CUNA Regulatory Comment Call


April 10, 2001

Fed Interim Rule Allows Regulation Z Electronic Disclosures

(MAJOR RULE)

EXECUTIVE SUMMARY

Comments on the interim final rules are due by June 1, 2001. Please submit your comments to CUNA by May 24, 2001. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also contact us if you would like a copy of the interim rules or you may access the rules on the Internet at the following address:
http://www.federalreserve.gov/boarddocs/press/boardacts/2001/20010329/attachment3.pdf

BACKGROUND

The Truth in Lending Act (TILA) is intended to promote the informed use of consumer credit by providing for disclosures about its terms and cost. TILA requires creditors to disclose the cost of credit as a dollar amount and as an annual percentage rate (APR) in a uniform manner. This uniformity is intended to assist consumers in comparison shopping for credit. Regulation Z implements TILA, which contains official staff commentary that interprets the regulation and provides guidance in applying the regulation to specific transactions. TILA and Regulation Z require that a number of disclosures be provided in writing.

In August 1999, the Fed issued proposed rules to permit financial institutions, creditors, lessors, and others to use electronic communication to provide federally mandated disclosures to consumers. Click here for CUNA’s comment letter, which generally supported the use of electronic disclosures while offering specific suggestions for improvement.

In October 2000, the E-Sign Act became effective and allows electronic documents and signatures to have the same validity as paper documents and handwritten signatures. There are also special rules for the use of electronic disclosures in consumer transactions. Such disclosures may be provided in electronic form only if the consumer specifically consents after receiving certain information.

The E-Sign Act currently permits the use of electronic disclosures and does not require implementing rules, as long as the appropriate consent is obtained. This generally requires that the consumers be informed as to the hardware and software requirements for accessing the information. Consumers must also give the consent electronically and must “reasonably demonstrate” that they are able to obtain the information electronically. The term “reasonably demonstrate” is currently the subject of significant controversy within the financial services industry.

The Fed’s interim rules are designed to establish uniform requirements for the timing and delivery of electronic disclosures. They include most of the provisions that were included in the 1999 proposed rules to the extent that they were not affected by the E-Sign Act. The requirements are generally consistent among the five interim final rules that have now been issued.

DESCRIPTION OF THE INTERIM FINAL RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY

I. Open-end Credit

Credit Card Solicitations and Applications

For credit card solicitations, when a consumer accesses a blank application or reply form electronically, he or she must also at the same time have access to the required disclosures. The card issuer does not need to confirm that the consumer read the disclosures.

Creditors have flexibility for complying with this provision. Here are a few examples.

Similar guidance also applies to home-equity lines of credit and adjustable rate mortgage (ARM) loans.

For a variable rate plan, the disclosed APR would be considered accurate if it is one that was in effect within 30 days before the disclosures are sent to a consumer’s e-mail address. If the disclosures are accessible at another location, such as an Internet website, the APR must be one that was in effect within the last 30 days.

Currently, the format and content requirements differ for disclosures in credit card applications or solicitations that are sent by direct mail, as opposed to those that are made available to the public, such as “take-one” applications and those found in catalogs or magazines. The direct mail applications must contain disclosures in a table form while those available to the public may contain alternative formats. The interim rule clarifies that tables must be used for disclosures that are available on an Internet website.

Right of Rescission

For certain open-end transactions secured by a home, such as a home-equity line of credit, consumers generally have three business days to rescind after agreeing to the transaction. Consumers are entitled to two copies of a notice that explain these rescission rights. The interim rule permits the creditor to provide only one electronic notice to each consumer who has an ownership interest in the home and who has consented to the electronic delivery of the notice.

Advertising

Currently, creditors using a catalog or multi-page advertisement may state certain disclosures regarding APRs and fees in a table or schedule. If these terms are mentioned elsewhere in the advertisement, then there must be a reference to this table or schedule. The interim rule expands this to electronic advertisements, and the reference to the table or schedule may take the form of an electronic link.

II. Closed-end Credit

General Disclosure Requirements

Regulation Z currently permits creditors to defer providing the TILA disclosures when a consumer requests credit by mail, telephone, or any other written or “electronic communication” without the direct solicitation by the creditor. The term “electronic communication” was originally intended to apply to telegraph or facsimile transmissions.

The interim final rule clarifies that “electronic communications” does not refer to credit requests received by e-mail or through the Internet. Therefore, under these circumstances, creditors may not delay providing the TILA disclosures. The Fed believes that the difficulties in providing disclosures for credit requests by mail or telephone do not exist for credit requests received by e-mail or through the Internet.

Residential Loans with Variable APRs

For mortgage loans with variable APRs, creditors must generally provide a booklet and other disclosures that generally describe the product. This information must be provided at the time the application is provided to the consumer.

For these disclosures that are provided electronically, creditors have flexibility for complying with this provision, and they do not have to confirm that the consumer read the disclosures. Here are a few examples:

Right of Rescission

For certain transactions secured by a home, consumers generally have three business days to rescind after agreeing to the terms. Consumers are entitled to two copies of a notice that explain these rescission rights. The interim rule permits the creditor to provide only one electronic notice to each consumer who has an ownership interest in the home and who has consented to the electronic delivery of the notice.

