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|(ITEM 5) XYZ CREDITOR |
(ITEM 2) I. M. Customer
640 Confusion Avenue
(ITEM 1) October 1, 2000
(ITEM 3) Acct. # 12345 Everywhere USA 00000
ANNUAL PERCENTAGE RATE
The cost of your credit as a yearly rate
The dollar amount the credit will cost you
Amount of credit provided to you or on your behalf
total of payments
The amount you will have paid when all payments are made on time
total sale price
The total cost of your purchase on credit including your down payment of
|You have the right to receive at this time an itemization of the Amount Finance (ITEM 7) or see reverse side for itemization of amount finance. |
____I want an itemization ____I do not want an itemization
|Your payment schedule will be: (ITEM 11)|
|Number of Payments||Amount of Payments||When Payments are Due|
|This obligation has a demand feature. (ITEM 13)|
|VARIABLE RATE (ITEM 10) Your loan contains a variable-rate feature. Disclosures about the variable-rate feature have been provided earlier, or The annual percentage rate may increase during the term of the transaction of (the circumstances . The rate may not increase (limitations) . Any increase will take the form of (effect) . If the interest rate increases (example) .|
|INSURANCE: (ITEM 18) Credit life insurance and credit disability insurance are not required to obtain credit and will not be provided unless you sign and agree to pay the additional cost.|
|Credit Life||I want credit life insurance_________________________|
|Credit Disability||I want credit disability insurance_____________________|
|Credit Life and Disability||I want credit life and disability insurance_______________|
|You may obtain property insurance from anyone you want that is acceptable to Creditor|
If you get the insurance from Creditor , you will pay $ .
|SECURITY: You are giving a security interest in ____________(ITEM 17), the goods or property being purchased. (brief description of property).|
|Filing fees $Non-filing insurance $(ITEM19)|
|LATE CHARGE: If a payment is late, you will be charged()|
|PREPAYMENT: If you pay off early, you: (ITEM 15) may will not have to pay a penalty.|
may will not be entitled to a refund of part of the finance charge
|ASSUMPTION: Someone buying your home cannot assume the remainder of the mortgage on the original terms. (ITEM 21)|
|REQUIRED DEPOSIT: The annual percentage rate does not take into account your required deposit. (ITEM 22)|
|See your contract documents for any additional information about nonpayment, default, any required repayment in full before the scheduled date, and prepayment refunds and penalties. (ITEM 20)|
|e means an estimate (ITEM 23)
I hereby acknowledge receipt of this disclosure. (ITEM 4)
See reverse side for itemization of amount financed(ITEM 7)
Itemization of the Amount Financed of $(ITEM 7)
$ Amount given to you directly
$ Amount paid on your account
Amount paid to others on your behalf
$ to public officials
$ Prepaid finance charge
An understanding of what must be disclosed, may be disclosed, and may not be disclosed in connection with closed-end credit transactions is essential. The key point of reference for this purpose is Subpart C, Sec. 226.18, Content of Disclosures. A guide is presented in the form of an illustrative disclosure containing 23 possible disclosure elements for closed-end credit transactions.
Information on these elements, including citations of the applicable sections of Reg. Z, is also provided in the explanatory overview accompanying the illustrative disclosure. Because the disclosure elements for closed-end credit are required only “as applicable,” it is highly unlikely that all of those shown will have to be taken into consideration.
The entire form is surrounded by a border in order to highlight the “federal box” concept. Although the border is not required, the required information must be segregated from all other information by some means. The elements shown are numbered with the explanation of the items given below.
It is permissible, however, to rearrange the elements in a different order. Lenders may develop multipurpose forms, which would cover more than one type of transaction, and use the designation “N/A” wherever a particular element is not necessary for a specific transaction.
Another important point: It must be kept in mind that the sample presented is not a “model form” per se but represents only an attempt to illustrate all of the disclosure elements.
(1) the date of the transaction,
(2) the customer's name and address,
(3) the customer's account number and
(4) an acknowledgment of receipt.
While all four items may be included within the federal box, there is no specific requirement that any appear at all, either inside or outside the box, as additional information.
The identity of the creditor making the disclosure is required, but this disclosure item may appear within the federal box or elsewhere. Further, this item may appear more conspicuously, i.e., in larger print or perhaps through the use of a logo, than the annual percentage rate and finance charge disclosures.
