Docstoc

Truth in Lending

Document Sample
Truth in Lending Powered By Docstoc
					Regulation Z
Truth in Lending


Background and Summary                                  regulation and provide guidance on the electronic
                                                        delivery of disclosures consistent with the E-Sign
The Truth in Lending Act (TILA), 15 USC 1601 et         Act.
seq., was enacted on May 29, 1968, as title I of the       In July 2008, Regulation Z was amended to
Consumer Credit Protection Act (Pub. L. 90-321).        protect consumers in the mortgage market from
The TILA, implemented by Regulation Z (12 CFR           unfair, abusive, or deceptive lending and servicing
226), became effective July 1, 1969.                    practices. Specifically, the change applied protec-
  The TILA was first amended in 1970 to prohibit        tions to a newly defined category of ‘‘higher-priced
unsolicited credit cards. Additional major amend-       mortgages’’ that includes virtually all closed-end
ments to the TILA and Regulation Z were made by         subprime loans secured by a consumer’s principal
the Fair Credit Billing Act of 1974, the Consumer       dwelling. The revisions also applied new protec-
Leasing Act of 1976, the Truth in Lending Simplifi-     tions to mortgage loans secured by a dwelling,
cation and Reform Act of 1980, the Fair Credit and      regardless of loan price, and required the delivery
Charge Card Disclosure Act of 1988, the Home            of early disclosures for more types of transactions.
Equity Loan Consumer Protection Act of 1988.            The revisions also banned several advertising
   Regulation Z also was amended to implement           practices deemed deceptive or misleading. The
section 1204 of the Competitive Equality Banking        Mortgage Disclosure Improvement Act of 2008
Act of 1987, and in 1988, to include adjustable rate    (MDIA) broadened and added to the requirements
mortgage loan disclosure requirements. All con-         of the Board’s July 2008 final rule by requiring early
sumer leasing provisions were deleted from Regu-        truth-in-lending disclosures for more types of
lation Z in 1981 and transferred to Regulation M        transactions and by adding a waiting period
(12 CFR 213).                                           between the time when disclosures are given and
                                                        consummation of the transaction. In 2009, Regula-
   The Home Ownership and Equity Protection Act         tion Z was amended to address those provisions.
of 1994 amended TILA. The law imposed new               The MDIA also requires disclosure of payment
disclosure requirements and substantive limitations     examples if the loan’s interest rate or payments can
on certain closed-end mortgage loans bearing            change, as well as disclosure of a statement that
rates or fees above a certain percentage or             there is no guarantee the consumer will be able to
amount. The law also included new disclosure            refinance in the future. In 2010, Regulation Z was
requirements to assist consumers in comparing the       amended to address these provisions, which
costs and other material considerations involved in     became effective on January 30, 2011.
a reverse mortgage transaction and authorized the
Federal Reserve Board to prohibit specific acts and        In December 2008, the Board adopted two final
practices in connection with mortgage transac-          rules pertaining to open-end (not home-secured)
tions.                                                  credit. The first rule involved Regulation Z revisions
                                                        and made comprehensive changes applicable to
   The TILA amendments of 1995 dealt primarily          several disclosures required for: applications and
with tolerances for real estate secured credit.         solicitations, new accounts, periodic statements,
Regulation Z was amended on September 14, 1996          change in terms notifications, and advertisements.
to incorporate changes to the TILA. Specifically,       The second was a rule published under the Federal
the revisions limit lenders’ liability for disclosure   Trade Commission (FTC) Act and was issued jointly
errors in real estate secured loans consummated         with the Office of Thrift Supervision and the National
after September 30, 1995. The Economic Growth           Credit Union Administration. It sought to protect
and Regulatory Paperwork Reduction Act of 1996          consumers from unfair acts or practices with
further amended TILA. The amendments were               respect to consumer credit card accounts. Before
made to simplify and improve disclosures related        these rules became effective, however, the Credit
to credit transactions.                                 Card Accountability Responsibility and Disclosure
  The Electronic Signatures in Global and National      Act of 2009 (Credit CARD Act) amended TILA and
Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et        established a number of new requirements for
seq., was enacted in 2000 and did not require           open-end consumer credit plans. Several provi-
implementing regulations. On November 9, 2007,          sions of the Credit CARD Act are similar to
the amendments to Regulation Z and the official         provisions in the Board’s December 2008 TILA
staff commentary were issued to simplify the            revisions and the joint FTC Act rule, but other




Consumer Compliance Handbook                                                                    Reg. Z • 1 (6/11)
Truth in Lending



portions of the Credit CARD Act address practices          Subpart A (§§226.1 through 226.4) of the regu-
or mandate disclosures that were not addressed in       lation provides general information that applies to
these rules.                                            open-end and closed-end credit transactions. It
   The Credit CARD Act provisions are effective in      sets forth definitions and stipulates which transac-
three stages. The provisions effective first required   tions are covered and which are exempt from the
creditors to increase the amount of notice consum-      regulation. It also contains the rules for determining
ers receive before the rate on a credit card account    which fees are finance charges.
is increased or a significant change is made to the       Subpart B (§§226.5 through 226.16) of the
account’s terms. These amendments also allowed          regulation contains rules for disclosures for home-
consumers to reject such increases and changes          equity loans, credit and charge card accounts, and
by informing the creditor before the increase or        other open-end credit.
change goes into effect. The provisions effective
                                                           Subpart B also covers rules for resolving billing
next involved rules regarding interest rate in-
                                                        errors, calculating annual percentage rates, credit
creases, over-the-limit transactions, and student
                                                        balances, and advertising open-end credit. Special
cards. Finally, the provisions effective last ad-
                                                        rules apply to credit card transactions only, such as
dressed the reasonableness and proportionality of
                                                        certain prohibitions on the issuance of credit cards
penalty fees and charges and re-evaluation of rate
                                                        and restrictions on the right to offset a cardholder’s
increases.
                                                        indebtedness. Additional special rules apply to
   In 2009, Regulation Z was amended following the      home-equity lines of credit, such as certain prohi-
passage of the Higher Education Opportunity Act         bitions against closing accounts or changing
(HEOA) by adding disclosure and timing require-         account terms.
ments that apply to lenders making private educa-
                                                           Subpart C (§§226.17 through 226.24) includes
tion loans.
                                                        provisions for closed-end credit. Residential mort-
  In 2009, the Helping Families Save Their Homes        gage transactions, demand loans, and installment
Act amended TILA to establish a new requirement         credit contracts, including direct loans by banks
for notifying consumers of the sale or transfer of      and purchased dealer paper, are included in the
their mortgage loans. The purchaser or assignee         closed-end credit category. Subpart C also con-
that acquires the loan must provide the required        tains disclosure rules for regular and variable rate
disclosures no later than 30 days after the date on     loans, refinancings and assumptions, credit bal-
which it acquired the loan.                             ances, calculating annual percentage rates, and
   In 2010, the Board further amended Regulation Z      advertising closed-end credit.
to prohibit payment to a loan originator that is           Subpart D (§§226.25 through 226.30), which
based on the terms or conditions of the loan, other     applies to both open-end and closed-end credit,
than the amount of credit extended. The amend-          sets forth the duty of creditors to retain evidence of
ment applies to mortgage brokers and the compa-         compliance with the regulation. It also clarifies the
nies that employ them, as well as to mortgage loan      relationship between the regulation and state law,
officers employed by depository institutions and        and requires creditors to set a cap for variable rate
other lenders. In addition, the amendment prohibits     transactions secured by a consumer’s dwelling.
a loan originator from directing or ″steering″ a
                                                           Subpart E (§§226.31 through 226.36) contains
consumer to a loan that is not in the consumer’s
                                                        special requirements for mortgages that fit the
interest to increase the loan originator’s compen-
                                                        criteria in §226.32(a) (‘‘high-cost mortgages’’),
sation. Separately, the Dodd-Frank Wall Street
                                                        §226.33(a) (‘‘reverse mortgages’’), and §226.35(a)
Reform and Consumer Protection Act amended
                                                        (‘‘higher-priced mortgage loans’’), as well as loans
TILA to include several provisions that protect the
                                                        secured by a consumer’s principal dwelling.
integrity of the appraisal process when a consum-
er’s home is securing the loan. The rule also              Subpart F (§§226.46 through 226.48) includes
requires that appraisers receive customary and          disclosure and timing requirements that apply to
reasonable payments for their services. The ap-         creditors making private education loans. It also
praiser and loan originator compensation require-       limits certain practices by creditors including
ments became effective on April 1, 2011.                ‘‘co-branding’’ products with educational institu-
                                                        tions in the marketing of private student loans. The
                                                        rule requires that creditors obtain a self-certification
Format of Regulation Z                                  form signed by the consumer before consummat-
                                                        ing the loan. It also requires creditors with preferred
The disclosure rules creditors must follow differ
                                                        lender arrangements with educational institutions
depending on whether the creditor is offering
                                                        to provide certain information to those institutions.
open-end credit, such as credit cards or home-
equity lines, or closed-end credit, such as car loans     Subpart G (§§226.51 through 226.59) relates to
or mortgages.                                           credit card accounts under an open-end (not


2 (6/11) • Reg. Z                                                                 Consumer Compliance Handbook
                                                                                                       Truth in Lending


home-secured) consumer credit plan (except for              fair credit billing and credit card practices;
§226.57(c), which applies to all open-end credit          • Provides consumers with rescission rights;
plans). This subpart contains rules on the evalua-
tion of a consumer’s ability to pay, limits on fees       • Provides for rate caps on certain dwelling-
during the first year after account opening, limits         secured loans;
and prohibitions on penalty fees, and rules on            • Imposes limitations on home equity lines of credit
allocation of payments in excess of the minimum             and certain closed-end home mortgages; and
payment. The subpart also limits increases in the
annual percentage rate (APR), fees, and charges,          • Delineates and prohibits unfair or deceptive
and prohibits the assessment of fees for over-the-          mortgage lending practices.
limit transactions unless the consumer consents.             The TILA and Regulation Z do not, however, tell
There are also rules for reporting and marketing of       financial institutions how much interest they may
college student open-end credit, requirements for         charge or whether they must grant a consumer a
the internet posting of credit card account agree-        loan.
ments under an open-end (not home-secured)
consumer credit plan, and requirements to reevalu-
ate rate increases.                                       Summary of Coverage Considerations
                                                          §§226.1 & 226.2
  The appendices to the regulation set forth model
forms and clauses that creditors may use when             Lenders must carefully consider several factors
providing open-end and closed-end disclosures.            when deciding whether a loan requires Truth in
The appendices contain detailed rules for calculat-       Lending disclosures or is subject to other Regula-
ing the APR for open-end credit (appendix F) and          tion Z requirements. The coverage considerations
closed-end credit (appendixes D and J). Appendi-          under Regulation Z are addressed in more detail in
ces K and L provide total annual loan cost rate           the commentary to Regulation Z. For example,
computations and assumed loan periods for re-             broad coverage considerations are included under
verse mortgage transactions. Appendices M1 and            section 226.1(c) of the regulation and relevant
M2 provide guidance for calculating the minimum           definitions appear in section 226.2.
payment repayment estimate.
   Official staff interpretations of the regulation are   Exempt Transactions §226.3
published in a commentary that is normally up-
dated annually in March. Good faith compliance            The following transactions are exempt from Regu-
with the commentary protects creditors from civil         lation Z:
liability under the act. In addition, the commentary      • Credit extended primarily for a business, com-
includes mandates, which are not necessarily                mercial, or agricultural purpose;1
explicit in Regulation Z, on disclosures or other
actions required of creditors. It is virtually impos-     • Credit extended to other than a natural person
sible to comply with Regulation Z without reference         (including credit to government agencies or
to and reliance on the commentary.                          instrumentalities);

   Note: The following narrative does not discuss all     • Credit in excess of $25 thousand not secured by
the sections of Regulation Z, but rather highlights         real property or by personal property used as the
only certain sections of the regulation and the Truth       principal dwelling of the consumer;
in Lending Act.                                           • Public utility credit;
                                                          • Credit extended by a broker-dealer registered
Subpart A - General                                         with the Securities and Exchange Commission
                                                            (SEC) or the Commodity Futures Trading Com-
Purpose of the TILA and Regulation Z                        mission (CFTC), involving securities or commodi-
                                                            ties accounts;
The Truth in Lending Act is intended to ensure that
credit terms are disclosed in a meaningful way so         • Home fuel budget plans; and
consumers can compare credit terms more readily           • Certain student loan programs.
and knowledgeably. Before its enactment, consum-
                                                            When determining whether credit is for consumer
ers were faced with a bewildering array of credit
terms and rates. It was difficult to compare loans
because they were seldom presented in the same              1. If a credit card is involved, generally exempt credit (e.g.,
format. Now, all creditors must use the same credit       business or agricultural purpose credit) is still subject to
                                                          requirements that govern the issuance of credit cards and liability
terminology and expressions of rates. In addition to      for their unauthorized use. Credit cards must not be issued on an
providing a uniform system for disclosures, the act:      unsolicited basis and, if a credit card is lost or stolen, the
                                                          cardholder must not be held liable for more than $50 for the
• Protects consumers against inaccurate and un-           unauthorized use of the card.


Consumer Compliance Handbook                                                                               Reg. Z • 3 (6/11)
Truth in Lending



purposes, the creditor must evaluate all of the         may routinely furnish disclosures to the consumer.
following:                                              Disclosure under such circumstances does not
                                                        control whether the transaction is covered, but can
• Any statement obtained from the consumer
                                                        assure protection to the financial institution and
  describing the purpose of the proceeds.
                                                        compliance with the law.
  – For example, a statement that the proceeds will
    be used for a vacation trip would indicate a
    consumer purpose.
  – If the loan has a mixed-purpose (e.g., pro-
    ceeds will be used to buy a car that will be
    used for personal and business purposes), the
    lender must look to the primary purpose of the
    loan to decide whether disclosures are neces-
    sary. A statement of purpose from the con-
    sumer will help the lender make that decision.
  – A checked box indicating that the loan is for a
    business purpose, absent any documentation
    showing the intended use of the proceeds
    could be insufficient evidence that the loan did
    not have a consumer purpose.
• The consumer’s primary occupation and how it
  relates to the use of the proceeds. The higher the
  correlation between the consumer’s occupation
  and the property purchased from the loan
  proceeds, the greater the likelihood that the loan
  has a business purpose. For example, proceeds
  used to purchase dental supplies for a dentist
  would indicate a business purpose.
• Personal management of the assets purchased
  from proceeds. The lower the degree of the
  borrower’s personal involvement in the manage-
  ment of the investment or enterprise purchased
  by the loan proceeds, the less likely the loan will
  have a business purpose. For example, money
  borrowed to purchase stock in an automobile
  company by an individual who does not work for
  that company would indicate a personal invest-
  ment and a consumer purpose.
• The size of the transaction. The larger the size of
  the transaction, the more likely the loan will have
  a business purpose. For example, if the loan is for
  a $5,000,000 real estate transaction, that might
  indicate a business purpose.
• The amount of income derived from the property
  acquired by the loan proceeds relative to the
  borrower’s total income. The lesser the income
  derived from the acquired property, the more
  likely the loan will have a consumer purpose. For
  example, if the borrower has an annual salary of
  $100,000 and receives about $500 in annual
  dividends from the acquired property, that would
  indicate a consumer purpose.
  All five factors must be evaluated before the
lender can conclude that disclosures are not
necessary. Normally, no one factor, by itself, is
sufficient reason to determine the applicability of
Regulation Z. In any event, the financial institution


4 (6/11) • Reg. Z                                                               Consumer Compliance Handbook
                                                                   Truth in Lending




                      Coverage Considerations under Regulation Z




Consumer Compliance Handbook                                          Reg. Z • 5 (6/11)
Truth in Lending



Determination of Finance Charge and                        – Overstatements are not violations.
APR                                                      • Rescission rights after the three-business-day
                                                           rescission period (closed-end credit only):
Finance Charge (Open-End and                               – The disclosed finance charge is considered
Closed-End Credit) §226.4                                    accurate if it does not vary from the actual
The finance charge is a measure of the cost of               finance charge by more than one-half of
consumer credit represented in dollars and cents.            1 percent of the credit extended.
Along with APR disclosures, the disclosure of the          – The disclosed finance charge is considered
finance charge is central to the uniform credit cost         accurate if it does not vary from the actual
disclosure envisioned by the TILA.                           finance charge by more than 1 percent of the
   The finance charge does not include any charge            credit extended for the initial and subsequent
of a type payable in a comparable cash transac-              refinancings of residential mortgage transac-
tion. Examples of charges payable in a comparable            tions when the new loan is made at a different
cash transaction may include taxes, title, license           financial institution. (This excludes high cost
fees, or registration fees paid in connection with an        mortgage loans subject to §226.32, transac-
automobile purchase.                                         tions in which there are new advances, and
                                                             new consolidations.)
   Finance charges include any charges or fees
payable directly or indirectly by the consumer and       • Rescission rights in foreclosure:
imposed directly or indirectly by the financial            – The disclosed finance charge is considered
institution either as an incident to or as a condition       accurate if it does not vary from the actual
of an extension of consumer credit. The finance              finance charge by more than $35.
charge on a loan always includes any interest
charges and often, other charges. Regulation Z             – Overstatements are not considered violations.
includes examples, applicable both to open-end             – The consumer can rescind if a mortgage
and closed-end credit transactions, of what must,            broker fee is not included as a finance charge.
must not, or need not be included in the disclosed
                                                           Note: Normally, the finance charge tolerance for
finance charge (§226.4(b)).
                                                         a rescindable transaction is either 0.5 percent of
                                                         the credit transaction or, for certain refinancings,
Accuracy Tolerances (Closed-End                          1 percent of the credit transaction. However, in the
Credit) §§226.18(d) & 226.23(h)                          event of a foreclosure, the consumer may exercise
                                                         the right of rescission if the disclosed finance
Regulation Z provides finance charge tolerances          charge is understated by more than $35.
for legal accuracy that should not be confused with
                                                           See the ‘‘Finance Charge Tolerances’’ charts
those provided in the TILA for reimbursement
                                                         within these examination procedures for help in
under regulatory agency orders. As with disclosed
                                                         determining appropriate finance charge toler-
APRs, if a disclosed finance charge were legally
                                                         ances.
accurate, it would not be subject to reimbursement.
   Under TILA and Regulation Z, finance charge
disclosures for open-end credit must be accurate         Calculating the Finance Charge
since there is no tolerance for finance charge           (Closed-End Credit)
errors. However, both TILA and Regulation Z permit       One of the more complex tasks under Regulation Z
various finance charge accuracy tolerances for           is determining whether a charge associated with an
closed-end credit.                                       extension of credit must be included in, or ex-
   Tolerances for the finance charge in a closed-        cluded from, the disclosed finance charge. The
end transaction are generally $5 if the amount           finance charge initially includes any charge that is,
financed is less than or equal to $1,000 and $10 if      or will be, connected with a specific loan. Charges
the amount financed exceeds $1,000. Tolerances           imposed by third parties are finance charges if the
for certain transactions consummated on or after         financial institution requires use of the third party.
September 30, 1995 are noted below.                      Charges imposed by settlement or closing agents
                                                         are finance charges if the bank requires the
• Credit secured by real property or a dwelling
                                                         specific service that gave rise to the charge and
  (closed-end credit only):
                                                         the charge is not otherwise excluded. The ‘‘Finance
  – The disclosed finance charge is considered           Charge Tolerances’’ charts within this document
    accurate if it does not vary from the actual         briefly summarize the rules that must be consid-
    finance charge by more than $100.                    ered.




6 (6/11) • Reg. Z                                                                 Consumer Compliance Handbook
                                                         Truth in Lending



Prepaid Finance Charges §226.18(b)(3)
A prepaid finance charge is any finance charge
paid separately to the financial institution or to a
third party, in cash or by check before or at closing,
settlement, or consummation of a transaction, or
withheld from the proceeds of the credit at any
time.
  Prepaid finance charges effectively reduce the
amount of funds available for the consumer’s use;
usually before or at the time the transaction is
consummated.
   Examples of finance charges frequently prepaid
by consumers are borrower’s points, loan origina-
tion fees, real estate construction inspection fees,
odd days’ interest (interest attributable to part of
the first payment period when that period is longer
than a regular payment period), mortgage guaran-
tee insurance fees paid to the Federal Housing
Administration, private mortgage insurance (PMI)
paid to such companies as the Mortgage Guaranty
Insurance Company (MGIC), and, in non-real-
estate transactions, credit report fees.


Precomputed Finance Charges
A precomputed finance charge includes, for ex-
ample, interest added to the note amount that is
computed by the add-on, discount, or simple
interest methods. If reflected in the face amount of
the debt instrument as part of the consumer’s
obligation, finance charges that are not viewed as
prepaid finance charges are treated as precom-
puted finance charges that are earned over the life
of the loan.




Consumer Compliance Handbook                                Reg. Z • 7 (6/11)
Truth in Lending




8 (6/11) • Reg. Z   Consumer Compliance Handbook
                                                                                              Truth in Lending



Instructions for the Finance Charge                      Annual Percentage Rate Definition
Chart                                                    §226.22 (Closed-End Credit)
The finance charge initially includes any charge         Credit costs may vary depending on the interest
that is, or will be, connected with a specific loan.     rate, the amount of the loan and other charges, the
Charges imposed by third parties are finance             timing and amounts of advances, and the repay-
charges if the creditor requires use of the third        ment schedule. The APR, which must be disclosed
party. Charges imposed on the consumer by a              in nearly all consumer credit transactions, is
settlement agent are finance charges only if the         designed to take into account all relevant factors
creditor requires the particular services for which      and to provide a uniform measure for comparing
the settlement agent is charging the borrower and        the cost of various credit transactions.
the charge is not otherwise excluded from the
finance charge.                                            The APR is a measure of the cost of credit,
                                                         expressed as a nominal yearly rate. It relates the
   Immediately below the finance charge definition,
                                                         amount and timing of value received by the
the chart presents five captions applicable to
                                                         consumer to the amount and timing of payments
determining whether a loan related charge is a
                                                         made. The disclosure of the APR is central to the
finance charge.
                                                         uniform credit cost disclosure envisioned by the
  The first caption is charges always included. This     TILA.
category focuses on specific charges given in the
                                                            The value of a closed-end credit APR must be
regulation or commentary as examples of finance
charges.                                                 disclosed as a single rate only, whether the loan
                                                         has a single interest rate, a variable interest rate, a
   The second caption, charges included unless           discounted variable interest rate, or graduated
conditions are met, focuses on charges that must         payments based on separate interest rates (step
be included in the finance charge unless the             rates), and it must appear with the segregated
creditor meets specific disclosure or other condi-       disclosures. Segregated disclosures are grouped
tions to exclude the charges from the finance            together and do not contain any information not
charge.                                                  directly related to the disclosures required under
   The third caption, conditions, focuses on the         §226.18.
conditions that need to be met if the charges               Since an APR measures the total cost of credit,
identified to the left of the conditions are permitted
                                                         including costs such as transaction charges or
to be excluded from the finance charge. Although
                                                         premiums for credit guarantee insurance, it is not
most charges under the second caption may be
                                                         an ‘‘interest’’ rate, as that term is generally used.
included in the finance charge at the creditor’s
                                                         APR calculations do not rely on definitions of
option, third party charges and application fees
                                                         interest in state law and often include charges,
(listed last under the third caption) must be
                                                         such as a commitment fee paid by the consumer,
excluded from the finance charge if the relevant
                                                         that are not viewed by some state usury statutes as
conditions are met. However, inclusion of appraisal
                                                         interest. Conversely, an APR might not include a
and credit report charges as part of the application
                                                         charge, such as a credit report fee in a real
fee is optional.
                                                         property transaction, which some state laws might
   The fourth caption, charges not included, identi-     view as interest for usury purposes. Furthermore,
fies fees or charges that are not included in the        measuring the timing of value received and of
finance charge under conditions identified by the        payments made, which is essential if APR calcula-
caption. If the credit transaction is secured by real    tions are to be accurate, must be consistent with
property or the loan is a residential mortgage           parameters under Regulation Z.
transaction, the charges identified in the column, if
                                                            The APR is often considered to be the finance
they are bona fide and reasonable in amount, must
                                                         charge expressed as a percentage. However, two
be excluded from the finance charge. For example,
                                                         loans could require the same finance charge and
if a consumer loan is secured by a vacant lot or
                                                         still have different APRs because of differing values
commercial real estate, any appraisal fees con-
                                                         of the amount financed or of payment schedules.
nected with the loan must not be included in the
                                                         For example, the APR is 12 percent on a loan with
finance charge.
                                                         an amount financed of $5,000 and 36 equal
   The fifth caption, charges never included, lists      monthly payments of $166.07 each. It is 13.26
specific charges provided by the regulation as           percent on a loan with an amount financed of
examples of those that automatically are not             $4,500 and 35 equal monthly payments of $152.18
finance charges (e.g., fees for unanticipated late       each and final payment of $152.22. In both cases
payments).                                               the finance charge is $978.52. The APRs on these




Consumer Compliance Handbook                                                                     Reg. Z • 9 (6/11)
Truth in Lending



example loans are not the same because an APR                financed has been reduced to reflect the
does not only reflect the finance charge. It relates         consumer’s reduced use of available funds at
the amount and timing of value received by the               consummation, the time interval during which
consumer to the amount and timing of payments                the consumer has use of the $2,475.69, 55
made.                                                        days to the first payment, has not changed.
                                                             Since the first payment period exceeds the
  The APR is a function of:
                                                             limitations of the regulation’s minor irregulari-
• The amount financed, which is not necessarily              ties provisions (see §226.17(c)(4)), it may not
  equivalent to the loan amount. For example, if the         be treated as regular. In calculating the APR,
  consumer must pay at closing a separate                    the first payment period must not be reduced
  1 percent loan origination fee (prepaid finance            by 25 days (i.e., the first payment period may
  charge) on a $100,000 residential mortgage loan,           not be treated as one month).
  the loan amount is $100,000, but the amount
                                                            Financial institutions may, if permitted by state or
  financed would be $100,000 less the $1,000 loan
                                                         other law, precompute interest by applying a rate
  fee, or $99,000.
                                                         against a loan balance using a simple interest,
• The finance charge, which is not necessarily           add-on, discount or some other method, and may
  equivalent to the total interest amount (interest is   earn interest using a simple interest accrual
  not defined by Regulation Z, but rather is defined     system, the Rule of 78’s (if permitted by law) or
  by state or other federal law). For example:           some other method. Unless the financial institu-
  – If the consumer must pay a $25 credit report         tion’s internal interest earnings and accrual meth-
    fee for an auto loan, the fee must be included       ods involve a simple interest rate based on a
                                                         360-day year that is applied over actual days (even
    in the finance charge. The finance charge in
                                                         that is important only for determining the accuracy
    that case is the sum of the interest on the loan
                                                         of the payment schedule), it is not relevant in
    (i.e., interest generated by the application of a
                                                         calculating an APR, since an APR is not an interest
    percentage rate against the loan amount) plus
                                                         rate (as that term is commonly used under state or
    the $25 credit report fee.
                                                         other law). Since the APR normally need not rely on
  – If the consumer must pay a $25 credit report         the internal accrual systems of a bank, it always
    fee for a home improvement loan secured by           may be computed after the loan terms have been
    real property, the credit report fee must be         agreed upon (as long as it is disclosed before
    excluded from the finance charge. The finance        actual consummation of the transaction).
    charge in that case would be only the interest
    on the loan.
• The payment schedule, which does not neces-            Special Requirements for Calculating the
  sarily include only principal and interest (P + I)     Finance Charge and APR
  payments. For example:
                                                         Proper calculation of the finance charge and APR
  – If the consumer borrows $2,500 for a vacation        are of primary importance. The regulation requires
    trip at 14 percent simple interest per annum         that the terms ‘‘finance charge’’ and ‘‘annual
    and repays that amount with 25 equal monthly         percentage rate’’ be disclosed more conspicuously
    payments beginning one month from consum-            than any other required disclosure. The finance
    mation of the transaction, the monthly P + I         charge and APR, more than any other disclosures,
    payment will be $115.87, if all months are           enable consumers to understand the cost of the
    considered equal, and the amount financed            credit and to comparison shop for credit. A
    would be $2,500. If the consumer’s payments          creditor’s failure to disclose those values accu-
    are increased by $2.00 a month to pay a              rately can result in significant monetary damages to
    non-financed $50 loan fee during the life of the     the creditor, either from a class action lawsuit or
    loan, the amount financed would remain at            from a regulatory agency’s order to reimburse
    $2,500 but the payment schedule would be             consumers for violations of law.
    increased to $117.87 a month, the finance
                                                            Footnote 45d: If an APR or finance charge is
    charge would increase by $50, and there
                                                         disclosed incorrectly, the error is not, in itself, a
    would be a corresponding increase in the APR.
                                                         violation of the regulation if:
    This would be the case whether or not state law
    defines the $50 loan fee as interest.                • The error resulted from a corresponding error in a
                                                           calculation tool used in good faith by the financial
  – If the loan above has 55 days to the first
                                                           institution.
    payment and the consumer prepays interest at
    consummation ($24.31 to cover the first 25           • Upon discovery of the error, the financial institu-
    days), the amount financed would be $2,500 -           tion promptly discontinues use of that calculation
    $24.31, or $2,475.69. Although the amount              tool for disclosure purposes.


10 (6/11) • Reg. Z                                                                 Consumer Compliance Handbook
                                                                                             Truth in Lending



• The financial institution notifies the Federal Re-     • Transaction fees;
  serve Board in writing of the error in the
                                                         • Fees imposed for the issuance or availability of
  calculation tool.
                                                           the open-end plan;
   When a financial institution claims a calculation
                                                         • Grace period; and
tool was used in good faith, the financial institution
assumes a reasonable degree of responsibility for        • Balance computation method.
ensuring that the tool in question provides the            Changes that do not require advance notice
accuracy required by the regulation. For example,        include:
the financial institution might verify the results
obtained using the tool by comparing those results       • Reductions of finance charges;
to the figures obtained by using another calculation     • Termination of account privileges resulting from
tool. The financial institution might also verify that     an agreement involving a court proceeding;
the tool, if it is designed to operate under the
actuarial method, produces figures similar to those      • The change is an increase in an APR upon
provided by the examples in appendix J to the              expiration of a specified period of time previously
regulation. The calculation tool should be checked         disclosed in writing;
for accuracy before it is first used and periodically    • The change applies to increases in variable
thereafter.                                                APRs that change according to an index not
                                                           under the card issuer’s control; and
                                                         • Rate increases due to the completion of, or failure
Subpart B - Open-End Credit                                of a consumer to comply with, the terms of a
                                                           workout or temporary hardship arrangement, if
Time of Disclosures (Credit Card
                                                           those terms are disclosed prior to commence-
Accounts) §226.5(b)                                        ment of the arrangement.
For credit card accounts under an open-end (not             A creditor may lower the credit limit without
home-secured) consumer credit plan, creditors            notice, but may not impose an over limit fee or
must adopt reasonable procedures designed to             penalty rate as a result of exceeding the new credit
ensure that periodic statements are mailed or            limit without a 45 day advance notice that the credit
delivered at least 21 days prior to the payment due      limit has been reduced. A creditor may suspend
date disclosed on the periodic statement and that        account privileges, terminate an account, or lower
payments are not treated as late for any purpose if      the credit limit without notice. However, a creditor
they are received within 21 days after mailing or        that lowers the credit limit may not impose an over
delivery of the statement. In addition, for all          limit fee or penalty rate as a result of exceeding the
open-end consumer credit accounts, creditors             new credit limit without a 45 day advance notice
must adopt reasonable procedures designed to             that the credit limit has been reduced.
ensure that periodic statements are mailed or
delivered at least 21 days prior to the date on which       For significant changes in terms (with the excep-
a grace period (if any) expires and that finance         tion of rate changes, increases in the minimum
charges are not imposed as a result of the loss of a     payment, certain changes in the balance compu-
grace period if a payment is received within 21          tation method, and when the change results from
days after mailing or delivery of a statement. For       the consumer’s failure to make a required minimum
purposes of this requirement, a ‘‘grace period’’ is      periodic payment within 60 days after the due
defined as a period within which any credit              date), a creditor must also provide consumers the
extended may be repaid without incurring a finance       right to reject the change. If the consumer does
charge due to a periodic interest rate.                  reject the change prior to the effective date, the
                                                         creditor may not apply the change to the account
                                                         (§226.9(h)(2)(i)).
Subsequent Disclosures (Open-End                           In addition, when a consumer rejects a change
Credit) §226.9                                           or increase, the creditor must not:
Creditors are required to provide consumers with         • Impose a fee or charge or treat the account as in
45 days’ advance written notice of rate increases          default solely as a result of the rejection; or
and other significant changes to the terms of their      • Require repayment of the balance on the account
credit card account agreements. The list of ‘‘signifi-     using a method that is less beneficial to the
cant changes’’ includes most fees and other terms          consumer than one of the following methods:
that a consumer should be aware of before use of           (1) the method of repayment prior to the rejection;
the account. Examples of such fees and terms               (2) an amortization period of not less than five
include:                                                   year from the date of rejection; or (3) a minimum
• Penalty fees;                                            periodic payment that includes a percentage of


Consumer Compliance Handbook                                                                   Reg. Z • 11 (6/11)
Truth in Lending



  the balance that is not more than twice the                When a balance is determined without first
  percentage included prior to the date of rejec-          deducting all credits and payments made during
  tion.                                                    the billing cycle, that fact and the amount of the
                                                           credits and payments must be disclosed.
                                                             If the financial institution uses the daily balance
Finance Charge (Open-End Credit)
                                                           method and applies a single daily periodic rate,
§226.6(a)
                                                           disclosure of the balance to which the rate was
Each finance charge imposed must be individually           applied may be stated as any of the following:
itemized. The aggregate total amount of the finance        • A balance for each day in the billing cycle. The
charge need not be disclosed.                                daily periodic rate is multiplied by the balance on
                                                             each day and the sum of the products is the
                                                             finance charge.
Determining the Balance and Computing the
Finance Charge                                             • A balance for each day in the billing cycle on
                                                             which the balance in the account changes. The
The examiner must know how to compute the                    finance charge is figured by the same method as
balance to which the periodic rate is applied.               discussed previously, but the statement shows
Common methods used are the previous balance                 the balance only for those days on which the
method, the daily balance method, and the aver-              balance changed.
age daily balance method, which are described as
follows:                                                   • The sum of the daily balances during the billing
                                                             cycle. The balance on which the finance charge
• Previous balance method. The balance on which              is computed is the sum of all the daily balances in
  the periodic finance charge is computed is
                                                             the billing cycle. The daily periodic rate is
  based on the balance outstanding at the start of
                                                             multiplied by that balance to determine the
  the billing cycle. The periodic rate is multiplied by
                                                             finance charge.
  this balance to compute the finance charge.
                                                           • The average daily balance during the billing
• Daily balance method. A daily periodic rate is
                                                             cycle. If this is stated, the financial institution
  applied to either the balance on each day in the
                                                             may, at its option, explain that the average daily
  cycle or the sum of the balances on each of the
                                                             balance is or can be multiplied by the number of
  days in the cycle. If a daily periodic rate is
                                                             days in the billing cycle and the periodic rate
  multiplied by the balance on each day in the
  billing cycle, the finance charge is the sum of the        applied to the product to determine the amount of
  products. If the daily periodic rate is multiplied by      interest.
  the sum of all the daily balances, the result is the       If the financial institution uses the daily balance
  finance charge.                                          method, but applies two or more daily periodic
• Average daily balance method. The average                rates, the sum of the daily balances may not be
  daily balance is the sum of the daily balances           used. Acceptable ways of disclosing the balances
  (either including or excluding current transac-          include:
  tions) divided by the number of days in the billing      • A balance for each day in the billing cycle;
  cycle. A periodic rate is then multiplied by the
                                                           • A balance for each day in the billing cycle on
  average daily balance to determine the finance
                                                             which the balance in the account changes; or
  charge. If the periodic rate is a daily one, the
  product of the rate multiplied by the average            • Two or more average daily balances. If the
  balance is multiplied by the number of days in the         average daily balances are stated, the financial
  cycle.                                                     institution may, at its option, explain that interest
                                                             is or may be determined by 1) multiplying each of
   In addition to those common methods, financial
                                                             the average daily balances by the number of
institutions have other ways of calculating the
                                                             days in the billing cycle (or if the daily rate varied
balance to which the periodic rate is applied. By
                                                             during the cycle), 2) by multiplying each of the
reading the financial institution’s explanation, the
                                                             results by the applicable daily periodic rate, and
examiner should be able to calculate the balance
                                                             3) adding these products together.
to which the periodic rate was applied. In some
cases, the examiner may need to obtain additional             In explaining the method used to find the
information from the financial institution to verify the   balance on which the finance charge is computed,
explanation disclosed. Any inability to understand         the financial institution need not reveal how it
the disclosed explanation should be discussed              allocates payments or credits. That information
with management, who should be reminded of                 may be disclosed as additional information, but all
Regulation Z’s requirement that disclosures be             required information must be clear and conspicu-
clear and conspicuous.                                     ous.


12 (6/11) • Reg. Z                                                                   Consumer Compliance Handbook
                                                                                                       Truth in Lending


   Note that §226.54 prohibits a credit card issuer         not include any of the charges just mentioned, the
from calculating finance charges based on bal-              financial institution may compute the historical rate
ances for days in previous billing cycles as a result       using the quotient method. In that method, the
of the loss of a grace period (a practice sometimes         financial institution divides the total finance charge
referred to as ‘‘double-cycle billing’’).                   for the cycle by the sum of the balances to which
                                                            the periodic rates were applied and multiplies the
                                                            quotient (expressed as a percentage) by the
Finance Charge Resulting from Two or More                   number of cycles in a year.
Periodic Rates
                                                                Alternatively, the financial institution may use the
Some financial institutions use more than one               method for computing the corresponding APR. In
periodic rate in computing the finance charge. For          that method, the financial institution multiplies each
example, one rate may apply to balances up to a             periodic rate by the number of periods in one year.
certain amount and another rate to balances more            If the finance charge includes a minimum, fixed, or
than that amount. If two or more periodic rates             transaction charge, the financial institution must
apply, the financial institution must disclose all          use the appropriate variation of the quotient
rates and conditions. The range of balances to              method. When transaction charges are imposed,
which each rate applies also must be disclosed. It          the financial institution should refer to appendix F of
is not necessary, however, to break the finance             this handbook for computational examples.
charge into separate components based on the
different rates.                                              The regulation also contains a computation rule
                                                            for small finance charges. If the finance charge
                                                            includes a minimum, fixed, or transaction charge,
Annual Percentage Rate (Open-End                            and the total finance charge for the cycle does not
Credit)                                                     exceed 50 cents, the financial institution may
                                                            multiply each applicable periodic rate by the
                                                            number of periods in a year to compute the APR.
Determination of APR §226.14
                                                              Optional calculation methods also are provided
The disclosed APR on an open-end credit account             for accounts involving daily periodic rates.
is accurate if it is within one-eighth of one               (§226.14(d))
percentage point of the APR calculated under
Regulation Z. The regulation states two basic
methods for determining the APR in open-end                 Brief Outline for Open-End Credit APR
credit transactions. The first involves multiplying         Calculations on Periodic Statements
each periodic rate by the number of periods in a              Note: Assume monthly billing cycles for each of
year. This method is used for disclosing:                   the calculations below.
• The corresponding APR in the initial disclosures;         i.   APR when finance charge is determined solely
• The corresponding APR on periodic statements;                  by applying one or more periodic rates:

• The APR in early disclosures for credit card                   a. Monthly periodic rates:
  accounts;                                                          1. Monthly rate x 12 = APR
• The APR in early disclosures for home-equity                              or
  plans;                                                             2. (Total finance charge / applicable bal-
• The APR in advertising; and                                           ance2) x 12 = APR
                                                                        This calculation may be used when
• The APR in oral disclosures.                                          different rates apply to different bal-
  The corresponding APR is prospective. In other                        ances.
words, it does not involve any particular finance                b. Daily periodic rates:
charge or periodic balance.
                                                                     1. Daily rate x 365 = APR
   The second method is the quotient method, used                           or
in computing the APR for periodic statements. The
quotient method reflects the annualized equivalent                   2. (Total finance charge / average daily
of the rate that was actually applied during a cycle.                   balance) x 12 = APR
This rate, also known as the historical rate, will differ                   or
from the corresponding APR if the creditor applies                   3. (Total finance charge / sum of balances)
minimum, fixed, or transaction charges to the                           x 365 = APR
account during the cycle.
  If the finance charge is determined by applying             2. For the following formulas, the APR cannot be determined if
one or more periodic rates to a balance, and does           the applicable balance is zero.


