Reg AA: UDAP

Question 1

First National Bank uses one contract for both commercial and consumer credit. The contract contains a confession of judgment clause. What must First National do to comply with the Regulation AA prohibition against such clauses in consumer contracts?

a. Allow the clause to remain in the contracts but do not enforce it in consumer transactions
b. State on the contract form that the confession of judgment is not applicable in consumer transaction
c. Cross out the clause when the form is used in a consumer transaction
d. Add a statement to the contract in which the borrower agrees to characterize every transaction as a commercial transaction

Answer 1

c. Cross out the clause when the form is used in a consumer transaction

The bank should cross out, blacken in, or remove the language in consumer contracts. According to the FTC guidelines on the credit practices rule, the bank does not have to reprint forms when the qualifying language does not meet the public policy requirements of the regulation.

Question 2

Martha Winters obtained a loan from First National Bank to purchase her living room furniture. The bank took a security interest in the furniture as collateral on the loan. Before the end of the loan term, Martha refinanced the remaining balance of the furniture loan at Second National Bank. Can Second National Bank take a security interest in the furniture?

a. Yes, but only if it obtains an assignment of First National’s security interest
b. Yes, because the loan is a refinancing of a purchase-money transaction
c. No, a nonpossessory security interest in consumer goods is prohibited
d. Yes, furniture is not considered to be households goods under the regulation

Answer 2

a. Yes, but only if it obtains an assignment of First National’s security interest

According to FTC guidelines, if the second bank acquires the first bank’s purchase-money security interest, the second bank may legally keep the nonpossessory security interest.

Question 3

How may a creditor legally obtain an assignment of the consumer’s wages in a consumer credit obligation?

a. By having the consumer execute a written assignment along with a disclosure statement concerning the effect of such an assignment
b. By the consumer’s execution of an assignment that is revocable at the consumer’s will
c. By the consumer’s execution of the assignment that is revocable on the consumer’s filing of bankruptcy
d. By the consumer’s execution of an assignment that is revocable by a signed judicial order

Answer 3

b. By the consumer’s execution of an assignment that is revocable at the consumer’s will

Question 4

Which of the following items is considered to be household goods in Reg AA?

a. A painting commissioned by the consumer
b. A living room sofa and chairs
c. Stereo equipment, including a receiver, speakers, cassette, and CD player
d. A diamond necklace

Answer 4

b. A living room sofa and chairs

Electronic equipment, antiques, jewelry (other than wedding rings) and works of art are not household goods for purposes of the regulation

Question 5

First National Bank purchases a portfolio of consumer loans from a finance company. The bank discovers there are consumer credit obligations in the portfolio that have confessions of judgment and waivers of exemptions. What should the bank do?

a. Require the finance company to repurchase the contracts with the illegal clauses
b. Cancel the obligations that have these clauses
c. Refrain from enforcing the clauses
d. Enforce the clauses on a case-by-case basis

Answer 5

c. Refrain from enforcing the clauses

The bank should not enforce the illegal clauses in the contract.

Question 6

The following are 4 consumer obligations secured by personal property at First National Bank:
Loan A = $15,000 loan to Nancy Fraser, cosigned by Ellen Fraser
Loan B = $26,000 loan to Bob Roberts, cosigned by Fred Phillips
Loan C = $10,000 loan to Francis McDonald, secured by household goods owned by Cindy Page; Ms. Page has not signed the note or a guarantee for the loan
Loan D - $7,000 loan to Mike Swanson, guaranteed by his father

First National is obligated to give a cosigner notice on all but one of the transactions. Which transaction does not require a cosigner notice?

Answer 6

Loan C.

If a consumer credit obligation is consigned or guaranteed by another individual, the bank must provide the cosigner or guarantor with a cosigner notice. The bank does not have to provide the notice to persons who simply pledge property as collateral on the debt of another person.

Question 7

Sonia Rice has a car loan at First National Bank. She often makes her payments late. She currently owes late charges of $50, $25 of which was incurred 2 months ago, and the rest was incurred before that time. Her normal installment payment is $350. She sends in a payment of $365. What should First National do with her payment?

a. Apply the first $50 to late charges, the next $315 to the regular payment, and send Sonia a bill for the remaining payment, giving her a 10-day grace period to pay the remaining $35
b. Apply the first $350 to the regular payment and the next $15 to accrued late charges
c. Apply the first $50 to late charges and the remaining $315 to the regular payment. Then apply another late charge to the past-due portion of the regular payment
d. Apply only enough to cover the most recently incurred late charges ($25) and apply the remainder to the payment

