Reg Z: Purpose and Application

Purpose Statement

Collects information that reveals whether the purpose of the loan is personal or business.

Does Reg Z limit the amount of interest that Bayside financial is allowed to charge borrowers for home mortgages?

No. They fully disclose the full costs of borrowing, but it does not regulate the amounts that are charged to the borrowers.

Annual Percentage Rate (APR) -

The total cost of the loan expressed as an annual rate, or an effective interest rate.

What are the 4 requirements of disclosures in Reg Z ?

1. The Loan is for personal, family, or household use (it is not of property not owner occupied) 2. The loan is subject to a finance charge; 3. The borrower is an individual; 4. The Loan amount is $54,600 or less in 2017(unless secured by a real Estate or dwelling). A Loan amount of $30,000 or more is not a requirement of Reg Z. If a dwelling is securing the loan, then disclosures must be provided within 3 days from the application.

Advertisement

A commercial message in any medium that promotes a credit transaction. Reg Z covers any advertisement of a loan that is covered by the regulation.An advertisement is defined as "a commercial message in any medium that promotes directly or indirectly a credit transaction." This includes any message appearing in print, radio, television, a public address system, Internet, e-mail, telephone, Point of Sale display, letter soliciting business, and so forth. Reg Z stipulates that all advertising must be clear and conspicuous. There are, however, no specific rules regarding a specific format or type size. However, the following do apply: The advertisement can only promote actually available terms If credit terms are listed, they must be terms which are actually available or which will be arranged by the creditor. Annual Percentage Rate If rates are advertised, they must always be described as Annual Percentage Rate, or by the abbreviation APR. Additional rates, such as the simple interest rate, may

Violations - Penalties "When in doubt, provide Reg Z disclosures."

If a significant violation has occurred, in some cases borrowers may also be able to revoke a loan transaction and get all the interest back that has been charged for the loan. Violations Reg Z violations usually occur when incorrect disclosures are provided (lender has no more than 2 years to revise them and reimburse amounts to every borrower), Because the disclosure rules are quite complex. Many violations occur for one of the following reasons: The disclosure statement is not provided prior to obligating the borrower on the loan Prepaid finance charges are not deducted from the face amount of the note when calculating the amount financed Disclosures, including rescission documents, are inaccurate or improperly prepared The law also allows borrowers to bring class action lawsuits, under which creditors may be sued for $500,000 (or 1% of their net worth, whichever is less) if there is gross negligence leading to a pattern or practice of Reg Z errors.

Closed-End Triggering Terms

If any of the triggering terms for closed-end loans are included, the following must also be disclosed: • The amount or percentage of the down payment. Again, however, this disclosure is required only if the advertisement is for a "credit sale." • Representative terms of repayment which means providing the terms of a normal transaction being advertised. This normally includes: • Term of repayment (36 months, 48 months, etc.) • The APR • Payment amount • The Annual Percentage Rate. If the rate may be increased after consummation, that fact must be disclosed

Mixed Purpose Loans

In a situation when a loan has both personal and business purposes, the primary purpose determines Reg Z applicability. Determining the primary purpose can get a little tricky, however. Reg Z permits you to determine the primary purpose of the loan in any reasonable manner you choose. Usually this can be determined by how much of the proceeds are going to the personal portion of the loan versus the portion going to the business purpose. If more than 50% of the proceeds are going toward the personal portion of the loan, then Reg Z applies; if more than 50% is business purpose, it doesn't. If it's not possible to use proceeds to make the determination, then any other reasonable basis could be used, like square footage of the building in this example. Be sure to document your rationale and conclusion, particularly if you conclude that the loan is a business- purpose loan.

Shades of Gray

In the previous section of this tutorial, you learned that one of the four requirements for Reg Z to apply is that the proceeds of the loan must be used primarily for personal, family, or household use. It's usually fairly clear when a loan is for personal use. For example, some of the more obvious examples of loans for personal use are: To buy a new home To take a vacation To purchase a family car

Installment loans

Installment loans - Another term for closed-end credit. The total amount, including finance charges, is known at the time of closing and a payment schedule must be disclosed showing the number and amount of payments that must be made.

Annual Percentage Rate

One of the most important disclosures that you must provide to consumers is the Annual Percentage Rate (APR) of the loan product that you are offering. APR calculation is quite complex. In this tutorial, You should refer to the system your financial institution has in place for proper, accurate calculation of a loan's APR. The Purpose of Reg Z

What is Open-End Credit?

