test.com - apply for credit card with low apr


Menu



Google



Guidance on credit cards, down payments, & PMI

The Federal Reserve Board recently published revisions to the Official Staff Commentary to Regulation Z-Truth in Lending (12 CFR 226). The commentary is the vehicle by which the Fed's Division of Consumer and Community Affairs issues official staff interpretations to Reg Z. Under Appendix C of the regulation, "anyone" may request an official staff interpretation. Interpretations that are adopted are incorporated into the Official Staff Commentary, usually on an annual basis.

The Fed's changes to the commentary address the prohibition against issuing unsolicited credit cards, they give guidance on calculating payment schedules involving private mortgage insurance (PMI), and they also discuss credit sale transactions where down payments include cash and property used as a trade-in.

The Fed also adopted several technical amendments, but this article will concentrate only on these three areas. Even though the amendments were effective March 31, 1999, compliance is optional until March 31, 2000 (see Federal Register, Vol. 64, No. 65, Tuesday, April 6, 1999).

Credit cards

Definition. Section 226.2(a)(15) of Reg Z defines a credit card as any card or device that can be used from time to time to obtain credit. Comment 2(a)(15)-2 provides examples of cards and devices that are and are not considered credit cards. The comment has been revised to include new examples addressing recent programs where cards are marketed from the outset with both credit and noncredit features.

A card or device that can be activated upon receipt to access credit, even if the card has a substantive use other than credit, is considered a credit card. Therefore, a check guarantee card that ties an "asset account" (i.e., share draft/checking account) to an overdraft line of credit is considered a credit card. Likewise, a card that accesses both a credit and asset account (i.e., debit/credit card) would also be considered a credit card.

Unsolicited credit. Section 226.12(a) of Reg Z prohibits credit unions from issuing credit cards except in response to a consumer's request or application for the card or as a renewal of, or substitute for, a previously accepted credit card. The prohibition addresses various concerns including the potential for theft, fraud, and consumer inconvenience in refuting claims of liability. The law does not prohibit credit unions from issuing unsolicited cards that have a noncredit purpose, so long as they cannot also be used to obtain credit (i.e., checkguarantee or purchase-price discount cards). Members can later convert these cards to credit cards if the credit union makes a credit feature available and the member requests the credit.

Comment 12(a)(1)-7 provides guidance regarding a card that's issued to and accepted by the consumer as a noncredit device and that subsequently is converted for use as a credit device at the consumer's request. The Fed has clarified the comment's applicability to recent programs where unsolicited cards are marketed from the outset as both stored-value cards and credit cards.

The revised comment now states that multi function cards connected with credit plans when they're issued are credit cards, and may not be sent without the consumer's prior request or application.

Liability. The comment makes clear that card issuers do not violate the prohibition merely by sending a card imprinted with information that identifies the consumer, so long as the issuer does not propose to connect the card to a credit plan at the time the card is issued.

To the extent that the interpretation of Reg Z previously may have been unclear, the Fed stated that liability will not attach to a card issuer's prior reliance on this comment in issuing multifunction cards that included a credit feature.

Down payments

Comment 2(a)(18)-3 gives guidance on how a credit union should disclose the down payment if a trade-in is involved in a credit sale transaction, and if the amount of the existing lien exceeds the tradein's value. Under Reg Z, the term "down payment" refers to an amount, including the value of any property used as a trade-in, paid to a seller to reduce the "cash price."

Disclosure. If the amount of an existing lien exceeds the value of the property being used as a trade-in and no cash payment is involved, credit unions must disclose zero as the down payment and not a negative number.

For example, a member owes $10,000 on an existing auto loan. The trade-in value of the auto is only $8,000, leaving a $2,000 deficit. The credit union should disclose a down payment of zero, not negative $2,000.

What about cash payments? Credit unions may either 1) disclose the entire cash payment as the down payment, or 2) apply the cash payment first to any excess lien amount and disclose the remaining cash as the down payment. Using the above $10,000 auto loan example with a trade-in value of $8,000, if the member provides $1,500 in cash (which does not extinguish the $2,000 deficit), the credit union may disclose a down payment of $1,500 or zero.

Total sale price. In addition, Comment 18(j)-2 provides the formula for calculating the total sale price in a credit sale transaction: It's the sum of the cash price, certain other amounts financed, and the finance charge. In response to requests for guidance, the Fed revised the commentary to address how the total sale price may be affected by down payments involving both cash and property used as a trade-in with a lien exceeding the value of the trade-in. This guidance is provided in a new Comment 18(j)-3.

Private mortgage insurance

The Homeowners Protection Act of 1998 limits the amount of PMI consumers can be required to purchase. Borrowers may request cancellation of PMI under some circumstances and lenders must terminate PMI automatically when certain conditions are met.

The Fed added Comment 18(g)-5 in response to creditors' requests for guidance on how the new statutory requirements affect Truth in Lending Act disclosures.

Payment schedule. PMI premiums are finance charges and are figured into disclosures such as the annual percentage rate and the payment schedule. Truth in Lending Act disclosures are based on the legal obligation between the parties, and the comment provides that the payment schedule disclosure should reflect all components of the finance charge, including PMI for the period there's a legal obligation to maintain the insurance. In other words, the payment schedule should reflect the member's PMI payments until the date on which the credit union must automatically terminate coverage, even though the member may have a right to request that insurance be cancelled earlier.

Additional guidance. The comment also clarified that credit unions may rely on the guidance found in Comment 17(c)(1)-8 for variablerate transactions and Comment 17(c)(1)-10 for discounted and premium variable-rate transactions in calculating payment schedules that involve PMI.

Miscellaneous

The Fed also adopted some technical amendments to the Official Staff Commentary. Comment 14(c)10 was revised to expressly refer to "current-cycle" or "prior-cycle" debits and credits to address finance charges that are imposed during the current billing cycle, but relate to account activity that occurred during the prior billing cycle.

The Fed also addressed coverage under the so-called "high-cost" mortgage rules of Section 226.32. Credit unions must follow the rules in this section only if the total points and fees payable by the member exceed the greater of $400 or 8% of the total loan amount.

The Fed is required to adjust the $400 amount each year. The adjusted amount will now be added to the commentary at Comment 32(a) (1)(ii)-2.

Copyright Credit Union National Association, Inc. Jun 1999
Provided by ProQuest Information and Learning Company. All rights Reserved