Reg Z: Purpose and Application Flashcards

Reg Z: Purpose and Application Flashcards

Regulation ZRegulation 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.Open-end loansAlso known as revolving credit; the consumer can borrow funds, repay part or all ofthem, and then borrow again up to the established credit limit in these arrangements.Correlation between Reg Z and TILAThe 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.Retail LenderRetail 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.Mixed Purpose LoansIn 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.Annual Percentage Rate (APR) -The total cost of the loan expressed as an annual rate, or aneffective interest rate.

Regulation ZThe 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." AdvertisementA commercial message in any medium that promotes a credit transaction. Reg Zcovers 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 termsIf credit terms are listed, they must be terms which are actually available or which will be arranged by the creditor.Annual Percentage RateIf 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 Oral ResponsesNothing 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).Notice of Transfer of Mortgage LoansWhenever 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 amortgage loan (whether closed- or open-ended) secured by the borrower's principal dwelling. Thenotice 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, andwhere the borrower may contact the new owner and where the transfer was recorded.Non Owner-Occupied Rental PropertiesIf 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.Agriculture LoansLoans 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

Truth In Lending Act - TILAPassed 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.Business CreditThis is a loan with a commercial, or business purpose.There are special rules thatcover loans to purchase or rehabilitate rental property, where some are considered business credit, some are considered consumer credit.ApplicationThe 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 Disclosure StatementsReg 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 - 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.ViolationsReg Z violations usually occur when