CUNA Regulatory Comment Call


May 3, 2007

Fed Proposed Rules for Regulation Z Electronic Disclosures

EXECUTIVE SUMMARY

Comments on the proposed rules will be due by June 29, 2007. Please submit your comments to CUNA by June 18, 2007. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.com and to Senior Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us if you would like a copy of the proposed rules or you may access the rules here.

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 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.

In 2001, the Fed issued interim final rules regarding electronic disclosures. These were intended to ensure consistency with the E-Sign Act, which became effective on October 1, 2000. The E-Sign Act permits the use of electronic signatures and disclosures, as long as appropriate consent is received from the consumer.

The mandatory compliance date for the 2001 rules was to be October 1, 2001. However, as a result of concerns from credit unions and others, the Fed rescinded the compliance date, and the 2001 rules were never finalized. Since then, creditors have been able to provide electronic disclosures, as long as they complied with the E-Sign Act. These proposed rules will replace the 2001 interim final rules, although they do incorporate some of the provisions of those interim rules.

DESCRIPTION OF THE PROPOSED RULES AND CHANGES TO THE OFFICIAL STAFF COMMENTARY

I. Open-end Credit

General Disclosure Requirements

For open-end credit electronic disclosures, the general rule will be that creditors may provide these disclosures in electronic form, as long as the creditor complies with the consumer consent and the other applicable provisions of the E-Sign Act, which has been in effect since October 1, 2000. If these disclosures are provided in both paper and in electronic form, consent would not be required as the paper form could be used to satisfy the disclosure requirements.

Certain disclosures are to be provided to consumers in electronic form without the need to comply with the consumer consent requirements under the E-Sign Act. These specific disclosures, along with the circumstances in which they may be provided without consent, are discussed below.

Credit Card Solicitations and Applications

Under the proposed rules and the official staff commentary, if a consumer accesses an application or solicitation for a credit or charge card in electronic form, the required disclosures that must be included would need to be provided in electronic form on or with the application or solicitation. However, if a consumer receives an application or solicitation in paper form, such as through the mail, a creditor may not comply with these disclosure requirements by providing these disclosures in electronic form without the consumer’s consent, such as including a reference in these materials to a website in which these disclosures would be available.

The official staff commentary provides examples of how to include the electronic disclosures within an electronic application or solicitation. This includes having the disclosures appear on the screen, providing a reference to the location of these disclosures, or providing a link that the consumer may use to access these disclosures, as long as the link cannot be bypassed. The card issuer does not need to confirm that the consumer read the disclosures.

The bankruptcy law that was enacted in 2005 amended TILA to require that solicitations to open a card account using the Internet or other computer system must contain the same disclosures as those made for applications or solicitations sent by direct mail. The Fed proposes to also apply this provision to applications using the Internet or other computer systems, in addition to solicitations.

Similar to the 2001 interim rules, the proposed rules provide that the variable APRs disclosed on electronic applications and solicitations will be considered accurate if they were in effect within thirty days before they were posted or sent electronically. For direct mail solicitations and applications, variable APRs will be considered accurate if they were in effect within sixty days before they were mailed.

Requirements for Home Equity Plans

Under the proposed rules and official staff commentary, if a consumer accesses a home equity line of credit application in electronic form, the required disclosures must be provided in electronic form on or with the application. However, if a consumer receives an application or solicitation in paper form, such as through the mail, a creditor may not comply with these disclosure requirements by providing these disclosures in electronic form without the consumer’s consent, such as including a reference in these materials to a website in which these disclosures would be available.

Similar to electronic applications and solicitations, as described above, the official staff commentary provides examples of how to incorporate these electronic disclosures. Again, this includes having the disclosures appear on the screen, providing a reference to the location of these disclosures, or providing a link that the consumer may use to access these disclosures, as long as the link cannot be bypassed. The creditor does not need to confirm that the consumer read the disclosures.

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 explains these rescission rights. The proposed rules will permit the creditor to provide only one electronic notice to each consumer who has an ownership interest in the home and has the right to rescind, as long as each has consented to the electronic delivery of the notice. This is similar to the 2001 interim final rules that addressed this issue.

Advertising

Under the proposed rules and official staff commentary, if a consumer accesses an advertisement for open-end credit in electronic form, the required disclosures must be provided in electronic form on or with the advertisement. However, if a consumer receives an advertisement in paper form, such as through the mail, a creditor may not comply with these disclosure requirements by providing these disclosures in electronic form without the consumer’s consent, such as including a reference in these materials to a website in which these disclosures would be available.

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 proposed rules will expand this to electronic advertisements, and the reference to the table or schedule may take the form of an electronic link. This is similar to the 2001 interim final rules that addressed this issue.