Open-end loans are also known as revolving credit plans. When we use the term "revolving credit" in this course, we'll be referring to any type of open-end loan. The following are true of open-end credit arrangements •They're ongoing plans, with repeated transactions contemplated. •The consumer can borrow money, repay part or all of it, and then borrow again up to the established credit limit. Revolving loans often have "blanket" terms. They have standard pricing and terms for all applicants. The disclosures remain the same from one loan to the next and can be prepared in advance of the transaction. Standard disclosure forms are often used so it's hard for anything to go wrong with any specific loan disclosure

Truth In Lending Act - TILA

Passed by Congress in 1968, this statute is implemented by the Consumer Financial Protection Bureau's Regulation Z.The TILA was implemented by the Federal Reserve Board's enactment of Regulation Z (12 CFR Part 226). The terms within the TILA apply to most types of credit, including closed-end credit, more commonly referred to as an installment loan, and open-ended revolving credit, such as a credit card or line of credit. The regulations are designed to guard consumers against inaccurate or unfair practices on the part of the lender. Different states and industries have their own variations of TILA, but the chief feature remains the proper disclosure of key information to protect both the consumer and the lender in credit transactions.

What is the role of the Reg Z?

Purpose statement - Collects information that reveals whether the purpose of the loan is personal or business. Lenders have to provide meaningful disclosures about Loan Terms - Disclosure Statement before the Loan Docs are executed or the first transaction occurs in open-end transactions. Applicants would be able to compare loan costs at different institutions.

The Purpose of Reg Z

Reg Z requires lenders to disclose information about a loan in a way that allows applicants to compare loan costs at different institutions, all of which were calculated on the same basis. With Reg Z, consumers now have a convenient "yardstick" to use in comparing credit alternatives. Reg Z seeks to take away much of the confusion that exists when borrowing money. It helps consumers make the best decision concerning extremely significant.

Disclosure Statements

Reg Z requires lenders to provide meaningful disclosures about loan terms. This information must be given to an applicant on a "disclosure statement" before the loan documents (promissory note, credit agreement, mortgage, etc.) are executed, or before the first transaction occurs in open-end transactions. If the loan is to be secured by a dwelling, disclosures must be provided within three days of the date the application is received.

Violations "When in doubt, provide Reg Z disclosures."

Reg Z violations usually occur when incorrect disclosures are provided and happen because the disclosure rules are quite complex. Compliance is not only important to your organization, but to you personally as well. Penalties for violations can include: • Personal fines • Class action law suits • Reimbursement to borrowers • Court costs/attorney fees

Regulation Z

Regulation Z standardizes the disclosure of essential information about the terms and costs of a loan provided to consumers. Regulation Z is jointly enforced by the U.S. Federal Reserve Board and the Consumer Financial Protection Bureau (CFPB), though the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 shifted most of enforcement powers towards the CFPB.

Key Disclosures

Remember that the underlying purpose of Reg Z is to help consumers know what they are really paying for, so they can accurately compare different loans. The way Reg Z does this is with two key disclosures: Finance Charge • The finance charge is the total of all the charges assessed as a condition for obtaining the loan. • The finance charge shows the consumer the total cost of the loan in dollars and cents. Annual Percentage Rate (APR) • The Annual Percentage Rate, commonly called APR, is the total cost of the loan expressed as an annual rate, or effective interest rate. It tells the consumer the relative cost of the loan over time. • The APR helps consumers compare the cost of loans from different lenders with different credit plans. Reg Z requires disclosure of the finance charge and Annual Percentage Rate (APR) regardless of whether you are granting a revolving credit line or an installment loan.

Retail Lender

Retail lenders are either federally or state chartered and regulated as such. Retail lending sometimes comes under increased scrutiny during periods of increased borrower defaults. Some think that retail lenders should have a fiduciary responsibility to the individuals that they lend to. Others believe that borrowers should be financially educated enough to make wise borrowing decisions.

Regulation Z

The Consumer Financial Protection Bureau's regulation implementing the Truth in Lending Act, it requires lenders to disclose information about a loan in a way that allows applicants to compare loan costs at different institutions. Regulation Z Safety Rule - This is used when there is a legitimate question whether the purpose of the loan is a consumer or commercial purpose. When in doubt, provide Regulation Z disclosures."

