Office of Thrift Supervision Page 1

Office of Thrift Supervision January 29, 2004

Department of the Treasury

Regulatory Bulletin

RB 36-1

Handbook: Compliance Activities Handbook

Subject: Consumer Laws and Regulations Section: 300

Compliance Activities Handbook Update 

Summary: This is the fourth update to the Compliance Activities Handbook. It includes 

revisions to Sections 305, 323, 325 and 360, Truth in Lending, Homeowner Protection Act, Consumer 

Leasing and Homeownership Counseling, respectively.

For Further Information Contact: Your Office of Thrift Supervision (OTS) Regional Office or the Compliance Policy Division of the OTS, Washington, DC. You may access this bulletin at our website: 

www.ots.treas.gov

Regulatory Bulletin 36-1

Summary of Changes

OTS is issuing updates to the following Compliance Activities Handbook Sections. We provide a summary 

of changes below.

Section 300 Consumer Laws and Regulations

305 Truth in Lending: This revised section includes several modifications 

primarily related to recent regulatory changes in the implementation of the 

Home Ownership and Equity Protection Act pertaining to certain high 

cost mortgages, including worksheets for analysis of such lending.

323 Homeowner Protection Act: This section has been updated to conform 

to recent technical amendments made to the law, including defining original value, clarifying amortization of adjustable rate mortgages, providing 

a measure for good payment history and designating loans with balloon 

payments for treatment as adjustable rate mortgages.

325 Consumer Leasing: This section has been reformatted to present the material in clearer terms and to include key definitions.

360 Homeownership Counseling: This section has been updated to recognize the elimination of past statutory sunset provisions. In addition, current supervisory review has been limited to requirements involving delinquent borrowers pending further guidance from HUD on the applicability 

of first-time homebuyer requirements.
Regulatory Bulletin 36-1

Page 2 Office of Thrift Supervision

Instructions on Updating the Compliance Activities Handbook

January 2004

Discard Insert

Section 305 (all pages) Section 305 

(January 2004)

Section 323 (all pages) Section 323 

(January 2004)

Section 325 (all pages) Section 325

(January 2004)

Section 360 (all pages) Section 360

(January 2004)

—Scott M. Albinson

 Managing Director, Supervision
CHAPTER: Consumer Affairs Laws and Regulations

SECTION: Truth In Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.1

Introduction

Background and Summary 

The Truth in Lending Act (TILA), 15 USC 1601

et seq., was enacted on May 29, 1968, as title I of 

the Consumer Credit Protection Act (Pub. L. 90-

321). The TILA, implemented by Regulation Z

(12 CFR 226), became effective July 1, 1969. 

The TILA was first amended in 1970 to prohibit

unsolicited credit cards. Additional major

amendments to the TILA and Regulation Z were

made by the Fair Credit Billing Act of 1974, the

Consumer Leasing Act of 1976, the Truth in

Lending Simplification and Reform Act of 1980,

the Fair Credit and Charge Card Disclosure Act of 

1988, and the Home Equity Loan Consumer

Protection Act of 1988. 

Regulation Z also was amended to implement

section 1204 of the Competitive Equality Banking

Act of 1987 and, in 1988, to include adjustable

rate mortgage loan disclosure requirements. All

consumer leasing provisions were deleted from

Regulation Z in 1981 and transferred to

Regulation M (12 CFR 213). 

The Home Ownership and Equity Protection Act

of 1994 amended TILA. The law imposed new

disclosure requirements and substantive

limitations on certain closed-end mortgage loans

bearing rates or fees above a certain percentage or 

amount. The law also included new disclosure

requirements to assist consumers in comparing the

costs and other material considerations involved

in a reverse mortgage transaction and authorized

the Federal Reserve Board to prohibit specific acts 

and practices in connection with mortgage

transactions. Regulation Z was amended1 to

implement these legislative changes to TILA. 

The TILA amendments of 1995 dealt primarily

with tolerances for real estate secured credit. 

Regulation Z was amended on September 14,

1996 to incorporate changes to the TILA.

Specifically, the revisions limit lenders’ liability

for disclosure errors in real estate secured loans

consummated after September 30, 1995. The

Economic Growth and Regulatory Paperwork

Reduction Act of 1996 further amended TILA.

The amendments were made to simplify and

improve disclosures related to credit transactions. 

Format of Regulation Z 

The disclosure rules creditors must follow differ

depending on whether the creditor is offering

open-end credit, such as credit cards or homeequity lines, or closed-end credit, such as car

loans or mortgages. 

Subpart A (sections 226.1 through 226.4) of the

regulation provides general information that

applies to open-end and closed-end credit

transactions. It sets forth definitions and stipulates 

which transactions are covered and which are

exempt from the regulation. It also contains the

rules for determining which fees are finance

charges.

Subpart B (sections 226.5 through 226.16) of the

regulation contains rules for disclosures for homeequity loans, credit and charge card accounts, and 

other open-end credit. 

Subpart B also covers rules for resolving billing

errors, calculating annual percentage rates, credit

balances, and advertising open-end credit. Special

rules apply to credit card transactions only, such

as certain prohibitions on the issuance of credit

cards and restrictions on the right to offset a

cardholder’s indebtedness. Additional special

rules apply to home-equity lines of credit, such as 

certain prohibitions against closing accounts or

changing account terms. 

 

1

 60 FR 15463, March 24, 1995 and 66 FR 65604, 

December 20, 2001.

Approved – FFIEC
SECTION: Truth in Lending Section 305

305.2 Compliance Activities January 2004 Office of Thrift Supervision

Subpart C (sections 226.17 through 226.24)

includes provisions for closed-end credit.

Residential mortgage transactions, demand loans,

and installment credit contracts, including direct

loans by banks and purchased dealer paper, are

included in the closed-end credit category. 

Subpart C also contains disclosure rules for

regular and variable rate loans, refinancings and

assumptions, credit balances, calculating annual

percentage rates, and advertising closed-end 

credit. 

Subpart D (sections 226.25 through 226.30),

which applies to both open-end and closed-end 

credit, sets forth the duty of creditors to retain

evidence of compliance with the regulation. It also 

clarifies the relationship between the regulation

and state law, and requires creditors to set a cap

for variable rate transactions secured by a

consumer’s dwelling. 

Subpart E (sections 226.31 through 226.34)

applies to certain home mortgage transactions

including high-cost, closed-end mortgages and

reverse mortgages. It requires additional

disclosures and provides limitations for certain

home mortgage transactions having rates or fees

above a certain percentage or amount, and

prohibits specific acts and practices in connection

with those loans. Subpart E also includes

disclosure requirements for reverse mortgage

transactions (open-end and closed-end credit). 

The appendices to the regulation set forth model

forms and clauses that creditors may use when

providing open-end and closed-end disclosures.

The appendices contain detailed rules for

calculating the APR for open-end credit (appendix 

F) and closed-end credit (appendixes D and J).

The last two appendixes (appendixes K and L)

provide total annual loan cost rate computations

and assumed loan periods for reverse mortgage

transactions. 

Official staff interpretations of the regulation are

published in a commentary that is normally

updated annually in March. Good faith

compliance with the commentary protects

creditors from civil liability under the act. In

addition, the commentary includes mandates,

which are not necessarily explicit in Regulation Z, 

on disclosures or other actions required of

creditors. It is virtually impossible to comply with 

Regulation Z without reference to and reliance on

the commentary. 

Note: The following narrative does not encompass 

all the sections of Regulation Z, but rather 

highlights areas that have caused the most

problems with the calculation of the finance

charge and the calculation of the annual

percentage rate. 

Subpart A - General 

Purpose of the TILA and Regulation Z 

The Truth in Lending Act is intended to ensure 

that credit terms are disclosed in a meaningful

way so consumers can compare credit terms more 

readily and knowledgeably. Before its enactment,

consumers were faced with a bewildering array of 

credit terms and rates. It was difficult to compare

loans because they were seldom presented in the

same format. Now, all creditors must use the same 

credit terminology and expressions of rates. In

addition to providing a uniform system for

disclosures, the act is designed to: 

• Protect consumers against inaccurate and

unfair credit billing and credit card practices; 

• Provide consumers with rescission rights; 

• Provide for rate caps on certain dwellingsecured loans; and 

• Impose limitations on home equity lines of

credit and certain closed-end home

mortgages. 

The TILA and Regulation Z do not, however, tell

financial institutions how much interest they may

charge or whether they must grant a consumer a

loan. 

Summary of Coverage Considerations

§226.1 & §226.2

Lenders must carefully consider several factors

when deciding whether a loan requires Truth in

Lending disclosures or is subject to other

Regulation Z requirements. The coverage

considerations under Regulation Z are addressed
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.3

in more detail in the commentary to Regulation Z. 

For example, broad coverage considerations are

included under section 226.1(c) of the regulation

and relevant definitions appear in section 226.2. 

Exempt Transactions §226.3 

The following transactions are exempt from

Regulation Z: 

• Credit extended primarily for a business,

commercial, or agricultural purpose; 

• Credit extended to other than a natural person 

(including credit to government agencies or

instrumentalities); 

• Credit in excess of $25,000 and not secured

by real or personal property used as the

principal dwelling of the consumer; 

• Public utility credit; 

• Credit extended by a broker-dealer registered

with the Securities and Exchange Commission 

(SEC) or the Commodity Futures Trading

Commission (CFTC), involving securities or

commodities accounts; 

• Home fuel budget plans; and 

• Certain student loan programs. 

Footnote 4: If a credit card is involved, generally

exempt credit (e.g., business or agricultural

purpose credit) is still subject to requirements that 

govern the issuance of credit cards and liability

for their unauthorized use. Credit cards must not

be issued on an unsolicited basis and, if a credit

card is lost or stolen, the cardholder must not be

held liable for more than $50 for the unauthorized 

use of the card. 

When determining whether credit is for consumer

purposes, the creditor must evaluate all of the

following: 

• Any statement obtained from the consumer

describing the purpose of the proceeds. 

 For example, a statement that the

proceeds will be used for a vacation trip

would indicate a consumer purpose. 

 If the loan has a mixed-purpose (e.g.,

proceeds will be used to buy a car that

will be used for personal and business

purposes), the lender must look to the

primary purpose of the loan to decide

whether disclosures are necessary. A

statement of purpose from the consumer

will help the lender make that decision. 

 A checked box indicating that the loan is

for a business purpose, absent any

documentation showing the intended use

of the proceeds, could be insufficient

evidence that the loan did not have a

consumer purpose. 

• The consumer’s primary occupation and how

it relates to the use of the proceeds. The

higher the correlation between the consumer’s

occupation and the property purchased from

the loan proceeds, the greater the likelihood

that the loan has a business purpose. For

example, proceeds used to purchase dental

supplies for a dentist would indicate a

business purpose. 

• Personal management of the assets purchased

from proceeds. The lower the degree of the

borrower’s personal involvement in the

management of the investment or enterprise

purchased by the loan proceeds, the less likely 

the loan will have a business purpose. For

example, money borrowed to purchase stock

in an automobile company by an individual

who does not work for that company would

indicate a personal investment and a

consumer purpose. 

• The size of the transaction. The larger the

size of the transaction, the more likely the

loan will have a business purpose. For

example, if the loan is for a $5,000,000 real

estate transaction, that might indicate a

business purpose. 

• The amount of income derived from the

property acquired by the loan proceeds

relative to the borrower’s total income. The

lesser the income derived from the acquired

property, the more likely the loan will have a

consumer purpose. For example, if the 

borrower has an annual salary of $100,000

and receives about $500 in annual dividends
SECTION: Truth in Lending Section 305

305.4 Compliance Activities January 2004 Office of Thrift Supervision

from the acquired property, that would

indicate a consumer purpose. 

All five factors must be evaluated before the

lender can conclude that disclosures are not

necessary. Normally, no one factor, by itself, is

sufficient reason to determine the applicability of

Regulation Z. In any event, the financial

institution may routinely furnish disclosures to the 

consumer. Disclosure under such circumstances

does not control whether the transaction is

covered, but can assure protection to the financial

institution and compliance with the law. 
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.5

Coverage Considerations under Regulation Z

Regulation Z applies

Regulation Z does not apply, except for the rules of issuance of and 

unauthorized use liability for credit cards. (Exempt credit includes loans 

with a business or agricultural purpose, and certain student loans. Credit 

extended to acquire or improve rental property that is not owner-occupied 

is considered business purpose credit.)

Is the 

purpose of 

the credit 

for 

personal, 

family or 

household 

use?

Is the 

consumer 

credit 

extended to a 

consumer?

Is the 

consumer 

credit 

extended 

by a 

creditor?

Is the loan or 

credit plan 

secured by 

real property 

or by the 

consumer’s 

principal 

dwelling?

Is the 

amount 

financed or 

credit limit 

$25,000 or 

less?

Regulation Z does not apply. (Credit that is extended to a land trust is 

deemed to be credit extended to a consumer.)

The institution is not a “creditor” and Regulation Z does not apply unless at 

least one of the following tests is met:

1) The institution extends consumer credit regularly and 

 a) The obligation is initially payable to the institution and

 b) The obligation is either payable by written agreement in more than four 

installments or is subject to a finance charge

2) The institution is a card issuer that extends closed-end credit that is subject 

to a finance charge or is payable by written agreement in more than four 

installments.

3) The institution is not the card issuer, but it imposes a finance charge at the 

time of honoring a credit card.

(NOTE: All persons, including noncreditors, must comply with the advertising 

provisions of Regulation Z.)

Regulation Z does not apply, but may apply later if the loan 

is refinanced for $25,000 or less. If the principal dwelling is 

taken as collateral after consummation, rescission rights will 

apply and, in the case of open-end credit, billing disclosures 

and other provisions of Regulation Z will apply.

No

Yes

No

Yes

No

Yes

No No

Yes Yes
SECTION: Truth in Lending Section 305

305.6 Compliance Activities January 2004 Office of Thrift Supervision

Determination of Finance Charge and 

APR 

Finance Charge (Open-End and Closed-End 

Credit) §226.4

The finance charge is a measure of the cost of

consumer credit represented in dollars and cents.

Along with APR disclosures, the disclosure of the

finance charge is central to the uniform credit cost 

disclosure envisioned by the TILA. 

The finance charge does not include any charge of 

a type payable in a comparable cash transaction.

Examples of charges payable in a comparable

cash transaction may include taxes, title, license

fees, or registration fees paid in connection with

an automobile purchase. 

Finance charges include any charges or fees

payable directly or indirectly by the consumer and 

imposed directly or indirectly by the financial

institution either as an incident to or as a condition 

of an extension of consumer credit. The finance

charge on a loan always includes any interest

charges and often, other charges. Regulation Z

includes examples, applicable both to open-end 

and closed-end credit transactions, of what must,

must not, or need not be included in the disclosed

finance charge (§226.4(b)). 

Accuracy Tolerances (Closed-End Credit) 

§§226.18(d) & 226.23(h) 

Regulation Z provides finance charge tolerances

for legal accuracy that should not be confused

with those provided in the TILA for

reimbursement under regulatory agency orders.

As with disclosed APRs, if a disclosed finance

charge were legally accurate, it would not be

subject to reimbursement. 

Under TILA and Regulation Z, finance charge

disclosures for open-end credit must be accurate

since there is no tolerance for finance charge

errors. However, both TILA and Regulation Z

permit various finance charge accuracy tolerances

for closed-end credit. 

Tolerances for the finance charge in a closed-end 

transaction are generally $5 if the amount

financed is less than or equal to $1,000 and $10 if 

the amount financed exceeds $1,000. Tolerances

for certain transactions consummated on or after

September 30, 1995 are noted below. 

• Credit secured by real property or a dwelling

(closed-end credit only): 

 The disclosed finance charge is

considered accurate if it does not vary

from the actual finance charge by more

than $100. 

 Overstatements are not violations. 

• Rescission rights after the three-business-day 

rescission period (closed-end credit only): 

 The disclosed finance charge is

considered accurate if it does not vary

from the actual finance charge by more

than one-half of 1 percent of the credit

extended. 

 The disclosed finance charge is

considered accurate if it does not vary

from the actual finance charge by more

than 1 percent of the credit extended for

the initial and subsequent refinancings of

residential mortgage transactions when

the new loan is made at a different

financial institution. (This excludes high

cost mortgage loans subject to §226.32,

transactions in which there are new

advances, and new consolidations.) 

• Rescission rights in foreclosure: 

 The disclosed finance charge is

considered accurate if it does not vary

from the actual finance charge by more

than $35. 

 Overstatements are not considered

violations. 

 The consumer can rescind if a mortgage

broker fee is not included as a finance

charge. 

Note: Normally, the finance charge tolerance for a 

rescindable transaction is either 0.5 percent of the

credit transaction or, for certain refinancings, 1

percent of the credit transaction. However, in the
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.7

event of a foreclosure, the consumer may exercise 

the right of rescission if the disclosed finance

charge is understated by more than $35. 

See the “Finance Charge Tolerances” charts

within these examination procedures for help in

determining appropriate finance charge

tolerances. 

Calculating the Finance Charge (Closed-End 

Credit) 

One of the more complex tasks under Regulation

Z is determining whether a charge associated with 

an extension of credit must be included in, or

excluded from, the disclosed finance charge. The

finance charge initially includes any charge that

is, or will be, connected with a specific loan.

Charges imposed by third parties are finance

charges if the financial institution requires use of

the third party. Charges imposed by settlement or

closing agents are finance charges if the bank

requires the specific service that gave rise to the

charge and the charge is not otherwise excluded.

The “Finance Charge Tolerances” charts within

this document briefly summarize the rules that

must be considered. 

Prepaid Finance Charges §226.18(b) 

A prepaid finance charge is any finance charge

paid separately to the financial institution or to a

third party, in cash or by check before or at

closing, settlement, or consummation of a

transaction, or withheld from the proceeds of the

credit at any time. 

Prepaid finance charges effectively reduce the

amount of funds available for the consumer’s use, 

usually before or at the time the transaction is

consummated. 

Examples of finance charges frequently prepaid

by consumers are borrower’s points, loan

origination fees, real estate construction

inspection fees, odd days’ interest (interest

attributable to part of the first payment period

when that period is longer than a regular payment 

period), mortgage guarantee insurance fees paid to 

the Federal Housing Administration, private

mortgage insurance (PMI) paid to such companies 

as the Mortgage Guaranty Insurance Company

(MGIC), and, in non-real-estate transactions,

credit report fees. 

Precomputed Finance Charges 

A precomputed finance charge includes, for

example, interest added to the note amount that is

computed by the add-on, discount, or simple

interest methods. If reflected in the face amount of 

the debt instrument as part of the consumer’s

obligation, finance charges that are not viewed as

prepaid finance charges are treated as

precomputed finance charges that are earned over

the life of the loan.
SECTION: Truth in Lending Section 305

305.8 Compliance Activities January 2004 Office of Thrift Supervision

Finance Charge Chart

FINANCE CHARGE = DOLLAR COST OF CONSUMER CREDIT: It includes any charge payable directly or indirectly by 

the consumer and imposed directly or indirectly by the creditor as a condition of or incident to the extension of credit.

CHARGES ALWAYS 

INCLUDED

CHARGES INCLUDED 

UNLESS CONDITIONS 

ARE MET

CONDITIONS

(Any loan)

CHARGES NOT 

INCLUDED 

(Residential mortgage 

transactions and loans secured 

by real estate)

CHARGES NEVER 

INCLUDED

Charges payable in a comparable 

cash transaction.

Fees for unanticipated late 

payments

Overdraft fees not agreed to in 

writing

Seller’s points

Participation or membership fees

Discount offered by the seller to 

induce payment by cash or other 

means not involving the use of a 

credit card

Interest forfeited as a result of 

interest reduction required by law

Charges absorbed by the creditor as 

a cost of doing business

Interest

Transaction fees

Loan origination fees 

Consumer points

Credit guarantee insurance 

premiums

Charges imposed on the creditor for 

purchasing the loan, which are 

passed on to the consumer

Discounts for inducing payment by 

means other than credit

Mortgage broker fees

Other examples: Fee for preparing 

TILA disclosures; real estate 

construction loan inspection fees; 

fees for post-consummation tax or 

flood service policy; required credit 

life insurance charges

Premiums for credit life, A&H, or 

loss of income insurance

Debt cancellation fees

Premiums for property or liability 

insurance

Premiums for vendor’s single 

interest (VSI) insurance

Security interest charges (filing 

fees), insurance in lieu of filing fees 

and certain notary fees

Charges imposed by third parties

Charges imposed by third party 

closing agents

Appraisal and credit report fees

Insurance not required, disclosures 

are made, and consumer authorizes

Coverage not required, disclosures 

are made, and consumer authorizes

Consumer selects insurance 

company and disclosures are made

Insurer waives right of subrogation, 

consumer selects insurance 

company, and disclosures are made

The fee is for lien purposes, 

prescribed by law, payable to a third 

public official and is itemized and 

disclosed

Use of the third party is not required 

to obtain loan and creditor does not 

retain the charge

Creditor does not require and does 

not retain the fee for the particular 

service

Application fees, if charged to all 

applicants, are not finance charges. 

Application fees may include 

appraisal or credit report fees.

Fees for title insurance, title examination, 

property survey, etc.

