TILA: Subpart A and B
Grace Period
"grace period" is defined as a period within which any credit extended may be repaid without incurring a finance charge due to a periodic interest rate.
When determining whether credit is for consumer purposes, the creditor must evaluate all of the following:
- Any statement obtained from the consumer describing the purpose of the proceeds. - The consumer's primary occupation and how it relates to the use of the proceeds. - Personal management of the assets purchased from proceeds. - The size of the transaction. - The amount of income derived from the property acquired by the loan proceeds relative to the borrower's total income. Creditors should consider all five factors before determining that disclosures are not necessary. Normally, no one factor by itself is sufficient reason to determine the applicability of Regulation Z
Accuracy Tolerance: Recession rights after three business day rescission period.
- Disclosed finance charge is considered accurate if it is not understated by more then one-half of 1 percent of the credit extended or $100, whichever is greater. - Total payments for transactions is considered accurate for if it is understated by no more then one-half of 1 percent of the face amount of the note or $100, whichever is greater. - Disclosed finance charge and total payments are considered accurate if the amount disclosed was greater than the amount required to be disclosed.
Billing Error Resolution- A billing error notice is a written notice from a consumer that:
- Is received by a creditor at the address disclosed no later than 60 days after the creditor transmitted the first periodic statement that reflects the alleged billing error; - Enables the creditor to identify the consumer's name and account number; and - 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.
Examples of fees/terms classified as Significant Changes include:
- Penalty fees; - Transaction fees; - Fees imposed for the issuance or availability of the open-end plan; - Grace period; and - Balance computation method
Regulation Z Coverage
- Purpose of the credit for personal, family or household use - the consumer credit extended to a consumer - the consumer credit extended by a creditor - the loan or Credit plan secured by real property, a coop unit, or a dwelling - the amount financed or credit limit is at or below the annual threshold limit
APR is a function of:
- The amount finance, which is not necessarily equivalent to the loan amount. - The finance charge, which is not necessarily equivalent to the total interest amount. - Payment Schedule, which does not necessarily include only principal and interest.
Until a billing error is resolved, the following rules apply:
- 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) - The creditor or its agent is also prohibited from making or threatening 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 - 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
Accuracy Tolerance: Credit secured by real property or dwelling:
- The disclosed finance charge is considered accurate if it is not understated by more than $100. - Overstatements are not violations
Tolerance for disclosures. After the initiation of foreclosure on the consumer's principal dwelling that secures the credit obligation:
- The disclosed finance charge is considered accurate if it is understated by no more than $35. - The total of payments for transactions is considered accurate for purposes of this section if it is understated by no more than $35. - The disclosed finance charge and the total of payments are considered accurate if the amount disclosed was greater than the amount required to be disclosed
If an APR or finance charge is disclosed incorrectly, the error is not, in itself, a violation of the regulation if:
- The error resulted from a corresponding error in a calculation tool used in good faith by the financial institution. - Upon discovery of the error, the financial institution promptly discontinues use of that calculation tool for disclosure purposes. - The financial institution notifies the CFPB in writing of the error in the calculation tool. When a financial institution claims a calculation tool was used in good faith, the financial institution assumes a reasonable degree of responsibility for ensuring that the tool in question provides the accuracy required by the regulation
Examples of prepaid finance charges
- borrower's points, - loan origination fees, - real estate/construction inspection fees, - odd days' interest (interest attributable to part of the first payment period when that period is longer than a regular payment) - mortgage guarantee insurance fees paid to the Federal Housing Administration (FHA), - PMI paid to such companies as the Mortgage Guaranty Insurance Corporation (MGIC), - and, in non-real-estate transactions, credit report fees
Accuracy Tolerance: Refinancing, one percent tolerance for the initial and subsequent refinancing's of residential mortgage transactions when the new loan is made at a different financial institution.
- disclosed finance charge is considered accurate if it is not understated by more than 1 percent of the credit extended or $100, whichever is greater - The total of payments for transactions is considered accurate for purposes of this section if it is understated by no more than 1 percent of the face amount of the note or $100, whichever is greater - The disclosed finance charge and the total payments are considered accurate if the amount disclosed was greater than the amount required to be disclosed
Institution is not a creditor and Regulation Z does not apply unless at least one of the following tests is met:
1. The institution extends consumer credit regularly and a. The obligation is initially payable to the institution and b. The obligation is either payable by written agreement in more than four installments or is subject to a finance charge. 2. The institution is a card issuer that extends closed-end credit that is subject to a finance charge or is payable by written agreement in more than four installments. 3. The institution is not the card issuer, but it imposes a finance charge at the time of honoring a credit card.
Computation Method: Daily Balance Method
A daily periodic rate is applied to either the balance on each day in the cycle or the sum of the balances on each of the days in the cycle. If a daily periodic rate is multiplied by the balance on each day in the billing cycle, the finance charge is the sum of the products. If the daily periodic rate is multiplied by the sum of all the daily balances, the result is the finance charge
Right to rescind. After the initiation of foreclosure on the consumer's principal dwelling that secures the obligation, the consumer can rescind if
A mortgage broker fee that should have been included in the finance charge was not included; or The creditor did not provide the properly completed appropriate model form, or a substantially similar notice of rescission.
