or settlement service provider does not use an
average charge:
[[Page 66]]
(1) For any type of insurance;
(2) For any charge based on the loan amount or property value; or
(3) If doing so is otherwise prohibited by law.
(4) Transactions involving a seller--(i) Provision to seller. In a
transaction subject to paragraph (e)(1)(i) of this section that involves
a seller, the settlement agent shall provide the seller with the
disclosures in Sec. 1026.38 that relate to the seller's transaction
reflecting the actual terms of the seller's transaction.
(ii) Timing. The settlement agent shall provide the disclosures
required under paragraph (f)(4)(i) of this section no later than the day
of consummation. If during the 30-day period following consummation, an
event in connection with the settlement of the transaction occurs that
causes disclosures required under paragraph (f)(4)(i) of this section to
become inaccurate, and such inaccuracy results in a change to the amount
actually paid by the seller from that amount disclosed under paragraph
(f)(4)(i) of this section, the settlement agent shall deliver or place
in the mail corrected disclosures not later than 30 days after receiving
information sufficient to establish that such event has occurred.
(iii) Charges disclosed. The amount imposed on the seller for any
settlement service shall not exceed the amount actually received by the
service provider for that service, except as otherwise provided in
paragraph (f)(3)(ii) of this section.
(iv) Creditor's copy. When the consumer's and seller's disclosures
under this paragraph (f) are provided on separate documents, as
permitted under Sec. 1026.38(t)(5), the settlement agent shall provide
to the creditor (if the creditor is not the settlement agent) a copy of
the disclosures provided to the seller under paragraph (f)(4)(i) of this
section.
(5) No fee. No fee may be imposed on any person, as a part of
settlement costs or otherwise, by a creditor or by a servicer (as that
term is defined under 12 U.S.C. 2605(i)(2)) for the preparation or
delivery of the disclosures required under paragraph (f)(1)(i) of this
section.
(g) Special information booklet at time of application--(1) Creditor
to provide special information booklet. Except as provided in paragraphs
(g)(1)(ii) and (iii) of this section, the creditor shall provide a copy
of the special information booklet (required pursuant to section 5 of
the Real Estate Settlement Procedures Act (12 U.S.C. 2604) to help
consumers applying for federally related mortgage loans understand the
nature and cost of real estate settlement services) to a consumer who
applies for a consumer credit transaction secured by real property or a
cooperative unit.
(i) The creditor shall deliver or place in the mail the special
information booklet not later than three business days after the
consumer's application is received. However, if the creditor denies the
consumer's application before the end of the three-business-day period,
the creditor need not provide the booklet. If a consumer uses a mortgage
broker, the mortgage broker shall provide the special information
booklet and the creditor need not do so.
(ii) In the case of a home equity line of credit subject to Sec.
1026.40, a creditor or mortgage broker that provides the consumer with a
copy of the brochure entitled ``When Your Home is On the Line: What You
Should Know About Home Equity Lines of Credit,'' or any successor
brochure issued by the Bureau, is deemed to be in compliance with this
section.
(iii) The creditor or mortgage broker need not provide the booklet
to the consumer for a transaction, the purpose of which is not the
purchase of a one-to-four family residential property, including, but
not limited to, the following:
(A) Refinancing transactions;
(B) Closed-end loans secured by a subordinate lien; and
(C) Reverse mortgages.
(2) Permissible changes. Creditors may not make changes to,
deletions from, or additions to the special information booklet other
than the changes specified in paragraphs (g)(2)(i) through (iv) of this
section.
[[Page 67]]
(i) In the ``Complaints'' section of the booklet, ``the Bureau of
Consumer Financial Protection'' may be substituted for ``HUD's Office of
RESPA'' and ``the RESPA office.''
(ii) In the ``Avoiding Foreclosure'' section of the booklet, it is
permissible to inform homeowners that they may find information on and
assistance in avoiding foreclosures at http://www.consumerfinance.gov.
The reference to the HUD Web site, http://www.hud.gov/foreclosure/, in
the ``Avoiding Foreclosure'' section of the booklet shall not be
deleted.
(iii) In the ``No Discrimination'' section of the appendix to the
booklet, ``the Bureau of Consumer Financial Protection'' may be
substituted for the reference to the ``Board of Governors of the Federal
Reserve System.'' In the Contact Information section of the appendix to
the booklet, the following contact information for the Bureau may be
added: ``Bureau of Consumer Financial Protection, 1700 G Street NW.,
Washington, DC 20552; www.consumerfinance.gov/learnmore.'' The contact
information for HUD's Office of RESPA and Interstate Land Sales may be
removed from the ``Contact Information'' section of the appendix to the
booklet.
(iv) The cover of the booklet may be in any form and may contain any
drawings, pictures or artwork, provided that the title appearing on the
cover shall not be changed. Names, addresses, and telephone numbers of
the creditor or others and similar information may appear on the cover,
but no discussion of the matters covered in the booklet shall appear on
the cover. References to HUD on the cover of the booklet may be changed
to references to the Bureau.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 80108, Dec. 31, 2013;
80 FR 8776, Feb. 19, 2015; 82 FR 37768, Aug. 11, 2017]
Sec. 1026.20 Disclosure requirements regarding post-consummation
events.
(a) Refinancings. A refinancing occurs when an existing obligation
that was subject to this subpart is satisfied and replaced by a new
obligation undertaken by the same consumer. A refinancing is a new
transaction requiring new disclosures to the consumer. The new finance
charge shall include any unearned portion of the old finance charge that
is not credited to the existing obligation. The following shall not be
treated as a refinancing:
(1) A renewal of a single payment obligation with no change in the
original terms.
(2) A reduction in the annual percentage rate with a corresponding
change in the payment schedule.
(3) An agreement involving a court proceeding.
(4) A change in the payment schedule or a change in collateral
requirements as a result of the consumer's default or delinquency,
unless the rate is increased, or the new amount financed exceeds the
unpaid balance plus earned finance charge and premiums for continuation
of insurance of the types described in Sec. 1026.4(d).
(5) The renewal of optional insurance purchased by the consumer and
added to an existing transaction, if disclosures relating to the initial
purchase were provided as required by this subpart.
(b) Assumptions. An assumption occurs when a creditor expressly
agrees in writing with a subsequent consumer to accept that consumer as
a primary obligor on an existing residential mortgage transaction.
Before the assumption occurs, the creditor shall make new disclosures to
the subsequent consumer, based on the remaining obligation. If the
finance charge originally imposed on the existing obligation was an add-
on or discount finance charge, the creditor need only disclose:
(1) The unpaid balance of the obligation assumed.
(2) The total charges imposed by the creditor in connection with the
assumption.
(3) The information required to be disclosed under Sec. 1026.18(k),
(l), (m), and (n).
(4) The annual percentage rate originally imposed on the obligation.
(5) The payment schedule under Sec. 1026.18(g) and the total of
payments under Sec. 1026.18(h) based on the remaining obligation.
[[Page 68]]
(c) Rate adjustments with a corresponding change in payment. The
creditor, assignee, or servicer of an adjustable-rate mortgage shall
provide consumers with disclosures, as described in this paragraph (c),
in connection with the adjustment of interest rates pursuant to the loan
contract that results in a corresponding adjustment to the payment. To
the extent that other provisions of this subpart C govern the
disclosures required by this paragraph (c), those provisions apply to
assignees and servicers as well as to creditors. The disclosures
required by this paragraph (c) also shall be provided for an interest
rate adjustment resulting from the conversion of an adjustable-rate
mortgage to a fixed-rate transaction, if that interest rate adjustment
results in a corresponding payment change.
(1) Coverage--(i) In general. For purposes of this paragraph (c), an
adjustable-rate mortgage or ``ARM'' is a closed-end consumer credit
transaction secured by the consumer's principal dwelling in which the
annual percentage rate may increase after consummation.
(ii) Exemptions. The requirements of this paragraph (c) do not apply
to:
(A) ARMs with terms of one year or less;
(B) The first interest rate adjustment to an ARM if the first
payment at the adjusted level is due within 210 days after consummation
and the new interest rate disclosed at consummation pursuant to Sec.
1026.20(d) was not an estimate; or
(C) The creditor, assignee or servicer of an adjustable-rate
mortgage when the servicer on the loan is subject to the Fair Debt
Collections Practices Act (FDCPA) (15 U.S.C. 1692 et seq.) with regard
to the loan and the consumer has sent a notification pursuant to FDCPA
section 805(c) (15 U.S.C. 1692c(c)).
(2) Timing and content. Except as otherwise provided in paragraph
(c)(2) of this section, the disclosures required by this paragraph (c)
shall be provided to consumers at least 60, but no more than 120, days
before the first payment at the adjusted level is due. The disclosures
shall be provided to consumers at least 25, but no more than 120, days
before the first payment at the adjusted level is due for ARMs with
uniformly scheduled interest rate adjustments occurring every 60 days or
more frequently and for ARMs originated prior to January 10, 2015 in
which the loan contract requires the adjusted interest rate and payment
to be calculated based on the index figure available as of a date that
is less than 45 days prior to the adjustment date. The disclosures shall
be provided to consumers as soon as practicable, but not less than 25
days before the first payment at the adjusted level is due, for the
first adjustment to an ARM if it occurs within 60 days of consummation
and the new interest rate disclosed at consummation pursuant to Sec.
1026.20(d) was an estimate. The disclosures required by this paragraph
(c) shall include:
(i) A statement providing:
(A) An explanation that under the terms of the consumer's
adjustable-rate mortgage, the specific time period in which the current
interest rate has been in effect is ending and the interest rate and
mortgage payment will change;
(B) The effective date of the interest rate adjustment and when
additional future interest rate adjustments are scheduled to occur; and
(C) Any other changes to loan terms, features, or options taking
effect on the same date as the interest rate adjustment, such as the
expiration of interest-only or payment-option features.
(ii) A table containing the following information:
(A) The current and new interest rates;
(B) The current and new payments and the date the first new payment
is due; and
(C) For interest-only or negatively-amortizing payments, the amount
of the current and new payment allocated to principal, interest, and
taxes and insurance in escrow, as applicable. The current payment
allocation disclosed shall be the payment allocation for the last
payment prior to the date of the disclosure. The new payment allocation
disclosed shall be the expected payment allocation for the first payment
for which the new interest rate will apply.
[[Page 69]]
(iii) An explanation of how the interest rate is determined,
including:
(A) The specific index or formula used in making interest rate
adjustments and a source of information about the index or formula; and
(B) The type and amount of any adjustment to the index, including
any margin and an explanation that the margin is the addition of a
certain number of percentage points to the index, and any application of
previously foregone interest rate increases from past interest rate
adjustments.
(iv) Any limits on the interest rate or payment increases at each
interest rate adjustment and over the life of the loan, as applicable,
including the extent to which such limits result in the creditor,
assignee, or servicer foregoing any increase in the interest rate and
the earliest date that such foregone interest rate increases may apply
to future interest rate adjustments, subject to those limits.
(v) An explanation of how the new payment is determined, including:
(A) The index or formula used;
(B) Any adjustment to the index or formula, such as the addition of
a margin or the application of any previously foregone interest rate
increases from past interest rate adjustments;
(C) The loan balance expected on the date of the interest rate
adjustment; and
(D) The length of the remaining loan term expected on the date of
the interest rate adjustment and any change in the term of the loan
caused by the adjustment.
(vi) If applicable, a statement that the new payment will not be
allocated to pay loan principal and will not reduce the loan balance. If
the new payment will result in negative amortization, a statement that
the new payment will not be allocated to pay loan principal and will pay
only part of the loan interest, thereby adding to the balance of the
loan. If the new payment will result in negative amortization as a
result of the interest rate adjustment, the statement shall set forth
the payment required to amortize fully the remaining balance at the new
interest rate over the remainder of the loan term.
(vii) The circumstances under which any prepayment penalty, as
defined in Sec. 1026.32(b)(6)(i), may be imposed, such as when paying
the loan in full or selling or refinancing the principal dwelling; the
time period during which such a penalty may be imposed; and a statement
that the consumer may contact the servicer for additional information,
including the maximum amount of the penalty.
(3) Format. (i) The disclosures required by this paragraph (c) shall
be provided in the form of a table and in the same order as, and with
headings and format substantially similar to, forms H-4(D)(1) and (2) in
appendix H to this part; and
(ii) The disclosures required by paragraph (c)(2)(ii) of this
section shall be in the form of a table located within the table
described in paragraph (c)(3)(i) of this section. These disclosures
shall appear in the same order as, and with headings and format
substantially similar to, the table inside the larger table in forms H-
4(D)(1) and (2) in appendix H to this part.
(d) Initial rate adjustment. The creditor, assignee, or servicer of
an adjustable-rate mortgage shall provide consumers with disclosures, as
described in this paragraph (d), in connection with the initial interest
rate adjustment pursuant to the loan contract. To the extent that other
provisions of this subpart C govern the disclosures required by this
paragraph (d), those provisions apply to assignees and servicers as well
as to creditors. The disclosures required by this paragraph (d) shall be
provided as a separate document from other documents provided by the
creditor, assignee, or servicer. The disclosures shall be provided to
consumers at least 210, but no more than 240, days before the first
payment at the adjusted level is due. If the first payment at the
adjusted level is due within the first 210 days after consummation, the
disclosures shall be provided at consummation.
(1) Coverage--(i) In general. For purposes of this paragraph (d), an
adjustable-rate mortgage or ``ARM'' is a closed-end consumer credit
transaction secured by the consumer's principal
[[Page 70]]
dwelling in which the annual percentage rate may increase after
consummation.
(ii) Exemptions. The requirements of this paragraph (d) do not apply
to ARMs with terms of one year or less.
(2) Content. If the new interest rate (or the new payment calculated
from the new interest rate) is not known as of the date of the
disclosure, an estimate shall be disclosed and labeled as such. This
estimate shall be based on the calculation of the index reported in the
source of information described in paragraph (d)(2)(iv)(A) of this
section within fifteen business days prior to the date of the
disclosure. The disclosures required by this paragraph (d) shall
include:
(i) The date of the disclosure.
(ii) A statement providing:
(A) An explanation that under the terms of the consumer's
adjustable-rate mortgage, the specific time period in which the current
interest rate has been in effect is ending and that any change in the
interest rate may result in a change in the mortgage payment;
(B) The effective date of the interest rate adjustment and when
additional future interest rate adjustments are scheduled to occur; and
(C) Any other changes to loan terms, features, or options taking
effect on the same date as the interest rate adjustment, such as the
expiration of interest-only or payment-option features.
(iii) A table containing the following information:
(A) The current and new interest rates;
(B) The current and new payments and the date the first new payment
is due; and
(C) For interest-only or negatively-amortizing payments, the amount
of the current and new payment allocated to principal, interest, and
taxes and insurance in escrow, as applicable. The current payment
allocation disclosed shall be the payment allocation for the last
payment prior to the date of the disclosure. The new payment allocation
disclosed shall be the expected payment allocation for the first payment
for which the new interest rate will apply.
(iv) An explanation of how the interest rate is determined,
including:
(A) The specific index or formula used in making interest rate
adjustments and a source of information about the index or formula; and
(B) The type and amount of any adjustment to the index, including
any margin and an explanation that the margin is the addition of a
certain number of percentage points to the index.
(v) Any limits on the interest rate or payment increases at each
interest rate adjustment and over the life of the loan, as applicable,
including the extent to which such limits result in the creditor,
assignee, or servicer foregoing any increase in the interest rate and
the earliest date that such foregone interest rate increases may apply
to future interest rate adjustments, subject to those limits.
(vi) An explanation of how the new payment is determined, including:
(A) The index or formula used;
(B) Any adjustment to the index or formula, such as the addition of
a margin;
(C) The loan balance expected on the date of the interest rate
adjustment;
(D) The length of the remaining loan term expected on the date of
the interest rate adjustment and any change in the term of the loan
caused by the adjustment; and
(E) If the new interest rate or new payment provided is an estimate,
a statement that another disclosure containing the actual new interest
rate and new payment will be provided to the consumer between two and
four months before the first payment at the adjusted level is due for
interest rate adjustments that result in a corresponding payment change.
(vii) If applicable, a statement that the new payment will not be
allocated to pay loan principal and will not reduce the loan balance. If
the new payment will result in negative amortization, a statement that
the new payment will not be allocated to pay loan principal and will pay
only part of the loan interest, thereby adding to the balance of the
loan. If the new payment will result in negative amortization as a
result of the interest rate adjustment, the statement shall set forth
the
[[Page 71]]
payment required to amortize fully the remaining balance at the new
interest rate over the remainder of the loan term.
(viii) The circumstances under which any prepayment penalty, as
defined in Sec. 1026.32(b)(6)(i), may be imposed, such as when paying
the loan in full or selling or refinancing the principal dwelling; the
time period during which such a penalty may be imposed; and a statement
that the consumer may contact the servicer for additional information,
including the maximum amount of the penalty.
(ix) The telephone number of the creditor, assignee, or servicer for
consumers to call if they anticipate not being able to make their new
payments.
(x) The following alternatives to paying at the new rate that
consumers may be able to pursue and a brief explanation of each
alternative, expressed in simple and clear terms:
(A) Refinancing the loan with the current or another creditor or
assignee;
(B) Selling the property and using the proceeds to pay the loan in
full;
(C) Modifying the terms of the loan with the creditor, assignee, or
servicer; and
(D) Arranging payment forbearance with the creditor, assignee, or
servicer.
(xi) The Web site to access either the Bureau list or the HUD list
of homeownership counselors and counseling organizations, the HUD toll-
free telephone number to access the HUD list of homeownership counselors
and counseling organizations, and the Bureau Web site to access contact
information for State housing finance authorities (as defined in Sec.
1301 of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989).
(3) Format. (i) Except for the disclosures required by paragraph
(d)(2)(i) of this section, the disclosures required by this paragraph
(d) shall be provided in the form of a table and in the same order as,
and with headings and format substantially similar to, forms H-4(D)(3)
and (4) in appendix H to this part;
(ii) The disclosures required by paragraph (d)(2)(i) of this section
shall appear outside of and above the table required in paragraph
(d)(3)(i) of this section; and
(iii) The disclosures required by paragraph (d)(2)(iii) of this
section shall be in the form of a table located within the table
described in paragraph (d)(3)(i) of this section. These disclosures
shall appear in the same order as, and with headings and format
substantially similar to, the table inside the larger table in forms H-
4(D)(3) and (4) in appendix H to this part.
(e) Escrow account cancellation notice for certain mortgage
transactions--(1) Scope. In a closed-end consumer credit transaction
secured by a first lien on real property or a dwelling, other than a
reverse mortgage subject to Sec. 1026.33, for which an escrow account
was established in connection with the transaction and will be
cancelled, the creditor or servicer shall disclose the information
specified in paragraph (e)(2) of this section in accordance with the
form requirements in paragraph (e)(4) of this section, and the timing
requirements in paragraph (e)(5) of this section. For purposes of this
paragraph (e), the term ``escrow account'' has the same meaning as under
12 CFR 1024.17(b), and the term ``servicer'' has the same meaning as
under 12 CFR 1024.2(b).
(2) Content requirements. If an escrow account was established in
connection with a transaction subject to this paragraph (e) and the
escrow account will be cancelled, the creditor or servicer shall clearly
and conspicuously disclose, under the heading ``Escrow Closing Notice,''
the following information:
(i) A statement informing the consumer of the date on which the
consumer will no longer have an escrow account; a statement that an
escrow account may also be called an impound or trust account; a
statement of the reason why the escrow account will be closed; a
statement that without an escrow account, the consumer must pay all
property costs, such as taxes and homeowner's insurance, directly,
possibly in one or two large payments a year; and a table, titled ``Cost
to you,'' that contains an itemization of the amount of any fee the
creditor or servicer imposes on the consumer in
[[Page 72]]
connection with the closure of the consumer's escrow account, labeled
``Escrow Closing Fee,'' and a statement that the fee is for closing the
escrow account.
(ii) Under the reference ``In the future'':
(A) A statement of the consequences if the consumer fails to pay
property costs, including the actions that a State or local government
may take if property taxes are not paid and the actions the creditor or
servicer may take if the consumer does not pay some or all property
costs, such as adding amounts to the loan balance, adding an escrow
account to the loan, or purchasing a property insurance policy on the
consumer's behalf that may be more expensive and provide fewer benefits
than a policy that the consumer could obtain directly;
(B) A statement with a telephone number that the consumer can use to
request additional information about the cancellation of the escrow
account;
(C) A statement of whether the creditor or servicer offers the
option of keeping the escrow account open and, as applicable, a
telephone number the consumer can use to request that the account be
kept open; and
(D) A statement of whether there is a cut-off date by which the
consumer can request that the account be kept open.
(3) Optional information. The creditor or servicer may, at its
option, include its name or logo, the consumer's name, phone number,
mailing address and property address, the issue date of the notice, the
loan number, or the consumer's account number on the notice required by
this paragraph (e). Except for the name and logo of the creditor or
servicer, the information described in this paragraph may be placed
between the heading required by paragraph (e)(2) of this section and the
disclosures required by paragraphs (e)(2)(i) and (ii) of this section.
The name and logo may be placed above the heading required by paragraph
(e)(2) of this section.
(4) Form of disclosures. The disclosures required by paragraph
(e)(2) of this section shall be provided in a minimum 10-point font,
grouped together on the front side of a one-page document, separate from
all other materials, with the headings, content, order, and format
substantially similar to model form H-29 in appendix H to this part. The
disclosure of the heading required by paragraph (e)(2) of this section
shall be more conspicuous than, and shall precede, the other disclosures
required by paragraph (e)(2) of this section.
(5) Timing--(i) Cancellation upon consumer's request. If the
creditor or servicer cancels the escrow account at the consumer's
request, the creditor or servicer shall ensure that the consumer
receives the disclosures required by paragraph (e)(2) of this section no
later than three business days before the closure of the consumer's
escrow account.
(ii) Cancellations other than upon the consumer's request. If the
creditor or servicer cancels the escrow account and the cancellation is
not at the consumer's request, the creditor or servicer shall ensure
that the consumer receives the disclosures required by paragraph (e)(2)
of this section no later than 30 business days before the closure of the
consumer's escrow account.
(iii) Receipt of disclosure. If the disclosures required by
paragraph (e)(2) of this section are not provided to the consumer in
person, the consumer is considered to have received the disclosures
three business days after they are delivered or placed in the mail.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 11004, Feb. 14, 2013;
78 FR 63005, Oct. 23, 2013; 78 FR 80111, Dec. 31, 2013]
Effective Date Note: At 81 FR 72388, Oct. 19, 2016, Sec. 1026.20
was amended by adding paragraph (f), effective Apr. 19, 2018. For the
convenience of the user, the added text is set forth as follows:
Sec. 1026.20 Disclosure requirements regarding post-consummation
events.
* * * * *
(f) Successor in interest. If, upon confirmation, a servicer
provides a confirmed successor in interest who is not liable on the
mortgage loan obligation with a written notice and acknowledgment form
in accordance with Regulation X, Sec. 1024.32(c)(1) of this chapter,
the servicer is not required to provide to the confirmed successor in
interest any written disclosure required by paragraphs (c), (d), and (e)
of this section unless and until the confirmed successor in interest
either assumes the mortgage loan obligation under State law or has
provided the servicer an executed acknowledgment in accordance with
[[Page 73]]
Regulation X, Sec. 1024.32(c)(1)(iv) of this chapter, that the
confirmed successor in interest has not revoked.
Sec. 1026.21 Treatment of credit balances.
When a credit balance in excess of $1 is created in connection with
a transaction (through transmittal of funds to a creditor in excess of
the total balance due on an account, through rebates of unearned finance
charges or insurance premiums, or through amounts otherwise owed to or
held for the benefit of a consumer), the creditor shall:
(a) Credit the amount of the credit balance to the consumer's
account;
(b) Refund any part of the remaining credit balance, upon the
written request of the consumer; and
(c) Make a good faith effort to refund to the consumer by cash,
check, or money order, or credit to a deposit account of the consumer,
any part of the credit balance remaining in the account for more than 6
months, except that no further action is required if the consumer's
current location is not known to the creditor and cannot be traced
through the consumer's last known address or telephone number.
Sec. 1026.22 Determination of annual percentage rate.
(a) Accuracy of annual percentage rate. (1) The annual percentage
rate is a measure of the cost of credit, expressed as a yearly rate,
that relates the amount and timing of value received by the consumer to
the amount and timing of payments made. The annual percentage rate shall
be determined in accordance with either the actuarial method or the
United States Rule method. Explanations, equations and instructions for
determining the annual percentage rate in accordance with the actuarial
method are set forth in appendix J to this part. An error in disclosure
of the annual percentage rate or finance charge shall not, in itself, be
considered a violation of this part if:
(i) The error resulted from a corresponding error in a calculation
tool used in good faith by the creditor; and
(ii) Upon discovery of the error, the creditor promptly discontinues
use of that calculation tool for disclosure purposes and notifies the
Bureau in writing of the error in the calculation tool.
(2) As a general rule, the annual percentage rate shall be
considered accurate if it is not more than \1/8\ of 1 percentage point
above or below the annual percentage rate determined in accordance with
paragraph (a)(1) of this section.
(3) In an irregular transaction, the annual percentage rate shall be
considered accurate if it is not more than \1/4\ of 1 percentage point
above or below the annual percentage rate determined in accordance with
paragraph (a)(1) of this section. For purposes of this paragraph (a)(3),
an irregular transaction is one that includes one or more of the
following features: multiple advances, irregular payment periods, or
irregular payment amounts (other than an irregular first period or an
irregular first or final payment).
(4) Mortgage loans. If the annual percentage rate disclosed in a
transaction secured by real property or a dwelling varies from the
actual rate determined in accordance with paragraph (a)(1) of this
section, in addition to the tolerances applicable under paragraphs
(a)(2) and (3) of this section, the disclosed annual percentage rate
shall also be considered accurate if:
(i) The rate results from the disclosed finance charge; and
(ii)(A) The disclosed finance charge would be considered accurate
under Sec. 1026.18(d)(1) or Sec. 1026.38(o)(2), as applicable; or
(B) For purposes of rescission, if the disclosed finance charge
would be considered accurate under Sec. 1026.23(g) or (h), whichever
applies.
(5) Additional tolerance for mortgage loans. In a transaction
secured by real property or a dwelling, in addition to the tolerances
applicable under paragraphs (a)(2) and (3) of this section, if the
disclosed finance charge is calculated incorrectly but is considered
accurate under Sec. 1026.18(d)(1) or Sec. 1026.38(o)(2), as
applicable, or Sec. 1026.23(g) or (h), the disclosed annual percentage
rate shall be considered accurate:
(i) If the disclosed finance charge is understated, and the
disclosed annual percentage rate is also understated but
[[Page 74]]
it is closer to the actual annual percentage rate than the rate that
would be considered accurate under paragraph (a)(4) of this section;
(ii) If the disclosed finance charge is overstated, and the
disclosed annual percentage rate is also overstated but it is closer to
the actual annual percentage rate than the rate that would be considered
accurate under paragraph (a)(4) of this section.
(b) Computation tools. (1) The Regulation Z Annual Percentage Rate
Tables produced by the Bureau may be used to determine the annual
percentage rate, and any rate determined from those tables in accordance
with the accompanying instructions complies with the requirements of
this section. Volume I of the tables applies to single advance
transactions involving up to 480 monthly payments or 104 weekly
payments. It may be used for regular transactions and for transactions
with any of the following irregularities: an irregular first period, an
irregular first payment, and an irregular final payment. Volume II of
the tables applies to transactions involving multiple advances and any
type of payment or period irregularity.
(2) Creditors may use any other computation tool in determining the
annual percentage rate if the rate so determined equals the rate
determined in accordance with appendix J to this part, within the degree
of accuracy set forth in paragraph (a) of this section.
(c) Single add-on rate transactions. If a single add-on rate is
applied to all transactions with maturities up to 60 months and if all
payments are equal in amount and period, a single annual percentage rate
may be disclosed for all those transactions, so long as it is the
highest annual percentage rate for any such transaction.
(d) Certain transactions involving ranges of balances. For purposes
of disclosing the annual percentage rate referred to in Sec.
1026.17(g)(4) (Mail or telephone orders--delay in disclosures) and (h)
(Series of sales--delay in disclosures), if the same finance charge is
imposed on all balances within a specified range of balances, the annual
percentage rate computed for the median balance may be disclosed for all
the balances. However, if the annual percentage rate computed for the
median balance understates the annual percentage rate computed for the
lowest balance by more than 8 percent of the latter rate, the annual
percentage rate shall be computed on whatever lower balance will produce
an annual percentage rate that does not result in an understatement of
more than 8 percent of the rate determined on the lowest balance.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 80112, Dec. 31, 2013;
80 FR 80229, Dec. 24, 2015]
Sec. 1026.23 Right of rescission.
(a) Consumer's right to rescind. (1) In a credit transaction in
which a security interest is or will be retained or acquired in a
consumer's principal dwelling, each consumer whose ownership interest is
or will be subject to the security interest shall have the right to
rescind the transaction, except for transactions described in paragraph
(f) of this section. For purposes of this section, the addition to an
existing obligation of a security interest in a consumer's principal
dwelling is a transaction. The right of rescission applies only to the
addition of the security interest and not the existing obligation. The
creditor shall deliver the notice required by paragraph (b) of this
section but need not deliver new material disclosures. Delivery of the
required notice shall begin the rescission period.
(2) To exercise the right to rescind, the consumer shall notify the
creditor of the rescission by mail, telegram or other means of written
communication. Notice is considered given when mailed, when filed for
telegraphic transmission or, if sent by other means, when delivered to
the creditor's designated place of business.
(3)(i) The consumer may exercise the right to rescind until midnight
of the third business day following consummation, delivery of the notice
required by paragraph (b) of this section, or delivery of all material
disclosures, whichever occurs last. If the required notice or material
disclosures are not delivered, the right to rescind shall expire 3 years
after consummation, upon transfer of all of the consumer's interest in
the property, or upon sale of the property, whichever occurs first. In
the
[[Page 75]]
case of certain administrative proceedings, the rescission period shall
be extended in accordance with section 125(f) of the Act.
(ii) For purposes of this paragraph (a)(3), the term ``material
disclosures'' means the required disclosures of the annual percentage
rate, the finance charge, the amount financed, the total of payments,
the payment schedule, and the disclosures and limitations referred to in
Sec. Sec. 1026.32(c) and (d) and 1026.43(g).
(4) When more than one consumer in a transaction has the right to
rescind, the exercise of the right by one consumer shall be effective as
to all consumers.
(b)(1) Notice of right to rescind. In a transaction subject to
rescission, a creditor shall deliver two copies of the notice of the
right to rescind to each consumer entitled to rescind (one copy to each
if the notice is delivered in electronic form in accordance with the
consumer consent and other applicable provisions of the E-Sign Act). The
notice shall be on a separate document that identifies the transaction
and shall clearly and conspicuously disclose the following:
(i) The retention or acquisition of a security interest in the
consumer's principal dwelling.
(ii) The consumer's right to rescind the transaction.
(iii) How to exercise the right to rescind, with a form for that
purpose, designating the address of the creditor's place of business.
(iv) The effects of rescission, as described in paragraph (d) of
this section.
(v) The date the rescission period expires.
(2) Proper form of notice. To satisfy the disclosure requirements of
paragraph (b)(1) of this section, the creditor shall provide the
appropriate model form in appendix H of this part or a substantially
similar notice.
(c) Delay of creditor's performance. Unless a consumer waives the
right of rescission under paragraph (e) of this section, no money shall
be disbursed other than in escrow, no services shall be performed and no
materials delivered until the rescission period has expired and the
creditor is reasonably satisfied that the consumer has not rescinded.
(d) Effects of rescission. (1) When a consumer rescinds a
transaction, the security interest giving rise to the right of
rescission becomes void and the consumer shall not be liable for any
amount, including any finance charge.
(2) Within 20 calendar days after receipt of a notice of rescission,
the creditor shall return any money or property that has been given to
anyone in connection with the transaction and shall take any action
necessary to reflect the termination of the security interest.
(3) If the creditor has delivered any money or property, the
consumer may retain possession until the creditor has met its obligation
under paragraph (d)(2) of this section. When the creditor has complied
with that paragraph, the consumer shall tender the money or property to
the creditor or, where the latter would be impracticable or inequitable,
tender its reasonable value. At the consumer's option, tender of
property may be made at the location of the property or at the
consumer's residence. Tender of money must be made at the creditor's
designated place of business. If the creditor does not take possession
of the money or property within 20 calendar days after the consumer's
tender, the consumer may keep it without further obligation.
(4) The procedures outlined in paragraphs (d)(2) and (3) of this
section may be modified by court order.
(e) Consumer's waiver of right to rescind. The consumer may modify
or waive the right to rescind if the consumer determines that the
extension of credit is needed to meet a bona fide personal financial
emergency. To modify or waive the right, the consumer shall give the
creditor a dated written statement that describes the emergency,
specifically modifies or waives the right to rescind, and bears the
signature of all the consumers entitled to rescind. Printed forms for
this purpose are prohibited.
(f) Exempt transactions. The right to rescind does not apply to the
following:
(1) A residential mortgage transaction.
(2) A refinancing or consolidation by the same creditor of an
extension of
[[Page 76]]
credit already secured by the consumer's principal dwelling. The right
of rescission shall apply, however, to the extent the new amount
financed exceeds the unpaid principal balance, any earned unpaid finance
charge on the existing debt, and amounts attributed solely to the costs
of the refinancing or consolidation.
(3) A transaction in which a state agency is a creditor.
(4) An advance, other than an initial advance, in a series of
advances or in a series of single-payment obligations that is treated as
a single transaction under Sec. 1026.17(c)(6), if the notice required
by paragraph (b) of this section and all material disclosures have been
given to the consumer.
(5) A renewal of optional insurance premiums that is not considered
a refinancing under Sec. 1026.20(a)(5).
(g) Tolerances for accuracy--(1) One-half of 1 percent tolerance.
Except as provided in paragraphs (g)(2) and (h)(2) of this section:
(i) The finance charge and other disclosures affected by the finance
charge (such as the amount financed and the annual percentage rate)
shall be considered accurate for purposes of this section if the
disclosed finance charge:
(A) Is understated by no more than \1/2\ of 1 percent of the face
amount of the note or $100, whichever is greater; or
(B) Is greater than the amount required to be disclosed.
(ii) The total of payments for each transaction subject to Sec.
1026.19(e) and (f) shall be considered accurate for purposes of this
section if the disclosed total of payments:
(A) Is understated by no more than \1/2\ of 1 percent of the face
amount of the note or $100, whichever is greater; or
(B) Is greater than the amount required to be disclosed.
(2) One percent tolerance. In a refinancing of a residential
mortgage transaction with a new creditor (other than a transaction
covered by Sec. 1026.32), if there is no new advance and no
consolidation of existing loans:
(i) The finance charge and other disclosures affected by the finance
charge (such as the amount financed and the annual percentage rate)
shall be considered accurate for purposes of this section if the
disclosed finance charge:
(A) Is understated by no more than 1 percent of the face amount of
the note or $100, whichever is greater; or
(B) Is greater than the amount required to be disclosed.
(ii) The total of payments for each transaction subject to Sec.
1026.19(e) and (f) shall be considered accurate for purposes of this
section if the disclosed total of payments:
(A) Is understated by no more than 1 percent of the face amount of
the note or $100, whichever is greater; or
(B) Is greater than the amount required to be disclosed.
(h) Special rules for foreclosures--(1) Right to rescind. After the
initiation of foreclosure on the consumer's principal dwelling that
secures the credit obligation, the consumer shall have the right to
rescind the transaction if:
(i) A mortgage broker fee that should have been included in the
finance charge was not included; or
(ii) The creditor did not provide the properly completed appropriate
model form in appendix H of this part, or a substantially similar notice
of rescission.
(2) Tolerance for disclosures. After the initiation of foreclosure
on the consumer's principal dwelling that secures the credit obligation:
(i) The finance charge and other disclosures affected by the finance
charge (such as the amount financed and the annual percentage rate)
shall be considered accurate for purposes of this section if the
disclosed finance charge:
(A) Is understated by no more than $35; or
(B) Is greater than the amount required to be disclosed.
(ii) The total of payments for each transaction subject to Sec.
1026.19(e) and (f) shall be considered accurate for purposes of this
section if the disclosed total of payments:
(A) Is understated by no more than $35; or
(B) Is greater than the amount required to be disclosed.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 30745, May 23, 2013; 78
FR 60440, Oct. 1, 2013; 82 FR 37769, Aug. 11, 2017]
Sec. 1026.24 Advertising.
(a) Actually available terms. If an advertisement for credit states
specific
[[Page 77]]
credit terms, it shall state only those terms that actually are or will
be arranged or offered by the creditor.
(b) Clear and conspicuous standard. Disclosures required by this
section shall be made clearly and conspicuously.
(c) Advertisement of rate of finance charge. If an advertisement
states a rate of finance charge, it shall state the rate as an ``annual
percentage rate,'' using that term. If the annual percentage rate may be
increased after consummation, the advertisement shall state that fact.
If an advertisement is for credit not secured by a dwelling, the
advertisement shall not state any other rate, except that a simple
annual rate or periodic rate that is applied to an unpaid balance may be
stated in conjunction with, but not more conspicuously than, the annual
percentage rate. If an advertisement is for credit secured by a
dwelling, the advertisement shall not state any other rate, except that
a simple annual rate that is applied to an unpaid balance may be stated
in conjunction with, but not more conspicuously than, the annual
percentage rate.
(d) Advertisement of terms that require additional disclosures--(1)
Triggering terms. If any of the following terms is set forth in an
advertisement, the advertisement shall meet the requirements of
paragraph (d)(2) of this section:
(i) The amount or percentage of any downpayment.
(ii) The number of payments or period of repayment.
(iii) The amount of any payment.
(iv) The amount of any finance charge.
(2) Additional terms. An advertisement stating any of the terms in
paragraph (d)(1) of this section shall state the following terms, as
applicable (an example of one or more typical extensions of credit with
a statement of all the terms applicable to each may be used):
(i) The amount or percentage of the downpayment.
(ii) The terms of repayment, which reflect the repayment obligations
over the full term of the loan, including any balloon payment.
(iii) The ``annual percentage rate,'' using that term, and, if the
rate may be increased after consummation, that fact.
(e) Catalogs or other multiple-page advertisements; electronic
advertisements. (1) If a catalog or other multiple-page advertisement,
or an electronic advertisement (such as an advertisement appearing on an
Internet Web site), gives information in a table or schedule in
sufficient detail to permit determination of the disclosures required by
paragraph (d)(2) of this section, it shall be considered a single
advertisement if:
(i) The table or schedule is clearly and conspicuously set forth;
and
(ii) Any statement of the credit terms in paragraph (d)(1) of this
section appearing anywhere else in the catalog or advertisement clearly
refers to the page or location where the table or schedule begins.
(2) A catalog or other multiple-page advertisement or an electronic
advertisement (such as an advertisement appearing on an Internet Web
site) complies with paragraph (d)(2) of this section if the table or
schedule of terms includes all appropriate disclosures for a
representative scale of amounts up to the level of the more commonly
sold higher-priced property or services offered.
(f) Disclosure of rates and payments in advertisements for credit
secured by a dwelling--(1) Scope. The requirements of this paragraph
apply to any advertisement for credit secured by a dwelling, other than
television or radio advertisements, including promotional materials
accompanying applications.
(2) Disclosure of rates--(i) In general. If an advertisement for
credit secured by a dwelling states a simple annual rate of interest and
more than one simple annual rate of interest will apply over the term of
the advertised loan, the advertisement shall disclose in a clear and
conspicuous manner:
(A) Each simple annual rate of interest that will apply. In
variable-rate transactions, a rate determined by adding an index and
margin shall be disclosed based on a reasonably current index and
margin;
(B) The period of time during which each simple annual rate of
interest will apply; and
(C) The annual percentage rate for the loan. If such rate is
variable, the
[[Page 78]]
annual percentage rate shall comply with the accuracy standards in
Sec. Sec. 1026.17(c) and 1026.22.
(ii) Clear and conspicuous requirement. For purposes of paragraph
(f)(2)(i) of this section, clearly and conspicuously disclosed means
that the required information in paragraphs (f)(2)(i)(A) through (C)
shall be disclosed with equal prominence and in close proximity to any
advertised rate that triggered the required disclosures. The required
information in paragraph (f)(2)(i)(C) may be disclosed with greater
prominence than the other information.
(3) Disclosure of payments--(i) In general. In addition to the
requirements of paragraph (c) of this section, if an advertisement for
credit secured by a dwelling states the amount of any payment, the
advertisement shall disclose in a clear and conspicuous manner:
(A) The amount of each payment that will apply over the term of the
loan, including any balloon payment. In variable-rate transactions,
payments that will be determined based on the application of the sum of
an index and margin shall be disclosed based on a reasonably current
index and margin;
(B) The period of time during which each payment will apply; and
(C) In an advertisement for credit secured by a first lien on a
dwelling, the fact that the payments do not include amounts for taxes
and insurance premiums, if applicable, and that the actual payment
obligation will be greater.
(ii) Clear and conspicuous requirement. For purposes of paragraph
(f)(3)(i) of this section, a clear and conspicuous disclosure means that
the required information in paragraphs (f)(3)(i)(A) and (B) shall be
disclosed with equal prominence and in close proximity to any advertised
payment that triggered the required disclosures, and that the required
information in paragraph (f)(3)(i)(C) shall be disclosed with prominence
and in close proximity to the advertised payments.
(4) Envelope excluded. The requirements in paragraphs (f)(2) and
(f)(3) of this section do not apply to an envelope in which an
application or solicitation is mailed, or to a banner advertisement or
pop-up advertisement linked to an application or solicitation provided
electronically.
(g) Alternative disclosures--television or radio advertisements. An
advertisement made through television or radio stating any of the terms
requiring additional disclosures under paragraph (d)(2) of this section
may comply with paragraph (d)(2) of this section either by:
(1) Stating clearly and conspicuously each of the additional
disclosures required under paragraph (d)(2) of this section; or
(2) Stating clearly and conspicuously the information required by
paragraph (d)(2)(iii) of this section and listing a toll-free telephone
number, or any telephone number that allows a consumer to reverse the
phone charges when calling for information, along with a reference that
such number may be used by consumers to obtain additional cost
information.
(h) Tax implications. If an advertisement distributed in paper form
or through the Internet (rather than by radio or television) is for a
loan secured by the consumer's principal dwelling, and the advertisement
states that the advertised extension of credit may exceed the fair
market value of the dwelling, the advertisement shall clearly and
conspicuously state that:
(1) The interest on the portion of the credit extension that is
greater than the fair market value of the dwelling is not tax deductible
for Federal income tax purposes; and
(2) The consumer should consult a tax adviser for further
information regarding the deductibility of interest and charges.
(i) Prohibited acts or practices in advertisements for credit
secured by a dwelling. The following acts or practices are prohibited in
advertisements for credit secured by a dwelling:
(1) Misleading advertising of ``fixed'' rates and payments. Using
the word ``fixed'' to refer to rates, payments, or the credit
transaction in an advertisement for variable-rate transactions or other
transactions where the payment will increase, unless:
(i) In the case of an advertisement solely for one or more variable-
rate transactions,
[[Page 79]]
(A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate
Mortgage,'' or ``ARM'' appears in the advertisement before the first use
of the word ``fixed'' and is at least as conspicuous as any use of the
word ``fixed'' in the advertisement; and
(B) Each use of the word ``fixed'' to refer to a rate or payment is
accompanied by an equally prominent and closely proximate statement of
the time period for which the rate or payment is fixed, and the fact
that the rate may vary or the payment may increase after that period;
(ii) In the case of an advertisement solely for non-variable-rate
transactions where the payment will increase (e.g., a stepped-rate
mortgage transaction with an initial lower payment), each use of the
word ``fixed'' to refer to the payment is accompanied by an equally
prominent and closely proximate statement of the time period for which
the payment is fixed, and the fact that the payment will increase after
that period; or
(iii) In the case of an advertisement for both variable-rate
transactions and non-variable-rate transactions,
(A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate
Mortgage,'' or ``ARM'' appears in the advertisement with equal
prominence as any use of the term ``fixed,'' ``Fixed-Rate Mortgage,'' or
similar terms; and
(B) Each use of the word ``fixed'' to refer to a rate, payment, or
the credit transaction either refers solely to the transactions for
which rates are fixed and complies with paragraph (i)(1)(ii) of this
section, if applicable, or, if it refers to the variable-rate
transactions, is accompanied by an equally prominent and closely
proximate statement of the time period for which the rate or payment is
fixed, and the fact that the rate may vary or the payment may increase
after that period.
(2) Misleading comparisons in advertisements. Making any comparison
in an advertisement between actual or hypothetical credit payments or
rates and any payment or simple annual rate that will be available under
the advertised product for a period less than the full term of the loan,
unless:
(i) In general. The advertisement includes a clear and conspicuous
comparison to the information required to be disclosed under Sec.
1026.24(f)(2) and (3); and
(ii) Application to variable-rate transactions. If the advertisement
is for a variable-rate transaction, and the advertised payment or simple
annual rate is based on the index and margin that will be used to make
subsequent rate or payment adjustments over the term of the loan, the
advertisement includes an equally prominent statement in close proximity
to the payment or rate that the payment or rate is subject to adjustment
and the time period when the first adjustment will occur.
(3) Misrepresentations about government endorsement. Making any
statement in an advertisement that the product offered is a ``government
loan program'', ``government-supported loan'', or is otherwise endorsed
or sponsored by any Federal, state, or local government entity, unless
the advertisement is for an FHA loan, VA loan, or similar loan program
that is, in fact, endorsed or sponsored by a Federal, state, or local
government entity.
(4) Misleading use of the current lender's name. Using the name of
the consumer's current lender in an advertisement that is not sent by or
on behalf of the consumer's current lender, unless the advertisement:
(i) Discloses with equal prominence the name of the person or
creditor making the advertisement; and
(ii) Includes a clear and conspicuous statement that the person
making the advertisement is not associated with, or acting on behalf of,
the consumer's current lender.
(5) Misleading claims of debt elimination. Making any misleading
claim in an advertisement that the mortgage product offered will
eliminate debt or result in a waiver or forgiveness of a consumer's
existing loan terms with, or obligations to, another creditor.
(6) Misleading use of the term ``counselor''. Using the term
``counselor'' in an advertisement to refer to a for-profit mortgage
broker or mortgage creditor, its employees, or persons working for the
broker or creditor that are involved in offering, originating or selling
mortgages.
(7) Misleading foreign-language advertisements. Providing
information about
[[Page 80]]
some trigger terms or required disclosures, such as an initial rate or
payment, only in a foreign language in an advertisement, but providing
information about other trigger terms or required disclosures, such as
information about the fully-indexed rate or fully amortizing payment,
only in English in the same advertisement.
Subpart D_Miscellaneous
Sec. 1026.25 Record retention.
(a) General rule. A creditor shall retain evidence of compliance
with this part (other than advertising requirements under Sec. Sec.
1026.16 and 1026.24, and other than the requirements under Sec.
1026.19(e) and (f)) for two years after the date disclosures are
required to be made or action is required to be taken. The
administrative agencies responsible for enforcing the regulation may
require creditors under their jurisdictions to retain records for a
longer period if necessary to carry out their enforcement
responsibilities under section 108 of the Act.
(b) Inspection of records. A creditor shall permit the agency
responsible for enforcing this part with respect to that creditor to
inspect its relevant records for compliance.
(c) Records related to certain requirements for mortgage loans--(1)
Records related to requirements for loans secured by real property or a
cooperative unit--(i) General rule. Except as provided under paragraph
(c)(1)(ii) of this section, a creditor shall retain evidence of
compliance with the requirements of Sec. 1026.19(e) and (f) for three
years after the later of the date of consummation, the date disclosures
are required to be made, or the date the action is required to be taken.
(ii) Closing disclosures. (A) A creditor shall retain each completed
disclosure required under Sec. 1026.19(f)(1)(i) or (f)(4)(i), and all
documents related to such disclosures, for five years after
consummation, notwithstanding paragraph (c)(1)(ii)(B) of this section.
(B) If a creditor sells, transfers, or otherwise disposes of its
interest in a mortgage loan subject to Sec. 1026.19(f) and does not
service the mortgage loan, the creditor shall provide a copy of the
disclosures required under Sec. 1026.19(f)(1)(i) or (f)(4)(i) to the
owner or servicer of the mortgage as a part of the transfer of the loan
file. Such owner or servicer shall retain such disclosures for the
remainder of the five-year period described under paragraph
(c)(1)(ii)(A) of this section.
(C) The Bureau shall have the right to require provision of copies
of records related to the disclosures required under Sec.
1026.19(f)(1)(i) and (f)(4)(i).
(2) Records related to requirements for loan originator
compensation. Notwithstanding paragraph (a) of this section, for
transactions subject to Sec. 1026.36:
(i) A creditor shall maintain records sufficient to evidence all
compensation it pays to a loan originator, as defined in Sec.
1026.36(a)(1), and the compensation agreement that governs those
payments for three years after the date of payment.
(ii) A loan originator organization, as defined in Sec.
1026.36(a)(1)(iii), shall maintain records sufficient to evidence all
compensation it receives from a creditor, a consumer, or another person;
all compensation it pays to any individual loan originator, as defined
in Sec. 1026.36(a)(1)(ii); and the compensation agreement that governs
each such receipt or payment, for three years after the date of each
such receipt or payment.
(3) Records related to minimum standards for transactions secured by
a dwelling. Notwithstanding paragraph (a) of this section, a creditor
shall retain evidence of compliance with Sec. 1026.43 of this
regulation for three years after consummation of a transaction covered
by that section.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 6583, Jan. 30, 2013; 78
FR 11410, Feb. 15, 2013; 78 FR 60382, Oct. 1, 2013; 78 FR 80112, Dec.
31, 2013; 82 FR 37769, Aug. 11, 2017]
Sec. 1026.26 Use of annual percentage rate in oral disclosures.
(a) Open-end credit. In an oral response to a consumer's inquiry
about the cost of open-end credit, only the annual percentage rate or
rates shall be stated, except that the periodic rate or rates also may
be stated. If the annual percentage rate cannot be determined in advance
because there are finance charges other than a periodic
[[Page 81]]
rate, the corresponding annual percentage rate shall be stated, and
other cost information may be given.
(b) Closed-end credit. In an oral response to a consumer's inquiry
about the cost of closed-end credit, only the annual percentage rate
shall be stated, except that a simple annual rate or periodic rate also
may be stated if it is applied to an unpaid balance. If the annual
percentage rate cannot be determined in advance, the annual percentage
rate for a sample transaction shall be stated, and other cost
information for the consumer's specific transaction may be given.
Sec. 1026.27 Language of disclosures.
Disclosures required by this part may be made in a language other
than English, provided that the disclosures are made available in
English upon the consumer's request. This requirement for providing
English disclosures on request does not apply to advertisements subject
to Sec. Sec. 1026.16 and 1026.24.
Sec. 1026.28 Effect on state laws.
(a) Inconsistent disclosure requirements. (1) Except as provided in
paragraph (d) of this section, State law requirements that are
inconsistent with the requirements contained in chapter 1 (General
Provisions), chapter 2 (Credit Transactions), or chapter 3 (Credit
Advertising) of the Act and the implementing provisions of this part are
preempted to the extent of the inconsistency. A State law is
inconsistent if it requires a creditor to make disclosures or take
actions that contradict the requirements of the Federal law. A State law
is contradictory if it requires the use of the same term to represent a
different amount or a different meaning than the Federal law, or if it
requires the use of a term different from that required in the Federal
law to describe the same item. A creditor, State, or other interested
party may request the Bureau to determine whether a State law
requirement is inconsistent. After the Bureau determines that a State
law is inconsistent, a creditor may not make disclosures using the
inconsistent term or form. A determination as to whether a State law is
inconsistent with the requirements of sections 4 and 5 of RESPA (other
than the RESPA section 5(c) requirements regarding provision of a list
of certified homeownership counselors) and Sec. Sec. 1026.19(e) and
(f), 1026.37, and 1026.38 shall be made in accordance with this section
and not 12 CFR 1024.13.
(2)(i) State law requirements are inconsistent with the requirements
contained in sections 161 (Correction of billing errors) or 162
(Regulation of credit reports) of the Act and the implementing
provisions of this part and are preempted if they provide rights,
responsibilities, or procedures for consumers or creditors that are
different from those required by the Federal law. However, a state law
that allows a consumer to inquire about an open-end credit account and
imposes on the creditor an obligation to respond to such inquiry after
the time allowed in the Federal law for the consumer to submit written
notice of a billing error shall not be preempted in any situation where
the time period for making written notice under this part has expired.
If a creditor gives written notice of a consumer's rights under such
state law, the notice shall state that reliance on the longer time
period available under state law may result in the loss of important
rights that could be preserved by acting more promptly under Federal
law; it shall also explain that the state law provisions apply only
after expiration of the time period for submitting a proper written
notice of a billing error under the Federal law. If the state
disclosures are made on the same side of a page as the required Federal
disclosures, the state disclosures shall appear under a demarcation line
below the Federal disclosures, and the Federal disclosures shall be
identified by a heading indicating that they are made in compliance with
Federal law.
(ii) State law requirements are inconsistent with the requirements
contained in chapter 4 (Credit billing) of the Act (other than section
161 or 162) and the implementing provisions of this part and are
preempted if the creditor cannot comply with state law without violating
Federal law.
(iii) A state may request the Bureau to determine whether its law is
inconsistent with chapter 4 of the Act and its implementing provisions.
[[Page 82]]
(b) Equivalent disclosure requirements. If the Bureau determines
that a disclosure required by state law (other than a requirement
relating to the finance charge, annual percentage rate, or the
disclosures required under Sec. 1026.32) is substantially the same in
meaning as a disclosure required under the Act or this part, creditors
in that state may make the state disclosure in lieu of the Federal
disclosure. A creditor, state, or other interested party may request the
Bureau to determine whether a state disclosure is substantially the same
in meaning as a Federal disclosure.
(c) Request for determination. The procedures under which a request
for a determination may be made under this section are set forth in
appendix A.
(d) Special rule for credit and charge cards. State law requirements
relating to the disclosure of credit information in any credit or charge
card application or solicitation that is subject to the requirements of
section 127(c) of chapter 2 of the Act (Sec. 1026.60 of the regulation)
or in any renewal notice for a credit or charge card that is subject to
the requirements of section 127(d) of chapter 2 of the Act (Sec.
1026.9(e) of the regulation) are preempted. State laws relating to the
enforcement of section 127(c) and (d) of the Act are not preempted.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 80112, Dec. 31, 2013]
Sec. 1026.29 State exemptions.
(a) General rule. Any state may apply to the Bureau to exempt a
class of transactions within the state from the requirements of chapter
2 (Credit transactions) or chapter 4 (Credit billing) of the Act and the
corresponding provisions of this part. The Bureau shall grant an
exemption if it determines that:
(1) The state law is substantially similar to the Federal law or, in
the case of chapter 4, affords the consumer greater protection than the
Federal law; and
(2) There is adequate provision for enforcement.
(b) Civil liability. (1) No exemptions granted under this section
shall extend to the civil liability provisions of sections 130 and 131
of the Act.
(2) If an exemption has been granted, the disclosures required by
the applicable state law (except any additional requirements not imposed
by Federal law) shall constitute the disclosures required by the Act.
(c) Applications. The procedures under which a state may apply for
an exemption under this section are set forth in appendix B to this
part.
Sec. 1026.30 Limitation on rates.
A creditor shall include in any consumer credit contract secured by
a dwelling and subject to the Act and this part the maximum interest
rate that may be imposed during the term of the obligation when:
(a) In the case of closed-end credit, the annual percentage rate may
increase after consummation, or
(b) In the case of open-end credit, the annual percentage rate may
increase during the plan.
Subpart E_Special Rules for Certain Home Mortgage Transactions
Sec. 1026.31 General rules.
(a) Relation to other subparts in this part. The requirements and
limitations of this subpart are in addition to and not in lieu of those
contained in other subparts of this part.
(b) Form of disclosures. The creditor shall make the disclosures
required by this subpart clearly and conspicuously in writing, in a form
that the consumer may keep. The disclosures required by this subpart may
be provided to the consumer in electronic form, subject to compliance
with the consumer consent and other applicable provisions of the
Electronic Signatures in Global and National Commerce Act (E-Sign Act)
(15 U.S.C. 7001 et seq.).
(c) Timing of disclosure--(1) Disclosures for high-cost mortgages.
The creditor shall furnish the disclosures required by Sec. 1026.32 at
least three business days prior to consummation or account opening of a
high-cost mortgage as defined in Sec. 1026.32(a).
(i) Change in terms. After complying with this paragraph (c)(1) and
prior to consummation or account opening, if the creditor changes any
term that makes the disclosures inaccurate, new
[[Page 83]]
disclosures shall be provided in accordance with the requirements of
this subpart.
(ii) Telephone disclosures. A creditor may provide new disclosures
required by paragraph (c)(1)(i) of this section by telephone if the
consumer initiates the change and if, prior to or at consummation or
account opening:
(A) The creditor provides new written disclosures; and
(B) The consumer and creditor sign a statement that the new
disclosures were provided by telephone at least three days prior to
consummation or account opening, as applicable.
(iii) Consumer's waiver of waiting period before consummation or
account opening. The consumer may, after receiving the disclosures
required by this paragraph (c)(1), modify or waive the three-day waiting
period between delivery of those disclosures and consummation or account
opening if the consumer determines that the extension of credit is
needed to meet a bona fide personal financial emergency. To modify or
waive the right, the consumer shall give the creditor a dated written
statement that describes the emergency, specifically modifies or waives
the waiting period, and bears the signature of all the consumers
entitled to the waiting period. Printed forms for this purpose are
prohibited, except when creditors are permitted to use printed forms
pursuant to Sec. 1026.23(e)(2).
(2) Disclosures for reverse mortgages. The creditor shall furnish
the disclosures required by Sec. 1026.33 at least three business days
prior to:
(i) Consummation of a closed-end credit transaction; or
(ii) The first transaction under an open-end credit plan.
(d) Basis of disclosures and use of estimates--(1) Legal Obligation.
Disclosures shall reflect the terms of the legal obligation between the
parties.
(2) Estimates. If any information necessary for an accurate
disclosure is unknown to the creditor, the creditor shall make the
disclosure based on the best information reasonably available at the
time the disclosure is provided, and shall state clearly that the
disclosure is an estimate.
(3) Per-diem interest. For a transaction in which a portion of the
interest is determined on a per-diem basis and collected at
consummation, any disclosure affected by the per-diem interest shall be
considered accurate if the disclosure is based on the information known
to the creditor at the time that the disclosure documents are prepared.
(e) Multiple creditors; multiple consumers. If a transaction
involves more than one creditor, only one set of disclosures shall be
given and the creditors shall agree among themselves which creditor must
comply with the requirements that this part imposes on any or all of
them. If there is more than one consumer, the disclosures may be made to
any consumer who is primarily liable on the obligation. If the
transaction is rescindable under Sec. 1026.15 or Sec. 1026.23,
however, the disclosures shall be made to each consumer who has the
right to rescind.
(f) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor delivers the required
disclosures, the inaccuracy is not a violation of Regulation Z (12 CFR
part 1026), although new disclosures may be required for mortgages
covered by Sec. 1026.32 under paragraph (c) of this section, Sec.
1026.9(c), Sec. 1026.19, or Sec. 1026.20.
(g) Accuracy of annual percentage rate. For purposes of section
1026.32, the annual percentage rate shall be considered accurate, and
may be used in determining whether a transaction is covered by section
1026.32, if it is accurate according to the requirements and within the
tolerances under section 1026.22 for closed-end credit transactions or
1026.6(a) for open-end credit plans. The finance charge tolerances for
rescission under section 1026.23(g) or (h) shall not apply for this
purpose.
(h) Corrections and unintentional violations. A creditor or assignee
in a high-cost mortgage, as defined in Sec. 1026.32(a), who, when
acting in good faith, failed to comply with any requirement under
section 129 of the Act will not be deemed to have violated such
requirement if the creditor or assignee satisfies either of the
following sets of conditions:
[[Page 84]]
(1)(i) Within 30 days of consummation or account opening and prior
to the institution of any action, the consumer is notified of or
discovers the violation;
(ii) Appropriate restitution is made within a reasonable time; and
(iii) Within a reasonable time, whatever adjustments are necessary
are made to the loan or credit plan to either, at the choice of the
consumer:
(A) Make the loan or credit plan satisfy the requirements of 15
U.S.C. 1631-1651; or
(B) Change the terms of the loan or credit plan in a manner
beneficial to the consumer so that the loan or credit plan will no
longer be a high-cost mortgage.
(2)(i) Within 60 days of the creditor's discovery or receipt of
notification of an unintentional violation or bona fide error and prior
to the institution of any action, the consumer is notified of the
compliance failure;
(ii) Appropriate restitution is made within a reasonable time; and
(iii) Within a reasonable time, whatever adjustments are necessary
are made to the loan or credit plan to either, at the choice of the
consumer:
(A) Make the loan or credit plan satisfy the requirements of 15
U.S.C. 1631-1651; or
(B) Change the terms of the loan or credit plan in a manner
beneficial to the consumer so that the loan or credit plan will no
longer be a high-cost mortgage.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 6962, Jan. 31, 2013; 78
FR 60440, Oct. 1, 2013]
Sec. 1026.32 Requirements for high-cost mortgages.
(a) Coverage. (1) The requirements of this section apply to a high-
cost mortgage, which is any consumer credit transaction that is secured
by the consumer's principal dwelling, other than as provided in
paragraph (a)(2) of this section, and in which:
(i) The annual percentage rate applicable to the transaction, as
determined in accordance with paragraph (a)(3) of this section, will
exceed the average prime offer rate, as defined in Sec. 1026.35(a)(2),
for a comparable transaction by more than:
(A) 6.5 percentage points for a first-lien transaction, other than
as described in paragraph (a)(1)(i)(B) of this section;
(B) 8.5 percentage points for a first-lien transaction if the
dwelling is personal property and the loan amount is less than $50,000;
or
(C) 8.5 percentage points for a subordinate-lien transaction; or
(ii) The transaction's total points and fees, as defined in
paragraphs (b)(1) and (2) of this section, will exceed:
(A) 5 percent of the total loan amount for a transaction with a loan
amount of $20,000 or more; the $20,000 figure shall be adjusted annually
on January 1 by the annual percentage change in the Consumer Price Index
that was reported on the preceding June 1; or
(B) The lesser of 8 percent of the total loan amount or $1,000 for a
transaction with a loan amount of less than $20,000; the $1,000 and
$20,000 figures shall be adjusted annually on January 1 by the annual
percentage change in the Consumer Price Index that was reported on the
preceding June 1; or
(iii) Under the terms of the loan contract or open-end credit
agreement, the creditor can charge a prepayment penalty, as defined in
paragraph (b)(6) of this section, more than 36 months after consummation
or account opening, or prepayment penalties that can exceed, in total,
more than 2 percent of the amount prepaid.
(2) Exemptions. This section does not apply to the following:
(i) A reverse mortgage transaction subject to Sec. 1026.33;
(ii) A transaction to finance the initial construction of a
dwelling;
(iii) A transaction originated by a Housing Finance Agency, where
the Housing Finance Agency is the creditor for the transaction; or
(iv) A transaction originated pursuant to the United States
Department of Agriculture's Rural Development Section 502 Direct Loan
Program.
(3) Determination of annual percentage rate. For purposes of
paragraph (a)(1)(i) of this section, a creditor shall determine the
annual percentage rate for a closed- or open-end credit transaction
based on the following:
[[Page 85]]
(i) For a transaction in which the annual percentage rate will not
vary during the term of the loan or credit plan, the interest rate in
effect as of the date the interest rate for the transaction is set;
(ii) For a transaction in which the interest rate may vary during
the term of the loan or credit plan in accordance with an index, the
interest rate that results from adding the maximum margin permitted at
any time during the term of the loan or credit plan to the value of the
index rate in effect as of the date the interest rate for the
transaction is set, or the introductory interest rate, whichever is
greater; and
(iii) For a transaction in which the interest rate may or will vary
during the term of the loan or credit plan, other than a transaction
described in paragraph (a)(3)(ii) of this section, the maximum interest
rate that may be imposed during the term of the loan or credit plan.
(b) Definitions. For purposes of this subpart, the following
definitions apply:
(1) In connection with a closed-end credit transaction, points and
fees means the following fees or charges that are known at or before
consummation:
(i) All items included in the finance charge under Sec. 1026.4(a)
and (b), except that the following items are excluded:
(A) Interest or the time-price differential;
(B) Any premium or other charge imposed in connection with any
Federal or State agency program for any guaranty or insurance that
protects the creditor against the consumer's default or other credit
loss;
(C) For any guaranty or insurance that protects the creditor against
the consumer's default or other credit loss and that is not in
connection with any Federal or State agency program:
(1) If the premium or other charge is payable after consummation,
the entire amount of such premium or other charge; or
(2) If the premium or other charge is payable at or before
consummation, the portion of any such premium or other charge that is
not in excess of the amount payable under policies in effect at the time
of origination under section 203(c)(2)(A) of the National Housing Act
(12 U.S.C. 1709(c)(2)(A)), provided that the premium or charge is
required to be refundable on a pro rata basis and the refund is
automatically issued upon notification of the satisfaction of the
underlying mortgage loan;
(D) Any bona fide third-party charge not retained by the creditor,
loan originator, or an affiliate of either, unless the charge is
required to be included in points and fees under paragraph (b)(1)(i)(C),
(iii), or (iv) of this section;
(E) Up to two bona fide discount points paid by the consumer in
connection with the transaction, if the interest rate without any
discount does not exceed:
(1) The average prime offer rate, as defined in Sec. 1026.35(a)(2),
by more than one percentage point; or
(2) For purposes of paragraph (a)(1)(ii) of this section, for
transactions that are secured by personal property, the average rate for
a loan insured under Title I of the National Housing Act (12 U.S.C. 1702
et seq.) by more than one percentage point; and
(F) If no discount points have been excluded under paragraph
(b)(1)(i)(E) of this section, then up to one bona fide discount point
paid by the consumer in connection with the transaction, if the interest
rate without any discount does not exceed:
(1) The average prime offer rate, as defined in Sec. 1026.35(a)(2),
by more than two percentage points; or
(2) For purposes of paragraph (a)(1)(ii) of this section, for
transactions that are secured by personal property, the average rate for
a loan insured under Title I of the National Housing Act (12 U.S.C. 1702
et seq.) by more than two percentage points;
(ii) All compensation paid directly or indirectly by a consumer or
creditor to a loan originator, as defined in Sec. 1026.36(a)(1), that
can be attributed to that transaction at the time the interest rate is
set unless:
(A) That compensation is paid by a consumer to a mortgage broker, as
defined in Sec. 1026.36(a)(2), and already has been included in points
and fees under paragraph (b)(1)(i) of this section;
(B) That compensation is paid by a mortgage broker, as defined in
[[Page 86]]
Sec. 1026.36(a)(2), to a loan originator that is an employee of the
mortgage broker;
(C) That compensation is paid by a creditor to a loan originator
that is an employee of the creditor; or
(D) That compensation is paid by a retailer of manufactured homes to
its employee.
(iii) All items listed in Sec. 1026.4(c)(7) (other than amounts
held for future payment of taxes), unless:
(A) The charge is reasonable;
(B) The creditor receives no direct or indirect compensation in
connection with the charge; and
(C) The charge is not paid to an affiliate of the creditor;
(iv) Premiums or other charges payable at or before consummation for
any credit life, credit disability, credit unemployment, or credit
property insurance, or any other life, accident, health, or loss-of-
income insurance for which the creditor is a beneficiary, or any
payments directly or indirectly for any debt cancellation or suspension
agreement or contract;
(v) The maximum prepayment penalty, as defined in paragraph
(b)(6)(i) of this section, that may be charged or collected under the
terms of the mortgage loan; and
(vi) The total prepayment penalty, as defined in paragraph (b)(6)(i)
or (ii) of this section, as applicable, incurred by the consumer if the
consumer refinances the existing mortgage loan, or terminates an
existing open-end credit plan in connection with obtaining a new
mortgage loan, with the current holder of the existing loan or plan, a
servicer acting on behalf of the current holder, or an affiliate of
either.
(2) In connection with an open-end credit plan, points and fees
means the following fees or charges that are known at or before account
opening:
(i) All items included in the finance charge under Sec. 1026.4(a)
and (b), except that the following items are excluded:
(A) Interest or the time-price differential;
(B) Any premium or other charge imposed in connection with any
Federal or State agency program for any guaranty or insurance that
protects the creditor against the consumer's default or other credit
loss;
(C) For any guaranty or insurance that protects the creditor against
the consumer's default or other credit loss and that is not in
connection with any Federal or State agency program:
(1) If the premium or other charge is payable after account opening,
the entire amount of such premium or other charge; or
(2) If the premium or other charge is payable at or before account
opening, the portion of any such premium or other charge that is not in
excess of the amount payable under policies in effect at the time of
account opening under section 203(c)(2)(A) of the National Housing Act
(12 U.S.C. 1709(c)(2)(A)), provided that the premium or charge is
required to be refundable on a pro rata basis and the refund is
automatically issued upon notification of the satisfaction of the
underlying mortgage transaction;
(D) Any bona fide third-party charge not retained by the creditor,
loan originator, or an affiliate of either, unless the charge is
required to be included in points and fees under paragraphs
(b)(2)(i)(C), (b)(2)(iii) or (b)(2)(iv) of this section;
(E) Up to two bona fide discount points payable by the consumer in
connection with the transaction, provided that the conditions specified
in paragraph (b)(1)(i)(E) of this section are met; and
(F) Up to one bona fide discount point payable by the consumer in
connection with the transaction, provided that no discount points have
been excluded under paragraph (b)(2)(i)(E) of this section and the
conditions specified in paragraph (b)(1)(i)(F) of this section are met;
(ii) All compensation paid directly or indirectly by a consumer or
creditor to a loan originator, as defined in Sec. 1026.36(a)(1), that
can be attributed to that transaction at the time the interest rate is
set unless:
(A) That compensation is paid by a consumer to a mortgage broker, as
defined in Sec. 1026.36(a)(2), and already has been included in points
and fees under paragraph (b)(2)(i) of this section;
(B) That compensation is paid by a mortgage broker, as defined in
Sec. 1026.36(a)(2), to a loan originator that is an employee of the
mortgage broker;
[[Page 87]]
(C) That compensation is paid by a creditor to a loan originator
that is an employee of the creditor; or
(D) That compensation is paid by a retailer of manufactured homes to
its employee.
(iii) All items listed in Sec. 1026.4(c)(7) (other than amounts
held for future payment of taxes) unless:
(A) The charge is reasonable;
(B) The creditor receives no direct or indirect compensation in
connection with the charge; and
(C) The charge is not paid to an affiliate of the creditor;
(iv) Premiums or other charges payable at or before account opening
for any credit life, credit disability, credit unemployment, or credit
property insurance, or any other life, accident, health, or loss-of-
income insurance for which the creditor is a beneficiary, or any
payments directly or indirectly for any debt cancellation or suspension
agreement or contract;
(v) The maximum prepayment penalty, as defined in paragraph
(b)(6)(ii) of this section, that may be charged or collected under the
terms of the open-end credit plan;
(vi) The total prepayment penalty, as defined in paragraph (b)(6)(i)
or (ii) of this section, as applicable, incurred by the consumer if the
consumer refinances an existing closed-end credit transaction with an
open-end credit plan, or terminates an existing open-end credit plan in
connection with obtaining a new open-end credit plan, with the current
holder of the existing transaction or plan, a servicer acting on behalf
of the current holder, or an affiliate of either;
(vii) Any fees charged for participation in an open-end credit plan,
payable at or before account opening, as described in Sec.
1026.4(c)(4); and
(viii) Any transaction fee, including any minimum fee or per-
transaction fee, that will be charged for a draw on the credit line,
where the creditor must assume that the consumer will make at least one
draw during the term of the plan.
(3) Bona fide discount point--(i) Closed-end credit. The term bona
fide discount point means an amount equal to 1 percent of the loan
amount paid by the consumer that reduces the interest rate or time-price
differential applicable to the transaction based on a calculation that
is consistent with established industry practices for determining the
amount of reduction in the interest rate or time-price differential
appropriate for the amount of discount points paid by the consumer.
(ii) Open-end credit. The term bona fide discount point means an
amount equal to 1 percent of the credit limit for the plan when the
account is opened, paid by the consumer, and that reduces the interest
rate or time-price differential applicable to the transaction based on a
calculation that is consistent with established industry practices for
determining the amount of reduction in the interest rate or time-price
differential appropriate for the amount of discount points paid by the
consumer. See comment 32(b)(3)(i)-1 for additional guidance in
determining whether a discount point is bona fide.
(4) Total loan amount--(i) Closed-end credit. The total loan amount
for a closed-end credit transaction is calculated by taking the amount
financed, as determined according to Sec. 1026.18(b), and deducting any
cost listed in Sec. 1026.32(b)(1)(iii), (iv), or (vi) that is both
included as points and fees under Sec. 1026.32(b)(1) and financed by
the creditor.
(ii) Open-end credit. The total loan amount for an open-end credit
plan is the credit limit for the plan when the account is opened.
(5) Affiliate means any company that controls, is controlled by, or
is under common control with another company, as set forth in the Bank
Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
(6) Prepayment penalty--(i) Closed-end credit transactions. For a
closed-end credit transaction, prepayment penalty means a charge imposed
for paying all or part of the transaction's principal before the date on
which the principal is due, other than a waived, bona fide third-party
charge that the creditor imposes if the consumer prepays all of the
transaction's principal sooner than 36 months after consummation,
provided, however, that interest charged consistent with the monthly
interest accrual amortization method is not a
[[Page 88]]
prepayment penalty for extensions of credit insured by the Federal
Housing Administration that are consummated before January 21, 2015.
(ii) Open-end credit. For an open-end credit plan, prepayment
penalty means a charge imposed by the creditor if the consumer
terminates the open-end credit plan prior to the end of its term, other
than a waived, bona fide third-party charge that the creditor imposes if
the consumer terminates the open-end credit plan sooner than 36 months
after account opening.
(c) Disclosures. In addition to other disclosures required by this
part, in a mortgage subject to this section, the creditor shall disclose
the following in conspicuous type size:
(1) Notices. The following statement: ``You are not required to
complete this agreement merely because you have received these
disclosures or have signed a loan application. If you obtain this loan,
the lender will have a mortgage on your home. You could lose your home,
and any money you have put into it, if you do not meet your obligations
under the loan.''
(2) Annual percentage rate. The annual percentage rate.
(3) Regular payment; minimum periodic payment example; balloon
payment. (i) For a closed-end credit transaction, the amount of the
regular monthly (or other periodic) payment and the amount of any
balloon payment provided in the credit contract, if permitted under
paragraph (d)(1) of this section. The regular payment disclosed under
this paragraph shall be treated as accurate if it is based on an amount
borrowed that is deemed accurate and is disclosed under paragraph (c)(5)
of this section.
(ii) For an open-end credit plan:
(A) An example showing the first minimum periodic payment for the
draw period, the first minimum periodic payment for any repayment
period, and the balance outstanding at the beginning of any repayment
period. The example must be based on the following assumptions:
(1) The consumer borrows the full credit line, as disclosed in
paragraph (c)(5) of this section, at account opening and does not obtain
any additional extensions of credit;
(2) The consumer makes only minimum periodic payments during the
draw period and any repayment period; and
(3) The annual percentage rate used to calculate the example
payments remains the same during the draw period and any repayment
period. The creditor must provide the minimum periodic payment example
based on the annual percentage rate for the plan, as described in
paragraph (c)(2) of this section, except that if an introductory annual
percentage rate applies, the creditor must use the rate that will apply
to the plan after the introductory rate expires.
(B) If the credit contract provides for a balloon payment under the
plan as permitted under paragraph (d)(1) of this section, a disclosure
of that fact and an example showing the amount of the balloon payment
based on the assumptions described in paragraph (c)(3)(ii)(A) of this
section.
(C) A statement that the example payments show the first minimum
periodic payments at the current annual percentage rate if the consumer
borrows the maximum credit available when the account is opened and does
not obtain any additional extensions of credit, or a substantially
similar statement.
(D) A statement that the example payments are not the consumer's
actual payments and that the actual minimum periodic payments will
depend on the amount the consumer borrows, the interest rate applicable
to that period, and whether the consumer pays more than the required
minimum periodic payment, or a substantially similar statement.
(4) Variable-rate. For variable-rate transactions, a statement that
the interest rate and monthly payment may increase, and the amount of
the single maximum monthly payment, based on the maximum interest rate
required to be included in the contract by Sec. 1026.30.
(5) Amount borrowed; credit limit. (i) For a closed-end credit
transaction, the total amount the consumer will borrow, as reflected by
the face amount of the note. Where the amount borrowed includes financed
charges that are not prohibited under Sec. 1026.34(a)(10), that fact
shall be stated, grouped together
[[Page 89]]
with the disclosure of the amount borrowed. The disclosure of the amount
borrowed shall be treated as accurate if it is not more than $100 above
or below the amount required to be disclosed.
(ii) For an open-end credit plan, the credit limit for the plan when
the account is opened.
(d) Limitations. A high-cost mortgage shall not include the
following terms:
(1)(i) Balloon payment. Except as provided by paragraphs (d)(1)(ii)
and (iii) of this section, a payment schedule with a payment that is
more than two times a regular periodic payment.
(ii) Exceptions. The limitations in paragraph (d)(1)(i) of this
section do not apply to:
(A) A mortgage transaction with a payment schedule that is adjusted
to the seasonal or irregular income of the consumer;
(B) A loan with maturity of 12 months or less, if the purpose of the
loan is a ``bridge'' loan connected with the acquisition or construction
of a dwelling intended to become the consumer's principal dwelling; or
(C) A loan that meets the criteria set forth in Sec. Sec.
1026.43(f)(1)(i) through (vi) and 1026.43(f)(2), or the conditions set
forth in Sec. 1026.43(e)(6).
(iii) Open-end credit plans. If the terms of an open-end credit plan
provide for a repayment period during which no further draws may be
taken, the limitations in paragraph (d)(1)(i) of this section do not
apply to any adjustment in the regular periodic payment that results
solely from the credit plan's transition from the draw period to the
repayment period. If the terms of an open-end credit plan do not provide
for any repayment period, the limitations in paragraph (d)(1)(i) of this
section apply to all periods of the credit plan.
(2) Negative amortization. A payment schedule with regular periodic
payments that cause the principal balance to increase.
(3) Advance payments. A payment schedule that consolidates more than
two periodic payments and pays them in advance from the proceeds.
(4) Increased interest rate. An increase in the interest rate after
default.
(5) Rebates. A refund calculated by a method less favorable than the
actuarial method (as defined by section 933(d) of the Housing and
Community Development Act of 1992, 15 U.S.C. 1615(d)), for rebates of
interest arising from a loan acceleration due to default.
(6) Prepayment penalties. A prepayment penalty, as defined in
paragraph (b)(6) of this section.
(7) [Reserved]
(8) Acceleration of debt. A demand feature that permits the creditor
to accelerate the indebtedness by terminating the high-cost mortgage in
advance of the original maturity date and to demand repayment of the
entire outstanding balance, except in the following circumstances:
(i) There is fraud or material misrepresentation by the consumer in
connection with the loan or open-end credit agreement;
(ii) The consumer fails to meet the repayment terms of the agreement
for any outstanding balance that results in a default in payment under
the loan; or
(iii) There is any action or inaction by the consumer that adversely
affects the creditor's security for the loan, or any right of the
creditor in such security.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 6583, Jan. 30, 2013; 78
FR 6962, Jan. 31, 2013; 78 FR 35502, June 12, 2013; 78 FR 60440, Oct. 1,
2013]
Sec. 1026.33 Requirements for reverse mortgages.
(a) Definition. For purposes of this subpart, reverse mortgage
transaction means a nonrecourse consumer credit obligation in which:
(1) A mortgage, deed of trust, or equivalent consensual security
interest securing one or more advances is created in the consumer's
principal dwelling; and
(2) Any principal, interest, or shared appreciation or equity is due
and payable (other than in the case of default) only after:
(i) The consumer dies;
(ii) The dwelling is transferred; or
(iii) The consumer ceases to occupy the dwelling as a principal
dwelling.
(b) Content of disclosures. In addition to other disclosures
required by this part, in a reverse mortgage transaction the creditor
shall provide the following
[[Page 90]]
disclosures in a form substantially similar to the model form found in
paragraph (d) of appendix K of this part:
(1) Notice. A statement that the consumer is not obligated to
complete the reverse mortgage transaction merely because the consumer
has received the disclosures required by this section or has signed an
application for a reverse mortgage loan.
(2) Total annual loan cost rates. A good-faith projection of the
total cost of the credit, determined in accordance with paragraph (c) of
this section and expressed as a table of ``total annual loan cost
rates,'' using that term, in accordance with appendix K of this part.
(3) Itemization of pertinent information. An itemization of loan
terms, charges, the age of the youngest borrower and the appraised
property value.
(4) Explanation of table. An explanation of the table of total
annual loan cost rates as provided in the model form found in paragraph
(d) of appendix K of this part.
(c) Projected total cost of credit. The projected total cost of
credit shall reflect the following factors, as applicable:
(1) Costs to consumer. All costs and charges to the consumer,
including the costs of any annuity the consumer purchases as part of the
reverse mortgage transaction.
(2) Payments to consumer. All advances to and for the benefit of the
consumer, including annuity payments that the consumer will receive from
an annuity that the consumer purchases as part of the reverse mortgage
transaction.
(3) Additional creditor compensation. Any shared appreciation or
equity in the dwelling that the creditor is entitled by contract to
receive.
(4) Limitations on consumer liability. Any limitation on the
consumer's liability (such as nonrecourse limits and equity conservation
agreements).
(5) Assumed annual appreciation rates. Each of the following assumed
annual appreciation rates for the dwelling:
(i) 0 percent.
(ii) 4 percent.
(iii) 8 percent.
(6) Assumed loan period. (i) Each of the following assumed loan
periods, as provided in appendix L of this part:
(A) Two years.
(B) The actuarial life expectancy of the consumer to become
obligated on the reverse mortgage transaction (as of that consumer's
most recent birthday). In the case of multiple consumers, the period
shall be the actuarial life expectancy of the youngest consumer (as of
that consumer's most recent birthday).
(C) The actuarial life expectancy specified by paragraph
(c)(6)(i)(B) of this section, multiplied by a factor of 1.4 and rounded
to the nearest full year.
(ii) At the creditor's option, the actuarial life expectancy
specified by paragraph (c)(6)(i)(B) of this section, multiplied by a
factor of .5 and rounded to the nearest full year.
Sec. 1026.34 Prohibited acts or practices in connection with
high-cost mortgages.
(a) Prohibited acts or practices for high-cost mortgages--(1) Home
improvement contracts. A creditor shall not pay a contractor under a
home improvement contract from the proceeds of a high-cost mortgage,
other than:
(i) By an instrument payable to the consumer or jointly to the
consumer and the contractor; or
(ii) At the election of the consumer, through a third-party escrow
agent in accordance with terms established in a written agreement signed
by the consumer, the creditor, and the contractor prior to the
disbursement.
(2) Notice to assignee. A creditor may not sell or otherwise assign
a high-cost mortgage without furnishing the following statement to the
purchaser or assignee: ``Notice: This is a mortgage subject to special
rules under the Federal Truth in Lending Act. Purchasers or assignees of
this mortgage could be liable for all claims and defenses with respect
to the mortgage that the consumer could assert against the creditor.''
(3) Refinancings within one-year period. Within one year of having
extended a high-cost mortgage, a creditor
[[Page 91]]
shall not refinance any high-cost mortgage to the same consumer into
another high-cost mortgage, unless the refinancing is in the consumer's
interest. An assignee holding or servicing a high-cost mortgage shall
not, for the remainder of the one-year period following the date of
origination of the credit, refinance any high-cost mortgage to the same
consumer into another high-cost mortgage, unless the refinancing is in
the consumer's interest. A creditor (or assignee) is prohibited from
engaging in acts or practices to evade this provision, including a
pattern or practice of arranging for the refinancing of its own loans by
affiliated or unaffiliated creditors.
(4) Repayment ability for high-cost mortgages. In connection with an
open-end, high-cost mortgage, a creditor shall not open a plan for a
consumer where credit is or will be extended without regard to the
consumer's repayment ability as of account opening, including the
consumer's current and reasonably expected income, employment, assets
other than the collateral, and current obligations including any
mortgage-related obligations that are required by another credit
obligation undertaken prior to or at account opening, and are secured by
the same dwelling that secures the high-cost mortgage transaction. The
requirements set forth in Sec. 1026.34(a)(4)(i) through (iv) apply to
open-end high-cost mortgages, but do not apply to closed-end high-cost
mortgages. In connection with a closed-end, high-cost mortgage, a
creditor must comply with the repayment ability requirements set forth
in Sec. 1026.43. Temporary or ``bridge'' loans with terms of twelve
months or less, such as a loan to purchase a new dwelling where the
consumer plans to sell a current dwelling within twelve months, are
exempt from this repayment ability requirement.
(i) Mortgage-related obligations. For purposes of this paragraph
(a)(4), mortgage-related obligations are property taxes; premiums and
similar charges identified in Sec. 1026.4(b)(5), (7), (8), and (10)
that are required by the creditor; fees and special assessments imposed
by a condominium, cooperative, or homeowners association; ground rent;
and leasehold payments.
(ii) Basis for determination of repayment ability. Under this
paragraph (a)(4) a creditor must determine the consumer's repayment
ability in connection with an open-end, high cost mortgage as follows:
(A) A creditor must verify amounts of income or assets that it
relies on to determine repayment ability, including expected income or
assets, by the consumer's Internal Revenue Service Form W-2, tax
returns, payroll receipts, financial institution records, or other
third-party documents that provide reasonably reliable evidence of the
consumer's income or assets.
(B) A creditor must verify the consumer's current obligations,
including any mortgage-related obligations that are required by another
credit obligation undertaken prior to or at account opening, and are
secured by the same dwelling that secures the high-cost mortgage
transaction.
(iii) Presumption of compliance. For an open-end, high cost
mortgage, a creditor is presumed to have complied with this paragraph
(a)(4) with respect to a transaction if the creditor:
(A) Determines the consumer's repayment ability as provided in
paragraph (a)(4)(ii);
(B) Determines the consumer's repayment ability taking into account
current obligations and mortgage-related obligations as defined in
paragraph (a)(4)(i) of this section, and using the largest required
minimum periodic payment based on the following assumptions:
(1) The consumer borrows the full credit line at account opening
with no additional extensions of credit;
(2) The consumer makes only required minimum periodic payments
during the draw period and any repayment period;
(3) If the annual percentage rate may increase during the plan, the
maximum annual percentage rate that is included in the contract, as
required by Sec. 1026.30, applies to the plan at account opening and
will apply during the draw period and any repayment period.
(C) Assesses the consumer's repayment ability taking into account at
least one of the following: The ratio of total current obligations,
including any mortgage-related obligations that
[[Page 92]]
are required by another credit obligation undertaken prior to or at
account opening, and are secured by the same dwelling that secures the
high-cost mortgage transaction, to income, or the income the consumer
will have after paying current obligations.
(iv) Exclusions from presumption of compliance. Notwithstanding the
previous paragraph, no presumption of compliance is available for an
open-end, high-cost mortgage transaction for which the regular periodic
payments when aggregated do not fully amortize the outstanding principal
balance except as otherwise provided by Sec. 1026.32(d)(1)(ii).
(5) Pre-loan counseling--(i) Certification of counseling required. A
creditor shall not extend a high-cost mortgage to a consumer unless the
creditor receives written certification that the consumer has obtained
counseling on the advisability of the mortgage from a counselor that is
approved to provide such counseling by the Secretary of the U.S.
Department of Housing and Urban Development or, if permitted by the
Secretary, by a State housing finance authority.
(ii) Timing of counseling. The counseling required under this
paragraph (a)(5) must occur after:
(A) The consumer receives either the disclosure required by section
5(c) of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C.
2604(c)) or the disclosures required by Sec. 1026.40; or
(B) The consumer receives the disclosures required by Sec.
1026.32(c), for transactions in which neither of the disclosures listed
in paragraph (a)(5)(ii)(A) of this section are provided.
(iii) Affiliation prohibited. The counseling required under this
paragraph (a)(5) shall not be provided by a counselor who is employed by
or affiliated with the creditor.
(iv) Content of certification. The certification of counseling
required under paragraph (a)(5)(i) must include:
(A) The name(s) of the consumer(s) who obtained counseling;
(B) The date(s) of counseling;
(C) The name and address of the counselor;
(D) A statement that the consumer(s) received counseling on the
advisability of the high-cost mortgage based on the terms provided in
either the disclosure required by section 5(c) of the Real Estate
Settlement Procedures Act of 1974 (12 U.S.C. 2604(c)) or the disclosures
required by Sec. 1026.40.
(E) For transactions for which neither of the disclosures listed in
paragraph (a)(5)(ii)(A) of this section are provided, a statement that
the consumer(s) received counseling on the advisability of the high-cost
mortgage based on the terms provided in the disclosures required by
Sec. 1026.32(c); and
(F) A statement that the counselor has verified that the consumer(s)
received the disclosures required by either Sec. 1026.32(c) or the Real
Estate Settlement Procedures Act of 1974 (12 U.S.C. 2601 et seq.) with
respect to the transaction.
(v) Counseling fees. A creditor may pay the fees of a counselor or
counseling organization for providing counseling required under this
paragraph (a)(5) but may not condition the payment of such fees on the
consummation or account-opening of a mortgage transaction. If the
consumer withdraws the application that would result in the extension of
a high-cost mortgage, a creditor may not condition the payment of such
fees on the receipt of certification from the counselor required by
paragraph (a)(5)(i) of this section. A creditor may, however, confirm
that a counselor has provided counseling to the consumer pursuant to
this paragraph (a)(5) prior to paying the fee of a counselor or
counseling organization.
(vi) Steering prohibited. A creditor that extends a high-cost
mortgage shall not steer or otherwise direct a consumer to choose a
particular counselor or counseling organization for the counseling
required under this paragraph (a)(5).
(6) Recommended default. A creditor or mortgage broker, as defined
in section 1026.36(a)(2), may not recommend or encourage default on an
existing loan or other debt prior to and in connection with the
consummation or account opening of a high-cost mortgage that refinances
all or any portion of such existing loan or debt.
(7) Modification and deferral fees. A creditor, successor-in-
interest, assignee, or any agent of such parties may not charge a
consumer any fee to
[[Page 93]]
modify, renew, extend or amend a high-cost mortgage, or to defer any
payment due under the terms of such mortgage.
(8) Late fees--(i) General. Any late payment charge imposed in
connection with a high-cost mortgage must be specifically permitted by
the terms of the loan contract or open-end credit agreement and may not
exceed 4 percent of the amount of the payment past due. No such charge
may be imposed more than once for a single late payment.
(ii) Timing. A late payment charge may be imposed in connection with
a high-cost mortgage only if the payment is not received by the end of
the 15-day period beginning on the date the payment is due or, in the
case of a high-cost mortgage on which interest on each installment is
paid in advance, the end of the 30-day period beginning on the date the
payment is due.
(iii) Multiple late charges assessed on payment subsequently paid. A
late payment charge may not be imposed in connection with a high-cost
mortgage payment if any delinquency is attributable only to a late
payment charge imposed on an earlier payment, and the payment otherwise
is a full payment for the applicable period and is paid by the due date
or within any applicable grace period.
(iv) Failure to make required payment. The terms of a high-cost
mortgage agreement may provide that any payment shall first be applied
to any past due balance. If the consumer fails to make a timely payment
by the due date and subsequently resumes making payments but has not
paid all past due payments, the creditor may impose a separate late
payment charge for any payment(s) outstanding (without deduction due to
late fees or related fees) until the default is cured.
(9) Payoff statements--(i) Fee prohibition. In general, a creditor
or servicer (as defined in 12 CFR 1024.2(b)) may not charge a fee for
providing to a consumer, or a person authorized by the consumer to
obtain such information, a statement of the amount due to pay off the
outstanding balance of a high-cost mortgage.
(ii) Processing fee. A creditor or servicer may charge a processing
fee to cover the cost of providing a payoff statement, as described in
paragraph (a)(9)(i) of this section, by fax or courier, provided that
such fee may not exceed an amount that is comparable to fees imposed for
similar services provided in connection with consumer credit
transactions that are secured by the consumer's principal dwelling and
are not high-cost mortgages. A creditor or servicer shall make a payoff
statement available to a consumer, or a person authorized by the
consumer to obtain such information, by a method other than by fax or
courier and without charge pursuant to paragraph (a)(9)(i) of this
section.
(iii) Processing fee disclosure. Prior to charging a processing fee
for provision of a payoff statement by fax or courier, as permitted
pursuant to paragraph (a)(9)(ii) of this section, a creditor or servicer
shall disclose to a consumer or a person authorized by the consumer to
obtain the consumer's payoff statement that payoff statements, as
described in paragraph (a)(9)(i) of this section, are available by a
method other than by fax or courier without charge.
(iv) Fees permitted after multiple requests. A creditor or servicer
that has provided a payoff statement, as described in paragraph
(a)(9)(i) of this section, to a consumer, or a person authorized by the
consumer to obtain such information, without charge, other than the
processing fee permitted under paragraph (a)(9)(ii) of this section,
four times during a calendar year, may thereafter charge a reasonable
fee for providing such statements during the remainder of the calendar
year. Fees for payoff statements provided to a consumer, or a person
authorized by the consumer to obtain such information, in a subsequent
calendar year are subject to the requirements of this section.
(v) Timing of delivery of payoff statements. A payoff statement, as
described in paragraph (a)(9)(i) of this section, for a high-cost
mortgage shall be provided by a creditor or servicer within five
business days after receiving a request for such statement by a consumer
or a person authorized by the consumer to obtain such statement.
(10) Financing of points and fees. A creditor that extends credit
under a high-cost mortgage may not finance
[[Page 94]]
charges that are required to be included in the calculation of points
and fees, as that term is defined in Sec. 1026.32(b)(1) and (2). Credit
insurance premiums or debt cancellation or suspension fees that are
required to be included in points and fees under Sec. 1026.32(b)(1)(iv)
or (2)(iv) shall not be considered financed by the creditor when they
are calculated and paid in full on a monthly basis.
(b) Prohibited acts or practices for dwelling-secured loans;
structuring loans to evade high-cost mortgage requirements. A creditor
shall not structure any transaction that is otherwise a high-cost
mortgage in a form, for the purpose, and with the intent to evade the
requirements of a high-cost mortgage subject to this subpart, including
by dividing any loan transaction into separate parts.
[78 FR 6964, Jan. 31, 2013, as amended at 78 FR 30745, May 23, 2013; 78
FR 63005, Oct. 23, 2013]
Sec. 1026.35 Requirements for higher-priced mortgage loans.
(a) Definitions. For purposes of this section:
(1) ``Higher-priced mortgage loan'' means a closed-end consumer
credit transaction secured by the consumer's principal dwelling with an
annual percentage rate that exceeds the average prime offer rate for a
comparable transaction as of the date the interest rate is set:
(i) By 1.5 or more percentage points for loans secured by a first
lien with a principal obligation at consummation that does not exceed
the limit in effect as of the date the transaction's interest rate is
set for the maximum principal obligation eligible for purchase by
Freddie Mac;
(ii) By 2.5 or more percentage points for loans secured by a first
lien with a principal obligation at consummation that exceeds the limit
in effect as of the date the transaction's interest rate is set for the
maximum principal obligation eligible for purchase by Freddie Mac; or
(iii) By 3.5 or more percentage points for loans secured by a
subordinate lien.
(2) ``Average prime offer rate'' means an annual percentage rate
that is derived from average interest rates, points, and other loan
pricing terms currently offered to consumers by a representative sample
of creditors for mortgage transactions that have low-risk pricing
characteristics. The Bureau publishes average prime offer rates for a
broad range of types of transactions in a table updated at least weekly
as well as the methodology the Bureau uses to derive these rates.
(b) Escrow accounts--(1) Requirement to escrow for property taxes
and insurance. Except as provided in paragraph (b)(2) of this section, a
creditor may not extend a higher-priced mortgage loan secured by a first
lien on a consumer's principal dwelling unless an escrow account is
established before consummation for payment of property taxes and
premiums for mortgage-related insurance required by the creditor, such
as insurance against loss of or damage to property, or against liability
arising out of the ownership or use of the property, or insurance
protecting the creditor against the consumer's default or other credit
loss. For purposes of this paragraph (b), the term ``escrow account''
has the same meaning as under Regulation X (12 CFR 1024.17(b)), as
amended.
(2) Exemptions. Notwithstanding paragraph (b)(1) of this section:
(i) An escrow account need not be established for:
(A) A transaction secured by shares in a cooperative;
(B) A transaction to finance the initial construction of a dwelling;
(C) A temporary or ``bridge'' loan with a loan term of twelve months
or less, such as a loan to purchase a new dwelling where the consumer
plans to sell a current dwelling within twelve months; or
(D) A reverse mortgage transaction subject to Sec. 1026.33.
(ii) Insurance premiums described in paragraph (b)(1) of this
section need not be included in escrow accounts for loans secured by
dwellings in condominiums, planned unit developments, or other common
interest communities in which dwelling ownership requires participation
in a governing association, where the governing association has an
obligation to the dwelling owners to maintain a master policy insuring
all dwellings.
[[Page 95]]
(iii) Except as provided in paragraph (b)(2)(v) of this section, an
escrow account need not be established for a transaction if, at the time
of consummation:
(A) During the preceding calendar year, or, if the application for
the transaction was received before April 1 of the current calendar
year, during either of the two preceding calendar years, the creditor
extended a covered transaction, as defined by Sec. 1026.43(b)(1),
secured by a first lien on a property that is located in an area that is
either ``rural'' or ``underserved,'' as set forth in paragraph
(b)(2)(iv) of this section;
(B) During the preceding calendar year, or, if the application for
the transaction was received before April 1 of the current calendar
year, during either of the two preceding calendar years, the creditor
and its affiliates together extended no more than 2,000 covered
transactions, as defined by Sec. 1026.43(b)(1), secured by first liens,
that were sold, assigned, or otherwise transferred to another person, or
that were subject at the time of consummation to a commitment to be
acquired by another person;
(C) As of the preceding December 31st, or, if the application for
the transaction was received before April 1 of the current calendar
year, as of either of the two preceding December 31sts, the creditor and
its affiliates that regularly extended covered transactions, as defined
by Sec. 1026.43(b)(1), secured by first liens, together, had total
assets of less than $2,000,000,000; this asset threshold shall adjust
automatically each year, based on the year-to-year change in the average
of the Consumer Price Index for Urban Wage Earners and Clerical Workers,
not seasonally adjusted, for each 12-month period ending in November,
with rounding to the nearest million dollars (see comment 35(b)(2)(iii)-
1.iii for the applicable threshold); and
(D) Neither the creditor nor its affiliate maintains an escrow
account of the type described in paragraph (b)(1) of this section for
any extension of consumer credit secured by real property or a dwelling
that the creditor or its affiliate currently services, other than:
(1) Escrow accounts established for first-lien higher-priced
mortgage loans for which applications were received on or after April 1,
2010, and before May 1, 2016; or
(2) Escrow accounts established after consummation as an
accommodation to distressed consumers to assist such consumers in
avoiding default or foreclosure.
(iv) For purposes of paragraph (b)(2)(iii)(A) of this section:
(A) An area is ``rural'' during a calendar year if it is:
(1) A county that is neither in a metropolitan statistical area nor
in a micropolitan statistical area that is adjacent to a metropolitan
statistical area, as those terms are defined by the U.S. Office of
Management and Budget and as they are applied under currently applicable
Urban Influence Codes (UICs), established by the United States
Department of Agriculture's Economic Research Service (USDA-ERS);
(2) A census block that is not in an urban area, as defined by the
U.S. Census Bureau using the latest decennial census of the United
States; or
(3) A county or a census block that has been designated as rural by
the Bureau pursuant to the application process established under section
89002 of the Helping Expand Lending Practices in Rural Communities Act,
Public Law 114-94, title LXXXIX (2015). The provisions of this paragraph
(b)(2)(iv)(A)(3) shall cease to have any force or effect on December 4,
2017.
(B) An area is ``underserved'' during a calendar year if, according
to Home Mortgage Disclosure Act (HMDA) data for the preceding calendar
year, it is a county in which no more than two creditors extended
covered transactions, as defined in Sec. 1026.43(b)(1), secured by
first liens on properties in the county five or more times.
(C) A property shall be deemed to be in an area that is rural or
underserved in a particular calendar year if the property is:
(1) Located in a county that appears on the lists published by the
Bureau of counties that are rural or underserved, as defined by Sec.
1026.35(b)(2)(iv)(A)(1) or Sec. 1026.35(b)(2)(iv)(B), for that calendar
year,
(2) Designated as rural or underserved for that calendar year by any
[[Page 96]]
automated tool that the Bureau provides on its public Web site, or
(3) Not designated as located in an urban area, as defined by the
most recent delineation of urban areas announced by the Census Bureau,
by any automated address search tool that the U.S. Census Bureau
provides on its public Web site for that purpose and that specifically
indicates the urban or rural designations of properties.
(v) Notwithstanding paragraph (b)(2)(iii) of this section, an escrow
account must be established pursuant to paragraph (b)(1) of this section
for any first-lien higher-priced mortgage loan that, at consummation, is
subject to a commitment to be acquired by a person that does not satisfy
the conditions in paragraph (b)(2)(iii) of this section, unless
otherwise exempted by this paragraph (b)(2).
(3) Cancellation--(i) General. Except as provided in paragraph
(b)(3)(ii) of this section, a creditor or servicer may cancel an escrow
account required in paragraph (b)(1) of this section only upon the
earlier of:
(A) Termination of the underlying debt obligation; or
(B) Receipt no earlier than five years after consummation of a
consumer's request to cancel the escrow account.
(ii) Delayed cancellation. Notwithstanding paragraph (b)(3)(i) of
this section, a creditor or servicer shall not cancel an escrow account
pursuant to a consumer's request described in paragraph (b)(3)(i)(B) of
this section unless the following conditions are satisfied:
(A) The unpaid principal balance is less than 80 percent of the
original value of the property securing the underlying debt obligation;
and
(B) The consumer currently is not delinquent or in default on the
underlying debt obligation.
(c) Appraisals--(1) Definitions. For purposes of this section:
(i) Certified or licensed appraiser means a person who is certified
or licensed by the State agency in the State in which the property that
secures the transaction is located, and who performs the appraisal in
conformity with the Uniform Standards of Professional Appraisal Practice
and the requirements applicable to appraisers in title XI of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as
amended (12 U.S.C. 3331 et seq.), and any implementing regulations in
effect at the time the appraiser signs the appraiser's certification.
(ii) Credit risk means the financial risk that a consumer will
default on a loan.
(iii) Manufactured home has the same meaning as in 24 CFR 3280.2.
(iv) Manufacturer's invoice means a document issued by a
manufacturer and provided with a manufactured home to a retail dealer
that separately details the wholesale (base) prices at the factory for
specific models or series of manufactured homes and itemized options
(large appliances, built-in items and equipment), plus actual itemized
charges for freight from the factory to the dealer's lot or the homesite
(including any rental of wheels and axles) and for any sales taxes to be
paid by the dealer. The invoice may recite such prices and charges on an
itemized basis or by stating an aggregate price or charge, as
appropriate, for each category.
(v) National Registry means the database of information about State
certified and licensed appraisers maintained by the Appraisal
Subcommittee of the Federal Financial Institutions Examination Council.
(vi) New manufactured home means a manufactured home that has not
been previously occupied.
(vii) State agency means a ``State appraiser certifying and
licensing agency'' recognized in accordance with section 1118(b) of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12
U.S.C. 3347(b)) and any implementing regulations.
(2) Exemptions. Unless otherwise specified, the requirements in
paragraph (c)(3) through (6) of this section do not apply to the
following types of transactions:
(i) A loan that satisfies the criteria of a qualified mortgage as
defined pursuant to 15 U.S.C. 1639c;
(ii) An extension of credit for which the amount of credit extended
is equal to or less than the applicable threshold amount, which is
adjusted every year to reflect increases in the Consumer Price Index for
Urban Wage Earners and Clerical Workers, as applicable,
[[Page 97]]
and published in the official staff commentary to this paragraph
(c)(2)(ii);
(iii) A transaction secured by a mobile home, boat, or trailer.
(iv) A transaction to finance the initial construction of a
dwelling.
(v) A loan with a maturity of 12 months or less, if the purpose of
the loan is a ``bridge'' loan connected with the acquisition of a
dwelling intended to become the consumer's principal dwelling.
(vi) A reverse-mortgage transaction subject to 12 CFR 1026.33(a).
(vii) An extension of credit that is a refinancing secured by a
first lien, with refinancing defined as in Sec. 1026.20(a) (except that
the creditor need not be the original creditor or a holder or servicer
of the original obligation), provided that the refinancing meets the
following criteria:
(A) Either--
(1) The credit risk of the refinancing is retained by the person
that held the credit risk of the existing obligation and there is no
commitment, at consummation, to transfer the credit risk to another
person; or
(2) The refinancing is insured or guaranteed by the same Federal
government agency that insured or guaranteed the existing obligation;
(B) The regular periodic payments under the refinance loan do not--
(1) Cause the principal balance to increase;
(2) Allow the consumer to defer repayment of principal; or
(3) Result in a balloon payment, as defined in Sec.
1026.18(s)(5)(i); and
(C) The proceeds from the refinancing are used solely to satisfy the
existing obligation and amounts attributed solely to the costs of the
refinancing; and
(viii) A transaction secured by:
(A) A new manufactured home and land, but the exemption shall only
apply to the requirement in paragraph (c)(3)(i) of this section that the
appraiser conduct a physical visit of the interior of the new
manufactured home; or
(B) A manufactured home and not land, for which the creditor obtains
one of the following and provides a copy to the consumer no later than
three business days prior to consummation of the transaction--
(1) For a new manufactured home, the manufacturer's invoice for the
manufactured home securing the transaction, provided that the date of
manufacture is no earlier than 18 months prior to the creditor's receipt
of the consumer's application for credit;
(2) A cost estimate of the value of the manufactured home securing
the transaction obtained from an independent cost service provider; or
(3) A valuation, as defined in Sec. 1026.42(b)(3), of the
manufactured home performed by a person who has no direct or indirect
interest, financial or otherwise, in the property or transaction for
which the valuation is performed and has training in valuing
manufactured homes.
(3) Appraisals required--(i) In general. Except as provided in
paragraph (c)(2) of this section, a creditor shall not extend a higher-
priced mortgage loan to a consumer without obtaining, prior to
consummation, a written appraisal of the property to be mortgaged. The
appraisal must be performed by a certified or licensed appraiser who
conducts a physical visit of the interior of the property that will
secure the transaction.
(ii) Safe harbor. A creditor obtains a written appraisal that meets
the requirements for an appraisal required under paragraph (c)(3)(i) of
this section if the creditor:
(A) Orders that the appraiser perform the appraisal in conformity
with the Uniform Standards of Professional Appraisal Practice and title
XI of the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing
regulations in effect at the time the appraiser signs the appraiser's
certification;
(B) Verifies through the National Registry that the appraiser who
signed the appraiser's certification was a certified or licensed
appraiser in the State in which the appraised property is located as of
the date the appraiser signed the appraiser's certification;
(C) Confirms that the elements set forth in appendix N to this part
are addressed in the written appraisal; and
[[Page 98]]
(D) Has no actual knowledge contrary to the facts or certifications
contained in the written appraisal.
(4) Additional appraisal for certain higher-priced mortgage loans--
(i) In general. Except as provided in paragraphs (c)(2) and (c)(4)(vii)
of this section, a creditor shall not extend a higher-priced mortgage
loan to a consumer to finance the acquisition of the consumer's
principal dwelling without obtaining, prior to consummation, two written
appraisals, if:
(A) The seller acquired the property 90 or fewer days prior to the
date of the consumer's agreement to acquire the property and the price
in the consumer's agreement to acquire the property exceeds the seller's
acquisition price by more than 10 percent; or
(B) The seller acquired the property 91 to 180 days prior to the
date of the consumer's agreement to acquire the property and the price
in the consumer's agreement to acquire the property exceeds the seller's
acquisition price by more than 20 percent.
(ii) Different certified or licensed appraisers. The two appraisals
required under paragraph (c)(4)(i) of this section may not be performed
by the same certified or licensed appraiser.
(iii) Relationship to general appraisal requirements. If two
appraisals must be obtained under paragraph (c)(4)(i) of this section,
each appraisal shall meet the requirements of paragraph (c)(3)(i) of
this section.
(iv) Required analysis in the additional appraisal. One of the two
required appraisals must include an analysis of:
(A) The difference between the price at which the seller acquired
the property and the price that the consumer is obligated to pay to
acquire the property, as specified in the consumer's agreement to
acquire the property from the seller;
(B) Changes in market conditions between the date the seller
acquired the property and the date of the consumer's agreement to
acquire the property; and
(C) Any improvements made to the property between the date the
seller acquired the property and the date of the consumer's agreement to
acquire the property.
(v) No charge for the additional appraisal. If the creditor must
obtain two appraisals under paragraph (c)(4)(i) of this section, the
creditor may charge the consumer for only one of the appraisals.
(vi) Creditor's determination of prior sale date and price--(A)
Reasonable diligence. A creditor must obtain two written appraisals
under paragraph (c)(4)(i) of this section unless the creditor can
demonstrate by exercising reasonable diligence that the requirement to
obtain two appraisals does not apply. A creditor acts with reasonable
diligence if the creditor bases its determination on information
contained in written source documents, such as the documents listed in
appendix O to this part.
(B) Inability to determine prior sale date or price--modified
requirements for additional appraisal. If, after exercising reasonable
diligence, a creditor cannot determine whether the conditions in
paragraphs (c)(4)(i)(A) and (c)(4)(i)(B) are present and therefore must
obtain two written appraisals in accordance with paragraphs (c)(4)(i)
through (v) of this section, one of the two appraisals shall include an
analysis of the factors in paragraph (c)(4)(iv) of this section only to
the extent that the information necessary for the appraiser to perform
the analysis can be determined.
(vii) Exemptions from the additional appraisal requirement. The
additional appraisal required under paragraph (c)(4)(i) of this section
shall not apply to extensions of credit that finance a consumer's
acquisition of property:
(A) From a local, State or Federal government agency;
(B) From a person who acquired title to the property through
foreclosure, deed-in-lieu of foreclosure, or other similar judicial or
non-judicial procedure as a result of the person's exercise of rights as
the holder of a defaulted mortgage loan;
(C) From a non-profit entity as part of a local, State, or Federal
government program under which the non-profit entity is permitted to
acquire title to single-family properties for resale from a seller who
acquired title to the property through the process of foreclosure, deed-
in-lieu of foreclosure, or other similar judicial or non-judicial
procedure;
[[Page 99]]
(D) From a person who acquired title to the property by inheritance
or pursuant to a court order of dissolution of marriage, civil union, or
domestic partnership, or of partition of joint or marital assets to
which the seller was a party;
(E) From an employer or relocation agency in connection with the
relocation of an employee;
(F) From a servicemember, as defined in 50 U.S.C. App. 511(1), who
received a deployment or permanent change of station order after the
servicemember purchased the property;
(G) Located in an area designated by the President as a federal
disaster area, if and for as long as the Federal financial institutions
regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the
requirements in title XI of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et seq.), and
any implementing regulations in that area; or
(H) Located in a rural county, as defined in 12 CFR
1026.35(b)(2)(iv)(A).
(5) Required disclosure--(i) In general. Except as provided in
paragraph (c)(2) of this section, a creditor shall disclose the
following statement, in writing, to a consumer who applies for a higher-
priced mortgage loan: ``We may order an appraisal to determine the
property's value and charge you for this appraisal. We will give you a
copy of any appraisal, even if your loan does not close. You can pay for
an additional appraisal for your own use at your own cost.'' Compliance
with the disclosure requirement in Regulation B, 12 CFR 1002.14(a)(2),
satisfies the requirements of this paragraph.
(ii) Timing of disclosure. The disclosure required by paragraph
(c)(5)(i) of this section shall be delivered or placed in the mail no
later than the third business day after the creditor receives the
consumer's application for a higher-priced mortgage loan subject to
paragraph (c) of this section. In the case of a loan that is not a
higher-priced mortgage loan subject to paragraph (c) of this section at
the time of application, but becomes a higher-priced mortgage loan
subject to paragraph (c) of this section after application, the
disclosure shall be delivered or placed in the mail not later than the
third business day after the creditor determines that the loan is a
higher-priced mortgage loan subject to paragraph (c) of this section.
(6) Copy of appraisals--(i) In general. Except as provided in
paragraph (c)(2) of this section, a creditor shall provide to the
consumer a copy of any written appraisal performed in connection with a
higher-priced mortgage loan pursuant to paragraphs (c)(3) and (c)(4) of
this section.
(ii) Timing. A creditor shall provide to the consumer a copy of each
written appraisal pursuant to paragraph (c)(6)(i) of this section:
(A) No later than three business days prior to consummation of the
loan; or
(B) In the case of a loan that is not consummated, no later than 30
days after the creditor determines that the loan will not be
consummated.
(iii) Form of copy. Any copy of a written appraisal required by
paragraph (c)(6)(i) of this section may be provided to the applicant in
electronic form, subject to compliance with the consumer consent and
other applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
(iv) No charge for copy of appraisal. A creditor shall not charge
the consumer for a copy of a written appraisal required to be provided
to the consumer pursuant to paragraph (c)(6)(i) of this section.
(7) Relation to other rules. The rules in this paragraph (c) were
adopted jointly by the Federal Reserve Board (Board), the Office of the
Comptroller of the Currency (OCC), the Federal Deposit Insurance
Corporation, the National Credit Union Administration, the Federal
Housing Finance Agency, and the Bureau. These rules are substantively
identical to the Board's and the OCC's higher-priced mortgage loan
appraisal rules published separately in 12 CFR 226.43 (for the Board)
and in 12 CFR part 34, subpart G and 12 CFR part 164, subpart B (for the
OCC).
(d) Evasion; open-end credit. In connection with credit secured by a
consumer's principal dwelling that does not meet the definition of open-
end credit in Sec. 1026.2(a)(20), a creditor shall not structure a
home-secured loan as
[[Page 100]]
an open-end plan to evade the requirements of this section.
[78 FR 4753, Jan. 22, 2013, as amended at 78 FR 10442, Feb. 13, 2013; 78
FR 30745, May 23, 2013; 78 FR 44718, July 24, 2013; 78 FR 60441, Oct. 1,
2013; 78 FR 78585, 78586, Dec. 26, 2013; 80 FR 59967, Oct. 2, 2015; 81
FR 16082, Mar. 25, 2016]
Sec. 1026.36 Prohibited acts or practices and certain requirements
for credit secured by a dwelling.
(a) Definitions--(1) Loan originator. (i) For purposes of this
section, the term ``loan originator'' means a person who, in expectation
of direct or indirect compensation or other monetary gain or for direct
or indirect compensation or other monetary gain, performs any of the
following activities: takes an application, offers, arranges, assists a
consumer in obtaining or applying to obtain, negotiates, or otherwise
obtains or makes an extension of consumer credit for another person; or
through advertising or other means of communication represents to the
public that such person can or will perform any of these activities. The
term ``loan originator'' includes an employee, agent, or contractor of
the creditor or loan originator organization if the employee, agent, or
contractor meets this definition. The term ``loan originator'' includes
a creditor that engages in loan origination activities if the creditor
does not finance the transaction at consummation out of the creditor's
own resources, including by drawing on a bona fide warehouse line of
credit or out of deposits held by the creditor. All creditors that
engage in any of the foregoing loan origination activities are loan
originators for purposes of paragraphs (f) and (g) of this section. The
term does not include:
(A) A person who does not take a consumer credit application or
offer or negotiate credit terms available from a creditor, but who
performs purely administrative or clerical tasks on behalf of a person
who does engage in such activities.
(B) An employee of a manufactured home retailer who does not take a
consumer credit application, offer or negotiate credit terms available
from a creditor, or advise a consumer on credit terms (including rates,
fees, and other costs) available from a creditor.
(C) A person that performs only real estate brokerage activities and
is licensed or registered in accordance with applicable State law,
unless such person is compensated by a creditor or loan originator or by
any agent of such creditor or loan originator for a particular consumer
credit transaction subject to this section.
(D) A seller financer that meets the criteria in paragraph (a)(4) or
(a)(5) of this section, as applicable.
(E) A servicer or servicer's employees, agents, and contractors who
offer or negotiate terms for purposes of renegotiating, modifying,
replacing, or subordinating principal of existing mortgages where
consumers are behind in their payments, in default, or have a reasonable
likelihood of defaulting or falling behind. This exception does not
apply, however, to a servicer or servicer's employees, agents, and
contractors who offer or negotiate a transaction that constitutes a
refinancing under Sec. 1026.20(a) or obligates a different consumer on
the existing debt.
(ii) An ``individual loan originator'' is a natural person who meets
the definition of ``loan originator'' in paragraph (a)(1)(i) of this
section.
(iii) A ``loan originator organization'' is any loan originator, as
defined in paragraph (a)(1)(i) of this section, that is not an
individual loan originator.
(2) Mortgage broker. For purposes of this section, a mortgage broker
with respect to a particular transaction is any loan originator that is
not an employee of the creditor.
(3) Compensation. The term ``compensation'' includes salaries,
commissions, and any financial or similar incentive.
(4) Seller financers; three properties. A person (as defined in
Sec. 1026.2(a)(22)) that meets all of the following criteria is not a
loan originator under paragraph (a)(1) of this section:
(i) The person provides seller financing for the sale of three or
fewer properties in any 12-month period to purchasers of such
properties, each of which is owned by the person and serves as security
for the financing.
[[Page 101]]
(ii) The person has not constructed, or acted as a contractor for
the construction of, a residence on the property in the ordinary course
of business of the person.
(iii) The person provides seller financing that meets the following
requirements:
(A) The financing is fully amortizing.
(B) The financing is one that the person determines in good faith
the consumer has a reasonable ability to repay.
(C) The financing has a fixed rate or an adjustable rate that is
adjustable after five or more years, subject to reasonable annual and
lifetime limitations on interest rate increases. If the financing
agreement has an adjustable rate, the rate is determined by the addition
of a margin to an index rate and is subject to reasonable rate
adjustment limitations. The index the adjustable rate is based on is a
widely available index such as indices for U.S. Treasury securities or
LIBOR.
(5) Seller financers; one property. A natural person, estate, or
trust that meets all of the following criteria is not a loan originator
under paragraph (a)(1) of this section:
(i) The natural person, estate, or trust provides seller financing
for the sale of only one property in any 12-month period to purchasers
of such property, which is owned by the natural person, estate, or trust
and serves as security for the financing.
(ii) The natural person, estate, or trust has not constructed, or
acted as a contractor for the construction of, a residence on the
property in the ordinary course of business of the person.
(iii) The natural person, estate, or trust provides seller financing
that meets the following requirements:
(A) The financing has a repayment schedule that does not result in
negative amortization.
(B) The financing has a fixed rate or an adjustable rate that is
adjustable after five or more years, subject to reasonable annual and
lifetime limitations on interest rate increases. If the financing
agreement has an adjustable rate, the rate is determined by the addition
of a margin to an index rate and is subject to reasonable rate
adjustment limitations. The index the adjustable rate is based on is a
widely available index such as indices for U.S. Treasury securities or
LIBOR.
(6) Credit terms. For purposes of this section, the term ``credit
terms'' includes rates, fees, and other costs. Credit terms are selected
based on the consumer's financial characteristics when those terms are
selected based on any factors that may influence a credit decision, such
as debts, income, assets, or credit history.
(b) Scope. Paragraphs (c)(1) and (2) of this section apply to
closed-end consumer credit transactions secured by a consumer's
principal dwelling. Paragraph (c)(3) of this section applies to a
consumer credit transaction secured by a dwelling. Paragraphs (d)
through (i) of this section apply to closed-end consumer credit
transactions secured by a dwelling. This section does not apply to a
home equity line of credit subject to Sec. 1026.40, except that
paragraphs (h) and (i) of this section apply to such credit when secured
by the consumer's principal dwelling and paragraph (c)(3) applies to
such credit when secured by a dwelling. Paragraphs (d) through (i) of
this section do not apply to a loan that is secured by a consumer's
interest in a timeshare plan described in 11 U.S.C. 101(53D).
(c) Servicing practices. For purposes of this paragraph (c), the
terms ``servicer'' and ``servicing'' have the same meanings as provided
in 12 CFR 1024.2(b).
(1) Payment processing. In connection with a closed-end consumer
credit transaction secured by a consumer's principal dwelling:
(i) Periodic payments. No servicer shall fail to credit a periodic
payment to the consumer's loan account as of the date of receipt, except
when a delay in crediting does not result in any charge to the consumer
or in the reporting of negative information to a consumer reporting
agency, or except as provided in paragraph (c)(1)(iii) of this section.
A periodic payment, as used in this paragraph (c), is an amount
sufficient to cover principal, interest, and escrow (if applicable) for
a given billing cycle. A payment qualifies as a periodic payment even if
it does not include amounts required to
[[Page 102]]
cover late fees, other fees, or non-escrow payments a servicer has
advanced on a consumer's behalf.
(ii) Partial payments. Any servicer that retains a partial payment,
meaning any payment less than a periodic payment, in a suspense or
unapplied funds account shall:
(A) Disclose to the consumer the total amount of funds held in such
suspense or unapplied funds account on the periodic statement as
required by Sec. 1026.41(d)(3), if a periodic statement is required;
and
(B) On accumulation of sufficient funds to cover a periodic payment
in any suspense or unapplied funds account, treat such funds as a
periodic payment received in accordance with paragraph (c)(1)(i) of this
section.
(iii) Non-conforming payments. If a servicer specifies in writing
requirements for the consumer to follow in making payments, but accepts
a payment that does not conform to the requirements, the servicer shall
credit the payment as of five days after receipt.
(2) No pyramiding of late fees. In connection with a closed-end
consumer credit transaction secured by a consumer's principal dwelling,
a servicer shall not impose any late fee or delinquency charge for a
payment if:
(i) Such a fee or charge is attributable solely to failure of the
consumer to pay a late fee or delinquency charge on an earlier payment;
and
(ii) The payment is otherwise a periodic payment received on the due
date, or within any applicable courtesy period.
(3) Payoff statements. In connection with a consumer credit
transaction secured by a consumer's dwelling, a creditor, assignee or
servicer, as applicable, must provide an accurate statement of the total
outstanding balance that would be required to pay the consumer's
obligation in full as of a specified date. The statement shall be sent
within a reasonable time, but in no case more than seven business days,
after receiving a written request from the consumer or any person acting
on behalf of the consumer. When a creditor, assignee, or servicer, as
applicable, is not able to provide the statement within seven business
days of such a request because a loan is in bankruptcy or foreclosure,
because the loan is a reverse mortgage or shared appreciation mortgage,
or because of natural disasters or other similar circumstances, the
payoff statement must be provided within a reasonable time. A creditor
or assignee that does not currently own the mortgage loan or the
mortgage servicing rights is not subject to the requirement in this
paragraph (c)(3) to provide a payoff statement.
(d) Prohibited payments to loan originators--(1) Payments based on a
term of a transaction. (i) Except as provided in paragraph (d)(1)(iii)
or (iv) of this section, in connection with a consumer credit
transaction secured by a dwelling, no loan originator shall receive and
no person shall pay to a loan originator, directly or indirectly,
compensation in an amount that is based on a term of a transaction, the
terms of multiple transactions by an individual loan originator, or the
terms of multiple transactions by multiple individual loan originators.
If a loan originator's compensation is based in whole or in part on a
factor that is a proxy for a term of a transaction, the loan
originator's compensation is based on a term of a transaction. A factor
that is not itself a term of a transaction is a proxy for a term of the
transaction if the factor consistently varies with that term over a
significant number of transactions, and the loan originator has the
ability, directly or indirectly, to add, drop, or change the factor in
originating the transaction.
(ii) For purposes of this paragraph (d)(1) only, a ``term of a
transaction'' is any right or obligation of the parties to a credit
transaction. The amount of credit extended is not a term of a
transaction or a proxy for a term of a transaction, provided that
compensation received by or paid to a loan originator, directly or
indirectly, is based on a fixed percentage of the amount of credit
extended; however, such compensation may be subject to a minimum or
maximum dollar amount.
(iii) An individual loan originator may receive, and a person may
pay to an individual loan originator, compensation in the form of a
contribution to a defined contribution plan that is a
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designated tax-advantaged plan or a benefit under a defined benefit plan
that is a designated tax-advantaged plan. In the case of a contribution
to a defined contribution plan, the contribution shall not be directly
or indirectly based on the terms of that individual loan originator's
transactions. As used in this paragraph (d)(1)(iii), ``designated tax-
advantaged plan'' means any plan that meets the requirements of Internal
Revenue Code section 401(a), 26 U.S.C. 401(a); employee annuity plan
described in Internal Revenue Code section 403(a), 26 U.S.C. 403(a);
simple retirement account, as defined in Internal Revenue Code section
408(p), 26 U.S.C. 408(p); simplified employee pension described in
Internal Revenue Code section 408(k), 26 U.S.C. 408(k); annuity contract
described in Internal Revenue Code section 403(b), 26 U.S.C. 403(b); or
eligible deferred compensation plan, as defined in Internal Revenue Code
section 457(b), 26 U.S.C. 457(b).
(iv) An individual loan originator may receive, and a person may pay
to an individual loan originator, compensation under a non-deferred
profits-based compensation plan (i.e., any arrangement for the payment
of non-deferred compensation that is determined with reference to the
profits of the person from mortgage-related business), provided that:
(A) The compensation paid to an individual loan originator pursuant
to this paragraph (d)(1)(iv) is not directly or indirectly based on the
terms of that individual loan originator's transactions that are subject
to this paragraph (d); and
(B) At least one of the following conditions is satisfied:
(1) The compensation paid to an individual loan originator pursuant
to this paragraph (d)(1)(iv) does not, in the aggregate, exceed 10
percent of the individual loan originator's total compensation
corresponding to the time period for which the compensation under the
non-deferred profits-based compensation plan is paid; or
(2) The individual loan originator was a loan originator for ten or
fewer transactions subject to this paragraph (d) consummated during the
12-month period preceding the date of the compensation determination.
(2) Payments by persons other than consumer--(i) Dual compensation.
(A) Except as provided in paragraph (d)(2)(i)(C) of this section, if any
loan originator receives compensation directly from a consumer in a
consumer credit transaction secured by a dwelling:
(1) No loan originator shall receive compensation, directly or
indirectly, from any person other than the consumer in connection with
the transaction; and
(2) No person who knows or has reason to know of the consumer-paid
compensation to the loan originator (other than the consumer) shall pay
any compensation to a loan originator, directly or indirectly, in
connection with the transaction.
(B) Compensation received directly from a consumer includes payments
to a loan originator made pursuant to an agreement between the consumer
and a person other than the creditor or its affiliates, under which such
other person agrees to provide funds toward the consumer's costs of the
transaction (including loan originator compensation).
(C) If a loan originator organization receives compensation directly
from a consumer in connection with a transaction, the loan originator
organization may pay compensation to an individual loan originator, and
the individual loan originator may receive compensation from the loan
originator organization, subject to paragraph (d)(1) of this section.
(ii) Exemption. A payment to a loan originator that is otherwise
prohibited by section 129B(c)(2)(A) of the Truth in Lending Act is
nevertheless permitted pursuant to section 129B(c)(2)(B) of the Act,
regardless of whether the consumer makes any upfront payment of discount
points, origination points, or fees, as described in section
129B(c)(2)(B)(ii) of the Act, as long as the loan originator does not
receive any compensation directly from the consumer as described in
section 129B(c)(2)(B)(i) of the Act.
(3) Affiliates. For purposes of this paragraph (d), affiliates shall
be treated as a single ``person.''
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(e) Prohibition on steering--(1) General. In connection with a
consumer credit transaction secured by a dwelling, a loan originator
shall not direct or ``steer'' a consumer to consummate a transaction
based on the fact that the originator will receive greater compensation
from the creditor in that transaction than in other transactions the
originator offered or could have offered to the consumer, unless the
consummated transaction is in the consumer's interest.
(2) Permissible transactions. A transaction does not violate
paragraph (e)(1) of this section if the consumer is presented with loan
options that meet the conditions in paragraph (e)(3) of this section for
each type of transaction in which the consumer expressed an interest.
For purposes of paragraph (e) of this section, the term ``type of
transaction'' refers to whether:
(i) A loan has an annual percentage rate that cannot increase after
consummation;
(ii) A loan has an annual percentage rate that may increase after
consummation; or
(iii) A loan is a reverse mortgage.
(3) Loan options presented. A transaction satisfies paragraph (e)(2)
of this section only if the loan originator presents the loan options
required by that paragraph and all of the following conditions are met:
(i) The loan originator must obtain loan options from a significant
number of the creditors with which the originator regularly does
business and, for each type of transaction in which the consumer
expressed an interest, must present the consumer with loan options that
include:
(A) The loan with the lowest interest rate;
(B) The loan with the lowest interest rate without negative
amortization, a prepayment penalty, interest-only payments, a balloon
payment in the first 7 years of the life of the loan, a demand feature,
shared equity, or shared appreciation; or, in the case of a reverse
mortgage, a loan without a prepayment penalty, or shared equity or
shared appreciation; and
(C) The loan with the lowest total dollar amount of discount points,
origination points or origination fees (or, if two or more loans have
the same total dollar amount of discount points, origination points or
origination fees, the loan with the lowest interest rate that has the
lowest total dollar amount of discount points, origination points or
origination fees).
(ii) The loan originator must have a good faith belief that the
options presented to the consumer pursuant to paragraph (e)(3)(i) of
this section are loans for which the consumer likely qualifies.
(iii) For each type of transaction, if the originator presents to
the consumer more than three loans, the originator must highlight the
loans that satisfy the criteria specified in paragraph (e)(3)(i) of this
section.
(4) Number of loan options presented. The loan originator can
present fewer than three loans and satisfy paragraphs (e)(2) and
(e)(3)(i) of this section if the loan(s) presented to the consumer
satisfy the criteria of the options in paragraph (e)(3)(i) of this
section and the provisions of paragraph (e)(3) of this section are
otherwise met.
(f) Loan originator qualification requirements. A loan originator
for a consumer credit transaction secured by a dwelling must, when
required by applicable State or Federal law, be registered and licensed
in accordance with those laws, including the Secure and Fair Enforcement
for Mortgage Licensing Act of 2008 (SAFE Act, 12 U.S.C. 5102 et seq.),
its implementing regulations (12 CFR part 1007 or part 1008), and State
SAFE Act implementing law. To comply with this paragraph (f), a loan
originator organization that is not a government agency or State housing
finance agency must:
(1) Comply with all applicable State law requirements for legal
existence and foreign qualification;
(2) Ensure that each individual loan originator who works for the
loan originator organization is licensed or registered to the extent the
individual is required to be licensed or registered under the SAFE Act,
its implementing regulations, and State SAFE Act implementing law before
the individual acts as a loan originator in a consumer credit
transaction secured by a dwelling; and
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(3) For each of its individual loan originator employees who is not
required to be licensed and is not licensed as a loan originator
pursuant to Sec. 1008.103 of this chapter or State SAFE Act
implementing law:
(i) Obtain for any individual whom the loan originator organization
hired on or after January 1, 2014 (or whom the loan originator
organization hired before this date but for whom there were no
applicable statutory or regulatory background standards in effect at the
time of hire or before January 1, 2014, used to screen the individual)
and for any individual regardless of when hired who, based on reliable
information known to the loan originator organization, likely does not
meet the standards under Sec. 1026.36(f)(3)(ii), before the individual
acts as a loan originator in a consumer credit transaction secured by a
dwelling:
(A) A criminal background check through the Nationwide Mortgage
Licensing System and Registry (NMLSR) or, in the case of an individual
loan originator who is not a registered loan originator under the NMLSR,
a criminal background check from a law enforcement agency or commercial
service;
(B) A credit report from a consumer reporting agency described in
section 603(p) of the Fair Credit Reporting Act (15 U.S.C. 1681a(p))
secured, where applicable, in compliance with the requirements of
section 604(b) of the Fair Credit Reporting Act, 15 U.S.C. 1681b(b); and
(C) Information from the NMLSR about any administrative, civil, or
criminal findings by any government jurisdiction or, in the case of an
individual loan originator who is not a registered loan originator under
the NMLSR, such information from the individual loan originator;
(ii) Determine on the basis of the information obtained pursuant to
paragraph (f)(3)(i) of this section and any other information reasonably
available to the loan originator organization, for any individual whom
the loan originator organization hired on or after January 1, 2014 (or
whom the loan originator organization hired before this date but for
whom there were no applicable statutory or regulatory background
standards in effect at the time of hire or before January 1, 2014, used
to screen the individual) and for any individual regardless of when
hired who, based on reliable information known to the loan originator
organization, likely does not meet the standards under this paragraph
(f)(3)(ii), before the individual acts as a loan originator in a
consumer credit transaction secured by a dwelling, that the individual
loan originator:
(A)(1) Has not been convicted of, or pleaded guilty or nolo
contendere to, a felony in a domestic or military court during the
preceding seven-year period or, in the case of a felony involving an act
of fraud, dishonesty, a breach of trust, or money laundering, at any
time;
(2) For purposes of this paragraph (f)(3)(ii)(A):
(i) A crime is a felony only if at the time of conviction it was
classified as a felony under the law of the jurisdiction under which the
individual was convicted;
(ii) Expunged convictions and pardoned convictions do not render an
individual unqualified; and
(iii) A conviction or plea of guilty or nolo contendere does not
render an individual unqualified under this Sec. 1026.36(f) if the loan
originator organization has obtained consent to employ the individual
from the Federal Deposit Insurance Corporation (or the Board of
Governors of the Federal Reserve System, as applicable) pursuant to
section 19 of the Federal Deposit Insurance Act (FDIA), 12 U.S.C. 1829,
the National Credit Union Administration pursuant to section 205 of the
Federal Credit Union Act (FCUA), 12 U.S.C. 1785(d), or the Farm Credit
Administration pursuant to section 5.65(d) of the Farm Credit Act of
1971 (FCA), 12 U.S.C. 227a-14(d), notwithstanding the bars posed with
respect to that conviction or plea by the FDIA, FCUA, and FCA, as
applicable; and
(B) Has demonstrated financial responsibility, character, and
general fitness such as to warrant a determination that the individual
loan originator will operate honestly, fairly, and efficiently; and
[[Page 106]]
(iii) Provide periodic training covering Federal and State law
requirements that apply to the individual loan originator's loan
origination activities.
(g) Name and NMLSR ID on loan documents. (1) For a consumer credit
transaction secured by a dwelling, a loan originator organization must
include on the loan documents described in paragraph (g)(2) of this
section, whenever each such loan document is provided to a consumer or
presented to a consumer for signature, as applicable:
(i) Its name and NMLSR ID, if the NMLSR has provided it an NMLSR ID;
and
(ii) The name of the individual loan originator (as the name appears
in the NMLSR) with primary responsibility for the origination and, if
the NMLSR has provided such person an NMLSR ID, that NMLSR ID.
(2) The loan documents that must include the names and NMLSR IDs
pursuant to paragraph (g)(1) of this section are:
(i) The credit application;
(ii) The disclosures required by Sec. 1026.19 (e) and (f);
(iii) The note or loan contract; and
(iv) The security instrument.
(3) For purposes of this section, NMLSR ID means a number assigned
by the Nationwide Mortgage Licensing System and Registry to facilitate
electronic tracking and uniform identification of loan originators and
public access to the employment history of, and the publicly adjudicated
disciplinary and enforcement actions against, loan originators.
(h) Prohibition on mandatory arbitration clauses and waivers of
certain consumer rights--(1) Arbitration. A contract or other agreement
for a consumer credit transaction secured by a dwelling (including a
home equity line of credit secured by the consumer's principal dwelling)
may not include terms that require arbitration or any other non-judicial
procedure to resolve any controversy or settle any claims arising out of
the transaction. This prohibition does not limit a consumer and creditor
or any assignee from agreeing, after a dispute or claim under the
transaction arises, to settle or use arbitration or other non-judicial
procedure to resolve that dispute or claim.
(2) No waivers of Federal statutory causes of action. A contract or
other agreement relating to a consumer credit transaction secured by a
dwelling (including a home equity line of credit secured by the
consumer's principal dwelling) may not be applied or interpreted to bar
a consumer from bringing a claim in court pursuant to any provision of
law for damages or other relief in connection with any alleged violation
of any Federal law. This prohibition does not limit a consumer and
creditor or any assignee from agreeing, after a dispute or claim under
the transaction arises, to settle or use arbitration or other non-
judicial procedure to resolve that dispute or claim.
(i) Prohibition on financing credit insurance. (1) A creditor may
not finance, directly or indirectly, any premiums or fees for credit
insurance in connection with a consumer credit transaction secured by a
dwelling (including a home equity line of credit secured by the
consumer's principal dwelling). This prohibition does not apply to
credit insurance for which premiums or fees are calculated and paid in
full on a monthly basis.
(2) For purposes of this paragraph (i):
(i) ``Credit insurance'':
(A) Means credit life, credit disability, credit unemployment, or
credit property insurance, or any other accident, loss-of-income, life,
or health insurance, or any payments directly or indirectly for any debt
cancellation or suspension agreement or contract, but
(B) Excludes credit unemployment insurance for which the
unemployment insurance premiums are reasonable, the creditor receives no
direct or indirect compensation in connection with the unemployment
insurance premiums, and the unemployment insurance premiums are paid
pursuant to a separate insurance contract and are not paid to an
affiliate of the creditor;
(ii) A creditor finances premiums or fees for credit insurance if it
provides a consumer the right to defer payment of a credit insurance
premium or fee owed by the consumer beyond the monthly period in which
the premium or fee is due; and
(iii) Credit insurance premiums or fees are calculated on a monthly
basis if they are determined mathematically
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by multiplying a rate by the actual monthly outstanding balance.
(j) Policies and procedures to ensure and monitor compliance. (1) A
depository institution must establish and maintain written policies and
procedures reasonably designed to ensure and monitor the compliance of
the depository institution, its employees, its subsidiaries, and its
subsidiaries' employees with the requirements of paragraphs (d), (e),
(f), and (g) of this section. These written policies and procedures must
be appropriate to the nature, size, complexity, and scope of the
mortgage lending activities of the depository institution and its
subsidiaries.
(2) For purposes of this paragraph (j), ``depository institution''
has the meaning in section 1503(3) of the SAFE Act, 12 U.S.C. 5102(3).
For purposes of this paragraph (j), ``subsidiary'' has the meaning in
section 3 of the Federal Deposit Insurance Act, 12 U.S.C. 1813.
(k) Negative amortization counseling. (1) Counseling required. A
creditor shall not extend credit to a first-time borrower in connection
with a closed-end transaction secured by a dwelling, other than a
reverse mortgage transaction subject to Sec. 1026.33 or a transaction
secured by a consumer's interest in a timeshare plan described in 11
U.S.C. 101(53D), that may result in negative amortization, unless the
creditor receives documentation that the consumer has obtained
homeownership counseling from a counseling organization or counselor
certified or approved by the U.S. Department of Housing and Urban
Development to provide such counseling.
(2) Definitions. For the purposes of this paragraph (k), the
following definitions apply:
(i) A ``first-time borrower'' means a consumer who has not
previously received a closed-end credit transaction or open-end credit
plan secured by a dwelling.
(ii) ``Negative amortization'' means a payment schedule with regular
periodic payments that cause the principal balance to increase.
(3) Steering prohibited. A creditor that extends credit to a first-
time borrower in connection with a closed-end transaction secured by a
dwelling, other than a reverse mortgage transaction subject to Sec.
1026.33 or a transaction secured by a consumer's interest in a timeshare
plan described in 11 U.S.C. 101(53D), that may result in negative
amortization shall not steer or otherwise direct a consumer to choose a
particular counselor or counseling organization for the counseling
required under this paragraph (k).
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 6966, Jan. 31, 2013; 78
FR 11006, Feb. 14, 2013; 78 FR 11410, Feb. 15, 2013; 78 FR 60441, Oct.
1, 2013; 80 FR 8776, Feb. 19, 2015; 81 FR 72388, Oct. 19, 2016]
Sec. 1026.37 Content of disclosures for certain mortgage transactions
(Loan Estimate).
For each transaction subject to Sec. 1026.19(e), the creditor shall
disclose the information in this section:
(a) General information--(1) Form title. The title of the form,
``Loan Estimate,'' using that term.
(2) Form purpose. The statement, ``Save this Loan Estimate to
compare with your Closing Disclosure.''
(3) Creditor. The name and address of the creditor making the
disclosures.
(4) Date issued. The date the disclosures are mailed or delivered to
the consumer by the creditor, labeled ``Date Issued.''
(5) Applicants. The name and mailing address of the consumer(s)
applying for the credit, labeled ``Applicants.''
(6) Property. The address including the zip code of the property
that secures or will secure the transaction, or if the address is
unavailable, the location of such property including a zip code, labeled
``Property.''
(7) Sale price. (i) For transactions that involve a seller, the
contract sale price of the property identified in paragraph (a)(6) of
this section, labeled ``Sale Price.''
(ii) For transactions that do not involve a seller, the estimated
value of the property identified in paragraph (a)(6), labeled ``Prop.
Value.''
(8) Loan term. The term to maturity of the credit transaction,
stated in years or months, or both, as applicable, labeled ``Loan
Term.''
(9) Purpose. The consumer's intended use for the credit, labeled
``Purpose,'' using one of the following terms:
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(i) Purchase. If the credit is to finance the acquisition of the
property identified in paragraph (a)(6) of this section, the creditor
shall disclose that the loan is for a ``Purchase.''
(ii) Refinance. If the credit is not for the purpose described in
paragraph (a)(9)(i) of this section, and if the credit will be used to
refinance an existing obligation, as defined in Sec. 1026.20(a) (but
without regard to whether the creditor is the original creditor or a
holder or servicer of the original obligation), that is secured by the
property identified in paragraph (a)(6) of this section, the creditor
shall disclose that the loan is for a ``Refinance.''
(iii) Construction. If the credit is not for one of the purposes
described in paragraphs (a)(9)(i) or (ii) of this section and the credit
will be used to finance the initial construction of a dwelling on the
property identified in paragraph (a)(6) of this section, the creditor
shall disclose that the loan is for ``Construction.''
(iv) Home equity loan. If the credit is not for one of the purposes
described in paragraphs (a)(9)(i) through (iii) of this section, the
creditor shall disclose that the loan is a ``Home Equity Loan.''
(10) Product. A description of the loan product, labeled
``Product.''
(i) The description of the loan product shall include one of the
following terms:
(A) Adjustable rate. If the interest rate may increase after
consummation, but the rates that will apply or the periods for which
they will apply are not known at consummation, the creditor shall
disclose the loan product as an ``Adjustable Rate.''
(B) Step rate. If the interest rate will change after consummation,
and the rates that will apply and the periods for which they will apply
are known at consummation, the creditor shall disclose the loan product
as a ``Step Rate.''
(C) Fixed rate. If the loan product is not an Adjustable Rate or a
Step Rate, as described in paragraphs (a)(10)(i)(A) and (B) of this
section, respectively, the creditor shall disclose the loan product as a
``Fixed Rate.''
(ii) The description of the loan product shall include the features
that may change the periodic payment using the following terms, subject
to paragraph (a)(10)(iii) of this section, as applicable:
(A) Negative amortization. If the principal balance may increase due
to the addition of accrued interest to the principal balance, the
creditor shall disclose that the loan product has a ``Negative
Amortization'' feature.
(B) Interest only. If one or more regular periodic payments may be
applied only to interest accrued and not to the loan principal, the
creditor shall disclose that the loan product has an ``Interest Only''
feature.
(C) Step payment. If scheduled variations in regular periodic
payment amounts occur that are not caused by changes to the interest
rate during the loan term, the creditor shall disclose that the loan
product has a ``Step Payment'' feature.
(D) Balloon payment. If the terms of the legal obligation include a
``balloon payment,'' as that term is defined in paragraph (b)(5) of this
section, the creditor shall disclose that the loan has a ``Balloon
Payment'' feature.
(E) Seasonal payment. If the terms of the legal obligation expressly
provide that regular periodic payments are not scheduled between
specified unit-periods on a regular basis, the creditor shall disclose
that the loan product has a ``Seasonal Payment'' feature.
(iii) The disclosure of a loan feature under paragraph (a)(10)(ii)
of this section shall precede the disclosure of the loan product under
paragraph (a)(10)(i) of this section. If a transaction has more than one
of the loan features described in paragraph (a)(10)(ii) of this section,
the creditor shall disclose only the first applicable feature in the
order the features are listed in paragraph (a)(10)(ii) of this section.
(iv) The disclosures required by paragraphs (a)(10)(i)(A) and (B),
and (a)(10)(ii)(A) through (D) of this section must each be preceded by
the duration of any introductory rate or payment period, and the first
adjustment period, as applicable.
(11) Loan type. The type of loan, labeled ``Loan Type,'' offered to
the consumer using one of the following terms, as applicable:
(i) Conventional. If the loan is not guaranteed or insured by a
Federal or State government agency, the creditor
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shall disclose that the loan is a ``Conventional.''
(ii) FHA. If the loan is insured by the Federal Housing
Administration, the creditor shall disclose that the loan is an ``FHA.''
(iii) VA. If the loan is guaranteed by the U.S. Department of
Veterans Affairs, the creditor shall disclose that the loan is a ``VA.''
(iv) Other. For federally-insured or guaranteed loans other than
those described in paragraphs (a)(11)(ii) and (iii) of this section, and
for loans insured or guaranteed by a State agency, the creditor shall
disclose the loan type as ``Other,'' and provide a brief description of
the loan type.
(12) Loan identification number (Loan ID ). A number that may be
used by the creditor, consumer, and other parties to identify the
transaction, labeled ``Loan ID .''
(13) Rate lock. A statement of whether the interest rate disclosed
pursuant to paragraph (b)(2) of this section is locked for a specific
period of time, labeled ``Rate Lock.''
(i) For transactions in which the interest rate is locked for a
specific period of time, the creditor must provide the date and time
(including the applicable time zone) when that period ends.
(ii) The ``Rate Lock'' statement required by this paragraph (a)(13)
shall be accompanied by a statement that the interest rate, any points,
and any lender credits may change unless the interest rate has been
locked, and the date and time (including the applicable time zone) at
which estimated closing costs expire.
(b) Loan terms. A separate table under the heading ``Loan Terms''
that contains the following information and that satisfies the following
requirements:
(1) Loan amount. The total amount the consumer will borrow, as
reflected by the face amount of the note, labeled ``Loan Amount.''
(2) Interest rate. The interest rate that will be applicable to the
transaction at consummation, labeled ``Interest Rate.'' For an
adjustable rate transaction, if the interest rate at consummation is not
known, the rate disclosed shall be the fully-indexed rate, which, for
purposes of this paragraph, means the interest rate calculated using the
index value and margin at the time of consummation.
(3) Principal and interest payment. The initial periodic payment
amount that will be due under the terms of the legal obligation, labeled
``Principal & Interest,'' immediately preceded by the applicable unit-
period, and a statement referring to the payment amount that includes
any mortgage insurance and escrow payments that is required to be
disclosed pursuant to paragraph (c) of this section. If the interest
rate at consummation is not known, the amount disclosed shall be
calculated using the fully-indexed rate disclosed under paragraph (b)(2)
of this section.
(4) Prepayment penalty. A statement of whether the transaction
includes a prepayment penalty, labeled ``Prepayment Penalty.'' For
purposes of this paragraph (b)(4), ``prepayment penalty'' means a charge
imposed for paying all or part of a transaction's principal before the
date on which the principal is due, other than a waived, bona fide
third-party charge that the creditor imposes if the consumer prepays all
of the transaction's principal sooner than 36 months after consummation.
(5) Balloon payment. A statement of whether the transaction includes
a balloon payment, labeled ``Balloon Payment.'' For purposes of this
paragraph (b)(5), ``balloon payment'' means a payment that is more than
two times a regular periodic payment. ``Balloon payment'' includes the
payment or payments under a transaction that requires only one or two
payments during the loan term.
(6) Adjustments after consummation. For each amount required to be
disclosed by paragraphs (b)(1) through (3) of this section, a statement
of whether the amount may increase after consummation as an affirmative
or negative answer to the question, and under such question disclosed as
a subheading, ``Can this amount increase after closing?'' and, in the
case of an affirmative answer, the following additional information, as
applicable:
(i) Adjustment in loan amount. The maximum principal balance for the
transaction and the due date of the last payment that may cause the
principal
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balance to increase. The disclosure further shall indicate whether the
maximum principal balance is potential or is scheduled to occur under
the terms of the legal obligation.
(ii) Adjustment in interest rate. The frequency of interest rate
adjustments, the date when the interest rate may first adjust, the
maximum interest rate, and the first date when the interest rate can
reach the maximum interest rate, followed by a reference to the
disclosure required by paragraph (j) of this section. If the loan term,
as defined under paragraph (a)(8) of this section, may increase based on
an interest rate adjustment, the disclosure required by this paragraph
(b)(6)(ii) shall also state that fact and the maximum possible loan term
determined in accordance with paragraph (a)(8) of this section.
(iii) Increase in periodic payment. The scheduled frequency of
adjustments to the periodic principal and interest payment, the due date
of the first adjusted principal and interest payment, the maximum
possible periodic principal and interest payment, and the date when the
periodic principal and interest payment may first equal the maximum
principal and interest payment. If any adjustments to the principal and
interest payment are not the result of a change to the interest rate, a
reference to the disclosure required by paragraph (i) of this section.
If there is a period during which only interest is required to be paid,
the disclosure required by this paragraph (b)(6)(iii) shall also state
that fact and the due date of the last periodic payment of such period.
(7) Details about prepayment penalty and balloon payment. The
information required to be disclosed by paragraphs (b)(4) and (5) of
this section shall be disclosed as an affirmative or negative answer to
the question, and under such question disclosed as a subheading, ``Does
the loan have these features?'' If an affirmative answer for a
prepayment penalty or balloon payment is required to be disclosed, the
following information shall be included, as applicable:
(i) The maximum amount of the prepayment penalty that may be imposed
and the date when the period during which the penalty may be imposed
terminates; and
(ii) The maximum amount of the balloon payment and the due date of
such payment.
(8) Timing. (i) The dates required to be disclosed by paragraph
(b)(6)(ii) of this section shall be disclosed as the year in which the
event occurs, counting from the date that interest for the first
scheduled periodic payment begins to accrue after consummation.
(ii) The dates required to be disclosed by paragraphs (b)(6)(i),
(b)(6)(iii) and (b)(7)(ii) of this section shall be disclosed as the
year in which the event occurs, counting from the due date of the
initial periodic payment.
(iii) The date required to be disclosed by paragraph (b)(7)(i) of
this section shall be disclosed as the year in which the event occurs,
counting from the date of consummation.
(c) Projected payments. In a separate table under the heading
``Projected Payments,'' an itemization of each separate periodic payment
or range of payments, together with an estimate of taxes, insurance, and
assessments and the payments to be made with escrow account funds.
(1) Periodic payment or range of payments. (i) The initial periodic
payment or range of payments is a separate periodic payment or range of
payments and, except as otherwise provided in paragraph (c)(1)(ii) and
(iii) of this section, the following events require the disclosure of
additional separate periodic payments or ranges of payments:
(A) The periodic principal and interest payment or range of such
payments may change;
(B) A scheduled balloon payment, as defined in paragraph (b)(5) of
this section;
(C) The creditor must automatically terminate mortgage insurance or
any functional equivalent under applicable law; and
(D) The anniversary of the due date of the initial periodic payment
or range of payments that immediately follows the occurrence of multiple
events described in paragraph (c)(1)(i)(A) of this section during a
single year.
(ii) The table required by this paragraph (c) shall not disclose
more than
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four separate periodic payments or ranges of payments. For all events
requiring disclosure of additional separate periodic payments or ranges
of payments described in paragraph (c)(1)(i)(A) through (D) of this
section occurring after the third separate periodic payment or range of
payments disclosed, the separate periodic payments or ranges of payments
shall be disclosed as a single range of payments, subject to the
following exceptions:
(A) A balloon payment that is scheduled as a final payment under the
terms of the legal obligation shall always be disclosed as a separate
periodic payment or range of payments, in which case all events
requiring disclosure of additional separate periodic payments or ranges
of payments described in paragraph (c)(1)(i)(A) through (D) of this
section occurring after the second separate periodic payment or range of
payments disclosed, other than the balloon payment that is scheduled as
a final payment, shall be disclosed as a single range of payments.
(B) The automatic termination of mortgage insurance or any
functional equivalent under applicable law shall require disclosure of
an additional separate periodic payment or range of payments only if the
total number of separate periodic payments or ranges of payments
otherwise disclosed pursuant to this paragraph (c)(1) does not exceed
three.
(iii) When a range of payments is required to be disclosed under
this paragraph (c)(1), the creditor must disclose the minimum and
maximum amount for both the principal and interest payment under
paragraph (c)(2)(i) of this section and the total periodic payment under
paragraph (c)(2)(iv) of this section. A range of payments is required to
be disclosed under this paragraph (c)(1) when:
(A) Multiple events described in paragraph (c)(1)(i) of this section
are combined in a single range of payments pursuant to paragraph
(c)(1)(ii) of this section;
(B) Multiple events described in paragraph (c)(1)(i)(A) of this
section occur during a single year or an event described in paragraph
(c)(1)(i)(A) of this section occurs during the same year as the initial
periodic payment or range of payments, in which case the creditor
discloses the range of payments that would apply during the year in
which the events occur; or
(C) The periodic principal and interest payment may adjust based on
index rates at the time an interest rate adjustment may occur.
(2) Itemization. Each separate periodic payment or range of payments
disclosed on the table required by this paragraph (c) shall be itemized
as follows:
(i) The amount payable for principal and interest, labeled
``Principal & Interest,'' including the term ``only interest'' if the
payment or range of payments includes any interest only payment:
(A) In the case of a loan that has an adjustable interest rate, the
maximum principal and interest payment amounts are determined by
assuming that the interest rate in effect throughout the loan term is
the maximum possible interest rate, and the minimum amounts are
determined by assuming that the interest rate in effect throughout the
loan term is the minimum possible interest rate;
(B) In the case of a loan that has an adjustable interest rate and
also contains a negative amortization feature, the maximum principal and
interest payment amounts after the end of the period of the loan's term
during which the loan's principal balance may increase due to the
addition of accrued interest are determined by assuming the maximum
principal amount permitted under the terms of the legal obligation at
the end of such period, and the minimum amounts are determined pursuant
to paragraph (c)(2)(i)(A) of this section;
(ii) The maximum amount payable for mortgage insurance premiums
corresponding to the principal and interest payment disclosed pursuant
to paragraph (c)(2)(i) of this section, labeled ``Mortgage Insurance'';
(iii) The amount payable into an escrow account to pay some or all
of the charges described in paragraph (c)(4)(ii), as applicable, labeled
``Escrow,'' together with a statement that the amount disclosed can
increase over time; and
[[Page 112]]
(iv) The total periodic payment, calculated as the sum of the
amounts disclosed pursuant to paragraphs (c)(2)(i) through (iii) of this
section, labeled ``Total Monthly Payment.''
(3) Subheadings. (i) The labels required pursuant to paragraph
(c)(2) of this section must be listed under the subheading ``Payment
Calculation.''
(ii) Except as provided in paragraph (c)(3)(iii) of this section,
each separate periodic payment or range of payments to be disclosed
under this paragraph (c) must be disclosed under a subheading that
states the years of the loan during which that payment or range of
payments will apply. The subheadings must be stated in a sequence of
whole years from the due date of the initial periodic payment.
(iii) A balloon payment that is scheduled as a final payment under
the terms of the legal obligation must be disclosed under the subheading
``Final Payment.''
(4) Taxes, insurance, and assessments. Under the information
required by paragraphs (c)(1) through (3) of this section:
(i) The label ``Taxes, Insurance & Assessments'';
(ii) The sum of the charges identified in Sec. 1026.43(b)(8), other
than amounts identified in Sec. 1026.4(b)(5), expressed as a monthly
amount, even if no escrow account for the payment of some or any of such
charges will be established;
(iii) A statement that the amount disclosed pursuant to paragraph
(c)(4)(ii) of this section can increase over time;
(iv) A statement of whether the amount disclosed pursuant to
paragraph (c)(4)(ii) of this section includes payments for property
taxes, amounts identified in Sec. 1026.4(b)(8), and other amounts
described in paragraph (c)(4)(ii) of this section, along with a
description of any such other amounts, and an indication of whether such
amounts will be paid by the creditor using escrow account funds;
(v) A statement that the consumer must pay separately any amounts
described in paragraph (c)(4)(ii) of this section that are not paid by
the creditor using escrow account funds; and
(vi) A reference to the information disclosed pursuant to paragraph
(g)(3) of this section.
(5) Calculation of taxes and insurance. For purposes of paragraphs
(c)(2)(iii) and (c)(4)(ii) of this section, estimated property taxes and
homeowner's insurance shall reflect:
(i) The taxable assessed value of the real property or cooperative
unit securing the transaction after consummation, including the value of
any improvements on the property or to be constructed on the property,
if known, whether or not such construction will be financed from the
proceeds of the transaction, for property taxes; and
(ii) The replacement costs of the property during the initial year
after the transaction, for amounts identified in Sec. 1026.4(b)(8).
(d) Costs at closing--(1) Costs at closing table. In a separate
table, under the heading ``Costs at Closing'':
(i) Labeled ``Closing Costs,'' the dollar amount disclosed pursuant
to paragraph (g)(6) of this section, together with:
(A) A statement that the amount disclosed pursuant to paragraph
(d)(1)(i) of this section includes the amounts disclosed pursuant to
paragraphs (f)(4), (g)(5), and (g)(6)(ii);
(B) The dollar amount disclosed pursuant to paragraph (f)(4) of this
section, labeled ``Loan Costs'';
(C) The dollar amount disclosed pursuant to paragraph (g)(5) of this
section, labeled ``Other Costs'':
(D) The dollar amount disclosed pursuant to paragraph (g)(6)(ii) of
this section, labeled ``Lender Credits''; and
(E) A statement referring the consumer to the tables disclosed
pursuant to paragraphs (f) and (g) of this section for details.
(ii) Labeled ``Cash to Close,'' the dollar amount calculated in
accordance with paragraph (h)(1)(viii) of this section, together with:
(A) A statement that the amount includes the amount disclosed
pursuant to paragraph (d)(1)(i) of this section, and
(B) A statement referring the consumer to the location of the table
required pursuant to paragraph (h) of this section for details.
[[Page 113]]
(2) Optional alternative table for transactions without a seller or
for simultaneous subordinate financing. For transactions that do not
involve a seller or for simultaneous subordinate financing, instead of
the amount and statements described in paragraph (d)(1)(ii) of this
section, the creditor may alternatively disclose, using the label ``Cash
to Close'':
(i) The amount calculated in accordance with paragraph (h)(2)(iv) of
this section;
(ii) A statement of whether the disclosed estimated amount is due
from or to the consumer; and
(iii) A statement referring the consumer to the alternative table
disclosed pursuant to paragraph (h)(2) of this section for details.
(e) Web site reference. A statement that the consumer may obtain
general information and tools at the Web site of the Bureau, and the
link or uniform resource locator address to the Web site:
www.consumerfinance.gov/mortgage-estimate.
(f) Closing cost details; loan costs. Under the master heading
``Closing Cost Details,'' in a table under the heading ``Loan Costs,''
all loan costs associated with the transaction. The table shall contain
the items and amounts listed under four subheadings, described in
paragraphs (f)(1) through (4) of this section.
(1) Origination charges. Under the subheading ``Origination
Charges,'' an itemization of each amount, and a subtotal of all such
amounts, that the consumer will pay to each creditor and loan originator
for originating and extending the credit.
(i) The points paid to the creditor to reduce the interest rate
shall be itemized separately, as both a percentage of the amount of
credit extended and a dollar amount, and using the label ``__% of Loan
Amount (Points).'' If points to reduce the interest rate are not paid,
the disclosure required by this paragraph (f)(1)(i) must be blank.
(ii) The number of items disclosed under this paragraph (f)(1),
including the points disclosed under paragraph (f)(1)(i) of this
section, shall not exceed 13.
(2) Services you cannot shop for. Under the subheading ``Services
You Cannot Shop For,'' an itemization of each amount, and a subtotal of
all such amounts, the consumer will pay for settlement services for
which the consumer cannot shop in accordance with Sec.
1026.19(e)(1)(vi)(A) and that are provided by persons other than the
creditor or mortgage broker.
(i) For any item that is a component of title insurance or is for
conducting the closing, the introductory description ``Title --'' shall
appear at the beginning of the label for that item.
(ii) The number of items disclosed under this paragraph (f)(2) shall
not exceed 13.
(3) Services you can shop for. Under the subheading ``Services You
Can Shop For,'' an itemization of each amount and a subtotal of all such
amounts the consumer will pay for settlement services for which the
consumer can shop in accordance with Sec. 1026.19(e)(1)(vi)(A) and that
are provided by persons other than the creditor or mortgage broker.
(i) For any item that is a component of title insurance or is for
conducting the closing, the introductory description ``Title --'' shall
appear at the beginning of the label for that item.
(ii) The number of items disclosed under this paragraph (f)(3) shall
not exceed 14.
(4) Total loan costs. Under the subheading ``Total Loan Costs,'' the
sum of the subtotals disclosed under paragraphs (f)(1) through (3) of
this section.
(5) Item descriptions and ordering. The items listed as loan costs
pursuant to this paragraph (f) shall be labeled using terminology that
describes each item, subject to the requirements of paragraphs
(f)(1)(i), (f)(2)(i), and (f)(3)(i) of this section.
(i) The item prescribed in paragraph (f)(1)(i) of this section for
points shall be the first item listed in the disclosure pursuant to
paragraph (f)(1) of this section.
(ii) All other items must be listed in alphabetical order by their
labels under the applicable subheading.
(6) Use of addenda. (i) An addendum to a form of disclosures
prescribed by this section may not be used for items described in
paragraph (f)(1) or (2) of
[[Page 114]]
this section. If the creditor is not able to itemize every service and
every corresponding charge required to be disclosed in the number of
lines provided by paragraph (f)(1)(ii) or (f)(2)(ii) of this section,
the remaining charges shall be disclosed as an aggregate amount in the
last line permitted under paragraph (f)(1)(ii) or (f)(2)(ii), as
applicable, labeled ``Additional Charges.''
(ii) An addendum to a form of disclosures prescribed by this section
may be used for items described in paragraph (f)(3) of this section. If
the creditor is not able to itemize all of the charges required to be
disclosed in the number of lines provided by paragraph (f)(3)(ii), the
remaining charges shall be disclosed as follows:
(A) Label the last line permitted under paragraph (f)(3)(ii) with an
appropriate reference to an addendum and list the remaining items on the
addendum in accordance with the requirements in paragraphs (f)(3) and
(5) of this section; or
(B) Disclose the remaining charges as an aggregate amount in the
last line permitted under paragraph (f)(3)(ii), labeled ``Additional
Charges.''
(g) Closing cost details; other costs. Under the master heading
``Closing Cost Details,'' in a table under the heading ``Other Costs,''
all costs associated with the transaction that are in addition to the
costs disclosed under paragraph (f) of this section. The table shall
contain the items and amounts listed under six subheadings, described in
paragraphs (g)(1) through (6) of this section.
(1) Taxes and other government fees. Under the subheading ``Taxes
and Other Government Fees,'' the amounts to be paid to State and local
governments for taxes and other government fees, and the subtotal of all
such amounts, as follows:
(i) On the first line, the sum of all recording fees and other
government fees and taxes, except for transfer taxes paid by the
consumer and disclosed pursuant to paragraph (g)(1)(ii) of this section,
labeled ``Recording Fees and Other Taxes.''
(ii) On the second line, the sum of all transfer taxes paid by the
consumer, labeled ``Transfer Taxes.''
(iii) If an amount required to be disclosed by this paragraph (g)(1)
is not charged to the consumer, the amount disclosed on the applicable
line required by this paragraph (g)(1) must be blank.
(2) Prepaids. Under the subheading ``Prepaids,'' an itemization of
the amounts to be paid by the consumer in advance of the first scheduled
payment, and the subtotal of all such amounts, as follows:
(i) On the first line, the number of months for which homeowner's
insurance premiums are to be paid by the consumer at consummation and
the total dollar amount to be paid by the consumer at consummation for
such premiums, labeled ``Homeowner's Insurance Premium ( __ months).''
(ii) On the second line, the number of months for which mortgage
insurance premiums are to be paid by the consumer at consummation and
the total dollar amount to be paid by the consumer at consummation for
such premiums, labeled ``Mortgage Insurance Premium ( __ months).''
(iii) On the third line, the amount of prepaid interest to be paid
per day, the number of days for which prepaid interest will be
collected, the interest rate, and the total dollar amount to be paid by
the consumer at consummation for such interest, labeled ``Prepaid
Interest ( ___ per day for __ days @__ %).''
(iv) On the fourth line, the number of months for which property
taxes are to be paid by the consumer at consummation and the total
dollar amount to be paid by the consumer at consummation for such taxes,
labeled ``Property Taxes ( __ months).''
(v) If an amount is not charged to the consumer for any item for
which this paragraph (g)(2) prescribes a label, each of the amounts
required to be disclosed on that line must be blank.
(vi) A maximum of three additional items may be disclosed under this
paragraph (g)(2), and each additional item must be identified and
include the applicable time period covered by the amount to be paid by
the consumer at consummation and the total amount to be paid.
(3) Initial escrow payment at closing. Under the subheading
``Initial Escrow Payment at Closing,'' an itemization of
[[Page 115]]
the amounts that the consumer will be expected to place into a reserve
or escrow account at consummation to be applied to recurring periodic
charges, and the subtotal of all such amounts, as follows:
(i) On the first line, the amount escrowed per month, the number of
months covered by an escrowed amount collected at consummation, and the
total amount to be paid into the escrow account by the consumer at
consummation for homeowner's insurance premiums, labeled ``Homeowner's
Insurance __ per month for __ mo.''
(ii) On the second line, the amount escrowed per month, the number
of months covered by an escrowed amount collected at consummation, and
the total amount to be paid into the escrow account by the consumer at
consummation for mortgage insurance premiums, labeled ``Mortgage
Insurance __ per month for __ mo.''
(iii) On the third line, the amount escrowed per month, the number
of months covered by an escrowed amount collected at consummation, and
the total amount to be paid into the escrow account by the consumer at
consummation for property taxes, labeled ``Property Taxes __ per month
for __ mo.''
(iv) If an amount is not charged to the consumer for any item for
which this paragraph (g)(3) prescribes a label, each of the amounts
required to be disclosed on that line must be blank.
(v) A maximum of five items may be disclosed pursuant to this
paragraph (g)(3) in addition to the items described in paragraph
(g)(3)(i) through (iii) of this section, and each such additional item
must be identified with a descriptive label and include the applicable
amount per month, the number of months collected at consummation, and
the total amount to be paid.
(4) Other. Under the subheading ``Other,'' an itemization of any
other amounts in connection with the transaction that the consumer is
likely to pay or has contracted with a person other than the creditor or
loan originator to pay at closing and of which the creditor is aware at
the time of issuing the Loan Estimate, a descriptive label of each such
amount, and the subtotal of all such amounts.
(i) For any item that is a component of title insurance, the
introductory description ``Title --'' shall appear at the beginning of
the label for that item.
(ii) The parenthetical description ``(optional)'' shall appear at
the end of the label for items disclosing any premiums paid for separate
insurance, warranty, guarantee, or event-coverage products.
(iii) The number of items disclosed under this paragraph (g)(4)
shall not exceed five.
(5) Total other costs. Under the subheading ``Total Other Costs,''
the sum of the subtotals disclosed pursuant to paragraphs (g)(1) through
(4) of this section.
(6) Total closing costs. Under the subheading ``Total Closing
Costs,'' the component amounts and their sum, as follows:
(i) The sum of the amounts disclosed as loan costs and other costs
under paragraphs (f)(4) and (g)(5) of this section, labeled ``D + I'';
and
(ii) The amount of any lender credits, disclosed as a negative
number with the label ``Lender Credits'' provided that, if no such
amount is disclosed, the amount must be blank.
(7) Item descriptions and ordering. The items listed as other costs
pursuant to this paragraph (g) shall be labeled using terminology that
describes each item.
(i) The items prescribed in paragraphs (g)(1)(i) and (ii), (g)(2)(i)
through (iv), and (g)(3)(i) through (iii) of this section must be listed
in the order prescribed as the initial items under the applicable
subheading, with any additional items to follow.
(ii) All additional items must be listed in alphabetical order under
the applicable subheading.
(8) Use of addenda. An addendum to a form of disclosures prescribed
by this section may not be used for items required to be disclosed by
this paragraph (g). If the creditor is not able to itemize all of the
charges described in this paragraph (g) in the number of lines provided
by paragraphs (g)(2)(vi), (3)(v), or (4)(iii) of this section, the
remaining charges shall be disclosed as an aggregate amount in the last
line permitted under paragraphs (g)(2)(vi),
[[Page 116]]
(g)(3)(v), or (g)(4)(iii), as applicable, using the label ``Additional
Charges.''
(h) Calculating cash to close--(1) For all transactions. Under the
master heading ``Closing Cost Details,'' under the heading ``Calculating
Cash to Close,'' the total amount of cash or other funds that must be
provided by the consumer at consummation, with an itemization of that
amount into the following component amounts:
(i) Total closing costs. The amount disclosed under paragraph (g)(6)
of this section, labeled ``Total Closing Costs'';
(ii) Closing costs to be financed. The amount of any closing costs
to be paid out of loan proceeds, disclosed as a negative number, labeled
``Closing Costs Financed (Paid from your Loan Amount)'';
(iii) Down payment and other funds from borrower. Labeled ``Down
Payment/Funds from Borrower'':
(A)(1) In a purchase transaction as defined in paragraph (a)(9)(i)
of this section, the amount determined by subtracting the sum of the
loan amount disclosed under paragraph (b)(1) of this section and any
amount of existing loans assumed or taken subject to that will be
disclosed under Sec. 1026.38(j)(2)(iv) from the sale price of the
property disclosed under paragraph (a)(7)(i) of this section, except as
required by paragraph (h)(1)(iii)(A)(2) of this section;
(2) In a purchase transaction as defined in paragraph (a)(9)(i) of
this section that is a simultaneous subordinate financing transaction or
that involves improvements to be made on the property, or when the sum
of the loan amount disclosed under paragraph (b)(1) of this section and
any amount of existing loans assumed or taken subject to that will be
disclosed under Sec. 1026.38(j)(2)(iv) exceeds the sale price of the
property disclosed under paragraph (a)(7)(i) of this section, the amount
of estimated funds from the consumer as determined in accordance with
paragraph (h)(1)(v) of this section; or
(B) In all transactions not subject to paragraph (h)(1)(iii)(A) of
this section, the amount of estimated funds from the consumer as
determined in accordance with paragraph (h)(1)(v) of this section;
(iv) Deposit. (A) In a purchase transaction as defined in paragraph
(a)(9)(i) of this section, the amount that is paid to the seller or held
in trust or escrow by an attorney or other party under the terms of the
agreement for the sale of the property, disclosed as a negative number,
labeled ``Deposit'';
(B) In all transactions other than purchase transactions as defined
in paragraph (a)(9)(i) of this section, the amount of $0, labeled
``Deposit'';
(v) Funds for borrower. The amount of funds for the consumer,
labeled ``Funds for Borrower.'' The amount of the down payment and other
funds from the consumer disclosed under paragraph (h)(1)(iii)(A)(2) or
(h)(1)(iii)(B) of this section, as applicable, and of funds for the
consumer disclosed under this paragraph (h)(1)(v), are determined by
subtracting the sum of the loan amount disclosed under paragraph (b)(1)
of this section and any amount of existing loans assumed or taken
subject to that will be disclosed under Sec. 1026.38(j)(2)(iv)
(excluding any closing costs financed disclosed under paragraph
(h)(1)(ii) of this section) from the total amount of all existing debt
being satisfied in the transaction;
(A) If the calculation under this paragraph (h)(1)(v) yields an
amount that is a positive number, such amount is disclosed under
paragraph (h)(1)(iii)(A)(2) or (h)(1)(iii)(B) of this section, as
applicable, and $0 is disclosed under this paragraph (h)(1)(v);
(B) If the calculation under this paragraph (h)(1)(v) yields an
amount that is a negative number, such amount is disclosed under this
paragraph (h)(1)(v) as a negative number, and $0 is disclosed under
paragraph (h)(1)(iii)(A)(2) or (h)(1)(iii)(B) of this section, as
applicable;
(C) If the calculation under this paragraph (h)(1)(v) yields $0,
then $0 is disclosed under paragraph (h)(1)(iii)(A)(2) or (h)(1)(iii)(B)
of this section, as applicable, and under this paragraph (h)(1)(v);
(vi) Seller credits. The total amount that the seller will pay for
total loan costs as determined by paragraph (f)(4) of this section and
total other costs as determined by paragraph (g)(5) of this section, to
the extent known, disclosed
[[Page 117]]
as a negative number, labeled ``Seller Credits'';
(vii) Adjustments and other credits. The amount of all loan costs
determined under paragraph (f) of this section and other costs
determined under paragraph (g) of this section that are paid by persons
other than the loan originator, creditor, consumer, or seller, together
with any other amounts not otherwise disclosed under paragraph (f) or
(g) of this section that are required to be paid by the consumer at
closing in a transaction disclosed under paragraph (h)(1)(iii)(A)(1) of
this section or pursuant to a purchase and sale contract, labeled
``Adjustments and Other Credits''; and
(viii) Estimated Cash to Close. The sum of the amounts disclosed
under paragraphs (h)(1)(i) through (vii) of this section labeled ``Cash
to Close.''
(2) Optional alternative calculating cash to close table for
transactions without a seller or for simultaneous subordinate financing.
For transactions that do not involve a seller or for simultaneous
subordinate financing, instead of the table described in paragraph
(h)(1) above, the creditor may alternatively provide, in a separate
table, under the master heading ``Closing Cost Details,'' under the
heading ``Calculating Cash to Close,'' the total amount of cash or other
funds that must be provided by the consumer at consummation with an
itemization of that amount into the following component amounts:
(i) Loan amount. The amount disclosed under paragraph (b)(1) of this
section, labeled ``Loan Amount'';
(ii) Total closing costs. The amount disclosed under paragraph
(g)(6) of this section, disclosed as a negative number if the amount
disclosed under paragraph (g)(6) of this section is a positive number
and disclosed as a positive number if the amount disclosed under
paragraph (g)(6) of this section is a negative number, labeled ``Total
Closing Costs'';
(iii) Payoffs and payments. The total amount of payoffs and payments
to be made to third parties not otherwise disclosed under paragraphs (f)
and (g) of this section, labeled ``Total Payoffs and Payments'';
(iv) Cash to or from consumer. The amount of cash or other funds due
from or to the consumer and a statement of whether the disclosed
estimated amount is due from or to the consumer, calculated by the sum
of the amounts disclosed under paragraphs (h)(2)(i) through (iii) of
this section, labeled ``Cash to Close''; and
(v) Closing costs financed. The sum of the amounts disclosed under
paragraphs (h)(2)(i) and (iii) of this section, but only to the extent
that the sum is greater than zero and less than or equal to the sum
disclosed under paragraph (g)(6) of this section, labeled ``Closing
Costs Financed (Paid from your Loan Amount).''
(i) Adjustable payment table. If the periodic principal and interest
payment may change after consummation but not based on an adjustment to
the interest rate, or if the transaction is a seasonal payment product
as described in paragraph (a)(10)(ii)(E) of this section, a separate
table under the master heading ``Closing Cost Details'' required by
paragraph (f) of this section and under the heading ``Adjustable Payment
(AP) Table'' that contains the following information and satisfies the
following requirements:
(1) Interest only payments. Whether the transaction is an interest
only product pursuant to paragraph (a)(10)(ii)(B) of this section as an
affirmative or negative answer to the question ``Interest Only
Payments?'' and, if an affirmative answer is disclosed, the period
during which interest only periodic payments are scheduled.
(2) Optional payments. Whether the terms of the legal obligation
expressly provide that the consumer may elect to pay a specified
periodic principal and interest payment in an amount other than the
scheduled amount of the payment, as an affirmative or negative answer to
the question ``Optional Payments?'' and, if an affirmative answer is
disclosed, the period during which the consumer may elect to make such
payments.
(3) Step payments. Whether the transaction is a step payment product
pursuant to paragraph (a)(10)(ii)(C) of this section as an affirmative
or negative answer to the question ``Step Payments?'' and, if an
affirmative answer is disclosed, the period during which
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the regular periodic payments are scheduled to increase.
(4) Seasonal payments. Whether the transaction is a seasonal payment
product pursuant to paragraph (a)(10)(ii)(E) of this section as an
affirmative or negative answer to the question ``Seasonal Payments?''
and, if an affirmative answer is disclosed, the period during which
periodic payments are not scheduled.
(5) Principal and interest payments. Under the subheading
``Principal and Interest Payments,'' which subheading is immediately
preceded by the applicable unit-period, the following information:
(i) The number of the payment of the first periodic principal and
interest payment that may change under the terms of the legal obligation
disclosed under this paragraph (i), counting from the first periodic
payment due after consummation, and the amount or range of the periodic
principal and interest payment for such payment, labeled ``First Change/
Amount'';
(ii) The frequency of subsequent changes to the periodic principal
and interest payment, labeled ``Subsequent Changes''; and
(iii) The maximum periodic principal and interest payment that may
occur during the term of the transaction, and the first periodic
principal and interest payment that can reach such maximum, counting
from the first periodic payment due after consummation, labeled
``Maximum Payment.''
(j) Adjustable interest rate table. If the interest rate may
increase after consummation, a separate table under the master heading
``Closing Cost Details'' required by paragraph (f) of this section and
under the heading ``Adjustable Interest Rate (AIR) Table'' that contains
the following information and satisfies the following requirements:
(1) Index and margin. If the interest rate may adjust and the
product type is not a ``Step Rate'' under paragraph (a)(10)(i)(B) of
this section, the index upon which the adjustments to the interest rate
are based and the margin that is added to the index to determine the
interest rate, if any, labeled ``Index + Margin.''
(2) Increases in interest rate. If the product type is a ``Step
Rate'' and not also an ``Adjustable Rate'' under paragraph (a)(10)(i)(A)
of this section, the maximum amount of any adjustments to the interest
rate that are scheduled and pre-determined, labeled ``Interest Rate
Adjustments.''
(3) Initial interest rate. The interest rate at consummation of the
loan transaction, labeled ``Initial Interest Rate.''
(4) Minimum and maximum interest rate. The minimum and maximum
interest rates for the loan, after any introductory period expires,
labeled ``Minimum/Maximum Interest Rate.''
(5) Frequency of adjustments. The following information, under the
subheading ``Change Frequency'':
(i) The month when the interest rate after consummation may first
change, calculated from the date interest for the first scheduled
periodic payment begins to accrue, labeled ``First Change''; and
(ii) The frequency of interest rate adjustments after the initial
adjustment to the interest rate, labeled, ``Subsequent Changes.''
(6) Limits on interest rate changes. The following information,
under the subheading ``Limits on Interest Rate Changes'':
(i) The maximum possible change for the first adjustment of the
interest rate after consummation, labeled ``First Change''; and
(ii) The maximum possible change for subsequent adjustments of the
interest rate after consummation, labeled ``Subsequent Changes.''
(k) Contact information. Under the master heading, ``Additional
Information About This Loan,'' the following information:
(1) The name and Nationwide Mortgage Licensing System and Registry
identification number (NMLSR ID) (labeled ``NMLS ID/License ID'') for
the creditor (labeled ``Lender'') and the mortgage broker (labeled
``Mortgage Broker''), if any. In the event the creditor or the mortgage
broker has not been assigned an NMLSR ID, the license number or other
unique identifier issued by the applicable jurisdiction or regulating
body with which the creditor or mortgage broker is licensed and/or
registered shall be disclosed, with the abbreviation for the State of
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the applicable jurisdiction or regulatory body stated before the word
``License'' in the label, if any;
(2) The name and NMLSR ID of the individual loan officer (labeled
``Loan Officer'' and ``NMLS ID/License ID,'' respectively) of the
creditor and the mortgage broker, if any, who is the primary contact for
the consumer. In the event the individual loan officer has not been
assigned an NMLSR ID, the license number or other unique identifier
issued by the applicable jurisdiction or regulating body with which the
loan officer is licensed and/or registered shall be disclosed with the
abbreviation for the State of the applicable jurisdiction or regulatory
body stated before the word ``License'' in the label, if any; and
(3) The email address and telephone number of the loan officer
(labeled ``Email'' and ``Phone,'' respectively).
(l) Comparisons. Under the master heading, ``Additional Information
About This Loan'' required by paragraph (k) of this section, in a
separate table under the heading ``Comparisons'' along with the
statement ``Use these measures to compare this loan with other loans'':
(1) In five years. Using the label ``In 5 Years'':
(i) The total principal, interest, mortgage insurance, and loan
costs scheduled to be paid through the end of the 60th month after the
due date of the first periodic payment, expressed as a dollar amount,
along with the statement ``Total you will have paid in principal,
interest, mortgage insurance, and loan costs''; and
(ii) The principal scheduled to be paid through the end of the 60th
month after the due date of the first periodic payment, expressed as a
dollar amount, along with the statement ``Principal you will have paid
off.''
(2) Annual percentage rate. The ``Annual Percentage Rate,'' using
that term and the abbreviation ``APR'' and expressed as a percentage,
and the following statement: ``Your costs over the loan term expressed
as a rate. This is not your interest rate.''
(3) Total interest percentage. The total amount of interest that the
consumer will pay over the life of the loan, expressed as a percentage
of the amount of credit extended, using the term ``Total Interest
Percentage,'' the abbreviation ``TIP,'' and the statement ``The total
amount of interest that you will pay over the loan term as a percentage
of your loan amount.''
(m) Other considerations. Under the master heading ``Additional
Information About This Loan'' required by paragraph (k) of this section
and under the heading ``Other Considerations'':
(1) Appraisal. For transactions subject to 15 U.S.C. 1639h or
1691(e), as implemented in this part or Regulation B, 12 CFR part 1002,
respectively, a statement, labeled ``Appraisal,'' that:
(i) The creditor may order an appraisal to determine the value of
the property identified in paragraph (a)(6) of this section and may
charge the consumer for that appraisal;
(ii) The creditor will promptly provide the consumer a copy of any
appraisal, even if the transaction is not consummated; and
(iii) The consumer may choose to pay for an additional appraisal of
the property for the consumer's use.
(2) Assumption. A statement of whether a subsequent purchaser of the
property may be permitted to assume the remaining loan obligation on its
original terms, labeled ``Assumption.''
(3) Homeowner's insurance. At the option of the creditor, a
statement that homeowner's insurance is required on the property and
that the consumer may choose the insurance provider, labeled
``Homeowner's Insurance.''
(4) Late payment. A statement detailing any charge that may be
imposed for a late payment, stated as a dollar amount or percentage
charge of the late payment amount, and the number of days that a payment
must be late to trigger the late payment fee, labeled ``Late Payment.''
(5) Refinance. The following statement, labeled ``Refinance'':
``Refinancing this loan will depend on your future financial situation,
the property value, and market conditions. You may not be able to
refinance this loan.''
(6) Servicing. A statement of whether the creditor intends to
service the loan or transfer the loan to another servicer, labeled
``Servicing.''
(7) Liability after foreclosure. If the purpose of the credit
transaction is to
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refinance an extension of credit as described in paragraph (a)(9)(ii) of
this section, a brief statement that certain State law protections
against liability for any deficiency after foreclosure may be lost, the
potential consequences of the loss of such protections, and a statement
that the consumer should consult an attorney for additional information,
labeled ``Liability after Foreclosure.''
(8) Construction loans. In transactions involving new construction,
where the creditor reasonably expects that settlement will occur more
than 60 days after the provision of the loan estimate, at the creditor's
option, a clear and conspicuous statement that the creditor may issue a
revised disclosure any time prior to 60 days before consummation,
pursuant to Sec. 1026.19(e)(3)(iv)(F).
(n) Signature statement. (1) At the creditor's option, under the
master heading required by paragraph (k) of this section and under the
heading ``Confirm Receipt,'' a line for the signatures of the consumers
in the transaction. If the creditor includes a line for the consumer's
signature, the creditor must disclose the following above the signature
line: ``By signing, you are only confirming that you have received this
form. You do not have to accept this loan because you have signed or
received this form.''
(2) If the creditor does not include a line for the consumer's
signature, the creditor must disclose the following statement under the
heading ``Other Considerations'' required by paragraph (m) of this
section, labeled ``Loan Acceptance'': ``You do not have to accept this
loan because you have received this form or signed a loan application.''
(o) Form of disclosures--(1) General requirements. (i) The creditor
shall make the disclosures required by this section clearly and
conspicuously in writing, in a form that the consumer may keep. The
disclosures also shall be grouped together and segregated from
everything else.
(ii) Except as provided in paragraph (o)(5) of this section, the
disclosures shall contain only the information required by paragraphs
(a) through (n) of this section and shall be made in the same order, and
positioned relative to the master headings, headings, subheadings,
labels, and similar designations in the same manner, as shown in form H-
24, set forth in appendix H to this part.
(2) Headings and labels. If a master heading, heading, subheading,
label, or similar designation contains the word ``estimated'' or a
capital letter designation in form H-24, set forth in appendix H to this
part, that heading, label, or similar designation shall contain the word
``estimated'' and the applicable capital letter designation.
(3) Form. Except as provided in paragraph (o)(5) of this section:
(i) For a transaction subject to Sec. 1026.19(e) that is a
federally related mortgage loan, as defined in Regulation X, 12 CFR
1024.2, the disclosures must be made using form H-24, set forth in
appendix H to this part.
(ii) For any other transaction subject to this section, the
disclosures must be made with headings, content, and format
substantially similar to form H-24, set forth in appendix H to this
part.
(iii) The disclosures required by this section may be provided to
the consumer in electronic form, subject to compliance with the consumer
consent and other applicable provisions of the Electronic Signatures in
Global and National Commerce Act (15 U.S.C. 7001 et seq.).
(4) Rounding--(i) Nearest dollar. (A) The dollar amounts required to
be disclosed by paragraphs (b)(6) and (7), (c)(1)(iii), (c)(2)(ii) and
(iii), (c)(4)(ii), (f), (g), (h), (i), and (l) of this section shall be
rounded to the nearest whole dollar, except that the per-diem dollar
amount required to be disclosed by paragraph (g)(2)(iii) of this section
and the monthly dollar amounts required to be disclosed by paragraphs
(g)(3)(i) through (iii) and (g)(3)(v) of this section shall not be
rounded.
(B) The dollar amount required to be disclosed by paragraph (b)(1)
of this section shall not be rounded, and if the amount is a whole
number then the amount disclosed shall be truncated at the decimal
point.
(C) The dollar amounts required to be disclosed by paragraph
(c)(2)(iv) of this section shall be rounded to the nearest whole dollar,
if any of the component amounts are required by paragraph
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(o)(4)(i)(A) of this section to be rounded to the nearest whole dollar.
(ii) Percentages. The percentage amounts required to be disclosed
under paragraphs (b)(2) and (6), (f)(1)(i), (g)(2)(iii), (j), and (l)(2)
and (3) of this section shall be disclosed by rounding the exact amounts
to three decimal places and then dropping any trailing zeros that occur
to the right of the decimal place.
(5) Exceptions--(i) Unit-period. Wherever the form or this section
uses ``monthly'' to describe the frequency of any payments or uses
``month'' to describe the applicable unit-period, the creditor shall
substitute the appropriate term to reflect the fact that the
transaction's terms provide for other than monthly periodic payments,
such as bi-weekly or quarterly payments.
(ii) Translation. The form may be translated into languages other
than English, and creditors may modify form H-24 of appendix H to this
part to the extent that translation prevents the headings, labels,
designations, and required disclosure items under this section from
fitting in the space provided on form H-24.
(iii) Logo or slogan. The creditor providing the form may use a logo
for, and include a slogan with, the information required by paragraph
(a)(3) of this section in any font size or type, provided that such logo
or slogan does not cause the information required by paragraph (a)(3) of
this section to exceed the space provided for that information, as
illustrated in form H-24 of appendix H to this part. If the creditor
does not use a logo for the information required by paragraph (a)(3) of
this section, the information shall be disclosed in a similar format as
form H-24.
(iv) Business card. The creditor may physically attach a business
card over the information required to be disclosed by paragraph (a)(3)
of this section.
(v) Administrative information. The creditor may insert at the
bottom of each page under the disclosures required by this section as
illustrated by form H-24 of appendix H to this part, any administrative
information, text, or codes that assist in identification of the form or
the information disclosed on the form, provided that the space provided
on form H-24 of appendix H to this part for any of the information
required by this section is not altered.
[78 FR 80113, Dec. 31, 2013, as amended at 80 FR 8776, Feb. 19, 2015; 82
FR 37769, Aug. 11, 2017]
Sec. 1026.38 Content of disclosures for certain mortgage transactions
(Closing Disclosure).
For each transaction subject to Sec. 1026.19(f), the creditor shall
disclose the information in this section:
(a) General information--(1) Form title. The title of the form,
``Closing Disclosure,'' using that term.
(2) Form purpose. The following statement: ``This form is a
statement of final loan terms and closing costs. Compare this document
with your Loan Estimate.''
(3) Closing information. Under the heading ``Closing Information'':
(i) Date issued. The date the disclosures required by this section
are delivered to the consumer, labeled ``Date Issued.''
(ii) Closing date. The date of consummation, labeled ``Closing
Date.''
(iii) Disbursement date. The date the amount disclosed under
paragraph (j)(3)(iii) (cash to close from or to borrower) or (k)(3)(iii)
(cash from or to seller) of this section is expected to be paid in a
purchase transaction under Sec. 1026.37(a)(9)(i) to the consumer or
seller, respectively, as applicable, except as provided in comment
38(a)(3)(iii)-1, or the date some or all of the loan amount disclosed
under paragraph (b) of this section is expected to be paid to the
consumer or a third party other than a settlement agent in a transaction
that is not a purchase transaction under Sec. 1026.37(a)(9)(i), labeled
``Disbursement Date.''
(iv) Settlement agent. The name of the settlement agent conducting
the closing, labeled ``Settlement Agent.''
(v) File number. The number assigned to the transaction by the
settlement agent for identification purposes, labeled ``File .''
(vi) Property. The address or location of the property required to
be disclosed under Sec. 1026.37(a)(6), labeled ``Property.''
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(vii) Sale price. (A) In credit transactions where there is a
seller, the contract sale price of the property identified in paragraph
(a)(3)(vi) of this section, labeled ``Sale Price.''
(B) In credit transactions where there is no seller, the appraised
value of the property identified in paragraph (a)(3)(vi) of this
section, labeled ``Appraised Prop. Value.''
(4) Transaction information. Under the heading ``Transaction
Information'':
(i) Borrower. The consumer's name and mailing address, labeled
``Borrower.''
(ii) Seller. Where applicable, the seller's name and mailing
address, labeled ``Seller.''
(iii) Lender. The name of the creditor making the disclosure,
labeled ``Lender.''
(5) Loan information. Under the heading ``Loan Information'':
(i) Loan term. The information required to be disclosed under Sec.
1026.37(a)(8), labeled ``Loan Term.''
(ii) Purpose. The information required to be disclosed under Sec.
1026.37(a)(9), labeled ``Purpose.''
(iii) Product. The information required to be disclosed under Sec.
1026.37(a)(10), labeled ``Product.''
(iv) Loan type. The information required to be disclosed under Sec.
1026.37(a)(11), labeled ``Loan Type.''
(v) Loan identification number. The information required to be
disclosed under Sec. 1026.37(a)(12), labeled ``Loan ID .''
(vi) Mortgage insurance case number. The case number for any
mortgage insurance policy, if required by the creditor, labeled ``MIC
.''
(b) Loan terms. A separate table under the heading ``Loan Terms''
that includes the information required by Sec. 1026.37(b).
(c) Projected payments. A separate table, under the heading
``Projected Payments,'' that includes and satisfies the following
information and requirements:
(1) Projected payments or range of payments. The information
required to be disclosed pursuant to Sec. 1026.37(c)(1) through (4),
other than Sec. 1026.37(c)(4)(vi). In disclosing estimated escrow
payments as described in Sec. 1026.37(c)(2)(iii) and (c)(4)(ii), the
amount disclosed on the Closing Disclosure:
(i) For transactions subject to RESPA, is determined under the
escrow account analysis described in Regulation X, 12 CFR 1024.17;
(ii) For transactions not subject to RESPA, may be determined under
the escrow account analysis described in Regulation X, 12 CFR 1024.17 or
in the manner set forth in Sec. 1026.37(c)(5).
(2) Estimated taxes, insurance, and assessments. A reference to the
disclosure required by paragraph (l)(7) of this section.
(d) Costs at closing--(1) Costs at closing table. In a separate
table, under the heading ``Costs at Closing'':
(i) Labeled ``Closing Costs,'' the sum of the dollar amounts
disclosed pursuant to paragraphs (f)(4), (g)(5), and (h)(3) of this
section, together with:
(A) A statement that the amount disclosed pursuant to paragraph
(d)(1)(i) of this section includes the amounts disclosed pursuant to
paragraphs (f)(4), (g)(5), and (h)(3) of this section;
(B) The dollar amount disclosed pursuant to paragraph (f)(4) of this
section, labeled ``Loan Costs'';
(C) The dollar amount disclosed pursuant to paragraph (g)(5) of this
section, labeled ``Other Costs'';
(D) The dollar amount disclosed pursuant to paragraph (h)(3) of this
section, labeled ``Lender Credits''; and
(E) A statement referring the consumer to the tables disclosed
pursuant to paragraphs (f) and (g) of this section for details.
(ii) Labeled ``Cash to Close,'' the sum of the dollar amounts
calculated in accordance with paragraph (i)(9)(ii) of this section,
together with:
(A) A statement that the amount disclosed pursuant to paragraph
(d)(1)(ii) of this section includes the amount disclosed pursuant to
paragraph (d)(1)(i) of this section; and
(B) A statement referring the consumer to the table required
pursuant to paragraph (i) of this section for details.
(2) Alternative table for transactions without a seller or for
simultaneous subordinate financing. For transactions that do not involve
a seller or for simultaneous subordinate financing, if the
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creditor disclosed the optional alternative table under Sec.
1026.37(d)(2), the creditor shall disclose, with the label ``Cash to
Close,'' instead of the sum of the dollar amounts described in paragraph
(d)(1)(ii) of this section:
(i) The amount calculated in accordance with paragraph (e)(5)(ii) of
this section;
(ii) A statement of whether the disclosed amount is due from or to
the consumer; and
(iii) A statement referring the consumer to the table required
pursuant to paragraph (e) of this section for details.
(e) Alternative calculating cash to close table for transactions
without a seller or for simultaneous subordinate financing. For
transactions that do not involve a seller or for simultaneous
subordinate financing, if the creditor disclosed the optional
alternative table under Sec. 1026.37(h)(2), the creditor shall
disclose, instead of the table described in paragraph (i) of this
section, in a separate table, under the heading ``Calculating Cash to
Close,'' together with the statement ``Use this table to see what has
changed from your Loan Estimate'':
(1) Loan amount. Labeled ``Loan Amount:''
(i) Under the subheading ``Loan Estimate,'' the loan amount
disclosed on the Loan Estimate under Sec. 1026.37(b)(1);
(ii) Under the subheading ``Final,'' the loan amount disclosed under
paragraph (b) of this section;
(iii) Disclosed more prominently than the other disclosures under
paragraph (e)(1)(i) and (ii) of this section, under the subheading ``Did
this change?'':
(A) If the amount disclosed under paragraph (e)(1)(ii) of this
section is different than the amount disclosed under paragraph (e)(1)(i)
of this section (unless the difference is due to rounding), a statement
of that fact along with a statement of whether this amount increased or
decreased; or
(B) If the amount disclosed under paragraph (e)(1)(i) of this
section is equal to the amount disclosed under paragraph (e)(1)(ii) of
this section a statement of that fact.
(2) Total closing costs. Labeled ``Total Closing Costs'':
(i) Under the subheading ``Loan Estimate,'' the amount disclosed on
the Loan Estimate under Sec. 1026.37(h)(2)(ii);
(ii) Under the subheading ``Final,'' the amount disclosed under
paragraph (h)(1) of this section, disclosed as a negative number if the
amount disclosed under paragraph (h)(1) of this section is a positive
number and disclosed as a positive number if the amount disclosed under
paragraph (h)(1) of this section is a negative number; and
(iii) Disclosed more prominently than the other disclosures under
this paragraph (e)(2)(i) and (ii) of this section, under the subheading
``Did this change?'':
(A) If the amount disclosed under paragraph (e)(2)(ii) of this
section is different than the amount disclosed under paragraph (e)(2)(i)
of this section (unless the difference is due to rounding):
(1) A statement of that fact;
(2) If the difference in the amounts disclosed under paragraphs
(e)(2)(i) and (e)(2)(ii) is attributable to differences in itemized
charges that are included in either or both subtotals, a statement that
the consumer should see the total loan costs and total other costs
subtotals disclosed under paragraphs (f)(4) and (g)(5) of this section
(together with references to such disclosures), as applicable; and
(3) If the increase exceeds the limitations on increases in closing
costs under Sec. 1026.19(e)(3), a statement that such increase exceeds
the legal limits by the dollar amount of the excess and, if any refund
is provided under Sec. 1026.19(f)(2)(v), a statement directing the
consumer to the disclosure required under paragraph (h)(3) of this
section or, if applicable, a statement directing the consumer to the
principal reduction disclosure under paragraph (t)(5)(vii)(B) of this
section. Such dollar amount shall equal the sum total of all excesses of
the limitations on increases in closing costs under Sec. 1026.19(e)(3),
taking into account the different methods of calculating excesses of the
limitations on increases in closing costs under Sec. 1026.19(e)(3)(i)
and (ii).
(B) If the amount disclosed under paragraph (e)(2)(i) of this
section is equal to the amount disclosed under
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paragraph (e)(2)(ii) of this section, a statement of that fact.
(3) Closing costs paid before closing. Labeled ``Closing Costs Paid
Before Closing:''
(i) Under the subheading ``Loan Estimate,'' the amount of $0;
(ii) Under the subheading ``Final,'' any amount designated as
borrower-paid before closing under paragraph (h)(2) of this section,
disclosed as a positive number; and
(iii) Disclosed more prominently than the other disclosures under
this paragraph (e)(3)(i) and (ii) of this section, under the subheading
``Did this change?'':
(A) If the amount disclosed under paragraph (e)(3)(ii) of this
section is different than the amount disclosed under paragraph (e)(3)(i)
of this section (unless the difference is due to rounding), a statement
of that fact, along with a statement that the consumer paid such amounts
prior to consummation of the transaction; or
(B) If the amount disclosed under paragraph (e)(3)(ii) of this
section is equal to the amount disclosed under paragraph (e)(3)(i) of
this section, a statement of that fact.
(4) Payoffs and payments. Labeled ``Total Payoffs and Payments,''
(i) Under the subheading ``Loan Estimate,'' the total payoffs and
payments disclosed on the Loan Estimate under Sec. 1026.37(h)(2)(iii);
(ii) Under the subheading ``Final,'' the total amount of payoffs and
payments made to third parties disclosed under paragraph (t)(5)(vii)(B)
of this section, to the extent known, disclosed as a negative number if
the total amount disclosed under paragraph (t)(5)(vii)(B) of this
section is a positive number and disclosed as a positive number if the
total amount disclosed under paragraph (t)(5)(vii)(B) of this section is
a negative number;
(iii) Disclosed more prominently than the other disclosures under
this paragraph (e)(4)(i) and (ii), under the subheading ``Did this
change?'':
(A) If the amount disclosed under paragraph (e)(4)(ii) of this
section is different than the amount disclosed under paragraph (e)(4)(i)
of this section (unless the difference is due to rounding), a statement
of that fact along with a reference to the table disclosed under
paragraph (t)(5)(vii)(B) of this section; or
(B) If the amount disclosed under paragraph (e)(4)(ii) of this
section is equal to the amount disclosed under paragraph (e)(4)(i) of
this section, a statement of that fact.
(5) Cash to or from consumer. Labeled ``Cash to Close:''
(i) Under the subheading ``Loan Estimate,'' the estimated cash to
close on the Loan Estimate together with the statement of whether the
estimated amount is due from or to the consumer as disclosed under Sec.
1026.37(h)(2)(iv);
(ii) Under the subheading ``Final,'' the amount due from or to the
consumer, calculated by the sum of the amounts disclosed under
paragraphs (e)(1)(ii), (e)(2)(ii), (e)(3)(ii), and (e)(4)(ii) of this
section, disclosed as a positive number, together with a statement of
whether the disclosed amount is due from or to the consumer.
(6) Closing costs financed. Labeled ``Closing Costs Financed (Paid
from your Loan Amount),'' the sum of the amounts disclosed under
paragraphs (e)(1)(ii) and (e)(4)(ii) of this section, but only to the
extent that the sum is greater than zero and less than or equal to the
sum disclosed under paragraph (h)(1) of this section minus the sum
disclosed under paragraph (h)(2) of this section designated borrower-
paid before closing.
(f) Closing cost details; loan costs. Under the master heading
``Closing Cost Details'' with columns stating whether the charge was
borrower-paid at or before closing, seller-paid at or before closing, or
paid by others, all loan costs associated with the transaction, listed
in a table under the heading ``Loan Costs.'' The table shall contain the
items and amounts listed under four subheadings, described in paragraphs
(f)(1) through (5) of this section.
(1) Origination charges. Under the subheading ``Origination
Charges,'' and in the applicable columns as described in paragraph (f)
of this section, an itemization of each amount paid for charges
described in Sec. 1026.37(f)(1), the amount of compensation paid by the
creditor to a third-party loan originator along with the name of the
loan
[[Page 125]]
originator ultimately receiving the payment, and the total of all such
itemized amounts that are designated borrower-paid at or before closing.
(2) Services borrower did not shop for. Under the subheading
``Services Borrower Did Not Shop For'' and in the applicable columns as
described in paragraph (f) of this section, an itemization of the
services and corresponding costs for each of the settlement services
required by the creditor for which the consumer did not shop in
accordance with Sec. 1026.19(e)(1)(vi)(A) and that are provided by
persons other than the creditor or mortgage broker, the name of the
person ultimately receiving the payment for each such amount, and the
total of all such itemized amounts that are designated borrower-paid at
or before closing. Items that were disclosed pursuant to Sec.
1026.37(f)(3) must be disclosed under this paragraph (f)(2) if the
consumer was provided a written list of settlement service providers
under Sec. 1026.19(e)(1)(vi)(C) and the consumer selected a settlement
service provider contained on that written list.
(3) Services borrower did shop for. Under the subheading ``Services
Borrower Did Shop For'' and in the applicable column as described in
paragraph (f) of this section, an itemization of the services and
corresponding costs for each of the settlement services required by the
creditor for which the consumer shopped in accordance with Sec.
1026.19(e)(1)(vi)(A) and that are provided by persons other than the
creditor or mortgage broker, the name of the person ultimately receiving
the payment for each such amount, and the total of all such itemized
costs that are designated borrower-paid at or before closing. Items that
were disclosed pursuant to Sec. 1026.37(f)(3) must be disclosed under
this paragraph (f)(3) if the consumer was provided a written list of
settlement service providers under Sec. 1026.19(e)(1)(vi)(C) and the
consumer did not select a settlement service provider contained on that
written list.
(4) Total loan costs. Under the subheading ``Total Loan Costs
(Borrower-Paid),'' the sum of the amounts disclosed as borrower-paid
pursuant to paragraph (f)(5) of this section.
(5) Subtotal of loan costs. The sum of loan costs, calculated by
totaling the amounts described in paragraphs (f)(1) through (3) of this
section for costs designated borrower-paid at or before closing, labeled
``Loan Costs Subtotals.''
(g) Closing cost details; other costs. Under the master heading
``Closing Cost Details'' disclosed pursuant to paragraph (f) of this
section, with columns stating whether the charge was borrower-paid at or
before closing, seller-paid at or before closing, or paid by others, all
costs in connection with the transaction, other than those disclosed
under paragraph (f) of this section, listed in a table with a heading
disclosed as ``Other Costs.'' The table shall contain the items and
amounts listed under five subheadings, described in paragraphs (g)(1)
through (6) of this section.
(1) Taxes and other government fees. Under the subheading ``Taxes
and Other Government Fees,'' an itemization of each amount that is
expected to be paid to State and local governments for taxes and
government fees and the total of all such itemized amounts that are
designated borrower-paid at or before closing, as follows:
(i) On the first line:
(A) Before the columns described in paragraph (g) of this section,
the total amount of fees for recording deeds and, separately, the total
amount of fees for recording security instruments; and
(B) In the applicable column as described in paragraph (g) of this
section, the total amounts paid for recording fees (including, but not
limited to, the amounts in paragraph (g)(1)(i)(A) of this section); and
(ii) On subsequent lines, in the applicable column as described in
paragraph (g) of this section, an itemization of transfer taxes, with
the name of the government entity assessing the transfer tax.
(2) Prepaids. Under the subheading ``Prepaids'' and in the
applicable column as described in paragraph (g) of this section, an
itemization of each amount for charges described in Sec. 1026.37(g)(2),
the name of the person ultimately receiving the payment or government
entity assessing the property tax, provided that the person ultimately
receiving the payment need not be disclosed for the disclosure required
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by Sec. 1026.37(g)(2)(iii) when disclosed pursuant to this paragraph,
and the total of all such itemized amounts that are designated borrower-
paid at or before closing.
(3) Initial escrow payment at closing. Under the subheading
``Initial escrow payment at closing'' and in the applicable column as
described in paragraph (g) of this section, an itemization of each
amount for charges described in Sec. 1026.37(g)(3), the applicable
aggregate adjustment pursuant to 12 CFR 1024.17(d)(2) along with the
label ``aggregate adjustment,'' and the total of all such itemized
amounts that are designated borrower-paid at or before closing.
(4) Other. Under the subheading ``Other'' and in the applicable
column as described in paragraph (g) of this section, an itemization of
each amount for charges in connection with the transaction that are in
addition to the charges disclosed under paragraphs (f) and (g)(1)
through (3) for services that are required or obtained in the real
estate closing by the consumer, the seller, or other party, the name of
the person ultimately receiving the payment, and the total of all such
itemized amounts that are designated borrower-paid at or before closing.
(i) For any cost that is a component of title insurance services,
the introductory description ``Title --'' shall appear at the beginning
of the label for that actual cost.
(ii) The parenthetical description ``(optional)'' shall appear at
the end of the label for costs designated borrower-paid at or before
closing for any premiums paid for separate insurance, warranty,
guarantee, or event-coverage products.
(5) Total other costs. Under the subheading ``Total Other Costs
(Borrower-Paid),'' the sum of the amounts disclosed as borrower-paid
pursuant to paragraph (g)(6) of this section.
(6) Subtotal of costs. The sum of other costs, calculated by
totaling the costs disclosed in paragraphs (g)(1) through (4) of this
section designated borrower-paid at or before closing, labeled ``Other
Costs Subtotals.''
(h) Closing cost totals. (1) The sum of the costs disclosed as
borrower-paid pursuant to paragraph (h)(2) of this section and the
amount disclosed in paragraph (h)(3) of this section, under the
subheading ``Total Closing Costs (Borrower-Paid).''
(2) The sum of the amounts disclosed in paragraphs (f)(5) and (g)(6)
of this section, designated borrower-paid at or before closing, and the
sum of the costs designated seller-paid at or before closing or paid by
others disclosed pursuant to paragraphs (f) and (g) of this section,
labeled ``Closing Costs Subtotals.''
(3) The amount of lender credits as a negative number, labeled
``Lender Credits'' and designated borrower-paid at closing, and if a
refund is provided pursuant to Sec. 1026.19(f)(2)(v), a statement that
this amount includes a credit for an amount that exceeds the limitations
on increases in closing costs under Sec. 1026.19(e)(3), and the amount
of such credit under Sec. 1026.19(f)(2)(v).
(4) The services and costs disclosed pursuant to paragraphs (f) and
(g) of this section on the Closing Disclosure shall be labeled using
terminology that describes the item disclosed, in a manner that is
consistent with the descriptions or prescribed labels, as applicable,
used for such items on the Loan Estimate pursuant to Sec. 1026.37. The
creditor must also list the items on the Closing Disclosure in the same
sequential order as on the Loan Estimate pursuant to Sec. 1026.37.
(i) Calculating cash to close. In a separate table, under the
heading ``Calculating Cash to Close,'' together with the statement ``Use
this table to see what has changed from your Loan Estimate'':
(1) Total closing costs. (i) Under the subheading ``Loan Estimate,''
the ``Total Closing Costs'' disclosed on the Loan Estimate under Sec.
1026.37(h)(1)(i), labeled using that term.
(ii) Under the subheading ``Final,'' the amount disclosed under
paragraph (h)(1) of this section.
(iii) Under the subheading ``Did this change?,'' disclosed more
prominently than the other disclosures under this paragraph (i)(1):
(A) If the amount disclosed under paragraph (i)(1)(ii) of this
section is different than the amount disclosed under paragraph (i)(1)(i)
of this section (unless the difference is due to rounding):
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(1) A statement of that fact;
(2) If the difference in the ``Total Closing Costs'' is attributable
to differences in itemized charges that are included in either or both
subtotals, a statement that the consumer should see the total loan costs
and total other costs subtotals disclosed under paragraphs (f)(4) and
(g)(5) of this section (together with references to such disclosures),
as applicable; and
(3) If the increase exceeds the limitations on increases in closing
costs under Sec. 1026.19(e)(3), a statement that such increase exceeds
the legal limits by the dollar amount of the excess, and if any refund
is provided under Sec. 1026.19(f)(2)(v), a statement directing the
consumer to the disclosure required under paragraph (h)(3) of this
section or, if a principal reduction is used to provide the refund, a
statement directing the consumer to the principal reduction disclosure
under paragraph (j)(1)(v) of this section. Such dollar amount shall
equal the sum total of all excesses of the limitations on increases in
closing costs under Sec. 1026.19(e)(3), taking into account the
different methods of calculating excesses of the limitations on
increases in closing costs under Sec. 1026.19(e)(3)(i) and (ii).
(B) If the amount disclosed under paragraph (i)(1)(ii) of this
section is equal to the amount disclosed under paragraph (i)(1)(i) of
this section, a statement of that fact.
(2) Closing costs paid before closing. (i) Under the subheading
``Loan Estimate,'' the dollar amount ``$0,'' labeled ``Closing Costs
Paid Before Closing.''
(ii) Under the subheading ``Final,'' the amount of ``Total Closing
Costs'' disclosed under paragraph (h)(2) of this section and designated
as borrower-paid before closing, stated as a negative number.
(iii) Under the subheading ``Did this change?,'' disclosed more
prominently than the other disclosures under this paragraph (i)(2):
(A) If the amount disclosed under paragraph (i)(2)(ii) of this
section is different than the amount disclosed under paragraph (i)(2)(i)
of this section (unless the difference is due to rounding), a statement
of that fact, along with a statement that the consumer paid such amounts
prior to consummation of the transaction; or
(B) If the amount disclosed under paragraph (i)(2)(ii) of this
section is equal to the amount disclosed under paragraph (i)(2)(i) of
this section, a statement of that fact.
(3) Closing costs financed. (i) Under the subheading ``Loan
Estimate,'' the amount disclosed under Sec. 1026.37(h)(1)(ii), labeled
``Closing Costs Financed (Paid from your Loan Amount).''
(ii) Under the subheading ``Final,'' the actual amount of the
closing costs that are to be paid out of loan proceeds, if any, stated
as a negative number.
(iii) Under the subheading ``Did this change?,'' disclosed more
prominently than the other disclosures under this paragraph (i)(3):
(A) If the amount disclosed under paragraph (i)(3)(ii) of this
section is different than the amount disclosed under paragraph (i)(3)(i)
of this section (unless the difference is due to rounding), a statement
of that fact, along with a statement that the consumer included the
closing costs in the loan amount, which increased the loan amount; or
(B) If the amount disclosed under paragraph (i)(3)(ii) of this
section is equal to the amount disclosed under paragraph (i)(3)(i) of
this section, a statement of that fact.
(4) Down payment/funds from borrower. (i) Under the subheading
``Loan Estimate,'' the amount disclosed under Sec. 1026.37(h)(1)(iii),
labeled ``Down Payment/Funds from Borrower.''
(ii) Under the subheading ``Final'':
(A)(1) In a purchase transaction as defined in Sec.
1026.37(a)(9)(i), the amount determined by subtracting the sum of the
loan amount disclosed under paragraph (b) of this section and any amount
of existing loans assumed or taken subject to that is disclosed under
paragraph (j)(2)(iv) of this section from the sale price of the property
disclosed under paragraph (a)(3)(vii)(A) of this section, labeled ``Down
Payment/Funds from Borrower,'' except as required by paragraph
(i)(4)(ii)(A)(2) of this section;
(2) In a purchase transaction as defined in Sec. 1026.37(a)(9)(i)
that is a simultaneous subordinate financing transaction or that
involves improvements
[[Page 128]]
to be made on the property, or when the sum of the loan amount disclosed
under paragraph (b) of this section and any amount of existing loans
assumed or taken subject to that is disclosed under paragraph (j)(2)(iv)
of this section exceeds the sale price disclosed under paragraph
(a)(3)(vii)(A) of this section, the amount of funds from the consumer as
determined in accordance with paragraph (i)(6)(iv) of this section
labeled ``Down Payment/Funds from Borrower;'' or
(B) In all transactions not subject to paragraph (i)(4)(ii)(A) of
this section, the amount of funds from the consumer as determined in
accordance with paragraph (i)(6)(iv) of this section, labeled ``Down
Payment/Funds from Borrower.''
(iii) Under the subheading ``Did this change?,'' disclosed more
prominently than the other disclosures under this paragraph (i)(4):
(A) If the amount disclosed under paragraph (i)(4)(ii) of this
section is different than the amount disclosed under paragraph (i)(4)(i)
of this section (unless the difference is due to rounding), a statement
of that fact, along with a statement that the consumer increased or
decreased this payment and that the consumer should see the details
disclosed under paragraph (j)(1) or (j)(2) of this section, as
applicable; or
(B) If the amount disclosed under paragraph (i)(4)(ii) of this
section is equal to the amount disclosed under paragraph (i)(4)(i) of
this section, a statement of that fact.
(5) Deposit. (i) Under the subheading ``Loan Estimate,'' the amount
disclosed under Sec. 1026.37(h)(1)(iv), labeled ``Deposit.''
(ii) Under the subheading ``Final,'' the amount disclosed under
paragraph (j)(2)(ii) of this section, stated as a negative number.
(iii) Under the subheading ``Did this change?,'' disclosed more
prominently than the other disclosures under this paragraph (i)(5):
(A) If the amount disclosed under paragraph (i)(5)(ii) of this
section is different than the amount disclosed under paragraph (i)(5)(i)
of this section (unless the difference is due to rounding), a statement
of that fact, along with a statement that the consumer increased or
decreased this payment, as applicable, and that the consumer should see
the details disclosed under paragraph (j)(2)(ii) of this section; or
(B) If the amount disclosed under paragraph (i)(5)(ii) of this
section is equal to the amount disclosed under paragraph (i)(5)(i) of
this section, a statement of that fact.
(6) Funds for borrower. (i) Under the subheading ``Loan Estimate,''
the amount disclosed under Sec. 1026.37(h)(1)(v), labeled ``Funds for
Borrower.''
(ii) Under the subheading ``Final,'' the ``Funds for Borrower,''
labeled using that term, as determined in accordance with paragraph
(i)(6)(iv) of this section.
(iii) Under the subheading ``Did this change?,'' disclosed more
prominently than the other disclosures under this paragraph (i)(6):
(A) If the amount disclosed under paragraph (i)(6)(ii) of this
section is different than the amount disclosed under paragraph (i)(6)(i)
of this section (unless the difference is due to rounding), a statement
of that fact, along with a statement that the consumer's available funds
from the loan amount have increased or decreased, as applicable; or
(B) If the amount disclosed under paragraph (i)(6)(ii) of this
section is equal to the amount disclosed under paragraph (i)(6)(i) of
this section, a statement of that fact.
(iv) The ``Down Payment/Funds from Borrower'' to be disclosed under
paragraph (i)(4)(ii)(A)(2) or (B) of this section, as applicable, and
``Funds for Borrower'' to be disclosed under paragraph (i)(6)(ii) of
this section are determined by subtracting the sum of the loan amount
disclosed under paragraph (b) of this section and any amount for
existing loans assumed or taken subject to that is disclosed under
paragraph (j)(2)(iv) of this section (excluding any closing costs
financed disclosed under paragraph (i)(3)(ii) of this section) from the
total amount of all existing debt being satisfied in the transaction
disclosed under paragraphs (j)(1)(ii), (iii), and (v) of this section.
(A) If the calculation under this paragraph (i)(6)(iv) yields an
amount that is a positive number, such amount shall
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be disclosed under paragraph (i)(4)(ii)(A)(2) or (B) of this section, as
applicable, and $0 shall be disclosed under paragraph (i)(6)(ii) of this
section.
(B) If the calculation under this paragraph (i)(6)(iv) yields an
amount that is a negative number, such amount shall be disclosed under
paragraph (i)(6)(ii) of this section, stated as a negative number, and
$0 shall be disclosed under paragraph (i)(4)(ii)(A)(2) or (i)(4)(ii)(B)
of this section, as applicable.
(C) If the calculation under this paragraph (i)(6)(iv) yields $0, $0
shall be disclosed under paragraph (i)(4)(ii)(A)(2) or (i)(4)(ii)(B) of
this section, as applicable, and under paragraph (i)(6)(ii) of this
section.
(7) Seller credits. (i) Under the subheading ``Loan Estimate,'' the
amount disclosed under Sec. 1026.37(h)(1)(vi), labeled ``Seller
Credits.''
(ii) Under the subheading ``Final,'' the amount disclosed under
paragraph (j)(2)(v) of this section, stated as a negative number.
(iii) Under the subheading ``Did this change?,'' disclosed more
prominently than the other disclosures under this paragraph (i)(7):
(A) If the amount disclosed under paragraph (i)(7)(ii) of this
section is different than the amount disclosed under paragraph (i)(7)(i)
of this section (unless the difference is due to rounding), a statement
of that fact, along with a statement that the consumer should see the
details disclosed:
(1) Under paragraph (j)(2)(v) of this section and in the seller-paid
column under paragraphs (f) and (g) of this section; or
(2) Under either paragraph (j)(2)(v) of this section or in the
seller-paid column under paragraphs (f) or (g) of this section, if the
details are only disclosed under paragraph (j)(2)(v) or paragraph (f) or
(g); or
(B) If the amount disclosed under paragraph (i)(7)(ii) of this
section is equal to the amount disclosed under paragraph (i)(7)(i) of
this section, a statement of that fact.
(8) Adjustments and other credits. (i) Under the subheading ``Loan
Estimate,'' the amount disclosed on the Loan Estimate under Sec.
1026.37(h)(1)(vii), labeled ``Adjustments and Other Credits.''
(ii) Under the subheading ``Final,'' the amount equal to the total
of the amounts disclosed under paragraphs (j)(1)(iii) and (v) of this
section, to the extent amounts in paragraphs (j)(1)(iii) and (v) were
not included in the calculation required by paragraph (i)(4) or (6) of
this section, and paragraphs (j)(1)(vi) through (x) of this section,
reduced by the total of the amounts disclosed under paragraphs
(j)(2)(vi) through (xi) of this section.
(iii) Under the subheading ``Did this change?,'' disclosed more
prominently than the other disclosures under this paragraph (i)(8):
(A) If the amount disclosed under paragraph (i)(8)(ii) of this
section is different than the amount disclosed under paragraph (i)(8)(i)
of this section (unless the difference is due to rounding), a statement
of that fact, along with a statement that the consumer should see the
details disclosed under paragraphs (j)(1)(iii) and (v) through (x) and
(j)(2)(vi) through (xi) of this section, as applicable; or
(B) If the amount disclosed under paragraph (i)(8)(ii) of this
section is equal to the amount disclosed under paragraph (i)(8)(i) of
this section, a statement of that fact.
(9) Cash to close. (i) Under the subheading ``Loan Estimate,'' the
amount disclosed on the Loan Estimate under Sec. 1026.37(h)(1)(viii),
labeled ``Cash to Close'' and disclosed more prominently than the other
disclosures under this paragraph (i).
(ii) Under the subheading ``Final,'' the sum of the amounts
disclosed under paragraphs (i)(1) through (i)(8) of this section under
the subheading ``Final,'' and disclosed more prominently than the other
disclosures under this paragraph (i).
(j) Summary of borrower's transaction. Under the heading ``Summaries
of Transactions,'' with a statement to ``Use this table to see a summary
of your transaction,'' two separate tables are disclosed. The first
table shall include, under the subheading ``Borrower's Transaction,''
the following information and shall satisfy the following requirements:
[[Page 130]]
(1) Itemization of amounts due from borrower. (i) The total amount
due from the consumer at closing, calculated as the sum of items
required to be disclosed by paragraph (j)(1)(ii) through (x) of this
section, excluding items paid from funds other than closing funds as
described in paragraph (j)(4)(i) of this section, labeled ``Due from
Borrower at Closing'';
(ii) The amount of the contract sales price of the property being
sold in a purchase real estate transaction, excluding the price of any
tangible personal property if the consumer and seller have agreed to a
separate price for such items, labeled ``Sale Price of Property'';
(iii) The amount of the sales price of any tangible personal
property excluded from the contract sales price pursuant to paragraph
(j)(1)(ii) of this section, labeled ``Sale Price of Any Personal
Property Included in Sale'';
(iv) The total amount of closing costs disclosed that are designated
borrower-paid at closing, as the sum of the amounts calculated pursuant
to paragraphs (h)(2) and (3) of this section, labeled ``Closing Costs
Paid at Closing'';
(v) A description and the amount of any additional items that the
seller has paid prior to the real estate closing, but reimbursed by the
consumer at the real estate closing, and a description and the amount of
any other items owed by the consumer at the real estate closing not
otherwise disclosed pursuant to paragraph (f), (g), or (j) of this
section;
(vi) The description ``Adjustments for Items Paid by Seller in
Advance'';
(vii) The prorated amount of any prepaid taxes due from the consumer
to reimburse the seller at the real estate closing, and the time period
corresponding to that amount, labeled ``City/Town Taxes'';
(viii) The prorated amount of any prepaid taxes due from the
consumer to reimburse the seller at the real estate closing, and the
time period corresponding to that amount, labeled ``County Taxes'';
(ix) The prorated amount of any prepaid assessments due from the
consumer to reimburse the seller at the real estate closing, and the
time period corresponding to that amount, labeled ``Assessments''; and
(x) A description and the amount of any additional items paid by the
seller prior to the real estate closing that are due from the consumer
at the real estate closing.
(2) Itemization of amounts already paid by or on behalf of borrower.
(i) The sum of the amounts disclosed in this paragraphs (j)(2)(ii)
through (xi) of this section, excluding items paid from funds other than
closing funds as described in paragraph (j)(4)(i) of this section,
labeled ``Paid Already by or on Behalf of Borrower at Closing'';
(ii) Any amount that is paid to the seller or held in trust or
escrow by an attorney or other party under the terms of the agreement
for the sale of the property, labeled ``Deposit'';
(iii) The amount of the consumer's new loan amount or first user
loan as disclosed pursuant to paragraph (b) of this section, labeled
``Loan Amount'';
(iv) The amount of any existing loans that the consumer is assuming,
or any loans subject to which the consumer is taking title to the
property, labeled ``Existing Loan(s) Assumed or Taken Subject to'';
(v) The total amount of money that the seller will provide at the
real estate closing as a lump sum not otherwise itemized to pay for loan
costs as determined by paragraph (f) of this section and other costs as
determined by paragraph (g) of this section and any other obligations of
the seller to be paid directly to the consumer, labeled ``Seller
Credit'';
(vi) Descriptions and amounts of other items paid by or on behalf of
the consumer and not otherwise disclosed under paragraphs (f), (g), (h),
and (j)(2) of this section, labeled ``Other Credits,'' and descriptions
and the amounts of any additional amounts owed the consumer but payable
to the seller before the real estate closing, under the heading
``Adjustments'';
(vii) The description ``Adjustments for Items Unpaid by Seller'';
(viii) The prorated amount of any unpaid taxes due from the seller
to reimburse the consumer at the real estate closing, and the time
period corresponding to that amount, labeled ''City/Town Taxes'';
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(ix) The prorated amount of any unpaid taxes due from the seller to
reimburse the consumer at the real estate closing, and the time period
corresponding to that amount, labeled ``County Taxes'';
(x) The prorated amount of any unpaid assessments due from the
seller to reimburse the consumer at the real estate closing, and the
time period corresponding to that amount, labeled ``Assessments''; and
(xi) A description and the amount of any additional items which have
not yet been paid and which the consumer is expected to pay after the
real estate closing, but which are attributable in part to a period of
time prior to the real estate closing.
(3) Calculation of borrower's transaction. Under the label
``Calculation'':
(i) The amount disclosed pursuant to paragraph (j)(1)(i) of this
section, labeled ``Total Due from Borrower at Closing'';
(ii) The amount disclosed pursuant to paragraph (j)(2)(i) of this
section, if any, disclosed as a negative number, labeled ``Total Paid
Already by or on Behalf of Borrower at Closing''; and
(iii) A statement that the disclosed amount is due from or to the
consumer, and the amount due from or to the consumer at the real estate
closing, calculated by the sum of the amounts disclosed under paragraphs
(j)(3)(i) and (ii) of this section, labeled ``Cash to Close.''
(4) Items paid outside of closing funds. (i) Costs that are not paid
from closing funds but that would otherwise be disclosed in the table
required pursuant to paragraph (j) of this section, should be marked
with the phrase ``Paid Outside of Closing'' or the abbreviation
``P.O.C.'' and include the name of the party making the payment.
(ii) For purposes of this paragraph (j), ``closing funds'' means
funds collected and disbursed at real estate closing.
(k) Summary of seller's transaction. Under the heading ``Summaries
of Transactions'' required by paragraph (j) of this section, a separate
table under the subheading ``Seller's Transaction,'' that includes the
following information and satisfies the following requirements:
(1) Itemization of amounts due to seller. (i) The total amount due
to the seller at the real estate closing, calculated as the sum of items
required to be disclosed pursuant to paragraphs (k)(1)(ii) through (ix)
of this section, excluding items paid from funds other than closing
funds as described in paragraph (k)(4)(i) of this section, labeled ``Due
to Seller at Closing'';
(ii) The amount of the contract sales price of the property being
sold, excluding the price of any tangible personal property if the
consumer and seller have agreed to a separate price for such items,
labeled ``Sale Price of Property'';
(iii) The amount of the sales price of any tangible personal
property excluded from the contract sales price pursuant to paragraph
(k)(1)(ii) of this section, labeled ``Sale Price of Any Personal
Property Included in Sale'';
(iv) A description and the amount of other items paid to the seller
by the consumer pursuant to the contract of sale or other agreement,
such as charges that were not disclosed pursuant to Sec. 1026.37 on the
Loan Estimate or items paid by the seller prior to the real estate
closing but reimbursed by the consumer at the real estate closing;
(v) The description ``Adjustments for Items Paid by Seller in
Advance'';
(vi) The prorated amount of any prepaid taxes due from the consumer
to reimburse the seller at the real estate closing, and the time period
corresponding to that amount, labeled ``City/Town Taxes'';
(vii) The prorated amount of any prepaid taxes due from the consumer
to reimburse the seller at the real estate closing, and the time period
corresponding to that amount, labeled ``County Taxes'';
(viii) The prorated amount of any prepaid assessments due from the
consumer to reimburse the seller at the real estate closing, and the
time period corresponding to that amount, labeled ``Assessments''; and
(ix) A description and the amount of additional items paid by the
seller prior to the real estate closing that are reimbursed by the
consumer at the real estate closing.
[[Page 132]]
(2) Itemization of amounts due from seller. (i) The total amount due
from the seller at the real estate closing, calculated as the sum of
items required to be disclosed pursuant to paragraphs (k)(2)(ii) through
(xiii) of this section, excluding items paid from funds other than
closing funds as described in paragraph (k)(4)(i) of this section,
labeled ``Due from Seller at Closing'';
(ii) The amount of any excess deposit disbursed to the seller prior
to the real estate closing, labeled ``Excess Deposit'';
(iii) The amount of closing costs designated seller-paid at closing
disclosed pursuant to paragraph (h)(2) of this section, labeled
``Closing Costs Paid at Closing'';
(iv) The amount of any existing loans that the consumer is assuming,
or any loans subject to which the consumer is taking title to the
property, labeled ``Existing Loan(s) Assumed or Taken Subject to'';
(v) The amount of any loan secured by a first lien on the property
that will be paid off as part of the real estate closing, labeled
``Payoff of First Mortgage Loan'';
(vi) The amount of any loan secured by a second lien on the property
that will be paid off as part of the real estate closing, labeled
``Payoff of Second Mortgage Loan'';
(vii) The total amount of money that the seller will provide at the
real estate closing as a lump sum not otherwise itemized to pay for loan
costs as determined by paragraph (f) of this section and other costs as
determined by paragraph (g) of this section and any other obligations of
the seller to be paid directly to the consumer, labeled ``Seller
Credit'';
(viii) A description and amount of any and all other obligations
required to be paid by the seller at the real estate closing, including
any lien-related payoffs, fees, or obligations;
(ix) The description ``Adjustments for Items Unpaid by Seller'';
(x) The prorated amount of any unpaid taxes due from the seller to
reimburse the consumer at the real estate closing, and the time period
corresponding to that amount, labeled ``City/Town Taxes'';
(xi) The prorated amount of any unpaid taxes due from the seller to
the consumer at the real estate closing, and the time period
corresponding to that amount, labeled ``County Taxes'';
(xii) The prorated amount of any unpaid assessments due from the
seller to reimburse the consumer at the real estate closing, and the
time period corresponding to that amount, labeled ``Assessments''; and
(xiii) A description and the amount of any additional items which
have not yet been paid and which the consumer is expected to pay after
the real estate closing, but which are attributable in part to a period
of time prior to the real estate closing.
(3) Calculation of seller's transaction. Under the label
``Calculation'':
(i) The amount described in paragraph (k)(1)(i) of this section,
labeled ``Total Due to Seller at Closing'';
(ii) The amount described in paragraph (k)(2)(i) of this section,
disclosed as a negative number, labeled ``Total Due from Seller at
Closing''; and
(iii) A statement that the disclosed amount is due from or to the
seller, and the amount due from or to the seller at closing, calculated
by the sum of the amounts disclosed pursuant to paragraphs (k)(3)(i) and
(ii) of this section, labeled ``Cash.''
(4) Items paid outside of closing funds. (i) Charges that are not
paid from closing funds but that would otherwise be disclosed in the
table described in paragraph (k) of this section, should be marked with
the phrase ``Paid Outside of Closing'' or the acronym ``P.O.C.'' and
include a statement of the party making the payment.
(ii) For purposes of this paragraph (k), ``closing funds'' are
defined as funds collected and disbursed at real estate closing.
(l) Loan disclosures. Under the master heading ``Additional
Information About This Loan'' and under the heading ``Loan
Disclosures'':
(1) Assumption. Under the subheading ``Assumption,'' the information
required by Sec. 1026.37(m)(2).
(2) Demand feature. Under the subheading ``Demand Feature,'' a
statement of whether the legal obligation permits the creditor to demand
early
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repayment of the loan and, if the statement is affirmative, a reference
to the note or other loan contract for details.
(3) Late payment. Under the subheading ``Late Payment,'' the
information required by Sec. 1026.37(m)(4).
(4) Negative amortization. Under the subheading ``Negative
Amortization (Increase in Loan Amount),'' a statement of whether the
regular periodic payments may cause the principal balance to increase.
(i) If the regular periodic payments do not cover all of the
interest due, the creditor must provide a statement that the principal
balance will increase, such balance will likely become larger than the
original loan amount, and increases in such balance lower the consumer's
equity in the property.
(ii) If the consumer may make regular periodic payments that do not
cover all of the interest due, the creditor must provide a statement
that, if the consumer chooses a monthly payment option that does not
cover all of the interest due, the principal balance may become larger
than the original loan amount and the increases in the principal balance
lower the consumer's equity in the property.
(5) Partial payment policy. Under the subheading ``Partial
Payments'':
(i) If periodic payments that are less than the full amount due are
accepted, a statement that the creditor, using the term ``lender,'' may
accept partial payments and apply such payments to the consumer's loan;
(ii) If periodic payments that are less than the full amount due are
accepted but not applied to a consumer's loan until the consumer pays
the remainder of the full amount due, a statement that the creditor,
using the term ``lender,'' may hold partial payments in a separate
account until the consumer pays the remainder of the payment and then
apply the full periodic payment to the consumer's loan;
(iii) If periodic payments that are less than the full amount due
are not accepted, a statement that the creditor, using the term
``lender,'' does not accept any partial payments; and
(iv) A statement that, if the loan is sold, the new creditor, using
the term ``lender,'' may have a different policy.
(6) Security interest. Under the subheading ``Security Interest,'' a
statement that the consumer is granting a security interest in the
property securing the transaction, the property address including a zip
code, and a statement that the consumer may lose the property if the
consumer does not make the required payments or satisfy other
requirements under the legal obligation.
(7) Escrow account. Under the subheading ``Escrow Account'':
(i) Under the reference ``For now,'' a statement that an escrow
account may also be called an impound or trust account, a statement of
whether the creditor has established or will establish (at or before
consummation) an escrow account in connection with the transaction, and
the information required under paragraphs (l)(7)(i)(A) and (B) of this
section:
(A) A statement that the creditor may be liable for penalties and
interest if it fails to make a payment for any cost for which the escrow
account is established, a statement that the consumer would have to pay
such costs directly in the absence of the escrow account, and a table,
titled ``Escrow,'' that contains, if an escrow account is or will be
established, an itemization of the amounts listed in paragraphs
(l)(7)(i)(A)(1) through (4) of this section;
(1) The total amount the consumer will be required to pay into an
escrow account over the first year after consummation, labeled
``Escrowed Property Costs over Year 1,'' together with a descriptive
name of each charge to be paid (in whole or in part) from the escrow
account, calculated as the amount disclosed under paragraph
(l)(7)(i)(A)(4) of this section multiplied by the number of periodic
payments scheduled to be made to the escrow account during the first
year after consummation;
(2) The estimated amount the consumer is likely to pay during the
first year after consummation for the mortgage-related obligations
described in Sec. 1026.43(b)(8) that are known to the creditor and that
will not be paid using escrow account funds, labeled ``Non-Escrowed
Property Costs over Year 1,'' together with a descriptive name of each
such charge and a statement that
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the consumer may have to pay other costs that are not listed;
(3) The total amount disclosed under paragraph (g)(3) of this
section, a statement that the payment is a cushion for the escrow
account, labeled ``Initial Escrow Payment,'' and a reference to the
information disclosed under paragraph (g)(3) of this section;
(4) The amount the consumer will be required to pay into the escrow
account with each periodic payment during the first year after
consummation, labeled ``Monthly Escrow Payment.''
(5) A creditor complies with the requirements of paragraphs
(l)(7)(i)(A)(1) and (4) of this section if the creditor bases the
numerical disclosures required by those paragraphs on amounts derived
from the escrow account analysis required under Regulation X, 12 CFR
1024.17.
(B) A statement of whether the consumer will not have an escrow
account, the reason why an escrow account will not be established, a
statement that the consumer must pay all property costs, such as taxes
and homeowner's insurance, directly, a statement that the consumer may
contact the creditor to inquire about the availability of an escrow
account, and a table, titled ``No Escrow,'' that contains, if an escrow
account will not be established, an itemization of the following:
(1) The estimated total amount the consumer will pay directly for
the mortgage-related obligations described in Sec. 1026.43(b)(8) during
the first year after consummation that are known to the creditor and a
statement that, without an escrow account, the consumer must pay the
identified costs, possibly in one or two large payments, labeled
``Property Costs over Year 1''; and
(2) The amount of any fee the creditor imposes on the consumer for
not establishing an escrow account in connection with the transaction,
labeled ``Escrow Waiver Fee.''
(ii) Under the reference ``In the future'':
(A) A statement that the consumer's property costs may change and
that, as a result, the consumer's escrow payment may change;
(B) A statement that the consumer may be able to cancel any escrow
account that has been established, but that the consumer is responsible
for directly paying all property costs in the absence of an escrow
account; and
(C) A description of the consequences if the consumer fails to pay
property costs, including the actions that a State or local government
may take if property taxes are not paid and the actions the creditor may
take if the consumer does not pay some or all property costs, such as
adding amounts to the loan balance, adding an escrow account to the
loan, or purchasing a property insurance policy on the consumer's behalf
that may be more expensive and provide fewer benefits than what the
consumer could obtain directly.
(m) Adjustable payment table. Under the master heading ``Additional
Information About This Loan'' required by paragraph (l) of this section,
and under the heading ``Adjustable Payment (AP) Table,'' the table
required to be disclosed by Sec. 1026.37(i).
(n) Adjustable interest rate table. Under the master heading
``Additional Information About This Loan'' required by paragraph (l) of
this section, and under the heading ``Adjustable Interest Rate (AIR)
Table,'' the table required to be disclosed by Sec. 1026.37(j).
(o) Loan calculations. In a separate table under the heading ``Loan
Calculations'':
(1) Total of payments. The ``Total of Payments,'' using that term
and expressed as a dollar amount, and a statement that the disclosure is
the total the consumer will have paid after making all payments of
principal, interest, mortgage insurance, and loan costs, as scheduled.
The disclosed total of payments shall be treated as accurate if the
amount disclosed as the total of payments:
(i) Is understated by no more than $100; or
(ii) Is greater than the amount required to be disclosed.
(2) Finance charge. The ``Finance Charge,'' using that term and
expressed as a dollar amount, and the following statement: ``The dollar
amount the loan will cost you.'' The disclosed finance charge and other
disclosures affected by the disclosed financed charge (including the
amount financed and the
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annual percentage rate) shall be treated as accurate if the amount
disclosed as the finance charge:
(i) Is understated by no more than $100; or
(ii) Is greater than the amount required to be disclosed.
(3) Amount financed. The ``Amount Financed,'' using that term and
expressed as a dollar amount, and the following statement: ``The loan
amount available after paying your upfront finance charge.''
(4) Annual percentage rate. The ``Annual Percentage Rate,'' using
that term and the abbreviation ``APR'' and expressed as a percentage,
and the following statement: ``Your costs over the loan term expressed
as a rate. This is not your interest rate.''
(5) Total interest percentage. The ``Total Interest Percentage,''
using that term and the abbreviation ``TIP'' and expressed as a
percentage, and the following statement: ``The total amount of interest
that you will pay over the loan term as a percentage of your loan
amount.''
(p) Other disclosures. Under the heading ``Other Disclosures'':
(1) Appraisal. For transactions subject to 15 U.S.C. 1639h or
1691(e), as implemented in this part or Regulation B, 12 CFR part 1002,
respectively, under the subheading ``Appraisal,'' that:
(i) If there was an appraisal of the property in connection with the
loan, the creditor is required to provide the consumer with a copy at no
additional cost to the consumer at least three days prior to
consummation; and
(ii) If the consumer has not yet received a copy of the appraisal,
the consumer should contact the creditor using the information disclosed
pursuant to paragraph (r) of this section.
(2) Contract details. A statement that the consumer should refer to
the appropriate loan document and security instrument for information
about nonpayment, what constitutes a default under the legal obligation,
circumstances under which the creditor may accelerate the maturity of
the obligation, and prepayment rebates and penalties, under the
subheading ``Contract Details.''
(3) Liability after foreclosure. A brief statement of whether, and
the conditions under which, the consumer may remain responsible for any
deficiency after foreclosure under applicable State law, a brief
statement that certain protections may be lost if the consumer
refinances or incurs additional debt on the property, and a statement
that the consumer should consult an attorney for additional information,
under the subheading ``Liability after Foreclosure.''
(4) Refinance. Under the subheading ``Refinance,'' the statement
required by Sec. 1026.37(m)(5).
(5) Tax deductions. Under the subheading ``Tax Deductions,'' a
statement that, if the extension of credit exceeds the fair market value
of the property, the interest on the portion of the credit extension
that is greater than the fair market value of the property is not tax
deductible for Federal income tax purposes and a statement that the
consumer should consult a tax adviser for further information.
(q) Questions notice. In a separate notice labeled ``Questions?'':
(1) A statement directing the consumer to use the contact
information disclosed under paragraph (r) of this section if the
consumer has any questions about the disclosures required pursuant to
Sec. 1026.19(f);
(2) A reference to the Bureau's Web site to obtain more information
or to submit a complaint; and the link or uniform resource locator
address to the Web site: www.consumerfinance.gov/mortgage-closing; and
(3) A prominent question mark.
(r) Contact information. In a separate table, under the heading
``Contact Information,'' the following information for each creditor
(under the subheading ``Lender''), mortgage broker (under the subheading
``Mortgage Broker''), consumer's real estate broker (under the
subheading ``Real Estate Broker (B)''), seller's real estate broker
(under the subheading ``Real Estate Broker (S)''), and settlement agent
(under the subheading ``Settlement Agent'') participating in the
transaction:
(1) Name of the person, labeled ``Name'';
(2) Address, using that label;
(3) Nationwide Mortgage Licensing System & Registry (NMLSR ID)
identification number, labeled ``NMLS ID,''
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or, if none, license number or other unique identifier issued by the
applicable jurisdiction or regulating body with which the person is
licensed and/or registered, labeled ``License ID,'' with the
abbreviation for the State of the applicable jurisdiction or regulatory
body stated before the word ``License'' in the label, for the persons
identified in paragraph (r)(1) of this section;
(4) Name of the natural person who is the primary contact for the
consumer with the person identified in paragraph (r)(1) of this section,
labeled ``Contact'';
(5) NMLSR ID, labeled ``Contact NMLS ID,'' or, if none, license
number or other unique identifier issued by the applicable jurisdiction
or regulating body with which the person is licensed and/or registered,
labeled ``Contact License ID,'' with the abbreviation for the State of
the applicable jurisdiction or regulatory body stated before the word
``License'' in the label, for the natural person identified in paragraph
(r)(4) of this section,
(6) Email address for the person identified in paragraph (r)(4) of
this section, labeled ``Email''; and
(7) Telephone number for the person identified in paragraph (r)(4)
of this section, labeled ``Phone.''
(s) Signature statement. (1) At the creditor's option, under the
heading ``Confirm Receipt,'' a line for the signatures of the consumers
in the transaction. If the creditor provides a line for the consumer's
signature, the creditor must disclose above the signature line the
statement required to be disclosed under Sec. 1026.37(n)(1).
(2) If the creditor does not provide a line for the consumer's
signature, the statement required to be disclosed under Sec.
1026.37(n)(2) under the heading ``Other Disclosures'' required by
paragraph (p) of this section.
(t) Form of disclosures--(1) General requirements. (i) The creditor
shall make the disclosures required by this section clearly and
conspicuously in writing, in a form that the consumer may keep. The
disclosures also shall be grouped together and segregated from
everything else.
(ii) Except as provided in paragraph (t)(5), the disclosures shall
contain only the information required by paragraphs (a) through (s) of
this section and shall be made in the same order, and positioned
relative to the master headings, headings, subheadings, labels, and
similar designations in the same manner, as shown in form H-25, set
forth in appendix H to this part.
(2) Headings and labels. If a master heading, heading, subheading,
label, or similar designation contains the word ``estimated'' or a
capital letter designation in form H-25, set forth in appendix H to this
part, that heading, label, or similar designation shall contain the word
``estimated'' and the applicable capital letter designation.
(3) Form. Except as provided in paragraph (t)(5) of this section:
(i) For a transaction subject to Sec. 1026.19(f) that is a
federally related mortgage loan, as defined in Regulation X, 12 CFR
1024.2, the disclosures must be made using form H-25, set forth in
appendix H to this part.
(ii) For any other transaction subject to this section, the
disclosures must be made with headings, content, and format
substantially similar to form H-25, set forth in appendix H to this
part.
(iii) The disclosures required by this section may be provided to
the consumer in electronic form, subject to compliance with the consumer
consent and other applicable provisions of the Electronic Signatures in
Global and National Commerce Act (15 U.S.C. 7001 et seq.).
(4) Rounding--(i) Nearest dollar. The following dollar amounts are
required to be rounded to the nearest whole dollar:
(A) The dollar amounts required to be disclosed by paragraph (b) of
this section that are required to be rounded by Sec.
1026.37(o)(4)(i)(A) when disclosed under Sec. 1026.37(b)(6) and (7);
(B) The dollar amounts required to be disclosed by paragraph (c) of
this section that are required to be rounded by Sec.
1026.37(o)(4)(i)(A) when disclosed under Sec. 1026.37(c)(1)(iii);
(C) The dollar amounts required to be disclosed by paragraphs (e)
and (i) of this section under the subheading ``Loan Estimate'';
(D) The dollar amounts required to be disclosed by paragraph (m) of
this section; and
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(E) The dollar amounts required to be disclosed by paragraph (c) of
this section that are required to be rounded by Sec.
1026.37(o)(4)(i)(C) when disclosed under Sec. 1026.37(c)(2)(iv).
(ii) Percentages. The percentage amounts required to be disclosed
under paragraphs (b), (f)(1), (n), and (o)(4) and (5) of this section
shall be disclosed by rounding the exact amounts to three decimal places
and then dropping any trailing zeros to the right of the decimal point.
(iii) Loan amount. The dollar amount required to be disclosed by
paragraph (b) of this section as required by Sec. 1026.37(b)(1) shall
be disclosed as an unrounded number, except that if the amount is a
whole number then the amount disclosed shall be truncated at the decimal
point.
(5) Exceptions--(i) Unit-period. Wherever the form or this section
uses ``monthly'' to describe the frequency of any payments or uses
``month'' to describe the applicable unit-period, the creditor shall
substitute the appropriate term to reflect the fact that the
transaction's terms provide for other than monthly periodic payments,
such as bi-weekly or quarterly payments.
(ii) Lender credits. The amount required to be disclosed by
paragraph (d)(1)(i)(D) of this section may be omitted from the form if
the amount is zero.
(iii) Administrative information. The creditor may insert at the
bottom of each page under the disclosures required by this section as
illustrated by form H-25 of appendix H to this part, any administrative
information, text, or codes that assist in identification of the form or
the information disclosed on the form, provided that the space provided
on form H-25 for any of the information required by this section is not
altered.
(iv) Closing cost details--(A) Additional line numbers. Line numbers
provided on form H-25 of appendix H to this part for the disclosure of
the information required by paragraphs (f)(1) through (3) and (g)(1)
through (4) of this section that are not used may be deleted and the
deleted line numbers added to the space provided for any other of those
paragraphs as necessary to accommodate the disclosure of additional
items.
(B) Two pages. To the extent that adding or deleting line numbers
provided on form H-25 of appendix H to this part, as permitted by
paragraph (t)(5)(iv)(A) of this section, does not accommodate an
itemization of all information required to be disclosed by paragraphs
(f) through (h) on one page, the information required to be disclosed by
paragraphs (f) through (h) of this section may be disclosed on two
pages, provided that the information required by paragraph (f) is
disclosed on a page separate from the information required by paragraph
(g). The information required by paragraph (g), if disclosed on a page
separate from paragraph (f), shall be disclosed on the same page as the
information required by paragraph (h).
(v) Separation of consumer and seller information. The creditor or
settlement agent preparing the form may use form H-25 of appendix H to
this part for the disclosure provided to both the consumer and the
seller, with the following modifications to separate the information of
the consumer and seller, as necessary:
(A) The information required to be disclosed by paragraphs (j) and
(k) of this section may be disclosed on separate pages to the consumer
and the seller, respectively, with the information required by the other
paragraph left blank. The information disclosed to the consumer pursuant
to paragraph (j) of this section must be disclosed on the same page as
the information required by paragraph (i) of this section.
(B) The information required to be disclosed by paragraphs (f) and
(g) of this section with respect to costs paid by the consumer may be
left blank on the disclosure provided to the seller.
(C) The information required by paragraphs (a)(2), (a)(4)(iii),
(a)(5), (b) through (d), (i), (l) through (p), (r) with respect to the
creditor and mortgage broker, and (s)(2) of this section may be left
blank on the disclosure provided to the seller.
(vi) Modified version of the form for a seller or third-party. The
information required by paragraphs (a)(2), (a)(4)(iii), (a)(5), (b)
through (d), (f), and (g) with respect to costs paid by the consumer,
(i), (j), (l) through (p), (q)(1), and (r)
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with respect to the creditor and mortgage broker, and (s) of this
section may be deleted from the form provided to the seller or a third-
party, as illustrated by form H-25(I) of appendix H to this part.
(vii) Transaction without a seller or simultaneous subordinate
financing transaction. The following modifications to form H-25 of
appendix H to this part may be made for a transaction that does not
involve a seller or for simultaneous subordinate financing, and for
which the alternative tables are disclosed under paragraphs (d)(2) and
(e) of this section, as illustrated by form H-25(J) of appendix H to
this part:
(A) The information required by paragraph (a)(4)(ii), and paragraphs
(f), (g), and (h) of this section with respect to costs paid by the
seller, may be deleted.
(B) A table under the master heading ``Closing Cost Details''
required by paragraph (f) of this section may be added with the heading
``Payoffs and Payments'' that itemizes the amounts of payments made at
closing to other parties from the credit extended to the consumer or
funds provided by the consumer in connection with the transaction,
including designees of the consumer; the payees and a description of the
purpose of such disbursements under the subheading ``To''; and the total
amount of such payments labeled ``Total Payoffs and Payments.''
(C) The tables required to be disclosed by paragraphs (j) and (k) of
this section may be deleted.
(viii) Translation. The form may be translated into languages other
than English, and creditors may modify form H-25 of appendix H to this
part to the extent that translation prevents the headings, labels,
designations, and required disclosure items under this section from
fitting in the space provided on form H-25.
(ix) Customary recitals and information. An additional page may be
attached to the form for the purpose of including customary recitals and
information used locally in real estate settlements.
[78 FR 80120, Dec. 31, 2013, as amended at 80 FR 8776, Feb. 19, 2015; 80
FR 43920, July 24, 2015; 82 FR 37770, Aug. 11, 2017]
Sec. 1026.39 Mortgage transfer disclosures.
(a) Scope. The disclosure requirements of this section apply to any
covered person except as otherwise provided in this section. For
purposes of this section:
(1) A ``covered person'' means any person, as defined in Sec.
1026.2(a)(22), that becomes the owner of an existing mortgage loan by
acquiring legal title to the debt obligation, whether through a
purchase, assignment or other transfer, and who acquires more than one
mortgage loan in any twelve-month period. For purposes of this section,
a servicer of a mortgage loan shall not be treated as the owner of the
obligation if the servicer holds title to the loan, or title is assigned
to the servicer, solely for the administrative convenience of the
servicer in servicing the obligation.
(2) A ``mortgage loan'' means:
(i) An open-end consumer credit transaction that is secured by the
principal dwelling of a consumer; and
(ii) A closed-end consumer credit transaction secured by a dwelling
or real property.
(b) Disclosure required. Except as provided in paragraph (c) of this
section, each covered person is subject to the requirements of this
section and shall mail or deliver the disclosures required by this
section to the consumer on or before the 30th calendar day following the
date of transfer.
(1) Form of disclosures. The disclosures required by this section
shall be provided clearly and conspicuously in writing, in a form that
the consumer may keep. The disclosures required by this section may be
provided to the consumer in electronic form, subject to compliance with
the consumer consent and other applicable provisions of the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C.
7001 et seq.).
(2) The date of transfer. For purposes of this section, the date of
transfer to the covered person may, at the covered person's option, be
either the date of acquisition recognized in the books and records of
the acquiring party, or the date of transfer recognized in the books and
records of the transferring party.
[[Page 139]]
(3) Multiple consumers. If more than one consumer is liable on the
obligation, a covered person may mail or deliver the disclosures to any
consumer who is primarily liable.
(4) Multiple transfers. If a mortgage loan is acquired by a covered
person and subsequently sold, assigned, or otherwise transferred to
another covered person, a single disclosure may be provided on behalf of
both covered persons if the disclosure satisfies the timing and content
requirements applicable to each covered person.
(5) Multiple covered persons. If an acquisition involves multiple
covered persons who jointly acquire the loan, a single disclosure must
be provided on behalf of all covered persons.
(c) Exceptions. Notwithstanding paragraph (b) of this section, a
covered person is not subject to the requirements of this section with
respect to a particular mortgage loan if:
(1) The covered person sells, or otherwise transfers or assigns
legal title to the mortgage loan on or before the 30th calendar day
following the date that the covered person acquired the mortgage loan
which shall be the date of transfer recognized for purposes of paragraph
(b)(2) of this section;
(2) The mortgage loan is transferred to the covered person in
connection with a repurchase agreement that obligates the transferor to
repurchase the loan. However, if the transferor does not repurchase the
loan, the covered person must provide the disclosures required by this
section within 30 days after the date that the transaction is recognized
as an acquisition on its books and records; or
(3) The covered person acquires only a partial interest in the loan
and the party authorized to receive the consumer's notice of the right
to rescind and resolve issues concerning the consumer's payments on the
loan does not change as a result of the transfer of the partial
interest.
(d) Content of required disclosures. The disclosures required by
this section shall identify the mortgage loan that was sold, assigned or
otherwise transferred, and state the following, except that the
information required by paragraph (d)(5) of this section shall be stated
only for a mortgage loan that is a closed-end consumer credit
transaction secured by a dwelling or real property other than a reverse
mortgage transaction subject to Sec. 1026.33 of this part:
(1) The name, address, and telephone number of the covered person.
(i) If a single disclosure is provided on behalf of more than one
covered person, the information required by this paragraph shall be
provided for each of them unless paragraph (d)(1)(ii) of this section
applies.
(ii) If a single disclosure is provided on behalf of more than one
covered person and one of them has been authorized in accordance with
paragraph (d)(3) of this section to receive the consumer's notice of the
right to rescind and resolve issues concerning the consumer's payments
on the loan, the information required by paragraph (d)(1) of this
section may be provided only for that covered person.
(2) The date of transfer.
(3) The name, address and telephone number of an agent or party
authorized to receive notice of the right to rescind and resolve issues
concerning the consumer's payments on the loan. However, no information
is required to be provided under this paragraph if the consumer can use
the information provided under paragraph (d)(1) of this section for
these purposes.
(4) Where transfer of ownership of the debt to the covered person is
or may be recorded in public records, or, alternatively, that the
transfer of ownership has not been recorded in public records at the
time the disclosure is provided.
(5) Partial payment policy. Under the subheading ``Partial
Payment'':
(i) If periodic payments that are less than the full amount due are
accepted, a statement that the covered person, using the term
``lender,'' may accept partial payments and apply such payments to the
consumer's loan;
(ii) If periodic payments that are less than the full amount due are
accepted but not applied to a consumer's loan until the consumer pays
the remainder of the full amount due, a statement that the covered
person, using the term ``lender,'' may hold partial payments
[[Page 140]]
in a separate account until the consumer pays the remainder of the
payment and then apply the full periodic payment to the consumer's loan;
(iii) If periodic payments that are less than the full amount due
are not accepted, a statement that the covered person, using the term
``lender,'' does not accept any partial payments; and
(iv) A statement that, if the loan is sold, the new covered person,
using the term ``lender,'' may have a different policy.
(e) Optional disclosures. In addition to the information required to
be disclosed under paragraph (d) of this section, a covered person may,
at its option, provide any other information regarding the transaction.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 80130, Dec. 31, 2013]
Effective Date Note: At 81 FR 72388, Oct. 19, 2016, Sec. 1026.39
was amended by adding paragraph (f), effective Apr. 19, 2018. For the
convenience of the user, the added text is set forth as follows:
Sec. 1026.39 Mortgage transfer disclosures.
* * * * *
(f) Successor in interest. If, upon confirmation, a servicer
provides a confirmed successor in interest who is not liable on the
mortgage loan obligation with a written notice and acknowledgment form
in accordance with Regulation X, Sec. 1024.32(c)(1) of this chapter,
the servicer is not required to provide to the confirmed successor in
interest any written disclosure required by paragraph (b) of this
section unless and until the confirmed successor in interest either
assumes the mortgage loan obligation under State law or has provided the
servicer an executed acknowledgment in accordance with Regulation X,
Sec. 1024.32(c)(1)(iv) of this chapter, that the confirmed successor in
interest has not revoked.
Sec. 1026.40 Requirements for home equity plans.
The requirements of this section apply to open-end credit plans
secured by the consumer's dwelling. For purposes of this section, an
annual percentage rate is the annual percentage rate corresponding to
the periodic rate as determined under Sec. 1026.14(b).
(a) Form of disclosures--(1) General. The disclosures required by
paragraph (d) of this section shall be made clearly and conspicuously
and shall be grouped together and segregated from all unrelated
information. The disclosures may be provided on the application form or
on a separate form. The disclosure described in paragraph (d)(4)(iii),
the itemization of third-party fees described in paragraph (d)(8), and
the variable-rate information described in paragraph (d)(12) of this
section may be provided separately from the other required disclosures.
(2) Precedence of certain disclosures. The disclosures described in
paragraph (d)(1) through (4)(ii) of this section shall precede the other
required disclosures.
(3) For an application that is accessed by the consumer in
electronic form, the disclosures required under this section may be
provided to the consumer in electronic form on or with the application.
(b) Time of disclosures. The disclosures and brochure required by
paragraphs (d) and (e) of this section shall be provided at the time an
application is provided to the consumer. The disclosures and the
brochure may be delivered or placed in the mail not later than three
business days following receipt of a consumer's application in the case
of applications contained in magazines or other publications, or when
the application is received by telephone or through an intermediary
agent or broker.
(c) Duties of third parties. Persons other than the creditor who
provide applications to consumers for home equity plans must provide the
brochure required under paragraph (e) of this section at the time an
application is provided. If such persons have the disclosures required
under paragraph (d) of this section for a creditor's home equity plan,
they also shall provide the disclosures at such time. The disclosures
and the brochure may be delivered or placed in the mail not later than
three business days following receipt of a consumer's application in the
case of applications contained in magazines or other publications, or
when the application is received by telephone or through an intermediary
agent or broker.
(d) Content of disclosures. The creditor shall provide the following
disclosures, as applicable:
[[Page 141]]
(1) Retention of information. A statement that the consumer should
make or otherwise retain a copy of the disclosures.
(2) Conditions for disclosed terms. (i) A statement of the time by
which the consumer must submit an application to obtain specific terms
disclosed and an identification of any disclosed term that is subject to
change prior to opening the plan.
(ii) A statement that, if a disclosed term changes (other than a
change due to fluctuations in the index in a variable-rate plan) prior
to opening the plan and the consumer therefore elects not to open the
plan, the consumer may receive a refund of all fees paid in connection
with the application.
(3) Security interest and risk to home. A statement that the
creditor will acquire a security interest in the consumer's dwelling and
that loss of the dwelling may occur in the event of default.
(4) Possible actions by creditor. (i) A statement that, under
certain conditions, the creditor may terminate the plan and require
payment of the outstanding balance in full in a single payment and
impose fees upon termination; prohibit additional extensions of credit
or reduce the credit limit; and, as specified in the initial agreement,
implement certain changes in the plan.
(ii) A statement that the consumer may receive, upon request,
information about the conditions under which such actions may occur.
(iii) In lieu of the disclosure required under paragraph (d)(4)(ii)
of this section, a statement of such conditions.
(5) Payment terms. The payment terms of the plan. If different
payment terms may apply to the draw and any repayment period, or if
different payment terms may apply within either period, the disclosures
shall reflect the different payment terms. The payment terms of the plan
include:
(i) The length of the draw period and any repayment period.
(ii) An explanation of how the minimum periodic payment will be
determined and the timing of the payments. If paying only the minimum
periodic payments may not repay any of the principal or may repay less
than the outstanding balance, a statement of this fact, as well as a
statement that a balloon payment may result. A balloon payment results
if paying the minimum periodic payments does not fully amortize the
outstanding balance by a specified date or time, and the consumer must
repay the entire outstanding balance at such time.
(iii) An example, based on a $10,000 outstanding balance and a
recent annual percentage rate, showing the minimum periodic payment, any
balloon payment, and the time it would take to repay the $10,000
outstanding balance if the consumer made only those payments and
obtained no additional extensions of credit. For fixed-rate plans, a
recent annual percentage rate is a rate that has been in effect under
the plan within the twelve months preceding the date the disclosures are
provided to the consumer. For variable-rate plans, a recent annual
percentage rate is the most recent rate provided in the historical
example described in paragraph (d)(12)(xi) of this section or a rate
that has been in effect under the plan since the date of the most recent
rate in the table.
(6) Annual percentage rate. For fixed-rate plans, a recent annual
percentage rate imposed under the plan and a statement that the rate
does not include costs other than interest. A recent annual percentage
rate is a rate that has been in effect under the plan within the twelve
months preceding the date the disclosures are provided to the consumer.
(7) Fees imposed by creditor. An itemization of any fees imposed by
the creditor to open, use, or maintain the plan, stated as a dollar
amount or percentage, and when such fees are payable.
(8) Fees imposed by third parties to open a plan. A good faith
estimate, stated as a single dollar amount or range, of any fees that
may be imposed by persons other than the creditor to open the plan, as
well as a statement that the consumer may receive, upon request, a good
faith itemization of such fees. In lieu of the statement, the
itemization of such fees may be provided.
(9) Negative amortization. A statement that negative amortization
may occur
[[Page 142]]
and that negative amortization increases the principal balance and
reduces the consumer's equity in the dwelling.
(10) Transaction requirements. Any limitations on the number of
extensions of credit and the amount of credit that may be obtained
during any time period, as well as any minimum outstanding balance and
minimum draw requirements, stated as dollar amounts or percentages.
(11) Tax implications. A statement that the consumer should consult
a tax advisor regarding the deductibility of interest and charges under
the plan.
(12) Disclosures for variable-rate plans. For a plan in which the
annual percentage rate is variable, the following disclosures, as
applicable:
(i) The fact that the annual percentage rate, payment, or term may
change due to the variable-rate feature.
(ii) A statement that the annual percentage rate does not include
costs other than interest.
(iii) The index used in making rate adjustments and a source of
information about the index.
(iv) An explanation of how the annual percentage rate will be
determined, including an explanation of how the index is adjusted, such
as by the addition of a margin.
(v) A statement that the consumer should ask about the current index
value, margin, discount or premium, and annual percentage rate.
(vi) A statement that the initial annual percentage rate is not
based on the index and margin used to make later rate adjustments, and
the period of time such initial rate will be in effect.
(vii) The frequency of changes in the annual percentage rate.
(viii) Any rules relating to changes in the index value and the
annual percentage rate and resulting changes in the payment amount,
including, for example, an explanation of payment limitations and rate
carryover.
(ix) A statement of any annual or more frequent periodic limitations
on changes in the annual percentage rate (or a statement that no annual
limitation exists), as well as a statement of the maximum annual
percentage rate that may be imposed under each payment option.
(x) The minimum periodic payment required when the maximum annual
percentage rate for each payment option is in effect for a $10,000
outstanding balance, and a statement of the earliest date or time the
maximum rate may be imposed.
(xi) An historical example, based on a $10,000 extension of credit,
illustrating how annual percentage rates and payments would have been
affected by index value changes implemented according to the terms of
the plan. The historical example shall be based on the most recent 15
years of index values (selected for the same time period each year) and
shall reflect all significant plan terms, such as negative amortization,
rate carryover, rate discounts, and rate and payment limitations, that
would have been affected by the index movement during the period.
(xii) A statement that rate information will be provided on or with
each periodic statement.
(e) Brochure. The home equity brochure entitled ``What You Should
Know About Home Equity Lines of Credit'' or a suitable substitute shall
be provided.
(f) Limitations on home equity plans. No creditor may, by contract
or otherwise:
(1) Change the annual percentage rate unless:
(i) Such change is based on an index that is not under the
creditor's control; and
(ii) Such index is available to the general public.
(2) Terminate a plan and demand repayment of the entire outstanding
balance in advance of the original term (except for reverse mortgage
transactions that are subject to paragraph (f)(4) of this section)
unless:
(i) There is fraud or material misrepresentation by the consumer in
connection with the plan;
(ii) The consumer fails to meet the repayment terms of the agreement
for any outstanding balance;
(iii) Any action or inaction by the consumer adversely affects the
creditor's security for the plan, or any right of the creditor in such
security; or
[[Page 143]]
(iv) Federal law dealing with credit extended by a depository
institution to its executive officers specifically requires that as a
condition of the plan the credit shall become due and payable on demand,
provided that the creditor includes such a provision in the initial
agreement.
(3) Change any term, except that a creditor may:
(i) Provide in the initial agreement that it may prohibit additional
extensions of credit or reduce the credit limit during any period in
which the maximum annual percentage rate is reached. A creditor also may
provide in the initial agreement that specified changes will occur if a
specified event takes place (for example, that the annual percentage
rate will increase a specified amount if the consumer leaves the
creditor's employment).
(ii) Change the index and margin used under the plan if the original
index is no longer available, the new index has an historical movement
substantially similar to that of the original index, and the new index
and margin would have resulted in an annual percentage rate
substantially similar to the rate in effect at the time the original
index became unavailable.
(iii) Make a specified change if the consumer specifically agrees to
it in writing at that time.
(iv) Make a change that will unequivocally benefit the consumer
throughout the remainder of the plan.
(v) Make an insignificant change to terms.
(vi) Prohibit additional extensions of credit or reduce the credit
limit applicable to an agreement during any period in which:
(A) The value of the dwelling that secures the plan declines
significantly below the dwelling's appraised value for purposes of the
plan;
(B) The creditor reasonably believes that the consumer will be
unable to fulfill the repayment obligations under the plan because of a
material change in the consumer's financial circumstances;
(C) The consumer is in default of any material obligation under the
agreement;
(D) The creditor is precluded by government action from imposing the
annual percentage rate provided for in the agreement;
(E) The priority of the creditor's security interest is adversely
affected by government action to the extent that the value of the
security interest is less than 120 percent of the credit line; or
(F) The creditor is notified by its regulatory agency that continued
advances constitute an unsafe and unsound practice.
(4) For reverse mortgage transactions that are subject to Sec.
1026.33, terminate a plan and demand repayment of the entire outstanding
balance in advance of the original term except:
(i) In the case of default;
(ii) If the consumer transfers title to the property securing the
note;
(iii) If the consumer ceases using the property securing the note as
the primary dwelling; or
(iv) Upon the consumer's death.
(g) Refund of fees. A creditor shall refund all fees paid by the
consumer to anyone in connection with an application if any term
required to be disclosed under paragraph (d) of this section changes
(other than a change due to fluctuations in the index in a variable-rate
plan) before the plan is opened and, as a result, the consumer elects
not to open the plan.
(h) Imposition of nonrefundable fees. Neither a creditor nor any
other person may impose a nonrefundable fee in connection with an
application until three business days after the consumer receives the
disclosures and brochure required under this section. If the disclosures
and brochure are mailed to the consumer, the consumer is considered to
have received them three business days after they are mailed.
Sec. 1026.41 Periodic statements for residential mortgage loans.
(a) In general--(1) Scope. This section applies to a closed-end
consumer credit transaction secured by a dwelling, unless an exemption
in paragraph (e) of this section applies. A closed-end consumer credit
transaction secured by a dwelling is referred to as a mortgage loan for
purposes of this section.
(2) Periodic statements. A servicer of a transaction subject to this
section shall provide the consumer, for each
[[Page 144]]
billing cycle, a periodic statement meeting the requirements of
paragraphs (b), (c), and (d) of this section. If a mortgage loan has a
billing cycle shorter than a period of 31 days (for example, a bi-weekly
billing cycle), a periodic statement covering an entire month may be
used. For the purposes of this section, servicer includes the creditor,
assignee, or servicer, as applicable. A creditor or assignee that does
not currently own the mortgage loan or the mortgage servicing rights is
not subject to the requirement in this section to provide a periodic
statement.
(b) Timing of the periodic statement. The periodic statement must be
delivered or placed in the mail within a reasonably prompt time after
the payment due date or the end of any courtesy period provided for the
previous billing cycle.
(c) Form of the periodic statement. The servicer must make the
disclosures required by this section clearly and conspicuously in
writing, or electronically if the consumer agrees, and in a form that
the consumer may keep. Sample forms for periodic statements are provided
in appendix H-30. Proper use of these forms complies with the
requirements of this paragraph (c) and the layout requirements in
paragraph (d) of this section.
(d) Content and layout of the periodic statement. The periodic
statement required by this section shall include:
(1) Amount due. Grouped together in close proximity to each other
and located at the top of the first page of the statement:
(i) The payment due date;
(ii) The amount of any late payment fee, and the date on which that
fee will be imposed if payment has not been received; and
(iii) The amount due, shown more prominently than other disclosures
on the page and, if the transaction has multiple payment options, the
amount due under each of the payment options.
(2) Explanation of amount due. The following items, grouped together
in close proximity to each other and located on the first page of the
statement:
(i) The monthly payment amount, including a breakdown showing how
much, if any, will be applied to principal, interest, and escrow and, if
a mortgage loan has multiple payment options, a breakdown of each of the
payment options along with information on whether the principal balance
will increase, decrease, or stay the same for each option listed;
(ii) The total sum of any fees or charges imposed since the last
statement; and
(iii) Any payment amount past due.
(3) Past Payment Breakdown. The following items, grouped together in
close proximity to each other and located on the first page of the
statement:
(i) The total of all payments received since the last statement,
including a breakdown showing the amount, if any, that was applied to
principal, interest, escrow, fees and charges, and the amount, if any,
sent to any suspense or unapplied funds account; and
(ii) The total of all payments received since the beginning of the
current calendar year, including a breakdown of that total showing the
amount, if any, that was applied to principal, interest, escrow, fees
and charges, and the amount, if any, currently held in any suspense or
unapplied funds account.
(4) Transaction activity. A list of all the transaction activity
that occurred since the last statement. For purposes of this paragraph
(d)(4), transaction activity means any activity that causes a credit or
debit to the amount currently due. This list must include the date of
the transaction, a brief description of the transaction, and the amount
of the transaction for each activity on the list.
(5) Partial payment information. If a statement reflects a partial
payment that was placed in a suspense or unapplied funds account,
information explaining what must be done for the funds to be applied.
The information must be on the front page of the statement or,
alternatively, may be included on a separate page enclosed with the
periodic statement or in a separate letter.
(6) Contact information. A toll-free telephone number and, if
applicable, an electronic mailing address that may be used by the
consumer to obtain information about the consumer's account, located on
the front page of the statement.
[[Page 145]]
(7) Account information. The following information:
(i) The amount of the outstanding principal balance;
(ii) The current interest rate in effect for the mortgage loan;
(iii) The date after which the interest rate may next change;
(iv) The existence of any prepayment penalty, as defined in Sec.
1026.32(b)(6)(i), that may be charged;
(v) The Web site to access either the Bureau list or the HUD list of
homeownership counselors and counseling organizations and the HUD toll-
free telephone number to access contact information for homeownership
counselors or counseling organizations; and
(8) Delinquency information. If the consumer is more than 45 days
delinquent, the following items, grouped together in close proximity to
each other and located on the first page of the statement or,
alternatively, on a separate page enclosed with the periodic statement
or in a separate letter:
(i) The length of the consumer's delinquency;
(ii) A notification of possible risks, such as foreclosure, and
expenses, that may be incurred if the delinquency is not cured;
(iii) An account history showing, for the previous six months or the
period since the last time the account was current, whichever is
shorter, the amount remaining past due from each billing cycle or, if
any such payment was fully paid, the date on which it was credited as
fully paid;
(iv) A notice indicating any loss mitigation program to which the
consumer has agreed, if applicable;
(v) A notice of whether the servicer has made the first notice or
filing required by applicable law for any judicial or non-judicial
foreclosure process, if applicable;
(vi) The total payment amount needed to bring the account current;
and
(vii) A reference to the homeownership counselor information
disclosed pursuant to paragraph (d)(7)(v) of this section.
(e) Exemptions--(1) Reverse mortgages. Reverse mortgage
transactions, as defined by Sec. 1026.33(a), are exempt from the
requirements of this section.
(2) Timeshare plans. Transactions secured by consumers' interests in
timeshare plans, as defined by 11 U.S.C. 101(53D), are exempt from the
requirements of this section.
(3) Coupon books. The requirements of paragraph (a) of this section
do not apply to fixed-rate loans if the servicer:
(i) Provides the consumer with a coupon book that includes on each
coupon the information listed in paragraph (d)(1) of this section;
(ii) Provides the consumer with a coupon book that includes anywhere
in the coupon book:
(A) The account information listed in paragraph (d)(7) of this
section;
(B) The contact information for the servicer, listed in paragraph
(d)(6) of this section; and
(C) Information on how the consumer can obtain the information
listed in paragraph (e)(3)(iii) of this section;
(iii) Makes available upon request to the consumer by telephone, in
writing, in person, or electronically, if the consumer consents, the
information listed in paragraph (d)(2) through (5) of this section; and
(iv) Provides the consumer the information listed in paragraph
(d)(8) of this section in writing, for any billing cycle during which
the consumer is more than 45 days delinquent.
(4) Small servicers--(i) Exemption. A creditor, assignee, or
servicer is exempt from the requirements of this section for mortgage
loans serviced by a small servicer.
(ii) Small servicer defined. A small servicer is a servicer that:
(A) Services, together with any affiliates, 5,000 or fewer mortgage
loans, for all of which the servicer (or an affiliate) is the creditor
or assignee;
(B) Is a Housing Finance Agency, as defined in 24 CFR 266.5; or
(C) Is a nonprofit entity that services 5,000 or fewer mortgage
loans, including any mortgage loans serviced on behalf of associated
nonprofit entities, for all of which the servicer or an associated
nonprofit entity is the creditor. For purposes of this paragraph
(e)(4)(ii)(C), the following definitions apply:
[[Page 146]]
(1) The term ``nonprofit entity'' means an entity having a tax
exemption ruling or determination letter from the Internal Revenue
Service under section 501(c)(3) of the Internal Revenue Code of 1986 (26
U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-1), and;
(2) The term ``associated nonprofit entities'' means nonprofit
entities that by agreement operate using a common name, trademark, or
servicemark to further and support a common charitable mission or
purpose.
(iii) Small servicer determination. In determining whether a
servicer satisfies paragraph (e)(4)(ii)(A) of this section, the servicer
is evaluated based on the mortgage loans serviced by the servicer and
any affiliates as of January 1 and for the remainder of the calendar
year. In determining whether a servicer satisfies paragraph
(e)(4)(ii)(C) of this section, the servicer is evaluated based on the
mortgage loans serviced by the servicer as of January 1 and for the
remainder of the calendar year. A servicer that ceases to qualify as a
small servicer will have six months from the time it ceases to qualify
or until the next January 1, whichever is later, to comply with any
requirements from which the servicer is no longer exempt as a small
servicer. The following mortgage loans are not considered in determining
whether a servicer qualifies as a small servicer:
(A) Mortgage loans voluntarily serviced by the servicer for a non-
affiliate of the servicer and for which the servicer does not receive
any compensation or fees.
(B) Reverse mortgage transactions.
(C) Mortgage loans secured by consumers' interests in timeshare
plans.
(D) Transactions serviced by the servicer for a seller financer that
meets all of the criteria identified in Sec. 1026.36(a)(5).
(5) Consumers in bankruptcy. A servicer is exempt from the
requirements of this section for a mortgage loan while the consumer is a
debtor in bankruptcy under Title 11 of the United States Code.
(6) Charged-off loans. (i) A servicer is exempt from the
requirements of this section for a mortgage loan if the servicer:
(A) Has charged off the loan in accordance with loan-loss provisions
and will not charge any additional fees or interest on the account; and
(B) Provides, within 30 days of charge-off or the most recent
periodic statement, a periodic statement, clearly and conspicuously
labeled ``Suspension of Statements & Notice of Charge Off--Retain This
Copy for Your Records.'' The periodic statement must clearly and
conspicuously explain that, as applicable, the mortgage loan has been
charged off and the servicer will not charge any additional fees or
interest on the account; the servicer will no longer provide the
consumer a periodic statement for each billing cycle; the lien on the
property remains in place and the consumer remains liable for the
mortgage loan obligation and any obligations arising from or related to
the property, which may include property taxes; the consumer may be
required to pay the balance on the account in the future, for example,
upon sale of the property; the balance on the account is not being
canceled or forgiven; and the loan may be purchased, assigned, or
transferred.
(ii) Resuming compliance. (A) If a servicer fails at any time to
treat a mortgage loan that is exempt under paragraph (e)(6)(i) of this
section as charged off or charges any additional fees or interest on the
account, the obligation to provide a periodic statement pursuant to this
section resumes.
(B) Prohibition on retroactive fees. A servicer may not
retroactively assess fees or interest on the account for the period of
time during which the exemption in paragraph (e)(6)(i) of this section
applied.
[78 FR 11007, Feb. 14, 2013, as amended at 78 FR 44718, July 24, 2013;
78 FR 63005, Oct. 23, 2013; 79 FR 65322, Nov. 3, 2014; 81 FR 72388, Oct.
19, 2016]
Effective Date Note: At 81 FR 72388, Oct. 19, 2016, Sec. 1026.41
was amended by revising paragraph (e)(5), and adding paragraphs (f) and
(g), effective Apr. 19, 2018. For the convenience of the user, the added
and revised text is set forth as follows:
Sec. 1026.41 Periodic statements for residential mortgage loans.
* * * * *
[[Page 147]]
(e) * * *
(5) Certain consumers in bankruptcy--(i) Exemption. Except as
provided in paragraph (e)(5)(ii) of this section, a servicer is exempt
from the requirements of this section with regard to a mortgage loan if:
(A) Any consumer on the mortgage loan is a debtor in bankruptcy
under title 11 of the United States Code or has discharged personal
liability for the mortgage loan pursuant to 11 U.S.C. 727, 1141, 1228,
or 1328; and
(B) With regard to any consumer on the mortgage loan:
(1) The consumer requests in writing that the servicer cease
providing a periodic statement or coupon book;
(2) The consumer's bankruptcy plan provides that the consumer will
surrender the dwelling securing the mortgage loan, provides for the
avoidance of the lien securing the mortgage loan, or otherwise does not
provide for, as applicable, the payment of pre-bankruptcy arrearage or
the maintenance of payments due under the mortgage loan;
(3) A court enters an order in the bankruptcy case providing for the
avoidance of the lien securing the mortgage loan, lifting the automatic
stay pursuant to 11 U.S.C. 362 with regard to the dwelling securing the
mortgage loan, or requiring the servicer to cease providing a periodic
statement or coupon book; or
(4) The consumer files with the court overseeing the bankruptcy case
a statement of intention pursuant to 11 U.S.C. 521(a) identifying an
intent to surrender the dwelling securing the mortgage loan and a
consumer has not made any partial or periodic payment on the mortgage
loan after the commencement of the consumer's bankruptcy case.
(ii) Reaffirmation or consumer request to receive statement or
coupon book. A servicer ceases to qualify for an exemption pursuant to
paragraph (e)(5)(i) of this section with respect to a mortgage loan if
the consumer reaffirms personal liability for the loan or any consumer
on the loan requests in writing that the servicer provide a periodic
statement or coupon book, unless a court enters an order in the
bankruptcy case requiring the servicer to cease providing a periodic
statement or coupon book.
(iii) Exclusive address. A servicer may establish an address that a
consumer must use to submit a written request under paragraph
(e)(5)(i)(B)(1) or (e)(5)(ii) of this section, provided that the
servicer notifies the consumer of the address in a manner that is
reasonably designed to inform the consumer of the address. If a servicer
designates a specific address for requests under paragraph
(e)(5)(i)(B)(1) or (e)(5)(ii) of this section, the servicer shall
designate the same address for purposes of both paragraphs
(e)(5)(i)(B)(1) and (e)(5)(ii) of this section.
(iv) Timing of compliance following transition--(A) Triggering
events for transitioning to modified and unmodified periodic statements.
A servicer transitions to providing a periodic statement or coupon book
with the modifications set forth in paragraph (f) of this section or to
providing a periodic statement or coupon book without such modifications
when one of the following three events occurs:
(1) A mortgage loan becomes subject to the requirements of paragraph
(f) of this section;
(2) A mortgage loan ceases to be subject to the requirements of
paragraph (f) of this section; or
(3) A servicer ceases to qualify for an exemption pursuant to
paragraph (e)(5)(i) of this section with respect to a mortgage loan.
(B) Transitional single-billing-cycle exemption. A servicer is
exempt from the requirements of this section with respect to a single
billing cycle when the payment due date for that billing cycle is no
more than 14 days after the date on which one of the events listed in
paragraph (e)(5)(iv)(A) of this section occurs.
(C) Timing of first modified or unmodified statement after
transition. When one of the events listed in paragraph (e)(5)(iv)(A) of
this section occurs, a servicer must provide the next modified or
unmodified periodic statement or coupon book that complies with the
requirements of this section by delivering or placing it in the mail
within a reasonably prompt time after the first payment due date, or the
end of any courtesy period for the payment's corresponding billing
cycle, that is more than 14 days after the date on which the applicable
event listed in paragraph (e)(5)(iv)(A) of this section occurs.
* * * * *
(f) Modified periodic statements and coupon books for certain
consumers in bankruptcy. While any consumer on a mortgage loan is a
debtor in bankruptcy under title 11 of the United States Code, or if
such consumer has discharged personal liability for the mortgage loan
pursuant to 11 U.S.C. 727, 1141, 1228, or 1328, the requirements of this
section are subject to the following modifications with regard to that
mortgage loan:
(1) Requirements not applicable. The periodic statement may omit the
information set forth in paragraphs (d)(1)(ii) and (d)(8)(i), (ii), and
(v) of this section. The requirement in paragraph (d)(1)(iii) of this
section that the amount due must be shown more prominently than other
disclosures on the page shall not apply.
(2) Bankruptcy notices. The periodic statement must include the
following:
(i) A statement identifying the consumer's status as a debtor in
bankruptcy or the discharged status of the mortgage loan; and
[[Page 148]]
(ii) A statement that the periodic statement is for informational
purposes only.
(3) Chapter 12 and chapter 13 consumers. In addition to any other
provisions of this paragraph (f) that may apply, with regard to a
mortgage loan for which any consumer with primary liability is a debtor
in a chapter 12 or chapter 13 bankruptcy case, the requirements of this
section are subject to the following modifications:
(i) Requirements not applicable. In addition to omitting the
information set forth in paragraph (f)(1) of this section, the periodic
statement may also omit the information set forth in paragraphs
(d)(8)(iii), (iv), (vi), and (vii) of this section.
(ii) Amount due. The amount due information set forth in paragraph
(d)(1) of this section may be limited to the date and amount of the
post-petition payments due and any post-petition fees and charges
imposed by the servicer.
(iii) Explanation of amount due. The explanation of amount due
information set forth in paragraph (d)(2) of this section may be limited
to:
(A) The monthly post-petition payment amount, including a breakdown
showing how much, if any, will be applied to principal, interest, and
escrow;
(B) The total sum of any post-petition fees or charges imposed since
the last statement; and
(C) Any post-petition payment amount past due.
(iv) Transaction activity. The transaction activity information set
forth in paragraph (d)(4) of this section must include all payments the
servicer has received since the last statement, including all post-
petition and pre-petition payments and payments of post-petition fees
and charges, and all post-petition fees and charges the servicer has
imposed since the last statement. The brief description of the activity
need not identify the source of any payments.
(v) Pre-petition arrearage. If applicable, a servicer must disclose,
grouped in close proximity to each other and located on the first page
of the statement or, alternatively, on a separate page enclosed with the
periodic statement or in a separate letter:
(A) The total of all pre-petition payments received since the last
statement;
(B) The total of all pre-petition payments received since the
beginning of the consumer's bankruptcy case; and
(C) The current balance of the consumer's pre-petition arrearage.
(vi) Additional disclosures. The periodic statement must include, as
applicable:
(A) A statement that the amount due includes only post-petition
payments and does not include other payments that may be due under the
terms of the consumer's bankruptcy plan;
(B) If the consumer's bankruptcy plan requires the consumer to make
the post-petition mortgage payments directly to a bankruptcy trustee, a
statement that the consumer should send the payment to the trustee and
not to the servicer;
(C) A statement that the information disclosed on the periodic
statement may not include payments the consumer has made to the trustee
and may not be consistent with the trustee's records;
(D) A statement that encourages the consumer to contact the
consumer's attorney or the trustee with questions regarding the
application of payments; and
(E) If the consumer is more than 45 days delinquent on post-petition
payments, a statement that the servicer has not received all the
payments that became due since the consumer filed for bankruptcy.
(4) Multiple obligors. If this paragraph (f) applies in connection
with a mortgage loan with more than one primary obligor, the servicer
may provide the modified statement to any or all of the primary
obligors, even if a primary obligor to whom the servicer provides the
modified statement is not a debtor in bankruptcy.
(5) Coupon books. A servicer that provides a coupon book instead of
a periodic statement under paragraph (e)(3) of this section must include
in the coupon book the disclosures set forth in paragraphs (f)(2) and
(f)(3)(vi) of this section, as applicable. The servicer may include
these disclosures anywhere in the coupon book provided to the consumer
or on a separate page enclosed with the coupon book. The servicer must
make available upon request to the consumer by telephone, in writing, in
person, or electronically, if the consumer consents, the information
listed in paragraph (f)(3)(v) of this section, as applicable. The
modifications set forth in paragraphs (f)(1) and (f)(3)(i) through (iv)
and (vi) of this section apply to a coupon book and other information a
servicer provides to the consumer under paragraph (e)(3) of this
section.
(g) Successor in interest. If, upon confirmation, a servicer
provides a confirmed successor in interest who is not liable on the
mortgage loan obligation with a written notice and acknowledgment form
in accordance with Regulation X, Sec. 1024.32(c)(1) of this chapter,
the servicer is not required to provide to the confirmed successor in
interest any written disclosure required by this section unless and
until the confirmed successor in interest either assumes the mortgage
loan obligation under State law or has provided the servicer an executed
acknowledgment in accordance with Regulation X, Sec. 1024.32(c)(1)(iv)
of this chapter, that the confirmed successor in interest has not
revoked.
[[Page 149]]
Sec. 1026.42 Valuation independence.
(a) Scope. This section applies to any consumer credit transaction
secured by the consumer's principal dwelling.
(b) Definitions. For purposes of this section:
(1) ``Covered person'' means a creditor with respect to a covered
transaction or a person that provides ``settlement services,'' as
defined in 12 U.S.C. 2602(3) and implementing regulations, in connection
with a covered transaction.
(2) ``Covered transaction'' means an extension of consumer credit
that is or will be secured by the consumer's principal dwelling, as
defined in Sec. 1026.2(a)(19).
(3) ``Valuation'' means an estimate of the value of the consumer's
principal dwelling in written or electronic form, other than one
produced solely by an automated model or system.
(4) ``Valuation management functions'' means:
(i) Recruiting, selecting, or retaining a person to prepare a
valuation;
(ii) Contracting with or employing a person to prepare a valuation;
(iii) Managing or overseeing the process of preparing a valuation,
including by providing administrative services such as receiving orders
for and receiving a valuation, submitting a completed valuation to
creditors and underwriters, collecting fees from creditors and
underwriters for services provided in connection with a valuation, and
compensating a person that prepares valuations; or
(iv) Reviewing or verifying the work of a person that prepares
valuations.
(c) Valuation of consumer's principal dwelling--(1) Coercion. In
connection with a covered transaction, no covered person shall or shall
attempt to directly or indirectly cause the value assigned to the
consumer's principal dwelling to be based on any factor other than the
independent judgment of a person that prepares valuations, through
coercion, extortion, inducement, bribery, or intimidation of,
compensation or instruction to, or collusion with a person that prepares
valuations or performs valuation management functions.
(i) Examples of actions that violate paragraph (c)(1) include:
(A) Seeking to influence a person that prepares a valuation to
report a minimum or maximum value for the consumer's principal dwelling;
(B) Withholding or threatening to withhold timely payment to a
person that prepares a valuation or performs valuation management
functions because the person does not value the consumer's principal
dwelling at or above a certain amount;
(C) Implying to a person that prepares valuations that current or
future retention of the person depends on the amount at which the person
estimates the value of the consumer's principal dwelling;
(D) Excluding a person that prepares a valuation from consideration
for future engagement because the person reports a value for the
consumer's principal dwelling that does not meet or exceed a
predetermined threshold; and
(E) Conditioning the compensation paid to a person that prepares a
valuation on consummation of the covered transaction.
(2) Mischaracterization of value--(i) Misrepresentation. In
connection with a covered transaction, no person that prepares
valuations shall materially misrepresent the value of the consumer's
principal dwelling in a valuation. A misrepresentation is material for
purposes of this paragraph (c)(2)(i) if it is likely to significantly
affect the value assigned to the consumer's principal dwelling. A bona
fide error shall not be a misrepresentation.
(ii) Falsification or alteration. In connection with a covered
transaction, no covered person shall falsify and no covered person other
than a person that prepares valuations shall materially alter a
valuation. An alteration is material for purposes of this paragraph
(c)(2)(ii) if it is likely to significantly affect the value assigned to
the consumer's principal dwelling.
(iii) Inducement of mischaracterization. In connection with a
covered transaction, no covered person shall induce a person to violate
paragraph (c)(2)(i) or (ii) of this section.
(3) Permitted actions. Examples of actions that do not violate
paragraph (c)(1) or (c)(2) include:
[[Page 150]]
(i) Asking a person that prepares a valuation to consider
additional, appropriate property information, including information
about comparable properties, to make or support a valuation;
(ii) Requesting that a person that prepares a valuation provide
further detail, substantiation, or explanation for the person's
conclusion about the value of the consumer's principal dwelling;
(iii) Asking a person that prepares a valuation to correct errors in
the valuation;
(iv) Obtaining multiple valuations for the consumer's principal
dwelling to select the most reliable valuation;
(v) Withholding compensation due to breach of contract or
substandard performance of services; and
(vi) Taking action permitted or required by applicable Federal or
state statute, regulation, or agency guidance.
(d) Prohibition on conflicts of interest--(1)(i) In general. No
person preparing a valuation or performing valuation management
functions for a covered transaction may have a direct or indirect
interest, financial or otherwise, in the property or transaction for
which the valuation is or will be performed.
(ii) Employees and affiliates of creditors; providers of multiple
settlement services. In any covered transaction, no person violates
paragraph (d)(1)(i) of this section based solely on the fact that the
person:
(A) Is an employee or affiliate of the creditor; or
(B) Provides a settlement service in addition to preparing
valuations or performing valuation management functions, or based solely
on the fact that the person's affiliate performs another settlement
service.
(2) Employees and affiliates of creditors with assets of more than
$250 million for both of the past two calendar years. For any covered
transaction in which the creditor had assets of more than $250 million
as of December 31st for both of the past two calendar years, a person
subject to paragraph (d)(1)(i) of this section who is employed by or
affiliated with the creditor does not have a conflict of interest in
violation of paragraph (d)(1)(i) of this section based on the person's
employment or affiliate relationship with the creditor if:
(i) The compensation of the person preparing a valuation or
performing valuation management functions is not based on the value
arrived at in any valuation;
(ii) The person preparing a valuation or performing valuation
management functions reports to a person who is not part of the
creditor's loan production function, as defined in paragraph (d)(5)(i)
of this section, and whose compensation is not based on the closing of
the transaction to which the valuation relates; and
(iii) No employee, officer or director in the creditor's loan
production function, as defined in paragraph (d)(5)(i) of this section,
is directly or indirectly involved in selecting, retaining, recommending
or influencing the selection of the person to prepare a valuation or
perform valuation management functions, or to be included in or excluded
from a list of approved persons who prepare valuations or perform
valuation management functions.
(3) Employees and affiliates of creditors with assets of $250
million or less for either of the past two calendar years. For any
covered transaction in which the creditor had assets of $250 million or
less as of December 31st for either of the past two calendar years, a
person subject to paragraph (d)(1)(i) of this section who is employed by
or affiliated with the creditor does not have a conflict of interest in
violation of paragraph (d)(1)(i) of this section based on the person's
employment or affiliate relationship with the creditor if:
(i) The compensation of the person preparing a valuation or
performing valuation management functions is not based on the value
arrived at in any valuation; and
(ii) The creditor requires that any employee, officer or director of
the creditor who orders, performs, or reviews a valuation for a covered
transaction abstain from participating in any decision to approve, not
approve, or set the terms of that transaction.
(4) Providers of multiple settlement services. For any covered
transaction, a person who prepares a valuation or performs valuation
management functions
[[Page 151]]
in addition to performing another settlement service for the
transaction, or whose affiliate performs another settlement service for
the transaction, does not have a conflict of interest in violation of
paragraph (d)(1)(i) of this section as a result of the person or the
person's affiliate performing another settlement service for the
transaction if:
(i) The creditor had assets of more than $250 million as of December
31st for both of the past two calendar years and the conditions in
paragraph (d)(2)(i)-(iii) are met; or
(ii) The creditor had assets of $250 million or less as of December
31st for either of the past two calendar years and the conditions in
paragraph (d)(3)(i)-(ii) are met.
(5) Definitions. For purposes of this paragraph (d), the following
definitions apply:
(i) Loan production function. The term ``loan production function''
means an employee, officer, director, department, division, or other
unit of a creditor with responsibility for generating covered
transactions, approving covered transactions, or both.
(ii) Settlement service. The term ``settlement service'' has the
same meaning as in the Real Estate Settlement Procedures Act, 12 U.S.C.
2601 et seq.
(iii) Affiliate. The term ``affiliate'' has the same meaning as in
Regulation Y of the Board of Governors of the Federal Reserve System, 12
CFR 225.2(a).
(e) When extension of credit prohibited. In connection with a
covered transaction, a creditor that knows, at or before consummation,
of a violation of paragraph (c) or (d) of this section in connection
with a valuation shall not extend credit based on the valuation, unless
the creditor documents that it has acted with reasonable diligence to
determine that the valuation does not materially misstate or
misrepresent the value of the consumer's principal dwelling. For
purposes of this paragraph (e), a valuation materially misstates or
misrepresents the value of the consumer's principal dwelling if the
valuation contains a misstatement or misrepresentation that affects the
credit decision or the terms on which credit is extended.
(f) Customary and reasonable compensation--(1) Requirement to
provide customary and reasonable compensation to fee appraisers. In any
covered transaction, the creditor and its agents shall compensate a fee
appraiser for performing appraisal services at a rate that is customary
and reasonable for comparable appraisal services performed in the
geographic market of the property being appraised. For purposes of
paragraph (f) of this section, ``agents'' of the creditor do not include
any fee appraiser as defined in paragraph (f)(4)(i) of this section.
(2) Presumption of compliance. A creditor and its agents shall be
presumed to comply with paragraph (f)(1) of this section if:
(i) The creditor or its agents compensate the fee appraiser in an
amount that is reasonably related to recent rates paid for comparable
appraisal services performed in the geographic market of the property
being appraised. In determining this amount, a creditor or its agents
shall review the factors below and make any adjustments to recent rates
paid in the relevant geographic market necessary to ensure that the
amount of compensation is reasonable:
(A) The type of property,
(B) The scope of work,
(C) The time in which the appraisal services are required to be
performed,
(D) Fee appraiser qualifications,
(E) Fee appraiser experience and professional record, and
(F) Fee appraiser work quality; and
(ii) The creditor and its agents do not engage in any
anticompetitive acts in violation of state or Federal law that affect
the compensation paid to fee appraisers, including:
(A) Entering into any contracts or engaging in any conspiracies to
restrain trade through methods such as price fixing or market
allocation, as prohibited under section 1 of the Sherman Antitrust Act,
15 U.S.C. 1, or any other relevant antitrust laws; or
(B) Engaging in any acts of monopolization such as restricting any
person from entering the relevant geographic market or causing any
person to leave the relevant geographic market, as
[[Page 152]]
prohibited under section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or
any other relevant antitrust laws.
(3) Alternative presumption of compliance. A creditor and its agents
shall be presumed to comply with paragraph (f)(1) of this section if the
creditor or its agents determine the amount of compensation paid to the
fee appraiser by relying on information about rates that:
(i) Is based on objective third-party information, including fee
schedules, studies, and surveys prepared by independent third parties
such as government agencies, academic institutions, and private research
firms;
(ii) Is based on recent rates paid to a representative sample of
providers of appraisal services in the geographic market of the property
being appraised or the fee schedules of those providers; and
(iii) In the case of information based on fee schedules, studies,
and surveys, such fee schedules, studies, or surveys, or the information
derived therefrom, excludes compensation paid to fee appraisers for
appraisals ordered by appraisal management companies, as defined in
paragraph (f)(4)(iii) of this section.
(4) Definitions. For purposes of this paragraph (f), the following
definitions apply:
(i) Fee appraiser. The term ``fee appraiser'' means:
(A) A natural person who is a state-licensed or state-certified
appraiser and receives a fee for performing an appraisal, but who is not
an employee of the person engaging the appraiser; or
(B) An organization that, in the ordinary course of business,
employs state-licensed or state-certified appraisers to perform
appraisals, receives a fee for performing appraisals, and is not subject
to the requirements of section 1124 of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3353).
(ii) Appraisal services. The term ``appraisal services'' means the
services required to perform an appraisal, including defining the scope
of work, inspecting the property, reviewing necessary and appropriate
public and private data sources (for example, multiple listing services,
tax assessment records and public land records), developing and
rendering an opinion of value, and preparing and submitting the
appraisal report.
(iii) Appraisal management company. The term ``appraisal management
company'' means any person authorized to perform one or more of the
following actions on behalf of the creditor:
(A) Recruit, select, and retain fee appraisers;(B) Contract with fee
appraisers to perform appraisal services;
(C) Manage the process of having an appraisal performed, including
providing administrative services such as receiving appraisal orders and
appraisal reports, submitting completed appraisal reports to creditors
and underwriters, collecting fees from creditors and underwriters for
services provided, and compensating fee appraisers for services
performed; or
(D) Review and verify the work of fee appraisers.
(g) Mandatory reporting--(1) Reporting required. Any covered person
that reasonably believes an appraiser has not complied with the Uniform
Standards of Professional Appraisal Practice or ethical or professional
requirements for appraisers under applicable state or Federal statutes
or regulations shall refer the matter to the appropriate state agency if
the failure to comply is material. For purposes of this paragraph
(g)(1), a failure to comply is material if it is likely to significantly
affect the value assigned to the consumer's principal dwelling.
(2) Timing of reporting. A covered person shall notify the
appropriate state agency within a reasonable period of time after the
person determines that there is a reasonable basis to believe that a
failure to comply required to be reported under paragraph (g)(1) of this
section has occurred.
(3) Definition. For purposes of this paragraph (g), ``state agency''
means ``state appraiser certifying and licensing agency'' under 12
U.S.C. 3350(1) and any implementing regulations. The appropriate state
agency to which a covered person must refer a matter under paragraph
(g)(1) of this section is the agency for the state in which the
consumer's principal dwelling is located.
(h) The Bureau issued a joint rule to implement the appraisal
management
[[Page 153]]
company minimum requirements in the Financial Institutions Reform,
Recovery, and Enforcement Act, as amended by section 1473 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act. See 12 CFR part
34.
[76 FR 79772, Dec. 22, 2011, as amended at 80 FR 32687, June 9, 2015]
Sec. 1026.43 Minimum standards for transactions secured by a dwelling.
(a) Scope. This section applies to any consumer credit transaction
that is secured by a dwelling, as defined in Sec. 1026.2(a)(19),
including any real property attached to a dwelling, other than:
(1) A home equity line of credit subject to Sec. 1026.40;
(2) A mortgage transaction secured by a consumer's interest in a
timeshare plan, as defined in 11 U.S.C. 101(53(D)); or
(3) For purposes of paragraphs (c) through (f) of this section:
(i) A reverse mortgage subject to Sec. 1026.33;
(ii) A temporary or ``bridge'' loan with a term of 12 months or
less, such as a loan to finance the purchase of a new dwelling where the
consumer plans to sell a current dwelling within 12 months or a loan to
finance the initial construction of a dwelling;
(iii) A construction phase of 12 months or less of a construction-
to-permanent loan;
(iv) An extension of credit made pursuant to a program administered
by a Housing Finance Agency, as defined under 24 CFR 266.5;
(v) An extension of credit made by:
(A) A creditor designated as a Community Development Financial
Institution, as defined under 12 CFR 1805.104(h);
(B) A creditor designated as a Downpayment Assistance through
Secondary Financing Provider, pursuant to 24 CFR 200.194(a), operating
in accordance with regulations prescribed by the U.S. Department of
Housing and Urban Development applicable to such persons;
(C) A creditor designated as a Community Housing Development
Organization provided that the creditor has entered into a commitment
with a participating jurisdiction and is undertaking a project under the
HOME program, pursuant to the provisions of 24 CFR 92.300(a), and as the
terms community housing development organization, commitment,
participating jurisdiction, and project are defined under 24 CFR 92.2;
or
(D) A creditor with a tax exemption ruling or determination letter
from the Internal Revenue Service under section 501(c)(3) of the
Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-
1), provided that:
(1) During the calendar year preceding receipt of the consumer's
application, the creditor extended credit secured by a dwelling no more
than 200 times, except as provided in paragraph (a)(3)(vii) of this
section;
(2) During the calendar year preceding receipt of the consumer's
application, the creditor extended credit secured by a dwelling only to
consumers with income that did not exceed the low- and moderate-income
household limit as established pursuant to section 102 of the Housing
and Community Development Act of 1974 (42 U.S.C. 5302(a)(20)) and
amended from time to time by the U.S. Department of Housing and Urban
Development, pursuant to 24 CFR 570.3;
(3) The extension of credit is to a consumer with income that does
not exceed the household limit specified in paragraph (a)(3)(v)(D)(2) of
this section; and
(4) The creditor determines, in accordance with written procedures,
that the consumer has a reasonable ability to repay the extension of
credit.
(vi) An extension of credit made pursuant to a program authorized by
sections 101 and 109 of the Emergency Economic Stabilization Act of 2008
(12 U.S.C. 5211; 5219);
(vii) Consumer credit transactions that meet the following criteria
are not considered in determining whether a creditor exceeds the credit
extension limitation in paragraph (a)(3)(v)(D)(1) of this section:
(A) The transaction is secured by a subordinate lien;
(B) The transaction is for the purpose of:
[[Page 154]]
(1) Downpayment, closing costs, or other similar home buyer
assistance, such as principal or interest subsidies;
(2) Property rehabilitation assistance;
(3) Energy efficiency assistance; or
(4) Foreclosure avoidance or prevention;
(C) The credit contract does not require payment of interest;
(D) The credit contract provides that repayment of the amount of the
credit extended is:
(1) Forgiven either incrementally or in whole, at a date certain,
and subject only to specified ownership and occupancy conditions, such
as a requirement that the consumer maintain the property as the
consumer's principal dwelling for five years;
(2) Deferred for a minimum of 20 years after consummation of the
transaction;
(3) Deferred until sale of the property securing the transaction; or
(4) Deferred until the property securing the transaction is no
longer the principal dwelling of the consumer;
(E) The total of costs payable by the consumer in connection with
the transaction at consummation is less than 1 percent of the amount of
credit extended and includes no charges other than:
(1) Fees for recordation of security instruments, deeds, and similar
documents;
(2) A bona fide and reasonable application fee; and
(3) A bona fide and reasonable fee for housing counseling services;
and
(F) The creditor complies with all other applicable requirements of
this part in connection with the transaction.
(b) Definitions. For purposes of this section:
(1) Covered transaction means a consumer credit transaction that is
secured by a dwelling, as defined in Sec. 1026.2(a)(19), including any
real property attached to a dwelling, other than a transaction exempt
from coverage under paragraph (a) of this section.
(2) Fully amortizing payment means a periodic payment of principal
and interest that will fully repay the loan amount over the loan term.
(3) Fully indexed rate means the interest rate calculated using the
index or formula that will apply after recast, as determined at the time
of consummation, and the maximum margin that can apply at any time
during the loan term.
(4) Higher-priced covered transaction means a covered transaction
with an annual percentage rate that exceeds the average prime offer rate
for a comparable transaction as of the date the interest rate is set by
1.5 or more percentage points for a first-lien covered transaction,
other than a qualified mortgage under paragraph (e)(5), (e)(6), or (f)
of this section; by 3.5 or more percentage points for a first-lien
covered transaction that is a qualified mortgage under paragraph (e)(5),
(e)(6), or (f) of this section; or by 3.5 or more percentage points for
a subordinate-lien covered transaction.
(5) Loan amount means the principal amount the consumer will borrow
as reflected in the promissory note or loan contract.
(6) Loan term means the period of time to repay the obligation in
full.
(7) Maximum loan amount means the loan amount plus any increase in
principal balance that results from negative amortization, as defined in
Sec. 1026.18(s)(7)(v), based on the terms of the legal obligation
assuming:
(i) The consumer makes only the minimum periodic payments for the
maximum possible time, until the consumer must begin making fully
amortizing payments; and
(ii) The maximum interest rate is reached at the earliest possible
time.
(8) Mortgage-related obligations mean property taxes; premiums and
similar charges identified in Sec. 1026.4(b)(5), (7), (8), and (10)
that are required by the creditor; fees and special assessments imposed
by a condominium, cooperative, or homeowners association; ground rent;
and leasehold payments.
(9) Points and fees has the same meaning as in Sec. 1026.32(b)(1).
(10) Prepayment penalty has the same meaning as in Sec.
1026.32(b)(6).
(11) Recast means:
(i) For an adjustable-rate mortgage, as defined in Sec.
1026.18(s)(7)(i), the expiration of the period during which payments
based on the introductory fixed
[[Page 155]]
interest rate are permitted under the terms of the legal obligation;
(ii) For an interest-only loan, as defined in Sec.
1026.18(s)(7)(iv), the expiration of the period during which interest-
only payments are permitted under the terms of the legal obligation; and
(iii) For a negative amortization loan, as defined in Sec.
1026.18(s)(7)(v), the expiration of the period during which negatively
amortizing payments are permitted under the terms of the legal
obligation.
(12) Simultaneous loan means another covered transaction or home
equity line of credit subject to Sec. 1026.40 that will be secured by
the same dwelling and made to the same consumer at or before
consummation of the covered transaction or, if to be made after
consummation, will cover closing costs of the first covered transaction.
(13) Third-party record means:
(i) A document or other record prepared or reviewed by an
appropriate person other than the consumer, the creditor, or the
mortgage broker, as defined in Sec. 1026.36(a)(2), or an agent of the
creditor or mortgage broker;
(ii) A copy of a tax return filed with the Internal Revenue Service
or a State taxing authority;
(iii) A record the creditor maintains for an account of the consumer
held by the creditor; or
(iv) If the consumer is an employee of the creditor or the mortgage
broker, a document or other record maintained by the creditor or
mortgage broker regarding the consumer's employment status or employment
income.
(c) Repayment ability--(1) General requirement. A creditor shall not
make a loan that is a covered transaction unless the creditor makes a
reasonable and good faith determination at or before consummation that
the consumer will have a reasonable ability to repay the loan according
to its terms.
(2) Basis for determination. Except as provided otherwise in
paragraphs (d), (e), and (f) of this section, in making the repayment
ability determination required under paragraph (c)(1) of this section, a
creditor must consider the following:
(i) The consumer's current or reasonably expected income or assets,
other than the value of the dwelling, including any real property
attached to the dwelling, that secures the loan;
(ii) If the creditor relies on income from the consumer's employment
in determining repayment ability, the consumer's current employment
status;
(iii) The consumer's monthly payment on the covered transaction,
calculated in accordance with paragraph (c)(5) of this section;
(iv) The consumer's monthly payment on any simultaneous loan that
the creditor knows or has reason to know will be made, calculated in
accordance with paragraph (c)(6) of this section;
(v) The consumer's monthly payment for mortgage-related obligations;
(vi) The consumer's current debt obligations, alimony, and child
support;
(vii) The consumer's monthly debt-to-income ratio or residual income
in accordance with paragraph (c)(7) of this section; and
(viii) The consumer's credit history.
(3) Verification using third-party records. A creditor must verify
the information that the creditor relies on in determining a consumer's
repayment ability under Sec. 1026.43(c)(2) using reasonably reliable
third-party records, except that:
(i) For purposes of paragraph (c)(2)(i) of this section, a creditor
must verify a consumer's income or assets that the creditor relies on in
accordance with Sec. 1026.43(c)(4);
(ii) For purposes of paragraph (c)(2)(ii) of this section, a
creditor may verify a consumer's employment status orally if the
creditor prepares a record of the information obtained orally; and
(iii) For purposes of paragraph (c)(2)(vi) of this section, if a
creditor relies on a consumer's credit report to verify a consumer's
current debt obligations and a consumer's application states a current
debt obligation not shown in the consumer's credit report, the creditor
need not independently verify such an obligation.
(4) Verification of income or assets. A creditor must verify the
amounts of income or assets that the creditor relies on under Sec.
1026.43(c)(2)(i) to determine a consumer's ability to repay a covered
transaction using third-party records
[[Page 156]]
that provide reasonably reliable evidence of the consumer's income or
assets. A creditor may verify the consumer's income using a tax-return
transcript issued by the Internal Revenue Service (IRS). Examples of
other records the creditor may use to verify the consumer's income or
assets include:
(i) Copies of tax returns the consumer filed with the IRS or a State
taxing authority;
(ii) IRS Form W-2s or similar IRS forms used for reporting wages or
tax withholding;
(iii) Payroll statements, including military Leave and Earnings
Statements;
(iv) Financial institution records;
(v) Records from the consumer's employer or a third party that
obtained information from the employer;
(vi) Records from a Federal, State, or local government agency
stating the consumer's income from benefits or entitlements;
(vii) Receipts from the consumer's use of check cashing services;
and
(viii) Receipts from the consumer's use of a funds transfer service.
(5) Payment calculation--(i) General rule. Except as provided in
paragraph (c)(5)(ii) of this section, a creditor must make the
consideration required under paragraph (c)(2)(iii) of this section
using:
(A) The fully indexed rate or any introductory interest rate,
whichever is greater; and
(B) Monthly, fully amortizing payments that are substantially equal.
(ii) Special rules for loans with a balloon payment, interest-only
loans, and negative amortization loans. A creditor must make the
consideration required under paragraph (c)(2)(iii) of this section for:
(A) A loan with a balloon payment, as defined in Sec.
1026.18(s)(5)(i), using:
(1) The maximum payment scheduled during the first five years after
the date on which the first regular periodic payment will be due for a
loan that is not a higher-priced covered transaction; or
(2) The maximum payment in the payment schedule, including any
balloon payment, for a higher-priced covered transaction;
(B) An interest-only loan, as defined in Sec. 1026.18(s)(7)(iv),
using:
(1) The fully indexed rate or any introductory interest rate,
whichever is greater; and
(2) Substantially equal, monthly payments of principal and interest
that will repay the loan amount over the term of the loan remaining as
of the date the loan is recast.
(C) A negative amortization loan, as defined in Sec.
1026.18(s)(7)(v), using:
(1) The fully indexed rate or any introductory interest rate,
whichever is greater; and
(2) Substantially equal, monthly payments of principal and interest
that will repay the maximum loan amount over the term of the loan
remaining as of the date the loan is recast.
(6) Payment calculation for simultaneous loans. For purposes of
making the evaluation required under paragraph (c)(2)(iv) of this
section, a creditor must consider, taking into account any mortgage-
related obligations, a consumer's payment on a simultaneous loan that
is:
(i) A covered transaction, by following paragraph (c)(5)of this
section; or
(ii) A home equity line of credit subject to Sec. 1026.40, by using
the periodic payment required under the terms of the plan and the amount
of credit to be drawn at or before consummation of the covered
transaction.
(7) Monthly debt-to-income ratio or residual income--(i)
Definitions. For purposes of this paragraph (c)(7), the following
definitions apply:
(A) Total monthly debt obligations. The term total monthly debt
obligations means the sum of: the payment on the covered transaction, as
required to be calculated by paragraphs (c)(2)(iii) and (c)(5) of this
section; simultaneous loans, as required by paragraphs (c)(2)(iv) and
(c)(6) of this section; mortgage-related obligations, as required by
paragraph (c)(2)(v) of this section; and current debt obligations,
alimony, and child support, as required by paragraph (c)(2)(vi) of this
section.
(B) Total monthly income. The term total monthly income means the
sum of the consumer's current or reasonably expected income, including
any income
[[Page 157]]
from assets, as required by paragraphs (c)(2)(i) and (c)(4) of this
section.
(ii) Calculations--(A) Monthly debt-to-income ratio. If a creditor
considers the consumer's monthly debt-to-income ratio under paragraph
(c)(2)(vii) of this section, the creditor must consider the ratio of the
consumer's total monthly debt obligations to the consumer's total
monthly income.
(B) Monthly residual income. If a creditor considers the consumer's
monthly residual income under paragraph (c)(2)(vii) of this section, the
creditor must consider the consumer's remaining income after subtracting
the consumer's total monthly debt obligations from the consumer's total
monthly income.
(d) Refinancing of non-standard mortgages--(1) Definitions. For
purposes of this paragraph (d), the following definitions apply:
(i) Non-standard mortgage. The term non-standard mortgage means a
covered transaction that is:
(A) An adjustable-rate mortgage, as defined in Sec.
1026.18(s)(7)(i), with an introductory fixed interest rate for a period
of one year or longer;
(B) An interest-only loan, as defined in Sec. 1026.18(s)(7)(iv); or
(C) A negative amortization loan, as defined in Sec.
1026.18(s)(7)(v).
(ii) Standard mortgage. The term standard mortgage means a covered
transaction:
(A) That provides for regular periodic payments that do not:
(1) Cause the principal balance to increase;
(2) Allow the consumer to defer repayment of principal; or
(3) Result in a balloon payment, as defined in Sec.
1026.18(s)(5)(i);
(B) For which the total points and fees payable in connection with
the transaction do not exceed the amounts specified in paragraph (e)(3)
of this section;
(C) For which the term does not exceed 40 years;
(D) For which the interest rate is fixed for at least the first five
years after consummation; and
(E) For which the proceeds from the loan are used solely for the
following purposes:
(1) To pay off the outstanding principal balance on the non-standard
mortgage; and
(2) To pay closing or settlement charges required to be disclosed
under the Real Estate Settlement Procedures Act, 12 U.S.C. 2601 et seq.
(iii) Refinancing. The term refinancing has the same meaning as in
Sec. 1026.20(a).
(2) Scope. The provisions of this paragraph (d) apply to the
refinancing of a non-standard mortgage into a standard mortgage when the
following conditions are met:
(i) The creditor for the standard mortgage is the current holder of
the existing non-standard mortgage or the servicer acting on behalf of
the current holder;
(ii) The monthly payment for the standard mortgage is materially
lower than the monthly payment for the non-standard mortgage, as
calculated under paragraph (d)(5) of this section.
(iii) The creditor receives the consumer's written application for
the standard mortgage no later than two months after the non-standard
mortgage has recast.
(iv) The consumer has made no more than one payment more than 30
days late on the non-standard mortgage during the 12 months immediately
preceding the creditor's receipt of the consumer's written application
for the standard mortgage.
(v) The consumer has made no payments more than 30 days late during
the six months immediately preceding the creditor's receipt of the
consumer's written application for the standard mortgage; and
(vi) If the non-standard mortgage was consummated on or after
January 10, 2014, the non-standard mortgage was made in accordance with
paragraph (c) or (e) of this section, as applicable.
(3) Exemption from repayment ability requirements. A creditor is not
required to comply with the requirements of paragraph (c) of this
section if:
(i) The conditions in paragraph (d)(2) of this section are met; and
(ii) The creditor has considered whether the standard mortgage
likely will prevent a default by the consumer on the non-standard
mortgage once the loan is recast.
[[Page 158]]
(4) Offer of rate discounts and other favorable terms. A creditor
making a covered transaction under this paragraph (d) may offer to the
consumer rate discounts and terms that are the same as, or better than,
the rate discounts and terms that the creditor offers to new consumers,
consistent with the creditor's documented underwriting practices and to
the extent not prohibited by applicable State or Federal law.
(5) Payment calculations. For purposes of determining whether the
consumer's monthly payment for a standard mortgage will be materially
lower than the monthly payment for the non-standard mortgage, the
following provisions shall be used:
(i) Non-standard mortgage. For purposes of the comparison conducted
pursuant to paragraph (d)(2)(ii) of this section, the creditor must
calculate the monthly payment for a non-standard mortgage based on
substantially equal, monthly, fully amortizing payments of principal and
interest using:
(A) The fully indexed rate as of a reasonable period of time before
or after the date on which the creditor receives the consumer's written
application for the standard mortgage;
(B) The term of the loan remaining as of the date on which the
recast occurs, assuming all scheduled payments have been made up to the
recast date and the payment due on the recast date is made and credited
as of that date; and
(C) A remaining loan amount that is:
(1) For an adjustable-rate mortgage under paragraph (d)(1)(i)(A) of
this section, the outstanding principal balance as of the date of the
recast, assuming all scheduled payments have been made up to the recast
date and the payment due on the recast date is made and credited as of
that date;
(2) For an interest-only loan under paragraph (d)(1)(i)(B) of this
section, the outstanding principal balance as of the date of the recast,
assuming all scheduled payments have been made up to the recast date and
the payment due on the recast date is made and credited as of that date;
or
(3) For a negative amortization loan under paragraph (d)(1)(i)(C) of
this section, the maximum loan amount, determined after adjusting for
the outstanding principal balance.
(ii) Standard mortgage. For purposes of the comparison conducted
pursuant to paragraph (d)(2)(ii) of this section, the monthly payment
for a standard mortgage must be based on substantially equal, monthly,
fully amortizing payments based on the maximum interest rate that may
apply during the first five years after consummation.
(e) Qualified mortgages--(1) Safe harbor and presumption of
compliance--(i) Safe harbor for loans that are not higher-priced covered
transactions. A creditor or assignee of a qualified mortgage, as defined
in paragraphs (e)(2), (e)(4), (e)(5), (e)(6), or (f) of this section,
that is not a higher-priced covered transaction, as defined in paragraph
(b)(4) of this section, complies with the repayment ability requirements
of paragraph (c) of this section.
(ii) Presumption of compliance for higher-priced covered
transactions. (A) A creditor or assignee of a qualified mortgage, as
defined in paragraph (e)(2), (e)(4), (e)(5), (e)(6), or (f) of this
section, that is a higher-priced covered transaction, as defined in
paragraph (b)(4) of this section, is presumed to comply with the
repayment ability requirements of paragraph (c) of this section.
(B) To rebut the presumption of compliance described in paragraph
(e)(1)(ii)(A) of this section, it must be proven that, despite meeting
the prerequisites of paragraph (e)(2), (e)(4), (e)(5), (e)(6), or (f) of
this section, the creditor did not make a reasonable and good faith
determination of the consumer's repayment ability at the time of
consummation, by showing that the consumer's income, debt obligations,
alimony, child support, and the consumer's monthly payment (including
mortgage-related obligations) on the covered transaction and on any
simultaneous loans of which the creditor was aware at consummation would
leave the consumer with insufficient residual income or assets other
than the value of the dwelling (including any real property attached to
the dwelling) that secures the loan with which to meet living expenses,
including any recurring and material non-debt obligations
[[Page 159]]
of which the creditor was aware at the time of consummation.
(2) Qualified mortgage defined--general. Except as provided in
paragraph (e)(4), (e)(5), (e)(6), or (f) of this section, a qualified
mortgage is a covered transaction:
(i) That provides for regular periodic payments that are
substantially equal, except for the effect that any interest rate change
after consummation has on the payment in the case of an adjustable-rate
or step-rate mortgage, that do not:
(A) Result in an increase of the principal balance;
(B) Allow the consumer to defer repayment of principal, except as
provided in paragraph (f) of this section; or
(C) Result in a balloon payment, as defined in Sec.
1026.18(s)(5)(i), except as provided in paragraph (f) of this section;
(ii) For which the loan term does not exceed 30 years;
(iii) For which the total points and fees payable in connection with
the loan do not exceed the amounts specified in paragraph (e)(3) of this
section;
(iv) For which the creditor underwrites the loan, taking into
account the monthly payment for mortgage-related obligations, using:
(A) The maximum interest rate that may apply during the first five
years after the date on which the first regular periodic payment will be
due; and
(B) Periodic payments of principal and interest that will repay
either:
(1) The outstanding principal balance over the remaining term of the
loan as of the date the interest rate adjusts to the maximum interest
rate set forth in paragraph (e)(2)(iv)(A) of this section, assuming the
consumer will have made all required payments as due prior to that date;
or
(2) The loan amount over the loan term;
(v) For which the creditor considers and verifies at or before
consummation the following:
(A) The consumer's current or reasonably expected income or assets
other than the value of the dwelling (including any real property
attached to the dwelling) that secures the loan, in accordance with
appendix Q and paragraphs (c)(2)(i) and (c)(4) of this section; and
(B) The consumer's current debt obligations, alimony, and child
support in accordance with appendix Q and paragraphs (c)(2)(vi) and
(c)(3) of this section; and
(vi) For which the ratio of the consumer's total monthly debt to
total monthly income at the time of consummation does not exceed 43
percent. For purposes of this paragraph (e)(2)(vi), the ratio of the
consumer's total monthly debt to total monthly income is determined:
(A) Except as provided in paragraph (e)(2)(vi)(B) of this section,
in accordance with the standards in appendix Q;
(B) Using the consumer's monthly payment on:
(1) The covered transaction, including the monthly payment for
mortgage-related obligations, in accordance with paragraph (e)(2)(iv) of
this section; and
(2) Any simultaneous loan that the creditor knows or has reason to
know will be made, in accordance with paragraphs (c)(2)(iv) and (c)(6)
of this section.
(3) Limits on points and fees for qualified mortgages. (i) Except as
provided in paragraph (e)(3)(iii) of this section, a covered transaction
is not a qualified mortgage unless the transaction's total points and
fees, as defined in Sec. 1026.32(b)(1), do not exceed:
(A) For a loan amount greater than or equal to $100,000 (indexed for
inflation): 3 percent of the total loan amount;
(B) For a loan amount greater than or equal to $60,000 (indexed for
inflation) but less than $100,000 (indexed for inflation): $3,000
(indexed for inflation);
(C) For a loan amount greater than or equal to $20,000 (indexed for
inflation) but less than $60,000 (indexed for inflation): 5 percent of
the total loan amount;
(D) For a loan amount greater than or equal to $12,500 (indexed for
inflation) but less than $20,000 (indexed for inflation): $1,000
(indexed for inflation);
(E) For a loan amount less than $12,500 (indexed for inflation): 8
percent of the total loan amount.
(ii) The dollar amounts, including the loan amounts, in paragraph
(e)(3)(i) of
[[Page 160]]
this section shall be adjusted annually on January 1 by the annual
percentage change in the Consumer Price Index for All Urban Consumers
(CPI-U) that was reported on the preceding June 1. See the official
commentary to this paragraph (e)(3)(ii) for the current dollar amounts.
(iii) For covered transactions consummated on or before January 10,
2021, if the creditor or assignee determines after consummation that the
transaction's total points and fees exceed the applicable limit under
paragraph (e)(3)(i) of this section, the loan is not precluded from
being a qualified mortgage, provided:
(A) The loan otherwise meets the requirements of paragraphs (e)(2),
(e)(4), (e)(5), (e)(6), or (f) of this section, as applicable;
(B) The creditor or assignee pays to the consumer the amount
described in paragraph (e)(3)(iv) of this section within 210 days after
consummation and prior to the occurrence of any of the following events:
(1) The institution of any action by the consumer in connection with
the loan;
(2) The receipt by the creditor, assignee, or servicer of written
notice from the consumer that the transaction's total points and fees
exceed the applicable limit under paragraph (e)(3)(i) of this section;
or
(3) The consumer becoming 60 days past due on the legal obligation;
and
(C) The creditor or assignee, as applicable, maintains and follows
policies and procedures for post-consummation review of points and fees
and for making payments to consumers in accordance with paragraphs
(e)(3)(iii)(B) and (e)(3)(iv) of this section.
(iv) For purposes of paragraph (e)(3)(iii) of this section, the
creditor or assignee must pay to the consumer an amount that is not less
than the sum of the following:
(A) The dollar amount by which the transaction's total points and
fees exceeds the applicable limit under paragraph (e)(3)(i) of this
section; and
(B) Interest on the dollar amount described in paragraph
(e)(3)(iv)(A) of this section, calculated using the contract interest
rate applicable during the period from consummation until the payment
described in this paragraph (e)(3)(iv) is made to the consumer.
(4) Qualified mortgage defined--special rules--(i) General.
Notwithstanding paragraph (e)(2) of this section, a qualified mortgage
is a covered transaction that satisfies:
(A) The requirements of paragraphs (e)(2)(i) through (iii) of this
section; and
(B) One or more of the criteria in paragraph (e)(4)(ii) of this
section.
(ii) Eligible loans. A qualified mortgage under this paragraph
(e)(4) must be one of the following at consummation:
(A) A loan that is eligible, except with regard to matters wholly
unrelated to ability to repay:
(1) To be purchased or guaranteed by the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation operating
under the conservatorship or receivership of the Federal Housing Finance
Agency pursuant to section 1367(a) of the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617(a)); or
(2) To be purchased or guaranteed by any limited-life regulatory
entity succeeding the charter of either the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation pursuant to
section 1367(i) of the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 (12 U.S.C. 4617(i));
(B) A loan that is eligible to be insured, except with regard to
matters wholly unrelated to ability to repay, by the U.S. Department of
Housing and Urban Development under the National Housing Act (12 U.S.C.
1707 et seq.);
(C) A loan that is eligible to be guaranteed, except with regard to
matters wholly unrelated to ability to repay, by the U.S. Department of
Veterans Affairs;
(D) A loan that is eligible to be guaranteed, except with regard to
matters wholly unrelated to ability to repay, by the U.S. Department of
Agriculture pursuant to 42 U.S.C. 1472(h); or
(E) A loan that is eligible to be insured, except with regard to
matters wholly unrelated to ability to repay, by the Rural Housing
Service.
[[Page 161]]
(iii) Sunset of special rules. (A) Each respective special rule
described in paragraph (e)(4)(ii)(B), (C), (D), or (E) of this section
shall expire on the effective date of a rule issued by each respective
agency pursuant to its authority under TILA section 129C(b)(3)(ii) to
define a qualified mortgage.
(B) Unless otherwise expired under paragraph (e)(4)(iii)(A) of this
section, the special rules in this paragraph (e)(4) are available only
for covered transactions consummated on or before January 10, 2021.
(5) Qualified mortgage defined--small creditor portfolio loans. (i)
Notwithstanding paragraph (e)(2) of this section, a qualified mortgage
is a covered transaction:
(A) That satisfies the requirements of paragraph (e)(2) of this
section other than the requirements of paragraph (e)(2)(vi) and without
regard to the standards in appendix Q to this part;
(B) For which the creditor considers at or before consummation the
consumer's monthly debt-to-income ratio or residual income and verifies
the debt obligations and income used to determine that ratio in
accordance with paragraph (c)(7) of this section, except that the
calculation of the payment on the covered transaction for purposes of
determining the consumer's total monthly debt obligations in paragraph
(c)(7)(i)(A) shall be determined in accordance with paragraph (e)(2)(iv)
of this section instead of paragraph (c)(5) of this section;
(C) That is not subject, at consummation, to a commitment to be
acquired by another person, other than a person that satisfies the
requirements of paragraph (e)(5)(i)(D) of this section; and
(D) For which the creditor satisfies the requirements stated in
Sec. 1026.35(b)(2)(iii)(B) and (C).
(ii) A qualified mortgage extended pursuant to paragraph (e)(5)(i)
of this section immediately loses its status as a qualified mortgage
under paragraph (e)(5)(i) if legal title to the qualified mortgage is
sold, assigned, or otherwise transferred to another person except when:
(A) The qualified mortgage is sold, assigned, or otherwise
transferred to another person three years or more after consummation of
the qualified mortgage;
(B) The qualified mortgage is sold, assigned, or otherwise
transferred to a creditor that satisfies the requirements of paragraph
(e)(5)(i)(D) of this section;
(C) The qualified mortgage is sold, assigned, or otherwise
transferred to another person pursuant to a capital restoration plan or
other action under 12 U.S.C. 1831o, actions or instructions of any
person acting as conservator, receiver, or bankruptcy trustee, an order
of a State or Federal government agency with jurisdiction to examine the
creditor pursuant to State or Federal law, or an agreement between the
creditor and such an agency; or
(D) The qualified mortgage is sold, assigned, or otherwise
transferred pursuant to a merger of the creditor with another person or
acquisition of the creditor by another person or of another person by
the creditor.
(6) Qualified mortgage defined--temporary balloon-payment qualified
mortgage rules. (i) Notwithstanding paragraph (e)(2) of this section, a
qualified mortgage is a covered transaction:
(A) That satisfies the requirements of paragraph (f) of this section
other than the requirements of paragraph (f)(1)(vi); and
(B) For which the creditor satisfies the requirements stated in
Sec. 1026.35(b)(2)(iii)(B) and (C).
(ii) The provisions of this paragraph (e)(6) apply only to covered
transactions for which the application was received before April 1,
2016.
(f) Balloon-payment qualified mortgages made by certain creditors--
(1) Exemption. Notwithstanding paragraph (e)(2) of this section, a
qualified mortgage may provide for a balloon payment, provided:
(i) The loan satisfies the requirements for a qualified mortgage in
paragraphs (e)(2)(i)(A), (e)(2)(ii), (e)(2)(iii), and (e)(2)(v) of this
section, but without regard to the standards in appendix Q;
(ii) The creditor determines at or before consummation that the
consumer can make all of the scheduled payments under the terms of the
legal obligation, as described in paragraph (f)(1)(iv) of this section,
together with the consumer's monthly payments for
[[Page 162]]
all mortgage-related obligations and excluding the balloon payment, from
the consumer's current or reasonably expected income or assets other
than the dwelling that secures the loan;
(iii) The creditor considers at or before consummation the
consumer's monthly debt-to-income ratio or residual income and verifies
the debt obligations and income used to determine that ratio in
accordance with paragraph (c)(7) of this section, except that the
calculation of the payment on the covered transaction for purposes of
determining the consumer's total monthly debt obligations in
(c)(7)(i)(A) shall be determined in accordance with paragraph (f)(iv)(A)
of this section, together with the consumer's monthly payments for all
mortgage-related obligations and excluding the balloon payment;
(iv) The legal obligation provides for:
(A) Scheduled payments that are substantially equal, calculated
using an amortization period that does not exceed 30 years;
(B) An interest rate that does not increase over the term of the
loan; and
(C) A loan term of five years or longer.
(v) The loan is not subject, at consummation, to a commitment to be
acquired by another person, other than a person that satisfies the
requirements of paragraph (f)(1)(vi) of this section; and
(vi) The creditor satisfies the requirements stated in Sec.
1026.35(b)(2)(iii)(A), (B), and (C).
(2) Post-consummation transfer of balloon-payment qualified
mortgage. A balloon-payment qualified mortgage, extended pursuant to
paragraph (f)(1), immediately loses its status as a qualified mortgage
under paragraph (f)(1) if legal title to the balloon-payment qualified
mortgage is sold, assigned, or otherwise transferred to another person
except when:
(i) The balloon-payment qualified mortgage is sold, assigned, or
otherwise transferred to another person three years or more after
consummation of the balloon-payment qualified mortgage;
(ii) The balloon-payment qualified mortgage is sold, assigned, or
otherwise transferred to a creditor that satisfies the requirements of
paragraph (f)(1)(vi) of this section;
(iii) The balloon-payment qualified mortgage is sold, assigned, or
otherwise transferred to another person pursuant to a capital
restoration plan or other action under 12 U.S.C. 1831o, actions or
instructions of any person acting as conservator, receiver or bankruptcy
trustee, an order of a State or Federal governmental agency with
jurisdiction to examine the creditor pursuant to State or Federal law,
or an agreement between the creditor and such an agency; or
(iv) The balloon-payment qualified mortgage is sold, assigned, or
otherwise transferred pursuant to a merger of the creditor with another
person or acquisition of the creditor by another person or of another
person by the creditor.
(g) Prepayment penalties--(1) When permitted. A covered transaction
must not include a prepayment penalty unless:
(i) The prepayment penalty is otherwise permitted by law; and
(ii) The transaction:
(A) Has an annual percentage rate that cannot increase after
consummation;
(B) Is a qualified mortgage under paragraph (e)(2), (e)(4), (e)(5),
(e)(6), or (f) of this section; and
(C) Is not a higher-priced mortgage loan, as defined in Sec.
1026.35(a).
(2) Limits on prepayment penalties. A prepayment penalty:
(i) Must not apply after the three-year period following
consummation; and
(ii) Must not exceed the following percentages of the amount of the
outstanding loan balance prepaid:
(A) 2 percent, if incurred during the first two years following
consummation; and
(B) 1 percent, if incurred during the third year following
consummation.
(3) Alternative offer required. A creditor must not offer a consumer
a covered transaction with a prepayment penalty unless the creditor also
offers the consumer an alternative covered transaction without a
prepayment penalty and the alternative covered transaction:
[[Page 163]]
(i) Has an annual percentage rate that cannot increase after
consummation and has the same type of interest rate as the covered
transaction with a prepayment penalty; for purposes of this paragraph
(g), the term ``type of interest rate'' refers to whether a transaction:
(A) Is a fixed-rate mortgage, as defined in Sec.
1026.18(s)(7)(iii); or
(B) Is a step-rate mortgage, as defined in Sec. 1026.18(s)(7)(ii);
(ii) Has the same loan term as the loan term for the covered
transaction with a prepayment penalty;
(iii) Satisfies the periodic payment conditions under paragraph
(e)(2)(i) of this section;
(iv) Satisfies the points and fees conditions under paragraph
(e)(2)(iii) of this section, based on the information known to the
creditor at the time the transaction is offered; and
(v) Is a transaction for which the creditor has a good faith belief
that the consumer likely qualifies, based on the information known to
the creditor at the time the creditor offers the covered transaction
without a prepayment penalty.
(4) Offer through a mortgage broker. If the creditor offers a
covered transaction with a prepayment penalty to the consumer through a
mortgage broker, as defined in Sec. 1026.36(a)(2), the creditor must:
(i) Present the mortgage broker an alternative covered transaction
without a prepayment penalty that satisfies the requirements of
paragraph (g)(3) of this section; and
(ii) Establish by agreement that the mortgage broker must present
the consumer an alternative covered transaction without a prepayment
penalty that satisfies the requirements of paragraph (g)(3) of this
section, offered by:
(A) The creditor; or
(B) Another creditor, if the transaction offered by the other
creditor has a lower interest rate or a lower total dollar amount of
discount points and origination points or fees.
(5) Creditor that is a loan originator. If the creditor is a loan
originator, as defined in Sec. 1026.36(a)(1), and the creditor presents
the consumer a covered transaction offered by a person to which the
creditor would assign the covered transaction after consummation, the
creditor must present the consumer an alternative covered transaction
without a prepayment penalty that satisfies the requirements of
paragraph (g)(3) of this section, offered by:
(i) The assignee; or
(ii) Another person, if the transaction offered by the other person
has a lower interest rate or a lower total dollar amount of origination
discount points and points or fees.
(6) Applicability. This paragraph (g) applies only if a covered
transaction is consummated with a prepayment penalty and is not violated
if:
(i) A covered transaction is consummated without a prepayment
penalty; or
(ii) The creditor and consumer do not consummate a covered
transaction.
(h) Evasion; open-end credit. In connection with credit secured by a
consumer's dwelling that does not meet the definition of open-end credit
in Sec. 1026.2(a)(20), a creditor shall not structure the loan as an
open-end plan to evade the requirements of this section.
[78 FR 6584, Jan. 30, 2013, as amended at 78 FR 35502, June 12, 2013; 78
FR 44718, July 24, 2013; 78 FR 60442, Oct. 1, 2013; 78 FR 63005, Oct.
23, 2013; 79 FR 65323, Nov. 3, 2014; 80 FR 59968, Oct. 2, 2015]
Sec. Sec. 1026.44-1026.45 [Reserved]
Subpart F_Special Rules for Private Education Loans
Sec. 1026.46 Special disclosure requirements for private education
loans.
(a) Coverage. The requirements of this subpart apply to private
education loans as defined in Sec. 1026.46(b)(5). A creditor may, at
its option, comply with the requirements of this subpart for an
extension of credit subject to Sec. Sec. 1026.17 and 1026.18 that is
extended to a consumer for expenses incurred after graduation from a
law, medical, dental, veterinary, or other graduate school and related
to relocation, study for a bar or other examination, participation in an
internship or residency program, or similar purposes.
(1) Relation to other subparts in this part. Except as otherwise
specifically provided, the requirements and limitations of this subpart
are in addition to
[[Page 164]]
and not in lieu of those contained in other subparts of this part.
(2) [Reserved]
(b) Definitions. For purposes of this subpart, the following
definitions apply:
(1) Covered educational institution means:
(i) An educational institution that meets the definition of an
institution of higher education, as defined in paragraph (b)(2) of this
section, without regard to the institution's accreditation status; and
(ii) Includes an agent, officer, or employee of the institution of
higher education. An agent means an institution-affiliated organization
as defined by section 151 of the Higher Education Act of 1965 (20 U.S.C.
1019) or an officer or employee of an institution-affiliated
organization.
(2) Institution of higher education has the same meaning as in
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C.
1001-1002) and the implementing regulations published by the U.S.
Department of Education.
(3) Postsecondary educational expenses means any of the expenses
that are listed as part of the cost of attendance, as defined under
section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), of a
student at a covered educational institution. These expenses include
tuition and fees, books, supplies, miscellaneous personal expenses, room
and board, and an allowance for any loan fee, origination fee, or
insurance premium charged to a student or parent for a loan incurred to
cover the cost of the student's attendance.
(4) Preferred lender arrangement has the same meaning as in section
151 of the Higher Education Act of 1965 (20 U.S.C. 1019).
(5) Private education loan means an extension of credit that:
(i) Is not made, insured, or guaranteed under title IV of the Higher
Education Act of 1965 (20 U.S.C. 1070 et seq.);
(ii) Is extended to a consumer expressly, in whole or in part, for
postsecondary educational expenses, regardless of whether the loan is
provided by the educational institution that the student attends;
(iii) Does not include open-end credit or any loan that is secured
by real property or a dwelling; and
(iv) Does not include an extension of credit in which the covered
educational institution is the creditor if:
(A) The term of the extension of credit is 90 days or less; or
(B) an interest rate will not be applied to the credit balance and
the term of the extension of credit is one year or less, even if the
credit is payable in more than four installments.
(c) Form of disclosures--(1) Clear and conspicuous. The disclosures
required by this subpart shall be made clearly and conspicuously.
(2) Transaction disclosures. (i) The disclosures required under
Sec. Sec. 1026.47(b) and (c) shall be made in writing, in a form that
the consumer may keep. The disclosures shall be grouped together, shall
be segregated from everything else, and shall not contain any
information not directly related to the disclosures required under
Sec. Sec. 1026.47(b) and (c), which include the disclosures required
under Sec. 1026.18.
(ii) The disclosures may include an acknowledgement of receipt, the
date of the transaction, and the consumer's name, address, and account
number. The following disclosures may be made together with or
separately from other required disclosures: the creditor's identity
under Sec. 1026.18(a), insurance or debt cancellation under Sec.
1026.18(n), and certain security interest charges under Sec.
1026.18(o).
(iii) The term ``finance charge'' and corresponding amount, when
required to be disclosed under Sec. 1026.18(d), and the interest rate
required to be disclosed under Sec. Sec. 1026.47(b)(1)(i) and (c)(1),
shall be more conspicuous than any other disclosure, except the
creditor's identity under Sec. 1026.18(a).
(3) Electronic disclosures. The disclosures required under
Sec. Sec. 1026.47(b) and (c) may be provided to the consumer in
electronic form, subject to compliance with the consumer consent and
other applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). The
disclosures required by Sec. 1026.47(a) may be provided to the consumer
in electronic form on or with an application or solicitation that is
[[Page 165]]
accessed by the consumer in electronic form without regard to the
consumer consent or other provisions of the E-Sign Act. The form
required to be received under Sec. 1026.48(e) may be accepted by the
creditor in electronic form as provided for in that section.
(d) Timing of disclosures--(1) Application or solicitation
disclosures. (i) The disclosures required by Sec. 1026.47(a) shall be
provided on or with any application or solicitation. For purposes of
this subpart, the term solicitation means an offer of credit that does
not require the consumer to complete an application. A ``firm offer of
credit'' as defined in section 603(l) of the Fair Credit Reporting Act
(15 U.S.C. 1681a(l)) is a solicitation for purposes of this section.
(ii) The creditor may, at its option, disclose orally the
information in Sec. 1026.47(a) in a telephone application or
solicitation. Alternatively, if the creditor does not disclose orally
the information in Sec. 1026.47(a), the creditor must provide the
disclosures or place them in the mail no later than three business days
after the consumer has applied for the credit, except that, if the
creditor either denies the consumer's application or provides or places
in the mail the disclosures in Sec. 1026.47(b) no later than three
business days after the consumer requests the credit, the creditor need
not also provide the Sec. 1026.47(a) disclosures.
(iii) Notwithstanding paragraph (d)(1)(i) of this section, for a
loan that the consumer may use for multiple purposes including, but not
limited to, postsecondary educational expenses, the creditor need not
provide the disclosures required by Sec. 1026.47(a).
(2) Approval disclosures. The creditor shall provide the disclosures
required by Sec. 1026.47(b) before consummation on or with any notice
of approval provided to the consumer. If the creditor mails notice of
approval, the disclosures must be mailed with the notice. If the
creditor communicates notice of approval by telephone, the creditor must
mail the disclosures within three business days of providing the notice
of approval. If the creditor communicates notice of approval
electronically, the creditor may provide the disclosures in electronic
form in accordance with Sec. 1026.46(d)(3); otherwise the creditor must
mail the disclosures within three business days of communicating the
notice of approval. If the creditor communicates approval in person, the
creditor must provide the disclosures to the consumer at that time.
(3) Final disclosures. The disclosures required by Sec. 1026.47(c)
shall be provided after the consumer accepts the loan in accordance with
Sec. 1026.48(c)(1).
(4) Receipt of mailed disclosures. If the disclosures under
paragraphs (d)(1), (d)(2) or (d)(3) of this section are mailed to the
consumer, the consumer is considered to have received them three
business days after they are mailed.
(e) Basis of disclosures and use of estimates--(1) Legal obligation.
Disclosures shall reflect the terms of the legal obligation between the
parties.
(2) Estimates. If any information necessary for an accurate
disclosure is unknown to the creditor, the creditor shall make the
disclosure based on the best information reasonably available at the
time the disclosure is provided, and shall state clearly that the
disclosure is an estimate.
(f) Multiple creditors; multiple consumers. If a transaction
involves more than one creditor, only one set of disclosures shall be
given and the creditors shall agree among themselves which creditor will
comply with the requirements that this part imposes on any or all of
them. If there is more than one consumer, the disclosures may be made to
any consumer who is primarily liable on the obligation.
(g) Effect of subsequent events--(1) Approval disclosures. If a
disclosure under Sec. 1026.47(b) becomes inaccurate because of an event
that occurs after the creditor delivers the required disclosures, the
inaccuracy is not a violation of Regulation Z (12 CFR part 1026),
although new disclosures may be required under Sec. 1026.48(c).
(2) Final disclosures. If a disclosure under Sec. 1026.47(c)
becomes inaccurate because of an event that occurs after the creditor
delivers the required disclosures, the inaccuracy is not a violation of
Regulation Z (12 CFR part 1026).
Sec. 1026.47 Content of disclosures.
(a) Application or solicitation disclosures. A creditor shall
provide the disclosures required under paragraph (a)
[[Page 166]]
of this section on or with a solicitation or an application for a
private education loan.
(1) Interest Rates. (i) The interest rate or range of interest rates
applicable to the loan and actually offered by the creditor at the time
of application or solicitation. If the rate will depend, in part, on a
later determination of the consumer's creditworthiness or other factors,
a statement that the rate for which the consumer may qualify will depend
on the consumer's creditworthiness and other factors, if applicable.
(ii) Whether the interest rates applicable to the loan are fixed or
variable.
(iii) If the interest rate may increase after consummation of the
transaction, any limitations on the interest rate adjustments, or lack
thereof; a statement that the consumer's actual rate could be higher or
lower than the rates disclosed under paragraph (a)(1)(i) of this
section, if applicable; and, if the limitation is determined by
applicable law, that fact.
(iv) Whether the applicable interest rates typically will be higher
if the loan is not co-signed or guaranteed.
(2) Fees and default or late payment costs. (i) An itemization of
the fees or range of fees required to obtain the private education loan.
(ii) Any fees, changes to the interest rate, and adjustments to
principal based on the consumer's defaults or late payments.
(3) Repayment terms. (i) The term of the loan, which is the period
during which regularly scheduled payments of principal and interest will
be due.
(ii) A description of any payment deferral options, or, if the
consumer does not have the option to defer payments, that fact.
(iii) For each payment deferral option applicable while the student
is enrolled at a covered educational institution:
(A) Whether interest will accrue during the deferral period; and
(B) If interest accrues, whether payment of interest may be deferred
and added to the principal balance.
(iv) A statement that if the consumer files for bankruptcy, the
consumer may still be required to pay back the loan.
(4) Cost estimates. An example of the total cost of the loan
calculated as the total of payments over the term of the loan:
(i) Using the highest rate of interest disclosed under paragraph
(a)(1) of this section and including all finance charges applicable to
loans at that rate;
(ii) Using an amount financed of $10,000, or $5000 if the creditor
only offers loans of this type for less than $10,000; and
(iii) Calculated for each payment option.
(5) Eligibility. Any age or school enrollment eligibility
requirements relating to the consumer or cosigner.
(6) Alternatives to private education loans. (i) A statement that
the consumer may qualify for Federal student financial assistance
through a program under title IV of the Higher Education Act of 1965 (20
U.S.C. 1070 et seq.).
(ii) The interest rates available under each program under title IV
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) and whether
the rates are fixed or variable.
(iii) A statement that the consumer may obtain additional
information concerning Federal student financial assistance from the
institution of higher education that the student attends, or at the Web
site of the U.S. Department of Education, including an appropriate Web
site address.
(iv) A statement that a covered educational institution may have
school-specific education loan benefits and terms not detailed on the
disclosure form.
(7) Rights of the consumer. A statement that if the loan is
approved, the terms of the loan will be available and will not change
for 30 days except as a result of adjustments to the interest rate and
other changes permitted by law.
(8) Self-certification information. A statement that, before the
loan may be consummated, the consumer must complete the self-
certification form and that the form may be obtained from the
institution of higher education that the student attends.
(b) Approval disclosures. On or with any notice of approval provided
to the consumer, the creditor shall disclose the information required
under Sec. 1026.18 and the following information:
[[Page 167]]
(1) Interest rate. (i) The interest rate applicable to the loan.
(ii) Whether the interest rate is fixed or variable.
(iii) If the interest rate may increase after consummation of the
transaction, any limitations on the rate adjustments, or lack thereof.
(2) Fees and default or late payment costs. (i) An itemization of
the fees or range of fees required to obtain the private education loan.
(ii) Any fees, changes to the interest rate, and adjustments to
principal based on the consumer's defaults or late payments.
(3) Repayment terms. (i) The principal amount of the loan for which
the consumer has been approved.
(ii) The term of the loan, which is the period during which
regularly scheduled payments of principal and interest will be due.
(iii) A description of the payment deferral option chosen by the
consumer, if applicable, and any other payment deferral options that the
consumer may elect at a later time.
(iv) Any payments required while the student is enrolled at a
covered educational institution, based on the deferral option chosen by
the consumer.
(v) The amount of any unpaid interest that will accrue while the
student is enrolled at a covered educational institution, based on the
deferral option chosen by the consumer.
(vi) A statement that if the consumer files for bankruptcy, the
consumer may still be required to pay back the loan.
(vii) An estimate of the total amount of payments calculated based
on:
(A) The interest rate applicable to the loan. Compliance with Sec.
1026.18(h) constitutes compliance with this requirement.
(B) The maximum possible rate of interest for the loan or, if a
maximum rate cannot be determined, a rate of 25%.
(C) If a maximum rate cannot be determined, the estimate of the
total amount for repayment must include a statement that there is no
maximum rate and that the total amount for repayment disclosed under
paragraph (b)(3)(vii)(B) of this section is an estimate and will be
higher if the applicable interest rate increases.
(viii) The maximum monthly payment based on the maximum rate of
interest for the loan or, if a maximum rate cannot be determined, a rate
of 25%. If a maximum cannot be determined, a statement that there is no
maximum rate and that the monthly payment amount disclosed is an
estimate and will be higher if the applicable interest rate increases.
(4) Alternatives to private education loans. (i) A statement that
the consumer may qualify for Federal student financial assistance
through a program under title IV of the Higher Education Act of 1965 (20
U.S.C. 1070 et seq.).
(ii) The interest rates available under each program under title IV
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.), and
whether the rates are fixed or variable.
(iii) A statement that the consumer may obtain additional
information concerning Federal student financial assistance from the
institution of higher education that the student attends, or at the Web
site of the U.S. Department of Education, including an appropriate Web
site address.
(5) Rights of the consumer. (i) A statement that the consumer may
accept the terms of the loan until the acceptance period under Sec.
1026.48(c)(1) has expired. The statement must include the specific date
on which the acceptance period expires, based on the date upon which the
consumer receives the disclosures required under this subsection for the
loan. The disclosure must also specify the method or methods by which
the consumer may communicate acceptance.
(ii) A statement that, except for changes to the interest rate and
other changes permitted by law, the rates and terms of the loan may not
be changed by the creditor during the period described in paragraph
(b)(5)(i) of this section.
(c) Final disclosures. After the consumer has accepted the loan in
accordance with Sec. 1026.48(c)(1), the creditor shall disclose to the
consumer the information required by Sec. 1026.18 and the following
information:
(1) Interest rate. Information required to be disclosed under Sec.
1026.47(b)(1).
[[Page 168]]
(2) Fees and default or late payment costs. Information required to
be disclosed under Sec. 1026.47(b)(2).
(3) Repayment terms. Information required to be disclosed under
Sec. 1026.47(b)(3).
(4) Cancellation right. A statement that:
(i) The consumer has the right to cancel the loan, without penalty,
at any time before the cancellation period under Sec. 1026.48(d)
expires, and
(ii) Loan proceeds will not be disbursed until after the
cancellation period under Sec. 1026.48(d) expires. The statement must
include the specific date on which the cancellation period expires and
state that the consumer may cancel by that date. The statement must also
specify the method or methods by which the consumer may cancel. If the
creditor permits cancellation by mail, the statement must specify that
the consumer's mailed request will be deemed timely if placed in the
mail not later than the cancellation date specified on the disclosure.
The disclosures required by this paragraph (c)(4) must be made more
conspicuous than any other disclosure required under this section,
except for the finance charge, the interest rate, and the creditor's
identity, which must be disclosed in accordance with the requirements of
Sec. 1026.46(c)(2)(iii).
Sec. 1026.48 Limitations on private education loans.
(a) Co-branding prohibited. (1) Except as provided in paragraph (b)
of this section, a creditor, other than the covered educational
institution itself, shall not use the name, emblem, mascot, or logo of a
covered educational institution, or other words, pictures, or symbols
identified with a covered educational institution, in the marketing of
private education loans in a way that implies that the covered education
institution endorses the creditor's loans.
(2) A creditor's marketing of private education loans does not imply
that the covered education institution endorses the creditor's loans if
the marketing includes a clear and conspicuous disclosure that is
equally prominent and closely proximate to the reference to the covered
educational institution that the covered educational institution does
not endorse the creditor's loans and that the creditor is not affiliated
with the covered educational institution.
(b) Endorsed lender arrangements. If a creditor and a covered
educational institution have entered into an arrangement where the
covered educational institution agrees to endorse the creditor's private
education loans, and such arrangement is not prohibited by other
applicable law or regulation, paragraph (a)(1) of this section does not
apply if the private education loan marketing includes a clear and
conspicuous disclosure that is equally prominent and closely proximate
to the reference to the covered educational institution that the
creditor's loans are not offered or made by the covered educational
institution, but are made by the creditor.
(c) Consumer's right to accept. (1) The consumer has the right to
accept the terms of a private education loan at any time within 30
calendar days following the date on which the consumer receives the
disclosures required under Sec. 1026.47(b).
(2) Except for changes permitted under paragraphs (c)(3) and (c)(4),
the rate and terms of the private education loan that are required to be
disclosed under Sec. Sec. 1026.47(b) and (c) may not be changed by the
creditor prior to the earlier of:
(i) The date of disbursement of the loan; or
(ii) The expiration of the 30 calendar day period described in
paragraph (c)(1) of this section if the consumer has not accepted the
loan within that time.
(3) Exceptions not requiring re-disclosure. (i) Notwithstanding
paragraph (c)(2) of this section, nothing in this section prevents the
creditor from:
(A) Withdrawing an offer before consummation of the transaction if
the extension of credit would be prohibited by law or if the creditor
has reason to believe that the consumer has committed fraud in
connection with the loan application;
(B) Changing the interest rate based on adjustments to the index
used for a loan;
(C) Changing the interest rate and terms if the change will
unequivocally benefit the consumer; or
[[Page 169]]
(D) Reducing the loan amount based upon a certification or other
information received from the covered educational institution, or from
the consumer, indicating that the student's cost of attendance has
decreased or the consumer's other financial aid has increased. A
creditor may make corresponding changes to the rate and other terms only
to the extent that the consumer would have received the terms if the
consumer had applied for the reduced loan amount.
(ii) If the creditor changes the rate or terms of the loan under
this paragraph (c)(3), the creditor need not provide the disclosures
required under Sec. 1026.47(b) for the new loan terms, nor need the
creditor provide an additional 30-day period to the consumer to accept
the new terms of the loan under paragraph (c)(1) of this section.
(4) Exceptions requiring re-disclosure. (i) Notwithstanding
paragraphs (c)(2) or (c)(3) of this section, nothing in this section
prevents the creditor, at its option, from changing the rate or terms of
the loan to accommodate a specific request by the consumer. For example,
if the consumer requests a different repayment option, the creditor may,
but need not, offer to provide the requested repayment option and make
any other changes to the rate and terms.
(ii) If the creditor changes the rate or terms of the loan under
this paragraph (c)(4), the creditor shall provide the disclosures
required under Sec. 1026.47(b) and shall provide the consumer the 30-
day period to accept the loan under paragraph (c)(1) of this section.
The creditor shall not make further changes to the rates and terms of
the loan, except as specified in paragraphs (c)(3) and (4) of this
section. Except as permitted under Sec. 1026.48(c)(3), unless the
consumer accepts the loan offered by the creditor in response to the
consumer's request, the creditor may not withdraw or change the rates or
terms of the loan for which the consumer was approved prior to the
consumer's request for a change in loan terms.
(d) Consumer's right to cancel. The consumer may cancel a private
education loan, without penalty, until midnight of the third business
day following the date on which the consumer receives the disclosures
required by Sec. 1026.47(c). No funds may be disbursed for a private
education loan until the three-business day period has expired.
(e) Self-certification form. For a private education loan intended
to be used for the postsecondary educational expenses of a student while
the student is attending an institution of higher education, the
creditor shall obtain from the consumer or the institution of higher
education the form developed by the Secretary of Education under section
155 of the Higher Education Act of 1965, signed by the consumer, in
written or electronic form, before consummating the private education
loan.
(f) Provision of information by preferred lenders. A creditor that
has a preferred lender arrangement with a covered educational
institution shall provide to the covered educational institution the
information required under Sec. Sec. 1026.47(a)(1) through (5), for
each type of private education loan that the lender plans to offer to
consumers for students attending the covered educational institution for
the period beginning July 1 of the current year and ending June 30 of
the following year. The creditor shall provide the information annually
by the later of the 1st day of April, or within 30 days after entering
into, or learning the creditor is a party to, a preferred lender
arrangement.
Subpart G_Special Rules Applicable to Credit Card Accounts and Open-End
Credit Offered to College Students
Sec. 1026.51 Ability to Pay.
(a) General rule--(1)(i) Consideration of ability to pay. A card
issuer must not open a credit card account for a consumer under an open-
end (not home-secured) consumer credit plan, or increase any credit
limit applicable to such account, unless the card issuer considers the
consumer's ability to make the required minimum periodic payments under
the terms of the account based on the consumer's income or assets and
the consumer's current obligations.
(ii) Reasonable policies and procedures. Card issuers must establish
and maintain reasonable written policies and procedures to consider the
consumer's
[[Page 170]]
ability to make the required minimum payments under the terms of the
account based on a consumer's income or assets and a consumer's current
obligations. Reasonable policies and procedures include treating any
income and assets to which the consumer has a reasonable expectation of
access as the consumer's income or assets, or limiting consideration of
the consumer's income or assets to the consumer's independent income and
assets. Reasonable policies and procedures also include consideration of
at least one of the following: The ratio of debt obligations to income;
the ratio of debt obligations to assets; or the income the consumer will
have after paying debt obligations. It would be unreasonable for a card
issuer not to review any information about a consumer's income or assets
and current obligations, or to issue a credit card to a consumer who
does not have any income or assets.
(2) Minimum periodic payments--(i) Reasonable method. For purposes
of paragraph (a)(1) of this section, a card issuer must use a reasonable
method for estimating the minimum periodic payments the consumer would
be required to pay under the terms of the account.
(ii) Safe harbor. A card issuer complies with paragraph (a)(2)(i) of
this section if it estimates required minimum periodic payments using
the following method:
(A) The card issuer assumes utilization, from the first day of the
billing cycle, of the full credit line that the issuer is considering
offering to the consumer; and
(B) The card issuer uses a minimum payment formula employed by the
issuer for the product the issuer is considering offering to the
consumer or, in the case of an existing account, the minimum payment
formula that currently applies to that account, provided that:
(1) If the applicable minimum payment formula includes interest
charges, the card issuer estimates those charges using an interest rate
that the issuer is considering offering to the consumer for purchases
or, in the case of an existing account, the interest rate that currently
applies to purchases; and
(2) If the applicable minimum payment formula includes mandatory
fees, the card issuer must assume that such fees have been charged to
the account.
(b) Rules affecting young consumers--(1) Applications from young
consumers. A card issuer may not open a credit card account under an
open-end (not home-secured) consumer credit plan for a consumer less
than 21 years old, unless the consumer has submitted a written
application and the card issuer has:
(i) Financial information indicating the consumer has an independent
ability to make the required minimum periodic payments on the proposed
extension of credit in connection with the account; or
(ii)(A) A signed agreement of a cosigner, guarantor, or joint
applicant who is at least 21 years old to be either secondarily liable
for any debt on the account incurred by the consumer before the consumer
has attained the age of 21 or jointly liable with the consumer for any
debt on the account; and
(B) Financial information indicating such cosigner, guarantor, or
joint applicant has the ability to make the required minimum periodic
payments on such debts, consistent with paragraph (a) of this section.
(2) Credit line increases for young consumers. (i) If a credit card
account has been opened pursuant to paragraph (b)(1)(i) of this section,
no increase in the credit limit may be made on such account before the
consumer attains the age of 21 unless:
(A) At the time of the contemplated increase, the consumer has an
independent ability to make the required minimum periodic payments on
the increased limit consistent with paragraph (b)(1)(i) of this section;
or
(B) A cosigner, guarantor, or joint applicant who is at least 21
years old agrees in writing to assume liability for any debt incurred on
the account, consistent with paragraph (b)(1)(ii) of this section.
(ii) If a credit card account has been opened pursuant to paragraph
(b)(1)(ii) of this section, no increase in the credit limit may be made
on such account before the consumer attains the age of 21 unless the
cosigner, guarantor, or joint accountholder who assumed liability at
account opening agrees in
[[Page 171]]
writing to assume liability on the increase.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 25837, May 3, 2013]
Sec. 1026.52 Limitations on fees.
(a) Limitations prior to account opening and during first year after
account opening--(1) General rule. Except as provided in paragraph
(a)(2) of this section, the total amount of fees a consumer is required
to pay with respect to a credit card account under an open-end (not
home-secured) consumer credit plan during the first year after account
opening must not exceed 25 percent of the credit limit in effect when
the account is opened. For purposes of this paragraph, an account is
considered open no earlier than the date on which the account may first
be used by the consumer to engage in transactions.
(2) Fees not subject to limitations. Paragraph (a) of this section
does not apply to:
(i) Late payment fees, over-the-limit fees, and returned-payment
fees; or
(ii) Fees that the consumer is not required to pay with respect to
the account.
(3) Rule of construction. Paragraph (a) of this section does not
authorize the imposition or payment of fees or charges otherwise
prohibited by law.
(b) Limitations on penalty fees. A card issuer must not impose a fee
for violating the terms or other requirements of a credit card account
under an open-end (not home-secured) consumer credit plan unless the
dollar amount of the fee is consistent with paragraphs (b)(1) and (b)(2)
of this section.
(1) General rule. Except as provided in paragraph (b)(2) of this
section, a card issuer may impose a fee for violating the terms or other
requirements of a credit card account under an open-end (not home-
secured) consumer credit plan if the dollar amount of the fee is
consistent with either paragraph (b)(1)(i) or (b)(1)(ii) of this
section.
(i) Fees based on costs. A card issuer may impose a fee for
violating the terms or other requirements of an account if the card
issuer has determined that the dollar amount of the fee represents a
reasonable proportion of the total costs incurred by the card issuer as
a result of that type of violation. A card issuer must reevaluate this
determination at least once every twelve months. If as a result of the
reevaluation the card issuer determines that a lower fee represents a
reasonable proportion of the total costs incurred by the card issuer as
a result of that type of violation, the card issuer must begin imposing
the lower fee within 45 days after completing the reevaluation. If as a
result of the reevaluation the card issuer determines that a higher fee
represents a reasonable proportion of the total costs incurred by the
card issuer as a result of that type of violation, the card issuer may
begin imposing the higher fee after complying with the notice
requirements in Sec. 1026.9.
(ii) Safe harbors. A card issuer may impose a fee for violating the
terms or other requirements of an account if the dollar amount of the
fee does not exceed, as applicable:
(A) $27
(B) $38 if the card issuer previously imposed a fee pursuant to
paragraph (b)(1)(ii)(A) of this section for a violation of the same type
that occurred during the same billing cycle or one of the next six
billing cycles; or
(C) Three percent of the delinquent balance on a charge card account
that requires payment of outstanding balances in full at the end of each
billing cycle if the card issuer has not received the required payment
for two or more consecutive billing cycles.
(D) The amounts in paragraphs (b)(1)(ii)(A) and (b)(1)(ii)(B) of
this section will be adjusted annually by the Bureau to reflect changes
in the Consumer Price Index.
(2) Prohibited fees--(i) Fees that exceed dollar amount associated
with violation--(A) Generally. A card issuer must not impose a fee for
violating the terms or other requirements of a credit card account under
an open-end (not home-secured) consumer credit plan that exceeds the
dollar amount associated with the violation.
(B) No dollar amount associated with violation. A card issuer must
not impose a fee for violating the terms or other requirements of a
credit card account under an open-end (not home-secured) consumer credit
plan when there is no dollar amount associated with the violation. For
purposes of paragraph
[[Page 172]]
(b)(2)(i) of this section, there is no dollar amount associated with the
following violations:
(1) Transactions that the card issuer declines to authorize;
(2) Account inactivity; and
(3) The closure or termination of an account.
(ii) Multiple fees based on a single event or transaction. A card
issuer must not impose more than one fee for violating the terms or
other requirements of a credit card account under an open-end (not home-
secured) consumer credit plan based on a single event or transaction. A
card issuer may, at its option, comply with this prohibition by imposing
no more than one fee for violating the terms or other requirements of an
account during a billing cycle.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 18797, Mar. 28, 2013;
78 FR 76035, Dec. 16, 2013; 79 FR 48017, Aug. 15, 2014; 80 FR 56898,
Sept. 21, 2015; 81 FR 41421, June 27, 2016]
Effective Date Note: At 81 FR 84370, Nov. 22, 2016, Sec. 1026.52
was amended by revising the heading for paragraph (a), effective Oct. 1,
2017. At 82 FR 18975, Apr. 25, 2017, the effective date was delayed to
Apr. 1, 2018. For the convenience of the user, the revised text is set
forth as follows:
Sec. 1026.52 Limitations on fees.
(a) Limitations during first year after account opening--* * *
* * * * *
Sec. 1026.53 Allocation of payments.
(a) General rule. Except as provided in paragraph (b) of this
section, when a consumer makes a payment in excess of the required
minimum periodic payment for a credit card account under an open-end
(not home-secured) consumer credit plan, the card issuer must allocate
the excess amount first to the balance with the highest annual
percentage rate and any remaining portion to the other balances in
descending order based on the applicable annual percentage rate.
(b) Special rules--(1) Accounts with balances subject to deferred
interest or similar program. When a balance on a credit card account
under an open-end (not home-secured) consumer credit plan is subject to
a deferred interest or similar program that provides that a consumer
will not be obligated to pay interest that accrues on the balance if the
balance is paid in full prior to the expiration of a specified period of
time:
(i) Last two billing cycles. The card issuer must allocate any
amount paid by the consumer in excess of the required minimum periodic
payment consistent with paragraph (a) of this section, except that,
during the two billing cycles immediately preceding expiration of the
specified period, the excess amount must be allocated first to the
balance subject to the deferred interest or similar program and any
remaining portion allocated to any other balances consistent with
paragraph (a) of this section; or
(ii) Consumer request. The card issuer may at its option allocate
any amount paid by the consumer in excess of the required minimum
periodic payment among the balances on the account in the manner
requested by the consumer.
(2) Accounts with secured balances. When a balance on a credit card
account under an open-end (not home-secured) consumer credit plan is
secured, the card issuer may at its option allocate any amount paid by
the consumer in excess of the required minimum periodic payment to that
balance if requested by the consumer.
Sec. 1026.54 Limitations on the imposition of finance charges.
(a) Limitations on imposing finance charges as a result of the loss
of a grace period--(1) General rule. Except as provided in paragraph (b)
of this section, a card issuer must not impose finance charges as a
result of the loss of a grace period on a credit card account under an
open-end (not home-secured) consumer credit plan if those finance
charges are based on:
(i) Balances for days in billing cycles that precede the most recent
billing cycle; or
(ii) Any portion of a balance subject to a grace period that was
repaid prior to the expiration of the grace period.
(2) Definition of grace period. For purposes of paragraph (a)(1) of
this section, ``grace period'' has the same meaning as in Sec.
1026.5(b)(2)(ii)(B)(3).
(b) Exceptions. Paragraph (a) of this section does not apply to:
[[Page 173]]
(1) Adjustments to finance charges as a result of the resolution of
a dispute under Sec. 1026.12 or Sec. 1026.13; or
(2) Adjustments to finance charges as a result of the return of a
payment.
Sec. 1026.55 Limitations on increasing annual percentage rates,
fees, and charges.
(a) General rule. Except as provided in paragraph (b) of this
section, a card issuer must not increase an annual percentage rate or a
fee or charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) on a credit card account under an open-end
(not home-secured) consumer credit plan.
(b) Exceptions. A card issuer may increase an annual percentage rate
or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to an exception
set forth in this paragraph even if that increase would not be permitted
under a different exception.
(1) Temporary rate, fee, or charge exception. A card issuer may
increase an annual percentage rate or a fee or charge required to be
disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) upon
the expiration of a specified period of six months or longer, provided
that:
(i) Prior to the commencement of that period, the card issuer
disclosed in writing to the consumer, in a clear and conspicuous manner,
the length of the period and the annual percentage rate, fee, or charge
that would apply after expiration of the period; and
(ii) Upon expiration of the specified period:
(A) The card issuer must not apply an annual percentage rate, fee,
or charge to transactions that occurred prior to the period that exceeds
the annual percentage rate, fee, or charge that applied to those
transactions prior to the period;
(B) If the disclosures required by paragraph (b)(1)(i) of this
section are provided pursuant to Sec. 1026.9(c), the card issuer must
not apply an annual percentage rate, fee, or charge to transactions that
occurred within 14 days after provision of the notice that exceeds the
annual percentage rate, fee, or charge that applied to that category of
transactions prior to provision of the notice; and
(C) The card issuer must not apply an annual percentage rate, fee,
or charge to transactions that occurred during the period that exceeds
the increased annual percentage rate, fee, or charge disclosed pursuant
to paragraph (b)(1)(i) of this section.
(2) Variable rate exception. A card issuer may increase an annual
percentage rate when:
(i) The annual percentage rate varies according to an index that is
not under the card issuer's control and is available to the general
public; and
(ii) The increase in the annual percentage rate is due to an
increase in the index.
(3) Advance notice exception. A card issuer may increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) after complying with the
applicable notice requirements in Sec. 1026.9(b), (c), or (g), provided
that:
(i) If a card issuer discloses an increased annual percentage rate,
fee, or charge pursuant to Sec. 1026.9(b), the card issuer must not
apply that rate, fee, or charge to transactions that occurred prior to
provision of the notice;
(ii) If a card issuer discloses an increased annual percentage rate,
fee, or charge pursuant to Sec. 1026.9(c) or (g), the card issuer must
not apply that rate, fee, or charge to transactions that occurred prior
to or within 14 days after provision of the notice; and
(iii) This exception does not permit a card issuer to increase an
annual percentage rate or a fee or charge required to be disclosed under
Sec. 1026.6(b)(2)(ii), (iii), or (xii) during the first year after the
account is opened, while the account is closed, or while the card issuer
does not permit the consumer to use the account for new transactions.
For purposes of this paragraph, an account is considered open no earlier
than the date on which the account may first be used by the consumer to
engage in transactions.
(4) Delinquency exception. A card issuer may increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) due to the card
[[Page 174]]
issuer not receiving the consumer's required minimum periodic payment
within 60 days after the due date for that payment, provided that:
(i) The card issuer must disclose in a clear and conspicuous manner
in the notice of the increase pursuant to Sec. 1026.9(c) or (g):
(A) A statement of the reason for the increase; and
(B) That the increased annual percentage rate, fee, or charge will
cease to apply if the card issuer receives six consecutive required
minimum periodic payments on or before the payment due date beginning
with the first payment due following the effective date of the increase;
and
(ii) If the card issuer receives six consecutive required minimum
periodic payments on or before the payment due date beginning with the
first payment due following the effective date of the increase, the card
issuer must reduce any annual percentage rate, fee, or charge increased
pursuant to this exception to the annual percentage rate, fee, or charge
that applied prior to the increase with respect to transactions that
occurred prior to or within 14 days after provision of the Sec.
1026.9(c) or (g) notice.
(5) Workout and temporary hardship arrangement exception. A card
issuer may increase an annual percentage rate or a fee or charge
required to be disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or
(b)(2)(xii) due to the consumer's completion of a workout or temporary
hardship arrangement or the consumer's failure to comply with the terms
of such an arrangement, provided that:
(i) Prior to commencement of the arrangement (except as provided in
Sec. 1026.9(c)(2)(v)(D)), the card issuer has provided the consumer
with a clear and conspicuous written disclosure of the terms of the
arrangement (including any increases due to the completion or failure of
the arrangement); and
(ii) Upon the completion or failure of the arrangement, the card
issuer must not apply to any transactions that occurred prior to
commencement of the arrangement an annual percentage rate, fee, or
charge that exceeds the annual percentage rate, fee, or charge that
applied to those transactions prior to commencement of the arrangement.
(6) Servicemembers Civil Relief Act exception. If an annual
percentage rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (iii), or (xii) has been decreased pursuant to 50
U.S.C. app. 527 or a similar Federal or state statute or regulation, a
card issuer may increase that annual percentage rate, fee, or charge
once 50 U.S.C. app. 527 or the similar statute or regulation no longer
applies, provided that the card issuer must not apply to any
transactions that occurred prior to the decrease an annual percentage
rate, fee, or charge that exceeds the annual percentage rate, fee, or
charge that applied to those transactions prior to the decrease.
(c) Treatment of protected balances--(1) Definition of protected
balance. For purposes of this paragraph, ``protected balance'' means the
amount owed for a category of transactions to which an increased annual
percentage rate or an increased fee or charge required to be disclosed
under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) cannot be
applied after the annual percentage rate, fee, or charge for that
category of transactions has been increased pursuant to paragraph (b)(3)
of this section.
(2) Repayment of protected balance. The card issuer must not require
repayment of the protected balance using a method that is less
beneficial to the consumer than one of the following methods:
(i) The method of repayment for the account before the effective
date of the increase;
(ii) An amortization period of not less than five years, beginning
no earlier than the effective date of the increase; or
(iii) A required minimum periodic payment that includes a percentage
of the balance that is equal to no more than twice the percentage
required before the effective date of the increase.
(d) Continuing application. This section continues to apply to a
balance on a credit card account under an open-end (not home-secured)
consumer credit plan after:
(1) The account is closed or acquired by another creditor; or
[[Page 175]]
(2) The balance is transferred from a credit card account under an
open-end (not home-secured) consumer credit plan issued by a creditor to
another credit account issued by the same creditor or its affiliate or
subsidiary (unless the account to which the balance is transferred is
subject to Sec. 1026.40).
(e) Promotional waivers or rebates of interest, fees, and other
charges. If a card issuer promotes the waiver or rebate of finance
charges due to a periodic interest rate or fees or charges required to
be disclosed under Sec. 1026.6(b)(2)(ii), (iii), or (xii) and applies
the waiver or rebate to a credit card account under an open-end (not
home-secured) consumer credit plan, any cessation of the waiver or
rebate on that account constitutes an increase in an annual percentage
rate, fee, or charge for purposes of this section.
Sec. 1026.56 Requirements for over-the-limit transactions.
(a) Definition. For purposes of this section, the term ``over-the-
limit transaction'' means any extension of credit by a card issuer to
complete a transaction that causes a consumer's credit card account
balance to exceed the credit limit.
(b) Opt-in requirement--(1) General. A card issuer shall not assess
a fee or charge on a consumer's credit card account under an open-end
(not home-secured) consumer credit plan for an over-the-limit
transaction unless the card issuer:
(i) Provides the consumer with an oral, written or electronic
notice, segregated from all other information, describing the consumer's
right to affirmatively consent, or opt in, to the card issuer's payment
of an over-the-limit transaction;
(ii) Provides a reasonable opportunity for the consumer to
affirmatively consent, or opt in, to the card issuer's payment of over-
the-limit transactions;
(iii) Obtains the consumer's affirmative consent, or opt-in, to the
card issuer's payment of such transactions;
(iv) Provides the consumer with confirmation of the consumer's
consent in writing, or if the consumer agrees, electronically; and
(v) Provides the consumer notice in writing of the right to revoke
that consent following the assessment of an over-the-limit fee or
charge.
(2) Completion of over-the-limit transactions without consumer
consent. Notwithstanding the absence of a consumer's affirmative consent
under paragraph (b)(1)(iii) of this section, a card issuer may pay any
over-the-limit transaction on a consumer's account provided that the
card issuer does not impose any fee or charge on the account for paying
that over-the-limit transaction.
(c) Method of election. A card issuer may permit a consumer to
consent to the card issuer's payment of any over-the-limit transaction
in writing, orally, or electronically, at the card issuer's option. The
card issuer must also permit the consumer to revoke his or her consent
using the same methods available to the consumer for providing consent.
(d) Timing and placement of notices--(1) Initial notice--(i)
General. The notice required by paragraph (b)(1)(i) of this section
shall be provided prior to the assessment of any over-the-limit fee or
charge on a consumer's account.
(ii) Oral or electronic consent. If a consumer consents to the card
issuer's payment of any over-the-limit transaction by oral or electronic
means, the card issuer must provide the notice required by paragraph
(b)(1)(i) of this section immediately prior to obtaining that consent.
(2) Confirmation of opt-in. The notice required by paragraph
(b)(1)(iv) of this section may be provided no later than the first
periodic statement sent after the consumer has consented to the card
issuer's payment of over-the-limit transactions.
(3) Notice of right of revocation. The notice required by paragraph
(b)(1)(v) of this section shall be provided on the front of any page of
each periodic statement that reflects the assessment of an over-the-
limit fee or charge on a consumer's account.
(e) Content--(1) Initial notice. The notice required by paragraph
(b)(1)(i) of this section shall include all applicable items in this
paragraph (e)(1) and may
[[Page 176]]
not contain any information not specified in or otherwise permitted by
this paragraph.
(i) Fees. The dollar amount of any fees or charges assessed by the
card issuer on a consumer's account for an over-the-limit transaction;
(ii) APRs. Any increased periodic rate(s) (expressed as an annual
percentage rate(s)) that may be imposed on the account as a result of an
over-the-limit transaction; and
(iii) Disclosure of opt-in right. An explanation of the consumer's
right to affirmatively consent to the card issuer's payment of over-the-
limit transactions, including the method(s) by which the consumer may
consent.
(2) Subsequent notice. The notice required by paragraph (b)(1)(v) of
this section shall describe the consumer's right to revoke any consent
provided under paragraph (b)(1)(iii) of this section, including the
method(s) by which the consumer may revoke.
(3) Safe harbor. Use of Model Forms G-25(A) or G-25(B) of appendix G
to this part, or substantially similar notices, constitutes compliance
with the notice content requirements of paragraph (e) of this section.
(f) Joint relationships. If two or more consumers are jointly liable
on a credit card account under an open-end (not home-secured) consumer
credit plan, the card issuer shall treat the affirmative consent of any
of the joint consumers as affirmative consent for that account.
Similarly, the card issuer shall treat a revocation of consent by any of
the joint consumers as revocation of consent for that account.
(g) Continuing right to opt in or revoke opt-in. A consumer may
affirmatively consent to the card issuer's payment of over-the-limit
transactions at any time in the manner described in the notice required
by paragraph (b)(1)(i) of this section. Similarly, the consumer may
revoke the consent at any time in the manner described in the notice
required by paragraph (b)(1)(v) of this section.
(h) Duration of opt-in. A consumer's affirmative consent to the card
issuer's payment of over-the-limit transactions is effective until
revoked by the consumer, or until the card issuer decides for any reason
to cease paying over-the-limit transactions for the consumer.
(i) Time to comply with revocation request. A card issuer must
comply with a consumer's revocation request as soon as reasonably
practicable after the card issuer receives it.
(j) Prohibited practices. Notwithstanding a consumer's affirmative
consent to a card issuer's payment of over-the-limit transactions, a
card issuer is prohibited from engaging in the following practices:
(1) Fees or charges imposed per cycle--(i) General rule. A card
issuer may not impose more than one over-the-limit fee or charge on a
consumer's credit card account per billing cycle, and, in any event,
only if the credit limit was exceeded during the billing cycle. In
addition, except as provided in paragraph (j)(1)(ii) of this section, a
card issuer may not impose an over-the-limit fee or charge on the
consumer's credit card account for more than three billing cycles for
the same over-the-limit transaction where the consumer has not reduced
the account balance below the credit limit by the payment due date for
either of the last two billing cycles.
(ii) Exception. The prohibition in paragraph (j)(1)(i) of this
section on imposing an over-the-limit fee or charge in more than three
billing cycles for the same over-the-limit transaction(s) does not apply
if another over-the-limit transaction occurs during either of the last
two billing cycles.
(2) Failure to promptly replenish. A card issuer may not impose an
over-the-limit fee or charge solely because of the card issuer's failure
to promptly replenish the consumer's available credit following the
crediting of the consumer's payment under Sec. 1026.10.
(3) Conditioning. A card issuer may not condition the amount of a
consumer's credit limit on the consumer affirmatively consenting to the
card issuer's payment of over-the-limit transactions if the card issuer
assesses a fee or charge for such service.
(4) Over-the-limit fees attributed to fees or interest. A card
issuer may not impose an over-the-limit fee or charge for a billing
cycle if a consumer exceeds a credit limit solely because of fees or
interest charged by the card issuer to the
[[Page 177]]
consumer's account during that billing cycle. For purposes of this
paragraph (j)(4), the relevant fees or interest charges are charges
imposed as part of the plan under Sec. 1026.6(b)(3).
Sec. 1026.57 Reporting and marketing rules for college student
open-end credit.
(a) Definitions--(1) College student credit card. The term ``college
student credit card'' as used in this section means a credit card issued
under a credit card account under an open-end (not home-secured)
consumer credit plan to any college student.
(2) College student. The term ``college student'' as used in this
section means a consumer who is a full-time or part-time student of an
institution of higher education.
(3) Institution of higher education. The term ``institution of
higher education'' as used in this section has the same meaning as in
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 1001
and 1002).
(4) Affiliated organization. The term ``affiliated organization'' as
used in this section means an alumni organization or foundation
affiliated with or related to an institution of higher education.
(5) College credit card agreement. The term ``college credit card
agreement'' as used in this section means any business, marketing or
promotional agreement between a card issuer and an institution of higher
education or an affiliated organization in connection with which college
student credit cards are issued to college students currently enrolled
at that institution.
(b) Public disclosure of agreements. An institution of higher
education shall publicly disclose any contract or other agreement made
with a card issuer or creditor for the purpose of marketing a credit
card.
(c) Prohibited inducements. No card issuer or creditor may offer a
college student any tangible item to induce such student to apply for or
open an open-end consumer credit plan offered by such card issuer or
creditor, if such offer is made:
(1) On the campus of an institution of higher education;
(2) Near the campus of an institution of higher education; or
(3) At an event sponsored by or related to an institution of higher
education.
(d) Annual report to the Bureau--(1) Requirement to report. Any card
issuer that was a party to one or more college credit card agreements in
effect at any time during a calendar year must submit to the Bureau an
annual report regarding those agreements in the form and manner
prescribed by the Bureau.
(2) Contents of report. The annual report to the Bureau must include
the following:
(i) Identifying information about the card issuer and the agreements
submitted, including the issuer's name, address, and identifying number
(such as an RSSD ID number or tax identification number);
(ii) A copy of any college credit card agreement to which the card
issuer was a party that was in effect at any time during the period
covered by the report;
(iii) A copy of any memorandum of understanding in effect at any
time during the period covered by the report between the card issuer and
an institution of higher education or affiliated organization that
directly or indirectly relates to the college credit card agreement or
that controls or directs any obligations or distribution of benefits
between any such entities;
(iv) The total dollar amount of any payments pursuant to a college
credit card agreement from the card issuer to an institution of higher
education or affiliated organization during the period covered by the
report, and the method or formula used to determine such amounts;
(v) The total number of credit card accounts opened pursuant to any
college credit card agreement during the period covered by the report;
and
(vi) The total number of credit card accounts opened pursuant to any
such agreement that were open at the end of the period covered by the
report.
(3) Timing of reports. Except for the initial report described in
this paragraph (d)(3), a card issuer must submit its annual report for
each calendar year to the Bureau by the first business
[[Page 178]]
day on or after March 31 of the following calendar year.
Sec. 1026.58 Internet posting of credit card agreements.
(a) Applicability. The requirements of this section apply to any
card issuer that issues credit cards under a credit card account under
an open-end (not home-secured) consumer credit plan.
(b) Definitions--(1) Agreement. For purposes of this section,
``agreement'' or ``credit card agreement'' means the written document or
documents evidencing the terms of the legal obligation, or the
prospective legal obligation, between a card issuer and a consumer for a
credit card account under an open-end (not home-secured) consumer credit
plan. ``Agreement'' or ``credit card agreement'' also includes the
pricing information, as defined in Sec. 1026.58(b)(7).
(2) Amends. For purposes of this section, an issuer ``amends'' an
agreement if it makes a substantive change (an ``amendment'') to the
agreement. A change is substantive if it alters the rights or
obligations of the card issuer or the consumer under the agreement. Any
change in the pricing information, as defined in Sec. 1026.58(b)(7), is
deemed to be substantive.
(3) Business day. For purposes of this section, ``business day''
means a day on which the creditor's offices are open to the public for
carrying on substantially all of its business functions.
(4) Card issuer. For purposes of this section, ``card issuer'' or
``issuer'' means the entity to which a consumer is legally obligated, or
would be legally obligated, under the terms of a credit card agreement.
(5) Offers. For purposes of this section, an issuer ``offers'' or
``offers to the public'' an agreement if the issuer is soliciting or
accepting applications for accounts that would be subject to that
agreement.
(6) Open account. For purposes of this section, an account is an
``open account'' or ``open credit card account'' if it is a credit card
account under an open-end (not home-secured) consumer credit plan and
either:
(i) The cardholder can obtain extensions of credit on the account;
or
(ii) There is an outstanding balance on the account that has not
been charged off. An account that has been suspended temporarily (for
example, due to a report by the cardholder of unauthorized use of the
card) is considered an ``open account'' or ``open credit card account.''
(7) Pricing information. For purposes of this section, ``pricing
information'' means the information listed in Sec. 1026.6(b)(2)(i)
through (b)(2)(xii). Pricing information does not include temporary or
promotional rates and terms or rates and terms that apply only to
protected balances.
(8) Private label credit card account and private label credit card
plan. For purposes of this section:
(i) ``private label credit card account'' means a credit card
account under an open-end (not home-secured) consumer credit plan with a
credit card that can be used to make purchases only at a single merchant
or an affiliated group of merchants; and
(ii) ``private label credit card plan'' means all of the private
label credit card accounts issued by a particular issuer with credit
cards usable at the same single merchant or affiliated group of
merchants.
(c) Submission of agreements to Bureau--(1) Quarterly submissions. A
card issuer must make quarterly submissions to the Bureau, in the form
and manner specified by the Bureau. Quarterly submissions must be sent
to the Bureau no later than the first business day on or after January
31, April 30, July 31, and October 31 of each year. Each submission must
contain:
(i) Identifying information about the card issuer and the agreements
submitted, including the issuer's name, address, and identifying number
(such as an RSSD ID number or tax identification number);
(ii) The credit card agreements that the card issuer offered to the
public as of the last business day of the preceding calendar quarter
that the card issuer has not previously submitted to the Bureau;
(iii) Any credit card agreement previously submitted to the Bureau
that was amended during the preceding calendar quarter and that the card
issuer
[[Page 179]]
offered to the public as of the last business day of the preceding
calendar quarter, as described in Sec. 1026.58(c)(3); and
(iv) Notification regarding any credit card agreement previously
submitted to the Bureau that the issuer is withdrawing, as described in
Sec. 1026.58(c)(4), (c)(5), (c)(6), and (c)(7).
(2) [Reserved]
(3) Amended agreements. If a credit card agreement has been
submitted to the Bureau, the agreement has not been amended and the card
issuer continues to offer the agreement to the public, no additional
submission regarding that agreement is required. If a credit card
agreement that previously has been submitted to the Bureau is amended
and the card issuer offered the amended agreement to the public as of
the last business day of the calendar quarter in which the change became
effective, the card issuer must submit the entire amended agreement to
the Bureau, in the form and manner specified by the Bureau, by the first
quarterly submission deadline after the last day of the calendar quarter
in which the change became effective.
(4) Withdrawal of agreements. If a card issuer no longer offers to
the public a credit card agreement that previously has been submitted to
the Bureau, the card issuer must notify the Bureau, in the form and
manner specified by the Bureau, by the first quarterly submission
deadline after the last day of the calendar quarter in which the issuer
ceased to offer the agreement.
(5) De minimis exception. (i) A card issuer is not required to
submit any credit card agreements to the Bureau if the card issuer had
fewer than 10,000 open credit card accounts as of the last business day
of the calendar quarter.
(ii) If an issuer that previously qualified for the de minimis
exception ceases to qualify, the card issuer must begin making quarterly
submissions to the Bureau no later than the first quarterly submission
deadline after the date as of which the issuer ceased to qualify.
(iii) If a card issuer that did not previously qualify for the de
minimis exception qualifies for the de minimis exception, the card
issuer must continue to make quarterly submissions to the Bureau until
the issuer notifies the Bureau that the card issuer is withdrawing all
agreements it previously submitted to the Bureau.
(6) Private label credit card exception. (i) A card issuer is not
required to submit to the Bureau a credit card agreement if, as of the
last business day of the calendar quarter, the agreement:
(A) Is offered for accounts under one or more private label credit
card plans each of which has fewer than 10,000 open accounts; and
(B) Is not offered to the public other than for accounts under such
a plan.
(ii) If an agreement that previously qualified for the private label
credit card exception ceases to qualify, the card issuer must submit the
agreement to the Bureau no later than the first quarterly submission
deadline after the date as of which the agreement ceased to qualify.
(iii) If an agreement that did not previously qualify for the
private label credit card exception qualifies for the exception, the
card issuer must continue to make quarterly submissions to the Bureau
with respect to that agreement until the issuer notifies the Bureau that
the agreement is being withdrawn.
(7) Product testing exception. (i) A card issuer is not required to
submit to the Bureau a credit card agreement if, as of the last business
day of the calendar quarter, the agreement:
(A) Is offered as part of a product test offered to only a limited
group of consumers for a limited period of time;
(B) Is used for fewer than 10,000 open accounts; and
(C) Is not offered to the public other than in connection with such
a product test.
(ii) If an agreement that previously qualified for the product
testing exception ceases to qualify, the card issuer must submit the
agreement to the Bureau no later than the first quarterly submission
deadline after the date as of which the agreement ceased to qualify.
(iii) If an agreement that did not previously qualify for the
product testing exception qualifies for the exception, the card issuer
must continue to make quarterly submissions to the Bureau with respect
to that agreement until
[[Page 180]]
the issuer notifies the Bureau that the agreement is being withdrawn.
(8) Form and content of agreements submitted to the Bureau--(i) Form
and content generally. (A) Each agreement must contain the provisions of
the agreement and the pricing information in effect as of the last
business day of the preceding calendar quarter.
(B) Agreements must not include any personally identifiable
information relating to any cardholder, such as name, address, telephone
number, or account number.
(C) The following are not deemed to be part of the agreement for
purposes of Sec. 1026.58, and therefore are not required to be included
in submissions to the Bureau:
(1) Disclosures required by state or Federal law, such as affiliate
marketing notices, privacy policies, billing rights notices, or
disclosures under the E-Sign Act;
(2) Solicitation materials;
(3) Periodic statements;
(4) Ancillary agreements between the issuer and the consumer, such
as debt cancellation contracts or debt suspension agreements;
(5) Offers for credit insurance or other optional products and other
similar advertisements; and
(6) Documents that may be sent to the consumer along with the credit
card or credit card agreement such as a cover letter, a validation
sticker on the card, or other information about card security.
(D) Agreements must be presented in a clear and legible font.
(ii) Pricing information. (A) Pricing information must be set forth
in a single addendum to the agreement. The addendum must contain all of
the pricing information, as defined by Sec. 1026.58(b)(7). The addendum
may, but is not required to, contain any other information listed in
Sec. 1026.6(b), provided that information is complete and accurate as
of the applicable date under Sec. 1026.58. The addendum may not contain
any other information.
(B) Pricing information that may vary from one cardholder to another
depending on the cardholder's creditworthiness or state of residence or
other factors must be disclosed either by setting forth all the possible
variations (such as purchase APRs of 13 percent, 15 percent, 17 percent,
and 19 percent) or by providing a range of possible variations (such as
purchase APRs ranging from 13 percent to 19 percent).
(C) If a rate included in the pricing information is a variable
rate, the issuer must identify the index or formula used in setting the
rate and the margin. Rates that may vary from one cardholder to another
must be disclosed by providing the index and the possible margins (such
as the prime rate plus 5 percent, 8 percent, 10 percent, or 12 percent)
or range of margins (such as the prime rate plus from 5 to 12 percent).
The value of the rate and the value of the index are not required to be
disclosed.
(iii) Optional variable terms addendum. Provisions of the agreement
other than the pricing information that may vary from one cardholder to
another depending on the cardholder's creditworthiness or state of
residence or other factors may be set forth in a single addendum to the
agreement separate from the pricing information addendum.
(iv) Integrated agreement. Issuers may not provide provisions of the
agreement or pricing information in the form of change-in-terms notices
or riders (other than the pricing information addendum and the optional
variable terms addendum). Changes in provisions or pricing information
must be integrated into the text of the agreement, the pricing
information addendum or the optional variable terms addendum, as
appropriate.
(d) Posting of agreements offered to the public. (1) Except as
provided below, a card issuer must post and maintain on its publicly
available Web site the credit card agreements that the issuer is
required to submit to the Bureau under Sec. 1026.58(c). With respect to
an agreement offered solely for accounts under one or more private label
credit card plans, an issuer may fulfill this requirement by posting and
maintaining the agreement in accordance with the requirements of this
section on the publicly available Web site of at least one of the
merchants at which credit cards issued under each private label credit
card plan with 10,000 or more open accounts may be used.
[[Page 181]]
(2) Except as provided in Sec. 1026.58(d), agreements posted
pursuant to Sec. 1026.58(d) must conform to the form and content
requirements for agreements submitted to the Bureau specified in Sec.
1026.58(c)(8).
(3) Agreements posted pursuant to Sec. 1026.58(d) may be posted in
any electronic format that is readily usable by the general public.
Agreements must be placed in a location that is prominent and readily
accessible by the public and must be accessible without submission of
personally identifiable information.
(4) The card issuer must update the agreements posted on its Web
site pursuant to Sec. 1026.58(d) at least as frequently as the
quarterly schedule required for submission of agreements to the Bureau
under Sec. 1026.58(c). If the issuer chooses to update the agreements
on its Web site more frequently, the agreements posted on the issuer's
Web site may contain the provisions of the agreement and the pricing
information in effect as of a date other than the last business day of
the preceding calendar quarter.
(e) Agreements for all open accounts--(1) Availability of individual
cardholder's agreement. With respect to any open credit card account, a
card issuer must either:
(i) Post and maintain the cardholder's agreement on its Web site; or
(ii) Promptly provide a copy of the cardholder's agreement to the
cardholder upon the cardholder's request. If the card issuer makes an
agreement available upon request, the issuer must provide the cardholder
with the ability to request a copy of the agreement both by using the
issuer's Web site (such as by clicking on a clearly identified box to
make the request) and by calling a readily available telephone line the
number for which is displayed on the issuer's Web site and clearly
identified as to purpose. The card issuer must send to the cardholder or
otherwise make available to the cardholder a copy of the cardholder's
agreement in electronic or paper form no later than 30 days after the
issuer receives the cardholder's request.
(2) Special rule for issuers without interactive Web sites. An
issuer that does not maintain a Web site from which cardholders can
access specific information about their individual accounts, instead of
complying with Sec. 1026.58(e)(1), may make agreements available upon
request by providing the cardholder with the ability to request a copy
of the agreement by calling a readily available telephone line, the
number for which is displayed on the issuer's Web site and clearly
identified as to purpose or included on each periodic statement sent to
the cardholder and clearly identified as to purpose. The issuer must
send to the cardholder or otherwise make available to the cardholder a
copy of the cardholder's agreement in electronic or paper form no later
than 30 days after the issuer receives the cardholder's request.
(3) Form and content of agreements. (i) Except as provided in Sec.
1026.58(e), agreements posted on the card issuer's Web site pursuant to
Sec. 1026.58(e)(1)(i) or made available upon the cardholder's request
pursuant to Sec. 1026.58(e)(1)(ii) or (e)(2) must conform to the form
and content requirements for agreements submitted to the Bureau
specified in Sec. 1026.58(c)(8).
(ii) If the card issuer posts an agreement on its Web site or
otherwise provides an agreement to a cardholder electronically under
Sec. 1026.58(e), the agreement may be posted or provided in any
electronic format that is readily usable by the general public and must
be placed in a location that is prominent and readily accessible to the
cardholder.
(iii) Agreements posted or otherwise provided pursuant to Sec.
1026.58(e) may contain personally identifiable information relating to
the cardholder, such as name, address, telephone number, or account
number, provided that the issuer takes appropriate measures to make the
agreement accessible only to the cardholder or other authorized persons.
(iv) Agreements posted or otherwise provided pursuant to Sec.
1026.58(e) must set forth the specific provisions and pricing
information applicable to the particular cardholder. Provisions and
pricing information must be complete and accurate as of a date no more
than 60 days prior to:
[[Page 182]]
(A) The date on which the agreement is posted on the card issuer's
Web site under Sec. 1026.58(e)(1)(i); or
(B) The date the cardholder's request is received under Sec.
1026.58(e)(1)(ii) or (e)(2).
(v) Agreements provided upon cardholder request pursuant to Sec.
1026.58(e)(1)(ii) or (e)(2) may be provided by the issuer in either
electronic or paper form, regardless of the form of the cardholder's
request.
(f) E-Sign Act requirements. Card issuers may provide credit card
agreements in electronic form under Sec. 1026.58(d) and (e) without
regard to the consumer notice and consent requirements of section 101(c)
of the Electronic Signatures in Global and National Commerce Act (E-Sign
Act) (15 U.S.C. 7001 et seq.).
(g) Temporary suspension of agreement submission requirement--(1)
Quarterly submissions. The quarterly submission requirement in paragraph
(c) of this section is suspended for the submissions that would
otherwise be due to the Bureau by the first business day on or after
April 30, 2015; July 31, 2015; October 31, 2015; and January 31, 2016.
(2) Posting of agreements offered to the public. Nothing in
paragraph (g)(1) of this section shall affect the agreement posting
requirements in paragraph (d) of this section.
[76 FR 79772, Dec. 22, 2011, as amended at 80 FR 21158, Apr. 17, 2015]
Sec. 1026.59 Reevaluation of rate increases.
(a) General rule--(1) Evaluation of increased rate. If a card issuer
increases an annual percentage rate that applies to a credit card
account under an open-end (not home-secured) consumer credit plan, based
on the credit risk of the consumer, market conditions, or other factors,
or increased such a rate on or after January 1, 2009, and 45 days'
advance notice of the rate increase is required pursuant to Sec.
1026.9(c)(2) or (g), the card issuer must:
(i) Evaluate the factors described in paragraph (d) of this section;
and
(ii) Based on its review of such factors, reduce the annual
percentage rate applicable to the consumer's account, as appropriate.
(2) Rate reductions--(i) Timing. If a card issuer is required to
reduce the rate applicable to an account pursuant to paragraph (a)(1) of
this section, the card issuer must reduce the rate not later than 45
days after completion of the evaluation described in paragraph (a)(1).
(ii) Applicability of rate reduction. Any reduction in an annual
percentage rate required pursuant to paragraph (a)(1) of this section
shall apply to:
(A) Any outstanding balances to which the increased rate described
in paragraph (a)(1) of this section has been applied; and
(B) New transactions that occur after the effective date of the rate
reduction that would otherwise have been subject to the increased rate.
(b) Policies and procedures. A card issuer must have reasonable
written policies and procedures in place to conduct the review described
in paragraph (a) of this section.
(c) Timing. A card issuer that is subject to paragraph (a) of this
section must conduct the review described in paragraph (a)(1) of this
section not less frequently than once every six months after the rate
increase.
(d) Factors--(1) In general. Except as provided in paragraph (d)(2)
of this section, a card issuer must review either:
(i) The factors on which the increase in an annual percentage rate
was originally based; or
(ii) The factors that the card issuer currently considers when
determining the annual percentage rates applicable to similar new credit
card accounts under an open-end (not home-secured) consumer credit plan.
(2) Rate increases imposed between January 1, 2009 and February 21,
2010. For rate increases imposed between January 1, 2009 and February
21, 2010, an issuer must consider the factors described in paragraph
(d)(1)(ii) when conducting the first two reviews required under
paragraph (a) of this section, unless the rate increase subject to
paragraph (a) of this section was based solely upon factors specific to
the consumer, such as a decline in the consumer's credit risk, the
consumer's delinquency or default, or a violation of the terms of the
account.
[[Page 183]]
(e) Rate increases due to delinquency. If an issuer increases a rate
applicable to a consumer's account pursuant to Sec. 1026.55(b)(4) based
on the card issuer not receiving the consumer's required minimum
periodic payment within 60 days after the due date, the issuer is not
required to perform the review described in paragraph (a) of this
section prior to the sixth payment due date after the effective date of
the increase. However, if the annual percentage rate applicable to the
consumer's account is not reduced pursuant to Sec. 1026.55(b)(4)(ii),
the card issuer must perform the review described in paragraph (a) of
this section. The first such review must occur no later than six months
after the sixth payment due following the effective date of the rate
increase.
(f) Termination of obligation to review factors. The obligation to
review factors described in paragraph (a) and (d) of this section ceases
to apply:
(1) If the issuer reduces the annual percentage rate applicable to a
credit card account under an open-end (not home-secured) consumer credit
plan to the rate applicable immediately prior to the increase, or, if
the rate applicable immediately prior to the increase was a variable
rate, to a variable rate determined by the same formula (index and
margin) that was used to calculate the rate applicable immediately prior
to the increase; or
(2) If the issuer reduces the annual percentage rate to a rate that
is lower than the rate described in paragraph (f)(1) of this section.
(g) Acquired accounts--(1) General. Except as provided in paragraph
(g)(2) of this section, this section applies to credit card accounts
that have been acquired by the card issuer from another card issuer. A
card issuer that complies with this section by reviewing the factors
described in paragraph (d)(1)(i) must review the factors considered by
the card issuer from which it acquired the accounts in connection with
the rate increase.
(2) Review of acquired portfolio. If, not later than six months
after the acquisition of such accounts, a card issuer reviews all of the
credit card accounts it acquires in accordance with the factors that it
currently considers in determining the rates applicable to its similar
new credit card accounts:
(i) Except as provided in paragraph (g)(2)(iii), the card issuer is
required to conduct reviews described in paragraph (a) of this section
only for rate increases that are imposed as a result of its review under
this paragraph. See Sec. Sec. 1026.9 and 1026.55 for additional
requirements regarding rate increases on acquired accounts.
(ii) Except as provided in paragraph (g)(2)(iii) of this section,
the card issuer is not required to conduct reviews in accordance with
paragraph (a) of this section for any rate increases made prior to the
card issuer's acquisition of such accounts.
(iii) If as a result of the card issuer's review, an account is
subject to, or continues to be subject to, an increased rate as a
penalty, or due to the consumer's delinquency or default, the
requirements of paragraph (a) of this section apply.
(h) Exceptions--(1) Servicemembers Civil Relief Act exception. The
requirements of this section do not apply to increases in an annual
percentage rate that was previously decreased pursuant to 50 U.S.C. app.
527, provided that such a rate increase is made in accordance with Sec.
1026.55(b)(6).
(2) Charged off accounts. The requirements of this section do not
apply to accounts that the card issuer has charged off in accordance
with loan-loss provisions.
Sec. 1026.60 Credit and charge card applications and solicitations.
(a) General rules. The card issuer shall provide the disclosures
required under this section on or with a solicitation or an application
to open a credit or charge card account.
(1) Definition of solicitation. For purposes of this section, the
term solicitation means an offer by the card issuer to open a credit or
charge card account that does not require the consumer to complete an
application. A ``firm offer of credit'' as defined in section 603(l) of
the Fair Credit Reporting Act (15 U.S.C. 1681a(l)) for a credit or
charge card is a solicitation for purposes of this section.
(2) Form of disclosures; tabular format. (i) The disclosures in
paragraphs (b)(1)
[[Page 184]]
through (5) (except for (b)(1)(iv)(B)) and (b)(7) through (15) of this
section made pursuant to paragraph (c), (d)(2), (e)(1) or (f) of this
section generally shall be in the form of a table with headings,
content, and format substantially similar to any of the applicable
tables found in G-10 in appendix G to this part.
(ii) The table described in paragraph (a)(2)(i) of this section
shall contain only the information required or permitted by this
section. Other information may be presented on or with an application or
solicitation, provided such information appears outside the required
table.
(iii) Disclosures required by paragraphs (b)(1)(iv)(B),
(b)(1)(iv)(C) and (b)(6) of this section must be placed directly beneath
the table.
(iv) When a tabular format is required, any annual percentage rate
required to be disclosed pursuant to paragraph (b)(1) of this section,
any introductory rate required to be disclosed pursuant to paragraph
(b)(1)(ii) of this section, any rate that will apply after a premium
initial rate expires required to be disclosed under paragraph
(b)(1)(iii) of this section, and any fee or percentage amounts or
maximum limits on fee amounts disclosed pursuant to paragraphs (b)(2),
(b)(4), (b)(8) through (b)(13) of this section must be disclosed in bold
text. However, bold text shall not be used for: The amount of any
periodic fee disclosed pursuant to paragraph (b)(2) of this section that
is not an annualized amount; and other annual percentage rates or fee
amounts disclosed in the table.
(v) For an application or a solicitation that is accessed by the
consumer in electronic form, the disclosures required under this section
may be provided to the consumer in electronic form on or with the
application or solicitation.
(vi)(A) Except as provided in paragraph (a)(2)(vi)(B) of this
section, the table described in paragraph (a)(2)(i) of this section must
be provided in a prominent location on or with an application or a
solicitation.
(B) If the table described in paragraph (a)(2)(i) of this section is
provided electronically, it must be provided in close proximity to the
application or solicitation.
(3) Fees based on a percentage. If the amount of any fee required to
be disclosed under this section is determined on the basis of a
percentage of another amount, the percentage used and the identification
of the amount against which the percentage is applied may be disclosed
instead of the amount of the fee.
(4) Fees that vary by state. Card issuers that impose fees referred
to in paragraphs (b)(8) through (12) of this section that vary by state
may, at the issuer's option, disclose in the table required by paragraph
(a)(2)(i) of this section: The specific fee applicable to the consumer's
account; or the range of the fees, if the disclosure includes a
statement that the amount of the fee varies by state and refers the
consumer to a disclosure provided with the table where the amount of the
fee applicable to the consumer's account is disclosed. A card issuer may
not list fees for multiple states in the table.
(5) Exceptions. This section does not apply to:
(i) Home-equity plans accessible by a credit or charge card that are
subject to the requirements of Sec. 1026.40;
(ii) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(iii) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines;
(iv) Lines of credit accessed solely by account numbers;
(v) Additions of a credit or charge card to an existing open-end
plan;
(vi) General purpose applications unless the application, or
material accompanying it, indicates that it can be used to open a credit
or charge card account; or
(vii) Consumer-initiated requests for applications.
(b) Required disclosures. The card issuer shall disclose the items
in this paragraph on or with an application or a solicitation in
accordance with the requirements of paragraphs (c), (d), (e)(1) or (f)
of this section. A credit card issuer shall disclose all applicable
items in this paragraph except for paragraph (b)(7) of this section. A
[[Page 185]]
charge card issuer shall disclose the applicable items in paragraphs
(b)(2), (4), (7) through (12), and (15) of this section.