Fees for preparing loan documents, 

mortgages, and other settlement documents

Amounts required to be paid into escrow, if 

not otherwise included in the finance 

charge

Notary fees

Pre-consummation flood and pest 

inspection fees

Appraisal and credit report fees
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.9

Instructions for the Finance Charge Chart

The finance charge initially includes any charge

that is, or will be, connected with a specific loan.

Charges imposed by third parties are finance

charges if the creditor requires use of the third

party. Charges imposed on the consumer by a

settlement agent are finance charges only if the

creditor requires the particular services for which

the settlement agent is charging the borrower and 

the charge is not otherwise excluded from the

finance charge. 

Immediately below the finance charge definition,

the chart presents five captions applicable to

determining whether a loan related charge is a

finance charge. 

The first caption is charges always included. This 

category focuses on specific charges given in the

regulation or commentary as examples of finance

charges. 

The second caption, charges included unless

conditions are met, focuses on charges that must

be included in the finance charge unless the

creditor meets specific disclosure or other

conditions to exclude the charges from the finance

charge. 

The third caption, conditions, focuses on the

conditions that need to be met if the charges

identified to the left of the conditions are

permitted to be excluded from the finance charge.

Although most charges under the second caption

may be included in the finance charge at the

creditor’s option, third party charges and

application fees (listed last under the third caption) 

must be excluded from the finance charge if the

relevant conditions are met. However, inclusion of

appraisal and credit report charges as part of the

application fee is optional. 

The fourth caption, charges not included, 

identifies fees or charges that are not included in

the finance charge under conditions identified by

the caption. If the credit transaction is secured by

real property or the loan is a residential mortgage

transaction, the charges identified in the column, if 

they are bona fide and reasonable in amount, must 

be excluded from the finance charge. For example, 

if a consumer loan is secured by a vacant lot or

commercial real estate, any appraisal fees

connected with the loan must not be included in

the finance charge. 

The fifth caption, charges never included, lists

specific charges provided by the regulation as

examples of those that automatically are not

finance charges (e.g., fees for unanticipated late

payments). 

Annual Percentage Rate Definition §226.22 

(Closed-End Credit) 

Credit costs may vary depending on the interest

rate, the amount of the loan and other charges, the 

timing and amounts of advances, and the

repayment schedule. The APR, which must be

disclosed in nearly all consumer credit

transactions, is designed to take into account all

relevant factors and to provide a uniform measure 

for comparing the cost of various credit

transactions. 

The APR is a measure of the cost of credit,

expressed as a nominal yearly rate. It relates the

amount and timing of value received by the

consumer to the amount and timing of payments

made. The disclosure of the APR is central to the

uniform credit cost disclosure envisioned by the

TILA. 

The value of a closed-end credit APR must be

disclosed as a single rate only, whether the loan

has a single interest rate, a variable interest rate, a 

discounted variable interest rate, or graduated

payments based on separate interest rates (step

rates), and it must appear with the segregated

disclosures. Segregated disclosures are grouped

together and do not contain any information not

directly related to the disclosures required under

§226.18. 

Since an APR measures the total cost of credit,

including costs such as transaction charges or

premiums for credit guarantee insurance, it is not

an “interest” rate, as that term is generally used.

APR calculations do not rely on definitions of

interest in state law and often include charges,

such as a commitment fee paid by the consumer,

that are not viewed by some state usury statutes as 

interest. Conversely, an APR might not include a

charge, such as a credit report fee in a real
SECTION: Truth in Lending

305.10 Compliance Activities January 2004 Office of Thrift Supervision

property transaction, which some state laws might

view as interest for usury purposes. Furthermore,

measuring the timing of value received and of

payments made, which is essential if APR

calculations are to be accurate, must be consistent

with parameters under Regulation Z. 

The APR is often considered to be the finance

charge expressed as a percentage. However, two

loans could require the same finance charge and

still have different APRs because of differing

values of the amount financed or of payment

schedules. For example, the APR is 12 percent on

a loan with an amount financed of $5,000 and 36

equal monthly payments of $166.07 each. It is

13.26 percent on a loan with an amount financed

of $4,500 and 35 equal monthly payments of

$152.18 each and final payment of $152.22. In

both cases the finance charge is $978.52. The

APRs on these example loans are not the same

because an APR does not only reflect the finance

charge. It relates the amount and timing of value

received by the consumer to the amount and

timing of payments made. 

The APR is a function of: 

• The amount financed, which is not necessarily

equivalent to the loan amount. If the consumer 

must pay at closing a separate 1 percent loan

origination fee (prepaid finance charge) on a

$100,000 residential mortgage loan, the loan

amount is $100,000, but the amount financed

would be $100,000 less the $1,000 loan fee, or 

$99,000. 

• The finance charge, which is not necessarily

equivalent to the total interest amount. 

 If the consumer must pay a $25 credit

report fee for an auto loan, the fee must be 

included in the finance charge. The

finance charge in that case is the sum of

the interest on the loan (i.e., interest

generated by the application of a

percentage rate against the loan amount)

plus the $25 credit report fee. 

 If the consumer must pay a $25 credit

report fee for a home improvement loan

secured by real property, the credit report

fee must be excluded from the finance

charge. The finance charge in that case

would be only the interest on the loan. 

 Interest, which is defined by state or other 

federal law, is not defined by Regulation

Z. 

• The payment schedule, which does not

necessarily include only principal and interest

(P + I) payments. 

 If the consumer borrows $2,500 for a

vacation trip at 14 percent simple interest

per annum and repays that amount with 25 

equal monthly payments beginning one

month from consummation of the

transaction, the monthly P + I payment

will be $115.87, if all months are

considered equal, and the amount financed 

would be $2,500. If the consumer’s

payments are increased by $2.00 a month

to pay a non-financed $50 loan fee during 

the life of the loan, the amount financed

would remain at $2,500 but the payment

schedule would be increased to $117.87 a

month, the finance charge would increase

by $50, and there would be a

corresponding increase in the APR. This

would be the case whether or not state law 

defines the $50 loan fee as interest.

 If the loan above has 55 days to the first

payment and the consumer prepays

interest at consummation ($24.31 to cover

the first 25 days), the amount financed

would be $2,500 - $24.31, or $2,475.69.

Although the amount financed has been

reduced to reflect the consumer’s reduced

use of available funds at consummation,

the time interval during which the

consumer has use of the $2,475.69, 55

days to the first payment, has not changed. 

Since the first payment period exceeds the

limitations of the regulation’s minor

irregularities provisions (see

§226.17(c)(4)), it may not be treated as

regular. In calculating the APR, the first

payment period must not be reduced by 25 

days (i.e., the first payment period may

not be treated as one month). 

Financial institutions may, if permitted by state or

other law, precompute interest by applying a rate
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.11

against a loan balance using a simple interest, addon, discount or some other method, and may earn

interest using a simple interest accrual system, the

Rule of 78’s (if permitted by law) or some other

method. Unless the financial institution’s internal

interest earnings and accrual methods involve a

simple interest rate based on a 360-day year that is 

applied over actual days (even that is important

only for determining the accuracy of the payment

schedule), it is not relevant in calculating an APR, 

since an APR is not an interest rate (as that term is 

commonly used under state or other law). Since

the APR normally need not rely on the internal

accrual systems of a bank, it always may be

computed after the loan terms have been agreed

upon (as long as it is disclosed before actual

consummation of the transaction). 

Special Requirements for Calculating the 

Finance Charge and APR 

Proper calculation of the finance charge and APR

are of primary importance. The regulation requires 

that the terms “finance charge” and “annual 

percentage rate” be disclosed more conspicuously

than any other required disclosure. The finance

charge and APR, more than any other disclosures, 

enable consumers to understand the cost of the

credit and to comparison shop for credit. A

creditor’s failure to disclose those values

accurately can result in significant monetary

damages to the creditor, either from a class action

lawsuit or from a regulatory agency’s order to

reimburse consumers for violations of law. 

Footnote 45d: If an annual percentage rate or

finance charge is disclosed incorrectly, the error is 

not, in itself, a violation of the regulation if: 

• The error resulted from a corresponding error

in a calculation tool used in good faith by the 

financial institution. 

• Upon discovery of the error, the financial

institution promptly discontinues use of that

calculation tool for disclosure purposes. 

• The financial institution notifies the Federal

Reserve Board in writing of the error in the

calculation tool. 

When a financial institution claims a calculation

tool was used in good faith, the financial

institution assumes a reasonable degree of

responsibility for ensuring that the tool in question 

provides the accuracy required by the regulation.

For example, the financial institution might verify 

the results obtained using the tool by comparing

those results to the figures obtained by using

another calculation tool. The financial institution

might also verify that the tool, if it is designed to

operate under the actuarial method, produces

figures similar to those provided by the examples

in appendix J to the regulation. The calculation

tool should be checked for accuracy before it is

first used and periodically thereafter. 

Subpart B - Open-End Credit

The following is not a complete discussion of the

open-end credit requirements in the Truth in

Lending Act. Instead, the information provided

below is offered to clarify otherwise confusing

terms and requirements. Refer to §§226.5 through

226.16 and related commentary for a more

thorough understanding of the Act. 

Finance Charge (Open-End Credit) §226.6(a) 

Each finance charge imposed must be individually

itemized. The aggregate total amount of the

finance charge need not be disclosed. 

Determining the Balance and Computing the 

Finance Charge 

The examiner must know how to compute the

balance to which the periodic rate is applied.

Common methods used are the previous balance

method, the daily balance method, and the average 

daily balance method, which are described as

follows: 

• Previous balance method – The balance on

which the periodic finance charge is computed 

is based on the balance outstanding at the start 

of the billing cycle. The periodic rate is

multiplied by this balance to compute the

finance charge. 

• Daily balance method – A daily periodic rate 

is applied to either the balance on each day in
SECTION: Truth in Lending

305.12 Compliance Activities January 2004 Office of Thrift Supervision

the cycle or the sum of the balances on each of 

the days in the cycle. If a daily periodic rate is 

multiplied by the balance on each day in the

billing cycle, the finance charge is the sum of

the products. If the daily periodic rate is

multiplied by the sum of all the daily balances, 

the result is the finance charge. 

• Average daily balance method – The average

daily balance is the sum of the daily balances

(either including or excluding current

transactions) divided by the number of days in 

the billing cycle. A periodic rate is then

multiplied by the average daily balance to

determine the finance charge. If the periodic

rate is a daily one, the product of the rate

multiplied by the average balance is multiplied 

by the number of days in the cycle. 

In addition to those common methods, financial

institutions have other ways of calculating the

balance to which the periodic rate is applied. By

reading the financial institution’s explanation, the

examiner should be able to calculate the balance to 

which the periodic rate was applied. In some

cases, the examiner may need to obtain additional

information from the financial institution to verify

the explanation disclosed. Any inability to

understand the disclosed explanation should be

discussed with management, who should be

reminded of Regulation Z’s requirement that

disclosures be clear and conspicuous. 

When a balance is determined without first

deducting all credits and payments made during

the billing cycle, that fact and the amount of the

credits and payments must be disclosed. 

If the financial institution uses the daily balance

method and applies a single daily periodic rate,

disclosure of the balance to which the rate was

applied may be stated as any of the following: 

• A balance for each day in the billing cycle.

The daily periodic rate is multiplied by the

balance on each day and the sum of the

products is the finance charge. 

• A balance for each day in the billing cycle on

which the balance in the account changes. 

The finance charge is figured by the same

method as discussed previously, but the

statement shows the balance only for those

days on which the balance changed. 

• The sum of the daily balances during the

billing cycle. The balance on which the

finance charge is computed is the sum of all

the daily balances in the billing cycle. The

daily periodic rate is multiplied by that

balance to determine the finance charge. 

• The average daily balance during the billing

cycle. If this is stated, however, the financial 

institution must explain somewhere on the

periodic statement or in an accompanying

document that the finance charge is or may be 

determined by multiplying the average daily

balance by the number of days in the billing

cycle, rather than by multiplying the product

by the daily periodic rate. 

If the financial institution uses the daily balance

method, but applies two or more daily periodic

rates, the sum of the daily balances may not be

used. Acceptable ways of disclosing the balances

include: 

• A balance for each day in the billing cycle; 

• A balance for each day in the billing cycle on

which the balance in the account changes; or 

• Two or more average daily balances. If the

average daily balances are stated, the financial 

institution shall indicate on the periodic

statement or in an accompanying document

that the finance charge is or may be

determined by multiplying each of the average

daily balances by the number of days in the

billing cycle (or if the daily rate varies, by

multiplying the number of days that the

applicable rate was in effect), multiplying

each of the results by the applicable daily

periodic rate, and adding the products

together. 

In explaining the method used to find the balance

on which the finance charge is computed, the

financial institution need not reveal how it

allocates payments or credits. That information

may be disclosed as additional information, but all 

required information must be clear and

conspicuous. 
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.13

Finance Charge Resulting from Two or More 

Periodic Rates 

Some financial institutions use more than one

periodic rate in computing the finance charge. For

example, one rate may apply to balances up to a

certain amount and another rate to balances more

than that amount. If two or more periodic rates

apply, the financial institution must disclose all

rates and conditions. The range of balances to

which each rate applies also must be disclosed. It

is not necessary, however, to break the finance

charge into separate components based on the

different rates. 

Annual Percentage Rate (Open-End Credit)

Accuracy Tolerance §226.14 

The disclosed annual percentage rate (APR) on an 

open-end credit account is accurate if it is within

one-eighth of 1 percentage point of the APR

calculated under Regulation Z. 

Determination of APR 

The regulation states two basic methods for

determining the APR in open-end credit

transactions. The first involves multiplying each

periodic rate by the number of periods in a year.

This method is used for disclosing: 

• The corresponding APR in the initial

disclosures; 

• The corresponding APR on periodic

statements; 

• The APR in early disclosures for credit card

accounts; 

• The APR in early disclosures for home-equity 

plans; 

• The APR in advertising; and 

• The APR in oral disclosures. 

The corresponding APR is prospective. In other

words, it does not involve any particular finance

charge or periodic balance. 

The second method is the quotient method, used in 

computing the APR for periodic statements. The

quotient method reflects the annualized equivalent

of the rate that was actually applied during a cycle. 

This rate, also known as the historical rate, will

differ from the corresponding APR if the creditor

applies minimum, fixed, or transaction charges to

the account during the cycle. 

If the finance charge is determined by applying

one or more periodic rates to a balance, and does

not include any of the charges just mentioned, the

financial institution may compute the historical

rate using the quotient method. In that method, the 

financial institution divides the total finance 

charge for the cycle by the sum of the balances to 

which the periodic rates were applied and

multiplies the quotient (expressed as a percentage)

by the number of cycles in a year. 

Alternatively, the financial institution may use the

method for computing the corresponding APR. In

that method, the financial institution multiplies

each periodic rate by the number of periods in one 

year. If the finance charge includes a minimum,

fixed, or transaction charge, the financial

institution must use the appropriate variation of

the quotient method. When transaction charges are 

imposed, the financial institution should refer to

appendix F of this handbook for computational

examples. 

The regulation also contains a computation rule

for small finance charges. If the finance charge

includes a minimum, fixed, or transaction charge,

and the total finance charge for the cycle does not

exceed 50 cents, the financial institution may

multiply each applicable periodic rate by the

number of periods in a year to compute the APR. 

Optional calculation methods also are provided for 

accounts involving daily periodic rates

(§226.14(d)). 

Brief Outline for Open-End Credit APR 

Calculations on Periodic Statements 

Note: Assume monthly billing cycles for each of

the calculations below.

I. APR when finance charge is determined solely 

by applying one or more periodic rates:
SECTION: Truth in Lending

305.14 Compliance Activities January 2004 Office of Thrift Supervision

A. Monthly periodic rates:

1. Monthly rate x 12 = APR

or

2. (Total finance charge / applicable

balance2) x 12 = APR

This calculation may be used when

different rates apply to different balances.

A. Daily periodic rates:

1. Daily rate x 365 = APR

or

2. (Total finance charge / average daily 

balance) x 12 = APR

 or

3. (Total finance charge / sum of 

balances) x 365 = APR

II. APR when finance charge includes a

minimum, fixed, or other charge that is not

calculated using a periodic rate (and does not

include charges related to a specific

transaction, like cash advance fees):

A. Monthly periodic rates:

1. (Total finance charge / amount of 

applicable balance3) x 12 = APR4

B. Daily periodic rates

1. (Total finance charge / amount of 

applicable balance1) X 365 = APR3

 

2

If zero, no APR can be determined. The amount of 

applicable balance is the balance calculation method and may 

include the average daily balance, adjusted balance, or 

previous balance method.

3

If zero, no APR can be determined. The amount of 

applicable balance is the balance calculation method and may 

include the average daily balance, adjusted balance, or 

previous balance method.

4

Loan fees, points, or similar finance charges that relate to 

the opening of the account must not be included in the 

calculation of the APR.

2. The following may be used if at least 

a portion of the finance charge is 

determined by the application of a 

daily periodic rate. If not, use the 

formula above.

a. (Total finance charge / average

daily balance) x 12 = APR3

or

b. (Total finance charge / sum of

balances) x 365 = APR3

C. Monthly and daily periodic rates

1. If the finance charge imposed during 

the billing cycle does not exceed $.50 

for a monthly or longer billing cycles 

(or pro rata part of $.50 for a billing 

cycle shorter than monthly), the APR 

may be calculated by multiplying the 

monthly rate by 12 or the daily rate by 

365.

III. If the total finance charge included a charge

related to a specific transaction (such as a cash 

advance fee), even if the total finance charge

also included any other minimum, fixed, or

other charge not calculated using a periodic

rate, then the monthly and daily APRs are

calculated as follows: (total finance charge /

the greater of: the transaction amounts that

created the transaction fees or the sum of the

balances and other amounts on which a

finance charge was imposed during the billing

cycle5) X number of billing cycles in a year

(12) = APR6

 

5

The sum of the balances may include the average daily 

balance, adjusted balance, or previous balance method. 

Where a portion of the finance charge is determined by 

application of one or more daily periodic rates, sum of the 

balances also means the average of daily balances.

6 Cannot be less than the highest periodic rate applied, 

expressed as an APR.
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.15

Subpart C - Closed-End Credit 

The following is not a complete discussion of the

closed-end credit requirements in the Truth in

Lending Act. Instead, the information provided

below is offered to clarify otherwise confusing

terms and requirements. Refer to §§226.17

through 226.24 and related commentary for a

more thorough understanding of the Act. 

Finance Charge (Closed-End Credit) 

§226.17(a) 

The aggregate total amount of the finance charge

must be disclosed. Each finance charge imposed

need not be individually itemized and must not be

itemized with the segregated disclosures. 

Annual Percentage Rate (Closed-End Credit) 

§226.22 

Accuracy Tolerances

The disclosed APR on a closed-end transaction is

accurate for: 

• Regular transactions (which include any single 

advance transaction with equal payments and

equal payment periods, or an irregular first

payment period and/or a first or last irregular

payment), if it is within one-eighth of 1

percentage point of the APR calculated under

Regulation Z (§226.22(a)(2)). 

• Irregular transactions (which include multiple

advance transactions and other transactions

not considered regular), if it is within onequarter of 1 percentage point of the APR

calculated under Regulation Z (§226.22(a)(3)). 

• Mortgage transactions, if it is within oneeighth of 1 percentage point for regular

transactions or one-quarter of 1 percentage

point for irregular transactions and: 

i. The rate results from the disclosed finance 

charge; and

ii. The disclosed finance charge would be

considered accurate under §§226.18(d)(1)

or 226.23(g) or (h) (§226.22(a)(4)). 

Note: There is an additional tolerance for

mortgage loans when the disclosed finance charge

is calculated incorrectly but is considered accurate 

under §§226.18(d)(1) or 226.23(g) or (h)

(§226.22(a)(5)). 

Construction Loans §226.17(c)(6) and 

Appendix D 

Construction and certain other multiple advance

loans pose special problems in computing the

finance charge and APR. In many instances, the

amount and dates of advances are not predictable

with certainty since they depend on the progress of 

the work. Regulation Z provides that the APR and 

finance charge for such loans may be estimated for 

disclosure. 

At its option, the financial institution may rely on

the representations of other parties to acquire

necessary information (for example, it might look

to the consumer for the dates of advances). In

addition, if either the amounts or dates of advances 

are unknown (even if some of them are known),

the financial institution may, at its option, use

appendix D to the regulation to make calculations 

and disclosures. The finance charge and payment

schedule obtained through appendix D may be

used with volume one of the Federal Reserve

Board’s APR tables or with any other appropriate

computation tool to determine the APR. If the

financial institution elects not to use appendix D,

or if appendix D cannot be applied to a loan (e.g., 

appendix D does not apply to a combined

construction-permanent loan if the payments for

the permanent loan begin during the construction

period), the financial institution must make its

estimates under §226.17(c)(2) and calculate the

APR using multiple advance formulas. 

On loans involving a series of advances under an

agreement to extend credit up to a certain amount, 

a financial institution may treat all of the advances 

as a single transaction or disclose each advance as 

a separate transaction. If advances are disclosed

separately, disclosures must be provided before

each advance occurs, with the disclosures for the

first advance provided before consummation. 

