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The Law Offices of Michael D. Stewart
TheMiamiLaw.com
305-590-8909
866-438-6574

Consumer Purpose under TILA

When determining whether credit is for consumer purposes, the creditor must evaluate all of
the following:
? Any statement obtained from the consumer describing the purpose of the proceeds.
– For example, a statement that the proceeds will be used for a vacation trip would
indicate a consumer purpose.
– If the loan has a mixed-purpose (e.g., proceeds will be used to buy a car that will be
used for personal and business purposes), the lender must look to the primary
purpose of the loan to decide whether disclosures are necessary. A statement of
purpose from the consumer will help the lender make that decision.
– A checked box indicating that the loan is for a business purpose, absent any
documentation showing the intended use of the proceeds, could be insufficient
evidence that the loan did not have a consumer purpose.
? The consumer’s primary occupation and how it relates to the use of the proceeds. The
higher the correlation between the consumer’s occupation and the property purchased
from the loan proceeds, the greater the likelihood that the loan has a business purpose.
For example, proceeds used to purchase dental supplies for a dentist would indicate a
business purpose.
? Personal management of the assets purchased from proceeds. The lower the degree of
the borrower’s personal involvement in the management of the investment or enterprise
purchased by the loan proceeds, the less likely the loan will have a business purpose.
For example, money borrowed to purchase stock in an automobile company by an
individual who does not work for that company would indicate a personal investment
and a consumer purpose.
? The size of the transaction. The larger the size of the transaction, the more likely the
loan will have a business purpose. For example, if the loan is for a $5,000,000 real
estate transaction, that might indicate a business purpose.
? The amount of income derived from the property acquired by the loan proceeds relative
to the borrower’s total income. The lesser the income derived from the acquired
property, the more likely the loan will have a consumer purpose. For example, if the
borrower has an annual salary of $100,000 and receives about $500 in annual dividends
from the acquired property, that would indicate a consumer purpose.
All five factors must be evaluated before the lender can conclude that disclosures are not
necessary. Normally, no one factor, by itself, is sufficient reason to determine the
applicability of Regulation Z. In any event, the financial institution may routinely furnish
disclosures to the consumer. Disclosure under such circumstances does not control whether
the transaction is covered, but can assure protection to the financial institution and
compliance with the law.

The Law Offices of Michael D. Stewart
TheMiamiLaw.com
305-590-8909
866-438-6574

Truth in Lending Act

Subpart A – General
Purpose of the TILA and Regulation Z
The Truth in Lending Act is intended to ensure that credit terms are disclosed in a
meaningful way so consumers can compare credit terms more readily and knowledgeably.
Before its enactment, consumers were faced with a bewildering array of credit terms and
rates. It was difficult to compare loans because they were seldom presented in the same
format. Now, all creditors must use the same credit terminology and expressions of rates. In
addition to providing a uniform system for disclosures, the act is designed to:
? Protect consumers against inaccurate and unfair credit billing and credit card practices;
? Provide consumers with rescission rights;
? Provide for rate caps on certain dwelling-secured loans; and
? Impose limitations on home equity lines of credit and certain closed-end home
mortgages.