(1) Annual percentage rate. Each periodic rate that may be used to
compute the finance charge on an outstanding balance for purchases, a
cash advance, or a balance transfer, expressed as an annual percentage
rate (as determined by Sec. 1026.14(b)). When more than one rate
applies for a category of transactions, the range of balances to which
each rate is applicable shall also be disclosed. The annual percentage
rate for purchases disclosed pursuant to this paragraph shall be in at
least 16-point type, except for the following: Oral disclosures of the
annual percentage rate for purchases; or a penalty rate that may apply
upon the occurrence of one or more specific events.
(i) Variable rate information. If a rate disclosed under paragraph
(b)(1) of this section is a variable rate, the card issuer shall also
disclose the fact that the rate may vary and how the rate is determined.
In describing how the applicable rate will be determined, the card
issuer must identify the type of index or formula that is used in
setting the rate. The value of the index and the amount of the margin
that are used to calculate the variable rate shall not be disclosed in
the table. A disclosure of any applicable limitations on rate increases
shall not be included in the table.
(ii) Discounted initial rate. If the initial rate is an introductory
rate, as that term is defined in Sec. 1026.16(g)(2)(ii), the card
issuer must disclose in the table the introductory rate, the time period
during which the introductory rate will remain in effect, and must use
the term ``introductory'' or ``intro'' in immediate proximity to the
introductory rate. The card issuer also must disclose the rate that
would otherwise apply to the account pursuant to paragraph (b)(1) of
this section. Where the rate is not tied to an index or formula, the
card issuer must disclose the rate that will apply after the
introductory rate expires. In a variable-rate account, the card issuer
must disclose a rate based on the applicable index or formula in
accordance with the accuracy requirements set forth in paragraphs
(c)(2), (d)(3), or (e)(4) of this section, as applicable.
(iii) Premium initial rate. If the initial rate is temporary and is
higher than the rate that will apply after the temporary rate expires,
the card issuer must disclose the premium initial rate pursuant to
paragraph (b)(1) of this section and the time period during which the
premium initial rate will remain in effect. Consistent with paragraph
(b)(1) of this section, the premium initial rate for purchases must be
in at least 16-point type. The issuer must also disclose in the table
the rate that will apply after the premium initial rate expires, in at
least 16-point type.
(iv) Penalty rates--(A) In general. Except as provided in paragraph
(b)(1)(iv)(B) and (C) of this section, if a rate may increase as a
penalty for one or more events specified in the account agreement, such
as a late payment or an extension of credit that exceeds the credit
limit, the card issuer must disclose pursuant to this paragraph (b)(1)
the increased rate that may apply, a brief description of the event or
events that may result in the increased rate, and a brief description of
how long the increased rate will remain in effect.
(B) Introductory rates. If the issuer discloses an introductory
rate, as that term is defined in Sec. 1026.16(g)(2)(ii), in the table
or in any written or electronic promotional materials accompanying
applications or solicitations subject to paragraph (c) or (e) of this
section, the issuer must briefly disclose directly beneath the table the
circumstances, if any, under which the introductory rate may be revoked,
and the type of rate that will apply after the introductory rate is
revoked.
(C) Employee preferential rates. If a card issuer discloses in the
table a preferential annual percentage rate for which only employees of
the card issuer, employees of a third party, or other individuals with
similar affiliations with the card issuer or third party, such as
executive officers, directors, or principal shareholders are eligible,
the card issuer must briefly disclose directly beneath the table the
circumstances under which such preferential rate may be revoked, and the
rate that will apply after such preferential rate is revoked.
[[Page 186]]
(v) Rates that depend on consumer's creditworthiness. If a rate
cannot be determined at the time disclosures are given because the rate
depends, at least in part, on a later determination of the consumer's
creditworthiness, the card issuer must disclose the specific rates or
the range of rates that could apply and a statement that the rate for
which the consumer may qualify at account opening will depend on the
consumer's creditworthiness, and other factors if applicable. If the
rate that depends, at least in part, on a later determination of the
consumer's creditworthiness is a penalty rate, as described in paragraph
(b)(1)(iv) of this section, the card issuer at its option may disclose
the highest rate that could apply, instead of disclosing the specific
rates or the range of rates that could apply.
(vi) APRs that vary by state. Issuers imposing annual percentage
rates that vary by state may, at the issuer's option, disclose in the
table: the specific annual percentage rate applicable to the consumer's
account; or the range of the annual percentage rates, if the disclosure
includes a statement that the annual percentage rate varies by state and
refers the consumer to a disclosure provided with the table where the
annual percentage rate applicable to the consumer's account is
disclosed. A card issuer may not list annual percentage rates for
multiple states in the table.
(2) Fees for issuance or availability. (i) Any annual or other
periodic fee that may be imposed for the issuance or availability of a
credit or charge card, including any fee based on account activity or
inactivity; how frequently it will be imposed; and the annualized amount
of the fee.
(ii) Any non-periodic fee that relates to opening an account. A card
issuer must disclose that the fee is a one-time fee.
(3) Fixed finance charge; minimum interest charge. Any fixed finance
charge and a brief description of the charge. Any minimum interest
charge if it exceeds $1.00 that could be imposed during a billing cycle,
and a brief description of the charge. The $1.00 threshold amount shall
be adjusted periodically by the Bureau to reflect changes in the
Consumer Price Index. The Bureau shall calculate each year a price level
adjusted minimum interest charge using the Consumer Price Index in
effect on June 1 of that year. When the cumulative change in the
adjusted minimum value derived from applying the annual Consumer Price
level to the current minimum interest charge threshold has risen by a
whole dollar, the minimum interest charge will be increased by $1.00.
The issuer may, at its option, disclose in the table minimum interest
charges below this threshold.
(4) Transaction charges. Any transaction charge imposed by the card
issuer for the use of the card for purchases.
(5) Grace period. The date by which or the period within which any
credit extended for purchases may be repaid without incurring a finance
charge due to a periodic interest rate and any conditions on the
availability of the grace period. If no grace period is provided, that
fact must be disclosed. If the length of the grace period varies, the
card issuer may disclose the range of days, the minimum number of days,
or the average number of days in the grace period, if the disclosure is
identified as a range, minimum, or average. In disclosing in the tabular
format a grace period that applies to all types of purchases, the phrase
``How to Avoid Paying Interest on Purchases'' shall be used as the
heading for the row describing the grace period. If a grace period is
not offered on all types of purchases, in disclosing this fact in the
tabular format, the phrase ``Paying Interest'' shall be used as the
heading for the row describing this fact.
(6) Balance computation method. The name of the balance computation
method listed in paragraph (g) of this section that is used to determine
the balance for purchases on which the finance charge is computed, or an
explanation of the method used if it is not listed. In determining which
balance computation method to disclose, the card issuer shall assume
that credit extended for purchases will not be repaid within the grace
period, if any.
(7) Statement on charge card payments. A statement that charges
incurred by use of the charge card are due when the periodic statement
is received.
[[Page 187]]
(8) Cash advance fee. Any fee imposed for an extension of credit in
the form of cash or its equivalent.
(9) Late payment fee. Any fee imposed for a late payment.
(10) Over-the-limit fee. Any fee imposed for exceeding a credit
limit.
(11) Balance transfer fee. Any fee imposed to transfer an
outstanding balance.
(12) Returned-payment fee. Any fee imposed by the card issuer for a
returned payment.
(13) Required insurance, debt cancellation or debt suspension
coverage. (i) A fee for insurance described in Sec. 1026.4(b)(7) or
debt cancellation or suspension coverage described in Sec.
1026.4(b)(10), if the insurance or debt cancellation or suspension
coverage is required as part of the plan; and
(ii) A cross reference to any additional information provided about
the insurance or coverage accompanying the application or solicitation,
as applicable.
(14) Available credit. If a card issuer requires fees for the
issuance or availability of credit described in paragraph (b)(2) of this
section, or requires a security deposit for such credit, and the total
amount of those required fees and/or security deposit that will be
imposed and charged to the account when the account is opened is 15
percent or more of the minimum credit limit for the card, a card issuer
must disclose the available credit remaining after these fees or
security deposit are debited to the account, assuming that the consumer
receives the minimum credit limit. In determining whether the 15 percent
threshold test is met, the issuer must only consider fees for issuance
or availability of credit, or a security deposit, that are required. If
fees for issuance or availability are optional, these fees should not be
considered in determining whether the disclosure must be given.
Nonetheless, if the 15 percent threshold test is met, the issuer in
providing the disclosure must disclose the amount of available credit
calculated by excluding those optional fees, and the available credit
including those optional fees. This paragraph does not apply with
respect to fees or security deposits that are not debited to the
account.
(15) Web site reference. A reference to the Web site established by
the Bureau and a statement that consumers may obtain on the Web site
information about shopping for and using credit cards. Until January 1,
2013, issuers may substitute for this reference a reference to the Web
site established by the Board of Governors of the Federal Reserve
System.
(c) Direct mail and electronic applications and solicitations--(1)
General. The card issuer shall disclose the applicable items in
paragraph (b) of this section on or with an application or solicitation
that is mailed to consumers or provided to consumers in electronic form.
(2) Accuracy. (i) Disclosures in direct mail applications and
solicitations must be accurate as of the time the disclosures are
mailed. An accurate variable annual percentage rate is one in effect
within 60 days before mailing.
(ii) Disclosures provided in electronic form must be accurate as of
the time they are sent, in the case of disclosures sent to a consumer's
email address, or as of the time they are viewed by the public, in the
case of disclosures made available at a location such as a card issuer's
Web site. An accurate variable annual percentage rate provided in
electronic form is one in effect within 30 days before it is sent to a
consumer's email address, or viewed by the public, as applicable.
(d) Telephone applications and solicitations--(1) Oral disclosure.
The card issuer shall disclose orally the information in paragraphs
(b)(1) through (7) and (b)(14) of this section, to the extent
applicable, in a telephone application or solicitation initiated by the
card issuer.
(2) Alternative disclosure. The oral disclosure under paragraph
(d)(1) of this section need not be given if the card issuer either:
(i)(A) Does not impose a fee described in paragraph (b)(2) of this
section; or
(B) Imposes such a fee but provides the consumer with a right to
reject the plan consistent with Sec. 1026.5(b)(1)(iv); and
(ii) The card issuer discloses in writing within 30 days after the
consumer requests the card (but in no event later
[[Page 188]]
than the delivery of the card) the following:
(A) The applicable information in paragraph (b) of this section; and
(B) As applicable, the fact that the consumer has the right to
reject the plan and not be obligated to pay fees described in paragraph
(b)(2) or any other fees or charges until the consumer has used the
account or made a payment on the account after receiving a billing
statement.
(3) Accuracy. (i) The oral disclosures under paragraph (d)(1) of
this section must be accurate as of the time they are given.
(ii) The alternative disclosures under paragraph (d)(2) of this
section generally must be accurate as of the time they are mailed or
delivered. A variable annual percentage rate is one that is accurate if
it was:
(A) In effect at the time the disclosures are mailed or delivered;
or
(B) In effect as of a specified date (which rate is then updated
from time to time, but no less frequently than each calendar month).
(e) Applications and solicitations made available to general public.
The card issuer shall provide disclosures, to the extent applicable, on
or with an application or solicitation that is made available to the
general public, including one contained in a catalog, magazine, or other
generally available publication. The disclosures shall be provided in
accordance with paragraph (e)(1) or (e)(2) of this section.
(1) Disclosure of required credit information. The card issuer may
disclose in a prominent location on the application or solicitation the
following:
(i) The applicable information in paragraph (b) of this section;
(ii) The date the required information was printed, including a
statement that the required information was accurate as of that date and
is subject to change after that date; and
(iii) A statement that the consumer should contact the card issuer
for any change in the required information since it was printed, and a
toll-free telephone number or a mailing address for that purpose.
(2) No disclosure of credit information. If none of the items in
paragraph (b) of this section is provided on or with the application or
solicitation, the card issuer may state in a prominent location on the
application or solicitation the following:
(i) There are costs associated with the use of the card; and
(ii) The consumer may contact the card issuer to request specific
information about the costs, along with a toll-free telephone number and
a mailing address for that purpose.
(3) Prompt response to requests for information. Upon receiving a
request for any of the information referred to in this paragraph, the
card issuer shall promptly and fully disclose the information requested.
(4) Accuracy. The disclosures given pursuant to paragraph (e)(1) of
this section must be accurate as of the date of printing. A variable
annual percentage rate is accurate if it was in effect within 30 days
before printing.
(f) In-person applications and solicitations. A card issuer shall
disclose the information in paragraph (b) of this section, to the extent
applicable, on or with an application or solicitation that is initiated
by the card issuer and given to the consumer in person. A card issuer
complies with the requirements of this paragraph if the issuer provides
disclosures in accordance with paragraph (c)(1) or (e)(1) of this
section.
(g) Balance computation methods defined. The following methods may
be described by name. Methods that differ due to variations such as the
allocation of payments, whether the finance charge begins to accrue on
the transaction date or the date of posting the transaction, the
existence or length of a grace period, and whether the balance is
adjusted by charges such as late payment fees, annual fees and unpaid
finance charges do not constitute separate balance computation methods.
(1)(i) Average daily balance (including new purchases). This balance
is figured by adding the outstanding balance (including new purchases
and deducting payments and credits) for each day in the billing cycle,
and then dividing by the number of days in the billing cycle.
(ii) Average daily balance (excluding new purchases). This balance
is figured by adding the outstanding balance (excluding new purchases
and deducting payments and credits) for each day in
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the billing cycle, and then dividing by the number of days in the
billing cycle.
(2) Adjusted balance. This balance is figured by deducting payments
and credits made during the billing cycle from the outstanding balance
at the beginning of the billing cycle.
(3) Previous balance. This balance is the outstanding balance at the
beginning of the billing cycle.
(4) Daily balance. For each day in the billing cycle, this balance
is figured by taking the beginning balance each day, adding any new
purchases, and subtracting any payment and credits.
Effective Date Note: At 81 FR 84370, Nov. 22, 2016, Sec. 1026.60
was amended by revising paragraph (a)(5)(iv) and paragraph (b)
introductory text, effective Oct. 1, 2017. At 82 FR 18975, Apr. 25,
2017, the effective date was delayed to Apr. 1, 2018. For the
convenience of the user, the revised text is set forth as follows:
Sec. 1026.60 Credit and charge card applications and solicitations.
(a) * * *
(5) * * *
(iv) Lines of credit accessed solely by account numbers except for a
covered separate credit feature solely accessible by an account number
that is a hybrid prepaid-credit card as defined in Sec. 1026.61;
* * * * *
(b) Required disclosures. The card issuer shall disclose the items
in this paragraph on or with an application or a solicitation in
accordance with the requirements of paragraphs (c), (d), (e)(1), or (f)
of this section. A credit card issuer shall disclose all applicable
items in this paragraph except for paragraph (b)(7) of this section. A
charge card issuer shall disclose the applicable items in paragraphs
(b)(2), (4), (7) through (12), and (15) of this section. With respect to
a covered separate credit feature that is a charge card account
accessible by a hybrid prepaid-credit card as defined in Sec. 1026.61,
a charge card issuer also shall disclose the applicable items in
paragraphs (b)(3), (13), and (14) of this section.
* * * * *
Sec. 1026.61 Hybrid prepaid-credit cards.
(a) Hybrid prepaid-credit card--(1) In general. (i) Credit offered
in connection with a prepaid account is subject to this section and this
regulation as specified below.
(ii) For purposes of this regulation, except as provided in
paragraph (a)(4) of this section, a prepaid card is a hybrid prepaid-
credit card with respect to a separate credit feature as described in
paragraph (a)(2)(i) of this section when it can access credit from that
credit feature, or with respect to a credit feature structured as a
negative balance on the asset feature of the prepaid account as
described in paragraph (a)(3) of this section when it can access credit
from that credit feature. A hybrid prepaid-credit card is a credit card
for purposes of this regulation with respect to those credit features.
(iii) A prepaid card is not a hybrid prepaid-credit card or a credit
card for purposes of this regulation if the only credit offered in
connection with the prepaid account meets the conditions set forth in
paragraph (a)(4) of this section.
(2) Prepaid card can access credit from a covered separate credit
feature--(i) Covered separate credit feature. (A) A separate credit
feature that can be accessed by a hybrid prepaid-credit card as
described in this paragraph (a)(2)(i) is defined as a covered separate
credit feature. A prepaid card is a hybrid prepaid-credit card with
respect to a separate credit feature when it is a single device that can
be used from time to time to access the separate credit feature where
the following two conditions are both satisfied:
(1) The card can be used to draw, transfer, or authorize the draw or
transfer of credit from the separate credit feature in the course of
authorizing, settling, or otherwise completing transactions conducted
with the card to obtain goods or services, obtain cash, or conduct
person-to-person transfers; and
(2) The separate credit feature is offered by the prepaid account
issuer, its affiliate, or its business partner.
(B) A separate credit feature that meets the conditions set forth in
paragraph (a)(2)(i)(A) of this section is a covered separate credit
feature accessible by a hybrid prepaid-credit card even with respect to
credit that is drawn or transferred, or authorized to
[[Page 190]]
be drawn or transferred, from the credit feature outside the course of a
transaction conducted with the card to obtain goods or services, obtain
cash, or conduct person-to-person transfers.
(ii) Non-covered separate credit feature. A separate credit feature
that does not meet the two conditions set forth in paragraph (a)(2)(i)
of this section is defined as a non-covered separate credit feature. A
prepaid card is not a hybrid prepaid-credit card with respect to a non-
covered separate credit feature, even if the prepaid card is a hybrid
prepaid-credit card with respect to a covered separate credit feature as
described in paragraph (a)(2)(i) of this section. A non-covered separate
credit feature is not subject to the rules applicable to hybrid prepaid-
credit cards; however, it may be subject to this regulation depending on
its own terms and conditions, independent of the connection to the
prepaid account.
(3) Prepaid card can access credit extended through a negative
balance on the asset feature of the prepaid account--(i) In general.
Except as provided in paragraph (a)(4) of this section, a prepaid card
is a hybrid prepaid-credit card when it is a single device that can be
used from time to time to access credit extended through a negative
balance on the asset feature of the prepaid account.
(ii) Negative asset balances. Notwithstanding paragraph (a)(3)(i) of
this section with regard to coverage under this regulation, structuring
a hybrid prepaid-credit card to access credit through a negative balance
on the asset feature violates paragraph (b) of this section. A prepaid
account issuer can use a negative asset balance structure to extend
credit on an asset feature of a prepaid account only if the prepaid card
is not a hybrid prepaid-credit card as described in paragraph (a)(4) of
this section.
(4) Exception. A prepaid card is not a hybrid prepaid-credit card
and is not a credit card for purposes of this regulation where:
(i) The prepaid card cannot access credit from a covered separate
credit feature as described in paragraph (a)(2)(i) of this section; and
(ii) The prepaid card only can access credit extended through a
negative balance on the asset feature of the prepaid account where both
paragraphs (a)(4)(ii)(A) and (B) of this section are satisfied.
(A) The prepaid account issuer has an established policy and
practice of either declining to authorize any transaction for which it
reasonably believes the consumer has insufficient or unavailable funds
in the asset feature of the prepaid account at the time the transaction
is authorized to cover the amount of the transaction, or declining to
authorize any such transactions except in one or more of the following
circumstances:
(1) The amount of the transaction will not cause the asset feature
balance to become negative by more than $10 at the time of the
authorization; or
(2) In cases where the prepaid account issuer has received an
instruction or confirmation for an incoming electronic fund transfer
originated from a separate asset account to load funds to the prepaid
account or where the prepaid account issuer has received a request from
the consumer to load funds to the prepaid account from a separate asset
account but in either case the funds from the separate asset account
have not yet settled, the amount of the transaction will not cause the
asset feature balance to become negative at the time of the
authorization by more than the incoming or requested load amount, as
applicable.
(B) The following fees or charges are not imposed on the asset
feature of the prepaid account:
(1) Any fees or charges for opening, issuing, or holding a negative
balance on the asset feature, or for the availability of credit, whether
imposed on a one-time or periodic basis. This paragraph does not include
fees or charges to open, issue, or hold the prepaid account where the
amount of the fee or charge imposed on the asset feature is not higher
based on whether credit might be offered or has been accepted, whether
or how much credit the consumer has accessed, or the amount of credit
available;
(2) Any fees or charges that will be imposed only when credit is
extended on the asset feature or when there is a negative balance on the
asset feature,
[[Page 191]]
except that a prepaid account issuer may impose fees or charges for the
actual costs of collecting the credit extended if otherwise permitted by
law; or
(3) Any fees or charges where the amount of the fee or charge is
higher when credit is extended on the asset feature or when there is a
negative balance on the asset feature.
(C) A prepaid account issuer may still satisfy the exception in
paragraph (a)(4) of this section even if it debits fees or charges from
the asset feature when there are insufficient or unavailable funds in
the asset feature to cover those fees or charges at the time they are
imposed, so long as those fees or charges are not the type of fees or
charges enumerated in paragraph (a)(4)(ii)(B) of this section.
(5) Definitions. For purposes of this section and other provisions
in the regulation that relate to hybrid prepaid-credit cards:
(i) Affiliate means any company that controls, is controlled by, or
is under common control with another company, as set forth in the Bank
Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
(ii) Asset feature means an asset account that is a prepaid account,
or an asset subaccount of a prepaid account.
(iii) Business partner means a person (other than the prepaid
account issuer or its affiliates) that can extend credit through a
separate credit feature where the person or its affiliate has an
arrangement with a prepaid account issuer or its affiliate.
(iv) Credit feature means a separate credit account or a credit
subaccount of a prepaid account through which credit can be extended in
connection with a prepaid card, or a negative balance on an asset
feature of a prepaid account through which credit can be extended in
connection with a prepaid card.
(v) Prepaid account means a prepaid account as defined in Regulation
E, 12 CFR 1005.2(b)(3).
(vi) Prepaid account issuer means a financial institution as defined
in Regulation E, 12 CFR 1005.2(i), with respect to a prepaid account.
(vii) Prepaid card means any card, code, or other device that can be
used to access a prepaid account.
(viii) Separate credit feature means a credit account or a credit
subaccount of a prepaid account through which credit can be extended in
connection with a prepaid card that is separate from the asset feature
of the prepaid account. This term does not include a negative balance on
an asset feature of a prepaid account.
(b) Structure of credit features accessible by hybrid prepaid-credit
cards. With respect to a credit feature that is accessible by a hybrid
prepaid-credit card, a card issuer shall not structure the credit
feature as a negative balance on the asset feature of a prepaid account.
A card issuer shall structure the credit feature as a separate credit
feature, either as a separate credit account, or as a credit subaccount
of a prepaid account that is separate from the asset feature of the
prepaid account. The separate credit feature is a covered separate
credit feature accessible by a hybrid prepaid-credit card under Sec.
1026.61(a)(2)(i).
(c) Timing requirement for credit card solicitation or application
with respect to hybrid prepaid-credit cards. (1) With respect to a
covered separate credit feature that could be accessible by a hybrid
prepaid-credit card at any point, a card issuer must not do any of the
following until 30 days after the prepaid account has been registered:
(i) Open a covered separate credit feature that could be accessible
by the hybrid prepaid-credit card;
(ii) Make a solicitation or provide an application to open a covered
separate credit feature that could be accessible by the hybrid prepaid-
credit card; or
(iii) Allow an existing credit feature that was opened prior to the
consumer obtaining the prepaid account to become a covered separate
credit feature accessible by the hybrid prepaid-credit card.
(2) For purposes of paragraph (c) of this section, the term
solicitation has the meaning set forth in Sec. 1026.60(a)(1).
Effective Date Note: At 81 FR 84370, Nov. 22, 2016, Sec. 1026.61
was added, effective Oct. 1, 2017. At 82 FR 18975, Apr. 25, 2017, the
effective date was delayed to Apr. 1, 2018.
[[Page 192]]
Sec. Appendix A to Part 1026--Effect on State Laws
Request for Determination
A request for a determination that a state law is inconsistent or
that a state law is substantially the same as the Act and regulation
shall be in writing and addressed to the Executive Secretary, Bureau of
Consumer Financial Protection, 1700 G Street NW., Washington, DC 20006.
The request shall be made pursuant to the procedures herein.
Supporting Documents
A request for a determination shall include the following items:
(1) The text of the state statute, regulation, or other document
that is the subject of the request.
(2) Any other statute, regulation, or judicial or administrative
opinion that implements, interprets, or applies the relevant provision.
(3) A comparison of the state law with the corresponding provision
of the Federal law, including a full discussion of the basis for the
requesting party's belief that the state provision is either
inconsistent or substantially the same.
(4) Any other information that the requesting party believes may
assist the Bureau in its determination.
Public Notice of Determination
Notice that the Bureau intends to make a determination (either on
request or on its own motion) will be published in the Federal Register,
with an opportunity for public comment, unless the Bureau finds that
notice and opportunity for comment would be impracticable, unnecessary,
or contrary to the public interest and publishes its reasons for such
decision.
Subject to the Bureau's rules on Disclosure of Records and
Information (12 CFR Part 1070), all requests made, including any
documents and other material submitted in support of the requests, will
be made available for public inspection and copying.
Notice After Determination
Notice of a final determination will be published in the Federal
Register, and the Bureau will furnish a copy of such notice to the party
who made the request and to the appropriate state official.
Reversal of Determination
The Bureau reserves the right to reverse a determination for any
reason bearing on the coverage or effect of state or Federal law.
Notice of reversal of a determination will be published in the
Federal Register and a copy furnished to the appropriate state official.
Sec. Appendix B to Part 1026--State Exemptions
Application
Any state may apply to the Bureau for a determination that a class
of transactions subject to state law is exempt from the requirements of
the Act and this part. An application shall be in writing and addressed
to the Executive Secretary, Bureau of Consumer Financial Protection,
1700 G Street, NW., Washington, DC 20006, and shall be signed by the
appropriate state official. The application shall be made pursuant to
the procedures herein.
Supporting Documents
An application shall be accompanied by:
(1) The text of the state statute or regulation that is the subject
of the application, and any other statute, regulation, or judicial or
administrative opinion that implements, interprets, or applies it.
(2) A comparison of the state law with the corresponding provisions
of the Federal law.
(3) The text of the state statute or regulation that provides for
civil and criminal liability and administrative enforcement of the state
law.
(4) A statement of the provisions for enforcement, including an
identification of the state office that administers the relevant law,
information on the funding and the number and qualifications of
personnel engaged in enforcement, and a description of the enforcement
procedures to be followed, including information on examination
procedures, practices, and policies. If an exemption application extends
to federally chartered institutions, the applicant must furnish evidence
that arrangements have been made with the appropriate Federal agencies
to ensure adequate enforcement of state law in regard to such creditors.
(5) A statement of reasons to support the applicant's claim that an
exemption should be granted.
Public Notice of Application
Notice of an application will be published, with an opportunity for
public comment, in the Federal Register, unless the Bureau finds that
notice and opportunity for comment would be impracticable, unnecessary,
or contrary to the public interest and publishes its reasons for such
decision.
Subject to the Bureau's rules on Disclosure of Records and
Information (12 CFR Part 1070), all applications made, including any
documents and other material submitted in support of the applications,
will be made available for public inspection and copying.
[[Page 193]]
Favorable Determination
If the Bureau determines on the basis of the information before it
that an exemption should be granted, notice of the exemption will be
published in the Federal Register, and a copy furnished to the applicant
and to each Federal official responsible for administrative enforcement.
The appropriate state official shall inform the Bureau within 30
days of any change in its relevant law or regulations. The official
shall file with the Bureau such periodic reports as the Bureau may
require.
The Bureau will inform the appropriate state official of any
subsequent amendments to the Federal law, regulation, interpretations,
or enforcement policies that might require an amendment to state law,
regulation, interpretations, or enforcement procedures.
Adverse Determination
If the Bureau makes an initial determination that an exemption
should not be granted, the Bureau will afford the applicant a reasonable
opportunity to demonstrate further that an exemption is proper. If the
Bureau ultimately finds that an exemption should not be granted, notice
of an adverse determination will be published in the Federal Register
and a copy furnished to the applicant.
Revocation of Exemption
The Bureau reserves the right to revoke an exemption if at any time
it determines that the standards required for an exemption are not met.
Before taking such action, the Bureau will notify the appropriate
state official of its intent, and will afford the official such
opportunity as it deems appropriate in the circumstances to demonstrate
that revocation is improper. If the Bureau ultimately finds that
revocation is proper, notice of the Bureau's intention to revoke such
exemption will be published in the Federal Register with a reasonable
period of time for interested persons to comment.
Notice of revocation of an exemption will be published in the
Federal Register. A copy of such notice will be furnished to the
appropriate state official and to the Federal officials responsible for
enforcement. Upon revocation of an exemption, creditors in that state
shall then be subject to the requirements of the Federal law.
Sec. Appendix C to Part 1026--Issuance of Official Interpretations
Official Interpretations
Interpretations of this part issued by officials of the Bureau
provide the protection afforded under section 130(f) of the Act. Except
in unusual circumstances, such interpretations will not be issued
separately but will be incorporated in an official commentary to the
regulation which will be amended periodically.
Requests for Issuance of Official Interpretations
A request for an official interpretation shall be in writing and
addressed to the Assistant Director, Office of Regulations, Division of
Research, Markets, and Regulations, Bureau of Consumer Financial
Protection, 1700 G Street, NW., Washington, DC 20006. The request shall
contain a complete statement of all relevant facts concerning the issue,
including copies of all pertinent documents.
Scope of Interpretations
No interpretations will be issued approving creditors' forms,
statements, or calculation tools or methods. This restriction does not
apply to forms, statements, tools, or methods whose use is required or
sanctioned by a government agency.
Sec. Appendix D to Part 1026--Multiple Advance Construction Loans
Section 1026.17(c)(6) permits creditors to treat multiple advance
loans to finance construction of a dwelling that may be permanently
financed by the same creditor either as a single transaction or as more
than one transaction. If the actual schedule of advances is not known,
the following methods may be used to estimate the interest portion of
the finance charge and the annual percentage rate and to make
disclosures. If the creditor chooses to disclose the construction phase
separately, whether interest is payable periodically or at the end of
construction, part I may be used. If the creditor chooses to disclose
the construction and the permanent financing as one transaction, part II
may be used.
Part I--Construction Period Disclosed Separately
A. If interest is payable only on the amount actually advanced for
the time it is outstanding:
1. Estimated interest--Assume that one-half of the commitment amount
is outstanding at the contract interest rate for the entire construction
period.
2. Estimated annual percentage rate--Assume a single payment loan
that matures at the end of the construction period. The finance charge
is the sum of the estimated interest and any prepaid finance charge. The
amount financed for computation purposes is determined by subtracting
any prepaid finance charge from one-half of the commitment amount.
[[Page 194]]
3. Repayment schedule--The number and amounts of any interest
payments may be omitted in disclosing the payment schedule under Sec.
1026.18(g). The fact that interest payments are required and the timing
of such payments shall be disclosed.
4. Amount financed--The amount financed for disclosure purposes is
the entire commitment amount less any prepaid finance charge.
B. If interest is payable on the entire commitment amount without
regard to the dates or amounts of actual disbursement:
1. Estimated interest--Assume that the entire commitment amount is
outstanding at the contract interest rate for the entire construction
period.
2. Estimated annual percentage rate--Assume a single payment loan
that matures at the end of the construction period. The finance charge
is the sum of the estimated interest and any prepaid finance charge. The
amount financed for computation purposes is determined by subtracting
any prepaid finance charge from one-half of the commitment amount.
3. Repayment schedule--Interest payments shall be disclosed in
making the repayment schedule disclosure under Sec. 1026.18(g).
4. Amount financed--The amount financed for disclosure purposes is
the entire commitment amount less any prepaid finance charge.
[GRAPHIC] [TIFF OMITTED] TR22DE11.000
Part II--Construction and Permanent Financing Disclosed as One
Transaction
A. The creditor shall estimate the interest payable during the
construction period to be included in the total finance charge as
follows:
1. If interest is payable only on the amount actually advanced for
the time it is outstanding, assume that one-half of the commitment
amount is outstanding at the contract interest rate for the entire
construction period.
2. If interest is payable on the entire commitment amount without
regard to the dates or amounts of actual disbursements, assume that the
entire commitment amount is outstanding at the contract rate for the
entire construction period.
B. The creditor shall compute the estimated annual percentage rate
as follows:
[[Page 195]]
1. Estimated interest payable during the construction period shall
be treated for computation purposes as a prepaid finance charge
(although it shall not be treated as a prepaid finance charge for
disclosure purposes).
2. The number of payment shall not include any payments of interest
only that are made during the construction period.
3. The first payment period shall consist of one-half of the
construction period plus the period between the end of the construction
period and the amortization payment.
C. The creditor shall disclose the repayment schedule as follows:
1. For loans under paragraph A.1 of part II, other than loans that
are subject to Sec. 1026.19(e) and (f), without reflecting the number
or amounts of payments of interest only that are made during the
construction period. The fact that interest payments must be made and
the timing of such payments shall be disclosed.
2. For loans under paragraph A.2 of part II and loans under
paragraph A.1 of part II that are subject to Sec. 1026.19(e) and (f),
including any payments of interest only that are made during the
construction period.
D. The creditor shall disclose the amount financed as the entire
commitment amount less any prepaid finance charge.
[GRAPHIC] [TIFF OMITTED] TR22DE11.001
[[Page 196]]
[GRAPHIC] [TIFF OMITTED] TR22DE11.002
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 80130, Dec. 31, 2013]
Sec. Appendix E to Part 1026--Rules for Card Issuers That Bill on a
Transaction-by-Transaction Basis
The following provisions of Subpart B apply if credit cards are
issued and the card issuer and the seller are the same or related
persons; no finance charge is imposed; consumers are billed in full for
each use of the card on a transaction-by-transaction basis, by means of
an invoice or other statement reflecting each use of the card; and no
cumulative account is maintained which reflects the transactions by each
consumer during a period of time, such as a month. The term ``related
person'' refers to, for example, a franchised or licensed seller of a
creditor's product or service or a seller who assigns or sells sales
accounts to a creditor or arranges for credit under a plan that allows
the consumer to use the credit only in transactions with that seller. A
seller is not related to the creditor merely because the seller and the
creditor have an agreement authorizing the seller to honor the
creditor's credit card.
1. Section 1026.6(a)(5) or Sec. 1026.6(b)(5)(iii).
2. Section 1026.6(a)(2) or Sec. 1026.6(b)(3)(ii)(B), as applicable.
The disclosure required by Sec. 1026.6(a)(2) or Sec.
1026.6(b)(3)(ii)(B) shall be limited to those charges that are or may be
imposed as a result of the deferral of payment by use of the card, such
as late payment or delinquency charges. A tabular format is not
required.
3. Section 1026.6(a)(4) or Sec. 1026.6(b)(5)(ii).
[[Page 197]]
4. Section 1026.7(a)(2) or Sec. 1026.7(b)(2), as applicable; Sec.
1026.7(a)(9) or Sec. 1026.7(b)(9), as applicable. Creditors may comply
by placing the required disclosures on the invoice or statement sent to
the consumer for each transaction.
5. Section 1026.9(a). Creditors may comply by mailing or delivering
the statement required by Sec. 1026.6(a)(5) or Sec. 1026.6(b)(5)(iii)
(see appendix G-3 and G-3(A) to this part) to each consumer receiving a
transaction invoice during a one-month period chosen by the card issuer
or by sending either the statement prescribed by Sec. 1026.6(a)(5) or
Sec. 1026.6(b)(5)(iii), or an alternative billing error rights
statement substantially similar to that in appendix G-4 and G-4(A) to
this part, with each invoice sent to a consumer.
6. Section 1026.9(c). A tabular format is not required.
7. Section 1026.10.
8. Section 1026.11(a). This section applies when a card issuer
receives a payment or other credit that exceeds by more than $1 the
amount due, as shown on the transaction invoice. The requirement to
credit amounts to an account may be complied with by other reasonable
means, such as by a credit memorandum. Since no periodic statement is
provided, a notice of the credit balance shall be sent to the consumer
within a reasonable period of time following its occurrence unless a
refund of the credit balance is mailed or delivered to the consumer
within seven business days of its receipt by the card issuer.
9. Section 1026.12 including Sec. 1026.12(c) and (d), as
applicable. Section 1026.12(e) is inapplicable.
10. Section 1026.13, as applicable. All references to ``periodic
statement'' shall be read to indicate the invoice or other statement for
the relevant transaction. All actions with regard to correcting and
adjusting a consumer's account may be taken by issuing a refund or a new
invoice, or by other appropriate means consistent with the purposes of
the section.
11. Section 1026.15, as applicable.
Sec. Appendix F to Part 1026--Optional Annual Percentage Rate
Computations for Creditors Offering Open-End Credit Plans Secured by a
Consumer's Dwelling
In determining the denominator of the fraction under Sec.
1026.14(c)(3), no amount will be used more than once when adding the sum
of the balances subject to periodic rates to the sum of the amounts
subject to specific transaction charges. (Where a portion of the finance
charge is determined by application of one or more daily periodic rates,
the phrase ``sum of the balances'' shall also mean the ``average of
daily balances.'') In every case, the full amount of transactions
subject to specific transaction charges shall be included in the
denominator. Other balances or parts of balances shall be included
according to the manner of determining the balance subject to a periodic
rate, as illustrated in the following examples of accounts on monthly
billing cycles:
1. Previous balance--none.
A specific transaction of $100 occurs on the first day of the
billing cycle. The average daily balance is $100. A specific transaction
charge of 3% is applicable to the specific transaction. The periodic
rate is 1\1/2\% applicable to the average daily balance. The numerator
is the amount of the finance charge, which is $4.50. The denominator is
the amount of the transaction (which is $100), plus the amount by which
the balance subject to the periodic rate exceeds the amount of the
specific transactions (such excess in this case is 0), totaling $100.
The annual percentage rate is the quotient (which is 4\1/2\%)
multiplied by 12 (the number of months in a year), i.e., 54%.
2. Previous balance--$100.
A specific transaction of $100 occurs at the midpoint of the billing
cycle. The average daily balance is $150. A specific transaction charge
of 3% is applicable to the specific transaction. The periodic rate is
1\1/2\% applicable to the average daily balance. The numerator is the
amount of the finance charge which is $5.25. The denominator is the
amount of the transaction (which is $100), plus the amount by which the
balance subject to the periodic rate exceeds the amount of the specific
transaction (such excess in this case is $50), totaling $150. As
explained in example 1, the annual percentage rate is 3\1/2\% x 12 =
42%.
3. If, in example 2, the periodic rate applies only to the previous
balance, the numerator is $4.50 and the denominator is $200 (the amount
of the transaction, $100, plus the balance subject only to the periodic
rate, the $100 previous balance). As explained in example 1, the annual
percentage rate is 2\1/4\% x 12 = 27%.
4. If, in example 2, the periodic rate applies only to an adjusted
balance (previous balance less payments and credits) and the consumer
made a payment of $50 at the midpoint of the billing cycle, the
numerator is $3.75 and the denominator is $150 (the amount of the
transaction, $100, plus the balance subject to the periodic rate, the
$50 adjusted balance). As explained in example 1, the annual percentage
rate is 2\1/2\% x 12 = 30%.
5. Previous balance--$100.
A specific transaction (check) of $100 occurs at the midpoint of the
billing cycle. The average daily balance is $150. The specific
transaction charge is $.25 per check. The periodic rate is 1\1/2\%
applied to the average daily balance. The numerator is the amount
[[Page 198]]
of the finance charge, which is $2.50 and includes the $.25 check charge
and the $2.25 resulting from the application of the periodic rate. The
denominator is the full amount of the specific transaction (which is
$100) plus the amount by which the average daily balance exceeds the
amount of the specific transaction (which in this case is $50), totaling
$150. As explained in example 1, the annual percentage rate would be 1-
2/3% x 12 = 20%.
6. Previous balance--none.
A specific transaction of $100 occurs at the midpoint of the billing
cycle. The average daily balance is $50. The specific transaction charge
is 3% of the transaction amount or $3.00. The periodic rate is 1\1/2\%
per month applied to the average daily balance. The numerator is the
amount of the finance charge, which is $3.75, including the $3.00
transaction charge and $.75 resulting from application of the periodic
rate. The denominator is the full amount of the specific transaction
($100) plus the amount by which the balance subject to the periodic rate
exceeds the amount of the transaction ($0). Where the specific
transaction amount exceeds the balance subject to the periodic rate, the
resulting number is considered to be zero rather than a negative number
($50 - $100 = -$50). The denominator, in this case, is $100. As
explained in example 1, the annual percentage rate is 3\3/4\% x 12 =
45%.
Sec. Appendix G to Part 1026--Open-End Model Forms and Clauses
G-1 Balance Computation Methods Model Clauses (Home-equity Plans)
(Sec. Sec. 1026.6 and 1026.7)
G-1(A) Balance Computation Methods Model Clauses (Plans other than Home-
equity Plans) (Sec. Sec. 1026.6 and 1026.7)
G-2 Liability for Unauthorized Use Model Clause (Home-equity Plans)
(Sec. 1026.12)
G-2(A) Liability for Unauthorized Use Model Clause (Plans Other Than
Home-equity Plans) (Sec. 1026.12)
G-3 Long-Form Billing-Error Rights Model Form (Home-equity Plans)
(Sec. Sec. 1026.6 and 1026.9)
G-3(A) Long-Form Billing-Error Rights Model Form (Plans Other Than Home-
equity Plans) (Sec. Sec. 1026.6 and 1026.9)
G-4 Alternative Billing-Error Rights Model Form (Home-equity Plans)
(Sec. 1026.9)
G-4(A) Alternative Billing-Error Rights Model Form (Plans Other Than
Home-equity Plans) (Sec. 1026.9)
G-5 Rescission Model Form (When Opening an Account) (Sec. 1026.15)
G-6 Rescission Model Form (For Each Transaction) (Sec. 1026.15)
G-7 Rescission Model Form (When Increasing the Credit Limit) (Sec.
1026.15)
G-8 Rescission Model Form (When Adding a Security Interest) (Sec.
1026.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec. 1026.15)
G-10(A) Applications and Solicitations Model Form (Credit Cards) (Sec.
1026.60(b))
G-10(B) Applications and Solicitations Sample (Credit Cards) (Sec.
1026.60(b))
G-10(C) Applications and Solicitations Sample (Credit Cards) (Sec.
1026.60(b))
G-10(D) Applications and Solicitations Model Form (Charge Cards) (Sec.
1026.60(b))
G-10(E) Applications and Solicitations Sample (Charge Cards) (Sec.
1026.60(b))
G-11 Applications and Solicitations Made Available to General Public
Model Clauses (Sec. 1026.60(e))
G-12 Reserved
G-13(A) Change in Insurance Provider Model Form (Combined Notice) (Sec.
1026.9(f))
G-13(B) Change in Insurance Provider Model Form (Sec. 1026.9(f)(2))
G-14A Home-equity Sample
G-14B Home-equity Sample
G-15 Home-equity Model Clauses
G-16(A) Debt Suspension Model Clause (Sec. 1026.4(d)(3))
G-16(B) Debt Suspension Sample (Sec. 1026.4(d)(3))
G-17(A) Account-opening Model Form (Sec. 1026.6(b)(2))
G-17(B) Account-opening Sample (Sec. 1026.6(b)(2))
G-17(C) Account-opening Sample (Sec. 1026.6(b)(2))
G-17(D) Account-opening Sample (Sec. 1026.6(b)(2))
G-18(A) Transactions; Interest Charges; Fees Sample (Sec. 1026.7(b))
G-18(B) Late Payment Fee Sample (Sec. 1026.7(b))
G-18(C)(1) Minimum Payment Warning (When Amortization Occurs and the 36-
Month Disclosures Are Required) (Sec. 1026.7(b))
G-18(C)(2) Minimum Payment Warning (When Amortization Occurs and the 36-
Month Disclosures Are Not Required) (Sec. 1026.7(b))
G-18(C)(3) Minimum Payment Warning (When Negative or No Amortization
Occurs) (Sec. 1026.7(b))
G-18(D) Periodic Statement New Balance, Due Date, Late Payment and
Minimum Payment Sample (Credit cards) (Sec. 1026.7(b))
G-18(E) [Reserved]
G-18(F) Periodic Statement Form
G-18(G) Periodic Statement Form
G-18(H) Deferred Interest Periodic Statement Clause
G-19 Checks Accessing a Credit Card Account Sample (Sec. 1026.9(b)(3))
G-20 Change-in-Terms Sample (Increase in Annual Percentage Rate) (Sec.
1026.9(c)(2))
G-21 Change-in-Terms Sample (Increase in Fees) (Sec. 1026.9(c)(2))
[[Page 199]]
G-22 Penalty Rate Increase Sample (Payment 60 or Fewer Days Late) (Sec.
1026.9(g)(3))
G-23 Penalty Rate Increase Sample (Payment More Than 60 Days Late)
(Sec. 1026.9(g)(3))
G-24 Deferred Interest Offer Clauses (Sec. 1026.16(h))
G-25(A) Consent Form for Over-the-Limit Transactions (Sec. 1026.56)
G-25(B) Revocation Notice for Periodic Statement Regarding Over-the-
Limit Transactions (Sec. 1026.56)
G-1--Balance Computation Methods Model Clauses (Home-Equity Plans)
(a) Adjusted Balance Method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``adjusted balance'' of your account.
We get the ``adjusted balance'' by taking the balance you owed at the
end of the previous billing cycle and subtracting [any unpaid finance
charges and] any payments and credits received during the present
billing cycle.
(b) Previous Balance Method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the beginning of
each billing cycle [minus any unpaid finance charges]. We do not
subtract any payments or credits received during the billing cycle. [The
amount of payments and credits to your account this billing cycle was $
____.]
(c) Average Daily Balance Method (Excluding Current Transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (excluding current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day and
subtract any payments or credits [and any unpaid finance charges]. We do
not add in any new [purchases/advances/loans]. This gives us the daily
balance. Then, we add all the daily balances for the billing cycle
together and divide the total by the number of days in the billing
cycle. This gives us the ``average daily balance.''
(d) Average Daily Balance Method (Including Current Transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (including current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day, add
any new [purchases/advances/loans], and subtract any payments or
credits, [and unpaid finance charges]. This gives us the daily balance.
Then, we add up all the daily balances for the billing cycle and divide
the total by the number of days in the billing cycle. This gives us the
``average daily balance.''
(e) Ending Balance Method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the end of each
billing cycle (including new purchases and deducting payments and
credits made during the billing cycle).
(f) Daily Balance Method (Including Current Transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``daily balance'' of your account for
each day in the billing cycle. To get the ``daily balance'' we take the
beginning balance of your account each day, add any new [purchases/
advances/fees], and subtract [any unpaid finance charges and] any
payments or credits. This gives us the daily balance.
G-1(A)--Balance Computation Methods Model Clauses (Plans Other Than
Home-Equity Plans)
(a) Adjusted Balance Method
We figure the interest charge on your account by applying the
periodic rate to the ``adjusted balance'' of your account. We get the
``adjusted balance'' by taking the balance you owed at the end of the
previous billing cycle and subtracting [any unpaid interest or other
finance charges and] any payments and credits received during the
present billing cycle.
(b) Previous Balance Method
We figure the interest charge on your account by applying the
periodic rate to the amount you owe at the beginning of each billing
cycle. We do not subtract any payments or credits received during the
billing cycle.
(c) Average Daily Balance Method (Excluding Current Transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``average daily balance'' of your account. To get
the ``average daily balance'' we take the beginning balance of your
account each day and subtract [any unpaid interest or other finance
charges and] any payments or credits. We do not add in any new
[purchases/advances/fees]. This gives us the daily balance. Then, we add
all the daily balances for the billing cycle together and divide the
total by the number of days in the billing cycle. This gives us the
``average daily balance.''
(d) Average Daily Balance Method (Including Current Transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``average daily balance'' of your account. To get
the ``average daily balance'' we take the beginning balance of your
account each day, add any new [purchases/advances/fees], and subtract
[any unpaid interest or other finance charges and] any payments or
credits. This gives us the daily balance. Then, we add up all the daily
balances for the billing cycle
[[Page 200]]
and divide the total by the number of days in the billing cycle. This
gives us the ``average daily balance.''
(e) Ending Balance Method
We figure the interest charge on your account by applying the
periodic rate to the amount you owe at the end of each billing cycle
(including new [purchases/advances/fees] and deducting payments and
credits made during the billing cycle).
(f) Daily Balance Method (Including Current Transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``daily balance'' of your account for each day in
the billing cycle. To get the ``daily balance'' we take the beginning
balance of your account each day, add any new [purchases/advances/fees],
and subtract [any unpaid interest or other finance charges and] any
payments or credits. This gives us the daily balance.
G-2--Liability for Unauthorized Use Model Clause (Home-Equity Plans)
You may be liable for the unauthorized use of your credit card [or
other term that describes the credit card]. You will not be liable for
unauthorized use that occurs after you notify [name of card issuer or
its designee] at [address], orally or in writing, of the loss, theft, or
possible unauthorized use. [You may also contact us on the Web:
[Creditor Web or email address]] In any case, your liability will not
exceed [insert $50 or any lesser amount under agreement with the
cardholder].
G-2(A)--Liability for Unauthorized Use Model Clause (Plans Other Than
Home-Equity Plans)
If you notice the loss or theft of your credit card or a possible
unauthorized use of your card, you should write to us immediately at:
[address] [address listed on your bill],
or call us at [telephone number].
[You may also contact us on the Web: [Creditor Web or email
address]]
You will not be liable for any unauthorized use that occurs after
you notify us. You may, however, be liable for unauthorized use that
occurs before your notice to us. In any case, your liability will not
exceed [insert $50 or any lesser amount under agreement with the
cardholder].
G-3--Long-Form Billing-Error Rights Model Form (Home-Equity Plans)
YOUR BILLING RIGHTS
KEEP THIS NOTICE FOR FUTURE USE
This notice contains important information about your rights and our
responsibilities under the Fair Credit Billing Act.
Notify Us in Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[address] [the address listed on your bill]. Write to us as soon as
possible. We must hear from you no later than 60 days after we sent you
the first bill on which the error or problem appeared. [You may also
contact us on the Web: [Creditor Web or email address]] You can
telephone us, but doing so will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why
you believe there is an error. If you need more information, describe
the item you are not sure about.
If you have authorized us to pay your credit card bill automatically
from your savings or checking account, you can stop the payment on any
amount you think is wrong. To stop the payment your letter must reach us
three business days before the automatic payment is scheduled to occur.
Your Rights and Our Responsibilities After We Receive Your Written
Notice
We must acknowledge your letter within 30 days, unless we have
corrected the error by then. Within 90 days, we must either correct the
error or explain why we believe the bill was correct.
After we receive your letter, we cannot try to collect any amount
you question, or report you as delinquent. We can continue to bill you
for the amount you question, including finance charges, and we can apply
any unpaid amount against your credit limit. You do not have to pay any
questioned amount while we are investigating, but you are still
obligated to pay the parts of your bill that are not in question.
If we find that we made a mistake on your bill, you will not have to
pay any finance charges related to any questioned amount. If we didn't
make a mistake, you may have to pay finance charges, and you will have
to make up any missed payments on the questioned amount. In either case,
we will send you a statement of the amount you owe and the date that it
is due.
If you fail to pay the amount that we think you owe, we may report
you as delinquent. However, if our explanation does not satisfy you and
you write to us within ten days telling us that you still refuse to pay,
we must tell anyone we report you to that you have a question about your
bill. And, we must tell you the name of anyone we reported you to. We
must tell anyone we report you to that the matter has been settled
between us when it finally is.
[[Page 201]]
If we don't follow these rules, we can't collect the first $50 of
the questioned amount, even if your bill was correct.
Special Rule for Credit Card Purchases
If you have a problem with the quality of property or services that
you purchased with a credit card, and you have tried in good faith to
correct the problem with the merchant, you may have the right not to pay
the remaining amount due on the property or services.
There are two limitations on this right:
(a) You must have made the purchase in your home state or, if not
within your home state within 100 miles of your current mailing address;
and
(b) The purchase price must have been more than $50.
These limitations do not apply if we own or operate the merchant, or
if we mailed you the advertisement for the property or services.
G-3(A)--Long-Form Billing-Error Rights Model Form (Plans Other Than
Home-Equity Plans)
Your Billing Rights: Keep This Document For Future Use
This notice tells you about your rights and our responsibilities
under the Fair Credit Billing Act.
What To Do If You Find A Mistake On Your Statement
If you think there is an error on your statement, write to us at:
[Creditor Name]
[Creditor Address]
[You may also contact us on the Web: [Creditor Web or email
address]]
In your letter, give us the following information:
Account information: Your name and account
number.
Dollar amount: The dollar amount of the suspected
error.
Description of problem: If you think there is an
error on your bill, describe what you believe is wrong and why you
believe it is a mistake.
You must contact us:
Within 60 days after the error appeared on your
statement.
At least 3 business days before an automated
payment is scheduled, if you want to stop payment on the amount you
think is wrong.
You must notify us of any potential errors in writing [or
electronically]. You may call us, but if you do we are not required to
investigate any potential errors and you may have to pay the amount in
question.
What Will Happen After We Receive Your Letter
When we receive your letter, we must do two things:
1. Within 30 days of receiving your letter, we must tell you that we
received your letter. We will also tell you if we have already corrected
the error.
2. Within 90 days of receiving your letter, we must either correct
the error or explain to you why we believe the bill is correct.
While we investigate whether or not there has been an error:
We cannot try to collect the amount in question,
or report you as delinquent on that amount.
The charge in question may remain on your
statement, and we may continue to charge you interest on that amount.
While you do not have to pay the amount in
question, you are responsible for the remainder of your balance.
We can apply any unpaid amount against your
credit limit.
After we finish our investigation, one of two things will happen:
If we made a mistake: You will not have to pay
the amount in question or any interest or other fees related to that
amount.
If we do not believe there was a mistake: You
will have to pay the amount in question, along with applicable interest
and fees. We will send you a statement of the amount you owe and the
date payment is due. We may then report you as delinquent if you do not
pay the amount we think you owe.
If you receive our explanation but still believe your bill is wrong,
you must write to us within 10 days telling us that you still refuse to
pay. If you do so, we cannot report you as delinquent without also
reporting that you are questioning your bill. We must tell you the name
of anyone to whom we reported you as delinquent, and we must let those
organizations know when the matter has been settled between us.
If we do not follow all of the rules above, you do not have to pay
the first $50 of the amount you question even if your bill is correct.
Your Rights If You Are Dissatisfied With Your Credit Card Purchases
If you are dissatisfied with the goods or services that you have
purchased with your credit card, and you have tried in good faith to
correct the problem with the merchant, you may have the right not to pay
the remaining amount due on the purchase.
To use this right, all of the following must be true:
1. The purchase must have been made in your home state or within 100
miles of your current mailing address, and the purchase price must have
been more than $50. (Note: Neither of these are necessary if your
purchase was based on an advertisement we
[[Page 202]]
mailed to you, or if we own the company that sold you the goods or
services.)
2. You must have used your credit card for the purchase. Purchases
made with cash advances from an ATM or with a check that accesses your
credit card account do not qualify.
3. You must not yet have fully paid for the purchase.
If all of the criteria above are met and you are still dissatisfied
with the purchase, contact us in writing [or electronically] at:
[Creditor Name]
[Creditor Address]
[[Creditor Web or email address]]
While we investigate, the same rules apply to the disputed amount as
discussed above. After we finish our investigation, we will tell you our
decision. At that point, if we think you owe an amount and you do not
pay, we may report you as delinquent.
G-4--Alternative Billing-Error Rights Model Form (Home-Equity Plans)
BILLING RIGHTS SUMMARY
In Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[address] [the address shown on your bill] as soon as possible. [You may
also contact us on the Web: [Creditor Web or email address].] We must
hear from you no later than 60 days after we sent you the first bill on
which the error or problem appeared. You can telephone us, but doing so
will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why
you believe there is an error. If you need more information, describe
the item you are unsure about.
You do not have to pay any amount in question while we are
investigating, but you are still obligated to pay the parts of your bill
that are not in question. While we investigate your question, we cannot
report you as delinquent or take any action to collect the amount you
question.
Special Rule for Credit Card Purchases
If you have a problem with the quality of goods or services that you
purchased with a credit card, and you have tried in good faith to
correct the problem with the merchant, you may not have to pay the
remaining amount due on the goods or services. You have this protection
only when the purchase price was more than $50 and the purchase was made
in your home state or within 100 miles of your mailing address. (If we
own or operate the merchant, or if we mailed you the advertisement for
the property or services, all purchases are covered regardless of amount
or location of purchase.)
G-4(A)--Alternative Billing-Error Rights Model Form (Plans Other Than
Home-Equity Plans)
What To Do If You Think You Find A Mistake On Your Statement
If you think there is an error on your statement, write to us at:
[Creditor Name]
[Creditor Address]
[You may also contact us on the Web: [Creditor Web or email
address]]
In your letter, give us the following information:
Account information: Your name and account
number.
Dollar amount: The dollar amount of the suspected
error.
Description of Problem: If you think there is an
error on your bill, describe what you believe is wrong and why you
believe it is a mistake.
You must contact us within 60 days after the error appeared on your
statement.
You must notify us of any potential errors in writing [or
electronically]. You may call us, but if you do we are not required to
investigate any potential errors and you may have to pay the amount in
question.
While we investigate whether or not there has been an error, the
following are true:
We cannot try to collect the amount in question,
or report you as delinquent on that amount.
The charge in question may remain on your
statement, and we may continue to charge you interest on that amount.
But, if we determine that we made a mistake, you will not have to pay
the amount in question or any interest or other fees related to that
amount.
While you do not have to pay the amount in
question, you are responsible for the remainder of your balance.
We can apply any unpaid amount against your
credit limit.
Your Rights If You Are Dissatisfied With Your Credit Card Purchases
If you are dissatisfied with the goods or services that you have
purchased with your credit card, and you have tried in good faith to
correct the problem with the merchant, you may have the right not to pay
the remaining amount due on the purchase.
To use this right, all of the following must be true:
1. The purchase must have been made in your home state or within 100
miles of your current mailing address, and the purchase price must have
been more than $50. (Note: Neither of these is necessary if your
purchase was based on an advertisement we
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mailed to you, or if we own the company that sold you the goods or
services.)
2. You must have used your credit card for the purchase. Purchases
made with cash advances from an ATM or with a check that accesses your
credit card account do not qualify.
3. You must not yet have fully paid for the purchase.
If all of the criteria above are met and you are still dissatisfied
with the purchase, contact us in writing [or electronically] at:
[Creditor Name]
[Creditor Address]
[[Creditor Web address]]
While we investigate, the same rules apply to the disputed amount as
discussed above. After we finish our investigation, we will tell you our
decision. At that point, if we think you owe an amount and you do not
pay we may report you as delinquent.
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G-11--Applications and Solicitations Made Available to the General
Public Model Clauses
(a) Disclosure of Required Credit Information
The information about the costs of the card described in this
[application]/[solicitation] is accurate as of (month/year). This
information may have changed after that date. To find out what may have
changed, [call us at (telephone number)][write to us at (address)].
(b) No Disclosure of Credit Information
There are costs associated with the use of this card. To obtain
information about these costs, call us at (telephone number) or write to
us at (address).
G-12 [Reserved]
G-13(A)--Change in Insurance Provider Model Form (Combined Notice)
The credit card account you have with us is insured. This is to
notify you that we plan to replace your current coverage with insurance
coverage from a different insurer.
If we obtain insurance for your account from a different insurer,
you may cancel the insurance.
[Your premium rate will increase to $ __ per __.]
[Your coverage will be affected by the following:
[ ] The elimination of a type of coverage previously provided to
you. [(explanation)] [See __ of the attached policy for details.]
[ ] A lowering of the age at which your coverage will terminate or
will become more restrictive. [(explanation)] [See __ of the attached
policy or certificate for details.]
[ ] A decrease in your maximum insurable loan balance, maximum
periodic benefit payment, maximum number of payments, or any other
decrease in the dollar amount of your coverage or benefits.
[(explanation)] [See __ of the attached policy or certificate for
details.]
[ ] A restriction on the eligibility for benefits for you or others.
[(explanation)] [See __ of the attached policy or certificate for
details.]
[ ] A restriction in the definition of ``disability'' or other key
term of coverage. [(explanation)] [See __ of the attached policy or
certificate for details.]
[ ] The addition of exclusions or limitations that are broader or
other than those under the current coverage. [(explanation)] [See __ of
the attached policy or certificate for details.]
[ ] An increase in the elimination (waiting) period or a change to
nonretroactive coverage. [(explanation)] [See __ of the attached policy
or certificate for details).]
[The name and mailing address of the new insurer providing the
coverage for your account is (name and address).]
G-13(B)--Change in Insurance Provider Model Form
We have changed the insurer providing the coverage for your account.
The new insurer's name and address are (name and address). A copy of the
new policy or certificate is attached.
You may cancel the insurance for your account.
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G-16(A) Debt Suspension Model Clause
Please enroll me in the optional [insert name of program], and bill
my account the fee of [how cost is determined]. I understand that
enrollment is not required to obtain credit. I also understand that
depending on the event, the protection may only temporarily suspend my
duty to make minimum payments, not reduce the balance I owe. I
understand that my balance will actually grow during the suspension
period as interest continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here]. X__________
G-16(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $.83 per $100 of my month-end account balance. I
understand that enrollment is not required to obtain credit. I also
understand that depending on the event, the protection may only
temporarily suspend my duty to make minimum payments, not reduce the
balance I owe. I understand that my balance will actually grow during
the suspension period as interest continues to accumulate.
To Enroll, Initial Here. X__________
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G-18(B)--Late Payment Fee Sample
Late Payment Warning: If we do not receive your minimum payment by
the date listed above, you may have to pay a $35 late fee and your APRs
may be increased up to the Penalty APR of 28.99%.
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G-18(E) [Reserved]
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G-18(H)--Deferred Interest Periodic Statement Clause
[You must pay your promotional balance in full by [date] to avoid
paying accrued interest charges.]
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G-24--Deferred Interest Offer Clauses
(a) For Credit Card Accounts Under an Open-End (Not Home-Secured)
Consumer Credit Plan
[Interest will be charged to your account from the purchase date if
the purchase balance is not paid in full within the/by [deferred
interest period/date] or if you make a late payment.]
(b) For Other Open-End Plans
[Interest will be charged to your account from the purchase date if
the purchase balance is not paid in full within the/by [deferred
interest period/date] or if your account is otherwise in default.]
G-25(A)--Consent Form for Over-the-Credit Limit Transactions
Your Choice Regarding Over-the-Credit Limit Coverage
Unless you tell us otherwise, we will decline any transaction that
causes you to go over your credit limit. If you want us to authorize
these transactions, you can request over-the-credit limit coverage.
If you have over-the-credit limit coverage and you go over your
credit limit, we will charge you a fee of up to $35. We may also
increase your APRs to the Penalty APR of XX.XX%. You will only pay one
fee per billing cycle, even if you go over your limit multiple times in
the same cycle.
Even if you request over-the-credit limit coverage, in some cases we
may still decline a transaction that would cause you to go over your
limit, such as if you are past due or significantly over your credit
limit.
If you want over-the-limit coverage and to allow us to authorize
transactions that go over your credit limit, please:
--Call us at [telephone number];
--Visit [Web site]; or
--Check or initial the box below, and return the form to us at
[address].
__________
_ I want over-the-limit coverage. I understand that if I go over my
credit limit, my APRs may be increased and I will be charged a fee of up
to $35. [I have the right to cancel this coverage at any time.]
[_ I do not want over-the-limit coverage. I understand that
transactions that exceed my credit limit will not be authorized.]
Printed Name:___________________________________________________________
Date:___________________________________________________________________
[Account Number]:_______________________________________________________
G-25(B)--Revocation Notice for Periodic Statement Regarding Over-the-
Credit Limit Transactions
You currently have over-the-credit limit coverage on your account,
which means that we pay transactions that cause you go to over your
credit limit. If you do go over your credit limit, we will charge you a
fee of up to $35. We may also increase your APRs. To remove over-the-
credit-limit coverage from your account, call us at 1-800-xxxxxxx or
visit [insert Web site].
[You may also write us at: [insert address].]
[You may also check or initial the box below and return this form to
us at: [insert address].
_ I want to cancel over-the-limit coverage for my account.
Printed Name:___________________________________________________________
Date:___________________________________________________________________
[Account Number]:_______________________________________________________
Sec. Appendix H to Part 1026--Closed-End Model Forms and Clauses
H-1 Credit Sale Model Form (Sec. 1026.18)
H-2 Loan Model Form (Sec. 1026.18)
H-3 Amount Financed Itemization Model Form (Sec. 1026.18(c))
H-4(A) Variable-Rate Model Clauses (Sec. 1026.18(f)(1))
H-4(B) Variable-Rate Model Clauses (Sec. 1026.18(f)(2))
H-4(C) Variable-Rate Model Clauses (Sec. 1026.19(b))
H-4(D)(1) Adjustable-Rate Mortgage Model Form (Sec. 1026.20(c))
H-4(D)(2) Adjustable-Rate Mortgage Sample Form (Sec. 1026.20(c))
H-4(D)(3) Adjustable-Rate Mortgage Model Form (Sec. 1026.20(d))
H-4(D)(4) Adjustable-Rate Mortgage Sample Form (Sec. 1026.20(d))
H-4(E) Fixed-Rate Mortgage Interest Rate and Payment Summary Model
Clause (Sec. 1026.18(s))
H-4(F) Adjustable-Rate Mortgage or Step-Rate Mortgage Interest Rate and
Payment Summary Model Clause (Sec. 1026.18(s))
H-4(G) Mortgage with Negative Amortization Interest Rate and Payment
Summary Model Clause (Sec. 1026.18(s))
H-4(H) Fixed-Rate Mortgage with Interest-Only Interest Rate and Payment
Summary Model Clause (Sec. 1026.18(s))
H-4(I) Adjustable-Rate Mortgage Introductory Rate Disclosure Model
Clause (Sec. 1026.18(s)(2)(iii))
H-4(J) Balloon Payment Disclosure Model Clause (Sec. 1026.18(s)(5))
H-4(K) No Guarantee to Refinance Statement Model Clause (Sec.
1026.18(t))
H-5 Demand Feature Model Clauses (Sec. 1026.18(i))
H-6 Assumption Policy Model Clause (Sec. 1026.18(q))
H-7 Required Deposit Model Clause (Sec. 1026.18(r))
H-8 Rescission Model Form (General) (Sec. 1026.23)
H-9 Rescission Model Form (Refinancing (with Original Creditor)) (Sec.
1026.23)
H-10 Credit Sale Sample
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H-11 Installment Loan Sample
H-12 Refinancing Sample
H-13 Closed-End Transaction With Demand Feature Sample
H-14 Variable-Rate Mortgage Sample (Sec. 1026.19(b))
H-15 Closed-End Graduated-Payment Transaction Sample
H-16 Mortgage Sample
H-17(A) Debt Suspension Model Clause
H-17(B) Debt Suspension Sample
H-18 Private Education Loan Application and Solicitation Model Form
H-19 Private Education Loan Approval Model Form
H-20 Private Education Loan Final Model Form
H-21 Private Education Loan Application and Solicitation Sample
H-22 Private Education Loan Approval Sample
H-23 Private Education Loan Final Sample
H-24(A) Mortgage Loan Transaction Loan Estimate--Model Form
H-24(B) Mortgage Loan Transaction Loan Estimate--Fixed Rate Loan Sample
H-24(C) Mortgage Loan Transaction Loan Estimate--Interest Only
Adjustable Rate Loan Sample
H-24(D) Mortgage Loan Transaction Loan Estimate--Refinance Sample
H-24(E) Mortgage Loan Transaction Loan Estimate--Balloon Payment Sample
H-24(F) Mortgage Loan Transaction Loan Estimate--Negative Amortization
Sample
H-24(G) Mortgage Loan Transaction Loan Estimate--Modification to Loan
Estimate for Transaction Not Involving Seller--Model Form
H-25(A) Mortgage Loan Transaction Closing Disclosure--Model Form
H-25(B) Mortgage Loan Transaction Closing Disclosure--Fixed Rate Loan
Sample
H-25(C) Mortgage Loan Transaction Closing Disclosure--Borrower Funds
From Second-Lien Loan in Summaries of Transactions Sample
H-25(D) Mortgage Loan Transaction Closing Disclosure--Borrower
Satisfaction of Seller's Second-Lien Loan Outside of Closing in
Summaries of Transactions Sample
H-25(E) Mortgage Loan Transaction Closing Disclosure--Refinance
Transaction Sample
H-25(F) Mortgage Loan Transaction Closing Disclosure--Refinance
Transaction Sample (amount in excess of Sec. 1026.19(e)(3))
H-25(G) Mortgage Loan Transaction Closing Disclosure--Refinance
Transaction With Cash From Consumer at Consummation Sample
H-25(H) Mortgage Loan Transaction Closing Disclosure--Modification to
Closing Cost Details--Model Form
H-25(I) Mortgage Loan Transaction Closing Disclosure--Modification to
Closing Disclosure for Disclosure Provided to Seller--Model Form
H-25(J) Mortgage Loan Transaction Closing Disclosure--Modification to
Closing Disclosure for Transaction Not Involving Seller--Model Form
H-26 Mortgage Loan Transaction--Pre-Loan Estimate Statement--Model Form
H-27(A) Mortgage Loan Transaction --Written List of Providers--Model
Form
H-27(B) Mortgage Loan Transaction--Sample of Written List of Providers
H-27(C) Mortgage Loan Transaction--Sample of Written List of Providers
with Services You Cannot Shop For
H-28(A) Mortgage Loan Transaction Loan Estimate--Spanish Language Model
Form
H-28(B) Mortgage Loan Transaction Loan Estimate--Spanish Language
Purchase Sample
H-28(C) Mortgage Loan Transaction Loan Estimate--Spanish Language
Refinance Sample
H-28(D) Mortgage Loan Transaction Loan Estimate--Spanish Language
Balloon Payment Sample
H-28(E) Mortgage Loan Transaction Loan Estimate--Spanish Language
Negative Amortization Sample
H-28(F) Mortgage Loan Transaction Closing Disclosure--Spanish Language
Model Form
H-28(G) Mortgage Loan Transaction Closing Disclosure--Spanish Language
Purchase Sample
H-28(H) Mortgage Loan Transaction Closing Disclosure--Spanish Language
Refinance Sample
H-28(I) Mortgage Loan Transaction Loan Estimate--Modification to Loan
Estimate for Transaction Not Involving Seller--Spanish Language Model
Form
H-28(J) Mortgage Loan Transaction Closing Disclosure--Modification to
Closing Disclosure for Transaction Not Involving Seller--Spanish
Language Model Form
H-29 Escrow Cancellation Notice Model Form (Sec. 1026.20(e))
H-30(A) Sample Form of Periodic Statement (Sec. 1026.41)
H-30(B) Sample Form of Periodic Statement with Delinquency Box (Sec.
1026.41)
H-30(C) Sample Form of Periodic Statement for a Payment-Option Loan
(Sec. 1026.41)
H-30(D) Sample Clause for Homeownership Counselor Contact Information
(Sec. 1026.41)
H-30(E) Sample Form of Periodic Statement for Consumer in Chapter 7 or
Chapter 11 Bankruptcy
H-30(F) Sample Form of Periodic Statement for Consumer in Chapter 12 or
Chapter 13 Bankruptcy
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H-4(C)--Variable Rate Model Clauses
This disclosure describes the features of the adjustable-rate
mortgage (ARM) program you are considering. Information on other ARM
programs is available upon request.
[[Page 239]]
How Your Interest Rate and Payment Are Determined
Your interest rate will be based on [an index
plus a margin] [a formula].
Your payment will be based on the interest rate,
loan balance, and loan term.
--[The interest rate will be based on (identification of index) plus our
margin. Ask for our current interest rate and margin.]
--[The interest rate will be based on (identification of formula). Ask
us for our current interest rate.]
--Information about the index [formula for rate adjustments] is
published [can be found] ___.
--[The initial interest rate is not based on the (index) (formula) used
to make later adjustments. Ask us for the amount of current interest
rate discounts.]
How Your Interest Rate Can Change
Your interest rate can change (frequency).
[Your interest rate cannot increase or decrease
more than __ percentage points at each adjustment.]
Your interest rate cannot increase [or decrease]
more than __ percentage points over the term of the loan.
How Your Payment Can Change
Your payment can change (frequency) based on
changes in the interest rate.
[Your payment cannot increase more than (amount
or percentage) at each adjustment.]
[You will be notified at least 210, but no more
than 240, days before first payment at the adjusted level is due after
the initial interest rate adjustment of the loan. This notice will
contain information about the adjustment, including the interest rate,
payment amount, and loan balance.]
[You will be notified at least 60, but no more
than 120, days before first payment at the adjusted level is due after
any interest rate adjustment resulting in a corresponding payment
change. This notice will contain information about the adjustment,
including the interest rate, payment amount, and loan balance.]
[For example, on a $10,000 [term] loan with an
initial interest rate of __ [(the rate shown in the interest rate column
below for the year 19 __)] [(in effect (month) (year)], the maximum
amount that the interest rate can rise under this program is __
percentage points, to __%, and the monthly payment can rise from a
first-year payment of $__ to a maximum of $__ in the __ year. To see
what your payments would be, divide your mortgage amount by $10,000;
then multiply the monthly payment by that amount. (For example, the
monthly payment for a mortgage amount of $60,000 would be: $60,000 /
$10,000 = 6; 6 x __ = $__ per month.)]
[Example
The example below shows how your payments would have changed under
this ARM program based on actual changes in the index from 1982 to 1996.
This does not necessarily indicate how your index will change in the
future.
The example is based on the following assumptions:
------------------------------------------------------------------------
------------------------------------------------------------------------
Amount................................... $10,000.
Term..................................... ----.
Change date.............................. ----.
Payment adjustment....................... (frequency).
Interest adjustment...................... (frequency).
[Margin] *............................... ----.
------------------------------------------------------------------------
Caps __ [periodic interest rate cap]....................................
__ [lifetime interest rate cap..........................................
__ [payment cap]........................................................
[Interest rate carryover]...............................................
[Negative amortization].................................................
[Interest rate discount].**.............................................
Index(identification of index or formula)...............................
------------------------------------------------------------------------
* This is a margin we have used recently, your margin may be different.
** This is the amount of a discount we have provided recently; your loan
may be discounted by a different amount.]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Margin
Year Index (%) (percentage Interest rate (%) Monthly payment Remaining balance
points) ($) ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1982..................................................... ................. ................. .................
1983..................................................... ................. ................. .................
1984..................................................... ................. ................. .................
1985..................................................... ................. ................. .................
1986..................................................... ................. ................. .................
1987..................................................... ................. ................. .................
1988..................................................... ................. ................. .................
1989..................................................... ................. ................. .................
1990..................................................... ................. ................. .................
1991..................................................... ................. ................. .................
1992..................................................... ................. ................. .................
1993..................................................... ................. ................. .................
1994..................................................... ................. ................. .................
1995..................................................... ................. ................. .................
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1996..................................................... ................. ................. ................. .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then multiply the monthly payment by that
amount. (For example, in 1996 the monthly payment for a mortgage amount of $60,000 taken out in 1982 would be: $60,000 / $10,000 = 6; 6 x __ = $__ per
month.)
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H-4(I)--Introductory Rate Model Clause
[Introductory Rate Notice
You have a discounted introductory rate of ____ % that ends after
(period).
In the (period in sequence), even if market rates do not change,
this rate will increase to __ %.]
H-4(J)--Balloon Payment Model Clause
[Final Balloon Payment due (date): $______]
H-4(K)--``No-Guarantee-to-Refinance'' Statement Model Clause
There is no guarantee that you will be able to refinance to lower
your rate and payments.
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H-9--Rescission Model Form (Refinancing With Original Creditor)
NOTICE OF RIGHT TO CANCEL
Your Right To Cancel
You are entering into a new transaction to increase the amount of
credit previously provided to you. Your home is the security for this
new transaction. You have a legal right under Federal law to cancel this
new transaction, without cost, within three business days from whichever
of the following events occurs last:
(1) the date of this new transaction, which is ______; or
(2) the date you received your new Truth in Lending disclosures; or
(3) the date you received this notice of your right to cancel.
If you cancel this new transaction, it will not affect any amount
that you presently owe. Your home is the security for that amount.
Within 20 calendar days after we receive your notice of cancellation of
this new transaction, we must take the steps necessary to reflect the
fact that your home does not secure the increase of credit. We must also
return any money you have given to us or anyone else in connection with
this new transaction.
You may keep any money we have given you in this new transaction
until we have done the things mentioned above, but you must then offer
to return the money at the address below.
If we do not take possession of the money within 20 calendar days of
your offer, you may keep it without further obligation.
How To Cancel
If you decide to cancel this new transaction, you may do so by
notifying us in writing, at
________________________________________________________________________
(Creditor's name and business address).
You may use any written statement that is signed and dated by you
and states your intention to cancel, or you may use this notice by
dating and signing below. Keep one copy of this notice because it
contains important information about your rights.
If you cancel by mail or telegram, you must send the notice no later
than midnight of
________________________________________________________________________
(Date)__________________________________________________________________
(or midnight of the third business day following the latest of the three
events listed above).
If you send or deliver your written notice to cancel some other way,
it must be delivered to the above address no later than that time.
I WISH TO CANCEL
Consumer's Signature____________________________________________________
Date____________________________________________________________________
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H-13--Closed-End Transaction With Demand Feature Sample
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H-14--Variable Rate Mortgage Sample
This disclosure describes the features of the adjustable-rate
mortgage (ARM) program you are considering. Information on other ARM
programs is available upon request.
How Your Interest Rate and Payment Are Determined
Your interest rate will be based on an index rate
plus a margin.
Your payment will be based on the interest rate,
loan balance, and loan term.
--The interest rate will be based on the weekly average yield on
United States Treasury securities adjusted to a constant maturity of 1
year (your index), plus our margin. Ask us for our current interest rate
and margin.
--Information about the index rate is published weekly in the Wall
Street Journal.
Your interest rate will equal the index rate plus
our margin unless your interest rate ``caps'' limit the amount of change
in the interest rate.
How Your Interest Rate Can Change
Your interest rate can change yearly.
Your interest rate cannot increase or decrease
more than 2 percentage points per year.
Your interest rate cannot increase or decrease
more than 5 percentage points over the term of the loan.
How Your Monthly Payment Can Change
Your monthly payment can increase or decrease
substantially based on annual changes in the interest rate.
[For example, on a $10,000, 30-year loan with an
initial interest rate of 12.41 percent in effect in July 1996, the
maximum amount that the interest rate can rise under this program is 5
percentage points, to 17.41 percent, and the monthly payment can rise
from a first-year payment of $106.03 to a maximum of $145.34 in the
fourth year. To see what your payment is, divide your mortgage amount by
$10,000; then multiply the monthly payment by that amount. (For example,
the monthly payment for a mortgage amount of $60,000 would be: $60,000 /
$10,000 = 6; 6 x 106.03 = $636.18 per month.)]
[You will be notified at least 210, but no more
than 240, days before first payment at
[[Page 253]]
the adjusted level is due after the initial interest rate adjustment of
the loan. This notice will contain information about the adjustment,
including the interest rate, payment amount, and loan balance.]
[You will be notified at least 60, but no more
than 120, days before first payment at the adjusted level is due after
any interest rate adjustment resulting in a corresponding payment
change. This notice will contain information about the adjustment,
including the interest rate, payment amount, and loan balance.]
[Example
The example below shows how your payments would have changed under
this ARM program based on actual changes in the index from 1982 to 1996.
This does not necessarily indicate how your index will change in the
future. The example is based on the following assumptions:
------------------------------------------------------------------------
------------------------------------------------------------------------
Amount................................... $10,000.
Term..................................... 30 years.
Payment adjustment....................... 1 year.
Interest adjustment...................... 1 year.
Margin................................... 3 percentage points.
------------------------------------------------------------------------
Caps 2 percentage points annual interest rate...........................
5 percentage points lifetime interest rate..............................
Index Weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of one year..
------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Margin *
Year (as of 1st week ending in Index (percentage Interest rate Monthly Remaining
July) points) (%) payment ($) balance ($)
----------------------------------------------------------------------------------------------------------------
1982............................ 14.41 3 17.41 145.90 9,989.37
1983............................ 9.78 3 * * 15.41 129.81 9,969.66
1984............................ 12.17 3 15.17 127.91 9,945.51
1985............................ 7.66 3 ** 13.17 112.43 9,903.70
1986............................ 6.36 3 *** 12.41 106.73 9,848.94
1987............................ 6.71 3 *** 12.41 106.73 9,786.98
1988............................ 7.52 3 *** 12.41 106.73 9,716.88
1989............................ 7.97 3 *** 12.41 106.73 9,637.56
1990............................ 8.06 3 *** 12.41 106.73 9,547.83
1991............................ 6.40 3 *** 12.41 106.73 9,446.29
1992............................ 3.96 3 *** 12.41 106.73 9,331.56
1993............................ 3.42 3 *** 12.41 106.73 9,201.61
1994............................ 5.47 3 *** 12.41 106.73 9,054.72
1995............................ 5.53 3 *** 12.41 106.73 8,888.52
1996............................ 5.82 3 *** 12.41 106.73 8,700.37
----------------------------------------------------------------------------------------------------------------
* This is a margin we have used recently; your margin may be different.
** This interest rate reflects a 2 percentage point annual interest rate cap.
*** This interest rate reflects a 5 percentage point lifetime interest rate cap.
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then
multiply the monthly payment by that amount. (For example, in 1996 the monthly payment for a mortgage amount
of $60,000 taken out in 1982 would be: $60,000 / $10,000 = 6; 6 x $106.73 = $640.38.)]
[You will be notified at least 210, but no more
than 240, days before first payment at the adjusted level is due after
the initial interest rate adjustment of the loan. This notice will
contain information about the adjustment, including the interest rate,
payment amount, and loan balance.]
[You will be notified at least 60, but no more
than 120, days before first payment at the adjusted level is due after
any interest rate adjustment resulting in a corresponding payment
change. This notice will contain information about the adjustment,
including the interest rate, payment amount, and loan balance.]
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H-15 Closed-End Graduated Payment Transaction Sample
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H-17(A) Debt Suspension Model Clause
Please enroll me in the optional [insert name of program], and bill
my account the fee of [insert charge for the initial term of coverage].
I understand that enrollment is not required to obtain credit. I also
understand that depending on the event, the protection may only
temporarily suspend my duty to make minimum payments, not reduce the
balance I owe. I understand that my balance will actually grow during
the suspension period as interest continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here].
X_______________________________________________________________________
H-17(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $200.00. I understand that enrollment is not required
to obtain credit. I also understand that depending on the event, the
protection may only temporarily suspend my duty to make minimum
payments, not reduce the balance I owe. I understand that my balance
will actually grow during the suspension period as interest continues to
accumulate.
To Enroll, Initial Here.
X_______________________________________________________________________
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H-24(A) Mortgage Loan Transaction Loan Estimate--Model Form
Description: This is a blank model Loan Estimate that illustrates
the application of the content requirements in Sec. 1026.37. This form
provides two variations of page one, four variations of page two, and
four variations of page three, reflecting the variable content
requirements in Sec. 1026.37.
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H-24(B) Mortgage Loan Transaction Loan Estimate--Fixed Rate Loan Sample
Description: This is a sample of a completed Loan Estimate for a
fixed rate loan. This loan is for the purchase of property at a sale
price of $180,000 and has a loan amount of $162,000, a 30-year loan
term, a fixed interest rate of 3.875 percent, and a prepayment penalty
equal to 2.00 percent of the outstanding principal balance of the loan
for the first two years after consummation of the transaction. The
consumer has elected to lock the interest rate. The creditor requires an
escrow account and that the consumer pay for private mortgage insurance.
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H-24(C) Mortgage Loan Transaction Loan Estimate--Interest Only
Adjustable Rate Loan Sample
Description: This is a sample of a completed Loan Estimate for an
adjustable rate loan with interest only payments. This loan is for the
purchase of property at a sale price of $240,000 and has a loan amount
of $211,000 and a 30-year loan term. For the first five years of the
loan term, the scheduled payments cover only interest and the loan has
an introductory interest rate that is fixed at 4.00 percent. After five
years, the payments include principal and the interest rate adjusts
every three years based on the value of the Monthly Treasury Average
index plus a margin of 4.00 percent. The consumer has elected to lock
the interest rate. The creditor does not require an escrow account with
the loan.
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The creditor requires that the consumer pay for private mortgage
insurance.
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H-24(D) Mortgage Loan Transaction Loan Estimate--Refinance Sample
Description: This is a sample of a completed Loan Estimate for a
transaction that is for a refinance of an existing mortgage loan that
secures the property, for which the consumer is estimated to receive
funds from the transaction. The estimated property value is $180,000,
the loan amount is $150,000, the estimated outstanding balance of the
existing mortgage loan is $120,000, and the interest rate is 4.25
percent. The consumer has elected to lock the interest rate. The
creditor requires an escrow account and that the consumer pay for
private mortgage insurance.
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H-24(E) Mortgage Loan Transaction Loan Estimate--Balloon Payment Sample
Description: This is a sample of the information required by Sec.
1026.37(a) through (c) for a transaction with a loan term of seven years
that includes a final balloon payment.
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H-24(F) Mortgage Loan Transaction Loan Estimate--Negative Amortization
Sample
Description: This is a sample of the information required by Sec.
1026.37(a) and (b) for a transaction with negative amortization.
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H-24(G) Mortgage Loan Transaction Loan Estimate--Modification to Loan
Estimate for Transaction Not Involving Seller--Model Form
Description: This is a blank model Loan Estimate that illustrates
the application of the content requirements in Sec. 1026.37, with the
optional alternative tables permitted by Sec. 1026.37(d)(2) and (h)(2)
for transactions without a seller. This form provides one variation of
page one, four variations of page two, and four variations of page
three, reflecting the variable content requirements in Sec. 1026.37.
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H-25(A) Mortgage Loan Transaction Closing Disclosure--Model Form
Description: This is a blank model Closing Disclosure that
illustrates the content requirements in Sec. 1026.38. This form
provides three variations of page one, one page two, one page three,
four variations of page four, and four variations of page five,
reflecting the variable content requirements in Sec. 1026.38. This form
does not reflect modifications permitted under Sec. 1026.38(t).
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H-25(B) Mortgage Loan Transaction Closing Disclosure--Fixed Rate Loan
Sample
Description: This is a sample of a completed Closing Disclosure for
the fixed rate loan illustrated by form H-24(B). The purpose, product,
sale price, loan amount, loan term, and interest rate have not changed
from the estimates provided on the Loan Estimate. The creditor requires
an escrow account and that the consumer pay for private mortgage
insurance for the transaction.
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H-25(C) Mortgage Loan Transaction Closing Disclosure--Borrower Funds
From Second-Lien Loan in Summaries of Transactions Sample
Description: This is a sample of the information required on the
Closing Disclosure by Sec. 1026.38(j) for disclosure of consumer funds
from a simultaneous second-lien credit transaction not otherwise
disclosed pursuant to Sec. 1026.38(j)(2)(iii) or (iv) that is used to
finance part of the purchase price of the property subject to the
transaction.
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H-25(D) Mortgage Loan Transaction Closing Disclosure--Borrower
Satisfaction of Seller's Second-Lien Loan Outside of Closing in
Summaries of Transactions Sample
Description: This is a sample of the information required on the
Closing Disclosure by Sec. 1026.38(j) and (k) for the satisfaction of a
junior-lien transaction by the consumer, which was not paid from closing
funds.
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H-25(E) Mortgage Loan Transaction Closing Disclosure--Refinance
Transaction Sample
Description: This is a sample of a completed Closing Disclosure for
the refinance transaction illustrated by form H-24(D). The purpose, loan
amount, loan term, and interest rate have not changed from the estimates
provided on the Loan Estimate. The outstanding balance of the existing
mortgage loan securing the property was less than estimated on the Loan
Estimate. The creditor requires an escrow account and that the consumer
pay for private mortgage insurance for the transaction.
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H-25(F) Mortgage Loan Transaction Closing Disclosure--Refinance
Transaction Sample (Amount in Excess of Sec. 1026.19(e)(3))
Description: This is a sample of the completed disclosures required
by Sec. 1026.38(e) and (h) for a completed Closing Disclosure for the
refinance transaction illustrated by form H-24(D). The Closing Costs
have increased in excess of the good faith requirements of Sec.
1026.19(e)(3) by $200, for which the creditor has provided a refund
under Sec. 1026.19(f)(2)(v).
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H-25(G) Mortgage Loan Transaction Closing Disclosure--Refinance
Transaction With Cash From Consumer at Consummation
Description: This is a sample of a completed Closing Disclosure for
a refinance transaction in which the consumer must pay additional funds
to satisfy the existing mortgage loan securing the property and other
existing debt to consummate the transaction.
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H-25(H) Mortgage Loan Transaction Closing Disclosure--Modification to
Closing Cost Details--Model Form
Description: This is a blank model form of the modification to
Closing Cost Details permitted by Sec. 1026.38(t)(5)(iv)(B).
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H-25(I) Mortgage Loan Transaction Closing Disclosure--Modification to
Closing Disclosure for Disclosure Provided to Seller--Model Form
Description: This is a blank model form of the modification
permitted by Sec. 1026.38(t)(5)(vi).
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H-25(J) Mortgage Loan Transaction Closing Disclosure--Modification to
Closing Disclosure for Transaction Not Involving Seller--Model Form
Description: This is a blank model form of the alternative
disclosures and modifications permitted by Sec. 1026.38(d)(2), (e), and
(t)(5)(vii) for transactions without a seller.
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H-26 Mortgage Loan Transaction--Pre-Loan Estimate Statement--Model Form
Description: This is a model of the statement required by Sec.
1026.19(e)(2)(ii) to be stated at the top of the front of the first page
of a written estimate of terms or costs specific to a consumer that is
provided to a consumer before the consumer receives the disclosures
required under Sec. 1026.19(e)(1)(i).
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H-27(A) Mortgage Loan Transaction--Written List of Providers--Model Form
Description: This is a blank model form for the written list of
settlement service providers required by Sec. 1026.19(e)(1)(vi) and the
statement required by Sec. 1026.19(e)(1)(vi)(C) that the consumer may
select a settlement service provider that is not on the list.
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H-27(B) Mortgage Loan Transaction--Sample of Written List of Providers
Description: This is a sample of the Written List of Providers for
the transaction in the sample Loan Estimate illustrated by form H-24(B).
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H-27(C) Mortgage Loan Transaction--Sample of Written List of Providers
With Services You Cannot Shop for
Description: This is a sample of the Written List of Providers with
information about the providers selected by the creditor for the charges
disclosed pursuant to Sec. 1026.37(f)(2).
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H-28(A) Mortgage Loan Transaction Loan Estimate--Spanish Language Model
Form
Description: This is a blank model Loan Estimate that illustrates
the application of the content requirements in Sec. 1026.37, and is
translated into the Spanish language as permitted by Sec.
1026.37(o)(5)(ii). This form provides two variations of page one, four
variations of page two, and four variations of page three, reflecting
the variable content requirements in Sec. 1026.37.
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H-28(B) Mortgage Loan Transaction Loan Estimate--Spanish Language
Purchase Sample
Description: This is a sample of the Loan Estimate illustrated by
form H-24(C) for a 5 Year Interest Only, 5/3 Adjustable Rate loan,
translated into the Spanish language as permitted by Sec.
1026.37(o)(5)(ii).
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H-28(C) Mortgage Loan Transaction Loan Estimate--Spanish Language
Refinance Sample
Description: This is a sample of the Loan Estimate illustrated by
form H-24(D) for a refinance transaction in which the consumer is
estimated to receive funds from the transaction, translated into the
Spanish language as permitted by Sec. 1026.37(o)(5)(ii).
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H-28(D) Mortgage Loan Transaction Loan Estimate--Spanish Language
Balloon Payment Sample
Description: This is a sample of the information required by Sec.
1026.37(a) through (c) for a transaction with a loan term of seven years
that includes a final balloon payment illustrated by form H-24(E),
translated into the Spanish language as permitted by Sec.
1026.37(o)(5)(ii).
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H-28(E) Mortgage Loan Transaction Loan Estimate--Spanish Language
Negative Amortization Sample
Description: This is a sample of the information required by Sec.
1026.37(a) and (b) for a transaction with negative amortization
illustrated by form H-24(F), translated into the Spanish language as
permitted by Sec. 1026.37(o)(5)(ii).
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H-28(F) Mortgage Loan Transaction Closing Disclosure--Spanish Language
Model Form
Description: This is a blank model Closing Disclosure that
illustrates the content requirements in Sec. 1026.38, and is translated
into the Spanish language as permitted by Sec. 1026.38(t)(5)(viii).
This form provides three variations of page one, one page two, one page
three, four variations of page four, four variations of page five, and
two variations of page six reflecting the variable content requirements
in Sec. 1026.38. This form does not reflect any other modifications
permitted under Sec. 1026.38(t).
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H-28(G) Mortgage Loan Transaction Closing Disclosure--Spanish Language
Purchase Sample
Description: This is a sample of the Closing Disclosure illustrated
by form H-25(B) translated into the Spanish language as permitted by
Sec. 1026.38(t)(5)(viii).
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H-28(H) Mortgage Loan Transaction Closing Disclosure--Spanish Language
Refinance Sample
Description: This is a sample of the Closing Disclosure illustrated
by form H-25(E) translated into the Spanish language as permitted by
Sec. 1026.38(t)(5)(viii).
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H-28(I) Mortgage Loan Transaction Loan Estimate--Modification to Loan
Estimate for Transaction Not Involving Seller--Spanish Language Model
Form
Description: This is a blank model Loan Estimate that illustrates
form H-24(G), with the optional alternative disclosures permitted by
Sec. 1026.37(d)(2) and (h)(2) for transactions without a seller,
translated into the Spanish language as permitted by Sec.
1026.37(o)(5)(ii).
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H-28(J) Mortgage Loan Transaction Closing Disclosure--Modification to
Closing Disclosure for Transaction Not Involving Seller--Spanish
Language Model Form
Description: This is a blank model Closing Disclosure that
illustrates form H-25(J), with the alternative disclosures under Sec.
1026.38(d)(2), (e), and (t)(5)(vii) for transactions without a seller,
translated into the Spanish language as permitted by Sec.
1026.38(t)(5)(viii).
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H-29 Escrow Cancellation Notice Model Form (Sec. 1026.20(e))
Description: This is a blank model form of the disclosures required
by Sec. 1026.20(e).
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H-30(C) Sample Form of Periodic Statement for a Payment-Option Loan
[GRAPHIC] [TIFF OMITTED] TR19OC16.000
H-30(D) Sample Clause for Homeownership Counselor Contact Information
Housing Counselor Information: If you would like counseling or
assistance, you can contact the following:
[[Page 421]]
U.S. Department of Housing and Urban Development
(HUD): For a list of homeownership counselors or counseling
organizations in your area, go to http://www.hud.gov/offices/hsg/sfh/
hcc/hcs.cfm or call 800-569-4287.
[76 FR 79772, Dec. 22, 2011, as amended at 78 FR 11008, Feb. 14, 2013;
78 FR 80130, Dec. 31, 2013; 80 FR 8776, Feb. 19, 2015; 81 FR 72388, Oct.
19, 2016]
Effective Date Note: At 81 FR 72390, Oct. 19, 2016, and delayed at
82 FR 30948, July, 5, 2017, appendix H to part 1026 was amended by
adding H-30(E) and H-30(F), effective Apr. 19, 2018. For the convenience
of the user, the added text is set forth as follows:
Sec. Appendix H to Part 1026--Closed-End Model Forms and Clauses
* * * * *
H-30(E) Sample Form of Periodic Statement for Consumer in Chapter 7 or
Chapter 11 Bankruptcy
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H-30(F) Sample Form of Periodic Statement for Consumer in Chapter 12 or
Chapter 13 Bankruptcy
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Sec. Appendix I to Part 1026 [Reserved]
Sec. Appendix J to Part 1026--Annual Percentage Rate Computations for
Closed-End Credit Transactions
(a) Introduction
(1) Section 1026.22(a) of Regulation Z provides that the annual
percentage rate for other than open-end credit transactions shall be
determined in accordance with either the actuarial method or the United
States Rule method. This appendix contains an explanation of the
actuarial method as well as equations, instructions and examples of how
this method applies to single advance and multiple advance transactions.
(2) Under the actuarial method, at the end of each unit-period (or
fractional unit-period) the unpaid balance of the amount financed is
increased by the finance charge earned during that period and is
decreased by the total payment (if any) made at the end of that period.
The determination of unit-periods and fractional unit-periods shall be
consistent with the definitions and rules in paragraphs (b)(3), (4) and
(5) of this section and the general equation in paragraph (b)(8) of this
section.
(3) In contrast, under the United States Rule method, at the end of
each payment period, the unpaid balance of the amount financed is
increased by the finance charge earned during that payment period and is
decreased by the payment made at the end of that payment period. If the
payment is less than the finance charge earned, the adjustment of the
unpaid balance of the amount financed is postponed until the end of the
next payment period. If at that time the sum of the two payments is
still less than the total earned finance charge for the two payment
periods, the adjustment of the unpaid balance of the amount financed is
postponed still another payment period, and so forth.
(b) Instructions and Equations for the Actuarial Method
(1) General Rule
The annual percentage rate shall be the nominal annual percentage
rate determined by multiplying the unit-period rate by the number of
unit-periods in a year.
(2) Term of the Transaction
The term of the transaction begins on the date of its consummation,
except that if the finance charge or any portion of it is earned
beginning on a later date, the term begins on the later date. The term
ends on the date the last payment is due, except that if an advance is
scheduled after that date, the term ends on the later date. For
computation purposes, the length of the term shall be equal to the time
interval between any point in time on the beginning date to the same
point in time on the ending date.
(3) Definitions of Time Intervals
(i) A period is the interval of time between advances or between
payments and includes the interval of time between the date the finance
charge begins to be earned and the date of the first advance thereafter
or the date of the first payment thereafter, as applicable.
(ii) A common period is any period that occurs more than once in a
transaction.
(iii) A standard interval of time is a day, week, semimonth, month,
or a multiple of a week or a month up to, but not exceeding, 1 year.
(iv) All months shall be considered equal. Full months shall be
measured from any point in time on a given date of a given month to the
same point in time on the same date of another month. If a series of
payments (or advances) is scheduled for the last day of each month,
months shall be measured from the last day of the given month to the
last day of another month. If payments (or advances) are scheduled for
the 29th or 30th of each month, the last day of February shall be used
when applicable.
(4) Unit-Period
(i) In all transactions other than a single advance, single payment
transaction, the unit-period shall be that common period, not to exceed
1 year, that occurs most frequently in the transaction, except that
(A) If 2 or more common periods occur with equal frequency, the
smaller of such common periods shall be the unit-period; or
(B) If there is no common period in the transaction, the unit-period
shall be that period which is the average of all periods rounded to the
nearest whole standard interval of time. If the average is equally near
2 standard intervals of time, the lower shall be the unit-period.
(ii) In a single advance, single payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed 1
year.
(5) Number of Unit-Periods Between 2 Given Dates
(i) The number of days between 2 dates shall be the number of 24-
hour intervals between any point in time on the first date to the same
point in time on the second date.
(ii) If the unit-period is a month, the number of full unit-periods
between 2 dates shall be the number of months measured back from the
later date. The remaining fraction of a unit-period shall be the number
of days measured forward from the earlier date to the beginning of the
first full unit-period, divided by 30. If the unit-period is a month,
there are 12 unit-periods per year.
[[Page 425]]
(iii) If the unit-period is a semimonth or a multiple of a month not
exceeding 11 months, the number of days between 2 dates shall be 30
times the number of full months measured back from the later date, plus
the number of remaining days. The number of full unit-periods and the
remaining fraction of a unit-period shall be determined by dividing such
number of days by 15 in the case of a semimonthly unit-period or by the
appropriate multiple of 30 in the case of a multimonthly unit-period. If
the unit-period is a semimonth, the number of unit-periods per year
shall be 24. If the number of unit-periods is a multiple of a month, the
number of unit-periods per year shall be 12 divided by the number of
months per unit-period.
(iv) If the unit-period is a day, a week, or a multiple of a week,
the number of full unit-periods and the remaining fractions of a unit-
period shall be determined by dividing the number of days between the 2
given dates by the number of days per unit-period. If the unit-period is
a day, the number of unit-periods per year shall be 365. If the unit-
period is a week or a multiple of a week, the number of unit-periods per
year shall be 52 divided by the number of weeks per unit-period.
(v) If the unit-period is a year, the number of full unit-periods
between 2 dates shall be the number of full years (each equal to 12
months) measured back from the later date. The remaining fraction of a
unit-period shall be
(A) The remaining number of months divided by 12 if the remaining
interval is equal to a whole number of months, or
(B) The remaining number of days divided by 365 if the remaining
interval is not equal to a whole number of months.
(vi) In a single advance, single payment transaction in which the
term is less than a year and is equal to a whole number of months, the
number of unit-periods in the term shall be 1, and the number of unit-
periods per year shall be 12 divided by the number of months in the term
or 365 divided by the number of days in the term.
(vii) In a single advance, single payment transaction in which the
term is less than a year and is not equal to a whole number of months,
the number of unit-periods in the term shall be 1, and the number of
unit-periods per year shall be 365 divided by the number of days in the
term.
(6) Percentage Rate for a Fraction of a Unit-Period
The percentage rate of finance charge for a fraction (less than 1)
of a unit-period shall be equal to such fraction multiplied by the
percentage rate of finance charge per unit-period.
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Sec. Appendix K to Part 1026--Total Annual Loan Cost Rate Computations
for Reverse Mortgage Transactions
(a) Introduction. Creditors are required to disclose a series of
total annual loan cost rates for each reverse mortgage transaction. This
appendix contains the equations creditors must use in computing the
total annual loan cost rate for various transactions, as well as
instructions, explanations, and examples for various transactions. This
appendix is modeled after appendix J of this part (Annual Percentage
Rates Computations for Closed-end Credit Transactions); creditors should
consult appendix J of this part for additional guidance in using the
formulas for reverse mortgages.
(b) Instructions and equations for the total annual loan cost rate--
(1) General rule. The total annual loan cost rate shall be the nominal
total annual loan cost rate determined by multiplying the unit-period
rate by the number of unit-periods in a year.
(2) Term of the transaction. For purposes of total annual loan cost
disclosures, the term of a reverse mortgage transaction is assumed to
begin on the first of the month in which consummation is expected to
occur. If a loan cost or any portion of a loan cost is initially
incurred beginning on a date later than consummation, the term of the
transaction is assumed to begin on the first of the month in which that
loan cost is incurred. For purposes of total annual loan cost
disclosures, the term ends on each of the assumed loan periods specified
in Sec. 1026.33(c)(6).
(3) Definitions of time intervals. (i) A period is the interval of
time between advances.
(ii) A common period is any period that occurs more than once in a
transaction.
(iii) A standard interval of time is a day, week, semimonth, month,
or a multiple of a week or a month up to, but not exceeding, 1 year.
(iv) All months shall be considered to have an equal number of days.
(4) Unit-period. (i) In all transactions other than single-advance,
single-payment transactions, the unit-period shall be that common
period, not to exceed one year, that occurs most frequently in the
transaction, except that:
(A) If two or more common periods occur with equal frequency, the
smaller of such common periods shall be the unit-period; or
(B) If there is no common period in the transaction, the unit-period
shall be that period which is the average of all periods rounded to the
nearest whole standard interval of time. If the average is equally near
two standard intervals of time, the lower shall be the unit-period.
(ii) In a single-advance, single-payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed one
year.
(5) Number of unit-periods between two given dates. (i) The number
of days between two dates shall be the number of 24-hour intervals
between any point in time on the first date to the same point in time on
the second date.
(ii) If the unit-period is a month, the number of full unit-periods
between two dates shall be the number of months. If the unit-period is a
month, the number of unit-periods per year shall be 12.
(iii) If the unit-period is a semimonth or a multiple of a month not
exceeding 11 months, the number of days between two dates shall be 30
times the number of full months. The number of full unit-periods shall
be determined by dividing the number of days by 15 in the case of a
semimonthly unit-period or by the appropriate multiple of 30 in the case
of a multimonthly unit-period. If the unit-period is a semimonth, the
number of unit-periods per year shall be 24. If the number of unit-
periods is a multiple of a month, the number of unit-periods per year
shall be 12 divided by the number of months per unit-period.
(iv) If the unit-period is a day, a week, or a multiple of a week,
the number of full unit-periods shall be determined by dividing the
number of days between the two given dates by the number of days per
unit-period. If the unit-period is a day, the number of unit-periods per
year shall be 365. If the unit-period is a week or a multiple of a week,
the number of unit-periods per year shall be 52 divided by the number of
weeks per unit-period.
(v) If the unit-period is a year, the number of full unit-periods
between two dates shall be the number of full years (each equal to 12
months).
(6) Symbols. The symbols used to express the terms of a transaction
in the equation set forth in paragraph (b)(8) of this appendix are
defined as follows:
Aj = The amount of each periodic or lump-sum advance to the
consumer under the reverse mortgage transaction.
i = Percentage rate of the total annual loan cost per unit-period,
expressed as a decimal equivalent.
j = The number of unit-periods until the jth advance.
n = The number of unit-periods between consummation and repayment of the
debt.
Pn = Min (Baln, Valn). This is the
maximum amount that the creditor can be repaid at the
specified loan term.
Baln = Loan balance at time of repayment, including all costs
and fees incurred by the consumer (including any shared
appreciation or shared equity amount) compounded to time n at
the creditor's contract rate of interest.
[[Page 437]]
Valn = Val0(1 + [sigma])\y\, where Val0
is the property value at consummation, [sigma] is the assumed
annual rate of appreciation for the dwelling, and y is the
number of years in the assumed term. Valn must be
reduced by the amount of any equity reserved for the consumer
by agreement between the parties, or by 7 percent (or the
amount or percentage specified in the credit agreement), if
the amount required to be repaid is limited to the net
proceeds of sale.
[sigma] = The summation operator.
Symbols used in the examples shown in this appendix are defined as
follows:
[GRAPHIC] [TIFF OMITTED] TR22DE11.072
w = The number of unit-periods per year.
I = wi x 100 = the nominal total annual loan cost rate.
(7) General equation. The total annual loan cost rate for a reverse
mortgage transaction must be determined by first solving the following
formula, which sets forth the relationship between the advances to the
consumer and the amount owed to the creditor under the terms of the
reverse mortgage agreement for the loan cost rate per unit-period (the
loan cost rate per unit-period is then multiplied by the number of unit-
periods per year to obtain the total annual loan cost rate I; that is, I
= wi):
[GRAPHIC] [TIFF OMITTED] TR22DE11.073
(8) Solution of general equation by iteration process. (i) The
general equation in paragraph (b)(7) of this appendix, when applied to a
simple transaction for a reverse mortgage loan of equal monthly advances
of $350 each, and with a total amount owed of $14,313.08 at an assumed
repayment period of two years, takes the special form:
[GRAPHIC] [TIFF OMITTED] TR22DE11.074
Using the iteration procedures found in steps 1 through 4 of (b)(9)(i)
of appendix J of this part, the total annual loan cost rate, correct to
two decimals, is 48.53%.
[[Page 438]]
(ii) In using these iteration procedures, it is expected that
calculators or computers will be programmed to carry all available
decimals throughout the calculation and that enough iterations will be
performed to make virtually certain that the total annual loan cost rate
obtained, when rounded to two decimals, is correct. Total annual loan
cost rates in the examples below were obtained by using a 10-digit
programmable calculator and the iteration procedure described in
appendix J of this part.
(9) Assumption for discretionary cash advances. If the consumer
controls the timing of advances made after consummation (such as in a
credit line arrangement), the creditor must use the general formula in
paragraph (b)(7) of this appendix. The total annual loan cost rate shall
be based on the assumption that 50 percent of the principal loan amount
is advanced at closing, or in the case of an open-end transaction, at
the time the consumer becomes obligated under the plan. Creditors shall
assume the advances are made at the interest rate then in effect and
that no further advances are made to, or repayments made by, the
consumer during the term of the transaction or plan.
(10) Assumption for variable-rate reverse mortgage transactions. If
the interest rate for a reverse mortgage transaction may increase during
the loan term and the amount or timing is not known at consummation,
creditors shall base the disclosures on the initial interest rate in
effect at the time the disclosures are provided.
(11) Assumption for closing costs. In calculating the total annual
loan cost rate, creditors shall assume all closing and other consumer
costs are financed by the creditor.
(c) Examples of total annual loan cost rate computations--(1) Lump-
sum advance at consummation.
Lump-sum advance to consumer at consummation: $30,000
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 11.60%
Estimated time of repayment (based on life expectancy of a consumer at
age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 4%
P10 = Min (103,385.84, 137,662.72)
[GRAPHIC] [TIFF OMITTED] TR22DE11.075
i = .1317069438
Total annual loan cost rate (100(.1317069438 x 1)) = 13.17%
(2) Monthly advance beginning at consummation.
Monthly advance to consumer, beginning at consummation: $492.51
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 9.00%
Estimated time of repayment (based on life expectancy of a consumer at
age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR22DE11.076
Total annual loan cost rate (100(.009061140 x 12)) = 10.87%
(3) Lump sum advance at consummation and monthly advances
thereafter.
Lump sum advance to consumer at consummation: $10,000
Monthly advance to consumer, beginning at consummation: $725
Total of consumer's loan costs financed at consummation: $4,500
Contract rate of interest: 8.5%
[[Page 439]]
Estimated time of repayment (based on life expectancy of a consumer at
age 75): 12 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR22DE11.077
Total annual loan cost rate (100(.007708844 x 12)) = 9.25%
(d) Reverse mortgage model form and sample form--(1) Model form.
Total Annual Loan Cost Rate
Loan Terms
Age of youngest borrower:
Appraised property value:
Interest rate:
Monthly advance:
Initial draw:
Line of credit:
Initial Loan Charges
Closing costs:
Mortgage insurance premium:
Annuity cost:
Monthly Loan Charges
Servicing fee:
Other Charges:
Mortgage insurance:
Shared Appreciation:
Repayment Limits
----------------------------------------------------------------------------------------------------------------
Total annual loan cost rate
Assumed annual appreciation ---------------------------------------------------------------------------
(percent) [ ]-year loan [ ]-year loan [ ]-year loan
2-year loan term term] term term
----------------------------------------------------------------------------------------------------------------
0................................... ................. [ ] .................
4................................... ................. [ ] .................
8................................... ................. [ ] ................. .................
----------------------------------------------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you keep
the loan and how much your house appreciates in value. Generally, the
longer you keep a reverse mortgage, the lower the total annual loan cost
rate will be.
This table shows the estimated cost of your reverse mortgage loan,
expressed as an annual rate. It illustrates the cost for three [four]
loan terms: 2 years, [half of life expectancy for someone your age,]
that life expectancy, and 1.4 times that life expectancy. The table also
shows the cost of the loan, assuming the value of your home appreciates
at three different rates: 0%, 4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically include
principal, interest, closing costs, mortgage insurance premiums, annuity
costs, and servicing costs (but not costs when you sell the home).
The rates in this table are estimates. Your actual cost may differ
if, for example, the amount of your loan advances varies or the interest
rate on your mortgage changes.
Signing an Application or Receiving These Disclosures Does Not
Require You To Complete This Loan
(2) Sample Form.
Total Annual Loan Cost Rate
Loan Terms
Age of youngest borrower: 75
Appraised property value: $100,000
Interest rate: 9%
Monthly advance: $301.80
Initial draw: $1,000
Line of credit: $4,000
Initial Loan Charges
Closing costs: $5,000
Mortgage insurance premium: None
Annuity cost: None
Monthly Loan Charges
Servicing fee: None
Other Charges
Mortgage insurance: None
[[Page 440]]
Shared Appreciation: None
Repayment Limits
Net proceeds estimated at 93% of projected home sale
----------------------------------------------------------------------------------------------------------------
Total annual loan cost rate
Assumed annual appreciation ---------------------------------------------------------------------------
(percent) 2-year loan term 6-year loan term 12-year loan term 17-year loan term
(percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
0................................... 39.00 [14.94] 9.86 3.87
4................................... 39.00 [14.94] 11.03 10.14
8................................... 39.00 [14.94] 11.03 10.20
----------------------------------------------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you keep
the loan and how much your house appreciates in value. Generally, the
longer you keep a reverse mortgage, the lower the total annual loan cost
rate will be.
This table shows the estimated cost of your reverse mortgage loan,
expressed as an annual rate. It illustrates the cost for three [four]
loan terms: 2 years, [half of life expectancy for someone your age,]
that life expectancy, and 1.4 times that life expectancy. The table also
shows the cost of the loan, assuming the value of your home appreciates
at three different rates: 0%, 4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically include
principal, interest, closing costs, mortgage insurance premiums, annuity
costs, and servicing costs (but not disposition costs--costs when you
sell the home).
The rates in this table are estimates. Your actual cost may differ
if, for example, the amount of your loan advances varies or the interest
rate on your mortgage changes.
Signing an Application or Receiving These Disclosures Does Not
Require You To Complete This Loan
Sec. Appendix L to Part 1026--Assumed Loan Periods for Computations of
Total Annual Loan Cost Rates
(a) Required tables. In calculating the total annual loan cost rates
in accordance with appendix K of this part, creditors shall assume three
loan periods, as determined by the following table.
(b) Loan periods. (1) Loan Period 1 is a two-year loan period.
(2) Loan Period 2 is the life expectancy in years of the youngest
borrower to become obligated on the reverse mortgage loan, as shown in
the U.S. Decennial Life Tables for 1979-1981 for females, rounded to the
nearest whole year.
(3) Loan Period 3 is the life expectancy figure in Loan Period 3,
multiplied by 1.4 and rounded to the nearest full year (life expectancy
figures at .5 have been rounded up to 1).
(4) At the creditor's option, an additional period may be included,
which is the life expectancy figure in Loan Period 2, multiplied by .5
and rounded to the nearest full year (life expectancy figures at .5 have
been rounded up to 1).
----------------------------------------------------------------------------------------------------------------
[Optional loan Loan period 2
Age of youngest borrower Loan period 1 (in period (in (life expectancy) Loan period 3 (in
years) years)] (in years) years)
----------------------------------------------------------------------------------------------------------------
62.................................. 2 [11] 21 29
63.................................. 2 [10] 20 28
64.................................. 2 [10] 19 27
65.................................. 2 [9] 18 25
66.................................. 2 [9] 18 25
67.................................. 2 [9] 17 24
68.................................. 2 [8] 16 22
69.................................. 2 [8] 16 22
70.................................. 2 [8] 15 21
71.................................. 2 [7] 14 20
72.................................. 2 [7] 13 18
73.................................. 2 [7] 13 18
74.................................. 2 [6] 12 17
75.................................. 2 [6] 12 17
76.................................. 2 [6] 11 15
77.................................. 2 [5] 10 14
78.................................. 2 [5] 10 14
79.................................. 2 [5] 9 13
80.................................. 2 [5] 9 13
81.................................. 2 [4] 8 11
82.................................. 2 [4] 8 11
83.................................. 2 [4] 7 10
84.................................. 2 [4] 7 10
[[Page 441]]
85.................................. 2 [3] 6 8
86.................................. 2 [3] 6 8
87.................................. 2 [3] 6 8
88.................................. 2 [3] 5 7
89.................................. 2 [3] 5 7
90.................................. 2 [3] 5 7
91.................................. 2 [2] 4 6
92.................................. 2 [2] 4 6
93.................................. 2 [2] 4 6
94.................................. 2 [2] 4 6
95 and over......................... 2 [2] 3 4
----------------------------------------------------------------------------------------------------------------
Sec. Appendix M1 to Part 1026--Repayment Disclosures
(a) Definitions. (1) ``Promotional terms'' means terms of a
cardholder's account that will expire in a fixed period of time, as set
forth by the card issuer.
(2) ``Deferred interest or similar plan'' means a plan where a
consumer will not be obligated to pay interest that accrues on balances
or transactions if those balances or transactions are paid in full prior
to the expiration of a specified period of time.
(b) Calculating minimum payment repayment estimates--(1) Minimum
payment formulas. When calculating the minimum payment repayment
estimate, card issuers must use the minimum payment formula(s) that
apply to a cardholder's account. If more than one minimum payment
formula applies to an account, the issuer must apply each minimum
payment formula to the portion of the balance to which the formula
applies. In this case, the issuer must disclose the longest repayment
period calculated. For example, assume that an issuer uses one minimum
payment formula to calculate the minimum payment amount for a general
revolving feature, and another minimum payment formula to calculate the
minimum payment amount for special purchases, such as a ``club plan
purchase.'' Also, assume that based on a consumer's balances in these
features and the annual percentage rates that apply to such features,
the repayment period calculated pursuant to this appendix for the
general revolving feature is 5 years, while the repayment period
calculated for the special purchase feature is 3 years. This issuer must
disclose 5 years as the repayment period for the entire balance to the
consumer. If any promotional terms related to payments apply to a
cardholder's account, such as a deferred billing plan where minimum
payments are not required for 12 months, card issuers may assume no
promotional terms apply to the account. For example, assume that a
promotional minimum payment of $10 applies to an account for six months,
and then after the promotional period expires, the minimum payment is
calculated as 2 percent of the outstanding balance on the account or $20
whichever is greater. An issuer may assume during the promotional period
that the $10 promotional minimum payment does not apply, and instead
calculate the minimum payment disclosures based on the minimum payment
formula of 2 percent of the outstanding balance or $20, whichever is
greater. Alternatively, during the promotional period, an issuer in
calculating the minimum payment repayment estimate may apply the
promotional minimum payment until it expires and then apply the minimum
payment formula that applies after the promotional minimum payment
expires. In the above example, an issuer could calculate the minimum
payment repayment estimate during the promotional period by applying the
$10 promotional minimum payment for the first six months and then
applying the 2 percent or $20 (whichever is greater) minimum payment
formula after the promotional minimum payment expires. In calculating
the minimum payment repayment estimate during a promotional period, an
issuer may not assume that the promotional minimum payment will apply
until the outstanding balance is paid off by making only minimum
payments (assuming the repayment estimate is longer than the promotional
period). In the above example, the issuer may not calculate the minimum
payment repayment estimate during the promotional period by assuming
that the $10 promotional minimum payment will apply beyond the six
months until the outstanding balance is repaid.
(2) Annual percentage rate. When calculating the minimum payment
repayment estimate, a card issuer must use the annual percentage rates
that apply to a cardholder's account, based on the portion of the
balance to which the rate applies. If any promotional terms related to
annual percentage rates apply to a cardholder's account, other than
deferred interest or similar plans, a card issuer in calculating the
minimum payment repayment estimate during the promotional period must
apply the promotional annual percentage rate(s) until it expires and
then must apply the rate that applies after the
[[Page 442]]
promotional rate(s) expires. If the rate that applies after the
promotional rate(s) expires is a variable rate, a card issuer must
calculate that rate based on the applicable index or formula. This
variable rate is accurate if it was in effect within the last 30 days
before the minimum payment repayment estimate is provided. For deferred
interest plans or similar plans, if minimum payments under the deferred
interest or similar plan will repay the balances or transactions in full
prior to the expiration of the specified period of time, a card issuer
must assume that the consumer will not be obligated to pay the accrued
interest. This means, in calculating the minimum payment repayment
estimate, the card issuer must apply a zero percent annual percentage
rate to the balance subject to the deferred interest or similar plan.
If, however, minimum payments under the deferred interest plan or
similar plan may not repay the balances or transactions in full prior to
the expiration of the specified period of time, a card issuer must
assume that a consumer will not repay the balances or transactions in
full prior to the expiration of the specified period of time and thus
the consumer will be obligated to pay the accrued interest. This means,
in calculating the minimum payment repayment estimate, the card issuer
must apply the annual percentage rate at which interest is accruing to
the balance subject to the deferred interest or similar plan.
(3) Beginning balance. When calculating the minimum payment
repayment estimate, a card issuer must use as the beginning balance the
outstanding balance on a consumer's account as of the closing date of
the last billing cycle. When calculating the minimum payment repayment
estimate, a card issuer may round the beginning balance as described
above to the nearest whole dollar.
(4) Assumptions. When calculating the minimum payment repayment
estimate, a card issuer for each of the terms below, may either make the
following assumption about that term, or use the account term that
applies to a consumer's account.
(i) Only minimum monthly payments are made each month. In addition,
minimum monthly payments are made each month--for example, a debt
cancellation or suspension agreement, or skip payment feature does not
apply to the account.
(ii) No additional extensions of credit are obtained, such as new
purchases, transactions, fees, charges or other activity. No refunds or
rebates are given.
(iii) The annual percentage rate or rates that apply to a
cardholder's account will not change, through either the operation of a
variable rate or the change to a rate, except as provided in paragraph
(b)(2) of this Appendix. For example, if a penalty annual percentage
rate currently applies to a consumer's account, a card issuer may assume
that the penalty annual percentage rate will apply to the consumer's
account indefinitely, even if the consumer may potentially return to a
non-penalty annual percentage rate in the future under the account
agreement.
(iv) There is no grace period.
(v) The final payment pays the account in full (i.e., there is no
residual finance charge after the final month in a series of payments).
(vi) The average daily balance method is used to calculate the
balance.
(vii) All months are the same length and leap year is ignored. A
monthly or daily periodic rate may be assumed. If a daily periodic rate
is assumed, the issuer may either assume (1) a year is 365 days long,
and all months are 30.41667 days long, or (2) a year is 360 days long,
and all months are 30 days long.
(viii) Payments are credited either on the last day of the month or
the last day of the billing cycle.
(ix) Payments are allocated to lower annual percentage rate balances
before higher annual percentage rate balances.
(x) The account is not past due and the account balance does not
exceed the credit limit.
(xi) When calculating the minimum payment repayment estimate, the
assumed payments, current balance and interest charges for each month
may be rounded to the nearest cent, as shown in appendix M2 to this
part.
(5) Tolerance. A minimum payment repayment estimate shall be
considered accurate if it is not more than 2 months above or below the
minimum payment repayment estimate determined in accordance with the
guidance in this appendix (prior to rounding described in Sec.
1026.7(b)(12)(i)(B) and without use of the assumptions listed in
paragraph (b)(4) of this appendix to the extent a card issuer chooses
instead to use the account terms that apply to a consumer's account).
For example, assume the minimum payment repayment estimate calculated
using the guidance in this appendix is 28 months (2 years, 4 months),
and the minimum payment repayment estimate calculated by the issuer is
30 months (2 years, 6 months). The minimum payment repayment estimate
should be disclosed as 2 years, due to the rounding rule set forth in
Sec. 1026.7(b)(12)(i)(B). Nonetheless, based on the 30-month estimate,
the issuer disclosed 3 years, based on that rounding rule. The issuer
would be in compliance with this guidance by disclosing 3 years, instead
of 2 years, because the issuer's estimate is within the 2 months'
tolerance, prior to rounding. In addition, even if an issuer's estimate
is more than 2 months above or below the minimum payment repayment
estimate calculated using the guidance in this Appendix, so long as the
issuer discloses the
[[Page 443]]
correct number of years to the consumer based on the rounding rule set
forth in Sec. 1026.7(b)(12)(i)(B), the issuer would be in compliance
with this guidance. For example, assume the minimum payment repayment
estimate calculated using the guidance in this appendix is 32 months (2
years, 8 months), and the minimum payment repayment estimate calculated
by the issuer is 38 months (3 years, 2 months). Under the rounding rule
set forth in Sec. 1026.7(b)(12)(i)(B), both of these estimates would be
rounded and disclosed to the consumer as 3 years. Thus, if the issuer
disclosed 3 years to the consumer, the issuer would be in compliance
with this guidance even though the minimum payment repayment estimate
calculated by the issuer is outside the 2 months' tolerance amount.
(c) Calculating the minimum payment total cost estimate. When
calculating the minimum payment total cost estimate, a card issuer must
total the dollar amount of the interest and principal that the consumer
would pay if he or she made minimum payments for the length of time
calculated as the minimum payment repayment estimate under paragraph (b)
of this Appendix. The minimum payment total cost estimate is deemed to
be accurate if it is based on a minimum payment repayment estimate that
is within the tolerance guidance set forth in paragraph (b)(5) of this
Appendix. For example, assume the minimum payment repayment estimate
calculated using the guidance in this appendix is 28 months (2 years, 4
months), and the minimum payment repayment estimate calculated by the
issuer is 30 months (2 years, 6 months). The minimum payment total cost
estimate will be deemed accurate even if it is based on the 30 month
estimate for length of repayment, because the issuer's minimum payment
repayment estimate is within the 2 months' tolerance, prior to rounding.
In addition, assume the minimum payment repayment estimate calculated
under this appendix is 32 months (2 years, 8 months), and the minimum
payment repayment estimate calculated by the issuer is 38 months (3
years, 2 months). Under the rounding rule set forth in Sec.
1026.7(b)(12)(i)(B), both of these estimates would be rounded and
disclosed to the consumer as 3 years. If the issuer based the minimum
payment total cost estimate on 38 months (or any other minimum payment
repayment estimate that would be rounded to 3 years), the minimum
payment total cost estimate would be deemed to be accurate.
(d) Calculating the estimated monthly payment for repayment in 36
months--(1) In general. When calculating the estimated monthly payment
for repayment in 36 months, a card issuer must calculate the estimated
monthly payment amount that would be required to pay off the outstanding
balance shown on the statement within 36 months, assuming the consumer
paid the same amount each month for 36 months.
(2) Weighted annual percentage rate. In calculating the estimated
monthly payment for repayment in 36 months, an issuer may use a weighted
annual percentage rate that is based on the annual percentage rates that
apply to a cardholder's account and the portion of the balance to which
the rate applies, as shown in appendix M2 to this part. If a card issuer
uses a weighted annual percentage rate and any promotional terms related
to annual percentage rates apply to a cardholder's account, other than
deferred interest plans or similar plans, in calculating the weighted
annual percentage rate, the issuer must calculate a weighted average of
the promotional rate and the rate that will apply after the promotional
rate expires based on the percentage of 36 months each rate will apply,
as shown in appendix M2 to this part. For deferred interest plans or
similar plans, if minimum payments under the deferred interest or
similar plan will repay the balances or transactions in full prior to
the expiration of the specified period of time, if a card issuer uses a
weighted annual percentage rate, the card issuer must assume that the
consumer will not be obligated to pay the accrued interest. This means,
in calculating the weighted annual percentage rate, the card issuer must
apply a zero percent annual percentage rate to the balance subject to
the deferred interest or similar plan. If, however, minimum payments
under the deferred interest plan or similar plan may not repay the
balances or transactions in full prior to the expiration of the
specified period of time, a card issuer in calculating the weighted
annual percentage rate must assume that a consumer will not repay the
balances or transactions in full prior to the expiration of the
specified period of time and thus the consumer will be obligated to pay
the accrued interest. This means, in calculating the weighted annual
percentage rate, the card issuer must apply the annual percentage rate
at which interest is accruing to the balance subject to the deferred
interest or similar plan. A card issuer may use a method of calculating
the estimated monthly payment for repayment in 36 months other than a
weighted annual percentage rate, so long as the calculation results in
the same payment amount each month and so long as the total of the
payments would pay off the outstanding balance shown on the periodic
statement within 36 months.
(3) Assumptions. In calculating the estimated monthly payment for
repayment in 36 months, a card issuer must use the same terms described
in paragraph (b) of this Appendix, as appropriate.
(4) Tolerance. An estimated monthly payment for repayment in 36
months shall be considered accurate if it is not more than 10 percent
above or below the estimated monthly payment for repayment in 36 months
determined in accordance with the guidance in
[[Page 444]]
this appendix (after rounding described in Sec.
1026.7(b)(12)(i)(F)(1)(i)).
(e) Calculating the total cost estimate for repayment in 36 months.
When calculating the total cost estimate for repayment in 36 months, a
card issuer must total the dollar amount of the interest and principal
that the consumer would pay if he or she made the estimated monthly
payment calculated under paragraph (d) of this appendix each month for
36 months. The total cost estimate for repayment in 36 months shall be
considered accurate if it is based on the estimated monthly payment for
repayment in 36 months that is calculated in accordance with paragraph
(d) of this appendix.
(f) Calculating the savings estimate for repayment in 36 months.
When calculating the savings estimate for repayment in 36 months, if a
card issuer chooses under Sec. 1026.7(b)(12)(i) to round the
disclosures to the nearest whole dollar when disclosing them on the
periodic statement, the card issuer must calculate the savings estimate
for repayment in 36 months by subtracting the total cost estimate for
repayment in 36 months calculated under paragraph (e) of this appendix
(rounded to the nearest whole dollar) from the minimum payment total
cost estimate calculated under paragraph (c) of this appendix (rounded
to the nearest whole dollar). If a card issuer chooses under Sec.
1026.7(b)(12)(i), however, to round the disclosures to the nearest cent
when disclosing them on the periodic statement, the card issuer must
calculate the savings estimate for repayment in 36 months by subtracting
the total cost estimate for repayment in 36 months calculated under
paragraph (e) of this appendix (rounded to the nearest cent) from the
minimum payment total cost estimate calculated under paragraph (c) of
this appendix (rounded to the nearest cent). The savings estimate for
repayment in 36 months shall be considered accurate if it is based on
the total cost estimate for repayment in 36 months that is calculated in
accordance with paragraph (e) of this appendix and the minimum payment
total cost estimate calculated under paragraph (c) of this appendix.
Sec. Appendix M2 to Part 1026--Sample Calculations of Repayment
Disclosures
The following is an example of how to calculate the minimum payment
repayment estimate, the minimum payment total cost estimate, the
estimated monthly payment for repayment in 36 months, the total cost
estimate for repayment in 36 months, and the savings estimate for
repayment in 36 months using the guidance in appendix M1 to this part
where three annual percentage rates apply (where one of the rates is a
promotional APR), the total outstanding balance is $1000, and the
minimum payment formula is 2 percent of the outstanding balance or $20,
whichever is greater. The following calculation is written in SAS code.
data one;
/*
Note:
pmt01 = estimated monthly payment to repay balance in 36 months
sumpmts36 = sum of payments for repayment in 36 months
month = number of months to repay total balance if making only minimum
payments
pmt = minimum monthly payment
fc = monthly finance charge
sumpmts = sum of payments for minimum payments
*/
* inputs;
* annual percentage rates; apr1 = 0.0; apr2 = 0.17; apr3 = 0.21; *
insert in ascending order;
* outstanding balances; cbal1 = 500; cbal2 = 250; cbal3 = 250;
* dollar minimum payment; dmin = 20;
* percent minimum payment; pmin = 0.02; * (0.02 + perrate);
* promotional rate information;
* last month for promotional rate; expm = 6; * = 0 if no promotional
rate;
* regular rate; rrate = .17; * = 0 if no promotional rate;
array apr(3); array perrate(3);
days = 365/12; * calculate days in month;
* calculate estimated monthly payment to pay off balances in 36 months,
and total cost of repaying balance in 36 months;
array xperrate(3);
do I = 1 to 3;
xperrate(I) = (apr(I)/365) * days; * calculate periodic rate;
end;
if expmgt 0 then xperrate1a = (expm/36) * xperrate1 + (1-(expm/36)) *
(rrate/365) * days; else xperrate1a = xperrate1;
tbal = cbal1 + cbal2 + cbal3;
perrate36 = (cbal1 * xperrate1a + cbal2 * xperrate2 + cbal3 *
xperrate3)/(cbal1 + cbal2 + cbal3);
* months to repay; dmonths = 36;
* initialize counters for sum of payments for repayment in 36 months;
Sumpmts36 = 0;
pvaf = (1-(1 + perrate36) ** -dmonths)/perrate36; * calculate
present value of annuity factor;
pmt01 = round(tbal/pvaf,0.01); * calculate monthly payment for
designated number of months;
sumpmts36 = pmt01 * 36;
* calculate time to repay and total cost of making minimum payments each
month;
* initialize counter for months, and sum of payments;
month = 0;
sumpmts = 0;
do I = 1 to 3;
[[Page 445]]
perrate(I) = (apr(I)/365) * days; * calculate periodic rate;
end;
put perrate1 = perrate2 = perrate3 =;
eins:
month = month + 1; * increment month counter;
pmt = round(pmin * tbal,0.01); * calculate payment as percentage of
balance;
if month geexpm and expm ne 0 then perrate1 = (rrate/365) * days;
if pmtltdmin then pmt = dmin; * set dollar minimum payment;
array xxxbal(3); array cbal(3);
do I = 1 to 3;
xxxbal(I) = round(cbal(I) * (1 + perrate(I)),0.01);
end;
fc = xxxbal1 + xxxbal2 + xxxbal3 - tbal;
if pmtgt (tbal + fc) then do;
do I = 1 to 3;
if cbal(I) gt 0 then pmt = round(cbal(I) * (1 + perrate(I)),0.01); * set
final payment amount;
end;
end;
if pmt le xxxbal1 then do;
cbal1 = xxxbal1 - pmt;
cbal2 = xxxbal2;
cbal3 = xxxbal3;
end;
if pmtgt xxxbal1 and xxxbal2 gt 0 and pmt le (xxxbal1 + xxxbal2) then
do;
cbal2 = xxxbal2 - (pmt - xxxbal1);
cbal1 = 0;
cbal3 = xxxbal3;
end;
if pmtgt xxxbal2 and xxxbal3 gt 0 then do;
cbal3 = xxxbal3 - (pmt - xxxbal1 - xxxbal2);
cbal2 = 0;
end;
sumpmts = sumpmts + pmt; * increment sum of payments;
tbal = cbal1 + cbal2 + cbal3; * calculate new total balance;
* print month, balance, payment amount, and finance charge;
put month = tbal = cbal1 = cbal2 = cbal3 = pmt = fc =;
if tbalgt 0 then go to eins; * go to next month if balance is greater
than zero;
* initialize total cost savings;
savtot = 0;
savtot = round(sumpmts,1)--round (sumpmts36,1);
* print number of months to repay debt if minimum payments made, final
balance (zero), total cost if minimum payments made, estimated
monthly payment for repayment in 36 months, total cost for
repayment in 36 months, and total savings if repaid in 36
months;
put title = ` ';
put title = `number of months to repay debt if minimum payment made,
final balance, total cost if minimum payments made, estimated
monthly payment for repayment in 36 months, total cost for
repayment in 36 months, and total savings if repaid in 36
months';
put month = tbal = sumpmts = pmt01 = sumpmts36 = savtot =;
put title = ` ';
run;
Sec. Appendix N to Part 1026--Higher-Priced Mortgage Loan Appraisal Safe
Harbor Review
To qualify for the safe harbor provided in Sec. 1026.35(c)(3)(ii),
a creditor must confirm that the written appraisal:
1. Identifies the creditor who ordered the appraisal and the
property and the interest being appraised.
2. Indicates whether the contract price was analyzed.
3. Addresses conditions in the property's neighborhood.
4. Addresses the condition of the property and any improvements to
the property.
5. Indicates which valuation approaches were used, and includes a
reconciliation if more than one valuation approach was used.
6. Provides an opinion of the property's market value and an
effective date for the opinion.
7. Indicates that a physical property visit of the interior of the
property was performed, as applicable.
8. Includes a certification signed by the appraiser that the
appraisal was prepared in accordance with the requirements of the
Uniform Standards of Professional Appraisal Practice.
9. Includes a certification signed by the appraiser that the
appraisal was prepared in accordance with the requirements of title XI
of the Financial Institutions Reform, Recovery and Enforcement Act of
1989, as amended (12 U.S.C. 3331 et seq.), and any implementing
regulations.
[78 FR 10444, Feb. 13, 2013, as amended at 78 FR 78586, Dec. 26, 2013]
Sec. Appendix O to Part 1026--Illustrative Written Source Documents for
Higher-Priced Mortgage Loan Appraisal Rules
A creditor acts with reasonable diligence under Sec.
1026.35(c)(4)(vi)(A) if the creditor bases its determination on
information contained in written source documents, such as:
1. A copy of the recorded deed from the seller.
2. A copy of a property tax bill.
3. A copy of any owner's title insurance policy obtained by the
seller.
4. A copy of the RESPA settlement statement from the seller's
acquisition (i.e., the HUD-1 or any successor form).
[[Page 446]]
5. A property sales history report or title report from a third-
party reporting service.
6. Sales price data recorded in multiple listing services.
7. Tax assessment records or transfer tax records obtained from
local governments.
8. A written appraisal performed in compliance with Sec.
1026.35(c)(3)(i) for the same transaction.
9. A copy of a title commitment report detailing the seller's
ownership of the property, the date it was acquired, or the price at
which the seller acquired the property.
10. A property abstract.
[78 FR 10444, Feb. 13, 2013]
Sec. Appendix P to Part 1026 [Reserved]
Sec. Appendix Q to Part 1026--Standards for Determining Monthly Debt and
Income
Section 1026.43(e)(2)(vi) provides that, to satisfy the requirements
for a qualified mortgage under Sec. 1026.43(e)(2), the ratio of the
consumer's total monthly debt payments to total monthly income at the
time of consummation cannot exceed 43 percent. Section
1026.43(e)(2)(vi)(A) requires the creditor to calculate the ratio of the
consumer's total monthly debt payments to total monthly income using the
following standards, with additional requirements for calculating debt
and income appearing in Sec. 1026.43(e)(2)(vi)(B). Where guidance
issued by the U.S. Department of Housing and Urban Development, the U.S.
Department of Veterans Affairs, the U.S. Department of Agriculture, or
the Rural Housing Service, or issued by the Federal National Mortgage
Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation
(Freddie Mac) while operating under the conservatorship or receivership
of the Federal Housing Finance Agency, or issued by a limited-life
regulatory entity succeeding the charter of either Fannie Mae or Freddie
Mac (collectively, Agency or GSE guidance) is in accordance with
appendix Q, creditors may look to that guidance as a helpful resource in
applying appendix Q. Moreover, when the following standards do not
resolve how a specific kind of debt or income should be treated, the
creditor may either (1) exclude the income or include the debt, or (2)
rely on Agency or GSE guidance to resolve the issue. The following
standards resolve the appropriate treatment of a specific kind of debt
or income where the standards provide a discernible answer to the
question of how to treat the debt or income. However, a creditor may not
rely on Agency or GSE guidance to reach a resolution contrary to that
provided by the following standards, even if such Agency or GSE guidance
specifically addresses the particular type of debt or income but the
following standards provide more generalized guidance.
I. Consumer Employment Related Income
A. Stability of Income
1. Effective Income. Income may not be used in calculating the
consumer's debt-to-income ratio if it comes from any source that cannot
be verified, is not stable, or will not continue.
2. Verifying Employment History.
a. The creditor must verify the consumer's employment for the most
recent two full years, and the creditor must require the consumer to:
i. Explain any gaps in employment that span one or more months, and
ii. Indicate if he/she was in school or the military for the recent
two full years, providing evidence supporting this claim, such as
college transcripts, or discharge papers.
b. Allowances can be made for seasonal employment, typical for the
building trades and agriculture, if documented by the creditor.
Note: A consumer with a 25 percent or greater ownership interest in
a business is considered self-employed and will be evaluated as a self-
employed consumer.
3. Analyzing a Consumer's Employment Record.
a. When analyzing a consumer's employment, creditors must examine:
i. The consumer's past employment record; and
ii. The employer's confirmation of current, ongoing employment
status.
Note: Creditors may assume that employment is ongoing if a
consumer's employer verifies current employment and does not indicate
that employment has been, or is set to be terminated. Creditors should
not rely upon a verification of current employment that includes an
affirmative statement that the employment is likely to cease, such as a
statement that indicates the employee has given (or been given) notice
of employment suspension or termination.
b. Creditors may favorably consider the stability of a consumer's
income if he/she changes jobs frequently within the same line of work,
but continues to advance in income or benefits. In this analysis, income
stability takes precedence over job stability.
4. Consumers Returning to Work After an Extended Absence. A
consumer's income may be considered effective and stable when recently
returning to work after an extended absence if he/she:
a. Is employed in the current job for six months or longer; and
b. Can document a two year work history prior to an absence from
employment using:
i. Traditional employment verifications; and/or
ii. Copies of IRS Form W-2s or pay stubs.
[[Page 447]]
Note: An acceptable employment situation includes individuals who
took several years off from employment to raise children, then returned
to the workforce.
c. Important: Situations not meeting the criteria listed above may
not be used in qualifying. Extended absence is defined as six months.
B. Salary, Wage and Other Forms of Income
1. General Policy on Consumer Income Analysis.
a. The income of each consumer who will be obligated for the
mortgage debt and whose income is being relied upon in determining
ability to repay must be analyzed to determine whether his/her income
level can be reasonably expected to continue.
b. In most cases, a consumer's income is limited to salaries or
wages. Income from other sources can be considered as effective, when
properly verified and documented by the creditor.
Notes: i. Effective income for consumers planning to retire during
the first three-year period must include the amount of:
a. Documented retirement benefits;
b. Social Security payments; or
c. Other payments expected to be received in retirement.
ii. Creditors must not ask the consumer about possible, future
maternity leave.
iii. Creditors may assume that salary or wage income from employment
verified in accordance with section I.A.3 above can be reasonably
expected to continue if a consumer's employer verifies current
employment and income and does not indicate that employment has been, or
is set to be terminated. Creditors should not assume that income can be
reasonably expected to continue if a verification of current employment
includes an affirmative statement that the employment is likely to
cease, such as a statement that indicates the employee has given (or
been given) notice of employment suspension or termination.
2. Overtime and Bonus Income.
a. Overtime and bonus income can be used to qualify the consumer if
he/she has received this income for the past two years, and
documentation submitted for the loan does not indicate this income will
likely cease. If, for example, the employment verification states that
the overtime and bonus income is unlikely to continue, it may not be
used in qualifying.
b. The creditor must develop an average of bonus or overtime income
for the past two years. Periods of overtime and bonus income less than
two years may be acceptable, provided the creditor can justify and
document in writing the reason for using the income for qualifying
purposes.
3. Establishing an Overtime and Bonus Income Earning Trend.
a. The creditor must establish and document an earnings trend for
overtime and bonus income. If either type of income shows a continual
decline, the creditor must document in writing a sound rationalization
for including the income when qualifying the consumer.
b. A period of more than two years must be used in calculating the
average overtime and bonus income if the income varies significantly
from year to year.
4. Qualifying Part-Time Income.
a. Part-time and seasonal income can be used to qualify the consumer
if the creditor documents that the consumer has worked the part-time job
uninterrupted for the past two years, and plans to continue. Many low
and moderate income families rely on part-time and seasonal income for
day to day needs, and creditors should not restrict consideration of
such income when qualifying the income of these consumers.
b. Part-time income received for less than two years may be included
as effective income, provided that the creditor justifies and documents
that the income is likely to continue.
c. Part-time income not meeting the qualifying requirements may not
be used in qualifying.
Note: For qualifying purposes, ``part-time'' income refers to
employment taken to supplement the consumer's income from regular
employment; part-time employment is not a primary job and it is worked
less than 40 hours.
5. Income from Seasonal Employment.
a. Seasonal income is considered uninterrupted, and may be used to
qualify the consumer, if the creditor documents that the consumer:
i. Has worked the same job for the past two years, and
ii. Expects to be rehired the next season.
b. Seasonal employment includes, but is not limited to:
i. Umpiring baseball games in the summer; or
ii. Working at a department store during the holiday shopping
season.
6. Primary Employment Less Than 40 Hour Work Week.
a. When a consumer's primary employment is less than a typical 40-
hour work week, the creditor should evaluate the stability of that
income as regular, on-going primary employment.
b. Example: A registered nurse may have worked 24 hours per week for
the last year. Although this job is less than the 40-hour work week, it
is the consumer's primary employment, and should be considered effective
income.
7. Commission Income.
[[Page 448]]
a. Commission income must be averaged over the previous two years.
To qualify commission income, the consumer must provide:
i. Copies of signed tax returns for the last two years; and
ii. The most recent pay stub.
b. Consumers whose commission income was received for more than one
year, but less than two years may be considered favorably if the
underwriter can:
i. Document the likelihood that the income will continue, and
ii. Soundly rationalize accepting the commission income.
Notes: i. Unreimbursed business expenses must be subtracted from
gross income.
ii. A commissioned consumer is one who receives more than 25 percent
of his/her annual income from commissions.
iii. A tax transcript obtained directly from the IRS may be used in
lieu of signed tax returns.
8. Qualifying Commission Income Earned for Less Than One Year.
a. Commission income earned for less than one year is not considered
effective income. Exceptions may be made for situations in which the
consumer's compensation was changed from salary to commission within a
similar position with the same employer.
b. A consumer's income may also qualify when the portion of earnings
not attributed to commissions would be sufficient to qualify the
consumer for the mortgage.
9. Employer Differential Payments.
If the employer subsidizes a consumer's mortgage payment through
direct payments, the amount of the payments:
a. Is considered gross income, and
b. Cannot be used to offset the mortgage payment directly, even if
the employer pays the servicing creditor directly.
10. Retirement Income.
Retirement income must be verified from the former employer, or from
Federal tax returns. If any retirement income, such as employer pensions
or 401(k)'s, will cease within the first full three years of the
mortgage loan, such income may not be used in qualifying.
11. Social Security Income.
Social Security income must be verified by a Social Security
Administration benefit verification letter (sometimes called a ``proof
of income letter,'' ``budget letter,'' ``benefits letter,'' or ``proof
of award letter''). If any benefits expire within the first full three
years of the loan, the income source may not be used in qualifying.
Notes: i. If the Social Security Administration benefit verification
letter does not indicate a defined expiration date within three years of
loan origination, the creditor shall consider the income effective and
likely to continue. Pending or current re-evaluation of medical
eligibility for benefit payments is not considered an indication that
the benefit payments are not likely to continue.
ii. Some portion of Social Security income may be ``grossed up'' if
deemed nontaxable by the IRS.
12. Automobile Allowances and Expense Account Payments.
a. Only the amount by which the consumer's automobile allowance or
expense account payments exceed actual expenditures may be considered
income.
b. To establish the amount to add to gross income, the consumer must
provide the following:
i. IRS Form 2106, Employee Business Expenses, for the previous two
years; and
ii. Employer verification that the payments will continue.
c. If the consumer uses the standard per-mile rate in calculating
automobile expenses, as opposed to the actual cost method, the portion
that the IRS considers depreciation may be added back to income.
d. Expenses that must be treated as recurring debt include:
i. The consumer's monthly car payment; and
ii. Any loss resulting from the calculation of the difference
between the actual expenditures and the expense account allowance.
C. Consumers Employed by a Family Owned Business.
1. Income Documentation Requirement.
In addition to normal employment verification, a consumer employed
by a family owned business is required to provide evidence that he/she
is not an owner of the business, which may include:
a. Copies of signed personal tax returns, or
b. A signed copy of the corporate tax return showing ownership
percentage.
Note: A tax transcript obtained directly from the IRS may be used in
lieu of signed tax returns.
D. General Information on Self-Employed Consumers and Income Analysis.
1. Definition: Self-Employed Consumer.
A consumer with a 25 percent or greater ownership interest in a
business is considered self-employed.
2. Types of Business Structures.
There are four basic types of business structures. They include:
a. Sole proprietorships;
b. Corporations;
c. Limited liability or ``S'' corporations; and
d. Partnerships.
3. Minimum Length of Self Employment.
a. Income from self-employment is considered stable, and effective,
if the consumer has been self-employed for two or more years.
[[Page 449]]
b. Due to the high probability of failure during the first few years
of a business, the requirements described in the table below are
necessary for consumers who have been self-employed for less than two
years.
[GRAPHIC] [TIFF OMITTED] TR24JY13.000
4. General Documentation Requirements for Self-Employed Consumers.
Self-employed consumers must provide the following documentation:
a. Signed, dated individual tax returns, with all applicable tax
schedules for the most recent two years;
b. For a corporation, ``S'' corporation, or partnership, signed
copies of Federal business income tax returns for the last two years,
with all applicable tax schedules; and
c. Year to date profit and loss (P&L) statement and balance sheet.
5. Establishing a Self-Employed Consumer's Earnings Trend.
a. When qualifying income, the creditor must establish the
consumer's earnings trend from the previous two years using the
consumer's tax returns.
b. If a consumer:
i. Provides quarterly tax returns, the income analysis may include
income through the period covered by the tax filings, or
ii. Is not subject to quarterly tax returns, or does not file them,
then the income shown on the P&L statement may be included in the
analysis, provided the income stream based on the P&L is consistent with
the previous years' earnings.
c. If the P&L statements submitted for the current year show an
income stream considerably greater than what is supported by the
previous year's tax returns, the creditor must base the income analysis
solely on the income verified through the tax returns.
d. If the consumer's earnings trend for the previous two years is
downward and the most recent tax return or P&L is less than the prior
year's tax return, the consumer's most recent year's tax return or P&L
must be used to calculate his/her income.
6. Analyzing the Business's Financial Strength.
The creditor must consider the business's financial strength by
examining annual earnings. Annual earnings that are stable or increasing
are acceptable, while businesses that show a significant decline in
income over the analysis period are not acceptable.
E. Income Analysis: Individual Tax Returns (IRS Form 1040).
1. General Policy on Adjusting Income Based on a Review of IRS Form
1040.
The amount shown on a consumer's IRS Form 1040 as adjusted gross
income must either be increased or decreased based on the creditor's
analysis of the individual tax return and any related tax schedules.
2. Guidelines for Analyzing IRS Form 1040.
The table below contains guidelines for analyzing IRS Form 1040:
[[Page 450]]
[GRAPHIC] [TIFF OMITTED] TR24JY13.001
F. Income Analysis: Corporate Tax Returns (IRS Form 1120).
1. Description: Corporation.
A corporation is a State-chartered business owned by its
stockholders.
2. Need To Obtain Consumer Percentage of Ownership Information.
[[Page 451]]
a. Corporate compensation to the officers, generally in proportion
to the percentage of ownership, is shown on the:
i. Corporate tax return IRS Form 1120; and
ii. Individual tax returns.
b. When a consumer's percentage of ownership does not appear on the
tax returns, the creditor must obtain the information from the
corporation's accountant, along with evidence that the consumer has the
right to any compensation.
3. Analyzing Corporate Tax Returns.
a. In order to determine a consumer's self-employed income from a
corporation the adjusted business income must:
i. Be determined; and
ii. Multiplied by the consumer's percentage of ownership in the
business.
b. The table below describes the items found on IRS Form 1120 for
which an adjustment must be made in order to determine adjusted business
income.
[GRAPHIC] [TIFF OMITTED] TR24JY13.002
G. Income Analysis: ``S'' Corporation Tax Returns (IRS Form 1120S).
1. Description: ``S'' Corporation.
a. An ``S'' corporation is generally a small, start-up business,
with gains and losses passed to stockholders in proportion to each
stockholder's percentage of business ownership.
b. Income for owners of ``S'' corporations comes from IRS Form W-2
wages, and is taxed at the individual rate. The IRS Form 1120S,
Compensation of Officers line item is transferred to the consumer's
individual IRS Form 1040.
2. Analyzing ``S'' Corporation Tax Returns.
a. ``S'' corporation depreciation and depletion may be added back to
income in proportion to the consumer's share of the corporation's
income.
b. In addition, the income must also be reduced proportionately by
the total obligations payable by the corporation in less than one year.
c. Important: The consumer's withdrawal of cash from the corporation
may have a severe negative impact on the corporation's ability to
continue operating, and must be considered in the income analysis.
H. Income Analysis: Partnership Tax Returns (IRS Form 1065).
1. Description: Partnership.
a. A partnership is formed when two or more individuals form a
business, and share in profits, losses, and responsibility for running
the company.
b. Each partner pays taxes on his/her proportionate share of the
partnership's net income.
2. Analyzing Partnership Tax Returns.
a. Both general and limited partnerships report income on IRS Form
1065, and the partners' share of income is carried over to Schedule E of
IRS Form 1040.
b. The creditor must review IRS Form 1065 to assess the viability of
the business. Both depreciation and depletion may be added back to the
income in proportion to the consumer's share of income.
c. Income must also be reduced proportionately by the total
obligations payable by the partnership in less than one year.
d. Important: Cash withdrawals from the partnership may have a
severe negative impact on the partnership's ability to continue
operating, and must be considered in the income analysis.
II. Non-Employment Related Consumer Income
A. Alimony, Child Support, and Maintenance Income Criteria.
Alimony, child support, or maintenance income may be considered
effective, if:
1. Payments are likely to be received consistently for the first
three years of the mortgage;
2. The consumer provides the required documentation, which includes
a copy of the:
[[Page 452]]
i. Final divorce decree;
ii. Legal separation agreement;
iii. Court order; or
iv. Voluntary payment agreement; and
3. The consumer can provide acceptable evidence that payments have
been received during the last 12 months, such as:
i. Cancelled checks;
ii. Deposit slips;
iii. Tax returns; or
iv. Court records.
Notes: i. Periods less than 12 months may be acceptable, provided
the creditor can adequately document the payer's ability and willingness
to make timely payments.
ii. Child support may be ``grossed up'' under the same provisions as
non-taxable income sources.
B. Investment and Trust Income.
1. Analyzing Interest and Dividends.
a. Interest and dividend income may be used as long as tax returns
or account statements support a two-year receipt history. This income
must be averaged over the two years.
b. Subtract any funds that are derived from these sources, and are
required for the cash investment, before calculating the projected
interest or dividend income.
2. Trust Income.
a. Income from trusts may be used if constant payments will continue
for at least the first three years of the mortgage term as evidenced by
trust income documentation.
b. Required trust income documentation includes a copy of the Trust
Agreement or other trustee statement, confirming the:
i. Amount of the trust;
ii. Frequency of distribution; and
iii. Duration of payments.
c. Trust account funds may be used for the required cash investment
if the consumer provides adequate documentation that the withdrawal of
funds will not negatively affect income. The consumer may use funds from
the trust account for the required cash investment, but the trust income
used to determine repayment ability cannot be affected negatively by its
use.
3. Notes Receivable Income.
a. In order to include notes receivable income, the consumer must
provide:
i. A copy of the note to establish the amount and length of payment,
and
ii. Evidence that these payments have been consistently received for
the last 12 months through deposit slips, deposit receipts, cancelled
checks, bank or other account statements, or tax returns.
b. If the consumer is not the original payee on the note, the
creditor must establish that the consumer is able to enforce the note.
4. Eligible Investment Properties.
Follow the steps in the table below to calculate an investment
property's income or loss if the property to be subject to a mortgage is
an eligible investment property.
[GRAPHIC] [TIFF OMITTED] TR24JY13.003
C. Military, Government Agency, and Assistance Program Income.
1. Military Income.
a. Military personnel not only receive base pay, but often times are
entitled to additional forms of pay, such as:
i. Income from variable housing allowances;
ii. Clothing allowances;
iii. Flight or hazard pay;
iv. Rations; and
v. Proficiency pay.
b. These types of additional pay are acceptable when analyzing a
consumer's income as long as the probability of such pay to continue is
verified in writing.
Note: The tax-exempt nature of some of the above payments should
also be considered.
2. VA Benefits.
a. Direct compensation for service-related disabilities from the
Department of Veterans Affairs (VA) is acceptable, provided the creditor
receives documentation from the VA.
[[Page 453]]
b. Education benefits used to offset education expenses are not
acceptable.
3. Government Assistance Programs.
a. Income received from government assistance programs is acceptable
as long as the paying agency provides documentation indicating that the
income is expected to continue for at least three years.
b. If the income from government assistance programs will not be
received for at least three years, it may not be used in qualifying.
c. Unemployment income must be documented for two years, and there
must be reasonable assurance that this income will continue. This
requirement may apply to seasonal employment.
Note: Social Security income is acceptable as provided in section
I.B.11.
4. Mortgage Credit Certificates.
a. If a government entity subsidizes the mortgage payments either
through direct payments or tax rebates, these payments may be considered
as acceptable income.
b. Either type of subsidy may be added to gross income, or used
directly to offset the mortgage payment, before calculating the
qualifying ratios.
5. Homeownership Subsidies.
a. A monthly subsidy may be treated as income, if a consumer is
receiving subsidies under the housing choice voucher home ownership
option from a public housing agency (PHA). Although continuation of the
homeownership voucher subsidy beyond the first year is subject to
Congressional appropriation, for the purposes of underwriting, the
subsidy will be assumed to continue for at least three years.
b. If the consumer is receiving the subsidy directly, the amount
received is treated as income. The amount received may also be treated
as nontaxable income and be ``grossed up'' by 25 percent, which means
that the amount of the subsidy, plus 25 percent of that subsidy may be
added to the consumer's income from employment and/or other sources.
c. Creditors may treat this subsidy as an ``offset'' to the monthly
mortgage payment (that is, reduce the monthly mortgage payment by the
amount of the home ownership assistance payment before dividing by the
monthly income to determine the payment-to-income and debt-to-income
ratios). The subsidy payment must not pass through the consumer's hands.
d. The assistance payment must be:
i. Paid directly to the servicing creditor; or
ii. Placed in an account that only the servicing creditor may
access.
Note: Assistance payments made directly to the consumer must be
treated as income.
D. Rental Income.
1. Analyzing the Stability of Rental Income.
a. Rent received for properties owned by the consumer is acceptable
as long as the creditor can document the stability of the rental income
through:
i. A current lease;
ii. An agreement to lease; or
iii. A rental history over the previous 24 months that is free of
unexplained gaps greater than three months (such gaps could be explained
by student, seasonal, or military renters, or property rehabilitation).
b. A separate schedule of real estate is not required for rental
properties as long as all properties are documented on the Uniform
Residential Loan Application.
Note: The underwriting analysis may not consider rental income from
any property being vacated by the consumer, except under the
circumstances described below.
2. Rental Income From Consumer Occupied Property.
a. The rent for multiple unit property where the consumer resides in
one or more units and charges rent to tenants of other units may be used
for qualifying purposes.
b. Projected rent for the tenant-occupied units only may:
i. Be considered gross income, only after deducting vacancy and
maintenance factors, and
ii. Not be used as a direct offset to the mortgage payment.
3. Income from Roommates or Boarders in a Single Family Property.
a. Rental income from roommates or boarders in a single family
property occupied as the consumer's primary residence is acceptable.
b. The rental income may be considered effective if shown on the
consumer's tax return. If not on the tax return, rental income paid by
the roommate or boarder may not be used in qualifying.
4. Documentation Required To Verify Rental Income.
Analysis of the following required documentation is necessary to
verify all consumer rental income:
a. IRS Form 1040 Schedule E; and
b. Current leases/rental agreements.
5. Analyzing IRS Form 1040 Schedule E.
a. The IRS Form 1040 Schedule E is required to verify all rental
income. Depreciation shown on Schedule E may be added back to the net
income or loss.
b. Positive rental income is considered gross income for qualifying
purposes, while negative income must be treated as a recurring
liability.
c. The creditor must confirm that the consumer still owns each
property listed, by comparing Schedule E with the real estate owned
section of the Uniform Residential Loan Application (URLA).
6. Using Current Leases To Analyze Rental Income.
[[Page 454]]
a. The consumer can provide a current signed lease or other rental
agreement for a property that was acquired since the last income tax
filing, and is not shown on Schedule E.
b. In order to calculate the rental income:
i. Reduce the gross rental amount by 25 percent for vacancies and
maintenance;
ii. Subtract PITI and any homeowners association dues; and
iii. Apply the resulting amount to income, if positive, or recurring
debts, if negative.
7. Exclusion of Rental Income From Property Being Vacated by the
Consumer. Underwriters may not consider any rental income from a
consumer's principal residence that is being vacated in favor of another
principal residence, except under the conditions described below:
Notes: i. This policy assures that a consumer either has sufficient
income to make both mortgage payments without any rental income, or has
an equity position not likely to result in defaulting on the mortgage on
the property being vacated.
ii. This applies solely to a principal residence being vacated in
favor of another principal residence. It does not apply to existing
rental properties disclosed on the loan application and confirmed by tax
returns (Schedule E of form IRS 1040).
8. Policy Exceptions Regarding the Exclusion of Rental Income From a
Principal Residence Being Vacated by a Consumer.
When a consumer vacates a principal residence in favor of another
principal residence, the rental income, reduced by the appropriate
vacancy factor, may be considered in the underwriting analysis under the
circumstances listed in the table below.
[GRAPHIC] [TIFF OMITTED] TR24JY13.004
E. Non-Taxable and Projected Income
1. Types of Non-Taxable Income.
Certain types of regular income may not be subject to Federal tax.
Such types of non-taxable income include:
a. Some portion of Social Security, some Federal government employee
retirement income, Railroad Retirement Benefits, and some State
government retirement income;
b. Certain types of disability and public assistance payments;
c. Child support;
d. Military allowances; and
e. Other income that is documented as being exempt from Federal
income taxes.
2. Adding Non-Taxable Income to a Consumer's Gross Income.
a. The amount of continuing tax savings attributed to regular income
not subject to Federal taxes may be added to the consumer's gross
income.
b. The percentage of non-taxable income that may be added cannot
exceed the appropriate tax rate for the income amount. Additional
allowances for dependents are not acceptable.
c. The creditor:
[[Page 455]]
i. Must document and support the amount of income grossed up for any
non-taxable income source, and
ii. Should use the tax rate used to calculate the consumer's last
year's income tax.
Note: If the consumer is not required to file a Federal tax return,
the tax rate to use is 25 percent.
3. Analyzing Projected Income.
a. Projected or hypothetical income is not acceptable for qualifying
purposes. However, exceptions are permitted for income from the
following sources:
i. Cost-of-living adjustments;
ii. Performance raises; and
iii. Bonuses.
b. For the above exceptions to apply, the income must be:
i. Verified in writing by the employer; and
ii. Scheduled to begin within 60 days of loan closing.
4. Projected Income for New Job.
a. Projected income is acceptable for qualifying purposes for a
consumer scheduled to start a new job within 60 days of loan closing if
there is a guaranteed, non-revocable contract for employment.
b. The creditor must verify that the consumer will have sufficient
income or cash reserves to support the mortgage payment and any other
obligations between loan closing and the start of employment. Examples
of this type of scenario are teachers whose contracts begin with the new
school year, or physicians beginning a residency after the loan closes.
c. The income does not qualify if the loan closes more than 60 days
before the consumer starts the new job.
III. Consumer Liabilities: Recurring Obligations
1. Types of Recurring Obligation. Recurring obligations include:
a. All installment loans;
b. Revolving charge accounts;
c. Real estate loans;
d. Alimony;
e. Child support; and
f. Other continuing obligations.
2. Debt to Income Ratio Computation for Recurring Obligations.
a. The creditor must include the following when computing the debt
to income ratios for recurring obligations:
i. Monthly housing expense; and
ii. Additional recurring charges extending ten months or more, such
as
a. Payments on installment accounts;
b. Child support or separate maintenance payments;
c. Revolving accounts; and
d. Alimony.
b. Debts lasting less than ten months must be included if the amount
of the debt affects the consumer's ability to pay the mortgage during
the months immediately after loan closing, especially if the consumer
will have limited or no cash assets after loan closing.
Note: Monthly payments on revolving or open-ended accounts,
regardless of the balance, are counted as a liability for qualifying
purposes even if the account appears likely to be paid off within 10
months or less.
3. Revolving Account Monthly Payment Calculation. If the credit
report shows any revolving accounts with an outstanding balance but no
specific minimum monthly payment, the payment must be calculated as the
greater of:
a. 5 percent of the balance; or
b. $10.
Note: If the actual monthly payment is documented from the creditor
or the creditor obtains a copy of the current statement reflecting the
monthly payment, that amount may be used for qualifying purposes.
4. Reduction of Alimony Payment for Qualifying Ratio Calculation.
Since there are tax consequences of alimony payments, the creditor may
choose to treat the monthly alimony obligation as a reduction from the
consumer's gross income when calculating the ratio, rather than treating
it as a monthly obligation.
IV. Consumer Liabilities: Contingent Liability
1. Definition: Contingent Liability. A contingent liability exists
when an individual is held responsible for payment of a debt if another
party, jointly or severally obligated, defaults on the payment.
2. Application of Contingent Liability Policies. The contingent
liability policies described in this topic apply unless the consumer can
provide conclusive evidence from the debt holder that there is no
possibility that the debt holder will pursue debt collection against
him/her should the other party default.
3. Contingent Liability on Mortgage Assumptions. Contingent
liability must be considered when the consumer remains obligated on an
outstanding FHA-insured, VA-guaranteed, or conventional mortgage secured
by property that:
a. Has been sold or traded within the last 12 months without a
release of liability, or
b. Is to be sold on assumption without a release of liability being
obtained.
4. Exemption From Contingent Liability Policy on Mortgage
Assumptions. When a mortgage is assumed, contingent liabilities need not
be considered if the:
a. Originating creditor of the mortgage being underwritten obtains,
from the servicer of the assumed loan, a payment history showing that
the mortgage has been current during the previous 12 months, or
b. Value of the property, as established by an appraisal or the
sales price on the HUD-
[[Page 456]]
1 Settlement Statement from the sale of the property, results in a loan-
to-value (LTV) ratio of 75 percent or less.
5. Contingent Liability on Cosigned Obligations.
a. Contingent liability applies, and the debt must be included in
the underwriting analysis, if an individual applying for a mortgage is a
cosigner/co-obligor on:
i. A car loan;
ii. A student loan;
iii. A mortgage; or
iv. Any other obligation.
b. If the creditor obtains documented proof that the primary obligor
has been making regular payments during the previous 12 months, and does
not have a history of delinquent payments on the loan during that time,
the payment does not have to be included in the consumer's monthly
obligations.
V. Consumer Liabilities: Projected Obligations and Obligations Not
Considered Debt
1. Projected Obligations
a. Debt payments, such as a student loan or balloon-payment note
scheduled to begin or come due within 12 months of the mortgage loan
closing, must be included by the creditor as anticipated monthly
obligations during the underwriting analysis.
b. Debt payments do not have to be classified as projected
obligations if the consumer provides written evidence that the debt will
be deferred to a period outside the 12-month timeframe.
c. Balloon-payment notes that come due within one year of loan
closing must be considered in the underwriting analysis.
2. Obligations Not Considered Debt
Obligations not considered debt, and therefore not subtracted from
gross income, include:
a. Federal, State, and local taxes;
b. Federal Insurance Contributions Act (FICA) or other retirement
contributions, such as 401(k) accounts (including repayment of debt
secured by these funds):
c. Commuting costs;
d. Union dues;
e. Open accounts with zero balances;
f. Automatic deductions to savings accounts;
g. Child care; and
h. Voluntary deductions.
[78 FR 44718, July 24, 2013]
Sec. Supplement I to Part 1026--Official Interpretations
Introduction
1. Official status. This commentary is the vehicle by which the
Bureau of Consumer Financial Protection issues official interpretations
of Regulation Z. Good faith compliance with this commentary affords
protection from liability under section 130(f) of the Truth in Lending
Act. Section 130(f) (15 U.S.C. 1640) protects creditors from civil
liability for any act done or omitted in good faith in conformity with
any interpretation issued by a duly authorized official or employee of
the Bureau of Consumer Financial Protection.
2. Procedure for requesting interpretations. Under appendix C of the
regulation, anyone may request an official interpretation.
Interpretations that are adopted will be incorporated in this commentary
following publication in the Federal Register. No official
interpretations are expected to be issued other than by means of this
commentary.
3. Rules of construction. (a) Lists that appear in the commentary
may be exhaustive or illustrative; the appropriate construction should
be clear from the context. In most cases, illustrative lists are
introduced by phrases such as ``including, but not limited to,'' ``among
other things,'' ``for example,'' or ``such as.''
(b) Throughout the commentary, reference to ``this section'' or
``this paragraph'' means the section or paragraph in the regulation that
is the subject of the comment.
4. Comment designations. Each comment in the commentary is
identified by a number and the regulatory section or paragraph which it
interprets. The comments are designated with as much specificity as
possible according to the particular regulatory provision addressed. For
example, some of the comments to Sec. 1026.18(b) are further divided by
subparagraph, such as comment 18(b)(1)-1 and comment 18(b)(2)-1. In
other cases, comments have more general application and are designated,
for example, as comment 18-1 or comment 18(b)-1. This introduction may
be cited as comments I-1 through I-4. Comments to the appendices may be
cited, for example, as comment app. A-1.
Subpart A--General
Section 1026.1--Authority, Purpose, Coverage, Organization, Enforcement
and Liability
1(c) Coverage
1. Foreign applicability. Regulation Z applies to all persons
(including branches of foreign banks and sellers located in the United
States) that extend consumer credit to residents (including resident
aliens) of any state as defined in Sec. 1026.2. If an account is
located in the United States and credit is extended to a U.S. resident,
the transaction is subject to the regulation. This will be the case
whether or not a particular advance or purchase on the account takes
place in the United States and whether or not the extender of credit is
chartered or based in the
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United States or a foreign country. For example, if a U.S. resident has
a credit card account located in the consumer's state issued by a bank
(whether U.S. or foreign-based), the account is covered by the
regulation, including extensions of credit under the account that occur
outside the United States. In contrast, if a U.S. resident residing or
visiting abroad, or a foreign national abroad, opens a credit card
account issued by a foreign branch of a U.S. bank, the account is not
covered by the regulation.
Paragraph 1(c)(5).
1. Exemption for certain mortgage transactions. Section 1026.1(c)(5)
implements sections 128(a)(16) through (19), 128(b)(4), 129C(f)(1),
129C(g)(2) and (3), 129C(h), 129D(h), 129D(j)(1)(A), and 129D(j)(1)(B)
of the Truth in Lending Act and section 4(c) of the Real Estate
Settlement Procedures Act, by exempting persons from the disclosure
requirements of those sections, except in certain transactions. The
exemptions do not apply to certain transactions for which the disclosure
requirements are implemented in other parts of Regulation Z. Sections
1026.37 and 1026.38 implement sections 128(a)(16) through (19),
128(b)(4), 129C(f)(1), 129C(g)(2) and (3), 129D(h), and 129D(j)(1)(A) of
the Truth in Lending Act and section 4(c) of the Real Estate Settlement
Procedures Act for transactions subject to Sec. 1026.19(e) and (f).
Section 1026.38(l)(5) implements the disclosure requirements of section
129C(h) of the Truth in Lending Act for transactions subject to Sec.
1026.19(f). Section 1026.39(d)(5) implements the disclosure requirements
of section 129C(h) of the Truth in Lending Act for transactions subject
to Sec. 1026.39(d)(5). Section 1026.20(e) implements the disclosure
requirements of section 129D(j)(1)(B) of the Truth in Lending Act for
transactions subject to Sec. 1026.20(e). Section 1026.1(c)(5) does not
exempt any person from any other requirement of this part, Regulation X
(12 CFR part 1024), the Truth in Lending Act, or the Real Estate
Settlement Procedures Act.
1(d) Organization.
Paragraph 1(d)(5).
1. Effective date. i. General. The Bureau's revisions to Regulation
X and Regulation Z published on December 31, 2013 (the TILA-RESPA Final
Rule) apply to covered loans (closed-end credit transactions that are
secured by real property or a cooperative unit, whether or not treated
as real property under State or other applicable law) for which the
creditor or mortgage broker receives an application on or after October
3, 2015 (the effective date), except that Sec. 1026.19(e)(2), the
amendments to Sec. 1026.28(a)(1), and the amendments to the commentary
to Sec. 1026.29 became effective on October 3, 2015, without respect to
whether an application was received as of that date. Additionally,
Sec. Sec. 1026.20(e) and 1026.39(d)(5), as amended or adopted by the
TILA-RESPA Final Rule, took effect on October 3, 2015, for transactions
for which the creditor or mortgage broker received an application on or
after October 3, 2015, and take effect October 1, 2018, with respect to
transactions for which a creditor or mortgage broker received an
application prior to October 3, 2015.
ii. Pre-application activities. The provisions of Sec.
1026.19(e)(2) apply prior to a consumer's receipt of the disclosures
required by Sec. 1026.19(e)(1)(i) and therefore restrict activity that
may occur prior to receipt of an application by a creditor or mortgage
broker. These provisions include Sec. 1026.19(e)(2)(i), which restricts
the fees that may be imposed on a consumer, Sec. 1026.19(e)(2)(ii),
which requires a statement to be included on written estimates of terms
or costs specific to a consumer, and Sec. 1026.19(e)(2)(iii), which
prohibits creditors from requiring the submission of documents verifying
information related to the consumer's application. Accordingly, the
provisions of Sec. 1026.19(e)(2) are effective on October 3, 2015,
without respect to whether an application has been received on that
date.
iii. Determination of preemption. The amendments to Sec. 1026.28
and the commentary to Sec. 1026.29 govern the preemption of State laws,
and thus the amendments to those provisions and associated commentary
made by the TILA-RESPA Final Rule are effective on October 3, 2015,
without respect to whether an application has been received on that
date.
iv. Post-consummation escrow cancellation disclosure and partial
payment disclosure. A creditor, servicer, or covered person, as
applicable, must provide the disclosures required by Sec. Sec.
1026.20(e) and 1026.39(d)(5) for transactions for which the conditions
in Sec. 1026.20(e) or Sec. 1026.39(d)(5), as applicable, exist on or
after October 1, 2018, regardless of when the corresponding applications
were received. For transactions in which such conditions exist on or
after October 3, 2015, through September 30, 2018, a creditor, servicer,
or covered person, as applicable, complies with Sec. Sec. 1026.20(e)
and 1026.39(d)(5) if it provides the mandated disclosures in all cases
or if it provides them only in cases where the corresponding
applications were received on or after October 3, 2015.
v. Examples. For purposes of the following examples, an application
received before or after the effective date is any submission for the
purpose of obtaining an extension of credit that satisfies the
definition in Sec. 1026.2(a)(3), as adopted by the TILA-RESPA Final
Rule, even if that definition was not yet in effect on the date in
question. Cross-references in the following examples to provisions of
Regulation Z refer to those provisions as adopted or amended by the
TILA-RESPA Final Rule, together with any subsequent amendments, unless
noted otherwise.
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A. Application received on or after effective date of the TILA-RESPA
Final Rule. Assume a creditor receives an application on October 3,
2015, and that consummation of the transaction occurs on October 31,
2015. The amendments of the TILA-RESPA Final Rule, including the
requirement to provide the Loan Estimate and Closing Disclosure under
Sec. 1026.19(e) and (f), apply to the transaction. The creditor is also
required to provide the special information booklet under Sec.
1026.19(g).
B. Application received before effective date of the TILA-RESPA
Final Rule. Assume a creditor receives an application on September 30,
2015, and that consummation of the transaction occurs on October 30,
2015. The requirement to provide the Loan Estimate and Closing
Disclosure under Sec. 1026.19(e) and (f) does not apply to the
transaction. Instead, the creditor and the settlement agent must provide
the disclosures required by Sec. 1026.19, as it existed prior to the
effective date of the TILA-RESPA Final Rule, and by Regulation X, 12 CFR
1024.8. Similarly, the creditor must provide the special information
booklet required by Regulation X, 12 CFR 1024.6. However, the provisions
of Sec. 1026.19(e)(2) apply to the transaction beginning on October 3,
2015, because they became effective on October 3, 2015, without respect
to whether an application was received by the creditor or mortgage
broker on that date.
C. Predisclosure written estimates. Assume a creditor receives a
request from a consumer for a written estimate of terms or costs
specific to the consumer on October 3, 2015, before the consumer submits
an application to the creditor and thus before the consumer has received
the disclosures required by Sec. 1026.19(e)(1)(i). The creditor, if it
provides such a written estimate to the consumer, must comply with Sec.
1026.19(e)(2)(ii) and provide the required statement on the written
estimate, even though the creditor has not received an application on
that date.
D. Request for preemption determination. Assume a creditor submits a
request to the Bureau under Sec. 1026.28(a)(1) for a determination of
whether a State law is inconsistent with the disclosure requirements in
Regulation Z on October 3, 2015. Because the amendments to Sec.
1026.28(a)(1) are effective on that date and do not depend on whether
the creditor has received an application, Sec. 1026.28(a)(1) is
applicable to the request on that date, and the Bureau would make a
determination based on the provisions of Regulation Z in effect on that
date, including the requirements of Sec. 1026.19(e) and (f).
E. Effective dates for the post-consummation escrow cancelation
disclosure and partial payment disclosure. Assume a creditor receives an
application on October 10, 2010, and that the loan was consummated on
November 19, 2010. Assume further that, on December 19, 2016, the escrow
account established in connection with the mortgage loan was canceled or
the loan is sold to another covered person. A creditor, servicer, or
covered person, as applicable, may provide the disclosures required
under Sec. Sec. 1026.20(e) and 1026.39(d)(5) to the consumer, but the
creditor, servicer, or covered person, as applicable, is not required to
provide those disclosures in this case. Assume the same circumstances,
except that the escrow account established in connection with the loan
is canceled or the mortgage loan is sold to another covered person on
April 14, 2020. A creditor, servicer, or covered person, as applicable,
must provide the disclosures in Sec. Sec. 1026.20(e) and 1026.39(d)(5),
as applicable, because a condition requiring these disclosures occurred
after October 1, 2018 (thus the date the application was received is
irrelevant).
2. 2017 TILA-RESPA Amendments. i. Generally. Except as provided in
comment 1(d)(5)-2.ii, compliance with the amendments to this part
effective on October 10, 2017 (the 2017 TILA-RESPA Amendments) is
mandatory with respect to transactions for which a creditor or mortgage
broker received an application on or after October 1, 2018. Except as
provided in comment 1(d)(5)-2.ii, for transactions for which a creditor
or mortgage broker received an application prior to October 1, 2018,
from the effective date of the 2017 TILA-RESPA Amendments:
A. A person has the option of complying either: with 12 CFR part
1026 as it is in effect; or with 12 CFR part 1026 as it was in effect on
October 9, 2017, together with any amendments to 12 CFR part 1026 that
become effective after October 9, 2017, other than the 2017 TILA-RESPA
Amendments; and
B. An act or omission violates 12 CFR part 1026 only if it violates
both: 12 CFR part 1026 as it is in effect; and 12 CFR part 1026 as it
was in effect on October 9, 2017, together with any amendments to 12 CFR
part 1026 that become effective after October 9, 2017, other than the
2017 TILA-RESPA Amendments.
ii. Post-consummation escrow cancellation disclosure and partial
payment disclosure. Comment 1(d)(5)-1.iv sets forth the transactions to
which the disclosures required by Sec. Sec. 1026.20(e) and
1026.39(d)(5) are applicable.
Section 1026.2--Definitions and Rules of Construction
2(a)(2) Advertisement
1. Coverage. Only commercial messages that promote consumer credit
transactions requiring disclosures are advertisements. Messages
inviting, offering, or otherwise announcing generally to prospective
customers the availability of credit transactions, whether in visual,
oral, or print media, are covered by Regulation Z (12 CFR part 1026).
i. Examples include:
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A. Messages in a newspaper, magazine, leaflet, promotional flyer, or
catalog.
B. Announcements on radio, television, or public address system.
C. Electronic advertisements, such as on the Internet.
D. Direct mail literature or other printed material on any exterior
or interior sign.
E. Point of sale displays.
F. Telephone solicitations.
G. Price tags that contain credit information.
H. Letters sent to customers or potential customers as part of an
organized solicitation of business.
I. Messages on checking account statements offering auto loans at a
stated annual percentage rate.
J. Communications promoting a new open-end plan or closed-end
transaction.
ii. The term does not include:
A. Direct personal contacts, such as follow-up letters, cost
estimates for individual consumers, or oral or written communication
relating to the negotiation of a specific transaction.
B. Informational material, for example, interest-rate and loan-term
memos, distributed only to business entities.
C. Notices required by Federal or state law, if the law mandates
that specific information be displayed and only the information so
mandated is included in the notice.
D. News articles the use of which is controlled by the news medium.
E. Market-research or educational materials that do not solicit
business.
F. Communications about an existing credit account (for example, a
promotion encouraging additional or different uses of an existing credit
card account).
2. Persons covered. All persons must comply with the advertising
provisions in Sec. Sec. 1026.16 and 1026.24, not just those that meet
the definition of creditor in Sec. 1026.2(a)(17). Thus, home builders,
merchants, and others who are not themselves creditors must comply with
the advertising provisions of the regulation if they advertise consumer
credit transactions. However, under section 145 of the Act, the owner
and the personnel of the medium in which an advertisement appears, or
through which it is disseminated, are not subject to civil liability for
violations.
2(a)(3) Application.
1. In general. An application means the submission of a consumer's
financial information for purposes of obtaining an extension of credit.
For transactions subject to Sec. 1026.19(e), (f), or (g) of this part,
the term consists of the consumer's name, the consumer's income, the
consumer's social security number to obtain a credit report, the
property address, an estimate of the value of the property, and the
mortgage loan amount sought. This definition does not prevent a creditor
from collecting whatever additional information it deems necessary in
connection with the request for the extension of credit. However, once a
creditor has received these six pieces of information, it has an
application for purposes of the requirements of Regulation Z. A
submission may be in written or electronic format and includes a written
record of an oral application. The following examples for a transaction
subject to Sec. 1026.19(e), (f), or (g) are illustrative of this
provision:
i. Assume a creditor provides a consumer with an application form
containing 20 questions about the consumer's credit history and the
collateral value. The consumer submits answers to nine of the questions
and informs the creditor that the consumer will contact the creditor the
next day with answers to the other 11 questions. Although the consumer
provided nine pieces of information, the consumer did not provide a
social security number. The creditor has not yet received an application
for purposes of Sec. 1026.2(a)(3).
ii. Assume a creditor requires all applicants to submit 20 pieces of
information. The consumer submits only six pieces of information and
informs the creditor that the consumer will contact the creditor the
next day with answers to the other 14 questions. The six pieces of
information provided by the consumer were the consumer's name, income,
social security number, property address, estimate of the value of the
property, and the mortgage loan amount sought. Even though the creditor
requires 14 additional pieces of information to process the consumer's
request for a mortgage loan, the creditor has received an application
for the purposes of Sec. 1026.2(a)(3) and therefore must comply with
the relevant requirements under Sec. 1026.19.
2. Social security number to obtain a credit report. If a consumer
does not have a social security number, the creditor may substitute
whatever unique identifier the creditor uses to obtain a credit report
on the consumer. For example, a creditor has obtained a social security
number to obtain a credit report for purposes of Sec. 1026.2(a)(3)(ii)
if the creditor collects a Tax Identification Number from a consumer who
does not have a social security number, such as a foreign national.
3. Receipt of credit report fees. Section 1026.19(a)(1)(iii) permits
the imposition of a fee to obtain the consumer's credit history prior to
the delivery of the disclosures required under Sec. 1026.19(a)(1)(i).
Section 1026.19(e)(2)(i)(B) permits the imposition of a fee to obtain
the consumer's credit report prior to the delivery of the disclosures
required under Sec. 1026.19(e)(1)(i). Whether, or when, such fees are
received does not affect whether an application has been received for
the purposes of the definition in Sec. 1026.2(a)(3) and the timing
requirements in
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Sec. 1026.19(a)(1)(i) and (e)(1)(iii). For example, if, in a
transaction subject to Sec. 1026.19(e)(1)(i), a creditor receives the
six pieces of information identified under Sec. 1026.2(a)(3)(ii) on
Monday, June 1, but does not receive a credit report fee from the
consumer until Tuesday, June 2, the creditor does not comply with Sec.
1026.19(e)(1)(iii) if it provides the disclosures required under Sec.
1026.19(e)(1)(i) after Thursday, June 4. The three-business-day period
beings on Monday, June 1, the date the creditor received the six pieces
of information. The waiting period does not begin on Tuesday, June 2,
the date the creditor received the credit report fee.
2(a)(4) Billing Cycle or Cycle
1. Intervals. In open-end credit plans, the billing cycle determines
the intervals for which periodic disclosure statements are required;
these intervals are also used as measuring points for other duties of
the creditor. Typically, billing cycles are monthly, but they may be
more frequent or less frequent (but not less frequent than quarterly).
2. Creditors that do not bill. The term cycle is interchangeable
with billing cycle for definitional purposes, since some creditors'
cycles do not involve the sending of bills in the traditional sense but
only statements of account activity. This is commonly the case with
financial institutions when periodic payments are made through payroll
deduction or through automatic debit of the consumer's asset account.
3. Equal cycles. Although cycles must be equal, there is a
permissible variance to account for weekends, holidays, and differences
in the number of days in months. If the actual date of each statement
does not vary by more than four days from a fixed ``day'' (for example,
the third Thursday of each month) or ``date'' (for example, the 15th of
each month) that the creditor regularly uses, the intervals between
statements are considered equal. The requirement that cycles be equal
applies even if the creditor applies a daily periodic rate to determine
the finance charge. The requirement that intervals be equal does not
apply to the first billing cycle on an open-end account (i.e., the time
period between account opening and the generation of the first periodic
statement) or to a transitional billing cycle that can occur if the
creditor occasionally changes its billing cycles so as to establish a
new statement day or date. (See comments 9(c)(1)-3 and 9(c)(2)-3.)
4. Payment reminder. The sending of a regular payment reminder
(rather than a late payment notice) establishes a cycle for which the
creditor must send periodic statements.
2(a)(6) Business Day
1. Business function test. Activities that indicate that the
creditor is open for substantially all of its business functions include
the availability of personnel to make loan disbursements, to open new
accounts, and to handle credit transaction inquiries. Activities that
indicate that the creditor is not open for substantially all of its
business functions include a retailer's merely accepting credit cards
for purchases or a bank's having its customer-service windows open only
for limited purposes such as deposits and withdrawals, bill paying, and
related services.
2. Rule for rescission, disclosures for certain mortgage
transactions, and private education loans. A more precise rule for what
is a business day (all calendar days except Sundays and the Federal
legal holidays specified in 5 U.S.C. 6103(a)) applies when the right of
rescission, the receipt of disclosures for certain dwelling- or real
estate-secured mortgage transactions under Sec. Sec. 1026.19(a)(1)(ii),
1026.19(a)(2), 1026.19(e)(1)(iii)(B), 1026.19(e)(1)(iv),
1026.19(e)(2)(i)(A), 1026.19(e)(4)(ii), 1026.19(f)(1)(ii),
1026.19(f)(1)(iii), 1026.20(e)(5), 1026.31(c), or the receipt of
disclosures for private education loans under Sec. 1026.46(d)(4) is
involved. Four Federal legal holidays are identified in 5 U.S.C. 6103(a)
by a specific date: New Year's Day, January 1; Independence Day, July 4;
Veterans Day, November 11; and Christmas Day, December 25. When one of
these holidays (July 4, for example) falls on a Saturday, Federal
offices and other entities might observe the holiday on the preceding
Friday (July 3). In cases where the more precise rule applies, the
observed holiday (in the example, July 3) is a business day.
2(a)(7) Card Issuer
1. Agent. An agent of a card issuer is considered a card issuer.
Because agency relationships are traditionally defined by contract and
by state or other applicable law, the regulation does not define agent.
Merely providing services relating to the production of credit cards or
data processing for others, however, does not make one the agent of the
card issuer. In contrast, a financial institution may become the agent
of the card issuer if an agreement between the institution and the card
issuer provides that the cardholder may use a line of credit with the
financial institution to pay obligations incurred by use of the credit
card.
2(a)(8) Cardholder
1. General rule. A cardholder is a natural person at whose request a
card is issued for consumer credit purposes or who is a co-obligor or
guarantor for such a card issued to another. The second category does
not include an employee who is a co-obligor or guarantor
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on a card issued to the employer for business purposes, nor does it
include a person who is merely the authorized user of a card issued to
another.
2. Limited application of regulation. For the limited purposes of
the rules on issuance of credit cards and liability for unauthorized
use, a cardholder includes any person, including an organization, to
whom a card is issued for any purpose--including a business,
agricultural, or commercial purpose.
3. Issuance. See the commentary to Sec. 1026.12(a).
4. Dual-purpose cards and dual-card systems. Some card issuers offer
dual-purpose cards that are for business as well as consumer purposes.
If a card is issued to an individual for consumer purposes, the fact
that an organization has guaranteed to pay the debt does not make it
business credit. On the other hand, if a card is issued for business
purposes, the fact that an individual sometimes uses it for consumer
purchases does not subject the card issuer to the provisions on periodic
statements, billing-error resolution, and other protections afforded to
consumer credit. Some card issuers offer dual-card systems--that is,
they issue two cards to the same individual, one intended for business
use, the other for consumer or personal use. With such a system, the
same person may be a cardholder for general purposes when using the card
issued for consumer use, and a cardholder only for the limited purposes
of the restrictions on issuance and liability when using the card issued
for business purposes.
2(a)(9) Cash Price
1. Components. This amount is a starting point in computing the
amount financed and the total sale price under Sec. 1026.18 for credit
sales. Any charges imposed equally in cash and credit transactions may
be included in the cash price, or they may be treated as other amounts
financed under Sec. 1026.18(b)(2).
2. Service contracts. Service contracts include contracts for the
repair or the servicing of goods, such as mechanical breakdown coverage,
even if such a contract is characterized as insurance under state law.
3. Rebates. The creditor has complete flexibility in the way it
treats rebates for purposes of disclosure and calculation. (See the
commentary to Sec. 1026.18(b).)
2(a)(10) Closed-End Credit
1. General. The coverage of this term is defined by exclusion. That
is, it includes any credit arrangement that does not fall within the
definition of open-end credit. Subpart C contains the disclosure rules
for closed-end credit when the obligation is subject to a finance charge
or is payable by written agreement in more than four installments.
2(a)(11) Consumer
1. Scope. Guarantors, endorsers, and sureties are not generally
consumers for purposes of the regulation, but they may be entitled to
rescind under certain circumstances and they may have certain rights if
they are obligated on credit card plans.
2. Rescission rules. For purposes of rescission under Sec. Sec.
1026.15 and 1026.23, a consumer includes any natural person whose
ownership interest in his or her principal dwelling is subject to the
risk of loss. Thus, if a security interest is taken in A's ownership
interest in a house and that house is A's principal dwelling, A is a
consumer for purposes of rescission, even if A is not liable, either
primarily or secondarily, on the underlying consumer credit transaction.
An ownership interest does not include, for example, leaseholds or
inchoate rights, such as dower.
3. Trusts. Credit extended to trusts established for tax or estate
planning purposes or to land trusts, as described in comment 3(a)-10, is
considered to be extended to a natural person for purposes of the
definition of consumer.
2(a)(12) Consumer Credit
1. Primary purpose. There is no precise test for what constitutes
credit offered or extended for personal, family, or household purposes,
nor for what constitutes the primary purpose. (See, however, the
discussion of business purposes in the commentary to Sec. 1026.3(a).)
2(a)(13) Consummation
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.
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.
2(a)(14) Credit
1. Exclusions. The following situations are not considered credit
for purposes of the regulation:
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i. Layaway plans, unless the consumer is contractually obligated to
continue making payments. Whether the consumer is so obligated is a
matter to be determined under applicable law. The fact that the consumer
is not entitled to a refund of any amounts paid towards the cash price
of the merchandise does not bring layaways within the definition of
credit.
ii. Tax liens, tax assessments, court judgments, and court approvals
of reaffirmation of debts in bankruptcy. However, third-party financing
of such obligations (for example, a bank loan obtained to pay off a tax
lien) is credit for purposes of the regulation.
iii. Insurance premium plans that involve payment in installments
with each installment representing the payment for insurance coverage
for a certain future period of time, unless the consumer is
contractually obligated to continue making payments.
iv. Home improvement transactions that involve progress payments, if
the consumer pays, as the work progresses, only for work completed and
has no contractual obligation to continue making payments.
v. Borrowing against the accrued cash value of an insurance policy
or a pension account, if there is no independent obligation to repay.
vi. Letters of credit.
vii. The execution of option contracts. However, there may be an
extension of credit when the option is exercised, if there is an
agreement at that time to defer payment of a debt.
viii. Investment plans in which the party extending capital to the
consumer risks the loss of the capital advanced. This includes, for
example, an arrangement with a home purchaser in which the investor pays
a portion of the downpayment and of the periodic mortgage payments in
return for an ownership interest in the property, and shares in any gain
or loss of property value.
ix. Mortgage assistance plans administered by a government agency in
which a portion of the consumer's monthly payment amount is paid by the
agency. No finance charge is imposed on the subsidy amount, and that
amount is due in a lump-sum payment on a set date or upon the occurrence
of certain events. (If payment is not made when due, a new note imposing
a finance charge may be written, which may then be subject to the
regulation.)
2. Payday loans; deferred presentment. Credit includes a transaction
in which a cash advance is made to a consumer in exchange for the
consumer's personal check, or in exchange for the consumer's
authorization to debit the consumer's deposit account, and where the
parties agree either that the check will not be cashed or deposited, or
that the consumer's deposit account will not be debited, until a
designated future date. This type of transaction is often referred to as
a ``payday loan'' or ``payday advance'' or ``deferred-presentment
loan.'' A fee charged in connection with such a transaction may be a
finance charge for purposes of Sec. 1026.4, regardless of how the fee
is characterized under state law. Where the fee charged constitutes a
finance charge under Sec. 1026.4 and the person advancing funds
regularly extends consumer credit, that person is a creditor and is
required to provide disclosures consistent with the requirements of
Regulation Z. (See Sec. 1026.2(a)(17).)
Paragraph 2(a)(15)
1. Usable from time to time. A credit card must be usable from time
to time. Since this involves the possibility of repeated use of a single
device, checks and similar instruments that can be used only once to
obtain a single credit extension are not credit cards.
2. Examples. i. Examples of credit cards include:
A. A card that guarantees checks or similar instruments, if the
asset account is also tied to an overdraft line or if the instrument
directly accesses a line of credit.
B. A card that accesses both a credit and an asset account (that is,
a debit-credit card).
C. An identification card that permits the consumer to defer payment
on a purchase.
D. An identification card indicating loan approval that is presented
to a merchant or to a lender, whether or not the consumer signs a
separate promissory note for each credit extension.
E. A card or device that can be activated upon receipt to access
credit, even if the card has a substantive use other than credit, such
as a purchase-price discount card. Such a card or device is a credit
card notwithstanding the fact that the recipient must first contact the
card issuer to access or activate the credit feature.
ii. In contrast, credit card does not include, for example:
A. A check-guarantee or debit card with no credit feature or
agreement, even if the creditor occasionally honors an inadvertent
overdraft.
B. Any card, key, plate, or other device that is used in order to
obtain petroleum products for business purposes from a wholesale
distribution facility or to gain access to that facility, and that is
required to be used without regard to payment terms.
C. An account number that accesses a credit account, unless the
account number can access an open-end line of credit to purchase goods
or services. For example, if a creditor provides a consumer with an
open-end line of credit that can be accessed by an account number in
order to transfer funds into another account (such as an asset account
with the same creditor), the account number is not a credit card for
purposes of Sec. 1026.2(a)(15)(i). However, if the account
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number can also access the line of credit to purchase goods or services
(such as an account number that can be used to purchase goods or
services on the Internet), the account number is a credit card for
purposes of Sec. 1026.2(a)(15)(i), regardless of whether the creditor
treats such transactions as purchases, cash advances, or some other type
of transaction. Furthermore, if the line of credit can also be accessed
by a card (such as a debit card), that card is a credit card for
purposes of Sec. 1026.2(a)(15)(i).
3. Charge card. Generally, charge cards are cards used in connection
with an account on which outstanding balances cannot be carried from one
billing cycle to another and are payable when a periodic statement is
received. Under the regulation, a reference to credit cards generally
includes charge cards. In particular, references to credit card accounts
under an open-end (not home-secured) consumer credit plan in Subparts B
and G generally include charge cards. The term charge card is, however,
distinguished from credit card or credit card account under an open-end
(not home-secured) consumer credit plan in Sec. Sec. 1026.60,
1026.6(b)(2)(xiv), 1026.7(b)(11), 1026.7(b)(12), 1026.9(e), 1026.9(f),
1026.28(d), 1026.52(b)(1)(ii)(C), and Appendices G-10 through G-13.
4. Credit card account under an open-end (not home-secured) consumer
credit plan. An open-end consumer credit account is a credit card
account under an open-end (not home-secured) consumer credit plan for
purposes of Sec. 1026.2(a)(15)(ii) if:
i. The account is accessed by a credit card, as defined in Sec.
1026.2(a)(15)(i); and
ii. The account is not excluded under Sec. 1026.2(a)(15)(ii)(A) or
(a)(15)(ii)(B).
2(a)(16) Credit Sale
1. Special disclosure. If the seller is a creditor in the
transaction, the transaction is a credit sale and the special credit
sale disclosures (that is, the disclosures under Sec. 1026.18(j)) must
be given. This applies even if there is more than one creditor in the
transaction and the creditor making the disclosures is not the seller.
(See the commentary to Sec. 1026.17(d).)
2. Sellers who arrange credit. If the seller of the property or
services involved arranged for financing but is not a creditor as to
that sale, the transaction is not a credit sale. Thus, if a seller
assists the consumer in obtaining a direct loan from a financial
institution and the consumer's note is payable to the financial
institution, the transaction is a loan and only the financial
institution is a creditor.
3. Refinancings. Generally, when a credit sale is refinanced within
the meaning of Sec. 1026.20(a), loan disclosures should be made.
However, if a new sale of goods or services is also involved, the
transaction is a credit sale.
4. Incidental sales. Some lenders sell a product or service--such as
credit, property, or health insurance--as part of a loan transaction.
Section 1026.4 contains the rules on whether the cost of credit life,
disability or property insurance is part of the finance charge. If the
insurance is financed, it may be disclosed as a separate credit-sale
transaction or disclosed as part of the primary transaction; if the
latter approach is taken, either loan or credit-sale disclosures may be
made. (See the commentary to Sec. 1026.17(c)(1) for further discussion
of this point.)
5. Credit extensions for educational purposes. A credit extension
for educational purposes in which an educational institution is the
creditor may be treated as either a credit sale or a loan, regardless of
whether the funds are given directly to the student, credited to the
student's account, or disbursed to other persons on the student's
behalf. The disclosure of the total sale price need not be given if the
transaction is treated as a loan.
2(a)(17) Creditor
1. General. The definition contains four independent tests. If any
one of the tests is met, the person is a creditor for purposes of that
particular test.
Paragraph 2(a)(17)(i)
1. Prerequisites. This test is composed of two requirements, both of
which must be met in order for a particular credit extension to be
subject to the regulation and for the credit extension to count towards
satisfaction of the numerical tests mentioned in Sec. 1026.2(a)(17)(v).
i. First, there must be either or both of the following:
A. A written (rather than oral) agreement to pay in more than four
installments. A letter that merely confirms an oral agreement does not
constitute a written agreement for purposes of the definition.
B. A finance charge imposed for the credit. The obligation to pay
the finance charge need not be in writing.
ii. Second, the obligation must be payable to the person in order
for that person to be considered a creditor. If an obligation is made
payable to bearer, the creditor is the one who initially accepts the
obligation.
2. Assignees. If an obligation is initially payable to one person,
that person is the creditor even if the obligation by its terms is
simultaneously assigned to another person. For example:
i. An auto dealer and a bank have a business relationship in which
the bank supplies the dealer with credit sale contracts that are
initially made payable to the dealer and provide for the immediate
assignment of the obligation to the bank. The dealer and purchaser
execute the contract only after the bank approves the creditworthiness
of the
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purchaser. Because the obligation is initially payable on its face to
the dealer, the dealer is the only creditor in the transaction.
3. Numerical tests. The examples below illustrate how the numerical
tests of Sec. 1026.2(a)(17)(v) are applied. The examples assume that
consumer credit with a finance charge or written agreement for more than
4 installments was extended in the years in question and that the person
did not extend such credit in 2006.
4. Counting transactions. For purposes of closed-end credit, the
creditor counts each credit transaction. For open-end credit,
transactions means accounts, so that outstanding accounts are counted
instead of individual credit extensions. Normally the number of
transactions is measured by the preceding calendar year; if the
requisite number is met, then the person is a creditor for all
transactions in the current year. However, if the person did not meet
the test in the preceding year, the number of transactions is measured
by the current calendar year. For example, if the person extends
consumer credit 26 times in 2007, it is a creditor for purposes of the
regulation for the last extension of credit in 2007 and for all
extensions of consumer credit in 2008. On the other hand, if a business
begins in 2007 and extends consumer credit 20 times, it is not a
creditor for purposes of the regulation in 2007. If it extends consumer
credit 75 times in 2008, however, it becomes a creditor for purposes of
the regulation (and must begin making disclosures) after the 25th
extension of credit in that year and is a creditor for all extensions of
consumer credit in 2009.
5. Relationship between consumer credit in general and credit
secured by a dwelling. Extensions of credit secured by a dwelling are
counted towards the 25-extensions test. For example, if in 2007 a person
extends unsecured consumer credit 23 times and consumer credit secured
by a dwelling twice, it becomes a creditor for the succeeding extensions
of credit, whether or not they are secured by a dwelling. On the other
hand, extensions of consumer credit not secured by a dwelling are not
counted towards the number of credit extensions secured by a dwelling.
For example, if in 2007 a person extends credit not secured by a
dwelling 8 times and credit secured by a dwelling 3 times, it is not a
creditor.
6. Effect of satisfying one test. Once one of the numerical tests is
satisfied, the person is also a creditor for the other type of credit.
For example, in 2007 a person extends consumer credit secured by a
dwelling 5 times. That person is a creditor for all succeeding credit
extensions, whether they involve credit secured by a dwelling or not.
7. Trusts. In the case of credit extended by trusts, each individual
trust is considered a separate entity for purposes of applying the
criteria. For example:
i. A bank is the trustee for three trusts. Trust A makes 15
extensions of consumer credit annually; Trust B makes 10 extensions of
consumer credit annually; and Trust C makes 30 extensions of consumer
credit annually. Only Trust C is a creditor for purposes of the
regulation.
Paragraph 2(a)(17)(ii) [Reserved]
Paragraph 2(a)(17)(iii)
1. Card issuers subject to Subpart B. Section 1026.2(a)(17)(iii)
makes certain card issuers creditors for purposes of the open-end credit
provisions of the regulation. This includes, for example, the issuers of
so-called travel and entertainment cards that expect repayment at the
first billing and do not impose a finance charge. Since all disclosures
are to be made only as applicable, such card issuers would omit finance
charge disclosures. Other provisions of the regulation regarding such
areas as scope, definitions, determination of which charges are finance
charges, Spanish language disclosures, record retention, and use of
model forms, also apply to such card issuers.
Paragraph 2(a)(17)(iv)
1. Card issuers subject to Subparts B and C. Section
1026.2(a)(17)(iv) includes as creditors card issuers extending closed-
end credit in which there is a finance charge or an agreement to pay in
more than four installments. These card issuers are subject to the
appropriate provisions of Subparts B and C, as well as to the general
provisions.
2(a)(18) Downpayment
1. Allocation. If a consumer makes a lump-sum payment, partially to
reduce the cash price and partially to pay prepaid finance charges, only
the portion attributable to reducing the cash price is part of the
downpayment. (See the commentary to Sec. 1026.2(a)(23).)
2. Pick-up payments. i. Creditors may treat the deferred portion of
the downpayment, often referred to as pick-up payments, in a number of
ways. If the pick-up payment is treated as part of the downpayment:
A. It is subtracted in arriving at the amount financed under Sec.
1026.18(b).
B. It may, but need not, be reflected in the payment schedule under
Sec. 1026.18(g).
ii. If the pick-up payment does not meet the definition (for
example, if it is payable after the second regularly scheduled payment)
or if the creditor chooses not to treat it as part of the downpayment:
A. It must be included in the amount financed.B. It must be shown in
the payment schedule.
iii. Whichever way the pick-up payment is treated, the total of
payments under Sec. 1026.18(h) must equal the sum of the payments
disclosed under Sec. 1026.18(g).
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3. Effect of existing liens. i. No cash payment. In a credit sale,
the ``downpayment'' may only be used to reduce the cash price. For
example, when a trade-in is used as the downpayment and the existing
lien on an automobile to be traded in exceeds the value of the
automobile, creditors must disclose a zero on the downpayment line
rather than a negative number. To illustrate, assume a consumer owes
$10,000 on an existing automobile loan and that the trade-in value of
the automobile is only $8,000, leaving a $2,000 deficit. The creditor
should disclose a downpayment of $0, not -$2,000.
ii. Cash payment. If the consumer makes a cash payment, creditors
may, at their option, disclose the entire cash payment as the
downpayment, or apply the cash payment first to any excess lien amount
and disclose any remaining cash as the downpayment. In the above
example:
A. If the downpayment disclosed is equal to the cash payment, the
$2,000 deficit must be reflected as an additional amount financed under
Sec. 1026.18(b)(2).
B. If the consumer provides $1,500 in cash (which does not
extinguish the $2,000 deficit), the creditor may disclose a downpayment
of $1,500 or of $0.
C. If the consumer provides $3,000 in cash, the creditor may
disclose a downpayment of $3,000 or of $1,000.
2(a)(19) Dwelling
1. Scope. A dwelling need not be the consumer's principal residence
to fit the definition, and thus a vacation or second home could be a
dwelling. However, for purposes of the definition of residential
mortgage transaction and the right to rescind, a dwelling must be the
principal residence of the consumer. (See the commentary to Sec. Sec.
1026.2(a)(24), 1026.15, and 1026.23.)
2. Use as a residence. Mobile homes, boats, and trailers are
dwellings if they are in fact used as residences, just as are
condominium and cooperative units. Recreational vehicles, campers, and
the like not used as residences are not dwellings.
3. Relation to exemptions. Any transaction involving a security
interest in a consumer's principal dwelling (as well as in any real
property) remains subject to the regulation despite the general
exemption in Sec. 1026.3(b).
2(a)(20) Open-End Credit
1. General. This definition describes the characteristics of open-
end credit (for which the applicable disclosure and other rules are
contained in Subpart B), as distinct from closed-end credit. Open-end
credit is consumer credit that is extended under a plan and meets all 3
criteria set forth in the definition.
2. Existence of a plan. The definition requires that there be a
plan, which connotes a contractual arrangement between the creditor and
the consumer. Some creditors offer programs containing a number of
different credit features. The consumer has a single account with the
institution that can be accessed repeatedly via a number of sub-accounts
established for the different program features and rate structures. Some
features of the program might be used repeatedly (for example, an
overdraft line) while others might be used infrequently (such as the
part of the credit line available for secured credit). If the program as
a whole is subject to prescribed terms and otherwise meets the
definition of open-end credit, such a program would be considered a
single, multifeatured plan.
3. Repeated transactions. Under this criterion, the creditor must
reasonably contemplate repeated transactions. This means that the credit
plan must be usable from time to time and the creditor must legitimately
expect that there will be repeat business rather than a one-time credit
extension. The creditor must expect repeated dealings with consumers
under the credit plan as a whole and need not believe a consumer will
reuse a particular feature of the plan. The determination of whether a
creditor can reasonably contemplate repeated transactions requires an
objective analysis. Information that much of the creditor's customer
base with accounts under the plan make repeated transactions over some
period of time is relevant to the determination, particularly when the
plan is opened primarily for the financing of infrequently purchased
products or services. A standard based on reasonable belief by a
creditor necessarily includes some margin for judgmental error. The fact
that particular consumers do not return for further credit extensions
does not prevent a plan from having been properly characterized as open-
end. For example, if much of the customer base of a clothing store makes
repeat purchases, the fact that some consumers use the plan only once
would not affect the characterization of the store's plan as open-end
credit. The criterion regarding repeated transactions is a question of
fact to be decided in the context of the creditor's type of business and
the creditor's relationship with its customers. For example, it would be
more reasonable for a bank or depository institution to contemplate
repeated transactions with a customer than for a seller of aluminum
siding to make the same assumption about its customers.
4. Finance charge on an outstanding balance. The requirement that a
finance charge may be computed and imposed from time to time on the
outstanding balance means that there is no specific amount financed for
the plan for which the finance charge, total of payments, and payment
schedule can be calculated. A plan may meet the definition of open-end
credit even though a finance charge
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is not normally imposed, provided the creditor has the right, under the
plan, to impose a finance charge from time to time on the outstanding
balance. For example, in some plans, a finance charge is not imposed if
the consumer pays all or a specified portion of the outstanding balance
within a given time period. Such a plan could meet the finance charge
criterion, if the creditor has the right to impose a finance charge,
even though the consumer actually pays no finance charges during the
existence of the plan because the consumer takes advantage of the option
to pay the balance (either in full or in installments) within the time
necessary to avoid finance charges.
5. Reusable line. The total amount of credit that may be extended
during the existence of an open-end plan is unlimited because available
credit is generally replenished as earlier advances are repaid. A line
of credit is self-replenishing even though the plan itself has a fixed
expiration date, as long as during the plan's existence the consumer may
use the line, repay, and reuse the credit. The creditor may occasionally
or routinely verify credit information such as the consumer's continued
income and employment status or information for security purposes but,
to meet the definition of open-end credit, such verification of credit
information may not be done as a condition of granting a consumer's
request for a particular advance under the plan. In general, a credit
line is self-replenishing if the consumer can take further advances as
outstanding balances are repaid without being required to separately
apply for those additional advances. A credit card account where the
plan as a whole replenishes meets the self-replenishing criterion,
notwithstanding the fact that a credit card issuer may verify credit
information from time to time in connection with specific transactions.
This criterion of unlimited credit distinguishes open-end credit from a
series of advances made pursuant to a closed-end credit loan commitment.
For example:
i. Under a closed-end commitment, the creditor might agree to lend a
total of $10,000 in a series of advances as needed by the consumer. When
a consumer has borrowed the full $10,000, no more is advanced under that
particular agreement, even if there has been repayment of a portion of
the debt. (See Sec. 1026.2(a)(17)(iv) for disclosure requirements when
a credit card is used to obtain the advances.)
ii. This criterion does not mean that the creditor must establish a
specific credit limit for the line of credit or that the line of credit
must always be replenished to its original amount. The creditor may
reduce a credit limit or refuse to extend new credit in a particular
case due to changes in the creditor's financial condition or the
consumer's creditworthiness. (The rules in Sec. 1026.40(f), however,
limit the ability of a creditor to suspend credit advances for home
equity plans.) While consumers should have a reasonable expectation of
obtaining credit as long as they remain current and within any preset
credit limits, further extensions of credit need not be an absolute
right in order for the plan to meet the self-replenishing criterion.6.
Verifications of collateral value. Creditors that otherwise meet the
requirements of Sec. 1026.2(a)(20) extend open-end credit
notwithstanding the fact that the creditor must verify collateral values
to comply with Federal, state, or other applicable law or verifies the
value of collateral in connection with a particular advance under the
plan.
7. Open-end real estate mortgages. Some credit plans call for
negotiated advances under so-called open-end real estate mortgages. Each
such plan must be independently measured against the definition of open-
end credit, regardless of the terminology used in the industry to
describe the plan. The fact that a particular plan is called an open-end
real estate mortgage, for example, does not, by itself, mean that it is
open-end credit under the regulation.
2(a)(21) Periodic Rate
1. Basis. The periodic rate may be stated as a percentage (for
example, 1 and \1/2\% per month) or as a decimal equivalent (for
example, .015 monthly). It may be based on any portion of a year the
creditor chooses. Some creditors use \1/360\ of an annual rate as their
periodic rate. These creditors:
i. May disclose a \1/360\ rate as a daily periodic rate, without
further explanation, if it is in fact only applied 360 days per year.
But if the creditor applies that rate for 365 days, the creditor must
note that fact and, of course, disclose the true annual percentage rate.
ii. Would have to apply the rate to the balance to disclose the
annual percentage rate with the degree of accuracy required in the
regulation (that is, within \1/8\th of 1 percentage point of the rate
based on the actual 365 days in the year).
2. Transaction charges. Periodic rate does not include initial one-
time transaction charges, even if the charge is computed as a percentage
of the transaction amount.
2(a)(22) Person
1. Joint ventures. A joint venture is an organization and is
therefore a person.
2. Attorneys. An attorney and his or her client are considered to be
the same person for purposes of this part when the attorney is acting
within the scope of the attorney-client relationship with regard to a
particular transaction.
3. Trusts. A trust and its trustee are considered to be the same
person for purposes of this part.
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2(a)(23) Prepaid Finance Charge
1. General. Prepaid finance charges must be taken into account under
Sec. 1026.18(b) in computing the disclosed amount financed, and must be
disclosed if the creditor provides an itemization of the amount financed
under Sec. 1026.18(c).
2. Examples. i. Common examples of prepaid finance charges include:
A. Buyer's points.
B. Service fees.
C. Loan fees.
D. Finder's fees.
E. Loan-guarantee insurance.
F. Credit-investigation fees.
ii. However, in order for these or any other finance charges to be
considered prepaid, they must be either paid separately in cash or check
or withheld from the proceeds. Prepaid finance charges include any
portion of the finance charge paid prior to or at closing or settlement.
3. Exclusions. Add-on and discount finance charges are not prepaid
finance charges for purposes of this part. Finance charges are not
prepaid merely because they are precomputed, whether or not a portion of
the charge will be rebated to the consumer upon prepayment. (See the
commentary to Sec. 1026.18(b).)
4. Allocation of lump-sum payments. In a credit sale transaction
involving a lump-sum payment by the consumer and a discount or other
item that is a finance charge under Sec. 1026.4, the discount or other
item is a prepaid finance charge to the extent the lump-sum payment is
not applied to the cash price. For example, a seller sells property to a
consumer for $10,000, requires the consumer to pay $3,000 at the time of
the purchase, and finances the remainder as a closed-end credit
transaction. The cash price of the property is $9,000. The seller is the
creditor in the transaction and therefore the $1,000 difference between
the credit and cash prices (the discount) is a finance charge. (See the
commentary to Sec. 1026.4(b)(9) and (c)(5).) If the creditor applies
the entire $3,000 to the cash price and adds the $1,000 finance charge
to the interest on the $6,000 to arrive at the total finance charge, all
of the $3,000 lump-sum payment is a downpayment and the discount is not
a prepaid finance charge. However, if the creditor only applies $2,000
of the lump-sum payment to the cash price, then $2,000 of the $3,000 is
a downpayment and the $1,000 discount is a prepaid finance charge.
2(a)(24) Residential Mortgage Transaction
1. Relation to other sections. This term is important in five
provisions in the regulation:
i. Section 1026.4(c)(7)--exclusions from the finance charge.
ii. Section 1026.15(f)--exemption from the right of rescission.
iii. Section 1026.18(q)--whether or not the obligation is assumable.
iv. Section 1026.20(b)--disclosure requirements for assumptions.
v. Section 1026.23(f)--exemption from the right of rescission.
2. Lien status. The definition is not limited to first lien
transactions. For example, a consumer might assume a paid-down first
mortgage (or borrow part of the purchase price) and borrow the balance
of the purchase price from a creditor who takes a second mortgage. The
second mortgage transaction is a residential mortgage transaction if the
dwelling purchased is the consumer's principal residence.
3. Principal dwelling. A consumer can have only one principal
dwelling at a time. Thus, a vacation or other second home would not be a
principal dwelling. However, if a consumer buys or builds a new dwelling
that will become the consumer's principal dwelling within a year or upon
the completion of construction, the new dwelling is considered the
principal dwelling for purposes of applying this definition to a
particular transaction. (See the commentary to Sec. Sec. 1026.15(a) and
1026.23(a).)
4. Construction financing. If a transaction meets the definition of
a residential mortgage transaction and the creditor chooses to disclose
it as several transactions under Sec. 1026.17(c)(6), each one is
considered to be a residential mortgage transaction, even if different
creditors are involved. For example:
i. The creditor makes a construction loan to finance the initial
construction of the consumer's principal dwelling, and the loan will be
disbursed in five advances. The creditor gives six sets of disclosures
(five for the construction phase and one for the permanent phase). Each
one is a residential mortgage transaction.
ii. One creditor finances the initial construction of the consumer's
principal dwelling and another creditor makes a loan to satisfy the
construction loan and provide permanent financing. Both transactions are
residential mortgage transactions.
5. Acquisition. i. A residential mortgage transaction finances the
acquisition of a consumer's principal dwelling. The term does not
include a transaction involving a consumer's principal dwelling if the
consumer had previously purchased and acquired some interest to the
dwelling, even though the consumer had not acquired full legal title.
ii. Examples of new transactions involving a previously acquired
dwelling include the financing of a balloon payment due under a land
sale contract and an extension of credit made to a joint owner of
property to buy out the other joint owner's interest. In these
instances, disclosures are not required under Sec. 1026.18(q)
(assumability policies). However, the rescission rules of Sec. Sec.
1026.15 and 1026.23 do apply to these new transactions.
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iii. In other cases, the disclosure and rescission rules do not
apply. For example, where a buyer enters into a written agreement with
the creditor holding the seller's mortgage, allowing the buyer to assume
the mortgage, if the buyer had previously purchased the property and
agreed with the seller to make the mortgage payments, Sec. 1026.20(b)
does not apply (assumptions involving residential mortgages).
6. Multiple purpose transactions. A transaction meets the definition
of this section if any part of the loan proceeds will be used to finance
the acquisition or initial construction of the consumer's principal
dwelling. For example, a transaction to finance the initial construction
of the consumer's principal dwelling is a residential mortgage
transaction even if a portion of the funds will be disbursed directly to
the consumer or used to satisfy a loan for the purchase of the land on
which the dwelling will be built.
7. Construction on previously acquired vacant land. A residential
mortgage transaction includes a loan to finance the construction of a
consumer's principal dwelling on a vacant lot previously acquired by the
consumer.
2(a)(25) Security Interest
1. Threshold test. The threshold test is whether a particular
interest in property is recognized as a security interest under
applicable law. The regulation does not determine whether a particular
interest is a security interest under applicable law. If the creditor is
unsure whether a particular interest is a security interest under
applicable law (for example, if statutes and case law are either silent
or inconclusive on the issue), the creditor may at its option consider
such interests as security interests for Truth in Lending purposes.
However, the regulation and the commentary do exclude specific
interests, such as after-acquired property and accessories, from the
scope of the definition regardless of their categorization under
applicable law, and these named exclusions may not be disclosed as
security interests under the regulation. (But see the discussion of
exclusions elsewhere in the commentary to Sec. 1026.2(a)(25).)
2. Exclusions. The general definition of security interest excludes
three groups of interests: incidental interests, interests in after-
acquired property, and interests that arise solely by operation of law.
These interests may not be disclosed with the disclosures required under
Sec. Sec. 1026.18, 1026.19(e) and (f), and 1026.38(l)(6), but the
creditor is not precluded from preserving these rights elsewhere in the
contract documents, or invoking and enforcing such rights, if it is
otherwise lawful to do so. If the creditor is unsure whether a
particular interest is one of the excluded interests, the creditor may,
at its option, consider such interests as security interests for
purposes of the Truth in Lending Act (15 U.S.C. 1601 et seq.) and
Regulation Z.
3. Incidental interests. i. Incidental interests in property that
are not security interests include, among other things:
A. Assignment of rents.
B. Right to condemnation proceeds.
C. Interests in accessories and replacements.
D. Interests in escrow accounts, such as for taxes and insurance.
E. Waiver of homestead or personal property rights.
ii. The notion of an incidental interest does not encompass an
explicit security interest in an insurance policy if that policy is the
primary collateral for the transaction--for example, in an insurance
premium financing transaction.
4. Operation of law. Interests that arise solely by operation of law
are excluded from the general definition. Also excluded are interests
arising by operation of law that are merely repeated or referred to in
the contract. However, if the creditor has an interest that arises by
operation of law, such as a vendor's lien, and takes an independent
security interest in the same property, such as a UCC security interest,
the latter interest is a disclosable security interest unless otherwise
provided.
5. Rescission rules. Security interests that arise solely by
operation of law are security interests for purposes of rescission.
Examples of such interests are mechanics' and materialmen's liens.
6. Specificity of disclosure. A creditor need not separately
disclose multiple security interests that it may hold in the same
collateral. The creditor need only disclose that the transaction is
secured by the collateral, even when security interests from prior
transactions remain of record and a new security interest is taken in
connection with the transaction. In disclosing the fact that the
transaction is secured by the collateral, the creditor also need not
disclose how the security interest arose. For example, in a closed-end
credit transaction, a rescission notice need not specifically state that
a new security interest is ``acquired'' or an existing security interest
is ``retained'' in the transaction. The acquisition or retention of a
security interest in the consumer's principal dwelling instead may be
disclosed in a rescission notice with a general statement such as the
following: ``Your home is the security for the new transaction.''
2(b) Rules of Construction
1. [Reserved]
2. Amount. The numerical amount must be a dollar amount unless
otherwise indicated. For example, in a closed-end transaction (Subpart
C), the amount financed and the amount of any payment must be expressed
as a dollar amount. In some cases, an amount
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should be expressed as a percentage. For example, in disclosures
provided before the first transaction under an open-end plan (Subpart
B), creditors are permitted to explain how the amount of any finance
charge will be determined; where a cash-advance fee (which is a finance
charge) is a percentage of each cash advance, the amount of the finance
charge for that fee is expressed as a percentage.
Section 1026.3--Exempt Transactions
1. Relationship to Sec. 1026.12. The provisions in Sec. 1026.12(a)
and (b) governing the issuance of credit cards and the limitations on
liability for their unauthorized use apply to all credit cards, even if
the credit cards are issued for use in connection with extensions of
credit that otherwise are exempt under this section.
3(a) Business, Commercial, Agricultural, or Organizational Credit
1. Primary purposes. A creditor must determine in each case if the
transaction is primarily for an exempt purpose. If some question exists
as to the primary purpose for a credit extension, the creditor is, of
course, free to make the disclosures, and the fact that disclosures are
made under such circumstances is not controlling on the question of
whether the transaction was exempt. (See comment 3(a)-2, however, with
respect to credit cards.)
2. Business purpose purchases. i. Business-purpose credit cards--
extensions of credit for consumer purposes. If a business-purpose credit
card is issued to a person, the provisions of the regulation do not
apply, other than as provided in Sec. Sec. 1026.12(a) and 1026.12(b),
even if extensions of credit for consumer purposes are occasionally made
using that business-purpose credit card. For example, the billing error
provisions set forth in Sec. 1026.13 do not apply to consumer-purpose
extensions of credit using a business-purpose credit card.
ii. Consumer-purpose credit cards--extensions of credit for business
purposes. If a consumer-purpose credit card is issued to a person, the
provisions of the regulation apply, even to occasional extensions of
credit for business purposes made using that consumer-purpose credit
card. For example, a consumer may assert a billing error with respect to
any extension of credit using a consumer-purpose credit card, even if
the specific extension of credit on such credit card or open-end credit
plan that is the subject of the dispute was made for business purposes.
3. Factors. In determining whether credit to finance an
acquisition--such as securities, antiques, or art--is primarily for
business or commercial purposes (as opposed to a consumer purpose), the
following factors should be considered:
i. General. A. The relationship of the borrower's primary occupation
to the acquisition. The more closely related, the more likely it is to
be business purpose.
B. The degree to which the borrower will personally manage the
acquisition. The more personal involvement there is, the more likely it
is to be business purpose.
C. The ratio of income from the acquisition to the total income of
the borrower. The higher the ratio, the more likely it is to be business
purpose.
D. The size of the transaction. The larger the transaction, the more
likely it is to be business purpose.
E. The borrower's statement of purpose for the loan.
ii. Business-purpose examples. Examples of business-purpose credit
include:
A. A loan to expand a business, even if it is secured by the
borrower's residence or personal property.
B. A loan to improve a principal residence by putting in a business
office.
C. A business account used occasionally for consumer purposes.
iii. Consumer-purpose examples. Examples of consumer-purpose credit
include:
A. Credit extensions by a company to its employees or agents if the
loans are used for personal purposes.
B. A loan secured by a mechanic's tools to pay a child's tuition.
C. A personal account used occasionally for business purposes.
4. Non-owner-occupied rental property. Credit extended to acquire,
improve, or maintain rental property (regardless of the number of
housing units) that is not owner-occupied is deemed to be for business
purposes. This includes, for example, the acquisition of a warehouse
that will be leased or a single-family house that will be rented to
another person to live in. If the owner expects to occupy the property
for more than 14 days during the coming year, the property cannot be
considered non-owner-occupied and this special rule will not apply. For
example, a beach house that the owner will occupy for a month in the
coming summer and rent out the rest of the year is owner occupied and is
not governed by this special rule. (See comment 3(a)-5, however, for
rules relating to owner-occupied rental property.)
5. Owner-occupied rental property. If credit is extended to acquire,
improve, or maintain rental property that is or will be owner-occupied
within the coming year, different rules apply:
i. Credit extended to acquire the rental property is deemed to be
for business purposes if it contains more than 2 housing units.
ii. Credit extended to improve or maintain the rental property is
deemed to be for business purposes if it contains more than 4
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housing units. Since the amended statute defines dwelling to include 1
to 4 housing units, this rule preserves the right of rescission for
credit extended for purposes other than acquisition. Neither of these
rules means that an extension of credit for property containing fewer
than the requisite number of units is necessarily consumer credit. In
such cases, the determination of whether it is business or consumer
credit should be made by considering the factors listed in comment 3(a)-
3.
6. Business credit later refinanced. Business-purpose credit that is
exempt from the regulation may later be rewritten for consumer purposes.
Such a transaction is consumer credit requiring disclosures only if the
existing obligation is satisfied and replaced by a new obligation made
for consumer purposes undertaken by the same obligor.
7. Credit card renewal. A consumer-purpose credit card that is
subject to the regulation may be converted into a business-purpose
credit card at the time of its renewal, and the resulting business-
purpose credit card would be exempt from the regulation. Conversely, a
business-purpose credit card that is exempt from the regulation may be
converted into a consumer-purpose credit card at the time of its
renewal, and the resulting consumer-purpose credit card would be subject
to the regulation.
8. Agricultural purpose. An agricultural purpose includes the
planting, propagating, nurturing, harvesting, catching, storing,
exhibiting, marketing, transporting, processing, or manufacturing of
food, beverages (including alcoholic beverages), flowers, trees,
livestock, poultry, bees, wildlife, fish, or shellfish by a natural
person engaged in farming, fishing, or growing crops, flowers, trees,
livestock, poultry, bees, or wildlife. The exemption also applies to a
transaction involving real property that includes a dwelling (for
example, the purchase of a farm with a homestead) if the transaction is
primarily for agricultural purposes.
9. Organizational credit. The exemption for transactions in which
the borrower is not a natural person applies, for example, to loans to
corporations, partnerships, associations, churches, unions, and
fraternal organizations. The exemption applies regardless of the purpose
of the credit extension and regardless of the fact that a natural person
may guarantee or provide security for the credit. But see comment 3(a)-
10 concerning credit extended to trusts.
10. Trusts. Credit extended for consumer purposes to certain trusts
is considered to be credit extended to a natural person rather than
credit extended to an organization. Specifically:
i. Trusts for tax or estate planning purposes. In some instances, a
creditor may extend credit for consumer purposes to a trust that a
consumer has created for tax or estate planning purposes (or both).
Consumers sometimes place their assets in trust, with themselves or
themselves and their families or other prospective heirs as
beneficiaries, to obtain certain tax benefits and to facilitate the
future administration of their estates. During their lifetimes, however,
such consumers may continue to use the assets and/or income of such
trusts as their property. A creditor extending credit to finance the
acquisition of, for example, a consumer's dwelling that is held in such
a trust, or to refinance existing debt secured by such a dwelling, may
prepare the note, security instrument, and similar loan documents for
execution by a trustee, rather than the beneficiaries of the trust.
Regardless of the capacity or capacities in which the loan documents are
executed, assuming the transaction is primarily for personal, family, or
household purposes, the transaction is subject to the regulation because
in substance (if not form) consumer credit is being extended.
ii. Land trusts. In some jurisdictions, a financial institution
financing a residential real estate transaction for an individual uses a
land trust mechanism. Title to the property is conveyed to the land
trust for which the financial institution itself is trustee. The
underlying installment note is executed by the financial institution in
its capacity as trustee and payment is secured by a trust deed,
reflecting title in the financial institution as trustee. In some
instances, the consumer executes a personal guaranty of the
indebtedness. The note provides that it is payable only out of the
property specifically described in the trust deed and that the trustee
has no personal liability on the note. Assuming the transactions are
primarily for personal, family, or household purposes, these
transactions are subject to the regulation because in substance (if not
form) consumer credit is being extended.
3(b) Credit Over Applicable Threshold Amount
1. Threshold amount. For purposes of Sec. 1026.3(b), the threshold
amount in effect during a particular period is the amount stated in
comment 3(b)-3 below for that period. The threshold amount is adjusted
effective January 1 of each year by any annual percentage increase in
the Consumer Price Index for Urban Wage Earners and Clerical Workers
(CPI-W) that was in effect on the preceding June 1. Comment 3(b)-3 will
be amended to provide the threshold amount for the upcoming year after
the annual percentage change in the CPI-W that was in effect on June 1
becomes available. Any increase in the threshold amount will be rounded
to the nearest $100 increment. For example, if the annual percentage
increase in the CPI-W
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would result in a $950 increase in the threshold amount, the threshold
amount will be increased by $1,000. However, if the annual percentage
increase in the CPI-W would result in a $949 increase in the threshold
amount, the threshold amount will be increased by $900.
2. No increase in the CPI-W. If the CPI-W in effect on June 1 does
not increase from the CPI-W in effect on June 1 of the previous year,
the threshold amount effective the following January 1 through December
31 will not change from the previous year. When this occurs, for the
years that follow, the threshold is calculated based on the annual
percentage change in the CPI-W applied to the dollar amount that would
have resulted, after rounding, if decreases and any subsequent increases
in the CPI-W had been taken into account.
i. Net increases. If the resulting amount calculated, after
rounding, is greater than the current threshold, then the threshold
effective January 1 the following year will increase accordingly.
ii. Net decreases. If the resulting amount calculated, after
rounding, is equal to or less than the current threshold, then the
threshold effective January 1 the following year will not change, but
future increases will be calculated based on the amount that would have
resulted.
3. Threshold. For purposes of Sec. 1026.3(b), the threshold amount
in effect during a particular period is the amount stated below for that
period.
i. Prior to July 21, 2011, the threshold amount is $25,000.
ii. From July 21, 2011 through December 31, 2011, the threshold
amount is $50,000.
iii. From January 1, 2012 through December 31, 2012, the threshold
amount is $51,800.
iv. From January 1, 2013 through December 31, 2013, the threshold
amount is $53,000.
v. From January 1, 2014 through December 31, 2014, the threshold
amount is $53,500.
vi. From January 1, 2015 through December 31, 2015, the threshold
amount is $54,600.
vii. From January 1, 2016 through December 31, 2016, the threshold
amount is $54,600.
viii. From January 1, 2017 through December 31, 2017, the threshold
amount is $54,600.
ix. From January 1, 2018 through December 31, 2018, the threshold
amount is $55,800.
4. Open-end credit. i. Qualifying for exemption. An open-end account
is exempt under Sec. 1026.3(b) (unless secured by real property, or by
personal property used or expected to be used as the consumer's
principal dwelling) if either of the following conditions is met:
A. The creditor makes an initial extension of credit at or after
account opening that exceeds the threshold amount in effect at the time
the initial extension is made. If a creditor makes an initial extension
of credit after account opening that does not exceed the threshold
amount in effect at the time the extension is made, the creditor must
have satisfied all of the applicable requirements of this part from the
date the account was opened (or earlier, if applicable), including but
not limited to the requirements of Sec. 1026.6 (account-opening
disclosures), Sec. 1026.7 (periodic statements), Sec. 1026.52
(limitations on fees), and Sec. 1026.55 (limitations on increasing
annual percentage rates, fees, and charges). For example:
1. Assume that the threshold amount in effect on January 1 is
$50,000. On February 1, an account is opened but the creditor does not
make an initial extension of credit at that time. On July 1, the
creditor makes an initial extension of credit of $60,000. In this
circumstance, no requirements of this part apply to the account.
2. Assume that the threshold amount in effect on January 1 is
$50,000. On February 1, an account is opened but the creditor does not
make an initial extension of credit at that time. On July 1, the
creditor makes an initial extension of credit of $50,000 or less. In
this circumstance, the account is not exempt and the creditor must have
satisfied all of the applicable requirements of this part from the date
the account was opened (or earlier, if applicable).
B. The creditor makes a firm written commitment at account opening
to extend a total amount of credit in excess of the threshold amount in
effect at the time the account is opened with no requirement of
additional credit information for any advances on the account (except as
permitted from time to time with respect to open-end accounts pursuant
to Sec. 1026.2(a)(20)).
ii. Subsequent changes generally. Subsequent changes to an open-end
account or the threshold amount may result in the account no longer
qualifying for the exemption in Sec. 1026.3(b). In these circumstances,
the creditor must begin to comply with all of the applicable
requirements of this part within a reasonable period of time after the
account ceases to be exempt. Once an account ceases to be exempt, the
requirements of this part apply to any balances on the account. The
creditor, however, is not required to comply with the requirements of
this part with respect to the period of time during which the account
was exempt. For example, if an open-end credit account ceases to be
exempt, the creditor must within a reasonable period of time provide the
disclosures required by Sec. 1026.6 reflecting the current terms of the
account and begin to provide periodic statements consistent with Sec.
1026.7. However, the creditor is not required to disclose fees or
charges imposed while the account was exempt. Furthermore, if the
creditor provided disclosures consistent with the requirements of this
part while the account was exempt, it is not required to provide
disclosures required by Sec. 1026.6 reflecting the current terms of the
account. See also comment 3(b)-6.
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iii. Subsequent changes when exemption is based on initial extension
of credit. If a creditor makes an initial extension of credit that
exceeds the threshold amount in effect at that time, the open-end
account remains exempt under Sec. 1026.3(b) regardless of a subsequent
increase in the threshold amount, including an increase pursuant to
Sec. 1026.3(b)(1)(ii) as a result of an increase in the CPI-W.
Furthermore, in these circumstances, the account remains exempt even if
there are no further extensions of credit, subsequent extensions of
credit do not exceed the threshold amount, the account balance is
subsequently reduced below the threshold amount (such as through
repayment of the extension), or the credit limit for the account is
subsequently reduced below the threshold amount. However, if the initial
extension of credit on an account does not exceed the threshold amount
in effect at the time of the extension, the account is not exempt under
Sec. 1026.3(b) even if a subsequent extension exceeds the threshold
amount or if the account balance later exceeds the threshold amount (for
example, due to the subsequent accrual of interest).
iv. Subsequent changes when exemption is based on firm commitment.
A. General. If a creditor makes a firm written commitment at account
opening to extend a total amount of credit that exceeds the threshold
amount in effect at that time, the open-end account remains exempt under
Sec. 1026.3(b) regardless of a subsequent increase in the threshold
amount pursuant to Sec. 1026.3(b)(1)(ii) as a result of an increase in
the CPI-W. However, see comment 3(b)-8 with respect to the increase in
the threshold amount from $25,000 to $50,000. If an open-end account is
exempt under Sec. 1026.3(b) based on a firm commitment to extend
credit, the account remains exempt even if the amount of credit actually
extended does not exceed the threshold amount. In contrast, if the firm
commitment does not exceed the threshold amount at account opening, the
account is not exempt under Sec. 1026.3(b) even if the account balance
later exceeds the threshold amount. In addition, if a creditor reduces a
firm commitment, the account ceases to be exempt unless the reduced firm
commitment exceeds the threshold amount in effect at the time of the
reduction. For example:
1. Assume that, at account opening in year one, the threshold amount
in effect is $50,000 and the account is exempt under Sec. 1026.3(b)
based on the creditor's firm commitment to extend $55,000 in credit. If
during year one the creditor reduces its firm commitment to $53,000, the
account remains exempt under Sec. 1026.3(b). However, if during year
one the creditor reduces its firm commitment to $40,000, the account is
no longer exempt under Sec. 1026.3(b).
2. Assume that, at account opening in year one, the threshold amount
in effect is $50,000 and the account is exempt under Sec. 1026.3(b)
based on the creditor's firm commitment to extend $55,000 in credit. If
the threshold amount is $56,000 on January 1 of year six as a result of
increases in the CPI-W, the account remains exempt. However, if the
creditor reduces its firm commitment to $54,000 on July 1 of year six,
the account ceases to be exempt under Sec. 1026.3(b).
B. Initial extension of credit. If an open-end account qualifies for
a Sec. 1026.3(b) exemption at account opening based on a firm
commitment, that account may also subsequently qualify for a Sec.
1026.3(b) exemption based on an initial extension of credit. However,
that initial extension must be a single advance in excess of the
threshold amount in effect at the time the extension is made. In
addition, the account must continue to qualify for an exemption based on
the firm commitment until the initial extension of credit is made. For
example:
1. Assume that, at account opening in year one, the threshold amount
in effect is $50,000 and the account is exempt under Sec. 1026.3(b)
based on the creditor's firm commitment to extend $55,000 in credit. The
account is not used for an extension of credit during year one. On
January 1 of year two, the threshold amount is increased to $51,000
pursuant to Sec. 1026.3(b)(1)(ii) as a result of an increase in the
CPI-W. On July 1 of year two, the consumer uses the account for an
initial extension of $52,000. As a result of this extension of credit,
the account remains exempt under Sec. 1026.3(b) even if, after July 1
of year two, the creditor reduces the firm commitment to $51,000 or
less.
2. Same facts as in paragraph iv.B.1 above except that the consumer
uses the account for an initial extension of $30,000 on July 1 of year
two and for an extension of $22,000 on July 15 of year two. In these
circumstances, the account is not exempt under Sec. 1026.3(b) based on
the $30,000 initial extension of credit because that extension did not
exceed the applicable threshold amount ($51,000), although the account
remains exempt based on the firm commitment to extend $55,000 in credit.
3. Same facts as in paragraph iv.B.1 above except that, on April 1
of year two, the creditor reduces the firm commitment to $50,000, which
is below the $51,000 threshold then in effect. Because the account
ceases to qualify for a Sec. 1026.3(b) exemption on April 1 of year
two, the account does not qualify for a Sec. 1026.3(b) exemption based
on a $52,000 initial extension of credit on July 1 of year two.
5. Closed-end credit. i. Qualifying for exemption. A closed-end loan
is exempt under Sec. 1026.3(b) (unless the extension of credit is
secured by real property, or by personal property used or expected to be
used as the consumer's principal dwelling; or is a private education
loan as defined in Sec. 1026.46(b)(5)), if either of the following
conditions is met:
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A. The creditor makes an extension of credit at consummation that
exceeds the threshold amount in effect at the time of consummation. In
these circumstances, the loan remains exempt under Sec. 1026.3(b) even
if the amount owed is subsequently reduced below the threshold amount
(such as through repayment of the loan).
B. The creditor makes a commitment at consummation to extend a total
amount of credit in excess of the threshold amount in effect at the time
of consummation. In these circumstances, the loan remains exempt under
Sec. 1026.3(b) even if the total amount of credit extended does not
exceed the threshold amount.
ii. Subsequent changes. If a creditor makes a closed-end extension
of credit or commitment to extend closed-end credit that exceeds the
threshold amount in effect at the time of consummation, the closed-end
loan remains exempt under Sec. 1026.3(b) regardless of a subsequent
increase in the threshold amount. However, a closed-end loan is not
exempt under Sec. 1026.3(b) merely because it is used to satisfy and
replace an existing exempt loan, unless the new extension of credit is
itself exempt under the applicable threshold amount. For example, assume
a closed-end loan that qualified for a Sec. 1026.3(b) exemption at
consummation in year one is refinanced in year ten and that the new loan
amount is less than the threshold amount in effect in year ten. In these
circumstances, the creditor must comply with all of the applicable
requirements of this part with respect to the year ten transaction if
the original loan is satisfied and replaced by the new loan, which is
not exempt under Sec. 1026.3(b). See also comment 3(b)-6.
6. Addition of a security interest in real property or a dwelling
after account opening or consummation. i. Open-end credit. For open-end
accounts, if after account opening a security interest is taken in real
property, or in personal property used or expected to be used as the
consumer's principal dwelling, a previously exempt account ceases to be
exempt under Sec. 1026.3(b) and the creditor must begin to comply with
all of the applicable requirements of this part within a reasonable
period of time. See comment 3(b)-4.ii. If a security interest is taken
in the consumer's principal dwelling, the creditor must also give the
consumer the right to rescind the security interest consistent with
Sec. 1026.15.
ii. Closed-end credit. For closed-end loans, if after consummation a
security interest is taken in real property, or in personal property
used or expected to be used as the consumer's principal dwelling, an
exempt loan remains exempt under Sec. 1026.3(b). However, the addition
of a security interest in the consumer's principal dwelling is a
transaction for purposes of Sec. 1026.23, and the creditor must give
the consumer the right to rescind the security interest consistent with
that section. See Sec. 1026.23(a)(1) and its commentary. In contrast,
if a closed-end loan that is exempt under Sec. 1026.3(b) is satisfied
and replaced by a loan that is secured by real property, or by personal
property used or expected to be used as the consumer's principal
dwelling, the new loan is not exempt under Sec. 1026.3(b), and the
creditor must comply with all of the applicable requirements of this
part. See comment 3(b)-5.
7. Application to extensions secured by mobile homes. Because a
mobile home can be a dwelling under Sec. 1026.2(a)(19), the exemption
in Sec. 1026.3(b) does not apply to a credit extension secured by a
mobile home that is used or expected to be used as the principal
dwelling of the consumer. See comment 3(b)-6.
8. Transition rule for open-end accounts exempt prior to July 21,
2011. Section 1026.3(b)(2) applies only to open-end accounts opened
prior to July 21, 2011. Section 1026.3(b)(2) does not apply if a
security interest is taken by the creditor in real property, or in
personal property used or expected to be used as the consumer's
principal dwelling. If, on July 20, 2011, an open-end account is exempt
under Sec. 1026.3(b) based on a firm commitment to extend credit in
excess of $25,000, the account remains exempt under Sec. 1026.3(b)(2)
until December 31, 2011 (unless the firm commitment is reduced to
$25,000 or less). If the firm commitment is increased on or before
December 31, 2011 to an amount in excess of $50,000, the account remains
exempt under Sec. 1026.3(b)(1) regardless of subsequent increases in
the threshold amount as a result of increases in the CPI-W. If the firm
commitment is not increased on or before December 31, 2011 to an amount
in excess of $50,000, the account ceases to be exempt under Sec.
1026.3(b) based on a firm commitment to extend credit. For example:
i. Assume that, on July 20, 2011, the account is exempt under Sec.
1026.3(b) based on the creditor's firm commitment to extend $30,000 in
credit. On November 1, 2011, the creditor increases the firm commitment
on the account to $55,000. In these circumstances, the account remains
exempt under Sec. 1026.3(b)(1) regardless of subsequent increases in
the threshold amount as a result of increases in the CPI-W.
ii. Same facts as paragraph i above except, on November 1, 2011, the
creditor increases the firm commitment on the account to $40,000. In
these circumstances, the account ceases to be exempt under Sec.
1026.3(b)(2) after December 31, 2011, and the creditor must begin to
comply with the applicable requirements of this part.
3(c) Public Utility Credit
1. Examples. Examples of public utility services include:
i. General. A. Gas, water, or electrical services.
B. Cable television services.
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C. Installation of new sewer lines, water lines, conduits, telephone
poles, or metering equipment in an area not already serviced by the
utility.
ii. Extensions of credit not covered. The exemption does not apply
to extensions of credit, for example:
A. To purchase appliances such as gas or electric ranges, grills, or
telephones.
B. To finance home improvements such as new heating or air
conditioning systems.
3(d) Securities or Commodities Accounts
1. Coverage. This exemption does not apply to a transaction with a
broker registered solely with the state, or to a separate credit
extension in which the proceeds are used to purchase securities.
3(e) Home Fuel Budget Plans
1. Definition. Under a typical home fuel budget plan, the fuel
dealer estimates the total cost of fuel for the season, bills the
customer for an average monthly payment, and makes an adjustment in the
final payment for any difference between the estimated and the actual
cost of the fuel. Fuel is delivered as needed, no finance charge is
assessed, and the customer may withdraw from the plan at any time. Under
these circumstances, the arrangement is exempt from the regulation, even
if a charge to cover the billing costs is imposed.
3(f) Student Loan Programs
1. Coverage. This exemption applies to loans made, insured, or
guaranteed under title IV of the Higher Education Act of 1965 (20 U.S.C.
1070 et seq.). This exemption does not apply to private education loans
as defined by Sec. 1026.46(b)(5).
3(h) Partial exemption for certain mortgage loans.
1. Partial exemption. Section 1026.3(h) exempts certain transactions
from the disclosures described in Sec. 1026.19(g), and, under certain
circumstances, Sec. 1026.19(e) and (f). Section 1026.3(h) exempts
transactions from Sec. 1026.19(e) and (f) if the creditor chooses to
provide disclosures described in Sec. 1026.18 that comply with this
part pursuant to Sec. 1026.3(h)(6)(i), but does not exempt transactions
from Sec. 1026.19(e) and (f) if the creditor chooses to provide
disclosures described in Sec. 1026.19(e) and (f) that comply with this
part pursuant to Sec. 1026.3(h)(6)(ii). Creditors may provide, at their
option, either the disclosures described in Sec. 1026.18 or the
disclosures described in Sec. 1026.19(e) and (f). In providing these
disclosures, creditors must comply with all provisions of this part
relating to those disclosures. Section 1026.3(h) does not exempt
transactions from any of the other requirements of this part, to the
extent they are applicable. For transactions that would otherwise be
subject to Sec. 1026.19(e), (f), and (g), creditors must comply with
all other applicable requirements of this part, including the consumer's
right to rescind the transaction under Sec. 1026.23, to the extent that
provision is applicable.
2. Establishing compliance. The conditions that the transaction not
require the payment of interest under Sec. 1026.3(h)(3) and that
repayment of the amount of credit extended be forgiven or deferred in
accordance with Sec. 1026.3(h)(4) must be reflected in the loan
contract. The other requirements of Sec. 1026.3(h) need not be
reflected in the loan contract, but the creditor must retain evidence of
compliance with those provisions, as required by Sec. 1026.25(a) or
(c), as applicable. In particular, because the exemption in Sec.
1026.3(h) means the creditor is not required to provide the disclosures
of closing costs under Sec. 1026.37 or Sec. 1026.38 (unless the
creditor chooses to provide disclosures described in Sec. 1026.19(e)
and (f) that comply with this part), the creditor must retain evidence
reflecting that the costs payable by the consumer in connection with the
transaction at consummation are limited to recording fees, transfer
taxes, a bona fide and reasonable application fee, and a bona fide and
reasonable housing counseling fee, and that the total of application and
housing counseling fees is less than 1 percent of the amount of credit
extended, in accordance with Sec. 1026.3(h)(5). Unless the itemization
of the amount financed provided to the consumer sufficiently details
this requirement, the creditor must establish compliance with Sec.
1026.3(h)(5) by some other written document and retain it in accordance
with Sec. 1026.25(a) or (c), as applicable.
3. Relationship to partial exemption for certain federally related
mortgage loans. Regulation X provides a partial exemption from certain
Regulation X disclosure requirements in 12 CFR 1024.5(d). The partial
exemption in Regulation X, 12 CFR 1024.5(d)(2) provides that certain
Regulation X disclosure requirements do not apply to a federally related
mortgage loan, as defined in Regulation X, 12 CFR 1024.2(b), that
satisfies the criteria in Sec. 1026.3(h) of this part. For a federally
related mortgage loan that is not otherwise covered by Regulation Z,
lenders may satisfy the criteria in Sec. 1026.3(h)(6) by providing the
disclosures described in Sec. 1026.18 that comply with this part or the
disclosures described in Sec. 1026.19(e) and (f) that comply with this
part.
4. Recording fees. See comment 37(g)(1)-1 for a discussion of what
constitutes a recording fee.
5. Transfer taxes. See comment 37(g)(1)-3 for a discussion of what
constitutes a transfer tax.
[[Page 475]]
Section 1026.4--Finance Charge
4(a) Definition
1. Charges in comparable cash transactions. Charges imposed
uniformly in cash and credit transactions are not finance charges. In
determining whether an item is a finance charge, the creditor should
compare the credit transaction in question with a similar cash
transaction. A creditor financing the sale of property or services may
compare charges with those payable in a similar cash transaction by the
seller of the property or service.
i. For example, the following items are not finance charges:
A. Taxes, license fees, or registration fees paid by both cash and
credit customers.
B. Discounts that are available to cash and credit customers, such
as quantity discounts.
C. Discounts available to a particular group of consumers because
they meet certain criteria, such as being members of an organization or
having accounts at a particular financial institution. This is the case
even if an individual must pay cash to obtain the discount, provided
that credit customers who are members of the group and do not qualify
for the discount pay no more than the nonmember cash customers.
D. Charges for a service policy, auto club membership, or policy of
insurance against latent defects offered to or required of both cash and
credit customers for the same price.
ii. In contrast, the following items are finance charges:
A. Inspection and handling fees for the staged disbursement of
construction-loan proceeds.
B. Fees for preparing a Truth in Lending disclosure statement, if
permitted by law (for example, the Real Estate Settlement Procedures Act
prohibits such charges in certain transactions secured by real
property).
C. Charges for a required maintenance or service contract imposed
only in a credit transaction.
iii. If the charge in a credit transaction exceeds the charge
imposed in a comparable cash transaction, only the difference is a
finance charge. For example:
A. If an escrow agent is used in both cash and credit sales of real
estate and the agent's charge is $100 in a cash transaction and $150 in
a credit transaction, only $50 is a finance charge.
2. Costs of doing business. Charges absorbed by the creditor as a
cost of doing business are not finance charges, even though the creditor
may take such costs into consideration in determining the interest rate
to be charged or the cash price of the property or service sold.
However, if the creditor separately imposes a charge on the consumer to
cover certain costs, the charge is a finance charge if it otherwise
meets the definition. For example:
i. A discount imposed on a credit obligation when it is assigned by
a seller-creditor to another party is not a finance charge as long as
the discount is not separately imposed on the consumer. (See Sec.
1026.4(b)(6).)
ii. A tax imposed by a state or other governmental body on a
creditor is not a finance charge if the creditor absorbs the tax as a
cost of doing business and does not separately impose the tax on the
consumer. (For additional discussion of the treatment of taxes, see
other commentary to Sec. 1026.4(a).)
3. Forfeitures of interest. If the creditor reduces the interest
rate it pays or stops paying interest on the consumer's deposit account
or any portion of it for the term of a credit transaction (including,
for example, an overdraft on a checking account or a loan secured by a
certificate of deposit), the interest lost is a finance charge. (See the
commentary to Sec. 1026.4(c)(6).) For example:
i. A consumer borrows $5,000 for 90 days and secures it with a
$10,000 certificate of deposit paying 15% interest. The creditor charges
the consumer an interest rate of 6% on the loan and stops paying
interest on $5,000 of the $10,000 certificate for the term of the loan.
The interest lost is a finance charge and must be reflected in the
annual percentage rate on the loan.
ii. However, the consumer must be entitled to the interest that is
not paid in order for the lost interest to be a finance charge. For
example:
A. A consumer wishes to buy from a financial institution a $10,000
certificate of deposit paying 15% interest but has only $4,000. The
financial institution offers to lend the consumer $6,000 at an interest
rate of 6% but will pay the 15% interest only on the amount of the
consumer's deposit, $4,000. The creditor's failure to pay interest on
the $6,000 does not result in an additional finance charge on the
extension of credit, provided the consumer is entitled by the deposit
agreement with the financial institution to interest only on the amount
of the consumer's deposit.
B. A consumer enters into a combined time deposit/credit agreement
with a financial institution that establishes a time deposit account and
an open-end line of credit. The line of credit may be used to borrow
against the funds in the time deposit. The agreement provides for an
interest rate on any credit extension of, for example, 1%. In addition,
the agreement states that the creditor will pay 0% interest on the
amount of the time deposit that corresponds to the amount of the credit
extension(s). The interest that is not paid on the time deposit by the
financial institution is not a finance charge (and therefore does not
affect the annual percentage rate computation).
[[Page 476]]
4. Treatment of transaction fees on credit card plans. Any
transaction charge imposed on a cardholder by a card issuer is a finance
charge, regardless of whether the issuer imposes the same, greater, or
lesser charge on withdrawals of funds from an asset account such as a
checking or savings account. For example:
i. Any charge imposed on a credit cardholder by a card issuer for
the use of an automated teller machine (ATM) to obtain a cash advance
(whether in a proprietary, shared, interchange, or other system) is a
finance charge regardless of whether the card issuer imposes a charge on
its debit cardholders for using the ATM to withdraw cash from a consumer
asset account, such as a checking or savings account.
ii. Any charge imposed on a credit cardholder for making a purchase
or obtaining a cash advance outside the United States, with a foreign
merchant, or in a foreign currency is a finance charge, regardless of
whether a charge is imposed on debit cardholders for such transactions.
The following principles apply in determining what is a foreign
transaction fee and the amount of the fee:
A. Included are (1) fees imposed when transactions are made in a
foreign currency and converted to U.S. dollars; (2) fees imposed when
transactions are made in U.S. dollars outside the U.S.; and (3) fees
imposed when transactions are made (whether in a foreign currency or in
U.S. dollars) with a foreign merchant, such as via a merchant's Web
site. For example, a consumer may use a credit card to make a purchase
in Bermuda, in U.S. dollars, and the card issuer may impose a fee
because the transaction took place outside the United States.
B. Included are fees imposed by the card issuer and fees imposed by
a third party that performs the conversion, such as a credit card
network or the card issuer's corporate parent. (For example, in a
transaction processed through a credit card network, the network may
impose a 1 percent charge and the card-issuing bank may impose an
additional 2 percent charge, for a total of a 3 percentage point foreign
transaction fee being imposed on the consumer.)
C. Fees imposed by a third party are included only if they are
directly passed on to the consumer. For example, if a credit card
network imposes a 1 percent fee on the card issuer, but the card issuer
absorbs the fee as a cost of doing business (and only passes it on to
consumers in the general sense that the interest and fees are imposed on
all its customers to recover its costs), then the fee is not a foreign
transaction fee and need not be disclosed. In another example, if the
credit card network imposes a 1 percent fee for a foreign transaction on
the card issuer, and the card issuer imposes this same fee on the
consumer who engaged in the foreign transaction, then the fee is a
foreign transaction fee and a finance charge.
D. A card issuer is not required to disclose a fee imposed by a
merchant. For example, if the merchant itself performs the currency
conversion and adds a fee, this fee need not be disclosed by the card
issuer. Under Sec. 1026.9(d), a card issuer is not obligated to
disclose finance charges imposed by a party honoring a credit card, such
as a merchant, although the merchant is required to disclose such a
finance charge if the merchant is subject to the Truth in Lending Act
and Regulation Z.
E. The foreign transaction fee is determined by first calculating
the dollar amount of the transaction by using a currency conversion rate
outside the card issuer's and third party's control. Any amount in
excess of that dollar amount is a foreign transaction fee. Conversion
rates outside the card issuer's and third party's control include, for
example, a rate selected from the range of rates available in the
wholesale currency exchange markets, an average of the highest and
lowest rates available in such markets, or a government-mandated or
government-managed exchange rate (or a rate selected from a range of
such rates).
F. The rate used for a particular transaction need not be the same
rate that the card issuer (or third party) itself obtains in its
currency conversion operations. In addition, the rate used for a
particular transaction need not be the rate in effect on the date of the
transaction (purchase or cash advance).
5. Taxes. i. Generally, a tax imposed by a state or other
governmental body solely on a creditor is a finance charge if the
creditor separately imposes the charge on the consumer.
ii. In contrast, a tax is not a finance charge (even if it is
collected by the creditor) if applicable law imposes the tax:
A. Solely on the consumer;
B. On the creditor and the consumer jointly;
C. On the credit transaction, without indicating which party is
liable for the tax; or
D. On the creditor, if applicable law directs or authorizes the
creditor to pass the tax on to the consumer. (For purposes of this
section, if applicable law is silent as to passing on the tax, the law
is deemed not to authorize passing it on.)
iii. For example, a stamp tax, property tax, intangible tax, or any
other state or local tax imposed on the consumer, or on the credit
transaction, is not a finance charge even if the tax is collected by the
creditor.
iv. In addition, a tax is not a finance charge if it is excluded
from the finance charge by another provision of the regulation or
commentary (for example, if the tax is imposed uniformly in cash and
credit transactions).
[[Page 477]]
4(a)(1) Charges by Third Parties
1. Choosing the provider of a required service. An example of a
third-party charge included in the finance charge is the cost of
required mortgage insurance, even if the consumer is allowed to choose
the insurer.
2. Annuities associated with reverse mortgages. Some creditors offer
annuities in connection with a reverse-mortgage transaction. The amount
of the premium is a finance charge if the creditor requires the purchase
of the annuity incident to the credit. Examples include the following:
i. The credit documents reflect the purchase of an annuity from a
specific provider or providers.
ii. The creditor assesses an additional charge on consumers who do
not purchase an annuity from a specific provider.
iii. The annuity is intended to replace in whole or in part the
creditor's payments to the consumer either immediately or at some future
date.
4(a)(2) Special Rule; Closing Agent Charges
1. General. This rule applies to charges by a third party serving as
the closing agent for the particular loan. An example of a closing agent
charge included in the finance charge is a courier fee where the
creditor requires the use of a courier.
2. Required closing agent. If the creditor requires the use of a
closing agent, fees charged by the closing agent are included in the
finance charge only if the creditor requires the particular service,
requires the imposition of the charge, or retains a portion of the
charge. Fees charged by a third-party closing agent may be otherwise
excluded from the finance charge under Sec. 1026.4. For example, a fee
that would be paid in a comparable cash transaction may be excluded
under Sec. 1026.4(a). A charge for conducting or attending a closing is
a finance charge and may be excluded only if the charge is included in
and is incidental to a lump-sum fee excluded under Sec. 1026.4(c)(7).
4(a)(3) Special Rule; Mortgage Broker Fees
1. General. A fee charged by a mortgage broker is excluded from the
finance charge if it is the type of fee that is also excluded when
charged by the creditor. For example, to exclude an application fee from
the finance charge under Sec. 1026.4(c)(1), a mortgage broker must
charge the fee to all applicants for credit, whether or not credit is
extended.
2. Coverage. This rule applies to charges paid by consumers to a
mortgage broker in connection with a consumer credit transaction secured
by real property or a dwelling.
3. Compensation by lender. The rule requires all mortgage broker
fees to be included in the finance charge. Creditors sometimes
compensate mortgage brokers under a separate arrangement with those
parties. Creditors may draw on amounts paid by the consumer, such as
points or closing costs, to fund their payment to the broker.
Compensation paid by a creditor to a mortgage broker under an agreement
is not included as a separate component of a consumer's total finance
charge (although this compensation may be reflected in the finance
charge if it comes from amounts paid by the consumer to the creditor
that are finance charges, such as points and interest).
4(b) Examples of Finance Charges
1. Relationship to other provisions. Charges or fees shown as
examples of finance charges in Sec. 1026.4(b) may be excludable under
Sec. 1026.4(c), (d), or (e). For example:
i. Premiums for credit life insurance, shown as an example of a
finance charge under Sec. 1026.4(b)(7), may be excluded if the
requirements of Sec. 1026.4(d)(1) are met.
ii. Appraisal fees mentioned in Sec. 1026.4(b)(4) are excluded for
real property or residential mortgage transactions under Sec.
1026.4(c)(7).
Paragraph 4(b)(2)
1. Checking account charges. A checking or transaction account
charge imposed in connection with a credit feature is a finance charge
under Sec. 1026.4(b)(2) to the extent the charge exceeds the charge for
a similar account without a credit feature. If a charge for an account
with a credit feature does not exceed the charge for an account without
a credit feature, the charge is not a finance charge under Sec.
1026.4(b)(2). To illustrate:
i. A $5 service charge is imposed on an account with an overdraft
line of credit (where the institution has agreed in writing to pay an
overdraft), while a $3 service charge is imposed on an account without a
credit feature; the $2 difference is a finance charge. (If the
difference is not related to account activity, however, it may be
excludable as a participation fee. See the commentary to Sec.
1026.4(c)(4).)
ii. A $5 service charge is imposed for each item that results in an
overdraft on an account with an overdraft line of credit, while a $25
service charge is imposed for paying or returning each item on a similar
account without a credit feature; the $5 charge is not a finance charge.
Paragraph 4(b)(3)
1. Assumption fees. The assumption fees mentioned in Sec.
1026.4(b)(3) are finance charges only when the assumption occurs and the
fee is imposed on the new buyer. The assumption fee is a finance charge
in the new buyer's transaction.
[[Page 478]]
Paragraph 4(b)(5)
1. Credit loss insurance. Common examples of the insurance against
credit loss mentioned in Sec. 1026.4(b)(5) are mortgage guaranty
insurance, holder in due course insurance, and repossession insurance.
Such premiums must be included in the finance charge only for the period
that the creditor requires the insurance to be maintained.
2. Residual value insurance. Where a creditor requires a consumer to
maintain residual value insurance or where the creditor is a beneficiary
of a residual value insurance policy written in connection with an
extension of credit (as is the case in some forms of automobile balloon-
payment financing, for example), the premiums for the insurance must be
included in the finance charge for the period that the insurance is to
be maintained. If a creditor pays for residual-value insurance and
absorbs the payment as a cost of doing business, such costs are not
considered finance charges. (See comment 4(a)-2.)
Paragraphs 4(b)(7) and (b)(8)
1. Pre-existing insurance policy. The insurance discussed in Sec.
1026.4(b)(7) and (b)(8) does not include an insurance policy (such as a
life or an automobile collision insurance policy) that is already owned
by the consumer, even if the policy is assigned to or otherwise made
payable to the creditor to satisfy an insurance requirement. Such a
policy is not ``written in connection with'' the transaction, as long as
the insurance was not purchased for use in that credit extension, since
it was previously owned by the consumer.
2. Insurance written in connection with a transaction. Credit
insurance sold before or after an open-end (not home-secured) plan is
opened is considered ``written in connection with a credit
transaction.'' Insurance sold after consummation in closed-end credit
transactions or after the opening of a home-equity plan subject to the
requirements of Sec. 1026.40 is not considered ``written in connection
with'' the credit transaction if the insurance is written because of the
consumer's default (for example, by failing to obtain or maintain
required property insurance) or because the consumer requests insurance
after consummation or the opening of a home-equity plan subject to the
requirements of Sec. 1026.40 (although credit-sale disclosures may be
required for the insurance sold after consummation if it is financed).
3. Substitution of life insurance. The premium for a life insurance
policy purchased and assigned to satisfy a credit life insurance
requirement must be included in the finance charge, but only to the
extent of the cost of the credit life insurance if purchased from the
creditor or the actual cost of the policy (if that is less than the cost
of the insurance available from the creditor). If the creditor does not
offer the required insurance, the premium to be included in the finance
charge is the cost of a policy of insurance of the type, amount, and
term required by the creditor.
4. Other insurance. Fees for required insurance not of the types
described in Sec. 1026.4(b)(7) and (b)(8) are finance charges and are
not excludable. For example, the premium for a hospitalization insurance
policy, if it is required to be purchased only in a credit transaction,
is a finance charge.
Paragraph 4(b)(9)
1. Discounts for payment by other than credit. The discounts to
induce payment by other than credit mentioned in Sec. 1026.4(b)(9)
include, for example, the following situation: The seller of land offers
individual tracts for $10,000 each. If the purchaser pays cash, the
price is $9,000, but if the purchaser finances the tract with the seller
the price is $10,000. The $1,000 difference is a finance charge for
those who buy the tracts on credit.
2. Exception for cash discounts. i. Creditors may exclude from the
finance charge discounts offered to consumers for using cash or another
means of payment instead of using a credit card or an open-end plan. The
discount may be in whatever amount the seller desires, either as a
percentage of the regular price (as defined in section 103(z) of the
Act, as amended) or a dollar amount. Pursuant to section 167(b) of the
Act, this provision applies only to transactions involving an open-end
credit plan or a credit card (whether open-end or closed-end credit is
extended on the card). The merchant must offer the discount to
prospective buyers whether or not they are cardholders or members of the
open-end credit plan. The merchant may, however, make other
distinctions. For example:
A. The merchant may limit the discount to payment by cash and not
offer it for payment by check or by use of a debit card.
B. The merchant may establish a discount plan that allows a 15%
discount for payment by cash, a 10% discount for payment by check, and a
5% discount for payment by a particular credit card. None of these
discounts is a finance charge.
ii. Pursuant to section 171(c) of the Act, discounts excluded from
the finance charge under this paragraph are also excluded from treatment
as a finance charge or other charge for credit under any state usury or
disclosure laws.
3. Determination of the regular price. i. The regular price is
critical in determining whether the difference between the price charged
to cash customers and credit customers is a discount or a surcharge, as
these terms are defined in amended section 103 of the Act. The regular
price is defined in section 103 of the Act as--* * * the tag or posted
price charged for the property or service if a single price is tagged or
posted, or the price charged for the property or service when payment is
made
[[Page 479]]
by use of an open-end credit account or a credit card if either (1) no
price is tagged or posted, or (2) two prices are tagged or posted * * *.
ii. For example, in the sale of motor vehicle fuel, the tagged or
posted price is the price displayed at the pump. As a result, the higher
price (the open-end credit or credit card price) must be displayed at
the pump, either alone or along with the cash price. Service station
operators may designate separate pumps or separate islands as being for
either cash or credit purchases and display only the appropriate prices
at the various pumps. If a pump is capable of displaying on its meter
either a cash or a credit price depending upon the consumer's means of
payment, both the cash price and the credit price must be displayed at
the pump. A service station operator may display the cash price of fuel
by itself on a curb sign, as long as the sign clearly indicates that the
price is limited to cash purchases.
Paragraph 4(b)(10)
1. Definition. Debt cancellation coverage provides for payment or
satisfaction of all or part of a debt when a specified event occurs. The
term ``debt cancellation coverage'' includes guaranteed automobile
protection, or ``GAP,'' agreements, which pay or satisfy the remaining
debt after property insurance benefits are exhausted. Debt suspension
coverage provides for suspension of the obligation to make one or more
payments on the date(s) otherwise required by the credit agreement, when
a specified event occurs. The term ``debt suspension'' does not include
loan payment deferral arrangements in which the triggering event is the
bank's unilateral decision to allow a deferral of payment and the
borrower's unilateral election to do so, such as by skipping or reducing
one or more payments (``skip payments'').
2. Coverage written in connection with a transaction. Coverage sold
after consummation in closed-end credit transactions or after the
opening of a home-equity plan subject to the requirements of Sec.
1026.40 is not ``written in connection with'' the credit transaction if
the coverage is written because the consumer requests coverage after
consummation or the opening of a home-equity plan subject to the
requirements of Sec. 1026.40 (although credit-sale disclosures may be
required for the coverage sold after consummation if it is financed).
Coverage sold before or after an open-end (not home-secured) plan is
opened is considered ``written in connection with a credit
transaction.''
4(c) Charges Excluded From the Finance Charge
Paragraph 4(c)(1)
1. Application fees. An application fee that is excluded from the
finance charge is a charge to recover the costs associated with
processing applications for credit. The fee may cover the costs of
services such as credit reports, credit investigations, and appraisals.
The creditor is free to impose the fee in only certain of its loan
programs, such as mortgage loans. However, if the fee is to be excluded
from the finance charge under Sec. 1026.4(c)(1), it must be charged to
all applicants, not just to applicants who are approved or who actually
receive credit.
Paragraph 4(c)(2)
1. Late payment charges. i. Late payment charges can be excluded
from the finance charge under Sec. 1026.4(c)(2) whether or not the
person imposing the charge continues to extend credit on the account or
continues to provide property or services to the consumer. In
determining whether a charge is for actual unanticipated late payment on
a 30-day account, for example, factors to be considered include:
A. The terms of the account. For example, is the consumer required
by the account terms to pay the account balance in full each month? If
not, the charge may be a finance charge.
B. The practices of the creditor in handling the accounts. For
example, regardless of the terms of the account, does the creditor allow
consumers to pay the accounts over a period of time without demanding
payment in full or taking other action to collect? If no effort is made
to collect the full amount due, the charge may be a finance charge.
ii. section 1026.4(c)(2) applies to late payment charges imposed for
failure to make payments as agreed, as well as failure to pay an account
in full when due.
2. Other excluded charges. Charges for ``delinquency, default, or a
similar occurrence'' include, for example, charges for reinstatement of
credit privileges or for submitting as payment a check that is later
returned unpaid.
Paragraph 4(c)(3)
1. Assessing interest on an overdraft balance. A charge on an
overdraft balance computed by applying a rate of interest to the amount
of the overdraft is not a finance charge, even though the consumer
agrees to the charge in the account agreement, unless the financial
institution agrees in writing that it will pay such items.
Paragraph 4(c)(4)
1. Participation fees--periodic basis. The participation fees
described in Sec. 1026.4(c)(4) do not necessarily have to be formal
membership fees, nor are they limited to credit card plans. The
provision applies to any credit plan in which payment of a fee is a
condition of access to the plan itself, but it does not
[[Page 480]]
apply to fees imposed separately on individual closed-end transactions.
The fee may be charged on a monthly, annual, or other periodic basis; a
one-time, non-recurring fee imposed at the time an account is opened is
not a fee that is charged on a periodic basis, and may not be treated as
a participation fee.
2. Participation fees--exclusions. Minimum monthly charges, charges
for non-use of a credit card, and other charges based on either account
activity or the amount of credit available under the plan are not
excluded from the finance charge by Sec. 1026.4(c)(4). Thus, for
example, a fee that is charged and then refunded to the consumer based
on the extent to which the consumer uses the credit available would be a
finance charge. (See the commentary to Sec. 1026.4(b)(2). Also, see
comment 14(c)-2 for treatment of certain types of fees excluded in
determining the annual percentage rate for the periodic statement.)
Paragraph 4(c)(5)
1. Seller's points. The seller's points mentioned in Sec.
1026.4(c)(5) include any charges imposed by the creditor upon the
noncreditor seller of property for providing credit to the buyer or for
providing credit on certain terms. These charges are excluded from the
finance charge even if they are passed on to the buyer, for example, in
the form of a higher sales price. Seller's points are frequently
involved in real estate transactions guaranteed or insured by
governmental agencies. A commitment fee paid by a noncreditor seller
(such as a real estate developer) to the creditor should be treated as
seller's points. Buyer's points (that is, points charged to the buyer by
the creditor), however, are finance charges.
2. Other seller-paid amounts. Mortgage insurance premiums and other
finance charges are sometimes paid at or before consummation or
settlement on the borrower's behalf by a noncreditor seller. The
creditor should treat the payment made by the seller as seller's points
and exclude it from the finance charge if, based on the seller's
payment, the consumer is not legally bound to the creditor for the
charge. A creditor who gives disclosures before the payment has been
made should base them on the best information reasonably available.
Paragraph 4(c)(6)
1. Lost interest. Certain Federal and state laws mandate a
percentage differential between the interest rate paid on a deposit and
the rate charged on a loan secured by that deposit. In some situations,
because of usury limits the creditor must reduce the interest rate paid
on the deposit and, as a result, the consumer loses some of the interest
that would otherwise have been earned. Under Sec. 1026.4(c)(6), such
``lost interest'' need not be included in the finance charge. This rule
applies only to an interest reduction imposed because a rate
differential is required by law and a usury limit precludes compliance
by any other means. If the creditor imposes a differential that exceeds
that required, only the lost interest attributable to the excess amount
is a finance charge. (See the commentary to Sec. 1026.4(a).)
4(c)(7) Real-Estate Related Fees
1. Real estate or residential mortgage transaction charges. The list
of charges in Sec. 1026.4(c)(7) applies both to residential mortgage
transactions (which may include, for example, the purchase of a mobile
home) and to other transactions secured by real estate. The fees are
excluded from the finance charge even if the services for which the fees
are imposed are performed by the creditor's employees rather than by a
third party. In addition, the cost of verifying or confirming
information connected to the item is also excluded. For example, credit-
report fees cover not only the cost of the report but also the cost of
verifying information in the report. In all cases, charges excluded
under Sec. 1026.4(c)(7) must be bona fide and reasonable.
2. Lump-sum charges. If a lump sum charged for several services
includes a charge that is not excludable, a portion of the total should
be allocated to that service and included in the finance charge.
However, a lump sum charged for conducting or attending a closing (for
example, by a lawyer or a title company) is excluded from the finance
charge if the charge is primarily for services related to items listed
in Sec. 1026.4(c)(7) (for example, reviewing or completing documents),
even if other incidental services such as explaining various documents
or disbursing funds for the parties are performed. The entire charge is
excluded even if a fee for the incidental services would be a finance
charge if it were imposed separately.
3. Charges assessed during the loan term. Real estate or residential
mortgage transaction charges excluded under Sec. 1026.4(c)(7) are those
charges imposed solely in connection with the initial decision to grant
credit. This would include, for example, a fee to search for tax liens
on the property or to determine if flood insurance is required. The
exclusion does not apply to fees for services to be performed
periodically during the loan term, regardless of when the fee is
collected. For example, a fee for one or more determinations during the
loan term of the current tax-lien status or flood-insurance requirements
is a finance charge, regardless of whether the fee is imposed at
closing, or when the service is performed. If a creditor is uncertain
about what portion of a fee to be paid at consummation or loan closing
is related to the initial decision to grant credit,
[[Page 481]]
the entire fee may be treated as a finance charge.
4(d) Insurance and Debt Cancellation and Debt Suspension Coverage
1. General. Section 1026.4(d) permits insurance premiums and charges
and debt cancellation and debt suspension charges to be excluded from
the finance charge. The required disclosures must be made in writing,
except as provided in Sec. 1026.4(d)(4). The rules on location of
insurance and debt cancellation and debt suspension disclosures for
closed-end transactions are in Sec. 1026.17(a). For purposes of Sec.
1026.4(d), all references to insurance also include debt cancellation
and debt suspension coverage unless the context indicates otherwise.
2. Timing of disclosures. If disclosures are given early, for
example under Sec. 1026.17(f) or Sec. 1026.19(a), the creditor need
not redisclose if the actual premium is different at the time of
consummation. If insurance disclosures are not given at the time of
early disclosure and insurance is in fact written in connection with the
transaction, the disclosures under Sec. 1026.4(d) must be made in order
to exclude the premiums from the finance charge.
3. Premium rate increases. The creditor should disclose the premium
amount based on the rates currently in effect and need not designate it
as an estimate even if the premium rates may increase. An increase in
insurance rates after consummation of a closed-end credit transaction or
during the life of an open-end credit plan does not require redisclosure
in order to exclude the additional premium from treatment as a finance
charge.
4. Unit-cost disclosures. i. Open-end credit. The premium or fee for
insurance or debt cancellation or debt suspension for the initial term
of coverage may be disclosed on a unit-cost basis in open-end credit
transactions. The cost per unit should be based on the initial term of
coverage, unless one of the options under comment 4(d)-12 is available.
ii. Closed-end credit. One of the transactions for which unit-cost
disclosures (such as 50 cents per year for each $100 of the amount
financed) may be used in place of the total insurance premium involves a
particular kind of insurance plan. For example, a consumer with a
current indebtedness of $8,000 is covered by a plan of credit life
insurance coverage with a maximum of $10,000. The consumer requests an
additional $4,000 loan to be covered by the same insurance plan. Since
the $4,000 loan exceeds, in part, the maximum amount of indebtedness
that can be covered by the plan, the creditor may properly give the
insurance-cost disclosures on the $4,000 loan on a unit-cost basis.
5. Required credit life insurance; debt cancellation or suspension
coverage. Credit life, accident, health, or loss-of-income insurance,
and debt cancellation and suspension coverage described in Sec.
1026.4(b)(10), must be voluntary in order for the premium or charges to
be excluded from the finance charge. Whether the insurance or coverage
is in fact required or optional is a factual question. If the insurance
or coverage is required, the premiums must be included in the finance
charge, whether the insurance or coverage is purchased from the creditor
or from a third party. If the consumer is required to elect one of
several options--such as to purchase credit life insurance, or to assign
an existing life insurance policy, or to pledge security such as a
certificate of deposit--and the consumer purchases the credit life
insurance policy, the premium must be included in the finance charge.
(If the consumer assigns a preexisting policy or pledges security
instead, no premium is included in the finance charge. The security
interest would be disclosed under Sec. 1026.6(a)(4), Sec.
1026.6(b)(5)(ii), or Sec. 1026.18(m). See the commentary to Sec.
1026.4(b)(7) and (b)(8).)
6. Other types of voluntary insurance. Insurance is not credit life,
accident, health, or loss-of-income insurance if the creditor or the
credit account of the consumer is not the beneficiary of the insurance
coverage. If the premium for such insurance is not imposed by the
creditor as an incident to or a condition of credit, it is not covered
by Sec. 1026.4.
7. Signatures. If the creditor offers a number of insurance options
under Sec. 1026.4(d), the creditor may provide a means for the consumer
to sign or initial for each option, or it may provide for a single
authorizing signature or initial with the options selected designated by
some other means, such as a check mark. The insurance authorization may
be signed or initialed by any consumer, as defined in Sec.
1026.2(a)(11), or by an authorized user on a credit card account.
8. Property insurance. To exclude property insurance premiums or
charges from the finance charge, the creditor must allow the consumer to
choose the insurer and disclose that fact. This disclosure must be made
whether or not the property insurance is available from or through the
creditor. The requirement that an option be given does not require that
the insurance be readily available from other sources. The premium or
charge must be disclosed only if the consumer elects to purchase the
insurance from the creditor; in such a case, the creditor must also
disclose the term of the property insurance coverage if it is less than
the term of the obligation.
9. Single-interest insurance. Blanket and specific single-interest
coverage are treated the same for purposes of the regulation. A charge
for either type of single-interest insurance may be excluded from the
finance charge if:
i. The insurer waives any right of subrogation.
[[Page 482]]
ii. The other requirements of Sec. 1026.4(d)(2) are met. This
includes, of course, giving the consumer the option of obtaining the
insurance from a person of the consumer's choice. The creditor need not
ascertain whether the consumer is able to purchase the insurance from
someone else.
10. Single-interest insurance defined. The term single-interest
insurance as used in the regulation refers only to the types of coverage
traditionally included in the term vendor's single-interest insurance
(or VSI), that is, protection of tangible property against normal
property damage, concealment, confiscation, conversion, embezzlement,
and skip. Some comprehensive insurance policies may include a variety of
additional coverages, such as repossession insurance and holder-in-due-
course insurance. These types of coverage do not constitute single-
interest insurance for purposes of the regulation, and premiums for them
do not qualify for exclusion from the finance charge under Sec.
1026.4(d). If a policy that is primarily VSI also provides coverages
that are not VSI or other property insurance, a portion of the premiums
must be allocated to the nonexcludable coverages and included in the
finance charge. However, such allocation is not required if the total
premium in fact attributable to all of the non-VSI coverages included in
the policy is $1.00 or less (or $5.00 or less in the case of a multiyear
policy).
11. Initial term. i. The initial term of insurance or debt
cancellation or debt suspension coverage determines the period for which
a premium amount must be disclosed, unless one of the options discussed
under comment 4(d)-12 is available. For purposes of Sec. 1026.4(d), the
initial term is the period for which the insurer or creditor is
obligated to provide coverage, even though the consumer may be allowed
to cancel the coverage or coverage may end due to nonpayment before that
term expires.
ii. For example: A. The initial term of a property insurance policy
on an automobile that is written for one year is one year even though
premiums are paid monthly and the term of the credit transaction is four
years.
B. The initial term of an insurance policy is the full term of the
credit transaction if the consumer pays or finances a single premium in
advance.
12. Initial term; alternative. i. General. A creditor has the option
of providing cost disclosures on the basis of one year of insurance or
debt cancellation or debt suspension coverage instead of a longer
initial term (provided the premium or fee is clearly labeled as being
for one year) if:
A. The initial term is indefinite or not clear, or
B. The consumer has agreed to pay a premium or fee that is assessed
periodically but the consumer is under no obligation to continue the
coverage, whether or not the consumer has made an initial payment.
ii. Open-end plans. For open-end plans, a creditor also has the
option of providing unit-cost disclosure on the basis of a period that
is less than one year if the consumer has agreed to pay a premium or fee
that is assessed periodically, for example monthly, but the consumer is
under no obligation to continue the coverage.
iii. Examples. To illustrate:
A. A credit life insurance policy providing coverage for a 30-year
mortgage loan has an initial term of 30 years, even though premiums are
paid monthly and the consumer is not required to continue the coverage.
Disclosures may be based on the initial term, but the creditor also has
the option of making disclosures on the basis of coverage for an assumed
initial term of one year.
13. Loss-of-income insurance. The loss-of-income insurance mentioned
in Sec. 1026.4(d) includes involuntary unemployment insurance, which
provides that some or all of the consumer's payments will be made if the
consumer becomes unemployed involuntarily.
4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees
1. General. Fees charged for the specialized form of debt
cancellation agreement known as guaranteed automobile protection
(``GAP'') agreements must be disclosed according to Sec. 1026.4(d)(3)
rather than according to Sec. 1026.4(d)(2) for property insurance.
2. Disclosures. Creditors can comply with Sec. 1026.4(d)(3) by
providing a disclosure that refers to debt cancellation or debt
suspension coverage whether or not the coverage is considered insurance.
Creditors may use the model credit insurance disclosures only if the
debt cancellation or debt suspension coverage constitutes insurance
under state law. (See Model Clauses and Samples at G-16 and H-17 in
appendix G and appendix H to part 1026 for guidance on how to provide
the disclosure required by Sec. 1026.4(d)(3)(iii) for debt suspension
products.)
3. Multiple events. If debt cancellation or debt suspension coverage
for two or more events is provided at a single charge, the entire charge
may be excluded from the finance charge if at least one of the events is
accident or loss of life, health, or income and the conditions specified
in Sec. 1026.4(d)(3) or, as applicable, Sec. 1026.4(d)(4), are
satisfied.
4. Disclosures in programs combining debt cancellation and debt
suspension features. If the consumer's debt can be cancelled under
certain circumstances, the disclosure may be modified to reflect that
fact. The disclosure could, for example, state (in addition to the
language required by Sec. 1026.4(d)(3)(iii)) that ``In some
circumstances, my debt may be cancelled.'' However, the disclosure would
not be permitted to list the specific events that would result in debt
cancellation.
[[Page 483]]
4(d)(4) Telephone Purchases
1. Affirmative request. A creditor would not satisfy the requirement
to obtain a consumer's affirmative request if the ``request'' was a
response to a script that uses leading questions or negative consent. A
question asking whether the consumer wishes to enroll in the credit
insurance or debt cancellation or suspension plan and seeking a yes-or-
no response (such as ``Do you want to enroll in this optional debt
cancellation plan?'') would not be considered leading.
4(e) Certain Security Interest Charges
1. Examples. i. Excludable charges. Sums must be actually paid to
public officials to be excluded from the finance charge under Sec.
1026.4(e)(1) and (e)(3). Examples are charges or other fees required for
filing or recording security agreements, mortgages, continuation
statements, termination statements, and similar documents, as well as
intangible property or other taxes even when the charges or fees are
imposed by the state solely on the creditor and charged to the consumer
(if the tax must be paid to record a security agreement). (See comment
4(a)-5 regarding the treatment of taxes, generally.)
ii. Charges not excludable. If the obligation is between the
creditor and a third party (an assignee, for example), charges or other
fees for filing or recording security agreements, mortgages,
continuation statements, termination statements, and similar documents
relating to that obligation are not excludable from the finance charge
under this section.
2. Itemization. The various charges described in Sec. 1026.4(e)(1)
and (e)(3) may be totaled and disclosed as an aggregate sum, or they may
be itemized by the specific fees and taxes imposed. If an aggregate sum
is disclosed, a general term such as security interest fees or filing
fees may be used.
3. Notary fees. In order for a notary fee to be excluded under Sec.
1026.4(e)(1), all of the following conditions must be met:
i. The document to be notarized is one used to perfect, release, or
continue a security interest.
ii. The document is required by law to be notarized.
iii. A notary is considered a public official under applicable law.
iv. The amount of the fee is set or authorized by law.
4. Nonfiling insurance. The exclusion in Sec. 1026.4(e)(2) is
available only if nonfiling insurance is purchased. If the creditor
collects and simply retains a fee as a sort of ``self-insurance''
against nonfiling, it may not be excluded from the finance charge. If
the nonfiling insurance premium exceeds the amount of the fees
excludable from the finance charge under Sec. 1026.4(e)(1), only the
excess is a finance charge. For example:
i. The fee for perfecting a security interest is $5.00 and the fee
for releasing the security interest is $3.00. The creditor charges
$10.00 for nonfiling insurance. Only $8.00 of the $10.00 is excludable
from the finance charge.
4(f) Prohibited Offsets
1. Earnings on deposits or investments. The rule that the creditor
shall not deduct any earnings by the consumer on deposits or investments
applies whether or not the creditor has a security interest in the
property.
Subpart B--Open-End Credit
Section 1026.5--General Disclosure Requirements
5(a) Form of Disclosures
5(a)(1) General
1. Clear and conspicuous standard. The ``clear and conspicuous''
standard generally requires that disclosures be in a reasonably
understandable form. Disclosures for credit card applications and
solicitations under Sec. 1026.60, highlighted account-opening
disclosures under Sec. 1026.6(b)(1), highlighted disclosure on checks
that access a credit card under Sec. 1026.9(b)(3), highlighted change-
in-terms disclosures under Sec. 1026.9(c)(2)(iv)(D), and highlighted
disclosures when a rate is increased due to delinquency, default or for
a penalty under Sec. 1026.9(g)(3)(ii) must also be readily noticeable
to the consumer.
2. Clear and conspicuous--reasonably understandable form. Except
where otherwise provided, the reasonably understandable form standard
does not require that disclosures be segregated from other material or
located in any particular place on the disclosure statement, or that
numerical amounts or percentages be in any particular type size. For
disclosures that are given orally, the standard requires that they be
given at a speed and volume sufficient for a consumer to hear and
comprehend them. (See comment 5(b)(1)(ii)-1.) Except where otherwise
provided, the standard does not prohibit:
i. Pluralizing required terminology (``finance charge'' and ``annual
percentage rate'').
ii. Adding to the required disclosures such items as contractual
provisions, explanations of contract terms, state disclosures, and
translations.
iii. Sending promotional material with the required disclosures.
iv. Using commonly accepted or readily understandable abbreviations
(such as ``mo.'' for ``month'' or ``TX'' for ``Texas'') in making any
required disclosures.
v. Using codes or symbols such as ``APR'' (for annual percentage
rate), ``FC'' (for finance charge), or ``Cr'' (for credit balance), so
long as a legend or description of the code or symbol is provided on the
disclosure statement.
[[Page 484]]
3. Clear and conspicuous--readily noticeable standard. To meet the
readily noticeable standard, disclosures for credit card applications
and solicitations under Sec. 1026.60, highlighted account-opening
disclosures under Sec. 1026.6(b)(1), highlighted disclosures on checks
that access a credit card account under Sec. 1026.9(b)(3), highlighted
change-in-terms disclosures under Sec. 1026.9(c)(2)(iv)(D), and
highlighted disclosures when a rate is increased due to delinquency,
default or penalty pricing under Sec. 1026.9(g)(3)(ii) must be given in
a minimum of 10-point font. (See special rule for font size requirements
for the annual percentage rate for purchases under Sec. Sec.
1026.60(b)(1) and 1026.6(b)(2)(i).)
4. Integrated document. The creditor may make both the account-
opening disclosures (Sec. 1026.6) and the periodic-statement
disclosures (Sec. 1026.7) on more than one page, and use both the front
and the reverse sides, except where otherwise indicated, so long as the
pages constitute an integrated document. An integrated document would
not include disclosure pages provided to the consumer at different times
or disclosures interspersed on the same page with promotional material.
An integrated document would include, for example:
i. Multiple pages provided in the same envelope that cover related
material and are folded together, numbered consecutively, or clearly
labeled to show that they relate to one another; or
ii. A brochure that contains disclosures and explanatory material
about a range of services the creditor offers, such as credit, checking
account, and electronic fund transfer features.
5. Disclosures covered. Disclosures that must meet the ``clear and
conspicuous'' standard include all required communications under this
subpart. Therefore, disclosures made by a person other than the card
issuer, such as disclosures of finance charges imposed at the time of
honoring a consumer's credit card under Sec. 1026.9(d), and notices,
such as the correction notice required to be sent to the consumer under
Sec. 1026.13(e), must also be clear and conspicuous.
Paragraph 5(a)(1)(ii)(A)
1. Electronic disclosures. Disclosures that need not be provided in
writing under Sec. 1026.5(a)(1)(ii)(A) may be provided in writing,
orally, or in electronic form. If the consumer requests the service in
electronic form, such as on the creditor's Web site, the specified
disclosures may be provided in electronic form without regard to the
consumer consent or other provisions of the Electronic Signatures in
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
Paragraph 5(a)(1)(iii)
1. Disclosures not subject to E-Sign Act. See the commentary to
Sec. 1026.5(a)(1)(ii)(A) regarding disclosures (in addition to those
specified under Sec. 1026.5(a)(1)(iii)) that may be provided in
electronic form without regard to the consumer consent or other
provisions of the E-Sign Act.
5(a)(2) Terminology
1. When disclosures must be more conspicuous. For home-equity plans
subject to Sec. 1026.40, the terms finance charge and annual percentage
rate, when required to be used with a number, must be disclosed more
conspicuously than other required disclosures, except in the cases
provided in Sec. 1026.5(a)(2)(ii). At the creditor's option, finance
charge and annual percentage rate may also be disclosed more
conspicuously than the other required disclosures even when the
regulation does not so require. The following examples illustrate these
rules:
i. In disclosing the annual percentage rate as required by Sec.
1026.6(a)(1)(ii), the term annual percentage rate is subject to the more
conspicuous rule.
ii. In disclosing the amount of the finance charge, required by
Sec. 1026.7(a)(6)(i), the term finance charge is subject to the more
conspicuous rule.
iii. Although neither finance charge nor annual percentage rate need
be emphasized when used as part of general informational material or in
textual descriptions of other terms, emphasis is permissible in such
cases. For example, when the terms appear as part of the explanations
required under Sec. 1026.6(a)(1)(iii) and (a)(1)(iv), they may be
equally conspicuous as the disclosures required under Sec. Sec.
1026.6(a)(1)(ii) and 1026.7(a)(7).
2. Making disclosures more conspicuous. In disclosing the terms
finance charge and annual percentage rate more conspicuously for home-
equity plans subject to Sec. 1026.40, only the words finance charge and
annual percentage rate should be accentuated. For example, if the term
total finance charge is used, only finance charge should be emphasized.
The disclosures may be made more conspicuous by, for example:
i. Capitalizing the words when other disclosures are printed in
lower case.
ii. Putting them in bold print or a contrasting color.
iii. Underlining them.
iv. Setting them off with asterisks.
v. Printing them in larger type.
3. Disclosure of figures--exception to more conspicuous rule. For
home-equity plans subject to Sec. 1026.40, the terms annual percentage
rate and finance charge need not be more conspicuous than figures
(including, for example, numbers, percentages, and dollar signs).
4. Consistent terminology. Language used in disclosures required in
this subpart must be
[[Page 485]]
close enough in meaning to enable the consumer to relate the different
disclosures; however, the language need not be identical.
5(b) Time of Disclosures
5(b)(1) Account-Opening Disclosures
5(b)(1)(i) General Rule
1. Disclosure before the first transaction. When disclosures must be
furnished ``before the first transaction,'' account-opening disclosures
must be delivered before the consumer becomes obligated on the plan.
Examples include:
i. Purchases. The consumer makes the first purchase, such as when a
consumer opens a credit plan and makes purchases contemporaneously at a
retail store, except when the consumer places a telephone call to make
the purchase and opens the plan contemporaneously. (See commentary to
Sec. 1026.5(b)(1)(iii) below.)
ii. Advances. The consumer receives the first advance. If the
consumer receives a cash advance check at the same time the account-
opening disclosures are provided, disclosures are still timely if the
consumer can, after receiving the disclosures, return the cash advance
check to the creditor without obligation (for example, without paying
finance charges).
2. Reactivation of suspended account. If an account is temporarily
suspended (for example, because the consumer has exceeded a credit
limit, or because a credit card is reported lost or stolen) and then is
reactivated, no new account-opening disclosures are required.
3. Reopening closed account. If an account has been closed (for
example, due to inactivity, cancellation, or expiration) and then is
reopened, new account-opening disclosures are required. No new account-
opening disclosures are required, however, when the account is closed
merely to assign it a new number (for example, when a credit card is
reported lost or stolen) and the ``new'' account then continues on the
same terms.
4. Converting closed-end to open-end credit. If a closed-end credit
transaction is converted to an open-end credit account under a written
agreement with the consumer, account-opening disclosures under Sec.
1026.6 must be given before the consumer becomes obligated on the open-
end credit plan. (See the commentary to Sec. 1026.17 on converting
open-end credit to closed-end credit.)
5. Balance transfers. A creditor that solicits the transfer by a
consumer of outstanding balances from an existing account to a new open-
end plan must furnish the disclosures required by Sec. 1026.6 so that
the consumer has an opportunity, after receiving the disclosures, to
contact the creditor before the balance is transferred and decline the
transfer. For example, assume a consumer responds to a card issuer's
solicitation for a credit card account subject to Sec. 1026.60 that
offers a range of balance transfer annual percentage rates, based on the
consumer's creditworthiness. If the creditor opens an account for the
consumer, the creditor would comply with the timing rules of this
section by providing the consumer with the annual percentage rate (along
with the fees and other required disclosures) that would apply to the
balance transfer in time for the consumer to contact the creditor and
withdraw the request. A creditor that permits consumers to withdraw the
request by telephone has met this timing standard if the creditor does
not effect the balance transfer until 10 days after the creditor has
sent account-opening disclosures to the consumer, assuming the consumer
has not contacted the creditor to withdraw the request. Card issuers
that are subject to the requirements of Sec. 1026.60 may establish
procedures that comply with both Sec. Sec. 1026.60 and 1026.6 in a
single disclosure statement.
6. Substitution or replacement of credit card accounts. i.
Generally. When a card issuer substitutes or replaces an existing credit
card account with another credit card account, the card issuer must
either provide notice of the terms of the new account consistent with
Sec. 1026.6(b) or provide notice of the changes in the terms of the
existing account consistent with Sec. 1026.9(c)(2). Whether a
substitution or replacement results in the opening of a new account or a
change in the terms of an existing account for purposes of the
disclosure requirements in Sec. Sec. 1026.6(b) and 1026.9(c)(2) is
determined in light of all the relevant facts and circumstances. For
additional requirements and limitations related to the substitution or
replacement of credit card accounts, see Sec. Sec. 1026.12(a) and
1026.55(d) and comments 12(a)(1)-1 through -8, 12(a)(2)-1 through -9,
55(b)(3)-3, and 55(d)-1 through -3.
ii. Relevant facts and circumstances. Listed below are facts and
circumstances that are relevant to whether a substitution or replacement
results in the opening of a new account or a change in the terms of an
existing account for purposes of the disclosure requirements in
Sec. Sec. 1026.6(b) and 1026.9(c)(2). When most of the facts and
circumstances listed below are present, the substitution or replacement
likely constitutes the opening of a new account for which Sec.
1026.6(b) disclosures are appropriate. When few of the facts and
circumstances listed below are present, the substitution or replacement
likely constitutes a change in the terms of an existing account for
which Sec. 1026.9(c)(2) disclosures are appropriate.
A. Whether the card issuer provides the consumer with a new credit
card;
B. Whether the card issuer provides the consumer with a new account
number;
C. Whether the account provides new features or benefits after the
substitution or replacement (such as rewards on purchases);
[[Page 486]]
D. Whether the account can be used to conduct transactions at a
greater or lesser number of merchants after the substitution or
replacement (such as when a retail card is replaced with a cobranded
general purpose credit card that can be used at a wider number of
merchants);
E. Whether the card issuer implemented the substitution or
replacement on an individualized basis (such as in response to a
consumer's request); and
F. Whether the account becomes a different type of open-end plan
after the substitution or replacement (such as when a charge card is
replaced by a credit card).
iii. Replacement as a result of theft or unauthorized use.
Notwithstanding paragraphs i and ii above, a card issuer that replaces a
credit card or provides a new account number because the consumer has
reported the card stolen or because the account appears to have been
used for unauthorized transactions is not required to provide a notice
under Sec. Sec. 1026.6(b) or 1026.9(c)(2) unless the card issuer has
changed a term of the account that is subject to Sec. Sec. 1026.6(b) or
1026.9(c)(2).
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured)
Plan
1. Disclosing charges before the fee is imposed. Creditors may
disclose charges imposed as part of an open-end (not home-secured) plan
orally or in writing at any time before a consumer agrees to pay the fee
or becomes obligated for the charge, unless the charge is specified
under Sec. 1026.6(b)(2). (Charges imposed as part of an open-end (not
home-secured plan) that are not specified under Sec. 1026.6(b)(2) may
alternatively be disclosed in electronic form; see the commentary to
Sec. 1026.5(a)(1)(ii)(A).) Creditors must provide such disclosures at a
time and in a manner that a consumer would be likely to notice them. For
example, if a consumer telephones a card issuer to discuss a particular
service, a creditor would meet the standard if the creditor clearly and
conspicuously discloses the fee associated with the service that is the
topic of the telephone call orally to the consumer. Similarly, a
creditor providing marketing materials in writing to a consumer about a
particular service would meet the standard if the creditor provided a
clear and conspicuous written disclosure of the fee for that service in
those same materials. A creditor that provides written materials to a
consumer about a particular service but provides a fee disclosure for
another service not promoted in such materials would not meet the
standard. For example, if a creditor provided marketing materials
promoting payment by Internet, but included the fee for a replacement
card on such materials with no explanation, the creditor would not be
disclosing the fee at a time and in a manner that the consumer would be
likely to notice the fee.
5(b)(1)(iii) Telephone Purchases
1. Return policies. In order for creditors to provide disclosures in
accordance with the timing requirements of this paragraph, consumers
must be permitted to return merchandise purchased at the time the plan
was established without paying mailing or return-shipment costs.
Creditors may impose costs to return subsequent purchases of merchandise
under the plan, or to return merchandise purchased by other means such
as a credit card issued by another creditor. A reasonable return policy
would be of sufficient duration that the consumer is likely to have
received the disclosures and had sufficient time to make a decision
about the financing plan before his or her right to return the goods
expires. Return policies need not provide a right to return goods if the
consumer consumes or damages the goods, or for installed appliances or
fixtures, provided there is a reasonable repair or replacement policy to
cover defective goods or installations. If the consumer chooses to
reject the financing plan, creditors comply with the requirements of
this paragraph by permitting the consumer to pay for the goods with
another reasonable form of payment acceptable to the merchant and keep
the goods although the creditor cannot require the consumer to do so.
5(b)(1)(iv) Membership Fees
1. Membership fees. See Sec. 1026.60(b)(2) and related commentary
for guidance on fees for issuance or availability of a credit or charge
card.
2. Rejecting the plan. If a consumer has paid or promised to pay a
membership fee including an application fee excludable from the finance
charge under Sec. 1026.4(c)(1) before receiving account-opening
disclosures, the consumer may, after receiving the disclosures, reject
the plan and not be obligated for the membership fee, application fee,
or any other fee or charge. A consumer who has received the disclosures
and uses the account, or makes a payment on the account after receiving
a billing statement, is deemed not to have rejected the plan.
3. Using the account. A consumer uses an account by obtaining an
extension of credit after receiving the account-opening disclosures,
such as by making a purchase or obtaining an advance. A consumer does
not ``use'' the account by activating the account. A consumer also does
not ``use'' the account when the creditor assesses fees on the account
(such as start-up fees or fees associated with credit insurance or debt
cancellation or suspension programs agreed to as a part of the
application and before the consumer receives account-opening
disclosures).
[[Page 487]]
For example, the consumer does not ``use'' the account when a creditor
sends a billing statement with start-up fees, there is no other activity
on the account, the consumer does not pay the fees, and the creditor
subsequently assesses a late fee or interest on the unpaid fee balances.
A consumer also does not ``use'' the account by paying an application
fee excludable from the finance charge under Sec. 1026.4(c)(1) prior to
receiving the account-opening disclosures.
4. Home-equity plans. Creditors offering home-equity plans subject
to the requirements of Sec. 1026.40 are subject to the requirements of
Sec. 1026.40(h) regarding the collection of fees.
5(b)(2) Periodic Statements
5(b)(2)(i) Statement Required
1. Periodic statements not required. Periodic statements need not be
sent in the following cases:
i. If the creditor adjusts an account balance so that at the end of
the cycle the balance is less than $1--so long as no finance charge has
been imposed on the account for that cycle.
ii. If a statement was returned as undeliverable. If a new address
is provided, however, within a reasonable time before the creditor must
send a statement, the creditor must resume sending statements. Receiving
the address at least 20 days before the end of a cycle would be a
reasonable amount of time to prepare the statement for that cycle. For
example, if an address is received 22 days before the end of the June
cycle, the creditor must send the periodic statement for the June cycle.
(See Sec. 1026.13(a)(7).)
2. Termination of draw privileges. When a consumer's ability to draw
on an open-end account is terminated without being converted to closed-
end credit under a written agreement, the creditor must continue to
provide periodic statements to those consumers entitled to receive them
under Sec. 1026.5(b)(2)(i), for example, when the draw period of an
open-end credit plan ends and consumers are paying off outstanding
balances according to the account agreement or under the terms of a
workout agreement that is not converted to a closed-end transaction. In
addition, creditors must continue to follow all of the other open-end
credit requirements and procedures in subpart B.
3. Uncollectible accounts. An account is deemed uncollectible for
purposes of Sec. 1026.5(b)(2)(i) when a creditor has ceased collection
efforts, either directly or through a third party.
4. Instituting collection proceedings. Creditors institute a
delinquency collection proceeding by filing a court action or initiating
an adjudicatory process with a third party. Assigning a debt to a debt
collector or other third party would not constitute instituting a
collection proceeding.
5(b)(2)(ii) Timing Requirements
1. Mailing or delivery of periodic statements. A creditor is not
required to determine the specific date on which a periodic statement is
mailed or delivered to an individual consumer for purposes of Sec.
1026.5(b)(2)(ii). A creditor complies with Sec. 1026.5(b)(2)(ii) if it
has adopted reasonable procedures designed to ensure that periodic
statements are mailed or delivered to consumers no later than a certain
number of days after the closing date of the billing cycle and adds that
number of days to the 21-day or 14-day period required by Sec.
1026.5(b)(2)(ii) when determining, as applicable, the payment due date
for purposes of Sec. 1026.5(b)(2)(ii)(A), the date on which any grace
period expires for purposes of Sec. 1026.5(b)(2)(ii)(B)(1), or the date
after which the payment will be treated as late for purposes of Sec.
1026.5(b)(2)(ii)(B)(2). For example:
A. If a creditor has adopted reasonable procedures designed to
ensure that periodic statements for a credit card account under an open-
end (not home-secured) consumer credit plan or an account under an open-
end consumer credit plan that provides a grace period are mailed or
delivered to consumers no later than three days after the closing date
of the billing cycle, the payment due date for purposes of Sec.
1026.5(b)(2)(ii)(A) and the date on which any grace period expires for
purposes of Sec. 1026.5(b)(2)(ii)(B)(1) must be no less than 24 days
after the closing date of the billing cycle. Similarly, in these
circumstances, the limitations in Sec. 1026.5(b)(2)(ii)(A) and
(b)(2)(ii)(B)(1) on treating a payment as late and imposing finance
charges apply for 24 days after the closing date of the billing cycle.
B. If a creditor has adopted reasonable procedures designed to
ensure that periodic statements for an account under an open-end
consumer credit plan that does not provide a grace period are mailed or
delivered to consumers no later than five days after the closing date of
the billing cycle, the date on which a payment must be received in order
to avoid being treated as late for purposes of Sec.
1026.5(b)(2)(ii)(B)(2) must be no less than 19 days after the closing
date of the billing cycle. Similarly, in these circumstances, the
limitation in Sec. 1026.5(b)(2)(ii)(B)(2) on treating a payment as late
for any purpose applies for 19 days after the closing date of the
billing cycle.
2. Treating a payment as late for any purpose. Treating a payment as
late for any purpose includes increasing the annual percentage rate as a
penalty, reporting the consumer as delinquent to a credit reporting
agency, assessing a late fee or any other fee, initiating collection
activities, or terminating benefits (such as rewards on purchases) based
on the
[[Page 488]]
consumer's failure to make a payment within a specified amount of time
or by a specified date. The prohibitions in Sec. 1026.5(b)(2)(ii)(A)(2)
and (b)(2)(B)(2)(ii) on treating a payment as late for any purpose apply
only during the 21-day or 14-day period (as applicable) following
mailing or delivery of the periodic statement stating the due date for
that payment and only if the required minimum periodic payment is
received within that period. For example:
i. Assume that, for a credit card account under an open-end (not
home-secured) consumer credit plan, a periodic statement mailed on April
4 states that a required minimum periodic payment of $50 is due on April
25. If the card issuer does not receive any payment on or before April
25, Sec. 1026.5(b)(2)(ii)(A)(2) does not prohibit the card issuer from
treating the required minimum periodic payment as late.
ii. Same facts as in paragraph i above. On April 20, the card issuer
receives a payment of $30 and no additional payment is received on or
before April 25. Section 1026.5(b)(2)(ii)(A)(2) does not prohibit the
card issuer from treating the required minimum periodic payment as late.
iii. Same facts as in paragraph i above. On May 4, the card issuer
has not received the $50 required minimum periodic payment that was due
on April 25. The periodic statement mailed on May 4 states that a
required minimum periodic payment of $150 is due on May 25. Section
1026.5(b)(2)(ii)(A)(2) does not permit the card issuer to treat the $150
required minimum periodic payment as late until April 26. However, the
card issuer may continue to treat the $50 required minimum periodic
payment as late during this period.
iv. Assume that, for an account under an open-end consumer credit
plan that does not provide a grace period, a periodic statement mailed
on September 10 states that a required minimum periodic payment of $100
is due on September 24. If the creditor does not receive any payment on
or before September 24, Sec. 1026.5(b)(2)(ii)(B)(2)(ii) does not
prohibit the creditor from treating the required minimum periodic
payment as late.
3. Grace periods. i. Definition of grace period. For purposes of
Sec. 1026.5(b)(2)(ii)(B), ``grace period'' means a period within which
any credit extended may be repaid without incurring a finance charge due
to a periodic interest rate. A deferred interest or similar promotional
program under which the consumer is not obligated to pay interest that
accrues on a balance if that balance is paid in full prior to the
expiration of a specified period of time is not a grace period for
purposes of Sec. 1026.5(b)(2)(ii)(B). Similarly, a period following the
payment due date during which a late payment fee will not be imposed is
not a grace period for purposes of Sec. 1026.5(b)(2)(ii)(B). See
comments 7(b)(11)-1, 7(b)(11)-2, and 54(a)(1)-2.
ii. Applicability of Sec. 1026.5(b)(2)(ii)(B)(1). Section
1026.5(b)(2)(ii)(B)(1) applies if an account is eligible for a grace
period when the periodic statement is mailed or delivered. Section
1026.5(b)(2)(ii)(B)(1) does not require the creditor to provide a grace
period or prohibit the creditor from placing limitations and conditions
on a grace period to the extent consistent with Sec.
1026.5(b)(2)(ii)(B) and Sec. 1026.54. See comment 54(a)(1)-1.
Furthermore, the prohibition in Sec. 1026.5(b)(2)(ii)(B)(1)(ii) applies
only during the 21-day period following mailing or delivery of the
periodic statement and applies only when the creditor receives a payment
within that 21-day period that satisfies the terms of the grace period.
iii. Example. Assume that the billing cycles for an account begin on
the first day of the month and end on the last day of the month and that
the payment due date for the account is the twenty-fifth of the month.
Assume also that, under the terms of the account, the balance at the end
of a billing cycle must be paid in full by the following payment due
date in order for the account to remain eligible for the grace period.
At the end of the April billing cycle, the balance on the account is
$500. The grace period applies to the $500 balance because the balance
for the March billing cycle was paid in full on April 25. Accordingly,
Sec. 1026.5(b)(2)(ii)(B)(1)(i) requires the creditor to have reasonable
procedures designed to ensure that the periodic statement reflecting the
$500 balance is mailed or delivered on or before May 4. Furthermore,
Sec. 1026.5(b)(2)(ii)(B)(1)(ii) requires the creditor to have
reasonable procedures designed to ensure that the creditor does not
impose finance charges as a result of the loss of the grace period if a
$500 payment is received on or before May 25. However, if the creditor
receives a payment of $300 on April 25, Sec. 1026.5(b)(2)(ii)(B)(1)(ii)
would not prohibit the creditor from imposing finance charges as a
result of the loss of the grace period (to the extent permitted by Sec.
1026.54).
4. Application of Sec. 1026.5(b)(2)(ii) to charge card and charged-
off accounts. i. Charge card accounts. For purposes of Sec.
1026.5(b)(2)(ii)(A)(1), the payment due date for a credit card account
under an open-end (not home-secured) consumer credit plan is the date
the card issuer is required to disclose on the periodic statement
pursuant to Sec. 1026.7(b)(11)(i)(A). Because Sec. 1026.7(b)(11)(ii)
provides that Sec. 1026.7(b)(11)(i) does not apply to periodic
statements provided solely for charge card accounts, Sec.
1026.5(b)(2)(ii)(A)(1) also does not apply to the mailing or delivery of
periodic statements provided solely for such accounts. However, in these
circumstances, Sec. 1026.5(b)(2)(ii)(A)(2) requires the card issuer to
have reasonable procedures designed to ensure that a payment is not
treated as late for any purpose during
[[Page 489]]
the 21-day period following mailing or delivery of the statement. A card
issuer that complies with Sec. 1026.5(b)(2)(ii)(A) as discussed above
with respect to a charge card account has also complied with Sec.
1026.5(b)(2)(ii)(B)(2). Section 1026.5(b)(2)(ii)(B)(1) does not apply to
charge card accounts because, for purposes of Sec. 1026.5(b)(2)(ii)(B),
a grace period is a period within which any credit extended may be
repaid without incurring a finance charge due to a periodic interest
rate and, consistent with Sec. 1026.2(a)(15)(iii), charge card accounts
do not impose a finance charge based on a periodic rate.
ii. Charged-off accounts. For purposes of Sec.
1026.5(b)(2)(ii)(A)(1), the payment due date for a credit card account
under an open-end (not home-secured) consumer credit plan is the date
the card issuer is required to disclose on the periodic statement
pursuant to Sec. 1026.7(b)(11)(i)(A). Because Sec. 1026.7(b)(11)(ii)
provides that Sec. 1026.7(b)(11)(i) does not apply to periodic
statements provided for charged-off accounts where full payment of the
entire account balance is due immediately, Sec. 1026.5(b)(2)(ii)(A)(1)
also does not apply to the mailing or delivery of periodic statements
provided solely for such accounts. Furthermore, although Sec.
1026.5(b)(2)(ii)(A)(2) requires the card issuer to have reasonable
procedures designed to ensure that a payment is not treated as late for
any purpose during the 21-day period following mailing or delivery of
the statement, Sec. 1026.5(b)(2)(ii)(A)(2) does not prohibit a card
issuer from continuing to treat prior payments as late during that
period. See comment 5(b)(2)(ii)-2. Similarly, although Sec.
1026.5(b)(2)(ii)(B)(2) applies to open-end consumer credit accounts in
these circumstances, Sec. 1026.5(b)(2)(ii)(B)(2)(ii) does not prohibit
a creditor from continuing treating prior payments as late during the
14-day period following mailing or delivery of a periodic statement.
Section 1026.5(b)(2)(ii)(B)(1) does not apply to charged-off accounts
where full payment of the entire account balance is due immediately
because such accounts do not provide a grace period.
5. Consumer request to pick up periodic statements. When a consumer
initiates a request, the creditor may permit, but may not require, the
consumer to pick up periodic statements. If the consumer wishes to pick
up a statement, the statement must be made available in accordance with
Sec. 1026.5(b)(2)(ii).
6. Deferred interest and similar promotional programs. See comment
7(b)-1.iv.
5(c) Basis of Disclosures and Use of Estimates
1. Legal obligation. The disclosures should reflect the credit terms
to which the parties are legally bound at the time of giving the
disclosures.
i. The legal obligation is determined by applicable state or other
law.
ii. The fact that a term or contract may later be deemed
unenforceable by a court on the basis of equity or other grounds does
not, by itself, mean that disclosures based on that term or contract did
not reflect the legal obligation.
iii. The legal obligation normally is presumed to be contained in
the contract that evidences the agreement. But this may be rebutted if
another agreement between the parties legally modifies that contract.
2. Estimates--obtaining information. Disclosures may be estimated
when the exact information is unknown at the time disclosures are made.
Information is unknown if it is not reasonably available to the creditor
at the time disclosures are made. The reasonably available standard
requires that the creditor, acting in good faith, exercise due diligence
in obtaining information. In using estimates, the creditor is not
required to disclose the basis for the estimated figures, but may
include such explanations as additional information. The creditor
normally may rely on the representations of other parties in obtaining
information. For example, the creditor might look to insurance companies
for the cost of insurance.
3. Estimates--redisclosure. If the creditor makes estimated
disclosures, redisclosure is not required for that consumer, even though
more accurate information becomes available before the first
transaction. For example, in an open-end plan to be secured by real
estate, the creditor may estimate the appraisal fees to be charged; such
an estimate might reasonably be based on the prevailing market rates for
similar appraisals. If the exact appraisal fee is determinable after the
estimate is furnished but before the consumer receives the first advance
under the plan, no new disclosure is necessary.
5(d) Multiple Creditors; Multiple Consumers
1. Multiple creditors. Under Sec. 1026.5(d):
i. Creditors must choose which of them will make the disclosures.
ii. A single, complete set of disclosures must be provided, rather
than partial disclosures from several creditors.
iii. All disclosures for the open-end credit plan must be given,
even if the disclosing creditor would not otherwise have been obligated
to make a particular disclosure.
2. Multiple consumers. Disclosures may be made to either obligor on
a joint account. Disclosure responsibilities are not satisfied by giving
disclosures to only a surety or guarantor for a principal obligor or to
an authorized user. In rescindable transactions, however, separate
disclosures must be given to each consumer who has the right to rescind
under Sec. 1026.15.
3. Card issuer and person extending credit not the same person.
Section 127(c)(4)(D) of the Truth in Lending Act (15 U.S.C.
1637(c)(4)(D)) contains rules pertaining to charge card
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issuers with plans that allow access to an open-end credit plan that is
maintained by a person other than the charge card issuer. These rules
are not implemented in Regulation Z (although they were formerly
implemented in Sec. 1026.60(f)). However, the statutory provisions
remain in effect and may be used by charge card issuers with plans
meeting the specified criteria.
5(e) Effect of Subsequent Events
1. Events causing inaccuracies. Inaccuracies in disclosures are not
violations if attributable to events occurring after disclosures are
made. For example, when the consumer fails to fulfill a prior commitment
to keep the collateral insured and the creditor then provides the
coverage and charges the consumer for it, such a change does not make
the original disclosures inaccurate. The creditor may, however, be
required to provide a new disclosure(s) under Sec. 1026.9(c).
2. Use of inserts. When changes in a creditor's plan affect required
disclosures, the creditor may use inserts with outdated disclosure
forms. Any insert:
i. Should clearly refer to the disclosure provision it replaces.
ii. Need not be physically attached or affixed to the basic
disclosure statement.
iii. May be used only until the supply of outdated forms is
exhausted.
Section 1026.6--Account-Opening Disclosures
6(a) Rules Affecting Home-Equity Plans
6(a)(1) Finance Charge
Paragraph 6(a)(1)(i)
1. When finance charges accrue. Creditors are not required to
disclose a specific date when finance charges will begin to accrue.
Creditors may provide a general explanation such as that the consumer
has 30 days from the closing date to pay the new balance before finance
charges will accrue on the account.
2. Grace periods. In disclosing whether or not a grace period
exists, the creditor need not use ``free period,'' ``free-ride period,''
``grace period'' or any other particular descriptive phrase or term. For
example, a statement that ``the finance charge begins on the date the
transaction is posted to your account'' adequately discloses that no
grace period exists. In the same fashion, a statement that ``finance
charges will be imposed on any new purchases only if they are not paid
in full within 25 days after the close of the billing cycle'' indicates
that a grace period exists in the interim.
Paragraph 6(a)(1)(ii)
1. Range of balances. The range of balances disclosure is
inapplicable:
i. If only one periodic rate may be applied to the entire account
balance.
ii. If only one periodic rate may be applied to the entire balance
for a feature (for example, cash advances), even though the balance for
another feature (purchases) may be subject to two rates (a 1.5% monthly
periodic rate on purchase balances of $0-$500, and a 1% monthly periodic
rate for balances above $500). In this example, the creditor must give a
range of balances disclosure for the purchase feature.
2. Variable-rate disclosures--coverage. i. Examples. This section
covers open-end credit plans under which rate changes are specifically
set forth in the account agreement and are tied to an index or formula.
A creditor would use variable-rate disclosures for plans involving rate
changes such as the following:
A. Rate changes that are tied to the rate the creditor pays on its
six-month certificates of deposit.
B. Rate changes that are tied to Treasury bill rates.
C. Rate changes that are tied to changes in the creditor's
commercial lending rate.
ii. An open-end credit plan in which the employee receives a lower
rate contingent upon employment (that is, with the rate to be increased
upon termination of employment) is not a variable-rate plan.
3. Variable-rate plan--rate(s) in effect. In disclosing the rate(s)
in effect at the time of the account-opening disclosures (as is required
by Sec. 1026.6(a)(1)(ii)), the creditor may use an insert showing the
current rate; may give the rate as of a specified date and then update
the disclosure from time to time, for example, each calendar month; or
may disclose an estimated rate under Sec. 1026.5(c).
4. Variable-rate plan--additional disclosures required. In addition
to disclosing the rates in effect at the time of the account-opening
disclosures, the disclosures under Sec. 1026.6(a)(1)(ii) also must be
made.
5. Variable-rate plan--index. The index to be used must be clearly
identified; the creditor need not give, however, an explanation of how
the index is determined or provide instructions for obtaining it.
6. Variable-rate plan--circumstances for increase. i. Circumstances
under which the rate(s) may increase include, for example:
A. An increase in the Treasury bill rate.
B. An increase in the Federal Reserve discount rate.
ii. The creditor must disclose when the increase will take effect;
for example:
A. ``An increase will take effect on the day that the Treasury bill
rate increases,'' or
B. ``An increase in the Federal Reserve discount rate will take
effect on the first day of the creditor's billing cycle.''
7. Variable-rate plan--limitations on increase. In disclosing any
limitations on rate increases, limitations such as the maximum increase
per year or the maximum increase
[[Page 491]]
over the duration of the plan must be disclosed. When there are no
limitations, the creditor may, but need not, disclose that fact. (A
maximum interest rate must be included in dwelling-secured open-end
credit plans under which the interest rate may be changed. See Sec.
1026.30 and the commentary to that section.) Legal limits such as usury
or rate ceilings under state or Federal statutes or regulations need not
be disclosed. Examples of limitations that must be disclosed include:
i. ``The rate on the plan will not exceed 25% annual percentage
rate.''
ii. ``Not more than \1/2\ percent increase in the annual percentage
rate per year will occur.''
8. Variable-rate plan--effects of increase. Examples of effects of
rate increases that must be disclosed include:
i. Any requirement for additional collateral if the annual
percentage rate increases beyond a specified rate.
ii. Any increase in the scheduled minimum periodic payment amount.
9. Variable-rate plan--change-in-terms notice not required. No
notice of a change in terms is required for a rate increase under a
variable-rate plan as defined in comment 6(a)(1)(ii)-2.
10. Discounted variable-rate plans. In some variable-rate plans,
creditors may set an initial interest rate that is not determined by the
index or formula used to make later interest rate adjustments.
Typically, this initial rate is lower than the rate would be if it were
calculated using the index or formula.
i. For example, a creditor may calculate interest rates according to
a formula using the six-month Treasury bill rate plus a 2 percent
margin. If the current Treasury bill rate is 10 percent, the creditor
may forgo the 2 percent spread and charge only 10 percent for a limited
time, instead of setting an initial rate of 12 percent, or the creditor
may disregard the index or formula and set the initial rate at 9
percent.
ii. When creditors use an initial rate that is not calculated using
the index or formula for later rate adjustments, the account-opening
disclosure statement should reflect:
A. The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate), together with a statement of how
long the initial rate will remain in effect;
B. The current rate that would have been applied using the index or
formula (also expressed as a periodic rate and a corresponding annual
percentage rate); and
C. The other variable-rate information required in Sec.
1026.6(a)(1)(ii).
iii. In disclosing the current periodic and annual percentage rates
that would be applied using the index or formula, the creditor may use
any of the disclosure options described in comment 6(a)(1)(ii)-3.
11. Increased penalty rates. If the initial rate may increase upon
the occurrence of one or more specific events, such as a late payment or
an extension of credit that exceeds the credit limit, the creditor must
disclose the initial rate and the increased penalty rate that may apply.
If the penalty rate is based on an index and an increased margin, the
issuer must disclose the index and the margin. The creditor must also
disclose the specific event or events that may result in the increased
rate, such as ``22% APR, if 60 days late.'' If the penalty rate cannot
be determined at the time disclosures are given, the creditor must
provide an explanation of the specific event or events that may result
in the increased rate. At the creditor's option, the creditor may
disclose the period for which the increased rate will remain in effect,
such as ``until you make three timely payments.'' The creditor need not
disclose an increased rate that is imposed when credit privileges are
permanently terminated.
Paragraph 6(a)(1)(iii)
1. Explanation of balance computation method. A shorthand phrase
such as ``previous balance method'' does not suffice in explaining the
balance computation method. (See Model Clauses G-1 and G-1(A) to part
1026.)
2. Allocation of payments. Creditors may, but need not, explain how
payments and other credits are allocated to outstanding balances. For
example, the creditor need not disclose that payments are applied to
late charges, overdue balances, and finance charges before being applied
to the principal balance; or in a multifeatured plan, that payments are
applied first to finance charges, then to purchases, and then to cash
advances. (See comment 7-1 for definition of multifeatured plan.)
Paragraph 6(a)(1)(iv)
1. Finance charges. In addition to disclosing the periodic rate(s)
under Sec. 1026.6(a)(1)(ii), creditors must disclose any other type of
finance charge that may be imposed, such as minimum, fixed, transaction,
and activity charges; required insurance; or appraisal or credit report
fees (unless excluded from the finance charge under Sec. 1026.4(c)(7)).
Creditors are not required to disclose the fact that no finance charge
is imposed when the outstanding balance is less than a certain amount or
the balance below which no finance charge will be imposed.
6(a)(2) Other Charges
1. General; examples of other charges. Under Sec. 1026.6(a)(2),
significant charges related to the plan (that are not finance charges)
must also be disclosed. For example:
i. Late-payment and over-the-credit-limit charges.
[[Page 492]]
ii. Fees for providing documentary evidence of transactions
requested under Sec. 1026.13 (billing error resolution).
iii. Charges imposed in connection with residential mortgage
transactions or real estate transactions such as title, appraisal, and
credit-report fees (see Sec. 1026.4(c)(7)).
iv. A tax imposed on the credit transaction by a state or other
governmental body, such as a documentary stamp tax on cash advances.
(See the commentary to Sec. 1026.4(a)).
v. A membership or participation fee for a package of services that
includes an open-end credit feature, unless the fee is required whether
or not the open-end credit feature is included. For example, a
membership fee to join a credit union is not an ``other charge,'' even
if membership is required to apply for credit. For example, if the
primary benefit of membership in an organization is the opportunity to
apply for a credit card, and the other benefits offered (such as a
newsletter or a member information hotline) are merely incidental to the
credit feature, the membership fee would be disclosed as an ``other
charge.''
vi. Charges imposed for the termination of an open-end credit plan.
2. Exclusions. The following are examples of charges that are not
``other charges'':
i. Fees charged for documentary evidence of transactions for income
tax purposes.
ii. Amounts payable by a consumer for collection activity after
default; attorney's fees, whether or not automatically imposed;
foreclosure costs; post-judgment interest rates imposed by law; and
reinstatement or reissuance fees.
iii. Premiums for voluntary credit life or disability insurance, or
for property insurance, that are not part of the finance charge.
iv. Application fees under Sec. 1026.4(c)(1).
v. A monthly service charge for a checking account with overdraft
protection that is applied to all checking accounts, whether or not a
credit feature is attached.
vi. Charges for submitting as payment a check that is later returned
unpaid (See commentary to Sec. 1026.4(c)(2)).
vii. Charges imposed on a cardholder by an institution other than
the card issuer for the use of the other institution's ATM in a shared
or interchange system. (See also comment 7(a)(2)-2.)
viii. Taxes and filing or notary fees excluded from the finance
charge under Sec. 1026.4(e).
ix. A fee to expedite delivery of a credit card, either at account
opening or during the life of the account, provided delivery of the card
is also available by standard mail service (or other means at least as
fast) without paying a fee for delivery.
x. A fee charged for arranging a single payment on the credit
account, upon the consumer's request (regardless of how frequently the
consumer requests the service), if the credit plan provides that the
consumer may make payments on the account by another reasonable means,
such as by standard mail service, without paying a fee to the creditor.
6(a)(3) Home-Equity Plan Information
1. Additional disclosures required. For home-equity plans, creditors
must provide several of the disclosures set forth in Sec. 1026.40(d)
along with the disclosures required under Sec. 1026.6. Creditors also
must disclose a list of the conditions that permit the creditor to
terminate the plan, freeze or reduce the credit limit, and implement
specified modifications to the original terms. (See comment
40(d)(4)(iii)-1.)
2. Form of disclosures. The home-equity disclosures provided under
this section must be in a form the consumer can keep, and are governed
by Sec. 1026.5(a)(1). The segregation standard set forth in Sec.
1026.40(a) does not apply to home-equity disclosures provided under
Sec. 1026.6.
3. Disclosure of payment and variable-rate examples. i. The payment-
example disclosure in Sec. 1026.40(d)(5)(iii) and the variable-rate
information in Sec. 1026.40(d)(12)(viii), (d)(12)(x), (d)(12)(xi), and
(d)(12)(xii) need not be provided with the disclosures under Sec.
1026.6 if the disclosures under Sec. 1026.40(d) were provided in a form
the consumer could keep; and the disclosures of the payment example
under Sec. 1026.40(d)(5)(iii), the maximum-payment example under Sec.
1026.40(d)(12)(x) and the historical table under Sec.
1026.40(d)(12)(xi) included a representative payment example for the
category of payment options the consumer has chosen.
ii. For example, if a creditor offers three payment options (one for
each of the categories described in the commentary to Sec.
1026.40(d)(5)), describes all three options in its early disclosures,
and provides all of the disclosures in a retainable form, that creditor
need not provide the Sec. 1026.40(d)(5)(iii) or (d)(12) disclosures
again when the account is opened. If the creditor showed only one of the
three options in the early disclosures (which would be the case with a
separate disclosure form rather than a combined form, as discussed under
Sec. 1026.40(a)), the disclosures under Sec. 1026.40(d)(5)(iii),
(d)(12)(viii), (d)(12)(x), (d)(12)(xi) and (d)(12)(xii) must be given to
any consumer who chooses one of the other two options. If the Sec.
1026.40(d)(5)(iii) and (d)(12) disclosures are provided with the second
set of disclosures, they need not be transaction-specific, but may be
based on a representative example of the category of payment option
chosen.
4. Disclosures for the repayment period. The creditor must provide
disclosures about both the draw and repayment phases when giving the
disclosures under Sec. 1026.6. Specifically, the creditor must make the
disclosures in Sec. 1026.6(a)(3), state the corresponding annual
[[Page 493]]
percentage rate, and provide the variable-rate information required in
Sec. 1026.6(a)(1)(ii) for the repayment phase. To the extent the
corresponding annual percentage rate, the information in Sec.
1026.6(a)(1)(ii), and any other required disclosures are the same for
the draw and repayment phase, the creditor need not repeat such
information, as long as it is clear that the information applies to both
phases.
6(a)(4) Security Interests
1. General. Creditors are not required to use specific terms to
describe a security interest, or to explain the type of security or the
creditor's rights with respect to the collateral.
2. Identification of property. Creditors sufficiently identify
collateral by type by stating, for example, motor vehicle or household
appliances. (Creditors should be aware, however, that the Federal credit
practices rules, as well as some state laws, prohibit certain security
interests in household goods.) The creditor may, at its option, provide
a more specific identification (for example, a model and serial number).
3. Spreader clause. If collateral for preexisting credit with the
creditor will secure the plan being opened, the creditor must disclose
that fact. (Such security interests may be known as ``spreader'' or
``dragnet'' clauses, or as ``cross-collateralization'' clauses.) The
creditor need not specifically identify the collateral; a reminder such
as ``collateral securing other loans with us may also secure this loan''
is sufficient. At the creditor's option, a more specific description of
the property involved may be given.
4. Additional collateral. If collateral is required when advances
reach a certain amount, the creditor should disclose the information
available at the time of the account-opening disclosures. For example,
if the creditor knows that a security interest will be taken in
household goods if the consumer's balance exceeds $1,000, the creditor
should disclose accordingly. If the creditor knows that security will be
required if the consumer's balance exceeds $1,000, but the creditor does
not know what security will be required, the creditor must disclose on
the initial disclosure statement that security will be required if the
balance exceeds $1,000, and the creditor must provide a change-in-terms
notice under Sec. 1026.9(c) at the time the security is taken. (See
comment 6(a)(4)-2.)
5. Collateral from third party. Security interests taken in
connection with the plan must be disclosed, whether the collateral is
owned by the consumer or a third party.
6(a)(5) Statement of Billing Rights
1. See the commentary to Model Forms G-3, G-3(A), G-4, and G-4(A).
6(b) Rules Affecting Open-End (Not Home-Secured) Plans
6(b)(1) Form of Disclosures; Tabular Format for Open-End (Not Home-
Secured) Plans
1. Relation to tabular summary for applications and solicitations.
See commentary to Sec. 1026.60(a), (b), and (c) regarding format and
content requirements, except for the following:
i. Creditors must use the accuracy standard for annual percentage
rates in Sec. 1026.6(b)(4)(ii)(G).
ii. Generally, creditors must disclose the specific rate for each
feature that applies to the account. If the rates on an open-end (not
home-secured) plan vary by state and the creditor is providing the
account-opening table in person at the time the plan is established in
connection with financing the purchase of goods or services the creditor
may, at its option, disclose in the account-opening table (A) the rate
applicable to the consumer's account, or (B) the range of rates, if the
disclosure includes a statement that the rate varies by state and refers
the consumer to the account agreement or other disclosure provided with
the account-opening table where the rate applicable to the consumer's
account is disclosed.
iii. Creditors must explain whether or not a grace period exists for
all features on the account. The row heading ``Paying Interest'' must be
used if any one feature on the account does not have a grace period.
iv. Creditors must name the balance computation method used for each
feature of the account and state that an explanation of the balance
computation method(s) is provided in the account-opening disclosures.
v. Creditors must state that consumers' billing rights are provided
in the account-opening disclosures.
vi. If fees on an open-end (not home-secured) plan vary by state and
the creditor is providing the account-opening table in person at the
time the plan is established in connection with financing the purchase
of goods or services the creditor may, at its option, disclose in the
account-opening table (A) the specific fee applicable to the consumer's
account, or (B) the range of fees, if the disclosure includes a
statement that the amount of the fee varies by state and refers the
consumer to the account agreement or other disclosure provided with the
account-opening table where the fee applicable to the consumer's account
is disclosed.
vii. Creditors that must disclose the amount of available credit
must state the initial credit limit provided on the account.
viii. Creditors must disclose directly beneath the table the
circumstances under which an introductory rate may be revoked and the
rate that will apply after the introductory rate is revoked. Issuers of
credit card accounts under an open-end (not home-
[[Page 494]]
secured) consumer credit plan are subject to limitations on the
circumstances under which an introductory rate may be revoked. (See
comment 60(b)(1)-5 for guidance on how a card issuer may disclose the
circumstances under which an introductory rate may be revoked.)
ix. The applicable forms providing safe harbors for account-opening
tables are under appendix G-17 to part 1026.
2. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 1026.6 disclosures.
3. Terminology. Section 1026.6(b)(1) generally requires that the
headings, content, and format of the tabular disclosures be
substantially similar, but need not be identical, to the tables in
appendix G to part 1026; but see Sec. 1026.5(a)(2) for terminology
requirements applicable to Sec. 1026.6(b).
6(b)(2) Required Disclosures for Account-Opening Table for Open-End (Not
Home-Secured) Plans
6(b)(2)(iii) Fixed Finance Charge; Minimum Interest Charge
1. Example of brief statement. See Samples G-17(B), G-17(C), and G-
17(D) for guidance on how to provide a brief description of a minimum
interest charge.
6(b)(2)(v) Grace Period
1. Grace period. Creditors must state any conditions on the
applicability of the grace period. A creditor, however, may not disclose
under Sec. 1026.6(b)(2)(v) the limitations on the imposition of finance
charges as a result of a loss of a grace period in Sec. 1026.54, or the
impact of payment allocation on whether interest is charged on
transactions as a result of a loss of a grace period. Some creditors may
offer a grace period on all types of transactions under which interest
will not be charged on transactions if the consumer pays the outstanding
balance shown on a periodic statement in full by the due date shown on
that statement for one or more billing cycles. In these circumstances,
Sec. 1026.6(b)(2)(v) requires that the creditor disclose the grace
period and the conditions for its applicability using the following
language, or substantially similar language, as applicable: ``Your due
date is [at least] ___ days after the close of each billing cycle. We
will not charge you any interest on your account if you pay your entire
balance by the due date each month.'' However, other creditors may offer
a grace period on all types of transactions under which interest may be
charged on transactions even if the consumer pays the outstanding
balance shown on a periodic statement in full by the due date shown on
that statement each billing cycle. In these circumstances, Sec.
1026.6(b)(2)(v) requires the creditor to amend the above disclosure
language to describe accurately the conditions on the applicability of
the grace period.
2. No grace period. Creditors may use the following language to
describe that no grace period is offered, as applicable: ``We will begin
charging interest on [applicable transactions] on the transaction
date.''
3. Grace period on some features. Some creditors do not offer a
grace period on cash advances and balance transfers, but offer a grace
period for all purchases under which interest will not be charged on
purchases if the consumer pays the outstanding balance shown on a
periodic statement in full by the due date shown on that statement for
one or more billing cycles. In these circumstances, Sec.
1026.6(b)(2)(v) requires that the creditor disclose the grace period for
purchases and the conditions for its applicability, and the lack of a
grace period for cash advances and balance transfers using the following
language, or substantially similar language, as applicable: ``Your due
date is [at least] ___ days after the close of each billing cycle. We
will not charge you any interest on purchases if you pay your entire
balance by the due date each month. We will begin charging interest on
cash advances and balance transfers on the transaction date.'' However,
other creditors may offer a grace period on all purchases under which
interest may be charged on purchases even if the consumer pays the
outstanding balance shown on a periodic statement in full by the due
date shown on that statement each billing cycle. In these circumstances,
Sec. 1026.6(a)(2)(v) requires the creditor to amend the above
disclosure language to describe accurately the conditions on the
applicability of the grace period. Also, some creditors may not offer a
grace period on cash advances and balance transfers, and will begin
charging interest on these transactions from a date other than the
transaction date, such as the posting date. In these circumstances,
Sec. 1026.6(a)(2)(v) requires the creditor to amend the above
disclosure language to be accurate.
6(b)(2)(vi) Balance Computation Method
1. Use of same balance computation method for all features. In cases
where the balance for each feature is computed using the same balance
computation method, a single identification of the name of the balance
computation method is sufficient. In this case, a creditor may use an
appropriate name listed in Sec. 1026.60(g) (e.g., ``average daily
balance (including new purchases)'') to satisfy the requirement to
disclose the name of the method for all features on the account, even
though the name only refers to purchases. For example, if a creditor
uses the average daily balance method including new transactions for all
features, a creditor may use the name ``average daily balance (including
[[Page 495]]
new purchases)'' listed in Sec. 1026.60(g)(i) to satisfy the
requirement to disclose the name of the balance computation method for
all features. As an alternative, in this situation, a creditor may
revise the balance computation names listed in Sec. 1026.60(g) to refer
more broadly to all new credit transactions, such as using the language
``new transactions'' or ``current transactions'' (e.g., ``average daily
balance (including new transactions)''), rather than simply referring to
new purchases when the same method is used to calculate the balances for
all features of the account. See Samples G-17(B) and G-17(C) for
guidance on how to disclose the balance computation method where the
same method is used for all features on the account.
2. Use of balance computation names in Sec. 1026.60(g) for balances
other than purchases. The names of the balance computation methods
listed in Sec. 1026.60(g) describe balance computation methods for
purchases. When a creditor is disclosing the name of the balance
computation methods separately for each feature, in using the names
listed in Sec. 1026.60(g) to satisfy the requirements of Sec.
1026.6(b)(2)(vi) for features other than purchases, a creditor must
revise the names listed in Sec. 1026.60(g) to refer to the other
features. For example, when disclosing the name of the balance
computation method applicable to cash advances, a creditor must revise
the name listed in Sec. 1026.60(g)(i) to disclose it as ``average daily
balance (including new cash advances)'' when the balance for cash
advances is figured by adding the outstanding balance (including new
cash advances and deducting payments and credits) for each day in the
billing cycle, and then dividing by the number of days in the billing
cycle. Similarly, a creditor must revise the name listed in Sec.
1026.60(g)(ii) to disclose it as ``average daily balance (excluding new
cash advances)'' when the balance for cash advances is figured by adding
the outstanding balance (excluding new cash advances and deducting
payments and credits) for each day in the billing cycle, and then
dividing by the number of days in the billing cycle. See comment
6(b)(2)(vi)-1 for guidance on the use of one balance computation name
when the same balance computation method is used for all features on the
account.
6(b)(2)(xiii) Available Credit
1. Right to reject the plan. Creditors may use the following
language to describe consumers' right to reject a plan after receiving
account-opening disclosures: ``You may still reject this plan, provided
that you have not yet used the account or paid a fee after receiving a
billing statement. If you do reject the plan, you are not responsible
for any fees or charges.''
6(b)(3) Disclosure of Charges Imposed as Part of Open-End (Not Home-
Secured) Plans
1. When finance charges accrue. Creditors are not required to
disclose a specific date when a cost that is a finance charge under
Sec. 1026.4 will begin to accrue.
2. Grace periods. In disclosing in the account agreement or
disclosure statement whether or not a grace period exists, the creditor
need not use any particular descriptive phrase or term. However, the
descriptive phrase or term must be sufficiently similar to the
disclosures provided pursuant to Sec. Sec. 1026.60(b)(5) and
1026.6(b)(2)(v) to satisfy a creditor's duty to provide consistent
terminology under Sec. 1026.5(a)(2).
3. No finance charge imposed below certain balance. Creditors are
not required to disclose the fact that no finance charge is imposed when
the outstanding balance is less than a certain amount or the balance
below which no finance charge will be imposed.
Paragraph 6(b)(3)(ii)
1. Failure to use the plan as agreed. Late payment fees, over-the-
limit fees, and fees for payments returned unpaid are examples of
charges resulting from consumers' failure to use the plan as agreed.
2. Examples of fees that affect the plan. Examples of charges the
payment, or nonpayment, of which affects the consumer's account are:
i. Access to the plan. Fees for using the card at the creditor's ATM
to obtain a cash advance, fees to obtain additional cards including
replacements for lost or stolen cards, fees to expedite delivery of
cards or other credit devices, application and membership fees, and
annual or other participation fees identified in Sec. 1026.4(c)(4).
ii. Amount of credit extended. Fees for increasing the credit limit
on the account, whether at the consumer's request or unilaterally by the
creditor.
iii. Timing or method of billing or payment. Fees to pay by
telephone or via the Internet.
3. Threshold test. If the creditor is unsure whether a particular
charge is a cost imposed as part of the plan, the creditor may at its
option consider such charges as a cost imposed as part of the plan for
purposes of the Truth in Lending Act.
Paragraph 6(b)(3)(iii)(B)
1. Fees for package of services. A fee to join a credit union is an
example of a fee for a package of services that is not imposed as part
of the plan, even if the consumer must join the credit union to apply
for credit. In contrast, a membership fee is an example of a fee for a
package of services that is considered to be imposed as part of a plan
where the primary benefit of membership in the organization is the
opportunity to apply for a credit card, and the other benefits offered
[[Page 496]]
(such as a newsletter or a member information hotline) are merely
incidental to the credit feature.
6(b)(4) Disclosure of Rates for Open-End (Not Home-Secured) Plans
6(b)(4)(i)(B) Range of Balances
1. Range of balances. Creditors are not required to disclose the
range of balances:
i. If only one periodic interest rate may be applied to the entire
account balance.
ii. If only one periodic interest rate may be applied to the entire
balance for a feature (for example, cash advances), even though the
balance for another feature (purchases) may be subject to two rates (a
1.5% monthly periodic interest rate on purchase balances of $0-$500, and
a 1% periodic interest rate for balances above $500). In this example,
the creditor must give a range of balances disclosure for the purchase
feature.
6(b)(4)(i)(D) Balance Computation Method
1. Explanation of balance computation method. Creditors do not
provide a sufficient explanation of a balance computation method by
using a shorthand phrase such as ``previous balance method'' or the name
of a balance computation method listed in Sec. 1026.60(g). (See Model
Clauses G-1(A) in appendix G to part 1026. See Sec. 1026.6(b)(2)(vi)
regarding balance computation descriptions in the account-opening
summary.)
2. Allocation of payments. Creditors may, but need not, explain how
payments and other credits are allocated to outstanding balances.
6(b)(4)(ii) Variable-Rate Accounts
1. Variable-rate disclosures--coverage. i. Examples. Examples of
open-end plans that permit the rate to change and are considered
variable-rate plans include:
A. Rate changes that are tied to the rate the creditor pays on its
six-month certificates of deposit.
B. Rate changes that are tied to Treasury bill rates.
C. Rate changes that are tied to changes in the creditor's
commercial lending rate.
ii. Examples of open-end plans that permit the rate to change and
are not considered variable-rate include:
A. Rate changes that are invoked under a creditor's contract
reservation to increase the rate without reference to such an index or
formula (for example, a plan that simply provides that the creditor
reserves the right to raise its rates).
B. Rate changes that are triggered by a specific event such as an
open-end credit plan in which the employee receives a lower rate
contingent upon employment, and the rate increases upon termination of
employment.
2. Variable-rate plan--circumstances for increase. i. The following
are examples that comply with the requirement to disclose circumstances
under which the rate(s) may increase:
A. ``The Treasury bill rate increases.''
B. ``The Federal Reserve discount rate increases.''
ii. Disclosing the frequency with which the rate may increase
includes disclosing when the increase will take effect; for example:
A. ``An increase will take effect on the day that the Treasury bill
rate increases.''
B. ``An increase in the Federal Reserve discount rate will take
effect on the first day of the creditor's billing cycle.''
3. Variable-rate plan--limitations on increase. In disclosing any
limitations on rate increases, limitations such as the maximum increase
per year or the maximum increase over the duration of the plan must be
disclosed. When there are no limitations, the creditor may, but need
not, disclose that fact. Legal limits such as usury or rate ceilings
under state or Federal statutes or regulations need not be disclosed.
Examples of limitations that must be disclosed include:
i. ``The rate on the plan will not exceed 25% annual percentage
rate.''
ii. ``Not more than \1/2\; of 1% increase in the annual percentage
rate per year will occur.''
4. Variable-rate plan--effects of increase. Examples of effects of
rate increases that must be disclosed include:
i. Any requirement for additional collateral if the annual
percentage rate increases beyond a specified rate.
ii. Any increase in the scheduled minimum periodic payment amount.
5. Discounted variable-rate plans. In some variable-rate plans,
creditors may set an initial interest rate that is not determined by the
index or formula used to make later interest rate adjustments.
Typically, this initial rate is lower than the rate would be if it were
calculated using the index or formula.
i. For example, a creditor may calculate interest rates according to
a formula using the six-month Treasury bill rate plus a 2 percent
margin. If the current Treasury bill rate is 10 percent, the creditor
may forgo the 2 percent spread and charge only 10 percent for a limited
time, instead of setting an initial rate of 12 percent, or the creditor
may disregard the index or formula and set the initial rate at 9
percent.
ii. When creditors disclose in the account-opening disclosures an
initial rate that is not calculated using the index or formula for later
rate adjustments, the disclosure should reflect:
A. The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate), together with a statement of how
long the initial rate will remain in effect;
[[Page 497]]
B. The current rate that would have been applied using the index or
formula (also expressed as a periodic rate and a corresponding annual
percentage rate); and
C. The other variable-rate information required by Sec.
1026.6(b)(4)(ii).
6(b)(4)(iii) Rate Changes Not Due to Index or Formula
1. Events that cause the initial rate to change. i. Changes based on
expiration of time period. If the initial rate will change at the
expiration of a time period, creditors that disclose the initial rate in
the account-opening disclosure must identify the expiration date and the
fact that the initial rate will end at that time.
ii. Changes based on specified contract terms. If the account
agreement provides that the creditor may change the initial rate upon
the occurrence of a specified event or events, the creditor must
identify the events or events. Examples include the consumer not making
the required minimum payment when due, or the termination of an employee
preferred rate when the employment relationship is terminated.
2. Rate that will apply after initial rate changes. i. Increased
margins. If the initial rate is based on an index and the rate may
increase due to a change in the margin applied to the index, the
creditor must disclose the increased margin. If more than one margin
could apply, the creditor may disclose the highest margin.
ii. Risk-based pricing. In some plans, the amount of the rate change
depends on how the creditor weighs the occurrence of events specified in
the account agreement that authorize the creditor to change rates, as
well as other factors. Creditors must state the increased rate that may
apply. At the creditor's option, the creditor may state the possible
rates as a range, or by stating only the highest rate that could be
assessed. The creditor must disclose the period for which the increased
rate will remain in effect, such as ``until you make three timely
payments,'' or if there is no limitation, the fact that the increased
rate may remain indefinitely.
3. Effect of rate change on balances. Creditors must disclose
information to consumers about the balance to which the new rate will
apply and the balance to which the current rate at the time of the
change will apply. Card issuers subject to Sec. 1026.55 may be subject
to certain restrictions on the application of increased rates to certain
balances.
6(b)(5) Additional Disclosures for Open-End (Not Home-Secured) Plans
6(b)(5)(i) Voluntary Credit Insurance, Debt Cancellation or Debt
Suspension
1. Timing. Under Sec. 1026.4(d), disclosures required to exclude
the cost of voluntary credit insurance or debt cancellation or debt
suspension coverage from the finance charge must be provided before the
consumer agrees to the purchase of the insurance or coverage. Creditors
comply with Sec. 1026.6(b)(5)(i) if they provide those disclosures in
accordance with Sec. 1026.4(d). For example, if the disclosures
required by Sec. 1026.4(d) are provided at application, creditors need
not repeat those disclosures at account opening.
6(b)(5)(ii) Security Interests
1. General. Creditors are not required to use specific terms to
describe a security interest, or to explain the type of security or the
creditor's rights with respect to the collateral.
2. Identification of property. Creditors sufficiently identify
collateral by type by stating, for example, motor vehicle or household
appliances. (Creditors should be aware, however, that the Federal credit
practices rules, as well as some state laws, prohibit certain security
interests in household goods.) The creditor may, at its option, provide
a more specific identification (for example, a model and serial number.)
3. Spreader clause. If collateral for preexisting credit with the
creditor will secure the plan being opened, the creditor must disclose
that fact. (Such security interests may be known as ``spreader'' or
``dragnet'' clauses, or as ``cross-collateralization'' clauses.) The
creditor need not specifically identify the collateral; a reminder such
as ``collateral securing other loans with us may also secure this loan''
is sufficient. At the creditor's option, a more specific description of
the property involved may be given.
4. Additional collateral. If collateral is required when advances
reach a certain amount, the creditor should disclose the information
available at the time of the account-opening disclosures. For example,
if the creditor knows that a security interest will be taken in
household goods if the consumer's balance exceeds $1,000, the creditor
should disclose accordingly. If the creditor knows that security will be
required if the consumer's balance exceeds $1,000, but the creditor does
not know what security will be required, the creditor must disclose on
the initial disclosure statement that security will be required if the
balance exceeds $1,000, and the creditor must provide a change-in-terms
notice under Sec. 1026.9(c) at the time the security is taken. (See
comment 6(b)(5)(ii)-2.)
5. Collateral from third party. Security interests taken in
connection with the plan must be disclosed, whether the collateral is
owned by the consumer or a third party.
6(b)(5)(iii) Statement of Billing Rights
1. See the commentary to Model Forms G-3(A) and G-4(A).
[[Page 498]]
Section 1026.7--Periodic Statement
1. Multifeatured plans. Some plans involve a number of different
features, such as purchases, cash advances, or overdraft checking.
Groups of transactions subject to different finance charge terms because
of the dates on which the transactions took place are treated like
different features for purposes of disclosures on the periodic
statements. The commentary includes additional guidance for
multifeatured plans.
7(a) Rules Affecting Home-Equity Plans
7(a)(1) Previous Balance
1. Credit balances. If the previous balance is a credit balance, it
must be disclosed in such a way so as to inform the consumer that it is
a credit balance, rather than a debit balance.
2. Multifeatured plans. In a multifeatured plan, the previous
balance may be disclosed either as an aggregate balance for the account
or as separate balances for each feature (for example, a previous
balance for purchases and a previous balance for cash advances). If
separate balances are disclosed, a total previous balance is optional.
3. Accrued finance charges allocated from payments. Some open-end
credit plans provide that the amount of the finance charge that has
accrued since the consumer's last payment is directly deducted from each
new payment, rather than being separately added to each statement and
reflected as an increase in the obligation. In such a plan, the previous
balance need not reflect finance charges accrued since the last payment.
7(a)(2) Identification of Transactions
1. Multifeatured plans. In identifying transactions under Sec.
1026.7(a)(2) for multifeatured plans, creditors may, for example, choose
to arrange transactions by feature (such as disclosing sale transactions
separately from cash advance transactions) or in some other clear
manner, such as by arranging the transactions in general chronological
order.
2. Automated teller machine (ATM) charges imposed by other
institutions in shared or interchange systems. A charge imposed on the
cardholder by an institution other than the card issuer for the use of
the other institution's ATM in a shared or interchange system and
included by the terminal-operating institution in the amount of the
transaction need not be separately disclosed on the periodic statement.
7(a)(3) Credits
1. Identification--sufficiency. The creditor need not describe each
credit by type (returned merchandise, rebate of finance charge, etc.)--
``credit'' would suffice--except if the creditor is using the periodic
statement to satisfy the billing-error correction notice requirement.
(See the commentary to Sec. 1026.13(e) and (f).)
2. Format. A creditor may list credits relating to credit extensions
(payments, rebates, etc.) together with other types of credits (such as
deposits to a checking account), as long as the entries are identified
so as to inform the consumer which type of credit each entry represents.
3. Date. If only one date is disclosed (that is, the crediting date
as required by the regulation), no further identification of that date
is necessary. More than one date may be disclosed for a single entry, as
long as it is clear which date represents the date on which credit was
given.
4. Totals. A total of amounts credited during the billing cycle is
not required.
7(a)(4) Periodic Rates
1. Disclosure of periodic rates--whether or not actually applied.
Except as provided in Sec. 1026.7(a)(4)(ii), any periodic rate that may
be used to compute finance charges (and its corresponding annual
percentage rate) must be disclosed whether or not it is applied during
the billing cycle. For example:
i. If the consumer's account has both a purchase feature and a cash
advance feature, the creditor must disclose the rate for each, even if
the consumer only makes purchases on the account during the billing
cycle.
ii. If the rate varies (such as when it is tied to a particular
index), the creditor must disclose each rate in effect during the cycle
for which the statement was issued.
2. Disclosure of periodic rates required only if imposition
possible. With regard to the periodic rate disclosure (and its
corresponding annual percentage rate), only rates that could have been
imposed during the billing cycle reflected on the periodic statement
need to be disclosed. For example:
i. If the creditor is changing rates effective during the next
billing cycle (because of a variable-rate plan), the rates required to
be disclosed under Sec. 1026.7(a)(4) are only those in effect during
the billing cycle reflected on the periodic statement. For example, if
the monthly rate applied during May was 1.5%, but the creditor will
increase the rate to 1.8% effective June 1, 1.5% (and its corresponding
annual percentage rate) is the only required disclosure under Sec.
1026.7(a)(4) for the periodic statement reflecting the May account
activity.
ii. If rates applicable to a particular type of transaction changed
after a certain date and the old rate is only being applied to
transactions that took place prior to that date, the creditor need not
continue to disclose the old rate for those consumers that have no
outstanding balances to which that rate could be applied.
3. Multiple rates--same transaction. If two or more periodic rates
are applied to the same balance for the same type of transaction (for
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example, if the finance charge consists of a monthly periodic rate of
1.5% applied to the outstanding balance and a required credit life
insurance component calculated at 0.1% per month on the same outstanding
balance), the creditor may do either of the following:
i. Disclose each periodic rate, the range of balances to which it is
applicable, and the corresponding annual percentage rate for each. (For
example, 1.5% monthly, 18% annual percentage rate; 0.1% monthly, 1.2%
annual percentage rate.)
ii. Disclose one composite periodic rate (that is, 1.6% per month)
along with the applicable range of balances and the corresponding annual
percentage rate.
4. Corresponding annual percentage rate. In disclosing the annual
percentage rate that corresponds to each periodic rate, the creditor may
use ``corresponding annual percentage rate,'' ``nominal annual
percentage rate,'' ``corresponding nominal annual percentage rate,'' or
similar phrases.
5. Rate same as actual annual percentage rate. When the
corresponding rate is the same as the annual percentage rate disclosed
under Sec. 1026.7(a)(7), the creditor need disclose only one annual
percentage rate, but must use the phrase ``annual percentage rate.''
6. Range of balances. See comment 6(a)(1)(ii)-1. A creditor is not
required to adjust the range of balances disclosure to reflect the
balance below which only a minimum charge applies.
7(a)(5) Balance on Which Finance Charge Computed
1. Limitation to periodic rates. Section 1026.7(a)(5) only requires
disclosure of the balance(s) to which a periodic rate was applied and
does not apply to balances on which other kinds of finance charges (such
as transaction charges) were imposed. For example, if a consumer obtains
a $1,500 cash advance subject to both a 1% transaction fee and a 1%
monthly periodic rate, the creditor need only disclose the balance
subject to the monthly rate (which might include portions of earlier
cash advances not paid off in previous cycles).
2. Split rates applied to balance ranges. If split rates were
applied to a balance because different portions of the balance fall
within two or more balance ranges, the creditor need not separately
disclose the portions of the balance subject to such different rates
since the range of balances to which the rates apply has been separately
disclosed. For example, a creditor could disclose a balance of $700 for
purchases even though a monthly periodic rate of 1.5% applied to the
first $500, and a monthly periodic rate of 1% to the remainder. This
option to disclose a combined balance does not apply when the finance
charge is computed by applying the split rates to each day's balance (in
contrast, for example, to applying the rates to the average daily
balance). In that case, the balances must be disclosed using any of the
options that are available if two or more daily rates are imposed. (See
comment 7(a)(5)-5.)
3. Monthly rate on average daily balance. Creditors may apply a
monthly periodic rate to an average daily balance.
4. Multifeatured plans. In a multifeatured plan, the creditor must
disclose a separate balance (or balances, as applicable) to which a
periodic rate was applied for each feature or group of features subject
to different periodic rates or different balance computation methods.
Separate balances are not required, however, merely because a grace
period is available for some features but not others. A total balance
for the entire plan is optional. This does not affect how many balances
the creditor must disclose--or may disclose--within each feature. (See,
for example, comment 7(a)(5)-5.)
5. Daily rate on daily balances. If the finance charge is computed
on the balance each day by application of one or more daily periodic
rates, the balance on which the finance charge was computed may be
disclosed in any of the following ways for each feature:
i. If a single daily periodic rate is imposed, the balance to which
it is applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. The sum of the daily balances during the billing cycle.
D. The average daily balance during the billing cycle, in which case
the creditor shall explain that the average daily balance is or can be
multiplied by the number of days in the billing cycle and the periodic
rate applied to the product to determine the amount of the finance
charge.
ii. If two or more daily periodic rates may be imposed, the balances
to which the rates are applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. Two or more average daily balances, each applicable to the daily
periodic rates imposed for the time that those rates were in effect, as
long as the creditor explains that the finance charge is or may be
determined by (1) multiplying each of the average balances by the number
of days in the billing cycle (or if the daily rate varied during the
cycle, by multiplying by the number of days the applicable rate was in
effect), (2) multiplying each of the results by the applicable daily
periodic rate, and (3) adding these products together.
6. Explanation of balance computation method. See the commentary to
6(a)(1)(iii).
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7. Information to compute balance. In connection with disclosing the
finance charge balance, the creditor need not give the consumer all of
the information necessary to compute the balance if that information is
not otherwise required to be disclosed. For example, if current
purchases are included from the date they are posted to the account, the
posting date need not be disclosed.
8. Non-deduction of credits. The creditor need not specifically
identify the total dollar amount of credits not deducted in computing
the finance charge balance. Disclosure of the amount of credits not
deducted is accomplished by listing the credits (Sec. 1026.7(a)(3)) and
indicating which credits will not be deducted in determining the balance
(for example, ``credits after the 15th of the month are not deducted in
computing the finance charge.'').
9. Use of one balance computation method explanation when multiple
balances disclosed. Sometimes the creditor will disclose more than one
balance to which a periodic rate was applied, even though each balance
was computed using the same balance computation method. For example, if
a plan involves purchases and cash advances that are subject to
different rates, more than one balance must be disclosed, even though
the same computation method is used for determining the balance for each
feature. In these cases, one explanation of the balance computation
method is sufficient. Sometimes the creditor separately discloses the
portions of the balance that are subject to different rates because
different portions of the balance fall within two or more balance
ranges, even when a combined balance disclosure would be permitted under
comment 7(a)(5)-2. In these cases, one explanation of the balance
computation method is also sufficient (assuming, of course, that all
portions of the balance were computed using the same method).
7(a)(6) Amount of Finance Charge and Other Charges
7(a)(6)(i) Finance Charges
1. Total. A total finance charge amount for the plan is not
required.
2. Itemization--types of finance charges. Each type of finance
charge (such as periodic rates, transaction charges, and minimum
charges) imposed during the cycle must be separately itemized; for
example, disclosure of only a combined finance charge attributable to
both a minimum charge and transaction charges would not be permissible.
Finance charges of the same type may be disclosed, however, individually
or as a total. For example, five transaction charges of $1 may be listed
separately or as $5.
3. Itemization--different periodic rates. Whether different periodic
rates are applicable to different types of transactions or to different
balance ranges, the creditor may give the finance charge attributable to
each rate or may give a total finance charge amount. For example, if a
creditor charges 1.5% per month on the first $500 of a balance and 1%
per month on amounts over $500, the creditor may itemize the two
components ($7.50 and $1.00) of the $8.50 charge, or may disclose $8.50.
4. Multifeatured plans. In a multifeatured plan, in disclosing the
amount of the finance charge attributable to the application of periodic
rates no total periodic rate disclosure for the entire plan need be
given.
5. Finance charges not added to account. A finance charge that is
not included in the new balance because it is payable to a third party
(such as required life insurance) must still be shown on the periodic
statement as a finance charge.
6. Finance charges other than periodic rates. See comment
6(a)(1)(iv)-1 for examples.
7. Accrued finance charges allocated from payments. Some plans
provide that the amount of the finance charge that has accrued since the
consumer's last payment is directly deducted from each new payment,
rather than being separately added to each statement and therefore
reflected as an increase in the obligation. In such a plan, no
disclosure is required of finance charges that have accrued since the
last payment.
8. Start-up fees. Points, loan fees, and similar finance charges
relating to the opening of the account that are paid prior to the
issuance of the first periodic statement need not be disclosed on the
periodic statement. If, however, these charges are financed as part of
the plan, including charges that are paid out of the first advance, the
charges must be disclosed as part of the finance charge on the first
periodic statement. However, they need not be factored into the annual
percentage rate. (See Sec. 1026.14(c)(3).)
7(a)(6)(ii) Other Charges
1. Identification. In identifying any other charges actually imposed
during the billing cycle, the type is adequately described as late
charge or membership fee, for example. Similarly, closing costs or
settlement costs, for example, may be used to describe charges imposed
in connection with real estate transactions that are excluded from the
finance charge under Sec. 1026.4(c)(7), if the same term (such as
closing costs) was used in the initial disclosures and if the creditor
chose to itemize and individually disclose the costs included in that
term. Even though the taxes and filing or notary fees excluded from the
finance charge under Sec. 1026.4(e) are not required to be disclosed as
other charges under Sec. 1026.6(a)(2), these charges may be included in
the amount shown as closing costs or settlement costs on the periodic
statement, if the charges were itemized and disclosed as part
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of the closing costs or settlement costs on the initial disclosure
statement. (See comment 6(a)(2)-1 for examples of other charges.)
2. Date. The date of imposing or debiting other charges need not be
disclosed.
3. Total. Disclosure of the total amount of other charges is
optional.
4. Itemization--types of other charges. Each type of other charge
(such as late-payment charges, over-the-credit-limit charges, and
membership fees) imposed during the cycle must be separately itemized;
for example, disclosure of only a total of other charges attributable to
both an over-the-credit-limit charge and a late-payment charge would not
be permissible. Other charges of the same type may be disclosed,
however, individually or as a total. For example, three fees of $3 for
providing copies related to the resolution of a billing error could be
listed separately or as $9.
7(a)(7) Annual Percentage Rate
1. Plans subject to the requirements of Sec. 1026.40. For home-
equity plans subject to the requirements of Sec. 1026.40, creditors are
not required to disclose an effective annual percentage rate. Creditors
that state an annualized rate in addition to the corresponding annual
percentage rate required by Sec. 1026.7(a)(4) must calculate that rate
in accordance with Sec. 1026.14(c).
2. Labels. Creditors that choose to disclose an annual percentage
rate calculated under Sec. 1026.14(c) and label the figure as ``annual
percentage rate'' must label the periodic rate expressed as an
annualized rate as the ``corresponding APR,'' ``nominal APR,'' or a
similar phrase as provided in comment 7(a)(4)-4. Creditors also comply
with the label requirement if the rate calculated under Sec. 1026.14(c)
is described as the ``effective APR'' or something similar. For those
creditors, the periodic rate expressed as an annualized rate could be
labeled ``annual percentage rate,'' consistent with the requirement
under Sec. 1026.7(b)(4). If the two rates represent different values,
creditors must label the rates differently to meet the clear and
conspicuous standard under Sec. 1026.5(a)(1).
7(a)(8) Grace Period
1. Terminology. Although the creditor is required to indicate any
time period the consumer may have to pay the balance outstanding without
incurring additional finance charges, no specific wording is required,
so long as the language used is consistent with that used on the
account-opening disclosure statement. For example, ``To avoid additional
finance charges, pay the new balance before __'' would suffice.
7(a)(9) Address for Notice of Billing Errors
1. Terminology. The periodic statement should indicate the general
purpose for the address for billing-error inquiries, although a detailed
explanation or particular wording is not required.
2. Telephone number. A telephone number, email address, or Web site
location may be included, but the mailing address for billing-error
inquiries, which is the required disclosure, must be clear and
conspicuous. The address is deemed to be clear and conspicuous if a
precautionary instruction is included that telephoning or notifying the
creditor by email or Web site will not preserve the consumer's billing
rights, unless the creditor has agreed to treat billing error notices
provided by electronic means as written notices, in which case the
precautionary instruction is required only for telephoning.
7(a)(10) Closing Date of Billing Cycle; New Balance
1. Credit balances. See comment 7(a)(1)-1.
2. Multifeatured plans. In a multifeatured plan, the new balance may
be disclosed for each feature or for the plan as a whole. If separate
new balances are disclosed, a total new balance is optional.
3. Accrued finance charges allocated from payments. Some plans
provide that the amount of the finance charge that has accrued since the
consumer's last payment is directly deducted from each new payment,
rather than being separately added to each statement and therefore
reflected as an increase in the obligation. In such a plan, the new
balance need not reflect finance charges accrued since the last payment.
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
1. Deferred interest or similar transactions. Creditors offer a
variety of payment plans for purchases that permit consumers to avoid
interest charges if the purchase balance is paid in full by a certain
date. ``Deferred interest'' has the same meaning as in Sec.
1026.16(h)(2) and associated commentary. The following provides guidance
for a deferred interest or similar plan where, for example, no interest
charge is imposed on a $500 purchase made in January if the $500 balance
is paid by July 31.
i. Annual percentage rates. Under Sec. 1026.7(b)(4), creditors must
disclose each annual percentage rate that may be used to compute the
interest charge. Under some plans with a deferred interest or similar
feature, if the deferred interest balance is not paid by a certain date,
July 31 in this example, interest charges applicable to the billing
cycles between the date of purchase in January and July 31 may be
imposed. Annual percentage rates that may apply to the deferred interest
balance ($500 in this example) if the
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balance is not paid in full by July 31 must appear on periodic
statements for the billing cycles between the date of purchase and July
31. However, if the consumer does not pay the deferred interest balance
by July 31, the creditor is not required to identify, on the periodic
statement disclosing the interest charge for the deferred interest
balance, annual percentage rates that have been disclosed in previous
billing cycles between the date of purchase and July 31.
ii. Balances subject to periodic rates. Under Sec. 1026.7(b)(5),
creditors must disclose the balances subject to interest during a
billing cycle. The deferred interest balance ($500 in this example) is
not subject to interest for billing cycles between the date of purchase
and July 31 in this example. Periodic statements sent for those billing
cycles should not include the deferred interest balance in the balance
disclosed under Sec. 1026.7(b)(5). This amount must be separately
disclosed on periodic statements and identified by a term other than the
term used to identify the balance disclosed under Sec. 1026.7(b)(5)
(such as ``deferred interest balance''). During any billing cycle in
which an interest charge on the deferred interest balance is debited to
the account, the balance disclosed under Sec. 1026.7(b)(5) should
include the deferred interest balance for that billing cycle.
iii. Amount of interest charge. Under Sec. 1026.7(b)(6)(ii),
creditors must disclose interest charges imposed during a billing cycle.
For some deferred interest purchases, the creditor may impose interest
from the date of purchase if the deferred interest balance ($500 in this
example) is not paid in full by July 31 in this example, but otherwise
will not impose interest for billing cycles between the date of purchase
and July 31. Periodic statements for billing cycles preceding July 31 in
this example should not include in the interest charge disclosed under
Sec. 1026.7(b)(6)(ii) the amounts a consumer may owe if the deferred
interest balance is not paid in full by July 31. In this example, the
February periodic statement should not identify as interest charges
interest attributable to the $500 January purchase. This amount must be
separately disclosed on periodic statements and identified by a term
other than ``interest charge'' (such as ``contingent interest charge''
or ``deferred interest charge''). The interest charge on a deferred
interest balance should be reflected on the periodic statement under
Sec. 1026.7(b)(6)(ii) for the billing cycle in which the interest
charge is debited to the account.
iv. Due date to avoid obligation for finance charges under a
deferred interest or similar program. Section 1026.7(b)(14) requires
disclosure on periodic statements of the date by which any outstanding
balance subject to a deferred interest or similar program must be paid
in full in order to avoid the obligation for finance charges on such
balance. This disclosure must appear on the front of any page of each
periodic statement issued during the deferred interest period beginning
with the first periodic statement issued during the deferred interest
period that reflects the deferred interest or similar transaction.
7(b)(1) Previous Balance
1. Credit balances. If the previous balance is a credit balance, it
must be disclosed in such a way so as to inform the consumer that it is
a credit balance, rather than a debit balance.
2. Multifeatured plans. In a multifeatured plan, the previous
balance may be disclosed either as an aggregate balance for the account
or as separate balances for each feature (for example, a previous
balance for purchases and a previous balance for cash advances). If
separate balances are disclosed, a total previous balance is optional.
3. Accrued finance charges allocated from payments. Some open-end
credit plans provide that the amount of the finance charge that has
accrued since the consumer's last payment is directly deducted from each
new payment, rather than being separately added to each statement and
reflected as an increase in the obligation. In such a plan, the previous
balance need not reflect finance charges accrued since the last payment.
7(b)(2) Identification of Transactions
1. Multifeatured plans. Creditors may, but are not required to,
arrange transactions by feature (such as disclosing purchase
transactions separately from cash advance transactions). Pursuant to
Sec. 1026.7(b)(6), however, creditors must group all fees and all
interest separately from transactions and may not disclose any fees or
interest charges with transactions.
2. Automated teller machine (ATM) charges imposed by other
institutions in shared or interchange systems. A charge imposed on the
cardholder by an institution other than the card issuer for the use of
the other institution's ATM in a shared or interchange system and
included by the terminal-operating institution in the amount of the
transaction need not be separately disclosed on the periodic statement.
7(b)(3) Credits
1. Identification--sufficiency. The creditor need not describe each
credit by type (returned merchandise, rebate of finance charge, etc.)--
``credit'' would suffice--except if the creditor is using the periodic
statement to satisfy the billing-error correction notice requirement.
(See the commentary to Sec. 1026.13(e) and (f).) Credits may be
distinguished from transactions in any way that is clear and
conspicuous, for example, by use of debit and credit columns or by use
of plus signs and/or minus signs.
[[Page 503]]
2. Date. If only one date is disclosed (that is, the crediting date
as required by the regulation), no further identification of that date
is necessary. More than one date may be disclosed for a single entry, as
long as it is clear which date represents the date on which credit was
given.
3. Totals. A total of amounts credited during the billing cycle is
not required.
7(b)(4) Periodic Rates
1. Disclosure of periodic interest rates--whether or not actually
applied. Except as provided in Sec. 1026.7(b)(4)(ii), any periodic
interest rate that may be used to compute finance charges, expressed as
and labeled ``Annual Percentage Rate,'' must be disclosed whether or not
it is applied during the billing cycle. For example:
i. If the consumer's account has both a purchase feature and a cash
advance feature, the creditor must disclose the annual percentage rate
for each, even if the consumer only makes purchases on the account
during the billing cycle.
ii. If the annual percentage rate varies (such as when it is tied to
a particular index), the creditor must disclose each annual percentage
rate in effect during the cycle for which the statement was issued.
2. Disclosure of periodic interest rates required only if imposition
possible. With regard to the periodic interest rate disclosure (and its
corresponding annual percentage rate), only rates that could have been
imposed during the billing cycle reflected on the periodic statement
need to be disclosed. For example:
i. If the creditor is changing annual percentage rates effective
during the next billing cycle (either because it is changing terms or
because of a variable-rate plan), the annual percentage rates required
to be disclosed under Sec. 1026.7(b)(4) are only those in effect during
the billing cycle reflected on the periodic statement. For example, if
the annual percentage rate applied during May was 18%, but the creditor
will increase the rate to 21% effective June 1, 18% is the only required
disclosure under Sec. 1026.7(b)(4) for the periodic statement
reflecting the May account activity.
ii. If the consumer has an overdraft line that might later be
expanded upon the consumer's request to include secured advances, the
rates for the secured advance feature need not be given until such time
as the consumer has requested and received access to the additional
feature.
iii. If annual percentage rates applicable to a particular type of
transaction changed after a certain date and the old rate is only being
applied to transactions that took place prior to that date, the creditor
need not continue to disclose the old rate for those consumers that have
no outstanding balances to which that rate could be applied.
3. Multiple rates--same transaction. If two or more periodic rates
are applied to the same balance for the same type of transaction (for
example, if the interest charge consists of a monthly periodic interest
rate of 1.5% applied to the outstanding balance and a required credit
life insurance component calculated at 0.1% per month on the same
outstanding balance), creditors must disclose the periodic interest
rate, expressed as an 18% annual percentage rate and the range of
balances to which it is applicable. Costs attributable to the credit
life insurance component must be disclosed as a fee under Sec.
1026.7(b)(6)(iii).
4. Fees. Creditors that identify fees in accordance with Sec.
1026.7(b)(6)(iii) need not identify the periodic rate at which a fee
would accrue if the fee remains unpaid. For example, assume a fee is
imposed for a late payment in the previous cycle and that the fee,
unpaid, would be included in the purchases balance and accrue interest
at the rate for purchases. The creditor need not separately disclose
that the purchase rate applies to the portion of the purchases balance
attributable to the unpaid fee.
5. Ranges of balances. See comment 6(b)(4)(i)(B)-1. A creditor is
not required to adjust the range of balances disclosure to reflect the
balance below which only a minimum charge applies.
6. Deferred interest transactions. See comment 7(b)-1.i.
7(b)(5) Balance on Which Finance Charge Computed
1. Split rates applied to balance ranges. If split rates were
applied to a balance because different portions of the balance fall
within two or more balance ranges, the creditor need not separately
disclose the portions of the balance subject to such different rates
since the range of balances to which the rates apply has been separately
disclosed. For example, a creditor could disclose a balance of $700 for
purchases even though a monthly periodic rate of 1.5% applied to the
first $500, and a monthly periodic rate of 1% to the remainder. This
option to disclose a combined balance does not apply when the interest
charge is computed by applying the split rates to each day's balance (in
contrast, for example, to applying the rates to the average daily
balance). In that case, the balances must be disclosed using any of the
options that are available if two or more daily rates are imposed. (See
comment 7(b)(5)-4.)
2. Monthly rate on average daily balance. Creditors may apply a
monthly periodic rate to an average daily balance.
3. Multifeatured plans. In a multifeatured plan, the creditor must
disclose a separate balance (or balances, as applicable) to which a
periodic rate was applied for each feature. Separate balances are not
required, however, merely because a grace period is available
[[Page 504]]
for some features but not others. A total balance for the entire plan is
optional. This does not affect how many balances the creditor must
disclose--or may disclose--within each feature. (See, for example,
comments 7(b)(5)-4 and 7(b)(4)-5.)
4. Daily rate on daily balance. If a finance charge is computed on
the balance each day by application of one or more daily periodic
interest rates, the balance on which the interest charge was computed
may be disclosed in any of the following ways for each feature:
i. If a single daily periodic interest rate is imposed, the balance
to which it is applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. The sum of the daily balances during the billing cycle.
D. The average daily balance during the billing cycle, in which case
the creditor may, at its option, explain that the average daily balance
is or can be multiplied by the number of days in the billing cycle and
the periodic rate applied to the product to determine the amount of
interest.
ii. If two or more daily periodic interest rates may be imposed, the
balances to which the rates are applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. Two or more average daily balances, each applicable to the daily
periodic interest rates imposed for the time that those rates were in
effect. The creditor may, at its option, explain that interest is or may
be determined by (1) multiplying each of the average balances by the
number of days in the billing cycle (or if the daily rate varied during
the cycle, by multiplying by the number of days the applicable rate was
in effect), (2) multiplying each of the results by the applicable daily
periodic rate, and (3) adding these products together.
5. Information to compute balance. In connection with disclosing the
interest charge balance, the creditor need not give the consumer all of
the information necessary to compute the balance if that information is
not otherwise required to be disclosed. For example, if current
purchases are included from the date they are posted to the account, the
posting date need not be disclosed.
6. Non-deduction of credits. The creditor need not specifically
identify the total dollar amount of credits not deducted in computing
the finance charge balance. Disclosure of the amount of credits not
deducted is accomplished by listing the credits (Sec. 1026.7(b)(3)) and
indicating which credits will not be deducted in determining the balance
(for example, ``credits after the 15th of the month are not deducted in
computing the interest charge.'').
7. Use of one balance computation method explanation when multiple
balances disclosed. Sometimes the creditor will disclose more than one
balance to which a periodic rate was applied, even though each balance
was computed using the same balance computation method. For example, if
a plan involves purchases and cash advances that are subject to
different rates, more than one balance must be disclosed, even though
the same computation method is used for determining the balance for each
feature. In these cases, one explanation or a single identification of
the name of the balance computation method is sufficient. Sometimes the
creditor separately discloses the portions of the balance that are
subject to different rates because different portions of the balance
fall within two or more balance ranges, even when a combined balance
disclosure would be permitted under comment 7(b)(5)-1. In these cases,
one explanation or a single identification of the name of the balance
computation method is also sufficient (assuming, of course, that all
portions of the balance were computed using the same method). In these
cases, a creditor may use an appropriate name listed in Sec. 1026.60(g)
(e.g., ``average daily balance (including new purchases)'') as the
single identification of the name of the balance computation method
applicable to all features, even though the name only refers to
purchases. For example, if a creditor uses the average daily balance
method including new transactions for all features, a creditor may use
the name ``average daily balance (including new purchases)'' listed in
Sec. 1026.60(g)(i) to satisfy the requirement to disclose the name of
the balance computation method for all features. As an alternative, in
this situation, a creditor may revise the balance computation names
listed in Sec. 1026.60(g) to refer more broadly to all new credit
transactions, such as using the language ``new transactions'' or
``current transactions'' (e.g., ``average daily balance (including new
transactions)''), rather than simply referring to new purchases, when
the same method is used to calculate the balances for all features of
the account.
8. Use of balance computation names in Sec. 1026.60(g) for balances
other than purchases. The names of the balance computation methods
listed in Sec. 1026.60(g) describe balance computation methods for
purchases. When a creditor is disclosing the name of the balance
computation methods separately for each feature, in using the names
listed in Sec. 1026.60(g) to satisfy the requirements of Sec.
1026.7(b)(5) for features other than purchases, a creditor must revise
the names listed in Sec. 1026.60(g) to refer to the other features. For
example, when disclosing the
[[Page 505]]
name of the balance computation method applicable to cash advances, a
creditor must revise the name listed in Sec. 1026.60(g)(i) to disclose
it as ``average daily balance (including new cash advances)'' when the
balance for cash advances is figured by adding the outstanding balance
(including new cash advances and deducting payments and credits) for
each day in the billing cycle, and then dividing by the number of days
in the billing cycle. Similarly, a creditor must revise the name listed
in Sec. 1026.60(g)(ii) to disclose it as ``average daily balance
(excluding new cash advances)'' when the balance for cash advances is
figured by adding the outstanding balance (excluding new cash advances
and deducting payments and credits) for each day in the billing cycle,
and then dividing by the number of days in the billing cycle. See
comment 7(b)(5)-7 for guidance on the use of one balance computation
method explanation or name when multiple balances are disclosed.
7(b)(6) Charges Imposed
1. Examples of charges. See commentary to Sec. 1026.6(b)(3).
2. Fees. Costs attributable to periodic rates other than interest
charges shall be disclosed as a fee. For example, if a consumer obtains
credit life insurance that is calculated at 0.1% per month on an
outstanding balance and a monthly interest rate of 1.5% applies to the
same balance, the creditor must disclose the dollar cost attributable to
interest as an ``interest charge'' and the credit insurance cost as a
``fee.''
3. Total fees and interest charged for calendar year to date. i.
Monthly statements. Some creditors send monthly statements but the
statement periods do not coincide with the calendar month. For creditors
sending monthly statements, the following comply with the requirement to
provide calendar year-to-date totals.
A. A creditor may disclose calendar-year-to-date totals at the end
of the calendar year by separately aggregating finance charges
attributable to periodic interest rates and fees for 12 monthly cycles,
starting with the period that begins during January and finishing with
the period that begins during December. For example, if statement
periods begin on the 10th day of each month, the statement covering
December 10, 2011 through January 9, 2012, may disclose the separate
year-to-date totals for interest charged and fees imposed from January
10, 2011, through January 9, 2012. Alternatively, the creditor could
provide a statement for the cycle ending January 9, 2012, showing the
separate year-to-date totals for interest charged and fees imposed
January 1, 2011, through December 31, 2011.
B. A creditor may disclose calendar-year-to-date totals at the end
of the calendar year by separately aggregating finance charges
attributable to periodic interest rates and fees for 12 monthly cycles,
starting with the period that begins during December and finishing with
the period that begins during November. For example, if statement
periods begin on the 10th day of each month, the statement covering
November 10, 2011 through December 9, 2011, may disclose the separate
year-to-date totals for interest charged and fees imposed from December
10, 2010, through December 9, 2011.
ii. Quarterly statements. Creditors issuing quarterly statements may
apply the guidance set forth for monthly statements to comply with the
requirement to provide calendar year-to-date totals on quarterly
statements.
4. Minimum charge in lieu of interest. A minimum charge imposed if a
charge would otherwise have been determined by applying a periodic rate
to a balance except for the fact that such charge is smaller than the
minimum must be disclosed as a fee. For example, assume a creditor
imposes a minimum charge of $1.50 in lieu of interest if the calculated
interest for a billing period is less than that minimum charge. If the
interest calculated on a consumer's account for a particular billing
period is 50 cents, the minimum charge of $1.50 would apply. In this
case, the entire $1.50 would be disclosed as a fee; the periodic
statement would reflect the $1.50 as a fee, and $0 in interest.
5. Adjustments to year-to-date totals. In some cases, a creditor may
provide a statement for the current period reflecting that fees or
interest charges imposed during a previous period were waived or
reversed and credited to the account. Creditors may, but are not
required to, reflect the adjustment in the year-to-date totals, nor, if
an adjustment is made, to provide an explanation about the reason for
the adjustment. Such adjustments should not affect the total fees or
interest charges imposed for the current statement period.
6. Acquired accounts. An institution that acquires an account or
plan must include, as applicable, fees and charges imposed on the
account or plan prior to the acquisition in the aggregate disclosures
provided under Sec. 1026.7(b)(6) for the acquired account or plan.
Alternatively, the institution may provide separate totals reflecting
activity prior and subsequent to the account or plan acquisition. For
example, a creditor that acquires an account or plan on August 12 of a
given calendar year may provide one total for the period from January 1
to August 11 and a separate total for the period beginning on August 12.
7. Account upgrades. A creditor that upgrades, or otherwise changes,
a consumer's plan to a different open-end credit plan must include, as
applicable, fees and charges imposed for that portion of the calendar
year prior to the upgrade or change in the consumer's plan in the
aggregate disclosures provided pursuant to Sec. 1026.7(b)(6) for the
new
[[Page 506]]
plan. For example, assume a consumer has incurred $125 in fees for the
calendar year to date for a retail credit card account, which is then
replaced by a cobranded credit card account also issued by the creditor.
In this case, the creditor must reflect the $125 in fees incurred prior
to the replacement of the retail credit card account in the calendar
year-to-date totals provided for the cobranded credit card account.
Alternatively, the institution may provide two separate totals
reflecting activity prior and subsequent to the plan upgrade or change.
7(b)(7) Change-in-Terms and Increased Penalty Rate Summary for Open-End
(Not Home-Secured) Plan
1. Location of summary tables. If a change-in-terms notice required
by Sec. 1026.9(c)(2) is provided on or with a periodic statement, a
tabular summary of key changes must appear on the front of the
statement. Similarly, if a notice of a rate increase due to delinquency
or default or as a penalty required by Sec. 1026.9(g)(1) is provided on
or with a periodic statement, information required to be provided about
the increase, presented in a table, must appear on the front of the
statement.
7(b)(8) Grace Period
1. Terminology. In describing the grace period, the language used
must be consistent with that used on the account-opening disclosure
statement. (See Sec. 1026.5(a)(2)(i).)
2. Deferred interest transactions. See comment 7(b)-1.iv.
3. Limitation on the imposition of finance charges in Sec. 1026.54.
Section 1026.7(b)(8) does not require a card issuer to disclose the
limitations on the imposition of finance charges as a result of a loss
of a grace period in Sec. 1026.54, or the impact of payment allocation
on whether interest is charged on transactions as a result of a loss of
a grace period.
7(b)(9) Address for Notice of Billing Errors
1. Terminology. The periodic statement should indicate the general
purpose for the address for billing-error inquiries, although a detailed
explanation or particular wording is not required.
2. Telephone number. A telephone number, email address, or Web site
location may be included, but the mailing address for billing-error
inquiries, which is the required disclosure, must be clear and
conspicuous. The address is deemed to be clear and conspicuous if a
precautionary instruction is included that telephoning or notifying the
creditor by email or Web site will not preserve the consumer's billing
rights, unless the creditor has agreed to treat billing error notices
provided by electronic means as written notices, in which case the
precautionary instruction is required only for telephoning.
7(b)(10) Closing Date of Billing Cycle; New Balance
1. Credit balances. See comment 7(b)(1)-1.
2. Multifeatured plans. In a multifeatured plan, the new balance may
be disclosed for each feature or for the plan as a whole. If separate
new balances are disclosed, a total new balance is optional.
3. Accrued finance charges allocated from payments. Some plans
provide that the amount of the finance charge that has accrued since the
consumer's last payment is directly deducted from each new payment,
rather than being separately added to each statement and therefore
reflected as an increase in the obligation. In such a plan, the new
balance need not reflect finance charges accrued since the last payment.
7(b)(11) Due Date; Late Payment Costs
1. Informal periods affecting late payments. Although the terms of
the account agreement may provide that a card issuer may assess a late
payment fee if a payment is not received by a certain date, the card
issuer may have an informal policy or practice that delays the
assessment of the late payment fee for payments received a brief period
of time after the date upon which a card issuer has the contractual
right to impose the fee. A card issuer must disclose the due date
according to the legal obligation between the parties, and need not
consider the end of an informal ``courtesy period'' as the due date
under Sec. 1026.7(b)(11).
2. Assessment of late payment fees. Some state or other laws require
that a certain number of days must elapse following a due date before a
late payment fee may be imposed. In addition, a card issuer may be
restricted by the terms of the account agreement from imposing a late
payment fee until a payment is late for a certain number of days
following a due date. For example, assume a payment is due on March 10
and the account agreement or state law provides that a late payment fee
cannot be assessed before March 21. A card issuer must disclose the due
date under the terms of the legal obligation (March 10 in this example),
and not a date different than the due date, such as when the card issuer
is restricted by the account agreement or state or other law from
imposing a late payment fee unless a payment is late for a certain
number of days following the due date (March 21 in this example).
Consumers' rights under state law to avoid the imposition of late
payment fees during a specified period following a due date are
unaffected by the disclosure requirement. In this example, the card
issuer would disclose March 10 as the due date for purposes of Sec.
1026.7(b)(11), but could not, under state law, assess a late payment fee
before March 21.
[[Page 507]]
3. Fee or rate triggered by multiple events. If a late payment fee
or penalty rate is triggered after multiple events, such as two late
payments in six months, the card issuer may, but is not required to,
disclose the late payment and penalty rate disclosure each month. The
disclosures must be included on any periodic statement for which a late
payment could trigger the late payment fee or penalty rate, such as
after the consumer made one late payment in this example. For example,
if a cardholder has already made one late payment, the disclosure must
be on each statement for the following five billing cycles.
4. Range of late fees or penalty rates. A card issuer that imposes a
range of late payment fees or rates on a credit card account under an
open-end (not home-secured) consumer credit plan may state the highest
fee or rate along with an indication lower fees or rates could be
imposed. For example, a phrase indicating the late payment fee could be
``up to $29'' complies with this requirement.
5. Penalty rate in effect. If the highest penalty rate has
previously been triggered on an account, the card issuer may, but is not
required to, delete the amount of the penalty rate and the warning that
the rate may be imposed for an untimely payment, as not applicable.
Alternatively, the card issuer may, but is not required to, modify the
language to indicate that the penalty rate has been increased due to
previous late payments (if applicable).
6. Same day each month. The requirement that the due date be the
same day each month means that the due date must generally be the same
numerical date. For example, a consumer's due date could be the 25th of
every month. In contrast, a due date that is the same relative date but
not numerical date each month, such as the third Tuesday of the month,
generally would not comply with this requirement. However, a consumer's
due date may be the last day of each month, even though that date will
not be the same numerical date. For example, if a consumer's due date is
the last day of each month, it will fall on February 28th (or February
29th in a leap year) and on August 31st.
7. Change in due date. A creditor may adjust a consumer's due date
from time to time provided that the new due date will be the same
numerical date each month on an ongoing basis. For example, a creditor
may choose to honor a consumer's request to change from a due date that
is the 20th of each month to the 5th of each month, or may choose to
change a consumer's due date from time to time for operational reasons.
See comment 2(a)(4)-3 for guidance on transitional billing cycles.
8. Billing cycles longer than one month. The requirement that the
due date be the same day each month does not prohibit billing cycles
that are two or three months, provided that the due date for each
billing cycle is on the same numerical date of the month. For example, a
creditor that establishes two-month billing cycles could send a consumer
periodic statements disclosing due dates of January 25, March 25, and
May 25.
9. Payment due date when the creditor does not accept or receive
payments by mail. If the due date in a given month falls on a day on
which the creditor does not receive or accept payments by mail and the
creditor is required to treat a payment received the next business day
as timely pursuant to Sec. 1026.10(d), the creditor must disclose the
due date according to the legal obligation between the parties, not the
date as of which the creditor is permitted to treat the payment as late.
For example, assume that the consumer's due date is the 4th of every
month and the creditor does not accept or receive payments by mail on
Thursday, July 4. Pursuant to Sec. 1026.10(d), the creditor may not
treat a mailed payment received on the following business day, Friday,
July 5, as late for any purpose. The creditor must nonetheless disclose
July 4 as the due date on the periodic statement and may not disclose a
July 5 due date.
7(b)(12) Repayment Disclosures
1. Rounding. In disclosing on the periodic statement the minimum
payment total cost estimate, the estimated monthly payment for repayment
in 36 months, the total cost estimate for repayment in 36 months, and
the savings estimate for repayment in 36 months under Sec.
1026.7(b)(12)(i) or (b)(12)(ii) as applicable, a card issuer, at its
option, must either round these disclosures to the nearest whole dollar
or to the nearest cent. Nonetheless, an issuer's rounding for all of
these disclosures must be consistent. An issuer may round all of these
disclosures to the nearest whole dollar when disclosing them on the
periodic statement, or may round all of these disclosures to the nearest
cent. An issuer may not, however, round some of the disclosures to the
nearest whole dollar, while rounding other disclosures to the nearest
cent.
Paragraph 7(b)(12)(i)(F)
1. Minimum payment repayment estimate disclosed on the periodic
statement is three years or less. Section 1026.7(b)(12)(i)(F)(2)(i)
provides that a credit card issuer is not required to provide the
disclosures related to repayment in 36 months if the minimum payment
repayment estimate disclosed under Sec. 1026.7(b)(12)(i)(B) after
rounding is 3 years or less. For example, if the minimum payment
repayment estimate is 2 years 6 months to 3 years 5 months, issuers
would be required under Sec. 1026.7(b)(12)(i)(B) to disclose that it
would take 3 years to pay off the balance in full if making only the
minimum
[[Page 508]]
payment. In these cases, an issuer would not be required to disclose the
36-month disclosures on the periodic statement because the minimum
payment repayment estimate disclosed to the consumer on the periodic
statement (after rounding) is 3 years or less.
7(b)(12)(iv) Provision of Information About Credit Counseling Services
1. Approved organizations. Section 1026.7(b)(12)(iv)(A) requires
card issuers to provide information regarding at least three
organizations that have been approved by the United States Trustee or a
bankruptcy administrator pursuant to 11 U.S.C. 111(a)(1) to provide
credit counseling services in, at the card issuer's option, either the
state in which the billing address for the account is located or the
state specified by the consumer. A card issuer does not satisfy the
requirements in Sec. 1026.7(b)(12)(iv)(A) by providing information
regarding providers that have been approved pursuant to 11 U.S.C.
111(a)(2) to offer personal financial management courses.
2. Information regarding approved organizations. i. Provision of
information obtained from United States Trustee or bankruptcy
administrator. A card issuer complies with the requirements of Sec.
1026.7(b)(12)(iv)(A) if, through the toll-free number disclosed pursuant
to Sec. 1026.7(b)(12)(i) or (b)(12)(ii), it provides the consumer with
information obtained from the United States Trustee or a bankruptcy
administrator, such as information obtained from the Web site operated
by the United States Trustee. Section 1026.7(b)(12)(iv)(A) does not
require a card issuer to provide information that is not available from
the United States Trustee or a bankruptcy administrator. If, for
example, the Web site address for an organization approved by the United
States Trustee is not available from the Web site operated by the United
States Trustee, a card issuer is not required to provide a Web site
address for that organization. However, Sec. 1026.7(b)(12)(iv)(B)
requires the card issuer to, at least annually, update the information
it provides for consistency with the information provided by the United
States Trustee or a bankruptcy administrator.
ii. Provision of information consistent with request of approved
organization. If requested by an approved organization, a card issuer
may at its option provide, in addition to the name of the organization
obtained from the United States Trustee or a bankruptcy administrator,
another name used by that organization through the toll-free number
disclosed pursuant to Sec. 1026.7(b)(12)(i) or (b)(12)(ii). In
addition, if requested by an approved organization, a card issuer may at
its option provide through the toll-free number disclosed pursuant to
Sec. 1026.7(b)(12)(i) or (b)(12)(ii) a street address, telephone
number, or Web site address for the organization that is different than
the street address, telephone number, or Web site address obtained from
the United States Trustee or a bankruptcy administrator. However, if
requested by an approved organization, a card issuer must not provide
information regarding that organization through the toll-free number
disclosed pursuant to Sec. 1026.7(b)(12)(i) or (b)(12)(ii).
iii. Information regarding approved organizations that provide
credit counseling services in a language other than English. A card
issuer may at its option provide through the toll-free number disclosed
pursuant to Sec. 1026.7(b)(12)(i) or (b)(12)(ii) information regarding
approved organizations that provide credit counseling services in
languages other than English. In the alternative, a card issuer may at
its option state that such information is available from the Web site
operated by the United States Trustee. Disclosing this Web site address
does not by itself constitute a statement that organizations have been
approved by the United States Trustee for purposes of comment
7(b)(12)(iv)-2.iv.
iv. Statements regarding approval by the United States Trustee or a
bankruptcy administrator. Section 1026.7(b)(12)(iv) does not require a
card issuer to disclose through the toll-free number disclosed pursuant
to Sec. 1026.7(b)(12)(i) or (b)(12)(ii) that organizations have been
approved by the United States Trustee or a bankruptcy administrator.
However, if a card issuer chooses to make such a disclosure, Sec.
1026.7(b)(12)(iv) requires that the card issuer also disclose that:
A. The United States Trustee or a bankruptcy administrator has
determined that the organizations meet the minimum requirements for
nonprofit pre-bankruptcy budget and credit counseling;
B. The organizations may provide other credit counseling services
that have not been reviewed by the United States Trustee or a bankruptcy
administrator; and
C. The United States Trustee or the bankruptcy administrator does
not endorse or recommend any particular organization.
3. Automated response systems or devices. At their option, card
issuers may use toll-free telephone numbers that connect consumers to
automated systems, such as an interactive voice response system, through
which consumers may obtain the information required by Sec.
1026.7(b)(12)(iv) by inputting information using a touch-tone telephone
or similar device.
4. Toll-free telephone number. A card issuer may provide a toll-free
telephone number that is designed to handle customer service calls
generally, so long as the option to receive the information required by
Sec. 1026.7(b)(12)(iv) is prominently disclosed to the consumer. For
automated systems, the option to receive the information required
[[Page 509]]
by Sec. 1026.7(b)(12)(iv) is prominently disclosed to the consumer if
it is listed as one of the options in the first menu of options given to
the consumer, such as ``Press or say `3' if you would like information
about credit counseling services.'' If the automated system permits
callers to select the language in which the call is conducted and in
which information is provided, the menu to select the language may
precede the menu with the option to receive information about accessing
credit counseling services.
5. Third parties. At their option, card issuers may use a third
party to establish and maintain a toll-free telephone number for use by
the issuer to provide the information required by Sec.
1026.7(b)(12)(iv).
6. Web site address. When making the repayment disclosures on the
periodic statement pursuant to Sec. 1026.7(b)(12), a card issuer at its
option may also include a reference to a Web site address (in addition
to the toll-free telephone number) where its customers may obtain the
information required by Sec. 1026.7(b)(12)(iv), so long as the
information provided on the Web site complies with Sec.
1026.7(b)(12)(iv). The Web site address disclosed must take consumers
directly to the Web page where information about accessing credit
counseling may be obtained. In the alternative, the card issuer may
disclose the Web site address for the Web page operated by the United
States Trustee where consumers may obtain information about approved
credit counseling organizations. Disclosing this Web site address does
not by itself constitute a statement that organizations have been
approved by the United States Trustee for purposes of comment
7(b)(12)(iv)-2.iv.
7. Advertising or marketing information. If a consumer requests
information about credit counseling services, the card issuer may not
provide advertisements or marketing materials to the consumer (except
for providing the name of the issuer) prior to providing the information
required by Sec. 1026.7(b)(12)(iv). Educational materials that do not
solicit business are not considered advertisements or marketing
materials for this purpose. Examples:
i. Toll-free telephone number. As described in comment 7(b)(12)(iv)-
4, an issuer may provide a toll-free telephone number that is designed
to handle customer service calls generally, so long as the option to
receive the information required by Sec. 1026.7(b)(12)(iv) through that
toll-free telephone number is prominently disclosed to the consumer.
Once the consumer selects the option to receive the information required
by Sec. 1026.7(b)(12)(iv), the issuer may not provide advertisements or
marketing materials to the consumer (except for providing the name of
the issuer) prior to providing the required information.
ii. Web page. If the issuer discloses a link to a Web site address
as part of the disclosures pursuant to comment 7(b)(12)(iv)-6, the
issuer may not provide advertisements or marketing materials (except for
providing the name of the issuer) on the Web page accessed by the
address prior to providing the information required by Sec.
1026.7(b)(12)(iv).
7(b)(12)(v) Exemptions
1. Billing cycle where paying the minimum payment due for that
billing cycle will pay the outstanding balance on the account for that
billing cycle. Under Sec. 1026.7(b)(12)(v)(C), a card issuer is exempt
from the repayment disclosure requirements set forth in Sec.
1026.7(b)(12) for a particular billing cycle where paying the minimum
payment due for that billing cycle will pay the outstanding balance on
the account for that billing cycle. For example, if the entire
outstanding balance on an account for a particular billing cycle is $20
and the minimum payment is $20, an issuer would not need to comply with
the repayment disclosure requirements for that particular billing cycle.
In addition, this exemption would apply to a charged-off account where
payment of the entire account balance is due immediately.
7(b)(13) Format Requirements
1. Combined deposit account and credit account statements. Some
financial institutions provide information about deposit account and
open-end credit account activity on one periodic statement. For purposes
of providing disclosures on the front of the first page of the periodic
statement pursuant to Sec. 1026.7(b)(13), the first page of such a
combined statement shall be the page on which credit transactions first
appear.
Section 1026.8--Identifying Transactions on Periodic Statements
8(a) Sale Credit
1. Sale credit. The term ``sale credit'' refers to a purchase in
which the consumer uses a credit card or otherwise directly accesses an
open-end line of credit (see comment 8(b)-1 if access is by means of a
check) to obtain goods or services from a merchant, whether or not the
merchant is the card issuer or creditor. ``Sale credit'' includes:
i. The purchase of funds-transfer services (such as a wire transfer)
from an intermediary.
ii. The purchase of services from the card issuer or creditor. For
the purchase of services that are costs imposed as part of the plan
under Sec. 1026.6(b)(3), card issuers and creditors comply with the
requirements for identifying transactions under this section by
disclosing the fees in accordance with the requirements of Sec.
1026.7(b)(6). For the purchases of services that are not costs imposed
as part of the plan, card issuers and creditors may, at their option,
identify transactions
[[Page 510]]
under this section or in accordance with the requirements of Sec.
1026.7(b)(6).
2. Amount--transactions not billed in full. If sale transactions are
not billed in full on any single statement, but are billed periodically
in precomputed installments, the first periodic statement reflecting the
transaction must show either the full amount of the transaction together
with the date the transaction actually took place; or the amount of the
first installment that was debited to the account together with the date
of the transaction or the date on which the first installment was
debited to the account. In any event, subsequent periodic statements
should reflect each installment due, together with either any other
identifying information required by Sec. 1026.8(a) (such as the
seller's name and address in a three-party situation) or other
appropriate identifying information relating the transaction to the
first billing. The debiting date for the particular installment, or the
date the transaction took place, may be used as the date of the
transaction on these subsequent statements.
3. Date--when a transaction takes place. i. If the consumer conducts
the transaction in person, the date of the transaction is the calendar
date on which the consumer made the purchase or order, or secured the
advance.
ii. For transactions billed to the account on an ongoing basis
(other than installments to pay a precomputed amount), the date of the
transaction is the date on which the amount is debited to the account.
This might include, for example, monthly insurance premiums.
iii. For mail, Internet, or telephone orders, a creditor may
disclose as the transaction date either the invoice date, the debiting
date, or the date the order was placed by telephone or via the Internet.
iv. In a foreign transaction, the debiting date may be considered
the transaction date.
4. Date--sufficiency of description. i. If the creditor discloses
only the date of the transaction, the creditor need not identify it as
the ``transaction date.'' If the creditor discloses more than one date
(for example, the transaction date and the posting date), the creditor
must identify each.
ii. The month and day sufficiently identify the transaction date,
unless the posting of the transaction is delayed so long that the year
is needed for a clear disclosure to the consumer.
5. Same or related persons. i. For purposes of identifying
transactions, the term same or related persons refers to, for example:
A. Franchised or licensed sellers of a creditor's product or
service.
B. Sellers who assign or sell open-end sales accounts to a creditor
or arrange for such credit under a plan that allows the consumer to use
the credit only in transactions with that seller.
ii. A seller is not related to the creditor merely because the
seller and the creditor have an agreement authorizing the seller to
honor the creditor's credit card.
6. Brief identification--sufficiency of description. The ``brief
identification'' provision in Sec. 1026.8(a)(1)(i) requires a
designation that will enable the consumer to reconcile the periodic
statement with the consumer's own records. In determining the
sufficiency of the description, the following rules apply:
i. While item-by-item descriptions are not necessary, reasonable
precision is required. For example, ``merchandise,'' ``miscellaneous,''
``second-hand goods,'' or ``promotional items'' would not suffice.
ii. A reference to a department in a sales establishment that
accurately conveys the identification of the types of property or
services available in the department is sufficient--for example,
``jewelry,'' or ``sporting goods.''
iii. A number or symbol that is related to an identification list
printed elsewhere on the statement that reasonably identifies the
transaction with the creditor is sufficient.
7. Seller's name--sufficiency of description. The requirement
contemplates that the seller's name will appear on the periodic
statement in essentially the same form as it appears on transaction
documents provided to the consumer at the time of the sale. The seller's
name may also be disclosed as, for example:
i. A more complete spelling of the name that was alphabetically
abbreviated on the receipt or other credit document.
ii. An alphabetical abbreviation of the name on the periodic
statement even if the name appears in a more complete spelling on the
receipt or other credit document. Terms that merely indicate the form of
a business entity, such as ``Inc.,'' ``Co.,'' or ``Ltd.,'' may always be
omitted.
8. Location of transaction. i. If the seller has multiple stores or
branches within a city, the creditor need not identify the specific
branch at which the sale occurred.
ii. When no meaningful address is available because the consumer did
not make the purchase at any fixed location of the seller, the creditor
may omit the address, or may provide some other identifying designation,
such as ``aboard plane,'' ``ABC Airways Flight,'' ``customer's home,''
``telephone order,'' ``internet order'' or ``mail order.''
8(b) Nonsale credit.
1. Nonsale credit. The term ``nonsale credit'' refers to any form of
loan credit including, for example:
i. A cash advance.
ii. An advance on a credit plan that is accessed by overdrafts on a
checking account.
iii. The use of a ``supplemental credit device'' in the form of a
check or draft or the use of the overdraft credit plan accessed by
[[Page 511]]
a debit card, even if such use is in connection with a purchase of goods
or services.
iv. Miscellaneous debits to remedy mispostings, returned checks, and
similar entries.
2. Amount--overdraft credit plans. If credit is extended under an
overdraft credit plan tied to a checking account or by means of a debit
card tied to an overdraft credit plan:
i. The amount to be disclosed is that of the credit extension, not
the face amount of the check or the total amount of the debit/credit
transaction.
ii. The creditor may disclose the amount of the credit extensions on
a cumulative daily basis, rather than the amount attributable to each
check or each use of the debit card that accesses the credit plan.
3. Date of transaction. See comment 8(a)-4.
4. Nonsale transaction--sufficiency of identification. The creditor
sufficiently identifies a nonsale transaction by describing the type of
advance it represents, such as cash advance, loan, overdraft loan, or
any readily understandable trade name for the credit program.
Section 1026.9--Subsequent Disclosure Requirements
9(a) Furnishing Statement of Billing Rights
9(a)(1) Annual Statement
1. General. The creditor may provide the annual billing rights
statement:
i. By sending it in one billing period per year to each consumer
that gets a periodic statement for that period; or
ii. By sending a copy to all of its accountholders sometime during
the calendar year but not necessarily all in one billing period (for
example, sending the annual notice in connection with renewal cards or
when imposing annual membership fees).
2. Substantially similar. See the commentary to Model Forms G-3 and
G-3(A) in appendix G to part 1026.
9(a)(2) Alternative Summary Statement
1. Changing from long-form to short form statement and vice versa.
If the creditor has been sending the long-form annual statement, and
subsequently decides to use the alternative summary statement, the first
summary statement must be sent no later than 12 months after the last
long-form statement was sent. Conversely, if the creditor wants to
switch to the long-form, the first long-form statement must be sent no
later than 12 months after the last summary statement.
2. Substantially similar. See the commentary to Model Forms G-4 and
G-4(A) in appendix G to part 1026.
9(b) Disclosures for Supplemental Credit Access Devices and Additional
Features
1. Credit access device--examples. Credit access device includes,
for example, a blank check, payee-designated check, blank draft or
order, or authorization form for issuance of a check; it does not
include a check issued payable to a consumer representing loan proceeds
or the disbursement of a cash advance.
2. Credit account feature--examples. A new credit account feature
would include, for example:
i. The addition of overdraft checking to an existing account
(although the regular checks that could trigger the overdraft feature
are not themselves ``devices'').
ii. The option to use an existing credit card to secure cash
advances, when previously the card could only be used for purchases.
Paragraph 9(b)(2)
1. Different finance charge terms. Except as provided in Sec.
1026.9(b)(3) for checks that access a credit card account, if the
finance charge terms are different from those previously disclosed, the
creditor may satisfy the requirement to give the finance charge terms
either by giving a complete set of new account-opening disclosures
reflecting the terms of the added device or feature or by giving only
the finance charge disclosures for the added device or feature.
9(b)(3) Checks That Access a Credit Card Account
9(b)(3)(i) Disclosures
1. Front of the page containing the checks. The following would
comply with the requirement that the tabular disclosures provided
pursuant to Sec. 1026.9(b)(3) appear on the front of the page
containing the checks:
i. Providing the tabular disclosure on the front of the first page
on which checks appear, for an offer where checks are provided on
multiple pages;
ii. Providing the tabular disclosure on the front of a mini-book or
accordion booklet containing the checks; or
iii. Providing the tabular disclosure on the front of the
solicitation letter, when the checks are printed on the front of the
same page as the solicitation letter even if the checks can be separated
by the consumer from the solicitation letter using perforations.
2. Combined disclosures for checks and other transactions subject to
the same terms. A card issuer may include in the tabular disclosure
provided pursuant to Sec. 1026.9(b)(3) disclosures regarding the terms
offered on non-check transactions, provided that such transactions are
subject to the same terms that are required to be disclosed pursuant to
Sec. 1026.9(b)(3)(i) for the checks that access a credit card account.
However, a card issuer may not include in the table information
regarding additional terms that are not required disclosures for checks
that access a credit card account pursuant to Sec. 1026.9(b)(3).
