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#396109 - 08/03/05 07:02 PM Offering a discount for auto-pay
P*Q Offline

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We offer a 1/4 % discount for loan customers who opt for autopay. We're running into an issue where we don't disclose that if they close out the account that auto-pay is tied to, we're going to raise their rate (remove their 1/4 discount). How do we do this? Doesn't the initial note rate have to be what they're actually paying (at closing, would be auto pay rate-discount) but say 2 days later they close out the checking account, we want to be able to raise the rate yet they have a note stating it's discounted. Can we up the rate if we have them sign a disclosure stating that they realize the rate is dependent upon auto pay and will increase if auto pay is no longer done. Lastly,what rate is being disclosed on TIL? A lot of talk I know but appreciate your responses.

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#396110 - 08/03/05 07:08 PM Re: Offering a discount for auto-pay
rlcarey Offline
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If you want to raise the rate when the deposit account closes or they stop the autopay, you will be creating a variable rate account and will need to adjust your contract and TIL to address this issue. The TIL should disclose the contracted rate (discounted) at the time of loan closing.
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#396111 - 08/03/05 07:36 PM Re: Offering a discount for auto-pay
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Pizzaz, because of this issue, we don't increase the rate on real estate loans if the account is closed, I think you could have an ARM if you're not careful. We do increase the rate on non-real estate secured loans when the auto debit is discontinued and include all of the proper disclosures as required by 226.18(f)(1).

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#396112 - 08/03/05 08:16 PM Re: Offering a discount for auto-pay
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Let me rephrase, I'm referring to consumer loans, not mortgages. So like equities, auto, personal, etc. How can these become variable products?

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#396113 - 08/03/05 08:34 PM Re: Offering a discount for auto-pay
Beagles22 Offline
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We also give the .25 discount but do not later raise the rate if the account is closed. I think I would be inclined to think it would be a variable rate loan as rlcarey states above Pizzaz. I would just give the rate and the few that take advantage and close just got one over on your bank.
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#396114 - 08/03/05 08:52 PM Re: Offering a discount for auto-pay
rlcarey Offline
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Quote:

How can these become variable products?





228.18(f) Variable rate.

(1) If the annual percentage rate may increase after consummation in a transaction not secured by the consumer's principal dwelling or in a transaction secured by the consumer's principal dwelling with a term of one year or less.............

Deposit account closes - rate goes up .25% - sounds like it qualifies.

You also mentioned equities - if you are talking home equities - that could make them ARMs.
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#396115 - 08/04/05 02:15 PM Re: Offering a discount for auto-pay
P*Q Offline

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Pardon my ignorance but I was under the assumption that variable rate meant the rate was tied to some sort of index, in the case of our consumer notes, it is not.

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#396116 - 08/04/05 02:20 PM Re: Offering a discount for auto-pay
Dan Persfull Offline
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A variable rate loan is any loan where the interest rate can change after consummation. It does not have to be tied to an index, just to some triggering event, i.e. canceling the auto-debit.
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#396117 - 08/04/05 07:24 PM Re: Offering a discount for auto-pay
SLU Voice Offline
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It's been a while since I was a Laser Pro expert, but I believe that software can handle that kind of adjustment. I'm not experienced with the other types of loan software so I can't say about them, but LP I believe can handle it. It will make the correct disclosures and verbiage on the Promissory Note.
Oh, it's also 226.18(f), not 228.18(f).

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#396118 - 08/04/05 08:00 PM Re: Offering a discount for auto-pay
swiggles Offline
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We have always offered a discount for autopay and chose not to attempt to raise the rate if the account is closed. We've been doing this as long as I can remember....which a long time. Most customers just naturally think that if they discontinue the autopay, you WILL raise the rate. Naturally, you would not want staff to infer that this is the case. Relatively few of our autopay customers discontinue the agreement.
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#396119 - 08/04/05 08:25 PM Re: Offering a discount for auto-pay
P*Q Offline

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What is odd is that I've posed the same question to a group of compliance folks I know that aren't "related" to BOL and a good number of them state that their products are fixed, they disclose the discounted rate but then have the customer sign an agreement/addendum that if they close their account, their rate will increase to XX (1/4% higher in most cases). All said no examiner or auditor has ever had an issue with this practice.

