VIDEO: Required Deposit Disclosure on TIL
In this Compliance Clip (video), Adam talks about the deposit disclosure requirements found in Regulation Z if the creditor requires the consumer to maintain a deposit as a condition of the specific transaction. In addition, Adam shares a best practice in managing the required deposit disclosure on TIL.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about the required deposit disclosure on the Truth-in-Lending disclosure. So what is the required deposit disclosure on the TIL?
Well, what Regulation Z says is if the creditor requires a consumer to maintain a deposit account as a condition of the specific transaction, a statement that the annual percentage rate does not reflect the effect of the required deposit must be made on the tTruth-in-Lending disclosure. So what we're talking about here are essentially your deposit secured loans, your share loans, or your CD-secured loans, whatever you call them in your financial institution. In other words, if you're going to have a loan where the collateral is a CD, for instance, then Regulation Z says that you are required to check a box on your system that populates a disclosure that tells the consumer that the annual percentage rate of their loan does not reflect the effect of the required deposit. In other words, you've got a deposit, like a CD that is earning interest, an annual percentage yield, and you've got a loan where they're paying interest and their APR, and they have an APR, but that APR does not relate to the APY, and that's essentially what this disclosure is saying is those two are not calculated together. So the APR is not affected by the required deposit on account.
Now, there are some exceptions to this rule, specifically a required deposit need not include, for example, three main things. Number one, an escrow account for items such as taxes, insurance, or repairs; number two, a deposit that earns not less than 5% per year; or number three, payments under a Morris plan. Now, we understand what an escrow account is, and we also understand that payments under a Morris Plan are gonna be pretty rare, and that's pretty much not gonna apply to most of us watching this video.
However, the second piece is what typically applies. And what this says is a required deposit need not include a deposit that earns not less than 5% per year. In other words, if you have an interest rate on your deposit of greater than 5%, you do not need the required deposit disclosure. The required deposit disclosure is required for any loan where the interest rate [on a secured deposit] is less than 5%. So if you have a percentage greater than 5% [on a secured deposit], you don't need it, but less than you do, what do you do in your organization? Do you just tell your lenders to remember which is which? No, I think the best practice here is to just check the box every time.
As far as managing this, it becomes a challenge when you only do it in some cases and don't do it in other cases. So what I always recommend, and typically with the best practice I see in other financial institutions, is for you to just include the required deposit disclosure anytime you take a deposit as collateral on a loan, like a CD-secured loan, it just makes it a non-issue. Now, if you do have an auditor trying to cite you for a violation because you did not include the disclosure, well, if the amount is over 5% [on a secured deposit], then the disclosure was technically not needed, and therefore you would not have a violation.
That is the required deposit disclosure that is needed on a Truth-in-Lending disclosure under Regulation Z. And that's all I have for you for this Compliance Clip.