Consumer Compliance Handbook                                                                              Reg. Z • 13 (6/11)
Truth in Lending


ii.   APR when finance charge includes a minimum,                     resolve the outstanding credit card balance of a
      fixed, or other charge that is not calculated                   deceased account holder in a timely manner. If an
      using a periodic rate (and does not include                     administrator requests the amount of the balance:
      charges related to a specific transaction, like                 • The issuer is prohibited from imposing additional
      cash advance fees):                                               fees on the account;
      a. Monthly periodic rates:                                      • The issuer is required to disclose the amount of
         1. (Total finance charge / amount of appli-                    the balance to the administrator in a timely
            cable balance) x 12 = APR3                                  manner (safe harbor of 30 days); and
      b. Daily periodic rates                                         • If the balance is paid in full within 30 days after
         1. (Total finance charge / amount of appli-                    disclosure of the balance, the issuer must waive
            cable balance) X 365 = APR                                  or rebate any trailing or residual interest charges
                                                                        that accrued on the balance following the
         2. The following may be used if at least a
                                                                        disclosure.
            portion of the finance charge is deter-
            mined by the application of a daily
            periodic rate. If not, use the formula                    Minimum Payments §226.7(b)(12)
            above.
                                                                      For credit card accounts under an open-end credit
             a. (Total finance charge / average daily
                                                                      plan, card issuers generally must disclose on
                balance) x 12 = APR
                                                                      periodic statements an estimate of the amount of
                  or
                                                                      time and the total cost (principal and interest)
             b. (Total finance charge / sum of bal-                   involved in paying the balance in full by making
                ances) x 365 = APR                                    only the minimum payments, and an estimate of the
      c. Monthly and daily periodic rates                             monthly payment amount required to pay off the
         1. If the finance charge imposed during the                  balance in 36 months and the total cost (principal
            billing cycle does not exceed $.50 for a                  and interest) of repaying the balance in 36 months.
            monthly or longer billing cycles (or pro                  Card issuers also must disclose a minimum
            rata part of $.50 for a billing cycle shorter             payment warning, and an estimate of the total
            than monthly), the APR may be calcu-                      interest that a consumer would save if that
            lated by multiplying the monthly rate by                  consumer repaid the balance in 36 months, instead
            12 or the daily rate by 365.                              of making minimum payments.

iii. If the total finance charge included a charge
     related to a specific transaction (such as a                     Subpart C - Closed-End Credit
     cash advance fee), even if the total finance
     charge also included any other minimum, fixed,                   Finance Charge (Closed-End Credit)
     or other charge not calculated using a periodic                  §226.17(a)
     rate, then the monthly and daily APRs are
     calculated as follows: (total finance charge /                   The aggregate total amount of the finance charge
     the greater of: the transaction amounts that                     must be disclosed. Each finance charge imposed
     created the transaction fees or the sum of the                   need not be individually itemized and must not be
     balances and other amounts on which a                            itemized with the segregated disclosures.
     finance charge was imposed during the billing
     cycle4) X number of billing cycles in a year
                                                                      Annual Percentage Rate (Closed-End
     (12) = APR. 5
                                                                      Credit) §226.22

Timely Settlement of Estates §226.11(c)                               Accuracy Tolerances
Issuers are required to establish procedures to                       The disclosed APR on a closed-end transaction is
ensure that any administrator of an estate can                        accurate for:
                                                                      • Regular transactions (which include any single
  3. Loan fees, points, or similar finance charges that relate to       advance transaction with equal payments and
the opening of the account must not be included in the calculation      equal payment periods, or an irregular first
of the APR.
  4. The sum of the balances may include amounts computed by
                                                                        payment period and/or a first or last irregular
the average daily balance, adjusted balance, or previous balance        payment), if it is within one-eighth of 1 percent-
method. When a portion of the finance charge is determined by           age point of the APR calculated under Regula-
application of one or more daily periodic rates, the sum of the
balances also means the average of daily balances.                      tion Z (§226.22(a)(2)).
  5. If the product is less than the highest periodic rate applied,
expressed as an APR, the higher figure must be disclosed as the       • Irregular transactions (which include multiple
APR.                                                                    advance transactions and other transactions not


14 (6/11) • Reg. Z                                                                             Consumer Compliance Handbook
                                                                                               Truth in Lending



  considered regular), if it is within one-quarter of     Board’s APR tables or with any other appropriate
  1 percentage point of the APR calculated under          computation tool to determine the APR. If the
  Regulation Z (§226.22(a)(3)).                           financial institution elects not to use appendix D, or
• Mortgage transactions, if it is within one-eighth of    if appendix D cannot be applied to a loan (e.g.,
  1 percentage point for regular transactions or          appendix D does not apply to a combined
  one-quarter of 1 percentage point for irregular         construction-permanent loan if the payments for
  transactions or:                                        the permanent loan begin during the construction
                                                          period), the financial institution must make its
  i.    The rate results from the disclosed finance       estimates under §226.17(c)(2) and calculate the
        charge, and the disclosed finance is consid-      APR using multiple advance formulas.
        ered accurate under §§226.18(d)(1) or
        226.23(g) or (h) (§226.22(a)(4)); or                 On loans involving a series of advances under an
                                                          agreement to extend credit up to a certain amount,
  ii.   The disclosed finance charge is calculated        a financial institution may treat all of the advances
        incorrectly but is considered accurate under      as a single transaction or disclose each advance
        §§226.18(d)(1) or 226.23(g) or (h) and either:    as a separate transaction. If advances are dis-
        (a) the finance charge is understated and         closed separately, disclosures must be provided
            the disclosed APR is also understated         before each advance occurs, with the disclosures
            but is closer to the actual APR than the      for the first advance provided before consumma-
            APR that would be considered accurate         tion.
            under §226.22(a)(4); or                         In a transaction that finances the construction of
        (b) the disclosed finance charge is over-         a dwelling that may or will be permanently financed
            stated and the disclosed APR is also          by the same financial institution, the construction-
            overstated but is closer to the actual        permanent financing phases may be disclosed in
            APR than the APR that would be consid-        one of three ways listed below.
            ered accurate under §226.22(a)(4).            • As a single transaction, with one disclosure
   For example, in an irregular transaction subject         combining both phases.
to a tolerance of 1/4th of 1 percentage point, if the     • As two separate transactions, with one disclosure
actual APR is 9.00% and a $75 omission from the             for each phase.
finance charge corresponds to a rate of 8.50% that
is considered accurate under §226.22(a)(4), a             • As more than two transactions, with one disclo-
disclosed APR of 8.65% is considered accurate               sure for each advance and one for the permanent
under §226.22(a)(5). However, a disclosed APR               financing phase.
below 8.50% or above 9.25% would not be                      If two or more disclosures are furnished, buyer’s
considered accurate.                                      points or similar amounts imposed on the con-
                                                          sumer may be allocated among the transactions in
                                                          any manner the financial institution chooses, as
Construction Loans §226.17(c)(6) and                      long as the charges are not applied more than
Appendix D                                                once. In addition, if the financial institution chooses
                                                          to give two sets of disclosures and the consumer is
Construction and certain other multiple advance           obligated for both construction and permanent
loans pose special problems in computing the              phases at the outset, both sets of disclosures must
finance charge and APR. In many instances, the            be given to the consumer initially, before consum-
amount and dates of advances are not predictable          mation of each transaction occurs.
with certainty since they depend on the progress of
                                                             If the creditor requires interest reserves for
the work. Regulation Z provides that the APR and
                                                          construction loans, special appendix D rules apply
finance charge for such loans may be estimated for
                                                          that can make the disclosure calculations quite
disclosure.
                                                          complicated. The amount of interest reserves
   At its option, the financial institution may rely on   included in the commitment amount must not be
the representations of other parties to acquire           treated as a prepaid finance charge.
necessary information (for example, it might look to
                                                            If the lender uses appendix D for construction-
the consumer for the dates of advances). In
                                                          only loans with required interest reserves, the
addition, if either the amounts or dates of advances
                                                          lender must estimate construction interest using
are unknown (even if some of them are known), the
                                                          the interest reserve formula in appendix D. The
financial institution may, at its option, use appendix
                                                          lender’s own interest reserve values must be
D to the regulation to make calculations and
                                                          completely disregarded for disclosure purposes.
disclosures. The finance charge and payment
schedule obtained through appendix D may be                 If the lender uses appendix D for combination
used with volume one of the Federal Reserve               construction-permanent loans, the calculations can


Consumer Compliance Handbook                                                                     Reg. Z • 15 (6/11)
Truth in Lending



be much more complex. Appendix D is used to                  sures on calculation tools that assume all months
estimate the construction interest, which is then            have an equal number of days, even if their
measured against the lender’s contractual interest           practice is to take account of the variations in
reserves.                                                    months to collect interest.
   If the interest reserve portion of the lender’s             For example, a financial institution may calculate
contractual commitment amount exceeds the                    disclosures using a financial calculator based on a
amount of construction interest estimated under              360-day year with 30-day months, when, in fact, it
appendix D, the excess value is considered part of           collects interest by applying a factor of 1/365 of the
the amount financed if the lender has contracted to          annual interest rate to actual days.
disburse those amounts whether they ultimately are              Disclosure violations may occur, however, when
needed to pay for accrued construction interest. If          a financial institution applies a daily interest factor
the lender will not disburse the excess amount if it         based on a 360-day year to the actual number of
is not needed to pay for accrued construction                days between payments. In those situations, the
interest, the excess amount must be ignored for              financial institution must disclose the higher values
disclosure purposes.                                         of the finance charge, the APR, and the payment
                                                             schedule resulting from this practice.
Calculating the Annual Percentage Rate                          For example, a 12 percent simple interest rate
§226.22                                                      divided by 360 days results in a daily rate of
                                                             .033333 percent. If no charges are imposed except
The APR must be determined under one of the                  interest, and the amount financed is the same as
following:                                                   the loan amount, applying the daily rate on a daily
• The actuarial method, which is defined by                  basis for a 365-day year on a $10,000 one year,
  Regulation Z and explained in appendix J to the            single payment, unsecured loan results in an APR
  regulation.                                                of 12.17 percent (.033333% x 365 = 12.17%), and
                                                             a finance charge of $1,216.67. There would be a
• The U.S. Rule, which is permitted by Regulation Z          violation if the APR were disclosed as 12 percent or
  and briefly explained in appendix J to the                 if the finance charge were disclosed as $1,200
  regulation. The U.S. Rule is an accrual method             (12% x $10,000).
  that seems to have first surfaced officially in an
  early nineteenth century United States Supreme                However, if there are no other charges except
  Court case, Story v. Livingston (38 U.S. 359).             interest, the application of a 360-day year daily rate
                                                             over 365 days on a regular loan would not result in
   Whichever method is used by the financial                 an APR in excess of the one eighth of one
institution, the rate calculated will be accurate if it is   percentage point APR tolerance unless the nominal
able to ‘‘amortize’’ the amount financed while it            interest rate is greater than 9 percent. For irregular
generates the finance charge under the accrual               loans, with one-quarter of 1 percentage point APR
method selected. Financial institutions also may             tolerance, the nominal interest rate would have to
rely on minor irregularities and accuracy tolerances         be greater than 18 percent to exceed the tolerance.
in the regulation, both of which effectively permit
somewhat imprecise, but still legal, APRs to be
disclosed.                                                   Variable Rate Information §226.18(f)
                                                             If the terms of the legal obligation allow the financial
360-Day and 365-Day Years                                    institution, after consummation of the transaction, to
§226.17(c)(3)                                                increase the APR, the financial institution must
                                                             furnish the consumer with certain information on
Confusion often arises over whether to use the               variable rates. Graduated payment mortgages and
360-day or 365-day year in computing interest,               step-rate transactions without a variable rate fea-
particularly when the finance charge is computed             ture are not considered variable rate transactions.
by applying a daily rate to an unpaid balance.               In addition, variable rate disclosures are not
Many single payment loans or loans payable on                applicable to rate increases resulting from delin-
demand are in this category. There are also loans            quency, default, assumption, acceleration, or trans-
in this category that call for periodic installment          fer of the collateral.
payments. Regulation Z does not require the use of
                                                                Some of the more important transaction-specific
one method of interest computation in preference
                                                             variable rate disclosure requirements under §226.18
to another (although state law may). It does,
                                                             follow.
however, permit financial institutions to disregard
the fact that months have different numbers of days          • Disclosures for variable rate loans must be given
when calculating and making disclosures. This                  for the full term of the transaction and must be
means financial institutions may base their disclo-            based on the terms in effect at the time of


16 (6/11) • Reg. Z                                                                     Consumer Compliance Handbook
                                                                                             Truth in Lending



  consummation.                                           rate or payment amount is changed (§226.20(c)).
• If the variable rate transaction includes either a
  seller buy-down that is reflected in a contract or a    Payment Schedule §226.18(g)
  consumer buy-down, the disclosed APR should
  be a composite rate based on the lower rate for         The disclosed payment schedule must reflect all
  the buy-down period and the rate that is the basis      components of the finance charge. It includes all
  for the variable rate feature for the remainder of      payments scheduled to repay loan principal,
  the term.                                               interest on the loan, and any other finance charge
                                                          payable by the consumer after consummation of
• If the initial rate is not determined by the index or
                                                          the transaction.
  formula used to make later interest rate adjust-
  ments, as in a discounted variable rate transac-          However, any finance charge paid separately
  tion, the disclosed APR must reflect a composite        before or at consummation (e.g., odd days’ inter-
  rate based on the initial rate for as long as it is     est) is not part of the payment schedule. It is a
  applied and, for the remainder of the term, the         prepaid finance charge that must be reflected as a
  rate that would have been applied using the             reduction in the value of the amount financed.
  index or formula at the time of consummation              At the creditor’s option, the payment schedule
  (i.e., the fully indexed rate).                         may include amounts beyond the amount financed
  – If a loan contains a rate or payment cap that         and finance charge (e.g., certain insurance premi-
    would prevent the initial rate or payment, at the     ums or real estate escrow amounts such as taxes
    time of the adjustment, from changing to the          added to payments). However, when calculating
    fully indexed rate, the effect of that rate or        the APR, the creditor must disregard such amounts.
    payment cap needs to be reflected in the                If the obligation is a renewable balloon payment
    disclosures.                                          instrument that unconditionally obligates the finan-
  – The index at consummation need not be used            cial institution to renew the short-term loan at the
    if the contract provides a delay in the imple-        consumer’s option or to renew the loan subject to
    mentation of changes in an index value (e.g.,         conditions within the consumer’s control, the pay-
    the contract indicates that future rate changes       ment schedule must be disclosed using the longer
    are based on the index value in effect for some       term of the renewal period or periods. The long-
    specified period, like 45 days before the             term loan must be disclosed with a variable rate
    change date). Instead, the financial institution      feature.
    may use any rate from the date of consumma-              If there are no renewal conditions or if the
    tion back to the beginning of the specified           financial institution guarantees to renew the obliga-
    period (e.g., during the previous 45-day pe-          tion in a refinancing, the payment schedule must
    riod).                                                be disclosed using the shorter balloon payment
• If the initial interest rate is set according to the    term. The short-term loan must be disclosed as a
  index or formula used for later adjustments, but is     fixed rate loan, unless it contains a variable rate
  set at a value as of a date before consummation,        feature during the initial loan term.
  disclosures should be based on the initial interest
  rate, even though the index may have changed
  by the consummation date.                               Amount Financed §226.18(b)
   For variable-rate loans that are not secured by        Definition
the consumer’s principal dwelling or that are
secured by the consumer’s principal dwelling but          The amount financed is the net amount of credit
have a term of one year or less, creditors must           extended for the consumer’s use. It should not be
disclose the circumstances under which the rate           assumed that the amount financed under the
may increase, any limitations on the increase, the        regulation is equivalent to the note amount, pro-
effect of an increase, and an example of the              ceeds, or principal amount of the loan. The amount
payment terms that would result from an increase.         financed normally equals the total of payments less
§226.18(f)(1).                                            the finance charge.

   For variable-rate consumer loans secured by the          To calculate the amount financed, all amounts
consumer’s principal dwelling and having a matu-          and charges connected with the transaction, either
rity of more than one year, creditors must state that     paid separately or included in the note amount,
the loan has a variable-rate feature and that the         must first be identified. Any prepaid, precomputed,
disclosures were previously given. (§226.18(f)(2))        or other finance charge must then be determined.
Extensive disclosures about the loan program are             The amount financed must not include any
provided when consumers apply for such a loan             finance charges. If finance charges have been
(§226.19(b), and throughout the loan term when the        included in the obligation (either prepaid or pre-


Consumer Compliance Handbook                                                                    Reg. Z • 17 (6/11)
Truth in Lending



computed), they must be subtracted from the face        charges paid separately, for an amount financed of
amount of the obligation when determining the           $5,025 - $50 = $4,975. The answer is the same
amount financed. The resulting value must be            whether finance charges included in the obligation
reduced further by an amount equal to any prepaid       are considered prepaid or precomputed finance
finance charge paid separately. The final resulting     charges.
value is the amount financed.                              The financial institution may treat the $10 service
  When calculating the amount financed, finance         charge as an addition to the loan amount and not
charges (whether in the note amount or paid             as a prepaid finance charge. If it does, the loan
separately) should not be subtracted more than          principal would be $5,000. The $5,000 loan princi-
once from the total amount of an obligation.            pal does not include either the $400 or the $10
Charges not in the note amount and not included in      precomputed finance charge in the note. The loan
the finance charge (e.g., an appraisal fee paid         principal is increased by other amounts that are
separately in cash on a real estate loan) are not       financed which are not part of the finance charge
required to be disclosed under Regulation Z and         (the $25 credit report fee) and reduced by any
must not be included in the amount financed.            prepaid finance charges (the $50 loan fee, not the
                                                        $10 service charge) to arrive at the amount
  In a multiple advance construction loan, pro-
                                                        financed of $5,000 + $25 - $50 = $4,975.
ceeds placed in a temporary escrow account and
awaiting disbursement in draws to the developer
are not considered part of the amount financed          Other Calculations
until actually disbursed. Thus, if the entire commit-
ment amount is disbursed into the lender’s escrow       The financial institution may treat the $10 service
account, the lender must not base disclosures on        charge as a prepaid finance charge. If it does, the
the assumption that all funds were disbursed            loan principal would be $5,010. The $5,010 loan
immediately, even if the lender pays interest on the    principal does not include the $400 precomputed
escrowed funds.                                         finance charge. The loan principal is increased by
                                                        other amounts that are financed which are not part
                                                        of the finance charge (the $25 credit report fee)
Required Deposit §226.18(r)                             and reduced by any prepaid finance charges (the
                                                        $50 loan fee and the $10 service charge withheld
A required deposit, with certain exceptions, is one
                                                        from loan proceeds) to arrive at the same amount
that the financial institution requires the consumer
                                                        financed of $5,010 + $25 - $50- $10 = $4,975.
to maintain as a condition of the specific credit
transaction. It can include a compensating balance
or a deposit balance that secures the loan. The         Refinancings §226.20
effect of a required deposit is not reflected in the
APR. Also, a required deposit is not a finance          When an obligation is satisfied and replaced by a
charge since it is eventually released to the           new obligation to the original financial institution (or
consumer. A deposit that earns at least 5 percent       a holder or servicer of the original obligation) and is
per year need not be considered a required              undertaken by the same consumer, it must be
deposit.                                                treated as a refinancing for which a complete set of
                                                        new disclosures must be furnished. A refinancing
                                                        may involve the consolidation of several existing
Calculating the Amount Financed                         obligations, disbursement of new money to the
                                                        consumer, or the rescheduling of payments under
A consumer signs a note secured by real property
                                                        an existing obligation. In any form, the new
in the amount of $5,435. The note amount includes
                                                        obligation must completely replace the earlier one
$5,000 in proceeds disbursed to the consumer,
                                                        to be considered a refinancing under the regula-
$400 in precomputed interest, $25 paid to a credit
                                                        tion. The finance charge on the new disclosure
reporting agency for a credit report, and a $10
                                                        must include any unearned portion of the old
service charge. Additionally, the consumer pays a
                                                        finance charge that is not credited to the existing
$50 loan fee separately in cash at consummation.
                                                        obligation. (§226.20(a))
The consumer has no other debt with the financial
institution. The amount financed is $4,975.               The following transactions are not considered
                                                        refinancings even if the existing obligation is
  The amount financed may be calculated by first
                                                        satisfied and replaced by a new obligation under-
subtracting all finance charges included in the note
                                                        taken by the same consumer:
amount ($5,435 - $400 - $10 = $5,025). The $25
credit report fee is not a finance charge because       • A renewal of an obligation with a single payment
the loan is secured by real property. The $5,025 is       of principal and interest or with periodic interest
further reduced by the amount of prepaid finance          payments and a final payment of principal with no



18 (6/11) • Reg. Z                                                                Consumer Compliance Handbook
                                                               Truth in Lending



             Closed-End Credit: Finance Charge Accuracy Tolerances




Consumer Compliance Handbook                                     Reg. Z • 19 (6/11)
Truth in Lending



             Closed-End Credit: Accuracy and Reimbursement Tolerances for
                        UNDERSTATED FINANCE CHARGES




20 (6/11) • Reg. Z                                           Consumer Compliance Handbook
                                                                      Truth in Lending



                         Closed-End Credit: Accuracy Tolerances for
                            OVERSTATED FINANCE CHARGES




Consumer Compliance Handbook                                            Reg. Z • 21 (6/11)
Truth in Lending



            Closed-End Credit: Accuracy Tolerances for OVERSTATED APRS




22 (6/11) • Reg. Z                                        Consumer Compliance Handbook
                                                                  Truth in Lending



             Closed-End Credit: Accuracy and Reimbursement Tolerances
                            for UNDERSTATED APRS




Consumer Compliance Handbook                                        Reg. Z • 23 (6/11)
Truth in Lending



  change in the original terms.                            • Any membership or participation fee that could
                                                             be imposed.
• An APR reduction with a corresponding change
  in the payment schedule.                                    If any finance charges or other charge or
                                                           payment terms are set forth, affirmatively or nega-
• An agreement involving a court proceeding.
                                                           tively, in an advertisement for a home-equity plan
• Changes in credit terms arising from the consum-         subject to the requirements of section 226.5b, the
  er’s default or delinquency.                             advertisement also must clearly and conspicuously
• The renewal of optional insurance purchased by           set forth the following:
  the consumer and added to an existing transac-           • Any loan fee that is a percentage of the credit
  tion, if required disclosures were provided for the        limit under the plan and an estimate of any other
  initial purchase of the insurance.                         fees imposed for opening the plan, stated as a
  However, even if it is not accomplished by the             single dollar amount or a reasonable range;
cancellation of the old obligation and substitution of     • Any periodic rate used to compute the finance
a new one, a new transaction subject to new                  charge, expressed as an APR as determined
disclosures results if the financial institution:            under section §226.14(b); and
• Increases the rate based on a variable rate              • The maximum APR that may be imposed in a
  feature that was not previously disclosed; or              variable-rate plan.
• Adds a variable rate feature to the obligation.             Regulation Z’s open-end home-equity plan ad-
  If, at the time a loan is renewed, the rate is           vertising rules include a clear and conspicuous
increased, the increase is not considered a vari-          standard for home-equity plan advertisements,
able rate feature. It is the cost of renewal, similar to   consistent with the approach taken in the advertis-
a flat fee, as long as the new rate remains fixed          ing rules for consumer leases under Regulation M.
during the remaining life of the loan. If the original     Commentary provisions clarify how the clear and
debt is not canceled in connection with such a             conspicuous standard applies to advertisements of
renewal, the regulation does not require new               home-equity plans with promotional rates or pay-
disclosures. Also, changing the index of a variable        ments, and to Internet, television, and oral adver-
rate transaction to a comparable index is not              tisements of home-equity plans. The regulation
considered adding a variable rate feature to the           allows alternative disclosures for television and
obligation.                                                radio advertisements for home-equity plans. The
                                                           regulation also requires that advertisements ad-
                                                           equately disclose not only promotional plan terms,
Advertising §226.16 and §226.24                            but also the rates or payments that will apply over
                                                           the term of the plan.
The regulation requires that loan product advertise-
ments provide accurate and balanced information,             Regulation Z also contains provisions implement-
in a clear and conspicuous manner, about rates,            ing the Bankruptcy Abuse Prevention and Con-
monthly payments, and other loan features. The             sumer Protection Act of 2005, which requires
advertising rules ban several deceptive or mislead-        disclosure of the tax implications of certain home-
ing advertising practices, including representa-           equity plans.
tions that a rate or payment is ‘‘fixed’’ when in fact
it can change.
                                                           Closed-End Advertising (§226.24)

Advertising Rules for Open-End Plans                       If an advertisement for credit states specific credit
(§226.16)                                                  terms, it must state only those terms that actually
                                                           are or will be arranged or offered by the creditor.
If an advertisement for credit states specific credit         Disclosures required by this section must be
terms, it must state only those terms that actually        made ‘‘clearly and conspicuously.’’ To meet this
are or will be arranged or offered by the creditor. If     standard in general, credit terms need not be
any finance charges or other charges are set forth         printed in a certain type size nor appear in any
in an advertisement, the advertisement must also           particular place in the advertisement. For advertise-
clearly and conspicuously state the following:             ments for credit secured by a dwelling, a clear and
• Any minimum, fixed, transaction, activity or             conspicuous disclosure means that the required
  similar charge that could be imposed;                    information is disclosed with equal prominence and
                                                           in close proximity to the advertised rates or
• Any periodic rate that may be applied expressed
                                                           payments triggering the required disclosures.
  as an APR as determined under section
  §226.14(b). If the plan provides for a variable            If an advertisement states a rate of finance
  periodic rate, that fact must be disclosed; and          charge, it must state the rate as an ‘‘annual


24 (6/11) • Reg. Z                                                                  Consumer Compliance Handbook
                                                                                              Truth in Lending



percentage rate,’’ using that term. If the APR may         without adequately disclosing that the interest
be increased after consummation, the advertise-            rate or payment amounts are ‘‘fixed’’ only for a
ment must state that fact.                                 limited period of time, rather than for the full term
                                                           of the loan;
  If an advertisement is for credit not secured by a
dwelling, the advertisement must not state any           • Making comparisons between actual or hypotheti-
other rate, except that a simple annual rate or            cal credit payments or rates and any payment or
periodic rate that is applied to an unpaid balance         rate available under the advertised product that
may be stated in conjunction with, but not more            are not available for the full term of the loan, with
conspicuously than, the APR.                               certain exceptions for advertisements for variable
                                                           rate products;
  If an advertisement is for credit secured by a
dwelling, the advertisement must not state any           • Characterizing the products offered as ‘‘govern-
other rate, except that a simple annual rate that is       ment loan programs,’’ ‘‘government-supported
applied to an unpaid balance may be stated in              loans,’’ or otherwise endorsed or sponsored by a
conjunction with, but not more conspicuously than,         federal or state government entity even though
the APR. That is, an advertisement for credit              the advertised products are not government-
secured by a dwelling may not state a periodic             supported or -sponsored loans;
rate, other than a simple annual rate, that is applied   • Displaying the name of the consumer’s current
to an unpaid balance.                                      mortgage lender, unless the advertisement also
                                                           prominently discloses that the advertisement is
  ‘‘Triggering terms’’ - The following are triggering
                                                           from a mortgage lender not affiliated with the
terms that require additional disclosures:
                                                           consumer’s current lender;
• The amount or percentage of any down payment;
                                                         • Making claims of debt elimination if the product
• The number of payments or period of repayment;           advertised would merely replace one debt obli-
• The amount of any payment; and                           gation with another;

• The amount of any finance charge.                      • Creating a false impression that the mortgage
                                                           broker or lender is a ‘‘counselor’’ for the con-
  An advertisement stating a triggering term must          sumer; and
also state the following terms as applicable:
                                                         • In foreign-language advertisements, providing
• The amount or percentage of any down payment;            certain information, such as a low introductory
• The terms of repayment, which reflect the                ‘‘teaser’’ rate, in a foreign language, while
  repayment obligations over the full term of the          providing required disclosures only in English.
  loan, including any balloon payment; and
• The ‘‘annual percentage rate,’’ using that term,       Subpart D - Miscellaneous
  and, if the rate may be increased after consum-
  mation, that fact.                                     Civil Liability (TILA §§130 and 131)
  For any advertisement secured by a dwelling,           If a creditor fails to comply with any requirements of
other than television or radio advertisements, that      the TILA, other than with the advertising provisions
states a simple annual rate of interest and more         of chapter 3, it may be held liable to the consumer
than one simple annual rate of interest will apply       for:
over the term of the advertised loan, the advertise-
                                                         • Actual damage, and
ment must state in a clear and conspicuous
manner:                                                  • The cost of any legal action together with
                                                           reasonable attorney’s fees in a successful action.
• Each simple rate of interest that will apply. In
  variable-rate transactions, a rate determined by          If it violates certain requirements of the TILA, the
  adding an index and margin must be disclosed           creditor also may be held liable for either of the
  based on a reasonably current index and margin.        following:
• The period of time during which each simple            • In an individual action, twice the amount of the
  annual rate of interest will apply.                      finance charge involved, but not less than $100
                                                           or more than $1,000. However, in an individual
• The APR for the loan.                                    action relating to a closed-end credit transaction
  The regulation prohibits the following seven             secured by real property or a dwelling, twice the
deceptive or misleading acts or practices in               amount of the finance charge involved, but not
advertisements for closed-end mortgage loans:              less than $200 or more than $2,000.
• Stating that rates or payments for loans are           • In a class action, such amount as the court may
  ‘‘fixed’’ when those rates or payments can vary          allow. The total amount of recovery, however,


Consumer Compliance Handbook                                                                    Reg. Z • 25 (6/11)
Truth in Lending



  cannot be more than $500,000 or 1 percent of the      except where the assignment was involuntary
  creditor’s net worth, whichever is less.              (§131).
  Civil actions that may be brought against a
creditor also may be maintained against any
                                                        Relationship to State Law (TILA §111)
assignee of the creditor if the violation is apparent
on the face of the disclosure statement or other        State laws providing rights, responsibilities, or
documents assigned, except where the assign-            procedures for consumers or financial institutions
ment was involuntary.                                   for consumer credit contracts may be:
   A creditor that fails to comply with TILA’s          • Preempted by federal law;
requirements for loans that meet the criteria in
§226.32(a) (‘‘high-cost mortgage loans’’) or            • Not preempted by federal law; or
§226.35(a) (‘‘higher-priced mortgage loans’’) may       • Substituted in lieu of TILA and Regulation Z
be held liable to the consumer for all finance            requirements.
charges and fees paid to the creditor. For high-cost
                                                          State law provisions are preempted to the extent
mortgage loans (under §226.32(a)), any subse-
                                                        that they contradict the requirements in the follow-
quent assignee is subject to all claims and
                                                        ing chapters of the TILA and the implementing
defenses that the consumer could assert against
                                                        sections of Regulation Z:
the creditor, unless the assignee demonstrates that
it could not reasonably have determined that the        • Chapter 1, ‘‘General Provisions,’’ which contains
loan was subject to §226.32.                              definitions and acceptable methods for determin-
                                                          ing finance charges and annual percentage
                                                          rates.
Criminal Liability (TILA §112)                          • Chapter 2, ‘‘Credit Transactions,’’ which contains
Anyone who willingly and knowingly fails to comply        disclosure requirements, rescission rights, and
with any requirement of the TILA will be fined not        certain credit card provisions.
more than $5,000 or imprisoned not more than one        • Chapter 3, ‘‘Credit Advertising,’’ which contains
year, or both.                                            consumer credit advertising rules and APR oral
                                                          disclosure requirements.

Administrative Actions (TILA §108)                          For example, a state law would be preempted if
                                                        it required a bank to use the terms ‘‘nominal annual
The TILA authorizes federal regulatory agencies to      interest rate’’ in lieu of ‘‘annual percentage rate.’’
require financial institutions to make monetary and        Conversely, state law provisions are not pre-
other adjustments to the consumers’ accounts            empted under federal law if they call for, without
when the true finance charge or APR exceeds the         contradicting chapters 1, 2, or 3 of the TILA or the
disclosed finance charge or APR by more than a          implementing sections of Regulation Z, either of the
specified accuracy tolerance. That authorization        following:
extends to unintentional errors, including isolated
violations (e.g., an error that occurred only once or   • Disclosure of information not otherwise required.
errors, often without a common cause, that oc-            A state law that requires disclosure of the
curred infrequently and randomly).                        minimum periodic payment for open-end credit,
                                                          for example, would not be preempted because it
  Under certain circumstances, the TILA requires          does not contradict federal law.
federal regulatory agencies to order financial
institutions to reimburse consumers when under-         • Disclosures more detailed than those required. A
statement of the APR or finance charge involves:          state law that requires itemization of the amount
                                                          financed, for example, would not be preempted,
• Patterns or practices of violations (e.g., errors       unless it contradicts federal law by requiring the
  that occurred, often with a common cause,               itemization to appear with the disclosure of the
  consistently or frequently, reflecting a pattern        amount financed in the segregated closed-end
  with a specific type or types of consumer credit).      credit disclosures.
• Gross negligence.                                        The relationship between state law and chapter 4
• Willful noncompliance intended to mislead the         of the TILA (‘‘Credit Billing’’) involves two parts. The
  person to whom the credit was extended.               first part is concerned with sections 161 (correction
                                                        of billing errors) and 162 (regulation of credit
  Any proceeding that may be brought by a
                                                        reports) of the act; the second part addresses the
regulatory agency against a creditor may be
                                                        remaining sections of chapter 4.
maintained against any assignee of the creditor if
the violation is apparent on the face of the               State law provisions are preempted if they differ
disclosure statement or other documents assigned,       from the rights, responsibilities, or procedures


26 (6/11) • Reg. Z                                                                Consumer Compliance Handbook
                                                                                               Truth in Lending



contained in sections 161 or 162. An exception is          • The total points and fees (see definition below)
made, however, for state law that allows a con-              payable by the consumer at or before loan
sumer to inquire about an account and requires the           closing will exceed the greater of eight percent of
bank to respond to such inquiry beyond the time              the total loan amount or $592 for the calendar
limits provided by federal law. Such a state law             year 2011. (This dollar amount is adjusted
would not be preempted for the extra time period.            annually based on changes in the Consumer
                                                             Price Index. See staff commentary to 32(a)(1)(ii)
   State law provisions are preempted if they result
                                                             for a historical list of dollar amount adjustments.
in violations of sections 163 through 171 of chapter
                                                             (§226.32(a)(1))
4. For example, a state law that allows the card
issuer to offset the consumer’s credit-card indebt-
edness against funds held by the card issuer would         Exemptions:
be preempted, since it would violate 12 CFR
                                                           • Residential mortgage transactions (generally pur-
226.12(d). Conversely, a state law that requires
                                                             chase money mortgages);
periodic statements to be sent more than 14 days
before the end of a free-ride period would not be          • Reverse mortgage transactions subject to
preempted, since no violation of federal law is              §226.33; or
involved.                                                  • Open-end credit plans subject to Subpart B of
   A bank, state, or other interested party may ask          Regulation Z.
the Federal Reserve Board to determine whether
state law contradicts chapters 1 through 3 of the
                                                           Points and fees include the following:
TILA or Regulation Z. They also may ask if the state
law is different from, or would result in violations of,   • All items required to be disclosed under §226.4(a)
chapter 4 of the TILA and the implementing                   and (b), except interest or the time-price differ-
provisions of Regulation Z. If the board determines          ential;
that a disclosure required by state law (other than a      • All compensation paid to mortgage brokers; and
requirement relating to the finance charge, APR, or
the disclosures required under §226.32) is substan-        • All items listed in §226.4(c)(7), other than amounts
tially the same in meaning as a disclosure required          held for future taxes, unless all of the following
under the act or Regulation Z, generally creditors in        conditions are met:
that state may make the state disclosure in lieu of          – The charge is reasonable;
the federal disclosure.
                                                             – The creditor receives no direct or indirect
                                                               compensation in connection with the charge;
Subpart E - Special Rules for Certain                          and
Home Mortgage Transactions                                   – The charge is not paid to an affiliate of the
                                                               creditor; and
General Rules §226.31                                      • Premiums or other charges paid at or before
The requirements and limitations of this subpart are         closing whether paid in cash or financed, for
in addition to and not in lieu of those contained in         optional credit life, accident, health, or loss-of-
other subparts of Regulation Z. The disclosures for          income insurance, and other debt-protection or
high cost and reverse mortgage transactions must             debt cancellation products written in connection
be made clearly and conspicuously in writing, in a           with the credit transaction. (§226.32(b)(1))
form that the consumer may keep.
                                                           Prohibited Acts or Practices in
Credit Subject to §226.32                                  Connection with Credit Subject to
                                                           §226.32
The requirements of this section apply to a
consumer credit transaction secured by the con-            Among other requirements, a creditor extending
sumer’s principal dwelling, in which either:               mortgage credit subject to §226.32 (‘‘high-cost’’
• The APR at consummation will exceed by more              mortgage loans) must not make such loans based
  than 8 percentage points for first-lien mortgage         on the value of the consumer’s collateral without
  loans, or by more than 10 percentage points for          regard to the consumer’s repayment ability as of
  subordinate-lien mortgage loans, the yield on            consummation, including mortgage-related obliga-
  Treasury securities having comparable periods            tions.
  of maturity to the loan’s maturity (as of the 15th       • Mortgage-related obligations are expected prop-
  day of the month immediately preceding the                 erty taxes, premiums for mortgage-related insur-
  month in which the application for the extension           ance required by the creditor, and similar
  of credit is received by the creditor); or                 expenses.


Consumer Compliance Handbook                                                                     Reg. Z • 27 (6/11)
Truth in Lending



• A creditor must also verify amounts of income or         priced’’ mortgage loan) is a consumer credit
  assets that it relies on to determine repayment          transaction secured by the consumer’s principal
  ability using tax returns, payroll receipts, financial   dwelling with an APR that exceeds the average
  institution records, or other third party documents      prime offer rate for a comparable transaction as of
  that provide reasonably reliable evidence of the         the date the interest rate is set by:
  consumer’s income or assets.
                                                           • 1.5 or more percentage points for loans secured
  A presumption of compliance is available for               by a first lien on a dwelling, or
some transactions, but only if the creditor:
                                                           • 3.5 or more percentage points for loans secured
• Verifies the consumer’s repayment ability as               by a subordinate lien on a dwelling.
  required;
                                                              Average prime offer rate means an APR that is
• Determines the consumer’s repayment ability              derived from average interest rates, points, and
  using the largest payment of principal and               other loan pricing terms currently offered to con-
  interest scheduled in the first seven years              sumers by a representative sample of creditors for
  following consummation and taking into account           mortgage transactions that have low-risk pricing
  current obligations and mortgage-related obliga-         characteristics. The Federal Reserve Board pub-
  tions; and                                               lishes average prime offer rates for a broad range
• Assesses the consumer’s repayment ability tak-           of types of transactions in a table updated at least
  ing into account either the ratio of total debts to      weekly, as well as the methodology it uses to derive
  income or the income the consumer will have              these rates. These rates are available on the
  after paying debt obligations.                           website of the Federal Financial Institutions Exami-
  For high-cost mortgage loans, the regulation             nation Council.
prohibits the imposition of prepayment penalties             A higher-priced mortgage loan does not include:
under certain circumstances, and in no case may a
                                                           • a transaction to finance the initial construction of
penalty be imposed after two years following
                                                             a dwelling,
consummation.
                                                           • a temporary ‘‘bridge’’ loan with a term of twelve
  The regulation prohibits prepayment penalties at
                                                             months or less,
any time for high-cost mortgage if:
• Other applicable law (e.g., state law) prohibits         • a reverse mortgage subject to §226.33, or
  such penalty;                                            • a home equity line of credit subject to §226.5(b).
• The penalty applies where the source of the                The regulation prohibits prepayment penalties at
  prepayment funds is a refinancing by the same            any time for higher-priced mortgage loans if:
  mortgage lender or an affiliate;
                                                           • Other applicable law (e.g., state law) prohibits
• The consumer’s mortgage payment can change                 such penalty;
  during the first four years of the loan term
                                                           • The penalty will apply after the two-year period
  (applicable only to loans originated on or after
                                                             following consummation;
  October 1, 2009); or,
• The consumer’s total monthly debt payments (at           • The source of the prepayment funds is a
  consummation), including amounts owed under                refinancing by the same mortgage lender or an
  the mortgage, exceed 50 percent of the consum-             affiliate; or,
  er’s monthly gross income.                               • The consumer’s mortgage payment can change
  The regulation prohibits creditors from structur-          during the first four years of the loan term.
ing a home-secured loan as an open-end plan to               The regulation prohibits creditors from structur-
evade these requirements.                                  ing a home-secured loan as an open-end plan to
                                                           evade these requirements.