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#396120 - 08/04/05 08:36 PM Re: Offering a discount for auto-pay
Beagles22 Offline
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Would that be the same as the employee rate? There is a caviat on the note that says 'effective immediately upon termination of employment the rate will raise to x.xx%?' It has to be addressed in the documents seems to be the bottom line. We do not, we just give the lower rate. Maybe that is why we don't raise later?!? Along the same line though, would you then have to give 30 days notice to the ex-autopayer or ex-employee? I haven't had that happen in the past few years.
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#396121 - 08/04/05 08:40 PM Re: Offering a discount for auto-pay
Dan Persfull Offline
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These are "preferential rates". See Commentary:

5. Examples of variable-rate transactions.

i. The following transactions, if they have a term greater than one year and are secured by the consumer's principal dwelling, constitute variable-rate transactions subject to the disclosure requirements of 226.19(b).

A. Renewable balloon-payment instruments where the creditor is both unconditionally obligated to renew the balloon-payment loan at the consumer's option (or is obligated to renew subject to conditions within the consumer's control) and has the option of increasing the interest rate at the time of renewal. (See comment 17(c)(1)-11 for a discussion of conditions within a consumer's control in connection with renewable balloon-payment loans.)

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

C. "Price-level-adjusted mortgages" or other indexed mortgages that have a fixed rate of interest but provide for periodic adjustments to payments and the loan balance to reflect changes in an index measuring prices or inflation. The disclosures under 226.19(b) are not applicable to such loans, nor are the following provisions to the extent they relate to the determination of the interest rate by the addition of a margin, changes in the interest rate, or interest-rate discounts: Section 226.19(b)(2)(i), (iii), (iv), (v), (vi), (vii), (viii), and (ix). (See comments 20(c)-2 and 30-1 regarding the inapplicability of variable-rate adjustment notices and interest-rate limitations to price-level-adjusted or similar mortgages.)
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#396122 - 08/04/05 08:55 PM Re: Offering a discount for auto-pay
bgehres Offline
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What about loans not secured by the consumer's principal dwelling?

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#396123 - 08/04/05 09:01 PM Re: Offering a discount for auto-pay
Dan Persfull Offline
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They still fall within the category - they just don't require the specified 226.19(b) disclosures.
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#396124 - 08/04/05 09:23 PM Re: Offering a discount for auto-pay
rlcarey Offline
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Quote:

All said no examiner or auditor has ever had an issue with this practice.




Yet. They forgot the "yet" part.

They are probably trying to rely on this being a subsequent event. Unfortunately your TIL disclosure has to reflect the complete legal agreement. Just because it is on a separate piece of paper doesn't make it not a part of the legal agreement.
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#396125 - 08/05/05 01:33 PM Re: Offering a discount for auto-pay
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Randy, according to Dan's post, these loans are exempt because they are "preferred rate loans".

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#396126 - 08/05/05 01:41 PM Re: Offering a discount for auto-pay
Dan Persfull Offline
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They are only exempt from the specified sections of 226.19. They are still variable rate loans and you must disclose the fact the rate can change upon a triggering factor.
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#396127 - 08/05/05 01:43 PM Re: Offering a discount for auto-pay
rlcarey Offline
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No - they are not exempt from the variable rate provisions in general. The citation that Dan referred too indicates that they are exempt from having to make specific disclosures within an early ARM disclosure if that is the only variable rate feature involved in the ARM.

