Questions and Answers

These disclosures come from Section 18(k) of Regulation Z (12 CFR 226.18(k)).

First, if the credit has a finance charge "computed from time to time by application of a rate to the unpaid principal balance..." (i.e., simple interest), you must disclose whether or not a penalty may be imposed if the obligation is prepaid in full.

Second, if the credit includes a finance charge "other than the finance charge described in [the previous] paragraph" you must disclose whether or not the consumer is entitled to a rebate of any finance charge if the obligation is prepaid in full.

With respect to the first disclosure (prepayment penalties), a minimum finance charge is considered a prepayment penalty, but you are permitted to use the phrase minimum finance charge rather than penalty in disclosing it. [Commentary, Section 17(a)(1)-5.vii.]

With respect to the second disclosure (prepayment rebate), although a prepaid finance charge would seem to trigger this disclosure requirement in a simple interest transaction, the Commentary says that making the disclosure solely because of a prepaid finance charge is optional. [Commentary, Section 18(k)-3]