Question & Answer

Question: In the past, our bank has extended consumer loans without charging a fee. The bank has decided to charge a $20.00 fee for all future extensions of consumer loans. Does this fee affect our Truth in Lending disclosures?

Answer: No. A loan extension is an event that occurs after the loan is closed - presumably quite a while after the loan is closed. Disclosures given to the customer are based on the legal obligation, including the terms of credit at the time of closing. Changing any of these terms after the loan is on the books without changing the note is generally not an event that triggers new disclosures.

There are two principles to keep in mind. First, there is the "no new note" rule. Disclosures are based on the legal obligation. Unless that legal obligation officially changes, there is no need for new disclosures. The test for this is whether you extinguish the existing note and replace it with a new one. No new note usually means no new disclosures. In particular, agreements that you reach to accommodate the customer's request, such as an extension, don't trigger new disclosures.

Second, any change in terms that is adverse to the consumer - such as an increase in rate or an increase in payment amount - generally triggers new disclosures to the consumer unless they occur because of the consumer's delinquency. So if the extension involves a rate increase, the safe approach would be to make new disclosures. Always consider both these aspects before you decide whether to issue new disclosures.

Copyright © 1998 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 1, 2/98