2(a)(2)
Advertisement 1. Coverage. Only commercial messages that promote consumer credit
transactions requiring disclosures are advertisements. Messages inviting,
offering, or otherwise announcing generally to prospective customers
the availability of credit transactions, whether in visual, oral,
or print media, are covered by Regulation Z (12 CFR part 1026).
i. Examples include:
A. Messages in a newspaper, magazine,
leaflet, promotional flyer, or catalog.
B. Announcements on radio, television,
or public address system.
C. Electronic advertisements, such as
on the Internet.
D. Direct mail literature or other printed material on any exterior
or interior sign.
E. Point of sale displays.
F. Telephone solicitations.
G. Price tags that contain
credit information.
H. Letters sent to customers or potential customers as part of an
organized solicitation of business.
I. Messages on checking account statements
offering auto loans at a stated annual percentage rate.
J. Communications promoting
a new open-end plan or closed-end transaction.
ii. The term does not include:
A. Direct personal contacts,
such as follow-up letters, cost estimates for individual consumers,
or oral or written communication relating to the negotiation of a
specific transaction.
B. Informational material, for example, interest-rate and loan-term
memos, distributed only to business entities.
C. Notices required by Federal or state
law, if the law mandates that specific information be displayed and
only the information so mandated is included in the notice.
D. News articles the use
of which is controlled by the news medium.
E. Market-research or educational materials
that do not solicit business.
F. Communications about an existing
credit account (for example, a promotion encouraging additional or
different uses of an existing credit card account).
2. Persons covered. All persons must comply with the advertising provisions in sections
1026.16 and 1026.24, not just those that meet the definition of creditor
in section 1026.2(a)(17). Thus, home builders, merchants, and others
who are not themselves creditors must comply with the advertising
provisions of the regulation if they advertise consumer credit transactions.
However, under section 145 of the Act, the owner and the personnel
of the medium in which an advertisement appears, or through which
it is disseminated, are not subject to civil liability for violations.
2(a)(3) Application 1. In general. An
application means the submission of a consumer’s financial information
for purposes of obtaining an extension of credit. For transactions
subject to section 1026.19(e), (f), or (g) of this part, the term
consists of the consumer’s name, the consumer’s income,
the consumer’s social security number to obtain a credit report,
the property address, an estimate of the value of the property, and
the mortgage loan amount sought. This definition does not prevent
a creditor from collecting whatever additional information it deems
necessary in connection with the request for the extension of credit.
However, once a creditor has received these six pieces of information,
it has an application for purposes of the requirements of Regulation
Z. A submission may be in written or electronic format and includes
a written record of an oral application. The following examples for
a transaction subject to section 1026.19(e), (f), or (g) are illustrative
of this provision:
i. Assume a creditor provides a consumer
with an application form containing 20 questions about the consumer’s
credit history and the collateral value. The consumer submits answers
to nine of the questions and informs the creditor that the consumer
will contact the creditor the next day with answers to the other 11
questions. Although the consumer provided nine pieces of information,
the consumer did not provide a social security number. The creditor
has not yet received an application for purposes of section 1026.2(a)(3).
ii. Assume a creditor
requires all applicants to submit 20 pieces of information. The consumer
submits only six pieces of information and informs the creditor that
the consumer will contact the creditor the next day with answers to
the other 14 questions. The six pieces of information provided by
the consumer were the consumer’s name, income, social security
number, property address, estimate of the value of the property, and
the mortgage loan amount sought. Even though the creditor requires
14 additional pieces of information to process the consumer’s
request for a mortgage loan, the creditor has received an application
for the purposes of section 1026.2(a)(3) and therefore must comply
with the relevant requirements under section 1026.19.
2. Social security number
to obtain a credit report. If a consumer does not have a social
security number, the creditor may substitute whatever unique identifier
the creditor uses to obtain a credit report on the consumer. For example,
a creditor has obtained a social security number to obtain a credit
report for purposes of section 1026.2(a)(3)(ii) if the creditor collects
a Tax Identification Number from a consumer who does not have a social
security number, such as a foreign national.
3. Receipt of credit report fees. Section
1026.19(a)(1)(iii) permits the imposition of a fee to obtain the consumer’s
credit history prior to the delivery of the disclosures required
under section 1026.19(a)(1)(i). Section 1026.19(e)(2)(i)(B) permits
the imposition of a fee to obtain the consumer’s credit report
prior to the delivery of the disclosures required under section 1026.19(e)(1)(i).
Whether, or when, such fees are received does not affect whether an
application has been received for the purposes of the definition in
section 1026.2(a)(3) and the timing requirements in section 1026.19(a)(1)(i)
and (e)(1)(iii). For example, if, in a transaction subject to section
1026.19(e)(1)(i), a creditor receives the six pieces of information
identified under section 1026.2(a)(3)(ii) on Monday, June 1, but does
not receive a credit report fee from the consumer until Tuesday, June
2, the creditor does not comply with section 1026.19(e)(1)(iii) if
it provides the disclosures required under section 1026.19(e)(1)(i)
after Thursday, June 4. The three-business-day period beings on Monday,
June 1, the date the creditor received the six pieces of information.
The waiting period does not begin on Tuesday, June 2, the date the
creditor received the credit report fee.
6-6161.6
2(a)(4) Billing Cycle or Cycle 1. Intervals. In open-end credit plans,
the billing cycle determines the intervals for which periodic disclosure
statements are required; these intervals are also used as measuring
points for other duties of the creditor. Typically, billing cycles
are monthly, but they may be more frequent or less frequent (but not
less frequent than quarterly).
2. Creditors that do not bill. The term cycle
is interchangeable with billing cycle for definitional purposes, since
some creditors’ cycles do not involve the sending of bills in
the traditional sense but only statements of account activity. This
is commonly the case with financial institutions when periodic payments
are made through payroll deduction or through automatic debit of the
consumer’s asset account.
3. Equal cycles. Although cycles must be equal,
there is a permissible variance to account for weekends, holidays,
and differences in the number of days in months. If the actual date
of each statement does not vary by more than four days from a fixed
“day” (for example, the third Thursday of each month)
or “date” (for example, the 15th of each month) that the
creditor regularly uses, the intervals between statements are considered
equal. The requirement that cycles be equal applies even if the creditor
applies a daily periodic rate to determine the finance charge. The
requirement that intervals be equal does not apply to the first billing
cycle on an open-end account (i.e., the time period between account
opening and the generation of the first periodic statement) or to
a transitional billing cycle that can occur if the creditor occasionally
changes its billing cycles so as to establish a new statement day
or date. (See comments 9(c)(1)-3 and 9(c)(2)-3.)
4. Payment reminder. The
sending of a regular payment reminder (rather than a late payment
notice) establishes a cycle for which the creditor must send periodic
statements.
