IBA Compliance Connection

Your go to source for compliance!

We hired a third-party collection company to collect our charged off checking accounts, including unpaid overdrafts and fees. If a collection company enters into a repayment plan with the customer that has more than four installments, are we required to provide Truth in Lending Act disclosures? We do not receive payments directly from the customer. Under our agreement with the collection company, we receive a percentage of the amounts recovered.

—

by

admin

Yes, we believe you are required to provide Truth in Lending Act (TILA) disclosures when customers enter into written repayment plans of more than four installments with your debt collector.

As noted in the Joint Guidance on Overdraft Protection Programs, Regulation Z requires your bank to provide TILA disclosures when offering customers an overdraft repayment plan with more than four installments. The TILA’s disclosure requirements apply to creditors who regularly extend consumer credit that is payable by written agreement in more than four installments, and to whom the obligation is initially payable. In this case, your debt collector does not fit the definition of a creditor, since the customer’s obligation was initially payable to your bank, not the debt collector. However, we believe that in a case such as this, the debt collector is acting as an agent of your bank, and your bank does fit the definition of a creditor (as the debt was initially payable to your bank, and the debt now is payable in more than four installments).

Consequently, we believe that your bank should ensure that these customers receive appropriate TILA disclosures for the repayment plans, even though the plans are offered through a third-party collection agency. In the alternative, your bank could require the collection agency to limit repayment plans to four or fewer installments.

For resources related to our guidance, please see:

  • Joint Guidance on Overdraft Protection Programs, 70 Fed. Reg. 9127, 9131 (February 24, 2005) (“Some financial institutions also offer overdraft repayment loans to consumers who are unable to repay their overdrafts and bring their accounts to a positive balance within a specified time period. These closed-end loans will trigger Regulation Z disclosures, for example, if the loan is payable by written agreement in more than four installments. Regulation Z will also be triggered where such closed-end loans are subject to a finance charge.”)
  • Regulation Z, 12 CFR 1026.2(a)(17) (“Creditor means (i) A person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and to whom the obligation is initially payable . . . .”)
  • Regulation Z, Official Interpretations, Paragraph 2(a)(17)(i), Comment 1 (“This test is composed of two requirements, both of which must be met in order for a particular credit extension to be subject to the regulation . . . .

i. First, there must be either or both of the following:

  • A. A written (rather than oral) agreement to pay in more than four installments. A letter that merely confirms an oral agreement does not constitute a written agreement for purposes of the definition.
  • B. A finance charge imposed for the credit. The obligation to pay the finance charge need not be in writing.

ii. Second, the obligation must be payable to the person in order for that person to be considered a creditor. If an obligation is made payable to bearer, the creditor is the one who initially accepts the obligation.”)

  • Regulation Z, Official Interpretations, Paragraph 2(a)(17)(i), Comment 2 (“Assignees. If an obligation is initially payable to one person, that person is the creditor even if the obligation by its terms is simultaneously assigned to another person. . . .”)