We have 2 loan products that we offer our employees with a 0% interest rate during their time of employement. Once employement ends, if there is still an outstanding balance, the loan goes to a 12% interest rate. An addendum describing the process is signed by the borrower/employee at time of funding.

They are not secured and they are not revolving lines although they are written on open ended docs rather than closed ended docs due to the fact we were using the multi factored open ended lending plan up until the July changes to Reg Z.


My question is whether we have to provide a 45 day notice prior to the rate increase when an employee leaves employement?

No, but they need all the proper closed-end TIL disclosures, including the appropriate variable rate language.

We offer a discounted rate to employees. The loan is a closed end loan that could be secured by their primary dwelling. Upon termination, the discount is discontinued and the rate returns to the going rate at the time the loan was made. We have included in the TIL a Preferred Rate Feature - do we actually need to disclose this as a variable rate loan?

If you are asking about the new MDIA disclosures, then yes the loan meets the definition of an adjustable rate loan in section 226.18(s)(7)(i) of Reg. Z. As a result, you would use model clause H-4(F) and you would probably eliminate the middle column. You would show the employee discounted rate in the introductory rate column and you would use the normal customer rate in the maximum ever column. You would need to determine how fast that rate could be reached. Could the employee's employment terminate the day after the loan closes? If so, how fast does your contract indicate the rate would rise?

Thanks Reads Regs. I was thinking MDIA, but also what about the CHARM booklet, program disclosure, little variable rate check box on the TIL. Is all that required too? I think yes, but it seems silly for this product. They are using some form language called Preferred Rate Feature - and it has a clause "How the New Rate will be Determined Upon Termination of the Preferred Rate Reduction". The description is "the new rate will be the standard issue rate disclosed for this loan before the employee discount." Does that sentence need to state when that will happen, like 2 days after termination or something like that?

Did you look at comment 5 B to section 226.19(b) of Regulation Z?

"(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 §§226.19(b)(1) and 226.19(b)(2)(v), (viii), (ix), and (xii) are not applicable to such loans."

Per this, you don't have to give out the CHARM booklet. You need an ARM program type disclosure for preferred rate loans but it does not have to include all of the disclosures you normally provide to regular ARM customers. We created something for this at my bank. We give it out when the employee applies for the loan. We also indicate on the TIL that the loan has a variable rate feature. We make a disclosure under section 226.18(f) of Reg. Z that explains how the rate can change and under what circumstances. It seems like this might be what the clause you mentioned is doing.

In the 8/26/09 issue of the Federal Register, the FRB had a proposal to amend some of the closed end credit provisions of Reg. Z. One of the items they were proposing was to not require 226.19(b) type disclosures for preferred rate loans. The FRB did not take any action on this yet.

I did not look at the commentary. I have to remember to do that!!!

Thank you so much!

Here's an interesting comment letter that was sent to the FRB about the 12/29/10 MDIA interim rule. The letter raises issues about preferred rate loans. http://www.federalreserve.gov/SECRS/2011...470918495_1.pdf

I agree that River Girl and SkiDoo's products would be considered an ARM as the rate upon leaving the bank is known. (ie: "12%" - River Girl or "the rate returns to the going rate at the time the loan was made" - SkiDoo)

We are in the process of developing a loan plan where all Employees, Officers and Exec. Mgmt can apply for any type of loan at a fixed percentage (preferred rate) for the ammortized period of the loan - subject to credit approval, of course.

My questions is this - If our "loan agreements" state something like this - "Upon termination or resignation of employment status with the bank, this loan becomes due and payable in full within 90 days from the date of such termination / resignation." also states disclosures such as payments must continue during the 90 days, we're not obligated to refinance and that they may seek a refinance elsewhere or re-apply for a refinance of any balances remaining with us according to our underwriting standards.
Does the "due and payable in full" along with the "refinance" of any balances cause this to NOT be an ARM loan?

Any help is greatly appreciated as I am under a deadline and finding any samples for "preferred fixed-rate" loans hasn't been easy. Thanks

That sounds like a demand note. If you don't change the rate, it's not a VRL, but you will need to follow the guidelines in .17 and .18 and the model language.

Thanks RRJ and I agree. I am struggling in creating this product because our bank does not have any var. rate products except our HELOCs so I have never really looked into what disclosures are needed and with the MDIA changes for TIL's, I am not sure I want to.

Check your State law also. Demand loans, sometimes depending on the type of loan, are not legal in all States.

This seems an appropriate thread to post this question.

Bank has A LOC for overdraft protection at x.x% interest rate. Employees sign the note at that rate, but in fact were being charged a lesser rate. Would notice be required once employment terminates in this instance, since the disclosed rate was disclosed and no statement as to preferential rates was given?

Anybody?

So, your legal agreement and actual practice does not match?

Apparently ... No.

That's why I'm wondering if the lower rate is "implied"?

bump...Randy (and others)...care to elaborate more?

I have no idea what an "implied" rate might be in a legal transaction. Your TIL disclosure requirements must reflect your legal obligation.