6-6161.7
2(a)(6) Business Day 1. Business function test. Activities that indicate that the creditor is open for substantially
all of its business functions include the availability of personnel
to make loan disbursements, to open new accounts, and to handle credit
transaction inquiries. Activities that indicate that the creditor
is not open for substantially all of its business functions include
a retailer’s merely accepting credit cards for purchases or
a bank’s having its customer-service windows open only for limited
purposes such as deposits and withdrawals, bill paying, and related
services.
2. Rule for
rescission, disclosures for certain mortgage transactions, and private
education loans. A more precise rule for what is a business day
(all calendar days except Sundays and the Federal legal holidays specified
in 5 U.S.C. 6103(a)) applies when the right of rescission, the receipt
of disclosures for certain dwelling- or real estate-secured mortgage
transactions under sections 1026.19(a)(1)(ii), 1026.19(a)(2), 1026.19(e)(1)(iii)(B),
1026.19(e)(1)(iv), 1026.19(e)(2)(i)(A), 1026.19(e)(4)(ii), 1026.19(f)(1)(ii),
1026.19(f)(1)(iii), 1026.20(e)(5), 1026.31(c), or the receipt of disclosures
for private education loans under section 1026.46(d)(4) is involved.
Four Federal legal holidays are identified in 5 U.S.C. 6103(a) by
a specific date: New Year’s Day, January 1; Independence Day,
July 4; Veterans Day, November 11; and Christmas Day, December 25.
When one of these holidays (July 4, for example) falls on a Saturday,
Federal offices and other entities might observe the holiday on the
preceding Friday (July 3). In cases where the more precise rule applies,
the observed holiday (in the example, July 3) is a business day.
2(a)(7) Card Issuer 1. Agent.
i. An agent of a card issuer is considered
a card issuer. Except as provided in comment 2(a)(7)-1.ii, because
agency relationships are traditionally defined by contract and by
state or other applicable law, the regulation does not define agent.
Merely providing services relating to the production of credit cards
or data processing for others, however, does not make one the agent
of the card issuer. In contrast, a financial institution may become
the agent of the card issuer if an agreement between the institution
and the card issuer provides that the cardholder may use a line of
credit with the financial institution to pay obligations incurred
by use of the credit card.
ii. Under section 1026.2(a)(7), with respect
to a covered separate credit feature accessible by a hybrid prepaid-credit
card as defined in section 1026.61 where that credit feature is offered
by an affiliate or business partner of the prepaid account issuer
as those terms are defined in section 1026.61, the affiliate or business
partner offering the credit feature is an agent of the prepaid account
issuer and thus, is itself a card issuer with respect to the hybrid
prepaid-credit card.
2. Prepaid cards that are not hybrid prepaid-credit
cards. See section 1026.61(a) and comments 61(a)(2)-5.iii
and 61(a)(4)-1.iv for guidance on the applicability of this regulation
in connection with credit accessible by prepaid cards that are not
hybrid prepaid-credit cards.
6-6161.8
2(a)(8) Cardholder 1. General rule. A cardholder is a natural
person at whose request a card is issued for consumer credit purposes
or who is a co-obligor or guarantor for such a card issued to another.
The second category does not include an employee who is a co-obligor
or guarantor on a card issued to the employer for business purposes,
nor does it include a person who is merely the authorized user of
a card issued to another.
2. Limited application of regulation. For
the limited purposes of the rules on issuance of credit cards and
liability for unauthorized use, a cardholder includes any person,
including an organization, to whom a card is issued for any purpose—including
a business, agricultural, or commercial purpose.
3. Issuance. See the commentary
to section 1026.12(a).
4. Dual-purpose cards and dual-card systems. Some card issuers
offer dual-purpose cards that are for business as well as consumer purposes.
If a card is issued to an individual for consumer purposes, the fact
that an organization has guaranteed to pay the debt does not make
it business credit. On the other hand, if a card is issued for business
purposes, the fact that an individual sometimes uses it for consumer
purchases does not subject the card issuer to the provisions on periodic
statements, billing-error resolution, and other protections afforded
to consumer credit. Some card issuers offer dual-card systems—that
is, they issue two cards to the same individual, one intended for
business use, the other for consumer or personal use. With such a
system, the same person may be a cardholder for general purposes when
using the card issued for consumer use, and a cardholder only for
the limited purposes of the restrictions on issuance and liability
when using the card issued for business purposes.
6-6161.9
2(a)(9) Cash Price 1. Components. This amount
is a starting point in computing the amount financed and the total
sale price under section 1026.18 for credit sales. Any charges imposed
equally in cash and credit transactions may be included in the cash
price, or they may be treated as other amounts financed under section
1026.18(b)(2).
2. Service
contracts. Service contracts include contracts for the repair
or the servicing of goods, such as mechanical breakdown coverage,
even if such a contract is characterized as insurance under state
law.
3. Rebates. The creditor has complete flexibility in the way it treats rebates
for purposes of disclosure and calculation. (See the commentary
to section 1026.18(b).)
2(a)(10)
Closed-End Credit 1. General. The coverage of this term is defined
by exclusion. That is, it includes any credit arrangement that does
not fall within the definition of open-end credit. Subpart C contains
the disclosure rules for closed-end credit when the obligation is
subject to a finance charge or is payable by written agreement in
more than four installments.
6-6162
2(a)(11) Consumer 1. Scope. Guarantors, endorsers, and sureties
are not generally consumers for purposes of the regulation, but they
may be entitled to rescind under certain circumstances and they may
have certain rights if they are obligated on credit card plans.
2. Rescission rules. For purposes of rescission under sections 1026.15 and 1026.23, a
consumer includes any natural person whose ownership interest in his
or her principal dwelling is subject to the risk of loss. Thus, if
a security interest is taken in A’s ownership interest in a
house and that house is A’s principal dwelling, A is a consumer
for purposes of rescission, even if A is not liable, either primarily
or secondarily, on the underlying consumer credit transaction. An
ownership interest does not include, for example, leaseholds or inchoate
rights, such as dower.
3. Trusts. Credit extended to trusts established for tax or estate
planning purposes or to land trusts, as described in comment 3(a)-10,
is considered to be extended to a natural person for purposes of the
definition of consumer.
4. Successors in interest.
i. Assumption
of the mortgage loan obligation. A servicer may not require a
confirmed successor in interest to assume the mortgage loan obligation
to be considered a consumer for purposes of sections 1026.20(c) through
(e), 1026.36(c), 1026.39, and 1026.41. If a successor in interest
assumes a mortgage loan obligation under State law or is otherwise
liable on the mortgage loan obligation, the protections the successor
in interest enjoys under this part are not limited to sections 1026.20(c)
through (e), 1026.36(c), 1026.39, and 1026.41.
ii. Communications
with confirmed successors in interest. Communications in compliance
with this part to a confirmed successor in interest as defined in
section 1026.2(a)(27)(ii) do not violate section 805(b) of the Fair
Debt Collection Practices Act (FDCPA) because consumer for purposes
of FDCPA section 805 includes any person who meets the definition
in this part of confirmed successor in interest.
iii. Treatment
of transferor consumer. Even after a servicer’s confirmation
of a successor in interest, the servicer is still required to comply
with all applicable requirements of sections 1026.20(c) through (e),
1026.36(c), 1026.39, and 1026.41 with respect to the consumer who
transferred an ownership interest to the successor in interest.
iv. Multiple notices unnecessary. Except as
required by Regulation X, 12 CFR 1024.36, a servicer is not required
to provide to a confirmed successor in interest any written disclosure
required by section 1026.20(c), (d), or (e), section 1026.39, or section
1026.41 if the servicer is providing the same specific disclosure to another
consumer on the account. For example, a servicer is not required to
provide a periodic statement required by section 1026.41 to a confirmed
successor in interest if the servicer is providing the same periodic
statement to another consumer; a single statement may be sent in that
billing cycle. If a servicer confirms more than one successor in interest,
the servicer need not send any disclosure required by section 1026.20(c),
(d), or (e), section 1026.39, or section 1026.41 to more than one
of the confirmed successors in interest.
