Purpose and Scope - Utah's Credit Unions



Purpose and ScopeThe purposes of the Truth and Lending Act and Regulation Z are to:To promote the informed use of consumer credit by requiring disclosures about its terms and cost. To provide substantive protections for consumers in regards to consumer credit.Regulation Z applies when four conditions are met:The credit is offered or extended to consumers.The offering or extension of credit is done regularly.The credit is subject to a finance charge or is payable by a written agreement in more than four installments.The credit is primarily for personal, family, or household purposes.ExemptionsThe following types of credit are exempt from Reg Z:Business, commercial, agricultural, or organizational credit.Credit over the threshold amount (currently $50,000) except when the extension of credit is:Secured by any real property.Secured by personal property used or expected to be used as the principal dwelling of the consumer.A private education loan.Student loans made, insured, or guaranteed pursuant to a program authorized by title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq. ).An extension of credit to a participant in an employer-sponsored retirement plan.Business CreditThe commentary to section 226.3 of Regulation Z provides guidance on when an extension of credit can be considered for “business purposes.”Primary PurposeA creditor must determine in each case if the transaction is primarily for a business purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures.In determining whether credit to finance an acquisition is primarily for business or commercial purposes, the following factors should be considered:The relationship of the borrower's primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.The size of the transaction. The larger the transaction, the more likely it is to be business purpose.The borrower's statement of purpose for the loan.Business Purpose ExamplesExamples of business-purpose credit include:A loan to expand a business, even if it is secured by the borrower's residence or personal property.A loan to improve a principal residence by putting in a business office.A business account used occasionally for consumer purposes.Consumer Purpose ExamplesExamples of consumer-purpose credit include:Credit extensions by a company to its employees or agents if the loans are used for personal purposes.A loan secured by a mechanic's tools to pay a child's tuition.A personal account used occasionally for business purposes.Credit CardsIf a business-purpose credit card is issued to a person, the provisions of the regulation do not apply, even if extensions of credit for consumer purposes are occasionally made using that business-purpose credit card. Likewise, if a consumer-purpose credit card is issued to a person, the provisions of the regulation apply, even to occasional extensions of credit for business purposes made using that consumer-purpose credit card. Non-Owner-Occupied Rental PropertyCredit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner-occupied and this special rule will not apply. Owner-Occupied Rental PropertyIf credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. Organizational CreditTransactions in which the borrower is not a natural person are exempt from the regulation (for example, to loans to corporations, partnerships, associations, churches, unions, and fraternal organizations). The exemption applies regardless of the purpose of the credit extension and regardless of the fact that a natural person may guarantee or provide security for the credit.Key DefinitionsAdvertisement A commercial message in any medium that promotes, directly or indirectly, a credit transaction.Business Day A day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions. Closed-end Credit Any consumer credit other than “open-end credit.” Consumer A consumer is a person to whom consumer credit is offered or extended. Consumer Credit Credit offered or extended to a consumer primarily for personal, family, or household purposes.ConsummationThe time that a consumer becomes contractually obligated on a credit transaction.Credit CardAny card, plate, or other single credit device that may be used from time to time to obtain credit.Credit card account under an open-end (not home-secured) consumer credit plan means any open-end credit account accessed by a credit card, except:A credit card that accesses a home-equity planAn overdraft line of credit accessed by a debit card.Open-end CreditConsumer credit extended by a creditor under a plan in which:The creditor reasonably contemplates repeated transactions.The creditor may impose a finance charge from time to time on an outstanding unpaid balance.The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.Prepaid Finance ChargeAny finance charge paid separately in cash or by check before or at consummation of a transaction, or withheld from the proceeds of the credit at any time.Finance ChargeDefinitionThe cost of consumer credit as a dollar amount:Includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. Does not include any charge of a type payable in a comparable cash transaction.Third Party ChargesThe finance charge includes fees and amounts charged by someone other than the creditor, (with some exceptions), if the creditor:Requires the use of a third party as a condition of, or incident to the extension of credit, even if the consumer can choose the third party, ORRetains a portion of the third-party charge, to the extent of the portion retained.Closing AgentsFees charged by a third party that conducts the loan closing (such as a settlement agent, attorney, or escrow or title company) are finance charges only if the creditor:Requires the particular services for which the consumer is charged.Requires the imposition of the charge.Retains a portion of the third-party charge, to the extent of the portion retained.Examples of Finance ChargesThe finance charge includes the following types of charges:InterestService, transaction and activity chargesPoints, loan fees, assumption fees, finder's fees, and similar chargesDiscounts for inducing payment by means other than creditAppraisal, investigation, and credit report fees (exceptions apply)Premiums or other charges for any guarantee or insurance protecting the creditor against the consumer's default or other credit lossCharges imposed on a creditor by another person for purchasing or accepting a consumer’s obligation, if the consumer is required to pay the chargesPremiums or other charges for credit life, accident, health, or loss-of-income insurance, written in connection with a credit transaction (exceptions apply)Premiums or other charges for insurance against loss of or damage to property written in connection with a credit transaction (exceptions apply)Charges or premiums paid for debt cancellation or debt suspension coverage written in connection with a credit transaction (exceptions apply)ExclusionsCharges excluded from the finance charge include:Application fees charged to all applicants for credit, whether or not credit is actually extended.Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.Charges imposed by a financial institution for paying items that overdraw an account, unless the payment of such items and the imposition of the charge were previously agreed upon in writing.Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis.Seller's points (or any other seller paid fees)Real Estate related feesReal-Estate Related Fees The following fees in a transaction secured by real property or in a residential mortgage transaction, if the fees are bona fide and reasonable in amount:Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents.Notary and credit-report fees.Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest-infestation or flood-hazard determinations.Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.Property Insurance PremiumsPremiums for insurance against loss of or damage to property may be excluded from the finance charge if the following conditions are met:The insurance coverage may be obtained from a person of the consumer's choice and this fact is disclosed. (A creditor may reserve the right to refuse to accept, for reasonable cause, an insurer offered by the consumer.)If the coverage is obtained from or through the creditor, the premium for the initial term of insurance coverage must be disclosed.Debt Cancellation and Debt Suspension CoveragePremiums for credit life, accident, health, or loss-of-income insurance may be excluded from the finance charge if the following conditions are met:The insurance coverage is not required by the creditor, and this fact is disclosed in writing.The premium for the initial term of insurance coverage is disclosed in writingThe consumer signs or initials an affirmative written request for the insurance after receiving disclosures Voluntary Debt Cancellation or Debt Suspension FeesCharges or premiums paid for debt cancellation coverage for amounts exceeding the value of the collateral securing the obligation may be excluded from the finance charge if the following conditions are met:The coverage is not required by the creditor, and this fact is disclosed in writing.The fee or premium for the initial term of coverage is disclosed in writing.For debt suspension coverage: That the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension.The consumer signs or initials an affirmative written request for coverage after receiving the disclosures Security Interest ChargesIf itemized and disclosed, taxes and fees prescribed by law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest may be excluded from the finance charge. ................
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