In a transaction that finances the construction of a 

dwelling that may or will be permanently financed

by the same financial institution, the construction-
SECTION: Truth in Lending

305.16 Compliance Activities January 2004 Office of Thrift Supervision

permanent financing phases may be disclosed in

one of three ways listed below. 

• As a single transaction, with one disclosure

combining both phases. 

• As two separate transactions, with one

disclosure for each phase. 

• As more than two transactions, with one

disclosure for each advance and one for the

permanent financing phase. 

If two or more disclosures are furnished, buyer’s

points or similar amounts imposed on the

consumer may be allocated among the transactions 

in any manner the financial institution chooses, as

long as the charges are not applied more than

once. In addition, if the financial institution

chooses to give two sets of disclosures and the

consumer is obligated for both construction and

permanent phases at the outset, both sets of

disclosures must be given to the consumer

initially, before consummation of each transaction

occurs. 

If the creditor requires interest reserves for

construction loans, special appendix D rules apply 

that can make the disclosure calculations quite

complicated. The amount of interest reserves

included in the commitment amount must not be

treated as a prepaid finance charge. 

If the lender uses appendix D for constructiononly loans with required interest reserves, the

lender must estimate construction interest using

the interest reserve formula in appendix D. The

lender’s own interest reserve values must be

completely disregarded for disclosure purposes. 

If the lender uses appendix D for combination

construction-permanent loans, the calculations can

be much more complex. Appendix D is used to

estimate the construction interest, which is then

measured against the lender’s contractual interest

reserves. 

If the interest reserve portion of the lender’s

contractual commitment amount exceeds the

amount of construction interest estimated under

appendix D, the excess value is considered part of 

the amount financed if the lender has contracted to 

disburse those amounts whether they ultimately

are needed to pay for accrued construction

interest. If the lender will not disburse the excess

amount if it is not needed to pay for accrued

construction interest, the excess amount must be

ignored for disclosure purposes. 

Calculating the Annual Percentage Rate 

§226.22

The APR must be determined under one of the

following: 

• The actuarial method, which is defined by

Regulation Z and explained in appendix J to

the regulation. 

• The U.S. Rule, which is permitted by

Regulation Z and briefly explained in

appendix J to the regulation. The U.S. Rule is 

an accrual method that seems to have first

surfaced officially in an early nineteenth

century United States Supreme Court case,

Story v. Livingston (38 U.S. 359). 

Whichever method is used by the financial

institution, the rate calculated will be accurate if it 

is able to “amortize” the amount financed while it

generates the finance charge under the accrual

method selected. Financial institutions also may

rely on minor irregularities and accuracy

tolerances in the regulation, both of which

effectively permit somewhat imprecise, but still

legal, APRs to be disclosed. 

360-Day and 365-Day Years §226.17(c)(3) 

Confusion often arises over whether to use the

360-day or 365-day year in computing interest,

particularly when the finance charge is computed

by applying a daily rate to an unpaid balance.

Many single payment loans or loans payable on

demand are in this category. There are also loans

in this category that call for periodic installment

payments. 

Regulation Z does not require the use of one

method of interest computation in preference to

another (although state law may). It does,

however, permit financial institutions to disregard

the fact that months have different numbers of

days when calculating and making disclosures.

This means financial institutions may base their
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.17

disclosures on calculation tools that assume all

months have an equal number of days, even if

their practice is to take account of the variations in 

months to collect interest. 

For example, a financial institution may calculate

disclosures using a financial calculator based on a

360-day year with 30-day months, when, in fact, it 

collects interest by applying a factor of 1/365 of

the annual interest rate to actual days. 

Disclosure violations may occur, however, when a

financial institution applies a daily interest factor

based on a 360-day year to the actual number of

days between payments. In those situations, the

financial institution must disclose the higher

values of the finance charge, the APR, and the

payment schedule resulting from this practice. 

For example, a 12 percent simple interest rate

divided by 360 days results in a daily rate of

.033333 percent. If no charges are imposed except 

interest, and the amount financed is the same as

the loan amount, applying the daily rate on a daily 

basis for a 365-day year on a $10,000 one year,

single payment, unsecured loan results in an APR

of 12.17 percent (.033333% x 365 = 12.17%), and 

a finance charge of $1,216.67. There would be a

violation if the APR were disclosed as 12 percent

or if the finance charge were disclosed as $1,200

(12% x $10,000). 

However, if there are no other charges except

interest, the application of a 360-day year daily 

rate over 365 days on a regular loan would not

result in an APR in excess of the one eighth of one 

percentage point APR tolerance unless the

nominal interest rate is greater than 9 percent. For 

irregular loans, with one-quarter of 1 percentage

point APR tolerance, the nominal interest rate

would have to be greater than 18 percent to exceed 

the tolerance. 

Variable Rate Information §226.18(f) 

If the terms of the legal obligation allow the

financial institution, after consummation of the

transaction, to increase the APR, the financial

institution must furnish the consumer with certain

information on variable rates. Graduated payment

mortgages and step-rate transactions without a

variable rate feature are not considered variable

rate transactions. In addition, variable rate

disclosures are not applicable to rate increases

resulting from delinquency, default, assumption,

acceleration, or transfer of the collateral. 

Some of the more important transaction-specific 

variable rate disclosure requirements under

§226.18 follow. 

• Disclosures for variable rate loans must be

given for the full term of the transaction and

must be based on the terms in effect at the

time of consummation. 

• If the variable rate transaction includes either

a seller buydown that is reflected in a contract 

or a consumer buydown, the disclosed APR

should be a composite rate based on the lower 

rate for the buydown period and the rate that is 

the basis for the variable rate feature for the

remainder of the term. 

• If the initial rate is not determined by the

index or formula used to make later interest

rate adjustments, as in a discounted variable

rate transaction, the disclosed APR must

reflect a composite rate based on the initial

rate for as long as it is applied and, for the

remainder of the term, the rate that would

have been applied using the index or formula

at the time of consummation (i.e., the fully

indexed rate). 

 If a loan contains a rate or payment cap

that would prevent the initial rate or

payment, at the time of the adjustment,

from changing to the fully indexed rate,

the effect of that rate or payment cap

needs to be reflected in the disclosures. 

 The index at consummation need not be

used if the contract provides a delay in the 

implementation of changes in an index

value (e.g., the contract indicates that

future rate changes are based on the index 

value in effect for some specified period,

like 45 days before the change date).

Instead, the financial institution may use

any rate from the date of consummation

back to the beginning of the specified

period (e.g., during the previous 45-day 

period). 
SECTION: Truth in Lending

305.18 Compliance Activities January 2004 Office of Thrift Supervision

• If the initial interest rate is set according to the 

index or formula used for later adjustments,

but is set at a value as of a date before

consummation, disclosures should be based on 

the initial interest rate, even though the index

may have changed by the consummation date. 

For variable-rate loans that are not secured by the 

consumer’s principal dwelling or that are secured

by the consumer’s principal dwelling but have a

term of one year or less, creditors must disclose

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. 

§226.18(f)(1).

For variable-rate consumer loans secured by the

consumer’s principal dwelling and having a

maturity of more than one year, creditors must

state that the loan has a variable-rate feature and

that disclosures were previously given. 

(§226.18(f)(2)) Extensive disclosures about the

loan program are provided when consumers apply

for such a loan (§226.19(b), and throughout the

loan term when the rate or payment amount is

changed (§226.20(c)).

Payment Schedule §226.18(g) 

The disclosed payment schedule must reflect all

components of the finance charge. It includes all

payments scheduled to repay loan principal,

interest on the loan, and any other finance charge

payable by the consumer after consummation of

the transaction. 

However, any finance charge paid separately

before or at consummation (e.g., odd days’

interest) is not part of the payment schedule. It is a 

prepaid finance charge that must be reflected as a

reduction in the value of the amount financed. 

At the creditor’s option, the payment schedule

may include amounts beyond the amount financed

and finance charge (e.g., certain insurance

premiums or real estate escrow amounts such as

taxes added to payments). However, when

calculating the APR, the creditor must disregard

such amounts. 

If the obligation is a renewable balloon payment

instrument that unconditionally obligates the

financial institution to renew the short-term loan at 

the consumer’s option or to renew the loan subject 

to conditions within the consumer’s control, the

payment schedule must be disclosed using the 

longer term of the renewal period or periods. The 

long-term loan must be disclosed with a variable

rate feature. 

If there are no renewal conditions or if the

financial institution guarantees to renew the

obligation in a refinancing, the payment schedule 

must be disclosed using the shorter balloon

payment term. The short-term loan must be

disclosed as a fixed rate loan, unless it contains a

variable rate feature during the initial loan term. 

Amount Financed §226.18(b) 

Definition 

The amount financed is the net amount of credit

extended for the consumer’s use. It should not be

assumed that the amount financed under the

regulation is equivalent to the note amount,

proceeds, or principal amount of the loan. The

amount financed normally equals the total of 

payments less the finance charge. 

To calculate the amount financed, all amounts and 

charges connected with the transaction, either paid 

separately or included in the note amount, must

first be identified. Any prepaid, precomputed, or

other finance charge must then be determined. 

The amount financed must not include any

finance charges. If finance charges have been

included in the obligation (either prepaid or

precomputed), they must be subtracted from the

face amount of the obligation when determining

the amount financed. The resulting value must be

reduced further by an amount equal to any prepaid 

finance charge paid separately. The final resulting

value is the amount financed. 

When calculating the amount financed, finance

charges (whether in the note amount or paid

separately) should not be subtracted more than

once from the total amount of an obligation.

Charges not in the note amount and not included

in the finance charge (e.g., an appraisal fee paid
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.19

separately in cash on a real estate loan) are not

required to be disclosed under Regulation Z and

must not be included in the amount financed. 

In a multiple advance construction loan, proceeds

placed in a temporary escrow account and

awaiting disbursement in draws to the developer

are not considered part of the amount financed

until actually disbursed. Thus, if the entire

commitment amount is disbursed into the lender’s

escrow account, the lender must not base

disclosures on the assumption that all funds were

disbursed immediately, even if the lender pays 

interest on the escrowed funds. 

Required Deposit §226.18(r) 

A required deposit, with certain exceptions, is one

that the financial institution requires the consumer

to maintain as a condition of the specific credit

transaction. It can include a compensating balance 

or a deposit balance that secures the loan. The

effect of a required deposit is not reflected in the

APR. Also, a required deposit is not a finance

charge since it is eventually released to the

consumer. A deposit that earns at least 5 percent 

per year need not be considered a required deposit. 

Calculating the Amount Financed 

A consumer signs a note secured by real property

in the amount of $5,435. The note amount

includes $5,000 in proceeds disbursed to the

consumer, $400 in precomputed interest, $25 paid 

to a credit reporting agency for a credit report, and 

a $10 service charge. Additionally, the consumer

pays a $50 loan fee separately in cash at

consummation. The consumer has no other debt

with the financial institution. The amount financed 

is $4,975. 

The amount financed may be calculated by first

subtracting all finance charges included in the note 

amount ($5,435 - $400 - $10 = $5,025). The $25

credit report fee is not a finance charge because

the loan is secured by real property. The $5,025 is 

further reduced by the amount of prepaid finance

charges paid separately, for an amount financed of 

$5,025 - $50 = $4,975. The answer is the same

whether finance charges included in the obligation

are considered prepaid or precomputed finance

charges. 

The financial institution may treat the $10 service

charge as an addition to the loan amount and not

as a prepaid finance charge. If it does, the loan

principal would be $5,000. The $5,000 loan

principal does not include either the $400 or the

$10 precomputed finance charge in the note. The

loan principal is increased by other amounts that

are financed which are not part of the finance

charge (the $25 credit report fee) and reduced by

any prepaid finance charges (the $50 loan fee, not

the $10 service charge) to arrive at the amount

financed of $5,000 + $25 - $50 = $4,975. 

Other Calculations 

The financial institution may treat the $10 service

charge as a prepaid finance charge. If it does, the

loan principal would be $5,010. The $5,010 loan

principal does not include the $400 precomputed

finance charge. The loan principal is increased by

other amounts that are financed which are not part 

of the finance charge (the $25 credit report fee)

and reduced by any prepaid finance charges (the

$50 loan fee and the $10 service charge withheld

from loan proceeds) to arrive at the same amount

financed of $5,010 + $25 - $50- $10 = $4,975. 
SECTION: Truth in Lending

305.20 Compliance Activities January 2004 Office of Thrift Supervision

Closed-End Credit: Finance Charge Accuracy Tolerances

* See 15 USC 160 (aa) 

 and 12 CFR 226.32

Is this a 

closed-end 

credit 

TILA 

claim 

asserting 

rescission 

rights?

Finance charge 

tolerance is $35.

An overstated 

finance charge is 

not considered a 

violation.

Is the 

rescission 

claim a 

defense to 

foreclosure 

action?

Is the 

transaction 

secured by 

real estate or 

dwelling?

Did the 

transaction 

originate before 

9/30/95?

Yes No

Yes Yes

No

No

No

Is the 

transaction a 

refinancing?

No

Yes

Finance charge 

tolerance is $200

for 

understatements.

An overstated 

finance charge is 

not considered a 

violation.

Finance charge 

tolerance is $100

for 

understatements.

An overstated 

finance charge is 

not considered a 

violation.

The finance charge shall be 

considered accurate if it is not 

more than $5 above or below 

the exact finance charge in a 

transaction involving an 

amount financed of $1,000 or 

less, or not more than $10

above or below the exact 

finance charge in a transaction 

involving an amount financed 

of more than $1,000.

Finance charge tolerance is 1%

of the loan amount or $100, 

whichever is greater.

An overstated finance charge is 

not considered a violation.

No

No

Yes

Does the 

refinancing 

involve a 

consolidation or 

new advance?

Yes

Is the 

transaction a 

high-cost 

mortgage 

loan?*

Finance charge 

tolerance is one-half 

of 1% of the loan 

amount or $100, 

whichever is greater.

An overstated 

finance charge is not 

considered a 

violation.

Yes
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.21

No

Is the disclosed FC 

understated by more 

than $5?

No

Closed-End Credit: Accuracy and Reimbursement Tolerances for

 UNDERSTATED FINANCE CHARGES

Is the loan secured by real estate or a 

dwelling?

Yes

Is the disclosed FC understated 

by more than $100 (or $200 if 

the loan originated before 

9/30/95)?

No Yes

No violation FC Violation

FC violation No violation FC violation

Yes No Yes

Is the disclosed FC 

understated by more than 

$10?

No Yes

Is the amount financed greater 

than $1,000?

Is the loan 

term greater 

than 10 

years?

No Yes

Is the loan a 

regular loan?

No Yes

Is the disclosed FC plus the FC 

reimbursement tolerance (based 

on a one-quarter of 1 

percentage point APR 

tolerance) less than the correct 

Is the disclosed FC plus the FC 

reimbursement tolerance (based 

on a one-eighth of 1 percentage 

point APR tolerance) less than 

the correct FC?

Yes No No Yes

No reimbursement

Subject to 

reimbursement
SECTION: Truth in Lending

305.22 Compliance Activities January 2004 Office of Thrift Supervision

Closed-End Credit: Accuracy Tolerances for 

OVERSTATED FINANCE CHARGES

Is the loan secured by real estate or a 

dwelling?

No Yes

No violation

Is the amount financed greater 

than $1,000?

No Yes

Is the disclosed FC less 

$10 greater than the 

correct FC?

Is the disclosed FC less 

$5 greater than the 

correct FC?

No Yes

No violation FC violation

No Yes

No violation FC violation
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.23

Closed-End Credit: Accuracy Tolerances for

OVERSTATED APRs

APR Violation No violation

No Yes

Was the finance charge disclosure error the cause 

of the APR disclosure error?

APR Violation

Yes No

Is the finance charge disclosed greater than 

the correct finance charge?

Is this a “regular” loan?

(12 CFR 226, footnote 46)

No Yes

Is the disclosed APR greater than the correct 

APR by more than one-eighth of one percentage 

point?

Is the disclosed APR greater than the correct 

APR by more than one-quarter of one 

percentage point?

No No

No violation

Yes Yes

Is the loan secured by real estate or a dwelling?

No Yes

APR Violation
SECTION: Truth in Lending

305.24 Compliance Activities January 2004 Office of Thrift Supervision

Closed-End Credit: Accuracy and Reimbursement Tolerances For

UNDERSTATED APRs

Is the loan a “regular” loan?

No Yes

Is the disclosed APR understated by 

more than one-quarter of one percentage 

point?

Is the disclosed APR understated by 

more than one-eighth of one 

percentage point?

Yes No

No violation

No Yes

Is the loan secured by real estate or a dwelling?

No Yes

APR violation

No Yes

Is the finance charge understated by more than:

•$100 if the loan originated on or after 9/30/95?

•$200 if the loan originated before 9/30/95?

APR violation

Was the finance charge disclosure error the cause of 

the APR disclosure error?

No Yes

APR violation No violation

Is the loan term greater than 10 years?

No Yes

Is the loan a “regular” loan?

Is the disclosed APR understated by 

more than one-quarter of one percentage 

point?

No Yes

Is the disclosed APR understated by 

more than one-eighth of one percentage 

point?

Yes No No Yes

No reimbursement

Subject to reimbursement
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.25

Refinancings §226.20 

When an obligation is satisfied and replaced by a

new obligation to the original financial institution

(or a holder or servicer of the original obligation)

and is undertaken by the same consumer, it must

be treated as a refinancing for which a complete

set of new disclosures must be furnished. A

refinancing may involve the consolidation of

several existing obligations, disbursement of new

money to the consumer, or the rescheduling of

payments under an existing obligation. In any

form, the new obligation must completely replace

the earlier one to be considered a refinancing

under the regulation. The finance charge on the

new disclosure must include any unearned portion

of the old finance charge that is not credited to the 

existing obligation. (§226.20(a)) 

The following transactions are not considered

refinancings even if the existing obligation is

satisfied and replaced by a new obligation

undertaken by the same consumer: 

• A renewal of an obligation with a single

payment of principal and interest or with

periodic interest payments and a final payment 

of principal with no change in the original

terms. 

• An APR reduction with a corresponding

change in the payment schedule. 

• An agreement involving a court proceeding. 

• Changes in credit terms arising from the

consumer’s default or delinquency. 

• The renewal of optional insurance purchased

by the consumer and added to an existing

transaction, if required disclosures were

provided for the initial purchase of the

insurance. 

However, even if it is not accomplished by the

cancellation of the old obligation and substitution

of a new one, a new transaction subject to new

disclosures results if the financial institution: 

• Increases the rate based on a variable rate

feature that was not previously disclosed; or 

• Adds a variable rate feature to the obligation. 

If, at the time a loan is renewed, the rate is

increased, the increase is not considered a variable 

rate feature. It is the cost of renewal, similar to a

flat fee, as long as the new rate remains fixed

during the remaining life of the loan. If the

original debt is not canceled in connection with

such a renewal, the regulation does not require

new disclosures. Also, changing the index of a

variable rate transaction to a comparable index is

not considered adding a variable rate feature to the 

obligation. 

Subpart D - Miscellaneous 

Civil Liability §130 

If a creditor fails to comply with any requirements 

of the TILA, other than with the advertising

provisions of chapter 3, it may be held liable to the 

consumer for: 

• Actual damage, and 

• The cost of any legal action together with

reasonable attorney’s fees in a successful

action. 

If it violates certain requirements of the TILA, the 

creditor also may be held liable for either of the

following: 

• In an individual action, twice the amount of

the finance charge involved, but not less than

$100 or more than $1,000. However, in an

individual action relating to a closed-end 

credit transaction secured by real property or a 

dwelling, twice the amount of the finance

charge involved, but not less than $200 or

more than $2,000.

• In a class action, such amount as the court

may allow. The total amount of recovery,

however, cannot be more than $500,000 or 1

percent of the creditor’s net worth, whichever

is less. 

Civil actions that may be brought against a

creditor also may be maintained against any

assignee of the creditor if the violation is apparent 

on the face of the disclosure statement or other

documents assigned, except where the assignment

was involuntary. 
SECTION: Truth in Lending

305.26 Compliance Activities January 2004 Office of Thrift Supervision

A creditor that fails to comply with TILA’s

requirements for high-cost mortgage loans may be

held liable to the consumer for all finance charges

and fees paid to the creditor. Any subsequent

assignee is subject to all claims and defenses that

the consumer could assert against the creditor,

unless the assignee demonstrates that it could not

reasonably have determined that the loan was

subject to §226.32.

Criminal Liability §112 

Anyone who willingly and knowingly fails to

comply with any requirement of the TILA will be

fined not more than $5,000 or imprisoned not

more than one year, or both. 

Administrative Actions §108 

The TILA authorizes federal regulatory agencies

to require financial institutions to make monetary

and other adjustments to the consumers’ accounts

when the true finance charge or APR exceeds the

disclosed finance charge or APR by more than a

specified accuracy tolerance. That authorization

extends to unintentional errors, including isolated

violations (e.g., an error that occurred only once or 

errors, often without a common cause, that

occurred infrequently and randomly). 

Under certain circumstances, the TILA requires

federal regulatory agencies to order financial

institutions to reimburse consumers when

understatement of the APR or finance charge

involves: 

• Patterns or practices of violations (e.g., errors

that occurred, often with a common cause, 

consistently or frequently, reflecting a pattern

with a specific type or types of consumer

credit).

• Gross negligence. 