1. Primary purpose. There
is no precise test for what constitutes credit offered or extended
for personal, family, or household purposes, nor for what constitutes
the primary purpose. (See, however, the discussion of business
purposes in the commentary to section 1026.3(a).)
2(a)(13) Consummation 1. State law governs. When
a contractual obligation on the consumer’s part is created is
a matter to be determined under applicable law; Regulation Z does
not make this determination. A contractual commitment agreement, for
example, that under applicable law binds the consumer to the credit terms would
be consummation. Consummation, however, does not occur merely because
the consumer has made some financial investment in the transaction
(for example, by paying a nonrefundable fee) unless, of course, applicable
law holds otherwise.
2. Credit v. sale. Consummation does not occur when the consumer
becomes contractually committed to a sale transaction, unless the
consumer also becomes legally obligated to accept a particular credit
arrangement. For example, when a consumer pays a nonrefundable deposit
to purchase an automobile, a purchase contract may be created, but
consummation for purposes of the regulation does not occur unless
the consumer also contracts for financing at that time.
6-6162.1
2(a)(14) Credit 1. Exclusions. The following situations
are not considered credit for purposes of the regulation:
i. Layaway plans, unless the consumer is
contractually obligated to continue making payments. Whether the consumer
is so obligated is a matter to be determined under applicable law.
The fact that the consumer is not entitled to a refund of any amounts
paid towards the cash price of the merchandise does not bring layaways
within the definition of credit.
ii. Tax liens, tax assessments, court judgments,
and court approvals of reaffirmation of debts in bankruptcy. However,
third-party financing of such obligations (for example, a bank loan
obtained to pay off a tax lien) is credit for purposes of the regulation.
iii. Insurance premium
plans that involve payment in installments with each installment representing
the payment for insurance coverage for a certain future period of
time, unless the consumer is contractually obligated to continue making
payments.
iv. Home
improvement transactions that involve progress payments, if the consumer
pays, as the work progresses, only for work completed and has no contractual
obligation to continue making payments.
v. Borrowing against the accrued cash value
of an insurance policy or a pension account, if there is no independent
obligation to repay.
vi. Letters of credit.
vii. The execution of option contracts. However, there may be an
extension of credit when the option is exercised, if there is an agreement
at that time to defer payment of a debt.
viii. Investment plans in which the party
extending capital to the consumer risks the loss of the capital advanced.
This includes, for example, an arrangement with a home purchaser in
which the investor pays a portion of the downpayment and of the periodic
mortgage payments in return for an ownership interest in the property,
and shares in any gain or loss of property value.
ix. Mortgage assistance plans administered
by a government agency in which a portion of the consumer’s
monthly payment amount is paid by the agency. No finance charge is
imposed on the subsidy amount, and that amount is due in a lump-sum
payment on a set date or upon the occurrence of certain events. (If
payment is not made when due, a new note imposing a finance charge
may be written, which may then be subject to the regulation.)
6-6162.11
2. Payday loans; deferred
presentment. Credit includes a transaction in which a cash advance
is made to a consumer in exchange for the consumer’s personal
check, or in exchange for the consumer’s authorization to debit
the consumer’s deposit account, and where the parties agree
either that the check will not be cashed or deposited, or that the
consumer’s deposit account will not be debited, until a designated
future date. This type of transaction is often referred to as a “payday
loan” or “payday advance” or “deferred-presentment
loan.” A fee charged in connection with such a transaction may
be a finance charge for purposes of section 1026.4, regardless of
how the fee is characterized under state law. Where the fee charged
constitutes a finance charge under section 1026.4 and the person advancing
funds regularly extends consumer credit, that person is a creditor
and is required to provide disclosures consistent with the requirements
of Regulation Z. (See section 1026.2(a)(17).)
3. Transactions on the asset features of
prepaid accounts when there are insufficient or unavailable funds. Credit includes authorization of a transaction on the asset feature
of a prepaid account as defined in section 1026.61 where the consumer
has insufficient or unavailable funds in the asset feature of the
prepaid account at the time the transaction is authorized to cover
the amount of the transaction. It also includes settlement of a transaction
on the asset feature of a prepaid account where the consumer has insufficient
or unavailable funds in the asset feature of the prepaid account at
the time the transaction is settled to cover the amount of the transaction.
This includes a transaction where the consumer has sufficient or available
funds in the asset feature of a prepaid account to cover the amount
of the transaction at the time the transaction is authorized but insufficient
or unavailable funds in the asset feature of the prepaid account to
cover the transaction amount at the time the transaction is settled. See section 1026.61 and related commentary on the applicability
of this regulation to credit that is extended in connection with a
prepaid account.
4. Overdraft
credit. Credit includes, for example, funds extended by a financial
institution to a consumer to pay transactions that overdraw a checking
or other transaction account held at the financial institution whenever
the consumer has a contractual obligation to repay the funds.
6-6162.2
Paragraph 2(a)(15) 1. Usable from time to time. A credit card must be usable from time to time. Since this involves
the possibility of repeated use of a single device, checks and similar
instruments that can be used only once to obtain a single credit extension
are not credit cards.
2. Examples.
i. Examples of credit cards include:
A. A card that guarantees checks or similar instruments, if the asset
account is also tied to covered overdraft credit or if the instrument
directly accesses a line of credit.
B. A debit card (other than a debit
card that is solely an account number) that also accesses a credit
account (that is, a debit-credit card or hybrid debit-credit card
as defined in section 1026.62). See comment 2(a)(15)–2.ii.C
for guidance on whether a debit card that is solely an account number
is a credit card.
C. An identification card that permits the consumer to defer payment
on a purchase.
D.
An identification card indicating loan approval that is presented
to a merchant or to a lender, whether or not the consumer signs a
separate promissory note for each credit extension.
E. A card or device that can be activated
upon receipt to access credit, even if the card has a substantive
use other than credit, such as a purchase-price discount card. Such
a card or device is a credit card notwithstanding the fact that the
recipient must first contact the card issuer to access or activate
the credit feature.