The amount financed in dollars, along with a “descriptive explanation” similar to the one shown, must appear within the federal box. Because the amount financed is such an important disclosure element and is interrelated to all the other numerical disclosures, the regulation contains a mathematical routine for determining this item:
1.The procedure generally is to take the principal amount of the loan or the cash price of the item being sold and financed and then subtract any downpayment.
2.To this remaining amount is added any other creditor-financed items which are not part of the finance charge or are already not included in the #1. For example, the cost of certain allowable insurance coverages might be added to the transaction after other details are worked out.
3. From this sum would be deducted the amount of the prepaid finance charge.
Of all the optional or required truth-in-lending items, this is the only one which may not appear inside the federal box. Creditors are faced with two options. One is to give the consumer the alternative of requesting amount financed itemization, expressing this option in the federal box. The other is to automatically provide an itemization of amount financed outside the federal box. As a result, the sample shown lists Item 7 twice, once illustrating the optional feature and once again showing the elements which would comprise the required disclosure.
Most lenders will probably choose to provide the amount financed itemization automatically, owing to the practical difficulties of complying with a customer's request for this information at the time disclosure is otherwise provided.
The general approach to itemization requires “breaking up” the total amount into the various components shown. Where amounts are paid to parties other than public officials or government agencies, credit reporting agencies, appraisers and insurance companies, these parties must be named.
Flexibility is permitted for providing additional information in the itemization, enabling disclosures of amounts which technically are not part of the amount financed. In some instances, nonfinance charge items such as appraisal fees, title costs, and so forth may be paid out of pocket rather than financed and included in the loan amount, where they would become part of the amount financed. Consumers might, therefore, become confused if any of these costs are listed in the “Amount paid to others . . .” portions of the amount financed itemization section of the sample form, in large part because the sum of the amounts listed would not likely equal the amount financed. Consequently, many lenders probably will not use the regulatory flexibility provided but instead will choose to itemize only the elements which specifically fall within the strict definition of the amount financed
Charges added to amounts paid to other. A sum is sometimes added to the amount of a fee charged to a consumer for a service provided by a third party (such as for an extended warranty or a service contract) that is payable in the same amount in comparable cash and credit transactions. In the credit transaction, the amount is retained by the creditor. Given the flexibility permitted in meeting the requirements of the amount financed itemized, the creditor in such cases should reflect that the creditor has retained a portion of the amount paid to others. For example, the creditor should add to the category "amount paid to others" language such as "(we will be retaining a portion of this/these amount/s)."
The sum of the amount financed disclosure itself and the prepaid finance charge will usually equal the sum of the amounts shown in the other portions of the itemization. The prepaid finance charge, either as a total or itemized, must always be shown on the itemization.
Finally, for the broad category of transactions subject to the Real Estate Settlement Procedures Act, the amount financed itemization is not required as long as the RESPA-required good faith estimates of settlement costs are provided .
This element must be disclosed as a total within the federal box and may not be itemized. A descriptor, such as the one shown, must also be included. The amount includes not only the total of any finance charges paid after the loan is closed and through maturity, but also any prepaid finance charges.
On closed-end transactions secured by real estate or a dwelling consummated on or after 09/01/95, has a tolerance of $100 for understated finance charges and an absolute tolerance for overstated finance charges. The tolerances permitted remain in place for all other closed-end credit transactions. (Minimal allowable “tolerance” for inaccuracy is permitted, i.e., + or - $5 where the transaction involves an amount financed of $1,000 or less and + or - $10 where the amount financed is greater than $1,000.)
The finance charge must be disclosed more conspicuously, which the sample accomplishes by using both larger and bolder type face.
The annual percentage rate must be disclosed, using a descriptor similar to the one shown in the sample form. Like the finance charge, the APR disclosure must be more conspicuous (although these two items could be the same in the degree of conspicuousness), as is illustrated by the sample's bold and larger type face.
The APR disclosed must be within the allowable tolerance of .125% for regular transactions and .25% on irregular transactions of the computed APR.
For any transaction involving a finance charge of $5.00 or less on an amount financed of $75 or less, or a finance charge of $7.50 or less on an amount financed of more than $75, the creditor need not disclose the APR.
If the annual percentage rate may increase after consummation in a transaction not secured by the consumer’s principal dwelling or in a transaction secured by the consumer’s principal dwelling with a term of one year or less, the following disclosures:
1. the circumstances for an increase;
2. any limitation on these circumstances;
3. the effect, such as in the form of a payment change, change in maturity, final payment change or any combination of these; and
4. an example of the payment terms that would result from an increase. The example, however, may be provided separately outside the federal box should the creditor choose to do so.
