Truth in Lending
Truth in Lending, and its close ally, Regulation Z, have been at the center of the compliance circle from the beginning. Not only is Truth in Lending something that almost no-one can master, it keeps changing.
What is or is not a finance charge is a current debate. For years, the credit industry has believed that excluding some fees from the finance charge was desirable if for no reason other than keeping the APR from turning into an astronomical number.
Now, however, the theory on the table is that regulatory burden could be reduced by including all fees in the finance charge. So in the near future, we could spend our time defining what constitutes a fee instead of what constitutes a finance charge. On top of that, creditors would have to go out and find all the fees imposed by third parties such as car dealers and mortgage brokers.
The common violations in Truth in Lending are also the expensive ones. ARM rate calculations and ARM adjustment disclosures are commonly incorrect. These mistakes involve restitution. We have just come through a prolonged period of steady and low interest rates. However, now rates seem to be on the rise. When that happens, the ARM disclosure problems reappear.
The worst problem in prior rising rate environments was the discounted variable loan. If rates go up much, we can expect this compliance monster to re-appear. Second, when rates change - especially when they rise - the ARM adjustments become more complicated. Indexes may vary from week to week. In this kind of rate environment, getting close is not good enough. Loan operations must be accurate.
Whether simply posting product information or actually taking applications over the Internet, there are Truth in Lending disclosure rules to follow. First - that APR: it has to be out there before interest rates. Make sure that any rate sheets or product descriptions use the APR.
Second, the timing rules apply. Some of these rules, such as the 3-day rule for residential mortgage transactions, are not much of a problem. But some timing rules are an issue for page and content design. For example, ARM program disclosures must be provided as soon as a customer asks about an ARM program. This means that the program disclosure must be on the web site. Whether it has to pop up automatically or be a "click-on" choice for the customer is still not clear.
Similar timing rules apply to home equity credit lines and credit card programs. The disclosures - as well as the ads - go up on the web-site.
Although predatory lending has arisen as a fair lending concern, the first regulatory solution was added disclosures in Regulation Z. We thus have the high-cost mortgage disclosures (and calculations).
Disclosures have often been the solution to a practice that is considered unfair. This is where laws such as Truth in Lending and RESPA got invented. They were designed to deal with specific creditor practices that, in a variety of ways, took advantage of consumers. Disclosure is the first and most important step in giving consumers information they need to avoid being taken advantage of.
This principle works well in Truth in Lending. Solving concerns by adding to Truth in Lending is a regular Congressional Activity. Truth in Lending has never, ever stood still. Major issues, such as rate caps, adjustable rate mortgages, credit card solicitation practices, and home equity mortgage products all produced major additions to Truth in Lending. Look to future products to do the same.
It all comes down to information and fair treatment.
- Review your fees and finance charges. Compile a list of all fees that are or could become finance charges. Be ready for change.
- Talk with your lenders and marketers. Remind them that when they introduce new products, they should first be reviewed for Truth in Lending calculations and disclosures. Be friendly when you tell them this.
- Review the procedures used in loan operations for identifying index changes on ARM loans. The lack of change in recent years may conceal mistakes.
- Maintain regular contact with your web-page and electronic banking staff. Watch what services they are offering and preparing to offer on the "Net. Get disclosures right - both content and timing.
- Review your credit products and sales practices - and those of other lenders - to anticipate future developments in Truth in Lending.
Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 17 & 18, 1/00
First published on 01/01/2000