F. A prepaid card that is a hybrid prepaid-credit card as defined
in section 1026.61.
ii. In contrast, credit card does not include,
for example:
A. A check-guarantee or debit card with
no credit feature or agreement.
B. Any card, key, plate, or other device
that is used in order to obtain petroleum products for business purposes
from a wholesale distribution facility or to gain access to that facility,
and that is required to be used without regard to payment terms.
C. An account number
that accesses a credit account, unless the account number can access
an open-end line of credit to purchase goods or services or as provided
in section 1026.61 with respect to a hybrid prepaid-credit card. An
account number that can access an open-end line of credit to purchase
goods or services includes an account number that can access a covered
overdraft credit account offered by a very large financial institution.
For example, if a creditor provides a consumer with an open-end line
of credit that can be accessed by an account number in order to transfer
funds into another account (such as an asset account with the same
creditor), the account number is not a credit card for purposes of
section 1026.2(a)(15)(i). However, if the account number can also
access the line of credit to purchase goods or services (such as an
account number that can be used to purchase goods or services on the
internet), the account number is a credit card for purposes of section
1026.2(a)(15)(i), regardless of whether the creditor treats such transactions
as purchases, cash advances, or some other type of transaction. Furthermore,
if the line of credit can also be accessed by a card (such as a debit
card), that card is a credit card for purposes of section 1026.2(a)(15)(i).
D. A prepaid card that
is not a hybrid prepaid-credit card as defined in section 1026.61.
E. A check-guarantee
or debit card that can access non-covered overdraft credit as defined
in section 1026.62 and cannot access any other form of credit.
6-6162.21
3. Charge card.
i. Charge cards are credit cards where
no periodic rate is used to compute the finance charge. The term charge card does not include a hybrid debit-credit card as defined
in section 1026.62. Thus, covered overdraft credit extended by a very
large financial institution through a hybrid debit-credit card is
not subject to special charge card rules.
A. Under the regulation,
a reference to credit cards generally includes charge cards. In particular,
references to credit card accounts under an open-end (not home-secured)
consumer credit plan in subparts B and G generally include charge
cards.
B. The term charge card is, however, distinguished from credit card or credit
card account under an open-end (not home-secured) consumer credit
plan in sections 1026.6(b)(2)(xiv), 1026.7(b)(11) (except as described
in comment 2(a)(15)–3.ii below), 1026.7(b)(12), 1026.9(e), 1026.9(f),
1026.28(d), 1026.52(b)(1)(ii)(C), 1026.60, and appendices G–10
through G–13.
ii. A hybrid prepaid-credit card as defined
in section 1026.61 is a charge card with respect to a covered separate
credit feature if no periodic rate is used to compute the finance
charge in connection with the covered separate credit feature. Unlike
other charge card accounts, the requirements in section 1026.7(b)(11)
apply to a covered separate credit feature accessible by a hybrid
prepaid-credit card that is a charge card when that covered separate
credit feature is a credit card account under an open-end (not home-secured)
consumer credit plan. Thus, under section 1026.5(b)(2)(ii)(A), with
respect to a covered separate credit feature that is a credit card
account under an open-end (not home-secured) consumer credit plan,
a card issuer of a hybrid prepaid-credit card that meets the definition
of a charge card because no periodic rate is used to compute a finance
charge in connection with the covered separate credit feature must
adopt reasonable procedures for the covered separate credit feature
designed to ensure that (1) periodic statements are mailed or delivered
at least 21 days prior to the payment due date disclosed on the statement
pursuant to section 1026.7(b)(11)(i)(A); and (2) the card issuer does
not treat as late for any purposes a required minimum periodic payment
received by the card issuer within 21 days after mailing or delivery
of the periodic statement disclosing the due date for that payment.
4. Credit card
account under an open-end (not home-secured) consumer credit plan.
i. An open-end consumer credit
account is a credit card account under an open-end (not home-secured)
consumer credit plan for purposes of section 1026.2(a)(15)(ii) if:
A. The account is accessed by a credit card, as defined in section
1026.2(a)(15)(i); and
B. The account is not excluded under section 1026.2(a)(15)(ii)(A)
or (B).
ii. The exclusion from credit card account under an open-end (not
home-secured) consumer credit plan provided by section 1026.2(a)(15)(ii)(B)
for covered overdraft credit offered by a creditor that is not a very
large financial institution does not apply to a covered separate credit
feature accessible by a hybrid prepaid-credit card (including a hybrid
prepaid-credit card that is solely an account number) as defined in
section 1026.61.
6-6162.3
2(a)(16) Credit Sale 1. Special disclosure. If the seller is a
creditor in the transaction, the transaction is a credit sale and
the special credit sale disclosures (that is, the disclosures under
section 1026.18(j)) must be given. This applies even if there is more
than one creditor in the transaction and the creditor making the disclosures is not the
seller. (See the commentary to section 1026.17(d).)
2. Sellers who arrange credit. If the seller of the property or services involved arranged for
financing but is not a creditor as to that sale, the transaction is
not a credit sale. Thus, if a seller assists the consumer in obtaining
a direct loan from a financial institution and the consumer’s
note is payable to the financial institution, the transaction is a
loan and only the financial institution is a creditor.
3. Refinancings. Generally,
when a credit sale is refinanced within the meaning of section 1026.20(a),
loan disclosures should be made. However, if a new sale of goods or
services is also involved, the transaction is a credit sale.
4. Incidental sales. Some
lenders sell a product or service—such as credit, property,
or health insurance—as part of a loan transaction. Section 1026.4
contains the rules on whether the cost of credit life, disability
or property insurance is part of the finance charge. If the insurance
is financed, it may be disclosed as a separate credit-sale transaction
or disclosed as part of the primary transaction; if the latter approach
is taken, either loan or credit-sale disclosures may be made. (See the commentary to section 1026.17(c)(1) for further discussion
of this point.)
5. Credit
extensions for educational purposes. A credit extension for educational
purposes in which an educational institution is the creditor may be
treated as either a credit sale or a loan, regardless of whether the
funds are given directly to the student, credited to the student’s
account, or disbursed to other persons on the student’s behalf.
The disclosure of the total sale price need not be given if the transaction
is treated as a loan.
6-6162.4
2(a)(17) Creditor 1. General. The definition contains four independent
tests. If any one of the tests is met, the person is a creditor for
purposes of that particular test.
Paragraph 2(a)(17)(i) 1. Prerequisites. This test is composed of
two requirements, both of which must be met in order for a particular
credit extension to be subject to the regulation and for the credit
extension to count towards satisfaction of the numerical tests mentioned
in section 1026.2(a)(17)(v).
i. First, there must be either or
both of the following:
A. A written (rather than oral) agreement
to pay in more than four installments. A letter that merely confirms
an oral agreement does not constitute a written agreement for purposes
of the definition.
B. A finance charge imposed for the credit. The obligation to pay
the finance charge need not be in writing.
ii. Second, the obligation
must be payable to the person in order for that person to be considered
a creditor. If an obligation is made payable to bearer, the creditor
is the one who initially accepts the obligation.