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Paragraph 9(b)(3)(i)(D)
1. Grace period. A creditor may not disclose under Sec.
1026.9(b)(3)(i)(D) the limitations on the imposition of finance charges
as a result of a loss of a grace period in Sec. 1026.54, or the impact
of payment allocation on whether interest is charged on transactions as
a result of a loss of a grace period. Some creditors may offer a grace
period on credit extended by the use of an access check under which
interest will not be charged on the check transactions if the consumer
pays the outstanding balance shown on a periodic statement in full by
the due date shown on that statement for one or more billing cycles. In
these circumstances, Sec. 1026.9(b)(3)(i)(D) requires that the creditor
disclose the grace period using the following language, or substantially
similar language, as applicable: ``Your due date is [at least] __ days
after the close of each billing cycle. We will not charge you any
interest on check transactions if you pay your entire balance by the due
date each month.'' However, other creditors may offer a grace period on
check transactions under which interest may be charged on check
transactions even if the consumer pays the outstanding balance shown on
a periodic statement in full by the due date shown on that statement
each billing cycle. In these circumstances, Sec. 1026.9(b)(3)(i)(D)
requires the creditor to amend the above disclosure language to describe
accurately the conditions on the applicability of the grace period.
Creditors may use the following language to describe that no grace
period on check transactions is offered, as applicable: ``We will begin
charging interest on these checks on the transaction date.''
9(c) Change in Terms
9(c)(1) Rules Affecting Home-Equity Plans
1. Changes initially disclosed. No notice of a change in terms need
be given if the specific change is set forth initially, such as: rate
increases under a properly disclosed variable-rate plan, a rate increase
that occurs when an employee has been under a preferential rate
agreement and terminates employment, or an increase that occurs when the
consumer has been under an agreement to maintain a certain balance in a
savings account in order to keep a particular rate and the account
balance falls below the specified minimum. The rules in Sec. 1026.40(f)
relating to home-equity plans limit the ability of a creditor to change
the terms of such plans.
2. State law issues. Examples of issues not addressed by Sec.
1026.9(c) because they are controlled by state or other applicable law
include:
i. The types of changes a creditor may make. (But see Sec.
1026.40(f))
ii. How changed terms affect existing balances, such as when a
periodic rate is changed and the consumer does not pay off the entire
existing balance before the new rate takes effect.
3. Change in billing cycle. Whenever the creditor changes the
consumer's billing cycle, it must give a change-in-terms notice if the
change either affects any of the terms required to be disclosed under
Sec. 1026.6(a) or increases the minimum payment, unless an exception
under Sec. 1026.9(c)(1)(ii) applies; for example, the creditor must
give advance notice if the creditor initially disclosed a 25-day grace
period on purchases and the consumer will have fewer days during the
billing cycle change.
9(c)(1)(i) Written Notice Required
1. Affected consumers. Change-in-terms notices need only go to those
consumers who may be affected by the change. For example, a change in
the periodic rate for check overdraft credit need not be disclosed to
consumers who do not have that feature on their accounts.
2. Timing--effective date of change. The rule that the notice of the
change in terms be provided at least 15 days before the change takes
effect permits mid-cycle changes when there is clearly no retroactive
effect, such as the imposition of a transaction fee. Any change in the
balance computation method, in contrast, would need to be disclosed at
least 15 days prior to the billing cycle in which the change is to be
implemented.
3. Timing--advance notice not required. Advance notice of 15 days is
not necessary--that is, a notice of change in terms is required, but it
may be mailed or delivered as late as the effective date of the change--
in two circumstances:
i. If there is an increased periodic rate or any other finance
charge attributable to the consumer's delinquency or default.
ii. If the consumer agrees to the particular change. This provision
is intended for use in the unusual instance when a consumer substitutes
collateral or when the creditor can advance additional credit only if a
change relatively unique to that consumer is made, such as the
consumer's providing additional security or paying an increased minimum
payment amount. Therefore, the following are not ``agreements'' between
the consumer and the creditor for purposes of Sec. 1026.9(c)(1)(i): The
consumer's general acceptance of the creditor's contract reservation of
the right to change terms; the consumer's use of the account (which
might imply acceptance of its terms under state law); and the consumer's
acceptance of a unilateral term change that is not particular to that
consumer, but rather is of general applicability to consumers with that
type of account.
4. Form of change-in-terms notice. A complete new set of the initial
disclosures containing the changed term complies with
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Sec. 1026.9(c)(1)(i) if the change is highlighted in some way on the
disclosure statement, or if the disclosure statement is accompanied by a
letter or some other insert that indicates or draws attention to the
term change.
5. Security interest change--form of notice. A copy of the security
agreement that describes the collateral securing the consumer's account
may be used as the notice, when the term change is the addition of a
security interest or the addition or substitution of collateral.
6. Changes to home-equity plans entered into on or after November 7,
1989. Section 1026.9(c)(1) applies when, by written agreement under
Sec. 1026.40(f)(3)(iii), a creditor changes the terms of a home-equity
plan--entered into on or after November 7, 1989--at or before its
scheduled expiration, for example, by renewing a plan on terms different
from those of the original plan. In disclosing the change:
i. If the index is changed, the maximum annual percentage rate is
increased (to the limited extent permitted by Sec. 1026.30), or a
variable-rate feature is added to a fixed-rate plan, the creditor must
include the disclosures required by Sec. 1026.40(d)(12)(x) and
(d)(12)(xi), unless these disclosures are unchanged from those given
earlier.
ii. If the minimum payment requirement is changed, the creditor must
include the disclosures required by Sec. 1026.40(d)(5)(iii) (and, in
variable-rate plans, the disclosures required by Sec. 1026.40(d)(12)(x)
and (d)(12)(xi)) unless the disclosures given earlier contained
representative examples covering the new minimum payment requirement.
(See the commentary to Sec. 1026.40(d)(5)(iii), (d)(12)(x) and
(d)(12)(xi) for a discussion of representative examples.)
iii. When the terms are changed pursuant to a written agreement as
described in Sec. 1026.40(f)(3)(iii), the advance-notice requirement
does not apply.
9(c)(1)(ii) Notice not Required
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit.
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges. (But see Sec.
1026.40(f).)
v. Changes arising merely by operation of law; for example, if the
creditor's security interest in a consumer's car automatically extends
to the proceeds when the consumer sells the car.
2. Skip features. If a credit program allows consumers to skip or
reduce one or more payments during the year, or involves temporary
reductions in finance charges, no notice of the change in terms is
required either prior to the reduction or upon resumption of the higher
rates or payments if these features are explained on the initial
disclosure statement (including an explanation of the terms upon
resumption). For example, a merchant may allow consumers to skip the
December payment to encourage holiday shopping, or a teachers' credit
union may not require payments during summer vacation. Otherwise, the
creditor must give notice prior to resuming the original schedule or
rate, even though no notice is required prior to the reduction. The
change-in-terms notice may be combined with the notice offering the
reduction. For example, the periodic statement reflecting the reduction
or skip feature may also be used to notify the consumer of the
resumption of the original schedule or rate, either by stating
explicitly when the higher payment or charges resume, or by indicating
the duration of the skip option. Language such as ``You may skip your
October payment,'' or ``We will waive your finance charges for
January,'' may serve as the change-in-terms notice.
9(c)(1)(iii) Notice to Restrict Credit
1. Written request for reinstatement. If a creditor requires the
request for reinstatement of credit privileges to be in writing, the
notice under Sec. 1026.9(c)(1)(iii) must state that fact.
2. Notice not required. A creditor need not provide a notice under
this paragraph if, pursuant to the commentary to Sec. 1026.40(f)(2), a
creditor freezes a line or reduces a credit line rather than terminating
a plan and accelerating the balance.
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
1. Changes initially disclosed. Except as provided in Sec.
1026.9(g)(1), no notice of a change in terms need be given if the
specific change is set forth initially consistent with any applicable
requirements, such as rate or fee increases upon expiration of a
specific period of time that were disclosed in accordance with Sec.
1026.9(c)(2)(v)(B) or rate increases under a properly disclosed
variable-rate plan in accordance with Sec. 1026.9(c)(2)(v)(C). In
contrast, notice must be given if the contract allows the creditor to
increase a rate or fee at its discretion.
2. State law issues. Some issues are not addressed by Sec.
1026.9(c)(2) because they are controlled by state or other applicable
laws. These issues include the types of changes a creditor may make, to
the extent otherwise permitted by this part.
3. Change in billing cycle. Whenever the creditor changes the
consumer's billing cycle, it must give a change-in-terms notice if the
change affects any of the terms described in Sec. 1026.9(c)(2)(i),
unless an exception under Sec. 1026.9(c)(2)(v) applies; for example,
the creditor must give advance notice if the
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creditor initially disclosed a 28-day grace period on purchases and the
consumer will have fewer days during the billing cycle change. See also
Sec. 1026.7(b)(11)(i)(A) regarding the general requirement that the
payment due date for a credit card account under an open-end (not home-
secured) consumer credit plan must be the same day each month.
4. Relationship to Sec. 1026.9(b). If a creditor adds a feature to
the account on the type of terms otherwise required to be disclosed
under Sec. 1026.6, the creditor must satisfy: The requirement to
provide the finance charge disclosures for the added feature under Sec.
1026.9(b); and any applicable requirement to provide a change-in-terms
notice under Sec. 1026.9(c), including any advance notice that must be
provided. For example, if a creditor adds a balance transfer feature to
an account more than 30 days after account-opening disclosures are
provided, it must give the finance charge disclosures for the balance
transfer feature under Sec. 1026.9(b) as well as comply with the
change-in-terms notice requirements under Sec. 1026.9(c), including
providing notice of the change at least 45 days prior to the effective
date of the change. Similarly, if a creditor makes a balance transfer
offer on finance charge terms that are higher than those previously
disclosed for balance transfers, it would also generally be required to
provide a change-in-terms notice at least 45 days in advance of the
effective date of the change. A creditor may provide a single notice
under Sec. 1026.9(c) to satisfy the notice requirements of both
paragraphs (b) and (c) of Sec. 1026.9. For checks that access a credit
card account subject to the disclosure requirements in Sec.
1026.9(b)(3), a creditor is not subject to the notice requirements under
Sec. 1026.9(c) even if the applicable rate or fee is higher than those
previously disclosed for such checks. Thus, for example, the creditor
need not wait 45 days before applying the new rate or fee for
transactions made using such checks, but the creditor must make the
required disclosures on or with the checks in accordance with Sec.
1026.9(b)(3).
9(c)(2)(i) Changes Where Written Advance Notice is Required
1. Affected consumers. Change-in-terms notices need only go to those
consumers who may be affected by the change. For example, a change in
the periodic rate for check overdraft credit need not be disclosed to
consumers who do not have that feature on their accounts. If a single
credit account involves multiple consumers that may be affected by the
change, the creditor should refer to Sec. 1026.5(d) to determine the
number of notices that must be given.
2. Timing--effective date of change. The rule that the notice of the
change in terms be provided at least 45 days before the change takes
effect permits mid-cycle changes when there is clearly no retroactive
effect, such as the imposition of a transaction fee. Any change in the
balance computation method, in contrast, would need to be disclosed at
least 45 days prior to the billing cycle in which the change is to be
implemented.
3. Changes agreed to by the consumer. See also comment 5(b)(1)(i)-6.
4. Form of change-in-terms notice. Except if Sec. 1026.9(c)(2)(iv)
applies, a complete new set of the initial disclosures containing the
changed term complies with Sec. 1026.9(c)(2)(i) if the change is
highlighted on the disclosure statement, or if the disclosure statement
is accompanied by a letter or some other insert that indicates or draws
attention to the term being changed.
5. Security interest change--form of notice. A creditor must provide
a description of any security interest it is acquiring under Sec.
1026.9(c)(2)(iv). A copy of the security agreement that describes the
collateral securing the consumer's account may also be used as the
notice, when the term change is the addition of a security interest or
the addition or substitution of collateral.
6. Examples. See comment 55(a)-1 and 55(b)-3 for examples of how a
card issuer that is subject to Sec. 1026.55 may comply with the timing
requirements for notices required by Sec. 1026.9(c)(2)(i).
9(c)(2)(iii) Charges not Covered by Sec. 1026.6(b)(1) and (b)(2)
1. Applicability. Generally, if a creditor increases any component
of a charge, or introduces a new charge, that is imposed as part of the
plan under Sec. 1026.6(b)(3) but is not required to be disclosed as
part of the account-opening summary table under Sec. 1026.6(b)(1) and
(b)(2), the creditor must either, at its option (i) provide at least 45
days' written advance notice before the change becomes effective to
comply with the requirements of Sec. 1026.9(c)(2)(i), or (ii) provide
notice orally or in writing, or electronically if the consumer requests
the service electronically, of the amount of the charge to an affected
consumer before the consumer agrees to or becomes obligated to pay the
charge, at a time and in a manner that a consumer would be likely to
notice the disclosure. (See the commentary under Sec. 1026.5(a)(1)(iii)
regarding disclosure of such changes in electronic form.) For example, a
fee for expedited delivery of a credit card is a charge imposed as part
of the plan under Sec. 1026.6(b)(3) but is not required to be disclosed
in the account-opening summary table under Sec. 1026.6(b)(1) and
(b)(2). If a creditor changes the amount of that expedited delivery fee,
the creditor may provide written advance notice of the change to
affected consumers at least 45 days before the change becomes effective.
Alternatively,
[[Page 515]]
the creditor may provide oral or written notice, or electronic notice if
the consumer requests the service electronically, of the amount of the
charge to an affected consumer before the consumer agrees to or becomes
obligated to pay the charge, at a time and in a manner that the consumer
would be likely to notice the disclosure. (See comment 5(b)(1)(ii)-1 for
examples of disclosures given at a time and in a manner that the
consumer would be likely to notice them.)
9(c)(2)(iv) Disclosure Requirements
1. Changing margin for calculating a variable rate. If a creditor is
changing a margin used to calculate a variable rate, the creditor must
disclose the amount of the new rate (as calculated using the new margin)
in the table described in Sec. 1026.9(c)(2)(iv), and include a reminder
that the rate is a variable rate. For example, if a creditor is changing
the margin for a variable rate that uses the prime rate as an index, the
creditor must disclose in the table the new rate (as calculated using
the new margin) and indicate that the rate varies with the market based
on the prime rate.
2. Changing index for calculating a variable rate. If a creditor is
changing the index used to calculate a variable rate, the creditor must
disclose the amount of the new rate (as calculated using the new index)
and indicate that the rate varies and how the rate is determined, as
explained in Sec. 1026.6(b)(2)(i)(A). For example, if a creditor is
changing from using a prime rate to using the LIBOR in calculating a
variable rate, the creditor would disclose in the table the new rate
(using the new index) and indicate that the rate varies with the market
based on the LIBOR.
3. Changing from a variable rate to a non-variable rate. If a
creditor is changing a rate applicable to a consumer's account from a
variable rate to a non-variable rate, the creditor generally must
provide a notice as otherwise required under Sec. 1026.9(c) even if the
variable rate at the time of the change is higher than the non-variable
rate. However, a creditor is not required to provide a notice under
Sec. 1026.9(c) if the creditor provides the disclosures required by
Sec. 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in connection with changing a
variable rate to a lower non-variable rate. Similarly, a creditor is not
required to provide a notice under Sec. 1026.9(c) when changing a
variable rate to a lower non-variable rate in order to comply with 50
U.S.C. app. 527 or a similar Federal or state statute or regulation.
Finally, a creditor is not required to provide a notice under Sec.
1026.9(c) when changing a variable rate to a lower non-variable rate in
order to comply with Sec. 1026.55(b)(4).
4. Changing from a non-variable rate to a variable rate. If a
creditor is changing a rate applicable to a consumer's account from a
non-variable rate to a variable rate, the creditor generally must
provide a notice as otherwise required under Sec. 1026.9(c) even if the
non-variable rate is higher than the variable rate at the time of the
change. However, a creditor is not required to provide a notice under
Sec. 1026.9(c) if the creditor provides the disclosures required by
Sec. 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in connection with changing a
non-variable rate to a lower variable rate. Similarly, a creditor is not
required to provide a notice under Sec. 1026.9(c) when changing a non-
variable rate to a lower variable rate in order to comply with 50 U.S.C.
app. 527 or a similar Federal or state statute or regulation. Finally, a
creditor is not required to provide a notice under Sec. 1026.9(c) when
changing a non-variable rate to a lower variable rate in order to comply
with Sec. 1026.55(b)(4). See comment 55(b)(2)-4 regarding the
limitations in Sec. 1026.55(b)(2) on changing the rate that applies to
a protected balance from a non-variable rate to a variable rate.
5. Changes in the penalty rate, the triggers for the penalty rate,
or how long the penalty rate applies. If a creditor is changing the
amount of the penalty rate, the creditor must also redisclose the
triggers for the penalty rate and the information about how long the
penalty rate applies even if those terms are not changing. Likewise, if
a creditor is changing the triggers for the penalty rate, the creditor
must redisclose the amount of the penalty rate and information about how
long the penalty rate applies. If a creditor is changing how long the
penalty rate applies, the creditor must redisclose the amount of the
penalty rate and the triggers for the penalty rate, even if they are not
changing.
6. Changes in fees. If a creditor is changing part of how a fee that
is disclosed in a tabular format under Sec. 1026.6(b)(1) and (b)(2) is
determined, the creditor must redisclose all relevant information
related to that fee regardless of whether this other information is
changing. For example, if a creditor currently charges a cash advance
fee of ``Either $5 or 3% of the transaction amount, whichever is
greater(Max: $100),'' and the creditor is only changing the minimum
dollar amount from $5 to $10, the issuer must redisclose the other
information related to how the fee is determined. For example, the
creditor in this example would disclose the following: ``Either $10 or
3% of the transaction amount, whichever is greater (Max: $100).''
7. Combining a notice described in Sec. 1026.9(c)(2)(iv) with a
notice described in Sec. 1026.9(g)(3). If a creditor is required to
provide a notice described in Sec. 1026.9(c)(2)(iv) and a notice
described in Sec. 1026.9(g)(3) to a consumer, the creditor may combine
the two notices. This would occur if penalty pricing has been triggered,
and other terms are changing on the consumer's account at the same time.
8. Content. Sample G-20 contains an example of how to comply with
the requirements in Sec. 1026.9(c)(2)(iv) when a variable rate is
[[Page 516]]
being changed to a non-variable rate on a credit card account. The
sample explains when the new rate will apply to new transactions and to
which balances the current rate will continue to apply. Sample G-21
contains an example of how to comply with the requirements in Sec.
1026.9(c)(2)(iv) when the late payment fee on a credit card account is
being increased, and the returned payment fee is also being increased.
The sample discloses the consumer's right to reject the changes in
accordance with Sec. 1026.9(h).
9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required under
Sec. 1026.9(c)(2)(iv)(A)(1).
10. Terminology. See Sec. 1026.5(a)(2) for terminology requirements
applicable to disclosures required under Sec. 1026.9(c)(2)(iv)(A)(1).
11. Reasons for increase. i. In general. Section
1026.9(c)(2)(iv)(A)(8) requires card issuers to disclose the principal
reason(s) for increasing an annual percentage rate applicable to a
credit card account under an open-end (not home-secured) consumer credit
plan. The regulation does not mandate a minimum number of reasons that
must be disclosed. However, the specific reasons disclosed under Sec.
1026.9(c)(2)(iv)(A)(8) are required to relate to and accurately describe
the principal factors actually considered by the card issuer in
increasing the rate. A card issuer may describe the reasons for the
increase in general terms. For example, the notice of a rate increase
triggered by a decrease of 100 points in a consumer's credit score may
state that the increase is due to ``a decline in your creditworthiness''
or ``a decline in your credit score.'' Similarly, a notice of a rate
increase triggered by a 10% increase in the card issuer's cost of funds
may be disclosed as ``a change in market conditions.'' In some
circumstances, it may be appropriate for a card issuer to combine the
disclosure of several reasons in one statement. However, Sec.
1026.9(c)(2)(iv)(A)(8) requires that the notice specifically disclose
any violation of the terms of the account on which the rate is being
increased, such as a late payment or a returned payment, if such
violation of the account terms is one of the four principal reasons for
the rate increase.
ii. Example. Assume that a consumer made a late payment on the
credit card account on which the rate increase is being imposed, made a
late payment on a credit card account with another card issuer, and the
consumer's credit score decreased, in part due to such late payments.
The card issuer may disclose the reasons for the rate increase as a
decline in the consumer's credit score and the consumer's late payment
on the account subject to the increase. Because the late payment on the
credit card account with the other issuer also likely contributed to the
decline in the consumer's credit score, it is not required to be
separately disclosed. However, the late payment on the credit card
account on which the rate increase is being imposed must be specifically
disclosed even if that late payment also contributed to the decline in
the consumer's credit score.
9(c)(2)(v) Notice not Required
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit except as otherwise
required by Sec. 1026.9(c)(2)(vi).
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges.
v. Changes arising merely by operation of law; for example, if the
creditor's security interest in a consumer's car automatically extends
to the proceeds when the consumer sells the car.
2. Skip features. i. Skipped or reduced payments. If a credit
program allows consumers to skip or reduce one or more payments during
the year, no notice of the change in terms is required either prior to
the reduction in payments or upon resumption of the higher payments if
these features are explained on the account-opening disclosure statement
(including an explanation of the terms upon resumption). For example, a
merchant may allow consumers to skip the December payment to encourage
holiday shopping, or a teacher's credit union may not require payments
during summer vacation. Otherwise, the creditor must give notice prior
to resuming the original payment schedule, even though no notice is
required prior to the reduction. The change-in-terms notice may be
combined with the notice offering the reduction. For example, the
periodic statement reflecting the skip feature may also be used to
notify the consumer of the resumption of the original payment schedule,
either by stating explicitly when the higher resumes or by indicating
the duration of the skip option. Language such as ``You may skip your
October payment'' may serve as the change-in-terms notice.
ii. Temporary reductions in interest rates or fees. If a credit
program involves temporary reductions in an interest rate or fee, no
notice of the change in terms is required either prior to the reduction
or upon resumption of the original rate or fee if these features are
disclosed in advance in accordance with the requirements of Sec.
1026.9(c)(2)(v)(B). Otherwise, the creditor must give notice prior to
resuming the original rate or fee, even though no notice is required
prior to the reduction. The notice provided prior to resuming the
original rate or fee must comply with the timing requirements of Sec.
1026.9(c)(2)(i) and the content and format requirements of
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Sec. 1026.9(c)(2)(iv)(A), (B) (if applicable), (C) (if applicable), and
(D). See comment 55(b)-3 for guidance regarding the application of Sec.
1026.55 in these circumstances.
3. Changing from a variable rate to a non-variable rate. See comment
9(c)(2)(iv)-3.
4. Changing from a non-variable rate to a variable rate. See comment
9(c)(2)(iv)-4.
5. Temporary rate or fee reductions offered by telephone. The timing
requirements of Sec. 1026.9(c)(2)(v)(B) are deemed to have been met,
and written disclosures required by Sec. 1026.9(c)(2)(v)(B) may be
provided as soon as reasonably practicable after the first transaction
subject to a rate that will be in effect for a specified period of time
(a temporary rate) or the imposition of a fee that will be in effect for
a specified period of time (a temporary fee) if:
i. The consumer accepts the offer of the temporary rate or temporary
fee by telephone;
ii. The creditor permits the consumer to reject the temporary rate
or temporary fee offer and have the rate or rates or fee that previously
applied to the consumer's balances reinstated for 45 days after the
creditor mails or delivers the written disclosures required by Sec.
1026.9(c)(2)(v)(B), except that the creditor need not permit the
consumer to reject a temporary rate or temporary fee offer if the rate
or rates or fee that will apply following expiration of the temporary
rate do not exceed the rate or rates or fee that applied immediately
prior to commencement of the temporary rate or temporary fee; and
iii. The disclosures required by Sec. 1026.9(c)(2)(v)(B) and the
consumer's right to reject the temporary rate or temporary fee offer and
have the rate or rates or fee that previously applied to the consumer's
account reinstated, if applicable, are disclosed to the consumer as part
of the temporary rate or temporary fee offer.
6. First listing. The disclosures required by Sec.
1026.9(c)(2)(v)(B)(1) are only required to be provided in close
proximity and in equal prominence to the first listing of the temporary
rate or fee in the disclosure provided to the consumer. For purposes of
Sec. 1026.9(c)(2)(v)(B), the first statement of the temporary rate or
fee is the most prominent listing on the front side of the first page of
the disclosure. If the temporary rate or fee does not appear on the
front side of the first page of the disclosure, then the first listing
of the temporary rate or fee is the most prominent listing of the
temporary rate on the subsequent pages of the disclosure. For
advertising requirements for promotional rates, see Sec. 1026.16(g).
7. Close proximity--point of sale. Creditors providing the
disclosures required by Sec. 1026.9(c)(2)(v)(B) of this section in
person in connection with financing the purchase of goods or services
may, at the creditor's option, disclose the annual percentage rate or
fee that would apply after expiration of the period on a separate page
or document from the temporary rate or fee and the length of the period,
provided that the disclosure of the annual percentage rate or fee that
would apply after the expiration of the period is equally prominent to,
and is provided at the same time as, the disclosure of the temporary
rate or fee and length of the period.
8. Disclosure of annual percentage rates. If a rate disclosed
pursuant to Sec. 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) is a variable rate,
the creditor must disclose the fact that the rate may vary and how the
rate is determined. For example, a creditor could state ``After October
1, 2009, your APR will be 14.99%. This APR will vary with the market
based on the Prime Rate.''
9. Deferred interest or similar programs. If the applicable
conditions are met, the exception in Sec. 1026.9(c)(2)(v)(B) applies to
deferred interest or similar promotional programs under which the
consumer is not obligated to pay interest that accrues on a balance if
that balance is paid in full prior to the expiration of a specified
period of time. For purposes of this comment and Sec.
1026.9(c)(2)(v)(B), ``deferred interest'' has the same meaning as in
Sec. 1026.16(h)(2) and associated commentary. For such programs, a
creditor must disclose pursuant to Sec. 1026.9(c)(2)(v)(B)(1) the
length of the deferred interest period and the rate that will apply to
the balance subject to the deferred interest program if that balance is
not paid in full prior to expiration of the deferred interest period.
Examples of language that a creditor may use to make the required
disclosures under Sec. 1026.9(c)(2)(v)(B)(1) include:
i. ``No interest if paid in full in 6 months. If the balance is not
paid in full in 6 months, interest will be imposed from the date of
purchase at a rate of 15.99%.''
ii. ``No interest if paid in full by December 31, 2010. If the
balance is not paid in full by that date, interest will be imposed from
the transaction date at a rate of 15%.''
10. Relationship between Sec. Sec. 1026.9(c)(2)(v)(B) and
1026.6(b). A disclosure of the information described in Sec.
1026.9(c)(2)(v)(B)(1) provided in the account-opening table in
accordance with Sec. 1026.6(b) complies with the requirements of Sec.
1026.9(c)(2)(v)(B)(2), if the listing of the introductory rate in such
tabular disclosure also is the first listing as described in comment
9(c)(2)(v)-6.
11. Disclosure of the terms of a workout or temporary hardship
arrangement. In order for the exception in Sec. 1026.9(c)(2)(v)(D) to
apply, the disclosure provided to the consumer pursuant to Sec.
1026.9(c)(2)(v)(D)(2) must set forth:
i. The annual percentage rate that will apply to balances subject to
the workout or temporary hardship arrangement;
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ii. The annual percentage rate that will apply to such balances if
the consumer completes or fails to comply with the terms of, the workout
or temporary hardship arrangement;
iii. Any reduced fee or charge of a type required to be disclosed
under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), (b)(2)(viii), (b)(2)(ix),
(b)(2)(xi), or (b)(2)(xii) that will apply to balances subject to the
workout or temporary hardship arrangement, as well as the fee or charge
that will apply if the consumer completes or fails to comply with the
terms of the workout or temporary hardship arrangement;
iv. Any reduced minimum periodic payment that will apply to balances
subject to the workout or temporary hardship arrangement, as well as the
minimum periodic payment that will apply if the consumer completes or
fails to comply with the terms of the workout or temporary hardship
arrangement; and
v. If applicable, that the consumer must make timely minimum
payments in order to remain eligible for the workout or temporary
hardship arrangement.
12. Index not under creditor's control. See comment 55(b)(2)-2 for
guidance on when an index is deemed to be under a creditor's control.
13. Temporary rates--relationship to Sec. 1026.59. i. General.
Section 1026.59 requires a card issuer to review rate increases imposed
due to the revocation of a temporary rate. In some circumstances, Sec.
1026.59 may require an issuer to reinstate a reduced temporary rate
based on that review. If, based on a review required by Sec. 1026.59, a
creditor reinstates a temporary rate that had been revoked, the card
issuer is not required to provide an additional notice to the consumer
when the reinstated temporary rate expires, if the card issuer provided
the disclosures required by Sec. 1026.9(c)(2)(v)(B) prior to the
original commencement of the temporary rate. See Sec. 1026.55 and the
associated commentary for guidance on the permissibility and
applicability of rate increases.
ii. Example. A consumer opens a new credit card account under an
open-end (not home-secured) consumer credit plan on January 1, 2011. The
annual percentage rate applicable to purchases is 18%. The card issuer
offers the consumer a 15% rate on purchases made between January 1, 2012
and January 1, 2014. Prior to January 1, 2012, the card issuer
discloses, in accordance with Sec. 1026.9(c)(2)(v)(B), that the rate on
purchases made during that period will increase to the standard 18% rate
on January 1, 2014. In March 2012, the consumer makes a payment that is
ten days late. The card issuer, upon providing 45 days' advance notice
of the change under Sec. 1026.9(g), increases the rate on new purchases
to 18% effective as of June 1, 2012. On December 1, 2012, the issuer
performs a review of the consumer's account in accordance with Sec.
1026.59. Based on that review, the card issuer is required to reduce the
rate to the original 15% temporary rate as of January 15, 2013. On
January 1, 2014, the card issuer may increase the rate on purchases to
18%, as previously disclosed prior to January 1, 2012, without providing
an additional notice to the consumer.
9(d) Finance Charge Imposed at Time of Transaction
1. Disclosure prior to imposition. A person imposing a finance
charge at the time of honoring a consumer's credit card must disclose
the amount of the charge, or an explanation of how the charge will be
determined, prior to its imposition. This must be disclosed before the
consumer becomes obligated for property or services that may be paid for
by use of a credit card. For example, disclosure must be given before
the consumer has dinner at a restaurant, stays overnight at a hotel, or
makes a deposit guaranteeing the purchase of property or services.
9(e) Disclosures Upon Renewal of Credit or Charge Card
1. Coverage. This paragraph applies to credit and charge card
accounts of the type subject to Sec. 1026.60. (See Sec. 1026.60(a)(5)
and the accompanying commentary for discussion of the types of accounts
subject to Sec. 1026.60.) The disclosure requirements are triggered
when a card issuer imposes any annual or other periodic fee on such an
account or if the card issuer has changed or amended any term of a
cardholder's account required to be disclosed under Sec. 1026.6(b)(1)
and (b)(2) that has not previously been disclosed to the consumer,
whether or not the card issuer originally was required to provide the
application and solicitation disclosures described in Sec. 1026.60.
2. Form. The disclosures under this paragraph must be clear and
conspicuous, but need not appear in a tabular format or in a prominent
location. The disclosures need not be in a form the cardholder can
retain.
3. Terms at renewal. Renewal notices must reflect the terms actually
in effect at the time of renewal. For example, a card issuer that offers
a preferential annual percentage rate to employees during their
employment must send a renewal notice to employees disclosing the lower
rate actually charged to employees (although the card issuer also may
show the rate charged to the general public).
4. Variable rate. If the card issuer cannot determine the rate that
will be in effect if the cardholder chooses to renew a variable-rate
account, the card issuer may disclose the rate in effect at the time of
mailing or delivery of the renewal notice. Alternatively, the card
issuer may use the rate as
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of a specified date within the last 30 days before the disclosure is
provided.
5. Renewals more frequent than annual. If a renewal fee is billed
more often than annually, the renewal notice should be provided each
time the fee is billed. In this instance, the fee need not be disclosed
as an annualized amount. Alternatively, the card issuer may provide the
notice no less than once every 12 months if the notice explains the
amount and frequency of the fee that will be billed during the time
period covered by the disclosure, and also discloses the fee as an
annualized amount. The notice under this alternative also must state the
consequences of a cardholder's decision to terminate the account after
the renewal-notice period has expired. For example, if a $2 fee is
billed monthly but the notice is given annually, the notice must inform
the cardholder that the monthly charge is $2, the annualized fee is $24,
and $2 will be billed to the account each month for the coming year
unless the cardholder notifies the card issuer. If the cardholder is
obligated to pay an amount equal to the remaining unpaid monthly charges
if the cardholder terminates the account during the coming year but
after the first month, the notice must disclose the fact.
6. Terminating credit availability. Card issuers have some
flexibility in determining the procedures for how and when an account
may be terminated. However, the card issuer must clearly disclose the
time by which the cardholder must act to terminate the account to avoid
paying a renewal fee, if applicable. State and other applicable law
govern whether the card issuer may impose requirements such as
specifying that the cardholder's response be in writing or that the
outstanding balance be repaid in full upon termination.
7. Timing of termination by cardholder. When a card issuer provides
notice under Sec. 1026.9(e)(1), a cardholder must be given at least 30
days or one billing cycle, whichever is less, from the date the notice
is mailed or delivered to make a decision whether to terminate an
account.
8. Timing of notices. A renewal notice is deemed to be provided when
mailed or delivered. Similarly, notice of termination is deemed to be
given when mailed or delivered.
9. Prompt reversal of renewal fee upon termination. In a situation
where a cardholder has provided timely notice of termination and a
renewal fee has been billed to a cardholder's account, the card issuer
must reverse or otherwise withdraw the fee promptly. Once a cardholder
has terminated an account, no additional action by the cardholder may be
required.
10. Disclosure of changes in terms required to be disclosed pursuant
to Sec. 1026.6(b)(1) and (b)(2). Clear and conspicuous disclosure of a
changed term on a periodic statement provided to a consumer prior to
renewal of the consumer's account constitutes prior disclosure of that
term for purposes of Sec. 1026.9(e)(1). Card issuers should refer to
Sec. 1026.9(c)(2) for additional timing, content, and formatting
requirements that apply to certain changes in terms under that
paragraph.
9(e)(2) Notification on Periodic Statements
1. Combined disclosures. If a single disclosure is used to comply
with both Sec. Sec. 1026.9(e) and 1026.7, the periodic statement must
comply with the rules in Sec. Sec. 1026.60 and 1026.7. For example, a
description substantially similar to the heading describing the grace
period required by Sec. 1026.60(b)(5) must be used and the name of the
balance-calculation method must be identified (if listed in Sec.
1026.60(g)) to comply with the requirements of Sec. 1026.60. A card
issuer may include some of the renewal disclosures on a periodic
statement and others on a separate document so long as there is some
reference indicating that the disclosures relate to one another. All
renewal disclosures must be provided to a cardholder at the same time.
2. Preprinted notices on periodic statements. A card issuer may
preprint the required information on its periodic statements. A card
issuer that does so, however, must make clear on the periodic statement
when the preprinted renewal disclosures are applicable. For example, the
card issuer could include a special notice (not preprinted) at the
appropriate time that the renewal fee will be billed in the following
billing cycle, or could show the renewal date as a regular (preprinted)
entry on all periodic statements.
9(f) Change in Credit Card Account Insurance Provider
1. Coverage. This paragraph applies to credit card accounts of the
type subject to Sec. 1026.60 if credit insurance (typically life,
disability, and unemployment insurance) is offered on the outstanding
balance of such an account. (Credit card accounts subject to Sec.
1026.9(f) are the same as those subject to Sec. 1026.9(e); see comment
9(e)-1.) Charge card accounts are not covered by this paragraph. In
addition, the disclosure requirements of this paragraph apply only where
the card issuer initiates the change in insurance provider. For example,
if the card issuer's current insurance provider is merged into or
acquired by another company, these disclosures would not be required.
Disclosures also need not be given in cases where card issuers pay for
credit insurance themselves and do not separately charge the cardholder.
2. No increase in rate or decrease in coverage. The requirement to
provide the disclosure arises when the card issuer changes the provider
of insurance, even if there will be no increase in the premium rate
charged to the
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consumer and no decrease in coverage under the insurance policy.
3. Form of notice. If a substantial decrease in coverage will result
from the change in provider, the card issuer either must explain the
decrease or refer to an accompanying copy of the policy or group
certificate for details of the new terms of coverage. (See the
commentary to AppendixG-13 to part 1026.)
4. Discontinuation of insurance. In addition to stating that the
cardholder may cancel the insurance, the card issuer may explain the
effect the cancellation would have on the consumer's credit card plan.
5. Mailing by third party. Although the card issuer is responsible
for the disclosures, the insurance provider or another third party may
furnish the disclosures on the card issuer's behalf.
9(f)(3) Substantial Decrease in Coverage
1. Determination. Whether a substantial decrease in coverage will
result from the change in provider is determined by the two-part test in
Sec. 1026.9(f)(3): First, whether the decrease is in a significant term
of coverage; and second, whether the decrease might reasonably be
expected to affect a cardholder's decision to continue the insurance. If
both conditions are met, the decrease must be disclosed in the notice.
9(g) Increase in Rates Due to Delinquency or Default or as a Penalty
1. Relationship between Sec. 1026.9(c) and (g) and Sec. 1026.55--
examples. Card issuers subject to Sec. 1026.55 are prohibited from
increasing the annual percentage rate for a category of transactions on
any consumer credit card account unless specifically permitted by one of
the exceptions in Sec. 1026.55(b). See comments 55(a)-1 and 55(b)-3 and
the commentary to Sec. 1026.55(b)(4) for examples that illustrate the
relationship between the notice requirements of Sec. 1026.9(c) and (g)
and Sec. 1026.55.
2. Affected consumers. If a single credit account involves multiple
consumers that may be affected by the change, the creditor should refer
to Sec. 1026.5(d) to determine the number of notices that must be
given.
3. Combining a notice described in Sec. 1026.9(g)(3) with a notice
described in Sec. 1026.9(c)(2)(iv). If a creditor is required to
provide notices pursuant to both Sec. 1026.9(c)(2)(iv) and (g)(3) to a
consumer, the creditor may combine the two notices. This would occur
when penalty pricing has been triggered, and other terms are changing on
the consumer's account at the same time.
4. Content. Sample G-22 contains an example of how to comply with
the requirements in Sec. 1026.9(g)(3)(i) when the rate on a consumer's
credit card account is being increased to a penalty rate as described in
Sec. 1026.9(g)(1)(ii), based on a late payment that is not more than 60
days late. Sample G-23 contains an example of how to comply with the
requirements in Sec. 1026.9(g)(3)(i) when the rate increase is
triggered by a delinquency of more than 60 days.
5. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required under
Sec. 1026.9(g).
6. Terminology. See Sec. 1026.5(a)(2) for terminology requirements
applicable to disclosures required under Sec. 1026.9(g).
7. Reasons for increase. See comment 9(c)(2)(iv)-11 for guidance on
disclosure of the reasons for a rate increase for a credit card account
under an open-end (not home-secured) consumer credit plan.
9(g)(4) Exception for Decrease in Credit Limit
1. The following illustrates the requirements of Sec. 1026.9(g)(4).
Assume that a creditor decreased the credit limit applicable to a
consumer's account and sent a notice pursuant to Sec. 1026.9(g)(4) on
January 1, stating among other things that the penalty rate would apply
if the consumer's balance exceeded the new credit limit as of February
16. If the consumer's balance exceeded the credit limit on February 16,
the creditor could impose the penalty rate on that date. However, a
creditor could not apply the penalty rate if the consumer's balance did
not exceed the new credit limit on February 16, even if the consumer's
balance had exceeded the new credit limit on several dates between
January 1 and February 15. If the consumer's balance did not exceed the
new credit limit on February 16 but the consumer conducted a transaction
on February 17 that caused the balance to exceed the new credit limit,
the general rule in Sec. 1026.9(g)(1)(ii) would apply and the creditor
would be required to give an additional 45 days' notice prior to
imposition of the penalty rate (but under these circumstances the
consumer would have no ability to cure the over-the-limit balance in
order to avoid penalty pricing).
9(h) Consumer Rejection of Certain Significant Changes in Terms
1. Circumstances in which Sec. 1026.9(h) does not apply. Section
1026.9(h) applies when Sec. 1026.9(c)(2)(iv)(B) requires disclosure of
the consumer's right to reject a significant change to an account term.
Thus, for example, Sec. 1026.9(h) does not apply to changes to the
terms of home equity plans subject to the requirements of Sec. 1026.40
that are accessible by a credit or charge card because Sec.
1026.9(c)(2) does not apply to such plans. Similarly, Sec. 1026.9(h)
does not apply in the following circumstances because Sec.
1026.9(c)(2)(iv)(B) does not require disclosure of the right to reject
in those circumstances: (i) An increase in the required minimum
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periodic payment; (ii) a change in an annual percentage rate applicable
to a consumer's account (such as changing the margin or index for
calculating a variable rate, changing from a variable rate to a non-
variable rate, or changing from a non-variable rate to a variable rate);
(iii) a change in the balance computation method necessary to comply
with Sec. 1026.54; and (iv) when the change results from the creditor
not receiving the consumer's required minimum periodic payment within 60
days after the due date for that payment.
9(h)(1) Right To Reject
1. Reasonable requirements for submission of rejections. A creditor
may establish reasonable requirements for the submission of rejections
pursuant to Sec. 1026.9(h)(1). For example:
i. It would be reasonable for a creditor to require that rejections
be made by the primary account holder and that the consumer identify the
account number.
ii. It would be reasonable for a creditor to require that rejections
be made only using the toll-free telephone number disclosed pursuant to
Sec. 1026.9(c). It would also be reasonable for a creditor to designate
additional channels for the submission of rejections (such as an address
for rejections submitted by mail) so long as the creditor does not
require that rejections be submitted through such additional channels.
iii. It would be reasonable for a creditor to require that
rejections be received before the effective date disclosed pursuant to
Sec. 1026.9(c) and to treat the account as not subject to Sec.
1026.9(h) if a rejection is received on or after that date. It would
not, however, be reasonable to require that rejections be submitted
earlier than the day before the effective date. If a creditor is unable
to process all rejections received before the effective date, the
creditor may delay implementation of the change in terms until all
rejections have been processed. In the alternative, the creditor could
implement the change on the effective date and then, on any account for
which a timely rejection was received, reverse the change and remove or
credit any interest charges or fees imposed as a result of the change.
For example, if the effective date for a change in terms is June 15 and
the creditor cannot process all rejections received by telephone on June
14 until June 16, the creditor may delay imposition of the change until
June 17. Alternatively, the creditor could implement the change for all
affected accounts on June 15 and then, once all rejections have been
processed, return any account for which a timely rejection was received
to the prior terms and ensure that the account is not assessed any
additional interest or fees as a result of the change or that the
account is credited for such interest or fees.
2. Use of account following provision of notice. A consumer does not
waive or forfeit the right to reject a significant change in terms by
using the account for transactions prior to the effective date of the
change. Similarly, a consumer does not revoke a rejection by using the
account for transactions after the rejection is received.
Paragraph 9(h)(2)(ii)
1. Termination or suspension of credit availability. Section
1026.9(h)(2)(ii) does not prohibit a creditor from terminating or
suspending credit availability as a result of the consumer's rejection
of a significant change in terms.
2. Solely as a result of rejection. A creditor is prohibited from
imposing a fee or charge or treating an account as in default solely as
a result of the consumer's rejection of a significant change in terms.
For example, if credit availability is terminated or suspended as a
result of the consumer's rejection of a significant change in terms, a
creditor is prohibited from imposing a periodic fee that was not charged
before the consumer rejected the change (such as a closed account fee).
See also comment 55(d)-1. However, regardless of whether credit
availability is terminated or suspended as a result of the consumer's
rejection, a creditor is not prohibited from continuing to charge a
periodic fee that was charged before the rejection. Similarly, a
creditor that charged a fee for late payment before a change was
rejected is not prohibited from charging that fee after rejection of the
change.
Paragraph 9(h)(2)(iii)
1. Relevant date for repayment methods. Once a consumer has rejected
a significant change in terms, Sec. 1026.9(h)(2)(iii) prohibits the
creditor from requiring repayment of the balance on the account using a
method that is less beneficial to the consumer than one of the methods
listed in Sec. 1026.55(c)(2). When applying the methods listed in Sec.
1026.55(c)(2) pursuant to Sec. 1026.9(h)(2)(iii), a creditor may
utilize the date on which the creditor was notified of the rejection or
a later date (such as the date on which the change would have gone into
effect but for the rejection). For example, assume that on April 16 a
creditor provides a notice pursuant to Sec. 1026.9(c) informing the
consumer that the monthly maintenance fee for the account will increase
effective June 1. The notice also states that the consumer may reject
the increase by calling a specified toll-free telephone number before
June 1 but that, if the consumer does so, credit availability for the
account will be terminated. On May 5, the consumer calls the toll-free
number and exercises the right to reject. If the creditor chooses to
establish a five-year amortization period for the balance on the account
consistent with
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Sec. 1026.55(c)(2)(ii), that period may begin no earlier than the date
on which the creditor was notified of the rejection (May 5). However,
the creditor may also begin the amortization period on the date on which
the change would have gone into effect but for the rejection (June 1).
2. Balance on the account. i. In general. When applying the methods
listed in Sec. 1026.55(c)(2) pursuant to Sec. 1026.9(h)(2)(iii), the
provisions in Sec. 1026.55(c)(2) and the guidance in the commentary to
Sec. 1026.55(c)(2) regarding protected balances also apply to a balance
on the account subject to Sec. 1026.9(h)(2)(iii). If a creditor
terminates or suspends credit availability based on a consumer's
rejection of a significant change in terms, the balance on the account
that is subject to Sec. 1026.9(h)(2)(iii) is the balance at the end of
the day on which credit availability is terminated or suspended.
However, if a creditor does not terminate or suspend credit availability
based on the consumer's rejection, the balance on the account subject to
Sec. 1026.9(h)(2)(iii) is the balance at the end of the day on which
the creditor was notified of the rejection or, at the creditor's option,
a later date.
ii. Example. Assume that on June 16 a creditor provides a notice
pursuant to Sec. 1026.9(c) informing the consumer that the annual fee
for the account will increase effective August 1. The notice also states
that the consumer may reject the increase by calling a specified toll-
free telephone number before August 1 but that, if the consumer does so,
credit availability for the account will be terminated. On July 20, the
account has a purchase balance of $1,000 and the consumer calls the
toll-free number and exercises the right to reject. On July 22, a $200
purchase is charged to the account. If the creditor terminates credit
availability on July 25 as a result of the rejection, the balance
subject to the repayment limitations in Sec. 1026.9(h)(2)(iii) is the
$1,200 purchase balance at the end of the day on July 25. However, if
the creditor does not terminate credit availability as a result of the
rejection, the balance subject to the repayment limitations in Sec.
1026.9(h)(2)(iii) is the $1,000 purchase balance at the end of the day
on the date the creditor was notified of the rejection (July 20),
although the creditor may, at its option, treat the $200 purchase as
part of the balance subject to Sec. 1026.9(h)(2)(iii).
9(h)(3) Exception
1. Examples. Section 1026.9(h)(3) provides that Sec. 1026.9(h) does
not apply when the creditor has not received the consumer's required
minimum periodic payment within 60 days after the due date for that
payment. The following examples illustrate the application of this
exception:
i. Account becomes more than 60 days delinquent before notice
provided. Assume that a credit card account is opened on January 1 of
year one and that the payment due date for the account is the fifteenth
day of the month. On June 20 of year two, the creditor has not received
the required minimum periodic payments due on April 15, May 15, and June
15. On June 20, the creditor provides a notice pursuant to Sec.
1026.9(c) informing the consumer that a monthly maintenance fee of $10
will be charged beginning on August 4. However, Sec.
1026.9(c)(2)(iv)(B) does not require the creditor to notify the consumer
of the right to reject because the creditor has not received the April
15 minimum payment within 60 days after the due date. Furthermore, the
exception in Sec. 1026.9(h)(3) applies and the consumer may not reject
the fee.
ii. Account becomes more than 60 days delinquent after rejection.
Assume that a credit card account is opened on January 1 of year one and
that the payment due date for the account is the fifteenth day of the
month. On April 20 of year two, the creditor has not received the
required minimum periodic payment due on April 15. On April 20, the
creditor provides a notice pursuant to Sec. 1026.9(c) informing the
consumer that an annual fee of $100 will be charged beginning on June 4.
The notice further states that the consumer may reject the fee by
calling a specified toll-free telephone number before June 4 but that,
if the consumer does so, credit availability for the account will be
terminated. On May 5, the consumer calls the toll-free telephone number
and rejects the fee. Section 1026.9(h)(2)(i) prohibits the creditor from
charging the $100 fee to the account. If, however, the creditor does not
receive the minimum payments due on April 15 and May 15 by June 15,
Sec. 1026.9(h)(3) permits the creditor to charge the $100 fee. The
creditor must provide a second notice of the fee pursuant to Sec.
1026.9(c), but Sec. 1026.9(c)(2)(iv)(B) does not require the creditor
to disclose the right to reject and Sec. 1026.9(h)(3) does not allow
the consumer to reject the fee. Similarly, the restrictions in Sec.
1026.9(h)(2)(ii) and (iii) no longer apply.
Section 1026.10--Payments
10(a) General Rule.
1. Crediting date. Section 1026.10(a) does not require the creditor
to post the payment to the consumer's account on a particular date; the
creditor is only required to credit the payment as of the date of
receipt.
2. Date of receipt. The ``date of receipt'' is the date that the
payment instrument or other means of completing the payment reaches the
creditor. For example:
i. Payment by check is received when the creditor gets it, not when
the funds are collected.
ii. In a payroll deduction plan in which funds are deposited to an
asset account held by the creditor, and from which payments
[[Page 523]]
are made periodically to an open-end credit account, payment is received
on the date when it is debited to the asset account (rather than on the
date of the deposit), provided the payroll deduction method is voluntary
and the consumer retains use of the funds until the contractual payment
date.
iii. If the consumer elects to have payment made by a third party
payor such as a financial institution, through a preauthorized payment
or telephone bill-payment arrangement, payment is received when the
creditor gets the third party payor's check or other transfer medium,
such as an electronic fund transfer, as long as the payment meets the
creditor's requirements as specified under Sec. 1026.10(b).
iv. Payment made via the creditor's Web site is received on the date
on which the consumer authorizes the creditor to effect the payment,
even if the consumer gives the instruction authorizing that payment in
advance of the date on which the creditor is authorized to effect the
payment. If the consumer authorizes the creditor to effect the payment
immediately, but the consumer's instruction is received after 5 p.m. or
any later cut-off time specified by the creditor, the date on which the
consumer authorizes the creditor to effect the payment is deemed to be
the next business day.
10(b) Specific Requirements for Payments
1. Payment by electronic fund transfer. A creditor may be prohibited
from specifying payment by preauthorized electronic fund transfer. (See
Section 913 of the Electronic Fund Transfer Act.)
2. Payment methods promoted by creditor. If a creditor promotes a
specific payment method, any payments made via that method (prior to any
cut-off time specified by the creditor, to the extent permitted by Sec.
1026.10(b)(2)) are generally conforming payments for purposes of Sec.
1026.10(b). For example:
i. If a creditor promotes electronic payment via its Web site (such
as by disclosing on the Web site itself that payments may be made via
the Web site), any payments made via the creditor's Web site prior to
the creditor's specified cut-off time, if any, would generally be
conforming payments for purposes of Sec. 1026.10(b).
ii. If a creditor promotes payment by telephone (for example, by
including the option to pay by telephone in a menu of options provided
to consumers at a toll-free number disclosed on its periodic statement),
payments made by telephone would generally be conforming payments for
purposes of Sec. 1026.10(b).
iii. If a creditor promotes in-person payments, for example by
stating in an advertisement that payments may be made in person at its
branch locations, such in-person payments made at a branch or office of
the creditor generally would be conforming payments for purposes of
Sec. 1026.10(b).
iv. If a creditor promotes that payments may be made through an
unaffiliated third party, such as by disclosing the Web site address of
that third party on the periodic statement, payments made via that third
party's Web site generally would be conforming payments for purposes of
Sec. 1026.10(b). In contrast, if a customer service representative of
the creditor confirms to a consumer that payments may be made via an
unaffiliated third party, but the creditor does not otherwise promote
that method of payment, Sec. 1026.10(b) permits the creditor to treat
payments made via such third party as nonconforming payments in
accordance with Sec. 1026.10(b)(4).
3. Acceptance of nonconforming payments. If the creditor accepts a
nonconforming payment (for example, payment mailed to a branch office,
when the creditor had specified that payment be sent to a different
location), finance charges may accrue for the period between receipt and
crediting of payments.
4. Implied guidelines for payments. In the absence of specified
requirements for making payments (see Sec. 1026.10(b)):
i. Payments may be made at any location where the creditor conducts
business.
ii. Payments may be made any time during the creditor's normal
business hours.
iii. Payment may be by cash, money order, draft, or other similar
instrument in properly negotiable form, or by electronic fund transfer
if the creditor and consumer have so agreed.
5. Payments made at point of sale. If a card issuer that is a
financial institution issues a credit card under an open-end (not home-
secured) consumer credit plan that can be used only for transactions
with a particular merchant or merchants or a credit card that is
cobranded with the name of a particular merchant or merchants, and a
consumer is able to make a payment on that credit card account at a
retail location maintained by such a merchant, that retail location is
not considered to be a branch or office of the card issuer for purposes
of Sec. 1026.10(b)(3).
6. In-person payments on credit card accounts. For purposes of Sec.
1026.10(b)(3), payments made in person at a branch or office of a
financial institution include payments made with the direct assistance
of, or to, a branch or office employee, for example a teller at a bank
branch. A payment made at the bank branch without the direct assistance
of a branch or office employee, for example a payment placed in a branch
or office mail slot, is not a payment made in person for purposes of
Sec. 1026.10(b)(3).
7. In-person payments at affiliate of card issuer. If an affiliate
of a card issuer that is a financial institution shares a name with the
card issuer, such as ``ABC,'' and accepts
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in-person payments on the card issuer's credit card accounts, those
payments are subject to the requirements of Sec. 1026.10(b)(3).
10(d) Crediting of Payments When Creditor Does Not Receive or Accept
Payments on Due Date
1. Example. A day on which the creditor does not receive or accept
payments by mail may occur, for example, if the U.S. Postal Service does
not deliver mail on that date.
2. Treating a payment as late for any purpose. See comment
5(b)(2)(ii)-2 for guidance on treating a payment as late for any
purpose. When an account is not eligible for a grace period, imposing a
finance charge due to a periodic interest rate does not constitute
treating a payment as late.
10(e) Limitations on Fees Related to Method of Payment
1. Separate fee to allow consumers to make a payment. For purposes
of Sec. 1026.10(e), the term ``separate fee'' means a fee imposed on a
consumer for making a payment to the consumer's account. A fee or other
charge imposed if payment is made after the due date, such as a late fee
or finance charge, is not a separate fee to allow consumers to make a
payment for purposes of Sec. 1026.10(e).
2. Expedited. For purposes of Sec. 1026.10(e), the term
``expedited'' means crediting a payment the same day or, if the payment
is received after any cut-off time established by the creditor, the next
business day.
3. Service by a customer service representative. Service by a
customer service representative of a creditor means any payment made to
the consumer's account with the assistance of a live representative or
agent of the creditor, including those made in person, on the telephone,
or by electronic means. A customer service representative does not
include automated means of making payment that do not involve a live
representative or agent of the creditor, such as a voice response unit
or interactive voice response system. Service by a customer service
representative includes any payment transaction which involves the
assistance of a live representative or agent of the creditor, even if an
automated system is required for a portion of the transaction.
4. Creditor. For purposes of Sec. 1026.10(e), the term ``creditor''
includes a third party that collects, receives, or processes payments on
behalf of a creditor. For example:
i. Assume that a creditor uses a service provider to receive,
collect, or process on the creditor's behalf payments made through the
creditor's Web site or made through an automated telephone payment
service. In these circumstances, the service provider would be
considered a creditor for purposes of paragraph (e).
ii. Assume that a consumer pays a fee to a money transfer or payment
service in order to transmit a payment to the creditor on the consumer's
behalf. In these circumstances, the money transfer or payment service
would not be considered a creditor for purposes of paragraph (e).
iii. Assume that a consumer has a checking account at a depository
institution. The consumer makes a payment to the creditor from the
checking account using a bill payment service provided by the depository
institution. In these circumstances, the depository institution would
not be considered a creditor for purposes of paragraph (e).
10(f) Changes by Card Issuer
1. Address for receiving payment. For purposes of Sec. 1026.10(f),
``address for receiving payment'' means a mailing address for receiving
payment, such as a post office box, or the address of a branch or office
at which payments on credit card accounts are accepted.
2. Materiality. For purposes of Sec. 1026.10(f), a ``material
change'' means any change in the address for receiving payment or
procedures for handling cardholder payments which causes a material
delay in the crediting of a payment. ``Material delay'' means any delay
in crediting payment to a consumer's account which would result in a
late payment and the imposition of a late fee or finance charge. A delay
in crediting a payment which does not result in a late fee or finance
charge would be immaterial.
3. Safe harbor. i. General. A card issuer may elect not to impose a
late fee or finance charge on a consumer's account for the 60-day period
following a change in address for receiving payment or procedures for
handling cardholder payments which could reasonably be expected to cause
a material delay in crediting of a payment to the consumer's account.
For purposes of Sec. 1026.10(f), a late fee or finance charge is not
imposed if the fee or charge is waived or removed, or an amount equal to
the fee or charge is credited to the account.
ii. Retail location. For a material change in the address of a
retail location or procedures for handling cardholder payments at a
retail location, a card issuer may impose a late fee or finance charge
on a consumer's account for a late payment during the 60-day period
following the date on which the change took effect. However, if a card
issuer is notified by a consumer no later than 60 days after the card
issuer transmitted the first periodic statement that reflects the late
fee or finance charge for a late payment that the late payment was
caused by such change, the card issuer must waive or remove any late fee
or finance charge, or credit an amount
[[Page 525]]
equal to any late fee or finance charge, imposed on the account during
the 60-day period following the date on which the change took effect.
4. Examples. i. A card issuer changes the mailing address for
receiving payments by mail from a five-digit postal zip code to a nine-
digit postal zip code. A consumer mails a payment using the five-digit
postal zip code. The change in mailing address is immaterial and it does
not cause a delay. Therefore, a card issuer may impose a late fee or
finance charge for a late payment on the account.
ii. A card issuer changes the mailing address for receiving payments
by mail from one post office box number to another post office box
number. For a 60-day period following the change, the card issuer
continues to use both post office box numbers for the collection of
payments received by mail. The change in mailing address would not cause
a material delay in crediting a payment because payments would be
received and credited at both addresses. Therefore, a card issuer may
impose a late fee or finance charge for a late payment on the account
during the 60-day period following the date on which the change took
effect.
iii. Same facts as paragraph ii above, except the prior post office
box number is no longer valid and mail sent to that address during the
60-day period following the change would be returned to sender. The
change in mailing address is material and the change could cause a
material delay in the crediting of a payment because a payment sent to
the old address could be delayed past the due date. If, as a result, a
consumer makes a late payment on the account during the 60-day period
following the date on which the change took effect, a card issuer may
not impose any late fee or finance charge for the late payment.
iv. A card issuer permanently closes a local branch office at which
payments are accepted on credit card accounts. The permanent closing of
the local branch office is a material change in address for receiving
payment. Relying on the safe harbor, the card issuer elects not to
impose a late fee or finance charge for the 60-day period following the
local branch closing for late payments on consumer accounts which the
issuer reasonably determines are associated with the local branch and
which could reasonably be expected to have been caused by the branch
closing.
v. A consumer has elected to make payments automatically to a credit
card account, such as through a payroll deduction plan or a third party
payor's preauthorized payment arrangement. A card issuer changes the
procedures for handling such payments and as a result, a payment is
delayed and not credited to the consumer's account before the due date.
In these circumstances, a card issuer may not impose any late fee or
finance charge during the 60-day period following the date on which the
change took effect for a late payment on the account.
vi. A card issuer no longer accepts payments in person at a retail
location as a conforming method of payment, which is a material change
in the procedures for handling cardholder payment. In the 60-day period
following the date on which the change took effect, a consumer attempts
to make a payment in person at a retail location of a card issuer. As a
result, the consumer makes a late payment and the issuer charges a late
fee on the consumer's account. The consumer notifies the card issuer of
the late fee for the late payment which was caused by the material
change. In order to comply with Sec. 1026.10(f), the card issuer must
waive or remove the late fee or finance charge, or credit the consumer's
account in an amount equal to the late fee or finance charge.
5. Finance charge due to periodic interest rate. When an account is
not eligible for a grace period, imposing a finance charge due to a
periodic interest rate does not constitute imposition of a finance
charge for a late payment for purposes of Sec. 1026.10(f).
Section 1026.11--Treatment of Credit Balances; Account Termination
11(a) Credit Balances
1. Timing of refund. The creditor may also fulfill its obligations
under Sec. 1026.11 by:
i. Refunding any credit balance to the consumer immediately.
ii. Refunding any credit balance prior to receiving a written
request (under Sec. 1026.11(a)(2)) from the consumer.
iii. Refunding any credit balance upon the consumer's oral or
electronic request.
iv. Making a good faith effort to refund any credit balance before 6
months have passed. If that attempt is unsuccessful, the creditor need
not try again to refund the credit balance at the end of the 6-month
period.
2. Amount of refund. The phrases any part of the remaining credit
balance in Sec. 1026.11(a)(2) and any part of the credit balance
remaining in the account in Sec. 1026.11(a)(3) mean the amount of the
credit balance at the time the creditor is required to make the refund.
The creditor may take into consideration intervening purchases or other
debits to the consumer's account (including those that have not yet been
reflected on a periodic statement) that decrease or eliminate the credit
balance.
Paragraph 11(a)(2)
1. Written requests--standing orders. The creditor is not required
to honor standing orders requesting refunds of any credit balance that
may be created on the consumer's account.
[[Page 526]]
Paragraph 11(a)(3)
1. Good faith effort to refund. The creditor must take positive
steps to return any credit balance that has remained in the account for
over 6 months. This includes, if necessary, attempts to trace the
consumer through the consumer's last known address or telephone number,
or both.
2. Good faith effort unsuccessful. Section 1026.11 imposes no
further duties on the creditor if a good faith effort to return the
balance is unsuccessful. The ultimate disposition of the credit balance
(or any credit balance of $1 or less) is to be determined under other
applicable law.
11(b) Account Termination
Paragraph 11(b)(1)
1. Expiration date. The credit agreement determines whether or not
an open-end plan has a stated expiration (maturity) date. Creditors that
offer accounts with no stated expiration date are prohibited from
terminating those accounts solely because a consumer does not incur a
finance charge, even if credit cards or other access devices associated
with the account expire after a stated period. Creditors may still
terminate such accounts for inactivity consistent with Sec.
1026.11(b)(2).
11(c) Timely Settlement of Estate Debts
1. Administrator of an estate. For purposes of Sec. 1026.11(c), the
term ``administrator'' means an administrator, executor, or any personal
representative of an estate who is authorized to act on behalf of the
estate.
2. Examples. The following are examples of reasonable procedures
that satisfy this rule:
i. A card issuer may decline future transactions and terminate the
account upon receiving reasonable notice of the consumer's death.
ii. A card issuer may credit the account for fees and charges
imposed after the date of receiving reasonable notice of the consumer's
death.
iii. A card issuer may waive the estate's liability for all charges
made to the account after receiving reasonable notice of the consumer's
death.
iv. A card issuer may authorize an agent to handle matters in
accordance with the requirements of this rule.
v. A card issuer may require administrators of an estate to provide
documentation indicating authority to act on behalf of the estate.
vi. A card issuer may establish or designate a department, business
unit, or communication channel for administrators, such as a specific
mailing address or toll-free number, to handle matters in accordance
with the requirements of this rule.
vii. A card issuer may direct administrators, who call a general
customer service toll-free number or who send correspondence by mail to
an address for general correspondence, to an appropriate customer
service representative, department, business unit, or communication
channel to handle matters in accordance with the requirements of this
rule.
2. Request by an administrator of an estate. A card issuer may
receive a request for the amount of the balance on a deceased consumer's
account in writing or by telephone call from the administrator of an
estate. If a request is made in writing, such as by mail, the request is
received on the date the card issuer receives the correspondence.
3. Timely statement of balance. A card issuer must disclose the
balance on a deceased consumer's account, upon request by the
administrator of the decedent's estate. A card issuer may provide the
amount, if any, by a written statement or by telephone. This does not
preclude a card issuer from providing the balance amount to appropriate
persons, other than the administrator, such as the spouse or a relative
of the decedent, who indicate that they may pay any balance. This
provision does not relieve card issuers of the requirements to provide a
periodic statement, under Sec. 1026.5(b)(2). A periodic statement,
under Sec. 1026.5(b)(2), may satisfy the requirements of Sec.
1026.11(c)(2), if provided within 30 days of receiving a request by an
administrator of the estate.
4. Imposition of fees and interest charges. Section 1026.11(c)(3)
does not prohibit a card issuer from imposing fees and finance charges
due to a periodic interest rate based on balances for days that precede
the date on which the card issuer receives a request pursuant to Sec.
1026.11(c)(2). For example, if the last day of the billing cycle is June
30 and the card issuer receives a request pursuant to Sec.
1026.11(c)(2) on June 25, the card issuer may charge interest that
accrued prior to June 25.
5. Example. A card issuer receives a request from an administrator
for the amount of the balance on a deceased consumer's account on March
1. The card issuer discloses to the administrator on March 25 that the
balance is $1,000. If the card issuer receives payment in full of the
$1,000 on April 24, the card issuer must waive or rebate any additional
interest that accrued on the $1,000 balance between March 25 and April
24. If the card issuer receives a payment of $1,000 on April 25, the
card issuer is not required to waive or rebate interest charges on the
$1,000 balance in respect of the period between March 25 and April 25.
If the card issuer receives a partial payment of $500 on April 24, the
card issuer is not required to waive or rebate interest charges on the
$1,000 balance in respect of the period between March 25 and April 25.
[[Page 527]]
6. Application to joint accounts. A card issuer may impose fees and
charges on an account of a deceased consumer if a joint accountholder
remains on the account. If only an authorized user remains on the
account of a deceased consumer, however, then a card issuer may not
impose fees and charges.
Section 1026.12--Special Credit Card Provisions
1. Scope. Sections 1026.12(a) and (b) deal with the issuance and
liability rules for credit cards, whether the card is intended for
consumer, business, or any other purposes. Sections 1026.12(a) and (b)
are exceptions to the general rule that the regulation applies only to
consumer credit. (See Sec. Sec. 1026.1 and 1026.3.)
2. Definition of ``accepted credit card''. For purposes of this
section, ``accepted credit card'' means any credit card that a
cardholder has requested or applied for and received, or has signed,
used, or authorized another person to use to obtain credit. Any credit
card issued as a renewal or substitute in accordance with Sec.
1026.12(a) becomes an accepted credit card when received by the
cardholder.
12(a) Issuance of Credit Cards
Paragraph 12(a)(1)
1. Explicit request. A request or application for a card must be
explicit. For example, a request for an overdraft plan tied to a
checking account does not constitute an application for a credit card
with overdraft checking features.
2. Addition of credit features. If the consumer has a non-credit
card, the addition of credit features to the card (for example, the
granting of overdraft privileges on a checking account when the consumer
already has a check guarantee card) constitutes issuance of a credit
card.
3. Variance of card from request. The request or application need
not correspond exactly to the card that is issued. For example:
i. The name of the card requested may be different when issued.
ii. The card may have features in addition to those reflected in the
request or application.
4. Permissible form of request. The request or application may be
oral (in response to a telephone solicitation by a card issuer, for
example) or written.
5. Time of issuance. A credit card may be issued in response to a
request made before any cards are ready for issuance (for example, if a
new program is established), even if there is some delay in issuance.
6. Persons to whom cards may be issued. A card issuer may issue a
credit card to the person who requests it, and to anyone else for whom
that person requests a card and who will be an authorized user on the
requester's account. In other words, cards may be sent to consumer A on
A's request, and also (on A's request) to consumers B and C, who will be
authorized users on A's account. In these circumstances, the following
rules apply:
i. The additional cards may be imprinted in either A's name or in
the names of B and C.
ii. No liability for unauthorized use (by persons other than B and
C), not even the $50, may be imposed on B or C since they are merely
users and not cardholders as that term is defined in Sec. 1026.2 and
used in Sec. 1026.12(b); of course, liability of up to $50 for
unauthorized use of B's and C's cards may be imposed on A.
iii. Whether B and C may be held liable for their own use, or on the
account generally, is a matter of state or other applicable law.
7. Issuance of non-credit cards. i. General. Under Sec.
1026.12(a)(1), a credit card cannot be issued except in response to a
request or an application. (See comment 2(a)(15)-2 for examples of cards
or devices that are and are not credit cards.) A non-credit card may be
sent on an unsolicited basis by an issuer that does not propose to
connect the card to any credit plan; a credit feature may be added to a
previously issued non-credit card only upon the consumer's specific
request.
ii. Examples. A purchase-price discount card may be sent on an
unsolicited basis by an issuer that does not propose to connect the card
to any credit plan. An issuer demonstrates that it proposes to connect
the card to a credit plan by, for example, including promotional
materials about credit features or account agreements and disclosures
required by Sec. 1026.6. The issuer will violate the rule against
unsolicited issuance if, for example, at the time the card is sent a
credit plan can be accessed by the card or the recipient of the
unsolicited card has been preapproved for credit that the recipient can
access by contacting the issuer and activating the card.
8. Unsolicited issuance of PINs. A card issuer may issue personal
identification numbers (PINs) to existing credit cardholders without a
specific request from the cardholders, provided the PINs cannot be used
alone to obtain credit. For example, the PINs may be necessary if
consumers wish to use their existing credit cards at automated teller
machines or at merchant locations with point of sale terminals that
require PINs.
Paragraph 12(a)(2)
1. Renewal. Renewal generally contemplates the regular replacement
of existing cards because of, for example, security reasons or new
technology or systems. It also includes the re-issuance of cards that
have been suspended temporarily, but does not include the opening of a
new account after a previous account was closed.
[[Page 528]]
2. Substitution--examples. Substitution encompasses the replacement
of one card with another because the underlying account relationship has
changed in some way--such as when the card issuer has:
i. Changed its name.
ii. Changed the name of the card.
iii. Changed the credit or other features available on the account.
For example, the original card could be used to make purchases and
obtain cash advances at teller windows. The substitute card might be
usable, in addition, for obtaining cash advances through automated
teller machines. (If the substitute card constitutes an access device,
as defined in Regulation E, then the Regulation E issuance rules would
have to be followed.) The substitution of one card with another on an
unsolicited basis is not permissible, however, where in conjunction with
the substitution an additional credit card account is opened and the
consumer is able to make new purchases or advances under both the
original and the new account with the new card. For example, if a retail
card issuer replaces its credit card with a combined retailer/bank card,
each of the creditors maintains a separate account, and both accounts
can be accessed for new transactions by use of the new credit card, the
card cannot be provided to a consumer without solicitation.
iv. Substituted a card user's name on the substitute card for the
cardholder's name appearing on the original card.
v. Changed the merchant base, provided that the new card is honored
by at least one of the persons that honored the original card. However,
unless the change in the merchant base is the addition of an affiliate
of the existing merchant base, the substitution of a new card for
another on an unsolicited basis is not permissible where the account is
inactive. A credit card cannot be issued in these circumstances without
a request or application. For purposes of Sec. 1026.12(a), an account
is inactive if no credit has been extended and if the account has no
outstanding balance for the prior 24 months. (See Sec. 1026.11(b)(2).)
3. Substitution--successor card issuer. Substitution also occurs
when a successor card issuer replaces the original card issuer (for
example, when a new card issuer purchases the accounts of the original
issuer and issues its own card to replace the original one). A
permissible substitution exists even if the original issuer retains the
existing receivables and the new card issuer acquires the right only to
future receivables, provided use of the original card is cut off when
use of the new card becomes possible.
4. Substitution--non-credit-card plan. A credit card that replaces a
retailer's open-end credit plan not involving a credit card is not
considered a substitute for the retailer's plan--even if the consumer
used the retailer's plan. A credit card cannot be issued in these
circumstances without a request or application.
5. One-for-one rule. An accepted card may be replaced by no more
than one renewal or substitute card. For example, the card issuer may
not replace a credit card permitting purchases and cash advances with
two cards, one for the purchases and another for the cash advances.
6. One-for-one rule--exceptions. The regulation does not prohibit
the card issuer from:
i. Replacing a debit/credit card with a credit card and another card
with only debit functions (or debit functions plus an associated
overdraft capability), since the latter card could be issued on an
unsolicited basis under Regulation E.
ii. Replacing an accepted card with more than one renewal or
substitute card, provided that:
A. No replacement card accesses any account not accessed by the
accepted card;
B. For terms and conditions required to be disclosed under Sec.
1026.6, all replacement cards are issued subject to the same terms and
conditions, except that a creditor may vary terms for which no change in
terms notice is required under Sec. 1026.9(c); and
C. Under the account's terms the consumer's total liability for
unauthorized use with respect to the account does not increase.
7. Methods of terminating replaced card. The card issuer need not
physically retrieve the original card, provided the old card is voided
in some way, for example:
i. The issuer includes with the new card a notification that the
existing card is no longer valid and should be destroyed immediately.
ii. The original card contained an expiration date.
iii. The card issuer, in order to preclude use of the card,
reprograms computers or issues instructions to authorization centers.
8. Incomplete replacement. If a consumer has duplicate credit cards
on the same account (Card A--one type of bank credit card, for example),
the card issuer may not replace the duplicate cards with one Card A and
one Card B (Card B--another type of bank credit card) unless the
consumer requests Card B.
9. Multiple entities. Where multiple entities share responsibilities
with respect to a credit card issued by one of them, the entity that
issued the card may replace it on an unsolicited basis, if that entity
terminates the original card by voiding it in some way, as described in
comment 12(a)(2)-7. The other entity or entities may not issue a card on
an unsolicited basis in these circumstances.
12(b) Liability of Cardholder for Unauthorized Use
1. Meaning of cardholder. For purposes of this provision, cardholder
includes any person (including organizations) to whom a
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credit card is issued for any purpose, including business. When a
corporation is the cardholder, required disclosures should be provided
to the corporation (as opposed to an employee user).
2. Imposing liability. A card issuer is not required to impose
liability on a cardholder for the unauthorized use of a credit card; if
the card issuer does not seek to impose liability, the issuer need not
conduct any investigation of the cardholder's claim.
3. Reasonable investigation. If a card issuer seeks to impose
liability when a claim of unauthorized use is made by a cardholder, the
card issuer must conduct a reasonable investigation of the claim. In
conducting its investigation, the card issuer may reasonably request the
cardholder's cooperation. The card issuer may not automatically deny a
claim based solely on the cardholder's failure or refusal to comply with
a particular request, including providing an affidavit or filing a
police report; however, if the card issuer otherwise has no knowledge of
facts confirming the unauthorized use, the lack of information resulting
from the cardholder's failure or refusal to comply with a particular
request may lead the card issuer reasonably to terminate the
investigation. The procedures involved in investigating claims may
differ, but actions such as the following represent steps that a card
issuer may take, as appropriate, in conducting a reasonable
investigation:
i. Reviewing the types or amounts of purchases made in relation to
the cardholder's previous purchasing pattern.
ii. Reviewing where the purchases were delivered in relation to the
cardholder's residence or place of business.
iii. Reviewing where the purchases were made in relation to where
the cardholder resides or has normally shopped.
iv. Comparing any signature on credit slips for the purchases to the
signature of the cardholder or an authorized user in the card issuer's
records, including other credit slips.
v. Requesting documentation to assist in the verification of the
claim.
vi. Requiring a written, signed statement from the cardholder or
authorized user. For example, the creditor may include a signature line
on a billing rights form that the cardholder may send in to provide
notice of the claim. However, a creditor may not require the cardholder
to provide an affidavit or signed statement under penalty of perjury as
part of a reasonable investigation.
vii. Requesting a copy of a police report, if one was filed.
viii. Requesting information regarding the cardholder's knowledge of
the person who allegedly used the card or of that person's authority to
do so.
4. Checks that access a credit card account. The liability
provisions for unauthorized use under Sec. 1026.12(b)(1) only apply to
transactions involving the use of a credit card, and not if an
unauthorized transaction is made using a check accessing the credit card
account. However, the billing error provisions in Sec. 1026.13 apply to
both of these types of transactions.
12(b)(1)(ii) Limitation on Amount
1. Meaning of authority. Section 1026.12(b)(1)(i) defines
unauthorized use in terms of whether the user has actual, implied, or
apparent authority. Whether such authority exists must be determined
under state or other applicable law.
2. Liability limits--dollar amounts. As a general rule, the
cardholder's liability for a series of unauthorized uses cannot exceed
either $50 or the value obtained through the unauthorized use before the
card issuer is notified, whichever is less.
3. Implied or apparent authority. If a cardholder furnishes a credit
card and grants authority to make credit transactions to a person (such
as a family member or coworker) who exceeds the authority given, the
cardholder is liable for the transaction(s) unless the cardholder has
notified the creditor that use of the credit card by that person is no
longer authorized.
4. Credit card obtained through robbery or fraud. An unauthorized
use includes, but is not limited to, a transaction initiated by a person
who has obtained the credit card from the consumer, or otherwise
initiated the transaction, through fraud or robbery.
12(b)(2) Conditions of Liability
1. Issuer's option not to comply. A card issuer that chooses not to
impose any liability on cardholders for unauthorized use need not comply
with the disclosure and identification requirements discussed in Sec.
1026.12(b)(2).
Paragraph 12(b)(2)(ii)
1. Disclosure of liability and means of notifying issuer. The
disclosures referred to in Sec. 1026.12(b)(2)(ii) may be given, for
example, with the initial disclosures under Sec. 1026.6, on the credit
card itself, or on periodic statements. They may be given at any time
preceding the unauthorized use of the card.
2. Meaning of ``adequate notice.'' For purposes of this provision,
``adequate notice'' means a printed notice to a cardholder that sets
forth clearly the pertinent facts so that the cardholder may reasonably
be expected to have noticed it and understood its meaning. The notice
may be given by any means reasonably assuring receipt by the cardholder.
Paragraph 12(b)(2)(iii)
1. Means of identifying cardholder or user. To fulfill the condition
set forth in Sec. 1026.12(b)(2)(iii), the issuer must provide some
method whereby the cardholder or the
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authorized user can be identified. This could include, for example, a
signature, photograph, or fingerprint on the card or other biometric
means, or electronic or mechanical confirmation.
2. Identification by magnetic strip. Unless a magnetic strip (or
similar device not readable without physical aids) must be used in
conjunction with a secret code or the like, it would not constitute
sufficient means of identification. Sufficient identification also does
not exist if a ``pool'' or group card, issued to a corporation and
signed by a corporate agent who will not be a user of the card, is
intended to be used by another employee for whom no means of
identification is provided.
3. Transactions not involving card. The cardholder may not be held
liable under Sec. 1026.12(b) when the card itself (or some other
sufficient means of identification of the cardholder) is not presented.
Since the issuer has not provided a means to identify the user under
these circumstances, the issuer has not fulfilled one of the conditions
for imposing liability. For example, when merchandise is ordered by
telephone or the Internet by a person without authority to do so, using
a credit card account number by itself or with other information that
appears on the card (for example, the card expiration date and a 3- or
4-digit cardholder identification number), no liability may be imposed
on the cardholder.
12(b)(3) Notification to Card Issuer
1. How notice must be provided. Notice given in a normal business
manner--for example, by mail, telephone, or personal visit--is effective
even though it is not given to, or does not reach, some particular
person within the issuer's organization. Notice also may be effective
even though it is not given at the address or phone number disclosed by
the card issuer under Sec. 1026.12(b)(2)(ii).
2. Who must provide notice. Notice of loss, theft, or possible
unauthorized use need not be initiated by the cardholder. Notice is
sufficient so long as it gives the ``pertinent information'' which would
include the name or card number of the cardholder and an indication that
unauthorized use has or may have occurred.
3. Relationship to Sec. 1026.13. The liability protections afforded
to cardholders in Sec. 1026.12 do not depend upon the cardholder's
following the error resolution procedures in Sec. 1026.13. For example,
the written notification and time limit requirements of Sec. 1026.13 do
not affect the Sec. 1026.12 protections. (See also comment 12(b)-4.)
12(b)(5) Business Use of Credit Cards
1. Agreement for higher liability for business use cards. The card
issuer may not rely on Sec. 1026.12(b)(5) if the business is clearly
not in a position to provide 10 or more cards to employees (for example,
if the business has only 3 employees). On the other hand, the issuer
need not monitor the personnel practices of the business to make sure
that it has at least 10 employees at all times.
2. Unauthorized use by employee. The protection afforded to an
employee against liability for unauthorized use in excess of the limits
set in Sec. 1026.12(b) applies only to unauthorized use by someone
other than the employee. If the employee uses the card in an
unauthorized manner, the regulation sets no restriction on the
employee's potential liability for such use.
12(c) Right of Cardholder To Assert Claims or Defenses Against Card
Issuer
1. Relationship to Sec. 1026.13. The Sec. 1026.12(c) credit card
``holder in due course'' provision deals with the consumer's right to
assert against the card issuer a claim or defense concerning property or
services purchased with a credit card, if the merchant has been
unwilling to resolve the dispute. Even though certain merchandise
disputes, such as non-delivery of goods, may also constitute ``billing
errors'' under Sec. 1026.13, that section operates independently of
Sec. 1026.12(c). The cardholder whose asserted billing error involves
undelivered goods may institute the error resolution procedures of Sec.
1026.13; but whether or not the cardholder has done so, the cardholder
may assert claims or defenses under Sec. 1026.12(c). Conversely, the
consumer may pay a disputed balance and thus have no further right to
assert claims and defenses, but still may assert a billing error if
notice of that billing error is given in the proper time and manner. An
assertion that a particular transaction resulted from unauthorized use
of the card could also be both a ``defense'' and a billing error.
2. Claims and defenses assertible. Section 1026.12(c) merely
preserves the consumer's right to assert against the card issuer any
claims or defenses that can be asserted against the merchant. It does
not determine what claims or defenses are valid as to the merchant; this
determination must be made under state or other applicable law.
3. Transactions excluded. Section 1026.12(c) does not apply to the
use of a check guarantee card or a debit card in connection with an
overdraft credit plan, or to a check guarantee card used in connection
with cash-advance checks.
4. Method of calculating the amount of credit outstanding. The
amount of the claim or defense that the cardholder may assert shall not
exceed the amount of credit outstanding for the disputed transaction at
the time the cardholder first notifies the card issuer or the person
honoring the credit card of the existence of the claim or defense.
However, when a consumer has asserted a claim or defense against a
creditor pursuant to
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Sec. 1026.12(c), the creditor must apply any payment or other credit in
a manner that avoids or minimizes any reduction in the amount subject to
that claim or defense. Accordingly, to determine the amount of credit
outstanding for purposes of this section, payments and other credits
must be applied first to amounts other than the disputed transaction.
i. For examples of how to comply with Sec. Sec. 1026.12 and 1026.53
for credit card accounts under an open-end (not home-secured) consumer
credit plan, see comment 53-3.
ii. For other types of credit card accounts, creditors may, at their
option, apply payments consistent with Sec. 1026.53 and comment 53-3.
In the alternative, payments and other credits may be applied to: Late
charges in the order of entry to the account; then to finance charges in
the order of entry to the account; and then to any debits other than the
transaction subject to the claim or defense in the order of entry to the
account. In these circumstances, if more than one item is included in a
single extension of credit, credits are to be distributed pro rata
according to prices and applicable taxes.
12(c)(1) General Rule
1. Situations excluded and included. The consumer may assert claims
or defenses only when the goods or services are ``purchased with the
credit card.'' This could include mail, the Internet or telephone
orders, if the purchase is charged to the credit card account. But it
would exclude:
i. Use of a credit card to obtain a cash advance, even if the
consumer then uses the money to purchase goods or services. Such a
transaction would not involve ``property or services purchased with the
credit card.''
ii. The purchase of goods or services by use of a check accessing an
overdraft account and a credit card used solely for identification of
the consumer. (On the other hand, if the credit card is used to make
partial payment for the purchase and not merely for identification, the
right to assert claims or defenses would apply to credit extended via
the credit card, although not to the credit extended on the overdraft
line.)
iii. Purchases made by use of a check guarantee card in conjunction
with a cash advance check (or by cash advance checks alone). (See
comment 12(c)-3.) A cash advance check is a check that, when written,
does not draw on an asset account; instead, it is charged entirely to an
open-end credit account.
iv. Purchases effected by use of either a check guarantee card or a
debit card when used to draw on overdraft credit plans. (See comment
12(c)-3.) The debit card exemption applies whether the card accesses an
asset account via point of sale terminals, automated teller machines, or
in any other way, and whether the card qualifies as an ``access device''
under Regulation E or is only a paper based debit card. If a card serves
both as an ordinary credit card and also as check guarantee or debit
card, a transaction will be subject to this rule on asserting claims and
defenses when used as an ordinary credit card, but not when used as a
check guarantee or debit card.
12(c)(2) Adverse Credit Reports Prohibited
1. Scope of prohibition. Although an amount in dispute may not be
reported as delinquent until the matter is resolved:
i. That amount may be reported as disputed.
ii. Nothing in this provision prohibits the card issuer from
undertaking its normal collection activities for the delinquent and
undisputed portion of the account.
2. Settlement of dispute. A card issuer may not consider a dispute
settled and report an amount disputed as delinquent or begin collection
of the disputed amount until it has completed a reasonable investigation
of the cardholder's claim. A reasonable investigation requires an
independent assessment of the cardholder's claim based on information
obtained from both the cardholder and the merchant, if possible. In
conducting an investigation, the card issuer may request the
cardholder's reasonable cooperation. The card issuer may not
automatically consider a dispute settled if the cardholder fails or
refuses to comply with a particular request. However, if the card issuer
otherwise has no means of obtaining information necessary to resolve the
dispute, the lack of information resulting from the cardholder's failure
or refusal to comply with a particular request may lead the card issuer
reasonably to terminate the investigation.
12(c)(3) Limitations
Paragraph 12(c)(3)(i)(A)
1. Resolution with merchant. The consumer must have tried to resolve
the dispute with the merchant. This does not require any special
procedures or correspondence between them, and is a matter for factual
determination in each case. The consumer is not required to seek
satisfaction from the manufacturer of the goods involved. When the
merchant is in bankruptcy proceedings, the consumer is not required to
file a claim in those proceedings, and may instead file a claim for the
property or service purchased with the credit card with the card issuer
directly.
Paragraph 12(c)(3)(i)(B)
1. Geographic limitation. The question of where a transaction occurs
(as in the case of mail, Internet, or telephone orders, for example) is
to be determined under state or other applicable law.
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12(c)(3)(ii) Exclusion
1. Merchant honoring card. The exceptions (stated in Sec.
1026.12(c)(3)(ii)) to the amount and geographic limitations in Sec.
1026.12(c)(3)(i)(B) do not apply if the merchant merely honors, or
indicates through signs or advertising that it honors, a particular
credit card.
12(d) Offsets by Card Issuer Prohibited
Paragraph 12(d)(1)
1. Holds on accounts. ``Freezing'' or placing a hold on funds in the
cardholder's deposit account is the functional equivalent of an offset
and would contravene the prohibition in Sec. 1026.12(d)(1), unless done
in the context of one of the exceptions specified in Sec.
1026.12(d)(2). For example, if the terms of a security agreement
permitted the card issuer to place a hold on the funds, the hold would
not violate the offset prohibition. Similarly, if an order of a
bankruptcy court required the card issuer to turn over deposit account
funds to the trustee in bankruptcy, the issuer would not violate the
regulation by placing a hold on the funds in order to comply with the
court order.
2. Funds intended as deposits. If the consumer tenders funds as a
deposit (to a checking account, for example), the card issuer may not
apply the funds to repay indebtedness on the consumer's credit card
account.
3. Types of indebtedness; overdraft accounts. The offset prohibition
applies to any indebtedness arising from transactions under a credit
card plan, including accrued finance charges and other charges on the
account. The prohibition also applies to balances arising from
transactions not using the credit card itself but taking place under
plans that involve credit cards. For example, if the consumer writes a
check that accesses an overdraft line of credit, the resulting
indebtedness is subject to the offset prohibition since it is incurred
through a credit card plan, even though the consumer did not use an
associated check guarantee or debit card.
4. When prohibition applies in case of termination of account. The
offset prohibition applies even after the card issuer terminates the
cardholder's credit card privileges, if the indebtedness was incurred
prior to termination. If the indebtedness was incurred after
termination, the prohibition does not apply.
Paragraph 12(d)(2)
1. Security interest--limitations. In order to qualify for the
exception stated in Sec. 1026.12(d)(2), a security interest must be
affirmatively agreed to by the consumer and must be disclosed in the
issuer's account-opening disclosures under Sec. 1026.6. The security
interest must not be the functional equivalent of a right of offset; as
a result, routinely including in agreements contract language indicating
that consumers are giving a security interest in any deposit accounts
maintained with the issuer does not result in a security interest that
falls within the exception in Sec. 1026.12(d)(2). For a security
interest to qualify for the exception under Sec. 1026.12(d)(2) the
following conditions must be met:
i. The consumer must be aware that granting a security interest is a
condition for the credit card account (or for more favorable account
terms) and must specifically intend to grant a security interest in a
deposit account. Indicia of the consumer's awareness and intent include
at least one of the following (or a substantially similar procedure that
evidences the consumer's awareness and intent):
A. Separate signature or initials on the agreement indicating that a
security interest is being given.
B. Placement of the security agreement on a separate page, or
otherwise separating the security interest provisions from other
contract and disclosure provisions.
C. Reference to a specific amount of deposited funds or to a
specific deposit account number.
ii. The security interest must be obtainable and enforceable by
creditors generally. If other creditors could not obtain a security
interest in the consumer's deposit accounts to the same extent as the
card issuer, the security interest is prohibited by Sec. 1026.12(d)(2).
2. Security interest--after-acquired property. As used in Sec.
1026.12(d)(2), the term ``security interest'' does not exclude (as it
does for other Regulation Z purposes) interests in after-acquired
property. Thus, a consensual security interest in deposit-account funds,
including funds deposited after the granting of the security interest
would constitute a permissible exception to the prohibition on offsets.
3. Court order. If the card issuer obtains a judgment against the
cardholder, and if state and other applicable law and the terms of the
judgment do not so prohibit, the card issuer may offset the indebtedness
against the cardholder's deposit account.
Paragraph 12(d)(3)
1. Automatic payment plans--scope of exception. With regard to
automatic debit plans under Sec. 1026.12(d)(3), the following rules
apply:
i. The cardholder's authorization must be in writing and signed or
initialed by the cardholder.
ii. The authorizing language need not appear directly above or next
to the cardholder's signature or initials, provided it appears on the
same document and that it clearly spells out the terms of the automatic
debit plan.
[[Page 533]]
iii. If the cardholder has the option to accept or reject the
automatic debit feature (such option may be required under section 913
of the Electronic Fund Transfer Act), the fact that the option exists
should be clearly indicated.
2. Automatic payment plans--additional exceptions. The following
practices are not prohibited by Sec. 1026.12(d)(1):
i. Automatically deducting charges for participation in a program of
banking services (one aspect of which may be a credit card plan).
ii. Debiting the cardholder's deposit account on the cardholder's
specific request rather than on an automatic periodic basis (for
example, a cardholder might check a box on the credit card bill stub,
requesting the issuer to debit the cardholder's account to pay that
bill).
12(e) Prompt Notification of Returns and Crediting of Refunds
Paragraph 12(e)(1)
1. Normal channels. The term normal channels refers to any network
or interchange system used for the processing of the original charge
slips (or equivalent information concerning the transaction).
Paragraph 12(e)(2)
1. Crediting account. The card issuer need not actually post the
refund to the consumer's account within three business days after
receiving the credit statement, provided that it credits the account as
of a date within that time period.
Section 1026.13--Billing Error Resolution
1. Creditor's failure to comply with billing error provisions.
Failure to comply with the error resolution procedures may result in the
forfeiture of disputed amounts as prescribed in section 161(e) of the
Act. (Any failure to comply may also be a violation subject to the
liability provisions of section 130 of the Act.)
2. Charges for error resolution. If a billing error occurred,
whether as alleged or in a different amount or manner, the creditor may
not impose a charge related to any aspect of the error resolution
process (including charges for documentation or investigation) and must
credit the consumer's account if such a charge was assessed pending
resolution. Since the Act grants the consumer error resolution rights,
the creditor should avoid any chilling effect on the good faith
assertion of errors that might result if charges are assessed when no
billing error has occurred.
13(a) Definition of Billing Error
Paragraph 13(a)(1)
1. Actual, implied, or apparent authority. Whether use of a credit
card or open-end credit plan is authorized is determined by state or
other applicable law. (See comment 12(b)(1)(ii)-1.)
Paragraph 13(a)(3)
1. Coverage. i. Section 1026.13(a)(3) covers disputes about goods or
services that are ``not accepted'' or ``not delivered * * * as agreed'';
for example:
A. The appearance on a periodic statement of a purchase, when the
consumer refused to take delivery of goods because they did not comply
with the contract.
B. Delivery of property or services different from that agreed upon.
C. Delivery of the wrong quantity.
D. Late delivery.
E. Delivery to the wrong location.
ii. Section 1026.13(a)(3) does not apply to a dispute relating to
the quality of property or services that the consumer accepts. Whether
acceptance occurred is determined by state or other applicable law.
2. Application to purchases made using a third-party payment
intermediary. Section 1026.13(a)(3) generally applies to disputes about
goods and services that are purchased using a third-party payment
intermediary, such as a person-to-person Internet payment service,
funded through use of a consumer's open-end credit plan when the goods
or services are not accepted by the consumer or not delivered to the
consumer as agreed. However, the extension of credit must be made at the
time the consumer purchases the good or service and match the amount of
the transaction to purchase the good or service (including ancillary
taxes and fees). Under these circumstances, the property or service for
which the extension of credit is made is not the payment service, but
rather the good or service that the consumer has purchased using the
payment service. Thus, for example, Sec. 1026.13(a)(3) would not apply
to purchases using a third party payment intermediary that is funded
through use of an open-end credit plan if:
i. The extension of credit is made to fund the third-party payment
intermediary ``account,'' but the consumer does not contemporaneously
use those funds to purchase a good or service at that time.
ii. The extension of credit is made to fund only a portion of the
purchase amount, and the consumer uses other sources to fund the
remaining amount.
3. Notice to merchant not required. A consumer is not required to
first notify the merchant or other payee from whom he or she has
purchased goods or services and attempt to resolve a dispute regarding
the good or
[[Page 534]]
service before providing a billing-error notice to the creditor under
Sec. 1026.13(a)(3) asserting that the goods or services were not
accepted or delivered as agreed.
Paragraph 13(a)(5)
1. Computational errors. In periodic statements that are combined
with other information, the error resolution procedures are triggered
only if the consumer asserts a computational billing error in the
credit-related portion of the periodic statement. For example, if a bank
combines a periodic statement reflecting the consumer's credit card
transactions with the consumer's monthly checking statement, a
computational error in the checking account portion of the combined
statement is not a billing error.
Paragraph 13(a)(6)
1. Documentation requests. A request for documentation such as
receipts or sales slips, unaccompanied by an allegation of an error
under Sec. 1026.13(a) or a request for additional clarification under
Sec. 1026.13(a)(6), does not trigger the error resolution procedures.
For example, a request for documentation merely for purposes such as tax
preparation or recordkeeping does not trigger the error resolution
procedures.
13(b) Billing Error Notice
1. Withdrawal of billing error notice by consumer. The creditor need
not comply with the requirements of Sec. 1026.13(c) through (g) of this
section if the consumer concludes that no billing error occurred and
voluntarily withdraws the billing error notice. The consumer's
withdrawal of a billing error notice may be oral, electronic or written.
2. Form of written notice. The creditor may require that the written
notice not be made on the payment medium or other material accompanying
the periodic statement if the creditor so stipulates in the billing
rights statement required by Sec. Sec. 1026.6(a)(5) or (b)(5)(iii), and
1026.9(a). In addition, if the creditor stipulates in the billing rights
statement that it accepts billing error notices submitted
electronically, and states the means by which a consumer may
electronically submit a billing error notice, a notice sent in such
manner will be deemed to satisfy the written notice requirement for
purposes of Sec. 1026.13(b).
Paragraph 13(b)(1)
1. Failure to send periodic statement--timing. If the creditor has
failed to send a periodic statement, the 60-day period runs from the
time the statement should have been sent. Once the statement is
provided, the consumer has another 60 days to assert any billing errors
reflected on it.
2. Failure to reflect credit--timing. If the periodic statement
fails to reflect a credit to the account, the 60-day period runs from
transmittal of the statement on which the credit should have appeared.
3. Transmittal. If a consumer has arranged for periodic statements
to be held at the financial institution until called for, the statement
is ``transmitted'' when it is first made available to the consumer.
Paragraph 13(b)(2)
1. Identity of the consumer. The billing error notice need not
specify both the name and the account number if the information supplied
enables the creditor to identify the consumer's name and account.
13(c) Time for Resolution; General Procedures
1. Temporary or provisional corrections. A creditor may temporarily
correct the consumer's account in response to a billing error notice,
but is not excused from complying with the remaining error resolution
procedures within the time limits for resolution.
2. Correction without investigation. A creditor may correct a
billing error in the manner and amount asserted by the consumer without
the investigation or the determination normally required. The creditor
must comply, however, with all other applicable provisions. If a
creditor follows this procedure, no presumption is created that a
billing error occurred.
3. Relationship with Sec. 1026.12. The consumer's rights under the
billing error provisions in Sec. 1026.13 are independent of the
provisions set forth in Sec. 1026.12(b) and (c). (See comments 12(b)-4,
12(b)(3)-3, and 12(c)-1.)
Paragraph 13(c)(2)
1. Time for resolution. The phrase two complete billing cycles means
two actual billing cycles occurring after receipt of the billing error
notice, not a measure of time equal to two billing cycles. For example,
if a creditor on a monthly billing cycle receives a billing error notice
mid-cycle, it has the remainder of that cycle plus the next two full
billing cycles to resolve the error.
2. Finality of error resolution procedure. A creditor must comply
with the error resolution procedures and complete its investigation to
determine whether an error occurred within two complete billing cycles
as set forth in Sec. 1026.13(c)(2). Thus, for example, Sec.
1026.13(c)(2) prohibits a creditor from reversing amounts previously
credited for an alleged billing error even if the creditor obtains
evidence after the error resolution time period has passed indicating
that the billing error did not occur as asserted by the consumer.
Similarly, if a creditor fails to mail or deliver a written explanation
setting forth the reason why the billing error did not
[[Page 535]]
occur as asserted, or otherwise fails to comply with the error
resolution procedures set forth in Sec. 1026.13(f), the creditor
generally must credit the disputed amount and related finance or other
charges, as applicable, to the consumer's account. However, if a
consumer receives more than one credit to correct the same billing
error, Sec. 1026.13 does not prevent a creditor from reversing amounts
it has previously credited to correct that error, provided that the
total amount of the remaining credits is equal to or more than the
amount of the error and that the consumer does not incur any fees or
other charges as a result of the timing of the creditor's reversal. For
example, assume that a consumer asserts a billing error with respect to
a $100 transaction and that the creditor posts a $100 credit to the
consumer's account to correct that error during the time period set
forth in Sec. 1026.13(c)(2). However, following that time period, a
merchant or other person honoring the credit card issues a $100 credit
to the consumer to correct the same error. In these circumstances, Sec.
1026.13(c)(2) does not prohibit the creditor from reversing its $100
credit once the $100 credit from the merchant or other person has posted
to the consumer's account.
13(d) Rules Pending Resolution
1. Disputed amount. Disputed amount is the dollar amount alleged by
the consumer to be in error. When the allegation concerns the
description or identification of the transaction (such as the date or
the seller's name) rather than a dollar amount, the disputed amount is
the amount of the transaction or charge that corresponds to the disputed
transaction identification. If the consumer alleges a failure to send a
periodic statement under Sec. 1026.13(a)(7), the disputed amount is the
entire balance owing.
13(d)(1) Consumer's Right To Withhold Disputed Amount; Collection Action
Prohibited
1. Prohibited collection actions. During the error resolution
period, the creditor is prohibited from trying to collect the disputed
amount from the consumer. Prohibited collection actions include, for
example, instituting court action, taking a lien, or instituting
attachment proceedings.
2. Right to withhold payment. If the creditor reflects any disputed
amount or related finance or other charges on the periodic statement,
and is therefore required to make the disclosure under Sec.
1026.13(d)(4), the creditor may comply with that disclosure requirement
by indicating that payment of any disputed amount is not required
pending resolution. Making a disclosure that only refers to the disputed
amount would, of course, in no way affect the consumer's right under
Sec. 1026.13(d)(1) to withhold related finance and other charges. The
disclosure under Sec. 1026.13(d)(4) need not appear in any specific
place on the periodic statement, need not state the specific amount that
the consumer may withhold, and may be preprinted on the periodic
statement.
3. Imposition of additional charges on undisputed amounts. The
consumer's withholding of a disputed amount from the total bill cannot
subject undisputed balances (including new purchases or cash advances
made during the present or subsequent cycles) to the imposition of
finance or other charges. For example, if on an account with a grace
period (that is, an account in which paying the new balance in full
allows the consumer to avoid the imposition of additional finance
charges), a consumer disputes a $2 item out of a total bill of $300 and
pays $298 within the grace period, the consumer would not lose the grace
period as to any undisputed amounts, even if the creditor determines
later that no billing error occurred. Furthermore, finance or other
charges may not be imposed on any new purchases or advances that, absent
the unpaid disputed balance, would not have finance or other charges
imposed on them. Finance or other charges that would have been incurred
even if the consumer had paid the disputed amount would not be affected.
4. Automatic payment plans--coverage. The coverage of this provision
is limited to the card issuer's automatic payment plans, whether or not
the consumer's asset account is held by the card issuer or by another
financial institution. It does not apply to automatic or bill-payment
plans offered by financial institutions other than the credit card
issuer.
5. Automatic payment plans--time of notice. While the card issuer
does not have to restore or prevent the debiting of a disputed amount if
the billing error notice arrives after the three-business-day cut-off,
the card issuer must, however, prevent the automatic debit of any part
of the disputed amount that is still outstanding and unresolved at the
time of the next scheduled debit date.
13(d)(2) Adverse Credit Reports Prohibited
1. Report of dispute. Although the creditor must not issue an
adverse credit report because the consumer fails to pay the disputed
amount or any related charges, the creditor may report that the amount
or the account is in dispute. Also, the creditor may report the account
as delinquent if undisputed amounts remain unpaid.
2. Person. During the error resolution period, the creditor is
prohibited from making an adverse credit report about the disputed
amount to any person--including employers, insurance companies, other
creditors, and credit bureaus.
3. Creditor's agent. Whether an agency relationship exists between a
creditor and an
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issuer of an adverse credit report is determined by state or other
applicable law.
13(e) Procedures If Billing Error Occurred as Asserted
1. Correction of error. The phrase as applicable means that the
necessary corrections vary with the type of billing error that occurred.
For example, a misidentified transaction (or a transaction that is
identified by one of the alternative methods in Sec. 1026.8) is cured
by properly identifying the transaction and crediting related finance
and any other charges imposed. The creditor is not required to cancel
the amount of the underlying obligation incurred by the consumer.
2. Form of correction notice. The written correction notice may take
a variety of forms. It may be sent separately, or it may be included on
or with a periodic statement that is mailed within the time for
resolution. If the periodic statement is used, the amount of the billing
error must be specifically identified. If a separate billing error
correction notice is provided, the accompanying or subsequent periodic
statement reflecting the corrected amount may simply identify it as
credit.
3. Discovery of information after investigation period. See comment
13(c)(2)-2.
13(f) Procedures If Different Billing Error or No Billing Error Occurred
1. Different billing error. Examples of a different billing error
include:
i. Differences in the amount of an error (for example, the customer
asserts a $55.00 error but the error was only $53.00).
ii. Differences in other particulars asserted by the consumer (such
as when a consumer asserts that a particular transaction never occurred,
but the creditor determines that only the seller's name was disclosed
incorrectly).
2. Form of creditor's explanation. The written explanation (which
also may notify the consumer of corrections to the account) may take a
variety of forms. It may be sent separately, or it may be included on or
with a periodic statement that is mailed within the time for resolution.
If the creditor uses the periodic statement for the explanation and
correction(s), the corrections must be specifically identified. If a
separate explanation, including the correction notice, is provided, the
enclosed or subsequent periodic statement reflecting the corrected
amount may simply identify it as a credit. The explanation may be
combined with the creditor's notice to the consumer of amounts still
owing, which is required under Sec. 1026.13(g)(1), provided it is sent
within the time limit for resolution. (See commentary to Sec.
1026.13(e).)
3. Reasonable investigation. A creditor must conduct a reasonable
investigation before it determines that no billing error occurred or
that a different billing error occurred from that asserted. In
conducting its investigation of an allegation of a billing error, the
creditor may reasonably request the consumer's cooperation. The creditor
may not automatically deny a claim based solely on the consumer's
failure or refusal to comply with a particular request, including
providing an affidavit or filing a police report. However, if the
creditor otherwise has no knowledge of facts confirming the billing
error, the lack of information resulting from the consumer's failure or
refusal to comply with a particular request may lead the creditor
reasonably to terminate the investigation. The procedures involved in
investigating alleged billing errors may differ depending on the billing
error type.
i. Unauthorized transaction. In conducting an investigation of a
notice of billing error alleging an unauthorized transaction under Sec.
1026.13(a)(1), actions such as the following represent steps that a
creditor may take, as appropriate, in conducting a reasonable
investigation:
A. Reviewing the types or amounts of purchases made in relation to
the consumer's previous purchasing pattern.
B. Reviewing where the purchases were delivered in relation to the
consumer's residence or place of business.
C. Reviewing where the purchases were made in relation to where the
consumer resides or has normally shopped.
D. Comparing any signature on credit slips for the purchases to the
signature of the consumer (or an authorized user in the case of a credit
card account) in the creditor's records, including other credit slips.
E. Requesting documentation to assist in the verification of the
claim.
F. Requiring a written, signed statement from the consumer (or
authorized user, in the case of a credit card account). For example, the
creditor may include a signature line on a billing rights form that the
consumer may send in to provide notice of the claim. However, a creditor
may not require the consumer to provide an affidavit or signed statement
under penalty of perjury as a part of a reasonable investigation.
G. Requesting a copy of a police report, if one was filed.
H. Requesting information regarding the consumer's knowledge of the
person who allegedly obtained an extension of credit on the account or
of that person's authority to do so.
ii. Nondelivery of property or services. In conducting an
investigation of a billing error notice alleging the nondelivery of
property or services under Sec. 1026.13(a)(3), the creditor shall not
deny the assertion unless it conducts a reasonable investigation and
determines that the property or services were actually delivered,
mailed, or sent as agreed.
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iii. Incorrect information. In conducting an investigation of a
billing error notice alleging that information appearing on a periodic
statement is incorrect because a person honoring the consumer's credit
card or otherwise accepting an access device for an open-end plan has
made an incorrect report to the creditor, the creditor shall not deny
the assertion unless it conducts a reasonable investigation and
determines that the information was correct.
13(g) Creditor's Rights and Duties After Resolution
Paragraph 13(g)(1)
1. Amounts owed by consumer. Amounts the consumer still owes may
include both minimum periodic payments and related finance and other
charges that accrued during the resolution period. As explained in the
commentary to Sec. 1026.13(d)(1), even if the creditor later determines
that no billing error occurred, the creditor may not include finance or
other charges that are imposed on undisputed balances solely as a result
of a consumer's withholding payment of a disputed amount.
2. Time of notice. The creditor need not send the notice of amount
owed within the time period for resolution, although it is under a duty
to send the notice promptly after resolution of the alleged error. If
the creditor combines the notice of the amount owed with the explanation
required under Sec. 1026.13(f)(1), the combined notice must be provided
within the time limit for resolution.
Paragraph 13(g)(2)
1. Grace period if no error occurred. If the creditor determines,
after a reasonable investigation, that a billing error did not occur as
asserted, and the consumer was entitled to a grace period at the time
the consumer provided the billing error notice, the consumer must be
given a period of time equal to the grace period disclosed under Sec.
1026.6(a)(1) or (b)(2) and Sec. 1026.7(a)(8) or (b)(8) to pay any
disputed amounts due without incurring additional finance or other
charges. However, the creditor need not allow a grace period disclosed
under the above-mentioned sections to pay the amount due under Sec.
1026.13(g)(1) if no error occurred and the consumer was not entitled to
a grace period at the time the consumer asserted the error. For example,
assume that a creditor provides a consumer a grace period of 20 days to
pay a new balance to avoid finance charges, and that the consumer did
not carry an outstanding balance from the prior month. If the consumer
subsequently asserts a billing error for the current statement period
within the 20-day grace period, and the creditor determines that no
billing error in fact occurred, the consumer must be given at least 20
days (i.e., the full disclosed grace period) to pay the amount due
without incurring additional finance charges. Conversely, if the
consumer was not entitled to a grace period at the time the consumer
asserted the billing error, for example, if the consumer did not pay the
previous monthly balance of undisputed charges in full, the creditor may
assess finance charges on the disputed balance for the entire period the
item was in dispute.
Paragraph 13(g)(3)
1. Time for payment. The consumer has a minimum of 10 days to pay
(measured from the time the consumer could reasonably be expected to
have received notice of the amount owed) before the creditor may issue
an adverse credit report; if an initially disclosed grace period allows
the consumer a longer time in which to pay, the consumer has the benefit
of that longer period.
Paragraph 13(g)(4)
1. Credit reporting. Under Sec. 1026.13(g)(4)(i) and (iii) the
creditor's additional credit reporting responsibilities must be
accomplished promptly. The creditor need not establish costly procedures
to fulfill this requirement. For example, a creditor that reports to a
credit bureau on scheduled updates need not transmit corrective
information by an unscheduled computer or magnetic tape; it may provide
the credit bureau with the correct information by letter or other
commercially reasonable means when using the scheduled update would not
be ``prompt.'' The creditor is not responsible for ensuring that the
credit bureau corrects its information immediately.
2. Adverse report to credit bureau. If a creditor made an adverse
report to a credit bureau that disseminated the information to other
creditors, the creditor fulfills its Sec. 1026.13(g)(4)(ii) obligations
by providing the consumer with the name and address of the credit
bureau.
13(i) Relation to Electronic Fund Transfer Act and Regulation E
1. Coverage. Credit extended directly from a non-overdraft credit
line is governed solely by Regulation Z, even though a combined credit
card/access device is used to obtain the extension.
2. Incidental credit under agreement. Credit extended incident to an
electronic fund transfer under an agreement between the consumer and the
financial institution is governed by Sec. 1026.13(i), which provides
that certain error resolution procedures in both this part and
Regulation E apply. Incidental credit that is not extended under an
agreement between the consumer and the financial institution is governed
solely by the error resolution procedures in Regulation E.
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For example, credit inadvertently extended incident to an electronic
fund-transfer, such as under an overdraft service not subject to
Regulation Z, is governed solely by the Regulation E error resolution
procedures, if the bank and the consumer do not have an agreement to
extend credit when the consumer's account is overdrawn.
3. Application to debit/credit transactions-examples. If a consumer
withdraws money at an automated teller machine and activates an
overdraft credit feature on the checking account:
i. An error asserted with respect to the transaction is subject, for
error resolution purposes, to the applicable Regulation E (12 CFR Part
1005) provisions (such as timing and notice) for the entire transaction.
ii. The creditor need not provisionally credit the consumer's
account, under 12 CFR 1005.11(c)(2)(i), for any portion of the unpaid
extension of credit.
iii. The creditor must credit the consumer's account under Sec.
1005.11(c) with any finance or other charges incurred as a result of the
alleged error.
iv. The provisions of Sec. Sec. 1026.13(d) and (g) apply only to
the credit portion of the transaction.
Section 1026.14--Determination of Annual Percentage Rate
14(a) General Rule
1. Tolerance. The tolerance of 1/8th of 1 percentage point above or
below the annual percentage rate applies to any required disclosure of
the annual percentage rate. The disclosure of the annual percentage rate
is required in Sec. Sec. 1026.60, 1026.40, 1026.6, 1026.7, 1026.9,
1026.15, 1026.16, 1026.26, 1026.55, and 1026.56.
2. Rounding. The regulation does not require that the annual
percentage rate be calculated to any particular number of decimal
places; rounding is permissible within the 1/8th of 1 percent tolerance.
For example, an exact annual percentage rate of 14.33333% may be stated
as 14.33% or as 14.3%, or even as 14\1/4\%; but it could not be stated
as 14.2% or 14%, since each varies by more than the permitted tolerance.
3. Periodic rates. No explicit tolerance exists for any periodic
rate as such; a disclosed periodic rate may vary from precise accuracy
(for example, due to rounding) only to the extent that its annualized
equivalent is within the tolerance permitted by Sec. 1026.14(a).
Further, a periodic rate need not be calculated to any particular number
of decimal places.
4. Finance charges. The regulation does not prohibit creditors from
assessing finance charges on balances that include prior, unpaid finance
charges; state or other applicable law may do so, however.
5. Good faith reliance on faulty calculation tools. The regulation
relieves a creditor of liability for an error in the annual percentage
rate or finance charge that resulted from a corresponding error in a
calculation tool used in good faith by the creditor. Whether or not the
creditor's use of the tool was in good faith must be determined on a
case-by-case basis, but the creditor must in any case have taken
reasonable steps to verify the accuracy of the tool, including any
instructions, before using it. Generally, the safe harbor from liability
is available only for errors directly attributable to the calculation
tool itself, including software programs; it is not intended to absolve
a creditor of liability for its own errors, or for errors arising from
improper use of the tool, from incorrect data entry, or from
misapplication of the law.
6. Effect of leap year. Any variance in the annual percentage rate
that occurs solely by reason of the addition of February 29 in a leap
year may be disregarded, and such a rate may be disclosed without regard
to such variance.
14(b) Annual Percentage Rate--In General
1. Corresponding annual percentage rate computation. For purposes of
Sec. Sec. 1026.60, 1026.40, 1026.6, 1026.7(a)(4) or (b)(4), 1026.9,
1026.15, 1026.16, 1026.26, 1026.55, and 1026.56, the annual percentage
rate is determined by multiplying the periodic rate by the number of
periods in the year. This computation reflects the fact that, in such
disclosures, the rate (known as the corresponding annual percentage
rate) is prospective and does not involve any particular finance charge
or periodic balance.
14(c) Optional Effective Annual Percentage Rate for Periodic Statements
for Creditors Offering Open-End Credit Plans Secured by a Consumer's
Dwelling
1. General rule. The periodic statement may reflect (under Sec.
1026.7(a)(7)) the annualized equivalent of the rate actually applied
during a particular cycle; this rate may differ from the corresponding
annual percentage rate because of the inclusion of, for example, fixed,
minimum, or transaction charges. Sections 1026.14(c)(1) through (c)(4)
state the computation rules for the effective rate.
2. Charges related to opening, renewing, or continuing an account.
Sections 1026.14(c)(2) and (c)(3) exclude from the calculation of the
effective annual percentage rate finance charges that are imposed during
the billing cycle such as a loan fee, points, or similar charge that
relates to opening, renewing, or continuing an account. The charges
involved here do not relate to a specific transaction or to specific
activity on the account, but relate solely to the opening, renewing, or
continuing of the account. For example, an annual fee to renew an open-
end credit account
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that is a percentage of the credit limit on the account, or that is
charged only to consumers that have not used their credit card for a
certain dollar amount in transactions during the preceding year, would
not be included in the calculation of the annual percentage rate, even
though the fee may not be excluded from the finance charge under Sec.
1026.4(c)(4). (See comment 4(c)(4)-2.) This rule applies even if the
loan fee, points, or similar charges are billed on a subsequent periodic
statement or withheld from the proceeds of the first advance on the
account.
3. Classification of charges. If the finance charge includes a
charge not due to the application of a periodic rate, the creditor must
use the annual percentage rate computation method that corresponds to
the type of charge imposed. If the charge is tied to a specific
transaction (for example, 3 percent of the amount of each transaction),
then the method in Sec. 1026.14(c)(3) must be used. If a fixed or
minimum charge is applied, that is, one not tied to any specific
transaction, then the formula in Sec. 1026.14(c)(2) is appropriate.
4. Small finance charges. Section 1026.14(c)(4) gives the creditor
an alternative to Sec. 1026.14(c)(2) and (c)(3) if small finance
charges (50 cents or less) are involved; that is, if the finance charge
includes minimum or fixed fees not due to the application of a periodic
rate and the total finance charge for the cycle does not exceed 50
cents. For example, while a monthly activity fee of 50 cents on a
balance of $20 would produce an annual percentage rate of 30 percent
under the rule in Sec. 1026.14(c)(2), the creditor may disclose an
annual percentage rate of 18 percent if the periodic rate generally
applicable to all balances is 1 and \1/2\ percent per month.
5. Prior-cycle adjustments. i. The annual percentage rate reflects
the finance charges imposed during the billing cycle. However, finance
charges imposed during the billing cycle may relate to activity in a
prior cycle. Examples of circumstances when this may occur are:
A. A cash advance occurs on the last day of a billing cycle on an
account that uses the transaction date to figure finance charges, and it
is impracticable to post the transaction until the following cycle.
B. An adjustment to the finance charge is made following the
resolution of a billing error dispute.
C. A consumer fails to pay the purchase balance under a deferred
payment feature by the payment due date, and finance charges are imposed
from the date of purchase.
ii. Finance charges relating to activity in prior cycles should be
reflected on the periodic statement as follows:
A. If a finance charge imposed in the current billing cycle is
attributable to periodic rates applicable to prior billing cycles (such
as when a deferred payment balance was not paid in full by the payment
due date and finance charges from the date of purchase are now being
debited to the account, or when a cash advance occurs on the last day of
a billing cycle on an account that uses the transaction date to figure
finance charges and it is impracticable to post the transaction until
the following cycle), and the creditor uses the quotient method to
calculate the annual percentage rate, the numerator would include the
amount of any transaction charges plus any other finance charges posted
during the billing cycle. At the creditor's option, balances relating to
the finance charge adjustment may be included in the denominator if
permitted by the legal obligation, if it was impracticable to post the
transaction in the previous cycle because of timing, or if the
adjustment is covered by comment 14(c)-5.ii.B.
B. If a finance charge that is posted to the account relates to
activity for which a finance charge was debited or credited to the
account in a previous billing cycle (for example, if the finance charge
relates to an adjustment such as the resolution of a billing error
dispute, or an unintentional posting error, or a payment by check that
was later returned unpaid for insufficient funds or other reasons), the
creditor shall at its option:
1. Calculate the annual percentage rate in accordance with ii.A of
this paragraph, or
2. Disclose the finance charge adjustment on the periodic statement
and calculate the annual percentage rate for the current billing cycle
without including the finance charge adjustment in the numerator and
balances associated with the finance charge adjustment in the
denominator.
14(c)(1) Solely Periodic Rates Imposed
1. Periodic rates. Section 1026.14(c)(1) applies if the only finance
charge imposed is due to the application of a periodic rate to a
balance. The creditor may compute the annual percentage rate either:
i. By multiplying each periodic rate by the number of periods in the
year; or
ii. By the ``quotient'' method. This method refers to a composite
annual percentage rate when different periodic rates apply to different
balances. For example, a particular plan may involve a periodic rate of
\1/2\ percent on balances up to $500, and 1 percent on balances over
$500. If, in a given cycle, the consumer has a balance of $800, the
finance charge would consist of $7.50 (500 x .015) plus $3.00 (300 x
.01), for a total finance charge of $10.50. The annual percentage rate
for this period may be disclosed either as 18% on $500 and 12 percent on
$300, or as 15.75 percent on a balance of $800 (the quotient of $10.50
divided by $800, multiplied by 12).
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14(c)(2) Minimum or Fixed Charge, But Not Transaction Charge, Imposed
1. Certain charges not based on periodic rates. Section
1026.14(c)(2) specifies use of the quotient method to determine the
annual percentage rate if the finance charge imposed includes a certain
charge not due to the application of a periodic rate (other than a
charge relating to a specific transaction). For example, if the creditor
imposes a minimum $1 finance charge on all balances below $50, and the
consumer's balance was $40 in a particular cycle, the creditor would
disclose an annual percentage rate of 30 percent (1/40 x 12).
2. No balance. If there is no balance to which the finance charge is
applicable, an annual percentage rate cannot be determined under Sec.
1026.14(c)(2). This could occur not only when minimum charges are
imposed on an account with no balance, but also when a periodic rate is
applied to advances from the date of the transaction. For example, if on
May 19 the consumer pays the new balance in full from a statement dated
May 1, and has no further transactions reflected on the June 1
statement, that statement would reflect a finance charge with no account
balance.
14(c)(3) Transaction Charge Imposed
1. Transaction charges. i. Section 1026.14(c)(3) transaction charges
include, for example:
A. A loan fee of $10 imposed on a particular advance.
B. A charge of 3 percent of the amount of each transaction.
ii. The reference to avoiding duplication in the computation
requires that the amounts of transactions on which transaction charges
were imposed not be included both in the amount of total balances and in
the ``other amounts on which a finance charge was imposed'' figure. In a
multifeatured plan, creditors may consider each bona fide feature
separately in the calculation of the denominator. A creditor has
considerable flexibility in defining features for open-end plans, as
long as the creditor has a reasonable basis for the distinctions. For
further explanation and examples of how to determine the components of
this formula, see appendix F to part 1026.
2. Daily rate with specific transaction charge. Section
1026.14(c)(3) sets forth an acceptable method for calculating the annual
percentage rate if the finance charge results from a charge relating to
a specific transaction and the application of a daily periodic rate.
This section includes the requirement that the creditor follow the rules
in appendix F to part 1026 in calculating the annual percentage rate,
especially the provision in the introductory section of appendix F which
addresses the daily rate/transaction charge situation by providing that
the ``average of daily balances'' shall be used instead of the ``sum of
the balances.''
14(d) Calculations Where Daily Periodic Rate Applied
1. Quotient method. Section 1026.14(d) addresses use of a daily
periodic rate(s) to determine some or all of the finance charge and use
of the quotient method to determine the annual percentage rate. Since
the quotient formula in Sec. 1026.14(c)(1)(ii) and (c)(2) cannot be
used when a daily rate is being applied to a series of daily balances,
Sec. 1026.14(d) provides two alternative ways to calculate the annual
percentage rate--either of which satisfies the provisions of Sec.
1026.7(a)(7).
2. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and the
application of a daily periodic rate, see comment 14(c)(3)-2 for
guidance on an appropriate calculation method.
Section 1026.15--Right of Rescission
1. Transactions not covered. Credit extensions that are not subject
to the regulation are not covered by Sec. 1026.15 even if the
customer's principal dwelling is the collateral securing the credit. For
this purpose, credit extensions also would include the occurrences
listed in comment 15(a)(1)-1. For example, the right of rescission does
not apply to the opening of a business-purpose credit line, even though
the loan is secured by the customer's principal dwelling.
15(a) Consumer's Right To Rescind
Paragraph 15(a)(1)
1. Occurrences subject to right. Under an open-end credit plan
secured by the consumer's principal dwelling, the right of rescission
generally arises with each of the following occurrences:
i. Opening the account.
ii. Each credit extension.
iii. Increasing the credit limit.
iv. Adding to an existing account a security interest in the
consumer's principal dwelling.
v. Increasing the dollar amount of the security interest taken in
the dwelling to secure the plan. For example, a consumer may open an
account with a $10,000 credit limit, $5,000 of which is initially
secured by the consumer's principal dwelling. The consumer has the right
to rescind at that time and (except as noted in Sec. 1026.15(a)(1)(ii))
with each extension on the account. Later, if the creditor decides that
it wants the credit line fully secured, and increases the amount of its
interest in the consumer's dwelling, the consumer has the right to
rescind the increase.
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2. Exceptions. Although the consumer generally has the right to
rescind with each transaction on the account, Section 125(e) of the Act
provides an exception: the creditor need not provide the right to
rescind at the time of each credit extension made under an open-end
credit plan secured by the consumer's principal dwelling to the extent
that the credit extended is in accordance with a previously established
credit limit for the plan. This limited rescission option is available
whether or not the plan existed prior to the effective date of the Act.
3. Security interest arising from transaction. i. In order for the
right of rescission to apply, the security interest must be retained as
part of the credit transaction. For example:
A. A security interest that is acquired by a contractor who is also
extending the credit in the transaction.
B. A mechanic's or materialman's lien that is retained by a
subcontractor or supplier of a contractor-creditor, even when the latter
has waived its own security interest in the consumer's home.
ii. The security interest is not part of the credit transaction, and
therefore the transaction is not subject to the right of rescission
when, for example:
A. A mechanic's or materialman's lien is obtained by a contractor
who is not a party to the credit transaction but merely is paid with the
proceeds of the consumer's cash advance.
B. All security interests that may arise in connection with the
credit transaction are validly waived.
C. The creditor obtains a lien and completion bond that in effect
satisfies all liens against the consumer's principal dwelling as a
result of the credit transaction.
iii. Although liens arising by operation of law are not considered
security interests for purposes of disclosure under Sec. 1026.2, that
section specifically includes them in the definition for purposes of the
right of rescission. Thus, even though an interest in the consumer's
principal dwelling is not a required disclosure under Sec. 1026.6(c),
it may still give rise to the right of rescission.
4. Consumer. To be a consumer within the meaning of Sec. 1026.2,
that person must at least have an ownership interest in the dwelling
that is encumbered by the creditor's security interest, although that
person need not be a signatory to the credit agreement. For example, if
only one spouse enters into a secured plan, the other spouse is a
consumer if the ownership interest of that spouse is subject to the
security interest.
5. Principal dwelling. A consumer can only have one principal
dwelling at a time. (But see comment 15(a)(1)-6.) A vacation or other
second home would not be a principal dwelling. A transaction secured by
a second home (such as a vacation home) that is not currently being used
as the consumer's principal dwelling is not rescindable, even if the
consumer intends to reside there in the future. When a consumer buys or
builds a new dwelling that will become the consumer's principal dwelling
within one year or upon completion of construction, the new dwelling is
considered the principal dwelling if it secures the open-end credit
line. In that case, the transaction secured by the new dwelling is a
residential mortgage transaction and is not rescindable. For example, if
a consumer whose principal dwelling is currently A builds B, to be
occupied by the consumer upon completion of construction, an advance on
an open-end line to finance B and secured by B is a residential mortgage
transaction. Dwelling, as defined in Sec. 1026.2, includes structures
that are classified as personalty under state law. For example, a
transaction secured by a mobile home, trailer, or houseboat used as the
consumer's principal dwelling may be rescindable.
6. Special rule for principal dwelling. Notwithstanding the general
rule that consumers may have only one principal dwelling, when the
consumer is acquiring or constructing a new principal dwelling, a credit
plan or extension that is subject to Regulation Z and is secured by the
equity in the consumer's current principal dwelling is subject to the
right of rescission regardless of the purpose of that loan (for example,
an advance to be used as a bridge loan). For example, if a consumer
whose principal dwelling is currently A builds B, to be occupied by the
consumer upon completion of construction, a loan to finance B and
secured by A is subject to the right of rescission. Moreover, a loan
secured by both A and B is, likewise, rescindable.
Paragraph 15(a)(2)
1. Consumer's exercise of right. The consumer must exercise the
right of rescission in writing but not necessarily on the notice
supplied under Sec. 1026.15(b). Whatever the means of sending the
notification of rescission--mail, telegram or other written means--the
time period for the creditor's performance under Sec. 1026.15(d)(2)
does not begin to run until the notification has been received. The
creditor may designate an agent to receive the notification so long as
the agent's name and address appear on the notice provided to the
consumer under Sec. 1026.15(b). Where the creditor fails to provide the
consumer with a designated address for sending the notification of
rescission, delivery of the notification to the person or address to
which the consumer has been directed to send payments constitutes
delivery to the creditor or assignee. State law determines whether
delivery of the notification to a third party other than the person to
whom
[[Page 542]]
payments are made is delivery to the creditor or assignee, in the case
where the creditor fails to designate an address for sending the
notification of rescission.
Paragraph 15(a)(3)
1. Rescission period. i. The period within which the consumer may
exercise the right to rescind runs for 3 business days from the last of
3 events:
A. The occurrence that gives rise to the right of rescission.
B. Delivery of all material disclosures that are relevant to the
plan.
C. Delivery to the consumer of the required rescission notice.
ii. For example, an account is opened on Friday, June 1, and the
disclosures and notice of the right to rescind were given on Thursday,
May 31; the rescission period will expire at midnight of the third
business day after June 1--that is, Tuesday June 5. In another example,
if the disclosures are given and the account is opened on Friday, June
1, and the rescission notice is given on Monday, June 4, the rescission
period expires at midnight of the third business day after June 4--that
is Thursday, June 7. The consumer must place the rescission notice in
the mail, file it for telegraphic transmission, or deliver it to the
creditor's place of business within that period in order to exercise the
right.
2. Material disclosures. Section 1026.15(a)(3) sets forth the
material disclosures that must be provided before the rescission period
can begin to run. The creditor must provide sufficient information to
satisfy the requirements of Sec. 1026.6 for these disclosures. A
creditor may satisfy this requirement by giving an initial disclosure
statement that complies with the regulation. Failure to give the other
required initial disclosures (such as the billing rights statement) or
the information required under Sec. 1026.40 does not prevent the
running of the rescission period, although that failure may result in
civil liability or administrative sanctions. The payment terms set forth
in Sec. 1026.15(a)(3) apply to any repayment phase set forth in the
agreement. Thus, the payment terms described in Sec. 1026.6(e)(2) for
any repayment phase as well as for the draw period are ``material
disclosures.''
3. Material disclosures--variable rate program. For a variable rate
program, the material disclosures also include the disclosures listed in
Sec. 1026.6(a)(1)(ii): the circumstances under which the rate may
increase; the limitations on the increase; and the effect of an
increase. The disclosures listed in Sec. 1026.6(a)(1)(ii) for any
repayment phase also are material disclosures for variable-rate
programs.
4. Unexpired right of rescission. i. When the creditor has failed to
take the action necessary to start the three-day rescission period
running the right to rescind automatically lapses on the occurrence of
the earliest of the following three events:
A. The expiration of three years after the occurrence giving rise to
the right of rescission.
B. Transfer of all the consumer's interest in the property.
C. Sale of the consumer's interest in the property, including a
transaction in which the consumer sells the dwelling and takes back a
purchase money note and mortgage or retains legal title through a device
such as an installment sale contract.
ii. Transfer of all the consumer's interest includes such transfers
as bequests and gifts. A sale or transfer of the property need not be
voluntary to terminate the right to rescind. For example, a foreclosure
sale would terminate an unexpired right to rescind. As provided in
section 125 of the Act, the three-year limit may be extended by an
administrative proceeding to enforce the provisions of Sec. 1026.15. A
partial transfer of the consumer's interest, such as a transfer
bestowing co-ownership on a spouse, does not terminate the right of
rescission.
Paragraph 15(a)(4)
1. Joint owners. When more than one consumer has the right to
rescind a transaction, any one of them may exercise that right and
cancel the transaction on behalf of all. For example, if both a husband
and wife have the right to rescind a transaction, either spouse acting
alone may exercise the right and both are bound by the rescission.
15(b) Notice of Right To Rescind
1. Who receives notice. Each consumer entitled to rescind must be
given two copies of the rescission notice and the material
disclosures.In a transaction involving joint owners, both of whom are
entitled to rescind, both must receive the notice of the right to
rescind and disclosures. For example, if both spouses are entitled to
rescind a transaction, each must receive two copies of the rescission
notice (one copy to each if the notice is provided in electronic form in
accordance with the consumer consent and other applicable provisions of
the E-Sign Act) and one copy of the disclosures.
2. Format. The rescission notice may be physically separated from
the material disclosures or combined with the material disclosures, so
long as the information required to be included on the notice is set
forth in a clear and conspicuous manner. See the model notices in
appendix G.
3. Content. The notice must include all of the information outlined
in Sec. 1026.15(b)(1) through (5). The requirement in Sec. 1026.15(b)
that the transaction or occurrence be identified may be met by providing
the date of the transaction or occurrence. The notice may
[[Page 543]]
include additional information related to the required information, such
as:
i. A description of the property subject to the security interest.
ii. A statement that joint owners may have the right to rescind and
that a rescission by one is effective for all.
iii. The name and address of an agent of the creditor to receive
notice of rescission.
4. Time of providing notice. The notice required by Sec. 1026.15(b)
need not be given before the occurrence giving rise to the right of
rescission. The creditor may deliver the notice after the occurrence,
but the rescission period will not begin to run until the notice is
given. For example, if the creditor provides the notice on May 15, but
disclosures were given and the credit limit was raised on May 10, the 3-
business-day rescission period will run from May 15.
15(c) Delay of Creditor's Performance
1. General rule. i. Until the rescission period has expired and the
creditor is reasonably satisfied that the consumer has not rescinded,
the creditor must not, either directly or through a third party:
A. Disburse advances to the consumer.
B. Begin performing services for the consumer.
C. Deliver materials to the consumer.
ii. A creditor may, however, continue to allow transactions under an
existing open-end credit plan during a rescission period that results
solely from the addition of a security interest in the consumer's
principal dwelling. (See comment 15(c)-3 for other actions that may be
taken during the delay period.)
2. Escrow. The creditor may disburse advances during the rescission
period in a valid escrow arrangement. The creditor may not, however,
appoint the consumer as ``trustee'' or ``escrow agent'' and distribute
funds to the consumer in that capacity during the delay period.
3. Actions during the delay period. Section 1026.15(c) does not
prevent the creditor from taking other steps during the delay, short of
beginning actual performance. Unless otherwise prohibited, such as by
state law, the creditor may, for example:
i. Prepare the cash advance check.
ii. Perfect the security interest.
iii. Accrue finance charges during the delay period.
4. Performance by third party. The creditor is relieved from
liability for failure to delay performance if a third party with no
knowledge that the rescission right has been activated provides
materials or services, as long as any debt incurred for materials or
services obtained by the consumer during the rescission period is not
secured by the security interest in the consumer's dwelling. For
example, if a consumer uses a bank credit card to purchase materials
from a merchant in an amount below the floor limit, the merchant might
not contact the card issuer for authorization and therefore would not
know that materials should not be provided.
5. Delay beyond rescission period. i. The creditor must wait until
it is reasonably satisfied that the consumer has not rescinded. For
example, the creditor may satisfy itself by doing one of the following:
A. Waiting a reasonable time after expiration of the rescission
period to allow for delivery of a mailed notice.
B. Obtaining a written statement from the consumer that the right
has not been exercised.
ii. When more than one consumer has the right to rescind, the
creditor cannot reasonably rely on the assurance of only one consumer,
because other consumers may exercise the right.
15(d) Effects of Rescission
Paragraph 15(d)(1)
1. Termination of security interest. Any security interest giving
rise to the right of rescission becomes void when the consumer exercises
the right of rescission. The security interest is automatically negated,
regardless of its status and whether or not it was recorded or
perfected. Under Sec. 1026.15(d)(2), however, the creditor must take
any action necessary to reflect the fact that the security interest no
longer exists.
2. Extent of termination. The creditor's security interest is void
to the extent that it is related to the occurrence giving rise to the
right of rescission. For example, upon rescission:
i. If the consumer's right to rescind is activated by the opening of
a plan, any security interest in the principal dwelling is void.
ii. If the right arises due to an increase in the credit limit, the
security interest is void as to the amount of credit extensions over the
prior limit, but the security interest in amounts up to the original
credit limit is unaffected.
iii. If the right arises with each individual credit extension, then
the interest is void as to that extension, and other extensions are
unaffected.
Paragraph 15(d)(2)
1. Refunds to consumer. The consumer cannot be required to pay any
amount in the form of money or property either to the creditor or to a
third party as part of the occurrence subject to the right of
rescission. Any amounts of this nature already paid by the consumer must
be refunded. ``Any amount'' includes finance charges already accrued, as
well as other charges such as broker fees, application and commitment
fees, or fees for a title search or appraisal, whether paid to the
creditor, paid by the consumer directly to a third party, or passed
[[Page 544]]
on from the creditor to the third party. It is irrelevant that these
amounts may not represent profit to the creditor. For example:
i. If the occurrence is the opening of the plan, the creditor must
return any membership or application fee paid.
ii. If the occurrence is the increase in a credit limit or the
addition of a security interest, the creditor must return any fee
imposed for a new credit report or filing fees.
iii. If the occurrence is a credit extension, the creditors must
return fees such as application, title, and appraisal or survey fees, as
well as any finance charges related to the credit extension.
2. Amounts not refundable to consumer. Creditors need not return any
money given by the consumer to a third party outside of the occurrence,
such as costs incurred for a building permit or for a zoning variance.
Similarly, the term any amount does not apply to money or property given
by the creditor to the consumer; those amounts must be tendered by the
consumer to the creditor under Sec. 1026.15(d)(3).
3. Reflection of security interest termination. The creditor must
take whatever steps are necessary to indicate that the security interest
is terminated. Those steps include the cancellation of documents
creating the security interest, and the filing of release or termination
statements in the public record. In a transaction involving
subcontractors or suppliers that also hold security interests related to
the occurrence rescinded by the consumer, the creditor must insure that
the termination of their security interests is also reflected. The 20-
day period for the creditor's action refers to the time within which the
creditor must begin the process. It does not require all necessary steps
to have been completed within that time, but the creditor is responsible
for seeing the process through to completion.
Paragraph 15(d)(3)
1. Property exchange. Once the creditor has fulfilled its obligation
under Sec. 1026.15(d)(2), the consumer must tender to the creditor any
property or money the creditor has already delivered to the consumer. At
the consumer's option, property may be tendered at the location of the
property. For example, if fixtures or furniture have been delivered to
the consumer's home, the consumer may tender them to the creditor by
making them available for pick-up at the home, rather than physically
returning them to the creditor's premises. Money already given to the
consumer must be tendered at the creditor's place of business. For
purpose of property exchange, the following additional rules apply:
i. A cash advance is considered money for purposes of this section
even if the creditor knows what the consumer intends to purchase with
the money.
ii. In a 3-party open-end credit plan (that is, if the creditor and
seller are not the same or related persons), extensions by the creditor
that are used by the consumer for purchases from third-party sellers are
considered to be the same as cash advances for purposes of tendering
value to the creditor, even though the transaction is a purchase for
other purposes under the regulation. For example, if a consumer
exercises the unexpired right to rescind after using a 3-party credit
card for one year, the consumer would tender the amount of the purchase
price for the items charged to the account, rather than tendering the
items themselves to the creditor.
2. Reasonable value. If returning the property would be extremely
burdensome to the consumer, the consumer may offer the creditor its
reasonable value rather than returning the property itself. For example,
if building materials have already been incorporated into the consumer's
dwelling, the consumer may pay their reasonable value.
Paragraph 15(d)(4)
1. Modifications. The procedures outlined in Sec. 1026.15(d)(2) and
(3) may be modified by a court. For example, when a consumer is in
bankruptcy proceedings and prohibited from returning anything to the
creditor, or when the equities dictate, a modification might be made.
The sequence of procedures under Sec. 1026.15(d)(2) and (3), or a
court's modification of those procedures under Sec. 1026.15(d)(4), does
not affect a consumer's substantive right to rescind and to have the
loan amount adjusted accordingly. Where the consumer's right to rescind
is contested by the creditor, a court would normally determine whether
the consumer has a right to rescind and determine the amounts owed
before establishing the procedures for the parties to tender any money
or property.
15(e) Consumer's Waiver of Right To Rescind
1. Need for waiver. To waive the right to rescind, the consumer must
have a bona fide personal financial emergency that must be met before
the end of the rescission period. The existence of the consumer's waiver
will not, of itself, automatically insulate the creditor from liability
for failing to provide the right of rescission.
2. Procedure. To waive or modify the right to rescind, the consumer
must give a written statement that specifically waives or modifies the
right, and also includes a brief description of the emergency. Each
consumer entitled to rescind must sign the waiver statement. In a
transaction involving multiple consumers, such as a husband and wife
using their home as collateral, the waiver must bear the signatures of
both spouses.
[[Page 545]]
15(f) Exempt Transactions
1. Residential mortgage transaction. Although residential mortgage
transactions would seldom be made on bona fide open-end credit plans
(under which repeated transactions must be reasonably contemplated), an
advance on an open-end plan could be for a downpayment for the purchase
of a dwelling that would then secure the remainder of the line. In such
a case, only the particular advance for the downpayment would be exempt
from the rescission right.
2. State creditors. Cities and other political subdivisions of
states acting as creditors are not exempt from Sec. 1026.15.
3. Spreader clause. When the creditor holds a mortgage or deed of
trust on the consumer's principal dwelling and that mortgage or deed of
trust contains a ``spreader clause'' (also known as a ``dragnet'' or
cross-collateralization clause), subsequent occurrences such as the
opening of a plan or individual credit extensions are subject to the
right of rescission to the same degree as if the security interest were
taken directly to secure the open-end plan, unless the creditor
effectively waives its security interest under the spreader clause with
respect to the subsequent open-end credit extensions.
Section 1026.16--Advertising
1. Clear and conspicuous standard--general. Section 1026.16 is
subject to the general ``clear and conspicuous'' standard for subpart B
(see Sec. 1026.5(a)(1)) but prescribes no specific rules for the format
of the necessary disclosures, other than the format requirements related
to the disclosure of a promotional rate or payment under Sec.
1026.16(d)(6), a promotional rate or promotional fee under Sec.
1026.16(g), or a deferred interest or similar offer under Sec.
1026.16(h). Other than the disclosure of certain terms described in
Sec. Sec. 1026.16(d)(6), (g), or (h), the credit terms need not be
printed in a certain type size nor need they appear in any particular
place in the advertisement.
2. Clear and conspicuous standard--promotional rates or payments;
deferred interest or similar offers. i. For purposes of Sec.
1026.16(d)(6), a clear and conspicuous disclosure means that the
required information in Sec. 1026.16(d)(6)(ii)(A)-(C) is disclosed with
equal prominence and in close proximity to the promotional rate or
payment to which it applies. If the information in Sec.
1026.16(d)(6)(ii)(A)-(C) is the same type size and is located
immediately next to or directly above or below the promotional rate or
payment to which it applies, without any intervening text or graphical
displays, the disclosures would be deemed to be equally prominent and in
close proximity. Notwithstanding the above, for electronic
advertisements that disclose promotional rates or payments, compliance
with the requirements of Sec. 1026.16(c) is deemed to satisfy the clear
and conspicuous standard.
ii. For purposes of Sec. 1026.16(g)(4) as it applies to written or
electronic advertisements only, a clear and conspicuous disclosure means
the required information in Sec. 1026.16(g)(4)(i) and, as applicable,
(g)(4)(ii) and (g)(4)(iii) must be equally prominent to the promotional
rate or promotional fee to which it applies. If the information in Sec.
1026.16(g)(4)(i) and, as applicable, (g)(4)(ii) and (g)(4)(iii) is the
same type size as the promotional rate or promotional fee to which it
applies, the disclosures would be deemed to be equally prominent. For
purposes of Sec. 1026.16(h)(3) as it applies to written or electronic
advertisements only, a clear and conspicuous disclosure means the
required information in Sec. 1026.16(h)(3) must be equally prominent to
each statement of ``no interest,'' ``no payments,'' ``deferred
interest,'' ``same as cash,'' or similar term regarding interest or
payments during the deferred interest period. If the information
required to be disclosed under Sec. 1026.16(h)(3) is the same type size
as the statement of ``no interest,'' ``no payments,'' ``deferred
interest,'' ``same as cash,'' or similar term regarding interest or
payments during the deferred interest period, the disclosure would be
deemed to be equally prominent.
3. Clear and conspicuous standard--Internet advertisements for home-
equity plans. For purposes of this section, a clear and conspicuous
disclosure for visual text advertisements on the Internet for home-
equity plans subject to the requirements of Sec. 1026.40 means that the
required disclosures are not obscured by techniques such as graphical
displays, shading, coloration, or other devices and comply with all
other requirements for clear and conspicuous disclosures under Sec.
1026.16(d). (See also comment 16(c)(1)-2.)
4. Clear and conspicuous standard--televised advertisements for
home-equity plans. For purposes of this section, including alternative
disclosures as provided for by Sec. 1026.16(e), a clear and conspicuous
disclosure in the context of visual text advertisements on television
for home-equity plans subject to the requirements of Sec. 1026.40 means
that the required disclosures are not obscured by techniques such as
graphical displays, shading, coloration, or other devices, are displayed
in a manner that allows for a consumer to read the information required
to be disclosed, and comply with all other requirements for clear and
conspicuous disclosures under Sec. 1026.16(d). For example, very fine
print in a television advertisement would not meet the clear and
conspicuous standard if consumers cannot see and read the information
required to be disclosed.
5. Clear and conspicuous standard--oral advertisements for home-
equity plans. For purposes of this section, including alternative
disclosures as provided for by Sec. 1026.16(e), a
[[Page 546]]
clear and conspicuous disclosure in the context of an oral advertisement
for home-equity plans subject to the requirements of Sec. 1026.40,
whether by radio, television, the Internet, or other medium, means that
the required disclosures are given at a speed and volume sufficient for
a consumer to hear and comprehend them. For example, information stated
very rapidly at a low volume in a radio or television advertisement
would not meet the clear and conspicuous standard if consumers cannot
hear and comprehend the information required to be disclosed.
6. Expressing the annual percentage rate in abbreviated form.
Whenever the annual percentage rate is used in an advertisement for
open-end credit, it may be expressed using a readily understandable
abbreviation such as APR.
16(a) Actually Available Terms
1. General rule. To the extent that an advertisement mentions
specific credit terms, it may state only those terms that the creditor
is actually prepared to offer. For example, a creditor may not advertise
a very low annual percentage rate that will not in fact be available at
any time. Section 1026.16(a) is not intended to inhibit the promotion of
new credit programs, but to bar the advertising of terms that are not
and will not be available. For example, a creditor may advertise terms
that will be offered for only a limited period, or terms that will
become available at a future date.
2. Specific credit terms. Specific credit terms is not limited to
the disclosures required by the regulation but would include any
specific components of a credit plan, such as the minimum periodic
payment amount or seller's points in a plan secured by real estate.
16(b) Advertisement of Terms That Require Additional Disclosures
Paragraph 16(b)(1)
1. Triggering terms. Negative as well as affirmative references
trigger the requirement for additional information. For example, if a
creditor states no interest or no annual membership fee in an
advertisement, additional information must be provided. Other examples
of terms that trigger additional disclosures are:
i. Small monthly service charge on the remaining balance, which
describes how the amount of a finance charge will be determined.
ii. 12 percent Annual Percentage Rate or A $15 annual membership fee
buys you $2,000 in credit, which describe required disclosures under
Sec. 1026.6.
2. Implicit terms. Section 1026.16(b) applies even if the triggering
term is not stated explicitly, but may be readily determined from the
advertisement.
3. Membership fees. A membership fee is not a triggering term nor
need it be disclosed under Sec. 1026.16(b)(1)(iii) if it is required
for participation in the plan whether or not an open-end credit feature
is attached. (See comment 6(a)(2)-1 and Sec. 1026.6(b)(3)(iii)(B).)
4. Deferred billing and deferred payment programs. Statements such
as ``Charge it--you won't be billed until May'' or ``You may skip your
January payment'' are not in themselves triggering terms, since the
timing for initial billing or for monthly payments are not terms
required to be disclosed under Sec. 1026.6. However, a statement such
as ``No interest charges until May'' or any other statement regarding
when interest or finance charges begin to accrue is a triggering term,
whether appearing alone or in conjunction with a description of a
deferred billing or deferred payment program such as the examples above.
5. Variable-rate plans. In disclosing the annual percentage rate in
an advertisement for a variable-rate plan, as required by Sec.
1026.16(b)(1)(ii), the creditor may use an insert showing the current
rate; or may give the rate as of a specified recent date. The additional
requirement in Sec. 1026.16(b)(1)(ii) to disclose the variable-rate
feature may be satisfied by disclosing that the annual percentage rate
may vary or a similar statement, but the advertisement need not include
the information required by Sec. 1026.6(a)(1)(ii) or (b)(4)(ii).
6. Membership fees for open-end (not home-secured) plans. For
purposes of Sec. 1026.16(b)(1)(iii), membership fees that may be
imposed on open-end (not home-secured) plans shall have the same meaning
as in Sec. 1026.60(b)(2).
Paragraph 16(b)(2)
1. Assumptions. In stating the total of payments and the time period
to repay the obligation, assuming that the consumer pays only the
periodic payment amounts advertised, as required under Sec.
1026.16(b)(2), the following additional assumptions may be made:
i. Payments are made timely so as not to be considered late by the
creditor;
ii. Payments are made each period, and no debt cancellation or
suspension agreement, or skip payment feature applies to the account;
iii. No interest rate changes will affect the account;
iv. No other balances are currently carried or will be carried on
the account;
v. No taxes or ancillary charges are or will be added to the
obligation;
vi. Goods or services are delivered on a single date; and
vii. The consumer is not currently and will not become delinquent on
the account.
2. Positive periodic payment amounts. Only positive periodic payment
amounts trigger the additional disclosures under Sec. 1026.16(b)(2).
Therefore, if the periodic payment amount advertised is not a positive
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amount (e.g., ``No payments''), the advertisement need not state the
total of payments and the time period to repay the obligation.
16(c) Catalogs or Other Multiple-Page Advertisements; Electronic
Advertisements
1. Definition. The multiple-page advertisements to which Sec.
1026.16(c) refers are advertisements consisting of a series of
sequentially numbered pages--for example, a supplement to a newspaper. A
mailing consisting of several separate flyers or pieces of promotional
material in a single envelope does not constitute a single multiple-page
advertisement for purposes of Sec. 1026.16(c).
Paragraph 16(c)(1)
1. General. Section 1026.16(c)(1) permits creditors to put credit
information together in one place in a catalog or other multiple-page
advertisement or an electronic advertisement (such as an advertisement
appearing on an Internet Web site). The rule applies only if the
advertisement contains one or more of the triggering terms from Sec.
1026.16(b).
2. Electronic advertisement. If an electronic advertisement (such as
an advertisement appearing on an Internet Web site) contains the table
or schedule permitted under Sec. 1026.16(c)(1), any statement of terms
set forth in Sec. 1026.6 appearing anywhere else in the advertisement
must clearly direct the consumer to the location where the table or
schedule begins. For example, a term triggering additional disclosures
may be accompanied by a link that directly takes the consumer to the
additional information.
Paragraph 16(c)(2)
1. Table or schedule if credit terms depend on outstanding balance.
If the credit terms of a plan vary depending on the amount of the
balance outstanding, rather than the amount of any property purchased, a
table or schedule complies with Sec. 1026.16(c)(2) if it includes the
required disclosures for representative balances. For example, a
creditor would disclose that a periodic rate of 1.5% is applied to
balances of $500 or less, and a 1% rate is applied to balances greater
than $500.
16(d) Additional Requirements for Home-Equity Plans
1. Trigger terms. Negative as well as affirmative references trigger
the requirement for additional information. For example, if a creditor
states no annual fee, no points, or we waive closing costs in an
advertisement, additional information must be provided. (See comment
16(d)-4 regarding the use of a phrase such as no closing costs.)
Inclusion of a statement such as low fees, however, would not trigger
the need to state additional information. References to payment terms
include references to the draw period or any repayment period, to the
length of the plan, to how the minimum payments are determined and to
the timing of such payments.
2. Fees to open the plan. Section 1026.16(d)(1)(i) requires a
disclosure of any fees imposed by the creditor or a third party to open
the plan. In providing the fee information required under this
paragraph, the corresponding rules for disclosure of this information
apply. For example, fees to open the plan may be stated as a range.
Similarly, if property insurance is required to open the plan, a
creditor either may estimate the cost of the insurance or provide a
statement that such insurance is required. (See the commentary to Sec.
1026.40(d)(7) and (d)(8).)
3. Statements of tax deductibility. An advertisement that refers to
deductibility for tax purposes is not misleading if it includes a
statement such as ``consult a tax advisor regarding the deductibility of
interest.'' An advertisement distributed in paper form or through the
Internet (rather than by radio or television) that states that the
advertised extension of credit may exceed the fair market value of the
consumer's dwelling is not misleading if it clearly and conspicuously
states the required information in Sec. Sec. 1026.16(d)(4)(i) and
(d)(4)(ii).
4. Misleading terms prohibited. Under Sec. 1026.16(d)(5),
advertisements may not refer to home-equity plans as free money or use
other misleading terms. For example, an advertisement could not state
``no closing costs'' or ``we waive closing costs'' if consumers may be
required to pay any closing costs, such as recordation fees. In the case
of property insurance, however, a creditor may state, for example, ``no
closing costs'' even if property insurance may be required, as long as
the creditor also provides a statement that such insurance may be
required. (See the commentary to this section regarding fees to open a
plan.)
5. Promotional rates and payments in advertisements for home-equity
plans. Section 1026.16(d)(6) requires additional disclosures for
promotional rates or payments.
i. Variable-rate plans. In advertisements for variable-rate plans,
if the advertised annual percentage rate is based on (or the advertised
payment is derived from) the index and margin that will be used to make
rate (or payment) adjustments over the term of the loan, then there is
no promotional rate or promotional payment. If, however, the advertised
annual percentage rate is not based on (or the advertised payment is not
derived from) the index and margin that will be used to make rate (or
payment) adjustments, and a reasonably current application of the index
and margin would result in a higher annual percentage rate (or, given an
assumed balance, a higher payment) then there is a promotional rate or
promotional payment.
ii. Equal prominence, close proximity. Information required to be
disclosed in
[[Page 548]]
Sec. 1026.16(d)(6)(ii) that is immediately next to or directly above or
below the promotional rate or payment (but not in a footnote) is deemed
to be closely proximate to the listing. Information required to be
disclosed in Sec. 1026.16(d)(6)(ii) that is in the same type size as
the promotional rate or payment is deemed to be equally prominent.
iii. Amounts and time periods of payments. Section
1026.16(d)(6)(ii)(C) requires disclosure of the amount and time periods
of any payments that will apply under the plan. This section may require
disclosure of several payment amounts, including any balloon payment.
For example, if an advertisement for a home-equity plan offers a
$100,000 five-year line of credit and assumes that the entire line is
drawn resulting in a minimum payment of $800 per month for the first six
months, increasing to $1,000 per month after month six, followed by a
$50,000 balloon payment after five years, the advertisement must
disclose the amount and time period of each of the two monthly payment
streams, as well as the amount and timing of the balloon payment, with
equal prominence and in close proximity to the promotional payment.
However, if the final payment could not be more than twice the amount of
other minimum payments, the final payment need not be disclosed.
iv. Plans other than variable-rate plans. For a plan other than a
variable-rate plan, if an advertised payment is calculated in the same
way as other payments based on an assumed balance, the fact that the
minimum payment could increase solely if the consumer made an additional
draw does not make the payment a promotional payment. For example, if a
payment of $500 results from an assumed $10,000 draw, and the payment
would increase to $1,000 if the consumer made an additional $10,000
draw, the payment is not a promotional payment.
v. Conversion option. Some home-equity plans permit the consumer to
repay all or part of the balance during the draw period at a fixed rate
(rather than a variable rate) and over a specified time period. The
fixed-rate conversion option does not, by itself, make the rate or
payment that would apply if the consumer exercised the fixed-rate
conversion option a promotional rate or payment.
vi. Preferred-rate provisions. Some home-equity plans contain a
preferred-rate provision, where the rate will increase upon the
occurrence of some event, such as the consumer-employee leaving the
creditor's employ, the consumer closing an existing deposit account with
the creditor, or the consumer revoking an election to make automated
payments. A preferred-rate provision does not, by itself, make the rate
or payment under the preferred-rate provision a promotional rate or
payment.
6. Reasonably current index and margin. For the purposes of this
section, an index and margin is considered reasonably current if:
i. For direct mail advertisements, it was in effect within 60 days
before mailing;
ii. For advertisements in electronic form it was in effect within 30
days before the advertisement is sent to a consumer's email address, or
in the case of an advertisement made on an Internet Web site, when
viewed by the public; or
iii. For printed advertisements made available to the general
public, including ones contained in a catalog, magazine, or other
generally available publication, it was in effect within 30 days before
printing.
7. Relation to other sections. Advertisements for home-equity plans
must comply with all provisions in Sec. 1026.16, not solely the rules
in Sec. 1026.16(d). If an advertisement contains information (such as
the payment terms) that triggers the duty under Sec. 1026.16(d) to
state the annual percentage rate, the additional disclosures in Sec.
1026.16(b) must be provided in the advertisement. While Sec. 1026.16(d)
does not require a statement of fees to use or maintain the plan (such
as membership fees and transaction charges), such fees must be disclosed
under Sec. 1026.16(b)(1)(i) and (b)(1)(iii).
8. Inapplicability of closed-end rules. Advertisements for home-
equity plans are governed solely by the requirements in Sec. 1026.16,
except Sec. 1026.16(g), and not by the closed-end advertising rules in
Sec. 1026.24. Thus, if a creditor states payment information about the
repayment phase, this will trigger the duty to provide additional
information under Sec. 1026.16, but not under Sec. 1026.24.
9. Balloon payment. See comment 40(d)(5)(ii)-3 for information not
required to be stated in advertisements, and on situations in which the
balloon payment requirement does not apply.
16(e) Alternative Disclosures--Television or Radio Advertisements
1. Multi-purpose telephone number. When an advertised telephone
number provides a recording, disclosures must be provided early in the
sequence to ensure that the consumer receives the required disclosures.
For example, in providing several options--such as providing directions
to the advertiser's place of business--the option allowing the consumer
to request disclosures should be provided early in the telephone message
to ensure that the option to request disclosures is not obscured by
other information.
2. Statement accompanying toll free number. Language must accompany
a telephone number indicating that disclosures are available by calling
the telephone number, such as ``call 1-(800) 000-0000 for details about
credit costs and terms.''
[[Page 549]]
16(g) Promotional Rates and Fees
1. Rate in effect at the end of the promotional period. If the
annual percentage rate that will be in effect at the end of the
promotional period (i.e., the post-promotional rate) is a variable rate,
the post-promotional rate for purposes of Sec. 1026.16(g)(2)(i) is the
rate that would have applied at the time the promotional rate was
advertised if the promotional rate was not offered, consistent with the
accuracy requirements in Sec. 1026.60(c)(2) and (e)(4), as applicable.
2. Immediate proximity. For written or electronic advertisements,
including the term ``introductory'' or ``intro'' in the same phrase as
the listing of the introductory rate or introductory fee is deemed to be
in immediate proximity of the listing.
3. Prominent location closely proximate. For written or electronic
advertisements, information required to be disclosed in Sec.
1026.16(g)(4)(i) and, as applicable, (g)(4)(ii) and (g)(4)(iii) that is
in the same paragraph as the first listing of the promotional rate or
promotional fee is deemed to be in a prominent location closely
proximate to the listing. Information disclosed in a footnote will not
be considered in a prominent location closely proximate to the listing.
4. First listing. For purposes of Sec. 1026.16(g)(4) as it applies
to written or electronic advertisements, the first listing of the
promotional rate or promotional fee is the most prominent listing of the
rate or fee on the front side of the first page of the principal
promotional document. The principal promotional document is the document
designed to be seen first by the consumer in a mailing, such as a cover
letter or solicitation letter. If the promotional rate or promotional
fee does not appear on the front side of the first page of the principal
promotional document, then the first listing of the promotional rate or
promotional fee is the most prominent listing of the rate or fee on the
subsequent pages of the principal promotional document. If the
promotional rate or promotional fee is not listed on the principal
promotional document or there is no principal promotional document, the
first listing is the most prominent listing of the rate or fee on the
front side of the first page of each document listing the promotional
rate or promotional fee. If the promotional rate or promotional fee does
not appear on the front side of the first page of a document, then the
first listing of the promotional rate or promotional fee is the most
prominent listing of the rate or fee on the subsequent pages of the
document. If the listing of the promotional rate or promotional fee with
the largest type size on the front side of the first page (or subsequent
pages if the promotional rate or promotional fee is not listed on the
front side of the first page) of the principal promotional document (or
each document listing the promotional rate or promotional fee if the
promotional rate or promotional fee is not listed on the principal
promotional document or there is no principal promotional document) is
used as the most prominent listing, it will be deemed to be the first
listing. Consistent with comment 16(c)-1, a catalog or multiple-page
advertisement is considered one document for purposes of Sec.
1026.16(g)(4).
5. Post-promotional rate depends on consumer's creditworthiness. For
purposes of disclosing the rate that may apply after the end of the
promotional rate period, at the advertiser's option, the advertisement
may disclose the rates that may apply as either specific rates, or a
range of rates. For example, if there are three rates that may apply
(9.99%, 12.99% or 17.99%), an issuer may disclose these three rates as
specific rates (9.99%, 12.99% or 17.99%) or as a range of rates (9.99%-
17.99%).
16(h) Deferred Interest or Similar Offers
1. Deferred interest or similar offers clarified. Deferred interest
or similar offers do not include offers that allow a consumer to skip
payments during a specified period of time, and under which the consumer
is not obligated under any circumstances for any interest or other
finance charges that could be attributable to that period. Deferred
interest or similar offers also do not include 0% annual percentage rate
offers where a consumer is not obligated under any circumstances for
interest attributable to the time period the 0% annual percentage rate
was in effect, though such offers may be considered promotional rates
under Sec. 1026.16(g)(2)(i). Deferred interest or similar offers also
do not include skip payment programs that have no required minimum
payment for one or more billing cycles but where interest continues to
accrue and is imposed during that period.
2. Deferred interest period clarified. Although the terms of an
advertised deferred interest or similar offer may provide that a
creditor may charge the accrued interest if the balance is not paid in
full by a certain date, creditors sometimes have an informal policy or
practice that delays charging the accrued interest for payment received
a brief period of time after the date upon which a creditor has the
contractual right to charge the accrued interest. The advertisement need
not include the end of an informal ``courtesy period'' in disclosing the
deferred interest period under Sec. 1026.16(h)(3).
3. Immediate proximity. For written or electronic advertisements,
including the deferred interest period in the same phrase as the
statement of ``no interest,'' ``no payments,'' ``deferred interest,'' or
``same as cash'' or similar term regarding interest or payments during
the deferred interest period
[[Page 550]]
is deemed to be in immediate proximity of the statement.
4. Prominent location closely proximate. For written or electronic
advertisements, information required to be disclosed in Sec.
1026.16(h)(4)(i) and (ii) that is in the same paragraph as the first
statement of ``no interest,'' ``no payments,'' ``deferred interest,'' or
``same as cash'' or similar term regarding interest or payments during
the deferred interest period is deemed to be in a prominent location
closely proximate to the statement. Information disclosed in a footnote
is not considered in a prominent location closely proximate to the
statement.
5. First listing. For purposes of Sec. 1026.16(h)(4) as it applies
to written or electronic advertisements, the first statement of ``no
interest,'' ``no payments,'' ``deferred interest,'' ``same as cash,'' or
similar term regarding interest or payments during the deferred interest
period is the most prominent listing of one of these statements on the
front side of the first page of the principal promotional document. The
principal promotional document is the document designed to be seen first
by the consumer in a mailing, such as a cover letter or solicitation
letter. If one of the statements does not appear on the front side of
the first page of the principal promotional document, then the first
listing of one of these statements is the most prominent listing of a
statement on the subsequent pages of the principal promotional document.
If one of the statements is not listed on the principal promotional
document or there is no principal promotional document, the first
listing of one of these statements is the most prominent listing of the
statement on the front side of the first page of each document
containing one of these statements. If one of the statements does not
appear on the front side of the first page of a document, then the first
listing of one of these statements is the most prominent listing of a
statement on the subsequent pages of the document. If the listing of one
of these statements with the largest type size on the front side of the
first page (or subsequent pages if one of these statements is not listed
on the front side of the first page) of the principal promotional
document (or each document listing one of these statements if a
statement is not listed on the principal promotional document or there
is no principal promotional document) is used as the most prominent
listing, it will be deemed to be the first listing. Consistent with
comment 16(c)-1, a catalog or multiple-page advertisement is considered
one document for purposes of Sec. 1026.16(h)(4).
6. Additional information. Consistent with comment 5(a)-2, the
information required under Sec. 1026.16(h)(4) need not be segregated
from other information regarding the deferred interest or similar offer.
Advertisements may also be required to provide additional information
pursuant to Sec. 1026.16(b) though such information need not be
integrated with the information required under Sec. 1026.16(h)(4).
7. Examples. Examples of disclosures that could be used to comply
with the requirements of Sec. 1026.16(h)(3) include: ``no interest if
paid in full within 6 months'' and ``no interest if paid in full by
December 31, 2010.''
Subpart C--Closed-End Credit
Section 1026.17--General Disclosure Requirements
1. Rules for certain mortgage disclosures. Section 1026.17(a) and
(b) does not apply to the disclosures required by Sec. 1026.19(e), (f),
and (g), and Sec. 1026.20(e). For the disclosures required by Sec.
1026.19(e), (f), and (g), rules regarding the disclosures' form are
found in Sec. Sec. 1026.19(g), 1026.37(o), and 1026.38(t) and rules
regarding timing are found in Sec. 1026.19(e), (f), and (g). For the
disclosures required by Sec. 1026.20(e), rules regarding the
disclosures' form are found in Sec. 1026.20(e)(4) and rules regarding
timing are found in Sec. 1026.20(e)(5).
17(a) Form of Disclosures
Paragraph 17(a)(1)
1. Clear and conspicuous. This standard requires that disclosures be
in a reasonably understandable form. For example, while the regulation
requires no mathematical progression or format, the disclosures must be
presented in a way that does not obscure the relationship of the terms
to each other. In addition, although no minimum type size is mandated
(except for the interest rate and payment summary for mortgage
transactions required by Sec. 1026.18(s)), the disclosures must be
legible, whether typewritten, handwritten, or printed by computer.
2. Segregation of disclosures. i. The disclosures may be grouped
together and segregated from other information in a variety of ways. For
example, the disclosures may appear on a separate sheet of paper or may
be set off from other information on the contract or other documents:
A. By outlining them in a box.
B. By bold print dividing lines.
C. By a different color background.
D. By a different type style.
ii. The general segregation requirement described in this
subparagraph does not apply to the disclosures required under Sec.
1026.19(b) although the disclosures must be clear and conspicuous.
3. Location. The regulation imposes no specific location
requirements on the segregated disclosures. For example:
i. They may appear on a disclosure statement separate from all other
material.
[[Page 551]]
ii. They may be placed on the same document with the credit contract
or other information, so long as they are segregated from that
information.
iii. They may be shown on the front or back of a document.
iv. They need not begin at the top of a page.
v. They may be continued from one page to another.
4. Content of segregated disclosures. Section 1026.17(a)(1) contains
exceptions to the requirement that the disclosures under Sec. 1026.18
be segregated from material that is not directly related to those
disclosures. Section 1026.17(a)(1) lists the items that may be added to
the segregated disclosures, even though not directly related to those
disclosures. The section also lists the items required under Sec.
1026.18 that may be deleted from the segregated disclosures and appear
elsewhere. Any one or more of these additions or deletions may be
combined and appear either together with or separate from the segregated
disclosures. The itemization of the amount financed under Sec.
1026.18(c), however, must be separate from the other segregated
disclosures under Sec. 1026.18, except for private education loan
disclosures made in compliance with Sec. 1026.47. If a creditor chooses
to include the security interest charges required to be itemized under
Sec. 1026.4(e) and Sec. 1026.18(o) in the amount financed itemization,
it need not list these charges elsewhere.
5. Directly related. The segregated disclosures may, at the
creditor's option, include any information that is directly related to
those disclosures. The following is directly related information:
i. A description of a grace period after which a late payment charge
will be imposed. For example, the disclosure given under Sec.
1026.18(l) may state that a late charge will apply to ``any payment
received more than 15 days after the due date.''
ii. A statement that the transaction is not secured. For example,
the creditor may add a category labeled ``unsecured'' or ``not secured''
to the security interest disclosures given under Sec. 1026.18(m).
iii. The basis for any estimates used in making disclosures. For
example, if the maturity date of a loan depends solely on the occurrence
of a future event, the creditor may indicate that the disclosures assume
that event will occur at a certain time.
iv. The conditions under which a demand feature may be exercised.
For example, in a loan subject to demand after five years, the
disclosures may state that the loan will become payable on demand in
five years.
v. An explanation of the use of pronouns or other references to the
parties to the transaction. For example, the disclosures may state, ``
`You' refers to the customer and `we' refers to the creditor.''
vi. Instructions to the creditor or its employees on the use of a
multiple-purpose form. For example, the disclosures may state, ``Check
box if applicable.''
vii. A statement that the borrower may pay a minimum finance charge
upon prepayment in a simple-interest transaction. For example, when
state law prohibits penalties, but would allow a minimum finance charge
in the event of prepayment, the creditor may make the Sec.
1026.18(k)(1) disclosure by stating, ``You may be charged a minimum
finance charge.''
viii. A brief reference to negative amortization in variable-rate
transactions. For example, in the variable-rate disclosure, the creditor
may include a short statement such as ``Unpaid interest will be added to
principal.'' (See the commentary to Sec. 1026.18(f)(1)(iii).)
ix. A brief caption identifying the disclosures. For example, the
disclosures may bear a general title such as ``Federal Truth in Lending
Disclosures'' or a descriptive title such as ``Real Estate Loan
Disclosures.''
x. A statement that a due-on-sale clause or other conditions on
assumption are contained in the loan document. For example, the
disclosure given under Sec. 1026.18(q) may state, ``Someone buying your
home may, subject to conditions in the due-on-sale clause contained in
the loan document, assume the remainder of the mortgage on the original
terms.''
xi. If a state or Federal law prohibits prepayment penalties and
excludes the charging of interest after prepayment from coverage as a
penalty, a statement that the borrower may have to pay interest for some
period after prepayment in full. The disclosure given under Sec.
1026.18(k) may state, for example, ``If you prepay your loan on other
than the regular installment date, you may be assessed interest charges
until the end of the month.''
xii. More than one hypothetical example under Sec.
1026.18(f)(1)(iv) in transactions with more than one variable-rate
feature. For example, in a variable-rate transaction with an option
permitting consumers to convert to a fixed-rate transaction, the
disclosures may include an example illustrating the effects on the
payment terms of an increase resulting from conversion in addition to
the example illustrating an increase resulting from changes in the
index.
xiii. The disclosures set forth under Sec. 1026.18(f)(1) for
variable-rate transactions subject to Sec. 1026.18(f)(2).
xiv. A statement whether or not a subsequent purchaser of the
property securing an obligation may be permitted to assume the remaining
obligation on its original terms.
xv. A late-payment fee disclosure under Sec. 1026.18(l) on a single
payment loan.
xvi. The notice set forth in Sec. 1026.19(a)(4), in a closed-end
transaction not subject to
[[Page 552]]
Sec. 1026.19(a)(1)(i). In a mortgage transaction subject to Sec.
1026.19(a)(1)(i), the creditor must disclose the notice contained in
Sec. 1026.19(a)(4) grouped together with the disclosures made under
Sec. 1026.18. See comment 19(a)(4)-1.
6. Multiple-purpose forms. The creditor may design a disclosure
statement that can be used for more than one type of transaction, so
long as the required disclosures for individual transactions are clear
and conspicuous. (See the commentary to Appendices G and H for a
discussion of the treatment of disclosures that do not apply to specific
transactions.) Any disclosure listed in Sec. 1026.18 (except the
itemization of the amount financed under Sec. 1026.18(c) for
transactions other than private education loans) may be included on a
standard disclosure statement even though not all of the creditor's
transactions include those features. For example, the statement may
include:
i. The variable rate disclosure under Sec. 1026.18(f).
ii. The demand feature disclosure under Sec. 1026.18(i).
iii. A reference to the possibility of a security interest arising
from a spreader clause, under Sec. 1026.18(m).
iv. The assumption policy disclosure under Sec. 1026.18(q).
v. The required deposit disclosure under Sec. 1026.18(r).
7. Balloon payment financing with leasing characteristics. In
certain credit sale or loan transactions, a consumer may reduce the
dollar amount of the payments to be made during the course of the
transaction by agreeing to make, at the end of the loan term, a large
final payment based on the expected residual value of the property. The
consumer may have a number of options with respect to the final payment,
including, among other things, retaining the property and making the
final payment, refinancing the final payment, or transferring the
property to the creditor in lieu of the final payment. Such transactions
may have some of the characteristics of lease transactions subject to
Regulation M (12 CFR Part 1013), but are considered credit transactions
where the consumer assumes the indicia of ownership, including the
risks, burdens and benefits of ownership, upon consummation. These
transactions are governed by the disclosure requirements of this part
instead of Regulation M. Creditors should not include in the segregated
Truth in Lending disclosures additional information. Thus, disclosures
should show the large final payment in the payment schedule or interest
rate and payment summary table under Sec. 1026.18(g) or (s), as
applicable, and should not, for example, reflect the other options
available to the consumer at maturity.
Paragraph 17(a)(2)
1. When disclosures must be more conspicuous. The following rules
apply to the requirement that the terms ``annual percentage rate''
(except for private education loan disclosures made in compliance with
Sec. 1026.47) and ``finance charge'' be shown more conspicuously:
i. The terms must be more conspicuous only in relation to the other
required disclosures under Sec. 1026.18. For example, when the
disclosures are included on the contract document, those two terms need
not be more conspicuous as compared to the heading on the contract
document or information required by state law.
ii. The terms need not be more conspicuous except as part of the
finance charge and annual percentage rate disclosures under Sec.
1026.18(d) and (e), although they may, at the creditor's option, be
highlighted wherever used in the required disclosures. For example, the
terms may, but need not, be highlighted when used in disclosing a
prepayment penalty under Sec. 1026.18(k) or a required deposit under
Sec. 1026.18(r).
iii. The creditor's identity under Sec. 1026.18(a) may, but need
not, be more prominently displayed than the finance charge and annual
percentage rate.
iv. The terms need not be more conspicuous than figures (including,
for example, numbers, percentages, and dollar signs).
2. Making disclosures more conspicuous. The terms ``finance charge''
and (except for private education loan disclosures made in compliance
with Sec. 1026.47) ``annual percentage rate'' may be made more
conspicuous in any way that highlights them in relation to the other
required disclosures. For example, they may be:
i. Capitalized when other disclosures are printed in capital and
lower case.
ii. Printed in larger type, bold print or different type face.
iii. Printed in a contrasting color.
iv. Underlined.
v. Set off with asterisks.
17(b) Time of Disclosures
1. Consummation. As a general rule, disclosures must be made before
``consummation'' of the transaction. The disclosures need not be given
by any particular time before consummation, except in certain mortgage
transactions and variable-rate transactions secured by the consumer's
principal dwelling with a term greater than one year under Sec.
1026.19, and in private education loan transactions disclosed in
compliance with Sec. Sec. 1026.46 and 1026.47. (See the commentary to
Sec. 1026.2(a)(13) regarding the definition of consummation.)
2. Converting open-end to closed-end credit. Except for home equity
plans subject to Sec. 1026.40 in which the agreement provides for
[[Page 553]]
a repayment phase, if an open-end credit account is converted to a
closed-end transaction under a written agreement with the consumer, the
creditor must provide a set of closed-end credit disclosures before
consummation of the closed-end transaction. (See the commentary to Sec.
1026.19(b) for the timing rules for additional disclosures required upon
the conversion to a variable-rate transaction secured by a consumer's
principal dwelling with a term greater than one year.) If consummation
of the closed-end transaction occurs at the same time as the consumer
enters into the open-end agreement, the closed-end credit disclosures
may be given at the time of conversion. If disclosures are delayed until
conversion and the closed-end transaction has a variable-rate feature,
disclosures should be based on the rate in effect at the time of
conversion. (See the commentary to Sec. 1026.5 regarding conversion of
closed-end to open-end credit.)
3. Disclosures provided on credit contracts. Creditors must give the
required disclosures to the consumer in writing, in a form that the
consumer may keep, before consummation of the transaction. See Sec.
1026.17(a)(1) and (b). Sometimes the disclosures are placed on the same
document with the credit contract. Creditors are not required to give
the consumer two separate copies of the document before consummation,
one for the consumer to keep and a second copy for the consumer to
execute. The disclosure requirement is satisfied if the creditor gives a
copy of the document containing the unexecuted credit contract and
disclosures to the consumer to read and sign; and the consumer receives
a copy to keep at the time the consumer becomes obligated. It is not
sufficient for the creditor merely to show the consumer the document
containing the disclosures before the consumer signs and becomes
obligated. The consumer must be free to take possession of and review
the document in its entirety before signing.
i. Example. To illustrate, a creditor gives a consumer a multiple-
copy form containing a credit agreement and TILA disclosures. The
consumer reviews and signs the form and returns it to the creditor, who
separates the copies and gives one copy to the consumer to keep. The
creditor has satisfied the disclosure requirement.
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(1)
1. Legal obligation. The disclosures shall reflect the terms to
which the consumer and creditor are legally bound as of the outset of
the transaction. In the case of disclosures required under Sec.
1026.20(c), (d), and (e), the disclosures shall reflect the credit terms
to which the consumer and creditor are legally bound when the
disclosures are provided. The legal obligation is determined by
applicable State law or other law. Disclosures based on the assumption
that the consumer will abide by the terms of the legal obligation
throughout the term of the transaction comply with Sec. 1026.17(c)(1).
(Certain transactions are specifically addressed in this commentary.
See, for example, the discussion of buydown transactions elsewhere in
the commentary to Sec. 1026.17(c).) The fact that a term or contract
may later be deemed unenforceable by a court on the basis of equity or
other grounds does not, by itself, mean that disclosures based on that
term or contract did not reflect the legal obligation.
2. Modification of obligation. The legal obligation normally is
presumed to be contained in the note or contract that evidences the
agreement between the consumer and the creditor. But this presumption is
rebutted if another agreement between the consumer and creditor legally
modifies that note or contract. If the consumer and creditor informally
agree to a modification of the legal obligation, the modification should
not be reflected in the disclosures unless it rises to the level of a
change in the terms of the legal obligation. For example:
i. If the creditor offers a preferential rate, such as an employee
preferred rate, the disclosures should reflect the terms of the legal
obligation. (See the commentary to Sec. 1026.19(b) for an example of a
preferred-rate transaction that is a variable-rate transaction.)
ii. If the contract provides for a certain monthly payment schedule
but payments are made on a voluntary payroll deduction plan or an
informal principal-reduction agreement, the disclosures should reflect
the schedule in the contract.
iii. If the contract provides for regular monthly payments but the
creditor informally permits the consumer to defer payments from time to
time, for instance, to take account of holiday seasons or seasonal
employment, the disclosures should reflect the regular monthly payments.
3. Third-party buydowns. In certain transactions, a seller or other
third party may pay an amount, either to the creditor or to the
consumer, in order to reduce the consumer's payments for all or a
portion of the credit term. For example, a consumer and a bank agree to
a mortgage with an interest rate of 15% and level payments over 25
years. By a separate agreement, the seller of the property agrees to
subsidize the consumer's payments for the first two years of the
mortgage, giving the consumer an effective rate of 12% for that period.
i. If the third-party buydown is reflected in the credit contract
between the consumer and the bank, the finance charge and all other
disclosures affected by it must take the buydown into account as an
amendment to the contract's interest rate provision. For
[[Page 554]]
example, the annual percentage rate must be a composite rate that takes
account of both the lower initial rate and the higher subsequent rate,
and the disclosures required under Sec. Sec. 1026.18(g), 1026.18(s),
1026.37(c), and 1026.38(c), as applicable, must reflect the two payment
levels, except as otherwise provided in those paragraphs. However, the
amount paid by the seller would not be specifically reflected in the
disclosure of the finance charge and other disclosures affected by it
given by the bank, since that amount constitutes seller's points and
thus is not part of the finance charge. The seller-paid amount is
disclosed, however, as a credit from the seller in the summaries of
transactions disclosed pursuant to Sec. 1026.38(j) and (k).
ii. If the third-party buydown is not reflected in the credit
contract between the consumer and the bank and the consumer is legally
bound to the 15% rate from the outset, the disclosure of the finance
charge and other disclosures affected by it given by the bank must not
reflect the seller buydown in any way. For example, the annual
percentage rate and disclosures required under Sec. Sec. 1026.18(g),
1026.18(s), 1026.37(c), and 1026.38(c), as applicable, would not take
into account the reduction in the interest rate and payment level for
the first two years resulting from the buydown. The seller-paid amount
is, however, disclosed as a credit from the seller in the summaries of
transactions disclosed pursuant to Sec. 1026.38(j) and (k).
4. Consumer buydowns. In certain transactions, the consumer may pay
an amount to the creditor to reduce the payments on the transaction.
Consumer buydowns must be reflected as an amendment to the contract's
interest rate provision in the disclosure of the finance charge and
other disclosures affected by it given for that transaction. To
illustrate, in a mortgage transaction, the creditor and consumer agree
to a note specifying a 14 percent interest rate. However, in a separate
document, the consumer agrees to pay an amount to the creditor at
consummation in return for lower payments for a portion of the mortgage
term. The amount paid by the consumer may be deposited in an escrow
account or may be retained by the creditor. Depending upon the buydown
plan, the consumer's prepayment of the obligation may or may not result
in a portion of the amount being credited or refunded to the consumer.
In the disclosure of the finance charge and other disclosures affected
by it given for the mortgage, the creditor must reflect the terms of the
buydown agreement.
i. For example:
A. The amount paid by the consumer is a prepaid finance charge (even
if deposited in an escrow account).
B. A composite annual percentage rate must be calculated, taking
into account both interest rates, as well as the effect of the prepaid
finance charge.
C. The disclosures under Sec. Sec. 1026.18(g) and (s), 1026.37(c),
and 1026.38(c), as applicable, must reflect the multiple rate and
payment levels resulting from the buydown, except as otherwise provided
in those sections. Further, for example, the disclosures must reflect
that the transaction is a step rate product under Sec. Sec.
1026.37(a)(10)(B) and 1026.38(a)(5)(iii).
ii. The rules regarding consumer buydowns do not apply to
transactions known as ``lender buydowns.'' In lender buydowns, a
creditor pays an amount (either into an account or to the party to whom
the obligation is sold) to reduce the consumer's payments or interest
rate for all or a portion of the credit term. Typically, these
transactions are structured as a buydown of the interest rate during an
initial period of the transaction with a higher than usual rate for the
remainder of the term. The disclosure of the finance charge and other
disclosures affected by it for lender buydowns should be based on the
terms of the legal obligation between the consumer and the creditor. See
comment 17(c)(1)-3 for the analogous rules concerning third-party
buydowns.
5. Split buydowns. In certain transactions, a third party (such as a
seller) and a consumer both pay an amount to the creditor to reduce the
interest rate. The creditor must include the portion paid by the
consumer in the finance charge and disclose the corresponding multiple
payment levels, except as otherwise provided in Sec. Sec. 1026.18(s),
1026.37(c), and 1026.38(c), and composite annual percentage rate. The
portion paid by the third party and the corresponding reduction in
interest rate, however, should not be reflected in the disclosure of the
finance charge and other disclosures affected by it unless the lower
rate is reflected in the credit contract. See the discussion on third-
party and consumer buydown transactions elsewhere in the commentary to
Sec. 1026.17(c).
6. Wrap-around financing. Wrap-around transactions, usually loans,
involve the creditor's wrapping the outstanding balance on an existing
loan and advancing additional funds to the consumer. The pre-existing
loan, which is wrapped, may be to the same consumer or to a different
consumer. In either case, the consumer makes a single payment to the new
creditor, who makes the payments on the pre-existing loan to the
original creditor. Wrap-around loans or sales are considered new single-
advance transactions, with an amount financed equaling the sum of the
new funds advanced by the wrap creditor and the remaining principal owed
to the original creditor on the pre-existing loan. In disclosing the
itemization of the amount financed, the creditor may use a label such as
``the amount that will be paid to creditor X'' to describe the remaining
[[Page 555]]
principal balance on the pre-existing loan. This approach to Truth in
Lending calculations has no effect on calculations required by other
statutes, such as state usury laws.
7. Wrap-around financing with balloon payments. For wrap-around
transactions involving a large final payment of the new funds before the
maturity of the pre-existing loan, the amount financed is the sum of the
new funds and the remaining principal on the pre-existing loan. The
disclosures should be based on the shorter term of the wrap loan, with a
large final payment of both the new funds and the total remaining
principal on the pre-existing loan (although only the wrap loan will
actually be paid off at that time).
8. Basis of disclosures in variable-rate transactions. Except as
otherwise provided in Sec. Sec. 1026.18(s), 1026.37 and 1026.38, as
applicable, the disclosures for a variable-rate transaction must be
given for the full term of the transaction and must be based on the
terms in effect at the time of consummation. Creditors should base the
disclosures only on the initial rate and should not assume that this
rate will increase, except as otherwise provided in Sec. Sec.
1026.18(s), 1026.37 and 1026.38. For example, in a loan with an initial
rate of 10 percent and a 5 percentage points rate cap, creditors should
base the disclosures on the initial rate and should not assume that this
rate will increase 5 percentage points. However, in a variable-rate
transaction with a seller buydown that is reflected in the credit
contract, a consumer buydown, or a discounted or premium rate,
disclosures should not be based solely on the initial terms. In those
transactions, the disclosed annual percentage rate should be a composite
rate based on the rate in effect during the initial period and the rate
that is the basis of the variable-rate feature for the remainder of the
term. See the commentary to Sec. 1026.17(c) for a discussion of
buydown, discounted, and premium transactions and the commentary to
Sec. 1026.19(a)(2), (e), and (f) for a discussion of the redisclosure
in certain mortgage transactions with a variable-rate feature. See
Sec. Sec. 1026.37(c) and 1026.38(c) for rules regarding disclosure of
variable-rate transactions in the projected payments table for
transactions subject to Sec. 1026.19(e) and (f).
9. Use of estimates in variable-rate transactions. The variable-rate
feature does not, by itself, make the disclosures estimates.
10. Discounted and premium variable-rate transactions. In some
variable-rate transactions, creditors may set an initial interest rate
that is not determined by the index or formula used to make later
interest rate adjustments. Typically, this initial rate charged to
consumers is lower than the rate would be if it were calculated using
the index or formula. However, in some cases the initial rate may be
higher. In a discounted transaction, for example, a creditor may
calculate interest rates according to a formula using the six-month
Treasury bill rate plus a 2 percent margin. If the Treasury bill rate at
consummation is 10 percent, the creditor may forgo the 2 percent spread
and charge only 10 percent for a limited time, instead of setting an
initial rate of 12 percent.
i. When creditors use an initial interest rate that is not
calculated using the index or formula for later rate adjustments, the
disclosures should reflect a composite annual percentage rate based on
the initial rate for as long as it is charged and, for the remainder of
the term, the rate that would have been applied using the index or
formula at the time of consummation. The rate at consummation need not
be used if a contract provides for a delay in the implementation of
changes in an index value. For example, if the contract specifies that
rate changes are based on the index value in effect 45 days before the
change date, creditors may use any index value in effect during the 45
day period before consummation in calculating a composite annual
percentage rate.
ii. The effect of the multiple rates must also be reflected in the
calculation and disclosure of the finance charge, total of payments, and
the disclosures required under Sec. Sec. 1026.18(g) and (s),
1026.37(c), 1026.37(l)(1) and (3), 1026.38(c), and 1026.38(o)(5), as
applicable.
iii. If a loan contains a rate or payment cap that would prevent the
initial rate or payment, at the time of the first adjustment, from
changing to the rate determined by the index or formula at consummation,
the effect of that rate or payment cap should be reflected in the
disclosures.
iv. Because these transactions involve irregular payment amounts, an
annual percentage rate tolerance of \1/4\ of 1 percent applies, in
accordance with Sec. 1026.22(a)(3).
v. Examples of discounted variable-rate transactions include:
A. A 30-year loan for $100,000 with no prepaid finance charges and
rates determined by the Treasury bill rate plus two percent. Rate and
payment adjustments are made annually. Although the Treasury bill rate
at the time of consummation is 10 percent, the creditor sets the
interest rate for one year at 9 percent, instead of 12 percent according
to the formula. The disclosures should reflect a composite annual
percentage rate of 11.63 percent based on 9 percent for one year and 12
percent for 29 years. Reflecting those two rate levels, the payment
schedule disclosed pursuant to Sec. 1026.18(g) should show 12 payments
of $804.62 and 348 payments of $1,025.31. Similarly, the disclosures
required by Sec. Sec. 1026.18(s), 1026.37(c), 1026.37(l)(1) and (3),
1026.38(c), and 1026.38(o)(5) should reflect the effect of this
calculation. The finance charge should be $266,463.32 and, for
transactions subject to Sec. 1026.18, the total of payments should be
$366,463.32.
[[Page 556]]
B. Same loan as above, except with a two-percent rate cap on
periodic adjustments. The disclosures should reflect a composite annual
percentage rate of 11.53 percent based on 9 percent for the first year,
11 percent for the second year, and 12 percent for the remaining 28
years. Reflecting those three rate levels, the payment schedule
disclosed pursuant to Sec. 1026.18(g) should show 12 payments of
$804.62, 12 payments of $950.09, and 336 payments of $1,024.34.
Similarly, the disclosures required by Sec. Sec. 1026.18(s),
1026.37(c), 1026.37(l)(1) and (3), 1026.38(c), and 1026.38(o)(5) should
reflect the effect of this calculation. The finance charge should be
$265,234.76 and, for transactions subject to Sec. 1026.18, the total of
payments should be $365,234.76.
C. Same loan as above, except with a 7\1/2\ percent cap on payment
adjustments. The disclosures should reflect a composite annual
percentage rate of 11.64 percent, based on 9 percent for one year and 12
percent for 29 years. Because of the payment cap, five levels of
payments should be reflected. The payment schedule disclosed pursuant to
Sec. 1026.18(g) should show 12 payments of $804.62, 12 payments of
$864.97, 12 payments of $929.84, 12 payments of $999.58, and 312
payments of $1,070.04. Similarly, the disclosures required by Sec. Sec.
1026.18(s), 1026.37(c), 1026.37(l)(1) and (3), 1026.38(c), and
1026.38(o)(5) should reflect the effect of this calculation. The finance
charge should be $277,040.60, and, for transactions subject to Sec.
1026.18, the total of payments should be $377,040.60.
vi. A loan in which the initial interest rate is set according to
the index or formula used for later adjustments but is not set at the
value of the index or formula at consummation is not a discounted
variable-rate loan. For example, if a creditor commits to an initial
rate based on the formula on a date prior to consummation, but the index
has moved during the period between that time and consummation, a
creditor should base its disclosures on the initial rate.
11. Examples of variable-rate transactions. Variable-rate
transactions include:
i. Renewable balloon-payment instruments where the creditor is both
unconditionally obligated to renew the balloon-payment loan at the
consumer's option (or is obligated to renew subject to conditions within
the consumer's control) and has the option of increasing the interest
rate at the time of renewal. Disclosures must be based on the payment
amortization (unless the specified term of the obligation with renewals
is shorter) and on the rate in effect at the time of consummation of the
transaction. (Examples of conditions within a consumer's control include
requirements that a consumer be current in payments or continue to
reside in the mortgaged property. In contrast, setting a limit on the
rate at which the creditor would be obligated to renew or reserving the
right to change the credit standards at the time of renewal are examples
of conditions outside a consumer's control.) If, however, a creditor is
not obligated to renew as described above, disclosures must be based on
the term of the balloon-payment loan. Disclosures also must be based on
the term of the balloon-payment loan in balloon-payment instruments in
which the legal obligation provides that the loan will be renewed by a
``refinancing'' of the obligation, as that term is defined by Sec.
1026.20(a). If it cannot be determined from the legal obligation that
the loan will be renewed by a ``refinancing,'' disclosures must be based
either on the term of the balloon-payment loan or on the payment
amortization, depending on whether the creditor is unconditionally
obligated to renew the loan as described above. (This discussion does
not apply to construction loans subject to Sec. 1026.17(c)(6).)
ii. ``Shared-equity'' or ``shared-appreciation'' mortgages that have
a fixed rate of interest and an appreciation share based on the
consumer's equity in the mortgaged property. The appreciation share is
payable in a lump sum at a specified time. Disclosures must be based on
the fixed interest rate. (As discussed in the commentary to Sec.
1026.2, other types of shared-equity arrangements are not considered
``credit'' and are not subject to Regulation Z.)
iii. Preferred-rate loans where the terms of the legal obligation
provide that the initial underlying rate is fixed but will increase upon
the occurrence of some event, such as an employee leaving the employ of
the creditor, and the note reflects the preferred rate. The disclosures
are to be based on the preferred rate.
iv. Graduated-payment mortgages and step-rate transactions without a
variable-rate feature are not considered variable-rate transactions.
v. ``Price level adjusted mortgages'' or other indexed mortgages
that have a fixed rate of interest but provide for periodic adjustments
to payments and the loan balance to reflect changes in an index
measuring prices or inflation. Disclosures are to be based on the fixed
interest rate, except as otherwise provided in Sec. Sec. 1026.18(s),
1026.37, and 1026.38, as applicable.
12. Graduated payment adjustable rate mortgages. These mortgages
involve both a variable interest rate and scheduled variations in
payment amounts during the loan term. For example, under these plans, a
series of graduated payments may be scheduled before rate adjustments
affect payment amounts, or the initial scheduled payment may remain
constant for a set period before rate adjustments affect the payment
amount. In any case, the initial payment amount may be insufficient to
cover the scheduled interest, causing negative amortization from the
outset of the transaction. In these transactions, except as otherwise
provided in
[[Page 557]]
Sec. Sec. 1026.18(s), 1026.37(c), and 1026.38(c), the disclosures
should treat these features as follows:
i. The finance charge includes the amount of negative amortization
based on the assumption that the rate in effect at consummation remains
unchanged.
ii. The amount financed does not include the amount of negative
amortization.
iii. As in any variable-rate transaction, the annual percentage rate
is based on the terms in effect at consummation.
iv. The disclosures required by Sec. 1026.18(g) and (s) reflect the
amount of any scheduled initial payments followed by an adjusted level
of payments based on the initial interest rate. Since some mortgage
plans contain limits on the amount of the payment adjustment, the
disclosures required by Sec. 1026.18(g) and (s) may require several
different levels of payments, even with the assumption that the original
interest rate does not increase. For transactions subject to Sec.
1026.19(e) and (f), see Sec. 1026.37(c) and its commentary for a
discussion of different rules for graduated payment adjustable rate
mortgages.
13. Growth-equity mortgages. i. Also referred to as payment-
escalated mortgages, these mortgage plans involve scheduled payment
increases to prematurely amortize the loan. The initial payment amount
is determined as for a long-term loan with a fixed interest rate.
Payment increases are scheduled periodically, based on changes in an
index. The larger payments result in accelerated amortization of the
loan. In disclosing these mortgage plans, creditors may either:
A. Estimate the amount of payment increases, based on the best
information reasonably available; or
B. Disclose by analogy to the variable-rate disclosures in
1026.18(f)(1).
ii. This discussion does not apply to growth-equity mortgages in
which the amount of payment increases can be accurately determined at
the time of disclosure. For these mortgages, as for graduated-payment
mortgages, disclosures should reflect the scheduled increases in
payments.
14. Reverse mortgages. Reverse mortgages, also known as reverse
annuity or home equity conversion mortgages, typically involve the
disbursement of monthly advances to the consumer for a fixed period or
until the occurrence of an event such as the consumer's death. Repayment
of the loan (generally a single payment of principal and accrued
interest) may be required to be made at the end of the disbursements or,
for example, upon the death of the consumer. In disclosing these
transactions, creditors must apply the following rules, as applicable:
i. If the reverse mortgage has a specified period for disbursements
but repayment is due only upon the occurrence of a future event such as
the death of the consumer, the creditor must assume that disbursements
will be made until they are scheduled to end. The creditor must assume
repayment will occur when disbursements end (or within a period
following the final disbursement which is not longer than the regular
interval between disbursements). This assumption should be used even
though repayment may occur before or after the disbursements are
scheduled to end. In such cases, the creditor may include a statement
such as ``The disclosures assume that you will repay the loan at the
time our payments to you end. As provided in your agreement, your
repayment may be required at a different time.''
ii. If the reverse mortgage has neither a specified period for
disbursements nor a specified repayment date and these terms will be
determined solely by reference to future events including the consumer's
death, the creditor may assume that the disbursements will end upon the
consumer's death (estimated by using actuarial tables, for example) and
that repayment will be required at the same time (or within a period
following the date of the final disbursement which is not longer than
the regular interval for disbursements). Alternatively, the creditor may
base the disclosures upon another future event it estimates will be most
likely to occur first. (If terms will be determined by reference to
future events which do not include the consumer's death, the creditor
must base the disclosures upon the occurrence of the event estimated to
be most likely to occur first.)
iii. In making the disclosures, the creditor must assume that all
disbursements and accrued interest will be paid by the consumer. For
example, if the note has a nonrecourse provision providing that the
consumer is not obligated for an amount greater than the value of the
house, the creditor must nonetheless assume that the full amount to be
disbursed will be repaid. In this case, however, the creditor may
include a statement such as ``The disclosures assume full repayment of
the amount advanced plus accrued interest, although the amount you may
be required to pay is limited by your agreement.''
iv. Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared between the
consumer and the creditor. Such loans are considered variable-rate
mortgages, as described in comment 17(c)(1)-11, and the appreciation
feature must be disclosed in accordance with Sec. 1026.18(f)(1). If the
reverse mortgage has a variable interest rate, is written for a term
greater than one year, and is secured by the consumer's principal
dwelling, the shared appreciation feature must be described under Sec.
1026.19(b)(2)(vii).
15. Morris Plan transactions. When a deposit account is created for
the sole purpose of accumulating payments and then is applied to satisfy
entirely the consumer's obligation in
[[Page 558]]
the transaction, each deposit made into the account is considered the
same as a payment on a loan for purposes of making disclosures.
16. Number of transactions. Creditors have flexibility in handling
credit extensions that may be viewed as multiple transactions. For
example:
i. When a creditor finances the credit sale of a radio and a
television on the same day, the creditor may disclose the sales as
either 1 or 2 credit sale transactions.
ii. When a creditor finances a loan along with a credit sale of
health insurance, the creditor may disclose in one of several ways: a
single credit sale transaction, a single loan transaction, or a loan and
a credit sale transaction.
iii. The separate financing of a downpayment in a credit sale
transaction may, but need not, be disclosed as 2 transactions (a credit
sale and a separate transaction for the financing of the downpayment).
17. Special rules for tax refund anticipation loans. Tax refund
loans, also known as refund anticipation loans (RALs), are transactions
in which a creditor will lend up to the amount of a consumer's expected
tax refund. RAL agreements typically require repayment upon demand, but
also may provide that repayment is required when the refund is made. The
agreements also typically provide that if the amount of the refund is
less than the payment due, the consumer must pay the difference.
Repayment often is made by a preauthorized offset to a consumer's
account held with the creditor when the refund has been deposited by
electronic transfer. Creditors may charge fees for RALs in addition to
fees for filing the consumer's tax return electronically. In RAL
transactions subject to the regulation the following special rules
apply:
i. If, under the terms of the legal obligation, repayment of the
loan is required when the refund is received by the consumer (such as by
deposit into the consumer's account), the disclosures should be based on
the creditor's estimate of the time the refund will be delivered even if
the loan also contains a demand clause. The practice of a creditor to
demand repayment upon delivery of refunds does not determine whether the
legal obligation requires that repayment be made at that time; this
determination must be made according to applicable state or other law.
(See comment 17(c)(5)-1 for the rules regarding disclosures if the loan
is payable solely on demand or is payable either on demand or on an
alternate maturity date.)
ii. If the consumer is required to repay more than the amount
borrowed, the difference is a finance charge unless excluded under Sec.
1026.4. In addition, to the extent that any fees charged in connection
with the loan (such as for filing the tax return electronically) exceed
those fees for a comparable cash transaction (that is, filing the tax
return electronically without a loan), the difference must be included
in the finance charge.
18. Pawn Transactions. When, in connection with an extension of
credit, a consumer pledges or sells an item to a pawnbroker creditor in
return for a sum of money and retains the right to redeem the item for a
greater sum (the redemption price) within a specified period of time,
disclosures are required. In addition to other disclosure requirements
that may be applicable under Sec. 1026.18, for purposes of pawn
transactions:
i. The amount financed is the initial sum paid to the consumer. The
pawnbroker creditor need not provide a separate itemization of the
amount financed if that entire amount is paid directly to the consumer
and the disclosed description of the amount financed is ``the amount of
cash given directly to you'' or a similar phrase.
ii. The finance charge is the difference between the initial sum
paid to the consumer and the redemption price plus any other finance
charges paid in connection with the transaction. (See Sec. 1026.4.)
iii. The term of the transaction, for calculating the annual
percentage rate, is the period of time agreed to by the pawnbroker
creditor and the consumer. The term of the transaction does not include
a grace period (including any statutory grace period) after the agreed
redemption date.
19. Rebates and loan premiums. In a loan transaction, the creditor
may offer a premium in the form of cash or merchandise to prospective
borrowers. Similarly, in a credit sale transaction, a seller's or
manufacturer's rebate may be offered to prospective purchasers of the
creditor's goods or services. Such premiums and rebates must be
reflected in accordance with the terms of the legal obligation between
the consumer and the creditor. Thus, if the creditor is legally
obligated to provide the premium or rebate to the consumer as part of
the credit transaction, the disclosures should reflect its value in the
manner and at the time the creditor is obligated to provide it.
Paragraph 17(c)(2)(i)
1. Basis for estimates. Except as otherwise provided in Sec. Sec.
1026.19, 1026.37, and 1026.38, disclosures may be estimated when the
exact information is unknown at the time disclosures are made.
Information is unknown if it is not reasonably available to the creditor
at the time the disclosures are made. The ``reasonably available''
standard requires that the creditor, acting in good faith, exercise due
diligence in obtaining information. For example, the creditor must at a
minimum utilize generally accepted calculation tools, but need not
invest in the most sophisticated computer program to make a particular
type of calculation. The creditor normally may rely on the
representations of other parties
[[Page 559]]
in obtaining information. For example, the creditor might look to the
consumer for the time of consummation, to insurance companies for the
cost of insurance, or to realtors for taxes and escrow fees. The
creditor may utilize estimates in making disclosures even though the
creditor knows that more precise information will be available by the
point of consummation. However, new disclosures may be required under
Sec. 1026.17(f) or Sec. 1026.19. For purposes of Sec.
1026.17(c)(2)(i), creditors must provide the actual amounts of the
information required to be disclosed under Sec. Sec. 1026.37 and
1026.38, pursuant to Sec. 1026.19(e) and (f), subject to the estimation
and redisclosure rules in those provisions.
2. Labeling estimates. Estimates must be designated as such in the
segregated disclosures. For the disclosures required by Sec. 1026.19(e)
and (f), use of the Loan Estimate form H-24 of appendix H to this part
pursuant to Sec. 1026.37(o) or the Closing Disclosure form H-25 of
appendix H to this part pursuant to Sec. 1026.38(t), respectively,
satisfies the requirement that the disclosure state clearly that the
disclosure is an estimate. For all other disclosures, even though they
are based on the same assumption on which a specific estimated
disclosure was based, the creditor has flexibility in labeling the
estimates. Generally, only the particular disclosure for which the exact
information is unknown is labeled as an estimate. However, when several
disclosures are affected because of the unknown information, the
creditor has the option of labeling either every affected disclosure or
only the disclosure primarily affected. For example, when the finance
charge is unknown because the date of consummation is unknown, the
creditor must label the finance charge as an estimate and may also label
as estimates the total of payments and the payment schedule. When many
disclosures are estimates, the creditor may use a general statement,
such as ``all numerical disclosures except the late payment disclosure
are estimates,'' as a method to label those disclosures as estimates.
3. Simple-interest transactions. If consumers do not make timely
payments in a simple-interest transaction, some of the amounts
calculated for Truth in Lending disclosures will differ from amounts
that consumers will actually pay over the term of the transaction.
Creditors may label disclosures as estimates in these transactions,
except as otherwise provided by Sec. 1026.19. For example, because the
finance charge and total of payments may be larger than disclosed if
consumers make late payments, creditors may label the finance charge and
total of payments as estimates. On the other hand, creditors may choose
not to label disclosures as estimates. In all cases, creditors comply
with Sec. 1026.17(c)(2)(i) by basing disclosures on the assumption that
payments will be made on time and in the amounts required by the terms
of the legal obligation, disregarding any possible differences resulting
from consumers' payment patterns.
Paragraph 17(c)(2)(ii)
1. Per-diem interest. Section 1026.17(c)(2)(ii) applies to any
numerical amount (such as the finance charge, annual percentage rate, or
payment amount) that is affected by the amount of the per-diem interest
charge that will be collected at consummation. If the amount of per-diem
interest used in preparing the disclosures for consummation is based on
the information known to the creditor at the time the disclosure
document is prepared, the disclosures are considered accurate under this
rule, and affected disclosures are also considered accurate, even if the
disclosures are not labeled as estimates. For example, if the amount of
per-diem interest used to prepare disclosures is less than the amount of
per-diem interest charged at consummation, and as a result the finance
charge is understated by $200, the disclosed finance charge is
considered accurate even though the understatement is not within the
$100 tolerance of Sec. 1026.18(d)(1), and the finance charge was not
labeled as an estimate. In this example, if in addition to the
understatement related to the per-diem interest, a $90 fee is
incorrectly omitted from the finance charge, causing it to be
understated by a total of $290, the finance charge is considered
accurate because the $90 fee is within the tolerance in Sec.
1026.18(d)(1). For purposes of transactions subject to Sec. 1026.19(e)
and (f), the creditor shall disclose the actual amount of per diem
interest that will be collected at consummation, subject only to the
disclosure rules in those sections.
Paragraph 17(c)(3)
1. Minor variations. Section 1026.17(c)(3) allows creditors to
disregard certain factors in calculating and making disclosures. For
example:
i. Creditors may ignore the effects of collecting payments in whole
cents. Because payments cannot be collected in fractional cents, it is
often difficult to amortize exactly an obligation with equal payments;
the amount of the last payment may require adjustment to account for the
rounding of the other payments to whole cents.
ii. Creditors may base their disclosures on calculation tools that
assume that all months have an equal number of days, even if their
practice is to take account of the variations in months for purposes of
collecting interest. For example, a creditor may use a calculation tool
based on a 360-day year, when it in fact collects interest by applying a
factor of \1/365\ of the annual rate to 365 days. This rule does not,
however, authorize creditors to ignore, for disclosure
[[Page 560]]
purposes, the effects of applying \1/360\ of an annual rate to 365 days.
2. Use of special rules. A creditor may utilize the special rules in
Sec. 1026.17(c)(3) for purposes of calculating and making all
disclosures for a transaction or may, at its option, use the special
rules for some disclosures and not others.
Paragraph 17(c)(4)
1. Payment schedule irregularities. When one or more payments in a
transaction differ from the others because of a long or short first
period, the variations may be ignored in disclosing the payment schedule
pursuant to Sec. 1026.18(g), the disclosures required pursuant to
Sec. Sec. 1026.18(s), 1026.37(c), or 1026.38(c), or the finance charge,
annual percentage rate, and other terms. For example:
i. A 36-month auto loan might be consummated on June 8 with payments
due on July 1 and the first of each succeeding month. The creditor may
base its calculations on a payment schedule that assumes 36 equal
intervals and 36 equal installment payments, even though a precise
computation would produce slightly different amounts because of the
shorter first period.
ii. By contrast, in the same example, if the first payment were not
scheduled until August 1, the irregular first period would exceed the
limits in Sec. 1026.17(c)(4); the creditor could not use the special
rule and could not ignore the extra days in the first period in
calculating its disclosures.
2. Measuring odd periods. i. In determining whether a transaction
may take advantage of the rule in Sec. 1026.17(c)(4), the creditor must
measure the variation against a regular period. For purposes of that
rule:
A. The first period is the period from the date on which the finance
charge begins to be earned to the date of the first payment.
B. The term is the period from the date on which the finance charge
begins to be earned to the date of the final payment.
C. The regular period is the most common interval between payments
in the transaction.
ii. In transactions involving regular periods that are monthly,
semimonthly or multiples of a month, the length of the irregular and
regular periods may be calculated on the basis of either the actual
number of days or an assumed 30-day month. In other transactions, the
length of the periods is based on the actual number of days.
3. Use of special rules. A creditor may utilize the special rules in
Sec. 1026.17(c)(4) for purposes of calculating and making some
disclosures but may elect not to do so for all of the disclosures. For
example, the variations may be ignored in calculating and disclosing the
annual percentage rate but taken into account in calculating and
disclosing the finance charge and payment schedule.
4. Relation to prepaid finance charges. Prepaid finance charges,
including ``odd-days'' or ``per-diem'' interest, paid prior to or at
closing may not be treated as the first payment on a loan. Thus,
creditors may not disregard an irregularity in disclosing such finance
charges.
Paragraph 17(c)(5)
1. Demand disclosures. Disclosures for demand obligations are based
on an assumed 1-year term, unless an alternate maturity date is stated
in the legal obligation. Whether an alternate maturity date is stated in
the legal obligation is determined by applicable law. An alternate
maturity date is not inferred from an informal principal reduction
agreement or a similar understanding between the parties. However, when
the note itself specifies a principal reduction schedule (for example,
``payable on demand or $2,000 plus interest quarterly''), an alternate
maturity is stated and the disclosures must reflect that date.
2. Future event as maturity date. An obligation whose maturity date
is determined solely by a future event, as for example, a loan payable
only on the sale of property, is not a demand obligation. Because no
demand feature is contained in the obligation, demand disclosures under
Sec. 1026.18(i) are inapplicable and demand disclosures under Sec.
1026.38(l)(2) are answered in the negative. The disclosures should be
based on the creditor's estimate of the time at which the specified
event will occur and, except as otherwise provided in Sec. 1026.19(e)
and (f), may indicate the basis for the creditor's estimate, as noted in
the commentary to Sec. 1026.17(a).
3. Demand after stated period. Most demand transactions contain a
demand feature that may be exercised at any point during the term, but
certain transactions convert to demand status only after a fixed period.
The disclosures for a transaction that converts to demand status after a
fixed period should be based upon the legally agreed-upon maturity date.
Thus, for example, if a mortgage containing a call option that the
creditor may exercise during the first 30 days of the eighth year after
loan origination is written as a 20-year obligation, the disclosures
should be based on the 20-year term, with the demand feature disclosed
under Sec. 1026.18(i) or Sec. 1026.38(l)(2), as applicable.
4. Balloon mortgages. Balloon payment mortgages, with payments based
on a long-term amortization schedule and a large final payment due after
a shorter term, are not demand obligations unless a demand feature is
specifically contained in the contract. For example, a mortgage with a
term of five years and a payment schedule based on 20 years would not be
treated as a mortgage with a demand feature, in the absence of any
contractual demand provisions. In this type of mortgage, disclosures
should be based on
[[Page 561]]
the five-year term. See Sec. Sec. 1026.37(c) and 1026.38(c) and their
commentary for projected payment disclosures for balloon payment
mortgages.
Paragraph 17(c)(6)
1. Series of advances. Section 1026.17(c)(6)(i) deals with a series
of advances under an agreement to extend credit up to a certain amount.
A creditor may treat all of the advances as a single transaction or
disclose each advance as a separate transaction. If these advances are
treated as 1 transaction and the timing and amounts of advances are
unknown, creditors must make disclosures based on estimates, as provided
in Sec. 1026.17(c)(2). If the advances are disclosed separately,
disclosures must be provided before each advance occurs, with the
disclosures for the first advance provided by consummation.
2. Construction loans. Section 1026.17(c)(6)(ii) provides a flexible
rule for disclosure of construction loans that may be permanently
financed. These transactions have 2 distinct phases, similar to 2
separate transactions. The construction loan may be for initial
construction or subsequent construction, such as rehabilitation or
remodeling. The construction period usually involves several
disbursements of funds at times and in amounts that are unknown at the
beginning of that period, with the consumer paying only accrued interest
until construction is completed. Unless the obligation is paid at that
time, the loan then converts to permanent financing in which the loan
amount is amortized just as in a standard mortgage transaction. Section
1026.17(c)(6)(ii) permits the creditor to give either one combined
disclosure for both the construction financing and the permanent
financing, or a separate set of disclosures for the 2 phases. This rule
is available whether the consumer is initially obligated to accept
construction financing only or is obligated to accept both construction
and permanent financing from the outset. If the consumer is obligated on
both phases and the creditor chooses to give 2 sets of disclosures, both
sets must be given to the consumer initially, because both transactions
would be consummated at that time. (Appendix D provides a method of
calculating the annual percentage rate and other disclosures for
construction loans, which may be used, at the creditor's option, in
disclosing construction financing.)
3. Multiple-advance construction loans. Section 1026.17(c)(6)(i) and
(ii) are not mutually exclusive. For example, in a transaction that
finances the construction of a dwelling that may be permanently financed
by the same creditor, the construction phase may consist of a series of
advances under an agreement to extend credit up to a certain amount. In
these cases, the creditor may disclose the construction phase as either
1 or more than 1 transaction and also disclose the permanent financing
as a separate transaction.
4. Residential mortgage transaction. See the commentary to Sec.
1026.2(a)(24) for a discussion of the effect of Sec. 1026.17(c)(6) on
the definition of a residential mortgage transaction.
5. Allocation of costs. When a creditor uses the special rule in
Sec. 1026.17(c)(6) to disclose credit extensions as multiple
transactions, fees and charges must be allocated for purposes of
calculating disclosures. In the case of a construction-permanent loan
that a creditor chooses to disclose as multiple transactions, the
creditor must allocate to the construction transaction finance charges
under Sec. 1026.4 and points and fees under Sec. 1026.32(b)(1) that
would not be imposed but for the construction financing. For example,
inspection and handling fees for the staged disbursement of construction
loan proceeds must be included in the disclosures for the construction
phase and may not be included in the disclosures for the permanent
phase. If a creditor charges separate amounts for finance charges under
Sec. 1026.4 and points and fees under Sec. 1026.32(b)(1) for the
construction phase and the permanent phase, such amounts must be
allocated to the phase for which they are charged. If a creditor charges
an origination fee for construction financing only but charges a greater
origination fee for construction-permanent financing, the difference
between the two fees must be allocated to the permanent phase. All other
finance charges under Sec. 1026.4 and points and fees under Sec.
1026.32(b)(1) must be allocated to the permanent financing. Fees and
charges that are not used to compute the finance charge under Sec.
1026.4 or points and fees under Sec. 1026.32(b)(1) may be allocated
between the transactions in any manner the creditor chooses. For
example, a reasonable appraisal fee paid to an independent, third-party
appraiser may be allocated in any manner the creditor chooses because it
would be excluded from the finance charge pursuant to Sec. 1026.4(c)(7)
and excluded from points and fees pursuant to Sec. 1026.32(b)(1)(iii).
17(d) Multiple Creditors; Multiple Consumers
1. Multiple creditors. If a credit transaction involves more than
one creditor:
i. The creditors must choose which of them will make the
disclosures.
ii. A single, complete set of disclosures must be provided, rather
than partial disclosures from several creditors.
iii. All disclosures for the transaction must be given, even if the
disclosing creditor would not otherwise have been obligated to make a
particular disclosure. For example, if one of the creditors is the
seller, the total sale price disclosure under Sec. 1026.18(j) must be
made, even though the disclosing creditor is not the seller.
[[Page 562]]
2. Multiple consumers. When two consumers are joint obligors with
primary liability on an obligation, the disclosures may be given to
either one of them. If one consumer is merely a surety or guarantor, the
disclosures must be given to the principal debtor. In rescindable
transactions, however, separate disclosures must be given to each
consumer who has the right to rescind under Sec. 1026.23, although the
disclosures required under Sec. 1026.19(b) need only be provided to the
consumer who expresses an interest in a variable-rate loan program. When
two consumers are joint obligors with primary liability on an
obligation, the early disclosures required by Sec. 1026.19(a), (e), or
(g), as applicable, may be provided to any one of them. In rescindable
transactions, the disclosures required by Sec. 1026.19(f) must be given
separately to each consumer who has the right to rescind under Sec.
1026.23. In transactions that are not rescindable, the disclosures
required by Sec. 1026.19(f) may be provided to any consumer with
primary liability on the obligation. See Sec. Sec. 1026.2(a)(11),
1026.17(b), 1026.19(a), 1026.19(f), and 1026.23(b).
17(e) Effect of Subsequent Events
1. Events causing inaccuracies. Subject to Sec. 1026.19(e) and (f),
inaccuracies in disclosures are not violations if attributable to events
occurring after the disclosures are made. For example, when the consumer
fails to fulfill a prior commitment to keep the collateral insured and
the creditor then provides the coverage and charges the consumer for it,
such a change does not make the original disclosures inaccurate. The
creditor may, however, be required to make new disclosures under Sec.
1026.17(f) or Sec. 1026.19 if the events occurred between disclosure
and consummation, in some cases after consummation under Sec.
1026.19(f), or under Sec. 1026.20 if the events occurred after
consummation. For rules regarding permissible changes to the information
required to be disclosed by Sec. 1026.19(e) and (f), see Sec.
1026.19(e)(3) and (f)(2) and their commentary.
17(f) Early Disclosures
1. Change in rate or other terms. Redisclosure is required for
changes that occur between the time disclosures are made and
consummation if the annual percentage rate in the consummated
transaction exceeds the limits prescribed in Sec. 1026.17(f) even if
the prior disclosures would be considered accurate under the tolerances
in Sec. 1026.18(d) or 1026.22(a). To illustrate:
i. Transactions not secured by real property or a cooperative unit.
A. For transactions not secured by real property or a cooperative unit,
if disclosures are made in a regular transaction on July 1, the
transaction is consummated on July 15, and the actual annual percentage
rate varies by more than \1/8\ of 1 percentage point from the disclosed
annual percentage rate, the creditor must either redisclose the changed
terms or furnish a complete set of new disclosures before consummation.
Redisclosure is required even if the disclosures made on July 1 are
based on estimates and marked as such.
B. In a regular transaction not secured by real property or a
cooperative unit, if early disclosures are marked as estimates and the
disclosed annual percentage rate is within \1/8\ of 1 percentage point
of the rate at consummation, the creditor need not redisclose the
changed terms (including the annual percentage rate).
C. If disclosures for transactions not secured by real property or a
cooperative unit are made on July 1, the transaction is consummated on
July 15, and the finance charge increased by $35 but the disclosed
annual percentage rate is within the permitted tolerance, the creditor
must at least redisclose the changed terms that were not marked as
estimates. See Sec. 1026.18(d)(2).
ii. Reverse mortgages. In a transaction subject to Sec. 1026.19(a)
and not Sec. 1026.19(e) and (f), assume that, at the time the
disclosures required by Sec. 1026.19(a) are prepared in July, the loan
closing is scheduled for July 31 and the creditor does not plan to
collect per-diem interest at consummation. Assume further that
consummation actually occurs on August 5, and per-diem interest for the
remainder of August is collected as a prepaid finance charge. The
creditor may rely on the disclosures prepared in July that were accurate
when they were prepared. However, if the creditor prepares new
disclosures in August that will be provided at consummation, the new
disclosures must take into account the amount of the per-diem interest
known to the creditor at that time.
iii. Transactions secured by real property or a cooperative unit
other than reverse mortgages. For transactions secured by real property
or a cooperative unit other than reverse mortgages, assume that, at the
time the disclosures required by Sec. 1026.19(e) are prepared in July,
the loan closing is scheduled for July 31 and the creditor does not plan
to collect per-diem interest at consummation. Assume further that
consummation actually occurs on August 5, and per-diem interest for the
remainder of August is collected as a prepaid finance charge. The
creditor must make the disclosures required by Sec. 1026.19(f) three
days before consummation, and the disclosures required by Sec.
1026.19(f) must take into account the amount of per-diem interest that
will be collected at consummation.
2. Variable rate. The addition of a variable rate feature to the
credit terms, after early disclosures are given, requires new
disclosures. See Sec. 1026.19(e) and (f) to determine when new
disclosures are required for transactions secured by real property or a
cooperative unit, other than reverse mortgages.
[[Page 563]]
3. Content of new disclosures. Except as provided by Sec.
1026.19(e) and (f), if redisclosure is required, the creditor has the
option of either providing a complete set of new disclosures, or
providing disclosures of only the terms that vary from those originally
disclosed. See the commentary to Sec. 1026.19(a)(2).
4. Special rules. In mortgage transactions subject to Sec.
1026.19(a), the creditor must redisclose if, between the delivery of the
required early disclosures and consummation, the annual percentage rate
changes by more than a stated tolerance. When subsequent events occur
after consummation, new disclosures are required only if there is a
refinancing or an assumption within the meaning of Sec. 1026.20.
Paragraph 17(f)(2)
1. Irregular transactions. For purposes of this paragraph, a
transaction is deemed to be ``irregular'' according to the definition in
Sec. 1026.22(a)(3).
17(g) Mail or Telephone Orders--Delay in Disclosures
1. Conditions for use. Except for extensions of credit subject to
Sec. 1026.19(a) or (e) and (f), when the creditor receives a mail or
telephone request for credit, the creditor may delay making the
disclosures until the first payment is due if the following conditions
are met:
i. The credit request is initiated without face-to-face or direct
telephone solicitation. (Creditors may, however, use the special rule
when credit requests are solicited by mail.)
ii. The creditor has supplied the specified credit information about
its credit terms either to the individual consumer or to the public
generally. That information may be distributed through advertisements,
catalogs, brochures, special mailers, or similar means.
2. Insurance. The location requirements for the insurance
disclosures under Sec. 1026.18(n) permit them to appear apart from the
other disclosures. Therefore, a creditor may mail an insurance
authorization to the consumer and then prepare the other disclosures to
reflect whether or not the authorization is completed by the consumer.
Creditors may also disclose the insurance cost on a unit-cost basis, if
the transaction meets the requirements of Sec. 1026.17(g).
17(h) Series of Sales--Delay in Disclosures
1. Applicability. Except for extensions of credit covered by Sec.
1026.19(a) or (e) and (f), the creditor may delay the disclosures for
individual credit sales in a series of such sales until the first
payment is due on the current sale, assuming the two conditions in Sec.
1026.17(h) are met. If those conditions are not met, the general timing
rules in Sec. 1026.17(b) apply.
2. Basis of disclosures. Creditors structuring disclosures for a
series of sales under Sec. 1026.17(h) may compute the total sale price
as either:
i. The cash price for the sale plus that portion of the finance
charge and other charges applicable to that sale; or
ii. The cash price for the sale, other charges applicable to the
sale, and the total finance charge and outstanding principal.
17(i) Interim Student Credit Extensions
1. Definition. Student credit plans involve extensions of credit for
education purposes where the repayment amount and schedule are not known
at the time credit is advanced. These plans include loans made under any
student credit plan, whether government or private, where the repayment
period does not begin immediately. (Certain student credit plans that
meet this definition are exempt from Regulation Z. See Sec. 1026.3(f).)
2. Relation to other sections. For disclosures made before the
mandatory compliance date of the disclosures required under Sec. Sec.
1026.46, 47, and 48, paragraph 17(i) permitted creditors to omit from
the disclosures the terms set forth in that paragraph at the time the
credit was actually extended. However, creditors were required to make
complete disclosures at the time the creditor and consumer agreed upon
the repayment schedule for the total obligation. At that time, a new set
of disclosures of all applicable items under Sec. 1026.18 was required.
Most student credit plans are subject to the requirements in Sec. Sec.
1026.46, 47, and 48. Consequently, for applications for student credit
plans received on or after the mandatory compliance date of Sec. Sec.
1026.46, 47, and 48, the creditor may not omit from the disclosures the
terms set forth in paragraph 17(i). Instead, the creditor must comply
with Sec. Sec. 1026.46, 47, and 48, if applicable, or with Sec. Sec.
1026.17 and 1026.18.
3. Basis of disclosures. The disclosures given at the time of
execution of the interim note should reflect two annual percentage
rates, one for the interim period and one for the repayment period. The
use of Sec. 1026.17(i) in making disclosures does not, by itself, make
those disclosures estimates. Any portion of the finance charge, such as
statutory interest, that is attributable to the interim period and is
paid by the student (either as a prepaid finance charge, periodically
during the interim period, in one payment at the end of the interim
period, or capitalized at the beginning of the repayment period) must be
reflected in the interim annual percentage rate. Interest subsidies,
such as payments made by either a state or the Federal Government on an
interim loan, must be excluded in computing the annual percentage rate
on the interim obligation, when the consumer has no contingent liability
for payment of those amounts. Any finance charges
[[Page 564]]
that are paid separately by the student at the outset or withheld from
the proceeds of the loan are prepaid finance charges. An example of this
type of charge is the loan guarantee fee. The sum of the prepaid finance
charges is deducted from the loan proceeds to determine the amount
financed and included in the calculation of the finance charge.
4. Consolidation. Consolidation of the interim student credit
extensions through a renewal note with a set repayment schedule is
treated as a new transaction with disclosures made as they would be for
a refinancing. Any unearned portion of the finance charge must be
reflected in the new finance charge and annual percentage rate, and is
not added to the new amount financed. In itemizing the amount financed
under Sec. 1026.18(c), the creditor may combine the principal balances
remaining on the interim extensions at the time of consolidation and
categorize them as the amount paid on the consumer's account.
5. Approved student credit forms. See the commentary to appendix H
regarding disclosure forms approved for use in certain student credit
programs for which applications were received prior to the mandatory
compliance date of Sec. Sec. 1026.46, 1026.47, and 1026.48.
Section 1026.18--Content of Disclosures
1. As applicable. i. The disclosures required by this section need
be made only as applicable. Any disclosure not relevant to a particular
transaction may be eliminated entirely. For example:
A. In a loan transaction, the creditor may delete disclosure of the
total sale price.
B. In a credit sale requiring disclosure of the total sale price
under Sec. 1026.18(j), the creditor may delete any reference to a
downpayment where no downpayment is involved.
ii. Where the amounts of several numerical disclosures are the same,
the ``as applicable'' language also permits creditors to combine the
terms, so long as it is done in a clear and conspicuous manner. For
example:
A. In a transaction in which the amount financed equals the total of
payments, the creditor may disclose ``amount financed/total of
payments,'' together with descriptive language, followed by a single
amount.
B. However, if the terms are separated on the disclosure statement
and separate space is provided for each amount, both disclosures must be
completed, even though the same amount is entered in each space.
2. Format. See the commentary to Sec. 1026.17 and appendix H for a
discussion of the format to be used in making these disclosures, as well
as acceptable modifications.
3. Scope of coverage. i. Section 1026.18 applies to closed-end
consumer credit transactions, other than transactions that are subject
to Sec. 1026.19(e) and (f). Section 1026.19(e) and (f) applies to
closed-end consumer credit transactions that are secured by real
property or a cooperative unit, other than reverse mortgages subject to
Sec. 1026.33. Accordingly, the disclosures required by Sec. 1026.18
apply only to closed-end consumer credit transactions that are:
A. Unsecured;
B. Secured by personal property that is not a dwelling;
C. Secured by personal property (other than a cooperative unit) that
is a dwelling and are not also secured by real property; or
D. Reverse mortgages subject to Sec. 1026.33.
ii. Of the foregoing transactions that are subject to Sec. 1026.18,
the creditor discloses a payment schedule under Sec. 1026.18(g) for
those described in paragraphs i.A and i.B of this comment. For
transactions described in paragraphs i.C and i.D of this comment, the
creditor discloses an interest rate and payment summary table under
Sec. 1026.18(s). See also comments 18(g)-6 and 18(s)-4 for additional
guidance on the applicability to different transaction types of
Sec. Sec. 1026.18(g) or (s) and 1026.19(e) and (f).
iii. Because Sec. 1026.18 does not apply to transactions secured by
real property or a cooperative unit, other than reverse mortgages,
references in the section and its commentary to ``mortgages'' refer only
to transactions described in paragraphs i.C and i.D of this comment, as
applicable.
18(a) Creditor
1. Identification of creditor. The creditor making the disclosures
must be identified. This disclosure may, at the creditor's option,
appear apart from the other disclosures. Use of the creditor's name is
sufficient, but the creditor may also include an address and/or
telephone number. In transactions with multiple creditors, any one of
them may make the disclosures; the one doing so must be identified.
18(b) Amount Financed
1. Disclosure required. The net amount of credit extended must be
disclosed using the term amount financed and a descriptive explanation
similar to the phrase in the regulation.
Paragraph 18(b)(1)
1. Downpayments. A downpayment is defined in Sec. 1026.2(a)(18) to
include, at the creditor's option, certain deferred downpayments or
pick-up payments. A deferred downpayment that meets the criteria set
forth in the definition may be treated as part of the downpayment, at
the creditor's option.
i. Deferred downpayments that are not treated as part of the
downpayment (either because they do not meet the definition or because
the creditor simply chooses not to treat them as downpayments) are
included in the amount financed.
[[Page 565]]
ii. Deferred downpayments that are treated as part of the
downpayment are not part of the amount financed under Sec.
1026.18(b)(1).
Paragraph 18(b)(2)
1. Adding other amounts. Fees or other charges that are not part of
the finance charge and that are financed rather than paid separately at
consummation of the transaction are included in the amount financed.
Typical examples are real estate settlement charges and premiums for
voluntary credit life and disability insurance excluded from the finance
charge under Sec. 1026.4. This paragraph does not include any amounts
already accounted for under Sec. 1026.18(b)(1), such as taxes, tag and
title fees, or the costs of accessories or service policies that the
creditor includes in the cash price.
Paragraph 18(b)(3)
1. Prepaid finance charges. i. Prepaid finance charges that are paid
separately in cash or by check should be deducted under Sec.
1026.18(b)(3) in calculating the amount financed. To illustrate:
A. A consumer applies for a loan of $2,500 with a $40 loan fee. The
face amount of the note is $2,500 and the consumer pays the loan fee
separately by cash or check at closing. The principal loan amount for
purposes of Sec. 1026.18(b)(1) is $2,500 and $40 should be deducted
under Sec. 1026.18(b(3), thereby yielding an amount financed of $2,460.
ii. In some instances, as when loan fees are financed by the
creditor, finance charges are incorporated in the face amount of the
note. Creditors have the option, when the charges are not add-on or
discount charges, of determining a principal loan amount under Sec.
1026.18(b)(1) that either includes or does not include the amount of the
finance charges. (Thus the principal loan amount may, but need not, be
determined to equal the face amount of the note.) When the finance
charges are included in the principal loan amount, they should be
deducted as prepaid finance charges under Sec. 1026.18(b)(3). When the
finance charges are not included in the principal loan amount, they
should not be deducted under Sec. 1026.18(b)(3). The following examples
illustrate the application of Sec. 1026.18(b) to this type of
transaction. Each example assumes a loan request of $2,500 with a loan
fee of $40; the creditor assesses the loan fee by increasing the face
amount of the note to $2,540.
A. If the creditor determines the principal loan amount under Sec.
1026.18(b)(1) to be $2,540, it has included the loan fee in the
principal loan amount and should deduct $40 as a prepaid finance charge
under Sec. 1026.18(b)(3), thereby obtaining an amount financed of
$2,500.
B. If the creditor determines the principal loan amount under Sec.
1026.18(b)(1) to be $2,500, it has not included the loan fee in the
principal loan amount and should not deduct any amount under Sec.
1026.18(b)(3), thereby obtaining an amount financed of $2,500.
iii. The same rules apply when the creditor does not increase the
face amount of the note by the amount of the charge but collects the
charge by withholding it from the amount advanced to the consumer. To
illustrate, the following examples assume a loan request of $2,500 with
a loan fee of $40; the creditor prepares a note for $2,500 and advances
$2,460 to the consumer.
A. If the creditor determines the principal loan amount under Sec.
1026.18(b)(1) to be $2,500, it has included the loan fee in the
principal loan amount and should deduct $40 as a prepaid finance charge
under Sec. 1026.18(b)(3), thereby obtaining an amount financed of
$2,460.
B. If the creditor determines the principal loan amount under Sec.
1026.18(b)(1) to be $2,460, it has not included the loan fee in the
principal loan amount and should not deduct any amount under Sec.
1026.18(b)(3), thereby obtaining an amount financed of $2,460.
iv. Thus in the examples where the creditor derives the net amount
of credit by determining a principal loan amount that does not include
the amount of the finance charge, no subtraction is appropriate.
Creditors should note, however, that although the charges are not
subtracted as prepaid finance charges in those examples, they are
nonetheless finance charges and must be treated as such.
2. Add-on or discount charges. All finance charges must be deducted
from the amount of credit in calculating the amount financed. If the
principal loan amount reflects finance charges that meet the definition
of a prepaid finance charge in Sec. 1026.2, those charges are included
in the Sec. 1026.18(b)(1) amount and deducted under Sec.
1026.18(b)(3). However, if the principal loan amount includes finance
charges that do not meet the definition of a prepaid finance charge, the
Sec. 1026.18(b)(1) amount must exclude those finance charges. The
following examples illustrate the application of Sec. 1026.18(b) to
these types of transactions. Each example assumes a loan request of
$1000 for 1 year, subject to a 6 percent precomputed interest rate, with
a $10 loan fee paid separately at consummation.
i. The creditor assesses add-on interest of $60 which is added to
the $1000 in loan proceeds for an obligation with a face amount of
$1060. The principal for purposes of Sec. 1026.18(b)(1) is $1000, no
amounts are added under Sec. 1026.18(b)(2), and the $10 loan fee is a
prepaid finance charge to be deducted under Sec. 1026.18(b)(3). The
amount financed is $990.
ii. The creditor assesses discount interest of $60 and distributes
$940 to the consumer, who is liable for an obligation with a face amount
of $1000. The principal under Sec. 1026.18(b)(1) is $940, which results
in an
[[Page 566]]
amount financed of $930, after deduction of the $10 prepaid finance
charge under Sec. 1026.18(b)(3).
iii. The creditor assesses $60 in discount interest by increasing
the face amount of the obligation to $1060, with the consumer receiving
$1000. The principal under Sec. 1026.18(b)(1) is thus $1000 and the
amount financed $990, after deducting the $10 prepaid finance charge
under Sec. 1026.18(b)(3).
18(c) Itemization of Amount Financed
1. Disclosure required. i. The creditor has 2 alternatives in
complying with Sec. 1026.18(c):
A. The creditor may inform the consumer, on the segregated
disclosures, that a written itemization of the amount financed will be
provided on request, furnishing the itemization only if the customer in
fact requests it.
B. The creditor may provide an itemization as a matter of course,
without notifying the consumer of the right to receive it or waiting for
a request.
ii. Whether given as a matter of course or only on request, the
itemization must be provided at the same time as the other disclosures
required by Sec. 1026.18, although separate from those disclosures.
2. Additional information. Section 1026.18(c) establishes only a
minimum standard for the material to be included in the itemization of
the amount financed. Creditors have considerable flexibility in revising
or supplementing the information listed in Sec. 1026.18(c) and shown in
model form H-3, although no changes are required. The creditor may, for
example, do one or more of the following:
i. Include amounts that reflect payments not part of the amount
financed. For example, escrow items and certain insurance premiums may
be included, as discussed in the commentary to Sec. 1026.18(g).
ii. Organize the categories in any order. For example, the creditor
may rearrange the terms in a mathematical progression that depicts the
arithmetic relationship of the terms.
iii. Add categories. For example, in a credit sale, the creditor may
include the cash price and the downpayment. If the credit sale involves
a trade-in of the consumer's car and an existing lien on that car
exceeds the value of the trade-in amount, the creditor may disclose the
consumer's trade-in value, the creditor's payoff of the existing lien,
and the resulting additional amount financed.
iv. Further itemize each category. For example, the amount paid
directly to the consumer may be subdivided into the amount given by
check and the amount credited to the consumer's savings account.
v. Label categories with different language from that shown in Sec.
1026.18(c). For example, an amount paid on the consumer's account may be
revised to specifically identify the account as ``your auto loan with
us.''
vi. Delete, leave blank, mark ``N/A,'' or otherwise note
inapplicable categories in the itemization. For example, in a credit
sale with no prepaid finance charges or amounts paid to others, the
amount financed may consist of only the cash price less downpayment. In
this case, the itemization may be composed of only a single category and
all other categories may be eliminated.
3. Amounts appropriate to more than one category. When an amount may
appropriately be placed in any of several categories and the creditor
does not wish to revise the categories shown in Sec. 1026.18(c), the
creditor has considerable flexibility in determining where to show the
amount. For example, in a credit sale, the portion of the purchase price
being financed by the creditor may be viewed as either an amount paid to
the consumer or an amount paid on the consumer's account.
4. RESPA transactions. The Real Estate Settlement Procedures Act
(RESPA) requires creditors to provide a good faith estimate of closing
costs and a settlement statement listing the amounts paid by the
consumer. Reverse mortgages subject to RESPA and Sec. 1026.18 are
exempt from the requirements of Sec. 1026.18(c) if the creditor
complies with RESPA's requirements for a good faith estimate and
settlement statement. The itemization of the amount financed need not be
given, even though the content and timing of the good faith estimate and
settlement statement under RESPA differ from the requirements of
Sec. Sec. 1026.18(c) and 1026.19(a)(2). If a creditor chooses to
substitute RESPA's settlement statement for the itemization when
redisclosure is required under Sec. 1026.19(a)(2), the statement must
be delivered to the consumer at or prior to consummation. The
disclosures required by Sec. Sec. 1026.18(c) and 1026.19(a)(2) may
appear on the same page or on the same document as the good faith
estimate or the settlement statement, so long as the requirements of
Sec. 1026.17(a) are met.
Paragraph 18(c)(1)(i)
1. Amounts paid to consumer. This encompasses funds given to the
consumer in the form of cash or a check, including joint proceeds
checks, as well as funds placed in an asset account. It may include
money in an interest-bearing account even if that amount is considered a
required deposit under Sec. 1026.18(r). For example, in a transaction
with total loan proceeds of $500, the consumer receives a check for $300
and $200 is required by the creditor to be put into an interest-bearing
account. Whether or not the $200 is a required deposit, it is part of
the amount financed. At the creditor's option, it may be broken out and
labeled in the itemization of the amount financed.
[[Page 567]]
Paragraph 18(c)(1)(ii)
1. Amounts credited to consumer's account. The term consumer's
account refers to an account in the nature of a debt with that creditor.
It may include, for example, an unpaid balance on a prior loan, a credit
sale balance or other amounts owing to that creditor. It does not
include asset accounts of the consumer such as savings or checking
accounts.
Paragraph 18(c)(1)(iii)
1. Amounts paid to others. This includes, for example, tag and title
fees; amounts paid to insurance companies for insurance premiums;
security interest fees, and amounts paid to credit bureaus, appraisers
or public officials. When several types of insurance premiums are
financed, they may, at the creditor's option, be combined and listed in
one sum, labeled ``insurance'' or similar term. This includes, but is
not limited to, different types of insurance premiums paid to one
company and different types of insurance premiums paid to different
companies. Except for insurance companies and other categories noted in
Sec. 1026.18(c)(1)(iii), third parties must be identified by name.
2. Charges added to amounts paid to others. A sum is sometimes added
to the amount of a fee charged to a consumer for a service provided by a
third party (such as for an extended warranty or a service contract)
that is payable in the same amount in comparable cash and credit
transactions. In the credit transaction, the amount is retained by the
creditor. Given the flexibility permitted in meeting the requirements of
the amount financed itemization (see the commentary to Sec.
1026.18(c)), the creditor in such cases may reflect that the creditor
has retained a portion of the amount paid to others. For example, the
creditor could add to the category ``amount paid to others'' language
such as ``(we may be retaining a portion of this amount).''
Paragraph 18(c)(1)(iv)
1. Prepaid finance charge. Prepaid finance charges that are deducted
under Sec. 1026.18(b)(3) must be disclosed under this section. The
prepaid finance charges must be shown as a total amount but may, at the
creditor's option, also be further itemized and described. All amounts
must be reflected in this total, even if portions of the prepaid finance
charge are also reflected elsewhere. For example, if at consummation the
creditor collects interim interest of $30 and a credit report fee of
$10, a total prepaid finance charge of $40 must be shown. At the
creditor's option, the credit report fee paid to a third party may also
be shown elsewhere as an amount included in Sec. 1026.18(c)(1)(iii).
The creditor may also further describe the 2 components of the prepaid
finance charge, although no itemization of this element is required by
Sec. 1026.18(c)(1)(iv).
2. Prepaid mortgage insurance premiums. Regulation X under RESPA, 12
CFR 1024.8, requires creditors to give consumers a settlement statement
disclosing the costs associated with reverse mortgage loan transactions.
Included on the settlement statement are mortgage insurance premiums
collected at settlement, which are prepaid finance charges. In
calculating the total amount of prepaid finance charges, creditors
should use the amount for mortgage insurance listed on the line for
mortgage insurance on the settlement statement (line 1003 on HUD-1 or
HUD 1-A), without adjustment, even if the actual amount collected at
settlement may vary because of RESPA's escrow accounting rules. Figures
for mortgage insurance disclosed in conformance with RESPA shall be
deemed to be accurate for purposes of Regulation Z.
18(d) Finance Charge
1. Disclosure required. The creditor must disclose the finance
charge as a dollar amount, using the term finance charge, and must
include a brief description similar to that in Sec. 1026.18(d). The
creditor may, but need not, further modify the descriptor for variable
rate transactions with a phrase such as which is subject to change. The
finance charge must be shown on the disclosures only as a total amount;
the elements of the finance charge must not be itemized in the
segregated disclosures, although the regulation does not prohibit their
itemization elsewhere.
18(d)(2) Other Credit
1. Tolerance. When a finance charge error results in a misstatement
of the amount financed, or some other dollar amount for which the
regulation provides no specific tolerance, the misstated disclosure does
not violate the Act or the regulation if the finance charge error is
within the permissible tolerance under this paragraph.
18(e) Annual Percentage Rate
1. Disclosure required. The creditor must disclose the cost of the
credit as an annual rate, using the term annual percentage rate, plus a
brief descriptive phrase comparable to that used in Sec. 1026.18(e).
For variable rate transactions, the descriptor may be further modified
with a phrase such as which is subject to change. Under Sec.
1026.17(a), the terms annual percentage rate and finance charge must be
more conspicuous than the other required disclosures.
2. Exception. Section 1026.18(e) provides an exception for certain
transactions in which no annual percentage rate disclosure is required.
[[Page 568]]
18(f) Variable Rate
1. Coverage. The requirements of Sec. 1026.18(f) apply to all
transactions in which the terms of the legal obligation allow the
creditor to increase the rate originally disclosed to the consumer. It
includes not only increases in the interest rate but also increases in
other components, such as the rate of required credit life insurance.
The provisions, however, do not apply to increases resulting from
delinquency (including late payment), default, assumption, acceleration
or transfer of the collateral. Section 1026.18(f)(1) applies to
variable-rate transactions that are not secured by the consumer's
principal dwelling and to those that are secured by the principal
dwelling but have a term of one year or less. Section 1026.18(f)(2)
applies to variable-rate transactions that are secured by the consumer's
principal dwelling and have a term greater than one year. Moreover,
transactions subject to Sec. 1026.18(f)(2) are subject to the special
early disclosure requirements of Sec. 1026.19(b). (However, ``shared-
equity'' or ``shared-appreciation'' mortgages are subject to the
disclosure requirements of Sec. 1026.18(f)(1) and not to the
requirements of Sec. Sec. 1026.18(f)(2) and 1026.19(b) regardless of
the general coverage of those sections.) Creditors are permitted under
Sec. 1026.18(f)(1) to substitute in any variable-rate transaction the
disclosures required under Sec. 1026.19(b) for those disclosures
ordinarily required under Sec. 1026.18(f)(1). Creditors who provide
variable-rate disclosures under Sec. 1026.19(b) must comply with all of
the requirements of that section, including the timing of disclosures,
and must also provide the disclosures required under Sec.
1026.18(f)(2). Creditors substituting Sec. 1026.19(b) disclosures for
Sec. 1026.18(f)(1) disclosures may, but need not, also provide
disclosures pursuant to Sec. 1026.20(c). (Substitution of disclosures
under Sec. 1026.18(f)(1) in transactions subject to Sec. 1026.19(b) is
not permitted.)
Paragraph 18(f)(1)
1. Terms used in disclosure. In describing the variable rate
feature, the creditor need not use any prescribed terminology. For
example, limitations and hypothetical examples may be described in terms
of interest rates rather than annual percentage rates. The model forms
in appendix H provide examples of ways in which the variable rate
disclosures may be made.
2. Conversion feature. In variable-rate transactions with an option
permitting consumers to convert to a fixed-rate transaction, the
conversion option is a variable-rate feature that must be disclosed. In
making disclosures under Sec. 1026.18(f)(1), creditors should disclose
the fact that the rate may increase upon conversion; identify the index
or formula used to set the fixed rate; and state any limitations on and
effects of an increase resulting from conversion that differ from other
variable-rate features. Because Sec. 1026.18(f)(1)(iv) requires only
one hypothetical example (such as an example of the effect on payments
resulting from changes in the index), a second hypothetical example need
not be given.
Paragraph 18(f)(1)(i)
1. Circumstances. The circumstances under which the rate may
increase include identification of any index to which the rate is tied,
as well as any conditions or events on which the increase is contingent.
i. When no specific index is used, any identifiable factors used to
determine whether to increase the rate must be disclosed.
ii. When the increase in the rate is purely discretionary, the fact
that any increase is within the creditor's discretion must be disclosed.
iii. When the index is internally defined (for example, by that
creditor's prime rate), the creditor may comply with this requirement by
either a brief description of that index or a statement that any
increase is in the discretion of the creditor. An externally defined
index, however, must be identified.
Paragraph 18(f)(1)(ii)
1. Limitations. This includes any maximum imposed on the amount of
an increase in the rate at any time, as well as any maximum on the total
increase over the life of the transaction. Except for private education
loans disclosures, when there are no limitations, the creditor may, but
need not, disclose that fact, and limitations do not include legal
limits in the nature of usury or rate ceilings under state or Federal
statutes or regulations. (See Sec. 1026.30 for the rule requiring that
a maximum interest rate be included in certain variable-rate
transactions.) For disclosures with respect to private education loan
disclosures, see comment 47(b)(1)-2.
Paragraph 18(f)(1)(iii)
1. Effects. Disclosure of the effect of an increase refers to an
increase in the number or amount of payments or an increase in the final
payment. In addition, the creditor may make a brief reference to
negative amortization that may result from a rate increase. (See the
commentary to Sec. 1026.17(a)(1) regarding directly related
information.) If the effect cannot be determined, the creditor must
provide a statement of the possible effects. For example, if the
exercise of the variable-rate feature may result in either more or
larger payments, both possibilities must be noted.
Paragraph 18(f)(1)(iv)
1. Hypothetical example. The example may, at the creditor's option
appear apart from
[[Page 569]]
the other disclosures. The creditor may provide either a standard
example that illustrates the terms and conditions of that type of credit
offered by that creditor or an example that directly reflects the terms
and conditions of the particular transaction. In transactions with more
than one variable-rate feature, only one hypothetical example need be
provided. (See the commentary to Sec. 1026.17(a)(1) regarding
disclosure of more than one hypothetical example as directly related
information.)
2. Hypothetical example not required. The creditor need not provide
a hypothetical example in the following transactions with a variable-
rate feature:
i. Demand obligations with no alternate maturity date.
ii. Private education loans as defined in Sec. 1026.46(b)(5).
iii. Multiple-advance construction loans disclosed pursuant to
appendix D, Part I.
Paragraph 18(f)(2)
1. Disclosure required. In variable-rate transactions that have a
term greater than one year and are secured by the consumer's principal
dwelling, the creditor must give special early disclosures under Sec.
1026.19(b) in addition to the later disclosures required under Sec.
1026.18(f)(2). The disclosures under Sec. 1026.18(f)(2) must state that
the transaction has a variable-rate feature and that variable-rate
disclosures have been provided earlier. (See the commentary to Sec.
1026.17(a)(1) regarding the disclosure of certain directly related
information in addition to the variable-rate disclosures required under
Sec. 1026.18(f)(2).)
18(g) Payment Schedule
1. Amounts included in repayment schedule. The repayment schedule
should reflect all components of the finance charge, not merely the
portion attributable to interest. A prepaid finance charge, however,
should not be shown in the repayment schedule as a separate payment. The
payments may include amounts beyond the amount financed and finance
charge. For example, the disclosed payments may, at the creditor's
option, reflect certain insurance premiums where the premiums are not
part of either the amount financed or the finance charge, as well as
real estate escrow amounts such as taxes added to the payment in
mortgage transactions.
2. Deferred downpayments. As discussed in the commentary to Sec.
1026.2(a)(18), deferred downpayments or pick-up payments that meet the
conditions set forth in the definition of downpayment may be treated as
part of the downpayment. Even if treated as a downpayment, that amount
may nevertheless be disclosed as part of the payment schedule, at the
creditor's option.
3. Total number of payments. In disclosing the number of payments
for transactions with more than one payment level, creditors may but
need not disclose as a single figure the total number of payments for
all levels. For example, in a transaction calling for 108 payments of
$350, 240 payments of $335, and 12 payments of $330, the creditor need
not state that there will be a total of 360 payments.
4. Timing of payments. i. General rule. Section 1026.18(g) requires
creditors to disclose the timing of payments. To meet this requirement,
creditors may list all of the payment due dates. They also have the
option of specifying the ``period of payments'' scheduled to repay the
obligation. As a general rule, creditors that choose this option must
disclose the payment intervals or frequency, such as ``monthly'' or
``bi-weekly,'' and the calendar date that the beginning payment is due.
For example, a creditor may disclose that payments are due ``monthly
beginning on July 1, 1998.'' This information, when combined with the
number of payments, is necessary to define the repayment period and
enable a consumer to determine all of the payment due dates.
ii. Exception. In a limited number of circumstances, the beginning-
payment date is unknown and difficult to determine at the time
disclosures are made. For example, a consumer may become obligated on a
credit contract that contemplates the delayed disbursement of funds
based on a contingent event, such as the completion of repairs.
Disclosures may also accompany loan checks that are sent by mail, in
which case the initial disbursement and repayment dates are solely
within the consumer's control. In such cases, if the beginning-payment
date is unknown the creditor may use an estimated date and label the
disclosure as an estimate pursuant to Sec. 1026.17(c). Alternatively,
the disclosure may refer to the occurrence of a particular event, for
example, by disclosing that the beginning payment is due ``30 days after
the first loan disbursement.'' This information also may be included
with an estimated date to explain the basis for the creditor's estimate.
See comment 17(a)(1)-5.iii.
5. [Reserved]
6. Mortgage transactions. Section 1026.18(g) applies to closed-end
transactions, other than transactions that are subject to Sec.
1026.18(s) or Sec. 1026.19(e) and (f). Section 1026.18(s) applies to
closed-end transactions secured by real property or a dwelling, unless
they are subject to Sec. 1026.19(e) and (f). Section 1026.19(e) and (f)
applies to closed-end transactions secured by real property or a
cooperative unit, other than reverse mortgages. Thus, if a closed-end
consumer credit transaction is secured by real property, a cooperative
unit, or a dwelling and the transaction is a reverse mortgage or the
dwelling is personal property but not a cooperative unit, then the
creditor discloses an interest
[[Page 570]]
rate and payment summary table in accordance with Sec. 1026.18(s). See
comment 18(s)-4. If a closed-end consumer credit transaction is secured
by real property or a cooperative unit and is not a reverse mortgage,
the creditor discloses a projected payments table in accordance with
Sec. Sec. 1026.37(c) and 1026.38(c), as required by Sec. 1026.19(e)
and (f). In all such cases, the creditor is not subject to the
requirements of Sec. 1026.18(g). On the other hand, if a closed-end
consumer credit transaction is not secured by real property or a
dwelling (for example, if it is unsecured or secured by an automobile),
the creditor discloses a payment schedule in accordance with Sec.
1026.18(g) and is not subject to the requirements of Sec. 1026.18(s) or
Sec. Sec. 1026.37(c) and 1026.38(c).
Paragraph 18(g)(1)
1. Demand obligations. In demand obligations with no alternate
maturity date, the creditor has the option of disclosing only the due
dates or periods of scheduled interest payments in the first year (for
example, ``interest payable quarterly'' or ``interest due the first of
each month''). The amounts of the interest payments need not be shown.
Paragraph 18(g)(2)
1. Abbreviated disclosure. The creditor may disclose an abbreviated
payment schedule when the amount of each regularly scheduled payment
(other than the first or last payment) includes an equal amount to be
applied on principal and a finance charge computed by application of a
rate to the decreasing unpaid balance. In addition, in transactions
where payments vary because interest and principal are paid at different
intervals, the two series of payments may be disclosed separately and
the abbreviated payment schedule may be used for the interest payments.
For example, in transactions with fixed quarterly principal payments and
monthly interest payments based on the outstanding principal balance,
the amount of the interest payments will change quarterly as principal
declines. In such cases the creditor may treat the interest and
principal payments as two separate series of payments, separately
disclosing the number, amount, and due dates of principal payments, and,
using the abbreviated payment schedule, the number, amount, and due
dates of interest payments. This option may be used when interest and
principal are scheduled to be paid on the same date of the month as well
as on different dates of the month. The creditor using this alternative
must disclose the dollar amount of the highest and lowest payments and
make reference to the variation in payments.
2. Combined payment schedule disclosures. Creditors may combine the
option in Sec. 1026.18(g)(2) with the general payment schedule
requirements in transactions where only a portion of the payment
schedule meets the conditions of Sec. 1026.18(g)(2). For example, in a
transaction where payments rise sharply for five years and then decline
over the next 25 years, the first five years would be disclosed under
the general rule in Sec. 1026.18(g) and the next 25 years according to
the abbreviated schedule in Sec. 1026.18(g)(2).
3. Effect on other disclosures. Section 1026.18(g)(2) applies only
to the payment schedule disclosure. The actual amounts of payments must
be taken into account in calculating and disclosing the finance charge
and the annual percentage rate.
Paragraph 18(h) Total of Payments
1. Disclosure required. The total of payments must be disclosed
using that term, along with a descriptive phrase similar to the one in
the regulation. The descriptive explanation may be revised to reflect a
variable rate feature with a brief phrase such as ``based on the current
annual percentage rate which may change.''
2. Calculation of total of payments. The total of payments is the
sum of the payments disclosed under Sec. 1026.18(g). For example, if
the creditor disclosed a deferred portion of the downpayment as part of
the payment schedule, that payment must be reflected in the total
disclosed under this paragraph. To calculate the total of payments
amount for transactions subject to Sec. 1026.18(s), creditors should
use the rules in Sec. 1026.18(g) and associated commentary and, for
adjustable-rate transactions, comments 17(c)(1)-8 and -10.
3. Exception. Section 1026.18(h) permits creditors to omit
disclosure of the total of payments in single-payment transactions. This
exception does not apply to a transaction calling for a single payment
of principal combined with periodic payments of interest.
4. Demand obligations. In demand obligations with no alternate
maturity date, the creditor may omit disclosure of payment amounts under
Sec. 1026.18(g)(1). In those transactions, the creditor need not
disclose the total of payments.
Paragraph 18(i) Demand Feature
1. Disclosure requirements. The disclosure requirements of this
provision apply not only to transactions payable on demand from the
outset, but also to transactions that are not payable on demand at the
time of consummation but convert to a demand status after a stated
period. In demand obligations in which the disclosures are based on an
assumed maturity of 1 year under Sec. 1026.17(c)(5), that fact must
also be stated. appendix H contains model clauses that may be used in
making this disclosure.
[[Page 571]]
2. Covered demand features. The type of demand feature triggering
the disclosures required by Sec. 1026.18(i) includes only those demand
features contemplated by the parties as part of the legal obligation.
For example, this provision does not apply to transactions that covert
to a demand status as a result of the consumer's default. A due-on-sale
clause is not considered a demand feature. A creditor may, but need not,
treat its contractual right to demand payment of a loan made to its
executive officers as a demand feature to the extent that the
contractual right is required by Regulation O of the Board of Governors
of the Federal Reserve System (12 CFR 215.5) or other Federal law.
3. Relationship to payment schedule disclosures. As provided in
Sec. 1026.18(g)(1), in demand obligations with no alternate maturity
date, the creditor need only disclose the due dates or payment periods
of any scheduled interest payments for the first year. If the demand
obligation states an alternate maturity, however, the disclosed payment
schedule must reflect that stated term; the special rule in Sec.
1026.18(g)(1) is not available.
Paragraph 18(j) Total Sale Price
1. Disclosure required. In a credit sale transaction, the total sale
price must be disclosed using that term, along with a descriptive
explanation similar to the one in the regulation. For variable rate
transactions, the descriptive phrase may, at the creditor's option, be
modified to reflect the variable rate feature. For example, the
descriptor may read: ``The total cost of your purchase on credit, which
is subject to change, including your downpayment of * * *.'' The
reference to a downpayment may be eliminated in transactions calling for
no downpayment.
2. Calculation of total sale price. The figure to be disclosed is
the sum of the cash price, other charges added under Sec.
1026.18(b)(2), and the finance charge disclosed under Sec. 1026.18(d).
3. Effect of existing liens. When a credit sale transaction involves
property that is being used as a trade-in (an automobile, for example)
and that has a lien exceeding the value of the trade-in, the total sale
price is affected by the amount of any cash provided. (See comment
2(a)(18)-3.) To illustrate, assume a consumer finances the purchase of
an automobile with a cash price of $20,000. Another vehicle used as a
trade-in has a value of $8,000 but has an existing lien of $10,000,
leaving a $2,000 deficit that the consumer must finance.
i. If the consumer pays $1,500 in cash, the creditor may apply the
cash first to the lien, leaving a $500 deficit, and reflect a
downpayment of $0. The total sale price would include the $20,000 cash
price, an additional $500 financed under Sec. 1026.18(b)(2), and the
amount of the finance charge. Alternatively, the creditor may reflect a
downpayment of $1,500 and finance the $2,000 deficit. In that case, the
total sale price would include the sum of the $20,000 cash price, the
$2,000 lien payoff amount as an additional amount financed, and the
amount of the finance charge.
ii. If the consumer pays $3,000 in cash, the creditor may apply the
cash first to extinguish the lien and reflect the remainder as a
downpayment of $1,000. The total sale price would reflect the $20,000
cash price and the amount of the finance charge. (The cash payment
extinguishes the trade-in deficit and no charges are added under Sec.
1026.18(b)(2).) Alternatively, the creditor may elect to reflect a
downpayment of $3,000 and finance the $2,000 deficit. In that case, the
total sale price would include the sum of the $20,000 cash price, the
$2,000 lien payoff amount as an additional amount financed, and the
amount of the finance charge.
18(k) Prepayment
1. Disclosure required. The creditor must give a definitive
statement of whether or not a prepayment penalty will be imposed or a
prepayment rebate will be given.
i. The fact that no prepayment penalty will be imposed may not
simply be inferred from the absence of a prepayment penalty disclosure;
the creditor must indicate that prepayment will not result in a
prepayment penalty.
ii. If a prepayment penalty or prepayment rebate is possible for one
type of prepayment, even though not for all, a positive disclosure is
required. This applies to any type of prepayment, whether voluntary or
involuntary as in the case of prepayments resulting from acceleration.
iii. Any difference in prepayment rebate or prepayment penalty
policy, depending on whether prepayment is voluntary or not, must not be
disclosed with the segregated disclosures.
2. Rebate-penalty disclosure. A single transaction may involve both
a precomputed finance charge and a finance charge computed by
application of a rate to the unpaid balance (for example, mortgages with
mortgage-guarantee insurance). In these cases, disclosures about both
prepayment rebates and prepayment penalties are required. Sample form H-
15 in appendix H to this part illustrates a mortgage transaction in
which both rebate and penalty disclosures are necessary.
3. Prepaid finance charge. The existence of a prepaid finance charge
in a transaction does not, by itself, require a disclosure under Sec.
1026.18(k). A prepaid finance charge is not considered a prepayment
penalty under Sec. 1026.18(k)(1), nor does it require a disclosure
under Sec. 1026.18(k)(2). At its option, however, a creditor may
consider a prepaid finance charge to be under Sec. 1026.18(k)(2). If a
disclosure is made under Sec. 1026.18(k)(2) with respect
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to a prepaid finance charge or other finance charge, the creditor may
further identify that finance charge. For example, the disclosure may
state that the borrower ``will not be entitled to a refund of the
prepaid finance charge'' or some other term that describes the finance
charge.
Paragraph 18(k)(1)
1. Examples of prepayment penalties. For purposes of Sec.
1026.18(k)(1), the following are examples of prepayment penalties:
i. A charge determined by treating the loan balance as outstanding
for a period of time after prepayment in full and applying the interest
rate to such ``balance,'' even if the charge results from interest
accrual amortization used for other payments in the transaction under
the terms of the loan contract. ``Interest accrual amortization'' refers
to the method by which the amount of interest due for each period (e.g.,
month) in a transaction's term is determined. For example, ``monthly
interest accrual amortization'' treats each payment as made on the
scheduled, monthly due date even if it is actually paid early or late
(until the expiration of any grace period). Thus, under the terms of a
loan contract providing for monthly interest accrual amortization, if
the amount of interest due on May 1 for the preceding month of April is
$3,000, the loan contract will require payment of $3,000 in interest for
the month of April whether the payment is made on April 20, on May 1, or
on May 10. In this example, if the consumer prepays the loan in full on
April 20 and if the accrued interest as of that date is $2,000, then
assessment of a charge of $3,000 constitutes a prepayment penalty of
$1,000 because the amount of interest actually earned through April 20
is only $2,000.
ii. A fee, such as an origination or other loan closing cost, that
is waived by the creditor on the condition that the consumer does not
prepay the loan. However, the term prepayment penalty does not include a
waived bona fide third-party charge imposed by the creditor if the
consumer pays all of a covered transaction's principal before the date
on which the principal is due sooner than 36 months after consummation.
For example, assume that at consummation, the creditor waives $3,000 in
closing costs to cover bona fide third-party charges but the terms of
the loan agreement provide that the creditor may recoup the $3,000 in
waived charges if the consumer repays the entire loan balance sooner
than 36 months after consummation. The $3,000 charge is not a prepayment
penalty. In contrast, for example, assume that at consummation, the
creditor waives $3,000 in closing costs to cover bona fide third-party
charges but the terms of the loan agreement provide that the creditor
may recoup $4,500 in part to recoup waived charges, if the consumer
repays the entire loan balance sooner than 36 months after consummation.
The $3,000 that the creditor may impose to cover the waived bona fide
third-party charges is not a prepayment penalty, but the additional
$1,500 charge is a prepayment penalty and must be disclosed pursuant to
Sec. 1026.37(k)(1).
iii. A minimum finance charge in a simple interest transaction.
2. Fees that are not prepayment penalties. For purposes of Sec.
1026.18(k)(1), fees which are not prepayment penalties include, for
example:
i. Fees imposed for preparing and providing documents when a loan is
paid in full, if such fees are imposed whether or not the loan is
prepaid. Examples include a loan payoff statement, a reconveyance
document, or another document releasing the creditor's security interest
in the dwelling that secures the loan.
ii. Loan guarantee fees.
Paragraph 18(k)(2)
1. Rebate of finance charge. i. This applies to any finance charges
that do not take account of each reduction in the principal balance of
an obligation. This category includes, for example:
A. Precomputed finance charges such as add-on charges. This includes
computing a refund of an unearned finance charge, such as precomputed
interest, by a method that is less favorable to the consumer than the
actuarial method, as defined by section 933(d) of the Housing and
Community Development Act of 1992, 15 U.S.C. 1615(d). For purposes of
computing a refund of unearned interest, if using the actuarial method
defined by applicable State law results in a refund that is greater than
the refund calculated by using the method described in section 933(d) of
the Housing and Community Development Act of 1992, creditors should use
the State law definition in determining if a refund is a prepayment
penalty.
B. Charges that take account of some but not all reductions in
principal, such as mortgage guarantee insurance assessed on the basis of
an annual declining balance, when the principal is reduced on a monthly
basis.
ii. No description of the method of computing earned or unearned
finance charges is required or permitted as part of the segregated
disclosures under Sec. 1026.18(k)(2).
18(l) Late Payment
1. Definition. This paragraph requires a disclosure only if charges
are added to individual delinquent installments by a creditor who
otherwise considers the transaction ongoing on its original terms. Late
payment charges do not include:
i. The right of acceleration.
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ii. Fees imposed for actual collection costs, such as repossession
charges or attorney's fees.
iii. Deferral and extension charges.
iv. The continued accrual of simple interest at the contract rate
after the payment due date. However, an increase in the interest rate is
a late payment charge to the extent of the increase.
2. Content of disclosure. Many state laws authorize the calculation
of late charges on the basis of either a percentage or a specified
dollar amount, and permit imposition of the lesser or greater of the 2
charges. The disclosure made under Sec. 1026.18(l) may reflect this
alternative. For example, stating that the charge in the event of a late
payment is 5% of the late amount, not to exceed $5.00, is sufficient.
Many creditors also permit a grace period during which no late charge
will be assessed; this fact may be disclosed as directly related
information. (See the commentary to Sec. 1026.17(a).)
18(m) Security Interest
1. Purchase money transactions. When the collateral is the item
purchased as part of, or with the proceeds of, the credit transaction,
Sec. 1026.18(m) requires only a general identification such as ``the
property purchased in this transaction.'' However, the creditor may
identify the property by item or type instead of identifying it more
generally with a phrase such as ``the property purchased in this
transaction.'' For example, a creditor may identify collateral as ``a
motor vehicle,'' or as ``the property purchased in this transaction.''
Any transaction in which the credit is being used to purchase the
collateral is considered a purchase money transaction and the
abbreviated identification may be used, whether the obligation is
treated as a loan or a credit sale.
2. Nonpurchase money transactions. In nonpurchase money
transactions, the property subject to the security interest must be
identified by item or type. This disclosure is satisfied by a general
disclosure of the category of property subject to the security interest,
such as ``motor vehicles,'' ``securities,'' ``certain household items,''
or ``household goods.'' (Creditors should be aware, however, that the
Federal credit practices rules, as well as some state laws, prohibit
certain security interests in household goods.) At the creditor's
option, however, a more precise identification of the property or goods
may be provided.
3. Mixed collateral. In some transactions in which the credit is
used to purchase the collateral, the creditor may also take other
property of the consumer as security. In those cases, a combined
disclosure must be provided, consisting of an identification of the
purchase money collateral consistent with comment 18(m)-1 and a specific
identification of the other collateral consistent with comment 18(m)-2.
4. After-acquired property. An after-acquired property clause is not
a security interest to be disclosed under Sec. 1026.18(m).
5. Spreader clause. The fact that collateral for pre-existing credit
with the institution is being used to secure the present obligation
constitutes a security interest and must be disclosed. (Such security
interests may be known as ``spreader'' or ``dragnet'' clauses, or as
``cross-collateralization'' clauses.) A specific identification of that
collateral is unnecessary but a reminder of the interest arising from
the prior indebtedness is required. The disclosure may be made by using
language such as ``collateral securing other loans with us may also
secure this loan.'' At the creditor's option, a more specific
description of the property involved may be given.
6. Terms used in disclosure. No specified terminology is required in
disclosing a security interest. Although the disclosure may, at the
creditor's option, use the term security interest, the creditor may
designate its interest by using, for example, pledge, lien, or mortgage.
7. Collateral from third party. In certain transactions, the
consumer's obligation may be secured by collateral belonging to a third
party. For example, a loan to a student may be secured by an interest in
the property of the student's parents. In such cases, the security
interest is taken in connection with the transaction and must be
disclosed, even though the property encumbered is owned by someone other
than the consumer.
18(n) Insurance and Debt Cancellation
1. Location. This disclosure may, at the creditor's option, appear
apart from the other disclosures. It may appear with any other
information, including the amount financed itemization, any information
prescribed by state law, or other supplementary material. When this
information is disclosed with the other segregated disclosures, however,
no additional explanatory material may be included.
2. Debt cancellation. Creditors may use the model credit insurance
disclosures only if the debt cancellation coverage constitutes insurance
under state law. Otherwise, they may provide a parallel disclosure that
refers to debt cancellation coverage.
18(o) Certain Security Interest Charges
1. Format. No special format is required for these disclosures;
under Sec. 1026.4(e), taxes and fees paid to government officials with
respect to a security interest may be aggregated, or may be broken down
by individual charge. For example, the disclosure could be labeled
``filing fees and taxes'' and all funds disbursed for such purposes may
be aggregated in a single disclosure. This disclosure
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may appear, at the creditor's option, apart from the other required
disclosures. The inclusion of this information on a statement required
under the Real Estate Settlement Procedures Act is sufficient disclosure
for purposes of Truth in Lending.
Paragraph 18(p) Contract Reference
1. Content. Creditors may substitute, for the phrase ``appropriate
contract document,'' a reference to specific transaction documents in
which the additional information is found, such as ``promissory note''
or ``retail installment sale contract.'' A creditor may, at its option,
delete inapplicable items in the contract reference, as for example when
the contract documents contain no information regarding the right of
acceleration.
18(q) Assumption Policy
1. Policy statement. In many mortgages, the creditor cannot
determine, at the time disclosure must be made, whether a loan may be
assumable at a future date on its original terms. For example, the
assumption clause commonly used in mortgages sold to the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation conditions an assumption on a variety of factors such as the
creditworthiness of the subsequent borrower, the potential for
impairment of the lender's security, and execution of an assumption
agreement by the subsequent borrower. In cases where uncertainty exists
as to the future assumability of a mortgage, the disclosure under Sec.
1026.18(q) should reflect that fact. In making disclosures in such
cases, the creditor may use phrases such as ``subject to conditions,''
``under certain circumstances,'' or ``depending on future conditions.''
The creditor may provide a brief reference to more specific criteria
such as a due-on-sale clause, although a complete explanation of all
conditions is not appropriate. For example, the disclosure may state,
``Someone buying your home may be allowed to assume the mortgage on its
original terms, subject to certain conditions, such as payment of an
assumption fee.'' See comment 17(a)(1)-5 for an example for a reference
to a due-on-sale clause.
2. Original terms. The phrase original terms for purposes of Sec.
1026.18(q) does not preclude the imposition of an assumption fee, but a
modification of the basic credit agreement, such as a change in the
contract interest rate, represents different terms.
18(r) Required Deposit
1. Disclosure required. The creditor must inform the consumer of the
existence of a required deposit. (Appendix H provides a model clause
that may be used in making that disclosure.) Section 1026.18(r)
describes 3 types of deposits that need not be considered required
deposits. Use of the phrase ``need not'' permits creditors to include
the disclosure even in cases where there is doubt as to whether the
deposit constitutes a required deposit.
2. Pledged account mortgages. In these transactions, a consumer
pledges as collateral funds that the consumer deposits in an account
held by the creditor. The creditor withdraws sums from that account to
supplement the consumer's periodic payments. Creditors may treat these
pledged accounts as required deposits or they may treat them as consumer
buydowns in accordance with the commentary to Sec. 1026.17(c)(1).
3. Escrow accounts. The escrow exception in Sec. 1026.18(r)
applies, for example, to accounts for such items as maintenance fees,
repairs, or improvements, whether in a realty or a nonrealty
transaction. (See the commentary to Sec. 1026.17(c)(1) regarding the
use of escrow accounts in consumer buydown transactions.)
4. Interest-bearing accounts. When a deposit earns at least 5
percent interest per year, no disclosure is required under Sec.
1026.18(r). This exception applies whether the deposit is held by the
creditor or by a third party.
5. Morris Plan transactions. A deposit under a Morris Plan, in which
a deposit account is created for the sole purpose of accumulating
payments and this is applied to satisfy entirely the consumer's
obligation in the transaction, is not a required deposit.
6. Examples of amounts excluded. The following are among the types
of deposits that need not be treated as required deposits:
i. Requirement that a borrower be a customer or a member even if
that involves a fee or a minimum balance.
ii. Required property insurance escrow on a mobile home transaction.
iii. Refund of interest when the obligation is paid in full.
iv. Deposits that are immediately available to the consumer.
v. Funds deposited with the creditor to be disbursed (for example,
for construction) before the loan proceeds are advanced.
vi. [Reserved]
vii. Escrow of loan proceeds to be released when the repairs are
completed.
18(s) Interest Rate and Payment Summary for Mortgage Transactions
1. In general. Section 1026.18(s) prescribes format and content for
disclosure of interest rates and monthly (or other periodic) payments
for reverse mortgages and certain transactions secured by dwellings that
are personal property but not cooperative units. The information in
Sec. 1026.18(s)(2) through (4) is required to be in the form of a
table, except as otherwise provided, with headings and format
substantially similar to model clause H-4(E), H-4(F), H-4(G), or H-4(H)
in appendix H to this part. A disclosure that
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does not include the shading shown in a model clause but otherwise
follows the model clause's headings and format is substantially similar
to that model clause. Where Sec. 1026.18(s)(2) through (4) or the
applicable model clause requires that a column or row of the table be
labeled using the word ``monthly'' but the periodic payments are not due
monthly, the creditor should use the appropriate term, such as ``bi-
weekly'' or ``quarterly.'' In all cases, the table should have no more
than five vertical columns corresponding to applicable interest rates at
various times during the loan's term; corresponding payments would be
shown in horizontal rows. Certain loan types and terms are defined for
purposes of Sec. 1026.18(s) in Sec. 1026.18(s)(7).
2. Amortizing loans. Loans described as amortizing in Sec. Sec.
1026.18(s)(2)(i) and 1026.18(s)(3) include interest-only loans if they
do not also permit negative amortization. (For rules relating to loans
with balloon payments, see Sec. 1026.18(s)(5)). If an amortizing loan
is an adjustable-rate mortgage with an introductory rate (less than the
fully-indexed rate), creditors must provide a special explanation of
introductory rates. See Sec. 1026.18(s)(2)(iii).
3. Negative amortization. For negative amortization loans, creditors
must follow the rules in Sec. Sec. 1026.18(s)(2)(ii) and 1026.18(s)(4)
in disclosing interest rates and monthly payments. Loans with negative
amortization also require special explanatory disclosures about rates
and payments. See Sec. 1026.18(s)(6). Loans with negative amortization
include ``payment option'' loans, in which the consumer is permitted to
make minimum payments that will cover only some of the interest accruing
each month. See also comment 17(c)(1)-12, regarding graduated-payment
adjustable-rate mortgages.
4. Scope of coverage in relation to Sec. 1026.19(e) and (f).
Section 1026.18(s) applies to transactions secured by real property or a
dwelling, other than transactions that are subject to Sec. 1026.19(e)
and (f). Those provisions apply to closed-end transactions secured by
real property or a cooperative unit, other than reverse mortgages.
Accordingly, Sec. 1026.18(s) governs only closed-end reverse mortgages
and closed-end transactions secured by a dwelling, other than a
cooperative, that is personal property (such as a mobile home that is
not deemed real property under State or other applicable law).
18(s)(2) Interest Rates
18(s)(2)(i) Amortizing Loans
Paragraph 18(s)(2)(i)(A)
1. Fixed rate loans--payment increases. Although the interest rate
will not change after consummation for a fixed-rate loan, some fixed-
rate loans may have periodic payments that increase after consummation.
For example, the terms of the legal obligation may permit the consumer
to make interest-only payments for a specified period such as the first
five years after consummation. In such cases, the creditor must include
the increased payment under Sec. 1026.18(s)(3)(ii)(B) in the payment
row, and must show the interest rate in the column for that payment,
even though the rate has not changed since consummation. See also
comment 17(c)(1)-13, regarding growth equity mortgages.
Paragraph 18(s)(2)(i)(B)
1. Adjustable-rate mortgages and step-rate mortgages. Creditors must
disclose more than one interest rate for adjustable-rate mortgages and
step-rate mortgages, in accordance with Sec. 1026.18(s)(2)(i)(B).
Creditors must assume that an adjustable-rate mortgage's interest rate
will increase after consummation as rapidly as possible, taking into
account the terms of the legal obligation.
2. Maximum interest rate during first five years--adjustable-rate
mortgages and step-rate mortgages. The creditor must disclose the
maximum rate that could apply during the first five years after
consummation. If there are no interest rate caps other than the maximum
rate required under Sec. 1026.30, then the creditor should disclose
only the rate at consummation and the maximum rate. Such a table would
have only two columns.
i. For an adjustable-rate mortgage, the creditor must take into
account any interest rate caps when disclosing the maximum interest rate
during the first five years. The creditor must also disclose the
earliest date on which that adjustment may occur.
ii. If the transaction is a step-rate mortgage, the creditor should
disclose the rate that will apply after consummation. For example, the
legal obligation may provide that the rate is 6 percent for the first
two years following consummation, and then increases to 7 percent for at
least the next three years. The creditor should disclose the maximum
rate during the first five years as 7 percent and the date on which the
rate is scheduled to increase to 7 percent.
3. Maximum interest rate at any time. The creditor must disclose the
maximum rate that could apply at any time during the term of the loan
and the earliest date on which the maximum rate could apply.
i. For an adjustable-rate mortgage, the creditor must take into
account any interest rate caps in disclosing the maximum interest rate.
For example, if the legal obligation provides that at each annual
adjustment the rate may increase by no more than 2 percentage points,
the creditor must take this limit into account in determining the
earliest date on which the maximum possible rate may be reached.
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ii. For a step-rate mortgage, the creditor should disclose the
highest rate that could apply under the terms of the legal obligation
and the date on which that rate will first apply.
Paragraph 18(s)(2)(i)(C)
1. Payment increases. For some loans, the payment may increase
following consummation for reasons unrelated to an interest rate
adjustment. For example, an adjustable-rate mortgage may have an
introductory fixed rate for the first five years following consummation
and permit the borrower to make interest-only payments for the first
three years. The disclosure requirement of Sec. 1026.18(s)(2)(i)(C)
applies to all amortizing loans, including interest-only loans, if the
consumer's payment can increase in the manner described in Sec.
1026.18(s)(3)(i)(B), even if it is not the type of loan covered by Sec.
1026.18(s)(3)(i). Thus, Sec. 1026.18(s)(2)(i)(C) requires that the
creditor disclose the interest rate that corresponds to the first
payment that includes principal as well as interest, even though the
interest rate will not adjust at that time. In such cases, if the loan
is an interest-only loan, the creditor also must disclose the
corresponding periodic payment pursuant to Sec. 1026.18(s)(3)(ii). The
table would show, from left to right: The interest rate and payment at
consummation with the payment itemized to show that the payment is being
applied to interest only; the interest rate and payment when the
interest-only option ends; the maximum interest rate and payment during
the first five years; and the maximum possible interest rate and
payment. The disclosure requirements of Sec. 1026.18(s)(2)(i)(C) do not
apply to minor payment variations resulting solely from the fact that
months have different numbers of days.
18(s)(2)(ii) Negative Amortization Loans
1. Rate at consummation. In all cases the interest rate in effect at
consummation must be disclosed, even if it will apply only for a short
period such as one month.
2. Rates for adjustable-rate mortgages. The creditor must assume
that interest rates rise as quickly as possible after consummation, in
accordance with any interest rate caps under the legal obligation. For
adjustable-rate mortgages with no rate caps except a lifetime maximum,
creditors must assume that interest rate reaches the maximum at the
first adjustment. For example, assume that the legal obligation provides
for an interest rate at consummation of 1.5 percent. One month after
consummation, the interest rate adjusts and will adjust monthly
thereafter, according to changes in the index. The consumer may make
payments that cover only part of the interest accrued each month, until
the date the principal balance reaches 115 percent of its original
balance, or until the end of the fifth year after consummation,
whichever comes first. The maximum possible rate is 10.5 percent. No
other limits on interest rates apply. The minimum required payment
adjusts each year, and may increase by no more than 7.5 percent over the
previous year's payment. The creditor should disclose the following
rates and the dates when they are scheduled to occur: A rate of 1.5
percent for the first month following consummation and the minimum
payment; a rate of 10.5 percent, and the corresponding minimum payment
taking into account the 7.5 percent limit on payment increases, at the
beginning of the second year; and a rate of 10.5 percent and the
corresponding minimum payment taking into account the 7.5 percent
payment increase limit, at the beginning of the third year. The creditor
also must disclose the rate of 10.5 percent, the fully amortizing
payment, and the date on which the consumer must first make such a
payment under the terms of the legal obligation.
18(s)(2)(iii) Introductory Rate Disclosure for Amortizing Adjustable-
Rate Mortgage
1. Introductory rate. In some adjustable-rate mortgages, creditors
may set an initial interest rate that is lower than the fully indexed
rate at consummation. For amortizing loans with an introductory rate,
creditors must disclose the information required in Sec.
1026.18(s)(2)(iii) directly below the table.
Paragraph 18(s)(2)(iii)(B)
1. Place in sequence. ``Designation of the place in sequence''
refers to identifying the month or year, as applicable, of the change in
the rate resulting from the expiration of an introductory rate by its
place in the sequence of months or years, as applicable, of the
transaction's term. For example, if a transaction has a discounted rate
for the first three years, Sec. 1026.18(s)(2)(iii)(B) requires a
statement such as, ``In the fourth year, even if market rates do not
change, this rate will increase to __%.''
Paragraph 18(s)(2)(iii)(C)
1. Fully indexed rate. The fully indexed rate is defined in Sec.
1026.18(s)(7) as the index plus the margin at consummation. For purposes
of Sec. 1026.18(s)(2)(iii)(C), ``at consummation'' refers to
disclosures delivered at consummation, or three business days before
consummation pursuant to Sec. 1026.19(a)(2)(ii); for early disclosures
delivered within three business days after receipt of a consumer's
application pursuant to Sec. 1026.19(a)(1), the fully indexed rate
disclosed under Sec. 1026.18(s)(2)(iii)(C) may be based on the index in
effect at the time the disclosures
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are provided. The index in effect at consummation (or at the time of
early disclosures) need not be used if a contract provides for a delay
in the implementation of changes in an index value. For example, if the
contract specifies that rate changes are based on the index value in
effect 45 days before the change date, creditors may use any index value
in effect during the 45 days before consummation (or any earlier date of
disclosure) in calculating the fully indexed rate to be disclosed.
18(s)(3) Payments for Amortizing Loans
1. Payments corresponding to interest rates. Creditors must disclose
the periodic payment that corresponds to each interest rate disclosed
under Sec. 1026.18(s)(2)(i)(A)-(C). The corresponding periodic payment
is the regular payment for each such interest rate, without regard to
any final payment that differs from others because of the rounding of
periodic payments to account for payment amounts including fractions of
cents. Balloon payments, however, must be disclosed as provided in Sec.
1026.18(s)(5).
2. Principal and interest payment amounts; examples. i. For fixed-
rate interest-only transactions, Sec. 1026.18(s)(3)(ii)(B) requires
scheduled increases in the regular periodic payment amounts to be
disclosed along with the date of the increase. For example, in a fixed-
rate interest-only loan, a scheduled increase in the payment amount from
an interest-only payment to a fully amortizing payment must be
disclosed. Similarly, in a fixed-rate balloon loan, the balloon payment
must be disclosed in accordance with Sec. 1026.18(s)(5).
ii. For adjustable-rate mortgage transactions, Sec.
1026.18(s)(3)(i)(A) requires that for each interest rate required to be
disclosed under Sec. 1026.18(s)(2)(i) (the interest rate at
consummation, the maximum rate during the first five years, and the
maximum possible rate) a corresponding payment amount must be disclosed.
iii. The format of the payment disclosure varies depending on
whether all regular periodic payment amounts will include principal and
interest, and whether there will be an escrow account for taxes and
insurance.
Paragraph 18(s)(3)(i)(C)
1. Taxes and insurance. An estimated payment amount for taxes and
insurance must be disclosed if the creditor will establish an escrow
account for such amounts. If the escrow account will include amounts for
items other than taxes and insurance, such as homeowners association
dues, the creditor may but is not required to include such items in the
estimate. When such estimated escrow payments must be disclosed in
multiple columns of the table, such as for adjustable- and step-rate
transactions, each column should use the same estimate for taxes and
insurance except that the estimate should reflect changes in periodic
mortgage insurance premiums or any functionally equivalent fee that are
known to the creditor at the time the disclosure is made. The estimated
amounts of mortgage insurance premiums or any functionally equivalent
fee should be based on the declining principal balance that will occur
as a result of changes to the interest rate that are assumed for
purposes of disclosing those rates under Sec. 1026.18(s)(2) and
accompanying commentary. The payment amount must include estimated
amounts for property taxes and premiums for mortgage-related insurance
required by the creditor, such as insurance against loss of or damage to
property, or against liability arising out of the ownership or use of
the property, or insurance protecting the creditor against the
consumer's default or other credit loss. Premiums for credit insurance,
debt suspension and debt cancellation agreements, however, should not be
included. Except for periodic mortgage insurance premiums or any
functionally equivalent fee included in the escrow payment under Sec.
1026.18(s)(3)(i)(C), amounts included in the escrow payment disclosure
such as property taxes and homeowner's insurance generally are not
finance charges under Sec. 1026.4 and, therefore, do not affect other
disclosures, including the finance charge and annual percentage rate.
2. Mortgage insurance or any functional equivalent. For purposes of
Sec. 1026.18(s), ``mortgage insurance or any functional equivalent''
means the amounts identified in Sec. 1026.4(b)(5). ``Mortgage
guarantees'' (such as a United States Department of Veterans Affairs or
United States Department of Agriculture guarantee) provide coverage
similar to mortgage insurance, even if not technically considered
insurance under State or other applicable law. For purposes of Sec.
1026.18(s), ``mortgage insurance or any functional equivalent'' includes
any mortgage guarantee. Payment amounts under Sec. 1026.18(s)(3)(i)
should reflect the consumer's mortgage insurance payments or any
functionally equivalent fee until the date on which the creditor must
automatically terminate coverage under applicable law, even though the
consumer may have a right to request that the insurance be cancelled
earlier. The payment amount must reflect the terms of the legal
obligation, as determined by applicable State or other law. For example,
assume that under applicable law, mortgage insurance must terminate
after the 130th scheduled monthly payment, and the creditor collects at
closing and places in escrow two months of premiums. If, under the legal
obligation, the creditor will include mortgage insurance premiums in 130
payments and refund the escrowed payments when the insurance is
terminated, payment amounts
[[Page 578]]
disclosed through the 130th payment should reflect premium payments. If,
under the legal obligation, the creditor will apply the amount escrowed
to the two final insurance payments, payments disclosed through the
128th payment should reflect premium payments. The escrow amount
reflected on the disclosure should include mortgage insurance premiums
even if they are not escrowed and even if there is no escrow account
established for the transaction.
Paragraph 18(s)(3)(i)(D)
1. Total monthly payment. For amortizing loans, each column should
add up to a total estimated payment. The total estimated payment amount
should be labeled. If periodic payments are not due monthly, the
creditor should use the appropriate term such as ``quarterly'' or
``annually.''
18(s)(3)(ii) Interest-Only Payments
1. Interest-only loans that are also negative amortization loans.
The rules in Sec. 1026.18(s)(3)(ii) for disclosing payments on
interest-only loans apply only if the loan is not also a negative
amortization loan. If the loan is a negative amortization loan, even if
it also has an interest-only feature, payments are disclosed under the
rules in Sec. 1026.18(s)(4).
Paragraph 18(s)(3)(ii)(C)
1. Escrows. See the commentary under Sec. 1026.18(s)(3)(i)(C) for
guidance on escrows for purposes of Sec. 1026.18(s)(3)(ii)(C).
18(s)(4) Payments for Negative Amortization Loans
1. Table. Section 1026.18(s)(1) provides that tables shall include
only the information required in Sec. 1026.18(s)(2)-(4). Thus, a table
for a negative amortization loan must contain no more than two
horizontal rows of payments and no more than five vertical columns of
interest rates.
2. Payment amounts. The payment amounts disclosed under Sec.
1026.18(s)(4) are the minimum or fully amortizing periodic payments, as
applicable, corresponding to the interest rates disclosed under Sec.
1026.18(s)(2)(ii). The corresponding periodic payment is the regular
payment for each such interest rate, without regard to any final payment
that differs from the rest because of the rounding of periodic payments
to account for payment amounts including fractions of cents.
Paragraph 18(s)(4)(i)
1. Minimum required payments. In one row of the table, the creditor
must disclose the minimum required payment in each column of the table,
corresponding to each interest rate or adjustment required in Sec.
1026.18(s)(2)(ii). The payments in this row must be calculated based on
an assumption that the consumer makes the minimum required payment for
as long as possible under the terms of the legal obligation. This row
should be identified as the minimum payment option, and the statement
required by Sec. 1026.18(s)(4)(i)(C) should be included in the heading
for the row.
Paragraph 18(s)(4)(iii)
1. Fully amortizing payments. In one row of the table, the creditor
must disclose the fully amortizing payment in each column of the table,
corresponding to each interest rate required in Sec. 1026.18(s)(2)(ii).
The creditor must assume, for purposes of calculating the amounts in
this row that the consumer makes only fully amortizing payments starting
with the first scheduled payment.
18(s)(5) Balloon Payments
1. General. A balloon payment is one that is more than two times the
regular periodic payment. In a reverse mortgage transaction, the single
payment is not considered a balloon payment. A balloon payment must be
disclosed outside and below the table, unless the balloon payment
coincides with an interest rate adjustment or a scheduled payment
increase. In those cases, the balloon payment must be disclosed in the
table.
18(s)(6) Special Disclosures for Loans With Negative Amortization
1. Escrows. See the commentary under Sec. 1026.18(s)(3)(i)(C) for
guidance on escrows for purposes of Sec. 1026.18(s)(6). Under that
guidance, because mortgage insurance payments and functionally
equivalent fees decline over a loan's term, the payment amounts shown in
the table should reflect the mortgage insurance payment and functionally
equivalent fees that will be applicable at the time each disclosed
periodic payment will be in effect. Accordingly, the disclosed mortgage
insurance payment or functionally equivalent fee will be zero if it
corresponds to a periodic payment that will occur after the creditor
will be legally required to terminate mortgage insurance or any
functional equivalent. On the other hand, because only one escrow amount
is disclosed under Sec. 1026.18(s)(6) for negative amortization loans
and escrows that are not itemized in the payment amounts, the single
escrow amount disclosed should reflect the mortgage insurance amount or
any functionally equivalent fee that will be collected at the outset of
the loan's term, even though that amount will decline in the future and
ultimately will be discontinued pursuant to the terms of the mortgage
insurance policy.
18(s)(7) Definitions
1. Negative amortization loans. Under Sec. 1026.18(s)(7)(v), a
negative amortization loan is one that requires only a minimum periodic
[[Page 579]]
payment that covers only a portion of the accrued interest, resulting in
negative amortization. For such a loan, Sec. 1026.18(s)(4)(iii)
requires creditors to disclose the fully amortizing periodic payment for
each interest rate disclosed under Sec. 1026.18(s)(2)(ii), in addition
to the minimum periodic payment, regardless of whether the legal
obligation explicitly recites that the consumer may make the fully
amortizing payment. Some loan types that result in negative amortization
do not meet the definition of negative amortization loan for purposes of
Sec. 1026.18(s). These include, for example, loans requiring level,
amortizing payments but having a payment schedule containing gaps during
which interest accrues and is added to the principal balance before
regular, amortizing payments begin (or resume). For example, ``seasonal
income'' loans may provide for amortizing payments during nine months of
the year and no payments for the other three months; the required
minimum payments (when made) are amortizing payments, thus such loans
are not negative amortization loans under Sec. 1026.18(s)(7)(v). An
adjustable-rate loan that has fixed periodic payments that do not adjust
when the interest rate adjusts also would not be disclosed as a negative
amortization loan under Sec. 1026.18(s). For example, assume the
initial rate is 4%, for which the fully amortizing payment is $1500.
Under the terms of the legal obligation, the consumer will make $1500
monthly payments even if the interest rate increases, and the additional
interest is capitalized. The possibility (but not certainty) of negative
amortization occurring after consummation does not make this transaction
a negative amortization loan for purposes of Sec. 1026.18(s). Loans
that do not meet the definition of negative amortization loan, even if
they may have negative amortization, are amortizing loans and are
disclosed under Sec. Sec. 1026.18(s)(2)(i) and 1026.18(s)(3).
Section 1026.19--Certain Mortgage and Variable-Rate Transactions
19(a)(1)(i) Time of Disclosures
1. Coverage. Section 1026.19(a) requires early disclosure of credit
terms in reverse mortgage transactions subject to Sec. 1026.33 that are
secured by a consumer's dwelling that are also subject to the Real
Estate Settlement Procedures Act (RESPA) and its implementing Regulation
X. To be covered by Sec. 1026.19(a), a transaction must be a Federally
related mortgage loan under RESPA. ``Federally related mortgage loan''
is defined under RESPA (12 U.S.C. 2602) and Regulation X (12 CFR
1024.2(b)), and is subject to any interpretations by the Bureau.
2. Timing and use of estimates. The disclosures required by Sec.
1026.19(a)(1)(i) must be delivered or mailed not later than three
business days after the creditor receives the consumer's written
application. The general definition of ``business day'' in Sec.
1026.2(a)(6)--a day on which the creditor's offices are open to the
public for substantially all of its business functions--is used for
purposes of Sec. 1026.19(a)(1)(i). See comment 2(a)(6)-1. This general
definition is consistent with the definition of ``business day'' in
Regulation X--a day on which the creditor's offices are open to the
public for carrying on substantially all of its business functions. See
12 CFR 1024.2. Accordingly, the three-business-day period in Sec.
1026.19(a)(1)(i) for making early disclosures coincides with the time
period within which creditors subject to RESPA must provide good faith
estimates of settlement costs. If the creditor does not know the precise
credit terms, the creditor must base the disclosures on the best
information reasonably available and indicate that the disclosures are
estimates under Sec. 1026.17(c)(2). If many of the disclosures are
estimates, the creditor may include a statement to that effect (such as
``all numerical disclosures except the late-payment disclosure are
estimates'') instead of separately labeling each estimate. In the
alternative, the creditor may label as an estimate only the items
primarily affected by unknown information. (See the commentary to Sec.
1026.17(c)(2).) The creditor may provide explanatory material concerning
the estimates and the contingencies that may affect the actual terms, in
accordance with the commentary to Sec. 1026.17(a)(1).
3. Written application. Creditors may rely on RESPA and Regulation X
(including any interpretations issued by the Bureau) in deciding whether
a ``written application'' has been received. In general, Regulation X
defines ``application'' to mean the submission of a borrower's financial
information in anticipation of a credit decision relating to a federally
related mortgage loan. See 12 CFR 1024.2(b). An application is received
when it reaches the creditor in any of the ways applications are
normally transmitted--by mail, hand delivery, or through an intermediary
agent or broker. (See comment 19(b)-3 for guidance in determining
whether or not the transaction involves an intermediary agent or
broker.) If an application reaches the creditor through an intermediary
agent or broker, the application is received when it reaches the
creditor, rather than when it reaches the agent or broker.
4. Denied or withdrawn applications. The creditor may determine
within the three-business-day period that the application will not or
cannot be approved on the terms requested, as, for example, when a
consumer applies for a type or amount of credit that the creditor does
not offer, or the consumer's application cannot be approved for some
other reason. In that case, or if the consumer withdraws the application
within the three-business-day period, the creditor need not
[[Page 580]]
make the disclosures under this section. If the creditor fails to
provide early disclosures and the transaction is later consummated on
the original terms, the creditor will be in violation of this provision.
If, however, the consumer amends the application because of the
creditor's unwillingness to approve it on its original terms, no
violation occurs for not providing disclosures based on the original
terms. But the amended application is a new application subject to Sec.
1026.19(a)(1)(i).
5. Itemization of amount financed. In many mortgage transactions,
the itemization of the amount financed required by Sec. 1026.18(c) will
contain items, such as origination fees or points, that also must be
disclosed as part of the good faith estimates of settlement costs
required under RESPA. Creditors furnishing the RESPA good faith
estimates need not give consumers any itemization of the amount
financed.
19(a)(1)(ii) Imposition of Fees
1. Timing of fees. The consumer must receive the disclosures
required by this section before paying or incurring any fee imposed by a
creditor or other person in connection with the consumer's application
for a mortgage transaction that is subject to Sec. 1026.19(a)(1)(i),
except as provided in Sec. 1026.19(a)(1)(iii). If the creditor delivers
the disclosures to the consumer in person, a fee may be imposed anytime
after delivery. If the creditor places the disclosures in the mail, the
creditor may impose a fee after the consumer receives the disclosures
or, in all cases, after midnight on the third business day following
mailing of the disclosures. For purposes of Sec. 1026.19(a)(1)(ii), the
term ``business day'' means all calendar days except Sundays and legal
public holidays referred to in Sec. 1026.2(a)(6). See comment 2(a)(6)-
2. For example, assuming that there are no intervening legal public
holidays, a creditor that receives the consumer's written application on
Monday and mails the early mortgage loan disclosure on Tuesday may
impose a fee on the consumer after midnight on Friday.
2. Fees restricted. A creditor or other person may not impose any
fee, such as for an appraisal, underwriting, or broker services, until
the consumer has received the disclosures required by Sec.
1026.19(a)(1)(i). The only exception to the fee restriction allows the
creditor or other person to impose a bona fide and reasonable fee for
obtaining a consumer's credit history, such as for a credit report(s).
3. Collection of fees. A creditor complies with Sec.
1026.19(a)(1)(ii) if:
i. The creditor receives a consumer's written application directly
from the consumer and does not collect any fee, other than a fee for
obtaining a consumer's credit history, until the consumer receives the
early mortgage loan disclosure.
ii. A third party submits a consumer's written application to a
creditor and both the creditor and third party do not collect any fee,
other than a fee for obtaining a consumer's credit history, until the
consumer receives the early mortgage loan disclosure from the creditor.
iii. A third party submits a consumer's written application to a
second creditor following a prior creditor's denial of an application
made by the same consumer (or following the consumer's withdrawal), and,
if a fee already has been assessed, the new creditor or third party does
not collect or impose any additional fee until the consumer receives an
early mortgage loan disclosure from the new creditor.
19(a)(1)(iii) Exception to Fee Restriction
1. Requirements. A creditor or other person may impose a fee before
the consumer receives the required disclosures if it is for obtaining
the consumer's credit history, such as by purchasing a credit report(s)
on the consumer. The fee also must be bona fide and reasonable in
amount. For example, a creditor may collect a fee for obtaining a credit
report(s) if it is in the creditor's ordinary course of business to
obtain a credit report(s). If the criteria in Sec. 1026.19(a)(1)(iii)
are met, the creditor may describe or refer to this fee, for example, as
an ``application fee.''
19(a)(2) Waiting Periods for Early Disclosures and Corrected Disclosures
1. Business day definition. For purposes of Sec. 1026.19(a)(2),
``business day'' means all calendar days except Sundays and the legal
public holidays referred to in Sec. 1026.2(a)(6). See comment 2(a)(6)-
2.
2. Consummation after both waiting periods expire. Consummation may
not occur until both the seven-business-day waiting period and the
three-business-day waiting period have expired. For example, assume a
creditor delivers the early disclosures to the consumer in person or
places them in the mail on Monday, June 1, and the creditor then
delivers corrected disclosures in person to the consumer on Wednesday,
June 3. Although Saturday, June 6 is the third business day after the
consumer received the corrected disclosures, consummation may not occur
before Tuesday, June 9, the seventh business day following delivery or
mailing of the early disclosures.
Paragraph 19(a)(2)(i)
1. Timing. The disclosures required by Sec. 1026.19(a)(1)(i) must
be delivered or placed in the mail no later than the seventh business
day before consummation. The seven-business-day waiting period begins
when the creditor delivers the early disclosures or
[[Page 581]]
places them in the mail, not when the consumer receives or is deemed to
have received the early disclosures. For example, if a creditor delivers
the early disclosures to the consumer in person or places them in the
mail on Monday, June 1, consummation may occur on or after Tuesday, June
9, the seventh business day following delivery or mailing of the early
disclosures.
Paragraph 19(a)(2)(ii)
1. Conditions for redisclosure. If, at the time of consummation, the
annual percentage rate disclosed is accurate under Sec. 1026.22, the
creditor does not have to make corrected disclosures under Sec.
1026.19(a)(2). If, on the other hand, the annual percentage rate
disclosed is not accurate under Sec. 1026.22, the creditor must make
corrected disclosures of all changed terms (including the annual
percentage rate) so that the consumer receives them not later than the
third business day before consummation. For example, assume consummation
is scheduled for Thursday, June 11 and the early disclosures for a
regular mortgage transaction disclose an annual percentage rate of
7.00%:
i. On Thursday, June 11, the annual percentage rate will be 7.10%.
The creditor is not required to make corrected disclosures under Sec.
1026.19(a)(2).
ii. On Thursday, June 11, the annual percentage rate will be 7.15%.
The creditor must make corrected disclosures so that the consumer
receives them on or before Monday, June 8.
2. Content of new disclosures. If redisclosure is required, the
creditor may provide a complete set of new disclosures, or may
redisclose only the changed terms. If the creditor chooses to provide a
complete set of new disclosures, the creditor may but need not highlight
the new terms, provided that the disclosures comply with the format
requirements of Sec. 1026.17(a). If the creditor chooses to disclose
only the new terms, all the new terms must be disclosed. For example, a
different annual percentage rate will almost always produce a different
finance charge, and often a new schedule of payments; all of these
changes would have to be disclosed. If, in addition, unrelated terms
such as the amount financed or prepayment penalty vary from those
originally disclosed, the accurate terms must be disclosed. However, no
new disclosures are required if the only inaccuracies involve estimates
other than the annual percentage rate, and no variable rate feature has
been added. For a discussion of the requirement to redisclose when a
variable-rate feature is added, see comment 17(f)-2. For a discussion of
redisclosure requirements in general, see the commentary on Sec.
1026.17(f).
3. Timing. When redisclosures are necessary because the annual
percentage rate has become inaccurate, they must be received by the
consumer no later than the third business day before consummation. (For
redisclosures triggered by other events, the creditor must provide
corrected disclosures before consummation. See Sec. 1026.17(f).) If the
creditor delivers the corrected disclosures to the consumer in person,
consummation may occur any time on the third business day following
delivery. If the creditor provides the corrected disclosures by mail,
the consumer is considered to have received them three business days
after they are placed in the mail, for purposes of determining when the
three-business-day waiting period required under Sec. 1026.19(a)(2)(ii)
begins. Creditors that use electronic mail or a courier other than the
postal service may also follow this approach.
4. Basis for annual percentage rate comparison. To determine whether
a creditor must make corrected disclosures under Sec. 1026.22, a
creditor compares (a) what the annual percentage rate will be at
consummation to (b) the annual percentage rate stated in the most recent
disclosures the creditor made to the consumer. For example, assume
consummation for a regular mortgage transaction is scheduled for
Thursday, June 11, the early disclosures provided in May stated an
annual percentage rate of 7.00%, and corrected disclosures received by
the consumer on Friday, June 5 stated an annual percentage rate of
7.15%:
i. On Thursday, June 11, the annual percentage rate will be 7.25%,
which exceeds the most recently disclosed annual percentage rate by less
than the applicable tolerance. The creditor is not required to make
additional corrected disclosures or wait an additional three business
days under Sec. 1026.19(a)(2).
ii. On Thursday, June 11, the annual percentage rate will be 7.30%,
which exceeds the most recently disclosed annual percentage rate by more
than the applicable tolerance. The creditor must make corrected
disclosures such that the consumer receives them on or before Monday,
June 8.
19(a)(3) Consumer's Waiver of Waiting Period Before Consummation
1. Modification or waiver. A consumer may modify or waive the right
to a waiting period required by Sec. 1026.19(a)(2) only after the
creditor makes the disclosures required by Sec. 1026.18. The consumer
must have a bona fide personal financial emergency that necessitates
consummating the credit transaction before the end of the waiting
period. Whether these conditions are met is determined by the facts
surrounding individual situations. The imminent sale of the consumer's
home at foreclosure, where the foreclosure sale will proceed unless loan
proceeds are made available to the consumer during the waiting period,
is one example of a bona fide personal financial emergency. Each
consumer who is
[[Page 582]]
primarily liable on the legal obligation must sign the written statement
for the waiver to be effective.
2. Examples of waivers within the seven-business-day waiting period.
Assume the early disclosures are delivered to the consumer in person on
Monday, June 1, and at that time the consumer executes a waiver of the
seven-business-day waiting period (which would end on Tuesday, June 9)
so that the loan can be consummated on Friday, June 5:
i. If the annual percentage rate on the early disclosures is
inaccurate under Sec. 1026.22, the creditor must provide a corrected
disclosure to the consumer before consummation, which triggers the
three-business-day waiting period in Sec. 1026.19(a)(2)(ii). After the
consumer receives the corrected disclosure, the consumer must execute a
waiver of the three-business-day waiting period in order to consummate
the transaction on Friday, June 5.
ii. If a change occurs that does not render the annual percentage
rate on the early disclosures inaccurate under Sec. 1026.22, the
creditor must disclose the changed terms before consummation, consistent
with Sec. 1026.17(f). Disclosure of the changed terms does not trigger
an additional waiting period, and the transaction may be consummated on
June 5 without the consumer giving the creditor an additional
modification or waiver.
3. Examples of waivers made after the seven-business-day waiting
period. Assume the early disclosures are delivered to the consumer in
person on Monday, June 1 and consummation is scheduled for Friday, June
19. On Wednesday, June 17, a change to the annual percentage rate
occurs:
i. If the annual percentage rate on the early disclosures is
inaccurate under Sec. 1026.22, the creditor must provide a corrected
disclosure to the consumer before consummation, which triggers the
three-business-day waiting period in Sec. 1026.19(a)(2). After the
consumer receives the corrected disclosure, the consumer must execute a
waiver of the three-business-day waiting period in order to consummate
the transaction on Friday, June 19.
ii. If a change occurs that does not render the annual percentage
rate on the early disclosures inaccurate under Sec. 1026.22, the
creditor must disclose the changed terms before consummation, consistent
with Sec. 1026.17(f). Disclosure of the changed terms does not trigger
an additional waiting period, and the transaction may be consummated on
Friday, June 19 without the consumer giving the creditor an additional
modification or waiver.
19(a)(4) Notice
1. Inclusion in other disclosures. The notice required by Sec.
1026.19(a)(4) must be grouped together with the disclosures required by
Sec. 1026.19(a)(1)(i) or Sec. 1026.19(a)(2). See comment 17(a)(1)-2
for a discussion of the rules for segregating disclosures. In other
cases, the notice set forth in Sec. 1026.19(a)(4) may be disclosed
together with or separately from the disclosures required under Sec.
1026.18. See comment 17(a)(1)-5.xvi.
19(b) Certain Variable-Rate Transactions
1. Coverage. Section 1026.19(b) applies to all closed-end variable-
rate transactions that are secured by the consumer's principal dwelling
and have a term greater than one year. The requirements of this section
apply not only to transactions financing the initial acquisition of the
consumer's principal dwelling, but also to any other closed-end
variable-rate transaction secured by the principal dwelling. Closed-end
variable-rate transactions that are not secured by the principal
dwelling, or are secured by the principal dwelling but have a term of
one year or less, are subject to the disclosure requirements of Sec.
1026.18(f)(1) rather than those of Sec. 1026.19(b). (Furthermore,
``shared-equity'' or ``shared-appreciation'' mortgages are subject to
the disclosure requirements of Sec. 1026.18(f)(1) rather than those of
Sec. 1026.19(b) regardless of the general coverage of those sections.)
For purposes of this section, the term of a variable-rate demand loan is
determined in accordance with the commentary to Sec. 1026.17(c)(5). In
determining whether a construction loan that may be permanently financed
by the same creditor is covered under this section, the creditor may
treat the construction and the permanent phases as separate transactions
with distinct terms to maturity or as a single combined transaction. For
purposes of the disclosures required under Sec. 1026.18, the creditor
may nevertheless treat the two phases either as separate transactions or
as a single combined transaction in accordance with Sec. 1026.17(c)(6).
Finally, in any assumption of a variable-rate transaction secured by the
consumer's principal dwelling with a term greater than one year,
disclosures need not be provided under Sec. Sec. 1026.18(f)(2)(ii) or
1026.19(b).
2. Timing. A creditor must give the disclosures required under this
section at the time an application form is provided or before the
consumer pays a nonrefundable fee, whichever is earlier.
i. Intermediary agent or broker. In cases where a creditor receives
a written application through an intermediary agent or broker, however,
Sec. 1026.19(b) provides a substitute timing rule requiring the
creditor to deliver the disclosures or place them in the mail not later
than three business days after the creditor receives the consumer's
written application. (See comment 19(b)-3 for guidance in determining
whether or not the transaction involves an intermediary agent or
broker.) This three-day rule also applies
[[Page 583]]
where the creditor takes an application over the telephone.
ii. Telephone request. In cases where the consumer merely requests
an application over the telephone, the creditor must include the early
disclosures required under this section with the application that is
sent to the consumer.
iii. Mail solicitations. In cases where the creditor solicits
applications through the mail, the creditor must also send the
disclosures required under this section if an application form is
included with the solicitation.
iv. Conversion. In cases where an open-end credit account will
convert to a closed-end transaction subject to this section under a
written agreement with the consumer, disclosures under this section may
be given at the time of conversion. (See the commentary to Sec.
1026.20(a) for information on the timing requirements for Sec.
1026.19(b)(2) disclosures when a variable-rate feature is later added to
a transaction.)
v. Form of electronic disclosures provided on or with electronic
applications. Creditors must provide the disclosures required by this
section (including the brochure) on or with a blank application that is
made available to the consumer in electronic form, such as on a
creditor's Internet Web site. Creditors have flexibility in satisfying
this requirement. There are various methods creditors could use to
satisfy the requirement. Whatever method is used, a creditor need not
confirm that the consumer has read the disclosures. Methods include, but
are not limited to, the following examples:
A. The disclosures could automatically appear on the screen when the
application appears;
B. The disclosures could be located on the same web page as the
application (whether or not they appear on the initial screen), if the
application contains a clear and conspicuous reference to the location
of the disclosures and indicates that the disclosures contain rate, fee,
and other cost information, as applicable;
C. Creditors could provide a link to the electronic disclosures on
or with the application as long as consumers cannot bypass the
disclosures before submitting the application. The link would take the
consumer to the disclosures, but the consumer need not be required to
scroll completely through the disclosures; or
D. The disclosures could be located on the same web page as the
application without necessarily appearing on the initial screen,
immediately preceding the button that the consumer will click to submit
the application.
3. Intermediary agent or broker. i. In certain transactions
involving an ``intermediary agent or broker,'' a creditor may delay
providing disclosures. A creditor may not delay providing disclosures in
transactions involving either a legal agent (as determined by applicable
law) or any other third party that is not an ``intermediary agent or
broker.'' In determining whether or not a transaction involves an
``intermediary agent or broker'' the following factors should be
considered:
A. The number of applications submitted by the broker to the
creditor as compared to the total number of applications received by the
creditor. The greater the percentage of total loan applications
submitted by the broker in any given period of time, the less likely it
is that the broker would be considered an ``intermediary agent or
broker'' of the creditor during the next period.
B. The number of applications submitted by the broker to the
creditor as compared to the total number of applications received by the
broker. (This factor is applicable only if the creditor has such
information.) The greater the percentage of total loan applications
received by the broker that is submitted to a creditor in any given
period of time, the less likely it is that the broker would be
considered an ``intermediary agent or broker'' of the creditor during
the next period.
C. The amount of work (such as document preparation) the creditor
expects to be done by the broker on an application based on the
creditor's prior dealings with the broker and on the creditor's
requirements for accepting applications, taking into consideration the
customary practice of brokers in a particular area. The more work that
the creditor expects the broker to do on an application, in excess of
what is usually expected of a broker in that area, the less likely it is
that the broker would be considered an ``intermediary agent or broker''
of the creditor.
ii. An example of an ``intermediary agent or broker'' is a broker
who, customarily within a brief period of time after receiving an
application, inquires about the credit terms of several creditors with
whom the broker does business and submits the application to one of
them. The broker is responsible for only a small percentage of the
applications received by that creditor. During the time the broker has
the application, it might request a credit report and an appraisal (or
even prepare an entire loan package if customary in that particular
area).
4. Other variable-rate regulations. Transactions in which the
creditor is required to comply with and has complied with the disclosure
requirements of the variable-rate regulations of other Federal agencies
are exempt from the requirements of Sec. 1026.19(b), by virtue of Sec.
1026.19(d). The exception is also available to creditors that are
required by State law to comply with the Federal variable-rate
regulations noted above. Creditors using this exception should comply
with the timing requirements of those regulations
[[Page 584]]
rather than the timing requirements of Regulation Z in making the
variable-rate disclosures.
5. Examples of variable-rate transactions. i. The following
transactions, if they have a term greater than one year and are secured
by the consumer's principal dwelling, constitute variable-rate
transactions subject to the disclosure requirements of Sec. 1026.19(b).
A. Renewable balloon-payment instruments where the creditor is both
unconditionally obligated to renew the balloon-payment loan at the
consumer's option (or is obligated to renew subject to conditions within
the consumer's control) and has the option of increasing the interest
rate at the time of renewal. (See comment 17(c)(1)-11 for a discussion
of conditions within a consumer's control in connection with renewable
balloon-payment loans.)
B. Preferred-rate loans where the terms of the legal obligation
provide that the initial underlying rate is fixed but will increase upon
the occurrence of some event, such as an employee leaving the employ of
the creditor, and the note reflects the preferred rate. The disclosures
under Sec. Sec. 1026.19(b)(1) and 1026.19(b)(2)(v), (viii), (ix), and
(xii) are not applicable to such loans.
C. ``Price-level-adjusted mortgages'' or other indexed mortgages
that have a fixed rate of interest but provide for periodic adjustments
to payments and the loan balance to reflect changes in an index
measuring prices or inflation. The disclosures under Sec. 1026.19(b)(1)
are not applicable to such loans, nor are the following provisions to
the extent they relate to the determination of the interest rate by the
addition of a margin, changes in the interest rate, or interest rate
discounts: Sec. 1026.19(b)(2)(i), (iii), (iv), (v), (vi), (vii),
(viii), and (ix). (See comments 20(c)(1)(ii)-3.ii, 20(d)(1)(ii)-2.ii,
and 30-1 regarding the inapplicability of variable-rate adjustment
notices and interest rate limitations to price-level-adjusted or similar
mortgages.)
ii. Graduated-payment mortgages and step-rate transactions without a
variable-rate feature are not considered variable-rate transactions.
Paragraph 19(b)(1)
1. Substitute. Creditors who wish to use publications other than the
Consumer Handbook on Adjustable Rate Mortgages, available on the
Bureau's Web site, must make a good faith determination that their
brochures are suitable substitutes to the Consumer Handbook. A
substitute is suitable if it is, at a minimum, comparable to the
Consumer Handbook in substance and comprehensiveness. Creditors are
permitted to provide more detailed information than is contained in the
Consumer Handbook.
2. Applicability. The Consumer Handbook need not be given for
variable-rate transactions subject to this section in which the
underlying interest rate is fixed. (See comment 19(b)-5 for an example
of a variable-rate transaction where the underlying interest rate is
fixed.)
Paragraph 19(b)(2)
1. Disclosure for each variable-rate program. A creditor must
provide disclosures to the consumer that fully describe each of the
creditor's variable-rate loan programs in which the consumer expresses
an interest. If a program is made available only to certain customers of
an institution, a creditor need not provide disclosures for that program
to other consumers who express a general interest in a creditor's ARM
programs. Disclosures must be given at the time an application form is
provided or before the consumer pays a nonrefundable fee, whichever is
earlier. If program disclosures cannot be provided because a consumer
expresses an interest in individually negotiating loan terms that are
not generally offered, disclosures reflecting those terms may be
provided as soon as reasonably possible after the terms have been
decided upon, but not later than the time a non-refundable fee is paid.
If a consumer who has received program disclosures subsequently
expresses an interest in other available variable-rate programs subject
to 1026.19(b)(2), or the creditor and consumer decide on a program for
which the consumer has not received disclosures, the creditor must
provide appropriate disclosures as soon as reasonably possible. The
creditor, of course, is permitted to give the consumer information about
additional programs subject to Sec. 1026.19(b) initially.
2. Variable-rate loan program defined. i. Generally, if the
identification, the presence or absence, or the exact value of a loan
feature must be disclosed under this section, variable-rate loans that
differ as to such features constitute separate loan programs. For
example, separate loan programs would exist based on differences in any
of the following loan features:
A. The index or other formula used to calculate interest rate
adjustments.
B. The rules relating to changes in the index value, interest rate,
payments, and loan balance.
C. The presence or absence of, and the amount of, rate or payment
caps.
D. The presence of a demand feature.
E. The possibility of negative amortization.
F. The possibility of interest rate carryover.
G. The frequency of interest rate and payment adjustments.
H. The presence of a discount feature.
I. In addition, if a loan feature must be taken into account in
preparing the disclosures required by Sec. 1026.19(b)(2)(viii),
variable-rate loans that differ as to that feature
[[Page 585]]
constitute separate programs under Sec. 1026.19(b)(2).
ii. If, however, a representative value may be given for a loan
feature or the feature need not be disclosed under Sec. 1026.19(b)(2),
variable-rate loans that differ as to such features do not constitute
separate loan programs. For example, separate programs would not exist
based on differences in the following loan features:
A. The amount of a discount.
B. The amount of a margin.
3. Form of program disclosures. A creditor may provide separate
program disclosure forms for each ARM program it offers or a single
disclosure form that describes multiple programs. A disclosure form may
consist of more than one page. For example, a creditor may attach a
separate page containing the historical payment example for a particular
program. A disclosure form describing more than one program need not
repeat information applicable to each program that is described. For
example, a form describing multiple programs may disclose the
information applicable to all of the programs in one place with the
various program features (such as options permitting conversion to a
fixed rate) disclosed separately. The form, however, must state if any
program feature that is described is available only in conjunction with
certain other program features. Both the separate and multiple program
disclosures may illustrate more than one loan maturity or payment
amortization--for example, by including multiple payment and loan
balance columns in the historical payment example. Disclosures may be
inserted or printed in the Consumer Handbook (or a suitable substitute)
as long as they are identified as the creditor's loan program
disclosures.
4. As applicable. The disclosures required by this section need only
be made as applicable. Any disclosure not relevant to a particular
transaction may be eliminated. For example, if the transaction does not
contain a demand feature, the disclosure required under Sec.
1026.19(b)(2)(x) need not be given. As used in this section, payment
refers only to a payment based on the interest rate, loan balance and
loan term, and does not refer to payment of other elements such as
mortgage insurance premiums.
5. Revisions. A creditor must revise the disclosures required under
this section once a year as soon as reasonably possible after the new
index value becomes available. Revisions to the disclosures also are
required when the loan program changes.
Paragraph 19(b)(2)(i)
1. Change in interest rate, payment, or term. A creditor must
disclose the fact that the terms of the legal obligation permit the
creditor, after consummation of the transaction, to increase (or
decrease) the interest rate, payment, or term of the loan initially
disclosed to the consumer. For example, the disclosures for a variable-
rate program in which the interest rate and payment (but not loan term)
can change might read, ``Your interest rate and payment can change
yearly.'' In transactions where the term of the loan may change due to
rate fluctuations, the creditor must state that fact.
Paragraph 19(b)(2)(ii)
1. Identification of index or formula. If a creditor ties interest
rate changes to a particular index, this fact must be disclosed, along
with a source of information about the index. For example, if a creditor
uses the weekly average yield on U.S. Treasury Securities adjusted to a
constant maturity as its index, the disclosure might read, ``Your index
is the weekly average yield on U.S. Treasury Securities adjusted to a
constant maturity of one year published weekly in the Wall Street
Journal.'' If no particular index is used, the creditor must briefly
describe the formula used to calculate interest rate changes.
2. Changes at creditor's discretion. If interest rate changes are at
the creditor's discretion, this fact must be disclosed. If an index is
internally defined, such as by a creditor's prime rate, the creditor
should either briefly describe that index or state that interest rate
changes are at the creditor's discretion.
Paragraph 19(b)(2)(iii)
1. Determination of interest rate and payment. This provision
requires an explanation of how the creditor will determine the
consumer's interest rate and payment. In cases where a creditor bases
its interest rate on a specific index and adjusts the index through the
addition of a margin, for example, the disclosure might read, ``Your
interest rate is based on the index plus a margin, and your payment will
be based on the interest rate, loan balance, and remaining loan term.''
In transactions where paying the periodic payments will not fully
amortize the outstanding balance at the end of the loan term and where
the final payment will equal the periodic payment plus the remaining
unpaid balance, the creditor must disclose this fact. For example, the
disclosure might read, ``Your periodic payments will not fully amortize
your loan and you will be required to make a single payment of the
periodic payment plus the remaining unpaid balance at the end of the
loan term.'' The creditor, however, need not reflect any irregular final
payment in the historical example or in the disclosure of the initial
and maximum rates and payments. If applicable, the creditor should also
disclose that the rate and payment will be rounded.
[[Page 586]]
Paragraph 19(b)(2)(iv)
1. Current margin value and interest rate. Because the disclosures
can be prepared in advance, the interest rate and margin may be several
months old when the disclosures are delivered. A statement, therefore,
is required alerting consumers to the fact that they should inquire
about the current margin value applied to the index and the current
interest rate. For example, the disclosure might state, ``Ask us for our
current interest rate and margin.''
Paragraph 19(b)(2)(v)
1. Discounted and premium interest rate. In some variable-rate
transactions, creditors may set an initial interest rate that is not
determined by the index or formula used to make later interest rate
adjustments. Typically, this initial rate charged to consumers is lower
than the rate would be if it were calculated using the index or formula.
However, in some cases the initial rate may be higher. If the initial
interest rate will be a discount or a premium rate, creditors must alert
the consumer to this fact. For example, if a creditor discounted a
consumer's initial rate, the disclosure might state, ``Your initial
interest rate is not based on the index used to make later
adjustments.'' (See the commentary to Sec. 1026.17(c)(1) for a further
discussion of discounted and premium variable-rate transactions.) In
addition, the disclosure must suggest that consumers inquire about the
amount that the program is currently discounted. For example, the
disclosure might state, ``Ask us for the amount our adjustable rate
mortgages are currently discounted.'' In a transaction with a consumer
buydown or with a third-party buydown that will be incorporated in the
legal obligation, the creditor should disclose the program as a
discounted variable-rate transaction, but need not disclose additional
information regarding the buydown in its program disclosures. (See the
commentary to Sec. 1026.19(b)(2)(viii) for a discussion of how to
reflect the discount or premium in the historical example or the maximum
rate and payment disclosure).
Paragraph 19(b)(2)(vi)
1. Frequency. The frequency of interest rate and payment adjustments
must be disclosed. If interest rate changes will be imposed more
frequently or at different intervals than payment changes, a creditor
must disclose the frequency and timing of both types of changes. For
example, in a variable-rate transaction where interest rate changes are
made monthly, but payment changes occur on an annual basis, this fact
must be disclosed. In certain ARM transactions, the interval between
loan closing and the initial adjustment is not known and may be
different from the regular interval for adjustments. In such cases, the
creditor may disclose the initial adjustment period as a range of the
minimum and maximum amount of time from consummation or closing. For
example, the creditor might state: ``The first adjustment to your
interest rate and payment will occur no sooner than 6 months and no
later than 18 months after closing. Subsequent adjustments may occur
once each year after the first adjustment.'' (See comments
19(b)(2)(viii)(A)-7 and 19(b)(2)(viii)(B)-4 for guidance on other
disclosures when this alternative disclosure rule is used.)
Paragraph 19(b)(2)(vii)
1. Rate and payment caps. The creditor must disclose limits on
changes (increases or decreases) in the interest rate or payment. If an
initial discount is not taken into account in applying overall or
periodic rate limitations, that fact must be disclosed. If separate
overall or periodic limitations apply to interest rate increases
resulting from other events, such as the exercise of a fixed-rate
conversion option or leaving the creditor's employ, those limitations
must also be stated. Limitations do not include legal limits in the
nature of usury or rate ceilings under state or Federal statutes or
regulations. (See Sec. 1026.30 for the rule requiring that a maximum
interest rate be included in certain variable-rate transactions.) The
creditor need not disclose each periodic or overall rate limitation that
is currently available. As an alternative, the creditor may disclose the
range of the lowest and highest periodic and overall rate limitations
that may be applicable to the creditor's ARM transactions. For example,
the creditor might state: ``The limitation on increases to your interest
rate at each adjustment will be set at an amount in the following range:
Between 1 and 2 percentage points at each adjustment. The limitation on
increases to your interest rate over the term of the loan will be set at
an amount in the following range: Between 4 and 7 percentage points
above the initial interest rate.'' A creditor using this alternative
rule must include a statement in its program disclosures suggesting that
the consumer ask about the overall rate limitations currently offered
for the creditor's ARM programs. (See comments 19(b)(2)(viii)(A)-6 and
19(b)(2)(viii)(B)-3 for an explanation of the additional requirements
for a creditor using this alternative rule for disclosure of periodic
and overall rate limitations.)
2. Negative amortization and interest rate carryover. A creditor
must disclose, where applicable, the possibility of negative
amortization. For example, the disclosure might state, ``If any of your
payments is not sufficient to cover the interest due, the difference
will be added to your loan amount.'' Loans
[[Page 587]]
that provide for more than one way to trigger negative amortization are
separate variable-rate programs requiring separate disclosures. (See the
commentary to Sec. 1026.19(b)(2) for a discussion on the definition of
a variable-rate loan program and the format for disclosure.) If a
consumer is given the option to cap monthly payments that may result in
negative amortization, the creditor must fully disclose the rules
relating to the option, including the effects of exercising the option
(such as negative amortization will occur and the principal loan balance
will increase); however, the disclosure in Sec. 1026.19(b)(2)(viii)
need not be provided.
3. Conversion option. If a loan program permits consumers to convert
their variable-rate loans to fixed-rate loans, the creditor must
disclose that the interest rate may increase if the consumer converts
the loan to a fixed-rate loan. The creditor must also disclose the rules
relating to the conversion feature, such as the period during which the
loan may be converted, that fees may be charged at conversion, and how
the fixed rate will be determined. The creditor should identify any
index or other measure or formula used to determine the fixed rate and
state any margin to be added. In disclosing the period during which the
loan may be converted and the margin, the creditor may use information
applicable to the conversion feature during the six months preceding
preparation of the disclosures and state that the information is
representative of conversion features recently offered by the creditor.
The information may be used until the program disclosures are otherwise
revised. Although the rules relating to the conversion option must be
disclosed, the effect of exercising the option should not be reflected
elsewhere in the disclosures, such as in the historical example or in
the calculation of the initial and maximum interest rate and payments.
4. Preferred-rate loans. Section 1026.19(b) applies to preferred-
rate loans, where the rate will increase upon the occurrence of some
event, such as an employee leaving the creditor's employ, whether or not
the underlying rate is fixed or variable. In these transactions, the
creditor must disclose the event that would allow the creditor to
increase the rate such as that the rate may increase if the employee
leaves the creditor's employ. The creditor must also disclose the rules
relating to termination of the preferred rate, such as that fees may be
charged when the rate is changed and how the new rate will be
determined.
Paragraph 19(b)(2)(viii)
1. Historical example and initial and maximum interest rates and
payments. A creditor may disclose both the historical example and the
initial and maximum interest rates and payments.
Paragraph 19(b)(2)(viii)(A)
1. Index movement. This section requires a creditor to provide an
historical example, based on a $10,000 loan amount originating in 1977,
showing how interest rate changes implemented according to the terms of
the loan program would have affected payments and the loan balance at
the end of each year during a 15-year period. (In all cases, the
creditor need only calculate the payments and loan balance for the term
of the loan. For example, in a five-year loan, a creditor would show the
payments and loan balance for the five-year term, from 1977 to 1981,
with a zero loan balance reflected for 1981. For the remaining ten
years, 1982-1991, the creditor need only show the remaining index
values, margin and interest rate and must continue to reflect all
significant loan program terms such as rate limitations affecting them.)
Pursuant to this section, the creditor must provide a history of index
values for the preceding 15 years. Initially, the disclosures would give
the index values from 1977 to the present. Each year thereafter, the
revised program disclosures should include an additional year's index
value until 15 years of values are shown. If the values for an index
have not been available for 15 years, a creditor need only go back as
far as the values are available in giving a history and payment example.
In all cases, only one index value per year need be shown. Thus, in
transactions where interest rate adjustments are implemented more
frequently than once per year, a creditor may assume that the interest
rate and payment resulting from the index value chosen will stay in
effect for the entire year for purposes of calculating the loan balance
as of the end of the year and for reflecting other loan program terms.
In cases where interest rate changes are at the creditor's discretion
(see the commentary to Sec. 1026.19(b)(2)(ii)), the creditor must
provide a history of the rates imposed for the preceding 15 years,
beginning with the rates in 1977. In giving this history, the creditor
need only go back as far as the creditor's rates can reasonably be
determined.
2. Selection of index values. The historical example must reflect
the method by which index values are determined under the program. If a
creditor uses an average of index values or any other index formula, the
history given should reflect those values. The creditor should select
one date or, when an average of single values is used as an index, one
period and should base the example on index values measured as of that
same date or period for each year shown in the history. A date or period
at any time during the year may be selected, but the same date or period
must be used for each year in the historical example. For example, a
creditor could use values for the first business day in July or
[[Page 588]]
for the first week ending in July for each of the 15 years shown in the
example.
3. Selection of margin. For purposes of the disclosure required
under Sec. 1026.19(b)(2)(viii)(A), a creditor may select a
representative margin that has been used during the six months preceding
preparation of the disclosures, and should disclose that the margin is
one that the creditor has used recently. The margin selected may be used
until a creditor revises the disclosure form.
4. Amount of discount or premium. For purposes of the disclosure
required under Sec. 1026.19(b)(2)(viii)(A), a creditor may select a
discount or premium (amount and term) that has been used during the six
months preceding preparation of the disclosures, and should disclose
that the discount or premium is one that the creditor has used recently.
The discount or premium should be reflected in the historical example
for as long as the discount or premium is in effect. A creditor may
assume that a discount that would have been in effect for any part of a
year was in effect for the full year for purposes of reflecting it in
the historical example. For example, a 3-month discount may be treated
as being in effect for the entire first year of the example; a 15-month
discount may be treated as being in effect for the first two years of
the example. In illustrating the effect of the discount or premium,
creditors should adjust the value of the interest rate in the historical
example, and should not adjust the margin or index values. For example,
if during the six months preceding preparation of the disclosures the
fully indexed rate would have been 10% but the first year's rate under
the program was 8%, the creditor would discount the first interest rate
in the historical example by 2 percentage points.
5. Term of the loan. In calculating the payments and loan balances
in the historical example, a creditor need not base the disclosures on
each term to maturity or payment amortization that it offers. Instead,
disclosures for ARMs may be based upon terms to maturity or payment
amortizations of 5, 15 and 30 years, as follows: ARMs with terms or
amortizations from over 1 year to 10 years may be based on a 5-year term
or amortization; ARMs with terms or amortizations from over 10 years to
20 years may be based on a 15-year term or amortization; and ARMs with
terms or amortizations over 20 years may be based on a 30-year term or
amortization. Thus, disclosures for ARMs offered with any term from over
1 year to 40 years may be based solely on terms of 5, 15 and 30 years.
Of course, a creditor may always base the disclosures on the actual
terms or amortizations offered. If the creditor bases the disclosures on
5-, 15- or 30-year terms or payment amortization as provided above, the
term or payment amortization used in making the disclosure must be
stated.
6. Rate caps. A creditor using the alternative rule described in
comment 19(b)(2)(vii)-1 for disclosure of rate limitations must base the
historical example upon the highest periodic and overall rate
limitations disclosed under Sec. 1026.19(b)(2)(vii). In addition, the
creditor must state the limitations used in the historical example. (See
comment 19(b)(2)(viii)(B)-3 for an explanation of the use of the highest
rate limitation in other disclosures.)
7. Frequency of adjustments. In certain transactions, creditors may
use the alternative rule described in comment 19(b)(2)(vi)-1 for
disclosure of the frequency of rate and payment adjustments. In such
cases, the creditor may assume for purposes of the historical example
that the first adjustment occurred at the end of the first full year in
which the adjustment could occur. For example, in an ARM in which the
first adjustment may occur between 6 and 18 months after closing and
annually thereafter, the creditor may assume that the first adjustment
occurred at the end of the first year in the historical example. (See
comment 19(b)(2)(viii)(B)-4 for an explanation of how to compute the
maximum interest rate and payment when the initial adjustment period is
not known.)
Paragraph 19(b)(2)(viii)(B)
1. Initial and maximum interest rates and payments. The disclosure
form must state the initial and maximum interest rates and payments for
a $10,000 loan originated at an initial interest rate (index value plus
margin adjusted by the amount of any discount or premium) in effect as
of an identified month and year for the loan program disclosure. (See
comment 19(b)(2)-5 on revisions to the loan program disclosure.) In
calculating the maximum payment under this paragraph, a creditor should
assume that the interest rate increases as rapidly as possible under the
loan program, and the maximum payment disclosed should reflect the
amortization of the loan during this period. Thus, in a loan with 2
percentage point annual (and 5 percentage point overall) interest rate
limitations or ``caps,'' the maximum interest rate would be 5 percentage
points higher than the initial interest rate disclosed. Moreover, the
loan would not reach the maximum interest rate until the fourth year
because of the 2 percentage point annual rate limitations, and the
maximum payment disclosed would reflect the amortization of the loan
during this period. If the loan program includes a discounted or premium
initial interest rate, the initial interest rate should be adjusted by
the amount of the discount or premium.
2. Term of the loan. In calculating the initial and maximum
payments, the creditor need not base the disclosures on each term to
maturity or payment amortization offered
[[Page 589]]
under the program. Instead, the creditor may follow the rules set out in
comment 19(b)(2)(viii)(A)-5. If a historical example is provided under
Sec. 1026.19(b)(2)(viii)(A), the terms to maturity or payment
amortization used in the historical example must be used in calculating
the initial and maximum payment. In addition, creditors must state the
term or payment amortization used in making the disclosures under this
section.
3. Rate caps. A creditor using the alternative rule for disclosure
of interest rate limitations described in comment 19(b)(2)(vii)-1 must
calculate the maximum interest rate and payment based upon the highest
periodic and overall rate limitations disclosed under Sec.
1026.19(b)(2)(vii). In addition, the creditor must state the rate
limitations used in calculating the maximum interest rate and payment.
(See comment 19(b)(2)(viii)(A)-6 for an explanation of the use of the
highest rate limitation in other disclosures.)
4. Frequency of adjustments. In certain transactions, a creditor may
use the alternative rule for disclosure of the frequency of rate and
payment adjustments described in comment 19(b)(2)(vi)-1. In such cases,
the creditor must base the calculations of the initial and maximum rates
and payments upon the earliest possible first adjustment disclosed under
Sec. 1026.19(b)(2)(vi). (See comment 19(b)(2)(viii)(A)-7 for an
explanation of how to disclose the historical example when the initial
adjustment period is not known.)
5. Periodic payment statement. The statement that the periodic
payment may increase or decrease substantially may be satisfied by the
disclosure in paragraph 19(b)(2)(vi) if it states for example, ``your
monthly payment can increase or decrease substantially based on annual
changes in the interest rate.''
Paragraph 19(b)(2)(ix)
1. Calculation of payments. A creditor is required to include a
statement on the disclosure form that explains how a consumer may
calculate his or her actual monthly payments for a loan amount other
than $10,000. The example should be based upon the most recent payment
shown in the historical example or upon the initial interest rate
reflected in the maximum rate and payment disclosure. In transactions in
which the latest payment shown in the historical example is not for the
latest year of index values shown (such as in a five-year loan), a
creditor may provide additional examples based on the initial and
maximum payments disclosed under Sec. 1026.19(b)(2)(viii)(B). The
creditor, however, is not required to calculate the consumer's payments.
(See the model clauses in appendix H-4(C).)
Paragraph 19(b)(2)(x)
1. Demand feature. If a variable-rate loan subject to Sec.
1026.19(b) requirements contains a demand feature as discussed in the
commentary to Sec. 1026.18(i), this fact must be disclosed. (Pursuant
to Sec. 1026.18(i), creditors would also disclose the demand feature in
the standard disclosures given later.)
Paragraph 19(b)(2)(xi)
1. Adjustment notices. A creditor must disclose to the consumer the
type of information that will be contained in subsequent notices of
adjustments and when such notices will be provided. (See the commentary
to Sec. 1026.20(c) and (d) regarding notices of adjustments.) For
example, the disclosure provided pursuant to Sec. 1026.20(d) might
state, ``You will be notified at least 210, but no more than 240, days
before the first payment at the adjusted level is due after the initial
interest rate adjustment of the loan. This notice will contain
information about the adjustment, including the interest rate, payment
amount, and loan balance.'' The disclosure provided pursuant to Sec.
1026.20(c) might state, ``You will be notified at least 60, but no more
than 120, days before the first payment at the adjusted level is due
after any interest rate adjustment resulting in a corresponding payment
change. This notice will contain information about the adjustment,
including the interest rate, payment amount, and loan balance.''
Paragraph 19(b)(2)(xii)
1. Multiple loan programs. A creditor that offers multiple variable-
rate loan programs is required to have disclosures for each variable-
rate loan program subject to Sec. 1026.19(b)(2). Unless disclosures for
all of its variable-rate programs are provided initially, the creditor
must inform the consumer that other closed-end variable-rate programs
exist, and that disclosure forms are available for these additional loan
programs. For example, the disclosure form might state, ``Information on
other adjustable rate mortgage programs is available upon request.''
19(c) Electronic Disclosures
1. Form of disclosures. Whether disclosures must be in electronic
form depends upon the following:
i. If a consumer accesses an ARM loan application electronically
(other than as described under ii. below), such as online at a home
computer, the creditor must provide the disclosures in electronic form
(such as with the application form on its Web site) in order to meet the
requirement to provide disclosures in a timely manner on or with the
application. If the creditor instead mailed paper disclosures to the
consumer, this requirement would not be met.
[[Page 590]]
ii. In contrast, if a consumer is physically present in the
creditor's office, and accesses an ARM loan application electronically,
such as via a terminal or kiosk (or if the consumer uses a terminal or
kiosk located on the premises of an affiliate or third party that has
arranged with the creditor to provide applications to consumers), the
creditor may provide disclosures in either electronic or paper form,
provided the creditor complies with the timing, delivery, and
retainability requirements of the regulation.
19(e) Mortgage loans--Early disclosures.
1. Affiliate. The term ``affiliate,'' as used in Sec. 1026.19(e),
has the same meaning as in Sec. 1026.32(b)(5).
19(e)(1) Provision of disclosures.
19(e)(1)(i) Creditor.
1. Requirements. Section 1026.19(e)(1)(i) requires early disclosure
of credit terms in closed-end credit transactions that are secured by
real property or a cooperative unit, other than reverse mortgages. These
disclosures must be provided in good faith. Except as otherwise provided
in Sec. 1026.19(e), a disclosure is in good faith if it is consistent
with Sec. 1026.17(c)(2)(i). Section 1026.17(c)(2)(i) provides that if
any information necessary for an accurate disclosure is unknown to the
creditor, the creditor shall make the disclosure based on the best
information reasonably available to the creditor at the time the
disclosure is provided to the consumer. The ``reasonably available''
standard requires that the creditor, acting in good faith, exercise due
diligence in obtaining information. See comment 17(c)(2)(i)-1 for an
explanation of the standard set forth in Sec. 1026.17(c)(2)(i). See
comment 17(c)(2)(i)-2 for labeling disclosures required under Sec.
1026.19(e) that are estimates.
2. Cooperative units. Section 1026.19(e)(1)(i) requires early
disclosure of credit terms in closed-end credit transactions, other than
reverse mortgages, that are secured by real property or a cooperative
unit, regardless of whether a cooperative unit is treated as real
property under State or other applicable law.
19(e)(1)(ii) Mortgage broker.
1. Mortgage broker responsibilities. Section 1026.19(e)(1)(ii)(A)
provides that if a mortgage broker receives a consumer's application,
either the creditor or the mortgage broker must provide the consumer
with the disclosures required under Sec. 1026.19(e)(1)(i) in accordance
with Sec. 1026.19(e)(1)(iii). Section 1026.19(e)(1)(ii)(A) also
provides that if the mortgage broker provides the required disclosures,
it must comply with all relevant requirements of Sec. 1026.19(e). This
means that ``mortgage broker'' should be read in the place of
``creditor'' for all provisions of Sec. 1026.19(e), except to the
extent that such a reading would create responsibility for mortgage
brokers under Sec. 1026.19(f). To illustrate, comment 19(e)(4)(ii)-1
states that creditors comply with the requirements of Sec.
1026.19(e)(4) if the revised disclosures are reflected in the
disclosures required by Sec. 1026.19(f)(1)(i). ``Mortgage broker''
could not be read in place of ``creditor'' in comment 19(e)(4)(ii)-1
because mortgage brokers are not responsible for the disclosures
required under Sec. 1026.19(f)(1)(i). In addition, Sec.
1026.19(e)(1)(ii)(A) provides that the creditor must ensure that
disclosures provided by mortgage brokers comply with all requirements of
Sec. 1026.19(e), and that disclosures provided by mortgage brokers that
do comply with all such requirements satisfy the creditor's obligation
under Sec. 1026.19(e). The term ``mortgage broker,'' as used in Sec.
1026.19(e)(1)(ii), has the same meaning as in Sec. 1026.36(a)(2). See
also comment 36(a)-2. Section 1026.19(e)(1)(ii)(B) provides that if a
mortgage broker provides any disclosure required under Sec. 1026.19(e),
the mortgage broker must also comply with the requirements of Sec.
1026.25(c). For example, if a mortgage broker provides the disclosures
required under Sec. 1026.19(e)(1)(i), it must maintain records for
three years, in compliance with Sec. 1026.25(c)(1)(i).
2. Creditor responsibilities. If a mortgage broker issues any
disclosure required under Sec. 1026.19(e) in the creditor's place, the
creditor remains responsible under Sec. 1026.19(e) for ensuring that
the requirements of Sec. 1026.19(e) have been satisfied. For example,
if a mortgage broker receives a consumer's application and provides the
consumer with the disclosures required under Sec. 1026.19(e)(1)(i), the
creditor does not satisfy the requirements of Sec. 1026.19(e)(1)(i) if
it provides duplicative disclosures to the consumer. In the same
example, even if the broker provides an erroneous disclosure, the
creditor is responsible and may not issue a revised disclosure
correcting the error. The creditor is expected to maintain communication
with the broker to ensure that the broker is acting in place of the
creditor.
19(e)(1)(iii) Timing.
1. Timing and use of estimates. The disclosures required by Sec.
1026.19(e)(1)(i) must be delivered not later than three business days
after the creditor receives the consumer's application. For example, if
an application is received on Monday, the creditor satisfies this
requirement by either hand delivering the disclosures on or before
Thursday, or placing them in the mail on or before Thursday, assuming
each weekday is a business day. For purposes of Sec.
1026.19(e)(1)(iii)(A), the term ``business day'' means a day on which
the creditor's offices are open to the public for carrying out
substantially all of its business functions. See Sec. 1026.2(a)(6).
2. Waiting period. The seven-business-day waiting period begins when
the creditor delivers the disclosures or places them in the mail, not
when the consumer receives or is considered to have received the
disclosures.
[[Page 591]]
For example, if a creditor delivers the early disclosures to the
consumer in person or places them in the mail on Monday, June 1,
consummation may occur on or after Tuesday, June 9, the seventh business
day following delivery or mailing of the early disclosures, because, for
the purposes of Sec. 1026.19(e)(1)(iii)(B), Saturday is a business day,
pursuant to Sec. 1026.2(a)(6).
3. Denied or withdrawn applications. The creditor may determine
within the three-business-day period that the application will not or
cannot be approved on the terms requested, such as when a consumer's
credit score is lower than the minimum score required for the terms the
consumer applied for, or the consumer applies for a type or amount of
credit that the creditor does not offer. In that case, or if the
consumer withdraws the application within the three-business-day period
by, for instance, informing the creditor that he intends to take out a
loan from another creditor within the three-business-day period, the
creditor need not make the disclosures required under Sec.
1026.19(e)(1)(i). If the creditor fails to provide early disclosures and
the transaction is later consummated on the terms originally applied
for, then the creditor does not comply with Sec. 1026.19(e)(1)(i). If,
however, the consumer amends the application because of the creditor's
unwillingness to approve it on the terms originally applied for, no
violation occurs for not providing disclosures based on those original
terms. But the amended application is a new application subject to Sec.
1026.19(e)(1)(i).
4. Timeshares. If consummation occurs within three business days
after a creditor's receipt of an application for a transaction that is
secured by a consumer's interest in a timeshare plan described in 11
U.S.C. 101(53D), a creditor complies with Sec. 1026.19(e)(1)(iii) by
providing the disclosures required under Sec. 1026.19(f)(1)(i) instead
of the disclosures required under Sec. 1026.19(e)(1)(i).
5. Multiple-advance construction loans. Section 1026.19(e)(1)(iii)
generally requires a creditor to deliver the Loan Estimate or place it
in the mail not later than the third business day after the creditor
receives the consumer's application and not later than the seventh
business day before consummation. When a multiple-advance loan to
finance the construction of a dwelling may be permanently financed by
the same creditor, Sec. 1026.17(c)(6)(ii) and comment 17(c)(6)-2 permit
creditors to treat the construction phase and the permanent phase as
either one transaction, with one combined disclosure, or more than one
transaction, with a separate disclosure for each transaction. For
construction--permanent transactions disclosed as one transaction, the
creditor complies with Sec. 1026.19(e)(1)(iii) by delivering or placing
in the mail one combined disclosure required by Sec. 1026.19(e)(1)(i)
not later than the third business day after the creditor receives an
application and not later than the seventh business day before
consummation. For construction--permanent transactions disclosed as a
separate construction phase and a separate permanent phase for which an
application for both the construction and permanent financing has been
received, the creditor complies with Sec. 1026.19(e)(1)(iii) by
delivering or placing in the mail the separate disclosures required by
Sec. 1026.19(e)(1)(i) for both the construction financing and the
permanent financing not later than the third business day after the
creditor receives the application and not later than the seventh
business day before consummation. A creditor may also provide a separate
disclosure required by Sec. 1026.19(e)(1)(i) for the permanent phase
before receiving an application for permanent financing at any time not
later than the seventh business day before consummation. To illustrate:
i. Assume a creditor receives a consumer's application for
construction financing only on Monday, June 1. The creditor must deliver
or place in the mail the disclosures required by Sec. 1026.19(e)(1)(i)
for only the construction financing no later than Thursday, June 4, the
third business day after the creditor received the consumer's
application, and not later than the seventh business day before
consummation of the transaction.
ii. Assume the creditor receives a consumer's application for both
construction and permanent financing on Monday, June 1. The creditor
must deliver or place in the mail the disclosures required by Sec.
1026.19(e)(1)(i) for both the construction and permanent financing,
disclosed as either one transaction or separate transactions, no later
than Thursday, June 4, the third business day after the creditor
received the consumer's application, and not later than the seventh
business day before consummation of the transaction.
iii. Assume the creditor receives a consumer's application for
construction financing only on Monday, June 1. Assume further that the
creditor receives the consumer's application for permanent financing on
Monday, June 8. The creditor must deliver or place in the mail the
disclosures required by Sec. 1026.19(e)(1)(i) for the construction
financing no later than Thursday, June 4, the third business day after
the creditor received the consumer's application for the construction
financing only, and not later than the seventh business day before
consummation of the construction transaction. The creditor must deliver
or place in the mail the disclosures required by Sec. 1026.19(e)(1)(i)
for the permanent financing no later than Thursday, June 11, the third
business day after the creditor received the consumer's application for
the permanent financing, and not later
[[Page 592]]
than the seventh business day before consummation of the permanent
financing transaction.
iv. Assume the same facts as in comment 19(e)(1)(iii)-5.ii, under
which the creditor provides the disclosures required by Sec.
1026.19(e)(1)(i) for both construction financing and permanent
financing. If the creditor generally conducts separate closings for the
construction financing and the permanent financing or expects that the
construction financing and the permanent financing may have separate
closings, providing separate Loan Estimates for the construction
financing and for the permanent financing allows the creditor to deliver
separate Closing Disclosures for the separate phases. For example,
assume further that the consumer has requested permanent financing after
receiving separate Loan Estimates for the construction financing and for
the permanent financing, that consummation of the construction financing
is scheduled for July 1, and that consummation of the permanent
financing is scheduled on or about June 1 of the following year. The
creditor may provide the construction financing Closing Disclosure at
least three business days before consummation of that transaction on
July 1 and delay providing the permanent financing Closing Disclosure
until three business days before consummation of that transaction on or
about June 1 of the following year, in accordance with Sec.
1026.19(f)(1)(ii). The creditor may also issue a revised Loan Estimate
for the permanent financing at any time prior to 60 days before
consummation, following the procedures under Sec. 1026.19(e)(3)(iv)(F).
19(e)(1)(iv) Receipt of early disclosures.
1. Mail delivery. Section 1026.19(e)(1)(iv) provides that, if any
disclosures required under Sec. 1026.19(e)(1)(i) are not provided to
the consumer in person, the consumer is considered to have received the
disclosures three business days after they are delivered or placed in
the mail. The creditor may, alternatively, rely on evidence that the
consumer received the disclosures earlier than three business days. For
example, if the creditor sends the disclosures via overnight mail on
Monday, and the consumer signs for receipt of the overnight delivery on
Tuesday, the creditor could demonstrate that the disclosures were
received on Tuesday.
2. Electronic delivery. The three-business-day period provided in
Sec. 1026.19(e)(1)(iv) applies to methods of electronic delivery, such
as email. For example, if a creditor sends the disclosures required
under Sec. 1026.19(e) via email on Monday, pursuant to Sec.
1026.19(e)(1)(iv) the consumer is considered to have received the
disclosures on Thursday, three business days later. The creditor may,
alternatively, rely on evidence that the consumer received the emailed
disclosures earlier. For example, if the creditor emails the disclosures
at 1 p.m. on Tuesday, the consumer emails the creditor with an
acknowledgement of receipt of the disclosures at 5 p.m. on the same day,
the creditor could demonstrate that the disclosures were received on the
same day. Creditors using electronic delivery methods, such as email,
must also comply with Sec. 1026.37(o)(3)(iii), which provides that the
disclosures in Sec. 1026.37 may be provided to the consumer in
electronic form, subject to compliance with the consumer consent and
other applicable provisions of the E-Sign Act. For example, if a
creditor delivers the disclosures required under Sec. 1026.19(e)(1)(i)
to a consumer via email, but the creditor did not obtain the consumer's
consent to receive disclosures via email prior to delivering the
disclosures, then the creditor does not comply with Sec.
1026.37(o)(3)(iii), and the creditor does not comply with Sec.
1026.19(e)(1)(i), assuming the disclosures were not provided in a
different manner in accordance with the timing requirements of Sec.
1026.19(e)(1)(iii).
19(e)(1)(v) Consumer's waiver of waiting period before consummation.
1. Modification or waiver. A consumer may modify or waive the right
to the seven-business-day waiting period required by Sec.
1026.19(e)(1)(iii) only after the creditor makes the disclosures
required by Sec. 1026.19(e)(1)(i). The consumer must have a bona fide
personal financial emergency that necessitates consummating the credit
transaction before the end of the waiting period. Whether these
conditions are met is determined by the circumstances of the individual
situation. The imminent sale of the consumer's home at foreclosure,
where the foreclosure sale will proceed unless loan proceeds are made
available to the consumer during the waiting period, is one example of a
bona fide personal financial emergency. Each consumer who is primarily
liable on the legal obligation must sign the written statement for the
waiver to be effective.
2. Examples of waivers within the seven-business-day waiting period.
If the early disclosures are delivered to the consumer in person on
Monday, June 1, the seven-business-day waiting period ends on Tuesday,
June 9. If on Monday, June 1, the consumer executes a waiver of the
seven-business-day waiting period, the final disclosures required by
Sec. 1026.19(f)(1)(i) could then be delivered three business days
before consummation, as required by Sec. 1026.19(f)(1)(ii), on Tuesday,
June 2, and the loan could be consummated on Friday, June 5. See Sec.
1026.19(f)(1)(iv) for waiver of the three-business-day waiting period
under Sec. 1026.19(f).
19(e)(1)(vi) Shopping for settlement service providers.
1. Permission to shop. Section 1026.19(e)(1)(vi)(A) permits
creditors to impose reasonable requirements regarding the qualifications
of the provider. For example, the creditor may require that a settlement
[[Page 593]]
agent chosen by the consumer must be appropriately licensed in the
relevant jurisdiction. In contrast, a creditor does not permit a
consumer to shop for purposes of Sec. 1026.19(e)(1)(vi) if the creditor
requires the consumer to choose a provider from a list provided by the
creditor. Whether the creditor permits the consumer to shop consistent
with Sec. 1026.19(e)(1)(vi)(A) is determined based on all the relevant
facts and circumstances. The requirements of Sec. 1026.19(e)(1)(vi)(B)
and (C) do not apply if the creditor does not permit the consumer to
shop consistent with Sec. 1026.19(e)(1)(vi)(A).
2. Disclosure of services for which the consumer may shop. If a
creditor permits a consumer to shop for a settlement service, Sec.
1026.19(e)(1)(vi)(B) requires the creditor to identify settlement
services required by the creditor for which the consumer is permitted to
shop in the disclosures provided pursuant to Sec. 1026.19(e)(1)(i). See
Sec. 1026.37(f)(3) regarding the content and format for disclosure of
services required by the creditor for which the consumer is permitted to
shop.
3. Written list of providers. If the creditor permits the consumer
to shop for a settlement service it requires, Sec. 1026.19(e)(1)(vi)(C)
requires the creditor to provide the consumer with a written list
identifying at least one available provider of that service and stating
that the consumer may choose a different provider for that service. The
settlement service providers identified on the written list required by
Sec. 1026.19(e)(1)(vi)(C) must correspond to the required settlement
services for which the consumer may shop, disclosed under Sec.
1026.37(f)(3). See form H-27 in appendix H to this part for a model
list. Creditors using form H-27 in appendix H properly are deemed to be
in compliance with Sec. 1026.19(e)(1)(vi)(C). Creditors may make
changes in the format or content of form H-27 in appendix H and be
deemed to be in compliance with Sec. 1026.19(e)(1)(vi)(C), so long as
the changes do not affect the substance, clarity, or meaningful sequence
of the form. An acceptable change to form H-27 in appendix H includes,
for example, deleting the column for estimated fee amounts.
4. Identification of available providers. Section
1026.19(e)(1)(vi)(C) provides that the creditor must identify settlement
service providers, that are available to the consumer, for the
settlement services that are required by the creditor for which a
consumer is permitted to shop. A creditor does not comply with the
identification requirement in Sec. 1026.19(e)(1)(vi)(C) unless it
provides sufficient information to allow the consumer to contact the
provider, such as the name under which the provider does business and
the provider's address and telephone number. Similarly, a creditor does
not comply with the availability requirement in Sec.
1026.19(e)(1)(vi)(C) if it provides a written list consisting of only
settlement service providers that are no longer in business or that do
not provide services where the consumer or property is located.
5. Statement that consumer may choose different provider. Section
1026.19(e)(1)(vi)(C) requires the creditor to include on the written
list a statement that the consumer may choose a provider that is not
included on that list. See form H-27 of appendix H to this part for a
model of such a statement.
6. Additional information on written list. The creditor may include
a statement on the written list that the listing of a settlement service
provider does not constitute an endorsement of that service provider.
The creditor may also identify on the written list providers of services
for which the consumer is not permitted to shop, provided that the
creditor clearly and conspicuously distinguishes those services from the
services for which the consumer is permitted to shop. This may be
accomplished by placing the services under different headings. For
example, if the list provided pursuant to Sec. 1026.19(e)(1)(vi)(C)
identifies providers of pest inspections and surveys, but the consumer
may select a provider, other than those identified on the list, for only
the survey, then the list must specifically inform the consumer that the
consumer is permitted to select a provider, other than a provider
identified on the list, for only the survey.
7. Relation to RESPA and Regulation X. Section 1026.19 does not
prohibit creditors from including affiliates on the written list
required under Sec. 1026.19(e)(1)(vi)(C). However, a creditor that
includes affiliates on the written list must also comply with 12 CFR
1024.15. Furthermore, the written list is a ``referral'' under 12 CFR
1024.14(f).
19(e)(2) Predisclosure activity.
19(e)(2)(i) Imposition of fees on consumer.
19(e)(2)(i)(A) Fee restriction.
1. Fees restricted. A creditor or other person may not impose any
fee, such as for an application, appraisal, or underwriting, until the
consumer has received the disclosures required by Sec. 1026.19(e)(1)(i)
and indicated an intent to proceed with the transaction. The only
exception to the fee restriction allows the creditor or other person to
impose a bona fide and reasonable fee for obtaining a consumer's credit
report, pursuant to Sec. 1026.19(e)(2)(i)(B).
2. Intent to proceed. Section 1026.19(e)(2)(i)(A) provides that a
consumer may indicate an intent to proceed with a transaction in any
manner the consumer chooses, unless a particular manner of communication
is required by the creditor. The creditor must document this
communication to satisfy the requirements of Sec. 1026.25. For example,
oral communication in person immediately upon delivery of the
disclosures required by Sec. 1026.19(e)(1)(i) is sufficiently
indicative of intent. Oral communication over
[[Page 594]]
the phone, written communication via email, or signing a pre-printed
form are also sufficiently indicative of intent if such actions occur
after receipt of the disclosures required by Sec. 1026.19(e)(1)(i).
However, a consumer's silence is not indicative of intent because it
cannot be documented to satisfy the requirements of Sec. 1026.25. For
example, a creditor or third party may not deliver the disclosures, wait
for some period of time for the consumer to respond, and then charge the
consumer a fee for an appraisal if the consumer does not respond, even
if the creditor or third party disclosed that it would do so.
3. Timing of fees. At any time prior to delivery of the disclosures
required under Sec. 1026.19(e)(1)(i), a creditor or other person may
impose a credit report fee in connection with the consumer's application
for a mortgage loan that is subject to Sec. 1026.19(e)(1)(i) as
provided in Sec. 1026.19(e)(2)(i)(B). The consumer must have received
the disclosures required under Sec. 1026.19(e)(1)(i) and indicated an
intent to proceed with the transaction described by those disclosures
before paying or incurring any other fee imposed by a creditor or other
person in connection with the consumer's application for a mortgage loan
that is subject to Sec. 1026.19(e)(1)(i).
4. Collection of fees. A creditor or other person complies with
Sec. 1026.19(e)(2)(i)(A) if:
i. A creditor receives a consumer's application directly from the
consumer and does not impose any fee, other than a bona fide and
reasonable fee for obtaining a consumer's credit report, until the
consumer receives the disclosures required under Sec. 1026.19(e)(1)(i)
and indicates an intent to proceed with the transaction described by
those disclosures.
ii. A third party submits a consumer's application to a creditor and
neither the creditor nor the third party imposes any fee, other than a
bona fide and reasonable fee for obtaining a consumer's credit report,
until the consumer receives the disclosures required under Sec.
1026.19(e)(1)(i) and indicates an intent to proceed with the transaction
described by those disclosures.
iii. A third party submits a consumer's application to a creditor
following a different creditor's denial of the consumer's application
(or following the consumer's withdrawal of that application), and if a
fee already has been assessed for obtaining the credit report, the new
creditor or third party does not impose any additional fee until the
consumer receives disclosures required under Sec. 1026.19(e)(1)(i) from
the new creditor and indicates an intent to proceed with the transaction
described by those disclosures.
5. Fees ``imposed by'' a person. For purposes of Sec. 1026.19(e), a
fee is ``imposed by'' a person if the person requires a consumer to
provide a method for payment, even if the payment is not made at that
time. For example, if a creditor or other person requires the consumer
to provide a $500 check to pay for a ``processing fee'' before the
consumer receives the disclosures required by Sec. 1026.19(e)(1)(i),
the creditor or other person does not comply with Sec.
1026.19(e)(2)(i), even if the creditor or other person had stated that
the check will not be cashed until after the disclosures required by
Sec. 1026.19(e)(1)(i) are received by the consumer and waited until
after the consumer subsequently indicated an intent to proceed to cash
the check. Similarly, a creditor or other person does not comply with
the requirements of Sec. 1026.19(e)(2)(i) if the creditor or other
person requires the consumer to provide a credit card number before the
consumer receives the disclosures required by Sec. 1026.19(e)(1)(i),
even if the creditor or other person had promised not to charge the
consumer's credit card for the $500 processing fee until after the
disclosures required by Sec. 1026.19(e)(1)(i) are received by the
consumer and waited until after the consumer subsequently indicated an
intent to proceed. In contrast, a creditor or other person complies with
Sec. 1026.19(e)(2)(i) if the creditor or other person requires the
consumer to provide a credit card number before the consumer receives
the disclosures required by Sec. 1026.19(e)(1)(i) and subsequently
indicates an intent to proceed, provided that the consumer's
authorization is only to pay for the cost of a credit report and the
creditor or other person only charges a reasonable and bona fide fee for
obtaining the consumer's credit report. This is so even if the creditor
or other person maintains the consumer's credit card number on file and
charges the consumer a $500 processing fee after the disclosures
required by Sec. 1026.19(e)(1)(i) are received and the consumer
subsequently indicates an intent to proceed with the transaction
described by those disclosures, provided that the creditor or other
person requested and received a separate authorization from the consumer
for the processing fee after the consumer received the disclosures
required by Sec. 1026.19(e)(1)(i) and indicated an intent to proceed
with the transaction described by those disclosures.
19(e)(2)(i)(B) Exception to fee restriction.
1. Requirements. A creditor or other person may impose a fee before
the consumer receives the required disclosures if the fee is for
purchasing a credit report on the consumer. The fee also must be bona
fide and reasonable in amount. For example, a creditor or other person
may collect a fee for obtaining a credit report if it is in the
creditor's or other person's ordinary course of business to obtain a
credit report. If the criteria in Sec. 1026.19(e)(2)(i)(B) are met, the
creditor or other person must accurately describe or refer to this fee,
for example, as a ``credit report fee.''
[[Page 595]]
19(e)(2)(ii) Written information provided to consumer.
1. Requirements. Section 1026.19(e)(2)(ii) requires the creditor or
other person to include a clear and conspicuous statement on the top of
the front of the first page of a written estimate of terms or costs
specific to the consumer if it is provided to the consumer before the
consumer receives the disclosures required by Sec. 1026.19(e)(1)(i).
For example, if the creditor provides a document showing the estimated
monthly payment for a mortgage loan, and the estimate was based on the
estimated loan amount and the consumer's estimated credit score, then
the creditor must include the statement on the document. In contrast, if
the creditor provides the consumer with a preprinted list of closing
costs common in the consumer's area, the creditor need not include the
statement. Similarly, the statement would not be required on a
preprinted list of available rates for different loan products. This
requirement does not apply to an advertisement, as defined in Sec.
1026.2(a)(2). Section 1026.19(e)(2)(ii) requires that the notice must be
in a font size that is no smaller than 12-point font, and must state:
``Your actual rate, payment, and costs could be higher. Get an official
Loan Estimate before choosing a loan.'' See form H-26 of appendix H to
this part for a model statement. Section 1026.19(e)(2)(ii) also
prohibits the creditor or other person from making these written
estimates with headings, content, and format substantially similar to
form H-24 or H-25 of appendix H to this part.
19(e)(2)(iii) Verification of information.
1. Requirements. The creditor or other person may collect from the
consumer any information that it requires prior to providing the early
disclosures before or at the same time as collecting the information
listed in Sec. 1026.2(a)(3)(ii). However, the creditor or other person
is not permitted to require, before providing the disclosures required
by Sec. 1026.19(e)(1)(i), that the consumer submit documentation to
verify the information collected from the consumer. See also Sec.
1026.2(a)(3) and the related commentary regarding the definition of
application. To illustrate:
i. A creditor may ask for the sale price and address of the
property, but the creditor may not require the consumer to provide a
purchase and sale agreement to support the information the consumer
provides orally before the creditor provides the disclosures required by
Sec. 1026.19(e)(1)(i).
ii. A mortgage broker may ask for the names, account numbers, and
balances of the consumer's checking and savings accounts, but the
mortgage broker may not require the consumer to provide bank statements,
or similar documentation, to support the information the consumer
provides orally before the mortgage broker provides the disclosures
required by Sec. 1026.19(e)(1)(i).
19(e)(3) Good faith determination for estimates of closing costs.
19(e)(3)(i) General rule.
1. Requirement. Section 1026.19(e)(3)(i) provides the general rule
that an estimated closing cost disclosed under Sec. 1026.19(e) is not
in good faith if the charge paid by or imposed on the consumer exceeds
the amount originally disclosed under Sec. 1026.19(e)(1)(i). Although
Sec. 1026.19(e)(3)(ii) and (iii) provide exceptions to the general
rule, the charges that are generally subject to Sec. 1026.19(e)(3)(i)
include, but are not limited to, the following:
i. Fees paid to the creditor.
ii. Fees paid to a mortgage broker.
iii. Fees paid to an affiliate of the creditor or a mortgage broker.
iv. Fees paid to an unaffiliated third party if the creditor did not
permit the consumer to shop for a third party service provider for a
settlement service.
v. Transfer taxes.
2. Charges ``paid by or imposed on the consumer.'' For purposes of
Sec. 1026.19(e), a charge ``paid by or imposed on the consumer'' refers
to the final amount for the charge paid by or imposed on the consumer at
consummation or settlement, whichever is later. ``Consummation'' is
defined in Sec. 1026.2(a)(13). ``Settlement'' is defined in Regulation
X, 12 CFR 1024.2(b). For example, at consummation, the consumer pays the
creditor $100 for recording fees. Settlement of the transaction
concludes five days after consummation, and the actual recording fees
are $70. The creditor refunds the consumer $30 immediately after
recording. The recording fee paid by the consumer is $70.
3. Fees ``paid to'' a person. For purposes of Sec. 1026.19(e), a
fee is not considered ``paid to'' a person if the person does not retain
the fee. For example, if a consumer pays the creditor transfer taxes and
recording fees at the real estate closing and the creditor subsequently
uses those funds to pay the county that imposed these charges, then the
transfer taxes and recording fees are not ``paid to'' the creditor for
purposes of Sec. 1026.19(e). Similarly, if a consumer pays the creditor
an appraisal fee in advance of the real estate closing and the creditor
subsequently uses those funds to pay another party for an appraisal,
then the appraisal fee is not ``paid to'' the creditor for the purposes
of Sec. 1026.19(e). A fee is also not considered ``paid to'' a person,
for purposes of Sec. 1026.19(e), if the person retains the fee as
reimbursement for an amount it has already paid to another party. If a
creditor pays for an appraisal in advance of the real estate closing and
the consumer pays the creditor an appraisal fee at the real estate
closing, then the fee is not ``paid to'' the creditor for the purposes
of Sec. 1026.19(e), even though the creditor retains the fee, because
[[Page 596]]
the payment is a reimbursement for an amount already paid.
4. Transfer taxes and recording fees. See comments 37(g)(1)-1, -2,
and -3 for a discussion of the difference between transfer taxes and
recording fees.
5. Lender credits. The disclosure of ``lender credits,'' as
identified in Sec. 1026.37(g)(6)(ii), is required by Sec.
1026.19(e)(1)(i). ``Lender credits,'' as identified in Sec.
1026.37(g)(6)(ii), represents the sum of non-specific lender credits and
specific lender credits. Non-specific lender credits are generalized
payments from the creditor to the consumer that do not pay for a
particular fee on the disclosures provided pursuant to Sec.
1026.19(e)(1). Specific lender credits are specific payments, such as a
credit, rebate, or reimbursement, from a creditor to the consumer to pay
for a specific fee. Non-specific lender credits and specific lender
credits are negative charges to the consumer. The actual total amount of
lender credits, whether specific or non-specific, provided by the
creditor that is less than the estimated ``lender credits'' identified
in Sec. 1026.37(g)(6)(ii) and disclosed pursuant to Sec. 1026.19(e) is
an increased charge to the consumer for purposes of determining good
faith under Sec. 1026.19(e)(3)(i). For example, if the creditor
discloses a $750 estimate for ``lender credits'' pursuant to Sec.
1026.19(e), but only $500 of lender credits is actually provided to the
consumer, the creditor has not complied with Sec. 1026.19(e)(3)(i)
because the actual amount of lender credits provided is less than the
estimated ``lender credits'' disclosed pursuant to Sec. 1026.19(e), and
is therefore, an increased charge to the consumer for purposes of
determining good faith under Sec. 1026.19(e)(3)(i). However, if the
creditor discloses a $750 estimate for ``lender credits'' identified in
Sec. 1026.37(g)(6)(ii) to cover the cost of a $750 appraisal fee, and
the appraisal fee subsequently increases by $150, and the creditor
increases the amount of the lender credit by $150 to pay for the
increase, the credit is not being revised in a way that violates the
requirements of Sec. 1026.19(e)(3)(i) because, although the credit
increased from the amount disclosed, the amount paid by the consumer did
not. However, if the creditor discloses a $750 estimate for ``lender
credits'' to cover the cost of a $750 appraisal fee, but subsequently
reduces the credit by $50 because the appraisal fee decreased by $50,
then the requirements of Sec. 1026.19(e)(3)(i) have been violated
because, although the amount of the appraisal fee decreased, the amount
of the lender credit decreased. See also Sec. 1026.19(e)(3)(iv)(D) and
comment 19(e)(3)(iv)(D)-1 for a discussion of lender credits in the
context of interest rate dependent charges.
6. Good faith analysis for lender credits. For purposes of
conducting the good faith analysis required under Sec. 1026.19(e)(3)(i)
for lender credits, the total amount of lender credits, whether specific
or non-specific, actually provided to the consumer is compared to the
amount of the ``lender credits'' identified in Sec. 1026.37(g)(6)(ii).
The total amount of lender credits actually provided to the consumer is
determined by aggregating the amount of the ``lender credits''
identified in Sec. 1026.38(h)(3) with the amounts paid by the creditor
that are attributable to a specific loan cost or other cost, disclosed
pursuant to Sec. 1026.38(f) and (g).
7. Use of unrounded numbers. Sections 1026.37(o)(4) and
1026.38(t)(4) require that the dollar amounts of certain charges
disclosed on the Loan Estimate and Closing Disclosure, respectively, to
be rounded to the nearest whole dollar. However, to conduct the good
faith analysis required under Sec. 1026.19(e)(3)(i) and (ii), the
creditor should use unrounded numbers to compare the actual charge paid
by or imposed on the consumer for a settlement service with the
estimated cost of the service.
19(e)(3)(ii) Limited increases permitted for certain charges.
1. Requirements. Section 1026.19(e)(3)(ii) provides that certain
estimated charges are in good faith if the sum of all such charges paid
by or imposed on the consumer does not exceed the sum of all such
charges disclosed pursuant to Sec. 1026.19(e) by more than 10 percent.
Section 1026.19(e)(3)(ii) permits this limited increase for only the
following items:
i. Fees paid to an unaffiliated third party if the creditor
permitted the consumer to shop for the third-party service, consistent
with Sec. 1026.19(e)(1)(vi)(A).
ii. Recording fees.
2. Aggregate increase limited to ten percent. Under Sec.
1026.19(e)(3)(ii)(A), whether an individual estimated charge subject to
Sec. 1026.19(e)(3)(ii) is in good faith depends on whether the sum of
all charges subject to Sec. 1026.19(e)(3)(ii) increases by more than 10
percent, regardless of whether a particular charge increases by more
than 10 percent. This is true even if an individual charge was omitted
from the estimate provided under Sec. 1026.19(e)(1)(i) and then imposed
at consummation. The following examples illustrate the determination of
good faith for charges subject to Sec. 1026.19(e)(3)(ii):
i. Assume that, in the disclosures provided under Sec.
1026.19(e)(1)(i), the creditor includes a $300 estimated fee for a
settlement agent, the settlement agent fee is included in the category
of charges subject to Sec. 1026.19(e)(3)(ii), and the sum of all
charges subject to Sec. 1026.19(e)(3)(ii) (including the settlement
agent fee) equals $1,000. In this case, the creditor does not violate
Sec. 1026.19(e)(3)(ii) if the actual settlement agent fee exceeds the
estimated settlement agent fee by more than 10 percent (i.e., the fee
exceeds $330), provided that the sum of all such actual charges does not
exceed the sum of all such estimated
[[Page 597]]
charges by more than 10 percent (i.e., the sum of all such charges does
not exceed $1,100).
ii. Assume that, in the disclosures provided under Sec.
1026.19(e)(1)(i), the sum of all estimated charges subject to Sec.
1026.19(e)(3)(ii) equals $1,000. If the creditor does not include an
estimated charge for a notary fee but a $10 notary fee is charged to the
consumer, and the notary fee is subject to Sec. 1026.19(e)(3)(ii), then
the creditor does not violate Sec. 1026.19(e)(1)(i) if the sum of all
amounts charged to the consumer subject to Sec. 1026.19(e)(3)(ii) does
not exceed $1,100, even though an individual notary fee was not included
in the estimated disclosures provided under Sec. 1026.19(e)(1)(i).
3. Services for which the consumer may, but does not, select a
settlement service provider. Good faith is determined pursuant to Sec.
1026.19(e)(3)(ii), instead of Sec. 1026.19(e)(3)(i), if the creditor
permits the consumer to shop for a settlement service provider,
consistent with Sec. 1026.19(e)(1)(vi)(A). Section 1026.19(e)(3)(ii)
provides that if the creditor requires a service in connection with the
mortgage loan transaction, and permits the consumer to shop for that
service consistent with Sec. 1026.19(e)(1)(vi), but the consumer either
does not select a settlement service provider or chooses a settlement
service provider identified by the creditor on the list, then good faith
is determined pursuant to Sec. 1026.19(e)(3)(ii), instead of Sec.
1026.19(e)(3)(i). For example, if, in the disclosures provided pursuant
to Sec. Sec. 1026.19(e)(1)(i) and 1026.37(f)(3), a creditor discloses
an estimated fee for an unaffiliated settlement agent and permits the
consumer to shop for that service, but the consumer either does not
choose a provider, or chooses a provider identified by the creditor on
the written list provided pursuant to Sec. 1026.19(e)(1)(vi)(C), then
the estimated settlement agent fee is included with the fees that may,
in aggregate, increase by no more than 10 percent for the purposes of
Sec. 1026.19(e)(3)(ii). If, however, the consumer chooses a provider
that is not on the written list, then good faith is determined according
to Sec. 1026.19(e)(3)(iii).
4. Recording fees. Section 1026.19(e)(3)(ii) provides that an
estimate of a charge for a third-party service or recording fees is in
good faith if the conditions specified in Sec. 1026.19(e)(3)(ii)(A),
(B), and (C) are satisfied. Recording fees are not charges for third-
party services because recording fees are paid to the applicable
government entity where the documents related to the mortgage
transaction are recorded, and thus, the condition specified in Sec.
1026.19(e)(3)(ii)(B) that the charge for third-party service not be paid
to an affiliate of the creditor is inapplicable for recording fees. The
condition specified in Sec. 1026.19(e)(3)(ii)(C), that the creditor
permits the consumer to shop for the third-party service, is similarly
inapplicable. Therefore, estimates of recording fees need only satisfy
the condition specified in Sec. 1026.19(e)(3)(ii)(A) to meet the
requirements of Sec. 1026.19(e)(3)(ii).
5. Calculating the aggregate amount of estimated charges. In
calculating the aggregate amount of estimated charges for purposes of
conducting the good faith analysis pursuant to Sec. 1026.19(e)(3)(ii),
the aggregate amount of estimated charges must reflect charges for
services that are actually performed. For example, assume that the
creditor included a $100 estimated fee for a pest inspection in the
disclosures provided pursuant to Sec. 1026.19(e)(1)(i), and the fee is
included in the category of charges subject to Sec. 1026.19(e)(3)(ii),
but a pest inspection was not obtained in connection with the
transaction, then for purposes of the good faith analysis required under
Sec. 1026.19(e)(3)(ii), the sum of all charges subject to Sec.
1026.19(e)(3)(ii) paid by or imposed on the consumer is compared to the
sum of all such charges disclosed pursuant to Sec. 1026.19(e), minus
the $100 estimated pest inspection fee.
6. Shopping for a third-party service. For good faith to be
determined under Sec. 1026.19(e)(3)(ii) a creditor must permit a
consumer to shop consistent with Sec. 1026.19(e)(1)(vi)(A). Section
1026.19(e)(1)(vi)(A) provides that a creditor permits a consumer to shop
for a settlement service if the creditor permits the consumer to select
the provider of that service, subject to reasonable requirements. If the
creditor permits the consumer to shop consistent with Sec.
1026.19(e)(1)(vi)(A) good faith is determined under Sec.
1026.19(e)(3)(ii), unless the settlement service provider is the
creditor or an affiliate of the creditor, in which case good faith is
determined under Sec. 1026.19(e)(3)(i). As noted in comment
19(e)(1)(vi)-1, whether the creditor permits the consumer to shop
consistent with Sec. 1026.19(e)(1)(vi)(A) is determined based on all
the relevant facts and circumstances.
19(e)(3)(iii) Variations permitted for certain charges.
1. Good faith requirement for prepaid interest, property insurance
premiums, and escrowed amounts. Estimates of prepaid interest, property
insurance premiums, and amounts placed into an escrow, impound, reserve
or similar account must be consistent with the best information
reasonably available to the creditor at the time the disclosures are
provided. Differences between the amounts of such charges disclosed
under Sec. 1026.19(e)(1)(i) and the amounts of such charges paid by or
imposed on the consumer do not constitute a lack of good faith, so long
as the original estimated charge, or lack of an estimated charge for a
particular service, was based on the best information reasonably
available to the creditor at the time the disclosure was provided. This
means that the estimate disclosed under Sec. 1026.19(e)(1)(i) was
obtained by
[[Page 598]]
the creditor through due diligence, acting in good faith. See comments
17(c)(2)(i)-1 and 19(e)(1)(i)-1. For example, if the creditor requires
homeowner's insurance but fails to include a homeowner's insurance
premium on the estimates provided pursuant to Sec. 1026.19(e)(1)(i),
then the creditor's failure to disclose does not comply with Sec.
1026.19(e)(3)(iii). However, if the creditor does not require flood
insurance and the subject property is located in an area where floods
frequently occur, but not specifically located in a zone where flood
insurance is required, failure to include flood insurance on the
original estimates provided pursuant to Sec. 1026.19(e)(1)(i) does not
constitute a lack of good faith under Sec. 1026.19(e)(3)(iii). Or, if
the creditor knows that the loan must close on the 15th of the month but
estimates prepaid interest to be paid from the 30th of that month, then
the under-disclosure does not comply with Sec. 1026.19(e)(3)(iii). If,
however, the creditor estimates consistent with the best information
reasonably available that the loan will close on the 30th of the month
and bases the estimate of prepaid interest accordingly, but the loan
actually closed on the 1st of the next month instead, the creditor
complies with Sec. 1026.19(e)(3)(iii).
2. Good faith requirement for required services chosen by the
consumer. If a service is required by the creditor, the creditor permits
the consumer to shop for that service consistent with Sec.
1026.19(e)(1)(vi)(A), the creditor provides the list required under
Sec. 1026.19(e)(1)(vi)(C), and the consumer chooses a service provider
that is not on that list to perform that service, then the actual
amounts of such fees need not be compared to the original estimates for
such fees to perform the good faith analysis required under Sec.
1026.19(e)(3)(i) or (ii). Differences between the amounts of such
charges disclosed under Sec. 1026.19(e)(1)(i) and the amounts of such
charges paid by or imposed on the consumer do not constitute a lack of
good faith, so long as the original estimated charge, or lack of an
estimated charge for a particular service, was based on the best
information reasonably available to the creditor at the time the
disclosure was provided. For example, if the consumer informs the
creditor that the consumer will choose a settlement agent not identified
by the creditor on the written list provided under Sec.
1026.19(e)(1)(vi)(C), and the creditor discloses an unreasonably low
estimated settlement agent fee of $20 when the average prices for
settlement agent fees in that area are $150, then the under-disclosure
does not comply with Sec. 1026.19(e)(3)(iii) and good faith is
determined under Sec. 1026.19(e)(3)(i). If the creditor permits the
consumer to shop consistent with Sec. 1026.19(e)(1)(vi)(A) but fails to
provide the written list required under Sec. 1026.19(e)(1)(vi)(C), good
faith is determined under Sec. 1026.19(e)(3)(ii) instead of Sec.
1026.19(e)(3)(iii) unless the settlement service provider is the
creditor or an affiliate of the creditor in which case good faith is
determined under Sec. 1026.19(e)(3)(i). As noted in comment
19(e)(1)(vi)-1 whether the creditor permits the consumer to shop
consistent with Sec. 1026.19(e)(1)(vi)(A) is determined based on all
the relevant facts and circumstances.
3. Good faith requirement for property taxes or non-required
services chosen by the consumer. Differences between the amounts of
estimated charges for property taxes or services not required by the
creditor disclosed under Sec. 1026.19(e)(1)(i) and the amounts of such
charges paid by or imposed on the consumer do not constitute a lack of
good faith, so long as the original estimated charge, or lack of an
estimated charge for a particular service, was based on the best
information reasonably available to the creditor at the time the
disclosure was provided. For example, if the consumer informs the
creditor that the consumer will obtain a type of inspection not required
by the creditor, the creditor must include the charge for that item in
the disclosures provided under Sec. 1026.19(e)(1)(i), but the actual
amount of the inspection fee need not be compared to the original
estimate for the inspection fee to perform the good faith analysis
required by Sec. 1026.19(e)(3)(iii). The original estimated charge, or
lack of an estimated charge for a particular service, complies with
Sec. 1026.19(e)(3)(iii) if it is made based on the best information
reasonably available to the creditor at the time that the estimate was
provided. But, for example, if the subject property is located in a
jurisdiction where consumers are customarily represented at closing by
their own attorney, even though it is not a requirement, and the
creditor fails to include a fee for the consumer's attorney, or includes
an unreasonably low estimate for such fee, on the original estimates
provided under Sec. 1026.19(e)(1)(i), then the creditor's failure to
disclose, or unreasonably low estimation, does not comply with Sec.
1026.19(e)(3)(iii). Similarly, the amount disclosed for property taxes
must be based on the best information reasonably available to the
creditor at the time the disclosure was provided. For example, if the
creditor fails to include a charge for property taxes, or includes an
unreasonably low estimate for that charge, on the original estimates
provided under Sec. 1026.19(e)(1)(i), then the creditor's failure to
disclose, or unreasonably low estimation, does not comply with Sec.
1026.19(e)(3)(iii) and the charge for property tax would be subject to
the good faith determination under Sec. 1026.19(e)(3)(i).
4. Bona fide charges. In covered transactions, Sec.
1026.19(e)(1)(i) requires the creditor to provide the consumer with good
faith estimates of the disclosures in Sec. 1026.37. Section
1026.19(e)(3)(iii) provides that an estimate of the charges listed in
Sec. 1026.19(e)(3)(iii) is in
[[Page 599]]
good faith if it is consistent with the best information reasonably
available to the creditor at the time the disclosure is provided and
that good faith is determined under Sec. 1026.19(e)(3)(iii) even if
such charges are paid to the creditor or affiliates of the creditor, so
long as the charges are bona fide. For determining good faith under
Sec. 1026.19(e)(1)(i), to be bona fide, charges must be lawful and for
services that are actually performed.
19(e)(3)(iv) Revised estimates.
1. Requirement. Pursuant to Sec. 1026.19(e)(3)(i) and (ii), good
faith is determined by calculating the difference between the estimated
charges originally provided pursuant to Sec. 1026.19(e)(1)(i) and the
actual charges paid by or imposed on the consumer. Section
1026.19(e)(3)(iv) provides the exception to this rule. Pursuant to Sec.
1026.19(e)(3)(iv), for purposes of determining good faith under Sec.
1026.19(e)(3)(i) and (ii), the creditor may use a revised estimate of a
charge instead of the amount originally disclosed under Sec.
1026.19(e)(1)(i) if the revision is due to one of the reasons set forth
in Sec. 1026.19(e)(3)(iv)(A) through (F).
2. Actual increase. A creditor may determine good faith under Sec.
1026.19(e)(3)(i) and (ii) based on the increased charges reflected on
revised disclosures only to the extent that the reason for revision, as
identified in Sec. 1026.19(e)(3)(iv)(A) through (F), actually increased
the particular charge. For example, if a consumer requests a rate lock
extension, then the revised disclosures on which a creditor relies for
purposes of determining good faith under Sec. 1026.19(e)(3)(i) may
reflect a new rate lock extension fee, but the fee may be no more than
the rate lock extension fee charged by the creditor in its usual course
of business, and the creditor may not rely on changes to other charges
unrelated to the rate lock extension for purposes of determining good
faith under Sec. 1026.19(e)(3)(i) and (ii).
3. Documentation requirement. In order to comply with Sec. 1026.25,
creditors must retain records demonstrating compliance with the
requirements of Sec. 1026.19(e). For example, if revised disclosures
are provided because of a changed circumstance under Sec.
1026.19(e)(3)(iv)(A) affecting settlement costs, the creditor must be
able to show compliance with Sec. 1026.19(e) by documenting the
original estimate of the cost at issue, explaining the reason for
revision and how it affected settlement costs, showing that the
corrected disclosure increased the estimate only to the extent that the
reason for revision actually increased the cost, and showing that the
timing requirements of Sec. 1026.19(e)(4) were satisfied. However, the
documentation requirement does not require separate corrected
disclosures for each change. A creditor may provide corrected
disclosures reflecting multiple changed circumstances, provided that the
creditor's documentation demonstrates that each correction complies with
the requirements of Sec. 1026.19(e).
4. Revised disclosures for general informational purposes. Section
1026.19(e)(3)(iv) does not prohibit the creditor from issuing revised
disclosures for informational purposes, e.g., to keep the consumer
apprised of updated information, even if the revised disclosures may not
be used for purposes of determining good faith under Sec.
1026.19(e)(3)(i) and (ii). See comment 19(e)(3)(iv)(A)-1.ii for an
example in which the creditor issues revised disclosures even though the
sum of all costs subject to the 10 percent tolerance category has not
increased by more than 10 percent.
5. Best information reasonably available. Regardless of whether a
creditor may use particular disclosures for purposes of determining good
faith under Sec. 1026.19(e)(3)(i) and (ii), except as otherwise
provided in Sec. 1026.19(e), any disclosures must be based on the best
information reasonably available to the creditor at the time they are
provided to the consumer. See Sec. 1026.17(c)(2)(i) and comment
17(c)(2)(i)-1. For example, if the creditor issues revised disclosures
reflecting a new rate lock extension fee for purposes of determining
good faith under Sec. 1026.19(e)(3)(i), other charges unrelated to the
rate lock extension must be reflected on the revised disclosures based
on the best information reasonably available to the creditor at the time
the revised disclosures are provided. Nonetheless, any increases in
those other charges unrelated to the rate lock extension may not be used
for the purposes of determining good faith under Sec. 1026.19(e)(3).
19(e)(3)(iv)(A) Changed circumstance affecting settlement charges.
1. Requirement. For the purpose of determining good faith under
Sec. 1026.19(e)(3)(i) and (ii), revised charges are compared to actual
charges if the revision was caused by a changed circumstance. See also
comment 19(e)(3)(iv)(A)-2 regarding the definition of a changed
circumstance. The following examples illustrate the application of this
provision:
i. Charges subject to the zero percent tolerance category. Assume a
creditor provides a $200 estimated appraisal fee pursuant to Sec.
1026.19(e)(1)(i), which will be paid to an affiliated appraiser and
therefore may not increase for purposes of determining good faith under
Sec. 1026.19(e)(3)(i), except as provided in Sec. 1026.19(e)(3)(iv).
The estimate was based on information provided by the consumer at
application, which included information indicating that the subject
property was a single-family dwelling. Upon arrival at the subject
property, the appraiser discovers that the property is actually a
single-family dwelling located on a farm. A different schedule of
appraisal fees applies to residences located on farms. A changed
circumstance has occurred (i.e., information
[[Page 600]]
provided by the consumer is found to be inaccurate after the disclosures
required under Sec. 1026.19(e)(1)(i) were provided), which caused an
increase in the cost of the appraisal. Therefore, if the creditor issues
revised disclosures with the corrected appraisal fee, the actual
appraisal fee of $400 paid at the real estate closing by the consumer
will be compared to the revised appraisal fee of $400 to determine if
the actual fee has increased above the estimated fee. However, if the
creditor failed to provide revised disclosures, then the actual
appraisal fee of $400 must be compared to the originally disclosed
estimated appraisal fee of $200.
ii. Charges subject to the ten percent tolerance category. Assume a
creditor provides a $400 estimate of title fees, which are included in
the category of fees which may not increase by more than 10 percent for
the purposes of determining good faith under Sec. 1026.19(e)(3)(ii),
except as provided in Sec. 1026.19(e)(3)(iv). An unreleased lien is
discovered and the title company must perform additional work to release
the lien. However, the additional costs amount to only a five percent
increase over the sum of all fees included in the category of fees which
may not increase by more than 10 percent. A changed circumstance has
occurred (i.e., new information), but the sum of all costs subject to
the 10 percent tolerance category has not increased by more than 10
percent. Section 1026.19(e)(3)(iv) does not prohibit the creditor from
issuing revised disclosures, but if the creditor issues revised
disclosures in this scenario, when the disclosures required by Sec.
1026.19(f)(1)(i) are delivered, the actual title fees of $500 may not be
compared to the revised title fees of $500; they must be compared to the
originally estimated title fees of $400 because the changed circumstance
did not cause the sum of all costs subject to the 10 percent tolerance
category to increase by more than 10 percent.
2. Changed circumstance. A changed circumstance may be an
extraordinary event beyond the control of any interested party. For
example, a war or a natural disaster would be an extraordinary event
beyond the control of an interested party. A changed circumstance may
also be an unexpected event specific to the consumer or the transaction.
For example, if the creditor provided an estimate of title insurance on
the disclosures required under Sec. 1026.19(e)(1)(i), but the title
insurer goes out of business during underwriting, then this unexpected
event specific to the transaction is a changed circumstance. A changed
circumstance may also be information specific to the consumer or
transaction that the creditor relied upon when providing the disclosures
required under Sec. 1026.19(e)(1)(i) and that was inaccurate or changed
after the disclosures were provided. For example, if the creditor relied
on the consumer's income when providing the disclosures required under
Sec. 1026.19(e)(1)(i), and the consumer represented to the creditor
that the consumer had an annual income of $90,000, but underwriting
determines that the consumer's annual income is only $80,000, then this
inaccuracy in information relied upon is a changed circumstance. Or,
assume two co-applicants applied for a mortgage loan. One applicant's
income was $30,000, while the other applicant's income was $50,000. If
the creditor relied on the combined income of $80,000 when providing the
disclosures required under Sec. 1026.19(e)(1)(i), but the applicant
earning $30,000 becomes unemployed during underwriting, thereby reducing
the combined income to $50,000, then this change in information relied
upon is a changed circumstance. A changed circumstance may also be the
discovery of new information specific to the consumer or transaction
that the creditor did not rely on when providing the original
disclosures required under Sec. 1026.19(e)(1)(i). For example, if the
creditor relied upon the value of the property in providing the
disclosures required under Sec. 1026.19(e)(1)(i), but during
underwriting a neighbor of the seller, upon learning of the impending
sale of the property, files a claim contesting the boundary of the
property to be sold, then this new information specific to the
transaction is a changed circumstance.
3. Six pieces of information presumed collected, but not required.
Section 1026.19(e)(1)(iii) requires creditors to deliver the disclosures
not later than the third business day after the creditor receives the
consumer's application, which consists of the six pieces of information
identified in Sec. 1026.2(a)(3)(ii). A creditor is not required to
collect the consumer's name, monthly income, social security number to
obtain a credit report, the property address, an estimate of the value
of the property, or the mortgage loan amount sought. However, for
purposes of determining whether an estimate is provided in good faith
under Sec. 1026.19(e)(1)(i), a creditor is presumed to have collected
these six pieces of information. For example, if a creditor provides the
disclosures required by Sec. 1026.19(e)(1)(i) prior to receiving the
property address from the consumer, the creditor cannot subsequently
claim that the receipt of the property address is a changed circumstance
pursuant to Sec. 1026.19(e)(3)(iv)(A) or (B).
19(e)(3)(iv)(B) Changed circumstance affecting eligibility.
1. Requirement. If changed circumstances cause a change in the
consumer's eligibility for specific loan terms disclosed pursuant to
Sec. 1026.19(e)(1)(i) and revised disclosures are provided because the
change in eligibility resulted in increased cost for a settlement
service beyond the applicable tolerance threshold, the charge paid by or
imposed on the consumer for the settlement service for
[[Page 601]]
which cost increased due to the change in eligibility is compared to the
revised estimated cost for the settlement service to determine if the
actual fee has increased above the estimated fee. For example, assume
that, prior to providing the disclosures required by Sec.
1026.19(e)(1)(i), the creditor believed that the consumer was eligible
for a loan program that did not require an appraisal. The creditor then
provides the estimated disclosures required by Sec. 1026.19(e)(1)(i),
which do not include an estimated charge for an appraisal. During
underwriting it is discovered that the consumer was delinquent on
mortgage loan payments in the past, making the consumer ineligible for
the loan program originally identified on the estimated disclosures, but
the consumer remains eligible for a different program that requires an
appraisal. If the creditor provides revised disclosures reflecting the
new program and including the appraisal fee, then the actual appraisal
fee will be compared to the appraisal fee included in the revised
disclosures to determine if the actual fee has increased above the
estimated fee. However, if the revised disclosures also include
increased estimates for title fees, the actual title fees must be
compared to the original estimates assuming that the increased title
fees do not stem from the change in eligibility or any other change
warranting a revised disclosure. See also Sec. 1026.19(e)(3)(iv)(A) and
comment 19(e)(3)(iv)(A)-2 regarding the definition of changed
circumstances.
19(e)(3)(iv)(C) Revisions requested by the consumer.
1. Requirement. If the consumer requests revisions to the
transaction that affect items disclosed pursuant to Sec.
1026.19(e)(1)(i), and the creditor provides revised disclosures
reflecting the consumer's requested changes, the final disclosures are
compared to the revised disclosures to determine whether the actual fee
has increased above the estimated fee. For example, assume that the
consumer decides to grant a power of attorney authorizing a family
member to consummate the transaction on the consumer's behalf after the
disclosures required under Sec. 1026.19(e)(1)(i) are provided. If the
creditor provides revised disclosures reflecting the fee to record the
power of attorney, then the actual charges will be compared to the
revised charges to determine if the fees have increased.
19(e)(3)(iv)(D) Interest rate dependent charges.
1. Requirements. If the interest rate is not locked when the
disclosures required by Sec. 1026.19(e)(1)(i) are provided, then, no
later than three business days after the date the interest rate is
subsequently locked, Sec. 1026.19(e)(3)(iv)(D) requires the creditor to
provide a revised version of the disclosures required under Sec.
1026.19(e)(1)(i) reflecting the revised interest rate, the points
disclosed under Sec. 1026.37(f)(1), lender credits, and any other
interest rate dependent charges and terms. The following example
illustrates this requirement:
i. Assume a creditor sets the interest rate by executing a rate lock
agreement with the consumer. If such an agreement exists when the
original disclosures required under Sec. 1026.19(e)(1)(i) are provided,
then the actual points and lender credits are compared to the estimated
points disclosed under Sec. 1026.37(f)(1) and lender credits included
in the original disclosures provided under Sec. 1026.19(e)(1)(i) for
the purpose of determining good faith under Sec. 1026.19(e)(3)(i). If
the consumer enters into a rate lock agreement with the creditor after
the disclosures required under Sec. 1026.19(e)(1)(i) were provided,
then Sec. 1026.19(e)(3)(iv)(D) requires the creditor to provide, no
later than three business days after the date that the consumer and the
creditor enter into a rate lock agreement, a revised version of the
disclosures required under Sec. 1026.19(e)(1)(i) reflecting the revised
interest rate, the points disclosed under Sec. 1026.37(f)(1), lender
credits, and any other interest rate dependent charges and terms.
Provided that the revised version of the disclosures required under
Sec. 1026.19(e)(1)(i) reflect any revised points disclosed under Sec.
1026.37(f)(1) and lender credits, the actual points and lender credits
are compared to the revised points and lender credits for the purpose of
determining good faith under Sec. 1026.19(e)(3)(i).
2. After the Closing Disclosure is provided. Under Sec.
1026.19(e)(3)(iv)(D), no later than three business days after the date
the interest rate is locked, the creditor must provide to the consumer a
revised version of the Loan Estimate as required by Sec.
1026.19(e)(1)(i). Section 1026.19(e)(4)(ii) prohibits a creditor from
providing a revised version of the Loan Estimate as required by Sec.
1026.19(e)(1)(i) on or after the date on which the creditor provides the
Closing Disclosure as required by Sec. 1026.19(f)(1)(i). If the
interest rate is locked on or after the date on which the creditor
provides the Closing Disclosure and the Closing Disclosure is inaccurate
as a result, then the creditor must provide the consumer a corrected
Closing Disclosure, at or before consummation, reflecting any changed
terms, pursuant to Sec. 1026.19(f)(2). If the rate lock causes the
Closing Disclosure to become inaccurate before consummation in a manner
listed in Sec. 1026.19(f)(2)(ii), the creditor must ensure that the
consumer receives a corrected Closing Disclosure no later than three
business days before consummation, as provided in that paragraph.
19(e)(3)(iv)(E) Expiration.
1. Requirements. If the consumer indicates an intent to proceed with
the transaction more than 10 business days after the disclosures were
originally provided under
[[Page 602]]
Sec. 1026.19(e)(1)(iii), for the purpose of determining good faith
under Sec. 1026.19(e)(3)(i) and (ii), a creditor may use a revised
estimate of a charge instead of the amount originally disclosed under
Sec. 1026.19(e)(1)(i). Section 1026.19(e)(3)(iv)(E) requires no
justification for the change to the original estimate other than the
lapse of 10 business days. For example, assume a creditor includes a
$500 underwriting fee on the disclosures provided under Sec.
1026.19(e)(1)(i) and the creditor delivers those disclosures on a
Monday. If the consumer indicates intent to proceed 11 business days
later, the creditor may provide new disclosures with a $700 underwriting
fee. In this example, Sec. 1026.19(e) and Sec. 1026.25 require the
creditor to document that a new disclosure was provided under Sec.
1026.19(e)(3)(iv)(E) but do not require the creditor to document a
reason for the increase in the underwriting fee.
2. Longer time period. For transactions in which the interest rate
is locked for a specific period of time, Sec. 1026.37(a)(13)(ii)
requires the creditor to provide the date and time (including the
applicable time zone) when that period ends. If the creditor establishes
a period greater than 10 business days after the disclosures were
originally provided (or subsequently extends it to such a longer period)
before the estimated closing costs expire, notwithstanding the 10-
business-day period discussed in comment 19(e)(3)(iv)(E)-1, that longer
time period becomes the relevant time period for purposes of Sec.
1026.19(e)(3)(iv)(E). Accordingly, in such a case, the creditor may not
issue revised disclosures for purposes of determining good faith under
Sec. 1026.19(e)(3)(i) and (ii) under Sec. 1026.19(e)(3)(iv)(E) until
after the longer time period has expired. A creditor establishes such a
period greater than 10 business days by communicating the greater time
period to the consumer, including through oral communication.
19(e)(3)(iv)(F) Delayed settlement date on a construction loan.
1. Requirements. A loan for the purchase of a home that has yet to
be constructed, or a loan to purchase a home under construction (i.e.,
construction is currently underway), is a construction loan to build a
home for the purposes of Sec. 1026.19(e)(3)(iv)(F). However, if a use
and occupancy permit has been issued for the home prior to the issuance
of the disclosures required under Sec. 1026.19(e)(1)(i), then the home
is not considered to be under construction and the transaction would not
be a construction loan to build a home for the purposes of Sec.
1026.19(e)(3)(iv)(F).
19(e)(4) Provision and receipt of revised disclosures.
19(e)(4)(i) General rule.
1. Three-business-day requirement. Section 1026.19(e)(4)(i) provides
that subject to the requirements of Sec. 1026.19(e)(4)(ii), if a
creditor uses a revised estimate pursuant to Sec. 1026.19(e)(3)(iv) for
the purpose of determining good faith under Sec. 1026.19(e)(3)(i) and
(ii), the creditor shall provide a revised version of the disclosures
required under Sec. 1026.19(e)(1)(i) reflecting the revised estimate
within three business days of receiving information sufficient to
establish that one of the reasons for revision provided under Sec.
1026.19(e)(3)(iv)(A) through (C), (E) and (F) has occurred. The
following examples illustrate these requirements:
i. Assume a creditor requires a pest inspection. The unaffiliated
pest inspection company informs the creditor on Monday that the subject
property contains evidence of termite damage, requiring a further
inspection, the cost of which will cause an increase in estimated
settlement charges subject to Sec. 1026.19(e)(3)(ii) by more than 10
percent. The creditor must provide revised disclosures by Thursday to
comply with Sec. 1026.19(e)(4)(i).
ii. Assume a creditor receives information on Monday that, because
of a changed circumstance under Sec. 1026.19(e)(3)(iv)(A), the title
fees will increase by an amount totaling six percent of the originally
estimated settlement charges subject to Sec. 1026.19(e)(3)(ii). The
creditor had received information three weeks before that, because of a
changed circumstance under Sec. 1026.19(e)(3)(iv)(A), the pest
inspection fees increased by an amount totaling five percent of the
originally estimated settlement charges subject to Sec.
1026.19(e)(3)(ii). Thus, on Monday, the creditor has received sufficient
information to establish a valid reason for revision and must provide
revised disclosures reflecting the 11 percent increase by Thursday to
comply with Sec. 1026.19(e)(4)(i).
iii. Assume a creditor requires an appraisal. The creditor receives
the appraisal report, which indicates that the value of the home is
significantly lower than expected. However, the creditor has reason to
doubt the validity of the appraisal report. A reason for revision has
not been established because the creditor reasonably believes that the
appraisal report is incorrect. The creditor then chooses to send a
different appraiser for a second opinion, but the second appraiser
returns a similar report. At this point, the creditor has received
information sufficient to establish that a reason for revision has, in
fact, occurred, and must provide corrected disclosures within three
business days of receiving the second appraisal report. In this example,
in order to comply with Sec. 1026.19(e)(3)(iv) and Sec. 1026.25, the
creditor must maintain records documenting the creditor's doubts
regarding the validity of the appraisal to demonstrate that the reason
for revision did not occur upon receipt of the first appraisal report.
2. Relationship to Sec. 1026.19(e)(3)(iv)(D). If the reason for the
revision is provided under Sec. 1026.19(e)(3)(iv)(D), notwithstanding
the three-business-day rule set forth in
[[Page 603]]
Sec. 1026.19(e)(4)(i), Sec. 1026.19(e)(3)(iv)(D) requires the creditor
to provide a revised version of the disclosures required under Sec.
1026.19(e)(1)(i) no later than three business days after the date the
interest rate is locked. See comment 19(e)(3)(iv)(D)-1.
19(e)(4)(ii) Relationship to disclosures required under Sec.
1026.19(f)(1)(i).
1. Revised disclosures may not be delivered at the same time as the
Closing Disclosure. Section 1026.19(e)(4)(ii) prohibits a creditor from
providing a revised version of the disclosures required under Sec.
1026.19(e)(1)(i) on or after the date on which the creditor provides the
disclosures required under Sec. 1026.19(f)(1)(i). Section
1026.19(e)(4)(ii) also requires that the consumer must receive a revised
version of the disclosures required under Sec. 1026.19(e)(1)(i) no
later than four business days prior to consummation, and provides that
if the revised version of the disclosures are not provided to the
consumer in person, the consumer is considered to have received the
revised version of the disclosures three business days after the
creditor delivers or places in the mail the revised version of the
disclosures. See also comments 19(e)(1)(iv)-1 and -2. If, however, there
are less than four business days between the time the revised version of
the disclosures is required to be provided pursuant to Sec.
1026.19(e)(4)(i) and consummation, creditors comply with the
requirements of Sec. 1026.19(e)(4) if the revised disclosures are
reflected in the disclosures required by Sec. 1026.19(f)(1)(i). See
below for illustrative examples:
i. If the creditor is scheduled to meet with the consumer and
provide the disclosures required by Sec. 1026.19(f)(1)(i) on Wednesday,
and the APR becomes inaccurate on Tuesday, the creditor complies with
the requirements of Sec. 1026.19(e)(4) by providing the disclosures
required under Sec. 1026.19(f)(1)(i) reflecting the revised APR on
Wednesday. However, the creditor does not comply with the requirements
of Sec. 1026.19(e)(4) if it provided both a revised version of the
disclosures required under Sec. 1026.19(e)(1)(i) reflecting the revised
APR on Wednesday, and also provides the disclosures required under Sec.
1026.19(f)(1)(i) on Wednesday.
ii. If the creditor is scheduled to email the disclosures required
under Sec. 1026.19(f)(1)(i) to the consumer on Wednesday, and the
consumer requests a change to the loan that would result in revised
disclosures pursuant to Sec. 1026.19(e)(3)(iv)(C) on Tuesday, the
creditor complies with the requirements of Sec. 1026.19(e)(4) by
providing the disclosures required under Sec. 1026.19(f)(1)(i)
reflecting the consumer-requested changes on Wednesday. However, the
creditor does not comply if it provides both the revised version of the
disclosures required under Sec. 1026.19(e)(1)(i) reflecting consumer
requested changes, and also the disclosures required under Sec.
1026.19(f)(1)(i) on Wednesday.
19(f) Mortgage loans--Final disclosures.
19(f)(1) Provision of disclosures.
19(f)(1)(i) Scope.
1. Requirements. Section 1026.19(f)(1)(i) requires disclosure of the
actual terms of the credit transaction, and the actual costs associated
with the settlement of that transaction, for closed-end credit
transactions that are secured by real property or a cooperative unit,
other than reverse mortgages subject to Sec. 1026.33. For example, if
the creditor requires the consumer to pay money into a reserve account
for the future payment of taxes, the creditor must disclose to the
consumer the exact amount that the consumer is required to pay into the
reserve account. If the disclosures provided under Sec.
1026.19(f)(1)(i) do not contain the actual terms of the transaction, the
creditor does not violate Sec. 1026.19(f)(1)(i) if the creditor
provides corrected disclosures that contain the actual terms of the
transaction and complies with the other requirements of Sec.
1026.19(f), including the timing requirements in Sec. 1026.19(f)(1)(ii)
and (f)(2). For example, if the creditor provides the disclosures
required by Sec. 1026.19(f)(1)(i) on Monday, June 1, but the consumer
adds a mobile notary service to the terms of the transaction on Tuesday,
June 2, the creditor complies with Sec. 1026.19(f)(1)(i) if it provides
disclosures reflecting the revised terms of the transaction on or after
Tuesday, June 2, assuming that the corrected disclosures are also
provided at or before consummation, under Sec. 1026.19(f)(2)(i).