• Willful noncompliance intended to mislead

the person to whom the credit was extended. 

Any proceeding that may be brought by a

regulatory agency against a creditor may be

maintained against any assignee of the creditor if

the violation is apparent on the face of the

disclosure statement or other documents assigned,

except where the assignment was involuntary. 

(§131) 

Relationship to State Law §111 

State laws providing rights, responsibilities, or

procedures for consumers or financial institutions

for consumer credit contracts may be: 

• Preempted by federal law; 

• Appropriate under state law and not

preempted by federal law; or 

• Substituted in lieu of TILA and Regulation Z

requirements. 

State law provisions are preempted to the extent

that they contradict the requirements in the

following chapters of the TILA and the

implementing sections of Regulation Z: 

• Chapter 1, “General Provisions,” which

contains definitions and acceptable methods

for determining finance charges and annual

percentage rates. For example, a state law

would be preempted if it required a bank to

include in the finance charge any fees that the

federal law excludes, such as seller’s points. 

• Chapter 2, “Credit Transactions,” which

contains disclosure requirements, rescission

rights, and certain credit card provisions. For

example, a state law would be preempted if it

required a bank to use the terms “nominal

annual interest rate” in lieu of “annual

percentage rate.” 

• Chapter 3, “Credit Advertising,” which

contains consumer credit advertising rules and

annual percentage rate oral disclosure

requirements. 

Conversely, state law provisions may be

appropriate and are not preempted under federal

law if they call for, without contradicting chapters 

1, 2, or 3 of the TILA or the implementing

sections of Regulation Z, either of the following: 

• Disclosure of information not otherwise

required. A state law that requires disclosure 

of the minimum periodic payment for open-
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.27

end credit, for example, would not be

preempted because it does not contradict

federal law. 

• Disclosures more detailed than those required.

A state law that requires itemization of the

amount financed, for example, would not be

preempted, unless it contradicts federal law by 

requiring the itemization to appear with the

disclosure of the amount financed in the

segregated closed-end credit disclosures. 

The relationship between state law and chapter 4

of the TILA (“Credit Billing”) involves two parts. 

The first part is concerned with sections 161

(correction of billing errors) and 162 (regulation of 

credit reports) of the act; the second part addresses 

the remaining sections of chapter 4. 

State law provisions are preempted if they differ

from the rights, responsibilities, or procedures

contained in sections 161 or 162. An exception is

made, however, for state law that allows a

consumer to inquire about an account and requires 

the bank to respond to such inquiry beyond the

time limits provided by federal law. Such a state

law would not be preempted for the extra time

period. 

State law provisions are preempted if they result in 

violations of sections 163 through 171 of chapter

4. For example, a state law that allows the card

issuer to offset the consumer’s credit-card 

indebtedness against funds held by the card issuer

would be preempted, since it would violate 12

CFR 226.12(d). Conversely, a state law that

requires periodic statements to be sent more than

14 days before the end of a free-ride period would 

not be preempted, since no violation of federal law 

is involved. 

A bank, state, or other interested party may ask the 

Federal Reserve Board to determine whether state

law contradicts chapters 1 through 3 of the TILA

or Regulation Z. They also may ask if the state law 

is different from, or would result in violations of,

chapter 4 of the TILA and the implementing

provisions of Regulation Z. If the board

determines that a disclosure required by state law

(other than a requirement relating to the finance

charge, annual percentage rate, or the disclosures

required under §226.32) is substantially the same

in meaning as a disclosure required under the act

or Regulation Z, generally creditors in that state

may make the state disclosure in lieu of the federal 

disclosure.

Subpart E - Special Rules for Certain 

Home Mortgage Transactions 

General Rules §226.31 

The requirements and limitations of this subpart

are in addition to and not in lieu of those contained 

in other subparts of Regulation Z. The disclosures 

for high cost and reverse mortgage transactions

must be made clearly and conspicuously in

writing, in a form that the consumer may keep. 

Certain Closed-End Home Mortgages §226.32 

The requirements of this section apply to a 

consumer credit transaction secured by the

consumer’s principal dwelling, in which either: 

• The APR at consummation will exceed by

more than 8 percentage points for first-lien 

mortgage loans, or by more than 10

percentage points for subordinate-lien 

mortgage loans, the yield on Treasury

securities having comparable periods of

maturity to the loan’s maturity (as of the 15th

day of the month immediately preceding the

month in which the application for the

extension of credit is received by the creditor); 

or

• The total points and fees (see definition

below) payable by the consumer at or before

loan closing will exceed the greater of eight

percent of the total loan amount or $480 for

the calendar year 2002. (This dollar amount is 

adjusted annually based on changes in the

Consumer Price Index. See staff commentary

to 32(a)(1)(ii) for a historical list of dollar

amount adjustments.) (§226.32(a)(1))

Exemptions: 

• Residential mortgage transactions (generally

purchase money mortgages),

• Reverse mortgage transactions subject to

§226.33, or 
SECTION: Truth in Lending

305.28 Compliance Activities January 2004 Office of Thrift Supervision

• Open-end credit plans subject to Subpart B of

Regulation Z. 

Points and Fees include the following: 

• All items required to be disclosed under

§226.4(a) and (b), except interest or the timeprice differential;

• All compensation paid to mortgage brokers;

and 

• All items listed in §226.4(c)(7), other than

amounts held for future taxes, unless all of the 

following conditions are met:

 The charge is reasonable; 

 The creditor receives no direct or indirect

compensation in connection with the 

charge; 

 The charge is not paid to an affiliate of the 

creditor; and 

 Premiums or other charges, paid at or

before closing whether paid in cash or

financed, for optional credit life, accident,

health, or loss-of-income insurance, and

other debt-protection or debt cancellation

products written in connection with the

credit transaction (§226.32(b)(1)).

Reverse Mortgages §226.33 

A reverse mortgage is a non-recourse transaction

secured by the consumer’s principal dwelling

which ties repayment (other than upon default) to

the homeowner’s death or permanent move from,

or transfer of the title of, the home. 

Specific Defenses §108 

Defense Against Civil, Criminal, and 

Administrative Actions 

A financial institution in violation of TILA may

avoid liability by:

• Discovering the error before an action is

brought against the financial institution, or

before the consumer notifies the financial

institution, in writing, of the error. 

• Notifying the consumer of the error within 60

days of discovery. 

• Making the necessary adjustments to the

consumer’s account, also within 60 days of

discovery. (The consumer will pay no more

than the lesser of the finance charge actually

disclosed or the dollar equivalent of the APR

actually disclosed.) 

The above three actions also may allow the

financial institution to avoid a regulatory order to

reimburse the customer. 

An error is “discovered” if it is: 

• Discussed in a final, written report of

examination. 

• Identified through the financial institution’s

own procedures. 

• An inaccurately disclosed APR or finance

charge included in a regulatory agency

notification to the financial institution. 

When a disclosure error occurs, the financial

institution is not required to re-disclose after a

loan has been consummated or an account has

been opened. If the financial institution corrects a

disclosure error by merely re-disclosing required

information accurately, without adjusting the

consumer’s account, the financial institution may

still be subject to civil liability and an order to

reimburse from its regulator. 

The circumstances under which a financial

institution may avoid liability under the TILA do

not apply to violations of the Fair Credit Billing

Act (chapter 4 of the TILA). 

Additional Defenses Against Civil Actions 

The financial institution may avoid liability in a

civil action if it shows by a preponderance of

evidence that the violation was not intentional and

resulted from a bona fide error that occurred

despite the maintenance of procedures to avoid the 

error. 

A bona fide error may include a clerical,

calculation, computer malfunction, programming,
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.29

or printing error. It does not include an error of

legal judgment. 

Showing that a violation occurred unintentionally

could be difficult if the financial institution is

unable to produce evidence that explicitly

indicates it has an internal controls program

designed to ensure compliance. The financial

institution’s demonstrated commitment to

compliance and its adoption of policies and

procedures to detect errors before disclosures are

furnished to consumers could strengthen its

defense. 

Statute of Limitations §§108 and 130 

Civil actions may be brought within one year after 

the violation occurred. After that time, and if

allowed by state law, the consumer may still assert 

the violation as a defense if a financial institution

were to bring an action to collect the consumer’s

debt. 

Criminal actions are not subject to the TILA oneyear statute of limitations. 

Regulatory administrative enforcement actions

also are not subject to the one-year statute of

limitations. However, enforcement actions under

the policy guide involving erroneously disclosed

APRs and finance charges are subject to time

limitations by the TILA. Those limitations range

from the date of the last regulatory examination of 

the financial institution, to as far back as 1969,

depending on when loans were made, when

violations were identified, whether the violations

were repeat violations, and other factors. 

There is no time limitation on willful violations

intended to mislead the consumer. A summary of

the various time limitations follows. 

• For open-end credit, reimbursement applies to

violations not older than two years. 

• For closed-end credit, reimbursement is

generally directed for loans with violations

occurring since the immediately preceding

examination.

RESCISSION RIGHTS (Open-End and 

Closed-End Credit) §226.15 and §226.23

TILA provides that for certain transactions

secured by the consumer’s principal dwelling, a

consumer has three business days after becoming

obligated on the debt to rescind the transaction. 

The right of rescission allows consumer(s) time to

reexamine their credit agreements and cost

disclosures and to reconsider whether they want to 

place their homes at risk by offering it/them as

security for the credit. Transactions exempt from

the right of rescission include residential mortgage

transactions (§226.2(a)(24)) and refinancings or

consolidations with the original creditor where no

“new money” is advanced.

If a transaction is rescindable, consumers must be 

given a notice explaining that the creditor has a

security interest in the consumer’s home, that the

consumer may rescind, how the consumer may

rescind, the effects of rescission, and the date the

rescission period expires.

To rescind a transaction, a consumer must notify

the creditor in writing by midnight of the third

business day after the latest of three events: (1)

consummation of the transaction, (2) delivery of

material TILA disclosures, or (3) receipt of the

required notice of the right to rescind. For

purposes of rescission, business day means every

calendar day except Sundays and the legal public

holidays (§226.2(a)(6)). The term “material

disclosures” is defined in §226.23(a)(3) to mean

the required disclosures of the annual percentage

rate, the finance charge, the amount financed, the

total of payments, the payment schedule, and the

disclosures and limitations referred to in

§226.32(c) and (d). 

The creditor may not disburse any monies (except

into an escrow account) and may not provide

services or materials until the three-day rescission

period has elapsed and the creditor is reasonably

satisfied that the consumer has not rescinded. If

the consumer rescinds the transaction, the creditor

must refund all amounts paid by the consumer

(even amounts disbursed to third parties) and

terminate its security interest in the consumer’s

home.
SECTION: Truth in Lending

305.30 Compliance Activities January 2004 Office of Thrift Supervision

A consumer may waive the three-day rescission

period and receive immediate access to loan

proceeds if the consumer has a “bona fide personal 

financial emergency.” The consumer must give

the creditor a signed and dated waiver statement

that describes the emergency, specifically waives

the right, and bears the signatures of all consumers 

entitled to rescind the transaction. The consumer

provides the explanation for the bona fide personal 

financial emergency, but the creditor decides the

sufficiency of the emergency. 

If the required rescission notice or material TILA

disclosures are not delivered or if they are

inaccurate, the consumer’s right to rescind may be 

extended from three days after becoming obligated 

on a loan to up to three years.

Examination Objectives

1. To appraise the quality of the financial

institution’s compliance management system

for the Truth in Lending Act and Regulation

Z. 

2. To determine the reliance that can be placed

on the financial institution’s compliance

management system, including internal

controls and procedures performed by the

person(s) responsible for monitoring the

financial institution’s compliance review

function for the Truth In Lending Act and

Regulation Z. 

3. To determine the financial institution’s

compliance with the Truth In Lending Act and 

Regulation Z. 

4. To initiate corrective action when policies or

internal controls are deficient, or when

violations of law or regulation are identified. 

5. To determine whether the institution will be

required to make adjustments to consumer

accounts under the restitution provisions of the 

Act. 

General Procedures 

1. Obtain information pertinent to the area of

examination from the financial institution’s 

compliance management system program

(historical examination findings, complaint

information, and significant findings from

compliance review and audit). 

2. Through discussions with management and

review of the following documents, determine

whether the financial institution’s internal

controls are adequate to ensure compliance in

the area under review. Identify procedures

used daily to detect errors/violations promptly. 

Also, review the procedures used to ensure

compliance when changes occur (e.g., changes 

in interest rates, service charges, computation

methods, and software programs). 

o Organizational charts.

o Process flowcharts.

o Policies and procedures.

o Loan documentation and disclosures.

o Checklists/worksheets and review 

documents.

o Computer programs. 

3. Review compliance review and audit work

papers and determine whether: 

a. The procedures used address all regulatory 

provisions (see Transactional Testing

section). 

b. Steps are taken to follow up on previously 

identified deficiencies. 

c. The procedures used include samples that

cover all product types and decision

centers. 

d. The work performed is accurate (through

a review of some transactions). 

e. Significant deficiencies, and the root

cause of the deficiencies, are included in

reports to management/board.

f. Corrective actions are timely and

appropriate. 

g. The area is reviewed at an appropriate

interval. 
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.31

Disclosure Forms 

4. Determine if the financial institution has

changed any preprinted TILA disclosure

forms or if there are forms that have not been

previously reviewed for accuracy. If so:

Verify the accuracy of each preprinted

disclosure by reviewing the following: 

• Note and/or contract forms (including

those furnished to dealers). 

• Standard closed-end credit disclosures

(§§226.17(a) and 226.18). 

• ARM disclosures (§226.19(b)). 

• High cost mortgage disclosures

(§226.32(c)). 

• Initial disclosures (§226.6(a)-(d)) and, if

applicable, additional HELC disclosures

(§226.6(e)). 

• Credit card application/solicitation

disclosures (§226.5a(b)-(e)). 

• HELC disclosures (§226.5b(d) and (e)). 

• Statement of billing rights and change in

terms notice (§226.9(a)). 

• Reverse mortgage disclosures

(§226.33(b)). 

Closed-End Credit Forms Review Procedures 

a. Determine the disclosures are clear,

conspicuous, grouped, and segregated.

The terms Finance Charge and APR

should be more conspicuous than other

terms (§226.17(a)). 

b. Determine the disclosures include the

following as applicable (§226.18). 

1. Identity of the creditor 

2. Brief description of the finance charge 

3. Brief description of the APR 

4. Variable rate verbiage (§226.18(f)(1)

or (2)). 

5. Payment schedule 

6. Brief description of the total of

payments 

7. Demand feature 

8. Description of total sales price in a

credit sale 

9. Prepayment penalty’s or rebates 

10. Late payment amount or percentage 

11. Description for security interest 

12. Various insurance verbiage 

(§226.4(d)). 

13. Statement referring to the contract 

14. Statement regarding assumption of the 

note 

15. Statement regarding required deposits.

c. Determine all variable rate loans with a

maturity greater than one year secured by

a principal dwelling are given the

following disclosures at the time of

application (§226.19). 

1. Consumer handbook on adjustable

rate mortgages or substitute 

2. Statement that interest rate payments

and or terms can change 

3. The index/formula and a source of

information 

4. Explanation of the interest

rate/payment determination and

margin 

5. Statement that the consumer should

ask for the current interest rate and

margin 

6. Statement that the interest rate is

discounted, if applicable 

7. Frequency of interest rate and

payment changes 

8. Rules relating to all changes 
SECTION: Truth in Lending

305.32 Compliance Activities January 2004 Office of Thrift Supervision

9. Either a historical example based on

15 years, or the initial rate and

payment with a statement that the

periodic payment may substantially

increase or decrease together with a

maximum interest rate and payment

10. Explanation of how to compute the

loan payment, giving an example 

11. Demand feature, if applicable 

12. Statement of content and timing of

adjustment notices 

13. Statement that other variable rate loan 

program disclosures are available, if

applicable. 

d. Determine that the disclosures required for 

high-cost mortgage transactions clearly

and conspicuously include the items

below. [§226.32(c), see Form H-16 in

Appendix H.]

1. The required statement “you are not

required to complete this agreement

merely because you have received

these disclosures or have signed a loan 

application. If you obtain this loan, the 

lender will have a mortgage on your

home. You could lose your home, and

any money you have put into it, if you 

do not meet your obligations under the 

loan”

2. Annual percentage rate

3. Amount of the regular monthly (or

other periodic) payment and the

amount of any balloon payment. The

regular payment should include

amounts for voluntary items, such as

credit life insurance or debtcancellation coverage, only if the 

consumer has previously agreed to the 

amount [See staff commentary to

32(c)(3).]

4. Statement that the interest rate may

increase, and the amount of the single

maximum monthly payment, based on

the maximum interest rate allowed

under the contract, if applicable.

5. For a mortgage refinancing, the total

amount borrowed, as reflected by the

face amount of the note; and where

the amount borrowed includes

premiums or other charges for

optional credit insurance or debtcancellation coverage, that fact shall

be stated (grouped together with the

amount borrowed).

Open-End Credit Forms Review Procedures 

a. Determine the initial disclosure statement

is provided before the first transaction

under the account and ensure the

disclosure includes the items below as

applicable (§226.6). 

1. Statement of when the finance charge

is to accrue and if a grace period

exists 

2. Statement of periodic rates used and

the corresponding APR 

3. Explanation of the method of

determining the balance on which the

finance charge may be computed 

4. Explanation of how the finance charge 

would be determined 

5. Statement of the amount of any other

charges 

6. Statement of creditor’s security

interest in the property 

7. Statement of billing rights (§§226.12

and 226.13) 

8. Certain home equity plan information

if not provided with the application in

a form the consumer could keep. 

(§226.6(e)(7))

b. Determine the following credit card

disclosures were made clearly and

conspicuously on or with a solicitation or

an application. Disclosures in 12-point 

type are deemed to comply with the

requirements. See staff comment

5a(a)(2)-1. The APR for purchases (other 

than an introductory rate that is lower than 
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.33

the rate that will apply after the

introductory rate expires) must be in at

least 18-point type (§226.5a). 

1. APR for purchases, cash advances,

and balance transfers, including

penalty rates that may apply. If the

rate is variable, the index or formula,

and margin must be identified.

2. Fee for issuance of the card 

3. Minimum finance charge 

4. Transaction fees 

5. Length of the “grace period” 

6. Balance computation method 

7. Statement that charges incurred by use 

of the charge card are due when the

periodic statement is received.

Note: The above items must be provided

in a prominent location in the form of a

table. The remaining items may be

included in the same table or clearly and

conspicuously elsewhere on the same

document. An explanation of specific

events that may result in the imposition of 

a penalty rate must be placed outside the

table with an asterisk inside the table (or

other means) directing the consumer to the 

additional information.

8. Cash advance fees 

9. Late payment fees 

10. Fees for exceeding the credit limit 

c. Determine that disclosure of items 1-7 in

“b” above are made orally for creditorinitiated telephone applications and preapproved solicitations. Also, determine for 

applications or solicitations made to the

general public that the card issuer makes

one of the optional disclosures

(§226.5a(d) and (e)). 

d. Determine the following home equity

disclosures were made clearly and

conspicuously, at the time of application

(§226.5b). 

1. Home equity brochure 

2. Statement that the consumer should

retain a copy of the disclosure 

3. Statement of the time the specific

terms are available 

4. Statement that terms are subject to

change before the plan opens 

5. Statement that the consumer may

receive a full refund of all fees 

6. Statement that the consumer’s

dwelling secures the credit 

7. Statement that the consumer could

lose the dwelling 

8. Creditors right to change, freeze, or

terminate the account 

9. Statement that information about

conditions for adverse action are

available upon request 

10. Payment terms including the length of

the draw and repayment periods, how

the minimum payment is determined,

the timing of payments, and an

example based on $10,000 and a

recent APR 

11. A recent APR imposed under the plan

and a statement that the rate does not

include costs other than interest (fixed

rate plans only) 

12. Itemization of all fees paid to creditor 

13. Estimate of any fees payable to third

parties to open the account and a

statement that the consumer may

receive a good faith itemization of

third party fees 

14. Statement regarding negative

amortization, as applicable 

15. Transaction requirements 

16. Statement that the consumer should

consult a tax advisor regarding the

deductibility of interest and charges

under the plan 
SECTION: Truth in Lending

305.34 Compliance Activities January 2004 Office of Thrift Supervision

17. For variable rate home equity plans,

disclose the following: 

i. That the APR, payment, or term

may change 

ii. The APR excludes costs other

than interest 

iii. Identify the index and its source 

iv. How the rate will be determined 

v. Statement that the consumer

should request information on the

current index value, margin,

discount, premium, or APR 

vi. Statement that the initial rate is

discounted and the duration of the

discount, if applicable 

vii. Frequency of APR changes 

viii.Rules relating to changes in the

index, APR, and payment amount 

ix. Lifetime rate cap and any annual

caps, or a statement that there is

no annual limitation 

x. The minimum payment

requirement, using the maximum

APR, and when the maximum

APR may be imposed 

xi. A table, based on a $10,000 

balance, reflecting all significant

plan terms 

xii. Statement that rate information

will be provided on or with each

periodic statement. 

e. Determine when the last statement of

billing rights was furnished to customers

and whether the institution used the short

form notice with each periodic statement

(§226.9(a)). 

f. Determine that the notice of any change in 

terms was provided 15 days prior to the

effective date of the change (§226.9(b)). 

g. Determine that disclosure of items 1-7 in

“b” above are provided if the account is

renewed. Additionally, the disclosure

provided upon renewal must disclose how

and when the cardholder may terminate

the credit to avoid paying the renewal fee

(§226.9(e)). 

h. Determine that a statement of the

maximum interest rate that may be

imposed during the term of the obligation

is made for any loan in which the APR

may increase during the plan (§226.30(b)). 

