FRB Publishes Final Z Commentary Update

It's out and it's final. The commentary is officially updated for 1999. There are some modifications from the proposal but no surprises.

Downpayments. The final rule contains more options for disclosures than did the proposal. The proposal would have required a disclosure of $0 for any downpayment in kind or cash when a trade-in had a negative value. The final rule permits a disclosure of a cash downpayment with the negative value on the trade-in added to the amount financed.

Some commenters argued that disclosing $0 when the customer in fact produced some cash as a downpayment would be confusing. The FRB decided to permit both methods of disclosure. The APR and finance charge disclosures would be the same, whichever method the creditor chooses.

Issuance of Credit Cards. The Truth in Lending Act prohibits issuing a credit card without a request from the consumer. The prohibition is designed to protect both the creditor and consumer by limiting the issuance of credit cards to situations when both the creditor and the consumer are aware of the issuance.

As creditors design new credit products, and new combined credit and non-credit use cards, the Commentary has given guidance on which instruments are subject to the restriction. In this latest addition to the commentary, the FRB draws a clear distinction between products that have a credit feature planned or offered and products that have no credit feature.

The new commentary provision prohibits the unsolicited issuance of cards that have a credit feature capability, or that include the offer of a credit feature. In other words, it violates Regulation Z to issue a debit card with an invitation or offer to add a credit feature to the card.

Private Mortgage Insurance. The Homeowners Protection Act of 1998 does not give any federal agency the authority for issuing regulations. However, there is nothing to stop the Federal Reserve from explaining how provisions of that law affect Regulation Z disclosures. The PMI fees affected by the law are finance charges and must be reflected in the TIL disclosure.

New Commentary paragraph 18(g)-5 explains that the payment schedule should reflect the insurance payments from settlement to the time that the creditor must automatically terminate the insurance. The fact that the borrower may have the right to request termination at an earlier time does not affect the disclosure.

This guidance is consistent with the general principle that disclosures should be based on the underlying legal obligation. In this case, the underlying legal obligation is the automatic termination of the insurance. The fact that the customer could request termination earlier doesn't alter the lender's legal obligation to terminate in any event.

Action Steps

Review your credit and debit card issuance procedures. Check to be sure that your bank's practice of issuing cards that may have a credit feature is consistent with the Commentary interpretation.
Provide a fact sheet on disclosing PMI fees to customers. Include illustrations of the payment schedule.
If you sell and finance any repossessed property, notify appropriate departments about correct disclosure of credit sales.