2. Best information reasonably available. Creditors may estimate
disclosures provided under Sec. 1026.19(f)(1)(ii)(A) and (f)(2)(ii)
using the best information reasonably available when the actual term is
unknown to the creditor at the time disclosures are made, consistent
with Sec. 1026.17(c)(2)(i).
i. Actual term unknown. An actual term is unknown if it is not
reasonably available to the creditor at the time the disclosures are
made. The ``reasonably available'' standard requires that the creditor,
acting in good faith, exercise due diligence in obtaining the
information. For example, the creditor must at a minimum utilize
generally accepted calculation tools, but need not invest in the most
sophisticated computer program to make a particular type of calculation.
The creditor normally may rely on the representations of other parties
in obtaining information. For example, the creditor might look to the
consumer for the time of consummation, to insurance companies for the
cost of insurance, to realtors for taxes and escrow fees, or to a
settlement agent for homeowner's association dues or other information
in connection with a real estate settlement. The following examples
illustrate the reasonably available standard for purposes of Sec.
1026.19(f)(1)(i).
[[Page 604]]
A. Assume a creditor provides the disclosure under Sec.
1026.19(f)(1)(ii)(A) for a transaction in which the title insurance
company that is providing the title insurance policies is acting as the
settlement agent in connection with the transaction, but the creditor
does not request the actual cost of the lender's title insurance policy
that the consumer is purchasing from the title insurance company and
instead discloses an estimate based on information from a different
transaction. The creditor has not exercised due diligence in obtaining
the information about the cost of the lender's title insurance policy
required under the ``reasonably available'' standard in connection with
the estimate disclosed for the lender's title insurance policy.
B. Assume that in the prior example the creditor obtained
information about the terms of the consumer's transaction from the
settlement agent regarding the amounts disclosed under Sec. 1026.38(j)
and (k). The creditor has exercised due diligence in obtaining the
information about the costs under Sec. 1026.38(j) and (k) for purposes
of the ``reasonably available'' standard in connection with such
disclosures under Sec. 1026.38(j) and (k).
ii. Estimates. If an actual term is unknown, the creditor may
utilize estimates using the best information reasonably available in
making disclosures even though the creditor knows that more precise
information will be available at or before consummation. However, the
creditor may not utilize an estimate without exercising due diligence to
obtain the actual term for the consumer's transaction. See comment
19(f)(1)(i)-2.i. The creditor is required to provide corrected
disclosures containing the actual terms of the transaction at or before
consummation under Sec. 1026.19(f)(2), subject to the exceptions
provided for in that paragraph. Disclosures under Sec. 1026.19(f) are
subject to the labeling rules set forth in Sec. 1026.38. See comment
17(c)(2)(i)-2 for guidance on labeling estimates.
iii. Settlement agent. If a settlement agent provides disclosures
required by Sec. 1026.19(f)(1)(i) three business days before
consummation pursuant to Sec. 1026.19(f)(1)(v), the ``best information
reasonably available'' standard applies to terms for which the actual
term is unknown to the settlement agent at the time the disclosures are
provided. The settlement agent normally may rely on the representations
of other parties in obtaining information, but if information about
actual terms is not reasonably available, the settlement agent also must
satisfy the ``best information reasonably available'' standard.
Accordingly, the settlement agent is required to exercise due diligence
to obtain information if it is providing the Closing Disclosure pursuant
to Sec. 1026.19(f)(1)(v). For example, for the loan terms table
required to be disclosed under Sec. 1026.38(b), the settlement agent
would be considered to have exercised due diligence if it obtained such
information from the creditor. Because the creditor remains responsible
under Sec. 1026.19(f)(1)(v) for ensuring that the Closing Disclosure is
provided in accordance with Sec. 1026.19(f), the creditor is expected
to maintain communication with the settlement agent to ensure that the
settlement agent is acting in place of the creditor. See comment
19(f)(1)(v)-3 for guidance on a creditor's responsibilities where a
settlement agent provides disclosures.
3. Denied or withdrawn applications. The creditor is not required to
provide the disclosures required under Sec. 1026.19(f)(1)(i) if, before
the time the creditor is required to provide the disclosures under Sec.
1026.19(f), the creditor determines the consumer's application will not
or cannot be approved on the terms requested, or the consumer has
withdrawn the application, and, as such, the transaction will not be
consummated. For transactions covered by Sec. 1026.19(f)(1)(i), the
creditor may rely on comment 19(e)(1)(iii)-3 in determining that
disclosures are not required by Sec. 1026.19(f)(1)(i) because the
consumer's application will not or cannot be approved on the terms
requested or the consumer has withdrawn the application.
19(f)(1)(ii) Timing.
1. Timing. Except as provided in Sec. 1026.19(f)(1)(ii)(B),
(f)(2)(i), (f)(2)(iii), (f)(2)(iv), and (f)(2)(v), the disclosures
required by Sec. 1026.19(f)(1)(i) must be received by the consumer no
later than three business days before consummation. For example, if
consummation is scheduled for Thursday, the creditor satisfies this
requirement by hand delivering the disclosures on Monday, assuming each
weekday is a business day. For purposes of Sec. 1026.19(f)(1)(ii), the
term ``business day'' means all calendar days except Sundays and legal
public holidays referred to in Sec. 1026.2(a)(6). See comment 2(a)(6)-
2.
2. Receipt of disclosures three business days before consummation.
Section 1026.19(f)(1)(ii)(A) provides that the consumer must receive the
disclosures no later than three business days before consummation. To
comply with this requirement, the creditor must arrange for delivery
accordingly. Section 1026.19(f)(1)(iii) provides that, if any
disclosures required under Sec. 1026.19(f)(1)(i) are not provided to
the consumer in person, the consumer is considered to have received the
disclosures three business days after they are delivered or placed in
the mail. Thus, for example, if consummation is scheduled for Thursday,
a creditor would satisfy the requirements of Sec. 1026.19(f)(1)(ii)(A)
if the creditor places the disclosures in the mail on Thursday of the
previous week, because, for the purposes of Sec. 1026.19(f)(1)(ii),
Saturday is a business day, pursuant to Sec. 1026.2(a)(6), and,
[[Page 605]]
pursuant to Sec. 1026.19(f)(1)(iii), the consumer would be considered
to have received the disclosures on the Monday before consummation is
scheduled. See comment 19(f)(1)(iii)-1. A creditor would not satisfy the
requirements of Sec. 1026.19(f)(1)(ii)(A) in this example if the
creditor places the disclosures in the mail on the Monday before
consummation. However, the creditor in this example could satisfy the
requirements of Sec. 1026.19(f)(1)(ii)(A) by delivering the disclosures
on Monday, for instance, by way of electronic mail, provided the
requirements of Sec. 1026.38(t)(3)(iii) relating to disclosures in
electronic form are satisfied and assuming that each weekday is a
business day, and provided that the creditor obtains evidence that the
consumer received the emailed disclosures on Monday. See comment
19(f)(1)(iii)-2.
3. Timeshares. For transactions secured by a consumer's interest in
a timeshare plan described in 11 U.S.C. 101(53D), Sec.
1026.19(f)(1)(ii)(B) requires a creditor to ensure that the consumer
receives the disclosures required under Sec. 1026.19(f)(1)(i) no later
than consummation. Timeshare transactions covered by Sec.
1026.19(f)(1)(ii)(B) may be consummated at the time or any time after
the disclosures required by Sec. 1026.19(f)(1)(i) are received by the
consumer. For example, if a consumer provides the creditor with an
application, as defined by Sec. 1026.2(a)(3), for a mortgage loan
secured by a timeshare on Monday, June 1, and consummation of the
timeshare transaction is scheduled for Friday, June 5, the creditor
complies with Sec. 1026.19(f)(1)(ii)(B) by ensuring that the consumer
receives the disclosures required by Sec. 1026.19(f)(1)(i) no later
than consummation on Friday, June 5. If a consumer provides the creditor
with an application for a mortgage loan secured by a timeshare on
Monday, June 1 and consummation of the timeshare transaction is
scheduled for Tuesday, June 2, then the creditor complies with Sec.
1026.19(f)(1)(ii)(B) by ensuring that the consumer receives the
disclosures required by Sec. 1026.19(f)(1)(i) no later than
consummation on Tuesday, June 2. In some cases, a Loan Estimate must be
provided under Sec. 1026.19(e) before provision of the Closing
Disclosure. See comment 19(e)(1)(iii)-4 for guidance on providing the
Loan Estimate for transactions secured by a consumer's interest in a
timeshare plan.
19(f)(1)(iii) Receipt of disclosures.
1. Mail delivery. Section 1026.19(f)(1)(iii) provides that, if any
disclosures required under Sec. 1026.19(f)(1)(i) are not provided to
the consumer in person, the consumer is considered to have received the
disclosures three business days after they are delivered or placed in
the mail. If the creditor delivers the disclosures required under Sec.
1026.19(f)(1)(i) in person, consummation may occur any time on the third
business day following delivery. If the creditor provides the
disclosures by mail, the consumer is considered to have received them
three business days after they are placed in the mail, for purposes of
determining when the three-business-day waiting period required under
Sec. 1026.19(f)(1)(ii)(A) begins. The creditor may, alternatively, rely
on evidence that the consumer received the disclosures earlier than
three business days after mailing. See comment 19(e)(1)(iv)-1 for an
example in which the creditor sends disclosures via overnight mail.
2. Other forms of delivery. Creditors that use electronic mail or a
courier other than the United States Postal Service also may follow the
approach for disclosures provided by mail described in comment
19(f)(1)(iii)-1. For example, if a creditor sends a disclosure required
under Sec. 1026.19(f) via email on Monday, pursuant to Sec.
1026.19(f)(1)(iii) the consumer is considered to have received the
disclosure on Thursday, three business days later. The creditor may,
alternatively, rely on evidence that the consumer received the emailed
disclosures earlier after delivery. See comment 19(e)(1)(iv)-2 for an
example in which the creditor emails disclosures and receives an
acknowledgment from the consumer on the same day. Creditors using
electronic delivery methods, such as email, must also comply with Sec.
1026.38(t)(3)(iii). For example, if a creditor delivers the disclosures
required by Sec. 1026.19(f)(1)(i) to a consumer via email, but the
creditor did not obtain the consumer's consent to receive disclosures
via email prior to delivering the disclosures, then the creditor does
not comply with Sec. 1026.38(t)(3)(iii), and the creditor does not
comply with Sec. 1026.19(f)(1)(i), assuming the disclosures were not
provided in a different manner in accordance with the timing
requirements of Sec. 1026.19(f)(1)(ii).
19(f)(1)(iv) Consumer's waiver of waiting period before
consummation.
1. Modification or waiver. A consumer may modify or waive the right
to the three-business-day waiting periods required by Sec.
1026.19(f)(1)(ii)(A) or (f)(2)(ii) only after the creditor makes the
disclosures required by Sec. 1026.19(f)(1)(i). The consumer must have a
bona fide personal financial emergency that necessitates consummating
the credit transaction before the end of the waiting period. Whether
these conditions are met is determined by the facts surrounding
individual situations. The imminent sale of the consumer's home at
foreclosure, where the foreclosure sale will proceed unless loan
proceeds are made available to the consumer during the waiting period,
is one example of a bona fide personal financial emergency. Each
consumer who is primarily liable on the legal obligation must sign the
written statement for the waiver to be effective.
19(f)(1)(v) Settlement agent.
1. Requirements. For purposes of Sec. 1026.19(f), a settlement
agent is the person conducting
[[Page 606]]
the settlement. A settlement agent may provide the disclosures required
under Sec. 1026.19(f)(1)(i) instead of the creditor. By assuming this
responsibility, the settlement agent becomes responsible for complying
with all of the relevant requirements of Sec. 1026.19(f), meaning that
``settlement agent'' should be read in the place of ``creditor'' for all
the relevant provisions of Sec. 1026.19(f), except where such a reading
would create responsibility for settlement agents under Sec.
1026.19(e). For example, comment 19(f)(1)(ii)-3 explains that, in some
cases involving transactions secured by a consumer's interest in a
timeshare plan, a Loan Estimate must be provided under Sec. 1026.19(e).
``Settlement agent'' could not be read in place of ``creditor'' in
comment 19(f)(1)(ii)-3 because settlement agents are not responsible for
the disclosures required by Sec. 1026.19(e)(1)(i). To ensure timely and
accurate compliance with the requirements of Sec. 1026.19(f)(1)(v), the
creditor and settlement agent need to communicate effectively.
2. Settlement agent responsibilities. If a settlement agent provides
any disclosure under Sec. 1026.19(f), the settlement agent must comply
with the relevant requirements of Sec. 1026.19(f). For example, if the
creditor and settlement agent agree that the creditor will deliver the
disclosures required under Sec. 1026.19(f)(1)(i) to be received by the
consumer three business days before consummation, pursuant to Sec.
1026.19(f)(1)(ii)(A), and that the settlement agent will deliver any
corrected disclosures at or before consummation, including disclosures
provided so that they are received by the consumer three business days
before consummation under Sec. 1026.19(f)(2)(ii), and will permit the
consumer to inspect the disclosures during the business day before
consummation, the settlement agent must ensure that the consumer
receives the disclosures required under Sec. 1026.19(f)(1)(i) at or
before consummation and is able to inspect the disclosures during the
business day before consummation, if the consumer so requests, in
accordance with Sec. 1026.19(f)(2)(i). See comment 19(f)(1)(v)-3 below
for additional guidance regarding the creditor's responsibilities where
the settlement agent provides disclosures. The settlement agent may
assume the responsibility to provide some or all of the disclosures
required by Sec. 1026.19(f). See comment 19(f)(1)(v)-4 for guidance on
how creditors and settlement agents may divide responsibilities for
completing the disclosures.
3. Creditor responsibilities. If a settlement agent provides
disclosures required under Sec. 1026.19(f) in the creditor's place, the
creditor remains responsible under Sec. 1026.19(f) for ensuring that
the requirements of Sec. 1026.19(f) have been satisfied. For example,
if the settlement agent assumes the responsibility for providing all of
the disclosures required under Sec. 1026.19(f)(1)(i), the creditor does
not comply with Sec. 1026.19(f) if the settlement agent does not
provide these disclosures at all, or if the consumer receives the
disclosures later than three business days before consummation, as
required by Sec. 1026.19(f)(1)(ii)(A) and, as applicable, (f)(2)(ii).
The creditor does not satisfy the requirements of Sec. 1026.19(f) if it
provides duplicative disclosures. For example, a creditor does not
satisfy its obligation by issuing disclosures required under Sec.
1026.19(f) that mirror ones already issued by the settlement agent for
the purpose of demonstrating that the consumer received timely
disclosures. The creditor is expected to maintain communication with the
settlement agent to ensure that the settlement agent is acting in place
of the creditor. Disclosures provided by a settlement agent in
accordance with Sec. 1026.19(f)(1)(v) satisfy the creditor's obligation
under Sec. 1026.19(f)(1)(i).
4. Shared responsibilities permitted--completing the disclosures.
Creditors and settlement agents may agree to divide responsibility with
respect to completing any of the disclosures under Sec. 1026.38 for the
disclosures provided under Sec. 1026.19(f)(1)(i). The settlement agent
may assume the responsibility to complete some or all of the disclosures
required by Sec. 1026.19(f). For example, the creditor complies with
the requirements of Sec. 1026.19(f)(1)(i) and the settlement agent
complies with the requirements of Sec. 1026.19(f)(1)(v) if the
settlement agent agrees to complete only the portion of the disclosures
required by Sec. 1026.19(f)(1)(i) related to closing costs for taxes,
title fees, and insurance premiums, and the creditor agrees to complete
the remainder of the disclosures required by Sec. 1026.19(f)(1)(i), and
either the settlement agent or the creditor provides the consumer with
one single disclosure form containing all of the information required to
be disclosed pursuant to Sec. 1026.19(f)(1)(i), in accordance with the
other requirements in Sec. 1026.19(f), such as requirements related to
timing and delivery.
19(f)(2) Subsequent changes.
19(f)(2)(i) Changes before consummation not requiring a new waiting
period.
1. Requirements. Under Sec. 1026.19(f)(2)(i), if the disclosures
provided under Sec. 1026.19(f)(1)(i) become inaccurate before
consummation, other than as provided under Sec. 1026.19(f)(2)(ii), the
creditor shall provide corrected disclosures reflecting any changed
terms to the consumer so that the consumer receives the corrected
disclosures at or before consummation. The creditor need not comply with
the timing requirements in Sec. 1026.19(f)(1)(ii) if an event other
than one identified in Sec. 1026.19(f)(2)(ii) occurs, and such changes
occur after the creditor provides the consumer with the disclosures
required by Sec. 1026.19(f)(1)(i). For example:
[[Page 607]]
i. Assume consummation is scheduled for Thursday, the consumer
received the disclosures required under Sec. 1026.19(f)(1)(i) on
Monday, and a walk-through inspection occurs on Wednesday morning.
During the walk-through the consumer discovers damage to the dishwasher.
The seller agrees to credit the consumer $500 towards a new dishwasher.
The creditor complies with the requirements of Sec. 1026.19(f) if the
creditor provides corrected disclosures so that the consumer receives
them at or before consummation on Thursday.
ii. Assume consummation is scheduled for Friday and on Monday
morning the creditor sends the disclosures via overnight delivery to the
consumer, ensuring that the consumer receives the disclosures on
Tuesday. On Monday night, the seller agrees to sell certain household
furnishings to the consumer for an additional $1,000, to be paid at the
real estate closing, and the consumer immediately informs the creditor
of the change. The creditor must provide corrected disclosures so that
the consumer receives them at or before consummation. The creditor does
not violate Sec. 1026.19(f) because the change to the transaction
resulting from negotiations between the seller and consumer occurred
after the creditor provided the final disclosures, regardless of the
fact that the change occurred before the consumer had received the final
disclosures.
iii. Assume consummation is scheduled for Thursday, the consumer
received the disclosures required under Sec. 1026.19(f)(1)(i) on
Monday, and a walk-through inspection occurs on Wednesday morning. As a
result of consumer and seller negotiations, the total amount due from
the buyer increases by $500. Also on Wednesday, the creditor discovers
that the homeowner's insurance premium that was disclosed as $800 is
actually $850. The new $500 amount due and the $50 insurance premium
understatements are not violations of Sec. 1026.19(f)(1)(i), and the
creditor complies with Sec. 1026.19(f)(1)(i) by providing corrected
disclosures reflecting the $550 increase so that the consumer receives
them at or before consummation, pursuant to Sec. 1026.19(f)(2)(ii).
2. Inspection. A settlement agent may satisfy the requirement to
permit the consumer to inspect the disclosures under Sec.
1026.19(f)(2)(i), subject to Sec. 1026.19(f)(1)(v).
19(f)(2)(ii) Changes before consummation requiring a new waiting
period.
1. Conditions for corrected disclosures. Pursuant to Sec.
1026.19(f)(2)(ii), if, at the time of consummation, the annual
percentage rate becomes inaccurate, the loan product changes, or a
prepayment penalty is added to the transaction, the creditor must
provide corrected disclosures with all changed terms so that the
consumer receives them not later than the third business day before
consummation. Requirements for annual percentage rate disclosures are
set forth in Sec. 1026.38(o)(4), and requirements determining whether
an annual percentage rate is accurate are set forth in Sec. 1026.22.
Requirements for loan product disclosures are set forth in Sec.
1026.38(a)(5)(iii) and Sec. 1026.37(a)(10). Requirements for prepayment
penalty disclosures are set forth in Sec. 1026.38(b) and Sec.
1026.37(b)(4).
i. Example--APR becomes inaccurate. Assume consummation is scheduled
for Thursday, June 11 and the disclosure for a regular mortgage
transaction received by the consumer on Monday, June 8 under Sec.
1026.19(f)(1)(i) discloses an annual percentage rate of 7.00 percent:
A. On Thursday, June 11, the annual percentage rate will be 7.10
percent. The creditor is not required to delay consummation to provide
corrected disclosures under Sec. 1026.19(f)(2)(ii) because the annual
percentage rate is accurate pursuant to Sec. 1026.22, but the creditor
is required under Sec. 1026.19(f)(2)(i) to provide corrected
disclosures, including any other changed terms, so that the consumer
receives them on or before Thursday, June 11.
B. On Thursday, June 11, the annual percentage rate will be 7.15
percent and corrected disclosures were not received by the consumer on
or before Monday, June 8 because the annual percentage rate is
inaccurate pursuant to Sec. 1026.22. The creditor is required to delay
consummation and provide corrected disclosures, including any other
changed terms, so that the consumer receives them at least three
business days before consummation under Sec. 1026.19(f)(2)(ii).
ii. Example--loan product changes. Assume consummation is scheduled
for Thursday, June 11 and the disclosures provided under Sec.
1026.19(f)(1)(i) disclose a product required to be disclosed as a
``Fixed Rate'' that contains no features that may change the periodic
payment.
A. On Thursday, June 11, the loan product required to be disclosed
changes to a ``5/1 Adjustable Rate.'' The creditor is required to
provide corrected disclosures and delay consummation until the consumer
has received the corrected disclosures provided under Sec.
1026.19(f)(1)(i) reflecting the change in the product disclosure, and
any other changed terms, at least three business days before
consummation. If, after the corrected disclosures in this example are
provided, the loan product subsequently changes before consummation to a
``3/1 Adjustable Rate,'' the creditor is required to provide additional
corrected disclosures and again delay consummation until the consumer
has received the corrected disclosures provided under Sec.
1026.19(f)(1)(i) reflecting the change in the product disclosure, and
any other changed terms, at least three business days before
consummation.
B. On Thursday, June 11, the loan product required to be disclosed
has changed to a
[[Page 608]]
``Fixed Rate'' with a ``Negative Amortization'' feature. The creditor is
required to provide corrected disclosures and delay consummation until
the consumer has received the corrected disclosures provided under Sec.
1026.19(f)(1)(i) reflecting the change in the product disclosure, and
any other changed terms, at least three business days before
consummation.
iii. Example--prepayment penalty is added. Assume consummation is
scheduled for Thursday, June 11 and the disclosure provided under Sec.
1026.19(f)(1)(i) did not disclose a prepayment penalty. On Wednesday,
June 10, a prepayment penalty is added to the transaction such that the
disclosure required by Sec. 1026.38(b) becomes inaccurate. The creditor
is required to provide corrected disclosures and delay consummation
until the consumer has received the corrected disclosures provided under
Sec. 1026.19(f)(1)(i) reflecting the change in the disclosure of the
loan terms, and any other changed terms, at least three business days
before consummation. If, after the revised disclosures in this example
are provided but before consummation, the prepayment penalty is removed
such that the description of the prepayment penalty again becomes
inaccurate, and no other changes to the transaction occur, the creditor
is required to provide corrected disclosures so that the consumer
receives them at or before consummation under Sec. 1026.19(f)(2)(i),
but the creditor is not required to delay consummation because Sec.
1026.19(f)(2)(ii)(C) applies only when a prepayment penalty is added.
19(f)(2)(iii) Changes due to events occurring after consummation.
1. Requirements. Under Sec. 1026.19(f)(2)(iii), if during the 30-
day period following consummation, an event in connection with the
settlement of the transaction occurs that causes the disclosures to
become inaccurate, and such inaccuracy results in a change to an amount
actually paid by the consumer from that amount disclosed under Sec.
1026.19(f)(1)(i), the creditor shall deliver or place in the mail
corrected disclosures not later than 30 days after receiving information
sufficient to establish that such event has occurred. The following
examples illustrate this requirement. (See also comment 19(e)(4)(i)-1
for further guidance on when sufficient information has been received to
establish an event has occurred.)
i. Assume consummation occurs on a Monday and the security
instrument is recorded on Tuesday, the day after consummation. If the
creditor learns on Tuesday that the fee charged by the recorder's office
differs from that previously disclosed pursuant to Sec.
1026.19(f)(1)(i), and the changed fee results in a change in the amount
actually paid by the consumer, the creditor complies with Sec.
1026.19(f)(1)(i) and (f)(2)(iii) by revising the disclosures accordingly
and delivering or placing them in the mail no later than 30 days after
Tuesday.
ii. Assume consummation occurs on a Tuesday, October 1 and the
security instrument is not recorded until 15 days after October 1 on
Thursday, October 16. The creditor learns on Monday, November 4 that the
transfer taxes owed to the State differ from those previously disclosed
pursuant to Sec. 1026.19(f)(1)(i), resulting in an increase in the
amount actually paid by the consumer. The creditor complies with Sec.
1026.19(f)(1)(i) and Sec. 1026.19(f)(2)(iii) by revising the
disclosures accordingly and delivering or placing them in the mail no
later than 30 days after Monday, November 4. Assume further that the
increase in transfer taxes paid by the consumer also exceeds the amount
originally disclosed under Sec. 1026.19(e)(1)(i) above the limitations
prescribed by Sec. 1026.19(e)(3)(i). Pursuant to Sec.
1026.19(f)(2)(v), the creditor does not violate Sec. 1026.19(e)(1)(i)
if the creditor refunds the excess to the consumer no later than 60 days
after consummation, and the creditor does not violate Sec.
1026.19(f)(1)(i) if the creditor delivers disclosures corrected to
reflect the refund of such excess no later than 60 days after
consummation. The creditor satisfies these requirements under Sec.
1026.19(f)(2)(v) if it revises the disclosures accordingly and delivers
or places them in the mail by November 30.
iii. Assume consummation occurs on a Monday and the security
instrument is recorded on Tuesday, the day after consummation. During
the recording process on Tuesday the settlement agent and the creditor
discover that the property is subject to an unpaid $500 nuisance
abatement assessment, which was not disclosed pursuant to Sec.
1026.19(f)(1)(i), and learns that pursuant to an agreement with the
seller, the $500 assessment will be paid by the seller rather than the
consumer. Because the $500 assessment does not result in a change to an
amount actually paid by the consumer, the creditor is not required to
provide a corrected disclosure pursuant to Sec. 1026.19(f)(2)(iii).
However, the assessment will result in a change to an amount actually
paid by the seller from the amount disclosed under Sec.
1026.19(f)(4)(i). Pursuant to Sec. 1026.19(f)(4)(ii), the settlement
agent must deliver or place in the mail corrected disclosures to the
seller no later than 30 days after Tuesday and provide a copy to the
creditor pursuant to Sec. 1026.19(f)(4)(iv).
iv. Assume consummation occurs on a Monday and the security
instrument is recorded on Tuesday, the day after consummation. Assume
further that ten days after consummation the municipality in which the
property is located raises property tax rates effective after the date
on which settlement concludes. Section 1026.19(f)(2)(iii) does not
require the creditor to provide the consumer
[[Page 609]]
with corrected disclosures because the increase in property tax rates is
not in connection with the settlement of the transaction.
2. Per-diem interest. Under Sec. 1026.19(f)(2)(iii), if during the
30-day period following consummation, an event in connection with the
settlement of the transaction occurs that causes the disclosures to
become inaccurate, and such inaccuracy results in a change to an amount
actually paid by the consumer from that amount disclosed under Sec.
1026.19(f)(1)(i), the creditor must provide the consumer corrected
disclosures, except as described in this comment. A creditor is not
required to provide corrected disclosures under Sec. 1026.19(f)(2)(iii)
if the only changes that would be required to be disclosed in the
corrected disclosure are changes to per-diem interest and any
disclosures affected by the change in per-diem interest, even if the
amount of per-diem interest actually paid by the consumer differs from
the amount disclosed under Sec. 1026.38(g)(2) and (o). Nonetheless, if
a creditor is providing a corrected disclosure under Sec.
1026.19(f)(2)(iii) for reasons other than changes in per-diem interest
and the per-diem interest has changed as well, the creditor must
disclose in the corrected disclosures under Sec. 1026.19(f)(2)(iii) the
correct amount of the per-diem interest and provide corrected
disclosures for any disclosures that are affected by the change in per-
diem interest.
19(f)(2)(iv) Changes due to clerical errors.
1. Requirements. Section 1026.19(f)(2)(iv) requires the creditor to
deliver or place in the mail corrected disclosures if the disclosures
provided pursuant to Sec. 1026.19(f)(1)(i) contain non-numeric clerical
errors. An error is considered clerical if it does not affect a
numerical disclosure and does not affect requirements imposed by Sec.
1026.19(e) or (f). For example, if the disclosure identifies the
incorrect settlement service provider as the recipient of a payment,
then Sec. 1026.19(f)(2)(iv) requires the creditor to deliver or place
in the mail corrected disclosures reflecting the corrected non-numeric
disclosure no later than 60 days after consummation. However, if, for
example, the disclosure lists the wrong property address, which affects
the delivery requirement imposed by Sec. 1026.19(e) or (f), the error
would not be considered clerical.
19(f)(2)(v) Refunds related to the good faith analysis.
1. Requirements. Section 1026.19(f)(2)(v) provides that, if amounts
paid at consummation exceed the amounts specified under Sec.
1026.19(e)(3)(i) or (ii), the creditor does not violate Sec.
1026.19(e)(1)(i) if the creditor refunds the excess to the consumer no
later than 60 days after consummation, and the creditor does not violate
Sec. 1026.19(f)(1)(i) if the creditor delivers or places in the mail
disclosures corrected to reflect the refund of such excess no later than
60 days after consummation. For example, assume that at consummation the
consumer must pay four itemized charges that are subject to the good
faith determination under Sec. 1026.19(e)(3)(i). If the actual amounts
paid by the consumer for the four itemized charges subject to Sec.
1026.19(e)(3)(i) exceed their respective estimates on the disclosures
required under Sec. 1026.19(e)(1)(i) by $30, $25, $25, and $15, then
the total would exceed the limitations prescribed by Sec.
1026.19(e)(3)(i) by $95. If, further, the amounts paid by the consumer
for services that are subject to the good faith determination under
Sec. 1026.19(e)(3)(ii) totaled $1,190, but the respective estimates on
the disclosures required under Sec. 1026.19(e)(1)(i) totaled only
$1,000, then the total would exceed the limitations prescribed by Sec.
1026.19(e)(3)(ii) by $90. The creditor does not violate Sec.
1026.19(e)(1)(i) if the creditor refunds $185 to the consumer no later
than 60 days after consummation. The creditor does not violate Sec.
1026.19(f)(1)(i) if the creditor delivers or places in the mail
corrected disclosures reflecting the $185 refund of the excess amount
collected no later than 60 days after consummation. See comments 38-4
and 38(h)(3)-2 for additional guidance on disclosing refunds.
19(f)(3) Charges disclosed.
19(f)(3)(i) Actual charge.
1. Requirements. Section 1026.19(f)(3)(i) provides the general rule
that the amount imposed on the consumer for any settlement service shall
not exceed the amount actually received by the settlement service
provider for that service. Except as otherwise provided in Sec.
1026.19(f)(3)(ii), a creditor violates Sec. 1026.19(f)(3)(i) if the
amount imposed upon the consumer exceeds the amount actually received by
the service provider for that service.
19(f)(3)(ii) Average charge.
1. Requirements. Average-charge pricing is the exception to the rule
in Sec. 1026.19(f)(3)(i) that consumers shall not pay more than the
exact amount charged by a settlement service provider for the
performance of that service. See comment 19(f)(3)(i)-1. If the creditor
develops representative samples of specific settlement costs for a
particular class of transactions, the creditor may charge the average
cost for that settlement service instead of the actual cost for such
transactions. An average-charge program may not be used in a way that
inflates the cost for settlement services overall.
2. Defining the class of transactions. Section 1026.19(f)(3)(ii)(B)
requires a creditor to use an appropriate period of time, appropriate
geographic area, and appropriate type of loan to define a particular
class of transactions. For purposes of Sec. 1026.19(f)(3)(ii)(B), a
period of time is appropriate if the sample size is sufficient to
calculate average costs with reasonable precision, provided that the
period of time is not less than 30 days and not more than six months.
For purposes of
[[Page 610]]
Sec. 1026.19(f)(3)(ii)(B), a geographic area and loan type are
appropriate if the sample size is sufficient to calculate average costs
with reasonable precision, provided that the area and loan type are not
defined in a way that pools costs between dissimilar populations. For
example:
i. Assume a creditor defines a geographic area that contains two
subdivisions, one with a median appraisal cost of $200, and the other
with a median appraisal cost of $1,000. This geographic area would not
satisfy the requirements of Sec. 1026.19(f)(3)(ii) because the cost
characteristics of the two populations are dissimilar. However, a
geographic area would be appropriately defined if both subdivisions had
a relatively normal distribution of appraisal costs, even if the
distribution for each subdivision ranges from below $200 to above
$1,000.
ii. Assume a creditor defines a type of loan that includes two
distinct rate products. The median recording fee for one product is $80,
while the median recording fee for the other product is $130. This
definition of loan type would not satisfy the requirements of Sec.
1026.19(f)(3)(ii) because the cost characteristics of the two products
are dissimilar. However, a type of loan would be appropriately defined
if both products had a relatively normal distribution of recording fees,
even if the distribution for each product ranges from below $80 to above
$130.
3. Uniform use. If a creditor chooses to use an average charge for a
settlement service for a particular loan within a class, Sec.
1026.19(f)(3)(ii)(C) requires the creditor to use that average charge
for that service on all loans within the class. For example:
i. Assume a creditor elects to use an average charge for appraisal
fees. The creditor defines a class of transactions as all fixed rate
loans originated between January 1 and April 30 secured by real property
or a cooperative unit located within a particular metropolitan
statistical area. The creditor must then charge the average appraisal
charge to all consumers obtaining fixed rate loans originated between
May 1 and August 30 secured by real property or a cooperative unit
located within the same metropolitan statistical area.
ii. The example in paragraph i of this comment assumes that a
consumer would not be required to pay the average appraisal charge
unless an appraisal was required on that particular loan. Using the
example above, if a consumer applies for a loan within the defined
class, but already has an appraisal report acceptable to the creditor
from a prior loan application, the creditor may not charge the consumer
the average appraisal fee because an acceptable appraisal report has
already been obtained for the consumer's application. Similarly,
although the creditor defined the class broadly to include all fixed
rate loans, the creditor may not require the consumer to pay the average
appraisal charge if the particular fixed rate loan program the consumer
applied for does not require an appraisal.
4. Average amount paid. The average charge must correspond to the
average amount paid by or imposed on consumers and sellers during the
prior defined time period. For example, assume a creditor calculates an
average tax certification fee based on four-month periods starting
January 1 of each year. The tax certification fees charged to a consumer
on May 20 may not exceed the average tax certification fee paid from
January 1 through April 30. A creditor may delay the period by a
reasonable amount of time if such delay is needed to perform the
necessary analysis and update the affected systems, provided that each
subsequent period is scheduled accordingly. For example, a creditor may
define a four-month period from January 1 to April 30 and begin using
the average charge from that period on May 15, provided the average
charge is used until September 15, at which time the average charge for
the period from May 1 to August 31 becomes effective.
5. Adjustments based on retrospective analysis required. Creditors
using average charges must ensure that the total amount paid by or
imposed on consumers for a service does not exceed the total amount paid
to the providers of that service for the particular class of
transactions. A creditor may find that, even though it developed an
average-cost pricing program in accordance with the requirements of
Sec. 1026.19(f)(3)(ii), over time it has collected more from consumers
than it has paid to settlement service providers. For example, assume a
creditor defines a class of transactions and uses that class to develop
an average charge of $135 for pest inspections. The creditor then
charges $135 per transaction for 100 transactions from January 1 through
April 30, but the actual average cost to the creditor of pest
inspections during this period is $115. The creditor then decreases the
average charge for the May to August period to account for the lower
average cost during the January to April period. At this point, the
creditor has collected $2,000 more than it has paid to settlement
service providers for pest inspections. The creditor then charges $115
per transaction for 70 transactions from May 1 to August 30, but the
actual average cost to the creditor of pest inspections during this
period is $125. Based on the average cost to the creditor from the May
to August period, the average charge to the consumer for the September
to December period should be $125. However, while the creditor spent
$700 more than it collected during the May to August period, it
collected $1,300 more than it spent from January to August. In cases
such as these, the creditor remains responsible for ensuring that the
amount collected from consumers
[[Page 611]]
does not exceed the total amounts paid for the corresponding settlement
services over time. The creditor may develop a variety of methods that
achieve this outcome. For example, the creditor may choose to refund the
proportional overage paid to the affected consumers. Or the creditor may
choose to factor in the excess amount collected to decrease the average
charge for an upcoming period. Although any method may comply with this
requirement, a creditor is deemed to have complied if it defines a six-
month time period and establishes a rolling monthly period of
reevaluation. For example, assume a creditor defines a six-month time
period from January 1 to June 30 and the creditor uses the average
charge starting July 1. If, at the end of July, the creditor
recalculates the average cost from February 1 to July 31, and then uses
the recalculated average cost for transactions starting August 1, the
creditor complies with the requirements of Sec. 1026.19(f)(3)(ii), even
if the creditor actually collected more from consumers than was paid to
providers over time.
6. Adjustments based on prospective analysis permitted, but not
required. A creditor may prospectively adjust average charges if it
develops a statistically reliable and accurate method for doing so. For
example, assume a creditor calculates average charges based on two time
periods: winter (October 1 to March 31), and summer (April 1 to
September 30). If the creditor can demonstrate that the average cost of
a particular settlement service is always at least 15 percent more
expensive during the winter period than the summer period, the creditor
may increase the average charge for the next winter period by 15 percent
over the average cost for the current summer period, provided, however,
that the creditor performs retrospective periodic adjustments, as
explained in comment 19(f)(3)(ii)-5.
7. Charges that vary with loan amount or property value. An average
charge may not be used for any charge that varies according to the loan
amount or property value. For example, an average charge may not be used
for a transfer tax if the transfer tax is calculated as a percentage of
the loan amount or property value. Average charges also may not be used
for any insurance premium. For example, average charges may not be used
for title insurance or for either the upfront premium or initial escrow
deposit for hazard insurance.
8. Prohibited by law. An average charge may not be used where
prohibited by any applicable State or local law. For example, a creditor
may not impose an average charge for an appraisal if applicable law
prohibits creditors from collecting any amount in excess of the actual
cost of the appraisal.
9. Documentation required. To comply with Sec. 1026.25, a creditor
must retain all documentation used to calculate the average charge for a
particular class of transactions for at least three years after any
settlement for which that average charge was used. The documentation
must support the components and methods of calculation. For example, if
a creditor calculates an average charge for a particular county
recording fee by simply averaging all of the relevant fees paid in the
prior month, the creditor need only retain the receipts for the
individual recording fees, a ledger demonstrating that the total amount
received did not exceed the total amount paid over time, and a document
detailing the calculation. However, if a creditor develops complex
algorithms for determining averages, not only must the creditor maintain
the underlying receipts and ledgers, but the creditor must maintain
documentation sufficiently detailed to allow an examiner to verify the
accuracy of the calculations.
19(f)(4) Transactions involving a seller.
19(f)(4)(i) Provision to seller.
1. Requirement. Section 1026.19(f)(4)(i) requires the settlement
agent to provide the seller with the disclosures required under Sec.
1026.38 that relate to the seller's transaction reflecting the actual
terms of the seller's transaction. The settlement agent complies with
this provision by providing a copy of the Closing Disclosure provided to
the consumer, if the Closing Disclosure also contains the information
under Sec. 1026.38 relating to the seller's transaction or,
alternatively, by providing the disclosures under Sec. 1026.38(t)(5)(v)
or (vi), as applicable.
2. Simultaneous subordinate financing. In a purchase transaction
with simultaneous subordinate financing, the settlement agent complies
with Sec. 1026.19(f)(4)(i) by providing the seller with only the first-
lien transaction disclosures required under Sec. 1026.38 that relate to
the seller's transaction reflecting the actual terms of the seller's
transaction in accordance with comment 19(f)(4)(i)-1 if the first-lien
Closing Disclosure records the entirety of the seller's transaction. If
the first-lien Closing Disclosure does not record the entirety of the
seller's transaction, the settlement agent complies with Sec.
1026.19(f)(4)(i) by providing the seller with both the first-lien and
simultaneous subordinate financing transaction disclosures required
under Sec. 1026.38 that relate to the seller's transaction reflecting
the actual terms of the seller's transaction in accordance with comment
19(f)(4)(i)-1.
19(f)(4)(ii) Timing.
1. Requirement. Section 1026.19(f)(4)(ii) provides that the
settlement agent shall provide the disclosures required under Sec.
1026.19(f)(4)(i) no later than the day of consummation. If during the
30-day period following consummation, an event in connection with the
settlement of the transaction occurs that causes such disclosures to
become inaccurate and such inaccuracy results in a change to
[[Page 612]]
the amount actually paid by the seller from that amount disclosed under
Sec. 1026.19(f)(4)(i), the settlement agent shall deliver or place in
the mail corrected disclosures not later than 30 days after receiving
information sufficient to establish that such event has occurred.
Section 1026.19(f)(4)(i) requires disclosure of the items that relate to
the seller's transaction. Thus, the settlement agent need only
redisclose if an item related to the seller's transaction becomes
inaccurate and such inaccuracy results in a change to the amount
actually paid by the seller. For example, assume a transaction where the
seller pays the transfer tax, the consummation occurs on Monday, and the
security instrument is recorded on Tuesday, the day after consummation.
If the settlement agent receives information on Tuesday sufficient to
establish that transfer taxes owed to the State differ from those
disclosed pursuant to Sec. 1026.19(f)(4)(i), the settlement agent
complies with Sec. 1026.19(f)(4)(ii) by revising the disclosures
accordingly and delivering or placing them in the mail not later than 30
days after Tuesday. See comment 19(e)(4)(i)-1 for guidance on when
sufficient information has been received to establish an event has
occurred. See also comment 19(f)(2)(iii)-1.iii for another example in
which corrected disclosures must be provided to the seller.
19(g) Special information booklet at time of application.
19(g)(1) Creditor to provide special information booklet.
1. Revision of booklet. The Bureau may, from time to time, issue
revised or alternative versions of the special information booklet that
addresses transactions subject to Sec. 1026.19(g) by publishing a
notice in the Federal Register. The Bureau also may choose to permit the
forms or booklets of other Federal agencies to be used by creditors. In
such an event, the availability of the booklet or alternate materials
for these transactions will be set forth in a notice in the Federal
Register. The current version of the booklet can be accessed on the
Bureau's Web site, www.consumerfinance.gov/learnmore.
2. Multiple applicants. When two or more persons apply together for
a loan, the creditor complies with Sec. 1026.19(g) if the creditor
provides a copy of the booklet to one of the persons applying.
3. Consumer's application. Section 1026.19(g)(1)(i) requires that
the creditor deliver or place in the mail the special information
booklet not later than three business days after the consumer's
application is received. ``Application'' is defined in Sec.
1026.2(a)(3)(ii). The creditor need not provide the booklet under Sec.
1026.19(g)(1)(i) when it denies an application or if the consumer
withdraws the application before the end of the three-business-day
period under Sec. 1026.19(e)(1)(iii)(A). See comment 19(e)(1)(iii)-3
for additional guidance on denied or withdrawn applications.
19(g)(2) Permissible changes.
1. Reproduction. The special information booklet may be reproduced
in any form, provided that no changes are made, except as otherwise
provided under Sec. 1026.19(g)(2). See also comment 19(g)(2)-3.
Provision of the special information booklet as a part of a larger
document does not satisfy the requirements of Sec. 1026.19(g). Any
color, size and quality of paper, type of print, and method of
reproduction may be used so long as the booklet is clearly legible.
2. Other permissible changes. The special information booklet may be
translated into languages other than English. Changes to the booklet
other than those specified in Sec. 1026.19(g)(2)(i) through (iv) and
comment 19(g)(2)-3 do not comply with Sec. 1026.19(g).
3. Permissible changes to title of booklets in use before October 3,
2015. Section 1026.19(g)(2)(iv) provides that the title appearing on the
cover of the booklet shall not be changed. Comment 19(g)(1)-1 states
that the Bureau may, from time to time, issue revised or alternative
versions of the special information booklet that address transactions
subject to Sec. 1026.19(g) by publishing a notice in the Federal
Register. Until the Bureau issues a version of the special information
booklet relating to the Loan Estimate and Closing Disclosure under
Sec. Sec. 1026.37 and 1026.38, for applications that are received on or
after October 3, 2015, a creditor may change the title appearing on the
cover of the version of the special information booklet in use before
October 3, 2015, provided the words ``settlement costs'' are used in the
title. See comment 1(d)(5)-1 for guidance regarding compliance with
Sec. 1026.19(g) for applications received on or after October 3, 2015.
Section 1026.20 Disclosure Requirements Regarding Post-Consummation
Events
20(a) Refinancings
1. Definition. A refinancing is a new transaction requiring a
complete new set of disclosures. Whether a refinancing has occurred is
determined by reference to whether the original obligation has been
satisfied or extinguished and replaced by a new obligation, based on the
parties' contract and applicable law. The refinancing may involve the
consolidation of several existing obligations, disbursement of new money
to the consumer or on the consumer's behalf, or the rescheduling of
payments under an existing obligation. In any form, the new obligation
must completely replace the prior one.
i. Changes in the terms of an existing obligation, such as the
deferral of individual installments, will not constitute a refinancing
unless accomplished by the cancellation of
[[Page 613]]
that obligation and the substitution of a new obligation.
ii. A substitution of agreements that meets the refinancing
definition will require new disclosures, even if the substitution does
not substantially alter the prior credit terms.
2. Exceptions. A transaction is subject to Sec. 1026.20(a) only if
it meets the general definition of a refinancing. Section 1026.20(a)(1)
through (5) lists 5 events that are not treated as refinancings, even if
they are accomplished by cancellation of the old obligation and
substitution of a new one.
3. Variable-rate. i. If a variable-rate feature was properly
disclosed under the regulation, a rate change in accord with those
disclosures is not a refinancing. For example, no new disclosures are
required when the variable-rate feature is invoked on a renewable
balloon-payment mortgage that was previously disclosed as a variable-
rate transaction.
ii. Even if it is not accomplished by the cancellation of the old
obligation and substitution of a new one, a new transaction subject to
new disclosures results if the creditor either:
A. Increases the rate based on a variable-rate feature that was not
previously disclosed; or
B. Adds a variable-rate feature to the obligation. A creditor does
not add a variable-rate feature by changing the index of a variable-rate
transaction to a comparable index, whether the change replaces the
existing index or substitutes an index for one that no longer exists.
iii. If either of the events in paragraph 20(a)-3.ii.A or ii.B
occurs in a transaction secured by a principal dwelling with a term
longer than one year, the disclosures required under Sec. 1026.19(b)
also must be given at that time.
4. Unearned finance charge. In a transaction involving precomputed
finance charges, the creditor must include in the finance charge on the
refinanced obligation any unearned portion of the original finance
charge that is not rebated to the consumer or credited against the
underlying obligation. For example, in a transaction with an add-on
finance charge, a creditor advances new money to a consumer in a fashion
that extinguishes the original obligation and replaces it with a new
one. The creditor neither refunds the unearned finance charge on the
original obligation to the consumer nor credits it to the remaining
balance on the old obligation. Under these circumstances, the unearned
finance charge must be included in the finance charge on the new
obligation and reflected in the annual percentage rate disclosed on
refinancing. Accrued but unpaid finance charges are included in the
amount financed in the new obligation.
5. Coverage. Section 1026.20(a) applies only to refinancings
undertaken by the original creditor or a holder or servicer of the
original obligation. A ``refinancing'' by any other person is a new
transaction under the regulation, not a refinancing under this section.
Paragraph 20(a)(1)
1. Renewal. This exception applies both to obligations with a single
payment of principal and interest and to obligations with periodic
payments of interest and a final payment of principal. In determining
whether a new obligation replacing an old one is a renewal of the
original terms or a refinancing, the creditor may consider it a renewal
even if:
i. Accrued unpaid interest is added to the principal balance.
ii. Changes are made in the terms of renewal resulting from the
factors listed in Sec. 1026.17(c)(3).
iii. The principal at renewal is reduced by a curtailment of the
obligation.
Paragraph 20(a)(2)
1. Annual percentage rate reduction. A reduction in the annual
percentage rate with a corresponding change in the payment schedule is
not a refinancing. If the annual percentage rate is subsequently
increased (even though it remains below its original level) and the
increase is effected in such a way that the old obligation is satisfied
and replaced, new disclosures must then be made.
2. Corresponding change. A corresponding change in the payment
schedule to implement a lower annual percentage rate would be a
shortening of the maturity, or a reduction in the payment amount or the
number of payments of an obligation. The exception in Sec.
1026.20(a)(2) does not apply if the maturity is lengthened, or if the
payment amount or number of payments is increased beyond that remaining
on the existing transaction.
Paragraph 20(a)(3)
1. Court agreements. This exception includes, for example,
agreements such as reaffirmations of debts discharged in bankruptcy,
settlement agreements, and post-judgment agreements. (See the commentary
to Sec. 1026.2(a)(14) for a discussion of court-approved agreements
that are not considered ``credit.'')
Paragraph 20(a)(4)
1. Workout agreements. A workout agreement is not a refinancing
unless the annual percentage rate is increased or additional credit is
advanced beyond amounts already accrued plus insurance premiums.
Paragraph 20(a)(5)
1. Insurance renewal. The renewal of optional insurance added to an
existing credit transaction is not a refinancing, assuming
[[Page 614]]
that appropriate Truth in Lending disclosures were provided for the
initial purchase of the insurance.
20(b) Assumptions
1. General definition. i. An assumption as defined in Sec.
1026.20(b) is a new transaction and new disclosures must be made to the
subsequent consumer. An assumption under the regulation requires the
following three elements:
A. A residential mortgage transaction.
B. An express acceptance of the subsequent consumer by the creditor.
C. A written agreement.
ii. The assumption of a nonexempt consumer credit obligation
requires no disclosures unless all three elements are present. For
example, an automobile dealer need not provide Truth in Lending
disclosures to a customer who assumes an existing obligation secured by
an automobile. However, a residential mortgage transaction with the
elements described in Sec. 1026.20(b) is an assumption that calls for
new disclosures; the disclosures must be given whether or not the
assumption is accompanied by changes in the terms of the obligation.
(See comment 2(a)(24)-5 for a discussion of assumptions that are not
considered residential mortgage transactions.)
2. Existing residential mortgage transaction. A transaction may be a
residential mortgage transaction as to one consumer and not to the other
consumer. In that case, the creditor must look to the assuming consumer
in determining whether a residential mortgage transaction exists. To
illustrate: The original consumer obtained a mortgage to purchase a home
for vacation purposes. The loan was not a residential mortgage
transaction as to that consumer. The mortgage is assumed by a consumer
who will use the home as a principal dwelling. As to that consumer, the
loan is a residential mortgage transaction. For purposes of Sec.
1026.20(b), the assumed loan is an ``existing residential mortgage
transaction'' requiring disclosures, if the other criteria for an
assumption are met.
3. Express agreement. Expressly agrees means that the creditor's
agreement must relate specifically to the new debtor and must
unequivocally accept that debtor as a primary obligor. The following
events are not construed to be express agreements between the creditor
and the subsequent consumer:
i. Approval of creditworthiness.
ii. Notification of a change in records.
iii. Mailing of a coupon book to the subsequent consumer.
iv. Acceptance of payments from the new consumer.
4. Retention of original consumer. The retention of the original
consumer as an obligor in some capacity does not prevent the change from
being an assumption, provided the new consumer becomes a primary
obligor. But the mere addition of a guarantor to an obligation for which
the original consumer remains primarily liable does not give rise to an
assumption. However, if neither party is designated as the primary
obligor but the creditor accepts payment from the subsequent consumer,
an assumption exists for purposes of Sec. 1026.20(b).
5. Status of parties. Section 1026.20(b) applies only if the
previous debtor was a consumer and the obligation is assumed by another
consumer. It does not apply, for example, when an individual takes over
the obligation of a corporation.
6. Disclosures. For transactions that are assumptions within this
provision, the creditor must make disclosures based on the ``remaining
obligation.'' For example:
i. The amount financed is the remaining principal balance plus any
arrearages or other accrued charges from the original transaction.
ii. If the finance charge is computed from time to time by
application of a percentage rate to an unpaid balance, in determining
the amount of the finance charge and the annual percentage rate to be
disclosed, the creditor should disregard any prepaid finance charges
paid by the original obligor, but must include in the finance charge any
prepaid finance charge imposed in connection with the assumption.
iii. If the creditor requires the assuming consumer to pay any
charges as a condition of the assumption, those sums are prepaid finance
charges as to that consumer, unless exempt from the finance charge under
Sec. 1026.4. If a transaction involves add-on or discount finance
charges, the creditor may make abbreviated disclosures, as outlined in
Sec. 1026.20(b)(1) through (5). Creditors providing disclosures
pursuant to this section for assumptions of variable-rate transactions
secured by the consumer's principal dwelling with a term longer than one
year need not provide new disclosures under Sec. 1026.18(f)(2)(ii) or
Sec. 1026.19(b). In such transactions, a creditor may disclose the
variable-rate feature solely in accordance with Sec. 1026.18(f)(1).
7. Abbreviated disclosures. The abbreviated disclosures permitted
for assumptions of transactions involving add-on or discount finance
charges must be made clearly and conspicuously in writing in a form that
the consumer may keep. However, the creditor need not comply with the
segregation requirement of Sec. 1026.17(a)(1). The terms annual
percentage rate and total of payments, when disclosed according to Sec.
1026.20(b)(4) and (5), are not subject to the description requirements
of Sec. 1026.18(e) and (h). The term annual percentage rate disclosed
under Sec. 1026.20(b)(4) need not be more conspicuous than other
disclosures.
20(c) Rate adjustments with a corresponding change in payment.
[[Page 615]]
1. Creditors, assignees, and servicers. Creditors, assignees, and
servicers that own either the applicable adjustable-rate mortgage or the
applicable mortgage servicing rights or both are subject to the
requirements of Sec. 1026.20(c). Creditors, assignees, and servicers
are also subject to the requirements of any provision of subpart C that
governs Sec. 1026.20(c). For example, the form requirements of Sec.
1026.17(a) apply to Sec. 1026.20(c) disclosures and thus, assignees and
servicers, as well as creditors, are subject to those requirements.
While creditors, assignees, and servicers are all subject to the
requirements of Sec. 1026.20(c), they may decide among themselves which
of them will provide the required disclosures.
2. Loan modifications. Under Sec. 1026.20(c), the interest rate
adjustment disclosures are required only for interest rate adjustments
occurring pursuant to the loan contract. Accordingly, creditors,
assignees, and servicers need not provide the disclosures for interest
rate adjustments occurring in loan modifications made for loss
mitigation purposes. Subsequent interest rate adjustments resulting in a
corresponding payment change occurring pursuant to the modified loan
contract, however, are subject to the requirements of Sec. 1026.20(c).
3. Conversions. In addition to the disclosures required for interest
rate adjustments under an adjustable-rate mortgage, Sec. 1026.20(c)
also requires the disclosures for an ARM converting to a fixed-rate
transaction when the conversion changes the interest rate and results in
a corresponding payment change. When an open-end account converts to a
closed-end adjustable-rate mortgage, the Sec. 1026.20(c) disclosure is
not required until the implementation of an interest rate adjustment
post-conversion that results in a corresponding payment change. For
example, for an open-end account that converts to a closed-end 3/1
hybrid ARM, i.e., an ARM with a fixed rate of interest for the first
three years after which the interest rate adjusts annually, the first
Sec. 1026.20(c) disclosure would not be required until three years
after the conversion, and only if that first adjustment resulted in a
payment change.
Paragraph 20(c)(1)(i).
1. In general. An adjustable-rate mortgage, as defined in Sec.
1026.20(c)(1)(i), is a variable-rate transaction as that term is used in
subpart C, except as distinguished by comment Sec. 1026.20(c)(1)(ii)-3.
The requirements of this section are not limited to transactions
financing the initial acquisition of the consumer's principal dwelling.
Paragraph 20(c)(1)(ii).
1. Short-term ARMs. Under Sec. 1026.20(c)(1)(ii), construction,
home improvement, bridge, and other loans with terms of one year or less
are not subject to the requirements in Sec. 1026.20(c). In determining
the term of a construction loan that may be permanently financed by the
same creditor or assignee, the creditor or assignee may treat the
construction and the permanent phases as separate transactions with
distinct terms to maturity or as a single combined transaction.
2. First new payment due within 210 days after consummation. Section
1026.20(c) disclosures are not required if the first payment at the
adjusted level is due within 210 days after consummation, when the new
interest rate disclosed at consummation pursuant to Sec. 1026.20(d) is
not an estimate. For example, the creditor, assignee, or servicer would
not be required to provide the disclosures required by Sec. 1026.20(c)
for the first time an ARM interest rate adjusts if the first payment at
the adjusted level was due 120 days after consummation and the adjusted
interest rate disclosed at consummation pursuant to Sec. 1026.20(d) was
not an estimate.
3. Non-adjustable-rate mortgages. The following transactions, if
structured as fixed-rate and not as adjustable-rate mortgages based on
an index or formula, are not subject to Sec. 1026.20(c):
i. Shared-equity or shared-appreciation mortgages;
ii. Price-level adjusted or other indexed mortgages that have a
fixed rate of interest but provide for periodic adjustments to payments
and the loan balance to reflect changes in an index measuring prices or
inflation;
iii. Graduated-payment mortgages or step-rate transactions;
iv. Renewable balloon-payment instruments; and
v. Preferred-rate loans.
Paragraph 20(c)(2).
1. Timing. The requirement that Sec. 1026.20(c) disclosures be
provided to consumers within a certain timeframe means that the
creditor, assignee, or servicer must deliver the notice or place it in
the mail within that timeframe, excluding any grace or courtesy periods.
The requirement that the Sec. 1026.20(c) disclosures must be provided
between 25 and 120 days before the first payment at the adjusted level
is due for frequently-adjusting ARMs, applies to ARMs that adjust
regularly at a maximum of every 60 days.
Paragraph 20(c)(2)(ii)(A).
1. Current and new interest rates. The current interest rate is the
interest rate that applies on the date the disclosure is provided to the
consumer. The new interest rate is the actual interest rate that will
apply on the date of the adjustment. The new interest rate is used to
determine the new payment. The ``new interest rate'' has the same
meaning as the ``adjusted interest rate.'' The requirements of Sec.
1026.20(c)(2)(ii)(A) do not preclude creditors, assignees, and servicers
from rounding the interest rate, pursuant to the requirements of the ARM
contract.
Paragraph 20(c)(2)(iv).
[[Page 616]]
1. Rate limits and foregone interest rate increases. Interest rate
carryover, or foregone interest rate increases, is the amount of
interest rate increase foregone at any ARM interest rate adjustment
that, subject to rate caps, can be added to future interest rate
adjustments to increase, or to offset decreases in, the rate determined
by using the index or formula. The disclosures required by Sec.
1026.20(c)(2)(iv) regarding foregone interest rate increases apply only
to transactions permitting interest rate carryover.
Paragraph 20(c)(2)(v)(B).
1. Application of previously foregone interest rate increases. The
disclosures regarding the application of previously foregone interest
rate increases apply only to transactions permitting interest rate
carryover.
Paragraph 20(c)(2)(vi).
1. Amortization statement. For ARMs requiring the payment of
interest only, such as interest-only loans, Sec. 1026.20(c)(2)(vi)
requires a statement that the new payment covers all of the interest but
none of the principal, and therefore will not reduce the loan balance.
For negatively-amortizing ARMs, Sec. 1026.20(c)(2)(vi) requires a
statement that the new payment covers only part of the interest and none
of the principal, and therefore the unpaid interest will be added to the
principal balance.
2. Amortization payment. Disclosure of the payment needed to
amortize fully the outstanding balance at the new interest rate over the
remainder of the loan term is required only when negative amortization
occurs as a result of the interest rate adjustment. The disclosure is
not required simply because a loan has interest-only or partially-
amortizing payments. For example, an ARM with a five-year term and
payments based on a longer amortization schedule, in which the final
payment will equal the periodic payment plus the remaining unpaid
balance, does not require disclosure of the payment necessary to
amortize fully the loan in the remainder of the five-year term. A
disclosure is also not required when the new payment is sufficient to
prevent negative amortization but the final loan payment will be a
different amount due to rounding.
Paragraph 20(c)(2)(vii).
1. Prepayment penalty. The creditor, assignee, or servicer of an ARM
with no prepayment penalty, as that term is used in Sec.
1026.20(c)(2)(vii), may decide to exclude the prepayment section from
the Sec. 1026.20(c) disclosure, retain the prepayment section and
insert after the heading ``None'' or other indication that there is no
prepayment penalty, or indicate there is no prepayment penalty in some
other manner. See also comment 1.vi to Appendices G and H--Open-End and
Closed-End Model Forms and Clauses.
Paragraph 20(c)(3)(i).
1. Format of disclosures. The requirements of Sec. 1026.20(c)(3)(i)
and (ii) to provide the Sec. 1026.20(c) disclosures in the same order
as, and with headings and format substantially similar to, the model and
sample forms do not preclude creditors, assignees, and servicers from
modifying the disclosures to accommodate particular consumer
circumstances or transactions not addressed by the forms. For example,
in the case of a consumer bankruptcy or under certain State laws, the
creditor, assignee, or servicer may modify the forms to remove language
regarding personal liability. Creditors, assignees, and servicers
providing the required notice to a consumer whose ARM is converting to a
fixed-rate mortgage, may modify the model language to explain that the
interest rate will no longer adjust. Creditors, assignees, and servicers
electing to provide consumers with interest rate notices in cases where
the interest rate adjusts without a corresponding change in payment may
modify the forms to fit that circumstance. A payment-option ARM, which
is an ARM permitting consumers to choose among several different payment
options for each billing period, is an example of a loan that may
require modification of the Sec. 1026.20(c) model and sample forms. See
appendix H-30(C) for an example of an allocation table for a payment-
option loan.
20(d) Initial rate adjustment.
1. Creditors, assignees, and servicers. Creditors, assignees, and
servicers that own either the applicable adjustable-rate mortgage or the
applicable mortgage servicing rights or both are subject to the
requirements of Sec. 1026.20(d). Creditors, assignees, and servicers
are also subject to the requirements of any provision of subpart C that
governs Sec. 1026.20(d). For example, the form requirements of Sec.
1026.17(a) apply to Sec. 1026.20(d) disclosures and thus, assignees and
servicers, as well as creditors, are subject to those requirements.
While creditors, assignees, and servicers are all subject to the
requirements of Sec. 1026.20(d), they may decide among themselves which
of them will provide the required disclosures.
2. Loan modifications. Under Sec. 1026.20(d), the interest rate
adjustment disclosures are required only for the initial interest rate
adjustment occurring pursuant to the loan contract. Accordingly,
creditors, assignees, and servicers need not provide the disclosures for
interest rate adjustments occurring in loan modifications made for loss
mitigation purposes. The initial interest rate adjustment occurring
pursuant to the modified loan contract, however, is subject to the
requirements of Sec. 1026.20(d).
3. Timing and form of initial rate adjustment. The requirement that
Sec. 1026.20(d) disclosures be provided in writing, separate and
distinct from all other correspondence, means that
[[Page 617]]
the initial ARM interest rate adjustment notice must be provided to
consumers as a separate document but may, in the case of mailing the
disclosure, be in the same envelope with other material and, in the case
of emailing the disclosure, be a separate attachment from other
attachments in the same email. The requirement that the disclosures be
provided to consumers between 210 and 240 days ``before the first
payment at the adjusted level is due'' means the creditor, assignee, or
servicer must deliver the notice or place it in the mail between 210 and
240 days prior to the due date, excluding any grace or courtesy periods,
of the first payment calculated using the adjusted interest rate.
4. Conversions. When an open-end account converts to a closed-end
adjustable-rate mortgage, the Sec. 1026.20(d) disclosure is not
required until the implementation of the initial interest rate
adjustment post-conversion. For example, for an open-end account that
converts to a closed-end 3/1 hybrid ARM, i.e., an ARM with a fixed rate
of interest for the first three years after which the interest rate
adjusts annually, the Sec. 1026.20(d) disclosure would not be required
until three years after the conversion when the interest rate adjusts
for the first time.
Paragraph 20(d)(1)(i).
1. In general. An adjustable-rate mortgage, as defined in Sec.
1026.20(d)(1)(i), is a variable-rate transaction as that term is used in
subpart C, except as distinguished by comment Sec. 1026.20(d)(1)(ii)-2.
The requirements of this section are not limited to transactions
financing the initial acquisition of the consumer's principal dwelling.
Paragraph 20(d)(1)(ii).
1. Short-term ARMs. Under Sec. 1026.20(d)(1)(ii), construction,
home improvement, bridge, and other loans with terms of one year or less
are not subject to the requirements in Sec. 1026.20(d). In determining
the term of a construction loan that may be permanently financed by the
same creditor or assignee, the creditor or assignee may treat the
construction and the permanent phases as separate transactions with
distinct terms to maturity or as a single combined transaction.
2. Non-adjustable-rate mortgages. The following transactions, if
structured as fixed-rate and not as adjustable-rate mortgages based on
an index or formula, are not subject to Sec. 1026.20(d):
i. Shared-equity or shared-appreciation mortgages;
ii. Price-level adjusted or other indexed mortgages that have a
fixed rate of interest but provide for periodic adjustments to payments
and the loan balance to reflect changes in an index measuring prices or
inflation;
iii. Graduated-payment mortgages or step-rate transactions;
iv. Renewable balloon-payment instruments; and
v. Preferred-rate loans.
Paragraph 20(d)(2)(i).
1. Date of the disclosure. The date that must appear on the
disclosure is the date the creditor, assignee, or servicer generates the
notice to be provided to the consumer.
Paragraph 20(d)(2)(iii)(A).
1. Current and new interest rates. The current interest rate is the
interest rate that applies on the date of the disclosure. The new
interest rate is the interest rate used to calculate the new payment and
may be an estimate pursuant to Sec. 1026.20(d)(2). The new payment, if
calculated from an estimated new interest rate, will also be an
estimate. The ``new interest rate'' has the same meaning as the
``adjusted interest rate.'' The requirements of Sec.
1026.20(d)(2)(iii)(A) do not preclude creditors, assignees, and
servicers from rounding the interest rate, pursuant to the requirements
of the ARM contract.
Paragraph 20(d)(2)(v).
1. Rate limits and foregone interest rate increases. Interest rate
carryover, or foregone interest rate increases, is the amount of
interest rate increase foregone at the first ARM interest rate
adjustment that, subject to rate caps, can be added to future interest
rate adjustments to increase, or to offset decreases in, the rate
determined by using the index or formula. The disclosures required by
Sec. 1026.20(d)(2)(v) regarding foregone interest rate increases apply
only to transactions permitting interest rate carryover.
Paragraph 20(d)(2)(vii).
1. Amortization statement. For ARMs requiring the payment of
interest only, such as interest-only loans, Sec. 1026.20(d)(2)(vii)
requires a statement that the new payment covers all of the interest but
none of the principal, and therefore will not reduce the loan balance.
For negatively-amortizing ARMs, Sec. 1026.20(d)(2)(vii) requires a
statement that the new payment covers only part of the interest and none
of the principal, and therefore the unpaid interest will be added to the
principal balance.
2. Amortization payment. Disclosure of the payment needed to
amortize fully the outstanding balance at the new interest rate over the
remainder of the loan term is required only when negative amortization
occurs as a result of the interest rate adjustment. The disclosure is
not required simply because a loan has interest-only or partially-
amortizing payments. For example, an ARM with a five-year term and
payments based on a longer amortization schedule, in which the final
payment will equal the periodic payment plus the remaining unpaid
balance, does not require disclosure of the payment necessary to
amortize fully the loan in the remainder of the five-year term. A
disclosure is also not required when the new payment is sufficient to
prevent negative amortization
[[Page 618]]
but the final loan payment will be a different amount due to rounding.
Paragraph 20(d)(2)(viii).
1. Prepayment penalty. The creditor, assignee, or servicer of an ARM
with no prepayment penalty, as that term is used in Sec.
1026.20(d)(2)(viii), may decide to exclude the prepayment section from
the Sec. 1026.20(d) disclosure, retain the prepayment section and
insert after the heading ``None'' or other indication that there is no
prepayment penalty, or indicate there is no prepayment penalty in some
other manner. See also comment to Appendices G and H--Open-End and
Closed-End Model Forms and Clauses--1.vi.
Paragraph 20(d)(3)(i).
1. Format of disclosures. The requirements of Sec. 1026.20(d)(3)(i)
and (iii) to provide the Sec. 1026.20(d) disclosures in the same order
as, and with headings and format substantially similar to, the model and
sample forms do not preclude creditors, assignees, and servicers from
modifying the disclosures to accommodate particular consumer
circumstances or transactions not addressed by the forms. For example,
in the case of a consumer bankruptcy or under certain State laws, the
creditor, assignee, or servicer may modify the forms to remove language
regarding personal liability. A payment-option ARM, which is an ARM
permitting consumers to choose among several different payment options
for each billing period, is an example of a loan that may require
modification of the Sec. 1026.20(d) model and sample forms. See
appendix H-30(C) for an example of an allocation table for a payment-
option loan.
20(e) Escrow account cancellation notice for certain mortgage
transactions.
20(e)(1) Scope.
1. Real property or dwelling. For purposes of Sec. 1026.20(e)(1),
the term ``real property'' includes vacant and unimproved land. The term
``dwelling'' includes vacation and second homes and mobile homes, boats,
and trailers used as residences. See Sec. 1026.2(a)(19) and related
commentary for additional guidance regarding the term ``dwelling.''
2. Escrow account established in connection with the consumer's
delinquency or default. Neither creditors nor servicers are required to
provide the disclosures required by Sec. 1026.20(e)(2) when an escrow
account that was established solely in connection with the consumer's
delinquency or default on the underlying debt obligation will be
cancelled.
3. Termination of the underlying debt obligation. Neither creditors
nor servicers are required to provide disclosures required by Sec.
1026.20(e)(2) when the underlying debt obligation for which an escrow
account was established is terminated, including by repayment,
refinancing, rescission, and foreclosure.
20(e)(2) Content requirements.
1. Clear and conspicuous standard. The clear and conspicuous
standard generally requires that disclosures be in a reasonably
understandable form and readily noticeable to the consumer.
Paragraph 20(e)(2)(i).
1. Escrow closing fee. Section 1026.20(e)(2)(i) requires the
creditor to itemize the amount of any fee the creditor or servicer
imposes on the consumer in connection with the closure of the consumer's
escrow account, labeled ``Escrow Closing Fee.'' If the creditor or
servicer independently decides to cancel the escrow account, rather than
agreeing to close it at the request of the consumer, and does not charge
a fee in connection with the cancellation, the creditor or service
complies with Sec. 1026.20(e)(2) by leaving the disclosure blank on the
front-side of the one-page document described in Sec. 1026.20(e)(4).
20(e)(3) Optional information.
1. Optional information permitted. Section 1026.20(e)(3) lists
information that the creditor or servicer may, at its option, include on
the notice required by Sec. 1026.20(e). To comply with Sec.
1026.20(e)(3), the creditor or servicer may place the information
required by Sec. 1026.20(e)(3), other than the name and logo of the
creditor or servicer, between the heading required by Sec.
1026.20(e)(2) and the disclosures required by Sec. 1026.20(e)(2)(i) and
(ii). The name and logo may be placed above the heading required Sec.
1026.20(e)(2).
20(e)(4) Form of disclosures.
1. Grouped and separate. The disclosures required by Sec.
1026.20(e)(2) must be grouped together on the front side of a separate
one-page document that contains no other material.
2. Notice must be in writing in a form that the consumer may keep.
The notice containing the disclosures required by Sec. 1026.20(e)(2)
must be in writing in a form that the consumer may keep. See also Sec.
1026.17(a) and related commentary for additional guidance on the form
requirements applicable to the disclosures required by Sec.
1026.20(e)(2).
20(e)(5) Timing.
20(e)(5)(i) Cancellation upon consumer's request.
1. Timing requirements Section 1026.20(e)(5)(i) provides that if the
creditor or servicer cancels the escrow account at the consumer's
request, the creditor or servicer shall ensure that the consumer
receives the disclosures required by Sec. 1026.20(e)(2) no later than
three business days before closure of the consumer's escrow account. For
example, for closure to occur on Thursday, the consumer must receive the
disclosures on or before Monday, assuming each weekday is a business
day. For purposes of Sec. 1026.20(e)(5), the term ``business day''
means all calendar days except Sundays and legal public holidays
referred to in Sec. 1026.2(a)(6). See comment 2(a)(6)-2.
20(e)(5)(iii) Receipt of disclosure.
[[Page 619]]
1. Timing of receipt. Section 1026.20(e)(5)(iii) provides that if
the disclosures required under Sec. 1026.20(e)(2) are not provided to
the consumer in person, the consumer is considered to have received the
disclosures three business days after they are delivered or placed in
the mail. If the creditor or servicer provides the disclosures required
by Sec. 1026.20(e)(2) by mail, the consumer is considered to have
received them three business days after they are placed in the mail for
purposes of determining when the waiting periods required by Sec.
1026.20(e)(5)(i) and (ii) begins. Creditors and servicers that use
electronic mail or a courier to provide disclosures may also follow this
approach. If, however, the creditor or servicer delivers the disclosures
required by Sec. 1026.20(e)(2) to the consumer in person, the escrow
account may be closed any time on the third or 30th business day
following the date of delivery, as applicable. Whatever method is used
to provide disclosures, creditors and servicers may rely on
documentation of receipt in determining when the waiting periods
required by Sec. 1026.20(e)(5)(i) and (ii) begin.
Section 1026.21--Treatment of Credit Balances
Paragraph 21(a)
1. Credit balance. A credit balance arises whenever the creditor
receives or holds funds in an account in excess of the total balance due
from the consumer on that account. A balance might result, for example,
from the debtor's paying off a loan by transmitting funds in excess of
the total balance owed on the account, or from the early payoff of a
loan entitling the consumer to a rebate of insurance premiums and
finance charges. However, Sec. 1026.21 does not determine whether the
creditor in fact owes or holds sums for the consumer. For example, if a
creditor has no obligation to rebate any portion of precomputed finance
charges on prepayment, the consumer's early payoff would not create a
credit balance with respect to those charges. Similarly, nothing in this
provision interferes with any rights the creditor may have under the
contract or under state law with respect to set-off, cross
collateralization, or similar provisions.
2. Total balance due. The phrase total balance due refers to the
total outstanding balance. Thus, this provision does not apply where the
consumer has simply paid an amount in excess of the payment due for a
given period.
3. Timing of refund. The creditor may also fulfill its obligation
under this section by:
i. Refunding any credit balance to the consumer immediately.
ii. Refunding any credit balance prior to a written request from the
consumer.
iii. Making a good faith effort to refund any credit balance before
6 months have passed. If that attempt is unsuccessful, the creditor need
not try again to refund the credit balance at the end of the 6-month
period.
Paragraph 21(b)
1. Written requests--standing orders. The creditor is not required
to honor standing orders requesting refunds of any credit balance that
may be created on the consumer's account.
Paragraph 21(c)
1. Good faith effort to refund. The creditor must take positive
steps to return any credit balance that has remained in the account for
over 6 months. This includes, if necessary, attempts to trace the
consumer through the consumer's last known address or telephone number,
or both.
2. Good faith effort unsuccessful. Section 1026.21 imposes no
further duties on the creditor if a good faith effort to return the
balance is unsuccessful. The ultimate disposition of the credit balance
(or any credit balance of $1 or less) is to be determined under other
applicable law.
Section 1026.22--Determination of Annual Percentage Rate
22(a) Accuracy of Annual Percentage Rate
Paragraph 22(a)(1)
1. Calculation method. The regulation recognizes both the actuarial
method and the United States Rule Method (U.S. Rule) as measures of an
exact annual percentage rate. Both methods yield the same annual
percentage rate when payment intervals are equal. They differ in their
treatment of unpaid accrued interest.
2. Actuarial method. When no payment is made, or when the payment is
insufficient to pay the accumulated finance charge, the actuarial method
requires that the unpaid finance charge be added to the amount financed
and thereby capitalized. Interest is computed on interest since in
succeeding periods the interest rate is applied to the unpaid balance
including the unpaid finance charge. Appendix J provides instructions
and examples for calculating the annual percentage rate using the
actuarial method.
3. U.S. Rule. The U.S. Rule produces no compounding of interest in
that any unpaid accrued interest is accumulated separately and is not
added to principal. In addition, under the U.S. Rule, no interest
calculation is made until a payment is received.
4. Basis for calculations. When a transaction involves ``step
rates'' or ``split rates''--that is, different rates applied at
different times or to different portions of the principal balance--a
single composite annual percentage rate must be calculated and disclosed
for the entire transaction. Assume, for example, a step-rate transaction
in which a $10,000 loan
[[Page 620]]
is repayable in 5 years at 10 percent interest for the first 2 years, 12
percent for years 3 and 4, and 14 percent for year 5. The monthly
payments are $210.71 during the first 2 years of the term, $220.25 for
years 3 and 4, and $222.59 for year 5. The composite annual percentage
rate, using a calculator with a ``discounted cash flow analysis'' or
``internal rate of return'' function, is 10.75 percent.
5. Good faith reliance on faulty calculation tools. Section
1026.22(a)(1) absolves a creditor of liability for an error in the
annual percentage rate or finance charge that resulted from a
corresponding error in a calculation tool used in good faith by the
creditor. Whether or not the creditor's use of the tool was in good
faith must be determined on a case-by-case basis, but the creditor must
in any case have taken reasonable steps to verify the accuracy of the
tool, including any instructions, before using it. Generally, the
creditor is not liable only for errors directly attributable to the
calculation tool itself, including software programs; Sec.
1026.22(a)(1) is not intended to absolve a creditor of liability for its
own errors, or for errors arising from improper use of the tool, from
incorrect data entry, or from misapplication of the law.
Paragraph 22(a)(2)
1. Regular transactions. The annual percentage rate for a regular
transaction is considered accurate if it varies in either direction by
not more than \1/8\ of 1 percentage point from the actual annual
percentage rate. For example, when the exact annual percentage rate is
determined to be 101/8%, a disclosed annual percentage rate from 10% to
10 \1/4\%, or the decimal equivalent, is deemed to comply with the
regulation.
Paragraph 22(a)(3)
1. Irregular transactions. The annual percentage rate for an
irregular transaction is considered accurate if it varies in either
direction by not more than \1/4\ of 1 percentage point from the actual
annual percentage rate. This tolerance is intended for more complex
transactions that do not call for a single advance and a regular series
of equal payments at equal intervals. The \1/4\ of 1 percentage point
tolerance may be used, for example, in a construction loan where
advances are made as construction progresses, or in a transaction where
payments vary to reflect the consumer's seasonal income. It may also be
used in transactions with graduated payment schedules where the contract
commits the consumer to several series of payments in different amounts.
It does not apply, however, to loans with variable rate features where
the initial disclosures are based on a regular amortization schedule
over the life of the loan, even though payments may later change because
of the variable rate feature.
22(a)(4) Mortgage Loans
1. Example. If a creditor improperly omits a $75 fee from the
finance charge on a regular transaction, the understated finance charge
is considered accurate under Sec. 1026.18(d)(1) or Sec. 1026.38(o)(2),
as applicable, and the annual percentage rate corresponding to that
understated finance charge also is considered accurate even if it falls
outside the tolerance of \1/8\ of 1 percentage point provided under
Sec. 1026.22(a)(2). Because a $75 error was made, an annual percentage
rate corresponding to a $100 understatement of the finance charge would
not be considered accurate.
22(a)(5) Additional Tolerance for Mortgage Loans
1. Example. This paragraph contains an additional tolerance for a
disclosed annual percentage rate that is incorrect but is closer to the
actual annual percentage rate than the rate that would be considered
accurate under the tolerance in Sec. 1026.22(a)(4). To illustrate: in
an irregular transaction subject to a \1/4\ of 1 percentage point
tolerance, if the actual annual percentage rate is 9.00 percent and a
$75 omission from the finance charge corresponds to a rate of 8.50
percent that is considered accurate under Sec. 1026.22(a)(4), a
disclosed APR of 8.65 percent is within the tolerance in Sec.
1026.22(a)(5). In this example of an understated finance charge, a
disclosed annual percentage rate below 8.50 or above 9.25 percent will
not be considered accurate.
22(b) Computation Tools
Paragraph 22(b)(1)
1. Bureau tables. Volumes I and II of the Bureau's Annual Percentage
Rate Tables provide a means of calculating annual percentage rates for
regular and irregular transactions, respectively. An annual percentage
rate computed in accordance with the instructions in the tables is
deemed to comply with the regulation, even where use of the tables
produces a rate that falls outside the general standard of accuracy. To
illustrate:Volume I may be used for single advance transactions with
completely regular payment schedules or with payment schedules that are
regular except for an odd first payment, odd first period or odd final
payment. When used for a transaction with a large final balloon payment,
Volume I may produce a rate that is considerably higher than the exact
rate produced using a computer program based directly on appendix J.
However, the Volume I rate--produced using certain adjustments in that
volume--is considered to be in compliance.
[[Page 621]]
Paragraph 22(b)(2)
1. Other calculation tools. Creditors need not use the Bureau tables
in calculating the annual percentage rates. Any computation tools may be
used, so long as they produce annual percentage rates within \1/8\ or
\1/4\ of 1 percentage point, as applicable, of the precise actuarial or
U.S. Rule annual percentage rate.
22(c) Single Add-On Rate Transactions
1. General rule. Creditors applying a single add-on rate to all
transactions up to 60 months in length may disclose the same annual
percentage rate for all those transactions, although the actual annual
percentage rate varies according to the length of the transaction.
Creditors utilizing this provision must show the highest of those rates.
For example, an add-on rate of 10 percent converted to an annual
percentage rate produces the following actual annual percentage rates at
various maturities: At 3 months, 14.94 percent; at 21 months, 18.18
percent; and at 60 months, 17.27 percent. The creditor must disclose an
annual percentage rate of 18.18 percent (the highest annual percentage
rate) for any transaction up to 5 years, even though that rate is
precise only for a transaction of 21 months.
22(d) Certain Transactions Involving Ranges of Balances
1. General rule. Creditors applying a fixed dollar finance charge to
all balances within a specified range of balances may understate the
annual percentage rate by up to 8 percent of that rate, by disclosing
for all those balances the annual percentage rate computed on the median
balance within that range. For example: If a finance charge of $9
applies to all balances between $91 and $100, an annual percentage rate
of 10 percent (the rate on the median balance) may be disclosed as the
annual percentage rate for all balances, even though a $9 finance charge
applied to the lowest balance ($91) would actually produce an annual
percentage rate of 10.7 percent.
Section 1026.23--Right of Rescission
1. Transactions not covered. Credit extensions that are not subject
to the regulation are not covered by Sec. 1026.23 even if a customer's
principal dwelling is the collateral securing the credit. For example,
the right of rescission does not apply to a business purpose loan, even
though the loan is secured by the customer's principal dwelling.
23(a) Consumer's Right to Rescind
Paragraph 23(a)(1)
1. Security interest arising from transaction. i. In order for the
right of rescission to apply, the security interest must be retained as
part of the credit transaction. For example:
A. A security interest that is acquired by a contractor who is also
extending the credit in the transaction.
B. A mechanic's or materialman's lien that is retained by a
subcontractor or supplier of the contractor-creditor, even when the
latter has waived its own security interest in the consumer's home.
ii. The security interest is not part of the credit transaction and
therefore the transaction is not subject to the right of rescission
when, for example:
A. A mechanic's or materialman's lien is obtained by a contractor
who is not a party to the credit transaction but is merely paid with the
proceeds of the consumer's unsecured bank loan.
B. All security interests that may arise in connection with the
credit transaction are validly waived.
C. The creditor obtains a lien and completion bond that in effect
satisfies all liens against the consumer's principal dwelling as a
result of the credit transaction.
iii. Although liens arising by operation of law are not considered
security interests for purposes of disclosure under Sec. 1026.2, that
section specifically includes them in the definition for purposes of the
right of rescission. Thus, even though an interest in the consumer's
principal dwelling is not a required disclosure under Sec. 1026.18(m),
it may still give rise to the right of rescission.
2. Consumer. To be a consumer within the meaning of Sec. 1026.2,
that person must at least have an ownership interest in the dwelling
that is encumbered by the creditor's security interest, although that
person need not be a signatory to the credit agreement. For example, if
only one spouse signs a credit contract, the other spouse is a consumer
if the ownership interest of that spouse is subject to the security
interest.
3. Principal dwelling. A consumer can only have one principal
dwelling at a time. (But see comment 23(a)(1)-4.) A vacation or other
second home would not be a principal dwelling. A transaction secured by
a second home (such as a vacation home) that is not currently being used
as the consumer's principal dwelling is not rescindable, even if the
consumer intends to reside there in the future. When a consumer buys or
builds a new dwelling that will become the consumer's principal dwelling
within one year or upon completion of construction, the new dwelling is
considered the principal dwelling if it secures the acquisition or
construction loan. In that case, the transaction secured by the new
dwelling is a residential mortgage transaction and is not rescindable.
For example, if a consumer whose principal dwelling is currently A
builds B, to be occupied by the consumer upon completion of
construction, a construction loan to finance B and secured
[[Page 622]]
by B is a residential mortgage transaction. Dwelling, as defined in
Sec. 1026.2, includes structures that are classified as personalty
under state law. For example, a transaction secured by a mobile home,
trailer, or houseboat used as the consumer's principal dwelling may be
rescindable.
4. Special rule for principal dwelling. Notwithstanding the general
rule that consumers may have only one principal dwelling, when the
consumer is acquiring or constructing a new principal dwelling, any loan
subject to Regulation Z and secured by the equity in the consumer's
current principal dwelling (for example, a bridge loan) is subject to
the right of rescission regardless of the purpose of that loan. For
example, if a consumer whose principal dwelling is currently A builds B,
to be occupied by the consumer upon completion of construction, a
construction loan to finance B and secured by A is subject to the right
of rescission. A loan secured by both A and B is, likewise, rescindable.
5. Addition of a security interest. Under Sec. 1026.23(a), the
addition of a security interest in a consumer's principal dwelling to an
existing obligation is rescindable even if the existing obligation is
not satisfied and replaced by a new obligation, and even if the existing
obligation was previously exempt under Sec. 1026.3(b). The right of
rescission applies only to the added security interest, however, and not
to the original obligation. In those situations, only the Sec.
1026.23(b) notice need be delivered, not new material disclosures; the
rescission period will begin to run from the delivery of the notice.
Paragraph 23(a)(2)
1. Consumer's exercise of right. The consumer must exercise the
right of rescission in writing but not necessarily on the notice
supplied under Sec. 1026.23(b). Whatever the means of sending the
notification of rescission--mail, telegram or other written means--the
time period for the creditor's performance under Sec. 1026.23(d)(2)
does not begin to run until the notification has been received. The
creditor may designate an agent to receive the notification so long as
the agent's name and address appear on the notice provided to the
consumer under Sec. 1026.23(b). Where the creditor fails to provide the
consumer with a designated address for sending the notification of
rescission, delivering notification to the person or address to which
the consumer has been directed to send, payments constitutes delivery to
the creditor or assignee. State law determines whether delivery of the
notification to a third party other than the person to whom payments are
made is delivery to the creditor or assignee, in the case where the
creditor fails to designate an address for sending the notification of
rescission.
Paragraph 23(a)(3)
1. Rescission period. i. The period within which the consumer may
exercise the right to rescind runs for 3 business days from the last of
3 events:
A. Consummation of the transaction.
B. Delivery of all material disclosures.
C. Delivery to the consumer of the required rescission notice.
ii. For example:
A. If a transaction is consummated on Friday, June 1, and the
disclosures and notice of the right to rescind were given on Thursday,
May 31, the rescission period will expire at midnight of the third
business day after June 1--that is, Tuesday, June 5.
B. If the disclosures are given and the transaction consummated on
Friday, June 1, and the rescission notice is given on Monday, June 4,
the rescission period expires at midnight of the third business day
after June 4--that is, Thursday, June 7. The consumer must place the
rescission notice in the mail, file it for telegraphic transmission, or
deliver it to the creditor's place of business within that period in
order to exercise the right.
2. Material disclosures. Section 1026.23(a)(3)(ii) sets forth the
material disclosures that must be provided before the rescission period
can begin to run. Failure to provide information regarding the annual
percentage rate also includes failure to inform the consumer of the
existence of a variable rate feature. Failure to give the other required
disclosures does not prevent the running of the rescission period,
although that failure may result in civil liability or administrative
sanctions.
3. Unexpired right of rescission. i. When the creditor has failed to
take the action necessary to start the three-business day rescission
period running, the right to rescind automatically lapses on the
occurrence of the earliest of the following three events:
A. The expiration of three years after consummation of the
transaction.
B. Transfer of all the consumer's interest in the property.
C. Sale of the consumer's interest in the property, including a
transaction in which the consumer sells the dwelling and takes back a
purchase money note and mortgage or retains legal title through a device
such as an installment sale contract.
ii. Transfer of all the consumers' interest includes such transfers
as bequests and gifts. A sale or transfer of the property need not be
voluntary to terminate the right to rescind. For example, a foreclosure
sale would terminate an unexpired right to rescind. As provided in
Section 125 of the Act, the three-year limit may be extended by an
administrative proceeding to enforce the provisions
[[Page 623]]
of this section. A partial transfer of the consumer's interest, such as
a transfer bestowing co-ownership on a spouse, does not terminate the
right of rescission.
Paragraph 23(a)(4)
1. Joint owners. When more than one consumer has the right to
rescind a transaction, any of them may exercise that right and cancel
the transaction on behalf of all. For example, if both husband and wife
have the right to rescind a transaction, either spouse acting alone may
exercise the right and both are bound by the rescission.
Paragraph 23(b)
23(b)(1) Notice of Right To Rescind
1. Who receives notice. Each consumer entitled to rescind must be
given two copies of the rescission notice and the material disclosures.
In a transaction involving joint owners, both of whom are entitled to
rescind, both must receive the notice of the right to rescind and
disclosures. For example, if both spouses are entitled to rescind a
transaction, each must receive two copies of the rescission notice (one
copy to each if the notice is provided in electronic form in accordance
with the consumer consent and other applicable provisions of the E-Sign
Act) and one copy of the disclosures.
2. Format. The notice must be on a separate piece of paper, but may
appear with other information such as the itemization of the amount
financed. The material must be clear and conspicuous, but no minimum
type size or other technical requirements are imposed. The notices in
appendix H provide models that creditors may use in giving the notice.
3. Content. The notice must include all of the information outlined
in Section 1026.23(b)(1)(i) through (v). The requirement in Sec.
1026.23(b) that the transaction be identified may be met by providing
the date of the transaction. The creditor may provide a separate form
that the consumer may use to exercise the right of rescission, or that
form may be combined with the other rescission disclosures, as
illustrated in appendix H. The notice may include additional information
related to the required information, such as:
i. A description of the property subject to the security interest.
ii. A statement that joint owners may have the right to rescind and
that a rescission by one is effective for all.
iii. The name and address of an agent of the creditor to receive
notice of rescission.
4. Time of providing notice. The notice required by Sec. 1026.23(b)
need not be given before consummation of the transaction. The creditor
may deliver the notice after the transaction is consummated, but the
rescission period will not begin to run until the notice is given. For
example, if the creditor provides the notice on May 15, but disclosures
were given and the transaction was consummated on May 10, the 3-business
day rescission period will run from May 15.
23(c) Delay of Creditor's Performance
1. General rule. Until the rescission period has expired and the
creditor is reasonably satisfied that the consumer has not rescinded,
the creditor must not, either directly or through a third party:
i. Disburse loan proceeds to the consumer.
ii. Begin performing services for the consumer.
iii. Deliver materials to the consumer.
2. Escrow. The creditor may disburse loan proceeds during the
rescission period in a valid escrow arrangement. The creditor may not,
however, appoint the consumer as ``trustee'' or ``escrow agent'' and
distribute funds to the consumer in that capacity during the delay
period.
3. Actions during the delay period. Section 1026.23(c) does not
prevent the creditor from taking other steps during the delay, short of
beginning actual performance. Unless otherwise prohibited, such as by
state law, the creditor may, for example:
i. Prepare the loan check.
ii. Perfect the security interest.
iii. Prepare to discount or assign the contract to a third party.
iv. Accrue finance charges during the delay period.
4. Delay beyond rescission period. i. The creditor must wait until
it is reasonably satisfied that the consumer has not rescinded. For
example, the creditor may satisfy itself by doing one of the following:
A. Waiting a reasonable time after expiration of the rescission
period to allow for delivery of a mailed notice.
B. Obtaining a written statement from the consumer that the right
has not been exercised.
ii. When more than one consumer has the right to rescind, the
creditor cannot reasonably rely on the assurance of only one consumer,
because other consumers may exercise the right.
23(d) Effects of Rescission
Paragraph 23(d)(1)
1. Termination of security interest. Any security interest giving
rise to the right of rescission becomes void when the consumer exercises
the right of rescission. The security interest is automatically negated
regardless of its status and whether or not it was recorded or
perfected. Under Sec. 1026.23(d)(2), however, the creditor must take
any action necessary to reflect the fact that the security interest no
longer exists.
[[Page 624]]
Paragraph 23(d)(2)
1. Refunds to consumer. The consumer cannot be required to pay any
amount in the form of money or property either to the creditor or to a
third party as part of the credit transaction. Any amounts of this
nature already paid by the consumer must be refunded. ``Any amount''
includes finance charges already accrued, as well as other charges, such
as broker fees, application and commitment fees, or fees for a title
search or appraisal, whether paid to the creditor, paid directly to a
third party, or passed on from the creditor to the third party. It is
irrelevant that these amounts may not represent profit to the creditor.
2. Amounts not refundable to consumer. Creditors need not return any
money given by the consumer to a third party outside of the credit
transaction, such as costs incurred for a building permit or for a
zoning variance. Similarly, the term any amount does not apply to any
money or property given by the creditor to the consumer; those amounts
must be tendered by the consumer to the creditor under Sec.
1026.23(d)(3).
3. Reflection of security interest termination. The creditor must
take whatever steps are necessary to indicate that the security interest
is terminated. Those steps include the cancellation of documents
creating the security interest, and the filing of release or termination
statements in the public record. In a transaction involving
subcontractors or suppliers that also hold security interests related to
the credit transaction, the creditor must insure that the termination of
their security interests is also reflected. The 20-day period for the
creditor's action refers to the time within which the creditor must
begin the process. It does not require all necessary steps to have been
completed within that time, but the creditor is responsible for seeing
the process through to completion.
Paragraph 23(d)(3)
1. Property exchange. Once the creditor has fulfilled its
obligations under Sec. 1026.23(d)(2), the consumer must tender to the
creditor any property or money the creditor has already delivered to the
consumer. At the consumer's option, property may be tendered at the
location of the property. For example, if lumber or fixtures have been
delivered to the consumer's home, the consumer may tender them to the
creditor by making them available for pick-up at the home, rather than
physically returning them to the creditor's premises. Money already
given to the consumer must be tendered at the creditor's place of
business.
2. Reasonable value. If returning the property would be extremely
burdensome to the consumer, the consumer may offer the creditor its
reasonable value rather than returning the property itself. For example,
if building materials have already been incorporated into the consumer's
dwelling, the consumer may pay their reasonable value.
Paragraph 23(d)(4)
1. Modifications. The procedures outlined in Sec. 1026.23(d)(2) and
(3) may be modified by a court. For example, when a consumer is in
bankruptcy proceedings and prohibited from returning anything to the
creditor, or when the equities dictate, a modification might be made.
The sequence of procedures under Sec. 1026.23(d)(2) and (3), or a
court's modification of those procedures under Sec. 1026.23(d)(4), does
not affect a consumer's substantive right to rescind and to have the
loan amount adjusted accordingly. Where the consumer's right to rescind
is contested by the creditor, a court would normally determine whether
the consumer has a right to rescind and determine the amounts owed
before establishing the procedures for the parties to tender any money
or property.
23(e) Consumer's Waiver of Right to Rescind
1. Need for waiver. To waive the right to rescind, the consumer must
have a bona fide personal financial emergency that must be met before
the end of the rescission period. The existence of the consumer's waiver
will not, of itself, automatically insulate the creditor from liability
for failing to provide the right of rescission.
2. Procedure. To waive or modify the right to rescind, the consumer
must give a written statement that specifically waives or modifies the
right, and also includes a brief description of the emergency. Each
consumer entitled to rescind must sign the waiver statement. In a
transaction involving multiple consumers, such as a husband and wife
using their home as collateral, the waiver must bear the signatures of
both spouses.
23(f) Exempt Transactions
1. Residential mortgage transaction. Any transaction to construct or
acquire a principal dwelling, whether considered real or personal
property, is exempt. (See the commentary to Sec. 1026.23(a).) For
example, a credit transaction to acquire a mobile home or houseboat to
be used as the consumer's principal dwelling would not be rescindable.
2. Lien status. The lien status of the mortgage is irrelevant for
purposes of the exemption in Sec. 1026.23(f)(1); the fact that a loan
has junior lien status does not by itself preclude application of this
exemption. For example, a home buyer may assume the existing first
mortgage and create a second mortgage to finance the balance of the
purchase price. Such a transaction would not be rescindable.
3. Combined-purpose transaction. A loan to acquire a principal
dwelling and make improvements to that dwelling is exempt if treated as
one transaction. If, on the other
[[Page 625]]
hand, the loan for the acquisition of the principal dwelling and the
subsequent advances for improvements are treated as more than one
transaction, then only the transaction that finances the acquisition of
that dwelling is exempt.
4. New advances. The exemption in Sec. 1026.23(f)(2) applies only
to refinancings (including consolidations) by the original creditor. The
original creditor is the creditor to whom the written agreement was
initially made payable. In a merger, consolidation or acquisition, the
successor institution is considered the original creditor for purposes
of the exemption in Sec. 1026.23(f)(2). If the refinancing involves a
new advance of money, the amount of the new advance is rescindable. In
determining whether there is a new advance, a creditor may rely on the
amount financed, refinancing costs, and other figures stated in the
latest Truth in Lending disclosures provided to the consumer and is not
required to use, for example, more precise information that may only
become available when the loan is closed. For purposes of the right of
rescission, a new advance does not include amounts attributed solely to
the costs of the refinancing. These amounts would include Sec.
1026.4(c)(7) charges (such as attorneys fees and title examination and
insurance fees, if bona fide and reasonable in amount), as well as
insurance premiums and other charges that are not finance charges.
(Finance charges on the new transaction--points, for example--would not
be considered in determining whether there is a new advance of money in
a refinancing since finance charges are not part of the amount
financed.) To illustrate, if the sum of the outstanding principal
balance plus the earned unpaid finance charge is $50,000 and the new
amount financed is $51,000, then the refinancing would be exempt if the
extra $1,000 is attributed solely to costs financed in connection with
the refinancing that are not finance charges. Of course, if new advances
of money are made (for example, to pay for home improvements) and the
consumer exercises the right of rescission, the consumer must be placed
in the same position as he or she was in prior to entering into the new
credit transaction. Thus, all amounts of money (which would include all
the costs of the refinancing) already paid by the consumer to the
creditor or to a third party as part of the refinancing would have to be
refunded to the consumer. (See the commentary to Sec. 1026.23(d)(2) for
a discussion of refunds to consumers.) A model rescission notice
applicable to transactions involving new advances appears in appendix H.
The general rescission notice (model form H-8) is the appropriate form
for use by creditors not considered original creditors in refinancing
transactions.
5. State creditors. Cities and other political subdivisions of
states acting as creditors are not exempted from this section.
6. Multiple advances. Just as new disclosures need not be made for
subsequent advances when treated as one transaction, no new rescission
rights arise so long as the appropriate notice and disclosures are given
at the outset of the transaction. For example, the creditor extends
credit for home improvements secured by the consumer's principal
dwelling, with advances made as repairs progress. As permitted by Sec.
1026.17(c)(6), the creditor makes a single set of disclosures at the
beginning of the construction period, rather than separate disclosures
for each advance. The right of rescission does not arise with each
advance. However, if the advances are treated as separate transactions,
the right of rescission applies to each advance.7. Spreader clauses.
When the creditor holds a mortgage or deed of trust on the consumer's
principal dwelling and that mortgage or deed of trust contains a
``spreader clause,'' subsequent loans made are separate transactions and
are subject to the right of rescission. Those loans are rescindable
unless the creditor effectively waives its security interest under the
spreader clause with respect to the subsequent transactions.
8. Converting open-end to closed-end credit. Under certain state
laws, consummation of a closed-end credit transaction may occur at the
time a consumer enters into the initial open-end credit agreement. As
provided in the commentary to Sec. 1026.17(b), closed-end credit
disclosures may be delayed under these circumstances until the
conversion of the open-end account to a closed-end transaction. In
accounts secured by the consumer's principal dwelling, no new right of
rescission arises at the time of conversion. Rescission rights under
Sec. 1026.15 are unaffected.
23(g) Tolerances for Accuracy
1. Example. See comment 38(o)-1 for examples illustrating the
interaction of the finance charge and total of payments accuracy
requirements for each transaction subject to Sec. 1026.19(e) and (f).
23(g)(2) One Percent Tolerance
1. New advance. The phrase ``new advance'' has the same meaning as
in comment 23(f)-4.
23(h) Special Rules for Foreclosures
1. Rescission. Section 1026.23(h) applies only to transactions that
are subject to rescission under Sec. 1026.23(a)(1).
Paragraph 23(h)(1)(i)
1. Mortgage broker fees. A consumer may rescind a loan in
foreclosure if a mortgage broker fee that should have been included in
[[Page 626]]
the finance charge was omitted, without regard to the dollar amount
involved. If the amount of the mortgage broker fee is included but
misstated the rule in Sec. 1026.23(h)(2) applies.
23(h)(2) Tolerance for Disclosures
1. General. The tolerance for disclosure of the finance charge is
based on the accuracy of the total finance charge rather than its
component charges. For transactions subject to Sec. 1026.19(e) and (f),
the tolerance for disclosure of the total of payments is based on the
accuracy of the total of payments, taken as a whole, rather than its
component charges.
2. Example. See comment 38(o)-1 for examples illustrating the
interaction of the finance charge and total of payments accuracy
requirements for each transaction subject to Sec. 1026.19(e) and (f).
Section 1026.24--Advertising
24(a) Actually Available Terms
1. General rule. To the extent that an advertisement mentions
specific credit terms, it may state only those terms that the creditor
is actually prepared to offer. For example, a creditor may not advertise
a very low annual percentage rate that will not in fact be available at
any time. This provision is not intended to inhibit the promotion of new
credit programs, but to bar the advertising of terms that are not and
will not be available. For example, a creditor may advertise terms that
will be offered for only a limited period, or terms that will become
available at a future date.
24(b) Clear and Conspicuous Standard
1. Clear and conspicuous standard--general. This section is subject
to the general ``clear and conspicuous'' standard for this subpart, see
Sec. 1026.17(a)(1), but prescribes no specific rules for the format of
the necessary disclosures, other than the format requirements related to
the advertisement of rates and payments as described in comment 24(b)-2
below. The credit terms need not be printed in a certain type size nor
need they appear in any particular place in the advertisement. For
example, a merchandise tag that is an advertisement under the regulation
complies with this section if the necessary credit terms are on both
sides of the tag, so long as each side is accessible.
2. Clear and conspicuous standard--rates and payments in
advertisements for credit secured by a dwelling. For purposes of Sec.
1026.24(f), a clear and conspicuous disclosure means that the required
information in Sec. Sec. 1026.24(f)(2)(i) and 1026.24(f)(3)(i)(A) and
(B) is disclosed with equal prominence and in close proximity to the
advertised rates or payments triggering the required disclosures, and
that the required information in Sec. 1026.24(f)(3)(i)(C) is disclosed
prominently and in close proximity to the advertised rates or payments
triggering the required disclosures. If the required information in
Sec. Sec. 1026.24(f)(2)(i) and 1026.24(f)(3)(i)(A) and (B) is the same
type size as the advertised rates or payments triggering the required
disclosures, the disclosures are deemed to be equally prominent. The
information in Sec. 1026.24(f)(3)(i)(C) must be disclosed prominently,
but need not be disclosed with equal prominence or be the same type size
as the payments triggering the required disclosures. If the required
information in Sec. Sec. 1026.24(f)(2)(i) and 1026.24(f)(3)(i) is
located immediately next to or directly above or below the advertised
rates or payments triggering the required disclosures, without any
intervening text or graphical displays, the disclosures are deemed to be
in close proximity. Notwithstanding the above, for electronic
advertisements that disclose rates or payments, compliance with the
requirements of Sec. 1026.24(e) is deemed to satisfy the clear and
conspicuous standard.
3. Clear and conspicuous standard--Internet advertisements for
credit secured by a dwelling. For purposes of this section, a clear and
conspicuous disclosure for visual text advertisements on the Internet
for credit secured by a dwelling means that the required disclosures are
not obscured by techniques such as graphical displays, shading,
coloration, or other devices and comply with all other requirements for
clear and conspicuous disclosures under Sec. 1026.24. See also comment
24(e)-4.
4. Clear and conspicuous standard--televised advertisements for
credit secured by a dwelling. For purposes of this section, including
alternative disclosures as provided for by Sec. 1026.24(g), a clear and
conspicuous disclosure in the context of visual text advertisements on
television for credit secured by a dwelling means that the required
disclosures are not obscured by techniques such as graphical displays,
shading, coloration, or other devices, are displayed in a manner that
allows a consumer to read the information required to be disclosed, and
comply with all other requirements for clear and conspicuous disclosures
under Sec. 1026.24. For example, very fine print in a television
advertisement would not meet the clear and conspicuous standard if
consumers cannot see and read the information required to be disclosed.
5. Clear and conspicuous standard--oral advertisements for credit
secured by a dwelling. For purposes of this section, including
alternative disclosures as provided for by Sec. 1026.24(g), a clear and
conspicuous disclosure in the context of an oral advertisement for
credit secured by a dwelling, whether by radio, television, or other
medium, means that the required disclosures are given at a speed and
volume sufficient for a consumer to hear and comprehend them. For
example,
[[Page 627]]
information stated very rapidly at a low volume in a radio or television
advertisement would not meet the clear and conspicuous standard if
consumers cannot hear and comprehend the information required to be
disclosed.
24(c) Advertisement of Rate of Finance Charge
1. Annual percentage rate. Advertised rates must be stated in terms
of an annual percentage rate, as defined in Sec. 1026.22. Even though
state or local law permits the use of add-on, discount, time-price
differential, or other methods of stating rates, advertisements must
state them as annual percentage rates. Unlike the transactional
disclosure of an annual percentage rate under Sec. 1026.18(e), the
advertised annual percentage rate need not include a descriptive
explanation of the term and may be expressed using the abbreviation APR.
The advertisement must state that the rate is subject to increase after
consummation if that is the case, but the advertisement need not
describe the rate increase, its limits, or how it would affect the
payment schedule. As under Sec. 1026.18(f), relating to disclosure of a
variable rate, the rate increase disclosure requirement in this
provision does not apply to any rate increase due to delinquency
(including late payment), default, acceleration, assumption, or transfer
of collateral.
2. Simple or periodic rates. The advertisement may not
simultaneously state any other rate, except that a simple annual rate or
periodic rate applicable to an unpaid balance may appear along with (but
not more conspicuously than) the annual percentage rate. An
advertisement for credit secured by a dwelling may not state a periodic
rate, other than a simple annual rate, that is applied to an unpaid
balance. For example, in an advertisement for credit secured by a
dwelling, a simple annual interest rate may be shown in the same type
size as the annual percentage rate for the advertised credit, subject to
the requirements of Sec. 1026.24(f). A simple annual rate or periodic
rate that is applied to an unpaid balance is the rate at which interest
is accruing; those terms do not include a rate lower than the rate at
which interest is accruing, such as an effective rate, payment rate, or
qualifying rate.
3. Buydowns. When a third party (such as a seller) or a creditor
wishes to promote the availability of reduced interest rates (consumer
or seller buydowns), the advertised annual percentage rate must be
determined in accordance with the commentary to Sec. 1026.17(c)
regarding the basis of transactional disclosures for buydowns. The
seller or creditor may advertise the reduced simple interest rate,
provided the advertisement shows the limited term to which the reduced
rate applies and states the simple interest rate applicable to the
balance of the term. The advertisement may also show the effect of the
buydown agreement on the payment schedule for the buydown period, but
this will trigger the additional disclosures under Sec. 1026.24(d)(2).
4. Discounted variable-rate transactions. The advertised annual
percentage rate for discounted variable-rate transactions must be
determined in accordance with comment 17(c)(1)-10 regarding the basis of
transactional disclosures for such financing.
i. A creditor or seller may promote the availability of the initial
rate reduction in such transactions by advertising the reduced simple
annual rate, provided the advertisement shows with equal prominence and
in close proximity the limited term to which the reduced rate applies
and the annual percentage rate that will apply after the term of the
initial rate reduction expires. See Sec. 1026.24(f).
ii. Limits or caps on periodic rate or payment adjustments need not
be stated. To illustrate using the second example in comment 17(c)(1)-
10, the fact that the rate is presumed to be 11 percent in the second
year and 12 percent for the remaining 28 years need not be included in
the advertisement.
iii. The advertisement may also show the effect of the discount on
the payment schedule for the discount period, but this will trigger the
additional disclosures under Sec. 1026.24(d).
24(d) Advertisement of Terms That Require Additional Disclosures
1. General rule. Under Sec. 1026.24(d)(1), whenever certain
triggering terms appear in credit advertisements, the additional credit
terms enumerated in Sec. 1026.24(d)(2) must also appear. These
provisions apply even if the triggering term is not stated explicitly
but may be readily determined from the advertisement. For example, an
advertisement may state ``80 percent financing available,'' which is in
fact indicating that a 20 percent downpayment is required.
24(d)(1) Triggering Terms
1. Downpayment. i. The dollar amount of a downpayment or a statement
of the downpayment as a percentage of the price requires further
information. By virtue of the definition of downpayment in Sec. 1026.2,
this triggering term is limited to credit sale transactions. It includes
such statements as:
A. Only 5% down.
B. As low as $100 down.
C. Total move-in costs of $800.
ii. This provision applies only if a downpayment is actually
required; statements such as no downpayment or no trade-in required do
not trigger the additional disclosures under this paragraph.
[[Page 628]]
2. Payment period. i. The number of payments required or the total
period of repayment includes such statements as:
A. 48-month payment terms.
B. 30-year mortgage.
C. Repayment in as many as 36 monthly installments.
ii. But it does not include such statements as ``pay weekly,''
``monthly payment terms arranged,'' or ``take years to repay,'' since
these statements do not indicate a time period over which a loan may be
financed.
3. Payment amount. i. The dollar amount of any payment includes
statements such as:
A. ``Payable in installments of $103.''
B. ``$25 weekly.''
C. ``$500,000 loan for just $1,650 per month.''
D. ``$1,200 balance payable in 10 equal installments.''
ii. In the last example, the amount of each payment is readily
determinable, even though not explicitly stated. But statements such as
``monthly payments to suit your needs'' or ``regular monthly payments''
are not deemed to be statements of the amount of any payment.
4. Finance charge. i. The dollar amount of the finance charge or any
portion of it includes statements such as:
A. ``$500 total cost of credit.''
B. ``$2 monthly carrying charge.''
C. ``$50,000 mortgages, 2 points to the borrower.''
ii. In the last example, the $1,000 prepaid finance charge can be
readily determined from the information given. Statements of the annual
percentage rate or statements that there is no particular charge for
credit (such as ``no closing costs'') are not triggering terms under
this paragraph.
24(d)(2) Additional Terms
1. Disclosure of downpayment. The total downpayment as a dollar
amount or percentage must be shown, but the word ``downpayment'' need
not be used in making this disclosure. For example, ``10% cash required
from buyer'' or ``credit terms require minimum $100 trade-in'' would
suffice.
2. Disclosure of repayment terms. The phrase ``terms of repayment''
generally has the same meaning as the ``payment schedule'' required to
be disclosed under Sec. 1026.18(g), the interest rate and payment
summary table required to be disclosed pursuant to Sec. 1026.18(s), or
the projected payments table required to be disclosed pursuant to
Sec. Sec. 1026.37(c) and 1026.38(c), as applicable. Section
1026.24(d)(2)(ii) provides flexibility to creditors in making this
disclosure for advertising purposes. Repayment terms may be expressed in
a variety of ways in addition to an exact repayment schedule; this is
particularly true for advertisements that do not contemplate a single
specific transaction. Repayment terms, however, must reflect the
consumer's repayment obligations over the full term of the loan,
including any balloon payment, see comment 24(d)(2)-3, not just the
repayment terms that will apply for a limited period of time. For
example:
i. A creditor may use a unit-cost approach in making the required
disclosure, such as ``48 monthly payments of $27.83 per $1,000
borrowed.''
ii. In an advertisement for credit secured by a dwelling, when any
series of payments varies because of the inclusion of mortgage insurance
premiums, a creditor may state the number and timing of payments, the
fact that payments do not include amounts for mortgage insurance
premiums, and that the actual payment obligation will be higher.
iii. In an advertisement for credit secured by a dwelling, when one
series of monthly payments will apply for a limited period of time
followed by a series of higher monthly payments for the remaining term
of the loan, the advertisement must state the number and time period of
each series of payments, and the amounts of each of those payments. For
this purpose, the creditor must assume that the consumer makes the lower
series of payments for the maximum allowable period of time.
3. Balloon payment; disclosure of repayment terms. In some
transactions, a balloon payment will occur when the consumer only makes
the minimum payments specified in an advertisement. A balloon payment
results if paying the minimum payments does not fully amortize the
outstanding balance by a specified date or time, usually the end of the
term of the loan, and the consumer must repay the entire outstanding
balance at such time. If a balloon payment will occur when the consumer
only makes the minimum payments specified in an advertisement, the
advertisement must state with equal prominence and in close proximity to
the minimum payment statement the amount and timing of the balloon
payment that will result if the consumer makes only the minimum payments
for the maximum period of time that the consumer is permitted to make
such payments.
4. Annual percentage rate. The advertised annual percentage rate may
be expressed using the abbreviation ``APR.'' The advertisement must also
state, if applicable, that the annual percentage rate is subject to
increase after consummation.
5. Use of examples. A creditor may use illustrative credit
transactions to make the necessary disclosures under Sec.
1026.24(d)(2). That is, where a range of possible combinations of credit
terms is offered, the advertisement may use examples of typical
transactions, so long as each example contains all of the applicable
terms required by Sec. 1026.24(d). The examples must be labeled as such
and must reflect representative credit terms made available by the
creditor to present and prospective customers.
[[Page 629]]
24(e) Catalogs or Other Multiple-Page Advertisements; Electronic
Advertisements
1. Definition. The multiple-page advertisements to which this
section refers are advertisements consisting of a series of sequentially
numbered pages--for example, a supplement to a newspaper. A mailing
consisting of several separate flyers or pieces of promotional material
in a single envelope does not constitute a single multiple-page
advertisement for purposes of Sec. 1026.24(e).
2. General. Section 1026.24(e) permits creditors to put credit
information together in one place in a catalog or other multiple-page
advertisement or in an electronic advertisement (such as an
advertisement appearing on an Internet Web site). The rule applies only
if the advertisement contains one or more of the triggering terms from
Sec. 1026.24(d)(1). A list of different annual percentage rates
applicable to different balances, for example, does not trigger further
disclosures under Sec. 1026.24(d)(2) and so is not covered by Sec.
1026.24(e).
3. Representative examples. The table or schedule must state all the
necessary information for a representative sampling of amounts of
credit. This must reflect amounts of credit the creditor actually
offers, up to and including the higher-priced items. This does not mean
that the chart must make the disclosures for the single most expensive
item the seller offers, but only that the chart cannot be limited to
information about less expensive sales when the seller commonly offers a
distinct level of more expensive goods or services. The range of
transactions shown in the table or schedule in a particular catalog or
multiple-page advertisement need not exceed the range of transactions
actually offered in that advertisement.
4. Electronic advertisement. If an electronic advertisement (such as
an advertisement appearing on an Internet Web site) contains the table
or schedule permitted under Sec. 1026.24(e)(1), any statement of terms
set forth in Sec. 1026.24(d)(1) appearing anywhere else in the
advertisement must clearly direct the consumer to the location where the
table or schedule begins. For example, a term triggering additional
disclosures may be accompanied by a link that directly takes the
consumer to the additional information.
24(f) Disclosure of Rates and Payments in Advertisements for Credit
Secured by a Dwelling
1. Applicability. The requirements of Sec. 1026.24(f)(2) apply to
advertisements for loans where more than one simple annual rate of
interest will apply. The requirements of Sec. 1026.24(f)(3)(i)(A)
require a clear and conspicuous disclosure of each payment that will
apply over the term of the loan. In determining whether a payment will
apply when the consumer may choose to make a series of lower monthly
payments that will apply for a limited period of time, the creditor must
assume that the consumer makes the series of lower payments for the
maximum allowable period of time. See comment 24(d)(2)-2.iii. However,
for purposes of Sec. 1026.24(f), the creditor may, but need not, assume
that specific events which trigger changes to the simple annual rate of
interest or to the applicable payments will occur. For example:
i. Fixed-rate conversion loans. If a loan program permits consumers
to convert their variable-rate loans to fixed rate loans, the creditor
need not assume that the fixed-rate conversion option, by itself, means
that more than one simple annual rate of interest will apply to the loan
under Sec. 1026.24(f)(2) and need not disclose as a separate payment
under Sec. 1026.24(f)(3)(i)(A) the payment that would apply if the
consumer exercised the fixed-rate conversion option.
ii. Preferred-rate loans. Some loans contain a preferred-rate
provision, where the rate will increase upon the occurrence of some
event, such as the consumer-employee leaving the creditor's employ or
the consumer closing an existing deposit account with the creditor or
the consumer revoking an election to make automated payments. A creditor
need not assume that the preferred-rate provision, by itself, means that
more than one simple annual rate of interest will apply to the loan
under Sec. 1026.24(f)(2) and the payments that would apply upon
occurrence of the event that triggers the rate increase need not be
disclosed as a separate payment under Sec. 1026.24(f)(3)(i)(A).
iii. Rate reductions. Some loans contain a provision where the rate
will decrease upon the occurrence of some event, such as if the consumer
makes a series of payments on time. A creditor need not assume that the
rate reduction provision, by itself, means that more than one simple
annual rate of interest will apply to the loan under Sec. 1026.24(f)(2)
and need not disclose the payments that would apply upon occurrence of
the event that triggers the rate reduction as a separate payment under
Sec. 1026.24(f)(3)(i)(A).
2. Equal prominence, close proximity. Information required to be
disclosed under Sec. Sec. 1026.24(f)(2)(i) and 1026.24(f)(3)(i) that is
immediately next to or directly above or below the simple annual rate or
payment amount (but not in a footnote) is deemed to be closely proximate
to the listing. Information required to be disclosed under Sec. Sec.
1026.24(f)(2)(i) and 1026.24(f)(3)(i)(A) and (B) that is in the same
type size as the simple annual rate or payment amount is deemed to be
equally prominent.
3. Clear and conspicuous standard. For more information about the
applicable clear and conspicuous standard, see comment 24(b)-2.
[[Page 630]]
4. Comparisons in advertisements. When making any comparison in an
advertisement between actual or hypothetical credit payments or rates
and the payments or rates available under the advertised product, the
advertisement must state all applicable payments or rates for the
advertised product and the time periods for which those payments or
rates will apply, as required by this section.
5. Application to variable-rate transactions--disclosure of rates.
In advertisements for variable-rate transactions, if a simple annual
rate that applies at consummation is not based on the index and margin
that will be used to make subsequent rate adjustments over the term of
the loan, the requirements of Sec. 1026.24(f)(2)(i) apply.
6. Reasonably current index and margin. For the purposes of this
section, an index and margin is considered reasonably current if:
i. For direct mail advertisements, it was in effect within 60 days
before mailing;
ii. For advertisements in electronic form it was in effect within 30
days before the advertisement is sent to a consumer's email address, or
in the case of an advertisement made on an Internet Web site, when
viewed by the public; or
iii. For printed advertisements made available to the general
public, including ones contained in a catalog, magazine, or other
generally available publication, it was in effect within 30 days before
printing.
24(f)(3) Disclosure of Payments
1. Amounts and time periods of payments. Section 1026.24(f)(3)(i)
requires disclosure of the amounts and time periods of all payments that
will apply over the term of the loan. This section may require
disclosure of several payment amounts, including any balloon payment.
For example, if an advertisement for credit secured by a dwelling offers
$300,000 of credit with a 30-year loan term for a payment of $600 per
month for the first six months, increasing to $1,500 per month after
month six, followed by a balloon payment of $30,000 at the end of the
loan term, the advertisement must disclose the amount and time periods
of each of the two monthly payment streams, as well as the amount and
timing of the balloon payment, with equal prominence and in close
proximity to each other. However, if the final scheduled payment of a
fully amortizing loan is not greater than two times the amount of any
other regularly scheduled payment, the final payment need not be
disclosed.
2. Application to variable-rate transactions--disclosure of
payments. In advertisements for variable-rate transactions, if the
payment that applies at consummation is not based on the index and
margin that will be used to make subsequent payment adjustments over the
term of the loan, the requirements of Sec. 1026.24(f)(3)(i) apply.
24(g) Alternative Disclosures--Television or Radio Advertisements
1. Multi-purpose telephone number. When an advertised telephone
number provides a recording, disclosures should be provided early in the
sequence to ensure that the consumer receives the required disclosures.
For example, in providing several options--such as providing directions
to the advertiser's place of business--the option allowing the consumer
to request disclosures should be provided early in the telephone message
to ensure that the option to request disclosures is not obscured by
other information.
2. Statement accompanying telephone number. Language must accompany
a telephone number indicating that disclosures are available by calling
the telephone number, such as ``call 1-(800) 000-0000 for details about
credit costs and terms.''
24(i) Prohibited Acts or Practices in Advertisements for Credit Secured
by a Dwelling
1. Comparisons in advertisements. The requirements of Sec.
1026.24(i)(2) apply to all advertisements for credit secured by a
dwelling, including radio and television advertisements. A comparison
includes a claim about the amount a consumer may save under the
advertised product. For example, a statement such as ``save $300 per
month on a $300,000 loan'' constitutes an implied comparison between the
advertised product's payment and a consumer's current payment.
2. Misrepresentations about government endorsement. A statement that
the Federal Community Reinvestment Act entitles the consumer to
refinance his or her mortgage at the low rate offered in the
advertisement is prohibited because it conveys a misleading impression
that the advertised product is endorsed or sponsored by the Federal
government.
3. Misleading claims of debt elimination. The prohibition against
misleading claims of debt elimination or waiver or forgiveness does not
apply to legitimate statements that the advertised product may reduce
debt payments, consolidate debts, or shorten the term of the debt.
Examples of misleading claims of debt elimination or waiver or
forgiveness of loan terms with, or obligations to, another creditor of
debt include: ``Wipe-Out Personal Debts!'', ``New DEBT-FREE Payment'',
``Set yourself free; get out of debt today'', ``Refinance today and wipe
your debt clean!'', ``Get yourself out of debt * * * Forever!'', and
``Pre-payment Penalty Waiver.''
[[Page 631]]
Subpart D--Miscellaneous
Section 1026.25--Record Retention
25(a) General Rule
1. Evidence of required actions. The creditor must retain evidence
that it performed the required actions as well as made the required
disclosures. This includes, for example, evidence that the creditor
properly handled adverse credit reports in connection with amounts
subject to a billing dispute under Sec. 1026.13, and properly handled
the refunding of credit balances under Sec. Sec. 1026.11 and 1026.21.
2. Methods of retaining evidence. Adequate evidence of compliance
does not necessarily mean actual paper copies of disclosure statements
or other business records. The evidence may be retained by any method
that reproduces records accurately (including computer programs). Unless
otherwise required, the creditor need retain only enough information to
reconstruct the required disclosures or other records. Thus, for
example, the creditor need not retain each open-end periodic statement,
so long as the specific information on each statement can be retrieved.
3. Certain variable-rate transactions. In variable-rate transactions
that are subject to the disclosure requirements of Sec. 1026.19(b),
written procedures for compliance with those requirements as well as a
sample disclosure form for each loan program represent adequate evidence
of compliance. (See comment 25(a)-2 pertaining to permissible methods of
retaining the required disclosures.)
4. Home equity plans. In home equity plans that are subject to the
requirements of Sec. 1026.40, written procedures for compliance with
those requirements as well as a sample disclosure form and contract for
each home equity program represent adequate evidence of compliance. (See
comment 25(a)-2 pertaining to permissible methods of retaining the
required disclosures.)
25(c) Records Related to Certain Requirements for Mortgage Loans.
25(c)(1) Records related to requirements for loans secured by real
property or a cooperative unit.
1. Evidence of required actions. The creditor must retain evidence
that it performed the required actions as well as made the required
disclosures. This includes, for example, evidence that the creditor
properly differentiated between affiliated and independent third party
settlement service providers for determining good faith under Sec.
1026.19(e)(3); evidence that the creditor properly documented the reason
for revisions under Sec. 1026.19(e)(3)(iv); or evidence that the
creditor properly calculated average cost under Sec. 1026.19(f)(3)(ii).
2. Mortgage brokers. See Sec. 1026.19(e)(1)(ii)(B) for the
responsibilities of mortgage brokers to comply with the requirements of
Sec. 1026.25(c).
25(c)(2) Records Related to Requirements for Loan Originator
Compensation
1. Scope of records of loan originator compensation. Section
1026.25(c)(2)(i) requires a creditor to maintain records sufficient to
evidence all compensation it pays to a loan originator, as well as the
compensation agreements that govern those payments, for three years
after the date of the payments. Section 1026.25(c)(2)(ii) requires that
a loan originator organization maintain records sufficient to evidence
all compensation it receives from a creditor, a consumer, or another
person and all compensation it pays to any individual loan originators,
as well as the compensation agreements that govern those payments or
receipts, for three years after the date of the receipts or payments.
i. Records sufficient to evidence payment and receipt of
compensation. Records are sufficient to evidence payment and receipt of
compensation if they demonstrate the following facts: The nature and
amount of the compensation; that the compensation was paid, and by whom;
that the compensation was received, and by whom; and when the payment
and receipt of compensation occurred. The compensation agreements
themselves are to be retained in all circumstances consistent with Sec.
1026.25(c)(2)(i). The additional records that are sufficient necessarily
will vary on a case-by-case basis depending on the facts and
circumstances, particularly with regard to the nature of the
compensation. For example, if the compensation is in the form of a
salary, records to be retained might include copies of required filings
under the Internal Revenue Code that demonstrate the amount of the
salary. If the compensation is in the form of a contribution to or a
benefit under a designated tax-advantaged plan, records to be maintained
might include copies of required filings under the Internal Revenue Code
or other applicable Federal law relating to the plan, copies of the plan
and amendments thereto in which individual loan originators participate
and the names of any loan originators covered by the plan, or
determination letters from the Internal Revenue Service regarding the
plan. If the compensation is in the nature of a commission or bonus,
records to be retained might include a settlement agent ``flow of
funds'' worksheet or other written record or a creditor closing
instructions letter directing disbursement of fees at consummation.
Where a loan originator is a mortgage broker, a disclosure of
compensation or broker agreement required by applicable State law that
recites the broker's total compensation for a transaction is a record of
the amount actually paid to the loan originator in connection with the
transaction, unless actual compensation deviates
[[Page 632]]
from the amount in the disclosure or agreement. Where compensation has
been decreased to defray the cost, in whole or part, of an unforeseen
increase in an actual settlement cost over an estimated settlement cost
disclosed to the consumer pursuant to section 5(c) of RESPA (or omitted
from that disclosure), records to be maintained are those documenting
the decrease in compensation and reasons for it.
ii. Compensation agreement. For purposes of Sec. 1026.25(c)(2), a
compensation agreement includes any agreement, whether oral, written, or
based on a course of conduct that establishes a compensation arrangement
between the parties (e.g., a brokerage agreement between a creditor and
a mortgage broker or provisions of employment contracts between a
creditor and an individual loan originator employee addressing payment
of compensation). Where a compensation agreement is oral or based on a
course of conduct and cannot itself be maintained, the records to be
maintained are those, if any, evidencing the existence or terms of the
oral or course of conduct compensation agreement. Creditors and loan
originators are free to specify what transactions are governed by a
particular compensation agreement as they see fit. For example, they may
provide, by the terms of the agreement, that the agreement governs
compensation payable on transactions consummated on or after some future
effective date (in which case, a prior agreement governs transactions
consummated in the meantime). For purposes of applying the record
retention requirement to transaction-specific commissions, the relevant
compensation agreement for a given transaction is the agreement pursuant
to which compensation for that transaction is determined.
iii. Three-year retention period. The requirements in Sec.
1026.25(c)(2)(i) and (ii) that the records be retained for three years
after the date of receipt or payment, as applicable, means that the
records are retained for three years after each receipt or payment, as
applicable, even if multiple compensation payments relate to a single
transaction. For example, if a loan originator organization pays an
individual loan originator a commission consisting of two separate
payments of $1,000 each on June 5 and July 7, 2014, then the loan
originator organization is required to retain records sufficient to
evidence the two payments through June 4, 2017, and July 6, 2017,
respectively.
2. Example. An example of the application of Sec. 1026.25(c)(2) to
a loan originator organization is as follows: Assume a loan originator
organization originates only transactions that are not subject to Sec.
1026.36(d)(2), thus all of its origination compensation is paid
exclusively by creditors that fund its originations. Further assume that
the loan originator organization pays its individual loan originator
employees commissions and annual bonuses. The loan originator
organization must retain a copy of the agreement with any creditor that
pays the loan originator organization compensation for originating
consumer credit transactions subject to Sec. 1026.36 and documentation
evidencing the specific payment it receives from the creditor for each
transaction originated. In addition, the loan originator organization
must retain copies of the agreements with its individual loan originator
employees governing their commissions and their annual bonuses and
records of any specific commissions and bonuses paid.
25(c)(3) Records related to minimum standards for transactions
secured by a dwelling.
1. Evidence of compliance with repayment ability provisions. A
creditor must retain evidence of compliance with Sec. 1026.43 for three
years after the date of consummation of a consumer credit transaction
covered by that section. (See comment 25(c)(3)-2 for guidance on the
retention of evidence of compliance with the requirement to offer a
consumer a loan without a prepayment penalty under Sec. 1026.43(g)(3).)
If a creditor must verify and document information used in underwriting
a transaction subject to Sec. 1026.43, the creditor shall retain
evidence sufficient to demonstrate compliance with the documentation
requirements of the rule. Although a creditor need not retain actual
paper copies of the documentation used in underwriting a transaction
subject to Sec. 1026.43, to comply with Sec. 1026.25(c)(3), the
creditor must be able to reproduce such records accurately. For example,
if the creditor uses a consumer's Internal Revenue Service (IRS) Form W-
2 to verify the consumer's income, the creditor must be able to
reproduce the IRS Form W-2 itself, and not merely the income information
that was contained in the form.
2. Dwelling-secured transactions and prepayment penalties. If a
transaction covered by Sec. 1026.43 has a prepayment penalty, the
creditor must maintain records that document that the creditor complied
with requirements for offering the consumer an alternative transaction
that does not include a prepayment penalty under Sec. 1026.43(g)(3),
(4), or (5). However, the creditor need not maintain records that
document compliance with those provisions if a transaction is
consummated without a prepayment penalty or if the creditor and consumer
do not consummate a covered transaction. If a creditor offers a
transaction with a prepayment penalty to a consumer through a mortgage
broker, to evidence compliance with Sec. 1026.43(g)(4) the creditor
should retain evidence of the alternative covered transaction presented
to the mortgage broker, such as a rate sheet, and the agreement with the
mortgage broker required by Sec. 1026.43(g)(4)(ii).
[[Page 633]]
Section 1026.26--Use of Annual Percentage Rate in Oral Disclosures
1. Application of rules. The restrictions of Sec. 1026.26 apply
only if the creditor chooses to respond orally to the consumer's request
for credit cost information. Nothing in the regulation requires the
creditor to supply rate information orally. If the creditor volunteers
information (including rate information) through oral solicitations
directed generally to prospective customers, as through a telephone
solicitation, those communications may be advertisements subject to the
rules in Sec. Sec. 1026.16 and 1026.24.
26(a) Open-End Credit
1. Information that may be given. The creditor may state periodic
rates in addition to the required annual percentage rate, but it need
not do so. If the annual percentage rate is unknown because transaction
charges, loan fees, or similar finance charges may be imposed, the
creditor must give the corresponding annual percentage rate (that is,
the periodic rate multiplied by the number of periods in a year, as
described in Sec. Sec. 1026.6(a)(1)(ii) and (b)(4)(i)(A) and
1026.7(a)(4) and (b)(4)). In such cases, the creditor may, but need not,
also give the consumer information about other finance charges and other
charges.
26(b) Closed-End Credit
1. Information that may be given. The creditor may state other
annual or periodic rates that are applied to an unpaid balance, along
with the required annual percentage rate. This rule permits disclosure
of a simple interest rate, for example, but not an add-on, discount, or
similar rate. If the creditor cannot give a precise annual percentage
rate in its oral response because of variables in the transaction, it
must give the annual percentage rate for a comparable sample
transaction; in this case, other cost information may, but need not, be
given. For example, the creditor may be unable to state a precise annual
percentage rate for a mortgage loan without knowing the exact amount to
be financed, the amount of loan fees or mortgage insurance premiums, or
similar factors. In this situation, the creditor should state an annual
percentage rate for a sample transaction; it may also provide
information about the consumer's specific case, such as the contract
interest rate, points, other finance charges, and other charges.
Section 1026.27--Language of Disclosures
1. Subsequent disclosures. If a creditor provides account-opening
disclosures in a language other than English, subsequent disclosures
need not be in that other language. For example, if the creditor gave
Spanish-language account-opening disclosures, periodic statements and
change-in-terms notices may be made in English.
Section 1026.28--Effect on State Laws
28(a) Inconsistent Disclosure Requirements
1. General. There are three sets of preemption criteria: One applies
to the general disclosure and advertising rules of the regulation, and
two apply to the credit billing provisions. Section 1026.28 also
provides for Bureau determinations of preemption. For purposes of
determining whether a State law is inconsistent with the requirements of
sections 4 and 5 of RESPA (other than the RESPA section 5(c)
requirements regarding provision of a list of certified homeownership
counselors) and Sec. Sec. 1026.19(e) and (f), 1026.37, and 1026.38
under Sec. 1026.28, any reference to ``creditor'' in Sec. 1026.28 or
this commentary includes a creditor, a mortgage broker, or a settlement
agent, as applicable.
2. Rules for chapters 1, 2, and 3. The standard for judging whether
state laws that cover the types of requirements in chapters 1 (General
provisions), 2 (Credit transactions), and 3 (Credit advertising) of the
Act are inconsistent and therefore preempted, is contradiction of the
Federal law. Examples of laws that would be preempted include:
i. A state law that requires use of the term finance charge, but
defines the term to include fees that the Federal law excludes, or to
exclude fees the Federal law includes.
ii. A state law that requires a label such as nominal annual
interest rate to be used for what the Federal law calls the annual
percentage rate.
3. Laws not contradictory to chapters 1, 2, and 3. i. Generally,
state law requirements that call for the disclosure of items of
information not covered by the Federal law, or that require more
detailed disclosures, do not contradict the Federal requirements.
Examples of laws that are not preempted include:
A. A state law that requires disclosure of the minimum periodic
payment for open-end credit, even though not required by Sec. 1026.7.
B. A state law that requires contracts to contain warnings such as:
``Read this contract before you sign. Do not sign if any spaces are left
blank. You are entitled to a copy of this contract.''
ii. Similarly, a state law that requires itemization of the amount
financed does not automatically contradict the permissive itemization
under Sec. 1026.18(c). However, a state law requirement that the
itemization appear with the disclosure of the amount financed in the
segregated closed-end credit disclosures is inconsistent, and this
location requirement would be preempted.
4. Creditor's options. Before the Bureau makes a determination about
a specific state law, the creditor has certain options.
[[Page 634]]
i. Since the prohibition against giving the state disclosures does
not apply until the Bureau makes its determination, the creditor may
choose to give state disclosures until the Bureau formally determines
that the state law is inconsistent. (The Bureau will provide sufficient
time for creditors to revise forms and procedures as necessary to
conform to its determinations.) Under this first approach, as in all
cases, the Federal disclosures must be clear and conspicuous, and the
closed-end disclosures must be properly segregated in accordance with
Sec. 1026.17(a)(1). This ability to give state disclosures relieves any
uncertainty that the creditor might have prior to Bureau determinations
of inconsistency.
ii. As a second option, the creditor may apply the preemption
standards to a state law, conclude that it is inconsistent, and choose
not to give the state-required disclosures. However, nothing in Sec.
1026.28(a) provides the creditor with immunity for violations of state
law if the creditor chooses not to make state disclosures and the Bureau
later determines that the state law is not preempted.
5. Rules for correction of billing errors and regulation of credit
reports. The preemption criteria for the fair credit billing provisions
set forth in Sec. 1026.28 have two parts. With respect to the rules on
correction of billing errors and regulation of credit reports (which are
in Sec. 1026.13), Sec. 1026.28(a)(2)(i) provides that a state law is
inconsistent and preempted if its requirements are different from the
Federal law. An exception is made, however, for state laws that allow
the consumer to inquire about an account and require the creditor to
respond to such inquiries beyond the time limits in the Federal law.
Such a state law is not preempted with respect to the extra time period.
For example, Sec. 1026.13 requires the consumer to submit a written
notice of billing error within 60 days after transmittal of the periodic
statement showing the alleged error. If a state law allows the consumer
90 days to submit a notice, the state law remains in effect to provide
the extra 30 days. Any state law disclosures concerning this extended
state time limit must reflect the qualifications and conform to the
format specified in Sec. 1026.28(a)(2)(i). Examples of laws that would
be preempted include:
i. A state law that has a narrower or broader definition of billing
error.
ii. A state law that requires the creditor to take different steps
to resolve errors.
iii. A state law that provides different timing rules for error
resolution (subject to the exception discussed above).
6. Rules for other fair credit billing provisions. The second part
of the criteria for fair credit billing relates to the other rules
implementing chapter 4 of the Act (addressed in Sec. Sec. 1026.4(c)(8),
1026.5(b)(2)(ii), 1026.6(a)(5) and (b)(5)(iii), 1026.7(a)(9) and (b)(9),
1026.9(a), 1026.10, 1026.11, 1026.12(c) through (f), 1026.13, and
1026.21). Section 1026.28(a)(2)(ii) provides that the test of
inconsistency is whether the creditor can comply with state law without
violating Federal law. For example:
i. A state law that allows the card issuer to offset the consumer's
credit-card indebtedness against funds held by the card issuer would be
preempted, since Sec. 1026.12(d) prohibits such action.
ii. A state law that requires periodic statements to be sent more
than 14 days before the end of a free-ride period would not be
preempted.
iii. A state law that permits consumers to assert claims and
defenses against the card issuer without regard to the $50 and 100-mile
limitations of Sec. 1026.12(c)(3)(ii) would not be preempted.
iv. In paragraphs ii. and iii. of this comment, compliance with
state law would involve no violation of the Federal law.
7. Who may receive a chapter 4 determination. Only states (through
their authorized officials) may request and receive determinations on
inconsistency with respect to the fair credit billing provisions.
8. Preemption determination--Arizona. The Bureau recognizes state
law preemption determinations made by the Board of Governors of the
Federal Reserve System prior to July 21, 2011, until and unless the
Bureau makes and publishes any contrary determination. Effective October
1, 1983, the Board of Governors determined that the following provisions
in the state law of Arizona are preempted by the Federal law:
i. Section 44-287 B.5--Disclosure of final cash price balance. This
provision is preempted in those transactions in which the amount of the
final cash price balance is the same as the Federal amount financed,
since in such transactions the state law requires the use of a term
different from the Federal term to represent the same amount.
ii. Section 44-287 B.6--Disclosure of finance charge. This provision
is preempted in those transactions in which the amount of the finance
charge is different from the amount of the Federal finance charge, since
in such transactions the state law requires the use of the same term as
the Federal law to represent a different amount.
iii. Section 44-287 B.7--Disclosure of the time balance. The time
balance disclosure provision is preempted in those transactions in which
the amount is the same as the amount of the Federal total of payments,
since in such transactions the state law requires the use of a term
different from the Federal term to represent the same amount.
9. Preemption determination--Florida. The Bureau recognizes state
law preemption determinations made by the Board of Governors of the
Federal Reserve System prior to July 21, 2011, until and unless the
Bureau
[[Page 635]]
makes and publishes any contrary determination. Effective October 1,
1983, the Board of Governors determined that the following provisions in
the state law of Florida are preempted by the Federal law:
i. Sections 520.07(2)(f) and 520.34(2)(f)--Disclosure of amount
financed. This disclosure is preempted in those transactions in which
the amount is different from the Federal amount financed, since in such
transactions the state law requires the use of the same term as the
Federal law to represent a different amount.
ii. Sections 520.07(2)(g), 520.34(2)(g), and 520.35(2)(d)--
Disclosure of finance charge and a description of its components. The
finance charge disclosure is preempted in those transactions in which
the amount of the finance charge is different from the Federal amount,
since in such transactions the state law requires the use of the same
term as the Federal law to represent a different amount. The requirement
to describe or itemize the components of the finance charge, which is
also included in these provisions, is not preempted.
iii. Sections 520.07(2)(h) and 520.34(2)(h)--Disclosure of total of
payments. The total of payments disclosure is preempted in those
transactions in which the amount differs from the amount of the Federal
total of payments, since in such transactions the state law requires the
use of the same term as the Federal law to represent a different amount
than the Federal law.
iv. Sections 520.07(2)(i) and 520.34(2)(i)--Disclosure of deferred
payment price. This disclosure is preempted in those transactions in
which the amount is the same as the Federal total sale price, since in
such transactions the state law requires the use of a different term
than the Federal law to represent the same amount as the Federal law.
10. Preemption determination--Missouri. The Bureau recognizes state
law preemption determinations made by the Board of Governors of the
Federal Reserve System prior to July 21, 2011, until and unless the
Bureau makes and publishes any contrary determination. Effective October
1, 1983, the Board of Governors determined that the following provisions
in the state law of Missouri are preempted by the Federal law:
i. Sections 365.070-6(9) and 408.260-5(6)--Disclosure of principal
balance. This disclosure is preempted in those transactions in which the
amount of the principal balance is the same as the Federal amount
financed, since in such transactions the state law requires the use of a
term different from the Federal term to represent the same amount.
ii. Sections 365.070-6(10) and 408.260-5(7)--Disclosure of time
price differential and time charge, respectively. These disclosures are
preempted in those transactions in which the amount is the same as the
Federal finance charge, since in such transactions the state law
requires the use of a term different from the Federal law to represent
the same amount.
iii. Sections 365.070-2 and 408.260-2--Use of the terms time price
differential and time charge in certain notices to the buyer. In those
transactions in which the state disclosure of the time price
differential or time charge is preempted, the use of the terms in this
notice also is preempted. The notice itself is not preempted.
iv. Sections 365.070-6(11) and 408.260-5(8)--Disclosure of time
balance. The time balance disclosure is preempted in those transactions
in which the amount is the same as the amount of the Federal total of
payments, since in such transactions the state law requires the use of a
different term than the Federal law to represent the same amount.
v. Sections 365.070-6(12) and 408.260-5(9)--Disclosure of time sale
price. This disclosure is preempted in those transactions in which the
amount is the same as the Federal total sale price, since in such
transactions the state law requires the use of a different term from the
Federal law to represent the same amount.
11. Preemption determination--Mississippi. The Bureau recognizes
state law preemption determinations made by the Board of Governors of
the Federal Reserve System prior to July 21, 2011, until and unless the
Bureau makes and publishes any contrary determination. Effective October
1, 1984, the Board of Governors determined that the following provision
in the state law of Mississippi is preempted by the Federal law:
i. Section 63-19-31(2)(g)--Disclosure of finance charge. This
disclosure is preempted in those cases in which the term finance charge
would be used under state law to describe a different amount than the
finance charge disclosed under Federal law.
12. Preemption determination--South Carolina. The Bureau recognizes
state law preemption determinations made by the Board of Governors of
the Federal Reserve System prior to July 21, 2011, until and unless the
Bureau makes and publishes any contrary determination. Effective October
1, 1984, the Board of Governors determined that the following provision
in the state law of South Carolina is preempted by the Federal law.
i. Section 37-10-102(c)--Disclosure of due-on-sale clause. This
provision is preempted, but only to the extent that the creditor is
required to include the disclosure with the segregated Federal
disclosures. If the creditor may comply with the state law by placing
the due-on-sale notice apart from the Federal disclosures, the state law
is not preempted.
13. Preemption determination--Arizona. The Bureau recognizes state
law preemption determinations made by the Board of Governors of the
Federal Reserve System prior to July 21, 2011, until and unless the
Bureau
[[Page 636]]
makes and publishes any contrary determination.
i. Effective October 1, 1986, the Board of Governors determined that
the following provision in the state law of Arizona is preempted by the
Federal law:
A. Section 6-621A.2--Use of the term the total sum of $____ in
certain notices provided to borrowers. This term describes the same item
that is disclosed under Federal law as the total of payments. Since the
state law requires the use of a different term than Federal law to
describe the same item, the state-required term is preempted. The notice
itself is not preempted.
ii. Note: The state disclosure notice that incorporated the above
preempted term was amended on May 4, 1987, to provide that disclosures
must now be made pursuant to the Federal disclosure provisions.
14. Preemption determination--Indiana. The Bureau recognizes state
law preemption determinations made by the Board of Governors of the
Federal Reserve System prior to July 21, 2011, until and unless the
Bureau makes and publishes any contrary determination. Effective October
1, 1988, the Board of Governors determined that the following provision
in the state law of Indiana is preempted by the Federal law:
i. Section 23-2-5-8--Inclusion of the loan broker's fees and charges
in the calculation of, among other items, the finance charge and annual
percentage rate disclosed to potential borrowers. This disclosure is
inconsistent with section 106(a) and Sec. 1026.4(a) of the Federal
statute and regulation, respectively, and is preempted in those
instances where the use of the same term would disclose a different
amount than that required to be disclosed under Federal law.
15. Preemption determination--Wisconsin. The Bureau recognizes state
law preemption determinations made by the Board of Governors of the
Federal Reserve System prior to July 21, 2011, until and unless the
Bureau makes and publishes any contrary determination. Effective October
1, 1991, the Board of Governors determined that the following provisions
in the state law of Wisconsin are preempted by the Federal law:
i. Section 422.308(1)--the disclosure of the annual percentage rate
in cases where the amount of the annual percentage rate disclosed to
consumers under the state law differs from the amount that would be
disclosed under Federal law, since in those cases the state law requires
the use of the same term as the Federal law to represent a different
amount than the Federal law.
ii. Section 766.565(5)--the provision permitting a creditor to
include in an open-end home equity agreement authorization to declare
the account balance due and payable upon receiving notice of termination
from a non-obligor spouse, since such provision is inconsistent with the
purpose of the Federal law.
28(b) Equivalent Disclosure Requirements
1. General. A state disclosure may be substituted for a Federal
disclosure only after the Bureau has made a finding of substantial
similarity. Thus, the creditor may not unilaterally choose to make a
state disclosure in place of a Federal disclosure, even if it believes
that the state disclosure is substantially similar. Since the rule
stated in Sec. 1026.28(b) does not extend to any requirement relating
to the finance charge or annual percentage rate, no state provision on
computation, description, or disclosure of these terms may be
substituted for the Federal provision.
28(d) Special Rule for Credit and Charge Cards
1. General. The standard that applies to preemption of state laws as
they affect transactions of the type subject to Sec. Sec. 1026.60 and
1026.9(e) differs from the preemption standards generally applicable
under the Truth in Lending Act. The Fair Credit and Charge Card
Disclosure Act fully preempts state laws relating to the disclosure of
credit information in consumer credit or charge card applications or
solicitations. (For purposes of this section, a single credit or charge
card application or solicitation that may be used to open either an
account for consumer purposes or an account for business purposes is
deemed to be a ``consumer credit or charge card application or
solicitation.'') For example, a state law requiring disclosure of credit
terms in direct mail solicitations for consumer credit card accounts is
preempted. A state law requiring disclosures in telephone applications
for consumer credit card accounts also is preempted, even if it applies
to applications initiated by the consumer rather than the issuer,
because the state law relates to the disclosure of credit information in
applications or solicitations within the general field of preemption,
that is, consumer credit and charge cards.
2. Limitations on field of preemption. Preemption under the Fair
Credit and Charge Card Disclosure Act does not extend to state laws
applying to types of credit other than open-end consumer credit and
charge card accounts. Thus, for example, a state law is not preempted as
it applies to disclosures in credit and charge card applications and
solicitations solely for business-purpose accounts. On the other hand,
state credit disclosure laws will not apply to a single application or
solicitation to open either an account for consumer purposes or an
account for business purposes. Such ``dual purpose'' applications and
solicitations are treated as ``consumer credit or charge card
applications or solicitations'' under this section and state
[[Page 637]]
credit disclosure laws applicable to them are preempted. Preemption
under this statute does not extend to state laws applicable to home
equity plans; preemption determinations in this area are based on the
Home Equity Loan Consumer Protection Act, as implemented in Sec.
1026.40 of the regulation.
3. Laws not preempted. State laws relating to disclosures concerning
credit and charge cards other than in applications, solicitations, or
renewal notices are not preempted under Sec. 1026.28(d). In addition,
state laws regulating the terms of credit and charge card accounts are
not preempted, nor are laws preempted that regulate the form or content
of information unrelated to the information required to be disclosed
under Sec. Sec. 1026.60 and 1026.9(e). Finally, state laws concerning
the enforcement of the requirements of Sec. Sec. 1026.60 and 1026.9(e)
and state laws prohibiting unfair or deceptive acts or practices
concerning credit and charge card applications, solicitations and
renewals are not preempted. Examples of laws that are not preempted
include:
i. A state law that requires card issuers to offer a grace period or
that prohibits certain fees in credit and charge card transactions.
ii. A state retail installment sales law or a state plain language
law, except to the extent that it regulates the disclosure of credit
information in applications, solicitations and renewals of accounts of
the type subject to Sec. Sec. 1026.60 and 1026.9(e).
iii. A state law requiring notice of a consumer's rights under
antidiscrimination or similar laws or a state law requiring notice about
credit information available from state authorities.
Section 1026.29--State Exemptions
29(a) General Rule
1. Classes eligible. The state determines the classes of
transactions for which it will request an exemption, and makes its
application for those classes. Classes might be, for example, all open-
end credit transactions, all open-end and closed-end transactions, or
all transactions in which the creditor is a bank.
2. Substantial similarity. The ``substantially similar'' standard
requires that State statutory or regulatory provisions and State
interpretations of those provisions be generally the same as the Federal
Act and Regulation Z. This includes the requirement that State
provisions for reimbursement to consumers for overcharges be at least
equivalent to those required in section 108 of the Act. A State will be
eligible for an exemption even if its law covers classes of transactions
not covered by the Federal law. For example, if a State's law covers
agricultural credit, this will not prevent the Bureau from granting an
exemption for consumer credit, even though agricultural credit is not
covered by the Federal law. For transactions subject to Sec. 1026.19(e)
and (f), Sec. 1026.29(a)(1) requires that the State statutory or
regulatory provisions and State interpretations of those provisions
require disclosures that are generally the same as the disclosures
required by Sec. 1026.19(e) and (f), with form and content as
prescribed by Sec. Sec. 1026.37 and 1026.38.
3. Adequate enforcement. The standard requiring adequate provision
for enforcement generally means that appropriate state officials must be
authorized to enforce the state law through procedures and sanctions
comparable to those available to Federal enforcement agencies.
Furthermore, state law must make adequate provision for enforcement of
the reimbursement rules.
4. Exemptions granted. i. The Bureau recognizes exemptions granted
by the Board of Governors of the Federal Reserve System prior to July
21, 2011, until and unless the Bureau makes and publishes any contrary
determination. Effective October 1, 1982, the Board of Governors granted
the following exemptions from portions of the revised Truth in Lending
Act:
A. Maine. Credit or lease transactions subject to the Maine Consumer
Credit Code and its implementing regulations are exempt from chapters 2,
4 and 5 of the Federal Act. (The exemption does not apply to
transactions in which a Federally chartered institution is a creditor or
lessor.)
B. Connecticut. Credit transactions subject to the Connecticut Truth
in Lending Act are exempt from chapters 2 and 4 of the Federal Act. (The
exemption does not apply to transactions in which a Federally chartered
institution is a creditor.)
C. Massachusetts. Credit transactions subject to the Massachusetts
Truth in Lending Act are exempt from chapters 2 and 4 of the Federal
Act. (The exemption does not apply to transactions in which a Federally
chartered institution is a creditor.)
D. Oklahoma. Credit or lease transactions subject to the Oklahoma
Consumer Credit Code are exempt from chapters 2 and 5 of the Federal
Act. (The exemption does not apply to sections 132 through 135 of the
Federal Act, nor does it apply to transactions in which a Federally
chartered institution is a creditor or lessor.)
E. Wyoming. Credit transactions subject to the Wyoming Consumer
Credit Code are exempt from chapter 2 of the Federal Act. (The exemption
does not apply to transactions in which a Federally chartered
institution is a creditor.)
ii. Although RESPA and its implementing Regulation X do not provide
procedures for granting State exemptions, for transactions subject to
Sec. 1026.19(e) and (f), compliance with the requirements of Sec. Sec.
1026.19(e) and (f), 1026.37, and 1026.38 satisfies the requirements of
sections 4 and 5 of RESPA (other than the RESPA section 5(c)
requirements regarding
[[Page 638]]
provision of a list of certified homeownership counselors). If such a
transaction is subject to one of the State exemptions previously granted
by the Board of Governors and noted in comment 29(a)-4.i above, however,
then compliance with the requirements of any State laws and regulations
incorporating the requirements of Sec. Sec. 1026.19(e) and (f),
1026.37, and 1026.38 likewise satisfies the requirements of sections 4
and 5 of RESPA (other than the RESPA section 5(c) requirements regarding
provision of a list of certified homeownership counselors) and the
provisions of Regulation X (12 CFR part 1024) implementing those
sections of RESPA.
29(b) Civil Liability
1. Not eligible for exemption. The provision that an exemption may
not extend to sections 130 and 131 of the Act assures that consumers
retain access to both Federal and state courts in seeking damages or
civil penalties for violations, while creditors retain the defenses
specified in those sections.
Section 1026.30--Limitation on Rates
1. Scope of coverage. i. The requirement of this section applies to
consumer credit obligations secured by a dwelling (as dwelling is
defined in Sec. 1026.2(a)(19)) in which the annual percentage rate may
increase after consummation (or during the term of the plan, in the case
of open-end credit) as a result of an increase in the interest rate
component of the finance charge--whether those increases are tied to an
index or formula or are within a creditor's discretion. The section
applies to credit sales as well as loans. Examples of credit obligations
subject to this section include:
A. Dwelling-secured credit obligations that require variable-rate
disclosures under the regulation because the interest rate may increase
during the term of the obligation.
B. Dwelling-secured open-end credit plans entered into before
November 7, 1989 (the effective date of the home equity rules) that are
not considered variable-rate obligations for purposes of disclosure
under the regulation but where the creditor reserves the contractual
right to increase the interest rate--periodic rate and corresponding
annual percentage rate--during the term of the plan.
ii. In contrast, credit obligations in which there is no contractual
right to increase the interest rate during the term of the obligation
are not subject to this section. Examples include:
A. ``Shared-equity'' or ``shared-appreciation'' mortgage loans that
have a fixed rate of interest and a shared-appreciation feature based on
the consumer's equity in the mortgaged property. (The appreciation share
is payable in a lump sum at a specified time.)
B. Dwelling-secured fixed-rate closed-end balloon-payment mortgage
loans and dwelling-secured fixed-rate open-end plans with a stated term
that the creditor may renew at maturity. (Contrast with the renewable
balloon-payment mortgage instrument described in comment 17(c)(1)-11.)
C. Dwelling-secured fixed-rate closed-end multiple advance
transactions in which each advance is disclosed as a separate
transaction.
D. ``Price level adjusted mortgages'' or other indexed mortgages
that have a fixed rate of interest but provide for periodic adjustments
to payments and the loan balance to reflect changes in an index
measuring prices or inflation.
iii. The requirement of this section does not apply to credit
obligations entered into prior to December 9, 1987. Consequently, new
advances under open-end credit plans existing prior to December 9, 1987,
are not subject to this section.
2. Refinanced obligations. On or after December 9, 1987, when a
credit obligation is refinanced, as defined in Sec. 1026.20(a), the new
obligation is subject to this section if it is dwelling-secured and
allows for increases in the interest rate.
3. Assumptions. On or after December 9, 1987, when a credit
obligation is assumed, as defined in Sec. 1026.20(b), the obligation
becomes subject to this section if it is dwelling-secured and allows for
increases in the interest rate.
4. Modifications of obligations. The modification of an obligation,
regardless of when the obligation was entered into, is generally not
covered by this section. For example, increasing the credit limit on a
dwelling-secured, open-end plan with a variable interest rate entered
into before the effective date of the rule does not make the obligation
subject to this section. If, however, a security interest in a dwelling
is added on or after December 9, 1987, to a credit obligation that
allows for interest rate increases, the obligation becomes subject to
this section. Similarly, if a variable interest rate feature is added to
a dwelling-secured credit obligation, the obligation becomes subject to
this section.
5. Land trusts. In some states, a land trust is used in residential
real estate transactions. (See discussion in comment 3(a)-8.) If a
consumer-purpose loan that allows for interest rate increases is secured
by an assignment of a beneficial interest in a land trust that holds
title to a consumer's dwelling, that loan is subject to this section.
6. Relationship to other sections. Unless otherwise provided for in
the commentary to this section, other provisions of the regulation such
as definitions, exemptions, rules and interpretations also apply to this
section where appropriate. To illustrate:
i. An adjustable interest rate business-purpose loan is not subject
to this section even if the loan is secured by a dwelling because
[[Page 639]]
such credit extensions are not subject to the regulation. (See generally
Sec. 1026.3(a).)
ii. Creditors subject to this section are only those that fall
within the definition of a creditor in Sec. 1026.2(a)(17).
7. Consumer credit contract. Creditors are required to specify a
lifetime maximum interest rate in their credit contracts--the instrument
that creates personal liability and generally contains the terms and
conditions of the agreement (for example, a promissory note or home-
equity line of credit agreement). In some states, the signing of a
commitment letter may create a binding obligation, for example,
constituting consummation as defined in Sec. 1026.2(a)(13). The maximum
interest rate must be included in the credit contract, but a creditor
may include the rate ceiling in the commitment instrument as well.
8. Manner of stating the maximum interest rate. The maximum interest
rate must be stated in the credit contract either as a specific amount
or in any other manner that would allow the consumer to easily
ascertain, at the time of entering into the obligation, what the rate
ceiling will be over the term of the obligation.
i. For example, the following statements would be sufficiently
specific:
A. The maximum interest rate will not exceed X%.
B. The interest rate will never be higher than X percentage points
above the initial rate of Y%.
C. The interest rate will not exceed X%, or X percentage points
above [a rate to be determined at some future point in time], whichever
is less.
D. The maximum interest rate will not exceed X%, or the state usury
ceiling, whichever is less.
ii. The following statements would not comply with this section:
A. The interest rate will never be higher than X percentage points
over the prevailing market rate.
B. The interest rate will never be higher than X percentage points
above [a rate to be determined at some future point in time].
C. The interest rate will not exceed the state usury ceiling which
is currently X%.
iii. A creditor may state the maximum rate in terms of a maximum
annual percentage rate that may be imposed. Under an open-end credit
plan, this normally would be the corresponding annual percentage rate.
(See generally Sec. 1026.6(a)(1)(ii) and (b)(4)(i)(A).)
9. Multiple interest rate ceilings. Creditors are not prohibited
from setting multiple interest rate ceilings. For example, on loans with
multiple variable-rate features, creditors may establish a maximum
interest rate for each feature. To illustrate, in a variable-rate loan
that has an option to convert to a fixed rate, a creditor may set one
maximum interest rate for the initially imposed index-based variable-
rate feature and another for the conversion option. Of course, a
creditor may establish one maximum interest rate applicable to all
features.
10. Interest rate charged after default. State law may allow an
interest rate after default higher than the contract rate in effect at
the time of default; however, the interest rate after default is subject
to a maximum interest rate set forth in a credit obligation that is
otherwise subject to this section. This rule applies only in situations
in which a post-default agreement is still considered part of the
original obligation.
11. Increasing the maximum interest rate--general rule. Generally, a
creditor may not increase the maximum interest rate originally set on a
credit obligation subject to this section unless the consumer and the
creditor enter into a new obligation. Therefore, under an open-end plan,
a creditor may not increase the rate ceiling imposed merely because
there is an increase in the credit limit. If an open-end plan is closed
and another opened, a new rate ceiling may be imposed. Furthermore,
where an open-end plan has a fixed maturity and a creditor renews the
plan at maturity, or enters into a closed-end credit transaction, a new
maximum interest rate may be set at that time. If the open-end plan
provides for a repayment phase, the maximum interest rate cannot be
increased when the repayment phase begins unless the agreement provided
for such an increase. For a closed-end credit transaction, a new maximum
interest rate may be set only if the transaction is satisfied and
replaced by a new obligation. (The exceptions in Sec. 1026.20(a)(1)-(5)
which limit what transactions are considered refinancings for purposes
of disclosure do not apply with respect to increasing a rate ceiling
that has been imposed; if a transaction is satisfied and replaced, the
rate ceiling may be increased.)
12. Increasing the maximum interest rate--assumption of an
obligation. If an obligation subject to this section is assumed by a new
obligor and the original obligor is released from liability, the maximum
interest rate set on the obligation may be increased as part of the
assumption agreement. (This rule applies whether or not the transaction
constitutes an assumption as defined in Sec. 1026.20(b).)
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 1026.31--General Rules
31(c) Timing of Disclosure
1. Furnishing disclosures. Disclosures are considered furnished when
received by the consumer.
[[Page 640]]
31(c)(1) Disclosures for high-cost mortgages.
1. Pre-consummation or account opening waiting period. A creditor
must furnish Sec. 1026.32 disclosures at least three business days
prior to consummation for a closed-end, high-cost mortgage and at least
three business days prior to account opening for an open-end, high-cost
mortgage. Under Sec. 1026.32, ``business day'' has the same meaning as
the rescission rule in comment 2(a)(6)-2--all calendar days except
Sundays and the Federal legal holidays listed in 5 U.S.C. 6103(a).
However, while the disclosure rule under Sec. Sec. 1026.15 and 1026.23
extends to midnight of the third business day, the rule under Sec.
1026.32 does not. For example, under Sec. 1026.32, if disclosures were
provided on a Friday, consummation or account opening could occur any
time on Tuesday, the third business day following receipt of the
disclosures. If the timing of the rescission rule were to be used,
consummation or account opening could not occur until after midnight on
Tuesday.
31(c)(1)(i) Change in Terms
1. Redisclosure required. Creditors must provide new disclosures
when a change in terms makes disclosures previously provided under Sec.
1026.32(c) inaccurate, including disclosures based on and labeled as an
estimate. A change in terms may result from a formal written agreement
or otherwise.
2. Premiums or other charges financed at consummation or account
opening. If the consumer finances the payment of premiums or other
charges as permitted under Sec. 1026.34(a)(10), and as a result the
monthly payment differs from what was previously disclosed under Sec.
1026.32, redisclosure is required and a new three-day waiting period
applies.
31(c)(1)(ii) Telephone disclosures.
1. Telephone disclosures. Disclosures by telephone must be furnished
at least three business days prior to consummation or account opening,
as applicable, calculated in accordance with the timing rules under
Sec. 1026.31(c)(1).
31(c)(1)(iii) Consumer's waiver of waiting period before
consummation or account opening.
31(c)(1)(iii) Consumer's waiver of waiting period before
consummation or account opening.
1. Modification or waiver. A consumer may modify or waive the right
to the three-day waiting period only after receiving the disclosures
required by Sec. 1026.32 and only if the circumstances meet the
criteria for establishing a bona fide personal financial emergency under
Sec. 1026.23(e). Whether these criteria are met is determined by the
facts surrounding individual situations. The imminent sale of the
consumer's home at foreclosure during the three-day period is one
example of a bona fide personal financial emergency. Each consumer
entitled to the three-day waiting period must sign the handwritten
statement for the waiver to be effective.
31(c)(2) Disclosures for Reverse Mortgages
1. Business days. For purposes of providing reverse mortgage
disclosures, ``business day'' has the same meaning as in comment
31(c)(1)-1--all calendar days except Sundays and the Federal legal
holidays listed in 5 U.S.C. 6103(a). This means if disclosures are
provided on a Friday, consummation could occur any time on Tuesday, the
third business day following receipt of the disclosures.
2. Open-end plans. Disclosures for open-end reverse mortgages must
be provided at least three business days before the first transaction
under the plan (see Sec. 1026.5(b)(1)).
31(d) Basis of Disclosures and Use of Estimates
1. Redisclosure. Section 1026.31(d) allows the use of estimates when
information necessary for an accurate disclosure is unknown to the
creditor, provided that the disclosure is clearly identified as an
estimate. For purposes of Subpart E, the rule in Sec. 1026.31(c)(1)(i)
requiring new disclosures when the creditor changes terms also applies
to disclosures labeled as estimates.
31(d)(3) Per-Diem Interest
1. Per-diem interest. This paragraph applies to the disclosure of
any numerical amount (such as the finance charge, annual percentage
rate, or payment amount) that is affected by the amount of the per-diem
interest charge that will be collected at consummation. If the amount of
per-diem interest used in preparing the disclosures for consummation is
based on the information known to the creditor at the time the
disclosure document is prepared, the disclosures are considered accurate
under this rule, and affected disclosures are also considered accurate,
even if the disclosures were not labeled as estimates. (See comment
17(c)(2)(ii)-1 generally.)
31(h) Corrections and unintentional violations.
1. Notice requirements. Notice of a violation pursuant to Sec.
1026.31(h)(1) or (2) should be in writing. The notice should make the
consumer aware of the choices available under Sec. 1026.31(h)(1)(iii)
and (2)(iii). For notice to be adequate, the consumer should have at
least 60 days in which to consider the available options and communicate
a choice to the creditor or assignee.
2. Reasonable time. To claim the benefit of Sec. 1026.31(h), a
creditor or assignee must implement appropriate restitution and the
consumer's elected adjustment within a reasonable time after the
consumer provides notice of that election to the creditor or assignee.
[[Page 641]]
What length of time is reasonable will depend on what changes to a loan
or credit plan's documentation, disclosure, or terms are necessary to
effectuate the adjustment. In general, implementing appropriate
restitution and completing an adjustment within 30 days of the
consumer's providing notice of the election can be considered
reasonable.
Section 1026.32--Requirements for High-Cost Mortgages
32(a) Coverage
Paragraph 32(a)(1).
1. The term high-cost mortgage includes both a closed-end credit
transaction and an open-end credit plan secured by the consumer's
principal dwelling. For purposes of determining coverage under Sec.
1026.32, an open-end consumer credit transaction is the account opening
of an open-end credit plan. An advance of funds or a draw on the credit
line under an open-end credit plan subsequent to account opening does
not constitute an open-end ``transaction.''
Paragraph 32(a)(1)(i).
1. Average prime offer rate. High-cost mortgages include closed- and
open-end consumer credit transactions secured by the consumer's
principal dwelling with an annual percentage rate that exceeds the
average prime offer rate for a comparable transaction as of the date the
interest rate is set by the specified amount. The term ``average prime
offer rate'' is defined in Sec. 1026.35(a)(2).
2. Comparable transaction. Guidance for determining a comparable
transaction is set forth in comments 35(a)(1)-1 and 35(a)(2)-2 and -3,
which direct creditors to published tables of average prime offer rates
for fixed- and variable-rate closed-end credit transactions. Creditors
opening open-end credit plans must compare the annual percentage rate
for the plan to the average prime offer rate for the most closely
comparable closed-end transaction. To identify the most closely
comparable closed-end transaction, the creditor should identify whether
the credit plan is fixed- or variable-rate; if the plan is fixed-rate,
the term of the plan to maturity; if the plan is variable-rate, the
duration of any initial, fixed-rate period; and the date the interest
rate for the plan is set. If a fixed-rate plan has no definite plan
length, a creditor must use the average prime offer rate for a 30-year
fixed-rate loan. If a variable-rate plan has an optional, fixed-rate
feature, a creditor must use the rate table for variable-rate
transactions. If a variable-rate plan has an initial, fixed-rate period
that is not in whole years, a creditor must identify the most closely-
comparable transaction by using the number of whole years closest to the
actual fixed-rate period. For example, if a variable-rate plan has an
initial fixed-rate period of 20 months, a creditor must use the average
prime offer rate for a two-year adjustable-rate loan. If a variable-rate
plan has no initial fixed-rate period, or if it has an initial fixed-
rate period of less than one year, a creditor must use the average prime
offer rate for a one-year adjustable-rate loan. Thus, for example, if
the initial fixed-rate period is six months, a creditor must use the
average prime offer rate for a one-year adjustable-rate loan.
3. Rate set. Comment 35(a)(1)-2 provides guidance for determining
the average prime offer rate in effect on the date that the interest
rate for the transaction is set.
Paragraph 32(a)(1)(i)(B).
1. Loan amount less than $50,000. The creditor must determine
whether to apply the APR threshold in Sec. 1026.32(a)(1)(i)(B) based on
the loan amount, which is the face amount of the note.
Paragraph 32(a)(1)(ii).
1. Annual adjustment of $1,000 amount. The $1,000 figure in Sec.
1026.32(a)(1)(ii)(B) is adjusted annually on January 1 by the annual
percentage change in the CPI that was in effect on the preceding June 1.
The Bureau will publish adjustments after the June figures become
available each year.
i. For 2015, $1,020, reflecting a 2 percent increase in the CPI-U
from June 2013 to June 2014, rounded to the nearest whole dollar.
ii. For 2016, $1,017, reflecting a .2 percent decrease in the CPI-U
from June 2014 to June 2015, rounded to the nearest whole dollar.
iii. For 2017, $1,029, reflecting a 1.1 percent increase in the CPI-
U from June 2015 to June 2016, rounded to the nearest whole dollar.
iv. For 2018, $1,052, reflecting a 2.2 percent increase in the CPI-U
from June 2016 to June 2017, rounded to the nearest whole dollar.
2. Historical adjustment of $400 amount. Prior to January 10, 2014,
a mortgage loan was covered by Sec. 1026.32 if the total points and
fees payable by the consumer at or before loan consummation exceeded the
greater of $400 or 8 percent of the total loan amount. The $400 figure
was adjusted annually on January 1 by the annual percentage change in
the CPI that was in effect on the preceding June 1, as follows:
i. For 1996, $412, reflecting a 3.00 percent increase in the CPI-U
from June 1994 to June 1995, rounded to the nearest whole dollar.
ii. For 1997, $424, reflecting a 2.9 percent increase in the CPI-U
from June 1995 to June 1996, rounded to the nearest whole dollar.
iii. For 1998, $435, reflecting a 2.5 percent increase in the CPI-U
from June 1996 to June 1997, rounded to the nearest whole dollar.
iv. For 1999, $441, reflecting a 1.4 percent increase in the CPI-U
from June 1997 to June 1998, rounded to the nearest whole dollar.
v. For 2000, $451, reflecting a 2.3 percent increase in the CPI-U
from June 1998 to June 1999, rounded to the nearest whole dollar.
vi. For 2001, $465, reflecting a 3.1 percent increase in the CPI-U
from June 1999 to June 2000, rounded to the nearest whole dollar.
[[Page 642]]
vii. For 2002, $480, reflecting a 3.27 percent increase in the CPI-U
from June 2000 to June 2001, rounded to the nearest whole dollar.
viii. For 2003, $488, reflecting a 1.64 percent increase in the CPI-
U from June 2001 to June 2002, rounded to the nearest whole dollar.
ix. For 2004, $499, reflecting a 2.22 percent increase in the CPI-U
from June 2002 to June 2003, rounded to the nearest whole dollar.
x. For 2005, $510, reflecting a 2.29 percent increase in the CPI-U
from June 2003 to June 2004, rounded to the nearest whole dollar.
xi. For 2006, $528, reflecting a 3.51 percent increase in the CPI-U
from June 2004 to June 2005, rounded to the nearest whole dollar.
xii. For 2007, $547, reflecting a 3.55 percent increase in the CPI-U
from June 2005 to June 2006, rounded to the nearest whole dollar.
xiii. For 2008, $561, reflecting a 2.56 percent increase in the CPI-
U from June 2006 to June 2007, rounded to the nearest whole dollar.
xiv. For 2009, $583, reflecting a 3.94 percent increase in the CPI-U
from June 2007 to June 2008, rounded to the nearest whole dollar.
xv. For 2010, $579, reflecting a 0.74 percent decrease in the CPI-U
from June 2008 to June 2009, rounded to the nearest whole dollar.
xvi. For 2011, $592, reflecting a 2.2 percent increase in the CPI-U
from June 2009 to June 2010, rounded to the nearest whole dollar.
xvii. For 2012, $611, reflecting a 3.2 percent increase in the CPI-U
from June 2010 to June 2011, rounded to the nearest whole dollar.
xviii. For 2013, $625, reflecting a 2.3 percent increase in the CPI-
U from June 2011 to June 2012, rounded to the nearest whole dollar.
xix. For 2014, $632, reflecting a 1.1 percent increase in the CPI-U
from June 2012 to June 2013, rounded to the nearest whole dollar.
3. Applicable threshold. For purposes of Sec. 1026.32(a)(1)(ii), a
creditor must determine the applicable points and fees threshold based
on the face amount of the note (or, in the case of an open-end credit
plan, the credit limit for the plan when the account is opened).
However, the creditor must apply the allowable points and fees
percentage to the ``total loan amount,'' as defined in Sec.
1026.32(b)(4). For closed-end credit transactions, the total loan amount
may be different than the face amount of the note. The $20,000 amount in
Sec. 1026.32(a)(1)(ii)(A) and (B) is adjusted annually on January 1 by
the annual percentage change in the CPI that was in effect on the
preceding June 1.
i. For 2015, $20,391, reflecting a 2 percent increase in the CPI-U
from June 2013 to June 2014, rounded to the nearest whole dollar.
ii. For 2016, $20,350, reflecting a .2 percent decrease in the CPI-U
from June 2014 to June 2015, rounded to the nearest whole dollar.
iii. For 2017, $20,579, reflecting a 1.1 percent increase in the
CPI-U from June 2015 to June 2016, rounded to the nearest whole dollar.
iv. For 2018, $21,032, reflecting a 2.2 percent increase in the CPI-
U from June 2016 to June 2017, rounded to the nearest whole dollar.
Paragraph 32(a)(1)(iii).
1. Maximum period and amount. Section 1026.32(a)(1)(iii) provides
that a closed-end credit transaction or an open-end credit plan is a
high-cost mortgage if, under the terms of the loan contract or open-end
credit agreement, a creditor can charge either a prepayment penalty more
than 36 months after consummation or account opening, or total
prepayment penalties that exceed 2 percent of any amount prepaid.
Section 1026.32(a)(1)(iii) applies only for purposes of determining
whether a transaction is subject to the high-cost mortgage requirements
and restrictions in Sec. 1026.32(c) and (d) and Sec. 1026.34. However,
if a transaction is subject to those requirements and restrictions by
operation of any provision of Sec. 1026.32(a)(1), including by
operation of Sec. 1026.32(a)(1)(iii), then the transaction may not
include a prepayment penalty. See Sec. 1026.32(d)(6). As a result,
Sec. 1026.32(a)(1)(iii) effectively establishes a maximum period during
which a prepayment penalty may be imposed, and a maximum prepayment
penalty amount that may be imposed, on a closed-end credit transaction
or open-end credit plan (other than such a mortgage as described in
Sec. 1026.32(a)(2)) secured by a consumer's principal dwelling. Closed-
end credit transactions covered by Sec. 1026.43 are subject to the
additional prepayment penalty restrictions set forth in Sec.
1026.43(g).
2. Examples; open-end credit. If the terms of an open-end credit
agreement allow for a prepayment penalty that exceeds 2 percent of the
initial credit limit for the plan, the agreement will be deemed to be a
transaction with a prepayment penalty that exceeds 2 percent of the
``amount prepaid'' within the meaning of Sec. 1026.32(a)(1)(iii). The
following examples illustrate how to calculate whether the terms of an
open-end credit agreement comply with the maximum prepayment penalty
period and amounts described in Sec. 1026.32(a)(1)(iii).
i. Assume that the terms of a home-equity line of credit with an
initial credit limit of $10,000 require the consumer to pay a $500 flat
fee if the consumer terminates the plan less than 36 months after
account opening. The $500 fee constitutes a prepayment penalty under
Sec. 1026.32(b)(6)(ii), and the penalty is greater than 2 percent of
the $10,000 initial credit limit, which is $200. Under Sec.
1026.32(a)(1)(iii), the plan is a high-cost mortgage subject to the
requirements and restrictions set forth in Sec. Sec. 1026.32 and
1026.34.
ii. Assume that the terms of a home-equity line of credit with an
initial credit limit of $10,000 and a ten-year term require the consumer
to pay a $200 flat fee if the consumer terminates the plan prior to its
normal expiration. The $200 prepayment penalty does not exceed 2 percent
of the initial credit limit, but the terms of the agreement permit the
creditor to charge the fee more than 36
[[Page 643]]
months after account opening. Thus, under Sec. 1026.32(a)(1)(iii), the
plan is a high-cost mortgage subject to the requirements and
restrictions set forth in Sec. Sec. 1026.32 and 1026.34.
iii. Assume that, under the terms of a home-equity line of credit
with an initial credit limit of $150,000, the creditor may charge the
consumer any closing costs waived by the creditor if the consumer
terminates the plan less than 36 months after account opening. Assume
also that the creditor waived closing costs of $1,000. Bona fide third-
party charges comprised $800 of the $1,000 in waived closing costs, and
origination charges retained by the creditor or its affiliate comprised
the remaining $200. Under Sec. 1026.32(b)(6)(ii), the $800 in bona fide
third-party charges is not a prepayment penalty, while the $200 for the
creditor's own originations costs is a prepayment penalty. The total
prepayment penalty of $200 is less than 2 percent of the initial
$150,000 credit limit, and the penalty does not apply if the consumer
terminates the plan more than 36 months after account opening. Thus, the
plan is not a high-cost mortgage under Sec. 1026.32(a)(1)(iii).
32(a)(2) Exemptions.
Paragraph 32(a)(2)(ii).
1. Construction-permanent loans. Section 1026.32 does not apply to a
transaction to finance the initial construction of a dwelling. This
exemption applies to a construction-only loan as well as to the
construction phase of a construction-to-permanent loan. Section 1026.32
may apply, however, to permanent financing that replaces a construction
loan, whether the permanent financing is extended by the same or a
different creditor. When a construction loan may be permanently financed
by the same creditor, Sec. 1026.17(c)(6)(ii) permits the creditor to
give either one combined disclosure for both the construction financing
and the permanent financing, or a separate set of disclosures for each
of the two phases as though they were two separate transactions. See
also comment 17(c)(6)-2. Section 1026.17(c)(6)(ii) addresses only how a
creditor may elect to disclose a construction to permanent transaction.
Which disclosure option a creditor elects under Sec. 1026.17(c)(6)(ii)
does not affect the determination of whether the permanent phase of the
transaction is subject to Sec. 1026.32. When the creditor discloses the
two phases as separate transactions, the annual percentage rate for the
permanent phase must be compared to the average prime offer rate for a
transaction that is comparable to the permanent financing to determine
coverage under Sec. 1026.32. Likewise, a single amount of points and
fees, also reflecting the appropriate charges from the permanent phase,
must be calculated and compared with the total loan amount to determine
coverage under Sec. 1026.32. When the creditor discloses the two phases
as a single transaction, a single annual percentage rate, reflecting the
appropriate charges from both phases, must be calculated for the
transaction in accordance with Sec. 1026.32(a)(3) and appendix D to
part 1026. This annual percentage rate must be compared to the average
prime offer rate for a transaction that is comparable to the permanent
financing to determine coverage under Sec. 1026.32. Likewise, a single
amount of points and fees, also reflecting the appropriate charges from
both phases of the transaction, must be calculated and compared with the
total loan amount to determine coverage under Sec. 1026.32. If the
transaction is determined to be a high-cost mortgage, only the permanent
phase is subject to the requirements of Sec. Sec. 1026.32 and 1026.34.
Paragraph 32(a)(2)(iii).
1. Housing Finance Agency. For purposes of Sec. 1026.32(a)(2)(iii),
a Housing Finance Agency means a housing finance agency as defined in 24
CFR 266.5.
32(a)(3) Determination of annual percentage rate.
1. In general. The guidance set forth in the commentary to Sec.
1026.17(c)(1) and in Sec. 1026.40 addresses calculation of the annual
percentage rate disclosures for closed-end credit transactions and open-
end credit plans, respectively. Section 1026.32(a)(3) requires a
different calculation of the annual percentage rate solely to determine
coverage under Sec. 1026.32(a)(1)(i).
2. Open-end credit. The annual percentage rate for an open-end
credit plan must be determined in accordance with Sec. 1026.32(a)(3),
regardless of whether there is an advance of funds at account opening.
Section 1026.32(a)(3) does not require the calculation of the annual
percentage rate for any extensions of credit subsequent to account
opening. Any draw on the credit line subsequent to account opening is
not treated as a separate transaction for purposes of determining annual
percentage rate threshold coverage.
3. Rates that vary; index rate plus maximum margin. i. Section
1026.32(a)(3)(ii) applies in the case of a closed- or open-end credit
transaction when the interest rate for the transaction varies solely in
accordance with an index. For purposes of Sec. 1026.32(a)(3)(ii), a
transaction's interest rate varies in accordance with an index even if
the transaction has an initial rate that is not determined by the index
used to make later interest rate adjustments provided that, following
the first rate adjustment, the interest rate for the transaction varies
solely in accordance with an index.
ii. In general, for transactions subject to Sec. 1026.32(a)(3)(ii),
the annual percentage rate is determined by adding the index rate in
effect on the date that the interest rate for the transaction is set to
the maximum margin for the transaction, as set forth in the agreement
for the loan or plan. In some cases, a transaction subject to Sec.
1026.32(a)(3)(ii) may
[[Page 644]]
have an initial rate that is a premium rate and is higher than the index
rate plus the maximum margin as of the date the interest rate for the
transaction is set. In such cases, the annual percentage rate is
determined based on the initial ``premium'' rate.
iii. The following examples illustrate the rule:
A. Assume that the terms of a closed-end, adjustable-rate mortgage
loan provide for a fixed, initial interest rate of 2 percent for two
years following consummation, after which the interest rate will adjust
annually in accordance with an index plus a 2 percent margin. Also
assume that the applicable index is 3 percent as of the date the
interest rate for the transaction is set, and a lifetime interest rate
cap of 15 percent applies to the transaction. Pursuant to Sec.
1026.32(a)(3)(ii), for purposes of determining the annual percentage
rate for Sec. 1026.32(a)(1)(i), the interest rate for the transaction
is 5 percent (3 percent index rate plus 2 percent margin).
B. Assume the same transaction terms set forth in paragraph 3.iii.A,
except that an initial interest rate of 6 percent applies to the
transaction. Pursuant to Sec. 1026.32(a)(3)(ii), for purposes of
determining the annual percentage rate for Sec. 1026.32(a)(1)(i), the
interest rate for the transaction is 6 percent.
C. Assume that the terms of an open-end credit agreement with a
five-year draw period and a five-year repayment period provide for a
fixed, initial interest rate of 2 percent for the first year of the
repayment period, after which the interest rate will adjust annually
pursuant to a publicly-available index outside the creditor's control,
in accordance with the limitations applicable to open-end credit plans
in Sec. 1026.40(f). Also assume that, pursuant to the terms of the
open-end credit agreement, a margin of 2 percent applies because the
consumer is employed by the creditor, but that the margin will increase
to 4 percent if the consumer's employment with the creditor ends.
Finally, assume that the applicable index rate is 3.5 percent as of the
date the interest rate for the transaction is set, and a lifetime
interest rate cap of 15 percent applies to the transaction. Pursuant to
Sec. 1026.32(a)(3)(ii), for purposes of determining the annual
percentage rate for Sec. 1026.32(a)(1)(i), the interest rate for the
transaction is 7.5 percent (3.5 percent index rate plus 4 percent
maximum margin).
D. Assume the same transaction terms set forth in paragraph 3.iii.C,
except that an initial interest rate of 8 percent applies to the
transaction. Pursuant to Sec. 1026.32(a)(3)(ii), for purposes of
determining the annual percentage rate for Sec. 1026.32(a)(1)(i), the
interest rate for the transaction is 8 percent.
4. Rates that vary other than in accordance with an index. Section
1026.32(a)(3)(iii) applies when the interest rate applicable to a
closed- or open-end transaction may or will vary, except as described in
Sec. 1026.32(a)(3)(ii). Section 1026.32(a)(3)(iii) thus applies where
multiple fixed rates apply to a transaction, such as in a step-rate
mortgage. For example, assume the following interest rates will apply to
a transaction: 3 percent for the first six months, 4 percent for the
next 10 years, and 5 percent for the remaining loan term. In this
example, Sec. 1026.32(a)(3)(iii) would be used to determine the
interest rate, and 5 percent would be the maximum interest rate
applicable to the transaction used to determine the annual percentage
rate for purposes of Sec. 1026.32(a)(1)(i). Section 1026.32(a)(3)(iii)
also applies to any other adjustable-rate loan where the interest rate
may vary but according to a formula other than the sum of an index and a
margin.
5. Fixed-rate and -term payment options. If an open-end credit plan
has only a fixed rate during the draw period, a creditor must use the
interest rate applicable to that feature to determine the annual
percentage rate, as required by Sec. 1026.32(a)(3)(i). However, if an
open-end credit plan has a variable rate, but also offers a fixed-rate
and -term payment option during the draw period, Sec. 1026.32(a)(3)
requires a creditor to use the terms applicable to the variable-rate
feature for determining the annual percentage rate, as described in
Sec. 1026.32(a)(3)(ii).
32(b) Definitions.
32(b) Definitions
Paragraph 32(b)(1).
1. Known at or before consummation. Section 1026.32(b)(1) includes
in points and fees for closed-end credit transactions those items listed
in Sec. 1026.32(b)(1)(i) through (vi) that are known at or before
consummation. The following examples clarify how to determine whether a
charge or fee is known at or before consummation.
i. General. In general, a charge or fee is ``known at or before
consummation'' if the creditor knows at or before consummation that the
charge or fee will be imposed in connection with the transaction, even
if the charge or fee is scheduled to be paid after consummation. Thus,
for example, if the creditor charges the consumer $400 for an appraisal
conducted by an affiliate of the creditor, the $400 is included in
points and fees, even if the consumer finances it and repays it over the
loan term, because the creditor knows at or before consummation that the
charge or fee is imposed in connection with the transaction. By
contrast, if a creditor does not know whether a charge or fee will be
imposed, it is not included in points and fees. For example, charges or
fees that the creditor may impose if the consumer seeks to modify a loan
after consummation are not included in points and fees, because the
creditor does not know at or before consummation whether the consumer
will seek to modify the loan and therefore incur the fees or charges.
[[Page 645]]
ii. Prepayment penalties. Notwithstanding the guidance in comment
32(b)(1)-1.i, under Sec. 1026.32(b)(1)(v) the maximum prepayment
penalty that may be charged or collected under the terms of the mortgage
loan is included in points and fees because the amount of the maximum
prepayment penalty that may be charged or collected is known at or
before consummation.
iii. Certain mortgage and credit insurance premiums. Notwithstanding
the guidance in comment 32(b)(1)-1.i, under Sec. 1026.32(b)(1)(i)(C)(1)
and (iii) premiums and charges for private mortgage insurance and credit
insurance that are payable after consummation are not included in points
and fees, even if the amounts of such premiums and charges are known at
or before consummation.
2. Charges paid by parties other than the consumer. Under Sec.
1026.32(b)(1), points and fees may include charges paid by third parties
in addition to charges paid by the consumer. Specifically, charges paid
by third parties that fall within the definition of points and fees set
forth in Sec. 1026.32(b)(1)(i) through (vi) are included in points and
fees. In calculating points and fees in connection with a transaction,
creditors may rely on written statements from the consumer or third
party paying for a charge, including the seller, to determine the source
and purpose of any third-party payment for a charge.
i. Examples--included in points and fees. A creditor's origination
charge paid by a consumer's employer on the consumer's behalf that is
included in the finance charge as defined in Sec. 1026.4(a) or (b),
must be included in points and fees under Sec. 1026.32(b)(1)(i), unless
other exclusions under Sec. 1026.4 or Sec. 1026.32(b)(1)(i)(A) through
(F) apply. In addition, consistent with comment 32(b)(1)(i)-1, a third-
party payment of an item excluded from the finance charge under a
provision of Sec. 1026.4, while not included in the total points and
fees under Sec. 1026.32(b)(1)(i), may be included under Sec.
1026.32(b)(1)(ii) through (vi). For example, a payment by a third party
of a creditor-imposed fee for an appraisal performed by an employee of
the creditor is included in points and fees under Sec.
1026.32(b)(1)(iii). See comment 32(b)(1)(i)-1.
ii. Examples--not included in points and fees. A charge paid by a
third party is not included in points and fees under Sec.
1026.32(b)(1)(i) if the exclusions to points and fees in Sec.
1026.32(b)(1)(i)(A) through (F) apply. For example, certain bona fide
third-party charges not retained by the creditor, loan originator, or an
affiliate of either are excluded from points and fees under Sec.
1026.32(b)(1)(i)(D), regardless of whether those charges are paid by a
third party or the consumer.
iii. Seller's points. Seller's points, as described in Sec.
1026.4(c)(5) and commentary, are excluded from the finance charge and
thus are not included in points and fees under Sec. 1026.32(b)(1)(i).
However, charges paid by the seller for items listed in Sec.
1026.32(b)(1)(ii) through (vi) are included in points and fees.
iv. Creditor-paid charges. Charges that are paid by the creditor,
other than loan originator compensation paid by the creditor that is
required to be included in points and fees under Sec.
1026.32(b)(1)(ii), are excluded from points and fees. See Sec. Sec.
1026.32(b)(1)(i)(A), 1026.4(a), and comment 4(a)-(2).
Paragraph 32(b)(1)(i).
1. General. Section 1026.32(b)(1)(i) includes in the total ``points
and fees'' items included in the finance charge under Sec. 1026.4(a)
and (b). However, certain items that may be included in the finance
charge are excluded from points and fees under Sec. 1026.32(b)(1)(i)(A)
through (F). Items excluded from the finance charge under other
provisions of Sec. 1026.4 are not included in the total points and fees
under Sec. 1026.32(b)(1)(i), but may be included in points and fees
under Sec. 1026.32(b)(1)(ii) through (vi). To illustrate: A fee imposed
by the creditor for an appraisal performed by an employee of the
creditor meets the definition of ``finance charge'' under Sec.
1026.4(a) as ``any charge payable directly or indirectly by the consumer
and imposed directly or indirectly by the creditor as an incident to or
a condition of the extension of credit.'' However, Sec. 1026.4(c)(7)
specifies that appraisal fees are not included in the finance charge. A
fee imposed by the creditor for an appraisal performed by an employee of
the creditor therefore would not be included in the finance charge and
would not be counted in points and fees under Sec. 1026.32(b)(1)(i).
Section 1026.32(b)(1)(iii), however, expressly includes in points and
fees items listed in Sec. 1026.4(c)(7) (including appraisal fees) if
the creditor receives compensation in connection with the charge. A
creditor would receive compensation for an appraisal performed by its
own employee. Thus, the appraisal fee in this example must be included
in the calculation of points and fees.
Paragraph 32(b)(1)(i)(B).
1. Federal and State mortgage insurance premiums and guaranty fees.
Under Sec. 1026.32(b)(1)(i)(B), mortgage insurance premiums or guaranty
fees in connection with a Federal or State agency program are excluded
from points and fees, even though they are included in the finance
charge under Sec. 1026.4(a) and (b). For example, if a consumer is
required to pay a $2,000 mortgage insurance premium for a loan insured
by the Federal Housing Administration, the $2,000 must be included in
the finance charge but is not counted in points and fees. Similarly, if
a consumer pays a 2 percent funding fee for a loan guaranteed by the
U.S. Department of Veterans Affairs or through the U.S Department of
Agriculture's Rural Development Single Family Housing Guaranteed
[[Page 646]]
Loan Program, the fee is included in the finance charge but is not
included in points and fees.
Paragraph 32(b)(1)(i)(C).
1. Private mortgage insurance premiums. i. Payable after
consummation. Under Sec. 1026.32(b)(1)(i)(C)(1), private mortgage
insurance premiums payable after consummation are excluded from points
and fees.
ii. Payable at or before consummation. A. General. Under Sec.
1026.32(b)(1)(i)(C)(2), private mortgage insurance premiums payable at
or before consummation (i.e., single or up-front premiums) may be
excluded from points and fees, even though they are included in the
finance charge under Sec. 1026.4(a) and (b). However, the portion of
the premium that exceeds the amount payable under policies in effect at
the time of origination under section 203(c)(2)(A) of the National
Housing Act (12 U.S.C. 1709(c)(2)(A)) is included in points and fees. To
determine whether any portion of the premium exceeds the amount payable
under policies in effect at the time of origination under section
203(c)(2)(A) of the National Housing Act, a creditor references the
premium amount that would be payable for the transaction under that Act,
as implemented by applicable regulations and other written authorities
issued by the Federal Housing Administration (such as Mortgagee
Letters), even if the transaction would not qualify to be insured under
that Act (including, for example, because the principal amount exceeds
the maximum insurable under that Act).
B. Non-refundable premiums. To qualify for the exclusion from points
and fees, private mortgage insurance premiums payable at or before
consummation must be required to be refunded on a pro rata basis and the
refund must be automatically issued upon notification of the
satisfaction of the underlying mortgage loan.
C. Example. Assume that a $3,000 private mortgage insurance premium
charged on a closed-end mortgage loan is payable at or before closing
and is required to be refunded on a pro rata basis and that the refund
is automatically issued upon notification of the satisfaction of the
underlying mortgage loan. Assume also that the maximum premium allowable
under the National Housing Act is $2,000. In this case, the creditor
could exclude $2,000 from points and fees but would have to include the
$1,000 that exceeds the allowable premium under the National Housing
Act. However, if the $3,000 private mortgage insurance premium were not
required to be refunded on a pro rata basis or if the refund were not
automatically issued upon notification of the satisfaction of the
underlying mortgage loan, the entire $3,000 premium would be included in
points and fees.
2. Method of paying private mortgage insurance premiums. The portion
of any private mortgage insurance premiums payable at or before
consummation that does not qualify for an exclusion from points and fees
under Sec. 1026.32(b)(1)(i)(C)(2) must be included in points and fees
for purposes of Sec. 1026.32(b)(1)(i) whether paid in cash or financed
and whether the insurance is optional or required.
Paragraph 32(b)(1)(i)(D).
1. Charges not retained by the creditor, loan originator, or an
affiliate of either. In general, a creditor is not required to count in
points and fees any bona fide third-party charge not retained by the
creditor, loan originator, or an affiliate of either. For example, if
bona fide charges are imposed by a third-party settlement agent and are
not retained by the creditor, loan originator, or an affiliate of
either, those charges are not included in points and fees, even if those
charges are included in the finance charge under Sec. 1026.4(a)(2). The
term loan originator has the same meaning as in Sec. 1026.36(a)(1).
2. Private mortgage insurance. The exclusion for bona fide third-
party charges not retained by the creditor, loan originator, or an
affiliate of either is limited by Sec. 1026.32(b)(1)(i)(C) in the
general definition of ``points and fees.'' Section 1026.32(b)(1)(i)(C)
requires inclusion in points and fees of premiums or other charges
payable at or before consummation for any private guaranty or insurance
protecting the creditor against the consumer's default or other credit
loss to the extent that the premium or charge exceeds the amount payable
under policies in effect at the time of origination under section
203(c)(2)(A) of the National Housing Act (12 U.S.C. 1709(c)(2)(A)).
These premiums or charges must also be included if the premiums or
charges are not required to be refundable on a pro-rated basis, or the
refund is not required to be automatically issued upon notification of
the satisfaction of the underlying mortgage loan. Under these
circumstances, even if the premiums or other charges are not retained by
the creditor, loan originator, or an affiliate of either, they must be
included in the points and fees calculation for qualified mortgages. See
comments 32(b)(1)(i)(c)-1 and -2 for further discussion of including
private mortgage insurance premiums payable at or before consummation in
the points and fees calculation.
3. Real estate-related fees. The exclusion for bona fide third-party
charges not retained by the creditor, loan originator, or an affiliate
of either is limited by Sec. 1026.32(b)(1)(iii) in the general
definition of points and fees. Section 1026.32(b)(1)(iii) requires
inclusion in points and fees of items listed in Sec. 1026.4(c)(7)
unless the charge is reasonable, the creditor receives no direct or
indirect compensation in connection with the charge, and the charge is
not paid to an affiliate of the creditor. If a charge is required to be
included in points and fees under Sec. 1026.32(b)(1)(iii), it may not
[[Page 647]]
be excluded under Sec. 1026.32(b)(1)(i)(D), even if the criteria for
exclusion in Sec. 1026.32(b)(1)(i)(D) are satisfied.
4. Credit insurance. The exclusion for bona fide third-party charges
not retained by the creditor, loan originator, or an affiliate of either
is limited by Sec. 1026.32(b)(1)(iv) in the general definition of
points and fees. Section 1026.32(b)(1)(iv) requires inclusion in points
and fees of premiums and other charges for credit insurance and certain
other types of insurance. If a charge is required to be included in
points and fees under Sec. 1026.32(b)(1)(iv), it may not be excluded
under Sec. 1026.32(b)(1)(i)(D), even if the criteria for exclusion in
Sec. 1026.32(b)(1)(i)(D) are satisfied.
Paragraph 32(b)(1)(i)(E).
1. Bona fide discount point. The term bona fide discount point is
defined in Sec. 1026.32(b)(3).
2. Average prime offer rate. The average prime offer rate for
purposes of paragraph (b)(1)(i)(E) of this section is the average prime
offer rate that applies to a comparable transaction as of the date the
discounted interest rate for the transaction is set. For the meaning of
``comparable transaction,'' refer to comment 35(a)(2)-2. The table of
average prime offer rates published by the Bureau indicates how to
identify the comparable transaction. See comment 35(a)(2)-2.
3. Example. Assume a transaction that is a first-lien, purchase-
money home mortgage with a fixed interest rate and a 30-year term.
Assume also that the consumer locks in an interest rate of 6 percent on
May 1, 2014 that was discounted from a rate of 6.5 percent because the
consumer paid two discount points. Finally, assume that the average
prime offer rate as of May 1, 2014 for home mortgages with a fixed
interest rate and a 30-year term is 5.5 percent. The creditor may
exclude two bona fide discount points from the points and fees
calculation because the rate from which the discounted rate was derived
(6.5 percent) exceeded the average prime offer rate for a comparable
transaction as of the date the rate on the transaction was set (5.5
percent) by only 1 percentage point.
Paragraph 32(b)(1)(i)(F).
1. Bona fide discount point and average prime offer rate. Comments
32(b)(1)(i)(E)-1 and -2 provide guidance concerning the definition of
bona fide discount point and average prime offer rate, respectively.
2. Example. Assume a transaction that is a first-lien, purchase-
money home mortgage with a fixed interest rate and a 30-year term.
Assume also that the consumer locks in an interest rate of 6 percent on
May 1, 2014, that was discounted from a rate of 7 percent because the
consumer paid four discount points. Finally, assume that the average
prime offer rate as of May 1, 2014, for home mortgages with a fixed
interest rate and a 30-year term is 5 percent. The creditor may exclude
one discount point from the points and fees calculation because the rate
from which the discounted rate was derived (7 percent) exceeded the
average prime offer rate for a comparable transaction as of the date the
rate on the transaction was set (5 percent) by only 2 percentage points.
Paragraph 32(b)(1)(ii).
1. Loan originator compensation--general. Compensation paid by a
consumer or creditor to a loan originator, other than an employee of the
creditor, is included in the calculation of points and fees for a
transaction, provided that such compensation can be attributed to that
particular transaction at the time the interest rate is set.
Compensation paid to an employee of a creditor is not included in points
and fees. Loan originator compensation includes amounts the loan
originator retains and is not dependent on the label or name of any fee
imposed in connection with the transaction.
2. Loan originator compensation--attributable to a particular
transaction. Loan originator compensation is compensation that is paid
by a consumer or creditor to a loan originator that can be attributed to
that particular transaction. The amount of compensation that can be
attributed to a particular transaction is the dollar value of
compensation that the loan originator will receive if the transaction is
consummated. As explained in comment 32(b)(1)(ii)-3, the amount of
compensation that a loan originator will receive is calculated as of the
date the interest rate is set and includes compensation that is paid
before, at, or after consummation.
3. Loan originator compensation--timing. Compensation paid to a loan
originator that can be attributed to a transaction must be included in
the points and fees calculation for that loan regardless of whether the
compensation is paid before, at, or after consummation. The amount of
loan originator compensation that can be attributed to a transaction is
determined as of the date the interest rate is set. Thus, loan
originator compensation for a transaction includes compensation that can
be attributed to that transaction at the time the creditor sets the
interest rate for the transaction, even if that compensation is not paid
until after consummation.
4. Loan originator compensation--calculating loan originator
compensation in connection with other charges or payments included in
the finance charge or made to loan originators. i. Consumer payments to
mortgage brokers. As provided in Sec. 1026.32(b)(1)(ii)(A), consumer
payments to a mortgage broker already included in the points and fees
calculation under Sec. 1026.32(b)(1)(i) need not be counted again under
Sec. 1026.32(b)(1)(ii). For example, assume a consumer pays a mortgage
broker a $3,000 fee for a transaction. The $3,000
[[Page 648]]
mortgage broker fee is included in the finance charge under Sec.
1026.4(a)(3). Because the $3,000 mortgage broker fee is already included
in points and fees under Sec. 1026.32(b)(1)(i), it is not counted again
under Sec. 1026.32(b)(1)(ii).
ii. Payments by a mortgage broker to its individual loan originator
employee. As provided in Sec. 1026.32(b)(1)(ii)(B), compensation paid
by a mortgage broker to its individual loan originator employee is not
included in points and fees under Sec. 1026.32(b)(1)(ii). For example,
assume a consumer pays a $3,000 fee to a mortgage broker, and the
mortgage broker pays a $1,500 commission to its individual loan
originator employee for that transaction. The $3,000 mortgage broker fee
is included in points and fees, but the $1,500 commission is not
included in points and fees because it has already been included in
points and fees as part of the $3,000 mortgage broker fee.
iii. Creditor's origination fees--loan originator not employed by
creditor. Compensation paid by a creditor to a loan originator who is
not employed by the creditor is included in the calculation of points
and fees under Sec. 1026.32(b)(1)(ii). Such compensation is included in
points and fees in addition to any origination fees or charges paid by
the consumer to the creditor that are included in points and fees under
Sec. 1026.32(b)(1)(i). For example, assume that a consumer pays to the
creditor a $3,000 origination fee and that the creditor pays a mortgage
broker $1,500 in compensation attributed to the transaction. Assume
further that the consumer pays no other charges to the creditor that are
included in points and fees under Sec. 1026.32(b)(1)(i) and that the
mortgage broker receives no other compensation that is included in
points and fees under Sec. 1026.32(b)(1)(ii). For purposes of
calculating points and fees, the $3,000 origination fee is included in
points and fees under Sec. 1026.32(b)(1)(i) and the $1,500 in loan
originator compensation is included in points and fees under Sec.
1026.32(b)(1)(ii), equaling $4,500 in total points and fees, provided
that no other points and fees are paid or compensation received.
5. Loan originator compensation--calculating loan originator
compensation in manufactured home transactions. i. If a manufactured
home retailer qualifies as a loan originator under Sec. 1026.36(a)(1),
then compensation that is paid by a consumer or creditor to the retailer
for loan origination activities and that can be attributed to the
transaction at the time the interest rate is set must be included in
points and fees. For example, assume a manufactured home retailer takes
a residential mortgage loan application and is entitled to receive at
consummation a $1,000 commission from the creditor for taking the
mortgage loan application. The $1,000 commission is loan originator
compensation that must be included in points and fees.
ii. If the creditor has knowledge that the sales price of a
manufactured home includes loan originator compensation, then such
compensation can be attributed to the transaction at the time the
interest rate is set and therefore is included in points and fees under
Sec. 1026.32(b)(1)(ii). However, the creditor is not required to
investigate the sales price of a manufactured home to determine if the
sales price includes loan originator compensation.
iii. As provided in Sec. 1026.32(b)(1)(ii)(D), compensation paid by
a manufactured home retailer to its employees is not included in points
and fees under Sec. 1026.32(b)(1)(ii).
ii. If the creditor has knowledge that the sales price of a
manufactured home includes loan originator compensation, then such
compensation can be attributed to the transaction at the time the
interest rate is set and therefore is included in points and fees under
Sec. 1026.32(b)(1)(ii). However, the creditor is not required to
investigate the sales price of a manufactured home to determine if the
sales price includes loan originator compensation.
iii. As provided in Sec. 1026.32(b)(1)(ii)(D), compensation paid by
a manufactured home retailer to its employees is not included in points
and fees under Sec. 1026.32(b)(1)(ii).
Paragraph 32(b)(1)(iii).
1. Other charges. Section 1026.32(b)(1)(iii) defines points and fees
to include all items listed in Sec. 1026.4(c)(7), other than amounts
held for the future payment of taxes, unless certain exclusions apply.
An item listed in Sec. 1026.4(c)(7) may be excluded from the points and
fees calculation if the charge is reasonable; the creditor receives no
direct or indirect compensation from the charge; and the charge is not
paid to an affiliate of the creditor. For example, a reasonable fee paid
by the consumer to an independent, third-party appraiser may be excluded
from the points and fees calculation (assuming no compensation is paid
to the creditor or its affiliate and no charge is paid to an affiliate).
By contrast, a fee paid by the consumer for an appraisal performed by
the creditor must be included in the calculation, even though the fee
may be excluded from the finance charge if it is bona fide and
reasonable in amount.
Paragraph 32(b)(1)(iv).
1. Credit insurance and debt cancellation or suspension coverage. In
determining points and fees for purposes of Sec. 1026.32(b)(1),
premiums paid at or before consummation for credit insurance or any debt
cancellation or suspension agreement or contract are included in points
and fees whether they are paid in cash or, if permitted by applicable
law, financed and whether the insurance or coverage is optional or
required. Such charges are also included whether the amount represents
the entire premium or payment for the coverage or an initial payment.
[[Page 649]]
2. Credit property insurance. Credit property insurance includes
insurance against loss of or damage to personal property, such as a
houseboat or manufactured home. Credit property insurance covers the
creditor's security interest in the property. Credit property insurance
does not include homeowners' insurance, which, unlike credit property
insurance, typically covers not only the dwelling but its contents and
protects the consumer's interest in the property.
3. Life, accident, health, or loss-of-income insurance. Premiums or
other charges for these types of insurance are included in points and
fees only if the creditor is a beneficiary. If the consumer or another
person designated by the consumer is the sole beneficiary, then the
premiums or other charges are not included in points and fees.
Paragraph 32(b)(2).
1. See comment 32(b)(1)-2 for guidance concerning the inclusion in
points and fees of charges paid by parties other than the consumer.
Paragraph 32(b)(2)(i).
1. Finance charge. The points and fees calculation under Sec.
1026.32(b)(2) generally does not include items that are included in the
finance charge but that are not known until after account opening, such
as minimum monthly finance charges or charges based on account activity
or inactivity. Transaction fees also generally are not included in the
points and fees calculation, except as provided in Sec.
1026.32(b)(2)(vi). See comments 32(b)(1)-1 and 32(b)(1)(i)-1 for
additional guidance concerning the calculation of points and fees.
Paragraph 32(b)(2)(i)(B).
1. See comment 32(b)(1)(i)(B)-1 for further guidance concerning the
exclusion of mortgage insurance premiums payable in connection with any
Federal or State agency program.
Paragraph 32(b)(2)(i)(C).
1. See comment 32(b)(1)(i)(C)-1 and -2 for further guidance
concerning the exclusion of mortgage insurance premiums payable for any
guaranty or insurance that protects the creditor against the consumer's
default or other credit loss and that is not in connection with any
Federal or State agency program.
Paragraph 32(b)(2)(i)(D).
1. For purposes of Sec. 1026.32(b)(2)(i)(D), the term loan
originator means a loan originator as that term is defined in Sec.
1026.36(a)(1), without regard to Sec. 1026.36(a)(2). See comments
32(b)(1)(i)(D)-1 through -4 for further guidance concerning the
exclusion of bona fide third-party charges from points and fees.
Paragraph 32(b)(2)(i)(E).
1. See comments 32(b)(1)(i)(E)-1 through -3 for further guidance
concerning the exclusion of up to two bona fide discount points from
points and fees.
Paragraph 32(b)(2)(i)(F).
1. See comments 32(b)(1)(i)(F)-1 and -2 for further guidance
concerning the exclusion of up to one bona fide discount point from
points and fees.
Paragraph 32(b)(2)(ii).
1. For purposes of Sec. 1026.32(b)(2)(ii), the term loan originator
means a loan originator as that term is defined in Sec. 1026.36(a)(1),
without regard to Sec. 1026.36(a)(2). See the commentary to Sec.
1026.32(b)(1)(ii) for additional guidance concerning the inclusion of
loan originator compensation in points and fees.
Paragraph 32(b)(2)(iii).
1. Other charges. See comment 32(b)(1)(iii)-1 for further guidance
concerning the inclusion of items listed in Sec. 1026.4(c)(7) in points
and fees.
Paragraph 32(b)(2)(iv).
1. Credit insurance and debt cancellation or suspension coverage.
See comments 32(b)(1)(iv)-1 through -3 for further guidance concerning
the inclusion of premiums for credit insurance and debt cancellation or
suspension coverage in points and fees.
Paragraph 32(b)(2)(vii).
1. Participation fees. Fees charged for participation in a credit
plan must be included in the points and fees calculation for purposes of
Sec. 1026.32 if payable at or before account opening. These fees
include annual fees or other periodic fees that must be paid as a
condition of access to the plan itself. See commentary to Sec.
1026.4(c)(4) for a description of these fees.
Paragraph 32(b)(2)(viii).
1. Transaction fees to draw down the credit line. Section
1026.32(b)(2)(viii) requires creditors in open-end credit plans to
include in points and fees any transaction fee, including any per-
transaction fee, that will be charged for a draw on the credit line.
Section 1026.32(b)(2)(viii) requires the creditor to assume that the
consumer will make at least one draw during the term of the credit plan.
Thus, if the terms of the open-end credit plan permit the creditor to
charge a $10 transaction fee each time the consumer draws on the credit
line, Sec. 1026.32(b)(2)(viii) requires the creditor to include one $10
charge in the points and fees calculation.
2. Fixed-rate loan option. If the terms of an open-end credit plan
permit a consumer to draw on the credit line using either a variable-
rate feature or a fixed-rate feature, Sec. 1026.32(b)(2)(viii) requires
the creditor to use the terms applicable to the variable-rate feature
for determining the transaction fee that must be included in the points
and fees calculation.
32(b)(3) Bona fide discount point.
32(b)(3)(i) Closed-end credit.
1. Definition of bona fide discount point. Section 1026.32(b)(3)
provides that, to be bona fide, a discount point must reduce the
interest rate based on a calculation that is consistent with established
industry practices for determining the amount of reduction in
[[Page 650]]
the interest rate or time-price differential appropriate for the amount
of discount points paid by the consumer. To satisfy this standard, a
creditor may show that the reduction is reasonably consistent with
established industry norms and practices for secondary mortgage market
transactions. For example, a creditor may rely on pricing in the to-be-
announced (TBA) market for mortgage-backed securities (MBS) to establish
that the interest rate reduction is consistent with the compensation
that the creditor could reasonably expect to receive in the secondary
market. The creditor may also establish that its interest rate reduction
is consistent with established industry practices by showing that its
calculation complies with requirements prescribed in Fannie Mae or
Freddie Mac guidelines for interest rate reductions from bona fide
discount points. For example, assume that the Fannie Mae Single-Family
Selling Guide or the Freddie Mac Single Family Seller/Servicer Guide
imposes a cap on points and fees but excludes from the cap discount
points that result in a bona fide reduction in the interest rate. Assume
the guidelines require that, for a discount point to be bona fide so
that it would not count against the cap, a discount point must result in
at least a 25 basis point reduction in the interest rate. Accordingly,
if the creditor offers a 25 basis point interest rate reduction for a
discount point and the requirements of Sec. 1026.32(b)(1)(i)(E) or (F)
are satisfied, the discount point is bona fide and is excluded from the
calculation of points and fees.
32(b)(4) Total loan amount.
32(b)(4)(i) Closed-end credit.
1. Total loan amount; examples. Below are several examples showing
how to calculate the total loan amount for closed-end mortgage loans,
each using a $10,000 amount borrowed, a $300 appraisal fee, and $400 in
prepaid finance charges. A $500 single premium for optional credit
unemployment insurance is used in one example.
i. If the consumer finances a $300 fee for a creditor-conducted
appraisal and pays $400 in prepaid finance charges at closing, the
amount financed under Sec. 1026.18(b) is $9,900 ($10,000 plus the $300
appraisal fee that is paid to and financed by the creditor, less $400 in
prepaid finance charges). The $300 appraisal fee paid to the creditor is
added to other points and fees under Sec. 1026.32(b)(1)(iii). It is
deducted from the amount financed ($9,900) to derive a total loan amount
of $9,600.
ii. If the consumer pays the $300 fee for the creditor-conducted
appraisal in cash at closing, the $300 is included in the points and
fees calculation because it is paid to the creditor. However, because
the $300 is not financed by the creditor, the fee is not part of the
amount financed under Sec. 1026.18(b). In this case, the amount
financed is the same as the total loan amount: $9,600 ($10,000, less
$400 in prepaid finance charges).
iii. If the consumer finances a $300 fee for an appraisal conducted
by someone other than the creditor or an affiliate, the $300 fee is not
included with other points and fees under Sec. 1026.32(b)(1)(iii). In
this case, the amount financed is the same as the total loan amount:
$9,900 ($10,000 plus the $300 fee for an independently-conducted
appraisal that is financed by the creditor, less the $400 paid in cash
and deducted as prepaid finance charges).
iv. If the consumer finances a $300 fee for a creditor-conducted
appraisal and a $500 single premium for optional credit unemployment
insurance, and pays $400 in prepaid finance charges at closing, the
amount financed under Sec. 1026.18(b) is $10,400 ($10,000, plus the
$300 appraisal fee that is paid to and financed by the creditor, plus
the $500 insurance premium that is financed by the creditor, less $400
in prepaid finance charges). The $300 appraisal fee paid to the creditor
is added to other points and fees under Sec. 1026.32(b)(1)(ii), and the
$500 insurance premium is added under 1026.32(b)(1)(iv). The $300 and
$500 costs are deducted from the amount financed ($10,400) to derive a
total loan amount of $9,600.
32(b)(6) Prepayment penalty.
1. Examples of prepayment penalties; closed-end credit transactions.
For purposes of Sec. 1026.32(b)(6)(i), the following are examples of
prepayment penalties:
i. A charge determined by treating the loan balance as outstanding
for a period of time after prepayment in full and applying the interest
rate to such ``balance,'' even if the charge results from interest
accrual amortization used for other payments in the transaction under
the terms of the loan contract. ``Interest accrual amortization'' refers
to the method by which the amount of interest due for each period (e.g.,
month) in a transaction's term is determined. For example, ``monthly
interest accrual amortization'' treats each payment as made on the
scheduled, monthly due date even if it is actually paid early or late
(until the expiration of any grace period). Thus, under the terms of a
loan contract providing for monthly interest accrual amortization, if
the amount of interest due on May 1 for the preceding month of April is
$3,000, the loan contract will require payment of $3,000 in interest for
the month of April whether the payment is made on April 20, on May 1, or
on May 10. In this example, if the consumer prepays the loan in full on
April 20 and if the accrued interest as of that date is $2,000, then
assessment of a charge of $3,000 constitutes a prepayment penalty of
$1,000 because the amount of interest actually earned through April 20
is only $2,000.
[[Page 651]]
ii. A fee, such as an origination or other loan closing cost, that
is waived by the creditor on the condition that the consumer does not
prepay the loan. However, the term prepayment penalty does not include a
waived bona fide third-party charge imposed by the creditor if the
consumer pays all of a covered transaction's principal before the date
on which the principal is due sooner than 36 months after consummation.
For example, assume that at consummation, the creditor waives $3,000 in
closing costs to cover bona fide third-party charges but the terms of
the loan agreement provide that the creditor may recoup the $3,000 in
waived charges if the consumer repays the entire loan balance sooner
than 36 months after consummation. The $3,000 charge is not a prepayment
penalty. In contrast, for example, assume that at consummation, the
creditor waives $3,000 in closing costs to cover bona fide third-party
charges but the terms of the loan agreement provide that the creditor
may recoup $4,500, in part to recoup waived charges, if the consumer
repays the entire loan balance sooner than 36 months after consummation.
The $3,000 that the creditor may impose to cover the waived bona fide
third-party charges is not a prepayment penalty, but the additional
$1,500 charge is a prepayment penalty and subject to the restrictions
under Sec. 1026.43(g).
iii. A minimum finance charge in a simple interest transaction.
iv. Computing a refund of unearned interest by a method that is less
favorable to the consumer than the actuarial method, as defined by
section 933(d) of the Housing and Community Development Act of 1992, 15
U.S.C. 1615(d). For purposes of computing a refund of unearned interest,
if using the actuarial method defined by applicable State law results in
a refund that is greater than the refund calculated by using the method
described in section 933(d) of the Housing and Community Development Act
of 1992, creditors should use the State law definition in determining if
a refund is a prepayment penalty.
2. Fees that are not prepayment penalties; closed-end credit
transactions. For purposes of Sec. 1026.32(b)(6)(i), fees that are not
prepayment penalties include, for example:
i. Fees imposed for preparing and providing documents when a loan is
paid in full if such fees are imposed whether or not the loan is
prepaid. Examples include a loan payoff statement, a reconveyance
document, or another document releasing the creditor's security interest
in the dwelling that secures the loan.
ii. Loan guarantee fees.
3. Examples of prepayment penalties; open-end credit. For purposes
of Sec. 1026.32(b)(6)(ii), the term prepayment penalty includes a
charge, including a waived closing cost, imposed by the creditor if the
consumer terminates the open-end credit plan prior to the end of its
term. This includes a charge imposed if the consumer terminates the plan
outright or, for example, if the consumer terminates the plan in
connection with obtaining a new loan or plan with the current holder of
the existing plan, a servicer acting on behalf of the current holder, or
an affiliate of either. However, the term prepayment penalty does not
include a waived bona fide third-party charge imposed by the creditor if
the consumer terminates the open-end credit plan during the first 36
months after account opening.
4. Fees that are not prepayment penalties; open-end credit. For
purposes of Sec. 1026.32(b)(6)(ii), fees that are not prepayment
penalties include, for example:
i. Fees imposed for preparing and providing documents when an open-
end credit plan is terminated, if such fees are imposed whether or not
the consumer terminates the plan prior to the end of its term. Examples
include a payoff statement, a reconveyance document, or another document
releasing the creditor's security interest in the dwelling that secures
the line of credit.
ii. Loan guarantee fees.
iii. Any fee that the creditor may impose in lieu of termination and
acceleration under comment 40(f)(2)-2.
32(c)(2) Annual percentage rate.
1. Disclosing annual percentage rate for open-end high-cost
mortgages. In disclosing the annual percentage rate for an open-end,
high-cost mortgage under Sec. 1026.32(c)(2), creditors must comply with
Sec. 1026.6(a)(1). If a fixed-rate, discounted introductory or initial
interest rate is offered on the transaction, Sec. 1026.32(c)(2)
requires a creditor to disclose the annual percentage rate of the fixed-
rate, discounted introductory or initial interest rate feature, and the
rate that would apply when the feature expires.
32(c)(3) Regular payment; minimum periodic payment example; balloon
payment.
1. Balloon payment. Except as provided in Sec. 1026.32(d)(1)(ii)
and (iii), a mortgage transaction subject to this section may not
include a payment schedule that results in a balloon payment.
Paragraph 32(c)(3)(i).
1. General. The regular payment is the amount due from the consumer
at regular intervals, such as monthly, bimonthly, quarterly, or
annually. There must be at least two payments, and the payments must be
in an amount and at such intervals that they fully amortize the amount
owed. In disclosing the regular payment, creditors may rely on the rules
set forth in Sec. 1026.18(g); however, the amounts for voluntary items,
such as credit life insurance, may be included in the regular payment
disclosure only if the consumer has previously agreed to the amounts.
[[Page 652]]
i. If the loan has more than one payment level, the regular payment
for each level must be disclosed. For example:
A. In a 30-year graduated payment mortgage where there will be
payments of $300 for the first 120 months, $400 for the next 120 months,
and $500 for the last 120 months, each payment amount must be disclosed,
along with the length of time that the payment will be in effect.
B. If interest and principal are paid at different times, the
regular amount for each must be disclosed.
C. In discounted or premium variable-rate transactions where the
creditor sets the initial interest rate and later rate adjustments are
determined by an index or formula, the creditor must disclose both the
initial payment based on the discount or premium and the payment that
will be in effect thereafter. Additional explanatory material which does
not detract from the required disclosures may accompany the disclosed
amounts. For example, if a monthly payment is $250 for the first six
months and then increases based on an index and margin, the creditor
could use language such as the following: ``Your regular monthly payment
will be $250 for six months. After six months your regular monthly
payment will be based on an index and margin, which currently would make
your payment $350. Your actual payment at that time may be higher or
lower.''
32(c)(4) Variable-rate.
1. Calculating ``worst-case'' payment example. For a closed-end
credit transaction, creditors may rely on instructions in Sec.
1026.19(b)(2)(viii)(B) for calculating the maximum possible increases in
rates in the shortest possible timeframe, based on the face amount of
the note (not the hypothetical loan amount of $10,000 required by Sec.
1026.19(b)(2)(viii)(B)). The creditor must provide a maximum payment for
each payment level, where a payment schedule provides for more than one
payment level and more than one maximum payment amount is possible. For
an open-end credit plan, the maximum monthly payment must be based on
the following assumptions:
i. The consumer borrows the full credit line at account opening with
no additional extensions of credit.
ii. The consumer makes only minimum periodic payments during the
draw period and any repayment period.
iii. If the annual percentage rate may increase during the plan, the
maximum annual percentage rate that is included in the contract, as
required by Sec. 1026.30, applies to the plan at account opening.
32(c)(5) Amount Borrowed
1. Optional insurance; debt-cancellation coverage. This disclosure
is required when the amount borrowed in a refinancing includes premiums
or other charges for credit life, accident, health, or loss-of-income
insurance, or debt-cancellation coverage (whether or not the debt-
cancellation coverage is insurance under applicable law) that provides
for cancellation of all or part of the consumer's liability in the event
of the loss of life, health, or income or in the case of accident. See
comment 4(d)(3)-2 and comment app. G and H-2 regarding terminology for
debt-cancellation coverage.
Paragraph 32(d) Limitations
1. Additional prohibitions applicable under other sections. Section
1026.34 sets forth certain prohibitions in connection with high-cost
mortgages, in addition to the limitations in Sec. 1026.32(d). Further,
Sec. 1026.35(b) prohibits certain practices in connection with closed-
end transactions that meet the coverage test in Sec. 1026.35(a).
Because the coverage test in Sec. 1026.35(a) is generally broader than
the coverage test in Sec. 1026.32(a), most closed-end high-cost
mortgages are also subject to the prohibitions set forth in Sec.
1026.35(b) (such as escrows), in addition to the limitations in Sec.
1026.32(d).
32(d)(1)(i) Balloon Payment
1. Regular periodic payments. The repayment schedule for a high-cost
mortgage must fully amortize the outstanding principal balance through
``regular periodic payments.'' A payment is a ``regular periodic
payment'' if it is not more than two times the amount of other payments.
For purposes of open-end credit plans, the term ``regular periodic
payment'' or ``periodic payment'' means the required minimum periodic
payment.
2. Repayment period. If the terms of an open-end credit plan provide
for a repayment period during which no further draws may be taken, the
limitations in Sec. 1026.32(d)(1)(i) apply to regular periodic payments
required by the credit plan during the draw period, but do not apply to
any adjustment in the regular periodic payment that results from the
transition from the credit plan's draw period to its repayment period.
Further, the limitation on balloon payments in Sec. 1026.32(d)(1)(i)
does not preclude increases in regular periodic payments that result
solely from the initial draw or additional draws on the credit line
during the draw period.
3. No repayment period. If the terms of an open-end credit plan do
not provide for a repayment period, the repayment schedule must fully
amortize any outstanding principal balance in the draw period through
regular periodic payments. However, the limitation on balloon payments
in Sec. 1026.32(d)(1)(i) does not preclude increases in regular
periodic payments that result solely from the initial draw or additional
draws on the credit line during the draw period.
[[Page 653]]
32(d)(2) Negative Amortization
1. Negative amortization. The prohibition against negative
amortization in a high-cost mortgage does not preclude reasonable
increases in the principal balance that result from events permitted by
the legal obligation unrelated to the payment schedule. For example,
when a consumer fails to obtain property insurance and the creditor
purchases insurance, the creditor may add a reasonable premium to the
consumer's principal balance, to the extent permitted by applicable law
and the consumer's legal obligation.
32(d)(4) Increased Interest Rate
1. Variable-rate transactions. The limitation on interest rate
increases does not apply to rate increases resulting from changes in
accordance with the legal obligation in a variable-rate transaction,
even if the increase occurs after default by the consumer.
32(d)(5) Rebates
1. Calculation of refunds. The limitation applies only to refunds of
precomputed (such as add-on) interest and not to any other charges that
are considered finance charges under Sec. 1026.4 (for example, points
and fees paid at closing). The calculation of the refund of interest
includes odd-days interest, whether paid at or after consummation.
32(d)(8) Acceleration of debt.
Paragraph 32(d)(8)(i).
1. Fraud or material misrepresentation. A creditor may terminate a
loan or open-end credit agreement and accelerate the balance if there
has been fraud or material misrepresentation by the consumer in
connection with the loan or open-end credit agreement. What constitutes
fraud or misrepresentation is determined by applicable State law and may
include acts of omission as well as overt acts, as long as any necessary
intent on the part of the consumer exists.
Paragraph 32(d)(8)(ii)
1. Failure to meet repayment terms. A creditor may terminate a loan
or open-end credit agreement and accelerate the balance when the
consumer fails to meet the repayment terms resulting in a default in
payment under the agreement; a creditor may do so, however, only if the
consumer actually fails to make payments resulting in a default in the
agreement. For example, a creditor may not terminate and accelerate if
the consumer, in error, sends a payment to the wrong location, such as a
branch rather than the main office of the creditor. If a consumer files
for or is placed in bankruptcy, the creditor may terminate and
accelerate under Sec. 1026.32(d)(8)(ii) if the consumer fails to meet
the repayment terms resulting in a default of the agreement. Section
1026.32(d)(8)(ii) does not override any State or other law that requires
a creditor to notify a consumer of a right to cure, or otherwise places
a duty on the creditor before it can terminate a loan or open-end credit
agreement and accelerate the balance.
Paragraph 32(d)(8)(iii)
1. Impairment of security. A creditor may terminate a loan or open-
end credit agreement and accelerate the balance if the consumer's action
or inaction adversely affects the creditor's security for the loan, or
any right of the creditor in that security. Action or inaction by third
parties does not, in itself, permit the creditor to terminate and
accelerate.
2. Examples. i. A creditor may terminate and accelerate, for
example, if:
A. The consumer transfers title to the property or sells the
property without the permission of the creditor.
B. The consumer fails to maintain required insurance on the
dwelling.
C. The consumer fails to pay taxes on the property.
D. The consumer permits the filing of a lien senior to that held by
the creditor.
E. The sole consumer obligated on the credit dies.
F. The property is taken through eminent domain.
G. A prior lienholder forecloses.
ii. By contrast, the filing of a judgment against the consumer would
be cause for termination and acceleration only if the amount of the
judgment and collateral subject to the judgment is such that the
creditor's security is adversely and materially affected in violation of
the loan or open-end credit agreement. If the consumer commits waste or
otherwise destructively uses or fails to maintain the property,
including demolishing or removing structures from the property, such
that the action adversely affects the security in a material way, the
loan or open-end credit agreement may be terminated and the balance
accelerated. Illegal use of the property by the consumer would permit
termination and acceleration if it subjects the property to seizure. If
one of two consumers obligated on a loan dies, the creditor may
terminate the loan and accelerate the balance if the security is
adversely affected. If the consumer moves out of the dwelling that
secures the loan and that action adversely affects the security in a
material way, the creditor may terminate a loan or open-end credit
agreement and accelerate the balance.
Section 1026.33--Requirements for Reverse Mortgages
33(a) Definition
1. Nonrecourse transaction. A nonrecourse reverse mortgage
transaction limits the
[[Page 654]]
homeowner's liability to the proceeds of the sale of the home (or any
lesser amount specified in the credit obligation). If a transaction
structured as a closed-end reverse mortgage transaction allows recourse
against the consumer, and the annual percentage rate or the points and
fees exceed those specified under Sec. 1026.32(a)(1), the transaction
is subject to all the requirements of Sec. 1026.32, including the
limitations concerning balloon payments and negative amortization.
Paragraph 33(a)(2)
1. Default. Default is not defined by the statute or regulation, but
rather by the legal obligation between the parties and state or other
law.
2. Definite term or maturity date. To meet the definition of a
reverse mortgage transaction, a creditor cannot require any principal,
interest, or shared appreciation or equity to be due and payable (other
than in the case of default) until after the consumer's death, transfer
of the dwelling, or the consumer ceases to occupy the dwelling as a
principal dwelling. Some state laws require legal obligations secured by
a mortgage to specify a definite maturity date or term of repayment in
the instrument. An obligation may state a definite maturity date or term
of repayment and still meet the definition of a reverse-mortgage
transaction if the maturity date or term of repayment used would not
operate to cause maturity prior to the occurrence of any of the maturity
events recognized in the regulation. For example, some reverse mortgage
programs specify that the final maturity date is the borrower's 150th
birthday; other programs include a shorter term but provide that the
term is automatically extended for consecutive periods if none of the
other maturity events has yet occurred. These programs would be
permissible.
33(c) Projected Total Cost of Credit
33(c)(1) Costs to Consumer
1. Costs and charges to consumer--relation to finance charge. All
costs and charges to the consumer that are incurred in a reverse
mortgage transaction are included in the projected total cost of credit,
and thus in the total annual loan cost rates, whether or not the cost or
charge is a finance charge under Sec. 1026.4.
2. Annuity costs. As part of the credit transaction, some creditors
require or permit a consumer to purchase an annuity that immediately--or
at some future time--supplements or replaces the creditor's payments.
The amount paid by the consumer for the annuity is a cost to the
consumer under this section, regardless of whether the annuity is
purchased through the creditor or a third party, or whether the purchase
is mandatory or voluntary. For example, this includes the costs of an
annuity that a creditor offers, arranges, assists the consumer in
purchasing, or that the creditor is aware the consumer is purchasing as
a part of the transaction.
3. Disposition costs excluded. Disposition costs incurred in
connection with the sale or transfer of the property subject to the
reverse mortgage are not included in the costs to the consumer under
this paragraph. (However, see the definition of Valnin
appendix K to the regulation to determine the effect certain disposition
costs may have on the total annual loan cost rates.)
Paragraph 33(c)(2) Payments to Consumer
1. Payments upon a specified event. The projected total cost of
credit should not reflect contingent payments in which a credit to the
outstanding loan balance or a payment to the consumer's estate is made
upon the occurrence of an event (for example, a ``death benefit''
payable if the consumer's death occurs within a certain period of time).
Thus, the table of total annual loan cost rates required under Sec.
1026.33(b)(2) would not reflect such payments. At its option, however, a
creditor may put an asterisk, footnote, or similar type of notation in
the table next to the applicable total annual loan cost rate, and state
in the body of the note, apart from the table, the assumption upon which
the total annual loan cost is made and any different rate that would
apply if the contingent benefit were paid.
33(c)(3) Additional Creditor Compensation
1. Shared appreciation or equity. Any shared appreciation or equity
that the creditor is entitled to receive pursuant to the legal
obligation must be included in the total cost of a reverse mortgage
loan. For example, if a creditor agrees to a reduced interest rate on
the transaction in exchange for a portion of the appreciation or equity
that may be realized when the dwelling is sold, that portion is included
in the projected total cost of credit.
33(c)(4) Limitations on Consumer Liability
1. In general. Creditors must include any limitation on the
consumer's liability (such as a nonrecourse limit or an equity
conservation agreement) in the projected total cost of credit. These
limits and agreements protect a portion of the equity in the dwelling
for the consumer or the consumer's estate. For example, the following
are limitations on the consumer's liability that must be included in the
projected total cost of credit:
i. A limit on the consumer's liability to a certain percentage of
the projected value of the home.
ii. A limit on the consumer's liability to the net proceeds from the
sale of the property subject to the reverse mortgage.
[[Page 655]]
2. Uniform assumption for ``net proceeds'' recourse limitations. If
the legal obligation between the parties does not specify a percentage
for the ``net proceeds'' liability of the consumer, for purposes of the
disclosures required by Sec. 1026.33, a creditor must assume that the
costs associated with selling the property will equal 7 percent of the
projected sale price (see the definition of the Valn symbol
under appendix K(b)(6)).
Section 1026.34--Prohibited Acts or Practices in Connection With High-
Cost Mortgages
34(a) Prohibited Acts or Practices for High-Cost Mortgages
34(a)(1) Home-Improvement Contracts
Paragraph 34(a)(1)(i)
1. Joint payees. If a creditor pays a contractor with an instrument
jointly payable to the contractor and the consumer, the instrument must
name as payee each consumer who is primarily obligated on the note.
34(a)(2) Notice to Assignee
1. Subsequent sellers or assignors. Any person, whether or not the
original creditor, that sells or assigns a mortgage subject to Sec.
1026.32 must furnish the notice of potential liability to the purchaser
or assignee.
2. Format. While the notice of potential liability need not be in
any particular format, the notice must be prominent. Placing it on the
face of the note, such as with a stamp, is one means of satisfying the
prominence requirement.
3. Assignee liability. Pursuant to section 131(d) of the Act, the
Act's general holder-in-due course protections do not apply to
purchasers and assignees of loans covered by Sec. 1026.32. For such
loans, a purchaser's or other assignee's liability for all claims and
defenses that the consumer could assert against the creditor is not
limited to violations of the Act.
34(a)(3) Refinancings Within One-Year Period
1. In the borrower's interest. The determination of whether or not a
refinancing covered by Sec. 1026.34(a)(3) is in the borrower's interest
is based on the totality of the circumstances, at the time the credit is
extended. A written statement by the borrower that ``this loan is in my
interest'' alone does not meet this standard.
i. A refinancing would be in the borrower's interest if needed to
meet the borrower's ``bona fide personal financial emergency'' (see
generally Sec. 1026.23(e) and Sec. 1026.31(c)(1)(iii)).
ii. In connection with a refinancing that provides additional funds
to the borrower, in determining whether a loan is in the borrower's
interest consideration should be given to whether the loan fees and
charges are commensurate with the amount of new funds advanced, and
whether the real estate-related charges are bona fide and reasonable in
amount (see generally Sec. 1026.4(c)(7)).
2. Application of the one-year refinancing prohibition to creditors
and assignees. The prohibition in Sec. 1026.34(a)(3) applies where an
extension of credit subject to Sec. 1026.32 is refinanced into another
loan subject to Sec. 1026.32. The prohibition is illustrated by the
following examples. Assume that Creditor A makes a loan subject to Sec.
1026.32 on January 15, 2003, secured by a first lien; this loan is
assigned to Creditor B on February 15, 2003:
i. Creditor A is prohibited from refinancing the January 2003 loan
(or any other loan subject to Sec. 1026.32 to the same borrower) into a
loan subject to Sec. 1026.32, until January 15, 2004. Creditor B is
restricted until January 15, 2004, or such date prior to January 15,
2004 that Creditor B ceases to hold or service the loan. During the
prohibition period, Creditors A and B may make a subordinate lien loan
that does not refinance a loan subject to Sec. 1026.32. Assume that on
April 1, 2003, Creditor A makes but does not assign a second-lien loan
subject to Sec. 1026.32. In that case, Creditor A would be prohibited
from refinancing either the first-lien or second-lien loans (or any
other loans to that borrower subject to Sec. 1026.32) into another loan
subject to Sec. 1026.32 until April 1, 2004.
ii. The loan made by Creditor A on January 15, 2003 (and assigned to
Creditor B) may be refinanced by Creditor C at any time. If Creditor C
refinances this loan on March 1, 2003 into a new loan subject to Sec.
1026.32, Creditor A is prohibited from refinancing the loan made by
Creditor C (or any other loan subject to Sec. 1026.32 to the same
borrower) into another loan subject to Sec. 1026.32 until January 15,
2004. Creditor C is similarly prohibited from refinancing any loan
subject to Sec. 1026.32 to that borrower into another until March 1,
2004. (The limitations of Sec. 1026.34(a)(3) no longer apply to
Creditor B after Creditor C refinanced the January 2003 loan and
Creditor B ceased to hold or service the loan.)
Paragraph 34(a)(4) Repayment Ability for High-Cost Mortgages
1. Application of repayment ability rule. The Sec. 1026.34(a)(4)
prohibition against making loans without regard to consumers' repayment
ability applies to open-end, high-cost mortgages. The Sec. 1026.43
repayment ability provisions apply to closed-end, high-cost mortgages.
Accordingly, in connection with a closed-end, high-cost mortgage, Sec.
1026.34(a)(4) requires a creditor to comply with the repayment ability
requirements set forth in Sec. 1026.43.
2. General prohibition. Section 1026.34(a)(4) prohibits a creditor
from extending credit under a high-cost, open-end credit plan based
[[Page 656]]
on the value of the consumer's collateral without regard to the
consumer's repayment ability as of account opening, including the
consumer's current and reasonably expected income, employment, assets
other than the collateral, current obligations, and property tax and
insurance obligations. A creditor may base its determination of
repayment ability on current or reasonably expected income from
employment or other sources, on assets other than the collateral, or
both.
3. Other dwelling-secured obligations. For purposes of Sec.
1026.34(a)(4), current obligations include another credit obligation of
which the creditor has knowledge undertaken prior to or at account
opening and secured by the same dwelling that secures the high-cost
mortgage transaction.
4. Discounted introductory rates and non-amortizing payments. A
credit agreement may determine a consumer's initial payments using a
temporarily discounted interest rate or permit the consumer to make
initial payments that are non-amortizing. In such cases the creditor may
determine repayment ability using the assumptions provided in Sec.
1026.34(a)(4)(iv).
5. Repayment ability as of account opening. Section 1026.34(a)(4)
prohibits a creditor from disregarding repayment ability based on the
facts and circumstances known to the creditor as of account opening. In
general, a creditor does not violate this provision if a consumer
defaults because of a significant reduction in income (for example, a
job loss) or a significant obligation (for example, an obligation
arising from a major medical expense) that occurs after account opening.
However, if a creditor has knowledge as of account opening of reductions
in income (for example, if a consumer's written application states that
the consumer plans to retire within twelve months without obtaining new
employment, or states that the consumer will transition from full-time
to part-time employment), the creditor must consider that information.
6. Income, assets, and employment. Any current or reasonably
expected assets or income may be considered by the creditor, except the
collateral itself. For example, a creditor may use information about
current or expected salary, wages, bonus pay, tips, and commissions.
Employment may be full-time, part-time, seasonal, irregular, military,
or self-employment. Other sources of income could include interest or
dividends; retirement benefits; public assistance; and alimony, child
support, or separate maintenance payments. A creditor may also take into
account assets such as savings accounts or investments that the consumer
can or will be able to use.
7. Interaction with Regulation B. Section 1026.34(a)(4) does not
require or permit the creditor to make inquiries or verifications that
would be prohibited by Regulation B, 12 CFR part 1002.
34(a)(4)(i) Mortgage-Related Obligations
1. Mortgage-related obligations. A creditor must include in its
repayment ability analysis the expected property taxes and premiums for
mortgage-related insurance required by the creditor as set forth in
Sec. 1026.35(b), as well as similar mortgage-related expenses. Similar
mortgage-related expenses include homeowners' association dues and
condominium or cooperative fees.
34(a)(4)(ii) Verification of Repayment Ability
1. Income and assets relied on. A creditor must verify the income
and assets the creditor relies on to evaluate the consumer's repayment
ability. For example, if a consumer earns a salary and also states that
he or she is paid an annual bonus, but the creditor only relies on the
applicant's salary to evaluate repayment ability, the creditor need only
verify the salary.
2. Income and assets--co-applicant. If two persons jointly apply for
credit and both list income or assets on the application, the creditor
must verify repayment ability with respect to both applicants unless the
creditor relies only on the income or assets of one of the applicants in
determining repayment ability.
3. Expected income. If a creditor relies on expected income, the
expectation must be reasonable and it must be verified with third-party
documents that provide reasonably reliable evidence of the consumer's
expected income. For example, if the creditor relies on an expectation
that a consumer will receive an annual bonus, the creditor may verify
the basis for that expectation with documents that show the consumer's
past annual bonuses and the expected bonus must bear a reasonable
relationship to past bonuses. Similarly, if the creditor relies on a
consumer's expected salary following the consumer's receipt of an
educational degree, the creditor may verify that expectation with a
written statement from an employer indicating that the consumer will be
employed upon graduation at a specified salary.
Paragraph 34(a)(4)(ii)(A)
1. Internal Revenue Service (IRS) Form W-2. A creditor may verify a
consumer's income using a consumer's IRS Form W-2 (or any subsequent
revisions or similar IRS Forms used for reporting wages and tax
withholding). The creditor may also use an electronic retrieval service
for obtaining the consumer's W-2 information.
2. Tax returns. A creditor may verify a consumer's income or assets
using the consumer's tax return. A creditor may also use IRS Form 4506
``Request for Copy of Tax Return,'' Form 4506-T ``Request for Transcript
[[Page 657]]
of Tax Return,'' or Form 8821 ``Tax Information Authorization'' (or any
subsequent revisions or similar IRS Forms appropriate for obtaining tax
return information directly from the IRS) to verify the consumer's
income or assets. The creditor may also use an electronic retrieval
service for obtaining tax return information.
3. Other third-party documents that provide reasonably reliable
evidence of consumer's income or assets. Creditors may verify income and
assets using documents produced by third parties. Creditors may not rely
on information provided orally by third parties, but may rely on
correspondence from the third party, such as by letter or email. The
creditor may rely on any third-party document that provides reasonably
reliable evidence of the consumer's income or assets. For example,
creditors may verify the consumer's income using receipts from a check-
cashing or remittance service, or by obtaining a written statement from
the consumer's employer that states the consumer's income.
4. Information specific to the consumer. Creditors must verify a
consumer's income or assets using information that is specific to the
individual consumer. Creditors may use third-party databases that
contain individual-specific data about a consumer's income or assets,
such as a third-party database service used by the consumer's employer
for the purpose of centralizing income verification requests, so long as
the information is reasonably current and accurate. Information about
average incomes for the consumer's occupation in the consumer's
geographic location or information about average incomes paid by the
consumer's employer, however, would not be specific to the individual
consumer.
5. Duplicative collection of documentation. A creditor that has made
a loan to a consumer and is refinancing or extending new credit to the
same consumer need not collect from the consumer a document the creditor
previously obtained if the creditor has no information that would
reasonably lead the creditor to believe that document has changed since
it was initially collected. For example, if the creditor has obtained
the consumer's 2006 tax return to make a home purchase loan in May 2007,
the creditor may rely on the 2006 tax return if the creditor makes a
home equity loan to the same consumer in August 2007. Similarly, if the
creditor has obtained the consumer's bank statement for May 2007 in
making the first loan, the creditor may rely on that bank statement for
that month in making the subsequent loan in August 2007.
Paragraph 34(a)(4)(ii)(B)
1. In general. A credit report may be used to verify current
obligations. A credit report, however, might not reflect an obligation
that a consumer has listed on an application. The creditor is
responsible for considering such an obligation, but the creditor is not
required to independently verify the obligation. Similarly, a creditor
is responsible for considering certain obligations undertaken just
before or at account opening and secured by the same dwelling that
secures the transaction (for example, a ``piggy back'' loan), of which
the creditor knows, even if not reflected on a credit report. See
comment 34(a)(4)-3.
34(a)(4)(iii) Presumption of Compliance
1. In general. A creditor is presumed to have complied with Sec.
1026.34(a)(4) if the creditor follows the three underwriting procedures
specified in paragraph 34(a)(4)(iii) for verifying repayment ability,
determining the payment obligation, and measuring the relationship of
obligations to income. The procedures for verifying repayment ability
are required under Sec. 1026.34(a)(4)(ii); the other procedures are not
required but, if followed along with the required procedures, create a
presumption that the creditor has complied with Sec. 1026.34(a)(4). The
consumer may rebut the presumption with evidence that the creditor
nonetheless disregarded repayment ability despite following these
procedures. For example, evidence of a very high debt-to-income ratio
and a very limited residual income could be sufficient to rebut the
presumption, depending on all of the facts and circumstances. If a
creditor fails to follow one of the non-required procedures set forth in
Sec. 1026.34(a)(4)(iii), then the creditor's compliance is determined
based on all of the facts and circumstances without there being a
presumption of either compliance or violation.
Paragraph 34(a)(4)(iii)(B)
1. Determination of payment schedule. To retain a presumption of
compliance under Sec. 1026.34(a)(4)(iii), a creditor must determine the
consumer's ability to pay the principal and interest obligation based on
the maximum scheduled payment. In general, a creditor should determine a
payment schedule for purposes of Sec. 1026.34(a)(4)(iii)(B) based on
the guidance in the commentary to Sec. 1026.32(c)(3).
Paragraph 34(a)(4)(iii)(C)
1. ``Income'' and ``debt''. To determine whether to classify
particular inflows or obligations as ``income'' or ``debt,'' creditors
may look to widely accepted governmental and non-governmental
underwriting standards, including, for example, those set forth in the
Federal Housing Administration's handbook on Mortgage Credit Analysis
for Mortgage Insurance.
[[Page 658]]
34(a)(4)(iv) Exclusions From Presumption of Compliance
1. In general. The exclusions from the presumption of compliance
should be interpreted consistent with comments 32(d)(1)(i)-1 and
32(d)(2)-1.
2. Renewable balloon loan. If a creditor is unconditionally
obligated to renew a balloon-payment loan at the consumer's option (or
is obligated to renew subject to conditions within the consumer's
control), the full term resulting from such renewal is the relevant term
for purposes of the exclusion of certain balloon-payment loans. See
comment 17(c)(1)-11 for a discussion of conditions within a consumer's
control in connection with renewable balloon-payment loans.
34(a)(5) Pre-loan counseling.
34(a)(5)(i) Certification of counseling required.
1. HUD-approved counselor. For purposes of Sec. 1026.34(a)(5),
counselors approved by the Secretary of the U.S. Department of Housing
and Urban Development are homeownership counselors certified pursuant to
section 106(e) of the Housing and Urban Development Act of 1968 (12
U.S.C. 1701x(e)), or as otherwise determined by the Secretary.
2. State housing finance authority. For purposes of Sec.
1026.34(a)(5), a ``State housing finance authority'' has the same
meaning as ``State housing finance agency'' provided in 24 CFR 214.3.
3. Processing applications. Prior to receiving certification of
counseling, a creditor may not extend a high-cost mortgage, but may
engage in other activities, such as processing an application that will
result in the extension of a high-cost mortgage (by, for example,
ordering an appraisal or title search).
4. Form of certification. The written certification of counseling
required by Sec. 1026.34(a)(5)(i) may be received by mail, email,
facsimile, or any other method, so long as the certification is in a
retainable form.
5. Purpose of certification. Certification of counseling indicates
that a consumer has received counseling as required by Sec.
1026.34(a)(5), but it does not indicate that a counselor has made a
judgment or determination as to the appropriateness of the transaction
for the consumer.
34(a)(5)(ii) Timing of counseling.
1. Disclosures for open-end credit plans. Section 1026.34(a)(5)(ii)
permits receipt of either the disclosure required by section 5(c) of
RESPA or the disclosures required under Sec. 1026.40 to allow
counseling to occur. Pursuant to 12 CFR 1024.7(h), the disclosures
required by Sec. 1026.40 can be provided for open-end plans in lieu of
the usual disclosure required by section 5(c) of RESPA.
2. Transactions not subject to RESPA or Sec. 1026.40. For closed-
end mortgage transactions that are not subject to RESPA, the counseling
certification must include a statement that the consumer(s) received
counseling on the advisability of the high-cost mortgage based on the
terms provided in the disclosures required by Sec. 1026.32(c).
(Reference to counseling on advisability using the disclosures required
by Sec. 1026.32(c) is not required for transactions subject to RESPA or
Sec. 1026.40.) The disclosures required by Sec. 1026.32(c) must be
furnished to the consumer at least three business days prior to
consummation of the mortgage. The creditor may wish to furnish the
disclosures sooner, to provide sufficient time for counseling and
certification.
3. Initial disclosure. Counseling may occur after receipt of either
an initial disclosure required by section 5(c) of RESPA, the disclosures
required by Sec. 1026.40, or the disclosures required by Sec.
1026.32(c), regardless of whether revised versions of such disclosures
are subsequently provided to the consumer.
34(a)(5)(iv) Content of certification.
1. Statement of counseling on advisability. A statement that a
consumer has received counseling on the advisability of the high-cost
mortgage means that the consumer has received counseling about key terms
of the mortgage transaction, as set out in either the disclosure
required by section 5(c) of RESPA or the disclosures provided to the
consumer pursuant to Sec. 1026.40, or, for closed-end transactions not
subject to RESPA, the disclosures required by Sec. 1026.32(c); the
consumer's budget, including the consumer's income, assets, financial
obligations, and expenses; and the affordability of the mortgage
transaction for the consumer. Examples of such terms of the mortgage
transaction include the initial interest rate, the initial monthly
payment, whether the payment may increase, how the minimum periodic
payment will be determined, and fees imposed by the creditor, as may be
reflected in the applicable disclosure. A statement that a consumer has
received counseling on the advisability of the high-cost mortgage does
not require the counselor to have made a judgment or determination as to
the appropriateness of the mortgage transaction for the consumer.
2. Statement of verification. A statement that a counselor has
verified that the consumer has received the disclosures required by
either Sec. 1026.32(c) or by RESPA for the high-cost mortgage means
that a counselor has confirmed, orally, in writing, or by some other
means, receipt of such disclosures with the consumer.
34(a)(5)(v) Counseling fees.
1. Financing. Section 1026.34(a)(5)(v) does not prohibit a creditor
from financing the counseling fee as part of the transaction for a high-
cost mortgage, if the fee is a bona fide third-party charge as provided
by Sec. 1026.32(b)(5)(i).
34(a)(5)(vi) Steering prohibited.
[[Page 659]]
1. An example of an action that constitutes steering would be when a
creditor repeatedly highlights or otherwise distinguishes the same
counselor in the notices the creditor provides to consumers pursuant to
Sec. 1026.34(a)(5)(vii).
2. Section 1026.34(a)(5)(vi) does not prohibit a creditor from
providing a consumer with objective information related to counselors or
counseling organizations in response to a consumer's inquiry. An example
of an action that would not constitute steering would be when a consumer
asks the creditor for information about the fees charged by a counselor,
and the creditor responds by providing the consumer information about
fees charged by the counselor to other consumers that previously
obtained counseling pursuant to Sec. 1026.34(a)(5).
34(a)(6) Recommended default.
1. Facts and circumstances. Whether a creditor or mortgage broker
``recommends or encourages'' default for purposes of Sec. 1026.34(a)(6)
depends on all of the relevant facts and circumstances.
2. Examples. i. A creditor or mortgage broker ``recommends or
encourages'' default when the creditor or mortgage broker advises the
consumer to stop making payments on an existing loan in a manner that is
likely to cause the consumer to default on the existing loan.
ii. When delay of consummation of a high-cost mortgage occurs for
reasons outside the control of a creditor or mortgage broker, that
creditor or mortgage broker does not ``recommend or encourage'' default
because the creditor or mortgage broker informed a consumer that:
A. The consumer's high-cost mortgage is scheduled to be consummated
prior to the due date for the next payment due on the consumer's
existing loan, which is intended to be paid by the proceeds of the new
high-cost mortgage; and
B. Any delay of consummation of the new high-cost mortgage beyond
the payment due date of the existing loan will not relieve the consumer
of the obligation to make timely payment on that loan.
34(a)(8) Late fees.
34(a)(8)(i) General.
1. For purposes of Sec. 1026.34(a)(8), in connection with an open-
end credit plan, the amount of the payment past due is the required
minimum periodic payment as provided under the terms of the open-end
credit agreement.
34(a)(8)(iii) Multiple late charges assessed on payment subsequently
paid.
1. Section 1026.34(a)(8)(iii) prohibits the pyramiding of late fees
or charges in connection with a high-cost mortgage payment. For example,
assume that a consumer's regular periodic payment of $500 is due on the
1st of each month. On August 25, the consumer makes a $500 payment which
was due on August 1, and as a result, a $10 late charge is assessed. On
September 1, the consumer makes another $500 payment for the regular
periodic payment due on September 1, but does not pay the $10 late
charge assessed on the August payment. Under Sec. 1026.34(h)(2), it is
impermissible to allocate $10 of the consumer's September 1 payment to
cover the late charge, such that the September payment becomes
delinquent. In short, because the $500 payment made on September 1 is a
full payment for the applicable period and is paid by its due date or
within any applicable grace period, no late charge may be imposed on the
account in connection with the September payment.
34(a)(8)(iv) Failure to make required payment.
1. Under Sec. 1026.34(a)(8)(iv), if a consumer fails to make one or
more required payments and then resumes making payments but fails to
bring the account current, it is permissible, if permitted by the terms
of the loan contract or open-end credit agreement, to apply the
consumer's payments first to the past due payment(s) and to impose a
late charge on each subsequent required payment until the account is
brought current. To illustrate: Assume that a consumer's regular
periodic payment of $500 is due on the 1st of each month, or before the
expiration of a 15-day grace period. Also assume that the consumer fails
to make a timely installment payment by August 1 (or within the
applicable grace period), and a $10 late charge therefore is imposed.
The consumer resumes making monthly payments on September 1. Under Sec.
1026.34(a)(8)(iv), if permitted by the terms of the loan contract, the
creditor may apply the $500 payment made on September 1 to satisfy the
missed $500 payment that was due on August 1. If the consumer makes no
other payment prior to the end of the grace period for the payment that
was due on September 1, the creditor may also impose a $10 late fee for
the payment that was due on September 1.
34(a)(10) Financing of points and fees.
1. Points and fees. For purposes of Sec. 1026.34(a)(10), ``points
and fees'' means those items that are required to be included in the
calculation of points and fees under Sec. 1026.32(b)(1) and (2). Thus,
for example, in connection with the extension of credit under a high-
cost mortgage, a creditor may finance a fee charged by a third-party
counselor in connection with the consumer's receipt of pre-loan
counseling under Sec. 1026.34(a)(5), because, pursuant to Sec.
1026.32(b)(1)(i)(D) and (b)(2)(i)(D), such a fee is excluded from the
calculation of points and fees as a bona fide third-party charge.
2. Examples of financing points and fees. For purposes of Sec.
1026.34(a)(10), points and fees are financed if, for example, they are
added to the loan balance or financed through a separate note, if the
note is payable to the creditor or to an affiliate of the creditor. In
the
[[Page 660]]
case of an open-end credit plan, a creditor also finances points and
fees if the creditor advances funds from the credit line to cover the
fees.
34(b) Prohibited acts or practices for dwelling-secured loans;
structuring loans to evade high-cost mortgage requirements.
1. Examples. i. A creditor structures a transaction in violation of
Sec. 1026.34(b) if, for example, the creditor structures a loan that
would otherwise be a high-cost mortgage as two or more loans, whether
made consecutively or at the same time, for example, to divide the loan
fees to avoid the points and fees threshold for high-cost mortgages in
Sec. 1026.32(a)(1)(ii).
ii. A creditor does not structure a transaction in violation of
Sec. 1026.34(b) when a loan to finance the initial construction of a
dwelling may be permanently financed by the same creditor, such as a
``construction-to-permanent'' loan, and the construction phase and the
permanent phase are treated as separate transactions. Section
1026.17(c)(6)(ii) permits the creditor to give either one combined
disclosure for both the construction financing and the permanent
financing, or a separate set of disclosures for each of the two phases
as though they were two separate transactions. See also comment
17(c)(6)-2.
2. Amount of credit extended. Where a loan is documented as open-end
credit but the features and terms or other circumstances demonstrate
that it does not meet the definition of open-end credit, the loan is
subject to the rules for closed-end credit. Thus, in determining the
``total loan amount'' for purposes of applying the triggers under Sec.
1026.32, the amount of credit that would have been extended if the loan
had been documented as a closed-end loan is a factual determination to
be made in each case. Factors to be considered include the amount of
money the consumer originally requested, the amount of the first advance
or the highest outstanding balance, or the amount of the credit line.
The full amount of the credit line is considered only to the extent that
it is reasonable to expect that the consumer might use the full amount
of credit.
34(b) Prohibited Acts or Practices for Dwelling-Secured Loans; Open-End
Credit
1. Amount of credit extended. Where a loan is documented as open-end
credit but the features and terms or other circumstances demonstrate
that it does not meet the definition of open-end credit, the loan is
subject to the rules for closed-end credit, including Sec. 1026.32 if
the rate or fee trigger is met. In applying the triggers under Sec.
1026.32, the ``amount financed,'' including the ``principal loan
amount'' must be determined. In making the determination, the amount of
credit that would have been extended if the loan had been documented as
a closed-end loan is a factual determination to be made in each case.
Factors to be considered include the amount of money the consumer
originally requested, the amount of the first advance or the highest
outstanding balance, or the amount of the credit line. The full amount
of the credit line is considered only to the extent that it is
reasonable to expect that the consumer might use the full amount of
credit.
Section 1026.35--Requirements for Higher-Priced Mortgage Loans
35(a) Definitions
Paragraph 35(a)(1).
1. Comparable transaction. A higher-priced mortgage loan is a
consumer credit transaction secured by the consumer's principal dwelling
with an annual percentage rate that exceeds the average prime offer rate
for a comparable transaction as of the date the interest rate is set by
the specified margin. The table of average prime offer rates published
by the Bureau indicates how to identify the comparable transaction.
2. Rate set. A transaction's annual percentage rate is compared to
the average prime offer rate as of the date the transaction's interest
rate is set (or ``locked'') before consummation. Sometimes a creditor
sets the interest rate initially and then re-sets it at a different
level before consummation. The creditor should use the last date the
interest rate is set before consummation.
3. Threshold for ``jumbo'' loans. Section 1026.35(a)(1)(ii) provides
a separate threshold for determining whether a transaction is a higher-
priced mortgage loan subject to Sec. 1026.35 when the principal balance
exceeds the limit in effect as of the date the transaction's rate is set
for the maximum principal obligation eligible for purchase by Freddie
Mac (a ``jumbo'' loan). The Federal Housing Finance Agency (FHFA)
establishes and adjusts the maximum principal obligation pursuant to
rules under 12 U.S.C. 1454(a)(2) and other provisions of federal law.
Adjustments to the maximum principal obligation made by FHFA apply in
determining whether a mortgage loan is a ``jumbo'' loan to which the
separate coverage threshold in Sec. 1026.35(a)(1)(ii) applies.
Paragraph 35(a)(2)
1. Average prime offer rate. Average prime offer rates are annual
percentage rates derived from average interest rates, points, and other
loan pricing terms currently offered to consumers by a representative
sample of creditors for mortgage transactions that have low-risk pricing
characteristics. Other pricing terms include commonly used indices,
margins, and initial fixed-rate periods for variable-rate transactions.
Relevant pricing characteristics include a consumer's credit history and
transaction characteristics such as the loan-to-value ratio, owner-
[[Page 661]]
occupant status, and purpose of the transaction. To obtain average prime
offer rates, the Bureau uses a survey of creditors that both meets the
criteria of Sec. 1026.35(a)(2) and provides pricing terms for at least
two types of variable-rate transactions and at least two types of non-
variable-rate transactions. An example of such a survey is the Freddie
Mac Primary Mortgage Market Survey[supreg].
2. Bureau table. The Bureau publishes on the Internet, in table
form, average prime offer rates for a wide variety of transaction types.
The Bureau calculates an annual percentage rate, consistent with
Regulation Z (see Sec. 1026.22 and appendix J), for each transaction
type for which pricing terms are available from a survey. The Bureau
estimates annual percentage rates for other types of transactions for
which direct survey data are not available based on the loan pricing
terms available in the survey and other information. The Bureau
publishes on the Internet the methodology it uses to arrive at these
estimates.
3. Additional guidance on determination of average prime offer
rates. The average prime offer rate has the same meaning in Sec.
1026.35 as in Regulation C, 12 CFR part 1003. See 12 CFR
1003.4(a)(12)(ii). Guidance on the average prime offer rate under Sec.
1026.35(a)(2), such as when a transaction's rate is set and
determination of the comparable transaction, is provided in the official
commentary under Regulation C, the publication entitled ``A Guide to
HMDA Reporting: Getting it Right!'', and the relevant ``Frequently Asked
Questions'' on Home Mortgage Disclosure Act (HMDA) compliance posted on
the FFIEC's Web site at http://www.ffiec.gov/hmda.
35(b) Escrow Accounts
1. Principal dwelling. Section 1026.35(b)(1) applies to principal
dwellings, including structures that are classified as personal property
under State law. For example, an escrow account must be established on a
higher-priced mortgage loan secured by a first lien on a manufactured
home, boat, or trailer used as the consumer's principal dwelling. See
the commentary under Sec. Sec. 1026.2(a)(19) and(24), 1026.15, and
1026.23. Section 1026.35(b)(1) also applies to a higher-priced mortgage
loan secured by a first lien on a condominium if it is in fact used as
the consumer's principal dwelling. But see Sec. 1026.35(b)(2) for
exemptions from the escrow requirement that may apply to such
transactions.
35(b)(1) Requirement to escrow for property taxes and insurance
1. Administration of escrow accounts. Section 1026.35(b)(1) requires
creditors to establish an escrow account for payment of property taxes
and premiums for mortgage-related insurance required by the creditor
before the consummation of a higher-priced mortgage loan secured by a
first lien on a principal dwelling. Section 6 of RESPA, 12 U.S.C. 2605,
and Regulation X, 12 CFR 1024.17, address how escrow accounts must be
administered.
2. Optional insurance items. Section 1026.35(b)(1) does not require
that an escrow account be established for premiums for mortgage-related
insurance that the creditor does not require in connection with the
credit transaction, such as earthquake insurance or credit life
insurance, even if the consumer voluntarily obtains such insurance.
3. Transactions not subject to Sec. 1026.35(b)(1). Section
1026.35(b)(1) requires a creditor to establish an escrow account before
consummation of a first-lien higher-priced mortgage loan. This
requirement does not affect a creditor's ability, right, or obligation,
pursuant to the terms of the legal obligation or applicable law, to
offer or require an escrow account for a transaction that is not subject
to Sec. 1026.35(b)(1).
35(b)(2) Exemptions
35(b)(2) Exemptions.
Paragraph 35(b)(2)(i).
1. Construction-permanent loans. Under Sec. 1026.35(b)(2)(ii)(B),
Sec. 1026.35 does not apply to a transaction to finance the initial
construction of a dwelling. Section 1026.35 may apply, however, to
permanent financing that replaces a construction loan, whether the
permanent financing is extended by the same or a different creditor.
When a construction loan may be permanently financed by the same
creditor, Sec. 1026.17(c)(6)(ii) permits the creditor to give either
one combined disclosure for both the construction financing and the
permanent financing, or a separate set of disclosures for each of the
two phases as though they were two separate transactions. See also
comment 17(c)(6)-2. Section 1026.17(c)(6)(ii) addresses only how a
creditor may elect to disclose a construction-permanent transaction.
Which disclosure option a creditor elects under Sec. 1026.17(c)(6)(ii)
does not affect the determination of whether the permanent phase of the
transaction is subject to Sec. 1026.35. When the creditor discloses the
two phases as separate transactions, the annual percentage rate for the
permanent phase must be compared to the average prime offer rate for a
transaction that is comparable to the permanent financing to determine
whether the transaction is a higher-priced mortgage loan under Sec.
1026.35(a). When the creditor discloses the two phases as a single
transaction, a single annual percentage rate, reflecting the appropriate
charges from both phases, must be calculated for the transaction in
accordance with Sec. 1026.22(a)(1) and appendix D to part 1026. This
annual percentage rate must be compared to the average prime offer rate
for
[[Page 662]]
a transaction that is comparable to the permanent financing to determine
the transaction is a higher-priced mortgage loan under Sec. 1026.35(a).
If the transaction is determined to be a higher-priced mortgage loan,
only the permanent phase is subject to the requirement of Sec.
1026.35(b)(1) to establish and maintain an escrow account, and the
period for which the escrow account must remain in place under Sec.
1026.35(b)(3) is measured from the time the conversion to the permanent
phase financing occurs.
Paragraph 35(b)(2)(ii).
1. Limited exemption. A creditor is required to escrow for payment
of property taxes for all first-lien higher-priced mortgage loans
secured by condominium, planned unit development, or similar dwellings
or units regardless of whether the creditor escrows for insurance
premiums for such dwellings or units.
2. Planned unit developments. Planned unit developments (PUDs) are a
form of property ownership often used in retirement communities, golf
communities, and similar communities made up of homes located within a
defined geographical area. PUDs usually have a homeowners' association
or some other governing association, analogous to a condominium
association and with similar authority and obligations. Thus, as with
condominiums, PUDs often have master insurance policies that cover all
units in the PUD. Under Sec. 1026.35(b)(2)(ii), if a PUD's governing
association is obligated to maintain such a master insurance policy, an
escrow account required by Sec. 1026.35(b)(1) for a transaction secured
by a unit in the PUD need not include escrows for insurance. This
exemption applies not only to condominiums and PUDs but also to any
other type of property ownership arrangement that has a governing
association with an obligation to maintain a master insurance policy.
3. More than one governing association associated with a dwelling.
The limited exemption provided pursuant to Sec. 1026.35(b)(2)(ii)
applies to each master insurance policy for properties with multiple
governing associations, to the extent each governing association has an
obligation to maintain a master insurance policy.
Paragraph 35(b)(2)(iii).
1. Requirements for exemption. Under Sec. 1026.35(b)(2)(iii),
except as provided in Sec. 1026.35(b)(2)(v), a creditor need not
establish an escrow account for taxes and insurance for a higher-priced
mortgage loan, provided the following four conditions are satisfied when
the higher-priced mortgage loan is consummated:
i. During the preceding calendar year, or during either of the two
preceding calendar years if the application for the loan was received
before April 1 of the current calendar year, a creditor extended a
first-lien covered transaction, as defined in Sec. 1026.43(b)(1),
secured by a property located in an area that is either ``rural'' or
``underserved,'' as set forth in Sec. 1026.35(b)(2)(iv).
A. In general, whether the rural-or-underserved test is satisfied
depends on the creditor's activity during the preceding calendar year.
However, if the application for the loan in question was received before
April 1 of the current calendar year, the creditor may instead meet the
rural-or-underserved test based on its activity during the next-to-last
calendar year. This provides creditors with a grace period if their
activity meets the rural-or-underserved test (in Sec.
1026.35(b)(2)(iii)(A)) in one calendar year but fails to meet it in the
next calendar year.
B. A creditor meets the rural-or-underserved test for any higher-
priced mortgage loan consummated during a calendar year if it extended a
first-lien covered transaction in the preceding calendar year secured by
a property located in a rural-or-underserved area. If the creditor does
not meet the rural-or-underserved test in the preceding calendar year,
the creditor meets this condition for a higher-priced mortgage loan
consummated during the current calendar year only if the application for
the loan was received before April 1 of the current calendar year and
the creditor extended a first-lien covered transaction during the next-
to-last calendar year that is secured by a property located in a rural
or underserved area. The following examples are illustrative:
1. Assume that a creditor extended during 2016 a first-lien covered
transaction that is secured by a property located in a rural or
underserved area. Because the creditor extended a first-lien covered
transaction during 2016 that is secured by a property located in a rural
or underserved area, the creditor can meet this condition for exemption
for any higher-priced mortgage loan consummated during 2017.
2. Assume that a creditor did not extend during 2016 a first-lien
covered transaction secured by a property that is located in a rural or
underserved area. Assume further that the same creditor extended during
2015 a first-lien covered transaction that is located in a rural or
underserved area. Assume further that the creditor consummates a higher-
priced mortgage loan in 2017 for which the application was received in
November 2017. Because the creditor did not extend during 2016 a first-
lien covered transaction secured by a property that is located in a
rural or underserved area, and the application was received on or after
April 1, 2017, the creditor does not meet this condition for exemption.
However, assume instead that the creditor consummates a higher-priced
mortgage loan in 2017 based on an application received in February 2017.
The creditor meets this condition for exemption for this
[[Page 663]]
loan because the application was received before April 1, 2017, and the
creditor extended during 2015 a first-lien covered transaction that is
located in a rural or underserved area.
ii. The creditor and its affiliates together extended no more than
2,000 covered transactions, as defined in Sec. 1026.43(b)(1), secured
by first liens, that were sold, assigned, or otherwise transferred by
the creditor or its affiliates to another person, or that were subject
at the time of consummation to a commitment to be acquired by another
person, during the preceding calendar year or during either of the two
preceding calendar years if the application for the loan was received
before April 1 of the current calendar year. For purposes of Sec.
1026.35(b)(2)(iii)(B), a transfer of a first-lien covered transaction to
``another person'' includes a transfer by a creditor to its affiliate.
A. In general, whether this condition is satisfied depends on the
creditor's activity during the preceding calendar year. However, if the
application for the loan in question is received before April 1 of the
current calendar year, the creditor may instead meet this condition
based on activity during the next-to-last calendar year. This provides
creditors with a grace period if their activity falls at or below the
threshold in one calendar year but exceeds it in the next calendar year.
B. For example, assume that in 2015 a creditor and its affiliates
together extended 1,500 loans that were sold, assigned, or otherwise
transferred by the creditor or its affiliates to another person, or that
were subject at the time of consummation to a commitment to be acquired
by another person, and 2,500 such loans in 2016. Because the 2016
transaction activity exceeds the threshold but the 2015 transaction
activity does not, the creditor satisfies this condition for exemption
for a higher-priced mortgage loan consummated during 2017 if the
creditor received the application for the loan before April 1, 2017, but
does not satisfy this condition for a higher-priced mortgage loan
consummated during 2017 if the application for the loan was received on
or after April 1, 2017.
C. For purposes of Sec. 1026.35(b)(2)(iii)(B), extensions of first-
lien covered transactions, during the applicable time period, by all of
a creditor's affiliates, as ``affiliate'' is defined in Sec.
1026.32(b)(5), are counted toward the threshold in this section.
``Affiliate'' is defined in Sec. 1026.32(b)(5) as ``any company that
controls, is controlled by, or is under common control with another
company, as set forth in the Bank Holding Company Act of 1956 (12 U.S.C.
1841 et seq.).'' Under the Bank Holding Company Act, a company has
control over a bank or another company if it ``directly or indirectly or
acting through one or more persons owns, controls, or has power to vote
25 per centum or more of any class of voting securities of the bank or
company''; it ``controls in any manner the election of a majority of the
directors or trustees of the bank or company''; or the Federal Reserve
Board ``determines, after notice and opportunity for hearing, that the
company directly or indirectly exercises a controlling influence over
the management or policies of the bank or company.'' 12 U.S.C.
1841(a)(2).
iii. As of the end of the preceding calendar year, or as of the end
of either of the two preceding calendar years if the application for the
loan was received before April 1 of the current calendar year, the
creditor and its affiliates that regularly extended covered transactions
secured by first liens, together, had total assets that are less than
the applicable annual asset threshold.
A. For purposes of Sec. 1026.35(b)(2)(iii)(C), in addition to the
creditor's assets, only the assets of a creditor's ``affiliate'' (as
defined by Sec. 1026.32(b)(5)) that regularly extended covered
transactions (as defined by Sec. 1026.43(b)(1)) secured by first liens,
are counted toward the applicable annual asset threshold. See comment
35(b)(2)(iii)-1.ii.C for discussion of definition of ``affiliate.''
B. Only the assets of a creditor's affiliate that regularly extended
first-lien covered transactions during the applicable period are
included in calculating the creditor's assets. The meaning of
``regularly extended'' is based on the number of times a person extends
consumer credit for purposes of the definition of ``creditor'' in Sec.
1026.2(a)(17). Because covered transactions are ``transactions secured
by a dwelling,'' consistent with Sec. 1026.2(a)(17)(v), an affiliate
regularly extended covered transactions if it extended more than five
covered transactions in a calendar year. Also consistent with Sec.
1026.2(a)(17)(v), because a covered transaction may be a high-cost
mortgage subject to Sec. 1026.32, an affiliate regularly extends
covered transactions if, in any 12-month period, it extends more than
one covered transaction that is subject to the requirements of Sec.
1026.32 or one or more such transactions through a mortgage broker.
Thus, if a creditor's affiliate regularly extended first-lien covered
transactions during the preceding calendar year, the creditor's assets
as of the end of the preceding calendar year, for purposes of the asset
limit, take into account the assets of that affiliate. If the creditor,
together with its affiliates that regularly extended first-lien covered
transactions, exceeded the asset limit in the preceding calendar year--
to be eligible to operate as a small creditor for transactions with
applications received before April 1 of the current calendar year--the
assets of the creditor's affiliates that regularly extended covered
transactions in the year before the preceding calendar year are included
in calculating the creditor's assets.
[[Page 664]]
C. If multiple creditors share ownership of a company that regularly
extended first-lien covered transactions, the assets of the company
count toward the asset limit for a co-owner creditor if the company is
an ``affiliate,'' as defined in Sec. 1026.32(b)(5), of the co-owner
creditor. Assuming the company is not an affiliate of the co-owner
creditor by virtue of any other aspect of the definition (such as by the
company and co-owner creditor being under common control), the company's
assets are included toward the asset limit of the co-owner creditor only
if the company is controlled by the co-owner creditor, ``as set forth in
the Bank Holding Company Act.'' If the co-owner creditor and the company
are affiliates (by virtue of any aspect of the definition), the co-owner
creditor counts all of the company's assets toward the asset limit,
regardless of the co-owner creditor's ownership share. Further, because
the co-owner and the company are mutual affiliates the company also
would count all of the co-owner's assets towards its own asset limit.
See comment 35(b)(2)(iii)-1.ii.C for discussion of the definition of
``affiliate.''
D. A creditor satisfies the criterion in Sec. 1026.35(b)(2)(iii)(C)
for purposes of any higher-priced mortgage loan consummated during 2016,
for example, if the creditor (together with its affiliates that
regularly extended first-lien covered transactions) had total assets of
less than the applicable asset threshold on December 31, 2015. A
creditor that (together with its affiliates that regularly extended
first-lien covered transactions) did not meet the applicable asset
threshold on December 31, 2015 satisfies this criterion for a higher-
priced mortgage loan consummated during 2016 if the application for the
loan was received before April 1, 2016 and the creditor (together with
its affiliates that regularly extended first-lien covered transactions)
had total assets of less than the applicable asset threshold on December
31, 2014.
E. Under Sec. 1026.35(b)(2)(iii)(C), the $2,000,000,000 asset
threshold adjusts automatically each year based on the year-to-year
change in the average of the Consumer Price Index for Urban Wage Earners
and Clerical Workers, not seasonally adjusted, for each 12-month period
ending in November, with rounding to the nearest million dollars. The
Bureau will publish notice of the asset threshold each year by amending
this comment. For calendar year 2018, the asset threshold is
$2,112,000,000. A creditor that together with the assets of its
affiliates that regularly extended first-lien covered transactions
during calendar year 2017 has total assets of less than $2,112,000,000
on December 31, 2017, satisfies this criterion for purposes of any loan
consummated in 2018 and for purposes of any loan consummated in 2019 for
which the application was received before April 1, 2019. For historical
purposes:
1. For calendar year 2013, the asset threshold was $2,000,000,000.
Creditors that had total assets of less than $2,000,000,000 on December
31, 2012, satisfied this criterion for purposes of the exemption during
2013.
2. For calendar year 2014, the asset threshold was $2,028,000,000.
Creditors that had total assets of less than $2,028,000,000 on December
31, 2013, satisfied this criterion for purposes of the exemption during
2014.
3. For calendar year 2015, the asset threshold was $2,060,000,000.
Creditors that had total assets of less than $2,060,000,000 on December
31, 2014, satisfied this criterion for purposes of any loan consummated
in 2015 and, if the creditor's assets together with the assets of its
affiliates that regularly extended first-lien covered transactions
during calendar year 2014 were less than that amount, for purposes of
any loan consummated in 2016 for which the application was received
before April 1, 2016.
4. For calendar year 2016, the asset threshold was $2,052,000,000. A
creditor that together with the assets of its affiliates that regularly
extended first-lien covered transactions during calendar year 2015 had
total assets of less than $2,052,000,000 on December 31, 2015, satisfied
this criterion for purposes of any loan consummated in 2016 and for
purposes of any loan consummated in 2017 for which the application was
received before April 1, 2017.
5. For calendar year 2017, the asset threshold was $2,069,000,000. A
creditor that together with the assets of its affiliates that regularly
extended first-lien covered transactions during calendar year 2016 had
total assets of less than $2,069,000,000 on December 31, 2016, satisfied
this criterion for purposes of any loan consummated in 2017 and for
purposes of any loan consummated in 2018 for which the application was
received before April 1, 2018.
iv. The creditor and its affiliates do not maintain an escrow
account for any mortgage transaction being serviced by the creditor or
its affiliate at the time the transaction is consummated, except as
provided in Sec. 1026.35(b)(2)(iii)(D)(1) and (2). Thus, the exemption
applies, provided the other conditions of Sec. 1026.35(b)(2)(iii) are
satisfied, even if the creditor previously maintained escrow accounts
for mortgage loans, provided it no longer maintains any such accounts
except as provided in Sec. 1026.35(b)(2)(iii)(D)(1) and (2). Once a
creditor or its affiliate begins escrowing for loans currently serviced
other than those addressed in Sec. 1026.35(b)(2)(iii)(D)(1) and (2),
however, the creditor and its affiliate become ineligible for the
exemption in Sec. 1026.35(b)(2)(iii) on higher-priced mortgage loans
they make while such escrowing continues. Thus, as long as a creditor
(or its affiliate) services and maintains escrow accounts for any
mortgage loans, other than as provided in
[[Page 665]]
Sec. 1026.35(b)(2)(iii)(D)(1) and (2), the creditor will not be
eligible for the exemption for any higher-priced mortgage loan it may
make. For purposes of Sec. 1026.35(b)(2)(iii), a creditor or its
affiliate ``maintains'' an escrow account only if it services a mortgage
loan for which an escrow account has been established at least through
the due date of the second periodic payment under the terms of the legal
obligation.
Paragraph 35(b)(2)(iii)(D)(1).
1. Exception for certain accounts. Escrow accounts established for
first-lien higher-priced mortgage loans for which applications were
received on or after April 1, 2010, and before May 1, 2016, are not
counted for purposes of Sec. 1026.35(b)(2)(iii)(D). For applications
received on and after May 1, 2016, creditors, together with their
affiliates, that establish new escrow accounts, other than those
described in Sec. 1026.35(b)(2)(iii)(D)(2), do not qualify for the
exemption provided under Sec. 1026.35(b)(2)(iii). Creditors, together
with their affiliates, that continue to maintain escrow accounts
established for first-lien higher-priced mortgage loans for which
applications were received on or after April 1, 2010, and before May 1,
2016, still qualify for the exemption provided under Sec.
1026.35(b)(2)(iii) so long as they do not establish new escrow accounts
for transactions for which they received applications on or after May 1,
2016, other than those described in Sec. 1026.35(b)(2)(iii)(D)(2), and
they otherwise qualify under Sec. 1026.35(b)(2)(iii).
Paragraph 35(b)(2)(iii)(D)(2).
1. Exception for post-consummation escrow accounts for distressed
consumers. An escrow account established after consummation for a
distressed consumer does not count for purposes of Sec.
1026.35(b)(2)(iii)(D). Distressed consumers are consumers who are
working with the creditor or servicer to attempt to bring the loan into
a current status through a modification, deferral, or other
accommodation to the consumer. A creditor, together with its affiliates,
that establishes escrow accounts after consummation as a regular
business practice, regardless of whether consumers are in distress, does
not qualify for the exception described in Sec.
1026.35(b)(2)(iii)(D)(2).
Paragraph 35(b)(2)(iv).
1. Requirements for ``rural'' or ``underserved'' status. An area is
considered to be ``rural'' or ``underserved'' during a calendar year for
purposes of Sec. 1026.35(b)(2)(iii)(A) if it satisfies either the
definition for ``rural'' or the definition for ``underserved'' in Sec.
1026.35(b)(2)(iv). A creditor's extensions of covered transactions, as
defined by Sec. 1026.43(b)(1), secured by first liens on properties
located in such areas are considered in determining whether the creditor
satisfies the condition in Sec. 1026.35(b)(2)(iii)(A). See comment
35(b)(2)(iii)-1.
i. Under Sec. 1026.35(b)(2)(iv)(A), an area is rural during a
calendar year if it is: A county that is neither in a metropolitan
statistical area nor in a micropolitan statistical area that is adjacent
to a metropolitan statistical area; a census block that is not in an
urban area, as defined by the U.S. Census Bureau using the latest
decennial census of the United States; or a county or a census block
that has been designated as ``rural'' by the Bureau pursuant to the
application process established in 2016. See Application Process for
Designation of Rural Area under Federal Consumer Financial Law;
Procedural Rule, 81 FR 11099 (Mar. 3, 2016). Metropolitan statistical
areas and micropolitan statistical areas are defined by the Office of
Management and Budget and applied under currently applicable Urban
Influence Codes (UICs), established by the United States Department of
Agriculture's Economic Research Service (USDA-ERS). For purposes of
Sec. 1026.35(b)(2)(iv)(A)(1), ``adjacent'' has the meaning applied by
the USDA-ERS in determining a county's UIC; as so applied, ``adjacent''
entails a county not only being physically contiguous with a
metropolitan statistical area but also meeting certain minimum
population commuting patterns. A county is a ``rural'' area under Sec.
1026.35(b)(2)(iv)(A)(1) if the USDA-ERS categorizes the county under UIC
4, 6, 7, 8, 9, 10, 11, or 12. Descriptions of UICs are available on the
USDA-ERS Web site at http://www.ers.usda.gov/data-products/urban-
influence-codes/documentation.aspx. A county for which there is no
currently applicable UIC (because the county has been created since the
USDA-ERS last categorized counties) is a rural area only if all counties
from which the new county's land was taken are themselves rural under
currently applicable UICs.
ii. Under Sec. 1026.35(b)(2)(iv)(B), an area is underserved during
a calendar year if, according to Home Mortgage Disclosure Act (HMDA)
data for the preceding calendar year, it is a county in which no more
than two creditors extended covered transactions, as defined in Sec.
1026.43(b)(1), secured by first liens, five or more times on properties
in the county. Specifically, a county is an ``underserved'' area if, in
the applicable calendar year's public HMDA aggregate dataset, no more
than two creditors have reported five or more first-lien covered
transactions, with HMDA geocoding that places the properties in that
county. For purposes of this determination, because only covered
transactions are counted, all first-lien originations (and only first-
lien originations) reported in the HMDA data are counted except those
for which the owner-occupancy status is reported as ``Not owner-
occupied'' (HMDA code 2), the property type is reported as
``Multifamily'' (HMDA code 3), the applicant's or co-applicant's race is
reported as ``Not applicable'' (HMDA code 7), or the applicant's or
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co-applicant's sex is reported as ``Not applicable'' (HMDA code 4). The
most recent HMDA data are available at http://www.ffiec.gov/hmda.
iii. A. Each calendar year, the Bureau applies the ``underserved''
area test and the ``rural'' area test to each county in the United
States. If a county satisfies either test, the Bureau will include the
county on a published list of counties that are rural or underserved as
defined by Sec. 1026.35(b)(2)(iv)(A)(1) or Sec. 1026.35(b)(2)(iv)(B)
for a particular calendar year, even if the county contains census
blocks that are designated by the Census Bureau as urban. To facilitate
compliance with appraisal requirements in Sec. 1026.35(c), the Bureau
also creates a list of those counties that are rural under the Bureau's
definition without regard to whether the counties are underserved. To
the extent that U.S. territories are treated by the Census Bureau as
counties and are neither metropolitan statistical areas nor micropolitan
statistical areas adjacent to metropolitan statistical areas, such
territories will be included on these lists as rural areas in their
entireties. The Bureau will post on its public Web site the applicable
lists for each calendar year by the end of that year and publish such
lists in the Federal Register, to assist creditors in ascertaining the
availability to them of the exemption during the following year. Any
county that the Bureau includes on its published lists of counties that
are rural or underserved under the Bureau's definitions for a particular
year is deemed to qualify as a rural or underserved area for that
calendar year for purposes of Sec. 1026.35(b)(2)(iv), even if the
county contains census blocks that are designated by the Census Bureau
as urban. A property located in such a listed county is deemed to be
located in a rural or underserved area, even if the census block in
which the property is located is designated as urban.
B. A property is deemed to be in a rural or underserved area
according to the definitions in Sec. 1026.35(b)(2)(iv) during a
particular calendar year if it is identified as such by an automated
tool provided on the Bureau's public Web site. A printout or electronic
copy from the automated tool provided on the Bureau's public Web site
designating a particular property as being in a rural or underserved
area may be used as ``evidence of compliance'' that a property is in a
rural or underserved area, as defined in Sec. 1026.35(b)(2)(iv)(A) and
(B), for purposes of the record retention requirements in Sec. 1026.25.
C. The U.S. Census Bureau may provide on its public Web site an
automated address search tool that specifically indicates if a property
is located in an urban area for purposes of the Census Bureau's most
recent delineation of urban areas. For any calendar year that began
after the date on which the Census Bureau announced its most recent
delineation of urban areas, a property is deemed to be in a rural area
if the search results provided for the property by any such automated
address search tool available on the Census Bureau's public Web site do
not designate the property as being in an urban area. A printout or
electronic copy from such an automated address search tool available on
the Census Bureau's public Web site designating a particular property as
not being in an urban area may be used as ``evidence of compliance''
that the property is in a rural area, as defined in Sec.
1026.35(b)(2)(iv)(A), for purposes of the record retention requirements
in Sec. 1026.25.
D. For a given calendar year, a property qualifies for a safe harbor
if any of the enumerated safe harbors affirms that the property is in a
rural or underserved area or not in an urban area. For example, the
Census Bureau's automated address search tool may indicate a property is
in an urban area, but the Bureau's rural or underserved counties list
indicates the property is in a rural or underserved county. The property
in this example is in a rural or underserved area because it qualifies
under the safe harbor for the rural or underserved counties list. The
lists of counties published by the Bureau, the automated tool on its
public Web site, and the automated address search tool available on the
Census Bureau's public Web site, are not the exclusive means by which a
creditor can demonstrate that a property is in a rural or underserved
area as defined in Sec. 1026.35(b)(2)(iv)(A) and (B). However,
creditors are required to retain ``evidence of compliance'' in
accordance with Sec. 1026.25, including determinations of whether a
property is in a rural or underserved area as defined in Sec.
1026.35(b)(2)(iv)(A) and (B).
2. Examples. i. An area is considered ``rural'' for a given calendar
year based on the most recent available UIC designations by the USDA-ERS
and the most recent available delineations of urban areas by the U.S.
Census Bureau that are available at the beginning of the calendar year.
These designations and delineations are updated by the USDA-ERS and the
U.S. Census Bureau respectively once every ten years. As an example,
assume a creditor makes first-lien covered transactions in Census Block
X that is located in County Y during calendar year 2017. As of January
1, 2017, the most recent UIC designations were published in the second
quarter of 2013, and the most recent delineation of urban areas was
announced in the Federal Register in 2012, see U.S. Census Bureau,
Qualifying Urban Areas for the 2010 Census, 77 FR 18652 (Mar. 27, 2012).
To determine whether County Y is rural under the Bureau's definition
during calendar year 2017, the creditor can use USDA-ERS's 2013 UIC
designations. If County Y is not rural,
[[Page 667]]
the creditor can use the U.S. Census Bureau's 2012 delineation of urban
areas to determine whether Census Block X is rural and is therefore a
``rural'' area for purposes of Sec. 1026.35(b)(2)(iv)(A). In addition,
an area is considered ``rural'' if it is a county or a census block that
has been designated as rural by the Bureau using the application process
established in 2016. See Application Process for Designation of Rural
Area under Federal Consumer Financial Law; Procedural Rule, 81 FR 11099
(Mar. 3, 2016). Designations under this process are time-limited and
expire on December 4, 2017.
ii. A county is considered an ``underserved'' area for a given
calendar year based on the most recent available HMDA data. For example,
assume a creditor makes first-lien covered transactions in County Y
during calendar year 2016, and the most recent HMDA data are for
calendar year 2015, published in the third quarter of 2016. The creditor
will use the 2015 HMDA data to determine ``underserved'' area status for
County Y in calendar year 2016 for the purposes of qualifying for the
``rural or underserved'' exemption for any higher-priced mortgage loans
consummated in calendar year 2017 or for any higher-priced mortgage loan
consummated during 2018 for which the application was received before
April 1, 2018.
Paragraph 35(b)(2)(v).
1. Forward commitments. A creditor may make a mortgage loan that
will be transferred or sold to a purchaser pursuant to an agreement that
has been entered into at or before the time the loan is consummated.
Such an agreement is sometimes known as a ``forward commitment.'' Even
if a creditor is otherwise eligible for the exemption in Sec.
1026.35(b)(2)(iii), a first-lien higher-priced mortgage loan that will
be acquired by a purchaser pursuant to a forward commitment is subject
to the requirement to establish an escrow account under Sec.
1026.35(b)(1) unless the purchaser is also eligible for the exemption in
Sec. 1026.35(b)(2)(iii) or the transaction is otherwise exempt under
Sec. 1026.35(b)(2). The escrow requirement applies to any such
transaction, whether the forward commitment provides for the purchase
and sale of the specific transaction or for the purchase and sale of
mortgage obligations with certain prescribed criteria that the
transaction meets. For example, assume a creditor that qualifies for the
exemption in Sec. 1026.35(b)(2)(iii) makes a higher-priced mortgage
loan that meets the purchase criteria of an investor with which the
creditor has an agreement to sell such mortgage obligations after
consummation. If the investor is ineligible for the exemption in Sec.
1026.35(b)(2)(iii), an escrow account must be established for the
transaction before consummation in accordance with Sec. 1026.35(b)(1)
unless the transaction is otherwise exempt (such as a reverse mortgage
or home equity line of credit).
35(b)(3) Cancellation.
1. Termination of underlying debt obligation. Section
1026.35(b)(3)(i) provides that, in general, an escrow account required
by Sec. 1026.35(b)(1) may not be cancelled until the underlying debt
obligation is terminated or the consumer requests cancellation at least
five years after consummation. Methods by which an underlying debt
obligation may be terminated include, among other things, repayment,
refinancing, rescission, and foreclosure.
2. Minimum durations. Section 1026.35(b)(3) establishes minimum
durations for which escrow accounts established pursuant to Sec.
1026.35(b)(1) must be maintained. This requirement does not affect a
creditor's right or obligation, pursuant to the terms of the legal
obligation or applicable law, to offer or require an escrow account
thereafter.
3. Less than eighty percent unpaid principal balance. The term
``original value'' in Sec. 1026.35(b)(3)(ii)(A) means the lesser of the
sales price reflected in the sales contract for the property, if any, or
the appraised value of the property at the time the transaction was
consummated. In determining whether the unpaid principal balance has
reached less than 80 percent of the original value of the property
securing the underlying debt, the creditor or servicer shall count any
subordinate lien of which it has reason to know. If the consumer
certifies in writing that the equity in the property securing the
underlying debt obligation is unencumbered by a subordinate lien, the
creditor or servicer may rely upon the certification in making its
determination unless it has actual knowledge to the contrary.
35(c)--Appraisals
35(c)(1) Definitions
35(c)(1)(i) Certified or Licensed Appraiser
1. USPAP. The Uniform Standards of Professional Appraisal Practice
(USPAP) are established by the Appraisal Standards Board of the
Appraisal Foundation (as defined in 12 U.S.C. 3350(9)). Under Sec.
1026.35(c)(1)(i), the relevant USPAP standards are those found in the
edition of USPAP and that are in effect at the time the appraiser signs
the appraiser's certification.
2. Appraiser's certification. The appraiser's certification refers
to the certification that must be signed by the appraiser for each
appraisal assignment. This requirement is specified in USPAP Standards
Rule 2-3.
3. FIRREA title XI and implementing regulations. The relevant
regulations are those prescribed under section 1110 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), as
amended (12
[[Page 668]]
U.S.C. 3339), that relate to an appraiser's development and reporting of
the appraisal in effect at the time the appraiser signs the appraiser's
certification. Paragraph (3) of FIRREA section 1110 (12 U.S.C. 3339(3)),
which relates to the review of appraisals, is not relevant for
determining whether an appraiser is a certified or licensed appraiser
under Sec. 1026.35(c)(1)(i).
35(c)(2) Exemptions
1. Compliance with title XI of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA). Section 1026.35(c)(2)
provides exemptions solely from the requirements of section
1026.35(c)(3) through (6). Institutions subject to the requirements of
FIRREA and its implementing regulations that make a loan qualifying for
an exemption under section 1026.35(c)(2) must still comply with
appraisal and evaluation requirements under FIRREA and its implementing
regulations.
Paragraph 35(c)(2)(i)
1. Qualified mortgage criteria. Under Sec. 1026.35(c)(2)(i), a loan
is exempt from the appraisal requirements of Sec. 1026.35(c) if either:
i. The loan is--(1) subject to the Bureau's ability-to-repay
requirements in Sec. 1026.43 as a ``covered transaction'' (defined in
Sec. 1026.43(b)(1)) and (2) a qualified mortgage pursuant to the
Bureau's rules or, for loans insured, guaranteed, or administered by the
U.S. Department of Housing and Urban Development (HUD), U.S. Department
of Veterans Affairs (VA), U.S. Department of Agriculture (USDA), or
Rural Housing Service (RHS), a qualified mortgage pursuant to applicable
rules prescribed by those agencies (but only once such rules are in
effect; otherwise, the Bureau's definition of a qualified mortgage
applies to those loans); or
ii. The loan is--(1) not subject to the Bureau's ability-to-repay
requirements in Sec. 1026.43 as a ``covered transaction'' (defined in
Sec. 1026.43(b)(1)), but (2) meets the criteria for a qualified
mortgage in the Bureau's rules or, for loans insured, guaranteed, or
administered by HUD, VA, USDA, or RHS, meets the criteria for a
qualified mortgage in the applicable rules prescribed by those agencies
(but only once such rules are in effect; otherwise, the Bureau's
criteria for a qualified mortgage applies to those loans). To explain
further, loans enumerated in Sec. 1026.43(a) are not ``covered
transactions'' under the Bureau's ability-to-repay requirements in Sec.
1026.43, and thus cannot be qualified mortgages (entitled to a
rebuttable presumption or safe harbor of compliance with the ability-to-
repay requirements of Sec. 1026.43, see, e.g., Sec. 1026.43(e)(1)).
These include an extension of credit made pursuant to a program
administered by a Housing Finance Agency, as defined under 24 CFR 266.5,
or pursuant to a program authorized by sections 101 and 109 of the
Emergency Economic Stabilization Act of 2008. See Sec.
1026.43(a)(3)(iv) and (vi). They also include extensions of credit made
by a creditor identified in Sec. 1026.43(a)(3)(v). However, these loans
are eligible for the exemption in Sec. 1026.35(c)(2)(i) if they meet
the Bureau's qualified mortgage criteria in Sec. 1026.43(e)(2), (4),
(5), or (6) or Sec. 1026.43(f) (including limits on when loans must be
consummated) or, for loans that are insured, guaranteed, or administered
by HUD, VA, USDA, or RHS, in applicable rules prescribed by those
agencies (but only once such rules are in effect; otherwise, the
Bureau's criteria for a qualified mortgage applies to those loans). For
example, assume that HUD has prescribed rules to define loans insured
under its programs that are qualified mortgages and those rules are in
effect. Assume further that a creditor designated as a Community
Development Financial Institution, as defined under 12 CFR 1805.104(h),
originates a loan insured by the Federal Housing Administration, which
is a part of HUD. The loan is not a ``covered transaction'' and thus is
not a qualified mortgage. See Sec. 1026.43(a)(3)(v)(A) and (b)(1).
Nonetheless, the transaction is eligible for an exemption from the
appraisal requirements of Sec. 1026.35(c) if it meets the qualified
mortgage criteria in HUD's rules. Nothing in Sec. 1026.35(c)(2)(i)
alters the definition of a qualified mortgage under regulations of the
Bureau, HUD, VA, USDA, or RHS.
Paragraph 35(c)(2)(ii)
1. Threshold amount. For purposes of Sec. 1026.35(c)(2)(ii), the
threshold amount in effect during a particular period is the amount
stated in comment 35(c)(2)(ii)-3 for that period. The threshold amount
is adjusted effective January 1 of each year by any annual percentage
increase in the Consumer Price Index for Urban Wage Earners and Clerical
Workers (CPI-W) that was in effect on the preceding June 1. Comment
35(c)(2)(ii)-3 will be amended to provide the threshold amount for the
upcoming year after the annual percentage change in the CPI-W that was
in effect on June 1 becomes available. Any increase in the threshold
amount will be rounded to the nearest $100 increment. For example, if
the annual percentage increase in the CPI-W would result in a $950
increase in the threshold amount, the threshold amount will be increased
by $1,000. However, if the annual percentage increase in the CPI-W would
result in a $949 increase in the threshold amount, the threshold amount
will be increased by $900.
2. No increase in the CPI-W. If the CPI-W in effect on June 1 does
not increase from the CPI-W in effect on June 1 of the previous year,
the threshold amount effective the following January 1 through December
31 will
[[Page 669]]
not change from the previous year. When this occurs, for the years that
follow, the threshold is calculated based on the annual percentage
change in the CPI-W applied to the dollar amount that would have
resulted, after rounding, if decreases and any subsequent increases in
the CPI-W had been taken into account.
i. Net increases. If the resulting amount calculated, after
rounding, is greater than the current threshold, then the threshold
effective January 1 the following year will increase accordingly.
ii. Net decreases. If the resulting amount calculated, after
rounding, is equal to or less than the current threshold, then the
threshold effective January 1 the following year will not change, but
future increases will be calculated based on the amount that would have
resulted.
3. Threshold. For purposes of Sec. 1026.35(c)(2)(ii), the threshold
amount in effect during a particular period is the amount stated below
for that period.
i. From January 18, 2014, through December 31, 2014, the threshold
amount is $25,000.
ii. From January 1, 2015, through December 31, 2015, the threshold
amount is $25,500.
iii. From January 1, 2016, through December 31, 2016, the threshold
amount is $25,500.
iv. From January 1, 2017, through December 31, 2017, the threshold
amount is $25,500.
v. From January 1, 2018, through December 31, 2018, the threshold
amount is $26,000.
4. Qualifying for exemption--in general. A transaction is exempt
under Sec. 1026.35(c)(2)(ii) if the creditor makes an extension of
credit at consummation that is equal to or below the threshold amount in
effect at the time of consummation.
5. Qualifying for exemption--subsequent changes. A transaction does
not meet the condition for an exemption under Sec. 1026.35(c)(2)(ii)
merely because it is used to satisfy and replace an existing exempt
loan, unless the amount of the new extension of credit is equal to or
less than the applicable threshold amount. For example, assume a closed-
end loan that qualified for a Sec. 1026.35(c)(2)(ii) exemption at
consummation in year one is refinanced in year ten and that the new loan
amount is greater than the threshold amount in effect in year ten. In
these circumstances, the creditor must comply with all of the applicable
requirements of Sec. 1026.35(c) with respect to the year ten
transaction if the original loan is satisfied and replaced by the new
loan, unless another exemption from the requirements of Sec. 1026.35(c)
applies. See Sec. 1026.35(c)(2) and (c)(4)(vii).
Paragraph 35(c)(2)(iii)
1. Secured by a mobile home. For purposes of the exemption in Sec.
1026.35(c)(2)(iii), a mobile home does not include a manufactured home,
as defined in Sec. 1026.35(c)(1)(ii).
Paragraph 35(c)(2)(iv)
1. Construction-to-permanent loans. Section 1026.35(c) does not
apply to a transaction to finance the initial construction of a
dwelling. This exclusion applies to a construction-only loan as well as
to the construction phase of a construction-to-permanent loan. Section
1026.35(c) does apply, however, to permanent financing that replaces a
construction loan, whether the permanent financing is extended by the
same or a different creditor, unless the permanent financing is
otherwise exempt from the requirements of Sec. 1026.35(c). See Sec.
1026.35(c)(2). When a construction loan may be permanently financed by
the same creditor, the general disclosure requirements for closed-end
credit (Sec. 1026.17) provide that the creditor may give either one
combined disclosure for both the construction financing and the
permanent financing, or a separate set of disclosures for each of the
two phases as though they were two separate transactions. See Sec.
1026.17(c)(6)(ii) and comment 17(c)(6)-2. Section 1026.17(c)(6)(ii)
addresses only how a creditor may elect to disclose a construction-to-
permanent transaction. Which disclosure option a creditor elects under
Sec. 1026.17(c)(6)(ii) does not affect the determination of whether the
permanent phase of the transaction is subject to Sec. 1026.35(c). When
the creditor discloses the two phases as separate transactions, the
annual percentage rate for the permanent phase must be compared to the
average prime offer rate for a transaction that is comparable to the
permanent financing to determine coverage under Sec. 1026.35(c). When
the creditor discloses the two phases as a single transaction, a single
annual percentage rate, reflecting the appropriate charges from both
phases, must be calculated for the transaction in accordance with Sec.
1026.35 and appendix D to part 1026. The annual percentage rate must be
compared to the average prime offer rate for a transaction that is
comparable to the permanent financing to determine coverage under Sec.
1026.35(c). If the transaction is determined to be a higher-priced
mortgage loan not otherwise exempt under Sec. 1026.35(c)(2), only the
permanent phase is subject to the requirements of Sec. 1026.35(c).
2. Financing initial construction. The exemption for construction
loans in Sec. 1026.35(c)(2)(iv) applies to temporary financing of the
construction of a dwelling that will be replaced by permanent financing
once construction is complete. The exemption does not apply, for
example, to loans to finance the purchase of manufactured homes that
have not been or are in the process of being built when the financing
obtained by the consumer at that time is permanent. See Sec.
1026.35(c)(2)(viii).
[[Page 670]]
Paragraph 35(c)(2)(vii)(A)(1)
1. Same credit risk holder. The requirement that the holder of the
credit risk on the existing obligation and the refinancing be the same
applies to situations in which an entity bears the financial
responsibility for the default of a loan by either holding the loan in
its portfolio or guaranteeing payments of principal and any interest to
investors in a mortgage-backed security in which the loan is pooled. See
Sec. 1026.35(c)(1)(ii) (defining ``credit risk''). For example, a
credit risk holder could be a bank that bears the credit risk on the
existing obligation by holding the loan in the bank's portfolio. Another
example of a credit risk holder would be a government-sponsored
enterprise that bears the risk of default on a loan by guaranteeing the
payment of principal and any interest on a loan to investors in a
mortgage-backed security. The holder of credit risk under Sec.
1026.35(c)(2)(vii)(A)(1) does not mean individual investors in a
mortgage-backed security or providers of private mortgage insurance.
2. Same credit risk holder--illustrations.
Illustrations of the credit risk holder of the existing obligation
continuing to be the credit risk holder of the refinancing include, but
are not limited to, the following:
i. The existing obligation is held in the portfolio of a bank, thus
the bank holds the credit risk. The bank arranges to refinance the loan
and also will hold the refinancing in its portfolio. If the refinancing
otherwise meets the requirements for an exemption under Sec.
1026.35(c)(2)(vii), the transaction will qualify for the exemption
because the credit risk holder is the same for the existing obligation
and the refinance transaction. In this case, the exemption would apply
regardless of whether the bank arranged to refinance the loan directly
or indirectly, such as through the servicer or subservicer on the
existing obligation.
ii. The existing obligation is held in the portfolio of a
government-sponsored enterprise (GSE), thus the GSE holds the credit
risk. The existing obligation is then refinanced by the servicer of the
loan and immediately transferred to the GSE. The GSE pools the
refinancing in a mortgage-backed security guaranteed by the GSE, thus
the GSE holds the credit risk on the refinance loan. If the refinance
transaction otherwise meets the requirements for an exemption under
Sec. 1026.35(c)(2)(vii), the transaction will qualify for the exemption
because the credit risk holder is the same for the existing obligation
and the refinance transaction. In this case, the exemption would apply
regardless of whether the existing obligation was refinanced by the
servicer or subservicer on the existing obligation (acting as a
``creditor'' under Sec. 1026.2(a)(17)) or by a different creditor.
3. Forward commitments. A creditor may make a mortgage loan that
will be sold or otherwise transferred pursuant to an agreement that has
been entered into at or before the time the transaction is consummated.
Such an agreement is sometimes known as a ``forward commitment.'' A
refinance loan does not satisfy the requirement of Sec.
1026.35(c)(2)(vii)(A)(1) if the loan will be acquired pursuant to a
forward commitment, such that the credit risk on the refinance loan will
transfer to a person who did not hold the credit risk on the existing
obligation.
Paragraph 35(c)(2)(vii)(B)
1. Regular periodic payments. Under Sec. 1026.35(c)(2)(vii)(B), the
regular periodic payments on the refinance loan must not: result in an
increase of the principal balance (negative amortization); allow the
consumer to defer repayment of principal (see comment 43(e)(2)(i)-2); or
result in a balloon payment. Thus, the terms of the legal obligation
must require the consumer to make payments of principal and interest on
a monthly or other periodic basis that will repay the loan amount over
the loan term. Except for payments resulting from any interest rate
changes after consummation in an adjustable-rate or step-rate mortgage,
the periodic payments must be substantially equal. For an explanation of
the term ``substantially equal,'' see comment 43(c)(5)(i)-4. In
addition, a single-payment transaction is not a refinancing meeting the
requirements of Sec. 1026.35(c)(2)(vii) because it does not require
``regular periodic payments.''
Paragraph 35(c)(2)(vii)(C)
1. Permissible use of proceeds. The exemption for a refinancing
under Sec. 1026.35(c)(2)(vii) is available only if the proceeds from
the refinancing are used exclusively for the existing obligation and
amounts attributed solely to the costs of the refinancing. The existing
obligation includes the unpaid principal balance of the existing first
lien loan, any earned unpaid finance charges, and any other lawful
charges related to the existing loan. For guidance on the meaning of
refinancing costs, see comment 23(f)-4. If the proceeds of a refinancing
are used for other purposes, such as to pay off other liens or to
provide additional cash to the consumer for discretionary spending, the
transaction does not qualify for the exemption for a refinancing under
Sec. 1026.35(c)(2)(vii) from the appraisal requirements in Sec.
1026.35(c).
[[Page 671]]
For applications received on or after July 18, 2015
Paragraph 35(c)(2)(viii)(A)
1. Secured by new manufactured home and land--physical visit of the
interior. A transaction secured by a new manufactured home and land is
subject to the requirements of Sec. 1026.35(c)(3) through (6) except
for the requirement in Sec. 1026.35(c)(3)(i) that the appraiser conduct
a physical inspection of the interior of the property. Thus, for
example, a creditor of a loan secured by a new manufactured home and
land could comply with Sec. 1026.35(c)(3)(i) by obtaining an appraisal
conducted by a state-certified or -licensed appraiser based on plans and
specifications for the new manufactured home and an inspection of the
land on which the property will be sited, as well as any other
information necessary for the appraiser to complete the appraisal
assignment in conformity with the Uniform Standards of Professional
Appraisal Practice and the requirements of FIRREA and any implementing
regulations.
Paragraph 35(c)(2)(viii)(B)
1. Secured by a manufactured home and not land. Section
1026.35(c)(2)(viii)(B) applies to a higher-priced mortgage loan secured
by a manufactured home and not land, regardless of whether the home is
titled as realty by operation of state law.
Paragraph 35(c)(2)(viii)(B)(2)
1. Independent. A cost service provider from which the creditor
obtains a manufactured home unit cost estimate under Sec.
1026.35(c)(2)(viii)(B)(2) is ``independent'' if that person is not
affiliated with the creditor in the transaction, such as by common
corporate ownership, and receives no direct or indirect financial
benefits based on whether the transaction is consummated.
2. Adjustments. The requirement that the cost estimate be from an
independent cost service provider does not prohibit a creditor from
providing a cost estimate that reflects adjustments to account for
factors such as special features, condition or location. However, the
requirement that the estimate be obtained from an independent cost
service provider means that any adjustments to the estimate must be
based on adjustment factors available as part of the independent cost
service used, with associated values that are determined by the
independent cost service.
Paragraph 35(c)(2)(viii)(C)(3)
1. Interest in the property. A person has a direct or indirect in
the property if, for example, the person has any ownership or reasonably
foreseeable ownership interest in the manufactured home. To illustrate,
a person who seeks a loan to purchase the manufactured home to be valued
has a reasonably foreseeable ownership interest in the property.
2. Interest in the transaction. A person has a direct or indirect
interest in the transaction if, for example, the person or an affiliate
of that person also serves as a loan officer of the creditor or
otherwise arranges the credit transaction, or is the retail dealer of
the manufactured home. A person also has a prohibited interest in the
transaction if the person is compensated or otherwise receives financial
or other benefits based on whether the transaction is consummated.
3. Training in valuing manufactured homes. Training in valuing
manufactured homes includes, for example, successfully completing a
course in valuing manufactured homes offered by a state or national
appraiser association or receiving job training from an employer in the
business of valuing manufactured homes.
4. Manufactured home valuation--example. A valuation in compliance
with Sec. 1026.35(c)(2)(viii)(B)(3) would include, for example, an
appraisal of the manufactured home in accordance with the appraisal
requirements for a manufactured home classified as personal property
under the Title I Manufactured Home Loan Insurance Program of the U.S.
Department of Housing and Urban Development, pursuant to section
2(b)(10) of the National Housing Act, 12 U.S.C. 1703(b)(10).
35(c)(3) Appraisals Required
35(c)(3)(i) In General
1. Written appraisal--electronic transmission. To satisfy the
requirement that the appraisal be ``written,'' a creditor may obtain the
appraisal in paper form or via electronic transmission.
35(c)(3)(ii) Safe Harbor.
1. Safe harbor. A creditor that satisfies the safe harbor conditions
in Sec. 1026.35(c)(3)(ii)(A) through (D) complies with the appraisal
requirements of Sec. 1026.35(c)(3)(i). A creditor that does not satisfy
the safe harbor conditions in Sec. 1026.35(c)(3)(ii)(A) through (D)
does not necessarily violate the appraisal requirements of Sec.
1026.35(c)(3)(i).
2. Appraiser's certification. For purposes of Sec.
1026.35(c)(3)(ii), the appraiser's certification refers to the
certification specified in item 9 of appendix N. See also comment
35(c)(1)(i)-2.
Paragraph 35(c)(3)(ii)(C)
1. Confirming elements in the appraisal. To confirm that the
elements in appendix N to this part are included in the written
appraisal, a creditor need not look beyond the face of the written
appraisal and the appraiser's certification.
[[Page 672]]
35(c)(4) Additional Appraisal for Certain Higher-Priced Mortgage Loans
1. Acquisition. For purposes of Sec. 1026.35(c)(4), the terms
``acquisition'' and ``acquire'' refer to the acquisition of legal title
to the property pursuant to applicable State law, including by purchase.
35(c)(4)(i) In General
1. Appraisal from a previous transaction. An appraisal that was
previously obtained in connection with the seller's acquisition or the
financing of the seller's acquisition of the property does not satisfy
the requirements to obtain two written appraisals under Sec.
1026.35(c)(4)(i).
2. 90-day, 180-day calculation. The time periods described in Sec.
1026.35(c)(4)(i)(A) and (B) are calculated by counting the day after the
date on which the seller acquired the property, up to and including the
date of the consumer's agreement to acquire the property that secures
the transaction. For example, assume that the creditor determines that
date of the consumer's acquisition agreement is October 15, 2012, and
that the seller acquired the property on April 17, 2012. The first day
to be counted in the 180-day calculation would be April 18, 2012, and
the last day would be October 15, 2012. In this case, the number of days
from April 17 would be 181, so an additional appraisal is not required.
3. Date seller acquired the property. For purposes of Sec.
1026.35(c)(4)(i)(A) and (B), the date on which the seller acquired the
property is the date on which the seller became the legal owner of the
property pursuant to applicable State law.
4. Date of the consumer's agreement to acquire the property. For the
date of the consumer's agreement to acquire the property under Sec.
1026.35(c)(4)(i)(A) and (B), the creditor should use the date on which
the consumer and the seller signed the agreement provided to the
creditor by the consumer. The date on which the consumer and the seller
signed the agreement might not be the date on which the consumer became
contractually obligated under State law to acquire the property. For
purposes of Sec. 1026.35(c)(4)(i)(A) and (B), a creditor is not
obligated to determine whether and to what extent the agreement is
legally binding on both parties. If the dates on which the consumer and
the seller signed the agreement differ, the creditor should use the
later of the two dates.
5. Price at which the seller acquired the property. The price at
which the seller acquired the property refers to the amount paid by the
seller to acquire the property. The price at which the seller acquired
the property does not include the cost of financing the property.
6. Price the consumer is obligated to pay to acquire the property.
The price the consumer is obligated to pay to acquire the property is
the price indicated on the consumer's agreement with the seller to
acquire the property. The price the consumer is obligated to pay to
acquire the property from the seller does not include the cost of
financing the property. For purposes of Sec. 1026.35(c)(4)(i)(A) and
(B), a creditor is not obligated to determine whether and to what extent
the agreement is legally binding on both parties. See also comment
35(c)(4)(i)-4.
35(c)(4)(ii) Different Certified or Licensed Appraisers
1. Independent appraisers. The requirements that a creditor obtain
two separate appraisals under Sec. 1026.35(c)(4)(i), and that each
appraisal be conducted by a different licensed or certified appraiser
under Sec. 1026.35(c)(4)(ii), indicate that the two appraisals must be
conducted independently of each other. If the two certified or licensed
appraisers are affiliated, such as by being employed by the same
appraisal firm, then whether they have conducted the appraisal
independently of each other must be determined based on the facts and
circumstances of the particular case known to the creditor.
35(c)(4)(iii) Relationship to General Appraisal Requirements
1. Safe harbor. When a creditor is required to obtain an additional
appraisal under Sec. 1026(c)(4)(i), the creditor must comply with the
requirements of both Sec. 1026.35(c)(3)(i) and Sec. 1026.35(c)(4)(ii)
through (v) for that appraisal. The creditor complies with the
requirements of Sec. 1026.35(c)(3)(i) for the additional appraisal if
the creditor meets the safe harbor conditions in Sec. 1026.35(c)(3)(ii)
for that appraisal.
35(c)(4)(iv) Required Analysis in the Additional Appraisal
1. Determining acquisition dates and prices used in the analysis of
the additional appraisal. For guidance on identifying the date on which
the seller acquired the property, see comment 35(c)(4)(i)-3. For
guidance on identifying the date of the consumer's agreement to acquire
the property, see comment 35(c)(4)(i)-4. For guidance on identifying the
price at which the seller acquired the property, see comment
35(c)(4)(i)-5. For guidance on identifying the price the consumer is
obligated to pay to acquire the property, see comment 35(c)(4)(i)-6.
35(c)(4)(v) No Charge for Additional Appraisal
1. Fees and mark-ups. The creditor is prohibited from charging the
consumer for the performance of one of the two appraisals required under
Sec. 1026.35(c)(4)(i), including by imposing a fee specifically for
that appraisal or by marking up the interest rate or any
[[Page 673]]
other fees payable by the consumer in connection with the higher-priced
mortgage loan.
35(c)(4)(vi) Creditor's Determination of Prior Sale Date and Price
35(c)(4)(vi)(A) In General
1. Estimated sales price. If a written source document describes the
seller's acquisition price in a manner that indicates that the price
described is an estimated or assumed amount and not the actual price,
the creditor should look at an alternative document to satisfy the
reasonable diligence standard in determining the price at which the
seller acquired the property.
2. Reasonable diligence--oral statements insufficient. Reliance on
oral statements of interested parties, such as the consumer, seller, or
mortgage broker, does not constitute reasonable diligence under Sec.
1026.35(c)(4)(vi)(A).
3. Lack of information and conflicting information--two appraisals
required. If a creditor is unable to demonstrate that the requirement to
obtain two appraisals under Sec. 1026.35(c)(4)(i) does not apply, the
creditor must obtain two written appraisals before extending a higher-
priced mortgage loan subject to the requirements of Sec. 1026.35(c).
See also comment 35(c)(4)(vi)(B)-1. For example:
i. Assume a creditor orders and reviews the results of a title
search, which shows that a prior sale occurred between 91 and 180 days
ago, but not the price paid in that sale. Thus, based on the title
search, the creditor would not be able to determine whether the price
the consumer is obligated to pay under the consumer's acquisition
agreement is more than 20 percent higher than the seller's acquisition
price, pursuant to Sec. 1026.35(c)(4)(i)(B). Before extending a higher-
priced mortgage loan subject to the appraisal requirements of Sec.
1026.35(c), the creditor must either: (1) Perform additional diligence
to ascertain the seller's acquisition price and, based on this
information, determine whether two written appraisals are required; or
(2) obtain two written appraisals in compliance with Sec.
1026.35(c)(4). See also comment 35(c)(4)(vi)(B)-1.
ii. Assume a creditor reviews the results of a title search
indicating that the last recorded purchase was more than 180 days before
the consumer's agreement to acquire the property. Assume also that the
creditor subsequently receives a written appraisal indicating that the
seller acquired the property between 91 and 180 days before the
consumer's agreement to acquire the property. In this case, unless one
of these sources is clearly wrong on its face, the creditor would not be
able to determine whether the seller acquired the property within 180
days of the date of the consumer's agreement to acquire the property
from the seller, pursuant to Sec. 1026.35(c)(4)(i)(B). Before extending
a higher-priced mortgage loan subject to the appraisal requirements of
Sec. 1026.35(c), the creditor must either: perform additional diligence
to ascertain the seller's acquisition date and, based on this
information, determine whether two written appraisals are required; or
obtain two written appraisals in compliance with Sec. 1026.35(c)(4).
See also comment 35(c)(4)(vi)(B)-1.
35(c)(4)(vi)(B) Inability To Determine Prior Sales Date or Price--
Modified Requirements for Additional Appraisal
1. Required analysis. In general, the additional appraisal required
under Sec. 1026.35(c)(4)(i) should include an analysis of the factors
listed in Sec. 1026.35(c)(4)(iv)(A) through (C). However, if, following
reasonable diligence, a creditor cannot determine whether the conditions
in Sec. 1026.35(c)(4)(i)(A) or (B) are present due to a lack of
information or conflicting information, the required additional
appraisal must include the analyses required under Sec.
1026.35(c)(4)(iv)(A) through (C) only to the extent that the information
necessary to perform the analyses is known. For example, assume that a
creditor is able, following reasonable diligence, to determine that the
date on which the seller acquired the property occurred between 91 and
180 days prior to the date of the consumer's agreement to acquire the
property. However, the creditor is unable, following reasonable
diligence, to determine the price at which the seller acquired the
property. In this case, the creditor is required to obtain an additional
written appraisal that includes an analysis under Sec.
1026.35(c)(4)(iv)(B) and (c)(4)(iv)(C) of the changes in market
conditions and any improvements made to the property between the date
the seller acquired the property and the date of the consumer's
agreement to acquire the property. However, the creditor is not required
to obtain an additional written appraisal that includes analysis under
Sec. 1026.35(c)(4)(iv)(A) of the difference between the price at which
the seller acquired the property and the price that the consumer is
obligated to pay to acquire the property.
35(c)(4)(vii) Exemptions From the Additional Appraisal Requirement
Paragraph 35(c)(4)(vii)(C)
1. Non-profit entity. For purposes of Sec. 1026.35(c)(4)(vii)(C), a
``non-profit entity'' is a person with a tax exemption ruling or
determination letter from the Internal Revenue Service under section
501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)).
[[Page 674]]
Paragraph 35(c)(4)(vii)(H)
1. Bureau table of rural counties. The Bureau publishes on its Web
site a table of rural counties under Sec. 1026.35(c)(4)(vii)(H) for
each calendar year by the end of that calendar year. See comment
35(b)(2)(iv)-1. A property securing an HPML subject to Sec. 1026.35(c)
is in a rural county under Sec. 1026.35(c)(4)(vii)(H) if the county in
which the property is located is on the table of rural counties most
recently published by the Bureau. For example, for a transaction
occurring in 2015, assume that the Bureau most recently published a
table of rural counties at the end of 2014. The property securing the
transaction would be located in a rural county for purposes of Sec.
1026.35(c)(4)(vii)(H) if the county is on the table of rural counties
published by the Bureau at the end of 2014.
35(c)(5) Required Disclosure
35(c)(5)(i) In General
1. Multiple applicants. When two or more consumers apply for a loan
subject to this section, the creditor is required to give the disclosure
to only one of the consumers.
2. Appraisal independence requirements not affected. Nothing in the
text of the consumer notice required by Sec. 1026.35(c)(5)(i) should be
construed to affect, modify, limit, or supersede the operation of any
legal, regulatory, or other requirements or standards relating to
independence in the conduct of appraisers or restrictions on the use of
borrower-ordered appraisals by creditors.
35(c)(6) Copy of Appraisals
35(c)(6)(i) In General
1. Multiple applicants. When two or more consumers apply for a loan
subject to this section, the creditor is required to give the copy of
each required appraisal to only one of the consumers.
35(c)(6)(ii) Timing
1. ``Provide.'' For purposes of the requirement to provide a copy of
the appraisal within a specified time under Sec. 1026.35(c)(6)(ii),
``provide'' means ``deliver.'' Delivery occurs three business days after
mailing or delivering the copies to the last-known address of the
applicant, or when evidence indicates actual receipt by the applicant
(which, in the case of electronic receipt, must be based upon consent
that complies with the E-Sign Act), whichever is earlier.
2. No waiver. Regulation B, 12 CFR 1002.14(a)(1), allowing the
consumer to waive the requirement that the appraisal copy be provided
three business days before consummation, does not apply to higher-priced
mortgage loans subject to Sec. 1026.35(c). A consumer of a higher-
priced mortgage loan subject to Sec. 1026.35(c) may not waive the
timing requirement to receive a copy of the appraisal under Sec.
1026.35(c)(6)(i).
35(c)(6)(iv) No Charge for Copy Of Appraisal
1. Fees and mark-ups. The creditor is prohibited from charging the
consumer for any copy of an appraisal required to be provided under
Sec. 1026.35(c)(6)(i), including by imposing a fee specifically for a
required copy of an appraisal or by marking up the interest rate or any
other fees payable by the consumer in connection with the higher-priced
mortgage loan.
35(e) Rules for Higher-Priced Mortgage Loans
Paragraph 35(e)(2)(ii)(C)
1. Payment change. Section 1026.35(e)(2) provides that a loan
subject to this section may not have a penalty described by Sec.
1026.32(d)(6) unless certain conditions are met. Section
1026.35(e)(2)(ii)(C) lists as a condition that the amount of the
periodic payment of principal or interest or both may not change during
the four-year period following consummation. For examples showing
whether a prepayment penalty is permitted or prohibited in connection
with particular payment changes, see comment 32(d)(7)(iv)-1. Those
examples, however, include a condition that Sec. 1026.35(e)(2) does not
include: The condition that, at consummation, the consumer's total
monthly debt payments may not exceed 50 percent of the consumer's
monthly gross income. For guidance about circumstances in which payment
changes are not considered payment changes for purposes of this section,
see comment 32(d)(7)(iv)-2.
2. Negative amortization. Section 1026.32(d)(2) provides that a loan
described in Sec. 1026.32(a) may not have a payment schedule with
regular periodic payments that cause the principal balance to increase.
Therefore, the commentary to Sec. 1026.32(d)(7)(iv) does not include
examples of payment changes in connection with negative amortization.
The following examples show whether, under Sec. 1026.35(e)(2),
prepayment penalties are permitted or prohibited in connection with
particular payment changes, when a loan agreement permits negative
amortization:
i. Initial payments for a variable-rate transaction consummated on
January 1, 2010, are $1,000 per month and the loan agreement permits
negative amortization to occur. Under the loan agreement, the first date
that a scheduled payment in a different amount may be due is January 1,
2014, and the creditor does not have the right to change scheduled
payments prior to that date even if negative amortization occurs. A
prepayment penalty is permitted with this mortgage transaction provided
that the other Sec. 1026.35(e)(2) conditions are met, that is: Provided
that the prepayment penalty is
[[Page 675]]
permitted by other applicable law, the penalty expires on or before
December 31, 2011, and the penalty will not apply if the source of the
prepayment funds is a refinancing by the creditor or its affiliate.
ii. Initial payments for a variable-rate transaction consummated on
January 1, 2010 are $1,000 per month and the loan agreement permits
negative amortization to occur. Under the loan agreement, the first date
that a scheduled payment in a different amount may be due is January 1,
2014, but the creditor has the right to change scheduled payments prior
to that date if negative amortization occurs. A prepayment penalty is
prohibited with this mortgage transaction because the payment may change
within the four-year period following consummation.
Section 1026.36--Prohibited Acts or Practices and Certain Requirements
for Credit Secured by a Dwelling
36(a) Definitions
1. Meaning of loan originator. i. General. A. Section 1026.36(a)
defines the set of activities or services any one of which, if done for
or in the expectation of compensation or gain, makes the person doing
such activities or performing such services a loan originator, unless
otherwise excluded. The scope of activities covered by the term loan
originator includes:
1. Referring a consumer to any person who participates in the
origination process as a loan originator. Referring is an activity
included under each of the activities of offering, arranging, or
assisting a consumer in obtaining or applying to obtain an extension of
credit. Referring includes any oral or written action directed to a
consumer that can affirmatively influence the consumer to select a
particular loan originator or creditor to obtain an extension of credit
when the consumer will pay for such credit. See comment 36(a)-4 with
respect to certain activities that do not constitute referring.
2. Arranging a credit transaction, including initially contacting
and orienting the consumer to a particular loan originator's or
creditor's origination process or particular credit terms that are or
may be available to that consumer selected based on the consumer's
financial characteristics, assisting the consumer to apply for credit,
taking an application, offering particular credit terms to the consumer
selected based on the consumer's financial characteristics, negotiating
credit terms, or otherwise obtaining or making an extension of credit.
3. Assisting a consumer in obtaining or applying for consumer credit
by advising on particular credit terms that are or may be available to
that consumer based on the consumer's financial characteristics, filling
out an application form, preparing application packages (such as a
credit application or pre-approval application or supporting
documentation), or collecting application and supporting information on
behalf of the consumer to submit to a loan originator or creditor. A
person who, acting on behalf of a loan originator or creditor, collects
information or verifies information provided by the consumer, such as by
asking the consumer for documentation to support the information the
consumer provided or for the consumer's authorization to obtain
supporting documents from third parties, is not collecting information
on behalf of the consumer. See also comment 36(a)-4.i through .iv with
respect to application-related administrative and clerical tasks and
comment 36(a)-1.v with respect to third-party advisors.
4. Presenting particular credit terms for the consumer's
consideration that are selected based on the consumer's financial
characteristics, or communicating with a consumer for the purpose of
reaching a mutual understanding about prospective credit terms.
5. Advertising or communicating to the public that one can or will
perform any loan origination services. Advertising the services of a
third party that engages or intends to engage in loan origination
activities does not make the advertiser a loan originator.
B. The term ``loan originator'' includes employees, agents, and
contractors of a creditor as well as employees, agents, and contractors
of a mortgage broker that satisfy this definition.
C. The term ``loan originator'' includes any creditor that satisfies
the definition of loan originator but makes use of ``table funding'' by
a third party. See comment 36(a)-1.ii discussing table funding. Solely
for purposes of Sec. 1026.36(f) and (g) concerning loan originator
qualifications, the term loan originator includes any creditor that
satisfies the definition of loan originator, even if the creditor does
not make use of table funding. Such a person is a creditor, not a loan
originator, for general purposes of this part, including the provisions
of Sec. 1026.36 other than Sec. 1026.36(f) and (g).
D. A ``loan originator organization'' is a loan originator other
than a natural person. The term includes any legal person or
organization such as a sole proprietorship, trust, partnership, limited
liability partnership, limited partnership, limited liability company,
corporation, bank, thrift, finance company, or credit union. An
``individual loan originator'' is limited to a natural person. (Under
Sec. 1026.2(a)(22), the term ``person'' means a natural person or an
organization.)
E. The term ``loan originator'' does not include consumers who
obtain extensions of consumer credit on their own behalf.
ii. Table funding. Table funding occurs when the creditor does not
provide the funds for the transaction at consummation out of the
creditor's own resources, including, for
[[Page 676]]
example, by drawing on a bona fide warehouse line of credit or out of
deposits held by the creditor. Accordingly, a table-funded transaction
is consummated with the debt obligation initially payable by its terms
to one person, but another person provides the funds for the transaction
at consummation and receives an immediate assignment of the note, loan
contract, or other evidence of the debt obligation. Although Sec.
1026.2(a)(17)(i)(B) provides that a person to whom a debt obligation is
initially payable on its face generally is a creditor, Sec.
1026.36(a)(1) provides that, solely for the purposes of Sec. 1026.36,
such a person is also considered a loan originator. For example, if a
person closes a transaction in its own name but does not fund the
transaction from its own resources and assigns the transaction after
consummation to the person providing the funds, it is considered a
creditor for purposes of Regulation Z and also a loan originator for
purposes of Sec. 1026.36. However, if a person closes in its own name
and finances a consumer credit transaction from the person's own
resources, including drawing on a bona fide warehouse line of credit or
out of deposits held by the person, and does not assign the loan at
closing, the person is a creditor not making use of table funding but is
included in the definition of loan originator for the purposes of Sec.
1026.36(f) and (g) concerning loan originator qualifications.
iii. Servicing. A loan servicer or a loan servicer's employees,
agents, or contractors that otherwise meet the definition of ``loan
originator'' are excluded from the definition when modifying or offering
to modify an existing loan on behalf of the current owner or holder of
the loan (including an assignee or the servicer, if applicable). Other
than Sec. 1026.36(c), Sec. 1026.36 applies to extensions of consumer
credit. Thus, other than Sec. 1026.36(c), Sec. 1026.36 does not apply
if a person renegotiates, modifies, replaces, or subordinates an
existing obligation or its terms, unless the transaction constitutes a
refinancing under Sec. 1026.20(a) or obligates a different consumer on
the existing debt.
iv. Real estate brokerage. The definition of ``loan originator''
does not include a person that performs only real estate brokerage
activities (e.g., does not perform mortgage broker or consumer credit
referral activities or extend consumer credit) if the person is licensed
or registered under applicable State law governing real estate
brokerage, unless such person is paid by a loan originator or a creditor
for a particular consumer credit transaction subject to Sec. 1026.36.
Such a person is not paid by a loan originator or a creditor if the
person is paid by a loan originator or creditor on behalf of a buyer or
seller solely for performing real estate brokerage activities. Such a
person is not paid for a particular consumer credit transaction subject
to Sec. 1026.36 if the person is paid compensation by a loan originator
or creditor, or affiliate of the loan originator or creditor, solely for
performing real estate brokerage activities in connection with a
property owned by that loan originator or creditor.
v. Third-party advisors. The definition of ``loan originator'' does
not include bona fide third-party advisors such as accountants,
attorneys, registered financial advisors, housing counselors, or others
who do not receive compensation for engaging in loan origination
activities. Advisory activity not constituting loan originator activity
would include, for example, licensed accountants advising clients on tax
implications of credit terms, registered financial advisors advising
clients on potential effects of credit terms on client finances, HUD-
approved housing counselors assisting consumers with understanding the
credit origination process and various credit terms or collecting and
organizing documents to support a credit application, or a licensed
attorney assisting clients with consummating a real property transaction
or with divorce, trust, or estate planning matters. Such a person,
however, who advises a consumer on credit terms offered by either the
person or the person's employer, or who receives compensation or other
monetary gain, directly or indirectly, from the loan originator or
creditor on whose credit offer the person advises a consumer, generally
would be a loan originator. A referral by such a person does not make
the person a loan originator, however, where the person neither receives
nor expects any compensation from a loan originator or creditor for
referring the consumer. HUD-approved housing counselors who simply
assist a consumer in obtaining or applying to obtain consumer credit
from a loan originator or creditor are not loan originators if the
compensation is not contingent on referrals or on engaging in additional
loan origination activities and either of two alternative conditions is
satisfied: The first alternative condition is that the compensation is
expressly permitted by applicable local, State, or Federal law that
requires counseling and the counseling performed complies with such law
(for example, Sec. 1026.34(a)(5) and Sec. 1026.36(k)). The second
alternative condition is that the compensation is a fixed sum received
from a creditor, loan originator, or the affiliate of a loan originator
or a creditor as a result of agreements between creditors or loan
originators and local, State, or Federal agencies. However, HUD-approved
housing counselors are loan originators if, for example, they receive
compensation that is contingent on referrals or on engaging in loan
originator activity other than assisting a consumer in obtaining or
applying to obtain consumer credit from a loan originator or creditor.
2. Meaning of mortgage broker. For purposes of Sec. 1026.36, with
respect to a particular
[[Page 677]]
transaction, the term ``mortgage broker'' refers to a loan originator
who is not an employee of the creditor. Accordingly, the term ``mortgage
broker'' includes companies that engage in the activities described in
Sec. 1026.36(a) and also includes employees of such companies that
engage in these activities. Section 1026.36(d) prohibits certain
payments to a loan originator. These prohibitions apply to payments made
to all loan originators, including payments made to mortgage brokers,
and payments made by a company acting as a mortgage broker to its
employees who are loan originators.
3. Meaning of creditor. For purposes of Sec. 1026.36(d) and (e), a
creditor means a creditor that is not deemed to be a loan originator on
the transaction under this section. Thus, a person that closes a loan in
its own name (but another person provides the funds for the transaction
at consummation and receives an immediate assignment of the note, loan
contract, or other evidence of the debt obligation) is deemed a loan
originator, not a creditor, for purposes of Sec. 1026.36. However, that
person is still a creditor for all other purposes of Regulation Z.
4. Managers, administrative and clerical staff. For purposes of
Sec. 1026.36, managers, administrative and clerical staff, and similar
individuals who are employed by (or contractor or agent of) a creditor
or loan originator organization and take an application, offer, arrange,
assist a consumer in obtaining or applying to obtain, negotiate, or
otherwise obtain or make a particular extension of credit for another
person are loan originators. The following examples describe activities
that, in the absence of any other activities, do not render a manager,
administrative or clerical staff member, or similar employee a loan
originator:
i. Application-related administrative and clerical tasks. The
definition of loan originator does not include a loan originator's or
creditor's employee who provides a credit application form from the
entity for which the person works to the consumer for the consumer to
complete or, without assisting the consumer in completing the credit
application, processing or analyzing the information, or discussing
particular credit terms that are or may be available from a creditor or
loan originator to that consumer selected based on the consumer's
financial characteristics, delivers the credit application from a
consumer to a loan originator or creditor. A person does not assist the
consumer in completing the application if the person explains to the
consumer filling out the application the contents of the application or
where particular consumer information is to be provided, or generally
describes the credit application process to a consumer without
discussing particular credit terms that are or may be available from a
creditor or loan originator to that consumer selected based on the
consumer's financial characteristics.
ii. Responding to consumer inquiries and providing general
information. The definition of loan originator does not include persons
who:
A. Provide general explanations, information, or descriptions in
response to consumer queries, such as explaining credit terminology or
lending policies or who confirm written offer terms already transmitted
to the consumer;
B. As employees of a creditor or loan originator, provide loan
originator or creditor contact information of the loan originator or
creditor entity for which he or she works, or of a person who works for
that the same entity to a consumer, provided that the person does not
discuss particular credit terms that are or may be available from a
creditor or loan originator to that consumer selected based on the
consumer's financial characteristics and does not direct the consumer,
based on his or her assessment of the consumer's financial
characteristics, to a particular loan originator or particular creditor
seeking to originate credit transactions to consumers with those
financial characteristics;
C. Describe other product-related services (for example, persons who
describe optional monthly payment methods via telephone or via automatic
account withdrawals, the availability and features of online account
access, the availability of 24-hour customer support, or free mobile
applications to access account information); or
D. Explain or describe the steps that a consumer would need to take
to obtain an offer of credit, including providing general guidance on
qualifications or criteria that would need to be met that is not
specific to that consumer's circumstances.
iii. Loan processing. The definition of loan originator does not
include persons who, acting on behalf of a loan originator or a
creditor:
A. Compile and assemble credit application packages and supporting
documentation;
B. Verify information provided by the consumer in a credit
application such as by asking the consumer for supporting documentation
or the consumer's authorization for the person to obtain supporting
documentation from other persons;
C. Coordinate consummation of the credit transaction or other
aspects of the credit transaction process, including by communicating
with a consumer about process deadlines and documents needed at
consummation, provided that any communication that includes a discussion
about credit terms available from a creditor to that consumer selected
based on the consumer's financial characteristics only confirms credit
terms already agreed to by the consumer;
[[Page 678]]
D. Provide a consumer with information unrelated to credit terms,
such as the best days of the month for scheduling consummation; or
E. Communicate on behalf of a loan originator that a written credit
offer has been sent to a consumer without providing any details of that
offer.
iv. Underwriting, credit approval, and credit pricing. The
definition of loan originator does not include persons who:
A. Receive and evaluate a consumer's information to make
underwriting decisions on whether a consumer qualifies for an extension
of credit and communicate decisions to a loan originator or creditor,
provided that only a loan originator communicates such underwriting
decisions to the consumer;
B. Approve particular credit terms or set particular credit terms
available from a creditor to that consumer selected based on the
consumer's financial characteristics in offer or counter-offer
situations, provided that only a loan originator communicates to or with
the consumer regarding these credit terms, an offer, or provides or
engages in negotiation, a counter-offer, or approval conditions; or
C. Establish credit pricing that the creditor offers generally to
the public, via advertisements or other marketing or via other persons
that are loan originators.
v. Producing managers. Managers that work for creditors or loan
originator organizations sometimes engage themselves in loan origination
activities, as set forth in the definition of loan originator in Sec.
1026.36(a)(1)(i) (such managers are sometimes referred to as ``producing
managers''). The definition of loan originator includes persons,
including managers, who are employed by a creditor or loan originator
organization and take an application, offer, arrange, assist a consumer
with obtaining or applying to obtain, negotiate, or otherwise obtain or
make a particular extension of credit for another person, even if such
persons are also employed by the creditor or loan originator
organization to perform duties that are not loan origination activities.
Thus, such producing managers are loan originators.
5. Compensation. i. General. For purposes of Sec. 1026.36,
compensation is defined in Sec. 1026.36(a)(3) as salaries, commissions,
and any financial or similar incentive. For example, the term
``compensation'' includes:
A. An annual or other periodic bonus; or
B. Awards of merchandise, services, trips, or similar prizes.
ii. Name of fee. Compensation includes amounts the loan originator
retains and is not dependent on the label or name of any fee imposed in
connection with the transaction. For example, if a loan originator
imposes a ``processing fee'' in connection with the transaction and
retains such fee, it is compensation for purposes of Sec. 1026.36,
including Sec. 1026.36(d) and (e), whether the originator expends the
time to process the consumer's application or uses the fee for other
expenses, such as overhead.
iii. Amounts for third-party charges. Compensation does not include
amounts the loan originator receives as payment for bona fide and
reasonable charges, such as credit reports, where those amounts are
passed on to a third party that is not the creditor, its affiliate, or
the affiliate of the loan originator. See comment 36(a)-5.v.
iv. Amounts for charges for services that are not loan origination
activities.
1. A payment received by a loan originator organization for bona
fide and reasonable charges for services it performs that are not loan
origination activities;
2. A payment received by an affiliate of a loan originator
organization for bona fide and reasonable charges for services it
performs that are not loan origination activities; or
3. A payment received by a loan originator organization for bona
fide and reasonable charges for services that are not loan origination
activities where those amounts are not retained by the loan originator
but are paid to the creditor, its affiliate, or the affiliate of the
loan originator organization. See comment 36(a)-5.v.
B. Compensation includes any salaries, commissions, and any
financial or similar incentive to an individual loan originator,
regardless of whether it is labeled as payment for services that are not
loan origination activities.
C. Loan origination activities for purposes of this comment means
activities described in Sec. 1026.36(a)(1)(i) (e.g., taking an
application, offering, arranging, negotiating, or otherwise obtaining an
extension of consumer credit for another person) that would make a
person performing those activities for compensation a loan originator as
defined in Sec. 1026.36(a)(1)(i).
v. Amounts that exceed the actual charge for a service. In some
cases, amounts received by the loan originator organization for payment
for third-party charges described in comment 36(a)-5.iii or payment for
services to the creditor, its affiliates, or the affiliates of the loan
originator organization described in comment 36(a)-5.iv.A.3 may exceed
the actual charge because, for example, the loan originator organization
cannot determine with accuracy what the actual charge will be when it is
imposed and instead uses average charge pricing (in accordance with the
Real Estate Settlement Procedures Act). In such a case, the difference
retained by the loan originator organization is not compensation if the
charge imposed on the consumer or collected from a person other than the
consumer was bona fide and reasonable and also complies with State and
other applicable law. On the other hand, if the loan originator
[[Page 679]]
organization marks up the charge (a practice known as ``upcharging''),
and the originator retains the difference between the actual charge and
the marked-up charge, the amount retained is compensation for purposes
of Sec. 1026.36, including Sec. 1026.36(d) and (e). For example:
A. Assume a loan originator organization receives compensation
directly from either a consumer or a creditor. Further assume the loan
originator organization uses average charge pricing in accordance with
the Real Estate Settlement Procedures Act and, based on its past average
cost for credit reports, charges the consumer $25 for a credit report
provided by a third party. Under the loan originator organization's
agreement with the consumer reporting agency, the cost of the credit
report is to be paid in a month-end bill and will vary between $15 and
$35 depending on how many credit reports the originator obtains that
month. Assume the $25 for the credit report is paid by the consumer or
is paid by the creditor with proceeds from a rebate. At the end of the
month, the cost for the credit report is determined to be $15 for this
consumer's transaction, based on the loan originator organization's
credit report volume that month. In this case, the $10 difference
between the $25 credit report fee imposed on the consumer and the actual
$15 cost for the credit report is not compensation for purposes of Sec.
1026.36, even though the $10 is retained by the loan originator
organization.
B. Using the same example as in comment 36(a)-5.v.A, the $10
difference would be compensation for purposes of Sec. 1026.36 if the
price for a credit report varies between $10 and $15.
vi. Returns on equity interests and dividends on equity holdings.
The term ``compensation'' for purposes of Sec. 1026.36(d) and (e) also
includes, for example, awards of stock, stock options and equity
interests. Thus, the awarding of stock, stock options, or equity
interests to loan originators is subject to the restrictions in Sec.
1026.36(d) and (e). For example, a person may not award additional stock
or a preferable type of equity interest to a loan originator based on
the terms of a consumer credit transaction subject to Sec. 1026.36
originated by that loan originator. However, bona fide returns or
dividends paid on stock or other equity holdings, including those paid
to owners or shareholders of a loan originator organization who own such
stock or equity interests, are not compensation for purposes of Sec.
1026.36(d) and (e). Bona fide returns or dividends are those returns and
dividends that are paid pursuant to documented ownership or equity
interests and that are not functionally equivalent to compensation.
Ownership and equity interests must be bona fide. Bona fide ownership
and equity interests are allocated according to a loan originator's
respective capital contribution where the allocation is not a mere
subterfuge for the payment of compensation based on terms of a
transaction. Ownership and equity interests also are not bona fide if
the formation or maintenance of the business from which returns or
dividends are paid is a mere subterfuge for the payment of compensation
based on the terms of a transaction. For example, assume that three
individual loan originators form a loan originator organization that is
a limited liability company (LLC). The three individual loan originators
are members of the LLC, and the LLC agreement governing the loan
originator organization's structure calls for regular distributions
based on the members' respective equity interests. If the members'
respective equity interests are allocated based on the members' terms of
transactions, rather than according to their respective capital
contributions, then distributions based on such equity interests are not
bona fide and, thus, are compensation for purposes of Sec. 1026.36(d)
and (e).
36(a)(1)(i)(B) Employee of a retailer of manufactured homes.
1. The definition of loan originator does not include an employee of
a manufactured home retailer that ``assists'' a consumer in obtaining or
applying for consumer credit as defined in comment 36(a)-1.i.A.3,
provided the employee does not advise the consumer on specific credit
terms, or otherwise engage in loan originator activity as defined in
Sec. 1026.36(a)(1). The following examples describe activities that, in
the absence of other activities, do not define a manufactured home
retailer employee as a loan originator:
i. Generally describing the credit application process to a consumer
without advising on credit terms available from a creditor.
ii. Preparing residential mortgage loan packages, which means
compiling and processing loan application materials and supporting
documentation, and providing general application instructions to
consumers so consumers can complete an application, without interacting
or communicating with the consumer regarding transaction terms, but not
filling out a consumer's application, inputting the information into an
online application or other automated system, or taking information from
the consumer over the phone to complete the application.
iii. Collecting information on behalf of the consumer with regard to
a residential mortgage loan. Collecting information ``on behalf of the
consumer'' would include gathering information or supporting
documentation from third parties on behalf of the consumer to provide to
the consumer, for the consumer then to provide in the application or for
the consumer to submit to the loan originator or creditor.
iv. Providing or making available general information about
creditors or loan originators that may offer financing for manufactured
homes in the consumer's general area,
[[Page 680]]
when doing so does not otherwise amount to ``referring'' as defined in
comment 36(a)-1.i.A.1. This includes making available, in a neutral
manner, general brochures or information about the different creditors
or loan originators that may offer financing to a consumer, but does not
include recommending a particular creditor or loan originator or
otherwise influencing the consumer's decision.
36(a)(4) Seller Financers; Three Properties
1. Reasonable ability to repay safe harbors. A person in good faith
determines that the consumer to whom the person extends seller financing
has a reasonable ability to repay the obligation if the person complies
with Sec. 1026.43(c) of this part or complies with the alternative
criteria discussed in this comment. If the consumer intends to make
payments from income, the person considers evidence of the consumer's
current or reasonably expected income. If the consumer intends to make
payments with income from employment, the person considers the
consumer's earnings, which may be reflected in payroll statements or
earnings statements, IRS Form W-2s or similar IRS forms used for
reporting wages or tax withholding, or military Leave and Earnings
Statements. If the consumer intends to make payments from other income,
the person considers the consumer's income from sources such as a
Federal, State, or local government agency providing benefits and
entitlements. If the consumer intends to make payments from income
earned from assets, the person considers the relevant assets, such as
funds held in accounts with financial institutions, equity ownership
interests, or rental property. However, the value of the dwelling that
secures the financing does not constitute evidence of the consumer's
ability to repay. In considering these and other potential sources of
income to determine in good faith that the consumer has a reasonable
ability to repay the obligation, the person making that determination
may rely on copies of tax returns the consumer filed with the Internal
Revenue Service or a State taxing authority.
2. Adjustable rate safe harbors. i. Annual rate increase. An annual
rate increase of two percentage points or less is reasonable.
ii. Lifetime increase. A lifetime limitation of an increase of six
percentage points or less, subject to a minimum floor of the person's
choosing and maximum ceiling that does not exceed the usury limit
applicable to the transaction, is reasonable.
36(a)(5) Seller Financers; One Property
1. Adjustable rate safe harbors. For a discussion of reasonable
annual and lifetime interest rate increases, see comment 36(a)(4)-2.
36(b) Scope.
1. Scope of coverage. Section 1026.36(c)(1) and (c)(2) applies to
closed-end consumer credit transactions secured by a consumer's
principal dwelling. Section 1026.36(c)(3) applies to a consumer credit
transaction, including home equity lines of credit under Sec. 1026.40,
secured by a consumer's dwelling. Paragraphs (h) and (i) of Sec.
1026.36 apply to home equity lines of credit under Sec. 1026.40 secured
by a consumer's principal dwelling. Paragraphs (d), (e), (f), (g), (h),
and (i) of Sec. 1026.36 apply to closed-end consumer credit
transactions secured by a dwelling. Closed-end consumer credit
transactions include transactions secured by first or subordinate liens,
and reverse mortgages that are not home equity lines of credit under
Sec. 1026.40. See Sec. 1026.36(b) for additional restrictions on the
scope of Sec. 1026.36, and Sec. Sec. 1026.1(c) and 1026.3(a) and
corresponding commentary for further discussion of extensions of credit
subject to Regulation Z.
36(c) Servicing Practices
Paragraph 36(c)(1)(i)
1. Crediting of payments. Under Sec. 1026.36(c)(1)(i), a mortgage
servicer must credit a payment to a consumer's loan account as of the
date of receipt. This does not require that a mortgage servicer post the
payment to the consumer's loan account on a particular date; the
servicer is only required to credit the payment as of the date of
receipt. Accordingly, a servicer that receives a payment on or before
its due date (or within any grace period), and does not enter the
payment on its books or in its system until after the payment's due date
(or expiration of any grace period), does not violate this rule as long
as the entry does not result in the imposition of a late charge,
additional interest, or similar penalty to the consumer, or in the
reporting of negative information to a consumer reporting agency.
2. Method of crediting periodic payments. The method by which
periodic payments shall be credited is based on the legal obligation
between the creditor and consumer, subject to applicable law.
3. Date of receipt. The ``date of receipt'' is the date that the
payment instrument or other means of payment reaches the mortgage
servicer. For example, payment by check is received when the mortgage
servicer receives it, not when the funds are collected. If the consumer
elects to have payment made by a third-party payor such as a financial
institution, through a preauthorized payment or telephone bill-payment
arrangement, payment is received when the mortgage servicer receives the
third-party payor's check or other transfer medium, such as an
electronic fund transfer.
4. Temporary loss mitigation programs. If a loan contract has not
been permanently modified but the consumer has agreed to a
[[Page 681]]
temporary loss mitigation program, a periodic payment under Sec.
1026.36(c)(1)(i) is the amount sufficient to cover principal, interest,
and escrow (if applicable) for a given billing cycle under the loan
contract, regardless of the payment due under the temporary loss
mitigation program.
5. Permanent loan modifications. If a loan contract has been
permanently modified, a periodic payment under Sec. 1026.36(c)(1)(i) is
an amount sufficient to cover principal, interest, and escrow (if
applicable) for a given billing cycle under the modified loan contract.
Paragraph 36(c)(1)(ii).
1. Handling of partial payments. If a servicer receives a partial
payment from a consumer, to the extent not prohibited by applicable law
or the legal obligation between the parties, the servicer may take any
of the following actions:
i. Credit the partial payment upon receipt.
ii. Return the partial payment to the consumer.
iii. Hold the payment in a suspense or unapplied funds account. If
the payment is held in a suspense or unapplied funds account, this fact
must be reflected on future periodic statements, in accordance with
Sec. 1026.41(d)(3). When sufficient funds accumulate to cover a
periodic payment, as defined in Sec. 1026.36(c)(1)(i), they must be
treated as a periodic payment received in accordance with Sec.
1026.36(c)(1)(i).
Paragraph 36(c)(1)(iii).
1. Payment requirements. The servicer may specify reasonable
requirements for making payments in writing, such as requiring that
payments be accompanied by the account number or payment coupon; setting
a cut-off hour for payment to be received, or setting different hours
for payment by mail and payments made in person; specifying that only
checks or money orders should be sent by mail; specifying that payment
is to be made in U.S. dollars; or specifying one particular address for
receiving payments, such as a post office box. The servicer may be
prohibited, however, from requiring payment solely by preauthorized
electronic fund transfer. See section 913 of the Electronic Fund
Transfer Act, 15 U.S.C. 1693k.
2. Payment requirements--limitations. Requirements for making
payments must be reasonable; it should not be difficult for most
consumers to make conforming payments. For example, it would be
reasonable to require a cut-off time of 5 p.m. for receipt of a mailed
check at the location specified by the servicer for receipt of such
check.
3. Implied guidelines for payments. In the absence of specified
requirements for making payments, payments may be made at any location
where the servicer conducts business; any time during the servicer's
normal business hours; and by cash, money order, draft, or other similar
instrument in properly negotiable form, or by electronic fund transfer
if the servicer and consumer have so agreed.
Paragraph 36(c)(2).
1. Pyramiding of late fees. The prohibition on pyramiding of late
fees in Sec. 1026.36(c)(2) should be construed consistently with the
``credit practices rule'' of the Federal Trade Commission, 16 CFR 444.4.
Paragraph 36(c)(3).
1. Person acting on behalf of the consumer. For purposes of Sec.
1026.36(c)(3), a person acting on behalf of the consumer may include the
consumer's representative, such as an attorney representing the
individual, a non-profit consumer counseling or similar organization, or
a creditor with which the consumer is refinancing and which requires the
payoff statement to complete the refinancing. A creditor, assignee or
servicer may take reasonable measures to verify the identity of any
person acting on behalf of the consumer and to obtain the consumer's
authorization to release information to any such person before the
``reasonable time'' period begins to run.
2. Payment requirements. The creditor, assignee or servicer may
specify reasonable requirements for making payoff requests, such as
requiring requests to be directed to a mailing address, email address,
or fax number specified by the creditor, assignee or servicer or any
other reasonable requirement or method. If the consumer does not follow
these requirements, a longer timeframe for responding to the request
would be reasonable.
3. Accuracy of payoff statements. Payoff statements must be accurate
when issued.
36(d) Prohibited Payments to Loan Originators
1. Persons covered. Section 1026.36(d) prohibits any person
(including a creditor) from paying compensation to a loan originator in
connection with a covered credit transaction, if the amount of the
payment is based on a term of a transaction. For example, a person that
purchases an extension of credit from the creditor after consummation
may not compensate the loan originator in a manner that violates Sec.
1026.36(d).
2. Mortgage brokers. The payments made by a company acting as a
mortgage broker to its employees who are loan originators are subject to
the section's prohibitions. For example, a mortgage broker may not pay
its employee more for a transaction with a 7 percent interest rate than
for a transaction with a 6 percent interest rate.
36(d)(1) Payments Based on a Term of a Transaction
1. Compensation that is ``based on'' a term of a transaction. i.
Objective facts and circumstances. Whether compensation is ``based on''
a term of a transaction does not require
[[Page 682]]
a comparison of multiple transactions or proof that any person
subjectively intended that there be a relationship between the amount of
the compensation paid and a transaction term. Instead, the determination
is based on the objective facts and circumstances indicating that
compensation would have been different if a transaction term had been
different. Generally, when there is a compensation policy in place and
the objective facts and circumstances indicate the policy was followed,
the determination of whether compensation would have been different if a
transaction term had been different is made by analysis of the policy.
In the absence of a compensation policy, or when a compensation policy
is not followed, the determination may be made based on a comparison of
transactions originated and the amounts of compensation paid.
ii. Single or multiple transactions. The prohibition on payment and
receipt of compensation under Sec. 1026.36(d)(1)(i) encompasses
compensation that directly or indirectly is based on the terms of a
single transaction of a single individual loan originator, the terms of
multiple transactions by that single individual loan originator, or the
terms of multiple transactions by multiple individual loan originators.
Compensation to an individual loan originator that is based upon profits
determined with reference to a mortgage-related business is considered
compensation that is based on the terms of multiple transactions by
multiple individual loan originators. For clarification about the
exceptions permitting compensation based upon profits determined with
reference to mortgage-related business pursuant to either a designated
tax-advantaged plan or a non-deferred profits-based compensation plan,
see comment 36(d)(1)-3. For clarification about ``mortgage-related
business,'' see comments 36(d)(1)-3.v.B and -3.v.E.
A. Assume that a creditor pays a bonus to an individual loan
originator out of a bonus pool established with reference to the
creditor's profits and the profits are determined with reference to the
creditor's revenue from origination of closed-end consumer credit
transactions secured by a dwelling. In such instance, the bonus is
considered compensation that is based on the terms of multiple
transactions by multiple individual loan originators. Therefore, the
bonus is prohibited under Sec. 1026.36(d)(1)(i), unless it is otherwise
permitted under Sec. 1026.36(d)(1)(iv).
B. Assume that an individual loan originator's employment contract
with a creditor guarantees a quarterly bonus in a specified amount
conditioned upon the individual loan originator meeting certain
performance benchmarks (e.g., volume of originations monthly). A bonus
paid following the satisfaction of those contractual conditions is not
directly or indirectly based on the terms of a transaction by an
individual loan originator, the terms of multiple transactions by that
individual loan originator, or the terms of multiple transactions by
multiple individual loan originators under Sec. 1026.36(d)(1)(i) as
clarified by this comment 36(d)(1)-1.ii, because the creditor is
obligated to pay the bonus, in the specified amount, regardless of the
terms of transactions of the individual loan originator or multiple
individual loan originators and the effect of those terms of multiple
transactions on the creditor's profits. Because this type of bonus is
not directly or indirectly based on the terms of multiple transactions
by multiple individual loan originators, as described in Sec.
1026.36(d)(1)(i) (as clarified by this comment 36(d)(1)-1.ii), it is not
subject to the 10-percent total compensation limit described in Sec.
1026.36(d)(1)(iv)(B)(1).
iii. Transaction term defined. A ``term of a transaction'' under
Sec. 1026.36(d)(1)(ii) is any right or obligation of any of the parties
to a credit transaction. A ``credit transaction'' is the operative acts
(e.g., the consumer's purchase of certain goods or services essential to
the transaction) and written and oral agreements that, together, create
the consumer's right to defer payment of debt or to incur debt and defer
its payment. For the purposes of Sec. 1026.36(d)(1)(ii), this
definition includes:
A. The rights and obligations, or part of any rights or obligations,
memorialized in a promissory note or other credit contract, as well as
the security interest created by a mortgage, deed of trust, or other
security instrument, and in any document incorporated by reference in
the note, contract, or security instrument;
B. The payment of any loan originator or creditor fees or charges
for the credit, or for a product or service provided by the loan
originator or creditor related to the extension of that credit, imposed
on the consumer, including any fees or charges financed through the
interest rate; and
C. The payment of any fees or charges imposed on the consumer,
including any fees or charges financed through the interest rate, for
any product or service required to be obtained or performed as a
condition of the extension of credit.
D. The fees and charges described above in paragraphs B and C can
only be a term of a transaction if the fees or charges are required to
be disclosed in the Good Faith Estimate, the HUD-1, or the HUD-1A (and
subsequently in any integrated disclosures promulgated by the Bureau
under TILA section 105(b) (15 U.S.C. 1604(b)) and RESPA section 4 (12
U.S.C. 2603) as amended by sections 1098 and 1100A of the Dodd-Frank
Act).
2. Compensation that is or is not based on a term of a transaction
or a proxy for a term of a transaction. Section 1026.36(d)(1) does not
prohibit compensating a loan originator differently on different
transactions, provided
[[Page 683]]
the difference is not based on a term of a transaction or a proxy for a
term of a transaction. The rule prohibits compensation to a loan
originator for a transaction based on, among other things, that
transaction's interest rate, annual percentage rate, collateral type
(e.g., condominium, cooperative, detached home, or manufactured
housing), or the existence of a prepayment penalty. The rule also
prohibits compensation to a loan originator that is based on any factor
that is a proxy for a term of a transaction. Compensation paid to a loan
originator organization directly by a consumer in a transaction is not
prohibited by Sec. 1026.36(d)(1) simply because that compensation
itself is a term of the transaction. Nonetheless, that compensation may
not be based on any other term of the transaction or a proxy for any
other term of the transaction. In addition, in a transaction where a
loan originator organization is paid compensation directly by a
consumer, compensation paid by the loan originator organization to
individual loan originators is not prohibited by Sec. 1026.36(d)(1)
simply because it is based on the amount of compensation paid directly
by the consumer to the loan originator organization but the compensation
to the individual loan originator may not be based on any other term of
the transaction or proxy for any other term of the transaction.
i. Permissible methods of compensation. Compensation based on the
following factors is not compensation based on a term of a transaction
or a proxy for a term of a transaction:
A. The loan originator's overall dollar volume (i.e., total dollar
amount of credit extended or total number of transactions originated),
delivered to the creditor. See comment 36(d)(1)-9 discussing variations
of compensation based on the amount of credit extended.
B. The long-term performance of the originator's loans.
C. An hourly rate of pay to compensate the originator for the actual
number of hours worked.
D. Whether the consumer is an existing customer of the creditor or a
new customer.
E. A payment that is fixed in advance for every loan the originator
arranges for the creditor (e.g., $600 for every credit transaction
arranged for the creditor, or $1,000 for the first 1,000 credit
transactions arranged and $500 for each additional credit transaction
arranged).
F. The percentage of applications submitted by the loan originator
to the creditor that results in consummated transactions.
G. The quality of the loan originator's loan files (e.g., accuracy
and completeness of the loan documentation) submitted to the creditor.
ii. Proxies for terms of a transaction. If the loan originator's
compensation is based in whole or in part on a factor that is a proxy
for a term of a transaction, then the loan originator's compensation is
based on a term of a transaction. A factor (that is not itself a term of
a transaction) is a proxy for a term of a transaction if the factor
consistently varies with a term or terms of the transaction over a
significant number of transactions, and the loan originator has the
ability, directly or indirectly, to add, drop, or change the factor when
originating the transaction. For example:
A. Assume a creditor pays a loan originator a higher commission for
transactions to be held by the creditor in portfolio than for
transactions sold by the creditor into the secondary market. The
creditor holds in portfolio only extensions of credit that have a fixed
interest rate and a five-year term with a final balloon payment. The
creditor sells into the secondary market all other extensions of credit,
which typically have a higher fixed interest rate and a 30-year term.
Thus, whether an extension of credit is held in portfolio or sold into
the secondary market for this creditor consistently varies with the
interest rate and whether the credit has a five-year term or a 30-year
term (which are terms of the transaction) over a significant number of
transactions. Also, the loan originator has the ability to change the
factor by, for example, advising the consumer to choose an extension of
credit a five-year term. Therefore, under these circumstances, whether
or not an extension of credit will be held in portfolio is a proxy for a
term of a transaction.
B. Assume a loan originator organization pays loan originators
higher commissions for transactions secured by property in State A than
in State B. For this loan originator organization, over a significant
number of transactions, transactions in State B have substantially lower
interest rates than transactions in State A. The loan originator,
however, does not have any ability to influence whether the transaction
is secured by property located in State A or State B. Under these
circumstances, the factor that affects compensation (the location of the
property) is not a proxy for a term of a transaction.
iii. Pooled compensation. Section 1026.36(d)(1) prohibits the
sharing of pooled compensation among loan originators who originate
transactions with different terms and are compensated differently. For
example, assume that Loan Originator A receives a higher commission than
Loan Originator B and that loans originated by Loan Originator A
generally have higher interest rates than loans originated by Loan
Originator B. Under these circumstances, the two loan originators may
not share pooled compensation because each receives compensation based
on the terms of the transactions they collectively make.
[[Page 684]]
3. Interpretation of Sec. 1026.36(d)(1)(iii) and (iv). Subject to
certain restrictions, Sec. 1026.36(d)(1)(iii) and Sec.
1026.36(d)(1)(iv) permit contributions to or benefits under designated
tax-advantaged plans and compensation under a non-deferred profits-based
compensation plan even if the contributions, benefits, or compensation,
respectively, are based on the terms of multiple transactions by
multiple individual loan originators.
i. Designated tax-advantaged plans. Section 1026.36(d)(1)(iii)
permits an individual loan originator to receive, and a person to pay,
compensation in the form of contributions to a defined contribution plan
or benefits under a defined benefit plan provided the plan is a
designated tax-advantaged plan (as defined in Sec. 1026.36(d)(1)(iii)),
even if contributions to or benefits under such plans are directly or
indirectly based on the terms of multiple transactions by multiple
individual loan originators. In the case of a designated tax-advantaged
plan that is a defined contribution plan, Sec. 1026.36(d)(1)(iii) does
not permit the contribution to be directly or indirectly based on the
terms of that individual loan originator's transactions. A defined
contribution plan has the meaning set forth in Internal Revenue Code
section 414(i), 26 U.S.C. 414(i). A defined benefit plan has the meaning
set forth in Internal Revenue Code section 414(j), 26 U.S.C. 414(j).
ii. Non-deferred profits-based compensation plans. As used in Sec.
1026.36(d)(1)(iv), a ``non-deferred profits-based compensation plan'' is
any compensation arrangement where an individual loan originator may be
paid variable, additional compensation based in whole or in part on the
mortgage-related business profits of the person paying the compensation,
any affiliate, or a business unit within the organizational structure of
the person or the affiliate, as applicable (i.e., depending on the level
within the person's or affiliate's organization at which the non-
deferred profits-based compensation plan is established). A non-deferred
profits-based compensation plan does not include a designated tax-
advantaged plan or other forms of deferred compensation that are not
designated tax-advantaged plans, such as those created pursuant to
Internal Revenue Code section 409A, 26 U.S.C. 409A. Thus, if
contributions to or benefits under a designated tax-advantaged plan or
compensation under another form of deferred compensation plan are
determined with reference to the mortgage-related business profits of
the person making the contribution, then the contribution, benefits, or
other compensation, as applicable, are not permitted by Sec.
1026.36(d)(1)(iv) (although, in the case of contributions to or benefits
under a designated tax-advantaged plan, the benefits or contributions
may be permitted by Sec. 1026.36(d)(1)(iii)). Under a non-deferred
profits-based compensation plan, the individual loan originator may, for
example, be paid directly in cash, stock, or other non-deferred
compensation, and the compensation under the non-deferred profits-based
compensation plan may be determined by a fixed formula or may be at the
discretion of the person (e.g., the person may elect not to pay
compensation under a non-deferred profits-based compensation plan in a
given year), provided the compensation is not directly or indirectly
based on the terms of the individual loan originator's transactions. As
used in Sec. 1026.36(d)(1)(iv) and this commentary, non-deferred
profits-based compensation plans include, without limitation, bonus
pools, profits pools, bonus plans, and profit-sharing plans.
Compensation under a non-deferred profits-based compensation plan could
include, without limitation, annual or periodic bonuses, or awards of
merchandise, services, trips, or similar prizes or incentives where the
bonuses, contributions, or awards are determined with reference to the
profits of the person, business unit, or affiliate, as applicable. As
used in Sec. 1026.36(d)(1)(iv) and this commentary, a business unit is
a division, department, or segment within the overall organizational
structure of the person or the person's affiliate that performs discrete
business functions and that the person or the affiliate treats
separately for accounting or other organizational purposes. For example,
a creditor that pays its individual loan originators bonuses at the end
of a calendar year based on the creditor's average net return on assets
for the calendar year is operating a non-deferred profits-based
compensation plan under Sec. 1026.36(d)(1)(iv). A bonus that is paid to
an individual loan originator from a source other than a non-deferred
profits-based compensation plan (or a deferred compensation plan where
the bonus is determined with reference to mortgage-related business
profits), such as a retention bonus budgeted for in advance or a
performance bonus paid out of a bonus pool set aside at the beginning of
the company's annual accounting period as part of the company's
operating budget, does not violate the prohibition on payment of
compensation based on the terms of multiple transactions by multiple
individual loan originators under Sec. 1026.36(d)(1)(i), as clarified
by comment 36(d)(1)-1.ii; therefore, Sec. 1026.36(d)(1)(iv) does not
apply to such bonuses.
iii. Compensation that is not directly or indirectly based on the
terms of multiple transactions by multiple individual loan originators.
The compensation arrangements addressed in Sec. 1026.36(d)(1)(iii) and
(iv) are permitted even if they are directly or indirectly based on the
terms of multiple transactions by multiple individual loan originators.
See comment 36(d)(1)-1 for additional interpretation. If a loan
originator organization's revenues are exclusively derived from
transactions subject to Sec. 1026.36(d) (whether paid by creditors,
consumers, or both) and that
[[Page 685]]
loan originator organization pays its individual loan originators a
bonus under a non-deferred profits-based compensation plan, the bonus is
not directly or indirectly based on the terms of multiple transactions
by multiple individual loan originators if Sec. 1026.36(d)(1)(i) is
otherwise complied with.
iv. Compensation based on terms of an individual loan originator's
transactions. Under both Sec. 1026.36(d)(1)(iii), with regard to
contributions made to a defined contribution plan that is a designated
tax-advantaged plan, and Sec. 1026.36(d)(1)(iv)(A), with regard to
compensation under a non-deferred profits-based compensation plan, the
payment of compensation to an individual loan originator may not be
directly or indirectly based on the terms of that individual loan
originator's transaction or transactions. Consequently, for example,
where an individual loan originator makes loans that vary in their
interest rate spread, the compensation payment may not take into account
the average interest rate spread on the individual loan originator's
transactions during the relevant calendar year.
v. Compensation under non-deferred profits-based compensation plans.
Assuming that the conditions in Sec. 1026.36(d)(1)(iv)(A) are met,
Sec. 1026.36(d)(1)(iv)(B)(1) permits certain compensation to an
individual loan originator under a non-deferred profits-based
compensation plan. Specifically, if the compensation is determined with
reference to the profits of the person from mortgage-related business,
compensation under a non-deferred profits-based compensation plan is
permitted provided the compensation does not, in the aggregate, exceed
10 percent of the individual loan originator's total compensation
corresponding to the time period for which compensation under the non-
deferred profits-based compensation plan is paid. The compensation
restrictions under Sec. 1026.36(d)(1)(iv)(B)(1) are sometimes referred
to in this commentary as the ``10-percent total compensation limit'' or
the ``10-percent limit.''
A. Total compensation. For purposes of Sec.
1026.36(d)(1)(iv)(B)(1), the individual loan originator's total
compensation consists of the sum total of: (1) All wages and tips
reportable for Medicare tax purposes in box 5 on IRS form W-2 (or, if
the individual loan originator is an independent contractor, reportable
compensation on IRS form 1099-MISC) that are actually paid during the
relevant time period (regardless of when the wages and tips are earned),
except for any compensation under a non-deferred profits-based
compensation plan that is earned during a different time period (see
comment 36(d)(1)-3.v.C); (2) at the election of the person paying the
compensation, all contributions that are actually made during the
relevant time period by the creditor or loan originator organization to
the individual loan originator's accounts in designated tax-advantaged
plans that are defined contribution plans (regardless of when the
contributions are earned); and (3) at the election of the person paying
the compensation, all compensation under a non-deferred profits-based
compensation plan that is earned during the relevant time period,
regardless of whether the compensation is actually paid during that time
period (see comment 36(d)(1)-3.v.C). If an individual loan originator
has some compensation that is reportable on the W-2 and some that is
reportable on the 1099-MISC, the total compensation is the sum total of
what is reportable on each of the two forms.
B. Profits of the Person. Under Sec. 1026.36(d)(1)(iv), a plan is a
non-deferred profits-based compensation plan if compensation is paid,
based in whole or in part, on the profits of the person paying the
compensation. As used in Sec. 1026.36(d)(1)(iv), ``profits of the
person'' include, as applicable depending on where the non-deferred
profits-based compensation plan is set, the profits of the person, the
business unit to which the individual loan originators are assigned for
accounting or other organizational purposes, or any affiliate of the
person. Profits from mortgage-related business are profits determined
with reference to revenue generated from transactions subject to Sec.
1026.36(d). Pursuant to Sec. 1026.36(b) and comment 36(b)-1, Sec.
1026.36(d) applies to closed-end consumer credit transactions secured by
dwellings. This revenue includes, without limitation, and as applicable
based on the particular sources of revenue of the person, business unit,
or affiliate, origination fees and interest associated with dwelling-
secured transactions for which individual loan originators working for
the person were loan originators, income from servicing of such
transactions, and proceeds of secondary market sales of such
transactions. If the amount of the individual loan originator's
compensation under non-deferred profits-based compensation plans paid
for a time period does not, in the aggregate, exceed 10 percent of the
individual loan originator's total compensation corresponding to the
same time period, compensation under non-deferred profits-based
compensation plans may be paid under Sec. 1026.36(d)(1)(iv)(B)(1)
regardless of whether or not it was determined with reference to the
profits of the person from mortgage-related business.
C. Time period for which the compensation under the non-deferred
profits-based compensation plan is paid and to which the total
compensation corresponds. Under Sec. 1026.36(d)(1)(iv)(B)(1),
determination of whether payment of compensation under a non-deferred
profits-based compensation plan complies with the 10-percent limit
requires a calculation of the ratio of the compensation under the non-
deferred profits-
[[Page 686]]
based compensation plan (i.e., the compensation subject to the 10-
percent limit) and the total compensation corresponding to the relevant
time period. For compensation subject to the 10-percent limit, the
relevant time period is the time period for which a person makes
reference to profits in determining the compensation (i.e., when the
compensation was earned). It does not matter whether the compensation is
actually paid during that particular time period. For total
compensation, the relevant time period is the same time period, but only
certain types of compensation may be included in the total compensation
amount for that time period (see comment 36(d)(1)-3.v.A). For example,
assume that during calendar year 2014 a creditor pays an individual loan
originator compensation in the following amounts: $80,000 in commissions
based on the individual loan originator's performance and volume of
loans generated during the calendar year; and $10,000 in an employer
contribution to a designated tax-advantaged defined contribution plan on
behalf of the individual loan originator. The creditor desires to pay
the individual loan originator a year-end bonus of $10,000 under a non-
deferred profits-based compensation plan. The commissions are paid and
employer contributions to the designated tax-advantaged defined
contribution plan are made during calendar year 2014, but the year-end
bonus will be paid in January 2015. For purposes of the 10-percent
limit, the year-end bonus is counted toward the 10-percent limit for
calendar year 2014, even though it is not actually paid until 2015.
Therefore, for calendar year 2014 the individual loan originator's
compensation that is subject to the 10-percent limit would be $10,000
(i.e., the year-end bonus) and the total compensation would be $100,000
(i.e., the sum of the commissions, the designated tax-advantaged plan
contribution (assuming the creditor elects to include it in total
compensation for calendar year 2014), and the bonus (assuming the
creditor elects to include it in total compensation for calendar year
2014)); the bonus would be permissible under Sec. 1026.36(d)(1)(iv)
because it does not exceed 10 percent of total compensation. The
determination of total compensation corresponding to 2014 also would not
take into account any compensation subject to the 10-percent limit that
is actually paid in 2014 but is earned during a different calendar year
(e.g., an annual bonus determined with reference to mortgage-related
business profits for calendar year 2013 that is paid in January 2014).
If the employer contribution to the designated tax-advantaged plan is
earned in 2014 but actually made in 2015, however, it may not be
included in total compensation for 2014. A company, business unit, or
affiliate, as applicable, may pay compensation subject to the 10-percent
limit during different time periods falling within its annual accounting
period for keeping records and reporting income and expenses, which may
be a calendar year or a fiscal year depending on the annual accounting
period. In such instances, however, the 10-percent limit applies both as
to each time period and cumulatively as to the annual accounting period.
For example, assume that a creditor uses a calendar-year accounting
period. If the creditor pays an individual loan originator a bonus at
the end of each quarter under a non-deferred profits-based compensation
plan, the payment of each quarterly bonus is subject to the 10-percent
limit measured with respect to each quarter. The creditor can also pay
an annual bonus under the non-deferred profits-based compensation plan
that does not exceed the difference of 10 percent of the individual loan
originator's total compensation corresponding to the calendar year and
the aggregate amount of the quarterly bonuses.
D. Awards of merchandise, services, trips, or similar prizes or
incentives. If any compensation paid to an individual loan originator
under Sec. 1026.36(d)(1)(iv) consists of an award of merchandise,
services, trips, or similar prize or incentive, the cash value of the
award is factored into the calculation of the 10-percent total
compensation limit. For example, during a given calendar year,
individual loan originator A and individual loan originator B are each
employed by a creditor and paid $40,000 in salary, and $45,000 in
commissions. The creditor also contributes $5,000 to a designated tax-
advantaged defined contribution plan for each individual loan originator
during that calendar year, which the creditor elects to include in the
total compensation amount. Neither individual loan originator is paid
any other form of compensation by the creditor. In December of the
calendar year, the creditor rewards both individual loan originators for
their performance during the calendar year out of a bonus pool
established with reference to the profits of the mortgage origination
business unit. Individual loan originator A is paid a $10,000 cash
bonus, meaning that individual loan originator A's total compensation is
$100,000 (assuming the creditor elects to include the bonus in the total
compensation amount). Individual loan originator B is paid a $7,500 cash
bonus and awarded a vacation package with a cash value of $3,000,
meaning that individual loan originator B's total compensation is
$100,500 (assuming the creditor elects to include the reward in the
total compensation amount). Under Sec. 1026.36(d)(1)(iv)(B)(1),
individual loan originator A's $10,000 bonus is permissible because the
bonus would not constitute more than 10 percent of individual loan
originator A's total compensation for the calendar year. The creditor
may not pay individual loan originator B the $7,500 bonus and award the
vacation package, however, because the total value of the bonus and the
[[Page 687]]
vacation package would be $10,500, which is greater than 10 percent
(10.45 percent) of individual loan originator B's total compensation for
the calendar year. One way to comply with Sec. 1026.36(d)(1)(iv)(B)(1)
would be if the amount of the bonus were reduced to $7,000 or less or
the vacation package were structured such that its cash value would be
$2,500 or less.
E. Compensation determined only with reference to non-mortgage-
related business profits. Compensation under a non-deferred profits-
based compensation plan is not subject to the 10-percent total
compensation limit under Sec. 1026.36(d)(1)(iv)(B)(1) if the non-
deferred profits-based compensation plan is determined with reference
only to profits from business other than mortgage-related business, as
determined in accordance with reasonable accounting principles.
Reasonable accounting principles reflect an accurate allocation of
revenues, expenses, profits, and losses among the person, any affiliate
of the person, and any business units within the person or affiliates,
and are consistent with the accounting principles applied by the person,
the affiliate, or the business unit with respect to, as applicable, its
internal budgeting and auditing functions and external reporting
requirements. Examples of external reporting and filing requirements
that may be applicable to creditors and loan originator organizations
are Federal income tax filings, Federal securities law filings, or
quarterly reporting of income, expenses, loan origination activity, and
other information required by government-sponsored enterprises. As used
in Sec. 1026.36(d)(1)(iv)(B)(1), profits means positive profits or
losses avoided or mitigated.
F. Additional examples. 1. Assume that, during a given calendar
year, a loan originator organization pays an individual loan originator
employee $40,000 in salary and $125,000 in commissions, and makes a
contribution of $15,000 to the individual loan originator's 401(k) plan.
At the end of the year, the loan originator organization wishes to pay
the individual loan originator a bonus based on a formula involving a
number of performance metrics, to be paid out of a profit pool
established at the level of the company but that is determined in part
with reference to the profits of the company's mortgage origination
unit. Assume that the loan originator organization derives revenues from
sources other than transactions covered by Sec. 1026.36(d). In this
example, the performance bonus would be directly or indirectly based on
the terms of multiple individual loan originators' transactions as
described in Sec. 1026.36(d)(1)(i), because it is being determined with
reference to profits from mortgage-related business. Assume,
furthermore, that the loan originator organization elects to include the
bonus in the total compensation amount for the calendar year. Thus, the
bonus is permissible under Sec. 1026.36(d)(1)(iv)(B)(1) if it does not
exceed 10 percent of the loan originator's total compensation, which in
this example consists of the individual loan originator's salary and
commissions, the contribution to the 401(k) plan (if the loan originator
organization elects to include the contribution in the total
compensation amount), and the performance bonus. Therefore, if the loan
originator organization elects to include the 401(k) contribution in
total compensation for these purposes, the loan originator organization
may pay the individual loan originator a performance bonus of up to
$20,000 (i.e., 10 percent of $200,000 in total compensation). If the
loan originator organization does not include the 401(k) contribution in
calculating total compensation, or the 401(k) contribution is actually
made in January of the following calendar year (in which case it cannot
be included in total compensation for the initial calendar year), the
bonus may be up to $18,333.33. If the loan originator organization
includes neither the 401(k) contribution nor the performance bonus in
the total compensation amount, the bonus may not exceed $16,500.
2. Assume that the compensation during a given calendar year of an
individual loan originator employed by a creditor consists of only
salary and commissions, and the individual loan originator does not
participate in a designated tax-advantaged defined contribution plan.
Assume further that the creditor uses a calendar-year accounting period.
At the end of the calendar year, the creditor pays the individual loan
originator two bonuses: A ``performance'' bonus based on the individual
loan originator's aggregate loan volume for a calendar year that is paid
out of a bonus pool determined with reference to the profits of the
mortgage origination business unit, and a year-end ``holiday'' bonus in
the same amount to all company employees that is paid out of a company-
wide bonus pool. Because the performance bonus is paid out of a bonus
pool that is determined with reference to the profits of the mortgage
origination business unit, it is compensation that is determined with
reference to mortgage-related business profits, and the bonus is
therefore subject to the 10-percent total compensation limit. If the
company-wide bonus pool from which the ``holiday'' bonus is paid is
derived in part from profits of the creditor's mortgage origination
business unit, then the combination of the ``holiday'' bonus and the
performance bonus is subject to the 10-percent total compensation limit.
The ``holiday'' bonus is not subject to the 10-percent total
compensation limit if the bonus pool is determined with reference only
to the profits of business units other than the mortgage origination
business unit, as determined in accordance with reasonable accounting
principles. If the ``performance''
[[Page 688]]
bonus and the ``holiday'' bonus in the aggregate do not exceed 10
percent of the individual loan originator's total compensation, the
bonuses may be paid under Sec. 1026.36(d)(1)(iv)(B)(1) without the
necessity of determining from which bonus pool they were paid or whether
they were determined with reference to the profits of the creditor's
mortgage origination business unit.
G. Reasonable reliance by individual loan originator on accounting
or statement by person paying compensation. An individual loan
originator is deemed to comply with its obligations regarding receipt of
compensation under Sec. 1026.36(d)(1)(iv)(B)(1) if the individual loan
originator relies in good faith on an accounting or a statement provided
by the person who determined the individual loan originator's
compensation under a non-deferred profits-based compensation plan
pursuant to Sec. 1026.36(d)(1)(iv)(B)(1) and where the statement or
accounting is provided within a reasonable time period following the
person's determination.
vi. Individual loan originators who originate ten or fewer
transactions. Assuming that the conditions in Sec. 1026.36(d)(1)(iv)(A)
are met, Sec. 1026.36(d)(1)(iv)(B)(2) permits compensation to an
individual loan originator under a non-deferred profits-based
compensation plan even if the payment or contribution is directly or
indirectly based on the terms of multiple individual loan originators'
transactions if the individual is a loan originator (as defined in Sec.
1026.36(a)(1)(i)) for ten or fewer consummated transactions during the
12-month period preceding the compensation determination. For example,
assume a loan originator organization employs two individual loan
originators who originate transactions subject to Sec. 1026.36 during a
given calendar year. Both employees are individual loan originators as
defined in Sec. 1026.36(a)(1)(ii), but only one of them (individual
loan originator B) acts as a loan originator in the normal course of
business, while the other (individual loan originator A) is called upon
to do so only occasionally and regularly performs other duties (such as
serving as a manager). In January of the following calendar year, the
loan originator organization formally determines the financial
performance of its mortgage business for the prior calendar year. Based
on that determination, the loan originator organization on February 1
decides to pay a bonus to the individual loan originators out of a
company bonus pool. Assume that, between February 1 of the prior
calendar year and January 31 of the current calendar year, individual
loan originator A was the loan originator for eight consummated
transactions, and individual loan originator B was the loan originator
for 15 consummated transactions. The loan originator organization may
award the bonus to individual loan originator A under Sec.
1026.36(d)(1)(iv)(B)(2). The loan originator organization may not award
the bonus to individual loan originator B relying on the exception under
Sec. 1026.36(d)(1)(iv)(B)(2) because it would not apply, although it
could award a bonus pursuant to the 10-percent total compensation limit
under Sec. 1026.36(d)(1)(iv)(B)(1) if the requirements of that
provision are complied with.
4. Creditor's flexibility in setting loan terms. Section 1026.36(d)
also does not limit a creditor from offering or providing different loan
terms to the consumer based on the creditor's assessment of the credit
and other transactional risks involved. If a creditor pays compensation
to a loan originator in compliance with Sec. 1026.36(d), the creditor
may recover the costs of the loan originator's compensation and other
costs of the transaction by charging the consumer points or fees or a
higher interest rate or a combination of these. Thus, in these
transactions, a creditor may charge a higher interest rate to a consumer
who will pay fewer of the costs of the transaction at or before closing
or it may offer the consumer a lower rate if the consumer pays more of
the transaction costs at or before closing. For example, if the consumer
pays half of the transaction costs at or before closing, a creditor may
charge an interest rate of 6.0 percent but, if the consumer pays none of
the transaction costs at or before closing, the creditor may charge an
interest rate of 6.5 percent. In these transactions, a creditor also may
offer different consumers varying interest rates that include a
consistent interest rate premium to recoup the loan originator's
compensation through increased interest paid by the consumer (such as by
consistently adding 0.25 percentage points to the interest rate on each
transaction where the loan originator is compensated based on a
percentage of the amount of the credit extended).
5. Effect of modification of transaction terms. Under Sec.
1026.36(d)(1), a loan originator's compensation may not be based on any
of the terms of a credit transaction. Thus, a creditor and a loan
originator may not agree to set the loan originator's compensation at a
certain level and then subsequently lower it in selective cases (such as
where the consumer is able to obtain a lower rate from another
creditor). When the creditor offers to extend credit with specified
terms and conditions (such as the rate and points), the amount of the
originator's compensation for that transaction is not subject to change
(increase or decrease) based on whether different credit terms are
negotiated. For example, if the creditor agrees to lower the rate that
was initially offered, the new offer may not be accompanied by a
reduction in the loan originator's compensation. Thus, while the
creditor may change credit terms or pricing to match a competitor, to
avoid triggering high-cost mortgage provisions, or
[[Page 689]]
for other reasons, the loan originator's compensation on that
transaction may not be changed for those reasons. A loan originator
therefore may not agree to reduce its compensation or provide a credit
to the consumer to pay a portion of the consumer's closing costs, for
example, to avoid high-cost mortgage provisions. A loan originator
organization may not reduce its own compensation in a transaction where
the loan originator organization receives compensation directly from the
consumer, with or without a corresponding reduction in compensation paid
to an individual loan originator. See comment 36(d)(1)-7 for further
interpretation.
6. Periodic changes in loan originator compensation and terms of
transactions. Section 1026.36 does not limit a creditor or other person
from periodically revising the compensation it agrees to pay a loan
originator. However, the revised compensation arrangement must not
result in payments to the loan originator that are based on the terms of
a credit transaction. A creditor or other person might periodically
review factors such as loan performance, transaction volume, as well as
current market conditions for loan originator compensation, and
prospectively revise the compensation it agrees to pay to a loan
originator. For example, assume that during the first six months of the
year, a creditor pays $3,000 to a particular loan originator for each
loan delivered, regardless of the terms of the transaction. After
considering the volume of business produced by that loan originator, the
creditor could decide that as of July 1, it will pay $3,250 for each
loan delivered by that particular loan originator, regardless of the
terms of the transaction. No violation occurs even if the loans made by
the creditor after July 1 generally carry a higher interest rate than
loans made before that date, to reflect the higher compensation.
7. Permitted decreases in loan originator compensation.
Notwithstanding comment 36(d)(1)-5, Sec. 1026.36(d)(1) does not
prohibit a loan originator from decreasing its compensation to defray
the cost, in whole or part, of an unforeseen increase in an actual
settlement cost over an estimated settlement cost disclosed to the
consumer pursuant to section 5(c) of RESPA or an unforeseen actual
settlement cost not disclosed to the consumer pursuant to section 5(c)
of RESPA. For purposes of comment 36(d)(1)-7, an increase in an actual
settlement cost over an estimated settlement cost or a cost not
disclosed is unforeseen if the increase occurs even though the estimate
provided to the consumer is consistent with the best information
reasonably available to the disclosing person at the time of the
estimate. For example:
i. Assume that a consumer agrees to lock an interest rate with a
creditor in connection with the financing of a purchase-money
transaction. A title issue with the property being purchased delays
closing by one week, which in turn causes the rate lock to expire. The
consumer desires to re-lock the interest rate. Provided that the title
issue was unforeseen, the loan originator may decrease the loan
originator's compensation to pay for all or part of the rate-lock
extension fee.
ii. Assume that when applying the tolerance requirements under the
regulations implementing RESPA sections 4 and 5(c), there is a tolerance
violation of $70 that must be cured. Provided the violation was
unforeseen, the rule is not violated if the individual loan originator's
compensation decreases to pay for all or part of the amount required to
cure the tolerance violation.
8. Record retention. See comment 25(c)(2)-1 and -2 for commentary on
complying with the record retention requirements of Sec. 1026.25(c)(2)
as they apply to Sec. 1026.36(d)(1).
9. Amount of credit extended. A loan originator's compensation may
be based on the amount of credit extended, subject to certain
conditions. Section 1026.36(d)(1) does not prohibit an arrangement under
which a loan originator is paid compensation based on a percentage of
the amount of credit extended, provided the percentage is fixed and does
not vary with the amount of credit extended. However, compensation that
is based on a fixed percentage of the amount of credit extended may be
subject to a minimum and/or maximum dollar amount, as long as the
minimum and maximum dollar amounts do not vary with each credit
transaction. For example:
i. A creditor may offer a loan originator 1 percent of the amount of
credit extended for all loans the originator arranges for the creditor,
but not less than $1,000 or greater than $5,000 for each loan.
ii. A creditor may not offer a loan originator 1 percent of the
amount of credit extended for loans of $300,000 or more, 2 percent of
the amount of credit extended for loans between $200,000 and $300,000,
and 3 percent of the amount of credit extended for loans of $200,000 or
less.
10. Amount of credit extended under a reverse mortgage. For closed-
end reverse mortgage loans, the ``amount of credit extended'' for
purposes of Sec. 1026.36(d)(1) means either:
i. The maximum proceeds available to the consumer under the loan; or
ii. The maximum claim amount as defined in 24 CFR 206.3 if the
mortgage is subject to 24 CFR part 206, or the appraised value of the
property, as determined by the appraisal used in underwriting the loan,
if the mortgage is not subject to 24 CFR part 206.
[[Page 690]]
36(d)(2) Payments by Persons Other Than Consumer
36(d)(2)(i) Dual Compensation
1. Compensation in connection with a particular transaction. Under
Sec. 1026.36(d)(2)(i)(A), if any loan originator receives compensation
directly from a consumer in a transaction, no other person may provide
any compensation to any loan originator, directly or indirectly, in
connection with that particular credit transaction, whether before, at,
or after consummation. See comment 36(d)(2)(i)-2 discussing compensation
received directly from the consumer. The restrictions imposed under
Sec. 1026.36(d)(2)(i) relate only to payments, such as commissions,
that are specific to, and paid solely in connection with, the
transaction in which the consumer has paid compensation directly to a
loan originator. In a transaction where a loan originator receives
compensation directly from a consumer, a creditor still may provide
funds for the benefit of the consumer in that transaction, provided such
funds are applied solely toward costs of the transaction other than loan
originator compensation. Section 1026.36(d)(2)(i)(C) provides that, if a
loan originator organization receives compensation directly from a
consumer, the loan originator organization may provide compensation to
individual loan originators, and the individual loan originator may
receive compensation from the loan originator organization, subject to
the restriction in Sec. 1026.36(d)(1). (See comment 36(a)(1)-1.i for an
explanation of the use of the term ``loan originator organization'' and
``individual loan originator'' for purposes of Sec.
1026.36(d)(2)(i)(C).) For example, payments by a mortgage broker to an
individual loan originator as compensation for originating a specific
credit transaction do not violate Sec. 1026.36(d)(2)(i)(A) even if the
consumer directly pays the mortgage broker a fee in connection with that
transaction. However, neither the mortgage broker nor the individual
loan originator can receive compensation from the creditor in connection
with that particular credit transaction.
2. Compensation received directly from a consumer. i. Payments by a
consumer to a loan originator from loan proceeds are considered
compensation received directly from the consumer, while payments derived
from an increased interest rate are not considered compensation received
directly from the consumer. However, payments by a consumer to the
creditor are not considered payments to the loan originator that are
received directly from the consumer whether they are paid directly by
the consumer (for example, in cash or by check) or out of the loan
proceeds. See the definition of ``compensation'' in Sec. 1026.36(a)(3)
and related commentary.
ii. Funds from the creditor that will be applied to reduce the
consumer's settlement charges, including origination fees paid by a
creditor to the loan originator, that are characterized on the
disclosures made pursuant to the Real Estate Settlement Procedures Act
as a ``credit'' are nevertheless not considered to be received by the
loan originator directly from the consumer for purposes of Sec.
1026.36(d)(2)(i).
iii. Section 1026.36(d)(2)(i)(B) provides that compensation received
directly from a consumer includes payments to a loan originator made
pursuant to an agreement between the consumer and a person other than
the creditor or its affiliates, under which such other person agrees to
provide funds toward the consumer's costs of the transaction (including
loan originator compensation). Compensation to a loan originator is
sometimes paid on the consumer's behalf by a person other than a
creditor or its affiliates, such as a non-creditor seller, home builder,
home improvement contractor or real estate broker or agent. Such
payments to a loan originator are considered compensation received
directly from the consumer for purposes of Sec. 1026.36(d)(2) if they
are made pursuant to an agreement between the consumer and the person
other than the creditor or its affiliates. State law determines whether
there is an agreement between the parties. See Sec. 1026.2(b)(3). The
parties do not have to agree specifically that the payments will be used
to pay for the loan originator's compensation, but just that the person
will make a payment to the loan originator toward the consumer's costs
of the transaction, or ``closing costs'' and the loan originator retains
such payment. For example, assume that a non-creditor seller (that is
not the creditor's affiliate) has an agreement with the consumer to pay
$1,000 of the consumer's closing costs on a transaction. Any of the
$1,000 that is paid by the non-creditor seller to the loan originator
and constitutes ``compensation'' as defined in Sec. 1026.36(a)(3) to
the loan originator is compensation received directly from the consumer,
even if the agreement does not specify that some or all of $1,000 must
be used to compensate the loan originator. Nonetheless, payments by the
consumer to the creditor are not payments to the loan originator that
are received directly from the consumer. See comment 36(d)(2)(i)-2.i.
Accordingly, payments in the transaction to the creditor on behalf of
the consumer by a person other than the creditor or its affiliates are
not payments to the loan originator that are received directly from the
consumer.
[[Page 691]]
36(d)(3) Affiliates
1. For purposes of Sec. 1026.36(d), affiliates are treated as a
single ``person.'' The term ``affiliate'' is defined in Sec.
1026.32(b)(2). For example, assume a parent company has two mortgage
lending subsidiaries. Under Sec. 1026.36(d)(1), subsidiary ``A'' could
not pay a loan originator greater compensation for a loan with an
interest rate of 8 percent than it would pay for a loan with an interest
rate of 7 percent. If the loan originator may deliver loans to both
subsidiaries, they must compensate the loan originator in the same
manner. Accordingly, if the loan originator delivers the loan to
subsidiary ``B'' and the interest rate is 8 percent, the originator must
receive the same compensation that would have been paid by subsidiary A
for a loan with a rate of either 7 or 8 percent.
36(e) Prohibition on Steering
1. Compensation. See comment 36(d)(1)-1 for guidance on compensation
that is subject to Sec. 1026.36(e).
36(e)(1) General
1. Steering. For purposes of Sec. 1026.36(e), directing or
``steering'' a consumer to consummate a particular credit transaction
means advising, counseling, or otherwise influencing a consumer to
accept that transaction. For such actions to constitute steering, the
consumer must actually consummate the transaction in question. Thus,
Sec. 1026.36(e)(1) does not address the actions of a loan originator if
the consumer does not actually obtain a loan through that loan
originator.
2. Prohibited conduct. Under Sec. 1026.36(e)(1), a loan originator
may not direct or steer a consumer to consummate a transaction based on
the fact that the loan originator would increase the amount of
compensation that the loan originator would receive for that transaction
compared to other transactions, unless the consummated transaction is in
the consumer's interest.
i. In determining whether a consummated transaction is in the
consumer's interest, that transaction must be compared to other possible
loan offers available through the originator, if any, and for which the
consumer was likely to qualify, at the time that transaction was offered
to the consumer. Possible loan offers are available through the loan
originator if they could be obtained from a creditor with which the loan
originator regularly does business. Section 1026.36(e)(1) does not
require a loan originator to establish a business relationship with any
creditor with which the loan originator does not already do business. To
be considered a possible loan offer available through the loan
originator, an offer need not be extended by the creditor; it need only
be an offer that the creditor likely would extend upon receiving an
application from the applicant, based on the creditor's current credit
standards and its current rate sheets or other similar means of
communicating its current credit terms to the loan originator. An
originator need not inform the consumer about a potential transaction if
the originator makes a good faith determination that the consumer is not
likely to qualify for it.
ii. Section 1026.36(e)(1) does not require a loan originator to
direct a consumer to the transaction that will result in a creditor
paying the least amount of compensation to the originator. However, if
the loan originator reviews possible loan offers available from a
significant number of the creditors with which the originator regularly
does business, and the originator directs the consumer to the
transaction that will result in the least amount of creditor-paid
compensation for the loan originator, the requirements of Sec.
1026.36(e)(1) are deemed to be satisfied. In the case where a loan
originator directs the consumer to the transaction that will result in a
greater amount of creditor-paid compensation for the loan originator,
Sec. 1026.36(e)(1) is not violated if the terms and conditions on that
transaction compared to the other possible loan offers available through
the originator, and for which the consumer likely qualifies, are the
same. A loan originator who is an employee of the creditor on a
transaction may not obtain compensation that is based on the
transaction's terms or conditions pursuant to Sec. 1026.36(d)(1), and
compliance with that provision by such a loan originator also satisfies
the requirements of Sec. 1026.36(e)(1) for that transaction with the
creditor. However, if a creditor's employee acts as a broker by
forwarding a consumer's application to a creditor other than the loan
originator's employer, such as when the employer does not offer any loan
products for which the consumer would qualify, the loan originator is
not an employee of the creditor in that transaction and is subject to
Sec. 1026.36(e)(1) if the originator is compensated for arranging the
loan with the other creditor.
iii. See the commentary under Sec. 1026.36(e)(3) for additional
guidance on what constitutes a ``significant number of creditors with
which a loan originator regularly does business'' and guidance on the
determination about transactions for which ``the consumer likely
qualifies.''
3. Examples. Assume a loan originator determines that a consumer
likely qualifies for a loan from Creditor A that has a fixed interest
rate of 7 percent, but the loan originator directs the consumer to a
loan from Creditor B having a rate of 7.5 percent. If the loan
originator receives more in compensation from Creditor B than the amount
that would have been paid by Creditor A, the prohibition in Sec.
1026.36(e) is violated unless the higher-rate loan is in the consumer's
interest. For
[[Page 692]]
example, a higher-rate loan might be in the consumer's interest if the
lower-rate loan has a prepayment penalty, or if the lower-rate loan
requires the consumer to pay more in up-front charges that the consumer
is unable or unwilling to pay or finance as part of the loan amount.
36(e)(2) Permissible Transactions
1. Safe harbors. A loan originator that satisfies Sec.
1026.36(e)(2) is deemed to comply with Sec. 1026.36(e)(1). A loan
originator that does not satisfy Sec. 1026.36(e)(2) is not subject to
any presumption regarding the originator's compliance or noncompliance
with Sec. 1026.36(e)(1).
2. Minimum number of loan options. To obtain the safe harbor, Sec.
1026.36(e)(2) requires that the loan originator present loan options
that meet the criteria in Sec. 1026.36(e)(3)(i) for each type of
transaction in which the consumer expressed an interest. As required by
Sec. 1026.36(e)(3)(ii), the loan originator must have a good faith
belief that the options presented are loans for which the consumer
likely qualifies. If the loan originator is not able to form such a good
faith belief for loan options that meet the criteria in Sec.
1026.36(e)(3)(i) for a given type of transaction, the loan originator
may satisfy Sec. 1026.36(e)(2) by presenting all loans for which the
consumer likely qualifies and that meet the other requirements in Sec.
1026.36(e)(3) for that given type of transaction. A loan originator may
present to the consumer any number of loan options, but presenting a
consumer more than four loan options for each type of transaction in
which the consumer expressed an interest and for which the consumer
likely qualifies would not likely help the consumer make a meaningful
choice.
36(e)(3) Loan Options Presented
1. Significant number of creditors. A significant number of the
creditors with which a loan originator regularly does business is three
or more of those creditors. If the loan originator regularly does
business with fewer than three creditors, the originator is deemed to
comply by obtaining loan options from all the creditors with which it
regularly does business. Under Sec. 1026.36(e)(3)(i), the loan
originator must obtain loan options from a significant number of
creditors with which the loan originator regularly does business, but
the loan originator need not present loan options from all such
creditors to the consumer. For example, if three loans available from
one of the creditors with which the loan originator regularly does
business satisfy the criteria in Sec. 1026.36(e)(3)(i), presenting
those and no options from any other creditor satisfies that section.
2. Creditors with which loan originator regularly does business. To
qualify for the safe harbor in Sec. 1026.36(e)(2), the loan originator
must obtain and review loan options from a significant number of the
creditors with which the loan originator regularly does business. For
this purpose, a loan originator regularly does business with a creditor
if:
i. There is a written agreement between the originator and the
creditor governing the originator's submission of mortgage loan
applications to the creditor;
ii. The creditor has extended credit secured by a dwelling to one or
more consumers during the current or previous calendar month based on an
application submitted by the loan originator; or
iii. The creditor has extended credit secured by a dwelling twenty-
five or more times during the previous twelve calendar months based on
applications submitted by the loan originator. For this purpose, the
previous twelve calendar months begin with the calendar month that
precedes the month in which the loan originator accepted the consumer's
application.
3. Lowest interest rate. To qualify under the safe harbor in Sec.
1026.36(e)(2), for each type of transaction in which the consumer has
expressed an interest, the loan originator must present the consumer
with loan options that meet the criteria in Sec. 1026.36(e)(3)(i) for
which the loan originator has a good faith belief that the consumer is
likely to qualify. The criteria are: the loan with the lowest interest
rate; the loan with the lowest total dollar amount of discount points,
origination points or origination fees; and a loan with the lowest
interest rate without negative amortization, a prepayment penalty, a
balloon payment in the first seven years of the loan term, shared
equity, or shared appreciation, or, in the case of a reverse mortgage, a
loan without a prepayment penalty, shared equity, or shared
appreciation. The loan with the lowest interest rate for which the
consumer likely qualifies is the loan with the lowest rate the consumer
can likely obtain, regardless of how many discount points, origination
points or origination fees the consumer must pay to obtain it. To
identify the loan with the lowest interest rate, for any loan that has
an initial rate that is fixed for at least five years, the loan
originator uses the initial rate that would be in effect at
consummation. For a loan with an initial rate that is not fixed for at
least five years:
i. If the interest rate varies based on changes to an index, the
originator uses the fully-indexed rate that would be in effect at
consummation without regard to any initial discount or premium.
ii. For a step-rate loan, the originator uses the highest rate that
would apply during the first five years.
4. Transactions for which the consumer likely qualifies. To qualify
under the safe harbor in Sec. 1026.36(e)(2), the loan originator must
have
[[Page 693]]
a good faith belief that the loan options presented to the consumer
pursuant to Sec. 1026.36(e)(3) are transactions for which the consumer
likely qualifies. The loan originator's belief that the consumer likely
qualifies should be based on information reasonably available to the
loan originator at the time the loan options are presented. In making
this determination, the loan originator may rely on information provided
by the consumer, even if it subsequently is determined to be inaccurate.
For purposes of Sec. 1026.36(e)(3), a loan originator is not expected
to know all aspects of each creditor's underwriting criteria. But
pricing or other information that is routinely communicated by creditors
to loan originators is considered to be reasonably available to the loan
originator, for example, rate sheets showing creditors' current pricing
and the required minimum credit score or other eligibility criteria.
36(f) Loan Originator Qualification Requirements
1. Scope. Section 1026.36(f) sets forth qualification requirements
that a loan originator must meet. As provided in Sec. 1026.36(a)(1) and
accompanying commentary, the term ``loan originator'' includes natural
persons and organizations and does not exclude creditors for purposes of
the qualification requirements in Sec. 1026.36(f).
2. Licensing and registration requirements. Section 1026.36(f)
requires loan originators to comply with applicable State and Federal
licensing and registration requirements, including any such requirements
imposed by the SAFE Act and its implementing regulations and State laws.
SAFE Act licensing and registration requirements apply to individual
loan originators, but many State licensing and registration requirements
apply to loan originator organizations as well.
3. No effect on licensing and registration requirements. Section
1026.36(f) does not affect which loan originators must comply with State
and Federal licensing and registration requirements. For example, the
fact that the definition of loan originator in Sec. 1026.36(a)(1)
differs somewhat from that in the SAFE Act does not affect who must
comply with the SAFE Act. To illustrate, assume an individual is an
employee of an organization that a State has determined to be a bona
fide nonprofit organization and the State has not subjected the employee
to that State's SAFE Act loan originator licensing. If that same
individual meets the definition of loan originator in Sec.
1026.36(a)(1), the individual is subject to the requirements of Sec.
1026.36, but the State may continue not to subject the employee to that
State's SAFE Act licensing requirements. Similarly, the qualification
requirements imposed under Sec. 1026.36(f) do not add to or affect the
criteria that States must consider in determining whether a loan
originator organization is a bona fide nonprofit organization under the
SAFE Act.
Paragraph 36(f)(1)
1. Legal existence and foreign qualification. Section 1026.36(f)(1)
requires a loan originator organization to comply with applicable State
law requirements governing the legal existence and foreign qualification
of the loan originator organization. Covered State law requirements
include those that must be complied with to bring the loan originator
organization into legal existence, to maintain its legal existence, to
be permitted to transact business in another State, or to facilitate
service of process. For example, covered State law requirements include
those for incorporation or other type of legal formation and for
designating and maintaining a registered agent for service of process.
State law requirements to pay taxes and other requirements that do not
relate to legal accountability of the loan originator organization to
consumers are outside the scope of Sec. 1026.36(f)(1).
