Disclosure Requirements for ‘Skip-a-Payment’ Programs
November 21, 2011
November 22, 2011
Open-End Loan Disclosures for Skip a Payment
If the features of the skip payment program are disclosed in the account-opening disclosure, the credit union does not have to provide a change-in-terms notice. The skip payment features that would be explained in the account opening agreement include the times when skip payments will be allowed (such as, “you may skip the December payment”), the amount of any fee, how the credit union will collect that fee (such as a withdrawal from the member’s share account), the fact that finance charges will continue to accrue on the account, and the payment amount upon resumption of regular payments.
If the skip payment features of an open-end loan are not provided in the initial account-opening document, then certain change-in-terms notices are required before a member may skip a payment.
If no skip payment fee is charged, the credit union must only provide a change-in-terms notice prior to resuming the original payment schedule to advise members of the resumption of regular payments, even though no notice is required prior to the skip payment. This change-in-terms notice must be provided at least 45 days prior to resuming the regular payment schedule. In fact, the change-in-terms notice required for resumption is often combined with the initial letter or notice offering the skip payment. This is done to notify the member of the resumption of the original payment either by explicitly stating when the regular payment resumes or by indicating the duration of the skip. For instance, the credit union can print on the August statement, “You may skip your October payment,” and this can serve as the change-in-terms notice required prior to resumption of the regular payment schedule.
Charging a skip payment fee would require a change-in-terms notice pursuant to Section 226.9 of Regulation Z. This section requires that the change-in-terms notice be provided at least 45 days before the “effective date of the change.” In other words, the notice must be provided at least 45 days before the date the fee is charged. This notice could also be combined with the “resumption of payment notice” in a letter or notice offering the skip payment, or it could be printed on a monthly statement as long as the notice is provided at least 45 days prior to the date the fee is charged.
Closed-End Loan Disclosures for Skip a Payment
Regulation Z does not require subsequent disclosures for skip payments on closed-end loans. Generally, the only time that new Truth in Lending Act (TILA) disclosures are required for closed-end loans is if a refinancing occurs. A refinancing takes place when an existing obligation is satisfied and replaced by a new obligation for the same borrower. New disclosures are not necessary if the existing agreement is only being modified, for example, by lowering the payment or permitting a payment to be skipped. This is true regardless of whether the change is considered adverse to the borrower. Subsequent disclosures are not necessary when the existing loan agreement remains in place but is only being modified.
Although the fee for allowing a skip payment is considered a finance charge, new TILA disclosures will not be required as long as the skip payment is accomplished by amending the existing closed-end loan agreement rather than by a complete refinancing (as described above). Because new disclosures are not required, the inaccuracy created by imposing the fee is not a Truth-in-Lending violation according to Section 226.17 (e) of Regulation Z.
Prior to allowing skip payments, the credit union should make members aware of a number of issues, including the right to skip a payment, which month(s) a skip payment will be allowed, the amount of any fee, how the credit union will collect that fee (such as a withdrawal from the member’s share account), and the effect the skip payment will have on increasing the total finance charges and extending the loan term.
This notice can be sent as a letter with a tear-off along the bottom for the member to sign and return to the credit union which acknowledges the member’s desire to skip a particular loan payment and indicates that the member understands and agrees to the skip payment terms and conditions.
More information about “skip-a-payment” programs and the impact of Regulation Z is available here.
Source: CUNA CompBlog
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