Determination of Annual Percentage Rate

The APR is a measure of the cost of credit, expressed as a yearly rate. An APR is considered accurate if it is not more than 1/8th of 1 percentage point above or below the APR determined in accordance with this section. An error in disclosure of the APR or finance charge is not, in itself, considered a violation of this regulation if:

• The error resulted from a corresponding error in a calculation tool used in good faith by the creditor; and
   
• Upon discovery of the error, the credit union promptly discontinues use of that calculation tool for disclosure purposes, and notifies the FRB in writing of the error in the calculation tool.

Where one or more periodic rates may be used to compute the finance charge, the APR(s) to be disclosed must be computed by multiplying each periodic rate by the number of periods in a year.

Right of Rescission

Consumer's Right to Rescind

For the following credit plans in which a security interest is or will be retained or acquired in a member's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind:

• The plan when the plan is opened;
   
• Each credit extension made under the plan;
   
• When a security interest is added or increased to secure an existing plan; and
   
• When a credit limit on the plan is increased.

However, a consumer does not have the right to rescind each credit extension made under the plan if such extension is made in accordance with a previously established credit limit for the plan.

To exercise the right to rescind, the consumer must notify the credit union of the rescission by mail, telegram, or other means of written communication. Notice is considered given when mailed, or when filed for telegraphic transmission, or, if sent by other means, when delivered to the credit union's designated place of business.

A consumer may exercise the right to rescind until midnight of the third (3^rd) business day following the occurrence that gave rise to the right of rescission, delivery of the notice, or delivery of all “material” (i.e., required) disclosures, whichever occurs last. If the required notice and material disclosures are not delivered, the right to rescind shall expire 3 years after the occurrence giving rise to the right of rescission, or upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first.

When more than one consumer has the right to rescind, the exercise of the right by one consumer shall be effective as to all consumers.

Notice of Right to Rescind

In any transaction or occurrence subject to rescission, a credit union must deliver two (2) copies of the notice of the right to rescind to each consumer entitled to rescind (one copy to each if the notice is delivered in electronic form in accordance with the consumer consent and other applicable provisions of the E-Sign Act). The notice must identify the transaction or occurrence and clearly and conspicuously disclose the following:

• The retention or acquisition of a security interest in the consumer's principal dwelling;
   
• The consumer's right to rescind;
   
• How to exercise the right to rescind, with a form for that purpose, designating the address of the credit union's place of business;
   
• The effects of rescission; and
   
• The date the rescission period expires.

Delay of Credit Union’s Performance

Unless a consumer waives the right to rescind, no money may be disbursed other than in escrow, no services may be performed, and no materials may be delivered until after the rescission period has expired and the credit union is reasonably satisfied that the consumer has not rescinded. A credit union does not violate this section if a third party with no knowledge of the event activating the rescission right does not delay in providing materials or services, as long as the debt incurred for those materials or services is not secured by the property subject to rescission.

However, a credit union may disburse advances during the rescission period in a valid escrow arrangement. The credit union may not, however, appoint the consumer as “trustee” or “escrow agent” and distribute funds to the consumer in that capacity during the delay period. A credit union may also do the following, unless otherwise prohibited by state law:

• Prepare the cash advance check;
   
• Perfect the security interest; and/or
   
• Accrue finance charges during the delay period.

Effects of Rescission

When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void, and the consumer is not longer liable for any amount, including any finance charge.

Within 20 calendar days after receipt of a notice of rescission, the credit union must return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.

If the credit union has delivered any money or property, the consumer may retain possession until the credit union returns it. At the consumer's option, tender of property may be made at the location of the property or at the consumer's residence. Tender of money must be made at the credit union's designated place of business. If the credit union does not take possession of the money or property within 20 calendar days after the consumer's tender, the consumer may keep it without further obligation.

The procedures outlined above may be modified by court order.

Consumer's Waiver of Right to Rescind

The consumer may modify or waive the right to rescind if he/she determines that the extension of credit is needed to meet a bona fide personal financial emergency. To modify or waive the right, the consumer must give the credit union a dated written statement that describes the emergency, specifically modifies or waives the right to rescind, and bears the signature of all the consumers entitled to rescind. Preprinted forms are prohibited, unless authorized by the FRB.

Exempt Transactions

The right to rescind does not apply to the following:

• A residential mortgage transaction.
   
