CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2002 No. 5 April 19, 2002

Vol 2002 No. 5 April 19, 2002

Federal Reserve Issues Revised Reg Z Commentary

The Federal Reserve Board ("Board") has published revisions to the official staff commentary to Regulation Z, which implements the Truth in Lending Act. The changes address how to provide disclosures that are incorporated within a credit contract, clarifies how to account for certain holidays that fall within the recission period under Section 226.2(a)(6), and clarifies how to treat insurance and debt cancellation coverage. The Board also makes certain technical changes.

Disclosures integrated with agreement. Regulation Z requires creditors to give disclosures in writing in a form that the consumer may keep. See Sections 226.17(a)(1) and (b). In certain credit contracts (such as motor vehicle installment sales contracts), creditors often place Regulation Z disclosures directly on the contract. Recent court decisions have addressed inconsistently whether creditors that use a single integrated document must provide consumers with a separate copy of the disclosures from the executable contract.

New Comment 17(b)-3 states that the consumer must be free to "take possession of and review" the document in its entirety before signing. In contrast, it would not be sufficient for the creditor simply to "show" the consumer the document containing the disclosures before the consumer signs. The Board does not indicate how a creditor may document compliance with these guidelines, though a provision in a policy manual to this effect, along with consistent training, may be warranted.

In an example provided, a creditor satisfies this requirement if it gives the consumer a multiple- copy contract containing the disclosures, the consumer reviews and signs the form and returns it to the creditor, who separates the copies and gives one copy to the consumer to keep.

The Board notes in its preamble to the notice announcing the new commentary that Regulation Z would not be met if a consumer receives a copy of the disclosures to keep, not immediately, but within a reasonable time after consummation. The Board also notes that it is important for a consumer to receive a copy of the disclosures whether or not the consumer signs and becomes obligated, over objections from commenters about allowing consumers to be in possession of an unsigned contract. For instance, in the Board's own example, if after the consumer reviews the multi-copy contract containing the required disclosures, the consumer decides not to sign, the creditor presumably would be required to let the would-be consumer keep a copy of the unsigned contract. This may raise an inference that a particular offer remains open indefinitely.

The Board also noted that Comment 17(b)-3 is not intended to affect the rules governing the use of electronic communications under Regulation Z, which generally provide that a disclosure is in a form that can be kept if it can be downloaded and printed.

Business day. Generally, when consumers have a right to rescind a home-secured loan, they may exercise the right until midnight of the third business day following consummation or the delivery of certain disclosures, whichever occurs last. For purposes of rescission, section 226.2(a)(6) defines "business day" to mean all calendar days except Sundays and the federal legal holidays listed in 5 U.S.C. § 6103(a). Four of the ten holidays listed in the statute are identified by a specific date (New Year's Day, January 1; Independence Day, July 4; Veterans Day, November 11; Christmas Day, December 25). Comment 2(a)(6)-2 clarifies that for these four holidays, only the date specified in the statute is considered a legal holiday for purposes of rescission. Thus, if the date falls on a weekend, the Friday before the specified date or the Monday following it are considered business days even if government offices are closed in observance of the holiday.

Insurance and debt cancellation coverage. Under section 226.4(d), amounts paid for credit insurance or debt cancellation coverage may be excluded from the finance charge if the creditor discloses the fee or premium for the initial term of coverage, among other conditions. Comment 4(d)-12(i) clarifies that creditors have the option of providing disclosures on the basis of one year of coverage where the fee or premium for the coverage is assessed periodically and the consumer is under no obligation to continue the coverage. The revision clarifies that this option applies when the consumer can cancel the coverage, whether or not the consumer has made an initial payment.

The new and revised comments are effective immediately. For further information, contact David A. Stein, Senior Attorney, or Dan S. Sokolov, Attorney, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412.