We offer customers a zero interest loan to pay back the amount of their deposit account overdrafts. The loans are payable in more than four installments. Is it a UDAAP violation, or would it violate any regulation, to require customers to make the first periodic payment when they sign the loan documents?

No, we are not aware of any rule that would prohibit you from requiring the first month’s payment at the time of the loan closing. However, this practice could raise the possibility of being viewed by regulators or by customers as abusive.

Because the loans are payable in more than four installments, Regulation Z applies, which requires the disclosure of the timing of payments before the transaction is consummated. The Official Interpretations to the regulation state that “it is not sufficient for the creditor merely to show the consumer the document containing the disclosures before the consumer signs and becomes obligated. The consumer must be free to take possession of and review the document in its entirety before signing.” However, the Official Interpretations also make clear that a creditor can satisfy this requirement by giving a copy of the disclosures to the customer to read and keep and then asking the customer sign the other copy.

Even if you technically are in compliance with Regulation Z’s disclosure requirements, it is possible that the practice of requiring the first payment at the loan closing may be viewed as abusive. An abusive act is one that “materially interferes” with the customer’s capability to understand a condition of the product. If customers learn that a payment is due at signing immediately before they sign for the loan, the last minute disclosure might be deemed to “materially interfere” with the customer’s understanding of the loan.

Of course, a strong argument could be made that the loans are not abusive because they are provided as a customer accommodation, without charging interest, to help customers who are struggling to repay their overdrafts. To further mitigate the risks of a UDAAP claim, we believe it would be prudent to provide the customer with a reasonable amount of advance notice about the loan terms before having the loan agreement signed — at least the amount of time that an average person would need to read the notice — even when the notice is provided on the same day.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.1(c) (Regulation Z applies if the credit is payable by a written agreement in more than four installments.)

Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 17(b), Comment 3 (“It is not sufficient for the creditor merely to show the consumer the document containing the disclosures before the consumer signs and becomes obligated. The consumer must be free to take possession of and review the document in its entirety before signing.”)

Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 17(b), Comment 3(i) (“A creditor gives a consumer a multiple-copy form containing a credit agreement and TILA disclosures. The consumer reviews and signs the form and returns it to the creditor, who separates the copies and gives one copy to the consumer to keep. The creditor has satisfied the disclosure requirement.”)

Consumer Financial Protection Act of 2010 (UDAAP), 12 USC 5531(d) (An abusive act or practice is one that “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service . . . .”)