• A credit plan in which a state agency is a creditor.
   
• A refinancing of an extension of credit by the same creditor where the credit is already secured by the consumer’s dwelling. The right of rescission does apply to any new amount financed that exceeds the unpaid principal balance, any unearned finance charge on the existing debt, and amounts attributed to the costs of the refinancing.
   
• Subsequent advances in a multiple advancing loan as long as the proper disclosures, including the right of rescission if appropriate, were given at the outset of the transaction.
   
• A renewal of option insurance premiums that is not a refinancing subject to new disclosures.
   
• The opening of a business-purpose credit line, even though the loan is secured by the consumer’s principal dwelling.

Closed-End Credit

General Disclosure Requirements

Form of Disclosures

A credit union must make the closed-end disclosures clearly and conspicuously in writing, in a form that the member may keep. The disclosures must be grouped together, segregated from everything else, and may not contain any information not directly related to the disclosures required under §1026.18 (e.g., the credit union’s identity, the variable rate example, insurance or debt cancellation, and certain security interest charges).

The terms “finance charge” and “annual percentage rate,” when required to be disclosed together with a corresponding amount or percentage rate, must be more conspicuous than any other disclosure, except the credit union's identity.

Although no minimum type size is mandated, the disclosures must be legible, whether typewritten, handwritten, or printed by computer.

Time of Disclosures

The credit union must make disclosures before consummation of the transaction.

Basis of Disclosures and Use of Estimates

The disclosures must reflect the terms of the legal obligation between the parties. If any information necessary for an accurate disclosure is unknown to the credit union, it must make the disclosure based on the best information reasonably available at the time the disclosure is provided to the member, and must state clearly that the disclosure is an estimate.

For a transaction in which a portion of the interest is determined on a per diem basis and collected at consummation, any disclosure affected by the per diem interest must be considered accurate if the disclosure is based on the information known to the credit union at the time that the disclosure documents are prepared for consummation of the transaction.

The credit union may disregard the effects of the following in making calculations and disclosures:

• Payments must be collected in whole cents.
   
• Dates of scheduled payments and advances may be changed because the scheduled date is not a business day.
   
• Months have different numbers of days.
   
• The occurrence of leap year.

Effect of Subsequent Events

If a disclosure becomes inaccurate because of an event that occurs after the credit union delivers the required disclosures, the inaccuracy is not a violation of this regulation, although new disclosures may be required.

Early Disclosures

If disclosures required by this subpart are given before the date of consummation of a transaction and a subsequent event makes them inaccurate, the credit union must disclose the following before consummation:

• Any changed term unless the term was based on an estimate and was labeled an estimate; and
   
• All changed terms, if the APR at the time of consummation varies from the APR disclosed earlier by more than 1/8 of 1 percentage point in a regular transaction, or more than 1/4 of 1 percentage point in an irregular transaction (i.e., one that has one or more of the following features: multiple advances, irregular payment periods, or irregular payment amounts [other than an irregular first period, or first or final payment]).

Mail or Telephone Orders - Delay in Disclosures

If a credit union receives a request for an extension of credit by mail, telephone, or facsimile machine without face-to-face or direct telephone solicitation, the credit union may delay the disclosures until the due date of the first payment, if the following information for representative amounts or ranges of credit is made available in written form or in electronic form to the member or to the public before the actual purchase order or request:

• The cash price or the principal loan amount;
• The total sale price;
• The finance charge;
• The APR, and if the rate may increase after consummation, the following disclosures:
   
  • The circumstances under which the rate may increase.
  • Any limitations on the increase.
  • The effect of an increase; and
  • The terms of repayment.

Content of Disclosures

For each transaction, the credit union must disclose the following information as applicable:

• Creditor. The identity of the creditor making the disclosures.
   
• Amount Financed. The “amount financed,”using that term, and a brief description such as the amount of credit provided to you or on your behalf. The amount financed is calculated by:
   
  • Determining the principal loan amount or the cash price (subtracting any down payment);
  • Adding any other amounts that are financed by the credit union and are not part of the finance charge; and
  • Subtracting any prepaid finance charge.
     
• Itemization of Amount Financed. A separate written itemization of the amount financed, including:
   
  • The amount of any proceeds distributed directly to the member;
  • The amount credited to the consumer's account with the credit union;
  • Any amounts paid to other persons by the credit union on the member's behalf. The credit union must identify those persons (the following payees may be described using generic or other general terms and need not be further identified: public officials or government agencies, credit reporting agencies, appraisers, and insurance companies); and
  • The prepaid finance charge.