Reverse Mortgage Forms Review Procedures 

(Both open and closed-end) 

a. Determine that the disclosures required for 

reverse mortgage transactions are

substantially similar to the model form in

Appendix K and include the items below.

1. A statement that the consumer is not

obligated to complete the reverse

mortgage transaction merely because

he or she has received the disclosures

or signed an application 

2. A good faith projection of the total

cost of the credit expressed as a table

of “total annual loan cost rates”

including payments to the consumer,

additional creditor compensation,

limitations on consumer liability,

assumed annual appreciation, and the

assumed loan period 

3. An itemization of loan terms, charges,

the age of the youngest borrower, and

the appraised property value 

4. An explanation of the table of total

annual loan costs rates. 

Note: Forms that include or involve

current transactions, such as change in

terms notices, periodic billing statements,

rescission notices, and billing error

communications, are verified for accuracy

when the file review worksheets are

completed. 
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.35

Timing of Disclosures 

5. Review financial institution policies,

procedures, and systems to determine, either

separately, or when completing the actual file

review, whether the applicable disclosures

listed below are furnished when required by

Regulation Z. Take into account products that

have different features, such as closed-end 

loans or credit card accounts that are fixed or

variable rate. 

a. Credit card application and solicitation

disclosures - On or with the application

(§226.5a(b)).

b. HELC disclosures – At the time the

application is provided or within three

business days under certain circumstances

(§226.5b(b)).

c. Open-end credit initial disclosures –

Before the first transaction is made under

the plan (§226.5(b)(1)). 

d. Periodic disclosures – At the end of a

billing cycle if the account has a debit or

credit balance of $1 or more or if a finance 

charge has been imposed (§226.5(b)(2)). 

e. Statement of billing rights – At least once

per year (§226.9(a)). 

f. Supplemental credit devices – Before the

first transaction under the plan

(§226.9(b)). 

g. Open-end credit change in terms – 15 days 

prior to the effective change date

(§226.9(c)). 

h. Finance charge imposed at time of

transaction – Prior to imposing any fee

(§226.9(d)). 

i. Disclosures upon renewal of credit or

charge card – 30 days or one billing cycle, 

whichever is less before the delivery of

the periodic statement on which the

renewal fee is charged. Alternatively,

notice may be delayed until the mailing or

delivery of the periodic statement on

which the renewal fee is charged to the

accounts if the notice meets certain

requirements (§226.9(e)). 

j. Change in credit account insurance

provider – Certain information 30 days

before the change in provider occurs and

certain information 30 days after the

change in provider occurs. The institution

may provide a combined disclosure 30

days before the change in provider occurs

(§226.9(f)). 

k. Closed-end credit disclosures – Before

consummation (§226.17(b)). 

l. Disclosures for certain closed-end home

mortgages – Three business days prior to

consummation (§226.31(c)(1)). 

m. Disclosures for reverse mortgages – Three 

days prior to consummation of a closedend credit transaction or prior to the first

transaction under an open-end credit plan

(§226.31(c)(2)).

n. Disclosures for adjustable-rate mortgages

– At least once each year during which an 

interest rate adjustment is implemented

without an accompanying payment

change, and at least 25, but no more than

120 calendar days before a new payment

amount is due, or in accordance with other 

variable-rate subsequent-disclosure 

regulations issued by a supervisory agency 

(§226.20(c)).

Record Retention 

6. Review the financial institution’s record

retention practices to determine whether

evidence of compliance (for other than the

advertising requirements) is retained for at

least two years after the disclosures was

required to be made or other action was

required to be taken (§226.25). 

Transactional Testing 

Note: When verifying APR accuracies, use the

OCC’s APR calculation model or other calculation 

tool acceptable to your regulatory agency.
SECTION: Truth in Lending

305.36 Compliance Activities January 2004 Office of Thrift Supervision

Advertising 

7. Sample advertising copy, including any

Internet advertising, since the previous

examination and verify that the terms of credit 

are specific. If triggering terms are used,

determine the required disclosures are made

(§§226.16 and 226.24). 

For advertisements for closed-end credit,

determine: 

 if a rate of finance charge was stated, that 

it was stated as an APR 

 if an APR will increase after

consummation, a statement to that fact is

made 

Closed-End Credit 

8. For each type of closed-end loan being tested,

determine the accuracy of the disclosures by

comparing the disclosures to the contract and

other financial institution documents

(§226.17). 

9. Determine whether the required disclosures

were made before consummation of the

transaction and ensure the presence and

accuracy of the items below, as applicable

(§226.18). 

a. Amount financed 

b. Itemization of the amount financed

(RESPA GFE may substitute) 

c. Finance charge 

d. APR 

e. Variable rate verbiage as follows for loans 

not secured by a principal dwelling or

with terms of one year or less: 

1. Circumstances which permit rate

increase 

2. Limitations on the increase (periodic

or lifetime) 

3. Effects of the increase 

4. Hypothetical example of new payment 

terms 

f. Payment schedule including amount,

timing and number of payments. 

g. Total of payments. 

h. Total sales price (credit sale) 

i. Description of security interest 

j. Credit life insurance premium included in

the finance charge unless: 

 Insurance is not required; 

 Premium for the initial term is

disclosed; and 

 Consumer signs or initials an

affirmative written request for the

insurance. 

k. Property insurance available from the

creditor excluded from the finance charge

if the premium for the initial term of the

insurance is disclosed 

l. Required deposit. 

10. Determine for adjustable rate mortgage loans

secured by the borrower’s principal dwelling

with maturities of more than one year that the

required early and subsequent disclosures are

complete, accurate, and timely. Early

disclosures required by §226.19(a) are verified 

during the closed-end credit forms review.

Subsequent disclosures should include the

items below, as applicable (§226.20(c)). 

a. Current and prior interest rates 

b. Index values used to determine current

and prior interest rates 

c. Extent to which the creditor has foregone

an increase in the interest rate

d. Contractual effects of the adjustment (new 

payment and loan balance) 

e. Payment required to avoid negative

amortization.
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.37

Note: The accuracy of the adjusted interest rates

and indexes should be verified by comparing them

with the contract and early disclosures. Refer to

the Additional Variable Rate Testing section of

these examination procedures. 

11. Determine, for each type of closed-end 

rescindable loan being tested, two copies of

the rescission notice are provided to each

person whose ownership interest is or will be

subject to the security interest. The rescission

notice must disclose the items below

(§226.23(b)). 

a. Security interest taken in the consumer’s

principal dwelling 

b. Consumer’s right to rescind the

transaction 

c. How to exercise the right to rescind, with 

a form for that purpose, designating the

address of the creditor’s place of business 

d. Effects of rescission 

e. Date the rescission period expires. 

12. Ensure funding was delayed until the

rescission period expired (§226.23(c)). 

13. Determine if the institution has waived the

three-day right to rescind since the previous

examination. If applicable, test rescission

waivers (§226.23(e)).

14. Determine whether the maximum interest rate

in the contract is disclosed for any adjustable

rate consumer credit contract secured by a

dwelling (§226.30(a)). 

Open-End Credit 

15. For each open-end credit product tested,

determine the accuracy of the disclosures by

comparing the disclosure with the contract and 

other financial institution documents

(§226.5(c)). 

16. Review the financial institution’s policies,

procedures, and practices to determine

whether it provides appropriate disclosures for 

creditor-initiated direct mail applications and

solicitations to open charge card accounts,

telephone applications and solicitations to

open charge card accounts, and applications

and solicitations made available to the general

public to open charge card accounts

(§226.5a(b), (c), and (d)). 

17. Determine for all home equity plans with a

variable rate that the APR is based on an

independent index. Further, ensure home

equity plans are terminated or terms changed

only if certain conditions exist (§226.5b(f)).

18. Determine that, if any consumer rejected a

home equity plan because a disclosed term

changed before the plan was opened, all fees

were refunded. Verify that non-refundable 

fees were not imposed until three business

days after the consumer received the required

disclosures and brochure (§226.5b(g) and (h)). 

19. Review consecutive periodic billing

statements for each major type of open-end 

credit activity offered (overdraft and homeequity lines of credit, credit card programs,

etc.). Determine whether disclosures were

calculated accurately and are consistent with

the initial disclosure statement furnished in

connection with the accounts (or any

subsequent change in terms notice) and the

underlying contractual terms governing the

plan(s). The periodic statement must disclose

the items below, as applicable (§226.7). 

a. Previous balance 

b. Identification of transactions 

c. Dates and amounts of any credits 

d. Periodic rates and corresponding APRs, if

variable rate plan, must disclose that the

periodic rates may vary 

e. Balance on which the finance charge is

computed and an explanation of how the

balance is determined 

f. Amount of finance charge with an

itemization of each of the components of

the finance charge 

g. Annual percentage rate 
SECTION: Truth in Lending

305.38 Compliance Activities January 2004 Office of Thrift Supervision

h. Itemization of other charges 

i. Closing date and balance 

j. Payment date, if there is a “free ride”

period 

k. Address for notice of billing errors. 

20. Verify the institution credits a payment to the 

open-end account as of the date of receipt

(§226.10). 

21. Determine institution’s treatment of credit

balances. Specifically, if the account’s credit

balance is in excess of $1, the institution must 

disclose the items below (§226.11). 

a. Credit the amount to the consumer’s

account; 

b. Refund any part of the remaining credit

balance within seven business days from

receiving a written request from the

consumer; and 

c. Make a good faith effort to refund the

amount of the credit to a deposit account

of the consumer if the credit remains for

more than six months. 

22. Review a sample of billing error resolution

files and a sample of consumers who have

asserted a claim or defense against the

financial institution for a credit card dispute

regarding property or services. Verify the

following (§§226.12 and 226.13). 

a. Credit cards are issued only upon request 

b. Liability for unauthorized credit card use

is limited to $50 

c. Disputed amounts are not reported

delinquent unless remaining unpaid after

the dispute has been settled 

d. Offsetting credit card indebtedness is

prohibited 

e. Errors are resolved within two complete

billing cycles. 

23. Determine, for each type of open-end 

rescindable loan being tested, two copies of

the rescission notice are provided to each

person whose ownership interest is or will be

subject to the security interest and perform

items 11, 12, and 13 under Closed-End Credit. 

Additional Variable Rate Testing 

24. Verify that when accounts were opened or

loans were consummated that loan contract

terms were recorded correctly in the financial

institution’s calculation systems (e.g., its

computer). Determine the accuracy of the

following recorded information: 

a. Index value, 

b. Margin and method of calculating rate

changes, 

c. Rounding method, and 

d. Adjustment caps (periodic and lifetime). 

25. Using a sample of periodic disclosures for

open-end variable rate accounts (e.g., home

equity accounts) and closed-end rate change

notices for adjustable rate mortgage loans: 

a. Compare the rate-change date and rate on

the credit obligation to the actual ratechange date and rate imposed. 

b. Determine that the index disclosed and

imposed is based on the terms of the

contract (example: the weekly average of

one-year Treasury constant maturities,

taken as of 45 days before the change

date) (§§226.7(g) and 226.20(c)(2)). 

c. Determine that the new interest rate is

correctly disclosed by adding the correct

index value with the margin stated in the

note, plus or minus any contractual

fractional adjustment (§§226.7(g) and

226.20 (c)(1)). 

d. Determine that the new payment disclosed

(§226.20(c)(4)) was based on an interest

rate and loan balance in effect at least 25

days before the payment change date
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.39

(consistent with the contract)

(§226.20(c)). 

Certain Home Mortgage Transactions 

26. Determine whether the financial institution 

originates consumer credit transactions subject 

to Subpart E of Regulation Z; specifically,

certain closed-end home mortgages (high-cost 

mortgages (§226.32) and reverse mortgages

(§226.33).

27. Examiners may use the attached worksheet as

an aid for identifying and reviewing high-cost 

mortgages. 

28. Review both high-cost and reverse mortgages

to ensure the following:

a. Required disclosures are provided to

consumers in addition to, not in lieu of,

the disclosures contained in other subparts 

of Regulation Z (§226.31(a)).

b. Disclosures are clear and conspicuous, in

writing, and in a form that the consumer

may keep (§226.31(b)).

c. Disclosures are furnished at least three

business days prior to consummation of a

mortgage transaction covered by §226.32

or a closed-end reverse mortgage

transaction (or at least three business days 

prior to the first transaction under an

open-end reverse mortgage) (§226.31(c)).

d. Disclosures reflect the terms of the legal

obligation between the parties

(§226.31(d)).

e. If the transaction involves more than one

creditor, only one creditor shall provide

the disclosures. Where the obligation

involves multiple consumers, the

disclosures may be provided to any

consumer who is primarily liable on the

obligation. However, for rescindable

transactions, the disclosures must be

provided to each consumer who has the

right to rescind (§226.31(e)).

f. The APR is accurately calculated and

disclosed in accordance with the

requirements and within the tolerances

allowed in §226.22 (§226.31(g)).

29. For high-cost mortgages (§226.32), ensure

that: 

b. In addition to other required disclosures,

the creditor discloses the following at least 

three business days prior to

consummation: [See model disclosure at

App. H-16]

1. Notice containing the prescribed

language (§226.32(c)(1)).

2. Annual percentage rate

(§226.32(c)(2)).

3. Amount of regular loan payment and

the amount of any balloon payment

(§226.32(c)(3)).

4. For variable rate loans, a statement

that the interest rate and monthly

payment may increase, and the

amount of the single maximum 

monthly payment allowed under the

contract (§226.32(c)(4)). 

5. For a mortgage refinancing, the total

amount the consumer will borrow (the 

face amount) and if this amount

includes premiums or other charges

for optional credit insurance or debtcancellation coverage, that fact is

stated. This disclosure shall be treated 

as accurate if within $100

(§226.32(c)(5)).

6. A new disclosure is required if,

subsequent to providing the additional

disclosure but prior to consummation,

there are changes in any terms that

make the disclosures inaccurate. For

example, if a consumer purchases

optional credit insurance and, as a

result, the monthly payment differs

from the payment previously

disclosed, redisclosure is required and

a new three-day waiting period

applies (§226.31(c)(1)(i)).

7. If a creditor provides new disclosures

by telephone when the consumer
SECTION: Truth in Lending

305.40 Compliance Activities January 2004 Office of Thrift Supervision

initiates a change in terms, then at

consummation: (§226.31(c)(1)(ii)) 

 The creditor must provide new

written disclosures and both

parties must sign a statement that

these new disclosures were

provided by telephone at least

three days prior to consummation.

8. If a consumer waives the right to a

three-day waiting period to meet a

bona fide personal financial

emergency, the consumer’s waiver

must be a dated written statement (not 

a pre-printed form) describing the

emergency and bearing the signature

of all entitled to the waiting period (a

consumer can waive only after

receiving the required disclosures and

prior to consummation)

(§226.31(c)(1)(iii)).

c. High-cost mortgage transactions do not

provide for any of the following loan

terms:

1. Balloon payment (if term is less than 

5 years, with exceptions) 

(§226.32(d)(1)(i) and (ii)).

2. Negative amortization 

(§226.32(d)(2)).

3. Advance payments from the proceeds

of more than 2 periodic payments

(§226.32(d)(3)).

4. Increased interest rate after default

(§226.32(d)(4)).

5. A rebate of interest, arising from a

loan acceleration due to default,

calculated by a method less favorable

than the actuarial method

(§226.32(d)(5)).

6. Prepayment penalties (but permitted 

in the first five years if certain

conditions are met) (§226.32(d)(6)

and (7)).

7. A due-on-demand clause permitting

the creditor to terminate the loan in

advance of maturity and accelerate the 

balance, with certain exceptions 

(§226.32(d)(8)).

d. The creditor is not engaged in the

following acts and practices for high-cost 

mortgages:

1. Home improvement contracts –

paying a contractor under a home

improvement contract from the

proceeds of a mortgage unless certain

conditions are met (§226.34(a)(1)).

2. Notice to assignee – selling or

otherwise assigning a high-cost 

mortgage without furnishing the

required statement to the purchaser or

assignee (§226.34(a)(2)).

3. Refinancing within one year of

extending credit – within one year of

making a high-cost mortgage loan, a

creditor may not refinance any highcost mortgage loan to the same

borrower into another high-cost 

mortgage loan that is not in the

borrower’s interest. This also applies

to assignees that hold or service the

high-cost mortgage loan. 

Commentary to 34(a)(3) has examples 

applying the refinancing prohibition

and addressing “borrower’s interest”

(§226.34(a)(3)).

4. Consumers’ ability to repay –

engaging in a pattern or practice of

extending high-cost mortgages based

on the consumer’s collateral without

regard to repayment ability, including

the consumer’s current and expected

income, current obligations, and

employment. A violation is presumed

if there is a pattern or practice of

making such mortgage loans without

verifying and documenting

consumers’ repayment ability. 

A. A creditor may consider any

expected income of the consumer,

including:

i. Regular salary or wages;

ii. Gifts;
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.41

iii. Expected retirement 

payments; and

iv. Income from selfemployment.

B. Equity income that would be

realized from the collateral may

not be considered.

C. Creditors may verify and

document a consumer’s income

and obligations through any

reliable source that provides the

creditor with a reasonable basis

for believing that there are

sufficient funds to support the

loan. Reliable sources include:

i. Credit reports;

ii. Tax return;

iii. Pension statements; or

iv. Payment records for 

employment income.

D. If a loan transaction includes a

discounted introductory rate, the

creditor must consider the

consumer’s ability to repay based

on the non-discounted or fully

indexed rate. 

Commentary to 34(a)(4) contains

guidance on income that may be

considered, on “pattern or

practice,” and on “verifying and

documenting” income and

obligations (§226.34(a)(4)).

30. Ensure that the creditor does not structure a

home-secured loan as an open-end plan

(“spurious open-end credit”) to evade the

requirements of Regulation Z. See staff

commentary to 34(b) for factors to be

considered (§226.34(b)).

Administrative Enforcement 

31. If there is noncompliance involving

understated finance charges or understated

APRs subject to reimbursement under the

FFIEC Policy Guide on Reimbursement

(policy guide), continue with step 32. 

32. Document the date on which the

administrative enforcement of the TILA

policy statement would apply for

reimbursement purposes by determining the 

date of the preceding examination. 

33. If the noncompliance involves indirect (thirdparty paper) disclosure errors and affected

consumers have not been reimbursed: 

a. Prepare comments, discussing the need for 

improved internal controls to be included

in the report of examination. 

b. Notify your supervisory office for follow

up with the regulator that has primary

responsibility for the original creditor. 

If the noncompliance involves direct credit: 

c. Make an initial determination whether the

violation is a pattern or practice. 

d. Calculate the reimbursement for the loans

or accounts in an expanded sample of the

identified population. 

e. Estimate the total impact on the

population based on the expanded sample. 

f. Inform management that reimbursement

may be necessary under the law and the

policy guide, and discuss all substantive

facts including the sample loans and

calculations. 

g. Inform management of the financial

institution’s options under section 130 of

the TILA for avoiding civil liability and of 

its option under the policy guide and

section 108 (e)(6) of the TILA for

avoiding a regulatory agency’s order to

reimburse affected borrowers.
SECTION: Truth in Lending Section 305

305.42 Compliance Activities January 2004 Office of Thrift Supervision

HIGH-COST MORTGAGE (§226.32) WORKSHEET

Borrower’s Name Loan Number:

COVERAGE

Yes No

Is the loan secured by the consumer’s principal dwelling?

[§226.2(a)(19), §226.32(a)(1)]

If the answer is No, STOP HERE 

Is the loan for the following purpose?

 1. Residential Mortgage Transaction – [§226.2(a)(24)]

 2. Reverse Mortgage Transaction – [§226.33]

 3. Open-End Credit Plan – Subpart B 

 [note prohibition against structuring loans as open-end

 plans to evade §226.32 – [§226.34(b)]

If the answer is Yes to Box 1, 2, or 3, STOP HERE. If No, continue to Test 1.
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.43

TEST 1 – CALCULATION OF APR

A. Disclosed APR

B. Treasury Security Yield of Comparable Maturity

Obtain the Treasury Constant Maturities Yield from the FRB’s Statistical 

Release, H-15 – Selected Interest Rates (the “Business” links will display daily 

yields). Use the yield that has the most comparable maturity to the loan term 

and is from the 15th day of the month that immediately precedes the month of 

the application. If the 15th is not a business day, use the yield for the business 

day immediately preceding the 15th. If the loan term is exactly halfway 

between two published security maturities, use the lower of the two yields.) 

Note: Creditors may use the FRB’s Selected Interest Rates or the actual 

auction results. See Staff Commentary to Regulation Z for further details. 

