Reg Z: Prepare to Implement the Reg Z Commentary Update

Each year the Federal Reserve Board updates the Official Staff Commentary to Regulation Z, Truth in Lending. While in some years, the Commentary update is expansive, this year's update was relatively modest. There were clarifications to several rules, both open-end and closed-end credit, but no major changes. The common theme to this year's update seems to be what kind of charge is this and where does it go?

Payment Schedule
On the side of closed end credit, there is a clarification of how PMI (mortgage insurance) should be disclosed in the payment schedule. Some creditors have come up with some fairly creative but not necessarily clear methods for disclosing PMI. The Commentary update is intended to impose some consistency on the resulting chaos.

The payment schedule should reflect the PMI payments until the date on which the creditor must terminate coverage. The Commentary requires the use of this date, even though a consumer could, if certain conditions occur, request the termination of insurance sooner. The mandatory termination date will be established either by federal law, the Homeowners Protection Act of 1998, or by a more restrictive state law.

In requiring creditors to use the date for mandatory creditor termination of insurance, the Commentary sets a uniform standard for all creditors.

The second part of the revised Commentary paragraph 226.18(g)-5 explains how to take into account the fact that several PMI payments may have been paid into escrow at closing. If two payments are collected for escrow at closing and the lender will maintain a two month cushion in the escrow, the TIL disclosure should reduce the number of PMI payments by those two.

The Commentary gives the example that if the customer's legal obligation will be to make 130 payments of PMI and two months payments are placed in escrow, then the TIL disclosure should show only 128 payments. In effect, the last two payments must be made from the escrow account.

HOEPA Disclosures
The commentary clarifies how to use the Treasury securities for high-cost loan calculations. The FRB rejected some wishful suggestions that creditors be permitted to use different iterations of the Treasury securities. The FRB seeks uniformity in all lender's disclosures.

The Commentary provides that for any loan terms that exceed 20 years, lenders should use the H-15 for a 20-year constant maturity of Treasury Securities. In calculating the length of a loan, lenders may ignore odd first payment periods such as those described in 226.17(c)(4).

Open-End Finance Charges. The Commentary also clarifies the finance charge status of certain fees related to credit cards. Two charges were at issue: fees for expedited delivery of a credit card and fees for expedited payment on an account. In both cases, the FRB concluded that the fees are not finance charges imposed because of the credit. The FRB also concluded that the fees are not part of the credit plan and therefore need not be disclosed as "other charges." The cost of the fee should be disclosed to the consumer at the time the service is requested. If it is billed to the account, the fee should be reflected in the periodic statement.

Card Issuance
The Commentary gives some resolution to the debates about reissuance of cards, both credit and debit. The critical issue under Regulation Z is that the service the card provides has been requested by the consumer and agreed to. Issuers may separate or combine credit and debit cards as long as the consumer has requested the service. Creditors may issue multiple cards provided that the cards are all subject to the same terms, conditions, and contractual limitations as the original card.

The mandatory effective date of these Commentary updates is October 1.

Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 7, 7/03