These facts must be shown inside the federal box as a variable rate disclosure. I
If the annual percentage rate may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, the disclosures must be provided at the time an application form is provided or before the consumer pays a nonrefundable fee, whichever is earlier. The following disclosures are to be included in the federal box:
1. The fact that the transaction contains a variable-rate feature.
2. A statement that variable-rate disclosures have been provided earlier.
The key to determining whether these disclosure elements are applicable to a particular transaction revolves around whether an APR rate increase may be incurred. Thus, generally falling within this requirement are renegotiable rate mortgage instruments, most shared appreciation mortgages, preferred rate employee loans for which the legal obligation reflects the preferred rate for as long as the employee works for the creditor, “buy-down” loans which also have a variable rate feature, and so forth.
Importantly, where a variable rate feature does exist, the descriptive explanation or the terms finance charge, total of payments, and annual percentage rate may be amended by adding a phrase such as “which is subject to change.” This would alert the consumer to the effects of the variable rate on the numerical elements disclosed.
Finally, from a computational standpoint, the finance charge, total or payments, annual percentage rate payment schedule, and so forth are computed as if the contract rate in effect at the time of consummation.
Any adjustable rate mortgage loan originated by a creditor must include a limitation on the maximum interest rate that may apply during the term of the loan.
The borrower’s payment schedule also must be disclosed. The specific payment shown must include not only the repayment of principal but also all elements of any finance charge imposed.
It is permissible to include additional amounts scheduled for payment of nonfinance charge items such as tax and insurance escrows (which are not included in the basic obligation) and credit insurance monthly premiums
In transactions where the obligation calls for a number of different-size payments, abbreviateddisclosures are permissible. For example, for a graduated payment mortgage which also involves a finance charge in the form of credit insurance, it would be permissible to disclose specifically the size of the more substantial payment increases during the initial periods when payment changes would be of considerable size. For later periods, the creditor could disclose the highest and lowest payments which would occur during the latter part of the life of the loan, when changes would be much smaller owing to the existence only of the mortgage insurance premium.
The size and number of payments, as well as the specific dates when they would be due, must be shown. Special rules apply for deferred down-payments and demand obligations. In the event an abbreviated disclosure is used, however, the actual amounts of all payments still must be taken into account when providing the other numerical disclosures.
The total of payments must be disclosed using that term, along with a descriptive phrase. The total of payment is the sum of the payments disclosed. Creditors may omit disclosure of the total of payments in single-payment transactions. This exception does not apply to a transaction calling for a single payment of principal combined with periodic payments of interest. In demand obligations with no alternate maturity date, the creditor may omit disclosure of payment amounts. In those transactions, the creditor need not disclose the total of payments.
In cases where the payment schedule contains payment amounts outside the finance charge and the amount financed, the total of the finance charge and the amount financed will not equal the total of payments.
If the obligation has a demand feature, this must be disclosed. Model clauses are provided in Appendix H 5 of Regulation Z.
In a credit sale, the total sale price must be disclosed. The amount is the sum of the cash price, any other amounts financed and the finance charge. This disclosure would be applicable not only when vendors are selling and financing goods or services, but also when a lender might be selling and financing repossessed or foreclosed property. However, to the extent that a lender might engage in the sale of incidental goods or services such as insurance in connection with a basic lending transaction, this disclosure would not be necessary. The description shown is the Federal Reserve’s.
This disclosure element combines two previous ones relating to prepayment penalties and rebates of unearned finance charges. For all loans, at least one and perhaps two specific disclosures may now be required. For simple interest transactions where the finance charge is computed each period on the outstanding balance, a definitive statement must be made to disclose whether the consumer will or will not have to pay any type of penalty upon prepayment in full. Items which are penalties include, for example:
1. Interest charges for any period after prepayment in full is made.
2. A minimum finance charge.
For other types of transactions, i.e., those involving precomputed finance charges, a statement must be made as to whether the consumer will be entitled to a refund of part of the finance charge in the event of prepayment.
Some types of transactions, such as mortgage loans, contain both types of finance charges. As a result, both disclosures would be necessary, one pertaining to the simple interest portion and the other relating to the precomputed portion usually encompassing the prepaid finance charge, an item ordinarily not refunded in the event of prepayment.