The Law Offices of Michael D. Stewart
TheMiamiLaw.com
305-590-8909
866-438-6574

Format of Regulation Z

Format of Regulation Z
The disclosure rules creditors must follow differ depending on whether the creditor is
offering open-end credit, such as credit cards or home-equity lines, or closed-end credit,
such as car loans or mortgages.
Subpart A (sections 226.1 through 226.4) of the regulation provides general information
that applies to open-end and closed-end credit transactions. It sets forth definitions and
stipulates which transactions are covered and which are exempt from the regulation. It also
contains the rules for determining which fees are finance charges.
Subpart B (sections 226.5 through 226.16) of the regulation contains rules for disclosures
for home-equity loans, credit and charge card accounts, and other open-end credit.
Subpart B also covers rules for resolving billing errors, calculating annual percentage rates,
credit balances, and advertising open-end credit. Special rules apply to credit card
transactions only, such as certain prohibitions on the issuance of credit cards and
restrictions on the right to offset a cardholder’s indebtedness. Additional special rules apply
to home-equity lines of credit, such as certain prohibitions against closing accounts or
changing account terms.
Subpart C (sections 226.17 through 226.24) includes provisions for closed-end credit.
Residential mortgage transactions, demand loans, and installment credit contracts, including
direct loans by banks and purchased dealer paper, are included in the closed-end credit
category. Subpart C also contains disclosure rules for regular and variable rate loans,
refinancings and assumptions, credit balances, calculating annual percentage rates, and
advertising closed-end credit.
Subpart D (sections 226.25 through 226.30), which applies to both open-end and closed-end
credit, sets forth the duty of creditors to retain evidence of compliance with the regulation.
It also clarifies the relationship between the regulation and state law, and requires creditors
to set a cap for variable rate transactions secured by a consumer’s dwelling.
Subpart E (sections 226.31 through 226.34) applies to certain home mortgage transactions
including high-cost, closed-end mortgages and reverse mortgages. It requires additional
disclosures and provides limitations for certain home mortgage transactions having rates or
2 72 FR 63462, November 9, 2007. These amendments took effect December 10, 2007, with a mandatory compliance
date of October 1, 2008. Further technical amendments were issued December 14, 2007, with a January 14, 2008
effective date and an October 1, 2008 mandatory compliance date: 72 FR 71058.
3
fees above a certain percentage or amount, and prohibits specific acts and practices in
connection with those loans. Subpart E also includes disclosure requirements for reverse
mortgage transactions (open-end and closed-end credit).
The appendices to the regulation set forth model forms and clauses that creditors may use
when providing open-end and closed-end disclosures. The appendices contain detailed rules
for calculating the APR for open-end credit (appendix F) and closed-end credit (appendixes
D and J). The last two appendixes (appendixes K and L) provide total annual loan cost rate
computations and assumed loan periods for reverse mortgage transactions.
Official staff interpretations of the regulation are published in a commentary that is
normally updated annually in March. Good faith compliance with the commentary protects
creditors from civil liability under the act. In addition, the commentary includes mandates,
which are not necessarily explicit in Regulation Z, on disclosures or other actions required
of creditors. It is virtually impossible to comply with Regulation Z without reference to and
reliance on the commentary.

The Law Offices of Michael D. Stewart
TheMiamiLaw.com
305-590-8909
866-438-6574

The Home Ownership and Equity Protection Act of 1994

The Home Ownership and Equity Protection Act of 1994 amended TILA. The law imposed
new disclosure requirements and substantive limitations on certain closed-end mortgage
loans bearing rates or fees above a certain percentage or amount. The law also included new
disclosure requirements to assist consumers in comparing the costs and other material
considerations involved in a reverse mortgage transaction and authorized the Federal
Reserve Board to prohibit specific acts and practices in connection with mortgage
transactions. Regulation Z was amended1 to implement these legislative changes to TILA.

The Law Offices of Michael D. Stewart
TheMiamiLaw.com
305-590-8909
866-438-6574

Truth and Lending Act – Regulation Z

This is the html version of the file http://www.federalreserve.gov/boarddocs/caletters/2008/0805/08-05_attachment1.pdf.