Joan and Fernando are applying for a home mortgage loan at bayside Financial. If the Loan is secured by a dwelling, within how many days of applying for the loan does Reg Z require loan disclosures to the Allen's?

Disclosures must be provided within 3 days of the date the application is received

Owner-occupied -

Used in determining whether a loan is to purchase or rehabilitate rental property. To obtain "owner-occupied" status, the owner must live in one of the units or dwellings that are being purchased or improved for a minimum of 14 days during the coming year.

when a loan is considered revolving credit or open-end credit?

When they are ongoing and allow a consumer to borrow money, repay part or all of it, and then borrow again. Revolving loans - Another term for open-end credit, these loans normally have standard pricing and terms for all similar applicants.

Notice of Transfer of Mortgage Loans

Whenever a mortgage loan is sold or otherwise transferred to a new third party, a notice must be provided to the borrower. This notice must be provided within 30 days of the transfer by the purchaser or transferee of the loan, not the entity selling or transferring the loan. For applications received on or after October 3, 2015, the Partial Payment Disclosure notice must also be provided.Required to be provided by the new owner or transferee of a mortgage loan (whether closed- or open-ended) secured by the borrower's principal dwelling. The notice is required when legal title of the loan itself, not merely servicing rights, changes hands, but includes sales and transfers to affiliates. The notice includes information on the loan, new owner, and where the borrower may contact the new owner and where the transfer was recorded.

Truth In Lending Act

Why does Reg Z distinguish between business and consumer credit? The idea behind Reg Z is that consumers need Reg Z protection more than businesses because consumers borrow less frequently than businesses, and consumers are less knowledgeable about financial matters. Risk 2 As long as our advertising is not blatantly inaccurate or deceptive, isn't it up to the consumer to decide whether our loan products are best for them? Reg Z disclosures allow consumers to have all of the information that they need to compare similar loan products in order to determine which product best suits their needs. Risk 3 What should we do if we cannot determine whether a loan is for business or consumer purposes? When in doubt as to whether or not the proceeds are to be used for consumer or business purposes, provide Reg Z disclosures. It doesn't hurt to disclose even when it's not necessary.

What is Closed-End Credit?

Also known as installment credit; this type of loan doesn't allow the borrower to "re-borrow" money that has already been repaid. The term of the loan is established in advance, as is the amount advanced, which is repaid over the term of the loan.Closed-end loans normally don't allow the borrower to "re-borrow" money that has already been repaid. Closed-end loans are also known as installment loans. The following are true of closed-end loans: • They have a fixed, predetermined principal amount • They have a predetermined repayment schedule • The entire loan balance is given to the borrower at the beginning of the loan term (or in agreed-to installments) and is paid back over a fixed period of time Installment loans usually have unique terms. Every loan may be different: they may have a differing principal amount, interest rate, fees, repayment schedule, and so on. Each loan requires specific calculations before it can be properly disclosed. That gives rise to the possibility of many more errors.

Open-end loans

Also known as revolving credit; the consumer can borrow funds, repay part or all of them, and then borrow again up to the established credit limit in these arrangements.

Vacant Land

An investment loan for purchasing and carrying vacant land is not automatically considered either personal or business-purpose. If, on the other hand, the borrower purchased that land and does not obtain an additional loan to build her principal dwelling, then you should rely on the five factors we discussed above to determine whether the investment is business or personal use.

Student Loans

Certain types of loans are exempt from Reg Z disclosures, so you may rule them out. E.G., many types of student loans are exempt, at least during the period of schooling. Specifically, loans originated under the following federal statutory programs are exempt from Reg Z disclosure: • The National Direct Student Loan Program • Auxiliary Loans to Assist the Students (also known as PLUS) The Guaranteed Student Loan Program

Student Loans

Certain types of loans are exempt from Reg Z disclosures, so you may rule them out. Most student loans have this exemption because other laws already require adequate disclosures. Please note, however, that upon graduation or termination of schooling, full disclosure must be made.

Education loan

Closed-end loans having an express purpose of paying for post-secondary education expenses follow additional rules under Reg Z. There are 3 separate disclosures that must be provided during the lending process, including a right to cancel the loan for 3 days after closing without penalty. The borrower must also sign a self-certification form that contains information about education costs and financial aid. In addition, the lender must guarantee the rate and terms of such loans for 30 days after approval to give the applicant time to decide whether or not to accept.