Take a deep breath - I have been dealing with this issue for years and at many different banks - I have heard all the arguments. Anytime you can change the interest rate on a consumer loan you have a variable rate transaction that requires the variable rate disclosures.
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#396128 - 08/05/05 01:46 PM Re: Offering a discount for auto-pay
P*Q Offline

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OK guys, I think I finally get it. So, in summary, humor the slow pregnant gal , if we have them sign the note and TIL that reflects the 1/4% discount and also have them sign a disclosure that states if they no longer use the autopay option, their rate will increase by 1/4% , that would good? If so, last question, if the rate does happen to increase, should we provide a new TIL and note with the higher rate or does the original addendum disclosure cover us. As a side note, I really appreciate all the help you have given me in regards to this issue.

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#396129 - 08/05/05 01:50 PM Re: Offering a discount for auto-pay
Dan Persfull Offline
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You would not need to redisclose, that's the purpose of the addendum.
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#396130 - 08/05/05 01:53 PM Re: Offering a discount for auto-pay
rlcarey Offline
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Well, what you need to do is make the proper disclosure on the original TIL according to the following provisions:

226.18(f) Variable rate. (1) If the annual percentage rate may increase after consummation in a transaction not secured by the consumer's principal dwelling or in a transaction secured by the consumer's principal dwelling with a term of one year or less, the following disclosures: 43

43 Information provided in accordance with Secs. 226.18(f)(2) and 226.19(b) may be substituted for the disclosures required by paragraph (f)(1) of this section.

(i) The circumstances under which the rate may increase.
(ii) Any limitations on the increase.
(iii) The effect of an increase.
(iv) An example of the payment terms that would result from an increase.
(2) If the annual percentage rate may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, the following disclosures:
(i) The fact that the transaction contains a variable-rate feature.
(ii) A statement that variable-rate disclosures have been provided earlier.
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#396131 - 08/05/05 03:34 PM Re: Offering a discount for auto-pay
Andy_Z Offline
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Wow. Lots of good discussion above. Pizzaz probably wishes the question wasn't asked. But as noted, the rules do apply. And I'll bet a dozen other folks read this thread and think to themselves, "oh crap, note on To Do list, check..." This is a reason so many banks opt to ignore the change and just hold the consumer to their word. That is what we did and we never saw issues with intentionally getting the lower rate and stopping the auto-pay. If you do this, you also need the right system to look for auto-pay, to recognize that it didn't happen, figure out why, and bump the rate accordingly. Did it not come out because they were short on funds, or was the auto-pay canceled? Was a check presented for payment on the note for that month's payment or to pay ahead? Did it stop last month, but start again this month and do we need to bring the rate down, again? Depending on how you word this, you may need artificial intelligence in your system or a manual review and investigation.

I can see that it is a violation that would go undetected. Unless one of these files gets selected for an accrual audit and you compare the actual terms against the note terms you wouldn't typically find it.

But I would hate to be the person doing the file search on a big portfolio after the class action notice was received. So hopefully others will benefit from this discussion.
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#396132 - 08/05/05 09:57 PM Re: Offering a discount for auto-pay
ToTo Offline
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One other thing to remember on this issue is that if you advertise the APR that would result with auto debit, and you do increase the rate if the auto debit ceases, you are advertising a variable rate loan and I believe you would need to indicate in the ad that the APR is subject to increase after consummation (or something to that effect). While the APR is not a trigger on closed end, it appears that if the APR is stated, this is required (226.24(c)(2)(iii)). This is not totally clear, but that is the way we handle these. We also specifically state in such ads that the rate is for a loan that has auto debit.

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#396133 - 08/06/05 12:52 PM Re: Offering a discount for auto-pay
rlcarey Offline
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Technically, the statement of the APR alone would not trigger the disclosure under Reg Z, but disclosing the fact that the rate may increase due to a certain event or that a certain thing is required (auto debit) to obtain the rate advertised is very solid advice from an unfair and deceptive advertising practice perspective.
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