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Jan 25, 2010
Categories: Consumer Lending

Minimum Payment Disclosures; Reg Z & Reg E Webcast

Posted by Steve Van Beek

The minimum payment disclosures are certainly one of the most confusing new disclosures that credit unions have had to work through.  Here is a brief synopsis of how we got here:
  • Bankruptcy Act of 2005 requires minimum payment warnings
  • Federal Reserve proposes and finalizes minimum payment warnings effective July 1, 2010 - these notices gave the option of a "generic example" or the actual disclosure 
  • Credit CARD Act amends the Truth in Lending Act (superseding the Bankruptcy Act requirements) and requires actual disclosures and disclosures about how to pay off the balance in 36 months 
  • Federal Reserve proposes and finalizes new minimum payment warnings effective February 22, 2010 according to the requirements in the Credit CARD Act.  
Thus, the possibility of the "generic examples" has been removed and credit unions will need to follow the most recent Federal Reserve amendments (the July 1, 2010 minimum payment warnings are removed).


New Requirements

The new requirements are going to require 1 of 3 minimum payment disclosures on a member's account - depending upon that member's particular situation.  Thus, credit unions will need to work with their processors to be sure their systems can identify and reproduce which minimum payment warning needs to be produced.

This requirement applies to credit card periodic statements mailed or delivered on or after February 22, 2010 (see page 5).

Which disclosures to include will depend on the amount of the minimum payment and how quickly that payment will pay off the outstanding balance on the account (after the assumptions provided in Appendix M1).

The Federal Reserve produced model forms of these 3 variations of the minimum payment warnings.  Below are links to the 3 model forms followed by the situations they will need to be used.

  • If a member, paying only the minimum payment, will not pay off the account in 3 years.

G-18(C)(2) - When Amortization Occurs and the 36-month Disclosures are Not Required

  • If a member, paying only the minimum payment, will pay off the account in 3 years or less.

G-18(C)(3) - When Negative or No Amortization Occurs

  • If a member, paying only the minimum payment, will never pay off the balance on the account.

The way the Fed wrote the regulation, credit unions need to disclose the calculations according to 12 CFR 226.7(b)(12)(i)(F) - (start on page 2).  The default is the 36-month disclosures (226.7(b)(12)(i)(F)(1) - but those disclosures do not apply in situations where the balance will be paid off in less than 36-months by simply making the minimum payments (instead, use 226.7(b)(12)(i)(F)(2)(i-iii) - page 3).  Additionally, the 36-month disclosures are not required (and wouldn't make sense) if the account has negative amortization (i.e. making the minimum payments only would never pay off the balance).  For the negative amortization situations, use 226.7(b)(12)(i)(F)(2) - starting with (ii) at the bottom of page 3 (the Fed messed up their numbering in this section and will need to correct it).


Rounding Issue
The commentary contains an explanation on how credit unions are supposed to round to determine if the balance will be paid off in 3 years or less:
"Minimum payment repayment estimate disclosed on the periodic statement is three years or less. Section 226.7(b)(12)(i)(F)(2)(i) provides that a credit card issuer is not required to provide the disclosures related to repayment in 36 months if the minimum payment repayment estimate disclosed under § 226.7(b)(12)(i)(B) after rounding is 3 years or less. For example, if the minimum payment repayment estimate is 2 years 6 months to 3 years 5 months, issuers would be required under § 226.7(b)(12)(i)(B) to disclose that it would take 3 years to pay off the balance in full if making only the minimum payment. In these cases, an issuer would not be required to disclose the 36- month disclosures on the periodic statement because the minimum payment repayment estimate disclosed to the consumer on the periodic statement (after rounding) is 3 years or less."
So, in the situation described in the staff commentary - you would be using G-18(C)(2).

Be sure to work with your data processor to be sure they can differentiate between accounts to ensure the proper rounding calculations occur and the proper minimum payment disclosures are being included.

***
On February 17, Anthony, Sarah, and I will be conducting a NAFCU webcast discussing the February 22, 2010 changes to Regulation Z as well as the July 1, 2010 changes to Regulation E dealing with overdraft protection programs.  We will tackle many of the common concerns and problems that have arose as these compliance dates approach.  You can sign up here (or if you've always wanted to put a face with a name - here is your chance). 
  

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