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We have all been trained to respect the requirement under the Truth-in-Lending Act and Regulation Z that disclosures be prepared with precision.  The failure to precisely and accurately disclose can result in significant Truth-in-Lending Act penalties.  We know that there is a tolerance allowed in correctly formulating and disclosing the Annual Percentage Rate.  However, there are other, sometimes overlooked, “get-out-of-jail-free” cards that can be played.

The law and regulation allow creditors to make numerical disclosures as “estimates” within certain permissible parameters.  The law provides that if any information necessary for an accurate disclosure is unknown to the creditor, then it can make the disclosure based on the best information reasonably available at the time the disclosure is given to the consumer.   To take advantage of this provision, however, the disclosure must clearly state that it is an estimate.   This is accomplished by using the symbol “e” after the numeric disclosure, and then footnoting at the end of the disclosure statement that “’e’ = estimate.”  Or, if all numerical amounts are affected, the footnote may state “all numerical disclosures except the late payment disclosure are estimates.”

In addition to this specific provision, the law also allows a creditor to disregard the effects of certain information in making the calculations for disclosures—known as “minor variations.”  For example, creditors may disregard the fact that months have different numbers of days, that some scheduled dates are not business days, or that leap years may occur during the term of the credit extension. In addition, creditors may disregard that there are irregular first payment periods.

So what is the significance of this?  Well, when information vital to the accuracy of a disclosure cannot be known with a certainty—such as the effect on the APR of the number of days in a month in a pre-computed interest, check-in-the-mail loan—the specific provision or the disregarded factors may prove to be a valuable tool.

Many of us use the APRWIN software program to test our APRs.  Frankly, I am not certain whether that program takes into account within the tolerances already permitted by Regulation Z, the effect of the disregarded factors.   (I’ve had more than my share of discussions with the Federal Reserve Board Staff seeking a definitive answer to this question. I have not been successful.  If any reader has the answer, I’d appreciate the help!)

Practice Pointer:  In thinking about the tolerance provisions of Regulation Z, be sure to consider the right to disregard entirely certain data points in determining the accuracy of your disclosures.

Please note: This is the one hundred twenty-seventh blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.