Introductory Rates-How to disclose APR

When an introductory rate is offered on a fixed consumer installment loan can we disclose the TIL terms on the note and then do an addendum for the introductory rate? Unfortunately our method for calculating the TIL disclosures will not break it down for us and we will have to use two different software programs for the disclosures. We've never offered an introductory rate before so any advice on how to do the disclosures would be greatly appreciated.

Does the teaser price change to a variable rate or a second (higher?) fixed rate?

A higher fixed rate.

What you describe is a stepped-rate loan and you need to show the effects of both rates on the payement schedule, FC, and APR. If you base your entire disclosure on the teaser rate, you may walk into a reimbursement order.

On the other hand, there is now no penalty for undercharging and overdisclosing. You could use the "real" rate as the basis for your disclosures and give the customer a "gift" of several (3,6,12) discounted payments at the beginning of the loan. Strictly speaking, basing the disclosure on the higher contract rate for the full term would not violate Regulation Z. However, your examiner might not be impressed. I would tread carefully here. But you might be able to get the examiner's help in getting better resources.

One of my audits is to verify interest accruals. Routinely over-disclosing on the note and under-charging on the system could turn into an administrative nightmare, accounting wise. You'd have to clearly identify those loans.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

If you opt to make a complete disclosure, there shouldn't be a need to use two separate software programs for one disclosure. You may need one to do the calculations and one to print the results.

Years ago I wrote some Excel spreadsheets to help our lenders on the construction calculations. While my APRs were within tolerance, they weren't exact if the lender included odd days. I never got the Fed calendar right for those.

You could try to use Excel or Lotus to do this yourself if you can get it to work. You could also find a consultant or vendor who may already have a product or could customize one for you. Used in conjunction with your existing software, you may be able to streamline your process.

You may be able to search on keywords to find someone or speak to an existing vendor. If it was me, I'd also look at APR Systems. That is Richard Insley's site. I still use his APR Examiner from compliance school and I think he still does custom calculators. If he doesn't he may be able to refer you.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

Yes, Andy, I still support all those APR EXAMINER calculators (about 3,000) that were distributed at Compliance School for many years. I do custom calculator projects too - frequently using Excel. Many times during my years as a compliance officer it was necessary to build calc tools for squirrely deals that didn't match our loan doc systems' capabilities.

Even though Regulation Z now does not penalize you for over-disclosure, I agree with Andy that choosing to over-disclose routinely is not a good idea. The law was changed to remove the overdisclosure penalty to provide some safety to lenders in gray areas of interpretation (is it or is it not a finance charge) but not to invite overdisclosures. If your bank is going to offer the product more than a few times, you do need to find a calculation tool to prepare correct disclosures. If your CEO doesn't want to buy new software, Richard's APR Examiner is a nifty tool -- with many other uses as well.

The oldest Reg Z rule of thumb is "if in doubt, disclose." It clearly applies in cases where you aren't 100% sure if a fee should be included in the FC. On the other hand, I wouldn't ignore a feature of the legal obligation between the parties (the temporary teaser rate). This seems to fly in the face of the spirit of the TILA and isn't the sort of grey area Congress had in mind while curing the Rodash mess.

Plus, don't forget 226.5(c)"Disclosures shall reflect the terms of the legal obligation between the parties." What you are really discribing here is a variable rate loan.

Thanks for bringing up my favorite two sections of Regulation Z: 5(c) and 17(c). Disclosures must be based on the underlying legal obligation. Whether as part of the note or an addendum agreement, the change in rate provision is part of the underlying legal obligation. Thus, the variable rate.

Sorry to lead this discussion off track with the term "teaser price", but the original post & clarification described this as a closed-end instalment loan with two fixed rates. If the second (& subsequent) rate(s) is/are specified in the credit agreement (note), then you do not get into variable rate disclosures.

I understand how to disclose in the Fed box for this type of loan; however, I am not sure how to disclosure the interest rate. Are both the initial rate and the go to fixed rate required to be disclosed in the note? The section of our closed end note where the interest rate is stated only has a space for one rate.