Reverse Mortgages §226.33                                    With few exceptions, a creditor may not extend a
                                                           higher-priced mortgage loan secured by a first lien
A reverse mortgage is a non-recourse transaction           on a principal dwelling unless an escrow account is
secured by the consumer’s principal dwelling               established before consummation for payment of
which ties repayment (other than upon default) to          property taxes and premiums for mortgage-related
the homeowner’s death or permanent move from,              insurance required by the creditor. The exceptions
or transfer of the title of, the home.                     involve loans secured by shares in a cooperative or
                                                           condominium units where the condominium asso-
                                                           ciation has an obligation to maintain a master
Higher-Priced Mortgage Loans §226.35
                                                           insurance policy. Additionally, a ‘‘jumbo’’ loan
A mortgage loan subject to §226.35 (‘‘higher-              secured by a first lien is not subject to the escrow


28 (6/11) • Reg. Z                                                                  Consumer Compliance Handbook
                                                                                                         Truth in Lending


requirement unless its APR rate exceeds the              • Receive, and no person can pay directly or
average prime offer rate for a comparable transac-         indirectly, compensation based on a loan’s terms
tion as of the date the interest rate is set by 2.5 or     or conditions other than the loan amount (and
more percentage points. A ‘‘jumbo’’ loan is a              then only provided that such compensation is
transaction with a principal obligation at consum-         based on a fixed percentage of the loan amount);
mation that exceeds the limit in effect for the          • Receive compensation, directly or indirectly,
maximum principal obligation eligible for purchase         from a creditor or another party for a loan when a
by Freddie Mac. §226.35(b)(3)(v).                          consumer directly pays the loan originator’s
  A creditor may allow a consumer to cancel the            compensation; or
escrow account one year after consummation if a          • Direct or ‘‘steer’’ a consumer to a loan that is not
consumer’s written cancellation request is received        in a consumer’s interest to increase the loan
no earlier than 365 days after consummation.               originator’s compensation.
                                                           A loan originator can obtain a ‘‘safe harbor’’ for
Prohibited Acts or Practices in                          compliance with the anti-steering requirement by
Connection with Credit Secured by a                      obtaining loan options from a significant number of
Consumer’s Dwelling §226.36                              the creditors with which the loan originator regularly
                                                         does business and, for each loan type in which the
Loan Servicing Practices                                 consumer has expressed interest, presenting the
Companies that service mortgage loans are pro-           consumer with loan options for which the loan
hibited from engaging in certain practices, such as      originator believes in good faith the consumer likely
pyramiding late fees. In addition, servicers are         qualifies, that include:
required to credit consumers’ loan payments as of        1. The loan with the lowest interest rate;
the date of receipt and provide a payoff statement
                                                         2. The loan with the lowest interest rate without any
within a reasonable time of request.
                                                            risky features (such as prepayment penalties,
  Specifically, for a consumer credit transaction           negative amortization, or a balloon payment in
secured by a consumer’s principal dwelling, a loan          the first seven years); and
servicer cannot:
                                                         3. The loan with the lowest total dollar amount for
• Fail, with limited exception, to credit a payment to      origination points or fees and discount points.
  the consumer’s loan account as of the date of
                                                            The loan originator compensation provisions do
  receipt;
                                                         not apply to open-end home-equity lines of credit
• Impose on the consumer any late fee or delin-          or to loans secured by a consumer’s interest in a
  quency charge in connection with a timely              timeshare plan.
  payment made in full, when the only delinquency
  is attributable to late fees or delinquency charges
  assessed on an earlier payment; or                     Notification of Sale or Transfer of
                                                         Mortgage Loans §226.39
• Fail to provide, within a reasonable time after
  receiving a request from the consumer or person        Notice of new owner—No later than 30 calendar
  acting on behalf of the consumer, an accurate          days after the date on which a mortgage loan is
  statement of the total outstanding balance that        acquired by or otherwise sold, assigned, or
  would be required to satisfy the consumer’s            otherwise transferred6 to a third party, the ‘‘covered
  obligations in full as of a specific date.             person’’7 shall notify the consumer clearly and
                                                         conspicuously in writing, in a form that the con-
                                                         sumer may keep, of such transfer and include:
Loan Originator Compensation
                                                         • Identification of the loan that was sold, assigned,
  To protect borrowers in the residential mortgage
market, certain unfair practices relating to compen-
                                                            6. The date of transfer to the covered person may, at the
sation of mortgage brokers and other loan origina-       covered person’s option, be either the date of acquisition
tors are prohibited.                                     recognized in the books and records of the acquiring party or the
                                                         date of transfer recognized in the books and records of the
  Loan originators include mortgage broker com-          transferring party.
panies, including those companies that close loans          7. A ‘‘covered person’’ means any person, as defined in
                                                         12 CFR 226.2(a)(22), that becomes the owner of an existing
in their own names in table-funded transactions,         mortgage loan by acquiring legal title to the debt obligation,
and loan officers and other employees of creditors       whether through a purchase, assignment, or other transfer, and
that originate loans. Creditors are not considered to    who acquires more than one mortgage loan in any twelve-month
                                                         period. For purposes of this section, a servicer of a mortgage loan
be loan originators unless they use table funding or     shall not be treated as the owner of the obligation if the servicer
function as a mortgage broker in the transaction.        holds title to the loan or it is assigned to the services solely for the
                                                         administrative convenience of the servicer in servicing the
  Loan originators cannot:                               obligation. See §226.39(a)(1).


Consumer Compliance Handbook                                                                                Reg. Z • 29 (6/11)
Truth in Lending


  or otherwise transferred;                               ferring party does not repurchase the mortgage
                                                          loan); or
• Name, address, and telephone number of the
  covered person;                                       • The covered person acquires only a partial
                                                          interest in the mortgage loan and the agent or
• Date of transfer;
                                                          party authorized to receive the consumer’s
• Name, address, and telephone number of an               rescission notice and resolve issues concerning
  agent or party having authority, on behalf of the       the consumer’s payments on the mortgage loan
  covered person, to receive notice of the right to       does not change as a result of that transfer.
  rescind and resolve issues concerning the con-
  sumer’s payments on the mortgage loan;
                                                        Valuation Independence §226.42
• Location where transfer of ownership of the debt
                                                           Regulation Z seeks to ensure that real estate
  to the covered person is or may be recorded (in
                                                        appraisers are free to use their independent
  public records or, alternatively, that the transfer
                                                        professional judgment in assigning home values
  of ownership has not been recorded in public
                                                        without influence or pressure from those with
  records at the time the disclosure is provided);
                                                        interests in the transactions. Regulation Z also
  and                                                   seeks to ensure that appraisers receive customary
• At the option of the covered person, any other        and reasonable payments for their services. Regu-
  relevant information regarding the transaction.       lation Z’s valuation rules apply to creditors and
                                                        settlement services providers for consumer credit
   This notice of sale or transfer must be provided
                                                        transactions secured by the consumer’s principal
for any consumer credit transaction that is secured
                                                        dwelling (‘‘covered transaction’’) and includes
by the principal dwelling of a consumer. Thus, it
                                                        several provisions that protect the integrity of the
applies to both closed-end mortgage loans and
                                                        appraisal process when a consumer’s principal
open-end home equity lines of credit. This notifica-
                                                        dwelling is securing the loan. In general, the rule
tion is required of the covered person even if the      prohibits ‘‘covered persons’’ from engaging in
loan servicer remains the same.                         coercion, bribery, and other similar actions de-
   Regulation Z also establishes special rules          signed to cause anyone who prepares a valuation
regarding the delivery of the notice when there is      to base the value of the property on factors other
more than one covered person. In a joint acquisi-       than the person’s independent judgment.8 More
tion of a loan, the covered persons must provide a      specifically, Regulation Z:
single disclosure that lists the contact information    • Prohibits coercion and other similar actions
for all covered persons. However, if one of the           designed to cause appraisers to base the
covered persons is authorized to receive a notice         appraised value of properties on factors other
of rescission and to resolve issues concerning the        than their independent judgment;
consumer’s payments, the disclosure may state
                                                        • Prohibits appraisers and appraisal management
contact information only for that covered person. In
                                                          companies hired by lenders from having financial
addition, if the multiple covered persons each
                                                          or other interests in the properties or the credit
acquire a partial interest in the loan pursuant to
                                                          transactions;
separate and unrelated agreements, they may
provide either a single notice or separate notices.     • Prohibits creditors from extending credit based
Finally, if a covered person acquires a loan and          on appraisals if they know beforehand of viola-
subsequently transfers it to another covered per-         tions involving appraiser coercion or conflicts of
son, a single notice may be provided on behalf of         interest, unless the creditors determine that the
both of them, as long as the notice satisfies the         values of the properties are not materially mis-
timing and content requirements with respect to           stated;
each of them.                                           • Requires that creditors or settlement service
   In addition, there are three exceptions to the         providers that have information about appraiser
notice requirement to provide the notice of sale or       misconduct file reports with the appropriate state
transfer:                                                 licensing authorities; and
• The covered person sells, assigns, or otherwise       • Requires the payment of reasonable and custom-
  transfers legal title to the mortgage loan on or
  before the 30th calendar day following the date of      8. This section applies to any consumer credit transaction
  transfer on which it acquired the mortgage loan;      secured by the consumer’s principal dwelling. A ‘‘covered
                                                        person’’ means a creditor with respect to a covered transaction or
• The mortgage loan is transferred to the covered       a person that provides ‘‘settlement services,’’ as defined in
  person in connection with a repurchase agree-         12 U.S.C. 2602(3) and implementing regulations, in connection
                                                        with a covered transaction. A ‘‘covered transaction’’ means an
  ment that obligates the transferring party to         extension of consumer credit that is or will be secured by the
  repurchase the mortgage loan (unless the trans-       consumer’s principal dwelling, as defined in §226.2(a)(19).


30 (6/11) • Reg. Z                                                                     Consumer Compliance Handbook
                                                                                             Truth in Lending



  ary compensation to appraisers who are not               business days prior to disbursement of the loan
  employees of the creditors or of the appraisal           funds.
  management companies hired by the creditors.

                                                         Rights of the Consumer
Subpart F - Special Rules for Private                    The creditor must disclose that, if approved for the
Education Loans                                          loan, the consumer has the right to accept the loan
                                                         on the terms approved for up to 30 calendar days.
Special Disclosure Requirements for                      The disclosure must inform the consumer that the
Private Education Loans §226.46                          rate and terms of the loan will not change during
                                                         this period, except for changes to the rate based
The disclosures required under Subpart F apply           on adjustments to the index used for the loan and
only to private education loans. Except where            other changes permitted by law. A consumer also
specifically provided otherwise, the requirements        has the right to cancel the loan, without penalty,
and limitations of Subpart F are in addition to the      until midnight of the third business day following
requirements of the other subparts of Regulation Z.      the date on which the consumer receives the final
                                                         disclosures.
  A private education loan means an extension of
credit that:
• Is not made, insured, or guaranteed under title IV     Limitations on Private Educational Loans
  of the Higher Education Act of 1965;                   §226.48
• Is extended to a consumer expressly, in whole or       This section contains rules and limitations on
  part, for postsecondary educational expenses,          private education loans, including:
  regardless of whether the loan is provided by the
  educational institution that the student attends;      1. A prohibition on co-branding in the marketing of
  and                                                       private education loans;

• Does not include open-end credit or any loan that      2. Rules governing the thirty-day acceptance pe-
  is secured by real property or a dwelling.                riod and three business-day cancellation period
                                                            and prohibition on disbursement of loan pro-
   A private education loan does not include an             ceeds until the cancellation period has expired;
extension of credit in which the covered educa-
tional institution is the creditor if:                   3. The requirement that the creditor obtain a
                                                            self-certification form from the consumer before
• The term of the extension of credit is 90 days or         consummation; and
  less, or
                                                         4. The requirement that creditors in preferred
• An interest rate will not be applied to the credit        lender arrangements provide certain information
  balance and the term of the extension of credit is        to covered educational institutions.
  one year or less, even if the credit is payable in
  more than four installments.
                                                         Co-Branding Prohibited

Content of Disclosures §226.47                           Regulation Z prohibits creditors from using the
                                                         name, emblem, mascot, or logo of a covered
Disclosure Requirements                                  institution (or other words, pictures, or symbols
                                                         readily identified with a covered institution) in the
This section establishes the content that a creditor     marketing of private education loans in a way that
must include in its disclosures to a consumer at         implies endorsement by the educational institution.
three different stages in the private education loan     Marketing that refers to an educational institution
origination process:                                     does not imply endorsement if the marketing
1. Application or Solicitation Disclosures—With any      includes a clear and conspicuous disclosure that is
   application or solicitation;                          equally prominent and closely proximate to the
                                                         reference to the institution that the educational
2. Approval Disclosures—With any notice of ap-           institution does not endorse the creditor’s loans,
   proval of the private education loan; and             and that the creditor is not affiliated with the
3. Final Disclosures—After the consumer accepts          educational institution. There is also an exception in
   the loan. In addition, §226.48(d) requires that the   cases where the educational institution actually
   disclosures must be provided at least three           does endorse the creditor’s loans, but the market-




Consumer Compliance Handbook                                                                   Reg. Z • 31 (6/11)
Truth in Lending



ing must make a clear and conspicuous disclosure          use a reasonable method to estimate a consumer’s
that is equally prominent and closely proximate to        minimum payment. The regulation provides a safe
the reference to the institution that the creditor, and   harbor for issuers to estimate the required minimum
not the educational institution, is making the loan.      periodic payment if the card issuer:
                                                          1. Assumes utilization, from the first day of the
                                                             billing cycle, of the full credit line that the issuer
Subpart G - Special Rules Applicable                         is considering offering to the consumer; and
To Credit Card Accounts and
                                                          2. Uses a minimum payment formula employed by
Open-End Credit Offered To College                           the issuer for the product the issuer is consider-
Students                                                     ing offering to the consumer or, in the case of an
                                                             existing account, the minimum payment formula
Evaluation of the Consumer’s Ability to                      that currently applies to that account, provided
Pay §226.51                                                  that:
Regulation Z requires credit card issuers to con-            a. If the minimum payment formula includes
sider a consumer’s ability to pay before opening a              interest charges, the card issuer estimates
new credit card account or increasing the credit                those charges using an interest rate that the
limit for an existing credit card account. Addition-            issuer is considering offering to the con-
ally, the rule provides specific requirements before            sumer for purchases or, in the case of an
opening a new credit card account or increasing                 existing account, the interest rate that cur-
the credit limit on an existing account when the                rently applies to purchases; and
consumer is under the age of 21.                             b. If the applicable minimum payment formula
   When evaluating a consumer’s ability to pay,                 includes mandatory fees, the card issuer
credit card issuers must perform a review of a                  must assume that such fees have been
consumer’s income or assets and current obliga-                 charged to the account.
tions. Creditors are permitted, however, to rely on
information provided by the consumer. The rule
does not require issuers to verify a consumer’s
                                                          Specific Requirements for Underage
statements. A card issuer may also consider               Consumers §226.51(b)(1)
information obtained through any empirically de-          Regulation Z prohibits the issuance of a credit card
rived, demonstrably and statistically sound model         to a consumer who has not attained the age of 21
that reasonably estimates a consumer’s income or          unless the consumer has submitted a written
assets.                                                   application and the creditor has:
  The rule also requires that issuers consider at         • Information indicating that the underage con-
least one of the following:                                 sumer has an independent means of repaying
• The ratio of debt obligations to income;                  any debts incurred in connection with the ac-
                                                            count; or
• The ratio of debt obligations to assets; or
                                                          • The signature of a cosigner who has attained the
• The income of the consumer will have after                age of 21, who has the means to repay debts
  paying debt obligations (i.e., residual income).          incurred by the underage consumer in connec-
  The rule also provides that it would be unreason-         tion with the account, and who assumes joint
able for an issuer not to review any information            liability for such debts.
about a consumer’s income, assets, or current               If the account is opened based on a cosigner’s
obligations, or to issue a credit card to a consumer      ability to pay, the issuer must also obtain written
who does not have any income or assets.                   consent from the cosigner before increasing the
   Because credit card accounts typically require         credit limit.
consumers to make a minimum monthly payment
that is a percentage of the total balance (plus, in
some cases, accrued interest and fees), creditors         Limitations of Fees §226.52
are required to consider the consumer’s ability to
                                                          Limitations During First Year After Account
make the required minimum payments. Card
                                                          Opening §226.52(a)
issuers must also establish and maintain reason-
able written policies and procedures to consider a        During the first year after account opening, issuers
consumer’s income or assets and current obliga-           are prohibited from requiring consumers to pay
tions. Because the minimum payment is unknown             fees (other than fees for late payments, returned
at account opening, the rule requires that creditors      payments, and exceeding the credit limit) that in




32 (6/11) • Reg. Z                                                                   Consumer Compliance Handbook
                                                                                               Truth in Lending



the aggregate exceed 25% of the initial credit limit.     finance charges on the portion of the balance that
                                                          has been repaid.
Limitations on Penalty Fees §226.52(b)
TILA requires that penalty fees imposed by card           General Prohibition on Applying
issuers be reasonable and proportional to the             Increased Rates to Existing Balances
violation of the account terms. Among other things,       §226.55
the regulation prohibits credit card issuers from
                                                          There are some general exceptions to the prohibi-
charging a penalty fee of more than $25 for paying
                                                          tion against applying increased rates to existing
late or otherwise violating the account’s terms for
                                                          balances:
the first violation (or $35 for an additional violation
of the same type during the next six billing cycles)      • A temporary rate lasting at least six months
unless the issuer determines that a higher fee              expires, provided that the credit card issuer
represents a reasonable proportion of the costs it          complied with applicable disclosure require-
incurs as a result of that type of violation and            ments;
reevaluates that determination at least once every        • The rate is increased due to the operation of an
twelve months.                                              index available to the general public and not
    Credit card issuers are banned from charging            under the card issuer’s control (i.e., the rate is a
penalty fees that exceed the dollar amount associ-          variable rate);
ated with the consumer’s violation of the terms or        • The minimum payment has not been received
other requirements of the credit card account. For          within 60 days after the due date;
example, card issuers are no longer permitted to
charge a $39 fee when a consumer is late making           • The consumer successfully completes or fails to
a $20 minimum payment. Instead, in this example,            comply with the terms of a workout arrangement;
the fee cannot exceed $20. The regulation also              and
bans imposition of penalty fees when there is no          • The APR on an existing balance has been
dollar amount associated with the violation, such as        reduced pursuant to the Servicemembers Civil
‘‘inactivity’’ fees based on the consumer’s failure to      Relief Act (SCRA). The creditor is permitted to
use the account to make new purchases. It also              increase the rate once the SCRA ceases to
prohibits issuers from charging multiple penalty            apply, but only to the rate that applied prior to the
fees based on a single late payment or other                reduction.
violation of the account terms.
                                                             Regulation Z’s limitations on the application of
                                                          increased rates to existing balances continue to
Payment Allocation §226.53                                apply when the account is closed, acquired by
                                                          another institution through a merger or the sale of a
When different rates apply to different balances on       credit card portfolio, or when the balance is
a credit card account, issuers are required to            transferred to another credit account issued by the
allocate payments in excess of the minimum                same creditor (or its affiliate or subsidiary).
payment to first pay the balance with the highest
APR, and any remaining portion to the other                 For new transactions, creditors are generally
balances in descending order based on the                 prevented from increasing the APR during the first
applicable APR. For deferred interest programs,           year after an account is opened. After the first year,
however, issuers must allocate excess payments            creditors are permitted to increase the APRs that
first to the deferred interest balance during the last    apply to new transactions so long as the creditor
two billing cycles of the deferred interest period. In    complies with the regulation’s 45-day advance
addition, during a deferred interest period, issuers      notice requirement (§226.9).
are permitted (but not required) to allocate excess
payments in the manner requested by the con-
sumer.
                                                          Fees for Transactions that Exceed the
                                                          Credit Limit §226.56
Double-Cycle Billing and Partial Grace                    Consumer consent requirement - Regulation Z
                                                          requires an issuer to obtain a consumer’s express
Period §226.54
                                                          consent (or opt-in) before the issuer may impose
Issuers are generally prohibited from imposing            any fees on a consumer’s credit card account for
finance charges on balances for days in previous          making an extension of credit that exceeds the
billing cycles as a result of the loss of a grace         account’s credit limit. Prior to providing such
period. In addition, when a consumer pays some,           consent, the consumer must be notified by the
but not all, of a balance prior to the expiration of a    issuer of any fees that may be assessed for an
grace period, an issuer is prohibited from imposing       over-the-limit transaction. If the consumer con-


Consumer Compliance Handbook                                                                     Reg. Z • 33 (6/11)
Truth in Lending



sents, the issuer is also required to provide a notice      offered by the creditor. Specifically, Regulation Z
of the consumer’s right to revoke that consent on           prohibits such offers:
the front page of any periodic statement that               • On the campus of an institution of higher
reflects the imposition of an over-the-limit fee.             education;
   Prior to obtaining a consumer’s consent to the           • Near the campus of an institution of higher
payment of over-the-limit transactions, the issuer            education; or
must provide the consumer with a notice disclos-
ing, among other things, the dollar amount of any           • At an event sponsored by or related to an
charges that will be assessed for an over-the-limit           institution of higher education.
transaction, as well as any increased rate that may            A tangible item means physical items, such as
apply if the consumer exceeds the credit limit.             gift cards, t-shirts, or magazine subscriptions, but
Issuers are prevented from assessing any over-the-          does not include non-physical items such as
limit fee or charge on an account unless the                discounts, reward points, or promotional credit
consumer consents to the payment of transactions            terms. With respect to offers ‘‘near’’ the campus,
that exceed the credit limit.                               the commentary to the regulation states that a
   Prohibited practices - Even if the consumer has          location that is within 1,000 feet of the border of the
affirmatively consented to the issuer’s payment of          campus is considered near the campus.
over-the-limit transactions, Regulation Z prohibits            Regulation Z also requires card issuers to submit
certain issuer practices in connection with the             an annual report to the Board containing the terms
assessment of over-the-limit fees or charges. An            and conditions of business, marketing, or promo-
issuer can only charge one over-the-limit fee or            tional agreements with an institution of higher
charge per billing cycle. In addition, an issuer            education or an alumni organization or foundation
cannot impose an over-the-limit fee on the account          affiliated with an institution of higher education.
for the same transaction in more than three billing
cycles. Furthermore, fees may not be imposed for
the second or third billing cycle unless the                Online Disclosure of Credit Card
consumer has failed to reduce the account balance           Agreements §226.58
below the credit limit by the payment due date in
                                                            The regulation requires that issuers post credit
that cycle.
                                                            card agreements on their websites and to submit
   Regulation Z also prevents unfair or deceptive           those agreements to the Board for posting on a
acts or practices in connection with the manipula-          website maintained by the Board. There are three
tion of credit limits in order to increase over-the-limit   exceptions for when issuers are not required to
fees or other penalty charges. Specifically, issuers        provide statements to the Board:
are prohibited from engaging in three practices:
                                                            • The issuer has fewer than 10,000 open credit
• Assessing an over-the-limit fee because the                 card accounts; or
  creditor failed to promptly replenish the consum-
                                                            • The agreement currently is not offered to the
  er’s available credit;
                                                              public and the agreement is used only for one or
• Conditioning the amount of available credit on              more private label credit card plans with credit
  the consumer’s consent to the payment of                    cards usable only at a single merchant or group
  over-the-limit transactions (e.g., opting in to an          of affiliated merchants and that involves fewer
  over-the-limit service to obtain a higher credit            than 10,000 open accounts; or
  limit); and
                                                            • The agreement currently is not offered to the
• Imposing any fee if the credit limit is exceeded            public and the agreement is for one or more
  solely because of the issuer’s assessment of                plans offered to test a new product offered only to
  accrued interest charges or fees on the consum-             a limited group of consumers for a limited time
  er’s account.                                               that involves fewer than 10,000 open accounts.


Special Rules for Marketing to Students                     Reevaluation of Rate Increases §226.59
§226.57
                                                            For any rate increase imposed on or after Janu-
Regulation Z establishes several requirements               ary 1, 2009, that requires 45 days advance notice,
related to the marketing of credit cards and other          the regulation requires card issuers to review the
open-end consumer credit plans to students at an            account no less frequently than once each six
institution of higher education. The regulation limits      months and, if appropriate based on that review,
a creditor’s ability to offer a college student any         reduce the annual percentage rate. The require-
tangible item to induce the student to apply for or         ment to reevaluate rate increases applies both to
participate in an open-end consumer credit plan             increases in annual percentage rates based on


34 (6/11) • Reg. Z                                                                    Consumer Compliance Handbook
                                                                                                Truth in Lending



consumer-specific factors, such as changes in the         information accurately, without adjusting the con-
consumer’s creditworthiness, and to increases in          sumer’s account, the financial institution may still
annual percentage rates imposed based on factors          be subject to civil liability and an order to reimburse
that are not specific to the consumer, such as            from its regulator.
changes in market conditions or the issuer’s cost of        The circumstances under which a financial
funds. If based on its review a card issuer is            institution may avoid liability under the TILA do not
required to reduce the rate applicable to an              apply to violations of the Fair Credit Billing Act
account, the final regulation requires that the rate      (chapter 4 of the TILA).
be reduced within 45 days after completion of the
evaluation.
   This review must consider either the same              Additional Defenses Against Civil Actions
factors on which the increase was originally based        The financial institution may avoid liability in a civil
or the factors the card issuer currently considers in     action if it shows by a preponderance of evidence
determining the annual percentage rate applicable         that the violation was not intentional and resulted
to similar new credit card accounts. However, the         from a bona fide error that occurred despite the
first two reviews of rate increases that occurred         maintenance of procedures to avoid the error.
between January 1, 2009, and February 21, 2010,
                                                            A bona fide error may include a clerical,
must use the factors the card issuer currently
                                                          calculation, computer malfunction, programming,
considers in determining the annual percentage
                                                          or printing error. It does not include an error of legal
rate applicable to similar new credit card accounts.
                                                          judgment.
                                                             Showing that a violation occurred unintentionally
Specific Defenses (TILA §108)                             could be difficult if the financial institution is unable
Defense Against Civil, Criminal, and                      to produce evidence that explicitly indicates it has
Administrative Actions                                    an internal controls program designed to ensure
                                                          compliance. The financial institution’s demon-
A financial institution in violation of TILA may avoid    strated commitment to compliance and its adoption
liability by:                                             of policies and procedures to detect errors before
• Discovering the error before an action is brought       disclosures are furnished to consumers could
  against the financial institution, or before the        strengthen its defense.
  consumer notifies the financial institution, in
  writing, of the error.                                  Statute of Limitations (TILA §§108 and
• Notifying the consumer of the error within 60 days      130)
  of discovery.
                                                          Civil actions may be brought within one year after
• Making the necessary adjustments to the con-            the violation occurred. For private education loans,
  sumer’s account, also within 60 days of discov-         civil actions may be brought within one year from
  ery. (The consumer will pay no more than the            the date on which the first regular payment of
  lesser of the finance charge actually disclosed or      principal and interest is due. After that time, and if
  the dollar equivalent of the APR actually dis-          allowed by state law, the consumer may still assert
  closed.)                                                the violation as a defense if a financial institution
   The above three actions also may allow the             were to bring an action to collect the consumer’s
financial institution to avoid a regulatory order to      debt.
reimburse the customer.                                     Criminal actions are not subject to the TILA
  An error is ‘‘discovered’’ if it is:                    one-year statute of limitations.
• Discussed in a final, written report of examina-           Regulatory administrative enforcement actions
  tion.                                                   also are not subject to the one-year statute of
                                                          limitations. However, enforcement actions under
• Identified through the financial institution’s own
                                                          the policy guide involving erroneously disclosed
  procedures.
                                                          APRs and finance charges are subject to time
• An inaccurately disclosed APR or finance charge         limitations by the TILA. Those limitations range from
  included in a regulatory agency notification to the     the date of the last regulatory examination of the
  financial institution.                                  financial institution, to as far back as 1969,
  When a disclosure error occurs, the financial           depending on when loans were made, when
institution is not required to re-disclose after a loan   violations were identified, whether the violations
has been consummated or an account has been               were repeat violations, and other factors.
opened. If the financial institution corrects a              There is no time limitation on willful violations
disclosure error by merely re-disclosing required         intended to mislead the consumer. A summary of


Consumer Compliance Handbook                                                                       Reg. Z • 35 (6/11)
Truth in Lending


the various time limitations follows.                  • Receipt9 of the required notice of the right to
• For open-end credit, reimbursement applies to          rescind.
  violations not older than two years.                    For purposes of rescission, business day means
• For closed-end credit, reimbursement is gener-       every calendar day except Sundays and the legal
  ally directed for loans with violations occurring    public holidays (§226.2(a)(6)). The term ‘‘material
                                                       disclosures’’ is defined in §226.23(a)(3) to mean
  since the immediately preceding examination.
                                                       the required disclosures of the APR, the finance
                                                       charge, the amount financed, the total of payments,
Rescission Rights (Open-End and                        the payment schedule, and the disclosures and
Closed-End Credit) §226.15 and                         limitations referred to in §226.32(c) and (d).
§226.23                                                   The creditor may not disburse any monies
TILA provides that for certain transactions secured    (except into an escrow account) and may not
by the consumer’s principal dwelling, a consumer       provide services or materials until the three-day
has three business days after becoming obligated       rescission period has elapsed and the creditor is
on the debt to rescind the transaction. The right of   reasonably satisfied that the consumer has not
rescission allows consumer(s) time to reexamine        rescinded. If the consumer rescinds the transac-
their credit agreements and cost disclosures and to    tion, the creditor must refund all amounts paid by
reconsider whether they want to place their homes      the consumer (even amounts disbursed to third
at risk by offering it as security for the credit. A   parties) and terminate its security interest in the
higher-priced mortgage loan (whether or not it is a    consumer’s home.
HOEPA loan) having a prepayment penalty that              A consumer may waive the three-day rescission
does not conform to the prepayment penalty             period and receive immediate access to loan
limitations (§226.32(c) and (d) and §226.35(b)(2))     proceeds if the consumer has a ‘‘bona fide
is also subject to a three-year right of rescission.   personal financial emergency.’’ The consumer
Transactions exempt from the right of rescission       must give the creditor a signed and dated waiver
include residential mortgage transactions              statement that describes the emergency, specifi-
(§226.2(a)(24)) and refinancings or consolidations     cally waives the right, and bears the signatures of
with the original creditor where no ‘‘new money’’ is   all consumers entitled to rescind the transaction.
advanced.                                              The consumer provides the explanation for the
  If a transaction is rescindable, consumers must      bona fide personal financial emergency, but the
be given a notice explaining that the creditor has a   creditor decides the sufficiency of the emergency.
security interest in the consumer’s home, that the       If the required rescission notice or material TILA
consumer may rescind, how the consumer may             disclosures are not delivered or if they are inaccu-
rescind, the effects of rescission, and the date the   rate, the consumer’s right to rescind may be
rescission period expires.                             extended from three days after becoming obli-
  To rescind a transaction, a consumer must notify     gated on a loan to up to three years.
the creditor in writing by midnight of the third
business day after the latest of three events:            9. 12 CFR 226.15(b) and 226.23(b)(1) were amended to
                                                       include the electronic delivery of the notice of the right to rescind.
• Consummation of the transaction,                     If a paper notice of the right to rescind is used, a creditor must
                                                       deliver two copies of the notice to each consumer entitled to
• Delivery of material TILA disclosures, or            rescind. However, under the final rule on electronic delivery of
                                                       disclosures if the notice is in electronic form, in accordance with
                                                       the consumer consent and other applicable provisions of the
                                                       E-Sign Act, only one copy to each customer is required.




36 (6/11) • Reg. Z                                                                      Consumer Compliance Handbook
Regulation Z
Examination Objectives


EXAMINATION OBJECTIVES                                   3. Review compliance review and audit work
                                                            papers and determine whether:
1. To appraise the quality of the financial institu-
   tion’s compliance management system for the              a. The procedures used address all regulatory
   Truth in Lending Act and Regulation Z.                      provisions (see Transactional Testing sec-
                                                               tion).
2. To determine the reliance that can be placed on
   the financial institution’s compliance manage-           b. Steps are taken to follow up on previously
   ment system, including internal controls and                identified deficiencies.
   procedures performed by the person(s) respon-            c. The procedures used include samples that
   sible for monitoring the financial institution’s            cover all product types and decision cen-
   compliance review function for the Truth In                 ters.
   Lending Act and Regulation Z.
                                                            d. The work performed is accurate (through a
3. To determine the financial institution’s compli-            review of some transactions).
   ance with the Truth In Lending Act and Regula-
                                                            e. Significant deficiencies, and the root cause
   tion Z.
                                                               of the deficiencies, are included in reports
4. To initiate corrective action when policies or              to management/board.
   internal controls are deficient, or when violations
                                                            f. Corrective actions are timely and appropri-
   of law or regulation are identified.
                                                               ate.
5. To determine whether the institution will be
                                                            g. The area is reviewed at an appropriate
   required to make adjustments to consumer
                                                               interval.
   accounts under the restitution provisions of the
   Act.                                                  4. Review the financial institution’s record reten-
                                                            tion practices to determine whether evidence
                                                            of compliance (for other than the advertising
                                                            requirements) is retained for at least two years
EXAMINATION PROCEDURES                                      after the disclosures were required to be made
                                                            or other action was required to be taken.
General Procedures                                          (§226.25)
1. Obtain information pertinent to the area of
   examination from the financial institution’s com-     Disclosure Forms
   pliance management system program (histori-           5. Determine if the financial institution has
   cal examination findings, complaint informa-             changed any TILA disclosure forms or if there
   tion, and significant findings from compliance           are forms that have not been previously
   review and audit).                                       reviewed for accuracy. If so:
2. Through discussions with management and                  Verify the accuracy of each disclosure by
   review of the following documents, determine             reviewing the following:
   whether the financial institution’s internal con-
   trols are adequate to ensure compliance in the           • Credit card application/solicitation disclo-
   area under review. Identify procedures used                sures (§226.5a(b)-(e)).
   daily to detect errors/violations promptly. Also,        • HELOC disclosures (§226.5b(d) and (e)).
   review the procedures used to ensure compli-
                                                            • Initial disclosures (§226.6(a)-(d)) and, if ap-
   ance when changes occur (e.g., changes in
                                                              plicable, additional HELOC disclosures
   interest rates, service charges, computation
                                                              (§226.6(e)).
   methods, and software programs).
                                                            • Periodic statement disclosures (§226.7).
    • Organizational charts.
                                                            • Statement of billing rights and change in
    • Process flowcharts.
                                                              terms notice (§226.9(a),(b),(c) or (g)).
    • Policies and procedures.
                                                            • Note and/or contract forms (including those
    • Loan documentation and disclosures.                     furnished to dealers).
    • Checklists/worksheets and review docu-                • Notice of Right to Rescind/Cancel
      ments.                                                  (§§226.15(b), 226.23(b)(1)) and 226.47(c)(4).
    • Computer programs.                                    • Standard closed-end credit disclosures


Consumer Compliance Handbook                                                                  Reg. Z • 37 (6/11)
Examination Objectives


       (§§226.17(a) and 226.18).                                    §226.18(s).10 (§226.18(g))
     • ARM disclosures (§226.19(b)).                           d. For a closed-end transaction secured by
     • High cost mortgage disclosures (§226.32(c)).               real property or a dwelling (other than a
                                                                  transaction secured by a consumer’s inter-
     • Reverse mortgage disclosures (§226.33(b)).                 est in a timeshare plan described in
     • Private education loan disclosures (§226.47).              11 U.S.C. 101(53D)), determine that the
                                                                  creditor discloses the following information
                                                                  about the interest rate and payments, as
Closed-End Credit Disclosure Forms
                                                                  applicable (§226.18(s)):
Review Procedures
                                                                    Interest Rates
     a. Determine that the disclosures are clear,
        conspicuous, and grouped together or                        (1) For a fixed-rate mortgage, the interest
        segregated as required, in a form the                           rate at consummation. (§226.18(s)
        consumer may keep. The terms ‘‘Finance                          (2)(i)(A))
        Charge’’ and ‘‘Annual Percentage Rate’’                     (2) For an adjustable-rate or step-rate mort-
        and corresponding rates or amounts should                       gage (§226.18(s)(2)(i)(B)):
        be more conspicuous than other terms,
                                                                         (i) The interest rate at consummation
        except for the creditor’s identity. For private
                                                                             and the period of time until the first
        student loans the term ‘‘Annual Percentage
                                                                             interest rate adjustment may occur,
        Rate’’ and corresponding rate must be less
                                                                             labeled as the ’’introductory rate
        conspicuous than the term ‘‘finance charge’’
                                                                             and monthly payment’’; (Note: as
        and the corresponding amount, as well as
                                                                             set forth in comment 18(s)-1,if peri-
        less conspicuous than the interest rate, the                         odic payments are not due monthly,
        notice of the right to cancel and creditor’s                         the creditor should use the appro-
        identity. (§§226.17(a), 226.47(b), and (c))                          priate term, such as ‘‘quarterly’’ or
     b. Determine the disclosures include the fol-                           ‘‘annually.’’)
        lowing as applicable. (§226.18)                                  (ii) The maximum interest rate that may
          (1) Identity of the creditor                                        apply during the first five years after
                                                                              the date on which the first regular
          (2) Brief description of the finance charge
                                                                              periodic payment will be due and
          (3) Brief description of the APR                                    the earliest date on which that rate
          (4) Variable rate information (§226.18(f)(1)                        may apply, labeled as ‘‘maximum
              or (2))                                                         during first five years’’; and

          (5) Payment schedule                                           (iii) The maximum interest rate that may
                                                                               apply during the life of the loan and
          (6) Brief description of the total of pay-                           the earliest date on which that rate
              ments                                                            may apply, labeled as ‘‘maximum
          (7) Demand feature                                                   ever.’’
          (8) Description of total sales price in a                 (3) For a loan that provides for payment
              credit sale                                               increases occurring without regard to
                                                                        an interest rate adjustment11 (as de-
          (9) Prepayment penalties or rebates
                                                                        scribed in §226.18(s)(3)(i)(B)), the inter-
         (10) Late payment amount or percentage                         est rate in effect at the time the first such
         (11) Description for security interest                         payment increase is scheduled to occur
                                                                        and the date on which the increase will
         (12) Insurance conditions for finance charge                   occur, labeled as ‘‘first adjustment’’ if
              exclusions (§226.4(d))                                    the loan is an adjustable-rate mortgage
         (13) Statement referring to the contract                       or, otherwise, labeled as ‘‘first in-
                                                                        crease.’’12 (§226.18(s)(2)(i)(C))
         (14) Statement regarding assumption of the
              note
         (15) Statement regarding required depos-            10. For example, home construction loans that are secured by
              its.                                        real property or a dwelling are subject to § 226.18(s) and not
                                                          § 226.18 (g). See comment App. D-6 of Regulation Z.
     c. Determine that the creditor discloses the            11. Note: this category includes interest-only loans, as set forth
        number, amounts, and timing of payments           in comment 18(s)(2)(i)(C)-1
                                                             12. Because model forms and clauses published by the Board
        scheduled to repay the obligation (other          are safe harbors, this rate may also be labeled ‘‘Maximum Ever,’’
        than for a transaction that is subject to         pursuant to model clause H-4(H). See comment App. G and H-1.