Page 1
1
Regulation Z
Truth in Lending
Introduction
Background and Summary
The Truth in Lending Act (TILA), 15 USC 1601 et seq., was enacted on May 29, 1968, as
title I of the Consumer Credit Protection Act (Pub. L. 90-321). The TILA, implemented by
Regulation Z (12 CFR 226), became effective July 1, 1969.
The TILA was first amended in 1970 to prohibit unsolicited credit cards. Additional major
amendments to the TILA and Regulation Z were made by the Fair Credit Billing Act of
1974, the Consumer Leasing Act of 1976, the Truth in Lending Simplification and Reform
Act of 1980, the Fair Credit and Charge Card Disclosure Act of 1988, the Home Equity
Loan Consumer Protection Act of 1988.
Regulation Z also was amended to implement section 1204 of the Competitive Equality
Banking Act of 1987, and in 1988, to include adjustable rate mortgage loan disclosure
requirements. All consumer leasing provisions were deleted from Regulation Z in 1981 and
transferred to Regulation M (12 CFR 213).
The Home Ownership and Equity Protection Act of 1994 amended TILA. The law imposed
new disclosure requirements and substantive limitations on certain closed-end mortgage
loans bearing rates or fees above a certain percentage or amount. The law also included new
disclosure requirements to assist consumers in comparing the costs and other material
considerations involved in a reverse mortgage transaction and authorized the Federal
Reserve Board to prohibit specific acts and practices in connection with mortgage
transactions. Regulation Z was amended
1
to implement these legislative changes to TILA.
The TILA amendments of 1995 dealt primarily with tolerances for real estate secured
credit. Regulation Z was amended on September 14, 1996 to incorporate changes to the
TILA. Specifically, the revisions limit lenders’ liability for disclosure errors in real estate
secured loans consummated after September 30, 1995. The Economic Growth and
Regulatory Paperwork Reduction Act of 1996 further amended TILA. The amendments
were made to simplify and improve disclosures related to credit transactions.
The Electronic Signatures in Global and National Commerce Act (the E-Sign Act), 15
U.S.C. 7001 et seq., was enacted in 2000 and did not require implementing regulations. On
November 9, 2007, the amendments to Regulation Z and the official staff commentary were
1
60 FR 15463, March 24, 1995 and 66 FR 65604, December 20, 2001.
Page 2
2
issued to simplify the regulation and provide guidance on the electronic delivery of
disclosures consistent with the E-Sign Act.
2
Format of Regulation Z
The disclosure rules creditors must follow differ depending on whether the creditor is
offering open-end credit, such as credit cards or home-equity lines, or closed-end credit,
such as car loans or mortgages.
Subpart A (sections 226.1 through 226.4) of the regulation provides general information
that applies to open-end and closed-end credit transactions. It sets forth definitions and
stipulates which transactions are covered and which are exempt from the regulation. It also
contains the rules for determining which fees are finance charges.
Subpart B (sections 226.5 through 226.16) of the regulation contains rules for disclosures
for home-equity loans, credit and charge card accounts, and other open-end credit.
Subpart B also covers rules for resolving billing errors, calculating annual percentage rates,
credit balances, and advertising open-end credit. Special rules apply to credit card
transactions only, such as certain prohibitions on the issuance of credit cards and
restrictions on the right to offset a cardholder’s indebtedness. Additional special rules apply
to home-equity lines of credit, such as certain prohibitions against closing accounts or
changing account terms.
Subpart C (sections 226.17 through 226.24) includes provisions for closed-end credit.
Residential mortgage transactions, demand loans, and installment credit contracts, including
direct loans by banks and purchased dealer paper, are included in the closed-end credit
category. Subpart C also contains disclosure rules for regular and variable rate loans,
refinancings and assumptions, credit balances, calculating annual percentage rates, and
advertising closed-end credit.
Subpart D (sections 226.25 through 226.30), which applies to both open-end and closed-end
credit, sets forth the duty of creditors to retain evidence of compliance with the regulation.
It also clarifies the relationship between the regulation and state law, and requires creditors
to set a cap for variable rate transactions secured by a consumer’s dwelling.
Subpart E (sections 226.31 through 226.34) applies to certain home mortgage transactions
including high-cost, closed-end mortgages and reverse mortgages. It requires additional
disclosures and provides limitations for certain home mortgage transactions having rates or
2
72 FR 63462, November 9, 2007. These amendments took effect December 10, 2007, with a mandatory compliance
date of October 1, 2008. Further technical amendments were issued December 14, 2007, with a January 14, 2008
effective date and an October 1, 2008 mandatory compliance date: 72 FR 71058.
Page 3
3
fees above a certain percentage or amount, and prohibits specific acts and practices in
connection with those loans. Subpart E also includes disclosure requirements for reverse
mortgage transactions (open-end and closed-end credit).
The appendices to the regulation set forth model forms and clauses that creditors may use
when providing open-end and closed-end disclosures. The appendices contain detailed rules
for calculating the APR for open-end credit (appendix F) and closed-end credit (appendixes
D and J). The last two appendixes (appendixes K and L) provide total annual loan cost rate
computations and assumed loan periods for reverse mortgage transactions.
Official staff interpretations of the regulation are published in a commentary that is
normally updated annually in March. Good faith compliance with the commentary protects
creditors from civil liability under the act. In addition, the commentary includes mandates,
which are not necessarily explicit in Regulation Z, on disclosures or other actions required
of creditors. It is virtually impossible to comply with Regulation Z without reference to and
reliance on the commentary.
NOTE: The following narrative does not encompass all the sections of Regulation Z,
but rather highlights areas that have caused the most problems with the calculation of
the finance charge and the calculation of the annual percentage rate.
Subpart A – General
Purpose of the TILA and Regulation Z
The Truth in Lending Act is intended to ensure that credit terms are disclosed in a
meaningful way so consumers can compare credit terms more readily and knowledgeably.
Before its enactment, consumers were faced with a bewildering array of credit terms and
rates. It was difficult to compare loans because they were seldom presented in the same
format. Now, all creditors must use the same credit terminology and expressions of rates. In
addition to providing a uniform system for disclosures, the act is designed to:
? Protect consumers against inaccurate and unfair credit billing and credit card practices;
? Provide consumers with rescission rights;
? Provide for rate caps on certain dwelling-secured loans; and
? Impose limitations on home equity lines of credit and certain closed-end home
mortgages.
Page 4
4
The TILA and Regulation Z do not, however, tell financial institutions how much interest
they may charge or whether they must grant a consumer a loan.
Summary of Coverage Considerations