Pre-Computed finance Charge
A precomputed finance charge includes, for example, interest added to the note amount that is computed by the add-on, discount, or simple interest methods. If reflected in the face amount of the debt instrument as part of the consumers obligation, finance charges that are not viewed as prepaid finance charges are treated as precomputed finance charges that are earned over the life of the loan.
Prepaid Finance Charges
A prepaid finance charge is any finance charge paid separately to the financial institution or to a third party, in cash or by check before or at closing, settlement, or consummation of a transaction, or withheld from the proceeds of the credit at any time. Prepaid finance charges effectively reduce the amount of funds available for the consumer's use, usually before or at the time the transaction is consummated.
Exempt Transactions
Credit extended primarily for a business, commercial, or agricultural purpose; Credit extended to other than a natural person (including credit to government agencies or instrumentalities); NOTE: Credit extended to trusts established for tax or estate planning purposes or to land trusts is considered to be extended to a natural person for purposes of the definition of "consumer". Credit in excess of an annually adjusted threshold not secured by real property or by personal property used or expected to be used as the principal dwelling of the consumer; • Public utility credit; • Credit extended by a broker-dealer registered with the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), involving securities or commodities accounts; • Home fuel budget plans not subject to a finance charge; and • Certain student loan programs.
Open-End: Payments
Creditors are required to 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. If a creditor fails to credit a payment 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. If card issuer issues material change in the address for receiving/handling payments and changes cause material delay crediting the payment, 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.
Subsequent Disclosures: For Open-End, not home-secured, the following applies:
Creditors are required to provide consumers with 45 days' advance written notice of rate increases and other significant changes to the terms of their credit card account agreements. The list of "significant changes" includes most fees and other terms that a consumer should be aware of before use of the account. A creditor may suspend account privileges, terminate an account, or lower the credit limit without notice. However, a creditor that lowers the credit limit may not impose an over limit fee or penalty rate as a result of exceeding the new credit limit without a 45-day advance notice that the credit limit has been reduced. For significant changes in terms (with the exception of rate changes, increases in the minimum payment, certain changes in the balance computation method, and when the change results from the consumer's failure to make a required minimum periodic payment within 60 days after the due date), a creditor must also provide consumers the right to reject the change. If the consumer does reject the change prior to the effective date, the creditor may not apply the change to the account
Open-End: Credit Cards, timing of periodic statement requirements
For credit card accounts under an open-end (not home-secured) consumer credit plan, creditors must adopt reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days prior to the payment due date disclosed on the periodic statement and that payments are not treated as late for any purpose if they are received within 21 days after mailing or delivery of the statement. Additionally, creditors must adopt reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days prior to the date on which a grace period (if any) expires and that finance charges are not imposed as a result of the loss of a grace period if a payment is received within 21 days after mailing or delivery of a statement.
Timely Settlement of Estates
Issuers are required to establish procedures to ensure that any administrator of an estate can resolve the outstanding credit card balance of a deceased account holder in a timely manner. If an administrator requests the amount of the balance: - The issuer is prohibited from imposing additional fees on the account; - The issuer is required to disclose the amount of the balance to the administrator in a timely manner (safe harbor of 30 days); and - If the balance is paid in full within 30 days after disclosure of the balance, the issuer must waive or rebate any trailing or residual interest charges that accrued on the balance following the disclosure.
Subsequent Disclosures': Changes that do not require advance written notice
Reductions of finance charges; • Termination of account privileges resulting from an agreement involving a court proceeding; • Increase in an APR upon expiration of a specified period of time previously disclosed in writing; • Increases in variable APRs that change according to an index not under the card issuer's control; and • Rate increases due to the completion of, or failure of a consumer to comply with, the terms of a workout or temporary hardship arrangement, if those terms are disclosed prior to commencement of the arrangement.
Change in Terms Notices for Home Equity Plans
Servicers are required to provide consumers with 15 days' advance written notice of a change to any term required to be disclosed. Notice is not required when the change involves a reduction of any component of a finance charge or other charge or when the change results from an agreement involving a court proceeding If the creditor prohibits additional extensions of credit or reduces the credit limit in certain circumstances (if permitted by contract), a written notice must be provided no later than three business days after the action is taken and must include the specific reasons for the action. If the creditor requires the consumer to request reinstatement of credit privileges, the notice also must state that fact.
Open-End: Finance Charge Resulting from Two or More Periodic Rates
Some financial institutions use more than one periodic rate in computing the finance charge. For example, one rate may apply to balances up to a certain amount and another rate to balances more than that amount. If two or more periodic rates apply, the financial institution must disclose all rates and conditions. The range of balances to which each rate applies also must be disclosed. It is not necessary, however, to break the finance charge into separate components based on the different rates
APR (Closed-End)
The APR is a measure of the cost of credit, expressed as a nominal yearly rate. It relates to the amount and timing of value received by the consumer to the amount and timing of payments made. Value of a closed-end credit AMPR must be disclosed as a single rate only, whether the loan has a single interest rate or graduated payments based on separate interest rates and it must appear with the segregated disclosures.