[§226.32(a)(1)(i)]

http://www.federalreserve.gov/releases/H15/data.htm

C. Treasury Security Yield of Comparable Maturity (Box B)

Plus: 8 percentage points for first-lien loan; or 

 10 percentage points for subordinate-lien loan

Yes No

D. Is Box A greater than Box C?

If Yes, the transaction is a High-Cost Mortgage. If No, continue to Test 2, Points and 

Fees.
SECTION: Truth in Lending Section 305

305.44 Compliance Activities January 2004 Office of Thrift Supervision

HIGH-COST MORTGAGE (§226.32) WORKSHEET

TEST 2 – CALCULATION OF POINTS AND FEES

STEP 1: Identify all Charges Paid by the Consumer at or before Loan Closing

A. Finance Charges – §226.4(a) and (b) (Interest, including per-diem interest, and time 

price differential are excluded from these amounts.)

Fee Subtotals

 Loan Points

 Mortgage Broker Fee

 Loan Service Fees

 Required Closing Agent/3rd Party Fees

 Required Credit Insurance

 Private Mortgage Insurance

 Life of Loan Charges (flood, taxes, etc.)

 Any Other Fees Considered Finance Charges

 Subtotal

B. Certain Non-Finance Charges Under §226.4(c)(7) – Include fees paid by consumers 

only if the amount of the fee is unreasonable or if the creditor receives direct or indirect 

compensation from the charge or the charge is paid to an affiliate of the bank. (See the 

example in §226.32(b)(1)(ii) of the commentary for further explanation.)

 Title Examination

 Title Insurance

 Property Survey

 Document Preparation Charge

 Credit Report

 Appraisal

 Fee for “Initial” Flood Hazard Determination 

 Pest Inspection

 Any Other Fees Not Considered Finance Charges

 Subtotal

C. Premiums or Other Charges for Optional Credit Life, Accident, 

Health, or Loss-of-Income Insurance, or Debt-Cancellation Coverage

D. Total Points & Fees: Add Subtotals for A, B, C 
SECTION: Truth in Lending Section 305

Office of Thrift Supervision January 2004 Compliance Activities 305.45

HIGH-COST MORTGAGE (§226.32) WORKSHEET

TEST 2 – CALCULATION OF POINTS AND FEES (continued)

STEP 2: Determine the Total Loan Amount for Cost Calculation [226.32(a)(1)(ii)]

A. Determine the Amount Financed [§226.18(b)]

 Principal Loan Amount

 Plus: Other Amounts Financed by the Lender (not

 already included in the principal and not part of the

 finance charge)

 Less: Prepaid Finance Charges [§226.2(a)(23)]

 Equals: Amount Financed

B. Deduct costs included in the points and fees under 

§226.32(b)(1)(iii) and (iv) (Step 1, Box B and Box C) that are 

financed by the creditor

C. Total Loan Amount (Step 2, Box A minus Box B)

TEST 2 – CALCULATION OF POINTS AND FEES (continued)

STEP 3: Perform High-Fee Cost Calculation

A. Eight Percent of the Total Loan Amount (Step 2, Box C)

B. Annual Adjustment Amount – [§226.32(a)(1)(ii)]

1999: $441; 2000: $451; 2001: $465; 2002: $480

(use the dollar amount corresponding to the year of the loan’s 

origination)

C. Total Points & Fees (Step 1, Box D)

Yes No

In Step 3, does Box C exceed the greater of Box A or Box B?

If Yes, the transaction is a High-Cost Mortgage. If No, the transaction is not a HighCost Mortgage under Test 2, Points and Fees.
CHAPTER: Consumer Affairs Laws and Regulations

SECTION: Homeowners Protection Act Section 323

Office of Thrift Supervision January 2004 Compliance Activities 323.1

I. Background

The Homeowners Protection Act of 1998 (the Act) 

was signed into law on July 29, 1998, and became 

effective on July 29, 1999. The Act was amended 

on December 27, 2000 to provide technical corrections and clarification. The Act, also known as the 

“PMI Cancellation Act,” addresses homeowners’

difficulties in canceling private mortgage insurance 

(PMI)1 coverage. It establishes provisions for canceling and terminating PMI, establishes disclosure

and notification requirements, and requires the return of unearned premiums.

PMI is insurance that protects lenders from the

risk of default and foreclosure. PMI allows prospective buyers who cannot, or choose not to, provide significant down payments to obtain mortgage 

financing at affordable rates. It is used extensively 

to facilitate “high-ratio” loans (generally, loans in

which the loan to value (LTV) ratio exceeds 80

percent). With PMI, the lender can recover costs

associated with the resale of foreclosed property,

and accrued interest payments or fixed costs, such 

as taxes or insurance policies, paid prior to resale. 

Excessive PMI coverage provides little extra protection for a lender and does not benefit the borrower. In some instances, homeowners have

experienced problems in canceling PMI. At other 

times, lenders may have agreed to terminate coverage when the borrower’s equity reached 20 percent, but the policies and procedures used for

canceling or terminating PMI coverage varied

widely among lenders. Prior to the Act, homeowners had limited recourse when lenders refused 

 

1

 The Act does not apply to mortgage insurance made 

available under the National Housing Act, title 38 of 

the United States Code, or title V of the Housing Act 

of 1949. This includes mortgage insurance on loans 

made by the Federal Housing Administration and 

guarantees on mortgage loans made by the Veterans 

Administration.

refused 

to cancel their PMI coverage. Even homeowners

in the few states that had laws pertaining to PMI

cancellation or termination noted difficulties in

canceling or terminating their PMI policies. The

Act now protects homeowners by prohibiting life

of loan PMI coverage for borrower-paid PMI

products and establishing uniform procedures for

the cancellation and termination of PMI policies.

II. Scope and Effective Date

The Act applies primarily to “residential mortgage 

transactions,” defined as mortgage loan transactions consummated on or after July 29, 1999, to

finance the acquisition, initial construction or refinancing2

 of a single-family dwelling that serves as 

a borrower’s principal residence.3 The Act also

includes provisions for annual written disclosures

for “residential mortgages,” defined as mortgages, 

loans or other evidences of a security interest created for a single-family dwelling that is the principal residence of the borrower (12 USC 4901(14)

and (15)). A condominium, townhouse, cooperative or mobile home is considered to be a singlefamily dwelling covered by the Act. 

The Act’s requirements vary depending on whether 

a mortgage is: 

• A “residential mortgage” or a “residential

mortgage transaction”;

• Defined as high risk (either by the lender in the 

case of nonconforming loans, or Fannie Mae

 

2

 For purposes of these procedures, “refinancing” 

means the refinancing of loans any portion of which 

was to provide financing for the acquisition or initial 

construction of a single-family dwelling that serves as 

a borrower’s principal residence. See 15 USCC 1601 

et. seq. and 12 CFR 226.20.

3

 For purposes of these procedures, junior mortgages 

that provide financing for the acquisition, initial construction or refinancing of a single-family dwelling 

that serves as a borrower’s primary residence are covered.

Approved – FFIEC
SECTION: Homeowners Protection Act Section: 323

323.2 Compliance Activities January 2004 Office of Thrift Supervision

and Freddie Mac in the case of conforming 

loans);

• Financed under a fixed rate or an adjustable 

rate; or 

• Covered by borrower-paid private mortgage 

insurance (BPMI) or lender-paid private mortgage insurance (LPMI).4

 III. Cancellation and Termination of 

PMI for Non-High Risk 

Residential Mortgage 

Transactions 

A. Borrower Requested Cancellation

A borrower may initiate cancellation of PMI coverage by submitting a written request to the servicer. The servicer must take action to cancel PMI 

when the cancellation date occurs, which is when

the principal balance of the loan reaches (based on 

actual payments) or is first scheduled to reach 80

percent of the “original value,”5 irrespective of the 

outstanding balance, based upon the initial amortization schedule (in the case of a fixed rate loan) or 

amortization schedule then in effect (in the case of 

an adjustable rate loan),6 or any date thereafter

that:

• the borrower submits a written cancellation 

request;

 

4

 All sections of these procedures and manual apply to 

BPMI. For LPMI, relevant sections begin under that 

heading the follow thereafter.

5

 “Original value” is defined as the lesser of the sales 

price of the secured property as reflected in the purchase contract or, the appraised value at the time of 

loan consummation. In the case of a refinancing, the 

term means the appraised value relied upon by the 

lender to approve the refinance transaction.

6

 The Act includes as an adjustable rate mortgage, a 

balloon loan that “contains a conditional right to refinance or modify the unamortized principal at the maturity date.” Therefore, if a balloon loan contains a 

conditional right to refinance, the initial disclosure for 

an adjustable rate mortgage would be used even if the 

interest rate is fixed.

• the borrower has a good payment history;7

• the borrower is current;8 and

• the borrower satisfies any requirement of the

mortgage holder for: (i) evidence of a type established in advance that the value of the property has not declined below the original value; 

and (ii) certification that the borrower’s equity 

in the property is not subject to a subordinate 

lien (12 USC 4902(a)(4)).

Once PMI is canceled, the servicer may not require 

further PMI payments or premiums more than 30

days after the later of: (i) the date on which the

written request was received or (ii) the date on

which the borrower satisfied the evidence and certification requirements of the mortgage holder described previously (12 USC 4902(e)(1)).

B. Automatic Termination

The Act requires a servicer to automatically terminate PMI for residential mortgage transactions on

the date that:

• the principal balance of the mortgage is first

scheduled to reach 78 percent of the original 

value of the secured property (based solely on 

the initial amortization schedule in the case of 

a fixed rate loan or on the amortization schedule then in effect in the case of an adjustable

rate loan, irrespective of the outstanding balance) if the borrower is current; or

• if the borrower is not current on that date, on 

the first day of the first month following the

date that the borrower becomes current (12

USC 4902(b)).

 

7

 A borrower has a good payment history if the borrower: (1) has not made a payment that was 60 days or 

more past due within the first 12 months of the last 2 

years prior to the later of the cancellation date, or the 

date that the borrower request cancellation; or (2) has 

not made a payment that was 30 days or more past due 

within the 12 months prior to the later of the cancellation date or the date that the borrower requests cancellation.

8

 The Act does not define current.
SECTION: Homeowners Protection Act Section: 323

Office of Thrift Supervision January 2004 Compliance Activities 323.3

If PMI is terminated, the servicer may not require 

further payments or premiums of PMI more than

30 days after the termination date or the date following the termination date on which the borrower 

becomes current on the payments, whichever is

sooner (12 USC 4902(e)(2)). 

There is no provision in the automatic termination 

section of the Act, as there is with the borrowerrequested PMI cancellation section, that protects

the lender against declines in property value or

subordinate liens. The automatic termination provisions make no reference to good payment history 

(as prescribed in the borrower-requested provisions), but state only that the borrower must be

current on mortgage payments (12 USC 4902(b)). 

C. Final Termination

If PMI coverage on a residential mortgage transaction was not canceled at the borrower’s request or 

by the automatic termination provision, the servicer must terminate PMI coverage by the first day 

of the month immediately following the date that is 

the midpoint of the loan’s amortization period if,

on that date, the borrower is current on the payments required by the terms of the mortgage. (If

the borrower is not current on that date, PMI

should be terminated when the borrower does become current). 

The midpoint of the amortization period is halfway 

through the period between the first day of the amortization period established at consummation and 

ending when the mortgage is scheduled to be amortized. The servicer may not require further payments or premiums of PMI more than 30 days

after PMI is terminated (12 USC 4902(e)(3)). 

D. Loan Modifications

If a borrower and mortgage holder agree to modify 

the terms and conditions of a loan pursuant to a

residential mortgage transaction, the cancellation, 

termination or final termination dates shall be recalculated to reflect the modification (12 USC

4902(d)).

E. Exclusions

The Act’s cancellation and termination provisions

do not apply to residential mortgage transactions

for which Lender Paid Mortgage Insurance

(LPMI) is required (12 USC 4905(b). 

F. Return of Unearned Premiums

The servicer must return all unearned PMI premiums to the borrower within 45 days after cancellation or termination of PMI coverage. Within 30

days after notification by the servicer of cancellation or termination of PMI coverage, a mortgage

insurer must return to the servicer any amount of

unearned premiums it is holding to permit the servicer to return such premiums to the borrower (12 

USC 4902(f)).

G. Accrued Obligations for Premium Payments

The cancellation or termination of PMI does not

affect the rights of any lender, servicer or mortgage 

insurer to enforce any obligation of a borrower for 

payments of premiums that accrued before the

cancellation or termination occurred (12 USC

4902 (h)).

IV. Exceptions to Cancellation and 

Termination Provisions for High 

Risk Residential Mortgage 

Transactions

The borrower-requested cancellation at 80 percent 

LTV and the automatic termination at 78 percent

LTV requirements of the Act do not apply to “high 

risk” loans. However, high risk loans are subject

to final termination and are divided into two categories - conforming (Fannie Mae/Freddie Macdefined high-risk loans) and nonconforming

(lender-defined high-risk loans) (12 USC

4902(g)(1)). 

A. Conforming Loans (Fannie Mae/Freddie 

Mac-Defined High Risk Loans)

Conforming loans are those loans with an original 

principal balance not exceeding Freddie Mac’s and 
SECTION: Homeowners Protection Act Section: 323

323.4 Compliance Activities January 2004 Office of Thrift Supervision

Fannie Mae’s conforming loan limits.9 Fannie 

Mae and Freddie Mac are authorized under the Act 

to establish a category of residential mortgage

transactions that are not subject to the Act’s requirements for borrower-requested cancellation or

automatic termination, because of the high risk

associated with them.10 They are, however, subject 

to the final termination provision of the Act. As

such, PMI on a conforming high risk loan must be 

terminated by the first day of the month following 

the date that is the midpoint of the loan’s initial

amortization schedule (in the case of a fixed rate

loan) or amortization schedule then in effect (in the 

case of an adjustable rate loan) if, on that date, the 

borrower is current on the loan. (If the borrower is 

not current on that date, PMI should be terminated 

when the borrower does become current.) 

B. Nonconforming Loans (Lender-Defined 

High Risk Loans)

Nonconforming loans are those residential mortgage transactions that have an original principal

balance exceeding Freddie Mac’s and Fannie

Mae’s conforming loan limits. Lender-defined 

high risk loans are not subject to the Act’s requirements for borrower-requested cancellation or

automatic termination. However, if a residential

mortgage transaction is a lender-defined high risk

loan, PMI must be terminated on the date on which 

the principal balance of the mortgage, based solely 

on the initial amortization schedule (in the case of 

a fixed rate loan) or the amortization schedule then 

in effect (in the case of an adjustable rate loan) for 

that mortgage and irrespective of the outstanding

balance for that mortgage on that date, is first

scheduled to reach 77 percent of the original value 

of the property securing the loan.

Like conforming loans that are determined to be

high risk by Freddie Mac and Fannie Mae, a residential mortgage transaction that is a lenderdefined high risk loan is subject to the final termination provision of the Act.

 

9

 The limit was $322,700 in 2003.

10 Fannie Mae and Freddie Mac have not defined highrisk loans as of the date of this publication.

C. Notices

The lender must provide written initial disclosures 

at consummation for all high-risk residential mortgage transactions (as defined by the lender or Fannie Mae or Freddie Mac), that in no case will PMI 

be required beyond the midpoint of the amortization period of the loan, if the loan is current. More 

specific notice as to the 77 percent LTV termination standards for lender defined high-risk loans is 

not required under the Act. 

V. Basic Disclosure and Notice 

Requirements Applicable to 

Residential Mortgage 

Transactions and Residential 

Mortgages

The Act requires the lender in a residential mortgage transaction to provide to the borrower, at the 

time of consummation, certain disclosures that describe the borrower’s rights for PMI cancellation 

and termination. A borrower may not be charged

for any disclosure required by the Act. Initial disclosures vary, based upon whether the transaction

is a fixed rate mortgage, adjustable rate mortgage

or high-risk loan. The Act also requires that the

borrower be provided with certain annual and other 

notices concerning PMI cancellation and termination. Residential mortgages are subject to certain

annual disclosure requirements. 

A. Initial Disclosures for Fixed Rate 

Residential Mortgage Transactions

When PMI is required for non-high risk fixed rate 

mortgages, the lender must provide to the borrower 

at the time the transaction is consummated: (i) a

written initial amortization schedule, and (ii) a

written notice that discloses:

• The borrower’s right to request cancellation of 

PMI, and, based on the initial amortization

schedule, the date the loan balance is scheduled to reach 80 percent of the original value

of the property;

• The borrower’s right to request cancellation on 

an earlier date, if actual payments bring the

loan balance to 80 percent of the original value 
SECTION: Homeowners Protection Act Section: 323

Office of Thrift Supervision January 2004 Compliance Activities 323.5

of the property sooner than the date based on

the initial amortization schedule;

• That PMI will automatically terminate when

the LTV ratio reaches 78 percent of the original value of the property and the specific date 

that is projected to occur (based on the initial

amortization schedule); and 

• The Act provides for exemptions to the cancellation and automatic termination provisions for 

high-risk mortgages and whether these exemptions apply to the borrower’s loan (12 USC

4903(a)(1)(A)). 

B. Initial Disclosures for Adjustable Rate 

Residential Mortgage Transactions

When PMI is required for non-high risk adjustable 

rate mortgages, the lender must provide to the borrower, at the time the transaction is consummated, 

a written notice that discloses:

• The borrower’s right to request cancellation of 

PMI on (i) the date the loan balance is first

scheduled to reach 80 percent of the original 

value of the property based on the amortization 

schedule then in effect or (ii) the date the balance actually reaches 80 percent of the original 

value of the property based on actual payments. The notice must also state that the servicer will notify the borrower when either (i) or 

(ii) occurs;

• That PMI will automatically terminate when

the loan balance is first scheduled to reach 78 

percent of the original value of the property

based on the amortization schedule then in effect. The notice must also state that the borrower will be notified when PMI is terminated 

(or that termination will occur when the borrower becomes current on payments); and

• That there are exemptions to the cancellation

and automatic termination provisions for high

risk mortgages and whether such exemptions

apply to the borrower’s loan (12 USC

4903(a)(1(B)). 

C. Initial Disclosures for High Risk 

Residential Mortgage Transactions

When PMI is required for high risk residential

mortgage transactions, the lender must provide to

the borrower a written notice stating that PMI will 

not be required beyond the date that is the midpoint 

of the loan’s amortization period if, on that date,

the borrower is current on the payments as required by the terms of the loan. The lender must

provide this notice at consummation. The lender

need not provide disclosure of the termination at 77 

percent LTV for lender defined high risk mortgages (12 USC 4903(a)(2)).

D. Annual Disclosures for Residential 

Mortgage Transactions

For all residential mortgage transactions, including 

high risk mortgages for which PMI is required, the 

servicer must provide the borrower with an annual 

written statement that sets forth the rights of the

borrower to PMI cancellation and termination and 

the address and telephone number that the borrower may use to contact the servicer to determine 

whether the borrower may cancel PMI (12 USC

4903(a)(3)).

E. Disclosures for Existing Residential 

Mortgages

When PMI was required for a residential mortgage 

consummated before July 29, 1999, the servicer 

must provide to the borrower an annual written

statement that:

• States that PMI may be canceled with the consent of the lender or in accordance with state

law; and

• Provides the servicer’s address and telephone 

number, so that the borrower may contact the 

servicer to determine whether the borrower

may cancel PMI (12 USC 4903(b)).
SECTION: Homeowners Protection Act Section: 323

323.6 Compliance Activities January 2004 Office of Thrift Supervision

VI. Notification Upon Cancellation 

or Termination of PMI Relating 

to Residential Mortgage 

Transactions

A. General

The servicer must, not later than 30 days after

PMI relating to a residential mortgage transaction

is cancelled or terminated, notify the borrower in

writing that:11

• PMI has terminated and the borrower no

longer has PMI; and

• No further premiums, payments or other fees 

are due or payable by the borrower in connection with PMI (12 USC 4904(a)).

B. Notice of Grounds/Timing

If a servicer determines that a borrower in a residential mortgage transaction does not qualify for

PMI cancellation or automatic termination, the

servicer must provide the borrower with a written

notice of the grounds relied on for that determination. If an appraisal was used in making the determination, the servicer must give the appraisal 

results to the borrower. If a borrower does not

qualify for cancellation, the notice must be provided not later than 30 days following the later of: 

(i) the date the borrower’s request for cancellation 

is received; or (ii) the date on which the borrower

satisfies any evidence and certification requirements of the mortgage holder. If the borrower does 

not meet the requirements for automatic termination, the notice must be provided not later than 30 

days following the scheduled termination date (12

USC 4904(b)).

 

11 For adjustable rate mortgages, the initial notice to 

borrowers must state that the servicer will notify the 

borrower when the cancellation and automatic termination dates are reached (12 USC 4903(a)(1)(B)). 

Servicers should take care that the appropriate notices 

are made to borrowers when those dates are reached.

VII. Disclosure Requirements for 

Lender Paid Mortgage Insurance

A. Definitions

Borrower paid mortgage insurance (BPMI) means 

PMI that is required for a residential mortgage 

transaction, the payments for which are made by

the borrower.

Lender paid mortgage insurance (LPMI) means

PMI that is required for a residential mortgage

transaction, the payments for which are made by a 

person other than the borrower.

Loan commitment means a prospective lender’s

written confirmation of its approval, including any 

applicable closing conditions, of the application of 

a prospective borrower for a residential mortgage

loan (12 USC 4905(a)).