38 (6/11) • Reg. Z                                                                        Consumer Compliance Handbook
                                                                                         Examination Objectives


         (4) For a negative amortization loan13                        accrued interest and principal, for each
             (§226.18(s)(2)(ii)):                                      interest   rate     disclosed       under
              (i) The interest rate at consummation                    §226.18(s)(2)(i) (§226.18(s)(3)(i)):
                  and, if it will adjust after consumma-               (i) The corresponding periodic princi-
                  tion, the length of time until it will                   pal and interest payment, labeled
                  adjust, and the label ’’introductory’’                   as ‘‘principal and interest;’’
                  or ’’intro’’;
                                                                       (ii) If the periodic payment may in-
              (ii) The maximum interest rate that could                     crease without regard to an interest
                   apply when the consumer must                             rate adjustment, the payment that
                   begin making fully amortizing pay-                       corresponds to the first such in-
                   ments under the terms of the legal                       crease and the earliest date on
                   obligation;                                              which the increase could occur;
              (iii) If the minimum required payment                    (iii) If an escrow account is established,
                    will increase before the consumer                        an estimate of the amount of taxes
                    must begin making fully amortizing                       and insurance, including any mort-
                    payments, the maximum interest                           gage insurance payable with each
                    rate that could apply at the time of                     periodic payment; and
                    the first payment increase and the
                    date the increase is scheduled to                  (iv) The sum of the amounts disclosed
                    occur; and                                              under §§226.18(s)(3)(i)(A) and (C)
                                                                            or (s)(3)(i)(B) and (C), as appli-
              (iv) If a second increase in the minimum                      cable, labeled as ’’total estimated
                   required payment may occur before                        monthly payment.’’
                   the consumer must begin making
                   fully amortizing payments, the maxi-             (2) Interest-only payments. If the loan is an
                   mum interest rate that could apply                   interest-only loan, for each interest rate
                   at the time of the second payment                    disclosed under §226.18(s)(2)(i), the
                   increase and the date the increase                   corresponding periodic payment and
                   is scheduled to occur.                               (§226.18(s)(3)(ii)):
         (5) For an amortizing adjustable-rate mort-                   (i) If the payment will be applied to only
             gage, if the interest rate at consumma-                       accrued interest, the amount ap-
             tion is less than the fully indexed rate,                     plied to interest, labeled as ’’interest
             the following (placed in a box directly                       payment,’’ and a statement that
             beneath the table required by para-                           none of the payment is being ap-
             graph 18 (s)(1) of the regulation, in a                       plied to principal;
             format substantially similar to Model                     (ii) If the payment will be applied to
             Clause H-4(I) in the regulation’s Appen-                       accrued interest and principal, an
             dix H):                                                        itemization of the amount of the first
              (i) The interest rate that applies at                         such payment applied to accrued
                  consummation and the period of                            interest and to principal, labeled as
                  time for which it applies;                                ’’interest payment’’ and ’’principal
                                                                            payment,’’ respectively;
              (ii) A statement that, even if market
                   rates do not change, the interest                   (iii) The escrow information described
                   rate will increase at the first adjust-                   in §226.18(s)(3)(i)(C); and
                   ment and a designation of the place                 (iv) The sum of all amounts required to
                   in sequence of the month or year, as                     be disclosed under §§226.18(s)(3)
                   applicable, of such rate adjustment                      (ii)(A) and (C) or (s)(3)(ii)(B) and (C),
                   (e.g., ‘‘in the third year’’); and                       as applicable, labeled as ’’total
              (iii) The fully-indexed rate.                                 estimated monthly payment.’’
        Payments for Amortizing Loans                               (3) Payments for negative amortization
                                                                        loans. If the loan is a negative amortiza-
         (1) Principal and interest payments. If all                    tion loan (§226.18(s)(4)):
             periodic payments will be applied to
                                                                       (i) The minimum periodic payment re-
  13. The term ’’negative amortization loan‘‘ means a loan, other          quired until the first payment in-
than a reverse mortgage subject to §226.33, that provides for a            crease or interest rate increase,
minimum periodic payment that covers only a portion of the
accrued interest, resulting in negative amortization.                      corresponding to the interest rate
§226.18(s)(7)(v)                                                           disclosed under §226.18(s)(2)(ii)(A);


Consumer Compliance Handbook                                                                        Reg. Z • 39 (6/11)
Examination Objectives



              (ii) The minimum periodic payment that            est in a timeshare plan described in
                   would be due at the first payment            11 U.S.C. 101(53D)), that is a negative
                   increase and the second, if any,             amortization loan, determine that the follow-
                   corresponding to the interest rates          ing information is disclosed (in close prox-
                   described in §226.18(s)(2)(ii)(C) and        imity to the table required in §226.18(s)(1),
                   (D);                                         with headings, content, and format substan-
              (iii) A statement that the minimum pay-           tially similar to Model Clause H-4(G) in
                    ment pays only some interest, does          Appendix H to this part) (§226.18(s)(6):
                    not repay any principal, and will           (i) The maximum interest rate, the shortest
                    cause the loan amount to increase;              period of time in which such interest
              (iv) The fully amortizing periodic pay-               rate could be reached, the amount of
                   ment amount at the earliest time                 estimated taxes and insurance included
                   when such a payment must be                      in each payment disclosed, and a
                   made, corresponding to the interest              statement that the loan offers payment
                   rate disclosed under §226.18                     options, two of which are shown; and
                   (s)(2)(ii)(B); and                           (ii) The dollar amount of the increase in the
              (v) If applicable, in addition to the                  loan’s principal balance if the consumer
                  payments in §§226.18(s)(4)(i) and                  makes only the minimum required pay-
                  (ii), for each interest rate disclosed             ments for the maximum possible time
                  under §226.18(s)(2)(ii), the amount                and the earliest date on which the
                  of the fully amortizing periodic pay-              consumer must begin making fully am-
                  ment, labeled as the ’’full payment                ortizing payments, assuming that the
                  option,’’ and a statement that these               maximum interest rate is reached at the
                  payments pay all principal and all                 earliest possible time.
                  accrued interest.
                                                             f. For a closed end transaction secured by
                      (Note: The information in
                                                                real property or a dwelling, (other than a
                  §§226.18(s)(2)-(4) must be dis-
                                                                transaction secured by a consumer’s inter-
                  closed in the form of a table with no
                                                                est in a timeshare plan described in
                  more than five columns, and with
                                                                11 U.S.C. 101(53D)), determine that the
                  headings and format substantially
                  similar to Model Clause H-4(E),               creditor disclosed a statement that there is
                  H-4(F), H-4(G), or H-4(H) in Appen-           no guarantee the consumer can refinance
                  dix H of the regulation. The table            the transaction to lower the interest rate or
                  should contain only the information           periodic payments. (§226.18(t)(1))
                  required in §§226.18 (s)(2)-(4), be              (Note: The statement required by
                  placed in a prominent location, and           §226.18(t)(1) should be in a form substan-
                  be in a minimum 10-point font.                tially similar to Model Clause H-4(K) in
                  (§226.18(s)(1))                               Appendix       H    to    the    regulation.
                                                                (§226.18(t)(2)))
         (4) Balloon payments. For loans with bal-
             loon payments (defined as a payment             g. Determine all variable rate loans with a
             that is more than two times a regular              maturity greater than one year secured by a
             periodic payment) (§226.18(s)(5)):                 principal dwelling are given the following
                                                                disclosures at the time of application.
              (i) Except as provided below, the bal-            (§226.19)
                  loon payment is disclosed sepa-
                  rately from other periodic payments            (1) Consumer handbook on adjustable
                  disclosed in the table (i.e., is outside           rate mortgages or substitute
                  the table and in a manner substan-             (2) Statement that interest rate payments
                  tially similar to Model Clause H-4(J)              and or terms can change
                  in Appendix H to the regulation);
                                                                 (3) The index/formula and a source of
              (ii) If the balloon payment is scheduled               information
                   to occur at the same time as another
                                                                 (4) Explanation of the interest rate/payment
                   payment required to be disclosed in
                                                                     determination and margin
                   the table, the balloon payment must
                   be disclosed in the table.                    (5) Statement that the consumer should
                                                                     ask for the current interest rate and
     e. For a closed-end transaction secured by
                                                                     margin
        real property or a dwelling (other than a
        transaction secured by a consumer’s inter-               (6) Statement that the interest rate is


40 (6/11) • Reg. Z                                                               Consumer Compliance Handbook
                                                                                Examination Objectives



            discounted, if applicable                          that fact shall be stated (grouped to-
                                                               gether with the amount borrowed).
        (7) Frequency of interest rate and pay-
            ment changes                               i.   For any closed-end mortgage loan (credit
                                                            transaction that is secured by the principal
        (8) Rules relating to all changes
                                                            dwelling of a consumer) that was sold,
        (9) Either a historical example based on            assigned, or otherwise transferred to the
            15 years, or the initial rate and pay-          covered person, determine that the cov-
            ment with a statement that the periodic         ered person notifies the borrower clearly
            payment may substantially increase or           and conspicuously in writing, in a form that
            decrease together with a maximum                the consumer may keep, of such transfer,
            interest rate and payment                       including (§226.39):
       (10) Explanation of how to compute the               (1) An identification of the loan that was
            loan payment, giving an example                     sold, assigned, or otherwise trans-
       (11) Demand feature, if applicable                       ferred;

       (12) Statement of content and timing of              (2) The name, address, and telephone
            adjustment notices                                  number of the covered person who
                                                                owns the mortgage loan;
       (13) Statement that other variable rate loan
            program disclosures are available, if           (3) The date of transfer (either the date of
            applicable                                          acquisition recognized in the books and
                                                                records of the covered person or that of
    h. Determine that the disclosures required for              the transferring party) identified by the
       high-cost mortgage transactions (§226.32)                covered person;
       clearly and conspicuously include the items
       below. (§226.32(c), see Form H-16 in                 (4) The name, address, and telephone
       Appendix H)                                              number of an agent or party having
                                                                authority, on behalf of the covered
       (1) The required statement ‘‘you are not                 person, to receive notice of the right to
           required to complete this agreement                  rescind and resolve issues concerning
           merely because you have received                     the consumer’s payments on the mort-
           these disclosures or have signed a loan              gage loan;
           application. If you obtain this loan, the
           lender will have a mortgage on your              (5) Where transfer of ownership of the debt
           home. You could lose your home, and                  to the covered person is or may be
           any money you have put into it, if you do            recorded in public records or, alterna-
           not meet your obligations under the                  tively, that the transfer of ownership has
           loan.’’                                              not been recorded in public records at
                                                                the time the disclosure is provided;
       (2) The APR.
                                                            (6) At the option of the covered person, any
       (3) Amount of the regular monthly (or other              other relevant information regarding the
           periodic) payment and the amount of                  transaction; and
           any balloon payment. The regular pay-
           ment should include amounts for volun-           (7) If there are multiple covered persons,
           tary items, such as credit life insurance            contact information for each of them,
           or debt-cancellation coverage, only if               unless one of them has been authorized
           the consumer has previously agreed to                to receive the consumer’s notice of the
           the amount (See staff commentary to                  right to rescind and resolve issues
           32(c)(3)).                                           concerning the consumer’s payments
                                                                on the loan.
       (4) Statement that the interest rate may
           increase, and the amount of the single              Note: This notice of sale or transfer must
           maximum monthly payment, based on                   be provided for any consumer credit
           the maximum interest rate allowed un-               transaction that is secured by the prin-
           der the contract, if applicable.                    cipal dwelling of a consumer. This
       (5) For a mortgage refinancing, the total               notification is required of the covered
           amount borrowed, as reflected by the                person even if the loan servicer remains
           face amount of the note; and where the              the same. In addition, if more than one
           amount borrowed includes premiums or                consumer is liable on the obligation, the
           other charges for optional credit insur-            covered person may mail or deliver the
           ance or debt-cancellation coverage,                 disclosure notice to any consumer who


Consumer Compliance Handbook                                                               Reg. Z • 41 (6/11)
Examination Objectives



              is primarily liable. And, if an acquisition                 2. If interest accrues, whether
              involves multiple covered persons who                          payment of interest may be
              each acquire a partial interest in the                         deferred and added to the
              loan pursuant to separate and unrelated                        principal balance; and
              agreements, each covered person has                         3. A statement that, if the con-
              a duty to ensure that disclosures related                      sumer files bankruptcy, the
              to its acquisition are accurate and                            consumer may still be re-
              provided in a timely manner unless an                          quired to repay the loan.
              exception in 226.39(c) applies. The             (d) Cost estimates, based on an ex-
              parties may, but are not required to,               ample of the total cost of the loan,
              provide a single notice that satisfies the          calculated using:
              timing and content requirements appli-
              cable to each covered person. (Com-                   (i)   The highest interest rate and
              mentary §226.39(b)(5)-2)                                    including all applicable fi-
                                                                          nance charges,
     j.   For private education loans subject to
          Subpart F, ensure that the required disclo-               (ii) An amount financed of
          sures are accurate (§226.47) and contain                       $10,000, or $5,000, if the credi-
          the following information:                                     tor offers loans less than
                                                                         $10,000; and
          (1) Application or solicitation disclosures
              disclose the following:                               (iii) Calculated for each payment
                                                                          option.
              (a) Interest rate, including:
                                                              (e) Eligibility (e.g., any age or school
                     (i)   Rate or range, and if the rate         enrollment eligibility requirements).
                           depends in part on a determi-
                           nation of the borrower’s credit-   (f)   Alternatives to private education
                           worthiness or other factors, a           loans, including:
                           statement to that effect;                (i)   A statement that the consumer
                     (ii) Whether rate is fixed or vari-                  may qualify for Federal student
                          able;                                           loans,
                     (iii) If rate may increase after con-          (ii) The interest rates available for
                           summation, any limitations, or                each program available under
                           lack thereof, and if the limita-              title IV of the Higher Education
                           tion is imposed by law, that                  Act of 1965, and whether the
                           fact. Also, the creditor must                 rate is variable or fixed;
                           state that the consumer’s ac-            (iii) A statement that the consumer
                           tual rate may be higher or                     may obtain additional informa-
                           lower that that disclosed, if                  tion regarding student federal
                           applicable; and                                financial assistance from his
                     (iv) Whether the rate will typically                 school or U.S. Department of
                          be higher if the loan is not                    Education, including an appro-
                          co-signed or guaranteed.                        priate website; and
              (b) Fees and default or late payment                  (iv) A statement that a covered
                  costs.                                                 educational institution may
                                                                         have school specific educa-
              (c) Repayment terms, including:                            tional loan benefits and terms
                     (i)   Term of the loan, which is the                not detailed in the loan disclo-
                           period during which regularly                 sure forms.
                           scheduled payments of princi-      (g) A statement that if the loan is
                           pal and interest will be due.          approved, that the loan will be
                     (ii) Deferral options, or if con-            available for 30 days and the terms
                          sumer does not have the op-             will not change, except for changes
                          tion to defer, that fact.               to the interest rate in the case of a
                                                                  variable rate and other changes
                     (iii) For each available deferral op-
                                                                  permitted by law.
                           tion applicable, information as
                           to:                                (h) A statement that before consumma-
                           1. Whether interest will accrue        tion, the borrower must complete a
                               during deferral period; and        self-certification form obtained from


42 (6/11) • Reg. Z                                                            Consumer Compliance Handbook
                                                                         Examination Objectives



                the student’s institution of higher                  ment);
                education.                                        2. The maximum possible rate
                                                                     of interest for the loan, or, if
       (2) For approval disclosures, the following
                                                                     a maximum rate cannot be
           information is required under §226.18:
                                                                     determined, a rate of 25%.
           (a) Interest rate, information, including:             3. If a maximum rate cannot
                (i)   Interest rate applicable to the                be determined, the esti-
                      loan                                           mate of the total amount for
                                                                     repayment must include a
                (ii) Whether the interest rate is                    statement that there is no
                     variable or fixed; and                          maximum rate and that the
                (iii) If the interest rate may in-                   total amount for repayment
                      crease after consummation,                     disclosed is an estimate.
                      any limitations on the rate ad-       (viii) The maximum monthly pay-
                      justments, or lack thereof.                  ment based on the maximum
           (b) Fees and default or late payment                    rate of interest for the loan, or,
               costs, including:                                   if a maximum rate of interest
                                                                   cannot be determined, a rate
                (i)   An itemization of the fees or
                                                                   of 25%. If a maximum cannot
                      range of fees required to ob-
                      tain the loan; and                           be determined, a statement
                                                                   that there is no maximum rate
                (ii) Any fees, changes to the inter-               and that the monthly payment
                     est rate, and adjustments to                  amount disclosed is an esti-
                     principal based on the con-                   mate and will be higher if the
                     sumer’s defaults or late pay-                 applicable interest rate in-
                     ments.                                        creases.
           (c) Repayment terms, including:              (d) Alternatives to private education
                (i)   Principal amount;                     loans, including:
                (ii) Term of the loan;                      (i)   A statement that the consumer
                                                                  may qualify for Federal student
                (iii) A description of the payment
                                                                  loans,
                      deferral option chosen by the
                      consumer, if applicable, and          (ii) The interest rates available for
                      any other payment deferral                 each program available under
                      options that the consumer may              title IV of the Higher Education
                      elect at a later time;                     Act of 1965, and whether the
                                                                 rate is variable or fixed; and
                (iv) Any payments required while
                     the student is enrolled at the         (iii) A statement that the consumer
                     educational institution, based               may obtain additional informa-
                     on the deferral option chosen                tion regarding student federal
                     by the consumer;                             financial assistance from his
                                                                  school or U.S. Department of
                (v) Amount of any unpaid interest
                                                                  Education, including an appro-
                    that will accrue while the stu-
                                                                  priate website.
                    dent is enrolled in school,
                    based upon the deferral option      (e) A statement that the consumer may
                    chosen by the consumer;                 accept the terms of the loan until
                                                            the acceptance period under sec-
                (vi) A statement that if the con-
                                                            tion §226.48(c)(1) has expired. The
                     sumer files for bankruptcy, that
                                                            statement must include:
                     the consumer may still be re-
                     quired to pay back the loan;           (i)   The specific date on which the
                                                                  acceptance period expires,
                (vii) An estimate of the total amount
                                                                  based on the date upon which
                      of payments calculated based
                                                                  the consumer receives the dis-
                      upon:
                                                                  closures required under this
                      1. The interest rate applicable
                                                                  subsection for the loan;
                         to the loan (compliance with
                         §226.18(h) constitutes com-        (ii) The method or methods by
                         pliance with this require-              which the consumer may com-


Consumer Compliance Handbook                                                        Reg. Z • 43 (6/11)
Examination Objectives



                           municate the acceptance (writ-        (vi) A statement that if the con-
                           ten, oral, or by electronic                sumer files for bankruptcy, that
                           means); and                                the consumer may still be re-
                                                                      quired to pay back the loan;
                     (iii) A statement that except for
                           changes to the interest rate          (vii) An estimate of the total amount
                           and other changes permitted                 of payments calculated based
                           by law, the rates and the terms             upon:
                           of the loan may not be changed              1. The interest rate applicable
                           by the creditor during the 30                  to the loan (compliance with
                           day acceptance period.                         §226.18(h) constitutes com-
                                                                          pliance with this require-
         (3) After the consumer has accepted the
                                                                          ment);
             loan in accordance with §226.48(a),
                                                                       2. The maximum possible rate
             final disclosures must disclose the infor-
                                                                          of interest for the loan, or, if
             mation required under §226.18 and the
                                                                          a maximum rate cannot be
             following:
                                                                          determined, a rate of 25%;
              (a) Interest rate, including:                            3. If a maximum rate cannot
                     (i)   Interest rate applicable to the                be determined, the esti-
                           loan;                                          mate of the total amount for
                                                                          repayment must include a
                     (ii) Whether the interest rate is                    statement that there is no
                          variable or fixed; and                          maximum rate and that the
                     (iii) If the interest rate may in-                   total amount for repayment
                           crease after consummation,                     disclosed is an estimate.
                           any limitations on the rate ad-       (viii) The maximum monthly pay-
                           justments, or lack thereof.                  ment based on the maximum
              (b) Fees and default or late payment                      rate of interest for the loan, or,
                  costs, including:                                     if a maximum rate of interest
                                                                        cannot be determined, a rate
                     (i)   An itemization of the fees or
                                                                        of 25%. If a maximum cannot
                           range of fees required to ob-
                                                                        be determined, a statement
                           tain the loan; and
                                                                        that there is no maximum rate
                     (ii) Any fees, changes to the inter-               and that the monthly payment
                          est rate, and adjustments to                  amount disclosed is an esti-
                          principal based on the con-                   mate and will be higher if the
                          sumer’s defaults or late pay-                 applicable interest rate in-
                          ments.                                        creases.
              (c) Repayment terms, including:                (d) In a text more conspicuous than
                     (i)   Principal amount;                     any other required disclosure, ex-
                                                                 cept for the finance charge, the
                     (ii) Term of the loan;                      interest rate, and the creditor’s
                     (iii) A description of the payment          identify the following disclosures:
                           deferral option chosen by the         (i)   A statement that the consumer
                           consumer, if applicable, and                has the right to cancel the
                           any other payment deferral                  loan, without penalty, at any
                           options that the consumer may               time before the midnight of the
                           elect at a later time;                      third business day following
                     (iv) Any payments required while                  the date on which the con-
                          the student is enrolled at the               sumer receives the final loan
                          educational institution, based               disclosures. The statement
                          on the deferral option chosen                must include the specific date
                          by the consumer;                             on which the cancellation pe-
                                                                       riod expires and that the con-
                     (v) Amount of any unpaid interest
                                                                       sumer may cancel by that
                         that will accrue while the stu-
                                                                       date.
                         dent is enrolled in school,
                         based upon the deferral option          (ii) A statement that the loan pro-
                         chosen by the consumer;                      ceeds will not be disbursed


44 (6/11) • Reg. Z                                                        Consumer Compliance Handbook
                                                                                    Examination Objectives



                     until the cancellation period                tronic form without regard to the con-
                     expires.                                     sumer consent or other provisions of the
                                                                  E-Sign Act in the circumstances set
                (iii) The method or methods by
                                                                  forth in those sections.
                      which the consumer may can-
                      cel; and                            c. Determine that the terminology used in
                                                             providing the disclosures required by
                (iv) If the creditor permits cancel-
                                                             §226.5 is consistent. (§226.5(a)(2)(i))
                     lation by mail, the statement
                     specifying that the consumer’s       d. Determine that, for home-equity plans sub-
                     mailed request will be deemed           ject to §226.5b, the terms finance charge
                     timely if placed in the mail not        and annual percentage rate, when required
                     later than the cancellation date        to be disclosed with a corresponding
                     specified on the disclosures.           amount or percentage rate, shall be more
                                                             conspicuous than any other required dis-
Open-End Credit Forms Review                                 closure. The terms need not be more
Procedures                                                   conspicuous when used for periodic state-
                                                             ment disclosures under §226.7(a)(4) and
    a. Determine that the creditor made the dis-
                                                             for advertisements under §226.16.
       closures clearly and conspicuously.
                                                             (§226.5(a)(2)(ii))
       §226.5(a)
                                                          e. Determine that, if disclosures are required
    b. Determine that the creditor made the appli-
                                                             to be presented in a tabular format pursuant
       cable disclosures in writing, in a form that
                                                             to §226.5(a)(3), that the term penalty APR
       the consumer may keep, except
                                                             shall be used, as applicable. §226.5(a)(2)(iii)
       (§226.5(a)(1)(ii)):
                                                                Note: The term penalty APR need not be
       (1) The following disclosures need not be             used in reference to the annual percentage
           written: Disclosures under §226.6(b)(3)           rate that applies with the loss of a promo-
           of charges that are imposed as part of            tional rate, assuming the annual percent-
           an open-end (not home-secured) plan               age rate that applies is not greater than the
           that are not required to be disclosed             annual percentage rate that would have
           under §226.6(b)(2) and related disclo-            applied at the end of the promotional
           sures       of       charges      under           period; or if the annual percentage rate that
           §226.9(c)(2)(iii)(B); disclosures under           applies with the loss of a promotional rate is
           §226.9(c)(2)(vi); disclosures under               a variable rate, the annual percentage rate
           §226.9(d) when a finance charge is                is calculated using the same index and
           imposed at the time of the transaction;           margin as would have been used to calcu-
           and disclosures under §226.56(b)(1)(i).           late the annual percentage rate that would
       (2) The following disclosures need not be in          have applied at the end of the promotional
           a retainable form: Disclosures that need          period. If credit insurance or debt cancel-
           not be written under paragraph                    lation or debt suspension coverage is
           (a)(1)(ii)(A) of this section; disclosures        required as part of the plan, the term
           for credit and charge card applications           required shall be used and the program
           and solicitations under §226.5a; home-            shall be identified by its name. If an annual
           equity disclosures under §226.5b(d);              percentage rate is required to be presented
           the alternative summary billing-rights            in a tabular format pursuant to paragraph
           statement under §226.9(a)(2); the credit          (a)(3)(i) or (a)(3)(iii) of this section, the term
           and charge card renewal disclosures               fixed, or a similar term, may not be used to
           required under §226.9(e); and the pay-            describe such rate unless the creditor also
           ment requirements under §226.10(b),               specifies a time period that the rate will be
           except as provided in §226.7(b)(13).              fixed and the rate will not increase during
                                                             that period, or if no such time period is
       (3) The disclosures required by this sub-             provided, the rate will not increase while the
           part may be provided to the consumer              plan is open.
           in electronic form, subject to compli-
           ance with the consumer consent and
           other applicable provisions of the Elec-
                                                        Credit and Charge Card Application and
           tronic Signatures in Global and National     Solicitation Disclosures §226.5a
           Commerce Act (E-Sign Act) (15 U.S.C.           a. Determine that the credit card solicitation or
           7001 et seq.). The disclosures required           application disclosures were made clearly
           by §§226.5a, 226.5b, and 226.16 may               and conspicuously on or with a solicitation
           be provided to the consumer in elec-              or an application. (§226.5a)


Consumer Compliance Handbook                                                                  Reg. Z • 45 (6/11)
Examination Objectives



     b. For the disclosures in §§226.5a(b)(1)             closed. (§226.5a(b)(1))
        through (5) (except for (b)(1)(iv)(B)) and          Note: The APR for purchases dis-
        (b)(7) through (15), determine that the           closed pursuant to §226.5a(b)(1) shall
        creditor made the disclosures required for        be in at least 16-point type, except for
        §§226.5a(c), (d)(2), (e)(1) and (f) in the form   the following: Oral disclosures of the
        of a table with headings, content, and            annual percentage rate for purchases;
        format substantially similar to the applicable    or a penalty rate that may apply upon
        tables found in G-10 in appendix G.               the occurrence of one or more specific
        (§226.5a(a)(2)(i))                                events.
     c. Determine that the table required by              (i)    Variable rate information. If a rate
        §226.5a(a)(2)(i) contains only the informa-              is a variable rate, determine that
        tion required or permitted by that section. If           the card issuer discloses the fact
        the creditor provides other information,                 that the rate may vary and how the
        determine that such information appears                  rate is determined. Determine that
        outside the table. (§226.5a(a)(2)(ii))                   the card issuer identifies the type
                                                                 of index or formula that is used in
     d. Determine that the disclosures required by
                                                                 setting the rate. Determine that
        §226.5a(b)(1)(iv)(B) and (b)(6) are placed
                                                                 the value of the index and the
        directly beneath the table required by
                                                                 amount of the margin that are
        §226.5a(a)(2)(i). (§225.5a(a)(2)(iii))
                                                                 used to calculate the variable rate
     e. When a tabular format is required, deter-                are not disclosed in the table.
        mine that the following disclosures are                  Determine further that a disclo-
        disclosed in bold text (§226.5a(a)(2)(iv)):              sure of any applicable limitations
                                                                 on rate increases or decreases is
         (1) Annual percentage rate required to be
                                                                 not included in the table.
             disclosed pursuant to paragraph (b)(1)
                                                                 (§226.5a(b)(1)(i))
             of this section,
                                                          (ii)   Discounted initial rate. If the initial
         (2) Introductory rate required to be dis-
                                                                 rate is an introductory rate, deter-
             closed pursuant to paragraph (b)(1)(ii)
                                                                 mine that the card issuer dis-
             of this section,
                                                                 closes in the table the introductory
         (3) Rate that will apply after a premium                rate, the time period during which
             initial rate expires required to be dis-            the introductory rate will remain in
             closed under paragraph (b)(1)(iii) of this          effect, and the term ‘‘introductory’’
             section, and                                        or ‘‘intro’’ in immediate proximity
                                                                 to the introductory rate. Determine
         (4) Fee or percentage amounts or maxi-
                                                                 further that the card issuer dis-
             mum limits on fee amounts required to
                                                                 closes, as applicable, either the
             be disclosed pursuant to paragraphs
                                                                 variable or fixed rate that would
             (b)(2), (b)(4), (b)(8) through (b)(13).
                                                                 otherwise apply to the account.
         Note: Bold text shall not be used for the               (§226.5a(b)(1)(ii))
         amount of any periodic fee disclosed pur-        (iii) Premium initial rate. If the initial
         suant to paragraph (b)(2) of this section that         rate is temporary and is higher
         is not an annualized amount; and other                 than the rate that will apply after
         APRs or fee amounts disclosed in the table.            the temporary rate expires, deter-
         (§226.5a(a)(2)(iv))                                    mine that the card issuer dis-
     f. Determine that the card issuer discloses, on            closes the premium initial rate and
        or with an solicitation or application:                 the time period during which the
        (§226.5a(b))                                            premium initial rate will remain in
                                                                effect. Determine that the pre-
          (1) Annual percentage rate. Each periodic
                                                                mium initial rate for purchases is
              rate that may be used to compute the
                                                                in at least 16-point type. Deter-
              finance charge on an outstanding
                                                                mine that the issuer discloses in
              balance for purchases, a cash ad-
                                                                the table the rate that will apply
              vance, or a balance transfer, ex-
                                                                after the premium initial rate ex-
              pressed as an annual percentage rate.
                                                                pires, in at least 16-point type.
              When more than one rate applies for a
                                                                (§226.5a(b)(1)(iii))
              category of transactions, determine
              that the range of balances to which         (iv) Penalty rates. If a rate may in-
              each rate is applicable is also dis-             crease as a penalty for one or


46 (6/11) • Reg. Z                                                       Consumer Compliance Handbook
                                                                            Examination Objectives



                 more events specified in the ac-                annual percentage rates that vary
                 count agreement, such as a late                 by state may, at the issuer’s
                 payment or an extension of credit               option, disclose in the table: the
                 that exceeds the credit limit, de-              specific annual percentage rate
                 termine that the card issuer dis-               applicable to the consumer’s ac-
                 closes the increased rate that may              count; or the range of the annual
                 apply, a brief description of the               percentage rates, if the disclosure
                 event or events that may result in              includes a statement that the an-
                 the increased rate, and a brief                 nual percentage rate varies by
                 description of how long the in-                 state and refers the consumer to a
                 creased rate will remain in effect.             disclosure provided with the table
                 (§226.5a(b)(1)(iv))                             where the annual percentage rate
                                                                 applicable to the consumer’s
            (v) Introductory rate. If the issuer
                                                                 account        is       disclosed.
                discloses an introductory rate in
                                                                 (§226.5a(b)(1)(vi))
                the table or in any written or
                electronic promotional materials         (2) Fees for issuance or availability. Deter-
                accompanying applications or so-             mine that the card issuer discloses any
                licitations (and subject to para-            annual or other periodic fee, ex-
                graph (c) or (e) of §226.5a),                pressed as an annualized amount, or
                determine that the issuer briefly            any other fee that may be imposed for
                discloses, directly beneath the              the issuance or availability of a credit
                table, the circumstances, if any,            or charge card, including any fee
                under which the introductory rate            based on account activity or inactivity.
                may be revoked, and the type of              (§226.5a(b)(2))
                rate that will apply after the intro-    (3) Fixed finance charge; minimum inter-
                ductory      rate    is    revoked.          est charge. Determine that the creditor
                (§226.5a(b)(1)(iv))                          discloses any fixed finance charge that
            (vi) Rates that depend on consumer’s             could be imposed during a billing
                 creditworthiness. If a rate cannot          cycle, as well as a brief description of
                 be determined at the time disclo-           that charge. Determine that the credi-
                                                             tor discloses any minimum interest
                 sures are given because the rate
                                                             charge if it exceeds $1.00 that could
                 depends, at least in part, on a
                                                             be imposed during a billing cycle, and
                 later determination of the consum-
                                                             a brief description of the charge.
                 er’s creditworthiness, determine
                                                             (§226.5a(b)(3))
                 that the card issuer discloses the
                 specific rates or the range of rates    (4) Transaction charge. Determine that the
                 that could apply and a statement            creditor discloses any transaction
                 that the rate for which the con-            charge imposed for the use of the card
                 sumer may qualify at account                for purchases. (§226.5a(b)(4))
                 opening will depend on the con-         (5) Grace period. Determine that the is-
                 sumer’s creditworthiness, and               suer discloses the date by which or the
                 other factors if applicable.                period within which any credit ex-
                 (§226.5a(b)(1)(v))                          tended for purchases may be repaid
                    Note: If the rate that depends,          without incurring a finance charge due
                 at least in part, on a later determi-       to a periodic interest rate and any
                 nation of the consumer’s credit-            conditions on the availability of the
                 worthiness is a penalty rate, as            grace period. If no grace period is
                 described in (b)(1)(iv), the card           provided, determine that this fact is
                 issuer at its option may disclose           disclosed. In disclosing in the tabular
                 the highest rate that could apply,          format a grace period that applies to all
                 instead of disclosing the specific          types of purchases, determine that the
                 rates or the range of rates that            issuer uses the phrase ‘‘How to Avoid
                 could apply. (§226.5a(b)(1)(v))             Paying Interest on Purchases’’ as the
            (vii) APRs that vary by state. Deter-            heading for the row describing the
                  mine that the card issuer does not         grace period. If a grace period is not
                  list annual percentage rates for           offered on all types of purchases, in
                  multiple states in the table. Note,        disclosing this fact in the tabular for-
                  however, that issuers imposing             mat, determine that the issuer uses the


Consumer Compliance Handbook                                                          Reg. Z • 47 (6/11)
Examination Objectives



               phrase ‘‘Paying Interest’’ as the head-         (14) Available credit. Determine whether
               ing for the row describing this fact.                total of required fees for the issuance
                 Note: If the length of the grace                   or availability of credit and/or security
               period varies, the card issuer may                   deposit debited to the account at
               disclose the range of days, the mini-                account opening equal or exceed
               mum number of days, or the average                   15 percent of minimum credit limit for
               number of days in the grace period, if               the account. If so, determine that the
               the disclosure is identified as a range,             creditor disclosed, as applicable, the
               minimum, or average. (§226.5a(b)(5))                 available credit remaining after the
                                                                    fees and/or security deposit are deb-
          (6) Balance computation method. Deter-
                                                                    ited to the account. (§226.5a(b)(14))
              mine that the creditor disclosed the
              name of the balance computation                  (15) Website reference. For issuers of credit
              method that is used to determine the                  cards that are not charge cards, deter-
              balance on which the finance charge is                mine that the creditor disclosed a
              computed, or an explanation of the                    reference to the website established
              method used if it is not listed. In                   by the Board and a statement that the
              determining which balance computa-                    consumers may obtain on the website
              tion method to disclose, the creditor                 information about shopping for and
              should have assumed that the credit                   using credit cards. (§226.5a(b)(15))
              extended will not be repaid within any
              grace period. (§226.5a(b)(6))
                 Note: Disclosures required by            Requirements for Home Equity Plans
              §226.5a(b)(6) must be placed directly       §226.5b
              beneath the table.
                                                            a. Determine that the following home equity
          (7) Statement on charge card payments.               disclosures were made clearly and con-
              Determine that the creditor discloses a          spicuously, at the time of application.
              statement that charges incurred by               (§226.5b)
              use of the charge card are due when               (1) Home equity brochure
              the periodic statement is received.
              (§226.5a(b)(7))                                   (2) Statement that the consumer should
                                                                    retain a copy of the disclosure
          (8) Cash advance fee. Determine that the
              creditor disclosed any fee imposed for            (3) Statement of the time the specific
              an extension of credit in the form of                 terms are available
              cash or its equivalent. (§226.5a(b)(8))           (4) Statement that terms are subject to
          (9) Late payment fee. Determine that the                  change before the plan opens
              creditor disclosed any fee imposed for            (5) Statement that the consumer may re-
              a late payment. (§226.5a(b)(9))                       ceive a full refund of all fees
         (10) Over-the-limit fee. Determine that the            (6) Statement that the consumer’s dwell-
              creditor disclosed any fee imposed                    ing secures the credit
              for exceeding the credit limit.
                                                                (7) Statement that the consumer could
              (§226.5a(b)(10))
                                                                    lose the dwelling
         (11) Balance transfer fee. Determine that
                                                                (8) Creditors right to change, freeze, or
              the creditor disclosed any fee imposed
                                                                    terminate the account
              to transfer a balance. (§226.5a(b)(11))
                                                                (9) Statement that information about con-
         (12) Returned payment fee. Determine that
                                                                    ditions for adverse action are available
              the creditor disclosed any fee im-
                                                                    upon request
              posed for a returned payment.
              (§226.5a(b)(12))                                 (10) Payment terms including the length of
                                                                    the draw and repayment periods, how
         (13) Required insurance, debt cancellation,
                                                                    the minimum payment is determined,
              or debt suspension coverage. Deter-
                                                                    the timing of payments, and an ex-
              mine that the fee imposed required
                                                                    ample based on $10,000 and a recent
              insurance, debt cancellation or suspen-
                                                                    APR
              sion coverage is disclosed if the insur-
              ance, debt cancellation or coverage              (11) A recent APR imposed under the plan
              is required as part of the plan.                      and a statement that the rate does not
              (§226.5a(b)(13))                                      include costs other than interest (fixed


48 (6/11) • Reg. Z                                                              Consumer Compliance Handbook
                                                                                   Examination Objectives



            rate plans only)                                     Note: the terms need not be more
                                                               conspicuous when used for periodic state-
       (12) Itemization of all fees paid to creditor
                                                               ment disclosures under §226.7(a)(4) and
       (13) Estimate of any fees payable to third              for advertisements under §226.16.
            parties to open the account and a                  (§226.5(a)(2)(ii))
            statement that the consumer may re-
            ceive a good faith itemization of third
            party fees                                   Account Opening Initial Disclosures
       (14) Statement regarding negative amorti-
                                                         §226.6
            zation, as applicable                           a. The following requirements apply only to
                                                               home-equity plans subject to the require-
       (15) Transaction requirements
                                                               ments of §226.5b. Determine that the credi-
       (16) Statement that the consumer should                 tor discloses, as applicable (§226.6(a)):
            consult a tax advisor regarding the
                                                               (1) Finance charge. The circumstances
            deductibility of interest and charges
                                                                   under which a finance charge will be
            under the plan
                                                                   imposed and an explanation of how it
       (17) For variable rate home equity plans,                   will be determined, including: a state-
            disclose the following:                                ment of when finance charges begin to
            (i)    That the APR, payment, or term                  accrue, and an explanation of whether
                   may change                                      or not any time period exists within
                                                                   which any credit extended may be
            (ii)   The APR excludes costs other                    repaid without incurring a finance
                   than interest                                   charge; a disclosure of each periodic
            (iii) Identify the index and its source                rate that may be used to compute the
                                                                   finance charge, the range of balances
            (iv) How the rate will be determined
                                                                   to which it is applicable, and the
            (v) Statement that the consumer                        corresponding annual percentage rate;
                should request information on the                  an explanation of the method used to
                current index value, margin, dis-                  determine the balance on which the
                count, premium, or APR                             finance charge may be computed; and,
            (vi) Statement that the initial rate is                an explanation of how the amount of any
                 discounted and the duration of the                finance charge will be determined,
                 discount, if applicable                           including a description of how any
                                                                   finance charge other than the periodic
            (vii) Frequency of APR changes                         rate will be determined. (§226.6(a)(1))
            (viii) Rules relating to changes in the                   If a creditor offers a variable-rate
                   index, APR, and payment amount                  plan, determine that the creditor dis-
                                                                   closes: the circumstances under which
            (ix) Lifetime rate cap and any annual                  the rate(s) may increase; any limitations
                 caps, or a statement that there is                on the increase; and the effect(s) of an
                 no annual limitation                              increase. When different periodic rates
            (x) The minimum payment require-                       apply to different types of transactions,
                ment, using the maximum APR,                       determine that the types of transactions
                and when the maximum APR may                       to which the periodic rates shall apply
                be imposed                                         shall also be disclosed. (§226.6(a)(1))
            (xi) A table, based on a $10,000                   (2) Other charges. The amount of any
                 balance, reflecting all significant               charge other than a finance charge that
                 plan terms                                        may be imposed as part of the plan, or
                                                                   an explanation of how the charge will be
            (xii) Statement that rate information will
                                                                   determined. (§226.6(a)(2))
                  be provided on or with each
                  periodic statement.                          (3) Home-equity plan information. The fol-
                                                                   lowing disclosures, as applicable
    b. For home-equity plans subject to §226.5b,
                                                                   (§226.6(a)(3)):
       determine that the terms finance charge
       and annual percentage rate, when required                   (i) A statement of the conditions under
       to be disclosed with a corresponding                            which the creditor may take certain
       amount or percentage rate, are more con-                        action,     as     described     in
       spicuous than any other required disclo-                        §226.5b(d)(4)(i), such as terminat-
       sure.                                                           ing the plan or changing the terms.


