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Truth in Lending: 5.8.3 Purchase Money Security Interests

If the consumer purchases the secured property as part of the credit transaction (a credit sale) or with the proceeds of the credit transaction (a loan), the property need only be generally identified.436 For example, the official interpretations suggest disclosing a security interest in “the property purchased in this transaction.”437 At its option, the creditor can provide a more specific identification of the secured property.438

Truth in Lending: 5.8.4.1 General

If the consumer does not purchase the secured property as part of the credit transaction or with the proceeds of the credit transaction, the secured property must be identified by item or type.441 Ordinarily only a general disclosure of the category of property subject to the security interest is necessary.

Truth in Lending: 5.8.4.2 Identification of the Collateral

In non-purchase-money transactions, the property in which a security interest is taken must be identified by item or type. Although a categorical identification generally may be acceptable,444 a cryptic reference to a category of property by use of industry shorthand may not be understood by a layman, and probably does not meet the requirements for a clear and conspicuous identification by item or type.445 Old Act cases are relevant and helpful.

Truth in Lending: 5.8.4.3 Overinclusive Description of Collateral

In describing the collateral for a debt, a creditor may disclose a security interest that it does not in fact have by the terms of the underlying security agreement. Such an overinclusive disclosure violates the Act. The policy reasons for prohibiting overinclusive security interest disclosures were well stated by the First Circuit:

Truth in Lending: 5.8.4.4 Underinclusive Disclosure of Security Interests

Lenders may also make an “underinclusive” disclosure.468 For example, mortgages may include language taking a security interest in existing personal property, but the disclosure statement may reflect only the security interest in the real estate.469 Except insofar as the particular additional collateral is specifically excluded from Truth in Lending disclosure as an “incidental” security interest,470 this is a violation of the Act and Regulat

Truth in Lending: 5.8.5 Mixed Purchase-Money and Non-Purchase-Money Collateral

Sometimes creditors will take a security interest in property being purchased as well as in other property. The official interpretations refer to those cases as involving “mixed collateral” and advise creditors to mix the disclosures as well. That is, the purchase-money collateral should be identified generally and the non-purchase-money collateral should be identified more specifically.475

Truth in Lending: 5.8.6 Property Already Secured: “Spreader Clauses”

The term “spreader clause” has been introduced into the TILA dictionary; however, its meaning is the same as the more commonly used terms “cross-collateral” or “dragnet” clauses.476 A “spreader clause” merely refers to a contractual provision under which collateral for previous credit transactions is also being used to secure the new transaction. For example, a bank may have taken a non-purchase-money security interest in a consumer’s household goods in a 2004 loan.

Truth in Lending: 5.8.7 Disclosure of Interests in Property Not Owned by Debtor

Occasionally and sometimes inadvertently, a creditor may take a security interest in property that does not belong to the consumer, but instead belongs to someone else. The official interpretations give the somewhat unrealistic example of a student loan secured by furniture belonging to the student’s parents.482 More typically loans are secured by all personal property in the consumer’s residence, regardless of whether the property belongs to the consumer, his or her friends, his or her relatives, or someone else.

Truth in Lending: 5.9.1 Overview

After TILA Simplification, statutory damages are no longer available for some violations of the statute.488 These provisions are tied only to actual damage relief under TILA. The availability of actual damages is discussed at § 11.6, infra.

Truth in Lending: 5.9.2 Disclosure of the Creditor

The identity of the creditor must be disclosed.490 Only the name of the creditor is required, but the creditor’s address and/or telephone number may also be included.491 At the option of the creditor, this disclosure may appear apart from the other disclosures.492

Truth in Lending: 5.9.3.1 General

The creditor has a choice: it must either automatically disclose an itemization of the amount financed or it may inform the consumer, on the segregated disclosures, that a written itemization will be provided on request, furnishing the itemization only if the consumer in fact requests it.500 If the consumer indicates that he or she wants the itemization, the creditor must provide it; if the consumer does not indicate that he or she wants the itemization, then the creditor does not have to disclose the itemization.