B. Initial Notice

In the case of LPMI required for a residential

mortgage transaction, the Act requires that the

lender provide a written notice to the borrower not 

later than the date on which a loan commitment is 

made. The written notice must advise the borrower of the differences between LPMI and BPMI 

by notifying the borrower that LPMI: 

• Differs from BPMI because it cannot be cancelled by the borrower or automatically terminated as provided under the Act;

• Usually results in a mortgage having a higher

interest rate than it would in the case of BPMI; 

and

• Terminates only when the mortgage is refinanced, (as that term is defined in the Truth in 

Lending Act, 15 USC 1601 et seq., and Regulation Z, 12 CFR 226.20), paid off, or otherwise terminated. 

The notice must also provide:

• That LPMI and BPMI have both benefits and

disadvantages; 
SECTION: Homeowners Protection Act Section: 323

Office of Thrift Supervision January 2004 Compliance Activities 323.7

• A generic analysis of the costs and benefits of 

a mortgage in the case of LPMI versus BPMI 

over a ten-year period, assuming prevailing interest and property appreciation rates; and

• That LPMI may be tax-deductible for federal

income taxes, if the borrower itemizes expenses for that purpose (12 USC 4905(c)(1)).

C. Notice at Termination Date

Not later than 30 days after the termination date

that would apply in the case of BPMI, the servicer 

shall provide to the borrower a written notice indicating that the borrower may wish to review financing options that could eliminate the

requirement for LPMI in connection with the mortgage (12 USC 4905(c)(2)). 

VIII. Fees for Disclosures

As stated previously, no fee or other cost may be

imposed on a borrower for the disclosures or notifications required to be given to a borrower by

lenders or servicers under the Act (12 USC 4906). 

IX. Civil Liability

A. Liability Dependent Upon Type of Action

Servicers, lenders and mortgage insurers that violate the Act are liable to borrowers as follows:

• Individual Action

In the case of individual borrowers:

 Actual damages (including interest

accruing on such damages);

 Statutory damages not to exceed

$2,000;

 Costs of the action; and

 Reasonable attorney fees.

• Class Action

In the case of a class action suit against a 

defendant that is subject to Section 10 of

the Act, (i.e., regulated by the federal

banking agencies, NCUA or the Farm

Credit Administration):

 Such statutory damages as the court

may allow up to the lesser of

$500,000 or 1 percent of the liable

party’s net worth;

 Costs of the action; and

 Reasonable attorney fees.

In the case of a class action suit against a defendant that is not subject to Section 10 of the Act,

(i.e., not regulated by the federal banking agencies, 

NCUA, or the Farm Credit Administration):

 Actual damages (including interest

accruing on such damages);

 Statutory damages up to $1,000 per 

class member but not to exceed the

lesser of (i) $500,000; or (ii) 1 percent of the liable party’s gross revenues;

 Costs of the action; and

 Reasonable attorney fees (12 USC

4907(a)).

B. Statute of Limitations

A borrower must bring an action under the Act 

within two years after the borrower discovers the

violation (12 USC 4907(b)).

C. Mortgage Servicer Liability Limitation

A servicer shall not be liable for its failure to comply with the requirements of the Act if the servicer’s failure to comply is due to the mortgage 

insurer’s or lender’s failure to comply with the Act 

(12 USC 4907(c)).
SECTION: Homeowners Protection Act Section: 323

323.8 Compliance Activities January 2004 Office of Thrift Supervision

 X. Enforcement

The Act directs the federal banking agencies to

enforce the Act under 12 USC 1818 or any other

authority conferred upon the agencies by law. Under the Act the agencies shall: 

• Notify applicable lenders or servicers of any

failure to comply with the Act;

• Require the lender or servicer, as applicable, to 

correct the borrower’s account to reflect the

date on which PMI should have been canceled 

or terminated under the Act; and

• Require the lender or servicer, as applicable, to 

return unearned PMI premiums to a borrower 

who paid premiums after the date on which the 

borrower’s obligation to pay PMI premiums 

ceased under the Act (12 USC 4909). 

Homeowners Protection Act 

Examination Objectives 

1. To determine the financial institution’s compliance with the Homeowners Protection Act

of 1998 (HPA), as amended.

2. To assess the quality of the financial institution’s policies and procedures for implementing the HPA.

3. To determine the reliance that can be placed

on the financial institution’s internal controls

and procedures for monitoring the institution’s compliance with the HPA. 

4. To initiate corrective action when violations

of HPA are identified, or when policies or internal controls are deficient.

Examination Procedures

1. Through discussions with management and

review of available information, determine if

the institution’s internal controls are adequate 

to ensure compliance with the HPA. Consider 

the following:

a. Organization charts

b. Process flowcharts

c. Policies and procedures

d. Loan documentation

e. Checklists

f. Training

g. Computer program documentation

2. Review any compliance audit material, including work papers and reports, to determine 

whether:

a. The institution's procedures address all

applicable provisions of HPA;

b. Steps are taken to follow-up on previously identified deficiencies;

c. The procedures used include samples

covering all product types and decision

centers;

d. The compliance audit work performed is 

accurate; 

e. Significant deficiencies and their causes

are included in reports to management

and/or to the Board of Directors;

f. Corrective action is taken in a timely and 

appropriate manner; and

g. The frequency of compliance review is

appropriate.

3. Review sample transactions, disclosure and

notification forms, and the financial institution’s policies and procedures to ensure the

institution provides:

• Initial Disclosures for (i) fixed rate

mortgages, (ii) adjustable rate mortgages, (iii) high risk loans, and (iv)

lender paid mortgage insurance; 

• Annual Notices for (i) fixed and adjustable rate mortgages and high risk
SECTION: Homeowners Protection Act Section: 323

Office of Thrift Supervision January 2004 Compliance Activities 323.9

loans, and (ii) existing residential mortgages; and

• Notices of (i) cancellation, (ii) termination, (iii) grounds for not canceling 

PMI, (iv) grounds for not terminating

PMI, (v) cancellation date for adjustable rate mortgages, and (vi) termination date for lender paid mortgage

insurance.

(Refer to Appendix A for required content of

the disclosure and notices.)

4. Using the above sample and bank policies and 

procedures, determine that borrowers are not

charged for any required disclosures or notifications (12 USC 4906). 

5. Obtain and review a sample of recent written

requests from borrowers to cancel their private 

mortgage insurance (PMI) on “non-high risk”

residential mortgage transactions. Verify that

the insurance was cancelled on either (a) the

date on which the principal balance of the loan 

was first scheduled to reach 80 percent of the 

original value of the property based on the initial amortization schedule (in the case of a

fixed rate loan) or amortization schedule then

in effect (in the case of an adjustable rate loan) 

or (b) the date on which the principal balance 

of the loan actually reached 80 percent of the

original value of the property based on actual

payments, in accordance with the applicable

provisions in 12 USC 4902(a)of HPA (i.e., 

good payment history, current payments and,

if required by the lender, evidence that the

value of the mortgaged property did not decline, and certification that the borrower’s equity was unencumbered by a subordinate lien) 

(12 USC 4902(a)).

6. Obtain and review a sample of “non-high risk” 

PMI residential mortgage transactions where

the borrower did not request cancellation. Select loans from the sample that have reached a 

78 percent or lower LTV ratio based on the

original value of the property and that are not 

current. Verify that PMI was terminated, 

based on the initial amortization schedule (in

the case of a fixed rate loan) or the amortization schedule then in effect (in the case of an

adjustable rate loan) on the date that the principal balance of the loan was first scheduled to 

reach 78 percent of the original value of the

mortgaged property (if the borrower was current) or on the first day of the first month after 

the date that the borrower became current (12 

USC 4902(b)).

7. Obtain a sample of PMI-covered residential

mortgage transactions (including high-risk 

loans, if any) that are at or beyond the midpoint of their amortization period. Determine 

whether PMI was terminated by the first day

of the following month if the loan was current. 

If the loan was not current at the midpoint, determine that PMI was terminated by the first

day of the month following the day the loan

became current. If, at the time of the examination, a loan at the midpoint is not current, determine whether the financial institution is

monitoring the loan and has systems in place

to ensure that PMI is terminated when the borrower becomes current (12 USC 4902(c) and

12 USC 4902(g)(2)).

8. Obtain a sample of any lender defined “high

risk” PMI residential mortgage transactions

that have a 77 percent or lower LTV based on 

the original value of the property. Verify that 

PMI was cancelled, based on the initial amortization schedule (in the case of a fixed rate

loan) or the amortization schedule then in effect (in the case of an adjustable rate loan), on 

the date that the principal balance of the loan

was scheduled to reach 77 percent of the original value of the mortgaged property (12 USC 

4902(g)(1)(B)). 

9. Obtain a sample of loans that have had PMI

cancelled or terminated (the samples obtained

above can be used). For PMI loans cancelled 

upon the borrowers’ requests, determine that

the financial institution did not require any

PMI payment(s) beyond 30 days of the borrower satisfying the evidence and certification 

requirements to cancel PMI (12 USC

4902(e)(1). For the PMI loans that received

automatic termination or final termination, determine that the financial institution did not require any PMI payment(s) beyond 30 days of
SECTION: Homeowners Protection Act Section: 323

323.10 Compliance Activities January 2004 Office of Thrift Supervision

termination (12 USC 4902(e)(2) and 12 USC

4902(e)(3)).

10. Using the samples in steps 5, 6, and 7, determine if the financial institution returned unearned premiums, if any, to the borrower

within 45 days after cancellation or termination (12 USC 4902(f)(1)).

Conclusions

11. Summarize all violations and internal deficiencies.

12. If the violation(s) and internal deficiencies

noted above represent(s) a pattern or practice, 

determine the root cause by identifying weaknesses in internal controls, compliance review, 

training, management oversight, or other factors. 

13. Identify action needed to correct violations and 

weaknesses in the institution’s compliance system, as appropriate. 

14. Discuss findings with the institution’s management and obtain a commitment for corrective action.

15. Determine if enforcement action is appropriate. If so, contact appropriate agency personnel for guidance. Section 10(c) of the Act

contains a provision requiring restitution of

unearned PMI premiums. 
APPENDIX A: Homeowners Protection Act Section 323

Office of Thrift Supervision January 2004 Compliance Activities 323A.1

This appendix provides guidance about the timing

and required content of disclosures and notice to be 

made in connection with the Act.

1. Initial disclosures at consummation for fixed

rate residential mortgage transactions must include:

a. A written amortization schedule (§4(a)(1)

(A)(i)).

b. A notice that the borrower may submit a

written request to cancel PMI as of the

date that, based on the initial amortization 

schedule, the principal balance is first

scheduled to reach 80% of the original 

value of the mortgaged property, irrespective of the outstanding balance of the

mortgage, or such earlier date that, based

on actual payments, the principal balance

actually reaches 80% of the original value 

of the mortgaged property and the borrower has a good payment history and has 

satisfied the lender’s requirements that the 

value of the mortgaged property has not

declined and is unencumbered by subordinate liens (§4(a)(1)(A)(ii)(I) and (II)).

c. The specific date, based on the initial amortization schedule, the loan balance is

scheduled to reach 80% of the original

value of the mortgaged property

(§4(a)(1)(A)(ii)(I)).

d. A notice that PMI will automatically terminate on the date that, based on the amortization schedule and irrespective of the

outstanding balance of the mortgage, the

principal balance is first scheduled to

reach 78% of the original value of the

mortgaged property if the loan is current

(§4(a)(1)(A)(ii)(III)).

e. The specific date the loan balance is

scheduled to reach 78% LTV 

(§4(a)(1)(A)(ii)(III)).

f. Notice that exemptions to the right to cancel and automatic termination exist for

high-risk loans and whether such exemptions apply (§4(a)(1)(A)(ii)(IV)).

2. Initial disclosures at consummation for adjustable rate residential mortgage transactions 

must include a notice that:

a. The borrower may submit a written request to cancel PMI as of the date that,

based on the amortization schedule(s) and

irrespective of the outstanding balance of

the mortgage, the principal balance is first 

scheduled to reach 80% of the original

value of the mortgaged property or such

earlier date that, based on actual payments, the principal balance actually

reaches 80% of the original value of the

mortgaged property and the borrower has

a good payment history and has satisfied

the lender requirements that the value of

the mortgaged property has not declined

and is unencumbered by subordinate liens

(§4(a)(1)(B)(i)).

b. The servicer will notify the borrower when 

the cancellation date is reached, i.e., when 

the loan balance represents 80% of the

original value of the mortgaged property 

(§4(a)(1)(B)(I)).

c. PMI will automatically terminate when the 

loan balance is first scheduled to reach

78% of the original value of the mortgaged 

property irrespective of the outstanding 

balance of the mortgage and the loan is

current (§4(a)(1)(B)(ii)).

d. On the termination date the borrower will

be notified of the termination or the fact

that PMI will be terminated when the loan 

is brought current (§4(a)(1)(B)(ii)).

e. Exemptions to the right to cancel and

automatic termination exist for high-risk 

loans and whether such exemptions apply 

(§ 4(a)(1)(B)(iii)).

3. Lender has established standards regarding the 

type of evidence it requires borrowers to provide to demonstrate that the value of the mortgage property has not declined and they are

provided when a request for cancellation occurs (§ 3(a)(3)(A)).
APPENDIX A: Homeowners Protection Act Section 323

323A.2 Compliance Activities January 2004 Office of Thrift Supervision

4. Lender provides written initial disclosures at

consummation for high risk residential mortgage transactions (as defined by the lender or

Fannie Mae or Freddie Mac), that PMI will

not be required beyond the midpoint of the

amortization period of the loan, if the loan is

current (4(a)(2)).

5. When the financial institution acts as servicer

for residential mortgage transactions, it provides an annual written statement to the borrowers explaining their rights to cancel or

terminate PMI and an address and telephone

number to contact the servicer to determine

whether they may cancel PMI (§4(a)(3)).

(Note: This disclosure may be included on

RESPA’s annual escrow account disclosure or

IRS interest payment disclosures.)

6. When the financial institution acts as servicer, 

it provides an annual written statement to each 

borrower who entered into a residential mortgage prior to July 29, 1999, that includes:

a. A statement that PMI may, under certain 

circumstances, be canceled by the borrower with the consent of the lender or in

accordance with applicable state law

(§4(b)(1)).

b. An address and telephone number that the 

borrower may use to contact the servicer

to determine whether the borrower may

cancel the PMI (§ 4(b)(2)). (Note: This

disclosure may be included on RESPA’s

annual escrow account disclosure or IRS

interest payment disclosure.)

7. When the financial institution acts as servicer

for residential mortgage transactions, it provides borrowers written notices within 30 days 

after the date of cancellation or termination of 

PMI that the borrower no longer has PMI and 

that no further PMI payments or related fees

are due (§ 5(a)).

8. When the financial institution services residential mortgage transactions, it returns all unearned PMI premiums to the borrower within

45 days of either termination upon the borrower’s request or automatic termination under 

the HPA (§3(e)).

9. When the financial institution acts as servicer

for residential mortgage transactions, it provides borrowers written notices of the grounds 

it relied on (including the results of any appraisal) to deny a borrower’s request for PMI 

cancellation, no later than 30 days after the

date the request is received, or the date on

which the borrower satisfies any evidence and 

certification requirements established by the

lender, whichever is later (§5(b)(1) and §5(b)

(2)(A)).

10. When the financial institution acts as servicer 

for residential mortgage transactions, it provides borrowers written notices of the grounds 

it relied on (including the results of any appraisal) for refusing to automatically terminate 

PMI not later than 30 days after the scheduled 

termination date (§5(b)(2)(B)).

Note: The scheduled termination date is reached

when, based on the initial amortization schedule (in 

the case of a fixed rate loan) or the amortization 

schedule(s) (in the case of an adjustable rate loan), 

the principal balance of the loan is first scheduled 

to reach 78% of the original value of mortgaged

property, assuming the borrower is current on that 

date or the earliest date thereafter on which the

borrower becomes current. 

11. When the financial institution acts as a servicer for adjustable rate residential mortgage

transactions, the financial institution notifies

borrowers that the cancellation date has been

reached (§4(a)(1)(B)(i)).

12. When the financial institution acts as a servicer for adjustable rate residential mortgage

transactions, the financial institution notifies

the borrowers on the termination date that PMI 

has been cancelled or will be cancelled as soon 

as the borrower is current on loan payments

(§4(a)(1)(B)(ii)).

13. When the financial institution requires “Lender 

Paid Mortgage Insurance” (LPMI) for residential mortgage transactions, it provides a written notice to a prospective borrower on or

before the loan commitment date that includes:
APPENDIX A: Homeowners Protection Act Section 323

Office of Thrift Supervision January 2004 Compliance Activities 323A.3

a. A statement that LPMI differs from borrower paid mortgage insurance (BPMI) in 

that the borrower may not cancel LPMI,

while BPMI is subject to cancellation and

automatic termination under the HPA 

(§6(c)(1)(A)).

b. A statement that LPMI usually results in a 

mortgage with a higher interest rate than

BPMI (§6(c)(1)(B)(i)).

c. A statement that LPMI only terminates

when the transaction is refinanced, paid

off, or otherwise terminated

(§6(c)(1)(B)(ii)).

d. A statement that LPMI and BPMI both

have benefits and disadvantages and a generic analysis reflecting the differing costs 

and benefits of each over a 10-year period, 

assuming prevailing interest and property

appreciation rates (§6(c)(1)(C)).

e. A statement that LPMI may be taxdeductible for federal income taxes if the

borrower itemizes expenses for that purpose (§6(c)(1)(D)).

14. If the lender requires LPMI for residential

mortgage transactions, and the financial institution acts as servicer, does it notify the borrower in writing within 30 days of the

termination date that would have applied if it

were a BPMI transaction, that the borrower

may wish to review financing options that

could eliminate the requirement for PMI

(§6(c)(2)).

15. When the financial institution prohibits borrower paid fees for the disclosures and notifications required under the HPA (§7).
CHAPTER: Consumer Affairs Laws and Regulations

SECTION: Consumer Leasing Section 325

Office of Thrift Supervision January 2004 Compliance Activities 325.1

Introduction

Overview

For consumers, leasing is an alternative to buying

either with cash or on credit. A lease is a contract 

between a lessor (the property owner) and a lessee 

(the property user) for the use of property subject

to stated terms and limitations for a specified period and at a specified payment.

The Consumer Leasing Act (15 USC 1667 et. seq.) 

(CLA) was passed in 1976 to assure that meaningful and accurate disclosure of lease terms is

provided to consumers before entering into a contract. It applies to consumer leases of personal

property. With this information, consumers can

more easily compare one lease with another, as

well as compare the cost of leasing with the cost of 

buying on credit or the opportunity cost of paying 

cash. In addition, the CLA puts limits on balloon 

payments sometimes due at the end of a lease, and 

regulates advertising. 

Originally, the CLA was part of the Truth in Lending Act, and was implemented by Regulation Z. 

When Regulation Z was revised in 1981, Regulation M was issued, and contained those provisions 

that govern consumer leases. 

Today a relatively small number of banks engage 

in consumer leasing. The trend seems to be for

leasing to be carried out through specialized bank 

subsidiaries, vehicle finance companies, other finance companies, or directly by retailers. 

Key Definitions

The definition of certain terms is necessary to understand the requirements imposed by the CLA. 

These terms include lease, lessor, lessee, consumer 

lease, open-end lease, closed-end lease, realized

value, residual value, gross capitalized cost, capitalized cost reduction, and adjusted capitalized 

cost. 

Lessee

A lessee is a natural person who enters in to or is 

offered a consumer lease. 

Lessor

A lessor is a natural person or organization who

regularly leases, offers to lease, or arranges for the 

lease of personal property under a consumer lease. 

A person who leases or offers to lease more than

five times in the preceding or current calendar year 

meets this definition. 

Consumer Lease

A consumer lease is a contract between a lessor

and a lessee:

• for the use of personal property by an individual (natural person),

• to be used primarily for personal, family, or

household purposes,

• for a period of more than 4 months (week-toweek and month-to-month leases do not meet

this criterion, even though they may be extended beyond 4 months), and

• with a total contractual cost of no more than

$25,000. 

Specifically excluded from coverage are leases that 

are: 

• for business, agricultural or made to an organization or government, 

• for real property,

• for personal property which are incidental to

the lease of real property, subject to certain

conditions, and 

• for credit sales, as defined in Regulation Z

§226.2(a)(16).

Approved – FFIEC
SECTION: Consumer Leasing Section 325

325.2 Compliance Activities January 2004 Office of Thrift Supervision

A lease meeting all of these criteria is covered by

the CLA and the Federal Reserve Board’s Regulation M. If any one of these criteria is not met, for 

example, if the leased property is used primarily

for business purposes or if the total contractual

cost exceeds $25,000, the CLA and Regulation M 

do not apply. 

Consumer leases fall into one of two categories: 

closed end and open end. Since the information

required to be disclosed to the consumer will vary 

with the kind of lease, it is important to note the

difference between them. However, to properly

understand the difference, realized value and residual value must first be defined.

Realized Value

The realized value is the price received by the lessor of the leased property at disposition, the

highest offer for disposition of the leased property, 

or the fair market value of the leased property at

the end of the lease term.