Paragraph 36(f)(2)
1. License or registration. Section 1026.36(f)(2) requires the loan
originator organization to ensure that individual loan originators who
work for it are licensed or registered in compliance with the SAFE Act
and other applicable law. The individual loan originators who work for a
loan originator organization include individual loan originators who are
its employees or who operate under a brokerage agreement with the loan
originator organization. Thus, for example, a brokerage is responsible
for verifying that the loan originator individuals who work directly for
it are licensed and registered in accordance with applicable law,
whether the individual loan originators are its employees or independent
contractors who operate pursuant to a brokerage agreement. A loan
originator organization can meet this duty by confirming the
registration or license status of an individual at
www.nmlsconsumeraccess.org.
Paragraph 36(f)(3)
1. Unlicensed individual loan originators. Section 1026.36(f)(3)
sets forth actions that a loan originator organization must take for any
of its individual loan originator employees who are not required to be
licensed and are not licensed as a loan originator pursuant to the SAFE
Act. Individual loan originators who are not subject to SAFE Act
licensing generally include employees of depository institutions and
their Federally regulated subsidiaries and employees of bona fide
nonprofit organizations that a State has exempted from licensing under
the criteria in 12 CFR 1008.103(e)(7).
[[Page 694]]
Paragraph 36(f)(3)(i)
1. Criminal and credit histories. Section 1026.36(f)(3)(i) requires
the loan originator organization to obtain, for any of its individual
loan originator employees who is not required to be licensed and is not
licensed as a loan originator pursuant to the SAFE Act, a criminal
background check, a credit report, and information related to any
administrative, civil, or criminal determinations by any government
jurisdiction. The requirement applies to individual loan originator
employees who were hired on or after January 1, 2014 (or whom the loan
originator organization hired before this date but for whom there were
no applicable statutory or regulatory background standards in effect at
the time of hire or before January 1, 2014, used to screen the
individual). A credit report may be obtained directly from a consumer
reporting agency or through a commercial service. A loan originator
organization with access to the NMLSR can meet the requirement for the
criminal background check by reviewing any criminal background check it
receives upon compliance with the requirement in 12 CFR 1007.103(d)(1)
and can meet the requirement to obtain information related to any
administrative, civil, or criminal determinations by any government
jurisdiction by obtaining the information through the NMLSR. Loan
originator organizations that do not have access to these items through
the NMLSR may obtain them by other means. For example, a criminal
background check may be obtained from a law enforcement agency or
commercial service. Information on any past administrative, civil, or
criminal findings (such as from disciplinary or enforcement actions) may
be obtained from the individual loan originator.
2. Retroactive obtaining of information not required. Section
1026.36(f)(3)(i) does not require the loan originator organization to
obtain the covered information for an individual whom the loan
originator organization hired as a loan originator before January 1,
2014, and screened under applicable statutory or regulatory background
standards in effect at the time of hire. However, if the individual
subsequently ceases to be employed as a loan originator by that loan
originator organization, and later resumes employment as a loan
originator by that loan originator organization (or any other loan
originator organization), the loan originator organization is subject to
the requirements of Sec. 1026.36(f)(3)(i).
Paragraph 36(f)(3)(ii)
Paragraph 36(f)(3)(ii).
1. Scope of review. Section 1026.36(f)(3)(ii) requires the loan
originator organization to review the information that it obtains under
Sec. 1026.36(f)(3)(i) and other reasonably available information to
determine whether the individual loan originator meets the standards in
Sec. 1026.36(f)(3)(ii). Other reasonably available information includes
any information the loan originator organization has obtained or would
obtain as part of a reasonably prudent hiring process, including
information obtained from application forms, candidate interviews, other
reliable information and evidence provided by a candidate, and reference
checks. The requirement applies to individual loan originator employees
who were hired on or after January 1, 2014 (or whom the loan originator
organization hired before this date but for whom there were no
applicable statutory or regulatory background standards in effect at the
time of hire or before January 1, 2014, used to screen the individual).
2. Retroactive determinations not required. Section
1026.36(f)(3)(ii) does not require the loan originator organization to
review the covered information and make the required determinations for
an individual whom the loan originator organization hired as a loan
originator on or before January 1, 2014 and screened under applicable
statutory or regulatory background standards in effect at the time of
hire. However, if the individual subsequently ceases to be employed as a
loan originator by that loan originator organization, and later resumes
employment as a loan originator by that loan originator organization (or
any other loan originator organization), the loan originator
organization employing the individual is subject to the requirements of
Sec. 1026.36(f)(3)(ii).
3. Subsequent determinations. The loan originator organization must
make the required determinations for an individual before the individual
acts as a loan originator. Subsequent reviews and assessments are
required only if the loan originator organization knows of reliable
information indicating that the individual loan originator likely no
longer meets the required standards in Sec. 1026.36(f)(3). For example,
if the loan originator organization has knowledge of criminal conduct of
its individual loan originator through a newspaper article, a previously
obtained criminal background report, or the NMLSR, the loan originator
organization must determine whether any resulting conviction, or any
other information, causes the individual to fail to meet the standards
in Sec. 1026.36(f)(3)(ii), regardless of when the loan originator was
hired or previously screened.
Paragraph 36(f)(3)(ii)(B)
1. Financial responsibility, character, and general fitness. The
determination of financial responsibility, character, and general
fitness required under Sec. 1026.36(f)(3)(ii)(B) requires an assessment
of all information obtained pursuant to paragraph (f)(3)(i) and any
other reasonably available information, including information that is
known to the
[[Page 695]]
loan originator organization or would become known to the loan
originator organization as part of a reasonably prudent hiring process.
The absence of any significant adverse information is sufficient to
support an affirmative determination that the individual meets the
standards. A review and assessment of financial responsibility is
sufficient if it considers, as relevant factors, the existence of
current outstanding judgments, tax liens, other government liens,
nonpayment of child support, or a pattern of bankruptcies, foreclosures,
or delinquent accounts. A review and assessment of financial
responsibility is not required to consider debts arising from medical
expenses. A review and assessment of character and general fitness is
sufficient if it considers, as relevant factors, acts of unfairness or
dishonesty, including dishonesty by the individual in the course of
seeking employment or in connection with determinations pursuant to the
qualification requirements of Sec. 1026.36(f), and any disciplinary
actions by regulatory or professional licensing agencies. No single
factor necessarily requires a determination that the individual does not
meet the standards for financial responsibility, character, or general
fitness, provided that the loan originator organization considers all
relevant factors and reasonably determines that, on balance, the
individual meets the standards.
2. Written procedures for making determinations. A loan originator
organization that establishes written procedures for determining whether
individuals meet the financial responsibility, character, and general
fitness standards under Sec. 1026.36(f)(3)(ii)(B) and comment
36(f)(3)(ii)(B)-1 and follows those written procedures for an individual
and complies with the requirement for that individual. Such procedures
may provide that bankruptcies and foreclosures are considered under the
financial responsibility standard only if they occurred within a recent
timeframe established in the procedures. Such procedures are not
required to include review of a credit score.
Paragraph 36(f)(3)(iii)
1. Training. The periodic training required in Sec.
1026.36(f)(3)(iii) must be sufficient in frequency, timing, duration,
and content to ensure that the individual loan originator has the
knowledge of State and Federal legal requirements that apply to the
individual loan originator's loan origination activities. The training
must take into consideration the particular responsibilities of the
individual loan originator and the nature and complexity of the mortgage
loans with which the individual loan originator works. An individual
loan originator is not required to receive training on requirements and
standards that apply to types of mortgage loans that the individual loan
originator does not originate, or on subjects in which the individual
loan originator already has the necessary knowledge and skill. Training
may be delivered by the loan originator organization or any other person
and may utilize workstation, internet, teleconferencing, or other
interactive technologies and delivery methods. Training that a
government agency or housing finance agency has established for an
individual to originate mortgage loans under a program sponsored or
regulated by a Federal, State, or other government agency or housing
finance agency satisfies the requirement in Sec. 1026.36(f)(3)(iii), to
the extent that the training covers the types of loans the individual
loan originator originates and applicable Federal and State laws and
regulations. Training that the NMLSR has approved to meet the licensed
loan originator continuing education requirement at Sec. 1008.107(a)(2)
of this chapter satisfies the requirement of Sec. 1026.36(f)(3)(iii),
to the extent that the training covers the types of loans the individual
loan originator originates and applicable Federal and State laws and
regulations. The training requirements under Sec. 1026.36(f)(3)(iii)
apply to individual loan originators regardless of when they were hired.
36(g) Name and NMLSR ID on Loan Documents
Paragraph 36(g)(1)
1. NMLSR ID. Section 1026.36(g) requires a loan originator
organization to include its name and NMLSR ID and the name and NMLSR ID
of the individual loan originator on certain loan documents. As provided
in Sec. 1026.36(a)(1), the term ``loan originator'' includes creditors
that engage in loan originator activities for purposes of this
requirement. Thus, for example, if an individual loan originator
employed by a bank originates a loan, the names and NMLSR IDs of the
individual and the bank must be included on covered loan documents. The
NMLSR ID is a number generally assigned by the NMLSR to individuals
registered or licensed through NMLSR to provide loan origination
services. For more information, see the SAFE Act sections 1503(3) and
(12) and 1504 (12 U.S.C. 5102(3) and (12) and 5103), and its
implementing regulations (12 CFR 1007.103(a) and 1008.103(a)(2)). A loan
originator organization may also have an NMLSR unique identifier.
2. Loan originators without NMLSR IDs. An NMLSR ID is not required
by Sec. 1026.36(g) to be included on loan documents if the loan
originator is not required to obtain and has not been issued an NMLSR
ID. For example, certain loan originator organizations and individual
loan originators who are employees of bona fide nonprofit organizations
may not be required to obtain a unique identifier
[[Page 696]]
under State law. However, some loan originators may have obtained NMLSR
IDs, even if they are not required to have one for their current jobs.
If a loan originator organization or an individual loan originator has
been provided a unique identifier by the NMLSR, it must be included on
the covered loan documents, regardless of whether the loan originator
organization or individual loan originator is required to obtain an
NMLSR unique identifier. In any event, the name of the loan originator
is required by Sec. 1026.36(g) to be included on the covered loan
documents.
3. Inclusion of name and NMLSR ID. Section 1026.36(g)(1) requires
the inclusion of loan originator names and NMLSR IDs on each loan
document. Those items need not be included more than once on each loan
document on which loan originator names and NMLSR IDs are required, such
as by including them on every page of a document.
Paragraph 36(g)(1)(ii)
1. Multiple individual loan originators. If more than one individual
meets the definition of a loan originator for a transaction, the name
and NMLSR ID of the individual loan originator with primary
responsibility for the transaction at the time the loan document is
issued must be included. A loan originator organization that establishes
and follows a reasonable, written policy for determining which
individual loan originator has primary responsibility for the
transaction at the time the document is issued complies with the
requirement. If the individual loan originator with primary
responsibility for a transaction at the time a document is issued is not
the same individual loan originator who had primary responsibility for
the transaction at the time that a previously issued document was
issued, the previously issued document is not required to be reissued
merely to change a loan originator name and NMLSR ID.
36(i) Prohibition on financing credit insurance.
1. Financing credit insurance premiums or fees. In the case of
single-premium credit insurance, a creditor violates Sec. 1026.36(i) by
adding the credit insurance premium or fee to the amount owed by the
consumer at closing. In the case of monthly-pay credit insurance, a
creditor violates Sec. 1026.36(i) if, upon the close of the monthly
period in which the premium or fee is due, the creditor includes the
premium or fee in the amount owed by the consumer.
36(k) Negative amortization counseling.
36(k)(1) Counseling required.
1. HUD-certified or -approved counselor or counseling organization.
For purposes of Sec. 1026.36(k), organizations or counselors certified
or approved by the U.S. Department of Housing and Urban Development
(HUD) to provide the homeownership counseling required by Sec.
1026.36(k) include counselors and counseling organizations that are
certified or approved pursuant to section 106(e) of the Housing and
Urban Development Act of 1968 (12 U.S.C. 1701x(e)) or 24 CFR part 214,
unless HUD determines otherwise.
2. Homeownership counseling. The counseling required under Sec.
1026.36(k) must include information regarding the risks and consequences
of negative amortization.
3. Documentation. Examples of documentation that demonstrate a
consumer has received the counseling required under Sec. 1026.36(k)
include a certificate of counseling, letter, or email from a HUD-
certified or -approved counselor or counseling organization indicating
that the consumer has received homeownership counseling.
4. Processing applications. Prior to receiving documentation that a
consumer has received the counseling required under Sec. 1026.36(k), a
creditor may not extend credit to a first-time borrower in connection
with a closed-end transaction secured by a dwelling that may result in
negative amortization, but may engage in other activities, such as
processing an application for such a transaction (by, for example,
ordering an appraisal or title search).
36(k)(3) Steering prohibited.
1. See comments 34(a)(5)(vi)-1 and -2 for guidance concerning
steering.
Section 1026.37--Content of Disclosures for Certain Mortgage
Transactions (Loan Estimate)
1. Disclosures not applicable. The disclosures required by Sec.
1026.37 are required to reflect the terms of the legal obligation
between the parties, and if any information necessary for an accurate
disclosure is unknown to the creditor, the creditor shall make the
disclosure in good faith, based on the best information reasonably
available to the creditor pursuant to Sec. Sec. 1026.17(c) and
1026.19(e). See comments 17(c)(1)-1, 17(c)(2)(i)-1 and -2, and
19(e)(1)(i)-1. Where a disclosure is not applicable to a particular
transaction, unless otherwise provided by Sec. 1026.37, form H-24 of
appendix H to this part may not be modified to delete the disclosure
from form H-24, or to state ``not applicable'' or ``N/A'' in place of
such disclosure. The portion of the form pertaining to the inapplicable
disclosure may be left blank, unless otherwise provided by Sec.
1026.37. For example, in a transaction for which the consumer does not
pay points to the creditor to reduce the interest rate, the amounts
required to be disclosed by Sec. 1026.37(f)(1)(i) may be left blank on
form H-24. As provided in Sec. 1026.37(i) and (j), however, the
adjustable payment and adjustable interest rate tables required by those
paragraphs may be included only if those disclosures are applicable to
the transaction and otherwise must be excluded.
2. Format. See Sec. 1026.37(o) and its commentary for guidance on
the proper format
[[Page 697]]
to be used in making the disclosures, as well as permissible
modifications.
37(a) General information.
37(a)(3) Creditor.
1. Multiple creditors. For transactions with multiple creditors, see
Sec. 1026.17(d) and comment 17(d)-1 for further guidance. The creditor
making the disclosures, however, must be identified as the creditor for
purposes of Sec. 1026.37(a)(3).
2. Mortgage broker as loan originator. In transactions involving a
mortgage broker, the name and address of the creditor must be disclosed,
if known, even if the mortgage broker provides the disclosures to the
consumer under Sec. 1026.19(e)(1)(ii). As required by Sec.
1026.19(e)(1)(i), the mortgage broker must make a good faith effort to
disclose the name and address of the creditor, but if the name of the
creditor is not yet known, the disclosure required by Sec.
1026.37(a)(3) may be left blank. See comment 37-1.
37(a)(4) Date issued.
1. Applicable date. Section 1026.37(a)(4) requires disclosure of the
date the creditor mails or delivers the Loan Estimate to the consumer.
The creditor's method of delivery does not affect the date issued. For
example, if the creditor hand delivers the Loan Estimate to the consumer
on August 14, or if the creditor places the Loan Estimate in the mail on
August 14, the date disclosed under Sec. 1026.37(a)(4) is August 14.
2. Mortgage broker as loan originator. In transactions involving a
mortgage broker, the date disclosed is the date the mortgage broker
mails or delivers the Loan Estimate to the consumer, because pursuant to
Sec. 1026.19(e)(1)(ii), the mortgage broker is required to comply with
all relevant requirements of Sec. 1026.19(e).
37(a)(5) Applicants.
1. Multiple consumers. If there is more than one consumer applying
for the credit, Sec. 1026.37(a)(5) requires disclosure of the name and
the mailing address of each consumer to whom the Loan Estimate will be
delivered. If the names and mailing addresses of all consumers applying
for the credit do not fit in the space allocated on the Loan Estimate,
an additional page with that information may be appended to the end of
the form. For additional information on permissible changes, see Sec.
1026.37(o)(5) and its commentary.
37(a)(6) Property.
1. Alternate property address. Section 1026.37(a)(6) requires
disclosure of the address including the zip code of the property that
secures or will secure the transaction. A creditor complies with Sec.
1026.37(a)(6) by disclosing a complete address for purposes of the U.S.
Postal Service. If the address is unavailable, a creditor complies with
Sec. 1026.37(a)(6) by disclosing the location of such property
including a zip code, which is required in all instances. Location of
the property under Sec. 1026.37(a)(6) includes location information,
such as a lot number. The disclosure of multiple zip codes is permitted
if the consumer is investigating home purchase opportunities in multiple
zip codes.
2. Personal property. Where personal property also secures the
credit transaction, a description of that property may be disclosed, at
the creditor's option pursuant to Sec. 1026.37(a)(6), if a description
fits in the space provided on form H-24 for the disclosure required by
Sec. 1026.37(a)(6). An additional page may not be appended to the form
to disclose a description of personal property.
3. Multiple properties. Where more than one property secures the
credit transaction, Sec. 1026.37(a)(6) requires disclosure of all
properties. If the addresses of all properties securing the transaction
do not fit in the space allocated on the Loan Estimate, an additional
page with that information with respect to real properties may be
appended to the end of the form.
37(a)(7) Sale price.
1. Estimated property value. In transactions where there is no
seller, such as in a refinancing, Sec. 1026.37(a)(7)(ii) requires the
creditor to disclose the estimated value of the property identified in
Sec. 1026.37(a)(6) based on the best information reasonably available
to the creditor at the time the disclosure is provided to the consumer,
which may include, at the creditor's option, the estimated value of the
improvements to be made on the property in transactions involving
construction. The creditor may use the estimate provided by the consumer
at application unless it has performed its own estimate of the property
value by the time the disclosure is provided to the consumer, in which
case the creditor must use its own estimate. If the creditor has
obtained any appraisals or valuations of the property for the
application at the time the disclosure is issued to the consumer, the
value determined by the appraisal or valuation to be used during
underwriting for the application is disclosed as the estimated property
value. If the creditor has obtained multiple appraisals or valuations
and has not yet determined which one will be used during underwriting,
it may disclose the value from any appraisal or valuation it reasonably
believes it may use in underwriting the transaction. In a transaction
that involves a seller, if the sale price is not yet known, the creditor
complies with Sec. 1026.37(a)(7) if it discloses the estimated value of
the property that it used as the basis for the disclosures in the Loan
Estimate.
2. Personal property. In transactions involving personal property
that is separately valued from real property, only the value of the real
property or cooperative unit is disclosed under Sec. 1026.37(a)(7).
Where personal property is included in the sale price of the real
property or cooperative unit (for example, if the consumer is purchasing
the furniture inside
[[Page 698]]
the dwelling), however, Sec. 1026.37(a)(7) permits disclosure of the
aggregate price without any reduction for the appraised or estimated
value of the personal property.
37(a)(8) Loan term.
1. Partial years.
i. Terms to maturity of 24 months or more. Section 1026.37(a)(8)
requires disclosure of the term to maturity in years, or months, or
both, as applicable. Where the term exceeds 24 months and equals a whole
number of years, a creditor complies with Sec. 1026.37(a)(8) by
disclosing the number of years, followed by the designation ``years.''
Where the term exceeds 24 months but does not equal a whole number of
years, a creditor complies with Sec. 1026.37(a)(8) by disclosing the
term to maturity as the number of years followed by the designation
``yr.'' and the remaining number of months, followed by the designation
``mo.'' For example, if the term to maturity of the transaction is 185
months, the correct disclosure would be ``15 yr. 5 mo.''
ii. Terms to maturity of less than 24 months. If the term to
maturity is less than 24 months and does not equal a whole number of
years, a creditor complies with Sec. 1026.37(a)(8) by disclosing the
number of months only, followed by the designation ``mo.'' For example,
if the term to maturity of a transaction is six months or 16 months, it
would be disclosed as ``6 mo.'' or ``16 mo.,'' respectively. If the term
to maturity is 12 months, however it would be disclosed simply as ``1
year.''
2. Adjustable loan term. Section 1026.37(a)(8) requires disclosure
of the term to maturity of the credit transaction. If the term to
maturity is adjustable, i.e., it is not known with certainty at
consummation, the creditor complies with Sec. 1026.37(a)(8), if it
discloses the possible range of the loan term, including the maximum
number of years possible under the terms of the legal obligation. For
example, if the loan term depends on the value of interest rate
adjustments during the term of the loan, to calculate the maximum loan
term, the creditor assumes that the interest rate rises as rapidly as
possible after consummation, taking into account the terms of the legal
obligation, including any applicable caps on interest rate adjustments
and lifetime interest rate cap.
3. Loan term start date. See comment app. D-7.i for an explanation
of how a creditor discloses the loan term of a multiple-advance loan to
finance the construction of a dwelling that may be permanently financed
by the same creditor.
37(a)(9) Purpose.
1. General. Section 1026.37(a)(9) requires disclosure of the
consumer's intended use of the credit. In ascertaining the consumer's
intended use, Sec. 1026.37(a)(9) requires the creditor to consider all
relevant information known to the creditor at the time of the
disclosure. If the purpose is not known, the creditor may rely on the
consumer's stated purpose. The following examples illustrate when each
of the permissible purposes should be disclosed:
i. Purchase. The consumer intends to use the proceeds from the
transaction to purchase the property that will secure the extension of
credit. In a purchase transaction with simultaneous subordinate
financing, the simultaneous subordinate loan is also disclosed with the
purpose ``Purchase.''
ii. Refinance. The consumer refinances an existing obligation
already secured by the consumer's dwelling to change the rate, term, or
other loan features and may or may not receive cash from the
transaction. For example, in a refinance with no cash provided, the new
amount financed does not exceed the unpaid principal balance, any earned
unpaid finance charge on the existing debt, and amounts attributed
solely to the costs of the refinancing. Conversely, in a refinance with
cash provided, the consumer refinances an existing mortgage obligation
and receives money from the transaction that is in addition to the funds
used to pay the unpaid principal balance, any earned unpaid finance
charge on the existing debt, and amounts attributed solely to the costs
of the refinancing. In such a transaction, the consumer may, for
example, use the newly-extended credit to pay off the balance of the
existing mortgage and other consumer debt, such as a credit card
balance.
iii. Construction. Section 1026.37(a)(9)(iii) requires the creditor
to disclose that the loan is for construction in transactions where the
creditor extends credit to finance only the cost of initial construction
(construction-only loan), not renovations to existing dwellings, and in
transactions where a multiple advance loan may be permanently financed
by the same creditor (construction-permanent loan). In a construction-
only loan, the borrower may be required to make interest-only payments
during the loan term with the balance commonly due at the end of the
construction project. For additional guidance on disclosing
construction-permanent loans, see Sec. 1026.17(c)(6)(ii), comments
17(c)(6)-2, -3, and -5, and appendix D to this part.
iv. Home equity loan. The creditor is required to disclose that the
credit is for a ``home equity loan'' if the creditor intends to extend
credit for any purpose other than a purchase, refinancing, or
construction. This disclosure applies whether the loan is secured by a
first or subordinate lien.
2. Refinance coverage. The disclosure requirements under Sec.
1026.37(a)(9)(ii) apply to credit transactions that meet the definition
of a refinancing under Sec. 1026.20(a) but without regard to whether
they are made by a creditor, holder, or servicer of the existing
obligation. Section 1026.20(a) applies only to refinancings undertaken
by the original
[[Page 699]]
creditor or a holder or servicer of the original debt. See comment
20(a)-5.
37(a)(10) Product.
1. No features. If the loan product disclosed pursuant to Sec.
1026.37(a)(10) does not include any of the features described in Sec.
1026.37(a)(10)(ii), only the product type and introductory and first
adjustment periods, if applicable, are disclosed. For example:
i. Adjustable rate. When disclosing an adjustable rate product, the
disclosure of the loan product must be preceded by the length of the
introductory period and the frequency of the first adjustment period
thereafter. Thus, for example, if the loan product is an adjustable rate
with an introductory rate that is fixed for the first five years of the
loan term and then adjusts every three years starting in year six, the
disclosure required by Sec. 1026.37(a)(10) is ``5/3 Adjustable Rate.''
If the first adjustment period is not the period for all adjustments
under the terms of the legal obligation, the creditor should still
disclose the initial adjustment period and should not disclose other
adjustment periods. For example, if the loan product is an adjustable
rate with an introductory rate that is fixed for the first five years of
the loan term and then adjusts every three years starting in year six,
and then annually starting in year fifteen, the disclosure required by
Sec. 1026.37(a)(10) would still be ``5/3 Adjustable Rate.''
A. No introductory period. If the loan product is an adjustable rate
with no introductory rate, the creditor should disclose ``0'' where the
introductory rate period would ordinarily be disclosed. For example, if
the loan product is an adjustable rate that adjusts every three years
with no introductory period, the disclosure required by Sec.
1026.37(a)(10) is ``0/3 Adjustable Rate.''
B. Introductory period not yet known. If the loan product is an
adjustable rate with an introductory period that is not yet known at the
time of delivery of the Loan Estimate, the creditor should disclose the
shortest potential introductory period for the particular loan product
offered. For example, if the loan product is an adjustable rate with an
introductory period that may be between 36 and 48 months and the rate
would then adjust every year, the disclosure required by Sec.
1026.37(a)(10) is ``3/1 Adjustable Rate.''
ii. Step rate. If the loan product is a step rate with an
introductory interest rate that lasts for ten years and adjusts every
year thereafter for the next five years, and then adjusts every three
years for the next 15 years, the disclosure required by Sec.
1026.37(a)(10) is ``10/1 Step Rate.'' If the loan product is a step rate
with no introductory rate, the creditor should disclose ``0'' where the
introductory rate period would ordinarily be disclosed.
iii. Fixed rate. If the loan product is not an adjustable rate or a
step rate, as described in Sec. 1026.37(a)(10)(i)(A) and (B), even if
an additional feature described in Sec. 1026.37(a)(10)(ii) may change
the consumer's periodic payment, the disclosure required by Sec.
1026.37(a)(10)(i) is ``Fixed Rate.''
2. Additional features. When disclosing a loan product with at least
one of the features described in Sec. 1026.37(a)(10)(ii), Sec.
1026.37(a)(10)(iii) and (iv) require the disclosure of only the first
applicable feature in the order of Sec. 1026.37(a)(10)(ii) and that it
be preceded by the time period or the length of the introductory period
and the frequency of the first adjustment period, as applicable,
followed by a description of the loan product and its time period as
provided for in Sec. 1026.37(a)(10)(i). For example:
i. Negative amortization. Some loan products, such as ``payment
option'' loans, permit the borrower to make payments that are
insufficient to cover all of the interest accrued, and the unpaid
interest is added to the principal balance. Where the loan product
includes a loan feature that may cause the loan balance to increase, the
disclosure required by Sec. 1026.37(a)(10)(ii)(A) is preceded by the
time period that the borrower is permitted to make payments that result
in negative amortization (e.g., ``2 Year Negative Amortization''),
followed by the loan product type. Thus, a fixed rate product with a
step-payment feature for the first two years of the legal obligation
that may negatively amortize is disclosed as ``2 Year Negative
Amortization, Fixed Rate.''
ii. Interest only. When disclosing an ``Interest Only'' feature, as
defined in Sec. 1026.18(s)(7)(iv), the applicable time period must
precede the label ``Interest Only.'' Thus, a fixed rate loan with only
interest due for the first five years of the loan term is disclosed as
``5 Year Interest Only, Fixed Rate.'' If the interest only feature fails
to cover the total interest due, then, as required by Sec.
1026.37(a)(10)(iii), the disclosure must reference the negative
amortization feature and not the interest only feature (e.g., ``5 Year
Negative Amortization, Fixed Rate''). See comment app. D-7.ii for an
explanation of the disclosure of the time period of an interest only
feature for a construction loan or a construction-permanent loan.
iii. Step payment. When disclosing a step payment feature (which is
sometimes referred to instead as a graduated payment), the period of
time at the end of which the scheduled payments will change must precede
the label ``Step Payment'' (e.g., ``5 Year Step Payment'') followed by
the name of the loan product. Thus, a fixed rate mortgage subject to a
5-year step payment plan is disclosed as a ``5 Year Step Payment, Fixed
Rate.''
iv. Balloon payment. If a loan product includes a ``balloon
payment,'' as that term is defined in Sec. 1026.37(b)(5), the
disclosure of the balloon payment feature, including the year
[[Page 700]]
the payment is due, precedes the disclosure of the loan product. Thus,
if the loan product is a step rate with an introductory rate that lasts
for three years and adjusts each year thereafter until the balloon
payment is due in the seventh year of the loan term, the disclosure
required is ``Year 7 Balloon Payment, 3/1 Step Rate.'' If the loan
product includes more than one balloon payment, only the earliest year
that a balloon payment is due shall be disclosed.
v. Seasonal payment. If a loan product includes a seasonal payment
feature, Sec. 1026.37(a)(10)(ii)(E) requires that the creditor disclose
the feature. The feature is not, however, required to be disclosed with
any preceding time period. Disclosure of the label ``Seasonal Payment''
without any preceding number of years satisfies this requirement.
3. Periods not in whole years.
i. Terms of 24 months or more. For product types and features that
have introductory periods or adjustment periods that do not equate to a
number of whole years, if the period is a number of months that is 24 or
greater and does not equate to a whole number of years, Sec.
1026.37(a)(10) requires disclosure of the whole number of years followed
by a decimal point with the remaining months rounded to two places. For
example, if the loan product is an adjustable rate with an introductory
period of 30 months that adjusts every year thereafter, the creditor
would be required to disclose ``2.5/1 Adjustable Rate.'' If the
introductory period were 31 months, the required disclosure would be
2.58/1 Adjustable Rate.''
ii. Terms of less than 24 months. For product types and features
that have introductory periods or adjustment periods that do not equate
to a number of whole years, if the period is less than 24 months, Sec.
1026.37(a)(10) requires disclosure of the number of months, followed by
the designation ``mo.'' For example, if the product type is an
adjustable rate with an 18-month introductory period that adjusts every
18 months starting in the 19th month, the required disclosure would be
``18 mo./18mo. Adjustable Rate.''
iii. Adjustments more frequent than monthly. For adjustment periods
that change more frequently than monthly, Sec. 1026.37(a)(10) requires
disclosure of the applicable unit-period, such as daily, weekly, or bi-
weekly. For example, for an adjustable rate construction loan with no
introductory fixed rate period where the interest rate adjusts every
seven days, the disclosure required by Sec. 1026.37(a)(10) is ``0/
Weekly Adjustable Rate.''
37(a)(11) Loan type.
1. Other. If the transaction is a type other than a conventional,
FHA, or VA loan, Sec. 1026.37(a)(11)(iv) requires the creditor to
disclose the loan type as ``Other'' and provide a name or brief
description of the loan type. For example, a loan that is guaranteed or
funded by the Federal government under the Rural Housing Service (RHS)
of the U.S. Department of Agriculture is required to be disclosed under
the subcategory ``Other.'' Section 1026.37(a)(11)(iv) requires a brief
description of the loan type (e.g., ``RHS''). A loan that is insured or
guaranteed by a State agency must also be disclosed as ``Other.''
37(a)(12) Loan identification number (Loan ID ).
1. Unique identifier. Section 1026.37(a)(12) requires that the
creditor disclose a loan identification number that may be used by the
creditor, consumer, and other parties to identify the transaction,
labeled as ``Loan ID .'' The loan identification number is determined
by the creditor, which number may contain any alpha-numeric characters.
Because the number must allow for the identification of the particular
credit transaction under Sec. 1026.37(a)(12), a creditor must use a
unique loan identification number, i.e., the creditor may not use the
same loan identification number for different, but related, loan
transactions (such as different loans to the same borrower). Where a
creditor issues a revised Loan Estimate for a transaction, the loan
identification number must be sufficient to enable identification of the
transaction pursuant to Sec. 1026.37(a)(12).
37(a)(13) Rate lock.
1. Interest rate. For purposes of Sec. 1026.37(a)(13), the interest
rate is locked for a specific period of time if the creditor has agreed
to extend credit to the consumer at a given rate, subject to
contingencies that are described in any rate lock agreement between the
creditor and consumer.
2. Expiration date. The disclosure required by Sec.
1026.37(a)(13)(ii) related to estimated closing costs is required
regardless of whether the interest rate is locked for a specific period
of time or whether the terms and costs are otherwise accepted or
extended. If the consumer fails to indicate an intent to proceed with
the transaction within 10 business days after the disclosures were
originally provided under Sec. 1026.19(e)(1)(iii) (or within any longer
time period established by the creditor), then, for determining good
faith under Sec. 1026.19(e)(3)(i) and (ii), a creditor may use a
revised estimate of a charge instead of the amount originally disclosed
under Sec. 1026.19(e)(1)(i). See comment 19(e)(3)(iv)(E)-2.
3. Time zone. The disclosure required by Sec. 1026.37(a)(13)
requires the applicable time zone for all times provided, as determined
by the creditor. For example, if the creditor is located in New York and
determines that the Loan Estimate will expire at 5:00 p.m. in the time
zone applicable to its location, while standard time is in effect, the
disclosure must include a reference to the Eastern time zone (i.e., 5:00
p.m. EST).
4. Revised disclosures. Once the consumer indicates an intent to
proceed within the
[[Page 701]]
time specified by the creditor under Sec. 1026.37(a)(13)(ii), the date
and time at which estimated closing costs expire are left blank on any
subsequent revised disclosures. The creditor may extend the period of
availability to expire beyond the time disclosed under Sec.
1026.37(a)(13)(ii). If the consumer indicates an intent to proceed
within that longer time period, the date and time at which estimated
closing costs expire are left blank on subsequent revised disclosures,
if any. See comment 19(e)(3)(iv)-5.
37(b) Loan terms.
1. Legal obligation. The disclosures required by Sec. 1026.37 must
reflect good faith estimates of the credit terms to which the parties
will be legally bound for the transaction. Accordingly, if certain terms
of the transaction are known or reasonably available to the creditor,
based on information such as the consumer's selection of a product type
or other information in the consumer's application, Sec. 1026.37
requires the creditor to disclose those credit terms. For example, if
the consumer selects a product type with a prepayment penalty, Sec.
1026.37(b)(4) requires disclosure of the maximum amount of the
prepayment penalty and period in which the prepayment penalty may be
charged as known to the creditor at the time the disclosures are
provided.
37(b)(2) Interest rate.
1. Interest rate at consummation not known. Where the interest rate
that will apply at consummation is not known at the time the creditor
must deliver the disclosures required by Sec. 1026.19(e), Sec.
1026.37(b)(2) requires disclosure of the fully-indexed rate, defined as
the index plus the margin at consummation. Although Sec. 1026.37(b)(2)
refers to the index plus margin ``at consummation,'' if the index value
that will be in effect at consummation is unknown at the time the
disclosures are provided under Sec. 1026.19(e)(1)(iii), i.e., within
three business days after receipt of a consumer's application, the
fully-indexed rate disclosed under Sec. 1026.37(b)(2) may be based on
the index in effect at the time the disclosure is delivered. The index
in effect at consummation (or the time the disclosure is delivered under
Sec. 1026.19(e)) need not be used if the contract provides for a delay
in the implementation of changes in an index value. For example, if the
contract specifies that rate changes are based on the index value in
effect 45 days before the change date, creditors may use any index value
in effect during the 45 days before consummation (or any earlier date of
disclosure) in calculating the fully-indexed rate to be disclosed. See
comment app. D-7.iii for an explanation of the disclosure of the
permanent financing interest rate for a construction-permanent loan.
37(b)(3) Principal and interest payment.
1. Frequency of principal and interest payment. Pursuant to Sec.
1026.37(o)(5)(i), if the contract provides for a unit-period, as defined
in appendix J to this part, of a month, such as a monthly payment
schedule, the payment disclosed under Sec. 1026.37(b)(3) should be
labeled ``Monthly Principal & Interest.'' If the contract requires bi-
weekly payments of principal or interest, the payment should be labeled
``Bi-Weekly Principal & Interest.'' If a creditor voluntarily permits a
payment schedule not provided for in the contract, such as an informal
principal-reduction arrangement, the disclosure should reflect only the
payment frequency provided for in the contract. See Sec. 1026.17(c)(1).
2. Initial periodic payment if not known. Under Sec. 1026.37(b)(3),
the initial periodic payment amount that will be due under the terms of
the legal obligation must be disclosed. If the initial periodic payment
is not known because it will be based on an interest rate at
consummation that is not known at the time the disclosures required by
Sec. 1026.19(e) must be provided, for example, if it is based on an
external index that may fluctuate before consummation, Sec.
1026.37(b)(3) requires that the disclosure be based on the fully-indexed
rate disclosed under Sec. 1026.37(b)(2). See comment 37(b)(2)-1 for
guidance regarding calculating the fully-indexed rate.
37(b)(4) Prepayment penalty.
1. Transaction includes a prepayment penalty. Section 1026.37(b)(4)
requires disclosure of a statement of whether the transaction includes a
prepayment penalty. If the transaction includes a prepayment penalty,
Sec. 1026.37(b)(7) sets forth the information that must be disclosed
under Sec. 1026.37(b)(4) (i.e., the maximum amount of the prepayment
penalty that may be imposed under the terms of the loan contract and the
date on which the penalty will no longer be imposed). For an example of
such disclosure, see form H-24 of appendix H to this part. The
disclosure under Sec. 1026.37(b)(4) applies to transactions where the
terms of the loan contract provide for a prepayment penalty, even though
the creditor does not know at the time of the disclosure whether the
consumer will, in fact, make a payment to the creditor that would cause
imposition of the penalty. For example, if the monthly interest accrual
amortization method described in comment 37(b)(4)-2.i is used such that
interest is assessed on the balance for a full month even if the
consumer makes a full prepayment before the end of the month, the
transaction includes a prepayment penalty that must be disclosed
pursuant to Sec. 1026.37(b)(4).
2. Examples of prepayment penalties. For purposes of Sec.
1026.37(b)(4), the following are examples of prepayment penalties:
i. A charge determined by treating the loan balance as outstanding
for a period of time after prepayment in full and applying the interest
rate to such ``balance,'' even if
[[Page 702]]
the charge results from interest accrual amortization used for other
payments in the transaction under the terms of the loan contract.
``Interest accrual amortization'' refers to the method by which the
amount of interest due for each period (e.g., month) in a transaction's
term is determined. For example, ``monthly interest accrual
amortization'' treats each payment as made on the scheduled, monthly due
date even if it is actually paid early or late (until the expiration of
any grace period). Thus, under the terms of a loan contract providing
for monthly interest accrual amortization, if the amount of interest due
on May 1 for the preceding month of April is $3,000, the loan contract
will require payment of $3,000 in interest for the month of April
whether the payment is made on April 20, on May 1, or on May 10. In this
example, if the consumer prepays the loan in full on April 20 and if the
accrued interest as of that date is $2,000, then assessment of a charge
of $3,000 constitutes a prepayment penalty of $1,000 because the amount
of interest actually earned through April 20 is only $2,000.
ii. A fee, such as an origination or other loan closing cost, that
is waived by the creditor on the condition that the consumer does not
prepay the loan. See comment 37(b)(4)-3.iii below for additional
guidance regarding waived bona fide third-party charges imposed by the
creditor if the consumer pays all of a covered transaction's principal
before the date on which the principal is due sooner than 36 months
after consummation.
iii. A minimum finance charge in a simple interest transaction.
iv. Computing a refund of unearned interest by a method that is less
favorable to the consumer than the actuarial method, as defined by
section 933(d) of the Housing and Community Development Act of 1992, 15
U.S.C. 1615(d). For purposes of computing a refund of unearned interest,
if using the actuarial method defined by applicable State law results in
a refund that is greater than the refund calculated by using the method
described in section 933(d) of the Housing and Community Development Act
of 1992, creditors should use the State law definition in determining if
a refund is a prepayment penalty.
3. Fees that are not prepayment penalties. For purposes of Sec.
1026.37(b)(4), fees that are not prepayment penalties include, for
example:
i. Fees imposed for preparing and providing documents when a loan is
paid in full, if such fees are imposed whether or not the loan is
prepaid. Examples include a loan payoff statement, a reconveyance
document, or another document releasing the creditor's security interest
in the dwelling that secures the loan.
ii. Loan guarantee fees.
iii. A waived bona fide third-party charge imposed by the creditor
if the consumer pays all of a covered transaction's principal before the
date on which the principal is due sooner than 36 months after
consummation. For example, assume that at consummation, the creditor
waives $3,000 in closing costs to cover bona fide third-party charges
but the terms of the loan agreement provide that the creditor may recoup
the $3,000 in waived charges if the consumer repays the entire loan
balance sooner than 36 months after consummation. The $3,000 charge is
not a prepayment penalty. In contrast, for example, assume that at
consummation, the creditor waives $3,000 in closing costs to cover bona
fide third-party charges but the terms of the loan agreement provide
that the creditor may recoup $4,500 in part to recoup waived charges, if
the consumer repays the entire loan balance sooner than 36 months after
consummation. The $3,000 that the creditor may impose to cover the
waived bona fide third-party charges is not a prepayment penalty, but
the additional $1,500 charge is a prepayment penalty and must be
disclosed pursuant to Sec. 1026.37(b)(4).
4. Rebate of finance charge. For an obligation that includes a
finance charge that does not take into account each reduction in the
principal balance of the obligation, the disclosure under Sec.
1026.37(b)(4) reflects whether or not the consumer is entitled to a
rebate of any finance charge if the obligation is prepaid in full or
part. Finance charges that do not take into account each reduction in
the principal balance of an obligation may include precomputed finance
charges. If any portion of an unearned precomputed finance charge will
not be provided as a rebate upon full prepayment, the disclosure
required by Sec. 1026.37(b)(4) will be an affirmative answer, indicate
the maximum amount of such precomputed finance charge that may not be
provided as a rebate to the consumer upon any prepayment, and state when
the period during which a full rebate would not be provided terminates,
as required by Sec. 1026.37(b)(7). If, instead, there will be a full
rebate of the precomputed finance charge and no other prepayment penalty
imposed on the consumer, to comply with the requirements of Sec.
1026.37(b)(4) and (7), the creditor states a negative answer only. If
the transaction involves both a precomputed finance charge and a finance
charge computed by application of a rate to an unpaid balance,
disclosure about both the entitlement to any rebate of the finance
charge upon prepayment and any other prepayment penalty are made as one
disclosure under Sec. 1026.37(b)(4), stating one affirmative or
negative answer and an aggregated amount and time period for the
information required by Sec. 1026.37(b)(7). For example, if in such a
transaction, a portion of the precomputed finance charge will
[[Page 703]]
not be provided as a rebate and the loan contract also provides for a
prepayment penalty based on the amount prepaid, both disclosures are
made under Sec. 1026.37(b)(4) as one aggregate amount, stating the
maximum amount and time period under Sec. 1026.37(b)(7). If the
transaction instead provides a rebate of the precomputed finance charge
upon prepayment, but imposes a prepayment penalty based on the amount
prepaid, to comply with Sec. 1026.37(b)(4), the creditor states an
affirmative answer and the information about the prepayment penalty, as
required by Sec. 1026.37(b)(7). For further guidance and examples of
these types of charges, see comment 18(k)(2)-1. For analogous guidance,
see comment 18(k)-2. For further guidance on prepaid finance charges
generally, see comment 18(k)-3.
5. Additional guidance. For additional guidance generally on
disclosure of prepayment penalties, see comment 18(k)-1.
37(b)(5) Balloon payment.
1. Regular periodic payment. If a payment is not itself a regular
periodic payment and is more than two times any one regular periodic
payment during the loan term, then it is disclosed as a balloon payment
under Sec. 1026.37(b)(5). The regular periodic payments used to
determine whether a payment is a balloon payment under Sec.
1026.37(b)(5) are the payments of principal and interest (or interest
only, depending on the loan features) specified under the terms of the
loan contract that are due from the consumer for two or more unit-
periods in succession. All regular periodic payments during the loan
term are used to determine whether a particular payment is a balloon
payment, regardless of whether the regular periodic payments have
changed during the loan term due to rate adjustments or other payment
changes permitted or required under the loan contract.
i. For example, assume that, under a 15-year step rate mortgage, the
loan contract provides for scheduled monthly payments of $300 each
during the years one through three and scheduled monthly payments of
$700 each during years four through 15. If an irregular payment of
$1,000 is scheduled during the final month of year 15, that payment is
disclosed as a balloon payment under Sec. 1026.37(b)(5), because it is
more than two times the regular periodic payment amount of $300 during
years one through three. This is the case even though the irregular
payment is not more than two times the regular periodic payment of $700
per month during years four through fifteen. The $700 monthly payments
during years four through fifteen are not balloon payments even though
they are more than two times the regular periodic payments during years
one through three, because they are regular periodic payments.
ii. If the loan has an adjustable rate under which the regular
periodic payments may increase after consummation, but the amounts of
such payment increases (if any) are unknown at the time of consummation,
then the regular periodic payments are based on the fully-indexed rate,
except as otherwise determined by any premium or discounted rates, the
application of any interest rate adjustment caps, or any other known,
scheduled rates under the terms specified in the loan contract. For
analogous guidance, see comments 17(c)(1)-8 and -10. Similarly, if a
loan has an adjustable interest rate which does not adjust the regular
periodic payment but would, if the rate increased, increase only the
final payment, the amount of the final payment for purposes of the
balloon payment determination is based on the fully-indexed rate, except
as otherwise determined by any premium or discounted rate caps, or any
other known, scheduled rates under the terms specified in the loan
contract. For example, assume that, under a 30-year adjustable rate
mortgage, (1) the loan contract requires monthly payments of $300 during
years one through five, (2) the loan contract permits interest rate
increases every three years starting in the sixth year up to the fully-
indexed rate, subject to caps on interest rate adjustments specified in
the loan contract, (3) based on the application of the interest rate
adjustment caps, the interest rate may increase to the fully-indexed
rate starting in year nine, and (4) the monthly payment based on the
fully-indexed rate is $700. The regular periodic payments during years
one through five are $300 per month, because they are known and
scheduled. The regular periodic payments during years six through eight
are up to $700 per month, based on the fully-indexed rate but subject to
the application of interest rate adjustment caps specified under the
loan contract. The regular periodic payments during years nine through
thirty are $700, based on the fully-indexed rate. Therefore, if an
irregular payment of $1,000 is scheduled during the final month of year
30, that payment is disclosed as a balloon payment under Sec.
1026.37(b)(5), because it is more than two times the regular periodic
payment amount of $300 during years one through five. This is the case
even though the irregular payment is not more than two times the regular
periodic payment during years nine through thirty (i.e., based on the
fully-indexed rate). However, the regular periodic payments during years
six through thirty themselves are not balloon payments, even though they
may be more than two times the regular periodic payments during years
one through five.
iii. For a loan with a negative amortization feature, the regular
periodic payment does not take into account the possibility that the
consumer may exercise an option to make a payment greater than the
scheduled periodic payment specified under the terms of the loan
contract, if any.
[[Page 704]]
iv. A final payment that differs from other regular periodic
payments because of rounding to account for payment amounts including
fractions of cents is still a regular periodic payment and need not be
disclosed as a balloon payment under Sec. 1026.37(b)(5).
v. The disclosure of balloon payments in the ``Projected Payments''
table under Sec. 1026.37(c) is governed by that section and its
commentary, rather than Sec. 1026.37(b)(5), except that the
determination, as a threshold matter, of whether a payment disclosed
under Sec. 1026.37(c) is a balloon payment is made in accordance with
Sec. 1026.37(b)(5) and its commentary.
2. Single and double payment transactions. The definition of a
``balloon payment'' under Sec. 1026.37(b)(5) includes the payments
under transactions that require only one or two payments during the loan
term, even though a single payment transaction does not require regular
periodic payments, and a transaction with only two scheduled payments
during the loan term may not require regular periodic payments.
37(b)(6) Adjustments after consummation.
1. Periods not in whole years. For guidance on how to disclose
increases after consummation that occur after a number of months less
than 24 but that do not equate to a number of whole years or within a
number of days less than a week, see the guidance provided in comment
37(a)(10)-3. For increases that occur after more than 24 months, see the
guidance provided in comment 37(b)(8)-1.
37(b)(6)(i) Adjustment in loan amount.
1. Additional information regarding adjustment in loan amount. A
creditor complies with the requirement under Sec. 1026.37(b)(6)(i) to
disclose additional information indicating whether the maximum principal
balance is potential or is scheduled to occur under the terms of the
legal obligation by using the phrase ``Can go as high as'' or ``Goes as
high as,'' respectively. A creditor complies with the requirement under
Sec. 1026.37(b)(6)(i) to disclose additional information indicating the
due date of the last payment that may cause the principal balance to
increase by using the phrase ``Increases until.'' See form H-24 of
appendix H to this part for the required format of such phrases, which
is required for federally related mortgage loans under Sec.
1026.37(o)(3).
37(b)(6)(ii) Adjustment in interest rate.
1. Additional information regarding adjustment in interest rate. A
creditor complies with the requirement under Sec. 1026.37(b)(6)(ii) to
disclose additional information indicating the frequency of adjustments
to the interest rate and date when the interest rate may first adjust by
using the phrases ``Adjusts every'' and ``starting in.'' A creditor
complies with the requirement under Sec. 1026.37(b)(6)(ii) to disclose
additional information indicating the maximum interest rate, and the
first date when the interest rate can reach the maximum interest rate
using the phrase ``Can go as high as'' and then indicating the date at
the end of that phrase or for a scheduled maximum interest rate under a
step rate loan, ``Goes as high as.'' If the loan term may increase based
on an interest rate adjustment, the disclosure shall indicate the
maximum possible loan term using the phrase ``Can increase loan term
to.'' See form H-24 of appendix H to this part for the required format
of such phrases, which is required for federally related mortgage loans
under Sec. 1026.37(o)(3).
2. Interest rates that adjust at multiple intervals. If the terms of
the legal obligation provide for more than one adjustment period, Sec.
1026.37(b)(6)(ii) requires disclosure of only the frequency of the first
interest rate adjustment. For example, if the interest rate is fixed for
five years, then adjusts every two years starting in year six, then
adjusts every year starting in year 10, the disclosure required is
``Adjusts every 2 years starting in year 6.''
37(b)(6)(iii) Increase in periodic payment.
1. Additional information regarding increase in periodic payment. A
creditor complies with the requirement under Sec. 1026.37(b)(6)(iii) to
disclose additional information indicating the scheduled frequency of
adjustments to the periodic principal and interest payment by using the
phrases ``Adjusts every'' and ``starting in.'' A creditor complies with
the requirement under Sec. 1026.37(b)(6)(iii) to disclose additional
information indicating the maximum possible periodic principal and
interest payment, and the date when the periodic principal and interest
payment may first equal the maximum principal and interest payment by
using the phrase ``Can go as high as'' and then indicating the date at
the end of that phrase or, for a scheduled maximum amount, such as under
a step payment loan, ``Goes as high as.'' A creditor complies with the
requirement under Sec. 1026.37(b)(6)(iii) to indicate that there is a
period during which only interest is required to be paid and the due
date of the last periodic payment of such period using the phrase
``Includes only interest and no principal until.'' See form H-24 of
appendix H to this part for the required format of such phrases, which
is required for federally related mortgage loans under Sec.
1026.37(o)(3). See comment app. D-7.iv for an explanation of the
disclosure of an increase in the periodic payment for a construction or
construction-permanent loan.
2. Periodic principal and interest payments that adjust at multiple
intervals. If there are multiple periods of adjustment under the terms
of the legal obligation, Sec. 1026.37(b)(6)(iii) requires disclosure of
the frequency of only the first adjustment to the periodic principal and
interest payment, regardless of the basis for the adjustment.
Accordingly, where the periodic principal and
[[Page 705]]
interest payment may change because of more than one factor and such
adjustments are on different schedules, the frequency disclosed is the
adjustment of whichever factor adjusts first. For example, where the
interest rate for a transaction is fixed until year six and then adjusts
every three years but the transaction also has a negative amortization
feature that ends in year seven, Sec. 1026.37(b)(6)(iii) requires
disclosure that the interest rate will adjust every three years starting
in year six because the periodic principal and interest payment adjusts
based on the interest rate before it adjusts based on the end of the
negative amortization period.
37(b)(7) Details about prepayment penalty and balloon payment.
Paragraph 37(b)(7)(i).
1. Maximum prepayment penalty. Section 1026.37(b)(7)(i) requires
disclosure of the maximum amount of the prepayment penalty that may be
imposed under the terms of the legal obligation. The creditor complies
with Sec. 1026.37(b)(7)(i) when it assumes that the consumer prepays at
a time when the prepayment penalty may be charged and that the consumer
makes all payments prior to the prepayment on a timely basis and in the
amount required by the terms of the legal obligation. The creditor must
determine the maximum of each amount used in calculating the prepayment
penalty. For example, if a transaction is fully amortizing and the
prepayment penalty is two percent of the loan balance at the time of
prepayment, the prepayment penalty amount should be determined by using
the highest loan balance possible during the period in which the penalty
may be imposed. If more than one type of prepayment penalty applies, the
creditor must aggregate the maximum amount of each type of prepayment
penalty in the maximum penalty disclosed.
2. Additional information regarding prepayment penalty. A creditor
complies with the requirement under Sec. 1026.37(b)(7)(i) to disclose
additional information indicating the maximum amount of the prepayment
penalty that may be imposed and the date when the period during which
the penalty may be imposed terminates using the phrases ``As high as''
and ``if you pay off the loan during.'' See form H-24 of appendix H to
this part for the required format of such phrases, which is required for
federally related mortgage loans under Sec. 1026.37(o)(3).
Paragraph 37(b)(7)(ii).
1. Additional information regarding balloon payment. A creditor
complies with the requirement under Sec. 1026.37(b)(7)(ii) to disclose
additional information indicating the maximum amount of the balloon
payment and the due date of such payment using the phrases ``You will
have to pay'' and ``at the end of.'' See form H-24 of appendix H to this
part for the required format of such phrases, which is required for
federally related mortgage loans under Sec. 1026.37(o)(3). If the
transaction includes more than one balloon payment, a creditor complies
with Sec. 1026.37(b)(7)(ii) by disclosing the highest of the balloon
payments and the due date of that payment.
37(b)(8) Timing.
1. Whole years. For adjustments that occur after a period of whole
years, the timing of information required by Sec. 1026.37(b)(8) starts
with year number ``1,'' counting from the date that interest for the
first scheduled periodic payment begins to accrue for Sec.
1026.37(b)(8)(i), or from the due date of the first periodic payment for
Sec. 1026.37(b)(8)(ii), or from the date of consummation for Sec.
1026.37(b)(8)(iii). For example, an interest rate that is fixed for five
years and can first adjust at the beginning of the 61st month from the
date that interest for the regularly scheduled periodic payment began to
accrue would be disclosed as beginning to adjust in ``year 6.'' A
monthly periodic payment that adjusts starting with the 61st scheduled
payment likewise would be disclosed as adjusting in ``year 6.''
2. Periods not in whole years. For adjustments that occur after a
number of months less than 24 that do not equate to a number of whole
years or within a number of days less than a week, see the guidance
provided in comment 37(a)(10)-3.
37(c) Projected payments.
1. Definitions. For purposes of Sec. 1026.37(c), the terms
``adjustable rate,'' ``fixed rate,'' ``negative amortization,'' and
``interest only'' have the meanings in Sec. 1026.37(a)(10).
2. Construction loans. See comment app. D-7.v for an explanation of
the projected payments disclosure for a construction or construction-
permanent loan.
37(c)(1) Periodic payment or range of payments.
Paragraph 37(c)(1)(i).
1. Periodic payments. For purposes of Sec. 1026.37(c)(1)(i), the
periodic payment is the regularly scheduled payment of principal and
interest, mortgage insurance premiums, and escrow payments described in
Sec. 1026.37(c)(2) without regard to any final payment that differs
from other payments because of rounding to account for payment amounts
including fractions of cents.
2. Initial periodic payment or range of payments. Section
1026.37(c)(1)(i) requires the creditor to disclose the initial periodic
payment or range of payments. The disclosure required is of the actual
periodic payment or range of payments that corresponds to the interest
rate that will apply at consummation, including any initial discounted
or premium interest rate. For examples of discounted and premium rate
transactions, see comment 17(c)(1)-10.v. For guidance regarding whether
the disclosure should reflect a buydown, see comments 17(c)(1)-3 through
-5.
[[Page 706]]
If the initial periodic payment or range of payments may vary based on
an adjustment to an index value that applies at consummation, Sec.
1026.37(c)(1)(i) requires that the disclosure of the initial periodic
payment or range of payments be based on the fully-indexed rate
disclosed under Sec. 1026.37(b)(2). See comment 37(b)(2)-1 for guidance
regarding calculating the fully-indexed rate.
Paragraph 37(c)(1)(i)(A).
1. Periodic principal and interest payments. For purposes of Sec.
1026.37(c)(1)(i)(A), periodic principal and interest payments may change
when the interest rate, applicable interest rate caps, required periodic
principal and interest payments, or ranges of such payments may change.
Minor payment variations resulting solely from the fact that months have
different numbers of days are not changes to periodic principal and
interest payments.
2. Negative amortization. In a loan that contains a negative
amortization feature, periodic principal and interest payments or the
range of such payments may change for purposes of Sec.
1026.37(c)(1)(i)(A) at the time the negative amortization period ends
under the terms of the legal obligation, meaning the consumer must begin
making payments that do not result in an increase of the principal
balance. The occurrence of an event requiring disclosure of additional
separate periodic payments or ranges of payments should be based on the
assumption that the consumer will make payments as scheduled or, if
applicable, elect to make the periodic payments that would extend the
negative amortization period to the latest time permitted under the
terms of the legal obligation. The occurrence of all subsequent events
requiring disclosure of additional separate periodic payments or ranges
of payments should be based on this assumption. The table required by
Sec. 1026.37(c) should also reflect any balloon payment that would
result from such scheduled payments or election. See Sec.
1026.37(c)(1)(ii)(A) for special rules regarding disclosure of balloon
payments.
3. Interest only. In a loan that contains an interest only feature,
periodic principal and interest payments may change for purposes of
Sec. 1026.37(c)(1)(i)(A) when the interest only period ends, meaning
the consumer must begin making payments that do not defer repayment of
principal.
Paragraph 37(c)(1)(i)(B).
1. Balloon payment. For purposes of Sec. 1026.37(c)(1)(i)(B),
whether a balloon payment occurs is determined pursuant to Sec.
1026.37(b)(5) and its commentary. For guidance on the amount of a
balloon payment disclosed on the table required by Sec. 1026.37(c), see
comment 37(c)(2)(i)-3.
Paragraph 37(c)(1)(i)(C).
1. General. ``Mortgage insurance or any functional equivalent''
means the amounts identified in Sec. 1026.4(b)(5). For purposes of
Sec. 1026.37(c), ``mortgage insurance or any functional equivalent''
includes any mortgage guarantee that provides coverage similar to
mortgage insurance (such as a United States Department of Veterans
Affairs or United States Department of Agriculture guarantee), even if
not technically considered insurance under State or other applicable
law. The fees for such a guarantee are included in ``mortgage insurance
premiums.''
2. Calculation of mortgage insurance termination. For purposes of
Sec. 1026.37(c)(1)(i)(C), mortgage insurance premiums should be
calculated based on the declining principal balance that will occur as a
result of changes to the interest rate and payment amounts, applying the
interest rates applicable to the transaction. Such calculation should
take into account any initial discounted or premium interest rate. For
example, for an adjustable rate transaction that has a discounted
interest rate during an initial five-year period, the creditor makes the
calculation using a composite rate based on the rate in effect during
the initial five-year period and, thereafter, the fully-indexed rate,
unless otherwise required by applicable law. For guidance on calculation
of the amount of mortgage insurance premiums to disclose on the table
required by Sec. 1026.37(c), see Sec. 1026.37(c)(2)(ii) and its
commentary. See comment 37(b)(2)-1 for guidance regarding calculating
the fully-indexed rate.
3. Disclosure of mortgage insurance termination. The table required
by Sec. 1026.37(c) should reflect the consumer's mortgage insurance
premiums until the date on which the creditor must automatically
terminate coverage under applicable law, even though the consumer may
have a right to request that the insurance be cancelled earlier. Unlike
termination of mortgage insurance, a subsequent decline in the
consumer's mortgage insurance premiums is not, by itself, an event that
requires the disclosure of additional separate periodic payments or
ranges of payments in the table required by Sec. 1026.37(c). For
example, some mortgage insurance programs annually adjust premiums based
on the declining loan balance. Such annual adjustment to the amount of
premiums would not require a separate disclosure of a periodic payment
or range payments.
Paragraph 37(c)(1)(i)(D).
1. Anniversary of the due date of initial periodic payment. Section
1026.37(c)(1)(i)(D) provides that the anniversary of the due date of the
initial periodic payment or range of payments that immediately follows
the occurrence of multiple events described in Sec. 1026.37(c)(1)(i)(A)
during a single year is an event that requires disclosure of additional
periodic payments or ranges of payments. Section 1026.37(c)(1)(i)(A)
provides that a potential change in the periodic principal and
[[Page 707]]
interest payment is an event requiring disclosure of additional separate
periodic payments. See comment 37(c)(1)(iii)(B)-1 for an example of the
application of Sec. 1026.37(c)(1)(i)(D).
Paragraph 37(c)(1)(ii).
Paragraph 37(c)(1)(ii)(A).
1. Special rule regarding balloon payments that are final payments.
Section 1026.37(c)(1)(ii)(A) is an exception to the general rule in
Sec. 1026.37(c)(1)(ii), and requires that a balloon payment that is
scheduled as a final payment under the terms of the legal obligation is
always disclosed as a separate periodic payment or range of payments, in
which case the creditor discloses as a single range of payments all
events requiring disclosure of additional separate periodic payments or
ranges of payments described in Sec. 1026.37(c)(1)(i)(A) through (D),
other than the final balloon payment, occurring after the second
separate periodic payment or range of payments disclosed. Balloon
payments that are not scheduled as final payments under the terms of the
legal obligation, such as a balloon payment due at the scheduled recast
of a loan that permits negative amortization, are disclosed pursuant to
the general rule in Sec. 1026.37(c)(1)(ii). A balloon payment that is a
final payment is disclosed as a single payment, and not combined with
other changes to periodic principal and interest payments and disclosed
as a range.
2. Example. Assume a loan with a term of seven years, where the
interest rate adjusts each year for the first three years and is fixed
thereafter, that provides for a balloon payment as the final payment,
where no mortgage insurance is required, and no escrow account will be
established for the payment of charges described in Sec.
1026.37(c)(4)(ii). The creditor discloses on the table required by Sec.
1026.37(c) in the first column the initial periodic payment or range of
payments, in the second column the periodic payment or range of payments
that would apply after the first interest rate adjustment, in the third
column the periodic payments or ranges of payments that would apply
after the second interest rate adjustment until the final balloon
payment (disclosed as a single range of payments), and in the fourth
column the final balloon payment. Although the balloon payment that is
scheduled as the final payment under the terms of the legal obligation
occurs after the third separate periodic payment or range of payments,
the creditor discloses the final balloon payment as a separate event
requiring disclosure of additional periodic payments or range of
payments due to the special rule in Sec. 1026.37(c)(1)(ii)(A).
Paragraph 37(c)(1)(ii)(B).
1. Special rule regarding disclosure of the automatic termination of
mortgage insurance. Section 1026.37(c)(1)(ii)(B) is an exception to the
general rule in Sec. 1026.37(c)(1)(ii), and requires that the automatic
termination of mortgage insurance or any functional equivalent under
applicable law is disclosed as a separate periodic payment or range of
payments only if the total number of separate periodic payments or
ranges of payments otherwise disclosed does not exceed three. This means
that the automatic termination of mortgage insurance or any functional
equivalent under applicable law is disclosed as its own event only if
there is a column in which to disclose it, i.e., there are only three
other separate periodic payments or ranges of payments that are required
to be disclosed. Where the automatic termination of mortgage insurance
or any functional equivalent under applicable law is not disclosed as a
separate periodic payment or range of payments, the absence of a
required mortgage insurance payment is disclosed with the next disclosed
event requiring disclosure of additional separate periodic payments or
ranges of payments, as applicable.
2. Examples of special rule regarding disclosure of the automatic
termination of mortgage insurance. i. Assume a step-rate loan with a 30-
year term with an introductory interest rate that lasts for five years,
a different interest rate that applies for the next five-year period, a
final interest rate adjustment after 10 years, where mortgage insurance
would terminate for purposes of Sec. 1026.37(c)(1)(i)(C) in the third
year, and where no escrow account would be established for the payment
of charges described in Sec. 1026.37(c)(4)(ii). The creditor would
disclose on the table required by Sec. 1026.37(c) the initial periodic
payment for years one through three (reflecting the principal and
interest payment corresponding to the introductory interest rate and
payments for mortgage insurance premiums), an additional separate
periodic payment for years four and five (reflecting the principal and
interest payment corresponding to the introductory rate and no payments
for mortgage insurance premiums), an additional separate periodic
payment or range of payments for years six through 10 (reflecting the
principal and interest payment corresponding to the interest rate that
would apply after the introductory rate), and an additional separate
periodic payment or range of payments for years 11 through 30
(reflecting the principal and interest payment corresponding to the
interest rate that would apply after the second interest rate adjustment
until the end of the loan term). In this example, the automatic
termination of mortgage insurance would be separately disclosed on the
table required by Sec. 1026.37(c) because the total number of separate
periodic payments or ranges of payments otherwise disclosed pursuant to
Sec. 1026.37(c)(1) does not exceed three.
ii. Assume the same loan as above, except that the terms of the
legal obligation also
[[Page 708]]
provide for a third interest rate adjustment that would occur after 15
years. The creditor would disclose on the table required by Sec.
1026.37(c) the initial periodic payment for years one through five
(reflecting the principal and interest payment corresponding to the
introductory interest rate and payments for mortgage insurance
premiums), an additional separate periodic payment or range of payments
for years six through 10 (reflecting the principal and interest payment
corresponding to the interest rate that would apply after the first
interest rate adjustment and no payments for mortgage insurance
premiums), an additional separate periodic payment or range of payments
for years 11 through 15 (reflecting the principal and interest payment
corresponding to the interest rate that would apply after the second
interest rate adjustment), and an additional separate periodic payment
or range of payments for years 16 through 30 (reflecting the principal
and interest payment corresponding to the interest rate that would apply
after the third interest rate adjustment until the end of the loan
term). In this example, the automatic termination of mortgage insurance
would not be separately disclosed on the table required by Sec.
1026.37(c) because the total number of separate periodic payments or
ranges of payments otherwise disclosed pursuant to Sec. 1026.37(c)(1)
exceeds three. However, the creditor would disclose the termination of
mortgage insurance beginning with the periodic payment or range of
payments for years six through 10, which is the next disclosed event
requiring disclosure of additional separate periodic payments or ranges
of payments.
Paragraph 37(c)(1)(iii).
1. Ranges of payments. When a range of payments is required to be
disclosed under Sec. 1026.37(c)(1), Sec. 1026.37(c)(1)(iii) requires
the creditor to disclose the minimum and maximum amount for both the
principal and interest payment under Sec. 1026.37(c)(2)(i) and the
total periodic payment under Sec. 1026.37(c)(2)(iv). The amount
required to be disclosed for mortgage insurance premiums pursuant to
Sec. 1026.37(c)(2)(ii) and the amount payable into an escrow account
pursuant to Sec. 1026.37(c)(2)(iii) shall not be disclosed as a range.
Paragraph 37(c)(1)(iii)(B).
1. Multiple events occurring in a single year. If multiple changes
to periodic principal and interest payments would result in more than
one separate periodic payment or range of payments in a single year,
Sec. 1026.37(c)(1)(iii)(B) requires the creditor to disclose the range
of payments that would apply during the year in which the events occur.
For example:
i. Assume a loan with a 30-year term with a payment that adjusts
every month for the first 12 months and is fixed thereafter, where
mortgage insurance is not required, and where no escrow account would be
established for the payment of charges described in Sec.
1026.37(c)(4)(ii). The creditor discloses as a single range of payments
the initial periodic payment and the periodic payment that would apply
after each payment adjustment during the first 12 months, which single
range represents the minimum payment and maximum payment, respectively.
Under Sec. 1026.37(c)(1)(i)(D), the creditor also discloses, as an
additional separate periodic payment or range of payments, the periodic
principal and interest payment or range of payments that would apply
after the payment becomes fixed.
ii. Assume instead a loan with a 30-year term with a payment that
adjusts upward at three months and at six months and is fixed
thereafter, where mortgage insurance is not required, and where no
escrow account would be established for the payment of charges described
in Sec. 1026.37(c)(4)(ii). The creditor discloses as a single range of
payments the initial periodic payment, the periodic payment that would
apply after the payment adjustment that occurs at three months, and the
periodic payment that would apply after the payment adjustment that
occurs at six months, which single range represents the minimum payment
and maximum payment, respectively, which would apply during the first
year of the loan. Under Sec. 1026.37(c)(1)(i)(D), the creditor also
discloses as an additional separate periodic payment or range of
payments, the principal and interest payment that would apply on the
first anniversary of the due date of the initial periodic payment or
range of payments, because that is the anniversary that immediately
follows the occurrence of the multiple payments or ranges of payments
that occurred during the first year of the loan.
iii. Assume that the same loan has a payment that, instead of
becoming fixed after the adjustment at six months, adjusts once more at
18 months and becomes fixed thereafter. The creditor discloses the same
single range of payments for year one. Under Sec. 1026.37(c)(1)(i)(D),
the creditor separately discloses the principal and interest payment
that would apply on the first anniversary of the due date of the initial
periodic payment in year two. Under Sec. 1026.37(c)(1)(i)(A) and
(c)(3)(ii), beginning in the next year in the sequence (i.e., in year
three), the creditor separately discloses the periodic payment that
would apply after the payment adjustment that occurs at 18 months. See
comment 37(c)(3)(ii)-1 regarding subheadings that state the years.
Paragraph 37(c)(1)(iii)(C).
1. Adjustable rate mortgages. For an adjustable rate loan, the
periodic principal and interest payment at each time the interest rate
may change will depend on the rate that applies at the time of the
adjustment, which is not known at the time the disclosure is
[[Page 709]]
provided. As a result, the creditor discloses the minimum and maximum
periodic principal and interest payment that could apply during each
period disclosed pursuant to Sec. 1026.37(c)(1) after the first period.
37(c)(2) Itemization.
Paragraph 37(c)(2)(i).
1. General rule for adjustable rate loans. For an adjustable rate
loan, in disclosing the maximum possible payment for principal and
interest under Sec. 1026.37(c), the creditor assumes that the interest
rate will rise as rapidly as possible after consummation, taking into
account the terms of the legal obligation, including any applicable caps
on interest rate adjustments and lifetime interest rate cap. For a loan
with no lifetime interest rate cap, the maximum rate is determined by
reference to other applicable laws, such as State usury law. In
disclosing the minimum payment for purposes of Sec. 1026.37(c), the
creditor assumes that the interest rate will decrease as rapidly as
possible after consummation, taking into account any introductory rates,
caps on interest rate adjustments, and lifetime interest rate floor. For
an adjustable rate loan based on an index that has no lifetime interest
rate floor, the minimum interest rate is equal to the margin.
2. Special rule for adjustable rate loans with negative amortization
features. Section 1026.37(c)(2)(i)(B) provides a special rule for
calculation of the maximum principal and interest payment in an
adjustable rate loan that contains a negative amortization feature. That
section provides that the maximum amounts payable for principal and
interest after the negative amortization period ends are calculated
using the maximum principal amount permitted under the terms of the
legal obligation at the end of the negative amortization period. See
section Sec. 1026.37(c)(1)(i)(A) and associated commentary for guidance
regarding when the negative amortization period ends for purposes of
Sec. 1026.37(c)(2). For example, if the maximum principal balance for
the last payment in the negative amortization period is achieved at an
interest rate that is not the maximum interest rate permitted under the
terms of the legal obligation before the negative amortization period
ends, future events requiring disclosure of additional, separate
periodic payments or ranges of payments assume that the interest rate in
effect at the end of the negative amortization period was such interest
rate, and not the maximum possible interest rate. After the end of the
negative amortization period, the general rule under Sec.
1026.37(c)(2)(i)(A) regarding assumptions of interest rate changes for
the maximum principal and interest payment to be disclosed applies from
such interest rate. The minimum payment in an adjustable rate loan that
contains a negative amortization feature is determined pursuant to the
general rule under Sec. 1026.37(c)(2)(i)(A).
3. Disclosure of balloon payment amounts. Although the existence of
a balloon payment is determined pursuant to Sec. 1026.37(b)(5) and its
commentary (see comment 37(c)(1)(i)(B)-1), balloon payment amounts to be
disclosed under Sec. 1026.37(c) are calculated in the same manner as
periodic principal and interest payments under Sec. 1026.37(c)(2)(i).
For example, for a balloon payment amount that can change depending on
previous interest rate adjustments that are based on the value of an
index at the time of the adjustment, the balloon payment amounts are
calculated using the assumptions for minimum and maximum interest rates
described in Sec. 1026.37(c)(2)(i) and its commentary, and should be
disclosed as a range of payments.
Paragraph 37(c)(2)(ii).
1. Mortgage insurance disclosure. Mortgage insurance premiums should
be reflected on the disclosure required by Sec. 1026.37(c) even if no
escrow account is established for the payment of mortgage insurance
premiums. If the consumer is not required to purchase mortgage insurance
or any functional equivalent, the creditor discloses the mortgage
insurance premium amount as ``0.'' If the creditor is disclosing the
automatic termination or the absence of mortgage insurance or any
functional equivalent under applicable law or the absence of mortgage
insurance or any functional equivalent after coverage has terminated,
the creditor discloses the mortgage insurance premium as ``-.''
2. Relationship to principal and interest disclosure. The creditor
discloses mortgage insurance premiums pursuant to Sec.
1026.37(c)(2)(ii) on the same periodic basis that payments for principal
and interest are disclosed pursuant to Sec. 1026.37(c)(2)(i), even if
mortgage insurance premiums are actually paid on some other periodic
basis.
Paragraph 37(c)(2)(iii).
1. Escrow disclosure. The disclosure described in Sec.
1026.37(c)(2)(iii) is required only if the creditor will establish an
escrow account for the payment of some or all of the charges described
in Sec. 1026.37(c)(4)(ii). If no escrow account for the payment of some
or all such charges will be established, the creditor discloses the
escrow amount as ``0.'' If an escrow account is established for the
payment of amounts described in Sec. 1026.37(c)(4)(ii), but no escrow
payment is required with a particular periodic payment (such as with a
final balloon payment) or range of payments, the escrow payment should
be disclosed as ``--.''
37(c)(3) Subheadings.
Paragraph 37(c)(3)(ii).
1. Years. Section 1026.37(c)(3)(ii) requires that each separate
periodic payment or range of payments be disclosed under a subheading
that states the years during which that payment or range of payments
will
[[Page 710]]
apply and that such subheadings be stated in a sequence of whole years
from the due date of the initial periodic payment. Therefore, for
purposes of Sec. 1026.37(c), ``year'' is defined as the twelve-month
interval beginning on the due date of the initial periodic payment, and
the next whole year begins each anniversary thereafter. If an event
requiring the disclosure of an additional separate periodic payment or
range of payments occurs on a date other than the anniversary of the due
date of the initial periodic payment, and no other events occur during
that single year requiring disclosure of multiple events under Sec.
1026.37(c)(1)(iii)(B), such event is disclosed beginning in the next
year in the sequence, because the separate periodic payment or range of
payments that applied during the previous year will also apply during a
portion of that year. For example:
i. Assume a fixed rate loan with a term of 124 months (10 years,
four months). The creditor would label the disclosure of periodic
payments as ``Years 1-11.''
ii. Assume a loan with a 30-year term that does not require mortgage
insurance and requires interest only payments for the first 60 months
from the due date of the initial periodic payment, then requires fixed,
fully amortizing payments of principal and interest beginning at the
61st month for the duration of the loan, the creditor would label the
first disclosure of periodic payments as ``Years 1-5'' (including the
term ``only interest'' pursuant to Sec. 1026.37(c)(2)(i)) and the
second disclosure of periodic payments or range of payments as ``Years
6-30.'' If that loan requires interest only payments for the first 54
months from the due date of the initial periodic payment, then requires
fixed, fully amortizing payments of principal and interest for the
duration of the loan, because the change in the periodic payment occurs
on a date other than the anniversary of the due date of the initial
periodic payment and the previous payment applies during that year, the
creditor would likewise label the first disclosure of periodic payments
as ``Years 1-5'' (including the term ``only interest'' pursuant to Sec.
1026.37(c)(2)(i)) and the second disclosure of periodic payments or
range of payments as ``Years 6-30.'' If the loan that requires interest
only payments for the first 54 months also requires mortgage insurance
that would automatically terminate under applicable law after the 100th
month from the due date of the initial periodic payment, the creditor
would label the first disclosure of periodic payments as ``Years 1-5''
(including the term ``only interest'' pursuant to Sec.
1026.37(c)(2)(i)), the second disclosure of periodic payments or range
of payments as ``Years 6-9,'' and the third disclosure of periodic
payments or range of payments as ``Years 10-30.''
2. Loans with variable terms. If the loan term may increase based on
an adjustment of the interest rate, the creditor must disclose the
maximum loan term possible under the legal obligation. To calculate the
maximum loan term, the creditor assumes that the interest rate rises as
rapidly as possible, taking into account the terms of the legal
obligation, including any applicable caps on interest rate adjustments
and lifetime interest rate cap. See comment 37(a)(8)-2.
37(c)(4) Taxes, insurance, and assessments.
Paragraph 37(c)(4)(ii).
1. Definition of taxes, insurance, and assessments. See the
commentary under Sec. 1026.43(b)(8) for guidance on the charges that
are included in taxes, insurance, and assessments for purposes of Sec.
1026.37(c)(4)(ii), except that the portion of that commentary related to
amounts identified in Sec. 1026.4(b)(5) is inapplicable to the
disclosure required by Sec. 1026.37(c)(4)(ii).
Paragraph 37(c)(4)(iv).
1. Description of other amounts. Section 1026.37(c)(4)(iv) requires
the creditor to disclose a statement of whether the amount disclosed
pursuant to Sec. 1026.37(c)(4)(ii) includes payments for property
taxes, amounts identified in Sec. 1026.4(b)(8) (homeowner's insurance
premiums), and other amounts described in Sec. 1026.37(c)(4)(ii), along
with a description of any such other amounts. If the amount disclosed
pursuant to Sec. 1026.37(c)(4)(ii) requires the creditor to disclose a
description of more than one amount other than amounts for payment of
property taxes or homeowner's insurance premiums, the creditor may
disclose a descriptive statement of one such amount along with an
indication that additional amounts are also included, such as by using
the phrase ``and additional costs.''
2. Amounts paid by the creditor using escrow account funds. Section
1026.37(c)(4)(iv) requires the creditor to disclose an indication of
whether the amounts disclosed under Sec. 1026.37(c)(4)(ii) will be paid
by the creditor using escrow account funds. If only a portion of the
amounts disclosed under Sec. 1026.37(c)(4)(ii), including, without
limitation, property taxes, homeowner's insurance, and assessments, will
be paid by the creditor using escrow account funds, the creditor may
indicate that only a portion of the amounts disclosed will be paid using
escrow account funds, such as by using the word ``some.''
37(d) Costs at closing.
37(d)(2) Optional alternative table for transactions without a
seller or for simultaneous subordinate financing.
1. Optional use. The optional alternative disclosure of the
estimated cash to close provided for in Sec. 1026.37(d)(2) may be used
by a creditor only in a transaction without a seller or a simultaneous
subordinate financing transaction. In a purchase transaction, the
optional alternative disclosure may be used for the simultaneous
subordinate financing Loan Estimate only if the first-lien Closing
[[Page 711]]
Disclosure will record the entirety of the seller's transaction.
Creditors may only use this alternative estimated cash to close
disclosure in conjunction with the alternative disclosure under Sec.
1026.37(h)(2).
2. Method of indication. The indication of whether the estimated
cash is either due from or payable to the consumer can be made by the
use of check boxes as shown in form H-24(D) of appendix H to this part.
37(f) Closing cost details; loan costs.
1. General description. The items disclosed under Sec. 1026.37(f)
include services that the creditor or mortgage broker require for
consummation, such as underwriting, appraisal, and title services.
2. Mortgage broker. Commentary under Sec. 1026.19(e)(1)(ii)
discusses the requirements and responsibilities of mortgage brokers that
provide the disclosures required by Sec. 1026.19(e), which include the
disclosures set forth in Sec. 1026.37(f).
3. Construction loan inspection and handling fees. Inspection and
handling fees for the staged disbursement of construction loan proceeds,
including draw fees, are loan costs associated with the transaction for
purposes of Sec. 1026.37(f). If inspection and handling fees are
collected at or before consummation, the total of such fees is disclosed
in the loan costs table. If inspection and handling fees will be
collected after consummation, the total of such fees is disclosed in a
separate addendum and the fees are not counted for purposes of the
calculating cash to close table. See comment 37(f)(6)-3 for a
description of an addendum used to disclose inspection and handling fees
that will be collected after consummation. See also comments 38(f)-2 and
app. D-7.vii. If the number of inspections and disbursements is not
known at the time the disclosures are provided, the creditor discloses
the fees that will be collected based on the best information reasonably
available to the creditor at the time the disclosure is provided. See
comment 19(e)(1)(i)-1. See Sec. 1026.17(e) and its commentary for an
explanation of the effect of subsequent events that cause inaccuracies
in disclosures.
37(f)(1) Origination charges.
1. Origination charges. Charges included under the subheading
``Origination Charges'' pursuant to Sec. 1026.37(f)(1) are those
charges paid by the consumer to each creditor and loan originator for
originating and extending the credit, regardless of how such fees are
denominated. In accordance with Sec. 1026.37(o)(4), the dollar amounts
disclosed under Sec. 1026.37(f)(1) must be rounded to the nearest whole
dollar and the percentage amounts must be disclosed as an exact number
up to two or three decimal places, except that decimal places shall not
be disclosed if the percentage is a whole number. See comment
19(e)(3)(i)-3 for a discussion of when a fee is considered to be ``paid
to'' a person. See Sec. 1026.36(a) and associated commentary for a
discussion of the meaning of ``loan originator'' in connection with
limits on compensation in a consumer credit transaction secured by a
dwelling.
2. Indirect loan originator compensation. Only charges paid directly
by the consumer to compensate a loan originator are included in the
amounts listed under Sec. 1026.37(f)(1). Compensation of a loan
originator paid indirectly by the creditor through the interest rate is
not itemized on the Loan Estimate required by Sec. 1026.19(e). However,
pursuant to Sec. 1026.38(f)(1), such compensation is itemized on the
Closing Disclosure required by Sec. 1026.19(f).
3. Description of charges. Other than for points charged in
connection with the transaction to reduce the interest rate, for which
specific language must be used, the creditor may use a general label
that uses terminology that, under Sec. 1026.37(f)(5), is consistent
with Sec. 1026.17(a)(1), clearly and conspicuously describes the
service that is disclosed as an origination charge pursuant to Sec.
1026.37(f)(1). Items that are listed under the subheading ``Origination
Charges'' may include, for example, application fee, origination fee,
underwriting fee, processing fee, verification fee, and rate-lock fee.
4. Points. If there are no points charged in connection with the
transaction to reduce the interest rate, the creditor leaves blank the
percentage of points used in the label and the dollar amount disclosed
under Sec. 1026.37(f)(1)(i).
5. Itemization. Creditors determine the level of itemization of
``Origination Charges'' that is appropriate under Sec. 1026.37(f)(1) in
relation to charges paid by the consumer to the creditor, subject to the
limitations in Sec. 1026.37(f)(1)(ii). For example, the following
charges should be itemized separately: compensation paid directly by a
consumer to a loan originator that is not also the creditor; or a charge
imposed to pay for a loan level pricing adjustment assessed on the
creditor, which the creditor passes onto the consumer as a charge at
consummation and not as an adjustment to the interest rate.
37(f)(2) Services you cannot shop for.
1. Services disclosed. Items included under the subheading
``Services You Cannot Shop For'' pursuant to Sec. 1026.37(f)(2) are for
those services that the creditor requires in connection with the
transaction that would be provided by persons other than the creditor or
mortgage broker and for which the creditor does not permit the consumer
to shop in accordance with Sec. 1026.19(e)(1)(vi). Comment
19(e)(1)(vi)-1 clarifies that a consumer is not permitted to shop if the
consumer must choose a provider from a list provided by the creditor.
Comment 19(e)(3)(i)-1 addresses determining good faith in providing
estimates under Sec. 1026.19(e), including estimates for services for
which the consumer cannot shop.
[[Page 712]]
Comments 19(e)(3)(iv)-1 through -3 discuss limits and requirements
applicable to providing revised estimates for services for which the
consumer cannot shop.
2. Examples of charges. Examples of the services and amounts to be
disclosed pursuant to Sec. 1026.37(f)(2) might include an appraisal
fee, appraisal management company fee, credit report fee, flood
determination fee, government funding fee, homeowner's association
certification fee, lender's attorney fee, tax status research fee,
third-party subordination fee, title--closing protection letter fee,
title--lender's title insurance policy, and an upfront mortgage
insurance fee, provided that the fee is charged at consummation and is
not a prepayment of future premiums over a specific future time period
or a payment into an escrow account. Government funding fees include a
United States Department of Veterans Affairs or United States Department
of Agriculture guarantee fee, or any other fee paid to a government
entity as part of a governmental loan program, that is paid at
consummation.
3. Title insurance services. The services required to be labeled
beginning with ``Title -'' pursuant to Sec. 1026.37(f)(2) or (3) are
those required for the issuance of title insurance policies to the
creditor in connection with the consummation of the transaction or for
conducting the closing. These services may include, for example:
i. Examination and evaluation, based on relevant law and title
insurance underwriting principles and guidelines, of the title evidence
to determine the insurability of the title being examined and what items
to include or exclude in any title commitment and policy to be issued;
ii. Preparation and issuance of the title commitment or other
document that discloses the status of the title as it is proposed to be
insured, identifies the conditions that must be met before the policy
will be issued, and obligates the insurer to issue a policy of title
insurance if such conditions are met;
iii. Resolution of underwriting issues and taking the steps needed
to satisfy any conditions for the issuance of the policies;
iv. Preparation and issuance of the policy or policies of title
insurance; and
v. Premiums for any title insurance coverage for the benefit of the
creditor.
4. Lender's title insurance policy. Section 1026.37(f)(2) and (3)
requires disclosure of the amount the consumer will pay for the lender's
title insurance policy. However, an owner's title insurance policy that
covers the consumer and is not required to be purchased by the creditor
is only disclosed pursuant to Sec. 1026.37(g). Accordingly, the
creditor must quote the amount of the lender's title insurance coverage
pursuant to Sec. 1026.37(f)(2) or (3) as applicable based on the type
of lender's title insurance policy required by its underwriting
standards for that loan. The amount disclosed for the lender's title
insurance policy pursuant to Sec. 1026.37(f)(2) or (3) is the amount of
the premium without any adjustment that might be made for the
simultaneous purchase of an owner's title insurance policy. This amount
may be disclosed as ``Title --Premium for Lender's Coverage,'' or in any
similar manner that clearly indicates the amount of the premium
disclosed pursuant to Sec. 1026.37(f)(2) is for the lender's title
insurance coverage. See comment 37(g)(4)-1 for a discussion of the
disclosure of the premium for an owner's title insurance policy that
covers the consumer.
37(f)(3) Services you can shop for.
1. Services disclosed. Items included under the subheading
``Services You Can Shop For'' pursuant to Sec. 1026.37(f)(3) are for
those services: That the creditor requires in connection with its
decision to make the loan; that would be provided by persons other than
the creditor or mortgage broker; and for which the creditor allows the
consumer to shop in accordance with Sec. 1026.19(e)(1)(vi). Comments
19(e)(3)(ii)-1 through -3, and -5 address the determination of good
faith in providing estimates of charges for services for which the
consumer can shop. Comment 19(e)(3)(iii)-2 discusses the determination
of good faith when the consumer chooses a provider that is not on the
list the creditor provides to the consumer when the consumer is
permitted to shop consistent with Sec. 1026.19(e)(1)(vi). Comments
19(e)(3)(iv)-1 through -3 discuss limits and requirements applicable to
providing revised estimates for services for which the consumer can
shop.
2. Example of charges. Examples of the services to be listed under
this subheading pursuant to Sec. 1026.37(f)(3) might include a pest
inspection fee, survey fee, title--closing agent fee, and title--closing
protection letter fee.
3. Title insurance. See comments 37(f)(2)-3 and -4 for guidance on
services that are to be labeled beginning with ``Title --'' and on
calculating and labeling the amount disclosed for lender's title
insurance pursuant to Sec. 1026.37(f)(3). See comment 37(g)(4)-1 for a
discussion of the disclosure of the premium for owner's title insurance
coverage.
37(f)(5) Item descriptions and ordering.
1. Clear and conspicuous standard. Section 1026.37(f)(5) requires
creditors to label the loan costs disclosed pursuant Sec. 1026.37(f)
using terminology that describes each item. A creditor complies with
this requirement if it uses terminology that is clear and conspicuous,
consistent with Sec. 1026.17(a)(1), and describes the service or
administrative function that the charge pays for in a manner that is
reasonably understood by consumers within the space provided in form H-
24 of appendix H to this part. For example, if a creditor imposes a fee
on a consumer to cover the costs associated with underwriting the
transaction, the creditor would comply with
[[Page 713]]
Sec. 1026.37(f)(5) if it labeled the cost ``Underwriting Fee.'' A label
that uses abbreviations or acronyms that are not reasonably understood
by consumers would not comply with Sec. 1026.37(f)(5).
37(f)(6) Use of addenda.
1. State law disclosures. If a creditor is required by State law to
make additional disclosures that, pursuant to Sec. 1026.37(f)(6)(i),
cannot be included in the disclosures required under Sec. 1026.37(f),
the creditor may make those additional State law disclosures on a
document whose pages are separate from, and are not presented as part
of, the disclosures prescribed in Sec. 1026.37, for example, as an
addendum to the Loan Estimate. See comment 37(o)(1)-1.
2. Reference to addendum. If an addendum is used as permitted under
Sec. 1026.37(f)(6)(ii), an example of a label that complies with the
requirement for an appropriate reference on the last line is: ``See
attached page for additional items you can shop for.''
3. Addendum for post-consummation inspection and handling fees. A
creditor makes the disclosures required by Sec. 1026.37(f) and comment
37(f)-3 for construction loan inspection and handling fees collected
after consummation by disclosing the total of such fees under the
heading ``Inspection and Handling Fees Collected After Closing'' in an
addendum, which may be the addendum pursuant to Sec. 1026.37(f)(6) or
any other addendum or additional page under Sec. 1026.37. See comment
37(o)(1)-1. For purposes of comment 38(f)-2, the addendum may be any
addendum or additional page under Sec. 1026.38. If the actual amount of
such fees is not known at the time the disclosures are provided, the
disclosures in the addendum are based upon the best information
reasonably available to the creditor at the time the disclosure is
provided. See comment 19(e)(1)(i)-1. For example, such information could
include amounts the creditor has previously charged in similar
construction transactions or the amount of estimated inspection and
handling fees used by the creditor for purposes of setting the
construction loan's commitment amount.
37(g) Closing cost details; other costs.
1. General description. The items listed under the heading of
``Other Costs'' pursuant to Sec. 1026.37(g) include services that are
ancillary to the creditor's decision to evaluate the collateral and the
consumer for the loan. The amounts disclosed for these items are:
Established by government action; determined by standard calculations
applied to ongoing fixed costs; or based on an obligation incurred by
the consumer independently of any requirement imposed by the creditor.
Except for prepaid interest under Sec. 1026.37(g)(2)(iii), or charges
for optional credit insurance provided by the creditor, the creditor
does not retain any of the amounts or portions of the amounts disclosed
as other costs.
2. Charges pursuant to property contract. The creditor is required
to disclose charges that are described in Sec. 1026.37(g)(1) through
(3). Other charges that are required to be paid at or before closing
pursuant to the property contract for sale between the consumer and
seller are disclosed on the Loan Estimate to the extent the creditor has
knowledge of those charges when it issues the Loan Estimate, consistent
with the good faith standard under Sec. 1026.19(e). A creditor has
knowledge of those charges where, for example, it has the real estate
purchase and sale contract. See also Sec. 1026.37(g)(4) and comment
37(g)(4)-3.
37(g)(1) Taxes and other government fees.
1. Recording fees. Recording fees listed under Sec. 1026.37(g)(1)
are fees assessed by a government authority to record and index the loan
and title documents as required under State or local law. Recording fees
are assessed based on the type of document to be recorded or its
physical characteristics, such as the number of pages. Unlike transfer
taxes, recording fees are not based on the sale price of the property or
loan amount. For example, a fee for recording a subordination agreement
that is $20, plus $3 for each page over three pages, is a recording fee,
but a fee of $1,250 based on 0.5 percent of the loan amount is a
transfer tax, and not a recording fee.
2. Other government charges. Any charges or fees imposed by a State
or local government that are not transfer taxes are aggregated with
recording fees and disclosed under Sec. 1026.37(g)(1)(i).
3. Transfer taxes--terminology. In general, transfer taxes listed
under Sec. 1026.37(g)(1) are State and local government fees on
mortgages and home sales that are based on the loan amount or sales
price, while recording fees are State and local government fees for
recording the loan and title documents. The name that is used under
State or local law to refer to these amounts is not determinative of
whether they are disclosed as transfer taxes or as recording fees and
other taxes under Sec. 1026.37(g)(1).
4. Transfer taxes--consumer. Only transfer taxes paid by the
consumer are disclosed on the Loan Estimate pursuant to Sec.
1026.37(g)(1). State and local government transfer taxes are governed by
State or local law, which determines if the seller or consumer is
ultimately responsible for paying the transfer taxes. For example, if
State law indicates a lien can attach to the consumer's acquired
property if the transfer tax is not paid, the transfer tax is disclosed.
If State or local law is unclear or does not specifically attribute
transfer taxes to the seller or the consumer, the creditor is in
compliance with requirements of Sec. 1026.37(g)(1) if the amount of the
transfer tax disclosed is not less than the amount apportioned to the
consumer using
[[Page 714]]
common practice in the locality of the property.
5. Transfer taxes--seller. Transfer taxes paid by the seller in a
purchase transaction are not disclosed on the Loan Estimate under Sec.
1026.37(g)(1), but are disclosed on the Closing Disclosure pursuant to
Sec. 1026.38(g)(1)(ii).
6. Deletion and addition of items. The lines and labels required by
Sec. 1026.37(g)(1) may not be deleted, even if recording fees or
transfer taxes are not charged to the consumer. No additional items may
be listed under the subheading in Sec. 1026.37(g)(1).
37(g)(2) Prepaids.
1. Examples. Prepaid items required to be disclosed pursuant to
Sec. 1026.37(g)(2) include the interest due at consummation for the
period of time before interest begins to accrue for the first scheduled
periodic payment and certain periodic charges that are required by the
creditor to be paid at consummation. Each periodic charge listed as a
prepaid item indicates, as applicable, the time period that the charge
will cover, the daily amount, the percentage rate of interest used to
calculate the charge, and the total dollar amount of the charge.
Examples of periodic charges that are disclosed pursuant to Sec.
1026.37(g)(2) include:
i. Real estate property taxes due within 60 days after consummation
of the transaction;
ii. Past-due real estate property taxes;
iii. Mortgage insurance premiums;
iv. Flood insurance premiums; and
v. Homeowner's insurance premiums.
2. Interest rate. The interest rate disclosed pursuant to Sec.
1026.37(g)(2)(iii) is the same interest rate disclosed pursuant to Sec.
1026.37(b)(2).
3. Terminology. For purposes of Sec. 1026.37(g)(2), the term
``property taxes'' has the same meaning as in Sec. 1026.43(b)(8) and
further described in comment 43(b)(8)-2; the term ``homeowner's
insurance'' means the amounts identified in Sec. 1026.4(b)(8); and the
term ``mortgage insurance'' has the same meaning as ``mortgage insurance
or any functional equivalent'' in Sec. 1026.37(c), which means the
amounts identified in Sec. 1026.4(b)(5).
4. Deletion of items. The lines and labels required by Sec.
1026.37(g)(2) may not be deleted, even if amounts for those labeled
items are not charged to the consumer. If an amount for a labeled item
is not charged to the consumer, the time period, daily amount, and
percentage used in the labels are left blank.
37(g)(3) Initial escrow payment at closing.
1. Listed item not charged. Pursuant to Sec. 1026.37(g)(3), each
periodic charge to be included in the escrow or reserve account must be
itemized under the ``Initial Escrow Payment at Closing'' subheading,
with a relevant label, monthly payment amount, and number of months
expected to be collected at consummation. If an item described in Sec.
1026.37(g)(3)(i) through (iii) is not charged to the consumer, the
monthly payment amount and time period used in the labels are left
blank.
2. Aggregate escrow account calculation. The aggregate escrow
account adjustment required under Sec. 1026.38(g)(3) and 12 CFR
1024.17(d)(2) is not included on the Loan Estimate under Sec.
1026.37(g)(3).
3. Terminology. As used in Sec. 1026.37(g)(3), the term ``property
taxes'' has the same meaning as in Sec. 1026.43(b)(8) and further
described in comment 43(b)(8)-2; the term ``homeowner's insurance''
means the amounts identified in Sec. 1026.4(b)(8); and the term
``mortgage insurance'' has the same meaning as ``mortgage insurance or
any functional equivalent'' in Sec. 1026.37(c).
4. Deletion of items. The lines and labels required by Sec.
1026.37(g)(3) may not be deleted, even if amounts for those labeled
items are not charged to the consumer.
5. Escrowed tax payments for different time frames. Payments for
property taxes that are paid at different time periods can be itemized
separately when done in accordance with 12 CFR 1024.17, as applicable.
For example, a general property tax covering a fiscal year from January
1 to December 31 can be listed as a property tax under Sec.
1026.37(g)(3)(i); and a separate property tax to fund schools that cover
a fiscal year from November 1 to October 31 can be added as a separate
item under Sec. 1026.37(g)(3)(v).
37(g)(4) Other.
1. Owner's title insurance policy rate. The amount disclosed for an
owner's title insurance premium pursuant to Sec. 1026.37(g)(4) is based
on a basic owner's policy rate, and not on an ``enhanced'' title
insurance policy premium, except that the creditor may instead disclose
the premium for an ``enhanced'' policy when the ``enhanced'' title
insurance policy is required by the real estate sales contract, if such
requirement is known to the creditor when issuing the Loan Estimate.
This amount should be disclosed as ``Title--Owner's Title Policy
(optional),'' or in any similar manner that includes the introductory
description ``Title -'' at the beginning of the label for the item, the
parenthetical description ``(optional)'' at the end of the label, and
clearly indicates the amount of the premium disclosed pursuant to Sec.
1026.37(g)(4) is for the owner's title insurance coverage. See comment
37(f)(2)-4 for a discussion of the disclosure of the premium for
lender's title insurance coverage.
2. Simultaneous title insurance premium rate in purchase
transactions. The premium for an owner's title insurance policy for
which a special rate may be available based on the simultaneous issuance
of a lender's and an owner's policy is calculated and disclosed pursuant
to Sec. 1026.37(g)(4) as follows:
i. The title insurance premium for a lender's title policy is based
on the full premium rate, consistent with Sec. 1026.37(f)(2) or (f)(3).
[[Page 715]]
ii. The owner's title insurance premium is calculated by taking the
full owner's title insurance premium, adding the simultaneous issuance
premium for the lender's coverage, and then deducting the full premium
for lender's coverage.
3. Designation of optional items. Products disclosed under Sec.
1026.37(g)(4) for which the parenthetical description ``(optional)'' is
included at the end of the label for the item include only items that
are separate from any item disclosed on the Loan Estimate under
paragraphs other than Sec. 1026.37(g)(4). For example, such items may
include optional owner's title insurance, credit life insurance, debt
suspension coverage, debt cancellation coverage, warranties of home
appliances and systems, and similar products, when coverage is written
in connection with a credit transaction that is subject to Sec.
1026.19(e). However, because the requirement in Sec. 1026.37(g)(4)(ii)
applies to separate products only, additional coverage and endorsements
on insurance otherwise required by the lender are not disclosed under
Sec. 1026.37(g)(4). See comments 4(b)(7) and (b)(8)-1 through -3 and
comments 4(b)(10)-1 and -2 for guidance on determining when credit life
insurance, debt suspension coverage, debt cancellation coverage, and
similar coverage is written in connection with a transaction subject to
Sec. 1026.19(e).
4. Examples. Examples of other items that are disclosed under Sec.
1026.37(g)(4) if the creditor is aware of those items when it issues the
Loan Estimate include commissions of real estate brokers or agents,
additional payments to the seller to purchase personal property pursuant
to the property contract, homeowner's association and condominium
charges associated with the transfer of ownership, and fees for
inspections not required by the creditor but paid by the consumer
pursuant to the property contract. Although the consumer is obligated
for these costs, they are not imposed upon the consumer by the creditor
or loan originator. Therefore, they are not disclosed with the
parenthetical description ``(optional)'' at the end of the label for the
item, and they are disclosed pursuant to Sec. 1026.37(g) rather than
Sec. 1026.37(f). Even if such items are not required to be disclosed on
the Loan Estimate under Sec. 1026.37(g)(4), however, they may be
required to be disclosed on the Closing Disclosure pursuant to Sec.
1026.38. Comment 19(e)(3)(iii)-3 discusses application of the good faith
requirement for services chosen by the consumer that are not required by
the creditor.
37(g)(6) Total closing costs.
Paragraph 37(g)(6)(ii).
1. Lender credits. Section 1026.19(e)(1)(i) requires disclosure of
lender credits as provided in Sec. 1026.37(g)(6)(ii). Such lender
credits include non-specific lender credits as well as specific lender
credits. See comment 19(e)(3)(i)-5.
2. Credits or rebates from the creditor to offset a portion or all
of the closing costs. For loans where a portion or all of the closing
costs are offset by a credit or rebate provided by the creditor
(sometimes referred to as ``no-cost'' loans), whether all or a defined
portion of the closing costs disclosed under Sec. 1026.37(f) or (g)
will be paid by a credit or rebate from the creditor, the creditor
discloses such credit or rebate as a lender credit under Sec.
1026.37(g)(6)(ii). The creditor should ensure that the lender credit
disclosed under Sec. 1026.37(g)(6)(ii) is sufficient to cover the
estimated costs the creditor represented to the consumer as not being
required to be paid by the consumer at consummation, regardless of
whether such representations pertained to specific items.
37(g)(7) Item descriptions and ordering.
1. Clear and conspicuous standard. See comment 37(f)(5)-1 for
guidance regarding the requirement to label items using terminology that
describes each item.
37(g)(8) Use of addenda.
1. State law disclosures. If a creditor is required by State law to
make additional disclosures that, pursuant to Sec. 1026.37(g)(8),
cannot be included in the disclosures required under Sec. 1026.37(g),
the creditor may make those additional State law disclosures on a
separate document whose pages are physically separate from, and are not
presented as part of, the disclosures prescribed in Sec. 1026.37. See
comment 37(o)(1)-1.
37(h) Calculating cash to close.
37(h)(1) For all transactions.
1. Labels for amounts disclosed. Section 1026.37(h)(1) describes the
amounts that are used to calculate the estimated amount of cash or other
funds that the consumer must provide at consummation. The labels that
are to be used under Sec. 1026.37(h)(1) are illustrated by form H-24(A)
of appendix H to this part.
2. Simultaneous subordinate financing. On the Loan Estimate for
simultaneous subordinate financing purchase transactions, the sale price
disclosed under Sec. 1026.37(a)(7)(i) is not used under Sec.
1026.37(h)(1) for the calculating cash to close table calculations that
include the sale price as a component of the calculation. For example,
sale price is generally included in the closing costs financed
calculation under Sec. 1026.37(h)(1)(ii) as a component of the
estimated total amount of payments to third parties. However, for
simultaneous subordinate financing transactions, the estimated total
amount of payments to third parties would not include the sale price.
The estimated total amount of payments to third parties only includes
payments occurring in the simultaneous subordinate financing transaction
other than payments toward the sale price.
37(h)(1)(ii) Closing costs financed.
[[Page 716]]
1. Calculation of amount. The amount of closing costs financed
disclosed under Sec. 1026.37(h)(1)(ii) is determined by subtracting the
estimated total amount of payments to third parties not otherwise
disclosed under Sec. 1026.37(f) and (g) from the loan amount disclosed
under Sec. 1026.37(b)(1). The estimated total amount of payments to
third parties includes the sale price disclosed under Sec.
1026.37(a)(7)(i), if applicable, unless otherwise excluded under comment
37(h)(1)-2. Other examples of payments to third parties not otherwise
disclosed under Sec. 1026.37(f) and (g) include the amount of
construction costs for transactions that involve improvements to be made
on the property and payoffs of secured or unsecured debt. If the result
of the calculation is zero or negative, the amount of $0 is disclosed
under Sec. 1026.37(h)(1)(ii). If the result of the calculation is a
positive number, that amount is disclosed as a negative number under
Sec. 1026.37(h)(1)(ii), but only to the extent that the absolute value
of the amount disclosed under Sec. 1026.37(h)(1)(ii) does not exceed
the total amount of closing costs disclosed under Sec. 1026.37(g)(6).
2. Loan amount. The loan amount disclosed under Sec. 1026.37(b)(1),
a component of the closing costs financed calculation, is the total
amount the consumer will borrow, as reflected by the face amount of the
note.
37(h)(1)(iii) Down payment and other funds from borrower.
1. Down payment and funds from borrower calculation. For purposes of
Sec. 1026.37(h)(1)(iii)(A)(1), the down payment and funds from borrower
amount is calculated as the difference between the sale price of the
property disclosed under Sec. 1026.37(a)(7)(i) and the sum of the loan
amount and any amount of existing loans assumed or taken subject to that
will be disclosed on the Closing Disclosure under Sec.
1026.38(j)(2)(iv). The calculation is independent of any loan program or
investor requirements.
2. Funds for borrower. Section 1026.37(h)(1)(iii)(A)(2) requires
that, in a purchase transaction as defined in paragraph (a)(9)(i) of
this section that is a simultaneous subordinate financing transaction or
that involves improvements to be made on the property, or when the sum
of the loan amount disclosed under Sec. 1026.37(b)(1) and any amount of
existing loans assumed or taken subject to that will be disclosed under
Sec. 1026.38(j)(2)(iv) exceeds the sale price disclosed under Sec.
1026.37(a)(7)(i), the amount of funds from the consumer is determined in
accordance with Sec. 1026.37(h)(1)(v). Section 1026.37(h)(1)(iii)(B)
requires that, for all non-purchase transactions, the amount of
estimated funds from the consumer is determined in accordance with Sec.
1026.37(h)(1)(v). Pursuant to Sec. 1026.37(h)(1)(v), the amount to be
disclosed under Sec. 1026.37(h)(1)(iii)(A)(2) or (B) is determined by
subtracting the sum of the loan amount disclosed under Sec.
1026.37(b)(1) and any amount of existing loans assumed or taken subject
to that will be disclosed under Sec. 1026.38(j)(2)(iv) (excluding any
closing costs financed disclosed under Sec. 1026.37(h)(1)(ii)) from the
total amount of all existing debt being satisfied in the transaction.
The total amount of all existing debt being satisfied in the transaction
is the sum of the amounts that will be disclosed on the Closing
Disclosure in the summaries of transactions table under Sec.
1026.38(j)(1)(ii), (iii), and (v), as applicable. When the result of the
calculation is positive, that amount is disclosed under Sec.
1026.37(h)(1)(iii) as ``Down Payment/Funds from Borrower,'' and $0 is
disclosed under Sec. 1026.37(h)(1)(v) as ``Funds for Borrower.'' When
the result of the calculation is negative, that amount is disclosed as a
negative number under Sec. 1026.37(h)(1)(v) as ``Funds for Borrower,''
and $0 is disclosed under Sec. 1026.37(h)(1)(iii) as ``Down Payment/
Funds from Borrower.'' When the result is $0, $0 is disclosed as ``Down
Payment/Funds from Borrower'' and ``Funds for Borrower'' under Sec.
1026.37(h)(1)(iii) and (v), respectively.
37(h)(1)(iv) Deposit.
1. Section 1026.37(h)(1)(iv)(A) requires disclosure of a deposit in
a purchase transaction. The deposit to be disclosed under Sec.
1026.37(h)(1)(iv)(A) is any amount that the consumer has agreed to pay
to a party identified in the real estate purchase and sale agreement to
be held until consummation of the transaction, which is often referred
to as an earnest money deposit. In a purchase transaction in which no
such deposit is paid in connection with the transaction, Sec.
1026.37(h)(1)(iv)(A) requires the creditor to disclose $0. In any other
type of transaction, Sec. 1026.37(h)(1)(iv)(B) requires disclosure of
the deposit amount as $0.
37(h)(1)(v) Funds for borrower.
1. No funds for borrower. When the down payment and other funds from
the borrower is determined in accordance with Sec.
1026.37(h)(1)(iii)(A)(1), the amount disclosed under Sec.
1026.37(h)(1)(v) as funds for the borrower is $0.
2. Total amount of existing debt satisfied in the transaction. The
amounts disclosed under Sec. 1026.37(h)(1)(iii)(A)(2) or (B), as
applicable, and (h)(1)(v) are determined by subtracting the sum of the
loan amount disclosed under Sec. 1026.37(b)(1) and any amount of
existing loans assumed or taken subject to that will be disclosed on the
Closing Disclosure under Sec. 1026.38(j)(2)(iv) (excluding any closing
costs financed disclosed under Sec. 1026.37(h)(1)(ii)) from the total
amount of all existing debt being satisfied in the transaction. The
total amount of all existing debt being satisfied in the transaction is
the sum of the amounts that will be disclosed on the Closing Disclosure
in the summaries of transactions table
[[Page 717]]
under Sec. 1026.38(j)(1)(ii), (iii), and (v), as applicable.
37(h)(1)(vi) Seller credits.
1. Non-specific seller credits to be disclosed. Non-specific seller
credits, i.e., general payments from the seller to the consumer that do
not pay for a particular fee on the disclosures provided under Sec.
1026.19(e)(1), known to the creditor at the time of delivery of the Loan
Estimate, are disclosed under Sec. 1026.37(h)(1)(vi). For example, a
creditor may learn the amount of seller credits that will be paid in the
transaction from information obtained from the consumer, from a review
of the purchase and sale contract, or from information obtained from a
real estate agent in the transaction.
2. Seller credits for specific charges. To the extent known by the
creditor at the time of delivery of the Loan Estimate, specific seller
credits, i.e., seller credits for specific items disclosed under Sec.
1026.37(f) and (g), may be either disclosed under Sec.
1026.37(h)(1)(vi) or reflected in the amounts disclosed for those
specific items under Sec. 1026.37(f) and (g). For example, if the
creditor knows at the time of the delivery of the Loan Estimate that the
seller has agreed to pay half of a $100 required pest inspection fee,
the creditor may either disclose the required pest inspection fee as
$100 under Sec. 1026.37(f) with a $50 seller credit disclosed under
Sec. 1026.37(h)(1)(vi) or disclose the required pest inspection fee as
$50 under Sec. 1026.37(f), reflecting the specific seller credit in the
amount disclosed for the pest inspection fee. If the creditor knows at
the time of the delivery of the Loan Estimate that the seller has agreed
to pay the entire $100 pest inspection fee, the creditor may either
disclose the required pest inspection fee as $100 under Sec. 1026.37(f)
with a $100 seller credit disclosed under Sec. 1026.37(h)(1)(vi) or
disclose nothing under Sec. 1026.37(f), reflecting that the specific
seller credit will cover the entire pest inspection fee.
37(h)(1)(vii) Adjustments and other credits.
1. Other credits known at the time the Loan Estimate is issued.
Amounts expected to be paid at closing by third parties not otherwise
associated with the transaction, such as gifts from family members and
not otherwise identified under Sec. 1026.37(h)(1), are included in the
amount disclosed under Sec. 1026.37(h)(1)(vii). Amounts expected to be
provided in advance of closing by third parties, including family
members, not otherwise associated with the transaction are not required
to be disclosed under Sec. 1026.37(h)(1)(vii).
2. Persons that may make payments causing adjustment and other
credits. Persons, as defined under Sec. 1026.2(a)(22), means natural
persons or organizations. Accordingly, persons that may pay amounts
disclosed under Sec. 1026.37(h)(1)(vii) include, for example, any
individual family members providing gifts or a developer or home builder
organization providing a credit in the transaction.
3. Credits. Only credits from persons other than the creditor or
seller can be disclosed pursuant to Sec. 1026.37(h)(1)(vii). Seller
credits and credits from the creditor are disclosed pursuant to Sec.
1026.37(h)(1)(vi) and Sec. 1026.37(g)(6)(ii), respectively.
4. Other credits to be disclosed. Credits other than those from the
creditor or seller are disclosed under Sec. 1026.37(h)(1)(vii).
Disclosure of other credits is, like other disclosures under Sec.
1026.37, subject to the good faith requirement under Sec.
1026.19(e)(1)(i). See Sec. 1026.19(e)(1)(i) and comments 17(c)(2)(i)-1
and 19(e)(1)(i)-1. The creditor may obtain information regarding items
to be disclosed under Sec. 1026.37(h)(1)(vii), for example, from the
consumer, from a review of the purchase and sale contract, or from
information obtained from a real estate agent in the transaction.
5. Proceeds from subordinate financing or other source. Funds that
are provided to the consumer from the proceeds of subordinate financing,
local or State housing assistance grants, or other similar sources are
included in the amount disclosed under Sec. 1026.37(h)(1)(vii) on the
first-lien transaction Loan Estimate.
6. Reduction in amounts for adjustments. Adjustments that require
additional funds from the consumer in a transaction disclosed using the
formula under Sec. 1026.37(h)(1)(iii)(A)(1) or pursuant to the real
estate purchase and sale contract, such as for additional personal
property that will be disclosed on the Closing Disclosure under Sec.
1026.38(j)(1)(iii) or adjustments that will be disclosed on the Closing
Disclosure under Sec. 1026.38(j)(1)(v), are only included in the amount
disclosed under Sec. 1026.37(h)(1)(vii) if such amounts are not
included in the calculation under Sec. 1026.37(h)(1)(iii)(A)(2) or (B)
or Sec. 1026.37(h)(1)(v) as debt being satisfied in the transaction.
Other examples of adjustments for additional funds from the consumer
include payoffs of secured or unsecured debt in a purchase transaction
disclosed using the formula under Sec. 1026.37(h)(1)(iii)(A)(1) or
prorations for property taxes and homeowner's association dues. The
total amount disclosed under Sec. 1026.37(h)(1)(vii) is a sum of
adjustments requiring additional funds from the consumer, calculated as
positive amounts, and other credits, such as those provided for in
comment 37(h)(1)(vii)-1, calculated as negative amounts.
37(h)(1)(viii) Estimated cash to close.
1. Result of cash to close calculation. The sum of the amounts
disclosed pursuant to Sec. 1026.37(h)(1)(i) through (vii) is disclosed
under Sec. 1026.37(h)(1)(viii) as either a positive number, a negative
number, or zero. A positive number indicates the amount that the
[[Page 718]]
consumer will pay at consummation. A negative number indicates the
amount that the consumer will receive at consummation. A result of zero
indicates that the consumer will neither pay nor receive any amount at
consummation.
37(h)(2) Optional alternative calculating cash to close table for
transactions without a seller or for simultaneous subordinate financing.
1. Optional use. The optional alternative disclosure of the
calculating cash to close table in Sec. 1026.37(h)(2) may only be
provided by a creditor in a transaction without a seller or for
simultaneous subordinate financing. In a purchase transaction, the
optional alternative disclosure may be used for the simultaneous
subordinate financing Loan Estimate only if the first-lien Closing
Disclosure will record the entirety of the seller's transaction. The use
of this alternative table for transactions without a seller or for
simultaneous subordinate financing is optional, but creditors may only
use this alternative estimated cash to close disclosure in conjunction
with the alternative disclosure under Sec. 1026.37(d)(2).
37(h)(2)(iii) Payoffs and payments.
1. Examples. Examples of the amounts incorporated in the total
amount disclosed under Sec. 1026.37(h)(2)(iii) include, but are not
limited to: Payoffs of existing liens secured by the property identified
under Sec. 1026.37(a)(6) such as existing mortgages, deeds of trust,
judgments that have attached to the real property, mechanics' and
materialmen's liens, and local, State and Federal tax liens; payments of
unsecured outstanding debts of the consumer; construction costs
associated with the transaction that the consumer will be obligated to
pay in any transaction in which the creditor is otherwise permitted to
use the alternative calculating cash to close table; and payments to
other third parties for outstanding debts of the consumer, excluding
settlement services, as required to be paid as a condition for the
extension of credit. Amounts that will be paid with funds provided by
the consumer, including partial payments, such as a portion of
construction costs, or amounts that will be paid by third parties and
will be disclosed on the Closing Disclosure under Sec.
1026.38(t)(5)(vii)(B), are calculated as credits, using positive
numbers, in the total amount disclosed under Sec. 1026.37(h)(2)(iii).
2. Disclosure of subordinate financing. i. First-lien Loan Estimate.
On the Loan Estimate for a first-lien transaction disclosed with the
optional alternative table pursuant to Sec. 1026.37(h)(2), such as a
refinance transaction that also has simultaneous subordinate financing,
the proceeds of the simultaneous subordinate financing are included, as
a positive number, in the total amount disclosed under Sec.
1026.37(h)(2)(iii). The total amount disclosed under Sec.
1026.37(h)(2)(iii) is a negative number unless the proceeds from the
subordinate financing and any amounts entered as credits as discussed in
comment 37(h)(2)(iii)-1 equal or exceed the total amount of other
payoffs and payments that are included in the calculation under Sec.
1026.37(h)(2)(iii). If the proceeds from the subordinate financing and
any amounts entered as credits as discussed in comment 37(h)(2)(iii)-1
equal or exceed the total amount of other payoffs and payments that are
included in the calculation under Sec. 1026.37(h)(2)(iii), the total
amount disclosed under Sec. 1026.37(h)(2)(iii) is disclosed as $0 or a
positive number.
ii. Simultaneous subordinate financing Loan Estimate. On the
simultaneous subordinate financing Loan Estimate disclosed with the
optional alternative table pursuant to Sec. 1026.37(h)(2), the proceeds
of the subordinate financing that will be applied to the first-lien
transaction may be included in the payoffs and payments disclosure under
Sec. 1026.37(h)(2)(iii).
37(h)(2)(iv) Cash to or from consumer.
1. Method of indication. The indication of whether the estimated
cash to close is either due from or payable to the consumer is made by
the use of check boxes, which is illustrated by form H-24(D) of appendix
H to this part.
37(h)(2)(v) Closing costs financed.
1. Limitation on amount disclosed. The amount disclosed under Sec.
1026.37(h)(2)(v) is limited to the total amount of closing costs
disclosed under Sec. 1026.37(g)(6), even if the difference between
Sec. 1026.37(h)(2)(i) and Sec. 1026.37(h)(2)(iii) is greater than the
amount disclosed under Sec. 1026.37(g)(6).
37(i) Adjustable payment table.
1. When table is not permitted to be disclosed. The disclosure
described in Sec. 1026.37(i) is required only if the periodic principal
and interest payment may change after consummation based on a loan term
other than a change to the interest rate, or the transaction contains a
seasonal payment product feature as described in Sec.
1026.37(a)(10)(ii)(E). If the transaction does not contain such loan
terms, this table shall not appear on the Loan Estimate.
2. Periods to be disclosed. Section 1026.37(i)(1) through (4)
requires disclosure of the periods during which interest only, optional
payment, step payment, and seasonal payment product features will be in
effect. The periods required to be disclosed should be disclosed by
describing the number of payments counting from the first periodic
payment due after consummation. The period of seasonal payments required
to be disclosed by Sec. 1026.37(i)(4), to be clear and conspicuous,
should be disclosed with a noun that identifies the unit-period, because
such feature may apply on a regular basis during the loan term that does
not depend on when regular
[[Page 719]]
periodic payments begin. The disclosures required by Sec. 1026.37(i)(1)
through (4) may include abbreviations to fit in the space provided for
the information on form H-24, provided the information is disclosed in a
clear and conspicuous manner. For example:
i. Period from date of consummation. If a loan has an interest only
period for the first 60 regular periodic payments due after
consummation, the disclosure states ``for your first 60 payments.''
ii. Period during middle of loan term. If the loan has an interest
only period between the 61st and 85th payments, the disclosure states
``from your 61st to 85th payment.''
iii. Multiple successive periods. If there are multiple periods
during which a certain adjustable payment term applies, such as a period
of step payments that occurs from the first through 12th payments, does
not occur from the 13th through 24th payments, and occurs again from the
25th through 36th payments, the period disclosed is the entire span of
all such periods. Accordingly, such period is disclosed as ``for your
first 36 payments.''
iv. Seasonal payments. For a seasonal payment product with a unit-
period of a month that does not require periodic payments for the months
of June, July, and August each year during the loan term, because such
feature depends on calendar months and not on when regular periodic
payments begin, the period is disclosed as ``from June to August.'' For
a transaction with a quarterly unit-period that does not require a
periodic payment every third quarter during the loan term and does not
depend on calendar months, the period is disclosed as ``every third
payment.'' In the same transaction, if the seasonal payment feature ends
after the 20th quarter, the period is disclosed as ``every quarter until
the 20th quarter.'' As described above in this comment 37(i)-2, the
creditor may abbreviate ``quarter'' to ``quart.'' or ``Q.''
37(i)(5) Principal and interest payments.
1. Statement of periodic payment frequency. The subheading required
by Sec. 1026.37(i)(5) must include the unit-period of the transaction,
such as ``quarterly,'' ``bi-weekly,'' or ``annual.'' This unit-period
should be the same as disclosed under Sec. 1026.37(b)(3). See Sec.
1026.37(o)(5)(i).
2. Initial payment adjustment unknown. The disclosure required by
Sec. 1026.37(i)(5) must state the number of the first payment for which
the regular periodic principal and interest payment may change. This
payment is typically set forth in the legal obligation. However, if the
exact payment number of the first adjustment is not known at the time
the creditor provides the Loan Estimate, the creditor must disclose the
earliest possible payment that may change under the terms of the legal
obligation, based on the information available to the creditor at the
time, as the initial payment number and amount.
3. Subsequent changes. The disclosure required by Sec.
1026.37(i)(5) must state the frequency of adjustments to the regular
periodic principal and interest payment after the initial adjustment, if
any, expressed in years, except if adjustments are more frequent than
once every year, in which case the disclosure should be expressed as
payments. If there is only one adjustment of the periodic payment under
the terms of the legal obligation (for example, if the loan has an
interest only period for the first 60 payments and there are no
adjustments to the payment after the end of the interest only period),
the disclosure should state: ``No subsequent changes.'' If the loan has
graduated increases in the regular periodic payment every 12th payment,
the disclosure should state: ``Every year.'' If the frequency of
adjustments to the periodic payment may change under the terms of the
legal obligation, the disclosure should state the smallest period of
adjustments that may occur. For example, if an increase in the periodic
payment is scheduled every sixth payment for 36 payments, and then every
12th payment for the next 24 payments, the disclosure should state:
``Every 6th payment.''
4. Maximum payment. The disclosure required by Sec. 1026.37(i)(5)
must state the larger of the maximum scheduled or maximum potential
amount of a regular periodic principal and interest payment under the
terms of the legal obligation, as well as the payment number of the
first periodic principal and interest payment that can reach such
amount. If the disclosed payment is scheduled, Sec. 1026.37(i)(5)
requires that the disclosure state the payment number when such payment
is reached with the preceding text, ``starting at.'' If the disclosed
payment is only potential, as may be the case for a loan that permits
optional payments, the disclosure states the earliest payment number
when such payment can be reached with the preceding text, ``as early
as.'' Section 1026.37(i)(5) requires that the first possible periodic
principal and interest payment that can reach the maximum be disclosed.
For example, for a fixed interest rate optional-payment loan with
scheduled payments that result in negative amortization under the terms
of the legal obligation, the maximum periodic payment disclosed should
be based on the consumer having elected to make the periodic payments
that would increase the principal balance to the maximum amount at the
latest time possible before the loan begins to fully amortize, which
would cause the periodic principal and interest payment to be the
maximum possible. For example, if the earliest payment that could reach
the maximum principal balance was the 41st payment at which time the
loan would begin to amortize and the periodic principal and interest
payment would be recalculated, but
[[Page 720]]
the last payment that permitted the principal balance to increase was
the 60th payment, the disclosure required by Sec. 1026.37(i)(5) must
assume the consumer only reaches the maximum principal balance at the
60th payment because this would result in the maximum possible principal
and interest payment under the terms of the legal obligation. The
disclosure must state the maximum periodic principal and interest
payment based on this assumption and state ``as early as the 61st
payment.''
5. Payments that do not pay principal. Although the label of the
disclosure required by Sec. 1026.37(i)(5) is ``Principal and Interest
Payments,'' and the section refers to periodic principal and interest
payments, it includes a scheduled periodic payment that only covers some
or all of the interest that is due and not any principal (i.e., an
interest only or negatively amortizing payment).
37(j) Adjustable interest rate table.
1. When table is not permitted to be disclosed. The disclosure
described in Sec. 1026.37(j) is required only if the interest rate may
increase after consummation, either based on changes to an index or
scheduled changes to the interest rate. If the legal obligation does not
permit the interest rate to adjust after consummation, such as for a
``Fixed Rate'' product under Sec. 1026.37(a)(10), this table is not
permitted to appear on the Loan Estimate. The creditor may not disclose
a blank table or a table with ``N/A'' inserted within each row.
37(j)(1) Index and margin.
1. Index and margin. The index disclosed pursuant to Sec.
1026.37(j)(1) must be stated such that a consumer reasonably can
identify it. A common abbreviation or acronym of the name of the index
may be disclosed in place of the proper name of the index, if it is a
commonly used public method of identifying the index. For example,
``LIBOR'' may be disclosed instead of London Interbank Offered Rate. The
margin should be disclosed as a percentage. For example, if the contract
determines the interest rate by adding 4.25 percentage points to the
index, the margin should be disclosed as ``4.25%.''
37(j)(2) Increases in interest rate.
1. Adjustments not based on an index. If the legal obligation
includes both adjustments to the interest rate based on an external
index and scheduled and pre-determined adjustments to the interest rate,
such as for a ``Step Rate'' product under Sec. 1026.37(a)(10), the
disclosure required by Sec. 1026.37(j)(1), and not Sec. 1026.37(j)(2),
must be provided pursuant to Sec. 1026.37(j)(2). The disclosure
described in Sec. 1026.37(j)(2) is stated only if the product type does
not permit the interest rate to adjust based on an external index.
37(j)(3) Initial interest rate.
1. Interest rate at consummation. In all cases, the interest rate in
effect at consummation must be disclosed as the initial interest rate,
even if it will apply only for a short period, such as one month.
37(j)(4) Minimum and maximum interest rate.
1. Minimum interest rate. The minimum interest rate required to be
disclosed by Sec. 1026.37(j)(4) is the minimum interest rate that may
occur at any time during the term of the transaction, after any
introductory or ``teaser'' interest rate expires, under the terms of the
legal obligation, such as an interest rate ``floor.'' If the terms of
the legal obligation do not state a minimum interest rate, the minimum
interest rate that applies to the transaction under applicable law must
be disclosed. If the terms of the legal obligation do not state a
minimum interest rate, and no other minimum interest rate applies to the
transaction under applicable law, the amount of the margin is disclosed.
2. Maximum interest rate. The maximum interest rate required to be
disclosed pursuant to Sec. 1026.37(j)(4) is the maximum interest rate
permitted under the terms of the legal obligation, such as an interest
rate ``cap.'' If the terms of the legal obligation do not specify a
maximum interest rate, the maximum interest rate permitted by applicable
law, such as State usury law, must be disclosed.
37(j)(5) Frequency of adjustments.
1. Exact month unknown. The disclosure required by Sec.
1026.37(j)(5) must state the first month for which the interest rate may
change. This month is typically scheduled in the terms of the legal
obligation. However, if the exact month is not known at the time the
creditor provides the Loan Estimate, the creditor must disclose the
earliest possible month under the terms of the legal obligation, based
on the best information available to the creditor at the time.
37(j)(6) Limits on interest rate changes.
1. Different limits on subsequent interest rate adjustments. If more
than one limit applies to the amount of adjustments to the interest rate
after the initial adjustment, the greatest limit on subsequent
adjustments must be disclosed. For example, if the initial interest rate
adjustment is capped at two percent, the second adjustment is capped at
two and a half percent, and all subsequent adjustments are capped at
three percent, the disclosure required by Sec. 1026.37(j)(6)(ii) states
``3%.''
37(k) Contact information.
1. NMLSR ID. Section 1026.37(k) requires the disclosure of an
Nationwide Mortgage Licensing System and Registry (NMLSR ID) number for
each creditor, mortgage broker, and loan officer identified on the Loan
Estimate. The NMLSR ID is a unique number or other identifier generally
assigned to individuals registered or licensed through NMLSR to provide
loan originating services. For more information, see the Secure and Fair
Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) sections
1503(3) and (12) and 1504 (12 U.S.C. 5102(3) and (12) and
[[Page 721]]
5103), and its implementing regulations (i.e., 12 CFR 1007.103(a) and
1008.103(a)(2)). An entity may also have an NMLSR ID. Thus, if the
creditor, mortgage broker, or loan officer has obtained an NMLSR ID, the
NMLSR IDs must be provided in the disclosures required by Sec.
1026.37(k)(1) and (2).
2. License number or unique identifier. Section 1026.37(k)(1) and
(2) requires the disclosure of a license number or unique identifier for
the creditor, mortgage broker, and loan officer if such entity or
individual has not obtained an NMLSR ID. In such event, if the
applicable State, locality, or other regulatory body with responsibility
for licensing and/or registering such entity's or individual's business
activities has issued a license number or other unique identifier to
such entity or individual, that number is disclosed. In addition, Sec.
1026.37(k)(1) and (2) require the abbreviation of the State of the
jurisdiction or regulatory body that issued such license or registration
is required to be included before the word ``License'' in the label
required by Sec. 1026.37(k)(1) and (2). If no such license or
registration is required to be disclosed, such as if an NMLSR number is
disclosed, the space provided for such an abbreviation in form H-24 of
appendix H to this part may be left blank. A U.S. Postal Service State
abbreviation complies with Sec. 1026.37(k)(1) and (2), if applicable.
3. Contact. Section 1026.37(k)(2) requires the disclosure of the
name and NMLSR ID of the person who is the primary contact for the
consumer, labeled ``Loan Officer.'' The loan officer is generally the
natural person employed by the creditor or mortgage broker disclosed
under Sec. 1026.37(k)(1) who interacts most frequently with the
consumer and who has an NMLSR ID or, if none, a license number or other
unique identifier to be disclosed under Sec. 1026.37(k)(2), as
applicable.
4. Email address and phone number. Section 1026.37(k)(3) requires
disclosure of the loan officer's email address and phone number.
Disclosure of a general number or email address for the loan officer's
lender or mortgage broker, as applicable, satisfies this requirement if
no such information is generally available for such person.
37(l) Comparisons.
37(l)(1) In five years.
1. Loans with terms of less than five years. In transactions with a
scheduled loan term of less than 60 months, to comply with Sec.
1026.37(l)(1), the creditor discloses the amounts paid through the end
of the loan term.
Paragraph 37(l)(1)(i).
1. Calculation of total payments in five years. The amount disclosed
under Sec. 1026.37(l)(1)(i) is the sum of principal, interest, mortgage
insurance, and loan costs scheduled to be paid through the end of the
60th month after the due date of the first periodic payment. For
guidance on how to calculate interest for mortgage loans that are
Adjustable Rate products under Sec. 1026.37(a)(10)(i)(A) for purposes
of Sec. 1026.37(l)(1)(i), see comment 17(c)(1)-10. In addition, for
purposes of Sec. 1026.37(l)(1)(i), the creditor should assume that the
consumer makes payments as scheduled and on time. For purposes of Sec.
1026.37(l)(1)(i), mortgage insurance means ``mortgage insurance or any
functional equivalent'' as defined under comment 37(c)(1)(i)(C)-1 and
includes prepaid or escrowed mortgage insurance. Loan costs are those
costs disclosed under Sec. 1026.37(f).
2. Negative amortization loans. For loans that have a negative
amortization feature under Sec. 1026.37(a)(10)(ii)(A), the creditor
calculates the total payments in five years using the scheduled
payments, even if it is a negatively amortizing payment amount, until
the consumer must begin making fully amortizing payments under the terms
of the legal obligation.
Paragraph 37(l)(1)(ii).
1. Calculation of principal paid in five years. The disclosure
required by Sec. 1026.37(l)(1)(ii) is calculated in the same manner as
the disclosure required by Sec. 1026.37(l)(1)(i), except that the
disclosed amount reflects only the total payments to principal through
the end of the 60th month after the due date of the first periodic
payment.
37(l)(3) Total interest percentage.
1. General. When calculating the total interest percentage, the
creditor assumes that the consumer will make each payment in full and on
time and will not make any additional payments. The creditor includes
prepaid interest that the consumer will pay when calculating the total
interest percentage. Prepaid interest that is disclosed as a negative
number under Sec. Sec. 1026.37(g)(2) or 1026.38(g)(2) is included as a
negative value when calculating the total interest percentage.
2. Adjustable rate and step rate mortgages. For Adjustable Rate
products under Sec. 1026.37(a)(10)(i)(A), Sec. 1026.37(l)(3) requires
that the creditor compute the total interest percentage in accordance
with comment 17(c)(1)-10. For Step Rate products under Sec.
1026.37(a)(10)(i)(B), Sec. 1026.37(l)(3) requires that the creditor
compute the total interest percentage in accordance with Sec.
1026.17(c)(1) and its associated commentary.
3. Negative amortization loans. For loans that have a negative
amortization feature under Sec. 1026.37(a)(10)(ii)(A), Sec.
1026.37(l)(3) requires that the creditor compute the total interest
percentage using the scheduled payment, even if it is a negatively
amortizing payment amount, until the consumer must begin making fully
amortizing payments under the terms of the legal obligation.
37(m) Other considerations.
37(m)(1) Appraisal.
[[Page 722]]
1. Applicability. The disclosure required by Sec. 1026.37(m)(1) is
only applicable to transactions subject to Sec. 1026.19(e) that are
also subject either to 15 U.S.C. 1639h or 1691(e) or both, as
implemented by this part or Regulation B, 12 CFR part 1002,
respectively. Accordingly, if a transaction is not also subject to
either or both of these provisions, as implemented by this part or
Regulation B, respectively, the disclosure required by Sec.
1026.37(m)(1) may be omitted from the Loan Estimate as described by
comment 37-1 as illustrated by form H-24 of appendix H to this part. For
transactions subject to section 1639h but not section 1691(e), the
creditor may delete the word ``promptly'' from the disclosure required
by Sec. 1026.37(m)(1)(ii).
2. Consummation. Section 1026.37(m)(1) requires the creditor to
disclose that it will provide a copy of any appraisal, even if the
transaction is not consummated. On form H-24, the disclosure required by
Sec. 1026.37(m)(1) states that the creditor will provide an appraisal,
even if the ``loan does not close.'' Pursuant to Sec. 1026.37(o)(3),
the disclosure required by Sec. 1026.37(m)(1) is that illustrated by
form H-24.
37(m)(2) Assumption.
1. Disclosure. Section 1026.37(m)(2) requires the creditor to
disclose whether or not a third party may be allowed to assume the loan
on its original terms if the property is sold or transferred by the
consumer. In many cases, the creditor cannot determine, at the time the
disclosure is made, whether a loan may be assumable at a future date on
its original terms. For example, the assumption clause commonly used in
mortgages sold to the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation conditions an assumption on a
variety of factors, such as the creditworthiness of the subsequent
borrower, the potential for impairment of the creditor's security, and
the execution of an assumption agreement by the subsequent borrower. If
the creditor can determine that such assumption is not permitted, the
creditor complies with Sec. 1026.37(m)(2) by disclosing that the loan
is not assumable. In all other situations, including where assumption of
a loan is permitted or is dependent on certain conditions or factors, or
uncertainty exists as to the future assumability of a mortgage loan, the
creditor complies with Sec. 1026.37(m)(2) by disclosing that, under
certain conditions, the creditor may allow a third party to assume the
loan on its original terms.
2. Original terms. For purposes of Sec. 1026.37(m)(2), the
imposition of an assumption fee is not a departure from the original
terms of the obligation but a modification of the legal obligation, such
as a change in the contract interest rate, represents a departure from
the original terms.
37(m)(3) Homeowner's insurance.
1. Optional disclosure. Section 1026.37(m)(3) provides that
creditors may, but are not required to, disclose a statement of whether
homeowner's insurance is required on the property and whether the
consumer may choose the insurance provider, labeled ``Homeowner's
Insurance.''
2. Relation to the finance charge. Section 1026.4(d)(2) describes
the conditions under which a creditor may exclude premiums for
homeowner's insurance from the finance charge. For transactions subject
to Sec. 1026.19(e), a creditor satisfies Sec. 1026.4(d)(2)(i) by
disclosing the statement described in Sec. 1026.37(m)(3).
37(m)(4) Late payment.
1. Definition. Section 1026.37(m)(4) requires a disclosure if
charges are added to an individual delinquent installment by a creditor
that otherwise considers the transaction ongoing on its original terms.
Late payment charges do not include: (i) The right of acceleration; (ii)
fees imposed for actual collection costs, such as repossession charges
or attorney's fees; (iii) referral and extension charges; or (iv) the
continued accrual of simple interest at the contract rate after the
payment due date. However, an increase in the interest rate on account
of a late payment by the consumer is a late payment charge to the extent
of the increase.
2. Applicability of State law. Many State laws authorize the
calculation of late charges as either a percentage of the delinquent
payment amount or a specified dollar amount, and permit the imposition
of the lesser or greater of the two calculations. The language provided
in the disclosure may reflect the requirements and alternatives allowed
under State law.
37(m)(6) Servicing.
1. Creditor's intent. Section 1026.37(m)(6) requires the creditor to
disclose whether it intends to service the loan directly or transfer
servicing to another servicer after consummation. A creditor complies
with Sec. 1026.37(m)(6) if the disclosure reflects the creditor's
intent at the time the Loan Estimate is issued.
37(m)(7) Liability after foreclosure.
1. When statement is not permitted to be disclosed. The disclosure
described by Sec. 1026.37(m)(7) is required under the condition
specified by Sec. 1026.37(m)(7), specifically, if the purpose of the
credit transaction is a refinance under Sec. 1026.37(a)(9)(ii). Under
any other conditions, this statement is not permitted to appear in the
Loan Estimate.
37(m)(8) Construction loans.
1. Clear and conspicuous statement regarding redisclosure for
construction loans. For construction loans in transactions involving new
construction, where the creditor reasonably expects the settlement date
to be 60
[[Page 723]]
days or more after the provision of the disclosures required under Sec.
1026.19(e)(1)(i), providing the statement, ``You may receive a revised
Loan Estimate at any time prior to 60 days before consummation'' under
the master heading ``Additional Information About This Loan'' and the
heading ``Other Considerations'' pursuant to Sec. 1026.37(m)(8)
satisfies the requirements set forth in Sec. 1026.19(e)(3)(iv)(F) that
the statement be made clearly and conspicuously on the disclosure.
37(n) Signature statement.
1. Signature line optional. Whether a signature line is provided
under Sec. 1026.37(n) is determined solely by the creditor. If a
signature line is provided, however, the disclosure must include the
statement required by Sec. 1026.37(n)(1).
2. Multiple consumers. If there is more than one consumer who will
be obligated in the transaction, the first consumer signs as the
applicant and each additional consumer signs as a co-applicant. If there
is not enough space under the heading ``Confirm Receipt'' to provide
signature lines for every consumer in the transaction, the creditor may
add additional signature pages, as needed, at the end of the form for
the remaining consumers' signatures. However, the creditor is required
to disclose the heading and statement required by Sec. 1026.37(n)(1) on
such additional pages.
3. Consumer's name. The creditor may insert the consumer's name
under the signature line, rather than using the designation
``Applicant'' or ``Co-Applicant'' as illustrated in form H-24 of
appendix H to this part, but is not required to do so pursuant to Sec.
1026.37(n)(1).
37(o) Form of disclosures.
37(o)(1) General requirements.
1. Clear and conspicuous; segregation. The clear and conspicuous
standard requires that the disclosures required by Sec. 1026.37 be
legible and in a readily understandable form. Section 1026.37(o)(1)(i)
requires that the disclosures be grouped together and segregated from
everything else. For example, creditors may not add additional pages in
between the pages of the Loan Estimate, or attach to the Loan Estimate
additional pages that are not provided for under Sec. 1026.37 after the
last page of the Loan Estimate. As required by Sec. 1026.37(o)(3)(i),
the disclosures for any transaction that is a federally related mortgage
loan under Regulation X, 12 CFR 1024.2, must be made using the standard
form H-24 of appendix H to this part. Accordingly, use of that form
constitutes compliance with the clear and conspicuous and segregation
requirements of Sec. 1026.37(o). In addition, Sec. 1026.37(o)(1)(ii)
requires creditors to disclose on the Loan Estimate only the information
required by Sec. 1026.37(a) through (n), except as otherwise provided
by Sec. 1026.37(o), and in the same order, and positioned relative to
the master headings, headings, subheadings, labels, and similar
designations in the same manner, as shown in form H-24, set forth in
appendix H to this part. For example, creditors may not use form H-24,
but include in the Loan Terms table under the subheading ``Can this
amount increase after closing?'' information that is not required by
Sec. 1026.37(b)(6).
2. Balloon payment financing with leasing characteristics. In
certain credit sale or loan transactions, a consumer may reduce the
dollar amount of the payments to be made during the transaction by
agreeing to make, at the end of the loan term, a large final payment
based on the expected residual value of the property. The consumer may
have a number of options with respect to the final payment, including,
among other things, retaining the property and making the final payment,
refinancing the final payment, or transferring the property to the
creditor in lieu of the final payment. Such transactions may have some
of the characteristics of lease transactions subject to Regulation M (12
CFR part 1013), but are considered credit transactions where the
consumer assumes the indicia of ownership, including the risks, burdens,
and benefits of ownership, upon consummation. These transactions are
governed by the disclosure requirements of this part instead of
Regulation M. Under Sec. 1026.37(o)(1)(ii), creditors may not include
any additional information with the disclosures required by Sec.
1026.37, except as provided in Sec. 1026.37(o)(5). Thus, the
disclosures must show the large final payment as a balloon payment in
the projected payments table required by Sec. 1026.37(c) and should
not, for example, reflect the other options available to the consumer at
maturity.
37(o)(2) Headings and labels.
1. Estimated amounts. Section 1026.37(o)(2) incorporates the
``estimated'' designations reflected on form H-24 of appendix H to this
part into the disclosure requirements of Sec. 1026.37, even if the
relevant provision of Sec. 1026.37 does not expressly require or permit
disclosure of the word ``estimate.'' Where form H-24 uses the
abbreviation ``est.'' in place of the word ``estimated,'' Sec.
1026.37(o)(2) also incorporates that designation into its requirement.
For example, Sec. 1026.37(c)(2)(iv) requires disclosure of the total
periodic payment labeled ``Total Monthly Payment,'' but the label on
form H-24 contains the designation ``Estimated'' and thus, the label
required by Sec. 1026.37(c)(2)(iv) must contain the designation
``Estimated.'' Although many of the disclosures required by Sec.
1026.38 cross-reference their counterparts in Sec. 1026.37, Sec.
1026.38(t) incorporates the ``estimated'' designations reflected on form
H-25, not form H-24.
37(o)(3) Form.
1. Non-federally related mortgage loans. For a non-federally related
mortgage loan, the
[[Page 724]]
creditor is not required to use form H-24 of appendix H to this part,
although its use as a model form for such transactions, if properly
completed with accurate content, constitutes compliance with the clear
and conspicuous and segregation requirements of Sec. 1026.37(o)(1)(i).
Even when the creditor elects not to use the model form, Sec.
1026.37(o)(1) requires that the disclosures be grouped together and
segregated from everything else; contain only the information required
by Sec. 1026.37(a) through (n); and be provided in the same order as
they occur in form H-24, using the same relative positions of the
headings, labels, and similar designations as shown in the form. In
addition, Sec. 1026.37(o)(2) requires that the creditor include the
designation of ``estimated'' for all headings, subheading, labels, and
similar designations required by Sec. 1026.37 for which form H-24
contains the ``estimated'' designation in such heading, subheading,
label, or similar designation. The disclosures required by Sec. 1026.37
comply with the requirement to be in a format substantially similar to
form H-24 when provided on letter size (8.5[sec] x 11[sec]) paper.
37(o)(4) Rounding.
1. Rounding. Consistent with Sec. 1026.2(b)(4), except as otherwise
provided in Sec. 1026.37(o)(4), any amount required to be disclosed by
Sec. 1026.37 is not permitted to be rounded and is disclosed using
decimal places where applicable, unless otherwise provided.
2. Calculations. If a dollar amount that is required to be rounded
by Sec. 1026.37(o)(4)(i) on the Loan Estimate is a total of one or more
dollar amounts that are not required or permitted to be rounded, the
total amount must be rounded consistent with Sec. 1026.37(o)(4)(i), but
such component amounts used in the calculation must use such unrounded
numbers. In addition, if any such unrounded component amount is required
to be disclosed under Sec. 1026.37, consistent with Sec. 1026.2(b)(4),
it should be disclosed as an unrounded number. If an amount that is
required to be rounded by Sec. 1026.37(o)(4)(i) on the Loan Estimate is
a total of one or more components that are also required to be rounded
by Sec. 1026.37(o)(4)(i), the total amount must be calculated using
such rounded amounts. For example, the subtotals required to be
disclosed by Sec. 1026.37(f)(1), (2), and (3) are calculated using the
rounded amounts disclosed under those subsections. See also comment
37(o)(4)(i)(C)-1. However, the amounts required to be disclosed by Sec.
1026.37(l) reference actual amounts for their components, rather than
other amounts disclosed under Sec. 1026.37 and rounded pursuant to
Sec. 1026.37(o)(4)(i), and thus, they are calculated using unrounded
numbers.
37(o)(4)(i) Nearest dollar.
Paragraph 37(o)(4)(i)(A).
1. Rounding of dollar amounts. Section 1026.37(o)(4)(i)(A) requires
that certain dollar amounts be rounded to the nearest whole dollar. For
example, under Sec. 1026.37(o)(4)(i)(A), periodic mortgage insurance
payments are rounded and disclosed to the nearest dollar, such that a
periodic mortgage insurance payment of $164.50 is disclosed under Sec.
1026.37(c)(2)(ii) as $165, but a periodic mortgage insurance payment of
$164.49 is disclosed as $164. The per-diem amount disclosed under Sec.
1026.37(g)(2)(iii) and the monthly amounts for the initial escrow
payment at closing disclosed pursuant to Sec. 1026.37(g)(3)(i) through
(iii) and (v) do not include partial cents. Dollar amounts are rounded
or truncated to the nearest whole cent. For example, under Sec.
1026.37(g)(2)(iii), the creditor discloses per-diem interest of $68.1254
as $68.13 or $68.12. See form H-24(B) in appendix H to this part for an
illustration of per-diem amounts for homeowner's insurance disclosed
pursuant to Sec. 1026.37(g)(3)(i).
Paragraph 37(o)(4)(i)(B).
1. Rounding of loan amount. Section 1026.37(o)(4)(i)(B) requires the
loan amount to be disclosed truncated at the decimal place if the loan
amount is a whole number. For example, if Sec. 1026.37(b)(1) requires
disclosure of a loan amount of $481,516.23, the creditor discloses the
amount as $481,516.23. However, if the loan amount required to be
disclosed were $481,516.00, the creditor would disclose $481,516.
Paragraph 37(o)(4)(i)(C).
1. Rounding of the total monthly payment. Section
1026.37(o)(4)(i)(C) requires the total monthly payment amount disclosed
under Sec. 1026.37(c)(2)(iv) to be rounded if any of its components are
rounded. For example, if the total monthly payment disclosed under Sec.
1026.37(c)(2)(iv) is composed of a $2,000.49 periodic principal and
interest payment required to be disclosed by Sec. 1026.37(c)(2)(i) and
a $164.49 periodic mortgage insurance payment required to be disclosed
by Sec. 1026.37(c)(2)(ii), the creditor would calculate the total
monthly payment by adding the exact periodic principal and interest
payment of $2,000.49 and the rounded periodic mortgage insurance payment
of $164, round the total, and disclose $2,164.
37(o)(4)(ii) Percentages.
1. Decimal places. Section 1026.37(o)(4)(ii) requires the percentage
amounts disclosed rounding exact amounts to three decimal places, but
the creditor does not disclose trailing zeros to the right of the
decimal point. For example, a 2.4999 percent annual percentage rate is
disclosed as ``2.5%'' under Sec. 1026.37(o)(4)(ii). Similarly, a 7.005
percent annual percentage rate is disclosed as ``7.005%,'' and a 7.000
percent annual percentage rate is disclosed as ``7%.''
37(o)(5) Exceptions.
1. Permissible changes. The changes required or permitted by Sec.
1026.37(o)(5) are permitted for federally related mortgage loans for
which the use of form H-24 is required under
[[Page 725]]
Sec. 1026.37(o)(3). For non-federally related mortgage loans, the
changes required or permitted by Sec. 1026.37(o)(5) do not affect the
substance, clarity, or meaningful sequence of the disclosure and
therefore, are permissible. Any changes to the disclosure not specified
in Sec. 1026.37(o)(5) or not permitted by other provisions of Sec.
1026.37 are not permissible for federally related mortgage loans.
Creditors in non-federally related mortgage loans making any changes
that affect the substance, clarity, or meaningful sequence of the
disclosure will lose their protection from civil liability under TILA
section 130.
2. Manual completion. Section 1026.37(o) does not require the
creditor to use a computer, typewriter, or other word processor to
complete the disclosure form. The information and amounts required to be
disclosed by Sec. 1026.37 on form H-24 of appendix H to this part may
be filled in by hand printing or using any other method, provided the
information is clear and legible and complies with the formatting
required by form H-24, including replicating bold font where required.
3. Contact information. If a transaction involves more than one
creditor or mortgage broker, the space provided on form H-24 of appendix
H to this part for the contact information required by Sec. 1026.37(m)
may be altered to add additional labels to accommodate the additional
information of such parties, provided that the information required by
Sec. 1026.37(l), (m), and (n) are disclosed on the same page as
illustrated by form H-24. If the space provided on form H-24 of appendix
H to this part does not allow for the disclosure of such contact and
other information on the same page, an additional page may be added to
provide the required contact information with an appropriate reference
to the additional page.
4. Unit-period. Section 1026.37(o)(5)(i) provides that wherever form
H-24 or Sec. 1026.37 uses ``monthly'' to describe the frequency of any
payments or uses ``month'' to describe the applicable unit-period, the
creditor is required to substitute the appropriate term to reflect the
fact that the transaction's terms provide for other than monthly
periodic payments, such as bi-weekly or quarterly payments. For purposes
of Sec. 1026.37, the term ``unit-period'' has the same meaning as in
appendix J to Regulation Z.
5. Additional page. Information required or permitted to be
disclosed by Sec. 1026.37 on a separate page should be formatted
similarly to form H-24 of appendix H to this part, so as not to affect
the substance, clarity, or meaningful sequence of the disclosure. In
addition, information provided on additional pages should be
consolidated on as few pages as necessary to not affect the substance,
clarity, or meaningful sequence of the disclosure.
6. Translation. Section 1026.37(o)(5)(ii) permits the translation of
form H-24 into languages other than English, consistent with Sec.
1026.27. Pursuant to Sec. 1026.37(o)(5)(ii) creditors may modify form
H-24 to the extent that translation prevents the headings, labels,
designations, and required disclosure items under Sec. 1026.37 from
fitting in the space provided on form H-24. For example, if the
translation of a required label does not fit within the line provided
for such label in form H-24, the label may be disclosed over two lines.
See form H-28 of appendix H to this part for Spanish translations of
form H-24.
Section 1026.38--Content of Disclosures for Certain Mortgage
Transactions (Closing Disclosure)
1. Disclosures not applicable. Where a disclosure is not applicable
to a particular transaction, form H-25 of appendix H to this part may
not be modified to state ``not applicable'' or ``N/A.'' The portion of
the form pertaining to the inapplicable disclosure may be left blank
unless otherwise provided by Sec. 1026.38. For example, the disclosure
required by Sec. 1026.38(r) of the consumer's or seller's real estate
broker may be left blank for a transaction that does not involve real
estate brokers, such as a refinance or home equity loan. As provided in
Sec. 1026.38(m) and (n), however, the adjustable payment and adjustable
interest rate tables required by those paragraphs may be included only
if those disclosures are applicable to the transaction and otherwise
must be excluded.
2. Format. See Sec. 1026.38(t) and its commentary for guidance on
the proper format to be used in making the disclosures, as well as
required and permissible modifications.
3. Good faith requirement. The disclosures required by Sec. 1026.38
are required to reflect the actual terms of the legal obligation between
the parties, and the actual costs associated with the settlement of the
transaction. Creditors and settlement agents may estimate disclosures as
provided pursuant to Sec. 1026.19(f)(1)(i) when the actual term or cost
is unknown at the time the disclosures are made. See Sec. Sec.
1026.17(c)(2) and 1026.19(f)(1)(i) and comments 17(c)(2)(i)-1 and -2,
and 19(f)(1)(i)-2.
4. Reductions in principal balance. A principal reduction that
occurs immediately or very soon after closing must be disclosed in the
summaries of transactions table on the standard Closing Disclosure
pursuant to Sec. 1026.38(j)(1)(v) or in the payoffs and payments table
on the alternative Closing Disclosure pursuant to Sec.
1026.38(t)(5)(vii)(B). The disclosure of a principal reduction under
Sec. 1026.38(j)(1)(v) or (t)(5)(vii)(B) includes the following
elements: (1) The amount of the principal reduction; (2) the phrase
``principal reduction'' or a similar phrase; (3) for a principal
reduction disclosure under
[[Page 726]]
Sec. 1026.38(t)(5)(vii)(B) only, the name of the payee; (4) if
applicable to the transaction, the phrase ``Paid Outside of Closing'' or
``P.O.C.'' and the name of the party making the payment; and (5) if the
principal reduction is used to satisfy the requirements of Sec.
1026.19(f)(2)(v), a statement that the principal reduction is being
provided to offset charges that exceed the legal limits, using any
language that meets the clear and conspicuous standard under Sec.
1026.38(t)(1)(i). If a creditor is required to disclose the name of the
party making the payment or that the principal reduction is being
provided to offset charges that exceed the legal limits, and there is
insufficient space under the Sec. 1026.38(j)(1)(v) or (t)(5)(vii)(B)
disclosure for these elements of the principal reduction disclosure, the
creditor may omit these elements from the Sec. 1026.38(j)(1)(v) or
(t)(5)(vii)(B) disclosure. If the creditor omits these elements from the
Sec. 1026.38(j)(1)(v) or (t)(5)(vii)(B) disclosure, the creditor must
provide a complete principal reduction disclosure under an appropriate
heading on an additional page, in accordance with Sec. 1026.38(j) and
(t)(5)(ix), as applicable, with a reference to the abbreviated principal
reduction disclosure under Sec. 1026.38(j)(1)(v) or (t)(5)(vii)(B).
i. Principal reduction not paid with closing funds. A principal
reduction is disclosed in the summaries of transactions table under
Sec. 1026.38(j)(1)(v) and marked with the phrase ``Paid Outside of
Closing'' or the abbreviation ``P.O.C.'' pursuant to Sec.
1026.38(j)(4)(i), or in the payoffs and payments table under Sec.
1026.38(t)(5)(vii)(B) marked with the phrase ``Paid Outside of Closing''
or the abbreviation ``P.O.C.,'' if it is not paid from closing funds.
For a principal reduction disclosed under Sec. 1026.38(j)(1)(v) that is
not paid from closing funds, the amount of the principal reduction is
not included in computing the summaries of transactions totals under
Sec. 1026.38(j) or the cash to close disclosures under Sec.
1026.38(i). For a principal reduction disclosed under Sec.
1026.38(t)(5)(vii)(B) that is not paid from closing funds, the amount of
the principal reduction is not included in computing the total payoffs
and payments amount disclosed under Sec. 1026.38(t)(5)(vii)(B) or the
cash to close amount disclosed under Sec. 1026.38(e)(5)(ii). For
example, a creditor providing a $500 principal reduction to satisfy the
refund requirements of Sec. 1026.19(f)(2)(v) discloses the principal
reduction under Sec. 1026.38(j)(1)(v) by providing in Section K of the
summaries of transactions table a statement such as ``$500.00 Principal
Reduction for exceeding legal limits P.O.C. Lender,'' and not including
the amount of the principal reduction in the summaries of transactions
totals under Sec. 1026.38(j) or the calculating cash to close
disclosures under Sec. 1026.38(i). Alternatively, if there is
insufficient space under Sec. 1026.38(j)(1)(v) for a creditor to
disclose the name of the party making the payment or a statement that
the principal reduction is being provided to offset charges that exceed
the legal limits, a creditor may disclose a statement such as ``$500.00
Principal Reduction P.O.C.'' under Sec. 1026.38(j)(1)(v) and a
statement on an additional page such as ``$500.00 Principal Reduction
for exceeding legal limits P.O.C. Lender. See Section K on page 3.''
ii. Principal reduction paid with closing funds. A principal
reduction is disclosed in the summaries of transactions table under
Sec. 1026.38(j)(1)(v) or in the payoffs and payments table under Sec.
1026.38(t)(5)(vii)(B) without the phrase ``Paid Outside of Closing'' or
the abbreviation ``P.O.C.'' if it is paid from closing funds. The amount
of a principal reduction that is paid with closing funds is included in
the applicable calculations required under Sec. 1026.38. For example,
in a refinance transaction using the alternative tables on the Closing
Disclosure, a creditor discloses a $1,000 principal reduction to reduce
the cash provided to the consumer by providing in the payoffs and
payments table under Sec. 1026.38(t)(5)(vii)(B) a statement such as
``Principal Reduction to Consumer'' under the column heading ``TO'' and
``$1,000.00'' under the column heading ``AMOUNT,'' and by including such
amount in the total payoffs and payments amount under Sec.
1026.38(t)(5)(vii)(B) and in the cash to close amount under Sec.
1026.38(e)(5)(ii). In this example, the creditor must disclose the
following elements under Sec. 1026.38(t)(5)(vii)(B): The amount of the
principal reduction, the phrase ``principal reduction'' or a similar
phrase, and the name of the payee. The creditor should not include in
the disclosure the phrase ``Paid Outside of Closing'' or ``P.O.C.'' and
the name of the party making the payment, or a statement that the
principal reduction is being provided to offset charges that exceed the
legal limits, because those principal reduction disclosure elements are
not applicable to the transaction in this particular example. The
creditor may not use an addendum for the principal reduction disclosure
in this example.
38(a) General information.
38(a)(3) Closing information.
38(a)(3)(i) Date issued.
1. Applicable date. For general guidance on identifying the date
issued for the Closing Disclosure, see the commentary to Sec.
1026.37(a)(4).
38(a)(3)(iii) Disbursement date.
1. Simultaneous subordinate financing disbursement date. The
disbursement date on the simultaneous subordinate financing Closing
Disclosure is the date some or all of the subordinate financing loan
amount disclosed under Sec. 1026.38(b) is expected to be paid to the
consumer or a third party other than a settlement agent.
38(a)(3)(iv) Settlement agent.
[[Page 727]]
1. Entity name. Section 1026.38(a)(3)(iv) requires the name of the
entity that employs the settlement agent. The name of the individual
conducting the closing is not required.
38(a)(3)(v) File number.
1. Alpha-numeric characters. The file number required by Sec.
1026.38(a)(3)(v) may contain any alpha-numeric characters and need not
be limited to numbers.
38(a)(3)(vi) Property.
1. Alternative property. For guidance on disclosing the location of
a property for which an address is unavailable, see the commentary to
Sec. 1026.37(a)(6). Where personal property also secures the credit
transaction, a description of that property may be disclosed, at the
creditor's option, pursuant to Sec. 1026.38(a)(3)(vi). If the form does
not provide enough space to disclose a description of personal property
under Sec. 1026.38(a)(3)(vi), at the creditor's option an additional
page may be used and appended to the end of the form provided that the
creditor complies with the requirements of Sec. 1026.38(t)(3).
2. Multiple properties. Where more than one property secures the
credit transaction, Sec. 1026.38(a)(3)(vi) requires disclosure of all
property addresses. If the addresses of all properties securing the
transaction do not fit in the space allocated on the Closing Disclosure,
an additional page with the addresses of all such properties may be
appended to the end of the form.
38(a)(3)(vii) Sale price.
1. No seller. In transactions where there is no seller, such as in a
refinancing, Sec. 1026.38(a)(3)(vii)(B) requires the creditor to
disclose the appraised value of the property. To comply with this
requirement, the creditor discloses the value determined by the
appraisal or valuation used to determine approval of the credit
transaction. If the creditor has not obtained an appraisal, the creditor
may disclose the estimated value of the property. Where an estimate is
disclosed, rather than an appraisal, the label for the disclosure is
changed to ``Estimated Prop. Value.'' The creditor may use the estimate
provided by the consumer at application but, if it has performed its own
estimate of the property value for purposes of approving the credit
transaction by the time the disclosure is provided to the consumer, the
creditor must disclose the estimate it used for purposes of approving
the credit transaction. For transactions involving construction where
there is no seller, the creditor must disclose the value of the property
that is used to determine the approval of the credit transaction,
including improvements to be made on the property if those improvements
are used in determining the approval of the credit transaction.
2. Personal property. For guidance on how to disclose the sale price
of a transaction that includes personal property under Sec.
1026.38(a)(3)(vii), see comment 37(a)(7)-2.
38(a)(4) Transaction information.
1. Multiple borrowers and sellers. The name and address of each
consumer and seller in the transaction must be provided under the
heading ``Transaction Information.'' If the form does not provide enough
space to include the required information for each consumer and seller,
an additional page may be used and appended to the end of the form
provided that the creditor complies with the requirements of Sec.
1026.38(t)(3). For additional guidance on disclosing multiple borrowers,
see comment 37(a)(5)-1.
2. No seller transactions or simultaneous subordinate financing
transactions. In transactions where there is no seller, such as in a
refinancing or home equity loan, or for simultaneous subordinate
financing purchase transactions if the first-lien Closing Disclosure
will record the entirety of the seller's transaction, the disclosure
under Sec. 1026.38(a)(4)(ii) may be left blank. See also Sec.
1026.38(t)(5)(vii)(A).
3. Multiple creditors. See comment 37(a)(3)-1 regarding
identification requirements for multiple creditors.
4. Consumers. Section 1026.38(a)(4)(i) requires disclosure of the
consumer's name and mailing address, labeled ``Borrower.'' For purposes
of Sec. 1026.38(a)(4)(i), the term ``consumer'' is limited to persons
to whom the credit is offered or extended. For guidance on how to
disclose multiple consumers, see comment 38(a)(4)-1.
38(a)(5) Loan information.
1. General. See commentary to Sec. 1026.37(a)(8) through (12) for
guidance on the general requirements and definitions applicable to Sec.
1026.38(a)(5)(i) through (v).
38(a)(5)(v) Loan identification number.
1. Same identification number as Loan Estimate. The loan
identification number disclosed pursuant to Sec. 1026.38(a)(5)(v) must
be one that enables the creditor, consumer, and other parties to
identify the transaction as the same transaction disclosed on the Loan
Estimate. The loan identification number may contain any alpha-numeric
characters. If a creditor uses the same loan identification number on
several revised Loan Estimates to the consumer, but adds after such
number a hyphen and a number to denote the number of revised Loan
Estimates in sequence, the creditor must disclose the loan
identification number before such hyphen on the Closing Disclosure to
identify the transaction as the same for which the initial and revised
Loan Estimates were provided.
38(b) Loan terms.
1. Guidance. See the commentary to Sec. 1026.37(b) for guidance on
the content of the disclosures required by Sec. 1026.38(b).
38(c) Projected payments.
[[Page 728]]
1. In general. For guidance on the disclosure of the projected
payments table, see Sec. 1026.37(c) and its commentary.
38(c)(1) Projected payments or range of payments.
1. Escrow account analysis. The amount of estimated escrow payments
disclosed on the Closing Disclosure is accurate if it differs from the
estimated escrow payment disclosed on the Loan Estimate because of the
escrow account analysis described in Regulation X, 12 CFR 1024.17.
38(d) Costs at closing.
38(d)(2) Alternative table for transactions without a seller or for
simultaneous subordinate financing.
1. Required use. The disclosure of the alternative cash to close
table in Sec. 1026.38(d)(2) may only be provided by a creditor in a
transaction without a seller or for a simultaneous subordinate financing
transaction. In a purchase transaction, the alternative disclosure may
be used for the simultaneous subordinate financing Closing Disclosure
only if the first-lien Closing Disclosure records the entirety of the
seller's transaction. The use of this alternative table for transactions
without a seller or for simultaneous subordinate financing transactions
is required if the Loan Estimate provided to the consumer disclosed the
optional alternative table under Sec. 1026.37(d)(2) and must be used in
conjunction with the use of the alternative calculating cash to close
disclosure under Sec. 1026.38(e). See comments 38(j)-3 and
38(k)(2)(vii)-1 for disclosure requirements applicable to the first-lien
transaction when the alternative disclosures are used for a simultaneous
subordinate financing transaction and a seller contributes to the costs
of the subordinate financing. See also comments 38(t)(5)(vii)(B)-1 and -
2 for the requirement to disclose the seller's contributions, if any,
toward the subordinate financing in the payoffs and payments table on
the simultaneous subordinate financing Closing Disclosure.
2. Method of indication. The indication of whether the cash is
either due from or payable to the consumer is made by the use of check
boxes as shown in form H-25(J) of appendix H to this part. Forms H-25(E)
and H-25(G) of appendix H to this part contain examples of the use of
these checkboxes.
38(e) Alternative calculating cash to close table for transactions
without a seller or for simultaneous subordinate financing.
1. Required use. The disclosure of the table in Sec. 1026.38(e) may
only be provided by a creditor in a transaction without a seller or for
a simultaneous subordinate financing transaction. In a purchase
transaction, the alternative disclosure may be used for the simultaneous
subordinate financing Closing Disclosure only if the first-lien Closing
Disclosure records the entirety of the seller's transaction. The use of
this alternative calculating cash to close table for transactions
without a seller or for simultaneous subordinate financing is required
for transactions in which the Loan Estimate provided to the consumer
disclosed the optional alternative table under Sec. 1026.37(h)(2), and
must be used in conjunction with the alternative disclosure under Sec.
1026.38(d)(2).
2. More prominent disclosures. Section 1026.38(e)(1)(iii), (2)(iii),
(3)(iii), and (4)(iii) requires that statements are given as to whether
the ``Final'' amount disclosed under each subparagraph (ii) of Sec.
1026.38(e)(1) through (e)(4) is different than or equal to, and in some
cases whether the amount is greater than or less than, the corresponding
``Loan Estimate'' amount disclosed under each subparagraph (i) of Sec.
1026.38(e)(1) through (e)(4). These statements are more prominent than
the other disclosures under Sec. 1026.38(e). The statement of whether
the estimated and final amounts are different, stated as a ``Yes'' or
``No'' in capital letters and in boldface, under the subheading ``Did
this change?,'' as shown on forms H-25(E) and H-25(G) of appendix H to
this part, complies with the requirement to state whether the amounts
are different more prominently. Such statement of ``No'' satisfies the
requirement to state that the estimated and final amounts are equal, and
these sections do not provide for any narrative text to be included with
such statement. The prominence requirement also requires that, in the
event an increase or decrease in costs has occurred, certain words
within the narrative text to be included under the subheading ``Did this
change?'' for a ``Yes'' answer are displayed more prominently than other
disclosures. For example, under Sec. 1026.38(e)(2)(iii)(A), this more
prominent statement could take the form of the phrases ``Total Loan
Costs (D)'' and ``Total Other Costs (I)'' being shown in boldface, as
shown on forms H-25(E) and H-25(G) of appendix H to this part. See
comment 38(e)-4 for further guidance regarding the prominence of such
statements.
3. Statements of differences. The dollar amounts disclosed under
Sec. 1026.38 generally are shown to two decimal places unless otherwise
required. See comment 38(t)(4)-1. Any amount in the ``Final'' column of
the alternative calculating cash to close table under Sec. 1026.38(e)
is shown to two decimal places unless otherwise required. Pursuant to
Sec. 1026.38(t)(4)(i)(C), however, any amount in the ``Loan Estimate''
column of the alternative calculating cash to close table under Sec.
1026.38(e) is rounded to the nearest dollar amount to match the
corresponding estimated amount disclosed on the Loan Estimate's
calculating cash to close table under Sec. 1026.37(h). For purposes of
Sec. 1026.38(e)(1)(iii), (2)(iii), and (4)(iii), each statement of a
change between the amounts disclosed on
[[Page 729]]
the Loan Estimate and the Closing Disclosure is based on the actual,
non-rounded estimate that would have been disclosed on the Loan Estimate
under Sec. 1026.37(h) if it had been shown to two decimal places rather
than a whole dollar amount. For example, if the amounts in the ``Loan
Estimate'' column of the total closing costs row disclosed under Sec.
1026.38(e)(2)(i) is $12,500, but the non-rounded estimate of total
closing costs is $12,500.35, and the ``Final'' column of the total
closing costs row disclosed under Sec. 1026.38(e)(2)(ii) is $12,500.35,
then, even though the table would appear to show a $0.35 increase in
total closing costs, no statement of such increase is given under Sec.
1026.38(e)(2)(iii).
4. Statements that the consumer should see details. The provisions
of Sec. 1026.38(e)(2)(iii)(A) and (e)(4)(iii)(A) each require a
statement that the consumer should see certain details of the closing
costs disclosed under Sec. 1026.38(f), (g), or (t). Forms H-25(E) and
H-25(G) of appendix H to this part contain examples of these statements.
For example, Sec. 1026.38(e)(4)(iii)(A) requires a statement that the
consumer should see the details disclosed pursuant to Sec.
1026.38(t)(5)(vii)(B), and, as shown on forms H-25(E) and H-25(G) of
appendix H to this part, the statement, ``See Payoffs and Payments,'' in
which the words ``Payoffs and Payments'' are in boldface, complies with
this provision.
5. Statement of increase or decrease. Section 1026.38(e)(1)(iii)(A)
requires a statement of whether the loan amount increased or decreased.
A creditor complies with this requirement by disclosing, ``This amount
increased'' or ``This amount decreased'' with the words ``increase'' and
``decrease'' in boldface font.
6. Estimated amounts. The amounts disclosed on the alternative
calculating cash to close table under the subheading ``Loan Estimate''
under Sec. 1026.38(e)(1)(i), (2)(i), (4)(i), and (5)(i) are the amounts
disclosed on the most recent Loan Estimate provided to the consumer
under Sec. 1026.19(e).
38(e)(1) Loan amount.
Paragraph 38(e)(1)(iii)(A).
1. Statements of increases or decreases. Section
1026.38(e)(1)(iii)(A) requires a statement of whether the amount
increased or decreased from the estimated amount. The statement, ``This
amount increased,'' in which the word ``increased'' is in boldface font
and is replaced with the word ``decreased'' as applicable, complies with
this requirement.
38(e)(2) Total closing costs.
Paragraph 38(e)(2)(i).
1. Reference to disclosure of total closing costs. Under Sec.
1026.38(e)(2)(i), the amount disclosed is labeled ``Total Closing
Costs,'' and such label is accompanied by a reference to the disclosure
of ``Total Closing Costs'' under Sec. 1026.38(h)(1). This reference may
take the form, for example, of a cross-reference in parenthesis to the
row on the table disclosed under Sec. 1026.38(h) that includes the
itemized amount for ``Total Closing Costs,'' as shown on form H-25 of
appendix H to this part.
Paragraph 38(e)(2)(iii)(A).
1. Statements and references regarding the total loan costs and
total other costs. Under Sec. 1026.38(e)(2)(iii)(A), the statements
under the subheading ``Did this change?'' that the consumer should see
the total loan costs and total other costs subtotals disclosed on the
Closing Disclosure under Sec. 1026.38(f)(4) and (g)(5) are made only if
and to the extent the difference in the ``Total Closing Costs'' is
attributable to differences in itemized charges that are included in
either or both of such subtotals.
i. For example, if an increase in the ``Total Closing Costs'' is
attributable only to an increase in the appraisal fee (which is an
itemized charge on the Closing Disclosure under the subheading
``Services Borrower Did Not Shop For,'' itself under the heading ``Loan
Costs''), then a statement is given under the subheading ``Did this
change?'' that the consumer should see the total loan costs subtotal
disclosed on the Closing Disclosure under Sec. 1026.38(f)(4). If the
increase in ``Total Closing Costs'' is attributable only to an increase
in recording fees (which is an itemized charge on the Closing Disclosure
under the subheading ``Taxes and Other Government Fees,'' itself under
the heading ``Other Costs''), then a statement is given under the
subheading ``Did this change?'' that the consumer should see the total
other costs subtotal disclosed on the Closing Disclosure under Sec.
1026.38(g)(5). If, however, the increase is attributable in part to an
increase in the appraisal fee and in part to an increase in the
recording fee, then a statement is given under the subheading ``Did this
change?'' that the consumer should see the total loan costs and total
other costs subtotals disclosed on the Closing Disclosure under Sec.
1026.38(f)(4) and (g)(5).
ii. For guidance regarding the requirement that this statement be
accompanied by a reference to the disclosures of the total loan costs
and total other costs under Sec. 1026.38(f)(4) and (g)(5), see comment
38(e)(2)(i)-1. For an example of such reference, see form H-25 of
appendix H to this part.
2. Disclosure of excess amounts above limitations on increases in
closing costs.
i. Because certain closing costs, individually, are generally
subject to the limitations on increases in closing costs under Sec.
1026.19(e)(3)(i) (e.g., fees paid to the creditor, transfer taxes, fees
paid to an affiliate of the creditor), while other closing costs are
collectively subject to the limitations on increases in closing costs
under Sec. 1026.19(e)(3)(ii) (e.g., recording fees, fees paid to an
unaffiliated third party identified by
[[Page 730]]
the creditor if the creditor permitted the consumer to shop for the
service provider), Sec. 1026.38(e)(2)(iii)(A) requires the creditor or
closing agent to calculate subtotals for each type of excess amount, and
then add such subtotals together to yield the dollar amount to be
disclosed in the table. See commentary to Sec. 1026.19(e)(3) for
additional guidance on calculating excess amounts above the limitations
on increases in closing costs under Sec. 1026.19(e)(3).
ii. Under Sec. 1026.38(e)(2)(iii)(A), calculation of the excess
amounts above the limitations on increases in closing costs takes into
account that the itemized, estimated closing costs disclosed on the Loan
Estimate will not result in charges to the consumer if the service is
not actually provided at or before consummation. For example, if the
Loan Estimate included under ``Services You Cannot Shop For'' a $30
charge for a ``title courier fee,'' but the title company elects to
hand-deliver the title documents package to the creditor at no charge,
the $30 fee is not factored into the calculation of the ``Total Closing
Costs'' that are subject to the limitations on increases in closing
costs. However, if the title courier fee was assessed, but at only $15,
the charge is factored into the calculation because the third party
service was actually provided, albeit at a lower amount than estimated.
For an example, see form H-25 of appendix H to this part.
iii. Under Sec. 1026.38(e)(2)(iii)(A), calculation of the excess
amounts above the limitations on increases in closing costs takes into
account that certain itemized charges listed on the Loan Estimate under
the subheading ``Services You Can Shop For'' may be subject to different
limitations depending on the circumstances. Although Sec.
1026.19(e)(3)(iii) provides exceptions to the general rule, such a
charge would generally be subject to the limitations under Sec.
1026.19(e)(3)(i) if the consumer decided to use a provider affiliated
with the creditor. However, the same charge would instead be subject to
the limitations under Sec. 1026.19(e)(3)(ii) if the consumer selected a
third party service provider unaffiliated with but identified by the
creditor, and the creditor permitted the consumer to shop for the
service provider. See commentary to Sec. 1026.19(e)(3) for additional
guidance on calculating excess amounts above the limitations on
increases in closing costs under Sec. 1026.19(e)(3).
3. Statements regarding excess amount and any credit to the
consumer. Section 1026.38(e)(2)(iii)(A) requires a statement that an
increase in closing costs exceeds legal limits by the dollar amount of
the excess and a statement directing the consumer to the disclosure of
lender credits under Sec. 1026.38(h)(3) or a principal reduction under
Sec. 1026.38(t)(5)(vii)(B), if provided under Sec. 1026.19(f)(2)(v).
See form H-25(F) in appendix H to this part for examples of such
statements under Sec. 1026.38(h)(3). See also comments 38-4 and
38(h)(3)-2.
38(e)(3) Closing costs paid before closing.
Paragraph 38(e)(3)(i).
1. Estimate of closing costs paid before closing. Under Sec.
1026.38(e)(3)(i), the ``Loan Estimate'' amount for ``Closing Costs
Subtotal Paid Before Closing'' is always shown as ``$0,'' because an
estimate of such amount is not disclosed on the Loan Estimate.
Paragraph 38(e)(3)(iii)(B).
1. Equal amount. Under Sec. 1026.38(e)(3)(iii)(B), the creditor
gives a statement that the ``Final'' amount disclosed under Sec.
1026.38(e)(3)(ii) is equal to the ``Loan Estimate'' amount disclosed
under Sec. 1026.38(e)(3)(i), only if the ``Final'' amount is $0,
because the ``Loan Estimate'' amount is always disclosed as $0 under
Sec. 1026.38(e)(3)(i). See comment 38(e)(3)(i)-1.
38(f) Closing cost details; loan costs.
1. Lender-paid charges and specific lender credits. Charges that are
designated as paid by others under Sec. 1026.38(f) and (g), below, may
include the letter ``L'' in parentheses, i.e. ``(L),'' to the left of
the amount in the column to designate those charges paid by the creditor
pursuant to the legal obligation between the creditor and consumer.
2. Construction loan inspection and handling fees. Construction loan
inspection and handling fees are loan costs associated with the
transaction for purposes of Sec. 1026.38(f). For information on how to
disclose inspection and handling fees for the staged disbursement of
construction loan proceeds if the amount or number of such fees or when
they will be collected is not known at or before consummation, see
comments 37(f)-3, 37(f)(6)-3, and app. D-7.vii. See Sec. 1026.17(e) and
its commentary concerning the effect of subsequent events that cause
inaccuracies in disclosures.
38(f)(1) Origination charges.
1. Guidance in other comments. For a description of origination
charges and discount points, see comments 37(f)(1)-1, -2, and -3.
2. Loan originator compensation. All compensation paid to a loan
originator, as defined by Sec. 1026.36(a)(1), that is a third-party
associated with the transaction, regardless of the party that pays the
compensation, must be disclosed pursuant to Sec. 1026.38(f)(1).
Compensation from the consumer to a third-party loan originator is
designated as borrower-paid at or before closing, as applicable, on the
Closing Disclosure. Compensation from the creditor to a third-party loan
originator is designated as paid by others on the Closing Disclosure.
Compensation to a third-party loan originator from both the consumer and
the creditor in the transaction is prohibited under Sec. 1026.36(d)(2).
3. Calculating compensation to a loan originator from the creditor.
The amount disclosed as paid from the creditor to a third-party
[[Page 731]]
loan originator under Sec. 1026.38(f)(1) is the dollar value of
salaries, commissions, and any financial or similar compensation
provided to a third-party loan originator by the creditor that are
considered to be points and fees under Sec. 1026.32(b)(1)(ii). For
additional guidance and examples on the calculation of compensation paid
to the third-party loan originator from the creditor, see comments
32(b)(1)(ii)-1, --2, -3, and -4.
38(f)(2) Services borrower did not shop for.
1. Guidance in other comments. For examples of services, costs, and
their descriptions disclosed under Sec. 1026.38(f)(2), see comments
37(f)(2)-1, -2, -3, and -4.
38(f)(3) Services borrower did shop for.
1. Provider on written list. Items that were disclosed pursuant to
Sec. 1026.37(f)(3) cannot be disclosed under Sec. 1026.38(f)(3) when
the consumer selected a provider contained on the written list provided
under Sec. 1026.19(e)(1)(vi)(C). Instead, such costs are disclosed
pursuant to Sec. 1026.38(f)(2).
38(f)(5) Subtotal of loan costs.
1. Charges subtotaled. The only charges that are loan costs that are
subtotaled pursuant to Sec. 1026.38(f)(5) are those costs designated
borrower-paid at or before closing. Charges which are loan costs
designated seller-paid at or before closing, or paid by others, are not
subtotaled pursuant to Sec. 1026.38(f)(5). The subtotal of charges that
are seller-paid at or before closing or paid by others is disclosed
under Sec. 1026.38(h)(2).
38(g) Closing costs details; other costs.
38(g)(1) Taxes and other government fees.
1. Guidance. For additional guidance on taxes and other government
fees, see comments 37(g)(1)-1, -2, -3, and -4.
2. Transfer taxes--itemization. The creditor may itemize the
transfer taxes paid on as many lines as necessary pursuant to Sec.
1026.38(g)(1) in order to disclose all of the transfer taxes paid as
part of the transaction. The taxes should be allocated in the applicable
columns as borrower-paid at or before closing, seller-paid at or before
closing, or paid by others, as provided by State or local law, the terms
of the legal obligation, or the real estate purchase contract.
3. Recording fees. i. Fees for recording deeds and security
instruments. Section 1026.38(g)(1)(i)(A) requires, on the first line
under the subheading ``Taxes and Other Government Fees'' and before the
columns described in Sec. 1026.38(g), disclosure of the total fees
expected to be paid to State and local governments for recording deeds
and, separately, the total fees expected to be paid to State and local
governments for recording security instruments. On a line labeled
``Recording Fees,'' form H-25 of appendix H to this part illustrates
such disclosures with the additional labels ``Deed'' and ``Mortgage,''
respectively.
ii. Total of all recording fees. Section 1026.38(g)(1)(i)(B)
requires, on the first line under the subheading ``Taxes and Other
Government Fees'' and in the applicable column described in Sec.
1026.38(g), disclosure of the total amounts paid for recording fees,
including but not limited to the amounts subject to Sec.
1026.38(g)(1)(i)(A). The total amount disclosed under Sec.
1026.38(g)(1)(i)(B) also includes recording fees expected to be paid to
State and local governments for recording any other instrument or
document to preserve marketable title or to perfect the creditor's
security interest in the property. See comments 37(g)(1)-1, -2, and -3
for discussions of the difference between transfer taxes and recording
fees.
38(g)(2) Prepaids.
1. Guidance. For additional guidance on prepaids, see comments
37(g)(2)-1 and -2.
2. Negative prepaid interest. The prepaid interest amount is
disclosed as a negative number if the calculation of prepaid interest
results in a negative number.
3. No prepaid interest. If interest is not collected for any period
between closing and the date from which interest will be collected with
the first monthly payment, then $0.00 is disclosed under Sec.
1026.38(g)(2).
4. Interest rate for prepaid interest. The dollar amounts disclosed
pursuant to Sec. 1026.38(g)(2) must be based on the interest rate
disclosed under Sec. 1026.38(b), as required by Sec. 1026.37(b)(2).
5. Property taxes. For a description of items that constitute
property taxes, see comment 43(b)(8)-2.
38(g)(3) Initial escrow payment at closing.
1. Initial escrow account itemization. The creditor must state the
amount that it will require the consumer to place into a reserve or
escrow account at consummation to be applied to recurring charges for
property taxes, homeowner's and similar insurance, mortgage insurance,
homeowner's association dues, condominium dues, and other periodic
charges. Each periodic charge to be included in the escrow or reserve
account must be itemized under the ``Initial Escrow Payment at Closing''
subheading, with a relevant label, monthly payment amount, and number of
months collected at closing.
2. Aggregate accounting. The method used to determine the aggregate
adjustment for the purposes of establishing the escrow account is
described in 12 CFR 1024.17(d)(2). Examples of this calculation
methodology can be found in appendix E to 12 CFR part 1024. The
aggregate adjustment, as illustrated by form H-25 of appendix H to this
part, is disclosed as the last listed item in the amounts disclosed
under Sec. 1026.38(g)(3).
3. Escrowed tax payments for different timeframes. Payments for
property taxes that are paid at different time periods can be itemized
separately when done in accordance with 12 CFR 1024.17. For example, a
general property tax covering a fiscal year from January 1 to December
31 can be listed as a
[[Page 732]]
property tax under Sec. 1026.38(g)(3) and a separate property tax to
fund schools that cover a fiscal year from November 1 to October 31 can
be added as a separate itemized amount under Sec. 1026.38(g)(3).
4. Property taxes. For a description of items that constitute
property taxes, see comment 43(b)(8)-2.
5. Definition of escrow account. For a description of the amounts
included in the initial escrow account disclosure under Sec.
1026.38(g)(3), see the definition of ``escrow account'' in 12 CFR
1024.17(b).
38(g)(4) Other.
1. Costs disclosed. The costs disclosed under Sec. 1026.38(g)(4)
include all real estate brokerage fees, homeowner's or condominium
association charges paid at consummation, home warranties, inspection
fees, and other fees that are part of the real estate closing but not
required by the creditor or not disclosed elsewhere under Sec. 1026.38.
2. Owner's title insurance premium. In a jurisdiction where
simultaneous issuance title insurance rates are permitted, any owner's
title insurance premium disclosed under Sec. 1026.38(g)(4) is
calculated by using the full owner's title insurance premium, adding any
simultaneous issuance premium for issuance of lender's coverage, and
then deducting the full premium for lender's coverage disclosed under
Sec. 1026.38(f)(2) or (f)(3). Section 1026.38(g)(4)(i) requires that
the disclosure of the cost of the premium for an owner's title insurance
policy include ``Title--'' at the beginning of the label. In addition,
Sec. 1026.38(g)(4)(ii) requires that the disclosure of the cost of the
premium for an owner's title insurance policy include the parenthetical
``(optional)'' at the end of the label when designated borrower-paid at
or before closing.
3. Guidance. For additional guidance on the use of the term
``(optional)'' under Sec. 1026.38(g)(4)(ii), see comment 37(g)(4)-3.
4. Real estate commissions. The amount of real estate commissions
pursuant to Sec. 1026.38(g)(4) must be the total amount paid to any
real estate brokerage as a commission, regardless of the identity of the
party holding any earnest money deposit. Additional charges made by real
estate brokerages or agents to the seller or consumer are itemized
separately as additional items for services rendered, with a description
of the service and an identification of the person ultimately receiving
the payment.
38(g)(6) Subtotal of costs.
1. Costs subtotaled. The only costs that are subtotaled pursuant to
Sec. 1026.38(g)(6) are those costs that are designated borrower-paid at
or before closing. Costs that are designated seller-paid at or before
closing, or paid by others, are not subtotaled pursuant to Sec.
1026.38(g)(6). The subtotal of charges that are designated seller-paid
at or before closing or paid by others is disclosed under Sec.
1026.38(h)(2).
38(h) Closing cost totals.
Paragraph 38(h)(2).
1. Charges paid by seller and by others subtotaled. All loan costs
and other costs that are designated seller-paid at or before closing, or
paid by others, are also totaled under Sec. 1026.38(h)(2).
Paragraph 38(h)(3).
1. General lender credits. When the consumer receives a generalized
credit from the creditor for closing costs, the amount of the credit
must be disclosed under Sec. 1026.38(h)(3). However, if such credit is
attributable to a specific loan cost or other cost listed in the Closing
Cost Details tables, pursuant to Sec. 1026.38(f) or (g), that amount
should be reflected in the Paid by Others column in the Closing Cost
Details tables under Sec. 1026.38(f) or (g). For a description of
lender credits from the creditor, see comment 17(c)(1)-19. For a
discussion of general lender credits and lender credits for specific
charges, see comment 19(e)(3)(i)-5.
2. Credits for excess charges. Credits from the creditor to offset
an amount charged in excess of the limitations described in Sec.
1026.19(e)(3) are disclosed pursuant to Sec. 1026.38(h)(3), along with
a statement that such amount was paid to offset an excess charge, with
funds other than closing funds. If an excess charge to the consumer is
discovered after consummation and a refund provided, the corrected
disclosure must be provided to the consumer under Sec.
1026.19(f)(2)(v). For an example, see form H-25(F) of appendix H to this
part.
Paragraph 38(h)(4).
1. Consistent terminology and order of charges. On the Closing
Disclosure the creditor must label the corresponding services and costs
disclosed under Sec. 1026.38(f) and (g) using terminology that
describes each item, as applicable, and must use terminology or the
prescribed label, as applicable, that is consistent with that used on
the Loan Estimate to identify each corresponding item. In addition,
Sec. 1026.38(h)(4) requires the creditor to list the items disclosed
under each subcategory of charges in a consistent order. If costs move
between subheadings under Sec. 1026.38(f)(2) and (f)(3), listing the
costs in alphabetical order in each subheading category is considered to
be in compliance with Sec. 1026.38(h)(4). See comment 37(f)(5)-1 for
guidance regarding the requirement to use terminology that describes the
items to be disclosed.
38(i) Calculating cash to close.
1. More prominent disclosures. Section 1026.38(i)(1)(iii), (2)(iii),
(3)(iii), (4)(iii), (5)(iii), (6)(iii), (7)(iii), and (8)(iii) requires
that statements are given as to whether the ``Final'' amount disclosed
under each subparagraph (ii) of Sec. 1026.38(i)(1) through (i)(8) is
different or equal to, and in some cases whether the
[[Page 733]]
amount is greater than or less than, the corresponding ``Loan Estimate''
amount disclosed under each subparagraph (i) of Sec. 1026.38(i)(1)
through (i)(8). These statements are more prominent than the other
disclosures under Sec. 1026.38(i). The statement of whether the
estimated and final amounts are different, stated as a ``Yes'' or ``No''
in capital letters and in boldface font, under the subheading ``Did this
change?,'' as shown on form H-25 of appendix H to this part, complies
with the requirement to state whether the amounts are different more
prominently. Such statement of ``No'' satisfies the requirement to state
that the estimated and final amounts are equal, and these sections do
not provide for any narrative text to be included with such statement.
The prominence requirement also requires that, in the event an increase
or decrease in costs has occurred, certain words within the narrative
text to be included under the subheading ``Did this change?'' for a
``Yes'' answer are displayed more prominently than other disclosures.
For example, under Sec. 1026.38(i)(1)(iii)(A), this more prominent
statement could take the form of the phrases ``Total Loan Costs'' and
``Total Other Costs'' being shown in boldface, as shown on form H-25 of
appendix H to this part. See comments 38(i)-3 and -4 for further
guidance regarding the prominence of such statements.
2. Statements of differences. The dollar amounts disclosed under
Sec. 1026.38 generally are shown to two decimal places unless otherwise
required. See comment 38(t)(4)-1. Any amount in the ``Final'' column of
the calculating cash to close table under Sec. 1026.38(i) is shown to
two decimal places unless otherwise required. Under Sec.
1026.38(t)(4)(i)(C), however, any amount in the ``Loan Estimate'' column
of the calculating cash to close table under Sec. 1026.38(i) is rounded
to the nearest dollar amount to match the corresponding estimated amount
disclosed on the Loan Estimate's calculating cash to close table under
Sec. 1026.37(h). For purposes of Sec. 1026.38(i)(1)(iii), (3)(iii),
(4)(iii), (5)(iii), (6)(iii), (7)(iii), and (8)(iii), each statement of
a change between the amounts disclosed on the Loan Estimate and the
Closing Disclosure is based on the actual, non-rounded estimate that
would have been disclosed on the Loan Estimate under Sec. 1026.37(h) if
it had been shown to two decimal places rather than a whole dollar
amount. For example, if the amount in the ``Loan Estimate'' column of
the total closing costs row disclosed under Sec. 1026.38(i)(1)(i) is
$12,500, but the non-rounded estimate of total closing costs is
$12,500.35, and the amount in the ``Final'' column of the total closing
costs row disclosed under Sec. 1026.38(i)(1)(ii) is $12,500.35, then,
even though the table would appear to show a $0.35 increase in total
closing costs, no statement of such increase is given under Sec.
1026.38(i)(1)(iii).
3. Statements that the consumer should see details. The provisions
of Sec. 1026.38(i)(4)(iii)(A), (5)(iii)(A), (7)(iii)(A), and
(8)(iii)(A) each require a statement that the consumer should see
certain details of the closing costs disclosed under Sec. 1026.38(j).
Form H-25 of appendix H to this part contains some examples of these
statements. For example, Sec. 1026.38(i)(5)(iii)(A) requires a
statement that the consumer should see the details disclosed under Sec.
1026.38(j)(2)(ii). The following statement, which is similar to that
shown on form H-25(B) of appendix H to this part for Sec.
1026.38(i)(7)(iii)(A), ``See Deposit in Section L,'' in which the words
``Section L'' are in boldface font, complies with this provision. In
addition, for example, the statement ``See details in Sections K and
L,'' in which the words ``Sections K and L'' are in boldface font,
complies with the requirement under Sec. 1026.38(i)(8)(iii)(A). See
form H-25(B) of appendix H to this part for an example of the statement
required by Sec. 1026.38(i)(8)(iii)(A). See also comment
38(i)(7)(iii)(A)-1 for additional examples that comply with the
requirements under Sec. 1026.38(i)(7)(iii)(A).
4. Statements of increases or decreases. The provisions of Sec.
1026.38(i)(4)(iii)(A), (i)(5)(iii)(A), and (i)(6)(iii)(A) each require a
statement of whether the amount increased or decreased from the
estimated amount. For the statement required by Sec.
1026.38(i)(6)(iii)(A), the statement ``This amount increased,'' in which
the word ``increased'' is in boldface and is replaced with the word
``decreased'' as applicable, complies with this requirement. For the
statements required by Sec. 1026.38(i)(4)(iii)(A) and (i)(5)(iii)(A),
the statement, ``You increased this payment,'' in which the word
``increased'' is in boldface and is replaced with the word ``decreased''
as applicable, complies with these requirements.
5. Estimated amounts. The amounts disclosed in the ``Loan Estimate''
column of the calculating cash to close table under Sec.
1026.38(i)(1)(i), (3)(i), (4)(i), (5)(i), (6)(i), (7)(i), (8)(i), and
(9)(i) are the amounts disclosed on the most recent Loan Estimate
provided to the consumer.
38(i)(1) Total closing costs.
Paragraph 38(i)(1)(iii)(A).
1. Statements and references regarding the total loan costs and
total other costs. Under Sec. 1026.38(i)(1)(iii)(A), the statements
under the subheading ``Did this change?'' that the consumer should see
the total loan costs and total other costs subtotals disclosed on the
Closing Disclosure under Sec. 1026.38(f)(4) and (g)(5) is made only if
and to the extent the difference in the ``Total Closing Costs'' is
attributable to differences in itemized charges that are included in
either or both of such subtotals.
i. For example, if an increase in the ``Total Closing Costs'' is
attributable only to an increase in the appraisal fee (which is an
[[Page 734]]
itemized charge on the Closing Disclosure under the subheading
``Services Borrower Did Not Shop For,'' itself under the heading ``Loan
Costs''), then a statement is given under the subheading ``Did this
change?'' that the consumer should see the total loan costs subtotal
disclosed on the Closing Disclosure under Sec. 1026.38(f)(4). If the
increase in ``Total Closing Costs'' is attributable only to an increase
in recording fees (which is an itemized charge on the Closing Disclosure
under the subheading ``Taxes and Other Government Fees,'' itself under
the heading ``Other Costs''), then a statement is given under the
subheading ``Did this change?'' that the consumer should see the total
other costs subtotal disclosed on the Closing Disclosure under Sec.
1026.38(g)(5). If, however, the increase is attributable in part to an
increase in the appraisal fee and in part to an increase in the
recording fee, then a statement is given under the subheading ``Did this
change?'' that the consumer should see the total loan costs and total
other costs subtotals disclosed on the Closing Disclosure under Sec.
1026.38(f)(4) and (g)(5).
ii. For guidance regarding the requirement that this statement be
accompanied by a reference to the disclosures of the total loan costs
and total other costs under Sec. 1026.38(f)(4) and (g)(5), see comment
38(i)-1. For an example of such reference, see form H-25 of appendix H
to this part.
2. Disclosure of excess amounts above limitations on increases in
closing costs.
i. Because certain closing costs, individually, are generally
subject to the limitations on increases in closing costs under Sec.
1026.19(e)(3)(i) (e.g., fees paid to the creditor, transfer taxes, fees
paid to an affiliate of the creditor), while other closing costs are
collectively subject to the limitations on increases in closing costs
under Sec. 1026.19(e)(3)(ii) (e.g., recording fees, fees paid to an
unaffiliated third party identified by the creditor if the creditor
permitted the consumer to shop for the service provider), Sec.
1026.38(i)(1)(iii)(A) requires the creditor or closing agent to
calculate subtotals for each type of excess amount, and then add such
subtotals together to yield the dollar amount to be disclosed in the
table. See commentary to Sec. 1026.19(e)(3) for additional guidance on
calculating excess amounts above the limitations on increases in closing
costs under Sec. 1026.19(e)(3).
ii. Under Sec. 1026.38(i)(1)(iii)(A), calculation of the excess
amounts above the limitations on increases in closing costs takes into
account that the itemized, estimated closing costs disclosed on the Loan
Estimate will not result in charges to the consumer if the service is
not actually provided at or before consummation. For example, if the
Loan Estimate included under ``Services You Cannot Shop For'' a $30
charge for a ``title courier fee,'' but the title company elects to
hand-deliver the title documents package to the creditor at no charge,
the $30 fee is not factored into the calculation of the ``Total Closing
Costs'' that are subject to the limitations on increases in closing
costs. However, if the title courier fee was assessed, but at only $15,
the charge is factored into the calculation because the third-party
service was actually provided, albeit at a lower amount than estimated.
iii. Under Sec. 1026.38(i)(1)(iii)(A), calculation of the excess
amounts above the limitations on increases in closing costs takes into
account that certain itemized charges listed on the Loan Estimate under
the subheading ``Services You Can Shop For'' may be subject to different
limitations depending on the circumstances. Although Sec.
1026.19(e)(3)(iii) provides exceptions to the general rule, such a
charge would generally be subject to the limitations under Sec.
1026.19(e)(3)(i) if the consumer decided to use a provider affiliated
with the creditor. However, the same charge would instead be subject to
the limitations under Sec. 1026.19(e)(3)(ii) if the consumer selected a
third-party service provider unaffiliated with but identified by the
creditor, and the creditor permitted the consumer to shop for the
service provider. See commentary to Sec. 1026.19(e)(3) for additional
guidance on calculating excess amounts above the limitations on
increases in closing costs under Sec. 1026.19(e)(3).
3. Statements regarding excess amount and any credit to the
consumer. Section 1026.38(i)(1)(iii)(A)(3) requires statements that an
increase in closing costs exceeds legal limits by the dollar amount of
the excess and a statement directing the consumer to the disclosure of
lender credits under Sec. 1026.38(h)(3), or a principal reduction under
Sec. 1026.38(j)(1)(v), if either is provided under Sec.
1026.19(f)(2)(v). See form H-25(F) of appendix H to this part for
examples of such statements under Sec. 1026.38(h)(3). See also comments
38-4 and 38(h)(3)-2.
38(i)(2) Closing costs paid before closing.
Paragraph 38(i)(2)(i).
1. Estimate of closing costs paid before closing. Under Sec.
1026.38(i)(2)(i), the ``Loan Estimate'' amount for ``Closing Costs Paid
Before Closing'' is always shown as ``$0,'' because an estimate of such
amount is not disclosed on the Loan Estimate.
Paragraph 38(i)(2)(iii)(B).
1. Equal amount. Under Sec. 1026.38(i)(2)(iii)(B), the creditor or
closing agent will give a statement that the ``Final'' amount disclosed
under Sec. 1026.38(i)(2)(ii) is equal to the ``Loan Estimate'' amount
disclosed under Sec. 1026.38(i)(2)(i), only if the ``Final'' amount is
$0, because the ``Loan Estimate'' amount is always disclosed as $0
pursuant to Sec. 1026.38(i)(2)(i). See comment 38(i)(2)(i)-1.
38(i)(3) Closing costs financed.
1. Calculation of amount. i. Generally. The amount of closing costs
financed disclosed
[[Page 735]]
under Sec. 1026.38(i)(3) is determined by subtracting the total amount
of payments to third parties not otherwise disclosed under Sec.
1026.38(f) and (g) from the loan amount disclosed under Sec.
1026.38(b). The total amount of payments to third parties includes the
sale price of the property disclosed under Sec. 1026.38(j)(1)(ii).
Other examples of payments to third parties not otherwise disclosed
under Sec. 1026.38(f) and (g) include the amount of construction costs
for transactions that involve improvements to be made on the property,
and payoffs of secured or unsecured debt. If the result of the
calculation is zero or negative, the amount of $0 is disclosed under
Sec. 1026.38(i)(3). If the result of the calculation is positive, that
amount is disclosed as a negative number under Sec. 1026.38(i)(3), but
only to the extent that the absolute value of the amount disclosed under
Sec. 1026.38(i)(3) does not exceed the total amount of closing costs
disclosed under Sec. 1026.38(h)(1).
ii. Simultaneous subordinate financing. For simultaneous subordinate
financing transactions, no sale price will be disclosed under Sec.
1026.38(j)(1)(ii), and therefore no sale price will be included in the
closing costs financed calculation as a payment to third parties. The
total amount of payments to third parties only includes payments
occurring in the simultaneous subordinate financing transaction other
than payments toward the sale price.
2. Loan amount. The loan amount disclosed under Sec. 1026.38(b), a
component of the closing costs financed calculation, is the total amount
the consumer will borrow, as reflected by the face amount of the note.
38(i)(4) Down payment/funds from borrower.
Paragraph 38(i)(4)(ii)(A).
1. Down payment and funds from borrower calculation. Under Sec.
1026.38(i)(4)(ii)(A)(1), the down payment and funds from borrower amount
is calculated as the difference between the sale price of the property
disclosed under Sec. 1026.38(a)(3)(vii)(A) and the sum of the loan
amount disclosed under Sec. 1026.38(b) and any amount of existing loans
assumed or taken subject to that is disclosed under Sec.
1026.38(j)(2)(iv), except as required by Sec. 1026.38(i)(4)(ii)(A)(2).
The calculation is independent of any loan program or investor
requirements. The ``Final'' amount disclosed for ``Down Payment/Funds
from Borrower'' reflects any change, following delivery of the Loan
Estimate, in the amount of down payment and other funds required of the
consumer. This change might result, for example, from an increase in the
purchase price of the property.
2. Funds for borrower. Section 1026.38(i)(4)(ii)(A)(2) requires
that, in a purchase transaction as defined in Sec. 1026.37(a)(9)(i)
that is a simultaneous subordinate financing transaction or that
involves improvements to be made on the property, or when the sum of the
loan amount disclosed under Sec. 1026.38(b) and any amount of existing
loans assumed or taken subject to that is disclosed under Sec.
1026.38(j)(2)(iv) exceeds the sale price disclosed under Sec.
1026.38(a)(3)(vii)(A), the amount of funds from the consumer is
determined in accordance with Sec. 1026.38(i)(6)(iv). Pursuant to Sec.
1026.38(i)(6)(iv), the ``Final'' amount of ``Down Payment/Funds from
Borrower'' to be disclosed under Sec. 1026.38(i)(4)(ii)(A)(2) is
determined by subtracting the sum of the loan amount and any amount of
existing loans assumed or taken subject to that is disclosed under Sec.
1026.38(j)(2)(iv) (excluding any closing costs financed disclosed under
Sec. 1026.38(i)(3)(ii)) from the total amount of all existing debt
being satisfied in the transaction disclosed under Sec.
1026.38(j)(1)(ii), (iii), and (v). The amount of ``Down Payment/Funds
from Borrower'' under the subheading ``Final'' is disclosed either as a
positive number or $0, depending on the result of the calculation. When
the result of the calculation is positive, that amount is disclosed
under Sec. 1026.38(i)(4)(ii)(A)(2) as ``Down Payment/Funds from
Borrower,'' and $0 is disclosed under Sec. 1026.38(i)(6)(ii) as ``Funds
for Borrower.'' When the result of the calculation is negative, that
amount is disclosed under Sec. 1026.38(i)(6)(ii) as ``Funds for
Borrower,'' and $0 is disclosed under Sec. 1026.38(i)(4)(ii)(A)(2) as
``Down Payment/Funds from Borrower.'' When the result is $0, $0 is
disclosed as ``Down Payment/Funds from Borrower'' and ``Funds for
Borrower'' under Sec. 1026.38(i)(4)(ii)(A)(2) and (6)(ii),
respectively. An increase in the amount of ``Down Payment/Funds from
Borrower'' under the subheading ``Final'' relative to the corresponding
amount under the subheading ``Loan Estimate'' might result, for example,
from a decrease in the loan amount or an increase in the amount of
existing debt being satisfied in the transaction. For additional
discussion of the determination of the ``Down Payment/Funds from
Borrower'' amount, see comment 38(i)(6)(ii)-1.
Paragraph 38(i)(4)(ii)(B).
1. Funds for borrower. Section 1026.38(i)(4)(ii)(B) requires that,
in all transactions not subject to Sec. 1026.38(i)(4)(ii)(A), the
``Final'' amount disclosed for ``Down Payment/Funds from Borrower'' is
the amount determined in accordance with Sec. 1026.38(i)(6)(iv).
Pursuant to Sec. 1026.38(i)(6)(iv), the ``Final'' amount of ``Down
Payment/Funds from Borrower'' to be disclosed under Sec.
1026.38(i)(4)(ii)(B) is determined by subtracting the sum of the loan
amount disclosed under Sec. 1026.38(b) and any amount of existing loans
assumed or taken subject to that is disclosed under Sec.
1026.38(j)(2)(iv) (excluding any closing costs financed disclosed under
Sec. 1026.38(i)(3)(ii)) from the total amount of all existing debt
being satisfied in the transaction disclosed under Sec.
1026.38(j)(1)(ii), (iii), and (v). The
[[Page 736]]
``Final'' amount of ``Down Payment/Funds from Borrower'' is disclosed
either as a positive number or $0, depending on the result of the
calculation. When the result of the calculation is positive, that amount
is disclosed under Sec. 1026.38(i)(4)(ii)(B) as ``Down Payment/Funds
from Borrower,'' and $0 is disclosed under Sec. 1026.38(i)(6)(ii) as
``Funds for Borrower.'' When the result of the calculation is negative,
that amount is disclosed under Sec. 1026.38(i)(6)(ii) as ``Funds for
Borrower,'' and $0 is disclosed under Sec. 1026.38(i)(4)(ii)(B) as
``Down Payment/Funds from Borrower.'' When the result is $0, $0 is
disclosed as ``Down Payment/Funds from Borrower'' and ``Funds for
Borrower'' under Sec. 1026.38(i)(4)(ii)(B) and (6)(ii), respectively.
An increase in the ``Final'' amount of ``Down Payment/Funds from
Borrower'' relative to the corresponding ``Loan Estimate'' amount might
result, for example, from a decrease in the loan amount or an increase
in the amount of existing debt being satisfied in the transaction. For
additional discussion of the determination of the ``Down Payment/Funds
from Borrower'' amount, see comment 38(i)(6)(ii)-1.
Paragraph 38(i)(4)(iii)(A).
1. Statement of differences. Section 1026.38(i)(4)(iii)(A) requires,
as applicable, a statement that the consumer has increased or decreased
this payment, along with a statement that the consumer should see the
details disclosed under Sec. 1026.38(j)(1) or (j)(2), as applicable.
The applicable disclosure to be referenced corresponds to the label on
the Closing Disclosure under which the information accounting for the
increase in the ``Down Payment/Funds from Borrower'' amount is
disclosed. For example, in a transaction that is a purchase as defined
in Sec. 1026.37(a)(9)(i), if the purchase price of the property has
increased and therefore caused the ``Down Payment/Funds from Borrower''
amount to increase, the statement, ``You increased this payment. See
details in Section K,'' with the words ``increased'' and ``Section K''
in boldface, complies with this requirement. In a purchase or
refinancing transaction, in the event the amount of the credit extended
by the creditor has decreased and therefore caused the ``Down Payment/
Funds from Borrower'' amount to increase, the statement can read, for
example, ``You increased this payment. See details in Section L,'' with
the same in boldface.
38(i)(5) Deposit.
1. When no deposit. Section 1026.38(i)(5) requires the disclosure in
the calculating cash to close table of the deposit required to be
disclosed under Sec. 1026.37(h)(1)(iv) and under Sec.
1026.38(j)(2)(ii), under the subheadings ``Loan Estimate'' and
``Final,'' respectively. Under Sec. 1026.37(h)(1)(iv), for all
transactions other than a purchase transaction as defined in Sec.
1026.37(a)(9)(i), the amount required to be disclosed is $0. In a
purchase transaction in which no deposit is paid in connection with the
transaction, under Sec. Sec. 1026.37(h)(1)(iv) and 1026.38(i)(5)(i) and
(ii) the amount required to be disclosed is $0.
38(i)(6) Funds for borrower.
Paragraph 38(i)(6)(ii).
1. Final funds for borrower. Section 1026.38(i)(6)(ii) provides that
the ``Final'' amount for ``Funds for Borrower'' is determined in
accordance with Sec. 1026.38(i)(6)(iv). Under Sec. 1026.38(i)(6)(iv),
the ``Final'' amount of ``Funds for Borrower'' to be disclosed under
Sec. 1026.38(i)(6)(ii) is determined by subtracting the sum of the loan
amount disclosed under Sec. 1026.38(b) and any amount of existing loans
assumed or taken subject to that is disclosed under Sec.
1026.38(j)(2)(iv) (excluding any closing costs financed disclosed under
Sec. 1026.38(i)(3)(ii)) from the total amount of all existing debt
being satisfied in the transaction disclosed under Sec.
1026.38(j)(1)(ii), (iii), and (v). The amount is disclosed under Sec.
1026.38(i)(6)(ii) either as a negative number or as $0, depending on the
result of the calculation. The ``Final'' amount of ``Funds for
Borrower'' disclosed under Sec. 1026.38(i)(6)(ii) is an amount to be
disbursed to the consumer or a designee of the consumer at consummation,
if any.
2. No funds for borrower. When the down payment and funds from the
borrower is determined in accordance with Sec. 1026.38(i)(4)(ii)(A)(1),
the amount disclosed under Sec. 1026.38(i)(6)(ii) as ``Funds for
Borrower'' is $0.
38(i)(7) Seller credits.
Paragraph 38(i)(7)(ii).
1. Final seller credits. Under Sec. 1026.38(i)(7)(ii), the
``Final'' amount of ``Seller Credits'' reflects any change, following
the delivery of the Loan Estimate, in the amount of funds given by the
seller to the consumer for generalized (i.e., lump sum) credits for
closing costs or for allowances for items purchased separately (e.g., if
the seller is a builder). Seller credits are distinguished from payments
by the seller for items attributable to periods of time prior to
consummation, which are among the ``Adjustments and Other Credits''
separately disclosed pursuant to Sec. 1026.38(i)(8). For additional
guidance regarding seller credits, see comments 38(j)(2)(v)-1 and -2.
Paragraph 38(i)(7)(iii)(A).
1. Statement that the consumer should see details. Under Sec.
1026.38(i)(7)(iii)(A), if the amount disclosed under Sec.
1026.38(i)(7)(ii) in the ``Final'' column is not equal to the amount
disclosed under Sec. 1026.38(i)(7)(i) in the ``Loan Estimate'' column
(unless the difference is due to rounding), the creditor must disclose a
statement that the consumer should see the details disclosed either: (1)
Under Sec. 1026.38(j)(2)(v) in the summaries of transactions table and
the seller-paid column of the closing cost details table under
[[Page 737]]
Sec. 1026.38(f) or (g); or (2) if the difference is attributable only
to general seller credits disclosed under Sec. 1026.38(j)(2)(v), or
only to specific seller credits disclosed in the seller-paid column of
the closing cost details table under Sec. 1026.38(f) or (g), under only
the applicable provision. If, for example, a decrease in the seller
credits disclosed under Sec. 1026.38(i)(7)(ii) is attributable only to
a decrease in general (i.e., lump sum) seller credits, then a statement
is given under the subheading ``Did this change?'' in the calculating
cash to close table that the consumer should see the details disclosed
under Sec. 1026.38(j)(2)(v) in the summaries of transactions table and
the seller-paid column of Sec. 1026.38(f) or (g), or that the consumer
should see the details disclosed under Sec. 1026.38(j)(2)(v) in the
summaries of transactions table. Form H-25(B) in appendix H to this part
demonstrates this disclosure where the decrease in seller credits is
attributable only to a decrease in general seller credits and the
creditor choses only to reference the applicable provision; form H-
25(B)'s statement ``See Seller Credits in Section L,'' in which the
words ``Section L'' are in boldface font, complies with this
requirement. Where the decrease in the seller credits disclosed under
Sec. 1026.38(i)(7)(ii) is attributable to specific and general seller
credits, or the creditor does not elect to reference only the applicable
provision, then a statement is given under the subheading ``Did this
change?'' that the consumer should see both the details disclosed under
Sec. 1026.38(j)(2)(v) in the summaries of transactions table and the
seller-paid column of the closing cost details table under Sec.
1026.38(f) or (g). For example, the statement ``See Seller-Paid column
on page 2 and Seller Credits in Section L,'' in which the words
``Seller-Paid'' and ``Section L'' are in boldface font, complies with
this requirement.
38(i)(8) Adjustments and other credits.
Paragraph 38(i)(8)(ii).
1. Adjustments and other credits. Under Sec. 1026.38(i)(8)(ii), the
``Final'' amount for ``Adjustments and Other Credits'' would include,
for example, prorations of taxes or homeowner's association fees,
utilities used but not paid for by the seller, rent collected in advance
by the seller from a tenant for a period extending beyond the
consummation, and interest on loan assumptions. This category also
includes generalized credits toward closing costs given by parties other
than the seller. For additional guidance regarding adjustments and other
credits, see commentary to Sec. Sec. 1026.37(h)(1)(vii) and
1026.38(j)(2)(vi) and (xi). If the calculation required by Sec.
1026.38(i)(8)(ii) yields a negative number, the creditor or closing
agent discloses the amount as a negative number.
38(i)(9) Cash to close.
Paragraph 38(i)(9)(ii).
1. Final cash to close amount. The ``Final'' amount of ``Cash to
Close'' disclosed under Sec. 1026.38(i)(9)(ii) is the same as the
amount disclosed on the Closing Disclosure as ``Cash to Close'' under
Sec. 1026.38(j)(3)(iii). If the calculation required by Sec.
1026.38(i)(9)(ii) yields a negative number, the creditor or closing
agent discloses the amount as a negative number.
2. More prominent disclosure. Section 1026.38(i)(9)(ii) requires
that the disclosure of the ``Final'' amount of ``Cash to Close'' be more
prominent than the other disclosures under Sec. 1026.38(i). Such more
prominent disclosure can take the form, for example, of boldface font,
as shown on form H-25 of appendix H to this part.
38(j) Summary of borrower's transaction.
1. In general. It is permissible to have two separate Closing
Disclosures in a transaction: one that reflects the consumer's costs and
credits only, which is provided to the consumer, and one that reflects
the seller's costs and credits only, which is provided to the seller.
See Sec. 1026.38(t)(5)(v) and (vi). Some State laws may prohibit
provision of information about the consumer to the seller and about the
seller to the consumer.
2. Addenda. Additional pages may be attached to the Closing
Disclosure to add lines, as necessary, to accommodate the complete
listing of all items required to be shown on the Closing Disclosure
under Sec. 1026.38(j) and (k), and for the purpose of including
customary recitals and information used locally in real estate closings
(for example, breakdown of payoff figures, a breakdown of the consumer's
total monthly mortgage payments, an accounting of debits received and
check disbursements, a statement stating receipt of funds, applicable
special stipulations between consumer and seller, and the date funds are
transferred). See Sec. 1026.38(t)(5)(ix). A reference such as ``See
attached page for additional information'' should be placed in the
applicable section of the Closing Disclosure.
3. Identical amounts. The amounts disclosed under the following
provisions of Sec. 1026.38(j) are the same as the amounts disclosed
under the corresponding provisions of Sec. 1026.38(k): Sec.
1026.38(j)(1)(ii) and (k)(1)(ii); Sec. 1026.38(j)(1)(iii) and
(k)(1)(iii); if the amount disclosed under Sec. 1026.38(j)(1)(v) is
attributable to contractual adjustments between the consumer and seller,
Sec. 1026.38(j)(1)(v) and (k)(1)(iv); Sec. 1026.38(j)(1)(vii) and
(k)(1)(vi); Sec. 1026.38(j)(1)(viii) and (k)(1)(vii); Sec.
1026.38(j)(1)(ix) and (k)(1)(viii); Sec. 1026.38(j)(1)(x) and
(k)(1)(ix); Sec. 1026.38(j)(2)(iv) and (k)(2)(iv); unless seller
contributions toward simultaneous subordinate financing are disclosed
under Sec. 1026.38(t)(5)(vii)(B) on the simultaneous subordinate
financing Closing Disclosure and Sec. 1026.38(k)(2)(vii) on the first-
lien Closing Disclosure, Sec. 1026.38(j)(2)(v) and (k)(2)(vii); Sec.
1026.38(j)(2)(viii) and (k)(2)(x);
[[Page 738]]
Sec. 1026.38(j)(2)(ix) and (k)(2)(xi); Sec. 1026.38(j)(2)(x) and
(k)(2)(xii); and Sec. 1026.38(j)(2)(xi) and (k)(2)(xiii).
38(j)(1) Itemization of amounts due from borrower.
Paragraph 38(j)(1)(ii).
1. Contract sales price and personal property. Section
1026.38(j)(1)(ii) requires disclosure of the contract sales price of the
property being sold, excluding the price of any tangible personal
property if the consumer and seller have agreed to a separate price for
such items. On the simultaneous subordinate financing Closing
Disclosure, no contract sales price is disclosed under Sec.
1026.38(j)(1)(ii). Personal property is defined by State law, but could
include such items as carpets, drapes, and appliances. Manufactured
homes are not considered personal property under Sec.
1026.38(j)(1)(ii).
Paragraph 38(j)(1)(v).
1. Contractual adjustments. Section 1026.38(j)(1)(v) requires
disclosure of amounts not otherwise disclosed under Sec. 1026.38(j)
that are owed to the seller but payable to the consumer after the real
estate closing. For example, the following items must be disclosed and
listed under the heading ``Adjustments'' under Sec. 1026.38(j), to the
extent applicable:
i. The balance in the seller's reserve account held in connection
with an existing loan, if assigned to the consumer in a loan assumption
transaction;
ii. Any rent that the consumer will collect after the real estate
closing for a period of time prior to the real estate closing; and
iii. The treatment of any tenant security deposit.
2. Other consumer charges. The amounts disclosed under Sec.
1026.38(j)(1)(v) which are for charges owed by the consumer at the real
estate closing not otherwise disclosed under Sec. 1026.38(f), (g), and
(j) will not have a corresponding credit in the summary of the seller's
transaction under Sec. 1026.38(k)(1)(iv). For example, the amounts paid
to any holders of existing liens on the property in a refinance
transaction, construction costs in connection with the transaction that
the consumer will be obligated to pay, payoff of other secured or
unsecured debt, any outstanding real estate property taxes, and
principal reductions are disclosed under Sec. 1026.38(j)(1)(v) without
a corresponding credit in the summary of the seller's transaction under
Sec. 1026.38(k)(1)(iv). See comment 38-4 for an explanation of how to
disclose a principal reduction under Sec. 1026.38(j)(1)(v).
3. Simultaneous subordinate financing Closing Disclosure. On the
simultaneous subordinate financing Closing Disclosure, the proceeds of
the subordinate financing applied to the first-lien transaction may be
included in the summaries of transactions table under Sec.
1026.38(j)(1)(v). See also comments 37(h)(1)(v)-2 and 37(h)(1)(vii)-6
for an explanation of how to disclose on the Loan Estimate amounts that
will be disclosed on the Closing Disclosure under Sec.
1026.38(j)(1)(v).
Paragraph 38(j)(1)(x).
1. Additional adjustments. Examples of items for which adjustments
may be made include taxes, other than those disclosed pursuant to Sec.
1026.38(j)(1)(vii) and (viii), paid in advance for an entire year or
other period, when the real estate closing occurs prior to the
expiration of the year or other period for which they were paid.
Additional examples of items for which adjustments may be made include:
i. Flood and hazard insurance premiums, if the consumer is being
substituted as an insured under the same policy;
ii. Mortgage insurance in loan assumptions;
iii. Planned unit development or condominium association assessments
paid in advance;
iv. Fuel or other supplies on hand, purchased by the seller, which
the consumer will use when the consumer takes possession of the
property; and
v. Ground rent paid in advance.
38(j)(2) Itemization of amounts already paid by or on behalf of
borrower.
Paragraph 38(j)(2)(ii).
1. Deposit. All amounts paid into a trust account by the consumer
pursuant to the contract of sale for real estate, any addenda thereto,
or any other agreement between the consumer and seller must be disclosed
under Sec. 1026.38(j)(2)(ii). If there is no deposit paid in a
transaction, that amount is left blank on the Closing Disclosure.
2. Reduction of deposit when deposit used to pay for closing charges
prior to closing. If the consumer's deposit has been applied toward a
charge for a closing cost, the amount applied should not be included in
the amount disclosed pursuant to Sec. 1026.38(j)(2)(ii), but instead
should be shown on the appropriate line for the closing cost in the
Closing Cost Detail tables pursuant to Sec. 1026.38(f) or (g),
designated borrower-paid before closing.
Paragraph 38(j)(2)(iii).
1. First user loan. For purposes of Sec. 1026.38(j), a first user
loan is a loan to finance construction of a new structure or purchase of
a new manufactured home that is known at the time of consummation to be
real property under State law, where the structure was constructed for
sale or the manufactured home was purchased for purposes of resale and
the loan is used as or converted to a loan to finance purchase by the
first user. For other loans subject to Sec. 1026.19(f) that finance
construction of a new structure or purchase of a manufactured home that
is known at the time of consummation to be real property under State
law, the sales price of the land and the construction cost or purchase
price of the manufactured home should be disclosed separately and the
amount of the
[[Page 739]]
loan in the current transaction must be disclosed. The remainder of the
Closing Disclosure should be completed taking into account adjustments
and charges related to the temporary financing and permanent financing
that are known at the time of consummation.
Paragraph 38(j)(2)(iv).
1. Assumption of existing loan obligation of seller by consumer. The
outstanding amount of any loans that the consumer is assuming, or
subject to which the consumer is taking title to the property must be
disclosed under Sec. 1026.38(j)(2)(iv). When more than one loan is
being assumed, the total amount of all outstanding loans being assumed
should be disclosed under Sec. 1026.38(j)(2)(iv).
Paragraph 38(j)(2)(v).
1. General seller credits. When the consumer receives a generalized
credit from the seller for closing costs or where the seller (typically
a builder) is making an allowance to the consumer for items to purchase
separately, the amount of the credit must be disclosed. However, if the
seller credit is attributable to a specific loan cost or other cost
listed in the Closing Cost Details tables, pursuant to Sec. 1026.38(f)
or (g), that amount should be reflected in the seller-paid column in the
Closing Cost Details tables under Sec. 1026.38(f) or (g).
2. Other seller credits. Any other obligations of the seller to be
paid directly to the consumer, such as for issues identified at a walk-
through of the property prior to closing, are disclosed under Sec.
1026.38(j)(2)(v).
Paragraph 38(j)(2)(vi).
1. Credits from any party other than the seller or creditor. Section
1026.38(j)(2)(vi) requires disclosure of a description and the amount of
items paid by or on behalf of the consumer and not disclosed elsewhere
under Sec. 1026.38(j)(2). For example, credits a consumer receives from
a real estate agent or other third party, other than a seller or
creditor, are disclosed pursuant to Sec. 1026.38(j)(2)(vi). However, if
the credit is attributable to a specific closing cost listed in the
Closing Cost Details tables under Sec. 1026.38(f) or (g), that amount
should be reflected in the paid by others column on the Closing Cost
Details tables and not in the disclosure required under Sec.
1026.38(j)(2)(vi). Similarly, if a real estate agent rebates a portion
of the agent's commission to the consumer, the rebate should be listed
as a credit along with a description of the rebate, which must include
the name of the party giving the credit.
2. Subordinate financing proceeds on first-lien Closing Disclosure.
Any financing arrangements or other new loans not otherwise disclosed
under Sec. 1026.38(j)(2)(iii) or (iv) must be disclosed under Sec.
1026.38(j)(2)(vi) on the first-lien Closing Disclosure. For example, if
the consumer is using a second mortgage loan to finance part of the
purchase price, whether from the same creditor, another creditor, or the
seller, the principal amount of the second loan must be disclosed with a
brief explanation on the first-lien Closing Disclosure. In this example,
the principal amount of the subordinate financing is disclosed on the
summaries of transactions table for the borrower's transaction either on
line 04 under the subheading ``L. Paid Already by or on Behalf of
Borrower at Closing,'' or under the subheading ``Other Credits.'' If the
net proceeds of the subordinate financing are less than the principal
amount of the subordinate financing, the net proceeds must also be
listed, and may be listed on the same line as the principal amount of
the subordinate financing on the first-lien Closing Disclosure. For an
example, see form H-25(C) of appendix H to this part.
3. Satisfaction of existing subordinate liens by consumer. For
payments to subordinate lien holders by or on behalf of the consumer,
disclosure of any amounts paid with funds other than closing funds, as
defined under Sec. 1026.38(j)(4)(ii), in connection with the second
mortgage payoff are required to be disclosed under Sec.
1026.38(j)(2)(vi), with a statement that such amounts were paid outside
of closing funds. For an example, see form H-25(D) of appendix H to this
part.
4. Transferred escrow balances. In a refinance transaction, any
transferred escrow balance is listed as a credit pursuant to Sec.
1026.38(j)(2)(vi), along with a description of the transferred escrow
balance.
5. Gift funds. A credit must be disclosed only for any money or
other payments made at closing by third parties, including family
members, not otherwise associated with the transaction, along with a
description of the nature of the funds provided under Sec.
1026.38(j)(2)(vi). Amounts provided in advance of the real estate
closing to consumers by third parties, including family members, not
otherwise associated with the transaction, are not required to be
disclosed under Sec. 1026.38(j)(2)(vi).
6. Adjustments. Section 1026.38(j)(2)(vi) requires the disclosure of
any additional amounts not already disclosed under Sec. 1026.38(f),
(g), (h), and (j)(2), that are owed to the consumer but payable to the
seller before the real estate closing. The disclosures made under Sec.
1026.38(j)(2)(vi) must also include a description for each disclosed
amount. For example, rent paid to the seller from a tenant before the
real estate closing for a period extending beyond the real estate
closing is disclosed by identifying the amount as rent from a tenant
under the heading ``Adjustments.'' See also Sec. 1026.38(k)(2)(viii),
which requires disclosure of a description and amount of any and all
other obligations required to be paid by the seller at the real estate
closing.
Paragraph 38(j)(2)(xi).
[[Page 740]]
1. Examples. Section 1026.38(j)(2)(xi) requires the disclosure of
any amounts the consumer is expected to pay after the real estate
closing that are attributable in part to a period of time prior to the
real estate closing. Examples of items that would be disclosed under
Sec. 1026.38(j)(2)(xi) include:
i. Utilities used but not paid for by the seller; and
ii. Interest on loan assumptions.
38(j)(3) Calculation of borrower's transaction.
Paragraph 38(j)(3)(iii).
1. Stating if amount is due to or from consumer. To comply with
Sec. 1026.38(j)(3)(iii), the creditor must state either the cash
required from the consumer at closing, or cash payable to the consumer
at closing.
2. Methodology. To calculate the cash to close, total the amounts
disclosed under Sec. 1026.38(j)(3)(i) and (ii). If that calculation
results in a positive amount, the amount is due from the consumer. If
the calculation results in a negative amount, the amount is due to the
consumer.
38(j)(4) Items paid outside of closing funds.
Paragraph 38(j)(4)(i).
1. Charges not paid with closing funds. Section 1026.38(j)(4)(i)
requires that any charges not paid from closing funds but that otherwise
are disclosed under Sec. 1026.38(j) be marked as ``paid outside of
closing'' or ``P.O.C.'' The disclosure must identify the party making
the payment, such as the consumer, seller, loan originator, real estate
agent, or any other person. For an example of a disclosure of a charge
not made from closing funds, see form H-25(D) of appendix H to this
part. For an explanation of what constitutes closing funds, see Sec.
1026.38(j)(4)(ii). See also comment 38-4 for an explanation of how to
disclose a principal reduction that is not paid from closing funds.
2. Items paid without closing funds not included in sums. Charges
that are paid outside of closing funds under Sec. 1026.38(j)(4)(i)
should not be included in computing totals under Sec. 1026.38(j)(1) and
(j)(2).
38(k) Summary of seller's transaction.
1. Transactions with no seller or simultaneous subordinate financing
transactions. Section 1026.38(k) does not apply in a transaction where
there is no seller, such as a refinance transaction or a transaction
with a construction purpose as defined in Sec. 1026.37(a)(9)(iii), or
in a simultaneous subordinate financing purchase transaction as defined
in Sec. 1026.37(a)(9)(i) if the first-lien Closing Disclosure records
the entirety of the seller's transaction.
2. Extra line items. For guidance regarding the use of addenda for
items disclosed on the Closing Disclosure under Sec. 1026.38(k), see
comment 38(j)-2.
3. Identical amounts. The amounts disclosed under certain provisions
of Sec. 1026.38(k) are the same as the amounts disclosed under certain
provisions of Sec. 1026.38(j). See comment 38(j)-3 for a listing of the
specific provisions.
38(k)(1) Itemization of amounts due to seller.
1. Simultaneous subordinate financing. Section 1026.38(k) does not
apply in a simultaneous subordinate financing purchase transaction as
defined in Sec. 1026.37(a)(9)(i) if the first-lien Closing Disclosure
records the entirety of the seller's transaction. If Sec. 1026.38(k)
applies to a simultaneous subordinate financing transaction, Sec.
1026.38(k) is completed based only on the terms and conditions of the
simultaneous subordinate financing transaction and no contract sales
price is disclosed under Sec. 1026.38(k)(1)(ii) on the Closing
Disclosure for the simultaneous subordinate financing.
38(k)(2) Itemization of amounts due from seller.
Paragraph 38(k)(2)(ii).
1. Distributions of deposit to seller prior to closing. If the
deposit or any portion thereof has been disbursed to the seller prior to
closing, the amount of the deposit that has been distributed to the
seller must be disclosed under Sec. 1026.38(k)(2)(ii).
Paragraph 38(k)(2)(iv).
1. Assumption of existing loan obligation of seller by consumer. If
the consumer is assuming or taking title subject to existing liens and
the amounts of the outstanding balance of the liens are to be deducted
from the sales price, the amounts of the outstanding balance of the
liens must be disclosed under Sec. 1026.38(k)(2)(iv).
2. Other seller credits. Any other obligations of the seller to be
paid directly to the consumer, such as credits for issues identified at
a walk-through of the property prior to the real estate closing, are
disclosed under Sec. 1026.38(k)(2)(vii).
Paragraph 38(k)(2)(vii).
1. Simultaneous subordinate financing--seller contribution. If a
simultaneous subordinate financing transaction is disclosed with the
alternative tables pursuant to Sec. 1026.38(d)(2) and (e), the first-
lien Closing Disclosure must include any contributions from the seller
toward the simultaneous subordinate financing that are disclosed in the
payoffs and payments table under Sec. 1026.38(t)(5)(vii)(B) on the
simultaneous subordinate financing Closing Disclosure. For example,
assume the simultaneous subordinate financing transaction is disclosed
using the alternative tables pursuant to Sec. 1026.38(d)(2) and (e) and
the seller contributes $200.00 toward the closing costs of the
simultaneous subordinate financing. The simultaneous subordinate
financing Closing Disclosure must include the $200.00 contribution in
the payoffs and payments table pursuant to Sec. 1026.38(t)(5)(vii)(B)
and comments 38(t)(5)(vii)(B)-1 and -2. The first-lien Closing
Disclosure must include the $200.00 contribution in the summaries of
transactions table
[[Page 741]]
for the seller's transaction under Sec. 1026.38(k)(2)(vii).
Paragraph 38(k)(2)(viii).
1. Satisfaction of other seller obligations. Seller obligations,
other than second liens, that must be paid off to clear title to the
property must be disclosed pursuant to Sec. 1026.38(k)(2)(viii).
Examples of disclosures pursuant to Sec. 1026.38(k)(2)(viii) include
the satisfaction of outstanding liens imposed due to Federal, State, or
local income taxes, real estate property tax liens, judgments against
the seller reduced to a lien upon the property, or any other obligations
the seller wishes the closing agent to pay from their proceeds at the
real estate closing.
2. Consumer satisfaction of outstanding subordinate loans. If the
consumer is satisfying existing liens which will not be deducted from
the sales price, the amount of the outstanding balance of the loan must
be disclosed under Sec. 1026.38(k)(2)(viii). For example, the amount of
any second lien which will be paid as part of the real estate closing
that is not deducted from the seller's proceeds under Sec.
1026.38(k)(2)(iv), is disclosed under Sec. 1026.38(k)(2)(viii). For
payments to the subordinate lien holder, any amounts paid must be
disclosed, and other amounts paid by or on behalf of the seller must be
disclosed as paid outside of closing funds under Sec.
1026.38(j)(2)(vi). For additional discussion, see comment 38(j)(2)(vi)-
2.
3. Escrows held by closing agent for payment of invoices received
after consummation. Funds to be held by the closing agent for the
payment of either repairs, or water, fuel, or other utility bills that
cannot be prorated between the parties at closing because the amounts
used by the seller prior to closing are not yet known must be disclosed
under Sec. 1026.38(k)(2)(viii). Subsequent disclosure of the actual
amount of these post-closing items to be paid from closing funds is
optional.
38(k)(3) Calculation of seller's transaction.
1. Stating if amount is due to or from seller. To comply with Sec.
1026.38(k)(3)(iii), the creditor must state either the cash required
from the seller at closing, or cash payable to the seller at closing.
2. Methodology. To calculate the cash due to or from the consumer,
total the amounts disclosed under Sec. 1026.38(k)(3)(i) and (ii). If
that calculation results in a positive amount, the amount is due to the
seller. If the calculation results in a negative amount, the amount is
due from the seller.
38(k)(4) Items paid outside of closing funds.
1. Guidance. For guidance regarding the disclosure of items paid
with funds other than closing funds, see comments 38(j)(4)(i)-1 and -2.
38(l) Loan disclosures.
38(l)(2) Demand feature.
1. Covered features. See comment 18(i)-2 for a description of demand
features triggering the disclosure requirements of Sec. 1026.38(l)(2).
38(l)(3) Late payment.
1. Guidance. See the commentary to Sec. 1026.37(m)(4) for guidance
on disclosing late payment fees, as required under Sec. 1026.38(l)(3).
38(l)(6) Security interest.
1. Alternate property address. Section 1026.38(l)(6) requires
disclosure of the address for the property that secures the credit,
including the zip code. If the address is unavailable, Sec.
1026.38(l)(6) requires disclosure of other location information for the
property, such as a lot number; however, disclosure of a zip code is
required in all instances. For transactions secured by a consumer's
interest in a timeshare plan, the creditor may disclose as other
location information a lot, square, or other such number or other legal
description of the property assigned by the local governing authority,
or if no such number or description is available, disclose the name of
the timeshare property or properties with a designation indicating that
the property is an interest in a timeshare plan.
2. Personal property. Where personal property also secures the
credit transaction, a description of that property may be disclosed, at
the creditor's option, pursuant to Sec. 1026.38(l)(6). If the form does
not provide enough space to disclose a description of personal property
to be disclosed under Sec. 1026.38(l)(6), an additional page may be
used and appended to the end of the form provided that the creditor
complies with the requirements of Sec. 1026.38(t)(3). The creditor may
use one addendum to disclose the personal property under Sec.
1026.38(a)(3)(vi) and (l)(6). See comment 38(a)(3)(vi)-1.
38(l)(7) Escrow account.
1. Definition of escrow account. For a description of an escrow
account for purposes of the escrow account disclosure under Sec.
1026.38(l)(7), see the definition of ``escrow account'' in 12 CFR
1024.17(b).
2. Addenda. Additional pages may be attached to the Closing
Disclosure to add lines, as necessary, to accommodate the complete
listing of all items required to be shown on the Closing Disclosure
under Sec. 1026.38(l)(7). See Sec. 1026.38(t)(5)(ix). A reference such
as ``See attached page for additional information'' must be placed in
the applicable section of the Closing Disclosure, if an additional page
is used to list all items required to be shown.
Paragraph 38(l)(7)(i)(A)(2).
1. Estimated costs not paid by escrow account funds. Section
1026.38(l)(7)(i)(A)(2) requires the creditor to estimate the amount the
consumer is likely to pay during the first year after consummation for
the mortgage-related obligations described in Sec. 1026.43(b)(8) that
are known to the creditor and that will not be paid using escrow account
funds. The creditor discloses this amount only if an escrow account will
be established.
[[Page 742]]
2. During the first year. Section 1026.38(l)(7)(i)(A)(2) requires
disclosure based on payments during the first year after consummation.
Alternatively, if the creditor elects to make the disclosures required
by Sec. 1026.38(l)(7)(i)(A)(1) and (l)(7)(i)(A)(4) based on amounts
derived from the escrow account analysis required under Regulation X, 12
CFR 1024.17, then the creditor may make the disclosures required by
Sec. 1026.38(l)(7)(i)(A)(2) based on a 12-month period beginning with
the borrower's initial payment date (rather than beginning with
consummation). See comment 38(l)(7)(i)(A)(5)-1.
Paragraph 38(l)(7)(i)(A)(4).
1. Estimated costs paid using escrow account funds. The amount the
consumer will be required to pay into an escrow account with each
periodic payment during the first year after consummation disclosed
under Sec. 1026.38(l)(7)(i)(A)(4) is equal to the sum of the amount of
estimated escrow payments disclosed under Sec. 1026.38(c)(1) (as
described in Sec. 1026.37(c)(2)(iii)) and the amount the consumer will
be required to pay into an escrow account to pay some or all of the
mortgage insurance premiums disclosed under Sec. 1026.38(c)(1) (as
described in Sec. 1026.37(c)(2)(ii)).
Paragraph 38(l)(7)(i)(A)(5).
1. During the first year. Section 1026.38(l)(7)(i)(A)(4) requires
disclosure of the amount the consumer will be required to pay into the
escrow account with each periodic payment during the first year after
consummation. Section 1026.38(l)(7)(i)(A)(1) requires a disclosure,
labeled ``Escrowed Property Costs over Year 1,'' calculated as the
amount disclosed under Sec. 1026.38(l)(7)(i)(A)(4) multiplied by the
number of periodic payments scheduled to be made to the escrow account
during the first year after consummation. For example, creditors may
base such disclosures on less than 12 payments if, based on the payment
schedule dictated by the legal obligation, fewer than 12 periodic
payments will be made to the escrow account during the first year after
consummation. Alternatively, Sec. 1026.38(l)(7)(i)(A)(5) permits the
creditor to base the disclosures required by Sec.
1026.38(l)(7)(i)(A)(1) and (4) on amounts derived from the escrow
account analysis required under Regulation X, 12 CFR 1024.17, even if
those disclosures differ from what would otherwise be disclosed under
Sec. 1026.38(l)(7)(i)(A)(1) and (4)--as, for example, when there are
fewer than 12 periodic payments scheduled to be made to the escrow
account during the first year after consummation.
Paragraph 38(l)(7)(i)(B)(1).
1. Estimated costs paid directly by the consumer. The creditor
discloses an amount under Sec. 1026.38(l)(7)(i)(B)(1) only if no escrow
account will be established.
2. During the first year. Section 1026.38(l)(7)(i)(B)(1) requires
disclosure based on payments during the first year after consummation. A
creditor may comply with this requirement by basing the disclosure on a
12-month period beginning with the borrower's initial payment date or on
a 12-month period beginning with consummation.
38(m) Adjustable payment table.
1. Guidance. See the commentary to Sec. 1026.37(i) for guidance
regarding the disclosure required by Sec. 1026.38(m).
2. Master heading. The disclosure required by Sec. 1026.38(m) is
required to be provided under a different master heading than the
disclosure required by Sec. 1026.37(i), but all other requirements
applicable to the disclosure required by Sec. 1026.37(i) apply to the
disclosure required by Sec. 1026.38(m).
3. When table is not permitted to be disclosed. Like the disclosure
required by Sec. 1026.37(i), the disclosure required by Sec.
1026.38(m) is required only if the periodic principal and interest
payment may change after consummation based on a loan term other than on
an adjustment to the interest rate or if the transaction is a seasonal
payment product as described under Sec. 1026.37(a)(10)(ii)(E). If the
transaction does not contain these terms, this table is not permitted on
the Closing Disclosure. See comments 37-1 and 37(i)-1.
4. Final loan terms. The disclosures required by Sec. 1026.38(m)
must include the information required by Sec. 1026.37(i), as
applicable, but the creditor must make the disclosure using the
information that is required by Sec. 1026.19(f). See comments
19(f)(1)(i)-1 and -2.
38(n) Adjustable interest rate table.
1. Guidance. See the commentary to Sec. 1026.37(j) for guidance
regarding the disclosures required by Sec. 1026.38(n).
2. Master heading. The disclosure required by Sec. 1026.38(n) is
required to be provided under a different master heading than the
disclosure required by Sec. 1026.37(j), but all other requirements
applicable to the disclosure required by Sec. 1026.37(j) apply to the
disclosure required by Sec. 1026.38(n).
3. When table is not permitted to be disclosed. Like the disclosure
required by Sec. 1026.37(j), the disclosure required by Sec.
1026.38(n) is required only if the interest rate may change after
consummation based on the terms of the legal obligation. If the interest
rate will not change after consummation, this table is not permitted on
the Closing Disclosure. See comments 37-1 and 37(j)-1.
4. Final loan terms. The disclosures required by Sec. 1026.38(n)
must include the information required by Sec. 1026.37(j), as
applicable, but the creditor must make the disclosure using the
information that is known at the time the disclosure is required to be
provided by Sec. 1026.19(f).
38(o) Loan calculations.
1. Examples. Section 1026.38(o)(1) and (2) sets forth the accuracy
requirements for the
[[Page 743]]
total of payments and the finance charge, respectively. The following
examples illustrate the interaction of these provisions:
i. Assume that loan costs that are designated borrower-paid at or
before closing and that are part of the finance charge (see Sec. 1026.4
for calculation of the finance charge) are understated by more than
$100. For example, assume that borrower-paid loan origination fees (see
Sec. 1026.4(a)) are cumulatively understated by $150, resulting in the
amounts disclosed as the total of payments and the finance charge both
being understated by more than $100. Both the disclosed total of
payments and the disclosed finance charge would not be accurate for
purposes of Sec. 1026.38(o)(1) and (2), respectively.
ii. Assume that loan costs that are designated borrower-paid at or
before closing and that are not part of the finance charge are
understated by more than $100. For example, assume that borrower-paid
property appraisal and inspection fees that are excluded from the
finance charge under Sec. 1026.4(c)(7)(iv) are cumulatively understated
by $150, resulting in the amount disclosed as the total of payments
being understated by more than $100. The disclosed total of payments
would not be accurate for purposes of Sec. 1026.38(o)(1), but the
disclosed finance charge would be accurate for purposes of Sec.
1026.38(o)(2).
38(o)(1) Total of payments.
1. Calculation of total of payments. The total of payments is the
total, expressed as a dollar amount, the consumer will have paid after
making all payments of principal, interest, mortgage insurance, and loan
costs, as scheduled, through the end of the loan term. The total of
payments excludes charges that would otherwise be included as components
of the total of payments if such charges are designated on the Closing
Disclosure as paid by seller or paid by others. A seller or other party,
such as the creditor, may agree to offset payments of principal,
interest, mortgage insurance, or loan costs, whether in whole or in
part, through a specific credit, for example through a specific seller
or lender credit. Because these amounts are not paid by the consumer,
they are excluded from the total of payments calculation. Non-specific
credits, however, are generalized payments to the consumer that do not
pay for a particular fee and therefore do not offset amounts for
purposes of the total of payments calculation. For guidance on the
amounts included in the total of payments calculation, see the ``In 5
Years'' disclosure under Sec. 1026.37(l)(1)(i) and comment 37(l)(1)(i)-
1. For a discussion of lender credits, see comment 19(e)(3)(i)-5. For a
discussion of seller credits, see comment 38(j)(2)(v)-1.
38(o)(2) Finance charge.
1. Calculation of finance charge. The finance charge is calculated
in accordance with the requirements of Sec. 1026.4 and its commentary
and is expressed as a dollar amount.
2. Disclosure. The finance charge is disclosed as a total amount;
the components of the finance charge are not itemized.
38(o)(3) Amount financed.
1. Calculation of amount financed. The amount financed is calculated
in accordance with the requirements of Sec. 1026.18(b) and its
commentary.
38(o)(5) Total interest percentage.
1. In general. For guidance on calculation and disclosure of the
total interest percentage, see Sec. 1026.37(l)(3) and its commentary.
38(p) Other disclosures.
38(p)(1) Appraisal.
1. Applicability. The disclosure required by Sec. 1026.38(p)(1) is
only applicable to closed-end transactions subject to Sec. 1026.19(f)
that are also subject either to 15 U.S.C. 1639h or 1691(e), as
implemented by this part or Regulation B, 12 CFR part 1002,
respectively. Accordingly, if a transaction is not subject to either of
those provisions, the disclosure required by Sec. 1026.38(p)(1) may be
left blank on form H-25 of appendix H to this part.
38(p)(3) Liability after foreclosure.
1. State law requirements. If the creditor forecloses on the
property and the proceeds of the foreclosure sale are less than the
unpaid balance on the loan, whether the consumer has continued or
additional responsibility for the loan balance after foreclosure, and
the conditions under which liability occurs, will vary by State. If the
applicable State law affords any type of protection, other than a
statute of limitations that only limits the timeframe in which a
creditor may seek redress, Sec. 1026.38(p)(3) requires a statement that
State law may protect the consumer from liability for the unpaid
balance.
38(q) Questions notice.
Paragraph 38(q)(3).
1. Prominent question mark. The notice required under Sec.
1026.38(q) includes a prominent question mark. This prominent question
mark is an aspect of form H-25 of appendix H to this part, the standard
form or model form, as applicable, pursuant to Sec. 1026.38(t). If the
creditor deviates from the depiction of the question mark as shown on
form H-25, the creditor complies with Sec. 1026.38(q) if (1) the size
and location of the question mark on the Closing Disclosure are
substantially similar in size and location to the question mark shown on
form H-25, and (2) the creditor otherwise complies with Sec.
1026.38(t)(5) regarding permissible changes to the form of the Closing
Disclosure.
38(r) Contact information.
1. Each person to be identified. Form H-25 of appendix H to this
part includes the contact information required to be disclosed under
Sec. 1026.38(r) generally in a five-column tabular format (i.e., there
are columns from left to right that disclose the contact information
[[Page 744]]
for the creditor, mortgage broker, consumer's real estate broker,
seller's real estate broker, and settlement agent). Columns are left
blank where no such person is participating in the transaction. For
example, if there is no mortgage broker involved in the transaction, the
column for the mortgage broker is left blank. Conversely, in the event
the transaction involves more than one of each such person (e.g., two
sellers' real estate brokers splitting a commission), the space in the
contact information table provided on form H-25 of appendix H to this
part may be altered to accommodate the information for such persons,
provided that the information required by Sec. 1026.38(o),(p),(q),(r)
and (s) is disclosed on the same page as illustrated by form H-25. If
the space provided on form H-25 does not accommodate the addition of
such information, an additional table to accommodate the information may
be provided on a separate page, with an appropriate reference to the
additional table. A creditor or settlement agent may also omit a column
on the table that is inapplicable or, if necessary, replace an
inapplicable column with the contact information for the additional
person.
2. Name of person. Where Sec. 1026.38(r)(1) calls for disclosure of
the name of the person participating in the transaction, the person's
legal name (e.g., the name used for registration, incorporation, or
chartering purposes), the person's trade name, if any, or an
abbreviation of the person's legal name or the trade name is disclosed,
so long as the disclosure is clear and conspicuous as required by Sec.
1026.38(t)(1)(i). For example, if the creditor's legal name is ``Alpha
Beta Chi Bank and Trust Company, N.A.'' and its trade name is ``ABC
Bank,'' then under Sec. 1026.38(r)(1) the full legal name, the trade
name, or an abbreviation such as ``ABC Bank & Trust Co.'' may be
disclosed. However, the abbreviation ``Bank & Trust Co.'' is not
sufficiently distinct to enable a consumer to identify the person, and
therefore would not be clear and conspicuous. If the creditor, mortgage
broker, seller's real estate broker, consumer's real estate broker, or
settlement agent participating in the transaction is a natural person,
the natural person's name is listed in the Sec. 1026.38(r)(1) and
(r)(4) disclosures (assuming that such natural person is the primary
contact for the consumer or seller, as applicable).
3. Address. The address disclosed under Sec. 1026.38(r)(2) is the
identified person's place of business where the primary contact for the
transaction is located (usually the local office), rather than a general
corporate headquarters address. If a natural person's name is to be
disclosed under Sec. 1026.38(r)(1), see comment 38(r)-2, the business
address of such natural person is listed (assuming that such natural
person is the primary contact for the consumer or seller, as
applicable).
4. NMLSR ID. Section 1026.38(r)(3) and (5) requires the disclosure
of an NMLSR identification (ID) number for each person identified in the
table. The NMLSR ID is a unique number or other identifier that is
generally assigned by the Nationwide Mortgage Licensing System &
Registry (NMLSR) to individuals registered or licensed through NMLSR to
provide loan originating services (for more information, see the Secure
and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act)
sections 1503(3) and (12) and 1504, 12 U.S.C. 5102(3) and (12) and 5103,
and its implementing regulations (i.e., 12 CFR 1007.103(a) and
1008.103(a)(2)). An entity may also have an NMLSR ID. Thus, any NMLSR ID
that is obtained by a creditor or mortgage broker entity disclosed under
Sec. 1026.38(r)(1), as applicable, or a natural person disclosed under
Sec. 1026.38(r)(4), either as required under the SAFE Act or otherwise,
is disclosed. If the creditor, mortgage broker, or natural person has an
NMLSR ID and a separate license number or unique identifier issued by
the applicable State, locality, or other regulatory body with
responsibility for licensing and/or registering such entity or person's
business activities, both the NMLSR ID and the separate license number
or unique identifier may be disclosed. The space in the table is left
blank for the disclosures in the columns corresponding to persons that
have no NMLSR ID to be disclosed under Sec. 1026.38(r)(3) and (5);
provided that, the creditor may omit the column from the table or, if
necessary, replace the column with the contact information for an
additional person. See comment 38(r)-1.
5. License number or unique identifier. Section 1026.38(r)(3) and
(5) requires the disclosure of a license number or unique identifier for
each person (including natural persons) identified in the table who does
not have a NMLSR ID if the applicable State, locality, or other
regulatory body with responsibility for licensing and/or registering
such person's business activities has issued a license number or other
unique identifier to such person under Sec. 1026.38(r)(3) and (5). The
space in the table is left blank for the disclosures in the columns
corresponding to persons who are not subject to the issuance of such a
license number or unique identifier to be disclosed under Sec.
1026.38(r)(3) and (5); provided that, the creditor or settlement agent
may omit the column from the table or, if necessary, replace the column
with the contact information for an additional person. See comment
38(r)-1. In addition, under Sec. 1026.38(r)(3) and (5), the
abbreviation of the State or the jurisdiction or regulatory body that
issued such license or registration is required to be included before
the word ``License'' in the label required by Sec. 1026.37(r)(3) and
(5). If no such license or registration is required to be disclosed,
such as if an NMLSR number is
[[Page 745]]
disclosed, the space provided for such an abbreviation in form H-25 of
appendix H to this part may be left blank. A creditor complies with the
requirements of Sec. 1026.38(r)(3) and (5) to disclose the abbreviation
of the State by disclosing a U.S. Postal Service State abbreviation, if
applicable.
6. Contact. Section 1026.38(r)(4) requires the disclosure of the
primary contact for the consumer. The primary contact is the natural
person employed by the person disclosed under Sec. 1026.38(r)(1) who
interacts most frequently with the consumer and who has an NMLSR ID or,
if none, a license number or other unique identifier to be disclosed
under Sec. 1026.38(r)(5), as applicable. For example, if the senior
loan officer employed by the creditor or mortgage broker disclosed under
Sec. 1026.38(r)(1) has an NMLSR ID, but the consumer meets with a
different loan officer to complete the application and answer questions,
the senior loan officer's name is disclosed under Sec. 1026.38(r)(4)
unless the other loan officer also has an NMLSR ID, in which case the
other loan officer's name is disclosed. Further, if the sales agent
employed by the consumer's real estate broker disclosed under Sec.
1026.38(r)(1) has a State-issued brokers' license number, but the
consumer meets with an associate sales agent to tour the property being
purchased and complete the sales contract, the sales agent's name is
disclosed under Sec. 1026.38(r)(4) unless the associate sales agent
also has a State-issued license number, in which case the associate
sales agent's name is disclosed. Moreover, if the closing attorney
employed by the settlement agent disclosed under Sec. 1026.38(r)(1) has
a State-issued settlement agent license number, but the consumer meets
with the attorney's assistant to fill out any necessary documentation
prior to the closing and to answer questions, the closing attorney's
name is disclosed under Sec. 1026.38(r)(4) because the assistant is
only performing clerical functions.
7. Email address and phone number. Section 1026.38(r)(6) and (7)
requires disclosure of the email address and phone number, respectively,
for the persons listed in Sec. 1026.37(r)(4). Disclosure of a general
number or email address for the lender, mortgage broker, real estate
broker, or settlement agent, as applicable, satisfies this requirement
if no such information is generally available for such person.
38(s) Signature statement.
1. General requirements. See the commentary to Sec. 1026.37(n) for
guidance regarding the optional signature requirements and signature
lines for multiple consumers.
38(t) Form of disclosures.
38(t)(1) General requirements.
1. Clear and conspicuous; segregation. The clear and conspicuous
standard requires that the disclosures required by Sec. 1026.38 be
legible and in a readily understandable form. The disclosures also must
be grouped together and segregated from everything else. As required by
Sec. 1026.38(t)(3), the disclosures for any transaction that is a
federally related mortgage loan under Regulation X, 12 CFR 1024.2, must
be made using the standard form H-25 of appendix H to this part.
Accordingly, use of that form constitutes compliance with the clear and
conspicuous and segregation requirements of Sec. 1026.38(t)(1).
2. Balloon payment financing with leasing characteristics. In
certain credit sale or loan transactions, a consumer may reduce the
dollar amount of the payments to be made during the course of the
transaction by agreeing to make, at the end of the loan term, a large
final payment based on the expected residual value of the property. The
consumer may have a number of options with respect to the final payment,
including, among other things, retaining the property and making the
final payment, refinancing the final payment, or transferring the
property to the creditor in lieu of the final payment. Such transactions
may have some of the characteristics of lease transactions subject to
Regulation M (12 CFR part 1013), but are considered credit transactions
where the consumer assumes the indicia of ownership, including the
risks, burdens and benefits of ownership, upon consummation. These
transactions are governed by the disclosure requirements of this part
instead of Regulation M. Under Sec. 1026.38(t)(1)(ii), creditors may
not include any additional information in the disclosures required by
Sec. 1026.38. Thus, the disclosures must show the large final payment
as a balloon payment in the projected payments table required by Sec.
1026.38(c) and should not, for example, reflect the other options
available to the consumer at maturity.
38(t)(2) Headings and labels.
1. Estimated amounts. Certain amounts are estimated when provided on
the disclosure required by Sec. 1026.37. When disclosed as required by
Sec. 1026.38, however, many of the corresponding disclosures must be
actual amounts rather than estimates in accordance with the requirements
of Sec. 1026.19(f), even though the provision of Sec. 1026.38 cross-
references a counterpart in Sec. 1026.37. Section 1026.38(t)(2)
provides that, if a master heading, heading, subheading, label, or
similar designation contains the word ``estimated'' in form H-25 of
appendix H to this part, that heading, label, or similar designation
shall contain the word ``estimated.'' Thus, Sec. 1026.38(t)(2)
incorporates the ``estimated'' designations reflected on form H-25 into
the requirements of Sec. 1026.38. See comment 37(o)(2)-1.
38(t)(3) Form.
1. Non-federally related mortgage loans. For a transaction that is
not a federally related mortgage loan, the creditor is not required to
use form H-25 of appendix H to this part, although its use as a model
form for such
[[Page 746]]
transactions, if properly completed with accurate content, constitutes
compliance with the clear and conspicuous and segregation requirements
of Sec. 1026.38(t)(1)(i). Even when the creditor elects not to use the
model form, Sec. 1026.38(t)(1)(ii) requires that the disclosures
contain only the information required by Sec. 1026.38(a) through (s),
and that the creditor make the disclosures in the same order as they
occur in form H-25, use the same headings, labels, and similar
designations as used in the form (many of which also are expressly
required by Sec. 1026.38(a) through (s)), and position the disclosures
relative to those designations in the same manner as shown in the form.
In order to be in a format substantially similar to form H-25, the
disclosures required by Sec. 1026.38 must be provided on letter size
(8.5[sec] x 11[sec]) paper.
38(t)(4) Rounding.
1. Generally. Consistent with Sec. 1026.2(b)(4), any amount
required to be disclosed by Sec. 1026.38 and not required to be rounded
by Sec. 1026.38(t)(4) must be disclosed as an exact numerical amount
using decimal places where applicable, unless otherwise provided. For
example, under Sec. 1026.38(t)(4), the principal and interest payment
disclosed under Sec. 1026.37(b)(3) and Sec. 1026.38(b) must be
disclosed using decimal places even if the amount of cents is zero, in
contrast to the loan amount disclosed under Sec. 1026.37(b)(1) and
Sec. 1026.38(b).
2. Guidance. For guidance regarding the requirements of Sec.
1026.38(t)(4), see the commentary to Sec. 1026.37(o)(4).
38(t)(5) Exceptions.
1. Permissible changes. The changes required and permitted by Sec.
1026.38(t)(5) are permitted for federally related mortgage loans for
which the use of form H-25 is required under Sec. 1026.38(t)(3). For
non-federally related mortgage loans, the changes required or permitted
by Sec. 1026.38(t)(5), do not affect the substance, clarity, or
meaningful sequence of the disclosure and therefore, are permissible.
Any changes to the disclosure not specified in Sec. 1026.38(t)(5) or
not permitted by other provisions of Sec. 1026.38 are not permissible
for federally related mortgage loans. Creditors in non-federally related
mortgage loans making any changes that affect the substance, clarity, or
meaningful sequence of the disclosure will lose their protection from
civil liability under TILA section 130.
2. Manual completion. The creditor, or settlement agent preparing
the form, under Sec. 1026.19(f)(1)(v) is not required to use a
computer, typewriter, or other word processor to complete the disclosure
required by Sec. 1026.38. The creditor or settlement agent may fill in
information and amounts required to be disclosed by Sec. 1026.38 on
form H-25 of appendix H to this part by hand printing or using any other
method, provided the person produces clear and legible text and uses the
formatting required by Sec. 1026.38, including replicating bold font
where required.
3. Unit-period. Section 1026.38(t)(5)(i) provides that wherever form
H-25 or Sec. 1026.38 uses ``monthly'' to describe the frequency of any
payments or uses ``month'' to describe the applicable unit-period, the
creditor is required to substitute the appropriate term to reflect the
fact that the transaction's terms provide for other than monthly
periodic payments, such as bi-weekly or quarterly payments. For purposes
of Sec. 1026.38, the term ``unit-period'' has the same meaning as in
appendix J to Regulation Z.
4. Signature lines. Section 1026.38(t) does not restrict the
addition of signature lines to the disclosure required by Sec. 1026.38,
provided any signature lines for confirmations of receipt of the
disclosure appear only under the ``Confirm Receipt'' heading required by
Sec. 1026.38(s) as illustrated by form H-25 of appendix H to this part.
If the number of signatures requested by the creditor for confirming
receipt of the disclosure requires space for signature lines in excess
of that provided on form H-25, an additional page may be added to
accommodate the additional signature lines with an appropriate reference
to the additional page. Such additional page should also contain the
heading and statement required by Sec. 1026.38(s) in the format
provided on form H-25. Signatures for a purpose other than confirming
receipt of the form may be obtained on a separate page, and consistent
with Sec. 1026.38(t)(1)(i), not on the same page as the information
required by Sec. 1026.38.
5. Additional page. Information required or permitted to be
disclosed by Sec. 1026.38 on a separate page should be formatted
similarly to form H-25 of appendix H to this part, so as not to affect
the substance, clarity, or meaningful sequence of the disclosure. In
addition, information provided on additional pages should be
consolidated on as few pages as necessary so as not to affect the
substance, clarity, or meaningful sequence of the disclosure.
6. Page numbers. References required by provisions of Sec. 1026.38
to information disclosed pursuant to other provisions of the section, as
illustrated on form H-25 of appendix H, may be altered to refer to the
appropriate page number of the form containing such information.
7. Translation. Section 1026.38(t)(5)(viii) permits the translation
of form H-25 into languages other than English, similar to Sec.
1026.37(o)(5)(ii). Pursuant Sec. 1026.38(t)(5)(viii) creditors may
modify form H-25 to the extent that translation prevents the headings,
labels, designations, and required disclosure items under Sec. 1026.38
from fitting in the space provided on form H-25. For example, if the
translation of a required label does not fit within the line provided
for such label in form H-25, the label may be disclosed over
[[Page 747]]
two lines. See form H-28 of appendix H to this part for Spanish
translations of form H-25.
38(t)(5)(iv) Closing Cost Details.
1. Line numbers; closing cost details. Section 1026.38(t)(5)(iv)(A)
permits the deletion of unused lines from the disclosures required by
Sec. 1026.38(f)(1) through (3) and (g)(1) through (4), if necessary to
allow the addition of lines to other sections that require them for the
required disclosures. This provision permits creditors and settlement
agents to use the space gained from deleting unused lines for additional
lines to accommodate all of the costs that are required to be itemized.
For example, if the only origination charge required by Sec.
1026.38(f)(1) is points, the remaining seven lines illustrated on form
H-25 of appendix H to this part may be deleted and added to the
disclosure required by Sec. 1026.38(g)(4), if seven lines in addition
to those provided on form H-25 are necessary to accommodate such
disclosure.
2. Two pages; closing cost details. Section 1026.38(t)(5)(iv)(B)
permits the disclosure of the information required by Sec. 1026.38(f)
through (h) over two pages, but only if form H-25 of appendix H to this
part, as modified pursuant to Sec. 1026.38(t)(5)(iv)(A), does not
accommodate all of the costs required to be disclosed on one page. If
the deletion of unused lines and the addition of such lines to other
sections permits the disclosures required by Sec. 1026.38(f) through
(h) to fit on one page, modification pursuant to Sec.
1026.38(t)(5)(iv)(B) is not permissible.
3. Separate pages for Loan Costs and Other Costs. The modification
permitted by Sec. 1026.38(t)(5)(iv)(B) allows the information required
by Sec. 1026.38(f) through (h) to be disclosed over two pages, numbered
as ``2a'' and ``2b.'' For an example of such a modification, see form H-
25(H) of appendix H to this part. Under this modification, the
information required by Sec. 1026.38(h) must remain on the same page as
the information required by Sec. 1026.38(g). Accordingly, the Loan
Costs section of form H-25 may appear on its own page ``2a,'' but the
Other Costs section must appear on the same page as the Total Closing
Costs section on page ``2b.'' The modifications permitted by Sec.
1026.38(t)(5)(iv)(A) and (B) may be used in conjunction to ensure
disclosure of Sec. 1026.38(f) on one page and Sec. 1026.38(g) and (h)
on a separate page.
38(t)(5)(v) Separation of consumer and seller information.
1. Permissible form modifications to separate consumer and seller
information. The modifications to the form permitted by Sec.
1026.38(t)(5)(v) may be made by the creditor in any one of the following
ways:
i. Leave the applicable disclosure blank concerning the seller or
consumer on the form provided to the other party;
ii. Omit the table or label, as applicable, for the disclosure
concerning the seller or consumer on the form provided to the other
party; or
iii. Provide to the seller, or assist the settlement agent in
providing to the seller, a modified version of the form under Sec.
1026.38(t)(5)(vi), as illustrated by form H-25(I) of appendix H to this
part.
2. Provision of separate disclosure to consumer. If applicable State
law prohibits sharing with the consumer the information disclosed under
Sec. 1026.38(k), a creditor may provide a separate form to the
consumer. A creditor may also provide a separate form to the consumer in
any other situation where the creditor in its discretion chooses to do
so, such as based on the seller's request. For the permissible form
modifications to separate consumer and seller information, see comment
38(t)(5)(v)-1.
3. Provision of separate disclosure to seller. To separate the
information of the consumer and seller under Sec. 1026.38(t)(5)(v), a
creditor may assist the settlement agent in providing (or provide when
acting as a settlement agent) a separate form to the seller where
applicable State law prohibits sharing with the seller the information
disclosed under Sec. 1026.38(a)(2), (a)(4)(iii), (a)(5), (b) through
(d), (f), or (g), with respect to closing costs paid by the consumer, or
Sec. 1026.38(i), (j), (l) through (p), or (r), with respect to closing
costs paid by the creditor and mortgage broker. A creditor may also
assist the settlement agent in providing (or provide when acting as a
settlement agent) a separate form to the seller in any other situation
where the creditor in its discretion chooses to do so, such as based on
the consumer's request. For the permissible form modifications to
separate consumer and seller information, see comment 38(t)(5)(v)-1.
38(t)(5)(vi) Modified version of the form for a seller or third-
party.
1. For permissible form modifications to separate consumer and
seller information, see comment 38(t)(5)(v)-1.
38(t)(5)(vii) Transaction without a seller or simultaneous
subordinate financing transaction.
1. Alternative tables. The alternative tables pursuant to Sec.
1026.38(d)(2) and (e) are required to be disclosed to use the
modification permitted under Sec. 1026.38(t)(5)(vii).
2. Appraised property value. The modifications permitted by Sec.
1026.38(t)(5)(vii) do not specifically refer to the label required by
Sec. 1026.38(a)(3)(vii)(B) for transactions that do not involve a
seller, because the label is required by that section and therefore is
not a modification. As required by Sec. 1026.38(a)(3)(vii)(B), a form
used for a transaction that does not involve a seller and is modified
under Sec. 1026.38(t)(5)(vii) must contain the label ``Appraised Prop.
Value'' or ``Estimated Prop. Value'' where there is no appraisal.
Paragraph 38(t)(5)(vii)(B).
[[Page 748]]
1. Amounts paid by third parties. Under Sec. 1026.38(t)(5)(vii)(B),
the payoffs and payments table itemizes the amounts of payments made at
closing to other parties from the credit extended to the consumer or
funds provided by the consumer, including designees of the consumer.
Designees of the consumer for purposes of Sec. 1026.38(t)(5)(vii)(B)
include third parties who provide funds on behalf of the consumer. Such
amounts may be disclosed as credits in the payoffs and payments table.
Some examples of amounts paid by third parties that may be disclosed as
credits on the payoffs and payments table under Sec.
1026.38(t)(5)(vii)(B) include gift funds, grants, proceeds from loans
that satisfy the partial exemption criteria in Sec. 1026.3(h), and, on
the Closing Disclosure for a simultaneous subordinate financing
transaction, contributions from a seller for costs associated with the
subordinate financing.
2. Disclosure of subordinate financing. i. First-lien Closing
Disclosure. On the Closing Disclosure for a first-lien transaction
disclosed with the alternative tables pursuant to Sec. 1026.38(d)(2)
and (e), such as a refinance transaction, that also has simultaneous
subordinate financing, the proceeds of the subordinate financing are
included in the payoffs and payments table under Sec.
1026.38(t)(5)(vii)(B) by disclosing, as a credit, the principal amount
of the subordinate financing, and, if the net proceeds of the
subordinate financing are less than the principal amount of the
subordinate financing, the net proceeds. The creditor may list the
principal amount and net proceeds of the subordinate financing on the
same line. For example, the creditor may disclose the principal amount
of the subordinate financing under the subheading ``To'' with a
description of the payment, and the net proceeds of the subordinate
financing under the subheading ``Amount.''
ii. Simultaneous subordinate financing Closing Disclosure. On the
Closing Disclosure for a simultaneous subordinate financing transaction
disclosed with the alternative tables pursuant to Sec. 1026.38(d)(2)
and (e), the proceeds of the subordinate financing applied to the first-
lien transaction may be included in the payoffs and payments table under
Sec. 1026.38(t)(5)(vii)(B).
iii. Simultaneous subordinate financing--seller contribution. If a
creditor discloses the alternative tables pursuant to Sec.
1026.38(d)(2) and (e) on the simultaneous subordinate financing Closing
Disclosure, the creditor must also disclose as a credit in the payoffs
and payments table on the simultaneous subordinate financing Closing
Disclosure, any contributions from the seller toward the simultaneous
subordinate financing. For example, assume the subordinate-lien creditor
provides the alternative tables pursuant to Sec. 1026.38(d)(2) and (e)
on the simultaneous subordinate financing Closing Disclosure and the
seller contributes $200.00 toward the closing costs of the simultaneous
subordinate financing. The subordinate-lien creditor must disclose the
$200.00 contribution as a credit on the simultaneous subordinate
financing Closing Disclosure in the payoffs and payments table under
Sec. 1026.38(t)(5)(vii)(B). See also comments 38(j)-3 and
38(k)(2)(vii)-1 for disclosure requirements applicable to the first-lien
transaction when the alternative disclosures are used for a simultaneous
subordinate financing transaction and a seller contributes to the costs
of the subordinate financing.
3. Other examples. For additional examples of items disclosed under
Sec. 1026.38(t)(5)(vii)(B), see comment 37(h)(2)(iii)-1. See also
comment 38-4 for an explanation of how to disclose a principal reduction
under Sec. 1026.38(t)(5)(vii)(B).
38(t)(5)(ix) Customary recitals and information.
1. Customary recitals and information. Section 1026.38(t)(5)(ix)
permits an additional page to be added to the disclosure for customary
recitals and information used locally in real estate settlements.
Examples of such information include a breakdown of payoff figures, a
breakdown of the consumer's total monthly mortgage payments, check
disbursements, a statement indicating receipt of funds, applicable
special stipulations between buyer and seller, and the date funds are
transferred.
Section 1026.39--Mortgage Transfer Disclosures
39(a) Scope
Paragraph 39(a)(1)
1. Covered persons. The disclosure requirements of this section
apply to any ``covered person'' that becomes the legal owner of an
existing mortgage loan, whether through a purchase, or other transfer or
assignment, regardless of whether the person also meets the definition
of a ``creditor'' in Regulation Z. The fact that a person purchases or
acquires mortgage loans and provides the disclosures under this section
does not by itself make that person a ``creditor'' as defined in the
regulation.
2. Acquisition of legal title. To become a ``covered person''
subject to this section, a person must become the owner of an existing
mortgage loan by acquiring legal title to the debt obligation.
i. Partial interest. A person may become a covered person by
acquiring a partial interest in the mortgage loan. If the original
creditor transfers a partial interest in the loan to one or more
persons, all such transferees are covered persons under this section.
ii. Joint acquisitions. All persons that jointly acquire legal title
to the loan are covered persons under this section, and under
[[Page 749]]
Sec. 1026.39(b)(5), a single disclosure must be provided on behalf of
all such covered persons. Multiple persons are deemed to jointly acquire
legal title to the loan if each acquires a partial interest in the loan
pursuant to the same agreement or by otherwise acting in concert. See
comments 39(b)(5)-1 and 39(d)(1)(ii)-1 regarding the disclosure
requirements for multiple persons that jointly acquire a loan.
iii. Affiliates. An acquiring party that is a separate legal entity
from the transferor must provide the disclosures required by this
section even if the parties are affiliated entities.
3. Exclusions. i. Beneficial interest. Section 1026.39 does not
apply to a party that acquires only a beneficial interest or a security
interest in the loan, or to a party that assumes the credit risk without
acquiring legal title to the loan. For example, an investor that
acquires mortgage-backed securities, pass-through certificates, or
participation interests and does not acquire legal title in the
underlying mortgage loans is not covered by this section.
ii. Loan servicers. Pursuant to TILA Section 131(f)(2), the servicer
of a mortgage loan is not the owner of the obligation for purposes of
this section if the servicer holds title to the loan as a result of the
assignment of the obligation to the servicer solely for the
administrative convenience of the servicer in servicing the obligation.
4. Mergers, corporate acquisitions, or reorganizations. Disclosures
are required under this section when, as a result of a merger, corporate
acquisition, or reorganization, the ownership of a mortgage loan is
transferred to a different legal entity.
Paragraph 39(a)(2)
1. Mortgage transactions covered. Section 1026.39 applies to closed-
end or open-end consumer credit transactions secured by the principal
dwelling of a consumer.
39(b) Disclosure Required
1. Generally. A covered person must mail or deliver the disclosures
required by this section on or before the 30th calendar day following
the date of transfer, unless an exception in Sec. 1026.39(c) applies.
For example, if a covered person acquires a mortgage loan on March 15,
the disclosure must be mailed or delivered on or before April 14.
39(b)(1) Form of Disclosures
1. Combining disclosures. The disclosures under this section can be
combined with other materials or disclosures, including the transfer of
servicing notices required by the Real Estate Settlement Procedure Act
(12 U.S.C. 2601 et seq.) so long as the combined disclosure satisfies
the timing and other requirements of this section.
39(b)(4) Multiple Transfers
1. Single disclosure for multiple transfers. A mortgage loan might
be acquired by a covered person and subsequently transferred to another
entity that is also a covered person required to provide the disclosures
under this section. In such cases, a single disclosure may be provided
on behalf of both covered persons instead of providing two separate
disclosures if the disclosure satisfies the timing and content
requirements applicable to each covered person. For example, if a
covered person acquires a loan on March 15 with the intent to assign the
loan to another entity on April 30, the covered person could mail the
disclosure on or before April 14 to provide the required information for
both entities and indicate when the subsequent transfer is expected to
occur.
2. Estimating the date. When a covered person provides the
disclosure required by this section that also describes a subsequent
transfer, the date of the subsequent transfer may be estimated when the
exact date is unknown at the time the disclosure is made. Information is
unknown if it is not reasonably available to the covered person at the
time the disclosure is made. The ``reasonably available'' standard
requires that the covered person, acting in good faith, exercise due
diligence in obtaining information. The covered person normally may rely
on the representations of other parties in obtaining information. The
covered person might make the disclosure using an estimated date even
though the covered person knows that more precise information will be
available in the future. For example, a covered person may provide a
disclosure on March 31 stating that it acquired the loan on March 15 and
that a transfer to another entity is expected to occur ``on or around''
April 30, even if more precise information will be available by April
14.
3. Duty to comply. Even though one covered person provides the
disclosures for another covered person, each has a duty to ensure that
disclosures related to its acquisition are accurate and provided in a
timely manner unless an exception in Sec. 1026.39(c) applies.
39(b)(5) Multiple Covered Person
1. Single disclosure required. If multiple covered persons jointly
acquire the loan, a single disclosure must be provided on behalf of all
covered persons instead of providing separate disclosures. See comment
39(a)(1)-2.ii regarding a joint acquisition of legal title, and comment
39(d)(1)(ii)-1 regarding the disclosure requirements for multiple
persons that jointly acquire a loan. If multiple covered persons jointly
acquire the loan and complete the acquisition on separate dates, a
single disclosure must be provided on behalf
[[Page 750]]
of all persons on or before the 30th day following the earliest
acquisition date. For examples, if covered persons A and B enter into an
agreement with the original creditor to jointly acquire the loan, and
complete the acquisition on March 15 and March 25, respectively, a
single disclosure must be provided on behalf of both persons on or
before April 14. If the two acquisition dates are more than 30 days
apart, a single disclosure must be provided on behalf of both persons on
or before the 30th day following the earlier acquisition date, even
though one person has not completed its acquisition. See comment
39(b)(4)-2 regarding use of an estimated date of transfer.
2. Single disclosure not required. If multiple covered persons each
acquire a partial interest in the loan pursuant to separate and
unrelated agreements and not jointly, each covered person has a duty to
ensure that disclosures related to its acquisition are accurate and
provided in a timely manner unless an exception in Sec. 1026.39(c)
applies. The parties may, but are not required to, provide a single
disclosure that satisfies the timing and content requirements applicable
to each covered person.
3. Timing requirements. A single disclosure provided on behalf of
multiple covered persons must satisfy the timing and content
requirements applicable to each covered person unless an exception in
Sec. 1026.39(c) applies.
4. Duty to comply. Even though one covered person provides the
disclosures for another covered person, each has a duty to ensure that
disclosures related to its acquisition are accurate and provided in a
timely manner unless an exception in Sec. 1026.39(c) applies. See
comments 39(c)(1)-2, 39(c)(3)-1 and 39(c)(3)-2 regarding transfers of a
partial interest in the mortgage loan.
39(c) Exceptions
Paragraph 39(c)(1)
1. Transfer of all interest. A covered person is not required to
provide the disclosures required by this section if it sells, assigns or
otherwise transfers all of its interest in the mortgage loan on or
before the 30th calendar day following the date that it acquired the
loan. For example, if covered person A acquires the loan on March 15 and
subsequently transfers all of its interest in the loan to covered person
B on April 1, person A is not required to provide the disclosures
required by this section. Person B, however, must provide the
disclosures required by this section unless an exception in Sec.
1026.39(c) applies.
2. Transfer of partial interests. A covered person that subsequently
transfers a partial interest in the loan is required to provide the
disclosures required by this section if the covered person retains a
partial interest in the loan on the 30th calendar day after it acquired
the loan, unless an exception in Sec. 1026.39(c) applies. For example,
if covered person A acquires the loan on March 15 and subsequently
transfers fifty percent of its interest in the loan to covered person B
on April 1, person A is required to provide the disclosures under this
section if it retains a partial interest in the loan on April 14. Person
B in this example must also provide the disclosures required under this
section unless an exception in Sec. 1026.39(c) applies. Either person A
or person B could provide the disclosure on behalf of both of them if
the disclosure satisfies the timing and content requirements applicable
to each of them. In this example, a single disclosure for both covered
persons would have to be provided on or before April 14 to satisfy the
timing requirements for person A's acquisition of the loan on March 15.
See comment 39(b)(4)-1 regarding a single disclosure for multiple
transfers.
Paragraph 39(c)(2)
1. Repurchase agreements. The original creditor or owner of the
mortgage loan might sell, assign or otherwise transfer legal title to
the loan to secure temporary business financing under an agreement that
obligates the original creditor or owner to repurchase the loan. The
covered person that acquires the loan in connection with such a
repurchase agreement is not required to provide disclosures under this
section. However, if the transferor does not repurchase the mortgage
loan, the acquiring party must provide the disclosures required by this
section within 30 days after the date that the transaction is recognized
as an acquisition on its books and records.
2. Intermediary parties. The exception in Sec. 1026.39(c)(2)
applies regardless of whether the repurchase arrangement involves an
intermediary party. For example, legal title to the loan may transfer
from the original creditor to party A through party B as an
intermediary. If the original creditor is obligated to repurchase the
loan, neither party A nor party B is required to provide the disclosures
under this section. However, if the original creditor does not
repurchase the loan, party A must provide the disclosures required by
this section within 30 days after the date that the transaction is
recognized as an acquisition on its books and records unless another
exception in Sec. 1026.39(c) applies.
Paragraph 39(c)(3)
1. Acquisition of partial interests. This exception applies if the
covered person acquires only a partial interest in the loan, and there
is no change in the agent or person authorized to receive notice of the
right to rescind and resolve issues concerning the consumer's payments.
If, as a result of the transfer of a
[[Page 751]]
partial interest in the loan, a different agent or party is authorized
to receive notice of the right to rescind and resolve issues concerning
the consumer's payments, the disclosures under this section must be
provided.
2. Examples. i. A covered person is not required to provide the
disclosures under this section if it acquires a partial interest in the
loan from the original creditor who remains authorized to receive the
notice of the right to rescind and resolve issues concerning the
consumer's payments after the transfer.
ii. The original creditor transfers fifty percent of its interest in
the loan to covered person A. Person A does not provide the disclosures
under this section because the exception in Sec. 1026.39(c)(3) applies.
The creditor then transfers the remaining fifty percent of its interest
in the loan to covered person B and does not retain any interest in the
loan. Person B must provide the disclosures under this section.
iii. The original creditor transfers fifty percent of its interest
in the loan to covered person A and also authorizes party X as its agent
to receive notice of the right to rescind and resolve issues concerning
the consumer's payments on the loan. Since there is a change in an agent
or party authorized to receive notice of the right to rescind and
resolve issues concerning the consumer's payments, person A is required
to provide the disclosures under this section. Person A then transfers
all of its interest in the loan to covered person B. Person B is not
required to provide the disclosures under this section if the original
creditor retains a partial interest in the loan and party X retains the
same authority.
iv. The original creditor transfers all of its interest in the loan
to covered person A. Person A provides the disclosures under this
section and notifies the consumer that party X is authorized to receive
notice of the right to rescind and resolve issues concerning the
consumer's payments on the loan. Person A then transfers fifty percent
of its interest in the loan to covered person B. Person B is not
required to provide the disclosures under this section if person A
retains a partial interest in the loan and party X retains the same
authority.
39(d) Content of Required Disclosures
1. Identifying the loan. The disclosures required by this section
must identify the loan that was acquired or transferred. The covered
person has flexibility in determining what information to provide for
this purpose and may use any information that would reasonably inform a
consumer which loan was acquired or transferred. For example, the
covered person may identify the loan by stating:
i. The address of the mortgaged property along with the account
number or loan number previously disclosed to the consumer, which may
appear in a truncated format;
ii. The account number alone, or other identifying number, if that
number has been previously provided to the consumer, such as on a
statement that the consumer receives monthly; or
iii. The date on which the credit was extended and the original
amount of the loan or credit line.
2. Partial payment policy. The disclosures required by Sec.
1026.39(d)(5) must identify whether the covered person accepts periodic
payments from the consumer that are less than the full amount due and
whether the covered person applies the payments to a consumer's loan or
holds the payments in a separate account until the consumer pays the
remainder of the full amount due. The disclosures required by Sec.
1026.39(d)(5) apply only to a mortgage loan that is a closed-end
consumer credit transaction secured by a dwelling or real property and
that is not a reverse mortgage transaction subject to Sec. 1026.33. In
an open-end consumer credit transaction secured by the consumer's
principal dwelling, Sec. 1026.39(d) requires a covered person to
provide the disclosures required by Sec. 1026.39(d)(1) through (4), but
not the partial payment policy disclosure required by Sec.
1026.39(d)(5). If, however, the dwelling in the open-end consumer credit
transaction is not the consumer's principal dwelling (e.g., it is used
solely for vacation purposes), none of the disclosures required by Sec.
1026.39(d) is required because the transaction is not a mortgage loan
for purposes of Sec. 1026.39. See Sec. 1026.39(a)(2). In contrast, a
closed-end consumer credit transaction secured by the consumer's
dwelling that is not the consumer's principal dwelling is considered a
mortgage loan for purposes of Sec. 1026.39. Assuming that the
transaction is not a reverse mortgage transaction subject to Sec.
1026.33, Sec. 1026.39(d) requires a covered person to provide the
disclosures under Sec. 1026.39(d)(1) through (5). But if the
transaction is a reverse mortgage transaction subject to Sec. 1026.33,
Sec. 1026.39(d) requires a covered person to provide only the
disclosures under Sec. 1026.39(d)(1) through (4).
Paragraph 39(d)(1)
1. Identification of covered person. Section 1026.39(d)(1) requires
a covered person to provide its name, address, and telephone number. The
party identified must be the covered person who owns the mortgage loan,
regardless of whether another party services the loan or is the covered
person's agent. In addition to providing its name, address and telephone
number, the covered person may, at its option, provide an address for
receiving electronic mail or an Internet Web site address, but is not
required to do so.
[[Page 752]]
Paragraph 39(d)(1)(i)
1. Multiple transfers, single disclosure. If a mortgage loan is
acquired by a covered person and subsequently transferred to another
covered person, a single disclosure may be provided on behalf of both
covered persons instead of providing two separate disclosures as long as
the disclosure satisfies the timing and content requirements applicable
to each covered person. See comment 39(b)(4)-1 regarding multiple
transfers. A single disclosure for multiple transfers must state the
name, address, and telephone number of each covered person unless Sec.
1026.39(d)(1)(ii) applies.
Paragraph 39(d)(1)(ii)
1. Multiple covered persons, single disclosure. If multiple covered
persons jointly acquire the loan, a single disclosure must be provided
on behalf of all covered persons instead of providing separate
disclosures. The single disclosure must provide the name, address, and
telephone number of each covered person unless Sec. 1026.39(d)(1)(ii)
applies and one of the covered persons has been authorized in accordance
with Sec. 1026.39(d)(3) of this section to receive the consumer's
notice of the right to rescind and resolve issues concerning the
consumer's payments on the loan. In such cases, the information required
by Sec. 1026.39(d)(1) may be provided only for that covered person.
2. Multiple covered persons, multiple disclosures. If multiple
covered persons each acquire a partial interest in the loan in separate
transactions and not jointly, each covered person must comply with the
disclosure requirements of this section unless an exception in Sec.
1026.39(c) applies. See comment 39(a)(1)-2.ii regarding a joint
acquisition of legal title, and comment 39(b)(5)-2 regarding the
disclosure requirements for multiple covered persons.
Paragraph 39(d)(3)
1. Identifying agents. Under Sec. 1026.39(d)(3), the covered person
must provide the name, address and telephone number for the agent or
other party having authority to receive the notice of the right to
rescind and resolve issues concerning the consumer's payments on the
loan. If multiple persons are identified under this paragraph, the
disclosure shall provide the name, address and telephone number for each
and indicate the extent to which the authority of each person differs.
Section 1026.39(d)(3) does not require that a covered person designate
an agent or other party, but if the consumer cannot contact the covered
person for these purposes, the disclosure must provide the name, address
and telephone number for an agent or other party that can address these
matters. If an agent or other party is authorized to receive the notice
of the right to rescind and resolve issues concerning the consumer's
payments on the loan, the disclosure can state that the consumer may
contact that agent regarding any questions concerning the consumer's
account without specifically mentioning rescission or payment issues.
However, if multiple agents are listed on the disclosure, the disclosure
shall state the extent to which the authority of each agent differs by
indicating if only one of the agents is authorized to receive notice of
the right to rescind, or only one of the agents is authorized to resolve
issues concerning payments.
2. Other contact information. The covered person may also provide an
agent's electronic mail address or Internet Web site address, but is not
required to do so.
Paragraph 39(d)(4)
1. Where recorded. Section 1026.39(d)(4) requires the covered person
to disclose where transfer of ownership of the debt to the covered
person is recorded if it has been recorded in public records.
Alternatively, the disclosure can state that the transfer of ownership
of the debt has not been recorded in public records at the time the
disclosure is provided, if that is the case, or the disclosure can state
where the transfer may later be recorded. An exact address is not
required and it would be sufficient, for example, to state that the
transfer of ownership is recorded in the office of public land records
or the recorder of deeds office for the county or local jurisdiction
where the property is located.
39(d)(5) Partial payment policy.
1. Format of disclosure. Section 1026.39(d)(5) requires disclosure
of the partial payment policy of covered persons for closed-end consumer
credit transactions secured by a dwelling or real property, other than a
reverse mortgage transaction subject to Sec. 1026.33. A covered person
may utilize the format of the disclosure illustrated by form H-25 of
appendix H to this part for the information required to be disclosed by
Sec. 1026.38(l)(5). For example, the statement required Sec.
1026.39(d)(5)(iii) that a new covered person may have a different
partial payment policy may be disclosed using the language illustrated
by form H-25, which states ``If this loan is sold, your new lender may
have a different policy.'' The text illustrated by form H-25 may be
modified to suit the format of the covered person's disclosure under
Sec. 1026.39. For example, the format illustrated by form H-25 begins
with the text, ``Your lender may'' or ``Your lender does not,'' which
may not be suitable to the format of the covered person's other
disclosures under Sec. 1026.39. This text may be modified to suit the
format of the covered person's integrated disclosure, using a phrase
such as ``We will'' or ``We are your new lender and have a different
Partial Payment Policy than your
[[Page 753]]
previous lender. Under our policy we will.'' Any modifications must be
appropriate and not affect the substance, clarity, or meaningful
sequence of the disclosure.
39(e) Optional Disclosures
1. Generally. Section 1026.39(e) provides that covered persons may,
at their option, include additional information about the mortgage
transaction that they consider relevant or helpful to consumers. For
example, the covered person may choose to inform consumers that the
location where they should send mortgage payments has not changed. See
comment 39(b)(1)-1 regarding combined disclosures.
Section 1026.40--Requirements for Home-Equity Plans
1. Coverage. This section applies to all open-end credit plans
secured by the consumer's dwelling, as defined in Sec. 1026.2(a)(19),
and is not limited to plans secured by the consumer's principal
dwelling. (See the commentary to Sec. 1026.3(a), which discusses
whether transactions are consumer or business-purpose credit, for
guidance on whether a home equity plan is subject to Regulation Z.)
2. Changes to home equity plans entered into on or after November 7,
1989. Section 1026.9(c) applies if, by written agreement under Sec.
1026.40(f)(3)(iii), a creditor changes the terms of a home equity plan--
entered into on or after November 7, 1989--at or before its scheduled
expiration, for example, by renewing a plan on different terms. A new
plan results, however, if the plan is renewed (with or without changes
to the terms) after the scheduled expiration. The new plan is subject to
all open-end credit rules, including Sec. Sec. 1026.6, 1026.15, and
1026.40.
3. Transition rules and renewals of preexisting plans. The
requirements of this section do not apply to home equity plans entered
into before November 7, 1989. The requirements of this section also do
not apply if the original consumer, on or after November 7, 1989, renews
a plan entered into prior to that date (with or without changes to the
terms). If, on or after November 7, 1989, a security interest in the
consumer's dwelling is added to a line of credit entered into before
that date, the substantive restrictions of this section apply for the
remainder of the plan, but no new disclosures are required under this
section.
4. Disclosure of repayment phase--applicability of requirements.
Some plans provide in the initial agreement for a period during which no
further draws may be taken and repayment of the amount borrowed is made.
All of the applicable disclosures in this section must be given for the
repayment phase. Thus, for example, a creditor must provide payment
information about the repayment phase as well as about the draw period,
as required by Sec. 1026.40(d)(5). If the rate that will apply during
the repayment phase is fixed at a known amount, the creditor must
provide an annual percentage rate under Sec. 1026.40(d)(6) for that
phase. If, however, a creditor uses an index to determine the rate that
will apply at the time of conversion to the repayment phase--even if the
rate will thereafter be fixed--the creditor must provide the information
in Sec. 1026.40(d)(12), as applicable.
5. Payment terms--applicability of closed-end provisions and
substantive rules. All payment terms that are provided for in the
initial agreement are subject to the requirements of subpart B and not
subpart C of the regulation. Payment terms that are subsequently added
to the agreement may be subject to subpart B or to subpart C, depending
on the circumstances. The following examples apply these general rules
to different situations:
i. If the initial agreement provides for a repayment phase or for
other payment terms such as options permitting conversion of part or all
of the balance to a fixed rate during the draw period, these terms must
be disclosed pursuant to Sec. Sec. 1026.6 and 1026.40, and not under
subpart C. Furthermore, the creditor must continue to provide periodic
statements under Sec. 1026.7 and comply with other provisions of
subpart B (such as the substantive requirements of Sec. 1026.40(f))
throughout the plan, including the repayment phase.
ii. If the consumer and the creditor enter into an agreement during
the draw period to repay all or part of the principal balance on
different terms (for example, with a fixed rate of interest) and the
amount of available credit will be replenished as the principal balance
is repaid, the creditor must continue to comply with subpart B. For
example, the creditor must continue to provide periodic statements and
comply with the substantive requirements of Sec. 1026.40(f) throughout
the plan.
iii. If the consumer and creditor enter into an agreement during the
draw period to repay all or part of the principal balance and the amount
of available credit will not be replenished as the principal balance is
repaid, the creditor must give closed-end credit disclosures pursuant to
subpart C for that new agreement. In such cases, subpart B, including
the substantive rules, does not apply to the closed-end credit
transaction, although it will continue to apply to any remaining open-
end credit available under the plan.
6. Spreader clause. When a creditor holds a mortgage or deed of
trust on the consumer's dwelling and that mortgage or deed of trust
contains a spreader clause (also known as a dragnet or cross-
collateralization clause), subsequent occurrences such as the opening of
an open-end plan are subject to the rules applicable to home equity
plans to the same degree as if a security interest were taken
[[Page 754]]
directly to secure the plan, unless the creditor effectively waives its
security interest under the spreader clause with respect to the
subsequent open-end credit extensions.
7. Appraisals and other valuations. For consumer credit transactions
subject to Sec. 1026.40 and secured by the consumer's principal
dwelling, creditors and other persons must comply with the requirements
for appraisals and other valuations under Sec. 1026.42.
40(a) Form of Disclosures
40(a)(1) General
1. Written disclosures. The disclosures required under this section
must be clear and conspicuous and in writing, but need not be in a form
the consumer can keep. (See the commentary to Sec. 1026.6(a)(3) for
special rules when disclosures required under Sec. 1026.40(d) are given
in a retainable form.)
2. Disclosure of annual percentage rate--more conspicuous
requirement. As provided in Sec. 1026.5(a)(2), when the term annual
percentage rate is required to be disclosed with a number, it must be
more conspicuous than other required disclosures.
3. Segregation of disclosures. i. While most of the disclosures must
be grouped together and segregated from all unrelated information, the
creditor is permitted to include information that explains or expands on
the required disclosures, including, for example:
A. Any prepayment penalty.
B. How a substitute index may be chosen.
C. Actions the creditor may take short of terminating and
accelerating an outstanding balance.
D. Renewal terms.
E. Rebate of fees.
ii. An example of information that does not explain or expand on the
required disclosures and thus cannot be included is the creditor's
underwriting criteria, although the creditor could provide such
information separately from the required disclosures.
4. Method of providing disclosures. A creditor may provide a single
disclosure form for all of its home equity plans, as long as the
disclosure describes all aspects of the plans. For example, if the
creditor offers several payment options, all such options must be
disclosed. (See, however, the commentary to Sec. 1026.40(d)(5)(iii) and
(d)(12) (x) and (xi) for disclosure requirements relating to these
provisions.) If any aspects of a plan are linked together, the creditor
must disclose clearly the relationship of the terms to each other. For
example, if the consumer can only obtain a particular payment option in
conjunction with a certain variable-rate feature, this fact must be
disclosed. A creditor has the option of providing separate disclosure
forms for multiple options or variations in features. For example, a
creditor that offers different payment options for the draw period may
prepare separate disclosure forms for the two payment options. A
creditor using this alternative, however, must include a statement on
each disclosure form that the consumer should ask about the creditor's
other home equity programs. (This disclosure is required only for those
programs available generally to the public. Thus, if the only other
programs available are employee preferred-rate plans, for example, the
creditor would not have to provide this statement.) A creditor that
receives a request for information about other available programs must
provide the additional disclosures as soon as reasonably possible.
5. Form of electronic disclosures provided on or with electronic
applications. Creditors must provide the disclosures required by this
section (including the brochure) on or with a blank application that is
made available to the consumer in electronic form, such as on a
creditor's Internet Web site. Creditors have flexibility in satisfying
this requirement. Methods creditors could use to satisfy the requirement
include, but are not limited to, the following examples (whatever method
is used, a creditor need not confirm that the consumer has read the
disclosures):
i. The disclosures could automatically appear on the screen when the
application appears;
ii. The disclosures could be located on the same Web page as the
application (whether or not they appear on the initial screen), if the
application contains a clear and conspicuous reference to the location
of the disclosures and indicates that the disclosures contain rate, fee,
and other cost information, as applicable;
iii. Creditors could provide a link to the electronic disclosures on
or with the application as long as consumers cannot bypass the
disclosures before submitting the application. The link would take the
consumer to the disclosures, but the consumer need not be required to
scroll completely through the disclosures; or
iv. The disclosures could be located on the same Web page as the
application without necessarily appearing on the initial screen,
immediately preceding the button that the consumer will click to submit
the application.
40(a)(2) Precedence of Certain Disclosures
1. Precedence rule. The list of conditions provided at the
creditor's option under Sec. 1026.40(d)(4)(iii) need not precede the
other disclosures.
Paragraph 40(a)(3)
1. Form of disclosures. Whether disclosures must be in electronic
form depends upon the following:
i. If a consumer accesses a home equity credit line application
electronically (other than as described under ii. below), such as
[[Page 755]]
online at a home computer, the creditor must provide the disclosures in
electronic form (such as with the application form on its Web site) in
order to meet the requirement to provide disclosures in a timely manner
on or with the application. If the creditor instead mailed paper
disclosures to the consumer, this requirement would not be met.
ii. In contrast, if a consumer is physically present in the
creditor's office, and accesses a home equity credit line application
electronically, such as via a terminal or kiosk (or if the consumer uses
a terminal or kiosk located on the premises of an affiliate or third
party that has arranged with the creditor to provide applications to
consumers), the creditor may provide disclosures in either electronic or
paper form, provided the creditor complies with the timing, delivery,
and retainability requirements of the regulation.
40(b) Time of Disclosures
1. Mail and telephone applications. If the creditor sends
applications through the mail, the disclosures and a brochure must
accompany the application. If an application is taken over the
telephone, the disclosures and brochure may be delivered or mailed
within three business days of taking the application. If an application
is mailed to the consumer following a telephone request, however, the
creditor also must send the disclosures and a brochure along with the
application.
2. General purpose applications. The disclosures and a brochure need
not be provided when a general purpose application is given to a
consumer unless (1) the application or materials accompanying it
indicate that it can be used to apply for a home equity plan or (2) the
application is provided in response to a consumer's specific inquiry
about a home equity plan. On the other hand, if a general purpose
application is provided in response to a consumer's specific inquiry
only about credit other than a home equity plan, the disclosures and
brochure need not be provided even if the application indicates it can
be used for a home equity plan, unless it is accompanied by promotional
information about home equity plans.
3. Publicly-available applications. Some creditors make applications
for home equity plans, such as take-ones, available without the need for
a consumer to request them. These applications must be accompanied by
the disclosures and a brochure, such as by attaching the disclosures and
brochure to the application form.
4. Response cards. A creditor may solicit consumers for its home
equity plan by mailing a response card which the consumer returns to the
creditor to indicate interest in the plan. If the only action taken by
the creditor upon receipt of the response card is to send the consumer
an application form or to telephone the consumer to discuss the plan,
the creditor need not send the disclosures and brochure with the
response card.
5. Denial or withdrawal of application. In situations where Sec.
1026.40(b) permits the creditor a three-day delay in providing
disclosures and the brochure, if the creditor determines within that
period that an application will not be approved, the creditor need not
provide the consumer with the disclosures or brochure. Similarly, if the
consumer withdraws the application within this three-day period, the
creditor need not provide the disclosures or brochure.
6. Intermediary agent or broker. In determining whether or not an
application involves an intermediary agent or broker as discussed in
Sec. 1026.40(b), creditors should consult the provisions in comment
19(b)-3.
40(c) Duties of Third Parties
1. Disclosure requirements. Although third parties who give
applications to consumers for home equity plans must provide the
brochure required under Sec. 1026.40(e) in all cases, such persons need
provide the disclosures required under Sec. 1026.40(d) only in certain
instances. A third party has no duty to obtain disclosures about a
creditor's home equity plan or to create a set of disclosures based on
what it knows about a creditor's plan. If, however, a creditor provides
the third party with disclosures along with its application form, the
third party must give the disclosures to the consumer with the
application form. The duties under this section are those of the third
party; the creditor is not responsible for ensuring that a third party
complies with those obligations. If an intermediary agent or broker
takes an application over the telephone or receives an application
contained in a magazine or other publication, Sec. 1026.40(c) permits
that person to mail the disclosures and brochure within three business
days of receipt of the application. (See the commentary to Sec.
1026.40(h) about imposition of nonrefundable fees.)
40(d) Content of Disclosures
1. Disclosures given as applicable. The disclosures required under
this section need be made only as applicable. Thus, for example, if
negative amortization cannot occur in a home equity plan, a reference to
it need not be made.
2. Duty to respond to requests for information. If the consumer,
prior to the opening of a plan, requests information as suggested in the
disclosures (such as the current index value or margin), the creditor
must provide this information as soon as reasonably possible after the
request.
[[Page 756]]
40(d)(1) Retention of Information
1. When disclosure not required. The creditor need not disclose that
the consumer should make or otherwise retain a copy of the disclosures
if they are retainable--for example, if the disclosures are not part of
an application that must be returned to the creditor to apply for the
plan.
40(d)(2) Conditions for Disclosed Terms
Paragraph 40(d)(2)(i)
1. Guaranteed terms. The requirement that the creditor disclose the
time by which an application must be submitted to obtain the disclosed
terms does not require the creditor to guarantee any terms. If a
creditor chooses not to guarantee any terms, it must disclose that all
of the terms are subject to change prior to opening the plan. The
creditor also is permitted to guarantee some terms and not others, but
must indicate which terms are subject to change.
2. Date for obtaining disclosed terms. The creditor may disclose
either a specific date or a time period for obtaining the disclosed
terms. If the creditor discloses a time period, the consumer must be
able to determine from the disclosure the specific date by which an
application must be submitted to obtain any guaranteed terms. For
example, the disclosure might read, ``To obtain the following terms, you
must submit your application within 60 days after the date appearing on
this disclosure,'' provided the disclosure form also shows the date.
Paragraph 40(d)(2)(ii)
1. Relation to other provisions. Creditors should consult the rules
in Sec. 1026.40(g) regarding refund of fees.
40(d)(4) Possible Actions by Creditor
Paragraph 40(d)(4)(i)
1. Fees imposed upon termination. This disclosure applies only to
fees (such as penalty or prepayment fees) that the creditor imposes if
it terminates the plan prior to normal expiration. The disclosure does
not apply to fees that are imposed either when the plan expires in
accordance with the agreement or if the consumer terminates the plan
prior to its scheduled maturity. In addition, the disclosure does not
apply to fees associated with collection of the debt, such as attorneys
fees and court costs, or to increases in the annual percentage rate
linked to the consumer's failure to make payments. The actual amount of
the fee need not be disclosed.
2. Changes specified in the initial agreement. If changes may occur
pursuant to Sec. 1026.40(f)(3)(i), a creditor must state that certain
changes will be implemented as specified in the initial agreement.
Paragraph 40(d)(4)(iii)
1. Disclosure of conditions. In making this disclosure, the creditor
may provide a highlighted copy of the document that contains such
information, such as the contract or security agreement. The relevant
items must be distinguished from the other information contained in the
document. For example, the creditor may provide a cover sheet that
specifically points out which contract provisions contain the
information, or may mark the relevant items on the document itself. As
an alternative to disclosing the conditions in this manner, the creditor
may simply describe the conditions using the language in Sec. Sec.
1026.40(f)(2)(i)-(iii), 1026.40(f)(3)(i) (regarding freezing the line
when the maximum annual percentage rate is reached), and
1026.40(f)(3)(vi) or language that is substantially similar. The
condition contained in Sec. 1026.40(f)(2)(iv) need not be stated. In
describing specified changes that may be implemented during the plan,
the creditor may provide a disclosure such as ``Our agreement permits us
to make certain changes to the terms of the line at specified times or
upon the occurrence of specified events.''
2. Form of disclosure. The list of conditions under Sec.
1026.40(d)(4)(iii) may appear with the segregated disclosures or apart
from them. If the creditor elects to provide the list of conditions with
the segregated disclosures, the list need not comply with the precedence
rule in Sec. 1026.40(a)(2).
40(d)(5) Payment Terms
Paragraph 40(d)(5)(i)
1. Length of the plan. The combined length of the draw period and
any repayment period need not be stated. If the length of the repayment
phase cannot be determined because, for example, it depends on the
balance outstanding at the beginning of the repayment period, the
creditor must state that the length is determined by the size of the
balance. If the length of the plan is indefinite (for example, because
there is no time limit on the period during which the consumer can take
advances), the creditor must state that fact.
2. Renewal provisions. If, under the credit agreement, a creditor
retains the right to review a line at the end of the specified draw
period and determine whether to renew or extend the draw period of the
plan, the possibility of renewal or extension--regardless of its
likelihood--should be ignored for purposes of the disclosures. For
example, if an agreement provides that the draw period is five years and
that the creditor may renew the draw period for an additional five
years, the possibility of renewal should be ignored and the draw period
should be considered five years. (See the commentary accompanying
[[Page 757]]
Sec. 1026.9(c)(1) dealing with change in terms requirements.)
Paragraph 40(d)(5)(ii)
1. Determination of the minimum periodic payment. This disclosure
must reflect how the minimum periodic payment is determined, but need
only describe the principal and interest components of the payment.
Other charges that may be part of the payment (as well as the balance
computation method) may, but need not, be described under this
provision.
2. Fixed rate and term payment options during draw period. If the
home equity plan permits the consumer to repay all or part of the
balance during the draw period at a fixed rate (rather than a variable
rate) and over a specified time period, this feature must be disclosed.
To illustrate, a variable-rate plan may permit a consumer to elect
during a ten-year draw period to repay all or a portion of the balance
over a three-year period at a fixed rate. The creditor must disclose the
rules relating to this feature including the period during which the
option can be selected, the length of time over which repayment can
occur, any fees imposed for such a feature, and the specific rate or a
description of the index and margin that will apply upon exercise of
this choice. For example, the index and margin disclosure might state:
``If you choose to convert any portion of your balance to a fixed rate,
the rate will be the highest prime rate published in the `Wall Street
Journal' that is in effect at the date of conversion plus a margin.'' If
the fixed rate is to be determined according to an index, it must be one
that is outside the creditor's control and is publicly available in
accordance with Sec. 1026.40(f)(1). The effect of exercising the option
should not be reflected elsewhere in the disclosures, such as in the
historical example required in Sec. 1026.40(d)(12)(xi).
3. Balloon payments. In programs where the occurrence of a balloon
payment is possible, the creditor must disclose the possibility of a
balloon payment even if such a payment is uncertain or unlikely. In such
cases, the disclosure might read, ``Your minimum payments may not be
sufficient to fully repay the principal that is outstanding on your
line. If they are not, you will be required to pay the entire
outstanding balance in a single payment.'' In programs where a balloon
payment will occur, such as programs with interest-only payments during
the draw period and no repayment period, the disclosures must state that
fact. For example, the disclosure might read, ``Your minimum payments
will not repay the principal that is outstanding on your line. You will
be required to pay the entire outstanding balance in a single payment.''
In making this disclosure, the creditor is not required to use the term
``balloon payment.'' The creditor also is not required to disclose the
amount of the balloon payment. (See, however, the requirement under
Sec. 1026.40(d)(5)(iii).) The balloon payment disclosure does not apply
in cases where repayment of the entire outstanding balance would occur
only as a result of termination and acceleration. The creditor also need
not make a disclosure about balloon payments if the final payment could
not be more than twice the amount of other minimum payments under the
plan.
Paragraph 40(d)(5)(iii)
1. Minimum periodic payment example. In disclosing the payment
example, the creditor may assume that the credit limit as well as the
outstanding balance is $10,000 if such an assumption is relevant to
calculating payments. (If the creditor only offers lines of credit for
less than $10,000, the creditor may assume an outstanding balance of
$5,000 instead of $10,000 in making this disclosure.) The example should
reflect the payment comprised only of principal and interest. Creditors
may provide an additional example reflecting other charges that may be
included in the payment, such as credit insurance premiums. Creditors
may assume that all months have an equal number of days, that payments
are collected in whole cents, and that payments will fall on a business
day even though they may be due on a non-business day. For variable-rate
plans, the example must be based on the last rate in the historical
example required in Sec. 1026.40(d)(12)(xi), or a more recent rate. In
cases where the last rate shown in the historical example is different
from the index value and margin (for example, due to a rate cap),
creditors should calculate the rate by using the index value and margin.
A discounted rate may not be considered a more recent rate in
calculating this payment example for either variable- or fixed-rate
plans.
2. Representative examples. i. In plans with multiple payment
options within the draw period or within any repayment period, the
creditor may provide representative examples as an alternative to
providing examples for each payment option. The creditor may elect to
provide representative payment examples based on three categories of
payment options. The first category consists of plans that permit
minimum payment of only accrued finance charges (interest only plans).
The second category includes plans in which a fixed percentage or a
fixed fraction of the outstanding balance or credit limit (for example,
2% of the balance or 1/180th of the balance) is used to determine the
minimum payment. The third category includes all other types of minimum
payment options, such as a specified dollar amount plus any accrued
finance charges. Creditors may classify their minimum payment
arrangements
[[Page 758]]
within one of these three categories even if other features exist, such
as varying lengths of a draw or repayment period, required payment of
past due amounts, late charges, and minimum dollar amounts. The creditor
may use a single example within each category to represent the payment
options in that category. For example, if a creditor permits minimum
payments of 1%, 2%, 3% or 4% of the outstanding balance, it may pick one
of these four options and provide the example required under Sec.
1026.40(d)(5)(iii) for that option alone.
ii. The example used to represent a category must be an option
commonly chosen by consumers, or a typical or representative example.
(See the commentary to Sec. 1026.40(d)(12)(x) and (xi) for a discussion
of the use of representative examples for making those disclosures.
Creditors using a representative example within each category must use
the same example for purposes of the disclosures under Sec.
1026.40(d)(5)(iii) and (d)(12)(x) and (xi).) Creditors may use
representative examples under Sec. 1026.40(d)(5) only with respect to
the payment example required under paragraph (d)(5)(iii). Creditors must
provide a full narrative description of all payment options under Sec.
1026.40(d)(5)(i) and (ii).
3. Examples for draw and repayment periods. Separate examples must
be given for the draw and repayment periods unless the payments are
determined the same way during both periods. In setting forth payment
examples for any repayment period under this section (and the historical
example under Sec. 1026.40(d)(12)(xi)), creditors should assume a
$10,000 advance is taken at the beginning of the draw period and is
reduced according to the terms of the plan. Creditors should not assume
an additional advance is taken at any time, including at the beginning
of any repayment period.
4. Reverse mortgages. Reverse mortgages, also known as reverse
annuity or home equity conversion mortgages, in addition to permitting
the consumer to obtain advances, may involve the disbursement of monthly
advances to the consumer for a fixed period or until the occurrence of
an event such as the consumer's death. Repayment of the reverse mortgage
(generally a single payment of principal and accrued interest) may be
required to be made at the end of the disbursements or, for example,
upon the death of the consumer. In disclosing these plans, creditors
must apply the following rules, as applicable:
i. If the reverse mortgage has a specified period for advances and
disbursements but repayment is due only upon occurrence of a future
event such as the death of the consumer, the creditor must assume that
disbursements will be made until they are scheduled to end. The creditor
must assume repayment will occur when disbursements end (or within a
period following the final disbursement which is not longer than the
regular interval between disbursements). This assumption should be used
even though repayment may occur before or after the disbursements are
scheduled to end. In such cases, the creditor may include a statement
such as ``The disclosures assume that you will repay the line at the
time the draw period and our payments to you end. As provided in your
agreement, your repayment may be required at a different time.'' The
single payment should be considered the ``minimum periodic payment'' and
consequently would not be treated as a balloon payment. The example of
the minimum payment under Sec. 1026.40(d)(5)(iii) should assume a
single $10,000 draw.
ii. If the reverse mortgage has neither a specified period for
advances or disbursements nor a specified repayment date and these terms
will be determined solely by reference to future events, including the
consumer's death, the creditor may assume that the draws and
disbursements will end upon the consumer's death (estimated by using
actuarial tables, for example) and that repayment will be required at
the same time (or within a period following the date of the final
disbursement which is not longer than the regular interval for
disbursements). Alternatively, the creditor may base the disclosures
upon another future event it estimates will be most likely to occur
first. (If terms will be determined by reference to future events which
do not include the consumer's death, the creditor must base the
disclosures upon the occurrence of the event estimated to be most likely
to occur first.)
iii. In making the disclosures, the creditor must assume that all
draws and disbursements and accrued interest will be paid by the
consumer. For example, if the note has a non-recourse provision
providing that the consumer is not obligated for an amount greater than
the value of the house, the creditor must nonetheless assume that the
full amount to be drawn or disbursed will be repaid. In this case,
however, the creditor may include a statement such as ``The disclosures
assume full repayment of the amount advanced plus accrued interest,
although the amount you may be required to pay is limited by your
agreement.''
iv. Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared between the
consumer and the creditor. The creditor must disclose the appreciation
feature, including describing how the creditor's share will be
determined, any limitations, and when the feature may be exercised.
40(d)(6) Annual Percentage Rate
1. Preferred-rate plans. If a creditor offers a preferential fixed-
rate plan in which the rate
[[Page 759]]
will increase a specified amount upon the occurrence of a specified
event, the creditor must disclose the specific amount the rate will
increase.
40(d)(7) Fees Imposed by Creditor
1. Applicability. The fees referred to in Sec. 1026.40(d)(7)
include items such as application fees, points, annual fees, transaction
fees, fees to obtain checks to access the plan, and fees imposed for
converting to a repayment phase that is provided for in the original
agreement. This disclosure includes any fees that are imposed by the
creditor to use or maintain the plan, whether the fees are kept by the
creditor or a third party. For example, if a creditor requires an annual
credit report on the consumer and requires the consumer to pay this fee
to the creditor or directly to the third party, the fee must be
specifically stated. Third party fees to open the plan that are
initially paid by the consumer to the creditor may be included in this
disclosure or in the disclosure under Sec. 1026.40(d)(8).
2. Manner of describing fees. Charges may be stated as an estimated
dollar amount for each fee, or as a percentage of a typical or
representative amount of credit. The creditor may provide a stepped fee
schedule in which a fee will increase a specified amount at a specified
date. (See the discussion contained in the commentary to Sec.
1026.40(f)(3)(i).)
3. Fees not required to be disclosed. Fees that are not imposed to
open, use, or maintain a plan, such as fees for researching an account,
photocopying, paying late, stopping payment, having a check returned,
exceeding the credit limit, or closing out an account do not have to be
disclosed under this section. Credit report and appraisal fees imposed
to investigate whether a condition permitting a freeze continues to
exist--as discussed in the commentary to Sec. 1026.40(f)(3)(vi)--are
not required to be disclosed under this section or Sec. 1026.40(d)(8).
4. Rebates of closing costs. If closing costs are imposed they must
be disclosed, regardless of whether such costs may be rebated later (for
example, rebated to the extent of any interest paid during the first
year of the plan).
5. Terms used in disclosure. Creditors need not use the terms
finance charge or other charge in describing the fees imposed by the
creditor under this section or those imposed by third parties under
Sec. 1026.40(d)(8).
40(d)(8) Fees Imposed by Third Parties to Open a Plan
1. Applicability. Section 1026.40(d)(8) applies only to fees imposed
by third parties to open the plan. Thus, for example, this section does
not require disclosure of a fee imposed by a government agency at the
end of a plan to release a security interest. Fees to be disclosed
include appraisal, credit report, government agency, and attorneys fees.
In cases where property insurance is required by the creditor, the
creditor either may disclose the amount of the premium or may state that
property insurance is required. For example, the disclosure might state,
``You must carry insurance on the property that secures this plan.''
2. Itemization of third-party fees. In all cases creditors must
state the total of third-party fees as a single dollar amount or a range
except that the total need not include costs for property insurance if
the creditor discloses that such insurance is required. A creditor has
two options with regard to providing the more detailed information about
third party fees. Creditors may provide a statement that the consumer
may request more specific cost information about third party fees from
the creditor. As an alternative to including this statement, creditors
may provide an itemization of such fees (by type and amount) with the
early disclosures. Any itemization provided upon the consumer's request
need not include a disclosure about property insurance.
3. Manner of describing fees. A good faith estimate of the amount of
fees must be provided. Creditors may provide, based on a typical or
representative amount of credit, a range for such fees or state the
dollar amount of such fees. Fees may be expressed on a unit cost basis,
for example, $5 per $1,000 of credit.
4. Rebates of third party fees. Even if fees imposed by third
parties may be rebated, they must be disclosed. (See the commentary to
Sec. 1026.40(d)(7).)
40(d)(9) Negative Amortization
1. Disclosure required. In transactions where the minimum payment
will not or may not be sufficient to cover the interest that accrues on
the outstanding balance, the creditor must disclose that negative
amortization will or may occur. This disclosure is required whether or
not the unpaid interest is added to the outstanding balance upon which
interest is computed. A disclosure is not required merely because a loan
calls for non-amortizing or partially amortizing payments.
40(d)(10) Transaction Requirements
1. Applicability. A limitation on automated teller machine usage
need not be disclosed under this paragraph unless that is the only means
by which the consumer can obtain funds.
40(d)(12) Disclosures for Variable-Rate Plans
1. Variable-rate provisions. Sample forms in appendix G-14 provide
illustrative guidance on the variable-rate rules.
[[Page 760]]
Paragraph 40(d)(12)(iv)
1. Determination of annual percentage rate. If the creditor adjusts
its index through the addition of a margin, the disclosure might read,
``Your annual percentage rate is based on the index plus a margin.'' The
creditor is not required to disclose a specific value for the margin.
Paragraph 40(d)(12)(viii)
1. Preferred-rate provisions. This paragraph requires disclosure of
preferred-rate provisions, where the rate will increase upon the
occurrence of some event, such as the borrower-employee leaving the
creditor's employ or the consumer closing an existing deposit account
with the creditor.
2. Provisions on conversion to fixed rates. The commentary to Sec.
1026.40(d)(5)(ii) discusses the disclosure requirements for options
permitting the consumer to convert from a variable rate to a fixed rate.
Paragraph 40(d)(12)(ix)
1. Periodic limitations on increases in rates. The creditor must
disclose any annual limitations on increases in the annual percentage
rate. If the creditor bases its rate limitation on 12 monthly billing
cycles, such a limitation should be treated as an annual cap. Rate
limitations imposed on less than an annual basis must be stated in terms
of a specific amount of time. For example, if the creditor imposes rate
limitations on only a semiannual basis, this must be expressed as a rate
limitation for a six-month time period. If the creditor does not impose
periodic limitations (annual or shorter) on rate increases, the fact
that there are no annual rate limitations must be stated.
2. Maximum limitations on increases in rates. The maximum annual
percentage rate that may be imposed under each payment option over the
term of the plan (including the draw period and any repayment period
provided for in the initial agreement) must be provided. The creditor
may disclose this rate as a specific number (for example, 18%) or as a
specific amount above the initial rate. For example, this disclosure
might read, ``The maximum annual percentage rate that can apply to your
line will be 5 percentage points above your initial rate.'' If the
creditor states the maximum rate as a specific amount above the initial
rate, the creditor must include a statement that the consumer should
inquire about the rate limitations that are currently available. If an
initial discount is not taken into account in applying maximum rate
limitations, that fact must be disclosed. If separate overall
limitations apply to rate increases resulting from events such as the
exercise of a fixed-rate conversion option or leaving the creditor's
employ, those limitations also must be stated. Limitations do not
include legal limits in the nature of usury or rate ceilings under state
or Federal statutes or regulations.
3. Form of disclosures. The creditor need not disclose each periodic
or maximum rate limitation that is currently available. Instead, the
creditor may disclose the range of the lowest and highest periodic and
maximum rate limitations that may be applicable to the creditor's home
equity plans. Creditors using this alternative must include a statement
that the consumer should inquire about the rate limitations that are
currently available.
Paragraph 40(d)(12)(x)
1. Maximum rate payment example. In calculating the payment
creditors should assume the maximum rate is in effect. Any discounted or
premium initial rates or periodic rate limitations should be ignored for
purposes of this disclosure. If a range is used to disclose the maximum
cap under Sec. 1026.40(d)(12)(ix), the highest rate in the range must
be used for the disclosure under this paragraph. As an alternative to
making disclosures based on each payment option, the creditor may choose
a representative example within the three categories of payment options
upon which to base this disclosure. (See the commentary to Sec.
1026.40(d)(5).) However, separate examples must be provided for the draw
period and for any repayment period unless the payment is determined the
same way in both periods. Creditors should calculate the example for the
repayment period based on an assumed $10,000 balance. (See the
commentary to Sec. 1026.40(d)(5) for a discussion of the circumstances
in which a creditor may use a lower outstanding balance.)
2. Time the maximum rate could be reached. In stating the date or
time when the maximum rate could be reached, creditors should assume the
rate increases as rapidly as possible under the plan. In calculating the
date or time, creditors should factor in any discounted or premium
initial rates and periodic rate limitations. This disclosure must be
provided for the draw phase and any repayment phase. Creditors should
assume the index and margin shown in the last year of the historical
example (or a more recent rate) is in effect at the beginning of each
phase.
Paragraph 40(d)(12)(xi)
1. Index movement. Index values and annual percentage rates must be
shown for the entire 15 years of the historical example and must be
based on the most recent 15 years. The example must be updated annually
to reflect the most recent 15 years of index values as soon as
reasonably possible after the new index value becomes available. If the
values for an index have not been available for 15 years, a creditor
need only go back as far as
[[Page 761]]
the values have been available and may start the historical example at
the year for which values are first available.
2. Selection of index values. The historical example must reflect
the method of choosing index values for the plan. For example, if an
average of index values is used in the plan, averages must be used in
the example, but if an index value as of a particular date is used, a
single index value must be shown. The creditor is required to assume one
date (or one period, if an average is used) within a year on which to
base the history of index values. The creditor may choose to use index
values as of any date or period as long as the index value as of this
date or period is used for each year in the example. Only one index
value per year need be shown, even if the plan provides for adjustments
to the annual percentage rate or payment more than once in a year. In
such cases, the creditor can assume that the index rate remained
constant for the full year for the purpose of calculating the annual
percentage rate and payment.
3. Selection of margin. A value for the margin must be assumed in
order to prepare the example. A creditor may select a representative
margin that it has used with the index during the six months preceding
preparation of the disclosures and state that the margin is one that it
has used recently. The margin selected may be used until the creditor
annually updates the disclosure form to reflect the most recent 15 years
of index values.
4. Amount of discount or premium. In reflecting any discounted or
premium initial rate, the creditor may select a discount or premium that
it has used during the six months preceding preparation of the
disclosures, and should disclose that the discount or premium is one
that the creditor has used recently. The discount or premium should be
reflected in the example for as long as it is in effect. The creditor
may assume that a discount or premium that would have been in effect for
any part of a year was in effect for the full year for purposes of
reflecting it in the historical example.
5. Rate limitations. Limitations on both periodic and maximum rates
must be reflected in the historical example. If ranges of rate
limitations are provided under Sec. 1026.40(d)(12)(ix), the highest
rates provided in those ranges must be used in the example. Rate
limitations that may apply more often than annually should be treated as
if they were annual limitations. For example, if a creditor imposes a 1%
cap every six months, this should be reflected in the example as if it
were a 2% annual cap.
6. Assumed advances. The creditor should assume that the $10,000
balance is an advance taken at the beginning of the first billing cycle
and is reduced according to the terms of the plan, and that the consumer
takes no subsequent draws. As discussed in the commentary to Sec.
1026.40(d)(5), creditors should not assume an additional advance is
taken at the beginning of any repayment period. If applicable, the
creditor may assume the $10,000 is both the advance and the credit
limit. (See the commentary to Sec. 1026.40(d)(5) for a discussion of
the circumstances in which a creditor may use a lower outstanding
balance.)
7. Representative payment options. The creditor need not provide an
historical example for all of its various payment options, but may
select a representative payment option within each of the three
categories of payments upon which to base its disclosure. (See the
commentary to Sec. 1026.40(d)(5).)
8. Payment information. i. The payment figures in the historical
example must reflect all significant program terms. For example,
features such as rate and payment caps, a discounted initial rate,
negative amortization, and rate carryover must be taken into account in
calculating the payment figures if these would have applied to the plan.
The historical example should include payments for as much of the length
of the plan as would occur during a 15-year period. For example:
A. If the draw period is 10 years and the repayment period is 15
years, the example should illustrate the entire 10-year draw period and
the first 5 years of the repayment period.
B. If the length of the draw period is 15 years and there is a 15-
year repayment phase, the historical example must reflect the payments
for the 15-year draw period and would not show any of the repayment
period. No additional historical example would be required to reflect
payments for the repayment period.
C. If the length of the plan is less than 15 years, payments in the
historical example need only be shown for the number of years in the
term. In such cases, however, the creditor must show the index values,
margin and annual percentage rates and continue to reflect all
significant plan terms such as rate limitations for the entire 15 years.
ii. A creditor need show only a single payment per year in the
example, even though payments may vary during a year. The calculations
should be based on the actual payment computation formula, although the
creditor may assume that all months have an equal number of days. The
creditor may assume that payments are made on the last day of the
billing cycle, the billing date or the payment due date, but must be
consistent in the manner in which the period used to illustrate payment
information is selected. Information about balloon payments and
remaining balance may, but need not, be reflected in the example.
9. Disclosures for repayment period. The historical example must
reflect all features of
[[Page 762]]
the repayment period, including the appropriate index values, margin,
rate limitations, length of the repayment period, and payments. For
example, if different indices are used during the draw and repayment
periods, the index values for that portion of the 15 years that reflect
the repayment period must be the values for the appropriate index.
10. Reverse mortgages. The historical example for reverse mortgages
should reflect 15 years of index values and annual percentage rates, but
the payment column should be blank until the year that the single
payment will be made, assuming that payment is estimated to occur within
15 years. (See the commentary to Sec. 1026.40(d)(5) for a discussion of
reverse mortgages.)
40(e) Brochure
1. Substitutes. A brochure is a suitable substitute for the home
equity brochure, ``What You Should Know About Home Equity Lines of
Credit,'' (available on the Bureau's Web site) if it is, at a minimum,
comparable to that brochure in substance and comprehensiveness.
Creditors are permitted to provide more detailed information than is
contained in that brochure.
2. Effect of third party delivery of brochure. If a creditor
determines that a third party has provided a consumer with the required
brochure pursuant to Sec. 1026.40(c), the creditor need not give the
consumer a second brochure.
40(f) Limitations on Home Equity Plans
1. Coverage. Section 1026.40(f) limits both actions that may be
taken and language that may be included in contracts, and applies to any
assignee or holder as well as to the original creditor. The limitations
apply to the draw period and any repayment period, and to any renewal or
modification of the original agreement.
Paragraph 40(f)(1)
1. External index. A creditor may change the annual percentage rate
for a plan only if the change is based on an index outside the
creditor's control. Thus, a creditor may not make rate changes based on
its own prime rate or cost of funds and may not reserve a contractual
right to change rates at its discretion. A creditor is permitted,
however, to use a published prime rate, such as that in the Wall Street
Journal, even if the bank's own prime rate is one of several rates used
to establish the published rate.
2. Publicly available. The index must be available to the public. A
publicly available index need not be published in a newspaper, but it
must be one the consumer can independently obtain (by telephone, for
example) and use to verify rates imposed under the plan.
3. Provisions not prohibited. This paragraph does not prohibit rate
changes that are specifically set forth in the agreement. For example,
stepped-rate plans, in which specified rates are imposed for specified
periods, are permissible. In addition, preferred-rate provisions, in
which the rate increases by a specified amount upon the occurrence of a
specified event, also are permissible.
Paragraph 40(f)(2)
1. Limitations on termination and acceleration. In general,
creditors are prohibited from terminating and accelerating payment of
the outstanding balance before the scheduled expiration of a plan.
However, creditors may take these actions in the four circumstances
specified in Sec. 1026.40(f)(2). Creditors are not permitted to specify
in their contracts any other events that allow termination and
acceleration beyond those permitted by the regulation. Thus, for
example, an agreement may not provide that the balance is payable on
demand nor may it provide that the account will be terminated and the
balance accelerated if the rate cap is reached.
2. Other actions permitted. If an event permitting termination and
acceleration occurs, a creditor may instead take actions short of
terminating and accelerating. For example, a creditor could temporarily
or permanently suspend further advances, reduce the credit limit, change
the payment terms, or require the consumer to pay a fee. A creditor also
may provide in its agreement that a higher rate or higher fees will
apply in circumstances under which it would otherwise be permitted to
terminate the plan and accelerate the balance. A creditor that does not
immediately terminate an account and accelerate payment or take another
permitted action may take such action at a later time, provided one of
the conditions permitting termination and acceleration exists at that
time.
Paragraph 40(f)(2)(i)
1. Fraud or material misrepresentation. A creditor may terminate a
plan and accelerate the balance if there has been fraud or material
misrepresentation by the consumer in connection with the plan. This
exception includes fraud or misrepresentation at any time, either during
the application process or during the draw period and any repayment
period. What constitutes fraud or misrepresentation is determined by
applicable state law and may include acts of omission as well as overt
acts, as long as any necessary intent on the part of the consumer
exists.
Paragraph 40(f)(2)(ii)
1. Failure to meet repayment terms. A creditor may terminate a plan
and accelerate the
[[Page 763]]
balance when the consumer fails to meet the repayment terms provided for
in the agreement. However, a creditor may terminate and accelerate under
this provision only if the consumer actually fails to make payments. For
example, a creditor may not terminate and accelerate if the consumer, in
error, sends a payment to the wrong location, such as a branch rather
than the main office of the creditor. If a consumer files for or is
placed in bankruptcy, the creditor may terminate and accelerate under
this provision if the consumer fails to meet the repayment terms of the
agreement. This section does not override any state or other law that
requires a right-to-cure notice, or otherwise places a duty on the
creditor before it can terminate a plan and accelerate the balance.
Paragraph 40(f)(2)(iii)
1. Impairment of security. A creditor may terminate a plan and
accelerate the balance if the consumer's action or inaction adversely
affects the creditor's security for the plan, or any right of the
creditor in that security. Action or inaction by third parties does not,
in itself, permit the creditor to terminate and accelerate.
2. Examples. i. A creditor may terminate and accelerate, for
example, if:
A. The consumer transfers title to the property or sells the
property without the permission of the creditor.
B. The consumer fails to maintain required insurance on the
dwelling.
C. The consumer fails to pay taxes on the property.
D. The consumer permits the filing of a lien senior to that held by
the creditor.
E. The sole consumer obligated on the plan dies.
F. The property is taken through eminent domain.
G. A prior lienholder forecloses.
ii. By contrast, the filing of a judgment against the consumer would
permit termination and acceleration only if the amount of the judgment
and collateral subject to the judgment is such that the creditor's
security is adversely affected. If the consumer commits waste or
otherwise destructively uses or fails to maintain the property such that
the action adversely affects the security, the plan may be terminated
and the balance accelerated. Illegal use of the property by the consumer
would permit termination and acceleration if it subjects the property to
seizure. If one of two consumers obligated on a plan dies the creditor
may terminate the plan and accelerate the balance if the security is
adversely affected. If the consumer moves out of the dwelling that
secures the plan and that action adversely affects the security, the
creditor may terminate a plan and accelerate the balance.
Paragraph 40(f)(3)
1. Scope of provision. In general, a creditor may not change the
terms of a plan after it is opened. For example, a creditor may not
increase any fee or impose a new fee once the plan has been opened, even
if the fee is charged by a third party, such as a credit reporting
agency, for a service. The change of terms prohibition applies to all
features of a plan, not only those required to be disclosed under this
section. For example, this provision applies to charges imposed for late
payment, although this fee is not required to be disclosed under Sec.
1026.40(d)(7).
2. Charges not covered. There are three charges not covered by this
provision. A creditor may pass on increases in taxes since such charges
are imposed by a governmental body and are beyond the control of the
creditor. In addition, a creditor may pass on increases in premiums for
property insurance that are excluded from the finance charge under Sec.
1026.4(d)(2), since such insurance provides a benefit to the consumer
independent of the use of the line and is often maintained
notwithstanding the line. A creditor also may pass on increases in
premiums for credit insurance that are excluded from the finance charge
under Sec. 1026.4(d)(1), since the insurance is voluntary and provides
a benefit to the consumer.
Paragraph 40(f)(3)(i)
1. Changes provided for in agreement. A creditor may provide in the
initial agreement that further advances will be prohibited or the credit
line reduced during any period in which the maximum annual percentage
rate is reached. A creditor also may provide for other specific changes
to take place upon the occurrence of specific events. Both the
triggering event and the resulting modification must be stated with
specificity. For example, in home equity plans for employees, the
agreement could provide that a specified higher rate or margin will
apply if the borrower's employment with the creditor ends. A contract
could contain a stepped-rate or stepped-fee schedule providing for
specified changes in the rate or the fees on certain dates or after a
specified period of time. A creditor also may provide in the initial
agreement that it will be entitled to a share of the appreciation in the
value of the property as long as the specific appreciation share and the
specific circumstances which require the payment of it are set forth. A
contract may permit a consumer to switch among minimum payment options
during the plan.
2. Prohibited provisions. A creditor may not include a general
provision in its agreement permitting changes to any or all of the terms
of the plan. For example, creditors may not include ``boilerplate''
language in the agreement stating that they reserve the right to
[[Page 764]]
change the fees imposed under the plan. In addition, a creditor may not
include any ``triggering events'' or responses that the regulation
expressly addresses in a manner different from that provided in the
regulation. For example, an agreement may not provide that the margin in
a variable-rate plan will increase if there is a material change in the
consumer's financial circumstances, because the regulation specifies
that temporarily freezing the line or lowering the credit limit is the
permissible response to a material change in the consumer's financial
circumstances. Similarly a contract cannot contain a provision allowing
the creditor to freeze a line due to an insignificant decline in
property value since the regulation allows that response only for a
significant decline.
Paragraph 40(f)(3)(ii)
1. Substitution of index. A creditor may change the index and margin
used under the plan if the original index becomes unavailable, as long
as historical fluctuations in the original and replacement indices were
substantially similar, and as long as the replacement index and margin
will produce a rate similar to the rate that was in effect at the time
the original index became unavailable. If the replacement index is newly
established and therefore does not have any rate history, it may be used
if it produces a rate substantially similar to the rate in effect when
the original index became unavailable.
Paragraph 40(f)(3)(iii)
1. Changes by written agreement. A creditor may change the terms of
a plan if the consumer expressly agrees in writing to the change at the
time it is made. For example, a consumer and a creditor could agree in
writing to change the repayment terms from interest-only payments to
payments that reduce the principal balance. The provisions of any such
agreement are governed by the limitations in Sec. 1026.40(f). For
example, a mutual agreement could not provide for future annual
percentage rate changes based on the movement of an index controlled by
the creditor or for termination and acceleration under circumstances
other than those specified in the regulation. By contrast, a consumer
could agree to a new credit limit for the plan, although the agreement
could not permit the creditor to later change the credit limit except by
a subsequent written agreement or in the circumstances described in
Sec. 1026.40(f)(3)(vi).
2. Written agreement. The change must be agreed to in writing by the
consumer. Creditors are not permitted to assume consent because the
consumer uses an account, even if use of an account would otherwise
constitute acceptance of a proposed change under state law.
Paragraph 40(f)(3)(iv)
1. Beneficial changes. After a plan is opened, a creditor may make
changes that unequivocally benefit the consumer. Under this provision, a
creditor may offer more options to consumers, as long as existing
options remain. For example, a creditor may offer the consumer the
option of making lower monthly payments or could increase the credit
limit. Similarly, a creditor wishing to extend the length of the plan on
the same terms may do so. Creditors are permitted to temporarily reduce
the rate or fees charged during the plan (though a change in terms
notice may be required under Sec. 1026.9(c) when the rate or fees are
returned to their original level). Creditors also may offer an
additional means of access to the line, even if fees are associated with
using the device, provided the consumer retains the ability to use prior
access devices on the original terms.
Paragraph 40(f)(3)(v)
1. Insignificant changes. A creditor is permitted to make
insignificant changes after a plan is opened. This rule accommodates
operational and similar problems, such as changing the address of the
creditor for purposes of sending payments. It does not permit a creditor
to change a term such as a fee charged for late payments.
2. Examples of insignificant changes. Creditors may make minor
changes to features such as the billing cycle date, the payment due date
(as long as the consumer does not have a diminished grace period if one
is provided), and the day of the month on which index values are
measured to determine changes to the rate for variable-rate plans. A
creditor also may change its rounding practice in accordance with the
tolerance rules set forth in Sec. 1026.14 (for example, stating an
exact APR of 14.3333 percent as 14.3 percent, even if it had previously
been stated as 14.33 percent). A creditor may change the balance
computation method it uses only if the change produces an insignificant
difference in the finance charge paid by the consumer. For example, a
creditor may switch from using the average daily balance method
(including new transactions) to the daily balance method (including new
transactions).
Paragraph 40(f)(3)(vi)
1. Suspension of credit privileges or reduction of credit limit. A
creditor may prohibit additional extensions of credit or reduce the
credit limit in the circumstances specified in this section of the
regulation. In addition, as discussed under Sec. 1026.40(f)(3)(i), a
creditor may contractually reserve the right to take such actions when
the maximum annual percentage rate is reached. A creditor may not
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take these actions under other circumstances, unless the creditor would
be permitted to terminate the line and accelerate the balance as
described in Sec. 1026.40(f)(2). The creditor's right to reduce the
credit limit does not permit reducing the limit below the amount of the
outstanding balance if this would require the consumer to make a higher
payment.
2. Temporary nature of suspension or reduction. Creditors are
permitted to prohibit additional extensions of credit or reduce the
credit limit only while one of the designated circumstances exists. When
the circumstance justifying the creditor's action ceases to exist,
credit privileges must be reinstated, assuming that no other
circumstance permitting such action exists at that time.
3. Imposition of fees. If not prohibited by state law, a creditor
may collect only bona fide and reasonable appraisal and credit report
fees if such fees are actually incurred in investigating whether the
condition permitting the freeze continues to exist. A creditor may not,
in any circumstances, impose a fee to reinstate a credit line once the
condition has been determined not to exist.
4. Reinstatement of credit privileges. Creditors are responsible for
ensuring that credit privileges are restored as soon as reasonably
possible after the condition that permitted the creditor's action ceases
to exist. One way a creditor can meet this responsibility is to monitor
the line on an ongoing basis to determine when the condition ceases to
exist. The creditor must investigate the condition frequently enough to
assure itself that the condition permitting the freeze continues to
exist. The frequency with which the creditor must investigate to
determine whether a condition continues to exist depends upon the
specific condition permitting the freeze. As an alternative to such
monitoring, the creditor may shift the duty to the consumer to request
reinstatement of credit privileges by providing a notice in accordance
with Sec. 1026.9(c)(1)(iii). A creditor may require a reinstatement
request to be in writing if it notifies the consumer of this requirement
on the notice provided under Sec. 1026.9(c)(1)(iii). Once the consumer
requests reinstatement, the creditor must promptly investigate to
determine whether the condition allowing the freeze continues to exist.
Under this alternative, the creditor has a duty to investigate only upon
the consumer's request.
5. Suspension of credit privileges following request by consumer. A
creditor may honor a specific request by a consumer to suspend credit
privileges. If the consumer later requests that the creditor reinstate
credit privileges, the creditor must do so provided no other
circumstance justifying a suspension exists at that time. If two or more
consumers are obligated under a plan and each has the ability to take
advances, the agreement may permit any of the consumers to direct the
creditor not to make further advances. A creditor may require that all
persons obligated under a plan request reinstatement.
6. Significant decline defined. What constitutes a significant
decline for purposes of Sec. 1026.40(f)(3)(vi)(A) will vary according
to individual circumstances. In any event, if the value of the dwelling
declines such that the initial difference between the credit limit and
the available equity (based on the property's appraised value for
purposes of the plan) is reduced by fifty percent, this constitutes a
significant decline in the value of the dwelling for purposes of Sec.
1026.40(f)(3)(vi)(A). For example, assume that a house with a first
mortgage of $50,000 is appraised at $100,000 and the credit limit is
$30,000. The difference between the credit limit and the available
equity is $20,000, half of which is $10,000. The creditor could prohibit
further advances or reduce the credit limit if the value of the property
declines from $100,000 to $90,000. This provision does not require a
creditor to obtain an appraisal before suspending credit privileges
although a significant decline must occur before suspension can occur.
7. Material change in financial circumstances. Two conditions must
be met for Sec. 1026.40(f)(3)(vi)(B) to apply. First, there must be a
``material change'' in the consumer's financial circumstances, such as a
significant decrease in the consumer's income. Second, as a result of
this change, the creditor must have a reasonable belief that the
consumer will be unable to fulfill the payment obligations of the plan.
A creditor may, but does not have to, rely on specific evidence (such as
the failure to pay other debts) in concluding that the second part of
the test has been met. A creditor may prohibit further advances or
reduce the credit limit under this section if a consumer files for or is
placed in bankruptcy.
8. Default of a material obligation. Creditors may specify events
that would qualify as a default of a material obligation under Sec.
1026.40(f)(3)(vi)(C). For example, a creditor may provide that default
of a material obligation will exist if the consumer moves out of the
dwelling or permits an intervening lien to be filed that would take
priority over future advances made by the creditor.
9. Government limits on the annual percentage rate. Under Sec.
1026.40(f)(3)(vi)(D), a creditor may prohibit further advances or reduce
the credit limit if, for example, a state usury law is enacted which
prohibits a creditor from imposing the agreed-upon annual percentage
rate.
[[Page 766]]
40(g) Refund of Fees
1. Refund of fees required. If any disclosed term, including any
term provided upon request pursuant to Sec. 1026.40(d), changes between
the time the early disclosures are provided to the consumer and the time
the plan is opened, and the consumer as a result decides to not enter
into the plan, a creditor must refund all fees paid by the consumer in
connection with the application. All fees, including credit report fees
and appraisal fees, must be refunded whether such fees are paid to the
creditor or directly to third parties. A consumer is entitled to a
refund of fees under these circumstances whether or not terms are
guaranteed by the creditor under Sec. 1026.40(d)(2)(i).
2. Variable-rate plans. The right to a refund of fees does not apply
to changes in the annual percentage rate resulting from fluctuations in
the index value in a variable-rate plan. Also, if the maximum annual
percentage rate is expressed as an amount over the initial rate, the
right to refund of fees would not apply to changes in the cap resulting
from fluctuations in the index value.
3. Changes in terms. If a term, such as the maximum rate, is stated
as a range in the early disclosures, and the term ultimately applicable
to the plan falls within that range, a change does not occur for
purposes of this section. If, however, no range is used and the term is
changed (for example, a rate cap of 6 rather than 5 percentage points
over the initial rate), the change would permit the consumer to obtain a
refund of fees. If a fee imposed by the creditor is stated in the early
disclosures as an estimate and the fee changes, the consumer could elect
to not enter into the agreement and would be entitled to a refund of
fees. On the other hand, if fees imposed by third parties are disclosed
as estimates and those fees change, the consumer is not entitled to a
refund of fees paid in connection with the application. Creditors must,
however, use the best information reasonably available in providing
disclosures about such fees.
4. Timing of refunds and relation to other provisions. The refund of
fees must be made as soon as reasonably possible after the creditor is
notified that the consumer is not entering into the plan because of the
changed term, or that the consumer wants a refund of fees. The fact that
an application fee may be refunded to some applicants under this
provision does not render such fees finance charges under Sec.
1026.4(c)(1) of the regulation.
40(h) Imposition of Nonrefundable Fees
1. Collection of fees after consumer receives disclosures. A fee may
be collected after the consumer receives the disclosures and brochure
and before the expiration of three days, although the fee must be
refunded if, within three days of receiving the required information,
the consumer decides to not enter into the agreement. In such a case,
the consumer must be notified that the fee is refundable for three days.
The notice must be clear and conspicuous and in writing, and may be
included with the disclosures required under Sec. 1026.40(d) or as an
attachment to them. If disclosures and brochure are mailed to the
consumer, Sec. 1026.40(h) provides that a nonrefundable fee may not be
imposed until six business days after the mailing.
2. Collection of fees before consumer receives disclosures. An
application fee may be collected before the consumer receives the
disclosures and brochure (for example, when an application contained in
a magazine is mailed in with an application fee) provided that it
remains refundable until three business days after the consumer receives
the Sec. 1026.40 disclosures. No other fees except a refundable
membership fee may be collected until after the consumer receives the
disclosures required under Sec. 1026.40.
3. Relation to other provisions. A fee collected before disclosures
are provided may become nonrefundable except that, under Sec.
1026.40(g), it must be refunded if the consumer elects to not enter into
the plan because of a change in terms. (Of course, all fees must be
refunded if the consumer later rescinds under Sec. 1026.15.)
Section 1026.41--Periodic Statements for Residential Mortgage Loans
41(a) In general.
1. Recipient of periodic statement. When two consumers are joint
obligors with primary liability on a closed-end consumer credit
transaction secured by a dwelling subject to Sec. 1026.41, the periodic
statement may be sent to either one of them. For example, if spouses
jointly own a home, the servicer need not send statements to both
spouses; a single statement may be sent.
2. Billing cycles shorter than a 31-day period. If a loan has a
billing cycle shorter than a period of 31 days (for example, a bi-weekly
billing cycle), a periodic statement covering an entire month may be
used. Such statement would separately list the upcoming payment due
dates and amounts due, as required by Sec. 1026.20(d)(1), and list all
transaction activity that occurred during the related time period, as
required by paragraph (d)(4). Such statement may aggregate the
information for the explanation of amount due, as required by paragraph
(d)(2), and past payment breakdown, as required by paragraph (d)(3).
3. One statement per billing cycle. The periodic statement
requirement in Sec. 1026.41 applies to the ``creditor, assignee, or
servicer as applicable.'' The creditor, assignee, and servicer are all
subject to this requirement
[[Page 767]]
(but see comment 41(a)-4), but only one statement must be sent to the
consumer each billing cycle. When two or more parties are subject to
this requirement, they may decide among themselves which of them will
send the statement.
4. Opting out. A consumer may not opt out of receiving periodic
statements altogether. However, consumers who have demonstrated the
ability to access statements online may opt out of receiving
notifications that statements are available. Such an ability may be
demonstrated, for example, by the consumer receiving notification that
the statements is available, going to the Web site where the information
is available, viewing the information about their account and selecting
a link or option there to indicate they no longer would like to receive
notifications when new statements are available.
41(b) Timing of the periodic statement.
1. Reasonably prompt time. Section 1026.41(b) requires that the
periodic statement be delivered or placed in the mail no later than a
reasonably prompt time after the payment due date or the end of any
courtesy period. Delivering, emailing or placing the periodic statement
in the mail within four days of the close of the courtesy period of the
previous billing cycle generally would be considered reasonably prompt.
2. Courtesy period. The meaning of ``courtesy period'' is explained
in comment 7(b)(11)-1.
41(c) Form of the periodic statement.
1. Clear and conspicuous standard. The ``clear and conspicuous''
standard generally requires that disclosures be in a reasonably
understandable form. Except where otherwise provided, the standard does
not prohibit adding to the required disclosures, as long as the
additional information does not overwhelm or obscure the required
disclosures. For example, while certain information about the escrow
account (such as the account balance) is not required on the periodic
statement, this information may be included.
2. Additional information; disclosures required by other laws.
Nothing in Sec. 1026.41 prohibits a servicer from including additional
information or combining disclosures required by other laws with the
disclosures required by this subpart, unless such prohibition is
expressly set forth in this subpart, or other applicable law.
3. Electronic distribution. The periodic statement may be provided
electronically if the consumer agrees. The consumer must give
affirmative consent to receive statements electronically. If statements
are provided electronically, the creditor, assignee, or servicer may
send a notification that a consumer's statement is available, with a
link to where the statement can be accessed, in place of the statement
itself.
4. Presumed consent. Any consumer who is currently receiving
disclosures for any account (for example, a mortgage or checking
account) electronically from their servicer shall be deemed to have
consented to receiving e-statements in place of paper statements.
41(d) Content and layout of the periodic statement.
1. Close proximity. Section 1026.41(d) requires several disclosures
to be provided in close proximity to one another. To meet this
requirement, the items to be provided in close proximity must be grouped
together, and set off from other groupings of items. This may be
accomplished in a variety of ways, for example, by presenting the
information in boxes, or by arranging the items on the document and
including spacing between the groupings. Items in close proximity may
not have any unrelated text between them. Text is unrelated if it does
not explain or expand upon the required disclosures.
2. Not applicable. If an item required by paragraph (d) or (e) of
this section is not applicable to the loan, it may be omitted from the
periodic statement or coupon book. For example, if there is no
prepayment penalty associated with a loan, the prepayment penalty
disclosures need not be provided on the periodic statement.
3. Terminology. A servicer may use terminology other than that found
on the sample periodic statements in appendix H-30, so long as the new
terminology is commonly understood. For example, servicers may take into
consideration regional differences in terminology and refer to the
account for the collection of taxes and insurance, referred to in Sec.
1026.41(d) as the ``escrow account,'' as an ``impound account.''
4. Temporary loss mitigation programs. If the consumer has agreed to
a temporary loss mitigation program, the disclosures required by Sec.
1026.41(d)(2), (3), and (5) regarding how payments were and will be
applied must identify how payments are applied according to the loan
contract, regardless of the temporary loss mitigation program.
5. First statement after exemption terminates. Section
1026.41(d)(2)(ii), (d)(3)(i), and (d)(4) requires the disclosure of the
total sum of any fees or charges imposed since the last statement, the
total of all payments received since the last statement, including a
breakdown of how payments were applied, and a list of all transaction
activity since the last statement. For purposes of the first periodic
statement provided to the consumer following termination of an exemption
under Sec. 1026.41(e), the disclosures required by Sec.
1026.41(d)(2)(ii), (d)(3)(i), and (d)(4) may be limited to account
activity since the last payment due date that occurred while the
exemption was in effect. For example, if mortgage loan payments are due
on the first
[[Page 768]]
of each month and the servicer's exemption under Sec. 1026.41(e)
terminated on January 15, the first statement provided to the consumer
after January 15 may be limited to the total sum of any fees or charges
imposed, the total of all payments received, a breakdown of how the
payments were applied, and a list of all transaction activity since
January 1.
41(d)(1) Amount due.
1. Acceleration. If the balance of a mortgage loan has been
accelerated but the servicer will accept a lesser amount to reinstate
the loan, the amount due under Sec. 1026.41(d)(1) must identify only
the lesser amount that will be accepted to reinstate the loan. The
periodic statement must be accurate when provided and should indicate,
if applicable, that the amount due is accurate only for a specified
period of time. For example, the statement may include language such as
``as of [date]'' or ``good through [date]'' and provide an amount due
that will reinstate the loan as of that date or good through that date,
respectively.
2. Temporary loss mitigation programs. If the consumer has agreed to
a temporary loss mitigation program, the amount due under Sec.
1026.41(d)(1) may identify either the payment due under the temporary
loss mitigation program or the amount due according to the loan
contract.
3. Permanent loan modifications. If the loan contract has been
permanently modified, the amount due under Sec. 1026.41(d)(1) must
identify only the amount due under the modified loan contract.
41(d)(2) Explanation of amount due.
1. Acceleration. If the balance of a mortgage loan has been
accelerated but the servicer will accept a lesser amount to reinstate
the loan, the explanation of amount due under Sec. 1026.41(d)(2) must
list both the reinstatement amount that is disclosed as the amount due
and the accelerated amount but not the monthly payment amount that would
otherwise be required under Sec. 1026.41(d)(2)(i). The periodic
statement must also include an explanation that the reinstatement amount
will be accepted to reinstate the loan through the ``as of [date]'' or
``good through [date],'' as applicable, along with any special
instructions for submitting the payment. The explanation should be on
the front page of the statement or, alternatively, may be included on a
separate page enclosed with the periodic statement. The explanation may
include related information, such as a statement that the amount
disclosed is ``not a payoff amount.''
2. Temporary loss mitigation programs. If the consumer has agreed to
a temporary loss mitigation program and the amount due identifies the
payment due under the temporary loss mitigation program, the explanation
of amount due under Sec. 1026.41(d)(2) must include both the amount due
according to the loan contract and the payment due under the temporary
loss mitigation program. The statement must also include an explanation
that the amount due is being disclosed as a different amount because of
the temporary loss mitigation program. The explanation should be on the
front page of the statement or, alternatively, may be included on a
separate page enclosed with the periodic statement or in a separate
letter.
41(d)(3) Past payment breakdown.
1. Partial payments. The disclosure of any partial payments received
since the previous statement that were sent to a suspense or unapplied
funds account as required by Sec. 1026.41(d)(3)(i) should reflect any
funds that were received in the time period covered by the current
statement and that were placed in such account. The disclosure of any
portion of payments since the beginning of the calendar year that was
sent to a partial payment or suspense account as required by Sec.
1026.41(d)(3)(ii) should reflect all funds that are currently held in a
suspense or unapplied funds account. For example:
i. Suppose a payment of $1,000 is due, but the consumer sends in
only $600 on January 1, which is held in a suspense account. Further
assume there are no fees charged on this account. Assuming there are no
other funds in the suspense account, the January statement should
reflect: Unapplied funds since last statement--$600. Unapplied funds
YTD--$600.
ii. Assume the same facts as in the preceding paragraph, except that
during February the consumer sends in $300 and this too is held in the
suspense account. The statement should reflect: Unapplied funds since
last statement--$300. Unapplied funds YTD--$900.
iii. Assume the same facts as in the preceding paragraph, except
that during March the consumer sends in $400. Of this payment, $100
completes a full periodic payment when added to the $900 in funds
already held in the suspense account. This $1,000 is applied to the
January payment, and the remaining $300 remains in the suspense account.
The statement should reflect: Unapplied funds since last statement--
$300. Unapplied Funds YTD--$300.
41(d)(4) Transaction Activity.
1. Meaning. Transaction activity includes any transaction that
credits or debits the amount currently due. This is the same amount that
is required to be disclosed under Sec. 1026.41(d)(1)(iii). Examples of
such transactions include, without limitation:
i. Payments received and applied;
ii. Payments received and held in a suspense account;
iii. The imposition of any fees (for example late fees); and
iv. The imposition of any charges (for example, private mortgage
insurance).
2. Description of late fees. The description of any late fee charges
includes the date of the
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late fee, the amount of the late fee, and the fact that a late fee was
imposed.
3. Partial payments. If a partial payment is sent to a suspense or
unapplied funds account, this fact must be in the transaction
description along with the date and amount of the payment.
41(d)(8) Delinquency information.
1. Length of delinquency. For purposes of Sec. 1026.41(d)(8), the
length of a consumer's delinquency is measured as of the date of the
periodic statement or the date of the written notice provided under
Sec. 1026.41(e)(3)(iv). A consumer's delinquency begins on the date an
amount sufficient to cover a periodic payment of principal, interest,
and escrow, if applicable, becomes due and unpaid, even if the consumer
is afforded a period after the due date to pay before the servicer
assesses a late fee. A consumer is delinquent if one or more periodic
payments of principal, interest, and escrow, if applicable, are due and
unpaid.
2. Application of funds. For purposes of Sec. 1026.41(d)(8), if a
servicer applies payments to the oldest outstanding periodic payment, a
payment by a delinquent consumer advances the date the consumer's
delinquency began. For example, assume a mortgage loan obligation under
which a consumer's periodic payment is due on the first of each month. A
consumer fails to make a payment on January 1 but makes a periodic
payment on February 3. The servicer applies the payment received on
February 3 to the outstanding January payment. On February 4, the
consumer is three days delinquent, and the next periodic statement
should disclose the length of the consumer's delinquency using February
2 as the first day of delinquency.
41(e)(3) Coupon book exemption.
1. Fixed rate. For guidance on the meaning of ``fixed rate'' for
purposes of Sec. 1026.41(e)(3), see Sec. 1026.18(s)(7)(iii) and its
commentary.
2. Coupon book. A coupon book is a booklet provided to the consumer
with a page for each billing cycle during a set period of time (often
covering one year). These pages are designed to be torn off and returned
to the servicer with a payment for each billing cycle. Additional
information about the loan is often included on or inside the front or
back cover, or on filler pages in the coupon book.
3. Information location. The information required by paragraph
(e)(3)(ii) need not be provided on each coupon, but should be provided
somewhere in the coupon book. Such information could be located, e.g.,
on or inside the front or back cover, or on filler pages in the coupon
book.
4. Outstanding principal balance. Paragraph (e)(3)(ii)(A) requires
the information listed in paragraph (d)(7) to be included in the coupon
book. Paragraph (d)(7)(i) requires the disclosure of the outstanding
principal balance. If the servicer makes use of a coupon book and the
exemption in Sec. 1026.41(e)(3), the servicer need only disclose the
principal balance at the beginning of the time period covered by the
coupon book.
41(e)(4) Small servicers.
41(e)(4)(ii) Small servicer defined.
1. Mortgage loans considered. Pursuant to Sec. 1026.41(a)(1), the
mortgage loans considered in determining status as a small servicer are
closed-end consumer credit transactions secured by a dwelling, subject
to the exclusions in Sec. 1026.41(e)(4)(iii).
2. Services, together with affiliates, 5,000 or fewer mortgage
loans. To qualify as a small servicer, under Sec. 1026.41(e)(4)(ii)(A),
a servicer must service, together with any affiliates, 5,000 or fewer
mortgage loans, for all of which the servicer (or an affiliate) is the
creditor or assignee. There are two elements to satisfying Sec.
1026.41(e)(4)(ii)(A). First, a servicer, together with any affiliates,
must service 5,000 or fewer mortgage loans. Second, a servicer must
service only mortgage loans for which the servicer (or an affiliate) is
the creditor or assignee. To be the creditor or assignee of a mortgage
loan, the servicer (or an affiliate) must either currently own the
mortgage loan or must have been the entity to which the mortgage loan
obligation was initially payable (that is, the originator of the
mortgage loan). A servicer is not a small servicer under Sec.
1026.41(e)(4)(ii)(A) if it services any mortgage loans for which the
servicer or an affiliate is not the creditor or assignee (that is, for
which the servicer or an affiliate is not the owner or was not the
originator). The following two examples demonstrate circumstances in
which a servicer would not qualify as a small servicer under Sec.
1026.41(e)(4)(ii)(A) because it did not meet both requirements under
Sec. 1026.41(e)(4)(ii)(A) for determining a servicer's status as a
small servicer:
i. A servicer services 3,000 mortgage loans, all of which it or an
affiliate owns or originated. An affiliate of the servicer services
4,000 other mortgage loans, all of which it or an affiliate owns or
originated. Because the number of mortgage loans serviced by a servicer
is determined by counting the mortgage loans serviced by a servicer
together with any affiliates, both of these servicers are considered to
be servicing 7,000 mortgage loans and neither servicer is a small
servicer.
ii. A service services 3,100 mortgage loans--3,000 mortgage loans it
owns or originated and 100 mortgage loans it neither owns nor
originated, but for which it owns the mortgage servicing rights. The
servicer is not a small servicer because it services mortgage loans for
which the servicer (or an affiliate) is not the creditor or assignee,
notwithstanding that the servicer services fewer than 5,000 mortgage
loans.
3. Master servicing and subservicing. A servicer that qualifies as a
small servicer
[[Page 770]]
does not lose its small servicer status if it retains a subservicer, as
that term is defined in 12 CFR 1024.31, to service any of its mortgage
loans. A subservicer can gain the benefit of the small servicer
exemption only if (1) the master servicer, as that term is defined in 12
CFR 1024.31, is a small servicer and (2) the subservicer is a small
servicer. A subservicer generally will not qualify as a small servicer
because it does not own or did not originate the mortgage loans it
subservices--unless it is an affiliate of a master servicer that
qualifies as a small servicer. The following examples demonstrate the
application of the small servicer exemption for different forms of
servicing relationships:
i. A credit union services 4,000 mortgage loans, all of which it
originated or owns. The credit union retains a credit union service
organization, that is not an affiliate, to subservice 1,000 of the
mortgage loans. The credit union is a small servicer and, thus, can gain
the benefit of the small servicer exemption for the 3,000 mortgage loans
the credit union services itself. The credit union service organization
is not a small servicer because it services mortgage loans it does not
own or did not originate. Accordingly, the credit union service
organization does not gain the benefit of the small servicer exemption
and, thus, must comply with any applicable mortgage servicing
requirements for the 1,000 mortgage loans it subservices.
ii. A bank holding company, through a lender subsidiary, owns or
originated 4,000 mortgage loans. All mortgage servicing rights for the
4,000 mortgage loans are owned by a wholly owned master servicer
subsidiary. Servicing for the 4,000 mortgage loans is conducted by a
wholly owned subservicer subsidiary. The bank holding company controls
all of these subsidiaries and, thus, they are affiliates of the bank
holding company pursuant 12 CFR 1026.32(b)(2). Because the master
servicer and subservicer service 5,000 or fewer mortgage loans, and
because all the mortgage loans are owned or originated by an affiliate,
the master servicer and the subservicer both qualify for the small
servicer exemption for all 4,000 mortgage loans.
iii. A nonbank servicer services 4,000 mortgage loans, all of which
it originated or owns. The servicer retains a ``component servicer'' to
assist it with servicing functions. The component servicer is not
engaged in ``servicing'' as defined in 12 CFR 1024.2; that is, the
component servicer does not receive any scheduled periodic payments from
a borrower pursuant to the terms of any mortgage loan, including amounts
for escrow accounts, and does not make the payments to the owner of the
loan or other third parties of principal and interest and such other
payments with respect to the amounts received from the borrower as may
be required pursuant to the terms of the mortgage servicing loan
documents or servicing contract. The component servicer is not a
subservicer pursuant to 12 CFR 1024.31 because it is not engaged in
servicing, as that term is defined in 12 CFR 1024.2. The nonbank
servicer is a small servicer and, thus, can gain the benefit of the
small servicer exemption with regard to all 4,000 mortgage loans it
services.
4. Nonprofit entity that services 5,000 or fewer mortgage loans. To
qualify as a small servicer under Sec. 1026.41(e)(4)(ii)(C), a servicer
must be a nonprofit entity that services 5,000 or fewer mortgage loans,
including any mortgage loans serviced on behalf of associated nonprofit
entities, for all of which the servicer or an associated nonprofit
entity is the creditor. There are two elements to satisfying Sec.
1026.41(e)(4)(ii)(C). First, a nonprofit entity must service 5,000 or
fewer mortgage loans, including any mortgage loans serviced on behalf of
associated nonprofit entities. For each associated nonprofit entity, the
small servicer determination is made separately, without consideration
of the number of loans serviced by another associated nonprofit entity.
Second, a nonprofit entity must service only mortgage loans for which
the servicer (or an associated nonprofit entity) is the creditor. To be
the creditor, the servicer (or an associated nonprofit entity) must have
been the entity to which the mortgage loan obligation was initially
payable (that is, the originator of the mortgage loan). A nonprofit
entity is not a small servicer under Sec. 1026.41(e)(4)(ii)(C) if it
services any mortgage loans for which the servicer (or an associated
nonprofit entity) is not the creditor (that is, for which the servicer
or an associated nonprofit entity was not the originator). The first of
the following two examples demonstrates circumstances in which a
nonprofit entity would qualify as a small servicer under Sec.
1026.41(e)(4)(ii)(C) because it meets both requirements for determining
a nonprofit entity's status as a small servicer under Sec.
1026.41(e)(4)(ii)(C). The second example demonstrates circumstances in
which a nonprofit entity would not qualify as a small servicer under
Sec. 1026.41(e)(4)(ii)(C) because it does not meet both requirements
under Sec. 1026.41(e)(4)(ii)(C).
i. Nonprofit entity A services 3,000 of its own mortgage loans, and
1,500 mortgage loans on behalf of associated nonprofit entity B. All
4,500 mortgage loans were originated by A or B. Associated nonprofit
entity C services 2,500 mortgage loans, all of which it originated.
Because the number of mortgage loans serviced by a nonprofit entity is
determined by counting the number of mortgage loans serviced by the
nonprofit entity (including mortgage loans serviced on behalf of
associated nonprofit entities) but not counting any mortgage loans
serviced by an associated nonprofit entity, A and C are both small
servicers.
[[Page 771]]
ii. A nonprofit entity services 4,500 mortgage loans--3,000 mortgage
loans it originated, 1,000 mortgage loans originated by associated
nonprofit entities, and 500 mortgage loans neither it nor an associated
nonprofit entity originated. The nonprofit entity is not a small
servicer because it services mortgage loans for which neither it nor an
associated nonprofit entity is the creditor, notwithstanding that it
services fewer than 5,000 mortgage loans.
41(e)(4)(iii) Small servicer determination.
1. Loans obtained by merger or acquisition. Any mortgage loans
obtained by a servicer or an affiliate as part of a merger or
acquisition, or as part of the acquisition of all of the assets or
liabilities of a branch office of a creditor, should be considered
mortgage loans for which the servicer or an affiliate is the creditor to
which the mortgage loan is initially payable. A branch office means
either an office of a depository institution that is approved as a
branch by a Federal or State supervisory agency or an office of a for-
profit mortgage lending institution (other than a depository
institution) that takes applications from the public for mortgage loans.
2. Timing for small servicer exemption. The following examples
demonstrate when a servicer either is considered or is no longer
considered a small servicer under Sec. 1026.41(e)(4)(ii)(A) and (C):
i. Assume a servicer (that as of January 1 of the current year
qualifies as a small servicer) begins servicing more than 5,000 mortgage
loans on October 1, and services more than 5,000 mortgage loans as of
January 1 of the following year. The servicer would no longer be
considered a small servicer on January 1 of the following year and would
have to comply with any requirements from which it is no longer exempt
as a small servicer on April 1 of the following year.
ii. Assume a servicer (that as of January 1 of the current year
qualifies as a small servicer) begins servicing more than 5,000 mortgage
loans on February 1, and services more than 5,000 mortgage loans as of
January 1 of the following year. The servicer would no longer be
considered a small servicer on January 1 of the following year and would
have to comply with any requirements from which it is no longer exempt
as a small servicer on that same January 1.
iii. Assume a servicer (that as of January 1 of the current year
qualifies as a small servicer) begins servicing more than 5,000 mortgage
loans on February 1, but services fewer than 5,000 mortgage loans as of
January 1 of the following year. The servicer is considered a small
servicer for the following year.
3. Mortgage loans not considered in determining whether a servicer
is a small servicer. Mortgage loans that are not considered pursuant to
Sec. 1026.41(e)(4)(iii) in applying Sec. 1026.41(e)(4)(ii)(A) are not
considered either for determining whether a servicer (together with any
affiliates) services 5,000 or fewer mortgage loans or whether a servicer
is servicing only mortgage loans that it (or an affiliate) owns or
originated. For example, assume a servicer services 5,400 mortgage
loans. Of these mortgage loans, the servicer owns or originated 4,800
mortgage loans, voluntarily services 300 mortgage loans that neither it
(nor an affiliate) owns or originated and for which the servicer does
not receive any compensation or fees, and services 300 reverse mortgage
transactions. The voluntarily serviced mortgage loans and reverse
mortgage loans are not considered in determining whether the servicer
qualifies as a small servicer pursuant to Sec. 1026.41(e)(4)(iii)(A).
Thus, because only the 4,800 mortgage loans owned or originated by the
servicer are considered in determining whether the servicer qualifies as
a small servicer, the servicer satisfies Sec. 1026.41(e)(4)(ii)(A) with
regard to all 5,400 mortgage loans it services.
4. Mortgage loans not considered in determining whether a nonprofit
entity is a small servicer. Mortgage loans that are not considered
pursuant to Sec. 1026.41(e)(4)(iii) in applying Sec.
1026.41(e)(4)(ii)(C) are not considered either for determining whether a
nonprofit entity services 5,000 or fewer mortgage loans, including any
mortgage loans serviced on behalf of associated nonprofit entities, or
whether a nonprofit entity is servicing only mortgage loans that it or
an associated nonprofit entity originated. For example, assume a
servicer that is a nonprofit entity services 5,400 mortgage loans. Of
these mortgage loans, the nonprofit entity originated 2,800 mortgage
loans and associated nonprofit entities originated 2,000 mortgage loans.
The nonprofit entity receives compensation for servicing the loans
originated by associated nonprofits. The nonprofit entity also
voluntarily services 600 mortgage loans that were originated by an
entity that is not an associated nonprofit entity, and receives no
compensation or fees for servicing these loans. The voluntarily serviced
mortgage loans are not considered in determining whether the servicer
qualifies as a small servicer. Thus, because only the 4,800 mortgage
loans originated by the nonprofit entity or associated nonprofit
entities are considered in determining whether the servicer qualifies as
a small servicer, the servicer satisfies Sec. 1026.41(e)(4)(ii)(C) with
regard to all 5,400 mortgage loans it services.
5. Limited role of voluntarily serviced mortgage loans. Reverse
mortgages and mortgage loans secured by consumers' interests in
timeshare plans, in addition to not being considered in determining
small servicer qualification, are also exempt from the requirements of
Sec. 1026.41. In contrast, although
[[Page 772]]
voluntarily serviced mortgage loans, as defined by Sec.
1026.41(e)(4)(iii)(A), are likewise not considered in determining small
servicer status, they are not exempt from the requirements of Sec.
1026.41. Thus, a servicer that does not qualify as a small servicer
would not have to provide periodic statements for reverse mortgages and
timeshare plans because they are exempt from the rule, but would have to
provide periodic statements for mortgage loans it voluntarily services.
41(e)(5) Consumers in bankruptcy.
1. Commencing a case. The requirements of Sec. 1026.41 do not apply
once a petition is filed under Title 11 of the United States Code,
commencing a case in which the consumer is a debtor.
2. Obligation to resume sending periodic statements. i. With respect
to any portion of the mortgage debt that is not discharged, a servicer
must resume sending periodic statements in compliance with Sec. 1026.41
within a reasonably prompt time after the next payment due date that
follows the earliest of any of three potential outcomes in the
consumer's bankruptcy case: the case is dismissed, the case is closed,
or the consumer receives a discharge under 11 U.S.C. 727, 1141, 1228, or
1328. However, this requirement to resume sending periodic statements
does not require a servicer to communicate with a consumer in a manner
that would be inconsistent with applicable bankruptcy law or a court
order in a bankruptcy case. To the extent permitted by such law or court
order, a servicer may adapt the requirements of Sec. 1026.41 in any
manner believed necessary.
ii. The periodic statement is not required for any portion of the
mortgage debt that is discharged under applicable provisions of the U.S.
Bankruptcy Code. If the consumer's bankruptcy case is revived--for
example if the court reinstates a previously dismissed case, reopens the
case, or revokes a discharge--the servicer is again exempt from the
requirement in Sec. 1026.41.
3. Joint obligors. When two or more consumers are joint obligors
with primary liability on a closed-end consumer credit transaction
secured by a dwelling subject to Sec. 1026.41, the exemption in Sec.
1026.41(e)(5) applies if any of the consumers is in bankruptcy. For
example, if a husband and wife jointly own a home, and the husband files
for bankruptcy, the servicer is exempt from providing periodic
statements to both the husband and the wife.
41(e)(6) Charged-off loans.
1. Change in ownership. If a charged-off mortgage loan is
subsequently purchased, assigned, or transferred, Sec. 1026.39(b)
requires a covered person, as defined in Sec. 1026.39(a)(1), to provide
mortgage transfer disclosures. See Sec. 1026.39.
2. Change in servicing. A servicer may take advantage of the
exemption in Sec. 1026.41(e)(6)(i), subject to the requirements of that
paragraph, and may rely on a prior servicer's provision to the consumer
of a periodic statement pursuant to Sec. 1026.41(e)(6)(i)(B) unless the
servicer provided the consumer a periodic statement pursuant to Sec.
1026.41(a).
Paragraph 41(e)(6)(i)(B).
1. Clearly and conspicuously. Section 1026.41(e)(6)(i)(B) requires
that the periodic statement be clearly and conspicuously labeled
``Suspension of Statements & Notice of Charge Off--Retain This Copy for
Your Records'' and that it clearly and conspicuously provide certain
explanations to the consumer, as applicable, but no minimum type size or
other technical requirements are imposed. The clear and conspicuous
standard generally requires that disclosures be in a reasonably
understandable form and readily noticeable to the consumer. See comment
41(c)-1.
Section 1026.42--Valuation Independence
42(a) Scope
1. Open- and closed-end credit. Section 1026.42 applies to both
open-end and closed-end transactions secured by the consumer's principal
dwelling.
2. Consumer's principal dwelling. Section 1026.42 applies only if
the dwelling that will secure a consumer credit transaction is the
principal dwelling of the consumer who obtains credit.
42(b) Definitions
Paragraph 42(b)(1)
1. Examples of covered persons. ``Covered persons'' include
creditors, mortgage brokers, appraisers, appraisal management companies,
real estate agents, and other persons that provide ``settlement
services'' as defined under the Real Estate Settlement Procedures Act
and implementing regulations. See 12 U.S.C. 2602(3).
2. Examples of persons not covered. The following persons are not
``covered persons'' (unless, of course, they are creditors with respect
to a covered transaction or perform ``settlement services'' in
connection with a covered transaction):
i. The consumer who obtains credit through a covered transaction.
ii. A person secondarily liable for a covered transaction, such as a
guarantor.
iii. A person that resides in or will reside in the consumer's
principal dwelling but will not be liable on the covered transaction,
such as a non-obligor spouse.
Paragraph 42(b)(2)
1. Principal dwelling. The term ``principal dwelling'' has the same
meaning under Sec. 1026.42(b) as under Sec. Sec. 1026.2(a)(24),
1026.15(a),
[[Page 773]]
and 1026.23(a). See comments 2(a)(24)-3, 15(a)-5, and 23(a)-3.
Paragraph 42(b)(3)
1. Valuation. A ``valuation'' is an estimate of value prepared by a
natural person, such as an appraisal report prepared by an appraiser or
an estimate of market value prepared by a real estate agent. The term
includes photographic or other information included with a written
estimate of value. A ``valuation'' includes an estimate provided or
viewed electronically, such as an estimate transmitted via electronic
mail or viewed using a computer.
2. Automated model or system. A ``valuation'' does not include an
estimate of value produced exclusively using an automated model or
system. However, a ``valuation'' includes an estimate of value developed
by a natural person based in part on an estimate of value produced using
an automated model or system.
3. Estimate. An estimate of the value of the consumer's principal
dwelling includes an estimate of a range of values for the consumer's
principal dwelling.
42(c) Valuation for consumer's principal dwelling
42(c)(1) Coercion
1. State law. The terms ``coercion,'' ``extortion,'' ``inducement,''
``bribery,'' ``intimidation,'' ``compensation,'' ``instruction,'' and
``collusion'' have the meanings given to them by applicable state law or
contract. See Sec. 1026.2(b)(3).
2. Purpose. A covered person does not violate Sec. 1026.42(c)(1) if
the person does not engage in an act or practice set forth in Sec.
1026.42(c)(1) for the purpose of causing the value assigned to the
consumer's principal dwelling to be based on a factor other than the
independent judgment of a person that prepares valuations. For example,
requesting that a person that prepares a valuation take certain actions,
such as consider additional, appropriate property information, does not
violate Sec. 1026.42(c), because such request does not supplant the
independent judgment of the person that prepares a valuation. See Sec.
1026.42(c)(3)(i). A covered person also may provide incentives, such as
additional compensation, to a person that prepares valuations or
performs valuation management functions under Sec. 1026.42(c)(1), as
long as the covered person does not cause or attempt to cause the value
assigned to the consumer's principal dwelling to be based on a factor
other than the independent judgment of the person that prepares
valuations.
3. Person that prepares valuations. For purposes of Sec. 1026.42,
the term ``valuation'' includes an estimate of value regardless of
whether it is an appraisal prepared by a state-certified or -licensed
appraiser. See comment 42(b)(3)-1. A person that prepares valuations may
or may not be a state-licensed or state-certified appraiser. Thus a
person violates Sec. 1026.42(c)(1) by engaging in prohibited acts or
practices directed towards any person that prepares or may prepare a
valuation of the consumer's principal dwelling for a covered
transaction. For example, a person violates Sec. 1026.42(c)(1) by
seeking to coerce a real estate agent to assign a value to the
consumer's principal dwelling based on a factor other than the
independent judgment of the real estate agent, in connection with a
covered transaction.
4. Indirect acts or practices. Section 1026.42(c)(1) prohibits both
direct and indirect attempts to cause the value assigned to the
consumer's principal dwelling to be based on a factor other than the
independent judgment of the person that prepares the valuation, through
coercion and certain other acts and practices. For example, a creditor
violates Sec. 1026.42(c)(1) if the creditor attempts to cause the value
an appraiser engaged by an appraisal management company assigns to the
consumer's principal dwelling to be based on a factor other than the
appraiser's independent judgment, by threatening to withhold future
business from a title company affiliated with the appraisal management
company unless the appraiser assigns a value to the dwelling that meets
or exceeds a minimum threshold.
Paragraph 42(c)(1)(i)
1. Applicability of examples. Section 1026.42(c)(1)(i) provides
examples of coercion of a person that prepares valuations. However,
Sec. 1026.42(c)(1)(i) also applies to coercion of a person that
performs valuation management functions or its affiliate. See Sec.
1026.42(c)(1); comment 42(c)(1) 4.
2. Specific value or predetermined threshold. As used in the
examples of actions prohibited under Sec. 1026.42(c)(1), a ``specific
value'' and a ``predetermined threshold'' include a predetermined
minimum, maximum, or range of values. Further, although the examples
assume a covered person's prohibited actions are designed to cause the
value assigned to the consumer's principal dwelling to equal or exceed a
certain amount, the rule applies equally to cases where a covered
person's prohibited actions are designed to cause the value assigned to
the dwelling to be below a certain amount.
42(c)(2) Mischaracterization of Value
42(c)(2)(i) Misrepresentation
1. Opinion of value. Section 1026.42(c)(2)(i) prohibits a person
that performs valuations from misrepresenting the value of the
consumer's principal dwelling in a valuation. Such person misrepresents
the value of the consumer's principal dwelling by assigning a value to
such dwelling that does not reflect
[[Page 774]]
the person's opinion of the value of such dwelling. For example, an
appraiser misrepresents the value of the consumer's principal dwelling
if the appraiser estimates that the value of such dwelling is $250,000
applying the standards required by the Uniform Standards of Professional
Appraisal Standards but assigns a value of $300,000 to such dwelling in
a Uniform Residential Appraisal Report.
42(c)(2)(iii) Inducement of Mischaracterization
1. Inducement. A covered person may not induce a person to
materially misrepresent the value of the consumer's principal dwelling
in a valuation or to falsify or alter a valuation. For example, a loan
originator may not coerce a loan underwriter to alter an appraisal
report to increase the value assigned to the consumer's principal
dwelling.
42(d) Prohibition on Conflicts of Interest
42(d)(1)(i) In General
1. Prohibited interest in the property. A person preparing a
valuation or performing valuation management functions for a covered
transaction has a prohibited interest in the property under paragraph
(d)(1)(i) if the person has any ownership or reasonably foreseeable
ownership interest in the property. For example, a person who seeks a
mortgage to purchase a home has a reasonably foreseeable ownership
interest in the property securing the mortgage, and therefore is not
permitted to prepare the valuation or perform valuation management
functions for that mortgage transaction under paragraph (d)(1)(i).
2. Prohibited interest in the transaction. A person preparing a
valuation or performing valuation management functions has a prohibited
interest in the transaction under paragraph (d)(1)(i) if that person or
an affiliate of that person also serves as a loan officer of the
creditor, mortgage broker, real estate broker, or other settlement
service provider for the transaction and the conditions under paragraph
(d)(4) are not satisfied. A person also has a prohibited interest in the
transaction if the person is compensated or otherwise receives financial
or other benefits based on whether the transaction is consummated. Under
these circumstances, the person is not permitted to prepare the
valuation or perform valuation management functions for that transaction
under paragraph (d)(1)(i).
42(d)(1)(ii) Employees and Affiliates of Creditors; Providers of
Multiple Settlement Services
1. Employees and affiliates of creditors. In general, a creditor may
use employees or affiliates to prepare a valuation or perform valuation
management functions without violating paragraph (d)(1)(i). However,
whether an employee or affiliate has a direct or indirect interest in
the property or transaction that creates a prohibited conflict of
interest under paragraph (d)(1)(i) depends on the facts and
circumstances of a particular case, including the structure of the
employment or affiliate relationship.
2. Providers of multiple settlement services. In general, a person
who prepares a valuation or perform valuation management functions for a
covered transaction may perform another settlement service for the same
transaction, or the person's affiliate may perform another settlement
service, without violating paragraph (d)(1)(i). However, whether the
person has a direct or indirect interest in the property or transaction
that creates a prohibited conflict of interest under paragraph (d)(1)(i)
depends on the facts and circumstances of a particular case.
42(d)(2) Employees and Affiliates of Creditors with Assets of More than
$250 Million for Both of the Past two Calendar Years
1. Safe harbor. A person who a prepares valuation or performs
valuation management functions for a covered transaction and is an
employee or affiliate of the creditor will not be deemed to have an
interest prohibited under paragraph (d)(1)(i) on the basis of the
employment or affiliate relationship with the creditor if the conditions
in paragraph (d)(2) are satisfied. Even if the conditions in paragraph
(d)(2) are satisfied, however, the person may have a prohibited conflict
of interest on other grounds, such as if the person performs a valuation
for a purchase-money mortgage transaction in which the person is the
buyer or seller of the subject property. Thus, in general, in any
covered transaction in which the creditor had assets of more than $250
million for both of the past two years, the creditor may use its own
employee or affiliate to prepare a valuation or perform valuation
management functions for a particular transaction, as long as the
conditions described in paragraph (d)(2) are satisfied. If the
conditions in paragraph (d)(2) are not satisfied, whether a person
preparing a valuation or performing valuation management functions has
violated paragraph (d)(1)(i) depends on all of the facts and
circumstances.
Paragraph 42(d)(2)(ii)
1. Prohibition on reporting to a person who is part of the
creditor's loan production function. To qualify for the safe harbor
under paragraph (d)(2), the person preparing a valuation or performing
valuation management functions may not report to a person who is part of
the creditor's loan production function (as defined in paragraph
(d)(5)(i) and comment
[[Page 775]]
42(d)(5)(i)-1). For example, if a person preparing a valuation is
directly supervised or managed by a loan officer or other person in the
creditor's loan production function, or by a person who is directly
supervised or managed by a loan officer, the condition under paragraph
(d)(2)(ii) is not met.
2. Prohibition on reporting to a person whose compensation is based
on the transaction closing. To qualify for the safe harbor under
paragraph (d)(2), the person preparing a valuation or performing
valuation management functions may not report to a person whose
compensation is based on the closing of the transaction to which the
valuation relates. For example, assume an appraisal management company
performs valuation management functions for a transaction in which the
creditor is an affiliate of the appraisal management company. If the
employee of the appraisal management company who is in charge of
valuation management functions for that transaction is supervised by a
person who earns a commission or bonus based on the percentage of closed
transactions for which the appraisal management company provides
valuation management functions, the condition under paragraph (d)(2)(ii)
is not met.
Paragraph 42(d)(2)(iii)
1. Direct or indirect involvement in selection of person who
prepares a valuation. In any covered transaction, the safe harbor under
paragraph (d)(2) is available if, among other things, no employee,
officer or director in the creditor's loan production function (as
defined in paragraph (d)(4)(ii) and comment 42(d)(4)(ii)-1) is directly
or indirectly involved in selecting, retaining, recommending or
influencing the selection of the person to prepare a valuation or
perform valuation management functions, or to be included in or excluded
from a list or panel of approved persons who prepare valuations or
perform valuation management functions. For example, if the person who
selects the person to prepare the valuation for a covered transaction is
supervised by an employee of the creditor who also supervises loan
officers, the condition in paragraph (d)(2)(iii) is not met.
42(d)(3) Employees and Affiliates of Creditors With Assets of $250
Million or Less for Either of the Past Two Calendar Years
1. Safe harbor. A person who prepares a valuation or performs
valuation management functions for a covered transaction and is an
employee or affiliate of the creditor will not be deemed to have
interest prohibited under paragraph (d)(1)(i) on the basis of the
employment or affiliate relationship with the creditor if the conditions
in paragraph (d)(3) are satisfied. Even if the conditions in paragraph
(d)(3) are satisfied, however, the person may have a prohibited conflict
of interest on other grounds, such as if the person performs a valuation
for a purchase-money mortgage transaction in which the person is the
buyer or seller of the subject property. Thus, in general, in any
covered transaction in which the creditor had assets of $250 million or
less for either of the past two calendar years, the creditor may use its
own employee or affiliate to prepare a valuation or perform valuation
management functions for a particular transaction, as long as the
conditions described in paragraph (d)(3) are satisfied. If the
conditions in paragraph (d)(3) are not satisfied, whether a person
preparing valuations or performing valuation management functions has
violated paragraph (d)(1)(i) depends on all of the facts and
circumstances.
42(d)(4) Providers of Multiple Settlement Services
Paragraph 42(d)(4)(i)
1. Safe harbor in transactions in which the creditor had assets of
more than $250 million for both of the past two calendar years. A person
preparing a valuation or performing valuation management functions in
addition to performing another settlement service for the same
transaction, or whose affiliate performs another settlement service for
the transaction, will not be deemed to have interest prohibited under
paragraph (d)(1)(i) as a result of the person or the person's affiliate
performing another settlement service if the conditions in paragraph
(d)(4)(i) are satisfied. Even if the conditions in paragraph (d)(4)(i)
are satisfied, however, the person may have a prohibited conflict of
interest on other grounds, such as if the person performs a valuation
for a purchase-money mortgage transaction in which the person is the
buyer or seller of the subject property. Thus, in general, in any
covered transaction with a creditor that had assets of more than $250
million for the past two years, a person preparing a valuation or
performing valuation management functions, or its affiliate, may provide
another settlement service for the same transaction, as long as the
conditions described in paragraph (d)(4)(i) are satisfied. If the
conditions in paragraph (d)(4)(i) are not satisfied, whether a person
preparing valuations or performing valuation management functions has
violated paragraph (d)(1)(i) depends on all of the facts and
circumstances.
2. Reporting. The safe harbor under paragraph (d)(4)(i) is available
if the condition specified in paragraph (d)(2)(ii), among others, is
met. Paragraph (d)(2)(ii) prohibits a person preparing a valuation or
performing valuation management functions from reporting to a person
whose compensation is based on the closing of the transaction to
[[Page 776]]
which the valuation relates. For example, assume an appraisal management
company performs both valuation management functions and title services,
including providing title insurance, for the same covered transaction.
If the appraisal management company employee in charge of valuation
management functions for the transaction is supervised by the title
insurance agent in the transaction, whose compensation depends in whole
or in part on whether title insurance is sold at the loan closing, the
condition in paragraph (d)(2)(ii) is not met.
Paragraph 42(d)(4)(ii)
1. Safe harbor in transactions in which the creditor had assets of
$250 million or less for either of the past two calendar years. A person
preparing a valuation or performing valuation management functions in
addition to performing another settlement service for the same
transaction, or whose affiliate performs another settlement service for
the transaction, will not be deemed to have an interest prohibited under
paragraph (d)(1)(i) as a result of the person or the person's affiliate
performing another settlement service if the conditions in paragraph
(d)(4)(ii) are satisfied. Even if the conditions in paragraph (d)(4)(ii)
are satisfied, however, the person may have a prohibited conflict of
interest on other grounds, such as if the person performs a valuation
for a purchase-money mortgage transaction in which the person is the
buyer or seller of the subject property. Thus, in general, in any
covered transaction in which the creditor had assets of $250 million or
less for either of the past two years, a person preparing a valuation or
performing valuation management functions, or its affiliate, may provide
other settlement services for the same transaction, as long as the
conditions described in paragraph (d)(4)(ii) are satisfied. If the
conditions in paragraph (d)(4)(ii) are not satisfied, whether a person
preparing valuations or performing valuation management functions has
violated paragraph (d)(1)(i) depends on all of the facts and
circumstances.
42(d)(5) Definitions
42(d)(5)(i) Loan Production Function
1. Loan production function. One condition of the safe harbors under
paragraphs (d)(2) and (d)(4)(i), involving transactions in which the
creditor had assets of more than $250 million for both of the past two
calendar years, is that the person who prepares a valuation or performs
valuation management functions must report to a person who is not part
of the creditor's ``loan production function.'' A creditor's ``loan
production function'' includes retail sales staff, loan officers, and
any other employee of the creditor with responsibility for taking a loan
application, offering or negotiating loan terms or whose compensation is
based on loan processing volume. A person is not considered part of a
creditor's loan production function solely because part of the person's
compensation includes a general bonus not tied to specific transactions
or a specific percentage of transactions closing, or a profit sharing
plan that benefits all employees. A person solely responsible for credit
administration or risk management is also not considered part of a
creditor's loan production function. Credit administration and risk
management includes, for example, loan underwriting, loan closing
functions (e.g., loan documentation), disbursing funds, collecting
mortgage payments and otherwise servicing the loan (e.g., escrow
management and payment of taxes), monitoring loan performance, and
foreclosure processing.
42(e) When Extension of Credit Prohibited
1. Reasonable diligence. A creditor will be deemed to have acted
with reasonable diligence under Sec. 1026.42(e) if the creditor extends
credit based on a valuation other than the valuation subject to the
restriction in Sec. 1026.42(e). A creditor need not obtain a second
valuation to document that the creditor has acted with reasonable
diligence to determine that the valuation does not materially misstate
or misrepresent the value of the consumer's principal dwelling, however.
For example, assume an appraiser notifies a creditor before consummation
that a loan originator attempted to cause the value assigned to the
consumer's principal dwelling to be based on a factor other than the
appraiser's independent judgment, through coercion. If the creditor
reasonably determines and documents that the appraisal does not
materially misstate or misrepresent the value of the consumer's
principal dwelling, for purposes of Sec. 1026.42(e), the creditor may
extend credit based on the appraisal.
42(f) Customary and Reasonable Compensation
42(f)(1) Requirement to Provide Customary and Reasonable Compensation to
Fee Appraisers
1. Agents of the creditor. Whether a person is an agent of the
creditor is determined by applicable law; however, a ``fee appraiser''
as defined in paragraph (f)(4)(i) is not an agent of the creditor for
purposes of paragraph (f), and therefore is not required to pay other
fee appraisers customary and reasonable compensation under paragraph
(f).
2. Geographic market. For purposes of paragraph (f), the
``geographic market of the property being appraised'' means the
geographic market relevant to compensation levels for appraisal
services. Depending on
[[Page 777]]
the facts and circumstances, the relevant geographic market may be a
state, metropolitan statistical area (MSA), metropolitan division, area
outside of an MSA, county, or other geographic area. For example, assume
that fee appraisers who normally work only in County A generally accept
$400 to appraise an attached single-family property in County A. Assume
also that very few or no fee appraisers who work only in contiguous
County B will accept a rate comparable to $400 to appraise an attached
single-family property in County A. The relevant geographic market for
an attached single-family property in County A may reasonably be defined
as County A. On the other hand, assume that fee appraisers who normally
work only in County A generally accept $400 to appraise an attached
single-family property in County A. Assume also that many fee appraisers
who normally work only in contiguous County B will accept a rate
comparable to $400 to appraise an attached single-family property in
County A. The relevant geographic market for an attached single-family
property in County A may reasonably be defined to include both County A
and County B.
3. Failure to perform contractual obligations. Paragraph (f)(1) does
not prohibit a creditor or its agent from withholding compensation from
a fee appraiser for failing to meet contractual obligations, such as
failing to provide the appraisal report or violating state or Federal
appraisal laws in performing the appraisal.
4. Agreement that fee is ``customary and reasonable.'' A document
signed by a fee appraiser indicating that the appraiser agrees that the
fee paid to the appraiser is ``customary and reasonable'' does not by
itself create a presumption of compliance with Sec. 1026.42(f) or
otherwise satisfy the requirement to pay a fee appraiser at a customary
and reasonable rate.
5. Volume-based discounts. Section 1026.42(f)(1) does not prohibit a
fee appraiser and a creditor (or its agent) from agreeing to
compensation based on transaction volume, so long as the compensation is
customary and reasonable. For example, assume that a fee appraiser
typically receives $300 for appraisals from creditors with whom it does
business; the fee appraiser, however, agrees to reduce the fee to $280
for a particular creditor, in exchange for a minimum number of
assignments from the creditor.
42(f)(2) Presumption of Compliance
1. In general. A creditor and its agent are presumed to comply with
paragraph (f)(1) if the creditor or its agent meets the conditions
specified in paragraph (f)(2) in determining the compensation paid to a
fee appraiser. These conditions are not requirements for compliance but,
if met, create a presumption that the creditor or its agent has complied
with Sec. 1026.42(f)(1). A person may rebut this presumption with
evidence that the amount of compensation paid to a fee appraiser was not
customary and reasonable for reasons unrelated to the conditions in
paragraph (f)(2)(i) or (f)(2)(ii). If a creditor or its agent does not
meet one of the non-required conditions set forth in paragraph (f)(2),
the creditor's and its agent's compliance with paragraph (f)(1) is
determined based on all of the facts and circumstances without a
presumption of either compliance or violation.
Paragraph 42(f)(2)(i)
1. Two-step process for determining customary and reasonable rates.
Paragraph (f)(2)(i) sets forth a two-step process for a creditor or its
agent to determine the amount of compensation that is customary and
reasonable in a given transaction. First, the creditor or its agent must
identify recent rates paid for comparable appraisal services in the
relevant geographic market. Second, once recent rates have been
identified, the creditor or its agent must review the factors listed in
paragraph (f)(2)(i)(A)-(F) and make any appropriate adjustments to the
rates to ensure that the amount of compensation is reasonable.
2. Identifying recent rates. Whether rates may reasonably be
considered ``recent'' depends on the facts and circumstances. Generally,
``recent'' rates would include rates charged within one year of the
creditor's or its agent's reliance on this information to qualify for
the presumption of compliance under paragraph (f)(2). For purposes of
the presumption of compliance under paragraph (f)(2), a creditor or its
agent may gather information about recent rates by using a reasonable
method that provides information about rates for appraisal services in
the geographic market of the relevant property; a creditor or its agent
may, but is not required to, use or perform a fee survey.
3. Accounting for factors. Once recent rates in the relevant
geographic market have been identified, the creditor or its agent must
review the factors listed in paragraph (f)(2)(i)(A)-(F) to determine the
appropriate rate for the current transaction. For example, if the recent
rates identified by the creditor or its agent were solely for appraisal
assignments in which the scope of work required consideration of two
comparable properties, but the current transaction required an appraisal
that considered three comparable properties, the creditor or its agent
might reasonably adjust the rate by an amount that accounts for the
increased scope of work, in addition to making any other appropriate
adjustments based on the remaining factors.
[[Page 778]]
Paragraph 42(f)(2)(i)(A)
1. Type of property. The type of property may include, for example,
detached or attached single-family property, condominium or cooperative
unit, or manufactured home.
Paragraph 42(f)(2)(i)(B)
1. Scope of work. The scope of work may include, for example, the
type of inspection (such as exterior only or both interior and exterior)
or number of comparables required for the appraisal.
Paragraph 42(f)(2)(i)(D)
1. Fee appraiser qualifications. The fee appraiser qualifications
may include, for example, a state license or certification in accordance
with the minimum criteria issued by the Appraisal Qualifications Board
of the Appraisal Foundation, or completion of continuing education
courses on effective appraisal methods and related topics.
2. Membership in professional appraisal organization. Paragraph
42(f)(2)(i)(D) does not override state or Federal laws prohibiting the
exclusion of an appraiser from consideration for an assignment solely by
virtue of membership or lack of membership in any particular appraisal
organization. See, e.g., 12 CFR 225.66(a).
Paragraph 42(f)(2)(i)(E)
1. Fee appraiser experience and professional record. The fee
appraiser's level of experience may include, for example, the fee
appraiser's years of service as a state-licensed or state-certified
appraiser, or years of service appraising properties in a particular
geographical area or of a particular type. The fee appraiser's
professional record may include, for example, whether the fee appraiser
has a past record of suspensions, disqualifications, debarments, or
judgments for waste, fraud, abuse or breach of legal or professional
standards.
Paragraph 42(f)(2)(i)(F)
1. Fee appraiser work quality. The fee appraiser's work quality may
include, for example, the past quality of appraisals performed by the
appraiser based on the written performance and review criteria of the
creditor or agent of the creditor.
Paragraph 42(f)(2)(ii)
1. Restraining trade. Under Sec. 1026.42(f)(2)(ii)(A), creditor or
its agent would not qualify for the presumption of compliance under
paragraph (f)(2) if it engaged in any acts to restrain trade such as
entering into a price fixing or market allocation agreement that affect
the compensation of fee appraisers. For example, if appraisal management
company A and appraisal management company B agreed to compensate fee
appraisers at no more than a specific rate or range of rates, neither
appraisal management company would qualify for the presumption of
compliance. Likewise, if appraisal management company A and appraisal
management company B agreed that appraisal management company A would
limit its business to a certain portion of the relevant geographic
market and appraisal management company B would limit its business to a
different portion of the relevant geographic market, and as a result
each appraisal management company unilaterally set the fees paid to fee
appraisers in their respective portions of the market, neither appraisal
management company would qualify for the presumption of compliance under
paragraph (f)(2).
2. Acts of monopolization. Under Sec. 1026.42(f)(2)(ii)(B), a
creditor or its agent would not qualify for the presumption of
compliance under paragraph (f)(2) if it engaged in any act of
monopolization such as restricting entry into the relevant geographic
market or causing any person to leave the relevant geographic market,
resulting in anticompetitive effects that affect the compensation paid
to fee appraisers. For example, if only one appraisal management company
exists or is predominant in a particular market area, that appraisal
management company might not qualify for the presumption of compliance
if it entered into exclusivity agreements with all creditors in the
market or all fee appraisers in the market, such that other appraisal
management companies had to leave or could not enter the market. Whether
this behavior would be considered an anticompetitive act that affects
the compensation paid to fee appraisers depends on all of the facts and
circumstances, including applicable law.
42(f)(3) Alternative Presumption of Compliance
1. In general. A creditor and its agent are presumed to comply with
paragraph (f)(1) if the creditor or its agent determine the compensation
paid to a fee appraiser based on information about customary and
reasonable rates that satisfies the conditions in paragraph (f)(3) for
that information. Reliance on information satisfying the conditions in
paragraph (f)(3) is not a requirement for compliance with paragraph
(f)(1), but creates a presumption that the creditor or its agent has
complied. A person may rebut this presumption with evidence that the
rate of compensation paid to a fee appraiser by the creditor or its
agent is not customary and reasonable based on facts or information
other than third-party information satisfying the conditions of this
paragraph (f)(3). If a creditor or its agent does not rely on
information that meets the conditions in paragraph (f)(3), the
creditor's and its agent's compliance
[[Page 779]]
with paragraph (f)(1) is determined based on all of the facts and
circumstances without a presumption of either compliance or violation.
2. Geographic market. The meaning of ``geographic market'' for
purposes of paragraph (f) is explained in comment (f)(1)-1.
3. Recent rates. Whether rates may reasonably be considered
``recent'' depends on the facts and circumstances. Generally, ``recent''
rates would include rates charged within one year of the creditor's or
its agent's reliance on this information to qualify for the presumption
of compliance under paragraph (f)(3).
42(f)(4) Definitions
42(f)(4)(i) Fee Appraiser
1. Organization. The term ``organization'' in paragraph
42(f)(4)(i)(B) includes a corporation, partnership, proprietorship,
association, cooperative, or other business entity and does not include
a natural person.
42(g) Mandatory Reporting
42(g)(1) Reporting Required
1. Reasonable basis. A person reasonably believes that an appraiser
has materially failed to comply with the Uniform Standards of
Professional Appraisal Practice (USPAP) established by the Appraisal
Standards Board of the Appraisal Foundation (as defined in 12 U.S.C.
3350(9)) or ethical or professional requirements for appraisers under
applicable state or Federal statutes or regulations if the person
possesses knowledge or information that would lead a reasonable person
in the same circumstances to conclude that the appraiser has materially
failed to comply with USPAP or such statutory or regulatory
requirements.
2. Material failure to comply. For purposes of Sec. 1026.42(g)(1),
a material failure to comply is one that is likely to affect the value
assigned to the consumer's principal dwelling. The following are
examples of a material failure to comply with USPAP or ethical or
professional requirements:
i. Mischaracterizing the value of the consumer's principal dwelling
in violation of Sec. 1026.42(c)(2)(i).
ii. Performing an assignment in a grossly negligent manner, in
violation of a rule under USPAP.
iii. Accepting an appraisal assignment on the condition that the
appraiser will report a value equal to or greater than the purchase
price for the consumer's principal dwelling, in violation of a rule
under USPAP.
3. Other matters. Section 1026.42(g)(1) does not require reporting
of a matter that is not material under Sec. 1026.42(g)(1), for example:
i. An appraiser's disclosure of confidential information in
violation of applicable state law.
ii. An appraiser's failure to maintain errors and omissions
insurance in violation of applicable state law.
4. Examples of covered persons. ``Covered persons'' include
creditors, mortgage brokers, appraisers, appraisal management companies,
real estate agents, and other persons that provide ``settlement
services'' as defined in section 3(3) of the Real Estate Settlement
Procedures Act (12 U.S.C. 2602(3)) and the implementing regulation at 12
CFR 1024.2. See Sec. 1026.42(b)(1).
5. Examples of persons not covered. The following persons are not
``covered persons'' (unless, of course, they are creditors with respect
to a covered transaction or perform ``settlement services'' in
connection with a covered transaction):
i. The consumer who obtains credit through a covered transaction.
ii. A person secondarily liable for a covered transaction, such as a
guarantor.
iii. A person that resides in or will reside in the consumer's
principal dwelling but will not be liable on the covered transaction,
such as a non-obligor spouse.
6. Appraiser. For purposes of Sec. 1026.42(g)(1), an ``appraiser''
is a natural person who provides opinions of the value of dwellings and
is required to be licensed or certified under the laws of the state in
which the consumer's principal dwelling is located or otherwise is
subject to the jurisdiction of the appraiser certifying and licensing
agency for that state. See 12 U.S.C. 3350(1).
Section 1026.43--Minimum Standards for Transactions Secured by a
Dwelling
1. Record retention. See Sec. 1026.25(c)(3) and comments 25(c)(3)-1
and -2 for guidance on the required retention of records as evidence of
compliance with Sec. 1026.43.
43(a) Scope.
1. Consumer credit. In general, Sec. 1026.43 applies to consumer
credit transactions secured by a dwelling, but certain dwelling-secured
consumer credit transactions are exempt or partially exempt from
coverage under Sec. 1026.43(a)(1) through (3). (See Sec. 1026.2(a)(12)
for the definition of ``consumer credit.'') Section 1026.43 does not
apply to an extension of credit primarily for a business, commercial, or
agricultural purpose, even if it is secured by a dwelling. See Sec.
1026.3 and associated commentary for guidance in determining the primary
purpose of an extension of credit. In addition, Sec. 1026.43 does not
apply to any change to an existing loan that is not treated as a
refinancing under Sec. 1026.20(a).
2. Real property. ``Dwelling'' means a residential structure that
contains one to four units, whether or not the structure is attached to
real property. See Sec. 1026.2(a)(19). For purposes of Sec. 1026.43,
the term ``dwelling''
[[Page 780]]
includes any real property to which the residential structure is
attached that also secures the covered transaction. For example, for
purposes of Sec. 1026.43(c)(2)(i), the value of the dwelling that
secures the covered transaction includes the value of any real property
to which the residential structure is attached that also secures the
covered transaction.
Paragraph 43(a)(3).
1. Renewable temporary or ``bridge'' loan. Under Sec.
1026.43(a)(3)(ii), a temporary or ``bridge'' loan with a term of 12
months or less is exempt from Sec. 1026.43(c) through (f). Examples of
such a loan are a loan to finance the purchase of a new dwelling where
the consumer plans to sell a current dwelling within 12 months and a
loan to finance the initial construction of a dwelling. Where a
temporary or ``bridge loan'' is renewable, the loan term does not
include any additional period of time that could result from a renewal
provision provided that any renewal possible under the loan contract is
for one year or less. For example, if a construction loan has an initial
loan term of 12 months but is renewable for another 12-month loan term,
the loan is exempt from Sec. 1026.43(c) through (f) because the initial
loan term is 12 months.
2. Construction phase of a construction-to-permanent loan. Under
Sec. 1026.43(a)(3)(iii), a construction phase of 12 months or less of a
construction-to-permanent loan is exempt from Sec. 1026.43(c) through
(f). A construction-to-permanent loan is a potentially multiple-advance
loan to finance the construction, rehabilitation, or improvement of a
dwelling that may be permanently financed by the same creditor. For such
a loan, the construction phase and the permanent phase may be treated as
separate transactions for the purpose of compliance with Sec.
1026.43(c) through (f), and the construction phase of the loan is exempt
from Sec. 1026.43(c) through (f), provided the initial term is 12
months or less. See Sec. 1026.17(c)(6)(ii), allowing similar treatment
for disclosures. Where the construction phase of a construction-to-
permanent loan is renewable for a period of one year or less, the term
of that construction phase does not include any additional period of
time that could result from a renewal provision. For example, if the
construction phase of a construction-to-permanent loan has an initial
term of 12 months but is renewable for another 12-month term before
permanent financing begins, the construction phase is exempt from Sec.
1026.43(c) through (f) because the initial term is 12 months. Any
renewal of one year or less also qualifies for the exemption. The
permanent phase of the loan is treated as a separate transaction and is
not exempt under Sec. 1026.43(a)(3)(iii). It may be a qualified
mortgage if it satisfies the appropriate requirements.
Paragraph 43(a)(3)(iv).
1. General. The requirements of Sec. 1026.43(c) through (f) do not
apply to an extension of credit made pursuant to a program administered
by a Housing Finance Agency, as defined under 24 CFR 266.5. Under the
exemption, the requirements of Sec. 1026.43(c) through (f) do not apply
to extensions of credit made by housing finance agencies and extensions
of credit made by intermediaries (e.g., private creditors) pursuant to a
program administered by a housing finance agency. For example, if a
creditor is extending credit, including a subordinate-lien covered
transaction, that will be made pursuant to a program administered by a
housing finance agency, the creditor is exempt from the requirements of
Sec. 1026.43(c) through (f). Similarly, the creditor is exempt from the
requirements of Sec. 1026.43(c) through (f) regardless of whether the
program administered by a housing finance agency is funded by Federal,
State, or other sources.
Paragraph 43(a)(3)(v)(D).