Answer 7

b. Apply the first $350 to the regular payment and the next $15 to accrued late charges

Question 8

First National Bank has obtained a judgment against Morris Smith for a defaulted consumer debt. The judgment is for $9,500 of principal plus interest accrued through the date of default and $500 in interest and late charges incurred since the date of default. Morris brings $5,000 to the bank as a partial repayment of the debt. How must the bank apply the money under federal law?

a. The entire $5,000 must be applied to the principal amount owing
b. The $5,000 must be applied first to interest accrued up to the date of the default, and then to principal
c. The bank can apply the money to any amounts owed at its discretion
d. The bank must apply the money first to interest and late charges accrued after the date of default.

Answer 8

c. The bank can apply the money to any amounts owed at its discretion

Amounts owed after a judgment is obtained are not subject to the late charge application restrictions of Reg AA. However the bank may be subject to state law restrictions regarding the application of funds.

Question 9

When must a cosigner notice be given to the consumer for an open-end credit account?

a. Before the consumer becomes legally obligated on the account.
b. At the time of application.
c. With the first periodic statement.
d. Within 30 days of the date of the first transaction on the account.

Answer 9

a. Before the consumer becomes legally obligated on the account.

Question 10

Which of the following is a contract provision permitted under Reg AA?

a. Confession of judgment clause
b. Waiver of exemption clause
c. Assignment of wages
d. Purchase-money security interest in household goods

Answer 10

d. Purchase-money security interest in household goods

Question 11

According to Reg AA, when must a notice be given to a cosigner on a consumer loan?

a. When the credit application is given
b. With the copies of the documents after they are executed
c. Within 3 business days of the execution of the loan documents
d. Before the cosigner becomes obligated on the loan.

Answer 11

d. Before the cosigner becomes obligated on the loan.

Question 12

Which of the following practices is not allowed under the Credit Card Practices Rules?

a. Charging a late fee when a payment is late
b. Requiring a security deposit for a credit card account
c. Calculating the balance based on days in a previous billing cycle because the grace period was lost
d. Charging a variable rate APR based on a public index that changes from time to time

Answer 12

c. Calculating the balance based on days in a previous billing cycle because the grace period was lost

Question 13

Martha Ramirez has a credit card with ABC Bank. ABC notified Martha that it will increase the APR on her card account for all new purchases after Aug 1. On Aug 1, Martha’s outstanding balance is $1,500. On Aug 10th, she charged $300. What is the term used to describe the $1,500 balance outstanding as of Aug 1?

a. Average outstanding balance
b. Protected balance
c. Computed balance
d. Previous balance

Answer 13

d. Previous balance

Question 14

What does Reg AA cover?

Answer 14

Consumer credit obligations

Question 15

What does Reg AA NOT cover?

Answer 15

Loans for purchase of real estate

Question 16

What is the definition of a complaint?

Answer 16

An allegation by or on behalf of an individual, group, or other entity that an act or practice is unfair or deceptive or violates any law or regulation to which it is subject.

Question 17

What three elements should a complaint include?

Answer 17

• A description of the alleged unfair act or practice
• Bank name and address
• Complainant name and address

Question 18

How quickly must a complaint be responded to, as required by Reg AA?

Answer 18

Within 15 calendar days.

Question 19

What does it mean to “pyramid charge” when an account is delinquent?

Answer 19

Charging me more than 1 late payment when I only made 1 late payment.

Collecting an additional delinquency charge when the delinquency is attributable only to the nonpayment of prior late charges and the payment is otherwise a full payment paid within the due date or the grace period.

Question 20

Can a co-signer be a business?

Answer 20

No, cosigners are natural persons

Question 21

Which of the following is true of cosigners?

a. Cosigners assume liability for a consumer obligation without receiving goods or services, or money in return for the obligation.
b. Cosigners do not receive the right to use an open-end account AND the cosigner’s signature is requested to grant credit to a consumer.
c. A cosigner may or not be noted on the credit obligation
d. All of the above.

Answer 21

d. All of the above are true.

Either A or B
And C

Question 22

When must the co-signer disclosure be delivered?

Answer 22

Before the co-signer becomes obligated on the debt, or if the account is open-end, before the cosigner becomes obligated for fees or transactions.

Question 23

What are the 3 co-signer disclosure requirements?

Answer 23

• Must be clear and conspicuous
• Must be in writing and substantially similar to the notice in the regulation
• Must be a separate document OR if in a credit document, must be in slightly larger type or set off from the other contract language

Question 24

Who is covered under the Consumer Credit Card Account Practices (CCCAP) Rule?