Rental Properties

Deciding whether a loan is for personal or business use can be difficult when dealing with investments. Reg Z, however, does provide some specific rules when a loan is used to purchase or improve rental property. The rules differ depending on the number of units purchased and whether or not the rental property is "owner-occupied." To be owner-occupied, the owner must live in one of the units or dwellings that are being purchased or improved for a minimum of 14 days during the coming year. These 14 days need not be consecutive; a borrower coming to the property and staying every weekend would still make the property owner-occupied. For a loan to purchase owner-occupied rental property to be considered consumer credit, the borrower must be purchasing only one or two units. If the borrower is purchasing three or more units, the purpose is considered business credit and is not subject to disclosure under Reg Z, regardless of whether or not the borrower is occupying one of the units.

Example

Frank and Molly are consumers searching for a home loan. After visiting several financial institutions in their home town, they have assembled a large collection of advertisements and other documents for the various loan products that these financial institutions offer. However, without Reg Z, there are no standard disclosures, so while Frank and Molly have many different loans to choose from, there is no simple way to compare them. Each loan has slightly different loan fees, insurance requirements, interest rates, and so on. These differences lead to confusion, and Frank and Molly are unable to determine which loan is the best loan for their specific needs. In their confusion over what the various numbers and percentages in the various disclosures actually mean, Frank and Molly end up applying for and accepting a loan that seems like a good deal, only to discover that this loan will end up costing them several thousand dollars more throughout the life of the loan than some of the other loans they considered. Reg Z has gone through many revisions over the years, such as the recent change in oversight from the Federal Reserve to the Consumer Financial Protection Bureau (CFPB), but its basic function remains the same. A Convenient "Yardstick" Reg Z requires lenders to disclose information about a loan in a way that allows applicants to compare loan costs at different institutions, all of which must be calculated on the same basis. For example, in a closed-end transaction, the amount financed and the amount of any payment must be expressed as a dollar amount. In another example, in open-end credit plans, the disclosure given before the first transaction may express a cash advance fee as a percentage of each cash advance. These and other rules allow consumers to make an informed decision before accepting a loan that may not be in their best interest.

Non Owner-Occupied Rental Properties

If a loan's primary purpose is to acquire, maintain, or improve rental property, and the property is not expected to be occupied by the owner at least 14 days in the coming year, you may automatically consider the loan to be business-purpose and exempt from Reg Z requirements.

What is the principal component of a loan's total finance charge?

It is the interest. Finance charge includes other fees that are imposed on the consumer as a condition for making the loan.

What is a finance charge?

It is the total of all charges assessed as a condition for making the loan, in dollars and cents. The Annual Percentage Rate (APR) is the total cost of the Loan expressed as an effective interest rate. Finance Charges are the total dollar amount the loan will cost the consumer.

Consumer Protections under the Truth in Lending Act

It regulates what companies can advertise & say about the benefits of their loans or services. E.g. borrowers considering an adjustable-rate mortgage must be offered specific reading materials from the Federal Reserve Board to ensure they understand the parameters of an ARM.

Agriculture Loans

Loans that are used primarily for agricultural purposes are also exempt from Reg Z, regardless of amount and even if they are secured by real estate. Congress has determined that loans for the purpose of agriculture are not to be considered consumer credit

Shades of Gray

Most business-purpose loans are also fairly straightforward: To buy a 30-unit apartment complex To buy Christmas tree inventory for a tree lot To buy a fast food franchise

Peter Corleone is applying for a Loan with Bayside Financial. He is looking to borrow $350,000.00 to purchase a 200-acre farm that includes a 4,000 square foot house that Peter and his family plan to live in. Peter plans to grow corn on the land, and farming the land will be his primary occupation. Is this loan covered by Reg Z?

No. Even if the borrower's personal residence will be on the property, as long as the primary purpose of the loan is agricultural, Reg Z does not apply

Oral Responses

Nothing in the regulation requires a creditor to respond orally to a consumer's request for information. If a creditor chooses to respond orally, only the Annual Percentage Rate must be stated. Other information may certainly be provided to the consumer, but if a rate is stated by the creditor, it must be in terms of the Annual Percentage Rate (although other information, such as the simple interest rate and terms, may be discussed as well).