Consumer Compliance Handbook                                                                 Reg. Z • 49 (6/11)
Examination Objectives



              (ii) The payment information described                pursuant to §226.6 (b)(2)(i);
                   in §226.5b(d)(5)(i) and (ii) for both        (2) Any introductory rate permitted to be
                   the draw period and any repayment                disclosed pursuant to paragraph
                   period.                                          (b)(2)(i)(B) or required to be disclosed
              (iii) A statement that negative amortiza-             under paragraph (b)(2)(i)(F) of this sec-
                    tion may occur as described in                  tion;
                    §226.5b(d)(9).                              (3) Any rate that will apply after a premium
              (iv) A statement of any transaction re-               initial rate expires permitted to be
                   quirements as described in                       disclosed pursuant to paragraph
                   §226.5b(d)(10).                                  (b)(2)(i)(C) or required to be disclosed
                                                                    pursuant to paragraph (b)(2)(i)(F); and
              (v) A statement regarding the tax impli-
                  cations    as     described      in           (4) Any fee or percentage amounts or
                  §226.5b(d)(11).                                   maximum limits on fee amounts dis-
                                                                    closed pursuant to paragraphs (b)(2)(ii),
              (vi) A statement that the annual percent-
                                                                    (b)(2)(iv), (b)(2)(vii) through (b)(2)(xii).
                   age rate imposed under the plan
                   does not include costs other than         d. Determine that bold text is not used for: The
                   interest    as     described      in         amount of any periodic fee disclosed pur-
                   §226.5b(d)(6) and (d)(12)(ii).               suant to paragraph (b)(2) of this section that
                                                                is not an annualized amount; and other
              (vii)The variable-rate disclosures de-
                                                                annual percentage rates or fee amounts
                   scribed in §226.5b(d)(12)(viii),
                                                                disclosed in the table. (§226.6(b)(1)(i))
                   (d)(12)(x),       (d)(12)(xi),     and
                   (d)(12)(xii), as well as the disclosure   e. Determine that only the information required
                   described in §226.5b(d)(5)(iii), un-         or permitted by §226.6 (b)(2)(i) through
                   less the disclosures provided with           (b)(2)(v) (except for (b)(2)(i)(D)(2)) and
                   the application were in a form the           (b)(2)(vii) through (b)(2)(xiv) are provided in
                   consumer could keep and included             the table. Disclosures required by para-
                   a representative payment example             graphs (b)(2)(i)(D)(2), (b)(2)(vi) and
                   for the category of payment option           (b)(2)(xv) of this section shall be placed
                   chosen by the consumer.                      directly below the table required by
                                                                §226.6(b)(1). (§226.6(b)(1)(ii)
         (4) Security interests. The fact that the
                                                                   Note: Disclosures required by §226.6
             creditor has or will acquire a security
                                                                (b)(3) through (b)(5) that are not otherwise
             interest in the property purchased un-
                                                                required to be in the table and other
             der the plan, or in other property
                                                                information may be presented with the
             identified by item or type. (§226.6(a)(4))
                                                                account agreement or account-opening
         (5) Statement of billing rights. A statement           disclosure statement, provided such infor-
             that outlines the consumer’s rights and            mation appears outside the required table.
             the creditor’s responsibilities under           f. For creditors that impose fees referred to in
             §§226.12(c) and 226.13 and that is                 §226.6(b)(2)(vii) through (b)(2)(xi) that vary
             substantially similar to the statement             by state and that provide the disclosures
             found in Model Form G-3 or, at the                 required by §226.6(b) in person at the time
             creditor’s option, G-3(A), in Appendix G           the open-end (not home-secured) plan is
             to this part. (§226.6(a)(5))                       established in connection with financing the
     b. For open-end (not home-secured) plans                   purchase of goods or services determine
        determine that the creditor provided the                that the creditor discloses in the account-
        account-opening disclosures specified in                opening table either:
        §226.6 (b)(2)(i) through (b)(2)(v) (except for          (1) the specific fee applicable to the con-
        §226.6 (b)(2)(i)(D)(2)) and §226.6 (b)(2)(vii)              sumer’s account, or
        through (b)(2)(xiv) in the form of a table with
        the headings, content, and format substan-              (2) The range of fees, a statement that the
        tially similar to any of the applicable tables              amount of the fee varies by state, and
        in G-17 in appendix G. (§226.6(b)(1))                       reference the account agreement or
                                                                    other disclosure provided with the
     c. For open-end (not home-secured) plans,                      account-opening table where the
        determine that the following disclosures are                amount of the fee applicable to the
        disclosed in bold text (§226.6(b)(1)(i)):                   consumer’s account is disclosed.
         (1) Any APR required to be disclosed                       (§226.6(b)(1)(iii)


50 (6/11) • Reg. Z                                                                Consumer Compliance Handbook
                                                                                Examination Objectives



               Note: A creditor is not permitted to list      purchases is in at least 16-point type.
           fees for multiple states in the account-           (§226.6(b)(2)(i)(C))
           opening summary table (§226.6(b)(1)             (5) Penalty rates. If the rate is a penalty
           (iii)). If the amount of any fee required to        rate, determine that the creditor dis-
           be disclosed under this section is                  closed as part of the APR disclosure
           determined on the basis of a percent-               the rate that may apply and a brief
           age of another amount, the percentage               description of the event or events that
           used and the identification of the amount           may result in the increased rate, and a
           against which the percentage is applied             brief description of how long the in-
           may be disclosed instead of the amount              creased rate will remain in effect.
           of the fee. (§226.6(b)(1)(iv)                       (§226.6(b)(2)(i)(D)(1))
    g. The following requirements apply to open-           (6) Introductory rates. If the creditor dis-
       end (not home-secured). Determine that the              closes in the table an introductory rate,
       creditor discloses in the appropriate format,           as that term is defined in
       as applicable:                                          §226.16(g)(2)(ii), determine that the
        (1) Annual percentage rate. Each periodic              creditor briefly disclosed directly be-
            rate that may be used to compute the               neath the table the circumstances
            finance charge on an outstanding                   under which the introductory rate may
            balance for purchases, a cash ad-                  be revoked, and the rate that will apply
            vance, or a balance transfer, ex-                  after the introductory rate is revoked.
            pressed as an APR. When more than                  (§226.6(b)(2)(i)(D)(2))
            one rate applies for a category of             (7) Point of sale where APRs vary by state
            transactions, determine that the credi-            or based on creditworthiness. If the
            tor discloses the range of balances to             creditor imposes an APR that varies by
            which each rate is applicable. Ensure              state or based on the consumer’s
            that the APR for purchases disclosed               creditworthiness and provides re-
            pursuant to this paragraph is in at least          quired disclosures in person at the
            16-point type, except for a penalty rate           time the open-end (not home-secured)
            that may apply upon the occurrence                 plan is established in connection with
            of one or more specific events.                    financing the purchase of goods or
            (§226.6(b)(2)(i))                                  services, determine that the creditor
        (2) Variable rate information. If the rate is a        discloses either (§226.6(b)(2)(i)(E)):
            variable rate, determine that the credi-          (i)    The specific APR applicable to
            tor also disclosed the fact that the rate                the consumer’s account, or
            may vary and how the rate is deter-
            mined (i.e., identify the type of index or        (ii)   The range of the APRs, if the
            formula used in setting the rate).                       disclosure includes a statement
            (§226.6(b)(2)(i)(A))                                     that the APR varies by state or will
                                                                     be determined based on the con-
        (3) Discounted initial rate. If the rate is an               sumer’s creditworthiness and re-
            introductory rate, determine that the                    fers the consumer to the account
            creditor disclosed that the rate would                   agreement or other disclosure pro-
            otherwise apply to the account. Where                    vided with the account-opening
            the rate is not tied to an index or                      table where the AP applicable to
            formula, determine that creditor dis-                    the consumer’s account is dis-
            closed the rate that applies after the                   closed. Determine that the credi-
            introductory rate expires. For a vari-                   tor does not list APRs for multiple
            able rate account, determine that the                    states in the account opening
            creditor disclosed a rate based on the                   table.
            applicable index or formula in accor-
                                                           (8) Credit card accounts under an open-
            dance with the accuracy requirements.
                                                               end (not home-secured) consumer
            (§226.6(b)(2)(i)(B))
                                                               credit plan. Determine that the issuer
        (4) Premium initial rate. If the initial rate is       discloses        in    the       table
            temporary and is higher than the rate              (§226.6(b)(2)(i)(F)):
            that will apply after the temporary rate
                                                              (i)    Any introductory rate, and
            expires, determine that the creditor
            disclosed the premium initial rate.               (ii)   Any rate that would apply upon
            Determine that the premium rate for                      expiration of a premium initial rate.


Consumer Compliance Handbook                                                              Reg. Z • 51 (6/11)
Examination Objectives



          (9) Fees for issuance or availability. Deter-           §226.6(b)(4)(i)(D). In determining which
              mine that the credit disclosed any                  balance computation method to dis-
              annual or periodic fee that may be                  close, the creditor should have as-
              imposed for the issuance or availability            sumed that the credit extended will not
              of an open-end plan (including any fee              be repaid within any grace period.
              based on account activity or inactivity);           (§226.6(b)(2)(vi))
              how frequently the fee will be imposed;        (14) Cash advance fee. Determine that the
              and the annualized amount of the fee.               creditor disclosed any fee imposed for
              (§226.6(b)(2)(ii))                                  an extension of credit in the form
         (10) Fixed finance charge (minimum inter-                of    cash     or    its    equivalent.
              est charge). Determine that the credi-              (§226.6(b)(2)(vii))
              tor disclosed any fixed finance charge,        (15) Late payment fee. Determine that the
              any minimum interest charge if it                   creditor disclosed any fee imposed for
              exceeds $1.00 that could be imposed                 a late payment. (§226.6(b)(2)(viii))
              during a billing cycle, and a brief
              description       of    the    charge.         (16) Over-the-limit fee. Determine that the
              (§226.6(b)(2)(iii))                                 creditor disclosed any fee imposed
                                                                  for exceeding the credit limit.
         (11) Transaction charges. Determine that                 (§226.6(b)(2)(ix))
              the creditor discloses any transaction
              charge imposed by the creditor for use         (17) Balance transfer fee. Determine that
              of the open-end plan for purchases.                 the creditor disclosed any fee imposed
              (§226.6(b)(2)(iv))                                  to transfer a balance. (§226.6(b)(2)(x))

         (12) Grace period. The date by which or the         (18) Returned payment fee. Determine that
              period within which any credit ex-                  the creditor disclosed any fee im-
              tended may be repaid without incur-                 posed for a returned payment.
              ring a finance charge due to a periodic             (§226.6(b)(2)(xi))
              interest rate and any conditions on the        (19) Required insurance, debt cancellation,
              availability of the grace period. If no             or debt suspension coverage. Deter-
              grace period is provided, that fact                 mine that the fee imposed required
              must be disclosed. If the length of the             insurance, debt cancellation or suspen-
              grace period varies, the creditor may               sion coverage is disclosed if the insur-
              disclose the range of days, the mini-               ance,                               debt
              mum number of days, or the average                  cancellation or coverage is required as
              number of the days in the grace                     part of the plan. (§226.6(b)(2)(xii))
              period, if the disclosure is identified as
                                                             (20) Available credit. Determine whether
              a range, minimum, or average. In
                                                                  total of required fees for the issuance
              disclosing in the tabular format a grace
                                                                  or availability of credit and/or security
              period that applies to all features on
                                                                  deposit debited to the account at
              the account, the phrase ‘‘How to Avoid
                                                                  account opening equal or exceed
              Paying Interest’’ shall be used as the
                                                                  15 percent of the credit limit for the
              heading for the row describing the
                                                                  account. If so, determine that the
              grace period. If a grace period is not
                                                                  creditor disclosed, as applicable, the
              offered on all features of the account,
                                                                  available credit remaining after the
              in disclosing this fact in the tabular
                                                                  fees and/or security deposit are deb-
              format, the phrase ‘‘Paying Interest’’
                                                                  ited to the account. (§226.6(b)(2)(xiii))
              shall be used as the heading for the
              row       describing        this      fact.    (21) Website reference. For issuers of credit
              (§226.6(b)(2)(v))                                   cards that are not charge cards, deter-
                                                                  mine that the creditor disclosed a
         (13) Balance computation method. Deter-
                                                                  reference to the website established
              mine that the creditor disclosed in the
                                                                  by the Board and a statement that the
              account opening disclosures the name
                                                                  consumers may obtain on the website
              of the balance computation method
                                                                  information about shopping for and
              that is used to determine the balance
                                                                  using credit cards. (§226.6(b)(2)(xiv))
              on which the finance charge is com-
              puted for each feature, or an explana-         (22) Billing error rights reference. Deter-
              tion of the method used if it is not listed,        mine that the creditor disclosed a
              along with a statement that an expla-               statement that information about con-
              nation of the methods required by                   sumers’ right to dispute transactions is


52 (6/11) • Reg. Z                                                            Consumer Compliance Handbook
                                                                                       Examination Objectives



            included in the account-opening dis-                            is accurate if it is a rate as of a
            closures. (§226.6(b)(2)(xv))                                    specified date and this rate was in
                                                                            effect within the last 30 days
       (23) Charges and finance charges. For
                                                                            before the disclosures are pro-
            charges imposed as part of open-end
                                                                            vided.
            (not home-secured) plan, the circum-
            stances under which the charge may                  (26) Rate changes not due to index or
            be imposed, including the amount of                      formula. For interest rate changes that
            the charge or explanation of how the                     are specifically set forth in the account
            charge is determined. For finance                        agreement and not tied to increases in
            charges, a statement of when finance                     an index or formula, determine that the
            charges begin to accrue, including an                    creditor discloses (§226.6(b)(4)(iii)):
            explanation of whether or not any time                   (i)    The initial rate (expressed as a
            period exists within which any credit                           periodic rate and a corresponding
            extended may be repaid without incur-                           APR).
            ring a finance charge. If such a time
            period is provided, a creditor may, at                   (ii)   How long the initial rate will remain
            its option and without disclosure, im-                          in effect and the specific events
            pose no finance charge when payment                             that cause the initial rate to
            is received after the time period’s                             change.
            expiration. (§226.6(b)(3)(i))                            (iii) The rate (expressed as a periodic
       (24) Disclosure of rates for open-end (not                          rate and a corresponding APR)
            home-secured) plans. Determine that                            that will apply when the initial rate
            the creditor disclosed, as applicable,                         is no longer in effect and any
            for each periodic rate that may be                             limitation on the time period the
            used      to       calculate  interest                         new rate will remain in effect.
            (§226.6(b)(4)(i)):                                       (iv) The balances to which the new
            (i)    The rate (expressed as a periodic                      rate will apply.
                   rate and a corresponding APR),                    (v) The balances to which the current
            (ii)   The range of balances to which                        rate at the time of the change will
                   the rate is applicable,                               apply.

            (iii) The type of transaction to which              (27) Voluntary credit insurance, debt can-
                  the periodic rate applies,                         cellation, or debt suspension. Deter-
                                                                     mine that the creditor disclosed the
            (iv) An explanation of the method                        applicable disclosures if the creditor
                 used to determine the balance to                    offers optional credit insurance, or
                 which the rate is applied.                          debt cancellation or dept suspension
       (25) Variable-rate accounts. For interest                     coverage. (§226.6(b)(5)(i))
            rate changes that are tied to increases             (28) Security interests. Determine that the
            in an index or formula (variable-rate                    creditor disclosed the fact that the
            accounts) determine that the following                   creditor has or will acquire a security
            are specifically set forth in the account                interest in the property purchased
            agreement (§226.6(b)(4)(ii)):                            under the plan, or in other property
            (i)    The fact that the annual percent-                 identified    by    item    or   type.
                   age rate may increase.                            (§226.6(b)(5)(ii))
            (ii)   How the rate is determined, includ-          (29) Statement of billing rights. Determine
                   ing the margin.                                   that the creditor disclosed a statement
                                                                     that outlines the consumer’s rights and
            (iii) The circumstances under which                      the      creditor’s     responsibilities.
                  the rate may increase.                             (§226.6(b)(5)(iii))
            (iv) The frequency with which the rate
                 may increase.
                                                          Periodic Statement Disclosures §226.7
            (v) Any limitation on the amount the
                rate may change.                             a. Rules affecting home-equity plans. For
                                                                home-equity plans subject to the require-
            (vi) The effect(s) of an increase.
                                                                ments of §226.5b, determine that the credi-
            (vii) Except as specified in paragraph              tor disclosed on the periodic statement
                  (b)(4)(ii)(H) of this section, a rate         items 1 through 10 below (§226.7(a)):


Consumer Compliance Handbook                                                                     Reg. Z • 53 (6/11)
Examination Objectives



            Note: The requirements of §226.7(a)                     disclosed. (§226.7(a)(5))
         apply only to home-equity plans subject to              (6) Amount of finance charge and other
         the requirements of §226.5b. Additionally, a                charges. (§226.7(a)(6))
         creditor may, at its option, comply with any
         of the requirements of paragraph §226.7(b);                (i)    Finance charges. The amount of
         however, any creditor that chooses to                             any finance charge debited or
         replace the disclosures required under                            added to the account during the
         paragraph (a)(7) with paragraph (b)(7)                            billing cycle, using the term fi-
         must also disclose the information required                       nance charge. Determine that the
         under paragraph (b)(6).                                           components of the finance charge
                                                                           are individually itemized and iden-
          (1) Previous balance. The account bal-
                                                                           tified to show the amount(s) due to
              ance outstanding at the beginning of
                                                                           the application of any periodic
              the billing cycle. (§226.7(a)(1))
                                                                           rates and the amounts(s) of any
          (2) Identification of transactions. An iden-                     other type of finance charge.
              tification of each credit transaction in                         Note: If there is more than one
              accordance with §226.8. (§226.7(a)(2))                       periodic rate, the amount of the
          (3) Credits. Any credit to the account                           finance charge attributable to
              during the billing cycle, including the                      each rate need not be separately
              amount and the date of crediting. The                        itemized         and      identified.
              date need not be provided if a delay in                      (§226.7(a)(6)(i))
              accounting does not result in any                     (ii)   Other charges. The amounts, item-
              finance or other charge. (§226.7(a)(3))                      ized and identified by type, of any
          (4) Periodic rates. Each periodic rate that                      charges other than finance
              may be used to compute the finance                           charges debited to the account
              charge, the range of balances to which                       during     the     billing   cycle.
              it is applicable, and the corresponding                      (§226.7(a)(6)(ii))
              annual percentage rate. If different                    Note: Creditors may comply with
              periodic rates apply to different types               paragraphs (a)(6) of §226.7, or with
              of transactions, the types of transac-                paragraph (b)(6) of §226.7, at their
              tions to which the periodic rates apply               option.
              shall also be disclosed. For variable-
                                                                 (7) Annual percentage rate. At a creditor’s
              rate plans, the fact that the periodic
                                                                     option, when a finance charge is
              rate(s) may vary. (§226.7(a)(4))
                                                                     imposed during the billing cycle, the
               (i)    Note that: If no finance charge is             annual percentage rate(s) determined
                      imposed when the outstanding                   under §226.14(c) using the term an-
                      balance is less than a certain                 nual percentage rate. (§226.7(a)(7))
                      amount, the creditor is not re-
                                                                 (8) Grace period. The date by which or the
                      quired to disclose that fact, or the
                                                                     time period within which the new
                      balance below which no finance
                                                                     balance or any portion of the new
                      charge will be imposed
                                                                     balance must be paid to avoid addi-
               (ii)   Note further that: An annual per-              tional finance charges. (§226.7(a)(8))
                      centage rate that differs from the
                                                                 (9) Address for notice of billing errors. The
                      rate that would otherwise apply
                                                                     address to be used for notice of billing
                      and is offered only for a promo-
                                                                     errors. Alternatively, the address may
                      tional period need not be dis-
                                                                     be provided on the billing rights state-
                      closed except in periods in which
                                                                     ment permitted by §226.9(a)(2).
                      the offered rate is actually ap-
                                                                     (§226.7(a)(9))
                      plied.
                                                                (10) Closing date of billing cycle; new
          (5) Balance on which finance charge com-
                                                                     balance. The closing date of the billing
              puted. The amount of the balance to
                                                                     cycle and the account balance out-
              which a periodic rate was applied and
                                                                     standing on that date. (§226.7(a)(10))
              an explanation of how that balance
              was determined. When a balance is              b. Rules affecting open-end (not home-
              determined without first deducting all            secured) plans. The requirements of para-
              credits and payments made during the              graph (b) of this section (1 through 14
              billing cycle, the fact and the amount of         below) apply only to plans other than
              the credits and payments shall be                 home-equity plans subject to the require-


54 (6/11) • Reg. Z                                                                Consumer Compliance Handbook
                                                                               Examination Objectives



       ments of §226.5b. For applicable plans,                       using the term Interest Charge,
       determine that the creditor discloses on the                  must be grouped together under
       periodic statement (§226.7(b)):                               the heading Interest Charged,
                                                                     itemized and totaled by type of
        (1) Previous balance. The account bal-
                                                                     transaction, and a total of finance
            ance outstanding at the beginning of
                                                                     charges attributable to periodic
            the billing cycle. (§226.7(b)(1))
                                                                     interest rates, using the term Total
        (2) Identification of transactions. An iden-                 Interest, must be disclosed for the
            tification of each credit transaction in                 statement period and calendar
            accordance with §226.8. (§226.7(b)(2))                   year to date, using a format sub-
        (3) Credits. Any credit to the account                       stantially similar to Sample
            during the billing cycle, including the                  G-18(A).
            amount and the date of crediting. The             (ii)   Fees. Charges imposed as part of
            date need not be provided if a delay in                  the plan other than charges attrib-
            crediting does not result in any finance                 utable to periodic interest rates
            or other charge. (§226.7(b)(3))                          must be grouped together under
        (4) Periodic rates. Each periodic rate that                  the heading Fees, identified con-
            may be used to compute the interest                      sistent with the feature or type,
            charge expressed as an annual per-                       and itemized, and a total of
            centage rate and using the term An-                      charges, using the term Fees,
            nual Percentage Rate, along with the                     must be disclosed for the state-
            range of balances to which it is appli-                  ment period and calendar year to
            cable. (§226.7(b)(4))                                    date, using a format substantially
            (i)    Note: If no interest charge is                    similar to Sample G-18(A).
                   imposed when the outstanding            (7) Change-in-terms and increased pen-
                   balance is less than a certain              alty rate summary for open-end (not
                   amount, the creditor is not re-             home-secured) plans. Creditors that
                   quired to disclose that fact, or the        provide a change-in-terms notice re-
                   balance below which no interest             quired by §226.9(c), or a rate increase
                   charge will be imposed. The types           notice required by §226.9(g), on or
                   of transactions to which the peri-          with the periodic statement, must dis-
                   odic rates apply shall also be              close       the      information        in
                   disclosed. For variable-rate plans,         §226.9(c)(2)(iv)(A) and (c)(2)(iv)(B)
                   the fact that the APR may vary;             (if applicable) or §226.9(g)(3)(i) on the
                   and                                         periodic statement in accordance
            (ii)   A promotional rate, as that term is         with the format requirements in
                   defined in §226.16(g)(2)(i), is re-         §226.9(c)(2)(iv)(D),                 and
                   quired to be disclosed only in              §226.9(g)(3)(ii). See Forms G-18(F)
                   periods in which the offered rate is        and G-18(G). (§226.7(b)(7))
                   actually applied.                       (8) Grace period. The date by which or the
        (5) Balance on which finance charge com-               time period within which the new
            puted. The amount of the balance to                balance or any portion of the new
            which a periodic rate was applied and              balance must be paid to avoid addi-
            an explanation of how that balance                 tional finance charges. If such a time
            was determined, using the term Bal-                period is provided, a creditor may, at
            ance Subject to Interest Rate.                     its option and without disclosure, im-
            (§226.7(b)(5))                                     pose no finance charge if payment is
                                                               received after the time period’s expira-
        (6) Charges imposed. The amounts of any
                                                               tion. (§226.7(b)(8))
            charges imposed as part of a plan as
            stated in §226.6(b)(3), grouped to-            (9) Address for notice of billing errors. The
            gether, in proximity to transactions               address to be used for notice of billing
            identified under paragraph (b)(2) of               errors. Alternatively, the address may
            this section, substantially similar to             be provided on the billing rights state-
            Sample G-18(A) in appendix G to this               ment permitted by §226.9(a)(2).
            part. (§226.7(b)(6))                               (§226.7(b)(9))
            (i)    Interest. Finance charges attribut-    (10) Closing date of billing cycle; new
                   able to periodic interest rates,            balance. The closing date of the billing


Consumer Compliance Handbook                                                             Reg. Z • 55 (6/11)
Examination Objectives



               cycle and the account balance out-                       minimum payment due for that
               standing on that date disclosed in                       billing cycle will pay the entire
               accordance      with §226.7(b)(13).                      outstanding balance on the ac-
               (§226.7(b)(10))                                          count for that billing cycle.
         (11) Due date; late payment costs. With the         (12) Given those exceptions above, deter-
              exception of periodic statements pro-               mine that the card issuer disclosed on
              vided solely for charge cards and                   the periodic statement §226.7(b)(12):
              periodic statements provided for a                 (i)    The following statement with a
              charged-off account where payment of                      bold heading: ‘‘Minimum Pay-
              the entire account balance is due                         ment Warning: If you make only
              immediately, determine that the credi-                    the minimum payment each pe-
              tor disclosed (in accordance with                         riod, you will pay more in interest
              §226.7(b)(13)) for a credit card ac-                      and it will take you longer to pay
              count under an open-end (not home-                        off          your        balance’’
              secured) consumer credit plan:                            (§226.7(b)(12)(i)(A));
               (i)    The due date for a payment (the            (ii)   The minimum payment repayment
                      due date must be the same day of                  estimate, as described in Appen-
                      the month for each billing cycle).                dix M1 to this part.
                      (§226.7(b)(11)(i)(A))                                Note: If the minimum payment
               (ii)   The amount of any late payment                    repayment estimate is less than 2
                      fee and any increased periodic                    years, determine that the card
                      rate(s) (expressed as an annual                   issuer disclosed the estimate in
                      percentage rate(s)) that may be                   months. Otherwise, the estimate
                      imposed on the account as a                       must be disclosed in years and
                      result of a late payment. If a range              rounded to the nearest whole year
                      of late payment fees may be                       (§226.7(b)(12)(i)(B));
                      assessed, verify that the card
                                                                 (iii) The minimum payment total cost
                      issuer either states a range of fees
                                                                       estimate, as described in Appen-
                      or the highest fee and an indica-
                                                                       dix M1 to this part, rounded to the
                      tion that the fee imposed could be
                                                                       nearest         whole        dollar
                      lower. (§226.7(b)(11)(i)(B))
                                                                       (§226.7(b)(12)(i)(C);
                         Note: If the rate may be in-
                      creased for more than one feature          (iv) The minimum payment repayment
                      or balance, the card issuer may                 estimate and the minimum pay-
                      state the range of rates or the                 ment total cost estimate are based
                      highest rate that could apply and               on the current outstanding bal-
                      at the issuer’s option an indication            ance shown on the periodic state-
                      that the rate imposed could be                  ment. A statement that the mini-
                      lower.                                          mum payment repayment estimate
                         Note further that: With the ex-              and the minimum payment total
                      ception of the negative or no                   cost estimate are based on the
                      amortization disclosures required               assumption that only minimum
                      by §226.7(b)(12)(ii), the repay-                payments are made and no other
                      ment disclosures in §226.7(b)(12)               amounts are added to the bal-
                      (as listed in step 12 below) are not            ance (§226.7(b)(12)(i)(D);
                      required for:                              (v) A toll-free telephone number
               (i)    Charge card accounts that re-                  where the consumer may obtain
                      quire payment of outstanding bal-              from the card issuer information
                      ances in full at the end of each               about
                      billing cycle;                                 credit    counseling      services
                                                                     (§226.7(b)(12)(i)(E)); and
               (ii)   A billing cycle immediately follow-
                      ing two consecutive billing cycles         (vi) The disclosures required for
                      in which the consumer paid the                  §226.7(b)(12)(i)(F)(1):
                      entire balance in full, had a zero                (a) The estimated monthly pay-
                      outstanding balance or had a                          ment for repayment in 36
                      credit balance; and                                   months, as described in Ap-
               (iii) A billing cycle where paying the                       pendix M1 to this part. The


56 (6/11) • Reg. Z                                                             Consumer Compliance Handbook
                                                                        Examination Objectives



                      estimated             monthly               feature where the required
                      payment for repayment in 36                 minimum payment for this
                      months must be rounded to                   fixed repayment feature will
                      the nearest whole dollar                    amortize that balance in a
                      (§226.7(b)(12)(i)(F)(1)(i));                fixed amount of time speci-
                                                                  fied in the account agree-
                 (b) A statement that the card
                                                                  ment which is less than 36
                     issuer estimates that the con-
                                                                  months.
                     sumer will repay the outstand-
                     ing balance shown on the           (vii) For non-amortizing or negatively
                     periodic statement in 3 years            amortizing credit card accounts
                     if the consumer pays the                 under an open-end (not home-
                     estimated monthly payment                secured) consumer credit plan,
                     for 3 years;                             determine that the card issuer
                                                              provides the following disclosures
                 (c) The total cost estimate for
                                                              on each periodic statement
                     repayment in 36 months, as
                                                              (§226.7(b)(12)(ii)):
                     described in Appendix M1 to
                     this part. The total cost esti-         (a) ‘‘Minimum Payment Warn-
                     mate for repayment in 36                    ing: Even if you make no
                     months must be rounded to                   more charges using this card,
                     the nearest whole dollar; and               if you make only the minimum
                                                                 payment each month we es-
                 (d) The savings estimate for re-
                                                                 timate you will never pay off
                     payment in 36 months, as
                                                                 the balance shown on this
                     described in Appendix M1 to
                                                                 statement because your pay-
                     this part. The savings esti-
                                                                 ment will be less than the
                     mate for repayment in 36
                                                                 interest charged each month’’
                     months must be rounded to
                                                                 (§226.7(b)(12)(ii)(A));
                     the nearest whole dollar.
                                                             (b) ‘‘If you make more than the
           Note: The disclosures (a through d
                                                                 minimum payment each pe-
         above) required for §226.7(b)(12)(i)(F)(1)
                                                                 riod, you will pay less in
         do not apply to a periodic statement in
                                                                 interest and pay off your bal-
         any of the following circumstances:
                                                                 ance                   sooner’’
                 (a) The minimum payment repay-                  (§226.7(b)(12)(ii)(B));
                     ment estimate that is dis-
                                                             (c) The estimated monthly pay-
                     closed on the periodic state-
                                                                 ment for repayment in 36
                     ment pursuant to paragraph
                                                                 months rounded to the near-
                     (b)(12)(i)(B) of this section
                                                                 est       whole        dollar
                     after rounding is three years
                                                                 (§226.7(b)(12)(ii)(C);
                     or less;
                                                             (d) A statement that the card
                 (b) The estimated monthly pay-
                                                                 issuer estimates that the con-
                     ment for repayment in 36
                                                                 sumer will repay the outstand-
                     months, as described in Ap-
                                                                 ing balance shown on the
                     pendix M1 to this part,
                                                                 periodic statement in 3 years
                     rounded to the nearest whole
                                                                 if the consumer pays the
                     dollar that is calculated for a
                                                                 estimated monthly payment
                     particular billing cycle is less
                                                                 each month for 3 years
                     than the minimum payment
                                                                 (§226.7(b)(12)(ii)(D)); and
                     required for the plan for that
                     billing cycle; and                      (e) A toll-free telephone number
                                                                 where the consumer may ob-
                 (c) A billing cycle where an ac-
                                                                 tain from the card issuer infor-
                     count has both a balance in a
                                                                 mation about credit counsel-
                     revolving feature where the
                                                                 ing                   services
                     required minimum payments
                                                                 (§226.7(b)(12)(ii)(E)).
                     for this feature will not amor-
                     tize that balance in a fixed       (viii) Verify that the items required to be
                     amount of time specified in               disclosed, as addressed in the
                     the account agreement and a               procedures in step 12 above
                     balance in a fixed repayment              (required by §226.7(b)(12)) are


Consumer Compliance Handbook                                                       Reg. Z • 57 (6/11)
Examination Objectives



                     disclosed in accordance with the                 outstanding balance must be paid in
                     format      requirements      of                 full in order to avoid the obligation to
                     §226.7(b)(13) and are similar to                 pay finance charges on such balance
                     the samples provided in Appen-                   must be disclosed on the front of each
                     dix G of Regulation Z.                           periodic statement issued during the
                                                                      deferred interest period beginning with
               (ix) Determine that a card issuer pro-
                                                                      the first periodic statement issued
                    vides (to the extent available from
                                                                      during the deferred interest period that
                    the United States Trustee or a
                                                                      reflects the deferred interest or similar
                    bankruptcy administrator) through
                                                                      transaction. The disclosure provided
                    the disclosed toll-free telephone
                                                                      pursuant to this paragraph must be
                    number the name, street address,
                                                                      substantially similar to Sample G-18(H)
                    telephone number, and website
                                                                      in Appendix G to this part.
                    address for at least three organi-
                                                                      (§226.7(b)(14))
                    zations that have been approved
                    by the United States Trustee or a
                    bankruptcy administrator to pro-        Subsequent Disclosure Requirements
                    vide credit counseling services in      §226.9
                    either the state in which the billing
                    address for the account is located        a.   Determine whether the creditor mailed or
                    or             the             state           delivered the billing rights statement at
                    specified by the consumer.                     least once per calendar year, at intervals
                    (§226.7(b)(12)(iv)(A))                         of not less than 6 months or more than 18
                                                                   months, customers and whether the insti-
               (x) Determine that the card issuer at               tution used the short form notice with each
                   least annually updates the credit               periodic statement. (§226.9(a)(1))
                   counseling information it dis-                     Note: As an alternative to the annual
                   closes for consistency with the                 billing rights statement (§226.9(a)(1)), the
                   information available from the                  creditor may mail or deliver, on or with
                   United       States      Trustee                each periodic statement, a statement
                   or a bankruptcy administrator.                  substantially similar to Model Form G-4 or
                   (§226.7(b)(12)(iv)(B))                          Model Form G-4(A) in appendix G to this
         (13) Determine that the card issuer pro-                  part, as applicable. Creditors offering
              vided periodic statement disclosures                 home-equity plans subject to the require-
              according to the following format re-                ments of §226.5b may use either Model
              quirements (§226.7(b)(13)):                          Form, at their option. (§226.9(a)(2))
               (i)   The due date is disclosed on the         b.   If, 30 days after mailing or delivering the
                     front of the first page of the                account-opening disclosures under
                     periodic statement and that the               §226.6(a)(1) or (b)(3)(ii)(A), the creditor
                     amount of the late payment fee                adds a credit feature or furnishes a credit
                     and the APR(s) are stated in close            access device (other than as a renewal,
                     proximity thereto.                            resupply, or the original issuance of a
                                                                   credit card, or except with regard to
               (ii) The ending balance and the re-
                                                                   checks that access a credit card account)
                    payment disclosures (required by
                                                                   on the same finance charge terms, deter-
                    paragraph (b)(12) of §226.7) are
                                                                   mine that the creditor discloses, before
                    disclosed closely proximate to the
                                                                   the consumer uses the feature or device
                    minimum payment due.
                                                                   for the first time, that it is for use in
               (iii) The due date, late payment fee                obtaining credit under the terms previ-
                     and APR, ending balance, mini-                ously disclosed. (§226.9(b)(1))
                     mum payment due, and repay-
                                                              c.   Determine that, except with regard to
                     ment disclosures are grouped to-
                                                                   checks that access a credit card account,
                     gether.
                                                                   whenever a credit feature is added or a
                       Note that sample G-18(D) in
                                                                   credit access device is mailed or deliv-
                     Appendix G of Regulation Z sets
                                                                   ered to the consumer, and the finance
                     forth an example of how these
                                                                   charge terms for the feature or device
                     terms may be grouped.
                                                                   differ from disclosures previously given,
         (14) For accounts with an outstanding bal-                the disclosures required by §226.6(a)(1)
              ance subject to a deferred interest or               or (b)(3)(ii)(A) that are applicable to the
              similar program, the date by which that              added feature or device are given before


58 (6/11) • Reg. Z                                                                Consumer Compliance Handbook
                                                                                 Examination Objectives



         the consumer uses the feature or device                      the checks and the applicable
         for the first time. (§226.9(b)(2))                           annual percentage rate. For a
                                                                      variable-rate account, a creditor
    d.   Checks that access a credit card ac-
                                                                      must disclose an annual percent-
         count. For open-end plans not subject to
                                                                      age rate based on the applicable
         the requirements of §226.5b, if checks
                                                                      index or formula in accordance
         that can be used to access a credit card
                                                                      with the accuracy requirements
         account are provided more than 30 days
                                                                      set forth in §226.9(b)(3)(ii).
         after account-opening disclosures under
                                                                      (§226.9(b)(3)(i)(B)(1))
         §226.6(b) are mailed or delivered, or are
         provided within 30 days of the account-               (3) Determine that the creditor discloses:
         opening disclosures and the finance                      (i) Any transaction fees applicable to
         charge terms for the checks differ from                      the checks disclosed under
         the finance charge terms previously dis-                     §226.6(b)(2)(iv).
         closed, determine that the creditor dis-                     (§226.9(b)(3)(i)(C))
         closes on the front of the page containing
         the checks the following terms in the form               (ii) Whether or not a grace period is
         of a table with the headings, content, and                    given within which any credit ex-
         form substantially similar to Sample G-19                     tended by use of the checks may
         in appendix G to this part (§226.9(b)(3)):                    be repaid without incurring a fi-
                                                                       nance charge due to a periodic
         (1) If a promotional rate applies to the                      interest rate. When disclosing
             checks, determine that the creditor                       whether there is a grace period,
             discloses:                                                the phrase ‘‘How to Avoid Paying
             (i) The promotional rate and the time                     Interest on Check Transactions’’
                 period during which the promo-                        shall be used as the row heading
                 tional rate will remain in effect                     when a grace period applies to
                 (§226.9(b)(3)(i)(A)(1));                              credit extended by the use of the
                                                                       checks. When disclosing the fact
             (ii) The type of rate that will apply
                                                                       that no grace period exists for
                  (such as whether the purchase or
                                                                       credit extended by use of the
                  cash advance rate applies) after
                                                                       checks, the phrase ‘‘Paying Inter-
                  the promotional rate expires, and
                                                                       est’’           shall          be
                  the annual percentage rate that
                                                                       used as the row heading.
                  will apply after the promotional
                                                                       (§226.9(b)(3)(i)(D))
                  rate expires. For a variable-rate
                  account, a creditor must disclose              Note: The disclosures in §226.9(b)(3)(i)
                  an annual percentage rate based              must be accurate as of the time the
                  on the applicable index or formula           disclosures are mailed or delivered. A
                  in accordance with the accuracy              variable APR is accurate if it was in effect
                  requirements set forth in para-              within 60 days of when the disclosures
                  graph (b)(3)(ii) of this section             are mailed or delivered.
                  (§226.9(b)(3)(i)(A)(2)); and            e.   Determine, for home-equity plans subject
             (iii) The date, if any, by which the              to the requirements of §226.5b:
                   consumer must use the checks in             (1) Whenever any term required to be
                   order to qualify for the promotional            disclosed under section §226.6(a) is
                   rate. If the creditor will honor                changed or the required minimum
                   checks used after such date but                 periodic payment is increased, the
                   will apply an annual percentage                 creditor mailed or delivered written
                   rate other than the promotional                 notice of the change at least 15 days
                   rate, the creditor must disclose                prior to the effective date of the
                   this fact and the type of annual                change. If the consumer agreed to the
                   percentage rate that will apply if              change, determine that notice was
                   the consumer uses the checks                    provided before the change went into
                   after           such           date             effect. (§226.9(c)(1)(i))
                   (§226.9(b)(3)(i)(A)(3)).
                                                               (2) If the creditor prohibits additional
         (2) If no promotional rate applies to the                 extensions of credit or reduces the
             checks, determine that the creditor                   credit limit that the creditor mailed or
             discloses:                                            delivered notice of the action not later
             (i) The type of rate that will apply to               than three business days after such


Consumer Compliance Handbook                                                                Reg. Z • 59 (6/11)
Examination Objectives



                action is taken. The notice must con-              terms under state law);
                tain the specific reasons for the ac-           (3) The consumer’s acceptance of a uni-
                tion. (§226.9(c)(1)(iii))                           lateral term change that is not particu-
              Note: Notice is not required when the                 lar to that consumer, but rather is of
            change involves a reduction of any com-                 general applicability to consumers
            ponent of a finance charge or other                     with that type of account; and
            charge or when the change results from
                                                                (4) The consumer’s request to reopen a
            an agreement involving a court proceed-
                                                                    closed account or to upgrade an
            ing. (§226.9(c)(1)(ii))
                                                                    existing account to another account
     f.    For plans other than home-equity plans                   offered by the creditor with different
           subject to the requirements of §226.5b,                  credit     or      other    features.
           except as provided in §§226.9(c)(2)(i)(B),               §226.9(c)(2)(i)(B)
           (c)(2)(iii) and (c)(2)(v), when a significant
           change in account terms as described in         i.   The 45-day advance notice requirement
           §226.9(c)(2)(ii) is made to a term required          applies to changes to the following terms
           to be disclosed under §226.6(b)(3), (b)(4)           (§226.9(c)(2)(ii)):
           or (b)(5) or the required minimum periodic            (1) APR increase, including each peri-
           payment is increased, determine that the                  odic rate that may be used to com-
           creditor provides a written notice of the                 pute the finance charge on outstand-
           change at least 45 days prior to the                      ing balances for purchases, a cash
           effective date of the change to each                      advance, or a balance transfer (such
           consumer who may be affected.                             rates may include any discounted
           (§226.9(c)(2)(i)(A))                                      initial rate, premium initial rate, or
     g.    For open-end (not home-secured) plans,                    penalty rate that may be applied to
           determine that increases in the rate appli-               the account):
           cable to a consumer’s account due to                      (i)    Variable-rate information;
           delinquency, default or as a penalty
           described in §226.9(g) that are not due to                (ii)   Discounted or premium initial
           a change in the contractual terms of the                         rates;
           consumer’s account are disclosed pursu-                   (iii) Penalty rates;
           ant to §226.9(g) instead of §226.9(c)(2).
           (§226.9(c)(2)(i)(A))                                  (2) Fees for issuance or availability,
                                                                     including any fee based upon ac-
     h.    When a notice of change in terms is                       count activity or inactivity;
           required, determine that it is mailed or
           delivered no later than the effective date            (3) Fixed finance charge or minimum
           of the change, if the consumer agrees to                  interest charge, if it exceeds $1.00;
           the particular change. §226.9(c)(2)(i)(B)             (4) Transaction charge for purchases;
           applies only when a consumer substitutes
                                                                 (5) Grace period;
           collateral or when the creditor can ad-
           vance additional credit only if a change              (6) Balance computation method;
           relatively unique to that consumer is                 (7) Cash advance fee;
           made, such as the consumer’s providing
           additional security or paying an increased            (8) Late payment fee;
           minimum          payment           amount.            (9) Over-the-limit fee;
           §226.9(c)(2)(i)(B)
                                                                (10) Balance transfer fee;
              Note: The that the 45-day timing require-
                                                                (11) Returned payment fee;
            ments discussed in step f above does not
            apply in certain narrow circumstances, as           (12) Required insurance, debt cancella-
            described in § 226.9(c)(2)(i)(B). The fol-               tion, or debt suspension coverage;
            lowing are not considered agreements                     and
            between the consumer and the creditor               (13) Increase in required minimum peri-
            for purposes of §226.9(c)(2)(i)(B):                      odic payment, or the acquisition of a
           (1) The consumer’s general acceptance                     security interest.
               of the creditor’s contract reservation      j.   Except as provided in §226.9(c)(2)(vi), if a
               of the right to change terms;                    creditor increases any component of a
           (2) The consumer’s use of the account                charge, or introduces a new charge,
               (which might imply acceptance of its             required to be disclosed under


60 (6/11) • Reg. Z                                                               Consumer Compliance Handbook
                                                                                Examination Objectives



         §226.6(b)(3) that is not a significant                  balances to which the current rate will
         change in account terms as described in                 apply as of the effective date of the
         paragraph (c)(2)(ii) of this section, deter-            change.
         mine    that       the   creditor     either        (8) If the change in terms being disclosed
         (§226.9(c)(2)(iii)):                                    is an increase in an annual percent-
         (1) Complies with the requirements of                   age rate for a credit card account
             §226.9(c)(2)(i), or                                 under an open-end (not home-
                                                                 secured) consumer credit plan, a
         (2) Provides notice of the amount of the
                                                                 statement of no more than four princi-
             charge before the consumer agrees
                                                                 pal reasons for the rate increase,
             to or becomes obligated to pay the                  listed in their order of importance.
             charge, at a time or in a manner that a                 Note: The disclosed reasons must
             consumer would be likely to notice the              accurately describe the principal fac-
             disclosure of the charge, either in                 tors actually considered by the card
             writing or orally.                                  issuer in increasing the rate. (Com-
    k.   Ensure that the written change-in-terms                 mentary §226.9(c)(2)(iv)-11)
         notice contains the following disclosures      l.   In addition to the disclosures in
         (§226.9(c)(2)(iv)(A)):                              §226.9(c)(2)(iv)(A), if a card issuer makes
         (1) A summary of the changes made to                a significant change in account terms on
             terms required by §§226.6(b)(1) and             a credit card account under an open-end
             (b)(2), a description of any increase in        (not home-secured) consumer credit plan,
             the required minimum payment, and a             determine that the creditor provides the
             description of any security interests           following information on the notice pro-
             being acquired by the creditor.                 vided pursuant to §226.9(c)(2)(i)
                                                             (§226.9(c)(2)(iv)(B)):
         (2) A statement that changes are being                 (Note that this information is not re-
             made to the account.                            quired to be provided in the case of an
         (3) For accounts other than credit card             increase in the required minimum peri-
             accounts under an open-end (not                 odic payment, an increase in a fee as a
             home-secured) consumer credit plan              result of a reevaluation of a determination
             subject to §226.9(c)(2)(iv)(B), a state-        made under §226.52(b)(1)(i) or an adjust-
             ment indicating that the consumer has           ment      to   the     safe    harbors    in
             the right to opt-out of the changes, if         §226.52(b)(1)(ii) to reflect changes in the
             applicable, and a reference to the              Consumer Price Index, a change in an
             opt-out right provided in the notice, if        annual percentage rate applicable to a
             applicable.                                     consumer’s account, a change in the
                                                             balance computation method applicable
         (4) The date the changes will become                to consumer’s account necessary to com-
             effective.                                      ply with §226.54, or when the change
         (5) If applicable, a statement that the             results from the creditor not receiving the
             consumer may find additional informa-           consumer’s required minimum periodic
             tion about the summarized changes,              payment within 60 days after the due date
             and other changes, in the notice.               for that payment.)