Answer 24

Natural persons and co-obligor/guarantors who are credit card holders

Question 25

Is the purpose of the CCCAP Rule to protect consumer and/or business credit?

Answer 25

Consumer

Question 26

Which of the following IS covered under the CCCAP?

a. A HELOC that can be accessed by a credit card or a charge card
b. An open-end consumer account accessed by a charge card
c. Overdraft lines of credit accessed by check guarantee cards or debit cards
d. Lines of credit accessed by check guarantee cards or debit cards that can be used only at ATMs
e. Lines of credit accessed solely by account numbers
f. None of the above

Answer 26

b. An open-end consumer account accessed by a charge card

Question 27

Institutions will have a safe harbor for compliance if they mail or deliver the consumer’s statement or bill at least __ days before the due date.

Answer 27

21

Question 28

In what two methods may creditors allocate payments?

Answer 28

High to low

Pro rata

Question 29

What is the high to low method for allocating payments?

Answer 29

The excess amount of the payment is allocated first to the balance with the highest APR and the remaining portions are applied to other balances in descending order based on the APRs

Question 30

What is the pro rata method for allocating payments?

Answer 30

The excess amount of the payment is allocated among the balances in the same proportion as each balance bears to the total balance

Question 31

An APR can increase for a category of transactions that occurs at least __ days after an advanced notice is given to the consumer of the increase; however, this exception does not apply during the __ ____ after the account is open.

Answer 31

7

first year

Question 32

An APR can increase if the institution does not receive a consumer’s required minimum payment within __ days after the due date.

Answer 32

30

Question 33

What is the protected balance?

Answer 33

The balance to which an increased APR does not apply when the APR on the account has been increased under the advanced notice exception.

Question 34

A bank must allow payments to be applied to the protected balance in one of two ways. In this method, the amortization period of no less than __ years, starting from the date the increased rate became effective.

Answer 34

5

Question 35

A bank must allow payments to be applied to the protected balance in one of two ways. In this method, the required minimum payment includes a percentage of the protected balance that is no more than __ the percentage that was required before the date the APR was increased.

Answer 35

twice

Question 36

A bank may not assess any charges or fees based solely on a ______ balance.

Answer 36

protected

Question 37

What is the name of this billing method? The bank charges a finance charge on any balance that is not based upon a balance for days in a billing cycle that precede the most recent billing cycle as a result of the loss of a grace period.

Answer 37

The 2-cycle billing method.

Question 38

Is the 2-cycle billing method a permitted balance computation method?

Answer 38

No, it’s considered “unfair”

Question 39

During an account’s __ year, a bank ___ ___ charge a security deposit or fee for the issuance or availability of credit that, in total, constitutes a majority of the available amount of credit on the account.

Answer 39

first

may not

Question 40

During the first billing cycle, the bank must not charge to the account security deposits and fees for the issuance or availability of credit that total more than __% of the initial credit available on the account.

Answer 40

25%

Question 41

Any additional security deposits and fees for issuance or availability of credit must be charged equally over no fewer than __ subsequent billing cycles immediately following the first billing cycle.

Answer 41

five

Question 42

An act or practice is considered deceptive if:

• There is a representation, omission, act or practice that is likely to _____.
• The act or practice is likely to deceive a _______ ______.
• The representation, omission, act or practice is _____.

Answer 42

• mislead
• reasonable consumer
• material

Question 43

What does it mean if an act or practice is “material?”

Answer 43

It means that the act or practice is likely to affect a consumer’s choice

Question 44

A practice is considered unfair if:

• It causes substantial consumer ______
• The injury is not outweighed by ______
• The injury caused by the practice is on that consumers could not have reasonably have ______.

Answer 44

• injury
• benefits
• avoided

Question 45

Which of the following criteria is used to judge whether a practice or act is unfair?

a. A business has a practice of providing a good or service at a higher cost to consumers than competing goods or services
b. A business has a practice of not providing a good or service in multiple outlets accessible to consumers
c. A business has a practice of allowing changes in terms after contract consummation
d. A business has a practice that violates public policy as determined by a court of law

Answer 45

d. A business has a practice that violates public policy as determined by a court of law

Question 46

What is a confession of judgment clause?

Answer 46

If default, it’s an automatic confession of judgment, which allows the lender to put the consumer in default without notice.

Question 47

What is an assignment of wages?

Answer 47

It allows the lender to garnish wages.