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TheMiamiLaw.com
305-590-8909
866-438-6574

FDIC

FDIC Law, Regulations, Related Acts

[Main Tabs] [Table of Contents – 5000] [Index] [Previous Page] [Next Page] [Search]

5000 – Statements of Policy

{{8-31-99 p.5049}}

ADMINISTRATIVE ENFORCEMENT OF THE TRUTH IN LENDING ACT?
RESTITUTION

Joint Statement of Policy

The Depository Institutions Deregulation and Monetary Control Act of 1980 (Pub. L. 96-221) was enacted on March 31, 1980. Title VI of that Act, the Truth in Lending Simplification and Reform Act, amends the Truth in Lending Act, 15 U.S.C. 1601, et seq. Section 608 of Title VI, effective March 31, 1980, authorizes the federal Truth in Lending enforcement agencies to order creditors to make monetary and other adjustments to the accounts of consumers where an annual percentage rate (APR) or finance charge was inaccurately disclosed. It generally requires the agencies to order restitution when such disclosure errors resulted from a clear and consistent pattern or practice of violations, gross negligence, or a willful violation which was intended to mislead the person to whom the credit was extended. However, the Act does not preclude the agencies from ordering restitution for isolated disclosure errors.
This policy guide summarizes and explains the restitution provisions of the Truth in Lending Act (Act), as amended. The material also explains corrective actions the financial regulatory agencies believe will be appropriate and generally intend to take in those situations in which the Act gives the agencies the authority to take equitable remedial action.
The agencies anticipate that most financial institutions will voluntarily comply with the restitution provisions of the Act as part of the normal regulatory process. If a creditor does not voluntarily act to correct violations, the agencies will use their cease and desist authority to require correction pursuant to: 15 U.S.C. 1607 and 12 U.S.C. 1818(b) in the cases of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision; 15 U.S.C. 1607 and 12 U.S.C. 1786(e)(1) in the case of the National Credit Union Administration.

Restitution Provisions

Definitions

Except as provided below, all definitions are those found in the Act and Regulation Z, 12 CFR Part 226.
1. “Current examination” means the most recent examination begun on or after March 31, 1980, in which compliance with Regulation Z was reviewed.
2. “Lump sum method” means a method of reimbursement in which a cash payment equal to the total adjustment will be made to a consumer.
3. “Lump sum/payment reduction method” means a method of reimbursement in which the total adjustment to a consumer will be made in two stages:
a. A cash payment that fully adjusts the consumer’s account up to the time of the cash payment; and,
b. A reduction of the remaining payment amounts on the loan.
4. “Understated APR” means a disclosed APR that is understated by more than the reimbursement tolerance provided in the Act 1 , as follows:
For loans 2 with an amortization schedule of 10 years or less, a disclosed APR which, when increased by the greater of the APR tolerance specified in the Act 3 and
{{8-31-99 p.5050}}Regulation Z 4 or one-quarter of one percent, is less than the actual APR calculated under the Act 5 .
For loans with an amortization schedule of more than 10 years, a disclosed APR which, when increased by the APR tolerance specified in the Act and Regulation Z (i.e., one-quarter of one percent for irregular loans, one-eighth of one percent for all other closed-end loans) is less than the actual APR 6 .
5. “Understated finance charge” means a disclosed finance charge which, when increased by the greater of the finance charge dollar tolerance specified in the Act and Regulation Z or a dollar tolerance that is generated by the corresponding APR reimbursement tolerance 7 , is less than the finance charge calculated under the Act.

