Research · 6 min read
What a Credit Disclosure Has to State Before a Plan Is Signed
Regulation Z requires a specific set of numbers, in specific words, grouped together and segregated from everything else, before a consumer becomes contractually obligated.
Key takeaways
- Closed-end credit disclosures are due before consummation, in writing, in a form the consumer may keep, and segregated from everything else.
- Finance charge and annual percentage rate must be more conspicuous than any other disclosure except the creditor's identity.
- The required set includes creditor identity, amount financed, finance charge, annual percentage rate, payment schedule, total of payments, and in a credit sale the total sale price.
- The itemization of the amount financed may be replaced by a statement of the right to request it, with a space to indicate whether it is wanted.
- Required statements also cover rate increases, prepayment charges or rebates, late payment charges, security interests, required deposits, and a reference to the contract for default and acceleration terms.
- A mail, telephone or facsimile order without face-to-face or direct telephone solicitation may delay the disclosures to the first payment due date, if representative pricing information was made available beforehand.
Answer first: before consummation, in writing, and set apart from the sales material
Regulation Z states the timing in one sentence. The creditor shall make disclosures before consummation of the transaction. Consummation is defined elsewhere in the regulation as the time the consumer becomes contractually obligated on a credit transaction.
The form requirement is equally direct. The creditor shall make the disclosures clearly and conspicuously in writing, in a form the consumer may keep. They may be provided electronically, subject to compliance with the consumer consent and other applicable provisions of the federal electronic signatures statute.
Then comes the isolation rule, which is the part that shapes how these documents look. The disclosures shall be grouped together, shall be segregated from everything else, and shall not contain any information not directly related to the required disclosures. A limited set of extras is permitted: an acknowledgment of receipt, the date of the transaction, and the consumer's name, address and account number.
The regulation also names which items may travel outside that grouping — the creditor's identity, the variable rate example, insurance or debt cancellation disclosures, and certain security interest charges — and requires that the itemization of the amount financed be separate from the other disclosures.
One more formatting instruction has real consequences. The terms finance charge and annual percentage rate, when disclosed together with a corresponding amount or percentage rate, shall be more conspicuous than any other disclosure except the creditor's identity.
The numbers, and the words that must appear with them
The content section requires the identity of the creditor making the disclosures.
It requires the amount financed, using that term, with a brief description such as the amount of credit provided to you or on your behalf. The regulation gives the arithmetic: determine the principal loan amount or the cash price minus any down payment, add other amounts financed by the creditor that are not part of the finance charge, and subtract any prepaid finance charge.
It requires the finance charge, using that term, with a brief description such as the dollar amount the credit will cost you. And it requires the annual percentage rate, using that term, with a brief description such as the cost of your credit as a yearly rate.
It requires the payment schedule — the number, amounts and timing of payments scheduled to repay the obligation. Where a series of payments varies because a finance charge is applied to the unpaid principal balance, the creditor may instead disclose the dollar amounts of the largest and smallest payments in the series with a reference to the variations in the others.
It requires the total of payments, using that term, with a descriptive explanation such as the amount you will have paid when you have made all scheduled payments. In a transaction involving a single payment, that disclosure is not required.
In a credit sale it requires the total sale price, using that term, with an explanation including the amount of any down payment. The total sale price is defined as the sum of the cash price, the other amounts financed, and the disclosed finance charge.
The itemization of the amount financed
This is the closest thing in the section to a line-by-line account of where the money goes, and it comes with an option that removes it.
The itemization must include the amount of any proceeds distributed directly to the consumer; the amount credited to the consumer's account with the creditor; any amounts paid to other persons by the creditor on the consumer's behalf, with those persons identified; and the prepaid finance charge.
The identification requirement has a stated relaxation. Public officials or government agencies, credit reporting agencies, appraisers and insurance companies may be described using generic or other general terms and need not be further identified.
The option is the part worth reading twice. The creditor need not provide the itemization if it provides a statement that the consumer has the right to receive a written itemization of the amount financed, together with a space for the consumer to indicate whether it is desired, and the consumer does not request it.
So the most granular disclosure in the section is one a consumer can be handed as a checkbox rather than as a document. Where the box is not ticked, the itemization is not required to be delivered.
Rate changes, prepayment, late charges and the other required statements
Where the annual percentage rate may increase after consummation in a transaction not secured by a principal dwelling, the section requires four disclosures: the circumstances under which the rate may increase, any limitations on the increase, the effect of an increase, and an example of the payment terms that would result from an increase.
On prepayment, the required statement depends on how the finance charge is computed. Where the finance charge is computed by applying a rate to the unpaid principal balance, the creditor must state whether or not a charge may be imposed for paying all or part of the principal before it is due. Where the finance charge is computed some other way, the creditor must state whether or not the consumer is entitled to a rebate of any finance charge on prepayment in full or in part.
On late payment, the section requires any dollar or percentage charge that may be imposed before maturity due to a late payment, other than a deferral or extension charge.
It requires disclosure of a security interest — the fact that the creditor has or will acquire a security interest in the property purchased as part of the transaction, or in other property identified by item or type.