2. Assignees. If an obligation
is initially payable to one person, that person is the creditor even
if the obligation by its terms is simultaneously assigned to another
person. For example:
i. An auto dealer and a bank have a business
relationship in which the bank supplies the dealer with credit sale
contracts that are initially made payable to the dealer and provide
for the immediate assignment of the obligation to the bank. The dealer
and purchaser execute the contract only after the bank approves the
creditworthiness of the purchaser. Because the obligation is initially
payable on its face to the dealer, the dealer is the only creditor
in the transaction.
3. Numerical tests. The examples below illustrate
how the numerical tests of section 1026.2(a)(17)(v) are applied. The
examples assume that consumer credit with a finance charge or written
agreement for more than 4 installments was extended in the years in
question and that the person did not extend such credit in 2006.
6-6162.5
4. Counting transactions. For purposes of closed-end credit, the creditor counts each credit transaction.
For open-end credit, transactions means accounts, so that outstanding
accounts are counted instead of individual credit extensions. Normally
the number of transactions is measured by the preceding calendar year;
if the requisite number is met, then the person is a creditor for
all transactions in the current year. However, if the person did not
meet the test in the preceding year, the number of transactions is
measured by the current calendar year. For example, if the person
extends consumer credit 26 times in 2007, it is a creditor for purposes
of the regulation for the last extension of credit in 2007 and for
all extensions of consumer credit in 2008. On the other hand, if a
business begins in 2007 and extends consumer credit 20 times, it is
not a creditor for purposes of the regulation in 2007. If it extends
consumer credit 75 times in 2008, however, it becomes a creditor for
purposes of the regulation (and must begin making disclosures) after
the 25th extension of credit in that year and is a creditor for all
extensions of consumer credit in 2009.
5. Relationship between consumer credit in general
and credit secured by a dwelling. Extensions of credit secured
by a dwelling are counted towards the 25-extensions test. For example,
if in 2007 a person extends unsecured consumer credit 23 times and
consumer credit secured by a dwelling twice, it becomes a creditor
for the succeeding extensions of credit, whether or not they are secured
by a dwelling. On the other hand, extensions of consumer credit not
secured by a dwelling are not counted towards the number of credit
extensions secured by a dwelling. For example, if in 2007 a person
extends credit not secured by a dwelling 8 times and credit secured
by a dwelling 3 times, it is not a creditor.
6. Effect of satisfying one test. Once one
of the numerical tests is satisfied, the person is also a creditor
for the other type of credit. For example, in 2007 a person extends
consumer credit secured by a dwelling 5 times. That person is a creditor
for all succeeding credit extensions, whether they involve credit
secured by a dwelling or not.
7. Trusts. In the case of credit extended
by trusts, each individual trust is considered a separate entity for
purposes of applying the criteria. For example:
i. A bank is the trustee for three trusts.
Trust A makes 15 extensions of consumer credit annually; Trust B makes
10 extensions of consumer credit annually; and Trust C makes 30 extensions
of consumer credit annually. Only Trust C is a creditor for purposes
of the regulation.
8. Prepaid cards that are not hybrid prepaid-credit
cards. See section 1026.61(a) and comments 61(a)(2)-5.iii
and 61(a)(4)-1.iv for guidance on the applicability of this regulation
in connection with credit accessible by prepaid cards that are not
hybrid prepaid-credit cards.
Paragraph 2(a)(17)(ii) [Reserved] 6-6162.6
Paragraph 2(a)(17)(iii) 1. Card issuers subject to Subpart
B. Section 1026.2(a)(17)(iii) makes certain card issuers creditors
for purposes of the open-end credit provisions of the regulation.
This includes, for example, the issuers of so-called travel and entertainment
cards that expect repayment at the first billing and do not impose
a finance charge. Since all disclosures are to be made only as applicable,
such card issuers would omit finance charge disclosures. Other provisions
of the regulation regarding such areas as scope, definitions, determination
of which charges are finance charges, Spanish language disclosures,
record retention, and use of model forms, also apply to such card
issuers.
2. Prepaid cards
that are not hybrid prepaid-credit cards. See section
1026.61(a) and comments 61(a)(2)-5.iii and 61(a)(4)-1.iv for guidance
on the applicability of this regulation in connection with credit
accessible by prepaid cards that are not hybrid prepaid-credit cards.
Paragraph 2(a)(17)(iv) 1. Card issuers subject
to Subparts B and C. Section 1026.2(a)(17)(iv) includes as creditors card issuers
extending closed-end credit in which there is a finance charge or
an agreement to pay in more than four installments. These card issuers
are subject to the appropriate provisions of Subparts B and C, as
well as to the general provisions.
6-6162.7
2(a)(18) Downpayment 1. Allocation. If a consumer makes a lump-sum
payment, partially to reduce the cash price and partially to pay prepaid
finance charges, only the portion attributable to reducing the cash
price is part of the downpayment. (See the commentary to section
1026.2(a)(23).)
2. Pick-up
payments.
i. Creditors may treat the deferred portion
of the downpayment, often referred to as pick-up payments,
in a number of ways. If the pick-up payment is treated as part of
the downpayment:
A. It is subtracted in arriving at the
amount financed under section 1026.18(b).
B. It may, but need not, be reflected
in the payment schedule under section 1026.18(g).
ii. If the pick-up payment
does not meet the definition (for example, if it is payable after
the second regularly scheduled payment) or if the creditor chooses
not to treat it as part of the downpayment:
A. It must be included
in the amount financed.
B. It must be shown in the payment schedule.
iii. Whichever
way the pick-up payment is treated, the total of payments under section
1026.18(h) must equal the sum of the payments disclosed under section
1026.18(g).
3. Effect of existing liens.
i. No cash payment. In a credit sale, the “downpayment” may only be used
to reduce the cash price. For example, when a trade-in is used as
the downpayment and the existing lien on an automobile to be traded
in exceeds the value of the automobile, creditors must disclose a
zero on the downpayment line rather than a negative number. To illustrate,
assume a consumer owes $10,000 on an existing automobile loan and
that the trade-in value of the automobile is only $8,000, leaving
a $2,000 deficit. The creditor should disclose a downpayment of $0,
not −$2,000.
ii. Cash payment. If the consumer
makes a cash payment, creditors may, at their option, disclose the
entire cash payment as the downpayment, or apply the cash payment
first to any excess lien amount and disclose any remaining cash as
the downpayment. In the above example:
A. If the downpayment
disclosed is equal to the cash payment, the $2,000 deficit must be
reflected as an additional amount financed under section 1026.18(b)(2).
B. If the consumer
provides $1,500 in cash (which does not extinguish the $2,000 deficit),
the creditor may disclose a downpayment of $1,500 or of $0.
C. If the consumer provides
$3,000 in cash, the creditor may disclose a downpayment of $3,000
or of $1,000.