II. Closed-end Credit

General Disclosure Requirements

Similar to open-end credit electronic disclosures, the general rule for closed-end credit disclosures will be that creditors may provide these disclosures in electronic form, as long as the creditor complies with the consumer consent and the other applicable provisions of the E-Sign Act. If these disclosures are provided in both paper and in electronic form, consent would not be required as the paper form could be used to satisfy the disclosure requirements. As discussed below, electronic disclosures relating to applications for adjustable rate mortgages secured by the principal dwelling and disclosures relating to closed-end credit advertising are to be provided in electronic form without the need to obtain the consumer’s consent.

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 disclosures may be deferred until the due date of the first payment, provided certain disclosures have been made available to the consumer and the public generally, such as in a catalog or advertisement. The term “electronic communication” was originally intended to apply to telegraph or facsimile transmissions.

The proposed rules will replace the term “electronic communication” with “facsimile machine” to clarify that such a delay will apply to credit requested by facsimile or telegram and not apply to credit requests received through the Internet. 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.

For credit requests made by telephone, mail, or facsimile machine, the disclosures that may be delayed until the first payment but otherwise have to be made available to the consumer or the public can be made available either in paper or electronic form, such as on a website. They may be made available in electronic form without the requirement to obtain consumer consent.

Certain Residential Loans and Variable APRs

The proposed rules will provide that if a consumer accesses a residential mortgage ARM application in electronic form, the disclosures required on or with an application for an ARM must be provided to the consumer in electronic form on or with the application. However, if a consumer receives an ARM application in paper form, such as through the mail, a creditor may not comply with these disclosure requirements by providing these disclosures in electronic form without the consumer’s consent, such as including a reference in these materials to a website in which these disclosures would be available.

Similar to electronic applications and solicitations and for home equity plans, as described above, the official staff commentary provides examples of how to incorporate these electronic disclosures. Again, this includes having the disclosures appear on the screen, providing a reference to the location of these disclosures, or providing a link that the consumer may use to access these disclosures, as long as the link cannot be bypassed. The creditor does not need to confirm that the consumer read the disclosures.

Right of Rescission

For certain closed-end transactions secured by a home, consumers generally have three business days to rescind after agreeing to the transaction (this does not apply to transactions such as residential mortgages or refinancings with the same creditor for the same amount of credit). Consumers are entitled to two copies of a notice that explains these rescission rights. The proposed rules will permit the creditor to provide only one electronic notice to each consumer who has an ownership interest in the home and has the right to rescind, as long as each has consented to the electronic delivery of the notice. This is similar to the 2001 interim final rules that addressed this issue.

Advertising

Under the proposed rules and official staff commentary, if a consumer accesses an advertisement for closed-end credit in electronic form, the required disclosures must be provided in electronic form on or with the advertisement. However, if a consumer receives an advertisement in paper form, such as through the mail, a creditor may not comply with these disclosure requirements by providing these disclosures in electronic form without the consumer’s consent, such as including a reference in these materials to a website in which these disclosures would be available.

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 proposed rules will expand this to electronic advertisements, and the reference to the table or schedule may take the form of an electronic link. This is similar to the 2001 interim final rules that addressed this issue.

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 2001 interim rules would have required that the consumer be able to review these rates simultaneously and that a link to the APR is not sufficient. This requirement is not included in the proposed rules because the Fed believes it is not necessary in light of the current requirements. The Fed believes that the current requirements would preclude requiring the consumer to scroll to another part of the webpage or access a link in order to view the APR.

III. Special Rules for Certain Home Mortgage Transactions

There are additional disclosure requirements for reverse mortgage loans and for loans with rates and fees that exceed the thresholds outlined in the Home Ownership and Equity Protection Act (HOEPA). For these disclosures, the general rule will be that creditors may provide these disclosures in electronic form, as long as the creditor complies the consumer consent and the other applicable provisions of the E-Sign Act. If these disclosures are provided in both paper and in electronic form, consent would not be required as the paper form could be used to satisfy the disclosure requirements.

IV. Withdrawal of the 2001 Interim Final Rules Regarding Timing and Delivery Requirements

The proposed rules will delete the general provisions regarding electronic communications that were included in the 2001 interim final rules. This includes the following timing and delivery requirements that were included in the 2001 rules:

The other general provisions will also be deleted, but this should have no impact on creditors as these other provisions generally outline the requirements that are already included in the E-Sign Act.

QUESTIONS TO CONSIDER REGARDING THE FED’S PROPOSAL ON ELECTRONIC DISCLOSURES

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com