         (6) In the case of a rate change, other             (1) A statement that the consumer has the
             than a penalty rate, a statement that if            right to reject the change or changes
             a penalty rate currently applies to the             prior to the effective date of the
                                                                 changes, unless the consumer fails to
             consumer’s account, the new rate
                                                                 make a required minimum periodic
             described in the notice will not apply
                                                                 payment within 60 days after the due
             to the consumer’s account until the
                                                                 date for that payment;
             consumer’s account balances are no
             longer subject to the penalty rate.             (2) Instructions for rejecting the change
                                                                 or changes, and a toll-free telephone
         (7) If the change in terms being disclosed
                                                                 number that the consumer may use to
             is an increase in the APR, the bal-
                                                                 notify the creditor of the rejection; and
             ances to which the increased rate will
             apply. If applicable, creditors should          (3) If applicable, a statement that if the
             disclose a statement indentifying the               consumer rejects the change or




Consumer Compliance Handbook                                                              Reg. Z • 61 (6/11)
Examination Objectives



                changes, the consumer’s ability to use          under §226.6(b)(2) (Account opening).
                the account for further advances will           (§226.9(c)(2)(iv)(D)(1))
                be terminated or suspended.                o.   If a notice required by §226.9(c)(2)(i)
     m.    Changes resulting from failure to make               (change in terms) is included on or with a
           minimum periodic payment within 60 days              periodic statement, determine that the
           from due date for credit card accounts               information          described           in
           under an open-end (not home-secured)                 §226.6(c)(2)(iv)(A)(1) is disclosed on the
           consumer credit plan. For a credit card              front of any page of the statement.
           account under an open-end (not home-                 Determine that the summary of changes
           secured)     consumer    credit    plan              described in §226.9(c)(2)(iv)(A)(1) imme-
           (§226.9(c)(2)(iv)(C)):                               diately follows the information described
                                                                in     §226.9(c)(2)(iv)(A)(2)     through
           (1) If the significant change required to
                                                                §226.9(c)(2)(iv)(A)(7) and, if applicable,
               be       disclosed        pursuant    to
               §226.9(c)(2)(i) of this section is an            paragraphs         §226.9(c)(2)(iv)(A)(8),
               increase in an annual percentage rate            §226.9(c)(2)(iv)(B),                  and
               or a fee or charge required to be                §226.9(c)(2)(iv)(C), and is substantially
               disclosed under §§226.6(b)(2)(ii),               similar to the format shown in Sample
               (b)(2)(iii), or (b)(2)(xii) based on the         G-20 or G-21 in appendix G to this part.
               consumer’s failure to make a minimum             (§226.9(c)(2)(iv)(D)(2))
               periodic payment within 60 days from        p.   If a notice required by §226.9(c)(2)(i) is
               the due date for that payment, deter-            not included on or with a periodic state-
               mine that the notice provided pursu-             ment, determine that the information de-
               ant to paragraph (c)(2)(i) of this sec-          scribed in §226.9(c)(2)(iv)(A)(1) is dis-
               tion states that the increase will cease         closed on the front of the first page of the
               to apply to transactions that occurred           notice or segregated on a separate page
               prior to or within 14 days of provision          from other information given with the
               of the notice, if the creditor receives          notice. (§226.9(c)(2)(iv)(D)(3))
               six consecutive required minimum
               periodic payments on or before the             Note: The summary of changes required to
               payment due date, beginning with the         be in a table pursuant to paragraph
               first payment due following the effec-       (c)(2)(iv)(A)(1) of this section may be on more
               tive date of the increase.                   than one page, and may use both the front
                                                            and reverse sides, so long as the table begins
           (2) If the significant change required to        on the front of the first page of the notice and
               be      disclosed       pursuant      to     there is a reference on the first page indicat-
               §226.9(c)(2)(i) is an increase in a fee      ing that the table continues on the following
               or charge required to be disclosed           page.
               under §§226.6(b)(2)(ii), (b)(2)(iii), or
               (b)(2)(xii) based on the consumer’s         q.   Determine that the summary of changes
               failure to make a minimum periodic               described in §226.9(c)(2)(iv)(A)(1) imme-
               payment within 60 days from the due              diately follows the information described
               date for that payment, determine that            in      §226.9(c)(2)(iv)(A)(2)      through
               the notice provided pursuant to                  §226.9(c)(2)(iv)(A)(7) and, if applicable,
               §226.9(c)(2)(i) also states the reason           §§226.9(c)(2)(iv)(A)(8), (c)(2)(iv)(B), and
               for the increase.                                (c)(2)(iv)(C), of this section, and is sub-
                                                                stantially similar to the format shown in
     n.    Determine that the summary of changes                Sample G-20 or G-21 in appendix G to
           described in §226.9(c)(2)(iv)(A)(1) is in a          this part. (§226.9(c)(2)(iv)(D)(3))
           tabular format (except for a summary of
           any increase in the required minimum            r.   For open-end plans (other than home
           periodic payment), with headings and                 equity plans subject to the requirements
           format substantially similar to any of the           of §226.5b), note that a creditor is not
           account-opening tables found in G-17 in              required to provide notice under this
           Appendix G. Determine that the table                 section if (§226.9(c)(2)(v)):
           discloses the changed term and informa-              (1) The change involves:
           tion relevant to the change, if that relevant
                                                                    (i) Charges for documentary evi-
           information is required by §226.6(b)(1)
                                                                        dence;
           and (b)(2). Determine that the new terms
           are described in the same level of detail                (ii) A reduction of any component of a
           as required when disclosing the terms                         finance or other charge;


62 (6/11) • Reg. Z                                                             Consumer Compliance Handbook
                                                                                   Examination Objectives



             (iii) A suspension of future credit privi-            the creditor and is available to the
                   leges (except as provided in                    general public (§226.9(c)(2)(v)(C)); or
                   §226.9(c)(2)(vi) of this section) or        (4) The change is an increase in an APR,
                   termination of an account or plan;              a fee or charge required to be dis-
             (iv) When the change results from an                  closed        under     §§226.6(b)(2)(ii),
                  agreement involving a court pro-                 (b)(2)(iii), or (b)(2)(xii), or the required
                  ceeding;                                         minimum periodic payment due to the
                                                                   completion of a workout or temporary
             (v) When the change is an extension
                                                                   hardship arrangement by the con-
                 of the grace period; or
                                                                   sumer or the consumer’s failure to
             (vi) The change is applicable only to                 comply with the terms of such
                  checks that access a credit card                 an arrangement, provided that
                  account and the changed terms                    (§226.9(c)(2)(v)(D)):
                  are disclosed on or with the checks
                                                                   (i) The APR or fee or charge appli-
                  in accordance with §226.9(b)(3)
                                                                       cable to a category of transactions
                  (§226.9(c)(2)(v)(A));
                                                                       or the required minimum periodic
         (2) The change is an increase in an APR                       payment following any such in-
             upon the expiration of a specified                        crease does not exceed the rate
             period of time, provided that                             or fee or charge or required mini-
             (§226.9(c)(2)(v)(B)):                                     mum periodic payment that ap-
             (i) Prior to commencement of that                         plied to that category of transac-
                                                                       tions prior to commencement of
                 period, the creditor disclosed in
                                                                       the arrangement or, if the rate that
                 writing to the consumer, in a clear
                                                                       applied to a category of transac-
                 and conspicuous manner, the
                                                                       tions prior to the commencement
                 length of the period and the an-
                                                                       of the workout or temporary hard-
                 nual percentage rate that would
                                                                       ship arrangement was a variable
                 apply after expiration of the pe-
                                                                       rate, the rate following any such
                 riod;
                                                                       increase is a variable rate deter-
             (ii) The disclosure of the length of the                  mined by the same formula (index
                  period and the annual percentage                     and margin) that applied to the
                  rate that would apply after expira-                  category of transactions prior to
                  tion of the period are set forth in                  commencement of the workout or
                  close proximity and in equal promi-                  temporary hardship arrangement;
                  nence to the first listing of the                    and
                  disclosure of the rate that applies              (ii) The creditor has provided the
                  during the specified period of                        consumer, prior to the commence-
                  time; and                                             ment of such arrangement, with a
             (iii) The annual percentage rate that                      clear and conspicuous disclosure
                   applies after that period does not                   of the terms of the arrangement
                   exceed the rate disclosed pursu-                     (including any increases due to
                   ant to §226.9(c)(2)(v)(B)(1), if the                 such completion or failure). This
                   rate                                                 disclosure must generally be pro-
                   disclosed        pursuant         to                 vided in writing. However, a credi-
                   §226.9(c)(2)(v)(B)(1) was a vari-                    tor may provide the disclosure of
                   able rate, the rate following any                    the terms of the arrangement orally
                   such increase is a variable rate                     by telephone, provided that the
                   determined by the same formula                       creditor mails or delivers a written
                   (index and margin) that was used                     disclosure of the terms of the
                   to calculate the variable rate dis-                  arrangement to the consumer as
                   closed          pursuant          to                 soon as reasonably practicable
                   §226.9(c)(2)(v)(B)(1);                               after the oral disclosure is pro-
                                                                        vided.
         (3) The change is an increase in a
             variable annual percentage rate in           s.   For open-end plans that are not subject to
             accordance with a credit card agree-              the requirements of §226.5b, if a creditor
             ment that provides for changes in the             decreases the credit limit on the account,
             rate according to operation of an                 determine that advance notice of the
             index that is not under the control of            decrease is provided before an over-the-


Consumer Compliance Handbook                                                                  Reg. Z • 63 (6/11)
Examination Objectives



           limit fee or a penalty rate can be imposed           (2) The date on which the delinquency or
           solely as a result of the consumer exceed-               default rate or penalty rate will apply;
           ing the newly decreased credit limit.                (3) The circumstances under which the
           Determine that notice is provided in                     delinquency or default rate or penalty
           writing or orally at least 45 days prior to              rate, as applicable, will cease to apply
           imposing the over-the-limit fee or penalty               to the consumer’s account, or that the
           rate and that it states that the credit limit            delinquency or default rate or penalty
           on the account has been or will be                       rate will remain in effect for a poten-
           decreased. (§226.9(c)(2)(vi))                            tially indefinite time period;
     t.    Determine that the disclosures contained             (4) A statement indicating to which bal-
           in §226.5a(b)(1) through (b)(7) are pro-                 ances the delinquency or default rate
           vided if the account is renewed and                      or penalty rate will be applied;
           (1) the card issuer imposes an annual or
           other periodic fee for the renewal or                (5) If applicable, a description of any
           (2) the card issuer has changed or                       balances to which the current rate will
           amended any term of the account re-                      continue to apply as of the effective
           quired to be disclosed under §226.6(b)(1)                date of the rate increase, unless a
           and (b)(2) that has not previously been                  consumer fails to make a minimum
           disclosed to the consumer. Additionally,                 periodic payment within 60 days from
           the disclosure provided upon renewal                     the due date for that payment; and
           must disclose how and when the card-                 (6) For a credit card account under an
           holder may terminate the credit to avoid                 open-end (not home-secured) con-
           paying the renewal fee, if any. (§226.9(e))              sumer credit plan, a statement of no
     u.    For plans other than home-equity plans                   more than four principal reasons for
           subject to the requirements of §226.5b                   the rate increase, listed in their order
           (except as provided in §226.9(g)(4)),                    of importance.
           determine that the creditor provides a                      Note: The disclosed reasons must
           written notice to each consumer who may                  accurately describe the principal fac-
           be affected when (§226.9(g)(1)):                         tors actually considered by the card
                                                                    issuer in increasing the rate. (Com-
           (1) A rate is increased due to the consum-               mentary §226.9(c)(2)(iv)-11)
               er’s delinquency or default; or
                                                           x.   For a credit card account under an
           (2) A rate is increased as a penalty for             open-end (not home secured) consumer
               one or more events specified in the              credit plan, if the rate increase required to
               account agreement, such as making a              be disclosed pursuant to paragraph (g)(1)
               late payment or obtaining an exten-              of this section is an increase pursuant to
               sion of credit that exceeds the credit           §226.55(b)(4) based on the consumer’s
               limit.                                           failure to make a minimum periodic pay-
     v.    Whenever any notice is required to be                ment within 60 days from the due date for
                                                                that payment, determine that the notice
           given pursuant to paragraph (g)(1) of this
                                                                provided pursuant to paragraph (g)(1) of
           section, determine that the creditor pro-
                                                                this section also states that the increase
           vided written notice of the increase in
                                                                will cease to apply to transactions that
           rates at least 45 days prior to the effective
                                                                occurred prior to or within 14 days of
           date of the increase. The notice must be
                                                                provision of the notice, if the creditor
           provided after the occurrence of the
                                                                receives six consecutive required mini-
           events described in §226.9(g)(1)(i) and
                                                                mum periodic payments on or before the
           (g)(1)(ii) that trigger the imposition of the
                                                                payment due date, beginning with the first
           rate increase. (§226.9(g)(2))                        payment due following the effective date
     w.    If a creditor is increasing the rate due to          of the increase. (§226.9(g)(3)(i)(B))
           delinquency or default or as a penalty,         y.   If a notice required by §226.9(g)(1) (In-
           determine that the creditor provided the             crease in rates due to delinquency or
           following information on the notice sent             default or as a penalty) is included on or
           pursuant to §226.9(g)(1) (§226.9                     with a periodic statement, determine that
           (g)(3)(i)(A)):                                       the disclosure described in paragraph
           (1) A statement that the delinquency or              (g)(3)(i) is in the form of a table and
               default rate or penalty rate, as appli-          provided on the front of any page of the
               cable, has been triggered;                       periodic statement, above the notice de-


64 (6/11) • Reg. Z                                                              Consumer Compliance Handbook
                                                                                  Examination Objectives



         scribed in paragraph (c)(2)(iv) of this               notice. (§226.9(g)(4)(ii))
         section if that notice is provided on the        bb. If a notice provided pursuant to
         same statement. (§226.9(g)(3)(ii)(A))                §226.9(g)(4)(i) is included on or with a
    z.   If a notice required by §226.9(g)(1) (in-            periodic statement, determine that the
         crease in rates) is not included on or with          information described in §226.9(g)(4)(i) is
         a periodic statement, determine that the             in the form of a table and provided on the
         information described in §226.9(g)(3)(i) is          front of any page of the periodic state-
         disclosed on the front of the first page of          ment (§226.9(g)(4)(iii)(A)); or,
         the notice. Ensure that only information         cc. If a notice required by §226.9(g)(4)(i) is
         related to the increase in the rate to a             not included on or with a periodic state-
         penalty rate is included with the notice.            ment, determine that the information de-
         Note: This notice may be combined with a
                                                              scribed in §226.9(g)(4)(i) is disclosed on
         notice described in §§226.9(c)(2)(iv) or
                                                              the front of the first page of the notice.
         (g)(4) (A statement indicating to which
                                                              Determine that only information related to
         balances the delinquency or default rate
                                                              the reduction in credit limit is included
         or penalty rate will be applied) of this
                                                              with the notice, except that this notice
         section. (§226.9(g)(3)(ii)(B))
                                                              may be combined with a notice de-
    aa. Exception for Decreases in the Credit                 scribed in §§226.9(c)(2)(iv) or (g)(1).
        Limit —If a creditor does not provide the             (§226.9(g)(4)(iii)(B))
        45 day notice under §226.9(g)(1) prior to
                                                          dd. When the consumer is given the right to
        increasing the rate for obtaining an exten-
                                                              reject a significant change to an account
        sion of credit that exceeds the credit limit,
                                                              term prior to the effective date of the
        determine that the creditor provides at
                                                              change, determine whether the consumer
        least 45 days in advance of imposing the
                                                              was given the option to reject the change
        penalty rate a notice, in writing, that
                                                              by notifying the creditor of the rejection
        includes (§226.9(g)(4)):
                                                              before the effective date of the change.
         (1) A statement that the credit limit on the         (§226.9(h)(1))
             account has or will be decreased.
                                                          ee. If the creditor was notified of the rejection
         (2) The date on which the penalty rate will          of a significant change to an account
             apply, if the outstanding balance ex-            term, determine that the creditor did not:
             ceeds the credit limit as of that date;
                                                               (1) Apply the charge to the account;
         (3) A statement that the penalty rate will
                                                               (2) Impose a fee or charge or treat the
             not be imposed on that date, if the
                                                                   account as in default solely as a result
             outstanding balance does not exceed
                                                                   of the rejection; or
             the credit limit as of that date;
                                                               (3) Require repayment of the balance on
         (4) The circumstances under which the
                                                                   the account using a method that is
             penalty rate, if applied, will cease to
                                                                   LESS beneficial to the consumer than
             apply to the account, or that the
                                                                   one of the following methods:
             penalty rate, if applied, will remain in
             effect for a potentially indefinite period            (i) The method of repayment for the
             of time;                                                  account on the date on which the
                                                                       creditor was notified of the rejec-
         (5) A statement indicating to which bal-
                                                                       tion;
             ances the penalty rate may be ap-
             plied; and                                            (ii) An amortization period of not less
                                                                        than five years, beginning no ear-
         (6) If applicable, a description of any
                                                                        lier than the date on which the
             balances to which the current rate will
                                                                        creditor was notified of the rejec-
             continue to apply as of the effective
                                                                        tion; or
             date of the rate increase, unless the
             consumer fails to make a minimum                      (iii) A required minimum periodic pay-
             periodic payment within 60 days from                        ment that includes a percentage
             the due date for that payment.                              of the balance that is equal to no
                                                                         more than twice the percentage
           In addition to this notice, determine that
                                                                         required on the date on which the
         the creditor does not increase the appli-
                                                                         creditor was notified of the rejec-
         cable rate to the penalty rate if the
                                                                         tion. (§226.9(h)(2))
         outstanding balance does not exceed the
         credit limit on the date set forth in the                Note that these requirements do not


Consumer Compliance Handbook                                                                Reg. Z • 65 (6/11)
Examination Objectives



            apply if the creditor has not received the              must be provided for any consumer credit
            consumer’s required minimum periodic                    transaction that is secured by the princi-
            payment within 60 days after the due date               pal dwelling of a consumer. This notifica-
            for that payment and the creditor has                   tion is required by the covered person
            provided timely change in terms disclo-                 even if the loan servicer remains the
            sures. (§226.9(h)(3))                                   same. In addition, if more than one
                                                                    consumer is liable on the obligation, the
     ff.   Determine that a statement of the maxi-
                                                                    covered person may mail or deliver the
           mum interest rate that may be imposed
                                                                    disclosure notice to any consumer who is
           during the term of the obligation is made                primarily liable. And, if an acquisition
           for any loan in which the APR may                        involves multiple covered persons who
           increase during the plan. (§226.30(b))                   each acquire a partial interest in the loan
     gg. For any open-end mortgage loan (credit                     pursuant to separate and unrelated agree-
         transaction that is secured by the princi-                 ments, each covered person has a duty
         pal dwelling of a consumer) that was sold,                 to ensure that disclosures related to its
         assigned, or otherwise transferred to the                  acquisition are accurate and provided in
         covered person, determine that the cov-                    a timely manner unless an exception in
         ered person notifies the borrower in                       226.39(c) applies. The parties may, but
         writing of such transfer, including                        are not required to, provide a single
         (§226.39):                                                 notice that satisfies the timing and con-
                                                                    tent requirements applicable to each
           (1) An identification of the loan that was               covered       person.        (Commentary
               sold, assigned, or otherwise trans-                  §226.39(b)(5)-2)
               ferred;
           (2) The name, address, and telephone
                                                            Disclosure Requirements for
               number of the covered person who
               owns the mortgage loan;
                                                            Over-the-Limit Transactions §226.56
                                                               a. Determine that the oral, written or electronic
           (3) The date of transfer (either the date of
                                                                  ‘‘opt-in’’ notice includes all of the following
               acquisition recognized in the books
                                                                  applicable items (and not any information
               and records of the covered person or
                                                                  not specified in or otherwise permitted)
               that of the transferring party) identified         §226.56(e)(1):
               by the covered person;
                                                                  (1) Fees—The dollar amount of any fees or
           (4) The name, address, and telephone                       charges assessed by the card issuer on
               number of an agent or party having                     a consumer’s account for an over-the-
               authority, on behalf of the covered                    limit transaction;
               person, to receive notice of the right to
               rescind and resolve issues concern-                (2) APR(s)—Any increased periodic rate(s)
               ing the consumer’s payments on the                     (expressed as an APR(s)) that may be
               mortgage loan;                                         imposed on the account as a result of
                                                                      an over-the-limit transaction; and
           (5) Where transfer of ownership of the
               debt to the covered person is or may               (3) Disclosure of opt-in right—An explana-
               be recorded in public records or,                      tion of the consumer’s right to affirma-
               alternatively, that the transfer of own-               tively consent to the card issuer’s pay-
               ership has not been recorded in                        ment of over-the-limit transactions,
               public records at the time the disclo-                 including the method(s) by which the
               sure is provided;                                      consumer may consent.

           (6) At the option of the covered person,            b. Determine that the written notice informing
               any other relevant information regard-             the consumer of the right to revoke consent
               ing the transaction; and                           following the assessment of an over-the-
                                                                  limit fee or charge describes that right,
           (7) If there are multiple covered persons,             including the method(s) by which the con-
               contact information for each of them,              sumer may revoke consent. §226.56(e)(2)
               unless one of them has been autho-
               rized to receive the consumer’s notice
               of the right to rescind and resolve          Reverse Mortgage Forms Review
               issues concerning the consumer’s             Procedures (Both Open and
               payments on the loan.                        Closed-End)
              Note: This notice of sale or transfer            a. Determine that the disclosures required for


66 (6/11) • Reg. Z                                                                  Consumer Compliance Handbook
                                                                                Examination Objectives



       reverse mortgage transactions are substan-            mine that the issuer has adequate proce-
       tially similar to the model form in Appendix          dures for ensuring that this requirement is
       K and include the items below:                        met.
       (1) A statement that the consumer is not         e. Periodic statement disclosures for open-
           obligated to complete the reverse mort-         end credit under §226.7—Required if at the
           gage transaction merely because he or           end of a billing cycle the account has a
           she has received the disclosures or             debit or credit balance of $1 or more or if a
           signed an application.                          finance charge has been imposed
       (2) A good faith projection of the total cost       (§226.5(b)(2)(i)). Also, the creditor must
           of the credit expressed as a table of           adopt reasonable procedures designed to
           ‘‘total annual loan cost rates’’ including      ensure that periodic statements for credit
           payments to the consumer, additional            card accounts are mailed or delivered at
           creditor compensation, limitations on           least 21 days prior to the payment due date
           consumer liability, assumed annual ap-          and the date on which any grace period
           preciation, and the assumed loan pe-            expires. (§226.5(b)(2)(ii))
           riod.                                        f. Statement of billing rights—At least once
       (3) An itemization of loan terms, charges,          per year. (§226.9(a))
           the age of the youngest borrower, and        g. Supplemental credit devices—Before the
           the appraised property value.                   first transaction under the plan. (§226.9(b))
       (4) An explanation of the table of total
                                                        h. Open-end credit change in significant terms
           annual loan costs rates.
                                                           as a result of a change in contractual
     Note: Forms that include or involve current           terms—45 days prior to the effective change
  transactions, such as change in terms notices,           date. (§226.9(c)(2))
  periodic billing statements, rescission notices,
                                                        i.   Open-end change in terms or rates due to
  and billing error communications, are verified for
                                                             delinquency or default or as a penalty—45
  accuracy when the file review worksheets are
                                                             days prior to the effective change date.
  completed.
                                                             (§226.9(g))
                                                        j.   Finance charge imposed at time of
Timing Requirements                                          transaction—Prior to imposing any fee.
6. Review financial institution policies, proce-             (§226.9(d))
   dures, and systems to determine, either sepa-        k. Disclosures upon renewal of credit or
   rately or when completing the actual file review,       charge card—30 days or one billing cycle,
   whether the applicable disclosures listed be-           whichever is less before the delivery of the
   low are furnished when required by Regula-              periodic statement on which the renewal
   tion Z. Take into account products that have            fee is charged, or at least 30 days prior to
   different features, such as closed-end loans or         the scheduled renewal date if the creditor
   credit card accounts that are fixed or variable         has changed or amended any term re-
   rate.                                                   quired to be disclosed under §226.6(b)(1)
    a. Credit card application and solicitation            and (b)(2) that has not previously been
       disclosures—On or with the application              disclosed to the consumer. (§226.9(e))
       (§226.5a(b))                                     l.   Change in credit account insurance
    b. HELOC disclosures—At the time the appli-              provider—Certain information 30 days be-
       cation is provided or within three business           fore the change in provider occurs and
       days under certain circumstances.                     certain information 30 days after the change
       (§226.5b(b))                                          in provider occurs. The institution may
                                                             provide a combined disclosure 30 days
    c. Open-end credit initial disclosures—Before
                                                             before the change in provider occurs.
       the first transaction is made under the plan.
                                                             (§226.9(f))
       (§226.5(b)(1))
                                                        m. Closed-end credit disclosures—Before con-
    d. Card Holder Agreement—Verify that the
                                                           summation. (§226.17(b))
       card issuer sends to the cardholder or
       otherwise make available to the cardholder       n. For disclosures for dwelling-secured trans-
       a copy of the cardholder’s agreement in             actions subject to RESPA (other than open-
       electronic or paper form no later than 30           end), multiple timing requirements apply.
       days after the issuer receives the cardhold-        Determine whether the creditor provides
       er’s request (§226.58(e)(1)(ii)(B)). Deter-         early disclosures within three business


Consumer Compliance Handbook                                                              Reg. Z • 67 (6/11)
Examination Objectives



         days after receiving the consumer’s written              bursing the private education loan
         application. The creditor is required to                 funds. (§226.46(d)(3))
         deliver or mail the early disclosures no later   t. Determine that the issuer provides a written
         than three business days after receiving the        over-the-limit notice prior to the assessment
         consumer’s application and at least seven           of any over-the-limit fee or charge on a
         business days before consummation                   consumer’s account. (§226.56(d)(1)(i))
         (§§226.19(a)(1)(i) and 226.19(a)(2)(i)). If
         the APR stated in the early disclosures is       u. Determine that, if a consumer consents to
         not considered accurate under § 226.22              the card issuer’s payment of any over-the-
         when compared to the APR at consumma-               limit transaction by oral or electronic means,
         tion, determine whether the creditor pro-           the card issuer provides the required writ-
         vided corrected disclosures of all changed          ten notice immediately prior to obtaining
         terms, including the APR, that the consumer         that consent. (§226.56(d)(1)(ii))
         received no later than the third business        v. Determine that the notice confirming the
         day          before          consummation.          consumer’s consent is provided no later
         (§226.19(a)(2)(ii))                                 than the first periodic statement sent after
     o. Disclosures for transactions subject to              the consumer has consented to the card
        §226.32—Three business days prior to                 issuer’s payment of over-the-limit transac-
        consummation. If such disclosures became             tions. In no case may the creditor assess an
        inaccurate due to a change by the creditor,          over-the-limit fee on the consumer’s ac-
        ensure that the creditor provided new,               count without first providing written confir-
        accurate disclosures no later than three             mation. (§226.56(d)(2))
        business days prior to consummation.              w. Determine that the notice providing the
        (§226.31(c)(1))                                      consumer notice in writing of the right to
     p. Disclosures for reverse mortgages—Three              revoke consent following the assessment of
        days prior to consummation of a closed-              an over-the-limit fee or charge is provided
        end credit transaction or prior to the first         on the front of any page of each periodic
        transaction under an open-end credit plan.           statement that reflects the assessment of an
        (§226.31(c)(2))                                      over-the-limit fee or charge on a consum-
                                                             er’s account. (§226.56(d)(3))
     q. Disclosures for adjustable-rate mortgages—
        At least once each year during which an           x. For home-equity plans subject to the re-
        interest rate adjustment is implemented              quirements of §226.5b, whenever any term
        without an accompanying payment change,              required to be disclosed under §226.6(a) is
        and at least 25, but no more than 120                changed or the required minimum periodic
        calendar days before a new payment                   payment is increased, determine that the
        amount is due, or in accordance with other           creditor mails or delivers written notice of
        variable-rate subsequent-disclosure regula-          the change to each consumer who may be
        tions issued by a supervisory agency.                affected. Determine that the notice is mailed
        (§226.20(c))                                         or delivered at least 15 days prior to the
                                                             effective date of the change. If the change
     r. Notice of new creditor (§226.39)—On or               has been agreed to by the consumer,
        before the 30th calendar day following the           determine that the notice is given before the
        acquisition.                                         effective    date      of    the     change.
     s. For private education loans subject to               (§226.9(c)(1)(i))
        Subpart F, determine that:                        y. Notice to restrict credit. For home-equity
         (1) Application or solicitation disclosures         plans subject to the requirements of
             were provided on or with any applica-           §226.5b, if the creditor prohibits additional
             tion or solicitation (§226.46(d)(1)(i));        extensions of credit or reduces the credit
                                                             limit pursuant to §226.5b(f)(3)(i) or (f)(3)(vi),
         (2) Approval disclosures were provided              determine that the creditor mails or delivers
             before consummation on or with any              written notice of the action to each con-
             notice of approval provided to the              sumer who will be affected not later than
             consumer (§226.46(d)(2)); and                   three business days after the action is taken
         (3) Final disclosures were provided after           and contains specific reasons for the ac-
             the consumer accepts the loan and at            tion. If the creditor requires the consumer to
             least three business days prior to dis-         request reinstatement of credit privileges,




68 (6/11) • Reg. Z                                                              Consumer Compliance Handbook
                                                                                    Examination Objectives



       determine that the notice states that fact.             must notify the consumer of the new
       (§226.9(c)(1)(iii))                                     requirements and must allow the consumer
                                                               to withdraw consent without charge.
Electronic Disclosures
                                                            c. If the financial institution makes its disclo-
7. Assess compliance for an institution’s elec-                sures available to consumers in electronic
   tronic disclosure requirements.                             form, determine that the forms comply with
                                                               the appropriate sections − §226.5(a)(1);
E-Sign Act                                                     §226.5a(a)(2)(v); §226.5b(a)(3); §226.15(b);
    a. Disclosures may be provided to the con-                 §226.16(c); §226.17(a)(1); §226.17(g);
       sumer in electronic form, subject to compli-            §226.19(c); §226.23(b)(1); §226.24(d) and
       ance with the consumer consent and other                §226.31(b).
       applicable provisions of the Electronic Sig-
       natures in Global and National Commerce              d. Card issuers may provide credit card
       Act (E-Sign Act) (15 U.S.C. 7001 et seq.).              agreements in electronic form under
       The E-Sign Act does not mandate that                    §226.58(d) and (e) without regard to the
       institutions or consumers use or accept                 consumer notice and consent requirements
       electronic records or signatures. It permits            of section 101(c) of the E-Sign Act.
       institutions to satisfy any statutory or regu-          (§226.58(f))
       latory requirements by providing the infor-
       mation electronically after obtaining the         Annual Report to the Board §226.57
       consumer’s affirmative consent. Before con-
                                                            a. If the card issuer was a party to one or more
       sent can be given, consumers must be
                                                               college credit card agreements in effect at
       provided with the following information:
                                                               any time during a calendar year, verify that
       (1) Any right or option to have the informa-            the card issuer submits to the Board an
           tion provided in paper or non-electronic            annual report regarding those agreements
           form;                                               in the form and manner prescribed by the
       (2) The right to withdraw the consent to                Board. (§226.57(d)(1))
           receive information electronically and                  Note that a college credit card agree-
           the consequences, including fees, of                ment is any business, marketing, or promo-
           doing so;                                           tional agreement between a card issuer
                                                               and an institution of higher education (or an
       (3) The scope of the consent (for example,
                                                               affiliated alumni organization or foundation)
           whether the consent applies only to a
                                                               in connection with which credit cards are
           particular transaction or to identified
                                                               issued to college students at that institution
           categories of records that may be
                                                               of higher education. (§226.57(a)(5))
           provided during the course of the
           parties’ relationship);                          b. The annual report to the Board must include
       (4) The procedures to withdraw consent                  the following (§226.57(d)(2)):
           and to update information needed to                 (1) Identifying information about the card
           contact the consumer electronically;                    issuer and the agreements submitted,
           and                                                     including the issuer’s name, address,
       (5) The methods by which a consumer may                     and identifying number (such as an
           obtain, upon request, a paper copy of                   RSSD ID number or tax identification
           an electronic record after consent has                  number);
           been given to receive the information               (2) A copy of any college credit card
           electronically and whether any fee will                 agreement to which the card issuer was
           charged.                                                a party that was in effect at any time
    b. The consumer must consent electronically                    during the period covered by the report;
       or confirm consent electronically in a man-             (3) A copy of any memorandum of under-
       ner that ‘‘reasonably demonstrates that the                 standing in effect at any time during the
       consumer can access information in the                      period covered by the report between
       electronic form that will be used to provide                the card issuer and an institution of
       the information that is the subject of the                  higher education or affiliated organiza-
       consent.’’ After the consent, if an institution             tion that directly or indirectly relates to
       changes the hardware or software require-                   the college credit card agreement or
       ments such that a consumer may be                           that controls or directs any obligations
       prevented from accessing and retaining                      or distribution of benefits between any
       information electronically, the institution                 such entities;


Consumer Compliance Handbook                                                                  Reg. Z • 69 (6/11)
Examination Objectives



         (4) The total dollar amount of any payments           described in §226.58(c)(4) and (c)(5).
             pursuant to a college credit card agree-   b. Verify that, except for the first two submis-
             ment from the card issuer to an institu-      sions on February 22, 2010 and August 2,
             tion of higher education or affiliated        2010, quarterly submissions are sent to the
             organization during the period covered        Board no later than the first business day on
             by the report, and the method or              or after January 31, April 30, July 31, and
             formula used to determine such                October 31 of each year. (§226.58(c.)(1))
             amounts;
                                                        c. Verify that the first submission is sent to the
         (5) The total number of credit card ac-           Board no later than February 22, 2010.
             counts opened pursuant to any college
             credit card agreement during the pe-       d. Verify that the first submission contains the
             riod covered by the report; and               credit card agreements that the card issuer
                                                           offered to the public as of December 31,
         (6) The total number of credit card ac-           2009. (§226.58(c)(2))
             counts opened pursuant to any such
             agreement that were open at the end of     e. Verify that the next submission is sent to the
             the period covered by the report.             Board no later than August 2, 2010, and
                                                           contains:
     c. If the card issuer is subject to reporting,
        determine if the card issuer submits its           (1) Any credit card agreement that the card
        annual report for each calendar year to the            issuer offered to the public as of
        Board by the first business day on or after            June 30, 2010 that the card issuer has
        March 31 of the following calendar year.               not previously submitted to the Board;
        (However, card issuers must submit the first       (2) Any credit card agreement previously
        report following the effective date of this
                                                               submitted to the Board that was
        section, providing information for the 2009
                                                               amended after December 31, 2009,
        calendar year, to the Board by February 22,
                                                               and on or before June 30, 2010, as
        2010.) (§226.57(d)(3))
                                                               described in §226.58(c)(3); and

The Submission of Agreements to the                        (3) Notification regarding any credit card
                                                               agreement previously submitted to the
Board §226.58(c)
                                                               Board that the issuer is withdrawing as
     a. For card issuers that issue credit cards               of June 30, 2010, as described in
        under a credit card account under an                   §226.58(c)(4) and (c)(5).
        open-end (not home-secured) consumer
        credit plan, determine that the card issuer     f. If a credit card agreement that previously
        makes quarterly submissions to the Board           has been submitted to the Board is
        in the form and manner specified by the            amended, verify that the card issuer sub-
        Board that contain:                                mits the entire amended agreement to the
                                                           Board by the first quarterly submission
         (1) Identifying information about the card        deadline after the last day of the calendar
             issuer and the agreements submitted,          quarter in which the change became effec-
             including the issuer’s name, address,         tive. (§226.58(c)(3))
             and identifying number (such as an               Note that if a credit card agreement has
             RSSD ID number or tax identification          been submitted to the Board, the agree-
             number);                                      ment has not been amended and the card
         (2) The credit card agreements that the           issuer continues to offer the agreement to
             card issuer offered to the public as of       the public, no additional submission regard-
             the last business day of the preceding        ing that agreement is required.
             calendar quarter that the card issuer      g. If a card issuer no longer offers to the public
             has not previously submitted to the           a credit card agreement that previously has
             Board;                                        been submitted to the Board, ensure that
         (3) Any credit card agreement previously          the card issuer notifies the Board by the first
             submitted to the Board that was               quarterly submission deadline after the last
             amended during the preceding calen-           day of the calendar quarter in which the
             dar quarter, as described in                  issuer ceased to offer the agreement.
             §226.58(c)(3); and                            (§226.58(c)(4))
         (4) Notification regarding any credit card       Note: A card issuer is not required to submit
             agreement previously submitted to the      any credit card agreements to the Board if the
             Board that the issuer is withdrawing, as   card issuer had fewer than 10,000 open credit


70 (6/11) • Reg. Z                                                           Consumer Compliance Handbook
                                                                                  Examination Objectives



    card accounts as of the last business day of the      a product test. (§226.58(c)(7)(i))
    calendar quarter. (§226.58(c)(5)(i))                  m. If an agreement that previously qualified for
    h. If an issuer that previously qualified for the        the product testing exception ceases to
       de minimis exception ceases to qualify,               qualify, determine that the card issuer
       determine that the card issuer begins                 submits the agreement to the Board no later
       making quarterly submissions to the Board             than the first quarterly submission deadline
       no later than the first quarterly submission          after the date as of which the agreement
       deadline after the date as of which the               ceased to qualify. (§226.58(c)(7)(ii))
       issuer ceased to qualify. (§226.58(c)(5)(ii))
                                                          n. If an agreement that did not previously
    i.   If a card issuer that did not previously            qualify for the product testing exception
         qualify for the de minimis exception quali-         qualifies for the exception, determine that
         fies for the de minimis exception, determine        the card issuer continues to make quarterly
         that the card issuer continues to make              submissions to the Board with respect to
         quarterly submissions to the Board until the        that agreement until the issuer notifies the
         issuer notifies the Board that the card issuer      Board that the agreement is being with-
         is withdrawing all agreements it previously         drawn. (§226.58(c)(7)(iii))
         submitted to the Board. (§226.58(c)(5)(iii))
                                                          o. Verify that each agreement contains the
    j.   A card issuer is not required to submit to the      provisions of the agreement and the pricing
         Board a credit card agreement if, as of the         information in effect as of the last business
         last business day of the calendar quarter,          day of the preceding calendar quarter.
         the agreement is offered for accounts under         (§226.58(c)(8)(i)(A))
         one or more private label credit card plans
                                                          p. Verify that agreements do not include any
         each of which has fewer than 10,000 open
                                                             personally identifiable information relating
         accounts and is not offered to the public
                                                             to any cardholder, such as name, address,
         other than for accounts under such a plan.
                                                             telephone number, or account number.
         (§226.58(c)(6)(i))
                                                             (§226.58(c)(8)(i)(B))
       Note: A private label credit card is one that is
                                                          q. Verify that agreements are presented in a
    usable only at a single merchant or affiliated
                                                             clear and legible font. (§226.58(c)(8)(i)(D))
    group of merchants. A private label credit card
    plan is all private label credit card accounts        r. Verify that pricing information is set forth in
    issued by a particular issuer with credit cards          a single addendum to the agreement that
    usable at the same single merchant or affiliated         contains only the pricing information.
    group of merchants. (§226.58(b)(7))                      (§226.58(c)(8)(ii)(A))
    k. If an agreement that previously qualified for         Note: With respect to information other than
       the private label credit card exception            the pricing information that may vary between
       ceases to qualify, determine that the card         cardholders depending on creditworthiness,
       issuer submits the agreement to the Board          state of residence, or other factors, issuers
       no later than the first quarterly submission       may, but are not required to, include that
       deadline after the date as of which the            information in a single addendum (the optional
       agreement        ceased       to     qualify.      variable terms addendum) to the agreement
       (§226.58(c)(6)(ii))                                separate from the pricing addendum.
    l.   If an agreement that did not previously          s. If pricing information varies from one card-
         qualify for the private label credit card           holder to another depending on the card-
         exception qualifies for the exception, deter-       holder’s creditworthiness or state of resi-
         mine that the card issuer continues to make         dence or other factors, verify that the
         quarterly submissions to the Board with             pricing information is disclosed either by
         respect to that agreement until the issuer          setting forth all the possible variations (such
         notifies the Board that the agreement is            as purchase APRs of 13 percent, 15 per-
         being withdrawn. (§226.58(c)(6)(iii))               cent, 17 percent, and 19 percent) or by
                                                             providing a range of possible variations
       Note: A card issuer is not required to submit
                                                             (such as purchase APRs ranging from
    to the Board a credit card agreement if, as of
                                                             13       percent       to     19      percent).
    the last business day of the calendar quarter,
                                                             (§226.58(c)(8)(ii)(B))
    the agreement is offered as part of a product
    test offered to only a limited group of consum-       t. If a rate included in the pricing information
    ers for a limited period of time, is used for fewer      is a variable rate, verify that the issuer
    than 10,000 open accounts, and is not offered            identifies the index or formula used in
    to the public other than in connection with such         setting the rate and the margin.