De Minimis Rule

If the amount of adjustment on an account is less than $1.00, no restitution will be ordered. However, the agencies may require a creditor to make any adjustments of less than $1.00 by paying into the United States Treasury, if more than one year has elapsed since the date of the violation.

Corrective Action Period

1. Open-end credit transactions will be subject to an adjustment if the violation occurred within the two-year period preceding the date of the current examination.
2. Closed-end credit transactions will be subject to an adjustment if the violation resulted from a clear and consistent pattern or practice or gross negligence where:
a. There is an understated APR on a loan which originated between January 1, 1997 and March 31, 1980.
b. There is an understated APR or understated finance charge, and the practice giving rise to the violation is identified during the current examination. Loans containing the violation which were consummated since the date of the immediately preceding examination are subject to an adjustment.
c. There is an understated APR or understated finance charge, the practice giving rise to the violation was identified during a prior examination and the practice is not corrected by the date of the current examination. Loans containing the violation which were consummated since the creditor was first notified in writing of the violation are
{{8-31-99 p.5051}}subject to an adjustment. (Prior examinations include any examinations conducted since July 1, 1969).
3. Each closed-end credit transaction, consummated since July 1, 1969, and containing a willful violation intended to mislead the consumer is subject to an adjustment.
4. For terminated loans subject to 2, above, an adjustment will not be ordered if the violation occurred in a transaction consummated more than two years prior to the date of the current examination.

Calculating the Adjustment

Consumers will not be required to pay any amount in excess of the finance charge or dollar equivalent of the APR actually disclosed on transactions involving:
1. Understated APR violations on transactions consummated between January 1, 1977 and March 31, 1980, or
2. Willful violations which were intended to mislead the consumer.
On all other transactions, applicable tolerances provided in the definitions of understated APR and understated finance charge may be applied in calculating the amount of adjustment to the consumer’s account.

Methods of Adjustment

The consumer’s account will be adjusted using the lump sum method or the lump sum/payment reduction method, at the discretion of the creditor.

Violations Involving the Non-Disclosure of the APR or Finance Charge

1. In cases where an APR was required to be disclosed but was not, the disclosed APR shall be considered to be the contract rate, if disclosed on the note or the Truth in Lending disclosure statement.
2. In cases where an APR was required to be disclosed but was not, and no contract rate was disclosed, consumers will not be required to pay an amount greater than the actual APR reduced by one-quarter of one percentage point, in the case of first lien mortgage transactions, and by one percentage point in all other transactions.
3. In cases where a finance charge was not disclosed, no adjustment will be ordered.

Violations Involving the Improper Disclosure of Credit Life, Accident, Health, or Loss of Income Insurance

1. If the creditor has not disclosed to the consumer in writing that credit life, accident, health, or loss of income insurance is optional, the insurance shall be treated as having been required and improperly excluded from the finance charge. An adjustment will be ordered if it results in an understated APR or finance charge. The insurance will remain in effect for the remainder of its term.
2. If the creditor has disclosed to the consumer in writing that credit life, accident, health, or loss of income insurance is optional, but there is either no signed insurance option or no disclosure of the cost of the insurance, the insurance shall be treated as having been required and improperly excluded from the finance charge. An adjustment will be ordered if it results in an understated APR or finance charge. The insurance will remain in effect for the remainder of its term.

Special Disclosures

Adjustments will not be required for violations involving the disclosures required by sections 106(c) and (d) of the Act, (15 U.S.C.

The Law Offices of Michael D. Stewart
TheMiamiLaw.com
305-590-8909
866-438-6574