Purpose of TILA
The TILA is intended to ensure that credit terms are disclosed in a meaningful way so consumers can compare credit terms more readily and knowledgeably. Now, all creditors must use the same credit terminology and expressions of rates. In addition to providing a uniform system for disclosures, the act: • Protects consumers against inaccurate and unfair credit billing and credit card practices; • Provides ability to repay requirements and other limitations applicable to credit cards; • Provides consumers with rescission rights; • Provides for rate caps on certain dwelling-secured loans; • Imposes limitations on home equity lines of credit (HELOCs) and certain closed-end home mortgages; • Provides minimum standards for most dwelling secured loans; and • Delineates and prohibits unfair or deceptive mortgage lending practices. The TILA and Regulation Z do not, however, tell financial institutions how much interest they may charge or whether they must grant a consumer a loan.
Computation Method: Average Daily Balance Method
The average daily balance is the sum of the daily balances (either including or excluding current transactions) divided by the number of days in the billing cycle. A periodic rate is then multiplied by the average daily balance to determine the finance charge. If the periodic rate is a daily one, the product of the rate multiplied by the average balance is multiplied by the number of days in the cycle.
Computation Method: Previous balance method
The balance on which the periodic finance charge is computed is based on the balance outstanding at the start of the billing cycle. The periodic rate is multiplied by this balance to compute the finance charge.
Open End: Determination of APR
The basic method for determining the APR in open-end credit transactions involves multiplying each periodic rate by the number of periods in a year. A second method of calculating the APR is the quotient method. At a creditor's option, the quotient method may be disclosed on periodic statements for home-equity plans. The quotient method reflects the annualized equivalent of the rate that was actually applied during a cycle. This rate, also known as the effective APR, will differ from the corresponding APR if the creditor applies minimum, fixed, or transaction charges to the account during the cycle
Billing Error Resolution: Timing/Notices
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 within the 30-day period. Furthermore, the creditor credit must comply with the appropriate resolution procedures provided within two complete billing cycles (but in no event later than 90 days) after receiving a billing error notice.
Open End: APR
The disclosed APR on an open-end credit account is accurate if it is within one-eighth of one percentage point of the APR calculated under Regulation Z.
Calculating the finance charge (closed-end)
The finance charge initially includes any charge that is, or will be, connected with a specific loan. Charges imposed by third parties are finance charges if the financial institution requires use of the third party. Charges imposed by settlement or closing agents are finance charges if the bank requires the specific service that gave rise to the charge and the charge is not otherwise excluded.
Finance Charge
The finance charge is a measure of the cost of consumer payments disclosure. Tolerances for certain transactions credit represented in dollars and cents. The finance charge does not include any charge of a type payable in a comparable cash transaction. Finance charges include any charges or fees payable directly or indirectly by the consumer and imposed directly or indirectly by the financial institution either as an incident to or as a condition of an extension of consumer credit. The finance charge on a loan always includes any interest charges and often, other charges.
Open-End: Adverting
The regulation requires that loan product advertisements provide accurate and balanced information, in a clear and conspicuous manner, about rates, monthly payments, and other loan features. If an advertisement for credit states specific credit terms, it must state only those terms that actually are or will be arranged or offered by the creditor. If any finance charges or other charges are set forth in an advertisement, the advertisement must also clearly and conspicuously state the following: - Any minimum, fixed, transaction, activity or similar charge that is a finance charge that could be imposed; - Any periodic rate that may be applied expressed as an APR as determined. If the plan provides for a variable periodic rate, that fact must be disclosed; and - Any membership or participation fee that could be imposed.
Special Requirements for calculating the finance charge and APR
The regulation requires that the terms "finance charge" and "annual percentage rate" be disclosed more conspicuously than any other required disclosure, subject to limited exceptions. The finance charge and APR, more than any other disclosures, enable consumers to understand the cost of the credit and to comparison shop for credit. A creditor's failure to disclose those values accurately can result in significant monetary damages to the creditor, either from a class action lawsuit or from a regulatory agency's order to reimburse consumers for violations of law.
Accuracy Tolerance (Closed-End Credit)
Tolerances for the finance charge in a closed-end transaction, other than a mortgage loan, are generally $5 if the amount financed is less than or equal to $1,000 and $10 if the amount financed exceeds $1,000.
For non-credit card open-end consumer plans without a grace period, creditor must:
adopt reasonable policies and procedures designed to ensure that periodic statements are mailed or delivered at least 14 days prior to the date on which the required minimum periodic payment is due Moreover, the creditor must adopt reasonable policies and procedures to ensure that it does not treat as late a required minimum periodic payment received by the creditor within 14 days after it has mailed or delivered the periodic statement.
If any finance charges or other charge or payment terms are set forth, affirmatively or negatively, in an advertisement for a home-equity plan, the advertisement also must clearly and conspicuously set forth the following:
• 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; • Any periodic rate used to compute the finance charge, expressed as an APR; and • The maximum APR that may be imposed in a variable-rate plan.
