The Commentary Proposal Is Out There

The annual December publication of the Truth in Lending Commentary proposal is right on time. The Federal Reserve Board has published proposals to revise and update the Official Staff Commentary to Regulation Z. Comments are due on or before January 22, 1999.

Credit Card
One proposal would update the explanation of what is or isn't a credit card. Comment 2(a)(15)-2 would be revised to include additional examples of mixed-purpose cards that meet the definition of credit card. New examples of credit cards include a card that must be activated after receipt even if it can only be activated by the customer contacting the creditor.

The "yes-it-is-a-credit-card" list would also include mixed-purpose cards even if the ability to use the card to access credit is only a small feature of the card. In other words, if it can be used for credit, however limited or infrequent that use may be, it is a credit card.

Cards Converted from Non-Credit to Credit
The Commentary has taken the position that a card issued for purposes not related to credit, such as the ability to be awarded cash discounts or buyer's points, may later have a credit feature added to it, with the consumer's request, without violating Regulation Z. However a card that has a credit feature when issued would violate Regulation Z if the card had not been requested or authorized by the consumer. Paragraph 12(a)(1)-7 would be revised to clarify this distinction.

Mixed-use cards can also have implications under Regulation B. There are two things to be aware of for credit discrimination purposes.

First, if a non-credit card has a credit feature added to it, it becomes subject to Regulation B, including technical requirements such as adverse action and counter-offer notices.

Second, the bank should review the new product to determine whether there may be any discriminatory impact. For example, if a credit feature is added to a card that offered special deposit products to customers aged 50 and older, adding a credit feature could violate ECOA's prohibition against discrimination on the basis of age.

Prior Month activity on the Periodic Statement
The FRB issued Commentary Paragraph 14(c)-10 to explain how to calculate APRs when the periodic statement reflects debits from the prior cycle. The existing paragraph does not explicitly discuss prior month credits which could also affect the APR. The paragraph would be revised to clarify that credits should be treated in the same way as debits.

Credit Sale Downpayments
Confusion continues about how to calculate and disclose certain downpayments - negative downpayments, actually. In today's car-buying patterns, it is not unusual for a customer to owe more on the existing loan than his or her vehicle is worth. Thus, although the vehicle turned on a purchase has a book value, the transaction as a whole has a negative value because of the money still owed on the loan. The proposal would add another example to Commentary paragraph 2(a)(18)-3. The new example assumes that the consumer pays part but not all of the difference in case. The FRB's advice remains that the downpayment is $0 rather than a negative amount.

To support the proposed revisions to the definition section, the proposal would also modify Paragraph 18(j)-2 to include a similar explanation and example. This paragraph would take the formula one step further. Any payment in cash would be used first to pay the amount owed on the trade-in and thus not be reflected as a part of the downpayment. Any amount of cash payment that exceeds the amount owed on the trade-in would become a cash downpayment. Any deficiency would result in no downpayment but would be added to the amount financed.

PMI
Unless your bank is issuing multi- purpose cards without consumer requests, most of this commentary proposal is smooth. However, the treatment of PMI is an area for potential concern.

The basic principle of all TIL disclosures is that they are based on the underlying legal obligation. Treatment of PMI (private mortgage insurance) has, in the past, been relatively straightforward - except for the payment schedule. The customer was legally obligated to pay PMI for the life of the loan, so the disclosure included PMI for the life of the loan.

The Homeowners Protection Act of 1998 ("HPA") changed all that. It now limits the ability of the creditor to require PMI, based on the evolving loan-to-value ratio. This means that now the lender has to figure out when the PMI is going to end. Although this is theoretically based on the legal obligation between the parties, if the loan contract specifies a loan-to-value ratio rather than a specific date, there will necessarily be assumptions about when the change will occur.

The proposed new paragraph, 18(g)-5 looks fairly simple and harmless. However, it may be difficult to implement. It simply states that the payment schedule (and the finance charge and the APR, of course) should reflect the PMI payments until the lender must automatically terminate the insurance. It should not reflect the possibility that the consumer may request termination at an earlier time.

ACTION STEPS

Review your bank's card products. Look especially for mixed-use cards. Include all credit and debit products.
Send a reminder memo to branch managers, product managers, and marketing to brief them on the way
Regulations B and Z affect mixed use cards.
If you take loans from dealers - applications or purchases - notify your dealers about the $0 downpayment rule in the commentary. Show them how to prepare correct disclosures.
Review your PMI policies and procedures. Get a good fix on when and how your mortgage department requires mortgage insurance.
Review the PMI requirements with your mortgage lenders.
Look at some loan files and run some test calculations to evaluate whether the commentary change would be easy or difficult to implement.
Share your results with the FRB in a comment letter.