My chief loan officer has asked me to look into the possibility of offering a new loan product. She gave me until Friday to get my information gathered (imagine that).



We are wanting to offer a loan program for consumers to purchase computers. The rate will be around 4.9%. Probably an 18 month term. Must have a good credit history and repayment ability. Trying to get the parents of school age kids to buy a computer I guess.



Here’s the part that I’m trying to gather info on:

In order to get this loan they must agree to 2 things: (1) the consumer has to have the loan payment automatically withdrawn from their bank account. (2) They must sign up for E-statements.



If they default on either one of these, then the loan rate would go up to 12%.



My questions are:



Can we do this?

How would we disclose this?

What regs apply?

How would we disclose for TIL purposes?

Regulatory and compliance issues?



I would appreciate any comments on this.

You can't require automatic payment - see Reg E 205.10(e).

I think the intent of the requirement for automatic payment is to receive the discounted interest rate on these loans, not whether or not the credit will be extended. In this case, would Reg E 205.10(e) still apply?

You can't require e-delivery of any document that must be "written" (although I don't see what "statements" would come into play if this is a closed-end credit.)

It will not be a condition of the loan, hence, we would not deny strictly for this reason, so it's an incentive. I see no problem with it. If they failed to do this, their rate would jump to the 12%.

On TIL, I'm trying to figure out how to disclose everything...It seems we'll need contractual wording stating something to the effect that they'll be in default if they don't get e-statements within 30 days of closing and/or they don't have auto draw.

Or disclosed like this....the discounted rate is contingent on auto draw and e-statement signup. If you default, the rate jumps to 12%

For TIL purposes, would we disclose per 226.18(f) guidelines?

The e-statements is a campaign management is on to get customers to sign up for this. They are tying it to a loan product simply because the majority of our loan customers have deposits with us........I guess.....I wasn't in on that board meeting...

If the statements in question are deposit account statements for accounts with EFTs, then the statements must be in writing and you will need ESIGN informed consent in order to switch from paper to electrons. Since ESIGN consent can't be done on paper and must demonstrate the customer's capability to open and read the e-documents, it's going to be awkward to set up one of these arrangements unless the loan application & approval is also online.

How can they do ESIGN if they don't have a computer? It was stated that that these loans are for people to buy computers. ESGIN might be a problem, unless the customers are simply buying a "new computer".

They'll have 30 days to get it set up.

Disclosure-wise, you have a 226.18(f)(1) situation with only one possible rate increase scenario. Since a high percentage of these borrowers will not follow through and opt in for e-statements, you'd better think through how you're going to handle the rate/payment increases & be sure your notes are adequate.