1. General. An extension of credit is exempt from the requirements
of Sec. 1026.43(c) through (f) if the credit is extended by a creditor
described in Sec. 1026.43(a)(3)(v)(D), provided the conditions
specified in that section are satisfied. The conditions specified in
Sec. 1026.43(a)(3)(v)(D)(1) and (2) are determined according to
activity that occurred in the calendar year preceding the calendar year
in which the consumer's application was received. Section
1026.43(a)(3)(v)(D)(2) provides that, during the preceding calendar
year, the creditor must have extended credit only to consumers with
income that did not exceed the limit then in effect for low- and
moderate-income households, as specified in regulations prescribed by
the U.S. Department of Housing and Urban Development pursuant to 24 CFR
570.3. For example, a creditor has satisfied the requirement in Sec.
1026.43(a)(3)(v)(D)(2) if the creditor extended credit only to consumers
with incomes that did not exceed the limit in effect on the dates the
creditor received each consumer's individual application. The condition
specified in Sec. 1026.43(a)(3)(v)(D)(3), which relates to the current
extension of credit, provides that the extension of credit must be to a
consumer with income that does not exceed the limit specified in Sec.
1026.43(a)(3)(v)(D)(2) in effect on the date the creditor received the
consumer's application. For example, assume that a creditor with a tax
exemption ruling under section 501(c)(3) of the Internal Revenue Code of
1986 has satisfied the conditions identified in Sec.
1026.43(a)(3)(v)(D)(1) and (2). If, on May 21, 2014, the creditor in
this example extends credit secured by a dwelling to a consumer whose
application reflected income in excess of the limit identified in Sec.
1026.43(a)(3)(v)(D)(2) in effect on the date
[[Page 781]]
the creditor received that consumer's application, the creditor has not
satisfied the condition in Sec. 1026.43(a)(3)(v)(D)(3) and this
extension of credit is not exempt from the requirements of Sec.
1026.43(c) through (f).
Paragraph 43(a)(3)(vi).
1. General. The requirements of Sec. 1026.43(c) through (f) do not
apply to a mortgage loan modification made in connection with a program
authorized by sections 101 and 109 of the Emergency Economic
Stabilization Act of 2008. If a creditor is underwriting an extension of
credit that is a refinancing, as defined by Sec. 1026.20(a), that will
be made pursuant to a program authorized by sections 101 and 109 of the
Emergency Economic Stabilization Act of 2008, the creditor also need not
comply with Sec. 1026.43(c) through (f). A creditor need not determine
whether the mortgage loan modification is considered a refinancing under
Sec. 1026.20(a) for purposes of determining applicability of Sec.
1026.43; if the transaction is made in connection with these programs,
the requirements of Sec. 1026.43(c) through (f) do not apply. In
addition, if a creditor underwrites a new extension of credit, such as a
subordinate-lien mortgage loan, that will be made pursuant to a program
authorized by sections 101 and 109 of the Emergency Economic
Stabilization Act of 2008, the creditor need not comply with the
requirements of Sec. 1026.43(c) through (f).
Paragraph 43(a)(3)(vii).
1. Requirements of exclusion. Section 1026.43(a)(3)(vii) excludes
certain transactions from the credit extension limit set forth in Sec.
1026.43(a)(3)(v)(D)(1), provided a transaction meets several conditions.
The terms of the credit contract must satisfy the conditions that the
transaction not require the payment of interest under Sec.
1026.43(a)(3)(vii)(C) and that repayment of the amount of credit
extended be forgiven or deferred in accordance with Sec.
1026.43(a)(3)(vii)(D). The other requirements of Sec.
1026.43(a)(3)(vii) need not be reflected in the credit contract, but the
creditor must retain evidence of compliance with those provisions, as
required by Sec. 1026.25(a). In particular, the creditor must have
information reflecting that the total of closing costs imposed in
connection with the transaction is less than 1 percent of the amount of
credit extended and include no charges other than recordation,
application, and housing counseling fees, in accordance with Sec.
1026.43(a)(3)(vii)(E). Unless an itemization of the amount financed
sufficiently details this requirement, the creditor must establish
compliance with Sec. 1026.43(a)(3)(vii)(E) by some other written
document and retain it in accordance with Sec. 1026.25(a).
43(b) Definitions.
43(b)(1) Covered transaction.
1. The definition of covered transaction restates the scope of the
rule as described at Sec. 1026.43(a).
43(b)(3) Fully indexed rate.
1. Discounted and premium adjustable-rate transactions. In some
adjustable-rate transactions, creditors may set an initial interest rate
that is not determined by the index or formula used to make later
interest rate adjustments. In some cases, the initial rate charged to
consumers is lower than the rate would be if it were calculated using
the index or formula that will apply after recast, as determined at
consummation (i.e., a ``discounted rate''). In other cases, the initial
rate may be higher (i.e., a ``premium rate''). For purposes of
determining the fully indexed rate where the initial interest rate is
not determined using the index or formula for subsequent interest rate
adjustments, the creditor must use the interest rate that would have
applied had the creditor used such index or formula plus margin at the
time of consummation. That is, in determining the fully indexed rate,
the creditor must not take into account any discounted or premium rate.
To illustrate, assume an adjustable-rate transaction where the initial
interest rate is not based on an index or formula, or is based on an
index or formula that will not apply after recast, and is set at 5
percent for the first five years. The loan agreement provides that
future interest rate adjustments will be calculated based on a specific
index plus a 3 percent margin. If the value of the index at consummation
is 5 percent, the interest rate that would have been applied at
consummation had the creditor based the initial rate on this index is 8
percent (5 percent plus 3 percent margin). For purposes of Sec.
1026.43(b)(3), the fully indexed rate is 8 percent. For discussion of
payment calculations based on the greater of the fully indexed rate or
premium rate for purposes of the repayment ability determination under
Sec. 1026.43(c), see Sec. 1026.43(c)(5)(i) and comment 43(c)(5)(i)-2.
2. Index or formula value at consummation. The value at consummation
of the index or formula need not be used if the contract provides for a
delay in the implementation of changes in an index value or formula. For
example, if the contract specifies that rate changes are based on the
index value in effect 45 days before the change date, the creditor may
use any index value in effect during the 45 days before consummation in
calculating the fully indexed rate.
3. Interest rate adjustment caps. If the terms of the legal
obligation contain a periodic interest rate adjustment cap that would
prevent the initial rate, at the time of the first adjustment, from
changing to the rate determined using the index or formula value at
consummation (i.e., the fully indexed rate), the creditor must not give
any effect to that rate cap when determining the fully indexed rate.
That is, a creditor must determine the fully indexed rate without taking
into account any periodic interest rate adjustment
[[Page 782]]
cap that may limit how quickly the fully indexed rate may be reached at
any time during the loan term under the terms of the legal obligation.
To illustrate, assume an adjustable-rate mortgage has an initial fixed
rate of 5 percent for the first three years of the loan, after which the
rate will adjust annually to a specified index plus a margin of 3
percent. The loan agreement provides for a 2 percent annual interest
rate adjustment cap, and a lifetime maximum interest rate of 10 percent.
The index value in effect at consummation is 4.5 percent; the fully
indexed rate is 7.5 percent (4.5 percent plus 3 percent), regardless of
the 2 percent annual interest rate adjustment cap that would limit when
the fully indexed rate would take effect under the terms of the legal
obligation.
4. Lifetime maximum interest rate. A creditor may choose, in its
sole discretion, to take into account the lifetime maximum interest rate
provided under the terms of the legal obligation when determining the
fully indexed rate. To illustrate, assume an adjustable-rate mortgage
has an initial fixed rate of 5 percent for the first three years of the
loan, after which the rate will adjust annually to a specified index
plus a margin of 3 percent. The loan agreement provides for a 2 percent
annual interest rate adjustment cap and a lifetime maximum interest rate
of 7 percent. The index value in effect at consummation is 4.5 percent;
under the generally applicable rule, the fully indexed rate is 7.5
percent (4.5 percent plus 3 percent). Nevertheless, the creditor may
choose to use the lifetime maximum interest rate of 7 percent as the
fully indexed rate, rather than 7.5 percent, for purposes of Sec.
1026.43(b)(3). Furthermore, if the creditor chooses to use the lifetime
maximum interest rate and the loan agreement provides a range for the
maximum interest rate, then the creditor complies by using the highest
rate in that range as the maximum interest rate for purposes of Sec.
1026.43(b)(3).
5. Step-rate and fixed-rate mortgages. Where the interest rate
offered under the terms of the legal obligation is not based on, and
does not vary with, an index or formula (i.e., there is no fully indexed
rate), the creditor must use the maximum interest rate that may apply at
any time during the loan term. To illustrate:
i. Assume a step-rate mortgage with an interest rate fixed at 6.5
percent for the first two years of the loan, 7 percent for the next
three years, and 7.5 percent thereafter for the remainder of loan term.
For purposes of this section, the creditor must use 7.5 percent, which
is the maximum rate that may apply during the loan term. ``Step-rate
mortgage'' is defined in Sec. 1026.18(s)(7)(ii).
ii. Assume a fixed-rate mortgage with an interest rate at
consummation of 7 percent that is fixed for the 30-year loan term. For
purposes of this section, the maximum interest rate that may apply
during the loan term is 7 percent, which is the interest rate that is
fixed at consummation. ``Fixed-rate mortgage'' is defined in Sec.
1026.18(s)(7)(iii).
43(b)(4) Higher-priced covered transaction.
1. Average prime offer rate. The average prime offer rate is defined
in Sec. 1026.35(a)(2). For further explanation of the meaning of
``average prime offer rate,'' and additional guidance on determining the
average prime offer rate, see comments 35(a)(2)-1 through -4.
2. Comparable transaction. A higher-priced covered transaction is a
consumer credit transaction that is secured by the consumer's dwelling
with an annual percentage rate that exceeds by the specified amount the
average prime offer rate for a comparable transaction as of the date the
interest rate is set. The published tables of average prime offer rates
indicate how to identify a comparable transaction. See comment 35(a)(2)-
2.
3. Rate set. A transaction's annual percentage rate is compared to
the average prime offer rate as of the date the transaction's interest
rate is set (or ``locked'') before consummation. Sometimes a creditor
sets the interest rate initially and then re-sets it at a different
level before consummation. The creditor should use the last date the
interest rate is set before consummation.
43(b)(5) Loan amount.
1. Disbursement of the loan amount. The definition of ``loan
amount'' requires the creditor to use the entire loan amount as
reflected in the loan contract or promissory note, even though the loan
amount may not be fully disbursed at consummation. For example, assume
the consumer enters into a loan agreement where the consumer is
obligated to repay the creditor $200,000 over 15 years, but only
$100,000 is disbursed at consummation and the remaining $100,000 will be
disbursed during the year following consummation in a series of advances
($25,000 each quarter). For purposes of this section, the creditor must
use the loan amount of $200,000, even though the loan agreement provides
that only $100,000 will be disbursed to the consumer at consummation.
Generally, creditors should rely on Sec. 1026.17(c)(6) and associated
commentary regarding treatment of multiple-advance and construction-to-
permanent loans as single or multiple transactions. See also comment
43(a)(3)-2.
43(b)(6) Loan term.
1. General. The loan term is the period of time it takes to repay
the loan amount in full. For example, a loan with an initial discounted
rate that is fixed for the first two years, and that adjusts
periodically for the next 28 years has a loan term of 30 years, which is
the amortization period on which the periodic amortizing payments are
based.
43(b)(7) Maximum loan amount.
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1. Calculation of maximum loan amount. For purposes of Sec.
1026.43(c)(2)(iii) and (c)(5)(ii)(C), a creditor must determine the
maximum loan amount for a negative amortization loan by using the loan
amount plus any increase in principal balance that can result from
negative amortization based on the terms of the legal obligation. In
determining the maximum loan amount, a creditor must assume that the
consumer makes the minimum periodic payment permitted under the loan
agreement for as long as possible, until the consumer must begin making
fully amortizing payments; and that the interest rate rises as quickly
as possible after consummation under the terms of the legal obligation.
Thus, creditors must assume that the consumer makes the minimum periodic
payment until any negative amortization cap is reached or until the
period permitting minimum periodic payments expires, whichever occurs
first. ``Loan amount'' is defined in Sec. 1026.43(b)(5); ``negative
amortization loan'' is defined in Sec. 1026.18(s)(7)(v).
2. Assumed interest rate. In calculating the maximum loan amount for
an adjustable-rate mortgage that is a negative amortization loan, the
creditor must assume that the interest rate will increase as rapidly as
possible after consummation, taking into account any periodic interest
rate adjustment caps provided in the loan agreement. For an adjustable-
rate mortgage with a lifetime maximum interest rate but no periodic
interest rate adjustment cap, the creditor must assume that the interest
rate increases to the maximum lifetime interest rate at the first
adjustment.
3. Examples. The following are examples of how to determine the
maximum loan amount for a negative amortization loan (all amounts shown
are rounded, and all amounts are calculated using non-rounded values):
i. Adjustable-rate mortgage with negative amortization. A. Assume an
adjustable-rate mortgage in the amount of $200,000 with a 30-year loan
term. The loan agreement provides that the consumer can make minimum
monthly payments that cover only part of the interest accrued each month
until the principal balance reaches 115 percent of its original balance
(i.e., a negative amortization cap of 115 percent) or for the first five
years of the loan (60 monthly payments), whichever occurs first. The
introductory interest rate at consummation is 1.5 percent. One month
after the first day of the first full calendar month following
consummation, the interest rate adjusts and will adjust monthly
thereafter based on the specified index plus a margin of 3.5 percent.
The maximum lifetime interest rate is 10.5 percent; there are no other
periodic interest rate adjustment caps that limit how quickly the
maximum lifetime rate may be reached. The minimum monthly payment for
the first year is based on the initial interest rate of 1.5 percent.
After that, the minimum monthly payment adjusts annually, but may
increase by no more than 7.5 percent over the previous year's payment.
The minimum monthly payment is $690 in the first year, $742 in the
second year, and $797 in the first part of the third year.
B. To determine the maximum loan amount, assume that the initial
interest rate increases to the maximum lifetime interest rate of 10.5
percent at the first adjustment (i.e., the due date of the first
periodic monthly payment) and accrues at that rate until the loan is
recast. Assume the consumer makes the minimum monthly payments as
scheduled, which are capped at 7.5 percent from year-to-year. As a
result, the consumer's minimum monthly payments are less than the
interest accrued each month, resulting in negative amortization (i.e.,
the accrued but unpaid interest is added to the principal balance).
Thus, assuming that the consumer makes the minimum monthly payments for
as long as possible and that the maximum interest rate of 10.5 percent
is reached at the first rate adjustment (i.e., the due date of the first
periodic monthly payment), the negative amortization cap of 115 percent
is reached on the due date of the 27th monthly payment and the loan is
recast. The maximum loan amount as of the due date of the 27th monthly
payment is $229,251.
ii. Fixed-rate, graduated payment mortgage with negative
amortization. A loan in the amount of $200,000 has a 30-year loan term.
The loan agreement provides for a fixed interest rate of 7.5 percent,
and requires the consumer to make minimum monthly payments during the
first year, with payments increasing 12.5 percent over the previous year
every year for four years. The payment schedule provides for payments of
$943 in the first year, $1,061 in the second year, $1,193 in the third
year, $1,343 in the fourth year, and $1,511 for the remaining term of
the loan. During the first three years of the loan, the payments are
less than the interest accrued each month, resulting in negative
amortization. Assuming that the consumer makes the minimum periodic
payments for as long as possible, the maximum loan amount is $207,662,
which is reached at the end of the third year of the loan (on the due
date of the 36th monthly payment). See comment 43(c)(5)(ii)(C)-3
providing examples of how to determine the consumer's repayment ability
for a negative amortization loan.
43(b)(8) Mortgage-related obligations.
1. General. Section 1026.43(b)(8) defines mortgage-related
obligations, which must be considered in determining a consumer's
ability to repay pursuant to Sec. 1026.43(c). Section 1026.43(b)(8)
includes, in the evaluation of mortgage-related obligations, fees and
special assessments owed to a condominium, cooperative, or homeowners
association. Section 1026.43(b)(8) includes ground rent and
[[Page 784]]
leasehold payments in the definition of mortgage-related obligations.
See commentary to Sec. 1026.43(c)(2)(v) regarding the requirement to
take into account any mortgage-related obligations for purposes of
determining a consumer's ability to repay.
2. Property taxes. Section 1026.43(b)(8) includes property taxes in
the evaluation of mortgage-related obligations. Obligations that are
related to the ownership or use of real property and paid to a taxing
authority, whether on a monthly, quarterly, annual, or other basis, are
property taxes for purposes of Sec. 1026.43(b)(8). Section
1026.43(b)(8) includes obligations that are equivalent to property
taxes, even if such obligations are not denominated as ``taxes.'' For
example, governments may establish or allow independent districts with
the authority to impose levies on properties within the district to fund
a special purpose, such as a local development bond district, water
district, or other public purpose. These levies may be referred to as
taxes, assessments, surcharges, or by some other name. For purposes of
Sec. 1026.43(b)(8), these are property taxes and are included in the
determination of mortgage-related obligations.
3. Insurance premiums and similar charges. Section 1026.43(b)(8)
includes in the evaluation of mortgage-related obligations premiums and
similar charges identified in Sec. 1026.4(b)(5), (7), (8), or (10) that
are required by the creditor. This includes all premiums or charges
related to coverage protecting the creditor against a consumer's
default, credit loss, collateral loss, or similar loss, if the consumer
is required to pay the premium or charge. For example, if Federal law
requires flood insurance to be obtained in connection with the mortgage
loan, the flood insurance premium is a mortgage-related obligation for
purposes of Sec. 1026.43(b)(8). Section 1026.43(b)(8) does not include
premiums or similar charges identified in Sec. 1026.4(b)(5), (7), (8),
or (10) that are not required by the creditor and that the consumer
purchases voluntarily. For example:
i. If a creditor does not require earthquake insurance to be
obtained in connection with the mortgage loan, but the consumer
voluntarily chooses to purchase such insurance, the earthquake insurance
premium is not a mortgage-related obligation for purposes of Sec.
1026.43(b)(8).
ii. If a creditor requires a minimum amount of coverage for
homeowners' insurance and the consumer voluntarily chooses to purchase a
more comprehensive amount of coverage, the portion of the premium
allocated to the required minimum coverage is a mortgage-related
obligation for purposes of Sec. 1026.43(b)(8), while the portion of the
premium allocated to the more comprehensive coverage voluntarily
purchased by the consumer is not a mortgage-related obligation for
purposes of Sec. 1026.43(b)(8).
iii. If the consumer purchases insurance or similar coverage not
required by the creditor at consummation without having requested the
specific non-required insurance or similar coverage and without having
agreed to the premium or charge for the specific non-required insurance
or similar coverage prior to consummation, the premium or charge is not
voluntary for purposes of Sec. 1026.43(b)(8) and is a mortgage-related
obligation.
4. Mortgage insurance, guarantee, or similar charges. Section
1026.43(b)(8) includes in the evaluation of mortgage-related obligations
premiums or charges protecting the creditor against the consumer's
default or other credit loss. This includes all premiums or similar
charges, whether denominated as mortgage insurance, guarantee, or
otherwise, as determined according to applicable State or Federal law.
For example, monthly ``private mortgage insurance'' payments paid to a
non-governmental entity, annual ``guarantee fee'' payments required by a
Federal housing program, and a quarterly ``mortgage insurance'' payment
paid to a State agency administering a housing program are all mortgage-
related obligations for purposes of Sec. 1026.43(b)(8). Section
1026.43(b)(8) includes these charges in the definition of mortgage-
related obligations if the creditor requires the consumer to pay them,
even if the consumer is not legally obligated to pay the charges under
the terms of the insurance program. For example, if a mortgage insurance
program obligates the creditor to make recurring mortgage insurance
payments, and the creditor requires the consumer to reimburse the
creditor for such recurring payments, the consumer's payments are
mortgage-related obligations for purposes of Sec. 1026.43(b)(8).
However, if a mortgage insurance program obligates the creditor to make
recurring mortgage insurance payments, and the creditor does not require
the consumer to reimburse the creditor for the cost of the mortgage
insurance payments, the recurring mortgage insurance payments are not
mortgage-related obligations for purposes of Sec. 1026.43(b)(8).
5. Relation to the finance charge. Section 1026.43(b)(8) includes in
the evaluation of mortgage-related obligations premiums and similar
charges identified in Sec. 1026.4(b)(5), (7), (8), or (10) that are
required by the creditor. These premiums and similar charges are
mortgage-related obligations regardless of whether the premium or
similar charge is excluded from the finance charge pursuant to Sec.
1026.4(d). For example, a premium for insurance against loss or damage
to the property written in connection with the credit transaction is a
premium identified in Sec. 1026.4(b)(8). If this premium is required by
the creditor, the premium is a mortgage-related obligation pursuant to
Sec. 1026.43(b)(8),
[[Page 785]]
regardless of whether the premium is excluded from the finance charge
pursuant to Sec. 1026.4(d)(2).
43(b)(11) Recast.
1. Date of the recast. The term ``recast'' means, for an adjustable-
rate mortgage, the expiration of the period during which payments based
on the introductory fixed rate are permitted; for an interest-only loan,
the expiration of the period during which the interest-only payments are
permitted; and, for a negative amortization loan, the expiration of the
period during which negatively amortizing payments are permitted. For
adjustable-rate mortgages, interest-only loans, and negative
amortization loans, the date on which the recast is considered to occur
is the due date of the last monthly payment based on the introductory
fixed rate, the interest-only payment, or the negatively amortizing
payment, respectively. To illustrate: A loan in an amount of $200,000
has a 30-year loan term. The loan agreement provides for a fixed
interest rate and permits interest-only payments for the first five
years of the loan (60 months). The loan is recast on the due date of the
60th monthly payment. Thus, the term of the loan remaining as of the
date the loan is recast is 25 years (300 months).
43(b)(12) Simultaneous loan.
1. General. Section 1026.43(b)(12) defines a simultaneous loan as
another covered transaction or a home equity line of credit (HELOC)
subject to Sec. 1026.40 that will be secured by the same dwelling and
made to the same consumer at or before consummation of the covered
transaction, whether it is made by the same creditor or a third-party
creditor. (As with all of Sec. 1026.43, the term ``dwelling'' includes
any real property attached to a dwelling.) For example, assume a
consumer will enter into a legal obligation that is a covered
transaction with Creditor A. Immediately prior to consummation of the
covered transaction with Creditor A, the consumer opens a HELOC that is
secured by the same dwelling with Creditor B. For purposes of this
section, the loan extended by Creditor B is a simultaneous loan. See
commentary to Sec. 1026.43(c)(2)(iv) and (c)(6), discussing the
requirement to consider the consumer's payment obligation on any
simultaneous loan for purposes of determining the consumer's ability to
repay the covered transaction subject to this section.
2. Same consumer. For purposes of the definition of ``simultaneous
loan,'' the term ``same consumer'' includes any consumer, as that term
is defined in Sec. 1026.2(a)(11), that enters into a loan that is a
covered transaction and also enters into another loan (e.g., second-lien
covered transaction or HELOC) secured by the same dwelling. Where two or
more consumers enter into a legal obligation that is a covered
transaction, but only one of them enters into another loan secured by
the same dwelling, the ``same consumer'' includes the person that has
entered into both legal obligations. For example, assume Consumer A and
Consumer B will both enter into a legal obligation that is a covered
transaction with a creditor. Immediately prior to consummation of the
covered transaction, Consumer B opens a HELOC that is secured by the
same dwelling with the same creditor; Consumer A is not a signatory to
the HELOC. For purposes of this definition, Consumer B is the same
consumer and the creditor must include the HELOC as a simultaneous loan.
43(b)(13) Third-party record.
1. Electronic records. Third-party records include records
transmitted electronically. For example, to verify a consumer's credit
history using third-party records as required by Sec.
1026.43(c)(2)(viii) and 1026.43(c)(3), a creditor may use a credit
report prepared by a consumer reporting agency that is transmitted
electronically.
2. Forms. A record prepared by a third party includes a form a
creditor gives to a third party to provide information, even if the
creditor completes parts of the form unrelated to the information
sought. For example, if a creditor gives a consumer's employer a form
for verifying the consumer's employment status and income, the creditor
may fill in the creditor's name and other portions of the form unrelated
to the consumer's employment status or income.
Paragraph 43(b)(13)(i).
1. Reviewed record. Under Sec. 1026.43(b)(13)(i), a third-party
record includes a document or other record prepared by the consumer, the
creditor, the mortgage broker, or the creditor's or mortgage broker's
agent, if the record is reviewed by an appropriate third party. For
example, a profit-and-loss statement prepared by a self-employed
consumer and reviewed by a third-party accountant is a third-party
record under Sec. 1026.43(b)(13)(i). In contrast, a profit-and-loss
statement prepared by a self-employed consumer and reviewed by the
consumer's non-accountant spouse is not a third-party record under Sec.
1026.43(b)(13)(i).
Paragraph 43(b)(13)(iii).
1. Creditor's records. Section 1026.43(b)(13)(iii) provides that a
third-party record includes a record the creditor maintains for an
account of the consumer held by the creditor. Examples of such accounts
include checking accounts, savings accounts, and retirement accounts.
Examples of such accounts also include accounts related to a consumer's
outstanding obligations to a creditor. For example, a third-party record
includes the creditor's records for a first-lien mortgage to a consumer
who applies for a subordinate-lien home equity loan.
43(c) Repayment ability.
43(c)(1) General requirement.
1. Reasonable and good faith determination. i. General. Creditors
generally are required by
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Sec. 1026.43(c)(1) to make reasonable and good faith determinations of
consumers' ability to repay. Section 1026.43(c) and the accompanying
commentary describe certain requirements for making this ability-to-
repay determination, but do not provide comprehensive underwriting
standards to which creditors must adhere. For example, the rule and
commentary do not specify how much income is needed to support a
particular level of debt or how credit history should be weighed against
other factors. So long as creditors consider the factors set forth in
Sec. 1026.43(c)(2) according to the requirements of Sec. 1026.43(c),
creditors are permitted to develop their own underwriting standards and
make changes to those standards over time in response to empirical
information and changing economic and other conditions. Whether a
particular ability-to-repay determination is reasonable and in good
faith will depend not only on the underwriting standards adopted by the
creditor, but on the facts and circumstances of an individual extension
of credit and how a creditor's underwriting standards were applied to
those facts and circumstances. A consumer's statement or attestation
that the consumer has the ability to repay the loan is not indicative of
whether the creditor's determination was reasonable and in good faith.
ii. Considerations. A. The following may be evidence that a
creditor's ability-to-repay determination was reasonable and in good
faith:
1. The consumer demonstrated actual ability to repay the loan by
making timely payments, without modification or accommodation, for a
significant period of time after consummation or, for an adjustable-
rate, interest-only, or negative-amortization mortgage, for a
significant period of time after recast;
2. The creditor used underwriting standards that have historically
resulted in comparatively low rates of delinquency and default during
adverse economic conditions; or
3. The creditor used underwriting standards based on empirically
derived, demonstrably and statistically sound models.
B. In contrast, the following may be evidence that a creditor's
ability-to-repay determination was not reasonable or in good faith:
1. The consumer defaulted on the loan a short time after
consummation or, for an adjustable-rate, interest-only, or negative-
amortization mortgage, a short time after recast;
2. The creditor used underwriting standards that have historically
resulted in comparatively high levels of delinquency and default during
adverse economic conditions;
3. The creditor applied underwriting standards inconsistently or
used underwriting standards different from those used for similar loans
without reasonable justification;
4. The creditor disregarded evidence that the underwriting standards
it used are not effective at determining consumers' repayment ability;
5. The creditor disregarded evidence that the consumer may have
insufficient residual income to cover other recurring obligations and
expenses, taking into account the consumer's assets other than the
property securing the loan, after paying his or her monthly payments for
the covered transaction, any simultaneous loans, mortgage-related
obligations, and any current debt obligations; or
6. The creditor disregarded evidence that the consumer would have
the ability to repay only if the consumer subsequently refinanced the
loan or sold the property securing the loan.
C. All of the considerations listed in paragraphs (A) and (B) above
may be relevant to whether a creditor's ability-to-repay determination
was reasonable and in good faith. However, these considerations are not
requirements or prohibitions with which creditors must comply, nor are
they elements of a claim that a consumer must prove to establish a
violation of the ability-to-repay requirements. For example, creditors
are not required to validate their underwriting criteria using
mathematical models. These considerations also are not absolute in their
application; instead they exist on a continuum and may apply to varying
degrees. For example, the longer a consumer successfully makes timely
payments after consummation or recast the less likely it is that the
creditor's determination of ability to repay was unreasonable or not in
good faith. Finally, each of these considerations must be viewed in the
context of all facts and circumstances relevant to a particular
extension of credit. For example, in some cases inconsistent application
of underwriting standards may indicate that a creditor is manipulating
those standards to approve a loan despite a consumer's inability to
repay. The creditor's ability-to-repay determination therefore may be
unreasonable or in bad faith. However, in other cases inconsistently
applied underwriting standards may be the result of, for example,
inadequate training and may nonetheless yield a reasonable and good
faith ability-to-repay determination in a particular case. Similarly,
although an early payment default on a mortgage will often be persuasive
evidence that the creditor did not have a reasonable and good faith
belief in the consumer's ability to repay (and such evidence may even be
sufficient to establish a prima facie case of an ability-to-repay
violation), a particular ability-to-repay determination may be
reasonable and in good faith even though the consumer defaulted shortly
after consummation if, for example,
[[Page 787]]
the consumer experienced a sudden and unexpected loss of income. In
contrast, an ability-to-repay determination may be unreasonable or not
in good faith even though the consumer made timely payments for a
significant period of time if, for example, the consumer was able to
make those payments only by foregoing necessities such as food and heat.
2. Repayment ability at consummation. Section 1026.43(c)(1) requires
the creditor to determine, at or before the time the loan is
consummated, that a consumer will have a reasonable ability to repay the
loan. A change in the consumer's circumstances after consummation (for
example, a significant reduction in income due to a job loss or a
significant obligation arising from a major medical expense) that cannot
be reasonably anticipated from the consumer's application or the records
used to determine repayment ability is not relevant to determining a
creditor's compliance with the rule. However, if the application or
records considered at or before consummation indicate there will be a
change in a consumer's repayment ability after consummation (for
example, if a consumer's application states that the consumer plans to
retire within 12 months without obtaining new employment or that the
consumer will transition from full-time to part-time employment), the
creditor must consider that information under the rule.
3. Interaction with Regulation B. Section 1026.43(c)(1) does not
require or permit the creditor to make inquiries or verifications
prohibited by Regulation B, 12 CFR part 1002.
43(c)(2) Basis for determination.
1. General. Section 1026.43(c)(2) sets forth factors creditors must
consider when making the ability-to-repay determination required under
Sec. 1026.43(c)(1) and the accompanying commentary provides guidance
regarding these factors. Creditors must conform to these requirements
and may rely on guidance provided in the commentary. However, Sec.
1026.43(c) and the accompanying commentary do not provide comprehensive
guidance on definitions and other technical underwriting criteria
necessary for evaluating these factors in practice. So long as a
creditor complies with the provisions of Sec. 1026.43(c), the creditor
is permitted to use its own definitions and other technical underwriting
criteria. A creditor may, but is not required to, look to guidance
issued by entities such as the Federal Housing Administration, the U.S.
Department of Veterans Affairs, the U.S. Department of Agriculture, or
Fannie Mae or Freddie Mac while operating under the conservatorship of
the Federal Housing Finance Agency. For example, a creditor may refer to
such guidance to classify particular inflows, obligations, or property
as ``income,'' ``debt,'' or ``assets.'' Similarly, a creditor may refer
to such guidance to determine what information to use when evaluating
the income of a self-employed or seasonally employed consumer or what
information to use when evaluating the credit history of a consumer who
has obtained few or no extensions of traditional ``credit'' as defined
in Sec. 1026.2(a)(14). These examples are illustrative, and creditors
are not required to conform to guidance issued by these or other such
entities. However, as required by Sec. 1026.43(c)(1), a creditor must
ensure that its underwriting criteria, as applied to the facts and
circumstances of a particular extension of credit, result in a
reasonable, good faith determination of a consumer's ability to repay.
For example, a definition used in underwriting that is reasonable in
isolation may lead to ability-to-repay determinations that are
unreasonable or not in good faith when considered in the context of a
creditor's underwriting standards or when adopted or applied in bad
faith. Similarly, an ability-to-repay determination is not unreasonable
or in bad faith merely because the underwriting criteria used included a
definition that was by itself unreasonable.
Paragraph 43(c)(2)(i).
1. Income or assets generally. A creditor may base its determination
of repayment ability on current or reasonably expected income from
employment or other sources, assets other than the dwelling that secures
the covered transaction, or both. The creditor may consider any type of
current or reasonably expected income, including, for example, the
following: salary; wages; self-employment income; military or reserve
duty income; bonus pay; tips; commissions; interest payments; dividends;
retirement benefits or entitlements; rental income; royalty payments;
trust income; public assistance payments; and alimony, child support,
and separate maintenance payments. The creditor may consider any of the
consumer's assets, other than the value of the dwelling that secures the
covered transaction, including, for example, the following: funds in a
savings or checking account, amounts vested in a retirement account,
stocks, bonds, certificates of deposit, and amounts available to the
consumer from a trust fund. (As stated in Sec. 1026.43(a), the value of
the dwelling includes the value of the real property to which the
residential structure is attached, if the real property also secures the
covered transaction.)
2. Income or assets relied on. A creditor need consider only the
income or assets necessary to support a determination that the consumer
can repay the covered transaction. For example, if a consumer's loan
application states that the consumer earns an annual salary from both a
full-time job and a part-time job and the creditor reasonably determines
that the consumer's income from the full-time job is sufficient to repay
the
[[Page 788]]
loan, the creditor need not consider the consumer's income from the
part-time job. Further, a creditor need verify only the income (or
assets) relied on to determine the consumer's repayment ability. See
comment 43(c)(4)-1.
3. Reasonably expected income. If a creditor relies on expected
income in excess of the consumer's income, either in addition to or
instead of current income, the expectation that the income will be
available for repayment must be reasonable and verified with third-party
records that provide reasonably reliable evidence of the consumer's
expected income. For example, if the creditor relies on an expectation
that a consumer will receive an annual bonus, the creditor may verify
the basis for that expectation with records that show the consumer's
past annual bonuses, and the expected bonus must bear a reasonable
relationship to the past bonuses. Similarly, if the creditor relies on a
consumer's expected salary from a job the consumer has accepted and will
begin after receiving an educational degree, the creditor may verify
that expectation with a written statement from an employer indicating
that the consumer will be employed upon graduation at a specified
salary.
4. Seasonal or irregular income. A creditor reasonably may determine
that a consumer can make periodic loan payments even if the consumer's
income, such as self-employment income, is seasonal or irregular. For
example, assume a consumer receives seasonal income from the sale of
crops or from agricultural employment. Each year, the consumer's income
arrives during only a few months. If the creditor determines that the
consumer's annual income divided equally across 12 months is sufficient
for the consumer to make monthly loan payments, the creditor reasonably
may determine that the consumer can repay the loan, even though the
consumer may not receive income during certain months.
5. Multiple applicants. When two or more consumers apply for an
extension of credit as joint obligors with primary liability on an
obligation, Sec. 1026.43(c)(2)(i) does not require the creditor to
consider income or assets that are not needed to support the creditor's
repayment ability determination. If the income or assets of one
applicant are sufficient to support the creditor's repayment ability
determination, the creditor is not required to consider the income or
assets of the other applicant. For example, if a husband and wife
jointly apply for a loan and the creditor reasonably determines that the
wife's income is sufficient to repay the loan, the creditor is not
required to consider the husband's income.
Paragraph 43(c)(2)(ii).
1. Employment status and income. Employment status need not be full-
time, and employment need not occur at regular intervals. If, in
determining the consumer's repayment ability, the creditor relies on
income from the consumer's employment, then that employment may be, for
example, full-time, part-time, seasonal, irregular, military, or self-
employment, so long as the creditor considers those characteristics of
the employment. Under Sec. 1026.43(c)(2)(ii), a creditor must verify a
consumer's current employment status only if the creditor relies on the
consumer's employment income in determining the consumer's repayment
ability. For example, if a creditor relies wholly on a consumer's
investment income to determine repayment ability, the creditor need not
verify or document employment status. See comments 43(c)(2)(i)-5 and
43(c)(4)-2 for guidance on which income to consider when multiple
consumers apply jointly for a loan.
Paragraph 43(c)(2)(iii).
1. General. For purposes of the repayment ability determination
required under Sec. 1026.43(c)(2), a creditor must consider the
consumer's monthly payment on a covered transaction that is calculated
as required under Sec. 1026.43(c)(5).
Paragraph 43(c)(2)(iv).
1. Home equity lines of credit. For purposes of Sec.
1026.43(c)(2)(iv), a simultaneous loan includes any covered transaction
or home equity line of credit (HELOC) subject to Sec. 1026.40 that will
be made to the same consumer at or before consummation of the covered
transaction and secured by the same dwelling that secures the covered
transaction. A HELOC that is a simultaneous loan that the creditor knows
or has reason to know about must be considered as a mortgage obligation
in determining a consumer's ability to repay the covered transaction
even though the HELOC is not a covered transaction subject to Sec.
1026.43. See Sec. 1026.43(a) discussing the scope of this section.
``Simultaneous loan'' is defined in Sec. 1026.43(b)(12). For further
explanation of ``same consumer,'' see comment 43(b)(12)-2.
2. Knows or has reason to know. In determining a consumer's
repayment ability for a covered transaction under Sec. 1026.43(c)(2), a
creditor must consider the consumer's payment obligation on any
simultaneous loan that the creditor knows or has reason to know will be
or has been made at or before consummation of the covered transaction.
For example, where a covered transaction is a home purchase loan, the
creditor must consider the consumer's periodic payment obligation for
any ``piggyback'' second-lien loan that the creditor knows or has reason
to
[[Page 789]]
know will be used to finance part of the consumer's down payment. The
creditor complies with this requirement where, for example, the creditor
follows policies and procedures that are designed to determine whether
at or before consummation the same consumer has applied for another
credit transaction secured by the same dwelling. To illustrate, assume a
creditor receives an application for a home purchase loan where the
requested loan amount is less than the home purchase price. The
creditor's policies and procedures must require the consumer to state
the source of the down payment and provide verification. If the creditor
determines the source of the down payment is another extension of credit
that will be made to the same consumer at or before consummation and
secured by the same dwelling, the creditor knows or has reason to know
of the simultaneous loan and must consider the simultaneous loan.
Alternatively, if the creditor has information that suggests the down
payment source is the consumer's existing assets, the creditor would be
under no further obligation to determine whether a simultaneous loan
will be extended at or before consummation of the covered transaction.
The creditor is not obligated to investigate beyond reasonable
underwriting policies and procedures to determine whether a simultaneous
loan will be extended at or before consummation of the covered
transaction.
3. Scope of timing. For purposes of Sec. 1026.43(c)(2)(iv), a
simultaneous loan includes a loan that comes into existence concurrently
with the covered transaction subject to Sec. 1026.43(c). A simultaneous
loan does not include a credit transaction that occurs after
consummation of the covered transaction that is subject to this section.
However, any simultaneous loan that specifically covers closing costs of
the covered transaction, but is scheduled to be extended after
consummation must be considered for the purposes of Sec.
1026.43(c)(2)(iv).
Paragraph 43(c)(2)(v).
1. General. A creditor must include in its repayment ability
assessment the consumer's monthly payment for mortgage-related
obligations, such as the expected property taxes and premiums or similar
charges identified in Sec. 1026.4(b)(5), (7), (8), or (10) that are
required by the creditor. See Sec. 1026.43(b)(8) defining the term
``mortgage-related obligations.'' Mortgage-related obligations must be
included in the creditor's determination of repayment ability regardless
of whether the amounts are included in the monthly payment or whether
there is an escrow account established. Section 1026.43(c)(2)(v)
includes only payments that occur on an ongoing or recurring basis in
the evaluation of the consumer's monthly payment for mortgage-related
obligations. One-time charges, or obligations satisfied at or before
consummation, are not ongoing or recurring, and are therefore not part
of the consumer's monthly payment for purposes of Sec.
1026.43(c)(2)(v). For example:
i. Assume that a consumer will be required to pay property taxes, as
described in comment 43(b)(8)-2, on a quarterly, annual, or other basis
after consummation. Section 1026.43(c)(2)(v) includes these recurring
property taxes in the evaluation of the consumer's monthly payment for
mortgage-related obligations. However, if the consumer will incur a one-
time charge to satisfy property taxes that are past due, Sec.
1026.43(c)(2)(v) does not include this one-time charge in the evaluation
of the consumer's monthly payment for mortgage-related obligations.
ii. Assume that a consumer will be required to pay mortgage
insurance premiums, as described in comment 43(b)(8)-2, on a monthly,
annual, or other basis after consummation. Section 1026.43(c)(2)(v)
includes these recurring mortgage insurance payments in the evaluation
of the consumer's monthly payment for mortgage-related obligations.
However, if the consumer will incur a one-time fee or charge for
mortgage insurance or similar purposes, such as an up-front mortgage
insurance premium imposed at consummation, Sec. 1026.43(c)(2)(v) does
not include this up-front mortgage insurance premium in the evaluation
of the consumer's monthly payment for mortgage-related obligations.
2. Obligations to an association, other than special assessments.
Section 1026.43(b)(8) defines mortgage-related obligations to include
obligations owed to a condominium, cooperative, or homeowners
association. However, Sec. 1026.43(c)(2)(v) does not require a creditor
to include in the evaluation of the consumer's monthly payment for
mortgage-related obligations payments to such associations imposed in
connection with the extension of credit, or imposed as an incident to
the transfer of ownership, if such obligations are fully satisfied at or
before consummation. For example, if a homeowners association imposes a
one-time transfer fee on the transaction, and the consumer will pay the
fee at or before consummation, Sec. 1026.43(c)(2)(v) does not require
the creditor to include this one-time transfer fee in the evaluation of
the consumer's monthly payment for mortgage-related obligations. Section
1026.43(c)(2)(v) also does not require the creditor to include this fee
in the evaluation of the consumer's monthly payment for mortgage-related
obligations if the consumer finances the fee in the loan amount.
However, if the consumer incurs the obligation and will satisfy the
obligation with recurring payments after consummation, regardless of
whether the obligation is escrowed, Sec. 1026.43(c)(2)(v) requires the
creditor to include the transfer fee in the evaluation of the consumer's
monthly payment for mortgage-related obligations.
[[Page 790]]
3. Special assessments imposed by an association. Section
1026.43(b)(8) defines mortgage-related obligations to include special
assessments imposed by a condominium, cooperative, or homeowners
association. Section 1026.43(c)(2)(v) does not require a creditor to
include special assessments in the evaluation of the consumer's monthly
payment for mortgage-related obligations if the special assessments are
fully satisfied at or before consummation. For example, if a homeowners
association imposes a special assessment that the consumer will have to
pay in full at or before consummation, Sec. 1026.43(c)(2)(v) does not
include the special assessment in the evaluation of the consumer's
monthly payment for mortgage-related obligations. Section
1026.43(c)(2)(v) does not require a creditor to include special
assessments in the evaluation of the consumer's monthly payment for
mortgage-related obligations if the special assessments are imposed as a
one-time charge. For example, if a homeowners association imposes a
special assessment that the consumer will have to satisfy in one
payment, Sec. 1026.43(c)(2)(v) does not include this one-time special
assessment in the evaluation of the consumer's monthly payment for
mortgage-related obligations. However, if the consumer will pay the
special assessment on a recurring basis after consummation, regardless
of whether the consumer's payments for the special assessment are
escrowed, Sec. 1026.43(c)(2)(v) requires the creditor to include this
recurring special assessment in the evaluation of the consumer's monthly
payment for mortgage-related obligations.
4. Pro rata amount. For purposes of Sec. 1026.43(c)(2)(v), the
creditor may divide the recurring payments for mortgage-related
obligations into monthly, pro rata amounts. In considering a mortgage-
related obligation that is not paid monthly, if the mortgage loan is
originated pursuant to a government program the creditor may determine
the pro rata monthly amount of the mortgage-related obligation in
accordance with the specific requirements of that program. If the
mortgage loan is originated pursuant to a government program that does
not contain specific standards for determining the pro rata monthly
amount of the mortgage-related obligation, or if the mortgage loan is
not originated pursuant to a government program, the creditor complies
with Sec. 1026.43(c)(2)(v) by dividing the total amount of a particular
non-monthly mortgage-related obligation by no more than the number of
months from the month that the non-monthly mortgage-related obligation
was due prior to consummation until the month that the non-monthly
mortgage-related obligation will be due after consummation. When
determining the pro rata monthly payment amount, the creditor may also
consider comment 43(c)(2)(v)-5, which explains that the creditor need
not project potential changes. The following examples further illustrate
how a creditor may determine the pro rata monthly amount of mortgage-
related obligations, pursuant to Sec. 1026.43(c)(2)(v):
i. Assume that a consumer applies for a mortgage loan on February
1st. Assume further that the subject property is located in a
jurisdiction where property taxes are paid in arrears on the first day
of October. The creditor complies with Sec. 1026.43(c)(2)(v) by
determining the annual property tax amount owed in the prior October,
dividing the amount by 12, and using the resulting amount as the pro
rata monthly property tax payment amount for the determination of the
consumer's monthly payment for mortgage-related obligations. The
creditor complies even if the consumer will likely owe more in the next
year than the amount owed the prior October because the jurisdiction
normally increases the property tax rate annually, provided that the
creditor does not have knowledge of an increase in the property tax rate
at the time of underwriting. See also comment 43(c)(2)(v)-5 regarding
estimates of mortgage-related obligations.
ii. Assume that a subject property is located in a special water
district, the assessments for which are billed separately from local
property taxes. The creditor complies with Sec. 1026.43(c)(2)(v) by
dividing the full amount that will be owed by the number of months in
the assessment period, and including the resulting amount in the
calculation of monthly mortgage-related obligations. However, Sec.
1026.43(c)(2)(v) does not require a creditor to adjust the monthly
amount to account for potential deviations from the average monthly
amount. For example, assume in this example that the special water
assessment is billed every eight months, that the consumer will have to
pay the first water district bill four months after consummation, and
that the seller will not provide the consumer with any funds to pay for
the seller's obligation (i.e., the four months prior to consummation).
Although the consumer will be required to budget twice the average
monthly amount to pay the first water district bill, Sec.
1026.43(c)(2)(v) does not require the creditor to use the increased
amount; the creditor complies with Sec. 1026.43(c)(2)(v) by using the
average monthly amount.
iii. Assume that the subject property is located in an area where
flood insurance is required by Federal law, and assume further that the
flood insurance policy premium is paid every three years following
consummation. The creditor complies with Sec. 1026.43(c)(2)(v) by
dividing the three-year premium by 36 months and including the resulting
amount in the determination of the consumer's monthly payment for
mortgage-related obligations. The creditor complies
[[Page 791]]
even if the consumer will not establish a monthly escrow for flood
insurance.
iv. Assume that the subject property is part of a homeowners
association that has imposed upon the seller a special assessment of
$1,200. Assume further that this special assessment will become the
consumer's obligation upon consummation of the transaction, that the
consumer is permitted to pay the special assessment in twelve $100
installments after consummation, and that the mortgage loan will not be
originated pursuant to a government program that contains specific
requirements for prorating special assessments. The creditor complies
with Sec. 1026.43(c)(2)(v) by dividing the $1,200 special assessment by
12 months and including the resulting $100 monthly amount in the
determination of the consumer's monthly payment for mortgage-related
obligations. The creditor complies by using this calculation even if the
consumer intends to pay the special assessment in a manner other than
that used by the creditor in determining the monthly pro rata amount,
such as where the consumer intends to pay six $200 installments.
5. Estimates. Estimates of mortgage-related obligations should be
based upon information that is known to the creditor at the time the
creditor underwrites the mortgage obligation. Information is known if it
is reasonably available to the creditor at the time of underwriting the
loan. Creditors may rely on guidance provided under comment 17(c)(2)(i)-
1 in determining if information is reasonably available. For purposes of
this section, the creditor need not project potential changes, such as
by estimating possible increases in taxes and insurance. See comment
43(c)(2)(v)-4 for additional examples discussing the projection of
potential changes. The following examples further illustrate the
requirements of Sec. 1026.43(c)(2)(v):
i. Assume that the property is subject to a community governance
association, such as a homeowners association. The creditor complies
with Sec. 1026.43(c)(2)(v) by relying on an estimate of mortgage-
related obligations prepared by the homeowners association. In
accordance with the guidance provided under comment 17(c)(2)(i)-1, the
creditor need only exercise due diligence in determining mortgage-
related obligations, and complies with Sec. 1026.43(c)(2)(v) by relying
on the representations of other reliable parties in preparing estimates.
ii. Assume that the homeowners association has imposed a special
assessment on the seller, but the seller does not inform the creditor of
the special assessment, the homeowners association does not include the
special assessment in the estimate of expenses prepared for the
creditor, and the creditor is unaware of the special assessment. The
creditor complies with Sec. 1026.43(c)(2)(v) if it does not include the
special assessment in the determination of mortgage-related obligations.
The creditor may rely on the representations of other reliable parties,
in accordance with the guidance provided under comment 17(c)(2)(i)-1.
iii. Assume that the homeowners association imposes a special
assessment after the creditor has completed underwriting, but prior to
consummation. The creditor does not violate Sec. 1026.43(c)(2)(v) if
the creditor does not include the special assessment in the
determination of the consumer's monthly payment for mortgage-related
obligations, provided the homeowners association does not inform the
creditor about the special assessment during underwriting. Section
1026.43(c)(2)(v) does not require the creditor to re-underwrite the
loan. The creditor has complied with Sec. 1026.43(c)(2)(v) by including
the obligations known to the creditor at the time the loan is
underwritten, even if the creditor learns of new mortgage-related
obligations before the transaction is consummated.
Paragraph 43(c)(2)(vi).
1. Consideration of current debt obligations. Section
1026.43(c)(2)(vi) requires creditors to consider a consumer's current
debt obligations and any alimony or child support the consumer is
required to pay. Examples of current debt obligations include student
loans, automobile loans, revolving debt, and existing mortgages that
will not be paid off at or before consummation. Creditors have
significant flexibility to consider current debt obligations in light of
attendant facts and circumstances, including that an obligation is
likely to be paid off soon after consummation. For example, a creditor
may take into account that an existing mortgage is likely to be paid off
soon after consummation because there is an existing contract for sale
of the property that secures that mortgage. Similarly, creditors should
consider whether debt obligations in forbearance or deferral at the time
of underwriting are likely to affect the consumer's ability to repay
based on the payment for which the consumer will be liable upon
expiration of the forbearance or deferral period and other relevant
facts and circumstances, such as when the forbearance or deferral period
will expire.
2. Multiple applicants. When two or more consumers apply for an
extension of credit as joint obligors with primary liability on an
obligation, Sec. 1026.43(c)(2)(vi) requires a creditor to consider the
debt obligations of all such joint applicants. For example, if a co-
applicant is repaying a student loan at the time of underwriting, the
creditor complies with Sec. 1026.43(c)(2)(vi) by considering the co-
applicant's student loan obligation. If one consumer is merely a surety
or guarantor, Sec. 1026.43(c)(2)(vi) does not require a creditor to
consider the debt obligations of such surety or guarantor. The
requirements of
[[Page 792]]
Sec. 1026.43(c)(2)(vi) do not affect the disclosure requirements of
this part, such as, for example, Sec. Sec. 1026.17(d), 1026.23(b),
1026.31(e), 1026.39(b)(3), and 1026.46(f).
Paragraph 43(c)(2)(vii).
1. Monthly debt-to-income ratio and residual income. See Sec.
1026.43(c)(7) and its associated commentary regarding the definitions
and calculations for the monthly debt-to-income ratio and residual
income.
Paragraph 43(c)(2)(viii).
1. Consideration of credit history. ``Credit history'' may include
factors such as the number and age of credit lines, payment history, and
any judgments, collections, or bankruptcies. Section 1026.43(c)(2)(viii)
does not require creditors to obtain or consider a consolidated credit
score or prescribe a minimum credit score that creditors must apply. The
rule also does not specify which aspects of credit history a creditor
must consider or how various aspects of credit history should be weighed
against each other or against other underwriting factors. Some aspects
of a consumer's credit history, whether positive or negative, may not be
directly indicative of the consumer's ability to repay. A creditor
therefore may give various aspects of a consumer's credit history as
much or as little weight as is appropriate to reach a reasonable, good
faith determination of ability to repay. Where a consumer has obtained
few or no extensions of traditional ``credit,'' as defined in Sec.
1026.2(a)(14), a creditor may, but is not required to, look to
nontraditional credit references, such as rental payment history or
utility payments.
2. Multiple applicants. When two or more consumers apply for an
extension of credit as joint obligors with primary liability on an
obligation, Sec. 1026.43(c)(2)(viii) requires a creditor to consider
the credit history of all such joint applicants. If a consumer is merely
a surety or guarantor, Sec. 1026.43(c)(2)(viii) does not require a
creditor to consider the credit history of such surety or guarantor. The
requirements of Sec. 1026.43(c)(2)(viii) do not affect the disclosure
requirements of this part, such as, for example, Sec. Sec. 1026.17(d),
1026.23(b), 1026.31(e), 1026.39(b)(3), and 1026.46(f).
43(c)(3) Verification using third-party records.
1. Records specific to the individual consumer. Records a creditor
uses for verification under Sec. 1026.43(c)(3) and (4) must be specific
to the individual consumer. Records regarding average incomes in the
consumer's geographic location or average wages paid by the consumer's
employer, for example, are not specific to the individual consumer and
are not sufficient for verification.
2. Obtaining records. To conduct verification under Sec.
1026.43(c)(3) and (4), a creditor may obtain records from a third-party
service provider, such as a party the consumer's employer uses to
respond to income verification requests, as long as the records are
reasonably reliable and specific to the individual consumer. A creditor
also may obtain third-party records directly from the consumer, likewise
as long as the records are reasonably reliable and specific to the
individual consumer. For example, a creditor using payroll statements to
verify the consumer's income, as allowed under Sec. 1026.43(c)(4)(iii),
may obtain the payroll statements from the consumer.
3. Credit report as a reasonably reliable third-party record. A
credit report generally is considered a reasonably reliable third-party
record under Sec. 1026.43(c)(3) for purposes of verifying items
customarily found on a credit report, such as the consumer's current
debt obligations, monthly debts, and credit history. Section
1026.43(c)(3) generally does not require creditors to obtain additional
reasonably reliable third-party records to verify information contained
in a credit report. For example, if a credit report states the existence
and amount of a consumer's debt obligation, the creditor is not required
to obtain additional verification of the existence or amount of that
obligation. In contrast, a credit report does not serve as a reasonably
reliably third-party record for purposes of verifying items that do not
appear on the credit report. For example, certain monthly debt
obligations, such as legal obligations like alimony or child support,
may not be reflected on a credit report. Thus, a credit report that does
not list a consumer's monthly alimony obligation does not serve as a
reasonably reliable third-party record for purposes of verifying that
obligation. If a credit report reflects a current debt obligation that a
consumer has not listed on the application, the creditor complies with
Sec. 1026.43(c)(3) if the creditor considers the existence and amount
of the debt obligation as it is reflected in the credit report. However,
in some cases a creditor may know or have reason to know that a credit
report may be inaccurate in whole or in part. For example, a creditor
may have information indicating that a credit report is subject to a
fraud alert, extended alert, active duty alert, or similar alert
identified in 15 U.S.C. 1681c-1 or that a debt obligation listed on a
credit report is subject to a statement of dispute pursuant to 15 U.S.C.
1681i(b). A creditor may also have other reasonably reliable third-party
records or other information or evidence that the creditor reasonably
finds to be reliable that contradict the credit report or otherwise
indicate that the credit report is inaccurate. If a creditor knows or
has reason to know that a credit report may be inaccurate in whole or in
part, the creditor complies with Sec. 1026.43(c)(3) by disregarding an
inaccurate or disputed item, items, or credit report, but does not have
to obtain additional third-party records. The creditor may also, but is
not required, to obtain other reasonably reliable third-party records to
verify information with respect to which the
[[Page 793]]
credit report, or item therein, may be inaccurate. For example, the
creditor might obtain statements or bank records regarding a particular
debt obligation subject to a statement of dispute. See also comment
43(c)(3)-6, which describes a situation in which a consumer reports a
debt obligation that is not listed on a credit report.
4. Verification of simultaneous loans. Although a credit report may
be used to verify current obligations, it will not reflect a
simultaneous loan that has not yet been consummated and may not reflect
a loan that has just recently been consummated. If the creditor knows or
has reason to know that there will be a simultaneous loan extended at or
before consummation, the creditor may verify the simultaneous loan by
obtaining third-party verification from the third-party creditor of the
simultaneous loan. For example, the creditor may obtain a copy of the
promissory note or other written verification from the third-party
creditor. For further guidance, see comments 43(c)(3)-1 and -2
discussing verification using third-party records.
5. Verification of mortgage-related obligations. Creditors must make
the repayment ability determination required under Sec. 1026.43(c)(2)
based on information verified from reasonably reliable records. For
general guidance regarding verification see comments 43(c)(3)-1 and -2,
which discuss verification using third-party records. With respect to
the verification of mortgage-related obligations that are property taxes
required to be considered under Sec. 1026.43(c)(2)(v), a record is
reasonably reliable if the information in the record was provided by a
governmental organization, such as a taxing authority or local
government. The creditor complies with Sec. 1026.43(c)(2)(v) by relying
on property taxes referenced in the title report if the source of the
property tax information was a local taxing authority. With respect to
other information in a record provided by an entity assessing charges,
such as a homeowners association, the creditor complies with Sec.
1026.43(c)(2)(v) if it relies on homeowners association billing
statements provided by the seller. Records are also reasonably reliable
if the information in the record was obtained from a valid and legally
executed contract. For example, the creditor complies with Sec.
1026.43(c)(2)(v) by relying on the amount of monthly ground rent
referenced in the ground rent agreement currently in effect and
applicable to the subject property. Records, other than those discussed
above, may be reasonably reliable for purposes of Sec. 1026.43(c)(2)(v)
if the source provided the information objectively.
6. Verification of current debt obligations. Section 1026.43(c)(3)
does not require creditors to obtain additional records to verify the
existence or amount of obligations shown on a consumer's credit report
or listed on the consumer's application, absent circumstances described
in comment 43(c)(3)-3. Under Sec. 1026.43(c)(3)(iii), if a creditor
relies on a consumer's credit report to verify a consumer's current debt
obligations and the consumer's application lists a debt obligation not
shown on the credit report, the creditor may consider the existence and
amount of the obligation as it is stated on the consumer's application.
The creditor is not required to further verify the existence or amount
of the obligation, absent circumstances described in comment 43(c)(3)-3.
7. Verification of credit history. To verify credit history, a
creditor may, for example, look to credit reports from credit bureaus or
to reasonably reliable third-party records that evidence nontraditional
credit references, such as evidence of rental payment history or public
utility payments.
8. Verification of military employment. A creditor may verify the
employment status of military personnel by using a military Leave and
Earnings Statement or by using the electronic database maintained by the
Department of Defense to facilitate identification of consumers covered
by credit protections provided pursuant to 10 U.S.C. 987.
43(c)(4) Verification of income or assets.
1. Income or assets relied on. A creditor need consider, and
therefore need verify, only the income or assets the creditor relies on
to evaluate the consumer's repayment ability. See comment 43(c)(2)(i)-2.
For example, if a consumer's application states that the consumer earns
a salary and is paid an annual bonus and the creditor relies on only the
consumer's salary to evaluate the consumer's repayment ability, the
creditor need verify only the salary. See also comments 43(c)(3)-1 and -
2.
2. Multiple applicants. If multiple consumers jointly apply for a
loan and each lists income or assets on the application, the creditor
need verify only the income or assets the creditor relies on in
determining repayment ability. See comment 43(c)(2)(i)-5.
3. Tax-return transcript. Under Sec. 1026.43(c)(4), a creditor may
verify a consumer's income using an Internal Revenue Service (IRS) tax-
return transcript, which summarizes the information in a consumer's
filed tax return, another record that provides reasonably reliable
evidence of the consumer's income, or both. A creditor may obtain a copy
of a tax-return transcript or a filed tax return directly from the
consumer or from a service provider. A creditor need not obtain the copy
directly from the IRS or other taxing authority. See comment 43(c)(3)-2.
Paragraph 43(c)(4)(vi).
1. Government benefits. In verifying a consumer's income, a creditor
may use a written or electronic record from a government agency of the
amount of any benefit payments or awards, such as a ``proof of income
[[Page 794]]
letter'' issued by the Social Security Administration (also known as a
``budget letter,'' ``benefits letter,'' or ``proof of award letter'').
43(c)(5) Payment calculation.
43(c)(5)(i) General rule.
1. General. For purposes of Sec. 1026.43(c)(2)(iii), a creditor
must determine the consumer's ability to repay the covered transaction
using the payment calculation methods set forth in Sec. 1026.43(c)(5).
The payment calculation methods differ depending on the type of credit
extended. The payment calculation method set forth in Sec.
1026.43(c)(5)(i) applies to any covered transaction that does not have a
balloon payment, or that is not an interest-only or negative
amortization loan, whether such covered transaction is a fixed-rate,
adjustable-rate or step-rate mortgage. The terms ``fixed-rate
mortgage,'' ``adjustable-rate mortgage,'' ``step-rate mortgage,''
``interest-only loan'' and ``negative amortization loan'' are defined in
Sec. 1026.18(s)(7)(iii), (i), (ii), (iv) and (v), respectively. For the
meaning of the term ``balloon payment,'' see Sec. 1026.18(s)(5)(i). The
payment calculation methods set forth in Sec. 1026.43(c)(5)(ii) apply
to any covered transaction that is a loan with a balloon payment,
interest-only loan, or negative amortization loan. See comment
43(c)(5)(i)-5 and the commentary to Sec. 1026.43(c)(5)(ii), which
provide examples for calculating the monthly payment for purposes of the
repayment ability determination required under Sec. 1026.43(c)(2)(iii).
2. Greater of the fully indexed rate or introductory rate; premium
adjustable-rate transactions. A creditor must determine a consumer's
repayment ability for the covered transaction using substantially equal,
monthly, fully amortizing payments that are based on the greater of the
fully indexed rate or any introductory interest rate. In some
adjustable-rate transactions, creditors may set an initial interest rate
that is not determined by the index or formula used to make later
interest rate adjustments. Sometimes, this initial rate charged to
consumers is lower than the rate would be if it were determined by using
the index plus margin, or formula (i.e., fully indexed rate). However,
an initial rate that is a premium rate is higher than the rate based on
the index or formula. In such cases, creditors must calculate the fully
amortizing payment based on the initial ``premium'' rate. ``Fully
indexed rate'' is defined in Sec. 1026.43(b)(3).
3. Monthly, fully amortizing payments. Section 1026.43(c)(5)(i) does
not prescribe the terms or loan features that a creditor may choose to
offer or extend to a consumer, but establishes the calculation method a
creditor must use to determine the consumer's repayment ability for a
covered transaction. For example, the terms of the loan agreement may
require that the consumer repay the loan in quarterly or bi-weekly
scheduled payments, but for purposes of the repayment ability
determination, the creditor must convert these scheduled payments to
monthly payments in accordance with Sec. 1026.43(c)(5)(i)(B).
Similarly, the loan agreement may not require the consumer to make fully
amortizing payments, but for purposes of the repayment ability
determination under Sec. 1026.43(c)(5)(i), the creditor must convert
any non-amortizing payments to fully amortizing payments.
4. Substantially equal. In determining whether monthly, fully
amortizing payments are substantially equal, creditors should disregard
minor variations due to payment-schedule irregularities and odd periods,
such as a long or short first or last payment period. That is, monthly
payments of principal and interest that repay the loan amount over the
loan term need not be equal, but the monthly payments should be
substantially the same without significant variation in the monthly
combined payments of both principal and interest. For example, where no
two monthly payments vary from each other by more than 1 percent
(excluding odd periods, such as a long or short first or last payment
period), such monthly payments would be considered substantially equal
for purposes of this section. In general, creditors should determine
whether the monthly, fully amortizing payments are substantially equal
based on guidance provided in Sec. 1026.17(c)(3) (discussing minor
variations), and Sec. 1026.17(c)(4)(i) through (iii) (discussing
payment-schedule irregularities and measuring odd periods due to a long
or short first period) and associated commentary.
5. Examples. The following are examples of how to determine the
consumer's repayment ability based on substantially equal, monthly,
fully amortizing payments as required under Sec. 1026.43(c)(5)(i) (all
amounts shown are rounded, and all amounts are calculated using non-
rounded values):
i. Fixed-rate mortgage. A loan in an amount of $200,000 has a 30-
year loan term and a fixed interest rate of 7 percent. For purposes of
Sec. 1026.43(c)(2)(iii), the creditor must determine the consumer's
ability to repay the loan based on a payment of $1,331, which is the
substantially equal, monthly, fully amortizing payment that will repay
$200,000 over 30 years using the fixed interest rate of 7 percent.
ii. Adjustable-rate mortgage with discount for five years. A loan in
an amount of $200,000 has a 30-year loan term. The loan agreement
provides for a discounted interest rate of 6 percent that is fixed for
an initial period of five years, after which the interest rate will
adjust annually based on a specified index plus a margin of 3 percent,
subject to a 2 percent annual periodic interest rate adjustment cap. The
index value in effect at consummation is 4.5 percent; the fully indexed
rate is 7.5 percent (4.5 percent plus 3 percent). Even
[[Page 795]]
though the scheduled monthly payment required for the first five years
is $1199, for purposes of Sec. 1026.43(c)(2)(iii) the creditor must
determine the consumer's ability to repay the loan based on a payment of
$1,398, which is the substantially equal, monthly, fully amortizing
payment that will repay $200,000 over 30 years using the fully indexed
rate of 7.5 percent.
iii. Step-rate mortgage. A loan in an amount of $200,000 has a 30-
year loan term. The loan agreement provides that the interest rate will
be 6.5 percent for the first two years of the loan, 7 percent for the
next three years of the loan, and 7.5 percent thereafter. Accordingly,
the scheduled payment amounts are $1,264 for the first two years, $1,328
for the next three years, and $1,388 thereafter for the remainder of the
term. For purposes of Sec. 1026.43(c)(2)(iii), the creditor must
determine the consumer's ability to repay the loan based on a payment of
$1,398, which is the substantially equal, monthly, fully amortizing
payment that would repay $200,000 over 30 years using the fully indexed
rate of 7.5 percent.
43(c)(5)(ii) Special rules for loans with a balloon payment,
interest-only loans, and negative amortization loans.
Paragraph 43(c)(5)(ii)(A).
1. General. For loans with a balloon payment, the rules differ
depending on whether the loan is a higher-priced covered transaction, as
defined under Sec. 1026.43(b)(4), or is not a higher-priced covered
transaction because the annual percentage rate does not exceed the
applicable threshold calculated using the applicable average prime offer
rate (APOR) for a comparable transaction. ``Average prime offer rate''
is defined in Sec. 1026.35(a)(2); ``higher-priced covered transaction''
is defined in Sec. 1026.43(b)(4). For higher-priced covered
transactions with a balloon payment, the creditor must consider the
consumer's ability to repay the loan based on the payment schedule under
the terms of the legal obligation, including any required balloon
payment. For loans with a balloon payment that are not higher-priced
covered transactions, the creditor should use the maximum payment
scheduled during the first five years of the loan following the date on
which the first regular periodic payment will be due. ``Balloon
payment'' is defined in Sec. 1026.18(s)(5)(i).
2. First five years after the date on which the first regular
periodic payment will be due. Under Sec. 1026.43(c)(5)(ii)(A)(1), the
creditor must determine a consumer's ability to repay a loan with a
balloon payment that is not a higher-priced covered transaction using
the maximum payment scheduled during the first five years (60 months)
after the date on which the first regular periodic payment will be due.
To illustrate:
i. Assume a loan that provides for regular monthly payments and a
balloon payment due at the end of a six-year loan term. The loan is
consummated on August 15, 2014, and the first monthly payment is due on
October 1, 2014. The first five years after the first monthly payment
end on October 1, 2019. The balloon payment must be made on the due date
of the 72nd monthly payment, which is September 1, 2020. For purposes of
determining the consumer's ability to repay the loan under Sec.
1026.43(c)(2)(iii), the creditor need not consider the balloon payment
that is due on September 1, 2020.
ii. Assume a loan that provides for regular monthly payments and a
balloon payment due at the end of a five-year loan term. The loan is
consummated on August 15, 2014, and the first monthly payment is due on
October 1, 2014. The first five years after the first monthly payment
end on October 1, 2019. The balloon payment must be made on the due date
of the 60th monthly payment, which is September 1, 2019. For purposes of
determining the consumer's ability to repay the loan under Sec.
1026.43(c)(2)(iii), the creditor must consider the balloon payment that
is due on September 1, 2019.
3. Renewable balloon-payment mortgage; loan term. A balloon-payment
mortgage that is not a higher-priced covered transaction could provide
that a creditor is unconditionally obligated to renew a balloon-payment
mortgage at the consumer's option (or is obligated to renew subject to
conditions within the consumer's control). See comment 17(c)(1)-11
discussing renewable balloon-payment mortgages. For purposes of this
section, the loan term does not include any period of time that could
result from a renewal provision. To illustrate, assume a three-year
balloon-payment mortgage that is not a higher-priced covered transaction
contains an unconditional obligation to renew for another three years at
the consumer's option. In this example, the loan term for the balloon-
payment mortgage is three years, and not the potential six years that
could result if the consumer chooses to renew the loan. Accordingly, the
creditor must underwrite the loan using the maximum payment scheduled in
the first five years after consummation, which includes the balloon
payment due at the end of the three-year loan term. See comment
43(c)(5)(ii)(A)-4.ii, which provides an example of how to determine the
consumer's repayment ability for a three-year renewable balloon-payment
mortgage that is not a higher-priced covered transaction.
4. Examples of loans with a balloon payment that are not higher-
priced covered transactions. The following are examples of how to
determine the maximum payment scheduled during the first five years
after the date on which the first regular periodic payment will be due
(all amounts shown are rounded, and all amounts are calculated using
non-rounded values):
[[Page 796]]
i. Balloon-payment mortgage with a three-year loan term; fixed
interest rate. A loan agreement provides for a fixed interest rate of 6
percent, which is below the APOR-calculated threshold for a comparable
transaction; thus the loan is not a higher-priced covered transaction.
The loan amount is $200,000, and the loan has a three-year loan term but
is amortized over 30 years. The monthly payment scheduled for the first
three years following consummation is $1,199, with a balloon payment of
$193,367 due at the end of the third year. For purposes of Sec.
1026.43(c)(2)(iii), the creditor must determine the consumer's ability
to repay the loan based on the balloon payment of $193,367.
ii. Renewable balloon-payment mortgage with a three-year loan term.
Assume the same facts above in comment 43(c)(5)(ii)(A)-4.i, except that
the loan agreement also provides that the creditor is unconditionally
obligated to renew the balloon-payment mortgage at the consumer's option
at the end of the three-year term for another three years. In
determining the maximum payment scheduled during the first five years
after the date on which the first regular periodic payment will be due,
the creditor must use a loan term of three years. Accordingly, for
purposes of Sec. 1026.43(c)(2)(iii), the creditor must determine the
consumer's ability to repay the loan based on the balloon payment of
$193,367.
iii. Balloon-payment mortgage with a six-year loan term; fixed
interest rate. A loan provides for a fixed interest rate of 6 percent,
which is below the APOR threshold for a comparable transaction, and
thus, the loan is not a higher-priced covered transaction. The loan
amount is $200,000, and the loan has a six-year loan term but is
amortized over 30 years. The loan is consummated on March 15, 2014, and
the monthly payment scheduled for the first six years following
consummation is $1,199, with the first monthly payment due on May 1,
2014. The first five years after the date on which the first regular
periodic payment will be due end on May 1, 2019. The balloon payment of
$183,995 is required on the due date of the 72nd monthly payment, which
is April 1, 2020 (more than five years after the date on which the first
regular periodic payment will be due). For purposes of Sec.
1026.43(c)(2)(iii), the creditor may determine the consumer's ability to
repay the loan based on the monthly payment of $1,199, and need not
consider the balloon payment of $183,995 due on April 1, 2020.
5. Higher-priced covered transaction with a balloon payment. Where a
loan with a balloon payment is a higher-priced covered transaction, the
creditor must determine the consumer's repayment ability based on the
loan's payment schedule, including any balloon payment. For example (all
amounts are rounded): Assume a higher-priced covered transaction with a
fixed interest rate of 7 percent. The loan amount is $200,000 and the
loan has a ten year loan term, but is amortized over 30 years. The
monthly payment scheduled for the first ten years is $1,331, with a
balloon payment of $172,955. For purposes of Sec. 1026.43(c)(2)(iii),
the creditor must consider the consumer's ability to repay the loan
based on the payment schedule that fully repays the loan amount,
including the balloon payment of $172,955.
Paragraph 43(c)(5)(ii)(B).
1. General. For loans that permit interest-only payments, the
creditor must use the fully indexed rate or introductory rate, whichever
is greater, to calculate the substantially equal, monthly payment of
principal and interest that will repay the loan amount over the term of
the loan remaining as of the date the loan is recast. For discussion
regarding the fully indexed rate, and the meaning of ``substantially
equal,'' see comments 43(b)(3)-1 through -5 and 43(c)(5)(i)-4,
respectively. Under Sec. 1026.43(c)(5)(ii)(B), the relevant term of the
loan is the period of time that remains as of the date the loan is
recast to require fully amortizing payments. For a loan on which only
interest and no principal has been paid, the loan amount will be the
outstanding principal balance at the time of the recast. ``Loan amount''
and ``recast'' are defined in Sec. 1026.43(b)(5) and (b)(11),
respectively. ``Interest-only'' and ``Interest-only loan'' are defined
in Sec. 1026.18(s)(7)(iv).
2. Examples. The following are examples of how to determine the
consumer's repayment ability based on substantially equal, monthly
payments of principal and interest under Sec. 1026.43(c)(5)(ii)(B) (all
amounts shown are rounded, and all amounts are calculated using non-
rounded values):
i. Fixed-rate mortgage with interest-only payments for five years. A
loan in an amount of $200,000 has a 30-year loan term. The loan
agreement provides for a fixed interest rate of 7 percent, and permits
interest-only payments for the first five years. The monthly payment of
$1,167 scheduled for the first five years would cover only the interest
due. The loan is recast on the due date of the 60th monthly payment,
after which the scheduled monthly payments increase to $1,414, a monthly
payment that repays the loan amount of $200,000 over the 25 years
remaining as of the date the loan is recast (300 months). For purposes
of Sec. 1026.43(c)(2)(iii), the creditor must determine the consumer's
ability to repay the loan based on a payment of $1,414, which is the
substantially equal, monthly, fully amortizing payment that would repay
$200,000 over the 25 years remaining as of the date the loan is recast
using the fixed interest rate of 7 percent.
ii. Adjustable-rate mortgage with discount for three years and
interest-only payments for five years. A loan in an amount of $200,000
has a 30-year loan term, but provides for interest-
[[Page 797]]
only payments for the first five years. The loan agreement provides for
a discounted interest rate of 5 percent that is fixed for an initial
period of three years, after which the interest rate will adjust each
year based on a specified index plus a margin of 3 percent, subject to
an annual interest rate adjustment cap of 2 percent. The index value in
effect at consummation is 4.5 percent; the fully indexed rate is 7.5
percent (4.5 percent plus 3 percent). The monthly payments for the first
three years are $833. For the fourth year, the payments are $1,167,
based on an interest rate of 7 percent, calculated by adding the 2
percent annual adjustment cap to the initial rate of 5 percent. For the
fifth year, the payments are $1,250, applying the fully indexed rate of
7.5 percent. These first five years of payments will cover only the
interest due. The loan is recast on the due date of the 60th monthly
payment, after which the scheduled monthly payments increase to $1,478,
a monthly payment that will repay the loan amount of $200,000 over the
remaining 25 years of the loan (300 months). For purposes of Sec.
1026.43(c)(2)(iii), the creditor must determine the consumer's ability
to repay the loan based on a monthly payment of $1,478, which is the
substantially equal, monthly payment of principal and interest that
would repay $200,000 over the 25 years remaining as of the date the loan
is recast using the fully indexed rate of 7.5 percent.
Paragraph 43(c)(5)(ii)(C).
1. General. For purposes of determining the consumer's ability to
repay a negative amortization loan, the creditor must use substantially
equal, monthly payments of principal and interest based on the fully
indexed rate or the introductory rate, whichever is greater, that will
repay the maximum loan amount over the term of the loan that remains as
of the date the loan is recast. Accordingly, before determining the
substantially equal, monthly payments the creditor must first determine
the maximum loan amount and the period of time that remains in the loan
term after the loan is recast. ``Recast'' is defined in Sec.
1026.43(b)(11). Second, the creditor must use the fully indexed rate or
introductory rate, whichever is greater, to calculate the substantially
equal, monthly payment amount that will repay the maximum loan amount
over the term of the loan remaining as of the date the loan is recast.
For discussion regarding the fully indexed rate and the meaning of
``substantially equal,'' see comments 43(b)(3)-1 through -5 and
43(c)(5)(i)-4, respectively. For the meaning of the term ``maximum loan
amount'' and a discussion of how to determine the maximum loan amount
for purposes of Sec. 1026.43(c)(5)(ii)(C), see Sec. 1026.43(b)(7) and
associated commentary. ``Negative amortization loan'' is defined in
Sec. 1026.18(s)(7)(v).
2. Term of loan. Under Sec. 1026.43(c)(5)(ii)(C), the relevant term
of the loan is the period of time that remains as of the date the terms
of the legal obligation recast. That is, the creditor must determine
substantially equal, monthly payments of principal and interest that
will repay the maximum loan amount based on the period of time that
remains after any negative amortization cap is triggered or any period
permitting minimum periodic payments expires, whichever occurs first.
3. Examples. The following are examples of how to determine the
consumer's repayment ability based on substantially equal, monthly
payments of principal and interest as required under Sec.
1026.43(c)(5)(ii)(C) (all amounts shown are rounded, and all amounts are
calculated using non-rounded values):
i. Adjustable-rate mortgage with negative amortization. A. Assume an
adjustable-rate mortgage in the amount of $200,000 with a 30-year loan
term. The loan agreement provides that the consumer can make minimum
monthly payments that cover only part of the interest accrued each month
until the date on which the principal balance reaches 115 percent of its
original balance (i.e., a negative amortization cap of 115 percent) or
for the first five years of the loan (60 monthly payments), whichever
occurs first. The introductory interest rate at consummation is 1.5
percent. One month after consummation, the interest rate adjusts and
will adjust monthly thereafter based on the specified index plus a
margin of 3.5 percent. The index value in effect at consummation is 4.5
percent; the fully indexed rate is 8 percent (4.5 percent plus 3.5
percent). The maximum lifetime interest rate is 10.5 percent; there are
no other periodic interest rate adjustment caps that limit how quickly
the maximum lifetime rate may be reached. The minimum monthly payment
for the first year is based on the initial interest rate of 1.5 percent.
After that, the minimum monthly payment adjusts annually, but may
increase by no more than 7.5 percent over the previous year's payment.
The minimum monthly payment is $690 in the first year, $742 in the
second year, and $797 in the first part of the third year.
B. To determine the maximum loan amount, assume that the interest
rate increases to the maximum lifetime interest rate of 10.5 percent at
the first adjustment (i.e., the due date of the first periodic monthly
payment), and interest accrues at that rate until the loan is recast.
Assume that the consumer makes the minimum monthly payments scheduled,
which are capped at 7.5 percent from year-to-year, for the maximum
possible time. Because the consumer's minimum monthly payments are less
than the interest accrued each month, negative amortization occurs
(i.e., the accrued but unpaid interest is added to the principal
balance). Thus, assuming that the consumer makes the minimum monthly
payments for as long as possible and that the maximum interest
[[Page 798]]
rate of 10.5 percent is reached at the first rate adjustment (i.e., the
due date of the first periodic monthly payment), the negative
amortization cap of 115 percent is reached on the due date of the 27th
monthly payment and the loan is recast as of that date. The maximum loan
amount as of the due date of the 27th monthly payment is $229,251, and
the remaining term of the loan is 27 years and nine months (333 months).
C. For purposes of Sec. 1026.43(c)(2)(iii), the creditor must
determine the consumer's ability to repay the loan based on a monthly
payment of $1,716, which is the substantially equal, monthly payment of
principal and interest that will repay the maximum loan amount of
$229,251 over the remaining loan term of 333 months using the fully
indexed rate of 8 percent. See comments 43(b)(7)-1 and -2 discussing the
calculation of the maximum loan amount, and Sec. 1026.43(b)(11) for the
meaning of the term ``recast.''
ii. Fixed-rate, graduated payment mortgage. A loan in the amount of
$200,000 has a 30-year loan term. The loan agreement provides for a
fixed interest rate of 7.5 percent, and requires the consumer to make
minimum monthly payments during the first year, with payments increasing
12.5 percent over the previous year every year for four years (the
annual payment cap). The payment schedule provides for payments of $943
in the first year, $1,061 in the second year, $1,193 in the third year,
$1,343 in the fourth year, and then requires $1,511 for the remaining
term of the loan. During the first three years of the loan, the payments
are less than the interest accrued each month, resulting in negative
amortization. Assuming the minimum payments increase year-to-year up to
the 12.5 percent payment cap, the consumer will begin making payments
that cover at least all of the interest accrued at the end of the third
year. Thus, the loan is recast on the due date of the 36th monthly
payment. The maximum loan amount on that date is $207,662, and the
remaining loan term is 27 years (324 months). For purposes of Sec.
1026.43(c)(2)(iii), the creditor must determine the consumer's ability
to repay the loan based on a monthly payment of $1,497, which is the
substantially equal, monthly payment of principal and interest that will
repay the maximum loan amount of $207,662 over the remaining loan term
of 27 years using the fixed interest rate of 7.5 percent.
43(c)(6) Payment calculation for simultaneous loans.
1. Scope. In determining the consumer's repayment ability for a
covered transaction under Sec. 1026.43(c)(2)(iii), a creditor must
include consideration of any simultaneous loan which it knows, or has
reason to know, will be made at or before consummation of the covered
transaction. For a discussion of the standard ``knows or has reason to
know,'' see comment 43(c)(2)(iv)-2. For the meaning of the term
``simultaneous loan,'' see Sec. 1026.43(b)(12).
2. Payment calculation--covered transaction. For a simultaneous loan
that is a covered transaction, as that term is defined under Sec.
1026.43(b)(1), a creditor must determine a consumer's ability to repay
the monthly payment obligation for a simultaneous loan as set forth in
Sec. 1026.43(c)(5), taking into account any mortgage-related
obligations required to be considered under Sec. 1026.43(c)(2)(v). For
the meaning of the term ``mortgage-related obligations,'' see Sec.
1026.43(b)(8).
3. Payment calculation--home equity line of credit. For a
simultaneous loan that is a home equity line of credit subject to Sec.
1026.40, the creditor must consider the periodic payment required under
the terms of the plan when assessing the consumer's ability to repay the
covered transaction secured by the same dwelling as the simultaneous
loan. Under Sec. 1026.43(c)(6)(ii), a creditor must determine the
periodic payment required under the terms of the plan by considering the
actual amount of credit to be drawn by the consumer at consummation of
the covered transaction. The amount to be drawn is the amount requested
by the consumer; when the amount requested will be disbursed, or actual
receipt of funds, is not determinative. Any additional draw against the
line of credit that the creditor of the covered transaction does not
know or have reason to know about before or during underwriting need not
be considered in relation to ability to repay. For example, where the
creditor's policies and procedures require the source of down payment to
be verified, and the creditor verifies that a simultaneous loan that is
a HELOC will provide the source of down payment for the first-lien
covered transaction, the creditor must consider the periodic payment on
the HELOC by assuming the amount drawn is at least the down payment
amount. In general, a creditor should determine the periodic payment
based on guidance in the commentary to Sec. 1026.40(d)(5) (discussing
payment terms).
43(c)(7) Monthly debt-to-income ratio or residual income.
1. Monthly debt-to-income ratio or monthly residual income. Under
Sec. 1026.43(c)(2)(vii), the creditor must consider the consumer's
monthly debt-to-income ratio, or the consumer's monthly residual income,
in accordance with the requirements in Sec. 1026.43(c)(7). In contrast
to the qualified mortgage provisions in Sec. 1026.43(e), Sec.
1026.43(c) does not prescribe a specific monthly debt-to-income ratio
with which creditors must comply. Instead, an appropriate threshold for
a consumer's monthly debt-to-income ratio or monthly residual income is
for the creditor to determine in making a reasonable and good faith
determination of a consumer's ability to repay.
[[Page 799]]
2. Use of both monthly debt-to-income ratio and monthly residual
income. If a creditor considers the consumer's monthly debt-to-income
ratio, the creditor may also consider the consumer's residual income as
further validation of the assessment made using the consumer's monthly
debt-to-income ratio.
3. Compensating factors. The creditor may consider factors in
addition to the monthly debt-to-income ratio or residual income in
assessing a consumer's repayment ability. For example, the creditor may
reasonably and in good faith determine that a consumer has the ability
to repay despite a higher debt-to-income ratio or lower residual income
in light of the consumer's assets other than the dwelling, including any
real property attached to the dwelling, securing the covered
transaction, such as a savings account. The creditor may also reasonably
and in good faith determine that a consumer has the ability to repay
despite a higher debt-to-income ratio in light of the consumer's
residual income.
43(d) Refinancing of non-standard mortgages.
43(d)(1) Definitions.
43(d)(1)(i) Non-standard mortgage.
Paragraph 43(d)(1)(i)(A).
1. Adjustable-rate mortgage with an introductory fixed rate. Under
Sec. 1026.43(d)(1)(i)(A), an adjustable-rate mortgage with an
introductory fixed interest rate for one year or longer is considered a
``non-standard mortgage.'' For example, a covered transaction that has a
fixed introductory rate for the first two, three, or five years and then
converts to a variable rate for the remaining 28, 27, or 25 years,
respectively, is a ``non-standard mortgage.'' A covered transaction with
an introductory rate for six months that then converts to a variable
rate for the remaining 29 and one-half years is not a ``non-standard
mortgage.''
43(d)(1)(ii) Standard mortgage.
Paragraph 43(d)(1)(ii)(A).
1. Regular periodic payments. Under Sec. 1026.43(d)(1)(ii)(A), a
``standard mortgage'' must provide for regular periodic payments that do
not result in an increase of the principal balance (negative
amortization), allow the consumer to defer repayment of principal (see
comment 43(e)(2)(i)-2), or result in a balloon payment. Thus, the terms
of the legal obligation must require the consumer to make payments of
principal and interest on a monthly or other periodic basis that will
repay the loan amount over the loan term. Except for payments resulting
from any interest rate changes after consummation in an adjustable-rate
or step-rate mortgage, the periodic payments must be substantially
equal. For an explanation of the term ``substantially equal,'' see
comment 43(c)(5)(i)-4. In addition, a single-payment transaction is not
a ``standard mortgage'' because it does not require ``regular periodic
payments.'' See also comment 43(e)(2)(i)-1.
Paragraph 43(d)(1)(ii)(D).
1. First five years after consummation. A ``standard mortgage'' must
have an interest rate that is fixed for at least the first five years
(60 months) after consummation. For example, assume an adjustable-rate
mortgage that applies the same fixed interest rate to determine the
first 60 payments of principal and interest due. The loan is consummated
on August 15, 2013, and the first monthly payment is due on October 1,
2013. The date that is five years after consummation is August 15, 2018.
The first interest rate adjustment occurs on September 1, 2018. This
loan meets the criterion for a ``standard mortgage'' under Sec.
1026.43(d)(1)(ii)(D) because the interest rate is fixed until September
1, 2018, which is more than five years after consummation. For guidance
regarding step-rate mortgages, see comment 43(e)(2)(iv)-3.iii.
Paragraph 43(d)(1)(ii)(E).
1. Permissible use of proceeds. To qualify as a ``standard
mortgage,'' the loan's proceeds may be used for only two purposes:
paying off the non-standard mortgage and paying for closing costs,
including paying escrow amounts required at or before closing. If the
proceeds of a covered transaction are used for other purposes, such as
to pay off other liens or to provide additional cash to the consumer for
discretionary spending, the transaction does not meet the definition of
a ``standard mortgage.''
43(d)(2) Scope.
1. Written application. For an explanation of the requirements for a
``written application'' in Sec. 1026.43(d)(2)(iii), (d)(2)(iv), and
(d)(2)(v), see comment 19(a)(1)(i)-3.
Paragraph 43(d)(2)(ii).
1. Materially lower. The exemptions afforded under Sec.
1026.43(d)(3) apply to a refinancing only if the monthly payment for the
new loan is ``materially lower'' than the monthly payment for an
existing non-standard mortgage. The payments to be compared must be
calculated based on the requirements under Sec. 1026.43(d)(5). Whether
the new loan payment is ``materially lower'' than the non-standard
mortgage payment depends on the facts and circumstances. In all cases, a
payment reduction of 10 percent or more meets the ``materially lower''
standard.
Paragraph 43(d)(2)(iv).
1. Late payment--12 months prior to application. Under Sec.
1026.43(d)(2)(iv), the exemptions in Sec. 1026.43(d)(3) apply to a
covered transaction only if, during the 12 months immediately preceding
the creditor's receipt of the consumer's written application for a
refinancing, the consumer has made no more than one payment on the non-
standard mortgage more than 30 days late. (For an explanation of
``written application,'' see comment 43(d)(2)-1.) For example, assume a
consumer applies for a refinancing on May 1, 2014. Assume also that the
consumer made a
[[Page 800]]
non-standard mortgage payment on August 15, 2013, that was 45 days late.
The consumer made no other late payments on the non-standard mortgage
between May 1, 2013, and May 1, 2014. In this example, the requirement
under Sec. 1026.43(d)(2)(iv) is met because the consumer made only one
payment that was over 30 days late within the 12 months prior to
applying for the refinancing (i.e., eight and one-half months prior to
application).
2. Payment due date. Whether a payment is more than 30 days late is
measured in relation to the contractual due date not accounting for any
grace period. For example, if the contractual due date for a non-
standard mortgage payment is the first day of every month, but no late
fee will be charged as long as the payment is received by the 16th of
the month, the payment due date for purposes of Sec. 1026.43(d)(2)(iv)
and (v) is the first day of the month, not the 16th day of the month.
Thus, a payment due under the contract on October 1st that is paid on
November 1st is made more than 30 days after the payment due date.
Paragraph 43(d)(2)(v).
1. Late payment--six months prior to application. Under Sec.
1026.43(d)(2)(v), the exemptions in Sec. 1026.43(d)(3) apply to a
covered transaction only if, during the six months immediately preceding
the creditor's receipt of the consumer's written application for a
refinancing, the consumer has made no payments on the non-standard
mortgage more than 30 days late. (For an explanation of ``written
application'' and how to determine the payment due date, see comments
43(d)(2)-1 and 43(d)(2)(iv)-2.) For example, assume a consumer with a
non-standard mortgage applies for a refinancing on May 1, 2014. If the
consumer made a payment on March 15, 2014, that was 45 days late, the
requirement under Sec. 1026.43(d)(2)(v) is not met because the consumer
made a payment more than 30 days late one and one-half months prior to
application. If the number of months between consummation of the non-
standard mortgage and the consumer's application for the standard
mortgage is six or fewer, the consumer may not have made any payment
more than 30 days late on the non-standard mortgage.
Paragraph 43(d)(2)(vi).
1. Non-standard mortgage loan made in accordance with ability-to-
repay or qualified mortgage requirements. For non-standard mortgages
that are consummated on or after January 10, 2014, Sec.
1026.43(d)(2)(vi) provides that the refinancing provisions set forth in
Sec. 1026.43(d) apply only if the non-standard mortgage was made in
accordance with the requirements of Sec. 1026.43(c) or (e), as
applicable. For example, if a creditor originated a non-standard
mortgage on or after January 10, 2014 that did not comply with the
requirements of Sec. 1026.43(c) and was not a qualified mortgage
pursuant to Sec. 1026.43(e), Sec. 1026.43(d) would not apply to the
refinancing of the non-standard mortgage loan into a standard mortgage
loan. However, Sec. 1026.43(d) applies to the refinancing of a non-
standard mortgage loan into a standard mortgage loan, regardless of
whether the non-standard mortgage loan was made in compliance with Sec.
1026.43(c) or (e), if the non-standard mortgage loan was consummated
prior to January 10, 2014.
43(d)(3) Exemption from repayment ability requirements.
1. Two-part determination. To qualify for the exemptions in Sec.
1026.43(d)(3), a creditor must have considered, first, whether the
consumer is likely to default on the existing mortgage once that loan is
recast and, second, whether the new mortgage likely would prevent the
consumer's default.
43(d)(4) Offer of rate discounts and other favorable terms.
1. Documented underwriting practices. In connection with a
refinancing made pursuant to Sec. 1026.43(d), Sec. 1026.43(d)(4)
requires a creditor offering a consumer rate discounts and terms that
are the same as, or better than, the rate discounts and terms offered to
new consumers to make such an offer consistent with the creditor's
documented underwriting practices. Section 1026.43(d)(4) does not
require a creditor making a refinancing pursuant to Sec. 1026.43(d) to
comply with the underwriting requirements of Sec. 1026.43(c). Rather,
Sec. 1026.43(d)(4) requires creditors providing such discounts to do so
consistent with documented policies related to loan pricing, loan term
qualifications, or other similar underwriting practices. For example,
assume that a creditor is providing a consumer with a refinancing made
pursuant to Sec. 1026.43(d) and that this creditor has a documented
practice of offering rate discounts to consumers with credit scores
above a certain threshold. Assume further that the consumer receiving
the refinancing has a credit score below this threshold, and therefore
would not normally qualify for the rate discount available to consumers
with high credit scores. This creditor complies with Sec. 1026.43(d)(4)
by offering the consumer the discounted rate in connection with the
refinancing made pursuant to Sec. 1026.43(d), even if the consumer
would not normally qualify for that discounted rate, provided that the
offer of the discounted rate is not prohibited by applicable State or
Federal law. However, Sec. 1026.43(d)(4) does not require a creditor to
offer a consumer such a discounted rate.
43(d)(5) Payment calculations.
43(d)(5)(i) Non-Standard mortgage.
1. Payment calculation for a non-standard mortgage. In determining
whether the monthly periodic payment for a standard mortgage is
materially lower than the monthly periodic payment for the non-standard
mortgage under Sec. 1026.43(d)(2)(ii), the creditor must consider the
monthly payment for the non-
[[Page 801]]
standard mortgage that will result after the loan is ``recast,''
assuming substantially equal payments of principal and interest that
amortize the remaining loan amount over the remaining term as of the
date the mortgage is recast. For guidance regarding the meaning of
``substantially equal,'' see comment 43(c)(5)(i)-4. For the meaning of
``recast,'' see Sec. 1026.43(b)(11) and associated commentary.
2. Fully indexed rate. The term ``fully indexed rate'' in Sec.
1026.43(d)(5)(i)(A) for calculating the payment for a non-standard
mortgage is generally defined in Sec. 1026.43(b)(3) and associated
commentary. Under Sec. 1026.43(b)(3) the fully indexed rate is
calculated at the time of consummation. For purposes of Sec.
1026.43(d)(5)(i), however, the fully indexed rate is calculated within a
reasonable period of time before or after the date the creditor receives
the consumer's written application for the standard mortgage. Thirty
days is generally considered ``a reasonable period of time.''
3. Written application. For an explanation of the requirements for a
``written application'' in Sec. 1026.43(d)(5)(i), see comment
19(a)(1)(i)-3.
4. Payment calculation for an adjustable-rate mortgage with an
introductory fixed rate. Under Sec. 1026.43(d)(5)(i), the monthly
periodic payment for an adjustable-rate mortgage with an introductory
fixed interest rate for a period of one or more years must be calculated
based on several assumptions.
i. First, the payment must be based on the outstanding principal
balance as of the date on which the mortgage is recast, assuming all
scheduled payments have been made up to that date and the last payment
due under those terms is made and credited on that date. For example,
assume an adjustable-rate mortgage with a 30-year loan term. The loan
agreement provides that the payments for the first 24 months are based
on a fixed rate, after which the interest rate will adjust annually
based on a specified index and margin. The loan is recast on the due
date of the 24th payment. If the 24th payment is due on September 1,
2014, the creditor must calculate the outstanding principal balance as
of September 1, 2014, assuming that all 24 payments under the fixed rate
terms have been made and credited timely.
ii. Second, the payment calculation must be based on substantially
equal monthly payments of principal and interest that will fully repay
the outstanding principal balance over the term of the loan remaining as
of the date the loan is recast. Thus, in the example above, the creditor
must assume a loan term of 28 years (336 monthly payments).
iii. Third, the payment must be based on the fully indexed rate, as
described in Sec. 1026.43(d)(5)(i)(A).
5. Example of payment calculation for an adjustable-rate mortgage
with an introductory fixed rate. The following example illustrates the
rule described in comment 43(d)(5)(i)-4:
i. A loan in an amount of $200,000 has a 30-year loan term. The loan
agreement provides for a discounted introductory interest rate of 5
percent that is fixed for an initial period of two years, after which
the interest rate will adjust annually based on a specified index plus a
margin of 3 percentage points.
ii. The non-standard mortgage is consummated on February 15, 2014,
and the first monthly payment is due on April 1, 2014. The loan is
recast on the due date of the 24th monthly payment, which is March 1,
2016.
iii. On March 15, 2015, the creditor receives the consumer's written
application for a refinancing after the consumer has made 12 monthly on-
time payments. On this date, the index value is 4.5 percent.
iv. To calculate the non-standard mortgage payment that must be
compared to the standard mortgage payment under Sec. 1026.43(d)(2)(ii),
the creditor must use:
A. The outstanding principal balance as of March 1, 2016, assuming
all scheduled payments have been made up to March 1, 2016, and the last
payment due under the fixed rate terms is made and credited on March 1,
2016. In this example, the outstanding principal balance is $193,948.
B. The fully indexed rate of 7.5 percent, which is the index value
of 4.5 percent as of March 15, 2015 (the date on which the application
for a refinancing is received) plus the margin of 3 percent.
C. The remaining loan term as of March 1, 2016, the date of the
recast, which is 28 years (336 monthly payments).
v. Based on these assumptions, the monthly payment for the non-
standard mortgage for purposes of determining whether the standard
mortgage monthly payment is lower than the non-standard mortgage monthly
payment (see Sec. 1026.43(d)(2)(ii)) is $1,383. This is the
substantially equal, monthly payment of principal and interest required
to repay the outstanding principal balance at the fully indexed rate
over the remaining term.
6. Payment calculation for an interest-only loan. Under Sec.
1026.43(d)(5)(i), the monthly periodic payment for an interest-only loan
must be calculated based on several assumptions:
i. First, the payment must be based on the outstanding principal
balance as of the date of the recast, assuming all scheduled payments
are made under the terms of the legal obligation in effect before the
mortgage is recast. For a loan on which only interest and no principal
has been paid, the outstanding principal balance at the time of recast
will be the loan amount, as defined in Sec. 1026.43(b)(5), assuming all
scheduled payments are made under the terms of the legal obligation in
effect before the mortgage is recast. For example, assume that a
mortgage
[[Page 802]]
has a 30-year loan term, and provides that the first 24 months of
payments are interest-only. If the 24th payment is due on September 1,
2015, the creditor must calculate the outstanding principal balance as
of September 1, 2015, assuming that all 24 payments under the interest-
only payment terms have been made and credited timely and that no
payments of principal have been made.
ii. Second, the payment calculation must be based on substantially
equal monthly payments of principal and interest that will fully repay
the loan amount over the term of the loan remaining as of the date the
loan is recast. Thus, in the example above, the creditor must assume a
loan term of 28 years (336 monthly payments).
iii. Third, the payment must be based on the fully indexed rate, as
described in Sec. 1026.43(d)(5)(i)(A).
7. Example of payment calculation for an interest-only loan. The
following example illustrates the rule described in comment 43(d)(5)(i)-
6:
i. A loan in an amount of $200,000 has a 30-year loan term. The loan
agreement provides for a fixed interest rate of 7 percent, and permits
interest-only payments for the first two years (the first 24 payments),
after which time amortizing payments of principal and interest are
required.
ii. The non-standard mortgage is consummated on February 15, 2014,
and the first monthly payment is due on April 1, 2014. The loan is
recast on the due date of the 24th monthly payment, which is March 1,
2016.
iii. On March 15, 2015, the creditor receives the consumer's written
application for a refinancing, after the consumer has made 12 monthly
on-time payments. The consumer has made no additional payments of
principal.
iv. To calculate the non-standard mortgage payment that must be
compared to the standard mortgage payment under Sec. 1026.43(d)(2)(ii),
the creditor must use:
A. The loan amount, which is the outstanding principal balance as of
March 1, 2016, assuming all scheduled interest-only payments have been
made and credited up to that date. In this example, the loan amount is
$200,000.
B. An interest rate of 7 percent, which is the interest rate in
effect at the time of consummation of this fixed-rate non-standard
mortgage.
C. The remaining loan term as of March 1, 2016, the date of the
recast, which is 28 years (336 monthly payments).
v. Based on these assumptions, the monthly payment for the non-
standard mortgage for purposes of determining whether the standard
mortgage monthly payment is lower than the non-standard mortgage monthly
payment (see Sec. 1026.43(d)(2)(ii)) is $1,359. This is the
substantially equal, monthly payment of principal and interest required
to repay the loan amount at the fully indexed rate over the remaining
term.
8. Payment calculation for a negative amortization loan. Under Sec.
1026.43(d)(5)(i), the monthly periodic payment for a negative
amortization loan must be calculated based on several assumptions:
i. First, the calculation must be based on the maximum loan amount,
determined after adjusting for the outstanding principal balance. If the
consumer makes only the minimum periodic payments for the maximum
possible time, until the consumer must begin making fully amortizing
payments, the outstanding principal balance will be the maximum loan
amount, as defined in Sec. 1026.43(b)(7). In this event, the creditor
complies with Sec. 1026.43(d)(5)(i)(C)(3) by relying on the examples of
how to calculate the maximum loan amount, see comment 43(b)(7)-3. If the
consumer makes payments above the minimum periodic payments for the
maximum possible time, the creditor must calculate the maximum loan
amount based on the outstanding principal balance. In this event, the
creditor complies with Sec. 1026.43(d)(5)(i)(C)(3) by relying on the
examples of how to calculate the maximum loan amount in comment
43(d)(5)(i)-10.
ii. Second, the calculation must be based on substantially equal
monthly payments of principal and interest that will fully repay the
maximum loan amount over the term of the loan remaining as of the date
the loan is recast. For example, if the loan term is 30 years and the
loan is recast on the due date of the 60th monthly payment, the creditor
must assume a remaining loan term of 25 years (300 monthly payments).
iii. Third, the payment must be based on the fully indexed rate as
of the date of the written application for the standard mortgage.
9. Example of payment calculation for a negative amortization loan
if only minimum payments made. The following example illustrates the
rule described in comment 43(d)(5)(i)-8:
i. A loan in an amount of $200,000 has a 30-year loan term. The loan
agreement provides that the consumer can make minimum monthly payments
that cover only part of the interest accrued each month until the date
on which the principal balance increases to the negative amortization
cap of 115 percent of the loan amount, or for the first five years of
monthly payments (60 payments), whichever occurs first. The loan is an
adjustable-rate mortgage that adjusts monthly according to a specified
index plus a margin of 3.5 percent.
ii. The non-standard mortgage is consummated on February 15, 2014,
and the first monthly payment is due on April 1, 2014. Assume that the
consumer has made only the minimum periodic payments. Assume further
that, based on the calculation of the
[[Page 803]]
maximum loan amount required under Sec. 1026.43(b)(7) and associated
commentary, the negative amortization cap of 115 percent would be
reached on June 1, 2016, the due date of the 27th monthly payment.
iii. On March 15, 2015, the creditor receives the consumer's written
application for a refinancing, after the consumer has made 12 monthly
on-time payments. On this date, the index value is 4.5 percent.
iv. To calculate the non-standard mortgage payment that must be
compared to the standard mortgage payment under Sec. 1026.43(d)(2)(ii),
the creditor must use:
A. The maximum loan amount of $229,251 as of June 1, 2016;
B. The fully indexed rate of 8 percent, which is the index value of
4.5 percent as of March 15, 2015 (the date on which the creditor
receives the application for a refinancing) plus the margin of 3.5
percent; and
C. The remaining loan term as of June 1, 2016, the date of the
recast, which is 27 years and nine months (333 monthly payments).
v. Based on these assumptions, the monthly payment for the non-
standard mortgage for purposes of determining whether the standard
mortgage monthly payment is lower than the non-standard mortgage monthly
payment (see Sec. 1026.43(d)(2)(ii)) is $1,716. This is the
substantially equal, monthly payment of principal and interest required
to repay the maximum loan amount at the fully indexed rate over the
remaining term.
10. Example of payment calculation for a negative amortization loan
if payments above minimum amount made. The following example illustrates
the rule described in comment 43(d)(5)(i)-8:
i. A loan in an amount of $200,000 has a 30-year loan term. The loan
agreement provides that the consumer can make minimum monthly payments
that cover only part of the interest accrued each month until the date
on which the principal balance increases to the negative amortization
cap of 115 percent of the loan amount, or for the first five years of
monthly payments (60 payments), whichever occurs first. The loan is an
adjustable-rate mortgage that adjusts monthly according to a specified
index plus a margin of 3.5 percent. The introductory interest rate at
consummation is 1.5 percent. One month after consummation, the interest
rate adjusts and will adjust monthly thereafter based on the specified
index plus a margin of 3.5 percent. The maximum lifetime interest rate
is 10.5 percent; there are no other periodic interest rate adjustment
caps that limit how quickly the maximum lifetime rate may be reached.
The minimum monthly payment for the first year is based on the initial
interest rate of 1.5 percent. After that, the minimum monthly payment
adjusts annually, but may increase by no more than 7.5 percent over the
previous year's payment. The minimum monthly payment is $690 in the
first year, $742 in the second year, $798 in the third year, $857 in the
fourth year, and $922 in the fifth year.
ii. The non-standard mortgage is consummated on February 15, 2014,
and the first monthly payment is due on April 1, 2014. Assume that the
consumer has made more than the minimum periodic payments, and that
after the consumer's 12th monthly on-time payment the outstanding
principal balance is $195,000. Based on the calculation of the maximum
loan amount after adjusting for this outstanding principal balance, the
negative amortization cap of 115 percent would be reached on March 1,
2019, the due date of the 60th monthly payment.
iii. On March 15, 2015, the creditor receives the consumer's written
application for a refinancing, after the consumer has made 12 monthly
on-time payments. On this date, the index value is 4.5 percent.
iv. To calculate the non-standard mortgage payment that must be
compared to the standard mortgage payment under Sec. 1026.43(d)(2)(ii),
the creditor must use:
A. The maximum loan amount of $229,219 as of March 1, 2019.
B. The fully indexed rate of 8 percent, which is the index value of
4.5 percent as of March 15, 2015 (the date on which the creditor
receives the application for a refinancing) plus the margin of 3.5
percent.
C. The remaining loan term as of March 1, 2019, the date of the
recast, which is exactly 25 years (300 monthly payments).
v. Based on these assumptions, the monthly payment for the non-
standard mortgage for purposes of determining whether the standard
mortgage monthly payment is lower than the non-standard mortgage monthly
payment (see Sec. 1026.43(d)(2)(ii)) is $1,769. This is the
substantially equal, monthly payment of principal and interest required
to repay the maximum loan amount at the fully indexed rate over the
remaining term.
43(d)(5)(ii) Standard mortgage.
1. Payment calculation for a standard mortgage. In determining
whether the monthly periodic payment for a standard mortgage is
materially lower than the monthly periodic payment for a non-standard
mortgage, the creditor must consider the monthly payment for the
standard mortgage that will result in substantially equal, monthly,
fully amortizing payments (as defined in Sec. 1026.43(b)(2)) using the
rate as of consummation. For guidance regarding the meaning of
``substantially equal'' see comment 43(c)(5)(i)-4. For a mortgage with a
single, fixed rate for the first five years after consummation, the
maximum rate that will apply during the first five years after
consummation will be the rate at consummation. For a step-rate mortgage,
however, the rate that must be
[[Page 804]]
used is the highest rate that will apply during the first five years
after consummation. For example, if the rate for the first two years
after the date on which the first regular periodic payment will be due
is 4 percent, the rate for the following two years is 5 percent, and the
rate for the next two years is 6 percent, the rate that must be used is
6 percent.
2. Example of payment calculation for a standard mortgage. The
following example illustrates the rule described in comment
43(d)(5)(ii)-1: A loan in an amount of $200,000 has a 30-year loan term.
The loan agreement provides for an interest rate of 6 percent that is
fixed for an initial period of five years, after which time the interest
rate will adjust annually based on a specified index plus a margin of 3
percent, subject to a 2 percent annual interest rate adjustment cap. The
creditor must determine whether the standard mortgage monthly payment is
materially lower than the non-standard mortgage monthly payment (see
Sec. 1026.43(d)(2)(ii)) based on a standard mortgage payment of $1,199.
This is the substantially equal, monthly payment of principal and
interest required to repay $200,000 over 30 years at an interest rate of
6 percent.
43(e) Qualified mortgages.
43(e)(1) Safe harbor and presumption of compliance.
1. General. Section 1026.43(c) requires a creditor to make a
reasonable and good faith determination at or before consummation that a
consumer will be able to repay a covered transaction. Section
1026.43(e)(1)(i) and (ii) provide a safe harbor and presumption of
compliance, respectively, with the repayment ability requirements of
Sec. 1026.43(c) for creditors and assignees of covered transactions
that satisfy the requirements of a qualified mortgage under Sec.
1026.43(e)(2), (e)(4), or (f). See Sec. 1026.43(e)(1)(i) and (ii) and
associated commentary.
43(e)(1)(i) Safe harbor for transactions that are not higher-priced
covered transactions.
1. Safe harbor. To qualify for the safe harbor in Sec.
1026.43(e)(1)(i), a covered transaction must meet the requirements of a
qualified mortgage under Sec. 1026.43(e)(2), (e)(4), or (f) and must
not be a higher-priced covered transaction, as defined in Sec.
1026.43(b)(4). For guidance on determining whether a loan is a higher-
priced covered transaction, see comment 43(b)(4)-1.
43(e)(1)(ii) Presumption of compliance for higher-priced covered
transactions.
1. General. Under Sec. 1026.43(e)(1)(ii), a creditor or assignee of
a qualified mortgage under Sec. 1026.43(e)(2), (e)(4), or (f) that is a
higher-priced covered transaction is presumed to comply with the
repayment ability requirements of Sec. 1026.43(c). To rebut the
presumption, it must be proven that, despite meeting the standards for a
qualified mortgage (including either the debt-to-income standard in
Sec. 1026.43(e)(2)(vi) or the standards of one of the entities
specified in Sec. 1026.43(e)(4)(ii)), the creditor did not have a
reasonable and good faith belief in the consumer's repayment ability.
Specifically, it must be proven that, at the time of consummation, based
on the information available to the creditor, the consumer's income,
debt obligations, alimony, child support, and the consumer's monthly
payment (including mortgage-related obligations) on the covered
transaction and on any simultaneous loans of which the creditor was
aware at consummation would leave the consumer with insufficient
residual income or assets other than the value of the dwelling
(including any real property attached to the dwelling) that secures the
loan with which to meet living expenses, including any recurring and
material non-debt obligations of which the creditor was aware at the
time of consummation, and that the creditor thereby did not make a
reasonable and good faith determination of the consumer's repayment
ability. For example, a consumer may rebut the presumption with evidence
demonstrating that the consumer's residual income was insufficient to
meet living expenses, such as food, clothing, gasoline, and health care,
including the payment of recurring medical expenses of which the
creditor was aware at the time of consummation, and after taking into
account the consumer's assets other than the value of the dwelling
securing the loan, such as a savings account. In addition, the longer
the period of time that the consumer has demonstrated actual ability to
repay the loan by making timely payments, without modification or
accommodation, after consummation or, for an adjustable-rate mortgage,
after recast, the less likely the consumer will be able to rebut the
presumption based on insufficient residual income and prove that, at the
time the loan was made, the creditor failed to make a reasonable and
good faith determination that the consumer had the reasonable ability to
repay the loan.
43(e)(2) Qualified mortgage defined--general.
Paragraph 43(e)(2)(i).
1. Regular periodic payments. Under Sec. 1026.43(e)(2)(i), a
qualified mortgage must provide for regular periodic payments that may
not result in an increase of the principal balance (negative
amortization), deferral of principal repayment, or a balloon payment.
Thus, the terms of the legal obligation must require the consumer to
make payments of principal and interest, on a monthly or other periodic
basis, that will fully repay the loan amount over the loan term. The
periodic payments must be substantially equal except for the effect that
any interest rate change after consummation has on the payment in the
case of an adjustable-rate or step-rate mortgage. In addition, because
Sec. 1026.43(e)(2)(i) requires that a qualified
[[Page 805]]
mortgage provide for regular periodic payments, a single-payment
transaction may not be a qualified mortgage.
2. Deferral of principal repayment. Under Sec. 1026.43(e)(2)(i)(B),
a qualified mortgage's regular periodic payments may not allow the
consumer to defer repayment of principal, except as provided in Sec.
1026.43(f). A loan allows the deferral of principal repayment if one or
more of the periodic payments may be applied solely to accrued interest
and not to loan principal. Deferred principal repayment also occurs if
the payment is applied to both accrued interest and principal but the
consumer is permitted to make periodic payments that are less than the
amount that would be required under a payment schedule that has
substantially equal payments that fully repay the loan amount over the
loan term. Graduated payment mortgages, for example, allow deferral of
principal repayment in this manner and therefore may not be qualified
mortgages.
Paragraph 43(e)(2)(ii).
1. General. The 30-year term limitation in Sec. 1026.43(e)(2)(ii)
is applied without regard to any interim period between consummation and
the beginning of the first full unit period of the repayment schedule.
For example, assume a covered transaction is consummated on March 20,
2014 and the due date of the first regular periodic payment is April 30,
2014. The beginning of the first full unit period of the repayment
schedule is April 1, 2014 and the loan term therefore ends on April 1,
2044. The transaction would comply with the 30-year term limitation in
Sec. 1026.43(e)(2)(ii).
Paragraph 43(e)(2)(iv).
1. Maximum interest rate during the first five years. For a
qualified mortgage, the creditor must underwrite the loan using a
periodic payment of principal and interest based on the maximum interest
rate that may apply during the first five years after the date on which
the first regular periodic payment will be due. Creditors must use the
maximum rate that could apply at any time during the first five years
after the date on which the first regular periodic payment will be due,
regardless of whether the maximum rate is reached at the first or
subsequent adjustment during the five year period.
2. Fixed-rate mortgage. For a fixed-rate mortgage, creditors should
use the interest rate in effect at consummation. ``Fixed-rate mortgage''
is defined in Sec. 1026.18(s)(7)(iii).
3. Interest rate adjustment caps. For an adjustable-rate mortgage,
creditors should assume the interest rate increases after consummation
as rapidly as possible, taking into account the terms of the legal
obligation. That is, creditors should account for any periodic interest
rate adjustment cap that may limit how quickly the interest rate can
increase under the terms of the legal obligation. Where a range for the
maximum interest rate during the first five years is provided, the
highest rate in that range is the maximum interest rate for purposes of
Sec. 1026.43(e)(2)(iv). Where the terms of the legal obligation are not
based on an index plus margin or formula, the creditor must use the
maximum interest rate that occurs during the first five years after the
date on which the first regular periodic payment will be due. To
illustrate:
i. Adjustable-rate mortgage with discount for three years. Assume an
adjustable-rate mortgage has an initial discounted rate of 5 percent
that is fixed for the first three years, measured from the first day of
the first full calendar month following consummation, after which the
rate will adjust annually based on a specified index plus a margin of 3
percent. The index value in effect at consummation is 4.5 percent. The
loan agreement provides for an annual interest rate adjustment cap of 2
percent, and a lifetime maximum interest rate of 12 percent. The first
rate adjustment occurs on the due date of the 36th monthly payment; the
rate can adjust to no more than 7 percent (5 percent initial discounted
rate plus 2 percent annual interest rate adjustment cap). The second
rate adjustment occurs on the due date of the 48th monthly payment; the
rate can adjust to no more than 9 percent (7 percent rate plus 2 percent
annual interest rate adjustment cap). The third rate adjustment occurs
on the due date of the 60th monthly payment; the rate can adjust to no
more than 11 percent (9 percent rate plus 2 percent annual interest rate
cap adjustment). The maximum interest rate during the first five years
after the date on which the first regular periodic payment will be due
is 11 percent (the rate on the due date of the 60th monthly payment).
For further discussion of how to determine whether a rate adjustment
occurs during the first five years after the date on which the first
regular periodic payment will be due, see comment 43(e)(2)(iv)-7.
ii. Adjustable-rate mortgage with discount for three years. Assume
the same facts as in paragraph 3.i except that the lifetime maximum
interest rate is 10 percent, which is less than the maximum interest
rate in the first five years after the date on which the first regular
periodic payment will be due of 11 percent that would apply but for the
lifetime maximum interest rate. The maximum interest rate during the
first five years after the date on which the first regular periodic
payment will be due is 10 percent.
iii. Step-rate mortgage. Assume a step-rate mortgage with an
interest rate fixed at 6.5 percent for the first two years, measured
from the first day of the first full calendar month following
consummation, 7 percent for the next three years, and then 7.5 percent
for the remainder of the loan term. The maximum interest rate during the
first five
[[Page 806]]
years after the date on which the first regular periodic payment will be
due is 7.5 percent.
4. First five years after the date on which the first regular
periodic payment will be due. Under Sec. 1026.43(e)(2)(iv)(A), the
creditor must underwrite the loan using the maximum interest rate that
may apply during the first five years after the date on which the first
regular periodic payment will be due. To illustrate, assume an
adjustable-rate mortgage with an initial fixed interest rate of 5
percent for the first five years, measured from the first day of the
first full calendar month following consummation, after which the
interest rate will adjust annually to the specified index plus a margin
of 6 percent, subject to a 2 percent annual interest rate adjustment
cap. The index value in effect at consummation is 5.5 percent. The loan
consummates on September 15, 2014, and the first monthly payment is due
on November 1, 2014. The first rate adjustment to no more than 7 percent
(5 percent plus 2 percent annual interest rate adjustment cap) occurs on
the due date of the 60th monthly payment, which is October 1, 2019, and
therefore, the rate adjustment occurs during the first five years after
the date on which the first regular periodic payment will be due. To
meet the definition of qualified mortgage under Sec. 1026.43(e)(2), the
creditor must underwrite the loan using a monthly payment of principal
and interest based on an interest rate of 7 percent.
5. Loan amount. To meet the definition of qualified mortgage under
Sec. 1026.43(e)(2), a creditor must determine the periodic payment of
principal and interest using the maximum interest rate permitted during
the first five years after the date on which the first regular periodic
payment will be due that repays either:
i. The outstanding principal balance as of the earliest date the
maximum interest rate during the first five years after the date on
which the first regular periodic payment will be due can take effect
under the terms of the legal obligation, over the remaining term of the
loan. To illustrate, assume a loan in an amount of $200,000 has a 30-
year loan term. The loan agreement provides for a discounted interest
rate of 5 percent that is fixed for an initial period of three years,
measured from the first day of the first full calendar month following
consummation, after which the interest rate will adjust annually based
on a specified index plus a margin of 3 percent, subject to a 2 percent
annual interest rate adjustment cap and a lifetime maximum interest rate
of 9 percent. The index value in effect at consummation equals 4.5
percent. Assuming the interest rate increases after consummation as
quickly as possible, the rate adjustment to the lifetime maximum
interest rate of 9 percent occurs on the due date of the 48th monthly
payment. The outstanding principal balance on the loan at the end of the
fourth year (after the 48th monthly payment is credited) is $188,218.
The creditor will meet the definition of qualified mortgage if it
underwrites the covered transaction using the monthly payment of
principal and interest of $1,564 to repay the outstanding principal
balance of $188,218 over the remaining 26 years of the loan term (312
months) using the maximum interest rate during the first five years of 9
percent; or
ii. The loan amount, as that term is defined in Sec. 1026.43(b)(5),
over the entire loan term, as that term is defined in Sec.
1026.43(b)(6). Using the same example above, the creditor will meet the
definition of qualified mortgage if it underwrites the covered
transaction using the monthly payment of principal and interest of
$1,609 to repay the loan amount of $200,000 over the 30-year loan term
using the maximum interest rate during the first five years of 9
percent.
6. Mortgage-related obligations. Section 1026.43(e)(2)(iv) requires
creditors to take the consumer's monthly payment for mortgage-related
obligations into account when underwriting the loan. For the meaning of
the term ``mortgage-related obligations,'' see Sec. 1026.43(b)(8) and
associated commentary.
7. Examples. The following are examples of how to determine the
periodic payment of principal and interest based on the maximum interest
rate during the first five years after the date on which the first
regular periodic payment will be due for purposes of meeting the
definition of qualified mortgage under Sec. 1026.43(e) (all payment
amounts shown are rounded, and all amounts are calculated using non-
rounded values; all initial fixed interest rate periods are measured
from the first day of the first full calendar month following
consummation):
i. Fixed-rate mortgage. A loan in an amount of $200,000 has a 30-
year loan term and a fixed interest rate of 7 percent. The maximum
interest rate during the first five years after the date on which the
first regular periodic payment will be due for a fixed-rate mortgage is
the interest rate in effect at consummation, which is 7 percent under
this example. The monthly fully amortizing payment scheduled over the 30
years is $1,331. The creditor will meet the definition of qualified
mortgage if it underwrites the loan using the fully amortizing payment
of $1,331.
ii. Adjustable-rate mortgage with discount for three years. A. A
loan in an amount of $200,000 has a 30-year loan term. The loan
agreement provides for a discounted interest rate of 5 percent that is
fixed for an initial period of three years, after which the interest
rate will adjust annually based on a specified index plus a margin of 3
percent, subject to a 2 percent annual interest rate adjustment cap and
a lifetime maximum interest rate of
[[Page 807]]
9 percent. The index value in effect at consummation is 4.5 percent. The
loan is consummated on March 15, 2014, and the first regular periodic
payment is due May 1, 2014. The loan agreement provides that the first
rate adjustment occurs on April 1, 2017 (the due date of the 36th
monthly payment); the second rate adjustment occurs on April 1, 2018
(the due date of the 48th monthly payment); and the third rate
adjustment occurs on April 1, 2019 (the due date of the 60th monthly
payment). Under this example, the maximum interest rate during the first
five years after the date on which the first regular periodic payment
due is 9 percent (the lifetime interest rate cap), which applies
beginning on April 1, 2018 (the due date of the 48th monthly payment).
The outstanding principal balance at the end of the fourth year (after
the 48th payment is credited) is $188,218.
B. The transaction will meet the definition of a qualified mortgage
if the creditor underwrites the loan using the monthly payment of
principal and interest of $1,564 to repay the outstanding principal
balance at the end of the fourth year of $188,218 over the remaining 26
years of the loan term (312 months), using the maximum interest rate
during the first five years after the date on which the first regular
periodic payment will be due of 9 percent. Alternatively, the
transaction will meet the definition of a qualified mortgage if the
creditor underwrites the loan using the monthly payment of principal and
interest of $1,609 to repay the loan amount of $200,000 over the 30-year
loan term, using the maximum interest rate during the first five years
after the date on which the first regular periodic payment will be due
of 9 percent.
iii. Adjustable-rate mortgage with discount for five years. A. A
loan in an amount of $200,000 has a 30-year loan term. The loan
agreement provides for a discounted interest rate of 6 percent that is
fixed for an initial period of five years, after which the interest rate
will adjust annually based on a specified index plus a margin of 3
percent, subject to a 2 percent annual interest rate adjustment cap. The
index value in effect at consummation is 4.5 percent. The loan
consummates on March 15, 2014 and the first regular periodic payment is
due May 1, 2014. Under the terms of the loan agreement, the first rate
adjustment to no more than 8 percent (6 percent plus 2 percent annual
interest rate adjustment cap) is on April 1, 2019 (the due date of the
60th monthly payment), which occurs less than five years after the date
on which the first regular periodic payment will be due. Thus, the
maximum interest rate under the terms of the loan during the first five
years after the date on which the first regular periodic payment will be
due is 8 percent.
B. The transaction will meet the definition of a qualified mortgage
if the creditor underwrites the loan using the monthly payment of
principal and interest of $1,436 to repay the outstanding principal
balance at the end of the fifth year of $186,109 over the remaining 25
years of the loan term (300 months), using the maximum interest rate
during the first five years after the date on which the first regular
periodic payment will be due of 8 percent. Alternatively, the
transaction will meet the definition of a qualified mortgage if the
creditor underwrites the loan using the monthly payment of principal and
interest of $1,468 to repay the loan amount of $200,000 over the 30-year
loan term, using the maximum interest rate during the first five years
after the date on which the first regular periodic payment will be due
of 8 percent.
iv. Adjustable-rate mortgage with discount for seven years. A. A
loan in an amount of $200,000 has a 30-year loan term. The loan
agreement provides for a discounted interest rate of 6 percent that is
fixed for an initial period of seven years, after which the interest
rate will adjust annually based on a specified index plus a margin of 3
percent, subject to a 2 percent annual interest rate adjustment cap. The
index value in effect at consummation is 4.5 percent. The loan is
consummated on March 15, 2014, and the first regular periodic payment is
due May 1, 2014. Under the terms of the loan agreement, the first rate
adjustment is on April 1, 2021 (the due date of the 84th monthly
payment), which occurs more than five years after the date on which the
first regular periodic payment will be due. Thus, the maximum interest
rate under the terms of the loan during the first five years after the
date on which the first regular periodic payment will be due is 6
percent.
B. The transaction will meet the definition of a qualified mortgage
if the creditor underwrites the loan using the monthly payment of
principal and interest of $1,199 to repay the loan amount of $200,000
over the 30-year loan term using the maximum interest rate during the
first five years after the date on which the first regular periodic
payment will be due of 6 percent.
iv. Step-rate mortgage. A. A loan in an amount of $200,000 has a 30-
year loan term. The loan agreement provides that the interest rate is
6.5 percent for the first two years of the loan, 7 percent for the next
three years, and then 7.5 percent for remainder of the loan term. The
maximum interest rate during the first five years after the date on
which the first regular periodic payment will be due is 7.5 percent,
which occurs on the due date of the 60th monthly payment. The
outstanding principal balance at the end of the fifth year (after the
60th payment is credited) is $187,868.
[[Page 808]]
B. The transaction will meet the definition of a qualified mortgage
if the creditor underwrites the loan using a monthly payment of
principal and interest of $1,388 to repay the outstanding principal
balance of $187,868 over the remaining 25 years of the loan term (300
months), using the maximum interest rate during the first five years
after the date on which the first regular periodic payment will be due
of 7.5 percent. Alternatively, the transaction will meet the definition
of a qualified mortgage if the creditor underwrites the loan using a
monthly payment of principal and interest of $1,398 to repay $200,000
over the 30-year loan term using the maximum interest rate during the
first five years after the date on which the first regular periodic
payment will be due of 7.5 percent.
Paragraph 43(e)(2)(v).
1. General. For guidance on satisfying Sec. 1026.43(e)(2)(v), a
creditor may rely on commentary to Sec. 1026.43(c)(2)(i) and (vi),
(c)(3), and (c)(4).
2. Income or assets. Section 1026.43(e)(2)(v)(A) requires creditors
to consider and verify the consumer's current or reasonably expected
income or assets. For purposes of this requirement, the creditor must
consider and verify, at a minimum, any income specified in appendix Q. A
creditor may also consider and verify any other income in accordance
with Sec. 1026.43(c)(2)(i) and (c)(4); however, such income would not
be included in the total monthly debt-to-income ratio determination
required by Sec. 1026.43(e)(2)(vi).
3. Debts. Section 1026.43(e)(2)(v)(B) requires creditors to consider
and verify the consumer's current debt obligations, alimony, and child
support. For purposes of this requirement, the creditor must consider
and verify, at a minimum, any debt or liability specified in appendix Q.
A creditor may also consider and verify other debt in accordance with
Sec. 1026.43(c)(2)(vi) and (c)(3); however, such debt would not be
included in the total monthly debt-to-income ratio determination
required by Sec. 1026.43(e)(2)(vi).
Paragraph 43(e)(2)(vi).
1. Calculation of monthly payment on the covered transaction and
simultaneous loans. As provided in appendix Q, for purposes of Sec.
1026.43(e)(2)(vi), creditors must include in the definition of ``debt''
a consumer's monthly housing expense. This includes, for example, the
consumer's monthly payment on the covered transaction (including
mortgage-related obligations) and on simultaneous loans. Accordingly,
Sec. 1026.43(e)(2)(vi)(B) provides the method by which a creditor
calculates the consumer's monthly payment on the covered transaction and
on any simultaneous loan that the creditor knows or has reason to know
will be made.
43(e)(3) Limits on points and fees for qualified mortgages.
Paragraph 43(e)(3)(i).
1. Total loan amount. The term ``total loan amount'' is defined in
Sec. 1026.32(b)(4)(i). For an explanation of how to calculate the
``total loan amount'' under Sec. 1026.43(e)(3)(i), see comment
32(b)(4)(i)-1.
2. Calculation of allowable points and fees. A creditor must
determine which category the loan falls into based on the face amount of
the note (the ``loan amount'' as defined in Sec. 1026.43(b)(5)). For
categories with a percentage limit, the creditor must apply the
allowable points and fees percentage to the ``total loan amount,'' which
may be different than the loan amount. A creditor must calculate the
allowable amount of points and fees for a qualified mortgage as follows:
i. First, the creditor must determine the ``tier'' into which the
loan falls based on the loan amount. The loan amount is the principal
amount the consumer will borrow, as reflected in the promissory note or
loan contract. See Sec. 1026.43(b)(5). For example, if the loan amount
is $55,000, the loan falls into the tier for loans greater than or equal
to $20,000 but less than $60,000, to which a 5 percent cap on points and
fees applies. For tiers with a prescribed dollar limit on points and
fees (e.g., for loans from $60,000 up to $100,000, the limit is $3,000),
the creditor does not need to do any further calculations.
ii. Second, for tiers with a percentage limit, the creditor must
determine the total loan amount based on the calculation for the total
loan amount under comment 32(b)(4)(i)-1. If the loan amount is $55,000,
for example, the total loan amount may be a different amount, such as
$52,000.
iii. Third, the creditor must apply the percentage cap on points and
fees to the total loan amount. For example, for a loan of $55,000 where
the total loan amount is $52,000, the allowable points and fees are 5
percent of $52,000, or $2,600.
3. Sample determination of allowable points and fees.
i. A covered transaction with a loan amount of $105,000 falls into
the first points and fees tier, to which a points and fees cap of 3
percent of the total loan amount applies. See Sec. 1026.43(e)(3)(i)(A).
Therefore, if the calculation under comment 32(b)(4)(i)-1 results in a
total loan amount of $102,000, then the allowable total points and fees
for this loan are 3 percent of $102,000, or $3,060.
ii. A covered transaction with a loan amount of $75,000 falls into
the second points and fees tier, to which a points and fees cap of
$3,000 applies. See Sec. 1026.43(e)(3)(i)(B). The allowable total
points and fees for this loan are $3,000, regardless of the total loan
amount.
iii. A covered transaction with a loan amount of $50,000 falls into
the third points and fees tier, to which a points and fees cap of 5
percent of the total loan amount applies.
[[Page 809]]
See Sec. 1026.43(e)(3)(i)(C). Therefore, if the calculation under
comment 32(b)(4)(i)-1 results in a total loan amount of $48,000, then
the allowable total points and fees for this loan are 5 percent of
$48,000, or $2,400.
iv. A covered transaction with a loan amount of $15,000 falls into
the fourth points and fees tier, to which a points and fees cap of
$1,000 applies. See Sec. 1026.43(e)(3)(i)(D). The allowable total
points and fees for this loan are $1,000, regardless of the total loan
amount.
v. A covered transaction with a loan amount of $10,000 falls into
the fifth points and fees tier, to which a points and fees cap of 8
percent of the total loan amount applies. See Sec. 1026.43(e)(3)(i)(E).
Therefore, if the calculation under comment 32(b)(4)(i)-1 results in a
total loan amount of $7,000, then the allowable total points and fees
for this loan are 8 percent of $7,000, or $560.
Paragraph 43(e)(3)(ii).
1. Annual adjustment for inflation. The dollar amounts, including
the loan amounts, in Sec. 1026.43(e)(3)(i) will be adjusted annually on
January 1 by the annual percentage change in the CPI-U that was in
effect on the preceding June 1. The Bureau will publish adjustments
after the June figures become available each year.
i. For 2015, reflecting a 2 percent increase in the CPI-U that was
reported on the preceding June 1, a covered transaction is not a
qualified mortgage unless the transactions total points and fees do not
exceed;
A. For a loan amount greater than or equal to $101,953: 3 percent of
the total loan amount;
B. For a loan amount greater than or equal to $61,172 but less than
$101,953: $3,059;
C. For a loan amount greater than or equal to $20,391 but less than
$61,172: 5 percent of the total loan amount;
D. For a loan amount greater than or equal to $12,744 but less than
$20,391; $1,020;
E. For a loan amount less than $12,744: 8 percent of the total loan
amount.
ii. For 2016, reflecting a .2 percent decrease in the CPI-U that was
reported on the preceding June 1, a covered transaction is not a
qualified mortgage unless the transactions total points and fees do not
exceed;
A. For a loan amount greater than or equal to $101,749: 3 percent of
the total loan amount;
B. For a loan amount greater than or equal to $61,050 but less than
$101,749: $3,052;
C. For a loan amount greater than or equal to $20,350 but less than
$61,050: 5 percent of the total loan amount;
D. For a loan amount greater than or equal to $12,719 but less than
$20,350; $1,017;
E. For a loan amount less than $12,719: 8 percent of the total loan
amount.
iii. For 2017, reflecting a 1.1 percent increase in the CPI-U that
was reported on the preceding June 1, a covered transaction is not a
qualified mortgage unless the transactions total points and fees do not
exceed:
A. For a loan amount greater than or equal to $102,894: 3 percent of
the total loan amount;
B. For a loan amount greater than or equal to $61,737 but less than
$102,894: $3,087;
C. For a loan amount greater than or equal to $20,579 but less than
$61,737: 5 percent of the total loan amount;
D. For a loan amount greater than or equal to $12,862 but less than
$20,579: $1,029;
E. For a loan amount less than $12,862: 8 percent of the total loan
amount.
iv. For 2018, reflecting a 2.2 percent increase in the CPI-U that
was reported on the preceding June 1, a covered transaction is not a
qualified mortgage unless the transaction's total points and fees do not
exceed:
A. For a loan amount greater than or equal to $105,158: 3 percent of
the total loan amount;
B. For a loan amount greater than or equal to $63,095 but less than
$105,158: $3,155;
C. For a loan amount greater than or equal to $21,032 but less than
$63,095: 5 percent of the total loan amount;
D. For a loan amount greater than or equal to $13,145 but less than
$21,032: $1,052;
E. For a loan amount less than $13,145: 8 percent of the total loan
amount.
Paragraph 43(e)(3)(iii).
1. Payment to the consumer. The creditor or assignee, as applicable,
complies with Sec. 1026.43(e)(3)(iii)(B) if it pays to the consumer the
amount described in Sec. 1026.43(e)(3)(iv) within 210 days after
consummation and prior to the occurrence of any of the events in Sec.
1026.43(e)(3)(iii)(B)(1) through (3). A creditor or assignee, as
applicable, does not comply with Sec. 1026.43(e)(3)(iii)(B) if it pays
to the consumer the amount described in Sec. 1026.43(e)(3)(iv) more
than 210 days after consummation or after the occurrence of any of the
events in Sec. 1026.43(e)(3)(iii)(B)(1) through (3). Payment may be
made by any means mutually agreeable to the consumer and the creditor or
assignee, as applicable, or by check. If payment is made by check, the
creditor or assignee complies with Sec. 1026.43(e)(3)(iii)(B) if the
check is delivered or placed in the mail to the consumer within 210 days
after consummation.
2. 60 days past due. Section 1026.43(e)(3)(iii)(B)(3) provides that,
to comply with Sec. 1026.43(e)(3)(iii)(B), the creditor or assignee
must pay to the consumer the amount described in Sec. 1026.43(e)(3)(iv)
prior to the consumer becoming 60 days past due on the legal obligation.
For this purpose, ``past due'' means the failure to make a periodic
payment (in one full payment or in two or more partial payments)
sufficient to cover principal, interest, and, if applicable, escrow
under the terms of the legal obligation. Other amounts, such as any late
fees, are not
[[Page 810]]
considered for this purpose. For purposes of Sec.
1026.43(e)(3)(iii)(B)(3), a periodic payment is 30 days past due when it
is not paid on or before the due date of the following scheduled
periodic payment and is 60 days past due when, after already becoming 30
days past due, it is not paid on or before the due date of the next
scheduled periodic payment. For purposes of Sec.
1026.43(e)(3)(iii)(B)(3), the creditor or assignee may treat a received
payment as applying to the oldest outstanding periodic payment. The
following example illustrates the meaning of 60 days past due for
purposes of Sec. 1026.43(e)(3)(iii)(B)(3):
i. Assume a loan is consummated on October 15, 2015, that the
consumer's periodic payment is due on the 1st of each month, and that
the consumer timely made the first periodic payment due on December 1,
2015. For purposes of Sec. 1026.43(e)(3)(iii)(B)(3), the consumer is 30
days past due if the consumer fails to make a payment (sufficient to
cover the scheduled January 1, 2016 periodic payment of principal,
interest, and, if applicable, escrow) on or before February 1, 2016. For
purposes of Sec. 1026.43(e)(3)(iii)(B)(3), the consumer is 60 days past
due if the consumer then also fails to make a payment (sufficient to
cover the scheduled January 1, 2016 periodic payment of principal,
interest, and, if applicable, escrow) on or before March 1, 2016. For
purposes of Sec. 1026.43(e)(3)(iii)(B)(3), the consumer is not 60 days
past due if the consumer makes a payment (sufficient to cover the
scheduled January 1, 2016 periodic payment of principal, interest, and,
if applicable, escrow) on or before March 1, 2016.
3. Post-consummation policies and procedures. The policies and
procedures described in Sec. 1026.43(e)(3)(iii)(C) need not require
that a creditor or assignee, as applicable, conduct a post-consummation
review of all loans originated by the creditor or acquired by the
assignee, nor must such policies and procedures require a creditor or
assignee to apply Sec. 1026.43(e)(3)(iii) and (iv) for all loans for
which the total points and fees are found to exceed the applicable limit
under Sec. 1026.43(e)(3)(i).
Paragraph 43(e)(3)(iv).
1. Interest rate. For purposes of Sec. 1026.43(e)(3)(iv)(B),
interest is calculated using the contract interest rate applicable
during the period from consummation until the payment described in Sec.
1026.43(e)(3)(iv) is made to the consumer. In an adjustable-rate or
step-rate transaction in which more than one interest rate applies
during the period from consummation until payment is made to the
consumer, the minimum payment amount is determined by calculating
interest on the dollar amount described in Sec. 1026.43(e)(3)(iv)(A) at
each such interest rate for the part of the overall period during which
that rate applies. However, Sec. 1026.43(e)(3)(iv) provides that, for
purposes of Sec. 1026.43(e)(3)(iii), the creditor or assignee can pay
to the consumer an amount that exceeds the sum of the amounts described
in Sec. 1026.43(e)(3)(iv)(A) and (B). Therefore, a creditor or assignee
may, for example, elect to calculate interest using the maximum interest
rate that may apply during the period from consummation until payment is
made to the consumer. See comment 43(e)(3)(iii)-1 for guidance on making
payments to the consumer.
2. Relationship to RESPA tolerance cure. Under Regulation X (12 CFR
1024.7(i)), if any charges at settlement exceed the charges listed on
the good faith estimate of settlement costs by more than the amounts
permitted under 12 CFR 1024.7(e), the loan originator may cure the
tolerance violation by reimbursing the amount by which the tolerance was
exceeded at settlement or within 30 calendar days after settlement.
Similarly, under Sec. 1026.19(f)(2)(v), if amounts paid by the consumer
exceed the amounts specified under Sec. 1026.19(e)(3)(i) or (ii), the
creditor complies with Sec. 1026.19(e)(1)(i) if the creditor refunds
the excess to the consumer no later than 60 days after consummation. The
amount paid to the consumer pursuant to Sec. 1026.43(e)(3)(iv) may be
offset by the amount paid to the consumer pursuant to 12 CFR 1024.7(i)
or Sec. 1026.19(f)(2)(v), to the extent that the amount paid to the
consumer pursuant to 12 CFR 1024.7(i) or Sec. 1026.19(f)(2)(v) is being
applied to fees or charges included in points and fees pursuant to Sec.
1026.32(b)(1). However, a creditor or assignee has not satisfied Sec.
1026.43(e)(3)(iii) unless the total amount described in Sec.
1026.43(e)(3)(iv), including any offset due to a payment made pursuant
to 12 CFR 1024.7(i) or Sec. 1026.19(f)(2)(v), is paid to the consumer
within 210 days after consummation and prior to the occurrence of any of
the events in Sec. 1026.43(e)(3)(iii)(B)(1) through (3).
43(e)(4) Qualified mortgage defined--special rules.
1. Alternative definition. Subject to the sunset provided under
Sec. 1026.43(e)(4)(iii), Sec. 1026.43(e)(4) provides an alternative
definition of qualified mortgage to the definition provided in Sec.
1026.43(e)(2). To be a qualified mortgage under Sec. 1026.43(e)(4), the
transaction must satisfy the requirements under Sec. 1026.43(e)(2)(i)
through (iii), in addition to being one of the types of loans specified
in Sec. 1026.43(e)(4)(ii)(A) through (E).
2. Termination of conservatorship. Section 1026.43(e)(4)(ii)(A)
requires that a covered transaction be eligible for purchase or
guarantee by the Federal National Mortgage Association (``Fannie Mae'')
or the Federal Home Loan Mortgage Corporation (``Freddie Mac'') (or any
limited-life regulatory entity succeeding the charter of either)
operating under the conservatorship or receivership of the Federal
Housing Finance Agency pursuant to section 1367 of the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617).
The special rule
[[Page 811]]
under Sec. 1026.43(e)(4)(ii)(A) does not apply if Fannie Mae or Freddie
Mac (or any limited-life regulatory entity succeeding the charter of
either) has ceased operating under the conservatorship or receivership
of the Federal Housing Finance Agency. For example, if either Fannie Mae
or Freddie Mac (or succeeding limited-life regulatory entity) ceases to
operate under the conservatorship or receivership of the Federal Housing
Finance Agency, Sec. 1026.43(e)(4)(ii)(A) would no longer apply to
loans eligible for purchase or guarantee by that entity; however, the
special rule would be available for a loan that is eligible for purchase
or guarantee by the other entity still operating under conservatorship
or receivership.
3. Timing. Under Sec. 1026.43(e)(4)(iii), the definition of
qualified mortgage under paragraph (e)(4) applies only to loans
consummated on or before January 10, 2021, regardless of whether Fannie
Mae or Freddie Mac (or any limited-life regulatory entity succeeding the
charter of either) continues to operate under the conservatorship or
receivership of the Federal Housing Finance Agency. Accordingly, Sec.
1026.43(e)(4) is available only for covered transactions consummated on
or before the earlier of either:
i. The date Fannie Mae or Freddie Mac (or any limited-life
regulatory entity succeeding the charter of either), respectively, cease
to operate under the conservatorship or receivership of the Federal
Housing Finance Agency pursuant to section 1367 of the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617);
or
ii. January 10, 2021, as provided by Sec. 1026.43(e)(4)(iii).
4. Eligible for purchase, guarantee, or insurance except with regard
to matters wholly unrelated to ability to repay. To satisfy Sec.
1026.43(e)(4)(ii), a loan need not be actually purchased or guaranteed
by Fannie Mae or Freddie Mac or insured or guaranteed by one of the
Agencies (the U.S. Department of Housing and Urban Development (HUD),
U.S. Department of Veterans Affairs (VA), U.S. Department of Agriculture
(USDA), or Rural Housing Service (RHS)). Rather, Sec. 1026.43(e)(4)(ii)
requires only that the creditor determine that the loan is eligible
(i.e., meets the criteria) for such purchase, guarantee, or insurance at
consummation. For example, for purposes of Sec. 1026.43(e)(4), a
creditor is not required to sell a loan to Fannie Mae or Freddie Mac (or
any limited-life regulatory entity succeeding the charter of either) for
that loan to be a qualified mortgage; however, the loan must be eligible
for purchase or guarantee by Fannie Mae or Freddie Mac (or any limited-
life regulatory entity succeeding the charter of either), including
satisfying any requirements regarding consideration and verification of
a consumer's income or assets, credit history, debt-to-income ratio or
residual income, and other credit risk factors, but not any requirements
regarding matters wholly unrelated to ability to repay. To determine
eligibility for purchase, guarantee or insurance, a creditor may rely on
a valid underwriting recommendation provided by a GSE automated
underwriting system (AUS) or an AUS that relies on an Agency
underwriting tool; compliance with the standards in the GSE or Agency
written guide in effect at the time; a written agreement between the
creditor or a direct sponsor or aggregator of the creditor and a GSE or
Agency that permits variation from the standards of the written guides
and/or variation from the AUSs, in effect at the time of consummation;
or an individual loan waiver granted by the GSE or Agency to the
creditor. For creditors relying on the variances of a sponsor or
aggregator, a loan that is transferred directly to or through the
sponsor or aggregator at or after consummation complies with Sec.
1026.43(e)(4). In using any of the four methods listed above, the
creditor need not satisfy standards that are wholly unrelated to
assessing a consumer's ability to repay that the creditor is required to
perform. Matters wholly unrelated to ability to repay are those matters
that are wholly unrelated to credit risk or the underwriting of the
loan. Such matters include requirements related to the status of the
creditor rather than the loan, requirements related to selling,
securitizing, or delivering the loan, and any requirement that the
creditor must perform after the consummated loan is sold, guaranteed, or
endorsed for insurance such as document custody, quality control, or
servicing.
Accordingly, a covered transaction is eligible for purchase or
guarantee by Fannie Mae or Freddie Mac, for example, if:
i. The loan conforms to the relevant standards set forth in the
Fannie Mae Single-Family Selling Guide or the Freddie Mac Single-Family
Seller/Servicer Guide in effect at the time, or to standards set forth
in a written agreement between the creditor or a sponsor or aggregator
of the creditor and Fannie Mae or Freddie Mac in effect at that time
that permits variation from the standards of those guides;
ii. The loan has been granted an individual waiver by a GSE, which
will allow purchase or guarantee in spite of variations from the
applicable standards; or
iii. The creditor inputs accurate information into the Fannie Mae or
Freddie Mac AUS or another AUS pursuant to a written agreement between
the creditor and Fannie Mae or Freddie Mac that permits variation from
the GSE AUS; the loan receives one of the recommendations specified
below in paragraphs A or B from the corresponding GSE AUS or an
equivalent recommendation pursuant to another AUS as authorized in
[[Page 812]]
the written agreement; and the creditor satisfies any requirements and
conditions specified by the relevant AUS that are not wholly unrelated
to ability to repay, the non-satisfaction of which would invalidate that
recommendation:
A. An ``Approve/Eligible'' recommendation from Desktop Underwriter
(DU); or
B. A risk class of ``Accept'' and purchase eligibility of ``Freddie
Mac Eligible'' from Loan Prospector (LP).
5. Repurchase and indemnification demands. A repurchase or
indemnification demand by Fannie Mae, Freddie Mac, HUD, VA, USDA, or RHS
is not dispositive of qualified mortgage status. Qualified mortgage
status under Sec. 1026.43(e)(4) depends on whether a loan is eligible
to be purchased, guaranteed, or insured at the time of consummation,
provided that other requirements under Sec. 1026.43(e)(4) are
satisfied. Some repurchase or indemnification demands are not related to
eligibility criteria at consummation. See comment 43(e)(4)-4. Further,
even where a repurchase or indemnification demand relates to whether the
loan satisfied relevant eligibility requirements as of the time of
consummation, the mere fact that a demand has been made, or even
resolved, between a creditor and GSE or agency is not dispositive for
purposes of Sec. 1026.43(e)(4). However, evidence of whether a
particular loan satisfied the Sec. 1026.43(e)(4) eligibility criteria
at consummation may be brought to light in the course of dealing over a
particular demand, depending on the facts and circumstances.
Accordingly, each loan should be evaluated by the creditor based on the
facts and circumstances relating to the eligibility of that loan at the
time of consummation. For example:
i. Assume eligibility to purchase a loan was based in part on the
consumer's employment income of $50,000 per year. The creditor uses the
income figure in obtaining an approve/eligible recommendation from DU. A
quality control review, however, later determines that the documentation
provided and verified by the creditor to comply with Fannie Mae
requirements did not support the reported income of $50,000 per year. As
a result, Fannie Mae demands that the creditor repurchase the loan.
Assume that the quality control review is accurate, and that DU would
not have issued an approve/eligible recommendation if it had been
provided the accurate income figure. The DU determination at the time of
consummation was invalid because it was based on inaccurate information
provided by the creditor; therefore, the loan was never a qualified
mortgage under Sec. 1026.43(e)(4).
ii. Assume that a creditor delivered a loan, which the creditor
determined was a qualified mortgage at the time of consummation under
Sec. 1026.43(e)(4), to Fannie Mae for inclusion in a particular To-Be-
Announced Mortgage Backed Security (MBS) pool of loans. The data
submitted by the creditor at the time of loan delivery indicated that
the various loan terms met the product type, weighted-average coupon,
weighted-average maturity, and other MBS pooling criteria, and MBS
issuance disclosures to investors reflected this loan data. However,
after delivery and MBS issuance, a quality control review determines
that the loan violates the pooling criteria.The loan still meets
eligibility requirements for Fannie Mae products and loan terms. Fannie
Mae, however, requires the creditor to repurchase the loan due to the
violation of MBS pooling requirements. Assume that the quality control
review determination is accurate. Because the loan still meets Fannie
Mae's eligibility requirements, it remains a qualified mortgage based on
these facts and circumstances.
Paragraph 43(e)(5).
1. Satisfaction of qualified mortgage requirements. For a covered
transaction to be a qualified mortgage under Sec. 1026.43(e)(5), the
mortgage must satisfy the requirements for a qualified mortgage under
Sec. 1026.43(e)(2), other than the requirements regarding debt-to-
income ratio. For example, a qualified mortgage under Sec.
1026.43(e)(5) may not have a loan term in excess of 30 years because
longer terms are prohibited for qualified mortgages under Sec.
1026.43(e)(2)(ii). Similarly, a qualified mortgage under Sec.
1026.43(e)(5) may not result in a balloon payment because Sec.
1026.43(e)(2)(i)(C) provides that qualified mortgages may not have
balloon payments except as provided under Sec. 1026.43(f). However, a
covered transaction need not comply with Sec. 1026.43(e)(2)(vi), which
prohibits consumer monthly debt-to-income ratios in excess of 43
percent. A covered transaction therefore can be a qualified mortgage
under Sec. 1026.43(e)(5) even though the consumer's monthly debt-to-
income ratio is greater than 43 percent.
2. Debt-to-income ratio or residual income. Section 1026.43(e)(5)
does not prescribe a specific monthly debt-to-income ratio with which
creditors must comply. Instead, creditors must consider a consumer's
debt-to-income ratio or residual income calculated generally in
accordance with Sec. 1026.43(c)(7) and verify the information used to
calculate the debt-to-income ratio or residual income in accordance with
Sec. 1026.43(c)(3) and (4). However, Sec. 1026.43(c)(7) refers
creditors to Sec. 1026.43(c)(5) for instructions on calculating the
payment on the covered transaction. Section 1026.43(c)(5) requires
creditors to calculate the payment differently than Sec.
1026.43(e)(2)(iv). For purposes of the qualified mortgage definition in
Sec. 1026.43(e)(5), creditors must base their calculation of the
consumer's debt-to-income ratio or residual income on the payment on the
covered transaction calculated according to Sec. 1026.43(e)(2)(iv)
instead of according to
[[Page 813]]
Sec. 1026.43(c)(5). Creditors are not required to calculate the
consumer's monthly debt-to-income ratio in accordance with appendix Q to
this part as is required under the general definition of qualified
mortgages by Sec. 1026.43(e)(2)(vi).
3. Forward commitments. A creditor may make a mortgage loan that
will be transferred or sold to a purchaser pursuant to an agreement that
has been entered into at or before the time the transaction is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' A mortgage that will be acquired by a purchaser pursuant
to a forward commitment does not satisfy the requirements of Sec.
1026.43(e)(5), whether the forward commitment provides for the purchase
and sale of the specific transaction or for the purchase and sale of
transactions with certain prescribed criteria that the transaction
meets. However, a forward commitment to another person that also meets
the requirements of Sec. 1026.43(e)(5)(i)(D) is permitted. For example,
assume a creditor that is eligible to make qualified mortgages under
Sec. 1026.43(e)(5) makes a mortgage. If that mortgage meets the
purchase criteria of an investor with which the creditor has an
agreement to sell loans after consummation, then the loan does not meet
the definition of a qualified mortgage under Sec. 1026.43(e)(5).
However, if the investor meets the requirements of Sec.
1026.43(e)(5)(i)(D), the mortgage will be a qualified mortgage if all
other applicable criteria also are satisfied.
4. Creditor qualifications. To be eligible to make qualified
mortgages under Sec. 1026.43(e)(5), a creditor must satisfy the
requirements stated in Sec. 1026.35(b)(2)(iii)(B) and (C). Section
1026.35(b)(2)(iii)(B) requires that, during the preceding calendar year,
or, if the application for the transaction was received before April 1
of the current calendar year, during either of the two preceding
calendar years, the creditor and its affiliates together extended no
more than 2,000 covered transactions, as defined by Sec. 1026.43(b)(1),
secured by first liens, that were sold, assigned, or otherwise
transferred to another person, or that were subject at the time of
consummation to a commitment to be acquired by another person. Section
1026.35(b)(2)(iii)(C) requires that, as of the preceding December 31st,
or, if the application for the transaction was received before April 1
of the current calendar year, as of either of the two preceding December
31sts, the creditor and its affiliates that regularly extended, during
the applicable period, covered transactions, as defined by Sec.
1026.43(b)(1), secured by first liens, together, had total assets of
less than $2 billion, adjusted annually by the Bureau for inflation.
5. Requirement to hold in portfolio. Creditors generally must hold a
loan in portfolio to maintain the transaction's status as a qualified
mortgage under Sec. 1026.43(e)(5), subject to four exceptions. Unless
one of these exceptions applies, a loan is no longer a qualified
mortgage under Sec. 1026.43(e)(5) once legal title to the debt
obligation is sold, assigned, or otherwise transferred to another
person. Accordingly, unless one of the exceptions applies, the
transferee could not benefit from the presumption of compliance for
qualified mortgages under Sec. 1026.43(e)(1) unless the loan also met
the requirements of another qualified mortgage definition.
6. Application to subsequent transferees. The exceptions contained
in Sec. 1026.43(e)(5)(ii) apply not only to an initial sale,
assignment, or other transfer by the originating creditor but to
subsequent sales, assignments, and other transfers as well. For example,
assume Creditor A originates a qualified mortgage under Sec.
1026.43(e)(5). Six months after consummation, Creditor A sells the
qualified mortgage to Creditor B pursuant to Sec. 1026.43(e)(5)(ii)(B)
and the loan retains its qualified mortgage status because Creditor B
complies with the limits on asset size and number of transactions. If
Creditor B sells the qualified mortgage, it will lose its qualified
mortgage status under Sec. 1026.43(e)(5) unless the sale qualifies for
one of the Sec. 1026.43(e)(5)(ii) exceptions for sales three or more
years after consummation, to another qualifying institution, as required
by supervisory action, or pursuant to a merger or acquisition.
7. Transfer three years after consummation. Under Sec.
1026.43(e)(5)(ii)(A), if a qualified mortgage under Sec. 1026.43(e)(5)
is sold, assigned, or otherwise transferred three years or more after
consummation, the loan retains its status as a qualified mortgage under
Sec. 1026.43(e)(5) following the transfer. The transferee need not be
eligible to originate qualified mortgages under Sec. 1026.43(e)(5). The
loan will continue to be a qualified mortgage throughout its life, and
the transferee, and any subsequent transferees, may invoke the
presumption of compliance for qualified mortgages under Sec.
1026.43(e)(1).
8. Transfer to another qualifying creditor. Under Sec.
1026.43(e)(5)(ii)(B), a qualified mortgage under Sec. 1026.43(e)(5) may
be sold, assigned, or otherwise transferred at any time to another
creditor that meets the requirements of Sec. 1026.43(e)(5)(i)(D). That
section requires that a creditor together with all its affiliates,
extended no more than 2,000 first-lien covered transactions that were
sold, assigned, or otherwise transferred by the creditor or its
affiliates to another person, or that were subject at the time of
consummation to a commitment to be acquired by another person; and have,
together with its affiliates that regularly extended covered
transactions secured by first liens, total assets less than $2 billion
(as adjusted for inflation). These tests are assessed based on
transactions and assets from the calendar
[[Page 814]]
year preceding the current calendar year or from either of the two
calendar years preceding the current calendar year if the application
for the transaction was received before April 1 of the current calendar
year. A qualified mortgage under Sec. 1026.43(e)(5) transferred to a
creditor that meets these criteria would retain its qualified mortgage
status even if it is transferred less than three years after
consummation.
9. Supervisory sales. Section 1026.43(e)(5)(ii)(C) facilitates sales
that are deemed necessary by supervisory agencies to revive troubled
creditors and resolve failed creditors. A qualified mortgage under Sec.
1026.43(e)(5) retains its qualified mortgage status if it is sold,
assigned, or otherwise transferred to another person pursuant to: A
capital restoration plan or other action under 12 U.S.C. 1831o; the
actions or instructions of any person acting as conservator, receiver or
bankruptcy trustee; an order of a State or Federal government agency
with jurisdiction to examine the creditor pursuant to State or Federal
law; or an agreement between the creditor and such an agency. A
qualified mortgage under Sec. 1026.43(e)(5) that is sold, assigned, or
otherwise transferred under these circumstances retains its qualified
mortgage status regardless of how long after consummation it is sold and
regardless of the size or other characteristics of the transferee.
Section 1026.43(e)(5)(ii)(C) does not apply to transfers done to comply
with a generally applicable regulation with future effect designed to
implement, interpret, or prescribe law or policy in the absence of a
specific order by or a specific agreement with a governmental agency
described in Sec. 1026.43(e)(5)(ii)(C) directing the sale of one or
more qualified mortgages under Sec. 1026.43(e)(5) held by the creditor
or one of the other circumstances listed in Sec. 1026.43(e)(5)(ii)(C).
For example, a qualified mortgage under Sec. 1026.43(e)(5) that is sold
pursuant to a capital restoration plan under 12 U.S.C. 1831o would
retain its status as a qualified mortgage following the sale. However,
if the creditor simply chose to sell the same qualified mortgage as one
way to comply with general regulatory capital requirements in the
absence of supervisory action or agreement it would lose its status as a
qualified mortgage following the sale unless it qualifies under another
definition of qualified mortgage.
10. Mergers and acquisitions. A qualified mortgage under Sec.
1026.43(e)(5) retains its qualified mortgage status if a creditor merges
with, is acquired by, or acquires another person regardless of whether
the creditor or its successor is eligible to originate new qualified
mortgages under Sec. 1026.43(e)(5) after the merger or acquisition.
However, the creditor or its successor can originate new qualified
mortgages under Sec. 1026.43(e)(5) only if it complies with all of the
requirements of Sec. 1026.43(e)(5) after the merger or acquisition. For
example, assume a creditor that originates 250 covered transactions each
year and originates qualified mortgages under Sec. 1026.43(e)(5) is
acquired by a larger creditor that originates 10,000 covered
transactions each year. Following the acquisition, the small creditor
would no longer be able to originate Sec. 1026.43(e)(5) qualified
mortgages because, together with its affiliates, it would originate more
than 500 covered transactions each year. However, the Sec.
1026.43(e)(5) qualified mortgages originated by the small creditor
before the acquisition would retain their qualified mortgage status.
43(f) Balloon-Payment qualified mortgages made by certain creditors.
43(f)(1) Exemption.
Paragraph 43(f)(1)(i).
1. Satisfaction of qualified mortgage requirements. Under Sec.
1026.43(f)(1)(i), for a mortgage that provides for a balloon payment to
be a qualified mortgage, the mortgage must satisfy the requirements for
a qualified mortgage in paragraphs (e)(2)(i)(A), (e)(2)(ii), (iii), and
(v). Therefore, a covered transaction with balloon payment terms must
provide for regular periodic payments that do not result in an increase
of the principal balance, pursuant to Sec. 1026.43(e)(2)(i)(A); must
have a loan term that does not exceed 30 years, pursuant to Sec.
1026.43(e)(2)(ii); must have total points and fees that do not exceed
specified thresholds pursuant to Sec. 1026.43(e)(2)(iii); and must
satisfy the consideration and verification requirements in Sec.
1026.43(e)(2)(v).
Paragraph 43(f)(1)(ii).
1. Example. Under Sec. 1026.43(f)(1)(ii), if a qualified mortgage
provides for a balloon payment, the creditor must determine that the
consumer is able to make all scheduled payments under the legal
obligation other than the balloon payment. For example, assume a loan in
an amount of $200,000 that has a five-year loan term, but is amortized
over 30 years. The loan agreement provides for a fixed interest rate of
6 percent. The loan consummates on March 3, 2014, and the monthly
payment of principal and interest scheduled for the first five years is
$1,199, with the first monthly payment due on April 1, 2014. The balloon
payment of $187,308 is required on the due date of the 60th monthly
payment, which is April 1, 2019. The loan can be a qualified mortgage if
the creditor underwrites the loan using the scheduled principal and
interest payment of $1,199, plus the consumer's monthly payment for all
mortgage-related obligations, and satisfies the other criteria set forth
in Sec. 1026.43(f).
2. Creditor's determination. A creditor must determine that the
consumer is able to make all scheduled payments other than the balloon
payment to satisfy Sec. 1026.43(f)(1)(ii), in accordance with the legal
obligation, together with the consumer's monthly payments for all
mortgage-related obligations
[[Page 815]]
and excluding the balloon payment, to meet the repayment ability
requirements of Sec. 1026.43(f)(1)(ii). A creditor satisfies Sec.
1026.43(f)(1)(ii) if it uses the maximum payment in the payment
schedule, excluding any balloon payment, to determine if the consumer
has the ability to make the scheduled payments.
Paragraph 43(f)(1)(iii).
1. Debt-to-income or residual income. A creditor must consider and
verify the consumer's monthly debt-to-income ratio or residual income to
meet the requirements of Sec. 1026.43(f)(1)(iii). To calculate the
consumer's monthly debt-to-income or residual income for purposes of
Sec. 1026.43(f)(1)(iii), the creditor may rely on the definitions and
calculation rules in Sec. 1026.43(c)(7) and its accompanying
commentary, except for the calculation rules for a consumer's total
monthly debt obligations (which is a component of debt-to-income and
residual income under Sec. 1026.43(c)(7)). For purposes of calculating
the consumer's total monthly debt obligations under Sec.
1026.43(f)(1)(iii), the creditor must calculate the monthly payment on
the covered transaction using the payment calculation rules in Sec.
1026.43(f)(1)(iv)(A), together with all mortgage-related obligations and
excluding the balloon payment.
Paragraph 43(f)(1)(iv).
1. Scheduled payments. Under Sec. 1026.43(f)(1)(iv)(A), the legal
obligation must provide that scheduled payments must be substantially
equal and determined using an amortization period that does not exceed
30 years. Balloon payments often result when the periodic payment would
fully repay the loan amount only if made over some period that is longer
than the loan term. For example, a loan term of 10 years with periodic
payments based on an amortization period of 20 years would result in a
balloon payment being due at the end of the loan term. Whatever the loan
term, the amortization period used to determine the scheduled periodic
payments that the consumer must pay under the terms of the legal
obligation may not exceed 30 years.
2. Substantially equal. The calculation of payments scheduled by the
legal obligation under Sec. 1026.43(f)(1)(iv)(A) are required to result
in substantially equal amounts. This means that the scheduled payments
need to be similar, but need not be equal. For further guidance on
substantially equal payments, see comment 43(c)(5)(i)-4.
3. Interest-only payments. A mortgage that only requires the payment
of accrued interest each month does not meet the requirements of Sec.
1026.43(f)(1)(iv)(A).
Paragraph 43(f)(1)(v).
1. Forward commitments. A creditor may make a mortgage loan that
will be transferred or sold to a purchaser pursuant to an agreement that
has been entered into at or before the time the transaction is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' A balloon-payment mortgage that will be acquired by a
purchaser pursuant to a forward commitment does not satisfy the
requirements of Sec. 1026.43(f)(1)(v), whether the forward commitment
provides for the purchase and sale of the specific transaction or for
the purchase and sale of transactions with certain prescribed criteria
that the transaction meets. However, a purchase and sale of a balloon-
payment qualified mortgage to another person that separately meets the
requirements of Sec. 1026.43(f)(1)(vi) is permitted. For example:
assume a creditor that meets the requirements of Sec. 1026.43(f)(1)(vi)
makes a balloon-payment mortgage that meets the requirements of Sec.
1026.43(f)(1)(i) through (iv); if the balloon-payment mortgage meets the
purchase criteria of an investor with which the creditor has an
agreement to sell such loans after consummation, then the balloon-
payment mortgage does not meet the definition of a qualified mortgage in
accordance with Sec. 1026.43(f)(1)(v). However, if the investor meets
the requirement of Sec. 1026.43(f)(1)(vi), the balloon-payment
qualified mortgage retains its qualified mortgage status.
Paragraph 43(f)(1)(vi).
1. Creditor qualifications. Under Sec. 1026.43(f)(1)(vi), to make a
qualified mortgage that provides for a balloon payment, the creditor
must satisfy three criteria that are also required under Sec.
1026.35(b)(2)(iii)(A), (B) and (C), which require:
i. During the preceding calendar year or during either of the two
preceding calendar years if the application for the transaction was
received before April 1 of the current calendar year, the creditor
extended a first-lien covered transaction, as defined in Sec.
1026.43(b)(1), on a property that is located in an area that is
designated either ``rural'' or ``underserved,'' as defined in Sec.
1026.35(b)(2)(iv), to satisfy the requirement of Sec.
1026.35(b)(2)(iii)(A) (the rural-or-underserved test). Pursuant to Sec.
1026.35(b)(2)(iv), an area is considered to be rural if it is: A county
that is neither in a metropolitan statistical area, nor a micropolitan
statistical area adjacent to a metropolitan statistical area, as those
terms are defined by the U.S. Office of Management and Budget; a census
block that is not in an urban area, as defined by the U.S. Census Bureau
using the latest decennial census of the United States; or a county or a
census block that has been designated as ``rural'' by the Bureau
pursuant to the application process established in 2016. See Application
Process for Designation of Rural Area under Federal Consumer Financial
Law; Procedural Rule, 81 FR 11099 (Mar. 3, 2016). An area is considered
to be underserved during a calendar year if, according to HMDA data for
the preceding calendar year, it is a county in which no more than two
[[Page 816]]
creditors extended covered transactions secured by first liens on
properties in the county five or more times.
A. The Bureau determines annually which counties in the United
States are rural or underserved as defined by Sec.
1026.35(b)(2)(iv)(A)(1) or Sec. 1026.35(b)(2)(iv)(B) and publishes on
its public Web site lists of those counties to assist creditors in
determining whether they meet the criterion at Sec.
1026.35(b)(2)(iii)(A). Creditors may also use an automated tool provided
on the Bureau's public Web site to determine whether specific properties
are located in areas that qualify as ``rural'' or ``underserved''
according to the definitions in Sec. 1026.35(b)(2)(iv) for a particular
calendar year. In addition, the U.S. Census Bureau may also provide on
its public Web site an automated address search tool that specifically
indicates if a property address is located in an urban area for purposes
of the Census Bureau's most recent delineation of urban areas. For any
calendar year that begins after the date on which the Census Bureau
announced its most recent delineation of urban areas, a property is
located in an area that qualifies as ``rural'' according to the
definitions in Sec. 1026.35(b)(2)(iv) if the search results provided
for the property by any such automated address search tool available on
the Census Bureau's public Web site do not identify the property as
being in an urban area. A property is also located in an area that
qualifies as ``rural,'' if the Bureau has designated that area as rural
under Sec. 1026.35(b)(2)(iv)(A)(3) and published that determination in
the Federal Register. See Application Process for Designation of Rural
Area under Federal Consumer Financial Law; Procedural Rule, 81 FR 11099
(Mar. 3, 2016).
B. For example, if a creditor extended during 2017 a first-lien
covered transaction that is secured by a property that is located in an
area that meets the definition of rural or underserved under Sec.
1026.35(b)(2)(iv), the creditor meets this element of the exception for
any transaction consummated during 2018.
C. Alternatively, if the creditor did not extend in 2017 a
transaction that meets the definition of rural or underserved test under
Sec. 1026.35(b)(2)(iv), the creditor satisfies this criterion for any
transaction consummated during 2018 for which it received the
application before April 1, 2018, if it extended during 2016 a first-
lien covered transaction that is secured by a property that is located
in an area that meets the definition of rural or underserved under Sec.
1026.35(b)(2)(iv).
ii. During the preceding calendar year, or, if the application for
the transaction was received before April 1 of the current calendar
year, during either of the two preceding calendar years, the creditor
together with its affiliates extended no more than 2,000 covered
transactions, as defined by Sec. 1026.43(b)(1), secured by first liens,
that were sold, assigned, or otherwise transferred to another person, or
that were subject at the time of consummation to a commitment to be
acquired by another person, to satisfy the requirement of Sec.
1026.35(b)(2)(iii)(B).
iii. As of the preceding December 31st, or, if the application for
the transaction was received before April 1 of the current calendar
year, as of either of the two preceding December 31sts, the creditor and
its affiliates that regularly extended covered transactions secured by
first liens, together, had total assets that do not exceed the
applicable asset threshold established by the Bureau, to satisfy the
requirement of Sec. 1026.35(b)(2)(iii)(C). The Bureau publishes notice
of the asset threshold each year by amending comment 35(b)(2)(iii)-
1.iii.
43(f)(2) Post-consummation transfer of balloon-payment qualified
mortgage.
1. Requirement to hold in portfolio. Creditors generally must hold a
balloon-payment qualified mortgage in portfolio to maintain the
transaction's status as a qualified mortgage under Sec. 1026.43(f)(1),
subject to four exceptions. Unless one of these exceptions applies, a
balloon-payment qualified mortgage is no longer a qualified mortgage
under Sec. 1026.43(f)(1) once legal title to the debt obligation is
sold, assigned, or otherwise transferred to another person. Accordingly,
unless one of the exceptions applies, the transferee could not benefit
from the presumption of compliance for qualified mortgages under Sec.
1026.43(f)(1) unless the loan also met the requirements of another
qualified mortgage definition.
2. Application to subsequent transferees. The exceptions contained
in Sec. 1026.43(f)(2) apply not only to an initial sale, assignment, or
other transfer by the originating creditor but to subsequent sales,
assignments, and other transfers as well. For example, assume Creditor A
originates a qualified mortgage under Sec. 1026.43(f)(1). Six months
after consummation, Creditor A sells the qualified mortgage to Creditor
B pursuant to Sec. 1026.43(f)(2)(ii) and the loan retains its qualified
mortgage status because Creditor B complies with the conditions relating
to operating in rural or underserved areas, asset size, and number of
transactions. If Creditor B sells the qualified mortgage, it will lose
its qualified mortgage status under Sec. 1026.43(f)(1) unless the sale
qualifies for one of the Sec. 1026.43(f)(2) exceptions for sales three
or more years after consummation, to another qualifying institution, as
required by supervisory action, or pursuant to a merger or acquisition.
Paragraph 43(f)(2)(i).
1. Transfer three years after consummation. Under Sec.
1026.43(f)(2)(i), if a balloon-payment qualified mortgage under Sec.
1026.43(f)(1) is sold, assigned, or otherwise transferred three years or
more after consummation, the balloon-payment qualified mortgage retains
its
[[Page 817]]
status as a qualified mortgage under Sec. 1026.43(f)(1) following the
sale. The transferee need not be eligible to originate qualified
mortgages under Sec. 1026.43(f)(1)(vi). The balloon-payment qualified
mortgage will continue to be a qualified mortgage throughout its life,
and the transferee, and any subsequent transferees, may invoke the
presumption of compliance for qualified mortgages under Sec.
1026.43(f)(1).
Paragraph 43(f)(2)(ii).
1. Transfer to another qualifying creditor. Under Sec.
1026.43(f)(2)(ii), a balloon-payment qualified mortgage under Sec.
1026.43(f)(1) may be sold, assigned, or otherwise transferred at any
time to another creditor that meets the requirements of Sec.
1026.43(f)(1)(vi). That section requires that a creditor: (1) Extended a
first-lien covered transaction, as defined in Sec. 1026.43(b)(1), on a
property located in a rural or underserved area; (2) together with all
affiliates, extended no more than 2,000 first-lien covered transactions
that were sold, assigned, or otherwise transferred by the creditor or
its affiliates to another person, or that were subject at the time of
consummation to a commitment to be acquired by another person; and (3)
have, together with its affiliates that regularly extended covered
transactions secured by first liens, total assets less than $2 billion
(as adjusted for inflation). These tests are assessed based on
transactions and assets from the calendar year preceding the current
calendar year or from either of the two calendar years preceding the
current calendar year if the application for the transaction was
received before April 1 of the current calendar year. A balloon-payment
qualified mortgage under Sec. 1026.43(f)(1) transferred to a creditor
that meets these criteria would retain its qualified mortgage status
even if it is transferred less than three years after consummation.
Paragraph 43(f)(2)(iii).
1. Supervisory sales. Section 1026.43(f)(2)(iii) facilitates sales
that are deemed necessary by supervisory agencies to revive troubled
creditors and resolve failed creditors. A balloon-payment qualified
mortgage under Sec. 1026.43(f)(1) retains its qualified mortgage status
if it is sold, assigned, or otherwise transferred to another person
pursuant to: (1) A capital restoration plan or other action under 12
U.S.C. 1831o; (2) the actions or instructions of any person acting as
conservator, receiver, or bankruptcy trustee; (3) an order of a State or
Federal government agency with jurisdiction to examine the creditor
pursuant to State or Federal law; or (4) an agreement between the
creditor and such an agency. A balloon-payment qualified mortgage under
Sec. 1026.43(f)(1) that is sold, assigned, or otherwise transferred
under these circumstances retains its qualified mortgage status
regardless of how long after consummation it is sold and regardless of
the size or other characteristics of the transferee. Section
1026.43(f)(2)(iii) does not apply to transfers done to comply with a
generally applicable regulation with future effect designed to
implement, interpret, or prescribe law or policy in the absence of a
specific order by or a specific agreement with a governmental agency
described in Sec. 1026.43(f)(2)(iii) directing the sale of one or more
qualified mortgages under Sec. 1026.43(f)(1) held by the creditor or
one of the other circumstances listed in Sec. 1026.43(f)(2)(iii). For
example, a balloon-payment qualified mortgage under Sec. 1026.43(f)(1)
that is sold pursuant to a capital restoration plan under 12 U.S.C.
1831o would retain its status as a qualified mortgage following the
sale. However, if the creditor simply chose to sell the same qualified
mortgage as one way to comply with general regulatory capital
requirements in the absence of supervisory action or agreement the
transaction would lose its status as a qualified mortgage following the
sale unless it qualifies under another definition of qualified mortgage.
Paragraph 43(f)(2)(iv).
1. Mergers and acquisitions. A qualified mortgage under Sec.
1026.43(f)(1) retains its qualified mortgage status if a creditor merges
with, is acquired by another person, or acquires another person
regardless of whether the creditor or its successor is eligible to
originate new balloon-payment qualified mortgages under Sec.
1026.43(f)(1) after the merger or acquisition. However, the creditor or
its successor can originate new balloon-payment qualified mortgages
under Sec. 1026.43(f)(1) only if it complies with all of the
requirements of Sec. 1026.43(f)(1) after the merger or acquisition. For
example, assume a small creditor that originates 250 first-lien covered
transactions each year and originates balloon-payment qualified
mortgages under Sec. 1026.43(f)(1) is acquired by a larger creditor
that originates 10,000 first-lien covered transactions each year.
Following the acquisition, the small creditor would no longer be able to
originate balloon-payment qualified mortgages because, together with its
affiliates, it would originate more than 500 first-lien covered
transactions each year. However, the balloon-payment qualified mortgages
originated by the small creditor before the acquisition would retain
their qualified mortgage status.
43(g) Prepayment penalties.
43(g)(2) Limits on prepayment penalties.
1. Maximum period and amount. Section 1026.43(g)(2) establishes the
maximum period during which a prepayment penalty may be imposed and the
maximum amount of the prepayment penalty. A covered transaction may
include a prepayment penalty that may be imposed during a shorter period
or in a lower amount than provided under Sec. 1026.43(g)(2). For
example, a covered transaction may include a prepayment penalty
[[Page 818]]
that may be imposed for two years after consummation and that equals 1
percent of the amount prepaid in each of those two years.
43(g)(3) Alternative offer required.
Paragraph 43(g)(3)(i).
1. Same type of interest rate. Under Sec. 1026.43(g)(3)(i), if a
creditor offers a consumer a covered transaction with a prepayment
penalty, the creditor must offer the consumer an alternative covered
transaction without a prepayment penalty and with an annual percentage
rate that cannot increase after consummation. Under Sec.
1026.43(g)(3)(i), if the covered transaction with a prepayment penalty
is a fixed-rate mortgage, as defined in Sec. 1026.18(s)(7)(iii), then
the alternative covered transaction without a prepayment penalty must
also be a fixed-rate mortgage. Likewise, if the covered transaction with
a prepayment penalty is a step-rate mortgage, as defined in Sec.
1026.18(s)(7)(ii), then the alternative covered transaction without a
prepayment penalty must also be a step-rate mortgage.
Paragraph 43(g)(3)(iv).
1. Points and fees. Whether or not an alternative covered
transaction without a prepayment penalty satisfies the points and fees
conditions for a qualified mortgage is determined based on the
information known to the creditor at the time the creditor offers the
consumer the transaction. At the time a creditor offers a consumer an
alternative covered transaction without a prepayment penalty under Sec.
1026.43(g)(3), the creditor may know the amount of some, but not all, of
the points and fees that will be charged for the transaction. For
example, a creditor may not know that a consumer intends to buy single-
premium credit unemployment insurance, which would be included in the
points and fees for the covered transaction. The points and fees
condition under Sec. 1026.43(g)(3)(iv) is satisfied if a creditor
reasonably believes, based on information known to the creditor at the
time the offer is made, that the amount of points and fees to be charged
for an alternative covered transaction without a prepayment penalty will
be less than or equal to the amount of points and fees allowed for a
qualified mortgage under Sec. 1026.43(e)(2)(iii).
Paragraph 43(g)(3)(v).
1. Transactions for which the consumer likely qualifies. Under Sec.
1026.43(g)(3)(v), the alternative covered transaction without a
prepayment penalty the creditor must offer under Sec. 1026.43(g)(3)
must be a transaction for which the creditor has a good faith belief the
consumer likely qualifies. For example, assume the creditor has a good
faith belief the consumer can afford monthly payments of up to $800. If
the creditor offers the consumer a fixed-rate mortgage with a prepayment
penalty for which monthly payments are $700 and an alternative covered
transaction without a prepayment penalty for which monthly payments are
$900, the requirements of Sec. 1026.43(g)(3)(v) are not met. The
creditor's belief that the consumer likely qualifies for the covered
transaction without a prepayment penalty should be based on the
information known to the creditor at the time the creditor offers the
transaction. In making this determination, the creditor may rely on
information provided by the consumer, even if the information
subsequently is determined to be inaccurate.
43(g)(4) Offer through a mortgage broker.
1. Rate sheet. Under Sec. 1026.43(g)(4), where the creditor offers
covered transactions with a prepayment penalty to consumers through a
mortgage broker, as defined in Sec. 1026.36(a)(2), the creditor must
present the mortgage broker an alternative covered transaction that
satisfies the requirements of Sec. 1026.43(g)(3). Creditors may comply
with this requirement by providing a rate sheet to the mortgage broker
that states the terms of such an alternative covered transaction without
a prepayment penalty.
2. Alternative to creditor's offer. Section 1026.43(g)(4)(ii)
requires that the creditor provide, by agreement, for the mortgage
broker to present the consumer an alternative covered transaction that
satisfies the requirements of Sec. 1026.43(g)(3) offered by either the
creditor or by another creditor, if the other creditor offers a covered
transaction with a lower interest rate or a lower total dollar amount of
discount points and origination points or fees. The agreement may
provide for the mortgage broker to present both the creditor's covered
transaction and an alternative covered transaction offered by another
creditor with a lower interest rate or a lower total dollar amount of
origination discount points and points or fees. See comment 36(e)(3)-3
for guidance in determining which step-rate mortgage has a lower
interest rate.
3. Agreement. The creditor's agreement with a mortgage broker for
purposes of Sec. 1026.43(g)(4) may be part of another agreement with
the mortgage broker, for example, a compensation agreement. Thus, the
creditor need not enter into a separate agreement with the mortgage
broker with respect to each covered transaction with a prepayment
penalty.
43(g)(5) Creditor that is a loan originator.
1. Loan originator. The definition of ``loan originator'' in Sec.
1026.36(a)(1) applies for purposes of Sec. 1026.43(g)(5). Thus, a loan
originator includes any creditor that satisfies the definition of loan
originator but makes use of ``table-funding'' by a third party. See
comment 36(a)-1.i and ii.
2. Lower interest rate. Under Sec. 1026.43(g)(5), a creditor that
is a loan originator must present an alternative covered transaction
without a prepayment penalty that satisfies the requirements of Sec.
1026.43(g)(3) offered by
[[Page 819]]
either the assignee for the covered transaction or another person, if
that other person offers a transaction with a lower interest rate or a
lower total dollar amount of origination points or fees or discount
points. See comment 36(e)(3)-3 for guidance in determining which step-
rate mortgage has a lower interest rate.
43(h) Evasion; open-end credit.
1. Subject to closed-end credit rules. Where a creditor documents a
loan as open-end credit but the features and terms, or other
circumstances, demonstrate that the loan does not meet the definition of
open-end credit in Sec. 1026.2(a)(20), the loan is subject to the rules
for closed-end credit, including Sec. 1026.43.
Subpart F--Special Rules for Private Education Loans
Section 1026.46--Special Disclosure Requirements for Private Education
Loans
46(a) Coverage
1. Coverage. This subpart applies to all private education loans as
defined in Sec. 1026.46(b)(5). Coverage under this subpart is optional
for certain extensions of credit that do not meet the definition of
``private education loan'' because the credit is not extended, in whole
or in part, for ``postsecondary educational expenses'' defined in Sec.
1026.46(b)(3). If a transaction is not covered and a creditor opts to
comply with any section of this subpart, the creditor must comply with
all applicable sections of this subpart. If a transaction is not covered
and a creditor opts not to comply with this subpart, the creditor must
comply with all applicable requirements under Sec. Sec. 1026.17 and
1026.18. Compliance with this subpart is optional for an extension of
credit for expenses incurred after graduation from a law, medical,
dental, veterinary, or other graduate school and related to relocation,
study for a bar or other examination, participation in an internship or
residency program, or similar purposes. However, if any part of such
loan is used for postsecondary educational expenses as defined in Sec.
1026.46(b)(3), then compliance with Subpart F is mandatory not optional.
46(b) Definitions
46(b)(1) Covered Educational Institution
1. General. A covered educational institution includes any
educational institution that meets the definition of an institution of
higher education in Sec. 1026.46(b)(2). An institution is also a
covered educational institution if it otherwise meets the definition of
an institution of higher education, except for its lack of
accreditation. Such an institution may include, for example, a
university or community college. It may also include an institution,
whether accredited or unaccredited, offering instruction to prepare
students for gainful employment in a recognized profession, such as
flying, culinary arts, or dental assistance. A covered educational
institution does not include elementary or secondary schools.
2. Agent. For purposes of Sec. 1026.46(b)(1), the term agent means
an institution-affiliated organization as defined by Section 151 of the
Higher Education Act of 1965 (20 U.S.C 1019) or an officer or employee
of an institution-affiliated organization. Under Section 151 of the
Higher Education Act, an institution-affiliated organization means any
organization that is directly or indirectly related to a covered
institution and is engaged in the practice of recommending, promoting,
or endorsing education loans for students attending the covered
institution or the families of such students. An institution-affiliated
organization may include an alumni organization, athletic organization,
foundation, or social, academic, or professional organization, of a
covered institution, but does not include any creditor with respect to
any private education loan made by that creditor.
46(b)(2) Institution of Higher Education
1. General. An institution of higher education includes any
institution that meets the definitions contained in sections 101 and 102
of the Higher Education Act of 1965 (20 U.S.C. 1001-1002) and
implementing Department of Education regulations (34 CFR 600). Such an
institution may include, for example, a university or community college.
It may also include an institution offering instruction to prepare
students for gainful employment in a recognized profession, such as
flying, culinary arts, or dental assistance. An institution of higher
education does not include elementary or secondary schools.
46(b)(3) Postsecondary Educational Expenses
1. General. The examples listed in Sec. 1026.46(b)(3) are
illustrative only. The full list of postsecondary educational expenses
is contained in section 472 of the Higher Education Act of 1965 (20
U.S.C. 1087ll).
46(b)(4) Preferred Lender Arrangement
1. General. The term ``preferred lender arrangement'' is defined in
section 151 of the Higher Education Act of 1965 (20 U.S.C. 1019). The
term refers to an arrangement or agreement between a creditor and a
covered educational institution (or an institution-affiliated
organization as defined by section 151 of the Higher Education Act of
1965 (20 U.S.C 1019)) under which a creditor provides private education
loans to consumers for students attending the covered educational
institution and the covered educational institution recommends,
promotes, or endorses the private education loan products of the
creditor.
[[Page 820]]
It does not include arrangements or agreements with respect to Federal
Direct Stafford/Ford loans, or Federal PLUS loans made under the Federal
PLUS auction pilot program.
46(b)(5) Private Education Loan
1. Extended expressly for postsecondary educational expenses. A
private education loan is one that is extended expressly for
postsecondary educational expenses. The term includes loans extended for
postsecondary educational expenses incurred while a student is enrolled
in a covered educational institution as well as loans extended to
consolidate a consumer's pre-existing private education loans.
2. Multiple-purpose loans. i. Definition. A private education loan
may include an extension of credit not excluded under Sec.
1026.46(b)(5) that the consumer may use for multiple purposes including,
but not limited to, postsecondary educational expenses. If the consumer
expressly indicates that the proceeds of the loan will be used to pay
for postsecondary educational expenses by indicating the loan's purpose
on an application, the loan is a private education loan.
ii. Coverage. A creditor generally will not know before an
application is received whether the consumer intends to use the loan for
postsecondary educational expenses. For this reason, the creditor need
not provide the disclosures required by Sec. 1026.47(a) on or with the
application or solicitation for a loan that may be used for multiple
purposes. See Sec. 1026.47(d)(1)(i). However, if the consumer expressly
indicates that the proceeds of the loan will be used to pay for
postsecondary educational expenses, the creditor must comply with
Sec. Sec. 1026.47(b) and (c) and Sec. 1026.48. For purposes of the
required disclosures, the creditor must calculate the disclosures based
on the entire amount of the loan, even if only a part of the proceeds is
intended for postsecondary educational expenses. The creditor may rely
solely on a check-box, or a purpose line, on a loan application to
determine whether or not the applicant intends to use loan proceeds for
postsecondary educational expenses.
iii. Examples. The creditor must comply only if the extension of
credit also meets the other parts of the definition of private education
loan. For example, if the creditor uses a single application form for
both open-end and closed-end credit, and the consumer applies for open-
end credit to be used for postsecondary educational expenses, the
extension of credit is not covered. Similarly, if the consumer indicates
the extension of credit will be used for educational expenses that are
not postsecondary educational expenses, such as elementary or secondary
educational expenses, the extension of credit is not covered. These
examples are only illustrative, not exhaustive.
3. Short-term loans. Some covered educational institutions offer
loans to students with terms of 90 days or less to assist the student in
paying for educational expenses, usually while the student waits for
other funds to be disbursed. Under Sec. 1026.46(b)(5)(iv)(A) such loans
are not considered private education loans, even if interest is charged
on the credit balance. (Because these loans charge interest, they are
not covered by the exception under Sec. 1026.46(b)(5)(iv)(B).) However,
these loans are extensions of credit subject to the requirements of
Sec. Sec. 1026.17 and 18. The legal agreement may provide that
repayment is required when the consumer or the educational institution
receives certain funds. If, under the terms of the legal obligation,
repayment of the loan is required when the certain funds are received by
the consumer or the educational institution (such as by deposit into the
consumer's or educational institution's account), the disclosures should
be based on the creditor's estimate of the time the funds will be
delivered.
4. Billing plans. Some covered educational institutions offer
billing plans that permit a consumer to make payments in installments.
Such plans are not considered private education loans, if an interest
rate will not be applied to the credit balance and the term of the
extension of credit is one year or less, even if the plan is payable in
more than four installments. However, such plans may be extensions of
credit subject to the requirements of Sec. Sec. 1026.17 and 1026.18.
46(c) Form of Disclosures
1. Form of disclosures--relation to other sections. Creditors must
make the disclosures required under this subpart in accordance with
Sec. 1026.46(c). Section 1026.46(c)(2) requires that the disclosures be
grouped together and segregated from everything else. In complying with
this requirement, creditors may follow the rules in Sec. 1026.17,
except where specifically provided otherwise. For example, although
Sec. 1026.17(b) requires creditors to provide only one set of
disclosures before consummation of the transaction, Sec. Sec.
1026.47(b) and (c) require that the creditor provide the disclosures
under Sec. 1026.18 both upon approval and after the consumer accepts
the loan.
46(c)(3) Electronic Disclosures
1. Application and solicitation disclosures--electronic disclosures.
If the disclosures required under Sec. 1026.47(a) are provided
electronically, they must be provided on or with the application or
solicitation reply form. Electronic disclosures are deemed to be on or
with an application or solicitation if they meet one of the following
conditions:
[[Page 821]]
i. They automatically appear on the screen when the application or
solicitation reply form appears;
ii. They are located on the same Web ``page'' as the application or
solicitation reply form without necessarily appearing on the initial
screen, if the application or reply form contains a clear and
conspicuous reference to the location of the disclosures and indicates
that the disclosures contain rate, fee, and other cost information, as
applicable; or
iii. They are posted on a Web site and the application or
solicitation reply form is linked to the disclosures in a manner that
prevents the consumer from by passing the disclosures before submitting
the application or reply form.
46(d) Timing of Disclosures
1. Receipt of disclosures. Under Sec. 1026.46(d)(4), if the
creditor places the disclosures in the mail, the consumer is considered
to have received them three business days after they are mailed. For
purposes of Sec. 1026.46(d)(4), ``business day'' means all calendar
days except Sundays and the legal public holidays referred to in Sec.
1026.2(a)(6). See comment 2(a)(6)-2. For example, if the creditor places
the disclosures in the mail on Thursday, June 4, the disclosures are
considered received on Monday, June 8.
46(d)(1) Application or Solicitation Disclosures
1. Invitations to apply. A creditor may contact a consumer who has
not been pre-selected for a private education loan about taking out a
loan (whether by direct mail, telephone, or other means) and invite the
consumer to complete an application. Such a contact does not meet the
definition of solicitation, nor is it covered by this subpart, unless
the contact itself includes the following:
i. An application form in a direct mailing, electronic communication
or a single application form as a ``take-one'' (in racks in public
locations, for example);
ii. An oral application in a telephone contact; or
iii. An application in an in-person contact.
46(d)(2) Approval Disclosures
1. Timing. The creditor must provide the disclosures required by
Sec. 1026.47(b) at the time the creditor provides to the consumer any
notice that the loan has been approved. However, nothing in this section
prevents the creditor from communicating to the consumer that additional
information is required from the consumer before approval may be
granted. In such a case, a creditor is not required to provide the
disclosures at that time. If the creditor communicates notice of
approval to the consumer by mail, the disclosures must be mailed at the
same time as the notice of approval. If the creditor communicates notice
of approval by telephone, the creditor must place the disclosures in the
mail within three business days of the telephone call. If the creditor
communicates notice of approval in electronic form, the creditor may
provide the disclosures in electronic form. If the creditor has complied
with the consumer consent and other applicable provisions of the
Electronic Signatures in Global and National Commerce Act (E-Sign Act)
(15 U.S.C. 7001 et seq.) the creditor may provide the disclosures solely
in electronic form; otherwise, the creditor must place the disclosures
in the mail within three business days of the communication.
46(g) Effect of Subsequent Events
1. Approval disclosures. Inaccuracies in the disclosures required
under Sec. 1026.47(b) are not violations if attributable to events
occurring after disclosures are made, although creditors are restricted
under Sec. 1026.48(c)(2) from making certain changes to the loan's rate
or terms after the creditor provides an approval disclosure to a
consumer. Since creditors are required provide the final disclosures
under Sec. 1026.47(c), they need not make new approval disclosures in
response to an event that occurs after the creditor delivers the
required approval disclosures, except as specified under Sec.
1026.48(c)(4). For example, at the time the approval disclosures are
provided, the creditor may not know the precise disbursement date of the
loan funds and must provide estimated disclosures based on the best
information reasonably available and labeled as an estimate. If, after
the approval disclosures are provided, the creditor learns from the
educational institution the precise disbursement date, new approval
disclosures would not be required, unless specifically required under
Sec. 1026.48(c)(4) if other changes are made. Similarly, the creditor
may not know the precise amounts of each loan to be consolidated in a
consolidation loan transaction and information about the precise amounts
would not require new approval disclosures, unless specifically required
under Sec. 1026.48(c)(4) if other changes are made.
2. Final disclosures. Inaccuracies in the disclosures required under
Sec. 1026.47(c) are not violations if attributable to events occurring
after disclosures are made. For example, if the consumer initially
chooses to defer payment of principal and interest while enrolled in a
covered educational institution, but later chooses to make payments
while enrolled, such a change does not make the original disclosures
inaccurate.
Section 1026.47--Content of Disclosures
1. As applicable. The disclosures required by this subpart need be
made only as applicable, unless specifically required otherwise. The
creditor need not provide any disclosure that
[[Page 822]]
is not applicable to a particular transaction. For example, in a
transaction consolidating private education loans, or in transactions
under Sec. 1026.46(a) for which compliance with this subpart is
optional, the creditor need not disclose the information under
Sec. Sec. 1026.47(a)(6), and (b)(4), and any other information
otherwise required to be disclosed under this subpart that is not
applicable to the transaction. Similarly, creditors making loans to
consumers where the student is not attending an institution of higher
education, as defined in Sec. 1026.46(b)(2), need not provide the
disclosures regarding the self-certification form in Sec.
1026.47(a)(8).
47(a) Application or Solicitation Disclosures
Paragraph 47(a)(1)(i)
1. Rates actually offered. The disclosure may state only those rates
that the creditor is actually prepared to offer. For example, a creditor
may not disclose a very low interest rate that will not in fact be
offered at any time. For a loan with variable interest rates, the ranges
of rates will be considered actually offered if:
i. For disclosures in applications or solicitations sent by direct
mail, the rates were in effect within 60 days before mailing;
ii. For disclosures in applications or solicitations in electronic
form, the rates were in effect within 30 days before the disclosures are
sent to a consumer, or for disclosures made on an Internet Web site,
within 30 days before being viewed by the public;
iii. For disclosures in printed applications or solicitations made
available to the general public, the rates were in effect within 30 days
before printing; or
iv. For disclosures provided orally in telephone applications or
solicitations, the rates are currently available at the time the
disclosures are provided.
2. Creditworthiness and other factors. If the rate will depend, at
least in part, on a later determination of the consumer's
creditworthiness or other factors, the disclosure must include a
statement that the rate for which the consumer may qualify at approval
will depend on the consumer's creditworthiness and other factors. The
creditor may, but is not required to, specify any additional factors
that it will use to determine the interest rate. For example, if the
creditor will determine the interest rate based on information in the
consumer's or cosigner's credit report and the type of school the
consumer attends, the creditor may state, ``Your interest rate will be
based on your credit history and other factors (cosigner credit and
school type).''
3. Rates applicable to the loan. For a variable-rate private
education loan, the disclosure of the interest rate or range of rates
must reflect the rate or rates calculated based on the index and margin
that will be used to make interest rate adjustments for the loan. The
creditor may provide a description of the index and margin or range of
margins used to make interest rate adjustments, including a reference to
a source, such as a newspaper, where the consumer may look up the index.
Paragraph 47(a)(1)(iii)
1. Coverage. The interest rate is considered variable if the terms
of the legal obligation allow the creditor to increase the interest rate
originally disclosed to the consumer and the requirements of Sec.
1026.47(a)(1)(iii) apply to all such transactions. The provisions do not
apply to increases resulting from delinquency (including late payment),
default, assumption, or acceleration.
2. Limitations. The creditor must disclose how often the rate may
change and any limit on the amount that the rate may increase at any one
time. The creditor must also disclose any maximum rate over the life of
the transaction. If the legal obligation between the parties does
specify a maximum rate, the creditor must disclose any legal limits in
the nature of usury or rate ceilings under state or Federal statutes or
regulations. However, if the applicable maximum rate is in the form of a
legal limit, such as a state's usury cap (rather than a maximum rate
specified in the legal obligation between the parties), the creditor
must disclose that the maximum rate is determined by applicable law. The
creditor must also disclose that the consumer's actual rate may be
higher or lower than the initial rates disclosed under Sec.
1026.47(a)(1)(i), if applicable.
Paragraph 47(a)(1)(iv)
1. Cosigner or guarantor--changes in applicable interest rate. The
creditor must state whether the interest rate typically will be higher
if the loan is not co-signed or guaranteed by a third party. The
creditor is required to provide a statement of the effect on the
interest rate and is not required to provide a numerical estimate of the
effect on the interest rate. For example, a creditor may state: ``Rates
are typically higher without a cosigner.''
47(a)(2) Fees and Default or Late Payment Costs
1. Fees or range of fees. The creditor must itemize fees required to
obtain the private education loan. The creditor must give a single
dollar amount for each fee, unless the fee is based on a percentage, in
which case a percentage must be stated. If the exact amount of the fee
is not known at the time of disclosure, the creditor may disclose the
dollar amount or percentage for each fee as an estimated range.
2. Fees required to obtain the private education loan. The creditor
must itemize the
[[Page 823]]
fees that the consumer must pay to obtain the private education loan.
Fees disclosed include all finance charges under Sec. 1026.4, such as
loan origination fees, credit report fees, and fees charged upon
entering repayment, as well as fees not considered finance charges but
required to obtain credit, such as application fees that are charged
whether or not credit is extended. Fees disclosed include those paid by
the consumer directly to the creditor and fees paid to third parties by
the creditor on the consumer's behalf. Creditors are not required to
disclose fees that apply if the consumer exercises an option under the
loan agreement after consummation, such as fees for deferment,
forbearance, or loan modification.
47(a)(3) Repayment Terms
1. Loan term. The term of the loan is the maximum period of time
during which regularly scheduled payments of principal and interest will
be due on the loan.
2. Payment deferral options--general. The creditor must describe the
options that the consumer has under the loan agreement to defer payment
on the loan. When there is no deferment option provided for the loan,
the creditor must disclose that fact. Payment deferral options required
to be disclosed include options for immediate deferral of payments, such
as when the student is currently enrolled at a covered educational
institution. The description may include of the length of the maximum
initial in-school deferment period, the types of payments that may be
deferred, and a description of any payments that are required during the
deferment period. The creditor may, but need not, disclose any
conditions applicable to the deferment option, such as that deferment is
permitted only while the student is continuously enrolled in school. If
payment deferral is not an option while the student is enrolled in
school, the creditor may disclose that the consumer must begin repayment
upon disbursement of the loan and that the consumer may not defer
repayment while enrolled in school. If the creditor offers payment
deferral options that may apply during the repayment period, such as an
option to defer payments if the student returns to school to pursue an
additional degree, the creditor must include a statement referring the
consumer to the contract document or promissory note for more
information.
3. Payment deferral options--in school deferment. For each payment
deferral option applicable while the student is enrolled at a covered
educational institution the creditor must disclose whether interest will
accrue while the student is enrolled at a covered educational
institution and, if interest does accrue, whether payment of interest
may be deferred and added to the principal balance.
4. Combination with cost estimate disclosure. The disclosures of the
loan term under Sec. 1026.47(a)(3)(i) and of the payment deferral
options applicable while the student is enrolled at a covered
educational institution under Sec. Sec. 1026.47(a)(3)(ii) and (iii) may
be combined with the disclosure of cost estimates required in Sec.
1026.47(a)(4). For example, the creditor may describe each payment
deferral option in the same chart or table that provides the cost
estimates for each payment deferral option. See appendix H-21.
5. Bankruptcy limitations. The creditor may comply with Sec.
1026.47(a)(3)(iv) by disclosing the following statement: ``If you file
for bankruptcy you may still be required to pay back this loan.''
47(a)(4) Cost Estimates
1. Total cost of the loan. For purposes of Sec. 1026.47(a)(4), the
creditor must calculate the example of the total cost of the loan in
accordance with the rules in Sec. 1026.18(h) for calculating the loan's
total of payments.
2. Basis for estimates. i. The creditor must calculate the total
cost estimate by determining all finance charges that would be
applicable to loans with the highest rate of interest required to be
disclosed under Sec. 1026.47(a)(1)(i). For example, if a creditor
charges a range of origination fees from 0% to 3%, but the 3%
origination fee would apply to loans with the highest initial rate, the
lender must assume the 3% origination fee is charged. The creditor must
base the total cost estimate on a total loan amount that includes all
prepaid finance charges and results in a $10,000 amount financed. For
example, if the prepaid finance charges are $600, the creditor must base
the estimate on a $10,600 total loan amount and an amount financed of
$10,000. The example must reflect an amount provided of $10,000. If the
creditor only offers a particular private education loan for less than
$10,000, the creditor may assume a loan amount that results in a $5,000
amount financed for that loan.
ii. If a prepaid finance charge is determined as a percentage of the
amount financed, for purposes of the example, the creditor should assume
that the fee is determined as a percentage of the total loan amount,
even if this is not the creditor's usual practice. For example, suppose
the consumer requires a disbursement of $10,000 and the creditor charges
a 3% origination fee. In order to calculate the total cost example, the
creditor must determine the loan amount that will result in a $10,000
amount financed after the 3% fee is assessed. In this example, the
resulting loan amount would be $10,309.28. Assessing the 3% origination
fee on the loan amount of $10,309.28 results in an origination fee of
$309.28, which is withheld from the loan funds disbursed to the
consumer. The principal loan amount of $10,309.28 minus the prepaid
finance charge of
[[Page 824]]
$309.28 results in an amount financed of $10,000.
3. Calculated for each option to defer interest payments. The
example must include an estimate of the total cost of the loan for each
in-school deferral option disclosed in Sec. 1026.47(a)(3)(iii). For
example, if the creditor provides the consumer with the option to begin
making principal and interest payments immediately, to defer principal
payments but begin making interest-only payments immediately, or to
defer all principal and interest payments while in school, the creditor
is required to disclose three estimates of the total cost of the loan,
one for each deferral option. If the creditor adds accrued interest to
the loan balance (i.e., interest is capitalized), the estimate of the
total loan cost should be based on the capitalization method that the
creditor actually uses for the loan. For instance, for each deferred
payment option where the creditor would capitalize interest on a
quarterly basis, the total loan cost must be calculated assuming
interest capitalizes on a quarterly basis.
4. Deferment period assumptions. Creditors may use either of the
following two methods for estimating the duration of in-school deferment
periods:
i. For loan programs intended for educational expenses of
undergraduate students, the creditor may assume that the consumer defers
payments for a four-year matriculation period, plus the loan's maximum
applicable grace period, if any. For all other loans, the creditor may
assume that the consumer defers for a two-year matriculation period,
plus the maximum applicable grace period, if any, or the maximum time
the consumer may defer payments under the loan program, whichever is
shorter.
ii. Alternatively, if the creditor knows that the student will be
enrolled in a program with a standard duration, the creditor may assume
that the consumer defers payments for the full duration of the program
(plus any grace period). For example, if a creditor makes loans intended
for students enrolled in a four-year medical school degree program, the
creditor may assume that the consumer defers payments for four years
plus the loan's maximum applicable grace period, if any. However, the
creditor may not modify the disclosure to correspond to a particular
student's situation. For example, even if the creditor knows that a
student will be a second-year medical school student, the creditor must
assume a four-year deferral period.
Paragraph 47(a)(6)(ii)
1. Terms of Federal student loans. The creditor must disclose the
interest rates available under each program under title IV of the Higher
Education Act of 1965 and whether the rates are fixed or variable, as
prescribed in the Higher Education Act of 1965 (20 U.S.C. 1077a). Where
the fixed interest rate for a loan varies by statute depending on the
date of disbursement or receipt of application, the creditor must
disclose only the interest rate as of the time the disclosure is
provided.
Paragraph 47(a)(6)(iii)
1. Web site address. The creditor must include with this disclosure
an appropriate U.S. Department of Education Web site address such as
``federalstudentaid.ed.gov.''
47(b) Approval Disclosures
47(b)(1) Interest Rate
1. Variable rate disclosures. The interest rate is considered
variable if the terms of the legal obligation allow the creditor to
increase the interest rate originally disclosed to the consumer. The
provisions do not apply to increases resulting from delinquency
(including late payment), default, assumption, or acceleration. In
addition to disclosing the information required under Sec. Sec.
1026.47(b)(ii) and (iii), the creditor must disclose the information
required under Sec. Sec. 1026.18(f)(1)(i) and (iii)--the circumstances
under which the rate may increase and the effect of an increase,
respectively. The creditor is required to disclose the maximum monthly
payment based on the maximum possible rate in Sec. 1026.47(b)(3)(viii),
and the creditor need not disclose a separate example of the payment
terms that would result from an increase under Sec. 1026.18(f)(1)(iv).
2. Limitations on rate adjustments. The creditor must disclose how
often the rate may change and any limit on the amount that the rate may
increase at any one time. The creditor must also disclose any maximum
rate over the life of the transaction. If the legal obligation between
the parties does provide a maximum rate, the creditor must disclose any
legal limits in the nature of usury or rate ceilings under state or
Federal statutes or regulations. However, if the applicable maximum rate
is in the form of a legal limit, such as a state's usury cap (rather
than a maximum rate specified in the legal obligation between the
parties), the creditor must disclose that the maximum rate is determined
by applicable law. Compliance with Sec. 1026.18(f)(1)(ii) (requiring
disclosure of any limitations on the increase of the interest rate) does
not necessarily constitute compliance with this section. Specifically,
this section requires that if there are no limitations on interest rate
increases, the creditor must disclose that fact. By contrast, comment
18(f)(1)(ii)-1 states that if there are no limitations the creditor need
not disclose that fact. In addition, under this section, limitations on
rate increases include, rather than exclude, legal limits in the nature
of usury
[[Page 825]]
or rate ceilings under state or Federal statutes or regulations.
3. Rates applicable to the loan. For a variable-rate loan, the
disclosure of the interest rate must reflect the index and margin that
will be used to make interest rate adjustments for the loan. The
creditor may provide a description of the index and margin or range of
margins used to make interest rate adjustments, including a reference to
a source, such as a newspaper, where the consumer may look up the index.
47(b)(2) Fees and Default or Late Payment Costs
1. Fees and default or late payment costs. Creditors may follow the
commentary for Sec. 1026.47(a)(2) in complying with Sec.
1026.47(b)(2). Creditors must disclose the late payment fees required to
be disclosed under Sec. 1026.18(l) as part of the disclosure required
under Sec. 1026.47(b)(2)(ii). If the creditor includes the itemization
of the amount financed under Sec. 1026.18(c)(1), any fees disclosed as
part of the itemization need not be separately disclosed elsewhere.
47(b)(3) Repayment Terms
1. Principal amount. The principal amount must equal what the face
amount of the note would be as of the time of approval, and it must be
labeled ``Total Loan Amount.'' See appendix H-18. This amount may be
different from the ``principal loan amount'' used to calculate the
amount financed under comment 18(b)(3)-1, because the creditor has the
option under that comment of using a ``principal loan amount'' that is
different from the face amount of the note. If the creditor elects to
provide an itemization of the amount financed under Sec. 1026.18(c)(1)
the creditor need not disclose the amount financed elsewhere.
2. Loan term. The term of the loan is the maximum period of time
during which regularly scheduled payments of principal and interest are
due on the loan.
3. Payment deferral options applicable to the consumer. Creditors
may follow the commentary for Sec. 1026.47(a)(3)(ii) in complying with
Sec. 1026.47(b)(3)(iii).
4. Payments required during enrollment. Required payments that must
be disclosed include payments of interest and principal, interest only,
or other payments that the consumer must make during the time that the
student is enrolled. Compliance with Sec. 1026.18(g) constitutes
compliance with Sec. 1026.47(b)(3)(iv).
5. Bankruptcy limitations. The creditor may comply with Sec.
1026.47(b)(3)(vi) by disclosing the following statement: ``If you file
for bankruptcy you may still be required to pay back this loan.''
6. An estimate of the total amount for repayment. The creditor must
disclose an estimate of the total amount for repayment at two interest
rates:
i. The interest rate in effect on the date of approval. Compliance
with the total of payments disclosure requirement of Sec. 1026.18(h)
constitutes compliance with this requirement.
ii. The maximum possible rate of interest applicable to the loan or,
if the maximum rate cannot be determined, a rate of 25%. If the legal
obligation between the parties specifies a maximum rate of interest, the
creditor must calculate the total amount for repayment based on that
rate. If the legal obligation does not specify a maximum rate but a
usury or rate ceiling under state or Federal statutes or regulations
applies, the creditor must use that rate. If a there is no maximum rate
in the legal obligation or under a usury or rate ceiling, the creditor
must base the disclosure on a rate of 25% and must disclose that there
is no maximum rate and that the total amount for repayment disclosed
under Sec. 1026.47(b)(3)(vii)(B) is an estimate and will be higher if
the applicable interest rate increases.
iii. If terms of the legal obligation provide a limitation on the
amount that the interest rate may increase at any one time, the creditor
may reflect the effect of the interest rate limitation in calculating
the total cost example. For example, if the legal obligation provides
that the interest rate may not increase by more than three percentage
points each year, the creditor may assume that the rate increases by
three percentage points each year until it reaches that maximum possible
rate, or if a maximum rate cannot be determined, an interest rate of
25%.
7. The maximum monthly payment. The creditor must disclose the
maximum payment that the consumer could be required to make under the
loan agreement, calculated using the maximum rate of interest applicable
to the loan, or if the maximum rate cannot be determined, a rate of 25%.
The creditor must determine and disclose the maximum rate of interest in
accordance with comments 47(b)(3)-6.ii and 47(b)(3)-6.iii. In addition,
if a maximum rate cannot be determined, the creditor must state that
there is no maximum rate and that the monthly payment amounts disclosed
under Sec. 1026.47(b)(3)(viii) are estimates and will be higher if the
applicable interest rate increases.
47(b)(4) Alternatives to Private Education Loans
1. General. Creditors may use the guidance provided in the
commentary for Sec. 1026.47(a)(6) in complying with Sec.
1026.47(b)(4).
47(b)(5) Rights of the Consumer
1. Notice of acceptance period. The disclosure that the consumer may
accept the terms of the loan until the acceptance period under
[[Page 826]]
Sec. 1026.48(c)(1) has expired must include the specific date on which
the acceptance period expires and state that the consumer may accept the
terms of the loan until that date. Under Sec. 1026.48(c)(1), the date
on which the acceptance period expires is based on when the consumer
receives the disclosures. If the creditor mails the disclosures, the
consumer is considered to have received them three business days after
the creditor places the disclosures in the mail See Sec. 1026.46(d)(4).
If the creditor provides an acceptance period longer than the minimum 30
calendar days, the disclosure must reflect the later date. The
disclosure must also specify the method or methods by which the consumer
may communicate acceptance.
47(c) Final Disclosures
1. Notice of right to cancel. The disclosure of the right to cancel
must include the specific date on which the three-day cancellation
period expires and state that the consumer has a right to cancel by that
date. See comments 48(d)-1 and -2. For example, if the disclosures were
mailed to the consumer on Friday, June 1, and the consumer is deemed to
receive them on Tuesday, June 5, the creditor could state: ``You have a
right to cancel this transaction, without penalty, by midnight on June
8, 2009. No funds will be disbursed to you or to your school until after
this time. You may cancel by calling us at 800-XXX-XXXX.'' If the
creditor permits cancellation by mail, the statement must specify that
the consumer's mailed request will be deemed timely if placed in the
mail not later than the cancellation date specified on the disclosure.
The disclosure must also specify the method or methods by which the
consumer may cancel.
2. More conspicuous. The statement of the right to cancel must be
more conspicuous than any other disclosure required under this section
except for the finance charge, the interest rate, and the creditor's
identity. See Sec. 1026.46(c)(2)(iii). The statement will be deemed to
be made more conspicuous if it is segregated from other disclosures,
placed near or at the top of the disclosure document, and highlighted in
relation to other required disclosures. For example, the statement may
be outlined with a prominent, noticeable box; printed in contrasting
color; printed in larger type, bold print, or different type face;
underlined; or set off with asterisks.
Section 1026.48--Limitations on Private Education Loans
1. Co-branding--definition of marketing. The prohibition on co-
branding in Sec. Sec. 1026.48(a) and (b) applies to the marketing of
private education loans. The term marketing includes any advertisement
under Sec. 1026.2(a)(2). In addition, the term marketing includes any
document provided by the creditor to the consumer related to a specific
transaction, such as an application or solicitation, a promissory note
or a contract provided to the consumer. For example, prominently
displaying the name of the educational institution at the top of the
application form or promissory note without mentioning the name of the
creditor, such as by naming the loan product the ``University of ABC
Loan,'' would be prohibited.2. Implied endorsement. A suggestion that a
private education loan is offered or made by the covered educational
institution instead of by the creditor is included in the prohibition on
implying that the covered educational institution endorses the private
education loan under Sec. 1026.48(a)(1). For example, naming the loan
the ``University of ABC Loan,'' suggests that the loan is offered by the
educational institution. However, the use of a creditor's full name,
even if that name includes the name of a covered educational
institution, does not imply endorsement. For example, a credit union
whose name includes the name of a covered educational institution is not
prohibited from using its own name. In addition, the authorized use of a
state seal by a state or an institution of higher education in the
marketing of state education loan products does not imply endorsement.
3. Disclosure. i. A creditor is considered to have complied with
Sec. 1026.48(a)(2) if the creditor's marketing contains a clear and
conspicuous statement, equally prominent and closely proximate to the
reference to the covered educational institution, using the name of the
creditor and the name of the covered educational institution that the
covered educational institution does not endorse the creditor's loans
and that the creditor is not affiliated with the covered educational
institution. For example, ``[Name of creditor]'s loans are not endorsed
by [name of school] and [name of creditor] is not affiliated with [name
of school].'' The statement is considered to be equally prominent and
closely proximate if it is the same type size and is located immediately
next to or directly above or below the reference to the educational
institution, without any intervening text or graphical displays.
ii. A creditor is considered to have complied with Sec. 1026.48(b)
if the creditor's marketing contains a clear and conspicuous statement,
equally prominent and closely proximate to the reference to the covered
educational institution, using the name of the creditor's loan or loan
program, the name of the covered educational institution, and the name
of the creditor, that the creditor's loans are not offered or made by
the covered educational institution, but are made by the creditor. For
example, ``[Name of loan or loan program] is not being offered or made
by [name of school], but by [name of creditor].'' The statement is
considered to be
[[Page 827]]
equally prominent and closely proximate if it is the same type size and
is located immediately next to or directly above or below the reference
to the educational institution, without any intervening text or
graphical displays.
48(c) Consumer's Right to Accept
1. 30 day acceptance period. The creditor must provide the consumer
with at least 30 calendar days from the date the consumer receives the
disclosures required under Sec. 1026.47(b) to accept the terms of the
loan. The creditor may provide the consumer with a longer period of
time. If the creditor places the disclosures in the mail, the consumer
is considered to have received them three business days after they are
mailed under Sec. 1026.46(d)(4). For purposes of determining when a
consumer receives mailed disclosures, ``business day'' means all
calendar days except Sundays and the legal public holidays referred to
in Sec. 1026.2(a)(6). See comment 46(d)-1. The consumer may accept the
loan at any time before the end of the 30-day period.
2. Method of acceptance. The creditor must specify a method or
methods by which the consumer can accept the loan at any time within the
30-day acceptance period. The creditor may require the consumer to
communicate acceptance orally or in writing. Acceptance may also be
communicated electronically, but electronic communication must not be
the only means provided for the consumer to communicate acceptance
unless the creditor has provided the approval disclosure electronically
in compliance with the consumer consent and other applicable provisions
of the Electronic Signatures in Global and National Commerce Act (E-Sign
Act) (15 U.S.C. 7001 et seq.). If acceptance by mail is allowed, the
consumer's communication of acceptance is considered timely if placed in
the mail within the 30-day period.
3. Prohibition on changes to rates and terms. The prohibition on
changes to the rates and terms of the loan applies to changes that
affect those terms that are required to be disclosed under Sec. Sec.
1026.47(b) and (c). The creditor is permitted to make changes that do
not affect any of the terms disclosed to the consumer under those
sections.
4. Permissible changes to rates and terms--re-disclosure not
required. Creditors are not required to consummate a loan where the
extension of credit would be prohibited by law or where the creditor has
reason to believe that the consumer has committed fraud. A creditor may
make changes to the rate based on adjustments to the index used for the
loan and changes that will unequivocally benefit the consumer. For
example, a creditor is permitted to reduce the interest rate or lower
the amount of a fee. A creditor may also reduce the loan amount based on
a certification or other information received from a covered educational
institution or from the consumer indicating that the student's cost of
attendance has decreased or the amount of other financial aid has
increased. A creditor may also withdraw the loan approval based on a
certification or other information received from a covered educational
institution or from the consumer indicating that the student is not
enrolled in the institution. For these changes permitted by Sec.
1026.48(c)(3), the creditor is not required to provide a new set of
approval disclosures required under Sec. 1026.47(b) or provide the
consumer with a new 30-day acceptance period under Sec. 1026.48(c)(1).
The creditor must provide the final disclosures under Sec. 1026.47(c).
5. Permissible changes to rates and terms--school certification. If
the creditor reduces the loan amount based on information that the
student's cost of attendance has decreased or the amount of other
financial aid has increased, the creditor may make certain corresponding
changes to the rate and terms. The creditor may change the rate or terms
to those that the consumer would have received if the consumer had
applied for the reduced loan amount. For example, assume a consumer
applies for, and is approved for, a $10,000 loan at a 7% interest rate.
However, after the consumer receives the approval disclosures, the
consumer's school certifies that the consumer's financial need is only
$8,000. The creditor may reduce the loan amount for which the consumer
is approved to $8,000. The creditor may also, for example, increase the
interest rate on the loan to 7.125%, but only if the consumer would have
received a rate of 7.125% if the consumer had originally applied for an
$8,000 loan.
6. Permissible changes to rates and terms--re-disclosure required. A
creditor may make changes to the interest rate or terms to accommodate a
request from a consumer. For example, assume a consumer applies for a
$10,000 loan and is approved for the $10,000 amount at an interest rate
of 6%. After the creditor has provided the approval disclosures, the
consumer's financial need increases, and the consumer requests to a loan
amount of $15,000. In this situation, the creditor is permitted to offer
a $15,000 loan, and to make any other changes such as raising the
interest rate to 7%, in response to the consumer's request. The creditor
must provide a new set of disclosures under Sec. 1026.47(b) and provide
the consumer with 30 days to accept the offer under Sec. 1026.48(c) for
the $15,000 loan offered in response to the consumer's request. However,
because the consumer may choose not to accept the offer for the $15,000
loan at the higher interest rate, the creditor may not withdraw or
change the rate or terms of the offer for the $10,000 loan, except as
permitted under Sec. 1026.48(c)(3), unless the consumer accepts the
$15,000 loan.
[[Page 828]]
48(d) Consumer's Right to Cancel
1. Right to cancel. If the creditor mails the disclosures, the
disclosures are considered received by the consumer three business days
after the disclosures were mailed. For purposes of determining when the
consumer receives the disclosures, the term ``business day'' is defined
as all calendar days except Sunday and the legal public holidays
referred to in Sec. 1026.2(a)(6). See Sec. 1026.46(d)(4). The consumer
has three business days from the date on which the disclosures are
deemed received to cancel the loan. For example, if the creditor places
the disclosures in the mail on Thursday, June 4, the disclosures are
considered received on Monday, June 8. The consumer may cancel any time
before midnight Thursday, June 11. The creditor may provide the consumer
with more time to cancel the loan than the minimum three business days
required under this section. If the creditor provides the consumer with
a longer period of time in which to cancel the loan, the creditor may
disburse the funds three business days after the consumer has received
the disclosures required under this section, but the creditor must honor
the consumer's later timely cancellation request.
2. Method of cancellation. The creditor must specify a method or
methods by which the consumer may cancel. For example, the creditor may
require the consumer to communicate cancellation orally or in writing.
Cancellation may also be communicated electronically, but electronic
communication must not be the only means by which the consumer may
cancel unless the creditor provided the final disclosure electronically
in compliance with the consumer consent and other applicable provisions
of the Electronic Signatures in Global and National Commerce Act (E-Sign
Act) (15 U.S.C. 7001 et seq.). If the creditor allows cancellation by
mail, the creditor must specify an address or the name and address of an
agent of the creditor to receive notice of cancellation. The creditor
must wait to disburse funds until it is reasonably satisfied that the
consumer has not canceled. For example, the creditor may satisfy itself
by waiting a reasonable time after expiration of the cancellation period
to allow for delivery of a mailed notice. The creditor may also satisfy
itself by obtaining a written statement from the consumer, which must be
provided to and signed by the consumer only at the end of the three-day
period, that the right has not been exercised.
3. Cancellation without penalty. The creditor may not charge the
consumer a fee for exercising the right to cancel under Sec.
1026.48(d). The prohibition extends only to fees charged specifically
for canceling the loan. The creditor is not required to refund fees,
such as an application fee, that are charged to all consumers whether or
not the consumer cancels the loan.
48(e) Self-Certification Form
1. General. Section 1026.48(e) requires that the creditor obtain the
self-certification form, signed by the consumer, before consummating the
private education loan. The rule applies only to private education loans
that will be used for the postsecondary educational expenses of a
student while that student is attending an institution of higher
education as defined in Sec. 1026.46(b)(2). It does not apply to all
covered educational institutions. The requirement applies even if the
student is not currently attending an institution of higher education,
but will use the loan proceeds for postsecondary educational expenses
while attending such institution. For example, a creditor is required to
obtain the form before consummating a private education loan provided to
a high school senior for expenses to be incurred during the consumer's
first year of college. This provision does not require that the creditor
obtain the self-certification form in instances where the loan is not
intended for a student attending an institution of higher education,
such as when the consumer is consolidating loans after graduation.
Section 155(a)(2) of the Higher Education Act of 1965 provides that the
form shall be made available to the consumer by the relevant institution
of higher education. However, Sec. 1026.48(e) provides flexibility to
institutions of higher education and creditors as to how the completed
self-certification form is provided to the lender. The creditor may
receive the form directly from the consumer, or the creditor may receive
the form from the consumer through the institution of higher education.
In addition, the creditor may provide the form, and the information the
consumer will require to complete the form, directly to the consumer.
2. Electronic signature. Under section 155(a)(2) of the Higher
Education Act of 1965, the institution of higher education may provide
the self-certification form to the consumer in written or electronic
form. Under section 155(a)(5) of the Higher Education Act of 1965, the
form may be signed electronically by the consumer. A creditor may accept
the self-certification form from the consumer in electronic form. A
consumer's electronic signature is considered valid if it meets the
requirements issued by the Department of Education under section
155(a)(5) of the Higher Education Act of 1965.
48(f) Provision of Information by Preferred Lenders
1. General. Section 1026.48(f) does not specify the format in which
creditors must provide the required information to the covered
educational institution. Creditors may choose to provide only the
required information or may provide copies of the form or forms the
lender uses to comply with
[[Page 829]]
Sec. 1026.47(a). A creditor is only required to provide the required
information if the creditor is aware that it is a party to a preferred
lender arrangement. For example, if a creditor is placed on a covered
educational institution's preferred lender list without the creditor's
knowledge, the creditor is not required to comply with Sec. 1026.48(f).
Subpart G--Special Rules Applicable to Credit Card Accounts and Open-End
Credit Offered to College Students
Section 1026.51 Ability To Pay
51(a) General Rule
51(a)(1)(i) Consideration of Ability to Pay
1. Consideration of additional factors. Section 1026.51(a) requires
a card issuer to consider a consumer's ability to make the required
minimum periodic payments under the terms of an account based on the
consumer's income or assets and current obligations. The card issuer may
also consider consumer reports, credit scores, and other factors,
consistent with Regulation B (12 CFR part 1002).
2. Ability to pay as of application or consideration of increase. A
card issuer complies with Sec. 1026.51(a) if it bases its consideration
of a consumer's ability to make the required minimum periodic payments
on the facts and circumstances known to the card issuer at the time the
consumer applies to open the credit card account or when the card issuer
considers increasing the credit line on an existing account.
3. Credit line increase. When a card issuer considers increasing the
credit line on an existing account, Sec. 1026.51(a) applies whether the
consideration is based upon a request of the consumer or is initiated by
the card issuer.
4. Consideration of income and assets. For purposes of Sec.
1026.51(a):
i. A card issuer may consider any current or reasonably expected
income or assets of the consumer or consumers who are applying for a new
account or will be liable for debts incurred on that account, including
a cosigner or guarantor. Similarly, when a card issuer is considering
whether to increase the credit limit on an existing account, the card
issuer may consider any current or reasonably expected income or assets
of the consumer or consumers who are accountholders, cosigners, or
guarantors, and are liable for debts incurred on that account. In both
of these circumstances, a card issuer may treat any income and assets to
which an applicant, accountholder, joint applicant, cosigner, or
guarantor who is or will be liable for debts incurred on the account has
a reasonable expectation of access as the applicant's current or
reasonably expected income--but is not required to do so. A card issuer
may instead limit its consideration of a consumer's current or
reasonably expected income or assets to the consumer's independent
income or assets as discussed in comments 51(b)(1)(i)-1 and 51(b)(2)-2.
Although these comments clarify the independent ability-to-pay
requirement that governs applications from consumers under 21, they
provide guidance regarding the use of ``independent income and assets''
as an underwriting criterion under Sec. 1026.51(a). For example,
comment 51(b)(1)(i)-1 explains that card issuers may not consider income
or assets to which applicants under 21 have only a reasonable
expectation of access. An issuer who chooses to comply with Sec.
1026.51(a) by limiting its consideration to applicants' independent
income and assets likewise would not consider income or assets to which
applicants 21 or older have only a reasonable expectation of access.
ii. Current or reasonably expected income includes, for example,
current or expected salary, wages, bonus pay, tips, and commissions.
Employment may be full-time, part-time, seasonal, irregular, military,
or self-employment. Other sources of income include interest or
dividends, retirement benefits, public assistance, alimony, child
support, and separate maintenance payments. Proceeds from student loans
may be considered as current or reasonably expected income only to the
extent that those proceeds exceed the amount disbursed or owed to an
educational institution for tuition and other expenses. Current or
reasonably expected income also includes income that is being deposited
regularly into an account on which the consumer is an accountholder
(e.g., an individual deposit account or joint account). Assets include,
for example, savings accounts and investments.
iii. Consideration of the income or assets of authorized users,
household members, or other persons who are not liable for debts
incurred on the account does not satisfy the requirement to consider the
consumer's current or reasonably expected income or assets, unless a
Federal or State statute or regulation grants a consumer who is liable
for debts incurred on the account an ownership interest in such income
and assets (e.g., joint ownership granted under State community property
laws), such income is being deposited regularly into an account on which
the consumer is an accountholder (e.g., an individual deposit account or
a joint account), or the consumer has a reasonable expectation of access
to such income or assets even though the consumer does not have a
current or expected ownership interest in the income or assets. See
comment 51(a)(1)-6 for examples of non-applicant income to which a
consumer has a reasonable expectation of access.
5. Information regarding income and assets. For purposes of Sec.
1026.51(a), a card issuer may
[[Page 830]]
consider the consumer's current or reasonably expected income and assets
based on the following information:
i. Information provided by the consumer in connection with the
account, including information provided by the consumer through the
application process. For example, card issuers may rely without further
inquiry on information provided by applicants in response to a request
for ``salary,'' ``income,'' ``assets,'' ``available income,''
``accessible income,'' or other language requesting that the applicant
provide information regarding current or reasonably expected income or
assets or any income or assets to which the applicant has a reasonable
expectation of access. However, card issuers may not rely solely on
information provided in response to a request for ``household income.''
In that case, the card issuer would need to obtain additional
information about an applicant's current or reasonably expected income,
including income and assets to which the applicant has a reasonable
expectation of access (such as by contacting the applicant). See
comments 51(a)(1)-4, -5, and -6 for additional guidance on determining
the consumer's current or reasonably expected income under Sec.
1026.51(a)(1). See comment 51(a)(1)-9 for guidance regarding the use of
a single, common application form or process for all credit card
applicants, regardless of age.
ii. Information provided by the consumer in connection with any
other financial relationship the card issuer or its affiliates have with
the consumer (subject to any applicable information-sharing rules).
iii. Information obtained through third parties (subject to any
applicable information-sharing rules).
iv. Information obtained through any empirically derived,
demonstrably and statistically sound model that reasonably estimates a
consumer's income or assets, including any income or assets to which the
consumer has a reasonable expectation of access.
6. Examples of considering income. Assume that an applicant is not
employed and that the applicant is age 21 or older so Sec. 1026.51(b)
does not apply.
i. If a non-applicant's salary or other income is deposited
regularly into a joint account shared with the applicant, a card issuer
is permitted to consider the amount of the non-applicant's income that
is being deposited regularly into the account to be the applicant's
current or reasonably expected income for purposes of Sec. 1026.51(a).
ii. The non-applicant's salary or other income is deposited into an
account to which the applicant does not have access. However, the non-
applicant regularly transfers a portion of that income into the
applicant's individual deposit account. A card issuer is permitted to
consider the amount of the non-applicant's income that is being
transferred regularly into the applicant's account to be the applicant's
current or reasonably expected income for purposes of Sec. 1026.51(a).
iii. The non-applicant's salary or other income is deposited into an
account to which the applicant does not have access. However, the non-
applicant regularly uses a portion of that income to pay for the
applicant's expenses. A card issuer is permitted to consider the amount
of the non-applicant's income that is used regularly to pay for the
applicant's expenses to be the applicant's current or reasonably
expected income for purposes of Sec. 1026.51(a) because the applicant
has a reasonable expectation of access to that income.
iv. The non-applicant's salary or other income is deposited into an
account to which the applicant does not have access, the non-applicant
does not regularly use that income to pay for the applicant's expenses,
and no Federal or State statute or regulation grants the applicant an
ownership interest in that income. A card issuer is not permitted to
consider the non-applicant's income as the applicant's current or
reasonably expected income for purposes of Sec. 1026.51(a) because the
applicant does not have a reasonable expectation of access to the non-
applicant's income.
7. Current obligations. A card issuer may consider the consumer's
current obligations based on information provided by the consumer or in
a consumer report. In evaluating a consumer's current obligations, a
card issuer need not assume that credit lines for other obligations are
fully utilized.
8. Joint applicants and joint accountholders. With respect to the
opening of a joint account for two or more consumers or a credit line
increase on such an account, the card issuer may consider the collective
ability of all persons who are or will be liable for debts incurred on
the account to make the required payments.
9. Single application. A card issuer may use a single, common
application form or process for all credit card applicants, regardless
of age. A card issuer may rely without further verification on income
and asset information provided by applicants through such an
application, so long as the application questions gather sufficient
information to allow the card issuer to satisfy the requirements of both
Sec. 1026.51(a) and (b), depending on whether a particular applicant
has reached the age of 21. For example, a card issuer might provide two
separate line items on its application form, one prompting applicants to
provide their ``personal income,'' and the other prompting applicants
for ``available income.'' A card issuer might also prompt applicants,
regardless of age, using only the term ``income'' and satisfy the
requirements of both Sec. 1026.51(a) and (b).
[[Page 831]]
51(a)(2) Minimum Periodic Payments
1. Applicable minimum payment formula. For purposes of estimating
required minimum periodic payments under the safe harbor set forth in
Sec. 1026.51(a)(2)(ii), if the account has or may have a promotional
program, such as a deferred payment or similar program, where there is
no applicable minimum payment formula during the promotional period, the
issuer must estimate the required minimum periodic payment based on the
minimum payment formula that will apply when the promotion ends.
2. Interest rate for purchases. For purposes of estimating required
minimum periodic payments under the safe harbor set forth in Sec.
1026.51(a)(2)(ii), if the interest rate for purchases is or may be a
promotional rate, the issuer must use the post-promotional rate to
estimate interest charges.
3. Mandatory fees. For purposes of estimating required minimum
periodic payments under the safe harbor set forth in Sec.
1026.51(a)(2)(ii), mandatory fees that must be assumed to be charged
include those fees the card issuer knows the consumer will be required
to pay under the terms of the account if the account is opened, such as
an annual fee. If a mandatory fee is a promotional fee (as defined in
Sec. 1026.16(g)), the issuer must use the post-promotional fee amount
for purposes of Sec. 1026.51(a)(2)(ii).
51(b) Rules Affecting Young Consumers
1. Age as of date of application or consideration of credit line
increase. Sections 1026.51(b)(1) and (b)(2) apply only to a consumer who
has not attained the age of 21 as of the date of submission of the
application under Sec. 1026.51(b)(1) or the date the credit line
increase is requested by the consumer (or if no request has been made,
the date the credit line increase is considered by the card issuer)
under Sec. 1026.51(b)(2).
2. Liability of cosigner, guarantor, or joint accountholder.
Sections 1026.51(b)(1)(ii) and (b)(2) require the signature or written
consent of a cosigner, guarantor, or joint accountholder agreeing either
to be secondarily liable for any debt on the account incurred by the
consumer before the consumer has attained the age of 21 or to be jointly
liable with the consumer for any debt on the account. Sections
1026.51(b)(1)(ii) and (b)(2) do not prohibit a card issuer from also
requiring the cosigner, guarantor, or joint accountholder to assume
liability for debts incurred after the consumer has attained the age of
21, consistent with any agreement made between the parties.
3. Authorized users exempt. If a consumer who has not attained the
age of 21 is being added to another person's account as an authorized
user and has no liability for debts incurred on the account, Sec.
1026.51(b)(1) and (b)(2) do not apply.
4. Electronic application. Consistent with Sec. 1026.5(a)(1)(iii),
an application may be provided to the consumer in electronic form
without regard to the consumer consent or other provisions of the
Electronic Signatures in Global and National Commerce Act (E-Sign Act)
(15 U.S.C. 7001 et seq.) in the circumstances set forth in Sec.
1026.60. The electronic submission of an application from a consumer or
a consent to a credit line increase from a cosigner, guarantor, or joint
accountholder to a card issuer would constitute a written application or
consent for purposes of Sec. 1026.51(b) and would not be considered a
consumer disclosure for purposes of the E-Sign Act.
5. Current obligations. A card issuer may consider the consumer's
current obligations under Sec. 1026.51(b)(1) and (b)(2)(i) based on
information provided by the consumer or in a consumer report. In
evaluating a consumer's current obligations, a card issuer need not
assume that credit lines for other obligations are fully utilized.
6. Joint applicants or joint accountholders. With respect to the
opening of a joint account for two or more consumers under Sec.
1026.51(b)(1) or a credit line increase on such an account under Sec.
1026.51(b)(2)(i), the card issuer may consider the collective ability of
all persons who are or will be liable for debts incurred on the account
to make the required payments. See commentary to Sec. 1026.51(b)(1)(i)
and (b)(2) for information on income and assets that may be considered
for joint applicants, joint accountholders, cosigners, or guarantors who
are under the age of 21, and commentary to Sec. 1026.51(b)(1)(ii) for
information on income and assets that may be considered for joint
applicants, joint accountholders, cosigners, or guarantors who are at
least 21 years old.
7. Relation to Regulation B. In considering an application or credit
line increase on the credit card account of a consumer who is less than
21 years old, card issuers must comply with the applicable rules in
Regulation B (12 CFR part 1026). A card issuer does not violate
Regulation B by complying with the requirements in Sec. 1026.51(b).
51(b)(1) Applications from young consumers
Paragraph 51(b)(1)(i).
1. Consideration of income and assets for young consumers. For
purposes of Sec. 1026.51(b)(1)(i):
i. A card issuer may consider any current or reasonably expected
income or assets of the consumer or consumers who are applying for a new
account or will be liable for debts incurred on that account, including
a cosigner or guarantor. However, because Sec. 1026.51(b)(1)(i)
requires that the consumer who has not attained the age of 21 have an
independent ability to make the required minimum periodic payments, the
card issuer may only consider the applicant's current or
[[Page 832]]
reasonably expected income or assets under Sec. 1026.51(b)(1)(i). The
card issuer may not consider income or assets to which an applicant,
joint applicant, cosigner, or guarantor, in each case who is under the
age of 21 and is or will be liable for debts incurred on the account,
has only a reasonable expectation of access.
ii. Current or reasonably expected income includes, for example,
current or expected salary, wages, bonus pay, tips, and commissions.
Employment may be full-time, part-time, seasonal, irregular, military,
or self-employment. Other sources of income include interest or
dividends, retirement benefits, public assistance, alimony, child
support, and separate maintenance payments. Proceeds from student loans
may be considered as current or reasonably expected income only to the
extent that those proceeds exceed the amount disbursed or owed to an
educational institution for tuition and other expenses. Current or
reasonably expected income includes income that is being deposited
regularly into an account on which the consumer is an accountholder
(e.g., an individual deposit account or a joint account). Assets
include, for example, savings accounts and investments. Current or
reasonably expected income and assets does not include income and assets
to which the consumer only has a reasonable expectation of access.
iii. Consideration of the income and assets of authorized users,
household members, or other persons who are not liable for debts
incurred on the account does not satisfy the requirement to consider the
consumer's current or reasonably expected income or assets, unless a
Federal or State statute or regulation grants a consumer who is liable
for debts incurred on the account an ownership interest in such income
or assets (e.g., joint ownership granted under State community property
laws), or the income is being deposited regularly into an account on
which the consumer is an accountholder (e.g., an individual deposit
account or a joint account). See comment 51(b)(1)(i)-3 for examples of
income that may be relied upon as a consumer's current or reasonably
expected income.
2. Information regarding income and assets for young consumers. For
purposes of Sec. 1026.51(b)(1)(i), a card issuer may consider the
consumer's current or reasonably expected income and assets based on the
following information:
i. Information provided by the consumer in connection with the
account, including information provided by the consumer through the
application process. For example, card issuers may rely without further
inquiry on information provided by applicants in response to a request
for ``salary,'' ``income,'' ``personal income,'' ``individual income,''
``assets,'' or other language requesting that the applicant provide
information regarding his or her current or reasonably expected income
or assets. However, card issuers may not rely solely on information
provided in response to a request for ``household income.'' Nor may they
rely solely on information provided in response to a request for
``available income,'' ``accessible income,'' or other language
requesting that the applicant provide any income or assets to which the
applicant has a reasonable expectation of access. In such cases, the
card issuer would need to obtain additional information about an
applicant's current or reasonably expected income (such as by contacting
the applicant). See comments 51(b)(1)(i)-1, -2, and -3 for additional
guidance on determining the consumer's current or reasonably expected
income under Sec. 1026.51(b)(1)(i). See comment 51(a)(1)-9 for guidance
regarding the use of a single, common application for all credit card
applicants, regardless of age.
ii. Information provided by the consumer in connection with any
other financial relationship the card issuer or its affiliates have with
the consumer (subject to any applicable information-sharing rules).
iii. Information obtained through third parties (subject to any
applicable information-sharing rules).
iv. Information obtained through any empirically derived,
demonstrably and statistically sound model that reasonably estimates a
consumer's income or assets.
3. Examples of considering income for young consumers. Assume that
an applicant is not employed and the applicant is under the age of 21 so
Sec. 1026.51(b) applies.
i. If a non-applicant's salary or other income is deposited
regularly into a joint account shared with the applicant, a card issuer
is permitted to consider the amount of the non-applicant's income that
is being deposited regularly into the account to be the applicant's
current or reasonably expected income for purposes of Sec.
1026.51(b)(1)(i).
ii. The non-applicant's salary or other income is deposited into an
account to which the applicant does not have access. However, the non-
applicant regularly transfers a portion of that income into the
applicant's individual deposit account. A card issuer is permitted to
consider the amount of the non-applicant's income that is being
transferred regularly into the applicant's account to be the applicant's
current or reasonably expected income for purposes of Sec.
1026.51(b)(1)(i).
iii. The non-applicant's salary or other income is deposited into an
account to which the applicant does not have access. However, the non-
applicant regularly uses that income to pay for the applicant's
expenses. A card issuer is not permitted to consider the non-applicant's
income that is used regularly to
[[Page 833]]
pay for the applicant's expenses as the applicant's current or
reasonably expected income for purposes of Sec. 1026.51(b)(1)(i),
unless a Federal or State statute or regulation grants the applicant an
ownership interest in such income.
iv. The non-applicant's salary or other income is deposited into an
account to which the applicant does not have access, the non-applicant
does not regularly use that income to pay for the applicant's expenses,
and no Federal or State statute or regulation grants the applicant an
ownership interest in that income. The card issuer is not permitted to
consider the non-applicant's income to be the applicant's current or
reasonably expected income for purposes of Sec. 1026.51(b)(1)(i).
Paragraph 51(b)(1)(ii).
1. Financial information. Information regarding income and assets
that satisfies the requirements of Sec. 1026.51(a) also satisfies the
requirements of Sec. 1026.51(b)(1)(ii)(B) and card issuers may rely on
the guidance in comments 51(a)(1)-4, -5, and -6 for purposes of
determining whether a cosigner, guarantor, or joint applicant who is at
least 21 years old has the ability to make the required minimum periodic
payments in accordance with Sec. 1026.51(b)(1)(ii)(B).
51(b)(2) Credit line increases for young consumers
1. Credit line request by joint accountholder aged 21 or older. The
requirement under Sec. 1026.51(b)(2) that a cosigner, guarantor, or
joint accountholder for a credit card account opened pursuant to Sec.
1026.51(b)(1)(ii) must agree in writing to assume liability for the
increase before a credit line is increased, does not apply if the
cosigner, guarantor or joint accountholder who is at least 21 years old
initiates the request for the increase.
2. Independent ability-to-pay standard. Under Sec. 1026.51(b)(2),
if a credit card account has been opened pursuant to Sec.
1026.51(b)(1)(i), no increase in the credit limit may be made on such
account before the consumer attains the age of 21 unless, at the time of
the contemplated increase, the consumer has an independent ability to
make the required minimum periodic payments on the increased limit,
consistent with Sec. 1026.51(b)(1)(i), or a cosigner, guarantor, or
joint applicant who is at least 21 years old assumes liability for any
debt incurred on the account, consistent with Sec. 1026.51(b)(1)(ii).
Thus, when a card issuer is considering whether to increase the credit
limit on an existing account, Sec. 1026.51(b)(2)(i)(A) requires that
consumers who have not attained the age of 21 and do not have a
cosigner, guarantor, or joint applicant who is 21 years or older must
have an independent ability to make the required minimum periodic
payments as of the time of the contemplated increase. Thus, the card
issuer may not consider income or assets to which an accountholder,
cosigner, or guarantor, in each case who is under the age of 21 and is
or will be liable for debts incurred on the account, has only a
reasonable expectation of access under Sec. 1026.51(b)(2)(i)(A). The
card issuer, however, may consider income or assets to which an
accountholder, cosigner, or guarantor, in each case who is age 21 or
older and is or will be liable for debts incurred on the account, has a
reasonable expectation of access under Sec. 1026.51(b)(2)(i)(B).
Information regarding income and assets that satisfies the requirements
of Sec. 1026.51(b)(1)(i) also satisfies the requirements of Sec.
1026.51(b)(2)(i)(A) and card issuers may rely on the guidance in the
commentary to Sec. 1026.51(b)(1)(i) for purposes of determining whether
an accountholder who is less than 21 years old has the independent
ability to make the required minimum periodic payments in accordance
with Sec. 1026.51(b)(2)(i)(A). Information regarding income and assets
that satisfies the requirements of Sec. 1026.51(a) also satisfies the
requirements of Sec. 1026.51(b)(2)(i)(B) and card issuers may rely on
the guidance in comments 51(a)(1)-4, -5, and -6 for purposes of
determining whether a cosigner, guarantor, or joint applicant who is at
least 21 years old has the ability to make the required minimum periodic
payments in accordance with Sec. 1026.51(b)(2)(i)(B).
Section 1026.52--Limitations on Fees
52(a) Limitations during first year after account opening.
52(a)(1) General rule
1. Application. The 25 percent limit in Sec. 1026.52(a)(1) applies
to fees that the card issuer charges to the account as well as to fees
that the card issuer requires the consumer to pay with respect to the
account through other means (such as through a payment from the
consumer's asset account to the card issuer or from another credit
account provided by the card issuer). For example:
i. Assume that, under the terms of a credit card account, a consumer
is required to pay $120 in fees for the issuance or availability of
credit at account opening. The consumer is also required to pay a cash
advance fee that is equal to five percent of the cash advance and a late
payment fee of $15 if the required minimum periodic payment is not
received by the payment due date (which is the twenty-fifth of the
month). At account opening on January 1 of year one, the credit limit
for the account is $500. Section 1026.52(a)(1) permits the card issuer
to charge to the account the $120 in fees for the issuance or
availability of credit at account opening. On February 1 of year one,
the consumer uses the account for a $100 cash advance. Section
1026.52(a)(1) permits the card issuer to charge
[[Page 834]]
a $5 cash-advance fee to the account. On March 26 of year one, the card
issuer has not received the consumer's required minimum periodic
payment. Section 1026.52(a)(2) permits the card issuer to charge a $15
late payment fee to the account. On July 15 of year one, the consumer
uses the account for a $50 cash advance. Section 1026.52(a)(1) does not
permit the card issuer to charge a $2.50 cash advance fee to the
account. Furthermore, Sec. 1026.52(a)(1) prohibits the card issuer from
collecting the $2.50 cash advance fee from the consumer by other means.
ii. Assume that, under the terms of a credit card account, a
consumer is required to pay $125 in fees for the issuance or
availability of credit during the first year after account opening. At
account opening on January 1 of year one, the credit limit for the
account is $500. Section 1026.52(a)(1) permits the card issuer to charge
the $125 in fees to the account. However, Sec. 1026.52(a)(1) prohibits
the card issuer from requiring the consumer to make payments to the card
issuer for additional non-exempt fees with respect to the account during
the first year after account opening. Section 1026.52(a)(1) also
prohibits the card issuer from requiring the consumer to open a separate
credit account with the card issuer to fund the payment of additional
non-exempt fees during the first year after the credit card account is
opened.
2. Fees that exceed 25 percent limit. A card issuer that charges a
fee to a credit card account that exceeds the 25 percent limit complies
with Sec. 1026.52(a)(1) if the card issuer waives or removes the fee
and any associated interest charges or credits the account for an amount
equal to the fee and any associated interest charges within a reasonable
amount of time but no later than the end of the billing cycle following
the billing cycle during which the fee was charged. For example,
assuming the facts in the example in comment 52(a)(1)-1.i above, the
card issuer complies with Sec. 1026.52(a)(1) if the card issuer charged
the $2.50 cash advance fee to the account on July 15 of year one but
waived or removed the fee or credited the account for $2.50 (plus any
interest charges on that $2.50) at the end of the billing cycle.
3. Changes in credit limit during first year.
i. Increases in credit limit. If a card issuer increases the credit
limit during the first year after the account is opened, Sec.
1026.52(a)(1) does not permit the card issuer to require the consumer to
pay additional fees that would otherwise be prohibited (such as a fee
for increasing the credit limit). For example, assume that, at account
opening on January 1, the credit limit for a credit card account is $400
and the consumer is required to pay $100 in fees for the issuance or
availability of credit. On July 1, the card issuer increases the credit
limit for the account to $600. Section 1026.52(a)(1) does not permit the
card issuer to require the consumer to pay additional fees based on the
increased credit limit.
ii. Decreases in credit limit. If a card issuer decreases the credit
limit during the first year after the account is opened, Sec.
1026.52(a)(1) requires the card issuer to waive or remove any fees
charged to the account that exceed 25 percent of the reduced credit
limit or to credit the account for an amount equal to any fees the
consumer was required to pay with respect to the account that exceed 25
percent of the reduced credit limit within a reasonable amount of time
but no later than the end of the billing cycle following the billing
cycle during which the credit limit was reduced. For example, assume
that, at account opening on January 1, the credit limit for a credit
card account is $1,000 and the consumer is required to pay $250 in fees
for the issuance or availability of credit. The billing cycles for the
account begin on the first day of the month and end on the last day of
the month. On July 30, the card issuer decreases the credit limit for
the account to $600. Section 1026.52(a)(1) requires the card issuer to
waive or remove $100 in fees from the account or to credit the account
for an amount equal to $100 within a reasonable amount of time but no
later than August 31.
4. Date on which account may first be used by consumer to engage in
transactions. i. Methods of compliance. For purposes of Sec.
1026.52(a)(1), an account is considered open no earlier than the date on
which the account may first be used by the consumer to engage in
transactions. A card issuer may consider an account open for purposes of
Sec. 1026.52(a)(1) on any of the following dates:
A. The date the account is first used by the consumer for a
transaction (such as when an account is established in connection with
financing the purchase of goods or services).
B. The date the consumer complies with any reasonable activation
procedures imposed by the card issuer for preventing fraud or
unauthorized use of a new account (such as requiring the consumer to
provide information that verifies his or her identity), provided that
the account may be used for transactions on that date.
C. The date that is seven days after the card issuer mails or
delivers to the consumer account-opening disclosures that comply with
Sec. 1026.6, provided that the consumer may use the account for
transactions after complying with any reasonable activation procedures
imposed by the card issuer for preventing fraud or unauthorized use of
the new account (such as requiring the consumer to provide information
that verifies his or her identity). If a card issuer has reasonable
procedures designed to ensure that account-opening disclosures that
comply with Sec. 1026.6 are mailed or delivered to consumers no later
than a certain number of days after the card issuer establishes the
account, the card
[[Page 835]]
issuer may add that number of days to the seven-day period for purposes
of determining the date on which the account was opened.
ii. Examples. A. Assume that, on July 1 of year one, a credit card
account under an open-end (not home-secured) consumer credit plan is
established in connection with financing the purchase of goods or
services and a $500 transaction is charged to the account by the
consumer. The card issuer may consider the account open on July 1 of
year one for purposes of Sec. 1026.52(a)(1). Accordingly, Sec.
1026.52(a)(1) ceases to apply to the account on July 1 of year two.
B. Assume that, on July 1 of year one, a card issuer approves a
consumer's application for a credit card account under an open-end (not
home-secured) consumer credit plan and establishes the account on its
internal systems. On July 5, the card issuer mails or delivers to the
consumer account-opening disclosures that comply with Sec. 1026.6. If
the consumer may use the account for transactions on the date the
consumer complies with any reasonable procedures imposed by the card
issuer for preventing fraud or unauthorized use, the card issuer may
consider the account open on July 12 of year one for purposes of Sec.
1026.52(a)(1). Accordingly, Sec. 1026.52(a)(1) ceases to apply to the
account on July 12 of year two.
C. Same facts as in paragraph B above except that the card issuer
has adopted reasonable procedures designed to ensure that account-
opening disclosures that comply with Sec. 1026.6 are mailed or
delivered to consumers no later than three days after an account is
established on its systems. If the consumer may use the account for
transactions on the date the consumer complies with any reasonable
procedures imposed by the card issuer for preventing fraud or
unauthorized use, the card issuer may consider the account open on July
11 of year one for purposes of Sec. 1026.52(a)(1). Accordingly, Sec.
1026.52(a)(1) ceases to apply to the account on July 11 of year two.
However, if the consumer uses the account for a transaction or complies
with the card issuer's reasonable procedures for preventing fraud or
unauthorized use on July 8 of year one, the card issuer may, at its
option, consider the account open on that date for purposes of Sec.
1026.52(a)(1) and Sec. 1026.52(a)(1) therefore ceases to apply to the
account on July 8 of year two.
52(a)(2) Fees Not Subject to Limitations
1. Covered fees. Except as provided in Sec. 1026.52(a)(2), Sec.
1026.52(a) applies to any fees or other charges that a card issuer will
or may require the consumer to pay with respect to a credit card account
during the first year after account opening, other than charges
attributable to periodic interest rates. For example, Sec. 1026.52(a)
applies to:
i. Fees that the consumer is required to pay for the issuance or
availability of credit described in Sec. 1026.60(b)(2), including any
fee based on account activity or inactivity and any fee that a consumer
is required to pay in order to receive a particular credit limit;
ii. Fees for insurance described in Sec. 1026.4(b)(7) or debt
cancellation or debt suspension coverage described in Sec.
1026.4(b)(10) written in connection with a credit transaction, if the
insurance or debt cancellation or debt suspension coverage is required
by the terms of the account;
iii. Fees that the consumer is required to pay in order to engage in
transactions using the account (such as cash advance fees, balance
transfer fees, foreign transaction fees, and fees for using the account
for purchases);
iv. Fees that the consumer is required to pay for violating the
terms of the account (except to the extent specifically excluded by
Sec. 1026.52(a)(2)(i));
v. Fixed finance charges; and
vi. Minimum charges imposed if a charge would otherwise have been
determined by applying a periodic interest rate to a balance except for
the fact that such charge is smaller than the minimum.
2. Fees the consumer is not required to pay. Section
1026.52(a)(2)(ii) provides that Sec. 1026.52(a) does not apply to fees
that the consumer is not required to pay with respect to the account.
For example, Sec. 1026.52(a) generally does not apply to fees for
making an expedited payment (to the extent permitted by Sec.
1026.10(e)), fees for optional services (such as travel insurance), fees
for reissuing a lost or stolen card, or statement reproduction fees.
3. Security deposits. A security deposit that is charged to a credit
card account is a fee for purposes of Sec. 1026.52(a). In contrast,
however, a security deposit is not subject to the 25 percent limit in
Sec. 1026.52(a)(1) if it is not charged to the account. For example,
Sec. 1026.52(a)(1) does not prohibit a card issuer from requiring a
consumer to provide funds at account opening pledged as security for the
account that exceed 25 percent of the credit limit at account opening so
long as those funds are not obtained from the account.
52(a)(3) Rule of Construction
1. Fees or charges otherwise prohibited by law. Section 1026.52(a)
does not authorize the imposition or payment of fees or charges
otherwise prohibited by law. For example, see 16 CFR 310.4(a)(4).
52(b) Limitations on Penalty Fees
1. Fees for violating the account terms or other requirements. For
purposes of Sec. 1026.52(b), a fee includes any charge imposed by a
card issuer based on an act or omission that violates the terms of the
account or any other requirements imposed by the card issuer with
respect to the account, other
[[Page 836]]
than charges attributable to periodic interest rates. Accordingly, for
purposes of Sec. 1026.52(b), a fee does not include charges
attributable to an increase in an annual percentage rate based on an act
or omission that violates the terms or other requirements of an account.
i. The following are examples of fees that are subject to the
limitations in Sec. 1026.52(b) or are prohibited by Sec. 1026.52(b):
A. Late payment fees and any other fees imposed by a card issuer if
an account becomes delinquent or if a payment is not received by a
particular date.
B. Returned payment fees and any other fees imposed by a card issuer
if a payment received via check, automated clearing house, or other
payment method is returned.
C. Any fee or charge for an over-the-limit transaction as defined in
Sec. 1026.56(a), to the extent the imposition of such a fee or charge
is permitted by Sec. 1026.56.
D. Any fee imposed by a card issuer if payment on a check that
accesses a credit card account is declined.
E. Any fee or charge for a transaction that the card issuer declines
to authorize. See Sec. 1026.52(b)(2)(i)(B).
F. Any fee imposed by a card issuer based on account inactivity
(including the consumer's failure to use the account for a particular
number or dollar amount of transactions or a particular type of
transaction). See Sec. 1026.52(b)(2)(i)(B).
G. Any fee imposed by a card issuer based on the closure or
termination of an account. See Sec. 1026.52(b)(2)(i)(B).
ii. The following are examples of fees to which Sec. 1026.52(b)
does not apply:
A. Balance transfer fees.
B. Cash advance fees.
C. Foreign transaction fees.
D. Annual fees and other fees for the issuance or availability of
credit described in Sec. 1026.60(b)(2), except to the extent that such
fees are based on account inactivity. See Sec. 1026.52(b)(2)(i)(B).
E. Fees for insurance described in Sec. 1026.4(b)(7) or debt
cancellation or debt suspension coverage described in Sec.
1026.4(b)(10) written in connection with a credit transaction, provided
that such fees are not imposed as a result of a violation of the account
terms or other requirements of an account.
F. Fees for making an expedited payment (to the extent permitted by
Sec. 1026.10(e)).
G. Fees for optional services (such as travel insurance).
H. Fees for reissuing a lost or stolen card.
2. Rounding to nearest whole dollar. A card issuer may round any fee
that complies with Sec. 1026.52(b) to the nearest whole dollar. For
example, if Sec. 1026.52(b) permits a card issuer to impose a late
payment fee of $21.50, the card issuer may round that amount up to the
nearest whole dollar and impose a late payment fee of $22. However, if
the late payment fee permitted by Sec. 1026.52(b) were $21.49, the card
issuer would not be permitted to round that amount up to $22, although
the card issuer could round that amount down and impose a late payment
fee of $21.
52(b)(1) General Rule
1. Relationship between Sec. 1026.52(b)(1)(i), (b)(1)(ii), and
(b)(2). i. Relationship between Sec. 1026.52(b)(1)(i) and (b)(1)(ii). A
card issuer may impose a fee for violating the terms or other
requirements of an account pursuant to either Sec. 1026.52(b)(1)(i) or
(b)(1)(ii).
A. A card issuer that complies with the safe harbors in Sec.
1026.52(b)(1)(ii) is not required to determine that its fees represent a
reasonable proportion of the total costs incurred by the card issuer as
a result of a type of violation under Sec. 1026.52(b)(1)(i).
B. A card issuer may impose a fee for one type of violation pursuant
to Sec. 1026.52(b)(1)(i) and may impose a fee for a different type of
violation pursuant to Sec. 1026.52(b)(1)(ii). For example, a card
issuer may impose a late payment fee of $30 based on a cost
determination pursuant to Sec. 1026.52(b)(1)(i) but impose returned
payment and over-the-limit fees of $25 or $35 pursuant to the safe
harbors in Sec. 1026.52(b)(1)(ii).
C. A card issuer that previously based the amount of a penalty fee
for a particular type of violation on a cost determination pursuant to
Sec. 1026.52(b)(1)(i) may begin to impose a penalty fee for that type
of violation that is consistent with Sec. 1026.52(b)(1)(ii) at any time
(subject to the notice requirements in Sec. 1026.9), provided that the
first fee imposed pursuant to Sec. 1026.52(b)(1)(ii) is consistent with
Sec. 1026.52(b)(1)(ii)(A). For example, assume that a late payment
occurs on January 15 and that, based on a cost determination pursuant to
Sec. 1026.52(b)(1)(i), the card issuer imposes a $30 late payment fee.
Another late payment occurs on July 15. The card issuer may impose
another $30 late payment fee pursuant to Sec. 1026.52(b)(1)(i) or may
impose a $25 late payment fee pursuant to Sec. 1026.52(b)(1)(ii)(A).
However, the card issuer may not impose a $35 late payment fee pursuant
to Sec. 1026.52(b)(1)(ii)(B). If the card issuer imposes a $25 fee
pursuant to Sec. 1026.52(b)(1)(ii)(A) for the July 15 late payment and
another late payment occurs on September 15, the card issuer may impose
a $35 fee for the September 15 late payment pursuant to Sec.
1026.52(b)(1)(ii)(B).
ii. Relationship between Sec. 1026.52(b)(1) and (b)(2). Section
1026.52(b)(1) does not permit a card issuer to impose a fee that is
inconsistent with the prohibitions in Sec. 1026.52(b)(2). For example,
if Sec. 1026.52(b)(2)(i) prohibits the card issuer from imposing a late
payment fee that exceeds $15, Sec. 1026.52(b)(1)(ii) does not permit
the card issuer to impose a higher late payment fee.
[[Page 837]]
52(b)(1)(i) Fees Based on Costs
1. Costs incurred as a result of violations. Section
1026.52(b)(1)(i) does not require a card issuer to base a fee on the
costs incurred as a result of a specific violation of the terms or other
requirements of an account. Instead, for purposes of Sec.
1026.52(b)(1)(i), a card issuer must have determined that a fee for
violating the terms or other requirements of an account represents a
reasonable proportion of the costs incurred by the card issuer as a
result of that type of violation. A card issuer may make a single
determination for all of its credit card portfolios or may make separate
determinations for each portfolio. The factors relevant to this
determination include:
i. The number of violations of a particular type experienced by the
card issuer during a prior period of reasonable length (for example, a
period of twelve months).
ii. The costs incurred by the card issuer during that period as a
result of those violations.
iii. At the card issuer's option, the number of fees imposed by the
card issuer as a result of those violations during that period that the
card issuer reasonably estimates it will be unable to collect. See
comment 52(b)(1)(i)-5.
iv. At the card issuer's option, reasonable estimates for an
upcoming period of changes in the number of violations of that type, the
resulting costs, and the number of fees that the card issuer will be
unable to collect. See illustrative examples in comments 52(b)(1)(i)-6
through -9.
2. Amounts excluded from cost analysis. The following amounts are
not costs incurred by a card issuer as a result of violations of the
terms or other requirements of an account for purposes of Sec.
1026.52(b)(1)(i):
i. Losses and associated costs (including the cost of holding
reserves against potential losses and the cost of funding delinquent
accounts).
ii. Costs associated with evaluating whether consumers who have not
violated the terms or other requirements of an account are likely to do
so in the future (such as the costs associated with underwriting new
accounts). However, once a violation of the terms or other requirements
of an account has occurred, the costs associated with preventing
additional violations for a reasonable period of time are costs incurred
by a card issuer as a result of violations of the terms or other
requirements of an account for purposes of Sec. 1026.52(b)(1)(i).
3. Third party charges. As a general matter, amounts charged to the
card issuer by a third party as a result of a violation of the terms or
other requirements of an account are costs incurred by the card issuer
for purposes of Sec. 1026.52(b)(1)(i). For example, if a card issuer is
charged a specific amount by a third party for each returned payment,
that amount is a cost incurred by the card issuer as a result of
returned payments. However, if the amount is charged to the card issuer
by an affiliate or subsidiary of the card issuer, the card issuer must
have determined that the charge represents a reasonable proportion of
the costs incurred by the affiliate or subsidiary as a result of the
type of violation. For example, if an affiliate of a card issuer
provides collection services to the card issuer on delinquent accounts,
the card issuer must have determined that the amounts charged to the
card issuer by the affiliate for such services represent a reasonable
proportion of the costs incurred by the affiliate as a result of late
payments.
4. Amounts charged by other card issuers. The fact that a card
issuer's fees for violating the terms or other requirements of an
account are comparable to fees assessed by other card issuers does not
satisfy the requirements of Sec. 1026.52(b)(1)(i).
5. Uncollected fees. For purposes of Sec. 1026.52(b)(1)(i), a card
issuer may consider fees that it is unable to collect when determining
the appropriate fee amount. Fees that the card issuer is unable to
collect include fees imposed on accounts that have been charged off by
the card issuer, fees that have been discharged in bankruptcy, and fees
that the card issuer is required to waive in order to comply with a
legal requirement (such as a requirement imposed by 12 CFR Part 1026 or
50 U.S.C. app. 527). However, fees that the card issuer chooses not to
impose or chooses not to collect (such as fees the card issuer chooses
to waive at the request of the consumer or under a workout or temporary
hardship arrangement) are not relevant for purposes of this
determination. See illustrative examples in comments 52(b)(2)(i)-6
through -9.
6. Late payment fees. i. Costs incurred as a result of late
payments. For purposes of Sec. 1026.52(b)(1)(i), the costs incurred by
a card issuer as a result of late payments include the costs associated
with the collection of late payments, such as the costs associated with
notifying consumers of delinquencies and resolving delinquencies
(including the establishment of workout and temporary hardship
arrangements).
ii. Examples. A. Late payment fee based on past delinquencies and
costs. Assume that, during year one, a card issuer experienced 1 million
delinquencies and incurred $26 million in costs as a result of those
delinquencies. For purposes of Sec. 1026.52(b)(1)(i), a $26 late
payment fee would represent a reasonable proportion of the total costs
incurred by the card issuer as a result of late payments during year
two.
B. Adjustment based on fees card issuer is unable to collect. Same
facts as above except that the card issuer imposed a late payment
[[Page 838]]
fee for each of the 1 million delinquencies experienced during year one
but was unable to collect 25% of those fees (in other words, the card
issuer was unable to collect 250,000 fees, leaving a total of 750,000
late payments for which the card issuer did collect or could have
collected a fee). For purposes of Sec. 1026.52(b)(2)(i), a late payment
fee of $35 would represent a reasonable proportion of the total costs
incurred by the card issuer as a result of late payments during year
two.
C. Adjustment based on reasonable estimate of future changes. Same
facts as paragraphs A and B above except the card issuer reasonably
estimates that--based on past delinquency rates and other factors
relevant to potential delinquency rates for year two--it will experience
a 2% decrease in delinquencies during year two (in other words, 20,000
fewer delinquencies for a total of 980,000). The card issuer also
reasonably estimates that it will be unable to collect the same
percentage of fees (25%) during year two as during year one (in other
words, the card issuer will be unable to collect 245,000 fees, leaving a
total of 735,000 late payments for which the card issuer will be able to
collect a fee). The card issuer also reasonably estimates that--based on
past changes in costs incurred as a result of delinquencies and other
factors relevant to potential costs for year two--it will experience a
5% increase in costs during year two (in other words, $1.3 million in
additional costs for a total of $27.3 million). For purposes of Sec.
1026.52(b)(1)(i), a $37 late payment fee would represent a reasonable
proportion of the total costs incurred by the card issuer as a result of
late payments during year two.
7. Returned payment fees. i. Costs incurred as a result of returned
payments. For purposes of Sec. 1026.52(b)(1)(i), the costs incurred by
a card issuer as a result of returned payments include:
A. Costs associated with processing returned payments and
reconciling the card issuer's systems and accounts to reflect returned
payments;
B. Costs associated with investigating potential fraud with respect
to returned payments; and
C. Costs associated with notifying the consumer of the returned
payment and arranging for a new payment.
ii. Examples. A. Returned payment fee based on past returns and
costs. Assume that, during year one, a card issuer experienced 150,000
returned payments and incurred $3.1 million in costs as a result of
those returned payments. For purposes of Sec. 1026.52(b)(1)(i), a $21
returned payment fee would represent a reasonable proportion of the
total costs incurred by the card issuer as a result of returned payments
during year two.
B. Adjustment based on fees card issuer is unable to collect. Same
facts as above except that the card issuer imposed a returned payment
fee for each of the 150,000 returned payments experienced during year
one but was unable to collect 15% of those fees (in other words, the
card issuer was unable to collect 22,500 fees, leaving a total of
127,500 returned payments for which the card issuer did collect or could
have collected a fee). For purposes of Sec. 1026.52(b)(2)(i), a
returned payment fee of $24 would represent a reasonable proportion of
the total costs incurred by the card issuer as a result of returned
payments during year two.
C. Adjustment based on reasonable estimate of future changes. Same
facts as paragraphs A and B above except the card issuer reasonably
estimates that--based on past returned payment rates and other factors
relevant to potential returned payment rates for year two--it will
experience a 2% increase in returned payments during year two (in other
words, 3,000 additional returned payments for a total of 153,000). The
card issuer also reasonably estimates that it will be unable to collect
25% of returned payment fees during year two (in other words, the card
issuer will be unable to collect 38,250 fees, leaving a total of 114,750
returned payments for which the card issuer will be able to collect a
fee). The card issuer also reasonably estimates that--based on past
changes in costs incurred as a result of returned payments and other
factors relevant to potential costs for year two--it will experience a
1% decrease in costs during year two (in other words, a $31,000
reduction in costs for a total of $3.069 million). For purposes of Sec.
1026.52(b)(1)(i), a $27 returned payment fee would represent a
reasonable proportion of the total costs incurred by the card issuer as
a result of returned payments during year two.
8. Over-the-limit fees. i. Costs incurred as a result of over-the-
limit transactions. For purposes of Sec. 1026.52(b)(1)(i), the costs
incurred by a card issuer as a result of over-the-limit transactions
include:
A. Costs associated with determining whether to authorize over-the-
limit transactions; and
B. Costs associated with notifying the consumer that the credit
limit has been exceeded and arranging for payments to reduce the balance
below the credit limit.
ii. Costs not incurred as a result of over-the-limit transactions.
For purposes of Sec. 1026.52(b)(1)(i), costs associated with obtaining
the affirmative consent of consumers to the card issuer's payment of
transactions that exceed the credit limit consistent with Sec. 1026.56
are not costs incurred by a card issuer as a result of over-the-limit
transactions.
iii. Examples. A. Over-the-limit fee based on past fees and costs.
Assume that, during year one, a card issuer authorized 600,000 over-the-
limit transactions and incurred $4.5 million in costs as a result of
those over-the-limit
[[Page 839]]
transactions. However, because of the affirmative consent requirements
in Sec. 1026.56, the card issuer was only permitted to impose 200,000
over-the-limit fees during year one. For purposes of Sec.
1026.52(b)(1)(i), a $23 over-the-limit fee would represent a reasonable
proportion of the total costs incurred by the card issuer as a result of
over-the-limit transactions during year two.
B. Adjustment based on fees card issuer is unable to collect. Same
facts as above except that the card issuer was unable to collect 30% of
the 200,000 over-the-limit fees imposed during year one (in other words,
the card issuer was unable to collect 60,000 fees, leaving a total of
140,000 over-the-limit transactions for which the card issuer did
collect or could have collected a fee). For purposes of Sec.
1026.52(b)(2)(i), an over-the-limit fee of $32 would represent a
reasonable proportion of the total costs incurred by the card issuer as
a result of over-the-limit transactions during year two.
C. Adjustment based on reasonable estimate of future changes. Same
facts as paragraphs A and B above except the card issuer reasonably
estimates that--based on past over-the-limit transaction rates, the
percentages of over-the-limit transactions that resulted in an over-the-
limit fee in the past (consistent with Sec. 1026.56), and factors
relevant to potential changes in those rates and percentages for year
two--it will authorize approximately the same number of over-the-limit
transactions during year two (600,000) and impose approximately the same
number of over-the-limit fees (200,000). The card issuer also reasonably
estimates that it will be unable to collect the same percentage of fees
(30%) during year two as during year one (in other words, the card
issuer was unable to collect 60,000 fees, leaving a total of 140,000
over-the-limit transactions for which the card issuer will be able to
collect a fee). The card issuer also reasonably estimates that--based on
past changes in costs incurred as a result of over-the-limit
transactions and other factors relevant to potential costs for year
two--it will experience a 6% decrease in costs during year two (in other
words, a $270,000 reduction in costs for a total of $4.23 million). For
purposes of Sec. 1026.52(b)(1)(i), a $30 over-the-limit fee would
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of over-the-limit transactions during year two.
9. Declined access check fees. i. Costs incurred as a result of
declined access checks. For purposes of Sec. 1026.52(b)(1)(i), the
costs incurred by a card issuer as a result of declining payment on a
check that accesses a credit card account include:
A. Costs associated with determining whether to decline payment on
access checks;
B. Costs associated with processing declined access checks and
reconciling the card issuer's systems and accounts to reflect declined
access checks;
C. Costs associated with investigating potential fraud with respect
to declined access checks; and
D. Costs associated with notifying the consumer and the merchant or
other party that accepted the access check that payment on the check has
been declined.
ii. Example. Assume that, during year one, a card issuer declined
100,000 access checks and incurred $2 million in costs as a result of
those declined checks. The card issuer imposed a fee for each declined
access check but was unable to collect 10% of those fees (in other
words, the card issuer was unable to collect 10,000 fees, leaving a
total of 90,000 declined access checks for which the card issuer did
collect or could have collected a fee). For purposes of Sec.
1026.52(b)(1)(i), a $22 declined access check fee would represent a
reasonable proportion of the total costs incurred by the card issuer as
a result of declined access checks during year two.
52(b)(1)(ii) Safe harbors
1. Multiple violations of same type. i. Same billing cycle or next
six billing cycles. A card issuer cannot impose a fee for a violation
pursuant to Sec. 1026.52(b)(1)(ii)(B) unless a fee has previously been
imposed for the same type of violation pursuant to Sec.
1026.52(b)(1)(ii)(A). Once a fee has been imposed for a violation
pursuant to Sec. 1026.52(b)(1)(ii)(A), the card issuer may impose a fee
pursuant to Sec. 1026.52(b)(1)(ii)(B) for any subsequent violation of
the same type until that type of violation has not occurred for a period
of six consecutive complete billing cycles. A fee has been imposed for
purposes of Sec. 1026.52(b)(1)(ii) even if the card issuer waives or
rebates all or part of the fee.
A. Late payments. For purposes of Sec. 1026.52(b)(1)(ii), a late
payment occurs during the billing cycle in which the payment may first
be treated as late consistent with the requirements of this part and the
terms or other requirements of the account.
B. Returned payments. For purposes of Sec. 1026.52(b)(1)(ii), a
returned payment occurs during the billing cycle in which the payment is
returned to the card issuer.
C. Transactions that exceed the credit limit. For purposes of Sec.
1026.52(b)(1)(ii), a transaction that exceeds the credit limit for an
account occurs during the billing cycle in which the transaction occurs
or is authorized by the card issuer.
D. Declined access checks. For purposes of Sec. 1026.52(b)(1)(ii),
a check that accesses a credit card account is declined during the
billing cycle in which the card issuer declines payment on the check.
ii. Relationship to Sec. Sec. 1026.52(b)(2)(ii) and 1026.56(j)(1).
If multiple violations are based on the same event or transaction such
that Sec. 1026.52(b)(2)(ii) prohibits the card issuer
[[Page 840]]
from imposing more than one fee, the event or transaction constitutes a
single violation for purposes of Sec. 1026.52(b)(1)(ii). Furthermore,
consistent with Sec. 1026.56(j)(1)(i), no more than one violation for
exceeding an account's credit limit can occur during a single billing
cycle for purposes of Sec. 1026.52(b)(1)(ii). However, Sec.
1026.52(b)(2)(ii) does not prohibit a card issuer from imposing fees for
exceeding the credit limit in consecutive billing cycles based on the
same over-the-limit transaction to the extent permitted by Sec.
1026.56(j)(1). In these circumstances, the second and third over-the-
limit fees permitted by Sec. 1026.56(j)(1) may be imposed pursuant to
Sec. 1026.52(b)(1)(ii)(B). See comment 52(b)(2)(ii)-1.
iii. Examples. The following examples illustrate the application of
Sec. 1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B) with respect to credit card
accounts under an open-end (not home-secured) consumer credit plan that
are not charge card accounts. For purposes of these examples, assume
that the billing cycles for the account begin on the first day of the
month and end on the last day of the month and that the payment due date
for the account is the twenty-fifth day of the month.
A. Violations of same type (late payments). A required minimum
periodic payment of $50 is due on March 25. On March 26, a late payment
has occurred because no payment has been received. Accordingly,
consistent with Sec. 1026.52(b)(1)(ii)(A), the card issuer imposes a
$25 late payment fee on March 26. In order for the card issuer to impose
a $35 late payment fee pursuant to Sec. 1026.52(b)(1)(ii)(B), a second
late payment must occur during the April, May, June, July, August, or
September billing cycles.
1. The card issuer does not receive any payment during the March
billing cycle. A required minimum periodic payment of $100 is due on
April 25. On April 20, the card issuer receives a $50 payment. No
further payment is received during the April billing cycle. Accordingly,
consistent with Sec. 1026.52(b)(1)(ii)(B), the card issuer may impose a
$35 late payment fee on April 26. Furthermore, the card issuer may
impose a $35 late payment fee for any late payment that occurs during
the May, June, July, August, September, or October billing cycles.
2. Same facts as in paragraph A above. On March 30, the card issuer
receives a $50 payment and the required minimum periodic payments for
the April, May, June, July, August, and September billing cycles are
received on or before the payment due date. A required minimum periodic
payment of $60 is due on October 25. On October 26, a late payment has
occurred because the required minimum periodic payment due on October 25
has not been received. However, because this late payment did not occur
during the six billing cycles following the March billing cycle, Sec.
1026.52(b)(1)(ii) only permits the card issuer to impose a late payment
fee of $25.
B. Violations of different types (late payment and over the credit
limit). The credit limit for an account is $1,000. Consistent with Sec.
1026.56, the consumer has affirmatively consented to the payment of
transactions that exceed the credit limit. A required minimum periodic
payment of $30 is due on August 25. On August 26, a late payment has
occurred because no payment has been received. Accordingly, consistent
with Sec. 1026.52(b)(1)(ii)(A), the card issuer imposes a $25 late
payment fee on August 26. On August 30, the card issuer receives a $30
payment. On September 10, a transaction causes the account balance to
increase to $1,150, which exceeds the account's $1,000 credit limit. On
September 11, a second transaction increases the account balance to
$1,350. On September 23, the card issuer receives the $50 required
minimum periodic payment due on September 25, which reduces the account
balance to $1,300. On September 30, the card issuer imposes a $25 over-
the-limit fee, consistent with Sec. 1026.52(b)(1)(ii)(A). On October
26, a late payment has occurred because the $60 required minimum
periodic payment due on October 25 has not been received. Accordingly,
consistent with Sec. 1026.52(b)(1)(ii)(B), the card issuer imposes a
$35 late payment fee on October 26.
C. Violations of different types (late payment and returned
payment). A required minimum periodic payment of $50 is due on July 25.
On July 26, a late payment has occurred because no payment has been
received. Accordingly, consistent with Sec. 1026.52(b)(1)(ii)(A), the
card issuer imposes a $25 late payment fee on July 26. On July 30, the
card issuer receives a $50 payment. A required minimum periodic payment
of $50 is due on August 25. On August 24, a $50 payment is received. On
August 27, the $50 payment is returned to the card issuer for
insufficient funds. In these circumstances, Sec. 1026.52(b)(2)(ii)
permits the card issuer to impose either a late payment fee or a
returned payment fee but not both because the late payment and the
returned payment result from the same event or transaction. Accordingly,
for purposes of Sec. 1026.52(b)(1)(ii), the event or transaction
constitutes a single violation. However, if the card issuer imposes a
late payment fee, Sec. 1026.52(b)(1)(ii)(B) permits the issuer to
impose a fee of $35 because the late payment occurred during the six
billing cycles following the July billing cycle. In contrast, if the
card issuer imposes a returned payment fee, the amount of the fee may be
no more than $25 pursuant to Sec. 1026.52(b)(1)(ii)(A).
2. Adjustments based on Consumer Price Index. For purposes of Sec.
1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B), the Bureau shall calculate each
year price level adjusted amounts using the Consumer Price Index in
effect on June 1 of that year. When the cumulative change in
[[Page 841]]
the adjusted minimum value derived from applying the annual Consumer
Price level to the current amounts in Sec. 1026.52(b)(1)(ii)(A) and
(b)(1)(ii)(B) has risen by a whole dollar, those amounts will be
increased by $1.00. Similarly, when the cumulative change in the
adjusted minimum value derived from applying the annual Consumer Price
level to the current amounts in Sec. 1026.52(b)(1)(ii)(A) and
(b)(1)(ii)(B) has decreased by a whole dollar, those amounts will be
decreased by $1.00. The Bureau will publish adjustments to the amounts
in Sec. 1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B).
i. Historical thresholds.
A. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $25 under Sec.
1026.52(b)(1)(ii)(A) and $35 under Sec. 1026.52(b)(1)(ii)(B), through
December 31, 2013.
B. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $26 under Sec.
1026.52(b)(1)(ii)(A) and $37 under Sec. 1026.52(b)(1)(ii)(B), through
December 31, 2014.
C. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $27 under Sec.
1026.52(b)(1)(ii)(A) and $38 under Sec. 1026.52(b)(1)(ii)(B), through
December 31, 2015.
D. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $27 under Sec.
1026.52(b)(1)(ii)(A), through December 31, 2016. Card issuers were
permitted to impose a fee for violating the terms of an agreement if the
fee did not exceed $37 under Sec. 1026.52(b)(1)(ii)(B), through June
26, 2016, and $38 under Sec. 1026.52(b)(1)(ii)(B) from June 27, 2016
through December 31, 2016.
E. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $27 under Sec.
1026.52(b)(1)(ii)(A) and $38 under Sec. 1026.52(b)(1)(ii)(B), through
December 31, 2017.
3. Delinquent balance for charge card accounts. Section
1026.52(b)(1)(ii)(C) provides that, when a charge card issuer that
requires payment of outstanding balances in full at the end of each
billing cycle has not received the required payment for two or more
consecutive billing cycles, the card issuer may impose a late payment
fee that does not exceed three percent of the delinquent balance. For
purposes of Sec. 1026.52(b)(1)(ii)(C), the delinquent balance is any
previously billed amount that remains unpaid at the time the late
payment fee is imposed pursuant to Sec. 1026.52(b)(1)(ii)(C).
Consistent with Sec. 1026.52(b)(2)(ii), a charge card issuer that
imposes a fee pursuant to Sec. 1026.52(b)(1)(ii)(C) with respect to a
late payment may not impose a fee pursuant to Sec. 1026.52(b)(1)(ii)(B)
with respect to the same late payment. The following examples illustrate
the application of Sec. 1026.52(b)(1)(ii)(C):
i. Assume that a charge card issuer requires payment of outstanding
balances in full at the end of each billing cycle and that the billing
cycles for the account begin on the first day of the month and end on
the last day of the month. At the end of the June billing cycle, the
account has a balance of $1,000. On July 5, the card issuer provides a
periodic statement disclosing the $1,000 balance consistent with Sec.
1026.7. During the July billing cycle, the account is used for $300 in
transactions, increasing the balance to $1,300. At the end of the July
billing cycle, no payment has been received and the card issuer imposes
a $25 late payment fee consistent with Sec. 1026.52(b)(1)(ii)(A). On
August 5, the card issuer provides a periodic statement disclosing the
$1,325 balance consistent with Sec. 1026.7. During the August billing
cycle, the account is used for $200 in transactions, increasing the
balance to $1,525. At the end of the August billing cycle, no payment
has been received. Consistent with Sec. 1026.52(b)(1)(ii)(C), the card
issuer may impose a late payment fee of $40, which is 3% of the $1,325
balance that was due at the end of the August billing cycle. Section
1026.52(b)(1)(ii)(C) does not permit the card issuer to include the $200
in transactions that occurred during the August billing cycle.
ii. Same facts as above except that, on August 25, a $100 payment is
received. Consistent with Sec. 1026.52(b)(1)(ii)(C), the card issuer
may impose a late payment fee of $37, which is 3% of the unpaid portion
of the $1,325 balance that was due at the end of the August billing
cycle ($1,225).
iii. Same facts as in paragraph A above except that, on August 25, a
$200 payment is received. Consistent with Sec. 1026.52(b)(1)(ii)(C),
the card issuer may impose a late payment fee of $34, which is 3% of the
unpaid portion of the $1,325 balance that was due at the end of the
August billing cycle ($1,125). In the alternative, the card issuer may
impose a late payment fee of $35 consistent with Sec.
1026.52(b)(1)(ii)(B). However, Sec. 1026.52(b)(2)(ii) prohibits the
card issuer from imposing both fees.
52(b)(2) Prohibited fees
1. Relationship to Sec. 1026.52(b)(1). A card issuer does not
comply with Sec. 1026.52(b) if it imposes a fee that is inconsistent
with the prohibitions in Sec. 1026.52(b)(2). Thus, the prohibitions in
Sec. 1026.52(b)(2) apply even if a fee is consistent with Sec.
1026.52(b)(1)(i) or (b)(1)(ii). For example, even if a card issuer has
determined for purposes of Sec. 1026.52(b)(1)(i) that a $27 fee
represents a reasonable proportion of the total costs incurred by the
card issuer as a result of a particular type of violation, Sec.
1026.52(b)(2)(i) prohibits the card issuer from
[[Page 842]]
imposing that fee if the dollar amount associated with the violation is
less than $27. Similarly, even if Sec. 1026.52(b)(1)(ii) permits a card
issuer to impose a $25 fee, Sec. 1026.52(b)(2)(i) prohibits the card
issuer from imposing that fee if the dollar amount associated with the
violation is less than $25.
52(b)(2)(i) Fees That Exceed Dollar Amount Associated With Violation
1. Late payment fees. For purposes of Sec. 1026.52(b)(2)(i), the
dollar amount associated with a late payment is the amount of the
required minimum periodic payment due immediately prior to assessment of
the late payment fee. Thus, Sec. 1026.52(b)(2)(i)(A) prohibits a card
issuer from imposing a late payment fee that exceeds the amount of that
required minimum periodic payment. For example:
i. Assume that a $15 required minimum periodic payment is due on
September 25. The card issuer does not receive any payment on or before
September 25. On September 26, the card issuer imposes a late payment
fee. For purposes of Sec. 1026.52(b)(2)(i), the dollar amount
associated with the late payment is the amount of the required minimum
periodic payment due on September 25 ($15). Thus, under Sec.
1026.52(b)(2)(i)(A), the amount of that fee cannot exceed $15 (even if a
higher fee would be permitted under Sec. 1026.52(b)(1)).
ii. Same facts as above except that, on September 25, the card
issuer receives a $10 payment. No further payments are received. On
September 26, the card issuer imposes a late payment fee. For purposes
of Sec. 1026.52(b)(2)(i), the dollar amount associated with the late
payment is the full amount of the required minimum periodic payment due
on September 25 ($15), rather than the unpaid portion of that payment
($5). Thus, under Sec. 1026.52(b)(2)(i)(A), the amount of the late
payment fee cannot exceed $15 (even if a higher fee would be permitted
under Sec. 1026.52(b)(1)).
iii. Assume that a $15 required minimum periodic payment is due on
October 28 and the billing cycle for the account closes on October 31.
The card issuer does not receive any payment on or before November 3. On
November 3, the card issuer determines that the required minimum
periodic payment due on November 28 is $50. On November 5, the card
issuer imposes a late payment fee. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with the late payment is
the amount of the required minimum periodic payment due on October 28
($15), rather than the amount of the required minimum periodic payment
due on November 28 ($50). Thus, under Sec. 1026.52(b)(2)(i)(A), the
amount of that fee cannot exceed $15 (even if a higher fee would be
permitted under Sec. 1026.52(b)(1)).
2. Returned payment fees. For purposes of Sec. 1026.52(b)(2)(i),
the dollar amount associated with a returned payment is the amount of
the required minimum periodic payment due immediately prior to the date
on which the payment is returned to the card issuer. Thus, Sec.
1026.52(b)(2)(i)(A) prohibits a card issuer from imposing a returned
payment fee that exceeds the amount of that required minimum periodic
payment. However, if a payment has been returned and is submitted again
for payment by the card issuer, there is no additional dollar amount
associated with a subsequent return of that payment and Sec.
1026.52(b)(2)(i)(B) prohibits the card issuer from imposing an
additional returned payment fee. For example:
i. Assume that the billing cycles for an account begin on the first
day of the month and end on the last day of the month and that the
payment due date is the twenty-fifth day of the month. A minimum payment
of $15 is due on March 25. The card issuer receives a check for $100 on
March 23, which is returned to the card issuer for insufficient funds on
March 26. For purposes of Sec. 1026.52(b)(2)(i), the dollar amount
associated with the returned payment is the amount of the required
minimum periodic payment due on March 25 ($15). Thus, Sec.
1026.52(b)(2)(i)(A) prohibits the card issuer from imposing a returned
payment fee that exceeds $15 (even if a higher fee would be permitted
under Sec. 1026.52(b)(1)). Furthermore, Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from assessing both a late payment fee and a
returned payment fee in these circumstances. See comment 52(b)(2)(ii)-1.
ii. Same facts as above except that the card issuer receives the
$100 check on March 31 and the check is returned for insufficient funds
on April 2. The minimum payment due on April 25 is $30. For purposes of
Sec. 1026.52(b)(2)(i), the dollar amount associated with the returned
payment is the amount of the required minimum periodic payment due on
March 25 ($15), rather than the amount of the required minimum periodic
payment due on April 25 ($30). Thus, Sec. 1026.52(b)(2)(i)(A) prohibits
the card issuer from imposing a returned payment fee that exceeds $15
(even if a higher fee would be permitted under Sec. 1026.52(b)(1)).
Furthermore, Sec. 1026.52(b)(2)(ii) prohibits the card issuer from
assessing both a late payment fee and a returned payment fee in these
circumstances. See comment 52(b)(2)(ii)-1.
iii. Same facts as paragraph i above except that, on March 28, the
card issuer presents the $100 check for payment a second time. On April
1, the check is again returned for insufficient funds. Section
1026.52(b)(2)(i)(B) prohibits the card issuer from imposing a returned
payment fee based on the return of the payment on April 1.
iv. Assume that the billing cycles for an account begin on the first
day of the month and end on the last day of the month and that the
payment due date is the twenty-
[[Page 843]]
fifth day of the month. A minimum payment of $15 is due on August 25.
The card issuer receives a check for $15 on August 23, which is not
returned. The card issuer receives a check for $50 on September 5, which
is returned to the card issuer for insufficient funds on September 7.
Section 1026.52(b)(2)(i)(B) does not prohibit the card issuer from
imposing a returned payment fee in these circumstances. Instead, for
purposes of Sec. 1026.52(b)(2)(i), the dollar amount associated with
the returned payment is the amount of the required minimum periodic
payment due on August 25 ($15). Thus, Sec. 1026.52(b)(2)(i)(A)
prohibits the card issuer from imposing a returned payment fee that
exceeds $15 (even if a higher fee would be permitted under Sec.
1026.52(b)(1)).
3. Over-the-limit fees. For purposes of Sec. 1026.52(b)(2)(i), the
dollar amount associated with extensions of credit in excess of the
credit limit for an account is the total amount of credit extended by
the card issuer in excess of the credit limit during the billing cycle
in which the over-the-limit fee is imposed. Thus, Sec.
1026.52(b)(2)(i)(A) prohibits a card issuer from imposing an over-the-
limit fee that exceeds that amount. Nothing in Sec. 1026.52(b) permits
a card issuer to impose an over-the-limit fee if imposition of the fee
is inconsistent with Sec. 1026.56. The following examples illustrate
the application of Sec. 1026.52(b)(2)(i)(A) to over-the-limit fees:
i. Assume that the billing cycles for a credit card account with a
credit limit of $5,000 begin on the first day of the month and end on
the last day of the month. Assume also that, consistent with Sec.
1026.56, the consumer has affirmatively consented to the payment of
transactions that exceed the credit limit. On March 1, the account has a
$4,950 balance. On March 6, a $60 transaction is charged to the account,
increasing the balance to $5,010. On March 25, a $5 transaction is
charged to the account, increasing the balance to $5,015. On the last
day of the billing cycle (March 31), the card issuer imposes an over-
the-limit fee. For purposes of Sec. 1026.52(b)(2)(i), the dollar amount
associated with the extensions of credit in excess of the credit limit
is the total amount of credit extended by the card issuer in excess of
the credit limit during the March billing cycle ($15). Thus, Sec.
1026.52(b)(2)(i)(A) prohibits the card issuer from imposing an over-the-
limit fee that exceeds $15 (even if a higher fee would be permitted
under Sec. 1026.52(b)(1)).
ii. Same facts as above except that, on March 26, the card issuer
receives a payment of $20, reducing the balance below the credit limit
to $4,995. Nevertheless, for purposes of Sec. 1026.52(b)(2)(i), the
dollar amount associated with the extensions of credit in excess of the
credit limit is the total amount of credit extended by the card issuer
in excess of the credit limit during the March billing cycle ($15).
Thus, consistent with Sec. 1026.52(b)(2)(i)(A), the card issuer may
impose an over-the-limit fee of $15.
4. Declined access check fees. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with declining payment on
a check that accesses a credit card account is the amount of the check.
Thus, when a check that accesses a credit card account is declined,
Sec. 1026.52(b)(2)(i)(A) prohibits a card issuer from imposing a fee
that exceeds the amount of that check. For example, assume that a check
that accesses a credit card account is used as payment for a $50
transaction, but payment on the check is declined by the card issuer
because the transaction would have exceeded the credit limit for the
account. For purposes of Sec. 1026.52(b)(2)(i), the dollar amount
associated with the declined check is the amount of the check ($50).
Thus, Sec. 1026.52(b)(2)(i)(A) prohibits the card issuer from imposing
a fee that exceeds $50. However, the amount of this fee must also comply
with Sec. 1026.52(b)(1)(i) or (b)(1)(ii).
5. Inactivity fees. Section 1026.52(b)(2)(i)(B)(2) prohibits a card
issuer from imposing a fee with respect to a credit card account under
an open-end (not home-secured) consumer credit plan based on inactivity
on that account (including the consumer's failure to use the account for
a particular number or dollar amount of transactions or a particular
type of transaction). For example, Sec. 1026.52(b)(2)(i)(B)(2)
prohibits a card issuer from imposing a $50 fee when a credit card
account under an open-end (not home-secured) consumer credit plan is not
used for at least $2,000 in purchases over the course of a year.
Similarly, Sec. 1026.52(b)(2)(i)(B)(2) prohibits a card issuer from
imposing a $50 annual fee on all accounts of a particular type but
waiving the fee on any account that is used for at least $2,000 in
purchases over the course of a year if the card issuer promotes the
waiver or rebate of the annual fee for purposes of Sec. 1026.55(e).
However, if the card issuer does not promote the waiver or rebate of the
annual fee for purposes of Sec. 1026.55(e), Sec.
1026.52(b)(2)(i)(B)(2) does not prohibit a card issuer from considering
account activity along with other factors when deciding whether to waive
or rebate annual fees on individual accounts (such as in response to a
consumer's request).
6. Closed account fees. Section 1026.52(b)(2)(i)(B)(3) prohibits a
card issuer from imposing a fee based on the closure or termination of
an account. For example, Sec. 1026.52(b)(2)(i)(B)(3) prohibits a card
issuer from:
i. Imposing a one-time fee to consumers who close their accounts.
ii. Imposing a periodic fee (such as an annual fee, a monthly
maintenance fee, or a closed account fee) after an account is closed or
terminated if that fee was not imposed
[[Page 844]]
prior to closure or termination. This prohibition applies even if the
fee was disclosed prior to closure or termination. See also comment
55(d)-1.
iii. Increasing a periodic fee (such as an annual fee or a monthly
maintenance fee) after an account is closed or terminated. However, a
card issuer is not prohibited from continuing to impose a periodic fee
that was imposed before the account was closed or terminated.
52(b)(2)(ii) Multiple Fees Based on a Single Event or Transaction
1. Single event or transaction. Section 1026.52(b)(2)(ii) prohibits
a card issuer from imposing more than one fee for violating the terms or
other requirements of an account based on a single event or transaction.
If Sec. 1026.56(j)(1) permits a card issuer to impose fees for
exceeding the credit limit in consecutive billing cycles based on the
same over-the-limit transaction, those fees are not based on a single
event or transaction for purposes of Sec. 1026.52(b)(2)(ii). The
following examples illustrate the application of Sec.
1026.52(b)(2)(ii). Assume for purposes of these examples that the
billing cycles for a credit card account begin on the first day of the
month and end on the last day of the month and that the payment due date
for the account is the twenty-fifth day of the month.
i. Assume that the required minimum periodic payment due on March 25
is $20. On March 26, the card issuer has not received any payment and
imposes a late payment fee. Consistent with Sec. Sec.
1026.52(b)(1)(ii)(A) and (b)(2)(i), the card issuer may impose a $20
late payment fee on March 26. However, Sec. 1026.52(b)(2)(ii) prohibits
the card issuer from imposing an additional late payment fee if the $20
minimum payment has not been received by a subsequent date (such as
March 31).
A. On April 3, the card issuer provides a periodic statement
disclosing that a $70 required minimum periodic payment is due on April
25. This minimum payment includes the $20 minimum payment due on March
25 and the $20 late payment fee imposed on March 26. On April 20, the
card issuer receives a $20 payment. No additional payments are received
during the April billing cycle. Section 1026.52(b)(2)(ii) does not
prohibit the card issuer from imposing a late payment fee based on the
consumer's failure to make the $70 required minimum periodic payment on
or before April 25. Accordingly, consistent with Sec.
1026.52(b)(1)(ii)(B) and (b)(2)(i), the card issuer may impose a $35
late payment fee on April 26.
B. On April 3, the card issuer provides a periodic statement
disclosing that a $20 required minimum periodic payment is due on April
25. This minimum payment does not include the $20 minimum payment due on
March 25 or the $20 late payment fee imposed on March 26. On April 20,
the card issuer receives a $20 payment. No additional payments are
received during the April billing cycle. Because the card issuer has
received the required minimum periodic payment due on April 25 and
because Sec. 1026.52(b)(2)(ii) prohibits the card issuer from imposing
a second late payment fee based on the consumer's failure to make the
$20 minimum payment due on March 25, the card issuer cannot impose a
late payment fee in these circumstances.
ii. Assume that the required minimum periodic payment due on March
25 is $30.
A. On March 25, the card issuer receives a check for $50, but the
check is returned for insufficient funds on March 27. Consistent with
Sec. Sec. 1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may
impose a late payment fee of $25 or a returned payment fee of $25.
However, Sec. 1026.52(b)(2)(ii) prohibits the card issuer from imposing
both fees because those fees would be based on a single event or
transaction.
B. Same facts as paragraph ii.A above except that that card issuer
receives the $50 check on March 27 and the check is returned for
insufficient funds on March 29. Consistent with Sec. Sec.
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a late
payment fee of $25 or a returned payment fee of $25. However, Sec.
1026.52(b)(2)(ii) prohibits the card issuer from imposing both fees
because those fees would be based on a single event or transaction. If
no payment is received on or before the next payment due date (April
25), Sec. 1026.52(b)(2)(ii) does not prohibit the card issuer from
imposing a late payment fee.
iii. Assume that the required minimum periodic payment due on July
25 is $30. On July 10, the card issuer receives a $50 payment, which is
not returned. On July 20, the card issuer receives a $100 payment, which
is returned for insufficient funds on July 24. Consistent with Sec.
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a
returned payment fee of $25. Nothing in Sec. 1026.52(b)(2)(ii)
prohibits the imposition of this fee.
iv. Assume that the credit limit for an account is $1,000 and that,
consistent with Sec. 1026.56, the consumer has affirmatively consented
to the payment of transactions that exceed the credit limit. On March
31, the balance on the account is $970 and the card issuer has not
received the $35 required minimum periodic payment due on March 25. On
that same date (March 31), a $70 transaction is charged to the account,
which increases the balance to $1,040. Consistent with Sec.
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a late
payment fee of $25 and an over-the-limit fee of $25. Section
1026.52(b)(2)(ii) does not prohibit the imposition of both fees because
those fees are based
[[Page 845]]
on different events or transactions. No additional transactions are
charged to the account during the March, April, or May billing cycles.
If the account balance remains more than $35 above the credit limit on
April 26, the card issuer may impose an over-the-limit fee of $35
pursuant to Sec. 1026.52(b)(1)(ii)(B), to the extent consistent with
Sec. 1026.56(j)(1). Furthermore, if the account balance remains more
than $35 above the credit limit on May 26, the card issuer may again
impose an over-the-limit fee of $35 pursuant to Sec.
1026.52(b)(1)(ii)(B), to the extent consistent with Sec. 1026.56(j)(1).
Thereafter, Sec. 1026.56(j)(1) does not permit the card issuer to
impose additional over-the-limit fees unless another over-the-limit
transaction occurs. However, if an over-the-limit transaction occurs
during the six billing cycles following the May billing cycle, the card
issuer may impose an over-the-limit fee of $35 pursuant to Sec.
1026.52(b)(1)(ii)(B).
v. Assume that the credit limit for an account is $5,000 and that,
consistent with Sec. 1026.56, the consumer has affirmatively consented
to the payment of transactions that exceed the credit limit. On July 23,
the balance on the account is $4,950. On July 24, the card issuer
receives the $100 required minimum periodic payment due on July 25,
reducing the balance to $4,850. On July 26, a $75 transaction is charged
to the account, which increases the balance to $4,925. On July 27, the
$100 payment is returned for insufficient funds, increasing the balance
to $5,025. Consistent with Sec. Sec. 1026.52(b)(1)(ii)(A) and
(b)(2)(i)(A), the card issuer may impose a returned payment fee of $25
or an over-the-limit fee of $25. However, Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from imposing both fees because those fees
would be based on a single event or transaction.
vi. Assume that the required minimum periodic payment due on March
25 is $50. On March 20, the card issuer receives a check for $50, but
the check is returned for insufficient funds on March 22. Consistent
with Sec. Sec. 1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer
may impose a returned payment fee of $25. On March 25, the card issuer
receives a second check for $50, but the check is returned for
insufficient funds on March 27. Consistent with Sec. Sec.
1026.52(b)(1)(ii)(A), (b)(1)(ii)(B), and (b)(2)(i)(A), the card issuer
may impose a late payment fee of $25 or a returned payment fee of $35.
However, Sec. 1026.52(b)(2)(ii) prohibits the card issuer from imposing
both fees because those fees would be based on a single event or
transaction.
vii. Assume that the required minimum periodic payment due on
February 25 is $100. On February 25, the card issuer receives a check
for $100. On March 3, the card issuer provides a periodic statement
disclosing that a $120 required minimum periodic payment is due on March
25. On March 4, the $100 check is returned to the card issuer for
insufficient funds. Consistent with Sec. Sec. 1026.52(b)(1)(ii)(A) and
(b)(2)(i)(A), the card issuer may impose a late payment fee of $25 or a
returned payment fee of $25 with respect to the $100 payment. However,
Sec. 1026.52(b)(2)(ii) prohibits the card issuer from imposing both
fees because those fees would be based on a single event or transaction.
On March 20, the card issuer receives a $120 check, which is not
returned. No additional payments are received during the March billing
cycle. Because the card issuer has received the required minimum
periodic payment due on March 25 and because Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from imposing a second fee based on the $100
payment that was returned for insufficient funds, the card issuer cannot
impose a late payment fee in these circumstances.
Section 1026.53--Allocation of Payments
1. Required minimum periodic payment. Section 1026.53 addresses the
allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the card issuer. Section 1026.53 does not
limit or otherwise address the card issuer's ability to determine,
consistent with applicable law and regulatory guidance, the amount of
the required minimum periodic payment or how that payment is allocated.
A card issuer may, but is not required to, allocate the required minimum
periodic payment consistent with the requirements in Sec. 1026.53 to
the extent consistent with other applicable law or regulatory guidance.
2. Applicable rates and balances. Section 1026.53 permits a card
issuer to allocate an amount paid by the consumer in excess of the
required minimum periodic payment based on the annual percentage rates
and balances on the day the preceding billing cycle ends, on the day the
payment is credited to the account, or on any day in between those two
dates. The day used by the card issuer to determine the applicable
annual percentage rates and balances for purposes of Sec. 1026.53
generally must be consistent from billing cycle to billing cycle,
although the card issuer may adjust this day from time to time. For
example:
i. Assume that the billing cycles for a credit card account start on
the first day of the month and end on the last day of the month. On the
date the March billing cycle ends (March 31), the account has a purchase
balance of $500 at a promotional annual percentage rate of 5% and
another purchase balance of $200 at a non-promotional annual percentage
rate of 15%. On April 5, a $100 purchase to which the 15% rate applies
is charged to the account. On April 15, the promotional rate expires and
Sec. 1026.55(b)(1) permits the card issuer to increase the rate that
applies to the $500 balance from 5% to 18%. On April 25, the card issuer
credits to the account $400
[[Page 846]]
paid by the consumer in excess of the required minimum periodic payment.
If the card issuer's practice is to allocate payments based on the rates
and balances on the last day of the prior billing cycle, the card issuer
would allocate the $400 payment to pay in full the $200 balance to which
the 15% rate applied on March 31 and then allocate the remaining $200 to
the $500 balance to which the 5% rate applied on March 31. In the
alternative, if the card issuer's practice is to allocate payments based
on the rates and balances on the day a payment is credited to the
account, the card issuer would allocate the $400 payment to the $500
balance to which the 18% rate applied on April 25.
ii. Same facts as above except that, on April 25, the card issuer
credits to the account $750 paid by the consumer in excess of the
required minimum periodic payment. If the card issuer's practice is to
allocate payments based on the rates and balances on the last day of the
prior billing cycle, the card issuer would allocate the $750 payment to
pay in full the $200 balance to which the 15% rate applied on March 31
and the $500 balance to which the 5% rate applied on March 31 and then
allocate the remaining $50 to the $100 purchase made on April 5. In the
alternative, if the card issuer's practice is to allocate payments based
on the rates and balances on the day a payment is credited to the
account, the card issuer would allocate the $750 payment to pay in full
the $500 balance to which the 18% rate applied on April 25 and then
allocate the remaining $250 to the $300 balance to which the 15% rate
applied on April 25.
3. Claims or defenses under Sec. 1026.12(c) and billing error
disputes under Sec. 1026.13. When a consumer has asserted a claim or
defense against the card issuer pursuant to Sec. 1026.12(c) or alleged
a billing error under Sec. 1026.13, the card issuer must apply the
consumer's payment in a manner that avoids or minimizes any reduction in
the amount subject to that claim, defense, or dispute. For example:
i. Assume that a credit card account has a $500 cash advance balance
at an annual percentage rate of 25% and a $1,000 purchase balance at an
annual percentage rate of 17%. Assume also that $200 of the cash advance
balance is subject to a claim or defense under Sec. 1026.12(c) or a
billing error dispute under Sec. 1026.13. If the consumer pays $900 in
excess of the required minimum periodic payment, the card issuer must
allocate $300 of the excess payment to pay in full the portion of the
cash advance balance that is not subject to the claim, defense, or
dispute and then allocate the remaining $600 to the $1,000 purchase
balance.
ii. Same facts as above except that the consumer pays $1,400 in
excess of the required minimum periodic payment. The card issuer must
allocate $1,300 of the excess payment to pay in full the $300 cash
advance balance that is not subject to the claim, defense, or dispute
and the $1,000 purchase balance. If there are no new transactions or
other amounts to which the remaining $100 can be allocated, the card
issuer may apply that amount to the $200 cash advance balance that is
subject to the claim, defense, or dispute. However, if the card issuer
subsequently determines that a billing error occurred as asserted by the
consumer, the card issuer must credit the account for the disputed
amount and any related finance or other charges and send a correction
notice consistent with Sec. 1026.13(e).
4. Balances with the same rate. When the same annual percentage rate
applies to more than one balance on an account and a different annual
percentage rate applies to at least one other balance on that account,
Sec. 1026.53 generally does not require that any particular method be
used when allocating among the balances with the same annual percentage
rate. Under these circumstances, a card issuer may treat the balances
with the same rate as a single balance or separate balances. See example
in comment 53-5.iv. However, when a balance on a credit card account is
subject to a deferred interest or similar program that provides that a
consumer will not be obligated to pay interest that accrues on the
balance if the balance is paid in full prior to the expiration of a
specified period of time, that balance must be treated as a balance with
an annual percentage rate of zero for purposes of Sec. 1026.53 during
that period of time. For example, if an account has a $1,000 purchase
balance and a $2,000 balance that is subject to a deferred interest
program that expires on July 1 and a 15% annual percentage rate applies
to both, the balances must be treated as balances with different rates
for purposes of Sec. 1026.53 until July 1. In addition, unless the card
issuer allocates amounts paid by the consumer in excess of the required
minimum periodic payment in the manner requested by the consumer
pursuant to Sec. 1026.53(b)(1)(ii), Sec. 1026.53(b)(1)(i) requires the
card issuer to apply any excess payments first to the $1,000 purchase
balance except during the last two billing cycles of the deferred
interest period (when it must be applied first to any remaining portion
of the $2,000 balance). See example in comment 53-5.v.
5. Examples. For purposes of the following examples, assume that
none of the required minimum periodic payment is allocated to the
balances discussed (unless otherwise stated).
i. Assume that a credit card account has a cash advance balance of
$500 at an annual percentage rate of 20% and a purchase balance of
$1,500 at an annual percentage rate of
[[Page 847]]
15% and that the consumer pays $800 in excess of the required minimum
periodic payment. Under Sec. 1026.53(a), the card issuer must allocate
$500 to pay off the cash advance balance and then allocate the remaining
$300 to the purchase balance.
ii. Assume that a credit card account has a cash advance balance of
$500 at an annual percentage rate of 20% and a purchase balance of
$1,500 at an annual percentage rate of 15% and that the consumer pays
$400 in excess of the required minimum periodic payment. Under Sec.
1026.53(a), the card issuer must allocate the entire $400 to the cash
advance balance.
iii. Assume that a credit card account has a cash advance balance of
$100 at an annual percentage rate of 20%, a purchase balance of $300 at
an annual percentage rate of 18%, and a $600 protected balance on which
the 12% annual percentage rate cannot be increased pursuant to Sec.
1026.55. If the consumer pays $500 in excess of the required minimum
periodic payment, Sec. 1026.53(a) requires the card issuer to allocate
$100 to pay off the cash advance balance, $300 to pay off the purchase
balance, and $100 to the protected balance.
iv. Assume that a credit card account has a cash advance balance of
$500 at an annual percentage rate of 20%, a purchase balance of $1,000
at an annual percentage rate of 15%, and a transferred balance of $2,000
that was previously at a discounted annual percentage rate of 5% but is
now at an annual percentage rate of 15%. Assume also that the consumer
pays $800 in excess of the required minimum periodic payment. Under
Sec. 1026.53(a), the card issuer must allocate $500 to pay off the cash
advance balance and allocate the remaining $300 among the purchase
balance and the transferred balance in the manner the card issuer deems
appropriate.
v. Assume that on January 1 a consumer uses a credit card account to
make a $1,200 purchase subject to a deferred interest program under
which interest accrues at an annual percentage rate of 15% but the
consumer will not be obligated to pay that interest if the balance is
paid in full on or before June 30. The billing cycles for this account
begin on the first day of the month and end on the last day of the
month. Each month from January through June, the consumer uses the
account to make $200 in purchases that are not subject to the deferred
interest program but are subject to the 15% rate.
A. Each month from February through June, the consumer pays $400 in
excess of the required minimum periodic payment on the payment due date,
which is the twenty-fifth of the month. Any interest that accrues on the
purchases not subject to the deferred interest program is paid by the
required minimum periodic payment. The card issuer does not accept
requests from consumers regarding the allocation of excess payments
pursuant to Sec. 1026.53(b)(1)(ii). Thus, Sec. 1026.53(b)(1)(i)
requires the card issuer to allocate the $400 excess payments received
on February 25, March 25, and April 25 consistent with Sec. 1026.53(a).
In other words, the card issuer must allocate those payments as follows:
$200 to pay off the balance not subject to the deferred interest program
(which is subject to the 15% rate) and the remaining $200 to the
deferred interest balance (which is treated as a balance with a rate of
zero). However, Sec. 1026.53(b)(1)(i) requires the card issuer to
allocate the entire $400 excess payment received on May 25 to the
deferred interest balance. Similarly, Sec. 1026.53(b)(1)(i) requires
the card issuer to allocate the $400 excess payment received on June 25
as follows: $200 to the deferred interest balance (which pays that
balance in full) and the remaining $200 to the balance not subject to
the deferred interest program.
B. Same facts as above, except that the card issuer does accept
requests from consumers regarding the allocation of excess payments
pursuant to Sec. 1026.53(b)(1)(ii). In addition, on April 25, the card
issuer receives an excess payment of $800, which the consumer requests
be allocated to pay off the $800 balance subject to the deferred
interest program. Section 1026.53(b)(1)(ii) permits the card issuer to
allocate the $800 excess payment in the manner requested by the
consumer.
53(b) Special Rules
1. Deferred interest and similar programs. Section 1026.53(b)(1)
applies to deferred interest or similar programs under which the
consumer is not obligated to pay interest that accrues on a balance if
that balance is paid in full prior to the expiration of a specified
period of time. For purposes of Sec. 1026.53(b)(1), ``deferred
interest'' has the same meaning as in Sec. 1026.16(h)(2) and associated
commentary. Section 1026.53(b)(1) applies regardless of whether the
consumer is required to make payments with respect to that balance
during the specified period. However, a grace period during which any
credit extended may be repaid without incurring a finance charge due to
a periodic interest rate is not a deferred interest or similar program
for purposes of Sec. 1026.53(b)(1). Similarly, a temporary annual
percentage rate of zero percent that applies for a specified period of
time consistent with Sec. 1026.55(b)(1) is not a deferred interest or
similar program for purposes of Sec. 1026.53(b)(1) unless the consumer
may be obligated to pay interest that accrues during the period if a
balance is not paid in full prior to expiration of the period.
2. Expiration of deferred interest or similar program during billing
cycle. For purposes of
[[Page 848]]
Sec. 1026.53(b)(1)(i), a billing cycle does not constitute one of the
two billing cycles immediately preceding expiration of a deferred
interest or similar program if the expiration date for the program
precedes the payment due date in that billing cycle. For example, assume
that a credit card account has a balance subject to a deferred interest
program that expires on June 15. Assume also that the billing cycles for
the account begin on the first day of the month and end on the last day
of the month and that the required minimum periodic payment is due on
the twenty-fifth day of the month. The card issuer does not accept
requests from consumers regarding the allocation of excess payments
pursuant to Sec. 1026.53(b)(1)(ii). Because the expiration date for the
deferred interest program (June 15) precedes the due date in the June
billing cycle (June 25), Sec. 1026.53(b)(1)(i) requires the card issuer
to allocate first to the deferred interest balance any amount paid by
the consumer in excess of the required minimum periodic payment during
the April and May billing cycles (as well as any amount paid by the
consumer before June 15). However, if the deferred interest program
expired on June 25 or on June 30 (or on any day in between), Sec.
1026.53(b)(1)(i) would apply only to the May and June billing cycles.
3. Consumer requests. i. Generally. Section 1026.53(b) does not
require a card issuer to allocate amounts paid by the consumer in excess
of the required minimum periodic payment in the manner requested by the
consumer, provided that the card issuer instead allocates such amounts
consistent with Sec. 1026.53(a) or (b)(1)(i), as applicable. For
example, a card issuer may decline consumer requests regarding payment
allocation as a general matter or may decline such requests when a
consumer does not comply with requirements set by the card issuer (such
as submitting the request in writing or submitting the request prior to
or contemporaneously with submission of the payment), provided that
amounts paid by the consumer in excess of the required minimum periodic
payment are allocated consistent with Sec. 1026.53(a) or (b)(1)(i), as
applicable. Similarly, a card issuer that accepts requests pursuant to
Sec. 1026.53(b)(1)(ii) or (b)(2) must allocate amounts paid by a
consumer in excess of the required minimum periodic payment consistent
with Sec. 1026.53(a) or (b)(1)(i), as applicable, if the consumer does
not submit a request. Furthermore, a card issuer that accepts requests
pursuant to Sec. 1026.53(b)(1)(ii) or (b)(2) must allocate consistent
with Sec. 1026.53(a) or (b)(1)(i), as applicable, if the consumer
submits a request with which the card issuer cannot comply (such as a
request that contains a mathematical error), unless the consumer submits
an additional request with which the card issuer can comply.
ii. Examples of consumer requests that satisfy Sec.
1026.53(b)(1)(ii) or (b)(2). A consumer has made a request for purposes
of Sec. 1026.53(b)(1)(ii) or (b)(2) if:
A. The consumer contacts the card issuer orally, electronically, or
in writing and specifically requests that a payment or payments be
allocated in a particular manner during the period of time that the
deferred interest or similar program applies to a balance on the account
or the period of time that a balance on the account is secured.
B. The consumer completes and submits to the card issuer a form or
payment coupon provided by the card issuer for the purpose of requesting
that a payment or payments be allocated in a particular manner during
the period of time that the deferred interest or similar program applies
to a balance on the account or the period of time that a balance on the
account is secured.
C. The consumer contacts the card issuer orally, electronically, or
in writing and specifically requests that a payment that the card issuer
has previously allocated consistent with Sec. 1026.53(a) or (b)(1)(i),
as applicable, instead be allocated in a different manner.
iii. Examples of consumer requests that do not satisfy Sec.
1026.53(b)(1)(ii) or (b)(2). A consumer has not made a request for
purposes of Sec. 1026.53(b)(1)(ii) or (b)(2) if:
A. The terms and conditions of the account agreement contain
preprinted language stating that by applying to open an account, by
using that account for transactions subject to a deferred interest or
similar program, or by using the account to purchase property in which
the card issuer holds a security interest the consumer requests that
payments be allocated in a particular manner.
B. The card issuer's online application contains a preselected check
box indicating that the consumer requests that payments be allocated in
a particular manner and the consumer does not deselect the box.
C. The payment coupon provided by the card issuer contains
preprinted language or a preselected check box stating that by
submitting a payment the consumer requests that the payment be allocated
in a particular manner.
D. The card issuer requires a consumer to accept a particular
payment allocation method as a condition of using a deferred interest or
similar program, purchasing property in which the card issuer holds a
security interest, making a payment, or receiving account services or
features.
[[Page 849]]
Section 1026.54--Limitations on the Imposition of Finance Charges
54(a) Limitations on imposing finance charges as a result of the loss of
a grace period
54(a)(1) General Rule
1. Eligibility for grace period. Section 1026.54 prohibits the
imposition of finance charges as a result of the loss of a grace period
in certain specified circumstances. Section 1026.54 does not require the
card issuer to provide a grace period. Furthermore, Sec. 1026.54 does
not prohibit the card issuer from placing limitations and conditions on
a grace period (such as limiting application of the grace period to
certain types of transactions or conditioning eligibility for the grace
period on certain transactions being paid in full by a particular date),
provided that such limitations and conditions are consistent with Sec.
1026.5(b)(2)(ii)(B) and Sec. 1026.54. Finally, Sec. 1026.54 does not
limit the imposition of finance charges with respect to a transaction
when the consumer is not eligible for a grace period on that transaction
at the end of the billing cycle in which the transaction occurred. For
example:
i. Assume that the billing cycles for a credit card account begin on
the first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. Assume also
that, for purchases made during the current billing cycle (for purposes
of this example, the June billing cycle), the grace period applies from
the date of the purchase until the payment due date in the following
billing cycle (July 25), subject to two conditions. First, the purchase
balance at the end of the preceding billing cycle (the May billing
cycle) must have been paid in full by the payment due date in the
current billing cycle (June 25). Second, the purchase balance at the end
of the current billing cycle (the June billing cycle) must be paid in
full by the following payment due date (July 25). Finally, assume that
the consumer was eligible for a grace period at the start of the June
billing cycle (in other words, assume that the purchase balance for the
April billing cycle was paid in full by May 25).
A. If the consumer pays the purchase balance for the May billing
cycle in full by June 25, then at the end of the June billing cycle the
consumer is eligible for a grace period with respect to purchases made
during that billing cycle. Therefore, Sec. 1026.54 limits the
imposition of finance charges with respect to purchases made during the
June billing cycle if the consumer does not pay the purchase balance for
the June billing cycle in full by July 25. Specifically, Sec.
1026.54(a)(1)(i) prohibits the card issuer from imposing finance charges
based on the purchase balance at the end of the June billing cycle for
days that precede the July billing cycle. Furthermore, Sec.
1026.54(a)(1)(ii) prohibits the card issuer from imposing finance
charges based on any portion of the balance at the end of the June
billing cycle that was paid on or before July 25.
B. If the consumer does not pay the purchase balance for the May
billing cycle in full by June 25, then the consumer is not eligible for
a grace period with respect to purchases made during the June billing
cycle at the end of that cycle. Therefore, Sec. 1026.54 does not limit
the imposition of finance charges with respect to purchases made during
the June billing cycle regardless of whether the consumer pays the
purchase balance for the June billing cycle in full by July 25.
ii. Same facts as above except that the card issuer places only one
condition on the provision of a grace period for purchases made during
the current billing cycle (the June billing cycle): that the purchase
balance at the end of the current billing cycle (the June billing cycle)
be paid in full by the following payment due date (July 25). In these
circumstances, Sec. 1026.54 applies to the same extent as discussed in
paragraphs i.A and i.B above regardless of whether the purchase balance
for the April billing cycle was paid in full by May 25.
2. Definition of grace period. For purposes of Sec. Sec.
1026.5(b)(2)(ii)(B) and 1026.54, a grace period is a period within which
any credit extended may be repaid without incurring a finance charge due
to a periodic interest rate. The following are not grace periods for
purposes of Sec. 1026.54:
i. Deferred interest and similar programs. A deferred interest or
similar promotional program under which a consumer will not be obligated
to pay interest that accrues on a balance if that balance is paid in
full prior to the expiration of a specified period of time is not a
grace period for purposes of Sec. 1026.54. Thus, Sec. 1026.54 does not
prohibit the card issuer from charging accrued interest to an account
upon expiration of a deferred interest or similar program if the balance
was not paid in full prior to expiration (to the extent consistent with
Sec. 1026.55 and other applicable law and regulatory guidance).
ii. Waivers or rebates of interest. As a general matter, a card
issuer has not provided a grace period with respect to transactions for
purposes of Sec. 1026.54 if, on an individualized basis (such as in
response to a consumer's request), the card issuer waives or rebates
finance charges that have accrued on transactions. In addition, when a
balance at the end of the preceding billing cycle is paid in full on or
before the payment due date in the current billing cycle, a card issuer
that waives or rebates trailing or residual interest accrued on that
balance or any other transactions during the current billing cycle has
not provided a grace period with respect to that balance or any other
transactions for
[[Page 850]]
purposes of Sec. 1026.54. However, if the terms of the account provide
that all interest accrued on transactions will be waived or rebated if
the balance for those transactions at the end of the billing cycle
during which the transactions occurred is paid in full by the following
payment due date, the card issuer is providing a grace period with
respect to those transactions for purposes of Sec. 1026.54. For
example:
A. Assume that the billing cycles for a credit card account begin on
the first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. On March 31,
the balance on the account is $1,000 and the consumer is not eligible
for a grace period with respect to that balance because the balance at
the end of the prior billing cycle was not paid in full on March 25. On
April 15, the consumer uses the account for a $500 purchase. On April
25, the card issuer receives a payment of $1,000. On May 3, the card
issuer mails or delivers a periodic statement reflecting trailing or
residual interest that accrued on the $1,000 balance from April 1
through April 24 as well as interest that accrued on the $500 purchase
from April 15 through April 30. On May 10, the consumer requests that
the trailing or residual interest charges be waived and the card issuer
complies. By waiving these interest charges, the card issuer has not
provided a grace period with respect to the $1,000 balance or the $500
purchase.
B. Same facts as in paragraph ii.A above except that the terms of
the account state that trailing or residual interest will be waived in
these circumstances or it is the card issuer's practice to waive
trailing or residual interest in these circumstances. By waiving these
interest charges, the card issuer has not provided a grace period with
respect to the $1,000 balance or the $500 purchase.
C. Assume that the billing cycles for a credit card account begin on
the first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. Assume also
that, for purchases made during the current billing cycle (for purposes
of this example, the June billing cycle), the terms of the account
provide that interest accrued on those purchases from the date of the
purchase until the payment due date in the following billing cycle (July
25) will be waived or rebated, subject to two conditions. First, the
purchase balance at the end of the preceding billing cycle (the May
billing cycle) must have been paid in full by the payment due date in
the current billing cycle (June 25). Second, the purchase balance at the
end of the current billing cycle (the June billing cycle) must be paid
in full by the following payment due date (July 25). Under these
circumstances, the card issuer is providing a grace period on purchases
for purposes of Sec. 1026.54. Therefore, assuming that the consumer was
eligible for this grace period at the start of the June billing cycle
(in other words, assuming that the purchase balance for the April
billing cycle was paid in full by May 25) and assuming that the consumer
pays the purchase balance for the May billing cycle in full by June 25,
Sec. 1026.54 applies to the imposition of finance charges with respect
to purchases made during the June billing cycle. Specifically, Sec.
1026.54(a)(1)(i) prohibits the card issuer from imposing finance charges
based on the purchase balance at the end of the June billing cycle for
days that precede the July billing cycle. Furthermore, Sec.
1026.54(a)(1)(ii) prohibits the card issuer from imposing finance
charges based on any portion of the balance at the end of the June
billing cycle that was paid on or before July 25.
3. Relationship to payment allocation requirements in Sec. 1026.53.
Card issuers must comply with the payment allocation requirements in
Sec. 1026.53 even if doing so will result in the loss of a grace
period.
4. Prohibition on two-cycle balance computation method. When a
consumer ceases to be eligible for a grace period, Sec.
1026.54(a)(1)(i) prohibits the card issuer from computing the finance
charge using the two-cycle average daily balance computation method.
This method calculates the finance charge using a balance that is the
sum of the average daily balances for two billing cycles. The first
balance is for the current billing cycle, and is calculated by adding
the total balance (including or excluding new purchases and deducting
payments and credits) for each day in the billing cycle, and then
dividing by the number of days in the billing cycle. The second balance
is for the preceding billing cycle.
5. Prohibition on imposing finance charges on amounts paid within
grace period. When a balance on a credit card account is eligible for a
grace period and the card issuer receives payment for some but not all
of that balance prior to the expiration of the grace period, Sec.
1026.54(a)(1)(ii) prohibits the card issuer from imposing finance
charges on the portion of the balance paid. Card issuers are not
required to use a particular method to comply with Sec.
1026.54(a)(1)(ii). However, when Sec. 1026.54(a)(1)(ii) applies, a card
issuer is in compliance if, for example, it applies the consumer's
payment to the balance subject to the grace period at the end of the
preceding billing cycle (in a manner consistent with the payment
allocation requirements in Sec. 1026.53) and then calculates interest
charges based on the amount of the balance that remains unpaid.
6. Examples. Assume that the annual percentage rate for purchases on
a credit card account is 15%. The billing cycle starts on the first day
of the month and ends on the
[[Page 851]]
last day of the month. The payment due date for the account is the
twenty-fifth day of the month. For purchases made during the current
billing cycle, the card issuer provides a grace period from the date of
the purchase until the payment due date in the following billing cycle,
provided that the purchase balance at the end of the current billing
cycle is paid in full by the following payment due date. For purposes of
this example, assume that none of the required minimum periodic payment
is allocated to the balances discussed. During the March billing cycle,
the following transactions are charged to the account: A $100 purchase
on March 10, a $200 purchase on March 15, and a $300 purchase on March
20. On March 25, the purchase balance for the February billing cycle is
paid in full. Thus, for purposes of Sec. 1026.54, the consumer is
eligible for a grace period on the March purchases. At the end of the
March billing cycle (March 31), the consumer's total purchase balance is
$600 and the consumer will not be charged interest on that balance if it
is paid in full by the following due date (April 25).
i. On April 10, a $150 purchase is charged to the account. On April
25, the card issuer receives $500 in excess of the required minimum
periodic payment. Section 1026.54(a)(1)(i) prohibits the card issuer
from reaching back and charging interest on any of the March
transactions from the date of the transaction through the end of the
March billing cycle (March 31). In these circumstances, the card issuer
may comply with Sec. 1026.54(a)(1)(ii) by applying the $500 excess
payment to the $600 purchase balance and then charging interest only on
the portion of the $600 purchase balance that remains unpaid ($100) from
the start of the April billing cycle (April 1) through the end of the
April billing cycle (April 30). In addition, the card issuer may charge
interest on the $150 purchase from the date of the transaction (April
10) through the end of the April billing cycle (April 31).
ii. Same facts as in paragraph 6 above except that, on March 18, a
$250 cash advance is charged to the account at an annual percentage rate
of 25%. The card issuer's grace period does not apply to cash advances,
but the card issuer does provide a grace period on the March purchases
because the purchase balance for the February billing cycle is paid in
full on March 25. On April 25, the card issuer receives $600 in excess
of the required minimum periodic payment. As required by Sec. 1026.53,
the card issuer allocates the $600 excess payment first to the balance
with the highest annual percentage rate (the $250 cash advance balance).
Although Sec. 1026.54(a)(1)(i) prohibits the card issuer from charging
interest on the March purchases based on days in the March billing
cycle, the card issuer may charge interest on the $250 cash advance from
the date of the transaction (March 18) through April 24. In these
circumstances, the card issuer may comply with Sec. 1026.54(a)(1)(ii)
by applying the remainder of the excess payment ($350) to the $600
purchase balance and then charging interest only on the portion of the
$600 purchase balance that remains unpaid ($250) from the start of the
April billing cycle (April 1) through the end of the April billing cycle
(April 30).
iii. Same facts as in paragraph 6 above except that the consumer
does not pay the balance for the February billing cycle in full on March
25 and therefore is not eligible for a grace period on the March
purchases. Under these circumstances, Sec. 1026.54 does not apply and
the card issuer may charge interest from the date of each transaction
through April 24 and interest on the remaining $100 from April 25
through the end of the April billing cycle (April 25).
Section 1026.55--Limitations on Increasing Annual Percentage Rates,
Fees, and Charges
55(a) General Rule
1. Increase in rate, fee, or charge. Section 1026.55(a) prohibits
card issuers from increasing an annual percentage rate or any fee or
charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) on a credit card account unless specifically
permitted by one of the exceptions in Sec. 1026.55(b). Except as
specifically provided in Sec. 1026.55(b), this prohibition applies even
if the circumstances under which an increase will occur are disclosed in
advance. The following examples illustrate the general application of
Sec. 1026.55(a) and (b). Additional examples illustrating specific
aspects of the exceptions in Sec. 1026.55(b) are provided in the
commentary to those exceptions.
i. Account-opening disclosure of non-variable rate for six months,
then variable rate. Assume that, at account opening on January 1 of year
one, a card issuer discloses that the annual percentage rate for
purchases is a non-variable rate of 15% and will apply for six months.
The card issuer also discloses that, after six months, the annual
percentage rate for purchases will be a variable rate that is currently
18% and will be adjusted quarterly by adding a margin of 8 percentage
points to a publicly-available index not under the card issuer's
control. Furthermore, the card issuer discloses that the annual
percentage rate for cash advances is the same variable rate that will
apply to purchases after six months. Finally, the card issuer discloses
that, to the extent consistent with Sec. 1026.55 and other applicable
law, a non-variable penalty rate of 30% may apply if the consumer makes
a late payment. The payment due date for the account is the twenty-fifth
day of the month and the required minimum periodic payments are applied
to accrued interest and fees but do not reduce the purchase and cash
advance balances.
[[Page 852]]
A. Change-in-terms rate increase for new transactions after first
year. On January 15 of year one, the consumer uses the account to make a
$2,000 purchase and a $500 cash advance. No other transactions are made
on the account. At the start of each quarter, the card issuer may adjust
the variable rate that applies to the $500 cash advance consistent with
changes in the index (pursuant to Sec. 1026.55(b)(2)). All required
minimum periodic payments are received on or before the payment due date
until May of year one, when the payment due on May 25 is received by the
creditor on May 28. At this time, the card issuer is prohibited by Sec.
1026.55 from increasing the rates that apply to the $2,000 purchase, the
$500 cash advance, or future purchases and cash advances. Six months
after account opening (July 1), the card issuer may begin to accrue
interest on the $2,000 purchase at the previously-disclosed variable
rate determined using an 8-point margin (pursuant to Sec.
1026.55(b)(1)). Because no other increases in rate were disclosed at
account opening, the card issuer may not subsequently increase the
variable rate that applies to the $2,000 purchase and the $500 cash
advance (except due to increases in the index pursuant to Sec.
1026.55(b)(2)). On November 16, the card issuer provides a notice
pursuant to Sec. 1026.9(c) informing the consumer of a new variable
rate that will apply on January 1 of year two (calculated using the same
index and an increased margin of 12 percentage points). On December 15,
the consumer makes a $100 purchase. On January 1 of year two, the card
issuer may increase the margin used to determine the variable rate that
applies to new purchases to 12 percentage points (pursuant to Sec.
1026.55(b)(3)). However, Sec. 1026.55(b)(3)(ii) does not permit the
card issuer to apply the variable rate determined using the 12-point
margin to the $2,000 purchase balance. Furthermore, although the $100
purchase occurred more than 14 days after provision of the Sec.
1026.9(c) notice, Sec. 1026.55(b)(3)(iii) does not permit the card
issuer to apply the variable rate determined using the 12-point margin
to that purchase because it occurred during the first year after account
opening. On January 15 of year two, the consumer makes a $300 purchase.
The card issuer may apply the variable rate determined using the 12-
point margin to the $300 purchase.
B. Account becomes more than 60 days delinquent during first year.
Same facts as above except that the required minimum periodic payment
due on May 25 of year one is not received by the card issuer until July
30 of year one. Because the card issuer received the required minimum
periodic payment more than 60 days after the payment due date, Sec.
1026.55(b)(4) permits the card issuer to increase the annual percentage
rate applicable to the $2,000 purchase, the $500 cash advance, and
future purchases and cash advances. However, Sec. 1026.55(b)(4)(i)
requires the card issuer to first comply with the notice requirements in
Sec. 1026.9(g). Thus, if the card issuer provided a Sec. 1026.9(g)
notice on July 25 stating that all rates on the account would be
increased to the 30% penalty rate, the card issuer could apply that rate
beginning on September 8 to all balances and to future transactions.
ii. Account-opening disclosure of non-variable rate for six months,
then increased non-variable rate for six months, then variable rate;
change-in-terms rate increase for new transactions after first year.
Assume that, at account opening on January 1 of year one, a card issuer
discloses that the annual percentage rate for purchases will increase as
follows: A non-variable rate of 5% for six months; a non-variable rate
of 10% for an additional six months; and thereafter a variable rate that
is currently 15% and will be adjusted monthly by adding a margin of 5
percentage points to a publicly-available index not under the card
issuer's control. The payment due date for the account is the fifteenth
day of the month and the required minimum periodic payments are applied
to accrued interest and fees but do not reduce the purchase balance. On
January 15 of year one, the consumer uses the account to make a $1,500
purchase. Six months after account opening (July 1), the card issuer may
begin to accrue interest on the $1,500 purchase at the previously-
disclosed 10% non-variable rate (pursuant to Sec. 1026.55(b)(1)). On
September 15, the consumer uses the account for a $700 purchase. On
November 16, the card issuer provides a notice pursuant to Sec.
1026.9(c) informing the consumer of a new variable rate that will apply
on January 1 of year two (calculated using the same index and an
increased margin of 8 percentage points). One year after account opening
(January 1 of year two), the card issuer may begin accruing interest on
the $2,200 purchase balance at the previously-disclosed variable rate
determined using a 5-point margin (pursuant to Sec. 1026.55(b)(1)).
Section 1026.55 does not permit the card issuer to apply the variable
rate determined using the 8-point margin to the $2,200 purchase balance.
Furthermore, Sec. 1026.55 does not permit the card issuer to
subsequently increase the variable rate determined using the 5-point
margin that applies to the $2,200 purchase balance (except due to
increases in the index pursuant to Sec. 1026.55(b)(2)). The card issuer
may, however, apply the variable rate determined using the 8-point
margin to purchases made on or after January 1 of year two (pursuant to
Sec. 1026.55(b)(3)).
iii. Change-in-terms rate increase for new transactions after first
year; penalty rate increase after first year. Assume that, at account
opening on January 1 of year one, a card issuer discloses that the
annual percentage rate for purchases is a variable rate
[[Page 853]]
determined by adding a margin of 6 percentage points to a publicly-
available index outside of the card issuer's control. The card issuer
also discloses that, to the extent consistent with Sec. 1026.55 and
other applicable law, a non-variable penalty rate of 28% may apply if
the consumer makes a late payment. The due date for the account is the
fifteenth of the month. On May 30 of year two, the account has a
purchase balance of $1,000. On May 31, the card issuer provides a notice
pursuant to Sec. 1026.9(c) informing the consumer of a new variable
rate that will apply on July 16 for all purchases made on or after June
15 (calculated by using the same index and an increased margin of 8
percentage points). On June 14, the consumer makes a $500 purchase. On
June 15, the consumer makes a $200 purchase. On July 1, the card issuer
has not received the payment due on June 15 and provides the consumer
with a notice pursuant to Sec. 1026.9(g) stating that the 28% penalty
rate will apply as of August 15 to all transactions made on or after
July 16 and that, if the consumer becomes more than 60 days late, the
penalty rate will apply to all balances on the account. On July 17, the
consumer makes a $300 purchase.
A. Account does not become more than 60 days delinquent. The payment
due on June 15 of year two is received on July 2. On July 16, Sec.
1026.55(b)(3)(ii) permits the card issuer to apply the variable rate
determined using the 8-point margin disclosed in the Sec. 1026.9(c)
notice to the $200 purchase made on June 15 but does not permit the card
issuer to apply this rate to the $1,500 purchase balance. On August 15,
Sec. 1026.55(b)(3)(ii) permits the card issuer to apply the 28% penalty
rate disclosed at account opening and in the Sec. 1026.9(g) notice to
the $300 purchase made on July 17 but does not permit the card issuer to
apply this rate to the $1,500 purchase balance (which remains at the
variable rate determined using the 6-point margin) or the $200 purchase
(which remains at the variable rate determined using the 8-point
margin).
B. Account becomes more than 60 days delinquent after provision of
Sec. 1026.9(g) notice. Same facts as above except the payment due on
June 15 of year two has not been received by August 15. Section
1026.55(b)(4) permits the card issuer to apply the 28% penalty rate to
the $1,500 purchase balance and the $200 purchase because it has not
received the June 15 payment within 60 days after the due date. However,
in order to do so, Sec. 1026.55(b)(4)(i) requires the card issuer to
first provide an additional notice pursuant to Sec. 1026.9(g). This
notice must be sent no earlier than August 15, which is the first day
the account became more than 60 days' delinquent. If the notice is sent
on August 15, the card issuer may begin accruing interest on the $1,500
purchase balance and the $200 purchase at the 28% penalty rate beginning
on September 29.
2. Relationship to grace period. Nothing in Sec. 1026.55 prohibits
a card issuer from assessing interest due to the loss of a grace period
to the extent consistent with Sec. 1026.5(b)(2)(ii)(B) and Sec.
1026.54. In addition, a card issuer has not reduced an annual percentage
rate on a credit card account for purposes of Sec. 1026.55 if the card
issuer does not charge interest on a balance or a portion thereof based
on a payment received prior to the expiration of a grace period. For
example, if the annual percentage rate for purchases on an account is
15% but the card issuer does not charge any interest on a $500 purchase
balance because that balance was paid in full prior to the expiration of
the grace period, the card issuer has not reduced the 15% purchase rate
to 0% for purposes of Sec. 1026.55.
55(b) Exceptions
1. Exceptions not mutually exclusive. A card issuer generally may
increase an annual percentage rate or a fee or charge required to be
disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
pursuant to an exception set forth in Sec. 1026.55(b) even if that
increase would not be permitted under a different exception. For
example, although a card issuer cannot increase an annual percentage
rate pursuant to Sec. 1026.55(b)(1) unless that rate is provided for a
specified period of at least six months, the card issuer may increase an
annual percentage rate during a specified period due to an increase in
an index consistent with Sec. 1026.55(b)(2). Similarly, although Sec.
1026.55(b)(3) does not permit a card issuer to increase an annual
percentage rate during the first year after account opening, the card
issuer may increase the rate during the first year after account opening
pursuant to Sec. 1026.55(b)(4) if the required minimum periodic payment
is not received within 60 days after the due date. However, if Sec.
1026.55(b)(4)(ii) requires a card issuer to decrease the rate, fee, or
charge that applies to a balance while the account is subject to a
workout or temporary hardship arrangement or subject to 50 U.S.C. app.
527 or a similar Federal or state statute or regulation, the card issuer
may not impose a higher rate, fee, or charge on that balance pursuant to
Sec. 1026.55(b)(5) or (b)(6) upon completion or failure of the
arrangement or once 50 U.S.C. app. 527 or the similar Federal or state
statute or regulation no longer applies. For example, assume that, on
January 1, the annual percentage rate that applies to a $1,000 balance
is increased from 12% to 30% pursuant to Sec. 1026.55(b)(4). On
February 1, the rate on that balance is decreased from 30% to 15%
consistent with Sec. 1026.55(b)(5) as a part of a workout or temporary
hardship arrangement. On July 1, Sec. 1026.55(b)(4)(ii) requires the
card issuer to reduce the rate that applies to any remaining portion of
the $1,000 balance
[[Page 854]]
from 15% to 12%. If the consumer subsequently completes or fails to
comply with the terms of the workout or temporary hardship arrangement,
the card issuer may not increase the 12% rate that applies to any
remaining portion of the $1,000 balance pursuant to Sec. 1026.55(b)(5).
2. Relationship between exceptions in Sec. 1026.55(b) and notice
requirements in Sec. 1026.9. Nothing in Sec. 1026.55 alters the
requirements in Sec. 1026.9(c) and (g) that creditors provide written
notice at least 45 days prior to the effective date of certain increases
in annual percentage rates, fees, and charges.
i. 14-day rule in Sec. 1026.55(b)(3)(ii). Although Sec.
1026.55(b)(3)(ii) permits a card issuer that discloses an increased rate
pursuant to Sec. 1026.9(c) or (g) to apply that rate to transactions
that occur more than 14 days after provision of the notice, the card
issuer cannot begin to accrue interest at the increased rate until that
increase goes into effect, consistent with Sec. 1026.9(c) or (g). For
example, if on May 1 a card issuer provides a notice pursuant to Sec.
1026.9(c) stating that a rate will increase from 15% to 18% on June 15,
Sec. 1026.55(b)(3)(ii) permits the card issuer to apply the 18% rate to
transactions that occur on or after May 16. However, neither Sec.
1026.55 nor Sec. 1026.9(c) permits the card issuer to begin accruing
interest at the 18% rate on those transactions until June 15. See
additional examples in comment 55(b)(3)-4.
ii. Mid-cycle increases; application of balance computation methods.
Once an increased rate has gone into effect, the card issuer cannot
calculate interest charges based on that increased rate for days prior
to the effective date. Assume that, in the example in paragraph i above,
the billing cycles for the account begin on the first day of the month
and end on the last day of the month. If, for example, the card issuer
uses the average daily balance computation method, it cannot apply the
18% rate to the average daily balance for the entire June billing cycle
because that rate did not become effective until June 15. However, the
card issuer could apply the 15% rate to the average daily balance from
June 1 through June 14 and the 18% rate to the average daily balance
from June 15 through June 30. Similarly, if the card issuer that uses
the daily balance computation method, it could apply the 15% rate to the
daily balance for each day from June 1 through June 14 and the 18% rate
to the daily balance for each day from June 15 through June 30.
iii. Mid-cycle increases; delayed implementation of increase. If
Sec. 1026.55(b) and Sec. 1026.9(b), (c), or (g) permit a card issuer
to apply an increased annual percentage rate, fee, or charge on a date
that is not the first day of a billing cycle, the card issuer may delay
application of the increased rate, fee, or charge until the first day of
the following billing cycle without relinquishing the ability to apply
that rate, fee, or charge. Thus, in the example in paragraphs i and ii
above, the card issuer could delay application of the 18% rate until the
start of the next billing cycle (April 1) without relinquishing its
ability to apply that rate under Sec. 1026.55(b)(3). Similarly, assume
that, at account opening on January 1, a card issuer discloses that a
non-variable annual percentage rate of 10% will apply to purchases for
six months and a non-variable rate of 15% will apply thereafter. The
first day of each billing cycle for the account is the fifteenth of the
month. If the six-month period expires on July 1, the card issuer may
delay application of the 15% rate until the start of the next billing
cycle (July 15) without relinquishing its ability to apply that rate
under Sec. 1026.55(b)(1).
3. Application of a lower rate, fee, or charge. Nothing in Sec.
1026.55 prohibits a card issuer from lowering an annual percentage rate
or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii). However, a card issuer
that does so cannot subsequently increase the rate, fee, or charge
unless permitted by one of the exceptions in Sec. 1026.55(b). The
following examples illustrate the application of the rule:
i. Application of lower rate during first year. Assume that a card
issuer discloses at account opening on January 1 of year one that a non-
variable annual percentage rate of 15% will apply to purchases. The card
issuer also discloses that, to the extent consistent with Sec. 1026.55
and other applicable law, a non-variable penalty rate of 30% may apply
if the consumer's required minimum periodic payment is received after
the payment due date, which is the tenth of the month. The required
minimum periodic payments are applied to accrued interest and fees but
do not reduce the purchase balance.
A. Temporary rate returns to standard rate at expiration. On
September 30 of year one, the account has a purchase balance of $1,400
at the 15% rate. On October 1, the card issuer provides a notice
pursuant to Sec. 1026.9(c) informing the consumer that the rate for new
purchases will decrease to a non-variable rate of 5% for six months
(from October 1 through March 31 of year two) and that, beginning on
April 1 of year two, the rate for purchases will increase to the 15%
non-variable rate disclosed at account opening. The card issuer does not
apply the 5% rate to the $1,400 purchase balance. On October 14 of year
one, the consumer makes a $300 purchase at the 5% rate. On January 15 of
year two, the consumer makes a $150 purchase at the 5% rate. On April 1
of year two, the card issuer may begin accruing interest on the $300
purchase and the $150 purchase at 15% as disclosed in the Sec.
1026.9(c) notice (pursuant to Sec. 1026.55(b)(1)).
B. Penalty rate increase. Same facts as above except that the
required minimum periodic payment due on November 10 of year
[[Page 855]]
one is not received until November 15. Section 1026.55 does not permit
the card issuer to increase any annual percentage rate on the account at
this time. The card issuer may apply the 30% penalty rate to new
transactions beginning on April 1 of year two pursuant to Sec.
1026.55(b)(3) by providing a Sec. 1026.9(g) notice informing the
consumer of this increase no later than February 14 of year two. The
card issuer may not, however, apply the 30% penalty rate to the $1,400
purchase balance as of September 30 of year one, the $300 purchase on
October 15 of year one, or the $150 purchase on January 15 of year two.
ii. Application of lower rate at end of first year. Assume that, at
account opening on January 1 of year one, a card issuer discloses that a
non-variable annual percentage rate of 15% will apply to purchases for
one year and discloses that, after the first year, the card issuer will
apply a variable rate that is currently 20% and is determined by adding
a margin of 10 percentage points to a publicly-available index not under
the card issuer's control. On December 31 of year one, the account has a
purchase balance of $3,000.
A. Notice of extension of existing temporary rate provided
consistent with Sec. 1026.55(b)(1)(i). On December 15 of year one, the
card issuer provides a notice pursuant to Sec. 1026.9(c) informing the
consumer that the existing 15% rate will continue to apply until July 1
of year two. The notice further states that, on July 1 of year two, the
variable rate disclosed at account opening will apply. On July 1 of year
two, Sec. 1026.55(b)(1) permits the card issuer to apply that variable
rate to any remaining portion of the $3,000 balance and to new
transactions.
B. Notice of new temporary rate provided consistent with Sec.
1026.55(b)(1)(i). On December 15 of year one, the card issuer provides a
notice pursuant to Sec. 1026.9(c) informing the consumer of a new
variable rate that will apply on January 1 of year two that is lower
than the variable rate disclosed at account opening. The new variable
rate is calculated using the same index and a reduced margin of 8
percentage points. The notice further states that, on July 1 of year
two, the margin will increase to the margin disclosed at account opening
(10 percentage points). On July 1 of year two, Sec. 1026.55(b)(1)
permits the card issuer to increase the margin used to determine the
variable rate that applies to new purchases to 10 percentage points and
to apply that rate to any remaining portion of the $3,000 purchase
balance.
C. No notice provided. Same facts as in paragraph ii.B above except
that the card issuer does not send a notice on December 15 of year one.
Instead, on January 1 of year two, the card issuer lowers the margin
used to determine the variable rate to 8 percentage points and applies
that rate to the $3,000 purchase balance and to new purchases. Section
1026.9 does not require advance notice in these circumstances. However,
unless the account becomes more than 60 days' delinquent, Sec. 1026.55
does not permit the card issuer to subsequently increase the rate that
applies to the $3,000 purchase balance except due to increases in the
index (pursuant to Sec. 1026.55(b)(2)).
iii. Application of lower rate after first year. Assume that a card
issuer discloses at account opening on January 1 of year one that a non-
variable annual percentage rate of 10% will apply to purchases for one
year, after which that rate will increase to a non-variable rate of 15%.
The card issuer also discloses that, to the extent consistent with Sec.
1026.55 and other applicable law, a non-variable penalty rate of 30% may
apply if the consumer's required minimum periodic payment is received
after the payment due date, which is the tenth of the month. The
required minimum periodic payments are applied to accrued interest and
fees but do not reduce the purchase balance.
A. Effect of 14-day period. On June 30 of year two, the account has
a purchase balance of $1,000 at the 15% rate. On July 1, the card issuer
provides a notice pursuant to Sec. 1026.9(c) informing the consumer
that the rate for new purchases will decrease to a non-variable rate of
5% for six months (from July 1 through December 31 of year two) and
that, beginning on January 1 of year three, the rate for purchases will
increase to a non-variable rate of 17%. On July 15 of year two, the
consumer makes a $200 purchase. On July 16, the consumer makes a $100
purchase. On January 1 of year three, the card issuer may begin accruing
interest on the $100 purchase at 17% (pursuant to Sec. 1026.55(b)(1)).
However, Sec. 1026.55(b)(1)(ii)(B) does not permit the card issuer to
apply the 17% rate to the $200 purchase because that transaction
occurred within 14 days after provision of the Sec. 1026.9(c) notice.
Instead, the card issuer may apply the 15% rate that applied to
purchases prior to provision of the Sec. 1026.9(c) notice. In addition,
if the card issuer applied the 5% rate to the $1,000 purchase balance,
Sec. 1026.55(b)(ii)(A) would not permit the card issuer to increase the
rate that applies to that balance on January 1 of year three to a rate
that is higher than 15% that previously applied to the balance.
B. Penalty rate increase. Same facts as above except that the
required minimum periodic payment due on August 25 is received on August
30. At this time, Sec. 1026.55 does not permit the card issuer to
increase the annual percentage rates that apply to the $1,000 purchase
balance, the $200 purchase, or the $100 purchase. Instead, those rates
can only be increased as discussed in paragraph iii.A above. However, if
the card issuer provides a notice pursuant to Sec. 1026.9(c) or (g) on
September 1, Sec. 1026.55(b)(3) permits the card issuer to apply an
increased
[[Page 856]]
rate (such as the 17% purchase rate or the 30% penalty rate) to
transactions that occur on or after September 16 beginning on October
16.
C. Application of lower temporary rate during specified period. Same
facts as in paragraph iii above. On June 30 of year two, the account has
a purchase balance of $1,000 at the 15% non-variable rate. On July 1,
the card issuer provides a notice pursuant to Sec. 1026.9(c) informing
the consumer that the rate for the $1,000 balance and new purchases will
decrease to a non-variable rate of 12% for six months (from July 1
through December 31 of year two) and that, beginning on January 1 of
year three, the rate for purchases will increase to a variable rate that
is currently 20% and is determined by adding a margin of 10 percentage
points to a publicly-available index not under the card issuer's
control. On August 15 of year two, the consumer makes a $500 purchase.
On October 1, the card issuer provides another notice pursuant to Sec.
1026.9(c) informing the consumer that the rate for the $1,000 balance,
the $500 purchase, and new purchases will decrease to a non-variable
rate of 5% for six months (from October 1 of year two through March 31
of year three) and that, beginning on April 1 of year three, the rate
for purchases will increase to a variable rate that is currently 23% and
is determined by adding a margin of 13 percentage points to the
previously-disclosed index. On November 15 of year two, the consumer
makes a $300 purchase. On April 1 of year three, Sec. 1026.55 permits
the card issuer to begin accruing interest using the following rates for
any remaining portion of the following balances: The 15% non-variable
rate for the $1,000 balance; the variable rate determined using the 10-
point margin for the $500 purchase; and the variable rate determined
using the 13-point margin for the $300 purchase.
4. Date on which transaction occurred. When a transaction occurred
for purposes of Sec. 1026.55 is generally determined by the date of the
transaction. However, if a transaction that occurred within 14 days
after provision of a Sec. 1026.9(c) or (g) notice is not charged to the
account prior to the effective date of the change or increase, the card
issuer may treat the transaction as occurring more than 14 days after
provision of the notice for purposes of Sec. 1026.55. See example in
comment 55(b)(3)-4.iii.B. In addition, when a merchant places a ``hold''
on the available credit on an account for an estimated transaction
amount because the actual transaction amount will not be known until a
later date, the date of the transaction for purposes of Sec. 1026.55 is
the date on which the card issuer receives the actual transaction amount
from the merchant. See example in comment 55(b)(3)-4.iii.A.
5. Category of transactions. For purposes of Sec. 1026.55, a
``category of transactions'' is a type or group of transactions to which
an annual percentage rate applies that is different than the annual
percentage rate that applies to other transactions. Similarly, a type or
group of transactions is a ``category of transactions'' for purposes of
Sec. 1026.55 if a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) applies to those
transactions that is different than the fee or charge that applies to
other transactions. For example, purchase transactions, cash advance
transactions, and balance transfer transactions are separate categories
of transactions for purposes of Sec. 1026.55 if a card issuer applies
different annual percentage rates to each. Furthermore, if, for example,
the card issuer applies different annual percentage rates to different
types of purchase transactions (such as one rate for purchases of
gasoline or purchases over $100 and a different rate for all other
purchases), each type constitutes a separate category of transactions
for purposes of Sec. 1026.55.
55(b)(1) Temporary rate, fee, or charge exception
1. Relationship to Sec. 1026.9(c)(2)(v)(B). A card issuer that has
complied with the disclosure requirements in Sec. 1026.9(c)(2)(v)(B)
has also complied with the disclosure requirements in Sec.
1026.55(b)(1)(i).
2. Period of six months or longer. A temporary annual percentage
rate, fee, or charge must apply for a specified period of six months or
longer before a card issuer can increase that rate, fee, or charge
pursuant to Sec. 1026.55(b)(1). The specified period must expire no
less than six months after the date on which the card issuer provides
the consumer with the disclosures required by Sec. 1026.55(b)(1)(i) or,
if later, the date on which the account can be used for transactions to
which the temporary rate, fee, or charge applies. Section 1026.55(b)(1)
does not prohibit a card issuer from limiting the application of a
temporary annual percentage rate, fee, or charge to a particular
category of transactions (such as to balance transfers or to purchases
over $100). However, in circumstances where the card issuer limits
application of the temporary rate, fee, or charge to a single
transaction, the specified period must expire no less than six months
after the date on which that transaction occurred. The following
examples illustrate the application of Sec. 1026.55(b)(1):
i. Assume that on January 1 a card issuer offers a consumer a 5%
annual percentage rate on purchases made during the months of January
through June. A 15% rate will apply thereafter. On February 15, a $500
purchase is charged to the account. On June 15, a $200 purchase is
charged to the account. On July
[[Page 857]]
1, the card issuer may begin accruing interest at the 15% rate on the
$500 purchase and the $200 purchase (pursuant to Sec. 1026.55(b)(1)).
ii. Same facts as above except that on January 1 the card issuer
offered the 5% rate on purchases beginning in the month of February.
Section 1026.55(b)(1) would not permit the card issuer to begin accruing
interest at the 15% rate on the $500 purchase and the $200 purchase
until August 1.
iii. Assume that on October 31 of year one the annual percentage
rate for purchases is 17%. On November 1, the card issuer offers the
consumer a 0% rate for six months on purchases made during the months of
November and December. The 17% rate will apply thereafter. On November
15, a $500 purchase is charged to the account. On December 15, a $300
purchase is charged to the account. On January 15 of year two, a $150
purchase is charged to the account. Section 1026.55(b)(1) would not
permit the card issuer to begin accruing interest at the 17% rate on the
$500 purchase and the $300 purchase until May 1 of year two. However,
the card issuer may accrue interest at the 17% rate on the $150 purchase
beginning on January 15 of year two.
iv. Assume that on June 1 of year one a card issuer offers a
consumer a 0% annual percentage rate for six months on the purchase of
an appliance. An 18% rate will apply thereafter. On September 1, a
$5,000 transaction is charged to the account for the purchase of an
appliance. Section 1026.55(b)(1) would not permit the card issuer to
begin accruing interest at the 18% rate on the $5,000 transaction until
March 1 of year two.
v. Assume that on May 31 of year one the annual percentage rate for
purchases is 15%. On June 1, the card issuer offers the consumer a 5%
rate for six months on a balance transfer of at least $1,000. The 15%
rate will apply thereafter. On June 15, a $3,000 balance is transferred
to the account. On July 15, a $200 purchase is charged to the account.
Section 1026.55(b)(1) would not permit the card issuer to begin accruing
interest at the 15% rate on the $3,000 transferred balance until
December 15. However, the card issuer may accrue interest at the 15%
rate on the $200 purchase beginning on July 15.
vi. Same facts as in paragraph v above except that the card issuer
offers the 5% rate for six months on all balance transfers of at least
$1,000 during the month of June and a $2,000 balance is transferred to
the account on June 30 (in addition to the $3,000 balance transfer on
June 15). Because the 5% rate is not limited to a particular
transaction, Sec. 1026.55(b)(1) permits the card issuer to begin
accruing interest on the $3,000 and $2,000 transferred balances on
December 1.
vii. Assume that a card issuer discloses at account opening on
January 1 of year one that the annual fee for the account is $0 until
January 1 of year two, when the fee will increase to $50. On January 1
of year two, the card issuer may impose the $50 annual fee. However, the
issuer must also comply with the notice requirements in Sec. 1026.9(e).
viii. Assume that a card issuer discloses at account opening on
January 1 of year one that the monthly maintenance fee for the account
is $0 until July 1 of year one, when the fee will increase to $10.
Beginning on July 1 of year one, the card issuer may impose the $10
monthly maintenance fee (to the extent consistent with Sec.
1026.52(a)).
3. Deferred interest and similar promotional programs. i.
Application of Sec. 1026.55. The general prohibition in Sec.
1026.55(a) applies to the imposition of accrued interest upon the
expiration of a deferred interest or similar promotional program under
which the consumer is not obligated to pay interest that accrues on a
balance if that balance is paid in full prior to the expiration of a
specified period of time. However, the exception in Sec. 1026.55(b)(1)
also applies to these programs, provided that the specified period is
six months or longer and that, prior to the commencement of the period,
the card issuer discloses the length of the period and the rate at which
interest will accrue on the balance subject to the deferred interest or
similar program if that balance is not paid in full prior to expiration
of the period. See comment 9(c)(2)(v)-9. For purposes of Sec. 1026.55,
``deferred interest'' has the same meaning as in Sec. 1026.16(h)(2) and
associated commentary.
ii. Examples. A. Deferred interest offer at account opening. Assume
that, at account opening on January 1 of year one, the card issuer
discloses the following with respect to a deferred interest program:
``No interest on purchases made in January of year one if paid in full
by December 31 of year one. If the balance is not paid in full by that
date, interest will be imposed from the transaction date at a rate of
20%.'' On January 15 of year one, the consumer makes a purchase of
$2,000. No other transactions are made on the account. The terms of the
deferred interest program require the consumer to make minimum periodic
payments with respect to the deferred interest balance, and the payment
due on April 1 is not received until April 10. Section 1026.55 does not
permit the card issuer to charge to the account interest that has
accrued on the $2,000 purchase at this time. Furthermore, if the
consumer pays the $2,000 purchase in full on or before December 31 of
year one, Sec. 1026.55 does not permit the card issuer to charge to the
account any interest that has accrued on that purchase. If, however, the
$2,000 purchase has not been paid in full by January 1 of year two,
Sec. 1026.55(b)(1) permits the card issuer to charge to the account the
interest accrued on that purchase at the 20% rate during year one (to
the extent consistent with other applicable law).
[[Page 858]]
B. Deferred interest offer after account opening. Assume that a card
issuer discloses at account opening on January 1 of year one that the
rate that applies to purchases is a variable annual percentage rate that
is currently 18% and will be adjusted quarterly by adding a margin of 8
percentage points to a publicly-available index not under the card
issuer's control. The card issuer also discloses that, to the extent
consistent with Sec. 1026.55 and other applicable law, a non-variable
penalty rate of 30% may apply if the consumer's required minimum
periodic payment is received after the payment due date, which is the
first of the month. On June 30 of year two, the consumer uses the
account for a $1,000 purchase in response to an offer of a deferred
interest program. Under the terms of this program, interest on the
purchase will accrue at the variable rate for purchases but the consumer
will not be obligated to pay that interest if the purchase is paid in
full by December 31 of year three. The terms of the deferred interest
program require the consumer to make minimum periodic payments with
respect to the deferred interest balance, and the payment due on
September 1 of year two is not received until September 6. Section
1026.55 does not permit the card issuer to charge to the account
interest that has accrued on the $1,000 purchase at this time.
Furthermore, if the consumer pays the $1,000 purchase in full on or
before December 31 of year three, Sec. 1026.55 does not permit the card
issuer to charge to the account any interest that has accrued on that
purchase. On December 31 of year three, the $1,000 purchase has been
paid in full. Under these circumstances, the card issuer may not charge
any interest accrued on the $1,000 purchase.
C. Application of Sec. 1026.55(b)(4) to deferred interest programs.
Same facts as in paragraph ii.B above except that, on November 2 of year
two, the card issuer has not received the required minimum periodic
payments due on September 1, October 1, or November 1 of year two and
sends a Sec. 1026.9(c) or (g) notice stating that interest accrued on
the $1,000 purchase since June 30 of year two will be charged to the
account on December 17 of year two and thereafter interest will be
charged on the $1,000 purchase consistent with the variable rate for
purchases. On December 17 of year two, Sec. 1026.55(b)(4) permits the
card issuer to charge to the account interest accrued on the $1,000
purchase since June 30 of year two and Sec. 1026.55(b)(3) permits the
card issuer to begin charging interest on the $1,000 purchase consistent
with the variable rate for purchases. However, if the card issuer
receives the required minimum periodic payments due on January 1,
February 1, March 1, April 1, May 1, and June 1 of year three, Sec.
1026.55(b)(4)(ii) requires the card issuer to cease charging the account
for interest on the $1,000 purchase no later than the first day of the
next billing cycle. See comment 55(b)(4)-3.iii. However, Sec.
1026.55(b)(4)(ii) does not require the card issuer to waive or credit
the account for interest accrued on the $1,000 purchase since June 30 of
year two. If the $1,000 purchase is paid in full on December 31 of year
three, the card issuer is not permitted to charge to the account
interest accrued on the $1,000 purchase after June 1 of year three.
4. Contingent or discretionary increases. Section 1026.55(b)(1)
permits a card issuer to increase a temporary annual percentage rate,
fee, or charge upon the expiration of a specified period of time.
However, Sec. 1026.55(b)(1) does not permit a card issuer to apply an
increased rate, fee, or charge that is contingent on a particular event
or occurrence or that may be applied at the card issuer's discretion.
The following examples illustrate rate increases that are not permitted
by Sec. 1026.55:
i. Assume that a card issuer discloses at account opening on January
1 of year one that a non-variable annual percentage rate of 15% applies
to purchases but that all rates on an account may be increased to a non-
variable penalty rate of 30% if a consumer's required minimum periodic
payment is received after the payment due date, which is the fifteenth
of the month. On March 1, the account has a $2,000 purchase balance. The
payment due on March 15 is not received until March 20. Section 1026.55
does not permit the card issuer to apply the 30% penalty rate to the
$2,000 purchase balance. However, pursuant to Sec. 1026.55(b)(3), the
card issuer could provide a Sec. 1026.9(c) or (g) notice on or before
November 16 informing the consumer that, on January 1 of year two, the
30% rate (or a different rate) will apply to new transactions.
ii. Assume that a card issuer discloses at account opening on
January 1 of year one that a non-variable annual percentage rate of 5%
applies to transferred balances but that this rate will increase to a
non-variable rate of 18% if the consumer does not use the account for at
least $200 in purchases each billing cycle. On July 1, the consumer
transfers a balance of $4,000 to the account. During the October billing
cycle, the consumer uses the account for $150 in purchases. Section
1026.55 does not permit the card issuer to apply the 18% rate to the
$4,000 transferred balance or the $150 in purchases. However, pursuant
to Sec. 1026.55(b)(3), the card issuer could provide a Sec. 1026.9(c)
or (g) notice on or before November 16 informing the consumer that, on
January 1 of year two, the 18% rate (or a different rate) will apply to
new transactions.
iii. Assume that a card issuer discloses at account opening on
January 1 of year one that the annual fee for the account is $10 but
[[Page 859]]
may be increased to $50 if a consumer's required minimum periodic
payment is received after the payment due date, which is the fifteenth
of the month. The payment due on July 15 is not received until July 23.
Section 1026.55 does not permit the card issuer to impose the $50 annual
fee at this time. Furthermore, Sec. 1026.55(b)(3) does not permit the
card issuer to increase the $10 annual fee during the first year after
account opening. However, Sec. 1026.55(b)(3) does permit the card
issuer to impose the $50 fee (or a different fee) on January 1 of year
two if, on or before November 16 of year one, the issuer informs the
consumer of the increased fee consistent with Sec. 1026.9(c) and the
consumer does not reject that increase pursuant to Sec. 1026.9(h).
iv. Assume that a card issuer discloses at account opening on
January 1 of year one that the annual fee for a credit card account
under an open-end (not home-secured) consumer credit plan is $0 but may
be increased to $100 if the consumer's balance in a deposit account
provided by the card issuer or its affiliate or subsidiary falls below
$5,000. On June 1 of year one, the balance on the deposit account is
$4,500. Section 1026.55 does not permit the card issuer to impose the
$100 annual fee at this time. Furthermore, Sec. 1026.55(b)(3) does not
permit the card issuer to increase the $0 annual fee during the first
year after account opening. However, Sec. 1026.55(b)(3) does permit the
card issuer to impose the $100 fee (or a different fee) on January 1 of
year two if, on or before November 16 of year one, the issuer informs
the consumer of the increased fee consistent with Sec. 1026.9(c) and
the consumer does not reject that increase pursuant to Sec. 1026.9(h).
5. Application of increased fees and charges. Section
1026.55(b)(1)(ii) limits the ability of a card issuer to apply an
increased fee or charge to certain transactions. However, to the extent
consistent with Sec. 1026.55(b)(3), (c), and (d), a card issuer
generally is not prohibited from increasing a fee or charge that applies
to the account as a whole. See comments 55(c)(1)-3 and 55(d)-1.
55(b)(2) Variable rate exception
1. Increases due to increase in index. Section 1026.55(b)(2)
provides that an annual percentage rate that varies according to an
index that is not under the card issuer's control and is available to
the general public may be increased due to an increase in the index.
This section does not permit a card issuer to increase the rate by
changing the method used to determine a rate that varies with an index
(such as by increasing the margin), even if that change will not result
in an immediate increase. However, from time to time, a card issuer may
change the day on which index values are measured to determine changes
to the rate.
2. Index not under card issuer's control. A card issuer may increase
a variable annual percentage rate pursuant to Sec. 1026.55(b)(2) only
if the increase is based on an index or indices outside the card
issuer's control. For purposes of Sec. 1026.55(b)(2), an index is under
the card issuer's control if:
i. The index is the card issuer's own prime rate or cost of funds. A
card issuer is permitted, however, to use a published prime rate, such
as that in the Wall Street Journal, even if the card issuer's own prime
rate is one of several rates used to establish the published rate.
ii. The variable rate is subject to a fixed minimum rate or similar
requirement that does not permit the variable rate to decrease
consistent with reductions in the index. A card issuer is permitted,
however, to establish a fixed maximum rate that does not permit the
variable rate to increase consistent with increases in an index. For
example, assume that, under the terms of an account, a variable rate
will be adjusted monthly by adding a margin of 5 percentage points to a
publicly-available index. When the account is opened, the index is 10%
and therefore the variable rate is 15%. If the terms of the account
provide that the variable rate will not decrease below 15% even if the
index decreases below 10%, the card issuer cannot increase that rate
pursuant to Sec. 1026.55(b)(2). However, Sec. 1026.55(b)(2) does not
prohibit the card issuer from providing in the terms of the account that
the variable rate will not increase above a certain amount (such as
20%).
iii. The variable rate can be calculated based on any index value
during a period of time (such as the 90 days preceding the last day of a
billing cycle). A card issuer is permitted, however, to provide in the
terms of the account that the variable rate will be calculated based on
the average index value during a specified period. In the alternative,
the card issuer is permitted to provide in the terms of the account that
the variable rate will be calculated based on the index value on a
specific day (such as the last day of a billing cycle). For example,
assume that the terms of an account provide that a variable rate will be
adjusted at the beginning of each quarter by adding a margin of 7
percentage points to a publicly-available index. At account opening at
the beginning of the first quarter, the variable rate is 17% (based on
an index value of 10%). During the first quarter, the index varies
between 9.8% and 10.5% with an average value of 10.1%. On the last day
of the first quarter, the index value is 10.2%. At the beginning of the
second quarter, Sec. 1026.55(b)(2) does not permit the card issuer to
increase the variable rate to 17.5% based on the first quarter's maximum
index value of 10.5%. However, if the terms of the account provide that
the variable rate will be calculated based on the average index value
during the prior quarter, Sec. 1026.55(b)(2) permits the card issuer to
increase the variable
[[Page 860]]
rate to 17.1% (based on the average index value of 10.1% during the
first quarter). In the alternative, if the terms of the account provide
that the variable rate will be calculated based on the index value on
the last day of the prior quarter, Sec. 1026.55(b)(2) permits the card
issuer to increase the variable rate to 17.2% (based on the index value
of 10.2% on the last day of the first quarter).
3. Publicly available. The index or indices must be available to the
public. A publicly-available index need not be published in a newspaper,
but it must be one the consumer can independently obtain (by telephone,
for example) and use to verify the annual percentage rate applied to the
account.
4. Changing a non-variable rate to a variable rate. Section 1026.55
generally prohibits a card issuer from changing a non-variable annual
percentage rate to a variable annual percentage rate because such a
change can result in an increase. However, a card issuer may change a
non-variable rate to a variable rate to the extent permitted by one of
the exceptions in Sec. 1026.55(b). For example, Sec. 1026.55(b)(1)
permits a card issuer to change a non-variable rate to a variable rate
upon expiration of a specified period of time. Similarly, following the
first year after the account is opened, Sec. 1026.55(b)(3) permits a
card issuer to change a non-variable rate to a variable rate with
respect to new transactions (after complying with the notice
requirements in Sec. 1026.9(b), (c) or (g)).
5. Changing a variable rate to a non-variable rate. Nothing in Sec.
1026.55 prohibits a card issuer from changing a variable annual
percentage rate to an equal or lower non-variable rate. Whether the non-
variable rate is equal to or lower than the variable rate is determined
at the time the card issuer provides the notice required by Sec.
1026.9(c). For example, assume that on March 1 a variable annual
percentage rate that is currently 15% applies to a balance of $2,000 and
the card issuer sends a notice pursuant to Sec. 1026.9(c) informing the
consumer that the variable rate will be converted to a non-variable rate
of 14% effective April 15. On April 15, the card issuer may apply the
14% non-variable rate to the $2,000 balance and to new transactions even
if the variable rate on March 2 or a later date was less than 14%.
6. Substitution of index. A card issuer may change the index and
margin used to determine the annual percentage rate under Sec.
1026.55(b)(2) if the original index becomes unavailable, as long as
historical fluctuations in the original and replacement indices were
substantially similar, and as long as the replacement index and margin
will produce a rate similar to the rate that was in effect at the time
the original index became unavailable. If the replacement index is newly
established and therefore does not have any rate history, it may be used
if it produces a rate substantially similar to the rate in effect when
the original index became unavailable.
55(b)(3) Advance notice exception
1. Relationship to Sec. 1026.9(h). A card issuer may not increase a
fee or charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) pursuant to Sec. 1026.55(b)(3) if the
consumer has rejected the increased fee or charge pursuant to Sec.
1026.9(h).
2. Notice provided pursuant to Sec. 1026.9(b) and (c). If an
increased annual percentage rate, fee, or charge is disclosed pursuant
to both Sec. 1026.9(b) and (c), that rate, fee, or charge may only be
applied to transactions that occur more than 14 days after provision of
the Sec. 1026.9(c) notice as provided in Sec. 1026.55(b)(3)(ii).
3. Account opening. i. Multiple accounts with same card issuer. When
a consumer has a credit card account with a card issuer and the consumer
opens a new credit card account with the same card issuer (or its
affiliate or subsidiary), the opening of the new account constitutes the
opening of a credit card account for purposes of Sec.
1026.55(b)(3)(iii) if, more than 30 days after the new account is
opened, the consumer has the option to obtain additional extensions of
credit on each account. For example, assume that, on January 1 of year
one, a consumer opens a credit card account with a card issuer. On July
1 of year one, the consumer opens a second credit card account with that
card issuer. On July 15, a $1,000 balance is transferred from the first
account to the second account. The opening of the second account
constitutes the opening of a credit card account for purposes of Sec.
1026.55(b)(3)(iii) so long as, on August 1, the consumer has the option
to engage in transactions using either account. Under these
circumstances, the card issuer could not increase an annual percentage
rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) on the second account
pursuant to Sec. 1026.55(b)(3) until July 1 of year two (which is one
year after the second account was opened).
ii. Substitution, replacement or consolidation. A. Generally. A
credit card account has not been opened for purposes of Sec.
1026.55(b)(3)(iii) when a credit card account issued by a card issuer is
substituted, replaced, or consolidated with another credit card account
issued by the same card issuer (or its affiliate or subsidiary).
Circumstances in which a credit card account has not been opened for
purposes of Sec. 1026.55(b)(3)(iii) include when:
1. A retail credit card account is replaced with a cobranded general
purpose credit card account that can be used at a wider number of
merchants;
2. A credit card account is replaced with another credit card
account offering different features;
[[Page 861]]
3. A credit card account is consolidated or combined with one or
more other credit card accounts into a single credit card account; or
4. A credit card account acquired through merger or acquisition is
replaced with a credit card account issued by the acquiring card issuer.
B. Limitation. A card issuer that replaces or consolidates a credit
card account with another credit card account issued by the card issuer
(or its affiliate or subsidiary) may not increase an annual percentage
rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) in a manner otherwise
prohibited by Sec. 1026.55. For example, assume that, on January 1 of
year one, a consumer opens a credit card account with an annual
percentage rate of 15% for purchases. On July 1 of year one, the account
is replaced with a credit card account that offers different features
(such as rewards on purchases). Under these circumstances, Sec.
1026.55(b)(3)(iii) prohibits the card issuer from increasing the annual
percentage rate for new purchases to a rate that is higher than 15%
pursuant to Sec. 1026.55(b)(3) until January 1 of year two (which is
one year after the first account was opened).
4. Examples. i. Change-in-terms rate increase; temporary rate
increase; 14-day period. Assume that an account is opened on January 1
of year one. On March 14 of year two, the account has a purchase balance
of $2,000 at a non-variable annual percentage rate of 15%. On March 15,
the card issuer provides a notice pursuant to Sec. 1026.9(c) informing
the consumer that the rate for new purchases will increase to a non-
variable rate of 18% on May 1. The notice further states that the 18%
rate will apply for six months (until November 1) and that thereafter
the card issuer will apply a variable rate that is currently 22% and is
determined by adding a margin of 12 percentage points to a publicly-
available index that is not under the card issuer's control. The
fourteenth day after provision of the notice is March 29 and, on that
date, the consumer makes a $200 purchase. On March 30, the consumer
makes a $1,000 purchase. On May 1, the card issuer may begin accruing
interest at 18% on the $1,000 purchase made on March 30 (pursuant to
Sec. 1026.55(b)(3)). Section 1026.55(b)(3)(ii) does not permit the card
issuer to apply the 18% rate to the $2,200 purchase balance as of March
29 because that balance reflects transactions that occurred prior to or
within 14 days after the provision of the Sec. 1026.9(c) notice. After
six months (November 2), the card issuer may begin accruing interest on
any remaining portion of the $1,000 purchase at the previously-disclosed
variable rate determined using the 12-point margin (pursuant to Sec.
1026.55(b)(1) and (b)(3)).
ii. Checks that access an account. Assume that a card issuer
discloses at account opening on January 1 of year one that the annual
percentage rate that applies to cash advances is a variable rate that is
currently 24% and will be adjusted quarterly by adding a margin of 14
percentage points to a publicly available index not under the card
issuer's control. On July 1 of year two, the card issuer provides checks
that access the account and, pursuant to Sec. 1026.9(b)(3)(i)(A),
discloses that a promotional rate of 15% will apply to credit extended
by use of the checks until January 1 of year three, after which the cash
advance rate determined using the 14-point margin will apply. On July 9
of year two, the consumer uses one of the checks to pay for a $500
transaction. Beginning on January 1 of year three, the card issuer may
apply the cash advance rate determined using the 14-point margin to any
remaining portion of the $500 transaction (pursuant to Sec.
1026.55(b)(1) and (b)(3)).
iii. Hold on available credit; 14-day period. Assume that an account
is opened on January 1 of year one. On September 14 of year two, the
account has a purchase balance of $2,000 at a non-variable annual
percentage rate of 17%. On September 15, the card issuer provides a
notice pursuant to Sec. 1026.9(c) informing the consumer that the rate
for new purchases will increase to a non-variable rate of 20% on October
30. The fourteenth day after provision of the notice is September 29. On
September 28, the consumer uses the credit card to check into a hotel
and the hotel obtains authorization for a $1,000 hold on the account to
ensure there is adequate available credit to cover the anticipated cost
of the stay.
A. The consumer checks out of the hotel on October 2. The actual
cost of the stay is $1,100 because of additional incidental costs. On
October 2, the hotel charges the $1,100 transaction to the account. For
purposes of Sec. 1026.55(b)(3), the transaction occurred on October 2.
Therefore, on October 30, Sec. 1026.55(b)(3) permits the card issuer to
apply the 20% rate to new purchases and to the $1,100 transaction.
However, Sec. 1026.55(b)(3)(ii) does not permit the card issuer to
apply the 20% rate to any remaining portion of the $2,000 purchase
balance.
B. Same facts as above except that the consumer checks out of the
hotel on September 29. The actual cost of the stay is $250, but the
hotel does not charge this amount to the account until November 1. For
purposes of Sec. 1026.55(b)(3), the card issuer may treat the
transaction as occurring more than 14 days after provision of the Sec.
1026.9(c) notice (i.e., after September 29). Accordingly, the card
issuer may apply the 20% rate to the $250 transaction.
5. Application of increased fees and charges. See comment 55(c)(1)-
3.
6. Delayed implementation of increase. Section 1026.55(b)(3)(iii)
does not prohibit a card issuer from notifying a consumer of an increase
in an annual percentage rate, fee, or charge consistent with Sec.
1026.9(b), (c), or (g).
[[Page 862]]
However, Sec. 1026.55(b)(3)(iii) does prohibit application of an
increased rate, fee, or charge during the first year after the account
is opened, while the account is closed, or while the card issuer does
not permit the consumer to use the account for new transactions. If
Sec. 1026.9(b), (c), or (g) permits a card issuer to apply an increased
rate, fee, or charge on a particular date and the account is closed on
that date or the card issuer does not permit the consumer to use the
account for new transactions on that date, the card issuer may delay
application of the increased rate, fee, or charge until the first day of
the following billing cycle without relinquishing the ability to apply
that rate, fee, or charge (assuming the increase is otherwise consistent
with Sec. 1026.55). See examples in comment 55(b)-2.iii. However, if
the account is closed or the card issuer does not permit the consumer to
use the account for new transactions on the first day of the following
billing cycle, then the card issuer must provide a new notice of the
increased rate, fee, or charge consistent with Sec. 1026.9(b), (c), or
(g).
7. Date on which account may first be used by consumer to engage in
transactions. For purposes of Sec. 1026.55(b)(3)(iii), an account is
considered open no earlier than the date on which the account may first
be used by the consumer to engage in transactions. An account is
considered open for purposes of Sec. 1026.55(b)(3)(iii) on any date
that the card issuer may consider the account open for purposes of Sec.
1026.52(a)(1). See comment 52(a)(1)-4.
55(b)(4) Delinquency exception
1. Receipt of required minimum periodic payment within 60 days of
due date. Section 1026.55(b)(4) applies when a card issuer has not
received the consumer's required minimum periodic payment within 60 days
after the due date for that payment. In order to satisfy this condition,
a card issuer that requires monthly minimum payments generally must not
have received two consecutive required minimum periodic payments.
Whether a required minimum periodic payment has been received for
purposes of Sec. 1026.55(b)(4) depends on whether the amount received
is equal to or more than the first outstanding required minimum periodic
payment. For example, assume that the required minimum periodic payments
for a credit card account are due on the fifteenth day of the month. On
May 13, the card issuer has not received the $50 required minimum
periodic payment due on March 15 or the $150 required minimum periodic
payment due on April 15. The sixtieth day after the March 15 payment due
date is May 14. If the card issuer receives a $50 payment on May 14,
Sec. 1026.55(b)(4) does not apply because the payment is equal to the
required minimum periodic payment due on March 15 and therefore the
account is not more than 60 days delinquent. However, if the card issuer
instead received a $40 payment on May 14, Sec. 1026.55(b)(4) would
apply beginning on May 15 because the payment is less than the required
minimum periodic payment due on March 15. Furthermore, if the card
issuer received the $50 payment on May 15, Sec. 1026.55(b)(4) would
apply because the card issuer did not receive the required minimum
periodic payment due on March 15 within 60 days after the due date for
that payment.
2. Relationship to Sec. 1026.9(g)(3)(i)(B). A card issuer that has
complied with the disclosure requirements in Sec. 1026.9(g)(3)(i)(B)
has also complied with the disclosure requirements in Sec.
1026.55(b)(4)(i).
3. Reduction in rate pursuant to Sec. 1026.55(b)(4)(ii). Section
1026.55(b)(4)(ii) provides that, if the card issuer receives six
consecutive required minimum periodic payments on or before the payment
due date beginning with the first payment due following the effective
date of the increase, the card issuer must reduce any annual percentage
rate, fee, or charge increased pursuant to Sec. 1026.55(b)(4) to the
annual percentage rate, fee, or charge that applied prior to the
increase with respect to transactions that occurred prior to or within
14 days after provision of the Sec. 1026.9(c) or (g) notice.
i. Six consecutive payments immediately following effective date of
increase. Section 1026.55(b)(4)(ii) does not apply if the card issuer
does not receive six consecutive required minimum periodic payments on
or before the payment due date beginning with the payment due
immediately following the effective date of the increase, even if, at
some later point in time, the card issuer receives six consecutive
required minimum periodic payments on or before the payment due date.
ii. Rate, fee, or charge that does not exceed rate, fee, or charge
that applied before increase. Although Sec. 1026.55(b)(4)(ii) requires
the card issuer to reduce an annual percentage rate, fee, or charge
increased pursuant to Sec. 1026.55(b)(4) to the annual percentage rate,
fee, or charge that applied prior to the increase, this provision does
not prohibit the card issuer from applying an increased annual
percentage rate, fee, or charge consistent with any of the other
exceptions in Sec. 1026.55(b). For example, if a temporary rate applied
prior to the Sec. 1026.55(b)(4) increase and the temporary rate expired
before a reduction in rate pursuant to Sec. 1026.55(b)(4)(ii), the card
issuer may apply an increased rate to the extent consistent with Sec.
1026.55(b)(1). Similarly, if a variable rate applied prior to the Sec.
1026.55(b)(4) increase, the card issuer may apply any increase in that
variable rate to the extent consistent with Sec. 1026.55(b)(2).
iii. Delayed implementation of reduction. If Sec. 1026.55(b)(4)(ii)
requires a card issuer to reduce an annual percentage rate, fee, or
[[Page 863]]
charge on a date that is not the first day of a billing cycle, the card
issuer may delay application of the reduced rate, fee, or charge until
the first day of the following billing cycle.
iv. Examples. The following examples illustrate the application of
Sec. 1026.55(b)(4)(ii):
A. Assume that the billing cycles for an account begin on the first
day of the month and end on the last day of the month and that the
required minimum periodic payments are due on the fifteenth day of the
month. Assume also that the account has a $5,000 purchase balance to
which a non-variable annual percentage rate of 15% applies. On May 16 of
year one, the card issuer has not received the required minimum periodic
payments due on the fifteenth day of March, April, or May and sends a
Sec. 1026.9(c) or (g) notice stating that the annual percentage rate
applicable to the $5,000 balance and to new transactions will increase
to 28% effective July 1. On July 1, Sec. 1026.55(b)(4) permits the card
issuer to apply the 28% rate to the $5,000 balance and to new
transactions. The card issuer receives the required minimum periodic
payments due on the fifteenth day of July, August, September, October,
November, and December. On January 1 of year two, Sec.
1026.55(b)(4)(ii) requires the card issuer to reduce the rate that
applies to any remaining portion of the $5,000 balance to 15%. The card
issuer is not required to reduce the rate that applies to any
transactions that occurred on or after May 31 (which is the fifteenth
day after provision of the Sec. 1026.9(c) or (g) notice).
B. Same facts as paragraph iv.A above except that the 15% rate that
applied to the $5,000 balance prior to the Sec. 1026.55(b)(4) increase
was scheduled to increase to 20% on August 1 of year one (pursuant to
Sec. 1026.55(b)(1)). On January 1 of year two, Sec. 1026.55(b)(4)(ii)
requires the card issuer to reduce the rate that applies to any
remaining portion of the $5,000 balance to 20%.
C. Same facts as paragraph iv.A above except that the 15% rate that
applied to the $5,000 balance prior to the Sec. 1026.55(b)(4) increase
was scheduled to increase to 20% on March 1 of year two (pursuant to
Sec. 1026.55(b)(1)). On January 1 of year two, Sec. 1026.55(b)(4)(ii)
requires the card issuer to reduce the rate that applies to any
remaining portion of the $5,000 balance to 15%.
D. Same facts as paragraph iv.A above except that the 15% rate that
applied to the $5,000 balance prior to the Sec. 1026.55(b)(4) increase
was a variable rate that was determined by adding a margin of 10
percentage points to a publicly-available index not under the card
issuer's control (consistent with Sec. 1026.55(b)(2)). On January 1 of
year two, Sec. 1026.55(b)(4)(ii) requires the card issuer to reduce the
rate that applies to any remaining portion of the $5,000 balance to the
variable rate determined using the 10-point margin.
E. For an example of the application of Sec. 1026.55(b)(4)(ii) to
deferred interest or similar programs, see comment 55(b)(1)-3.ii.C.
55(b)(5) Workout and temporary hardship arrangement exception
1. Scope of exception. Nothing in Sec. 1026.55(b)(5) permits a card
issuer to alter the requirements of Sec. 1026.55 pursuant to a workout
or temporary hardship arrangement. For example, a card issuer cannot
increase an annual percentage rate or a fee or charge required to be
disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii)
pursuant to a workout or temporary hardship arrangement unless otherwise
permitted by Sec. 1026.55. In addition, a card issuer cannot require
the consumer to make payments with respect to a protected balance that
exceed the payments permitted under Sec. 1026.55(c).
2. Relationship to Sec. 1026.9(c)(2)(v)(D). A card issuer that has
complied with the disclosure requirements in Sec. 1026.9(c)(2)(v)(D)
has also complied with the disclosure requirements in Sec.
1026.55(b)(5)(i). See comment 9(c)(2)(v)-10. Thus, although the
disclosures required by Sec. 1026.55(b)(5)(i) must generally be
provided in writing prior to commencement of the arrangement, a card
issuer may comply with Sec. 1026.55(b)(5)(i) by complying with Sec.
1026.9(c)(2)(v)(D), which states that the disclosure of the terms of the
arrangement may be made orally by telephone, provided that the card
issuer mails or delivers a written disclosure of the terms of the
arrangement to the consumer as soon as reasonably practicable after the
oral disclosure is provided.
3. Rate, fee, or charge that does not exceed rate, fee, or charge
that applied before workout or temporary hardship arrangement. Upon the
completion or failure of a workout or temporary hardship arrangement,
Sec. 1026.55(b)(5)(ii) prohibits the card issuer from applying to any
transactions that occurred prior to commencement of the arrangement an
annual percentage rate, fee, or charge that exceeds the annual
percentage rate, fee, or charge that applied to those transactions prior
to commencement of the arrangement. However, this provision does not
prohibit the card issuer from applying an increased annual percentage
rate, fee, or charge upon completion or failure of the arrangement, to
the extent consistent with any of the other exceptions in Sec.
1026.55(b). For example, if a temporary rate applied prior to the
arrangement and that rate expired during the arrangement, the card
issuer may apply an increased rate upon completion or failure of the
arrangement to the extent consistent with Sec. 1026.55(b)(1).
Similarly, if a variable rate applied prior to the arrangement, the card
issuer may apply
[[Page 864]]
any increase in that variable rate upon completion or failure of the
arrangement to the extent consistent with Sec. 1026.55(b)(2).
4. Examples. i. Assume that an account is subject to a $50 annual
fee and that, consistent with Sec. 1026.55(b)(4), the margin used to
determine a variable annual percentage rate that applies to a $5,000
balance is increased from 5 percentage points to 15 percentage points.
Assume also that the card issuer and the consumer subsequently agree to
a workout arrangement that reduces the annual fee to $0 and reduces the
margin back to 5 points on the condition that the consumer pay a
specified amount by the payment due date each month. If the consumer
does not pay the agreed-upon amount by the payment due date, Sec.
1026.55(b)(5) permits the card issuer to increase the annual fee to $50
and increase the margin for the variable rate that applies to the $5,000
balance up to 15 percentage points.
ii. Assume that a consumer fails to make four consecutive monthly
minimum payments totaling $480 on a consumer credit card account with a
balance of $6,000 and that, consistent with Sec. 1026.55(b)(4), the
annual percentage rate that applies to that balance is increased from a
non-variable rate of 15% to a non-variable penalty rate of 30%. Assume
also that the card issuer and the consumer subsequently agree to a
temporary hardship arrangement that reduces all rates on the account to
0% on the condition that the consumer pay an amount by the payment due
date each month that is sufficient to cure the $480 delinquency within
six months. If the consumer pays the agreed-upon amount by the payment
due date during the six-month period and cures the delinquency, Sec.
1026.55(b)(5) permits the card issuer to increase the rate that applies
to any remaining portion of the $6,000 balance to 15% or any other rate
up to the 30% penalty rate.
55(b)(6) Servicemembers Civil Relief Act exception
1. Rate, fee, or charge that does not exceed rate, fee, or charge
that applied before decrease. When a rate or a fee or charge subject to
Sec. 1026.55 has been decreased pursuant to 50 U.S.C. app. 527 or a
similar Federal or state statute or regulation, Sec. 1026.55(b)(6)
permits the card issuer to increase the rate, fee, or charge once 50
U.S.C. app. 527 or the similar statute or regulation no longer applies.
However, Sec. 1026.55(b)(6) prohibits the card issuer from applying to
any transactions that occurred prior to the decrease a rate, fee, or
charge that exceeds the rate, fee, or charge that applied to those
transactions prior to the decrease (except to the extent permitted by
one of the other exceptions in Sec. 1026.55(b)). For example, if a
temporary rate applied prior to a decrease in rate pursuant to 50 U.S.C.
app. 527 and the temporary rate expired during the period that 50 U.S.C.
app. 527 applied to the account, the card issuer may apply an increased
rate once 50 U.S.C. app. 527 no longer applies to the extent consistent
with Sec. 1026.55(b)(1). Similarly, if a variable rate applied prior to
a decrease in rate pursuant to 50 U.S.C. app. 527, the card issuer may
apply any increase in that variable rate once 50 U.S.C. app. 527 no
longer applies to the extent consistent with Sec. 1026.55(b)(2).
2. Decreases in rates, fees, and charges to amounts consistent with
50 U.S.C. app. 527 or similar statute or regulation. If a card issuer
deceases an annual percentage rate or a fee or charge subject to Sec.
1026.55 pursuant to 50 U.S.C. app. 527 or a similar Federal or state
statute or regulation and if the card issuer also decreases other rates,
fees, or charges (such as the rate that applies to new transactions) to
amounts that are consistent with 50 U.S.C. app. 527 or a similar Federal
or state statute or regulation, the card issuer may increase those
rates, fees, and charges consistent with Sec. 1026.55(b)(6).
3. Example. Assume that on December 31 of year one the annual
percentage rate that applies to a $5,000 balance on a credit card
account is a variable rate that is determined by adding a margin of 10
percentage points to a publicly-available index that is not under the
card issuer's control. The account is also subject to a monthly
maintenance fee of $10. On January 1 of year two, the card issuer
reduces the rate that applies to the $5,000 balance to a non-variable
rate of 6% and ceases to impose the $10 monthly maintenance fee and
other fees (including late payment fees) pursuant to 50 U.S.C. app. 527.
The card issuer also decreases the rate that applies to new transactions
to 6%. During year two, the consumer uses the account for $1,000 in new
transactions. On January 1 of year three, 50 U.S.C. app. 527 ceases to
apply and the card issuer provides a notice pursuant to Sec. 1026.9(c)
informing the consumer that on February 15 of year three the variable
rate determined using the 10-point margin will apply to any remaining
portion of the $5,000 balance and to any remaining portion of the $1,000
balance. The notice also states that the $10 monthly maintenance fee and
other fees (including late payment fees) will resume on February 15 of
year three. Consistent with Sec. 1026.9(c)(2)(iv)(B), the card issuer
is not required to provide a right to reject in these circumstances. On
February 15 of year three, Sec. 1026.55(b)(6) permits the card issuer
to begin accruing interest on any remaining portion of the $5,000 and
$1,000 balances at the variable rate determined using the 10-point
margin and to resume imposing the $10 monthly maintenance fee and other
fees (including late payment fees).
[[Page 865]]
55(c) Treatment of protected balances
55(c)(1) Definition of protected balance
1. Example of protected balance. Assume that, on March 15 of year
two, an account has a purchase balance of $1,000 at a non-variable
annual percentage rate of 12% and that, on March 16, the card issuer
sends a notice pursuant to Sec. 1026.9(c) informing the consumer that
the annual percentage rate for new purchases will increase to a non-
variable rate of 15% on May 1. The fourteenth day after provision of the
notice is March 29. On March 29, the consumer makes a $100 purchase. On
March 30, the consumer makes a $150 purchase. On May 1, Sec.
1026.55(b)(3)(ii) permits the card issuer to begin accruing interest at
15% on the $150 purchase made on March 30 but does not permit the card
issuer to apply that 15% rate to the $1,100 purchase balance as of March
29. Accordingly, the protected balance for purposes of Sec. 1026.55(c)
is the $1,100 purchase balance as of March 29. The $150 purchase made on
March 30 is not part of the protected balance.
2. First year after account opening. Section 1026.55(c) applies to
amounts owed for a category of transactions to which an increased annual
percentage rate or an increased fee or charge cannot be applied after
the rate, fee, or charge for that category of transactions has been
increased pursuant to Sec. 1026.55(b)(3). Because Sec.
1026.55(b)(3)(iii) does not permit a card issuer to increase an annual
percentage rate or a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) during the first year
after account opening, Sec. 1026.55(c) does not apply to balances
during the first year after account opening.
3. Increased fees and charges. Except as provided in Sec.
1026.55(b)(3)(iii), Sec. 1026.55(b)(3) permits a card issuer to
increase a fee or charge required to be disclosed under Sec.
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) after complying with the
applicable notice requirements in Sec. 1026.9(b) or (c), provided that
the increased fee or charge is not applied to a protected balance. To
the extent consistent with Sec. 1026.55(b)(3)(iii), a card issuer is
not prohibited from increasing a fee or charge that applies to the
account as a whole or to balances other than the protected balance. For
example, after the first year following account opening, a card issuer
generally may add or increase an annual or a monthly maintenance fee for
an account after complying with the notice requirements in Sec.
1026.9(c), including notifying the consumer of the right to reject the
new or increased fee under Sec. 1026.9(h). However, except as otherwise
provided in Sec. 1026.55(b), an increased fee or charge cannot be
applied to an account while the account is closed or while the card
issuer does not permit the consumer to use the account for new
transactions. See Sec. 1026.55(b)(3)(iii); see also Sec. Sec.
1026.52(b)(2)(i)(B)(3) and 1026.55(d)(1). Furthermore, if the consumer
rejects an increase in a fee or charge pursuant to Sec. 1026.9(h), the
card issuer is prohibited from applying the increased fee or charge to
the account and from imposing any other fee or charge solely as a result
of the rejection. See Sec. 1026.9(h)(2)(i) and (ii); comment
9(h)(2)(ii)-2.
4. Changing balance computation method. Nothing in Sec. 1026.55
prohibits a card issuer from changing the balance computation method
that applies to new transactions as well as protected balances.
55(c)(2) Repayment of protected balance
1. No less beneficial to the consumer. A card issuer may provide a
method of repaying the protected balance that is different from the
methods listed in Sec. 1026.55(c)(2) so long as the method used is no
less beneficial to the consumer than one of the listed methods. A method
is no less beneficial to the consumer if the method results in a
required minimum periodic payment that is equal to or less than a
minimum payment calculated using the method for the account before the
effective date of the increase. Similarly, a method is no less
beneficial to the consumer if the method amortizes the balance in five
years or longer or if the method results in a required minimum periodic
payment that is equal to or less than a minimum payment calculated
consistent with Sec. 1026.55(c)(2)(iii). For example:
i. If at account opening the cardholder agreement stated that the
required minimum periodic payment would be either the total of fees and
interest charges plus 1% of the total amount owed or $20 (whichever is
greater), the card issuer may require the consumer to make a minimum
payment of $20 even if doing so would pay off the balance in less than
five years or constitute more than 2% of the balance plus fees and
interest charges.
ii. A card issuer could increase the percentage of the balance
included in the required minimum periodic payment from 2% to 5% so long
as doing so would not result in amortization of the balance in less than
five years.
iii. A card issuer could require the consumer to make a required
minimum periodic payment that amortizes the balance in four years so
long as doing so would not more than double the percentage of the
balance included in the minimum payment prior to the date on which the
increased annual percentage rate, fee, or charge became effective.
Paragraph 55(c)(2)(ii)
1. Amortization period starting from effective date of increase.
Section 1026.55(c)(2)(ii) provides for an amortization period for the
protected balance of no less than five years,
[[Page 866]]
starting from the date on which the increased annual percentage rate or
fee or charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) became effective. A card issuer is not
required to recalculate the required minimum periodic payment for the
protected balance if, during the amortization period, that balance is
reduced as a result of the allocation of payments by the consumer in
excess of that minimum payment consistent with Sec. 1026.53 or any
other practice permitted by these rules and other applicable law.
2. Amortization when applicable rate is variable. If the annual
percentage rate that applies to the protected balance varies with an
index, the card issuer may adjust the interest charges included in the
required minimum periodic payment for that balance accordingly in order
to ensure that the balance is amortized in five years. For example,
assume that a variable rate that is currently 15% applies to a protected
balance and that, in order to amortize that balance in five years, the
required minimum periodic payment must include a specific amount of
principal plus all accrued interest charges. If the 15% variable rate
increases due to an increase in the index, the creditor may increase the
required minimum periodic payment to include the additional interest
charges.
Paragraph 55(c)(2)(iii)
1. Portion of required minimum periodic payment on other balances.
Section 1026.55(c)(2)(iii) addresses the portion of the required minimum
periodic payment based on the protected balance. Section
1026.55(c)(2)(iii) does not limit or otherwise address the card issuer's
ability to determine the portion of the required minimum periodic
payment based on other balances on the account or the card issuer's
ability to apply that portion of the minimum payment to the balances on
the account.
2. Example. Assume that the method used by a card issuer to
calculate the required minimum periodic payment for a credit card
account requires the consumer to pay either the total of fees and
accrued interest charges plus 2% of the total amount owed or $50,
whichever is greater. Assume also that the account has a purchase
balance of $2,000 at an annual percentage rate of 15% and a cash advance
balance of $500 at an annual percentage rate of 20% and that the card
issuer increases the rate for purchases to 18% but does not increase the
rate for cash advances. Under Sec. 1026.55(c)(2)(iii), the card issuer
may require the consumer to pay fees and interest plus 4% of the $2,000
purchase balance. Section 1026.55(c)(2)(iii) does not limit the card
issuer's ability to increase the portion of the required minimum
periodic payment that is based on the cash advance balance.
55(d) Continuing application
1. Closed accounts. If a credit card account under an open-end (not
home-secured) consumer credit plan with a balance is closed, Sec.
1026.55 continues to apply to that balance. For example, if a card
issuer or a consumer closes a credit card account with a balance, Sec.
1026.55(d)(1) prohibits the card issuer from increasing the annual
percentage rate that applies to that balance or imposing a periodic fee
based solely on that balance that was not charged before the account was
closed (such as a closed account fee) unless permitted by one of the
exceptions in Sec. 1026.55(b).
2. Acquired accounts. If, through merger or acquisition (for
example), a card issuer acquires a credit card account under an open-end
(not home-secured) consumer credit plan with a balance, Sec. 1026.55
continues to apply to that balance. For example, if a credit card
account has a $1,000 purchase balance with an annual percentage rate of
15% and the card issuer that acquires that account applies an 18% rate
to purchases, Sec. 1026.55(d)(1) prohibits the card issuer from
applying the 18% rate to the $1,000 balance unless permitted by one of
the exceptions in Sec. 1026.55(b).
3. Balance transfers. i. Between accounts issued by the same
creditor. If a balance is transferred from a credit card account under
an open-end (not home-secured) consumer credit plan issued by a creditor
to another credit account issued by the same creditor or its affiliate
or subsidiary, Sec. 1026.55 continues to apply to that balance. For
example, if a credit card account has a $2,000 purchase balance with an
annual percentage rate of 15% and that balance is transferred to another
credit card account issued by the same creditor that applies an 18% rate
to purchases, Sec. 1026.55(d)(2) prohibits the creditor from applying
the 18% rate to the $2,000 balance unless permitted by one of the
exceptions in Sec. 1026.55(b). However, the creditor would not
generally be prohibited from charging a new periodic fee (such as an
annual fee) on the second account so long as the fee is not based solely
on the $2,000 balance and the creditor has notified the consumer of the
fee either by providing written notice 45 days before imposing the fee
pursuant to Sec. 1026.9(c) or by providing account-opening disclosures
pursuant to Sec. 1026.6(b). See also Sec. 1026.55(b)(3)(iii); comment
55(b)(3)-3; comment 5(b)(1)(i)-6. Additional circumstances in which a
balance is considered transferred for purposes of Sec. 1026.55(d)(2)
include when:
A. A retail credit card account with a balance is replaced or
substituted with a cobranded general purpose credit card account that
can be used with a broader merchant base;
[[Page 867]]
B. A credit card account with a balance is replaced or substituted
with another credit card account offering different features;
C. A credit card account with a balance is consolidated or combined
with one or more other credit card accounts into a single credit card
account; and
D. A credit card account is replaced or substituted with a line of
credit that can be accessed solely by an account number.
ii. Between accounts issued by different creditors. If a balance is
transferred to a credit card account under an open-end (not home-
secured) consumer credit plan issued by a creditor from a credit card
account issued by a different creditor or an institution that is not an
affiliate or subsidiary of the creditor that issued the account to which
the balance is transferred, Sec. 1026.55(d)(2) does not prohibit the
creditor to which the balance is transferred from applying its account
terms to that balance, provided that those terms comply with this part.
For example, if a credit card account issued by creditor A has a $1,000
purchase balance at an annual percentage rate of 15% and the consumer
transfers that balance to a credit card account with a purchase rate of
17% issued by creditor B, creditor B may apply the 17% rate to the
$1,000 balance. However, creditor B may not subsequently increase the
rate on that balance unless permitted by one of the exceptions in Sec.
1026.55(b).
55(e) Promotional waivers or rebates of interest, fees, and other
charges
1. Generally. Nothing in Sec. 1026.55 prohibits a card issuer from
waiving or rebating finance charges due to a periodic interest rate or a
fee or charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii). However, if a card issuer promotes and
applies the waiver or rebate to an account, the card issuer cannot
temporarily or permanently cease or terminate any portion of the waiver
or rebate on that account unless permitted by one of the exceptions in
Sec. 1026.55(b). For example:
i. A card issuer applies an annual percentage rate of 15% to balance
transfers but promotes a program under which all of the interest accrued
on transferred balances will be waived or rebated for one year. If,
prior to the commencement of the one-year period, the card issuer
discloses the length of the period and the annual percentage rate that
will apply to transferred balances after expiration of that period
consistent with Sec. 1026.55(b)(1)(i), Sec. 1026.55(b)(1) permits the
card issuer to begin imposing interest charges on transferred balances
after one year. Furthermore, if, during the one-year period, a required
minimum periodic payment is not received within 60 days of the payment
due date, Sec. 1026.55(b)(4) permits the card issuer to begin imposing
interest charges on transferred balances (after providing a notice
consistent with Sec. 1026.9(g) and Sec. 1026.55(b)(4)(i)). However, if
a required minimum periodic payment is not more than 60 days delinquent
or if the consumer otherwise violates the terms or other requirements of
the account, Sec. 1026.55 does not permit the card issuer to begin
imposing interest charges on transferred balances until the expiration
of the one-year period.
ii. A card issuer imposes a monthly maintenance fee of $10 but
promotes a program under which the fee will be waived or rebated for the
six months following account opening. If, prior to account opening, the
card issuer discloses the length of the period and the monthly
maintenance fee that will be imposed after expiration of that period
consistent with Sec. 1026.55(b)(1)(i), Sec. 1026.55(b)(1) permits the
card issuer to begin imposing the monthly maintenance fee six months
after account opening. Furthermore, if, during the six-month period, a
required minimum periodic payment is not received within 60 days of the
payment due date, Sec. 1026.55(b)(4) permits the card issuer to begin
imposing the monthly maintenance fee (after providing a notice
consistent with Sec. 1026.9(c) and Sec. 1026.55(b)(4)(i)). However, if
a required minimum periodic payment is not more than 60 days delinquent
or if the consumer otherwise violates the terms or other requirements of
the account, Sec. 1026.55 does not permit the card issuer to begin
imposing the monthly maintenance fee until the expiration of the six-
month period.
2. Promotion of waiver or rebate. For purposes of Sec. 1026.55(e),
a card issuer generally promotes a waiver or rebate if the card issuer
discloses the waiver or rebate in an advertisement (as defined in Sec.
