Financial Update (July-September 1999)
Revisions Clarify Reg Z
Revisions Clarify Reg Z Consumer Lending Provisions
ecent revisions to the Federal Reserve's official staff commentary on Regulation Z, which applies and interprets the regulation's requirements, addressed the prohibition against the issuance of unsolicited credit cards and provided guidance on calculating payment schedules involving private mortgage insurance. The changes also clarified credit sale transactions where down payments include cash and property used as a trade-in and adopted some technical amendments. The revisions went into effect March 31, 1999, but compliance is optional until March 31, 2000.
Credit Cards Solicitation
Under these revisions, creditors may not issue 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 law does not prohibit creditors from issuing unsolicited cards that have a noncredit purpose such as check-guarantee or purchase-price discount cards so long as they cannot also be used to obtain credit. Consumers may later be able to convert these cards to credit cards if the issuer makes a credit feature available and the consumer requests the credit. Multifunction cards connected with credit plans are considered credit cards, and they may not be sent without the consumer's prior request or application.
If a finance charge posted to an account relates to activity for which a finance charge was debited or credited in a previous billing cycle, the creditor is required to take one of two actions. The creditor can calculate the annual percentage rate in accord with the regulation's guidelines. Or the creditor can disclose the finance charge adjustment on the periodic statement and calculate the annual percentage rate for the current billing cycle without including the finance charge adjustment in the numerator and balances associated with the finance charge adjustment in the denominator.
Mortgage Insurance and Mortgage Transactions
The payment schedule for private mortgage insurance should reflect the consumer's mortgage insurance payments until the date on which the creditor must automatically terminate coverage under applicable law even though the consumer may have a right to request that the insurance be cancelled earlier.
For certain home mortgage transactions, creditors must follow the rules in specific sections of Regulation Z if the total points and fees payable by the consumer at or before the loan closing exceed the greater of $400 or 8 percent of the total loan amount. The Federal Reserve Board is required to adjust the $400 amount each year. The adjusted amount for 1999 is $441, a 1.4 percent increase from June 1997 to June 1998, rounded to the nearest whole dollar.
Down Payments, Liens and Total Sale Price
In a credit sale, the "down payment" may be used only to reduce the cash price. For example, when a trade-in is used as the down payment on another automobile and the existing lien on the trade-in exceeds its value, creditors must disclose a zero on the down payment line rather than a negative number. If a consumer owes, say, $10,000 on a trade-in with a value of only $8,000, the creditor should disclose a down payment of $0, not negative $2,000.
If a consumer makes a cash payment, creditors may, at their option, disclose the entire cash payment as the down payment or apply the cash payment first to any excess lien amount and disclose any remaining cash as the down payment.
For additional information on these revisions, see the Federal Reserve Board of Governors Web site at www.federalreserve.gov/boarddocs/press/BoardActs/1999/199903312.