Note: The credit union need not comply with disclosing the itemized amount financed if the credit union provides a statement that the member has the right to receive a written itemization of the amount financed, together with a space for the member to indicate whether it is desired, and the member does not request it. Additionally, if the transaction is “federally-related” under the Real Estate Settlement Procedures Act (RESPA) and a good faith estimate is provided, the itemization need not be provided.

• Finance Charge. The “finance charge,” using that term, and a brief description such as “the dollar amount the credit will cost you.”
   
• Mortgage Loans. In a transaction secured by real property or a dwelling, the disclosed finance charge and other disclosures affected by the disclosed finance charge (including the amount financed and the APR) must be treated as accurate if the amount disclosed as the finance charge:
   
  • Is understated by no more than $100; or
  • Is greater than the amount required to be disclosed.
     
• Annual Percentage Rate. The “annual percentage rate,” using that term, and a brief description such as “the cost of your credit as a yearly rate.”
   
• Variable Rate. If the APR may increase after consummation in a transaction secured by the member's principal dwelling with a term of one year or less, the following disclosures[1]:
   
  • The circumstances under which the rate may increase.
  • Any limitations on the increase.
  • The effect of an increase.
  • An example of the payment terms that would result from an increase.

If the APR may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, the following disclosures:

• The fact that the transaction contains a variable-rate feature.
• A statement that variable-rate disclosures have been provided earlier.

• Payment Schedule. The number, amounts, and timing of payments scheduled to repay the obligation.
  • In a demand obligation with no alternate maturity date, the credit union may comply with this paragraph by disclosing the due dates or payment periods of any scheduled interest payments for the first year.
  • In a transaction in which a series of payments varies because a finance charge is applied to the unpaid principal balance, the credit union may comply with this paragraph by disclosing the following information:
     
    • The dollar amounts of the largest and smallest payments in the series.
    • A reference to the variations in the other payments in the series.
       
• Total of Payments. The “total of payments,” using that term, and a descriptive explanation such as “the amount you will have paid when you have made all scheduled payments.”
   
• Demand Feature. If the obligation has a demand feature, that fact must be disclosed. When the disclosures are based on an assumed maturity of 1 year, that fact must also be disclosed.
   
• Prepayment
   
  • When an obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance, a statement indicating whether or not a penalty may be imposed if the obligation is prepaid in full.[2]
  • When an obligation includes a finance charge other than the finance charge, a statement indicating whether or not the consumer is entitled to a rebate of any finance charge if the obligation is prepaid in full.
     
• Late payment Any dollar or percentage charge that may be imposed before maturity due to a late payment, other than a deferral or extension charge.
   
• Security Interest. The fact that the credit union has or will acquire a security interest in the property purchased as part of the transaction, or in other property identified by item or type.
   
• Insurance and Debt Cancellation. The items required in order to exclude certain insurance premiums and debt cancellation fees from the finance charge.
   
• Certain Security Interest Charges. Disclosures in order to exclude from the finance charge certain fees prescribed by law or certain premiums for insurance in lieu of perfecting a security interest.
   
• Contract Reference. A statement that the member should refer to the appropriate contract document for information about nonpayment, default, the right to accelerate the maturity of the obligation, and prepayment rebates and penalties. At the credit union's option, the statement may also include a reference to the contract for further information about security interests and, in a residential mortgage transaction, about the credit union's policy regarding assumption of the obligation.

Assumption Policy. In a residential mortgage transaction, a statement whether a subsequent purchaser of the dwelling from the member may be permitted to assume the remaining obligation on its original terms.

[1] These disclosures may be substituted for the ones required for variable rate transactions with terms greater than one year. Return

[2] Under the Federal Credit Union Act §107(5)(A)(viii), federal credit unions (FCUs) are not permitted to charge prepayment penalties. (However, on a 1^st or 2^nd mortgage loan, the FCU may require that any partial prepayment (1) be made on the date monthly installments are due and (2) be in the amount of that part of one or more monthly installments which would be applicable to principal.) Per NCUA Part 701.21(c)(6), members may repay a loan, outstanding balance on a line of credit, prior to maturity in whole or in part on any business day without penalty. Return