Need an interpretation of the Required Deposit Dislcosure requirement of Reg Z.

226.18r states that the creditor shall disclose the following information "If the creditor requires the consumer to maintain a deposit as a condition of the specific transaction, a statement that the annual percentage rate does not reflect the effect of the required deposit."

Do loans secured by CD's qualify as meeting the definition of a creditor "requiring the customer to maintain a deposit as a condition of the loan" thus triggering this disclosure requirement or would this not be considered a "required deposit" scenario?

Thanks in advance for your feedback!

We were told by our examiners that a loan secured by a CD requires the Fed box information that you find on the TIL to be on our loan agreement.

You'll find a better explanation in the commentary: See #4.

 18(r)  Required deposit.
  1.  Disclosure required.  The creditor must inform the consumer of the existence of a required deposit. (Appendix H provides a model clause that may be used in making that disclosure.) Footnote 45 describes three types of deposits that need not be considered required deposits. Use of the phrase "need not" permits creditors to include the disclosure even in cases where there is doubt as to whether the deposit constitutes a required deposit.
  2.  Pledged account mortgages.  In these transactions, a consumer pledges as collateral funds that the consumer deposits in an account held by the creditor. The creditor withdraws sums from that account to supplement the consumer's periodic payments. Creditors may treat these pledged accounts as required deposits or they may treat them as consumer buydowns in accordance with the commentary to § 226.17(c)(1).
  3.  Escrow accounts.  The escrow exception in footnote 45 applies, for example, to accounts for such items as maintenance fees, repairs, or improvements, whether in a realty or a nonrealty transaction. (See the commentary to § 226.17(c)(1) regarding the use of escrow accounts in consumer buydown transactions.)
  4.  Interest-bearing accounts.  When a deposit earns at least five percent interest per year, no disclosure is required under § 226.18(r). This exception applies whether the deposit is held by the creditor or by a third party.
  5.  Morris Plan transactions.  A deposit under a Morris Plan, in which a deposit account is created for the sole purpose of accumulating payments and this is applied to satisfy entirely the consumer's obligation in the transaction, is not a required deposit.
  6.  Examples of amounts excluded.  The following are among the types of deposits that need not be treated as required deposits:
  •  Requirement that a borrower be a customer or a member even if that involves a fee or a minimum balance.
  •  Required property insurance escrow on a mobile home transaction.
  •  Refund of interest when the obligation is paid in full.
  •  Deposits that are immediately available to the consumer.
  •  Funds deposited with the creditor to be disbursed (for example, for construction) before the loan proceeds are advanced.
  •  Escrow of condominium fees.
  •  Escrow of loan proceeds to be released when the repairs are completed.

Thanks for the feedback!

Southern, the commentary you provided is what I referred to, but I couldn't find anything in that that leads me to believe that a loan secured by a CD qualifies as being a "required deposit" requirement by the creditor for the loan transaction....but, I also didn't see in the exclusions in 6. that a CD secured loan is specifically excluded as well soooo.....

....I could be completely misunderstanding this or misinterpreting it, but as I read this requirement, I'm thinking more along the lines of a loan product the bank has where the bank requires the borrower to maintain a deposit account with the Bank as a condition of making the loan (say for automatic transfer purposes).

If a CD is offered up as collateral for a loan by the borrower, the Bank will gladly accept that as collateral. I'm just not sure that is a "requirement" of the loan transaction that would require the disclosure.

Am I not understanding this correctly?

If the CD is not a requirement of the loan, then why do you have a security interest in the CD? Are you saying the loan is not dependant of the pledge of the deposit account and it is not a requirement to receive the loan???

You need to check the box on all CD loans if the interest rate on the CD is less than 5%.

Thanks for the response Randy!

Collateral may be required on the loan, if this collateral is a CD, then it's a CD. I'm just not sure if collateral being required or being pledged to the loan is the same as a bank requirement that the customer maintain a deposit account with the Bank as a condition of the loan thus triggering the disclosure requirement.

If the borrower wants to borrow $8,000 to purchase a car or for any other consumer purpose reason and tells the officer he has a $10,000 CD with the Bank that he wants to pledge to the loan as collateral, we are not gonna say no. We'll make that loan. This would be a CD secured loan, but it's not really a loan with a bank requirement for the customer to maintain a deposit account with the Bank as a condition of the loan thus triggering the disclosure from my perspective. The CD is simply what the borrower is willing to pledge as collateral.

Perhaps I'm overanalyzing this and CD secured loans have always been treated as requiring the "Required deposit" disclosure, I just haven't been aware of this particular Reg Z provision, and now that I am and I read the language, I interpret it differently.

No, but as long as the CD is pledged as collateral you are going to require it stay on deposit, therefore it becomes a required deposit.

I see that Dan. Makes sense. Thanks for the response

I know I am overthinking the "requirement" part.

Randy, thanks for also pointing out the less than 5% requirement. I read through the requirement language and the commentary before posting the topic but the commentary in #4 on Interest bearing accounts did't really register with me initially. Now that you've pointed it out and I reread again, I can see that it's pretty straight forward in that if I accept the "deposit requirement" part, a CD secured loan with an interest rate less than 5% would definitely trigger the disclosure.

Again, thanks for your responses folks!

What if the pledged account is a savings account. Wouldn't the less than 5% rule apply?

Yes - it applies to any type of deposit account.

If a CD and the home (real estate) is used for collateral on a home purchase loan, must you check the "required deposit" box?

The loan would be subject to 1026.37 and 1026.38 and not 1026.18. There is no required deposit disclosure on an LE or CD.