Items Not Governed by the Truth in Lending Act

The TILA does not regulate the interest rates a lender may charge for services. Additionally, the act does not dictate to whom credit can be extended beyond standard laws against discrimination

Consumer Protections under the Truth in Lending Act - II

The TILA prevents loan originators from receiving compensation for issuing mortgages where the compensation is based on the existence of certain terms and conditions within the loan documents. The TILA also forbids lenders from steering potential buyers to loans that financially benefit the lender. Instead, lenders must show potential borrowers all available, applicable loans.

Consumer Protections under the Truth in Lending Act - III

The TILA provides the right of rescission. This gives borrowers a three-day period where they can reconsider their decision and decide not to take the loan without any risk of loss to personal funds. The right of rescission allows borrowers who were subjected to high-pressure tactics to cease the proceedings. This right can be applied to any loan a consumer may pursue

'Unlawful Loan'

The Truth in Lending Act applies to most types of credit, whether it be closed-end credit (such as an auto loan or mortgage) or open-ended credit (such as a credit card). The Act regulates what companies can advertise and say about the benefits of their loans or services.

Application

The Truth in Lending Act is consumer legislation, so it only affects consumer credit transactions. There is on limited instance: Credit cards - where businesses are covered. There are four requirements that a loan must meet to be considered consumer credit and therefore be subject to Reg Z disclosure requirements. These four requirements are: 1. The borrower is a natural person (an individual person: not a corporation, partnership, trust, or other non-individual organization) 2. The loan is for an amount of $54,600 or less in 2017 (unless secured by real estate or personal property used, or to be used as the consumer's principal dwelling or a personal residence) 3. The loan is subject to finance charge (or is payable by written agreement in more than four installments) 4. The loan is made primarily for personal, family, or household use

Correlation between Reg Z and TILA

The Truth in Lending Act, of which Regulation Z is part of, was enacted and updated several times as a result of deceiving practices by lenders, which provided misleading information to consumers about interest rates, hidden finance fees and other charges.

Closing Disclosure

The new final disclosure that reflects the actual terms and costs of the transaction. The disclosure was introduced under the TILA-RESPA Integrated Disclosure rule and combined and replaced the HUD-1 and the Final Truth-in-Lending disclosures

loan Estimate

The new form introduced under the TILA-RESPA Integrated Disclosure rule that is designed to provide disclosures that will be helpful to consumers in understanding the key features, costs, and risks of a mortgage loan. It combines and replaces RESPA's Good Faith Estimate and Regulation Z's initial Truth-in-Lending disclosure.

Finance charge

The total of all charges assessed by the lender as a condition for making the loan.

Special Rules for Home Equity Plans

There are even more requirements for advertisements of loans secured by dwellings and home equity line of credit plan advertising. Many of the critical initial disclosure elements must be made in any advertisement containing triggering terms.

Business Credit

This is a loan with a commercial, or business purpose. There are special rules that cover loans to purchase or rehabilitate rental property, where some are considered business credit, some are considered consumer credit.

Consumer Credit

This is a loan with a personal, family, or household purpose. There are special rules that cover loans to purchase or rehabilitate rental property, where some are considered business credit and some are considered consumer credit.

Investment Loans Remember: the closer the fit between the loan and the borrower's occupation, the greater the chance that its purpose is business, not personal.

To determine whether a loan's purpose is "personal" or "business." This is especially true when the purpose of a loan is investment. The following questions will help determine whether the primary purpose of a loan is business or personal. 1. How closely related is the loan to the borrower's occupation? 2. How actively will the borrower personally manage the investment? 3. How significant is the likely income from this investment compared to the total income of the debtor? 4. What is the size of the transaction? 5. What is the borrower's statement of purpose?

Henry Jones' son Adam has been accepted to a prestigious art academy instead of the public elementary school close to his home. A $10,000 personal loan to pay for his son's tuition that is secured by henry's business assets would be subject to Regulation Z

Yes. It is the purpose of the loan, not the collateral, which determines if Reg Z applies. The purpose here is clear even though the collateral is business related.

Would you say that an $18,000 loan to Arnold Jackson for a new family car is subject to Reg Z?

Yes. or when in doubt provide the Reg Z disclosure