6-6162.8
2(a)(19) Dwelling 1. Scope. A dwelling need not be the consumer’s
principal residence to fit the definition, and thus a vacation or
second home could be a dwelling. However, for purposes of the definition
of residential mortgage transaction, the right to rescind, and the
application of automated valuation model requirements, a dwelling
must be the principal residence of the consumer. (See the commentary
to sections 1026.2(a)(24), 1026.15, 1026.23, and 1026.42.)
2. Use as a residence. Mobile
homes, boats, and trailers are dwellings if they are in fact used
as residences, just as are condominium and cooperative units. Recreational
vehicles, campers, and the like not used as residences are not dwellings.
3. Relation to exemptions. Any transaction involving a security interest in a consumer’s
principal dwelling (as well as in any real property) remains subject
to the regulation despite the general exemption in section 1026.3(b).
4. Automated valuation models. For purposes of the application of the automated valuation model
requirements in section 1026.42(i), a consumer can have only one principal
dwelling at a time. Thus, a vacation or other second home would not
be a principal dwelling. However, if a consumer buys or builds a new
dwelling that will become the consumer’s principal dwelling
within a year or upon the completion of construction, the new dwelling
is considered the principal dwelling for purposes of applying this
definition to a particular transaction. (See the commentary
to section 1026.2(a)(24).)
6-6162.9
2(a)(20) Open-End Credit 1. General. This definition describes the
characteristics of open-end credit (for which the applicable disclosure
and other rules are contained in Subpart B), as distinct from closed-end
credit. Open-end credit is consumer credit that is extended under
a plan and meets all 3 criteria set forth in the definition.
2. Existence of a plan.
i. The definition requires
that there be a plan, which connotes a contractual arrangement between
the creditor and the consumer.
ii. With respect to a covered separate
credit feature accessible by a hybrid prepaid-credit card as defined
in section 1026.61, a plan means a program where the consumer is obligated
contractually to repay any credit extended by the creditor. For example,
a plan includes a program under which a creditor routinely extends
credit from a covered separate credit feature offered by the prepaid
account issuer, its affiliate, or its business partner where the prepaid
card can be used from time to time to draw, transfer, or authorize
the draw or transfer of credit from the covered separate credit feature
in the course of authorizing, settling, or otherwise completing transactions
conducted with the card to obtain goods or services, obtain cash,
or conduct person-to-person transfers, and the consumer is obligated
contractually to repay those credit transactions. Such a program constitutes
a plan notwithstanding that, for example, the creditor has not agreed
in writing to extend credit for those transactions, the creditor retains
discretion not to extend credit for those transactions, or the creditor
does not extend credit for those transactions once the consumer has
exceeded a certain amount of credit. See section 1026.61(a)
and related commentary for guidance on the applicability of this regulation
to credit accessible by hybrid prepaid-credit cards.
iii. Some creditors offer programs containing
a number of different credit features. The consumer has a single account
with the institution that can be accessed repeatedly via a number
of sub-accounts established for the different program features and
rate structures. Some features of the program might be used repeatedly
(for example, an overdraft line) while others might be used infrequently
(such as the part of the credit line available for secured credit).
If the program as a whole is subject to prescribed terms and otherwise
meets the definition of open-end credit, such a program would be considered
a single, multifeatured plan.
iv. With respect to a covered asset account
as defined in section 1026.62, a plan includes, for example, a program
where the consumer is obligated contractually to repay any credit
extended by the creditor. Such a program constitutes a plan notwithstanding
that, for example, the creditor has not agreed in writing to extend
credit for those transactions, the creditor retains discretion not
to extend credit for those transactions, or the creditor does not
extend credit for those transactions once the consumer has exceeded
a certain amount of credit.
3. Repeated transactions. Under this criterion,
the creditor must reasonably contemplate repeated transactions. This
means that the credit plan must be usable from time to time and the
creditor must legitimately expect that there will be repeat business
rather than a one-time credit extension. The creditor must expect
repeated dealings with consumers under the credit plan as a whole
and need not believe a consumer will reuse a particular feature of
the plan. The determination of whether a creditor can reasonably contemplate
repeated transactions requires an objective analysis. Information
that much of the creditor’s customer base with accounts under
the plan make repeated transactions over some period of time is relevant
to the determination, particularly when the plan is opened primarily
for the financing of infrequently purchased products or services.
A standard based on reasonable belief by a creditor necessarily includes
some margin for judgmental error. The fact that particular consumers
do not return for further credit extensions does not prevent a plan
from having been properly characterized as open-end. For example,
if much of the customer base of a clothing store makes repeat purchases,
the fact that some consumers use the plan only once would not affect
the characterization of the store’s plan as open-end credit.
The criterion regarding repeated transactions is a question of fact
to be decided in the context of the creditor’s type of business
and the creditor’s relationship with its customers. For example,
it would be more reasonable for a bank or depository institution to
contemplate repeated transactions with a customer than for a seller
of aluminum siding to make the same assumption about its customers.
6-6163
4. Finance charge on an outstanding
balance.
i. The requirement that a finance charge
may be computed and imposed from time to time on the outstanding balance
means that there is no specific amount financed for the plan for which
the finance charge, total of payments, and payment schedule can be
calculated. A plan may meet the definition of open-end credit even
though a finance charge is not normally imposed, provided the creditor
has the right, under the plan, to impose a finance charge from time
to time on the outstanding balance. For example, in some plans, a
finance charge is not imposed if the consumer pays all or a specified
portion of the outstanding balance within a given time period. Such
a plan could meet the finance charge criterion, if the creditor has
the right to impose a finance charge, even though the consumer actually
pays no finance charges during the existence of the plan because the
consumer takes advantage of the option to pay the balance (either
in full or in installments) within the time necessary to avoid finance
charges.
ii. With regard
to a covered separate credit feature and an asset feature on a prepaid
account that are both accessible by a hybrid prepaid-credit card as
defined in section 1026.61, any service, transaction, activity, or
carrying charges imposed on the covered separate credit feature, and
any such charges imposed on the asset feature of the prepaid account
to the extent that the amount of the charge exceeds comparable charges
imposed on prepaid accounts in the same prepaid account program that
do not have a covered separate credit feature accessible by a hybrid
prepaid-credit card, generally is a finance charge. See section
1026.4(a) and (b)(11). Such charges include a periodic fee to participate
in the covered separate credit feature, regardless of whether this
fee is imposed on the credit feature or on the asset feature of the
prepaid account. With respect to credit from a covered separate credit
feature accessible by a hybrid prepaid-credit card, any service, transaction,
activity, or carrying charges that are finance charges under section
1026.4 constitute finance charges imposed from time to time on an
outstanding unpaid balance as described in section 1026.2(a)(20) if
there is no specific amount financed for the credit feature for which
the finance charge, total of payments, and payment schedule can be
calculated.
iii. Regardless
of whether a financial institution assesses such charges on a covered
asset account as defined in section 1026.62 or a separate credit account,
any service, transaction, activity, or carrying charges imposed by
the financial institution for paying a transaction that overdraws
a consumer’s covered asset account held at the financial institution
are generally finance charges unless they are otherwise addressed
by section 1026.4(b)(2), (b)(12), or (c). See section 1026.4(a),
(b)(2), (b)(12), and (c). Additionally, such charges would constitute
finance charges imposed from time to time on an outstanding unpaid
balance, as described in section 1026.2(a)(20), if there is no specific
amount financed for the plan for which the finance charge, total of
payments, and payment schedule can be calculated.