Truth in Lending: 5.9.3.2 Amount of Any Proceeds Distributed Directly to the Consumer

This category includes any funds given to the consumer. It does not matter whether it is in the form of cash or check (including joint proceeds checks) or a deposit in a savings or checking account.517 It also does not matter whether an amount paid into a bank account is considered a required deposit;518 if it is also part of the amount financed, it must be included in the itemization.519

Truth in Lending: 5.9.3.4.1 General

The official interpretations list several examples of amounts paid to others: tag and title fees, insurance premiums, security interest fees, credit bureau fees, appraisal fees, and fees paid to public officials.523 Each person who receives funds on behalf of the consumer must be identified by name,524 except that public officials, government agencies, credit reporting agencies, appraisers, and insurance companies may be described with generic or other general terms.

Truth in Lending: 5.9.3.4.2 Car dealer mark-ups and commissions

One common practice among auto dealers is to disclose service contract charges among “amounts paid to others.” Because dealers usually mark up the price of service contracts (often considerably), and retain the mark-up as profit, the practice was challenged as both a TILA violation and a UDAP violation.534 The primary TILA claim was that the charge was not in fact “paid to a third party,” and so was an inaccurate disclosure (and one for which the consumer should recover actual damages, in the amount of the mark-up.) A second claim was that

Truth in Lending: 5.9.3.5 Prepaid Finance Charge

If an itemization of the amount financed is given, it must include a disclosure of the total prepaid finance charge.553 The creditor may, but need not, itemize the prepaid finance charge; for example, a creditor who has assessed a $40 prepaid finance charge may, at its option, also disclose that this prepaid finance charge consists of $30 interim interest and a $10 credit report fee, both of which were collected at consummation.554

Truth in Lending: 5.9.5.1 General

In a credit sale567 the “total sale price” must be disclosed using that term.568 The “total sale price” need not be disclosed except in a credit sale, even if the creditor takes a security interest in the consumer’s collateral.569

Truth in Lending: 5.9.5.2 Treatment of Down Payments

Down payments are included in the total sale price, as a general rule.579 Things get tricky when that down payment includes either “negative equity,” occasioned when the existing lien on a trade-in is greater than the value of the trade-in, or deferred “pickup payments.”

Truth in Lending: 5.9.6.1 General

Disclosures are required about the consequences of prepayment.585 For interest-bearing transactions, creditors must disclose whether there may be a prepayment penalty. For precomputed transactions creditors must disclose whether the consumer may be entitled to a rebate of unearned interest. The official interpretations contain examples of prepayment penalties.586

Truth in Lending: 5.9.6.2 Interest-Bearing Transactions

For interest-bearing transactions, the creditor must disclose whether or not the creditor will impose a “penalty” if the debt is prepaid in full prior to the last scheduled payment.595 The model forms596 suggest disclosing “Prepayment: If you pay off early, you ___ may ___ may not have to pay a penalty” and checking the appropriate box.

Truth in Lending: 5.9.6.3 Precomputed Transactions

In precomputed transactions the creditor must disclose whether or not the consumer is entitled to a rebate of any finance charge if the obligation is prepaid in full. The model forms607 suggest disclosing “Prepayment: If you pay off early, you ___ may ___ will not be entitled to a refund of part of the finance charge” and checking the appropriate box. In virtually every case, state law will require some rebate.

Truth in Lending: 5.9.6.4 Prepaid Finance Charge

A prepaid finance charge, by itself, does not require a prepayment disclosure.616 The prepaid finance charge is not considered a penalty nor does it require a rebate disclosure, as it is usually considered fully earned and non-rebatable upon prepayment in full.617

Truth in Lending: 5.9.6.5 Mixed Transactions

Most transactions will involve only one kind of finance charge and therefore will require only one kind of prepayment disclosure.619 If the transaction involves a finance charge computed by application of a rate to the unpaid balance, then the creditor should disclose only whether a penalty will be imposed in the event of prepayment in full. If the transaction involves a precomputed finance charge, then the creditor should disclose only whether a rebate of any finance charge will be given in the event of prepayment in full.

Truth in Lending: 5.9.7 Disclosure of Late Payment Charges

The creditor must disclose any dollar or percentage charge (other than a deferral or extension charge) that may be imposed before maturity due to a late payment.621 Disclosures are required only if charges are added to individual delinquent installments by a creditor who otherwise considers the transaction ongoing on its original terms.622 Statutory damages are not available for violating the late payment disclosure requirements.623 Actual da