Consumer Compliance Handbook                                                                   Reg. Z • 71 (6/11)
Examination Objectives



         (§226.58(c)(8)(ii)(C))                               tifiable information. (§226.58(d)(3))
     u. If rates vary from one cardholder to another,      f. Determine that the card issuer updates the
        verify that the issuer discloses such rates           agreements posted on its website at least
        by providing the index and the possible               as frequently as the quarterly schedule
        margins (such as the prime rate plus                  required for submission of agreements to
        5 percent, 8 percent, 10 percent, or 12 per-          the Board under § 226.58(c). (§226.58(d)(4))
        cent) or range of margins (such as the               Note that if the issuer chooses to update the
        prime rate plus from 5 to 12 percent).             agreements on its website more frequently, the
        (§226.58(c)(8)(ii)(C))                             agreements posted on the issuer’s website
            Note: The value of the rate and the value      may contain the provisions of the agreement
        of the index are not required to be dis-           and the pricing information in effect as of a date
        closed.                                            other than the last business day of the preced-
     v. Determine that issuers do not provide              ing calendar quarter.
        provisions of the agreement or pricing
        information in the form of change-in-terms      The Posting of Agreements for ‘‘Open’’
        notices or riders (other than the pricing       Accounts §226.58(e)
        information addendum and the optional
                                                           a. With respect to any open (i.e., the card-
        variable         terms        addendum).
                                                              holder can obtain extensions or there is an
        (§226.58(c)(8)(iv))
                                                              outstanding balance on the account that
     w. Determine that changes in provisions or               has not been charged off) credit card
        pricing information are integrated into the           account, determine that the card issuer
        text of the agreement, the pricing informa-           either:
        tion addendum or the optional variable
                                                              (1) Posts and maintains the cardholder’s
        terms     addendum,     as    appropriate.
                                                                  agreement on its website; or
        (§226.58(c)(8)(iv))
                                                              (2) Promptly provides a copy of the card-
The Posting of Agreements Offered to                              holder’s agreement to the cardholder
                                                                  upon the cardholder’s request.
the Public §226.58(d)
                                                           b. If the card issuer makes an agreement
     a. Determine that the card issuer posts and
                                                              available upon request, ensure that the
        maintains on its publicly available website
                                                              issuer provides the cardholder with the
        the credit card agreements that the issuer is
                                                              ability to request a copy of the agreement
        required to submit to the Board under
                                                              both by:
        §226.58(c). (§226.58(d)(1))
                                                              (1) Using the issuer’s website (such as by
     b. With respect to an agreement offered solely
                                                                  clicking on a clearly identified box to
        for accounts under one or more private
                                                                  make the request) §226.58(e)(1)(ii)(A),
        label credit card plans (and the issuer does
                                                                  and
        not post and maintain the agreements on its
        publicly available website), determine that           (2) Calling a readily available telephone
        the issuer posts and maintains the agree-                 line the number for which is displayed
        ment on the publicly available website of at              on the issuer’s Web site and clearly
        least one of the merchants where cards                    identified     as       to     purpose.
        issued under each private label credit card               (§226.58(e)(1)(ii)(B) and (e)(2))
        plan with 10,000 or more open accounts             c. If an issuer does not maintain a website
        may be used. (§226.58(d)(1))                          from which cardholders can access spe-
     c. Verify that agreements posted pursuant to             cific information about their individual ac-
        §226.58(d) conform to the form and content            counts determine that the issuer makes
        requirements for agreements submitted to              agreements available upon request by
        the Board specified in §226.58(c)(8).                 providing the cardholder with the ability to
        (§226.58(d)(2))                                       request a copy of the agreement by calling
                                                              a readily available telephone line the num-
     d. Determine that agreements are posted in
                                                              ber for which is (§226.58(e)(2)):
        an electronic format that is readily usable
        by the general public. (§226.58(d)(3))                (1) Displayed on the issuer’s website and
                                                                  clearly identified as to purpose; or
     e. Verify that agreements are placed in a
        location on its website that is prominent and         (2) Included on each periodic statement
        readily accessible by the public and acces-               sent to the cardholder and clearly
        sible without submission of personally iden-              identified as to purpose.


72 (6/11) • Reg. Z                                                              Consumer Compliance Handbook
                                                                                 Examination Objectives



    d. Verify that the card issuer sends to the         vertising, since the previous examination and
       cardholder or otherwise make available to        verify that the terms of credit are accurate,
       the cardholder a copy of the cardholder’s        clear, balanced, and conspicuous. If triggering
       agreement in electronic or paper form no         terms are used, determine that the required
       later than 30 days after the issuer receives     disclosures are made (§§226.16 and 226.24).
       the          cardholder’s           request.
                                                        a. For advertisements for closed-end credit:
       (§226.58(e)(1)(ii)(B))
                                                           (1) If a rate of finance charge was stated,
    e. Determine that agreements posted on the
                                                               determine that it was stated as an APR.
       card issuer’s website or made available
       upon the cardholder’s request conform to            (2) If an APR will increase after consumma-
       the form and content requirements for                   tion, verify that a statement to that fact is
       agreements submitted to the Board speci-                made.
       fied in §226.58(c)(8). (§226.58(e)(3)(i))           (3) Determine whether there are deceptive
    f. If the card issuer posts an agreement on its            or misleading statements or practices.
       website or otherwise provides an agree-          b. Determine that the creditor does not offer
       ment to a cardholder electronically, verify         college students any tangible item to in-
       that the agreement is posted or provided in         duce such students to apply for or open an
       an electronic format that is readily usable         open-end consumer credit plan offered by
       by the general public and is placed in a            such creditor, if such offer is made:
       location that is prominent and readily
       accessible       to     the     cardholder.         (1) On the campus of an institution of
       (§226.58(e)(3)(ii))                                     higher education;
    g. If agreements posted or otherwise provided          (2) Near the campus of an institution of
       contain personally identifiable information             higher education; or
       relating to the cardholder, such as name,           (3) At an event sponsored by or related to
       address, telephone number, or account                   an institution of higher education.
       number, ensure that the issuer takes appro-             (§226.57(c))
       priate measures to make the agreement
       accessible only to the cardholder or other       c. If an open-end credit advertisement refers
       authorized persons. (§226.58(e)(3)(iii))            to an APR as ‘‘fixed’’ (or similar term),
                                                           determine 1) that the advertisement also
    h. Determine that agreements posted or oth-            specifies a time period that the rate will be
       erwise provided set forth the specific provi-       fixed and 2) that the rate will not increase
       sions and pricing information applicable to         during that period. (§226.16(f))
       the particular cardholder. (§226.58(e)(3)(iv))
                                                        d. If an open-end credit advertisement used
    i.   Determine that provisions and pricing infor-      the word ‘‘fixed’’ or a similar word and no
         mation are complete and accurate as of a          time period is specified in which the rate will
         date no more than 60 days prior to                be fixed, determine that the rate will not
         (§226.58(e)(3)(iv)):                              increase while the plan is open. (§226.16(f))
         (1) The date on which the agreement is         e. For any advertisement of an open-end (not
             posted on the card issuer’s website           home-secured) plan, if any annual percent-
             under §226.58(e)(1)(i);                       age rate that may be applied to the account
         (2) The date the cardholder’s request is          is an introductory rate, determine that the
             received under §226.58(e)(1)(ii) or           term introductory or intro is in immediate
             (e)(2).                                       proximity to each listing of the introductory
                                                           rate. (§226.16(g)(3))
              Note that card issuers may provide
           credit card agreements in electronic form    f. For any advertisement of an open-end (not
           under §226.58(d) and (e) without regard         home-secured) plan, if any annual percent-
           to the consumer notice and consent              age rate that may be applied to the account
           requirements of section 101(c) of the           is a promotional rate, determine that the
           Electronic Signatures in Global and Na-         following information is stated in a clear and
           tional Commerce Act (E-Sign Act)                conspicuous manner in the advertisement
           (15 U.S.C. 7001 et seq.). (§226.58(f))          (§226.16(g)(4)):
                                                           (1) When the promotional rate will end; and
Advertising (Open- and Closed-End)
                                                           (2) The annual percentage rate that will
8. For open- and closed-end loans, sample                      apply after the end of the promotional
   advertising copy, including any electronic ad-              period.


Consumer Compliance Handbook                                                                Reg. Z • 73 (6/11)
Examination Objectives



        Note: If such rate is variable, determine that            application or solicitation is mailed, or to a
     the annual percentage rate complies with the                 banner advertisement or pop-up advertise-
     accuracy standards in §§226.5a(c)(2),                        ment linked to an application or solicitation
     226.5a(d)(3), 226.5a(e)(4), or 226.16(b)(1)(ii),             provided electronically. (§226.16(h)(5))
     as applicable. If such rate cannot be deter-
     mined at the time disclosures are given be-           Transactional Testing
     cause the rate depends at least in part on a
     later determination of the consumer’s creditwor-      NOTE: When verifying APR accuracies, use the
     thiness, determine that the advertisement dis-        OCC’s APR calculation model or other calculation
     closes the specific rates or the range of rates       tool acceptable to your regulatory agency.
     that might apply. Further, if the rate is stated in
                                                           9. Review the financial institution’s closed-end
     a written or electronic advertisement, deter-
                                                              and open-end transactions to ensure accuracy
     mine that the information in §§226.16 (g)(4)(i)
                                                              and completeness.
     and (g)(4)(ii) are stated in a prominent location
     closely proximate to the first listing of the
     promotional rate.                                     Closed-End Credit Transactional Testing
     g. If a deferred interest offer is advertised for     Procedures
        an open-end account not subject to
                                                              a. For each type of closed-end loan being
        §226.5b, determine that the deferred inter-
                                                                 tested, determine the accuracy of the
        est period is stated in a clear and conspicu-
                                                                 disclosures by comparing the disclosures
        ous manner in the advertisement. If the
                                                                 to the contract and other financial institution
        phrase ‘‘no interest’’ or similar term regard-
                                                                 documents. (§226.17)
        ing the possible avoidance of interest
        obligations under the deferred interest pro-          b. Determine whether the required disclosures
        gram is stated, determine that the term ‘‘if             were made before consummation of the
        paid in full’’ is also stated in a clear and             transaction and ensure the presence and
        conspicuous manner preceding the disclo-                 accuracy of the items below, as applicable.
        sure of the deferred interest period in the              (§226.18)
        advertisement. If the deferred interest offer              (1) Amount financed
        is included in a written or electronic adver-
        tisement, determine that the deferred inter-               (2) Itemization of the amount financed
        est period and, if applicable, the term ‘‘if                   (RESPA GFE may substitute)
        paid in full’’ are stated in immediate prox-               (3) Finance charge
        imity to each statement of ‘‘no interest,’’ ‘‘no
                                                                   (4) APR
        payments,’’ ‘‘deferred interest,’’ ‘‘same as
        cash,’’ or similar term regarding interest or              (5) Variable rate verbiage as follows for
        payments during the deferred interest pe-                      loans not secured by a principal dwell-
        riod. (§226.16(h)(3))                                          ing or with terms of one year or less:
     h. If any deferred interest offer is advertised                   (a) Circumstances which permit rate
        for an open-end account not subject to                             increase
        §226.5b, determine that the (h)(4)(i) and                      (b) Limitations on the increase (peri-
        (h)(4)(ii) language (of §226.16(h)(4) ) is                         odic or lifetime)
        stated in the advertisement and is similar to
        Sample G-24 in Appendix G. If the deferred                     (c) Effects of the increase
        interest offer is included in a written or                     (d) Hypothetical example of new pay-
        electronic advertisement, determine that                           ment terms
        this information is stated in a prominent
                                                                   (6) Payment schedule including amount,
        location closely proximate to the first state-
                                                                       timing and number of payments
        ment of ‘‘no interest,’’ ‘‘no payments,’’
        ‘‘deferred interest,’’ ‘‘same as cash,’’ or                (7) Total of payments
        similar term regarding interest or payments                (8) Total sales price (credit sale)
        during the deferred interest period.
        (§226.16(h)(4))                                            (9) Description of security interest
           Note: The requirements in §226.16(h)(4)                (10) Credit life insurance premium included
        apply to any advertisement of an open-end                      in the finance charge unless:
        credit plan not subject to §226.5b (require-
        ments for home equity plans) §226.16(h)(1).                    (a) Insurance is not required; and
        However, the requirements do not apply to                      (b) Premium for the initial term is
        an envelope or other enclosure in which an                         disclosed; and


74 (6/11) • Reg. Z                                                                 Consumer Compliance Handbook
                                                                                  Examination Objectives



            (c) Consumer signs or initials an affir-          ous examination. If applicable, test rescis-
                mative written request for the in-            sion waivers. (§226.23(e))
                surance                                    g. Determine whether the maximum interest
       (11) Property insurance available from the             rate in the contract is disclosed for any
            creditor excluded from the finance                adjustable rate consumer credit contract
            charge if the premium for the initial             secured by a dwelling. (§226.30(a))
            term of the insurance is disclosed             h. For private student loans with a right to
       (12) Required deposit                                  cancel, review cancellation requests to
                                                              determine if they were properly handled.
    c. Determine for adjustable rate mortgage
                                                              (§226.47(c))
       loans with maturities of more than one year
       that the required early and subsequent
       disclosures are complete, accurate, and
                                                         Certain Home Mortgage Transactions
       timely. Early disclosures required by
       §226.19(a) are verified during the closed-
                                                         Subject to Subpart E
       end credit forms review. Subsequent dis-            a. Determine whether the financial institution
       closures should include the items below, as            originates consumer credit transactions sub-
       applicable. (§226.20(c))                               ject to Subpart E of Regulation Z; specifi-
                                                              cally, certain closed-end home mortgages
       (1) Current and prior interest rates
                                                              (high-cost mortgages (§226.32), reverse
       (2) Index values used to determine current             mortgages (§226.33), and ‘‘higher-priced
           and prior interest rates                           mortgage loans’’ (§226.35). (Examiners may
                                                              use the attached worksheet as an aid for
       (3) Extent to which the creditor has fore-
                                                              identifying and reviewing high-cost mort-
           gone an increase in the interest rate
                                                              gages.)
       (4) Contractual effects of the adjustment
                                                           b. In addition to reviewing high-cost mort-
           (new payment and loan balance)
                                                              gages and reverse mortgages for compli-
       (5) Payment required to avoid negative                 ance with requirements in other subparts of
           amortization.                                      Regulation Z (for example, disclosure tim-
                                                              ing requirements under §226.19(a)), review
    Note: The accuracy of the adjusted interest
                                                              such mortgages to ensure the following:
  rates and indexes should be verified by compar-
  ing them with the contract and early disclosures.           (1) Required disclosures are provided to
  Refer to the Additional Variable Rate Testing                   consumers in addition to, not in lieu of,
  section of these examination procedures.                        the disclosures contained in other sub-
                                                                  parts of Regulation Z. (§226.31(a))
    d. Determine, for each type of closed-end
       rescindable loan being tested, the appro-              (2) Disclosures are clear and conspicuous,
       priate number of copies of the rescission                  in writing, and in a form that the
       notice are provided to each person whose                   consumer may keep. (§226.31(b))
       ownership interest is or will be subject to the        (3) Disclosures are furnished at least three
       security interest. The rescission notice must              business days prior to consummation of
       disclose the items below. (§226.23(b)(1))                  a mortgage transaction covered by
       (1) Security interest taken in the consum-                 §226.32 or a closed-end reverse mort-
           er’s principal dwelling                                gage transaction (or at least three
                                                                  business days prior to the first transac-
       (2) Consumer’s right to rescind the trans-                 tion under an open-end reverse mort-
           action                                                 gage). (§226.31(c))
       (3) How to exercise the right to rescind,              (4) Disclosures reflect the terms of the legal
           with a form for that purpose, designat-                obligation between the parties.
           ing the address of the creditor’s place                (§226.31(d))
           of business
                                                              (5) If the transaction involves more than
       (4) Effects of rescission                                  one creditor, that only one creditor
       (5) Date the rescission period expires.                    provided the disclosures. Where the
                                                                  obligation involves multiple consumers,
    e. Ensure funding was delayed until the rescis-               ensure that the disclosures were pro-
       sion period expired. (§226.23(c))                          vided to any consumer who is primarily
    f. Determine if the institution has waived the                liable on the obligation. Further, for
       three-day right to rescind since the previ-                rescindable transactions, verify that the


Consumer Compliance Handbook                                                                 Reg. Z • 75 (6/11)
Examination Objectives



              disclosures were provided to each con-            vided by telephone at least three days
              sumer who has the right to rescind.               prior to consummation.
              (§226.31(e))                                  (8) If a consumer waives the right to a
         (6) The APR is accurately calculated and               three-day waiting period to meet a bona
             disclosed in accordance with the re-               fide personal financial emergency, the
             quirements and within the tolerances               consumer’s waiver must be a dated
             allowed in §226.22. (§226.31(g))                   written statement (not a pre-printed
                                                                form) describing the emergency and
     c. For high-cost mortgages (§226.32), ensure
                                                                bearing the signature of all entitled to
        that, in addition to other required disclo-
                                                                the waiting period (a consumer can
        sures, the creditor discloses the following at
                                                                waive only after receiving the required
        least three business days prior to consum-
        mation (See model disclosure at App.                    disclosures and prior to consumma-
        H-16):                                                  tion). (§226.31(c)(1)(iii))

         (1) Notice containing the prescribed lan-       d. High-cost mortgage transactions (§226.32)
             guage. (§226.32(c)(1))                         do not provide for any of the following loan
                                                            terms:
         (2) The APR. (§226.32(c)(2))
                                                            (1) Balloon payment (if term is less than 5
         (3) Amount of regular loan payment and the             years, with exceptions). (§226.32(d)(1)(i)
             amount of any balloon payment. The                 and (ii))
             disclosed regular payment should be
             treated as accurate if it is based on an       (2) Negative amortization. (§226.32(d)(2))
             amount borrowed that is deemed                 (3) Advance payments from the proceeds
             accurate     under        § 226.32(c)(5).          of more than two periodic payments.
             (§226.32(c)(3))                                    (§226.32(d)(3))
         (4) For variable rate loans, a statement that      (4) Increased interest rate after default.
             the interest rate and monthly payment              (§226.32(d)(4))A rebate of interest, aris-
             may increase, and the amount of the                ing from a loan acceleration due to
             single maximum monthly payment                     default, calculated by a method less
             allowed      under      the     contract.          favorable than the actuarial method.
             (§226.32(c)(4))                                    (§226.32(d)(5))
         (5) For a mortgage refinancing, the total          (5) Prepayment penalty, unless:
             amount the consumer will borrow (the
             face amount) and if this amount in-                • it will not apply after the two-year
             cludes premiums or other charges for                 period following consummation;
             optional credit insurance or debt-                 • it will not apply if the source of
             cancellation coverage, that fact is                  prepayment funds is a refinancing by
             stated. This disclosure should be treated            the creditor or an affiliate of the
             as accurate if within $100 of the actual             creditor;
             amount borrowed. (§226.32(c)(5))
                                                                • the consumer’s total monthly debt
         (6) A new disclosure is required if, subse-              payments (including amounts owed
             quent to providing the additional disclo-            under mortgage), at consummation,
             sure but prior to consummation, there                is 50 percent or less of the consum-
             are changes in any terms that make the               er’s monthly gross income (as verified
             disclosures inaccurate. For example, if              in    accordance        with  section
             a consumer purchases optional credit                 §226.34(a)(4)(ii)); and
             insurance and, as a result, the monthly
                                                                • the amount of the periodic payment of
             payment differs from the payment pre-
                                                                  principal or interest or both may not
             viously disclosed, re-disclosure is re-
                                                                  change during the four-year period
             quired and a new three-day waiting
                                                                  following              consummation.
             period applies. (§226.31(c)(1)(i))
                                                                  (§§226.32(d)(6) and §226.32(d)(7))
         (7) If a creditor provides new disclosures
                                                            (6) A due-on-demand clause permitting the
             by telephone when the consumer initi-
                                                                creditor to terminate the loan in ad-
             ates a change in terms, then at consum-
                                                                vance of maturity and accelerate the
             mation (§226.31(c)(1)(ii)): The creditor
                                                                balance, with certain exceptions.
             must provide new written disclosures
                                                                (§226.32(d)(8))
             and both parties must sign a statement
             that these new disclosures were pro-        e. The creditor is not engaged in the following


76 (6/11) • Reg. Z                                                           Consumer Compliance Handbook
                                                                                 Examination Objectives



       acts and practices for high-cost mortgages:             sets other than collateral, and employ-
       (1) Home improvement contracts—paying                   ment.
           a contractor under a home improve-              (2) Review underwriting standards.
           ment contract from the proceeds of a
                                                           (3) Ensure the creditor bases its determina-
           mortgage unless certain conditions are
                                                               tion of repayment ability on current or
           met. (§226.34(a)(1))
                                                               reasonably expected income from em-
       (2) Notice to assignee—selling or other-                ployment or other sources, on assets
           wise assigning a high-cost mortgage                 other than the collateral, or both.
           without furnishing the required state-
                                                           (4) Determine that a creditor verifies
           ment to the purchaser or assignee.
           (§226.34(a)(2))                                     amounts of income or assets that it
                                                               relies on to determine repayment ability,
       (3) Refinancing within one year of extend-              including expected income or assets,
           ing credit—within one year of making a              by the consumer’s Internal Revenue
           high-cost mortgage (§226.32), a credi-              Service Form W-2, tax returns, payroll
           tor may not refinance any high-cost                 receipts, financial institution records, or
           mortgage to the same borrower into                  other third party documents that pro-
           another high-cost mortgage that is not              vide reasonably reliable evidence of the
           in the borrower’s interest. This also               consumer’s income or assets.
           applies to assignees that hold or ser-
           vice the high-cost mortgage. Commen-            (5) To establish whether a presumption of
           tary to 34(a)(3) has examples applying              compliance applies, determine whether
           the refinancing prohibition and address-            a creditor verifies the consumer’s cur-
           ing ‘‘borrower’s interest.’’ (§226.34(a)(3))        rent obligations by:
    f. For higher-priced mortgage loans (§226.35),             (i) Verifying repayment ability as de-
       ensure that the loan terms do not provide                   scribed above;
       for a prepayment penalty, unless:                       (ii) Determining the consumer’s repay-
       (1) The penalty is otherwise permitted by                    ment ability by using the largest
           law, including §226.32(d)(6);                            payment of principal and interest in
                                                                    the first seven years following con-
       (2) The penalty will not apply after the                     summation, taking into account cur-
           two-year period following consumma-                      rent and mortgage-related obliga-
           tion;                                                    tions; and
       (3) The penalty will not apply if the source            (iii) Assessing the consumer’s repay-
           of prepayment funds is a refinancing by                   ment ability taking into account at
           the creditor or an affiliate of the creditor;             least one of the following: the ratio of
           and                                                       total debt obligations to income, or
       (4) The amount of the periodic payment of                     the income the consumer will have
           principal or interest or both may not                     after paying debt obligations.
           change during the four-year period              (6) Evasion of requirements: Ensure that
           following consummation. (§226.35(b))                the creditor does not structure a high-
    g. For higher-priced mortgage loans secured                cost or higher-priced mortgage loan as
       by a first lien on a principal dwelling escrow          an open-end plan (‘‘spurious open-end
       accounts are established before consum-                 credit’’) to evade the requirements of
       mation for property taxes and premiums for              Regulation Z. See staff commentary to
       mortgage-related insurance required by the              34(b) for factors to be considered.
       creditor.                                               (§226.35(b)(4))
    h. For both high-cost (§226.32) and higher-                (i) The following are prohibited acts or
       priced mortgages (§226.35), review for the                  practices in connection with credit
       following:                                                  secured by a consumer’s principal
                                                                   dwelling (§226.36):
       (1) Ensure the subject loans are not being
           extended based on the consumer’s                        (1) Loan Servicing Practices: For a
           collateral without regard to repayment                      consumer credit transaction se-
           ability, including the consumer’s current                   cured by a consumer’s principal
           and expected income, current obliga-                        dwelling, determine if loan ser-
           tions, mortgage related obligations, as-                    vicer:



Consumer Compliance Handbook                                                                Reg. Z • 77 (6/11)
Examination Objectives


                         i. Failed to credit a conforming                    no person pays to a loan originator, directly
                            payment to the consumer’s                        or indirectly, compensation16 that is based
                            loan account as of the date                      on any of the transaction’s terms or condi-
                            of receipt, where the delay in                   tions. (§226.36(d)(1)(i))
                            crediting resulted in a charge                      Note: This prohibition does not apply if
                            to the consumer or in the                        the loan originator receives compensation
                            reporting of negative informa-                   directly from a consumer in a consumer
                            tion to a credit reporting                       credit transaction secured by a dwelling.
                            agency (§226.36(c)(1)(i));                       Additionally, the amount of credit extended
                        ii. Imposed on the consumer                          is not deemed to be a transaction term or
                            any late fee or delinquency                      condition, provided compensation received
                            charge in connection with a                      by or paid to a loan originator, directly or
                            payment, when the only de-                       indirectly, is based on a fixed percentage of
                            linquency was attributable to                    the amount of credit extended. Such com-
                            late fees or delinquency                         pensation may be subject to a minimum or
                            charges assessed on an ear-                      maximum dollar amount.
                            lier payment, and the pay-                   b. If any loan originator receives compensa-
                            ment is otherwise a full pay-                   tion directly from a consumer in a consumer
                            ment for the applicable                         credit transaction secured by a dwelling,
                            period and is paid on its due                   determine that (§226.36(d)(2)):
                            date or within any applicable
                                                                             (1) No loan originator receives compensa-
                            grace                   period
                                                                                 tion, directly or indirectly, from any
                            (§226.36(c)(1)(ii)); or
                                                                                 person other than the consumer in
                       iii Failed to provide, within a                           connection with the transaction
                           reasonable time after receiv-                         (§226.36(d)(2)(i)); and
                           ing a request from the con-
                           sumer or person acting on                         (2) No person who knows or has reason to
                           behalf of the consumer, an                            know of the consumer-paid compensa-
                           accurate statement of the to-                         tion to the loan originator (other than the
                           tal outstanding balance that                          consumer) pays any compensation to a
                           would be required to satisfy                          loan originator, directly or indirectly, in
                           the consumer’s obligations in                         connection with the transaction.
                           full as of a specific date. A                         (§226.36(d)(2)(ii))
                           reasonable time under most
                           circumstances would be to                Prohibition on Steering
                           provide the statement within
                           5 business days, unless refi-                 a. Determine that, in connection with a con-
                           nance application volume is                      sumer credit transaction secured by a
                           unusually               high.                    dwelling, a loan originator does not direct or
                           (§226.36(c)(1)(iii))                             ’’steer’’ a consumer to consummate a
                                                                            transaction based on the fact that the
                                                                            originator will receive greater compensation
Prohibited Payments to Loan                                                 from the creditor in that transaction than in
Originators14                                                               other transactions the originator offered or
                                                                            could have offered to the consumer, unless
     a. Determine that, in connection with a con-
                                                                            the consummated transaction is in the
        sumer credit transaction secured by a
                                                                            consumer’s interest. (§226.36(e)(1))
        dwelling,15 no loan originator receives and
                                                                            Note: The rule provides a safe harbor to
                                                                            facilitate compliance with the prohibition on
   14. The term ’’loan originator’’ means, with respect to a
particular transaction, a person who for compensation or other              steering in §226.36(e)(1). The loan origina-
monetary gain, or in expectation of compensation or other                   tor is deemed to comply with the anti-
monetary gain, arranges, negotiates, or otherwise obtains an                steering prohibition if the consumer is
extension of consumer credit for another person. The term ’’loan
originator’’ includes an employee of the creditor if the employee           presented with loan options that meet all of
meets this definition. The term ’’loan originator’’ includes the            the following conditions for each type of
creditor only if the creditor does not provide the funds for the
transaction at consummation out of the creditor’s own resources,
                                                                            transaction in which the consumer ex-
including drawing on a bona fide warehouse line of credit, or out
of deposits held by the creditor. A mortgage broker with respect    consumer’s interest in a timeshare plan described in 11 U.S.C.
to a particular transaction is any loan originator that is not an   101(53D). (§226.36(f))
employee of the creditor. See 12 C.F.R. §226.36 (a)(1)&(2)             16. Compensation includes salaries, commissions, and any
   15. Sections 36(d) and (e) do not apply to a home-equity line    financial or similar incentive, such as an annual or periodic bonus.
of credit subject to §226.5b or to a loan that is secured by a      (comment §226 36(d)(1)-1)


78 (6/11) • Reg. Z                                                                                  Consumer Compliance Handbook
                                                                                                  Examination Objectives


          pressed an interest:17                                           (2) Withholding or threatening to withhold
          (1) The loan originator obtains loan options                         timely payment to a person that pre-
              from a significant number of the credi-                          pares a valuation or performs valuation
              tors with which the originator regularly                         management functions because the
              does business and, for each type of                              person does not value the consumer’s
              transaction in which the consumer ex-                            principal dwelling at or above a certain
              pressed an interest, presents the con-                           amount;
              sumer with loan options that include                         (3) Implying to a person that prepares
              (§226.36(e)(3)(i)):                                              valuations that current or future reten-
               (i) The loan with the lowest interest                           tion of the person depends on the
                   rate;                                                       amount at which the person estimates
                                                                               the value of the consumer’s principal
               (ii) The loan with the lowest interest rate                     dwelling;
                    without negative amortization, a pre-
                    payment penalty, interest-only pay-                    (4) Excluding a person that prepares a
                    ments, a balloon payment in the first                      valuation from consideration for future
                    7 years of the life of the loan, a                         engagement because the person re-
                    demand feature, shared equity, or                          ports a value for the consumer’s princi-
                    shared appreciation; or, in the case                       pal dwelling that does not meet or
                    of a reverse mortgage, a loan with-                        exceed a predetermined threshold; and
                    out a prepayment penalty, or shared                    (5) Conditioning the compensation paid to
                    equity or shared appreciation; and                         a person that prepares a valuation on
               (iii) The loan with the lowest total dollar                     consummation of the covered transac-
                     amount for origination points or fees                     tion.
                     and discount points.                               b. Determine that the valuation does not
          (2) The loan originator has a good faith                         materially misrepresent the value of the
              belief that the options (presented to the                    consumer’s         principal       dwelling.
              consumer that are set forth, above) are                      (§226.42(c)(2)(i))
              loans for which the consumer likely                            (Note: A misrepresentation is material if it
              qualifies. (§226.36(e)(3)(ii))                               is likely to significantly affect the value
                                                                           assigned to the consumer’s principal dwell-
          (3) For each type of transaction, if the                         ing. A bona fide error shall not be a
              originator presents to the consumer                          misrepresentation.)
              more than three loans, the originator
              highlights the loans that satisfy options                 c. Determine that a valuation was not falsified
              1.i,    1.ii,    and     1.iii    above.                     or materially altered. (§226.42(c)(2)(ii))
              (§226.36(e)(3)(iii))                                           (Note: An alteration is material if it is likely
                Note: If the requirements set forth in                     to significantly affect the value assigned to
              §226.36(e) are met, the loan originator                      the consumer’s principal dwelling.)
              can, without steering, present fewer                      d. Determine that the covered person does
              than three loans. (§226.36(e)(4))                            not induce a person to materially misrepre-
                                                                           sent or falsify the value of a consumer’s
                                                                           principal dwelling (in violation of
Valuation Independence                                                     §226.42(c)(2)(i) or (ii)). (§226.42(c)(2)(iii))
     a. Determine that the covered person did not
                                                                        e. Prohibition on conflicts of interest. To the
        attempt to directly or indirectly cause the
                                                                           extent applicable, determine that the per-
        value assigned to the consumer’s principal
                                                                           son who prepared the valuations or per-
        dwelling to be based on any factor other
                                                                           formed the valuation management func-
        than the independent judgment of a person
                                                                           tions for a covered transaction did not have
        that prepares valuations. Examples of such
                                                                           a direct or indirect interest, financial or
        attempts include (§226.42(c)):
                                                                           otherwise, in the property or transaction for
          (1) Seeking to influence a person that                           which the valuation is or will be performed.
              prepares a valuation to report a mini-                       (§226.42(d)(1)(i))
              mum or maximum value for the consum-                            (Note: No person violates this section
              er’s principal dwelling;                                     solely because that the person is an
                                                                           employee or affiliate of the creditor, or
   17. The term ’’type of transaction’’ refers to whether: (i) A loan      provides a settlement service in addition to
has an APR that cannot increase after consummation; (ii) A loan
has an APR that may increase after consummation; or (iii) A loan           preparing valuations or performing valua-
is a reverse mortgage. (§226.36(e)(2))                                     tion management functions, or based solely


Consumer Compliance Handbook                                                                                 Reg. Z • 79 (6/11)
Examination Objectives



         on the fact that the person’s affiliate per-                management functions is not based the
         forms another settlement service, as long                   value arrived at in any valuation; and
         as the conditions discussed below ((f), (g),            (2) The creditor requires that any em-
         and (h)) are met If they are not met, whether               ployee, officer or director of the creditor
         the conflicts of interest provisions are                    who orders, performs, or reviews a
         violated by the above persons or entities                   valuation for a covered transaction ab-
         depends on all of the facts and circum-                     stain from participating in any decision
         stances. In other words, the conditions in                  to approve, not approve, or set the
         (f), (g), and (h) are a safe harbor, but not                terms of that transaction.
         required.)
                                                            h. For any covered transaction, determine that
     f. For any consumer credit transaction se-                a person who prepares a valuation or
        cured by the consumer’s principal dwelling             performs valuation management functions
        in which the creditor had assets of more               in addition to performing another settlement
        than $250 million as of December 31st for              service for the transaction, or whose affiliate
        both of the past two calendar years,                   performs another settlement service for the
        determine that a person subject to                     transaction, does not have a conflict of
        §226.42(d)(1)(i) who is employed by or                 interest in violation of §226.42(d)(1)(i) as a
        affiliated with the creditor does not have a           result of the person or the person’s affiliate
        conflict of interest in violation of                   performing another settlement service for
        §226.42(d)(1)(i) based solely on the per-              the transaction if (§226.42(d)(4)):
        son’s employment or affiliate relationship
        with the creditor if (§226.42(d)(2)):                    (1) The creditor had assets of more than
                                                                     $250 million as of December 31st for
         (1) The compensation of the person prepar-                  both of the past two calendar years and
             ing a valuation or performing valuation                 the conditions in paragraph (d)(2)(i)-(iii)
             management functions is not based on                    are met; or
             the value arrived at in any valuation;
                                                                 (2) The creditor had assets of $250 million
         (2) The person preparing a valuation or                     or less as of December 31st for either of
             performing valuation management func-                   the past two calendar years and the
             tions reports to a person who is not part               conditions in paragraph (d)(3)(i)-(ii) are
             of the creditor’s loan production func-                 met.
             tion, as defined in §226.42(d)(5)(i), and                 (Note: A valuation materially mis-
             whose compensation is not based on                      states or misrepresents the value of the
             the closing of the transaction to which                 consumer’s principal dwelling if the
             the valuation relates; and                              valuation contains a misstatement or
         (3) No employee, officer or director in the                 misrepresentation that affects the credit
             creditor’s loan production function, as                 decision or the terms on which credit
             defined in §226.42 (d)(5)(i), is directly or            are offered.)
             indirectly involved in selecting, retain-      i.   If the creditor did know at or before
             ing, recommending or influencing the                consummation of a violation of §§226.42(c)
             selection of the person to prepare a                or (d) in connection with a valuation,
             valuation or perform valuation manage-              determine that the creditor did not extend
             ment functions, or to be included in or             credit based on the valuation, unless the
             excluded from a list of approved per-               creditor documented that it acted with
             sons who prepare valuations or perform              reasonable diligence to determine that the
             valuation management functions.                     valuation did not materially misstate or
     g. For any covered transaction in which the                 misrepresent the value of the consumer’s
        creditor had assets of $250 million or less              principal dwelling. (§226.42(e))
        as of December 31st for either of the past                  (Note: For purposes of §226.42(e), a
        two calendar years, determine that a per-                valuation materially misstates or misrepre-
        son subject to §226.42(d)(1)(i) who is                   sents the value of the consumer’s principal
        employed by or affiliated with the creditor              dwelling if the valuation contains a misstate-
        does not have a conflict of interest in                  ment or misrepresentation that affects the
        violation of §226.42(d)(1)(i) based solely on            credit decision or the terms on which credit
        the person’s employment or affiliate relation-           is extended.)
        ship with the creditor if (§226.42(d)(3)):          j.   Customary and reasonable compensation.
         (1) The compensation of the person prepar-              For any covered transaction, determine that
             ing a valuation or performing valuation             the creditor and its agents compensated a


80 (6/11) • Reg. Z                                                                 Consumer Compliance Handbook
                                                                                   Examination Objectives



       fee appraiser for performing appraisal ser-             three business days after the consumer
       vices at a rate that is customary and                   received the required disclosures and bro-
       reasonable for comparable appraisal ser-                chure. (§226.5b(g) and (h))
       vices performed in the geographic market
                                                          e. Review consecutive periodic billing state-
       of the property being appraised.
                                                             ments for each major type of open-end
       (§226.42(f)(1))
                                                             credit activity offered (overdraft and home-
          (Note: For purposes of §226.42(f)
                                                             equity lines of credit, credit card programs,
       ‘‘agents’’ of the creditor do not include any
                                                             etc.). Determine whether disclosures were
       fee appraiser as defined in §226.42(f)(4)(i).
                                                             calculated accurately and are consistent
       In most cases the ‘‘agent’’ will be an
       appraisal management company to which                 with the initial disclosure statement fur-
       the creditor has outsourced the valuation             nished in connection with the accounts (or
       function.)                                            any subsequent change in terms notice)
                                                             and the underlying contractual terms gov-
    k. If the creditor reasonably believes an ap-            erning the plan(s).
       praiser has not complied with the Uniform
       Standards of Professional Appraisal Prac-          f. Determine whether the consumer was given
       tice or ethical or professional requirements          notice of the right to reject the significant
       for appraisers under applicable state or              change, with the exception of:
       federal statutes or regulations, determine              (1) An increase in the required minimum
       that the creditor referred the matter within a              periodic payment,
       reasonable period of time to the appropri-
       ate state agency if the failure to comply is            (2) A change in the APR,
       material. (§226.42(g)(1))                               (3) A change in the balance computation
          (Note: For purposes of §226.42(g), a                     method necessary to comply with
       failure to comply is material if it is likely to            §226.54, which sets forth certain limita-
       significantly affect the value assigned to the              tions on the imposition of finance
       consumer’s principal dwelling.)                             charges as a result of a loss of a grace
                                                                   period, or