Residual Value

The residual value is the value of the leased property at the end of the lease, as estimated or

assigned at consummation of the lease by the lessor.

Open-end Lease

An open-end lease is a lease in which the amount

owed at the end of the lease term is based on the

difference between the residual value of the leased 

property and its realized value. The consumer may 

pay all or part of the difference if the realized 

value is less than the residual value or he may get a 

refund if the realized value is greater than the residual value at scheduled termination. 

Closed-end Lease

A closed-end lease is a lease other than an openend lease. This type of lease allows the consumer 

to “walk away” at the end of the contract period,

with no further payment obligation – unless the

property has been damaged or has sustained abnormal wear and tear. 

Gross Capitalized Cost

The gross capitalized cost is the amount agreed

upon by the lessor and lessee as the value of the

leased property, plus any items that are capitalized 

or amortized during the lease term. These items

may include taxes, insurance, service agreements,

and any outstanding prior credit or lease balance. 

Capitalized Cost Reduction

This term means the total amount of any rebate, 

cash payment, net trade-in allowance, and noncash 

credit that reduces the gross capitalized cost. 

Adjusted Capitalized Cost

This is the gross capitalized cost less the capitalized cost reduction and the amount used by the

lessor in calculating the base periodic payment.

General Disclosure Requirements

Lessors are required by federal law to provide the 

consumer with leasing cost information and other

disclosures in a format similar to the model disclosure forms found in Appendix A to the regulation. 

Certain pieces of this information must be kept together and must be segregated from other lease

information. All of the information stated must be 

accurate, clear and conspicuous, and provided in 

writing in a form that the consumer may keep.1

Disclosures are to be provided in the following circumstances. 

Prior to or Due at Lease Signing

A dated disclosure must be given to the consumer

before signing the lease and must contain all of the 

information detailed in Section 4 of the regulation. 

Renegotiations and Extensions

New disclosures also must be provided when a

consumer renegotiates, or extends a lease, subject

to certain exceptions. 

 

1

 Alternatively, the information may be provided electronically, where agreed to by the consumer. The 

provisions to provide disclosures electronically are 

currently not mandatory. (7/2002)
SECTION: Consumer Leasing Section 325

Office of Thrift Supervision January 2004 Compliance Activities 325.3

Multiple Lessors/Lessees 

In the event of multiple lessors, one lessor on behalf of all the lessors may make the required

disclosures. If the lease involves more than one

lessee, the required disclosures should be given to

any lessee who is primarily liable.

Advertising 

Advertisements concerning consumer leases must

also comply with certain disclosure requirements. 

All advertisements must be accurate. If a printed

ad includes any reference to certain “trigger terms” 

– the amount of any payment, statement of a capitalized cost reduction (i.e., down payment), or 

other payment required prior to or at lease signing 

or delivery, or that no such payment is required –

then the ad must also state the following:

• that the transaction is for a lease,

• the total amount due prior to or at lease signing or delivery,

• the number, amounts and due dates or periods 

of the scheduled payments, and

• a statement of whether or not a security deposit is required.

An advertisement for an open-end lease also must 

include a statement that extra charges may be imposed at the end of the lease based on the

difference between the residual value and the realized value at the end of the lease term.

If lessors give a percentage rate in an advertisement, the rate cannot be more prominent than any 

of the other required disclosures. They must also

include a statement that “this percentage may not

measure the overall cost of financing this lease.” 

The lessor cannot use the term “annual percentage 

rate,” “annual lease rate,” or any equivalent term. 

Some fees (license, registration, taxes, and inspection fees) may vary by state or locality. An

advertisement may exclude these third-party fees

from the disclosure of a periodic payment or total

amount due at lease signing or delivery, provided

the ad states that these have been excluded. Otherwise, an ad may include these fees in the periodic 

payment or total amount due, provided it states

that the fees are based on a particular state or locality and indicates that the fees may vary.

Limits on Balloon Payments

In order to limit balloon payments that may be required of the consumer, certain sections of the

regulation call for reasonable calculations and estimates. These provisions protect the consumer at 

early termination of a lease, at the end of the lease 

term, or in delinquency, default, or late payment 

status. The provisions limit the lessee’s liability at 

the end of the lease term and set reasonableness

standards for wear and use charges, early termination charges, and penalties or fees for delinquency. 

Penalties and Liability 

Criminal and civil liability provisions of the Truth 

in Lending Act also apply to the CLA. Actions

alleging failure to disclose the required information, or otherwise comply with the CLA, must be

brought within one year of the termination of the

lease agreement. 

Record Retention

Lessors are required to maintain evidence of

compliance with the requirements imposed by

Regulation M, other than the advertising requirements under Section 7 of the regulation, for a

period of not less than two years after the date of

the disclosures are required to be made or an action is required to be taken.

Examination Objectives

1. To assess the quality of the institution’s compliance management system for the Consumer

Leasing Act. 

2. To determine that lessees of personal property 

are given meaningful and accurate disclosures 

of lease terms.

3. To determine if the limits of liability are

clearly indicated to the lessees and correctly

enforced by the institution.
SECTION: Consumer Leasing Section 325

325.4 Compliance Activities January 2004 Office of Thrift Supervision

4. To ensure that the financial institution provides accurate disclosures of its leasing terms

in all advertising. 

Examination Procedures

General Disclosure Requirements

A. Review the institution’s procedures for providing disclosures to ensure that there are

adequate controls and procedures to effect

compliance. 

B. Review the disclosures provided by the institution.

1. Are the disclosures clear and conspicuous

and provided in writing in a form the consumer may keep? Alternatively, are they

provided electronically where agreed to by 

the consumer? (§213.3(a) &

§213.3(a)(5))2

2. Are the disclosures given in a dated statement and in the prescribed format?

(§213.3(a)(1))

3. Is the information required by sections

213.4(b) through (f), (g)(2), (h)(3), (i)(1),

(j), and (m)(1) segregated and in a form

substantially similar to the model in Appendix A? (§213.3(a)(2))

4. Are the disclosures timely? (§213.3(a)(3))

5. If the lease involves more than one lessee, 

are the disclosures provided to any lessee

who is primarily liable? (§213.3(c))

6. If additional information is provided, is it

provided in a manner such that it does not 

mislead or confuse the lessee? (§213.3(b))

7. Are all estimates clearly identified and reasonable? (§213.3(d))

 

2

 The provisions to provide disclosures electronically 

are currently not mandatory. (7/2002)

8. Are the disclosures accurate and do the

disclosures contain the information required by section 213.4 (a ) through (t)?

(§213.4)

9. Are disclosures given to lessees when they 

“renegotiate” or “extend” their leases?

(§213.5)

Lessee Liability

A. Review the lease estimates and calculations to 

ensure that there is not any unreasonable balloon payment expected of the lessee in the

following circumstances:

• at early termination, 

1. Does the lessor disclose the conditions 

under which the lease may be terminated early and the amount and

method of determining the amount of

any early termination charges?

(§213.4(g)(1)

2. Are any early termination charges reasonable? (§213.4(g)(1), (q))

• at end of lease term, for wear and use,

1. If the lessor sets standards for wear

and use of the leased vehicle are the

amounts or method of determining any 

charge for excess mileage disclosed? 

(§213.4(h)(3))

2. Are standards for wear and use reasonable? (§213.4(h)(2))

• at end of lease term (for open-end leases), 

and 

1. Does the lessor disclose the limitations 

on the lessee’s liabilities at the end of

the lease term? (§213.4(m)(2))
SECTION: Consumer Leasing Section 325

Office of Thrift Supervision January 2004 Compliance Activities 325.5

2. Are the lessee and lessor permitted to

make a mutually agreeable final adjustment regarding excess liability? 

(§213.4(m)(3))

• in delinquency, default or late payment.

1. Does the lessor disclose penalties or

other charges for delinquency, default

or late payments? (§213.4(q))

2. Are the penalties or other charges

reasonable? (§213.4(q))

Advertising

A. Review advertising policies and procedures 

used by the institution to ensure that there are 

adequate controls and procedures to effect

compliance. 

B. Review a sample of the institution’s advertisements.

1. Do the advertisements advertise terms that 

are usually and customarily available?

(§213.7(a))

2. Are the disclosures contained in the advertisements clear and conspicuous?

(§213.7(b))

3. Do catalog/multiple page advertisements

comply with the page reference requirements? (§213.7(c))

4. When triggering terms are used, do the advertisements contain the additional

required information? (§213.7(d))

5. Do merchandise tags which use triggering

terms refer to a sign or display that contains the additional required disclosures?

(§213.7(e))

6. If television or radio advertisements use

triggering terms, if they do not contain the 

additional terms required by §7(d)(2), do

they use alternative disclosure methods

(direct consumers to a toll free number or 

written advertisement)? (§213.7(f))

Miscellaneous

1. Are records and other evidence of compliance retained for a period of no less than

two years? (§213.8)

References

Laws

15 USC 1667 Consumer Leasing Act of 1976

Et. Seq.

Regulations

12 CFR 213 Federal Reserve System 

Regulation M
SECTION: Consumer Leasing Section 325

325.6 Compliance Activities January 2004 Office of Thrift Supervision

THIS PAGE INTENTIONALLY 

LEFT BLANK
SECTION: Consumer Leasing Section 325

Examination Checklist

Instructions for Completing Form:

This checklist is an aid to analysis of the institution’s compliance program for consumer leasing operations. It 

is not a mandatory workpaper. It should be applied to the extent warranted by your risk-based scoping judgment. The columns correspond to the OTS Self-Assessment Guide summary of comprehensive compliance 

program components: Systems, Monitoring, Assessment, Accountability, Response, Training.

S M A A R T

Office of Thrift Supervision January 2004 Compliance Activities 325.7

1. Does the Bank engage in consumer leasing or purchase consumer leases 

from lessors? (§213.2(h)) 

(If no, there is no need to do further work on Consumer Leasing. If yes, 

complete the following checklist, answering yes (Y) or no (N) for each item.)

2. Are the disclosures made prior to consummation of the lease, that is, at the 

time a binding order is made or the lease is signed? (§213.3(a)(3)) 

3. Are the disclosures clear and conspicuous and provided in writing in a 

form the consumer may keep? (§213.3(a))

4. Are the disclosures given in a dated statement and (i) made either in a separate statement that identifies the consumer lease transaction, (ii) in the 

contract or (iii) other document evidencing the lease? (§213.3(a)(1))

5. Is the information required by sections 213.4(b) through (f), (g)(2), (h)(3), 

(i)(1), (j), and (m)(1) segregated and in a form substantially similar to the 

model in Appendix A? (§213.3(a)(2))

6. If the lease involves more than one lessee, are the disclosures provided to 

any lessee who is primarily liable? (§213.3 (c))

7. Alternatively, are they provided electronically where agreed to by the consumer? (§213.3(a)(5))3

8. If additional information is provided, is it provided in a manner such that it 

does not mislead or confuse the lessee? (§213.3(b))

9. Are disclosures provided to at least one lessee where there are multiple lessees and by at least one lessor when there are multiple lessors? 

(§213.3(c))

10. Are all estimates clearly identified and reasonable? (§213.3(d))

11. Are the following disclosures made in the lease?

A. Description of property (§213.4(a))

B. Amount due at lease signing or delivery (§213.4(b))

C. Payment schedule and total amount of periodic payments (§213.4(c))

 

3

 The provisions to provide disclosures electronically are currently not mandatory. (7/2002)
SECTION: Consumer Leasing Section 325

Examination Checklist

S M A A R T

325.8 Compliance Activities January 2004 Office of Thrift Supervision

D. Other charges (§213.4(d))

E. Total of payments (§213.4(e))

F. Regarding payment calculations:

i. Gross capitalized cost (§213.4(f)(1))

ii. Capitalized cost reduction (§213.4(f)(2))

iii. Adjusted capitalized cost (§213.4(f)(3))

iv. Residual value (§213.4(f)(4))

v. Depreciation and any amortized amounts (§213.4(f)(5))

vi. Rent charge (§213.4(f)(6))

vii. Total of base periodic payments (§213.4(f)(7))

viii. Lease payments (§213.4(f)(8))

ix. Basic periodic payment (§213.4(f)(9))

x. Itemization of other charges (§213.4(f) (10))

xi. Total periodic payment (§213.4(f) (11))

G. Regarding early termination: 

i. Conditions under which the lessee or lessor may terminate the 

lease prior to the end of the lease term (§213.4(g)(1))

ii. The amount or description of the method for determining the 

amount of any penalty or other charges for early termination 

(§213.4(g)(1))

iii. In a form substantially similar to the sample (§213.4(g)(2))

H. Regarding notice of wear and use

i. A statement specifying whether the lessor or the lessee is responsible for maintaining or servicing the leased property, with a 

description of the responsibility (§213.4(h)(1))

ii. A statement of the lessor’s standards for wear and use, which 

must be reasonable (§213.4(h)(2))

iii. In a form substantially similar to the sample (§213.4(h)(3))

I. Purchase option (§213.4(i))

J. Statement referencing other nonsegregated disclosures (§213.4(j))

K. Liability between residual and realized values (§213.4(k))
SECTION: Consumer Leasing Section 325

Examination Checklist

S M A A R T

Office of Thrift Supervision January 2004 Compliance Activities 325.9

L. Right of appraisal (§213.4(l))

M. For open-end leases, 

i. the rent and other charges paid by lessee (§213.4(m)(1))

ii. liability at end of lease term based on residual value and any excess liability (§213.4 (m) and (m)(2))

iii. mutually agreeable final adjustment (§213.4(m)(3))

N. Fees and taxes (§213.4(n))

O. Regarding insurance, 

i. Are the types and amounts of insurance that the lessee is required 

to have disclosed? (§213.4(o)) 

ii. If the lessor provides insurance, are the types, amounts, and cost 

also disclosed? (§213.4(o)(1)) 

P. Warranties or guarantees (§213.4 (p))

Q. Penalties and other charges for late payments, delinquency, or default 

(§213.4(q))

R. Security interest other than a security deposit (§213.4(r))

S. Regarding any information on rate:

i. Does the lessor use the term “annual percentage rate,” “annual 

lease rate,” or any equivalent term in the lease disclosure? 

(§213.4(s)) 

ii. If so, does a statement that “this percentage may not measure the 

overall cost of financing this lease” accompany the rate? 

(§213.4(s))

12. Are disclosures given to lessees when they “renegotiate” or “extend” their 

leases? (§213.5) 

13. Does the bank advertise its leasing program? If so, 

A. Do the advertisements advertise terms that are usually and customarily 

available? (§213.7(a))

B. Are the advertisements clear and conspicuous? (§213.7(b))

i. Are any affirmative or negative references to a charge that is part 

of the disclosure required under paragraph (d)(2)(ii) less prominent than the disclosure (except for the statement of a periodic 

payment? (§213.7(b)(1))
SECTION: Consumer Leasing Section 325

Examination Checklist

S M A A R T

325.10 Compliance Activities January 2004 Office of Thrift Supervision

ii. Are the advertisements of lease rates less prominent than any 

disclosure required by section 4 (except the notice of the limitations on rate)? (§213.7(b)(2))

C. Do catalog and multiple page advertisements comply with the page reference requirements? (§213.7(c))

D. If any triggering terms are used, are all the following disclosures made 

(§213.7(d)(2))

i. That the transaction advertised is a lease

ii. The total amount due prior to or at consummation or by delivery, 

if delivery occurs after consummation

iii. The number, amounts, and due dates or periods of scheduled 

payments under the lease

iv. A statement of whether or not a security deposit is required

v. A statement that an extra charge may be imposed at the end of 

the lease term where the lessee's liability (if any) is based on the 

difference between the residual value of the leased property and 

its realized value at the end of the lease term.

14. Do merchandise tags which use triggering terms refer to a sign or display 

that contains the additional required disclosures. (§213.7(e))

15. Do television or radio advertisements that do not contain the additional information required by section 4(d)(2) direct consumers to a toll-free 

number or written advertisement for additional information when triggering 

terms are used? (§213.7)

A. Is the toll free number listed along with a reference that the number 

may be used by consumer to obtain the information? (§213.7(f)(1)(i))

B. Does the written advertisement that is in general circulation in the 

community served by the station including the name and date of the 

publication, and is published beginning at least three days before and 

ending at least ten days after broadcast? (§213.7(f)(1)(ii))

C. Has the toll-free telephone number been available for no fewer than ten 

days, beginning on the date of broadcast? (§213.7(f)(2)(i))

D. Does the lessor provide the information required by paragraph (d)(2) 

over the toll-free number, orally or in writing upon request? 

(§213.7(f)(2)(ii))

16. Are records and other evidence of compliance retained for a period of no 

less than two (2) years as required by the CLA? (§213.8)
CHAPTER: Consumer Affairs Laws and Regulations

SECTION: Homeownership Counseling Procedures Section 360

Office of Thrift Supervision January 2004 Compliance Activities 360.1

Introduction

Section 106 (c)(5) of the Housing and Urban Development Act of 1968 (the Act) (12 USC

1701x(c)(5)) provides for homeownership counseling notification by creditors to eligible homeowners. The Act has been amended at various times,1

with the most recent amendment on November 26, 

2001, when the Departments of Veterans Affairs

and Housing and Urban Development, and Independent Agencies Appropriations Act of 2002

(Pub. L. 107-73) was enacted. Section 205 of that 

Act repealed the previous sunset provision. 

Applicability

All creditors that service loans secured by a mortgage or lien on a one-family residence (home

loans) are subject to the homeownership counseling 

notification requirements. Home loans include 

conventional mortgage loans and loans insured by 

the Department of Housing and Urban Development (HUD).

 

1

 Section 577 of the National Affordable Housing Act of 

1990 (Pub. L. 101-625) extended the homeownership counseling provisions to September 30, 1992; Section 162 of the 

Housing and Community Development Act of 1992 (Pub. L. 

102-550) extended the provisions to September 30, 1994; 

and Section 594 of the Departments of Veterans Affairs and 

Housing and Urban Development, and Independent Agencies Appropriation Act of 1999 (Pub. L. 105-276) extended 

the provisions to September 30, 2000.

Requirements

Notice Requirements2

A creditor or proposed creditor must provide notification of the availability of homeownership counseling to a homeowner, eligible for counseling, who 

fails to pay any amount by the due date under the 

terms of the home loan.

Eligibility

A homeowner must be given homeownership counseling notification if:

• The home loan is secured by the homeowner’s 

principal residence;

• The home loan is not assisted by the Farmers 

Home Administration; and

• The homeowner is, or is expected to be, unable 

to make payments, correct a home loan delinquency within a reasonable time, or resume 

full home loan payments due to a reduction in 

the homeowner’s income because of:

 An involuntary loss of, or reduction in, the 

homeowner’s employment, the homeowner’s self-employment, or income from

the pursuit of the homeowner’s occupation; or

 Any similar loss or reduction experienced 

by any person who contributes to the

homeowner’s income.

 

2

 The FFIEC Consumer Compliance Task Force has requested clarification from HUD on HUD’s current position 

regarding notice requirements to first-time homebuyers. 

These interagency examination procedures are currently 

limited to determining compliance with the Act’s notice 

provisions related to delinquent borrowers. However, 

should a response from HUD to the Task Force indicate that 

notices to first-time homebuyers should be provided under 

the Act, the agencies will expand these examination procedures to cover notices to first-time homebuyers.

Approved – FFIEC
SECTION: Homeownership Counseling Procedures Section 360

360.2 Compliance Activities January 2004 Office of Thrift Supervision

Contents of Notice

The notice must:

1. notify the homeowner of the availability of any 

homeownership counseling offered by the

creditor; and

2. provide either a list of HUD-approved nonprofit homeownership counseling organizations 

or the toll-free number3 HUD has established 

through which a list of such organizations may 

be obtained.

Timing of Notice

The notice must be given to a delinquent homeowner borrower no later than 45 days after the date 

on which the homeowner becomes delinquent. If,

within the 45-day period, the borrower brings the

loan current again, no notification is required.

Definitions

For purposes of these requirements, the following

definitions apply:

“Creditor” means a person or entity that is servicing a home loan on behalf of itself or another person or entity.

“Home loan” means a loan secured by a mortgage 

or lien on residential property.

“Homeowner” means a person who is obligated

under a home loan.

“Residential property” means a 1-family residence, 

including a 1-family unit in a condominium project, a membership interest and occupancy agreement in a cooperative housing project, and a

manufactured home and the lot on which the home 

is situated.

 

3

The number is 1-800-569-4287.

Examination Objective

To determine whether the financial institution has

established procedures regarding homeownership 

counseling notification requirements to ensure that 

it is in compliance with the provisions of Section 

106(c)(5) of the Housing and Urban Development 

Act of 1968.

Examination Procedures

Determine if the financial institution is informing 

eligible homeowners, within 45-days of an initial

loan default, of: (1) the availability of any homeownership counseling offered by the creditor; and

(2) the availability of any homeownership counseling by nonprofit organizations approved by HUD, 

or the toll-free telephone number through which the 

homeowner can obtain a list of such organizations.

Examination Checklist

1. Does the financial institution notify eligible 

homeowners, within 45-days of initial loan default, of any homeownership counseling the institution (creditor) provides?

2. Does the financial institution provide eligible

homeowners with the names of nonprofit organizations approved by HUD or the toll-free 

telephone number to obtain a list of such organizations?