5. Reusable line. The
total amount of credit that may be extended during the existence of
an open-end plan is unlimited because available credit is generally
replenished as earlier advances are repaid. A line of credit is self-replenishing
even though the plan itself has a fixed expiration date, as long as
during the plan’s existence the consumer may use the line, repay,
and reuse the credit. The creditor may occasionally or routinely verify
credit information such as the consumer’s continued income and
employment status or information for security purposes but, to meet
the definition of open-end credit, such verification of credit information
may not be done as a condition of granting a consumer’s request
for a particular advance under the plan. In general, a credit line
is self-replenishing if the consumer can take further advances as
outstanding balances are repaid without being required to separately
apply for those additional advances. A credit card account where the
plan as a whole replenishes meets the self-replenishing criterion,
notwithstanding the fact that a credit card issuer may verify credit
information from time to time in connection with specific transactions.
This criterion of unlimited credit distinguishes open-end credit from
a series of advances made pursuant to a closed-end credit loan commitment.
For example:
i. Under a closed-end
commitment, the creditor might agree to lend a total of $10,000 in
a series of advances as needed by the consumer. When a consumer has
borrowed the full $10,000, no more is advanced under that particular
agreement, even if there has been repayment of a portion of the debt.
(See section 1026.2(a)(17)(iv) for disclosure requirements
when a credit card is used to obtain the advances.)
ii. This criterion does not mean that the
creditor must establish a specific credit limit for the line of credit
or that the line of credit must always be replenished to its original
amount. The creditor may reduce a credit limit or refuse to extend
new credit in a particular case due to changes in the creditor’s
financial condition or the consumer’s creditworthiness. (The
rules in section 1026.40(f), however, limit the ability of a creditor
to suspend credit advances for home equity plans.) While consumers
should have a reasonable expectation of obtaining credit as long as
they remain current and within any preset credit limits, further extensions
of credit need not be an absolute right in order for the plan to meet
the self-replenishing criterion.
6. Verifications of collateral value. Creditors
that otherwise meet the requirements of section 1026.2(a)(20) extend
open-end credit notwithstanding the fact that the creditor must verify
collateral values to comply with federal, state, or other applicable
law or verifies the value of collateral in connection with a particular
advance under the plan.
7. Open-end real estate mortgages. Some credit plans call for negotiated
advances under so-called open-end real estate mortgages. Each such
plan must be independently measured against the definition of open-end
credit, regardless of the terminology used in the industry to describe
the plan. The fact that a particular plan is called an open-end real
estate mortgage, for example, does not, by itself, mean that it is
open-end credit under the regulation.
6-6163.1
2(a)(21) Periodic Rate 1. Basis. The periodic
rate may be stated as a percentage (for example, 1½ % per month)
or as a decimal equivalent (for example, .015 monthly). It may be
based on any portion of a year the creditor chooses. Some creditors
use 1/360 of an annual rate as their periodic rate. These creditors:
i. May disclose a 1/360 rate
as a daily periodic rate, without further explanation, if it is in
fact only applied 360 days per year. But if the creditor applies that
rate for 365 days, the creditor must note that fact and, of course,
disclose the true annual percentage rate.
ii. Would have to apply the rate to the
balance to disclose the annual percentage rate with the degree of
accuracy required in the regulation (that is, within ⅛th of
1 percentage point of the rate based on the actual 365 days in the
year).
2. Transaction charges. Periodic rate does not include initial
one-time transaction charges, even if the charge is computed as a
percentage of the transaction amount.
6-6163.2
2(a)(22) Person 1. Joint ventures. A joint venture is an organization
and is therefore a person.
2. Attorneys. An attorney and his or her client
are considered to be the same person for purposes of this part when
the attorney is acting within the scope of the attorney-client relationship
with regard to a particular transaction.
3. Trusts. A trust and its trustee are considered
to be the same person for purposes of this part.
6-6163.25
2(a)(23) Prepaid Finance Charge 1. General. Prepaid
finance charges must be taken into account under section 1026.18(b)
in computing the disclosed amount financed, and must be disclosed
if the creditor provides an itemization of the amount financed under
section 1026.18(c).
2. Examples.
i. Common examples of prepaid finance charges
include:
A. Buyer’s points.
B. Service fees.
C. Loan fees.
D. Finder’s fees.
E. Loan-guarantee
insurance.
F. Credit-investigation
fees.
ii. However, in order for these or any other finance charges to be
considered prepaid, they must be either paid separately in cash or
check or withheld from the proceeds. Prepaid finance charges include
any portion of the finance charge paid prior to or at closing or settlement.
3. Exclusions. Add-on and discount finance charges are not prepaid finance charges
for purposes of this part. Finance charges are not prepaid merely
because they are precomputed, whether or not a portion of the charge
will be rebated to the consumer upon prepayment. (See the commentary
to section 1026.18(b).)
4. Allocation of lump-sum payments. In a credit sale transaction
involving a lump-sum payment by the consumer and a discount or other
item that is a finance charge under section 1026.4, the discount or
other item is a prepaid finance charge to the extent the lump-sum
payment is not applied to the cash price. For example, a seller sells
property to a consumer for $10,000, requires the consumer to pay $3,000
at the time of the purchase, and finances the remainder as a closed-end
credit transaction. The cash price of the property is $9,000. The
seller is the creditor in the transaction and therefore the $1,000
difference between the credit and cash prices (the discount) is a
finance charge. (See the commentary to section 1026.4(b)(9)
and (c)(5).) If the creditor applies the entire $3,000 to the cash
price and adds the $1,000 finance charge to the interest on the $6,000
to arrive at the total finance charge, all of the $3,000 lump-sum
payment is a downpayment and the discount is not a prepaid finance
charge. However, if the creditor only applies $2,000 of the lump-sum
payment to the cash price, then $2,000 of the $3,000 is a downpayment
and the $1,000 discount is a prepaid finance charge.
6-6163.3
2(a)(24) Residential Mortgage Transaction 1. Relation
to other sections. This term is important in five provisions
in the regulation:
i. Section 1026.4(c)(7)—exclusions
from the finance charge.
ii. Section 1026.15(f)—exemption from the right of rescission.
iii. Section 1026.18(q)—whether
or not the obligation is assumable.
iv. Section 1026.20(b)—disclosure
requirements for assumptions.
v. Section 1026.23(f)—exemption from
the right of rescission.
2. Lien status. The definition is not limited
to first lien transactions. For example, a consumer might assume a
paid-down first mort gage (or borrow part of the purchase price)
and borrow the balance of the purchase price from a creditor who takes
a second mortgage. The second mortgage transaction is a residential
mortgage transaction if the dwelling purchased is the consumer’s
principal residence.