Open-End Credit Transactional Testing                          (4) When the change results from the
                                                                   creditor not receiving the required mini-
Procedures
                                                                   mum periodic payment within 60 days
    a. For each open-end credit product tested,                    after the due date for that payment.
       determine the accuracy of the disclosures                   (§226.9(c)(2)(iv)(B))
       by comparing the disclosure with the con-
                                                          g. Determine that the creditor did not increase
       tract and other financial institution docu-
                                                             the rate applicable to the consumer’s
       ments. (§226.5(c))
                                                             account to the penalty rate if the outstand-
    b. Review the financial institution’s policies,          ing balance did not exceed the credit limit
       procedures, and practices to determine                on the date set forth in the notice.
       whether it provides appropriate disclosures           (§226.9(g)(4))
       for creditor-initiated direct mail applications
                                                          h. Determine, for each type of open-end
       and solicitations to open charge card
                                                             rescindable loan being tested, the appro-
       accounts, telephone applications and so-
                                                             priate number of copies of the rescission
       licitations to open charge card accounts,
                                                             notice are provided to each person whose
       and applications and solicitations made
                                                             ownership interest is or will be subject to the
       available to the general public to open
                                                             security interest and perform the proce-
       charge card accounts. (§226.5a(b), (c),
                                                             dures 12, 13, and 14 under Closed-End
       and (d))
                                                             Credit section. (§226.15(b), (c) and (e))
    c. Determine for all home equity plans with a
                                                          i.   Additional variable rate testing: Verify that
       variable rate that the APR is based on an
                                                               when accounts were opened or loans were
       independent index. Further, ensure home
                                                               consummated that loan contract terms
       equity plans are terminated or terms
                                                               were recorded correctly in the financial
       changed only if certain conditions exist.
                                                               institution’s calculation systems (e.g., its
       (§226.5b(f))
                                                               computer). Determine the accuracy of the
    d. Determine that, if any consumer rejected a              following recorded information:
       home equity plan because a disclosed term
                                                               (1) Index value,
       changed before the plan was opened, all
       fees were refunded. Verify that non-                    (2) Margin and method of calculating rate
       refundable fees were not imposed until                      changes,


Consumer Compliance Handbook                                                                 Reg. Z • 81 (6/11)
Examination Objectives



          (3) Rounding method, and                          e. For in-person payments on a credit card
                                                               account under an open-end (not home-
          (4) Adjustment caps (periodic and lifetime).
                                                               secured) consumer credit plan at a finan-
     j.   Using a sample of periodic disclosures for           cial institution branch or office that accepts
          open-end variable rate accounts (e.g.,               such payments, a card issuer shall not
          home equity accounts) and closed-end rate            impose a cut-off time earlier than the close
          change notices for adjustable rate mort-             of business for any such payments made in
          gage loans:                                          person at any branch or office of the card
          (1) Compare the rate-change date and rate            issuer at which such payments are ac-
              on the credit obligation to the actual           cepted. However, a card issuer may im-
              rate-change date and rate imposed.               pose a cut-off time earlier than 5 p.m. for
                                                               such payments, if the close of business of
          (2) Determine that the index disclosed and           the branch or office is earlier than 5 p.m.
              imposed is based on the terms of the             (§226.10(b)(3)(i))
              contract (example: the weekly average
              of one-year Treasury constant maturi-         f. If a creditor fails to credit a payment as
              ties, taken as of 45 days before the             required and imposes a finance or other
              change date). (§§226.7(g) and                    charge, ensure that the creditor credits the
              226.20(c)(2))                                    charge(s) to the consumer’s account during
                                                               the next billing cycle. (§226.10(c)
          (3) Determine that the new interest rate is
              correctly disclosed by adding the cor-        g. If (due to a weekend or holiday, for
              rect index value with the margin stated          example) a creditor does not receive or
              in the note, plus or minus any contrac-          accept payments by mail on the due date
              tual fractional adjustment. (§§226.7(g)          for payments, determine that the creditor
              and 226.20 (c)(1))                               treats as timely a payment received on the
                                                               next business day. (§226.10(d)(1))
          (4) Determine that the new payment dis-                 Note: If a creditor accepts or receives
              closed (§226.20(c)(4)) was based on an           payments made on the due date by a
              interest rate and loan balance in effect         method other than mail, such as electronic
              at least 25 days before the payment              or telephone payments, the creditor is not
              change date (consistent with the con-            required to treat a payment made by that
              tract). (§226.20(c))                             method on the next business day as timely.
                                                            h. For credit card accounts under an open-
Crediting a Consumer’s Account                                 end (not home-secured) consumer credit
§226.10                                                        plan, determine that the creditor does not
                                                               impose a separate fee to allow consumers
     a. Ensure that the creditor credits payment to
                                                               to make a payment by any method, such as
        a consumer’s account as of the date of
                                                               mail, electronic, or telephone payments,
        receipt, except when a delay in crediting
                                                               unless such payment method involves an
        does not result in a finance charge or other
                                                               expedited service by a customer service
        charge. (§226.10(a))
                                                               representative of the creditor. (§226.10(e))
     b. If a creditor specifies requirements for
                                                            i.   If a card issuer makes a material change in
        payments, determine that they are reason-
                                                                 the address for receiving payments or
        able and allow most consumers to make
                                                                 procedures for handling payments, and
        conforming payments. (§226.10(b))
                                                                 such change causes a material delay in the
     c. If a creditor specifies, on or with the                  crediting of a payment to a consumer’s
        periodic statement, requirements for the                 account during the 60-day period following
        consumer to follow in making payments, but               the date on which such change took effect,
        accepts a payment that does not conform                  ensure that the card issuer does not impose
        to the requirements, determine that the                  any late fee or finance charge for a late
        payment is credited within five days of                  payment on the credit card account during
        receipt. (§226.10(b)(4))                                 the 60-day period following the date on
     d. If the creditor sets a cut-off time for                  which the change took effect. (§226.10(f))
        payments to be received by mail, by
        electronic means, by telephone, or in per-
        son, verify that the cut-off time is 5 p.m. or
                                                         Treatment of Credit Balances, Account
        later on the payment due date at the             Termination §226.11
        location specified by the creditor for the          a. Determine institution’s treatment of credit
        receipt of such payments. (§226.10(b)(2)(ii))          balances. Specifically, if the account’s credit


82 (6/11) • Reg. Z                                                               Consumer Compliance Handbook
                                                                                    Examination Objectives



       balance is in excess of $1, the institution            any fees on the account (such as a late fee,
       must take the actions listed below. (§226.11)          annual fee, or over the-limit fee) or increase
                                                              any annual percentage rate, except as
       (1) Credit the amount to the consumer’s
                                                              provided by §226.55(b)(2) (i.e., due to the
           account; and
                                                              operation of an index). (§226.11(c)(3)(i))
       (2) Either:
                                                           f. Determine that, if payment in full of the
           (i) Refund any part of the remaining               disclosed balance, pursuant to paragraph
               credit balance within seven busi-              226.11(c)(2), is received within 30 days
               ness days from receiving a written             after disclosure, the card issuer waives or
               request from the consumer; or                  rebates any additional finance charge due
                                                              to a periodic interest rate. (§226.11(c)(3)(ii))
           (ii) If no written request is received and
                the credit remains for more than six
                months, make a good faith effort to
                refund the amount of the credit to
                                                        Special Credit Card Provisions and
                the consumer by cash, check,            Billing Error Resolution §§226.12 and 13
                money order, or credit to a deposit        a. Repayment disclosures. Review a sample
                account of the consumer. No further           of billing error resolution files and a sample
                action is required if the consumer’s          of consumers who have asserted a claim or
                current location is not known to the          defense against the financial institution for a
                creditor and cannot be traced                 credit card dispute regarding property or
                through the consumer’s last known             services. Verify the following (§§226.12 and
                address or telephone number.                  226.13):
    b. Determine that institution has not termi-              (1) Credit cards are issued only upon
       nated an account prior to its expiration date              request;
       solely because the consumer did not incur              (2) Liability for unauthorized credit card
       a finance charge. However, a creditor is not               use is limited to $50;
       prohibited from closing an account that, for
                                                              (3) Disputed amounts are not reported
       three consecutive months, no credit has
                                                                  delinquent unless remaining unpaid af-
       been extended (such as by purchase, cash
                                                                  ter the dispute has been settled;
       advance, or balance transfer) and the
       account has had no outstanding balance.                (4) Offsetting credit card indebtedness is
       (§226.11(b))                                               prohibited; and
    c. Determine that, for credit card accounts               (5) Errors are resolved within two complete
       under an open-end (not home-secured)                       billing cycles.
       consumer credit plan, the card issuer has
       adopted reasonable written policies and
       procedures designed to ensure that an            Ability to Make the Required Minimum
       administrator of an estate of a deceased         Payments §226.51
       account holder can determine the amount             a. Determine that the card issuer does not
       of and pay any balance on the account in a             open a credit card account for a consumer
       timely manner. (§226.11(c)(1)(i))                      under an open-end (not home-secured)
          Note: This does not apply to the account            consumer credit plan, or increase any
       of a deceased consumer if a joint account              credit limit applicable to such account,
       holder remains on the account.                         unless the card issuer considers the ability
    d. Ensure that, upon request by the adminis-              of the consumer to make the required
       trator of an estate, the card issuer provides          minimum periodic payments under the
       the administrator with the amount of the               terms of the account based on the consum-
       balance on a deceased consumer’s ac-                   er’s income or assets and current obliga-
       count in a timely manner. (§226.11(c)(2)(i))           tions. (§226.51(a)(1)(i))
          Note: Providing the amount of the bal-           b. Verify that the card issuer establishes and
       ance on the account within 30 days of                  maintains reasonable written policies and
       receiving the request is deemed to be                  procedures to consider a consumer’s in-
       timely.                                                come or assets and current obligations.
    e. Verify that, after receiving a request from            Reasonable policies and procedures to
       the administrator of an estate for the amount          consider a consumer’s ability to make the
       of the balance on a deceased consumer’s                required payments include a consideration
       account, the card issuer does not impose               of at least one of the following:


Consumer Compliance Handbook                                                                  Reg. Z • 83 (6/11)
Examination Objectives



         (1) The ratio of debt obligations to income;                    interest rate that currently applies to
                                                                         purchases; and
         (2) The ratio of debt obligations to assets;
             or                                                      (ii) If the applicable minimum payment
                                                                          formula includes mandatory fees,
         (3) The income the consumer will have after                      the card issuer must assume that
             paying debt obligations.                                     such fees have been charged to the
     c. Confirm that the card issuer does not issue                       account.
        a credit card to a consumer who does not              f. Rules affecting young consumers: If the
        have any income or assets, and that the                  card issuer opens a credit card account
        credit does not issue a credit card without              under an open-end (not home-secured)
        reviewing any information about a consum-                consumer credit plan for a consumer less
        er’s income, assets, or current obligations.             than 21 years old, verify that the issuer
        (§226.51(a)(1)(ii))                                      requires that such consumers:
           Note: A card issuer may consider the
                                                                 (1) Submit a written application; and
        consumer’s income or assets based on
        information provided by the consumer, in                 (2) Possess an independent ability to make
        connection with the credit card account or                   the required minimum periodic pay-
        any other financial relationship the card                    ments on the proposed extension of
        issuer or its affiliates has with the consumer,              credit in connection with the account
        subject to any applicable information-                       under §226.51(b)(1)(i)) or provide a
        sharing rules, and information obtained                      signed agreement of a cosigner, guar-
        through third parties, subject to any appli-                 antor, or joint applicant who is at least
        cable information-sharing rules. A card                      21 years old who has the ability to make
        issuer may also consider information ob-                     the required minimum periodic pay-
        tained through any empirically derived,                      ments on such debts, and be either
        demonstrably and statistically sound model                   jointly or secondarily liable for any debt
        that reasonably estimates a consumer’s                       on the account incurred by the con-
        income or assets. (See Regulation Z Com-                     sumer before the consumer has at-
        mentary: §226.51(a)(1-4).)                                   tained the age of 21 pursuant to
                                                                     §226.51(b)(1)(ii)(A) and (B).
     d. Determine that the card issuer uses a
        reasonable method for estimating the mini-            g. If a credit card account has been opened
                                                                 for a consumer less than 21 years old with a
        mum periodic payments the consumer
                                                                 cosigner, guarantor, or joint applicant pur-
        would be required to pay under the terms of
                                                                 suant to §226.51(b)(1)(ii), determine that
        the account. (§226.51(a)(2)(i))
                                                                 the issuer does not increase the credit limit
     e. A card issuer’s estimate of the minimum                  on such account before the consumer
        periodic payment is compliant (i.e., re-                 attains the age of 21 unless the cosigner,
        ceives the benefit of a safe harbor) if it uses          guarantor, or joint accountholder who as-
        the following method (§226.51(a)(2)(ii)):                sumed liability at account opening agrees
         (1) The card issuer assumes utilization,                in writing to assume liability on the increase.
             from the first day of the billing cycle, of         (§226.51(b)(2))
             the full credit line that the issuer is
             considering offering to the consumer;
             and                                           Fees Charged During the First Year of a
                                                           Credit Card Account and Limitations on
         (2) The card issuer uses a minimum pay-
                                                           Fees §226.52
             ment formula employed by the issuer for
             the product the issuer is considering            a. During the first year after the opening of a
             offering to the consumer or, in the case            credit card account under an open-end (not
             of an existing account, the minimum                 home-secured) consumer credit plan, de-
             payment formula that currently applies              termine whether the card issuer required
             to that account, provided that:                     the consumer to pay covered fees in
                                                                 excess of the 25 percent of the credit limit at
              (i) If the applicable minimum payment
                                                                 the time of the account opening.
                  formula includes interest charges,
                                                                 (§226.52(a))
                  the card issuer estimates those
                                                                   Covered fees include fees:
                  charges using an interest rate that
                  the issuer is considering offering to          (1) For the issuance or availability of credit,
                  the consumer for purchases or, in                  including any fees based on account
                  the case of an existing account, the               activity or inactivity;


84 (6/11) • Reg. Z                                                                 Consumer Compliance Handbook
                                                                                   Examination Objectives



       (2) For insurance, debt cancellation or debt          nation instead of the safe harbors (see
           suspension, if the insurance or debt              below), review (§226.52(b)(1)(i)):
           cancellation or suspension is required            (1) The number of violations of a particular
           by the terms of the account;                          type experienced by the card issuer
       (3) The consumer is required to pay to                    during a prior period of reasonable
           engage in transactions using the ac-                  length (e.g., a 12-month period).
           count, such as:                                   (2) The costs incurred by the card issuer
            (i) Cash advance fees;                               during that period as a result of those
            (ii) Balance transfer fees;                          violations. Losses and associated costs
           (iii) Foreign transaction fees;                       (including the cost of holding reserves
                                                                 against potential losses and the cost of
           (iv) Fees for using the account for                   funding delinquent accounts) must be
                purchases; and                                   excluded from this analysis.
            (v) Fees the consumer is required to
                                                             (3) If used by the card issuer when making
                pay for violating the terms of the
                                                                 its determination:
                account, except to the extent they
                are specifically excluded (see be-               (i) The number of fees imposed by the
                low).                                                card issuer as a result of the type of
                                                                     violation during the period that the
    b. Fees not covered by this limitation include:
                                                                     issuer reasonably estimates it will
       (1) Late payment fees, over-the-limit fees,                   be unable to collect.
           and returned-payment fees; or
                                                                 (ii) Reasonable estimates for an upcom-
       (2) Fees that the consumer is not required                     ing period of changes in the number
           to pay with respect to the account, such                   of violations of the relevant type, the
           as:                                                        resulting costs, and the number of
            (i) An expedited payment fee;                             fees that the card issuer will be
                                                                      unable to collect.
            (ii) Fees for optional services like travel
                 insurance;                                  (4) If applicable, whether the items in
           (iii) Fees for reissuing a lost or stolen             paragraph 1-3 have been reevaluated
                 card; or                                        by the card issuer at least once during
                                                                 the prior 12 months. If as a result of the
           (iv) Statement reproduction fees.                     reevaluation the card issuer determines
    c. Review penetration rates of various optional              that a lower fee represents a reasonable
       services to determine if they are truly                   proportion of the total costs incurred by
       optional and therefore not covered by the                 the card issuer as a result of that type of
       25 percent limitation.                                    violation, determine that the card issuer
                                                                 begins imposing the lower fee within 45
    d. Ensure that the card issuer does not impose
                                                                 days after completing the reevaluation.
       a fee for violating the terms or other
                                                                    Note: If as a result of the reevaluation
       requirements of a credit card account
                                                                 the card issuer determines that a higher
       under an open-end (not home secured)
                                                                 fee represents a reasonable proportion
       consumer credit plan unless the dollar
                                                                 of the total costs incurred by the card
       amount of the fee is consistent with
                                                                 issuer as a result of that type of
       §§226.52(b)(1) and (b)(2). (§226.52(b))
                                                                 violation, the card issuer may begin
    e. Determine that a card issuer imposes a fee                imposing the higher fee after complying
       for violating the terms or other requirements             with the notice requirements in §226.9.
       of a credit card account under an open-end                (§226.52(b)(1)(i))
       (not home-secured) consumer credit plan
                                                          g. Safe harbors. A card issuer may impose a
       only if the dollar amount of the fee is
                                                             fee for violating the terms or other require-
       consistent with either §226.52(b)(1)(i) or
                                                             ments of the account if the dollar amount of
       §226.52(b)(1)(ii). (§226.52(b)(1))
                                                             the fee does not exceed (§226.52(b)(1)(ii)
    f. Cost determination. A card issuer may                 (A) - (C)):
       impose a fee for a particular violation (e.g.,
                                                             (1) For the first violation of a particular type,
       late payment) if the card issuer has deter-
                                                                 $25.00;
       mined that the fee represents a reasonable
       proportion of the total costs incurred by the         (2) For an additional violation of the same
       issuer as a result of that type of violation. If          type during the next six billing cycles,
       a card issuer is relying on a cost determi-               $35.00; or


Consumer Compliance Handbook                                                                  Reg. Z • 85 (6/11)
Examination Objectives



          (3) When a card issuer has not received the           program, determine whether the card is-
              required payment for two or more                  suer allocated any amount paid by the
              consecutive billing cycles for a charge           consumer in excess of the required mini-
              card account that requires payment of             mum periodic payment:
              outstanding balances in full at the end           (1) Consistent with the general requirement
              of each billing cycle, three percent of               discussed in (a) above, except that,
              the delinquent balance.                               during the two billing cycles immedi-
            Note: The dollar amounts in paragraphs 1                ately preceding expiration of the de-
          and 2 above will be adjusted annually by                  ferred interest period, the excess
          the Board to the extent that changes in the               amount must have been allocated first
          Consumer Price Index warrant an increase                  to the balance subject to the deferred
          or decrease of a whole dollar.                            interest or similar program and any
                                                                    remaining portion allocated to any other
     h. Determine that the card issuer does not                     balances; or
        impose a fee for violating the terms or other
        requirements of a credit card account                   (2) In the manner requested by the con-
        under an open-end (not home-secured)                        sumer.
        consumer credit plan that exceeds the
        dollar amount associated with the violation.
        §226.52(b)(2)(i)(A)                               Loss of a Grace Period §226.54
     i.   Determine that a card issuer does not              a. Determine whether the card issuer imposed
          impose a fee for violating the terms or other         finance charges as a result of the loss of a
          requirements of a credit card account                 grace period on a credit card account
          under an open end (not home-secured)                  under an open-end (not home-secured)
          consumer credit plan when there is no                 consumer credit plan based on:
          dollar amount associated with the violation.          (1) Balances for days in billing cycles that
          For purposes of §226.52(b)(2)(i), there is no             precede the most recent billing cycle, a
          dollar amount associated with the following               prohibited practice; or
          violations (§226.52(b)(2)(i)(B)):
                                                                (2) Any portion of a balance subject to a
          (1) Transactions that the card issuer de-                 grace period that was repaid prior to the
              clines to authorize;                                  expiration of the grace period. (§226.54).
          (2) Account inactivity; and                        b. With respect to the prohibition in a.2 above,
          (3) The closure or termination of an ac-              issuers are not required to follow any
              count.                                            specific methodology, but an issuer is in
                                                                compliance if it applies the consumer’s
     j.   Determine that the card issuer does not               payment to the balance subject to the
          impose more than one fee for violating the            grace period and calculates interest
          terms or other requirements of a credit card          charges on the amount of the balance that
          account under an open-end (not home-                  remains unpaid.
          secured) consumer credit plan based                      Exceptions: This rule does not apply to
          on a single event or transaction.                     adjustments to the finance charge as a
          (§226.52(b)(2)(ii))                                   result of:
                                                                (1) The resolution of a dispute under
Allocation of Credit Card Payments in                               §226.12, unauthorized use, or §226.13,
                                                                    billing error; or
Excess of the Minimum §226.53
     a. Determine whether, when a consumer                      (2) The return of a payment.
        makes a payment in excess of the required
        minimum periodic payment, the card issuer
        allocates the excess amount:                      Limitations on Increasing Annual
                                                          Percentage Rates, Fees, and Charges
          (1) First to the balance with the highest
                                                          §226.55
              APR, and
                                                             a. With respect to a credit card account under
          (2) Any remaining portion to the other
                                                                an open-end (not home-secured) consumer
              balances in descending order based on
                                                                credit plan, determine that the card issuer
              the applicable APR.
                                                                did not increase an APR or fee or charge
     b. For balances on a credit card account                   required     to     be      disclosed   under
        subject to a deferred interest or similar               §226.6(b)(2)(ii) (fee for issuance or availabil-


86 (6/11) • Reg. Z                                                                Consumer Compliance Handbook
                                                                               Examination Objectives



       ity (e.g., an annual fee)), (b)(2)(iii) (fixed          the general public.
       finance charge or minimum interest charge),            Note: For purposes of qualifying under
       or (b)(2)(xii) (fee for required insurance,         this exception, an index is considered
       debt cancellation, or debt suspension cov-          under the card issuer’s control if the card
       erage), unless as permitted by one of the           issuer applies a minimum rate or floor below
       six exceptions:                                     which the rate cannot decrease. However,
       (1) Temporary rate exception;                       because there is no disadvantage to con-
                                                           sumers, issuers are not prevented from
       (2) Variable rate exception;
                                                           setting a maximum rate or ceiling.
       (3) Advance notice exception;
                                                        e. If the advance notice exception applies
       (4) Delinquency exception;                          (§226.55(b)(3)), determine that the card
       (5) Workout and temporary hardship ar-              issuer:
           rangement; and                                  (1) Did not apply that increased APR, fee,
       (6) Servicemembers Civil Relief Act excep-              or charge to transactions that occurred
           tion (§226.55(a)-(b)).                              prior to provision of the notice;

    b. To assess whether the temporary rate                (2) Did not apply the increased APR, fee, or
       exception applies (§226.55(b)(1)), deter-               charge to transactions that occurred
       mine whether:                                           prior to or within 14 days after provision
                                                               of the notice; and
       (1) The card issuer increased the APR
           upon the expiration of a specified              (3) Did not increase the APR, fee, or charge
           period of six months or longer; and                 during the first year after the account is
                                                               opened.
       (2) Prior to the commencement of that
           period, the card issuer disclosed in         f. If the delinquency exception applies
           writing to the consumer, in a clear and         (§226.55(b)(4)), determine that the card
           conspicuous manner, the length of the           issuer:
           period and the annual percentage rate           (1) Disclosed in a clear and conspicuous
           that would apply after expiration of the            manner in the required notice a state-
           period.                                             ment of the reason for the increase, and
    c. If the temporary rate exception applies,            (2) Will cease the increase if the card issuer
       determine that the card issuer:                         receives six consecutive required mini-
       (1) Did not apply an APR to transactions                mum periodic payments on or before
           that occurred prior to the period that              the payment due date, beginning with
           exceeds the APR that applied to those               the first payment due following the
           transactions prior to the period;                   effective date of the increase.

       (2) Provided the required notice, but did        g. If the delinquency exception applies and
           not apply an APR (to transactions that          the card issuer received six consecutive
           occurred within 14 days after provision         required minimum periodic payments on or
           of the notice) that exceeds the APR that        before the payment due date beginning
           applied to that category of transactions        with the first payment due following the
           prior to provision of the notice; and           effective date of the increase, determine
                                                           that the card issuer reduces any APR, fee,
       (3) Did not apply an annual percentage              or charge (increased pursuant to the delin-
           rate to transactions that occurred dur-         quency exception) to the original APR, fee,
           ing the period that exceeds the in-             or charge that applied prior to the increase
           creased APR.                                    with respect to transactions that occurred
    d. If the variable rate exception applies              prior to or within 14 days after provision of
       (§226.55(b)(2)), determine that the card            the required notice.
       issuer did not increase an APR unless:           h. If the workout and temporary hardship
       (1) The increase in the APR is due to an            arrangement        exception    applies
           increase in the index; and                      (§226.55(b)(5), determine that:
       (2) The annual percentage rate varies ac-           (1) Prior to commencement of the arrange-
           cording to an index that is not under the           ment (except as provided in
           card issuer’s control and is available to           §226.9(c)(2)(v)(D)) the card issuer pro-




Consumer Compliance Handbook                                                              Reg. Z • 87 (6/11)
Examination Objectives



              vided the consumer with a clear and               (1) Impose more than one over-the-limit fee
              conspicuous written disclosure of the                 or charge on a consumer’s credit card
              terms of the arrangement (including any               account per billing cycle, and, in any
              increases due to the completion or                    event, only if the credit limit was ex-
              failure of the arrangement); and                      ceeded during the billing cycle. In
                                                                    addition, the card issuer may not im-
          (2) Upon the completion or failure of the
                                                                    pose an over-the-limit fee or charge on
              arrangement, the card issuer did not
                                                                    the consumer’s credit card account for
              apply to any transactions that occurred
                                                                    more than three billing cycles for the
              prior to commencement of the arrange-                 same over-the-limit transaction where
              ment an APR, fee, or charge that                      the consumer has not reduced the
              exceeds the APR, fee, or charge that                  account balance below the credit limit
              applied to those transactions prior to                by the payment due date for either of
              commencement of the arrangement.                      the last two billing cycles.
     i.   If the Servicemembers Civil Relief Act                (2) Impose an over-the-limit fee or charge
          exception applies (§226.55(b)(6)), deter-                 solely because of the card issuer’s
          mine that the card issuer increased the APR               failure to promptly replenish the consum-
          only after 50 U.S.C. app. 527 no longer                   er’s available credit following the cred-
          applied. Further, determine that the issuer               iting of the consumer’s payment.
          did not apply to any transactions that
                                                                (3) Condition the amount of a consumer’s
          occurred prior to the decrease an APR that
                                                                    credit limit on the consumer affirma-
          exceeded the APR that applied to those
                                                                    tively consenting to the card issuer’s
          transactions prior to the decrease.
                                                                    payment of over-the-limit transactions if
     j.   For protected balances (§226.55(c)), deter-               the card issuer assesses a fee or
          mine that the card issuer did not require                 charge for such service.
          repayment using a method that is less
                                                                (4) Impose an over-the-limit fee or charge
          beneficial to the consumer than one of the
                                                                    for a billing cycle if a consumer exceeds
          following methods:
                                                                    a credit limit solely because of fees or
          (1) The method of repayment for the ac-                   interest charged by the card issuer
              count before the effective date of the                (defined as charges imposed as part of
              increase;                                             the plan under §226.6(b)(3)) to the
          (2) An amortization period of not less than               consumer’s account during that billing
              five years, beginning no earlier than the             cycle.
              effective date of the increase; or
          (3) A required minimum periodic payment         Reevaluation of Rate Increases §226.59
              that includes a percentage of the bal-
              ance that is equal to no more than twice       a. If a card issuer increases an APR that
              the percentage required before the                applies to a credit card account under an
              effective date of the increase.                   open-end (not home secured) consumer
                                                                credit plan, based on the credit risk of the
                                                                consumer, market conditions, or other fac-
Requirements for Over-the-Limit                                 tors, or increased such a rate on or after
                                                                January 1, 2009, and 45 days’ advance
Transactions §226.56
                                                                notice of the rate increase is required
     a. Determine that, if two or more consumers                pursuant to §226.9(c)(2) or (g), determine
        are jointly liable on a credit card account             that the card issuer (§226.59(a)(1)):
        under an open-end (not home-secured)
                                                                (1) Evaluates the factors described in
        consumer credit plan, the card issuer treats
                                                                    §226.59(d); and
        the affirmative consent of any of the joint
        consumers as affirmative consent for that               (2) Based on its review of such factors,
        account. Similarly, determine that the card                 reduces the APR applicable to the
        issuer treats a revocation of consent by any                consumer’s account, as appropriate.
        of the joint consumers as revocation of              b. If a card issuer is required to reduce the
        consent for that account. (§226.56(f))                  rate applicable to an account pursuant to
     b. Notwithstanding a consumer’s affirmative                §226.59(a)(1), determine that the card is-
        consent to a card issuer’s payment of                   suer reduces the rate not later than 45 days
        over-the-limit transactions, determine that             after completion of the evaluation de-
        the card issuer does not (§226.56(j)):                  scribed in §226.59(a)(1). (§226.59(a)(2)(i))


88 (6/11) • Reg. Z                                                               Consumer Compliance Handbook
                                                                                 Examination Objectives



         Note that any reduction in an APR                   review occurs no later than six months after
       required pursuant to §226.59(a)(1) of this            the sixth payment due following the effec-
       section shall apply to (§226.59(a)(2)(ii)):           tive date of the rate increase. (§226.59(e))
       (1) Any outstanding balances to which            h. The obligation to review factors described
           the increased rate described in                 in §§226.59(a) and (d) ceases to apply
           §226.59(a)(1) has been applied; and             (§226.59(f)):
       (2) New transactions that occur after the             (1) If the issuer reduces the APR applicable
           effective date of the rate reduction that             to a credit card account under an
           would otherwise have been subject to                  open-end (not home-secured) con-
           the increased rate.                                   sumer credit plan to the rate applicable
                                                                 immediately prior to the increase, or, if
    c. Determine that the card issuer has reason-
                                                                 the rate applicable immediately prior to
       able written policies and procedures in
                                                                 the increase was a variable rate, to a
       place to conduct the review described in
                                                                 variable rate determined by the same
       §226.59(a). (§226.59(b))
                                                                 formula (index and margin) that was
    d. Determine that a card issuer that is subject              used to calculate the rate applicable
       to §226.59(a) conducts the review de-                     immediately prior to the increase; or
       scribed in §226.59(a)(1) not less frequently
                                                             (2) If the issuer reduces the APR to a rate
       than once every six months after the rate
                                                                 that is lower than the rate described in
       increase. (§226.59(c))
                                                                 §226.59(f)(1) of this section.
    e. Except as provided in §226.59(d)(2), deter-
                                                        i.   Except as provided in §226.59(g)(2),
       mine that the card issuer reviews either
                                                             §226.59 applies to credit card accounts
       (§226.59(d)(1)):
                                                             that have been acquired by the card issuer
       (1) The factors on which the increase in an           from another card issuer. (§226.59(g))
           APR was originally based; or
                                                        j.   Determine that a card issuer that complies
       (2) The factors that the card issuer cur-             with this section by reviewing the factors
           rently considers when determining the             described in §226.59(d)(1)(i) reviews the
           APRs applicable to similar new credit             factors considered by the card issuer from
           card accounts under an open-end (not              which it acquired the accounts in connec-
           home-secured) consumer credit plan.               tion with the rate increase. (§226.59(g)(1))
    f. For rate increases imposed between Janu-         k. If, not later than six months after the
       ary 1, 2009, and February 21, 2010, deter-          acquisition of such accounts, a card issuer
       mine that an issuer considers the factors           reviews all of the credit card accounts it
       described in §226.59(d)(1)(ii) when con-            acquires in accordance with the factors that
       ducting the first two reviews required under        it currently considers in determining the
       §226.59(a), unless the rate increase subject        rates applicable to its similar new credit
       to §226.59(a) was based solely upon fac-            card accounts (§226.59(g)(2)):
       tors specific to the consumer, such as a
                                                             (1) Except as provided in §226.59(g)(2)(iii),
       decline in the consumer’s credit risk, the
                                                                 determine that the card issuer conducts
       consumer’s delinquency or default, or a
                                                                 reviews described in §226.59(a) of this
       violation of the terms of the account.
                                                                 section for rate increases that are
       (§226.59(d)(2))
                                                                 imposed as a result of its review under
    g. If an issuer increases a rate applicable to a             this paragraph.
       consumer’s       account      pursuant      to
                                                             (2) Except as provided in §226.59(g)(2)(iii),
       §226.55(b)(4) based on the card issuer not
                                                                 note that the card issuer is not required
       receiving the consumer’s required mini-
                                                                 to conduct reviews in accordance with
       mum periodic payment within 60 days after
                                                                 §226.59(a) of this section for any rate
       the due date, note that the issuer is not
                                                                 increases made prior to the card issu-
       required to perform the review described in
                                                                 er’s acquisition of such accounts.
       §226.59(a) prior to the sixth payment due
       date after the effective date of the increase.        (3) Note that if as a result of the card
       However, if the APR applicable to the                     issuer’s review, an account is subject
       consumer’s account is not reduced pursu-                  to, or continues to be subject to, an
       ant to §226.55(b)(4)(ii), determine that the              increased rate as a penalty, or due to
       card issuer performs the review described                 the consumer’s delinquency or default,
       in §226.59(a). Determine that the first such              the requirements of §226.59(a) of this



Consumer Compliance Handbook                                                               Reg. Z • 89 (6/11)
Examination Objectives



              section apply.                                its option under the policy guide and
                                                            section 108 (e)(6) of the TILA for
            Servicemembers Civil Relief Act excep-
                                                            avoiding a regulatory agency’s order to
         tion: Note that the requirements of §226.59
                                                            reimburse affected borrowers.
         do not apply to increases in an APR that
         was previously decreased pursuant to the
         Servicemembers Civil Relief Act (50 U.S.C.
         app. 527), provided that such a rate
         increase is made in accordance with
         §226.55(b)(6). (§226.59(h)(1))
            Charged off accounts exception: Note
         that the requirements of §226.59 do not
         apply to accounts that the card issuer has
         charged off in accordance with loan-loss
         provisions. (§226.59(h)(2))
            Note that Appendix G to part 226 is
         amended by revising Forms G-10(B),
         G-10(C), G-10(E), G-17(B), G-17(C),
         G-18(B), G-18(D), G-18(F), G-18(G), G-20,
         G-21, G-22, G- 25(A), and G-25(B).

Administrative Enforcement
10. If there is noncompliance involving understated
    finance charges or understated APRs subject
    to reimbursement under the FFIEC Policy
    Guide on Reimbursement (policy guide):
     a. Document the date on which the adminis-
        trative enforcement of the TILA policy
        statement would apply for reimbursement
        purposes by determining the date of the
        preceding examination.
     b. If the noncompliance involves indirect (third-
        party paper) disclosure errors and affected
        consumers have not been reimbursed.
     c. Prepare comments, discussing the need for
        improved internal controls to be included in
        the report of examination.
     d. Notify your supervisory office for follow up
        with the regulator that has primary respon-
        sibility for the original creditor.
     e. If the noncompliance involves direct credit:
         (1) Make an initial determination whether
             the violation is a pattern or practice.
         (2) Calculate the reimbursement for the
             loans or accounts in an expanded
             sample of the identified population.
         (3) Estimate the total impact on the popu-
             lation based on the expanded sample.
         (4) Inform management that reimburse-
             ment may be necessary under the law
             and the policy guide, and discuss all
             substantive facts including the sample
             loans and calculations.
         (5) Inform management of the financial
             institution’s options under section 130 of
             the TILA for avoiding civil liability and of


90 (6/11) • Reg. Z                                                      Consumer Compliance Handbook
                                                                                      Examination Objectives



HIGH-COST-MORTGAGE (§ 226.32) WORKSHEET
Borrower’s name                                           Loan number
COVERAGE                                                                                      Yes         No

 Is the loan secured by the consumer’s principal dwelling?
   [§§ 226.2(a)(19) and 226.32(a)(1)]

                                        If the answer is No, STOP HERE

 Is the loan for the following purpose?
 1. Residential mortgage transaction [§ 226.2(a)(24)]

 2. Reverse mortgage transaction [§ 226.33]

 3. Open-End Credit Plan (Subpart B)
    [Note prohibition against structuring loans as open-end plans
    to evade §226.32−[§226.34(b)]

                 If the answer is Yes in Box 1, 2, or 3, STOP HERE. If No, continue to Test 1.

TEST 1: CALCULATION OF APR
 A Disclosed APR
 B Treasury Security Yield of Comparable Maturity
    Obtain the Treasury Constant Maturities Yield from the FRB’s Statistical Release,
    H-15—Selected Interest Rates (the ‘‘Business’’ links display daily yields). Use the
    yield that has the most comparable maturity to the loan term and is from the 15th day
    of the month that immediately precedes the month of the application. If the 15th is not
    a business day, use the yield for the business day immediately preceding the 15th.
    If the loan term is exactly halfway between two published security maturities, use the
    lower of the two yields. Note: Creditors may use the FRB’s Select Interest Rates or the
    actual auction results. See Staff Commentary to Regulation Z for further details.
    [§ 226.32(a)(1)(i)]
    www.federalreserve.gov/releases/h15/data.htm

 C Treasury Security Yield of Comparable Maturity (Box B)
    Plus:    8 percentage points for first-lien loan or
            10 percentage points for subordinate-lien loan
                                                                                              Yes          No

 D Is Box A greater than Box C?

         If Yes, the transaction is a High-Cost Mortgage. If No, continue to Test 2, Points and Fees.




Consumer Compliance Handbook                                                                     Reg. Z • 91 (6/11)
Examination Objectives


HIGH-COST MORTGAGE (§ 226.32) WORKSHEET—continued
TEST 2: CALCULATION OF POINTS AND FEES

STEP 1: Identify all Charges Paid by the Consumer at or before Loan Closing

 A Finance Charges − § 226.4(a) and (b) (Interest, including per-diem interest, and time price
   differential are excluded from these amounts.)


                                                                              Fee            Subtotal
      Loan Points

      Mortgage Broker Fee

      Loan Service Fees
      Required Closing Agent/Third-Party Fees

      Required Credit Insurance
      Private Mortgage Insurance

      Life of Loan Charges (flood, taxes, etc.)
      Any Other Fees Considered Finance Charges


 B Certain Non-Finance Charges under §226.4(c)(7) Include fees paid by consumers only if the amount
   of the fee is unreasonable, the creditor receives direct or indirect compensation from the charge, or
   the charge is paid to an affiliate of the bank. (See the example in §226.32(b)(1)(ii) of the commentary
   for further explanation.)
                                                                              Fee            Subtotal
      Title Examination
      Title Insurance
      Property Survey
      Document Preparation Charge
      Credit Report
      Appraisal

      Fee for ‘‘Initial’’ Flood Hazard Determination
      Pest Inspection

      Any Other Fees not Considered Finance Charges


 C Premiums or other charges for optional credit life, accident,
   health, or loss-of-income insurance or debt-cancellation
   coverage
 D Total points & fees: Add subtotals for A, B, C




92 (6/11) • Reg. Z                                                             Consumer Compliance Handbook
                                                                                  Examination Objectives


HIGH-COST MORTGAGE (§ 226.32) WORKSHEET—continued
TEST 2—CALCULATION OF POINTS AND FEES (continued)

STEP 2: Determine the total loan amount for cost calculation [§ 226.32(a)(1)(ii)]

 A. Determine the amount financed [§ 226.18(b)]
     Principal loan amount
     Plus: Other amounts financed by the lender (not already included in the principal
           and not part of the finance charge)
     Less: Prepaid finance charges [§ 226.2(a)(23)]

     Equals: Amount financed
 B. Deduct costs included in the points and fees under § 226.32(b)(1)(iii) and
    (iv) (Step 1, Box B and Box C) that are financed by the creditor
 C. Total loan amount (Step 2, Box A minus Box B)


STEP 3: Perform high-fee cost calculation

 A. Eight percent of the total loan amount (Step 2, Box C)
 B. Annual adjustment amount [§ 226.32(a)(1)(ii)]
       2010:   $579
 (Use the dollar amount corresponding to the year of the loan’s origination.)
 C. Total Points & Fees (Step 1, Box D)

                                                                                         Yes        No

 In Step 3, does Box C exceed the greater of Box A or Box B?

If Yes, the transaction is a High-Cost Mortgage. If No, the transaction is not a High-Cost Mortgage
under Test 2, Points and Fees.




Consumer Compliance Handbook                                                              Reg. Z • 93 (6/11)

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:14
posted:5/7/2012
language:English
pages:93