The language shown, which is the Federal Reserve’s, might be amended as a “directly related” to highlight a policy of no refunds with respect to the prepaid finance charge (i.e., “will not” ). As is usually the case, this would distinguish the policy from one of only charging the consumer “simple” interest to the date of prepayment and not charging, i.e., “refunding,” the remaining interest which might have been charged from prepayment through the remaining contemplated life of the loan. The reason is that this remainder is always included in the total finance charge disclosed but would not, of course, be collected upon prepayment.
The regulation requires disclosure of the late charge imposed, if any. The Federal Reserve's language shown refers only to a specific additional charge which may be imposed in dollars or as a percent, or both, on transactions which the creditor otherwise considers ongoing obligations. A grace period, if any, could also be mentioned as “directly related” information. The disclosure should refer, however, only to these types of charges, not others which might arise in arise in the event of serious delinquency, the right of acceleration, the imposition of collection costs, continued accrual of interest at the contract rate and so forth.
A description of the creditor's security interest must also be provided. The language suggested by the Federal Reserve is very brief. Further, in the definition of security interest, the Federal Reserve has taken great pains to delineate between security interests which are disclosable and those which are not. Thus, in a loan secured by the customer's home, the terms “lien,” “mortgage” or “deed of trust” might be substituted for the “security interest” language shown, and “your home” might be substituted for “the goods or property being purchased.”
Other less direct security interests might exist, often as a matter of contract law. These might include incidental interests, interests in after- acquired property and those arising solely by operation of state law. Generally, however, these interests are considered by the Fed as not being disclosable security interests. Therefore, they would not trigger the need for this disclosure nor would it be permissible to refer to them on the form.
In accordance with the regulation, the disclosure can state that the transaction is “unsecured” or “not secured” to the extent that no security interest exists.
When certain insurance coverages other than property insurance are written in connection with a credit transaction, exempting the costs of such insurance from the finance charge is permitted if the coverages are not required and specific disclosures are adhered to. To the extent that any such insurance is not written in connection with the transaction, the disclosures obviously would not be applicable. However, if the contractual relationship does require property insurance coverage, that fact must be disclosed, even if such coverage is not available through the creditor.
Importantly, it is permissible for the insurance disclosures to appear outside the federal box . Many creditors may use this option in order to provide a more complete disclosure of all the aspects surrounding insurance coverages. Another reason for using this option is that the illustrative language of the Federal Reserve, shown in the sample, seems to suggest that a borrower's affirmative indication of the desire for coverage as listed will require the creditor to provide coverage, a source of litigation in recent years.
This item arises because of the specific requirements that certain types of security interest charges be disclosed in order for them to be exempt from the finance charge. While the Federal Reserve's sample illustrates filing fees or nonfiling insurance typical of consumer credit transactions, these and similar items such as taxes and recording fees could arise in real estate transactions. Properly listed, the items would be exempt from the finance charge.
Again, such charges may be listed at the creditor's option elsewhere than in the federal box. For example, on transactions subject to RESPA, if these charges are disclosed when complying with RESPA, this is considered adequate compliance with the TIL disclosure requirement and the charges would not have to be disclosed again in this section of the form.
This disclosure is designed to alert consumers to the specific “contract,” “promissory note,” “retail installment sales contract” or whatever other legal document spells out in detail other provisions of the transaction.
Applicable only to a residential mortgage transaction, i.e., purchase, this item requires the creditor to provide a definitive statement of whether a subsequent purchaser of the home can assume the remaining obligation “on its original terms.”
If a required deposit exists, the Federal Reserve’s disclosure illustrated must be made. However, as stated, the deposit is not taken into account in computing the Annual Percentage Rate.
Examples of items the regulation excludes from the definition of a required definition are deposits earning at least 5% interest, escrow accounts, funds deposited with the creditor for disbursement in connection with a loan and some minimum balance requirements.
This item reflects the use of estimates, if applicable, for a transaction. The lower case “e” may be used with respect to any one or more of the numerical disclosures if accurate information is unknown when the disclosure is being provided. Where a substantial number of disclosures must be estimated, the lender may use a general phrase such as “all numerical disclosures are estimates” in lieu of labeling each element. The use of estimates is more likely to arise and be extensive in connection with transactions requiring advance disclosure.
Many mathematical elements, annual percentage rate, finance charge, amount financed, total of payments and payment schedule, are interrelated, so that estimating one aspect almost necessarily dictates that others be estimated also.