3. Principal dwelling. A consumer can have only one principal dwelling
at a time. Thus, a vacation or other second home would not be a principal
dwelling. However, if a consumer buys or builds a new dwelling that
will become the consumer’s principal dwelling within a year
or upon the completion of construction, the new dwelling is considered
the principal dwelling for purposes of applying this definition to
a particular transaction. (See the commentary to sections 1026.15(a)
and 1026.23(a).)
4. Construction
financing. If a transaction meets the definition of a residential
mortgage transaction and the creditor chooses to disclose it as several
transactions under section 1026.17(c)(6), each one is considered to
be a residential mortgage transaction, even if different creditors
are involved. For example:
i. The creditor makes a construction loan
to finance the initial construction of the consumer’s principal
dwelling, and the loan will be disbursed in five advances. The creditor
gives six sets of disclosures (five for the construction phase and
one for the permanent phase). Each one is a residential mortgage transaction.
ii. One creditor finances
the initial construction of the consumer’s principal dwelling
and another creditor makes a loan to satisfy the construction loan
and provide permanent financing. Both transactions are residential
mortgage transactions.
5. Acquisition.
i. A residential mortgage transaction finances
the acquisition of a consumer’s principal dwelling. The term
does not include a transaction involving a consumer’s principal
dwelling if the consumer had previously purchased and acquired some
interest to the dwelling, even though the consumer had not acquired
full legal title.
ii.
Examples of new transactions involving a previously acquired dwelling
include the financing of a balloon payment due under a land sale contract
and an extension of credit made to a joint owner of property to buy
out the other joint owner’s interest. In these instances, disclosures
are not required under section 1026.18(q) (assumability policies).
However, the rescission rules of sections 1026.15 and 1026.23 do apply
to these new transactions.
iii. In other cases, the disclosure and
rescission rules do not apply. For example, where a buyer enters into
a written agreement with the creditor holding the seller’s mortgage,
allowing the buyer to assume the mortgage, if the buyer had previously
purchased the property and agreed with the seller to make the mortgage
payments, section 1026.20(b) does not apply (assumptions involving
residential mortgages).
6-6163.31
6. Multiple purpose transactions. A transaction
meets the definition of this section if any part of the loan proceeds
will be used to finance the acquisition or initial construction of
the consumer’s principal dwelling. For example, a transaction
to finance the initial construction of the consumer’s principal
dwelling is a residential mortgage transaction even if a portion of
the funds will be disbursed directly to the consumer or used to satisfy
a loan for the purchase of the land on which the dwelling will be
built.
7. Construction
on previously acquired vacant land. A residential mortgage transaction
includes a loan to finance the construction of a consumer’s
principal dwelling on a vacant lot previously acquired by the consumer.
6-6163.4
2(a)(25) Security Interest 1. Threshold
test. The threshold test is whether a particular interest in
property is recognized as a security interest under applicable law.
The regulation does not determine whether a particular interest is
a security interest under applicable law. If the creditor is unsure
whether a particular interest is a secu rity interest under applicable
law (for example, if statutes and case law are either silent or inconclusive
on the issue), the creditor may at its option consider such interests
as security interests for Truth in Lending purposes. However, the
regulation and the commentary do exclude specific interests, such
as after-acquired property and accessories, from the scope of the
definition regardless of their categorization under applicable law,
and these named exclusions may not be disclosed as security interests
under the regulation. (But see the discussion of exclusions
elsewhere in the commentary to section 1026.2(a)(25).)
2. Exclusions. The general
definition of security interest excludes three groups of interests:
incidental interests, interests in after-acquired property, and interests
that arise solely by operation of law. These interests may not be
disclosed with the disclosures required under sections 1026.18, 1026.19(e)
and (f), and 1026.38(l)(6), but the creditor is not precluded
from preserving these rights elsewhere in the contract documents,
or invoking and enforcing such rights, if it is otherwise lawful to
do so. If the creditor is unsure whether a particular interest is
one of the excluded interests, the creditor may, at its option, consider
such interests as security interests for purposes of the Truth in
Lending Act (15 U.S.C. 1601 et seq .) and Regulation Z.
3. Incidental interests.
i. Incidental interests in
property that are not security interests include, among other things:
A. Assignment of rents.
B. Right to condemnation proceeds.
C. Interests in accessories
and replacements.
D. Interests in escrow accounts, such as for taxes and insurance.
E. Waiver of homestead
or personal property rights.
ii. The notion of an incidental interest
does not encompass an explicit security interest in an insurance policy
if that policy is the primary collateral for the transaction—for
example, in an insurance premium financing transaction.
4. Operation of law. Interests that arise solely by operation of law are excluded from
the general definition. Also excluded are interests arising by operation
of law that are merely repeated or referred to in the contract. However,
if the creditor has an interest that arises by operation of law, such
as a vendor’s lien, and takes an independent security interest
in the same property, such as a UCC security interest, the latter
interest is a disclosable security interest unless otherwise provided.
5. Rescission rules. Security interests that arise solely by operation of law are security
interests for purposes of rescission. Examples of such interests are
mechanics’ and materialmen’s liens.
6-6163.41
6. Specificity of disclosure. A creditor need not separately disclose multiple security interests
that it may hold in the same collateral. The creditor need only disclose
that the transaction is secured by the collateral, even when security
interests from prior transactions remain of record and a new security
interest is taken in connection with the transaction. In disclosing
the fact that the transaction is secured by the collateral, the creditor
also need not disclose how the security interest arose. For example,
in a closed-end credit transaction, a rescission notice need not specifically
state that a new security interest is “acquired” or an
existing security interest is “retained” in the transaction.
The acquisition or retention of a security interest in the consumer’s
principal dwelling instead may be disclosed in a rescission notice
with a general statement such as the following: “Your home is
the security for the new transaction.”
Paragraph 2(a)(27) 2(a)(27)(i) Successor in Interest 1. Joint tenants and tenants
by the entirety. If a consumer who has an ownership interest
as a joint tenant or tenant by the entirety in a dwelling securing
a closed-end consumer credit transaction dies, a surviving joint tenant
or tenant by the entirety with a right of survivorship in the property
is a successor in interest as defined in section 1026.2(a)(27)(i).
2. Beneficiaries of inter
vivos trusts. In the event of a transfer into an inter
vivos trust in which the consumer is and remains a beneficiary
and which does not relate to a transfer of rights of occupancy in
the property, the beneficiaries of the inter vivos trust rather
than the inter vivos trust itself are considered to be the
successors in interest for purposes of section 1026.2(a)(27)(i). For
example, assume Consumer A transfers her home into such an inter
vivos trust for the benefit of her spouse and herself. As of the
transfer date, Consumer A and her spouse are considered successors
in interest and, upon confirmation, are consumers for purposes of
certain provisions of this part. If the creditor has not released
Consumer A from the loan obligation, Consumer A also remains a consumer
more generally for purposes of this part.