It requires the items needed to exclude certain insurance premiums and debt cancellation fees from the finance charge, and the disclosures needed to exclude certain security-interest-related fees and premiums.
It requires a contract reference: a statement that the consumer should refer to the appropriate contract document for information about nonpayment, default, the right to accelerate the maturity of the obligation, and prepayment rebates and penalties.
And where the creditor requires the consumer to maintain a deposit as a condition of the specific transaction, it requires a statement that the annual percentage rate does not reflect the effect of the required deposit.
Estimates, later events, and the mail-or-telephone delay
The disclosures must reflect the terms of the legal obligation between the parties. Where information necessary for an accurate disclosure is unknown to the creditor, the creditor shall disclose based on the best information reasonably available at the time and shall state clearly that the disclosure is an estimate.
The regulation also fixes what happens when reality moves. If a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation, although new disclosures may be required under other named provisions.
There is a tolerance for the finance charge figure. In transactions other than those secured by real property or a dwelling, the disclosed finance charge is treated as accurate if, on an amount financed of one thousand dollars or less, it is not more than five dollars above or below the required amount; or, on an amount financed of more than one thousand dollars, not more than ten dollars above or below.
The annual percentage rate has a small-transaction exemption. For any transaction involving a finance charge of five dollars or less on an amount financed of seventy-five dollars or less, or a finance charge of seven dollars fifty or less on an amount financed of more than seventy-five dollars, the creditor need not disclose the annual percentage rate.
Finally, remote orders get their own timing rule. Where a creditor receives a purchase order or a request for an extension of credit by mail, telephone or facsimile without face-to-face or direct telephone solicitation, the creditor may delay the disclosures until the due date of the first payment — but only if specified information for representative amounts or ranges of credit is made available in written or electronic form to the consumer or to the public before the actual order or request. That information includes the cash price or principal loan amount, the total sale price, the finance charge, the annual percentage rate, and the rate-increase disclosures where applicable.
Two housekeeping rules close the section. Where a transaction involves more than one creditor, only one set of disclosures shall be given, and the creditors shall agree among themselves which of them complies. Where there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the obligation.
Sources
- 12 CFR 1026.17, “General disclosure requirements” (Regulation Z)The clear and conspicuous, in writing, retainable-form requirement and the electronic delivery condition; the grouping and segregation rule and the permitted extras; the items that may be given separately and the separate itemization requirement; the more-conspicuous rule for finance charge and annual percentage rate; the timing rule requiring disclosures before consummation; the multiple creditors and multiple consumers rules; the requirement that disclosures reflect the legal obligation and the estimate rule for unknown information; the subsequent-events provision; and the mail or telephone order delay with its list of representative information that must be made available beforehand.
- 12 CFR 1026.18, “Content of disclosures” (Regulation Z)The required disclosure of creditor identity, amount financed with its calculation, the itemization of the amount financed with its four components, the generic-identification relaxation and the request-based alternative; the finance charge with its accuracy tolerances for non-mortgage transactions; the annual percentage rate and its small-transaction exemption; the variable rate disclosures; the payment schedule and its varying-series alternative; the total of payments and its single-payment exception; the total sale price in a credit sale; the prepayment statements; the late payment charge; the security interest, insurance and debt cancellation, security interest charge, contract reference and required deposit statements.
Frequently asked questions
When are these disclosures due?
Before consummation of the transaction, which the regulation defines as the time the consumer becomes contractually obligated on a credit transaction. A separate provision allows a creditor receiving a mail, telephone or facsimile order without face-to-face or direct telephone solicitation to delay the disclosures until the due date of the first payment, if specified representative information was made available beforehand.
Do the disclosures have to be separate from the sales material?
The regulation requires them to be grouped together, segregated from everything else, and to contain no information not directly related to the required disclosures. A short list of permitted extras includes an acknowledgment of receipt, the transaction date, and the consumer's name, address and account number.
Which terms have to be most prominent?
The terms finance charge and annual percentage rate, when disclosed together with a corresponding amount or percentage rate, must be more conspicuous than any other disclosure except the creditor's identity.
Is an itemized breakdown of the amount financed always provided?
Not necessarily. The itemization must list proceeds distributed to the consumer, amounts credited to the consumer's account, amounts paid to other identified persons on the consumer's behalf, and the prepaid finance charge. But the creditor need not provide it if it instead offers a statement that the consumer has the right to receive a written itemization, with a space to indicate whether it is desired, and the consumer does not request it.
What has to be said about paying early?
Where the finance charge is computed by applying a rate to the unpaid principal balance, the creditor must state whether a charge may be imposed for paying principal before it is due. Where the finance charge is computed another way, the creditor must state whether the consumer is entitled to a rebate of any finance charge on prepayment.
What if the numbers turn out to be wrong later?
The regulation states that if a disclosure becomes inaccurate because of an event occurring after delivery, the inaccuracy is not a violation, although new disclosures may be required under other provisions. Where information is unknown at the time, the creditor discloses on the best information reasonably available and must clearly state that the disclosure is an estimate.