What are some examples of when multiple Loan Types would be offered to a member?

The concept of “Loan Types” is discussed in Chapter 4 of the LOANLINER Closed-End Pre-Approved Lending Planning Guide. Being familiar with this discussion will aid in your understanding of Loan Types.

Answer: When more than one Loan Type is offered, Truth in Lending Disclosures for each Loan Type must be provided to the member. The standard Pre-Approved Lending document selection supports up to two Loan Types. The first set of Truth in Lending Disclosures appear on the Pre-Approved Loan and Security Agreement and Truth in Lending Disclosure “Pre-Pre-Approved Note” and the second set appears on a Truth in Lending Disclosure (Pre-Approved) “Additional TIL”. Both Loan Types, and associated contract language, also appear in the Promise to Pay section on page 2 of the Pre-Approved Loan and Security Agreement and Truth in Lending Disclosure.

Examples of when more than one Loan Type would be offered to a member for a given Pre-Approved Lending transaction, thus requiring an Additional TIL, include but are not limited to:

1. Different Interest Rates, but Term of Loan is the same:

a) Member is interested in a 48 month loan for a vehicle, but is unsure if they will purchase a new vehicle with the 3.00% New Vehicle rate or a used vehicle with the 3.75% Used Vehicle rate.

Solution: Disclosures for the New Vehicle Loan Type (3.00%, 48 month term) will be made on the Pre-Approved Note.

Disclosures for the Used Vehicle Loan Type (3.75%, 48 month term) will be made on the Additional TIL.

b) Member is interested in a 48 month loan for a vehicle, but is unsure what the Loan to Value ratio (LTV) will be, a factor that impacts the Interest Rate for the loan. If the LTV is under 90%, the interest rate is 3.25%, if the LTV is 90% or greater, the interest rate is 3.75%.

Solution: Disclosures for the <90% LTV Loan Type (3.25%, 48 month term) will be made on the Pre-Approved Note.

Disclosures for the >=90% LTV Loan Type (3.75%, 48 month term) will be made on the Additional TIL.

2. Same Interest Rates, but Term of Loan is different:

a) Member is interested in a loan for a vehicle, but is unsure if they will purchase a new vehicle or a used vehicle. In either case the interest rate will be 3.50%. However the Term of the Loan for the New Vehicle Loan Type is 60 months, while the Term of the Loan for the Used Vehicle Loan Type is 48 months.

Solution: Disclosures for the New Vehicle Loan Type (3.75%, 60 month term) will be made on the Pre-Approved Note.

Disclosures for the Used Vehicle Loan Type (3.75%, 48 month term) will be made on the Additional TIL.

b) Member is interested in a New Vehicle Loan with an interest rate of 3.00% but wants their payment to be around $500.00 regardless of the purchase price. After some quick calculations, the Credit Union determines this means member may end up with a loan term of 60 months or 72 months.

Solution: Disclosures for the 60 Month New Vehicle Loan Type (3.00%, 60 month term) will be made on the Pre-Approved Note.

Disclosures for the 72 Month New Vehicle Loan Type (3.00%, 72 month term) will be made on the Additional TIL.

3. Different Rate Types (e.g. Fixed Rate vs. Step Rate vs. Variable Rate) a) Fixed Rate vs. Step Rate (also known as an Intro Rate Loan)

Member is interested in a loan for a vehicle, but is unsure if they will purchase a new vehicle or a used vehicle. In either case the interest rate will be 3.50%. However there is currently a “0.00% Interest Rate for 6 months” promotion going on for the New Vehicle Loan Type, but not for the Used Vehicle Loan Type.

Solution: Disclosures for the New Vehicle Loan Type (a Step Rate of 0.00% for six

months, which then increases to 3.50% for remainder of loan, 60 month term) will be made on the Pre-Approved Note.

Disclosures for the Used Vehicle Loan Type (Fixed Rate of 3.50% for the entire term of the loan, 60 month term) will be made on the Additional TIL.

b) Fixed Rate vs. Variable Rate (Increasing interest rates)

Member is interested in a New Vehicle Loan. Due to an environment of increasing interest rates, the Credit Union currently has two rate offers, 4.50% Fixed for 60 months or 3.50%

Variable rate for 60 months. The member is unsure which option they are interested in at this time but still wants to go shopping for a new vehicle without having to return to the Credit Union.

c) Fixed Rate vs. Variable Rate (Relationship Pricing*)

Member is interested in a New Vehicle Loan. The current terms for a new vehicle loan are a Fixed Rate of 4.00% for 60 months. However, the Credit Union offers a 0.25% rate discount (interest rate of 3.75%) if the member signs up for AutoPay with the Credit Union.

This discount may be revoked during the term of the loan, resulting in the interest rate increasing back to 4.00%, should the member discontinue AutoPay. The member is unsure if they want to sign up for AutoPay at this time but still wants to go shopping for a new vehicle without having to return to the Credit Union.

Solution: Disclosures for the Fixed Rate New Vehicle Loan Type (Fixed Rate of 4.00%, 60 month term) will be made on the Pre-Approved Note.

Disclosures for the AutoPay New Vehicle Loan Type (Variable Rate* of 3.75%, 60 month term) will be made on the Additional TIL.

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* Relationship Pricing and Variable Rate Disclosures:

Relationship Pricing refers to the practice of discounting an interest rate for a particular reason including, but not limited to:

• Member participation in a particular program(s) such as AutoPay, Direct Deposit, etc.,

• When a member meets certain qualifications such as having a combination of a checking account, $10,000 on deposit, and at least 3 loans with the Credit Union, or

• When the member is an employee of the Credit Union

If this interest rate discount cannot be revoked by the Credit Union during the term of the loan, the discounted interest rate is disclosed as a Fixed Rate on loan documents and disclosures.

If this interest rate discount can be revoked by the Credit Union during the term of the loan, the discounted interest rate is disclosed as a Variable Rate on loan documents and disclosures. This is because, as defined in Regulation Z, Variable Rate is defined as “an annual percentage rate (which) may increase after consummation” and includes “all transaction in which the terms of the legal obligation allow the creditor to increase the rate originally disclosed to the consumer.” [Reg Z,

§1026.18(f) Variable Rate & Commentary 18(f)-1. Coverage]

For Variable Rate Pre-Approved Loans, Variable Rate Promise to Pay language as well as Variable Rate Truth in Lending disclosures must appear on the Pre-Approved Loan and Security Agreement and Truth in Lending Disclosure and, if applicable, Truth in Lending Disclosure (Pre-Approved).

Variable Rate language and disclosures for Relationship Pricing must detail:

1. how the interest rate discount can be lost, 2. any limits on the resulting interest rate increase, 3. the effect of the increase, and

4. an example of the payment terms that would result from such an interest rate increase.

[Regulation Z, §1026.18(f)(1)(i) thru (iv) Closed-end Variable Rate disclosure requirements].

Chapter 10