We offer a Christmas loan payment deferral program to our closed-end consumer loan customers of good standing. Our loan agreements do not include the option of skipping a payment. Do any special regulations or disclosure requirements apply? Do we have to charge the borrower for the accrued interest? Can we charge a fee?

Your bank’s holiday deferred payment program should not trigger disclosure requirements under Regulation Z. For closed-end consumer loans, Regulation Z permits lenders to informally defer payments without triggering a change in terms or other disclosure requirements.

It is important that your bank not cancel the original loan and substitute it with a new loan, because this would be a refinancing requiring a completely new set of disclosures. Accordingly, when you offer a deferred payment for a closed-end loan, you should avoid any language that might suggest that the loan — or even the skipped payment — has been “cancelled.”

Your bank may choose whether or not to accrue interest during the skipped payment period. Some lenders continue to accrue interest during the month of the skipped payment and others waive the finance charge for the period in which the payment is skipped. Likewise, the question of charging a fee for skipping a payment also is a business decision for your bank. Needless to say, for all customers being offered this opportunity, you must provide a clear and complete disclosure of all relevant terms, and then apply the program only to the accounts of those customers who have affirmatively opted into the program.

For more information on this subject, we recommend reading the IBA article “Skip-a-Payment” Programs: Pitfalls and Concerns, which is available on GoToIBA.com.

For resources related to our guidance, please see:

Regulation Z, Official Interpretations, Paragraph 17(c)(1), Comment 2(iii) (“. . . If the consumer and creditor informally agree to a modification of the legal obligation, the modification should not be reflected in the disclosures unless it rises to the level of a change in the terms of the legal obligation. For example: . . . (iii) If the contract provides for regular monthly payments but the creditor informally permits the consumer to defer payments from time to time, for instance, to take account of holiday seasons or seasonal employment, the disclosures should reflect the regular monthly payments.”)
Regulation Z, 12 CFR 1026.20(a) (“A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. . . .”)
Illinois Banking Act, 205 ILCS 5/5e (“Notwithstanding the provisions of any other law in connection with extensions of credit,” banks may charge “interest, fees, and other charges . . . subject only to the provisions of subsection (1) of Section 4 of the Interest Act” and the laws applicable to real estate loans, provided that the bank sets fees based on its “prudent business judgment and safe and sound operating standards.”)
Interest Act, 815 ILCS 205/4(1) (“It is lawful for a state bank or a branch of an out-of-state bank . . . to receive or to contract to receive and collect interest and charges at any rate or rates agreed upon by the bank or branch and the borrower. . . .”)