1026.2(a)(2)). See comment 2(a)(2)-1. In addition, a card issuer
generally promotes a waiver or rebate for purposes of Sec. 1026.55(e)
if the card issuer discloses the waiver or rebate in communications
regarding existing accounts (such as communications regarding a
promotion that encourages additional or different uses of an existing
account). However, a card issuer does not promote a waiver or rebate for
purposes of Sec. 1026.55(e) if the advertisement or communication
relates to an inquiry or dispute about a specific charge or to interest,
fees, or charges that have already been waived or rebated.
i. Examples of promotional communications. The following are
examples of circumstances in which a card issuer is promoting a waiver
or rebate for purposes of Sec. 1026.55(e):
A. A card issuer discloses the waiver or rebate in a newspaper,
magazine, leaflet, promotional flyer, catalog, sign, or point-of-sale
display, unless the disclosure relates to interest, fees, or charges
that have already been waived.
[[Page 868]]
B. A card issuer discloses the waiver or rebate on radio or
television or through electronic advertisements (such as on the
Internet), unless the disclosure relates to interest, fees, or charges
that have already been waived or rebated.
C. A card issuer discloses a waiver or rebate to individual
consumers, such as by telephone, letter, or electronic communication,
through direct mail literature, or on or with account statements, unless
the disclosure relates to an inquiry or dispute about a specific charge
or to interest, fees, or charges that have already been waived or
rebated.
ii. Examples of non-promotional communications. The following are
examples of circumstances in which a card issuer is not promoting a
waiver or rebate for purposes of Sec. 1026.55(e):
A. After a card issuer has waived or rebated interest, fees, or
other charges subject to Sec. 1026.55 with respect to an account, the
issuer discloses the waiver or rebate to the accountholder on the
periodic statement or by telephone, letter, or electronic communication.
However, if the card issuer also discloses prospective waivers or
rebates in the same communication, the issuer is promoting a waiver or
rebate for purposes of Sec. 1026.55(e).
B. A card issuer communicates with a consumer about a waiver or
rebate of interest, fees, or other charges subject to Sec. 1026.55 in
relation to an inquiry or dispute about a specific charge, including a
dispute under Sec. Sec. 1026.12 or 1026.13.
C. A card issuer waives or rebates interest, fees, or other charges
subject to Sec. 1026.55 in order to comply with a legal requirement
(such as the limitations in Sec. 1026.52(a)).
D. A card issuer discloses a grace period, as defined in Sec.
1026.5(b)(2)(ii)(3).
E. A card issuer provides a period after the payment due date during
which interest, fees, or other charges subject to Sec. 1026.55 are
waived or rebated even if a payment has not been received.
F. A card issuer provides benefits (such as rewards points or cash
back on purchases or finance charges) that can be applied to the account
as credits, provided that the benefits are not promoted as reducing
interest, fees, or other charges subject to Sec. 1026.55.
3. Relationship of Sec. 1026.55(e) to grace period. Section
1026.55(e) does not apply to the waiver of finance charges due to a
periodic rate consistent with a grace period, as defined in Sec.
1026.5(b)(2)(ii)(3).
Section 1026.56--Requirements for Over-the-Limit Transactions
56(b) Opt-in requirement.
1. Policy and practice of declining over-the-limit transactions.
Section 1026.56(b)(1)(i)-(v), including the requirements to provide
notice and obtain consumer consent, do not apply to any card issuer that
has a policy and practice of declining to pay any over-the-limit
transactions for the consumer's credit card account when the card issuer
has a reasonable belief that completing a transaction will cause the
consumer to exceed the consumer's credit limit for that account. For
example, if a card issuer only authorizes those transactions which, at
the time of authorization, would not cause the consumer to exceed a
credit limit, it is not subject to the requirement to provide consumers
notice and an opportunity to affirmatively consent to the card issuer's
payment of over-the-limit transactions. However, if an over-the-limit
transaction is paid without the consumer providing affirmative consent,
the card issuer may not charge a fee for paying the transaction.
2. Over-the-limit transactions not required to be authorized or
paid. Section 1026.56 does not require a card issuer to authorize or pay
an over-the-limit transaction even if the consumer has affirmatively
consented to the card issuer's over-the-limit service.
3. Examples of reasonable opportunity to provide affirmative
consent. A card issuer provides a reasonable opportunity for the
consumer to provide affirmative consent to the card issuer's payment of
over-the-limit transactions when, among other things, it provides
reasonable methods by which the consumer may affirmatively consent. A
card issuer provides such reasonable methods if:
i. On the application. The card issuer provides the notice on the
application form that the consumer can fill out to request the service
as part of the application;
ii. By mail. The card issuer provides a form with the account-
opening disclosures or the periodic statement for the consumer to fill
out and mail to affirmatively request the service;
iii. By telephone. The card issuer provides a readily available
telephone line that consumers may call to provide affirmative consent.
iv. By electronic means. The card issuer provides an electronic
means for the consumer to affirmatively consent. For example, a card
issuer could provide a form that can be accessed and processed at its
Web site, where the consumer can check a box to opt in and confirm that
choice by clicking on a button that affirms the consumer's consent.
4. Separate consent required. A consumer's affirmative consent, or
opt-in, to a card issuer's payment of over-the-limit transactions must
be obtained separately from other consents or acknowledgments obtained
by the card issuer. For example, a consumer's signature on a credit
application to request a credit card would not by itself sufficiently
evidence the consumer's consent to the card issuer's payment of over-
the-limit
[[Page 869]]
transactions. However, a card issuer may obtain a consumer's affirmative
consent by providing a blank signature line or a check box on the
application that the consumer can sign or select to request the over-
the-limit service, provided that the signature line or check box is used
solely for purposes of evidencing the choice and not for any other
purpose, such as to also obtain consumer consents for other account
services or features or to receive disclosures electronically.
5. Written confirmation. A card issuer may comply with the
requirement in Sec. 1026.56(b)(1)(iv) to provide written confirmation
of the consumer's decision to affirmatively consent, or opt in, to the
card issuer's payment of over-the-limit transactions by providing the
consumer a copy of the consumer's completed opt-in form or by sending a
letter or notice to the consumer acknowledging that the consumer has
elected to opt into the card issuer's service. A card issuer may also
satisfy the written confirmation requirement by providing the
confirmation on the first periodic statement sent after the consumer has
opted in. For example, a card issuer could provide a written notice
consistent with Sec. 1026.56(e)(2) on the periodic statement. A card
issuer may not, however, assess any over-the-limit fees or charges on
the consumer's credit card account unless and until the card issuer has
sent the written confirmation. Thus, if a card issuer elects to provide
written confirmation on the first periodic statement after the consumer
has opted in, it would not be permitted to assess any over-the-limit
fees or charges until the next statement cycle.
56(b)(2) Completion of over-the-limit transactions without consumer
consent
1. Examples of over-the-limit transactions paid without consumer
consent. Section 1026.56(b)(2) provides that a card issuer may pay an
over-the-limit transaction even if the consumer has not provided
affirmative consent, so long as the card issuer does not impose a fee or
charge for paying the transaction. The prohibition on imposing fees for
paying an over-the-limit transaction applies even in circumstances where
the card issuer is unable to avoid paying a transaction that exceeds the
consumer's credit limit.
i. Transactions not submitted for authorization. A consumer has not
affirmatively consented to a card issuer's payment of over-the-limit
transactions. The consumer purchases a $3 cup of coffee using his credit
card. Because of the small dollar amount of the transaction, the
merchant does not submit the transaction to the card issuer for
authorization. The transaction causes the consumer to exceed the credit
limit. Under these circumstances, the card issuer is prohibited from
imposing a fee or charge on the consumer's credit card account for
paying the over-the-limit transaction because the consumer has not opted
in to the card issuer's over-the-limit service.
ii. Settlement amount exceeds authorization amount. A consumer has
not affirmatively consented to a card issuer's payment of over-the-limit
transactions. The consumer uses his credit card at a pay-at-the-pump
fuel dispenser to purchase $50 of fuel. Before permitting the consumer
to use the fuel pump, the merchant verifies the validity of the card by
requesting an authorization hold of $1. The subsequent $50 transaction
amount causes the consumer to exceed his credit limit. Under these
circumstances, the card issuer is prohibited from imposing a fee or
charge on the consumer's credit card account for paying the over-the-
limit transaction because the consumer has not opted in to the card
issuer's over-the-limit service.
iii. Intervening charges. A consumer has not affirmatively consented
to a card issuer's payment of over-the-limit transactions. The consumer
makes a $50 purchase using his credit card. However, before the $50
transaction is charged to the consumer's account, a separate recurring
charge is posted to the account. The $50 purchase then causes the
consumer to exceed his credit limit. Under these circumstances, the card
issuer is prohibited from imposing a fee or charge on the consumer's
credit card account for paying the over-the-limit transaction because
the consumer has not opted in to the card issuer's over-the-limit
service.
2. Permissible fees or charges when a consumer has not consented.
Section 1026.56(b)(2) does not preclude a card issuer from assessing
fees or charges other than over-the-limit fees when an over-the-limit
transaction is completed. For example, if a consumer has not opted in,
the card issuer may assess a balance transfer fee in connection with a
balance transfer, provided such a fee is assessed whether or not the
transfer exceeds the credit limit. Section 1026.56(b)(2) does not limit
the card issuer's ability to debit the consumer's account for the amount
of the over-the-limit transaction if the card issuer is permitted to do
so under applicable law. The card issuer may also assess interest
charges in connection with the over-the-limit transaction.
56(c) Method of election
1. Card issuer-determined methods. A card issuer may determine the
means available to consumers to affirmatively consent, or opt in, to the
card issuer's payment of over-the-limit transactions. For example, a
card issuer may decide to obtain consents in writing, electronically, or
orally, or through some combination of these methods. Section 1026.56(c)
further requires, however, that such methods must be made equally
available for consumers to revoke a prior consent.
[[Page 870]]
Thus, for example, if a card issuer allows a consumer to consent in
writing or electronically, it must also allow the consumer to revoke
that consent in writing or electronically.
2. Electronic requests. A consumer consent or revocation request
submitted electronically is not considered a consumer disclosure for
purposes of the E-Sign Act.
56(d) Timing and placement of notices
1. Contemporaneous notice for oral or electronic consent. Under
Sec. 1026.56(d)(1)(ii), if a card issuer seeks to obtain consent from
the consumer orally or by electronic means, the card issuer must provide
a notice containing the disclosures in Sec. 1026.56(e)(1) prior to and
as part of the process of obtaining the consumer's consent.
56(e) Content
1. Amount of over-the-limit fee. See Model Forms G-25(A) and G-25(B)
for guidance on how to disclose the amount of the over-the-limit fee.
2. Notice content. In describing the consumer's right to
affirmatively consent to a card issuer's payment of over-the-limit
transactions, the card issuer may explain that any transactions that
exceed the consumer's credit limit will be declined if the consumer does
not consent to the service. In addition, the card issuer should explain
that even if a consumer consents, the payment of over-the-limit
transactions is at the discretion of the card issuer. For example, the
card issuer may indicate that it may decline a transaction for any
reason, such as if the consumer is past due or significantly over the
limit. The card issuer may also disclose the consumer's right to revoke
consent.
56(f) Joint relationships
1. Authorized users. Section 1026.56(f) does not permit a card
issuer to treat a request to opt in to or to revoke a prior request for
the card issuer's payment of over-the-limit transactions from an
authorized user that is not jointly liable on a credit card account as a
consent or revocation request for that account.
56(g) Continuing right to opt in or revoke opt-in
1. Fees or charges for over-the-limit transactions incurred prior to
revocation. Section 1026.56(g) provides that a consumer may revoke his
or her prior consent at any time. If a consumer does so, this provision
does not require the card issuer to waive or reverse any over-the-limit
fees or charges assessed to the consumer's account for transactions that
occurred prior to the card issuer's implementation of the consumer's
revocation request. Nor does this requirement prevent the card issuer
from assessing over-the-limit fees in subsequent cycles if the
consumer's account balance continues to exceed the credit limit after
the payment due date as a result of an over-the-limit transaction that
occurred prior to the consumer's revocation of consent.
56(h) Duration of opt-in
1. Card issuer ability to stop paying over-the-limit transactions
after consumer consent. A card issuer may cease paying over-the-limit
transactions for consumers that have previously opted in at any time and
for any reason. For example, a card issuer may stop paying over-the-
limit transactions for a consumer to respond to changes in the credit
risk presented by the consumer.
56(j) Prohibited practices
1. Periodic fees or charges. A card issuer may charge an over-the-
limit fee or charge only if the consumer has exceeded the credit limit
during the billing cycle. Thus, a card issuer may not impose any
recurring or periodic fees for paying over-the-limit transactions (for
example, a monthly ``over-the-limit protection'' service fee), even if
the consumer has affirmatively consented to or opted in to the service,
unless the consumer has in fact exceeded the credit limit during that
cycle.
2. Examples of limits on fees or charges imposed per billing cycle.
Section 1026.56(j)(1) generally prohibits a card issuer from assessing a
fee or charge due to the same over-the-limit transaction for more than
three billing cycles. The following examples illustrate the prohibition.
i. Assume that a consumer has opted into a card issuer's payment of
over-the-limit transactions. The consumer exceeds the credit limit
during the December billing cycle and does not make sufficient payment
to bring the account balance back under the limit for four consecutive
cycles. The consumer does not engage in any additional transactions
during this period. In this case, Sec. 1026.56(j)(1) would permit the
card issuer to charge a maximum of three over-the-limit fees for the
December over-the-limit transaction.
ii. Assume the same facts as above except that the consumer makes
sufficient payment to reduce his account balance by the payment due date
during the February billing cycle. The card issuer may charge over-the-
limit fees for the December and January billing cycles. However, because
the consumer's account balance was below the credit limit by the payment
due date for the February billing cycle, the card issuer may not charge
an over-the-limit fee for the February billing cycle.
iii. Assume the same facts as in paragraph i, except that the
consumer engages in another over-the-limit transaction during the
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February billing cycle. Because the consumer has obtained an additional
extension of credit which causes the consumer to exceed his credit
limit, the card issuer may charge over-the-limit fees for the December
transaction on the January, February and March billing statements, and
additional over-the-limit fees for the February transaction on the April
and May billing statements. The card issuer may not charge an over-the-
limit fee for each of the December and the February transactions on the
March billing statement because it is prohibited from imposing more than
one over-the-limit fee during a billing cycle.
3. Replenishment of credit line. Section 1026.56(j)(2) does not
prevent a card issuer from delaying replenishment of a consumer's
available credit where appropriate, for example, where the card issuer
may suspect fraud on the credit card account. However, a card issuer may
not assess an over-the-limit fee or charge if the over-the-limit
transaction is caused by the card issuer's decision not to promptly
replenish the available credit after the consumer's payment is credited
to the consumer's account.
4. Examples of conditioning. Section 1026.56(j)(3) prohibits a card
issuer from conditioning or otherwise tying the amount of a consumer's
credit limit on the consumer affirmatively consenting to the card
issuer's payment of over-the-limit transactions where the card issuer
assesses an over-the-limit fee for the transaction. The following
examples illustrate the prohibition.
i. Amount of credit limit. Assume that a card issuer offers a credit
card with a credit limit of $1,000. The consumer is informed that if the
consumer opts in to the payment of the card issuer's payment of over-
the-limit transactions, the initial credit limit would be increased to
$1,300. If the card issuer would have offered the credit card with the
$1,300 credit limit but for the fact that the consumer did not consent
to the card issuer's payment of over-the-limit transactions, the card
issuer would not be in compliance with Sec. 1026.56(j)(3). Section
1026.56(j)(3) prohibits the card issuer from tying the consumer's opt-in
to the card issuer's payment of over-the-limit transactions as a
condition of obtaining the credit card with the $1,300 credit limit.
ii. Access to credit. Assume the same facts as above, except that
the card issuer declines the consumer's application altogether because
the consumer has not affirmatively consented or opted in to the card
issuer's payment of over-the-limit transactions. The card issuer is not
in compliance with Sec. 1026.56(j)(3) because the card issuer has
required the consumer's consent as a condition of obtaining credit.
5. Over-the-limit fees caused by accrued fees or interest. Section
1026.56(j)(4) prohibits a card issuer from imposing any over-the-limit
fees or charges on a consumer's account if the consumer has exceeded the
credit limit solely because charges imposed as part of the plan as
described in Sec. 1026.6(b)(3) were charged to the consumer's account
during the billing cycle. For example, a card issuer may not assess an
over-the-limit fee or charge even if the credit limit was exceeded due
to fees for services requested by the consumer if such fees would
constitute charges imposed as part of the plan (such as fees for
voluntary debt cancellation or suspension coverage). Section
1026.56(j)(4) does not, however, restrict card issuers from assessing
over-the-limit fees or charges due to accrued finance charges or fees
from prior cycles that have subsequently been added to the account
balance. The following examples illustrate the prohibition.
i. Assume that a consumer has opted in to a card issuer's payment of
over-the-limit transactions. The consumer's account has a credit limit
of $500. The billing cycles for the account begin on the first day of
the month and end on the last day of the month. The account is not
eligible for a grace period as defined in Sec. 1026.5(b)(2)(ii)(B)(3).
On December 31, the only balance on the account is a purchase balance of
$475. On that same date, $50 in fees charged as part of the plan under
Sec. 1026.6(b)(3)(i) and interest charges are imposed on the account,
increasing the total balance at the end of the December billing cycle to
$525. Although the total balance exceeds the $500 credit limit, Sec.
1026.56(j)(4) prohibits the card issuer from imposing an over-the-limit
fee or charge for the December billing cycle in these circumstances
because the consumer's credit limit was exceeded solely because of the
imposition of fees and interest charges during that cycle.
ii. Same facts as above except that, on December 31, the only
balance on the account is a purchase balance of $400. On that same date,
$50 in fees imposed as part of the plan under Sec. 1026.6(b)(3)(i),
including interest charges, are imposed on the account, increasing the
total balance at the end of the December billing cycle to $450. The
consumer makes a $25 payment by the January payment due date and the
remaining $25 in fees imposed as part of the plan in December is added
to the outstanding balance. On January 25, an $80 purchase is charged to
the account. At the close of the cycle on January 31, an additional $20
in fees imposed as part of the plan are imposed on the account,
increasing the total balance to $525. Because Sec. 1026.56(j)(4) does
not require the issuer to consider fees imposed as part of the plan for
the prior cycle in determining whether an over-the-limit fee may be
properly assessed for the current cycle, the issuer need not take into
account the remaining $25 in fees and interest charges from the December
cycle in determining whether fees imposed as part of the plan caused the
consumer to
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exceed the credit limit during the January cycle. Thus, under these
circumstances, Sec. 1026.56(j)(4) does not prohibit the card issuer
from imposing an over-the-limit fee or charge for the January billing
cycle because the $20 in fees imposed as part of the plan for the
January billing cycle did not cause the consumer to exceed the credit
limit during that cycle.
6. Additional restrictions on over-the-limit fees. See Sec.
1026.52(b).
Section 1026.57--Reporting and Marketing Rules for College Student Open-
End Credit
57(a) Definitions
57(a)(1) College student credit card
1. Definition. The definition of college student credit card
excludes home-equity lines of credit accessed by credit cards and
overdraft lines of credit accessed by debit cards. A college student
credit card includes a college affinity card within the meaning of TILA
section 127(r)(1)(A). In addition, a card may fall within the scope of
the definition regardless of the fact that it is not intentionally
targeted at or marketed to college students. For example, an agreement
between a college and a card issuer may provide for marketing of credit
cards to alumni, faculty, staff, and other non-student consumers who
have a relationship with the college, but also contain provisions that
contemplate the issuance of cards to students. A credit card issued to a
student at the college in connection with such an agreement qualifies as
a college student credit card.
57(a)(5) College credit card agreement
1. Definition. Section 1026.57(a)(5) defines ``college credit card
agreement'' to include any business, marketing or promotional agreement
between a card issuer and a college or university (or an affiliated
organization, such as an alumni club or a foundation) if the agreement
provides for the issuance of credit cards to full-time or part-time
students. Business, marketing or promotional agreements may include a
broad range of arrangements between a card issuer and an institution of
higher education or affiliated organization, including arrangements that
do not meet the criteria to be considered college affinity card
agreements as discussed in TILA section 127(r)(1)(A). For example, TILA
section 127(r)(1)(A) specifies that under a college affinity card
agreement, the card issuer has agreed to make a donation to the
institution or affiliated organization, the card issuer has agreed to
offer discounted terms to the consumer, or the credit card will display
pictures, symbols, or words identified with the institution or
affiliated organization; even if these conditions are not met, an
agreement may qualify as a college credit card agreement, if the
agreement is a business, marketing or promotional agreement that
contemplates the issuance of college student credit cards to college
students currently enrolled (either full-time or part-time) at the
institution. An agreement may qualify as a college credit card agreement
even if marketing of cards under the agreement is targeted at alumni,
faculty, staff, and other non-student consumers, as long as cards may
also be issued to students in connection with the agreement.
57(b) Public disclosure of agreements
1. Public disclosure. Section 1026.57(b) requires an institution of
higher education to publicly disclose any contract or other agreement
made with a card issuer or creditor for the purpose of marketing a
credit card. Examples of publicly disclosing such contracts or
agreements include, but are not limited to, posting such contracts or
agreements on the institution's Web site or making such contracts or
agreements available upon request, provided the procedures for
requesting the documents are reasonable and free of cost to the
requestor, and the requested contracts or agreements are provided within
a reasonable time frame.
2. Redaction prohibited. An institution of higher education must
publicly disclose any contract or other agreement made with a card
issuer for the purpose of marketing a credit card in its entirety and
may not redact any portion of such contract or agreement. Any clause
existing in such contracts or agreements, providing for the
confidentiality of any portion of the contract or agreement, would be
invalid to the extent it restricts the ability of the institution of
higher education to publicly disclose the contract or agreement in its
entirety.
57(c) Prohibited inducements
1. Tangible item clarified. A tangible item includes any physical
item, such as a gift card, a t-shirt, or a magazine subscription, that a
card issuer or creditor offers to induce a college student to apply for
or open an open-end consumer credit plan offered by such card issuer or
creditor. Tangible items do not include non-physical inducements such as
discounts, rewards points, or promotional credit terms.
2. Inducement clarified. If a tangible item is offered to a person
whether or not that person applies for or opens an open-end consumer
credit plan, the tangible item has not been offered to induce the person
to apply for or open the plan. For example, refreshments offered to a
college student on campus that are not conditioned on whether the
student has applied for or agreed to open an open-end consumer credit
plan would not violate Sec. 1026.57(c).
3. Near campus clarified. A location that is within 1,000 feet of
the border of the campus
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of an institution of higher education, as defined by the institution of
higher education, is considered near the campus of an institution of
higher education.
4. Mailings included. The prohibition in Sec. 1026.57(c) on
offering a tangible item to a college student to induce such student to
apply for or open an open-end consumer credit plan offered by such card
issuer or creditor applies to any solicitation or application mailed to
a college student at an address on or near the campus of an institution
of higher education.
5. Related event clarified. An event is related to an institution of
higher education if the marketing of such event uses the name, emblem,
mascot, or logo of an institution of higher education, or other words,
pictures, symbols identified with an institution of higher education in
a way that implies that the institution of higher education endorses or
otherwise sponsors the event.
6. Reasonable procedures for determining if applicant is a student.
Section 1026.57(c) applies solely to offering a tangible item to a
college student. Therefore, a card issuer or creditor may offer any
person who is not a college student a tangible item to induce such
person to apply for or open an open-end consumer credit plan offered by
such card issuer or creditor, on campus, near campus, or at an event
sponsored by or related to an institution of higher education. The card
issuer or creditor must have reasonable procedures for determining
whether an applicant is a college student before giving the applicant
the tangible item. For example, a card issuer or creditor may ask
whether the applicant is a college student as part of the application
process. The card issuer or creditor may rely on the representations
made by the applicant.
57(d) Annual report to the Bureau
57(d)(2) Contents of report
1. Memorandum of understanding. Section 1026.57(d)(2) requires that
the report to the Bureau include, among other items, a copy of any
memorandum of understanding between the card issuer and the institution
(or affiliated organization) that ``directly or indirectly relates to
the college credit card agreement or that controls or directs any
obligations or distribution of benefits between any such entities.''
Such a memorandum of understanding includes any document that amends the
college credit card agreement, or that constitutes a further agreement
between the parties as to the interpretation or administration of the
agreement. For example, a memorandum of understanding required to be
included in the report would include a document that provides details on
the dollar amounts of payments from the card issuer to the university,
to supplement the original agreement which only provided for payments in
general terms (e.g., as a percentage). A memorandum of understanding for
these purposes would not include email (or other) messages that merely
discuss matters such as the addresses to which payments should be sent
or the names of contact persons for carrying out the agreement.
Section 1026.58--Internet Posting of Credit Card Agreements
58(b) Definitions
58(b)(1) Agreement
1. Inclusion of pricing information. For purposes of this section, a
credit card agreement is deemed to include certain information, such as
annual percentage rates and fees, even if the issuer does not otherwise
include this information in the basic credit contract. This information
is listed under the defined term ``pricing information'' in Sec.
1026.58(b)(7). For example, the basic credit contract may not specify
rates, fees and other information that constitutes pricing information
as defined in Sec. 1026.58(b)(7); instead, such information may be
provided to the cardholder in a separate document sent along with the
card. However, this information nevertheless constitutes part of the
agreement for purposes of Sec. 1026.58.
2. Provisions contained in separate documents included. A credit
card agreement is defined as the written document or documents
evidencing the terms of the legal obligation, or the prospective legal
obligation, between a card issuer and a consumer for a credit card
account under an open-end (not home-secured) consumer credit plan. An
agreement therefore may consist of several documents that, taken
together, define the legal obligation between the issuer and consumer.
For example, provisions that mandate arbitration or allow an issuer to
unilaterally alter the terms of the card issuer's or consumer's
obligation are part of the agreement even if they are provided to the
consumer in a document separate from the basic credit contract.
58(b)(2) Amends
1. Substantive changes. A change to an agreement is substantive, and
therefore is deemed an amendment of the agreement, if it alters the
rights or obligations of the parties. Section 1026.58(b)(2) provides
that any change in the pricing information, as defined in Sec.
1026.58(b)(7), is deemed to be substantive. Examples of other changes
that generally would be considered substantive include:
i. Addition or deletion of a provision giving the issuer or consumer
a right under the agreement, such as a clause that allows an issuer to
unilaterally change the terms of an agreement.
ii. Addition or deletion of a provision giving the issuer or
consumer an obligation
[[Page 874]]
under the agreement, such as a clause requiring the consumer to pay an
additional fee.
iii. Changes that may affect the cost of credit to the consumer,
such as changes in a provision describing how the minimum payment will
be calculated.
iv. Changes that may affect how the terms of the agreement are
construed or applied, such as changes in a choice-of-law provision.
v. Changes that may affect the parties to whom the agreement may
apply, such as provisions regarding authorized users or assignment of
the agreement.
2. Non-substantive changes. Changes that generally would not be
considered substantive include, for example:
i. Correction of typographical errors that do not affect the meaning
of any terms of the agreement.
ii. Changes to the card issuer's corporate name, logo, or tagline.
iii. Changes to the format of the agreement, such as conversion to a
booklet from a full-sheet format, changes in font, or changes in
margins.
iv. Changes to the name of the credit card to which the program
applies.
v. Reordering sections of the agreement without affecting the
meaning of any terms of the agreement.
vi. Adding, removing, or modifying a table of contents or index.
vii. Changes to titles, headings, section numbers, or captions.
58(b)(4) Card issuer
1. Card issuer clarified. Section 1026.58(b)(4) provides that, for
purposes of Sec. 1026.58, card issuer or issuer means the entity to
which a consumer is legally obligated, or would be legally obligated,
under the terms of a credit card agreement. For example, Bank X and Bank
Y work together to issue credit cards. A consumer that obtains a credit
card issued pursuant to this arrangement between Bank X and Bank Y is
subject to an agreement that states ``This is an agreement between you,
the consumer, and Bank X that governs the terms of your Bank Y Credit
Card.'' The card issuer in this example is Bank X, because the agreement
creates a legally enforceable obligation between the consumer and Bank
X. Bank X is the issuer even if the consumer applied for the card
through a link on Bank Y's Web site and the cards prominently feature
the Bank Y logo on the front of the card.
2. Use of third-party service providers. An institution that is the
card issuer as defined in Sec. 1026.58(b)(4) has a legal obligation to
comply with the requirements of Sec. 1026.58. However, a card issuer
generally may use a third-party service provider to satisfy its
obligations under Sec. 1026.58, provided that the issuer acts in
accordance with regulatory guidance regarding use of third-party service
providers and other applicable regulatory guidance. In some cases, an
issuer may wish to arrange for the institution with which it partners to
issue credit cards to fulfill the requirements of Sec. 1026.58 on the
issuer's behalf. For example, Retailer and Bank work together to issue
credit cards. Under the Sec. 1026.58(b)(4) definition, Bank is the
issuer of these credit cards for purposes of Sec. 1026.58. However,
Retailer services the credit card accounts, including mailing account
opening materials and periodic statements to cardholders. While Bank is
responsible for ensuring compliance with Sec. 1026.58, Bank may arrange
for Retailer (or another appropriate third-party service provider) to
submit credit card agreements to the Bureau under Sec. 1026.58 on
Bank's behalf. Bank must comply with regulatory guidance regarding use
of third-party service providers and other applicable regulatory
guidance.
3. Partner institution Web sites. i. As explained in comments 58(d)-
2 and 58(e)-3, if an issuer provides cardholders with access to specific
information about their individual accounts, such as balance information
or copies of statements, through a third-party Web site, the issuer is
deemed to maintain that Web site for purposes of Sec. 1026.58. Such a
Web site is deemed to be maintained by the issuer for purposes of Sec.
1026.58 even where, for example, an unaffiliated entity designs the Web
site and owns and maintains the information technology infrastructure
that supports the Web site, cardholders with credit cards from multiple
issuers can access individual account information through the same Web
site, and the Web site is not labeled, branded, or otherwise held out to
the public as belonging to the issuer. A partner institution's Web site
is an example of a third-party Web site that may be deemed to be
maintained by the issuer for purposes of Sec. 1026.58. For example,
Retailer and Bank work together to issue credit cards. Under the Sec.
1026.58(b)(4) definition, Bank is the issuer of these credit cards for
purposes of Sec. 1026.58. Bank does not have a Web site. However,
cardholders can access information about their individual accounts, such
as balance information and copies of statements, through a Web site
maintained by Retailer. Retailer designs the Web site and owns and
maintains the information technology infrastructure that supports the
Web site. The Web site is branded and held out to the public as
belonging to Retailer. Because cardholders can access information about
their individual accounts through this Web site, the Web site is deemed
to be maintained by Bank for purposes of Sec. 1026.58. Bank therefore
may comply with Sec. 1026.58(d) by ensuring that agreements offered to
the public are posted on Retailer's Web site in accordance with Sec.
1026.58(d). Bank may comply with Sec. 1026.58(e) by ensuring that
cardholders can request copies of their individual agreements
[[Page 875]]
through Retailer's Web site in accordance with Sec. 1026.58(e)(1). Bank
need not create and maintain a Web site branded and held out to the
public as belonging to Bank in order to comply with Sec. Sec.
1026.58(d) and (e) as long as Bank ensures that Retailer's Web site
complies with these sections.
ii. In addition, Sec. 1026.58(d)(1) provides that, with respect to
an agreement offered solely for accounts under one or more private label
credit card plans, an issuer may comply with Sec. 1026.58(d) by posting
the agreement on the publicly available Web site of at least one of the
merchants at which credit cards issued under each private label credit
card plan with 10,000 or more open accounts may be used. This rule is
not conditioned on cardholders' ability to access account-specific
information through the merchant's Web site.
58(b)(5) Offers
1. Cards offered to limited groups. A card issuer is deemed to offer
a credit card agreement to the public even if the issuer solicits, or
accepts applications from, only a limited group of persons. For example,
a card issuer may market affinity cards to students and alumni of a
particular educational institution, or may solicit only high-net-worth
individuals for a particular card; in these cases, the agreement would
be considered to be offered to the public. Similarly, agreements for
credit cards issued by a credit union are considered to be offered to
the public even though such cards are available only to credit union
members.
2. Individualized agreements. A card issuer is deemed to offer a
credit card agreement to the public even if the terms of the agreement
are changed immediately upon opening of an account to terms not offered
to the public.
58(b)(6) Open account
1. Open account clarified. The definition of open account includes a
credit card account under an open-end (not home-secured) consumer credit
plan if either (i) the cardholder can obtain extensions of credit on the
account; or (ii) there is an outstanding balance on the account that has
not been charged off. Under this definition, an account that meets
either of these criteria is considered to be open even if the account is
inactive. Similarly, if an account has been closed for new activity (for
example, due to default by the cardholder), but the cardholder is still
making payments to pay off the outstanding balance, the account is
considered open.
58(b)(8) Private Label Credit Card Account and Private Label Credit Card
Plan
1. Private label credit card account. The term private label credit
card account means a credit card account under an open-end (not home-
secured) consumer credit plan with a credit card that can be used to
make purchases only at a single merchant or an affiliated group of
merchants. This term applies to any such credit card account, regardless
of whether it is issued by the merchant or its affiliate or by an
unaffiliated third party.
2. Co-branded credit cards. The term private label credit card
account does not include accounts with so-called co-branded credit
cards. Credit cards that display the name, mark, or logo of a merchant
or affiliated group of merchants as well as the mark, logo, or brand of
payment network are generally referred to as co-branded cards. While
these credit cards may display the brand of the merchant or affiliated
group of merchants as the dominant brand on the card, such credit cards
are usable at any merchant that participates in the payment network.
Because these credit cards can be used at multiple unaffiliated
merchants, accounts with such credit cards are not considered private
label credit card accounts under Sec. 1026.58(b)(8).
3. Affiliated group of merchants. The term ``affiliated group of
merchants'' means two or more affiliated merchants or other persons that
are related by common ownership or common corporate control. For
example, the term would include franchisees that are subject to a common
set of corporate policies or practices under the terms of their
franchise licenses. The term also applies to two or more merchants or
other persons that agree among each other, by contract or otherwise, to
accept a credit card bearing the same name, mark, or logo (other than
the mark, logo, or brand of a payment network), for the purchase of
goods or services solely at such merchants or persons. For example,
several local clothing retailers jointly agree to issue credit cards
called the ``Main Street Fashion Card'' that can be used to make
purchases only at those retailers. For purposes of this section, these
retailers would be considered an affiliated group of merchants.
4. Private label credit card plan. i. Which credit card accounts
issued by a particular issuer constitute a private label credit card
plan is determined by where the credit cards can be used. All of the
private label credit card accounts issued by a particular card issuer
with credit cards usable at the same merchant or affiliated group of
merchants constitute a single private label credit card plan, regardless
of whether the rates, fees, or other terms applicable to the individual
credit card accounts differ. For example, a card issuer has 3,000 open
private label credit card accounts with credit cards usable only at
Merchant A and 5,000 open private label credit card accounts with credit
cards usable only at Merchant B and its affiliates. The card issuer has
two separate private label credit card plans, as defined by Sec.
1026.58(b)(8)--one plan consisting of 3,000 open accounts with credit
cards usable only at Merchant A and another plan consisting
[[Page 876]]
of 5,000 open accounts with credit cards usable only at Merchant B and
its affiliates.
ii. The example above remains the same regardless of whether (or the
extent to which) the terms applicable to the individual open accounts
differ. For example, assume that, with respect to the card issuer's
3,000 open accounts with credit cards usable only at Merchant A in the
example above, 1,000 of the open accounts have a purchase APR of 12
percent, 1,000 of the open accounts have a purchase APR of 15 percent,
and 1,000 of the open accounts have a purchase APR of 18 percent. All of
the 5,000 open accounts with credit cards usable only at Merchant B and
Merchant B's affiliates have the same 15 percent purchase APR. The card
issuer still has only two separate private label credit card plans, as
defined by Sec. 1026.58(b)(8). The open accounts with credit cards
usable only at Merchant A do not constitute three separate private label
credit card plans under Sec. 1026.58(b)(8), even though the accounts
are subject to different terms.
58(c) Submission of Agreements to Bureau
58(c)(1) Quarterly Submissions
1. Quarterly submission requirement. Section 1026.58(c)(1) requires
card issuers to send quarterly submissions to the Bureau no later than
the first business day on or after January 31, April 30, July 31, and
October 31 of each year. For example, a card issuer has already
submitted three credit card agreements to the Bureau. On October 15, the
card issuer stops offering agreement A. On November 20, the card issuer
amends agreement B. On December 1, the issuer starts offering a new
agreement D. The card issuer must submit to the Bureau no later than the
first business day on or after January 31 (i) notification that the card
issuer is withdrawing agreement A, because it is no longer offered to
the public; (ii) the amended version of agreement B; and (iii) agreement
D.
2. No quarterly submission required. i. Under Sec. 1026.58(c)(1), a
card issuer is not required to make any submission to the Bureau at a
particular quarterly submission deadline if, during the previous
calendar quarter, the card issuer did not take any of the following
actions:
A. Offering a new credit card agreement that was not submitted to
the Bureau previously.
B. Amending an agreement previously submitted to the Bureau.
C. Ceasing to offer an agreement previously submitted to the Bureau.
ii. For example, a card issuer offers five agreements to the public
as of September 30 and submits these to the Bureau by October 31, as
required by Sec. 1026.58(c)(1). Between September 30 and December 31,
the card issuer continues to offer all five of these agreements to the
public without amending them and does not begin offering any new
agreements. The card issuer is not required to make any submission to
the Bureau by the following January 31.
3. Quarterly submission of complete set of updated agreements.
Section 1026.58(c)(1) permits a card issuer to submit to the Bureau on a
quarterly basis a complete, updated set of the credit card agreements
the card issuer offers to the public. For example, a card issuer offers
agreements A, B, and C to the public as of March 31. The card issuer
submits each of these agreements to the Bureau by April 30 as required
by Sec. 1026.58(c)(1). On May 15, the card issuer amends agreement A,
but does not make any changes to agreements B or C. As of June 30, the
card issuer continues to offer amended agreement A and agreements B and
C to the public. At the next quarterly submission deadline, July 31, the
card issuer must submit the entire amended agreement A and is not
required to make any submission with respect to agreements B and C. The
card issuer may either: (i) Submit the entire amended agreement A and
make no submission with respect to agreements B and C; or (ii) submit
the entire amended agreement A and also resubmit agreements B and C. A
card issuer may choose to resubmit to the Bureau all of the agreements
it offered to the public as of a particular quarterly submission
deadline even if the card issuer has not introduced any new agreements
or amended any agreements since its last submission and continues to
offer all previously submitted agreements.
58(c)(3) Amended Agreements
1. No requirement to resubmit agreements not amended. Under Sec.
1026.58(c)(3), if a credit card agreement has been submitted to the
Bureau, the agreement has not been amended, and the card issuer
continues to offer the agreement to the public, no additional submission
regarding that agreement is required. For example, a credit card issuer
begins offering an agreement in October and submits the agreement to the
Bureau the following January 31, as required by Sec. 1026.58(c)(1). As
of March 31, the card issuer has not amended the agreement and is still
offering the agreement to the public. The card issuer is not required to
submit anything to the Bureau regarding that agreement by April 30.
2. Submission of amended agreements. If a card issuer amends a
credit card agreement previously submitted to the Bureau, Sec.
1026.58(c)(3) requires the card issuer to submit the entire amended
agreement to the Bureau. The issuer must submit the amended agreement to
the Bureau by the first quarterly submission deadline after the last day
of the calendar quarter in which the change
[[Page 877]]
became effective. However, the issuer is required to submit the amended
agreement to the Bureau only if the issuer offered the amended agreement
to the public as of the last business day of the calendar quarter in
which the change became effective. For example, a card issuer submits an
agreement to the Bureau on October 31. On November 15, the issuer
changes the balance computation method used under the agreement. Because
an element of the pricing information has changed, the agreement has
been amended for purposes of Sec. 1026.58(c)(3). On December 31, the
last business day of the calendar quarter in which the change in the
balance computation method became effective, the issuer still offers the
agreement to the public as amended on November 15. The issuer must
submit the entire amended agreement to the Bureau no later than January
31.
3. Agreements amended but no longer offered to the public. A card
issuer should submit an amended agreement to the Bureau under Sec.
1026.58(c)(3) only if the issuer offered the amended agreement to the
public as of the last business day of the calendar quarter in which the
amendment became effective. Agreements that are not offered to the
public as of the last day of the calendar quarter should not be
submitted to the Bureau. For example, on December 31 a card issuer
offers two agreements, Agreement A and Agreement B. The issuer submits
these agreements to the Bureau by January 31 as required by Sec.
1026.58. On February 15, the issuer amends both Agreement A and
Agreement B. On February 28, the issuer stops offering Agreement A to
the public. On March 15, the issuer amends Agreement B a second time. As
a result, on March 31, the last business day of the calendar quarter,
the issuer offers to the public one agreement--Agreement B as amended on
March 15. By the April 30 quarterly submission deadline, the issuer must
(i) notify the Bureau that it is withdrawing Agreement A because
Agreement A is no longer offered to the public; and (ii) submit to the
Bureau Agreement B as amended on March 15. The issuer should not submit
to the Bureau either Agreement A as amended on February 15 or the
earlier version of Agreement B (as amended on February 15), as neither
was offered to the public on March 31, the last business day of the
calendar quarter.
4. Change-in-terms notices not permissible. Section 1026.58(c)(3)
requires that if an agreement previously submitted to the Bureau is
amended, the card issuer must submit the entire revised agreement to the
Bureau. A card issuer may not fulfill this requirement by submitting a
change-in-terms or similar notice covering only the terms that have
changed. In addition, amendments must be integrated into the text of the
agreement (or the addenda described in Sec. 1026.58(c)(8)), not
provided as separate riders. For example, a card issuer changes the
purchase APR associated with an agreement the issuer has previously
submitted to the Bureau. The purchase APR for that agreement was
included in the addendum of pricing information, as required by Sec.
1026.58(c)(8). The card issuer may not submit a change-in-terms or
similar notice reflecting the change in APR, either alone or accompanied
by the original text of the agreement and original pricing information
addendum. Instead, the card issuer must revise the pricing information
addendum to reflect the change in APR and submit to the Bureau the
entire text of the agreement and the entire revised addendum, even
though no changes have been made to the provisions of the agreement and
only one item on the pricing information addendum has changed.
58(c)(4) Withdrawal of Agreements
1. Notice of withdrawal of agreement. Section 1026.58(c)(4) requires
a card issuer to notify the Bureau if any agreement previously submitted
to the Bureau by that issuer is no longer offered to the public by the
first quarterly submission deadline after the last day of the calendar
quarter in which the card issuer ceased to offer the agreement. For
example, on January 5 a card issuer stops offering to the public an
agreement it previously submitted to the Bureau. The card issuer must
notify the Bureau that the agreement is being withdrawn by April 30, the
first quarterly submission deadline after March 31, the last day of the
calendar quarter in which the card issuer stopped offering the
agreement.
58(c)(5) De Minimis Exception
1. Relationship to other exceptions. The de minimis exception is
distinct from the private label credit card exception under Sec.
1026.58(c)(6) and the product testing exception under Sec.
1026.58(c)(7). The de minimis exception provides that a card issuer with
fewer than 10,000 open credit card accounts is not required to submit
any agreements to the Bureau, regardless of whether those agreements
qualify for the private label credit card exception or the product
testing exception. In contrast, the private label credit card exception
and the product testing exception provide that a card issuer is not
required to submit to the Bureau agreements offered solely in connection
with certain types of credit card plans with fewer than 10,000 open
accounts, regardless of the card issuer's total number of open accounts.
2. De minimis exception. Under Sec. 1026.58(c)(5), a card issuer is
not required to submit any credit card agreements to the Bureau under
Sec. 1026.58(c)(1) if the card issuer has fewer than 10,000 open credit
card accounts as of the last business day of the calendar quarter. For
example, a card issuer offers five credit card agreements to the public
as of September 30.
[[Page 878]]
However, the card issuer has only 2,000 open credit card accounts as of
September 30. The card issuer is not required to submit any agreements
to the Bureau by October 31 because the issuer qualifies for the de
minimis exception.
3. Date for determining whether card issuer qualifies clarified.
Whether a card issuer qualifies for the de minimis exception is
determined as of the last business day of each calendar quarter. For
example, as of December 31, a card issuer offers three agreements to the
public and has 9,500 open credit card accounts. As of January 30, the
card issuer still offers three agreements, but has 10,100 open accounts.
As of March 31, the card issuer still offers three agreements, but has
only 9,700 open accounts. Even though the card issuer had 10,100 open
accounts at one time during the calendar quarter, the card issuer
qualifies for the de minimis exception because the number of open
accounts was less than 10,000 as of March 31. The card issuer therefore
is not required to submit any agreements to the Bureau under Sec.
1026.58(c)(1) by April 30.
4. Date for determining whether card issuer ceases to qualify
clarified. Whether a card issuer has ceased to qualify for the de
minimis exception under Sec. 1026.58(c)(5) is determined as of the last
business day of the calendar quarter, For example, as of June 30, a card
issuer offers three agreements to the public and has 9,500 open credit
card accounts. The card issuer is not required to submit any agreements
to the Bureau under Sec. 1026.58(c)(1) because the card issuer
qualifies for the de minimis exception. As of July 15, the card issuer
still offers the same three agreements, but now has 10,000 open
accounts. The card issuer is not required to take any action at this
time, because whether a card issuer qualifies for the de minimis
exception under Sec. 1026.58(c)(5) is determined as of the last
business day of the calendar quarter. As of September 30, the card
issuer still offers the same three agreements and still has 10,000 open
accounts. Because the card issuer had 10,000 open accounts as of
September 30, the card issuer ceased to qualify for the de minimis
exception and must submit the three agreements it offers to the Bureau
by October 31, the next quarterly submission deadline.
5. Option to withdraw agreements clarified. Section 1026.58(c)(5)
provides that if a card issuer that did not previously qualify for the
de minimis exception qualifies for the de minimis exception, the card
issuer must continue to make quarterly submissions to the Bureau as
required by Sec. 1026.58(c)(1) until the card issuer notifies the
Bureau that the issuer is withdrawing all agreements it previously
submitted to the Bureau. For example, a card issuer has 10,001 open
accounts and offers three agreements to the public as of December 31.
The card issuer has submitted each of the three agreements to the Bureau
as required under Sec. 1026.58(c)(1). As of March 31, the card issuer
has only 9,999 open accounts. The card issuer has two options. First,
the card issuer may notify the Bureau that the card issuer is
withdrawing each of the three agreements it previously submitted. Once
the card issuer has notified the Bureau, the card issuer is no longer
required to make quarterly submissions to the Bureau under Sec.
1026.58(c)(1). Alternatively, the card issuer may choose not to notify
the Bureau that it is withdrawing its agreements. In this case, the card
issuer must continue making quarterly submissions to the Bureau as
required by Sec. 1026.58(c)(1). The card issuer might choose not to
withdraw its agreements if, for example, the card issuer believes that
it likely will cease to qualify for the de minimis exception again in
the near future.
58(c)(6) Private Label Credit Card Exception
1. Private label credit card exception. i. Under Sec.
1026.58(c)(6)(i), a card issuer is not required to submit to the Bureau
a credit card agreement if, as of the last business day of the calendar
quarter, the agreement (A) is offered for accounts under one or more
private label credit card plans each of which has fewer than 10,000 open
accounts; and (B) is not offered to the public other than for accounts
under such a plan. For example, a card issuer offers to the public a
credit card agreement offered solely for private label credit card
accounts with credit cards that can be used only at Merchant A. The card
issuer has 8,000 open accounts with such credit cards usable only at
Merchant A. The card issuer is not required to submit this agreement to
the Bureau under Sec. 1026.58(c)(1) because the agreement is offered
for a private label credit card plan with fewer than 10,000 open
accounts, and the credit card agreement is not offered to the public
other than for accounts under that private label credit card plan.
ii. In contrast, assume the same card issuer also offers to the
public a different credit card agreement that is offered solely for
private label credit card accounts with credit cards usable only at
Merchant B. The card issuer has 12,000 open accounts with such credit
cards usable only at Merchant B. The private label credit card exception
does not apply. Although this agreement is offered for a private label
credit card plan (i.e., the 12,000 private label credit card accounts
with credit cards usable only at Merchant B), and the agreement is not
offered to the public other than for accounts under that private label
credit card plan, the private label credit card plan has more than
10,000 open accounts. (The card issuer still is not required to submit
to the Bureau the agreement offered in connection with credit cards
[[Page 879]]
usable only at Merchant A, as each agreement is evaluated separately
under the private label credit card exception.)
2. Card issuers with small private label and other credit card
plans. Whether the private label credit card exception applies is
determined on an agreement-by-agreement basis. Therefore, some
agreements offered by a card issuer may qualify for the private label
credit card exception even though the card issuer also offers other
agreements that do not qualify, such as agreements offered for accounts
with cards usable at multiple unaffiliated merchants or agreements
offered for accounts under private label plans with 10,000 or more open
accounts.
3. De minimis exception distinguished. The private label credit card
exception under Sec. 1026.58(c)(6) is distinct from the de minimis
exception under Sec. 1026.58(c)(5). The private label credit card
exception exempts card issuers from submitting certain agreements to the
Bureau regardless of the card issuer's overall size as measured by total
number of open accounts. In contrast, the de minimis exception exempts a
particular card issuer from submitting any credit card agreements to the
Bureau if the card issuer has fewer than 10,000 total open accounts. For
example, a card issuer offers to the public two credit card agreements.
Agreement A is offered solely for private label credit card accounts
with credit cards usable only at Merchant A. The card issuer has 5,000
open credit card accounts with such credit cards usable only at Merchant
A. Agreement B is offered solely for credit card accounts with cards
usable at multiple unaffiliated merchants that participate in a major
payment network. The card issuer has 40,000 open credit card accounts
with such payment network cards. The card issuer is not required to
submit agreement A to the Bureau under Sec. 1026.58(c)(1) because
agreement A qualifies for the private label credit card exception under
Sec. 1026.58(c)(6). Agreement A is offered for accounts under a private
label credit card plan with fewer than 10,000 open accounts (i.e., the
5,000 accounts with credit cards usable only at Merchant A) and is not
otherwise offered to the public. The card issuer is required to submit
agreement B to the Bureau under Sec. 1026.58(c)(1). The card issuer
does not qualify for the de minimis exception under Sec. 1026.58(c)(5)
because it has more than 10,000 open accounts, and agreement B does not
qualify for the private label credit card exception under Sec.
1026.58(c)(6) because it is not offered solely for accounts under a
private label credit card plan with fewer than 10,000 open accounts.
4. Agreement otherwise offered to the public. i. An agreement
qualifies for the private label exception only if it is offered for
accounts under one or more private label credit card plans with fewer
than 10,000 open accounts and is not offered to the public other than
for accounts under such a plan. For example, a card issuer offers a
single agreement to the public. The agreement is offered for private
label credit card accounts with credit cards usable only at Merchant A.
The card issuer has 9,000 such open accounts with credit cards usable
only at Merchant A. The agreement also is offered for credit card
accounts with credit cards usable at multiple unaffiliated merchants
that participate in a major payment network. The agreement does not
qualify for the private label credit card exception. The agreement is
offered for accounts under a private label credit card plan with fewer
than 10,000 open accounts. However, the agreement also is offered to the
public for accounts that are not part of a private label credit card
plan and therefore does not qualify for the private label credit card
exception.
ii. Similarly, an agreement does not qualify for the private label
credit card exception if it is offered in connection with one private
label credit card plan with fewer than 10,000 open accounts and one
private label credit card plan with 10,000 or more open accounts. For
example, a card issuer offers a single credit card agreement to the
public. The agreement is offered for two types of accounts. The first
type of account is a private label credit card account with a credit
card usable only at Merchant A. The second type of account is a private
label credit card account with a credit card usable only at Merchant B.
The card issuer has 10,000 such open accounts with credit cards usable
only at Merchant A and 5,000 such open accounts with credit cards usable
only at Merchant B. The agreement does not qualify for the private label
credit card exception. While the agreement is offered for accounts under
a private label credit card plan with fewer than 10,000 open accounts
(i.e., the 5,000 open accounts with credit cards usable only at Merchant
B), the agreement is also offered for accounts not under such a plan
(i.e., the 10,000 open accounts with credit cards usable only at
Merchant A).
5. Agreement used for multiple small private label plans. The
private label exception applies even if the same agreement is used for
more than one private label credit card plan with fewer than 10,000 open
accounts. For example, a card issuer has 15,000 total open private label
credit card accounts. Of these, 7,000 accounts have credit cards usable
only at Merchant A, 5,000 accounts have credit cards usable only at
Merchant B, and 3,000 accounts have credit cards usable only at Merchant
C. The card issuer offers to the public a single credit card agreement
that is offered for all three types of accounts and is not offered for
any other type of account. The card issuer is not required to submit the
agreement to the Bureau under Sec. 1026.58(c)(1).
[[Page 880]]
The agreement is used for three different private label credit card
plans (i.e., the accounts with credit cards usable at Merchant A, the
accounts with credit cards usable at Merchant B, and the accounts with
credit cards usable at Merchant C), each of which has fewer than 10,000
open accounts, and the card issuer does not offer the agreement for any
other type of account. The agreement therefore qualifies for the private
label credit card exception under Sec. 1026.58(c)(6).
6. Multiple agreements used for one private label credit card plan.
The private label credit card exception applies even if a card issuer
offers more than one agreement in connection with a particular private
label credit card plan. For example, a card issuer has 5,000 open
private label credit card accounts with credit cards usable only at
Merchant A. The card issuer offers to the public three different
agreements each of which may be used in connection with private label
credit card accounts with credit cards usable only at Merchant A. The
agreements are not offered for any other type of credit card account.
The card issuer is not required to submit any of the three agreements to
the Bureau under Sec. 1026.58(c)(1) because each of the agreements is
used for a private label credit card plan which has fewer than 10,000
open accounts and none of the three is offered to the public other than
for accounts under such a plan.
58(c)(8) Form and content of agreements submitted to the Bureau
1. ``As of'' date clarified. Agreements submitted to the Bureau must
contain the provisions of the agreement and pricing information in
effect as of the last business day of the preceding calendar quarter.
For example, on June 1, a card issuer decides to decrease the purchase
APR associated with one of the agreements it offers to the public. The
change in the APR will become effective on August 1. If the card issuer
submits the agreement to the Bureau on July 31 (for example, because the
agreement has been otherwise amended), the agreement submitted should
not include the new lower APR because that APR was not in effect on June
30, the last business day of the preceding calendar quarter.
2. Pricing agreement addendum. Pricing information must be set forth
in the separate addendum described in Sec. 1026.58(c)(8)(ii)(A) even if
it is also stated elsewhere in the agreement.
3. Pricing agreement variations do not constitute separate
agreements. Pricing information that may vary from one cardholder to
another depending on the cardholder's creditworthiness or state of
residence or other factors must be disclosed by setting forth all the
possible variations or by providing a range of possible variations. Two
agreements that differ only with respect to variations in the pricing
information do not constitute separate agreements for purposes of this
section. For example, a card issuer offers two types of credit card
accounts that differ only with respect to the purchase APR. The purchase
APR for one type of account is 15 percent, while the purchase APR for
the other type of account is 18 percent. The provisions of the agreement
and pricing information for the two types of accounts are otherwise
identical. The card issuer should not submit to the Bureau one agreement
with a pricing information addendum listing a 15 percent purchase APR
and another agreement with a pricing information addendum listing an 18
percent purchase APR. Instead, the card issuer should submit to the
Bureau one agreement with a pricing information addendum listing
possible purchase APRs of 15 or 18 percent.
4. Optional variable terms addendum. Examples of provisions that
might be included in the variable terms addendum include a clause that
is required by law to be included in credit card agreements in a
particular state but not in other states (unless, for example, a clause
is included in the agreement used for all cardholders under a heading
such as ``For State X Residents''), the name of the credit card plan to
which the agreement applies (if this information is included in the
agreement), or the name of a charitable organization to which donations
will be made in connection with a particular card (if this information
is included in the agreement).
5. Integrated agreement requirement. Card issuers may not provide
provisions of the agreement or pricing information in the form of
change-in-terms notices or riders. The only two addenda that may be
submitted as part of an agreement are the pricing information addendum
and optional variable terms addendum described in Sec. 1026.58(c)(8).
Changes in provisions or pricing information must be integrated into the
body of the agreement, pricing information addendum, or optional
variable terms addendum described in Sec. 1026.58(c)(8). For example,
it would be impermissible for a card issuer to submit to the Bureau an
agreement in the form of a terms and conditions document dated January
1, 2005, four subsequent change in terms notices, and 2 addenda showing
variations in pricing information. Instead, the card issuer must submit
a document that integrates the changes made by each of the change in
terms notices into the body of the original terms and conditions
document and a single addendum displaying variations in pricing
information.
58(d) Posting of Agreements Offered to the Public
1. Requirement applies only to agreements submitted to the Bureau.
Card issuers are only required to post and maintain on their publicly
available Web site the credit card
[[Page 881]]
agreements that the card issuer must submit to the Bureau under Sec.
1026.58(c). If, for example, a card issuer is not required to submit any
agreements to the Bureau because the card issuer qualifies for the de
minimis exception under Sec. 1026.58(c)(5), the card issuer is not
required to post and maintain any agreements on its Web site under Sec.
1026.58(d). Similarly, if a card issuer is not required to submit a
specific agreement to the Bureau, such as an agreement that qualifies
for the private label exception under Sec. 1026.58(c)(6), the card
issuer is not required to post and maintain that agreement under Sec.
1026.58(d) (either on the card issuer's publicly available Web site or
on the publicly available Web sites of merchants at which private label
credit cards can be used). (The card issuer in both of these cases is
still required to provide each individual cardholder with access to his
or her specific credit card agreement under Sec. 1026.58(e) by posting
and maintaining the agreement on the card issuer's Web site or by
providing a copy of the agreement upon the cardholder's request.)
2. Card issuers that do not otherwise maintain Web sites. Unlike
Sec. 1026.58(e), Sec. 1026.58(d) does not include a special rule for
card issuers that do not otherwise maintain a Web site. If a card issuer
is required to submit one or more agreements to the Bureau under Sec.
1026.58(c), that card issuer must post those agreements on a publicly
available Web site it maintains (or, with respect to an agreement for a
private label credit card, on the publicly available Web site of at
least one of the merchants at which the card may be used, as provided in
Sec. 1026.58(d)(1)). If an issuer provides cardholders with access to
specific information about their individual accounts, such as balance
information or copies of statements, through a third-party Web site, the
issuer is considered to maintain that Web site for purposes of Sec.
1026.58. Such a third-party Web site is deemed to be maintained by the
issuer for purposes of Sec. 1026.58(d) even where, for example, an
unaffiliated entity designs the Web site and owns and maintains the
information technology infrastructure that supports the Web site,
cardholders with credit cards from multiple issuers can access
individual account information through the same Web site, and the Web
site is not labeled, branded, or otherwise held out to the public as
belonging to the issuer. Therefore, issuers that provide cardholders
with access to account-specific information through a third-party Web
site can comply with Sec. 1026.58(d) by ensuring that the agreements
the issuer submits to the Bureau are posted on the third-party Web site
in accordance with Sec. 1026.58(d). (In contrast, the Sec.
1026.58(d)(1) rule regarding agreements for private label credit cards
is not conditioned on cardholders' ability to access account-specific
information through the merchant's Web site.)
3. Private label credit card plans. i. Section 1026.58(d) provides
that, with respect to an agreement offered solely for accounts under one
or more private label credit card plans, a card issuer may comply by
posting and maintaining the agreement on the Web site of at least one of
the merchants at which the cards issued under each private label credit
card plan with 10,000 or more open accounts may be used. For example, a
card issuer has 100,000 open private label credit card accounts. Of
these, 75,000 open accounts have credit cards usable only at Merchant A
and 25,000 open accounts have credit cards usable only at Merchant B and
Merchant B's affiliates, Merchants C and D. The card issuer offers to
the public a single credit card agreement that is offered for both of
these types of accounts and is not offered for any other type of
account.
ii. The card issuer is required to submit the agreement to the
Bureau under Sec. 1026.58(c)(1). (The card issuer has more than 10,000
open accounts, so the Sec. 1026.58(c)(5) de minimis exception does not
apply. The agreement is offered solely for two different private label
credit card plans (i.e., one plan consisting of the accounts with credit
cards usable at Merchant A and one plan consisting of the accounts with
credit cards usable at Merchant B and its affiliates, Merchants C and
D), but both of these plans have more than 10,000 open accounts, so the
Sec. 1026.58(c)(6) private label credit card exception does not apply.
Finally, the agreement is not offered solely in connection with a
product test by the card issuer, so the Sec. 1026.58(c)(7) product test
exception does not apply.)
iii. Because the card issuer is required to submit the agreement to
the Bureau under Sec. 1026.58(c)(1), the card issuer is required to
post and maintain the agreement on the card issuer's publicly available
Web site under Sec. 1026.58(d). However, because the agreement is
offered solely for accounts under one or more private label credit card
plans, the card issuer may comply with Sec. 1026.58(d) in either of two
ways. First, the card issuer may comply by posting and maintaining the
agreement on the card issuer's own publicly available Web site.
Alternatively, the card issuer may comply by posting and maintaining the
agreement on the publicly available Web site of Merchant A and the
publicly available Web site of at least one of Merchants B, C and D. It
would not be sufficient for the card issuer to post the agreement on
Merchant A's Web site alone because Sec. 1026.58(d) requires the card
issuer to post the agreement on the publicly available Web site of ``at
least one of the merchants at which cards issued under each private
label credit card plan may be used'' (emphasis added).
iv. In contrast, assume that a card issuer has 100,000 open private
label credit card accounts. Of these, 5,000 open accounts have
[[Page 882]]
credit cards usable only at Merchant A and 95,000 open accounts have
credit cards usable only at Merchant B and Merchant B's affiliates,
Merchants C and D. The card issuer offers to the public a single credit
card agreement that is offered for both of these types of accounts and
is not offered for any other type of account.
v. The card issuer is required to submit the agreement to the Bureau
under Sec. 1026.58(c)(1). (The card issuer has more than 10,000 open
accounts, so the Sec. 1026.58(c)(5) de minimis exception does not
apply. The agreement is offered solely for two different private label
credit card plans (i.e., one plan consisting of the accounts with credit
cards usable at Merchant A and one plan consisting of the accounts with
credit cards usable at Merchant B and its affiliates, Merchants C and
D), but one of these plans has more than 10,000 open accounts, so the
Sec. 1026.58(c)(6) private label credit card exception does not apply.
Finally, the agreement is not offered solely in connection with a
product test by the card issuer, so the Sec. 1026.58(c)(7) product test
exception does not apply.)
vi. Because the card issuer is required to submit the agreement to
the Bureau under Sec. 1026.58(c)(1), the card issuer is required to
post and maintain the agreement on the card issuer's publicly available
Web site under Sec. 1026.58(d). However, because the agreement is
offered solely for accounts under one or more private label credit card
plans, the card issuer may comply with Sec. 1026.58(d) in either of two
ways. First, the card issuer may comply by posting and maintaining the
agreement on the card issuer's own publicly available Web site.
Alternatively, the card issuer may comply by posting and maintaining the
agreement on the publicly available Web site of at least one of
Merchants B, C and D. The card issuer is not required to post and
maintain the agreement on the publicly available Web site of Merchant A
because the card issuer's private label credit card plan consisting of
accounts with cards usable only at Merchant A has fewer than 10,000 open
accounts.
58(e) Agreements for All Open Accounts
1. Requirement applies to all open accounts. The requirement to
provide access to credit card agreements under Sec. 1026.58(e) applies
to all open credit card accounts, regardless of whether such agreements
are required to be submitted to the Bureau pursuant to Sec. 1026.58(c)
(or posted on the card issuer's Web site pursuant to Sec. 1026.58(d)).
For example, a card issuer that is not required to submit agreements to
the Bureau because it qualifies for the de minimis exception under Sec.
1026.58(c)(5)) would still be required to provide cardholders with
access to their specific agreements under Sec. 1026.58(e). Similarly,
an agreement that is no longer offered to the public would not be
required to be submitted to the Bureau under Sec. 1026.58(c), but would
still need to be provided to the cardholder to whom it applies under
Sec. 1026.58(e).
2. Readily available telephone line. Section 1026.58(e) provides
that card issuers that provide copies of cardholder agreements upon
request must provide the cardholder with the ability to request a copy
of their agreement by calling a readily available telephone line. To
satisfy the readily available standard, the financial institution must
provide enough telephone lines so that consumers get a reasonably prompt
response. The institution need only provide telephone service during
normal business hours. Within its primary service area, an institution
must provide a local or toll-free telephone number. It need not provide
a toll-free number or accept collect long-distance calls from outside
the area where it normally conducts business.
3. Issuers without interactive Web sites. Section 1026.58(e)(2)
provides that a card issuer that does not maintain a Web site from which
cardholders can access specific information about their individual
accounts is not required to provide a cardholder with the ability to
request a copy of the agreement by using the card issuer's Web site. A
card issuer without a Web site of any kind could comply by disclosing
the telephone number on each periodic statement; a card issuer with a
non-interactive Web site could comply in the same way, or alternatively
could comply by displaying the telephone number on the card issuer's Web
site. An issuer is considered to maintain an interactive Web site for
purposes of the Sec. 1026.58(e)(2) special rule if the issuer provide
cardholders with access to specific information about their individual
accounts, such as balance information or copies of statements, through a
third-party interactive Web site. Such a Web site is deemed to be
maintained by the issuer for purposes of Sec. 1026.58(e)(2) even where,
for example, an unaffiliated entity designs the Web site and owns and
maintains the information technology infrastructure that supports the
Web site, cardholders with credit cards from multiple issuers can access
individual account information through the same Web site, and the Web
site is not labeled, branded, or otherwise held out to the public as
belonging to the issuer. An issuer that provides cardholders with access
to specific information about their individual accounts through such a
Web site is not permitted to comply with the special rule in Sec.
1026.58(e)(2). Instead, such an issuer must comply with Sec.
1026.58(e)(1).
4. Deadline for providing requested agreements clarified. Sections
1026.58(e)(1)(ii) and (e)(2) require that credit card agreements
provided upon request must be sent to the cardholder or otherwise made
available to the cardholder in electronic or paper form no
[[Page 883]]
later than 30 days after the cardholder's request is received. For
example, if a card issuer chooses to respond to a cardholder's request
by mailing a paper copy of the cardholder's agreement, the card issuer
must mail the agreement no later than 30 days after receipt of the
cardholder's request. Alternatively, if a card issuer chooses to respond
to a cardholder's request by posting the cardholder's agreement on the
card issuer's Web site, the card issuer must post the agreement on its
Web site no later than 30 days after receipt of the cardholder's
request. Section 1026.58(e)(3)(v) provides that a card issuer may
provide cardholder agreements in either electronic or paper form
regardless of the form of the cardholder's request.
58(g) Temporary Suspension of Agreement Submission Requirement
1. Suspended quarterly submission requirement. Pursuant to Sec.
1026.58(g)(1), card issuers are not required to make quarterly
submissions to the Bureau, as otherwise required by Sec. 1026.58(c),
for the submissions that would otherwise be due by the first business
day on or after April 30, 2015; July 31, 2015; October 31, 2015; and
January 31, 2016. Specifically, a card issuer is not required to submit
information about the issuer and its agreements pursuant to Sec.
1026.58(c)(1)(i), new credit card agreements pursuant to Sec.
1026.58(c)(1)(ii), amended agreements pursuant to Sec.
1026.58(c)(1)(iii) and (c)(3), or notification of withdrawn agreements
pursuant to Sec. 1026.58(c)(1)(iv) and (c)(4) through (7) for those
four quarters.
2. Resuming submission of credit card agreements to the Bureau.
Beginning with the submission due on the first business day on or after
April 30, 2016, card issuers shall resume submitting credit card
agreements on a quarterly basis to the Bureau pursuant to Sec.
1026.58(c). A card issuer shall submit agreements for the prior calendar
quarter (that is, the calendar quarter ending March 31, 2016), as
specified in Sec. 1026.58(c)(1)(ii) through (iv) and (c)(3) through
(7), to the Bureau no later than the first business day on or after
April 30, 2016.
i. Specifically, the submission due on the first business day on or
after April 30, 2016 shall contain, as applicable:
A. Identifying information about the card issuer and the agreements
submitted, including the issuer's name, address, and identifying number
(such as an RSSD ID number or tax identification number), pursuant to
Sec. 1026.58(c)(1)(i);
B. The credit card agreements that the card issuer offered to the
public as of the last business day of the calendar quarter ending March
31, 2016 that the card issuer had not previously submitted to the Bureau
as of the first business day on or after January 31, 2015, pursuant to
Sec. 1026.58(c)(1)(ii);
C. Any credit card agreement previously submitted to the Bureau that
was amended since the last business day of the calendar quarter ending
December 31, 2014 and that the card issuer offered to the public as of
the last business day of the calendar quarter ending March 31, 2016,
pursuant to Sec. 1026.58(c)(1)(iii) and (c)(3); and
D. Notification regarding any credit card agreement previously
submitted to the Bureau that the issuer is withdrawing, pursuant to
Sec. 1026.58(c)(1)(iv) and (c)(4) through (7).
ii. In lieu of the submission described in comment 58(g)-2.i.B
through D, Sec. 1026.58(c)(1) permits a card issuer to submit to the
Bureau a complete, updated set of the credit card agreements the card
issuer offered to the public as of the calendar quarter ending March 31,
2016. See comment 58(c)(1)-3.
3. Continuing obligation to post agreements on a card issuer's own
Web site. Section 1026.58(d) requires a card issuer to post and maintain
on its publicly available Web site the credit card agreements that the
issuer is required to submit to the Bureau under Sec. 1026.58(c).
Pursuant to Sec. 1026.58(g)(2), during the temporary suspension period
set forth in Sec. 1026.58(g)(1), a card issuer shall continue to post
its agreements to its own publicly available Web site as required by
Sec. 1026.58(d) using the agreements it would have otherwise submitted
to the Bureau under Sec. 1026.58(c). For example, for purposes of Sec.
1026.58(d)(4), a card issuer must continue to update the agreements
posted on its own Web site at least as frequently as the quarterly
schedule required for submission of agreements to the Bureau set forth
in Sec. 1026.58(c)(1), notwithstanding the temporary suspension of
submission requirements in Sec. 1026.58(g)(1). Similarly, for purposes
of Sec. 1026.58(d)(2), agreements posted by a card issuer on its own
Web site must continue to conform to the form and content requirements
set forth in Sec. 1026.58(c)(8).
Section 1026.59--Reevaluation of Rate Increases
59(a) General Rule
59(a)(1) Evaluation of Increased Rate
1. Types of rate increases covered. Section 1026.59(a) applies both
to increases in annual percentage rates imposed on a consumer's account
based on that consumer's credit risk or other circumstances specific to
that consumer and to increases in annual percentage rates imposed based
on factors that are not specific to the consumer, such as changes in
market conditions or the issuer's cost of funds.
2. Rate increases actually imposed. Under Sec. 1026.59(a), a card
issuer must review changes in factors only if the increased rate is
actually imposed on the consumer's account. For example, if a card
issuer increases the penalty rate for a credit card account
[[Page 884]]
under an open-end (not home-secured) consumer credit plan and the
consumer's account has no balances that are currently subject to the
penalty rate, the card issuer is required to provide a notice pursuant
to Sec. 1026.9(c) of the change in terms, but the requirements of Sec.
1026.59 do not apply. However, if the consumer's account later becomes
subject to the penalty rate, the card issuer is required to provide a
notice pursuant to Sec. 1026.9(g) and the requirements of Sec. 1026.59
begin to apply upon imposition of the penalty rate. Similarly, if a card
issuer raises the cash advance rate applicable to a consumer's account
but the consumer engages in no cash advance transactions to which that
increased rate is applied, the card issuer is required to provide a
notice pursuant to Sec. 1026.9(c) of the change in terms, but the
requirements of Sec. 1026.59 do not apply. If the consumer subsequently
engages in a cash advance transaction, the requirements of Sec. 1026.59
begin to apply at that time.
3. Change in type of rate. i. Generally. A change from a variable
rate to a non-variable rate or from a non-variable rate to a variable
rate is not a rate increase for purposes of Sec. 1026.59, if the rate
in effect immediately prior to the change in type of rate is equal to or
greater than the rate in effect immediately after the change. For
example, a change from a variable rate of 15.99% to a non-variable rate
of 15.99% is not a rate increase for purposes of Sec. 1026.59 at the
time of the change. See Sec. 1026.55 for limitations on the
permissibility of changing from a non-variable rate to a variable rate.
ii. Change from non-variable rate to variable rate. A change from a
non-variable to a variable rate constitutes a rate increase for purposes
of Sec. 1026.59 if the variable rate exceeds the non-variable rate that
would have applied if the change in type of rate had not occurred. For
example, assume a new credit card account under an open-end (not home-
secured) consumer credit plan is opened on January 1 of year 1 and that
a non-variable annual percentage rate of 12% applies to all transactions
on the account. On January 1 of year 2, upon 45 days' advance notice
pursuant to Sec. 1026.9(c)(2), the rate on all new transactions is
changed to a variable rate that is currently 12% and is determined by
adding a margin of 10 percentage points to a publicly-available index
not under the card issuer's control. The change from the 12% non-
variable rate to the 12% variable rate on January 1 of year 2 is not a
rate increase for purposes of Sec. 1026.59(a). On April 1 of year 2,
the value of the variable rate increases to 12.5%. The increase in the
rate from 12% to 12.5% is a rate increase for purposes of Sec. 1026.59,
and the card issuer must begin periodically conducting reviews of the
account pursuant to Sec. 1026.59. The increase that must be evaluated
for purposes of Sec. 1026.59 is the increase from a non-variable rate
of 12% to a variable rate of 12.5%.
iii. Change from variable rate to non-variable rate. A change from a
variable to a non-variable rate constitutes a rate increase for purposes
of Sec. 1026.59 if the non-variable rate exceeds the variable rate that
would have applied if the change in type of rate had not occurred. For
example, assume a new credit card account under an open-end (not home-
secured) consumer credit plan is opened on January 1 of year 1 and that
a variable annual percentage rate that is currently 15% and is
determined by adding a margin of 10 percentage points to a publicly-
available index not under the card issuer's control applies to all
transactions on the account. On January 1 of year 2, upon 45 days'
advance notice pursuant to Sec. 1026.9(c)(2), the rate on all existing
balances and new transactions is changed to a non-variable rate that is
currently 15%. The change from the 15% variable rate to the 15% non-
variable rate on January 1 of year 2 is not a rate increase for purposes
of Sec. 1026.59(a). On April 1 of year 2, the value of the variable
rate that would have applied to the account decreases to 12.5%.
Accordingly, on April 1 of year 2, the non-variable rate of 15% exceeds
the 12.5% variable rate that would have applied but for the change in
type of rate. At this time, the change to the non-variable rate of 15%
constitutes a rate increase for purposes of Sec. 1026.59, and the card
issuer must begin periodically conducting reviews of the account
pursuant to Sec. 1026.59. The increase that must be evaluated for
purposes of Sec. 1026.59 is the increase from a variable rate of 12.5%
to a non-variable rate of 15%.
4. Rate increases prior to effective date of rule. For increases in
annual percentage rates made on or after January 1, 2009, and prior to
August 22, 2010, Sec. 1026.59(a) requires the card issuer to review the
factors described in Sec. 1026.59(d) and reduce the rate, as
appropriate, if the rate increase is of a type for which 45 days'
advance notice would currently be required under Sec. 1026.9(c)(2) or
(g). For example, 45 days' notice is not required under Sec.
1026.9(c)(2) if the rate increase results from the increase in the index
by which a properly-disclosed variable rate is determined in accordance
with Sec. 1026.9(c)(2)(v)(C) or if the increase occurs upon expiration
of a specified period of time and disclosures complying with Sec.
1026.9(c)(2)(v)(B) have been provided. The requirements of Sec. 1026.59
do not apply to such rate increases.
5. Amount of rate decrease. i. General. Even in circumstances where
a rate reduction is required, Sec. 1026.59 does not require that a card
issuer decrease the rate that applies to a credit card account to the
rate that was in effect prior to the rate increase subject to Sec.
1026.59(a). The amount of the rate decrease that is required must be
determined based upon the card issuer's reasonable policies
[[Page 885]]
and procedures under Sec. 1026.59(b) for consideration of factors
described in Sec. 1026.59(a) and (d). For example, assume a consumer's
rate on new purchases is increased from a variable rate of 15.99% to a
variable rate of 23.99% based on the consumer's making a required
minimum periodic payment five days late. The consumer makes all of the
payments required on the account on time for the six months following
the rate increase. Assume that the card issuer evaluates the account by
reviewing the factors on which the increase in an annual percentage rate
was originally based, in accordance with Sec. 1026.59(d)(1)(i). The
card issuer is not required to decrease the consumer's rate to the
15.99% that applied prior to the rate increase. However, the card
issuer's policies and procedures for performing the review required by
Sec. 1026.59(a) must be reasonable, as required by Sec. 1026.59(b),
and must take into account any reduction in the consumer's credit risk
based upon the consumer's timely payments.
ii. Change in type of rate. If the rate increase subject to Sec.
1026.59 involves a change from a variable rate to a non-variable rate or
from a non-variable rate to a variable rate, Sec. 1026.59 does not
require that the issuer reinstate the same type of rate that applied
prior to the change. However, the amount of any rate decrease that is
required must be determined based upon the card issuer's reasonable
policies and procedures under Sec. 1026.59(b) for consideration of
factors described in Sec. 1026.59(a) and (d).
59(a)(2) Rate Reductions
59(a)(2)(ii) Applicability of Rate Reduction
1. Applicability of reduced rate to new transactions. Section
1026.59(a)(2)(ii) requires, in part, that any reduction in rate required
pursuant to Sec. 1026.59(a)(1) must apply to new transactions that
occur after the effective date of the rate reduction, if those
transactions would otherwise have been subject to the increased rate
described in Sec. 1026.59(a)(1). A credit card account may have
multiple types of balances, for example, purchases, cash advances, and
balance transfers, to which different rates apply. For example, assume a
new credit card account opened on January 1 of year one has a rate
applicable to purchases of 15% and a rate applicable to cash advances
and balance transfers of 20%. Effective March 1 of year two, consistent
with the limitations in Sec. 1026.55 and upon giving notice required by
Sec. 1026.9(c)(2), the card issuer raises the rate applicable to new
purchases to 18% based on market conditions. The only transaction in
which the consumer engages in year two is a $1,000 purchase made on July
1. The rate for cash advances and balance transfers remains at 20%.
Based on a subsequent review required by Sec. 1026.59(a)(1), the card
issuer determines that the rate on purchases must be reduced to 16%.
Section 1026.59(a)(2)(ii) requires that the 16% rate be applied to the
$1,000 purchase made on July 1 and to all new purchases. The rate for
new cash advances and balance transfers may remain at 20%, because there
was no rate increase applicable to those types of transactions and,
therefore, the requirements of Sec. 1026.59(a) do not apply.
59(c) Timing
1. In general. The issuer may review all of its accounts subject to
Sec. 1026.59(a) at the same time once every six months, may review each
account once each six months on a rolling basis based on the date on
which the rate was increased for that account, or may otherwise review
each account not less frequently than once every six months.
2. Example. A card issuer increases the rates applicable to one half
of its credit card accounts on June 1, 2011. The card issuer increases
the rates applicable to the other half of its credit card accounts on
September 1, 2011. The card issuer may review the rate increases for all
of its credit card accounts on or before December 1, 2011, and at least
every six months thereafter. In the alternative, the card issuer may
first review the rate increases for the accounts that were repriced on
June 1, 2011 on or before December 1, 2011, and may first review the
rate increases for the accounts that were repriced on September 1, 2011
on or before March 1, 2012.
3. Rate increases prior to effective date of rule. For increases in
annual percentage rates applicable to a credit card account under an
open-end (not home-secured) consumer credit plan on or after January 1,
2009 and prior to August 22, 2010, Sec. 1026.59(c) requires that the
first review for such rate increases be conducted prior to February 22,
2011.
59(d) Factors
1. Change in factors. A creditor that complies with Sec. 1026.59(a)
by reviewing the factors it currently considers in determining the
annual percentage rates applicable to similar new credit card accounts
may change those factors from time to time. When a creditor changes the
factors it considers in determining the annual percentage rates
applicable to similar new credit card accounts from time to time, it may
comply with Sec. 1026.59(a) by reviewing the set of factors it
considered immediately prior to the change in factors for a brief
transition period, or may consider the new factors. For example, a
creditor changes the factors it uses to determine the rates applicable
to similar new credit card accounts on January 1, 2012. The creditor
reviews the rates applicable to its existing accounts that have been
subject to a rate increase pursuant to Sec. 1026.59(a) on January 25,
2012. The creditor complies with
[[Page 886]]
Sec. 1026.59(a) by reviewing, at its option, either the factors that it
considered on December 31, 2011 when determining the rates applicable to
similar new credit card accounts or the factors that it considers as of
January 25, 2012. For purposes of compliance with Sec. 1026.59(d), a
transition period of 60 days from the change of factors constitutes a
brief transition period.
2. Comparison of existing account to factors used for similar new
accounts. Under Sec. 1026.59(a), if a creditor evaluates an existing
account using the same factors that it considers in determining the
rates applicable to similar new accounts, the review of factors need not
result in existing accounts being subject to exactly the same rates and
rate structure as a creditor imposes on similar new accounts. For
example, a creditor may offer variable rates on similar new accounts
that are computed by adding a margin that depends on various factors to
the value of the LIBOR index. The account that the creditor is required
to review pursuant to Sec. 1026.59(a) may have variable rates that were
determined by adding a different margin, depending on different factors,
to a published prime rate. In performing the review required by Sec.
1026.59(a), the creditor may review the factors it uses to determine the
rates applicable to similar new accounts. If a rate reduction is
required, however, the creditor need not base the variable rate for the
existing account on the LIBOR index but may continue to use the
published prime rate. Section 1026.59(a) requires, however, that the
rate on the existing account after the reduction, as determined by
adding the published prime rate and margin, be comparable to the rate,
as determined by adding the margin and LIBOR, charged on a new account
for which the factors are comparable.
3. Similar new credit card accounts. A card issuer complying with
Sec. 1026.59(d)(1)(ii) is required to consider the factors that the
card issuer currently considers when determining the annual percentage
rates applicable to similar new credit card accounts under an open-end
(not home-secured) consumer credit plan. For example, a card issuer may
review different factors in determining the annual percentage rate that
applies to credit card plans for which the consumer pays an annual fee
and receives rewards points than it reviews in determining the rates for
credit card plans with no annual fee and no rewards points. Similarly, a
card issuer may review different factors in determining the annual
percentage rate that applies to private label credit cards than it
reviews in determining the rates applicable to credit cards that can be
used at a wider variety of merchants. In addition, a card issuer may
review different factors in determining the annual percentage rate that
applies to private label credit cards usable only at Merchant A than it
may review for private label credit cards usable only at Merchant B.
However, Sec. 1026.59(d)(1)(ii) requires a card issuer to review the
factors it considers when determining the rates for new credit card
accounts with similar features that are offered for similar purposes.
4. No similar new credit card accounts. In some circumstances, a
card issuer that complies with Sec. 1026.59(a) by reviewing the factors
that it currently considers in determining the annual percentage rates
applicable to similar new accounts may not be able to identify a class
of new accounts that are similar to the existing accounts on which a
rate increase has been imposed. For example, consumers may have existing
credit card accounts under an open-end (not home-secured) consumer
credit plan but the card issuer may no longer offer a product to new
consumers with similar characteristics, such as the availability of
rewards, size of credit line, or other features. Similarly, some
consumers' accounts may have been closed and therefore cannot be used
for new transactions, while all new accounts can be used for new
transactions. In those circumstances, Sec. 1026.59 requires that the
card issuer nonetheless perform a review of the rate increase on the
existing customers' accounts. A card issuer does not comply with Sec.
1026.59 by maintaining an increased rate without performing such an
evaluation. In such circumstances, Sec. 1026.59(d)(1)(ii) requires that
the card issuer compare the existing accounts to the most closely
comparable new accounts that it offers.
5. Consideration of consumer's conduct on existing account. A card
issuer that complies with Sec. 1026.59(a) by reviewing the factors that
it currently considers in determining the annual percentage rates
applicable to similar new accounts may consider the consumer's payment
or other account behavior on the existing account only to the same
extent and in the same manner that the issuer considers such information
when one of its current cardholders applies for a new account with the
card issuer. For example, a card issuer might obtain consumer reports
for all of its applicants. The consumer reports contain certain
information regarding the applicant's past performance on existing
credit card accounts. However, the card issuer may have additional
information about an existing cardholder's payment history or account
usage that does not appear in the consumer report and that, accordingly,
it would not generally have for all new applicants. For example, a
consumer may have made a payment that is five days late on his or her
account with the card issuer, but this information does not appear on
the consumer report. The card issuer may consider this additional
information in performing its review under Sec. 1026.59(a), but only to
the extent and in the manner that it considers such information if
[[Page 887]]
a current cardholder applies for a new account with the issuer.
6. Multiple rate increases between January 1, 2009 and February 21,
2010. i. General. Section 1026.59(d)(2) applies if an issuer increased
the rate applicable to a credit card account under an open-end (not
home-secured) consumer credit plan between January 1, 2009 and February
21, 2010, and the increase was not based solely upon factors specific to
the consumer. In some cases, a credit card account may have been subject
to multiple rate increases during the period from January 1, 2009 to
February 21, 2010. Some such rate increases may have been based solely
upon factors specific to the consumer, while others may have been based
on factors not specific to the consumer, such as the issuer's cost of
funds or market conditions. In such circumstances, when conducting the
first two reviews required under Sec. 1026.59, the card issuer may
separately review: (i) Rate increases imposed based on factors not
specific to the consumer, using the factors described in Sec.
1026.59(d)(1)(ii) (as required by Sec. 1026.59(d)(2)); and (ii) rate
increases imposed based on consumer-specific factors, using the factors
described in Sec. 1026.59(d)(1)(i). If the review of factors described
in Sec. 1026.59(d)(1)(i) indicates that it is appropriate to continue
to apply a penalty or other increased rate to the account as a result of
the consumer's payment history or other factors specific to the
consumer, Sec. 1026.59 permits the card issuer to continue to impose
the penalty or other increased rate, even if the review of the factors
described in Sec. 1026.59(d)(1)(ii) would otherwise require a rate
decrease.
ii. Example. Assume a credit card account was subject to a rate of
15% on all transactions as of January 1, 2009. On May 1, 2009, the
issuer increased the rate on existing balances and new transactions to
18%, based upon market conditions or other factors not specific to the
consumer or the consumer's account. Subsequently, on September 1, 2009,
based on a payment that was received five days after the due date, the
issuer increased the applicable rate on existing balances and new
transactions from 18% to a penalty rate of 25%. When conducting the
first review required under Sec. 1026.59, the card issuer reviews the
rate increase from 15% to 18% using the factors described in Sec.
1026.59(d)(1)(ii) (as required by Sec. 1026.59(d)(2)), and separately
but concurrently reviews the rate increase from 18% to 25% using the
factors described in paragraph Sec. 1026.59(d)(1)(i). The review of the
rate increase from 15% to 18% based upon the factors described in Sec.
1026.59(d)(1)(ii) indicates that a similarly situated new consumer would
receive a rate of 17%. The review of the rate increase from 18% to 25%
based upon the factors described in Sec. 1026.59(d)(1)(i) indicates
that it is appropriate to continue to apply the 25% penalty rate based
upon the consumer's late payment. Section 1026.59 permits the rate on
the account to remain at 25%.
59(f) Termination of Obligation to Review Factors
1. Revocation of temporary rates. i. In general. If an annual
percentage rate is increased due to revocation of a temporary rate,
Sec. 1026.59(a) requires that the card issuer periodically review the
increased rate. In contrast, if the rate increase results from the
expiration of a temporary rate previously disclosed in accordance with
Sec. 1026.9(c)(2)(v)(B), the review requirements in Sec. 1026.59(a) do
not apply. If a temporary rate is revoked such that the requirements of
Sec. 1026.59(a) apply, Sec. 1026.59(f) permits an issuer to terminate
the review of the rate increase if and when the applicable rate is the
same as the rate that would have applied if the increase had not
occurred.ii. Examples. Assume that on January 1, 2011, a consumer opens
a new credit card account under an open-end (not home-secured) consumer
credit plan. The annual percentage rate applicable to purchases is 15%.
The card issuer offers the consumer a 10% rate on purchases made between
February 1, 2012 and August 1, 2013 and discloses pursuant to Sec.
1026.9(c)(2)(v)(B) that on August 1, 2013 the rate on purchases will
revert to the original 15% rate. The consumer makes a payment that is
five days late in July 2012.
A. Upon providing 45 days' advance notice and to the extent
permitted under Sec. 1026.55, the card issuer increases the rate
applicable to new purchases to 15%, effective on September 1, 2012. The
card issuer must review that rate increase under Sec. 1026.59(a) at
least once each six months during the period from September 1, 2012 to
August 1, 2013, unless and until the card issuer reduces the rate to
10%. The card issuer performs reviews of the rate increase on January 1,
2013 and July 1, 2013. Based on those reviews, the rate applicable to
purchases remains at 15%. Beginning on August 1, 2013, the card issuer
is not required to continue periodically reviewing the rate increase,
because if the temporary rate had expired in accordance with its
previously disclosed terms, the 15% rate would have applied to purchase
balances as of August 1, 2013 even if the rate increase had not occurred
on September 1, 2012.
B. Same facts as above except that the review conducted on July 1,
2013 indicates that a reduction to the original temporary rate of 10% is
appropriate. Section 1026.59(a)(2)(i) requires that the rate be reduced
no later than 45 days after completion of the review, or no later than
August 15, 2013. Because the temporary rate would have expired prior to
the date on which the rate decrease is required to take effect, the card
issuer may, at its option, reduce the rate to 10% for any portion of the
period from July 1, 2013, to August 1,
[[Page 888]]
2013, or may continue to impose the 15% rate for that entire period. The
card issuer is not required to conduct further reviews of the 15% rate
on purchases.
C. Same facts as above except that on September 1, 2012 the card
issuer increases the rate applicable to new purchases to the penalty
rate on the consumer's account, which is 25%. The card issuer conducts
reviews of the increased rate in accordance with Sec. 1026.59 on
January 1, 2013 and July 1, 2013. Based on those reviews, the rate
applicable to purchases remains at 25%. The card issuer's obligation to
review the rate increase continues to apply after August 1, 2013,
because the 25% penalty rate exceeds the 15% rate that would have
applied if the temporary rate expired in accordance with its previously
disclosed terms. The card issuer's obligation to review the rate
terminates if and when the annual percentage rate applicable to
purchases is reduced to the 15% rate.
2. Example--relationship to Sec. 1026.59(a). Assume that on January
1, 2011, a consumer opens a new credit card account under an open-end
(not home-secured) consumer credit plan. The annual percentage rate
applicable to purchases is 15%. Upon providing 45 days' advance notice
and to the extent permitted under Sec. 1026.55, the card issuer
increases the rate applicable to new purchases to 18%, effective on
September 1, 2012. The card issuer conducts reviews of the increased
rate in accordance with Sec. 1026.59 on January 1, 2013 and July 1,
2013, based on the factors described in Sec. 1026.59(d)(1)(ii). Based
on the January 1, 2013 review, the rate applicable to purchases remains
at 18%. In the review conducted on July 1, 2013, the card issuer
determines that, based on the relevant factors, the rate it would offer
on a comparable new account would be 14%. Consistent with Sec.
1026.59(f), Sec. 1026.59(a) requires that the card issuer reduce the
rate on the existing account to the 15% rate that was in effect prior to
the September 1, 2012 rate increase.
59(g) Acquired Accounts
59(g)(1) General
1. Relationship to Sec. 1026.59(d)(2) for rate increases imposed
between January 1, 2009 and February 21, 2010. Section 1026.59(d)(2)
applies to acquired accounts. Accordingly, if a card issuer acquires
accounts on which a rate increase was imposed between January 1, 2009
and February 21, 2010 that was not based solely upon consumer-specific
factors, that acquiring card issuer must consider the factors that it
currently considers when determining the annual percentage rates
applicable to similar new credit card accounts, if it conducts either or
both of the first two reviews of such accounts that are required after
August 22, 2010 under Sec. 1026.59(a).
59(g)(2) Review of Acquired Portfolio
1. Example--general. A card issuer acquires a portfolio of accounts
that currently are subject to annual percentage rates of 12%, 15%, and
18%. Not later than six months after the acquisition of such accounts,
the card issuer reviews all of these accounts in accordance with the
factors that it currently uses in determining the rates applicable to
similar new credit card accounts. As a result of that review, the card
issuer decreases the rate on the accounts that are currently subject to
a 12% annual percentage rate to 10%, leaves the rate applicable to the
accounts currently subject to a 15% annual percentage rate at 15%, and
increases the rate applicable to the accounts currently subject to a
rate of 18% to 20%. Section 1026.59(g)(2) requires the card issuer to
review, no less frequently than once every six months, the accounts for
which the rate has been increased to 20%. The card issuer is not
required to review the accounts subject to 10% and 15% rates pursuant to
Sec. 1026.59(a), unless and until the card issuer makes a subsequent
rate increase applicable to those accounts.
2. Example--penalty rates. A card issuer acquires a portfolio of
accounts that currently are subject to standard annual percentage rates
of 12% and 15%. In addition, several acquired accounts are subject to a
penalty rate of 24%. Not later than six months after the acquisition of
such accounts, the card issuer reviews all of these accounts in
accordance with the factors that it currently uses in determining the
rates applicable to similar new credit card accounts. As a result of
that review, the card issuer leaves the standard rates applicable to the
accounts at 12% and 15%, respectively. The card issuer decreases the
rate applicable to the accounts currently at 24% to its penalty rate of
23%. Section 1026.59(g)(2) requires the card issuer to review, no less
frequently than once every six months, the accounts that are subject to
a penalty rate of 23%. The card issuer is not required to review the
accounts subject to 12% and 15% rates pursuant to Sec. 1026.59(a),
unless and until the card issuer makes a subsequent rate increase
applicable to those accounts.
Section 1026.60--Credit and Charge Card Applications and Solicitations
1. General. Section 1026.60 generally requires that credit
disclosures be contained in application forms and solicitations
initiated by a card issuer to open a credit or charge card account. (See
Sec. 1026.60(a)(5) and (e)(2) for exceptions; see Sec. 1026.60(a)(1)
and accompanying commentary for the definition of solicitation; see also
Sec. 1026.2(a)(15) and accompanying commentary for the definition of
charge card.)
2. Substitution of account-opening summary table for the disclosures
required by Sec. 1026.60. In
[[Page 889]]
complying with Sec. 1026.60(c), (e)(1) or (f), a card issuer may
provide the account-opening summary table described in Sec.
1026.6(b)(1) in lieu of the disclosures required by Sec. 1026.60, if
the issuer provides the disclosures required by Sec. 1026.6 on or with
the application or solicitation.
3. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 1026.60 disclosures.
60(a) General Rules
60(a)(1) Definition of Solicitation
1. Invitations to apply. A card issuer may contact a consumer who
has not been preapproved for a card account about opening an account
(whether by direct mail, telephone, or other means) and invite the
consumer to complete an application. Such a contact does not meet the
definition of solicitation, nor is it covered by this section, unless
the contact itself includes an application form in a direct mailing,
electronic communication or ``take-one''; an oral application in a
telephone contact initiated by the card issuer; or an application in an
in-person contact initiated by the card issuer.
60(a)(2) Form of Disclosures; Tabular Format
1. Location of table. i. General. Except for disclosures given
electronically, disclosures in Sec. 1026.60(b) that are required to be
provided in a table must be prominently located on or with the
application or solicitation. Disclosures are deemed to be prominently
located, for example, if the disclosures are on the same page as an
application or solicitation reply form. If the disclosures appear
elsewhere, they are deemed to be prominently located if the application
or solicitation reply form contains a clear and conspicuous reference to
the location of the disclosures and indicates that they contain rate,
fee, and other cost information, as applicable.
ii. Electronic disclosures. If the table is provided electronically,
the table must be provided in close proximity to the application or
solicitation. Card issuers have flexibility in satisfying this
requirement. Methods card issuers could use to satisfy the requirement
include, but are not limited to, the following examples (whatever method
is used, a card issuer need not confirm that the consumer has read the
disclosures):
A. The disclosures could automatically appear on the screen when the
application or reply form appears;
B. The disclosures could be located on the same Web page as the
application or reply form (whether or not they appear on the initial
screen), if the application or reply form contains a clear and
conspicuous reference to the location of the disclosures and indicates
that the disclosures contain rate, fee, and other cost information, as
applicable;
C. Card issuers could provide a link to the electronic disclosures
on or with the application (or reply form) as long as consumers cannot
bypass the disclosures before submitting the application or reply form.
The link would take the consumer to the disclosures, but the consumer
need not be required to scroll completely through the disclosures; or
D. The disclosures could be located on the same Web page as the
application or reply form without necessarily appearing on the initial
screen, immediately preceding the button that the consumer will click to
submit the application or reply.
2. Multiple accounts. If a tabular format is required to be used,
card issuers offering several types of accounts may disclose the various
terms for the accounts in a single table or may provide a separate table
for each account.
3. Information permitted in the table. See the commentary to Sec.
1026.60(b), (d), and (e)(1) for guidance on additional information
permitted in the table.
4. Deletion of inapplicable disclosures. Generally, disclosures need
only be given as applicable. Card issuers may, therefore, omit
inapplicable headings and their corresponding boxes in the table. For
example, if no foreign transaction fee is imposed on the account, the
heading Foreign transaction and disclosure may be deleted from the table
or the disclosure form may contain the heading Foreign transaction and a
disclosure showing none. There is an exception for the grace period
disclosure; even if no grace period exists, that fact must be stated.
5. Highlighting of annual percentage rates and fee amounts. i. In
general. See Samples G-10(B) and G-10(C) for guidance on providing the
disclosures described in Sec. 1026.60(a)(2)(iv) in bold text. Other
annual percentage rates or fee amounts disclosed in the table may not be
in bold text. Samples G-10(B) and G-10(C) also provide guidance to
issuers on how to disclose the rates and fees described in Sec.
1026.60(a)(2)(iv) in a clear and conspicuous manner, by including these
rates and fees generally as the first text in the applicable rows of the
table so that the highlighted rates and fees generally are aligned
vertically in the table.
ii. Maximum limits on fees. Section 1026.60(a)(2)(iv) provides that
any maximum limits on fee amounts must be disclosed in bold text. For
example, assume that, consistent with Sec. 1026.52(b)(1)(ii), a card
issuer's late payment fee will not exceed $35. The maximum limit of $35
for the late payment fee must be highlighted in bold. Similarly, assume
an issuer will charge a cash advance fee of $5 or 3 percent of the cash
advance transaction amount, whichever is greater, but the fee will not
exceed $100. The maximum limit of $100 for the cash advance fee must be
highlighted in bold.
[[Page 890]]
iii. Periodic fees. Section 1026.60(a)(2)(iv) provides that any
periodic fee disclosed pursuant to Sec. 1026.60(b)(2) that is not an
annualized amount must not be disclosed in bold. For example, if an
issuer imposes a $10 monthly maintenance fee for a card account, the
issuer must disclose in the table that there is a $10 monthly
maintenance fee, and that the fee is $120 on an annual basis. In this
example, the $10 fee disclosure would not be disclosed in bold, but the
$120 annualized amount must be disclosed in bold. In addition, if an
issuer must disclose any annual fee in the table, the amount of the
annual fee must be disclosed in bold.
6. Form of disclosures. Whether disclosures must be in electronic
form depends upon the following:
i. If a consumer accesses a credit card application or solicitation
electronically (other than as described under ii. below), such as online
at a home computer, the card issuer must provide the disclosures in
electronic form (such as with the application or solicitation on its Web
site) in order to meet the requirement to provide disclosures in a
timely manner on or with the application or solicitation. If the issuer
instead mailed paper disclosures to the consumer, this requirement would
not be met.
ii. In contrast, if a consumer is physically present in the card
issuer's office, and accesses a credit card application or solicitation
electronically, such as via a terminal or kiosk (or if the consumer uses
a terminal or kiosk located on the premises of an affiliate or third
party that has arranged with the card issuer to provide applications or
solicitations to consumers), the issuer may provide disclosures in
either electronic or paper form, provided the issuer complies with the
timing and delivery (``on or with'') requirements of the regulation.
7. Terminology. Section 1026.60(a)(2)(i) generally requires that the
headings, content and format of the tabular disclosures be substantially
similar, but need not be identical, to the applicable tables in appendix
G-10 to part 1026; but see Sec. 1026.5(a)(2) for terminology
requirements applicable to Sec. 1026.60 disclosures.
60(a)(4) Fees That Vary by State
1. Manner of disclosing range. If the card issuer discloses a range
of fees instead of disclosing the amount of the specific fee applicable
to the consumer's account, the range may be stated as the lowest
authorized fee (zero, if there are one or more states where no fee
applies) to the highest authorized fee.
60(a)(5) Exceptions
1. Noncoverage of consumer-initiated requests. Applications provided
to a consumer upon request are not covered by Sec. 1026.60, even if the
request is made in response to the card issuer's invitation to apply for
a card account. To illustrate, if a card issuer invites consumers to
call a toll-free number or to return a response card to obtain an
application, the application sent in response to the consumer's request
need not contain the disclosures required under Sec. 1026.60.
Similarly, if the card issuer invites consumers to call and make an oral
application on the telephone, Sec. 1026.60 does not apply to the
application made by the consumer. If, however, the card issuer calls a
consumer or initiates a telephone discussion with a consumer about
opening a card account and contemporaneously takes an oral application,
such applications are subject to Sec. 1026.60, specifically Sec.
1026.60(d). Likewise, if the card issuer initiates an in-person
discussion with a consumer about opening a card account and
contemporaneously takes an application, such applications are subject to
Sec. 1026.60, specifically Sec. 1026.60(f).
60(b) Required Disclosures
1. Tabular format. Provisions in Sec. 1026.60(b) and its commentary
provide that certain information must appear or is permitted to appear
in a table. The tabular format is required for Sec. 1026.60(b)
disclosures given pursuant to Sec. 1026.60(c), (d)(2), (e)(1) and (f).
The tabular format does not apply to oral disclosures given pursuant to
Sec. 1026.60(d)(1). (See Sec. 1026.60(a)(2).)
2. Accuracy. Rules concerning accuracy of the disclosures required
by Sec. 1026.60(b), including variable rate disclosures, are stated in
Sec. 1026.60(c)(2), (d)(3), and (e)(4), as applicable.
60(b)(1) Annual Percentage Rate
1. Variable-rate accounts--definition. For purposes of Sec.
1026.60(b)(1), a variable-rate account exists when rate changes are part
of the plan and are tied to an index or formula. (See the commentary to
Sec. 1026.6(b)(4)(ii) for examples of variable-rate plans.)
2. Variable-rate accounts--fact that rate varies and how the rate
will be determined. In describing how the applicable rate will be
determined, the card issuer must identify in the table the type of index
or formula used, such as the prime rate. In describing the index, the
issuer may not include in the table details about the index. For
example, if the issuer uses a prime rate, the issuer must disclose the
rate as a ``prime rate'' and may not disclose in the table other details
about the prime rate, such as the fact that it is the highest prime rate
published in the Wall Street Journal two business days before the
closing date of the statement for each billing period. The issuer may
not disclose in the table the current value of the index (such as that
the prime rate is currently 7.5 percent) or the amount of the margin or
spread added
[[Page 891]]
to the index or formula in setting the applicable rate. A card issuer
may not disclose any applicable limitations on rate increases or
decreases in the table, such as describing that the rate will not go
below a certain rate or higher than a certain rate. (See Samples G-10(B)
and G-10(C) for guidance on how to disclose the fact that the applicable
rate varies and how it is determined.)
3. Discounted initial rates. i. Immediate proximity. If the term
``introductory'' is in the same phrase as the introductory rate, as that
term is defined in Sec. 1026.16(g)(2)(ii), it will be deemed to be in
immediate proximity of the listing. For example, an issuer that uses the
phrase ``introductory balance transfer APR X percent'' has used the word
``introductory'' within the same phrase as the rate. (See Sample G-10(C)
for guidance on how to disclose clearly and conspicuously the expiration
date of the introductory rate and the rate that will apply after the
introductory rate expires, if an introductory rate is disclosed in the
table.)
ii. Subsequent changes in terms. The fact that an issuer may reserve
the right to change a rate subsequent to account opening, pursuant to
the notice requirements of Sec. 1026.9(c) and the limitations in Sec.
1026.55, does not, by itself, make that rate an introductory rate. For
example, assume an issuer discloses an annual percentage rate for
purchases of 12.99% but does not specify a time period during which that
rate will be in effect. Even if that issuer subsequently increases the
annual percentage rate for purchases to 15.99%, pursuant to a change-in-
terms notice provided under Sec. 1026.9(c), the 12.99% is not an
introductory rate.
iii. More than one introductory rate. If more than one introductory
rate may apply to a particular balance in succeeding periods, the term
``introductory'' need only be used to describe the first introductory
rate. For example, if an issuer offers a rate of 8.99% on purchases for
six months, 10.99% on purchases for the following six months, and 14.99%
on purchases after the first year, the term ``introductory'' need only
be used to describe the 8.99% rate.
4. Premium initial rates--subsequent changes in terms. The fact that
an issuer may reserve the right to change a rate subsequent to account
opening, pursuant to the notice requirements of Sec. 1026.9(c) and the
limitations in Sec. 1026.55 (as applicable), does not, by itself, make
that rate a premium initial rate. For example, assume an issuer
discloses an annual percentage rate for purchases of 18.99% but does not
specify a time period during which that rate will be in effect. Even if
that issuer subsequently reduces the annual percentage rate for
purchases to 15.99%, the 18.99% is not a premium initial rate. If the
rate decrease is the result of a change from a non-variable rate to a
variable rate or from a variable rate to a non-variable rate, see
comments 9(c)(2)(v)-3 and 9(c)(2)(v)-4 for guidance on the notice
requirements under Sec. 1026.9(c).
5. Increased penalty rates. i. In general. For rates that are not
introductory rates or employee preferential rates, if a rate may
increase as a penalty for one or more events specified in the account
agreement, such as a late payment or an extension of credit that exceeds
the credit limit, the card issuer must disclose the increased rate that
would apply, a brief description of the event or events that may result
in the increased rate, and a brief description of how long the increased
rate will remain in effect. The description of the specific event or
events that may result in an increased rate should be brief. For
example, if an issuer may increase a rate to the penalty rate because
the consumer does not make the minimum payment by 5 p.m., Eastern Time,
on its payment due date, the issuer should describe this circumstance in
the table as ``make a late payment.'' Similarly, if an issuer may
increase a rate that applies to a particular balance because the account
is more than 60 days late, the issuer should describe this circumstance
in the table as ``make a late payment.'' An issuer may not distinguish
between the events that may result in an increased rate for existing
balances and the events that may result in an increased rate for new
transactions. (See Samples G-10(B) and G-10(C) (in the row labeled
``Penalty APR and When it Applies'') for additional guidance on the
level of detail in which the specific event or events should be
described.) The description of how long the increased rate will remain
in effect also should be brief. If a card issuer reserves the right to
apply the increased rate to any balances indefinitely, to the extent
permitted by Sec. Sec. 1026.55(b)(4) and 1026.59, the issuer should
disclose that the penalty rate may apply indefinitely. The card issuer
may not disclose in the table any limitations imposed by Sec. Sec.
1026.55(b)(4) and 1026.59 on the duration of increased rates. For
example, if the issuer generally provides that the increased rate will
apply until the consumer makes twelve timely consecutive required
minimum periodic payments, except to the extent that Sec. Sec.
1026.55(b)(4) and 1026.59 apply, the issuer should disclose that the
penalty rate will apply until the consumer makes twelve consecutive
timely minimum payments. (See Samples G-10(B) and G-10(C) (in the row
labeled ``Penalty APR and When it Applies'') for additional guidance on
the level of detail which the issuer should use to describe how long the
increased rate will remain in effect.) A card issuer will be deemed to
meet the standard to clearly and conspicuously disclose the information
required by Sec. 1026.60(b)(1)(iv)(A) if the issuer uses the format
shown in Samples G-10(B) and G-10(C) (in the row labeled ``Penalty APR
and When it Applies'') to disclose this information.
[[Page 892]]
ii. Introductory rates--general. An issuer is required to disclose
directly beneath the table the circumstances under which an introductory
rate, as that term is defined in Sec. 1026.16(g)(2)(ii), may be
revoked, and the rate that will apply after the revocation. This
information about revocation of an introductory rate and the rate that
will apply after revocation must be provided even if the rate that will
apply after the introductory rate is revoked is the rate that would have
applied at the end of the promotional period. In a variable-rate
account, the rate that would have applied at the end of the promotional
period is a rate based on the applicable index or formula in accordance
with the accuracy requirements set forth in Sec. 1026.60(c)(2) or
(e)(4). In describing the rate that will apply after revocation of the
introductory rate, if the rate that will apply after revocation of the
introductory rate is already disclosed in the table, the issuer is not
required to repeat the rate, but may refer to that rate in a clear and
conspicuous manner. For example, if the rate that will apply after
revocation of an introductory rate is the standard rate that applies to
that type of transaction (such as a purchase or balance transfer
transaction), and the standard rates are labeled in the table as
``standard APRs,'' the issuer may refer to the ``standard APR'' when
describing the rate that will apply after revocation of an introductory
rate. (See Sample G-10(C) in the disclosure labeled ``Loss of
Introductory APR'' directly beneath the table.) The description of the
circumstances in which an introductory rate could be revoked should be
brief. For example, if an issuer may increase an introductory rate
because the account is more than 60 days late, the issuer should
describe this circumstance directly beneath the table as ``make a late
payment.'' In addition, if the circumstances in which an introductory
rate could be revoked are already listed elsewhere in the table, the
issuer is not required to repeat the circumstances again, but may refer
to those circumstances in a clear and conspicuous manner. For example,
if the circumstances in which an introductory rate could be revoked are
the same as the event or events that may trigger a ``penalty rate'' as
described in Sec. 1026.60(b)(1)(iv)(A), the issuer may refer to the
actions listed in the Penalty APR row, in describing the circumstances
in which the introductory rate could be revoked. (See Sample G-10(C) in
the disclosure labeled ``Loss of Introductory APR'' directly beneath the
table for additional guidance on the level of detail in which to
describe the circumstances in which an introductory rate could be
revoked.) A card issuer will be deemed to meet the standard to clearly
and conspicuously disclose the information required by Sec.
1026.60(b)(1)(iv)(B) if the issuer uses the format shown in Sample G-
10(C) to disclose this information.
iii. Introductory rates--limitations on revocation. Issuers that are
disclosing an introductory rate are prohibited by Sec. 1026.55 from
increasing or revoking the introductory rate before it expires unless
the consumer fails to make a required minimum periodic payment within 60
days after the due date for the payment. In making the required
disclosure pursuant to Sec. 1026.60(b)(1)(iv)(B), issuers should
describe this circumstance directly beneath the table as ``make a late
payment.''
iv. Employee preferential rates. An issuer is required to disclose
directly beneath the table the circumstances under which an employee
preferential rate may be revoked, and the rate that will apply after the
revocation. In describing the rate that will apply after revocation of
the employee preferential rate, if the rate that will apply after
revocation of the employee preferential rate is already disclosed in the
table, the issuer is not required to repeat the rate, but may refer to
that rate in a clear and conspicuous manner. For example, if the rate
that will apply after revocation of an employee preferential rate is the
standard rate that applies to that type of transaction (such as a
purchase or balance transfer transaction), and the standard rates are
labeled in the table as ``standard APRs,'' the issuer may refer to the
``standard APR'' when describing the rate that will apply after
revocation of an employee preferential rate. The description of the
circumstances in which an employee preferential rate could be revoked
should be brief. For example, if an issuer may increase an employee
preferential rate based upon termination of the employee's employment
relationship with the issuer or a third party, issuers may describe this
circumstance as ``if your employment with [issuer or third party]
ends.''
6. Rates that depend on consumer's creditworthiness. i. In general.
The card issuer, at its option, may disclose the possible rates that may
apply as either specific rates, or a range of rates. For example, if
there are three possible rates that may apply (9.99, 12.99 or 17.99
percent), an issuer may disclose specific rates (9.99, 12.99 or 17.99
percent) or a range of rates (9.99 to 17.99 percent). The card issuer
may not disclose only the lowest, highest or median rate that could
apply. (See Samples G-10(B) and G-10(C) for guidance on how to disclose
a range of rates.)
ii. Penalty rates. If the rate is a penalty rate, as described in
Sec. 1026.60(b)(1)(iv), the card issuer at its option may disclose the
highest rate that could apply, instead of disclosing the specific rates
or the range of rates that could apply. For example, if the penalty rate
could be up to 28.99 percent, but the issuer may impose a penalty rate
that is less than that rate depending on factors at the time the penalty
rate is imposed, the issuer may disclose the penalty rate as ``up
[[Page 893]]
to'' 28.99 percent. The issuer also must include a statement that the
penalty rate for which the consumer may qualify will depend on the
consumer's creditworthiness, and other factors if applicable.
iii. Other factors. Section 1026.60(b)(1)(v) applies even if other
factors are used in combination with a consumer's creditworthiness to
determine the rate for which a consumer may qualify at account opening.
For example, Sec. 1026.60(b)(1)(v) would apply if the issuer considers
the type of purchase the consumer is making at the time the consumer
opens the account, in combination with the consumer's creditworthiness,
to determine the rate for which the consumer may qualify at account
opening. If other factors are considered, the issuer should amend the
statement about creditworthiness, to indicate that the rate for which
the consumer may qualify at account opening will depend on the
consumer's creditworthiness and other factors. Nonetheless, Sec.
1026.60(b)(1)(v) does not apply if a consumer's creditworthiness is not
one of the factors that will determine the rate for which the consumer
may qualify at account opening (for example, if the rate is based solely
on the type of purchase that the consumer is making at the time the
consumer opens the account, or is based solely on whether the consumer
has other banking relationships with the card issuer).
7. Rate based on another rate on the account. In some cases, one
rate may be based on another rate on the account. For example, assume
that a penalty rate as described in Sec. 1026.60(b)(1)(iv)(A) is
determined by adding 5 percentage points to the current purchase rate,
which is 10 percent. In this example, the card issuer in disclosing the
penalty rate must disclose 15 percent as the current penalty rate. If
the purchase rate is a variable rate, then the penalty rate also is a
variable rate. In that case, the card issuer also must disclose the fact
that the penalty rate may vary and how the rate is determined, such as
``This APR may vary with the market based on the Prime Rate.'' In
describing the penalty rate, the issuer shall not disclose in the table
the amount of the margin or spread added to the current purchase rate to
determine the penalty rate, such as describing that the penalty rate is
determined by adding 5 percentage points to the purchase rate. (See
Sec. 1026.60(b)(1)(i) and comment 60(b)(1)-2 for further guidance on
describing a variable rate.)
8. Rates. The only rates that shall be disclosed in the table are
annual percentage rates determined under Sec. 1026.14(b). Periodic
rates shall not be disclosed in the table.
9. Deferred interest or similar transactions. An issuer offering a
deferred interest or similar plan, such as a promotional program that
provides that a consumer will not be obligated to pay interest that
accrues on a balance if that balance is paid in full prior to the
expiration of a specified period of time, may not disclose a 0% rate as
the rate applicable to deferred interest or similar transactions if
there are any circumstances under which the consumer will be obligated
for interest on such transactions for the deferred interest or similar
period.
60(b)(2) Fees for Issuance or Availability
1. Membership fees. Membership fees for opening an account must be
disclosed under this paragraph. A membership fee to join an organization
that provides a credit or charge card as a privilege of membership must
be disclosed only if the card is issued automatically upon membership.
Such a fee shall not be disclosed in the table if membership results
merely in eligibility to apply for an account.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account (for example,
travel insurance or card-registration services) shall not be disclosed
in the table if the basic account may be opened without paying such
fees. Issuing a card to each primary cardholder (not authorized users)
is considered a basic membership privilege and fees for additional
cards, beyond the first card on the account, must be disclosed as a fee
for issuance or availability. Thus, a fee to obtain an additional card
on the account beyond the first card (so that each cardholder would have
his or her own card) must be disclosed in the table as a fee for
issuance or availability under Sec. 1026.60(b)(2). This fee must be
disclosed even if the fee is optional; that is, if the fee is charged
only if the cardholder requests one or more additional cards. (See the
available credit disclosure in Sec. 1026.60(b)(14).)
3. One-time fees. Disclosure of non-periodic fees is limited to fees
related to opening the account, such as one-time membership or
participation fees, or an application fee that is excludable from the
finance charge under Sec. 1026.4(c)(1). The following are examples of
fees that shall not be disclosed in the table:
i. Fees for reissuing a lost or stolen card.
ii. Statement reproduction fees.
4. Waived or reduced fees. If fees required to be disclosed are
waived or reduced for a limited time, the introductory fees or the fact
of fee waivers may be disclosed in the table in addition to the required
fees if the card issuer also discloses how long the reduced fees or
waivers will remain in effect in accordance with the requirements of
Sec. Sec. 1026.9(c)(2)(v)(B) and 1026.55(b)(1).
5. Periodic fees and one-time fees. A card issuer disclosing a
periodic fee must disclose the amount of the fee, how frequently it will
be imposed, and the annualized amount of the fee. A card issuer
disclosing a non-periodic fee must disclose that the fee is a one-time
fee. (See Sample G-10(C) for guidance on how to meet these
requirements.)
[[Page 894]]
60(b)(3) Fixed Finance Charge; Minimum Interest Charge
1. Example of brief statement. See Samples G-10(B) and G-10(C) for
guidance on how to provide a brief description of a minimum interest
charge.
2. Adjustment of $1.00 threshold amount. Consistent with Sec.
1026.60(b)(3), the Bureau will publish adjustments to the $1.00
threshold amount, as appropriate.
60(b)(4) Transaction Charges
1. Charges imposed by person other than card issuer. Charges imposed
by a third party, such as a seller of goods, shall not be disclosed in
the table under this section; the third party would be responsible for
disclosing the charge under Sec. 1026.9(d)(1).
2. Foreign transaction fees. A transaction charge imposed by the
card issuer for the use of the card for purchases includes any fee
imposed by the issuer for purchases in a foreign currency or that take
place outside the United States or with a foreign merchant. (See comment
4(a)-4 for guidance on when a foreign transaction fee is considered
charged by the card issuer.) If an issuer charges the same foreign
transaction fee for purchases and cash advances in a foreign currency,
or that take place outside the United States or with a foreign merchant,
the issuer may disclose this foreign transaction fee as shown in Samples
G-10(B) and G-10(C). Otherwise, the issuer must revise the foreign
transaction fee language shown in Samples G-10(B) and G-10(C) to
disclose clearly and conspicuously the amount of the foreign transaction
fee that applies to purchases and the amount of the foreign transaction
fee that applies to cash advances.
60(b)(5) Grace Period
1. How grace period disclosure is made. The card issuer must state
any conditions on the applicability of the grace period. An issuer,
however, may not disclose under Sec. 1026.60(b)(5) the limitations on
the imposition of finance charges as a result of a loss of a grace
period in Sec. 1026.54, or the impact of payment allocation on whether
interest is charged on purchases as a result of a loss of a grace
period. Some issuers may offer a grace period on all purchases under
which interest will not be charged on purchases if the consumer pays the
outstanding balance shown on a periodic statement in full by the due
date shown on that statement for one or more billing cycles. In these
circumstances, Sec. 1026.60(b)(5) requires that the issuer disclose the
grace period and the conditions for its applicability using the
following language, or substantially similar language, as applicable:
``Your due date is [at least] __ days after the close of each billing
cycle. We will not charge you any interest on purchases if you pay your
entire balance by the due date each month.'' However, other issuers may
offer a grace period on all purchases under which interest may be
charged on purchases even if the consumer pays the outstanding balance
shown on a periodic statement in full by the due date shown on that
statement each billing cycle. In these circumstances, Sec.
1026.60(b)(5) requires the issuer to amend the above disclosure language
to describe accurately the conditions on the applicability of the grace
period.
2. No grace period. The issuer may use the following language to
describe that no grace period on any purchases is offered, as
applicable: ``We will begin charging interest on purchases on the
transaction date.''
3. Grace period on some purchases. If the issuer provides a grace
period on some types of purchases but no grace period on others, the
issuer may combine and revise the language in comments 60(b)(5)-1 and -2
as appropriate to describe to which types of purchases a grace period
applies and to which types of purchases no grace period is offered.
60(b)(6) Balance Computation Method
1. Form of disclosure. In cases where the card issuer uses a balance
computation method that is identified by name in Sec. 1026.60(g), the
card issuer must disclose below the table only the name of the method.
In cases where the card issuer uses a balance computation method that is
not identified by name in Sec. 1026.60(g), the disclosure below the
table must clearly explain the method in as much detail as set forth in
the descriptions of balance methods in Sec. 1026.60(g). The explanation
need not be as detailed as that required for the disclosures under Sec.
1026.6(b)(4)(i)(D).
2. Determining the method. In determining which balance computation
method to disclose for purchases, the card issuer must assume that a
purchase balance will exist at the end of any grace period. Thus, for
example, if the average daily balance method will include new purchases
only if purchase balances are not paid within the grace period, the card
issuer would disclose the name of the average daily balance method that
includes new purchases. The card issuer must not assume the existence of
a purchase balance, however, in making other disclosures under Sec.
1026.60(b).
60(b)(7) Statement on Charge Card Payments
1. Applicability and content. The disclosure that charges are
payable upon receipt of the periodic statement is applicable only to
charge card accounts. In making this disclosure, the card issuer may
make such modifications as are necessary to more accurately reflect the
circumstances of repayment under the account. For example, the
disclosure might read, ``Charges are due and payable upon receipt of the
periodic statement
[[Page 895]]
and must be paid no later than 15 days after receipt of such
statement.''
60(b)(8) Cash Advance Fee
1. Content. See Samples G-10(B) and G-10(C) for guidance on how to
disclose clearly and conspicuously the cash advance fee.
2. Foreign cash advances. Cash advance fees required to be disclosed
under Sec. 1026.60(b)(8) include any charge imposed by the card issuer
for cash advances in a foreign currency or that take place outside the
United States or with a foreign merchant. (See comment 4(a)-4 for
guidance on when a foreign transaction fee is considered charged by the
card issuer.) If an issuer charges the same foreign transaction fee for
purchases and cash advances in a foreign currency or that take place
outside the United States or with a foreign merchant, the issuer may
disclose this foreign transaction fee as shown in Samples G-10(B) and
(C). Otherwise, the issuer must revise the foreign transaction fee
language shown in Samples G-10(B) and (C) to disclose clearly and
conspicuously the amount of the foreign transaction fee that applies to
purchases and the amount of the foreign transaction fee that applies to
cash advances.
3. ATM fees. An issuer is not required to disclose pursuant to Sec.
1026.60(b)(8) any charges imposed on a cardholder by an institution
other than the card issuer for the use of the other institution's ATM in
a shared or interchange system.
60(b)(9) Late Payment Fee
1. Applicability. The disclosure of the fee for a late payment
includes only those fees that will be imposed for actual, unanticipated
late payments. (See the commentary to Sec. 1026.4(c)(2) for additional
guidance on late payment fees. See Samples G-10(B) and G-10(C) for
guidance on how to disclose clearly and conspicuously the late payment
fee.)
60(b)(10) Over-the-Limit Fee
1. Applicability. The disclosure of fees for exceeding a credit
limit does not include fees for other types of default or for services
related to exceeding the limit. For example, no disclosure is required
of fees for reinstating credit privileges or fees for the dishonor of
checks on an account that, if paid, would cause the credit limit to be
exceeded. (See Samples G-10(B) and G-10(C) for guidance on how to
disclose clearly and conspicuously the over-the-limit fee.)
60(b)(13) Required Insurance, Debt Cancellation or Debt Suspension
Coverage
1. Content. See Sample G-10(B) for guidance on how to comply with
the requirements in Sec. 1026.60(b)(13).
60(b)(14) Available Credit
1. Calculating available credit. If the 15 percent threshold test is
met, the issuer must disclose the available credit excluding optional
fees, and the available credit including optional fees. In calculating
the available credit to disclose in the table, the issuer must consider
all fees for the issuance or availability of credit described in Sec.
1026.60(b)(2), and any security deposit, that will be imposed and
charged to the account when the account is opened, such as one-time
issuance and set-up fees. For example, in calculating the available
credit, issuers must consider the first year's annual fee and the first
month's maintenance fee (as applicable) if they are charged to the
account on the first billing statement. In calculating the amount of the
available credit including optional fees, if optional fees could be
charged multiple times, the issuer shall assume that the optional fee is
only imposed once. For example, if an issuer charges a fee for each
additional card issued on the account, the issuer in calculating the
amount of the available credit including optional fees may assume that
the cardholder requests only one additional card. In disclosing the
available credit, the issuer shall round down the available credit
amount to the nearest whole dollar.
2. Content. See Sample G-10(C) for guidance on how to provide the
disclosure required by Sec. 1026.60(b)(14) clearly and conspicuously.
60(b)(15) Web Site Reference
1. Content. See Samples G-10(B) and G-10(C) for guidance on
disclosing a reference to the Web site established by the Bureau and a
statement that consumers may obtain on the Web site information about
shopping for and using credit card accounts.
60(c) Direct Mail and Electronic Applications and Solicitations
1. Mailed publications. Applications or solicitations contained in
generally available publications mailed to consumers (such as
subscription magazines) are subject to the requirements applicable to
take-ones in Sec. 1026.60(e), rather than the direct mail requirements
of Sec. 1026.60(c). However, if a primary purpose of a card issuer's
mailing is to offer credit or charge card accounts--for example, where a
card issuer ``prescreens'' a list of potential cardholders using credit
criteria, and then mails to the targeted group its catalog containing an
application or a solicitation for a card account--the direct mail rules
apply. In addition, a card issuer may use a single application form as a
take-one (in racks in public locations, for example) and for direct
mailings, if the card issuer complies with the requirements of Sec.
1026.60(c) even when the form is used as a take-one--that is, by
presenting the required Sec. 1026.60
[[Page 896]]
disclosures in a tabular format. When used in a direct mailing, the
credit term disclosures must be accurate as of the mailing date whether
or not the Sec. 1026.60(e)(1)(ii) and (e)(1)(iii) disclosures are
included; when used in a take-one, the disclosures must be accurate for
as long as the take-one forms remain available to the public if the
Sec. 1026.60(e)(1)(ii) and (e)(1)(iii) disclosures are omitted. (If
those disclosures are included in the take-one, the credit term
disclosures need only be accurate as of the printing date.)
60(d) Telephone Applications and Solicitations
1. Coverage. i. This paragraph applies if:
A. A telephone conversation between a card issuer and consumer may
result in the issuance of a card as a consequence of an issuer-initiated
offer to open an account for which the issuer does not require any
application (that is, a prescreened telephone solicitation).
B. The card issuer initiates the contact and at the same time takes
application information over the telephone.
ii. This paragraph does not apply to:
A. Telephone applications initiated by the consumer.
B. Situations where no card will be issued--because, for example,
the consumer indicates that he or she does not want the card, or the
card issuer decides either during the telephone conversation or later
not to issue the card.
2. Right to reject the plan. The right to reject the plan referenced
in this paragraph is the same as the right to reject the plan described
in Sec. 1026.5(b)(1)(iv). If an issuer substitutes the account-opening
summary table described in Sec. 1026.6(b)(1) in lieu of the disclosures
specified in Sec. 1026.60(d)(2)(ii), the disclosure specified in Sec.
1026.60(d)(2)(ii)(B) must appear in the table, if the issuer is required
to do so pursuant to Sec. 1026.6(b)(2)(xiii). Otherwise, the disclosure
specified in Sec. 1026.60(d)(2)(ii)(B) may appear either in or outside
the table containing the required credit disclosures.
3. Substituting account-opening table for alternative written
disclosures. An issuer may substitute the account-opening summary table
described in Sec. 1026.6(b)(1) in lieu of the disclosures specified in
Sec. 1026.60(d)(2)(ii).
60(e) Applications and Solicitations Made Available to General Public
1. Coverage. Applications and solicitations made available to the
general public include what are commonly referred to as take-one
applications typically found at counters in banks and retail
establishments, as well as applications contained in catalogs, magazines
and other generally available publications. In the case of credit
unions, this paragraph applies to applications and solicitations to open
card accounts made available to those in the general field of
membership.
2. In-person applications and solicitations. In-person applications
and solicitations initiated by a card issuer are subject to Sec.
1026.60(f), not Sec. 1026.60(e). (See Sec. 1026.60(f) and accompanying
commentary for rules relating to in-person applications and
solicitations.)
3. Toll-free telephone number. If a card issuer, in complying with
any of the disclosure options of Sec. 1026.60(e), provides a telephone
number for consumers to call to obtain credit information, the number
must be toll-free for nonlocal calls made from an area code other than
the one used in the card issuer's dialing area. Alternatively, a card
issuer may provide any telephone number that allows a consumer to call
for information and reverse the telephone charges.
60(e)(1) Disclosure of Required Credit Information
1. Date of printing. Disclosure of the month and year fulfills the
requirement to disclose the date an application was printed.
2. Form of disclosures. The disclosures specified in Sec.
1026.60(e)(1)(ii) and (e)(1)(iii) may appear either in or outside the
table containing the required credit disclosures.
60(e)(2) No Disclosure of Credit Information
1. When disclosure option available. A card issuer may use this
option only if the issuer does not include on or with the application or
solicitation any statement that refers to the credit disclosures
required by Sec. 1026.60(b). Statements such as no annual fee, low
interest rate, favorable rates, and low costs are deemed to refer to the
required credit disclosures and, therefore, may not be included on or
with the solicitation or application, if the card issuer chooses to use
this option.
60(e)(3) Prompt Response to Requests for Information
1. Prompt disclosure. Information is promptly disclosed if it is
given within 30 days of a consumer's request for information but in no
event later than delivery of the credit or charge card.
2. Information disclosed. When a consumer requests credit
information, card issuers need not provide all the required credit
disclosures in all instances. For example, if disclosures have been
provided in accordance with Sec. 1026.60(e)(1) and a consumer calls or
writes a card issuer to obtain information about changes in the
disclosures, the issuer need only provide the items of information that
have changed from those previously disclosed on or with the application
or solicitation. If a consumer requests information about particular
items, the card issuer need only provide the requested information. If,
[[Page 897]]
however, the card issuer has made disclosures in accordance with the
option in Sec. 1026.60(e)(2) and a consumer calls or writes the card
issuer requesting information about costs, all the required disclosure
information must be given.
3. Manner of response. A card issuer's response to a consumer's
request for credit information may be provided orally or in writing,
regardless of the manner in which the consumer's request is received by
the issuer. Furthermore, the card issuer must provide the information
listed in Sec. 1026.60(e)(1). Information provided in writing need not
be in a tabular format.
60(f) In-Person Applications and Solicitations
1. Coverage. i. This paragraph applies if:
A. An in-person conversation between a card issuer and a consumer
may result in the issuance of a card as a consequence of an issuer-
initiated offer to open an account for which the issuer does not require
any application (that is, a preapproved in-person solicitation).
B. The card issuer initiates the contact and at the same time takes
application information in person. For example, the following are
covered:
1. A consumer applies in person for a car loan at a financial
institution and the loan officer invites the consumer to apply for a
credit or charge card account; the consumer accepts the invitation and
submits an application.
2. An employee of a retail establishment, in the course of
processing a sales transaction using a bank credit card, asks a customer
if he or she would like to apply for the retailer's credit or charge
card; the customer responds affirmatively and submits an application.
ii. This paragraph does not apply to:
A. In-person applications initiated by the consumer.
B. Situations where no card will be issued--because, for example,
the consumer indicates that he or she does not want the card, or the
card issuer decides during the in-person conversation not to issue the
card.
Appendix A--Effect on State Laws
1. Who may make requests. Appendix A sets forth the procedures for
preemption determinations. As discussed in Sec. 1026.28, which contains
the standards for preemption, a request for a determination of whether a
state law is inconsistent with the requirements of chapters 1, 2, or 3
may be made by creditors, states, or any interested party. However, only
states may request and receive determinations in connection with the
fair credit billing provisions of chapter 4.
Appendix B--State Exemptions
1. General. Appendix B sets forth the procedures for exemption
applications. The exemption standards are found in Sec. 1026.29 and are
discussed in the commentary to that section.
Appendix C--Issuance of Official Interpretations
1. General. This commentary is the vehicle for providing official
interpretations. Individual interpretations generally will not be issued
separately from the commentary.
Appendix D--Multiple-Advance Construction Loans
1. General rule. Appendix D provides a special procedure that
creditors may use, at their option, to estimate and disclose the terms
of multiple-advance construction loans when the amounts or timing of
advances is unknown at consummation of the transaction. This appendix
reflects the approach taken in Sec. 1026.17(c)(6)(ii), which permits
creditors to provide separate or combined disclosures for the
construction period and for the permanent financing, if any; i.e., the
construction phase and the permanent phase may be treated as one
transaction or more than one transaction. appendix D may also be used in
multiple-advance transactions other than construction loans, when the
amounts or timing of advances is unknown at consummation.
2. Variable-rate multiple-advance loans. The hypothetical disclosure
required in variable-rate transactions by Sec. 1026.18(f)(1)(iv) is not
required for multiple-advance loans disclosed pursuant to appendix D,
part I.
3. Calculation of the total of payments. When disclosures are made
pursuant to appendix D, the total of payments may reflect either the sum
of the payments or the sum of the amount financed and the finance
charge.
4. Annual percentage rate. Appendix D does not require the use of
Volume I of the Bureau's Annual Percentage Rate Tables for calculation
of the annual percentage rate. Creditors utilizing appendix D in making
calculations and disclosures may use other computation tools to
determine the estimated annual percentage rate, based on the finance
charge and payment schedule obtained by use of the appendix.
5. Interest reserves. In a multiple-advance construction loan, a
creditor may establish an ``interest reserve'' to ensure that interest
is paid as it accrues by designating a portion of the loan to be used
for paying the interest that accrues on the loan. An interest reserve is
not treated as a prepaid finance charge, whether the interest reserve is
the same as or different from the estimated interest figure calculated
under appendix D.
i. If a creditor permits a consumer to make interest payments as
they become due, the
[[Page 898]]
interest reserve should be disregarded in the disclosures and
calculations under appendix D.
ii. If a creditor requires the establishment of an interest reserve
and automatically deducts interest payments from the reserve amount
rather than allow the consumer to make interest payments as they become
due, the fact that interest will accrue on those interest payments as
well as the other loan proceeds must be reflected in the calculations
and disclosures. To reflect the effects of such compounding, a creditor
should first calculate interest on the commitment amount (exclusive of
the interest reserve) and then add the figure obtained by assuming that
one-half of that interest is outstanding at the contract interest rate
for the entire construction period. For example, using the example shown
under paragraph A, part I of appendix D, the estimated interest would be
$1,117.68 ($1093.75 plus an additional $23.93 calculated by assuming
half of $1093.75 is outstanding at the contract interest rate for the
entire construction period), and the estimated annual percentage rate
would be 21.18%.
6. Relation to Sec. 1026.18(s). A creditor must disclose an
interest rate and payment summary table for certain transactions secured
by a dwelling, pursuant to Sec. 1026.18(s), instead of the general
payment schedule required by Sec. 1026.18(g) or the projected payments
table required by Sec. Sec. 1026.37(c) and 1026.38(c). Accordingly,
some home construction loans that are secured by a dwelling are subject
to Sec. 1026.18(s) and not Sec. 1026.18(g). See comment app. D-7 for a
discussion of transactions that are subject to Sec. Sec. 1026.37 and
1026.38. Under Sec. 1026.17(c)(6)(ii), when a multiple-advance
construction loan may be permanently financed by the same creditor, the
construction phase and the permanent phase may be treated as either one
transaction or more than one transaction. Following are illustrations of
the application of appendix D to transactions subject to Sec.
1026.18(s), under each of these two alternatives:
i. If a creditor uses appendix D and elects pursuant to Sec.
1026.17(c)(6)(ii) to disclose the construction and permanent phases as
separate transactions, the construction phase must be disclosed
according to the rules in Sec. 1026.18(s). Under Sec. 1026.18(s), the
creditor must disclose the applicable interest rates and corresponding
periodic payments during the construction phase in an interest rate and
payment summary table. The provision in appendix D, part I.A.3, which
allows the creditor to omit the number and amounts of any interest
payments ``in disclosing the payment schedule under Sec. 1026.18(g)''
does not apply because the transaction is governed by Sec. 1026.18(s)
rather than Sec. 1026.18(g). Also, because the construction phase is
being disclosed as a separate transaction and its terms do not repay all
principal, the creditor must disclose a balloon payment, pursuant to
Sec. 1026.18(s)(5).
ii. On the other hand, if the creditor elects to disclose the
construction and permanent phases as a single transaction, where
interest is payable on the amount actually advanced for the time it is
outstanding, the construction phase must be disclosed pursuant to
appendix D, part II.C.1, which provides that the creditor shall disclose
the repayment schedule without reflecting the number or amounts of
payments of interest only that are made during the construction phase.
Appendix D also provides, however, that creditors must disclose (outside
of the table) the fact that interest payments must be made and the
timing of such payments. The interest rate and payment summary table
disclosed under Sec. 1026.18(s) in such cases must reflect only the
permanent phase of the transaction. Therefore, in determining the rates
and payments that must be disclosed in the columns of the table,
creditors should apply the requirements of Sec. 1026.18(s) to the
permanent phase only. For example, under Sec. 1026.18(s)(2)(i)(A) or
Sec. 1026.18(s)(2)(i)(B)(1), as applicable, the creditor should
disclose the interest rate corresponding to the first installment due
under the permanent phase and not any rate applicable during the
construction phase.
7. Relation to Sec. Sec. 1026.37 and 1026.38. Creditors may use, at
their option, the following methods to estimate and disclose the terms
of multiple-advance construction loans pursuant to Sec. Sec. 1026.37
and 1026.38. As stated in comment app. D-1, appendix D may also be used
in multiple-advance transactions other than construction loans, when the
amounts or timing of advances is unknown at consummation.
i. Loan term. A. Disclosure as single transaction. If the
construction and permanent financing are disclosed as a single
transaction, the loan term disclosed is the total combined term of the
construction period and the permanent period. For example, if the term
of the construction financing is 12 months and the term of the permanent
financing is 30 years, and the two phases are disclosed as a single
transaction, the loan term disclosed is 31 years.
B. Term of permanent financing. The loan term of the permanent
financing is counted from the date that interest for the permanent
financing periodic payments begins to accrue, regardless of when the
permanent phase is disclosed.
ii. Product. A. Separate construction loan disclosure. If the
construction financing is disclosed separately and has payments of
interest only, the time period of the ``Interest Only'' feature that is
disclosed as part of the product disclosure under Sec. Sec.
1026.37(a)(10) and 1026.38(a)(5)(iii) is the period during which
interest-only payments are actually made and
[[Page 899]]
excludes any final balloon payment of principal and interest. For
example, the product disclosure for a fixed rate, interest-only
construction loan with a term of 12 months in which there will be 11
monthly interest payments and a final balloon payment of principal and
interest is ``11 mo. Interest Only, Fixed Rate.''
B. Combined construction-permanent disclosure. If a single, combined
construction-permanent disclosure is provided, the time period of the
``Interest Only'' feature that is disclosed as part of the product
disclosure under Sec. Sec. 1026.37(a)(10) and 1026.38(a)(5)(iii) is the
full term of the interest-only construction financing plus any interest-
only period for the permanent financing. For example, the product
disclosure for a single disclosure, fixed rate, construction-permanent
loan with a 12 month interest-only construction phase where the interest
rate is not subject to modification upon conversion to the permanent
phase is ``1 Year Interest Only, Fixed Rate.'' If the first year of the
permanent phase in this example also has a 12 month interest-only
period, the product disclosure is ``2 Year Interest Only, Fixed Rate.''
C. Product when interest rate at consummation not known. If the
interest rate for the permanent phase is not known at consummation for a
construction-permanent loan using a single, combined construction-
permanent disclosure or using separate disclosures for the permanent
phase, the creditor shall disclose the loan product under Sec. Sec.
1026.37(a)(10) and 1026.38(a)(5)(iii) as ``Adjustable Rate.'' If the
interest rate may increase under the terms of the legal obligation from
the disclosures provided at consummation, the loan product description
is ``Adjustable Rate'' in such cases, even if the interest rate will be
fixed for the term of the permanent phase once it is set.
iii. Interest rate. If the permanent financing has an adjustable
rate at consummation and separate disclosures are provided, the rate
disclosed for the permanent financing is the fully-indexed rate pursuant
to Sec. 1026.37(b)(2) and its commentary. If the permanent financing
has a fixed rate that will not be adjusted when the construction phase
converts to the permanent phase, that fixed rate is used for disclosure
purposes. If the permanent financing has a rate that may adjust when the
construction phase converts to the permanent phase, the permanent
financing has an adjustable rate. If the legal obligation for a loan
secured by the consumer's principal dwelling provides that the permanent
financing interest rate may adjust when the construction financing
converts to permanent financing, and such adjustment to the interest
rate results in a corresponding adjustment to the payment, the creditor
provides the disclosures pursuant to Sec. 1026.20(c), but not (d), if
the interest rate for the permanent phase will be fixed after the
conversion.
iv. Increase in periodic payment. If the amounts or timing of
advances is unknown at or before consummation and the appendix D
assumption that applies if interest is payable only on the amount
advanced for the time it is outstanding is used to calculate the
periodic payment:
A. A creditor discloses ``YES'' as the answer to ``Can this amount
increase after closing?'' pursuant to Sec. 1026.37(b)(6)(iii) whether
the creditor provides separate construction disclosures or combined
construction-permanent disclosures, even though calculation of the
construction financing periodic payments using the assumptions in
appendix D produces interest-only periodic payments that are equal in
amount.
B. A creditor that discloses ``YES'' as the answer to ``Can this
amount increase after closing?'' pursuant to Sec. 1026.37(b)(6)(iii)
may use months or years for the Sec. 1026.37(b)(6)(iii) disclosures,
consistent with comment 37(b)(6)-1. For example, for a 10-month
construction loan, the first Sec. 1026.37(b)(6)(iii) disclosure bullet
may disclose, ``Adjusts every mo. starting in mo. 1'' and the second
Sec. 1026.37(b)(6)(iii) disclosure bullet may disclose, ``Can go as
high as $[insert maximum possible periodic principal and interest
payment] in year 1''. The calculation of the maximum possible periodic
principal and interest payment disclosed is based on the maximum
principal balance that could be outstanding during the construction
phase. As part of the ``First Change/Amount'' disclosure in the
``Adjustable Payment (AP) Table'' pursuant to Sec. 1026.37(i)(5)(i),
the creditor may omit and leave blank the amount or range corresponding
to the first periodic principal and interest payment that may change. In
such cases, the creditor must still disclose the timing of the first
change, which is the number of the earliest possible payment (e.g., 1st
payment) that may change under the terms of the legal obligation.
C. When separate construction disclosures or the combined
construction-permanent disclosures are provided for adjustable-rate
construction financing, a creditor provides the Sec. 1026.37(b)(6)(iii)
disclosures reflecting changes that are due to changes in the interest
rate and changes that are due to changes in the total amount advanced.
Such a creditor discloses ``YES'' as the answer to ``Can this amount
increase after closing?'' pursuant to Sec. 1026.37(b)(6), because the
initial periodic payment may increase based upon an increase in the
interest rate in addition to a change based on the total amount
advanced. Such a creditor also discloses a reference to the adjustable
payment table required by Sec. 1026.37(i), disclosed as provided in
comment app. D-7.iv.B, because that disclosure reflects both a change
due to a change in the total amount advanced, which is a change to
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the periodic principal and interest payment that is not based on an
adjustment to the interest rate, as well as the fact that there are
interest-only payments. Such a creditor also includes a reference to the
adjustable interest rate table required by Sec. 1026.37(j) because that
disclosure reflects a change due to a change in the interest rate.
v. Projected payments table. A creditor must disclose a projected
payments table for certain transactions secured by real property or a
cooperative unit, pursuant to Sec. Sec. 1026.37(c) and 1026.38(c),
instead of the general payment schedule required by Sec. 1026.18(g) or
the interest rate and payments summary table required by Sec.
1026.18(s). Accordingly, some home construction loans that are secured
by real property or a cooperative unit are subject to Sec. Sec.
1026.37(c) and 1026.38(c) and not Sec. 1026.18(g). See comment app. D-6
for a discussion of transactions that are subject to Sec. 1026.18(s).
Under Sec. 1026.17(c)(6)(ii), when a multiple-advance construction loan
may be permanently financed by the same creditor, the construction phase
and the permanent phase may be treated as either one transaction or more
than one transaction. The following are illustrations of the application
of appendix D to transactions subject to Sec. Sec. 1026.37(c) and
1026.38(c), under each of the Sec. 1026.17(c)(6)(ii) alternatives:
A. If a creditor uses appendix D and elects pursuant to Sec.
1026.17(c)(6)(ii) to disclose the construction and permanent phases as
separate transactions, the construction phase must be disclosed
according to the rules in Sec. Sec. 1026.37(c) and 1026.38(c). Under
Sec. Sec. 1026.37(c) and 1026.38(c), the creditor must disclose the
periodic payments during the construction phase in a projected payments
table. The provision in appendix D, part I.A.3, which allows the
creditor to omit the number and amounts of any interest payments ``in
disclosing the payment schedule under Sec. 1026.18(g)'' does not apply
because the transaction is governed by Sec. Sec. 1026.37(c) and
1026.38(c) rather than Sec. 1026.18(g). If interest is payable only on
the amount actually advanced for the time it is outstanding, the
creditor determines the amount of the interest-only payment to be made
during the construction phase using the assumptions in appendix D, part
I.A.1. Also, because the construction phase is being disclosed as a
separate transaction and its periodic payments do not repay the
principal, the creditor must disclose the construction phase transaction
as a product with a balloon payment feature, pursuant to Sec. Sec.
1026.37(a)(10)(ii)(D) and 1026.38(a)(5)(iii), unless the transaction has
negative amortization, interest-only, or step payment features,
consistent with the requirement at Sec. 1026.37(a)(10)(iii). In
addition, the creditor must provide the balloon payment disclosures
pursuant to Sec. Sec. 1026.37(b)(5), 1026.37(b)(7)(ii), and 1026.38(b)
and disclose the balloon payment in the projected payments table.
B. If the creditor elects to disclose the construction and permanent
phases as a single transaction, the repayment schedule must be disclosed
pursuant to appendix D, part II.C.2. Under appendix D, part II.C.2, the
projected payments table reflects the interest-only payments during the
construction phase in a first column. The first column also reflects the
amortizing payments, and mortgage insurance and escrow payments, if any,
for the permanent phase if the term of the construction phase is not a
full year. The following column(s) reflect the payments for the
permanent phase. If interest is payable only on the amount actually
advanced for the time it is outstanding, the creditor determines the
amount of the interest-only payment to be made during the construction
phase using the assumption in appendix D, part II.A.1.
C. Consistent with comments 37(c)(2)(ii)-1 and 37(c)(2)(iii)-1, when
the loan is disclosed as one transaction and only the terms of the legal
obligation for the permanent phase require mortgage insurance or escrow,
the way the creditor discloses the escrow and mortgage insurance depends
on whether the first column of the projected payments table exclusively
discloses the construction phase. If the first column of the projected
payments table exclusively discloses the construction phase, the
creditor discloses ``0'' in the first column of the projected payments
table for mortgage insurance and a hyphen or dash in the first column of
the projected payments table for escrow. If the first column discloses
both the construction phase and the permanent phase payments, the amount
of the mortgage insurance premium or escrow payment (if any) for the
permanent phase is disclosed in the first column.
vi. Disclosure of construction costs.
A. Construction costs are the costs of improvements to be made to
the property that the consumer contracts for in connection with the
financing transaction and that will be paid in whole or in part with
loan proceeds.
B. On the Loan Estimate, a creditor factors construction costs into
the funds for borrower calculation under Sec. 1026.37(h)(1)(v). Because
these amounts are disclosed under Sec. 1026.38(j)(1)(v) on the Closing
Disclosure, they are included in existing debt that is factored into the
funds for borrower calculation under Sec. 1026.37(h)(1)(v). Comment
37(h)(1)(v)-2 explains that the total amount of all existing debt being
satisfied in the transaction that is used in the funds for borrower
calculation is the sum of the amounts that will be disclosed on the
Closing Disclosure in the summaries of transactions table under Sec.
1026.38(j)(1)(ii), (iii), and (v), as applicable. For transactions
without a seller or for simultaneous subordinate financing, construction
costs may instead be disclosed
[[Page 901]]
under Sec. 1026.37(h)(2)(iii) in the optional alternative calculating
cash to close table.
C. A creditor discloses the amount of construction costs on the
Closing Disclosure under Sec. 1026.38(j)(1)(v) in the summaries of
transactions table and factors them into the down payment/funds from
borrower and funds for borrower calculation under Sec. 1026.38(i)(4)
and (6). For transactions without a seller or for simultaneous
subordinate financing, construction costs may instead be disclosed under
Sec. 1026.38(t)(5)(vii)(B) in the optional alternative calculating cash
to close table.
D. A creditor in some cases places a portion of a construction
loan's proceeds in a reserve or other account at consummation. The
amount of such an account, at the creditor's option, may be disclosed
separately from other construction costs under Sec. 1026.38(j)(1)(v) if
space permits, or may be included in the amount disclosed for
construction costs under Sec. 1026.38(j)(1)(v). If the creditor chooses
to disclose separately the amount of loan proceeds placed in a reserve
or other account at consummation, the creditor may disclose the amount
as a separate itemized cost, along with an itemized cost for the balance
of the construction costs, in accordance with the disclosure and
calculation options described in comments app. D-7.vi-B and C. The
amount may be labeled with any accurate term, so long as any label the
creditor uses is in accordance with the ``clear and conspicuous''
standard explained at comment 37(f)(5)-1. If the amount placed in an
account is disclosed separately, the balance of construction costs
disclosed excludes the amount placed in an account to avoid double
counting.
vii. Construction loan inspection and handling fees. Comment 4(a)-
1.ii.A provides that inspection and handling fees, including draw fees,
for the staged disbursement of construction loan proceeds are part of
the finance charge. Comment 37(f)-3 states that such inspection and
handling fees are loan costs associated with the transaction for
purposes of Sec. 1026.37(f) and, as such, must be disclosed accurately
as part of the Loan Estimate. These fees must also be disclosed
accurately as part of the Closing Disclosure. Comment 38(f)-2 refers to
explanations under comments 37(f)-3 and 37(f)(6)-3 for making these
disclosures. Comment 37(f)-3 explains that, if such fees are collected
at or before consummation, they are disclosed in the loan costs table.
If such fees will be collected after consummation, they are disclosed in
a separate addendum and are not counted for purposes of the calculating
cash to close table. Comment 37(f)(6)-3 explains how to disclose
inspection and handling fees that will be collected after consummation
in an addendum. Under comment 38(f)-2, the same explanation applies to
an addendum used for disclosing such fees in the Closing Disclosure.
Comment 37(l)(1)-1 explains that the amount disclosed under Sec.
1026.37(l)(1)(i) is the sum of principal, interest, mortgage insurance,
and loan costs scheduled to be paid through the end of the 60th month
after the due date of the first periodic payment, and that loan costs
are those costs disclosed under Sec. 1026.37(f). Construction loan
inspection and handling fees are loan costs that must be included in the
sum of the ``In 5 Years'' disclosure under Sec. 1026.37(l)(1) and the
``Total of Payments'' disclosure under Sec. 1026.38(o)(1) because they
are disclosed under Sec. 1026.37(f), even when they are disclosed on an
addendum.
Appendix F--Optional Annual Percentage Rate Computations for Creditors
Offering Open-End Credit Plans Secured by a Consumer's Dwelling
1. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and the
application of a daily periodic rate, see comment 14(c)(3)-2 for
guidance on an appropriate calculation method.
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
1. Permissible changes. Although use of the model forms and clauses
is not required, creditors using them properly will be deemed to be in
compliance with the regulation with regard to those disclosures.
Creditors may make certain changes in the format or content of the forms
and clauses and may delete any disclosures that are inapplicable to a
transaction or a plan without losing the Act's protection from
liability, except formatting changes may not be made to model forms and
samples in H-18, H-19, H-20, H-21, H-22, H-23, H-24, H-25, H-26, H-27,
H-28, G-2(A), G-3(A), G-4(A), G-10(A)-(E), G-17(A)-(D), G-18(A) (except
as permitted pursuant to Sec. 1026.7(b)(2)), G-18(B)-(C), G-19, G-20,
and G-21, or to the model clauses in H-4(E), H-4(F), H-4(G), and H-4(H).
Creditors may modify the heading of the second column shown in Model
Clause H-4(H) to read ``first adjustment'' or ``first increase,'' as
applicable, pursuant to Sec. 1026.18(s)(2)(i)(C). The rearrangement of
the model forms and clauses may not be so extensive as to affect the
substance, clarity, or meaningful sequence of the forms and clauses.
Creditors making revisions with that effect will lose their protection
from civil liability. Except as otherwise specifically required,
acceptable changes include, for example:
i. Using the first person, instead of the second person, in
referring to the borrower.
ii. Using ``borrower'' and ``creditor'' instead of pronouns.
iii. Rearranging the sequences of the disclosures.
iv. Not using bold type for headings.
[[Page 902]]
v. Incorporating certain State ``plain English'' requirements.
vi. Deleting inapplicable disclosures by whiting out, blocking out,
filling in ``N/A'' (not applicable) or ``0,'' crossing out, leaving
blanks, checking a box for applicable items, or circling applicable
items. (This should permit use of multipurpose standard forms.)
vii. Using a vertical, rather than a horizontal, format for the
boxes in the closed-end disclosures.
2. Debt-cancellation coverage. This part does not authorize
creditors to characterize debt-cancellation fees as insurance premiums
for purposes of this part. Creditors may provide a disclosure that
refers to debt cancellation or debt suspension coverage whether or not
the coverage is considered insurance. Creditors may use the model credit
insurance disclosures only if the debt cancellation coverage constitutes
insurance under state law.
Appendix G--Open-End Model Forms and Clauses
1. Models G-1 and G-1(A). The model disclosures in G-1 and G-1(A)
(different balance computation methods) may be used in both the account-
opening disclosures under Sec. 1026.6 and the periodic disclosures
under Sec. 1026.7. As is clear from the models given, ``shorthand''
descriptions of the balance computation methods are not sufficient,
except where Sec. 1026.7(b)(5) applies. For creditors using model G-1,
the phrase ``a portion of'' the finance charge should be included if the
total finance charge includes other amounts, such as transaction
charges, that are not due to the application of a periodic rate. If
unpaid interest or finance charges are subtracted in calculating the
balance, that fact must be stated so that the disclosure of the
computation method is accurate. Only model G-1(b) contains a final
sentence appearing in brackets, which reflects the total dollar amount
of payments and credits received during the billing cycle. The other
models do not contain this language because they reflect plans in which
payments and credits received during the billing cycle are subtracted.
If this is not the case, however, the language relating to payments and
credits should be changed, and the creditor should add either the
disclosure of the dollar amount as in model G-1(b) or an indication of
which credits (disclosed elsewhere on the periodic statement) will not
be deducted in determining the balance. (Such an indication may also
substitute for the bracketed sentence in model G-1(b).) (See the
commentary to Sec. 1026.7(a)(5) and (b)(5).) For open-end plans subject
to the requirements of Sec. 1026.40, creditors may, at their option,
use the clauses in G-1 or G-1(A).
2. Models G-2 and G-2(A). These models contain the notice of
liability for unauthorized use of a credit card. For home-equity plans
subject to the requirements of Sec. 1026.40, at the creditor's option,
a creditor either may use G-2 or G-2(A). For open-end plans not subject
to the requirements of Sec. 1026.40, creditors properly use G-2(A).
3. Models G-3, G-3(A), G-4 and G-4(A).
i. These set out models for the long-form billing-error rights
statement (for use with the account-opening disclosures and as an annual
disclosure or, at the creditor's option, with each periodic statement)
and the alternative billing-error rights statement (for use with each
periodic statement), respectively. For home-equity plans subject to the
requirements of Sec. 1026.40, at the creditor's option, a creditor
either may use G-3 or G-3(A), and for creditors that use the short form,
G-4 or G-4(A). For open-end (not home-secured) plans that are not
subject to the requirements of Sec. 1026.40, creditors properly use G-
3(A) and G-4(A). Creditors must provide the billing-error rights
statements in a form substantially similar to the models in order to
comply with the regulation. The model billing-rights statements may be
modified in any of the ways set forth in the first paragraph to the
commentary on Appendices G and H. The models may, furthermore, be
modified by deleting inapplicable information, such as:
A. The paragraph concerning stopping a debit in relation to a
disputed amount, if the creditor does not have the ability to debit
automatically the consumer's savings or checking account for payment.
B. The rights stated in the special rule for credit card purchases
and any limitations on those rights.
ii. The model billing rights statements also contain optional
language that creditors may use. For example, the creditor may:
A. Include a statement to the effect that notice of a billing error
must be submitted on something other than the payment ticket or other
material accompanying the periodic disclosures.
B. Insert its address or refer to the address that appears elsewhere
on the bill.
C. Include instructions for consumers, at the consumer's option, to
communicate with the creditor electronically or in writing.
iii. Additional information may be included on the statements as
long as it does not detract from the required disclosures. For instance,
information concerning the reporting of errors in connection with a
checking account may be included on a combined statement as long as the
disclosures required by the regulation remain clear and conspicuous.
4. Models G-5 through G-9. These models set out notices of the right
to rescind that would be used at different times in an open-end plan.
The last paragraph of each of the rescission model forms contains a
blank for the date by which the consumer's notice of cancellation must
be sent or delivered. A
[[Page 903]]
parenthetical is included to address the situation in which the
consumer's right to rescind the transaction exists beyond 3 business
days following the date of the transaction, for example, when the notice
or material disclosures are delivered late or when the date of the
transaction in paragraph 1 of the notice is an estimate. The language of
the parenthetical is not optional. See the commentary to Sec.
1026.2(a)(25) regarding the specificity of the security interest
disclosure for model form G-7.
5. Model G-10(A), samples G-10(B) and G-10(C), model G-10(D), sample
G-10(E), model G-17(A), and samples G-17(B), 17(C) and 17(D). i. Model
G-10(A) and Samples G-10(B) and G-10(C) illustrate, in the tabular
format, the disclosures required under Sec. 1026.60 for applications
and solicitations for credit cards other than charge cards. Model G-
10(D) and Sample G-10(E) illustrate the tabular format disclosure for
charge card applications and solicitations and reflect the disclosures
in the table. Model G-17(A) and Samples G-17(B), G-17(C) and G-17(D)
illustrate, in the tabular format, the disclosures required under Sec.
1026.6(b)(2) for account-opening disclosures.
ii. Except as otherwise permitted, disclosures must be substantially
similar in sequence and format to Models G-10(A), G-10(D) and G-17(A).
While proper use of the model forms will be deemed in compliance with
the regulation, card issuers and other creditors offering open-end (not
home-secured) plans are permitted to disclose the annual percentage
rates for purchases, cash advances, or balance transfers in the same row
in the table for any transaction types for which the issuer or creditor
charges the same annual percentage rate. Similarly, card issuer and
other creditors offering open-end (not home-secured) plans are permitted
to disclose fees of the same amount in the same row if the fees are in
the same category. Fees in different categories may not be disclosed in
the same row. For example, a transaction fee and a penalty fee that are
of the same amount may not be disclosed in the same row. Card issuers
and other creditors offering open-end (not home-secured) plans are also
permitted to use headings other than those in the forms if they are
clear and concise and are substantially similar to the headings
contained in model forms, with the following exceptions. The heading
``penalty APR'' must be used when describing rates that may increase due
to default or delinquency or as a penalty, and in relation to required
insurance, or debt cancellation or suspension coverage, the term
``required'' and the name of the product must be used. (See also
Sec. Sec. 1026.60(b)(5) and 1026.6(b)(2)(v) for guidance on headings
that must be used to describe the grace period, or lack of grace period,
in the disclosures required under Sec. 1026.60 for applications and
solicitations for credit cards other than charge cards, and the
disclosures required under Sec. 1026.6(b)(2) for account-opening
disclosures, respectively.)
iii. Models G-10(A) and G-17(A) contain two alternative headings
(``Minimum Interest Charge'' and ``Minimum Charge'') for disclosing a
minimum interest or fixed finance charge under Sec. Sec. 1026.60(b)(3)
and 1026.6(b)(2)(iii). If a creditor imposes a minimum charge in lieu of
interest in those months where a consumer would otherwise incur an
interest charge but that interest charge is less than the minimum
charge, the creditor should disclose this charge under the heading
``Minimum Interest Charge'' or a substantially similar heading. Other
minimum or fixed finance charges should be disclosed under the heading
``Minimum Charge'' or a substantially similar heading.
iv. Models G-10(A), G-10(D) and G-17(A) contain two alternative
headings (``Annual Fees'' and ``Set-up and Maintenance Fees'') for
disclosing fees for issuance or availability of credit under Sec.
1026.60(b)(2) or Sec. 1026.6(b)(2)(ii). If the only fee for issuance or
availability of credit disclosed under Sec. 1026.60(b)(2) or Sec.
1026.6(b)(2)(ii) is an annual fee, a creditor should use the heading
``Annual Fee'' or a substantially similar heading to disclose this fee.
If a creditor imposes fees for issuance or availability of credit
disclosed under Sec. 1026.60(b)(2) or Sec. 1026.6(b)(2)(ii) other
than, or in addition to, an annual fee, the creditor should use the
heading ``Set-up and Maintenance Fees'' or a substantially similar
heading to disclose fees for issuance or availability of credit,
including the annual fee.
v. Although creditors are not required to use a certain paper size
in disclosing the Sec. Sec. 1026.60 or 1026.6(b)(1) and (2)
disclosures, samples G-10(B), G-10(C), G-17(B), G-17(C) and G-17(D) are
designed to be printed on an 8\1/2\ x 14 inch sheet of paper. A creditor
may use a smaller sheet of paper, such as 8\1/2\ x 11 inch sheet of
paper. If the table is not provided on a single side of a sheet of
paper, the creditor must include a reference or references, such as
``SEE BACK OF PAGE for more important information about your account.''
at the bottom of each page indicating that the table continues onto an
additional page or pages. A creditor that splits the table onto two or
more pages must disclose the table on consecutive pages and may not
include any intervening information between portions of the table. In
addition, the following formatting techniques were used in presenting
the information in the sample tables to ensure that the information is
readable:
A. A readable font style and font size (10-point Arial font style,
except for the purchase annual percentage rate which is shown in 16-
point type).
B. Sufficient spacing between lines of the text.
[[Page 904]]
C. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as appropriate.
For example, in the samples in the row of the tables with the heading
``APR for Balance Transfers,'' the forms disclose two components: The
applicable balance transfer rate and a cross reference to the balance
transfer fee. The samples show these two components on separate lines
with adequate space between each component. On the other hand, in the
samples, in the disclosure of the late payment fee, the forms disclose
two components: The late payment fee, and the cross reference to the
penalty rate. Because the disclosure of both these components is short,
these components are disclosed on the same line in the tables.
D. Standard spacing between words and characters. In other words,
the text was not compressed to appear smaller than 10-point type.
E. Sufficient white space around the text of the information in each
row, by providing sufficient margins above, below and to the sides of
the text.
F. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
vi. While the Bureau is not requiring issuers to use the above
formatting techniques in presenting information in the table (except for
the 10-point and 16-point font requirement), the Bureau encourages
issuers to consider these techniques when deciding how to disclose
information in the table, to ensure that the information is presented in
a readable format.
vii. Creditors are allowed to use color, shading and similar graphic
techniques with respect to the table, so long as the table remains
substantially similar to the model and sample forms in appendix G.
viii. Models G-10(A) and G-17(A) contain rows in the table with the
prescribed language, ``For Credit Card Tips from the Consumer Financial
Protection Bureau'' and calling for a ``[Reference to the Bureau's Web
site]'' next to that language. Until January 1, 2013, creditors may
substitute ``For Credit Card Tips from the Federal Reserve Board'' for
these two model forms' prescribed language and may provide a reference
to the Federal Reserve Board's Web site rather than the Bureau's Web
site.
6. Model G-11. Model G-11 contains clauses that illustrate the
general disclosures required under Sec. 1026.60(e) in applications and
solicitations made available to the general public.
7. Models G-13(A) and G-13(B). These model forms illustrate the
disclosures required under Sec. 1026.9(f) when the card issuer changes
the entity providing insurance on a credit card account. Model G-13(A)
contains the items set forth in Sec. 1026.9(f)(3) as examples of
significant terms of coverage that may be affected by the change in
insurance provider. The card issuer may either list all of these
potential changes in coverage and place a check mark by the applicable
changes, or list only the actual changes in coverage. Under either
approach, the card issuer must either explain the changes or refer to an
accompanying copy of the policy or group certificate for details of the
new terms of coverage. Model G-13(A) also illustrates the permissible
combination of the two notices required by Sec. 1026.9(f)--the notice
required for a planned change in provider and the notice required once a
change has occurred. This form may be modified for use in providing only
the disclosures required before the change if the card issuer chooses to
send two separate notices. Thus, for example, the references to the
attached policy or certificate would not be required in a separate
notice prior to a change in the insurance provider since the policy or
certificate need not be provided at that time. Model G-13(B) illustrates
the disclosures required under Sec. 1026.9(f)(2) when the insurance
provider is changed.
8. Samples G-18(A)-(D). For home-equity plans subject to the
requirements of Sec. 1026.40, if a creditor chooses to comply with the
requirements in Sec. 1026.7(b), the creditor may use Samples G-18(A)
through G-18(D) to comply with these requirements, as applicable.
9. Samples G-18(D). Sample G-18(D) illustrates how credit card
issuers may comply with proximity requirements for payment information
on periodic statements. Creditors that offer card accounts with a charge
card feature and a revolving feature may change the disclosure to make
clear to which feature the disclosures apply.
10. Forms G-18(F)-(G). Forms G-18(F) and G-18(G) are intended as a
compliance aid to illustrate front sides of a periodic statement, and
how a periodic statement for open-end (not home-secured) plans might be
designed to comply with the requirements of Sec. 1026.7. The samples
contain information that is not required by Regulation Z. The samples
also present information in additional formats that are not required by
Regulation Z.
i. Creditors are not required to use a certain paper size in
disclosing the Sec. 1026.7 disclosures. However, Forms G-18(F) and G-
18(G) are designed to be printed on an 8 x 14 inch sheet of paper.
ii. The due date for a payment, if a late payment fee or penalty
rate may be imposed, must appear on the front of the first page of the
statement. See Sample G-18(D) that illustrates how a creditor may comply
with proximity requirements for other disclosures. The payment
information disclosures appear in the upper right-hand corner on Samples
G-18(F) and G-18(G), but may be located elsewhere, as long as they
appear on the front of the first page of the periodic statement. The
summary of account activity presented on Samples G-18(F) and G-18(G) is
[[Page 905]]
not itself a required disclosure, although the previous balance and the
new balance, presented in the summary, must be disclosed in a clear and
conspicuous manner on periodic statements.
iii. Additional information not required by Regulation Z may be
presented on the statement. The information need not be located in any
particular place or be segregated from disclosures required by
Regulation Z, although the effect of proximity requirements for required
disclosures, such as the due date, may cause the additional information
to be segregated from those disclosures required to be disclosed in
close proximity to one another. Any additional information must be
presented consistent with the creditor's obligation to provide required
disclosures in a clear and conspicuous manner.
iv. Model Forms G-18(F) and G-18(G) demonstrate two examples of ways
in which transactions could be presented on the periodic statement.
Model Form G-18(G) presents transactions grouped by type and Model Form
G-18(F) presents transactions in a list in chronological order. Neither
of these approaches to presenting transactions is required; a creditor
may present transactions differently, such as in a list grouped by
authorized user or other means.
11. Model Form G-19. See Sec. 1026.9(b)(3) regarding the headings
required to be disclosed when describing in the tabular disclosure a
grace period (or lack of a grace period) offered on check transactions
that access a credit card account.
12. Sample G-24. Sample G-24 includes two model clauses for use in
complying with Sec. 1026.16(h)(4). Model clause (a) is for use in
connection with credit card accounts under an open-end (not home-
secured) consumer credit plan. Model clause (b) is for use in connection
with other open-end credit plans.
Appendix H--Closed-End Forms and Clauses
1. Models H-1 and H-2. i. Creditors may make several types of
changes to closed-end model forms H-1 (credit sale) and H-2 (loan) and
still be deemed to be in compliance with the regulation, provided that
the required disclosures are made clearly and conspicuously. Permissible
changes include the addition of the information permitted by Sec.
1026.17(a)(1) and ``directly related'' information as set forth in the
commentary to Sec. 1026.17(a).ii. The creditor may also delete or, on
multi-purpose forms, indicate inapplicable disclosures, such as:
A. The itemization of the amount financed option. (See Samples H-12
through H-15.)
B. The credit life and disability insurance disclosures. (See
Samples H-11 and H-12.)
C. The property insurance disclosures. (See Samples H-10 through H-
12, and H-14.)
D. The ``filing fees'' and ``non-filing insurance'' disclosures.
(See Samples H-11 and H-12.)
E. The prepayment penalty or rebate disclosures. (See Samples H-12
and H-14.)
F. The total sale price. (See Samples H-11 through H-15.)
iii. Other permissible changes include:
A. Adding the creditor's address or telephone number. (See the
commentary to Sec. 1026.18(a).)
B. Combining required terms where several numerical disclosures are
the same, for instance, if the ``total of payments'' equals the ``total
sale price.'' (See the commentary to Sec. 1026.18.)
C. Rearranging the sequence or location of the disclosures--for
instance, by placing the descriptive phrases outside the boxes
containing the corresponding disclosures, or by grouping the descriptors
together as a glossary of terms in a separate section of the segregated
disclosures; by placing the payment schedule at the top of the form; or
by changing the order of the disclosures in the boxes, including the
annual percentage rate and finance charge boxes.
D. Using brackets, instead of checkboxes, to indicate inapplicable
disclosures.
E. Using a line for the consumer to initial, rather than a checkbox,
to indicate an election to receive an itemization of the amount
financed.
F. Deleting captions for disclosures.
G. Using a symbol, such as an asterisk, for estimated disclosures,
instead of an ``e.''
H. Adding a signature line to the insurance disclosures to reflect
joint policies.
I. Separately itemizing the filing fees.
J. Revising the late charge disclosure in accordance with the
commentary to Sec. 1026.18(l).
2. Model H-3. Creditors have considerable flexibility in filling out
Model H-3 (itemization of the amount financed). Appropriate revisions,
such as those set out in the commentary to Sec. 1026.18(c), may be made
to this form without loss of protection from civil liability for proper
use of the model forms.
3. Models H-4 through H-7. The model clauses are not included in the
model forms although they are mandatory for certain transactions.
Creditors using the model clauses when applicable to a transaction are
deemed to be in compliance with the regulation with regard to that
disclosure.
4. Model H-4(A). This model contains the variable rate model clauses
applicable to transactions subject to Sec. 1026.18(f)(1) and is
intended to give creditors considerable flexibility in structuring
variable rate disclosures to fit individual plans. The information about
circumstances, limitations, and effects of an increase may be given in
terms of the contract interest rate or the annual percentage rate.
Clauses are shown for hypothetical
[[Page 906]]
examples based on the specific amount of the transaction and based on a
representative amount. Creditors may preprint the variable rate
disclosures based on a representative amount for similar types of
transactions, instead of constructing an individualized example for each
transaction. In both representative examples and transaction-specific
examples, creditors may refer either to the incremental change in rate,
payment amount, or number of payments, or to the resulting rate, payment
amount, or number of payments. For example, creditors may state that the
rate will increase by 2%, with a corresponding $150 increase in the
payment, or creditors may state that the rate will increase to 16%, with
a corresponding payment of $850.
5. Model H-4(B). This model clause illustrates the variable-rate
disclosure required under Sec. 1026.18(f)(2), which would alert
consumers to the fact that the transaction contains a variable-rate
feature and that disclosures were provided earlier.
6. Model H-4(C). This model clause illustrates the early disclosures
required generally under Sec. 1026.19(b). It includes information on
how the consumer's interest rate is determined and how it can change
over the term of the loan, and explains changes that may occur in the
borrower's monthly payment. It contains an example of how to disclose
historical changes in the index or formula values used to compute
interest rates for the preceding 15 years. The model clause also
illustrates the disclosure of the initial and maximum interest rates and
payments based on an initial interest rate (index value plus margin,
adjusted by the amount of any discount or premium) in effect as of an
identified month and year for the loan program disclosure and
illustrates how to provide consumers with a method for calculating the
monthly payment for the loan amount to be borrowed.
7. Models H-4(D) through H-4(J). These model clauses and sample and
model forms illustrate certain notices, statements, and other
disclosures required as follows:
i. Model H-4(D)(1) illustrates the interest rate adjustment notice
required under Sec. 1026.20(c) and Model H-4(D)(2) provides an example
of a notice of interest rate adjustment with corresponding payment
change. Model H-4(D)(3) illustrates the interest rate adjustment notice
required under Sec. 1026.20(d) and Model H-4(D)(4) provides an example
of a notice of initial interest rate adjustment.
ii. Model H-4(E) illustrates the interest rate and payment summary
table required under Sec. 1026.18(s) for a fixed-rate mortgage
transaction.
iii. Model H-4(F) illustrates the interest rate and payment summary
table required under Sec. 1026.18(s) for an adjustable-rate or a step-
rate mortgage transaction.
iv. Model H-4(G) illustrates the interest rate and payment summary
table required under Sec. 1026.18(s) for a mortgage transaction with
negative amortization.
v. Model H-4(H) illustrates the interest rate and payment summary
table required under Sec. 1026.18(s) for a fixed-rate, interest-only
mortgage transaction.
vi. Model H-4(I) illustrates the introductory rate disclosure
required by Sec. 1026.18(s)(2)(iii) for an adjustable-rate mortgage
transaction with an introductory rate.
vii. Model H-4(J) illustrates the balloon payment disclosure
required by Sec. 1026.18(s)(5) for a mortgage transaction with a
balloon payment term.
viii. Model H-4(K) illustrates the no-guarantee-to-refinance
statement required by Sec. 1026.18(t) for a mortgage transaction.
8. Model H-5. This contains the demand feature clause.
9. Model H-6. This contains the assumption clause.
10. Model H-7. This contains the required deposit clause.
11. Models H-8 and H-9. These models contain the rescission notices
for a typical closed-end transaction and a refinancing, respectively.
The last paragraph of each model form contains a blank for the date by
which the consumer's notice of cancellation must be sent or delivered. A
parenthetical is included to address the situation in which the
consumer's right to rescind the transaction exists beyond 3 business
days following the date of the transaction, for example, where the
notice or material disclosures are delivered late or where the date of
the transaction in paragraph 1 of the notice is an estimate. The
language of the parenthetical is not optional. See the commentary to
Sec. 1026.2(a)(25) regarding the specificity of the security interest
disclosure for model form H-9. The prior version of model form H-9 is
substantially similar to the current version and creditors may continue
to use it, as appropriate. Creditors are encouraged, however, to use the
current version when reordering or reprinting forms.
12. Sample forms. The sample forms (H-10 through H-15) serve a
different purpose than the model forms. The samples illustrate various
ways of adapting the model forms to the individual transactions
described in the commentary to appendix H. The deletions and
rearrangements shown relate only to the specific transactions described.
As a result, the samples do not provide the general protection from
civil liability provided by the model forms and clauses.
13. Sample H-10. This sample illustrates an automobile credit sale.
The cash price is $7,500 with a downpayment of $1,500. There is an 8%
add-on interest rate and a term of 3 years, with 36 equal monthly
payments. The credit life insurance premium and the filing fees are
financed by the creditor. There is a
[[Page 907]]
$25 credit report fee paid by the consumer before consummation, which is
a prepaid finance charge.
14. Sample H-11. This sample illustrates an installment loan. The
amount of the loan is $5,000. There is a 12% simple interest rate and a
term of 2 years. The date of the transaction is expected to be April 15,
1981, with the first payment due on June 1, 1981. The first payment
amount is labeled as an estimate since the transaction date is
uncertain. The odd days' interest ($26.67) is collected with the first
payment. The remaining 23 monthly payments are equal.
15. Sample H-12. This sample illustrates a refinancing and
consolidation loan. The amount of the loan is $5,000. There is a 15%
simple interest rate and a term of 3 years. The date of the transaction
is April 1, 1981, with the first payment due on May 1, 1981. The first
35 monthly payments are equal, with an odd final payment. The credit
disability insurance premium is financed. In calculating the annual
percentage rate, the U.S. Rule has been used. Since an itemization of
the amount financed is included with the disclosures, the statement
regarding the consumer's option to receive an itemization is deleted.
16. Samples H-13 through H-15. These samples illustrate various
closed-end transactions. Samples H-13 and H-15 are for transactions
subject to Sec. 1026.17(a). Samples H-13 and H-15 do not illustrate the
requirements of Sec. 1026.18(c) or (p) regarding the itemization of the
amount financed and a reference to contract documents. See form H-2 for
a model for these requirements.
17. Sample H-13. This sample illustrates a mortgage with a demand
feature. The loan amount is $44,900, payable in 360 monthly installments
at a simple interest rate of 14.75%. The 15 days of interim interest
($294.34) is collected as a prepaid finance charge at the time of
consummation of the loan (April 15, 1981). In calculating the disclosure
amounts, the minor irregularities provision in Sec. 1026.17(c)(4) has
been used. The property insurance premiums are not included in the
payment schedule. This disclosure statement could be used for notes with
the 7-year call option required by the Federal National Mortgage
Association (FNMA) in states where due-on-sale clauses are prohibited.
18. Sample H-14. This sample disclosure form illustrates the
disclosures under Sec. 1026.19(b) for a variable-rate transaction
secured by the consumer's principal dwelling with a term greater than
one year. The sample form shows a creditor how to adapt the model
clauses in appendix H-4(C) to the creditor's own particular variable-
rate program. The sample disclosure form describes the features of a
specific variable-rate mortgage program and alerts the consumer to the
fact that information on the creditor's other closed-end variable-rate
programs is available upon request. It includes information on how the
interest rate is determined and how it can change over time. Section
1026.19(b)(2)(viii) permits creditors the option to provide either a
historical example or an initial and maximum interest rates and payments
disclosure; both are illustrated in the sample disclosure. The
historical example explains how the monthly payment can change based on
a $10,000 loan amount, payable in 360 monthly installments, based on
historical changes in the values for the weekly average yield on U.S.
Treasury Securities adjusted to a constant maturity of one year. Index
values are measured for 15 years, as of the first week ending in July.
This reflects the requirement that the index history be based on values
for the same date or period each year in the example. The sample
disclosure also illustrates the alternative disclosure under Sec.
1026.19(b)(2)(viii)(B) that the initial and the maximum interest rates
and payments be shown for a $10,000 loan originated at an initial
interest rate of 12.41 percent (which was in effect July 1996) and to
have 2 percentage point annual (and 5 percentage point overall) interest
rate limitations or caps. Thus, the maximum amount that the interest
rate could rise under this program is 5 percentage points higher than
the 12.41 percent initial rate to 17.41 percent, and the monthly payment
could rise from $106.03 to a maximum of $145.34. The loan would not
reach the maximum interest rate until its fourth year because of the 2
percentage point annual rate limitations, and the maximum payment
disclosed reflects the amortization of the loan during that period. The
sample form also illustrates how to provide consumers with a method for
calculating their actual monthly payment for a loan amount other than
$10,000.
19. Sample H-15. This sample illustrates a graduated payment
transaction subject to Sec. 1026.17(a) with a 5-year graduation period
and a 7\1/2\ percent yearly increase in payments. The loan amount is
$44,900, payable in 360 monthly installments at a simple interest rate
of 14.75%. Two points ($898), as well as an initial guarantee insurance
premium of $225.00, are included in the prepaid finance charge. The
guarantee insurance premiums are calculated on the basis of \1/4\ of 1%
of the outstanding principal balance under an annual reduction plan. The
abbreviated disclosure permitted under Sec. 1026.18(g)(2) is used for
the payment schedule for years 6 through 30. The prepayment disclosure
refers to both penalties and rebates because information about penalties
is required for the simple interest portion of the obligation and
information about rebates is required for the guarantee insurance
portion of the obligation.
20. Sample H-16. This sample illustrates the disclosures required
under Sec. 1026.32(c). The sample illustrates the amount borrowed and
[[Page 908]]
the disclosures about optional insurance that are required for mortgage
refinancings under Sec. 1026.32(c)(5). Creditors may, at their option,
include these disclosures for all loans subject to Sec. 1026.32. The
sample also includes disclosures required under Sec. 1026.32(c)(3) when
the legal obligation includes a balloon payment.
21. HRSA-500-1 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-500-1 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been approved
for use for loans made prior to the mandatory compliance date of the
disclosures required under Subpart F. The form was approved for all
Health Education Assistance Loans (HEAL) with a variable interest rate
that were considered interim student credit extensions as defined in
Regulation Z.
22. HRSA-500-2 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-500-2 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been approved
for use for loans made prior to the mandatory compliance date of the
disclosures required under Subpart F. The form was approved for all HEAL
loans with a fixed interest rate that were considered interim student
credit extensions as defined in Regulation Z.23. HRSA-502-1 9-82.
Pursuant to section 113(a) of the Truth in Lending Act, Form HRSA-502-1
9-82 issued by the U.S. Department of Health and Human Services for
certain student loans has been approved for use for loans made prior to
the mandatory compliance date of the disclosures required under Subpart
F. The form was approved for all HEAL loans with a variable interest
rate in which the borrower has reached repayment status and is making
payments of both interest and principal.
24. HRSA-502-2 9-82. Pursuant to section 113(a) of the Truth in
Lending Act, Form HRSA-502-2 9-82 issued by the U.S. Department of
Health and Human Services for certain student loans has been approved
for use for loans made prior to the mandatory compliance date of the
disclosures required under Subpart F. The form was approved for all HEAL
loans with a fixed interest rate in which the borrower has reached
repayment status and is making payments of both interest and principal.
25. Models H-18, H-19, H-20. i. These model forms illustrate
disclosures required under Sec. 1026.47 on or with an application or
solicitation, at approval, and after acceptance of a private education
loan. Although use of the model forms is not required, creditors using
them properly will be deemed to be in compliance with the regulation
with regard to private education loan disclosures. Creditors may make
certain types of changes to private education loan model forms H-18
(application and solicitation), H-19 (approval), and H-20 (final) and
still be deemed to be in compliance with the regulation, provided that
the required disclosures are made clearly and conspicuously. The model
forms aggregate disclosures into groups under specific headings. Changes
may not include rearranging the sequence of disclosures, for instance,
by rearranging which disclosures are provided under each heading or by
rearranging the sequence of the headings and grouping of disclosures.
Changes to the model forms may not be so extensive as to affect the
substance or clarity of the forms. Creditors making revisions with that
effect will lose their protection from civil liability.
ii. The creditor may delete inapplicable disclosures, such as:
A. The Federal student financial assistance alternatives
disclosures.
B. The self-certification disclosure.
iii. Other permissible changes include, for example:
A. Adding the creditor's address, telephone number, or Web site.
B. Adding loan identification information, such as a loan
identification number.
C. Adding the date on which the form was printed or produced.
D. Placing the notice of the right to cancel in the top left or top
right of the disclosure to accommodate a window envelope.
E. Combining required terms where several numerical disclosures are
the same. For instance, if the itemization of the amount financed is
provided, the amount financed need not be separately disclosed.
F. Combining the disclosure of loan term and payment deferral
options required in Sec. 1026.47(a)(3) with the disclosure of cost
estimates required in Sec. 1026.47(a)(4) in the same chart or table
(See comment 47(a)(3)-4.)
G. Using the first person, instead of the second person, in
referring to the borrower.
H. Using ``borrower'' and ``creditor'' instead of pronouns.
I. Incorporating certain state ``plain English'' requirements.
J. Deleting inapplicable disclosures by whiting out, blocking out,
filling in ``N/A'' (not applicable) or ``0,'' crossing out, leaving
blanks, checking a box for applicable items, or circling applicable
items.
iv. Although creditors are not required to use a certain paper size
in disclosing the Sec. Sec. 1026.47(a), (b) and (c) disclosures,
samples H-21, H-22, and H-23 are designed to be printed on two 8\1/2\ x
11 inch sheets of paper. A creditor may use a larger sheet of paper,
such as 8\1/2\ x 14 inch sheets of paper, or may use multiple pages. If
the disclosures are provided on two sides of a single sheet of paper,
the creditor must include a reference or references, such as ``SEE BACK
OF PAGE'' at the bottom of each page indicating that the disclosures
continue onto the back of the page. If the disclosures are on two or
more
[[Page 909]]
pages, a creditor may not include any intervening information between
portions of the disclosure. In addition, the following formatting
techniques were used in presenting the information in the sample tables
to ensure that the information is readable:
A. A readable font style and font size (10-point Helvetica font
style for body text).
B. Sufficient spacing between lines of the text.
C. Standard spacing between words and characters. In other words,
the body text was not compressed to appear smaller than the 10-point
type size.
D. Sufficient white space around the text of the information in each
row, by providing sufficient margins above, below and to the sides of
the text.
E. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
v. While the Bureau is not requiring issuers to use the above
formatting techniques in presenting information in the disclosure, the
Bureau encourages issuers to consider these techniques when deciding how
to disclose information in the disclosure to ensure that the information
is presented in a readable format.
vi. Creditors are allowed to use color, shading and similar graphic
techniques in the disclosures, so long as the disclosures remain
substantially similar to the model and sample forms in appendix H.
26. Sample H-21. This sample illustrates a disclosure required under
Sec. 1026.47(a). The sample assumes a range of interest rates between
7.375% and 17.375%. The sample assumes a variable interest rate that
will never exceed 25% over the life of the loan. The term of the sample
loan is 20 years for an amount up to $20,000 and 30 years for an amount
more than $20,000. The repayment options and sample costs have been
combined into a single table, as permitted in the commentary to Sec.
1026.47(a)(3). It demonstrates the loan amount, interest rate, and total
paid when a consumer makes loan payments while in school, pays only
interest while in school, and defers all payments while in school.
27. Sample H-22. This sample illustrates a disclosure required under
Sec. 1026.47(b). The sample assumes the consumer financed $10,000 at an
8.23% annual percentage rate. The sample assumes a variable interest
rate that will never exceed 25% over the life of the loan. The payment
schedule and terms assumes a 20-year loan term and that the consumer
elected to defer payments while enrolled in school. This includes a
sample disclosure of a total loan amount of $10,600 and prepaid finance
charges totaling $600, for a total amount financed of $10,000.
28. Sample H-22. This sample illustrates a disclosure required under
Sec. 1026.47(c). The sample assumes the consumer financed $10,000 at an
8.23% annual percentage rate. The sample assumes a variable annual
percentage rate in an instance where there is no maximum interest rate.
The sample demonstrates disclosure of an assumed maximum rate, and the
statement that the consumer's actual maximum rate and payment amount
could be higher. The payment schedule and terms assumes a 20-year loan
term, the assumed maximum interest rate, and that the consumer elected
to defer payments while enrolled in school. This includes a sample
disclosure of a total loan amount of $10,600 and prepaid finance charges
totaling $600, for a total amount financed of $10,000.
29. Model Form H-29. Model form H-29 contains the disclosures for
the cancellation of an escrow account established in connection with a
closed-end transaction secured by a first lien on real property or a
dwelling.
i. This model form illustrates the disclosures required by Sec.
1026.20(e).
ii. A creditor or servicer satisfies Sec. 1026.20(e) if it provides
model form H-29 or a substantially similar notice, which is properly
completed with the disclosures required by Sec. 1026.20(e).
iii. Although creditors and servicers are not required to use a
certain paper size in disclosing the information under Sec. 1026.20(e),
model form H-29 is designed to be printed on an 8\1/2\ x 1- inch sheet
of paper. In addition, the following formatting techniques were used in
presenting the information in the model form to ensure that the
information is readable:
A. A readable font style and font size (10-point minimum font size);
B. Sufficient spacing between lines of the text;
C. Standard spacing between words and characters. In other words,
the text was not compressed to appear smaller than 10-point type;
D. Sufficient white space around the text of the information in each
row, by providing sufficient margins above, below and to the sides of
the text;
E. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
iv. While the regulation does not require creditors or servicers to
use the above formatting techniques in presenting information in the
tabular format (except for the 10-point minimum font size requirement),
creditors and servicers are encouraged to consider these techniques when
deciding how to disclose information in the notice to ensure that the
information is presented in a readable format.
v. Creditors and servicers may use color, shading and similar
graphic techniques with respect to the notice, so long as the notice
remains substantially similar to model form H-29.
[[Page 910]]
30. Standard Loan Estimate and Closing Disclosure forms. Forms H-
24(A) through (G), H-25(A) through (J), and H-28(A) through (J) are
model forms for the disclosures required under Sec. Sec. 1026.37 and
1026.38. However, pursuant to Sec. Sec. 1026.37(o)(3) and
1026.38(t)(3), for federally related mortgage loans forms H-24(A)
through (G) and H-25(A) through (J) are standard forms required to be
used for the disclosures required under Sec. Sec. 1026.37 and 1026.38,
respectively.
Appendix J--Annual Percentage Rate Computations for Closed-End Credit
Transactions
1. Use of appendix J. Appendix J sets forth the actuarial equations
and instructions for calculating the annual percentage rate in closed-
end credit transactions. While the formulas contained in this appendix
may be directly applied to calculate the annual percentage rate for an
individual transaction, they may also be utilized to program calculators
and computers to perform the calculations.
2. Relation to Bureau tables. The Bureau's Annual Percentage Rate
Tables also provide creditors with a calculation tool that applies the
technical information in appendix J. An annual percentage rate computed
in accordance with the instructions in the tables is deemed to comply
with the regulation. Volume I of the tables may be used for credit
transactions involving equal payment amounts and periods, as well as for
transactions involving any of the following irregularities: odd first
period, odd first payment and odd last payment. Volume II of the tables
may be used for transactions that involve any type of irregularities.
These tables may be obtained from the Bureau, 1700 G Street, NW.,
Washington, DC 20006, upon request.
Appendix K--Total Annual Loan Cost Rate Computations for Reverse
Mortgage Transactions
1. General. The calculation of total annual loan cost rates under
appendix K is based on the principles set forth and the estimation or
``iteration'' procedure used to compute annual percentage rates under
appendix J. Rather than restate this iteration process in full, the
regulation cross-references the procedures found in appendix J. In other
aspects the appendix reflects the special nature of reverse mortgage
transactions. Special definitions and instructions are included where
appropriate.
(b) Instructions and equations for the total annual loan cost rate
(b)(5) Number of unit-periods between two given dates
1. Assumption as to when transaction begins. The computation of the
total annual loan cost rate is based on the assumption that the reverse
mortgage transaction begins on the first day of the month in which
consummation is estimated to occur. Therefore, fractional unit-periods
(used under appendix J for calculating annual percentage rates) are not
used.
(b)(9) Assumption for discretionary cash advances
1. Amount of credit. Creditors should compute the total annual loan
cost rates for transactions involving discretionary cash advances by
assuming that 50 percent of the initial amount of the credit available
under the transaction is advanced at closing or, in an open-end
transaction, when the consumer becomes obligated under the plan. (For
the purposes of this assumption, the initial amount of the credit is the
principal loan amount less any costs to the consumer under Sec.
1026.33(c)(1).)
(b)(10) Assumption for variable-rate reverse mortgage transactions
1. Initial discount or premium rate. Where a variable-rate reverse
mortgage transaction includes an initial discount or premium rate, the
creditor should apply the same rules for calculating the total annual
loan cost rate as are applied when calculating the annual percentage
rate for a loan with an initial discount or premium rate (see the
commentary to Sec. 1026.17(c)).
(d) Reverse mortgage model form and sample form
(d)(2) Sample form
1. General. The ``clear and conspicuous'' standard for reverse
mortgage disclosures does not require disclosures to be printed in any
particular type size. Disclosures may be made on more than one page, and
use both the front and the reverse sides, as long as the pages
constitute an integrated document and the table disclosing the total
annual loan cost rates is on a single page.
Appendix L--Assumed Loan Periods for Computations of Total Annual Loan
Cost Rates
1. General. The life expectancy figures used in appendix L are those
found in the U.S. Decennial Life Tables for women, as rounded to the
nearest whole year and as published by the U.S. Department of Health and
Human Services. The figures contained in appendix
[[Page 911]]
L must be used by creditors for all consumers (men and women). Appendix
L will be revised periodically by the Bureau to incorporate revisions to
the figures made in the Decennial Tables.
Appendix O--Illustrative Written Source Documents for Higher-Priced
Mortgage Loan Appraisal Rules
1. Title commitment report. The ``title commitment report'' is a
document from a title insurance company describing the property interest
and status of its title, parties with interests in the title and the
nature of their claims, issues with the title that must be resolved
prior to closing of the transaction between the parties to the transfer,
amount and disposition of the premiums, and endorsements on the title
policy. This document is issued by the title insurance company prior to
the company's issuance of an actual title insurance policy to the
property's transferee and/or creditor financing the transaction. In
different jurisdictions, this instrument may be referred to by different
terms, such as a title commitment, title binder, title opinion, or title
report.
[76 FR 79772, Dec. 22, 2011]
Editorial Note: For Federal Register citations affecting supplement
I to part 1026, see the List of CFR Sections Affected, which appears in
the Finding Aids section of the printed volume and at www.fdsys.gov.
Effective Date Notes: 1. At 81 FR 84371, Nov. 22, 2016, supplement I
to part 1026 was amended by:
a. Under Section 1026.2--Definitions and Rules of Construction:
i. In subsection 2(a)(7) Card Issuer, paragraph 1 was revised and
paragraph 2 was added.
ii. In subsection 2(a)(14) Credit, paragraph 3 was added.
iii. In subsection Paragraph 2(a)(15):
A. Paragraph 2.i.B was revised.
B. Paragraph 2.i.F was added.
C. Paragraph 2.ii.C was revised.
D. Paragraph 2.ii.D was added.
E. Paragraphs 3 and 4 were revised.
iv. In subsection Paragraph 2(a)(17)(i), paragraph 8 was added.
v. In subsection Paragraph 2(a)(17)(iii), paragraph 2 was added.
vi. In subsection 2(a)(20) Open-End Credit, paragraphs 2 and 4 were
revised.
b. Under Section 1026.4--Finance Charge:
i. In subsection 4(a) Definition, paragraph 4 introductory text was
revised.
ii. In subsection Paragraph 4(b)(2), paragraph 1 was revised and
paragraph 2 was added.
iii. Subsection Paragraph 4(b)(11) was added.
iv. In subsection Paragraph 4(c)(3), paragraph 1 was revised and
paragraph 2 was added.
iv. In subsection Paragraph 4(c)(4), paragraph 1 was revised and
paragraph 3 was added.
c. Under Section 1026.5--General Disclosure Requirements:
i. In subsection 5(b)(2)(ii) Timing Requirements, paragraph 4.i was
revised.
d. Under Section 1026.6--Account-Opening Disclosures:
i. In subsection 6(b)(2) Required Disclosures for Account-Opening
Table for Open-End (Not Home-Secured) Plans, paragraphs 1 and 2 were
added.
ii. Subheading Paragraph 6(b)(3)(iii) and subsections Paragraph
6(b)(3)(iii)(D) and Paragraph 6(b)(3)(iii)(E) were added.
e. Under Section 1026.7--Periodic Statement:
i. In subsection 7(b)(13) Format Requirements, paragraph 1 was
revised.
f. Under Section 1026.8--Identifying Transactions on Periodic
Statements:
i. In subsection 8(a) Sale Credit, paragraph 1 introductory text is
revised and paragraph 9 was added.
ii. In subsection 8(b) Nonsale credit, the subheading is revised,
paragraph 1.ii was revised, paragraphs 1.v and 1.vi were added, and 2
introductory text was revised.
g. Under Section 1026.10--Payments:
i. In subsection 10(a) General Rule., the subheading was revised,
and paragraph 2.ii was revised.
ii. In subsection 10(b) Specific Requirements for Payments,
paragraph 1 was revised.
h. Under Section 1026.12--Special Credit Card Provisions:
i. In subsection Paragraph 12(a)(1), paragraphs 2 and 7 were
revised.
ii. In subsection Paragraph 12(a)(2), paragraph 6.i was revised,
paragraph 6.ii is redesignated as 6.iii, and new paragraph 6.ii was
added.
iii. In subsection 12(c) Right of Cardholder to Assert Claims or
Defenses Against Card Issuer, paragraph 5 was added.
iv. In subsection 12(c)(1) General Rule, paragraphs 1 introductory
text and 1.ii were revised.
v. In subsection 12(d) Offsets by Card Issuer Prohibited, paragraph
1 was added.
vi. In subsection Paragraph 12(d)(1), paragraph 2 was revised.
vii. In subsection Paragraph 12(d)(2), paragraph 1.i was revised,
paragraph 1.ii was redesignated as 1.iv, and new paragraph 1.ii and
paragraph 1.iii were added.
viii. In subsection Paragraph 12(d)(3), paragraph 1.iii was revised
and paragraphs 2.iii and 3 were added.
i. Under Section 1026.13--Billing Error Resolution:
i. In subsection 13(i) Relation to Electronic Fund Transfer Act and
Regulation E, paragraphs 2, 3 introductory text, 3.i, and 3.iv
[[Page 912]]
were revised and paragraphs 4 and 5 was added.
j. Under Section 1026.52--Limitations on Fees:
i. In subsection 52(a)(1) General rule, paragraph 1 introductory
text was revised and paragraphs 1.iii and 1.iv were added.
ii. In subsection 52(a)(2) Fees Not Subject to Limitations,
paragraph 1 introductory text was revised, paragraphs 2 and 3 were
redesignated as paragraphs 4 and 5, and new paragraphs 2 and 3 were
added.
iii. In subsection 52(b) Limitations on Penalty Fees, paragraphs 3
and 4 were added.
iv. In subsection 52(b)(2)(i) Fees That Exceed Dollar Amount
Associated with Violation, paragraph 7 was added.
k. Under Section 1026.55--Limitations on Increasing Annual
Percentage Rates, Fees, and Charges:
i. In subsection 55(a) General Rule, paragraphs 3 and 4 were added.
l. Under Section 1026.57--Reporting and Marketing Rules for College
Student Open-End Credit:
i. In subsection 57(a)(1) College student credit card, paragraph 1
was revised.
ii. In subsection 57(a)(5) College credit card agreement, paragraph
1 was revised.
iii. In subsection 57(b) Public disclosure of agreements, paragraph
3 was added.
iv. In subsection 57(c) Prohibited inducements, paragraph 7 was
added.
m. Under Section 1026.60--Credit and Charge Card Applications and
Solicitations:
i. Paragraph 1 was revised.
ii. In subsection 60(b) Required Disclosures, paragraphs 3 and 4
were added.
iii. In subsection 60(b)(4) Transaction Charges, paragraph 3 was
added.
iv. In subsection 60(b)(8) Cash Advance Fee, paragraph 4 was added.
n. Section 1026.61--Hybrid Prepaid-Credit Cards was added, effective
Oct. 1, 2017. At 82 FR 18975, Apr. 25, 2017, the effective date was
delayed to Apr. 1, 2018.
For the convenience of the user, the added and revised text is set
forth as follows:
Sec. Supplement I to Part 1026--Official Interpretations
* * * * *
Subpart A--General
* * * * *
Section 1026.2 Definitions and Rules of Construction
* * * * *
2(a)(7) Card Issuer
1. Agent. i. An agent of a card issuer is considered a card issuer.
Except as provided in comment 2(a)(7)-1.ii, because agency relationships
are traditionally defined by contract and by state or other applicable
law, the regulation does not define agent. Merely providing services
relating to the production of credit cards or data processing for
others, however, does not make one the agent of the card issuer. In
contrast, a financial institution may become the agent of the card
issuer if an agreement between the institution and the card issuer
provides that the cardholder may use a line of credit with the financial
institution to pay obligations incurred by use of the credit card.
ii. Under Sec. 1026.2(a)(7), with respect to a covered separate
credit feature accessible by a hybrid prepaid-credit card as defined in
Sec. 1026.61 where that credit feature is offered by an affiliate or
business partner of the prepaid account issuer as those terms are
defined in Sec. 1026.61, the affiliate or business partner offering the
credit feature is an agent of the prepaid account issuer and thus, is
itself a card issuer with respect to the hybrid prepaid-credit card.
2. Prepaid cards that are not hybrid prepaid-credit cards. See Sec.
1026.61(a) and comments 61(a)(2)-5.iii and 61(a)(4)-1.iv for guidance on
the applicability of this regulation in connection with credit
accessible by prepaid cards that are not hybrid prepaid-credit cards.
* * * * *
2(a)(14) Credit
* * * * *
3. Transactions on the asset features of prepaid accounts when there
are insufficient or unavailable funds. Credit includes authorization of
a transaction on the asset feature of a prepaid account as defined in
Sec. 1026.61 where the consumer has insufficient or unavailable funds
in the asset feature of the prepaid account at the time the transaction
is authorized to cover the amount of the transaction. It also includes
settlement of a transaction on the asset feature of a prepaid account
where the consumer has insufficient or unavailable funds in the asset
feature of the prepaid account at the time the transaction is settled to
cover the amount of the transaction. This includes a transaction where
the consumer has sufficient or available funds in the asset feature of a
prepaid account to cover the amount of the transaction at the time the
transaction is authorized but insufficient or unavailable funds in the
asset feature of the prepaid account to cover the transaction amount at
the time the transaction is settled. See Sec. 1026.61 and related
commentary on the applicability of this regulation to credit that is
extended in connection with a prepaid account.
[[Page 913]]
Paragraph 2(a)(15)
* * * * *
2. * * *
i. * * *
B. A debit card (other than a debit card that is solely an account
number) that also accesses a credit account (that is, a debit-credit
card). See comment 2(a)(15)-2.ii.C for guidance on whether a debit card
that is solely an account number is a credit card.
* * * * *
F. A prepaid card that is a hybrid prepaid-credit card as defined in
Sec. 1026.61.
ii. * * *
C. An account number that accesses a credit account, unless the
account number can access an open-end line of credit to purchase goods
or services or as provided in Sec. 1026.61 with respect to a hybrid
prepaid-credit card. For example, if a creditor provides a consumer with
an open-end line of credit that can be accessed by an account number in
order to transfer funds into another account (such as an asset account
with the same creditor), the account number is not a credit card for
purposes of Sec. 1026.2(a)(15)(i). However, if the account number can
also access the line of credit to purchase goods or services (such as an
account number that can be used to purchase goods or services on the
Internet), the account number is a credit card for purposes of Sec.
1026.2(a)(15)(i), regardless of whether the creditor treats such
transactions as purchases, cash advances, or some other type of
transaction. Furthermore, if the line of credit can also be accessed by
a card (such as a debit card), that card is a credit card for purposes
of Sec. 1026.2(a)(15)(i).
D. A prepaid card that is not a hybrid prepaid-credit card as
defined in Sec. 1026.61.
3. Charge card. i. Charge cards are credit cards where no periodic
rate is used to compute the finance charge. Under the regulation, a
reference to credit cards generally includes charge cards. In
particular, references to credit card accounts under an open-end (not
home-secured) consumer credit plan in subparts B and G generally include
charge cards. The term charge card is, however, distinguished from
credit card or credit card account under an open-end (not home-secured)
consumer credit plan in Sec. Sec. 1026.6(b)(2)(xiv), 1026.7(b)(11)
(except as described in comment 2(a)(15)-3.ii below), 1026.7(b)(12),
1026.9(e), 1026.9(f), 1026.28(d), 1026.52(b)(1)(ii)(C), 1026.60, and
appendices G-10 through G-13.
ii. A hybrid prepaid-credit card as defined in Sec. 1026.61 is a
charge card with respect to a covered separate credit feature if no
periodic rate is used to compute the finance charge in connection with
the covered separate credit feature. Unlike other charge card accounts,
the requirements in Sec. 1026.7(b)(11) apply to a covered separate
credit feature accessible by a hybrid prepaid-credit card that is a
charge card when that covered separate credit feature is a credit card
account under an open-end (not home-secured) consumer credit plan. Thus,
under Sec. 1026.5(b)(2)(ii)(A), with respect to a covered separate
credit feature that is a credit card account under an open-end (not
home-secured) consumer credit plan, a card issuer of a hybrid prepaid-
credit card that meets the definition of a charge card because no
periodic rate is used to compute a finance charge in connection with the
covered separate credit feature must adopt reasonable procedures for the
covered separate credit feature designed to ensure that (1) periodic
statements are mailed or delivered at least 21 days prior to the payment
due date disclosed on the statement pursuant to Sec.
1026.7(b)(11)(i)(A); and (2) the card issuer does not treat as late for
any purposes a required minimum periodic payment received by the card
issuer within 21 days after mailing or delivery of the periodic
statement disclosing the due date for that payment.
4. Credit card account under an open-end (not home-secured) consumer
credit plan. i. An open-end consumer credit account is a credit card
account under an open-end (not home-secured) consumer credit plan for
purposes of Sec. 1026.2(a)(15)(ii) if:
A. The account is accessed by a credit card, as defined in Sec.
1026.2(a)(15)(i); and
B. The account is not excluded under Sec. 1026.2(a)(15)(ii)(A)
through (C).
ii. As noted in Sec. 1026.2(a)(15)(ii)(C), the exclusion from
credit card account under an open-end (not home-secured) consumer credit
plan provided by that paragraph for an overdraft line of credit that is
accessed by an account number does not apply to a covered separate
credit feature accessible by a hybrid prepaid-credit card (including a
hybrid prepaid-credit card that is solely an account number) as defined
in Sec. 1026.61.
* * * * *
2(a)(17) Creditor
* * * * *
Paragraph 2(a)(17)(i)
* * * * *
8. Prepaid cards that are not hybrid prepaid-credit cards. See Sec.
1026.61(a) and comments 61(a)(2)-5.iii and 61(a)(4)-1.iv for guidance on
the applicability of this regulation in connection with credit
accessible by prepaid cards that are not hybrid prepaid-credit cards.
* * * * *
[[Page 914]]
Paragraph 2(a)(17)(iii)
* * * * *
2. Prepaid cards that are not hybrid prepaid-credit cards. See Sec.
1026.61(a) and comments 61(a)(2)-5.iii and 61(a)(4)-1.iv for guidance on
the applicability of this regulation in connection with credit
accessible by prepaid cards that are not hybrid prepaid-credit cards.
* * * * *
2(a)(20) Open-End Credit
* * * * *
2. Existence of a plan. i. The definition requires that there be a
plan, which connotes a contractual arrangement between the creditor and
the consumer.
ii. With respect to a covered separate credit feature accessible by
a hybrid prepaid-credit card as defined in Sec. 1026.61, a plan means a
program where the consumer is obligated contractually to repay any
credit extended by the creditor. For example, a plan includes a program
under which a creditor routinely extends credit from a covered separate
credit feature offered by the prepaid account issuer, its affiliate, or
its business partner where the prepaid card can be used from time to
time to draw, transfer, or authorize the draw or transfer of credit from
the covered separate credit feature in the course of authorizing,
settling, or otherwise completing transactions conducted with the card
to obtain goods or services, obtain cash, or conduct person-to-person
transfers, and the consumer is obligated contractually to repay those
credit transactions. Such a program constitutes a plan notwithstanding
that, for example, the creditor has not agreed in writing to extend
credit for those transactions, the creditor retains discretion not to
extend credit for those transactions, or the creditor does not extend
credit for those transactions once the consumer has exceeded a certain
amount of credit. See Sec. 1026.61(a) and related commentary for
guidance on the applicability of this regulation to credit accessible by
hybrid prepaid-credit cards.
iii. Some creditors offer programs containing a number of different
credit features. The consumer has a single account with the institution
that can be accessed repeatedly via a number of sub-accounts established
for the different program features and rate structures. Some features of
the program might be used repeatedly (for example, an overdraft line)
while others might be used infrequently (such as the part of the credit
line available for secured credit). If the program as a whole is subject
to prescribed terms and otherwise meets the definition of open-end
credit, such a program would be considered a single, multifeatured plan.
* * * * *
4. Finance charge on an outstanding balance. i. The requirement that
a finance charge may be computed and imposed from time to time on the
outstanding balance means that there is no specific amount financed for
the plan for which the finance charge, total of payments, and payment
schedule can be calculated. A plan may meet the definition of open-end
credit even though a finance charge is not normally imposed, provided
the creditor has the right, under the plan, to impose a finance charge
from time to time on the outstanding balance. For example, in some
plans, a finance charge is not imposed if the consumer pays all or a
specified portion of the outstanding balance within a given time period.
Such a plan could meet the finance charge criterion, if the creditor has
the right to impose a finance charge, even though the consumer actually
pays no finance charges during the existence of the plan because the
consumer takes advantage of the option to pay the balance (either in
full or in installments) within the time necessary to avoid finance
charges.
ii. With regard to a covered separate credit feature and an asset
feature on a prepaid account that are both accessible by a hybrid
prepaid-credit card as defined in Sec. 1026.61, any service,
transaction, activity, or carrying charges imposed on the covered
separate credit feature, and any such charges imposed on the asset
feature of the prepaid account to the extent that the amount of the
charge exceeds comparable charges imposed on prepaid accounts in the
same prepaid account program that do not have a covered separate credit
feature accessible by a hybrid prepaid-credit card, generally is a
finance charge. See Sec. 1026.4(a) and (b)(11). Such charges include a
periodic fee to participate in the covered separate credit feature,
regardless of whether this fee is imposed on the credit feature or on
the asset feature of the prepaid account. With respect to credit from a
covered separate credit feature accessible by a hybrid prepaid-credit
card, any service, transaction, activity, or carrying charges that are
finance charges under Sec. 1026.4 constitute finance charges imposed
from time to time on an outstanding unpaid balance as described in Sec.
1026.2(a)(20) if there is no specific amount financed for the credit
feature for which the finance charge, total of payments, and payment
schedule can be calculated.
* * * * *
[[Page 915]]
Section 1026.4 Finance Charge
4(a) Definition
* * * * *
4. Treatment of transaction fees on credit card plans. Except with
regard to a covered separate credit feature and an asset feature on a
prepaid account that are both accessible by a hybrid prepaid-credit card
as defined in Sec. 1026.61, which are addressed in more detail in
Sec. Sec. 1026.4(b)(11) and 1026.61, any transaction charge imposed on
a cardholder by a card issuer is a finance charge, regardless of whether
the issuer imposes the same, greater, or lesser charge on withdrawals of
funds from an asset account such as a checking or savings account. For
example:
* * * * *
4(b) Examples of Finance Charges
* * * * *
Paragraph 4(b)(2)
1. Checking or transaction account charges. A charge imposed in
connection with a credit feature on a checking or transaction account
(other than a prepaid account as defined in Sec. 1026.61) is a finance
charge under Sec. 1026.4(b)(2) to the extent the charge exceeds the
charge for a similar account without a credit feature. If a charge for
an account with a credit feature does not exceed the charge for an
account without a credit feature, the charge is not a finance charge
under Sec. 1026.4(b)(2). To illustrate:
i. A $5 service charge is imposed on an account with an overdraft
line of credit (where the institution has agreed in writing to pay an
overdraft), while a $3 service charge is imposed on an account without a
credit feature; the $2 difference is a finance charge. (If the
difference is not related to account activity, however, it may be
excludable as a participation fee. See the commentary to Sec.
1026.4(c)(4).)
ii. A $5 service charge is imposed for each item that results in an
overdraft on an account with an overdraft line of credit, while a $25
service charge is imposed for paying or returning each item on a similar
account without a credit feature; the $5 charge is not a finance charge.
2. Prepaid accounts. Fee or charges related to credit offered in
connection with prepaid accounts as defined in Sec. 1026.61 are
discussed in Sec. Sec. 1026.4(b)(11) and 1026.61 and related
commentary.
* * * * *
Paragraph 4(b)(11)
1. Credit in connection with a prepaid card. Section 1026.61 governs
credit offered in connection with a prepaid card.
i. A separate credit feature that meets the conditions of Sec.
1026.61(a)(2)(i) is defined as a covered separate credit feature
accessible by a hybrid prepaid-credit card. See Sec. 1026.61(a)(2)(i)
and comment 61(a)(2)-4. In this case, the hybrid prepaid-credit card can
access both the covered separate credit feature and the asset feature of
the prepaid account. The rules for classification of fees or charges as
finance charges in connection with this account structure are specified
in Sec. 1026.4(b)(11) and related commentary.
ii. If a prepaid card can access a non-covered separate credit
feature as described in Sec. 1026.61(a)(2)(ii), the card is not a
hybrid prepaid-credit card with respect to that credit feature. In that
case:
A. Section 1026.4(b)(11) and related commentary do not apply to fees
or charges imposed on the non-covered separate credit feature; instead,
the general rules set forth in Sec. 1026.4 determine whether these fees
or charges are finance charges; and
B. Fees or charges on the asset feature of the prepaid account are
not finance charges under Sec. 1026.4 with respect to the non-covered
separate credit feature. See comment 61(a)(2)-5.iii for guidance on the
applicability of this regulation in connection with non-covered credit
features accessible by prepaid cards.
iii. If the prepaid card is not a hybrid prepaid-credit card because
the only credit extended through a negative balance on the asset feature
of the prepaid account is pursuant to Sec. 1026.61(a)(4), fees charged
on the asset feature of the prepaid account in accordance with Sec.
1026.61(a)(4)(ii)(B) are not finance charges.
Paragraph 4(b)(11)(i)
1. Transaction fees imposed on the covered separate credit feature.
Consistent with comment 4(a)-4, any transaction charge imposed on a
cardholder by a card issuer on a covered separate credit feature
accessible by a hybrid prepaid-credit card is a finance charge.
Transaction charges that are imposed on the asset feature of a prepaid
account are subject to Sec. 1026.4(b)(11)(ii) and related commentary,
instead of Sec. 1026.4(b)(11)(i).
Paragraph 4(b)(11)(ii)
1. Fees or charges imposed on the asset feature of a prepaid
account. i. Under Sec. 1026.4(b)(11)(ii), with regard to a covered
separate credit feature and an asset feature of a prepaid account that
are both accessible by a hybrid prepaid-credit card as defined Sec.
1026.61, any fee or charge imposed on the asset feature of the prepaid
account is a finance charge to the extent that the amount
[[Page 916]]
of the fee or charge exceeds comparable fees or charges imposed on
prepaid accounts in the same prepaid account program that do not have a
covered separate credit feature accessible by a hybrid prepaid-credit
card. This comment provides guidance with respect to comparable fees
under Sec. 1026.4(b)(11)(ii) for the two types of credit extensions on
a covered separate credit feature. See Sec. 1026.61(a)(2)(i)(B) and
comment 61(a)(2)-4.ii. Comment 4(b)(11)(ii)-1.ii provides guidance for
credit extensions where the hybrid prepaid-credit card accesses credit
from the covered separate credit feature in the course of authorizing,
settling, or otherwise completing a transaction conducted with the card
to obtain goods or services, obtain cash, or conduct person-to-person
transfers. Comment 4(b)(11)(ii)-1.iii provides guidance for credit
extensions where a consumer draws or transfers credit from the covered
separate credit feature outside the course of a transaction conducted
with the card to obtain goods or services, obtain cash, or conduct
person-to-person transfers.
ii. Where the hybrid prepaid-credit card accesses credit from a
covered separate credit feature in the course of authorizing, settling,
or otherwise completing a transaction conducted with the card to obtain
goods or services, obtain cash, or conduct person-to-person transfers,
any per transaction fees imposed on the asset feature of prepaid
accounts, including load and transfer fees, for such credit from the
credit feature are comparable only to per transaction fees for each
transaction to access funds in the asset feature of a prepaid account
that are imposed on prepaid accounts in the same prepaid account program
that does not have such a credit feature. Per transaction fees for a
transaction that is conducted to load or draw funds into a prepaid
account from some other source are not comparable for purposes of Sec.
1026.4(b)(11)(ii). To illustrate:
A. Assume a prepaid account issuer charges $0.50 on prepaid accounts
without a covered separate credit feature for each transaction that
accesses funds in the asset feature of the prepaid accounts. Also,
assume that the prepaid account issuer charges $0.50 per transaction on
the asset feature of prepaid accounts in the same prepaid program where
the hybrid prepaid-credit card accesses credit from a covered separate
credit feature in the course of a transaction. In this case, the $0.50
per transaction fee imposed on the asset feature of the prepaid account
with a covered separate credit feature is not a finance charge.
B. Assume same facts as in paragraph A above, except that assume the
prepaid account issuer charges $1.25 on the asset feature of a prepaid
account for each transaction where the hybrid prepaid-credit card
accesses credit from the covered separate credit feature in the course
of the transaction. In this case, the additional $0.75 is a finance
charge.
C. Assume a prepaid account issuer charges $0.50 on prepaid accounts
without a covered separate credit feature for each transaction that
accesses funds in the asset feature of the prepaid accounts. Assume also
that the prepaid account issuer charges both a $0.50 per transaction fee
and a $1.25 transfer fee on the asset feature of prepaid accounts in the
same prepaid program where the hybrid prepaid-credit card accesses
credit from a covered separate credit feature in the course of a
transaction. In this case, both fees charged on a per-transaction basis
for the credit transaction (i.e., a combined fee of $1.75 per
transaction) must be compared to the $0.50 per transaction fee to access
funds in the asset feature of the prepaid account without a covered
separate credit feature. Accordingly, the $1.25 excess is a finance
charge.
D. Assume same facts as in paragraph C above, except that assume the
prepaid account issuer also charges a load fee of $1.25 whenever funds
are transferred or loaded from a separate asset account, such as from a
deposit account via a debit card, in the course of a transaction on
prepaid accounts without a covered separate credit feature, in addition
to charging a $0.50 per transaction fee. The $1.25 excess in paragraph C
is still a finance charge because load or transfer fees that are charged
on the asset feature of prepaid account for credit from the covered
separate credit feature are compared only to per transaction fees
imposed for accessing funds in the asset feature of the prepaid account
for prepaid accounts without such a credit feature. Per transaction fees
for a transaction that is conducted to load or draw funds into a prepaid
account from some other source are not comparable for purposes of Sec.
1026.4(b)(11)(ii).
iii. A consumer may choose in a particular circumstance to draw or
transfer credit from the covered separate credit feature outside the
course of a transaction conducted with the card to obtain goods or
services, obtain cash, or conduct person-to-person transfers. For
example, a consumer may use the prepaid card at the prepaid account
issuer's Web site to load funds from the covered separate credit feature
outside the course of a transaction conducted with the card to obtain
goods or services, obtain cash, or conduct person-to-person transfers.
See Sec. 1026.61(a)(2)(i)(B) and comment 61(a)(2)-4.ii. In these
situations, load or transfer fees imposed for draws or transfers of
credit from the covered separate credit feature outside the course of a
transaction are compared only with fees, if any, to load funds as a
direct deposit of salary from an employer or a direct deposit of
government benefits that are charged on prepaid accounts without a
covered separate credit feature. Fees imposed on prepaid accounts
without a covered
[[Page 917]]
separate credit feature for a one-time load or transfer of funds from a
separate asset account or from a non-covered separate credit feature are
not comparable for purposes of Sec. 1026.4(b)(11)(ii). To illustrate:
A. Assume a prepaid account issuer charges a $1.25 load fee to
transfer funds from a non-covered separate credit feature, such as a
non-covered separate credit card account, into prepaid accounts that do
not have a covered separate credit feature and does not charge a fee for
a direct deposit of salary from an employer or a direct deposit of
government benefits on those prepaid accounts. Assume the prepaid
account issuer charges $1.25 on the asset feature of a prepaid account
with a covered separate credit feature to load funds from the covered
separate credit feature outside the course of a transaction. In this
case, the $1.25 fee imposed on the asset feature of the prepaid account
with a covered separate credit feature is a finance charge because no
fee is charged for a direct deposit of salary from an employer or a
direct deposit of government benefits on prepaid accounts without such a
credit feature. Fees imposed on prepaid accounts without a covered
separate credit feature for a one-time load or transfer of funds from a
non-covered separate credit feature are not comparable for purposes of
Sec. 1026.4(b)(11)(ii).
B. Assume that a prepaid account issuer charges a $1.25 load fee for
a one-time transfer of funds from a separate asset account, such as from
a deposit account via a debit card, to a prepaid account without a
covered separate credit feature and does not charge a fee for a direct
deposit of salary from an employer or a direct deposit of government
benefits on those prepaid accounts. Assume the prepaid account issuer
charges $1.25 on the asset feature of a prepaid account with a covered
separate credit feature to load funds from the covered separate credit
feature outside the course of a transaction. In this case, the $1.25 fee
imposed on the asset feature of the prepaid account with a covered
separate credit feature is a finance charge because no fee is charged
for a direct deposit of salary from an employer or a direct deposit of
government benefits on prepaid accounts without a covered separate
credit feature. Fees imposed on prepaid accounts without a covered
separate credit feature for a one-time load or transfer of funds from a
separate asset account are not comparable for purposes of Sec.
1026.4(b)(11)(ii).
2. Relation to Regulation E. See Regulation E, 12 CFR 1005.18(g),
which only permits a financial institution to charge the same or higher
fees on the asset feature of a prepaid account with a covered separate
credit feature accessible by a hybrid prepaid-credit card than the
amount of a comparable fee it charges on prepaid accounts in the same
prepaid account program without such a credit feature. Under that
provision, a financial institution cannot charge a lower fee on the
asset feature of a prepaid account with a covered separate credit
feature accessible by a hybrid prepaid-credit card than the amount of a
comparable fee it charges on prepaid accounts without such a credit
feature in the same prepaid account program.
4(c) Charges Excluded From the Finance Charge
* * * * *
Paragraph 4(c)(3)
1. Assessing interest on an overdraft balance. Except with respect
to credit offered in connection with a prepaid account as defined in
Sec. 1026.61, a charge on an overdraft balance computed by applying a
rate of interest to the amount of the overdraft is not a finance charge,
even though the consumer agrees to the charge in the account agreement,
unless the financial institution agrees in writing that it will pay such
items.
2. Credit accessed in connection with a prepaid account. See comment
4(b)(11)-1 for guidance on when fees imposed with regard to credit
accessed in connection with a prepaid account as defined in Sec.
1026.61 are finance charges.
Paragraph 4(c)(4)
1. Participation fees--periodic basis. The participation fees
described in Sec. 1026.4(c)(4) do not necessarily have to be formal
membership fees, nor are they limited to credit card plans. Except as
provided in Sec. 1026.4(c)(4) for covered separate credit features
accessible by hybrid prepaid-credit cards as defined in Sec. 1026.61,
the provision applies to any credit plan in which payment of a fee is a
condition of access to the plan itself, but it does not apply to fees
imposed separately on individual closed-end transactions. The fee may be
charged on a monthly, annual, or other periodic basis; a one-time, non-
recurring fee imposed at the time an account is opened is not a fee that
is charged on a periodic basis, and may not be treated as a
participation fee.
* * * * *
3. Credit accessed in connection with by a prepaid account. See
comment 4(b)(11)-1 for guidance on when fees imposed with regard to
credit accessed in connection with a prepaid account as defined in Sec.
1026.61 are finance charges.
* * * * *
[[Page 918]]
Subpart B--Open-End Credit
Section 1026.5--General Disclosure Requirements
* * * * *
5(b) Time of Disclosures
* * * * *
5(b)(2) Periodic Statements
* * * * *
5(b)(2)(ii) Timing Requirements
* * * * *
4. * * *
i. Charge card accounts. For purposes of Sec.
1026.5(b)(2)(ii)(A)(1), the payment due date for a credit card account
under an open-end (not home-secured) consumer credit plan is the date
the card issuer is required to disclose on the periodic statement
pursuant to Sec. 1026.7(b)(11)(i)(A). Because Sec. 1026.7(b)(11)(ii)
provides that Sec. 1026.7(b)(11)(i) does not apply to periodic
statements provided solely for charge card accounts other than covered
separate credit features that are charge card accounts accessible by
hybrid prepaid-credit cards as defined in Sec. 1026.61, Sec.
1026.5(b)(2)(ii)(A)(1) also does not apply to the mailing or delivery of
periodic statements provided solely for such accounts. However, in these
circumstances, Sec. 1026.5(b)(2)(ii)(A)(2) requires the card issuer to
have reasonable procedures designed to ensure that a payment is not
treated as late for any purpose during the 21-day period following
mailing or delivery of the statement. A card issuer that complies with
Sec. 1026.5(b)(2)(ii)(A) as discussed above with respect to a charge
card account has also complied with Sec. 1026.5(b)(2)(ii)(B)(2).
Section 1026.5(b)(2)(ii)(B)(1) does not apply to charge card accounts
because, for purposes of Sec. 1026.5(b)(2)(ii)(B), a grace period is a
period within which any credit extended may be repaid without incurring
a finance charge due to a periodic interest rate and, consistent with
Sec. 1026.2(a)(15)(iii), charge card accounts do not impose a finance
charge based on a periodic rate.
* * * * *
Section 1026.6--Account-Opening Disclosures
* * * * *
6(b) Rules Affecting Open-End (Not Home-Secured) Plans
* * * * *
6(b)(2) Required Disclosures for Account-Opening Table for Open-End (Not
Home-Secured) Plans
1. Fees imposed on the asset feature of a prepaid account in
connection with a covered separate credit feature accessible by a hybrid
prepaid-credit card. With regard to a covered separate credit feature
and an asset feature on a prepaid account that are both accessible by a
hybrid prepaid-credit card as defined in Sec. 1026.61, a creditor is
required to disclose under Sec. 1026.6(b)(2) any fees or charges
imposed on the asset feature that are charges imposed as part of the
plan under Sec. 1026.6(b)(3) to the extent those fees fall within the
categories of fees or charges required to be disclosed under Sec.
1026.6(b)(2). For example, assume that a creditor imposes a $1.25 per
transaction fee on an asset feature of the prepaid account for purchases
when a hybrid prepaid-credit card accesses a covered separate credit
feature in the course of authorizing, settling, or otherwise completing
purchase transactions conducted with the card, and a $0.50 transaction
fee for purchases that access funds in the asset feature of a prepaid
account in the same program without such a credit feature. In this case,
the $0.75 excess is a charge imposed as part of the plan under Sec.
1026.6(b)(3) and must be disclosed under Sec. 1026.6(b)(2)(iv).
2. Fees imposed on the asset feature of a prepaid account that are
not charges imposed as part of the plan. A creditor is not required to
disclose under Sec. 1026.6(b)(2) any fee or charge imposed on the asset
feature of a prepaid account that is not a charge imposed as part of the
plan under Sec. 1026.6(b)(3). See Sec. 1026.6(b)(3)(iii)(D) and (E)
and related commentary regarding fees imposed on the asset feature of
the prepaid account that are not charges imposed as part of the plan
under Sec. 1026.6(b)(3).
* * * * *
6(b)(3) Disclosure of Charges Imposed as Part of Open-End (Not Home-
Secured) Plans
* * * * *
Paragraph 6(b)(3)(iii)
* * * * *
Paragraph 6(b)(3)(iii)(D)
1. Fees imposed on the asset feature of the prepaid account in
connection with a covered separate credit feature accessible by a hybrid
prepaid-credit card. Under Sec. 1026.6(b)(3)(iii)(D),
[[Page 919]]
with regard to a covered separate credit feature and an asset feature on
a prepaid account that are both accessible by a hybrid prepaid-credit
card as defined in Sec. 1026.61, a fee or charge imposed on the asset
feature of the prepaid account is not a charge imposed as part of the
plan under Sec. 1026.6(b)(3) with respect to a covered separate credit
feature to the extent that the amount of the fee or charge does not
exceed comparable fees or charges imposed on prepaid accounts in the
same prepaid account program that do not have a covered separate credit
feature assessed by a hybrid prepaid-credit card. To illustrate:
i. Assume a prepaid account issuer charges a $0.50 per transaction
fee on an asset feature of the prepaid account for purchases when a
hybrid prepaid-credit card accesses a covered separate credit feature in
the course of authorizing, settling, or otherwise completing purchase
transactions conducted with the card and a $0.50 transaction fee for
purchases that access funds in the asset feature of a prepaid account in
the same program without such a credit feature. The $0.50 fees are
comparable fees and the $0.50 fee for purchases when a hybrid prepaid-
credit card accesses a covered separate credit feature in the course of
authorizing, settling, or otherwise completing purchase transactions
conducted with the card is not a charge imposed as part of the plan.
However, if in this example, the prepaid account issuer imposes a $1.25
per transaction fee on an asset feature of the prepaid account for
purchases when a hybrid prepaid-credit card accesses a covered separate
credit feature in the course of authorizing, settling, or otherwise
completing purchase transactions conducted with the card, the $0.75
excess is a charge imposed as part of the plan. This $0.75 excess also
is a finance charge under Sec. 1026.4(b)(11)(ii).
ii. See comment 4(b)(11)(ii)-1 for additional illustrations of when
a prepaid account issuer is charging comparable per transaction fees or
load or transfer fees on the prepaid account.
Paragraph 6(b)(3)(iii)(E)
1. Fees imposed on the asset feature of a prepaid account in
connection with a non-covered separate credit feature. With regard to a
non-covered separate credit feature accessible by a prepaid card as
defined in Sec. 1026.61, under Sec. 1026.6(b)(3)(iii)(E), none of the
fees or charges imposed on the asset balance of the prepaid account are
charges imposed as part of the plan under Sec. 1026.6(b)(3) with
respect to the non-covered separate credit feature. In addition, none of
these fees or charges imposed on the asset feature of the prepaid
account are finance charges with respect to the non-covered separate
credit feature as discussed in comment 4(b)(11)-1.ii.B.
* * * * *
Section 1026.7--Periodic Statement
* * * * *
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
* * * * *
7(b)(13) Format Requirements
1. Combined asset account and credit account statements. Some
financial institutions provide information about deposit account and
open-end credit account activity on one periodic statement. For purposes
of providing disclosures on the front of the first page of the periodic
statement pursuant to Sec. 1026.7(b)(13), the first page of such a
combined statement shall be the page on which credit transactions first
appear. This guidance also applies to financial institutions that
provide information about prepaid accounts and account activity in
connection with covered separate credit features accessible by hybrid
prepaid-credit cards as defined in Sec. 1026.61 on one periodic
statement.
Section 1026.8 Identifying Transactions on Periodic Statements
8(a) Sale Credit
1. Sale credit. The term ``sale credit'' refers to a purchase in
which the consumer uses a credit card or otherwise directly accesses an
open-end line of credit (see comment 8(b)-1 if access is by means of a
check) to obtain goods or services from a merchant, whether or not the
merchant is the card issuer or creditor. See comment 8(a)-9 for guidance
on when credit accessed by a hybrid prepaid-credit card from a covered
separate credit feature is ``sale credit' or ``nonsale credit.'' ``Sale
credit'' includes:
* * * * *
9. Covered separate credit feature accessible by hybrid prepaid-
credit card. i. A transaction will be treated as a ``sale credit'' under
Sec. 1026.8(a) in cases where a consumer uses a hybrid prepaid-credit
card as defined in Sec. 1026.61 to make a purchase to obtain goods or
services from a merchant with credit from a covered separate credit
feature and the credit is drawn directly from the covered separate
credit feature without transferring funds into the asset feature of the
prepaid account to cover the amount of the purchase. For example, assume
that the consumer has $10 of funds in the asset feature of
[[Page 920]]
the prepaid account and initiates a transaction with a merchant to
obtain goods or services with the hybrid prepaid-credit card for $25. In
this case, $10 is debited from the asset feature, and $15 of credit is
drawn directly from the covered separate credit feature accessed by the
hybrid prepaid-credit card without any transfer of funds into the asset
feature of the prepaid account to cover the amount of the purchase. The
$15 credit transaction will be treated as ``sale credit'' under Sec.
1026.8(a).
ii. On the other hand, a transaction will be treated as ``nonsale
credit'' for purposes of Sec. 1026.8(b) in cases where a consumer uses
a hybrid prepaid-credit card as defined in Sec. 1026.61 to make a
purchase to obtain goods or services from a merchant and credit is
transferred from a covered separate credit feature accessed by the
hybrid prepaid-credit card into the asset feature of the prepaid account
to cover the amount of the purchase. For example, assume the same facts
as above, except that the $15 will be transferred from the credit
feature to the asset feature, and a transaction of $25 is debited from
the asset feature of the prepaid account. In this case, the $15 credit
transaction is treated as ``nonsale credit'' under Sec. 1026.8(b). See
comment 8(b)-1.vi below.
iii. If a transaction is ``sale credit'' as described above in
comment 8(a)-9.i, the following applies:
A. If a hybrid prepaid-credit card is used to obtain goods or
services from a merchant and the transaction is partially paid with
funds in the asset feature of the prepaid account, and partially paid
with credit from a covered separate credit feature, the amount to be
disclosed under Sec. 1026.8(a) is the amount of the credit extension,
not the total amount of the purchase transaction.
B. For a transaction at point of sale where credit from a covered
separate credit feature is accessed by a hybrid prepaid-credit card, and
that transaction partially involves the purchase of goods or services
and partially involves other credit such as cash back given to the
cardholder, the creditor must disclose the entire amount of the credit
transaction as sale credit, including the part of the transaction that
does not relate to the purchase of goods or services.
8(b) Nonsale Credit
1. * * *
ii. An advance on a credit plan that is accessed by overdrafts on an
asset account other than a prepaid account as defined in Sec. 1026.61.
* * * * *
v. An advance at an ATM on a covered separate credit feature
accessed by a hybrid prepaid-credit card as defined in Sec. 1026.61. If
a hybrid prepaid-credit card is used to obtain an advance at an ATM and
the transaction is partially paid with funds from the asset feature of
the prepaid account, and partially paid with a credit extension from the
covered separate credit feature, the amount to be disclosed under Sec.
1026.8(b) is the amount of the credit extension, not the total amount of
the ATM transaction.
vi. A transaction where a consumer uses a hybrid prepaid-credit card
as defined in Sec. 1026.61 to make a purchase to obtain goods or
services from a merchant and credit is transferred from a covered
separate credit feature accessed by the hybrid prepaid-credit card into
the asset feature of the prepaid account to cover the amount of the
purchase, as described in comment 8(a)-9.ii. In this scenario, the
amount to be disclosed under Sec. 1026.8(b) is the amount of the credit
extension, not the total amount of the purchase transaction.
2. Amount--overdraft credit plans. If credit is extended under an
overdraft credit plan tied to an asset account other than a prepaid
account as defined in Sec. 1026.61 or by means of a debit card tied to
an overdraft credit plan:
* * * * *
Section 1026.10--Payments
10(a) General Rule
* * * * *
2. * * *
ii. In a payroll deduction plan in which funds are deposited to an
asset account held by the creditor, and from which payments are made
periodically to an open-end credit account, payment is received on the
date when it is debited to the asset account (rather than on the date of
the deposit), provided the payroll deduction method is voluntary and the
consumer retains use of the funds until the contractual payment date.
Section 1026.12(d)(3)(ii) defines ``periodically'' to mean no more
frequently than once per calendar month for payments made periodically
from a deposit account, including a prepaid account, held by a card
issuer to pay credit card debt in a covered separate credit feature
accessible by a hybrid prepaid-credit card as defined in Sec. 1026.61
held by the card issuer. In a payroll deduction plan in which funds are
deposited to a prepaid account held by the card issuer, and from which
payments are made on a monthly basis to a covered separate credit
feature accessible by a hybrid prepaid-credit card that is held by the
card issuer, payment is received on the date when it is debited to the
prepaid account (rather than on the date of the deposit), provided the
payroll deduction method is voluntary and
[[Page 921]]
the consumer retains use of the funds until the contractual payment
date.
* * * * *
10(b) Specific Requirements for Payments
1. Payment by electronic fund transfer. A creditor may be prohibited
from specifying payment by preauthorized electronic fund transfer. See
section 913 of the Electronic Fund Transfer Act and Regulation E, 12 CFR
1005.10(e).
* * * * *
Section 1026.12--Special Credit Card Provisions
* * * * *
12(a) Issuance of Credit Cards
Paragraph 12(a)(1)
* * * * *
2. Addition of credit features. If the consumer has a non-credit
card, including a prepaid card, the addition of a credit feature or plan
to the card that would make the card into a credit card under Sec.
1026.2(a)(15)(i) constitutes issuance of a credit card. For example, the
following constitute issuance of a credit card:
i. Granting overdraft privileges on a checking account when the
consumer already has a check guarantee card; or
ii. Allowing a prepaid card to access a covered separate credit
feature that would make the card into a hybrid prepaid-credit card as
defined in Sec. 1026.61 with respect to the covered separate credit
feature.
* * * * *
7. Issuance of non-credit cards. i. Issuance of non-credit cards
other than prepaid cards. A. Under Sec. 1026.12(a)(1), a credit card
cannot be issued except in response to a request or an application. (See
comment 2(a)(15)-2 for examples of cards or devices that are and are not
credit cards.) A non-credit card other than a prepaid card may be sent
on an unsolicited basis by an issuer that does not propose to connect
the card to any credit plan; a credit feature may be added to a
previously issued non-credit card other than a prepaid card only upon
the consumer's specific request.
B. Examples. A purchase-price discount card may be sent on an
unsolicited basis by an issuer that does not propose to connect the card
to any credit plan. An issuer demonstrates that it proposes to connect
the card to a credit plan by, for example, including promotional
materials about credit features or account agreements and disclosures
required by Sec. 1026.6. The issuer will violate the rule against
unsolicited issuance if, for example, at the time the card is sent a
credit plan can be accessed by the card or the recipient of the
unsolicited card has been preapproved for credit that the recipient can
access by contacting the issuer and activating the card.
ii. Issuance of a prepaid card. Section 1026.12(a)(1) does not apply
to the issuance of a prepaid card where an issuer does not connect the
card to any covered separate credit feature that would make the prepaid
card into a hybrid prepaid-credit card as defined in Sec. 1026.61 at
the time the card is issued and only opens a covered separate credit
feature, or provides an application or solicitation to open a covered
separate credit feature, or allows an existing credit feature to become
a covered separate credit feature accessible by a hybrid prepaid-credit
card as defined in Sec. 1026.61 in compliance with Sec. 1026.61(c). A
covered separate credit feature may be added to a previously issued
prepaid card only upon the consumer's application or specific request
and only in compliance with Sec. 1026.61(c). An issuer does not connect
a prepaid card to a covered separate credit feature that would make the
card into a credit card simply by providing the disclosures required by
Regulation E, 12 CFR 1005.18(b)(2)(x), (b)(4)(iv), and (vii), with the
prepaid card. See Sec. 1026.12(a)(2) and related commentary for when a
hybrid prepaid-credit card as defined in Sec. 1026.61 may be issued as
a replacement or substitution for another hybrid prepaid-credit card.
See also Regulation E, 12 CFR 1005.5 and 1005.18(a), and related
commentary, governing issuance of access devices under Regulation E.
* * * * *
Paragraph 12(a)(2)
* * * * *
6. * * *
i. Replacing a single card that is both a debit card and a credit
card with a credit card and a separate debit card with only debit
functions (or debit functions plus an associated overdraft capability),
since the latter card could be issued on an unsolicited basis under
Regulation E.
ii. Replacing a single card that is both a prepaid card and a credit
card with a credit card and a separate prepaid card where the latter
card is not a hybrid prepaid-credit card as defined in Sec. 1026.61.
* * * * *
[[Page 922]]
12(c) Right of Cardholder To Assert Claims or Defenses Against Card
Issuer
* * * * *
5. Prepaid cards. i. Section 1026.12(c) applies to property or
services purchased with the hybrid prepaid-credit card that accesses a
covered separate credit feature as defined in Sec. 1026.61. The
following examples illustrate when a hybrid prepaid-credit card is used
to purchase property or services:
A. A consumer uses a hybrid prepaid-credit card as defined in Sec.
1026.61 to make a purchase to obtain goods or services from a merchant
and credit is drawn directly from a covered separate credit feature
accessed by the hybrid prepaid-credit card without transferring funds
into the asset feature of the prepaid account to cover the amount of the
purchase. For example, assume that the consumer has $10 of funds in the
asset feature of the prepaid account and initiates a transaction with a
merchant to obtain goods or services with the hybrid prepaid-credit card
for $25. In this case, $10 is debited from the asset feature and $15 of
credit is drawn directly from the covered separate credit feature
accessed by the hybrid prepaid-credit card without any transfer of funds
into the asset feature of the prepaid account to cover the amount of the
purchase. In this case, the consumer is using credit accessed by the
hybrid prepaid-credit card to purchase property or services where credit
is drawn directly from the covered separate credit feature accessed by
the hybrid prepaid-credit card to cover the amount of the purchase.
B. A consumer uses a hybrid prepaid-credit card as defined in Sec.
1026.61 to make a purchase to obtain goods or services from a merchant
and credit is transferred from a covered separate credit feature
accessed by the hybrid prepaid-credit card into the asset feature of the
prepaid account to cover the amount of the purchase. For example, assume
the same facts as above, except that the $15 will be transferred from a
covered separate credit feature to the asset feature, and a transaction
of $25 is debited from the asset feature of the prepaid account. In this
case, the consumer is using credit accessed by the hybrid prepaid-credit
card to purchase property or services because credit is transferred to
the asset feature of the prepaid account to cover the amount of a
purchase made with the card. This is true even though the $15 credit
transaction is treated as ``nonsale credit'' under Sec. 1026.8(b). See
comments 8(a)-9.ii and 8(b)-1.vi.
ii. For a transaction at point of sale where a hybrid prepaid-credit
card is used to obtain goods or services from a merchant and the
transaction is partially paid with funds from the asset feature of the
prepaid account, and partially paid with credit from the covered
separate credit feature, the amount of the purchase transaction that is
funded by credit generally would be subject to the requirements of Sec.
1026.12(c). The amount of the transaction funded from the prepaid
account would not be subject to the requirements of Sec. 1026.12(c).
12(c)(1) General Rule
1. Situations excluded and included. The consumer may assert claims
or defenses only when the goods or services are ``purchased with the
credit card.'' This would include when the goods or services are
purchased by a consumer using a hybrid prepaid-credit card to access a
covered separate credit feature as defined in Sec. 1026.61. This could
include mail, the Internet or telephone orders, if the purchase is
charged to the credit card account. But it would exclude:
* * * * *
ii. The purchase of goods or services by use of a check accessing an
overdraft account and a credit card used solely for identification of
the consumer. (On the other hand, if the credit card is used to make
partial payment for the purchase and not merely for identification, the
right to assert claims or defenses would apply to credit extended via
the credit card, although not to credit extended by the overdraft line
other than a covered separate credit feature accessible by a hybrid
prepaid-credit card.)
* * * * *
12(d) Offsets by Card Issuer Prohibited
1. Meaning of funds on deposit. For purposes of Sec. 1026.12(d),
funds of the cardholder held on deposit include funds in a consumer's
prepaid account as defined in Sec. 1026.61. In addition, for purposes
of Sec. 1026.12(d), deposit account includes a prepaid account.
Paragraph 12(d)(1)
* * * * *
2. Funds intended as deposits. If the consumer tenders funds as a
deposit (to a checking account, for example) or if the card issuer
receives funds designated for the consumer's prepaid account as defined
in Sec. 1026.61 with the issuer, such as by means of an ACH deposit or
an electronic transmittal of funds the consumer submits as cash at a
non-bank location, the card issuer may not apply the funds to repay
indebtedness on the consumer's credit card account.
* * * * *
Paragraph 12(d)(2)
1. * * *
[[Page 923]]
i. The consumer must be aware that granting a security interest is a
condition for the credit card account (or for more favorable account
terms) and must specifically intend to grant a security interest in a
deposit account.
ii. With respect to a credit card account other than a covered
separate credit feature accessible by a hybrid prepaid-credit card as
defined in Sec. 1026.61, indicia of the consumer's awareness and intent
to grant a security interest in a deposit account include at least one
of the following (or a substantially similar procedure that evidences
the consumer's awareness and intent):
A. Separate signature or initials on the agreement indicating that a
security interest is being given.
B. Placement of the security agreement on a separate page, or
otherwise separating the security interest provisions from other
contract and disclosure provisions.
C. Reference to a specific amount of deposited funds or to a
specific deposit account number.
iii. With respect to a covered separate credit feature accessible by
a hybrid prepaid-credit card as defined in Sec. 1026.61, in order for a
consumer to show awareness and intent to grant a security interest in a
deposit account, including a prepaid account, all of the following
conditions must be met:
A. In addition to being disclosed in the issuer's account-opening
disclosures under Sec. 1026.6, the security agreement must be provided
to the consumer in a document separate from the deposit account
agreement and the credit card account agreement;
B. The separate document setting forth the security agreement must
be signed by the consumer;
C. The separate document setting forth the security agreement must
refer to the deposit account number and to a specific amount of funds in
the deposit account in which the card issuer is taking a security
interest and these two elements of the document must be separately
signed or initialed by the consumer;
D. The separate document setting forth the security agreement must
specifically enumerate the conditions under which the card issuer will
enforce the security interest and each of those conditions must be
separately signed or initialed by the consumer.
* * * * *
Paragraph 12(d)(3)
1. * * *
iii. If the cardholder has the option to accept or reject the
automatic debit feature (such option may be required under section 913
of the Electronic Fund Transfer Act and Regulation E, 12 CFR
1005.10(e)), the fact that the option exists should be clearly
indicated.
2. * * *
iii. Automatically deducting from the consumer's deposit account any
fee or charge imposed on the asset feature of the prepaid account that
is not a charge imposed as part of the plan under Sec. 1026.6(b)(3).
See Sec. 1026.6(b)(3)(iii)(D) and (E) and related commentary regarding
fees imposed on the asset feature of a prepaid account that are not
charges imposed as part of the plan under Sec. 1026.6(b)(3) with
respect to covered separate credit features accessible by hybrid
prepaid-credit cards and non-covered separate credit features as those
terms are defined in Sec. 1026.61.
3. Prepaid accounts. With respect to covered separate credit
features accessible by hybrid prepaid-credit cards as defined in Sec.
1026.61, a card issuer is not prohibited under Sec. 1026.12(d) from
periodically deducting all or part of the cardholder's credit card debt
from a deposit account (including the prepaid account) held with the
card issuer (subject to the limitations of Sec. 1026.13(d)(1)) under a
plan that is authorized in writing by the cardholder, so long as the
creditor does not deduct all or part of the cardholder's credit card
debt from the deposit account more frequently than once per calendar
month, pursuant to such a plan. To illustrate, with respect to a covered
separate credit feature accessible by a hybrid prepaid-credit card,
assume that a periodic statement is sent out each month to a cardholder
on the first day of the month and the payment due date for the amount
due on that statement is the 25th day of each month. In this case:
i. The card issuer is not prohibited under Sec. 1026.12(d) from
automatically deducting the amount due on the periodic statement on the
25th of each month, or on an earlier date in each calendar month, from a
deposit account held by the card issuer, if the deductions are pursuant
to a plan that is authorized in writing by the cardholder (as discussed
in comment 12(d)(3)-1) and comply with the limitations in Sec.
1026.13(d)(1).
ii. The card issuer is prohibited under Sec. 1026.12(d) from
automatically deducting all or part of the cardholder's credit card debt
from a deposit account (including the prepaid account) held with the
card issuer more frequently than once per calendar month, such as on a
daily or weekly basis, or whenever deposits are made or expected to be
made to the deposit account.
* * * * *
Section 1026.13--Billing Error Resolution
* * * * *
[[Page 924]]
13(i) Relation to Electronic Fund Transfer Act and Regulation E
* * * * *
2. Incidental credit under an agreement with respect to an account
other than a prepaid account. Except with respect to a prepaid account
as defined in Sec. 1026.61, for credit extended incident to an
electronic fund transfer under an agreement between the consumer and the
financial institution, Sec. 1026.13(i)(1) provides that certain error
resolution procedures in both this part and Regulation E apply. Except
with respect to a prepaid account, incidental credit that is not
extended under an agreement between the consumer and the financial
institution is governed solely by the error resolution procedures in
Regulation E. For example, credit inadvertently extended incident to an
electronic fund transfer using a debit card, such as under an overdraft
service not subject to Regulation Z, is governed solely by the
Regulation E error resolution procedures, if the bank and the consumer
do not have an agreement to extend credit when the consumer's account is
overdrawn.
3. Application to debit/credit transactions--examples. If a consumer
uses a debit card to withdraw money at an automated teller machine and
activates an overdraft credit feature on the checking account:
i. An error asserted with respect to the transaction is subject, for
error resolution purposes, to the applicable Regulation E (12 CFR part
1005) provisions (such as timing and notice) for the entire transaction.
* * * * *
iv. The provisions of Sec. 1026.13(d) and (g) apply only to the
credit portion of the transaction.
4. Credit under a covered separate credit feature accessible by a
hybrid prepaid-credit card. For transactions involving a covered
separate credit feature accessible by a hybrid prepaid-credit card as
defined in Sec. 1026.61, whether Regulation E (12 CFR part 1005) or
Regulation Z applies depends on the nature of the transaction. For
example:
i. If the transaction solely involves an extension of credit under a
covered separate credit feature and does not access funds from the asset
feature of the prepaid account, the error resolution requirements of
Regulation Z apply. To illustrate, assume that there is $0 in the asset
feature of the prepaid account, and the consumer makes a $25 transaction
with the card. The error resolution requirements of Regulation Z apply
to the transaction. This is true regardless of whether the $25 of credit
is drawn directly from the covered separate credit feature without a
transfer to the asset feature of the prepaid account to cover the amount
of the transaction, or whether the $25 of credit is transferred from the
covered separate credit feature to the asset feature of the prepaid
account to cover the amount of the transaction.
ii. If the transaction accesses funds from the asset feature of a
prepaid account only (with no credit extended under the credit feature),
the provisions of Regulation E apply.
iii. If the transaction accesses funds from the asset feature of a
prepaid account but also involves an extension of credit under the
covered separate credit feature, a creditor must comply with the
requirements of Regulation E, 12 CFR 1005.11, and 1005.18(e) as
applicable, governing error resolution rather than those of Sec.
1026.13(a), (b), (c), (e), (f), and (h). To illustrate, assume that
there is $10 in the asset feature of the prepaid account, and the
consumer makes a $25 transaction with the card. The error resolution
requirements of Regulations E and Z apply as described above to the
transaction. This is true regardless of whether $10 is debited from the
asset feature and $15 of credit is drawn directly from the covered
separate credit feature without a transfer to the asset feature of the
prepaid account to cover the amount of the transaction, or whether $15
of credit is transferred from the covered separate credit feature to the
asset feature of the prepaid account and a $25 transaction is debited
from the asset feature to cover the amount of the transaction. When this
paragraph applies:
A. An error asserted with respect to the transaction is subject, for
error resolution purposes, to the applicable Regulation E (12 CFR part
1005) provisions (such as timing and notice) for the entire transaction.
B. The creditor need not provisionally credit the consumer's
account, under Regulation E, 12 CFR 1005.11(c)(2)(i), for any portion of
the unpaid extension of credit.
C. The creditor must credit the consumer's account under Sec.
1005.11(c) with any finance or other charges incurred as a result of the
alleged error.
D. The provisions of Sec. 1026.13(d) and (g) apply only to the
credit portion of the transaction.
5. Prepaid cards that are not hybrid prepaid-credit cards.
Regulation E, 12 CFR 1005.12(a)(1)(iv)(C) and (D), and (a)(2)(iii)
provide guidance on whether error resolution procedures in Regulations E
or Z apply to transactions involving credit features that are accessed
by prepaid cards that are not hybrid prepaid-credit cards as defined in
Sec. 1026.61. Regulation E 12 CFR 1005.12(a)(1)(iv)(C) provides that
with respect to transactions that involve credit extended
[[Page 925]]
through a negative balance to the asset feature of a prepaid account
that meets the conditions set forth in Sec. 1026.61(a)(4), these
transactions are governed solely by error resolution procedures in
Regulation E, and Regulation Z does not apply. Regulation E 12 CFR
1005.12(a)(1)(iv)(D) and (a)(2)(iii), taken together, provide that with
respect to transactions involving a prepaid account and a non-covered
separate credit feature as defined in Sec. 1026.61, a financial
institution must comply with Regulation E's error resolution procedures
with respect to transactions that access the prepaid account as
applicable, and the creditor must comply with Regulation Z's error
resolution procedures with respect to transactions that access the non-
covered separate credit feature, as applicable.
* * * * *
Subpart G--Special Rules Applicable to Credit Card Accounts and Open-End
Credit Offered to College Students
* * * * *
Section 1026.52--Limitations on Fees
52(a) Limitations During First Year After Account Opening
52(a)(1) General Rule
1. Application. The 25 percent limit in Sec. 1026.52(a)(1) applies
to fees that the card issuer charges to the account as well as to fees
that the card issuer requires the consumer to pay with respect to the
account through other means (such as through a payment from the
consumer's asset account, including a prepaid account as defined in
Sec. 1026.61, to the card issuer or from another credit account
provided by the card issuer). For example:
* * * * *
iii. Assume that a consumer opens a prepaid account accessed by a
prepaid card on January 1 of year one and opens a covered separate
credit feature accessible by a hybrid prepaid-credit card as defined by
Sec. 1026.61 that is a credit card account under an open-end (not home-
secured) consumer credit plan on March 1 of year one. Assume that, under
the terms of the covered separate credit feature accessible by the
hybrid prepaid-credit card, a consumer is required to pay $50 in fees
for the issuance or availability of credit at account opening. At credit
account opening on March 1 of year one, the credit limit for the account
is $200. Section 1026.52(a)(1) permits the card issuer to charge the $50
in fees to the credit account. However, Sec. 1026.52(a)(1) prohibits
the card issuer from requiring the consumer to make payments to the card
issuer for additional non-exempt fees with respect to the credit account
during the first year after account opening. Section 1026.52(a)(1) also
prohibits the card issuer from requiring the consumer to open an
additional credit feature with the card issuer to fund the payment of
additional non-exempt fees during the first year after the covered
separate credit feature is opened.
iv. Assume that a consumer opens a prepaid account accessed by a
prepaid card on January 1 of year one and opens a covered separate
credit feature accessible by a hybrid prepaid-credit card as defined in
Sec. 1026.61 that is a credit card account under an open-end (not home-
secured) consumer credit plan on March 1 of year one. Assume that, under
the terms of the covered separate credit feature accessible by the
hybrid prepaid-credit card, a consumer is required to pay $120 in fees
for the issuance or availability of credit at account opening. The
consumer is also required to pay a cash advance fee that is equal to 5
percent of any cash advance and a late payment fee of $15 if the
required minimum periodic payment is not received by the payment due
date (which is the 25th of the month). At credit account opening on
March 1 of year one, the credit limit for the account is $500. Section
1026.52(a)(1) permits the card issuer to charge to the account the $120
in fees for the issuance or availability of credit at account opening.
On April 1 of year one, the consumer uses the account for a $100 cash
advance. Section 1026.52(a)(1) permits the card issuer to charge a $5
cash advance fee to the account. On April 26 of year one, the card
issuer has not received the consumer's required minimum periodic
payment. Section 1026.52(a)(2) permits the card issuer to charge a $15
late payment fee to the account. On July 15 of year one, the consumer
uses the account for a $50 cash advance. Section 1026.52(a)(1) does not
permit the card issuer to charge a $2.50 cash advance fee to the
account, because the total amount of non-exempt fees reached the 25
percent limit with the $5 cash advance fee on April 1 (the $15 late fee
on April 26 is exempt pursuant to Sec. 1026.52(a)(2)(i)). Furthermore,
Sec. 1026.52(a)(1) prohibits the card issuer from collecting the $2.50
cash advance fee from the consumer by other means.
* * * * *
52(a)(2) Fees Not Subject to Limitations
1. Covered fees. Except as provided in Sec. 1026.52(a)(2) and
except as provided in comments 52(a)(2)-2 and-3, Sec. 1026.52(a)
applies to any fees or other charges that a card issuer will or may
require the consumer to pay with respect to a credit card account during
the first year after account opening, other
[[Page 926]]
than charges attributable to periodic interest rates. For example, Sec.
1026.52(a) applies to:
* * * * *
2. Fees in connection with a covered separate credit feature and an
asset feature of the prepaid account that are both accessible by a
hybrid prepaid-credit card. With regard to a covered separate credit
feature and an asset feature on a prepaid account that are both
accessible by a hybrid prepaid-credit card as defined in Sec. 1026.61
where the credit feature is a credit card account under an open-end (not
home-secured) consumer credit plan, Sec. 1026.52(a) applies to the
following fees:
i. Except as provided in Sec. 1026.52(a)(2), any fee or charge
imposed on the covered separate credit feature, other than a charge
attributable to a periodic interest rate, during the first year after
account opening that the card issuer will or may require the consumer to
pay in connection with the credit feature, and
ii. Except as provided in Sec. 1026.52(a)(2), any fee or charge
imposed on the asset feature of the prepaid account, other than a charge
attributable to a periodic interest rate, during the first year after
account opening that the card issuer will or may require the consumer to
pay where that fee or charge is a charge imposed as part of the plan
under Sec. 1026.6(b)(3).
3. Fees imposed on the asset feature of a prepaid account that are
not charges imposed as part of the plan. Section 1026.52(a) does not
apply to any fee or charge imposed on the asset feature of the prepaid
account that is not a charge imposed as part of the plan under Sec.
1026.6(b)(3). See Sec. 1026.6(b)(3)(iii)(D) and (E) and related
commentary regarding fees imposed on the asset feature of the prepaid
account that are not charges imposed as part of the plan under Sec.
1026.6(b)(3) with respect to covered separate credit features accessible
by hybrid prepaid-credit cards and non-covered separate credit features
as those terms are defined in Sec. 1026.61.
* * * * *
52(b) Limitations on Penalty Fees
* * * * *
3. Fees in connection with covered separate credit features
accessible by hybrid prepaid-credit cards. With regard to a covered
separate credit feature and an asset feature on a prepaid account that
are both accessible by a hybrid prepaid-credit card as defined in Sec.
1026.61 where the credit feature is a credit card account under an open-
end (not home-secured) consumer credit plan, Sec. 1026.52(b) applies to
any fee for violating the terms or other requirements of the credit
feature, regardless of whether those fees are imposed on the credit
feature or on the asset feature of the prepaid account. For example,
assume that a late fee will be imposed by the card issuer if the covered
separate credit feature becomes delinquent or if a payment is not
received by a particular date. This fee is subject to Sec. 1026.52(b)
regardless of whether the fee is imposed on the asset feature of the
prepaid account or on the separate credit feature.
4. Fees imposed on the asset feature of a prepaid account that are
not charges imposed as part of the plan. Section 1026.52(b) does not
apply to any fee or charge imposed on the asset feature of the prepaid
account that is not a charge imposed as part of the plan under Sec.
1026.6(b)(3). See Sec. 1026.6(b)(3)(iii)(D) and (E) and related
commentary regarding fees imposed on the asset feature prepaid account
that are not charges imposed as part of the plan under Sec.
1026.6(b)(3) with respect to covered separate credit features accessible
by hybrid prepaid-credit cards and non-covered separate credit features
as those terms are defined in Sec. 1026.61.
* * * * *
52(b)(2) Prohibited Fees
* * * * *
52(b)(2)(i) Fees That Exceed Dollar Amount Associated With Violation
* * * * *
7. Declined transaction fees. Section 1026.52(b)(2)(i)(B)(1) states
that card issuers must not impose a fee when there is no dollar amount
associated with the violation, such as for transactions that the card
issuer declines to authorize. With regard to a covered separate credit
feature and an asset feature on a prepaid account that are both
accessible by a hybrid prepaid-credit card as defined in Sec. 1026.61
where the credit feature is a credit card account under an open-end (not
home-secured) consumer credit plan, Sec. 1026.52(b)(2)(i)(B)(1)
prohibits a card issuer from imposing declined transaction fees in
connection with the credit feature, regardless of whether the declined
transaction fee is imposed on the credit feature or on the asset feature
of the prepaid account. For example, if the prepaid card attempts to
access credit from the covered separate credit feature accessible by the
hybrid prepaid-credit card and the transaction is declined, Sec.
1026.52(a)(2)(i)(B)(1) prohibits the card issuer from imposing a
declined transaction fee, regardless of whether the fee is imposed on
the credit feature or on the asset feature of the prepaid account. Fees
imposed for declining a transaction that would have only accessed
[[Page 927]]
the asset feature of the prepaid account and would not have accessed the
covered separate credit feature accessible by the hybrid prepaid-credit
are not covered by Sec. 1026.52(b)(2)(i)(B)(1).
* * * * *
Section 1026.55--Limitations on Increasing Annual Percentage Rates,
Fees, and Charges
55(a) General Rule
* * * * *
3. Fees in connection with covered separate credit features
accessible by hybrid prepaid-credit cards. With regard to a covered
separate credit feature and an asset feature on a prepaid account that
are both accessible by a hybrid prepaid-credit card as defined in Sec.
1026.61 where the credit feature is a credit card account under an open-
end (not home-secured) consumer credit plan, Sec. 1026.55(a) prohibits
card issuers from increasing an annual percentage rate or any fee or
charge required to be disclosed under Sec. 1026.6(b)(2)(ii), (iii), or
(xii) on a credit card account unless specifically permitted by one of
the exceptions in Sec. 1026.55(b). This is true regardless of whether
these fees or annual percentage rates are imposed on the asset feature
of the prepaid account or on the credit feature.
4. Fees imposed on the asset feature of a prepaid account that are
not charges imposed as part of the plan. Section 1026.55(a) does not
apply to any fee or charge imposed on the asset feature of the prepaid
account that is not a charge imposed as part of the plan under Sec.
1026.6(b)(3). See Sec. 1026.6(b)(3)(iii)(D) and (E) and related
commentary regarding fees imposed on the asset feature of the prepaid
account that are not charges imposed as part of the plan under Sec.
1026.6(b)(3) with respect to covered separate credit features accessible
by hybrid prepaid-credit cards and non-covered separate credit features
as those terms are defined in Sec. 1026.61.
* * * * *
Section 1026.57--Reporting and Marketing Rules for College Student Open-
End Credit
57(a) Definitions
57(a)(1) College Student Credit Card
1. Definition. The definition of college student credit card
excludes home-equity lines of credit accessed by credit cards and
overdraft lines of credit accessed by debit cards. A college student
credit card includes a college affinity card within the meaning of TILA
section 127(r)(1)(A). In addition, a card may fall within the scope of
the definition regardless of the fact that it is not intentionally
targeted at or marketed to college students. For example, an agreement
between a college and a card issuer may provide for marketing of credit
cards to alumni, faculty, staff, and other non-student consumers who
have a relationship with the college, but also contain provisions that
contemplate the issuance of cards to students. A credit card issued to a
student at the college in connection with such an agreement qualifies as
a college student credit card. The definition of college student credit
card includes a hybrid prepaid-credit card as defined by Sec. 1026.61
that is issued to any college student where the card can access a
covered separate credit feature that is a credit card account under an
open-end (not home-secured) consumer credit plan. The definition of
college student credit card also includes a prepaid account as defined
in Sec. 1026.61 that is issued to any college student where a covered
separate credit feature that is a credit card account under an open-end
(not home-secured) consumer credit plan accessible by a hybrid prepaid-
credit card as defined by Sec. 1026.61 may be added in the future to
the prepaid account.
57(a)(5) College Credit Card Agreement
1. Definition. Section 1026.57(a)(5) defines ``college credit card
agreement'' to include any business, marketing or promotional agreement
between a card issuer and a college or university (or an affiliated
organization, such as an alumni club or a foundation) if the agreement
provides for the issuance of credit cards to full-time or part-time
students. Business, marketing or promotional agreements may include a
broad range of arrangements between a card issuer and an institution of
higher education or affiliated organization, including arrangements that
do not meet the criteria to be considered college affinity card
agreements as discussed in TILA section 127(r)(1)(A). For example, TILA
section 127(r)(1)(A) specifies that under a college affinity card
agreement, the card issuer has agreed to make a donation to the
institution or affiliated organization, the card issuer has agreed to
offer discounted terms to the consumer, or the credit card will display
pictures, symbols, or words identified with the institution or
affiliated organization; even if these conditions are not met, an
agreement may qualify as a college credit card agreement, if the
agreement is a business, marketing or promotional agreement that
contemplates the issuance of college student credit cards to college
students currently enrolled (either full-time or part-time) at the
institution. An agreement may qualify as a college credit card agreement
even if marketing of cards under the agreement is targeted at alumni,
faculty, staff, and other non-student consumers, as long as
[[Page 928]]
cards may also be issued to students in connection with the agreement.
This definition also includes a business, marketing, or promotional
agreement between a card issuer and a college or university (or an
affiliated organization, such as an alumni club or a foundation) if the
agreement provides for the addition of a covered separate credit feature
that is a credit card account under an open-end (not home-secured)
consumer credit plan accessible by a hybrid prepaid-credit card as
defined by Sec. 1026.61 to prepaid accounts previously issued to full-
time or part-time students. This definition also includes a business,
marketing, or promotional agreement between a card issuer and a college
or university (or an affiliated organization, such as an alumni club or
a foundation) if (1) the agreement provides for the issuance of prepaid
accounts as defined in Sec. 1026.61 to full-time or part-time students;
and (2) a covered separate credit feature that is a credit card account
under an open-end (not home-secured) consumer credit plan accessible by
a hybrid prepaid-credit card as defined by Sec. 1026.61 may be added in
the future to the prepaid account.
57(b) Public Disclosure of Agreements
* * * * *
3. Credit card accounts in connection with prepaid accounts. Section
1026.57(b) applies to any contract or other agreement that an
institution of higher education makes with a card issuer or creditor for
the purpose of marketing either (1) the addition of a covered separate
credit feature that is a credit card account under an open-end (not
home-secured) consumer credit plan accessible by a hybrid prepaid-credit
card as defined in Sec. 1026.61 to prepaid accounts previously issued
to full-time or part-time students; or (2) new prepaid accounts as
defined in Sec. 1026.61 where a covered separate credit feature that is
a credit card account under an open-end (not home-secured) consumer
credit plan accessible by a hybrid prepaid-credit card as defined in
Sec. 1026.61 may be added in the future to the prepaid account. Thus,
under Sec. 1026.57(b), an institution of higher education must publicly
disclose such agreements.
57(c) Prohibited Inducements
* * * * *
7. Credit card accounts in connection with prepaid accounts. Section
1026.57(c) applies to (1) the application for or opening of a covered
separate credit feature that is a credit card account under an open-end
(not home-secured) consumer credit plan accessible by a hybrid prepaid-
credit card as defined in Sec. 1026.61 that is being added to a prepaid
account previously issued to a full-time or part-time student as well as
(2) the application for or opening of a prepaid account as defined in
Sec. 1026.61 where a covered separate credit feature that is a credit
card account under an open-end (not home-secured) consumer credit plan
accessible by a hybrid prepaid-credit card as defined in Sec. 1026.61
may be added in the future to the prepaid account.
* * * * *
Section 1026.60 Credit and Charge Card Applications and Solicitations
1. General. Section 1026.60 generally requires that credit
disclosures be contained in application forms and solicitations
initiated by a card issuer to open a credit or charge card account. (See
Sec. 1026.60(a)(5) and (e)(2) for exceptions; see Sec. 1026.60(a)(1)
and accompanying commentary for the definition of solicitation; see also
Sec. 1026.2(a)(15) and accompanying commentary for the definition of
charge card and Sec. 1026.61(c) for restrictions on when credit or
charge card accounts can be added to previously issued prepaid
accounts.)
* * * * *
60(b) Required Disclosures
* * * * *
3. Fees imposed on the asset feature of a prepaid account in
connection with a covered separate credit feature accessible by a hybrid
prepaid-credit card. With regard to a covered separate credit feature
and an asset feature on a prepaid account that are both accessible by a
hybrid prepaid-credit card as defined in Sec. 1026.61, a card issuer is
required to disclose under Sec. 1026.60(b) any fees or charges imposed
on the asset feature of the prepaid account that are charges imposed as
part of the plan under Sec. 1026.6(b)(3) to the extent those fees or
charges fall within the categories of fees or charges required to be
disclosed under Sec. 1026.60(b). For example, assume that a card issuer
imposes a $1.25 per transaction fee on the asset feature of a prepaid
account for purchases when a hybrid prepaid-credit card accesses a
covered separate credit feature in the course of authorizing, settling,
or otherwise completing purchase transactions conducted with the card,
and the card issuer charges $0.50 per transaction for purchases that
access funds in the asset feature of the prepaid account in the same
program without such a credit feature. In this case, the $0.75 excess is
a charge imposed as part of the plan under Sec. 1026.6(b)(3) and must
be disclosed under Sec. 1026.60(b)(4).
4. Fees imposed on the asset feature of a prepaid account that are
not charges imposed as part of the plan. A card issuer is not required
under Sec. 1026.60(b) to disclose any fee or
[[Page 929]]
charge imposed on the asset feature of the prepaid account that is not a
charge imposed as part of the plan under Sec. 1026.6(b)(3). See Sec.
1026.6(b)(3)(iii)(D) and (E) and related commentary regarding fees
imposed on the asset feature of the prepaid account that are not charges
imposed as part of the plan under Sec. 1026.6(b)(3) with respect to
covered separate credit features accessible by hybrid prepaid-credit
cards and non-covered separate credit features as those terms are
defined in Sec. 1026.61.
* * * * *
60(b)(4) Transaction Charges
* * * * *
3. Prepaid cards. i. With respect to a covered separate credit
feature accessible by a hybrid prepaid-credit card as defined by Sec.
1026.61, if a card issuer assesses a fee (other than a periodic rate
that may be used to compute the finance charge on an outstanding
balance) to make a purchase where this fee is imposed as part of the
plan as described in Sec. 1026.6(b)(3), that fee is a transaction
charge described in Sec. 1026.60(b)(4). See comments 60(b)-3 and -4.
This is so whether the fee is a per transaction fee to make a purchase,
or a flat fee for each day (or other period) the consumer has an
outstanding balance of purchase transactions.
ii. A fee for a transaction will be treated as a fee to make a
purchase under Sec. 1026.60(b)(4) in cases where a consumer uses a
hybrid prepaid-credit card as defined in Sec. 1026.61 to make a
purchase to obtain goods or services from a merchant and credit is drawn
directly from a covered separate credit feature accessed by the hybrid
prepaid-credit card without transferring funds into the asset feature of
the prepaid account to cover the amount of the purchase. For example,
assume that the consumer has $10 of funds in the asset feature of the
prepaid account and initiates a transaction with a merchant to obtain
goods or services with the hybrid prepaid-credit card for $25. In this
case, $10 is debited from the asset feature and $15 of credit is drawn
directly from the covered separate credit feature accessed by the hybrid
prepaid-credit card without any transfer of funds into the asset feature
of the prepaid account to cover the amount of the purchase. A per
transaction fee imposed for the $15 credit transaction must be disclosed
under Sec. 1026.60(b)(4).
iii. On the other hand, a fee for a transaction will be treated as a
cash advance fee under Sec. 1026.60(b)(8) in cases where a consumer
uses a hybrid prepaid-credit card as defined in Sec. 1026.61 to make a
purchase to obtain goods or services from a merchant and credit is
transferred from a covered separate credit feature accessed by the
hybrid prepaid-credit card into the asset feature of the prepaid account
to cover the amount of the purchase. For example, assume the same facts
as above, except that the $15 will be transferred from the covered
separate credit feature to the asset feature, and a transaction of $25
is debited from the asset feature of the prepaid account. In this case,
a per transaction fee for the $15 credit transaction must be disclosed
under Sec. 1026.60(b)(8).
* * * * *
60(b)(8) Cash Advance Fee
* * * * *
4. Prepaid cards. i. With respect to a covered separate credit
feature accessible by a hybrid prepaid-credit card as defined by Sec.
1026.61, if a card issuer assesses a fee (other than a periodic rate
that may be used to compute the finance charge on an outstanding
balance) for a cash advance, such as a cash withdrawal at an ATM, where
the fee is imposed as part of the plan as described in Sec.
1026.6(b)(3), that fee is a cash advance fee. See comments 60(b)-3 and -
4. In addition, a fee for a transaction will be treated as a cash
advance fee under Sec. 1026.60(b)(8) in cases where a consumer uses a
hybrid prepaid-credit card as defined in Sec. 1026.61 to make a
purchase to obtain goods or services from a merchant and credit is
transferred from a covered separate credit feature accessed by the
hybrid prepaid-credit card into the asset feature of the prepaid account
to cover the amount of the purchase. See comment 60(b)(4)-3.iii.
ii. If the cash advance fee is the same dollar amount as the
transaction charge for purchases described in Sec. 1026.60(b)(4), the
card issuer may disclose the fee amount under a heading that indicates
the fee applies to both purchase transactions and cash advances.
Examples of how fees for purchase transactions described in Sec.
1026.60(b)(4) and fees for cash advances described in Sec.
1026.60(b)(8) must be disclosed are as follows. Assume that all the fees
in the examples below are charged on the covered separate credit
feature.
A. A card issuer assesses a $15 fee for credit drawn from a covered
separate credit feature using a hybrid prepaid-credit card to purchase
goods or services at the point of sale when the consumer has
insufficient or unavailable funds in the prepaid account as described in
comment 60(b)(4)-3.ii. The card issuer assesses a $25 fee for credit
drawn from a covered separate credit feature using a hybrid prepaid-
credit card for a cash advance at an ATM when the consumer has
insufficient or unavailable funds in the prepaid account. In this
instance, the card issuer
[[Page 930]]
must disclose separately a purchase transaction charge of $15 and a cash
advance fee of $25.
B. A card issuer assesses a $15 fee for credit drawn from a covered
separate credit feature using a hybrid prepaid-credit card to purchase
goods or services at the point of sale when the consumer has
insufficient or unavailable funds in the prepaid account as discussed in
comment 60(b)(4)-3.ii. The card issuer assesses a $15 fee for credit
drawn from a covered separate credit feature using a hybrid prepaid-
credit card for providing cash at an ATM when the consumer has
insufficient or unavailable funds in the prepaid account. In this
instance, the card issuer may disclose the $15 fee under a heading that
indicates the fee applies to both purchase transactions and ATM cash
advances. Alternatively, the card issuer may disclose the $15 fee on two
separate rows, one row indicating that a $15 fee applies to purchase
transactions, and a second row indicating that a $15 fee applies to ATM
cash advances.
C. A card issuer assesses a $15 fee for credit drawn from a covered
separate credit feature using a hybrid prepaid-credit card for providing
cash at an ATM when the consumer has insufficient or unavailable funds
in the prepaid account. The card issuer also assesses a fee of $1.50 for
out-of-network ATM cash withdrawals and $1.00 for in-network ATM cash
withdrawals. The card issuer must disclose the cash advance fee as
$16.50 for out-of-network ATM cash withdrawals, indicating that $1.50 is
for the out-of-network ATM withdrawal fee, such as ``$16.50 (including a
$1.50 out-of-network ATM withdrawal fee).'' The card issuer also must
disclose the cash advance fee as $16.00 for in-network ATM cash
withdrawals, indicating that $1.00 is for the in-network ATM withdrawal
fee, such as ``$16 (including a $1.00 in-network ATM cash withdrawal
fee).''
* * * * *
Section 1026.61 Hybrid Prepaid-Credit Cards
61(a) Hybrid Prepaid-Credit Card
1. Scope of Sec. 1026.61. Section 1026.61 sets forth the definition
of hybrid prepaid-credit card, and several requirements that only apply
to covered separate credit features accessible by hybrid prepaid-credit
cards as defined in Sec. 1026.61(a)(2)(i). Hybrid prepaid-credit cards
and covered separate credit features accessible by hybrid prepaid-credit
cards are also subject to other rules in this regulation, and some of
those rules and related commentary contain specific guidance related to
hybrid prepaid-credit cards and covered separate credit features
accessible by hybrid prepaid-credit cards. For example, as discussed in
Sec. Sec. 1026.2(a)(15)(i) and 1026.61(a), a hybrid prepaid-credit card
is a credit card for purposes of this regulation with respect to a
covered separate credit feature. A covered separate credit feature
accessible by a hybrid prepaid-credit card also will be a credit card
account under an open-end (not home-secured) consumer credit plan as
defined in Sec. 1026.2(a)(15)(ii) if the covered separate credit
feature is an open-end credit plan. Thus, the provisions in this
regulation that apply to credit cards and credit card accounts under an
open-end (not home-secured) consumer credit plan generally will apply to
hybrid prepaid-credit cards and covered separate credit features
accessible by hybrid prepaid-credit cards as applicable (see generally
subparts B and G). Some of those rules and related commentary contain
specific guidance with respect to hybrid prepaid-credit cards and
covered separate credit features accessible by hybrid prepaid-credit
cards. See, e.g., Sec. Sec. 1026.2(a)(15)(i) and (ii), 1026.4(b)(11),
(c)(3) and (4), 1026.6(b)(3)(iii)(D) and (E), 1026.7(b)(11)(ii)(A),
1026.12(d)(3)(ii), 1026.13(i)(2), 1026.60(a)(5)(iv) and (b), and related
commentary to these and other rules in the regulation.
61(a)(1) In General
1. Credit. Under Sec. 1026.61(a)(1), except as provided in Sec.
1026.61(a)(4), a prepaid card is a hybrid prepaid-credit card if the
prepaid card can access credit from a covered separate credit feature as
described in Sec. 1026.61(a)(2)(i) or if it can access credit extended
through a negative balance on the asset feature of the prepaid account
as described in Sec. 1026.61(a)(3). When Sec. 1026.61 references
credit that can be accessed from a separate credit feature or credit
that can be extended through a negative balance on the asset feature, it
means credit that can be accessed or can be extended even if, for
example:
i. The person that can extend the credit does not agree in writing
to extend the credit;
ii. The person retains discretion not to extend the credit, or
iii. The person does not extend the credit once the consumer has
exceeded a certain amount of credit.
2. Prepaid card that is solely an account number. A prepaid card
that is solely an account number is a hybrid prepaid-credit card if it
meets the conditions set forth in Sec. 1026.61(a).
3. Usable from time to time. In order for a prepaid card to be a
hybrid prepaid-credit card under Sec. 1026.61(a), the prepaid card must
be capable of being used from time to time to access credit as described
in Sec. 1026.61(a). Since this involves the possibility of repeated use
of a single device, checks and similar instruments that can be used only
once to obtain a single credit extension are not hybrid prepaid-credit
cards. With respect to a preauthorized check that is issued on a prepaid
account for which credit is extended
[[Page 931]]
through a negative balance on the asset feature of the prepaid account,
or credit is drawn, transferred or authorized to be drawn or transferred
from a separate credit feature, the credit is obtained using the prepaid
account number and not the check at the time of preauthorization using
the prepaid account number. The prepaid account number is a hybrid
prepaid-credit card if the account number meets the conditions set forth
in Sec. 1026.61(a). See comment 61(a)(1)-2.
4. Prepaid account that is a digital wallet. i. A digital wallet
that is capable of being loaded with funds is a prepaid account under
Regulation E, 12 CFR 1005.2(b)(3). See Regulation E, 12 CFR 1005.2(b)(3)
and comment 2(b)(3)(i)-6. A prepaid account number that can access such
a digital wallet would be a hybrid prepaid-credit card if it meets the
conditions set forth in Sec. 1026.61(a). To illustrate:
A. A prepaid account number that can access such a digital wallet is
a hybrid prepaid-credit card where it can be used from time to time to
access a covered separate credit feature offered by the prepaid account
issuer, its affiliate, or its business partner in the course of
authorizing, settling, or otherwise completing a transaction conducted
with the prepaid account number to obtain goods or services, obtain
cash, or conduct person-to-person transfers as described in Sec.
1026.61(a)(2)(i).
B. A prepaid account number that can access such a digital wallet
also is a hybrid prepaid-credit card where it can be used from time to
time to access the stored credentials for a covered separate credit
feature offered by the prepaid account issuer, its affiliate, or its
business partner in the course of authorizing, settling, or otherwise
completing a transaction conducted with the prepaid account number to
obtain goods or services, obtain cash, or conduct person-to-person
transfers as described in Sec. 1026.61(a)(2)(i).
C. A prepaid account number that can access such a digital wallet is
not a hybrid prepaid-credit card with respect to credentials stored in
the prepaid account that can access a non-covered separate credit
feature as described in Sec. 1026.61(a)(2)(ii) that is not offered by
the prepaid account issuer, its affiliate, or its business partner, even
if the prepaid account number can access those credentials in the course
of authorizing, settling, or otherwise completing a transaction
conducted with the prepaid account number to obtain goods or services,
obtain cash, or conduct person-to-person transfers.
D. A prepaid account number that can access such a digital wallet is
not a hybrid prepaid-credit card with respect to credentials stored in
the prepaid account that can access a non-covered separate credit
feature as described in Sec. 1026.61(a)(2)(ii) where the prepaid
account number cannot access those credentials in the course of
authorizing, settling, or otherwise completing a transaction conducted
with the prepaid account number to obtain goods or services, obtain
cash, or conduct person-to-person transfers, even if such credit feature
is offered by the prepaid account issuer, its affiliate, or its business
partner.
ii. A digital wallet is not a prepaid account under Regulation E, 12
CFR 1005.2(b)(3), if the digital wallet can never be loaded with funds,
such as a digital wallet that only stores payment credentials for other
accounts. See Regulation E, 12 CFR 1005.2(b)(3) and comment 2(b)(3)(i)-
6. An account number that can access such a digital wallet would not be
a hybrid prepaid-credit card under Sec. 1026.61(a), even if it stores a
credential for a separate credit feature that is offered by the digital
wallet provider, its affiliate, or its business partner and can be used
in the course of a transaction involving the digital wallet.
5. Prepaid account that can be used for bill payment services. Where
a prepaid account can be used for online bill payment services offered
by the prepaid account issuer, the prepaid card (including a prepaid
account number) that can access that prepaid account is a hybrid
prepaid-credit card if it meets the requirements set forth in Sec.
1026.61(a). For example, if a prepaid account number can be used from
time to time to initiate a transaction using the online bill payment
service offered by the prepaid account issuer to pay a bill, and credit
can be drawn, transferred, or authorized to be drawn or transferred, to
the prepaid account from a covered separate credit feature offered by
the prepaid account issuer, its affiliate, or its business partner in
the course of authorizing, settling, or otherwise completing that
transaction as described in Sec. 1026.61(a)(2)(i), the prepaid account
number would be a hybrid prepaid-credit card under Sec. 1026.61(a). In
this case, the prepaid account number can be used to draw or transfer
credit, or authorize the draw or transfer of credit, from a covered
separate credit feature offered by the prepaid account issuer, its
affiliate, or its business partner in the course of completing a
transaction to pay for goods or services through the online bill payment
service.
61(a)(2) Prepaid Card Can Access Credit From a Covered Separate Credit
Feature
1. Draws or transfers of credit. i. For a prepaid card to be a
hybrid prepaid-credit card under Sec. 1026.61(a)(2)(i) with respect to
a separate credit feature, the prepaid account must be structured such
that the draw or transfer of credit, or authorizations of either, from a
separate credit feature offered by the prepaid account issuer, its
affiliate, or its business partner is capable of occurring in the course
[[Page 932]]
of authorizing, settling, or otherwise completing transactions conducted
with the prepaid card to obtain goods or services, obtain cash, or
conduct person-to-person transfers. See comment 61(a)(2)-2 for guidance
on when draws or transfers of credit can occur in the course of
authorizing, settling, or otherwise completing a transaction described
in Sec. 1026.61(a)(2)(i). In this case, the separate credit feature is
a covered separate credit feature accessible by a hybrid prepaid-credit
card under Sec. 1026.61(a)(2)(i).
ii. A prepaid card is a hybrid prepaid-credit card with respect to a
covered separate credit feature regardless of whether:
A. The credit is pushed from the covered separate credit feature to
the asset feature of the prepaid account in the course of authorizing,
settling, or otherwise completing transactions conducted with the card
to obtain goods or services, obtain cash, or conduct person-to-person
transfers; or
B. The credit is pulled from the covered separate credit feature to
the asset feature of the prepaid account in the course of authorizing,
settling, or otherwise completing transactions conducted with the card
to obtain goods or services, obtain cash, or conduct person-to-person
transfers.
iii. A prepaid card is a hybrid prepaid-credit card with respect to
a covered separate credit feature regardless of whether the covered
separate credit feature can only be used as an overdraft credit feature,
solely accessible by the hybrid prepaid-credit card, or whether it is a
general line of credit that can be accessed in other ways.
2. Credit that can be accessed from a separate credit feature in the
course of authorizing, settling, or otherwise completing a transaction.
i. Under Sec. 1026.61(a)(2)(i), a prepaid card is a hybrid prepaid-
credit card when the card can be used from time to time to access a
separate credit feature that is offered by the prepaid account issuer,
its affiliate, or its business partner and can be used to access credit
in the course of authorizing, settling, or otherwise completing
transactions conducted with the card to obtain goods or services, obtain
cash, or conduct person-to-person transfers. A draw, transfer, or
authorization of a draw or transfer from a separate credit feature is
deemed to be in the ``course of authorizing, settling, or otherwise
completing'' a transaction if it occurs during the authorization phase
of the transaction as discussed in comment 61(a)(2)-2.ii or in later
periods up to the settlement of the transaction, as discussed in comment
61(a)(2)-2.iii.
ii. The following examples illustrate transactions where credit can
be drawn, transferred, or authorized to be drawn or transferred from a
separate credit feature in the course of authorizing a transaction.
A. A transaction initiated using a prepaid card when there are
insufficient or unavailable funds in the asset feature of the prepaid
account at the time the transaction is initiated and credit is
transferred from the credit feature to the asset feature at the time the
transaction is authorized to complete the transaction.
B. A transaction initiated using a prepaid card when there are
insufficient or unavailable funds in the asset feature of the prepaid
account at the time the transaction is initiated and credit is directly
drawn from the credit feature to complete the transaction, without
transferring funds into the prepaid account.
iii. The following examples illustrate transactions where credit can
be drawn, transferred, or authorized to be drawn or transferred, in the
course of settling a transaction.
A. A transaction initiated using a prepaid card when there are
sufficient or available funds in the asset feature of the prepaid
account at the time of authorization to cover the amount of the
transaction but where the consumer does not have sufficient or available
funds in the asset feature to cover the transaction at the time of
settlement. Credit automatically is drawn, transferred, or authorized to
be drawn or transferred from the credit feature at settlement to pay the
transaction.
B. A transaction that was not authorized in advance where the
consumer does not have sufficient or available funds in the asset
feature to cover the transaction at the time of settlement. Credit
automatically is drawn, transferred, or authorized to be drawn or
transferred from the credit feature at settlement to pay the
transaction.
3. Accessing credit when the asset feature has sufficient funds.
Section 1026.61(a)(2)(i) applies where the prepaid card can be used from
time to time to draw funds from a covered separate credit feature that
is offered by a prepaid account issuer, its affiliate, or its business
partner in the course of authorizing, settling, or otherwise completing
transactions conducted with the card to obtain goods or services, obtain
cash, or conduct person-to-person transfers, even if there are
sufficient or available funds in the asset feature of the prepaid
account to complete the transaction. For example, the following separate
credit feature would meet the conditions of Sec. 1026.61(a)(2)(i).
i. The prepaid card can be used from time to time both to access the
asset feature of a prepaid account and to draw on the covered separate
credit feature in the course of a transaction independent of whether
there are sufficient or available funds in the asset feature to complete
the transaction. For example, assume that a consumer has $50 available
funds in her prepaid account. The consumer initiates a $25 transaction
with the card to purchase goods and services. If the consumer chooses at
the time the transaction is initiated to use the card to access
[[Page 933]]
the prepaid account, the card will draw on the funds in the asset
feature of the prepaid account to complete the transaction. If the
consumer chooses at the time the transaction is initiated to use the
card to access the credit feature, the card will draw on credit from the
credit feature to complete the transaction, regardless of the fact that
there were sufficient or available funds the prepaid account to complete
the transaction.
4. Covered separate credit features. i. Under Sec.
1026.61(a)(2)(i), a separate credit feature that meets the conditions of
Sec. 1026.61(a)(2)(i) is defined as a covered separate credit feature.
In this case, the hybrid prepaid-credit card can access both the covered
separate credit feature and the asset feature of the prepaid account.
Section 1026.61 and other provisions in the regulation and commentary
related to hybrid prepaid-credit cards refer to this credit feature
either as a covered separate credit feature or a covered separate credit
feature accessible by a hybrid prepaid-credit card. See, e.g.,
Sec. Sec. 1026.4(c)(4), 1026.7(b)(11)(ii)(A), 1026.12(d)(3)(ii), and
1026.60(a)(5)(iv) and (b). In addition, several provisions in the
regulation and commentary also describe this arrangement as one where a
covered separate credit feature and an asset feature on a prepaid
account are both accessible by a hybrid prepaid-credit card as defined
in Sec. 1026.61. See, e.g., Sec. Sec. 1026.4(b)(11),
1026.6(b)(3)(iii)(D), and 1026.13(i)(2).
ii. If a prepaid card is capable of drawing or transferring credit,
or authorizing either, from a separate credit feature offered by the
prepaid account issuer, its affiliate, or its business partner in the
course of authorizing, settling, or otherwise completing transactions
conducted with the prepaid card to obtain goods or services, obtain
cash, or conduct a person-to-person transfer, the credit feature is a
covered separate credit feature accessible by a hybrid prepaid-credit
card, even with respect to credit that is drawn or transferred, or
authorized to be drawn or transferred, from the credit feature outside
the course of a transaction conducted with the card to obtain goods or
services, obtain cash, or conduct person-to-person transfers. For
example, with respect to a covered separate credit feature, a consumer
may use the prepaid card at the prepaid account issuer's Web site to
load funds from the covered separate credit feature outside the course
of a transaction conducted with the card to obtain goods or services,
obtain cash, or conduct person-to-person transfers. This credit
transaction is considered a credit transaction on a covered separate
credit feature accessible by a hybrid prepaid-credit card, even though
the load or transfer of funds occurred outside the course of a
transaction conducted with the card to obtain goods or services, obtain
cash, or conduct person-to-person transfers.
5. Non-covered separate credit features. A separate credit feature
that does not meet the conditions set forth in Sec. 1026.61(a)(2)(i) is
defined as a non-covered separate credit feature as described in Sec.
1026.61(a)(2)(ii). A prepaid card is not a hybrid prepaid-credit card
with respect to a non-covered separate credit feature. To illustrate:
i. A prepaid card is not a hybrid prepaid-credit card under Sec.
1026.61(a)(2)(i) with respect to a separate credit feature if the credit
feature is not offered by the prepaid account issuer, its affiliate, or
its business partner. This is true even if the draw or transfer of
credit, or authorization of either, occurs during the course of
authorizing, settling, or otherwise completing transactions to obtain
goods or services, obtain cash, or conduct person-to-person transfers.
For example, assume a consumer links her prepaid account to a credit
card issued by a card issuer that is not the prepaid account issuer, its
affiliate, or its business partner so that credit is drawn automatically
into the asset feature of the prepaid account in the course of
authorizing, settling, or otherwise completing transactions conducted
with the prepaid card for which there are insufficient funds in the
asset feature. In this case, the separate credit feature is a non-
covered separate credit feature under Sec. 1026.61(a)(2)(ii). In this
situation, the prepaid card is not a hybrid prepaid-credit card with
respect to the separate credit feature offered by the unrelated third-
party card issuer.
ii. Even if a separate credit feature is offered by the prepaid
account issuer, its affiliate, or its business partner, a prepaid card
is not a hybrid prepaid-credit card under Sec. 1026.61(a)(2)(i) with
respect to that separate credit feature if the separate credit feature
cannot be accessed within the course of authorizing, settling, or
otherwise completing transactions to obtain goods or services, obtain
cash, or conduct person-to-person transfers. For example, assume that a
consumer can only conduct a draw or transfer of credit, or authorization
of either, from a separate credit feature to a prepaid account at the
prepaid account issuer's Web site, and these draws, transfers, or
authorizations of either, cannot occur in the course of authorizing,
settling, or otherwise completing transactions at the Web site to obtain
goods or services, obtain cash, or conduct person-to-person transfers.
In this case, the separate credit feature is a non-covered separate
credit feature under Sec. 1026.61(a)(2)(ii). In this situation, the
prepaid card is not a hybrid prepaid-credit card with respect to this
non-covered separate credit feature.
iii. The person offering the non-covered separate credit feature
does not become a card issuer under Sec. 1026.2(a)(7) and thus does not
become a creditor under Sec. 1026.2(a)(17)(iii) or (iv) because the
prepaid card can be used
[[Page 934]]
to access credit from the non-covered separate credit feature. The
person offering the non-covered separate credit feature, however, may
already have obligations under this regulation with respect to that
separate credit feature. For example, if the non-covered separate credit
feature is an open-end credit card account offered by an unrelated
third-party creditor that is not an affiliate or business partner of the
prepaid account issuer, the person already will be a card issuer under
Sec. 1026.2(a)(7) and a creditor under Sec. 1026.2(a)(17)(iii).
Nonetheless, in that case, the person does not need to comply with the
provisions in the regulation applicable to hybrid prepaid-credit cards
even though the prepaid card can access credit from the non-covered
separate credit feature. The obligations under this regulation that
apply to a non-covered separate credit feature are not affected by the
fact that the prepaid card can access credit from the non-covered
separate credit feature. See Sec. 1026.6(b)(3)(iii)(E) and comments
4(b)(11)-1.ii, 6(b)(2)-2, 6(b)(3)(iii)(E)-1, 12(d)(3)-2.iii, 52(a)(2)-3,
52(b)-4, 55(a)-4, and 60(b)-4.
6. Prepaid card that can access multiple separate credit features.
i. Even if a prepaid card is a hybrid prepaid-credit card with respect
to a covered separate credit feature, it is not a hybrid prepaid-credit
card with respect to any non-covered separate credit features.
ii. For example, assume that a prepaid card can access ``Separate
Credit Feature A'' where the card can be used from time to time to
access credit from a separate credit feature that is offered by the
prepaid account issuer, its affiliate, or its business partner in the
course of authorizing, settling, or otherwise completing transactions
conducted with the card to obtain goods or services, obtain cash, or
conduct person-to-person transfers. In addition, assume that the prepaid
card can also access ``Separate Credit Feature B'' but that credit
feature is being offered by an unrelated third-party creditor that is
not the prepaid account issuer, its affiliate, or its business partner.
The prepaid card is a hybrid prepaid-credit card with respect to
Separate Credit Feature A because it is a covered separate credit
feature. The prepaid card, however, is not a hybrid prepaid-credit card
with respect to Separate Credit Feature B because it is a non-covered
separate credit feature.
61(a)(3) Prepaid Card Can Access Credit Extended Through a Negative
Balance on the Asset Feature
61(a)(3)(i) In General
1. Credit accessed on an asset feature of a prepaid account. i. See
comment 2(a)(14)-3 for examples of when transactions authorized or paid
on the asset feature of a prepaid account meet the definition of credit
under Sec. 1026.2(a)(14).
ii. Except as provided in Sec. 1026.61(a)(4), a prepaid card would
trigger coverage as a hybrid prepaid-credit card if it is a single
device that can be used from time to time to access credit that can be
extended through a negative balance on the asset feature of the prepaid
account. (However, unless the only credit offered meets the requirements
of Sec. 1026.61(a)(4), such a product structure would violate the rules
under Sec. 1026.61(b).) A credit extension through a negative balance
on the asset feature of a prepaid account can occur during the
authorization phase of the transaction as discussed in comment
61(a)(3)(i)-1.iii or in later periods up to the settlement of the
transaction, as discussed in comment 61(a)(2)(i)-1.iv.
iii. The following example illustrates transactions where a credit
extension occurs during the course of authorizing a transaction.
A. A transaction initiated using a prepaid card when there are
insufficient or unavailable funds in the asset feature of the prepaid
account at the time the transaction is initiated and credit is extended
through a negative balance on the asset feature of the prepaid account
when the transaction is authorized.
iv. The following examples illustrate transactions where a credit
extension occurs at settlement.
A. Transactions that occur when there are sufficient or available
funds in the asset feature of the prepaid account at the time of
authorization to cover the amount of the transaction but where the
consumer does not have sufficient or available funds in the asset
feature to cover the transaction at the time of settlement. Credit is
extended through a negative balance on the asset feature at settlement
to pay those transactions.
B. Transactions that settle even though they were not authorized in
advance where credit is extended through a negative balance on the asset
feature at settlement to pay those transactions.
61(a)(3)(ii) Negative Asset Balances
1. Credit extended on the asset feature of the prepaid account.
Section 1026.61(a)(3)(i) determines whether a prepaid card triggers
coverage as a hybrid prepaid-credit card under Sec. 1026.61(a), and
thus, whether a prepaid account issuer is a card issuer under Sec.
1026.2(a)(7) subject to this regulation, including Sec. 1026.61(b).
However, Sec. 1026.61(b) requires that any credit feature accessible by
a hybrid prepaid-credit card must be structured as a separate credit
feature using either a credit subaccount of the prepaid account or a
separate credit account. In that case, a card issuer would violate Sec.
1026.61(b) if it structures the credit feature as a negative balance on
the asset feature of the prepaid account, unless the only credit offered
in
[[Page 935]]
connection with the prepaid account satisfies Sec. 1026.61(a)(4). A
prepaid account issuer can use a negative asset balance structure to
extend credit on a prepaid account if the prepaid card is not a hybrid
prepaid-credit card as described in Sec. 1026.61(a)(4).
61(a)(4) Exception
1. Prepaid card that is not a hybrid prepaid-credit card. i. A
prepaid card that is not a hybrid prepaid-credit card as described in
Sec. 1026.61(a) is not a credit card under this regulation. A prepaid
card is not a hybrid prepaid-credit card if:
A. The card cannot access credit from a covered separate credit
feature under Sec. 1026.61(a)(2)(i), though it is permissible for it to
access credit from a non-covered separate credit feature as described
under Sec. 1026.61(a)(2)(ii); and
B. The card can only access credit extended through a negative
balance on the asset feature of the prepaid account in accordance with
both the conditions set forth in Sec. 1026.61(a)(4)(ii)(A) and (B).
ii. Below is an example of when a prepaid card is not a hybrid
prepaid-credit card because the conditions set forth in Sec.
1026.61(a)(4) have been met.
A. The prepaid card can only access credit extended through a
negative balance on the asset feature of the prepaid account in
accordance with both the conditions set forth in Sec.
1026.61(a)(4)(ii)(A) and (B). The card can access credit from a non-
covered separate credit feature as defined in Sec. 1026.61(a)(2)(ii),
but cannot access credit for a covered separate credit feature as
defined in Sec. 1026.61(a)(2)(i).
iii. Below is an example of when a prepaid card is a hybrid prepaid-
credit card because the conditions set forth in Sec. 1026.61(a)(4) have
not been met.
A. When there is insufficient or unavailable funds in the asset
feature of the prepaid account at the time a transaction is initiated,
the card can be used to draw, transfer, or authorize the draw or
transfer of credit from a covered separate credit feature offered by the
prepaid account issuer, its affiliate, or its business partner during
the authorization phase to complete the transaction so that credit is
not extended on the asset feature of the prepaid account. The card is a
hybrid prepaid-credit card because it can be used to draw, transfer, or
authorize the draw or transfer of credit from a separate credit feature
in the circumstances set forth in Sec. 1026.61(a)(2)(i).
iv. In the case where a prepaid card is not a hybrid prepaid-credit
card because the only credit it can access meets the conditions set
forth in Sec. 1026.61(a)(4):
A. The prepaid account issuer is not a card issuer under Sec.
1026.2(a)(7) with respect to the prepaid card. The prepaid account
issuer also is not a creditor under Sec. 1026.2(a)(17)(iii) or (iv)
because it is not a card issuer under Sec. 1026.2(a)(7) with respect to
the prepaid card. The prepaid account issuer also is not a creditor
under Sec. 1026.2(a)(17)(i) as a result of imposing fees on the prepaid
account because those fees are not finance charges. See comment
4(b)(11)-1.iii.
Paragraph 61(a)(4)(ii)(A)
1. Authorization not required for every transaction. The prepaid
account issuer is not required to receive an authorization request for
each transaction to comply with Sec. 1026.61(a)(4)(ii)(A). Nonetheless,
the prepaid account issuer generally must establish an authorization
policy as described in Sec. 1026.61(a)(4)(ii)(A) and have reasonable
practices in place to comply with its established policy with respect to
the authorization requests it receives. In that case, a prepaid account
issuer is deemed to satisfy Sec. 1026.61(a)(4)(ii)(A) even if a
negative balance results on the prepaid account when a transaction is
settled.
2. Provisional credit. A prepaid account issuer may still satisfy
the requirements set forth in Sec. 1026.61(a)(4)(ii)(A) even if a
negative balance results on the asset feature of the prepaid account
because the prepaid account issuer debits the amount of any provisional
credit that was previously granted on the prepaid account as specified
in Regulation E, 12 CFR 1005.11, so long as the prepaid account issuer
otherwise complies with the conditions set forth in Sec. 1026.61(a)(4).
For example, under Sec. 1026.61(a)(4), a prepaid account issuer may not
impose a fee or charge enumerated under Sec. 1026.61(a)(4)(ii)(B) with
respect to this negative balance.
3. Delayed load cushion. i. Incoming fund transfers. For purposes of
Sec. 1026.61(a)(4)(ii)(A)(2), cases where the prepaid account issuer
has received an instruction or confirmation for an incoming electronic
fund transfer originated from a separate asset account to load funds to
the prepaid account include a direct deposit of salary from an employer
and a direct deposit of government benefits.
ii. Consumer requests. For purposes of Sec.
1026.61(a)(4)(ii)(A)(2), cases where the prepaid account issuer has
received a request from the consumer to load funds to the prepaid
account from a separate asset account include where the consumer, in the
course of a transaction, requests a load from a deposit account or uses
a debit card to cover the amount of the transaction if there are
insufficient funds in the asset feature of the prepaid account to pay
for the transaction.
4. Permitted authorization circumstances are not mutually exclusive.
The two circumstances set forth in Sec. 1026.61(a)(4)(ii)(A)(1) and (2)
are not mutually exclusive. For example, assume a prepaid account issuer
has adopted the $10 cushion described in Sec. 1026.61(a)(4)(ii)(A)(1),
and the delayed load
[[Page 936]]
cushion described in Sec. 1026.61(a)(4)(ii)(A)(2). Also, assume the
prepaid account issuer has received an instruction or confirmation for
an incoming electronic fund transfer originated from a separate asset
account to load funds to the prepaid account but the prepaid account
issuer has not received the funds from the separate asset account. In
this case, a prepaid account issuer satisfies Sec.
1026.61(a)(4)(iii)(A) if the amount of a transaction at authorization
will not cause the prepaid account balance to become negative at the
time of the authorization by more than the requested load amount plus
the $10 cushion.
Paragraph 61(a)(4)(ii)(B)
1. Different terms on different prepaid account programs. Section
1026.61(a)(4)(ii)(B) does not prohibit a prepaid account issuer from
charging different terms on different prepaid account programs. For
example, the terms may differ between a prepaid account program where a
covered separate credit feature accessible by a hybrid prepaid-credit
card is not offered in connection with any prepaid accounts within the
prepaid account program, and a prepaid account program where a covered
separate credit feature accessible by a hybrid prepaid-credit card may
be offered to some consumers in connection with their prepaid accounts.
Paragraph 61(a)(4)(ii)(B)(1)
1. Fees or charges covered by Sec. 1026.61(a)(4)(ii)(B)(1). To
qualify for the exception in Sec. 1026.61(a)(4)(ii)(B), the prepaid
account issuer may not impose any fees or charges for opening, issuing,
or holding a negative balance on the asset feature, or for the
availability of credit, whether imposed on a one-time or periodic basis.
Section 1026.61(a)(4)(ii)(B)(1) does not include fees or charges to
open, issue, or hold the prepaid account where the amount of the fee or
charge imposed on the asset feature is not higher based on whether
credit might be offered or has been accepted, whether or how much credit
the consumer has accessed, or the amount of credit available.
i. The types of fees or charges prohibited by Sec.
1026.61(a)(4)(ii)(B)(1) include:
A. A daily, weekly, monthly, or other periodic fee assessed each
period a prepaid account has a negative balance or is in ``overdraft''
status; and
B. A daily, weekly, monthly or other periodic fee to hold the
prepaid account where the amount of the fee that applies each period is
higher if the consumer is enrolled in a purchase cushion as described in
Sec. 1026.61(a)(4)(ii)(A)(1) or a delayed load cushion as described in
Sec. 1026.61(a)(4)(A)(ii)(2) during that period. For example, assume
that a consumer will pay a fee to hold the prepaid account of $10 if the
consumer is not enrolled in a purchase cushion as described in Sec.
1026.61(a)(4)(ii)(A)(1) or a delayed load cushion as described in Sec.
1026.61(a)(4)(A)(ii)(2) during that month, and will pay a fee to hold
the prepaid account of $15 if the consumer is enrolled in a purchase
cushion or delayed load cushion that period. The $15 charge is a charge
described in Sec. 1026.61(a)(4)(ii)(B)(1) because the amount of the fee
to hold the prepaid account is higher based on whether the consumer is
participating in the payment cushion or delayed load cushion during that
period.
ii. Fees or charges described in Sec. 1026.61(a)(4)(ii)(B) do not
include:
A. A daily, weekly, monthly, or other periodic fee to hold the
prepaid account where the amount of the fee is not higher based on
whether the consumer is enrolled in a purchase cushion as described in
Sec. 1026.61(a)(4)(ii)(A)(1) or a delayed load cushion as described in
Sec. 1026.61(a)(4)(A)(ii)(2) during that period, whether or how much
credit has been extended during that period, or the amount of credit
that is available during that period.
Paragraph 61(a)(4)(ii)(B)(2)
1. Fees or charges covered by Sec. 1026.61(a)(4)(ii)(B)(2). To
qualify for the exception in Sec. 1026.61(a)(4)(ii)(B), the prepaid
account issuer may not impose any fees or charges on the asset feature
of the prepaid account that will be imposed only when credit is extended
on the asset feature or when there is a negative balance on the asset
feature.
i. These types of fees or charges include:
A. A fee imposed because the balance on the prepaid account becomes
negative;
B. Interest charges attributable to a periodic rate that applies to
the negative balance;
C. Any fees for delinquency, default, or a similar occurrences that
result from the prepaid account having a negative balance or being in
``overdraft'' status, except that the actual costs to collect the credit
may be imposed if otherwise permitted by law; and
D. Late payment fees.
ii. Fees or charges described in Sec. 1026.61(a)(4)(ii)(B) do not
include:
A. Fees for actual collection costs, including attorney's fees, to
collect any credit extended on the prepaid account if otherwise
permitted by law. Late payment fees are not considered fees imposed for
actual collection costs. See comment 61(a)(4)(ii)(B)(2)-1.i.D.
Paragraph 61(a)(4)(ii)(B)(3)
1. Fees or charges covered by Sec. 1026.61(a)(4)(ii)(B)(3). i. To
qualify for the exception in Sec. 1026.61(a)(4)(ii)(B), the prepaid
account issuer may not impose any fees or charges on the asset feature
of the prepaid
[[Page 937]]
account that are higher when credit is extended on the asset feature or
when there is a negative balance on the asset feature. These types of
fees or charges include:
A. Transaction fees where the amount of the fee is higher based on
whether the transaction accesses only asset funds in the asset feature
or accesses credit. For example, a $15 transaction charge is imposed on
the asset feature each time a transaction is authorized or paid when
there are insufficient or unavailable funds in the asset feature at the
time of the authorization or settlement. A $1.50 fee is imposed each
time a transaction only accesses funds in the asset feature. The $15
charge is a charge described in Sec. 1026.61(a)(4)(ii)(B)(3) because
the amount of the transaction fee is higher when the transaction
accesses credit than the amount of the fee that applies when the
transaction accesses only asset funds in the asset feature; and
B. A fee for a service on the prepaid account where the amount of
the fee is higher based on whether the service is requested when the
asset feature has a negative balance. For example, if a prepaid account
issuer charges a higher fee for an ATM balance inquiry requested on the
prepaid account if the balance inquiry is requested when there is a
negative balance on the asset feature than the amount of fee imposed
when there is a positive balance on the asset feature, the balance
inquiry fee is a fee described in Sec. 1026.61(a)(4)(ii)(B)(3) because
the amount of the fee is higher based on whether it is imposed when
there is a negative balance on the asset feature.
ii. Fees or charges described in Sec. 1026.61(a)(4)(ii)(B) do not
include:
A. Transaction fees on the prepaid account where the amount of the
fee imposed when the transaction accesses credit does not exceed the
amount of the fee imposed when the transaction only accesses asset funds
in the prepaid account. For example, assume a $1.50 transaction charge
is imposed on the prepaid account for each paid transaction that is made
with the prepaid card, including transactions that only access asset
funds, transactions that take the account balance negative, and
transactions that occur when the account balance is already negative.
The $1.50 transaction charge imposed on the prepaid account is not a fee
described in Sec. 1026.61(a)(4)(ii)(B); and
B. A fee for a service on the prepaid account where the amount of
the fee is not higher based on whether the service is requested when the
asset feature has a negative balance. For example, if a prepaid account
issuer charges the same amount of fee for an ATM balance inquiry
regardless of whether there is a positive or negative balance on the
asset feature, the balance inquiry fee is not a fee described in Sec.
1026.61(a)(4)(ii)(B).
Paragraph 61(a)(4)(ii)(C)
1. Fees or charges not covered by Sec. 1026.61(a)(4)(ii)(B). Under
Sec. 1026.61(a)(4)(ii)(C), a prepaid account issuer may still satisfy
the exception in Sec. 1026.61(a)(4) even if it debits fees or charges
from the prepaid account when there are insufficient or unavailable
funds in the asset feature of the prepaid account to cover those fees or
charges at the time they are imposed, so long as those fees or charges
are not the type of fees or charges enumerated in Sec.
1026.61(a)(4)(ii)(B). A fee or charge not otherwise covered by Sec.
1026.61(a)(4)(ii)(B) does not become covered by that provision simply
because there are insufficient or unavailable funds in the asset feature
of the prepaid account to pay the fee when it is imposed. For example,
assume that a prepaid account issuer imposes a fee for an ATM balance
inquiry and the amount of the fee is not higher based on whether credit
is extended or whether there is a negative balance on the prepaid
account. Also assume that when the fee is imposed, there are
insufficient or unavailable funds in the asset feature of the prepaid
account to pay the fee. The ATM balance inquiry fee does not become a
fee covered by Sec. 1026.61(a)(4)(ii)(B) because the fee is debited
from the prepaid account balance when there are insufficient or
unavailable funds in the asset feature of the prepaid account to cover
the fee at the time it is imposed.
61(a)(5) Definitions
Paragraph 61(a)(5)(iii)
1. Arrangement. A person (other than the prepaid account issuer or
its affiliates) that can extend credit through a separate credit feature
is a business partner of a prepaid account issuer where the person that
can extend credit or its affiliate has an arrangement with a prepaid
account issuer or its affiliate. A person (other than the prepaid
account issuer or its affiliates) that can extend credit through a
separate credit feature or the person's affiliate has an arrangement
with a prepaid account issuer or its affiliate for purposes of Sec.
1026.61(a)(5)(iii) if the circumstances in either paragraph i or ii are
met:
i. A person that can extend credit or its affiliate has an
arrangement with a prepaid account issuer or its affiliate if the
prepaid account issuer or its affiliate has an agreement with the person
that can extend credit or its affiliate that allows a prepaid card from
time to time to draw, transfer, or authorize a draw or transfer of
credit from a credit feature offered by the person that can extend
credit in the course of authorizing, settling, or otherwise completing
transactions conducted with the card to obtain goods or services, obtain
cash, or conduct person-to-person transfers. However, the parties are
not
[[Page 938]]
considered to have such an agreement merely because the parties
participate in a card network or payment network.
ii. A person that can extend credit or its affiliate has an
arrangement with a prepaid account issuer or its affiliate if the
prepaid account issuer or its affiliate:
A. Has a business, marketing, or promotional agreement or other
arrangement with the person that can extend credit or its affiliate
where the agreement or arrangement provides that:
1. Prepaid accounts offered by the prepaid account issuer will be
marketed to the customers of the person that can extend credit; or
2. The credit feature will be marketed to the holders of prepaid
accounts offered by the prepaid account issuer (including any marketing
to customers to link the separate credit feature to the prepaid account
to be used as an overdraft credit feature); and
B. At the time of the marketing agreement or arrangement described
in comment 61(a)(5)(iii)-1.ii.A, or at any time afterwards, the prepaid
card from time to time can draw, transfer, or authorize the draw or
transfer of credit from the credit feature in the course of transactions
conducted with the card to obtain goods or services, obtain cash, or
conduct person-to-person transfers. This requirement is satisfied even
if there is no specific agreement, as described in comment
61(a)(5)(iii)-1.i, between the parties that the card can access the
credit feature. For example, this requirement is satisfied even if the
draw, transfer, or authorization of the draw or transfer from the credit
feature is effectuated through a card network or payment network.
2. Relationship to prepaid account issuer. A person (other than a
prepaid account issuer or its affiliates) that can extend credit through
a separate credit feature will be deemed to have an arrangement with the
prepaid account issuer if the person that can extend credit, its service
provider, or the person's affiliate has an arrangement with the prepaid
account issuer, its service provider such as a program manager, or the
issuer's affiliate. In that case, the person that can extend credit will
be a business partner of the prepaid account issuer. For example, if the
affiliate of the person that can extend credit has an arrangement with
the prepaid account issuer's affiliate, the person that can extend
credit will be the business partner of the prepaid account issuer.
Paragraph 61(a)(5)(iv)
1. Applicability of credit feature definition. The definition of
credit feature set forth in Sec. 1026.61(a)(5)(iv) only defines that
term for purposes of this regulation in relation to credit in connection
with a prepaid account or prepaid card. This definition does not impact
when an account, subaccount or negative balance is a credit feature
under the regulation with respect to credit in relation to a checking
account or other transaction account that is not a prepaid account, or a
debit card. See, e.g., comments 2(a)(15)-2.ii.A and 4(b)(2)-1 for where
the term credit feature is used in relation to a debit card or asset
account other than a prepaid account.
2. Asset account other than a prepaid account. A credit feature for
purposes of Sec. 1026.61(a)(5)(iv) does not include an asset account
other than a prepaid account that has an attached overdraft feature. For
example, assume that funds are loaded or transferred to a prepaid
account from an asset account (other than a prepaid account) on which an
overdraft feature is attached. The asset account is not a credit feature
under Sec. 1026.61(a)(5)(iv) even if the load or transfer of funds to
the prepaid account triggers the overdraft feature that is attached to
the asset account.
Paragraph 61(a)(5)(vii)
1. Definition of prepaid card. The term ``prepaid card'' in Sec.
1026.61(a)(5)(vii) includes any card, code, or other device that can be
used to access a prepaid account, including a prepaid account number or
other code.
61(b) Structure of Credit Features Accessible by Hybrid Prepaid-Credit
Cards
1. Credit subaccount on a prepaid account. If a credit feature that
is accessible by a hybrid prepaid-credit card is structured as a
subaccount of the prepaid account, the credit feature must be set up as
a separate balance on the prepaid account such that there are at least
two balances on the prepaid account--the asset account balance and the
credit account balance.
2. Credit extended on a credit subaccount or a separate credit
account. Under Sec. 1026.61(b), with respect to a credit feature that
is assessed by a hybrid prepaid-credit card, a card issuer at its option
may structure the credit feature as a separate credit feature, either as
a subaccount on the prepaid account that is separate from the asset
feature or as a separate credit account. The separate credit feature
would be a covered separate credit feature accessible by a hybrid
prepaid-credit card under Sec. 1026.61(a)(2)(i). Regardless of whether
the card issuer is structuring its covered separate credit feature as a
subaccount of the prepaid account or as a separate credit account:
i. If at the time a prepaid card transaction is initiated there are
insufficient or unavailable funds in the asset feature of the prepaid
account to complete the transaction, credit must be drawn, transferred
or authorized to be drawn or transferred, from the covered separate
credit feature at the time the transaction is authorized. The card
issuer may
[[Page 939]]
not allow the asset feature on the prepaid account to become negative
and draw or transfer the credit from the covered separate credit feature
at a later time, such as at the end of the day. The card issuer must
comply with the applicable provisions of this regulation with respect to
the credit extension from the time the prepaid card transaction is
authorized.
ii. For transactions where there are insufficient or unavailable
funds in the asset feature of the prepaid account to cover that
transaction at the time it settles and the prepaid transaction either
was not authorized in advance or the transaction was authorized and
there were sufficient or available funds in the prepaid account at the
time of authorization to cover the transaction, credit must be drawn
from the covered separate credit feature to settle these transactions.
The card issuer may not allow the asset feature on the prepaid account
to become negative. The card issuer must comply with the applicable
provisions of this regulation from the time the transaction is settled.
iii. If a negative balance would result on the asset feature in
circumstances other than those described in comment 61(b)-2.i and ii,
credit must be drawn from the covered separate credit feature to avoid
the negative balance. The card issuer may not allow the asset feature on
the prepaid account to become negative. The card issuer must comply with
the applicable provisions in this regulation from the time credit is
drawn from the covered separate credit feature. For example, assume that
a fee for an ATM balance inquiry is imposed on the prepaid account when
there are insufficient or unavailable funds to cover the amount of the
fee when it is imposed. Credit must be drawn from the covered separate
credit feature to avoid a negative balance.
61(c) Timing Requirement for Solicitation or Application With Respect to
Hybrid Prepaid-Credit Cards
1. Meaning of registration of a prepaid card or prepaid account. A
prepaid card or prepaid account is registered, such that the 30-day
timing requirement required by Sec. 1026.61(c) begins, when the prepaid
account issuer successfully completes its collection of consumer
identifying information and identity verification in accordance with the
requirements of applicable Federal and state law. The beginning of the
required 30-day timing requirement is triggered by successful completion
of collection of consumer identifying information and identity
verification, not by the consumer's mere purchase or obtaining of the
card. With respect to a prepaid account for which customer
identification and verification are completed before the account is
opened, the 30-day timing requirement begins on the day the prepaid
account is opened.
2. Unsolicited issuance of credit cards and disclosures related to
applications or solicitations for credit or charge card accounts. See
Sec. 1026.12(a)(1) and comment 12(a)(1)-7.ii for additional rules that
apply to the addition of a credit card or charge card account to a
previously-issued prepaid account. See also Sec. 1026.60 and related
commentary for disclosures that generally must be provided on or with
applications or solicitations to open a credit or charge card account.
3. Replacement or substitute cards. A card issuer is not required to
comply with Sec. 1026.61(c) when a hybrid prepaid-credit card is
permitted to be replaced, or substituted, for another hybrid prepaid-
credit card without a request or application under Sec. 1026.12(a)(2)
and related commentary. For example, Sec. 1026.61(c) does not apply to
situations where a prepaid account or credit feature that is accessible
by a hybrid prepaid-credit card is replaced because of security concerns
and a new hybrid prepaid-credit card is issued to access the new prepaid
account or covered separate credit feature without a request or
application under Sec. 1026.12(a)(2).
* * * * *
Effective Date Notes: 2. 81 FR 72395, Oct. 19, 2016, amended
supplement I to part 1026, effective Apr. 19, 2018, as follows:
a. Under Section 1026.2--Definitions and Rules of Construction:
i. Under 2(a)(11) Consumer, paragraph 4 was added.
ii. After the entry for 2(a)(25) Security Interest, the heading
Paragraph 2(a)(27), the heading 2(a)(27)(i) Successor in interest, and
paragraphs 1 and 2 under that heading were added.
b. Under Section 1026.20--Disclosure requirements regarding post-
consummation events, under 20(e)(4) Form of disclosures, paragraph 3 was
added.
c. Under Section 1026.36--Prohibited Acts or Practices and Certain
Requirements for Credit Secured by a Dwelling:
ii. Under Paragraph 36(c)(1)(iii), paragraph 2 was revised.
d. Under Section 1026.41--Periodic Statements for Residential
Mortgage Loans:
ii. Under 41(c) Form of the periodic statement, paragraph 5 was
added.
For the convenience of the user, the added and revised text is set
forth as follows:
Sec. Supplement I to Part 1026--Official Interpretations
* * * * *
[[Page 940]]
Subpart A--General
* * * * *
Sec. 1026.2--Definitions and Rules of Construction.
* * * * *
2(a)(11) Consumer
* * * * *
4. Successors in interest. i. Assumption of the mortgage loan
obligation. A servicer may not require a confirmed successor in interest
to assume the mortgage loan obligation to be considered a consumer for
purposes of Sec. Sec. 1026.20(c) through (e), 1026.36(c), 1026.39, and
1026.41. If a successor in interest assumes a mortgage loan obligation
under State law or is otherwise liable on the mortgage loan obligation,
the protections the successor in interest enjoys under this part are not
limited to Sec. Sec. 1026.20(c) through (e), 1026.36(c), 1026.39, and
1026.41.
ii. Communications with confirmed successors in interest.
Communications in compliance with this part to a confirmed successor in
interest as defined in Sec. 1026.2(a)(27)(ii) do not violate section
805(b) of the Fair Debt Collection Practices Act (FDCPA) because
consumer for purposes of FDCPA section 805 includes any person who meets
the definition in this part of confirmed successor in interest.
iii. Treatment of transferor consumer. Even after a servicer's
confirmation of a successor in interest, the servicer is still required
to comply with all applicable requirements of Sec. Sec. 1026.20(c)
through (e), 1026.36(c), 1026.39, and 1026.41 with respect to the
consumer who transferred an ownership interest to the successor in
interest.
iv. Multiple notices unnecessary. Except as required by Regulation
X, 12 CFR 1024.36, a servicer is not required to provide to a confirmed
successor in interest any written disclosure required by Sec.
1026.20(c), (d), or (e), Sec. 1026.39, or Sec. 1026.41 if the servicer
is providing the same specific disclosure to another consumer on the
account. For example, a servicer is not required to provide a periodic
statement required by Sec. 1026.41 to a confirmed successor in interest
if the servicer is providing the same periodic statement to another
consumer; a single statement may be sent in that billing cycle. If a
servicer confirms more than one successor in interest, the servicer need
not send any disclosure required by Sec. 1026.20(c), (d), or (e), Sec.
1026.39, or Sec. 1026.41 to more than one of the confirmed successors
in interest.
* * * * *
Paragraph 2(a)(27)
2(a)(27)(i) Successor in interest
1. Joint tenants and tenants by the entirety. If a consumer who has
an ownership interest as a joint tenant or tenant by the entirety in a
dwelling securing a closed-end consumer credit transaction dies, a
surviving joint tenant or tenant by the entirety with a right of
survivorship in the property is a successor in interest as defined in
Sec. 1026.2(a)(27)(i).
2. Beneficiaries of inter vivos trusts. In the event of a transfer
into an inter vivos trust in which the consumer is and remains a
beneficiary and which does not relate to a transfer of rights of
occupancy in the property, the beneficiaries of the inter vivos trust
rather than the inter vivos trust itself are considered to be the
successors in interest for purposes of Sec. 1026.2(a)(27)(i). For
example, assume Consumer A transfers her home into such an inter vivos
trust for the benefit of her spouse and herself. As of the transfer
date, Consumer A and her spouse are considered successors in interest
and, upon confirmation, are consumers for purposes of certain provisions
of this part. If the creditor has not released Consumer A from the loan
obligation, Consumer A also remains a consumer more generally for
purposes of this part.
* * * * *
Subpart C--Closed-End Credit
* * * * *
Sec. 1026.20--Disclosure requirements regarding post-consummation
events.
* * * * *
20(e)(4) Form of disclosures.
* * * * *
3. Modifications of disclosures. The requirements of Sec.
1026.20(e)(4) to provide the Sec. 1026.20(e) disclosures with the
headings, content, order, and format substantially similar to model form
H-29 in appendix H to this part do not preclude creditors and servicers
from modifying the disclosures to accommodate particular consumer
circumstances or transactions not addressed by the form or from
adjusting the statement required by Sec. 1026.20(e)(2)(ii)(A),
concerning consequences if the consumer fails to pay property costs, to
the circumstances of the particular consumer.
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
* * * * *
[[Page 941]]
Sec. 1026.36--Prohibited acts or practices and certain requirements for
credit secured by a dwelling.
Paragraph 36(c)(1)(iii).
* * * * *
2. Payment requirements--Limitations. Requirements for making
payments must be reasonable; it should not be difficult for most
consumers and potential successors in interest to make conforming
payments. For example, it would be reasonable to require a cut-off time
of 5 p.m. for receipt of a mailed check at the location specified by the
servicer for receipt of such check.
* * * * *
Sec. 1026.41--Periodic Statements for Residential Mortgage Loans.
* * * * *
41(c) Form of the periodic statement.
* * * * *
5. Permissible changes. Servicers may modify the sample forms for
periodic statements provided in appendix H-30 of this part to remove
language that could suggest liability under the mortgage loan agreement
if such language is not applicable. For example, in the case of a
confirmed successor in interest who has not assumed the mortgage loan
obligation under State law and is not otherwise liable on the mortgage
loan obligation, a servicer may modify the forms to:
i. Use ``this mortgage'' or ``the mortgage'' instead of ``your
mortgage.''
ii. Use ``The payments on this mortgage are late'' instead of ``You
are late on your mortgage payments.''
iii. Use ``This is the amount needed to bring the loan current''
instead of ``You must pay this amount to bring your loan current.''
* * * * *
Effective Date Notes: 3. At 81 FR 72395, Oct. 19, 2016, and delayed
at 82 FR 30948-30949, July 5, 2017, effective Apr. 18, 2018, supplement
I to part 1026 was amended as follows:
vii. After the entry for 41(d)(8), the heading 41(e) Exemptions was
added.
viii. The heading for 41(e)(5) was revised, and under that heading
paragraphs 1 through 3 were revised, and paragraph 4 was added.
ix. The heading 41(e)(5)(i) Exemption was added, and paragraph 1
under that heading was added.
x. The heading Paragraph 41(e)(5)(i)(B)(2) was added, and paragraph
1 under that heading was added.
xi. The heading Paragraph 41(e)(5)(i)(B)(4) was added, and paragraph
1 under that heading was added.
xii. The heading 41(e)(5)(ii) Reaffirmation or consumer request to
receive statement or coupon book was added, and paragraph 1 under that
heading was added.
xiii. The heading 41(e)(5)(iv) Timing of compliance following
transition was added.
xiv. The heading 41(e)(5)(iv)(A) Triggering events for transitioning
to modified or unmodified statement or coupon book was added, and
paragraphs 1 and 2 under that heading were added.
xv. The heading 41(e)(5)(iv)(B) Transitional single-billing-cycle
exemption was added, and paragraph 1 under that heading was added.
xvi. The heading 41(e)(5)(iv)(C) Timing of first modified or
unmodified statement or coupon book after transition was added, and
paragraphs 1 through 3 under that heading were added.
xix. The heading 41(f) Modified periodic statements and coupon books
for certain consumers in bankruptcy was added, and paragraphs 1 through
6 under that heading were added.
xx. The heading 41(f)(3) Chapter 12 and chapter 13 consumers was
added, and paragraphs 1 through 3 under that heading were added.
xxi. The heading 41(f)(3)(ii) Amount due was added, and paragraph 1
under that heading was added.
xxii. The heading 41(f)(3)(iii) Explanation of amount due was added,
and paragraph 1 under that heading was added.
xxiii. The heading 41(f)(3)(v) Pre-petition arrearage was added, and
paragraph 1 under that heading was added.
xxiv. The heading 41(f)(4) Multiple obligors was added, and
paragraphs 1 and 2 under that heading were added.
For the convenience of the user, the added and revised text is set
forth as follows:
Sec. Supplement I to Part 1026--Official Interpretations
* * * * *
Sec. 1026.41--Periodic Statements for Residential Mortgage Loans.
* * * * *
* * * * *
41(e) Exemptions.
* * * * *
41(e)(5) Certain consumers in bankruptcy.
1. Consumer's representative. If an agent of the consumer, such as
the consumer's bankruptcy counsel, submits a request under Sec.
1026.41(e)(5)(i)(B)(1) or (e)(5)(ii), the request is deemed to be
submitted by the consumer.
[[Page 942]]
2. Multiple requests. A consumer's most recent written request under
Sec. 1026.41(e)(5)(i)(B)(1) or (e)(5)(ii) that the servicer cease or
continue, as applicable, providing a periodic statement or coupon book
determines whether the exemption in Sec. 1026.41(e)(5)(i) applies.
3. Effective upon receipt. A consumer's written request under Sec.
1026.41(e)(5)(i)(B)(1) or (e)(5)(ii) is effective as of the date of
receipt by the servicer.
4. Bankruptcy case revived. If a consumer's bankruptcy case is
revived, for example, if the court reinstates a previously dismissed
case or reopens a case, Sec. 1026.41(e)(5) may apply again, including
the timing requirements in Sec. 1026.41(e)(5)(iv).
41(e)(5)(i) Exemption.
1. Multiple obligors. When two or more consumers are joint obligors
with primary liability on a mortgage loan subject to Sec. 1026.41,
Sec. 1026.41(e)(5)(i) applies if any one of the consumers meets its
criteria. For example, assume that two spouses jointly own a home and
are primary obligors on the mortgage loan. One spouse files for chapter
13 bankruptcy and has a bankruptcy plan that provides for surrendering
the dwelling that secures the mortgage loan. In part, Sec.
1026.41(e)(5)(i) exempts the servicer from providing a periodic
statement with regard to that mortgage loan, unless one of the spouses
requests in writing that the servicer provide a periodic statement or
coupon book pursuant to Sec. 1026.41(e)(5)(ii). If either spouse,
including the one who is not a debtor in bankruptcy, submits a written
request to receive a periodic statement or coupon book, the servicer
must provide a periodic statement or coupon book for that mortgage loan
account.
Paragraph 41(e)(5)(i)(B)(2).
1. Bankruptcy plan. For purposes of Sec. 1026.41(e)(5)(i)(B)(2),
bankruptcy plan refers to the consumer's most recently filed bankruptcy
plan under the applicable provisions of title 11 of the United States
Code, regardless of whether the court overseeing the consumer's
bankruptcy case has confirmed or approved the plan.
Paragraph 41(e)(5)(i)(B)(4).
1. Statement of intention. For purposes of Sec.
1026.41(e)(5)(i)(B)(4), the statement of intention refers to the
consumer's most recently filed statement of intention. For example, if a
consumer files a statement of intention on June 1 identifying an intent
to surrender the dwelling securing the mortgage loan but files an
amended statement of intention on June 15 identifying an intent to
retain the dwelling, the consumer's June 15 statement of intention is
the relevant filing for purposes of Sec. 1026.41(e)(5)(i)(B)(4).
41(e)(5)(ii) Reaffirmation or consumer request to receive statement
or coupon book.
1. Form of periodic statement or coupon book. Section
1026.41(e)(5)(ii) generally requires a servicer, notwithstanding Sec.
1026.41(e)(5)(i), to resume providing a periodic statement or coupon
book if the consumer in bankruptcy reaffirms personal liability for the
mortgage loan or any consumer on the mortgage loan requests in writing
that the servicer provide a periodic statement or coupon book. Whether a
servicer provides a periodic statement or coupon book as modified by
Sec. 1026.41(f) or an unmodified periodic statement or coupon book
depends on whether or not Sec. 1026.41(f) applies to that mortgage loan
at that time. For example, Sec. 1026.41(f) does not apply with respect
to a mortgage loan once the consumer has reaffirmed personal liability;
therefore, following a consumer's reaffirmation, a servicer generally
would provide a periodic statement or coupon book that complies with
Sec. 1026.41 but without the modifications set forth in Sec.
1026.41(f). See comment 41(f)-6. Section 1026.41(f) does apply, however,
with respect to a mortgage loan following a consumer's written request
to receive a periodic statement or coupon book, so long as any consumer
on the mortgage loan remains in bankruptcy or has discharged personal
liability for the mortgage loan; accordingly, following that written
request, a servicer must provide a periodic statement or coupon book
that includes the modifications set forth in Sec. 1026.41(f).
41(e)(5)(iv) Timing of compliance following transition.
41(e)(5)(iv)(A) Triggering events for transitioning to modified and
unmodified periodic statements.
1. Section 1026.41(f) becomes applicable or ceases to apply. Section
1026.41(e)(5)(iv) sets forth the time period in which a servicer must
provide a periodic statement or coupon book for the first time after a
mortgage loan either becomes subject to the requirements of Sec.
1026.41(f) or ceases to be subject to the requirements of Sec.
1026.41(f). A mortgage loan becomes subject to the requirements of Sec.
1026.41(f) when, for example, any consumer on the mortgage loan becomes
a debtor in bankruptcy or discharges personal liability for the mortgage
loan. A mortgage loan may cease to be subject to the requirements of
Sec. 1026.41(f) when, for example, the consumer in bankruptcy reaffirms
personal liability for a mortgage loan or the consumer's bankruptcy case
is closed or dismissed without the consumer having discharged personal
liability for the mortgage loan. See comment 41(f)-6.
2. Servicer ceases to qualify for an exemption. Section
1026.41(e)(5)(iv) sets forth the time period in which a servicer must
provide a periodic statement or coupon book for the first time after a
servicer ceases to qualify for an exemption pursuant to Sec.
1026.41(e)(5)(i) with respect to a mortgage loan. A servicer ceases to
qualify for an exemption pursuant to Sec. 1026.41(e)(5)(i) with respect
to a mortgage loan when, for example:
[[Page 943]]
i. The consumer's bankruptcy case is dismissed or closed without the
consumer having discharged personal liability for the mortgage loan;
ii. The consumer files an amended bankruptcy plan or statement of
intention that provides, as applicable, for the maintenance of payments
due under the mortgage loan and the payment of pre-petition arrearage or
that the consumer will retain the dwelling securing the mortgage loan;
iii. A consumer makes a partial or periodic payment on the mortgage
loan despite the consumer in bankruptcy having filed a statement of
intention identifying an intent to surrender the dwelling securing the
mortgage loan, thus making Sec. 1026.41(e)(5)(i)(B)(4) inapplicable;
iv. The consumer in bankruptcy reaffirms personal liability for the
mortgage loan; or
v. The consumer submits a written request pursuant to Sec.
1026.41(e)(ii) that the servicer resume providing a periodic statement
or coupon book.
41(e)(5)(iv)(B) Transitional single-billing-cycle exemption.
1. An exemption under Sec. 1026.41(e)(5)(iv) applies for only the
first billing cycle that occurs after one of the events listed in Sec.
1026.41(e)(5)(iv)(A) occurs. If a servicer is required to provide a
periodic statement or coupon book, the servicer must do so beginning
with the next billing cycle in accordance with the timing provisions of
Sec. 1026.41(e)(5)(iv)(C).
41(e)(5)(iv)(C) Timing of first modified or unmodified statement or
coupon book after transition.
1. Reasonably prompt time. Section 1026.41(e)(5)(iv)(C) requires
that, when one of the events listed in Sec. 1026.41(e)(5)(iv)(A)
occurs, a servicer must provide the next periodic statement or coupon
book by delivering or placing it in the mail within a reasonably prompt
time after the next payment due date, or the end of any courtesy period
for the payment's corresponding billing cycle, that is more than 14 days
after the date on which the applicable event listed in Sec.
1026.41(e)(5)(iv)(A) occurs. Delivering, emailing, or placing the
periodic statement or coupon book in the mail within four days after the
payment due date or the end of the courtesy period generally would be
considered reasonably prompt. See comment 41(b)-1.
2. Subsequent periodic statements or coupon books. Section
1026.41(e)(5)(iv)(C) applies to the timing of only the first periodic
statement or coupon book a servicer provides after one of the events
listed in Sec. 1026.41(e)(5)(iv)(A) occurs. For subsequent billing
cycles, a servicer must provide a periodic statement or coupon book in
accordance with the timing requirements of Sec. 1026.41(a)(2) and (b),
as applicable.
3. Duplicate coupon books not required. With respect to coupon
books, Sec. 1026.41 requires a servicer to provide a new coupon book
after one of the events listed in Sec. 1026.41(e)(5)(iv)(A) occurs only
to the extent the servicer has not previously provided the consumer with
a coupon book that covered the upcoming billing cycle.
* * * * *
41(f) Modified periodic statements and coupon books for certain
consumers in bankruptcy.
1. Compliance after the bankruptcy case ends. Except as provided in
Sec. 1026.41(e)(5), Sec. 1026.41(f) applies with regard to a mortgage
loan for which any consumer with primary liability is a debtor in a case
under title 11 of the United States Code. After the debtor exits
bankruptcy, Sec. 1026.41(f) continues to apply if the consumer has
discharged personal liability for the mortgage loan, but Sec.
1026.41(f) does not apply if the consumer has reaffirmed personal
liability for the mortgage loan or otherwise has not discharged personal
liability for the mortgage loan.
2. Terminology. With regard to a periodic statement provided under
Sec. 1026.41(f), a servicer may use terminology other than that found
on the sample periodic statements in appendix H-30, so long as the new
terminology is commonly understood. See comment 41(d)-3. For example, a
servicer may take into account terminology appropriate for consumers in
bankruptcy and refer to the ``amount due'' identified in Sec.
1026.41(d)(1), as the ``payment amount.'' Similarly, a servicer may
refer to an amount past due identified in Sec. 1026.41(d)(2)(iii) as
``past unpaid amount.'' Additionally, a servicer may refer to the
delinquency information required by Sec. 1026.41(d)(8) as an ``account
history,'' and to the amount needed to bring the loan current, referred
to in Sec. 1026.41(d)(8)(vi) as ``the total payment amount needed to
bring the account current,'' as ``unpaid amount.''
3. Other periodic statement requirements continue to apply. The
requirements of Sec. 1026.41, including the content and layout
requirements of Sec. 1026.41(d), apply unless modified expressly by
Sec. 1026.41(e)(5) or (f). For example, the requirement under Sec.
1026.41(d)(3) to disclose a past payment breakdown applies without
modification with respect to a periodic statement provided to a consumer
in bankruptcy.
4. Further modifications. A periodic statement or coupon book
provided under Sec. 1026.41(f) may be modified as necessary to
facilitate compliance with title 11 of the United States Code, the
Federal Rules of Bankruptcy Procedure, court orders, and local rules,
guidelines, and standing orders. For example, a periodic statement or
coupon book may include additional disclosures or disclaimers not
required under Sec. 1026.41(f) but
[[Page 944]]
that are related to the consumer's status as a debtor in bankruptcy or
that advise the consumer how to submit a written request under Sec.
1026.41(e)(5)(i)(B)(1). See comment 41(f)(3)-1.ii for a discussion of
the treatment of a bankruptcy plan that modifies the terms of the
mortgage loan, such as by reducing the outstanding balance of the
mortgage loan or altering the applicable interest rate.
5. Commencing compliance. A servicer must begin to provide a
periodic statement or coupon book that complies with paragraph (f) of
this section within the timeframe set forth in Sec. 1026.41(e)(5)(iv).
6. Reaffirmation. For purposes of Sec. 1026.41(f), a consumer who
has reaffirmed personal liability for a mortgage loan is not considered
to be a debtor in bankruptcy.
41(f)(3) Chapter 12 and chapter 13 consumers.
1. Pre-petition payments and post-petition payments. i. For purposes
of Sec. 1026.41(f)(3), pre-petition payments are payments made to cure
the consumer's pre-bankruptcy defaults, and post-petition payments are
payments made to satisfy the mortgage loan's periodic payments as they
come due after the bankruptcy case is filed. For example, assume a
consumer is $3,600 in arrears as of the bankruptcy filing date on a
mortgage loan requiring monthly periodic payments of $2,000. The
consumer's most recently filed bankruptcy plan requires the consumer to
make payments of $100 each month for 36 months to pay the pre-bankruptcy
arrearage, and $2,000 each month to satisfy the monthly periodic
payments. Assuming the consumer makes the payments according to the
plan, the $100 payments are the pre-petition payments and the $2,000
payments are the post-petition payments for purposes of the disclosures
required under Sec. 1026.41(f)(3).
ii. If a consumer is a debtor in a case under chapter 12 or if a
consumer's bankruptcy plan modifies the terms of the mortgage loan, such
as by reducing the outstanding balance of the mortgage loan or altering
the applicable interest rate, the disclosures under Sec. 1026.41(d)(1)
and (2) and (f)(3)(ii) and (iii) may disclose either the amount payable
under the original terms of the mortgage loan, the amount payable under
the remaining secured portion of the adjusted mortgage loan, or a
statement that the consumer should contact the trustee or the consumer's
attorney with any questions about the amount payable. In such cases, the
remaining disclosures under Sec. 1026.41(d) or (f)(3), as applicable,
may be limited to how payments are applied to the remaining secured
portion of the adjusted mortgage loan.
2. Post-petition fees and charges. For purposes of Sec.
1026.41(f)(3), post-petition fees and charges are those fees and charges
imposed after the bankruptcy case is filed. To the extent that the court
overseeing the consumer's bankruptcy case requires such fees and charges
to be included as an amendment to a servicer's proof of claim, a
servicer may include such fees and charges in the balance of the pre-
petition arrearage under Sec. 1026.41(f)(3)(v)(C) rather than treating
them as post-petition fees and charges for purposes of Sec.
1026.41(f)(3).
3. First statement after exemption terminates. Section Sec.
1026.41(f)(3)(iii) through (v) requires, in part, the disclosure of
certain information regarding account activity that has occurred since
the last statement. For purposes of the first periodic statement
provided to the consumer following termination of an exemption under
Sec. 1026.41(e), those disclosures regarding account activity that has
occurred since the last statement may be limited to account activity
since the last payment due date that occurred while the exemption was in
effect. See comment 41(d)-5.
41(f)(3)(ii) Amount due.
1. Amount due. The amount due under Sec. 1026.41(d)(1) is not
required to include any amounts other than post-petition payments the
consumer is required to make under the terms of a bankruptcy plan,
including any past due post-petition payments, and post-petition fees
and charges that a servicer has imposed. The servicer is not required to
include in the amount due any pre-petition payments due under a
bankruptcy plan or other amounts payable pursuant to a court order. The
servicer is not required to include in the amount due any post-petition
fees and charges that the servicer has not imposed. A servicer that
defers collecting a fee or charge until after complying with the Federal
Rule of Bankruptcy Procedure 3002.1 procedures, and thus after a
potential court determination on whether the fee or charge is allowed,
is not required to disclose the fee or charge until complying with such
procedures. However, a servicer may include in the amount due other
amounts due to the servicer that are not post-petition payments or fees
or charges, such as amounts due under an agreed order, provided those
other amounts are also disclosed in the explanation of amount due and
transaction activity.
41(f)(3)(iii) Explanation of amount due.
1. Explanation of amount due. The explanation of amount due under
Sec. 1026.41(d)(2) is not required to include any amounts other than
the post-petition payments, including the amount of any past due post-
petition payments and post-petition fees and charges that a servicer has
imposed. Consistent with Sec. 1026.41(d)(3)(i), the post-petition
payments must be broken down by the amount, if any, that will be applied
to principal, interest, and escrow. The servicer is not required to
disclose, as part of the explanation of amount due, any pre-petition
payments or the amount of the consumer's pre-bankruptcy arrearage.
However, a servicer may identify other amounts due to the servicer
provided those amounts are also disclosed in
[[Page 945]]
the amount due and transaction activity. See comment 41(d)-4.
41(f)(3)(v) Pre-petition arrearage.
1. Pre-petition arrearage. If the pre-petition arrearage is subject
to dispute, or has not yet been determined by the servicer, the periodic
statement may include a statement acknowledging the unresolved amount of
the pre-petition arrearage. A servicer may omit the information required
by Sec. 1026.41(f)(3)(v) from the periodic statement until such time as
the servicer has had a reasonable opportunity to determine the amount of
the pre-petition arrearage. The servicer may not omit the information
required by Sec. 1026.41(f)(3)(v) from the periodic statement after the
date that the bankruptcy court has fixed for filing proofs of claim in
the consumer's bankruptcy case.
41(f)(4) Multiple obligors.
1. Modified statements. When two or more consumers are joint
obligors with primary liability on a mortgage loan subject to Sec.
1026.41, a servicer may send the periodic statement to any one of the
primary obligors. See comment 41(a)-1. Section 1026.41(f)(4) provides
that a servicer may provide a modified statement under Sec. 1026.41(f),
if applicable, to any or all of the primary obligors, even if a primary
obligor to whom the servicer provides the modified statement is not a
debtor in bankruptcy. The servicer need not provide an unmodified
statement to any of the primary obligors. For example, assume that two
spouses jointly own a home and are both primarily liable on the mortgage
loan. One spouse files for chapter 13 bankruptcy, and that spouse's
chapter 13 bankruptcy plan provides that the same spouse will retain the
home by making pre-petition and post-petition payments. The servicer
complies with Sec. 1026.41 by providing the modified periodic statement
under Sec. 1026.41(f) to either spouse.
2. Obligors in different chapters of bankruptcy. If two or more
consumers are joint obligors with primary liability on a mortgage loan
subject to Sec. 1026.41 and are debtors under different chapters of
bankruptcy, only one of which is subject to Sec. 1026.41(f)(3), a
servicer may, but need not, include the modifications set forth in Sec.
1026.41(f)(3). For example, assume one joint obligor is a debtor in a
case under chapter 7 and another joint obligor is a debtor in a case
under chapter 13, and that the servicer is not exempt from the periodic
statement requirement under Sec. 1026.41(e)(5). The periodic statement
or coupon book is subject to the modifications set forth in Sec.
1026.41(f)(1) and (2), but the servicer may determine whether it is
appropriate to include the modifications set forth in Sec.
1026.41(f)(3).
* * * * *
PART 1030_TRUTH IN SAVINGS (REGULATION DD)--Table of Contents
Sec.
1030.1 Authority, purpose, coverage, and effect on state laws.
1030.2 Definitions.
1030.3 General disclosure requirements.
1030.4 Account disclosures.
1030.5 Subsequent disclosures.
1030.6 Periodic statement disclosures.
1030.7 Payment of interest.
1030.8 Advertising.
1030.9 Enforcement and record retention.
1030.10 [Reserved]
1030.11 Additional disclosure requirements for overdraft services.
Appendix A to Part 1030--Annual Percentage Yield Calculation
Appendix B to Part 1030--Model Clauses and Sample Forms
Appendix C to Part 1030--Effect on State Laws
Appendix D to Part 1030--Issuance of Official Interpretations
Supplement I to Part 1030--Official Interpretations
Authority: 12 U.S.C. 4302-4304, 4308, 5512, 5581.
Source: 76 FR 79278, Dec. 21, 2011, unless otherwise noted.
Sec. 1030.1 Authority, purpose, coverage, and effect on state laws.
(a) Authority. This part, known as Regulation DD, is issued by the
Bureau of Consumer Financial Protection to implement the Truth in
Savings Act of 1991 (the act), contained in the Federal Deposit
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 3201 et seq.,
Public Law 102-242, 105 Stat. 2236), as amended by title X, section
1100B of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Pub. L. 111-203, 124 Stat. 1376). Information-collection requirements
contained in this part have been approved by the Office of Management
and Budget under the provisions of 44 U.S.C. 3501 et seq. and have been
assigned OMB No. 3170-0004.
(b) Purpose. The purpose of this part is to enable consumers to make
informed decisions about accounts at depository institutions. This part
requires depository institutions to provide disclosures so that
consumers can make meaningful comparisons among depository institutions.
(c) Coverage. This part applies to depository institutions except
for credit
[[Page 946]]
unions. In addition, the advertising rules in Sec. 1030.8 of this part
apply to any person who advertises an account offered by a depository
institution, including deposit brokers.
(d) Effect on state laws. State law requirements that are
inconsistent with the requirements of the act and this part are
preempted to the extent of the inconsistency. Additional information on
inconsistent state laws and the procedures for requesting a preemption
determination from the Bureau are set forth in appendix C of this part.
Sec. 1030.2 Definitions.
For purposes of this part, the following definitions apply:
(a) Account means a deposit account at a depository institution that
is held by or offered to a consumer. It includes time, demand, savings,
and negotiable order of withdrawal accounts. For purposes of the
advertising requirements in Sec. 1030.8 of this part, the term also
includes an account at a depository institution that is held by or on
behalf of a deposit broker, if any interest in the account is held by or
offered to a consumer.
(b) Advertisement means a commercial message, appearing in any
medium, that promotes directly or indirectly:
(1) The availability or terms of, or a deposit in, a new account;
and
(2) For purposes of Sec. Sec. 1030.8(a) and 1030.11 of this part,
the terms of, or a deposit in, a new or existing account.
(c) Annual percentage yield means a percentage rate reflecting the
total amount of interest paid on an account, based on the interest rate
and the frequency of compounding for a 365-day period and calculated
according to the rules in appendix A of this part.
(d) Average daily balance method means the application of a periodic
rate to the average daily balance in the account for the period. The
average daily balance is determined by adding the full amount of
principal in the account for each day of the period and dividing that
figure by the number of days in the period.
(e) Bureau means the Bureau of Consumer Financial Protection.
(f) Bonus means a premium, gift, award, or other consideration worth
more than $10 (whether in the form of cash, credit, merchandise, or any
equivalent) given or offered to a consumer during a year in exchange for
opening, maintaining, renewing, or increasing an account balance. The
term does not include interest, other consideration worth $10 or less
given during a year, the waiver or reduction of a fee, or the absorption
of expenses.
(g) Business day means a calendar day other than a Saturday, a
Sunday, or any of the legal public holidays specified in 5 U.S.C.
6103(a).
(h) Consumer means a natural person who holds an account primarily
for personal, family, or household purposes, or to whom such an account
is offered. The term does not include a natural person who holds an
account for another in a professional capacity.
(i) Daily balance method means the application of a daily periodic
rate to the full amount of principal in the account each day.
(j) Depository institution and institution mean an institution
defined in section 19(b)(1)(A)(i) through (vi) of the Federal Reserve
Act (12 U.S.C. 461), except credit unions defined in section
19(b)(1)(A)(iv).
(k) Deposit broker means any person who is a deposit broker as
defined in section 29(g) of the Federal Deposit Insurance Act (12 U.S.C.
1831f(g)).
(l) Fixed-rate account means an account for which the institution
contracts to give at least 30 calendar days advance written notice of
decreases in the interest rate.
(m) Grace period means a period following the maturity of an
automatically renewing time account during which the consumer may
withdraw funds without being assessed a penalty.
(n) Interest means any payment to a consumer or to an account for
the use of funds in an account, calculated by application of a periodic
rate to the balance. The term does not include the payment of a bonus or
other consideration worth $10 or less given during a year, the waiver or
reduction of a fee, or the absorption of expenses.
(o) Interest rate means the annual rate of interest paid on an
account which does not reflect compounding. For the purposes of the
account disclosures in Sec. 1030.4(b)(1)(i) of this part, the
[[Page 947]]
interest rate may, but need not, be referred to as the ``annual
percentage rate'' in addition to being referred to as the ``interest
rate.''
(p) Passbook savings account means a savings account in which the
consumer retains a book or other document in which the institution
records transactions on the account.
(q) Periodic statement means a statement setting forth information
about an account (other than a time account or passbook savings account)
that is provided to a consumer on a regular basis four or more times a
year.
(r) State means a state, the District of Columbia, the commonwealth
of Puerto Rico, and any territory or possession of the United States.
(s) Stepped-rate account means an account that has two or more
interest rates that take effect in succeeding periods and are known when
the account is opened.
(t) Tiered-rate account means an account that has two or more
interest rates that are applicable to specified balance levels.
(u) Time account means an account with a maturity of at least seven
days in which the consumer generally does not have a right to make
withdrawals for six days after the account is opened, unless the deposit
is subject to an early withdrawal penalty of at least seven days'
interest on amounts withdrawn.
(v) Variable-rate account means an account in which the interest
rate may change after the account is opened, unless the institution
contracts to give at least 30 calendar days advance written notice of
rate decreases.
Sec. 1030.3 General disclosure requirements.
(a) Form. Depository institutions shall make the disclosures
required by Sec. Sec. 1030.4 through 1030.6 of this part, as
applicable, clearly and conspicuously, in writing, and in a form the
consumer may keep. The disclosures required by this part may be provided
to the consumer in electronic form, subject to compliance with the
consumer consent and other applicable provisions of the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C.
7001 et seq.). The disclosures required by Sec. Sec. 1030.4(a)(2) and
1030.8 may be provided to the consumer in electronic form without regard
to the consumer consent or other provisions of the E-Sign Act in the
circumstances set forth in those sections. Disclosures for each account
offered by an institution may be presented separately or combined with
disclosures for the institution's other accounts, as long as it is clear
which disclosures are applicable to the consumer's account.
(b) General. The disclosures shall reflect the terms of the legal
obligation of the account agreement between the consumer and the
depository institution. Disclosures may be made in languages other than
English, provided the disclosures are available in English upon request.
(c) Relation to Regulation E (12 CFR Part 1005). Disclosures
required by and provided in accordance with the Electronic Fund Transfer
Act (15 U.S.C. 1693 et seq.) and its implementing Regulation E (12 CFR
Part 1005) that are also required by this part may be substituted for
the disclosures required by this part.
(d) Multiple consumers. If an account is held by more than one
consumer, disclosures may be made to any one of the consumers.
(e) Oral response to inquiries. In an oral response to a consumer's
inquiry about interest rates payable on its accounts, the depository
institution shall state the annual percentage yield. The interest rate
may be stated in addition to the annual percentage yield. No other rate
may be stated.
(f) Rounding and accuracy rules for rates and yields--(1) Rounding.
The annual percentage yield, the annual percentage yield earned, and the
interest rate shall be rounded to the nearest one-hundredth of one
percentage point (.01%) and expressed to two decimal places. For account
disclosures, the interest rate may be expressed to more than two decimal
places.
(2) Accuracy. The annual percentage yield (and the annual percentage
yield earned) will be considered accurate if not more than one-twentieth
of one percentage point (.05%) above or below the annual percentage
yield (and the
[[Page 948]]
annual percentage yield earned) determined in accordance with the rules
in appendix A of this part.
Sec. 1030.4 Account disclosures.
(a) Delivery of account disclosures--(1) Account opening--(i)
General. A depository institution shall provide account disclosures to a
consumer before an account is opened or a service is provided, whichever
is earlier. An institution is deemed to have provided a service when a
fee required to be disclosed is assessed. Except as provided in
paragraph (a)(1)(ii) of this section, if the consumer is not present at
the institution when the account is opened or the service is provided
and has not already received the disclosures, the institution shall mail
or deliver the disclosures no later than 10 business days after the
account is opened or the service is provided, whichever is earlier.
(ii) Timing of electronic disclosures. If a consumer who is not
present at the institution uses electronic means (for example, an
Internet Web site) to open an account or request a service, the
disclosures required under paragraph (a)(1) of this section must be
provided before the account is opened or the service is provided.
(2) Requests. (i) A depository institution shall provide account
disclosures to a consumer upon request. If a consumer who is not present
at the institution makes a request, the institution shall mail or
deliver the disclosures within a reasonable time after it receives the
request and may provide the disclosures in paper form, or electronically
if the consumer agrees.
(ii) In providing disclosures upon request, the institution may:
(A) Specify an interest rate and annual percentage yield that were
offered within the most recent seven calendar days; state that the rate
and yield are accurate as of an identified date; and provide a telephone
number consumers may call to obtain current rate information.
(B) State the maturity of a time account as a term rather than a
date.
(b) Content of account disclosures. Account disclosures shall
include the following, as applicable:
(1) Rate information--(i) Annual percentage yield and interest rate.
The ``annual percentage yield'' and the ``interest rate,'' using those
terms, and for fixed-rate accounts the period of time the interest rate
will be in effect.
(ii) Variable rates. For variable-rate accounts:
(A) The fact that the interest rate and annual percentage yield may
change;
(B) How the interest rate is determined;
(C) The frequency with which the interest rate may change; and
(D) Any limitation on the amount the interest rate may change.
(2) Compounding and crediting--(i) Frequency. The frequency with
which interest is compounded and credited.
(ii) Effect of closing an account. If consumers will forfeit
interest if they close the account before accrued interest is credited,
a statement that interest will not be paid in such cases.
(3) Balance information--(i) Minimum balance requirements. (A) Any
minimum balance required to:
(1) Open the account;
(2) Avoid the imposition of a fee; or
(3) Obtain the annual percentage yield disclosed.
(B) Except for the balance to open the account, the disclosure shall
state how the balance is determined for these purposes.
(ii) Balance computation method. An explanation of the balance
computation method specified in Sec. 1030.7 of this part used to
calculate interest on the account.
(iii) When interest begins to accrue. A statement of when interest
begins to accrue on noncash deposits.
(4) Fees. The amount of any fee that may be imposed in connection
with the account (or an explanation of how the fee will be determined)
and the conditions under which the fee may be imposed.
(5) Transaction limitations. Any limitations on the number or dollar
amount of withdrawals or deposits.
(6) Features of time accounts. For time accounts:
(i) Time requirements. The maturity date.
(ii) Early withdrawal penalties. A statement that a penalty will or
may be imposed for early withdrawal, how
[[Page 949]]
it is calculated, and the conditions for its assessment.
(iii) Withdrawal of interest prior to maturity. If compounding
occurs during the term and interest may be withdrawn prior to maturity,
a statement that the annual percentage yield assumes interest remains on
deposit until maturity and that a withdrawal will reduce earnings. For
accounts with a stated maturity greater than one year that do not
compound interest on an annual or more frequent basis, that require
interest payouts at least annually, and that disclose an APY determined
in accordance with section E of appendix A of this part, a statement
that interest cannot remain on deposit and that payout of interest is
mandatory.
(iv) Renewal policies. A statement of whether or not the account
will renew automatically at maturity. If it will, a statement of whether
or not a grace period will be provided and, if so, the length of that
period must be stated. If the account will not renew automatically, a
statement of whether interest will be paid after maturity if the
consumer does not renew the account must be stated.
(7) Bonuses. The amount or type of any bonus, when the bonus will be
provided, and any minimum balance and time requirements to obtain the
bonus.
(c) Notice to existing account holders--(1) Notice of availability
of disclosures. Depository institutions shall provide a notice to
consumers who receive periodic statements and who hold existing accounts
of the type offered by the institution on June 21, 1993. The notice
shall be included on or with the first periodic statement sent on or
after June 21, 1993 (or on or with the first periodic statement for a
statement cycle beginning on or after that date). The notice shall state
that consumers may request account disclosures containing terms, fees,
and rate information for their account. In responding to such a request,
institutions shall provide disclosures in accordance with paragraph
(a)(2) of this section.
(2) Alternative to notice. As an alternative to the notice described
in paragraph (c)(1) of this section, institutions may provide account
disclosures to consumers. The disclosures may be provided either with a
periodic statement or separately, but must be sent no later than when
the periodic statement described in paragraph (c)(1) is sent.
Sec. 1030.5 Subsequent disclosures.
(a) Change in terms--(1) Advance notice required. A depository
institution shall give advance notice to affected consumers of any
change in a term required to be disclosed under Sec. 1030.4(b) of this
part if the change may reduce the annual percentage yield or adversely
affect the consumer. The notice shall include the effective date of the
change. The notice shall be mailed or delivered at least 30 calendar
days before the effective date of the change.
(2) No notice required. No notice under this section is required
for:
(i) Variable-rate changes. Changes in the interest rate and
corresponding changes in the annual percentage yield in variable-rate
accounts.
(ii) Check printing fees. Changes in fees assessed for check
printing.
(iii) Short-term time accounts. Changes in any term for time
accounts with maturities of one month or less.
(b) Notice before maturity for time accounts longer than one month
that renew automatically. For time accounts with a maturity longer than
one month that renew automatically at maturity, institutions shall
provide the disclosures described below before maturity. The disclosures
shall be mailed or delivered at least 30 calendar days before maturity
of the existing account. Alternatively, the disclosures may be mailed or
delivered at least 20 calendar days before the end of the grace period
on the existing account, provided a grace period of at least five
calendar days is allowed.
(1) Maturities of longer than one year. If the maturity is longer
than one year, the institution shall provide account disclosures set
forth in Sec. 1030.4(b) of this part for the new account, along with
the date the existing account matures. If the interest rate and annual
percentage yield that will be paid for the new account are unknown when
disclosures are provided, the institution shall state that those rates
have not yet been determined, the date when they will be determined, and
a telephone number consumers may call to
[[Page 950]]
obtain the interest rate and the annual percentage yield that will be
paid for the new account.
(2) Maturities of one year or less but longer than one month. If the
maturity is one year or less but longer than one month, the institution
shall either:
(i) Provide disclosures as set forth in paragraph (b)(1) of this
section; or
(ii) Disclose to the consumer:
(A) The date the existing account matures and the new maturity date
if the account is renewed;
(B) The interest rate and the annual percentage yield for the new
account if they are known (or that those rates have not yet been
determined, the date when they will be determined, and a telephone
number the consumer may call to obtain the interest rate and the annual
percentage yield that will be paid for the new account); and
(C) Any difference in the terms of the new account as compared to
the terms required to be disclosed under Sec. 1030.4(b) of this part
for the existing account.
(c) Notice before maturity for time accounts longer than one year
that do not renew automatically. For time accounts with a maturity
longer than one year that do not renew automatically at maturity,
institutions shall disclose to consumers the maturity date and whether
interest will be paid after maturity. The disclosures shall be mailed or
delivered at least 10 calendar days before maturity of the existing
account.
Sec. 1030.6 Periodic statement disclosures.
(a) General rule. If a depository institution mails or delivers a
periodic statement, the statement shall include the following
disclosures:
(1) Annual percentage yield earned. The ``annual percentage yield
earned'' during the statement period, using that term, calculated
according to the rules in appendix A of this part.
(2) Amount of interest. The dollar amount of interest earned during
the statement period.
(3) Fees imposed. Fees required to be disclosed under Sec.
1030.4(b)(4) of this part that were debited to the account during the
statement period. The fees shall be itemized by type and dollar amounts.
Except as provided in Sec. 1030.11(a)(1) of this part, when fees of the
same type are imposed more than once in a statement period, a depository
institution may itemize each fee separately or group the fees together
and disclose a total dollar amount for all fees of that type.
(4) Length of period. The total number of days in the statement
period, or the beginning and ending dates of the period.
(5) Aggregate fee disclosure. If applicable, the total overdraft and
returned item fees required to be disclosed by Sec. 1030.11(a).
(b) Special rule for average daily balance method. In making the
disclosures described in paragraph (a) of this section, institutions
that use the average daily balance method and that calculate interest
for a period other than the statement period shall calculate and
disclose the annual percentage yield earned and amount of interest
earned based on that period rather than the statement period. The
information in paragraph (a)(4) of this section shall be stated for that
period as well as for the statement period.
Sec. 1030.7 Payment of interest.
(a) Permissible methods--(1) Balance on which interest is
calculated. Institutions shall calculate interest on the full amount of
principal in an account for each day by use of either the daily balance
method or the average daily balance method. Institutions shall calculate
interest by use of a daily rate of at least \1/365\ of the interest
rate. In a leap year a daily rate of \1/366\ of the interest rate may be
used.
(2) Determination of minimum balance to earn interest. An
institution shall use the same method to determine any minimum balance
required to earn interest as it uses to determine the balance on which
interest is calculated. An institution may use an additional method that
is unequivocally beneficial to the consumer.
(b) Compounding and crediting policies. This section does not
require institutions to compound or credit interest at any particular
frequency.
(c) Date interest begins to accrue. Interest shall begin to accrue
not later than the business day specified for interest-bearing accounts
in section 606
[[Page 951]]
of the Expedited Funds Availability Act (12 U.S.C. 4005 et seq.) and the
Board of Governors of the Federal Reserve System's implementing
Regulation CC (12 CFR part 229). Interest shall accrue until the day
funds are withdrawn.
Sec. 1030.8 Advertising.
(a) Misleading or inaccurate advertisements. An advertisement shall
not:
(1) Be misleading or inaccurate or misrepresent a depository
institution's deposit contract; or
(2) Refer to or describe an account as ``free'' or ``no cost'' (or
contain a similar term) if any maintenance or activity fee may be
imposed on the account. The word ``profit'' shall not be used in
referring to interest paid on an account.
(b) Permissible rates. If an advertisement states a rate of return,
it shall state the rate as an ``annual percentage yield'' using that
term. (The abbreviation ``APY'' may be used provided the term ``annual
percentage yield'' is stated at least once in the advertisement.) The
advertisement shall not state any other rate, except that the ``interest
rate,'' using that term, may be stated in conjunction with, but not more
conspicuously than, the annual percentage yield to which it relates.
(c) When additional disclosures are required. Except as provided in
paragraph (e) of this section, if the annual percentage yield is stated
in an advertisement, the advertisement shall state the following
information, to the extent applicable, clearly and conspicuously:
(1) Variable rates. For variable-rate accounts, a statement that the
rate may change after the account is opened.
(2) Time annual percentage yield is offered. The period of time the
annual percentage yield will be offered, or a statement that the annual
percentage yield is accurate as of a specified date.
(3) Minimum balance. The minimum balance required to obtain the
advertised annual percentage yield. For tiered-rate accounts, the
minimum balance required for each tier shall be stated in close
proximity and with equal prominence to the applicable annual percentage
yield.
(4) Minimum opening deposit. The minimum deposit required to open
the account, if it is greater than the minimum balance necessary to
obtain the advertised annual percentage yield.
(5) Effect of fees. A statement that fees could reduce the earnings
on the account.
(6) Features of time accounts. For time accounts:
(i) Time requirements. The term of the account.
(ii) Early withdrawal penalties: A statement that a penalty will or
may be imposed for early withdrawal.
(iii) Required interest payouts. For noncompounding time accounts
with a stated maturity greater than one year that do not compound
interest on an annual or more frequent basis, that require interest
payouts at least annually, and that disclose an APY determined in
accordance with section E of appendix A of this part, a statement that
interest cannot remain on deposit and that payout of interest is
mandatory.
(d) Bonuses. Except as provided in paragraph (e) of this section, if
a bonus is stated in an advertisement, the advertisement shall state the
following information, to the extent applicable, clearly and
conspicuously:
(1) The ``annual percentage yield,'' using that term;
(2) The time requirement to obtain the bonus;
(3) The minimum balance required to obtain the bonus;
(4) The minimum balance required to open the account, if it is
greater than the minimum balance necessary to obtain the bonus; and
(5) When the bonus will be provided.
(e) Exemption for certain advertisements--(1) Certain media. If an
advertisement is made through one of the following media, it need not
contain the information in paragraphs (c)(1), (c)(2), (c)(4), (c)(5),
(c)(6)(ii), (d)(4), and (d)(5) of this section:
(i) Broadcast or electronic media, such as television or radio;
(ii) Outdoor media, such as billboards; or
(iii) Telephone response machines.
(2) Indoor signs. (i) Signs inside the premises of a depository
institution (or the premises of a deposit broker) are
[[Page 952]]
not subject to paragraphs (b), (c), (d) or (e)(1) of this section.
(ii) If a sign exempt by paragraph (e)(2) of this section states a
rate of return, it shall:
(A) State the rate as an ``annual percentage yield,'' using that
term or the term ``APY.'' The sign shall not state any other rate,
except that the interest rate may be stated in conjunction with the
annual percentage yield to which it relates.
(B) Contain a statement advising consumers to contact an employee
for further information about applicable fees and terms.
(f) Additional disclosures in connection with the payment of
overdrafts. Institutions that promote the payment of overdrafts in an
advertisement shall include in the advertisement the disclosures
required by Sec. 1030.11(b) of this part.
Sec. 1030.9 Enforcement and record retention.
(a) Administrative enforcement. Section 270 of the act (12 U.S.C.
4309) contains the provisions relating to administrative sanctions for
failure to comply with the requirements of the act and this part.
Compliance is enforced by the agencies listed in that section.
(b) [Reserved]
(c) Record retention. A depository institution shall retain evidence
of compliance with this part for a minimum of two years after the date
disclosures are required to be made or action is required to be taken.
The administrative agencies responsible for enforcing this part may
require depository institutions under their jurisdiction to retain
records for a longer period if necessary to carry out their enforcement
responsibilities under section 270 of the act.
Sec. 1030.10 [Reserved]
Sec. 1030.11 Additional disclosure requirements for overdraft services.
(a) Disclosure of total fees on periodic statements--(1) General. A
depository institution must separately disclose on each periodic
statement, as applicable:
(i) The total dollar amount for all fees or charges imposed on the
account for paying checks or other items when there are insufficient or
unavailable funds and the account becomes overdrawn, using the term
``Total Overdraft Fees;'' and
(ii) The total dollar amount for all fees or charges imposed on the
account for returning items unpaid.
(2) Totals required. The disclosures required by paragraph (a)(1) of
this section must be provided for the statement period and for the
calendar year-to-date;
(3) Format requirements. The aggregate fee disclosures required by
paragraph (a) of this section must be disclosed in close proximity to
fees identified under Sec. 1030.6(a)(3), using a format substantially
similar to Sample Form B-10 in appendix B to this part.
(b) Advertising disclosures for overdraft services--(1) Disclosures.
Except as provided in paragraphs (b)(2) through (4) of this section, any
advertisement promoting the payment of overdrafts shall disclose in a
clear and conspicuous manner:
(i) The fee or fees for the payment of each overdraft;
(ii) The categories of transactions for which a fee for paying an
overdraft may be imposed;
(iii) The time period by which the consumer must repay or cover any
overdraft; and
(iv) The circumstances under which the institution will not pay an
overdraft.
(2) Communications about the payment of overdrafts not subject to
additional advertising disclosures. Paragraph (b)(1) of this section
does not apply to:
(i) An advertisement promoting a service where the institution's
payment of overdrafts will be agreed upon in writing and subject to
Regulation Z (12 CFR part 1026);
(ii) A communication by an institution about the payment of
overdrafts in response to a consumer-initiated inquiry about deposit
accounts or overdrafts. Providing information about the payment of
overdrafts in response to a balance inquiry made through an automated
system, such as a telephone response machine, ATM, or an institution's
Internet site, is not a response to a consumer-initiated inquiry for
purposes of this paragraph;
[[Page 953]]
(iii) An advertisement made through broadcast or electronic media,
such as television or radio;
(iv) An advertisement made on outdoor media, such as billboards;
(v) An ATM receipt;
(vi) An in-person discussion with a consumer;
(vii) Disclosures required by federal or other applicable law;
(viii) Information included on a periodic statement or a notice
informing a consumer about a specific overdrawn item or the amount the
account is overdrawn;
(ix) A term in a deposit account agreement discussing the
institution's right to pay overdrafts;
(x) A notice provided to a consumer, such as at an ATM, that
completing a requested transaction may trigger a fee for overdrawing an
account, or a general notice that items overdrawing an account may
trigger a fee;
(xi) Informational or educational materials concerning the payment
of overdrafts if the materials do not specifically describe the
institution's overdraft service; or
(xii) An opt-out or opt-in notice regarding the institution's
payment of overdrafts or provision of discretionary overdraft services.
(3) Exception for ATM screens and telephone response machines. The
disclosures described in paragraphs (b)(1)(ii) and (iv) of this section
are not required in connection with any advertisement made on an ATM
screen or using a telephone response machine.
(4) Exception for indoor signs. Paragraph (b)(1) of this section
does not apply to advertisements for the payment of overdrafts on indoor
signs as described by Sec. 1030.8(e)(2) of this part, provided that the
sign contains a clear and conspicuous statement that fees may apply and
that consumers should contact an employee for further information about
applicable fees and terms. For purposes of this paragraph (b)(4), an
indoor sign does not include an ATM screen.
(c) Disclosure of account balances. If an institution discloses
balance information to a consumer through an automated system, the
balance may not include additional amounts that the institution may
provide to cover an item when there are insufficient or unavailable
funds in the consumer's account, whether under a service provided in its
discretion, a service subject to Regulation Z (12 CFR part 1026), or a
service to transfer funds from another account of the consumer. The
institution may, at its option, disclose additional account balances
that include such additional amounts, if the institution prominently
state s that any such balance includes such additional amounts and, if
applicable, that additional amounts are not available for all
transactions.
Sec. Appendix A to Part 1030--Annual Percentage Yield Calculation
The annual percentage yield measures the total amount of interest
paid on an account based on the interest rate and the frequency of
compounding. The annual percentage yield reflects only interest and does
not include the value of any bonus (or other consideration worth $10 or
less) that may be provided to the consumer to open, maintain, increase
or renew an account. Interest or other earnings are not to be included
in the annual percentage yield if such amounts are determined by
circumstances that may or may not occur in the future. The annual
percentage yield is expressed as an annualized rate, based on a 365-day
year. Institutions may calculate the annual percentage yield based on a
365-day or a 366-day year in a leap year. Part I of this appendix
discusses the annual percentage yield calculations for account
disclosures and advertisements, while Part II discusses annual
percentage yield earned calculations for periodic statements.
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
In general, the annual percentage yield for account disclosures
under Sec. Sec. 1030.4 and 1030.5 and for advertising under Sec.
1030.8 is an annualized rate that reflects the relationship between the
amount of interest that would be earned by the consumer for the term of
the account and the amount of principal used to calculate that interest.
Special rules apply to accounts with tiered and stepped interest rates,
and to certain time accounts with a stated maturity greater than one
year.
A. General Rules
Except as provided in Part I.E. of this appendix, the annual
percentage yield shall be calculated by the formula shown below.
Institutions shall calculate the annual percentage yield based on the
actual number of
[[Page 954]]
days in the term of the account. For accounts without a stated maturity
date (such as a typical savings or transaction account), the calculation
shall be based on an assumed term of 365 days. In determining the total
interest figure to be used in the formula, institutions shall assume
that all principal and interest remain on deposit for the entire term
and that no other transactions (deposits or withdrawals) occur during
the term. This assumption shall not be used if an institution requires,
as a condition of the account, that consumers withdraw interest during
the term. In such a case, the interest (and annual percentage yield
calculation) shall reflect that requirement. For time accounts that are
offered in multiples of months, institutions may base the number of days
on either the actual number of days during the applicable period, or the
number of days that would occur for any actual sequence of that many
calendar months. If institutions choose to use the latter rule, they
must use the same number of days to calculate the dollar amount of
interest earned on the account that is used in the annual percentage
yield formula (where ``Interest'' is divided by ``Principal'').
The annual percentage yield is calculated by use of the following
general formula (``APY'' is used for convenience in the formulas):
APY = 100 [(1 + Interest/Principal)(365/Days in term)-1]
``Principal'' is the amount of funds assumed to have been deposited
at the beginning of the account.
``Interest'' is the total dollar amount of interest earned on the
Principal for the term of the account.
``Days in term'' is the actual number of days in the term of the
account. When the ``days in term'' is 365 (that is, where the stated
maturity is 365 days or where the account does not have a stated
maturity), the annual percentage yield can be calculated by use of the
following simple formula:
APY = 100 (Interest/Principal)
Examples
(1) If an institution pays $61.68 in interest for a 365-day year on
$1,000 deposited into a NOW account, using the general formula above,
the annual percentage yield is 6.17%:
APY = 100 [(1 + 61.68 / 1,000) (365 / 365) - 1]
APY = 6.17%
Or, using the simple formula above (since, as an account without a
stated term, the term is deemed to be 365 days):
APY = 100 (61.68 / 1,000)
APY = 6.17%
(2) If an institution pays $30.37 in interest on a $1,000 six-month
certificate of deposit (where the six-month period used by the
institution contains 182 days), using the general formula above, the
annual percentage yield is 6.18%:
APY = 100 [(1 + 30.37 / 1,000) (365 / 182) - 1]
APY = 6.18%
B. Stepped-Rate Accounts (Different Rates Apply in Succeeding Periods)
For accounts with two or more interest rates applied in succeeding
periods (where the rates are known at the time the account is opened),
an institution shall assume each interest rate is in effect for the
length of time provided for in the deposit contract.
Examples
(1) If an institution offers a $1,000 6-month certificate of deposit
on which it pays a 5% interest rate, compounded daily, for the first
three months (which contain 91 days), and a 5.5% interest rate,
compounded daily, for the next three months (which contain 92 days), the
total interest for six months is $26.68 and, using the general formula
above, the annual percentage yield is 5.39%:
APY = 100 [(1 + 26.68/1,000) (365/183) - 1]
APY = 5.39%
(2) If an institution offers a $1,000 two-year certificate of
deposit on which it pays a 6% interest rate, compounded daily, for the
first year, and a 6.5% interest rate, compounded daily, for the next
year, the total interest for two years is $133.13, and, using the
general formula above, the annual percentage yield is 6.45%:
APY = 100 [(1 + 133.13/1,000) (365/730) - 1]
APY = 6.45%
C. Variable-Rate Accounts
For variable-rate accounts without an introductory premium or
discounted rate, an institution must base the calculation only on the
initial interest rate in effect when the account is opened (or
advertised), and assume that this rate will not change during the year.
Variable-rate accounts with an introductory premium (or discount)
rate must be calculated like a stepped-rate account. Thus, an
institution shall assume that: (1) The introductory interest rate is in
effect for the length of time provided for in the deposit contract; and
(2) the variable interest rate that would have been in effect when the
account is opened or advertised (but for the introductory rate) is in
effect for the remainder of the year. If the variable rate is tied to an
index, the index-based rate in effect at the time of disclosure must be
used for the remainder of the year. If the rate is not tied to an index,
the rate in effect for existing consumers holding the same account (who
are not receiving the introductory interest rate) must be used for the
remainder of the year.
[[Page 955]]
For example, if an institution offers an account on which it pays a
7% interest rate, compounded daily, for the first three months (which,
for example, contain 91 days), while the variable interest rate that
would have been in effect when the account was opened was 5%, the total
interest for a 365-day year for a $1,000 deposit is $56.52 (based on 91
days at 7% followed by 274 days at 5%). Using the simple formula, the
annual percentage yield is 5.65%:
APY = 100 (56.52/1,000)
APY = 5.65%
D. Tiered-Rate Accounts (Different Rates Apply to Specified Balance
Levels)
For accounts in which two or more interest rates paid on the account
are applicable to specified balance levels, the institution must
calculate the annual percentage yield in accordance with the method
described below that it uses to calculate interest. In all cases, an
annual percentage yield (or a range of annual percentage yields, if
appropriate) must be disclosed for each balance tier.
For purposes of the examples discussed below, assume the following:
----------------------------------------------------------------------------------------------------------------
Interest rate (percent) Deposit balance required to earn rate
----------------------------------------------------------------------------------------------------------------
5.25....................................... Up to but not exceeding $2,500.
5.50....................................... Above $2,500 but not exceeding $15,000.
5.75....................................... Above $15,000.
----------------------------------------------------------------------------------------------------------------
Tiering Method A. Under this method, an institution pays on the full
balance in the account the stated interest rate that corresponds to the
applicable deposit tier. For example, if a consumer deposits $8,000, the
institution pays the 5.50% interest rate on the entire $8,000.
When this method is used to determine interest, only one annual
percentage yield will apply to each tier. Within each tier, the annual
percentage yield will not vary with the amount of principal assumed to
have been deposited.
For the interest rates and deposit balances assumed above, the
institution will state three annual percentage yields--one corresponding
to each balance tier. Calculation of each annual percentage yield is
similar for this type of account as for accounts with a single interest
rate. Thus, the calculation is based on the total amount of interest
that would be received by the consumer for each tier of the account for
a year and the principal assumed to have been deposited to earn that
amount of interest.
First tier. Assuming daily compounding, the institution will pay
$53.90 in interest on a $1,000 deposit. Using the general formula, for
the first tier, the annual percentage yield is 5.39%:
APY = 100 [(1 + 53.90/1,000) (365/365) - 1]
APY = 5.39%
Using the simple formula:
APY = 100 (53.90/1,000)
APY = 5.39%
Second tier. The institution will pay $452.29 in interest on an
$8,000 deposit. Thus, using the simple formula, the annual percentage
yield for the second tier is 5.65%:
APY = 100 (452.29/8,000)
APY = 5.65%
Third tier. The institution will pay $1,183.61 in interest on a
$20,000 deposit. Thus, using the simple formula, the annual percentage
yield for the third tier is 5.92%:
APY = 100 (1,183.61/20,000)
APY = 5.92%
Tiering Method B. Under this method, an institution pays the stated
interest rate only on that portion of the balance within the specified
tier. For example, if a consumer deposits $8,000, the institution pays
5.25% on $2,500 and 5.50% on $5,500 (the difference between $8,000 and
the first tier cut-off of $2,500).
The institution that computes interest in this manner must provide a
range that shows the lowest and the highest annual percentage yields for
each tier (other than for the first tier, which, like the tiers in
Method A, has the same annual percentage yield throughout). The low
figure for an annual percentage yield range is calculated based on the
total amount of interest earned for a year assuming the minimum
principal required to earn the interest rate for that tier. The high
figure for an annual percentage yield range is based on the amount of
interest the institution would pay on the highest principal that could
be deposited to earn that same interest rate. If the account does not
have a limit on the maximum amount that can be deposited, the
institution may assume any amount.
For the tiering structure assumed above, the institution would state
a total of five annual percentage yields--one figure for the first tier
and two figures stated as a range for the other two tiers.
First tier. Assuming daily compounding, the institution would pay
$53.90 in interest on a $1,000 deposit. For this first tier, using the
simple formula, the annual percentage yield is 5.39%:
[[Page 956]]
APY = 100 (53.90/1,000)
APY = 5.39%
Second tier. For the second tier, the institution would pay between
$134.75 and $841.45 in interest, based on assumed balances of $2,500.01
and $15,000, respectively. For $2,500.01, interest would be figured on
$2,500 at 5.25% interest rate plus interest on $.01 at 5.50%. For the
low end of the second tier, therefore, the annual percentage yield is
5.39%, using the simple formula:
APY = 100 (134.75/2,500)
APY = 5.39%
For $15,000, interest is figured on $2,500 at 5.25% interest rate
plus interest on $12,500 at 5.50% interest rate. For the high end of the
second tier, the annual percentage yield, using the simple formula, is
5.61%:
APY = 100 (841.45/15,000)
APY = 5.61%
Thus, the annual percentage yield range for the second tier is 5.39%
to 5.61%.
Third tier. For the third tier, the institution would pay $841.45 in
interest on the low end of the third tier (a balance of $15,000.01). For
$15,000.01, interest would be figured on $2,500 at 5.25% interest rate,
plus interest on $12,500 at 5.50% interest rate, plus interest on $.01
at 5.75% interest rate. For the low end of the third tier, therefore,
the annual percentage yield (using the simple formula) is 5.61%:
APY = 100 (841.45/15,000)
APY = 5.61%
Since the institution does not limit the account balance, it may
assume any maximum amount for the purposes of computing the annual
percentage yield for the high end of the third tier. For an assumed
maximum balance amount of $100,000, interest would be figured on $2,500
at 5.25% interest rate, plus interest on $12,500 at 5.50% interest rate,
plus interest on $85,000 at 5.75% interest rate. For the high end of the
third tier, therefore, the annual percentage yield, using the simple
formula, is 5.87%.
APY = 100 (5,871.79/100,000)
APY = 5.87%
Thus, the annual percentage yield range that would be stated for the
third tier is 5.61% to 5.87%.
If the assumed maximum balance amount is $1,000,000 instead of
$100,000, the institution would use $985,000 rather than $85,000 in the
last calculation. In that case, for the high end of the third tier the
annual percentage yield, using the simple formula, is 5.91%:
APY = 100 (59,134.22/1,000,000)
APY = 5.91%
Thus, the annual percentage yield range that would be stated for the
third tier is 5.61% to 5.91%.
E. Time Accounts With a Stated Maturity Greater Than One Year That Pay
Interest at Least Annually
1. For time accounts with a stated maturity greater than one year
that do not compound interest on an annual or more frequent basis, and
that require the consumer to withdraw interest at least annually, the
annual percentage yield may be disclosed as equal to the interest rate.
Example
(1) If an institution offers a $1,000 two-year certificate of
deposit that does not compound and that pays out interest semi-annually
by check or transfer at a 6.00% interest rate, the annual percentage
yield may be disclosed as 6.00%.
(2) For time accounts covered by this paragraph that are also
stepped-rate accounts, the annual percentage yield may be disclosed as
equal to the composite interest rate.
Example
(1) If an institution offers a $1,000 three-year certificate of
deposit that does not compound and that pays out interest annually by
check or transfer at a 5.00% interest rate for the first year, 6.00%
interest rate for the second year, and 7.00% interest rate for the third
year, the institution may compute the composite interest rate and APY as
follows:
(a) Multiply each interest rate by the number of days it will be in
effect;
(b) Add these figures together; and
(c) Divide by the total number of days in the term.
(2) Applied to the example, the products of the interest rates and
days the rates are in effect are (5.00% x 365 days) 1825, (6.00% x 365
days) 2190, and (7.00% x 365 days) 2555, respectively. The sum of these
products, 6570, is divided by 1095, the total number of days in the
term. The composite interest rate and APY are both 6.00%.
Part II. Annual Percentage Yield Earned for Periodic Statements
The annual percentage yield earned for periodic statements under
Sec. 1030.6(a) is an annualized rate that reflects the relationship
between the amount of interest actually earned on the consumer's account
during the statement period and the average daily balance in the account
for the statement period. Pursuant to Sec. 1030.6(b), however, if an
institution uses the average daily balance method and calculates
interest for a period other than the statement period, the annual
percentage yield earned shall reflect the relationship between the
amount of interest earned and the average daily balance in the account
for that other period.
[[Page 957]]
The annual percentage yield earned shall be calculated by using the
following formulas (``APY Earned'' is used for convenience in the
formulas):
A. General Formula
APY Earned = 100 [(1 + Interest earned/Balance) (365/Days in period) -
1]
``Balance'' is the average daily balance in the account for the period.
``Interest earned'' is the actual amount of interest earned on the
account for the period.
``Days in period'' is the actual number of days for the period.
Examples
(1) Assume an institution calculates interest for the statement
period (and uses either the daily balance or the average daily balance
method), and the account has a balance of $1,500 for 15 days and a
balance of $500 for the remaining 15 days of a 30-day statement period.
The average daily balance for the period is $1,000. The interest earned
(under either balance computation method) is $5.25 during the period.
The annual percentage yield earned (using the formula above) is 6.58%:
APY Earned = 100 [(1 + 5.25/1,000) (365/30) - 1]
APY Earned = 6.58%
(2) Assume an institution calculates interest on the average daily
balance for the calendar month and provides periodic statements that
cover the period from the 16th of one month to the 15th of the next
month. The account has a balance of $2,000 September 1 through September
15 and a balance of $1,000 for the remaining 15 days of September. The
average daily balance for the month of September is $1,500, which
results in $6.50 in interest earned for the month. The annual percentage
yield earned for the month of September would be shown on the periodic
statement covering September 16 through October 15. The annual
percentage yield earned (using the formula above) is 5.40%:
APY Earned = 100 [(6.50/1,500) (365/30) - 1]
APY Earned = 5.40%
(3) Assume an institution calculates interest on the average daily
balance for a quarter (for example, the calendar months of September
through November), and provides monthly periodic statements covering
calendar months. The account has a balance of $1,000 throughout the 30
days of September, a balance of $2,000 throughout the 31 days of
October, and a balance of $3,000 throughout the 30 days of November. The
average daily balance for the quarter is $2,000, which results in $21 in
interest earned for the quarter. The annual percentage yield earned
would be shown on the periodic statement for November. The annual
percentage yield earned (using the formula above) is 4.28%:
APY Earned = 100 [(1 + 21/2,000) (365/91) - 1]
APY Earned = 4.28%
B. Special Formula for Use Where Periodic Statement Is Sent More Often
Than the Period for Which Interest Is Compounded
Institutions that use the daily balance method to accrue interest
and that issue periodic statements more often than the period for which
interest is compounded shall use the following special formula:
[GRAPHIC] [TIFF OMITTED] TR21DE11.035
The following definition applies for use in this formula (all other
terms are defined under Part II):
``Compounding'' is the number of days in each compounding period.
Assume an institution calculates interest for the statement period
using the daily balance method, pays a 5.00% interest rate, compounded
annually, and provides periodic statements for each monthly cycle. The
account has a daily balance of $1,000 for a 30-day statement period. The
interest earned is $4.11 for the period, and the annual percentage yield
earned (using the special formula above) is 5.00%:
[GRAPHIC] [TIFF OMITTED] TR21DE11.036
[[Page 958]]
APY Earned = 5.00%
Sec. Appendix B to Part 1030--Model Clauses and Sample Forms
Table of Contents
B-1--Model Clauses for Account Disclosures (Section 1030.4(b))
B-2--Model Clauses for Change in Terms (Section 1030.5(a))
B-3--Model Clauses for Pre-Maturity Notices for Time Accounts (Section
1030.5(b)(2) and 1030.5(d))
B-4--Sample Form (Multiple Accounts)
B-5--Sample Form (Now Account)
B-6--Sample Form (Tiered Rate Money Market Account)
B-7--Sample Form (Certificate of Deposit)
B-8--Sample Form (Certificate of Deposit Advertisement)
B-9--Sample Form (Money Market Account Advertisement)
B-10--Sample Form (Aggregate Overdraft and Returned Item Fees)
B-1--Model Clauses for Account Disclosures
(a) Rate Information
(i) Fixed-Rate Accounts
The interest rate on your account is __% with an annual percentage
yield of __%. You will be paid this rate [for (time period)/until
(date)/for at least 30 calendar days].
(ii) Variable-Rate Accounts
The interest rate on your account is __% with an annual percentage
yield of __%.
Your interest rate and annual percentage yield may change.
Determination of Rate
The interest rate on your account is based on (name of index) [plus/
minus a margin of __]; or
At our discretion, we may change the interest rate on your account.
Frequency of Rate Changes
We may change the interest rate on your account [every (time
period)/at any time].
Limitations on Rate Changes
The interest rate for your account will never change by more than
__% each (time period).
The interest rate will never be [less/more] than __%; or
The interest rate will never [exceed__% above/drop more than __%
below] the interest rate initially disclosed to you.
(iii) Stepped-Rate Accounts
The initial interest rate for your account is __%. You will be paid
this rate [for (time period)/until (date)]. After that time, the
interest rate for your account will be __%, and you will be paid this
rate [for (time period)/until (date)]. The annual percentage yield for
your account is __%.
(iv) Tiered-Rate Accounts
Tiering Method A
If your [daily balance/average daily balance] is
$__ or more, the interest rate paid on the entire balance in your
account will be __% with an annual percentage yield of __%.
If your [daily balance/average daily balance] is
more than $__, but less than $__, the interest rate paid on the entire
balance in your account will be __% with an annual percentage yield of
__%.
If your [daily balance/average daily balance] is
$__ or less, the interest rate paid on the entire balance will be __%
with an annual percentage yield of __%.
Tiering Method B
An interest rate of __% will be paid only for
that portion of your [daily balance/average daily balance] that is
greater than $__. The annual percentage yield for this tier will range
from __% to __%, depending on the balance in the account.
An interest rate of __% will be paid only for
that portion of your [daily balance/average daily balance] that is
greater than $__. The annual percentage yield for this tier will range
from __% to __%, depending on the balance in the account.
If your [daily balance/average daily balance] is
$__ or less, the interest rate paid on the entire balance will be __%
with an annual percentage yield of __%.
(b) Compounding and Crediting
(i) Frequency
Interest will be compounded [on a __ basis/every (time period)].
Interest will be credited to your account [on a __ basis/every (time
period)].
(ii) Effect of Closing an Account
If you close your account before interest is credited, you will not
receive the accrued interest.
(c) Minimum Balance Requirements
(i) To Open the Account
You must deposit $__ to open this account.
(ii) To Avoid Imposition of Fees
A minimum balance fee of $__ will be imposed every (time period) if
the balance in the account falls below $__ any day of the (time period).
[[Page 959]]
A minimum balance fee of $__ will be imposed every (time period) if
the average daily balance for the (time period) falls below $__. The
average daily balance is calculated by adding the principal in the
account for each day of the period and dividing that figure by the
number of days in the period.
(iii) To Obtain the Annual Percentage Yield Disclosed
You must maintain a minimum balance of $__ in the account each day
to obtain the disclosed annual percentage yield.
You must maintain a minimum average daily balance of $__ to obtain
the disclosed annual percentage yield. The average daily balance is
calculated by adding the principal in the account for each day of the
period and dividing that figure by the number of days in the period.
(d) Balance Computation Method
(i) Daily Balance Method
We use the daily balance method to calculate the interest on your
account. This method applies a daily periodic rate to the principal in
the account each day.
(ii) Average Daily Balance Method
We use the average daily balance method to calculate interest on
your account. This method applies a periodic rate to the average daily
balance in the account for the period. The average daily balance is
calculated by adding the principal in the account for each day of the
period and dividing that figure by the number of days in the period.
(e) Accrual of Interest on Noncash Deposits
Interest begins to accrue no later than the business day we receive
credit for the deposit of noncash items (for example, checks); or
Interest begins to accrue on the business day you deposit noncash
items (for example, checks).
(f) Fees
The following fees may be assessed against your account:
__$__
__$__
__$__
__(conditions for imposing fee) $__
__% of __.
(g) Transaction Limitations
The minimum amount you may [withdraw/write a check for] is $__.
You may make __ [deposits into/withdrawals from] your account each
(time period).
You may not make [deposits into/withdrawals from] your account until
the maturity date.
(h) Disclosures Relating to Time Accounts
(i) Time Requirements
Your account will mature on (date).
Your account will mature in (time period).
(ii) Early Withdrawal Penalties
We [will/may] impose a penalty if you withdraw [any/all] of the
[deposited funds/principal] before the maturity date. The fee imposed
will equal __ days/week[s]/month[s] of interest; or
We [will/may] impose a penalty of $__ if you withdraw [any/all] of
the [deposited funds/principal] before the maturity date.
If you withdraw some of your funds before maturity, the interest
rate for the remaining funds in your account will be __% with an annual
percentage yield of __%.
(iii) Withdrawal of Interest Prior to Maturity
The annual percentage yield assumes interest will remain on deposit
until maturity. A withdrawal will reduce earnings.
(iv) Renewal Policies
(1) Automatically Renewable Time Accounts
This account will automatically renew at maturity.
You will have [__ calendar/business] days after the maturity date to
withdraw funds without penalty; or
There is no grace period following the maturity of this account to
withdraw funds without penalty.
(2) Non-Automatically Renewable Time Accounts
This account will not renew automatically at maturity. If you do not
renew the account, your deposit will be placed in [an interest-bearing/a
noninterest-bearing] account.
(v) Required Interest Distribution
This account requires the distribution of interest and does not
allow interest to remain in the account.
(i) Bonuses
You will [be paid/receive] [$__/(description of item)] as a bonus
[when you open the account/on (date) __].
You must maintain a minimum [daily balance/average daily balance] of
$__ to obtain the bonus.
To earn the bonus, [$__/your entire principal] must remain on
deposit [for (time period)/until (date)__].
[[Page 960]]
B-2--Model Clauses for Change in Terms
On (date), the cost of (type of fee) will increase to $__.
On (date), the interest rate on your account will decrease to __%
with an annual percentage yield of __%.
On (date), the minimum [daily balance/average daily balance]
required to avoid imposition of a fee will increase to $__.
B-3--Model Clauses for Pre-Maturity Notices for Time Accounts
(a) Automatically Renewable Time Accounts With Maturities of One Year or
Less But Longer Than One Month
Your account will mature on (date).
If the account renews, the new maturity date will be (date).
The interest rate for the renewed account will be __% with an annual
percentage yield of __%; or
The interest rate and annual percentage yield have not yet been
determined. They will be available on (date). Please call (phone number)
to learn the interest rate and annual percentage yield for your new
account.
(b) Non-Automatically Renewable Time Accounts With Maturities Longer
Than One Year
Your account will mature on (date).
If you do not renew the account, interest [will/will not] be paid
after maturity.
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Sec. Appendix C to Part 1030--Effect on State Laws
(a) Inconsistent Requirements
State law requirements that are inconsistent with the requirements
of the act and this part are preempted to the extent of the
inconsistency. A state law is inconsistent if it requires a depository
institution to make disclosures or take actions that contradict the
requirements of the federal law. A state law is also contradictory if it
requires the use of the same term to represent a different amount or a
different meaning than the federal law, requires the use of a term
different from that required in the federal law to describe the same
item, or permits a method of calculating interest on an account
different from that required in the federal law.
(b) Preemption Determinations
A depository institution, state, or other interested party may
request the Bureau to determine whether a state law requirement is
inconsistent with the federal requirements. A request for a
determination shall be in writing and addressed to the Bureau of
Consumer Financial Protection, 1700 G Street NW., Washington, DC 20006.
Notice that the Bureau intends to make a determination (either on
request or on its own motion) will be published in the Federal Register,
with an opportunity for public comment unless the Bureau finds that
notice and opportunity for comment would be impracticable, unnecessary,
or contrary to the public interest and publishes its reasons for such
decision. Notice of a final determination will be published in the
Federal Register and furnished to the party who made the request and to
the appropriate state official.
(c) Effect of Preemption Determinations
After the Bureau determines that a state law is inconsistent, a
depository institution may not make disclosures using the inconsistent
term or take actions relying on the inconsistent law.
(d) Reversal of Determination
The Bureau reserves the right to reverse a determination for any
reason bearing on the coverage or effect of state or federal law. Notice
of reversal of a determination will be published in the Federal Register
and a copy furnished to the appropriate state official.
Sec. Appendix D to Part 1030--Issuance of Official Interpretations
Except in unusual circumstances, interpretations will not be issued
separately but will be incorporated in an official commentary to this
part, which will be amended periodically. No interpretations will be
issued approving depository institutions' forms, statements, or
calculation tools or methods.
Sec. Supplement I to Part 1030--Official Interpretations
Introduction
1. Official status. This commentary is the means by which the Bureau
of Consumer Financial Protection issues official interpretations of
Regulation DD.
Section 1030.1 Authority, purpose, coverage, and effect on state laws
(c) Coverage
1. Foreign applicability. Regulation DD applies to all depository
institutions, except credit unions, that offer deposit accounts to
residents (including resident aliens) of any state as defined in Sec.
1030.2(r). Accounts held in an institution located in a state are
covered, even if funds are transferred periodically to a location
outside the United States. Accounts held in an institution located
outside the United States are not covered, even if held by a U.S.
resident.
2. Persons who advertise accounts. Persons who advertise accounts
are subject to the advertising rules. For example, if a deposit broker
places an advertisement offering consumers an interest in an account at
a depository institution, the advertising rules apply to the
advertisement, whether the account is to be held by the broker or
directly by the consumer.
Section 1030.2--Definitions
(a) Account.
1. Covered accounts. Examples of accounts subject to the regulation
are:
i. Interest-bearing and noninterest-bearing accounts.
ii. Deposit accounts opened as a condition of obtaining a credit
card.
iii. Accounts denominated in a foreign currency.
iv. Individual retirement accounts (IRAs) and simplified employee
pension (SEP) accounts.
v. Payable on death (POD) or ``Totten trust'' accounts.
2. Other accounts. Examples of accounts not subject to the
regulation are:
i. Mortgage escrow accounts for collecting taxes and property
insurance premiums.
ii. Accounts established to make periodic disbursements on
construction loans.
iii. Trust accounts opened by a trustee pursuant to a formal written
trust agreement (not merely declarations of trust on a signature card
such as a ``Totten trust,'' or an IRA and SEP account).
iv. Accounts opened by an executor in the name of a decedent's
estate.
[[Page 971]]
3. Other investments. The term ``account'' does not apply to all
products of a depository institution. Examples of products not covered
are:
i. Government securities.
ii. Mutual funds.
iii. Annuities.
iv. Securities or obligations of a depository institution.
v. Contractual arrangements such as repurchase agreements, interest
rate swaps, and bankers acceptances.
(b) Advertisement.
1. Covered messages. Advertisements include commercial messages in
visual, oral, or print media that invite, offer, or otherwise announce
generally to prospective customers the availability of consumer
accounts--such as:
i. Telephone solicitations.
ii. Messages on automated teller machine (ATM) screens.
iii. Messages on a computer screen in an institution's lobby
(including any printout) other than a screen viewed solely by the
institution's employee.
iv. Messages in a newspaper, magazine, or promotional flyer or on
radio.
v. Messages that are provided along with information about the
consumer's existing account and that promote another account at the
institution.
2. Other messages. Examples of messages that are not advertisements
are:
i. Rate sheets in a newspaper, periodical, or trade journal (unless
the depository institution, or a deposit broker offering accounts at the
institution, pays a fee for or otherwise controls publication).
ii. In-person discussions with consumers about the terms for a
specific account.
iii. For purposes of Sec. 1030.8(b) of this part through Sec.
1030.8(e) of this part, information given to consumers about existing
accounts, such as current rates recorded on a voice-response machine or
notices for automatically renewable time account sent before renewal.
iv. Information about a particular transaction in an existing
account.
v. Disclosures required by federal or other applicable law.
vi. A deposit account agreement.
(f) Bonus.
1. Examples. Bonuses include items of value, other than interest,
offered as incentives to consumers, such as an offer to pay the final
installment deposit for a holiday club account. Items that are not a
bonus include discount coupons for goods or services at restaurants or
stores.
2. De minimis rule. Items with a de minimis value of $10 or less are
not bonuses. Institutions may rely on the valuation standard used by the
Internal Revenue Service to determine if the value of the item is de
minimis. Examples of items of de minimis value are:
i. Disability insurance premiums valued at an amount of $10 or less
per year.
ii. Coffee mugs, T-shirts or other merchandise with a market value
of $10 or less.
3. Aggregation. In determining if an item valued at $10 or less is a
bonus, institutions must aggregate per account per calendar year items
that may be given to consumers. In making this determination,
institutions aggregate per account only the market value of items that
may be given for a specific promotion. To illustrate, assume an
institution offers in January to give consumers an item valued at $7 for
each calendar quarter during the year that the average account balance
in a negotiable order of withdrawal (NOW) account exceeds $10,000. The
bonus rules are triggered, since consumers are eligible under the
promotion to receive up to $28 during the year. However, the bonus rules
are not triggered if an item valued at $7 is offered to consumers
opening a NOW account during the month of January, even though in
November the institution introduces a new promotion that includes, for
example, an offer to existing NOW account holders for an item valued at
$8 for maintaining an average balance of $5,000 for the month.
4. Waiver or reduction of a fee or absorption of expenses. Bonuses
do not include value that consumers receive through the waiver or
reduction of fees (even if the fees waived exceed $10) for banking-
related services such as the following:
i. A safe deposit box rental fee for consumers who open a new
account.
ii. Fees for travelers checks for account holders.
iii. Discounts on interest rates charged for loans at the
institution.
(h) Consumer.
1. Professional capacity. Examples of accounts held by a natural
person in a professional capacity for another are attorney-client trust
accounts and landlord-tenant security accounts.
2. Other accounts. Accounts not held in a professional capacity
include accounts held by an individual for a child under the Uniform
Gifts to Minors Act.
3. Sole proprietors. Accounts held by individuals as sole
proprietors are not covered.
4. Retirement plans. IRAs and SEP accounts are consumer accounts to
the extent that funds are invested in covered accounts. Keogh accounts
are not subject to the regulation.
(j) Depository institution and institution.
1. Foreign institutions. Branches of foreign institutions located in
the United States are subject to the regulation if they offer deposit
accounts to consumers. Edge Act and Agreement corporations, and agencies
of foreign institutions, are not depository institutions for purposes of
this part.
(k) Deposit broker.
[[Page 972]]
1. General. A deposit broker is a person who is in the business of
placing or facilitating the placement of deposits in an institution, as
defined by the Federal Deposit Insurance Act (12 U.S.C. 29(g)).
(n) Interest.
1. Relation to bonuses. Bonuses are not interest for purposes of
this part.
(p) Passbook savings account.
1. Relation to Regulation E. Passbook savings accounts include
accounts accessed by preauthorized electronic fund transfers to the
account (as defined in 12 CFR 1005.2(j)), such as an account that
receives direct deposit of social security payments. Accounts permitting
access by other electronic means are not ``passbook saving accounts''
and must comply with the requirements of Sec. 1030.6 if statements are
sent four or more times a year.
(q) Periodic statement.
1. Examples. Periodic statements do not include:
i. Additional statements provided solely upon request.
ii. General service information such as a quarterly newsletter or
other correspondence describing available services and products.
(t) Tiered-rate account.
1. Time accounts. Time accounts paying different rates based solely
on the amount of the initial deposit are not tiered-rate accounts.
2. Minimum balance requirements. A requirement to maintain a minimum
balance to earn interest does not make an account a tiered-rate account.
(u) Time account.
1. Club accounts. Although club accounts typically have a maturity
date, they are not time accounts unless they also require a penalty of
at least seven days' interest for withdrawals during the first six days
after the account is opened.2. Relation to Regulation D. Regulation D of
the Board of Governors of the Federal Reserve System (12 CFR part 204)
permits in limited circumstances the withdrawal of funds without penalty
during the first six days after a ``time deposit'' is opened. (See 12
CFR 204.2(c)(1)(i).) But the fact that a consumer makes a withdrawal as
permitted by Regulation D does not disqualify the account from being a
time account for purposes of this part.
(v) Variable-rate account.
1. General. A certificate of deposit permitting one or more rate
adjustments prior to maturity at the consumer's option is a variable-
rate account.
Section 1030.3--General Disclosure Requirements
(a) Form.
1. Design requirements. Disclosures must be presented in a format
that allows consumers to readily understand the terms of their account.
Institutions are not required to use a particular type size or typeface,
nor are institutions required to state any term more conspicuously than
any other term. Disclosures may be made:
i. In any order.
ii. In combination with other disclosures or account terms.
iii. In combination with disclosures for other types of accounts, as
long as it is clear to consumers which disclosures apply to their
account.
iv. On more than one page and on the front and reverse sides.
v. By using inserts to a document or filling in blanks.
vi. On more than one document, as long as the documents are provided
at the same time.
2. Consistent terminology. Institutions must use consistent
terminology to describe terms or features required to be disclosed. For
example, if an institution describes a monthly fee (regardless of
account activity) as a ``monthly service fee'' in account-opening
disclosures, the periodic statement and change-in-term notices must use
the same terminology so that consumers can readily identify the fee.
(b) General.
1. Specificity of legal obligation. Institutions may refer to the
calendar month or to roughly equivalent intervals during a calendar year
as a ``month.''
(c) Relation to Regulation E.
1. General rule. Compliance with Regulation E (12 CFR Part 1005) is
deemed to satisfy the disclosure requirements of this part, such as
when:
i. An institution changes a term that triggers a notice under
Regulation E, and uses the timing and disclosure rules of Regulation E
for sending change-in-term notices.
ii. Consumers add an ATM access feature to an account, and the
institution provides disclosures pursuant to Regulation E, including
disclosure of fees (see 12 CFR 1005.7.)
iii. An institution complying with the timing rules of Regulation E
discloses at the same time fees for electronic services (such as for
balance inquiry fees at ATMs) required to be disclosed by this part but
not by Regulation E.
iv. An institution relies on Regulation E's rules regarding
disclosure of limitations on the frequency and amount of electronic fund
transfers, including security-related exceptions. But any limitations on
``intra-institutional transfers'' to or from the consumer's other
accounts during a given time period must be disclosed, even though
intra-institutional transfers are exempt from Regulation E.