Advertising

Creditors are currently allowed to state a simple annual interest rate or periodic rate in addition to the APR, as long as that rate is stated in conjunction with, but not more conspicuously, than the APR. For electronic advertisements, the interim rule requires that the consumer be able to review these rates simultaneously. A link to the APR is not sufficient.

As with open-end credit, creditors using a catalog or multi-page advertisement may state certain disclosures regarding APRs and fees in a table or schedule. If these terms are mentioned elsewhere in the advertisement, then there must be a reference to this table or schedule. The interim rule expands this to electronic advertisements, and the reference to the table or schedule may take the form of an electronic link.

III. General Provisions Regarding Electronic Communications

(All five interim rules regarding electronic disclosures contain similar provisions.)

Definition

The interim final rules provide for the delivery of disclosures by means of “electronic communication.” This is limited to information that can be displayed as visual text. This would not include other means, such as audio and video voice response systems. Alternative means may be provided to visually-impaired consumers, as long as visual text is also used.

General Rule

Other than any requirements that disclosures be in paper form, the interim rules do not affect any other substantive provision of TILA or Regulation Z. The current format, timing, and retainability rules still apply, as well as the “clear and conspicuous” standard for disclosures.

Clear and Conspicuous Format

Electronic disclosures must be in a format that is “clear and conspicuous.” The E-Sign Act also requires the following:

The disclosures do not have to be provided separately from other information. However, advertisements should not be integrated into the text to the extent that the clear and conspicuous standard would be violated. Navigational tools that direct the consumer to related information are also acceptable to the extent that they do not violate the clear and conspicuous standard.

Timing

Electronic disclosures must comply with the existing timing requirements under TILA and Regulation Z. E-mail disclosures are timely when sent by the required time. Disclosures posted on an Internet website are timely if, by the required time, they are posted on the website and a notice is sent to the consumer alerting him or her that the disclosures have been posted.

Certain disclosures must be provided before the consumer is obligated to fulfill the terms of a transaction. The creditor does not have to confirm that the consumer read the disclosures. For on-line transactions, the disclosures may be accessible by an electronic link, as long as the consumer is not able to bypass this link. Another alternative is for the disclosures to appear on the screen automatically. This also applies to disclosures that are interspersed into the text of another document. An example would be when a consumer opens a credit card account and then makes an immediate purchase.

Many of the disclosures provided under TILA and Regulation Z must be in a form that the consumer may retain. Electronic disclosures are subject to this same requirement and must generally be provided in a form that may be printed or stored electronically. To ensure that consumers may retain and access the information, these disclosures must either be sent to the consumer’s designated e-mail address or must be available on the creditor’s Internet website.

Consumers must have the ability to receive and retain the information when they use equipment that is controlled by the creditor, such as an automated loan machine or a computer terminal located in the lobby. This requirement may be satisfied if the disclosures are sent to the consumer’s e-mail address, available on the creditor’s website, or printed automatically from the creditor’s equipment.

Consent

Under the E-Sign Act, consumers must give consent before they receive electronic disclosures “relating to a transaction.” Disclosures in connection with advertisements, credit card applications and solicitations, home-equity lines of credit and ARM applications, and mail and telephone orders are not considered to be related to a transaction and, therefore, prior consent does not have to be given. However, the required disclosures must ultimately be provided to the consumer.

Address or Location to Receive Electronic Communication

Creditors may deliver the electronic disclosures to the consumer’s e-mail address. The disclosures may also be made available at another location, such as an Internet website, as long as the consumer receives notices that the disclosures have been posted. This notice may be sent by e-mail or regular mail and must identify the account and the website address or other location where the disclosures are available. The disclosures must be made available for at least 90 days. The requirements for this notice do not apply to disclosures in connection with credit applications or solicitations that are mailed or publicly available, certain advertisements, mail and telephone orders, or home- equity lines of credit or ARM applications.

The consumer’s e-mail address is defined as one that is not limited to receiving communications solely from the creditor. This would, for example, exclude home-banking programs that allow communications by means of a computer and modem. Under these circumstances, the creditor must send a separate notice, either by e-mail or regular mail.

Although the notice must identify the account, this does not require the account number. If the notice refers to one account, the notice may, for example, just refer to “your credit card account.” If more than one account is involved, the notice could differentiate the accounts based on the card program or by use of a shortened account number.

Although the disclosures must be made available for at least 90 days, creditors have discretion to determine if they should be available at the same location for the entire period.

Redelivery

Creditors do not have to verify delivery of electronic disclosures. If a disclosure is returned undelivered, the creditor must then attempt redelivery, based on the address information that is on file. This may be delivery to a different e-mail address or to the postal address that is on file. Sending the notice electronically to the same address would not be sufficient if the creditor has a different address on file.

These redelivery requirements do not apply when a disclosure is delivered but cannot be read by the consumer because of technical problems. Creditors will be considered to be in compliance with the timing requirements if they send the initial notice in a timely manner, even if it is later returned as undeliverable.

Electronic Signatures

Any requirement for a signature is satisfied if it meets the definition of an electronic signature under the E-Sign Act. This includes any electronic sound, symbol, or process that is associated with a record and is executed or adopted by a person that has the intent to sign the record.

IV. Miscellaneous

QUESTIONS TO CONSIDER REGARDING THE FED’S
PROPOSAL TO ALLOW ELECTRONIC DISCLOSURES
(The Fed is Specifically Interested in Receiving Comments on Most of the Issues Raised by the Following Questions.)

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com