Reg Z: The Annual Reg Z Proposed Commentary Update

Just in time for New Year's, the FRB has issued a proposed update to its Official Staff Commentary to Regulation Z. The Commentary is the exclusive interpretive document for Regulation Z. The Commentary is official rather than informal so that it is as binding as the regulation itself.

Business Day
This Commentary update has three components. First, the update would clarify the definition of business day for the purpose of consumer rescission. Rescission has its own definition of business day. Instead of a banking business day, rescission counts days by what could be described as a consumer business day - a day on which a consumer is likely to do business. As a practical matter, a consumer business day is a day when the U.S. Postal Service is open.

The definition of business day excludes Sundays and federal legal holidays. There is often confusion about what constitutes a federal legal holiday. Some holidays are the day of the week, such as Labor Day. Others, such as Christmas and the 4th of July are date-specific, no matter what day of the week on which the date falls. Sometimes this date is on a Sunday which is already a non-business day.

The FRB is proposing to put an end to the confusion by explaining that only the date specified in the federal statute is not a business day for purposes of rescission. The same interpretation would apply to the early disclosure timing rules for high-cost mortgages defined in Section 226.32.

Insurance and Debt Cancellation Coverage
When and how fees for credit insurance or debt cancellation coverage are disclosed has everything to do with whether the fee is a finance charge. The goal of most lenders is to provide disclosures in a way to keep the fee from becoming a finance charge. The proposed commentary gives some additional guidance on how to accomplish this.

The long-standing rule is that disclosure may be based on the first year's fee or the initial term of the insurance. Creditors have questioned what the initial term should be if the consumer may cancel the insurance at any time. The proposed commentary explains that the creditor may use an assumed term of one year under several conditions: if the plan contemplates periodic payments but the consumer is not obligated to renew or continue the insurance after closing, or if the initial term is indefinite or not clear. The disclosure must clearly state that the amount disclosed is a one-year fee.

All of this is moot if the insurance is not voluntary. When the insurance is required as a condition of the credit, the insurance is always a finance charge.

Time of Disclosures
The biggest issue that the proposal would resolve is the question of when the creditor gives the consumer the disclosures in a form the consumer may keep. This would lay to rest the rather alarming court case which held that the use of a combined disclosure-note form did not comply with Truth in Lending because the consumer would not have the disclosure in a form the consumer could keep before signing the document. As the FRB put it, "questions have been raised about whether creditors must provide consumers with a separate copy of the document to keep before providing a second copy that consumers may execute."

In the interests of paper efficiency, many sellers and creditors use combined forms for various consumer loans. That paper efficiency went out the window with the court's decision. The proposed commentary essentially supports the court holding subject to one clarification.

Under the proposed commentary, a creditor would comply with the timing requirement by giving a copy of the combined document before it is executed. Simply showing this to the consumer - even with lots of time to read and consider the contents - won't pass the regulatory test. The unexecuted copy must be given to the consumer. Then the consumer would execute the document by signing and the creditor would give the consumer a copy of the executed document. It is more paper, but it is a procedure that can work. The rule does not include any specific guidance, but you will need to be able to prove compliance with this disclosure procedure. Spend the comment period reviewing your policies, procedures, and forms. Develop a plan for compliance, including cost, and share that in your comment letter.

ACTION STEPS

Review all the forms you use for disclosures and notes. Make a list of any that are combined TIL disclosures and notes.
If you purchase loans from dealers, look at all the forms used by these dealers. Also review the dealer's procedures for giving disclosures.
Check up on any insurance sales. Make sure that voluntary insurance is truly voluntary. Also check the terms used for the disclosure.
Write a comment letter.