(e) Oral response to inquiries.
1. Application of rule. Institutions are not required to provide
rate information orally.
2. Relation to advertising. The advertising rules do not cover an
oral response to a question about rates.
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3. Existing accounts. This paragraph does not apply to oral
responses about rate information for existing accounts. For example, if
a consumer holding a one-year certificate of deposit (CD) requests
interest rate information about the CD during the term, the institution
need not disclose the annual percentage yield.
(f) Rounding and accuracy rules for rates and yields
(f)(1) Rounding.
1. Permissible rounding. Examples of permissible rounding are an
annual percentage yield calculated to be 5.644%, rounded down and
disclosed as 5.64%; 5.645% rounded up and disclosed as 5.65%.
(f)(2) Accuracy.
1. Annual percentage yield and annual percentage yield earned. The
tolerance for annual percentage yield and annual percentage yield earned
calculations is designed to accommodate inadvertent errors. Institutions
may not purposely incorporate the tolerance into their calculation of
yields.
Section 1030.4--Account Disclosures
(a) Delivery of account disclosures.
(a)(1) Account opening.
1. New accounts. New account disclosures must be provided when:
i. A time account that does not automatically rollover is renewed by
a consumer.
ii. A consumer changes a term for a renewable time account (see
comment 5(b)-5 regarding disclosure alternatives.)
iii. An institution transfers funds from an account to open a new
account not at the consumer's request, unless the institution previously
gave account disclosures and any change-in-term notices for the new
account.
iv. An institution accepts a deposit from a consumer to an account
that the institution had deemed closed for the purpose of treating
accrued but uncredited interest as forfeited interest (see comment 7(b)-
3.)
2. Acquired accounts. New account disclosures need not be given when
an institution acquires an account through an acquisition of or merger
with another institution (but see Sec. 1030.5(a) of this part regarding
advance notice requirements if terms are changed).
(a)(2) Requests.
Paragraph (a)(2)(i).
1. Inquiries versus requests. A response to an oral inquiry (by
telephone or in person) about rates and yields or fees does not trigger
the duty to provide account disclosures. But when consumers ask for
written information about an account (whether by telephone, in person,
or by other means), the institution must provide disclosures unless the
account is no longer offered to the public.
2. General requests. When responding to a consumer's general request
for disclosures about a type of account (a NOW account, for example), an
institution that offers several variations may provide disclosures for
any one of them.
3. Timing for response. Ten business days is a reasonable time for
responding to requests for account information that consumers do not
make in person, including requests made by electronic means (such as by
electronic mail).
4. Use of electronic means. If a consumer who is not present at the
institution makes a request for account disclosures, including a request
made by telephone, email, or via the institution's Web site, the
institution may send the disclosures in paper form or, if the consumer
agrees, may provide the disclosures electronically, such as to an email
address that the consumer provides for that purpose, or on the
institution's Web site, without regard to the consumer consent or other
provisions of the E-Sign Act. The regulation does not require an
institution to provide, nor a consumer to agree to receive, the
disclosures required by Sec. 1030.4(a)(2) in electronic form.
Paragraph (a)(2)(ii)(A).
1. Recent rates. Institutions comply with this paragraph if they
disclose an interest rate and annual percentage yield accurate within
the seven calendar days preceding the date they send the disclosures.
Paragraph (a)(2)(ii)(B).
1. Term. Describing the maturity of a time account as ``1 year'' or
``6 months,'' for example, illustrates a statement of the maturity of a
time account as a term rather than a date (``January 10, 1995'').
(b) Content of account disclosures.
(b)(1) Rate information.
(b)(1)(i) Annual percentage yield and interest rate.
1. Rate disclosures. In addition to the interest rate and annual
percentage yield, institutions may disclose a periodic rate
corresponding to the interest rate. No other rate or yield (such as
``tax effective yield'') is permitted. If the annual percentage yield is
the same as the interest rate, institutions may disclose a single figure
but must use both terms.
2. Fixed-rate accounts. For fixed-rate time accounts paying the
opening rate until maturity, institutions may disclose the period of
time the interest rate will be in effect by stating the maturity date.
(See appendix B, B-7--Sample Form.) For other fixed-rate accounts,
institutions may use a date (``This rate will be in effect through May
4, 1995'') or a period (``This rate will be in effect for at least 30
days'').
3. Tiered-rate accounts. Each interest rate, along with the
corresponding annual percentage yield for each specified balance level
(or range of annual percentage yields, if appropriate), must be
disclosed for tiered-rate accounts. (See appendix A, Part I, Paragraph
D.)
[[Page 974]]
4. Stepped-rate accounts. A single composite annual percentage yield
must be disclosed for stepped-rate accounts. (See appendix A, Part I,
Paragraph B.) The interest rates and the period of time each will be in
effect also must be provided. When the initial rate offered for a
specified time on a variable-rate account is higher or lower than the
rate that would otherwise be paid on the account, the calculation of the
annual percentage yield must be made as if for a stepped-rate account.
(See appendix A, Part I, Paragraph C.)
(b)(1)(ii) Variable rates.
Paragraph (b)(1)(ii)(B).
1. Determining interest rates. To disclose how the interest rate is
determined, institutions must:
i. Identify the index and specific margin, if the interest rate is
tied to an index.
ii. State that rate changes are within the institution's discretion,
if the institution does not tie changes to an index.
Paragraph (b)(1)(ii)(C).
1. Frequency of rate changes. An institution reserving the right to
change rates at its discretion must state the fact that rates may change
at any time.
Paragraph (b)(1)(ii)(D).
1. Limitations. A floor or ceiling on rates or on the amount the
rate may decrease or increase during any time period must be disclosed.
Institutions need not disclose the absence of limitations on rate
changes.
(b)(2) Compounding and crediting.
(b)(2)(ii) Effect of closing an account.
1. Deeming an account closed. An institution may, subject to state
or other law, provide in its deposit contracts the actions by consumers
that will be treated as closing the account and that will result in the
forfeiture of accrued but uncredited interest. An example is the
withdrawal of all funds from the account prior to the date that interest
is credited.
(b)(3) Balance information.
(b)(3)(ii) Balance computation method.
1. Methods and periods. Institutions may use different methods or
periods to calculate minimum balances for purposes of imposing a fee
(the daily balance for a calendar month, for example) and accruing
interest (the average daily balance for a statement period, for
example). Each method and corresponding period must be disclosed.
(b)(3)(iii) When interest begins to accrue.
1. Additional information. Institutions may disclose additional
information such as the time of day after which deposits are treated as
having been received the following business day, and may use additional
descriptive terms such as ``ledger'' or ``collected'' balances to
disclose when interest begins to accrue.
(b)(4) Fees.
1. Covered fees. The following are types of fees that must be
disclosed:
i. Maintenance fees, such as monthly service fees.
ii. Fees to open or to close an account.
iii. Fees related to deposits or withdrawals, such as fees for use
of the institution's ATMs.
iv. Fees for special services, such as stop-payment fees, fees for
balance inquiries or verification of deposits, fees associated with
checks returned unpaid, and fees for regularly sending to consumers
checks that otherwise would be held by the institution.
2. Other fees. Institutions need not disclose fees such as the
following:
i. Fees for services offered to account and nonaccount holders
alike, such as travelers checks and wire transfers (even if different
amounts are charged to account and nonaccount holders).
ii. Incidental fees, such as fees associated with state escheat
laws, garnishment or attorneys fees, and fees for photocopying.
3. Amount of fees. Institutions must state the amount and conditions
under which a fee may be imposed. Naming and describing the fee (such as
``$4.00 monthly service fee'') will typically satisfy these
requirements.
4. Tied-accounts. Institutions must state if fees that may be
assessed against an account are tied to other accounts at the
institution. For example, if an institution ties the fees payable on a
NOW account to balances held in the NOW account and a savings account,
the NOW account disclosures must state that fact and explain how the fee
is determined.
5. Fees for overdrawing an account. Under Sec. 1030.4(b)(4) of this
part, institutions must disclose the conditions under which a fee may be
imposed. In satisfying this requirement institutions must specify the
categories of transactions for which an overdraft fee may be imposed. An
exhaustive list of transactions is not required. It is sufficient for an
institution to state that the fee applies to overdrafts ``created by
check, in-person withdrawal, ATM withdrawal, or other electronic
means,'' as applicable. Disclosing a fee ``for overdraft items'' would
not be sufficient.
(b)(5) Transaction limitations.
1. General rule. Examples of limitations on the number or dollar
amount of deposits or withdrawals that institutions must disclose are:
i. Limits on the number of checks that may be written on an account
within a given time period.
ii. Limits on withdrawals or deposits during the term of a time
account.
iii. Limitations required by Regulation D of the Board of Governors
of the Federal Reserve System (12 CFR part 204) on the number of
withdrawals permitted from money market deposit accounts by check to
third parties each month. Institutions need not
[[Page 975]]
disclose reservations of right to require notices for withdrawals from
accounts required by federal or state law.
(b)(6) Features of time accounts.
(b)(6)(i) Time requirements.
1. ``Callable'' time accounts. In addition to the maturity date, an
institution must state the date or the circumstances under which it may
redeem a time account at the institution's option (a ``callable'' time
account).
(b)(6)(ii) Early withdrawal penalties.
1. General. The term ``penalty'' may but need not be used to
describe the loss of interest that consumers may incur for early
withdrawal of funds from time accounts.
2. Examples. Examples of early withdrawal penalties are:
i. Monetary penalties, such as ``$10.00'' or ``seven days' interest
plus accrued but uncredited interest.''
ii. Adverse changes to terms such as a lowering of the interest
rate, annual percentage yield, or compounding frequency for funds
remaining on deposit.
iii. Reclamation of bonuses.
3. Relation to rules for IRAs or similar plans. Penalties imposed by
the Internal Revenue Code for certain withdrawals from IRAs or similar
pension or savings plans are not early withdrawal penalties for purposes
of this part.
4. Disclosing penalties. Penalties may be stated in months, whether
institutions assess the penalty using the actual number of days during
the period or using another method such as a number of days that occurs
in any actual sequence of the total calendar months involved. For
example, stating ``one month's interest'' is permissible, whether the
institution assesses 30 days' interest during the month of April, or
selects a time period between 28 and 31 days for calculating the
interest for all early withdrawals regardless of when the penalty is
assessed.
(b)(6)(iv) Renewal policies.
1. Rollover time accounts. Institutions offering a grace period on
time accounts that automatically renew need not state whether interest
will be paid if the funds are withdrawn during the grace period.
2. Nonrollover time accounts. Institutions paying interest on funds
following the maturity of time accounts that do not renew automatically
need not state the rate (or annual percentage yield) that may be paid.
(See appendix B, Model Clause B-1(h)(iv)(2).)
Section 1030.5--Subsequent Disclosures
(a) Change in terms.
(a)(1) Advance notice required.
1. Form of notice. Institutions may provide a change-in-term notice
on or with a periodic statement or in another mailing. If an institution
provides notice through revised account disclosures, the changed term
must be highlighted in some manner. For example, institutions may note
that a particular fee has been changed (also specifying the new amount)
or use an accompanying letter that refers to the changed term.
2. Effective date. An example of language for disclosing the
effective date of a change is ``As of November 21, 1994.''
3. Terms that change upon the occurrence of an event. An institution
offering terms that will automatically change upon the occurrence of a
stated event need not send an advance notice of the change provided the
institution fully describes the conditions of the change in the account
opening disclosures (and sends any change-in-term notices regardless of
whether the changed term affects that consumer's account at that time).
4. Examples. Examples of changes not requiring an advance change-in-
terms notice are:
i. The termination of employment for consumers for whom account
maintenance or activity fees were waived during their employment by the
depository institution.
ii. The expiration of one year in a promotion described in the
account opening disclosures to ``waive $4.00 monthly service charges for
one year.''
(a)(2) No notice required.
(a)(2)(ii) Check printing fees.
1. Increase in fees. A notice is not required for an increase in
fees for printing checks (or deposit and withdrawal slips) even if the
institution adds some amount to the price charged by the vendor.
(b) Notice before maturity for time accounts longer than one month
that renew automatically.
1. Maturity dates on nonbusiness days. In determining the term of a
time account, institutions may disregard the fact that the term will be
extended beyond the disclosed number of days because the disclosed
maturity falls on a nonbusiness day. For example, a holiday or weekend
may cause a ``one-year'' time account to extend beyond 365 days (or 366,
in a leap year) or a ``one-month'' time account to extend beyond 31
days.
2. Disclosing when rates will be determined. Ways to disclose when
the annual percentage yield will be available include the use of:
i. A specific date, such as ``October 28.''
ii. A date that is easily determinable, such as ``the Tuesday before
the maturity date stated on this notice'' or ``as of the maturity date
stated on this notice.''
3. Alternative timing rule. Under the alternative timing rule, an
institution offering a 10-day grace period would have to provide the
disclosures at least 10 days prior to the scheduled maturity date.
4. Club accounts. If consumers have agreed to the transfer of
payments from another account to a club time account for the next club
period, the institution must comply with the requirements for
automatically renewable time accounts--even though consumers may
withdraw funds from the club
[[Page 976]]
account at the end of the current club period.
5. Renewal of a time account. In the case of a change in terms that
becomes effective if a rollover time account is subsequently renewed:
i. If the change is initiated by the institution, the disclosure
requirements of this paragraph apply. (Paragraph 1030.5(a) applies if
the change becomes effective prior to the maturity of the existing time
account.)
ii. If the change is initiated by the consumer, the account opening
disclosure requirements of Sec. 1030.4(b) apply. (If the notice
required by this paragraph has been provided, institutions may give new
account disclosures or disclosures highlighting only the new term.)
6. Example. If a consumer receives a prematurity notice on a one-
year time account and requests a rollover to a six-month account, the
institution must provide either account opening disclosures including
the new maturity date or, if all other terms previously disclosed in the
prematurity notice remain the same, only the new maturity date.
(b)(1) Maturities of longer than one year.
1. Highlighting changed terms. Institutions need not highlight terms
that changed since the last account disclosures were provided.
(c) Notice before maturity for time accounts longer than one year
that do not renew automatically.
1. Subsequent account. When funds are transferred following maturity
of a nonrollover time account, institutions need not provide account
disclosures unless a new account is established.
Section 1030.6--Periodic Statement Disclosures
(a) General rule.
1. General. Institutions are not required to provide periodic
statements. If they do provide statements, disclosures need only be
furnished to the extent applicable. For example, if no interest is
earned for a statement period, institutions need not state that fact.
Or, institutions may disclose ``$0'' interest earned and ``0%'' annual
percentage yield earned.
2. Regulation E interim statements. When an institution provides
regular quarterly statements, and in addition provides a monthly interim
statement to comply with Regulation E, the interim statement need not
comply with this section unless it states interest or rate information.
(See 12 CFR 1005.9(b).)
3. Combined statements. Institutions may provide information about
an account (such as a MMDA) on the periodic statement for another
account (such as a NOW account) without triggering the disclosures
required by this section, as long as:
i. The information is limited to the account number, the type of
account, or balance information, and
ii. The institution also provides a periodic statement complying
with this section for each account.
4. Other information. Additional information that may be given on or
with a periodic statement includes:
i. Interest rates and corresponding periodic rates applied to
balances during the statement period.
ii. The dollar amount of interest earned year-to-date.
iii. Bonuses paid (or any de minimis consideration of $10 or less).
iv. Fees for products such as safe deposit boxes.
(a)(1) Annual percentage yield earned.
1. Ledger and collected balances. Institutions that accrue interest
using the collected balance method may use either the ledger or the
collected balance in determining the annual percentage yield earned.
(a)(2) Amount of interest.
1. Accrued interest. Institutions must state the amount of interest
that accrued during the statement period, even if it was not credited.
2. Terminology. In disclosing interest earned for the period,
institutions must use the term ``interest'' or terminology such as:
i. ``Interest paid,'' to describe interest that has been credited.
ii. ``Interest accrued'' or ``interest earned,'' to indicate that
interest is not yet credited.
3. Closed accounts. If consumers close an account between crediting
periods and forfeits accrued interest, the institution may not show any
figures for interest earned or annual percentage yield earned for the
period (other than zero, at the institution's option).
(a)(3) Fees imposed.
1. General. Periodic statements must state fees disclosed under
Sec. 1030.4(b) that were debited to the account during the statement
period, even if assessed for an earlier period.
2. Itemizing fees by type. In itemizing fees imposed more than once
in the period, institutions may group fees if they are the same type.
(See Sec. 1030.11(a)(1) of this part regarding certain fees that are
required to be grouped.) When fees of the same type are grouped
together, the description must make clear that the dollar figure
represents more than a single fee, for example, ``total fees for checks
written this period.'' Examples of fees that may not be grouped together
are--
i. Monthly maintenance and excess-activity fees.
ii. ``Transfer'' fees, if different dollar amounts are imposed, such
as $.50 for deposits and $1.00 for withdrawals.
iii. Fees for electronic fund transfers and fees for other services,
such as balance-inquiry or maintenance fees.
iv. Fees for paying overdrafts and fees for returning checks or
other items unpaid.
[[Page 977]]
3. Identifying fees. Statement details must enable consumers to
identify the specific fee. For example:
i. Institutions may use a code to identify a particular fee if the
code is explained on the periodic statement or in documents accompanying
the statement.
ii. Institutions using debit slips may disclose the date the fee was
debited on the periodic statement and show the amount and type of fee on
the dated debit slip.
4. Relation to Regulation E. Disclosure of fees in compliance with
Regulation E complies with this section for fees related to electronic
fund transfers (for example, totaling all electronic funds transfer fees
in a single figure).
(a)(4) Length of period.
1. General. Institutions providing the beginning and ending dates of
the period must make clear whether both dates are included in the
period.
2. Opening or closing an account mid-cycle. If an account is opened
or closed during the period for which a statement is sent, institutions
must calculate the annual percentage yield earned based on account
balances for each day the account was open.
(b) Special rule for average daily balance method.
1. Monthly statements and quarterly compounding. This rule applies,
for example, when an institution calculates interest on a quarterly
average daily balance and sends monthly statements. In this case, the
first two monthly statements would omit annual percentage yield earned
and interest earned figures; the third monthly statement would reflect
the interest earned and the annual percentage yield earned for the
entire quarter.
2. Length of the period. Institutions must disclose the length of
both the interest calculation period and the statement period. For
example, a statement could disclose a statement period of April 16
through May 15 and further state that ``the interest earned and the
annual percentage yield earned are based on your average daily balance
for the period April 1 through April 30.''
3. Quarterly statements and monthly compounding. Institutions that
use the average daily balance method to calculate interest on a monthly
basis and that send statements on a quarterly basis may disclose a
single interest (and annual percentage yield earned) figure.
Alternatively, an institution may disclose three interest and three
annual percentage yield earned figures, one for each month in the
quarter, as long as the institution states the number of days (or
beginning and ending dates) in the interest period if different from the
statement period.
Section 1030.7--Payment of Interest
(a)(1) Permissible methods.
1. Prohibited calculation methods. Calculation methods that do not
comply with the requirement to pay interest on the full amount of
principal in the account each day include:
i. Paying interest on the balance in the account at the end of the
period (the ``ending balance'' method).
ii. Paying interest for the period based on the lowest balance in
the account for any day in that period (the ``low balance'' method).
iii. Paying interest on a percentage of the balance, excluding the
amount set aside for reserve requirements (the ``investable balance''
method).
2. Use of 365-day basis. Institutions may apply a daily periodic
rate greater than \1/365\ of the interest rate--such as \1/360\ of the
interest rate--as long as it is applied 365 days a year.
3. Periodic interest payments. An institution can pay interest each
day on the account and still make uniform interest payments. For
example, for a one-year certificate of deposit an institution could make
monthly interest payments equal to \1/12\ of the amount of interest that
will be earned for a 365-day period (or 11 uniform monthly payments--
each equal to roughly \1/12\ of the total amount of interest--and one
payment that accounts for the remainder of the total amount of interest
earned for the period).
4. Leap year. Institutions may apply a daily rate of \1/366\ or \1/
365\ of the interest rate for 366 days in a leap year, if the account
will earn interest for February 29.
5. Maturity of time accounts. Institutions are not required to pay
interest after time accounts mature. (See 12 CFR Part 217, Regulation Q
of the Board of Governors of the Federal Reserve System, for limitations
on duration of interest payments.) Examples include:
i. During a grace period offered for an automatically renewable time
account, if consumers decide during that period not to renew the
account.
ii. Following the maturity of nonrollover time accounts.
iii. When the maturity date falls on a holiday, and consumers must
wait until the next business day to obtain the funds.
6. Dormant accounts. Institutions must pay interest on funds in an
account, even if inactivity or the infrequency of transactions would
permit the institution to consider the account to be ``inactive'' or
``dormant'' (or similar status) as defined by state or other law or the
account contract.
(a)(2) Determination of minimum balance to earn interest.
1. Daily balance accounts. Institutions that require a minimum
balance may choose not to pay interest for days when the balance drops
below the required minimum, if they
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use the daily balance method to calculate interest.
2. Average daily balance accounts. Institutions that require a
minimum balance may choose not to pay interest for the period in which
the balance drops below the required minimum, if they use the average
daily balance method to calculate interest.
3. Beneficial method. Institutions may not require that consumers
maintain both a minimum daily balance and a minimum average daily
balance to earn interest, such as by requiring consumers to maintain a
$500 daily balance and a prescribed average daily balance (whether
higher or lower). But an institution could offer a minimum balance to
earn interest that includes an additional method that is ``unequivocally
beneficial'' to consumers such as the following: An institution using
the daily balance method to calculate interest and requiring a $500
minimum daily balance could offer to pay interest on the account for
those days the minimum balance is not met as long as consumers maintain
an average daily balance throughout the month of $400.
4. Paying on full balance. Institutions must pay interest on the
full balance in the account that meets the required minimum balance. For
example, if $300 is the minimum daily balance required to earn interest,
and a consumer deposits $500, the institution must pay the stated
interest rate on the full $500 and not just on $200.
5. Negative balances prohibited. Institutions must treat a negative
account balance as zero to determine:
i. The daily or average daily balance on which interest will be
paid.
ii. Whether any minimum balance to earn interest is met.
6. Club accounts. Institutions offering club accounts (such as a
``holiday'' or ``vacation'' club) cannot impose a minimum balance
requirement for interest based on the total number or dollar amount of
payments required under the club plan. For example, if a plan calls for
$10 weekly payments for 50 weeks, the institution cannot set a $500
``minimum balance'' and then pay interest only if the consumer has made
all 50 payments.
7. Minimum balances not affecting interest. Institutions may use the
daily balance, average daily balance, or any other computation method to
calculate minimum balance requirements not involving the payment of
interest--such as to compute minimum balances for assessing fees.
(b) Compounding and crediting policies.
1. General. Institutions choosing to compound interest may compound
or credit interest annually, semi-annually, quarterly, monthly, daily,
continuously, or on any other basis.
2. Withdrawals prior to crediting date. If consumers withdraw funds
(without closing the account) prior to a scheduled crediting date,
institutions may delay paying the accrued interest on the withdrawn
amount until the scheduled crediting date, but may not avoid paying
interest.
3. Closed accounts. Subject to state or other law, an institution
may choose not to pay accrued interest if consumers close an account
prior to the date accrued interest is credited, as long as the
institution has disclosed that fact.
(c) Date interest begins to accrue.
1. Relation to Regulation CC. Institutions may rely on the Expedited
Funds Availability Act (EFAA) and Regulation CC of the Board of
Governors of the Federal Reserve System (12 CFR part 229) to determine,
for example, when a deposit is considered made for purposes of interest
accrual, or when interest need not be paid on funds because a deposited
check is later returned unpaid.
2. Ledger and collected balances. Institutions may calculate
interest by using a ``ledger'' or ``collected'' balance method, as long
as the crediting requirements of the EFAA are met (12 CFR 229.14).
3. Withdrawal of principal. Institutions must accrue interest on
funds until the funds are withdrawn from the account. For example, if a
check is debited to an account on a Tuesday, the institution must accrue
interest on those funds through Monday.
Section 1030.8--Advertising
(a) Misleading or inaccurate advertisements.
1. General. All advertisements are subject to the rule against
misleading or inaccurate advertisements, even though the disclosures
applicable to various media differ.
2. Indoor signs. An indoor sign advertising an annual percentage
yield is not misleading or inaccurate when:
i. For a tiered-rate account, it also provides the lower dollar
amount of the tier corresponding to the advertised annual percentage
yield.
ii. For a time account, it also provides the term required to obtain
the advertised annual percentage yield.
3. Fees affecting ``free'' accounts. For purposes of determining
whether an account can be advertised as ``free'' or ``no cost,''
maintenance and activity fees include:
i. Any fee imposed when a minimum balance requirement is not met, or
when consumers exceed a specified number of transactions.
ii. Transaction and service fees that consumers reasonably expect to
be imposed on a regular basis.
iii. A flat fee, such as a monthly service fee.
iv. Fees imposed to deposit, withdraw, or transfer funds, including
per-check or per-transaction charges (for example, $.25 for each
withdrawal, whether by check or in person).
[[Page 979]]
4. Other fees. Examples of fees that are not maintenance or activity
fees include:
i. Fees not required to be disclosed under Sec. 1030.4(b)(4).
ii. Check printing fees.
iii. Balance inquiry fees.
iv. Stop-payment fees and fees associated with checks returned
unpaid.
v. Fees assessed against a dormant account.
vi. Fees for ATM or electronic transfer services (such as
preauthorized transfers or home banking services) not required to obtain
an account.
5. Similar terms. An advertisement may not use the term ``fees
waived'' if a maintenance or activity fee may be imposed because it is
similar to the terms ``free'' or ``no cost.''
6. Specific account services. Institutions may advertise a specific
account service or feature as free if no fee is imposed for that service
or feature. For example, institutions offering an account that is free
of deposit or withdrawal fees could advertise that fact, as long as the
advertisement does not mislead consumers by implying that the account is
free and that no other fee (a monthly service fee, for example) may be
charged.
7. Free for limited time. If an account (or a specific account
service) is free only for a limited period of time--for example, for one
year following the account opening--the account (or service) may be
advertised as free if the time period is also stated.
8. Conditions not related to deposit accounts. Institutions may
advertise accounts as ``free'' for consumers meeting conditions not
related to deposit accounts, such as the consumer's age. For example,
institutions may advertise a NOW account as ``free for persons over 65
years old,'' even though a maintenance or activity fee is assessed on
accounts held by consumers 65 or younger.
9. Electronic advertising. If an electronic advertisement (such as
an advertisement appearing on an Internet Web site) displays a
triggering term (such as a bonus or annual percentage yield) the
advertisement must clearly refer the consumer to the location where the
additional required information begins. For example, an advertisement
that includes a bonus or annual percentage yield may be accompanied by a
link that directly takes the consumer to the additional information.
10. Examples. Examples of advertisements that would ordinarily be
misleading, inaccurate, or misrepresent the deposit contract are:
i. Representing an overdraft service as a ``line of credit,'' unless
the service is subject to Regulation Z, 12 CFR part 1026.
ii. Representing that the institution will honor all checks or
authorize payment of all transactions that overdraw an account, with or
without a specified dollar limit, when the institution retains
discretion at any time not to honor checks or authorize transactions.
iii. Representing that consumers with an overdrawn account are
allowed to maintain a negative balance when the terms of the account's
overdraft service require consumers promptly to return the deposit
account to a positive balance.
iv. Describing an institution's overdraft service solely as
protection against bounced checks when the institution also permits
overdrafts for a fee for overdrawing their accounts by other means, such
as ATM withdrawals, debit card transactions, or other electronic fund
transfers.
v. Advertising an account-related service for which the institution
charges a fee in an advertisement that also uses the word ``free'' or
``no cost'' (or a similar term) to describe the account, unless the
advertisement clearly and conspicuously indicates that there is a cost
associated with the service. If the fee is a maintenance or activity fee
under Sec. 1030.8(a)(2) of this part, however, an advertisement may not
describe the account as ``free'' or ``no cost'' (or contain a similar
term) even if the fee is disclosed in the advertisement.
11. Additional disclosures in connection with the payment of
overdrafts. The rule in Sec. 1030.3(a), providing that disclosures
required by Sec. 1030.8 may be provided to the consumer in electronic
form without regard to E-Sign Act requirements, applies to the
disclosures described in Sec. 1030.11(b), which are incorporated by
reference in Sec. 1030.8(f).
(b) Permissible rates.
1. Tiered-rate accounts. An advertisement for a tiered-rate account
that states an annual percentage yield must also state the annual
percentage yield for each tier, along with corresponding minimum balance
requirements. Any interest rates stated must appear in conjunction with
the applicable annual percentage yields for each tier.
2. Stepped-rate accounts. An advertisement that states an interest
rate for a stepped-rate account must state all the interest rates and
the time period that each rate is in effect.
3. Representative examples. An advertisement that states an annual
percentage yield for a given type of account (such as a time account for
a specified term) need not state the annual percentage yield applicable
to other time accounts offered by the institution or indicate that other
maturity terms are available. In an advertisement stating that rates for
an account may vary depending on the amount of the initial deposit or
the term of a time account, institutions need not list each balance
level and term offered. Instead, the advertisement may:
i. Provide a representative example of the annual percentage yields
offered, clearly described as such. For example, if an institution
offers a $25 bonus on all time accounts
[[Page 980]]
and the annual percentage yield will vary depending on the term
selected, the institution may provide a disclosure of the annual
percentage yield as follows: ``For example, our 6-month certificate of
deposit currently pays a 3.15% annual percentage yield.''
ii. Indicate that various rates are available, such as by stating
short-term and longer-term maturities along with the applicable annual
percentage yields: ``We offer certificates of deposit with annual
percentage yields that depend on the maturity you choose. For example,
our one-month CD earns a 2.75% APY. Or, earn a 5.25% APY for a three-
year CD.''
(c) When additional disclosures are required.
1. Trigger terms. The following are examples of information stated
in advertisements that are not ``trigger'' terms:
i. ``One, three, and five year CDs available.''
ii. ``Bonus rates available.''
iii. ``1% over our current rates,'' so long as the rates are not
determinable from the advertisement.
(c)(2) Time annual percentage yield is offered.
1. Specified date. If an advertisement discloses an annual
percentage yield as of a specified date, that date must be recent in
relation to the publication or broadcast frequency of the media used,
taking into account the particular circumstances or production deadlines
involved. For example, the printing date of a brochure printed once for
a deposit account promotion that will be in effect for six months would
be considered ``recent,'' even though rates change during the six-month
period. Rates published in a daily newspaper or on television must
reflect rates offered shortly before (or on) the date the rates are
published or broadcast.
2. Reference to date of publication. An advertisement may refer to
the annual percentage yield as being accurate as of the date of
publication, if the date is on the publication itself. For instance, an
advertisement in a periodical may state that a rate is ``current through
the date of this issue,'' if the periodical shows the date.
(c)(5) Effect of fees.
1. Scope. This requirement applies only to maintenance or activity
fees described in comment 8(a).
(c)(6) Features of time accounts.
(c)(6)(i) Time requirements.
1. Club accounts. If a club account has a maturity date but the term
may vary depending on when the account is opened, institutions may use a
phrase such as: ``The maturity date of this club account is November 15;
its term varies depending on when the account is opened.''
(c)(6)(ii) Early withdrawal penalties.
1. Discretionary penalties. Institutions imposing early withdrawal
penalties on a case-by-case basis may disclose that they ``may'' (rather
than ``will'') impose a penalty if such a disclosure accurately
describes the account terms.
(d) Bonuses.
1. General reference to ``bonus.'' General statements such as
``bonus checking'' or ``get a bonus when you open a checking account''
do not trigger the bonus disclosures.
(e) Exemption for certain advertisements.
(e)(1) Certain media.
Paragraph (e)(1)(i).
1. Internet advertisements. The exemption for advertisements made
through broadcast or electronic media does not extend to advertisements
posted on the Internet or sent by email.
Paragraph (e)(1)(iii).
1. Tiered-rate accounts. Solicitations for a tiered-rate account
made through telephone response machines must provide the annual
percentage yields and the balance requirements applicable to each tier.
(e)(2) Indoor signs.
Paragraph (e)(2)(i).
1. General. Indoor signs include advertisements displayed on
computer screens, banners, preprinted posters, and chalk or peg boards.
Any advertisement inside the premises that can be retained by a consumer
(such as a brochure or a printout from a computer) is not an indoor
sign.
Section 1030.9--Enforcement and Record Retention
(c) Record retention.
1. Evidence of required actions. Institutions comply with the
regulation by demonstrating that they have done the following:
i. Established and maintained procedures for paying interest and
providing timely disclosures as required by the regulation, and
ii. Retained sample disclosures for each type of account offered to
consumers, such as account-opening disclosures, copies of
advertisements, and change-in-term notices; and information regarding
the interest rates and annual percentage yields offered.2. Methods of
retaining evidence. Institutions must be able to reconstruct the
required disclosures or other actions. They need not keep disclosures or
other business records in hard copy. Records evidencing compliance may
be retained on microfilm, microfiche, or by other methods that reproduce
records accurately (including computer files).
3. Payment of interest. Institutions must retain sufficient rate and
balance information to permit the verification of interest paid on an
account, including the payment of interest on the full principal
balance.
Section 1030.10 [Reserved]
Section 1030.11--Additional Disclosures Regarding the Payment of
Overdrafts
(a) Disclosure of total fees on periodic statements.
[[Page 981]]
(a)(1) General.
1. Transfer services. The overdraft services covered by Sec.
1030.11(a)(1) of this part do not include a service providing for the
transfer of funds from another deposit account of the consumer to permit
the payment of items without creating an overdraft, even if a fee is
charged for the transfer.
2. Fees for paying overdrafts. Institutions must disclose on
periodic statements a total dollar amount for all fees or charges
imposed on the account for paying overdrafts. The institution must
disclose separate totals for the statement period and for the calendar
year-to-date. The total dollar amount for each of these periods includes
per-item fees as well as interest charges, daily or other periodic fees,
or fees charged for maintaining an account in overdraft status, whether
the overdraft is by check, debit card transaction, or by any other
transaction type. It also includes fees charged when there are
insufficient funds because previously deposited funds are subject to a
hold or are uncollected. It does not include fees for transferring funds
from another account of the consumer to avoid an overdraft, or fees
charged under a service subject to Regulation Z (12 CFR part 1026). See
also comment 11(c)-2. Under Sec. 1030.11(a)(1)(i), the disclosure must
describe the total dollar amount for all fees or charges imposed on the
account for the statement period and calendar year-to-date for paying
overdrafts using the term ``Total Overdraft Fees.'' This requirement
applies notwithstanding comment 3(a)-2.3. Fees for returning items
unpaid. The total dollar amount for all fees for returning items unpaid
must include all fees charged to the account for dishonoring or
returning checks or other items drawn on the account. The institution
must disclose separate totals for the statement period and for the
calendar year-to-date. Fees imposed when deposited items are returned
are not included. Institutions may use terminology such as ``returned
item fee'' or ``NSF fee'' to describe fees for returning items unpaid.
4. Waived fees. In some cases, an institution may provide a
statement for the current period reflecting that fees imposed during a
previous period were waived and credited to the account. Institutions
may, but are not required to, reflect the adjustment in the total for
the calendar year-to-date and in the applicable statement period. For
example, if an institution assesses a fee in January and refunds the fee
in February, the institution could disclose a year-to-date total
reflecting the amount credited, but it should not affect the total
disclosed for the February statement period, because the fee was not
assessed in the February statement period. If an institution assesses
and then waives and credits a fee within the same cycle, the institution
may, at its option, reflect the adjustment in the total disclosed for
fees imposed during the current statement period and for the total for
the calendar year-to-date. Thus, if the institution assesses and waives
the fee in the February statement period, the February fee total could
reflect a total net of the waived fee.
5. Totals for the calendar year to date. Some institutions'
statement periods do not coincide with the calendar month. In such
cases, the institution may disclose a calendar year-to-date total by
aggregating fees for 12 monthly cycles, starting with the period that
begins during January and finishing with the period that begins during
December. For example, if statement periods begin on the 10th day of
each month, the statement covering December 10, 2006 through January 9,
2007 may disclose the year-to-date total for fees imposed from January
10, 2006 through January 9, 2007. Alternatively, the institution could
provide a statement for the cycle ending January 9, 2007 showing the
year-to-date total for fees imposed January 1, 2006 through December 31,
2006.
6. Itemization of fees. An institution may itemize each fee in
addition to providing the disclosures required by Sec. 1030.11(a)(1) of
this part.
(a)(3) Format requirements.
1. Time period covered by periodic statement disclosures. The
disclosures under Sec. 1030.11(a) must be included on periodic
statements provided by an institution starting the first statement
period that begins after January 1, 2010. For example, if a consumer's
statement period typically closes on the 15th of each month, an
institution must provide the disclosures required by Sec. 1030.11(a)(1)
on subsequent periodic statements for that consumer beginning with the
statement reflecting the period from January 16, 2010 to February 15,
2010.
(b) Advertising disclosures for overdraft services.
1. Examples of institutions promoting the payment of overdrafts. A
depository institution would be required to include the advertising
disclosures in Sec. 1030.11(b)(1) of this part if the institution:
i. Promotes the institution's policy or practice of paying
overdrafts (unless the service would be subject to Regulation Z (12 CFR
part 1026)). This includes advertisements using print media such as
newspapers or brochures, telephone solicitations, electronic mail, or
messages posted on an Internet site. (But see Sec. 1030.11(b)(2) of
this part for communications that are not subject to the additional
advertising disclosures.)
ii. Includes a message on a periodic statement informing the
consumer of an overdraft limit or the amount of funds available for
overdrafts. For example, an institution that includes a message on a
periodic statement informing the consumer of a $500 overdraft
[[Page 982]]
limit or that the consumer has $300 remaining on the overdraft limit, is
promoting an overdraft service.
iii. Discloses an overdraft limit or includes the dollar amount of
an overdraft limit in a balance disclosed on an automated system, such
as a telephone response machine, ATM screen or the institution's
Internet site. (See, however, Sec. 1030.11(b)(3) of this part.)
2. Transfer services. The overdraft services covered by Sec.
1030.11(b)(1) of this part do not include a service providing for the
transfer of funds from another deposit account of the consumer to permit
the payment of items without creating an overdraft, even if a fee is
charged for the transfer.
3. Electronic media. The exception for advertisements made through
broadcast or electronic media, such as television or radio, does not
apply to advertisements posted on an institution's Internet site, on an
ATM screen, provided on telephone response machines, or sent by
electronic mail.
4. Fees. The fees that must be disclosed under Sec. 1030.11(b)(1)
of this part include per-item fees as well as interest charges, daily or
other periodic fees, and fees charged for maintaining an account in
overdraft status, whether the overdraft is by check or by other means.
The fees also include fees charged when there are insufficient funds
because previously deposited funds are subject to a hold or are
uncollected. The fees do not include fees for transferring funds from
another account to avoid an overdraft, or fees charged when the
institution has previously agreed in writing to pay items that overdraw
the account and the service is subject to Regulation Z, 12 CFR Part
1026.
5. Categories of transactions. An exhaustive list of transactions is
not required. Disclosing that a fee may be imposed for covering
overdrafts ``created by check, in-person withdrawal, ATM withdrawal, or
other electronic means'' would satisfy the requirements of Sec.
1030.11(b)(1)(ii) of this part where the fee may be imposed in these
circumstances. See comment 4(b)(4)-5 of this part.
6. Time period to repay. If a depository institution reserves the
right to require a consumer to pay an overdraft immediately or on demand
instead of affording consumers a specific time period to establish a
positive balance in the account, an institution may comply with Sec.
1030.11(b)(1)(iii) of this part by disclosing this fact.
7. Circumstances for nonpayment. An institution must describe the
circumstances under which it will not pay an overdraft. It is sufficient
to state, as applicable: ``Whether your overdrafts will be paid is
discretionary and we reserve the right not to pay. For example, we
typically do not pay overdrafts if your account is not in good standing,
or you are not making regular deposits, or you have too many
overdrafts.''
8. Advertising an account as ``free.'' If the advertised account-
related service is an overdraft service subject to the requirements of
Sec. 1030.11(b)(1) of this part, institutions must disclose the fee or
fees for the payment of each overdraft, not merely that a cost is
associated with the overdraft service, as well as other required
information. Compliance with comment 8(a)-10.v. is not sufficient.
(c) Disclosure of account balances.
1. Balance that does not include additional amounts. For purposes of
the balance disclosure requirement in Sec. 1030.11(c), if an
institution discloses balance information to a consumer through an
automated system, it must disclose a balance that excludes any funds
that the institution may provide to cover an overdraft pursuant to a
discretionary overdraft service, that will be paid by the institution
under a service subject to Regulation Z (12 CFR Part 1026), or that will
be transferred from another account held individually or jointly by a
consumer. The balance may, but need not, include funds that are
deposited in the consumer's account, such as from a check, that are not
yet made available for withdrawal in accordance with the funds
availability rules under Regulation CC of the Board of Governors of the
Federal Reserve System (12 CFR part 229). In addition, the balance may,
but need not, include funds that are held by the institution to satisfy
a prior obligation of the consumer (for example, to cover a hold for an
ATM or debit card transaction that has been authorized but for which the
bank has not settled).
2. Retail sweep programs. In a retail sweep program, an institution
establishes two legally distinct subaccounts, a transaction subaccount
and a savings subaccount, which together make up the consumer's account.
The institution allocates and transfers funds between the two
subaccounts in order to maximize the balance in the savings account
while complying with the monthly limitations on transfers out of savings
accounts under Regulation D of the Board of Governors of the Federal
Reserve System (12 CFR 204.2(d)(2)). Retail sweep programs are generally
not established for the purpose of covering overdrafts. Rather,
institutions typically establish retail sweep programs by agreement with
the consumer, in order for the institution to minimize its transaction
account reserve requirements and, in some cases, to provide a higher
interest rate than the consumer would earn on a transaction account
alone. Section 1030.11(c) does not require an institution to exclude
from the consumer's balance funds that may be transferred from another
account pursuant to a retail sweep program that is established for such
purposes and that has the following characteristics:
i. The account involved complies with Regulation D of the Board of
Governors of the Federal Reserve System (12 CFR 204.2(d)(2));
[[Page 983]]
ii. The consumer does not have direct access to the non-transaction
subaccount that is part of the retail sweep program; and
iii. The consumer's periodic statements show the account balance as
the combined balance in the subaccounts.
3. Additional balance. The institution may disclose additional
balances supplemented by funds that may be provided by the institution
to cover an overdraft, whether pursuant to a discretionary overdraft
service, a service subject to Regulation Z (12 CFR Part 1026), or a
service that transfers funds from another account held individually or
jointly by the consumer, so long as the institution prominently states
that any additional balance includes these additional overdraft amounts.
The institution may not simply state, for instance, that the second
balance is the consumer's ``available balance,'' or contains ``available
funds.'' Rather, the institution should provide enough information to
convey that the second balance includes these amounts. For example, the
institution may state that the balance includes ``overdraft funds.''
Where a consumer has not opted into, or as applicable, has opted out of
the institution's discretionary overdraft service, any additional
balance disclosed should not include funds that otherwise might be
available under that service. Where a consumer has not opted into, or as
applicable, has opted out of, the institution's discretionary overdraft
service for some, but not all transactions (e.g. , the consumer has not
opted into overdraft services for ATM and one-time debit card
transactions), an institution that includes these additional overdraft
funds in the second balance should convey that the overdraft funds are
not available for all transactions. For example, the institution could
state that overdraft funds are not available for ATM and one-time (or
everyday) debit card transactions. Similarly, if funds are not available
for all transactions pursuant to a service subject to Regulation Z (12
CFR part 1026) or a service that transfers funds from another account, a
second balance that includes such funds should also indicate this fact.
4. Automated systems. The balance disclosure requirement in Sec.
1030.11(c) applies to any automated system through which the consumer
requests a balance, including, but not limited to, a telephone response
system, the institution's Internet site, or an ATM. The requirement
applies whether the institution discloses a balance through an ATM owned
or operated by the institution or through an ATM not owned or operated
by the institution (including an ATM operated by a non-depository
institution). If the balance is obtained at an ATM, the requirement also
applies whether the balance is disclosed on the ATM screen or on a paper
receipt.
Appendix A to Part 1030--Annual Percentage Yield Calculation
Part I. Annual Percentage Yield for Account Disclosures and Advertising
Purposes
1. Rounding for calculations. The following are examples of
permissible rounding for calculating interest and the annual percentage
yield:
i. The daily rate applied to a balance carried to five or more
decimal places
ii. The daily interest earned carried to five or more decimal places
Part II. Annual Percentage Yield Earned for Periodic Statements
1. Balance method. The interest figure used in the calculation of
the annual percentage yield earned may be derived from the daily balance
method or the average daily balance method. The balance used in the
formula for the annual percentage yield earned is the sum of the
balances for each day in the period divided by the number of days in the
period.
2. Negative balances prohibited. Institutions must treat a negative
account balance as zero to determine the balance on which the annual
percentage yield earned is calculated. (See commentary to Sec.
1030.7(a)(2).)
A. General Formula
1. Accrued but uncredited interest. To calculate the annual
percentage yield earned, accrued but uncredited interest:
i. May not be included in the balance for statements issued at the
same time or less frequently than the account's compounding and
crediting frequency. For example, if monthly statements are sent for an
account that compounds interest daily and credits interest monthly, the
balance may not be increased each day to reflect the effect of daily
compounding.
ii. Must be included in the balance for succeeding statements if a
statement is issued more frequently than compounded interest is credited
on an account. For example, if monthly statements are sent for an
account that compounds interest daily and credits interest quarterly,
the balance for the second monthly statement would include interest that
had accrued for the prior month.
2. Rounding. The interest earned figure used to calculate the annual
percentage yield earned must be rounded to two decimals and reflect the
amount actually paid. For example, if the interest earned for a
statement period is $20.074 and the institution pays the consumer
$20.07, the institution must use $20.07 (not $20.074) to calculate the
annual percentage yield earned. For accounts paying interest based on
the daily balance method that compound and credit interest quarterly,
and send monthly statements, the institution may, but need not,
[[Page 984]]
round accrued interest to two decimals for calculating the annual
percentage yield earned on the first two monthly statements issued
during the quarter. However, on the quarterly statement the interest
earned figure must reflect the amount actually paid.
B. Special Formula for Use Where Periodic Statement Is Sent More Often
Than the Period for Which Interest Is Compounded
1. Statements triggered by Regulation E. Institutions may, but need
not, use this formula to calculate the annual percentage yield earned
for accounts that receive quarterly statements and are subject to
Regulation E's rule calling for monthly statements when an electronic
fund transfer has occurred. They may do so even though no monthly
statement was issued during a specific quarter. But institutions must
use this formula for accounts that compound and credit interest
quarterly and receive monthly statements that, while triggered by
Regulation E, comply with the provisions of Sec. 1030.6.
2. Days in compounding period. Institutions using the special annual
percentage yield earned formula must use the actual number of days in
the compounding period.
Appendix B to Part 1030--Model Clauses and Sample Forms
1. Modifications. Institutions that modify the model clauses will be
deemed in compliance as long as they do not delete required information
or rearrange the format in a way that affects the substance or clarity
of the disclosures.
2. Format. Institutions may use inserts to a document (see Sample
Form B-4) or fill-in blanks (see Sample Forms B-5, B-6 and B-7, which
use underlining to indicate terms that have been filled in) to show
current rates, fees, or other terms.
3. Disclosures for opening accounts. The sample forms illustrate the
information that must be provided to consumers when an account is
opened, as required by Sec. 1030.4(a)(1). (See Sec. 1030.4(a)(2),
which states the requirements for disclosing the annual percentage
yield, the interest rate, and the maturity of a time account in
responding to a consumer's request.)
4. Compliance with Regulation E. Institutions may satisfy certain
requirements under Regulation DD with disclosures that meet the
requirements of Regulation E. (See Sec. 1030.3(c).) For disclosures
covered by both this part and Regulation E (such as the amount of fees
for ATM usage, institutions should consult appendix A to Regulation E
for appropriate model clauses.
5. Duplicate disclosures. If a requirement such as a minimum balance
applies to more than one account term (to obtain a bonus and determine
the annual percentage yield, for example), institutions need not repeat
the requirement for each term, as long as it is clear which terms the
requirement applies to.
6. Sample forms. The sample forms (B-4 through B-8) serve a purpose
different from the model clauses. They illustrate ways of adapting the
model clauses to specific accounts. The clauses shown relate only to the
specific transactions described.
B-1 Model Clauses for Account Disclosures
B-1(h) Disclosures Relating to Time Accounts
1. Maturity. The disclosure in Clause (h)(i) stating a specific date
may be used in all cases. The statement describing a time period is
appropriate only when providing disclosures in response to a consumer's
request.
B-2 Model Clauses for Change in Terms
1. General. The second clause, describing a future decrease in the
interest rate and annual percentage yield, applies to fixed-rate
accounts only.
B-4 Sample Form (Multiple Accounts)
1. Rate sheet insert. In the rate sheet insert, the calculations of
the annual percentage yield for the three-month and six-month
certificates are based on 92 days and 181 days respectively. All
calculations in the insert assume daily compounding.
B-6 Sample Form (Tiered-Rate Money Market Account)
1. General. Sample Form B-6 uses Tiering Method A (discussed in
appendix A and Clause (a)(iv)) to calculate interest. It gives a
narrative description of a tiered-rate account; institutions may use
different formats (for example, a chart similar to the one in Sample
Form B-4), as long as all required information for each tier is clearly
presented. The form does not contain a separate disclosure of the
minimum balance required to obtain the annual percentage yield; the
tiered-rate disclosure provides that information.
PART 1041_PAYDAY, VEHICLE TITLE, AND CERTAIN HIGH-COST INSTALLMENT
LOANS (Eff. 1-16-18)--Table of Contents
Subpart A_General
Sec.
1041.1 Authority and purpose.
1041.2 Definitions.
1041.3 Scope of coverage; exclusions; exemptions.
[[Page 985]]
Subpart B_Underwriting
1041.4 Identification of unfair and abusive practice.
1041.5 Ability-to-repay determination required.
1041.6 Conditional exemption for certain covered short-term loans.
Subpart C_Payments
1041.7 Identification of unfair and abusive practice.
1041.8 Prohibited payment transfer attempts.
1041.9 Disclosure of payment transfer attempts.
Subpart D_Information Furnishing, Recordkeeping, Anti-Evasion, and
Severability
1041.10 Information furnishing requirements.
1041.11 Registered information systems.
1041.12 Compliance program and record retention.
1041.13 Prohibition against evasion.
1041.14 Severability.
Appendix A to Part 1041--Model Forms
Supplement I to Part 1041--Official Interpretations
Authority: 12 U.S.C. 5511, 5512, 5514(b), 5531(b), (c), and (d),
5532.
Effective Date Note: At 82 FR 54871, Nov. 17, 2017, part 1041 was
added, effective Jan. 16, 2018.
Subpart A_General
Sec. 1041.1 Authority and purpose.
(a) Authority. The regulation in this part is issued by the Bureau
of Consumer Financial Protection (Bureau) pursuant to Title X of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5481, et seq.).
(b) Purpose. The purpose of this part is to identify certain unfair
and abusive acts or practices in connection with certain consumer credit
transactions and to set forth requirements for preventing such acts or
practices. This part also prescribes requirements to ensure that the
features of those consumer credit transactions are fully, accurately,
and effectively disclosed to consumers. This part also prescribes
processes and criteria for registration of information systems.
Sec. 1041.2 Definitions.
(a) Definitions. For the purposes of this part, the following
definitions apply:
(1) Account has the same meaning as in Regulation E, 12 CFR
1005.2(b).
(2) Affiliate has the same meaning as in 12 U.S.C. 5481(1).
(3) Closed-end credit means an extension of credit to a consumer
that is not open-end credit under paragraph (a)(16) of this section.
(4) Consumer has the same meaning as in 12 U.S.C. 5481(4).
(5) Consummation means the time that a consumer becomes
contractually obligated on a new loan or a modification that increases
the amount of an existing loan.
(6) Cost of credit means the cost of consumer credit as expressed as
a per annum rate and is determined as follows:
(i) Charges included in the cost of credit. The cost of credit
includes all finance charges as set forth by Regulation Z, 12 CFR
1026.4, but without regard to whether the credit is consumer credit, as
that term is defined in 12 CFR 1026.2(a)(12), or is extended to a
consumer, as that term is defined in 12 CFR 1026.2(a)(11).
(ii) Calculation of the cost of credit--(A) Closed-end credit. For
closed-end credit, the cost of credit must be calculated according to
the requirements of Regulation Z, 12 CFR 1026.22.
(B) Open-end credit. For open-end credit, the cost of credit must be
calculated according to the rules for calculating the effective annual
percentage rate for a billing cycle as set forth in Regulation Z, 12 CFR
1026.14(c) and (d).
(7) Covered longer-term balloon-payment loan means a loan described
in Sec. 1041.3(b)(2).
(8) Covered longer-term loan means a loan described in Sec.
1041.3(b)(3).
(9) Covered person has the same meaning as in the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 12 U.S.C. 5481(6).
(10) Covered short-term loan means a loan described in Sec.
1041.3(b)(1).
(11) Credit has the same meaning as in Regulation Z, 12 CFR
1026.2(a)(14).
[[Page 986]]
(12) Electronic fund transfer has the same meaning as in Regulation
E, 12 CFR 1005.3(b).
(13) Lender means a person who regularly extends credit to a
consumer primarily for personal, family, or household purposes.
(14) Loan sequence or sequence means a series of consecutive or
concurrent covered short-term loans or covered longer-term balloon-
payment loans, or a combination thereof, in which each of the loans
(other than the first loan) is made during the period in which the
consumer has a covered short-term loan or covered longer-term balloon-
payment loan outstanding and for 30 days thereafter. For the purpose of
determining where a loan is located within a loan sequence:
(i) A covered short-term loan or covered longer-term balloon-payment
loan is the first loan in a sequence if the loan is extended to a
consumer who had no covered short-term loan or covered longer-term
balloon-payment loan outstanding within the immediately preceding 30
days;
(ii) A covered short-term or covered longer-term balloon-payment
loan is the second loan in the sequence if the consumer has a currently
outstanding covered short-term loan or covered longer-term balloon-
payment loan that is the first loan in a sequence, or if the
consummation date of the second loan is within 30 days following the
last day on which the consumer's first loan in the sequence was
outstanding;
(iii) A covered short-term or covered longer-term balloon-payment
loan is the third loan in the sequence if the consumer has a currently
outstanding covered short-term loan or covered longer-term balloon-
payment loan that is the second loan in the sequence, or if the
consummation date of the third loan is within 30 days following the last
day on which the consumer's second loan in the sequence was outstanding;
and
(iv) A covered short-term or covered longer-term balloon-payment
loan would be the fourth loan in the sequence if the consumer has a
currently outstanding covered short-term loan or covered longer-term
balloon-payment loan that is the third loan in the sequence, or if the
consummation date of the fourth loan would be within 30 days following
the last day on which the consumer's third loan in the sequence was
outstanding.
(15) Motor vehicle means any self-propelled vehicle primarily used
for on-road transportation. The term does not include motor homes,
recreational vehicles, golf carts, and motor scooters.
(16) Open-end credit means an extension of credit to a consumer that
is an open-end credit plan as defined in Regulation Z, 12 CFR
1026.2(a)(20), but without regard to whether the credit is consumer
credit, as defined in 12 CFR 1026.2(a)(12), is extended by a creditor,
as defined in 12 CFR 1026.2(a)(17), is extended to a consumer, as
defined in 12 CFR 1026.2(a)(11), or permits a finance charge to be
imposed from time to time on an outstanding balance as defined in 12 CFR
1026.4.
(17) Outstanding loan means a loan that the consumer is legally
obligated to repay, regardless of whether the loan is delinquent or is
subject to a repayment plan or other workout arrangement, except that a
loan ceases to be an outstanding loan if the consumer has not made at
least one payment on the loan within the previous 180 days.
(18) Service provider has the same meaning as in the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 12 U.S.C. 5481(26).
(19) Vehicle security means an interest in a consumer's motor
vehicle obtained by the lender or service provider as a condition of the
credit, regardless of how the transaction is characterized by State law,
including:
(i) Any security interest in the motor vehicle, motor vehicle title,
or motor vehicle registration whether or not the security interest is
perfected or recorded; or
(ii) A pawn transaction in which the consumer's motor vehicle is the
pledged good and the consumer retains use of the motor vehicle during
the period of the pawn agreement.
(b) Rule of construction. For purposes of this part, where
definitions are incorporated from other statutes or regulations, the
terms have the meaning and incorporate the embedded definitions,
appendices, and commentary
[[Page 987]]
from those other laws except to the extent that this part provides a
different definition for a parallel term.
Sec. 1041.3 Scope of coverage; exclusions; exemptions.
(a) General. This part applies to a lender that extends credit by
making covered loans.
(b) Covered loan. Covered loan means closed-end or open-end credit
that is extended to a consumer primarily for personal, family, or
household purposes that is not excluded under paragraph (d) of this
section or conditionally exempted under paragraph (e) or (f) of this
section; and:
(1) For closed-end credit that does not provide for multiple
advances to consumers, the consumer is required to repay substantially
the entire amount of the loan within 45 days of consummation, or for all
other loans, the consumer is required to repay substantially the entire
amount of any advance within 45 days of the advance;
(2) For loans not otherwise covered by paragraph (b)(1) of this
section:
(i) For closed-end credit that does not provide for multiple
advances to consumers, the consumer is required to repay substantially
the entire balance of the loan in a single payment more than 45 days
after consummation or to repay such loan through at least one payment
that is more than twice as large as any other payment(s).
(ii) For all other loans, either:
(A) The consumer is required to repay substantially the entire
amount of an advance in a single payment more than 45 days after the
advance is made or is required to make at least one payment on the
advance that is more than twice as large as any other payment(s); or
(B) A loan with multiple advances is structured such that paying the
required minimum payments may not fully amortize the outstanding balance
by a specified date or time, and the amount of the final payment to
repay the outstanding balance at such time could be more than twice the
amount of other minimum payments under the plan; or
(3) For loans not otherwise covered by paragraph (b)(1) or (2) of
this section, if both of the following conditions are satisfied:
(i) The cost of credit for the loan exceeds 36 percent per annum, as
measured:
(A) At the time of consummation for closed-end credit; or
(B) At the time of consummation and, if the cost of credit at
consummation is not more than 36 percent per annum, again at the end of
each billing cycle for open-end credit, except that:
(1) Open-end credit meets the condition set forth in this paragraph
(b)(3)(i)(B) in any billing cycle in which a lender imposes a finance
charge, and the principal balance is $0; and
(2) Once open-end credit meets the condition set forth in this
paragraph (b)(3)(i)(B), it meets the condition set forth in paragraph
(b)(3)(i)(B) for the duration of the plan.
(ii) The lender or service provider obtains a leveraged payment
mechanism as defined in paragraph (c) of this section.
(c) Leveraged payment mechanism. For purposes of paragraph (b) of
this section, a lender or service provider obtains a leveraged payment
mechanism if it has the right to initiate a transfer of money, through
any means, from a consumer's account to satisfy an obligation on a loan,
except that the lender or service provider does not obtain a leveraged
payment mechanism by initiating a single immediate payment transfer at
the consumer's request.
(d) Exclusions for certain types of credit. This part does not apply
to the following:
(1) Certain purchase money security interest loans. Credit extended
for the sole and express purpose of financing a consumer's initial
purchase of a good when the credit is secured by the property being
purchased, whether or not the security interest is perfected or
recorded.
(2) Real estate secured credit. Credit that is secured by any real
property, or by personal property used or expected to be used as a
dwelling, and the lender records or otherwise perfects the security
interest within the term of the loan.
(3) Credit cards. Any credit card account under an open-end (not
home-secured) consumer credit plan as defined in Regulation Z, 12 CFR
1026.2(a)(15)(ii).
[[Page 988]]
(4) Student loans. Credit made, insured, or guaranteed pursuant to a
program authorized by subchapter IV of the Higher Education Act of 1965,
20 U.S.C. 1070 through 1099d, or a private education loan as defined in
Regulation Z, 12 CFR 1026.46(b)(5).
(5) Non-recourse pawn loans. Credit in which the lender has sole
physical possession and use of the property securing the credit for the
entire term of the loan and for which the lender's sole recourse if the
consumer does not elect to redeem the pawned item and repay the loan is
the retention of the property securing the credit.
(6) Overdraft services and lines of credit. Overdraft services as
defined in 12 CFR 1005.17(a), and overdraft lines of credit otherwise
excluded from the definition of overdraft services under 12 CFR
1005.17(a)(1).
(7) Wage advance programs. Advances of wages that constitute credit
if made by an employer, as defined in the Fair Labor Standards Act, 29
U.S.C. 203(d), or by the employer's business partner, to the employer's
employees, provided that:
(i) The advance is made only against the accrued cash value of any
wages the employee has earned up to the date of the advance; and
(ii) Before any amount is advanced, the entity advancing the funds
warrants to the consumer as part of the contract between the parties on
behalf of itself and any business partners, that it or they, as
applicable:
(A) Will not require the consumer to pay any charges or fees in
connection with the advance, other than a charge for participating in
the wage advance program;
(B) Has no legal or contractual claim or remedy against the consumer
based on the consumer's failure to repay in the event the amount
advanced is not repaid in full; and
(C) With respect to the amount advanced to the consumer, will not
engage in any debt collection activities if the advance is not deducted
directly from wages or otherwise repaid on the scheduled date, place the
amount advanced as a debt with or sell it to a third party, or report to
a consumer reporting agency concerning the amount advanced.
(8) No-cost advances. Advances of funds that constitute credit if
the consumer is not required to pay any charge or fee to be eligible to
receive or in return for receiving the advance, provided that before any
amount is advanced, the entity advancing the funds warrants to the
consumer as part of the contract between the parties:
(i) That it has no legal or contractual claim or remedy against the
consumer based on the consumer's failure to repay in the event the
amount advanced is not repaid in full; and
(ii) That, with respect to the amount advanced to the consumer, such
entity will not engage in any debt collection activities if the advance
is not repaid on the scheduled date, place the amount advanced as a debt
with or sell it to a third party, or report to a consumer reporting
agency concerning the amount advanced.
(e) Alternative loan. Alternative loans are conditionally exempt
from the requirements of this part. Alternative loan means a covered
loan that satisfies the following conditions and requirements:
(1) Loan term conditions. An alternative loan must satisfy the
following conditions:
(i) The loan is not structured as open-end credit, as defined in
Sec. 1041.2(a)(16);
(ii) The loan has a term of not less than one month and not more
than six months;
(iii) The principal of the loan is not less than $200 and not more
than $1,000;
(iv) The loan is repayable in two or more payments, all of which
payments are substantially equal in amount and fall due in substantially
equal intervals, and the loan amortizes completely during the term of
the loan; and
(v) The lender does not impose any charges other than the rate and
application fees permissible for Federal credit unions under regulations
issued by the National Credit Union Administration at 12 CFR
701.21(c)(7)(iii).
(2) Borrowing history condition. Prior to making an alternative loan
under this paragraph (e), the lender must determine from its records
that the loan would not result in the consumer being indebted on more
than three outstanding loans made under this section
[[Page 989]]
from the lender within a period of 180 days. The lender must also make
no more than one alternative loan under this paragraph (e) at a time to
a consumer.
(3) Income documentation condition. In making an alternative loan
under this paragraph (e), the lender must maintain and comply with
policies and procedures for documenting proof of recurring income.
(4) Safe harbor. Loans made by Federal credit unions in compliance
with the conditions set forth by the National Credit Union
Administration at 12 CFR 701.21(c)(7)(iii) for a Payday Alternative Loan
are deemed to be in compliance with the requirements and conditions of
paragraphs (e)(1), (2), and (3) of this section.
(f) Accommodation loans. Accommodation loans are conditionally
exempt from the requirements of this part. Accommodation loan means a
covered loan if at the time that the loan is consummated:
(1) The lender and its affiliates collectively have made 2,500 or
fewer covered loans in the current calendar year, and made 2,500 or
fewer such covered loans in the preceding calendar year; and
(2)(i) During the most recent completed tax year in which the lender
was in operation, if applicable, the lender and any affiliates that were
in operation and used the same tax year derived no more than 10 percent
of their receipts from covered loans; or
(ii) If the lender was not in operation in a prior tax year, the
lender reasonably anticipates that the lender and any of its affiliates
that use the same tax year will derive no more than 10 percent of their
receipts from covered loans during the current tax year.
(3) Provided, however, that covered longer-term loans for which all
transfers meet the conditions in Sec. 1041.8(a)(1)(ii), and receipts
from such loans, are not included for the purpose of determining whether
the conditions of paragraphs (f)(1) and (2) of this section have been
satisfied.
(g) Receipts. For purposes of paragraph (f) of this section,
receipts means ``total income'' (or in the case of a sole proprietorship
``gross income'') plus ``cost of goods sold'' as these terms are defined
and reported on Internal Revenue Service (IRS) tax return forms (such as
Form 1120 for corporations; Form 1120S and Schedule K for S
corporations; Form 1120, Form 1065 or Form 1040 for LLCs; Form 1065 and
Schedule K for partnerships; and Form 1040, Schedule C for sole
proprietorships). Receipts do not include net capital gains or losses;
taxes collected for and remitted to a taxing authority if included in
gross or total income, such as sales or other taxes collected from
customers but excluding taxes levied on the entity or its employees; or
amounts collected for another (but fees earned in connection with such
collections are receipts). Items such as subcontractor costs,
reimbursements for purchases a contractor makes at a customer's request,
and employee-based costs such as payroll taxes are included in receipts.
(h) Tax year. For purposes of paragraph (f) of this section, ``tax
year'' has the meaning attributed to it by the IRS as set forth in IRS
Publication 538, which provides that a ``tax year'' is an annual
accounting period for keeping records and reporting income and expenses.
Subpart B_Underwriting
Sec. 1041.4 Identification of unfair and abusive practice.
It is an unfair and abusive practice for a lender to make covered
short-term loans or covered longer-term balloon-payment loans without
reasonably determining that the consumers will have the ability to repay
the loans according to their terms.
Sec. 1041.5 Ability-to-repay determination required.
(a) Definitions. For purposes of this section:
(1) Basic living expenses means expenditures, other than payments
for major financial obligations, that a consumer makes for goods and
services that are necessary to maintain the consumer's health, welfare,
and ability to produce income, and the health and welfare of the members
of the consumer's household who are financially dependent on the
consumer.
[[Page 990]]
(2) Debt-to-income ratio means the ratio, expressed as a percentage,
of the sum of the amounts that the lender projects will be payable by
the consumer for major financial obligations during the relevant monthly
period and the payments under the covered short-term loan or covered
longer-term balloon-payment loan during the relevant monthly period, to
the net income that the lender projects the consumer will receive during
the relevant monthly period, all of which projected amounts are
determined in accordance with paragraph (c) of this section.
(3) Major financial obligations means a consumer's housing expense,
required payments under debt obligations (including, without limitation,
outstanding covered loans), child support obligations, and alimony
obligations.
(4) National consumer report means a consumer report, as defined in
section 603(d) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(d),
obtained from a consumer reporting agency that compiles and maintains
files on consumers on a nationwide basis, as defined in section 603(p)
of the Fair Credit Reporting Act, 15 U.S.C. 1681a(p).
(5) Net income means the total amount that a consumer receives after
the payer deducts amounts for taxes, other obligations, and voluntary
contributions (but before deductions of any amounts for payments under a
prospective covered short-term loan or covered longer-term balloon-
payment loan or for any major financial obligation); provided that, the
lender may include in the consumer's net income the amount of any income
of another person to which the consumer has a reasonable expectation of
access.
(6) Payment under the covered short-term loan or covered longer-term
balloon-payment loan. (i) Means the combined dollar amount payable by
the consumer at a particular time following consummation in connection
with the covered short-term loan or covered longer-term balloon-payment
loan, assuming that the consumer has made preceding required payments
and in the absence of any affirmative act by the consumer to extend or
restructure the repayment schedule or to suspend, cancel, or delay
payment for any product, service, or membership provided in connection
with the loan;
(ii) Includes all principal, interest, charges, and fees; and
(iii) For a line of credit is calculated assuming that:
(A) The consumer will utilize the full amount of credit under the
covered short-term loan or covered longer-term balloon-payment loan as
soon as the credit is available to the consumer; and
(B) The consumer will make only minimum required payments under the
covered short-term loan or covered longer-term balloon-payment loan for
as long as permitted under the loan agreement.
(7) Relevant monthly period means the calendar month in which the
highest sum of payments is due under the covered short-term or covered
longer-term balloon-payment loan.
(8) Residual income means the sum of net income that the lender
projects the consumer will receive during the relevant monthly period,
minus the sum of the amounts that the lender projects will be payable by
the consumer for major financial obligations during the relevant monthly
period and payments under the covered short-term loan or covered longer-
term balloon-payment loan during the relevant monthly period, all of
which projected amounts are determined in accordance with paragraph (c)
of this section.
(b) Reasonable determination required. (1)(i) Except as provided in
Sec. 1041.6, a lender must not make a covered short-term loan or
covered longer-term balloon-payment loan or increase the credit
available under a covered short-term loan or covered longer-term
balloon-payment loan, unless the lender first makes a reasonable
determination that the consumer will have the ability to repay the loan
according to its terms.
(ii) For a covered short-term loan or covered longer-term balloon-
payment loan that is a line of credit, a lender must not permit a
consumer to obtain an advance under the line of credit more than 90 days
after the date of a required determination under this paragraph (b),
unless the lender first makes a new determination that the consumer will
have the ability to repay the covered short-term loan or covered
[[Page 991]]
longer-term balloon-payment loan according to its terms.
(2) A lender's determination of a consumer's ability to repay a
covered short-term loan or covered longer-term balloon-payment loan is
reasonable only if either:
(i) Based on the calculation of the consumer's debt-to-income ratio
for the relevant monthly period and the estimates of the consumer's
basic living expenses for the relevant monthly period, the lender
reasonably concludes that:
(A) For a covered short-term loan, the consumer can make payments
for major financial obligations, make all payments under the loan, and
meet basic living expenses during the shorter of the term of the loan or
the period ending 45 days after consummation of the loan, and for 30
days after having made the highest payment under the loan; and
(B) For a covered longer-term balloon-payment loan, the consumer can
make payments for major financial obligations, make all payments under
the loan, and meet basic living expenses during the relevant monthly
period, and for 30 days after having made the highest payment under the
loan; or
(ii) Based on the calculation of the consumer's residual income for
the relevant monthly period and the estimates of the consumer's basic
living expenses for the relevant monthly period, the lender reasonably
concludes that:
(A) For a covered short-term loan, the consumer can make payments
for major financial obligations, make all payments under the loan, and
meet basic living expenses during the shorter of the term of the loan or
the period ending 45 days after consummation of the loan, and for 30
days after having made the highest payment under the loan; and
(B) For a covered longer-term balloon-payment loan, the consumer can
make payments for major financial obligations, make all payments under
the loan, and meet basic living expenses during the relevant monthly
period, and for 30 days after having made the highest payment under the
loan.
(c) Projecting consumer net income and payments for major financial
obligations--(1) General. To make a reasonable determination required
under paragraph (b) of this section, a lender must obtain the consumer's
written statement in accordance with paragraph (c)(2)(i) of this
section, obtain verification evidence to the extent required by
paragraph (c)(2)(ii) of this section, assess information about rental
housing expense as required by paragraph (c)(2)(iii) of this section,
and use those sources of information to make a reasonable projection of
the amount of a consumer's net income and payments for major financial
obligations during the relevant monthly period. The lender must consider
major financial obligations that are listed in a consumer's written
statement described in paragraph (c)(2)(i)(B) of this section even if
they cannot be verified by the sources listed in paragraph (c)(2)(ii)(B)
of this section. To be reasonable, a projection of the amount of net
income or payments for major financial obligations may be based on a
consumer's written statement of amounts under paragraph (c)(2)(i) of
this section only as specifically permitted by paragraph (c)(2)(ii) or
(iii) or to the extent the stated amounts are consistent with the
verification evidence that is obtained in accordance with paragraph
(c)(2)(ii) of this section. In determining whether the stated amounts
are consistent with the verification evidence, the lender may reasonably
consider other reliable evidence the lender obtains from or about the
consumer, including any explanations the lender obtains from the
consumer.
(2) Evidence of net income and payments for major financial
obligations--(i) Consumer statements. A lender must obtain a consumer's
written statement of:
(A) The amount of the consumer's net income, which may include the
amount of any income of another person to which the consumer has a
reasonable expectation of access; and
(B) The amount of payments required for the consumer's major
financial obligations.
(ii) Verification evidence. A lender must obtain verification
evidence for the amounts of the consumer's net income and payments for
major financial
[[Page 992]]
obligations other than rental housing expense, as follows:
(A) For the consumer's net income:
(1) The lender must obtain a reliable record (or records) of an
income payment (or payments) directly to the consumer covering
sufficient history to support the lender's projection under paragraph
(c)(1) of this section if a reliable record (or records) is reasonably
available. If a lender determines that a reliable record (or records) of
some or all of the consumer's net income is not reasonably available,
then, the lender may reasonably rely on the consumer's written statement
described in paragraph (c)(2)(i)(A) of this section for that portion of
the consumer's net income.
(2) If the lender elects to include in the consumer's net income for
the relevant monthly period any income of another person to which the
consumer has a reasonable expectation of access, the lender must obtain
verification evidence to support the lender's projection under paragraph
(c)(1) of this section.
(B) For the consumer's required payments under debt obligations, the
lender must obtain a national consumer report, the records of the lender
and its affiliates, and a consumer report obtained from an information
system that has been registered for 180 days or more pursuant to Sec.
1041.11(c)(2) or is registered pursuant to Sec. 1041.11(d)(2), if
available. If the reports and records do not include a debt obligation
listed in the consumer's written statement described in paragraph
(c)(2)(i)(B) of this section, the lender may reasonably rely on the
written statement in determining the amount of the required payment.
(C) For a consumer's required payments under child support
obligations or alimony obligations, the lender must obtain a national
consumer report. If the report does not include a child support or
alimony obligation listed in the consumer's written statement described
in paragraph (c)(2)(i)(B) of this section, the lender may reasonably
rely on the written statement in determining the amount of the required
payment.
(D) Notwithstanding paragraphs (c)(2)(ii)(B) and (C) of this
section, the lender is not required to obtain a national consumer report
as verification evidence for the consumer's debt obligations, alimony
obligations, and child support obligations if during the preceding 90
days:
(1) The lender or an affiliate obtained a national consumer report
for the consumer, retained the report under Sec. 1041.12(b)(1)(ii), and
checked it again in connection with the new loan; and
(2) The consumer did not complete a loan sequence of three loans
made under this section and trigger the prohibition under paragraph
(d)(2) of this section since the previous report was obtained.
(iii) Rental housing expense. For a consumer's housing expense other
than a payment for a debt obligation that appears on a national consumer
report obtained pursuant to paragraph (c)(2)(ii)(B) of this section, the
lender may reasonably rely on the consumer's written statement described
in paragraph (c)(2)(i)(B) of this section.
(d) Additional limitations on lending--covered short-term loans and
covered longer-term balloon-payment loans--(1) Borrowing history review.
Prior to making a covered short-term loan or covered longer-term
balloon-payment loan under this section, in order to determine whether
any of the prohibitions in this paragraph (d) are applicable, a lender
must obtain and review information about the consumer's borrowing
history from the records of the lender and its affiliates, and from a
consumer report obtained from an information system that has been
registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or is
registered with the Bureau pursuant to Sec. 1041.11(d)(2), if
available.
(2) Prohibition on loan sequences of more than three covered short-
term loans or covered longer-term balloon-payment loans made under this
section. A lender must not make a covered short-term loan or covered
longer-term balloon-payment loan under this section during the period in
which the consumer has a covered short-term loan or covered longer-term
balloon-payment loan made under this section outstanding and for 30 days
thereafter if the new covered short-term loan or covered longer-term
balloon-payment loan would be the fourth loan in a sequence
[[Page 993]]
of covered short-term loans, covered longer-term balloon-payment loans,
or a combination of covered short-term loans and covered longer-term
balloon-payment loans made under this section.
(3) Prohibition on making a covered short-term loan or covered
longer-term balloon-payment loan under this section following a covered
short-term loan made under Sec. 1041.6. A lender must not make a
covered short-term loan or covered longer-term balloon-payment loan
under this section during the period in which the consumer has a covered
short-term loan made under Sec. 1041.6 outstanding and for 30 days
thereafter.
(e) Prohibition against evasion. A lender must not take any action
with the intent of evading the requirements of this section.
Sec. 1041.6 Conditional exemption for certain covered short-term
loans.
(a) Conditional exemption for certain covered short-term loans.
Sections 1041.4 and 1041.5 do not apply to a covered short-term loan
that satisfies the requirements set forth in paragraphs (b) through (e)
of this section. Prior to making a covered short-term loan under this
section, a lender must review the consumer's borrowing history in its
own records, the records of the lender's affiliates, and a consumer
report from an information system that has been registered for 180 days
or more pursuant to Sec. 1041.11(c)(2) or is registered with the Bureau
pursuant to Sec. 1041.11(d)(2). The lender must use this borrowing
history information to determine a potential loan's compliance with the
requirements in paragraphs (b) and (c) of this section.
(b) Loan term requirements. A covered short-term loan that is made
under this section must satisfy the following requirements:
(1) The loan satisfies the following principal amount limitations,
as applicable:
(i) For the first loan in a loan sequence of covered short-term
loans made under this section, the principal amount is no greater than
$500.
(ii) For the second loan in a loan sequence of covered short-term
loans made under this section, the principal amount is no greater than
two-thirds of the principal amount of the first loan in the loan
sequence.
(iii) For the third loan in a loan sequence of covered short-term
loans made under this section, the principal amount is no greater than
one-third of the principal amount of the first loan in the loan
sequence.
(2) The loan amortizes completely during the term of the loan and
the payment schedule provides for the lender allocating a consumer's
payments to the outstanding principal and interest and fees as they
accrue only by applying a fixed periodic rate of interest to the
outstanding balance of the unpaid loan principal during every scheduled
repayment period for the term of the loan.
(3) The lender and any service provider do not take vehicle security
as a condition of the loan, as defined in Sec. 1041.2(a)(19).
(4) The loan is not structured as open-end credit, as defined in
Sec. 1041.2(a)(16).
(c) Borrowing history requirements. Prior to making a covered short-
term loan under this section, the lender must determine that the
following requirements are satisfied:
(1) The consumer has not had in the past 30 days an outstanding
covered short-term loan under Sec. 1041.5 or covered longer-term
balloon-payment loan under Sec. 1041.5;
(2) The loan would not result in the consumer having a loan sequence
of more than three covered short-term loans under this section; and
(3) The loan would not result in the consumer having during any
consecutive 12-month period:
(i) More than six covered short-term loans outstanding; or
(ii) Covered short-term loans outstanding for an aggregate period of
more than 90 days.
(d) Restrictions on making certain covered loans and non-covered
loans following a covered short-term loan made under the conditional
exemption. If a lender makes a covered short-term loan under this
section to a consumer, the lender or its affiliate must not subsequently
make a covered loan, except a covered short-term loan made in accordance
with the requirements in this section, or a non-covered loan to the
[[Page 994]]
consumer while the covered short-term loan made under this section is
outstanding and for 30 days thereafter.
(e) Disclosures--(1) General form of disclosures--(i) Clear and
conspicuous. Disclosures required by this paragraph (e) must be clear
and conspicuous. Disclosures required by this section may contain
commonly accepted or readily understandable abbreviations.
(ii) In writing or electronic delivery. Disclosures required by this
paragraph (e) must be provided in writing or through electronic
delivery. The disclosures must be provided in a form that can be viewed
on paper or a screen, as applicable. This paragraph (e)(1)(ii) is not
satisfied by a disclosure provided orally or through a recorded message.
(iii) Retainable. Disclosures required by this paragraph (e) must be
provided in a retainable form.
(iv) Segregation requirements for notices. Notices required by this
paragraph (e) must be segregated from all other written or provided
materials and contain only the information required by this section,
other than information necessary for product identification, branding,
and navigation. Segregated additional content that is not required by
this paragraph (e) must not be displayed above, below, or around the
required content.
(v) Machine readable text in notices provided through electronic
delivery. If provided through electronic delivery, the notices required
by paragraphs (e)(2)(i) and (ii) of this section must use machine
readable text that is accessible via both web browsers and screen
readers.
(vi) Model forms--(A) First loan notice. The content, order, and
format of the notice required by paragraph (e)(2)(i) of this section
must be substantially similar to Model Form A-1 in appendix A to this
part.
(B) Third loan notice. The content, order, and format of the notice
required by paragraph (e)(2)(ii) of this section must be substantially
similar to Model Form A-2 in appendix A to this part.
(vii) Foreign language disclosures. Disclosures required under this
paragraph (e) may be made in a language other than English, provided
that the disclosures are made available in English upon the consumer's
request.
(2) Notice requirements--(i) First loan notice. A lender that makes
a first loan in a sequence of loans made under this section must provide
to a consumer a notice that includes, as applicable, the following
information and statements, using language substantially similar to the
language set forth in Model Form A-1 in appendix A to this part:
(A) Identifying statement. The statement ``Notice of restrictions on
future loans,'' using that phrase.
(B) Warning for loan made under this section--(1) Possible inability
to repay. A statement that warns the consumer not to take out the loan
if the consumer is unsure of being able to repay the total amount of
principal and finance charges on the loan by the contractual due date.
(2) Contractual due date. Contractual due date of the loan made
under this section.
(3) Total amount due. Total amount due on the contractual due date.
(C) Restriction on a subsequent loan required by Federal law. A
statement that informs a consumer that Federal law requires a similar
loan taken out within the next 30 days to be smaller.
(D) Borrowing limits. In a tabular form:
(1) Maximum principal amount on loan 1 in a sequence of loans made
under this section.
(2) Maximum principal amount on loan 2 in a sequence of loans made
under this section.
(3) Maximum principal amount on loan 3 in a sequence of loans made
under this section.
(4) Loan 4 in a sequence of loans made under this section is not
allowed.
(E) Lender name and contact information. Name of the lender and a
telephone number for the lender and, if applicable, a URL of the Web
site for the lender.
(ii) Third loan notice. A lender that makes a third loan in a
sequence of loans made under this section must provide to a consumer a
notice that includes the following information and statements, using
language substantially similar to the language set forth in Model Form
A-2 in appendix A to this part:
[[Page 995]]
(A) Identifying statement. The statement ``Notice of borrowing
limits on this loan and future loans,'' using that phrase.
(B) Two similar loans without 30-day break. A statement that informs
a consumer that the lender's records show that the consumer has had two
similar loans without taking at least a 30-day break between them.
(C) Restriction on loan amount required by Federal law. A statement
that informs a consumer that Federal law requires the third loan to be
smaller than previous loans in the loan sequence.
(D) Prohibition on subsequent loan. A statement that informs a
consumer that the consumer cannot take out a similar loan for at least
30 days after repaying the loan.
(E) Lender name and contact information. Name of the lender and a
telephone number for the lender and, if applicable, a URL of the Web
site for the lender.
(3) Timing. A lender must provide the notices required in paragraphs
(e)(2)(i) and (ii) of this section to the consumer before the applicable
loan under this section is consummated.
Subpart C_Payments
Sec. 1041.7 Identification of unfair and abusive practice.
It is an unfair and abusive practice for a lender to make attempts
to withdraw payment from consumers' accounts in connection with a
covered loan after the lender's second consecutive attempts to withdraw
payments from the accounts from which the prior attempts were made have
failed due to a lack of sufficient funds, unless the lender obtains the
consumers' new and specific authorization to make further withdrawals
from the accounts.
Sec. 1041.8 Prohibited payment transfer attempts.
(a) Definitions. For purposes of this section and Sec. 1041.9:
(1) Payment transfer means any lender-initiated debit or withdrawal
of funds from a consumer's account for the purpose of collecting any
amount due or purported to be due in connection with a covered loan.
(i) Means of transfer. A debit or withdrawal meeting the description
in paragraph (a)(1) of this section is a payment transfer regardless of
the means through which the lender initiates it, including but not
limited to a debit or withdrawal initiated through any of the following
means:
(A) Electronic fund transfer, including a preauthorized electronic
fund transfer as defined in Regulation E, 12 CFR 1005.2(k).
(B) Signature check, regardless of whether the transaction is
processed through the check network or another network, such as the
automated clearing house (ACH) network.
(C) Remotely created check as defined in Regulation CC, 12 CFR
229.2(fff).
(D) Remotely created payment order as defined in 16 CFR 310.2(cc).
(E) When the lender is also the account-holder, an account-holding
institution's transfer of funds from a consumer's account held at the
same institution, other than such a transfer meeting the description in
paragraph (a)(1)(ii) of this section.
(ii) Conditional exclusion for certain transfers by account-holding
institutions. When the lender is also the account-holder, an account-
holding institution's transfer of funds from a consumer's account held
at the same institution is not a payment transfer if all of the
conditions in this paragraph (a)(1)(ii) are met, notwithstanding that
the transfer otherwise meets the description in paragraph (a)(1) of this
section.
(A) The lender, pursuant to the terms of the loan agreement or
account agreement, does not charge the consumer any fee, other than a
late fee under the loan agreement, in the event that the lender
initiates a transfer of funds from the consumer's account in connection
with the covered loan for an amount that the account lacks sufficient
funds to cover.
(B) The lender, pursuant to the terms of the loan agreement or
account agreement, does not close the consumer's account in response to
a negative balance that results from a transfer of funds initiated in
connection with the covered loan.
[[Page 996]]
(2) Single immediate payment transfer at the consumer's request
means:
(i) A payment transfer initiated by a one-time electronic fund
transfer within one business day after the lender obtains the consumer's
authorization for the one-time electronic fund transfer.
(ii) A payment transfer initiated by means of processing the
consumer's signature check through the check system or through the ACH
system within one business day after the consumer provides the check to
the lender.
(b) Prohibition on initiating payment transfers from a consumer's
account after two consecutive failed payment transfers--(1) General. A
lender must not initiate a payment transfer from a consumer's account in
connection with any covered loan that the consumer has with the lender
after the lender has attempted to initiate two consecutive failed
payment transfers from that account in connection with any covered loan
that the consumer has with the lender. For purposes of this paragraph
(b), a payment transfer is deemed to have failed when it results in a
return indicating that the consumer's account lacks sufficient funds or,
if the lender is the consumer's account-holding institution, it is for
an amount that the account lacks sufficient funds to cover.
(2) Consecutive failed payment transfers. For purposes of the
prohibition in this paragraph (b):
(i) First failed payment transfer. A failed payment transfer is the
first failed payment transfer from the consumer's account if it meets
any of the following conditions:
(A) The lender has initiated no other payment transfer from the
account in connection with the covered loan or any other covered loan
that the consumer has with the lender.
(B) The immediately preceding payment transfer was successful,
regardless of whether the lender has previously initiated a first failed
payment transfer.
(C) The payment transfer is the first payment transfer to fail after
the lender obtains the consumer's authorization for additional payment
transfers pursuant to paragraph (c) of this section.
(ii) Second consecutive failed payment transfer. A failed payment
transfer is the second consecutive failed payment transfer from the
consumer's account if the immediately preceding payment transfer was a
first failed payment transfer. For purposes of this paragraph
(b)(2)(ii), a previous payment transfer includes a payment transfer
initiated at the same time or on the same day as the failed payment
transfer.
(iii) Different payment channel. A failed payment transfer meeting
the conditions in paragraph (b)(2)(ii) of this section is the second
consecutive failed payment transfer regardless of whether the first
failed payment transfer was initiated through a different payment
channel.
(c) Exception for additional payment transfers authorized by the
consumer--(1) General. Notwithstanding the prohibition in paragraph (b)
of this section, a lender may initiate additional payment transfers from
a consumer's account after two consecutive failed payment transfers if
the additional payment transfers are authorized by the consumer in
accordance with the requirements and conditions in this paragraph (c) or
if the lender executes a single immediate payment transfer at the
consumer's request in accordance with paragraph (d) of this section.
(2) General authorization requirements and conditions--(i) Required
payment transfer terms. For purposes of this paragraph (c), the specific
date, amount, and payment channel of each additional payment transfer
must be authorized by the consumer, except as provided in paragraph
(c)(2)(ii) or (iii) of this section.
(ii) Application of specific date requirement to re-initiating a
returned payment transfer. If a payment transfer authorized by the
consumer pursuant to this paragraph (c) is returned for nonsufficient
funds, the lender may re-initiate the payment transfer, such as by re-
presenting it once through the ACH system, on or after the date
authorized by the consumer, provided that the returned payment transfer
has not triggered the prohibition in paragraph (b) of this section.
(iii) Special authorization requirements and conditions for payment
transfers to collect a late fee or returned item fee. A lender may
initiate a payment transfer
[[Page 997]]
pursuant to this paragraph (c) solely to collect a late fee or returned
item fee without obtaining the consumer's authorization for the specific
date and amount of the payment transfer only if the consumer has
authorized the lender to initiate such payment transfers in advance of
the withdrawal attempt. For purposes of this paragraph (c)(2)(iii), the
consumer authorizes such payment transfers only if the consumer's
authorization obtained under paragraph (c)(3)(iii) of this section
includes a statement, in terms that are clear and readily understandable
to the consumer, that payment transfers may be initiated solely to
collect a late fee or returned item fee and that specifies the highest
amount for such fees that may be charged and the payment channel to be
used.
(3) Requirements and conditions for obtaining the consumer's
authorization--(i) General. For purposes of this paragraph (c), the
lender must request and obtain the consumer's authorization for
additional payment transfers in accordance with the requirements and
conditions in this paragraph (c)(3).
(ii) Provision of payment transfer terms to the consumer. The lender
may request the consumer's authorization for additional payment
transfers no earlier than the date on which the lender provides to the
consumer the consumer rights notice required by Sec. 1041.9(c). The
request must include the payment transfer terms required under paragraph
(c)(2)(i) of this section and, if applicable, the statement required by
paragraph (c)(2)(iii) of this section. The lender may provide the terms
and statement to the consumer by any one of the following means:
(A) In writing, by mail or in person, or in a retainable form by
email if the consumer has consented to receive electronic disclosures in
this manner under Sec. 1041.9(a)(4) or agrees to receive the terms and
statement by email in the course of a communication initiated by the
consumer in response to the consumer rights notice required by Sec.
1041.9(c).
(B) By oral telephone communication, if the consumer affirmatively
contacts the lender in that manner in response to the consumer rights
notice required by Sec. 1041.9(c) and agrees to receive the terms and
statement in that manner in the course of, and as part of, the same
communication.
(iii) Signed authorization required--(A) General. For an
authorization to be valid under this paragraph (c), it must be signed or
otherwise agreed to by the consumer in writing or electronically and in
a retainable format that memorializes the payment transfer terms
required under paragraph (c)(2)(i) of this section and, if applicable,
the statement required by paragraph (c)(2)(iii) of this section. The
signed authorization must be obtained from the consumer no earlier than
when the consumer receives the consumer rights notice required by Sec.
1041.9(c) in person or electronically, or the date on which the consumer
receives the notice by mail. For purposes of this paragraph
(c)(3)(iii)(A), the consumer is considered to have received the notice
at the time it is provided to the consumer in person or electronically,
or, if the notice is provided by mail, the earlier of the third business
day after mailing or the date on which the consumer affirmatively
responds to the mailed notice.
(B) Special requirements for authorization obtained by oral
telephone communication. If the authorization is granted in the course
of an oral telephone communication, the lender must record the call and
retain the recording.
(C) Memorialization required. If the authorization is granted in the
course of a recorded telephonic conversation or is otherwise not
immediately retainable by the consumer at the time of signature, the
lender must provide a memorialization in a retainable form to the
consumer by no later than the date on which the first payment transfer
authorized by the consumer is initiated. A memorialization may be
provided to the consumer by email in accordance with the requirements
and conditions in paragraph (c)(3)(ii)(A) of this section.
(4) Expiration of authorization. An authorization obtained from a
consumer pursuant to this paragraph (c) becomes null and void for
purposes of the exception in this paragraph (c) if:
(i) The lender subsequently obtains a new authorization from the
consumer pursuant to this paragraph (c); or
[[Page 998]]
(ii) Two consecutive payment transfers initiated pursuant to the
consumer's authorization fail, as specified in paragraph (b) of this
section.
(d) Exception for initiating a single immediate payment transfer at
the consumer's request. After a lender's second consecutive payment
transfer has failed as specified in paragraph (b) of this section, the
lender may initiate a payment transfer from the consumer's account
without obtaining the consumer's authorization for additional payment
transfers pursuant to paragraph (c) of this section if:
(1) The payment transfer is a single immediate payment transfer at
the consumer's request as defined in paragraph (a)(2) of this section;
and
(2) The consumer authorizes the underlying one-time electronic fund
transfer or provides the underlying signature check to the lender, as
applicable, no earlier than the date on which the lender provides to the
consumer the consumer rights notice required by Sec. 1041.9(c) or on
the date that the consumer affirmatively contacts the lender to discuss
repayment options, whichever date is earlier.
(e) Prohibition against evasion. A lender must not take any action
with the intent of evading the requirements of this section.
Sec. 1041.9 Disclosure of payment transfer attempts.
(a) General form of disclosures--(1) Clear and conspicuous.
Disclosures required by this section must be clear and conspicuous.
Disclosures required by this section may contain commonly accepted or
readily understandable abbreviations.
(2) In writing or electronic delivery. Disclosures required by this
section must be provided in writing or, so long as the requirements of
paragraph (a)(4) of this section are satisfied, through electronic
delivery. The disclosures must be provided in a form that can be viewed
on paper or a screen, as applicable. This paragraph (a)(2) is not
satisfied by a disclosure provided orally or through a recorded message.
(3) Retainable. Disclosures required by this section must be
provided in a retainable form, except for electronic short notices
delivered by mobile application or text message under paragraph (b) or
(c) of this section.
(4) Electronic delivery. Disclosures required by this section may be
provided through electronic delivery if the following consent
requirements are satisfied:
(i) Consumer consent--(A) General. Disclosures required by this
section may be provided through electronic delivery if the consumer
affirmatively consents in writing or electronically to the particular
electronic delivery method.
(B) Email option required. To obtain valid consumer consent to
electronic delivery under this paragraph, a lender must provide the
consumer with the option to select email as the method of electronic
delivery, separate and apart from any other electronic delivery methods
such as mobile application or text message.
(ii) Subsequent loss of consent. Notwithstanding paragraph (a)(4)(i)
of this section, a lender must not provide disclosures required by this
section through a method of electronic delivery if:
(A) The consumer revokes consent to receive disclosures through that
delivery method; or
(B) The lender receives notification that the consumer is unable to
receive disclosures through that delivery method at the address or
number used.
(5) Segregation requirements for notices. All notices required by
this section must be segregated from all other written or provided
materials and contain only the information required by this section,
other than information necessary for product identification, branding,
and navigation. Segregated additional content that is not required by
this section must not be displayed above, below, or around the required
content.
(6) Machine readable text in notices provided through electronic
delivery. If provided through electronic delivery, the payment notice
required by paragraph (b) of this section and the consumer rights notice
required by paragraph (c) of this section must use machine readable text
that is accessible via both web browsers and screen readers.
[[Page 999]]
(7) Model forms--(i) Payment notice. The content, order, and format
of the payment notice required by paragraph (b) of this section must be
substantially similar to Model Forms A-3 through A-4 in appendix A to
this part.
(ii) Consumer rights notice. The content, order, and format of the
consumer rights notice required by paragraph (c) of this section must be
substantially similar to Model Form A-5 in appendix A to this part.
(iii) Electronic short notice. The content, order, and format of the
electronic short notice required by paragraph (b) of this section must
be substantially similar to Model Clauses A-6 and A-7 in appendix A to
this part. The content, order, and format of the electronic short notice
required by paragraph (c) of this section must be substantially similar
to Model Clause A-8 in appendix A to this part.
(8) Foreign language disclosures. Disclosures required under this
section may be made in a language other than English, provided that the
disclosures are made available in English upon the consumer's request.
(b) Payment notice--(1) General. Prior to initiating the first
payment withdrawal or an unusual withdrawal from a consumer's account, a
lender must provide to the consumer a payment notice in accordance with
the requirements in this paragraph (b) as applicable.
(i) First payment withdrawal means the first payment transfer
scheduled to be initiated by a lender for a particular covered loan, not
including a single immediate payment transfer initiated at the
consumer's request as defined in Sec. 1041.8(a)(2).
(ii) Unusual withdrawal means a payment transfer that meets one or
more of the conditions described in paragraph (b)(3)(ii)(C) of this
section.
(iii) Exceptions. The payment notice need not be provided when the
lender initiates:
(A) The initial payment transfer from a consumer's account after
obtaining consumer authorization pursuant to Sec. 1041.8(c), regardless
of whether any of the conditions in paragraph (b)(3)(ii)(C) of this
section apply; or
(B) A single immediate payment transfer initiated at the consumer's
request in accordance with Sec. 1041.8(a)(2).
(2) First payment withdrawal notice--(i) Timing--(A) Mail. If the
lender provides the first payment withdrawal notice by mail, the lender
must mail the notice no earlier than when the lender obtains payment
authorization and no later than six business days prior to initiating
the transfer.
(B) Electronic delivery. (1) If the lender provides the first
payment withdrawal notice through electronic delivery, the lender must
send the notice no earlier than when the lender obtains payment
authorization and no later than three business days prior to initiating
the transfer.
(2) If, after providing the first payment withdrawal notice through
electronic delivery pursuant to the timing requirements in paragraph
(b)(2)(i) of this section, the lender loses the consumer's consent to
receive the notice through a particular electronic delivery method
according to paragraph (a)(4)(ii) of this section, the lender must
provide notice of any future unusual withdrawal, if applicable, through
alternate means.
(C) In person. If the lender provides the first payment withdrawal
notice in person, the lender must provide the notice no earlier than
when the lender obtains payment authorization and no later than three
business days prior to initiating the transfer.
(ii) Content requirements. The notice must contain the following
information and statements, as applicable, using language substantially
similar to the language set forth in Model Form A-3 in appendix A to
this part:
(A) Identifying statement. The statement, ``Upcoming Withdrawal
Notice,'' using that phrase, and, in the same statement, the name of the
lender providing the notice.
(B) Transfer terms--(1) Date. Date that the lender will initiate the
transfer.
(2) Amount. Dollar amount of the transfer.
(3) Consumer account. Sufficient information to permit the consumer
to identify the account from which the funds will be transferred. The
lender must not provide the complete account number of the consumer, but
may use a
[[Page 1000]]
truncated version similar to Model Form A-3 in appendix A to this part.
(4) Loan identification information. Sufficient information to
permit the consumer to identify the covered loan associated with the
transfer.
(5) Payment channel. Payment channel of the transfer.
(6) Check number. If the transfer will be initiated by a signature
or paper check, remotely created check (as defined in Regulation CC, 12
CFR 229.2(fff)), or remotely created payment order (as defined in 16 CFR
310.2(cc)), the check number associated with the transfer.
(C) Payment breakdown. In a tabular form:
(1) Payment breakdown heading. A heading with the statement
``Payment Breakdown,'' using that phrase.
(2) Principal. The amount of the payment that will be applied to
principal.
(3) Interest. The amount of the payment that will be applied to
accrued interest on the loan.
(4) Fees. If applicable, the amount of the payment that will be
applied to fees.
(5) Other charges. If applicable, the amount of the payment that
will be applied to other charges.
(6) Amount. The statement ``Total Payment Amount,'' using that
phrase, and the total dollar amount of the payment as provided in
paragraph (b)(2)(ii)(B)(2) of this section.
(7) Explanation of interest-only or negatively amortizing payment.
If applicable, a statement explaining that the payment will not reduce
principal, using the applicable phrase ``When you make this payment,
your principal balance will stay the same and you will not be closer to
paying off your loan'' or ``When you make this payment, your principal
balance will increase and you will not be closer to paying off your
loan.''
(D) Lender name and contact information. Name of the lender, the
name under which the transfer will be initiated (if different from the
consumer-facing name of the lender), and two different forms of lender
contact information that may be used by the consumer to obtain
information about the consumer's loan.
(3) Unusual withdrawal notice--(i) Timing--(A) Mail. If the lender
provides the unusual withdrawal notice by mail, the lender must mail the
notice no earlier than 10 business days and no later than six business
days prior to initiating the transfer.
(B) Electronic delivery. (1) If the lender provides the unusual
withdrawal notice through electronic delivery, the lender must send the
notice no earlier than seven business days and no later than three
business days prior to initiating the transfer.
(2) If, after providing the unusual withdrawal notice through
electronic delivery pursuant to the timing requirements in paragraph
(b)(3)(i)(B) of this section, the lender loses the consumer's consent to
receive the notice through a particular electronic delivery method
according to paragraph (a)(4)(ii) of this section, the lender must
provide notice of any future unusual withdrawal attempt, if applicable,
through alternate means.
(C) In person. If the lender provides the unusual withdrawal notice
in person, the lender must provide the notice no earlier than seven
business days and no later than three business days prior to initiating
the transfer.
(D) Exception for open-end credit. If the unusual withdrawal notice
is for open-end credit as defined in Sec. 1041.2(a)(16), the lender may
provide the unusual withdrawal notice in conjunction with the periodic
statement required under Regulation Z, 12 CFR 1026.7(b), in accordance
with the timing requirements of that section.
(ii) Content requirements. The unusual withdrawal notice must
contain the following information and statements, as applicable, using
language substantially similar to the language set forth in Model Form
A-4 in appendix A to this part:
(A) Identifying statement. The statement, ``Alert: Unusual
Withdrawal,'' using that phrase, and, in the same statement, the name of
the lender that is providing the notice.
(B) Basic payment information. The content required for the first
withdrawal notice under paragraphs (b)(2)(ii)(B) through (D) of this
section.
(C) Description of unusual withdrawal. The following content, as
applicable, in
[[Page 1001]]
a form substantially similar to the form in Model Form A-4 in appendix A
to this part:
(1) Varying amount--(i) General. If the amount of a transfer will
vary in amount from the regularly scheduled payment amount, a statement
that the transfer will be for a larger or smaller amount than the
regularly scheduled payment amount, as applicable.
(ii) Open-end credit. If the payment transfer is for open-end credit
as defined in Sec. 1041.2(a)(16), the varying amount content is
required only if the amount deviates from the scheduled minimum payment
due as disclosed in the periodic statement required under Regulation Z,
12 CFR 1026.7(b).
(2) Date other than date of regularly scheduled payment. If the
payment transfer date is not a date on which a regularly scheduled
payment is due under the terms of the loan agreement, a statement that
the transfer will be initiated on a date other than the date of a
regularly scheduled payment.
(3) Different payment channel. If the payment channel will differ
from the payment channel of the transfer directly preceding it, a
statement that the transfer will be initiated through a different
payment channel and a statement of the payment channel used for the
prior transfer.
(4) For purpose of re-initiating returned transfer. If the transfer
is for the purpose of re-initiating a returned transfer, a statement
that the lender is re-initiating a returned transfer, a statement of the
date and amount of the previous unsuccessful attempt, and a statement of
the reason for the return.
(4) Electronic delivery--(i) General. When the consumer has
consented to receive disclosures through electronic delivery, the lender
may provide the applicable payment notice required by paragraph (b)(1)
of this section through electronic delivery only if it also provides an
electronic short notice, except for email delivery as provided in
paragraph (b)(4)(iii) of this section.
(ii) Electronic short notice--(A) General content. The electronic
short notice required by this paragraph (b) must contain the following
information and statements, as applicable, in a form substantially
similar to Model Clause A-6 in appendix A to this part:
(1) Identifying statement, as required under paragraphs
(b)(2)(ii)(A) and (b)(3)(ii)(A) of this section;
(2) Transfer terms--(i) Date, as required under paragraphs
(b)(2)(ii)(B)(1) and (b)(3)(ii)(B) of this section;
(ii) Amount, as required under paragraphs (b)(2)(ii)(B)(2) and
(b)(3)(ii)(B) of this section;
(iii) Consumer account, as required and limited under paragraphs
(b)(2)(ii)(B)(3) and (b)(3)(ii)(B) of this section; and
(3) Web site URL. When the full notice is being provided through a
linked URL rather than as a PDF attachment, the unique URL of a Web site
that the consumer may use to access the full payment notice required by
paragraph (b) of this section.
(B) Additional content requirements. If the transfer meets any of
the conditions for unusual attempts described in paragraph (b)(3)(ii)(C)
of this section, the electronic short notice must also contain the
following information and statements, as applicable, using language
substantially similar to the language in Model Clause A-7 in appendix A
to this part:
(1) Varying amount, as defined under paragraph (b)(3)(ii)(C)(1) of
this section;
(2) Date other than due date of regularly scheduled payment, as
defined under paragraph (b)(3)(ii)(C)(2) of this section; and
(3) Different payment channel, as defined under paragraph
(b)(3)(ii)(C)(3) of this section.
(iii) Email delivery. When the consumer has consented to receive
disclosures through electronic delivery, and the method of electronic
delivery is email, the lender may either deliver the full notice
required by paragraph (b)(1) of this section in the body of the email or
deliver the full notice as a linked URL Web page or PDF attachment along
with the electronic short notice as provided in paragraph (b)(4)(ii) of
this section.
(c) Consumer rights notice--(1) General. After a lender initiates
two consecutive failed payment transfers from a consumer's account as
described in Sec. 1041.8(b), the lender must provide to the consumer a
consumer rights notice in accordance with the requirements of paragraphs
(c)(2) through (4) of this section.
[[Page 1002]]
(2) Timing. The lender must send the notice no later than three
business days after it receives information that the second consecutive
attempt has failed.
(3) Content requirements. The notice must contain the following
information and statements, using language substantially similar to the
language set forth in Model Form A-5 in appendix A to this part:
(i) Identifying statement. A statement that the lender, identified
by name, is no longer permitted to withdraw loan payments from the
consumer's account.
(ii) Last two attempts were returned. A statement that the lender's
last two attempts to withdraw payment from the consumer's account were
returned due to non-sufficient funds, or, if applicable to payments
initiated by the consumer's account-holding institution, caused the
account to go into overdraft status.
(iii) Consumer account. Sufficient information to permit the
consumer to identify the account from which the unsuccessful payment
attempts were made. The lender must not provide the complete account
number of the consumer, but may use a truncated version similar to Model
Form A-5 in appendix A to this part.
(iv) Loan identification information. Sufficient information to
permit the consumer to identify any covered loans associated with the
unsuccessful payment attempts.
(v) Statement of Federal law prohibition. A statement, using that
phrase, that in order to protect the consumer's account, Federal law
prohibits the lender from initiating further payment transfers without
the consumer's permission.
(vi) Contact about choices. A statement that the lender may be in
contact with the consumer about payment choices going forward.
(vii) Previous unsuccessful payment attempts. In a tabular form:
(A) Previous payment attempts heading. A heading with the statement
``previous payment attempts.''
(B) Payment due date. The scheduled due date of each previous
unsuccessful payment transfer attempted by the lender.
(C) Date of attempt. The date of each previous unsuccessful payment
transfer initiated by the lender.
(D) Amount. The amount of each previous unsuccessful payment
transfer initiated by the lender.
(E) Fees. The fees charged by the lender for each unsuccessful
payment attempt, if applicable, with an indication that these fees were
charged by the lender.
(viii) CFPB information. A statement, using that phrase, that the
Consumer Financial Protection Bureau created this notice, a statement
that the CFPB is a Federal government agency, and the URL to
www.consumerfinance.gov/payday-rule. This statement must be the last
piece of information provided in the notice.
(4) Electronic delivery--(i) General. When the consumer has
consented to receive disclosures through electronic delivery, the lender
may provide the consumer rights notice required by paragraph (c) of this
section through electronic delivery only if it also provides an
electronic short notice, except for email delivery as provided in
paragraph (c)(4)(iii) of this section.
(ii) Electronic short notice--(A) Content. The notice must contain
the following information and statements, as applicable, using language
substantially similar to the language set forth in Model Clause A-8 in
appendix A to this part:
(1) Identifying statement. As required under paragraph (c)(3)(i) of
this section;
(2) Last two attempts were returned. As required under paragraph
(c)(3)(ii) of this section;
(3) Consumer account. As required and limited under paragraph
(c)(3)(iii) of this section;
(4) Statement of Federal law prohibition. As required under
paragraph (c)(3)(v) of this section; and
(5) Web site URL. When the full notice is being provided through a
linked URL rather than as a PDF attachment, the unique URL of a Web site
that the consumer may use to access the full consumer rights notice
required by paragraph (c) of this section.
(B) [Reserved]
[[Page 1003]]
(iii) Email delivery. When the consumer has consented to receive
disclosures through electronic delivery, and the method of electronic
delivery is email, the lender may either deliver the full notice
required by paragraph (c)(1) of this section in the body of the email or
deliver the full notice as a linked URL Web page or PDF attachment along
with the electronic short notice as provided in paragraph (c)(4)(ii) of
this section.
Subpart D_Information Furnishing, Recordkeeping, Anti-Evasion, and
Severability
Sec. 1041.10 Information furnishing requirements.
(a) Loans subject to furnishing requirement. For each covered short-
term loan and covered longer-term balloon-payment loan a lender makes,
the lender must furnish the loan information described in paragraph (c)
of this section to each information system described in paragraph (b)(1)
of this section.
(b) Information systems to which information must be furnished. (1)
A lender must furnish information as required in paragraphs (a) and (c)
of this section to each information system that, as of the date the loan
is consummated:
(i) Has been registered with the Bureau pursuant to Sec.
1041.11(c)(2) for 180 days or more; or
(ii) Has been provisionally registered with the Bureau pursuant to
Sec. 1041.11(d)(1) for 180 days or more or subsequently has become
registered with the Bureau pursuant to Sec. 1041.11(d)(2).
(2) The Bureau will publish on its Web site and in the Federal
Register notice of the provisional registration of an information system
pursuant to Sec. 1041.11(d)(1), registration of an information system
pursuant to Sec. 1041.11(c)(2) or (d)(2), and suspension or revocation
of the provisional registration or registration of an information system
pursuant to Sec. 1041.11(h). For purposes of paragraph (b)(1) of this
section, an information system is provisionally registered or
registered, and its provisional registration or registration is
suspended or revoked, on the date that the Bureau publishes notice of
such provisional registration, registration, suspension, or revocation
on its Web site. The Bureau will maintain on the Bureau's Web site a
current list of information systems provisionally registered pursuant to
Sec. 1041.11(d)(1) and registered pursuant to Sec. 1041.11(c)(2) and
(d)(2). In the event that a provisional registration or registration of
an information system is suspended, the Bureau will provide instructions
on its Web site concerning the scope and terms of the suspension.
(c) Information to be furnished. A lender must furnish the
information described in this paragraph (c), at the times described in
this paragraph (c), concerning each covered loan as required in
paragraphs (a) and (b) of this section. A lender must furnish the
information in a format acceptable to each information system to which
it must furnish information.
(1) Information to be furnished at loan consummation. A lender must
furnish the following information no later than the date on which the
loan is consummated or as close in time as feasible to the date the loan
is consummated:
(i) Information necessary to uniquely identify the loan;
(ii) Information necessary to allow the information system to
identify the specific consumer(s) responsible for the loan;
(iii) Whether the loan is a covered short-term loan or a covered
longer-term balloon-payment loan;
(iv) Whether the loan is made under Sec. 1041.5 or Sec. 1041.6, as
applicable;
(v) The loan consummation date;
(vi) For a loan made under Sec. 1041.6, the principal amount
borrowed;
(vii) For a loan that is closed-end credit:
(A) The fact that the loan is closed-end credit;
(B) The date that each payment on the loan is due; and
(C) The amount due on each payment date; and
(viii) For a loan that is open-end credit:
(A) The fact that the loan is open-end credit;
(B) The credit limit on the loan;
(C) The date that each payment on the loan is due; and
[[Page 1004]]
(D) The minimum amount due on each payment date.
(2) Information to be furnished while loan is an outstanding loan.
During the period that the loan is an outstanding loan, a lender must
furnish any update to information previously furnished pursuant to this
section within a reasonable period of the event that causes the
information previously furnished to be out of date.
(3) Information to be furnished when loan ceases to be an
outstanding loan. A lender must furnish the following information no
later than the date the loan ceases to be an outstanding loan or as
close in time as feasible to the date the loan ceases to be an
outstanding loan:
(i) The date as of which the loan ceased to be an outstanding loan;
and
(ii) Whether all amounts owed in connection with the loan were paid
in full, including the amount financed, charges included in the cost of
credit, and charges excluded from the cost of credit.
Sec. 1041.11 Registered information systems.
(a) Definitions. (1) Consumer report has the same meaning as in
section 603(d) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(d).
(2) Federal consumer financial law has the same meaning as in
section 1002(14) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 12 U.S.C. 5481(14).
(b) Eligibility criteria for information systems. An entity is
eligible to be a provisionally registered information system pursuant to
paragraph (d)(1) of this section or a registered information system
pursuant to paragraph (c)(2) or (d)(2) of this section only if the
Bureau determines that the following conditions are satisfied:
(1) Receiving capability. The entity possesses the technical
capability to receive information lenders must furnish pursuant to Sec.
1041.10 immediately upon the furnishing of such information and uses
reasonable data standards that facilitate the timely and accurate
transmission and processing of information in a manner that does not
impose unreasonable costs or burdens on lenders.
(2) Reporting capability. The entity possesses the technical
capability to generate a consumer report containing, as applicable for
each unique consumer, all information described in Sec. 1041.10
substantially simultaneous to receiving the information from a lender.
(3) Performance. The entity will perform or performs in a manner
that facilitates compliance with and furthers the purposes of this part.
(4) Federal consumer financial law compliance program. The entity
has developed, implemented, and maintains a program reasonably designed
to ensure compliance with all applicable Federal consumer financial
laws, which includes written policies and procedures, comprehensive
training, and monitoring to detect and to promptly correct compliance
weaknesses.
(5) Independent assessment of Federal consumer financial law
compliance program. The entity provides to the Bureau in its application
for provisional registration or registration a written assessment of the
Federal consumer financial law compliance program described in paragraph
(b)(4) of this section and such assessment:
(i) Sets forth a detailed summary of the Federal consumer financial
law compliance program that the entity has implemented and maintains;
(ii) Explains how the Federal consumer financial law compliance
program is appropriate for the entity's size and complexity, the nature
and scope of its activities, and risks to consumers presented by such
activities;
(iii) Certifies that, in the opinion of the assessor, the Federal
consumer financial law compliance program is operating with sufficient
effectiveness to provide reasonable assurance that the entity is
fulfilling its obligations under all Federal consumer financial laws;
and
(iv) Certifies that the assessment has been conducted by a
qualified, objective, independent third-party individual or entity that
uses procedures and standards generally accepted in the profession,
adheres to professional and business ethics, performs all duties
[[Page 1005]]
objectively, and is free from any conflicts of interest that might
compromise the assessor's independent judgment in performing
assessments.
(6) Information security program. The entity has developed,
implemented, and maintains a comprehensive information security program
that complies with the Standards for Safeguarding Customer Information,
16 CFR part 314.
(7) Independent assessment of information security program. (i) The
entity provides to the Bureau in its application for provisional
registration or registration and on at least a biennial basis
thereafter, a written assessment of the information security program
described in paragraph (b)(6) of this section and such assessment:
(A) Sets forth the administrative, technical, and physical
safeguards that the entity has implemented and maintains;
(B) Explains how such safeguards are appropriate to the entity's
size and complexity, the nature and scope of its activities, and the
sensitivity of the customer information at issue;
(C) Explains how the safeguards that have been implemented meet or
exceed the protections required by the Standards for Safeguarding
Customer Information, 16 CFR part 314;
(D) Certifies that, in the opinion of the assessor, the information
security program is operating with sufficient effectiveness to provide
reasonable assurance that the entity is fulfilling its obligations under
the Standards for Safeguarding Customer Information, 16 CFR part 314;
and
(E) Certifies that the assessment has been conducted by a qualified,
objective, independent third-party individual or entity that uses
procedures and standards generally accepted in the profession, adheres
to professional and business ethics, performs all duties objectively,
and is free from any conflicts of interest that might compromise the
assessor's independent judgment in performing assessments.
(ii) Each written assessment obtained and provided to the Bureau on
at least a biennial basis pursuant to paragraph (b)(7)(i) of this
section must be completed and provided to the Bureau within 60 days
after the end of the period to which the assessment applies.
(8) Bureau supervisory authority. The entity acknowledges it is, or
consents to being, subject to the Bureau's supervisory authority.
(c) Registration of information systems prior to August 19, 2019--
(1) Preliminary approval. Prior to August 19, 2019, the Bureau may
preliminarily approve an entity for registration only if the entity
submits an application for preliminary approval to the Bureau by the
deadline set forth in paragraph (c)(3)(i) of this section containing
information sufficient for the Bureau to determine that the entity is
reasonably likely to satisfy the conditions set forth in paragraph (b)
of this section by the deadline set forth in paragraph (c)(3)(ii) of
this section. The assessments described in paragraphs (b)(5) and (7) of
this section need not be included with an application for preliminary
approval for registration or completed prior to the submission of the
application. The Bureau may require additional information and
documentation to facilitate this determination.
(2) Registration. Prior to August 19, 2019, the Bureau may approve
the application of an entity to be a registered information system only
if:
(i) The entity received preliminary approval pursuant to paragraph
(c)(1) of this section; and
(ii) The entity submits an application to the Bureau by the deadline
set forth in paragraph (c)(3)(ii) of this section that contains
information and documentation sufficient for the Bureau to determine
that the entity satisfies the conditions set forth in paragraph (b) of
this section. The Bureau may require additional information and
documentation to facilitate this determination or otherwise to assess
whether registration of the entity would pose an unreasonable risk to
consumers.
(3) Deadlines. (i) The deadline to submit an application for
preliminary approval for registration pursuant to paragraph (c)(1) of
this section is April 16, 2018.
(ii) The deadline to submit an application to be a registered
information system pursuant to paragraph (c)(2) of this section is 120
days from the date preliminary approval for registration is granted.
[[Page 1006]]
(iii) The Bureau may waive the deadlines set forth in this paragraph
(c).
(d) Registration of information systems on or after August 19,
2019--(1) Provisional registration. On or after August 19, 2019, the
Bureau may approve an entity to be a provisionally registered
information system only if the entity submits an application to the
Bureau that contains information and documentation sufficient for the
Bureau to determine that the entity satisfies the conditions set forth
in paragraph (b) of this section. The Bureau may require additional
information and documentation to facilitate this determination or
otherwise to assess whether provisional registration of the entity would
pose an unreasonable risk to consumers.
(2) Registration. An information system that is provisionally
registered pursuant to paragraph (d)(1) of this section shall
automatically become a registered information system pursuant to this
paragraph (d)(2) upon the expiration of the 240-day period commencing on
the date the information system is provisionally registered. For
purposes of this paragraph (d)(2), an information system is
provisionally registered on the date that the Bureau publishes notice of
the provisional registration on the Bureau's Web site.
(e) Applications. Applications for preliminary approval,
registration, and provisional registration shall be submitted in the
form required by the Bureau and shall include, in addition to the
information described in paragraph (c) or (d) of this section, as
applicable, the following information:
(1) The name under which the applicant conducts business, including
any ``doing business as'' or other trade name;
(2) The applicant's main business address, mailing address if it is
different from the main business address, telephone number, electronic
mail address, and Internet Web site; and
(3) The name and contact information (including telephone number and
electronic mail address) of the person authorized to communicate with
the Bureau on the applicant's behalf concerning the application.
(f) Denial of application. The Bureau will deny the application of
an entity seeking preliminary approval for registration under paragraph
(c)(1) of this section, registration under paragraph (c)(2) of this
section, or provisional registration under paragraph (d)(1) of this
section, if the Bureau determines, as applicable, that:
(1) The entity does not satisfy the conditions set forth in
paragraph (b) of this section, or, in the case of an entity seeking
preliminary approval for registration, is not reasonably likely to
satisfy the conditions as of the deadline set forth in paragraph
(c)(3)(ii) of this section;
(2) The entity's application is untimely or materially inaccurate or
incomplete; or
(3) Preliminary approval, provisional registration, or registration
of the entity would pose an unreasonable risk to consumers.
(g) Notice of material change. An entity that is a provisionally
registered or registered information system must provide to the Bureau
in writing a description of any material change to information contained
in its application for registration submitted pursuant to paragraph
(c)(2) of this section or provisional registration submitted pursuant to
paragraph (d)(1) of this section, or to information previously provided
to the Bureau pursuant to this paragraph (g), within 14 days of such
change.
(h) Suspension and revocation. (1) The Bureau will suspend or revoke
an entity's preliminary approval for registration pursuant to paragraph
(c)(1) of this section, provisional registration pursuant to paragraph
(d)(1) of this section, or registration pursuant to paragraph (c)(2) or
(d)(2) of this section if the Bureau determines:
(i) That the entity has not satisfied or no longer satisfies the
conditions described in paragraph (b) of this section or has not
complied with the requirement described in paragraph (g) of this
section; or
(ii) That preliminary approval, provisional registration, or
registration of the entity poses an unreasonable risk to consumers.
(2) The Bureau may require additional information and documentation
from an entity if it has reason to believe suspension or revocation
under
[[Page 1007]]
paragraph (h)(1) of this section may be warranted.
(3) Except in cases of willfulness or those in which the public
interest requires otherwise, prior to suspension or revocation under
paragraph (h)(1) of this section, the Bureau will provide written notice
of the facts or conduct that may warrant the suspension or revocation
and an opportunity for the entity or information system to demonstrate
or achieve compliance with this section or otherwise address the
Bureau's concerns.
(4) The Bureau will revoke an entity's preliminary approval for
registration, provisional registration, or registration if the entity
submits a written request to the Bureau that its preliminary approval,
provisional registration, or registration be revoked.
(5) For purposes of Sec. Sec. 1041.5 and 1041.6, suspension or
revocation of an information system's registration is effective five
days after the date that the Bureau publishes notice of the suspension
or revocation on the Bureau's Web site. For purposes of Sec.
1041.10(b)(1), suspension or revocation of an information system's
provisional registration or registration is effective on the date that
the Bureau publishes notice of the suspension or revocation on the
Bureau's Web site. The Bureau will also publish notice of a suspension
or revocation in the Federal Register.
(6) In the event that a provisional registration or registration of
an information system is suspended, the Bureau will provide instructions
concerning the scope and terms of the suspension on its Web site and in
the notice of suspension published in the Federal Register.
(i) Administrative appeals--(1) Grounds for administrative appeals.
An entity may appeal a determination of the Bureau that:
(i) Denies the application of an entity seeking preliminary approval
for registration under paragraph (c)(1) of this section, registration
under paragraph (c)(2) of this section, or provisional registration
under paragraph (d)(1) of this section; or
(ii) Suspends or revokes the entity's preliminary approval for
registration pursuant to paragraph (c)(1) of this section, provisional
registration pursuant to paragraph (d)(1) of this section, or
registration pursuant to paragraph (c)(2) or (d)(2) of this section.
(2) Time limits for filing administrative appeals. An appeal must be
submitted on a date that is within 30 business days of the date of the
determination. The Bureau may extend this time for good cause.
(3) Form and content of administrative appeals. An appeal shall be
made by electronic means as follows:
(i) The appeal shall be submitted as set forth on the Bureau's Web
site. The appeal shall be labeled ``Information System Registration
Appeal;''
(ii) The appeal shall set forth contact information for the
appellant including, to the extent available, a mailing address,
telephone number, or email address at which the Bureau may contact the
appellant regarding the appeal;
(iii) The appeal shall specify the date of the letter of
determination, and enclose a copy of the determination being appealed;
and
(iv) The appeal shall include a description of the issues in
dispute, specify the legal and factual basis for appealing the
determination, and include appropriate supporting information.
(4) Appeals process. The filing and pendency of an appeal does not
by itself suspend the determination that is the subject of the appeal
during the appeals process. Notwithstanding the foregoing, the Bureau
may, in its discretion, suspend the determination that is the subject of
the appeal during the appeals process.
(5) Decisions to grant or deny administrative appeals. The Bureau
shall decide whether to affirm the determination (in whole or in part)
or to reverse the determination (in whole or in part) and shall notify
the appellant of this decision in writing.
Sec. 1041.12 Compliance program and record retention.
(a) Compliance program. A lender making a covered loan must develop
and follow written policies and procedures that are reasonably designed
to ensure compliance with the requirements in this part. These written
policies and procedures must be appropriate to the size and complexity
of the
[[Page 1008]]
lender and its affiliates, and the nature and scope of the covered loan
lending activities of the lender and its affiliates.
(b) Record retention. A lender must retain evidence of compliance
with this part for 36 months after the date on which a covered loan
ceases to be an outstanding loan.
(1) Retention of loan agreement and documentation obtained in
connection with originating a covered short-term or covered longer-term
balloon-payment loan. To comply with the requirements in this paragraph
(b), a lender must retain or be able to reproduce an image of the loan
agreement and documentation obtained in connection with a covered short-
term or covered longer-term balloon-payment loan, including the
following documentation, as applicable:
(i) Consumer report from an information system that has been
registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or is
registered with the Bureau pursuant to Sec. 1041.11(d)(2);
(ii) Verification evidence, as described in Sec. 1041.5(c)(2)(ii);
and
(iii) Written statement obtained from the consumer, as described in
Sec. 1041.5(c)(2)(i).
(2) Electronic records in tabular format regarding origination
calculations and determinations for a covered short-term or covered
longer-term balloon-payment loan under Sec. 1041.5. To comply with the
requirements in this paragraph (b), a lender must retain electronic
records in tabular format that include the following information for a
covered loan made under Sec. 1041.5:
(i) The projection made by the lender of the amount of a consumer's
net income during the relevant monthly period;
(ii) The projections made by the lender of the amounts of a
consumer's major financial obligations during the relevant monthly
period;
(iii) Calculated residual income or debt-to-income ratio during the
relevant monthly period;
(iv) Estimated basic living expenses for the consumer during the
relevant monthly period; and
(v) Other consumer-specific information considered in making the
ability-to-repay determination.
(3) Electronic records in tabular format regarding type, terms, and
performance of covered short-term or covered longer-term balloon-payment
loan. To comply with the requirements in this paragraph (b), a lender
must retain electronic records in tabular format that include the
following information for a covered short-term or covered longer-term
balloon-payment loan:
(i) As applicable, the information listed in Sec. 1041.10(c)(1)(i)
through (viii) and (c)(2);
(ii) Whether the lender obtained vehicle security from the consumer;
(iii) The loan number in a loan sequence of covered short-term
loans, covered longer-term balloon-payment loans, or a combination
thereof;
(iv) For any full payment on the loan that was not received or
transferred by the contractual due date, the number of days such payment
was past due, up to a maximum of 180 days;
(v) For a loan with vehicle security: Whether repossession of the
vehicle was initiated;
(vi) Date of last or final payment received; and
(vii) The information listed in Sec. 1041.10(c)(3).
(4) Retention of records relating to payment practices for covered
loans. To comply with the requirements in this paragraph (b), a lender
must retain or be able to reproduce an image of the following
documentation, as applicable, in connection with a covered loan:
(i) Leveraged payment mechanism(s) obtained by the lender from the
consumer;
(ii) Authorization of additional payment transfer, as described in
Sec. 1041.8(c)(3)(iii); and
(iii) Underlying one-time electronic transfer authorization or
underlying signature check, as described in Sec. 1041.8(d)(2).
(5) Electronic records in tabular format regarding payment practices
for covered loans. To comply with the requirements in this paragraph
(b), a lender must retain electronic records in tabular format that
include the following information for covered loans:
(i) History of payments received and attempted payment transfers, as
defined in Sec. 1041.8(a)(1), including:
[[Page 1009]]
(A) Date of receipt of payment or attempted payment transfer;
(B) Amount of payment due;
(C) Amount of attempted payment transfer;
(D) Amount of payment received or transferred; and
(E) Payment channel used for attempted payment transfer.
(ii) If an attempt to transfer funds from a consumer's account is
subject to the prohibition in Sec. 1041.8(b)(1), whether the lender or
service provider obtained authorization to initiate a payment transfer
from the consumer in accordance with the requirements in Sec. 1041.8(c)
or (d).
Sec. 1041.13 Prohibition against evasion.
A lender must not take any action with the intent of evading the
requirements of this part.
Sec. 1041.14 Severability.
The provisions of this part are separate and severable from one
another. If any provision is stayed or determined to be invalid, the
remaining provisions shall continue in effect.
Sec. Appendix A to Part 1041--Model Forms
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Sec. Supplement I to Part 1041--Official Interpretations
Section 1041.2--Definitions
2(a)(3) Closed-End Credit
1. In general. Institutions may rely on 12 CFR 1026.2(a)(10) and its
related commentary in determining the meaning of closed-end credit, but
without regard to whether the credit is consumer credit, as that term is
defined in 12 CFR 1026.2(a)(12), or is extended to a consumer, as that
term is defined in 12 CFR 1026.2(a)(11).
2(a)(5) Consummation
1. New loan. When a contractual obligation on the consumer's part is
created is a matter to be determined under applicable law. A contractual
commitment agreement, for example, that under applicable law binds the
consumer to the loan 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 non-refundable
fee) unless applicable law holds otherwise.
2. Modification of existing loan that triggers underwriting
requirements. A modification of
[[Page 1014]]
an existing loan that increases the amount of an existing loan triggers
underwriting requirements under Sec. 1041.5 in certain circumstances.
If the outstanding amount of an existing loan is increased, or if the
total amount available under an open-end credit plan is increased, the
modification is consummated as of the time that the consumer becomes
contractually obligated on such a modification or increase. In those
cases, the modification must comply with the requirements of Sec.
1041.5(b). A loan modification does not trigger underwriting
requirements under Sec. 1041.5 if the modification reduces the
outstanding amount or the total amount available under an open-end
credit plan, or if the modification results only in the consumer
receiving additional time in which to repay the loan. For example,
providing a cost-free ``off-ramp'' or repayment plan to a consumer who
cannot repay a loan during the allotted term of the loan is a
modification of an existing loan--not a new loan--that results only in
the consumer receiving additional time in which to repay the loan. Thus,
providing a no-cost repayment plan does not constitute a modification
that increases the amount of an existing loan.
2(a)(11) Credit
1. In general. Institutions may rely on 12 CFR 1026.2(a)(14) and its
related commentary in determining the meaning of credit.
2(a)(12) Electronic Fund Transfer
1. In general. Institutions may rely on 12 CFR 1005.3(b) and its
related commentary in determining the meaning of electronic fund
transfer.
2(a)(13) Lender
1. Regularly extends credit. The test for determining whether a
person regularly extends credit for personal, family, or household
purposes is explained in Regulation Z, 12 CFR 1026.2(a)(17)(v). Any loan
to a consumer primarily for personal, family, or household purposes,
whether or not the loan is a covered loan under this part, counts toward
the numeric threshold for determining whether a person regularly extends
credit.
2(a)(16) Open-End Credit
1. In general. Institutions may rely on 12 CFR 1026.2(a)(20) and its
related commentary in determining the meaning of open-end credit, but
without regard to whether the credit permits a finance charge to be
imposed from time to time on an outstanding balance as defined in 12 CFR
1026.4. Also, for the purposes of defining open-end credit under this
part, the term credit, as defined in Sec. 1041.2(a)(11), is substituted
for the term consumer credit, as defined in 12 CFR 1026.2(a)(12); the
term lender, as defined in Sec. 1041.2(a)(13), is substituted for the
term creditor, as defined in 12 CFR 1026.2(a)(17); and the term
consumer, as defined in Sec. 1041.2(a)(4), is substituted for the term
consumer, as defined in 12 CFR 1026.2(a)(11). See generally Sec.
1041.2(b).
2(a)(17) Outstanding Loan
1. Payments owed to third parties. A loan is an outstanding loan if
it meets all the criteria set forth in Sec. 1041.2(a)(17), regardless
of whether the consumer is required to pay the lender, an affiliate of
the lender, or a service provider. A lender selling the loan or the loan
servicing rights to a third party does not affect whether a loan is an
outstanding loan under Sec. 1041.2(a)(17).
2. Stale loans. A loan is generally an outstanding loan if the
consumer has a legal obligation to repay the loan, even if the consumer
is delinquent or if the consumer is in a repayment plan or workout
arrangement. However, a loan that the consumer otherwise has a legal
obligation to repay is not an outstanding loan for purposes of this part
if the consumer has not made any payment on the loan within the previous
180-day period. A loan ceases to be an outstanding loan as of: The
earliest of the date the consumer repays the loan in full, the date the
consumer is released from the legal obligation to repay, the date the
loan is otherwise legally discharged, or the date that is 180 days
following the last payment that the consumer has made on the loan, even
if the payment is not a regularly scheduled payment in a scheduled
amount. If the consumer does not make any payments on a loan and none of
these other events occur, the loan ceases to be outstanding 180 days
after consummation. A loan cannot become an outstanding loan due to any
events that occur after the consumer repays the loan in full, the
consumer is released from the legal obligation to repay, the loan is
otherwise legally discharged, 180 days following the last payment that
the consumer has made on the loan, or 180 days after consummation of a
loan on which the consumer makes no payments.
2(a)(18) Service Provider
1. Credit access businesses and credit services organizations.
Persons who provide a material service to lenders in connection with the
lenders' offering or provision of covered loans are service providers,
subject to the specific limitations in section 1002(26) of the Dodd-
Frank Act. Accordingly, credit access businesses and credit service
organizations that provide a material service to lenders during the
course of obtaining for consumers, or assisting consumers in obtaining,
loans from lenders, are service providers, subject to the specific
limitations in section 1002(26) of the Dodd-Frank Act.
[[Page 1015]]
2(a)(19) Vehicle Security
1. An interest in a consumer's motor vehicle as a condition of
credit. Subject to the exclusion described in Sec. 1041.3(d)(1), a
lender's or service provider's interest in a consumer's motor vehicle
constitutes vehicle security only to the extent that the security
interest is obtained in connection with the credit. If a party obtains
such a security interest in a consumer's motor vehicle for a reason that
is unrelated to an extension of credit, the security interest does not
constitute vehicle security. For example, if a mechanic performs work on
a consumer's motor vehicle and a mechanic's lien attaches to the
consumer's motor vehicle by operation of law because the consumer did
not timely pay the mechanic's bill, the mechanic does not obtain vehicle
security for the purposes of Sec. 1041.2(a)(19).
2(b) Rule of Construction
1. Incorporation of terms from underlying statutes and regulations.
For purposes of this part, where definitions are incorporated from other
statutes or regulations, users may as applicable rely on embedded
definitions, appendices, and commentary for those other laws. For
example, 12 CFR 1005.2(b) and its related commentary determine the
meaning of account under Sec. 1041.2(a)(1). However, where this part
defines the same term or a parallel term in a way that creates a
substantive distinction, the definition in this part shall control. See,
for example, the definition of open-end credit in Sec. 1041.2(a)(16),
which is generally determined according to 12 CFR 1026.2(a)(20) and its
related commentary but without regard to whether the credit is consumer
credit, as that term is defined in 12 CFR 1026.2(a)(12), or is extended
to a consumer, as that term is defined in 12 CFR 1026.2(a)(11), because
this part provides a different and arguably broader definition of
consumer in Sec. 1041.2(a)(4).
Section 1041.3--Scope of Coverage; Exclusions; Exemptions
3(b) Covered Loans
1. Credit structure. The term covered loan includes open-end credit
and closed-end credit, regardless of the form or structure of the
credit.
2. Primary purpose. Under Sec. 1041.3(b), a loan is not a covered
loan unless it is extended primarily for personal, family, or household
purposes. Institutions may rely on 12 CFR 1026.3(a) and its related
commentary in determining the primary purpose of a loan.
Paragraph 3(b)(1)
1. Closed-end credit that does not provide for multiple advances to
consumers. A loan does not provide for multiple advances to a consumer
if the loan provides for full disbursement of the loan proceeds only
through disbursement on a single specific date.
2. Loans that provide for multiple advances to consumers. Both open-
end credit and closed-end credit may provide for multiple advances to
consumers. Open-end credit can have a fixed expiration date, as long as
during the plan's existence the consumer may use credit, repay, and
reuse the credit. Likewise, closed-end credit may consist of a series of
advances. For example:
i. Under a closed-end commitment, the lender might agree to lend a
total of $1,000 in a series of advances as needed by the consumer. When
a consumer has borrowed the full $1,000, no more is advanced under that
particular agreement, even if there has been repayment of a portion of
the debt.
3. Facts and circumstances test for determining whether loan is
substantially repayable within 45 days. Substantially repayable means
that the substantial majority of the loan or advance is required to be
repaid within 45 days of consummation or advance, as the case may be.
Application of the standard depends on the specific facts and
circumstances of each loan, including the timing and size of the
scheduled payments. A loan or advance is not substantially repayable
within 45 days of consummation or advance merely because a consumer
chooses to repay within 45 days when the loan terms do not require the
consumer to do so.
4. Deposit advance products. A loan or advance is substantially
repayable within 45 days of consummation or advance if the lender has
the right to be repaid through a sweep or withdrawal of any qualifying
electronic deposit made into the consumer's account within 45 days of
consummation or advance. A loan or advance described in this paragraph
is substantially repayable within 45 days of consummation or advance
even if no qualifying electronic deposit is actually made into or
withdrawn by the lender from the consumer's account.
5. Loans with alternative, ambiguous, or unusual payment schedules.
If a consumer, under any applicable law, would breach the terms of the
agreement between the consumer and the lender or service provider by not
substantially repaying the entire amount of the loan or advance within
45 days of consummation or advance, as the case may be, the loan is a
covered short-term loan under Sec. 1041.3(b)(1). For loans or advances
that are not required to be repaid within 45 days of consummation or
advance, if the consumer, under applicable law, would not breach the
terms of the agreement between the consumer and the lender by not
substantially repaying the loan or advance in full within 45 days, the
loan is a covered longer-term balloon-payment loan under Sec.
1041.3(b)(2) or a covered longer-term loan under Sec. 1041.3(b)(3) if
the loan otherwise satisfies the criteria specified in Sec.
1041.3(b)(2) or (3), respectively.
[[Page 1016]]
Paragraph 3(b)(2)
1. Closed-end credit that does not provide for multiple advances to
consumers. See comments 3(b)(1)-1 and 3(b)(1)-2.
2. Payments more than twice as large as other payments. For purposes
of Sec. 1041.3(b)(2)(i) and (ii), all required payments of principal
and any charges (or charges only, depending on the loan features) due
under the loan are used to determine whether a particular payment is
more than twice as large as another payment, regardless of whether the
payments have changed during the loan term due to rate adjustments or
other payment changes permitted or required under the loan.
3. Charges excluded. Charges for actual unanticipated late payments,
for exceeding a credit limit, or for delinquency, default, or a similar
occurrence that may be added to a payment are excluded from the
determination of whether the loan is repayable in a single payment or a
particular payment is more than twice as large as another payment.
Likewise, sums that are accelerated and due upon default are excluded
from the determination of whether the loan is repayable in a single
payment or a particular payment is more than twice as large as another
payment.
4. Multiple-advance structures. Loans that provide for more than one
advance are considered to be a covered longer-term balloon-payment loan
under Sec. 1041.3(b)(2)(ii) if either:
i. The consumer is required to repay substantially the entire amount
of an advance more than 45 days after the advance is made or is required
to make at least one payment on the advance that is more than twice as
large as any other payment; or
ii. A loan with multiple advances is structured such that paying the
required minimum payment may not fully amortize the outstanding balance
by a specified date or time, and the amount of the final payment to
repay the outstanding balance at such time could be more than twice the
amount of other minimum payments under the plan. For example, the lender
extends an open-end credit plan with a $500 credit limit, monthly
billing cycles, and a minimum payment due each billing cycle that is
equal to 10% of the outstanding principal. Fees or interest on the plan
are equal to 10% of the outstanding principal per month, so that if a
consumer pays nothing other than the minimum payment amount, the
outstanding principal remains the same. All outstanding amounts must be
repaid within six months of the advance. The credit plan is a covered
loan under Sec. 1041.3(b)(2)(ii) because if the consumer drew the
entire amount at one time and then made only minimum payments, the sixth
payment would be more than twice the amount of the minimum payment
required ($50).
Paragraph 3(b)(3)
1. Conditions for coverage of a longer-term loan. A loan that is not
a covered short-term loan or a covered longer-term balloon-payment loan
is a covered longer-term loan only if it satisfies both the cost of
credit requirement of Sec. 1041.3(b)(3)(i) and leveraged payment
mechanism requirement of Sec. 1041.3(b)(3)(ii). If the requirements of
Sec. 1041.3(b)(3) are met, and the loan is not otherwise excluded or
conditionally exempted from coverage by Sec. 1041.3(d), (e), or (f),
the loan is a covered longer-term loan. For example, a 60-day loan that
is not a covered longer-term balloon-payment loan is not a covered
longer-term loan if the cost of credit as measured pursuant to Sec.
1041.2(a)(6) is less than or equal to a rate of 36 percent per annum
even if the lender or service provider obtains a leveraged payment
mechanism.
2. No balance during a billing cycle. Under Sec.
1041.2(a)(6)(ii)(B), the cost of credit for open-end credit must be
calculated according to the rules for calculating the effective annual
percentage rate for a billing cycle as set forth in Regulation Z, 12 CFR
1026.14(c) and (d), which provide that the annual percentage rate cannot
be calculated for billing cycles in which there is a finance charge but
no other balance. Accordingly, pursuant to Sec. 1041.2(a)(6)(ii)(B),
the cost of credit could not be calculated for such billing cycles.
Section 1041.3(b)(3)(i)(B)(1) provides that, for such billing cycles, an
open-end credit plan is determined to have exceeded the threshold set
forth in that paragraph if there is no balance other than a finance
charge imposed by the lender.
3. Timing for coverage determination. A loan may become a covered
longer-term loan at any such time as both of the requirements of Sec.
1041.3(b)(3)(i) and (ii) are met. For example:
i. A lender originates a closed-end loan that is not a longer-term
balloon-payment loan to be repaid within six months of consummation with
a cost of credit equal to 60 percent. At the time of consummation, the
loan is not a covered longer-term loan because it does not have a
leveraged payment mechanism. After two weeks, the lender obtains a
leveraged payment mechanism. The loan is now a covered longer-term loan
because it meets both of the requirements of Sec. 1041.3(b)(3)(i) and
(ii).
ii. A lender extends an open-end credit plan with monthly billing
cycles and a leveraged payment mechanism. At consummation and again at
the end of the first billing cycle, the plan is not a covered longer-
term loan because its cost of credit is below 36 percent. In the second
billing cycle, the plan's cost of credit is 45 percent because several
fees are triggered in addition to interest on the principal balance. The
plan is now a covered longer-term loan because it meets both of the
requirements of Sec. 1041.3(b)(3)(i) and (ii).
[[Page 1017]]
Beginning on the first day of the third billing cycle, and thereafter
for the duration of the plan, the lender must therefore comply with the
requirements of this part including by, for example, providing a first
withdrawal notice before initiating the first payment transfer on or
after the first day of the third billing cycle. The requirements to
provide certain payment withdrawal notices under Sec. 1041.9 have been
structured so that the notices can be provided in the same mailing as
the periodic statements that are required by Regulation Z, 12 CFR
1026.7(b). See, e.g., Sec. 1041.9(b)(3)(i)(D).
Paragraph 3(b)(3)(ii)
1. Timing. The condition in Sec. 1041.3(b)(3)(ii) is satisfied if a
lender or service provider obtains a leveraged payment mechanism before,
at the same time as, or after the consumer receives the entire amount of
funds that the consumer is entitled to receive under the loan,
regardless of the means by which the lender or service provider obtains
a leveraged payment mechanism.
2. Leveraged payment mechanism in contract. The condition in Sec.
1041.3(b)(3)(ii) is satisfied if a loan agreement authorizes the lender
to elect to obtain a leveraged payment mechanism, regardless of the time
at which the lender actually obtains a leveraged payment mechanism. The
following are examples of situations in which a lender obtains a
leveraged payment mechanism under Sec. 1041.3(b)(3)(ii):
i. Future authorization. A loan agreement provides that the
consumer, at some future date, must authorize the lender or service
provider to debit the consumer's account on a recurring basis.
ii. Delinquency or default provisions. A loan agreement provides
that the consumer must authorize the lender or service provider to debit
the consumer's account on a one-time or a recurring basis if the
consumer becomes delinquent or defaults on the loan.
Paragraph 3(c)
1. Initiating a transfer of money from a consumer's account. A
lender or service provider obtains the ability to initiate a transfer of
money when that person can collect payment, or otherwise withdraw funds,
from a consumer's account, either on a single occasion or on a recurring
basis, without the consumer taking further action. Generally, when a
lender or service provider has the ability to ``pull'' funds or initiate
a transfer from the consumer's account, that person has a leveraged
payment mechanism. However, a ``push'' transaction from the consumer to
the lender or service provider does not in itself give the lender or
service provider a leveraged payment mechanism.
2. Lender-initiated transfers. The following are examples of
situations in which a lender or service provider has the ability to
initiate a transfer of money from a consumer's account:
i. Check. A lender or service provider obtains a check, draft, or
similar paper instrument written by the consumer, other than a single
immediate payment transfer at the consumer's request as described in
Sec. 1041.3(c) and comment 3(c)-3.
ii. Electronic fund transfer authorization. The consumer authorizes
a lender or service provider to initiate an electronic fund transfer
from the consumer's account in advance of the transfer, other than a
single immediate payment transfer at the consumer's request as described
in Sec. 1041.3(c) and comment 3(c)-3.
iii. Remotely created checks and remotely created payment orders. A
lender or service provider has authorization to create or present a
remotely created check (as defined by Regulation CC, 12 CFR 229.2(fff)),
remotely created payment order (as defined in 16 CFR 310.2(cc)), or
similar instrument drafted on the consumer's account.
iv. Transfer by account-holding institution. A lender or service
provider that is an account-holding institution has a right to initiate
a transfer of funds between the consumer's account and an account of the
lender or affiliate, including, but not limited to, an account-holding
institution's right of set-off.
3. Single immediate payment transfer at the consumer's request
excluded. A single immediate payment transfer at the consumer's request,
as defined in Sec. 1041.8(a)(2), is excluded from the definition of
leveraged payment mechanism. Accordingly, if the loan or other agreement
between the consumer and the lender or service provider does not
otherwise provide for the lender or service provider to initiate a
transfer without further consumer action, the lender or service provider
can initiate a single immediate payment transfer at the consumer's
request without causing the loan to become a covered loan under Sec.
1041.3(b)(3). See Sec. 1041.8(a)(2) and related commentary for guidance
on what constitutes a single immediate payment transfer at the
consumer's request.
4. Transfers not initiated by the lender. A lender or service
provider does not initiate a transfer of money from a consumer's account
if the consumer authorizes a third party, such as a bank's automatic
bill pay service, to initiate a transfer of money from the consumer's
account to a lender or service provider.
3(d) Exclusions
3(d)(1) Certain Purchase Money Security Interest Loans
1. ``Sole purpose'' test. The requirements of this part do not apply
to loans made solely and expressly to finance the consumer's initial
purchase of a good in which the lender
[[Page 1018]]
takes a security interest as a condition of the credit. For example, the
requirements of this part would not apply to a transaction in which a
lender makes a loan to a consumer for the express purpose of initially
purchasing a motor vehicle, television, household appliance, or
furniture in which the lender takes a security interest and the amount
financed is approximately equal to, or less than, the cost of acquiring
the good, even if the cost of credit exceeds 36 percent per annum and
the lender also obtains a leveraged payment mechanism. A loan is made
solely and expressly to finance the consumer's initial purchase of a
good even if the amount financed under the loan includes Federal, State,
or local taxes or amounts required to be paid under applicable State and
Federal licensing and registration requirements. This exclusion does not
apply to refinances of credit extended for the purchase of a good.
3(d)(2) Real Estate Secured Credit
1. Real estate and dwellings. The requirements of this part do not
apply to credit secured by any real property, or by any personal
property, such as a mobile home, used or expected to be used as a
dwelling if the lender records or otherwise perfects the security
interest within the term of the loan, even if the cost of credit exceeds
36 percent per annum and the lender or servicer provider also obtains a
leveraged payment mechanism. If the lender does not record or perfect
the security interest during the term of the loan, however, the credit
is not excluded from the requirements of this part under Sec.
1041.3(d)(2).
3(d)(5) Non-Recourse Pawn Loans
1. Lender possession required and no recourse permitted. A pawn loan
must satisfy two conditions to be excluded from the requirements of this
part under Sec. 1041.3(d)(5). First, the lender must have sole physical
possession and use of the property securing the pawned property at all
times during the entire term of the loan. If the consumer retains either
possession or use of the property, however limited the consumer's
possession or use of the property might be, the loan is not excluded
from the requirements of this part under Sec. 1041.3(d)(5). Second, the
lender must have no recourse if the consumer does not elect to redeem
the pawned item and repay the loan other than retaining the pawned
property to dispose of according to State or local law. If any consumer,
or if any co-signor, guarantor, or similar person, is personally liable
for the difference between the outstanding balance on the loan and the
value of the pawned property, the loan is not excluded from the
requirements of this part under Sec. 1041.3(d)(5).
3(d)(6) Overdraft Services
1. Definitions. Institutions may rely on 12 CFR 1005.17(a) and its
related commentary in determining whether credit is an overdraft service
or an overdraft line of credit that is excluded from the requirements of
this part under Sec. 1041.3(d)(6).
3(d)(7) Wage Advance Programs
1. Advances of wages under Sec. 1041.3(d)(7) must be offered by an
employer, as defined in the Fair Labor Standards Act, 29 U.S.C. 203(d),
or by the employer's business partner to the employer's employees
pursuant to a wage advance program. For example, an advance program
might be offered by a company that provides payroll card services or
accounting services to the employer, or by the employer with the
assistance of such a company. Similarly, an advance program might be
offered by a company that provides consumer financial products and
services as part of the employer's benefits program, such that the
company would have information regarding the wages accrued by the
employee.
Paragraph 3(d)(7)(i)
1. Under the exclusion in Sec. 1041.3(d)(7)(i), the advance must be
made only against accrued wages. To qualify for that exclusion, the
amount advanced must not exceed the amount of the employee's accrued
wages. Accrued wages are wages that the employee is entitled to receive
under State law in the event of separation from the employer for work
performed for the employer, but for which the employee has yet to be
paid.
Paragraph 3(d)(7)(ii)(B)
1. Under Sec. 1041.3(d)(7)(ii)(B), the entity advancing the funds
is required to warrant that it has no legal or contractual claim or
remedy against the consumer based on the consumer's failure to repay in
the event the amount advanced is not repaid in full. This provision does
not prevent the entity from obtaining a one-time authorization to seek
repayment from the consumer's transaction account.
3(d)(8) No-Cost Advances
1. Under Sec. 1041.3(d)(8)(i), the entity advancing the funds is
required to warrant that it has no legal or contractual claim or remedy
against the consumer based on the consumer's failure to repay in the
event the amount advanced is not repaid in full. This provision does not
prevent the entity from obtaining a one-time authorization to seek
repayment from the consumer's transaction account.
[[Page 1019]]
3(e) Alternative Loans
1. General. Section 1041.3(e) conditionally exempts from this part
alternative covered loans that satisfy the conditions and requirements
set forth in Sec. 1041.3(e). Nothing in Sec. 1041.3(e) provides
lenders with an exemption from the requirements of other applicable
laws, including State laws. The conditions for an alternative loan made
under Sec. 1041.3(e) largely track the conditions set forth by the
National Credit Union Administration at 12 CFR 701.21(c)(7)(iii) for a
Payday Alternative Loan made by a Federal credit union. All lenders,
including Federal credit unions and persons that are not Federal credit
unions, are permitted to make loans under Sec. 1041.3(e), provided that
such loans are permissible under other applicable laws, including State
laws.
3(e)(1) Loan Term Conditions
Paragraph 3(e)(1)(iv)
1. Substantially equal payments. Under Sec. 1041.3(e)(1)(iv),
payments are substantially equal in amount if the amount of each
scheduled payment on the loan is equal to or within a small variation of
the others. For example, if a loan is repayable in six biweekly payments
and the amount of each scheduled payment is within 1 percent of the
amount of the other payments, the loan is repayable in substantially
equal payments. In determining whether a loan is repayable in
substantially equal payments, a lender may disregard the effects of
collecting the payments in whole cents.
2. Substantially equal intervals. The intervals for scheduled
payments are substantially equal if the payment schedule requires
repayment on the same date each month or in the same number of days of
the prior scheduled payment. For example, a loan for which payment is
due every 15 days has payments due in substantially equal intervals. A
loan for which payment is due on the 15th day of each month also has
payments due in substantially equal intervals. In determining whether
payments fall due in substantially equal intervals, a lender may
disregard that dates of scheduled payments may be slightly changed
because the scheduled date is not a business day, that months have
different numbers of days, and the occurrence of leap years. Section
1041.3(e)(1)(iv) does not prevent a lender from accepting prepayment on
a loan made under Sec. 1041.3(e).
3. Amortization. Section 1041.3(e)(1)(iv) requires that the
scheduled payments fully amortize the loan over the contractual period
and prohibits lenders from making loans under Sec. 1041.3(e) with
interest-only payments or with a payment schedule that front-loads
payments of interest and fees. While under Sec. 1041.3(e)(1)(iv) the
payment amount must be substantially equal for each scheduled payment,
the amount of the payment that goes to principal and to interest will
vary. The amount of payment applied to interest will be greater for
earlier payments when there is a larger principal outstanding.
Paragraph 3(e)(1)(v)
1. Cost of credit. Under Sec. 1041.3(e)(1)(v), the lender must not
impose any charges other than the rate and application fees permissible
for Federal credit unions to charge under 12 CFR 701.21(c)(7)(iii).
Under 12 CFR 701.21(c)(7)(iii), application fees must reflect the actual
costs associated with processing the application and must not exceed
$20.
3(e)(2) Borrowing History Condition
1. Relevant records. A lender may make an alternative covered loan
under Sec. 1041.3(e) only if the lender determines from its records
that the consumer's borrowing history on alternative covered loans made
under Sec. 1041.3(e) meets the criteria set forth in Sec.
1041.3(e)(2). The lender is not required to obtain information about a
consumer's borrowing history from other persons, such as by obtaining a
consumer report from an information system that has been registered for
180 days or more pursuant to Sec. 1041.11(c)(2) or is registered with
the Bureau pursuant to Sec. 1041.11(d)(2).
2. Determining 180-day period. For purposes of counting the number
of loans made under Sec. 1041.3(e)(2), the 180-day period begins on the
date that is 180 days prior to the consummation date of the loan to be
made under Sec. 1041.3(e) and ends on the consummation date of such
loan.
3. Total number of loans made under Sec. 1041.3(e)(2). Section
1041.3(e)(2) excludes loans from the conditional exemption in Sec.
1041.3(e) if the loan would result in the consumer being indebted on
more than three outstanding loans made under Sec. 1041.3(e) from the
lender in any consecutive 180-day period. See Sec. 1041.2(a)(17) for
the definition of outstanding loan. Under Sec. 1041.3(e)(2), the lender
is required to determine from its records the consumer's borrowing
history on alternative covered loans made under Sec. 1041.3(e) by the
lender. The lender must use this information about borrowing history to
determine whether the loan would result in the consumer being indebted
on more than three outstanding loans made under Sec. 1041.3(e) from the
lender in a consecutive 180-day period, determined in the manner
described in comment 3(e)(2)-2. Section 1041.3(e) does not prevent
lenders from making a covered loan subject to the requirements of this
part.
4. Example. For example, assume that a lender seeks to make an
alternative loan under Sec. 1041.3(e) to a consumer and the loan does
not qualify for the safe harbor under Sec. 1041.3(e)(4). The lender
checks its own records and determines that during the 180
[[Page 1020]]
days preceding the consummation date of the prospective loan, the
consumer was indebted on two outstanding loans made under Sec.
1041.3(e) from the lender. The loan, if made, would be the third loan
made under Sec. 1041.3(e) on which the consumer would be indebted
during the 180-day period and, therefore, would be exempt from this part
under Sec. 1041.3(e). If, however, the lender determined that the
consumer was indebted on three outstanding loans under Sec. 1041.3(e)
from the lender during the 180 days preceding the consummation date of
the prospective loan, the condition in Sec. 1041.3(e)(2) would not be
satisfied and the loan would not be an alternative loan subject to the
exemption under Sec. 1041.3(e) but would instead be a covered loan
subject to the requirements of this part.
3(e)(3) Income Documentation Condition
1. General. Section 1041.3(e)(3) requires lenders to maintain
policies and procedures for documenting proof of recurring income and to
comply with those policies and procedures when making alternative loans
under Sec. 1041.3(e). Section 1041.3(e)(3) does not require lenders to
undertake the same income documentation procedures required by Sec.
1041.5(c)(2). For the purposes of Sec. 1041.3(e)(3), lenders may
establish any procedure for documenting recurring income that satisfies
the lender's own underwriting obligations. For example, lenders may
choose to use the procedure contained in the National Credit Union
Administration's guidance at 12 CFR 701.21(c)(7)(iii) on Payday
Alternative Loan programs recommending that Federal credit unions
document consumer income by obtaining two recent paycheck stubs.
3(f) Accommodation Lending
1. General. Section 1041.3(f) provides a conditional exemption for
covered loans if, at the time of origination: (1) The lender and its
affiliates collectively have made 2,500 or fewer covered loans in the
current calendar year and made 2,500 or fewer covered loans in the
preceding calendar year; and (2) during the most recent completed tax
year in which the lender was in operation, if applicable, the lender and
any affiliates that were in operation and used the same tax year derived
no more than 10 percent of their receipts from covered loans, or if the
lender was not in operation in a prior tax year, the lender reasonably
anticipates that the lender and any of its affiliates that use the same
tax year will, during the current tax year, derive no more than 10
percent of their combined receipts from covered loans. For example,
assume a lender begins operation in January 2019, uses the calendar year
as its tax year, and has no affiliates. In 2019, the lender could
originate up to 2,500 covered loans that are not subject to the
requirements of this part if at the time of each origination it
reasonably anticipates that no more than 10 percent of its receipts
during the current tax year will derive from covered loans. In 2020, the
lender could originate up to 2,500 covered loans that are not subject to
the requirements of this part if the lender made 2,500 or fewer covered
loans in 2019 and the lender derived no more than 10 percent of its
receipts in the 2019 tax year from covered loans. Section 1041.3(f)
provides that covered longer-term loans for which all transfers meet the
conditions in Sec. 1041.8(a)(1)(ii), and receipts from such loans, are
not included for the purpose of determining whether the conditions of
Sec. 1041.3(f)(1) and (2) have been satisfied. For example, a bank that
makes a covered longer-term loan using a loan agreement that includes
the conditions in Sec. 1041.8(a)(1)(ii) does not need to include that
loan, or the receipts from that loan, in determining whether it is below
the 2,500 loan threshold or the 10 percent of receipts threshold in
Sec. 1041.3(f)(1) and (2).
2. Reasonable anticipation of receipts for current tax year. A
lender and its affiliates can look to receipts to date in forecasting
their total receipts for the current tax year, but are expected to make
reasonable adjustments to account for an upcoming substantial change in
business plans or other relevant and known factors.
Section 1041.4-- Identification of Unfair and Abusive Practice
1. General. A lender who complies with Sec. 1041.5 in making a
covered short-term loan or a covered longer-term balloon-payment loan
has not engaged in the unfair and abusive practice under Sec. 1041.4. A
lender who complies with Sec. 1041.6 in making a covered short-term
loan has not committed the unfair and abusive practice under Sec.
1041.4 and is not subject to Sec. 1041.5.
Section 1041.5--Ability-to-Repay Determination Required
5(a) Definitions
5(a)(1) Basic Living Expenses
1. General. Under Sec. 1041.5(b), a lender must make a reasonable
determination that the consumer has the ability to repay a covered
short-term loan or covered longer-term balloon-payment loan according to
its terms. The consumer's ability to meet basic living expenses is part
of the broader ability-to-repay determination under Sec. 1041.5(b). See
comment 5(b)-1 for additional clarification. The lender's estimate of
basic living expenses must be reasonable. The lender may make a
reasonable estimate of basic living expenses without making an
individualized determination. See comment 5(b)-2.i.C for additional
clarification.
[[Page 1021]]
2. Expenditures included in basic living expenses. Section
1041.5(a)(1) defines basic living expenses as expenditures, other than
payments for major financial obligations, that the consumer makes for
goods and services necessary to maintain the consumer's health, welfare,
and ability to produce income, and the health and welfare of the members
of the consumer's household who are financially dependent on the
consumer. Examples of basic living expenses include food, utilities not
paid as part of rental housing expenses, transportation, out-of-pocket
medical expenses, phone and Internet services, and childcare. Basic
living expenses do not include expenditures for discretionary personal
and household goods or services, such as newspaper subscriptions, or
vacation activities. If the consumer is responsible for payment of
household goods and services on behalf of the consumer's dependents,
those expenditures are included in basic living expenses. As part of its
reasonable ability-to-repay determination, the lender may reasonably
consider whether another person (e.g., a spouse or adult family member
living with the consumer) is regularly contributing toward the
consumer's payment of basic living expenses (see comment 5(b)-2.i.C.2).
5(a)(2) Debt-to-Income Ratio
1. General. Section 1041.5(a)(2) defines debt-to-income ratio as the
ratio, expressed as a percentage, of the sum of the amounts that the
lender projects will be payable by the consumer for major financial
obligations during the relevant monthly period and the payments under
the covered short-term loan or covered longer-term balloon-payment loan
during the relevant monthly period, to the monthly net income that the
lender projects the consumer will receive during the relevant monthly
period, all of which projected amounts are determined in accordance with
Sec. 1041.5(c). See Sec. 1041.5(b)(2)(i) and associated commentary for
further clarification on the use of debt-to-income methodology to
determine ability to repay. For covered longer-term balloon-payment
loans, where the relevant monthly period may fall well into the future
relative to the consummation of the loan, the lender must calculate the
debt-to-income ratio using the projections made under Sec. 1041.5(c)
and in so doing must make reasonable assumptions about the consumer's
net income and major financial obligations during the relevant monthly
period compared to the period covered by the verification evidence. For
example, the lender cannot assume, absent a reasonable basis, that there
will be a substantial increase in net income or decrease in major
financial obligations between consummation and the relevant monthly
period. For further clarification, see comment 5(c)(1)-1 regarding the
consistency between the consumer's written statement and verification
evidence and comment 5(c)(2)(ii)(A)-2 regarding what constitutes
sufficient history of net income for purposes of verification evidence.
5(a)(3) Major Financial Obligations
1. General. Section 1041.5(a)(3) defines major financial obligations
as a consumer's housing expense, required payments due under debt
obligations (including, without limitation, outstanding covered loans),
child support obligations, and alimony obligations. Housing expense
includes the total periodic amount that the consumer pays for housing
during the relevant monthly period, such as the amount the consumer pays
to a landlord for rent or to a creditor for a mortgage (including
principal, interest, and any escrowed amounts if required). Debt
obligations for purposes of Sec. 1041.5(a)(3) do not include amounts
due or past due for medical bills, utilities, and other items that are
generally defined as basic living expenses under Sec. 1041.5(a)(1). The
amount of a payment required under a debt obligation includes the amount
the consumer must pay when due to avoid delinquency under the debt
obligation in the absence of any affirmative act by the consumer to
extend, delay, or restructure the repayment schedule. Thus, this would
include periodic or lump-sum payments for automobile loans, student
loans, and other covered and non-covered loans, and minimum monthly
credit card payments due during the relevant monthly period. It also
includes any delinquent amounts on such obligations that are due as of
the relevant monthly period, except where an obligation on a covered
short-term loan or a covered longer-term balloon-payment loan is no
longer outstanding or where the obligation is listed as charged off on a
national consumer report. For example, if the consumer has a periodic
automobile loan payment from a prior period that is past due and the
automobile finance company adds the past due payment to the next
regularly scheduled periodic payment which falls during the relevant
monthly period, then the past due periodic payment is a major financial
obligation.
2. Motor vehicle leases. For purposes of this rule, motor vehicle
leases shall be treated as a debt obligation.
5(a)(5) Net Income
1. General. Section 1041.5(a)(5) defines a consumer's net income to
mean the total amount that a consumer receives after the payer has
deducted amounts for taxes withheld by the consumer, other obligations,
and voluntary contributions (but before deductions of any amounts for
payments under a prospective covered short-term loan or covered longer-
term balloon-payment loan or
[[Page 1022]]
for any major financial obligation); provided that, a lender may elect
to include in the consumer's net income the amount of any income of
another person to which a consumer has a reasonable expectation of
access (see comment 5(a)(5)-3). Net income includes income that is
regularly received by the consumer as take-home pay, whether the
consumer is treated as an employee or independent contractor. Net income
also includes income regularly received by the consumer from other
sources, such as child support or alimony received by the consumer and
any payments received by the consumer from retirement, social security,
disability, or other government benefits, or annuity plans. Lenders may
include in net income irregular or seasonal income, such as tips,
bonuses, and overtime pay. Net income does not include one-time payments
anticipated to be received in the future from non-standard sources, such
as legal settlements, tax refunds, jury prizes, or remittances, unless
there is verification evidence of the amount and expected timing of such
income. If the consumer receives a traditional pay check but the
verification evidence obtained under Sec. 1041.5(c)(2) shows payment of
gross income or otherwise is unclear about whether deductions for the
consumer's taxes, other obligations, or voluntary contributions have
been made, or if the consumer is not paid via a traditional pay check,
then the lender may draw reasonable conclusions from the information
provided and is not required to inquire further about deductions for the
consumer's taxes, other obligations, or voluntary contributions.
2. Other obligations and voluntary contributions. An example of
other obligations is a consumer's portion of payments for premiums for
employer-sponsored health insurance plans. An example of a voluntary
contribution is a consumer's contribution to a defined contribution plan
meeting the requirements of Internal Revenue Code section 401(a), 26
U.S.C. 401(a). The lender may inquire about and reasonably consider
whether voluntary contributions will be discontinued prior to the
relevant monthly period, in which case they would not be deducted from
the amount of net income that is projected.
3. Reasonable expectation of access to another person's income.
Under Sec. 1041.5(a)(5), a lender may elect to include in the
consumer's net income the amount of any income of another person to
which the consumer has a reasonable expectation of access. The income of
any other person is considered net income to which the consumer has a
reasonable expectation of access if the consumer has direct access to
those funds on a regular basis through a transaction account in which
the consumer is an accountholder or cardholder. If the lender elects to
include any income of another person to which the consumer has a
reasonable expectation of access, then as part of the lender's
obligation to make a reasonable projection of the consumer's net income
during the applicable period, the lender must obtain verification
evidence demonstrating that the consumer has a reasonable expectation of
access to the portion of the other person's income that the lender
includes within its net income projection. See Sec. 1041.5(c)(2)(ii)(A)
and associated commentary. The following examples illustrate when a
consumer has reasonable expectation of access to the income of another
person for purposes of Sec. 1041.5(a)(5):
i. The consumer's spouse has a salary or income that is deposited
regularly into a joint account the spouse shares with the consumer. The
consumer has a reasonable expectation of access to the spouse's income.
ii. The consumer shares a household with a sibling. The sibling's
salary or other income is deposited into an account in which the
consumer does not have access. However, the sibling regularly transfers
a portion of that income from the sibling's deposit account into the
consumer's deposit account. The consumer has a reasonable expectation of
access to that portion of the sibling's income.
iii. The consumer's spouse has a salary or other income that is
deposited into an account to which the consumer does not have access,
and the spouse does not regularly transfer a portion of that income into
the consumer's account. The consumer does not have a reasonable
expectation of access to the spouse's income.
iv. The consumer does not have a joint bank account with his spouse,
nor does the spouse make regular deposits into the consumer's individual
deposit account. However, the spouse regularly pays for a portion of the
consumer's basic living expenses. The consumer does not have a
reasonable expectation of access to the spouse's income. However,
regular contributions toward payment of the consumer's basic living
expenses may be considered by the lender as a consumer-specific factor
that is relevant if the lender makes an individualized estimate of basic
living expenses (see comment 5(b)-2.i.C.2 for further clarification).
5(a)(6) Payment Under the Covered Short-Term Loan or Covered Longer-Term
Balloon-Payment Loan
Paragraphs 5(a)(6)(i) and (ii)
1. General. Section 1041.5(a)(6)(i) defines payment under a covered
short-term loan or covered longer-term balloon-payment loan as the
combined dollar amount payable by the consumer at a particular time
following consummation in connection with the loan, assuming that the
consumer has made preceding required payments and in the absence of any
affirmative act by the consumer to extend or restructure the repayment
schedule or to suspend, cancel, or delay payment
[[Page 1023]]
for any product, service, or membership provided in connection with the
covered short-term loan or covered longer-term balloon-payment loan.
Section 1041.5(a)(6)(ii) clarifies that it includes all principal,
interest, charges, and fees. A lender may not exclude a portion of the
payment simply because a consumer could avoid or delay paying a portion
of the payment, such as by requesting forbearance for that portion or by
cancelling a service provided in exchange for that portion. For example:
i. Assume that in connection with a covered longer-term balloon-
payment loan, a consumer would owe a periodic payment on a particular
date of $100 to the lender, which consists of $15 in finance charges,
$80 in principal, and a $5 service fee, and the consumer also owes $10
as a credit insurance premium to a separate insurance company. Assume
further that under the terms of the loan or other agreements entered
into in connection with the loan, the consumer has the right to cancel
the credit insurance at any time and avoid paying the $10 credit
insurance premium. The payment under the loan is $110.
ii. Assume that in connection with a covered short-term loan, a
consumer would owe on a particular date $25 in finance charges to the
lender. Under the terms of the loan, the consumer has the option of
paying $50 in principal on that date, in which case the lender would
charge $20 in finance charges instead. The payment under the loan is
$25.
iii. Assume that in connection with a covered short-term loan, a
consumer would owe on a particular date $25 in finance charges to the
lender and $70 in principal. Under the terms of the loan, the consumer
has the option of logging into her account on the lender's Web site and
selecting an option to defer the due date of the $70 payment toward
principal. The payment under the covered loan is $95.
Paragraph 5(a)(6)(iii)
1. General. Section 1041.5(a)(6)(iii) provides assumptions that a
lender must make in calculating the payment under Sec. 1041.5(a)(6) for
a covered short-term loan or covered longer-term balloon-payment loan
that is a line of credit (regardless of the extent to which available
credit will be replenished as the consumer repays earlier advances). For
a line of credit, the amount and timing of the consumer's actual
payments after consummation may depend on the consumer's utilization of
the credit or on amounts that the consumer has repaid prior to the
payments in question. Section 1041.5(a)(6)(iii) requires the lender to
calculate the total loan payment assuming that the consumer will utilize
the full amount of credit under the loan as soon as the credit is
available and that the consumer will make only minimum required payments
for as long as permitted under the loan agreement. Lenders should use
the same test with the same assumptions when they make a new ability-to-
repay determination under Sec. 1041.5(b)(1)(ii) prior to an advance
under the line of credit that is more than 90 days after the date of a
prior ability-to-repay determination for the line of credit, in order to
determine whether the consumer still has the ability to repay the
current credit line.
5(a)(8) Residual Income
1. General. Under Sec. 1041.5(a)(8), residual income is defined as
the sum of net income that the lender projects the consumer will receive
during the relevant monthly period, minus the sum of amounts that the
lender projects will be payable by the consumer for major financial
obligations during the relevant monthly period and payments under the
covered short-term loan or covered longer-term balloon-payment loan
during the relevant monthly period, all of which projected amounts are
determined in accordance with Sec. 1041.5(c). See Sec.
1041.5(b)(2)(ii) and associated commentary for further clarification on
the use of residual income methodology to determine ability to repay.
For covered longer-term balloon-payment loans, where the relevant
monthly period may fall well into the future relative to the
consummation of the loan, the lender must calculate the residual income
using the projections made under Sec. 1041.5(c) and in so doing must
make reasonable assumptions about the consumer's net income and major
financial obligations during the relevant monthly period compared to the
period covered by the verification evidence. For example, the lender
cannot assume, absent a reasonable basis, that there will be a
substantial increase in net income or decrease in major financial
obligations between consummation and the relevant monthly period. For
further clarification, see comment 5(c)(1)-1 regarding the consistency
between the consumer's written statement and verification evidence and
comment 5(c)(2)(ii)(A)-2 regarding what constitutes sufficient history
of net income for purposes of verification evidence.
5(b) Reasonable Determination Required
1. Overview. Section 1041.5(b) prohibits a lender from making a
covered short-term loan (other than a covered short-term loan described
in Sec. 1041.6) or a covered longer-term balloon-payment loan or
increasing the amount of credit available on such loan unless it first
makes a reasonable determination that the consumer will have the ability
to repay the loan according to its terms. For discussion of loan
modifications, see comment 2(a)(5)-2. Section 1041.5(b) provides
[[Page 1024]]
minimum standards that the lender's determination must meet to
constitute a reasonable determination. Section 1041.5(b)(2) provides
that a lender's ability-to-repay determination for a covered short-term
loan or covered longer-term balloon-payment loan is reasonable only if
the lender reasonably concludes that, based on the estimates of the
consumer's basic living expenses for the relevant monthly period and the
calculation of the consumer's residual income or the debt-to-income
ratio for the relevant monthly period, as applicable, the consumer can
pay for major financial obligations, make any payments under the loan,
and meet basic living expenses during the periods specified in Sec.
1041.5(b)(2). For covered short-term loans, the periods are the shorter
of the term of the loan or the period ending 45 days after consummation
of the loan, and 30 days after having made the highest payment on the
loan. For covered longer-term balloon-payment loans, the periods are the
relevant monthly period, and 30 days after having made the highest
payment on the loan. Thus, the rule requires lenders to make a debt-to-
income ratio or residual income calculation and an estimate of basic
living expenses for the relevant monthly period--the calendar month in
which the highest payments are due on the covered short-term loan or
covered longer-term balloon payment loan--and to use the results of the
calculation and estimate to make reasonable inferences and draw a
reasonable conclusion about whether the consumer can make loan payments,
pay for major financial obligations, and meet basic living expenses
during the periods specified in Sec. 1041.5(b)(2). This analysis is
designed to determine whether the consumer has the ability to repay the
loan according to its terms. See Sec. 1041.5(b)(2)(i) and (ii) and
corresponding commentary.
2. Reasonable determination. To comply with the requirements of
Sec. 1041.5(b), a lender's determination that a consumer will have the
ability to repay a covered short-term loan or covered longer-term
balloon-payment loan must be reasonable in all respects.
i. To be reasonable, a lender's determination of a consumer's
ability to repay a covered short-term loan or covered longer-term
balloon-payment loan must:
A. Include the reasonable conclusions required in Sec.
1041.5(b)(2), using either the debt-to-income ratio methodology under
Sec. 1041.5(b)(2)(i) or the residual income methodology under Sec.
1041.5(b)(2)(ii) as applied to the relevant monthly period;
B. Be based on reasonable projections of a consumer's net income and
major financial obligations during the relevant monthly period in
accordance with Sec. 1041.5(c);
C. Be based on reasonable estimates of basic living expenses during
the relevant monthly period. The following provides additional
clarification on what constitutes reasonable estimates of basic living
expenses:
1. Section 1041.5(a)(1) and (b) do not specify a particular method
that a lender must use to determine a consumer's basic living expenses.
A lender is not required to itemize the basic living expenses of each
consumer, but may instead arrive at estimates for the amount needed to
cover the costs of food, utilities not paid as part of rental housing
expenses, transportation, out-of-pocket medical expenses, phone and
Internet services, and childcare. A lender may reasonably estimate the
dollar amount or percentage of net income the consumer will need to meet
these basic living expenses based upon such sources as the lender's own
experience in making covered short-term or longer-term balloon-payment
loans to similarly-situated consumers, reasonably reliable information
available from government surveys or other publications about the basic
living expenses of similarly-situated consumers, or some combination
thereof. For example, it would be reasonable for the lender to use data
about relevant categories of expenses from the Consumer Expenditure
Survey of the Bureau of Labor Statistics or the Internal Revenue Code's
Collection Financial Standards, or a combination of the two data
sources, to develop non-individualized estimates of food, utilities not
paid as part of rental housing expenses, transportation, out-of-pocket
medical expenses, phone and internet services, and childcare for
consumers seeking covered short-term or longer-term balloon-payment
loans. In using the data from those sources to estimate the amount spent
on a particular category, the lender may make reasonable adjustments to
arrive at an estimate of basic living expenses, for instance where a
data source's information on a particular type of basic living expenses
overlaps with a type of major financial obligation as defined in Sec.
1041.5(a)(3) or where a data source groups expenses into different
categories than comment 5(a)(1)-2.
2. If the lender is conducting an individualized estimate by
itemizing the consumer's costs of food, utilities not paid as part of
rental housing expenses, transportation, out-of-pocket medical expenses,
phone and Internet services, and childcare, the lender may reasonably
consider other factors specific to the consumer that are not required to
be projected under Sec. 1041.5(c). Such consumer-specific factors could
include whether other persons are regularly contributing toward the
consumer's payment of basic living expenses. The lender may consider
such consumer-specific factors only when it is reasonable to do so. It
is not reasonable for the lender to consider whether other persons are
regularly contributing toward the consumer's payment of basic living
expenses if the lender is separately including in its projection of net
income any income of another
[[Page 1025]]
person to which the consumer has a reasonable expectation of access; and
D. Be consistent with a lender's written policies and procedures
required under Sec. 1041.12 and grounded in reasonable inferences and
conclusions as to a consumer's ability to repay a covered short-term
loan or covered longer-term balloon-payment loan according to its terms
in light of information the lender is required to obtain or consider as
part of its determination under Sec. 1041.5(b).
ii. A determination of ability to repay is not reasonable if it:
A. Relies on an implicit or explicit assumption that the consumer
will obtain additional consumer credit to be able to make payments under
the covered short-term loan or covered longer-term balloon-payment loan,
to make payments under major financial obligations, or to meet basic
living expenses;
B. Assumes that a consumer needs implausibly low amounts of funds to
meet basic living expenses under the residual income methodology or an
implausibly low percentage of net income to meet basic living expenses
if a lender uses the debt-to-income methodology. For example, assume a
consumer seeks a covered short-term loan. The lender uses a debt-to-
income methodology to make an ability-to-repay determination. Based on
the lender's projections of the consumer's net income and major
financial obligations under Sec. 1041.5(c), the lender calculates that
the consumer's debt-to-income ratio would be 90 percent, which means
that only 10 percent of the consumer's net income will be remaining to
pay for basic living expenses. It is not reasonable for the lender to
conclude under Sec. 1041.5(b)(2) that a consumer with a 90 percent
debt-to-income ratio would have the ability to repay the loan. See
comment 5(b)(2)(i)-3 for additional examples of ability-to-repay
determinations using the debt-to-income methodology; or
C. For covered longer-term balloon-payment loans, if the lender
relies on an assumption that a consumer will accumulate savings while
making one or more payments under a covered longer-term balloon-payment
loan and that, because of such assumed savings, the consumer will be
able to make a subsequent loan payment under the loan.
iii. Evidence that a lender's determinations of ability to repay are
not reasonable may include, without limitation, the factors described
under paragraphs (A) through (E) of comment 5(b)-2.iii. These factors
may be evaluated across a lender's entire portfolio of covered short-
term loans or covered longer-term balloon-payment loans or with respect
to particular products, geographic regions, particular periods during
which the loans were made, or other relevant categorizations. Other
relevant categorizations would include, without limitation, loans made
in reliance on consumer statements of income in the absence of
verification evidence (see comment 5(c)(2)(ii)(A)-4). The factors
described under paragraphs (A) through (E) of comment 5(b)-2.iii may be
considered either individually or in combination with one another. These
factors also are not absolute in their application; instead, they exist
on a continuum and may apply to varying degrees. Each of these factors
is viewed in the context of the facts and circumstances relevant to
whether the lender's ability-to-repay determinations are reasonable.
Relevant evidence may also include a comparison of the following factors
on the part of the lender to that of other lenders making covered short-
term loans or covered longer-term balloon-payment loans to similarly
situated consumers; however, such evidence about comparative performance
is not dispositive as to the evaluation of a lender's ability-to-repay
determinations.
A. Default rates. This evidence includes defaults during and at the
expiration of covered loan sequences as calculated on a per sequence or
per consumer basis;
B. Re-borrowing rates. This evidence includes the frequency with
which the lender makes consumers multiple covered short-term loans or
covered longer-term balloon-payment loans within a loan sequence as
defined in Sec. 1041.2(a)(14) (i.e., consecutive or concurrent loans
taken out within 30 days of a prior loan being outstanding);
C. Patterns of lending across loan sequences. This evidence includes
the frequency with which the lender makes multiple sequences of covered
short-term loans or covered longer-term balloon-payment loans to
consumers. This evidence also includes the frequency with which the
lender makes consumers new covered short-term loans or covered longer-
term balloon-payment loans immediately or soon after the expiration of a
cooling-off period under Sec. 1041.5(d)(2) or the 30-day period that
separates one loan sequence from another (see Sec. 1041.2(a)(14));
D. Evidence of delinquencies and collateral impacts. This evidence
includes the proportion of consumers who incur late fees, failed
presentments, delinquencies, and repossessions of motor vehicles for
loans involving vehicle security; and
E. Patterns of non-covered lending. This evidence includes the
frequency with which the lender makes non-covered loans shortly before
or shortly after consumers repay a covered short-term loan or covered
longer-term balloon-payment loan, and the non-covered loan bridges all
or a substantial part of either the period between two loans that
otherwise would be part of a loan sequence or of a cooling-off period.
An example would be where the lender, its affiliate, or a service
provider frequently makes 30-day non-recourse pawn loans to consumers
shortly before or soon after repayment of covered
[[Page 1026]]
short-term loans made by the lender, and where the lender then makes
additional covered short-term loans to the same consumers soon after
repayment of the pawn loans.
iv. Examples of evidence of the reasonableness of ability-to-repay
determinations. The following examples illustrate how the factors
described in comment 5(b)-2.iii may constitute evidence about whether
lenders' determinations of ability to repay are reasonable under Sec.
1041.5(b):
A. A significant percentage of consumers who obtain covered short-
term loans from a lender under Sec. 1041.5 re-borrow within 30 days of
repaying their initial loan, re-borrow within 30 days of repaying their
second loan, and re-borrow shortly after the end of the cooling-off
period that follows the initial loan sequence of three loans. Based on
the combination of these factors, this evidence suggests that the
lender's ability-to-repay determinations are not reasonable.
B. A lender frequently makes at or near the maximum number of loans
permitted under Sec. 1041.6 to consumers early within a 12-month period
(i.e., the loans do not require ability-to-repay determinations) and
then makes a large number of additional covered short-term loans to
those same consumers under Sec. 1041.5 (i.e., the loans require
ability-to-repay determinations) later within the 12-month period.
Assume that the loans made under Sec. 1041.5 are part of multiple loan
sequences of two or three loans each and the sequences begin soon after
the expiration of applicable cooling-off periods or 30-day periods that
separate one loan sequence from another. This evidence suggests that the
lender's ability-to-repay determinations for the covered short-term
loans made under Sec. 1041.5 are not reasonable. The fact that some of
the loans in the observed pattern were made under Sec. 1041.6 and thus
are conditionally exempted from the ability-to-repay requirements does
not mitigate the potential unreasonableness of the ability-to-repay
determinations for the covered short-term loans that were made under
Sec. 1041.5.
C. A lender frequently makes at or near the maximum number of loans
permitted under Sec. 1041.6 to consumers early within a 12-month period
(i.e., the loans do not require ability-to-repay determinations) and
then only occasionally makes additional covered short-term loans to
those same consumers under Sec. 1041.5 (i.e., the loans require
ability-to-repay determinations) later within the 12-month period. Very
few of those additional loans are part of loans sequences longer than
one loan. Absent other evidence that the ability-to-repay determination
is unreasonable (see comment 5(b)-2.iii.A through E), this evidence
suggests that the lender's ability-to-repay determinations for the loans
made under Sec. 1041.5 are reasonable.
D. Within a lender's portfolio of covered short-term loans, a small
percentage of loans result in default, consumers generally have short
loan sequences (fewer than three loans), and the consumers who take out
multiple loan sequences typically do not begin a new loan sequence until
several months after the end of a prior loan sequence. There is no
evidence of the lender or an affiliate making non-covered loans to
consumers to bridge cooling-off periods or the periods between loan
sequences. This evidence suggests that the lender's ability-to-repay
determinations are reasonable.
3. Payments under the covered short-term loan or longer-term
balloon-payment loan. Under the ability-to-repay requirements in Sec.
1041.5(b)(2)(i) and (ii), a lender must determine the amount of the
payments due in connection with the covered short-term loan or covered
longer-term balloon-payment loan during the relevant monthly period. See
Sec. 1041.5(a)(6) for the definition of payment under a covered short-
term loan or covered longer-term balloon-payment loan, including
assumptions that the lender must make in calculating the amount of
payments under a loan that is a line of credit.
Paragraph 5(b)(2)
1. General. For a covered short-term loan, Sec. 1041.5(b)(2)
requires the lender to reasonably conclude that, based on the estimates
of the consumer's basic living expenses for the relevant monthly period
and the lender's calculation of the consumer's debt-to-income ratio or
residual income for the relevant monthly period, as applicable, the
consumer can pay major financial obligations, make any payments on the
loan, and meet basic living expenses during the shorter of the term of
the loan or the period ending 45 days after consummation of the loan,
and for 30 days after having made the highest payment on the loan. See
Sec. 1041.5(b)(2)(i)(A) (the debt-to-income methodology) and Sec.
1041.5(b)(2)(ii)(A) (the residual income methodology) and corresponding
commentary. For a covered longer-term balloon-payment loan, Sec.
1041.5(b)(2) requires the lender to reasonably conclude that, based on
the estimates of the consumer's basic living expenses for the relevant
monthly period and the lender's calculation of the consumer's debt-to-
income ratio or residual income, as applicable, the consumer can pay
major financial obligations, make any payments on the loan, and meet
basic living expenses during the relevant monthly period, and for 30
days after having made the highest payment on the loan. See Sec.
1041.5(b)(2)(i)(B) (the debt-to-income methodology) and Sec.
1041.5(b)(2)(ii)(B) (the residual income methodology) and corresponding
commentary. If the loan has two or more payments that are equal to each
other in amount and higher than all other payments, the date of the
[[Page 1027]]
highest payment under the loan is considered the later in time of the
two or more highest payments. Under Sec. 1041.5(b)(2), lenders must
comply with either Sec. 1041.5(b)(2)(i) or (ii) depending on whether
they utilize the residual income or debt-to-income ratio methodology.
Paragraph 5(b)(2)(i)
1. Relation of periods under Sec. 1041.5(b)(2)(i) to relevant
monthly period. Section 1041.5(a)(2) defines debt-to-income ratio as the
ratio, expressed as a percentage, of the sum of the amounts that the
lender projects will be payable by the consumer for major financial
obligations during the relevant monthly period and the payments under
the covered short-term loan or covered longer-term balloon-payment loan
during the relevant monthly period, to the net income that the lender
projects the consumer will receive during the relevant monthly period,
all of which projected amounts are determined in accordance with Sec.
1041.5(c). Comment 5(a)(2)-1 clarifies that the relevant monthly period
is the calendar month during which the highest sum of payments on the
loan is due. The relevant monthly period is not the same period as the
periods set forth in Sec. 1041.5(b)(2)(i), which for covered short-term
loans are the shorter of the loan term or 45 days following
consummation, and 30 days following the date of the highest payment
under the loan, and for covered longer-term balloon-payment loans are
the relevant monthly period, and 30 days following the date of the
highest payment under the loan. There may be overlap between the
relevant monthly period and the periods set forth in Sec.
1041.5(b)(2)(i), but the degree of overlap will depend on the
contractual duration of the loan and the consummation and contractual
due dates. For example, assume a consumer takes a covered short-term
loan of 30 days in duration that is consummated on June 15 and with a
single payment due on July 14. The relevant monthly period is the
calendar month in which the sum of the highest payments on the loan is
due, which is the calendar month of July. This means that a portion of
both the loan term (i.e., June 15 to June 30) and the 30-day period
following the date of the highest payment on the loan (i.e., August 1 to
August 13) are outside of the relevant monthly period.
2. Use of projections for relevant monthly period to comply with
Sec. 1041.5(b)(2)(i). The lender is not required under Sec.
1041.5(b)(2)(i) to estimate the consumer's basic living expenses, make a
projection under Sec. 1041.5(c) of the consumer's net income and major
financial obligations, or calculate the consumer's debt-to-income ratio
for any period other than the relevant monthly period. The lender may
use the estimates of the consumer's basic living expenses for the
relevant monthly period, the projections about the consumer's net income
and major financial obligations during the relevant monthly period, and
the calculation of the consumer's debt-to-income ratio as a baseline of
information from which to make reasonable inferences and draw a
reasonable conclusion about whether the consumer will pay major
financial obligations, make the payments on the loan, and meet basic
living expenses during the periods specified in Sec. 1041.5(b)(2)(i).
To make reasonable inferences and draw a reasonable conclusion, the
lender cannot, for example, assume that the consumer will defer payment
of major financial obligations and basic living expenses until after the
30-day period that follows the date of the highest payment on the loan,
or assume that obligations and expenses (other than payments on the
covered loan itself) during the 30-day period will be less than during
the relevant monthly period. Nor can the lender assume the consumer will
be able to obtain additional credit during the loan term or during the
30-day period that follows the highest payment on the loan.
3. Examples. The following examples illustrate Sec.
1041.5(b)(2)(i):
i. Assume a lender considers making a covered short-term loan to a
consumer on March 1. The prospective loan would be repayable in a single
payment of $385 on March 17. The lender calculates that, based on its
projections of the consumer's net income and major financial obligations
during March (i.e., the relevant monthly period), the consumer will have
a debt-to-income ratio of 55 percent. The lender complies with the
requirement in Sec. 1041.5(b)(2) if, using that debt-to-income ratio,
the lender reasonably concludes that the consumer can pay for major
financial obligations, make the loan payment, and meet basic living
expenses during the loan term and to pay for major financial obligations
and meet basic living expenses for 30 days following the contractual due
date (i.e., from March 18 to April 16). The lender would not make a
reasonable conclusion if the lender were to assume, for example, that
the consumer would defer payment of major financial obligations until
after April 16 or that the consumer would obtain an additional extension
of credit on April 1.
ii. Assume a lender considers making a covered longer-term balloon-
payment loan to a consumer on March 1. The prospective loan would be
repayable in six biweekly payments. The first five of which would be for
$100, and the last of which would be for $275, due on May 20. The
highest sum of these payments that would be due within a monthly period
would be $375, during the month of May. The lender further calculates
that, based on its projections of net income and major financial
obligations during the relevant monthly period, the consumer will have a
debt-to-income ratio of 50 percent.
[[Page 1028]]
The lender complies with the requirement in Sec. 1041.5(b)(2)(i) if,
applying that debt-to-income ratio, the lender reasonably concludes that
the consumer can pay for major financial obligations, make the payments
under the loan, and meet basic living expenses during the month in which
the highest sum of payments on the loan are due (i.e., during the month
of May) and for 30 days following the highest payment on the loan (i.e.,
from May 21 to June 19). The lender would not make a reasonable
conclusion if the lender were to assume, for example, that the consumer
would defer payment of major financial obligations until after June 19
or that the consumer would obtain an additional extension of credit on
June 1.
Paragraph 5(b)(2)(ii)
1. Relation of periods under Sec. 1041.5(b)(2)(ii) to relevant
monthly period. Section 1041.5(a)(8) defines residual income as the sum
of net income that the lender projects the consumer will receive during
the relevant monthly period, minus the sum of the amounts that the
lender projects will be payable by the consumer for major financial
obligations during the relevant monthly period and payments under the
covered short-term loan or covered longer-term balloon-payment loan
during the relevant monthly period, all of which projected amounts are
determined in accordance with paragraph (c). The relevant monthly period
is the calendar month in which the highest sum of payments on the loan
is due. The relevant monthly period is not the same period as the
periods set forth in Sec. 1041.5(b)(2)(ii), although there may be some
overlap. See comment 5(b)(2)(i)-1 for further clarification and an
analogous example.
2. Use of projections for relevant monthly period to comply with
Sec. 1041.5(b)(2)(ii). The lender is not required under Sec.
1041.5(b)(2)(ii) to estimate the consumer's basic living expenses, make
a projection under Sec. 1041.5(c) of the consumer's net income and
major financial obligations, or calculate the consumer's residual income
for any period other than the relevant monthly period. The lender may
use the estimates of the consumer's basic living expenses for the
relevant monthly period, projections about the consumer's net income and
major financial obligations during the relevant monthly period and the
calculation of the consumer's residual income as a baseline of
information on which to make reasonable inferences and draw a reasonable
conclusion about whether the consumer will pay major financial
obligations, make the payments on the loan, and meet basic living
expenses during the periods specified in Sec. 1041.5(b)(2)(ii). See
comment 5(b)(2)(i)-2 for further clarification.
3. Examples. The following examples illustrate Sec.
1041.5(b)(2)(ii):
i. Assume a lender considers making a covered short-term loan to a
consumer on March 1. The prospective loan would be repayable in a single
payment of $385 on March 17. The lender calculates that, based on its
projections of the consumer's net income and major financial obligations
during March (i.e., the relevant monthly period), the consumer will have
$1,000 in residual income for the month. The lender complies with the
requirement in Sec. 1041.5(b)(2)(ii) if, based on the calculation of
residual income, it reasonably concludes that the consumer will be able
to pay major financial obligations, make the loan payment, and meet
basic living expenses during the loan term and for 30 days following the
contractual due date (i.e., from March 18 to April 16). The lender would
not make a reasonable conclusion if the lender were to assume, for
example, that the consumer would defer payment of major financial
obligations until after April 16, that the consumer would obtain an
additional extension of credit on April 1, or that the consumer's net
income will increase in April relative to the relevant monthly period
(i.e., March).
ii. Assume a lender considers making a covered longer-term balloon-
payment loan to a consumer on March 1. The prospective loan would be
repayable in six biweekly payments. The first five payments would be for
$100, and the last payment would be for $275, on May 20. The highest sum
of these payments that would be due within a monthly period would be
$375, during the month of May. The lender further calculates that, based
on its projections of net income and major financial obligations during
the relevant monthly period (i.e., May), and accounting for the $375
amount, which is the highest sum of loan payments due within a monthly
period, the consumer will have $1,200 in residual income. The lender
complies with the requirement in Sec. 1041.5(b)(2)(ii) if, based on the
calculation of residual income, it reasonably concludes that the
consumer will be able to pay major financial obligations, make the loan
payments, and meet basic living expenses during the relevant monthly
period (i.e., May) and to pay for basic living expenses and major
financial obligations for 30 days following the highest payment on the
loan (i.e., from May 21 to June 19). The lender would not make a
reasonable conclusion if the lender were to assume, for example, that
the consumer would be able to defer payment of major financial
obligations until after June 19 or that the consumer would obtain an
additional extension of credit on June 1, or that the consumer's net
income will increase in June relative to the relevant monthly period
(i.e., May).
[[Page 1029]]
5(c) Projecting Consumer Net Income and Payments for Major Financial
Obligations
Paragraph 5(c)(1)
1. General. Section 1041.5(c)(1) requires lenders to consider major
financial obligations that are listed in a consumer's written statement
described in Sec. 1041.5(c)(2)(i)(B) even if the obligations do not
appear in the national credit report or other verification documentation
that lenders are required to compile under Sec. 1041.5(c)(2)(ii)(B). To
be reasonable, Sec. 1041.5(c)(1) provides that a projection of the
amount of net income or payments for major financial obligations may be
based on a consumer's written statement of amounts under Sec.
1041.5(c)(2)(i) only as specifically permitted by Sec. 1041.5(c)(2)(ii)
or (iii) or to the extent the stated amounts are consistent with the
verification evidence that is obtained in accordance with Sec.
1041.5(c)(2)(ii). Section 1041.5(c)(1) further provides that, in
determining whether the stated amounts are consistent with the
verification evidence, the lender may reasonably consider other reliable
evidence the lender obtains from or about the consumer, including any
explanations the lender obtains from the consumer. For example:
i. Assume that a consumer states that her net income is $900 every
two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The consumer pay stub
the lender obtains as reasonably available verification evidence
pursuant to Sec. 1041.5(c)(2)(ii)(A) shows that the consumer received
$900 during the preceding pay period. The lender complies with Sec.
1041.5(c)(1) if it makes the determination required under Sec.
1041.5(b) based on a projection of $1,800 in net income for the relevant
monthly period because the reasonably available verification evidence
supports a projection of $900 in net income every two weeks.
ii. Assume that a consumer states that net income is $1,000 every
two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The lender obtains a
copy of the consumer's recent deposit account transaction records as
verification evidence pursuant to Sec. 1041.5(c)(2)(ii)(A). The account
transaction records show biweekly take-home pay of $800 during the
preceding two-week period. The lender does not comply with Sec.
1041.5(c)(1) if it makes the determination required under Sec.
1041.5(b) based on a net income projection of a $2,000 for the relevant
monthly period because this projection is not consistent with the
reasonably available verification evidence (which, rather, is consistent
with a total of $1,600 net income for the relevant monthly period). The
lender may request additional deposit account transaction records for
prior recent pay cycles and may reasonably project $2,000 in net income
for the relevant monthly period if such additional evidence is
consistent with the consumer's statement.
iii. Assume that a consumer states that net income is $1,000 every
two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The lender obtains a
copy of the consumer's recent deposit account transaction records as
verification evidence pursuant to Sec. 1041.5(c)(2)(ii)(A). The account
transaction records show biweekly take-home pay of $800 during the
preceding two-week period. Assume also, however, that the consumer
states that the consumer supplements his regular payroll income with
cash income from a second job, for which verification evidence is not
reasonably available because the consumer is paid in cash and does not
deposit the cash into the consumer's bank account, and that the consumer
earns between $100 and $300 every two weeks from this job. In this
instance, the lender complies with Sec. 1041.5(c)(1) if it makes the
determination required under Sec. 1041.5(b) based on a net income
projection of $2,000 for the relevant monthly period. The lender's
projection includes both the payroll income from the first job for which
verification evidence is reasonably available and the cash income from
the second job for which verification evidence is not reasonably
available (see comment 5(c)(2)(ii)(A)-3). In such circumstances, the
lender may reasonably consider the additional income reflected in the
consumer's written statement pursuant to Sec. 1041.5(c)(2)(ii)(A)(1).
iv. Assume that a consumer states that her net income is $1,000
every two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The lender
obtains electronic records of the consumer's deposit account
transactions as verification evidence pursuant to Sec.
1041.5(c)(2)(ii)(A) showing a biweekly direct deposit $800 during the
preceding two-week period and a biweekly direct deposit of $1,000 during
the prior two-week period. The consumer explains that the most recent
income was lower than her usual income of $1,000 because she missed two
days of work due to illness. The lender complies with Sec. 1041.5(c)(1)
if it makes the determination required under Sec. 1041.5(b) based on a
projection of $2,000 for the relevant monthly period because it
reasonably considers the consumer's explanation in determining whether
the stated amount is consistent with the verification evidence.
v. Assume that a consumer states that her net income is $2,000 every
two weeks, pursuant to Sec. 1041.5(c)(2)(i)(A). The lender obtains
electronic records of the consumer's deposit account transactions as
verification evidence pursuant to Sec. 1041.5(c)(2)(ii)(A) showing no
income transactions in the preceding month but showing consistent
biweekly direct deposits of $2,000 from ABC Manufacturing prior to that
month. The consumer explains that she was temporarily laid off for one
month while ABC Manufacturing retooled the plant where she works but
that she recently resumed work there. The lender
[[Page 1030]]
complies with Sec. 1041.5(c)(1) if it makes the determination required
under Sec. 1041.5(b) based on a projection of $4,000 for the relevant
monthly period because it reasonably considers the consumer's
explanation in determining whether the stated amount is consistent with
the verification evidence.
vi. Assume that a consumer states that she owes a child support
payment of $200 each month, pursuant to Sec. 1041.5(c)(2)(i)(B). The
national consumer report that the lender obtains as verification
evidence pursuant to Sec. 1041.5(c)(2)(ii)(C) does not include any
child support payment. The lender must consider the child support
obligation listed in the written statement. The lender complies with
Sec. 1041.5(c)(1) if it reasonably relies on the amount in the
consumer's written statement pursuant to Sec. 1041.5(c)(2)(ii)(C) to
make the determination required under Sec. 1041.5(b) based on a
projection of a $200 child support payment each month.
vii. Assume that a consumer does not list a student loan in her
written statement pursuant to Sec. 1041.5(c)(2)(i)(B), but the national
consumer report that the lender obtains as verification evidence
pursuant to Sec. 1041.5(c)(2)(ii)(B) lists such a loan with a payment
due during the relevant monthly period. The lender does not comply with
Sec. 1041.5(c)(1) if it makes the determination required under Sec.
1041.5(b) without including the student loan payment based on the
consumer's failure to list the loan in the written statement or on the
consumer's explanation that the loan has recently been paid off. The
lender may obtain and reasonably consider other reliable evidence, such
as records from the consumer or an updated national consumer report, and
may exclude the student loan payment if such additional evidence is
consistent with the consumer's statement or explanation.
viii. Assume that a consumer states that he owes a child support
payment of $200 each month, pursuant to Sec. 1041.5(c)(2)(i)(B). The
national consumer report that the lender obtains as verification
evidence pursuant to Sec. 1041.5(c)(2)(ii)(C) includes the child
support payment. The consumer states, further, that his child support
payment is deducted out of his paycheck prior to his receipt of take-
home pay. The lender obtains a recent pay stub of the consumer as
verification evidence which shows a $200 deduction but does not identify
the payee or include any other information regarding the nature of the
deduction. The lender complies with Sec. 1041.5(c)(1) if it makes the
determination required under Sec. 1041.5(b) based on a projection of
major financial obligations that does not include the $200 child support
payment each month, because it relies on the consumer's statement that
the child support payment is deducted from his paycheck prior to receipt
of take-home pay and nothing in the verification evidence is
inconsistent with the statement.
2. Consumer-specific factors regarding payment of major financial
obligations. Under Sec. 1041.5(c)(1), in projecting major financial
obligations the lender may consider consumer-specific factors, such as
whether other persons are regularly contributing toward the consumer's
payment of major financial obligations. The lender may consider such
consumer-specific factors only when it is reasonable to do so. It is not
reasonable for the lender to consider whether other persons are
regularly contributing toward the consumer's payment of major financial
obligations if the lender is separately including in its projection of
net income any income of another person to which the consumer has a
reasonable expectation of access (see comment 5(a)(5)-3).
5(c)(2) Evidence of Net Income and Payments for Major Financial
Obligations
Paragraph 5(c)(2)(i)
1. Statements from the consumer. Section 1041.5(c)(2)(i) requires a
lender to obtain a consumer's written statement of the amounts of the
consumer's net income and payments for the consumer's major financial
obligations currently and for the relevant monthly period. Section
1041.5(c)(2)(i) also provides that the written statement from the
consumer may include a statement from the consumer about the amount of
any income of another person to which the consumer has a reasonable
expectation of access. A consumer's written statement includes a
statement the consumer writes on a paper application or enters into an
electronic record, or an oral consumer statement that the lender records
and retains or memorializes in writing or electronically and retains.
Paragraph 5(c)(2)(ii)
1. Verification requirement. Section 1041.5(c)(2)(ii) establishes
requirements for a lender to obtain verification evidence for the
amounts of a consumer's net income and required payments for major
financial obligations other than rental housing expense.
Paragraph 5(c)(2)(ii)(A)
1. Income. Section 1041.5(c)(2)(ii)(A) requires a lender to obtain a
reliable record (or records) of an income payment (or payments) directly
to the consumer covering sufficient history to support the lender's
projection under Sec. 1041.5(c)(1) if a reliable record (or records) of
income payment (or payments) is reasonably available. Section
1041.5(c)(2)(ii)(A) also provides that if the lender elects to include
as the consumer's net income for the relevant monthly period the income
of another person to which the
[[Page 1031]]
consumer has a reasonable expectation of access, the lender must obtain
verification evidence of that income in the form of a reliable record
(or records) demonstrating that the consumer has regular access to that
income. Such verification evidence could consist of bank account
statements indicating that the consumer has access to a joint bank
account in which the other person's income is deposited, or that the
other person regularly deposits income into the consumer's bank account
(see comment 5(a)(5)-3 for further clarification). For purposes of
verifying net income, a reliable transaction record includes a facially
genuine original, photocopy, or image of a document produced by or on
behalf of the payer of income, or an electronic or paper compilation of
data included in such a document, stating the amount and date of the
income paid to the consumer. A reliable transaction record also includes
a facially genuine original, photocopy, or image of an electronic or
paper record of depository account transactions, prepaid account
transactions (including transactions on a general purpose reloadable
prepaid card account, a payroll card account, or a government benefits
card account) or money services business check-cashing transactions
showing the amount and date of a consumer's receipt of income.
2. Sufficient history. Under Sec. 1041.5(c)(2)(ii)(A), the lender
must obtain a reliable record or records of the consumer's net income
covering sufficient history to support the lender's projection under
Sec. 1041.5(c). For a covered short-term loan, sufficient history
typically would consist of one biweekly pay cycle or one monthly pay
cycle, depending on how frequently the consumer is paid. However, if
there is inconsistency between the consumer's written statement
regarding net income and the verification evidence which must be
reconciled by the lender (see comment 5(c)(1)-1), then depending on the
circumstances more than one pay cycle may be needed to constitute
sufficient history. For a covered longer-term balloon-payment loan,
sufficient history would generally consist of two biweekly pay cycles or
two monthly pay cycles, depending on how frequently the consumer is
paid. However, depending on the length of the loan, and the need to
resolve inconsistency between the consumer's written statement regarding
net income and the verification evidence, more than two pay cycles may
be needed to constitute sufficient history.
3. Reasonably available. The lender's obligation to obtain a
reliable record (or records) of income payment (or payments) covering
sufficient history to support the lender's projection under Sec.
1041.5(c)(1) applies if and to the extent a reliable record (or records)
is reasonably available. A reliable record of the consumer's net income
is reasonably available if, for example, the consumer's source of income
is from her employment and she possesses or can access a copy of the
consumer's recent pay stub. The consumer's recent transaction account
deposit history is a reliable record (or records) that is reasonably
available if the consumer has such an account. With regard to such bank
account deposit history, the lender could obtain it directly from the
consumer or, at its discretion, with the consumer's permission via an
account aggregator service that obtains and categorizes consumer deposit
account and other account transaction data. In situations in which
income is neither documented through pay stubs nor transaction account
records, the reasonably available standard requires the lender to act in
good faith and exercise due diligence as appropriate for the
circumstances to determine whether another reliable record (or records)
is reasonably available.
4. Reasonable reliance on consumer's statement if reliable record
not reasonably available. Under Sec. 1041.5(c)(2)(ii)(A), if a lender
determines that a reliable record (or records) of some or all of the
consumer's net income is not reasonably available, the lender may
reasonably rely on the consumer's written statement described in Sec.
1041.5(c)(2)(i)(A) for that portion of the consumer's net income.
Section 1041.5(c)(2)(ii)(A) does not permit a lender to rely on a
consumer's written statement that the consumer has a reasonable
expectation of access to the income of another person (see comment
5(c)(2)(ii)(A)-1). A lender reasonably relies on the consumer's written
statement if such action is consistent with a lender's written policies
and procedures required under Sec. 1041.12 and there is no indication
that the consumer's stated amount of net income on a particular loan is
implausibly high or that the lender is engaged in a pattern of
systematically overestimating consumers' income. Evidence of the
lender's systematic overestimation of consumers' income could include
evidence that the subset of the lender's portfolio consisting of the
loans where the lender relies on the consumers' statements to project
income in the absence of verification evidence perform worse, on a non-
trivial level, than other covered loans made by the lender with respect
to the factors noted in comment 5(b)-2.iii indicating poor loan
performance (e.g., high rates of default, frequent re-borrowings). If
the lender periodically reviews the performance of covered short-term
loans or covered longer-term balloon-payment loans where the lender has
relied on consumers' written statements of income and uses the results
of those reviews to make necessary adjustments to its policies and
procedures and future lending decisions, such actions indicate that the
lender is reasonably relying on consumers' statements. Such
[[Page 1032]]
necessary adjustments could include, for example, the lender changing
its underwriting criteria for covered short-term loans to provide that
the lender may not rely on the consumer's statement of net income in
absence of reasonably available verification evidence unless the
consumer's debt-to-income ratio is lower, on a non-trivial level, than
that of similarly situated applicants who provide verification evidence
of net income. A lender is not required to consider income that cannot
be verified other than through the consumer's written statement. For an
illustration of a lender's reliance on a consumer's written statement as
to a portion of her income for which verification evidence is not
reasonably available, see comment 5(c)(1)-1.iii.
Paragraph 5(c)(2)(ii)(B)
1. Payments under debt obligations. To verify a consumer's required
payments under debt obligations, Sec. 1041.5(c)(2)(ii)(B) requires a
lender to obtain a national consumer report, the records of the lender
and its affiliates, and a consumer report obtained from an information
system that has been registered for 180 days or more pursuant to Sec.
1041.11(c)(2) or is registered pursuant to Sec. 1041.11(d)(2), if
available. A lender satisfies its obligation under Sec. 1041.5(d)(1) to
obtain a consumer report from an information system that has been
registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or is
registered pursuant to Sec. 1041.11(d)(2), if available, when it
complies with the requirement in Sec. 1041.5(c)(2)(ii)(B) to obtain
this same consumer report. See comment 5(a)(3)-1 regarding the
definition of required payments.
2. Deduction of debt obligations prior to consumer's receipt of
take-home pay. If verification evidence shows that a debt obligation is
deducted prior to the consumer's receipt of take-home pay, the lender
does not include the debt obligation in the projection of major
financial obligations under Sec. 1041.5(c).
3. Inconsistent information. If the consumer reports and lender and
affiliate records do not include a debt obligation listed in the
consumer's written statement described in Sec. 1041.5(c)(2)(ii)(B), the
lender must consider the debt obligation listed in the consumer's
written statement to make a reasonable projection of the amount of
payments for debt obligations. The lender may reasonably rely on the
written statement in determining the amount of the required payment for
the debt obligation. If the reports and records include a debt
obligation that is not listed in the consumer's written statement, the
lender must consider the debt obligation listed in the report or record
unless it obtains additional verification evidence confirming that the
obligation has been paid off or otherwise released. A lender is not
responsible for information about a major financial obligation that is
not owed to the lender, its affiliates, or its service providers if such
obligation is not listed in a consumer's written statement, a national
consumer report, or a consumer report from an information system that
has been registered for 180 days or more pursuant to Sec. 1041.11(c)(2)
or is registered pursuant to Sec. 1041.11(d)(2).
Paragraph 5(c)(2)(ii)(C)
1. Payments under child support or alimony obligations. Section
1041.5(c)(2)(ii)(B) requires a lender to obtain a national consumer
report to verify a consumer's required payments under child support
obligations or alimony obligations under Sec. 1041.5(c)(2)(ii)(C). A
lender may use the same national consumer report to satisfy the
verification requirements under both Sec. 1041.5(c)(2)(ii)(B) and (C).
See comment 5(c)(2)(ii)(B)-1 for clarification on the interplay between
this obligation and Sec. 1041.5(d)(1). If the report does not include a
child support or alimony obligation listed in the consumer's written
statement described in Sec. 1041.5(c)(2)(i)(B), the lender must
consider the obligation listed in the consumer's written statement to
make a reasonable projection of the amount of payments for the child
support or alimony obligation. The lender may reasonably rely on the
written statement in determining the amount of the required payment for
the obligation.
2. Deduction of child support or alimony obligations prior to
consumer's receipt of take-home pay. If verification evidence shows that
a child support or alimony obligation is deducted prior to the
consumer's receipt of take-home pay, the lender does not include the
child support or alimony obligation in the projection of major financial
obligations under Sec. 1041.5(c). For an illustration, see comment
5(c)(1)-1.viii.
Paragraph 5(c)(2)(ii)(D)
1. Exception to obligation to obtain consumer report. Section
1041.5(c)(2)(ii)(D) provides that notwithstanding Sec.
1041.5(c)(2)(ii)(B) and (C), a lender is not required to obtain a
national consumer report to verify debt obligations and child support
and alimony obligations if during the preceding 90 days: The lender or
its affiliate has obtained a national consumer report for the consumer,
retained the report under Sec. 1041.12(b)(1)(ii) and checked it again
in connection with the new loan; and the consumer did not complete a
loan sequence of three loans under Sec. 1041.5 and trigger the 30-day
cooling-off period under Sec. 1041.5(d)(2) since the previous report
was obtained. To illustrate how the two conditions relate to each other,
assume a consumer obtains a sequence of three covered short-term loans
under Sec. 1041.5, with each loan being 15 days in duration, the first
loan consummating on June 1, and the final loan
[[Page 1033]]
no longer being outstanding as of July 15. The lender obtained a
consumer report on May 30 as part of its ability-to-repay determination
for the first loan in the sequence. Under Sec. 1041.5(c)(2)(ii)(D), the
lender is not required to obtain a consumer report for the second and
third loan in the sequence. Because the consumer took a three-loan
sequence, the consumer is subject to a 30-day cooling-off period which
expires on August 15 pursuant to Sec. 1041.5(d)(2). If the consumer
returns to the lender for another covered short-term loan under Sec.
1041.5 on August 15, the lender must obtain a consumer report under
Sec. 1041.5(c)(2)(ii)(B) and (C) to verify debt obligations and child
support and alimony obligations even though fewer than 90 days has
elapsed since the lender previously obtained a consumer report for the
consumer because the consumer completed a three-loan sequence and
triggered the 30-day cooling-off period since the previous report was
obtained.
2. Conflicts between consumer's written statement and national
consumer report. A lender is not required to obtain a new national
consumer report if the conditions under Sec. 1041.5(c)(2)(ii)(D) are
met; however, there may be circumstances in which a lender would
voluntarily obtain a new national consumer report to resolve potential
conflicts between a consumer's written statement and a national consumer
report obtained in the previous 90 days. See comments 5(c)(1)-1.vii and
5(c)(2)(ii)(B)-3.
Paragraph 5(c)(2)(iii)
1. Rental housing expense. Section 1041.5(c)(2)(iii) provides that
for the consumer's housing expense other than a payment for a debt
obligation that appears on a national consumer report obtained pursuant
to Sec. 1041.5(c)(2)(ii)(B) (i.e., with respect to lease or other
rental housing payments), the lender may reasonably rely on the
consumer's statement described in Sec. 1041.5(c)(2)(i)(B). A lender
reasonably relies on the consumer's written statement if such actions
are consistent with a lender's written policies and procedures required
under Sec. 1041.12, and there is no evidence that the stated amount for
rental housing expense on a particular loan is implausibly low or that
there is a pattern of the lender underestimating consumers' rental
housing expense.
2. Mortgage obligations. For a housing expense under a debt
obligation (i.e., a mortgage), a lender generally must verify the
obligation by obtaining a national consumer report that includes the
housing expense under a debt obligation pursuant to Sec.
1041.5(c)(2)(ii)(B). Under Sec. 1041.5(c)(2)(ii)(D), however, a lender
is not required to obtain a national consumer report if, during the
preceding 90 days: the lender or its affiliate has obtained a national
consumer report for the consumer and retained the report under Sec.
1041.12(b)(1)(ii) and checked it again in connection with the new loan;
and the consumer did not complete a loan sequence of three loans under
Sec. 1041.5 and trigger the 30-day cooling-off period under Sec.
1041.5(d)(2) since the previous report was obtained (see comment
5(c)(2)(ii)(D)-1).
5(d) Additional Limitations on Lending--Covered Short-Term Loans and
Covered Longer-Term Balloon-Payment Loans
Paragraph 5(d)
1. General. Section 1041.5(d) specifies certain circumstances in
which making a new covered short-term loan or a covered longer-term
balloon-payment loan under Sec. 1041.5 during or after a sequence of
covered short-term loans, covered longer-term balloon-payment loans, or
a combination of covered short-term loans and covered longer-term
balloon-payment loans is prohibited during a mandatory cooling-off
period. The prohibitions apply to making a covered short-term loan or
covered longer-term balloon-payment loan under Sec. 1041.5.
2. Application to rollovers. The prohibitions in Sec. 1041.5(d)
apply to new covered short-term loans or covered longer-term balloon-
payment loans under Sec. 1041.5, as well as to loans that are a
rollover of a prior loan (or what is termed a ``renewal'' in some
States). Rollovers are defined as a matter of State law but typically
involve deferral of repayment of the principal amount of a short-term
loan for a period of time in exchange for a fee. In the event that a
lender is permitted under State law to roll over a loan, the rollover
would be treated as applicable as a new covered short-term loan or
covered longer-term balloon-payment loan that, depending on when it
occurs in the sequence, would be subject to the prohibitions in Sec.
1041.5(d). For example, assume that a lender is permitted under
applicable State law to roll over a covered short-term loan and the
lender makes a covered short-term loan with $500 in principal and a 14-
day contractual duration. Assume that the consumer returns to the lender
on day 14 (the repayment date of the first loan), the lender reasonably
determines that the consumer has the ability to repay a new loan, and
the consumer is offered the opportunity to roll over the first loan for
an additional 14 days for a $75 fee. The rollover would be the second
loan in a loan sequence, as defined under Sec. 1041.2(a)(14), because
fewer than 30 days would have elapsed between consummation of the new
covered short-term loan (the rollover) and the consumer having had a
covered short-term loan made under Sec. 1041.5 outstanding. Assume that
the consumer returns on day 28 (the repayment date of the first
rollover, i.e., the second loan
[[Page 1034]]
in the sequence) and the lender again reasonably determines that the
consumer has the ability to repay a new loan and offers to roll over the
loan again for an additional 14 days for a $75 fee. The second rollover
would be the third loan in a loan sequence. If the consumer were to
return on day 42 (the repayment date of the second rollover, which is
the third loan in the sequence) and attempt to roll over the loan again,
that rollover would be considered the fourth loan in the loan sequence.
Therefore, that rollover would be prohibited and the consumer could not
obtain another covered short-term loan or covered longer-term balloon-
payment loan until the expiration of the 30-day cooling-off period,
which begins after the consumer repays the second rollover (i.e., the
third loan in the sequence).
5(d)(1) Borrowing History Review
1. Relationship to Sec. 1041.5(c)(2)(ii)(B) and (C). A lender
satisfies its obligation under Sec. 1041.5(d)(1) to obtain a consumer
report from an information system that has been registered for 180 days
or more pursuant to Sec. 1041.11(c)(2) or is registered pursuant to
Sec. 1041.11(d)(2), if available, when it complies with the requirement
in Sec. 1041.5(c)(2)(ii)(B) and (C) to obtain this same consumer
report.
2. Availability of information systems that have been registered for
180 days or more pursuant to Sec. 1041.11(c)(2) or are registered
pursuant to Sec. 1041.11(d)(2). If no information systems that have
been registered for 180 days or more pursuant to Sec. 1041.11(c)(2) or
are registered pursuant to Sec. 1041.11(d)(2) are available at the time
that the lender is required to obtain the information about the
consumer's borrowing history, the lender is nonetheless required to
obtain information about the consumer's borrowing history from the
records of the lender and its affiliates and to obtain the consumer's
statement about the amount and timing of payments of major financial
obligations as required under Sec. 1041.5(c)(2)(i)(B) (which would
include information on current debt obligations including any
outstanding covered loans). A lender may be unable to obtain a consumer
report from an information system that has been registered for 180 days
or more pursuant to Sec. 1041.11(c)(2) or that is registered pursuant
to Sec. 1041.11(d)(2) if, for example, all registered information
systems are temporarily unavailable.
5(d)(2) Prohibition on Loan Sequences of More Than Three Covered Short-
Term Loans or Covered Longer-Term Balloon-Payment Loans Made Under Sec.
1041.5.
1. Prohibition. Section 1041.5(d)(2) prohibits a lender from making
a fourth covered short-term loan or covered longer-term balloon-payment
loan under Sec. 1041.5 in a loan sequence of covered short-term loans,
covered longer-term balloon-payment loans, or a combination of covered
short-term loans and covered longer-term balloon-payment loans made
under Sec. 1041.5. See Sec. 1041.2(a)(14) for the definition of a loan
sequence.
2. Examples. The following examples illustrate application of the
prohibition under Sec. 1041.5(d)(2):
i. Assume that a lender makes a covered short-term loan to a
consumer under the requirements of Sec. 1041.5 on February 1 with a
contractual due date of February 15, the consumer repays the loan on
February 15, and the consumer returns to the lender on March 1 for
another loan. Assume that the second loan is a covered short-term loan
with a contractual due date of March 15. The second loan would be part
of the same loan sequence as the first loan because 30 or fewer days
have elapsed since repayment of the first loan. Assume that the lender
makes the second loan, the consumer repays the loan on March 15, and the
consumer returns to the lender on April 1 for another loan. Assume that
the third loan is a covered short-term loan with a contractual due date
of April 15. The third loan would be part of the same loan sequence as
the first and second loans because 30 or fewer days have elapsed since
repayment of the second loan. Assume that the lender makes the third
loan and the consumer repays the loan on April 15. Assume that all loans
are reported to a registered information system. The consumer would not
be eligible for another covered short-term loan or covered longer-term
balloon-payment loan under Sec. 1041.5(d) from any lender until a 30-
day cooling-off period following April 15 has elapsed, that is, starting
on May 16. The consumer also would not be eligible for another covered
short-term loan under Sec. 1041.6 during the same 30-day cooling-off
period. See Sec. 1041.6(c)(1) and accompanying commentary.
ii. Assume that a lender makes a covered short-term loan to a
consumer under the requirements of Sec. 1041.5 on February 1 with a
contractual due date of February 15, the consumer repays the loan on
February 15, and the consumer returns to the lender on March 1 for
another loan. Assume that the second loan is a covered longer-term
balloon-payment loan that has biweekly installment payments followed by
a final balloon payment on the contractual due date of May 1. The second
loan would be part of the same loan sequence as the first loan because
30 or fewer days have elapsed since repayment of the first loan. Assume
that the lender makes the second loan, the consumer repays the loan in
full as of May 1, and the consumer returns to the lender on May 15 for
another loan. Assume that the third loan is a covered short-term loan
with a contractual due date of May 30. The third loan would be part of
the same loan sequence as the first and second loans because 30 or fewer
days have
[[Page 1035]]
elapsed since repayment of the second loan. Assume that the lender makes
the third loan and the consumer repays the loan on May 30. Assume that
all loans are reported to a registered information system. The consumer
would not be eligible to receive another covered short-term loan or
covered longer-term balloon-payment loan under Sec. 1041.5(d) from any
lender until a 30-day cooling-off period following May 30 has elapsed,
that is until after June 29. The consumer also would not be eligible for
another covered short-term loan under Sec. 1041.6 during the same 30-
day cooling-off period. See Sec. 1041.6(c)(1) and accompanying
commentary.
5(e) Prohibition Against Evasion
1. General. Section 1041.5(e) provides that a lender must not take
any action with the intent of evading the requirements of Sec. 1041.5.
In determining whether a lender has taken action with the intent of
evading the requirements of Sec. 1041.5, the form, characterization,
label, structure, or written documentation of the lender's action shall
not be dispositive. Rather, the actual substance of the lender's action
as well as other relevant facts and circumstances will determine whether
the lender's action was taken with the intent of evading the
requirements of Sec. 1041.5. If the lender's action is taken solely for
legitimate business purposes, it is not taken with the intent of evading
the requirements of Sec. 1041.5. By contrast, if a consideration of all
relevant facts and circumstances reveals a purpose that is not a
legitimate business purpose, the lender's action may have been taken
with the intent of evading the requirements of Sec. 1041.5. A lender
action that is taken with the intent of evading the requirements of this
part may be knowing or reckless. Fraud, deceit, or other unlawful or
illegitimate activity may be one fact or circumstance that is relevant
to the determination of whether a lender's action was taken with the
intent of evading the requirements of Sec. 1041.5, but fraud, deceit,
or other unlawful or illegitimate activity is not a prerequisite to such
a finding.
2. Illustrative example--lender action that may have been taken with
the intent of evading the requirements of the rule. The following
example illustrates a lender action that, depending on the relevant
facts and circumstances, may have been taken with the intent of evading
the requirements of Sec. 1041.5 and thus may have violated Sec.
1041.5(e):
i. A storefront payday lender makes covered short-term loans to
consumers with a contractual duration of 14 days and a lump-sum
repayment structure. The lender's policies and procedures provide for a
standard loan contract including a ``recurring late fee'' as a lender
remedy that is automatically triggered in the event of the consumer's
delinquency (i.e., if the consumer does not pay the entire lump-sum
amount on the contractual due date, with no grace period), and in the
loan contract the consumer grants the lender authorization to initiate a
recurring ACH in the event such remedy is triggered. Assume that the
recurring late fee is to be paid biweekly while the loan remains
outstanding and is substantially equal to or greater than the fee that
the lender charges on transactions that are considered rollovers under
applicable State law. The practice of imposing a recurring late fee by
contract differs from the lender's prior practice of contacting the
consumer on or about the contractual due date requesting that the
consumer visit the store to discuss payment options including rollovers.
Assume that as a matter of practice, if a consumer does not repay the
first loan in a sequence when it is due, the lender charges recurring
late fees for 60 days unless the consumer repays the outstanding
balance. Such a period is roughly equivalent to two 14-day loan cycles
or two rollovers following the initial loan in the sequence, plus a 30-
day cooling-off period. See Sec. 1041.5(d)(2) and related commentary.
Depending on the relevant facts and circumstances, this action may have
been taken with the intent of evading the requirements of Sec. 1041.5.
By charging the recurring late fee for 60 days after the initial loan
was due, the lender avoided its obligation under Sec. 1041.5(b) to make
an ability-to-repay determination for the second and third loans in the
sequence and to comply with the mandatory cooling-off period in Sec.
1041.5(d)(2) after the third loan was no longer outstanding.
Section 1041.6--Conditional Exemption for Certain Covered Short-Term
Loans
6(a) Conditional Exemption for Certain Covered Short-Term Loans
1. General. Under Sec. 1041.6(a), a lender that complies with Sec.
1041.6(b) through (e) can make a covered short-term loan without
complying with the otherwise applicable requirements under Sec. 1041.5.
A lender who complies with Sec. 1041.6 in making a covered short-term
loan has not committed the unfair and abusive practice under Sec.
1041.4 and is not subject to Sec. 1041.5. However, nothing in Sec.
1041.6 provides lenders with an exemption to the requirements of other
applicable laws, including subpart C of this part and State laws.
2. Obtaining consumer borrowing history information. Under Sec.
1041.6(a), the lender must determine prior to making a covered short-
term loan under Sec. 1041.6 that requirements under Sec. 1041.6(b) and
(c) are satisfied. In particular, Sec. 1041.6(a) requires the lender to
obtain information about the consumer's borrowing history from the
records of the lender and the records of the lender's affiliates. (This
information about borrowing history
[[Page 1036]]
with the lender and its affiliates is also important to help a lender
avoid violations of Sec. 1041.6(d)). Furthermore, Sec. 1041.6(a)
requires the lender to obtain a consumer report from an information
system that has been registered for 180 days or more pursuant to Sec.
1041.11(c)(2) or is registered pursuant to Sec. 1041.11(d)(2). If no
information systems have been registered for 180 days or more pursuant
to Sec. 1041.11(c)(2) or are registered pursuant to Sec. 1041.11(d)(2)
and available as of the time the lender is required to obtain the
report, the lender cannot comply with the requirements in Sec.
1041.6(b) and (c). A lender may be unable to obtain such a consumer
report if, for example:
i. No information systems have been registered for 180 days or more
pursuant to Sec. 1041.11(c)(2) or are registered pursuant to Sec.
1041.11(d)(2); or
ii. If information systems have been registered for 180 days or more
pursuant to Sec. 1041.11(c)(2) or are registered pursuant to Sec.
1041.11(d)(2) but all such registered information systems are
temporarily unavailable. Under these circumstances, a lender cannot make
a covered short-term loan under Sec. 1041.6.
3. Consumer reports. A lender is not responsible for inaccurate or
incomplete information contained in a consumer report from an
information system that has been registered for 180 days or more
pursuant to Sec. 1041.11(c)(2) or is registered pursuant to Sec.
1041.11(d)(2).
6(b) Loan Term Requirements
Paragraph 6(b)(1)
1. Loan sequence. Section 1041.2(a)(14) defines a loan sequence. For
further clarification and examples regarding the definition of loan
sequence, see Sec. 1041.2(a)(14).
2. Principal amount limitations--general. For a covered short-term
loan made under Sec. 1041.6, different principal amount limitations
apply under Sec. 1041.6(b)(1) depending on whether the loan is the
first, second, or third loan in a loan sequence. The principal amount
limitations apply regardless of whether any or all of the loans are made
by the same lender, an affiliate, or unaffiliated lenders. Under Sec.
1041.6(b)(1)(i), for the first loan in a loan sequence, the principal
amount must be no greater than $500. Under Sec. 1041.6(b)(1)(ii), for
the second loan in a loan sequence, the principal amount must be no
greater than two-thirds of the principal amount of the first loan in the
loan sequence. Under Sec. 1041.6(b)(1)(iii), for the third loan in a
loan sequence, the principal amount must be no greater than one-third of
the principal amount of the first loan in the loan sequence.
3. Application to rollovers. The principal amount limitations under
Sec. 1041.6 apply to rollovers of the first or second loan in a loan
sequence as well as new loans that are counted as part of the same loan
sequence. Rollovers are defined as a matter of State law but typically
involve deferral of repayment of the principal amount of a short-term
loan for a period of time in exchange for a fee. In the event the lender
is permitted under State law to make rollovers, the lender may, in a
manner otherwise consistent with applicable State law and Sec. 1041.6,
roll over a covered short-term loan made under Sec. 1041.6, but the
rollover would be treated as the next loan in the loan sequence, as
applicable, and would therefore be subject to the principal amount
limitations set forth in Sec. 1041.6(b)(1) as well as other limitations
in Sec. 1041.6. For example, assume that a lender is permitted under
applicable State law to make a rollover. If the consumer obtains a first
loan in a loan sequence under Sec. 1041.6 with a principal amount of
$300, under Sec. 1041.6(b)(1)(ii), the lender may allow the consumer to
roll over that loan so long as the consumer repays at least $100, so
that the principal of the loan that is rolled over would be no greater
than $200. Similarly, under Sec. 1041.6(b)(1)(iii), the lender may
allow the consumer to roll over the second loan in the loan sequence as
permitted by State law, so long as the consumer repays at least an
additional $100, so that the principal of the loan that is rolled over
would be no greater than $100.
4. Example. Assume that a consumer who otherwise satisfies the
requirements of Sec. 1041.6 seeks a covered short-term loan and that
the lender chooses to make the loan without meeting all the specified
underwriting criteria required in Sec. 1041.5. Under Sec.
1041.6(b)(1)(i), the principal amount of the loan must not exceed $500.
Assume that the consumer obtains a covered short-term loan under Sec.
1041.6 with a principal amount of $450, the loan is contractually due in
14 days, and the consumer repays the loan on the contractual due date.
Assume that the consumer returns to the lender 10 days after the
repayment of the first loan to take out a second covered short-term loan
under Sec. 1041.6. Under Sec. 1041.6(b)(1)(ii), the principal amount
of the second loan may not exceed $300. Assume, further, that the
consumer is then made a covered short-term loan under Sec. 1041.6 with
a principal amount of $300, the loan is contractually due in 14 days,
and the consumer repays the loan on the contractual due date. If the
consumer returns to the lender 25 days after the repayment of the second
loan to take out a third covered short-term loan under Sec. 1041.6,
under Sec. 1041.6(b)(1)(iii), the principal amount of the third loan
may not exceed $150. These same limitations would apply if the consumer
went to a different, unaffiliated lender for the second or third loan.
If, however, the consumer does not return to the lender seeking a new
loan under Sec. 1041.6 until 32 days after the date on which the second
loan in the loan sequence was repaid, the subsequent loan would not be
part
[[Page 1037]]
of the prior loan sequence and instead would be the first loan in a new
loan sequence. Therefore, if otherwise permissible under Sec. 1041.6,
that loan would be subject to the $500 principal amount limitation under
Sec. 1041.6(b)(1)(i).
Paragraph 6(b)(2)
1. Equal payments and amortization for loans with multiple payments.
Section 1041.6(b)(2) provides that for a loan with multiple payments,
the loan must amortize completely during the term of the loan and the
payment schedule must allocate a consumer's payments to the outstanding
principal and interest and fees as they accrue only by applying a fixed
periodic rate of interest to the outstanding balance of the unpaid loan
principal during every repayment period for the term of the loan. For
example, if the loan has a contractual duration of 30 days with two
scheduled biweekly payments, under Sec. 1041.6(b)(2) the lender cannot
require the consumer to pay interest only for the first scheduled
biweekly payment and the full principal balance at the second scheduled
biweekly payment. Rather, the two scheduled payments must be equal in
amount and amortize over the course of the loan term in the manner
required under Sec. 1041.6(b)(2).
Paragraph 6(b)(3)
1. Inapplicability of conditional exemption to a loan with vehicle
security. Section 1041.6(b)(3) prohibits a lender from making a covered-
short-term loan under Sec. 1041.6 with vehicle security. If the lender
or its service provider take vehicle security in connection with a
covered short-term loan, the loan must be originated in compliance with
all of the requirements under Sec. 1041.5, including the ability-to-
repay determination.
Paragraph 6(b)(4)
1. Inapplicability of conditional exemption to an open-end loan.
Section 1041.6(b)(4) prohibits a lender from making a covered short-term
loan under Sec. 1041.6 structured as an open-end loan under Sec.
1041.2(a)(16). If a covered short-term loan is structured as an open-end
loan, the loan must be originated in compliance with all of the
requirements under Sec. 1041.5.
6(c) Borrowing History Requirements
Paragraph 6(c)(1)
1. Preceding loans. Section 1041.6(c)(1) provides that prior to
making a covered short-term loan under Sec. 1041.6, the lender must
determine that more than 30 days has elapsed since the consumer had an
outstanding loan that was either a covered short-term loan (as defined
in Sec. 1041.2(a)(10)) made under Sec. 1041.5 or a covered longer-term
balloon-payment loan (as defined in Sec. 1041.2(a)(7)) made under Sec.
1041.5. This requirement applies regardless of whether this prior loan
was made by the same lender, an affiliate, or an unaffiliated lender.
For example, assume that a lender makes a covered short-term loan to a
consumer under Sec. 1041.5, that the loan has a contractual duration of
14 days, and that the consumer repays the loan on the contractual due
date. If the consumer returns for a second loan 20 days after repaying
the loan, the lender cannot make a covered short-term loan under Sec.
1041.6.
Paragraph 6(c)(2)
1. Loan sequence limitation. Section 1041.6(c)(2) provides that a
lender cannot make a covered short-term loan under Sec. 1041.6 if the
loan would result in the consumer having a loan sequence of more than
three covered short-term loans under Sec. 1041.6 made by any lender.
This requirement applies regardless of whether any or all of the loans
in the loan sequence are made by the same lender, an affiliate, or
unaffiliated lenders. See comments 6(b)(1)-1 and -2 for further
clarification on the definition of loan sequence, as well as Sec.
1041.2(a)(14) and accompanying commentary. For example, assume that a
consumer obtains a covered short-term loan under the requirements of
Sec. 1041.6 on February 1 that has a contractual due date of February
15, that the consumer repays the loan on February 15, and that the
consumer returns to the lender on March 1 for another loan under Sec.
1041.6. The second loan under Sec. 1041.6 would be part of the same
loan sequence because 30 or fewer days have elapsed since repayment of
the first loan. Assume that the lender makes the second loan with a
contractual due date of March 15, that the consumer repays the loan on
March 15, and that the consumer returns to the lender on April 1 for
another loan under Sec. 1041.6. The third loan under Sec. 1041.6 would
be part of the same loan sequence as the first and second loans because
fewer than 30 days have elapsed since repayment of the second loan.
Assume that the lender makes the third loan, which has a contractual due
date of April 15 and that the consumer repays the loan on April 15. The
consumer would not be permitted to receive another covered short-term
loan under Sec. 1041.6 until the 30-day period following April 15 has
elapsed, that is until after May 15, assuming the other requirements
under Sec. 1041.6 are satisfied. The consumer would also be prohibited
from obtaining other forms of credit from the same lender or its
affiliate for 30 days under Sec. 1041.6(d); see comment 6(d)-1. Loans
that are rollovers count toward the sequence limitation under Sec.
1041.6(c)(2). For further clarification on how the requirements of Sec.
1041.6 apply to rollovers, see comment 6(b)(1)-3.
[[Page 1038]]
Paragraph 6(c)(3)
1. Consecutive 12-month period. Section 1041.6(c)(3) requires that a
covered short-term loan made under Sec. 1041.6 not result in the
consumer having more than six covered short-term loans outstanding
during a consecutive 12-month period or having covered short-term loans
outstanding for an aggregate period of more than 90 days during a
consecutive 12-month period. The consecutive 12-month period begins on
the date that is 12 months prior to the proposed contractual due date of
the new covered short-term loan to be made under Sec. 1041.6 and ends
on the proposed contractual due date. The lender must review the
consumer's borrowing history on covered short-term loans for the 12
months preceding the consummation date of the new covered short-term
loan less the period of proposed contractual indebtedness on that loan.
For example, for a new covered short-term loan to be made under Sec.
1041.6 with a proposed contractual term of 14 days, the lender must
review the consumer's borrowing history during the 351 days preceding
the consummation date of the new loan. The lender also must consider the
making of the new loan and the days of proposed contractual indebtedness
on that loan to determine whether the requirement under Sec.
1041.6(c)(3) regarding the total number of covered short-term loans and
total time of indebtedness on covered short-term loans during a
consecutive 12-month period is satisfied.
Paragraph 6(c)(3)(i)
1. Total number of covered short-term loans. Section 1041.6(c)(3)(i)
provides that a lender cannot make a covered-short term loan under Sec.
1041.6 if the loan would result in the consumer having more than six
covered short-term loans outstanding in any consecutive 12-month period.
The requirement counts covered short-term loans made under either Sec.
1041.5 or Sec. 1041.6 toward the limit. This requirement applies
regardless of whether any or all of the loans subject to the limitations
are made by the same lender, an affiliate, or an unaffiliated lender.
Under Sec. 1041.6(c)(3)(i), the lender must use the consumer's
borrowing history to determine whether the loan would result in the
consumer having more than six covered short-term loans outstanding
during a consecutive 12-month period. A lender may make a loan that
would comply with the requirement under Sec. 1041.6(c)(3)(i) even if
the six-loan limit would prohibit the consumer from taking out one or
two subsequent loans in the sequence.
2. Example. Assume that a lender seeks to make a covered short-term
loan to a consumer under Sec. 1041.6 with a contractual duration of 14
days. Assume, further, that the lender determines that during the past
30 days the consumer has not had an outstanding covered short-term loan
and that during the 351 days preceding the consummation date of the new
loan the consumer had outstanding a total of five covered short-term
loans. The new loan would be the sixth covered short-term loan that was
outstanding during a consecutive 12-month period. Therefore, the loan
would comply with the requirement regarding the aggregate number of
covered short-term loans under Sec. 1041.6. Because the consumer has
not had an outstanding covered short-term loan in the preceding 30 days,
this loan would be the first loan in a new loan sequence. Assume that a
week after repaying this first loan the consumer seeks another covered
short-term loan under Sec. 1041.6, also with a contractual duration of
14 days. Under Sec. 1041.6(c)(3)(i), this second loan in the loan
sequence cannot be made if it would result in the consumer taking out
more than six covered short-term loans in the 351 days preceding the
proposed consummation date of this loan.
Paragraph 6(c)(3)(ii)
1. Aggregate period of indebtedness. Section 1041.6(c)(3)(ii)
provides that a lender cannot make a covered short-term loan under Sec.
1041.6 if the loan would result in the consumer having covered short-
term loans outstanding for an aggregate period of more than 90 days in
any consecutive 12-month period. In addition to the proposed contractual
duration of the new loan, the aggregate period in which all covered
short-term loans made to the consumer during the consecutive 12-month
period under either Sec. 1041.5 or Sec. 1041.6 were outstanding is
counted toward the limit. This requirement applies regardless of whether
any or all of the covered short-term loans are made by the same lender,
an affiliate, or an unaffiliated lender. Under Sec. 1041.6(c)(3)(ii),
the lender must use the information it has obtained about the consumer's
borrowing history to determine whether the loan would result in the
consumer having covered short-term loans outstanding for an aggregate
period of more than 90 days during a consecutive 12-month period. A
lender may make a loan that would comply with the requirement under
Sec. 1041.6(c)(3)(ii) even if the 90-day limit would prohibit the
consumer from taking out one or two subsequent loans in the sequence.
2. Example. Assume that Lender A seeks to make a covered short-term
loan under Sec. 1041.6 with a contractual duration of 14 days. Assume,
further, that Lender A determines that during the past 30 days the
consumer did not have an outstanding covered short-term loan and that
during the 351 days preceding the consummation date of the new loan the
consumer had outstanding three covered short-term loans made by Lender A
and a fourth covered short-term loan made by Lender B. Assume that each
of the three
[[Page 1039]]
loans made by Lender A had a contractual duration of 14 days and that
the loan made by Lender B had a contractual duration of 30 days, for an
aggregate total of 72 days of contractual indebtedness. Assume, further,
that the consumer repaid each loan on its contractual due date. The new
loan, if made, would result in the consumer having covered short-term
loans outstanding for an aggregate period of 86 days during the
consecutive 12-month period. Therefore, the loan would comply with the
requirement regarding aggregate time of indebtedness. Because the
consumer has not had an outstanding covered short-term loan in the
preceding 30 days, this loan would be the first loan in a new loan
sequence. Assume that a week after repaying this first loan the consumer
seeks another covered short-term loan under Sec. 1041.6, also with a
contractual duration of 14 days. Under Sec. 1041.6(c)(3)(ii), this
second loan in the loan sequence cannot be made if it would result in
the consumer being in debt on covered short-term loans for more than 90
days in the 351 days preceding the proposed consummation date of this
loan.
6(d) Restrictions on Making Certain Covered Loans and Non-Covered Loans
Following a Covered Short-Term Loan Made Under the Conditional Exemption
1. General. If a lender makes a covered short-term loan under Sec.
1041.6 to a consumer, Sec. 1041.6(d) prohibits the lender or its
affiliate from making a covered short-term loan under Sec. 1041.5, a
covered longer-term balloon payment loan under Sec. 1041.5, a covered
longer-term loan, or a non-covered loan to the consumer while the
covered short-term loan made under Sec. 1041.6 is outstanding and for
30 days thereafter. During this period, a lender or its affiliate could
make a subsequent covered short-term loan in accordance with the
requirements in Sec. 1041.6.
2. Example. Assume that a lender makes both covered short-term loans
under Sec. 1041.6 and non-covered installment loans. Assume, further,
that the lender makes on April 1 a covered short-term loan under Sec.
1041.6 to a consumer who has not obtained a covered short-term loan
under Sec. 1041.6 in the previous 30 days. Assume that the consumer
repays this loan on April 15 and that the consumer returns to the lender
on April 30 to seek a non-covered installment loan. Because 30 days have
not elapsed since the consumer repaid the loan made under Sec. 1041.6,
neither the lender nor its affiliate can make a non-covered installment
loan to the consumer on April 30. May 16 is the earliest the lender or
its affiliate could make a non-covered installment loan to the consumer.
The prohibition in Sec. 1041.6(d) applies to covered short-term loans
and covered longer-term balloon payment loans made under Sec. 1041.5
and covered longer-term loans but not to covered short-term loans made
under Sec. 1041.6. Section 1041.6(d) would, therefore, not prohibit the
consumer from obtaining an additional covered short-term loan under
Sec. 1041.6 from the same lender or its affiliate on April 30, provided
that such loan complies with the principal amount reduction and other
requirements of Sec. 1041.6. The prohibition in Sec. 1041.6(d) on
making subsequent non-covered loans applies only to a lender and its
affiliates. Section 1041.6(d) would, therefore, not prohibit the
consumer from obtaining on April 30 a non-covered installment loan from
a lender not affiliated with the lender that made the covered short-term
loan on April 1.
6(e) Disclosures
1. General. Section 1041.6(e) sets forth two main disclosure
requirements related to a loan made under the requirements in Sec.
1041.6. The first, set forth in Sec. 1041.6(e)(2)(i), is a notice of
the restriction on the principal amount on the loan and restrictions on
the number of future loans and the principal amounts of such loans,
which is required to be provided to a consumer when the consumer seeks
the first loan in a sequence of covered short-term loans made under
Sec. 1041.6. The second, set forth in Sec. 1041.6(e)(2)(ii), is a
notice of the restriction on the principal amount on the loan and the
prohibition on another similar loan for at least 30 days after the loan
is repaid, which is required to be provided to a consumer when the
consumer seeks the third loan in a sequence of covered short-term loans
made under Sec. 1041.6.
6(e)(1) General Form of Disclosures
6(e)(1)(i) Clear and Conspicuous
1. Clear and conspicuous standard. Disclosures are clear and
conspicuous for purposes of Sec. 1041.6(e) if they are readily
understandable by the consumer and their location and type size are
readily noticeable to the consumer.
6(e)(1)(ii) In Writing or Electronic Delivery
1. General. Section 1041.6(e)(1)(ii) requires that disclosures
required by Sec. 1041.6 be provided to the consumer in writing or
through electronic delivery.
2. E-Sign Act requirements. The notices required by Sec.
1041.6(e)(2)(i) and (ii) may be provided to the consumer in electronic
form without regard to the Electronic Signatures in Global and National
Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
6(e)(1)(iii) Retainable
1. General. Electronic disclosures are retainable for purposes of
Sec. 1041.6(e) if they are in a format that is capable of being
printed, saved, or emailed by the consumer.
[[Page 1040]]
6(e)(1)(iv) Segregation Requirements for Notices
1. Segregated additional content. Although segregated additional
content that is not required by this section may not appear above,
below, or around the required content, this additional content may be
delivered through a separate form, such as a separate piece of paper or
Web page.
6(e)(1)(vi) Model Forms
1. Safe harbor provided by use of model forms. Although the use of
the model forms and clauses is not required, lenders using them will be
deemed to be in compliance with the disclosure requirement with respect
to such model forms consistent with section 1032(d) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (12 U.S.C. 5481, et seq.)
6(e)(2) Notice Requirements
6(e)(2)(i) First Loan Notice
1. As applicable standard. Due to the requirements in Sec.
1041.6(c)(3), a consumer may not be eligible to complete a three-loan
sequence of covered short-term loans under Sec. 1041.6 because
additional loans within 30 days of the expected pay-off date for the
first loan would violate one or more provisions of Sec. 1041.6(c)(3).
Such a consumer may be permitted to obtain only one or two loans in a
sequence of covered short-term loans under Sec. 1041.6, as applicable.
Under these circumstances, Sec. 1041.6(e)(2)(i) would require the
lender to modify the notice in Sec. 1041.6(e)(2)(i) to reflect these
limitations on subsequent loans. For example, if a consumer can receive
only a sequence of two covered short-term loans under Sec. 1041.6
because of the requirements in Sec. 1041.6(c)(3), the lender would have
to modify the notice to list the maximum principal amount on loans 1 and
2 and to indicate that loan 3 would not be permitted.
6(e)(3) Timing
1. General. Section 1041.6(e)(3) requires a lender to provide the
notices required in Sec. 1041.6(e)(2)(i) and (ii) to the consumer
before the applicable covered short-term loan under Sec. 1041.6 is
consummated. For example, a lender can provide the notice after a
consumer has completed a loan application but before the consumer has
signed the loan agreement. A lender would not have to provide the
notices to a consumer who inquires about a covered short-term loan under
Sec. 1041.6 but does not fill out an application to obtain this type of
loan.
2. Electronic notices. If a lender delivers a notice required by
this section electronically in accordance with Sec. 1041.6(e)(1)(ii),
Sec. 1041.6(e)(3) requires a lender to provide the electronic notice to
the consumer before a covered short-term loan under Sec. 1041.6 is
consummated. Specifically, Sec. 1041.6(e)(3) requires a lender to
present the retainable notice to the consumer before the consumer is
contractually obligated on the loan. To comply with Sec. 1041.6(e)(3),
a lender could, for example, display a screen on a web browser with the
notices required in Sec. 1041.6(e)(2)(i) and (ii), provided the screen
can be emailed, printed, or saved, before the covered short-term loan
under Sec. 1041.6 has been consummated.
Section 1041.7--Identification of Unfair and Abusive Practice
1. General. A lender who complies with Sec. 1041.8 with regard to a
covered loan has not committed the unfair and abusive practice under
Sec. 1041.7.
Section 1041.8--Prohibited Payment Transfer Attempts
8(a) Definitions
8(a)(1) Payment Transfer
1. Lender-initiated. A lender-initiated debit or withdrawal includes
a debit or withdrawal initiated by the lender's agent, such as a payment
processor.
2. Any amount due. The following are examples of funds transfers
that are for the purpose of collecting any amount due in connection with
a covered loan:
i. A transfer for the amount of a scheduled payment due under a loan
agreement for a covered loan.
ii. A transfer for an amount smaller than the amount of a scheduled
payment due under a loan agreement for a covered loan.
iii. A transfer for the amount of the entire unpaid loan balance
collected pursuant to an acceleration clause in a loan agreement for a
covered loan.
iv. A transfer for the amount of a late fee or other penalty
assessed pursuant to a loan agreement for a covered loan.
3. Amount purported to be due. A transfer for an amount that the
consumer disputes or does not legally owe is a payment transfer if it
otherwise meets the definition set forth in Sec. 1041.8(a)(1).
4. Transfers of funds not initiated by the lender. A lender does not
initiate a payment transfer when:
i. A consumer, on her own initiative or in response to a request or
demand from the lender, makes a payment to the lender in cash withdrawn
by the consumer from the consumer's account.
ii. A consumer makes a payment via an online or mobile bill payment
service offered by the consumer's account-holding institution.
[[Page 1041]]
iii. The lender seeks repayment of a covered loan pursuant to a
valid court order authorizing the lender to garnish a consumer's
account.
Paragraph 8(a)(1)(i)(A)
1. Electronic fund transfer. Any electronic fund transfer meeting
the general definition in Sec. 1041.8(a)(1) is a payment transfer,
including but not limited to an electronic fund transfer initiated by a
debit card or a prepaid card.
Paragraph 8(a)(1)(i)(B)
1. Signature check. A transfer of funds by signature check meeting
the general definition in Sec. 1041.8(a)(1) is a payment transfer
regardless of whether the transaction is processed through the check
network or through another network, such as the ACH network. The
following example illustrates this concept: A lender processes a
consumer's signature check through the check system to collect a
scheduled payment due under a loan agreement for a covered loan. The
check is returned for nonsufficient funds. The lender then converts and
processes the check through the ACH system, resulting in a successful
payment. Both transfers are payment transfers, because both were
initiated by the lender for purposes of collecting an amount due in
connection with a covered loan.
Paragraph 8(a)(1)(i)(E)
1. Transfer by account-holding institution. Under Sec.
1041.8(a)(1)(i)(E), when the lender is the account holder, a transfer of
funds by the account-holding institution from a consumer's account held
at the same institution is a payment transfer if it meets the general
definition in Sec. 1041.8(a)(1)(i), unless the transfer of funds meets
the conditions in Sec. 1041.8(a)(1)(ii) and is therefore excluded from
the definition. See Sec. 1041.8(a)(1)(ii) and related commentary.
2. Examples. Payment transfers initiated by an account-holding
institution from a consumer's account include, but are not limited to,
the following:
i. Initiating an internal transfer from a consumer's account to
collect a scheduled payment on a covered loan.
ii. Sweeping the consumer's account in response to a delinquency on
a covered loan.
iii. Exercising a right of offset to collect against an outstanding
balance on a covered loan.
Paragraph 8(a)(1)(ii) Conditional Exclusion for Certain Transfers by
Account-Holding Institutions
1. General. The exclusion in Sec. 1041.8(a)(1)(ii) applies only to
a lender that is also the consumer's account-holding institution. The
exclusion applies only if the conditions in both Sec.
1041.8(a)(1)(ii)(A) and (B) are met with respect to a particular
transfer of funds. A lender whose transfer meets the exclusion has not
committed the unfair and abusive practice under Sec. 1041.7 and is not
subject to Sec. 1041.8 or Sec. 1041.9 in connection with that
transaction, but is subject to subpart C for any transfers that do not
meet the exclusion in Sec. 1041.8(a)(1)(ii) and are therefore payment
transfers under Sec. 1041.8(a)(1).
Paragraph 8(a)(1)(ii)(A)
1. Terms of loan agreement or account agreement. The condition in
Sec. 1041.8(a)(1)(ii)(A) is met only if the terms of the loan agreement
or account agreement setting forth the restrictions on charging fees are
in effect at the time the covered loan is made and remain in effect for
the duration of the loan.
2. Fees prohibited. Examples of the types of fees restricted under
Sec. 1041.8(a)(1)(ii)(A) include, but are not limited to, nonsufficient
fund fees, overdraft fees, and returned-item fees. A lender seeking to
initiate transfers of funds pursuant to the exclusion in Sec.
1041.8(a)(1)(ii) may still charge the consumer a late fee for failure to
make a timely payment, as permitted under the terms of the loan
agreement and other applicable law, notwithstanding that the lender has
initiated a transfer of funds meeting the description in Sec.
1041.8(a)(1)(ii)(A) in an attempt to collect the payment.
Paragraph 8(a)(1)(ii)(B)
1. General. Under Sec. 1041.8(a)(1)(ii)(B), to be eligible for the
exclusion in Sec. 1041.8(a)(1)(ii), a lender may not close the
consumer's account in response to a negative balance that results from a
lender-initiated transfer of funds in connection with the covered loan.
A lender is not restricted from closing the consumer's account in
response to another event, even if the event occurs after a lender-
initiated transfer of funds has brought the account to a negative
balance. For example, a lender may close the account at the consumer's
request, for purposes of complying with other regulatory requirements,
or to protect the account from suspected fraudulent use or unauthorized
access, and still meet the condition in Sec. 1041.8(a)(1)(ii)(B).
2. Terms of loan agreement or account agreement. The condition in
Sec. 1041.8(a)(1)(ii)(B) is met only if the terms of the loan agreement
or account agreement providing that the lender will not close the
account in the specified circumstances are in effect at the time the
covered loan is made and remain in effect for the duration of the loan.
8(a)(2) Single Immediate Payment Transfer at the Consumer's Request
Paragraph 8(a)(2)(i)
1. Time of initiation. A one-time electronic fund transfer is
initiated at the time that
[[Page 1042]]
the transfer is sent out of the lender's control. Thus, the electronic
fund transfer is initiated at the time that the lender or its agent
sends the transfer to be processed by a third party, such as the
lender's bank. The following example illustrates this concept: A lender
obtains a consumer's authorization for a one-time electronic fund
transfer at 2 p.m. and sends the payment entry to its agent, a payment
processor, at 5 p.m. on the same day. The agent then sends the payment
entry to the lender's bank for further processing the next business day
at 8 a.m. The timing condition in Sec. 1041.8(a)(2)(ii) is satisfied,
because the lender's agent sent the transfer out of its control within
one business day after the lender obtained the consumer's authorization.
Paragraph 8(a)(2)(ii)
1. Time of processing. A signature check is processed at the time
that the check is sent out of the lender's control. Thus, the check is
processed at the time that the lender or its agent sends the check to be
processed by a third party, such as the lender's bank. For an example
illustrating this concept within the context of initiating a one-time
electronic fund transfer, see comment 8(a)(2)(i)-1.
2. Check provided by mail. For purposes of Sec. 1041.8(a)(2)(ii),
if the consumer provides the check by mail, the check is deemed to be
provided on the date that the lender receives it.
8(b) Prohibition on Initiating Payment Transfers From a Consumer's
Account After Two Consecutive Failed Payment Transfers
1. General. When the prohibition in Sec. 1041.8(b) applies, a
lender is generally restricted from initiating any further payment
transfers from the consumer's account in connection with any covered
loan that the consumer has with the lender at the time the prohibition
is triggered, unless the requirements and conditions in either Sec.
1041.8(c) or (d) are satisfied for each such covered loan for which the
lender seeks to initiate further payment transfers. The prohibition
applies, for example, to payment transfers that might otherwise be
initiated to collect payments that later fall due under a loan agreement
for a covered loan and to transfers to collect late fees or returned
item fees as permitted under the terms of such a loan agreement. In
addition, the prohibition applies regardless of whether the lender holds
an otherwise valid authorization or instrument from the consumer,
including but not limited to an authorization to collect payments by
preauthorized electronic fund transfers or a post-dated check. See Sec.
1041.8(c) and (d) and accompanying commentary for guidance on the
requirements and conditions that a lender must satisfy to initiate a
payment transfer from a consumer's account after the prohibition
applies.
2. Account. The prohibition in Sec. 1041.8(b) applies only to the
account from which the lender attempted to initiate the two consecutive
failed payment transfers.
3. More than one covered loan. The prohibition in Sec. 1041.8(b) is
triggered after the lender has attempted to initiate two consecutive
failed payment transfers in connection with any covered loan or covered
loans that the consumer has with the lender. Thus, when a consumer has
more than one covered loan with the lender, the two consecutive failed
payment transfers need not be initiated in connection with the same loan
in order for the prohibition to be triggered, but rather can be
initiated in connection with two different loans. For example, the
prohibition is triggered if the lender initiates the first failed
payment transfer to collect payment on one covered loan and the second
consecutive failed payment transfer to collect payment on a different
covered loan, assuming that the conditions for a first failed payment
transfer, in Sec. 1041.8(b)(2)(i), and second consecutive failed
transfer, in Sec. 1041.8(b)(2)(ii), are met.
4. Application to bona fide subsequent loan. If a lender triggers
the prohibition in Sec. 1041.8(b), the lender is not prohibited under
Sec. 1041.8(b) from initiating a payment transfer in connection with a
bona fide subsequent covered loan that was originated after the
prohibition was triggered, provided that the lender has not attempted to
initiate two consecutive failed payment transfers from the consumer's
account in connection with the bona fide subsequent covered loan. For
purposes of Sec. 1041.8(b) only, a bona fide subsequent covered loan
does not include a covered loan that refinances or rolls over any
covered loan that the consumer has with the lender at the time the
prohibition is triggered.
8(b)(1) General
1. Failed payment transfer. A payment transfer results in a return
indicating that the consumer's account lacks sufficient funds when it is
returned unpaid, or is declined, due to nonsufficient funds in the
consumer's account.
2. Date received. The prohibition in Sec. 1041.8(b) applies as of
the date on which the lender or its agent, such as a payment processor,
receives the return of the second consecutive failed transfer or, if the
lender is the consumer's account-holding institution, the date on which
the second consecutive failed payment transfer is initiated.
3. Return for other reason. A transfer that results in a return for
a reason other than a lack of sufficient funds, such as a return made
due to an incorrectly entered account
[[Page 1043]]
number, is not a failed transfer for purposes of Sec. 1041.8(b).
4. Failed payment transfer initiated by a lender that is the
consumer's account-holding institution. When a lender that is the
consumer's account-holding institution initiates a payment transfer for
an amount that the account lacks sufficient funds to cover, the payment
transfer is a failed payment transfer for purposes of the prohibition in
Sec. 1041.8(b), regardless of whether the result is classified or coded
in the lender's internal procedures, processes, or systems as a return
for nonsufficient funds or, if applicable, regardless of whether the
full amount of the payment transfer is paid out of overdraft. Such a
lender does not initiate a failed payment transfer for purposes of the
prohibition if the lender merely defers or foregoes debiting or
withdrawing payment from an account based on the lender's observation
that the account lacks sufficient funds.
8(b)(2) Consecutive Failed Payment Transfers
8(b)(2)(i) First Failed Payment Transfer
1. Examples. The following examples illustrate concepts of first
failed payment transfers under Sec. 1041.8(b)(2)(i). All of the
examples assume that the consumer has only one covered loan with the
lender:
i. A lender, having made no other attempts, initiates an electronic
fund transfer to collect the first scheduled payment due under a loan
agreement for a covered loan, which results in a return for
nonsufficient funds. The failed transfer is the first failed payment
transfer. The lender, having made no attempts in the interim, re-
presents the electronic fund transfer and the re-presentment results in
the collection of the full payment. Because the subsequent attempt did
not result in a return for nonsufficient funds, the number of
consecutive failed payment transfers resets to zero. The following
month, the lender initiates an electronic fund transfer to collect the
second scheduled payment due under the covered loan agreement, which
results in a return for nonsufficient funds. That failed transfer is a
first failed payment transfer.
ii. A storefront lender, having made no prior attempts, processes a
consumer's signature check through the check system to collect the first
scheduled payment due under a loan agreement for a covered loan. The
check is returned for nonsufficient funds. This constitutes the first
failed payment transfer. The lender does not thereafter convert and
process the check through the ACH system, or initiate any other type of
payment transfer, but instead contacts the consumer. At the lender's
request, the consumer comes into the store and makes the full payment in
cash withdrawn from the consumer's account. The number of consecutive
failed payment transfers remains at one, because the consumer's cash
payment was not a payment transfer as defined in Sec. 1041.8(a)(2).
8(b)(2)(ii) Second Consecutive Failed Payment Transfer
1. General. Under Sec. 1041.8(b)(2)(ii), a failed payment transfer
is the second consecutive failed transfer if the previous payment
transfer was a first failed payment transfer. The following examples
illustrate this concept:
i. Assume that a consumer has only one covered loan with a lender.
The lender, having initiated no other payment transfer in connection
with the covered loan, initiates an electronic fund transfer to collect
the first scheduled payment due under the loan agreement. The transfer
is returned for nonsufficient funds. The returned transfer is the first
failed payment transfer. The lender next initiates an electronic fund
transfer for the following scheduled payment due under the loan
agreement for the covered loan, which is also returned for nonsufficient
funds. The second returned transfer is the second consecutive failed
payment transfer.
ii. Assume that a consumer has two covered loans, Loan A and Loan B,
with a lender. Further assume that the lender has initiated no failed
payment transfers in connection with either covered loan. On the first
of the month, the lender initiates an electronic fund transfer to
collect a regularly scheduled payment on Loan A, resulting in a return
for nonsufficient funds. The returned transfer is the first failed
payment transfer. Two weeks later, the lender, having initiated no
further payment transfers in connection with either covered loan,
initiates an electronic fund transfer to collect a regularly scheduled
payment on Loan B, also resulting in a return for nonsufficient funds.
The second returned transfer is the second consecutive failed payment
transfer, and the lender is thus prohibited under Sec. 1041.8(b) from
initiating further payment transfers in connection with either covered
loan.
2. Previous payment transfer. Section 1041.8(b)(2)(ii) provides that
a previous payment transfer includes a payment transfer initiated at the
same time or on the same day as the first failed payment transfer. The
following example illustrates how this concept applies in determining
whether the prohibition in Sec. 1041.8(b) is triggered: Assume that a
consumer has only one covered loan with a lender. The lender has made no
other payment transfers in connection with the covered loan. On Monday
at 9 a.m., the lender initiates two electronic fund transfers to collect
the first scheduled payment under the loan agreement, each for half of
the total amount due. Both transfers are returned for nonsufficient
funds. Because each transfer is one of two failed transfers initiated at
the same time, the lender has initiated a second
[[Page 1044]]
consecutive failed payment transfer under Sec. 1041.8(b)(2)(ii), and
the prohibition in Sec. 1041.8(b) is therefore triggered.
3. Application to exception in Sec. 1041.8(d). When, after a second
consecutive failed payment transfer, a lender initiates a single
immediate payment transfer at the consumer's request pursuant to the
exception in Sec. 1041.8(d), the failed transfer count remains at two,
regardless of whether the transfer succeeds or fails. Further, the
exception is limited to a single payment transfer. Accordingly, if a
payment transfer initiated pursuant to the exception fails, the lender
is not permitted to re-initiate the transfer, such as by re-presenting
it through the ACH system, unless the lender obtains a new authorization
under Sec. 1041.8(c) or (d).
8(b)(2)(iii) Different Payment Channel
1. General. Section 8(b)(2)(iii) provides that if a failed payment
transfer meets the descriptions set forth in Sec. 1041.8(b)(2)(ii), it
is the second consecutive failed transfer regardless of whether the
first failed transfer was made through a different payment channel. The
following example illustrates this concept: A lender initiates an
electronic funds transfer through the ACH system for the purpose of
collecting the first payment due under a loan agreement for a covered
loan. The transfer results in a return for nonsufficient funds. This
constitutes the first failed payment transfer. The lender next processes
a remotely created check through the check system for the purpose of
collecting the same first payment due. The remotely created check is
returned for nonsufficient funds. The second failed attempt is the
second consecutive failed attempt because it meets the description set
forth in Sec. 1041.8(b)(2)(ii).
8(c) Exception for Additional Payment Transfers Authorized by the
Consumer
1. General. Section 1041.8(c) sets forth one of two exceptions to
the prohibition in Sec. 1041.8(b). Under the exception in Sec.
1041.8(c), a lender is permitted to initiate additional payment
transfers from a consumer's account after the lender's second
consecutive transfer has failed if the additional transfers are
authorized by the consumer in accordance with certain requirements and
conditions as specified in the rule. In addition to the exception under
Sec. 1041.8(c), a lender is permitted to execute a single immediate
payment transfers at the consumer's request under Sec. 1041.8(d), if
certain requirements and conditions are satisfied.
8(c)(1) General
1. Consumer's underlying payment authorization or instrument still
required. The consumer's authorization required by Sec. 1041.8(c) is in
addition to, and not in lieu of, any separate payment authorization or
instrument required to be obtained from the consumer under applicable
laws.
8(c)(2) General Authorization Requirements and Conditions
8(c)(2)(i) Required Payment Transfer Terms
1. General. Section 1041.8(c)(2)(i) sets forth the general
requirement that, for purposes of the exception in Sec. 1041.8(c), the
specific date, amount, and payment channel of each additional payment
transfer must be authorized by the consumer, subject to a limited
exception in Sec. 1041.8(c)(2)(iii) for payment transfers solely to
collect a late fee or returned item fee. Accordingly, for the exception
to apply to an additional payment transfer, the transfer's specific
date, amount, and payment channel must be included in the signed
authorization obtained from the consumer under Sec. 1041.8(c)(3)(iii).
For guidance on the requirements and conditions that apply when
obtaining the consumer's signed authorization, see Sec.
1041.8(c)(3)(iii) and accompanying commentary.
2. Specific date. The requirement that the specific date of each
additional payment transfer be authorized by the consumer is satisfied
if the consumer authorizes the month, day, and year of each transfer.
3. Amount larger than specific amount. The exception in Sec.
1041.8(c)(2) does not apply if the lender initiates a payment transfer
for an amount larger than the specific amount authorized by the
consumer. Accordingly, such a transfer would violate the prohibition on
additional payment transfers under Sec. 1041.8(b).
4. Smaller amount. A payment transfer initiated pursuant to Sec.
1041.8(c) is initiated for the specific amount authorized by the
consumer if its amount is equal to or smaller than the authorized
amount.
8(c)(2)(iii) Special Authorization Requirements and Conditions for
Payment Transfers To Collect a Late Fee or Returned Item Fee
1. General. If a lender obtains the consumer's authorization to
initiate a payment transfer solely to collect a late fee or returned
item fee in accordance with the requirements and conditions under Sec.
1041.8(c)(2)(iii), the general requirement in Sec. 1041.8(c)(2) that
the consumer authorize the specific date and amount of each additional
payment transfer need not be satisfied.
2. Highest amount. The requirement that the consumer's signed
authorization include a statement that specifies the highest amount that
may be charged for a late fee or returned item fee is satisfied, for
example, if the statement specifies the maximum amount permitted under
the loan agreement for a covered loan.
[[Page 1045]]
3. Varying fee amounts. If a fee amount may vary due to the
remaining loan balance or other factors, the rule requires the lender to
assume the factors that result in the highest amount possible in
calculating the specified amount.
8(c)(3) Requirements and Conditions for Obtaining the Consumer's
Authorization
8(c)(3)(ii) Provision of Payment Transfer Terms to the Consumer
1. General. A lender is permitted under Sec. 1041.8(c)(3)(ii) to
request a consumer's authorization on or after the day that the lender
provides the consumer rights notice required by Sec. 1041.9(c). For the
exception in Sec. 1041.8(c) to apply, however, the consumer's signed
authorization must be obtained no earlier than the date on which the
consumer is considered to have received the consumer rights notice, as
specified in Sec. 1041.8(c)(3)(iii).
2. Different options. Nothing in Sec. 1041.8(c)(3)(ii) prohibits a
lender from providing different options for the consumer to consider
with respect to the date, amount, or payment channel of each additional
payment transfer for which the lender is requesting authorization. In
addition, if a consumer declines a request, nothing in Sec.
1041.8(c)(3)(ii) prohibits a lender from making a follow-up request by
providing a different set of terms for the consumer to consider. For
example, if the consumer declines an initial request to authorize two
recurring payment transfers for a particular amount, the lender may make
a follow-up request for the consumer to authorize three recurring
payment transfers for a smaller amount.
Paragraph 8(c)(3)(ii)(A)
1. Request by email. Under Sec. 1041.8(c)(3)(ii)(A), a lender is
permitted to provide the required terms and statement to the consumer in
writing or in a retainable form by email if the consumer has consented
to receive electronic disclosures in that manner under Sec.
1041.9(a)(4) or agrees to receive the terms and statement by email in
the course of a communication initiated by the consumer in response to
the consumer rights notice required by Sec. 1041.9(c). The following
example illustrates a situation in which the consumer agrees to receive
the required terms and statement by email after affirmatively responding
to the notice:
i. After a lender provides the consumer rights notice in Sec.
1041.9(c) by mail to a consumer who has not consented to receive
electronic disclosures under Sec. 1041.9(a)(4), the consumer calls the
lender to discuss her options for repaying the loan, including the
option of authorizing additional payment transfers pursuant to Sec.
1041.8(c). In the course of the call, the consumer asks the lender to
provide the request for the consumer's authorization via email. Because
the consumer has agreed to receive the request via email in the course
of a communication initiated by the consumer in response to the consumer
rights notice, the lender is permitted under Sec. 1041.8(c)(3)(ii)(A)
to provide the request to the consumer by that method.
2. E-Sign Act does not apply to provision of terms and statement.
The required terms and statement may be provided to the consumer
electronically in accordance with the requirements for requesting the
consumer's authorization in Sec. 1041.8(c)(3) without regard to the E-
Sign Act. However, under Sec. 1041.8(c)(3)(iii)(A), an authorization
obtained electronically is valid only if it is signed or otherwise
agreed to by the consumer in accordance with the signature requirements
in the E-Sign Act. See Sec. 1041.8(c)(3)(iii)(A) and comment
8(c)(3)(iii)(A)-1.
3. Same communication. Nothing in Sec. 1041.8(c)(3)(ii) prohibits a
lender from requesting the consumer's authorization for additional
payment transfers and providing the consumer rights notice in the same
communication, such as a single written mailing or a single email to the
consumer. Nonetheless, the consumer rights notice may be provided to the
consumer only in accordance with the requirements and conditions in
Sec. 1041.9, including but not limited to the segregation requirements
that apply to the notice. Thus, for example, if a lender mails the
request for authorization and the notice to the consumer in the same
envelope, the lender must provide the notice on a separate piece of
paper, as required under Sec. 1041.9. Similarly, a lender could provide
the notice to a consumer in the body of an email and attach a document
containing the request for authorization. In such cases, it would be
permissible for the lender to add language after the text of the notice
explaining that the other document is a request for a new authorization.
Paragraph 8(c)(3)(ii)(B)
1. Request by oral telephone communication. Nothing in Sec.
1041.8(c)(3)(ii) prohibits a lender from contacting the consumer by
telephone to discuss repayment options, including the option of
authorizing additional payment transfers. However, under Sec.
1041.8(c)(3)(ii)(B), a lender is permitted to provide the required terms
and statement to the consumer by oral telephone communication for
purposes of requesting authorization only if the consumer affirmatively
contacts the lender in that manner in response to the consumer rights
notice required by Sec. 1041.9(c) and agrees to receive the terms and
statement by that method of delivery in the course of, and as part of,
the same communication.
[[Page 1046]]
8(c)(3)(iii) Signed Authorization Required
8(c)(3)(iii)(A) General
1. E-Sign Act signature requirements. For authorizations obtained
electronically, the requirement that the authorization be signed or
otherwise agreed to by the consumer is satisfied if the E-Sign Act
requirements for electronic records and signatures are met. Thus, for
example, the requirement is satisfied by an email from the consumer or
by a code entered by the consumer into the consumer's telephone keypad,
assuming that in each case the signature requirements in the E-Sign Act
are complied with.
2. Consumer's affirmative response to the notice. A consumer
affirmatively responds to the consumer rights notice that was provided
by mail when, for example, the consumer calls the lender on the
telephone to discuss repayment options after receiving the notice.
8(c)(3)(iii)(C) Memorialization Required
1. Timing. The memorialization is deemed to be provided to the
consumer on the date it is mailed or transmitted.
2. Form of memorialization. The requirement that the memorialization
be provided in a retainable form is not satisfied by a copy of a
recorded telephone call, notwithstanding that the authorization was
obtained in that manner.
3. Electronic delivery. A lender is permitted under Sec.
1041.8(c)(3)(iii)(C) to provide the memorialization to the consumer by
email in accordance with the requirements and conditions for requesting
authorization in Sec. 1041.8(c)(3)(ii)(A), regardless of whether the
lender requested the consumer's authorization in that manner. For
example, if the lender requested the consumer's authorization by
telephone but also has obtained the consumer's consent to receive
electronic disclosures by email under Sec. 1041.9(a)(4), the lender may
provide the memorialization to the consumer by email, as specified in
Sec. 1041.8(c)(3)(ii)(A).
8(d) Exception for Initiating a Single Immediate Payment Transfer at the
Consumer's Request
1. General. For guidance on the requirements and conditions that
must be satisfied for a payment transfer to meet the definition of a
single immediate payment transfer at the consumer's request, see Sec.
1041.8(a)(2) and accompanying commentary.
2. Application of prohibition. A lender is permitted under the
exception in Sec. 1041.8(d) to initiate a single payment transfer
requested by the consumer only once and thus is prohibited under Sec.
1041.8(b) from re-initiating the payment transfer if it fails, unless
the lender subsequently obtains the consumer's authorization to re-
initiate the payment transfer under Sec. 1041.8(c) or (d). However, a
lender is permitted to initiate any number of payment transfers from a
consumer's account pursuant to the exception in Sec. 1041.8(d),
provided that the requirements and conditions are satisfied for each
such transfer. See comment 8(b)(2)(ii)-3 for further guidance on how the
prohibition in Sec. 1041.8(b) applies to the exception in Sec.
1041.8(d).
3. Timing. A consumer affirmatively contacts the lender when, for
example, the consumer calls the lender after noticing on her bank
statement that the lender's last two payment withdrawal attempts have
been returned for nonsufficient funds.
8(e) Prohibition Against Evasion
1. General. Section 1041.8(e) provides that a lender must not take
any action with the intent of evading the requirements of Sec. 1041.8.
In determining whether a lender has taken action with the intent of
evading the requirements of Sec. 1041.8, the form, characterization,
label, structure, or written documentation of the lender's action shall
not be dispositive. Rather, the actual substance of the lender's action
as well as other relevant facts and circumstances will determine whether
the lender's action was taken with the intent of evading the
requirements of Sec. 1041.8. If the lender's action is taken solely for
legitimate business purposes, it is not taken with the intent of evading
the requirements of Sec. 1041.8. By contrast, if a consideration of all
relevant facts and circumstances reveals a purpose that is not a
legitimate business purpose, the lender's action may have been taken
with the intent of evading the requirements of Sec. 1041.8. A lender
action that is taken with the intent of evading the requirements of this
part may be knowing or reckless. Fraud, deceit, or other unlawful or
illegitimate activity may be one fact or circumstance that is relevant
to the determination of whether a lender's action was taken with the
intent of evading the requirements of Sec. 1041.8, but fraud, deceit,
or other unlawful or illegitimate activity is not a prerequisite to such
a finding.
2. Illustrative example. A lender collects payment on its covered
loans primarily through recurring electronic fund transfers authorized
by consumers at consummation. As a matter of lender policy and practice,
after a first attempt to initiate an ACH payment transfer from a
consumer's account for the full payment amount is returned for
nonsufficient funds, the lender initiates a second payment transfer from
the account on the following day for $1.00. If the second payment
transfer succeeds, the lender immediately splits the amount of the full
payment
[[Page 1047]]
into two separate payment transfers and initiates both payment transfers
from the account at the same time, resulting in two returns for
nonsufficient funds in the vast majority of cases. The lender developed
the policy and began the practice shortly prior to August 19, 2019. The
lender's prior policy and practice when re-presenting the first failed
payment transfer was to re-present for the payment's full amount.
Depending on the relevant facts and circumstances, the lender's actions
may have been taken with the intent of evading the requirements of Sec.
1041.8. Specifically, by initiating a second payment transfer for $1.00
from the consumer's account the day after a first transfer for the full
payment amount fails and, if that payment transfer succeeds, initiating
two simultaneous payment transfers from the account for the split amount
of the full payment, resulting in two returns for nonsufficient funds in
the vast majority of cases, the lender avoided the prohibition in Sec.
1041.8(b) on initiating payment transfers from a consumer's account
after two consecutive payment transfers have failed.
Section 1041.9--Disclosure of Payment Transfer Attempts
1. General. Section 1041.9 sets forth two main disclosure
requirements related to collecting payments from a consumer's account in
connection with a covered loan. The first, set forth in Sec. 1041.9(b),
is a payment notice required to be provided to a consumer in advance of
a initiating the first payment withdrawal or an unusual withdrawal from
the consumer's account, subject to certain exceptions. The second, set
forth in Sec. 1041.9(c), is a consumer rights notice required to be
provided to a consumer after a lender receives notice of a second
consecutive failed payment transfer from the consumer's account, as
described in Sec. 1041.8(b). In addition, Sec. 1041.9 requires lenders
to provide an electronic short notice in two situations when they are
providing the disclosures required by this section through certain forms
of electronic delivery. The first, set forth in Sec. 1041.9(b)(4), is
an electronic short notice that must be provided along with the payment
notice. This provision allows an exception for when the method of
electronic delivery is email; for that method, the lender may use the
electronic short notice under Sec. 1041.9(b)(4)(ii) or may provide the
full notice within the body of the email. The second, set forth in Sec.
1041.9(c)(4), is an electronic short notice that must be provided along
with the consumer rights notice. As with the payment notices, this
consumer rights notice provision also allows an exception for when the
method of electronic delivery is email; for that method, the lender may
use the electronic short notice under Sec. 1041.9(c)(4)(ii) or may
provide the full notice within the body of the email.
9(a) General Form of Disclosures
9(a)(1) Clear and Conspicuous
1. Clear and conspicuous standard. Disclosures are clear and
conspicuous for purposes of Sec. 1041.9 if they are readily
understandable and their location and type size are readily noticeable
to consumers.
9(a)(2) In Writing or Electronic Delivery
1. Electronic delivery. Section 1041.9(a)(2) allows the disclosures
required by Sec. 1041.9 to be provided through electronic delivery as
long as the requirements of Sec. 1041.9(a)(4) are satisfied, without
regard to the Electronic Signatures in Global and National Commerce Act
(E-Sign Act) (15 U.S.C. 7001 et seq.).
9(a)(3) Retainable
1. General. Electronic disclosures, to the extent permitted by Sec.
1041.9(a)(4), are retainable for purposes of Sec. 1041.9 if they are in
a format that is capable of being printed, saved, or emailed by the
consumer. The general requirement to provide disclosures in a retainable
form does not apply when the electronic short notices are provided in
via mobile application or text message. For example, the requirement
does not apply to an electronic short notice that is provided to the
consumer's mobile telephone as a text message. In contrast, if the
access is provided to the consumer via email, the notice must be in a
retainable form, regardless of whether the consumer uses a mobile
telephone to access the notice.
9(a)(4) Electronic Delivery
1. General. Section 1041.9(a)(4) permits disclosures required by
Sec. 1041.9 to be provided through electronic delivery if the consumer
consent requirements under Sec. 1041.9(a)(4) are satisfied.
9(a)(4)(i) Consumer Consent
9(a)(4)(i)(A) General
1. General. Section 1041.9(a)(4)(i) permits disclosures required by
Sec. 1041.9 to be provided through electronic delivery if the lender
obtains the consumer's affirmative consent to receive the disclosures
through a particular electronic delivery method. This affirmative
consent requires lenders to provide consumers with an option to select a
particular electronic delivery method. The consent must clearly show the
method of electronic delivery that will be used, such as email, text
message, or mobile application. Consent provided by checking a box
during the origination process may qualify as being in writing. Consent
can be obtained for multiple
[[Page 1048]]
methods of electronic delivery, but the consumer must have affirmatively
selected and provided consent for each method.
9(a)(4)(i)(B) Email Option Required
1. General. Section Sec. 1041.9(a)(4)(i)(B) provides that when
obtaining consumer consent to electronic delivery under Sec.
1041.9(a)(4), a lender must provide the consumer with an option to
receive the disclosures through email. The lender may choose to offer
email as the only method of electronic delivery under Sec.
1041.9(a)(4).
9(a)(4)(ii) Subsequent Loss of Consent
1. General. The prohibition on electronic delivery of disclosures in
Sec. 1041.9(a)(4)(ii) applies to the particular electronic method for
which consent is lost. When a lender loses a consumer's consent to
receive disclosures via text message, for example, but has not lost the
consumer's consent to receive disclosures via email, the lender may
continue to provide disclosures via email, assuming that all of the
requirements in Sec. 1041.9(a)(4) are satisfied.
2. Loss of consent applies to all notices. The loss of consent
applies to all notices required by Sec. 1041.9. For example, if a
consumer revokes consent in response to the electronic short notice text
message delivered along with the payment notice under Sec.
1041.9(b)(4)(ii), that revocation also applies to text delivery of the
electronic short notice that would be delivered with the consumer rights
notice under Sec. 1041.9(c)(4)(ii).
Paragraph 9(a)(4)(ii)(A)
1. Revocation. For purposes of Sec. 1041.9(a)(4)(ii)(A), a consumer
may revoke consent for any reason and by any reasonable means of
communication. Reasonable means of communication may include calling the
lender and revoking consent orally, mailing a revocation to an address
provided by the lender on its consumer correspondence, sending an email
response or clicking on a revocation link provided in an email from the
lender, and responding by text message to a text message sent by the
lender.
Paragraph 9(a)(4)(ii)(B)
1. Notice. A lender receives notification for purposes of Sec.
1041.9(a)(4)(ii)(B) when the lender receives any information indicating
that the consumer did not receive or is unable to receive disclosures in
a particular electronic manner. Examples of notice include but are not
limited to the following:
i. An email returned with a notification that the consumer's account
is no longer active or does not exist.
ii. A text message returned with a notification that the consumer's
mobile telephone number is no longer in service.
iii. A statement from the consumer that the consumer is unable to
access or review disclosures through a particular electronic delivery
method.
9(a)(5) Segregation Requirements for Notices
1. Segregated additional content. Although segregated additional
content that is not required by Sec. 1041.9 may not appear above,
below, or around the required content, additional content may be
delivered through a separate form, such as a separate piece of paper or
Web page.
9(a)(7) Model Forms
1. Safe harbor provided by use of model forms. Although the use of
the model forms and clauses is not required, lenders using them will be
deemed to be in compliance with the disclosure requirement with respect
to such model forms.
9(b) Payment Notice
9(b)(1)(i) First Payment Withdrawal
1. First payment withdrawal. Depending on when the payment
authorization granted by the consumer is obtained on a covered loan and
whether the exception for a single immediate payment transfer made at
the consumer's request applies, the first payment withdrawal may or may
not be the first payment made on a covered loan. When a lender obtains
payment authorization during the origination process, the lender may
provide the first payment withdrawal notice at that time. A lender that
obtains payment authorization after a payment has been made by the
consumer in cash, or after initiating a single immediate payment
transfer at the consumer's request, would deliver the notice later in
the loan term. If a consumer provides one payment authorization that the
lender uses to initiate a first payment withdrawal after a notice as
required by Sec. 1041.9(b)(1)(i), but the consumer later changes the
authorization or provides an additional authorization, the lender's
exercise of that new authorization would not be the first payment
withdrawal; however, it may be an unusual withdrawal under Sec.
1041.9(b)(1)(ii).
2. First payment withdrawal is determined when the loan is in
covered status. As discussed in comment 3(b)(3)-3, there may be
situations where a longer-term loan is not covered at the time of
origination but becomes covered at a later date. The lender's first
attempt to execute a payment transfer after a loan becomes a covered
loan under this part is the first payment withdrawal. For example,
consider a loan that is not considered covered at the time of
origination. If the lender initiates a payment withdrawal during the
first and second billing cycles and the loan becomes covered at the end
of the
[[Page 1049]]
second cycle, any lender initiated payment during the third billing
cycle is considered a first payment withdrawal under this section.
3. Intervening payments. Unscheduled intervening payments do not
change the determination of first payment withdrawal for purposes of the
notice requirement. For example, a lender originates a loan on April 1,
with a payment scheduled to be withdrawn on May 1. At origination, the
lender provides the consumer with a first payment withdrawal notice for
May 1. On April 28, the consumer makes the payment due on May 1 in cash.
The lender does not initiate a withdrawal on May 1. The lender initiates
a withdrawal for the next scheduled payment June 1. The lender satisfied
its notice obligation with the notice provided at origination, so it is
not required to send a first payment notice in connection with the June
1 payment although it may have to send an unusual payment notice if the
transfer meets one of the conditions in Sec. 1041.9(b)(3)(ii)(C).
9(b)(1)(iii) Exceptions
1. Exception for initial payment transfer applies even if the
transfer is unusual. The exception in Sec. 1041.9(b)(1)(iii)(A) applies
even if the situation would otherwise trigger the additional disclosure
requirements for unusual attempts under Sec. 1041.9(b)(3). For example,
if the payment channel of the initial payment transfer after obtaining
the consumer's consent is different than the payment channel used before
the prohibition under Sec. 1041.8 was triggered, the exception in Sec.
1041.9(b)(1)(iii)(A) applies.
2. Multiple transfers in advance. If a consumer has affirmatively
consented to multiple transfers in advance, the exception in Sec.
1041.9(b)(1)(iii)(A) applies only to the first initial payment transfer
of that series.
9(b)(2) First Payment Withdrawal Notice
9(b)(2)(i) Timing
1. When the lender obtains payment authorization. For all methods of
delivery, the earliest point that the lender may provide the first
payment withdrawal notice is when the lender obtains the payment
authorization. For example, the notice can be provided simultaneously
when the lender provides a consumer with a copy of a completed payment
authorization, or after providing the authorization copy. The provision
allows the lender to provide consumers with the notice at a convenient
time because the lender and consumer are already communicating about the
loan, but also allows flexibility for lenders that prefer to provide the
notice closer to the payment transfer date. For example, the lender
could obtain consumer consent to electronic delivery and deliver the
notice through email 4 days before initiating the transfer, or the
lender could hand deliver it to the consumer at the end of the loan
origination process.
9(b)(2)(i)(A) Mail
1. General. The six business-day period begins when the lender
places the notice in the mail, not when the consumer receives the
notice. For example, if a lender places the notice in the mail on
Monday, June 1, the lender may initiate the transfer of funds on
Tuesday, June 9, if it is the 6th business day following mailing of the
notice.
9(b)(2)(i)(B) Electronic Delivery
Paragraph 9(b)(2)(i)(B)(1)
1. General. The three-business-day period begins when the lender
sends the notice, not when the consumer receives or is deemed to have
received the notice. For example, if a lender sends the notice by email
on Monday, June 1, the lender may initiate the transfer of funds on
Thursday, June 4, the third business day following transmitting the
notice.
Paragraph 9(b)(2)(i)(B)(2)
1. General. In some circumstances, a lender may lose a consumer's
consent to receive disclosures through a particular electronic delivery
method after the lender has provided the notice. In such circumstances,
the lender may initiate the transfer for the payment currently due as
scheduled. If the lender is scheduled to make a future unusual
withdrawal attempt following the one that was disclosed in the
previously provided first withdrawal notice, the lender must provide
notice for that unusual withdrawal through alternate means, in
accordance with the applicable timing requirements in Sec.
1041.9(b)(3)(i).
2. Alternate Means. The alternate means may include a different
electronic delivery method that the consumer has consented to, in
person, or by mail, in accordance with the applicable timing
requirements in Sec. 1041.9(b)(3)(i).
9(b)(2)(ii) Content Requirements
9(b)(2)(ii)(B) Transfer Terms
Paragraph 9(b)(2)(ii)(B)(1) Date
1. Date. The initiation date is the date that the payment transfer
is sent outside of the lender's control. Accordingly, the initiation
date of the transfer is the date that the lender or its agent sends the
payment to be processed by a third party. For example, if a lender sends
its ACH payments to a payment processor working on the lender's behalf
on Monday, June 1, but the processor does not submit them to its bank
and the ACH network until Tuesday, June 2, the date of the payment
transfer is Tuesday the 2nd.
[[Page 1050]]
Paragraph 9(b)(2)(ii)(B)(2) Amount
1. Amount. The amount of the transfer is the total amount of money
that will be transferred from the consumer's account, regardless of
whether the total corresponds to the amount of a regularly scheduled
payment. For example, if a single transfer will be initiated for the
purpose of collecting a regularly scheduled payment of $50.00 and a late
fee of $30.00, the amount that must be disclosed under Sec.
1041.9(b)(2)(ii)(B)(2) is $80.00.
Paragraph 9(b)(2)(ii)(B)(5) Payment Channel
1. General. Payment channel refers to the specific payment method,
including the network that the transfer will travel through and the form
of the transfer. For example, a lender that uses the consumer's paper
check information to initiate a payment transfer through the ACH network
would use the ACH payment channel under Sec. 1041.9(b)(2)(ii)(B)(5). A
lender that uses consumer account and routing information to initiate a
remotely created check over the check network would use the remotely
created check payment channel. A lender that uses a post-dated signature
check to initiate a transfer over the check network would use the
signature check payment channel. A lender that initiates a payment from
a consumer's prepaid card would specify whether that payment is
processed as an ACH transfer, a PIN debit card network payment, or a
signature debit card network payment.
2. Illustrative examples. In describing the payment channel in the
disclosure, the most common payment channel descriptions include, but
are not limited to, ACH transfers, checks, remotely created checks,
remotely created payment orders, internal transfers, PIN debit card
payments, and signature debit card network payments.
9(b)(2)(ii)(C) Payment Breakdown
9(b)(2)(ii)(C)(2) Principal
1. General. The amount of the payment that is applied to principal
must always be included in the payment breakdown table, even if the
amount applied is $0.
9(b)(2)(ii)(C)(4) Fees
1. General. This field must only be provided if some of the payment
amount will be applied to fees. In situations where more than one fee
applies, fees may be disclosed separately or aggregated. A lender may
use its own term to describe the fee, such as ``late payment fee.''
9(b)(2)(ii)(C)(5) Other Charges
1. General. This field must only be provided if some of the payment
amount will be applied to other charges. In situations when more than
one other charge applies, other charges may be disclosed separately or
aggregated. A lender may use its own term to describe the charge, such
as ``insurance charge.''
9(b)(3) Unusual Withdrawal Notice
9(b)(3)(i) Timing
1. General. See comments on 9(b)(2) regarding the first payment
withdrawal notice.
9(b)(3)(ii) Content Requirements
1. General. If the payment transfer is unusual according to the
circumstances described in Sec. 1041.9(b)(3)(ii)(C), the payment notice
must contain both the basic payment information required by Sec.
1041.9(b)(2)(ii)(B) through (D) and the description of unusual
withdrawal required by Sec. 1041.9(b)(3)(ii)(C).
9(b)(3)(ii)(C) Description of Unusual Withdrawal
1. General. An unusual withdrawal notice is required under Sec.
1041.9(b)(3) if one or more conditions are present. The description of
an unusual withdrawal informs the consumer of the condition that makes
the pending payment transfer unusual.
2. Illustrative example. The lender provides a first payment
withdrawal notice at origination. The first payment withdrawal initiated
by the lender occurs on March 1, for $75, as a paper check. The second
payment is scheduled for April 1, for $75, as an ACH transfer. Before
the second payment, the lender provides an unusual withdrawal notice.
The notice contains the basic payment information along with an
explanation that the withdrawal is unusual because the payment channel
has changed from paper check to ACH. Because the amount did not vary,
the payment is taking place on the regularly scheduled date, and this is
not a re-initiated payment, the only applicable content under Sec.
1041.9(b)(3)(ii)(C) is the different payment channel information.
3. Varying amount. The information about varying amount for closed-
end loans in Sec. 1041.9(b)(3)(ii)(C)(1)(i) applies in two
circumstances. First, the requirement applies when a transfer is for the
purpose of collecting a payment that is not specified by amount on the
payment schedule, including, for example, a one-time electronic payment
transfer to collect a late fee. Second, the requirement applies when the
transfer is for the purpose of collecting a regularly scheduled payment
for an amount different from the regularly scheduled payment amount
according to the payment schedule. Given existing requirements for open-
end credit, circumstances that trigger an unusual withdrawal for open-
end credit are more limited according to Sec.
1041.9(b)(3)(ii)(C)(1)(ii). Because the outstanding balance on open-end
credit may change over time, the minimum payment due on the scheduled
payment date
[[Page 1051]]
may also fluctuate. However, the minimum payment amount due for open-end
credit would be disclosed to the consumer according to the periodic
statement requirement in Regulation Z. The payment transfer amount would
not be considered unusual with regards to open-end credit unless the
amount deviates from the minimum payment due as disclosed in the
periodic statement. The requirement for a first payment withdrawal
notice under Sec. 1041.9(b)(2) and the other circumstances that could
trigger an unusual withdrawal notice under Sec. 1041.9(b)(3)(ii)(C)(2)
through (4), continue to apply.
4. Date other than due date of regularly scheduled payment. The
changed date information in Sec. 1041.9(b)(3)(ii)(C)(2) applies in two
circumstances. First, the requirement applies when a transfer is for the
purpose of collecting a payment that is not specified by date on the
payment schedule, including, for example, a one-time electronic payment
transfer to collect a late fee. Second, the requirement applies when the
transfer is for the purpose of collecting a regularly scheduled payment
on a date that differs from the regularly scheduled payment date
according to the payment schedule.
9(b)(4) Electronic Delivery
1. General. If the lender is using a method of electronic delivery
other than email, such as text or mobile application, the lender must
provide the notice with the electronic short notice as provided in Sec.
1041.9(b)(4)(ii). If the lender is using email as the method of
electronic delivery, Sec. 1041.9(b)(4)(iii) allows the lender to
determine whether to use the electronic short notice approach or to
include the full text of the notice in the body of the email.
9(b)(4)(ii) Electronic Short Notice
9(b)(4)(ii)(A) General Content
1. Identifying statement. If the lender is using email as the method
of electronic delivery, the identifying statement required in Sec.
1041.9(b)(2)(ii)(A) and (b)(3)(ii)(A) must be provided in both the email
subject line and the body of the email.
9(c) Consumer Rights Notice
9(c)(2) Timing
1. General. Any information provided to the lender or its agent that
the payment transfer has failed would trigger the timing requirement
provided in Sec. 1041.9(c)(2). For example, if the lender's agent, a
payment processor, learns on Monday, June 1 that an ACH payment transfer
initiated by the processor on the lender's behalf has been returned for
non-sufficient funds, the lender would be required to send the consumer
rights notice by Thursday, June 4.
9(c)(3) Content Requirements
1. Identifying statement. If the lender is using email as the method
of electronic delivery, the identifying statement required in Sec.
1041.9(c)(3)(i) must be provided in both the email subject line and the
body of the email.
2. Fees. If the lender is also the consumer's account-holding
institution, this includes all fees charged in relation to the transfer,
including any returned payment fees charged to outstanding loan balance
and any fees, such as overdraft or insufficient fund fees, charged to
the consumer's account.
9(c)(4) Electronic Delivery
1. General. See comments 9(b)(4)-1 and 9(b)(4)(ii)(A)-1.
Section 1041.10--Furnishing Information to Registered Information
Systems
10(a) Loans Subject to Furnishing Requirement
1. Application to rollovers. The furnishing requirements in Sec.
1041.10(a) apply to each covered short-term loan or covered longer-term
balloon-payment loan a lender makes, as well as to loans that are a
rollover of a prior covered short-term loan or covered longer-term
balloon-payment loan (or what is termed a ``renewal'' in some States).
Rollovers are defined as a matter of State law but typically involve
deferral of repayment of the principal amount of a short-term loan for a
period of time in exchange for a fee. In the event that a lender is
permitted under State law to roll over a covered short-term loan or
covered longer-term balloon-payment loan and does so in accordance with
the requirements of Sec. 1041.5 or Sec. 1041.6, the rollover would be
treated, as applicable, as a new covered short-term loan or as a new
covered longer-term balloon-payment loan for purposes of Sec. 1041.10.
For example, assume that a lender is permitted under applicable State
law to roll over a covered short-term loan; the lender makes a covered
short-term loan with a 14-day contractual duration; and on day 14 the
lender reasonably determines that the consumer has the ability to repay
a new loan under Sec. 1041.5 and offers the consumer the opportunity to
roll over the first loan for an additional 14 days. If the consumer
accepts the rollover, the lender would report the original loan as no
longer outstanding and would report the rollover as a new covered short-
term loan.
2. Furnishing through third parties. Section 1041.10(a) requires
that, for each covered short-term loan and covered longer-term balloon
loan a lender makes, the lender must furnish the information concerning
the loan described in Sec. 1041.10(c) to each information system
described in Sec. 1041.10(b). A lender may furnish information to such
information system directly, or may furnish through a third
[[Page 1052]]
party acting on its behalf, including a provisionally registered or
registered information system.
10(b) Information Systems to Which Information Must Be Furnished
1. Provisional registration and registration of information system
while loan is outstanding. Pursuant to Sec. 1041.10(b)(1), a lender is
only required to furnish information about a covered loan to an
information system that, at the time the loan is consummated, has been
registered pursuant to Sec. 1041.11(c)(2) for 180 days or more or has
been provisionally registered pursuant to Sec. 1041.11(d)(1) for 180
days or more or subsequently has become registered pursuant to Sec.
1041.11(d)(2). For example, if an information system is provisionally
registered on March 1, 2020, the obligation to furnish information to
that system begins on August 28, 2020, 180 days from the date of
provisional registration. A lender is not required to furnish
information about a loan consummated on August 27, 2020 to an
information system that became provisionally registered on March 1,
2020.
2. Preliminary approval. Section 1041.10(b) requires that lenders
furnish information to information systems that are provisionally
registered pursuant to Sec. 1041.11(d)(1) and information systems that
are registered pursuant to Sec. 1041.11(c)(2) or (d)(2). Lenders are
not required to furnish information to entities that have received
preliminary approval for registration pursuant to Sec. 1041.11(c)(1)
but are not registered pursuant to Sec. 1041.11(c)(2).
10(c) Information To Be Furnished
1. Deadline for furnishing under Sec. 1041.10(c)(1) and (3).
Section 1041.10(c)(1) requires that a lender furnish specified
information no later than the date on which the loan is consummated or
as close in time as feasible to the date the loan is consummated.
Section 1041.10(c)(3) requires that a lender furnish specified
information no later than the date the loan ceases to be an outstanding
loan or as close in time as feasible to the date the loan ceases to be
an outstanding loan. Under each of Sec. 1041.10(c)(1) and (3), if it is
feasible to report on the specified date (such as the consummation
date), the specified date is the date by which the information must be
furnished.
10(c)(1) Information To Be Furnished at Loan Consummation
1. Type of loan. Section 1041.10(c)(1)(iii) requires that a lender
furnish information that identifies a covered loan as either a covered
short-term loan or a covered longer-term balloon-payment loan. For
example, a lender must identify a covered short-term loan as a covered
short-term loan.
2. Whether a loan is made under Sec. 1041.5 or Sec. 1041.6.
Section 1041.10(c)(1)(iv) requires that a lender furnish information
that identifies a covered loan as made under Sec. 1041.5 or made under
Sec. 1041.6. For example, a lender must identify a loan made under
Sec. 1041.5 as a loan made under Sec. 1041.5.
10(c)(2) Information To Be Furnished While Loan Is an Outstanding Loan
1. Examples. Section 1041.10(c)(2) requires that, during the period
that the loan is an outstanding loan, a lender must furnish any update
to information previously furnished pursuant to Sec. 1041.10 within a
reasonable period of the event that causes the information previously
furnished to be out of date. Information previously furnished can become
out of date due to changes in the loan terms or due to actions by the
consumer. For example, if a lender extends the term of a closed-end
loan, Sec. 1041.10(c)(2) would require the lender to furnish an update
to the date that each payment on the loan is due, previously furnished
pursuant to Sec. 1041.10(c)(1)(vii)(B), and to the amount due on each
payment date, previously furnished pursuant to Sec.
1041.10(c)(1)(vii)(C), to reflect the updated payment dates and amounts.
If the amount or minimum amount due on future payment dates changes
because the consumer fails to pay the amount due on a scheduled payment
date, Sec. 1041.10(c)(2) would require the lender to furnish an update
to the amount or minimum amount due on each payment date, previously
furnished pursuant to Sec. 1041.10(c)(1)(vii)(C) or (c)(1)(viii)(D), as
applicable, to reflect the updated amount or minimum amount due on each
payment date. However, if a consumer makes payment on a closed-end loan
as agreed and the loan is not modified to change the dates or amounts of
future payments on the loan, Sec. 1041.10(c)(2) would not require the
lender to furnish an update to information concerning the date that each
payment on the loan is due, previously furnished pursuant to Sec.
1041.10(c)(1)(vii)(B), or the amount due on each payment date,
previously furnished pursuant to Sec. 1041.10(c)(1)(vii)(C). Section
1041.10(c)(2) does not require a lender to furnish an update to reflect
that a payment was made.
2. Changes to information previously furnished pursuant to Sec.
1041.10(c)(2). Section 1041.10(c)(2) requires that, during the period
that the loan is an outstanding loan, a lender must furnish any update
to information previously furnished pursuant to Sec. 1041.10 within a
reasonable period of the event that causes the information previously
furnished to be out of date. This requirement extends to information
previously furnished pursuant to Sec. 1041.10(c)(2). For example, if a
lender furnishes an update to the amount or minimum amount due on each
payment date, previously furnished pursuant to
[[Page 1053]]
Sec. 1041.10(c)(1)(vii)(C) or (c)(1)(viii)(D), as applicable, and the
amount or minimum amount due on each payment date changes again after
the update, Sec. 1041.10(c)(2) requires that the lender must furnish an
update to the information previously furnished pursuant to Sec.
1041.10(c)(2).
Section 1041.11--Registered Information Systems
11(b) Eligibility Criteria for Registered Information Systems
11(b)(2) Reporting Capability
1. Timing. To be eligible for provisional registration or
registration, an entity must possess the technical capability to
generate a consumer report containing, as applicable for each unique
consumer, all information described in Sec. 1041.10 substantially
simultaneous to receiving the information from a lender. Technological
limitations may cause some slight delay in the appearance on a consumer
report of the information furnished pursuant to Sec. 1041.10, but any
delay must reasonable.
11(b)(3) Performance
1. Relationship with other law. To be eligible for provisional
registration or registration, an entity must perform in a manner that
facilitates compliance with and furthers the purposes of this part.
However, this requirement does not supersede consumer protection
obligations imposed upon a provisionally registered or registered
information system by other Federal law or regulation. For example, the
Fair Credit Reporting Act requires that, whenever a consumer reporting
agency prepares a consumer report it, shall follow reasonable procedures
to assure maximum possible accuracy of the information concerning the
individual about whom the report relates. See 15 U.S.C. 1681e(b). If
including information furnished pursuant to Sec. 1041.10 in a consumer
report would cause a provisionally registered or registered information
system to violate this requirement, Sec. 1041.11(b)(3) would not
require that the information be included in a consumer report.
2. Evidence of ability to perform in a manner that facilitates
compliance with and furthers the purposes of this part. Section
1041.11(c)(1) requires that an entity seeking preliminary approval to be
a registered information system must submit an application to the Bureau
containing information sufficient for the Bureau to determine that the
entity is reasonably likely to satisfy the conditions set forth in Sec.
1041.11(b). Section 1041.11(c)(2) and (d)(1) requires that an entity
seeking to be a registered information system or a provisionally
registered information system must submit an application that contains
information and documentation sufficient for the Bureau to determine
that the entity satisfies the conditions set forth in Sec. 1041.11(b).
In evaluating whether an applicant is reasonably likely to satisfy or
satisfies the requirement set forth in Sec. 1041.11(b)(3), the Bureau
will consider the extent to which an applicant has experience
functioning as a consumer reporting agency.
11(b)(4) Federal Consumer Financial Law Compliance Program
1. Policies and procedures. To be eligible for provisional
registration or registration, an entity must have policies and
procedures that are documented in sufficient detail to implement
effectively and maintain its Federal consumer financial law compliance
program. The policies and procedures must address compliance with
applicable Federal consumer financial laws in a manner reasonably
designed to prevent violations and to detect and prevent associated
risks of harm to consumers. The entity must also maintain and modify, as
needed, the policies and procedures so that all relevant personnel can
reference them in their day-to-day activities.
2. Training. To be eligible for provisional registration or
registration, an entity must provide specific, comprehensive training to
all relevant personnel that reinforces and helps implement written
policies and procedures. Requirements for compliance with Federal
consumer financial laws must be incorporated into training for all
relevant officers and employees. Compliance training must be current,
complete, directed to appropriate individuals based on their roles,
effective, and commensurate with the size of the entity and nature and
risks to consumers presented by its activity. Compliance training also
must be consistent with written policies and procedures and designed to
enforce those policies and procedures.
3. Monitoring. To be eligible for provisional registration or
registration, an entity must implement an organized and risk-focused
monitoring program to promptly identify and correct procedural or
training weaknesses so as to provide for a high level of compliance with
Federal consumer financial laws. Monitoring must be scheduled and
completed so that timely corrective actions are taken where appropriate.
11(b)(5) Independent Assessment of Federal Consumer Financial Law
Compliance Program
1. Assessor qualifications. An objective and independent third-party
individual or entity is qualified to perform the assessment required by
Sec. 1041.11(b)(5) if the individual or entity has substantial
experience in performing assessments of a similar size, scope, or
subject matter; has substantial expertise
[[Page 1054]]
in both the applicable Federal consumer financial laws and in the
entity's or information system's business; and has the appropriate
professional qualifications necessary to perform the required assessment
adequately.
2. Written assessment. A written assessment described in Sec.
1041.11(b)(5) need not conform to any particular format or style as long
as it succinctly and accurately conveys the required information.
11(b)(7) Independent Assessment of Information Security Program
1. Periodic assessments. Section 1041.11(b)(7) requires that, to
maintain its registration, an information system must obtain and provide
to the Bureau, on at least a biennial basis, a written assessment of the
information security program described in Sec. 1041.11(b)(6). The
period covered by each assessment obtained and provided to the Bureau to
satisfy this requirement must commence on the day after the last day of
the period covered by the previous assessment obtained and provided to
the Bureau.
2. Assessor qualifications. Professionals qualified to conduct
assessments required under Sec. 1041.11(b)(7) include: A person
qualified as a Certified Information System Security Professional
(CISSP) or as a Certified Information Systems Auditor (CISA); a person
holding Global Information Assurance Certification (GIAC) from the
SysAdmin, Audit, Network, Security (SANS) Institute; and an individual
or entity with a similar qualification or certification.
3. Written assessment. A written assessment described in Sec.
1041.11(b)(7) need not conform to any particular format or style as long
as it succinctly and accurately conveys the required information.
11(c) Registration of Information Systems Prior to August 19, 2019
11(c)(1) Preliminary Approval
1. In general. An entity seeking to become preliminarily approved
for registration pursuant to Sec. 1041.11(c)(1) must submit an
application to the Bureau containing information sufficient for the
Bureau to determine that the entity is reasonably likely to satisfy the
conditions set forth in Sec. 1041.11(b) as of the deadline set forth in
Sec. 1041.11(c)(3)(ii). The application must describe the steps the
entity plans to take to satisfy the conditions set forth in Sec.
1041.11(b) by the deadline and the entity's anticipated timeline for
such steps. The entity's plan must be reasonable and achievable.
11(c)(2) Registration
1. In general. An entity seeking to become a registered information
system pursuant to Sec. 1041.11(c)(2) must submit an application to the
Bureau by the deadline set forth in Sec. 1041.11(c)(3)(ii) containing
information and documentation adequate for the Bureau to determine that
the conditions described in Sec. 1041.11(b) are satisfied. The
application must succinctly and accurately convey the required
information, and must include the written assessments described in Sec.
1041.11(b)(5) and (7).
11(d) Registration of Information Systems on or After August 19, 2019
11(d)(1) Provisional Registration
1. In general. An entity seeking to become a provisionally
registered information system pursuant to Sec. 1041.11(d)(1) must
submit an application to the Bureau containing information and
documentation adequate for the Bureau to determine that the conditions
described in Sec. 1041.11(b) are satisfied. The application must
succinctly and accurately convey the required information, and must
include the written assessments described in Sec. 1041.11(b)(5) and
(7).
Section 1041.12--Compliance Program and Record Retention
12(a) Compliance Program
1. General. Section 1041.12(a) requires a lender making a covered
loan to develop and follow written policies and procedures that are
reasonably designed to ensure compliance with the applicable
requirements in this part. These written policies and procedures must
provide guidance to a lender's employees on how to comply with the
requirements in this part. In particular, under Sec. 1041.12(a), a
lender must develop and follow detailed written policies and procedures
reasonably designed to achieve compliance, as applicable, with the
ability-to-repay requirements in Sec. 1041.5, alternative requirements
in Sec. 1041.6, payments requirements in Sec. Sec. 1041.8 and 1041.9,
and requirements on furnishing loan information to registered and
provisionally registered information systems in Sec. 1041.10. The
provisions and commentary in each section listed above provide guidance
on what specific directions and other information a lender must include
in its written policies and procedures.
2. Examples. The written policies and procedures a lender must
develop and follow under Sec. 1041.12(a) depend on the types of loans
that the lender makes. A lender that makes a covered loan under Sec.
1041.5 must develop and follow written policies and procedures to ensure
compliance with the ability-to-repay requirements, including on
projecting a consumer's net income and payments on major financial
obligations, and estimating a consumer's basic living expenses. Among
other written policies and procedures, a lender that makes a covered
loan under Sec. 1041.5 or
[[Page 1055]]
Sec. 1041.6 must develop and follow written policies and procedures to
furnish loan information to registered and provisionally registered
information systems in accordance with Sec. 1041.10. A lender that
makes a covered loan subject to the requirements in Sec. 1041.6 or
Sec. 1041.9 must develop and follow written policies and procedures to
provide the required disclosures to consumers.
12(b) Record Retention
1. General. Section 1041.12(b) requires a lender to retain various
categories of documentation and information in connection with the
underwriting and performance of covered short-term loans and covered
longer-term balloon payment loans, as well as payment practices in
connection with covered loans generally. The items listed are non-
exhaustive as to the records that may need to be retained as evidence of
compliance with this part concerning loan origination and underwriting,
terms and performance, and payment practices.
12(b)(1) Retention of Loan Agreement and Documentation Obtained in
Connection With Originating a Covered Short-Term or Covered Longer-Term
Balloon-Payment Loan
1. Methods of retaining loan agreement and documentation obtained
for a covered short-term or covered longer-term balloon-payment loan.
Section 1041.12(b)(1) requires a lender either to retain the loan
agreement and documentation obtained in connection with a covered short-
term or covered longer-term balloon-payment loan in original form or to
be able to reproduce an image of the loan agreement and documentation
accurately. For example, if the lender uses a consumer's pay stub to
verify the consumer's net income, Sec. 1041.12(b)(1) requires the
lender to either retain a paper copy of the pay stub itself or be able
to reproduce an image of the pay stub, and not merely the net income
information that was contained in the pay stub. For documentation that
the lender receives electronically, such as a consumer report from a
registered information system, the lender may retain either the
electronic version or a printout of the report.
12(b)(2) Electronic Records in Tabular Format Regarding Origination
Calculations and Determinations for a Covered Short-Term or Longer-Term
Balloon-Payment Loan Under Sec. 1041.5
1. Electronic records in tabular format. Section 1041.12(b)(2)
requires a lender to retain records regarding origination calculations
and determinations for a covered loan in electronic, tabular format.
Tabular format means a format in which the individual data elements
comprising the record can be transmitted, analyzed, and processed by a
computer program, such as a widely used spreadsheet or database program.
Data formats for image reproductions, such as PDF, and document formats
used by word processing programs are not tabular formats. A lender does
not have to retain the records required in Sec. 1041.12(b)(2) in a
single, combined spreadsheet or database with the records required in
Sec. 1041.12(b)(3) and (5). Section 1041.12(b)(2), however, requires a
lender to be able to associate the records for a particular covered
short-term or covered longer-term balloon payment loan in Sec.
1041.12(b)(2) with unique loan and consumer identifiers in Sec.
1041.12(b)(3).
12(b)(3) Electronic Records in Tabular Format Regarding Type, Terms, and
Performance of Covered Short-Term or Covered Longer-Term Balloon-Payment
Loans
1. Electronic records in tabular format. Section 1041.12(b)(3)
requires a lender to retain records regarding loan type, terms, and
performance of covered short-term or covered longer-term balloon-payment
loans for a covered loan in electronic, tabular format. See comment
12(b)(2)-1 for a description of how to retain electronic records in
tabular format. A lender does not have to retain the records required in
Sec. 1041.12(b)(3) in a single, combined spreadsheet or database with
the records required in Sec. 1041.12(b)(2). Section 1041.12(b)(3),
however, requires a lender to be able to associate the records for a
particular covered short-term or covered longer-term balloon payment
loan in Sec. 1041.12(b)(2) and (5) with unique loan and consumer
identifiers in Sec. 1041.12(b)(3).
Paragraph 12(b)(3)(iv)
1. Maximum number of days, up to 180 days, any full payment was past
due. Section 1041.12(b)(3)(iv) requires a lender that makes a covered
loan to retain information regarding the number of days any full payment
is past due beyond the payment schedule established in the loan
agreement, up to 180 days. For this purpose, a full payment is defined
as principal, interest, and any charges. If a consumer makes a partial
payment on the contractual due date and the remainder of the payment 10
days later, the lender must record the full payment as being 10 days
past due. If a consumer fails to make a full payment on a covered loan
more than 180 days after the contractual due date, the lender must only
record the full payment as being 180 days past due.
12(b)(4) Retention of Records Relating to Payment Practices for Covered
Loans
1. Methods of retaining documentation. Section 1041.12(b)(4)
requires a lender either to retain certain payment-related information
in connection with covered loans in original form or to be able to
reproduce an image of
[[Page 1056]]
such documents accurately. For example, Sec. 1041.12(b)(4) requires the
lender to either retain a paper copy of the leveraged payment mechanism
obtained in connection with a covered longer-term loan or to be able to
reproduce an image of the mechanism. For documentation that the lender
receives electronically, the lender may retain either the electronic
version or a printout.
12(b)(5) Electronic Records in Tabular Format Regarding Payment
Practices for Covered Loans
1. Electronic records in tabular format. Section 1041.12(b)(5)
requires a lender to retain records regarding payment practices in
electronic, tabular format. See comment 12(b)(2)-1 for a description of
how to retain electronic records in tabular format. A lender does not
have to retain the records required in Sec. 1041.12(b)(5) in a single,
combined spreadsheet or database with the records required in Sec.
1041.12(b)(2) and (3). Section 1041.12(b)(5), however, requires a lender
to be able to associate the records for a particular covered short-term
or covered longer-term balloon payment loan in Sec. 1041.12(b)(5) with
unique loan and consumer identifiers in Sec. 1041.12(b)(3).
Section 1041.13--Prohibition Against Evasion
1. Lender action taken with the intent of evading the requirements
of the rule. Section 1041.13 provides that a lender must not take any
action with the intent of evading the requirements of this part. In
determining whether a lender has taken action with the intent of evading
the requirements of this part, the form, characterization, label,
structure, or written documentation of the lender's action shall not be
dispositive. Rather, the actual substance of the lender's action as well
as other relevant facts and circumstances will determine whether the
lender's action was taken with the intent of evading the requirements of
this part. If the lender's action is taken solely for legitimate
business purposes, it is not taken with the intent of evading the
requirements of this part. By contrast, if a consideration of all
relevant facts and circumstances reveals the presence of a purpose that
is not a legitimate business purpose, the lender's action may have been
taken with the intent of evading the requirements of this part. A lender
action that is taken with the intent of evading the requirements of this
part may be knowing or reckless. Fraud, deceit, or other unlawful or
illegitimate activity may be one fact or circumstance that is relevant
to the determination of whether a lender's action was taken with the
intent of evading the requirements of this part, but fraud, deceit, or
other unlawful or illegitimate activity is not a prerequisite to such a
finding.
PART 1070_DISCLOSURE OF RECORDS AND INFORMATION--Table of Contents
Subpart A_General Provisions and Definitions
Sec.
1070.1 Authority, purpose and scope.
1070.2 General definitions.
1070.3 Custodian of records; certification; alternative authority.
1070.4 Records of the CFPB not to be otherwise disclosed.
Subpart B_Freedom of Information Act
1070.10 General.
1070.11 Information made available; discretionary disclosures.
1070.12 Publication in the Federal Register.
1070.13 Public inspection and copying.
1070.14 Requests for CFPB records.
1070.15 Responsibility for responding to requests for CFPB records.
1070.16 Timing of responses to requests for CFPB records.
1070.17 Requests for expedited processing.
1070.18 Responses to requests for CFPB records.
1070.19 Classified information.
1070.20 Requests for business information provided to the CFPB.
1070.21 Administrative appeals.
1070.22 Fees for processing requests for CFPB records.
1070.23 Authority and responsibilities of the Chief FOIA Officer.
Subpart C_Disclosure of CFPB Information in Connection With Legal
Proceedings
1070.30 Purpose and scope; definitions.
1070.31 Service of summonses and complaints.
1070.32 Service of subpoenas, court orders, and other demands for CFPB
information or action.
1070.33 Testimony and production of documents prohibited unless approved
by the General Counsel.
1070.34 Procedure when testimony or production of documents is sought;
general.
1070.35 Procedure when response to demand is required prior to receiving
instructions.
1070.36 Procedure in the event of an adverse ruling.
1070.37 Considerations in determining whether the CFPB will comply with
a demand or request.
1070.38 Prohibition on providing expert or opinion testimony.
Subpart D_Confidential Information
1070.40 Purpose and scope.
[[Page 1057]]
1070.41 Non-disclosure of confidential information.
1070.42 Disclosure of confidential supervisory information to and by
supervised financial institutions.
1070.43 Disclosure of confidential information to law enforcement
agencies and other government agencies.
1070.44 Disclosure of confidential consumer complaint information.
1070.45 Affirmative disclosure of confidential information.
1070.46 Other disclosures of confidential information.
1070.47 Other rules regarding the disclosure of confidential
information.
1070.48 Privileges not affected by disclosure to the CFPB.
Subpart E_Privacy Act
1070.50 Purpose and scope; definitions.
1070.51 Authority and responsibilities of the Chief Privacy Officer.
1070.52 Fees.
1070.53 Request for access to records.
1070.54 CFPB procedures for responding to a request for access.
1070.55 Special procedures for medical records.
1070.56 Request for amendment of records.
1070.57 CFPB review of a request for amendment of records.
1070.58 Appeal of adverse determination of request for access or
amendment.
1070.59 Restrictions on disclosure.
1070.60 Exempt records.
1070.61 Training; rules of conduct; penalties for non-compliance.
1070.62 Preservation of records.
1070.63 Use and collection of social security numbers.
Authority: 12 U.S.C. 5481 et seq.; 5 U.S.C. 552; 5 U.S.C. 552a; 18
U.S.C. 1905; 18 U.S.C. 641; 44 U.S.C. ch. 30; 5 U.S.C. 301.
Source: 78 FR 11503, Feb. 15, 2013, unless otherwise noted.
Subpart A_General Provisions and Definitions
Sec. 1070.1 Authority, purpose, and scope.
(a) Authority. (1) This part is issued by the Bureau of Consumer
Financial Protection, an independent Bureau within the Federal Reserve
System, pursuant to the Consumer Financial Protection Act of 2010, 12
U.S.C. 5481 et seq.; the Freedom of Information Act, 5 U.S.C. 552; the
Privacy Act of 1974, 5 U.S.C. 552a; the Federal Records Act, 44 U.S.C.
3101; the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. the Right to
Financial Privacy Act of 1978, 12 U.S.C. 3401; the Trade Secrets Act, 18
U.S.C. 1905; 18 U.S.C. 641; and any other applicable law that
establishes a basis for the exercise of governmental authority by the
CFPB.
(2) This part establishes mechanisms for carrying out the CFPB's
statutory responsibilities under the statutes in paragraph (a)(1) of
this section to the extent those responsibilities require the
disclosure, production, or withholding of information. In this regard,
the CFPB has determined that the CFPB, and its delegates, may disclose
information of the CFPB, in accordance with the procedures set forth in
this part, whenever it is necessary or appropriate to do so in the
exercise of any of the CFPB's authority. The CFPB has determined that
all such disclosures, made in accordance with the rules and procedures
specified in this part, are authorized by law.
(b) Purpose and scope. This part contains the CFPB's rules relating
to the disclosure of records and information generated by and obtained
by the CFPB.
(1) Subpart A contains general provisions and definitions used in
this part.
(2) Subpart B implements the Freedom of Information Act, 5 U.S.C.
552.
(3) Subpart C sets forth the procedures with respect to subpoenas,
orders, or other requests for CFPB information in connection with legal
proceedings.
(4) Subpart D provides for the protection of confidential
information and procedures for sharing confidential information with
supervised institutions, government agencies, and others in certain
circumstances.
(5) Subpart E implements the Privacy Act of 1974, 5 U.S.C. 552a.
Sec. 1070.2 General definitions.
For purposes of this part:
(a) Business day means any day except Saturday, Sunday or a legal
Federal holiday.
(b) CFPB means the Bureau of Consumer Financial Protection.
(c) Chief FOIA Officer means the Chief Operating Officer of the
CFPB, or any CFPB employee to whom the Chief Operating Officer has
delegated authority to act under this part.
[[Page 1058]]
(d) Chief Operating Officer means the Chief Operating Officer of the
CFPB, or any CFPB employee to whom the Chief Operating Officer has
delegated authority to act under this part.
(e) Civil investigative demand material means any documentary
material, written report, or answers to questions, tangible thing, or
transcript of oral testimony received by the CFPB in any form or format
pursuant to a civil investigative demand, as those terms are set forth
in 12 U.S.C. 5562, or received by the CFPB voluntarily in lieu of a
civil investigative demand.
(f) Confidential information means confidential consumer complaint
information, confidential investigative information, and confidential
supervisory information, as well as any other CFPB information that may
be exempt from disclosure under the Freedom of Information Act pursuant
to 5 U.S.C. 552(b). Confidential information does not include
information contained in records that have been made publicly available
by the CFPB or information that has otherwise been publicly disclosed by
an employee with the authority to do so.
(g) Confidential consumer complaint information means information
received or generated by the CFPB, pursuant to 12 U.S.C. 5493 and 5534,
that comprises or documents consumer complaints or inquiries concerning
financial institutions or consumer financial products and services and
responses thereto, to the extent that such information is exempt from
disclosure pursuant to 5 U.S.C. 552(b).
(h) Confidential investigative information means:
(1) Civil investigative demand material; and
(2) Any documentary material prepared by, on behalf of, received by,
or for the use by the CFPB or any other Federal or State agency in the
conduct of an investigation of or enforcement action against a person,
and any information derived from such documents.
(i)(1) Confidential supervisory information means:
(i) Reports of examination, inspection and visitation, non-public
operating, condition, and compliance reports, and any information
contained in, derived from, or related to such reports;
(ii) Any documents, including reports of examination, prepared by,
or on behalf of, or for the use of the CFPB or any other Federal, State,
or foreign government agency in the exercise of supervisory authority
over a financial institution, and any information derived from such
documents;
(iii) Any communications between the CFPB and a supervised financial
institution or a Federal, State, or foreign government agency related to
the CFPB's supervision of the institution;
(iv) any information provided to the CFPB by a financial institution
to enable the CFPB to monitor for risks to consumers in the offering or
provision of consumer financial products or services, or to assess
whether an institution should be considered a covered person, as that
term is defined by 12 U.S.C. 5481, or is subject to the CFPB's
supervisory authority; and/or
(v) Information that is exempt from disclosure pursuant to 5 U.S.C.
552(b)(8).
(2) Confidential supervisory information does not include documents
prepared by a financial institution for its own business purposes and
that the CFPB does not possess.
(j) Director means the Director of the CFPB or his or her designee,
or a person authorized to perform the functions of the Director in
accordance with law.
(k) Employee means all current employees or officials of the CFPB,
including employees of contractors and any other individuals who have
been appointed by, or are subject to the supervision, jurisdiction, or
control of the Director, as well as the Director. The procedures
established within this part also apply to former employees where
specifically noted.
(l) Financial institution means any person involved in the offering
or provision of a ``financial product or service,'' including a
``covered person'' or ``service provider,'' as those terms are defined
by 12 U.S.C. 5481.
(m) General Counsel means the General Counsel of the CFPB or any
CFPB employee to whom the General Counsel has delegated authority to act
under this part.
[[Page 1059]]
(n) Person means an individual, partnership, company, corporation,
association (incorporated or unincorporated), trust, estate, cooperative
organization, or other entity.
(o) Report of examination means the report prepared by the CFPB
concerning the examination or inspection of a supervised financial
institution.
(p) State means any State, territory, or possession of the United
States, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, Guam, American Samoa, or
the United States Virgin Islands or any Federally recognized Indian
tribe, as defined by the Secretary of the Interior under section 104(a)
of the Federally Recognized Indian Tribe List Act of 1994 (25 U.S.C.
479a-1(a)), and includes any political subdivision thereof.
(q) Supervised financial institution means a financial institution
that is or that may become subject to the CFPB's supervisory authority.
Sec. 1070.3 Custodian of records; certification; alternative
authority.
(a) Custodian of records. The Chief Operating Officer is the
official custodian of all records of the CFPB, including records that
are in the possession or control of the CFPB or any CFPB employee.
(b) Certification of record. The Chief Operating Officer may certify
the authenticity of any CFPB record or any copy of such record, for any
purpose, and for or before any duly constituted Federal or State court,
tribunal, or agency.
(c) Alternative authority. Any action or determination required or
permitted to be done by the Chief Operating Officer may be done by any
employee who has been duly designated for this purpose by the Chief
Operating Officer.
Sec. 1070.4 Records of the CFPB not to be otherwise disclosed.
Except as provided by this part, employees or former employees of
the CFPB, or others in possession of a record of the CFPB that the CFPB
has not already made public, are prohibited from disclosing such
records, without authorization, to any person who is not an employee of
the CFPB.
Subpart B_Freedom of Information Act
Sec. 1070.10 General.
This subpart contains the regulations of the CFPB implementing the
Freedom of Information Act (the FOIA), 5 U.S.C. 552, as amended. These
regulations set forth procedures for requesting access to records
maintained by the CFPB. These regulations should be read together with
the FOIA, the 1987 Office of Management and Budget Guidelines for FOIA
Fees, the CFPB's Privacy Act regulations set forth in subpart E, and the
FOIA Web page on the CFPB's Web site, http://www.consumerfinance.gov,
which provide additional information about this topic.
Sec. 1070.11 Information made available; discretionary disclosures.
(a) In general. The FOIA provides for public access to information
and records developed or maintained by Federal agencies. Generally, the
FOIA divides agency information into three major categories and provides
methods by which each category of information is to be made available to
the public. The three major categories of information are as follows:
(1) Information required to be published in the Federal Register
(see Sec. 1070.12 of this subpart);
(2) Information required to be made available for public inspection
and copying or, in the alternative, to be published and offered for sale
(see Sec. 1070.13 of this subpart); and
(3) Information required to be made available to any member of the
public upon specific request (see Sec. Sec. 1070.14 through 1070.22 of
this subpart).
(b) Discretionary disclosures. Even though a FOIA exemption may
apply to the information or records requested, the CFPB may, if not
precluded by law, elect under the circumstances not to apply the
exemption. The fact that the exemption is not applied by the CFPB in
response to a particular request shall have no precedential significance
in processing other requests, but is merely an indication that, in the
processing of the particular request, the CFPB finds no necessity for
applying the exemption.
[[Page 1060]]
(c) Disclosures of records frequently requested. Subject to the
application of the FOIA exemptions and exclusions (5 U.S.C. 552(b) and
(c)), the CFPB shall make publicly available, as provided by Sec.
1070.13 of this subpart, all records regardless of form or format, which
have been released previously to any person under 5 U.S.C. 552(a)(3) and
Sec. Sec. 1070.14 through 1070.22 of this subpart, and which the CFPB
determines have become or are likely to become the subject of subsequent
requests for substantially the same records. When the CFPB receives
three (3) or more requests for substantially the same records, then the
CFPB shall also make the released records publicly available.
Sec. 1070.12 Publication in the Federal Register.
(a) Requirement. The CFPB shall separately state, publish and
maintain current in the Federal Register for the guidance of the public
the following information:
(1) Descriptions of its central and field organization and the
established place at which, the persons from whom, and the methods
whereby, the public may obtain information, make submissions or
requests, or obtain decisions;
(2) Statements of the general course and method by which its
functions are channeled and determined, including the nature and
requirements of all formal and informal procedures available;
(3) Rules of procedure, descriptions of forms available or the
places at which forms may be obtained, and instructions as to the scope
and contents of all papers, reports, or examinations;
(4) Substantive rules of general applicability adopted as authorized
by law, and statements of general policy or interpretations of general
applicability formulated and adopted by the CFPB; and
(5) Each amendment, revision, or repeal of matters referred to in
paragraphs (a)(1) through (4) of this section.
(b) Exceptions. Publication of the information under clause (a) of
this subpart shall be subject to the application of the FOIA exemptions
and exclusions (5 U.S.C. 552(b) and (c)) and the limitations provided in
5 U.S.C. 552(a)(1).
Sec. 1070.13 Public inspection and copying.
(a) In general. Subject to the application of the FOIA exemptions
and exclusions (5 U.S.C. 552(b) and (c)), the CFPB shall, in conformance
with 5 U.S.C. 552(a)(2), make available for public inspection and
copying, including by posting on the CFPB's Web site, http://
www.consumerfinance.gov, or, in the alternative, promptly publish and
offer for sale the following information:
(1) Final opinions, including concurring and dissenting opinions,
and orders made in the adjudication of cases;
(2) Those statements of policy and interpretations which have been
adopted by the CFPB but are not published in the Federal Register;
(3) Its administrative staff manuals and instructions to staff that
affect a member of the public;
(4) Copies of all records made publicly available pursuant to Sec.
1070.11 of this subpart; and
(5) A general index of the records referred to in paragraph (a)(4)
of this section.
(b) Information made available online. For records required to be
made available for public inspection and copying pursuant to 5 U.S.C.
552(a)(2) (paragraphs (a)(1) through (4) of this section), as soon as
practicable, the CFPB shall make such records available on its e-FOIA
Library, located at http://www.consumerfinance.gov.
(c) Record availability at the on-site e-FOIA Library. Any member of
the public may, upon request, access the CFPB's e-FOIA Library via a
computer terminal at 1700 G Street NW., Washington, DC 20552. Such a
request may be made by electronic means as set forth on the CFPB's Web
site, http://www.consumerfinance.gov, or in writing, to the Chief FOIA
Officer, Consumer Financial Protection Bureau, 1700 G Street NW.,
Washington, DC 20552. The request must indicate a preferred date and
time for the requested access. The CFPB reserves the right to arrange a
different date and time with the requester, if necessary.
(d) Redaction of identifying details. To prevent a clearly
unwarranted invasion of personal privacy, the CFPB may redact
identifying details contained in any matter described in paragraphs
[[Page 1061]]
(a)(1) through (4) of this section before making such matters available
for inspection or publication. The justification for the redaction shall
be explained fully in writing, and the extent of such redaction shall be
indicated on the portion of the record which is made available or
published, unless including that indication would harm an interest
protected by the exemption in 5 U.S.C. 552(b) under which the redaction
is made. If technically feasible, the extent of the redaction shall be
indicated at the place in the record where the redaction is made.
Sec. 1070.14 Requests for CFPB records.
(a) In general. Subject to the application of the FOIA exemptions
and exclusions (5 U.S.C. 552(b) and (c)), the CFPB shall promptly make
its records available to any person pursuant to a request that conforms
to the rules and procedures of this section.
(b) Form of request. A request for records of the CFPB shall be made
in writing or by electronic means.
(1) If a request is made in writing, it shall be addressed to the
Chief FOIA Officer, Consumer Financial Protection Bureau, 1700 G Street
NW., Washington, DC 20552. The request shall be labeled ``Freedom of
Information Act Request.''
(2) If a request is made by electronic means, it shall be submitted
as set forth on the CFPB's Web site, http://www.consumerfinance.gov. The
request shall be labeled ``Freedom of Information Act Request.''
(c) Content of request. (1) In order to ensure the CFPB's ability to
respond in a timely manner, a FOIA request should describe the records
that the requester seeks in sufficient detail to enable CFPB personnel
to locate them with a reasonable amount of effort. Whenever possible,
the request should include specific information about each record
sought, such as the date, title or name, author, recipient, and subject
matter of the record. If known, the requester should include any file
designations or descriptions for the records requested. As a general
rule, the more specific the requester is about the records or type of
records requested, the more likely the CFPB will be able to locate those
records in response to the request;
(2) In order to ensure the CFPB's ability to communicate effectively
with the requester, a request should include contact information for the
requester, including the name of the requester and, to the extent
available, a mailing address, telephone number, and email address at
which the CFPB may contact the requester regarding the request;
(3) The request should state whether the requester wishes to inspect
the records or desires to receive an electronic copy or have a copy made
and furnished without first inspecting the records;
(4) For the purpose of determining any fees that may apply to
processing a request, a requester should indicate in the request whether
the requester is a commercial user, an educational institution, non-
commercial scientific institution, representative of the news media,
governmental entity, or ``other'' requester, as those terms are defined
in Sec. 1070.22(b) of this subpart, and the basis for claiming that fee
category. Requesters may seek assistance in determining the appropriate
fee category by contacting the CFPB's FOIA Public Liaison at the
telephone number listed on the CFPB's Web site, http://
www.consumerfinance.gov. The CFPB will use any information provided to
the FOIA Public Liaison solely for the purpose of determining the
appropriate fee category that applies to the requester;
(5) If a requester seeks a waiver or reduction of fees associated
with processing a request, then the request shall include a statement to
that effect as is required by Sec. 1070.22(e) of this subpart. Any
request that does not seek a waiver or reduction of fees constitutes an
agreement of the requester to pay any and all fees (of up to $25) that
may apply to the request, as otherwise set forth in Sec. 1070.22 of
this subpart, except that the requester may specify in the request an
upper limit (of not less than $25) that the requester is willing to pay
to process the request; and
(6) If a requester seeks expedited processing of a request, then the
request must include a statement to that
[[Page 1062]]
effect as is required by Sec. 1070.17 of this subpart.
(d) Perfected requests; effect of request deficiencies. For purposes
of computing its deadline to respond to a request, the CFPB will deem
itself to have received a request only if, and on the date that, it
receives a request that contains substantially all of the information
required by and that otherwise conforms with paragraphs (b) and (c) of
this section. The CFPB need not accept a request, process a request, or
be bound by any deadlines in this subpart for processing a request that
fails to conform, in any material respect, to the requirements of
paragraphs (b) and (c) of this section. If a request is deficient in any
material respect, then the CFPB may return it to the requester and if it
does so, it shall advise the requester in what respect the request is
deficient, and what additional information is needed to respond to the
request. The requester may then amend or resubmit the request. A
determination by the CFPB that a request is deficient in any respect is
not a denial of a request for records and such determinations are not
subject to appeal. If a requester fails to respond to a CFPB
notification that a request is deficient within thirty (30) days of the
CFPB's notification, the CFPB will deem the request withdrawn.
(e) Requests by an individual for CFPB records pertaining to that
individual. An individual who wishes to inspect or obtain copies of
records of the Bureau that pertain to that individual shall file a
request in accordance with subpart E of these rules.
(f) Requests for CFPB records pertaining to another individual.
Where a request for records pertains to a third party, a requester may
receive greater access by submitting either a notarized authorization
signed by that individual or a declaration by that individual made in
compliance with the requirements set forth in 28 U.S.C. 1746 authorizing
disclosure of the records to the requester, or submits proof that the
individual is deceased (e.g., a copy of a death certificate or an
obituary). The CFPB may require a requester to supply additional
information if necessary in order to verify that a particular individual
has consented to disclosure.
Sec. 1070.15 Responsibility for responding to requests for CFPB
records.
(a) In general. In determining which records are responsive to a
request, the CFPB ordinarily will include only records in its possession
as of the date the CFPB begins its search for them. If any other date is
used, the CFPB shall inform the requester of that date.
(b) Authority to grant or deny requests. The Chief FOIA Officer
shall be authorized to grant or deny any request for a record of the
CFPB.
(c) Consultations and referrals. (1) When a requested record has
been created by an agency other than the CFPB, the CFPB shall refer the
record to the originating agency for a direct response to the requester.
(2) When a FOIA request is received for a record created by the CFPB
that includes information originated by another agency, the CFPB shall
consult the originating agency for review and recommendation on
disclosure. The CFPB shall not release any such records without prior
consultation with the originating agency.
(d) Notice of referral. Whenever the CFPB refers all or any part of
the responsibility for responding to a request to another agency, it
will notify the requester of the referral and inform the requester of
the name of each agency to which the request has been referred, in whole
or in part.
Sec. 1070.16 Timing of responses to requests for CFPB records.
(a) In general. Except as set forth in paragraphs (b) through (d) of
this section, and Sec. 1070.17 of this subpart, the CFPB shall respond
to requests according to their order of receipt.
(b) Multitrack processing. (1) The CFPB may establish separate
tracks to process simple and complex requests. The CFPB may assign a
request to the simple or complex track(s) based on the amount of work
and/or time needed to process the request. The CFPB shall process
requests in each track based on the date the request was perfected in
accordance with Sec. 1070.14(d).
(2) The CFPB may provide a requester in its complex track with an
[[Page 1063]]
opportunity to limit the scope of the request to qualify for faster
processing within the specified limits of the simple track(s).
(c) Time period for responding to requests for records. Ordinarily,
the CFPB shall have twenty (20) business days from when a request is
received by the CFPB to determine whether to grant or deny a request for
records. The twenty (20) business day time period set forth in this
paragraph shall not be tolled by the CFPB except that the CFPB may:
(1) Make one reasonable demand to the requester for clarifying
information about the request and toll the twenty (20) business day time
period while it awaits the clarifying information; or
(2) Toll the twenty (20) business day time period while it awaits
clarification from or addresses any dispute with the requester regarding
the assessment of fees.
(d) Unusual circumstances. (1) Where the CFPB determines that due to
unusual circumstances it cannot respond either to a request within the
time period set forth in paragraph (c) of this section or to an appeal
within the time period set forth in Sec. 1070.21 of this subpart, the
CFPB may extend the applicable time periods by informing the requester
in writing of the unusual circumstances and of the date by which the
CFPB expects to complete its processing of the request or appeal. Any
extension or extensions of time with respect to a request or an appeal
shall not cumulatively total more than ten (10) business days. However,
if the CFPB determines that it needs additional time beyond a ten (10)
business day extension to process the request or appeal, then the CFPB
shall notify the requester and provide the requester with an opportunity
to limit the scope of the request or appeal or to arrange for an
alternative time frame for processing the request or appeal or a
modified request or appeal. The requester shall retain the right to
define the desired scope of the request or appeal, as long as it meets
the requirements contained in this subpart.
(2) As used in this paragraph, ``unusual circumstances'' means:
(i) The need to search for and collect the requested records from
field facilities or other establishments that are separate from the
office processing the request;
(ii) The need to search for, collect, and appropriately examine a
voluminous amount of separate and distinct records which are demanded in
a single request; or
(iii) The need for consultation, which shall be conducted with all
practicable speed, with another agency having a substantial interest in
the determination of the request, or among two or more CFPB offices
having substantial subject matter interest therein.
Sec. 1070.17 Requests for expedited processing.
(a) In general. The CFPB shall process a request on an expedited
basis whenever a requester demonstrates a compelling need for expedited
processing in accordance with the requirements of this paragraph or in
other cases that the CFPB deems appropriate.
(b) Form and content of a request for expedited processing. A
request for expedited processing shall be made as follows:
(1) A request for expedited processing shall be made in writing or
by electronic means and submitted as part of a request for records in
accordance with section 1070.14(b). When a request for records includes
a request for expedited processing, the request shall be labeled
``Expedited Processing Requested.''
(2) A request for expedited processing shall contain a statement
that demonstrates a compelling need for the requester to obtain
expedited processing of the requested records. A ``compelling need'' is
defined as follows:
(i) Failure to obtain the requested records on an expedited basis
could reasonably be expected to pose an imminent threat to the life or
physical safety of an individual. The requester shall fully explain the
circumstances warranting such an expected threat so that the CFPB may
make a reasoned determination that a delay in obtaining the requested
records could pose such a threat; or
(ii) With respect to a request made by a person primarily engaged in
disseminating information, urgency to inform the public concerning
actual or alleged
[[Page 1064]]
Federal government activity. A person ``primarily engaged in
disseminating information'' does not include individuals who are engaged
only incidentally in the dissemination of information. The standard of
``urgency to inform'' requires that the records requested pertain to a
matter of current exigency to the American public and that delaying a
response to a request for records would compromise a significant
recognized interest to and throughout the American general public. The
requester must adequately explain the matter or activity and why the
records sought are necessary to be provided on an expedited basis.
(3) The requester shall certify the written statement that purports
to demonstrate a compelling need for expedited processing to be true and
correct to the best of the requester's knowledge and belief. The
certification must be in the form prescribed by 28 U.S.C. 1746: ``I
declare under penalty of perjury that the foregoing is true and correct
to the best of my knowledge and belief. Executed on [date].'' The
requester shall mail or submit electronically a copy of such written
certification to the Chief FOIA Officer as set forth in Sec. 1070.14(b)
of this subpart. The CFPB may waive this certification requirement in
appropriate circumstances.
(c) Determinations of requests for expedited processing. Within ten
(10) calendar days of its receipt of a request for expedited processing,
the CFPB shall decide whether to grant it and shall notify the requester
of the determination in writing.
(d) Effect of granting requests for expedited processing. If the
CFPB grants a request for expedited processing, then the CFPB shall give
the expedited request priority over non-expedited requests and shall
process the expedited request as soon as practicable. The CFPB may
assign expedited requests to their own simple and complex processing
tracks based upon the amount of work and/or time needed to process them.
Within each such track, an expedited request shall be processed in the
order of its receipt.
(e) Appeals of denials of requests for expedited processing. If the
CFPB denies a request for expedited processing, then the requester shall
have the right to submit an appeal of the denial determination in
accordance with Sec. 1070.21 of this subpart. The CFPB shall
communicate this appeal right as part of its written notification to the
requester denying expedited processing. The requester shall label its
appeal request ``Appeal for Expedited Processing.'' The CFPB shall act
expeditiously upon an appeal of a denial of a request for expedited
processing.
Sec. 1070.18 Responses to requests for CFPB records.
(a) Acknowledgements of requests. Upon receipt of a perfected
request, the CFPB will assign to the request a unique tracking number.
The CFPB will send an acknowledgement letter to the requester by mail or
email within ten (10) calendar days of receipt of the request. The
acknowledgment letter will contain the following information:
(1) The applicable request tracking number;
(2) The date of receipt of the request, as determined in accordance
with section 1070.14(d) of this subpart, as well as the date when the
requester may expect a response;
(3) A brief statement identifying the subject matter of the request;
and
(4) A confirmation, with respect to any fees that may apply to the
request pursuant to Sec. 1070.22 of this subpart, that the requester
has sought a waiver or reduction in such fees, has agreed to pay any and
all applicable fees, or has specified an upper limit (of not less than
$25) that the requester is willing to pay in fees to process the
request.
(b) Initial determination to grant or deny a request. (1) The
officer designated in Sec. 1070.15(b) to this subpart, or his or her
delegate, shall make initial determinations either to grant or to deny
in whole or in part requests for records.
(2) If the request is granted in full or in part, and if the
requester requests a copy of the records requested, then a copy of the
records shall be mailed or emailed to the requester in the requested
format, to the extent the records are readily producible in the
requested format. The CFPB shall also send the requester a statement of
the applicable fees, either at the time of
[[Page 1065]]
the determination or shortly thereafter.
(3) In the case of a request for inspection, the requester shall be
notified in writing of the determination, when and where the requested
records may be inspected, and of the fees incurred in complying with the
request. The CFPB shall then promptly make the records available for
inspection at the time and place stated, in a manner that will not
interfere with CFPB's operations and will not exclude other persons from
making inspections. The requester shall not be permitted to remove the
records from the room where inspection is made. If, after making
inspection, the requester desires copies of all or a portion of the
requested records, copies shall be furnished upon payment of the
established fees prescribed by Sec. 1070.22 of this subpart. Fees may
be charged for search and review time as stated in Sec. 1070.22 of this
subpart.
(4) If it is determined that the request for records should be
denied in whole or in part, the requester shall be notified by mail or
by email. The letter of notification shall:
(i) State the exemptions relied upon in denying the request;
(ii) If technically feasible, indicate the amount of information
deleted and the exemptions under which the deletion is made at the place
in the record where such deletion is made (unless providing such
indication would harm an interest protected by the exemption relied upon
to deny such material);
(iii) Set forth the name and title or position of the responsible
official;
(iv) Advise the requester of the right to administrative appeal in
accordance with Sec. 1070.21 of this subpart; and
(v) Specify the official or office to which such appeal shall be
submitted.
(5) If it is determined, after a reasonable search for records, that
no responsive records have been found to exist, the requester shall be
notified in writing or by email. The notification shall also advise the
requester of the right to administratively appeal the CFPB's
determination that no responsive records exist (i.e., to challenge the
adequacy of the CFPB's search for responsive records) in accordance with
Sec. 1070.21 of this subpart. The response shall specify the official
or office to which the appeal shall be submitted for review.
Sec. 1070.19 Classified information.
Whenever a request is made for a record containing information that
another agency has classified, or which may be appropriate for
classification by another agency under Executive Order 13526 or any
other executive order concerning the classification of information, the
CFPB shall refer the responsibility for responding to the request to the
classifying or originating agency, as appropriate.
Sec. 1070.20 Requests for business information provided to the CFPB.
(a) In general. Business information provided to the CFPB by a
business submitter shall not be disclosed pursuant to a FOIA request
except in accordance with this section.
(b) Definitions. For purposes of this section:
(1) Business information means commercial or financial information
obtained by the CFPB from a submitter that may be protected from
disclosure under Exemption 4 of the FOIA, 5 U.S.C. 552(b)(4).
(2) Submitter means any person from whom the CFPB obtains business
information, directly or indirectly. The term includes, without
limitation, corporations, State, local, and tribal governments, and
foreign governments.
(c) Designation of business information. A submitter of business
information will use good-faith efforts to designate, by appropriate
markings, either at the time of submission or at a reasonable time
thereafter, any portions of its submission that it considers to be
protected from disclosure under Exemption 4 of the FOIA. These
designations will expire ten (10) years after the date of the submission
unless the submitter requests otherwise and provides justification for,
a longer designation period.
(d) Notice to submitters. The CFPB shall provide a submitter with
prompt written notice of receipt of a request or appeal encompassing its
business information whenever required in accordance with paragraph (e)
of this section. Such written notice shall either describe the exact
nature of the business
[[Page 1066]]
information requested or provide copies of the records or portions of
records containing the business information. When notification of a
voluminous number of submitters is required, notification may be made by
posting or publishing the notice in a place reasonably likely to
accomplish it.
(e) When notice is required. (1) The CFPB shall provide a submitter
with notice of receipt of a request or appeal whenever:
(i) The information has been designated in good faith by the
submitter as information considered protected from disclosure under
Exemption 4; or
(ii) The CFPB has reason to believe that the information may be
protected from disclosure under Exemption 4.
(2) The notice requirements of this paragraph shall not apply if:
(i) The CFPB determines that the information is exempt under the
FOIA;
(ii) The information lawfully has been published or otherwise made
available to the public;
(iii) Disclosure of the information is required by statute (other
than the FOIA) or by a regulation issued in accordance with the
requirements of Executive Order 12600 (3 CFR, 1988 Comp., p. 235); or
(iv) The designation made by the submitter under paragraph (e)(1)(i)
of this section appears obviously frivolous, except that, in such a
case, the CFPB shall, within a reasonable time prior to a specified
disclosure date, give the submitter written notice of any final decision
to disclose the information.
(f) Opportunity to object to disclosure. (1) Through the notice
described in paragraph (d) of this section, the CFPB shall afford a
submitter ten (10) business days from the date of the notice to provide
the CFPB with a detailed statement of any objection to disclosure. Such
statement shall specify all grounds for withholding any of the
information under any exemption of the FOIA and, in the case of
Exemption 4, shall demonstrate why the information is considered to be a
trade secret or commercial or financial information that is privileged
or confidential. In the event that a submitter fails to respond to the
notice within the time specified in it, the submitter shall be
considered to have no objection to disclosure of the information.
Information provided by a submitter pursuant to this paragraph may
itself be subject to disclosure under the FOIA.
(2) When notice is given to a submitter under this section, the
requester shall be advised that such notice has been given to the
submitter. The requester shall be further advised that a delay in
responding to the request may be considered a denial of access to
records and that the requester may proceed with an administrative appeal
or seek judicial review, if appropriate. However, the requester will be
invited to agree to a voluntary extension of time so that the CFPB may
review the submitter's objection to disclose, if any.
(g) Notice of intent to disclose. The CFPB shall consider carefully
a submitter's objections and specific grounds for nondisclosure prior to
determining whether to disclose business information. Whenever the CFPB
decides to disclose business information over the objection of a
submitter, the CFPB shall forward to the submitter a written notice
which shall include:
(1) A statement of the reasons for which the submitter's disclosure
objections were not sustained;
(2) A description of the business information to be disclosed; and
(3) A specified disclosure date which is not less than ten (10)
business days after the notice of the final decision to release the
requested information has been mailed to the submitter. Except as
otherwise prohibited by law, a copy of the disclosure notice shall be
forwarded to the requester at the same time.
(h) Notice to submitter of FOIA lawsuit. Whenever a requester brings
suit seeking to compel disclosure of business information, the CFPB
shall promptly notify the submitter of that business information of the
existence of the suit.
(i) Notice to requester of business information. The CFPB shall
notify a requester whenever it provides the submitter with notice and an
opportunity to object to disclosure; whenever it notifies the submitter
of its intent to disclose the requested information; and whenever a
submitter files a lawsuit to
[[Page 1067]]
prevent the disclosure of the information.
Sec. 1070.21 Administrative appeals.
(a) Grounds for administrative appeals. A requester may appeal an
initial determination of the CFPB, including for the following reasons:
(1) To deny access to records in whole or in part (as provided in
Sec. 1070.18(b) of this subpart);
(2) To assign a particular fee category to the requestor (as
provided in Sec. 1070.22(b) of this subpart);
(3) To deny a request for a reduction or waiver of fees (as provided
in Sec. 1070.22(e) of this subpart);
(4) That no records exist that are responsive to the request (as
provided in Sec. 1070.18(b) of this subpart); or
(5) To deny a request for expedited processing (as provided in Sec.
1070.17(e) of this subpart).
(b) Time limits for filing administrative appeals. An appeal, other
than an appeal of a denial of expedited processing, must be postmarked
or submitted electronically on a date that is within forty-five (45)
calendar days of the date of the initial determination or the date of
the letter transmitting the last records released, whichever is later.
An appeal of a denial of expedited processing must be made within ten
(10) days of the date of the initial determination letter to deny
expedited processing (see Sec. 1070.17 of this subpart).
(c) Form and content of administrative appeals. In order to ensure a
timely response to an appeal, the appeal shall be made in writing or by
electronic means as follows:
(1) If appeal is made in writing, it shall be addressed to and
submitted to the officer specified in paragraph (e) of this section at
the address set forth in Sec. 1070.14(b) of this subpart. The appeal
shall be labeled ``Freedom of Information Act Appeal.''
(2) If an appeal is made by electronic means, it shall be addressed
to the officer specified in paragraph (e) of this section and submitted
as set forth on the CFPB's Web site, http://www.consumerfinance.gov. The
appeal shall be labeled ``Freedom of Information Act Appeal.''
(3) The appeal shall set forth contact information for the
requester, including, to the extent available, a mailing address,
telephone number, or email address at which the CFPB may contact the
requester regarding the appeal; and
(4) The appeal shall specify the applicable request tracking number,
the date of the initial request, and the date of the letter of initial
determination, and, where possible, enclose a copy of the initial
request and the initial determination being appealed.
(d) Processing of administrative appeals. Appeals will be stamped
with the date of their receipt by the FOIA response office, and will be
processed in the order of their receipt. The receipt of the appeal will
be acknowledged by the CFPB and the requester will be advised of the
date the appeal was received, the appeal tracking number, and the
expected date of response.
(e) Determinations to grant or deny administrative appeals. The
General Counsel is authorized to and shall decide whether to affirm the
initial determination (in whole or in part) or to reverse the initial
determination (in whole or in part) and shall notify the requester of
this decision in writing within twenty (20) business days after the date
of receipt of the appeal, unless extended pursuant to Sec. 1070.16(d)
of this subpart.
(1) If it is decided that the appeal is to be denied (in whole or in
part) the requester shall be:
(i) Notified in writing of the denial;
(ii) Notified of the reasons for the denial, including which of the
FOIA exemptions were relied upon;
(iii) Notified of the name and title or position of the official
responsible for the determination on appeal;
(iv) Provided with a statement that judicial review of the denial is
available in the United States District Court for the judicial district
in which the requester resides or has a principal place of business, the
judicial district in which the requested records are located, or the
District of Columbia in accordance with 5 U.S.C. 552(a)(4)(B); and
(v) Provided with notification that mediation services are available
to the requester as a non-exclusive alternative to litigation through
the Office
[[Page 1068]]
of Government Information Services in accordance with 5 U.S.C.
552(h)(3).
(2) If the initial determination is reversed on appeal, the
requester shall be so notified and the request shall be processed
promptly in accordance with the decision on appeal.
(3) If the initial determination is remanded on appeal to the Chief
FOIA Officer for further action, the requester shall be so notified and
the request shall be processed in accordance with the decision on
appeal. The remanded request shall be treated as a new request received
by the CFPB as of the date when the General Counsel transmits the remand
notification to the requester. The procedures and deadlines set forth in
this subpart for processing, deciding, responding to, and filing
administrative appeals of new FOIA requests shall apply to the remanded
request.
(f) Adjudication of administrative appeals of requests in
litigation. An appeal ordinarily will not be adjudicated if the request
becomes a matter of FOIA litigation.
Sec. 1070.22 Fees for processing requests for CFPB records.
(a) In general. The CFPB shall determine whether and to what extent
to charge a requester fees for processing a FOIA request, for the
services and in the amounts set forth in this paragraph, by determining
an appropriate fee category for the requester (as set forth in paragraph
(b) of this section) and then by charging the requester those fees
applicable to the assigned category (as set forth in paragraph (c) of
this section), unless circumstances exist (as described in paragraph (d)
of this section) that render fees inapplicable or inadvisable or unless
the requester has requested and the CFPB has granted a reduction in or
waiver of fees (as set forth in paragraph (e) of this section).
(1) The CFPB shall charge a requester fees for the cost of copying
or printing records at the rate of $0.10 per page.
(2) The CFPB shall charge a requester for all time spent by its
employees searching for records that are responsive to a request. The
CFPB shall charge the requester fees for search time as follows:
(i) The CFPB shall charge for search time at the salary rate(s)
(basic pay plus sixteen (16) percent) of the employee(s) who conduct the
search. However, the CFPB shall charge search fees at the rate of $9.00
per fifteen (15) minutes of search time whenever only administrative/
clerical employees conduct a search and at the rate of $23.00 per
fifteen (15) minutes of search time whenever only professional/executive
employees conduct a search. Search charges shall also include
transportation of employees and records necessary to the search at
actual cost. Fees may be charged for search time even if the search does
not yield any responsive records, or if records are exempt from
disclosure.
(ii) The CFPB shall charge the requester for the actual direct costs
of conducting an electronic records search, including computer search
time, runs, and output. The CFPB shall also charge for time spent by
computer operators or programmers (at the rates set forth in paragraph
(a)(2)(i) of this section) who conduct or assist in the conduct of an
electronic records search.
(3) The CFPB shall charge a requester for time spent by its
employees examining responsive records to determine whether any portions
of such record are exempt from disclosure, pursuant to the FOIA
exemptions of 5 U.S.C. 552(b). The CFPB shall also charge a requester
for time spent by its employees redacting any such exempt information
from a record and preparing a record for release to the requester. The
CFPB shall charge a requester for time spent reviewing records at the
salary rate(s) (i.e., basic pay plus sixteen (16) percent) of the
employees who conduct the review. However, the CFPB shall charge review
fees at the rate of $9.00 per fifteen (15) minutes of search time
whenever only administrative/clerical employees review records and at
the rate of $23.00 per fifteen (15) minutes of search time whenever only
professional/executive employees review records. Fees shall be charged
for review time even if records ultimately are not disclosed.
[[Page 1069]]
(4) Fees for all services provided shall be charged whether or not
copies are made available to the requester for inspection. However, no
fee shall be charged for monitoring a requester's inspection of records.
(5) Other services and materials requested which are not covered by
this part nor required by the FOIA are chargeable at the actual cost to
the CFPB. This includes, but is not limited to:
(i) Certifying that records are true copies; or
(ii) Sending records by special methods such as express mail, etc.
(b) Categories of requesters. (1) For purposes of assessing fees as
set forth in this section, each requester shall be assigned to one of
the following categories:
(i) Commercial user refers to one who seeks information for a use or
purpose that furthers the commercial, trade, or profit interests of the
requester or the person on whose behalf the request is made, which can
include furthering those interests through litigation. The CFPB may
determine from the use specified in the request that the requester is a
commercial user.
(ii) Educational institution refers to a preschool, a public or
private elementary or secondary school, an institution of graduate
higher education, an institution of undergraduate higher education, an
institution of professional education, and an institution of vocational
education, which operates a program or programs of scholarly research.
(iii) Non-commercial scientific institution refers to an institution
that is not operated on a ``commercial user'' basis as that term is
defined in paragraph (b)(2)(i) of this section, and which is operated
solely for the purpose of conducting scientific research, the results of
which are not intended to promote any particular product or industry.
(iv) Representative of the news media refers to any person or entity
that gathers information of potential interest to a segment of the
public, uses its editorial skills to turn the raw materials into a
distinct work, and distributes that work to an audience. In this
paragraph, the term `news' means information that is about current
events or that would be of current interest to the public. Examples of
news-media entities are television or radio stations broadcasting to the
public at large and publishers of periodicals (but only if such entities
qualify as disseminators of `news') who make their products available
for purchase by or subscription by or free distribution to the general
public. Other examples of news media entities include online
publications and Web sites that regularly deliver news content to the
public. These examples are not all-inclusive. Moreover, as methods of
news delivery evolve (for example, the adoption of the electronic
dissemination of newspapers through telecommunications services), such
alternative media shall be considered to be news-media entities. A
freelance journalist shall be regarded as working for a news-media
entity if the journalist can demonstrate a solid basis for expecting
publication through that entity, whether or not the journalist is
actually employed by the entity. A publication contract would present a
solid basis for such an expectation; the CFPB may also consider the past
publication record of the requester in making such a determination.
(v) ``Other'' requester refers to a requester who does not fall
within any of the previously described categories.
(2) Within twenty (20) calendar days of its receipt of a request,
the CFPB shall make a determination as to the proper fee category to
apply to a requester. The CFPB shall inform the requester of the
determination in the request acknowledgment letter, or if no such letter
is required, in writing. The CFPB shall base its determination upon a
review of the requester's submission and the CFPB's own records. Where
the CFPB has reasonable cause to doubt the use to which a requester will
put the records sought, or where that use is not clear from the request
itself, the CFPB should seek additional clarification before assigning
the request to a specific category.
(3) If the CFPB assigns to a requester a fee category, then the
requester shall have the right to submit an appeal of the CFPB's
determination in accordance with Sec. 1070.21 of this subpart. The CFPB
shall communicate this appeal
[[Page 1070]]
right as part of its written notification to the requester of an adverse
fee category determination. The requester shall label its appeal request
``Appeal of Fee Category Determination.''
(c) Fees applicable to each category of requester. The following fee
schedule applies uniformly throughout the CFPB to requests processed
under the FOIA. Specific levels of fees are prescribed for each category
of requester defined in paragraph (b) of this section.
(1) Commercial users shall be charged the full direct costs of
searching for, reviewing, and duplicating the records they request.
Moreover, when a request is received for disclosure that is primarily in
the commercial interest of the requester, the CFPB is not required to
consider a request for a waiver or reduction of fees based upon the
assertion that disclosure would be in the public interest. The CFPB may
recover the cost of searching for and reviewing records even if there is
ultimately no disclosure of records or no records are located.
(2) Educational and non-commercial scientific institution requesters
shall be charged only for the cost of duplicating the records they
request, except that the CFPB shall provide the first one hundred (100)
pages of duplication free of charge. To be eligible, requesters must
show that the request is made under the auspices of a qualifying
institution and that the records are not sought for a commercial use,
but are sought in furtherance of scholarly (if the request is from an
educational institution) or scientific (if the request is from a non-
commercial scientific institution) research. These categories do not
include requesters who want records for use in meeting individual
academic research or study requirements.
(3) Representatives of the news media shall be charged only for the
cost of duplicating the records they request, except that the CFPB shall
provide them with the first one hundred (100) pages of duplication free
of charge.
(4) Other requesters who do not fit any of the categories described
above shall be charged the full direct cost of searching for and
duplicating records that are responsive to the request, except that the
CFPB shall provide the first one hundred (100) pages of duplication and
the first two hours of search time free of charge. The CFPB may recover
the cost of searching for records even if there is ultimately no
disclosure of records, or no records are located. Requests from persons
for records about themselves filed in the CFPB's systems of records
shall continue to be treated under the fee provisions of the Privacy Act
of 1974, 5 U.S.C. 552a, which permit fees only for duplication, after
the first one hundred (100) pages are furnished free of charge.
(d) Other circumstances when fees are not charged. Notwithstanding
paragraphs (b) and (c) of this section, the CFPB may not charge a
requester a fee for processing a FOIA request if any of the following
applies:
(1) The cost of collecting a fee would be equal to or greater than
the fee itself;
(2) The fees were waived or reduced in accordance with paragraph (e)
of this section;
(3) If the CFPB fails to comply with any time limit under Sec.
1070.15 or Sec. 1070.21 of this subpart, and no unusual circumstances
(as that term is defined in Sec. 1070.16(d)) or exceptional
circumstances apply to the processing of the request, then the CFPB
shall not assess search fees, or if the requester is a representative of
the news media or an educational or noncommercial scientific
institution, then the CFPB shall not assess duplication fees. The term
``exceptional circumstances'' does not include a delay that results from
a predictable CFPB workload of requests, unless the CFPB demonstrates
reasonable progress in reducing its backlog of pending requests; or
(4) If the CFPB determines, as a matter of administrative
discretion, that waiving or reducing the fees would serve the interest
of the United States Government.
(e) Waiver or reduction of fees. (1) A requester shall be entitled
to receive from the CFPB a waiver or reduction in the fees otherwise
applicable to a FOIA request whenever the requester:
(i) Requests such waiver or reduction of fees in writing or by
electronic means as part of the FOIA request;
[[Page 1071]]
(ii) Labels the request for waiver or reduction of fees ``Fee Waiver
or Reduction Requested'' on the FOIA request; and
(iii) Demonstrates that the fee reduction or waiver request that a
waiver or reduction of the fees is in the public interest because:
(A) Furnishing the information is likely to contribute significantly
to public understanding of the operations or activities of the
government; and
(B) Furnishing the information is not primarily in the commercial
interest of the requester.
(2) To determine whether the requester has satisfied the
requirements of paragraph (e)(1)(ii)(A), the CFPB shall consider the
following factors:
(i) The subject of the requested records must concern identifiable
operations or activities of the Federal government, with a connection
that is direct and clear, and not remote or attenuated.
(ii) The disclosable portions of the requested records must be
meaningfully informative about government operations or activities in
order to be ``likely to contribute'' to an increased public
understanding of those operations or activities. The disclosure of
information that already is in the public domain, in either a
duplicative or a substantially similar form, is not as likely to
contribute to the public's understanding.
(iii) The disclosure must contribute to the understanding of a
reasonably broad audience of persons interested in the subject, as
opposed to the individual understanding of the requester. A requester's
expertise in the subject area and ability and intention to effectively
convey information to the public shall be considered. It shall be
presumed that a representative of the news media will satisfy this
consideration.
(iv) The public's understanding of the subject in question, as
compared to the level of public understanding existing prior to the
disclosure, must be enhanced by the disclosure to a significant extent.
(3) To determine whether the requester has satisfied the
requirements of paragraph (e)(1)(ii)(B), the CFPB shall consider the
following factors:
(i) The CFPB shall consider any commercial interest of the requester
(with reference to the definition of ``commercial user'' in (b)(1)(i) of
this section), or of any person on whose behalf the requester may be
acting, that would be furthered by the requested disclosure. Requesters
shall be given an opportunity in the administrative process to provide
explanatory information regarding this consideration.
(ii) A fee waiver or reduction is justified where the public
interest standard is satisfied and that public interest is greater in
magnitude than that of any identified commercial interest in disclosure.
The CFPB ordinarily shall presume that where a news media requester has
satisfied the public interest standard, the public interest will be the
interest primarily served by disclosure to that requester. Disclosure to
data brokers or others who merely compile and market government
information for direct economic return shall not be presumed to
primarily serve the public interest.
(4) Where only some of the records to be released satisfy the
requirements for a waiver of fees, a waiver shall be granted for those
records.
(5) The CFPB shall decide whether to grant or deny a request to
reduce or waive fees prior to processing a request. The CFPB shall
notify the requester of the determination in writing.
(6) If the CFPB denies a request to reduce or waive fees, then the
CFPB shall advise the requester, in the denial notification letter, that
the requester may incur fees if the CFPB proceeds to process the
request. The notification letter shall also advise the requester that
the CFPB will not proceed to process the request further unless the
requester, in writing, directs the CFPB to do so and either agrees to
pay any fees that may apply to processing the request or specifies an
upper limit (of not less than $25) that the requester is willing to pay
to process the request. If the CFPB does not receive this written
direction and agreement/specification within thirty (30) calendar days
of the date of the denial notification letter, then the CFPB shall deem
the request to be withdrawn.
[[Page 1072]]
(7) If the CFPB denies a request to reduce or waive fees, then the
requester shall have the right to submit an appeal of the denial
determination in accordance with section 1070.21 of this subpart. The
CFPB shall communicate this appeal right as part of its written
notification to the requester denying the fee reduction or waiver
request. The requester should label its appeal request ``Appeal for Fee
Reduction/Waiver.''
(f) Advance notice and prepayment of fees. (1) When the CFPB
estimates the fees for processing a request to exceed the limit set by
the requester, and that amount is less than $250, or the requester did
not specify a limit and the amount is less than $250, the requester
shall be notified of the estimated fees, and provided a breakdown of the
fees attributable to search, review, and duplication, respectively. The
requester must provide an agreement to pay the estimated fees; however,
the requester shall also be given an opportunity to reformulate the
request in an attempt to reduce fees.
(2) If the requester has failed to state a limit and the fees are
estimated to exceed $250, the requester shall be notified of the
estimated fees and provided a breakdown of the fees attributable to
search, review, and duplication, respectively. The requester must pre-
pay such amount prior to the processing of the request, or provide
satisfactory assurance of full payment if the requester has a history of
prompt payment of FOIA fees. The requester shall also be given an
opportunity to reformulate the request in such a way as to lower the
applicable fees.
(3) The CFPB reserves the right to request prepayment after a
request is processed and before documents are released.
(4) If a requester has previously failed to pay a fee within thirty
(30) calendar days of the date of the billing, the requester shall be
required to pay the full amount owed plus any applicable interest and to
make an advance payment of the full amount of the estimated fee before
the CFPB begins to process a new request or the pending request.
(5) When the CFPB acts under paragraphs (f)(1) through (4) of this
section, the statutory time limits of twenty (20) days (excluding
Saturdays, Sundays, and legal public holidays) from receipt of initial
requests or appeals, plus extensions of these time limits, shall begin
only after fees have been paid, a written agreement to pay fees has been
provided, or a request has been reformulated.
(g) Form of payment. Payment may be tendered as set forth on the
CFPB's Web site, http://www.consumerfinance.gov.
(h) Charging interest. The CFPB may charge interest on any unpaid
bill starting on the 31st day following the date of billing the
requester. Interest charges will be assessed at the rate provided in 31
U.S.C. 3717 and will accrue from the date of the billing until payment
is received by the CFPB. The CFPB will follow the provisions of the Debt
Collection Act of 1982 (Pub. L. 97-365, 96 Stat. 1749), as amended, and
its administrative procedures, including the use of consumer reporting
agencies, collection agencies, and offset.
(i) Aggregating requests. Where the CFPB reasonably believes that a
requester or a group of requesters acting together is attempting to
divide a request into a series of requests for the purpose of avoiding
fees, the CFPB may aggregate those requests and charge accordingly. The
CFPB may presume that multiple requests of this type made within a
thirty (30) day period have been made in order to avoid fees. Where
requests are separated by a longer period, the CFPB will aggregate them
only where there exists a solid basis for determining that aggregation
is warranted under all the circumstances involved. Multiple requests
involving unrelated matters will not be aggregated.
Sec. 1070.23 Authority and responsibilities of the Chief FOIA
Officer.
(a) Chief FOIA Officer. The Director authorizes the Chief FOIA
Officer to act upon all requests for agency records, with the exception
of determining appeals from the initial determinations of the Chief FOIA
Officer, which will be decided by the General Counsel. The Chief FOIA
officer shall, subject to the authority of the Director:
[[Page 1073]]
(1) Have CFPB-wide responsibility for efficient and appropriate
compliance with the FOIA;
(2) Monitor implementation of the FOIA throughout the CFPB and keep
the Director, the General Counsel, and the Attorney General
appropriately informed of the CFPB's performance in implementing the
FOIA;
(3) Recommend to the Director such adjustments to agency practices,
policies, personnel and funding as may be necessary to improve the Chief
FOIA Officer's implementation of the FOIA;
(4) Review and report to the Attorney General, through the Director,
at such times and in such formats as the Attorney General may direct, on
the CFPB's performance in implementing the FOIA;
(5) Facilitate public understanding of the purposes of the statutory
exemptions of the FOIA by including concise descriptions of the
exemptions in both the CFPB's handbook and the CFPB's annual report on
the FOIA, and by providing an overview, where appropriate, of certain
general categories of CFPB records to which those exemptions apply;
(6) Designate one or more FOIA Public Liaisons; and
(7) Maintain and update, as necessary and in accordance with the
requirements of this subpart, the CFPB's FOIA Web site, including its e-
FOIA Library.
(b) FOIA Public Liaisons. FOIA Public Liaisons shall report to the
Chief FOIA Officer and shall serve as supervisory officials to whom a
requester can raise concerns about the service the requester has
received from the CFPB's FOIA office, following an initial response from
the FOIA office staff. FOIA Public Liaisons shall be responsible for
assisting in reducing delays, increasing transparency and understanding
of the status of requests, and assisting in the resolution of disputes.
Subpart C_Disclosure of CFPB Information in Connection With Legal
Proceedings
Sec. 1070.30 Purpose and scope; definitions.
(a) This subpart sets forth the procedures to be followed with
respect to:
(1) Service of summonses and complaints directed to the CFPB, the
Director, or to any CFPB employee in connection with Federal or State
litigation arising out of or involving the performance of official
activities of the CFPB; and
(2) Subpoenas, court orders, or other requests or demands for any
CFPB information, whether contained in the files of the CFPB or acquired
by a CFPB employee as part of the performance of that employee's duties
or by virtue of employee's official status.
(b) This subpart does not apply to requests for official information
made pursuant to subparts B, D, and E of this part.
(c) This subpart does not apply to requests for information made in
the course of adjudicating claims against the CFPB by CFPB employees
(present or former) or applicants for CFPB employment for which
jurisdiction resides with the U.S. Equal Employment Opportunity
Commission, the U.S. Merit Systems Protection Board, the Office of
Special Counsel, the Federal Labor Relations Authority, or their
successor agencies, or a labor arbitrator operating under a collective
bargaining agreement between the CFPB and a labor organization
representing CFPB employees.
(d) This subpart is intended only to inform the public about CFPB
procedures concerning the service of process and responses to subpoenas,
summons, or other demands or requests for official information or action
and is not intended to and does not create, and may not be relied upon
to create any right or benefit, substantive or procedural, enforceable
at law by a party against the CFPB or the United States.
(e) For purposes of this subpart:
(1) Demand means a subpoena or order for official information,
whether contained in CFPB records or through testimony, related to or
for possible use in a legal proceeding.
(2) Legal proceeding encompasses all pre-trial, trial, and post-
trial stages of all judicial or administrative actions, hearings,
investigations, or similar proceedings before courts, commissions,
boards, grand juries, arbitrators, or other judicial or quasi-judicial
bodies or tribunals, whether criminal,
[[Page 1074]]
civil, or administrative in nature, and whether foreign or domestic.
This phrase includes all stages of discovery as well as formal or
informal requests by attorneys or others involved in legal proceedings.
(3) Official Information means all information of any kind, however
stored, that is in the custody and control of the CFPB or was acquired
by CFPB employees, or former employees as part of their official duties
or because of their official status while such individuals were employed
by or served on behalf of the CFPB. Official information also includes
any information acquired by CFPB employees or former employees while
such individuals were engaged in matters related to consumer financial
protection functions prior to the employees' transfer to the CFPB
pursuant to Subtitle F of the Consumer Financial Protection Act of 2010.
(4) Request means any request for official information in the form
of testimony, affidavits, declarations, admissions, responses to
interrogatories, document production, inspections, or formal or informal
interviews, during the course of a legal proceeding, including pursuant
to the Federal Rules of Civil Procedure, the Federal Rules of Criminal
Procedure, or other applicable rules of procedure.
(5) Testimony means a statement in any form, including personal
appearances before a court or other legal tribunal, interviews,
depositions, telephonic, televised, or videographed statements or any
responses given during discovery or similar proceeding in the course of
litigation.
Sec. 1070.31 Service of summonses and complaints.
(a) Only the General Counsel is authorized to receive and accept
summonses or complaints sought to be served upon the CFPB or CFPB
employees sued in their official capacity. Such documents should be
served upon the General Counsel, Consumer Financial Protection Bureau,
1700 G Street NW., Washington, DC 20552. This authorization for receipt
shall in no way affect the requirements of service elsewhere provided in
applicable rules and regulations.
(b) If, notwithstanding paragraph (a) of this section, any summons
or complaint described in that paragraph is delivered to an employee of
the CFPB, the employee shall decline to accept the proffered service and
may notify the person attempting to make service of the regulations set
forth herein. If, notwithstanding this instruction, an employee accepts
service of a document described in paragraph (a) of this section, the
employee shall immediately notify and deliver a copy of the summons and
complaint to the General Counsel.
(c) When a CFPB employee is sued in an individual capacity for an
act or omission occurring in connection with duties performed on behalf
of the CFPB (whether or not the officer or employee is also sued in an
official capacity), the employee by law is to be served personally with
process. See Fed. R. Civ. P. 4(i)(3). An employee sued in an individual
capacity for an act or omission occurring in connection with duties
performed on behalf of the CFPB shall immediately notify, and deliver a
copy of the summons and complaint to, the General Counsel.
(d) The CFPB will only accept service of process for an employee
sued in his or her official capacity. Documents for which the General
Counsel accepts service in official capacity shall be stamped ``Service
Accepted in Official Capacity Only.'' Acceptance of service shall not
constitute an admission or waiver with respect to jurisdiction,
propriety of service, improper venue, or any other defense in law or
equity available under applicable laws or rules.
Sec. 1070.32 Service of subpoenas, court orders, and other demands
for CFPB information or action.
(a) Except in cases in which the CFPB is represented by legal
counsel who have entered an appearance or otherwise given notice of
their representation, only the General Counsel is authorized to receive
and accept subpoenas or other demands or requests directed to the CFPB
or its employees, whether civil or criminal in nature, for:
(1) Records of the CFPB;
[[Page 1075]]
(2) Official information including, but not limited to, testimony,
affidavits, declarations, admissions, responses to interrogatories, or
informal statements, relating to material contained in the files of the
CFPB or which any CFPB employee acquired in the course and scope of the
performance of his or her official duties;
(3) Garnishment or attachment of compensation of current or former
employees; or
(4) The performance or non-performance of any official CFPB duty.
(b) Documents described in paragraph (a) of this section should be
served upon the General Counsel, Consumer Financial Protection Bureau,
1700 G Street NW., Washington, DC 20552. Service must be effected as
provided in applicable rules and regulations governing service in
Federal judicial and administrative proceedings. Acceptance of such
documents by the General Counsel does not constitute a waiver of any
defense that might otherwise exist with respect to service under the
Federal Rules of Civil or Criminal Procedure or other applicable laws or
regulations.
(c) In the event that any demand or request described in paragraph
(a) of this section is sought to be delivered to a CFPB employee other
than in the manner prescribed in paragraph (b) of this section, such
employee shall decline service and direct the server of process to these
regulations. If the demand or request is nonetheless delivered to the
employee, the employee shall immediately notify, and deliver a copy of
that document to, the General Counsel.
(d) Except as otherwise provided in this subpart, the CFPB is not an
agent for service for, or otherwise authorized to accept on behalf of
its employees, any subpoenas, orders, or other demands or requests,
which are not related to the employees' official duties except upon the
express, written authorization of the individual CFPB employee to whom
such demand or request is directed.
(e) Copies of any subpoenas, orders, or other demands or requests
that are directed to former employees of the CFPB in connection with the
performance of official CFPB duties shall also be served upon the
General Counsel. The CFPB shall not, however, serve as an agent for
service for the former employee, nor is the CFPB otherwise authorized to
accept service on behalf of its former employees. If the demand involves
their official duties as CFPB employees, former employees who receive
subpoenas, orders, or similar compulsory process should also notify, and
deliver a copy of the document to, the General Counsel.
Sec. 1070.33 Testimony and production of documents prohibited unless
approved by the General Counsel.
(a) Unless authorized by the General Counsel, no employee or former
employee of the CFPB shall, in response to a demand or a request provide
oral or written testimony by deposition, declaration, affidavit, or
otherwise concerning any official information.
(b) Unless authorized by the General Counsel, no employee or former
employee shall, in response to a demand or request, produce any document
or any material acquired as part of the performance of that employee's
duties or by virtue of that employee's official status.
Sec. 1070.34 Procedure when testimony or production of documents
is sought; general.
(a) If, as part of a proceeding in which the United States or the
CFPB is not a party, official information is sought through a demand for
testimony, CFPB records, or other material, the party seeking such
information must (except as otherwise required by Federal law or
authorized by the General Counsel) set forth in writing:
(1) The title and forum of the proceeding, if applicable;
(2) A detailed description of the nature and relevance of the
official information sought;
(3) A showing that other evidence reasonably suited to the
requester's needs is not available from any other source; and
(4) If testimony is requested, the intended use of the testimony, a
general summary of the desired testimony, and a showing that no document
could be provided and used in lieu of testimony.
[[Page 1076]]
(b) To the extent he or she deems necessary or appropriate, the
General Counsel may also require from the party seeking such information
a plan of all reasonably foreseeable demands, including but not limited
to the names of all employees and former employees from whom discovery
will be sought, areas of inquiry, expected duration of proceedings
requiring oral testimony, identification of potentially relevant
documents, or any other information deemed necessary to make a
determination. The purpose of this requirement is to assist the General
Counsel in making an informed decision regarding whether testimony or
the production of documents or material should be authorized.
(c) The General Counsel may consult or negotiate with an attorney
for a party, or the party if not represented by an attorney, to refine
or limit a request or demand so that compliance is less burdensome.
(d) The General Counsel will notify the CFPB employee and such other
persons as circumstances may warrant of his or her decision regarding
compliance with the request or demand.
Sec. 1070.35 Procedure when response to demand is required prior
to receiving instructions.
(a) If a response to a demand described in section 1070.34 of this
subpart is required before the General Counsel renders a decision, the
CFPB will request that the appropriate CFPB attorney or an attorney of
the Department of Justice, as appropriate, take steps to stay, postpone,
or obtain relief from the demand pending decision. If necessary, the
attorney will:
(1) Appear with the employee upon whom the demand has been made;
(2) Furnish the court or other authority with a copy of the
regulations contained in this subpart;
(3) Inform the court or other authority that the demand has been, or
is being, as the case may be, referred for the prompt consideration of
the appropriate CFPB official; and
(4) Respectfully request the court or authority to stay the demand
pending receipt of the requested instructions.
(b) In the event that an immediate demand for production or
disclosure is made in circumstances which would preclude the proper
designation or appearance of an attorney of the CFPB or the Department
of Justice on the employee's behalf, the employee, if necessary, shall
respectfully request from the demanding court or authority a reasonable
stay of proceedings for the purpose of obtaining instructions from the
General Counsel.
Sec. 1070.36 Procedure in the event of an adverse ruling.
If a stay or, or other relief from, the effect of a demand made
pursuant to sections 1070.34 and 1070.35 of this subpart is declined or
not obtained, or if the court or other judicial or quasi-judicial
authority declines to stay the effect of the demand made pursuant to
sections 1070.34 and 1070.35 of this subpart, or if the court or other
authority rules that the demand must be complied with irrespective of
the General Counsel's instructions not to produce the material or
disclose the information sought, the employee upon whom the demand has
been made shall respectfully decline to comply with the demand citing
this subpart and United States ex rel. Touhy v. Ragen, 340 U.S. 462
(1951).
Sec. 1070.37 Considerations in determining whether the CFPB will
comply with a demand or request.
(a) In deciding whether to comply with a demand or request, CFPB
officials and attorneys shall consider, among other pertinent
considerations:
(1) Whether such compliance would be unduly burdensome or otherwise
inappropriate under the applicable rules of discovery or the rules of
procedure governing the case or matter in which the demand arose;
(2) Whether the number of similar requests would have a cumulative
effect on the expenditure of CFPB resources;
(3) Whether compliance is appropriate under the relevant substantive
law concerning privilege or disclosure of information;
(4) The public interest;
(5) The need to conserve the time of CFPB employees for the conduct
of official business;
[[Page 1077]]
(6) The need to avoid spending time and money of the United States
for private purposes;
(7) The need to maintain impartiality between private litigants in
cases where a substantial government interest is not implicated;
(8) Whether compliance would have an adverse effect on performance
by the CFPB of its mission and duties;
(9) The need to avoid involving the CFPB in controversial issues not
related to its mission;
(10) Compliance would interfere with supervisory examinations,
compromise the CFPB's supervisory functions or programs, or undermine
public confidence in supervised financial institutions; and
(11) Compliance would interfere with the CFPB's ability to monitor
for risks to consumers in the offering or provision of consumer
financial products and services.
(b) Among those demands and requests in response to which compliance
will not ordinarily be authorized are those with respect to which any of
the following factors, inter alia, exist:
(1) Compliance would violate a statute or applicable rule of
procedure;
(2) Compliance would violate a specific regulation or Executive
order;
(3) Compliance would reveal information properly classified in the
interest of national security;
(4) Compliance would reveal confidential or privileged commercial or
financial information or trade secrets without the owner's consent;
(5) Compliance would compromise the integrity of the deliberative
processes of the CFPB;
(6) Compliance would not be appropriate or necessary under the
relevant substantive law governing privilege;
(7) Compliance would reveal confidential information; or
(8) Compliance would interfere with ongoing investigations or
enforcement proceedings, compromise constitutional rights, or reveal the
identity of a confidential informant.
(c) The CFPB may condition disclosure of official information
pursuant to a request or demand on the entry of an appropriate
protective order.
Sec. 1070.38 Prohibition on providing expert or opinion testimony.
(a) Except as provided in this section, and subject to 5 CFR
2635.805, CFPB employees or former employees shall not provide opinion
or expert testimony based upon information which they acquired in the
scope and performance of their official CFPB duties, except on behalf of
the CFPB or the United States or a party represented by the CFPB, or the
Department of Justice, as appropriate.
(b) Any expert or opinion testimony by a former employee of the CFPB
shall be excepted from paragraph (a) of this section where the testimony
involves only general expertise gained while employed at the CFPB.
(c) Upon a showing by the requestor of exceptional need or unique
circumstances and that the anticipated testimony will not be adverse to
the interests of the United States, the General Counsel may, consistent
with 5 CFR 2635.805, exercise his or her discretion to grant special,
written authorization for CFPB employees, or former employees, to appear
and testify as expert witnesses at no expense to the United States.
(d) If, despite the final determination of the General Counsel, a
court of competent jurisdiction or other appropriate authority orders
the appearance and expert or opinion testimony of a current or former
CFPB employee, that person shall immediately inform the General Counsel
of such order. If the General Counsel determines that no further legal
review of or challenge to the court's order will be made, the CFPB
employee, or former employee, shall comply with the order. If so
directed by the General Counsel, however, the employee, or former
employee, shall respectfully decline to testify.
Subpart D_Confidential Information
Sec. 1070.40 Purpose and scope.
This subpart does not apply to requests for official information
made pursuant to subparts B, C, or E of this part.
[[Page 1078]]
Sec. 1070.41 Non-disclosure of confidential information.
(a) Non-disclosure. Except as required by law or as provided in this
part, no current or former employee or contractor or consultant of the
CFPB, or any other person in possession of confidential information,
shall disclose such confidential information by any means (including
written or oral communications) or in any format (including paper and
electronic formats), to:
(1) Any person who is not an employee, contractor, or consultant of
the CFPB; or
(2) Any CFPB employee, contractor, or consultant when the disclosure
of such confidential information to that employee, contractor, or
consultant is not relevant to the performance of the employee's,
contractor's, or consultant's assigned duties.
(b) Disclosures to contractors and consultants. CFPB contractors or
consultants may receive confidential information only if such
contractors or consultants certify in writing to treat such confidential
information in accordance with these rules, Federal laws and regulations
that apply to Federal agencies for the protection of the confidentiality
of personally identifiable information and for data security and
integrity, as well as any additional conditions or limitations that the
CFPB may impose.
(c) Disclosure of materials derived from confidential information.
Nothing in this subpart shall limit the discretion of the CFPB to
disclose materials that it derives from or creates using confidential
information to the extent that such materials do not identify, either
directly or indirectly, any particular person to whom the confidential
information pertains.
(d) Disclosability of confidential information provided to the CFPB
by other agencies. Nothing in this subpart requires or authorizes the
CFPB to disclose confidential information that another agency has
provided to the CFPB to the extent that such disclosure contravenes
applicable law or the terms of any agreement that exists between the
CFPB and the agency to govern the CFPB's treatment of information that
the agency provides to the CFPB.
Sec. 1070.42 Disclosure of confidential supervisory information to
supervised financial institutions and their affiliates and by
supervised financial institutions and their affiliates to others.
(a) Discretionary disclosure of confidential supervisory information
to supervised financial institutions and their affiliates. The CFPB may,
in its discretion, and to the extent consistent with applicable law,
disclose confidential supervisory information concerning a supervised
financial institution or its service providers to that supervised
financial institution or to its affiliates.
(b) Disclosure of confidential supervisory information by a
supervised financial institution or its affiliates. Unless directed
otherwise by the Associate Director for Supervision, Enforcement, and
Fair Lending or by his or her delegee:
(1) Any supervised financial institution lawfully in possession of
confidential supervisory information of the CFPB pursuant to this
section may disclose such information, or portions thereof, to its
affiliates and to the following individuals to the extent that the
disclosure of such confidential supervisory information is relevant to
the performance of such individuals' assigned duties:
(i) The directors, officers, trustees, members, general partners, or
employees of the supervised financial institution; and
(ii) The directors, officers, trustees, members, general partners,
or employees of the affiliates of the supervised financial institution.
(2) Any supervised financial institution or affiliate thereof that
is lawfully in possession of confidential supervisory information of the
CFPB pursuant to this section may disclose such information, or portions
thereof, to:
(i) Its certified public accountant, legal counsel, contractor,
consultant, or service provider; or
(ii) Another person, with the prior written approval of the
Associate Director for Supervision, Enforcement, and Fair Lending or his
or her delegee.
[[Page 1079]]
(3) Where a supervised financial institution or its affiliate
discloses confidential supervisory information pursuant to this
paragraph (b) of this section:
(i) The recipient of such confidential supervisory information shall
not, without the prior written approval of the Associate Director for
Supervision, Enforcement, and Fair Lending or his or her delegee,
utilize, make, or retain copies of, or disclose confidential supervisory
information for any purpose, except as is necessary to provide advice or
services to the supervised financial institution or its affiliate; and
(ii) The supervised financial institution or affiliate disclosing
the confidential supervisory information shall take reasonable steps to
ensure that the recipient complies with paragraph (b)(3)(i) of this
section.
Sec. 1070.43 Disclosure of confidential information to law
enforcement agencies and other government agencies.
(a) Required disclosure of confidential information to government
agencies. The CFPB shall:
(1) Disclose a draft of a report of examination of a supervised
financial institution prior to its finalization, in accordance with 12
U.S.C. 5515(e)(1)(C), and disclose a final report of examination,
including any and all revisions made to such a report, to a Federal or
State agency with jurisdiction over that supervised financial
institution, provided that the CFPB receives from the agency reasonable
assurances as to the confidentiality of the information disclosed; and
(2) Disclose confidential consumer complaint information to a
Federal or State agency to facilitate preparation of reports to Congress
required by 12 U.S.C. 5493(b)(3)(C) and to facilitate the CFPB's
supervision and enforcement activities and its monitoring of the market
for consumer financial products and services, provided that the agency
shall first give written assurance to the CFPB that it will maintain
such information in confidence, including in a manner that conforms to
the standards that apply to Federal agencies for the protection of the
confidentiality of personally identifiable information and for data
security and integrity.
(b) Discretionary disclosure of confidential information to
government agencies. (1) Upon receipt of a written request that contains
the information required by paragraph (b)(2) of this section, the CFPB
may, in its sole discretion, disclose confidential information to a
Federal or State agency to the extent that the disclosure of the
information is relevant to the exercise of the agency's statutory or
regulatory authority or, with respect to the disclosure of confidential
supervisory information, to a Federal or State agency having
jurisdiction over a supervised financial institution.
(2) To obtain access to confidential information pursuant to
paragraph (b)(1) of this section, an authorized officer or employee of
the agency shall submit a written request to the General Counsel, who
shall act upon the request in consultation with the CFPB's Associate
Director for Supervision, Enforcement, and Fair Lending or other
appropriate CFPB personnel. The request shall include the following:
(i) A description of the particular information, kinds of
information, and where possible, the particular documents to which
access is sought;
(ii) A statement of the purpose for which the information will be
used;
(iii) A statement certifying and identifying the agency's legal
authority for requesting the documents;
(iv) A statement certifying and identifying the agency's legal
authority for protecting the requested information from public
disclosure; and
(v) A certification that the agency will maintain the requested
confidential information in confidence, including in a manner that
conforms to the standards that apply to Federal agencies for the
protection of the confidentiality of personally identifiable information
and for data security and integrity, as well as any additional
conditions or limitations that the CFPB may impose.
(c) State requests for information other than confidential
information. A request or demand by a State agency for information or
records of the CFPB other than confidential information shall be made
and considered in accordance
[[Page 1080]]
with the rules set forth elsewhere in this part.
(d) Negotiation of standing requests. The CFPB may negotiate terms
governing the exchange of confidential information with Federal or State
agencies on a standing basis, as appropriate.
Sec. 1070.44 Disclosure of confidential consumer complaint information.
Nothing in this part shall limit the discretion of the CFPB, to the
extent permitted by law, to disclose confidential consumer complaint
information as it deems necessary to investigate, resolve, or otherwise
respond to consumer complaints or inquiries concerning financial
institutions or consumer financial products and services.
Sec. 1070.45 Affirmative disclosure of confidential information.
(a) The CFPB may disclose confidential investigative information and
other confidential information, in accordance with applicable law, as
follows:
(1) To a CFPB employee, as that term is defined in Sec. 1070.2 of
this part and in accordance with Sec. 1070.41 of this subpart;
(2) To either House of the Congress or to an appropriate committee
or subcommittee of the Congress, as set forth in 12 U.S.C. 5562(d)(2),
provided that, upon the receipt by the CFPB of a request from the
Congress for confidential information that a financial institution
submitted to the CFPB along with a claim that such information consists
of a trade secret or privileged or confidential commercial or financial
information, or confidential supervisory information, the CFPB shall
notify the financial institution in writing of its receipt of the
request and provide the institution with a copy of the request;
(3) In investigational hearings and witness interviews, as is
reasonably necessary, at the discretion of the CFPB;
(4) In an administrative or court proceeding to which the CFPB is a
party. In the case of confidential investigatory material that contains
any trade secret or privileged or confidential commercial or financial
information, as claimed by designation by the submitter of such
material, or confidential supervisory information, the submitter may
seek an appropriate protective or in camera order prior to disclosure of
such material in a proceeding;
(5) To law enforcement agencies and other government agencies in
summary form to the extent necessary to notify such agencies of
potential violations of laws subject to their jurisdiction; or
(6) As required under any other applicable law.
Sec. 1070.46 Other disclosures of confidential information.
(a) To the extent permitted by law and as authorized by the Director
in writing, the CFPB may disclose confidential information other than as
set forth in this subpart.
(b) Prior to disclosing confidential information pursuant to
paragraph (a) of this section, the CFPB may, as it deems appropriate
under the circumstances, provide written notice to the person to whom
the confidential information pertains that the CFPB intends to disclose
its confidential information in accordance with this section.
(c) The authority of the Director to disclose confidential
information pursuant to paragraph (a) shall not be delegated. However, a
person authorized to perform the functions of the Director in accordance
with law may exercise the authority of the Director as set forth in this
section.
Sec. 1070.47 Other rules regarding the disclosure of confidential
information.
(a) Further disclosure prohibited. (1) All confidential information
made available under this subpart shall remain the property of the CFPB,
unless the General Counsel provides otherwise in writing.
(2) Except as set forth in this subpart, no supervised financial
institution, Federal or State agency, any officer, director, employee or
agent thereof, or any other person to whom the confidential information
is made available under this subpart, may further disclose such
confidential information without the prior written permission of the
General Counsel.
[[Page 1081]]
(3) A supervised financial institution, Federal or State agency, any
officer, director, employee or agent thereof, or any other person to
whom the CFPB's confidential information is made available under this
subpart, that receives from a third party a legally enforceable demand
or request for such confidential information (including but not limited
to, a subpoena or discovery request or a request made pursuant to the
Freedom of Information Act, 5 U.S.C. 552, the Privacy Act of 1974, 5
U.S.C. 552a, or any State analogue to such statutes) should:
(i) Inform the General Counsel of such request or demand in writing
and provide the General Counsel with a copy of such request or demand as
soon as practicable after receiving it;
(ii) To the extent permitted by applicable law, advise the requester
that:
(A) The confidential information sought may not be disclosed insofar
as it is the property of the CFPB; and
(B) Any request for the disclosure of such confidential information
is properly directed to the CFPB pursuant to its regulations set forth
in this part.
(iii) Consult with the General Counsel before complying with the
request or demand, and to the extent applicable:
(A) Give the CFPB a reasonable opportunity to respond to the demand
or request;
(B) Assert all reasonable and appropriate legal exemptions or
privileges that the CFPB may request be asserted on its behalf; and
(C) Consent to a motion by the CFPB to intervene in any action for
the purpose of asserting and preserving any claims of confidentiality
with respect to any confidential information.
(4) Nothing in this section shall prevent a supervised financial
institution, Federal or State agency, any officer, director, employee or
agent thereof, or any other person to whom the information is made
available under this subpart from complying with a legally valid and
enforceable order of a court of competent jurisdiction compelling
production of the CFPB's confidential information, or, if compliance is
deemed compulsory, with a request or demand from either House of the
Congress or a duly authorized committee of the Congress. To the extent
that compulsory disclosure of confidential information occurs as set
forth in this paragraph, the producing party shall use its best efforts
to ensure that the requestor secures an appropriate protective order or,
if the requestor is a legislative body, use its best efforts to obtain
the commitment or agreement of the legislative body that it will
maintain the confidentiality of the confidential information.
(5) No person obtaining access to confidential information pursuant
to this subpart may make a personal copy of any such information, and no
person may remove confidential information from the premises of the
institution or agency in possession of such information except as
permitted under this subpart or by the CFPB.
(b) Additional conditions and limitations. The CFPB may impose any
additional conditions or limitations on disclosure or use under this
subpart that it determines are necessary.
(c) Non-waiver--(1) In general. The CFPB shall not be deemed to have
waived any privilege applicable to any information by transferring that
information to, or permitting that information to be used by, any
Federal or State agency.
(2) Rule of construction. Paragraph (c)(1) of this section shall not
be construed as implying that any person waives any privilege applicable
to any information because paragraph (c)(1) of this section does not
apply to the transfer or use of that information.
Sec. 1070.48 Privileges not affected by disclosure to the CFPB.
(a) In general. The submission by any person of any information to
the CFPB for any purpose in the course of any supervisory or regulatory
process of the CFPB shall not be construed as waiving, destroying, or
otherwise affecting any privilege such person may claim with respect to
such information under Federal or State law as to any person or entity
other than the CFPB.
(b) Rule of construction. Paragraph (a) of this section shall not be
construed as implying or establishing that--
[[Page 1082]]
(1) Any person waives any privilege applicable to information that
is submitted or transferred under circumstances to which paragraph (a)
of this section does not apply; or
(2) Any person would waive any privilege applicable to any
information by submitting the information to the CFPB but for this
section.
Subpart E_The Privacy Act
Sec. 1070.50 Purpose and scope; definitions.
(a) This subpart implements the provisions of the Privacy Act of
1974, 5 U.S.C. 552a (the Privacy Act). The regulations apply to all
records maintained by the CFPB and which are retrieved by an
individual's name or personal identifier. The regulations set forth the
procedures for requests for access to, or amendment of, records
concerning individuals that are contained in systems of records
maintained by the CFPB. These regulations should be read in conjunction
with the Privacy Act, which provides additional information about this
topic.
(b) For purposes of this subpart, the following definitions apply:
(1) The term Chief Privacy Officer means the Chief Information
Officer of the CFPB or any CFPB employee to whom the Chief Information
Officer has delegated authority to act under this part;
(2) The term guardian means the parent of a minor, or the legal
guardian of any individual who has been declared to be incompetent due
to physical or mental incapacity or age by a court of competent
jurisdiction;
(3) Individual means a citizen of the United States or an alien
lawfully admitted for permanent residence;
(4) Maintain includes maintain, collect, use, or disseminate;
(5) Record means any item, collection, or grouping of information
about an individual that is maintained by an agency, including, but not
limited to, his education, financial transactions, medical history, and
criminal or employment history and that contains his name or the
identifying number, symbol, or other identifying particular assigned to
the individual, such as a finger or voiceprint or a photograph;
(6) Routine use means the disclosure of a record that is compatible
with the purpose for which it was collected;
(7) System of records means a group of any records under the control
of an agency from which information is retrieved by the name of the
individual or by some identifying number, symbol, or other identifying
particular assigned to the individual; and
(8) Statistical record means a record in a system of records
maintained for statistical research or reporting purposes only and not
used in whole or in part in making any determination about an
identifiable individual, except as provided by 13 U.S.C. 8.
Sec. 1070.51 Authority and responsibilities of the Chief Privacy
Officer.
The Chief Privacy Officer is authorized to:
(a) Respond to requests for access to, accounting of, or amendment
of records contained in a system of records maintained by the CFPB;
(b) Approve the publication of new systems of records and amend
existing systems of record; and
(c) File any necessary reports related to the Privacy Act.
Sec. 1070.52 Fees.
(a) Copies of records. The CFPB shall provide the requester with
copies of records requested pursuant to Sec. 1070.53 of this subpart at
the same cost charged for duplication of records under Sec. 1070.22 of
this part.
(b) No fee. The CFPB will not charge a fee if:
(1) Total charges associated with a request are less than $5, or
(2) The requester is a CFPB employee or former employee, or an
applicant for employment with the CFPB, and the request pertains to that
employee, former employee, or applicant.
Sec. 1070.53 Request for access to records.
(a) Procedures for making a request for access to records. An
individual's requests for access to records that pertain to that
individual (or to the individual for whom the requester serves as
guardian) may be submitted to the CFPB in writing or by electronic
means.
[[Page 1083]]
(1) If submitted in writing, the request shall be labeled ``Privacy
Act Request'' and shall be addressed to the Chief Privacy Officer,
Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC
20552.
(2) If submitted by electronic means, the request shall be labeled
``Privacy Act Request'' and the request shall be submitted as set forth
at the CFPB's Web site, http://www.consumerfinance.gov.
(b) Content of a request for access to records. A request for access
to records shall include:
(1) A statement that the request is made pursuant to the Privacy
Act;
(2) The name of the system of records that the requester believes
contains the record requested, or a description of the nature of the
record sought in detail sufficient to enable CFPB personnel to locate
the system of records containing the record with a reasonable amount of
effort;
(3) Whenever possible, a description of the nature of the record
sought, the date of the record or the period in which the requester
believes that the record was created, and any other information that
might assist the CFPB in identifying the record sought (e.g., maiden
name, dates of employment, account information, etc.).
(4) Information necessary to verify the requester's identity
pursuant to paragraph (c) of this section;
(5) The mailing or email address where the CFPB's response or
further correspondence should be sent.
(c) Verification of identity. To obtain access to the CFPB's records
pertaining to a requester, the requester shall provide proof to the CFPB
of the requester's identity as provided below.
(1) In general, the following will be considered adequate proof of a
requester's identity:
(i) A photocopy of two forms of identification, including one form
of identification that bears the requester's photograph, and one form of
identification that bears the requester's signature;
(ii) A photocopy of a single form of identification that bears both
the requester's photograph and signature; or
(iii) A statement swearing or affirming the requester's identity and
to the fact that the requester understands the penalties provided in 5
U.S.C. 552a(i)(3).
(2) Notwithstanding paragraph (c)(1) of this section, a designated
official may require additional proof of the requester's identity before
action will be taken on any request, if such official determines that it
is necessary to protect against unauthorized disclosure of information
in a particular case. In addition, if a requester seeks records
pertaining to an individual in the requester's capacity as that
individual's guardian, the requester shall be required to provide
adequate proof of the requester's legal relationship before action will
be taken on any request.
(d) Request for accounting of previous disclosures. An individual
may request an accounting of previous disclosures of records pertaining
to that individual in a system of records as provided in 5 U.S.C.
552a(c). Such requests should conform to the procedures and form for
requests for access to records set forth in paragraphs (a) and (b) of
this section.
Sec. 1070.54 CFPB procedures for responding to a request for access.
(a) Acknowledgment and response. The CFPB will provide written
acknowledgement of the receipt of a request within twenty (20) business
days from the receipt of the request and will, where practicable,
respond to each request within that twenty (20) day period. When a full
response is not practicable within the twenty (20) day period, the CFPB
will respond as promptly as possible.
(b) Disclosure. (1) When the CFPB discloses information in response
to a request, the CFPB will make the information available for
inspection and copying during regular business hours as provided in
Sec. 1070.13 of this part, or the CFPB will mail it or email it the
requester, if feasible, upon request.
(2) The requester may bring with him or her anyone whom the
requester chooses to see the requested material. All visitors to the
CFPB's buildings must comply with the applicable security procedures.
(c) Denial of a request. If the CFPB denies a request made pursuant
to Sec. 1070.53 of this subpart, it will inform
[[Page 1084]]
the requester in writing of the reason(s) for denial and the procedures
for appealing the denial.
Sec. 1070.55 Special procedures for medical records.
If an individual requests medical or psychological records pursuant
to Sec. 1070.53 of this subpart, the CFPB will disclose them directly
to the requester unless the CFPB determines that such disclosure could
have an adverse effect on the requester. If the CFPB makes that
determination, the CFPB shall provide the information to a licensed
physician or other appropriate representative that the requester
designates, who shall disclose those records to the requester in a
manner he or she deems appropriate.
Sec. 1070.56 Request for amendment of records.
(a) Procedures for making request. (1) If an individual wishes to
amend a record that pertains to that individual in a system of records,
that individual may submit a request in writing or by electronic means
to the Chief Privacy Officer, as set forth in Sec. 1070.53(a). The
request shall be labeled ``Privacy Act Amendment Request.''
(2) A request for amendment of a record must:
(i) Identify the system of records containing the record for which
amendment is requested;
(ii) Specify the portion of that record requested to be amended; and
(iii) Describe the nature and reasons for each requested amendment.
(3) When making a request for amendment of a record, the CFPB will
require a requester to verify his or her identity under the procedures
set forth in Sec. 1070.53(c) of this subpart, unless the requester has
already done so in a related request for access or amendment.
(b) Burden of proof. In a request for amendment of a record, the
requester bears the burden of proving by a preponderance of the evidence
that the record is not accurate, relevant, timely, or complete.
Sec. 1070.57 CFPB review of a request for amendment of records.
(a) Time limits. The CFPB will acknowledge a request for amendment
of records within ten (10) business days after it receives the request.
In the acknowledgment, the CFPB may request additional information
necessary for a determination on the request for amendment. The CFPB
will make a determination on a request to amend a record promptly.
(b) Contents of response to a request for amendment. When the CFPB
responds to a request for amendment, the CFPB will inform the requester
in writing whether the request is granted or denied, in whole or in
part. If the CFPB grants the request, it will take the necessary steps
to amend the record and, when appropriate and possible, notify prior
recipients of the record of its action. If the CFPB denies the request,
in whole or in part, it will inform the requester in writing:
(1) Why the request (or portion of the request) was denied;
(2) That the requester has a right to appeal; and
(3) How to file an appeal.