8099. Proposed Interpretation of Regulation Z

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F E D E R A L R ES ER V E BANK O F N EW YO R K r Circular No. 8 0 9 9 T L April 26, 1977 J PROPOSED INTERPRETATION OF REGULATION Z Requirements Applicable to Credit Card Issuers That Bill on a Transaction-by-Transaction Basis T o A ll M e m b e r B a n k s, an d O th e rs C on cern ed, in the S eco n d F ed era l R e se rv e D is tr ic t: Following is the text of a statement issued April 13 by the Board of Governors of the Federal Reserve System:

The Board of Governors of the Federal Reserve System today proposed an interpretation of Regulation Z (Truth in Lending) affecting credit card issuers which bill customers in full on a transaction-by-transaction basis and impose no finance charges. The Board will receive comment through May 16, 1977. Most credit cards extend open-end credit, such as the credit available with a bank credit card, or a depart­ ment store card, and customers are billed, usually monthly, for their purchases. A balance may be left after the customer makes a payment. Certain credit card issuers, however, such as some automobile rental companies, require payment in full for each transaction, and send bills only when there has been a transaction. No finance charges are imposed.

The proposal would permit such credit card issuers to continue sending bills to their customers on a transaction-by-transaction basis, and would not require them to send out periodic bills. The proposal would also require such card issuers to make only such disclosures, and conform only to other requirements of Regulation Z, that are consistent with and applicable to their billing systems. Printed below is an excerpt from the Federal R e g iste r of April 20, 1977, containing the text of the proposed interpretation and an explanatory notice by the Board of Governors re­ garding the proposal. Comments on the proposal should be submitted by May 16 and may be sent to our Consumer Affairs Division. Paul A. V olcker, President.

[ 12 CFR Part 226 ] [Reg. Z; Docket No. R^-0094] APPLICATION OF CERTAIN REQ UIR E­ M EN TS TO CR ED IT CARD PLANS IN ­ VOLVING TR AN SAC T! O N -BY-TR AN SAC­ TIO N BILLING AN D T H E IM POSITION OF NO FIN AN CE CHARGE AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

SUMMARY: This proposed interpreta­ tion of Regulation Z indicates the provi­ sions applicable to certain two-party credit card plans in connection with which the card issuers bill their custom ­ ers in full on a transaction-by-transac­ tion basis, rather than on an account basis using periodic statem ents, and in connection with which no finance charge is imposed. These credit card issuers are subject to the Act and Regulation Z sim ­ ply because the Fair Credit Billing Act am endm ents adjusted the definition of “creditor” to Impose certain require­ m ents upon all card issuers even though those requirements are generally appli­ cable only to open end creditors. The Board is directed to apply those require­ m ents to such card issuers “to the extent appropriate.” This proposed interpreta­ tion Is designed to indicate which of the requirements are appropriate for such card issuers.

DATE: Comments must be received on or before May 16,1977.

ADDRESS: Secretary, Board of Gover­ nors of the Federal Reserve System, Washington, D.C. 20551. All material submitted should include the docket number Rr-0094.

FOR FURTHER INFORMATION CON­ TACT:

D. Edwin Schmelzer, Chief, Fair Credit Practices Section, Division of Con­ sumer Affairs, Board of Governors of the Federal Reserve System, W ash­ ington, D.C. 20551 (202-452-2412). SUPPLEMENTARY INFORMATION:

Section 103(f) of the Truth in Lending Act, as implemented by § 226.2 (s) and (x) of Regulation Z, requires all credit card issuers to comply with certain pro­ visions of the Act and Regulation Z even though those provisions are generally applicable only to creditors of open end credit plans. There are certain two-party credit cards which are issued in connec­ tion with which no finance charge is im ­ posed and billing for payment in full is accomplished on a transaction-by-transaction basis, rather than on an account basis using periodic statements. This proposed interpretation is designed to indicate, as permitted by section 103(f) of the Act, the Board’s opinion regard­ ing which sections of the regulation are applicable to such credit card programs. The interpretation would nermit such card issuers to continue sending bills in the form of invoices or other statements to each customer for each transaction in which the card is used. It would not require that the card issuer convert to FEDERAL REGISTER, V O L 42, NO. 76— WEDNESDAY, APRIL 20, 1977 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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using a periodic billing statem ent which involves the m aintenance of accounts for each customer.

The interpretation would require such card issuers, prior to the first transac­ tion in which the card is used, to dis­ close any charges (other than a finance charge) which relate to the deferral of payment by use of the cards, such as a late payment or delinquency charge (5 226.7(a)(6)). The card issuer would be required to make disclosures regard­ ing any security interest which may be retained (5 226.7(a)(7)). The card is­ suer would also be required to provide the statem ent of rights and responsi­ bilities under the Fair Credit Billing Act prior to the first use of the card (§ 226.7 ( a ) (9 )).

The proposal would not require a dis­ closure regarding minimum payments (5 226.7(a) (8 )). Since the only types of credit cards considered herein are ones which require payment in full for each transaction at the time of billing, that disclosure is, by definition, inapplicable. The proposal would not require such card issuers to disclose the “previ­ ous balance”

(5 226.7(b )(1)(D ), the am ounts of “paym ents” and “credits” (5 226.7(b) (1) (ill)). or the closing date and “new balance” (§ 226.7(b) (1) (ix )). Those disclosures relate mainly to sys­ tem s which periodically bill their cus­ tomers on an account basis and do not appear to be germane to the type of sys­ tem under consideration in this proposal. The requirements to provide an iden­ tification of each transaction (5 226.7 (b ) (1) (ii)) and to provide an address for receipt of billing error inquiries (5 226.7(b) (1) (x )) would be deemed to apply to such systems. The proposal would permit the card issuer to comply with those sections by placing the rele­ vant inform ation on the invoice or other statem ent sent to the customer for each transaction.

The proivsions requiring the card is­ suer to send a periodic statem ent at least 14 days prior to the end of a “free period” (5 226.7(b) (2)) would be deemed inapplicable to such credit card systems since there are no finance charges im ­ posed under the credit card systems cov­ ered by this interpretation and, conse­ quently, no “free periods.” The proposal would permit the card issuer to make use of the exceptions from the general requirement that all disclo­ sures appear on the front of the periodic statem ent (§ 226.7(c)). All references to a “periodic statem ent” in § 226.7(c) would be read to indicate the invoice or other statem ent sent to the customer for each transaction.

This proposal would require the card issuer to send the statem ent prescribed by § 226.7(a) (9) to each customer on a semiannual basis (5 226.7(d)). The in­ terpretation would permit the card is­ suer to comply with that section by send­ ing the statem ent required by § 226.7 (a) (9) within the time periods provided in 5 226.7(d), or by sending either the statem ent prescribed by 5 226.7(a)(9) or the statem ent prescribed by § 226.7 (d) (5) with every invoice or other bill­ ing statem ent sent to its customers. The timing of this disclosure would be com ­ puted without reference to billing cycles and periodic statem ents, which do not exist in such programs. Consequently, if the card issuer decided to give the state­ m ent semiannually instead of with every invoice, this proposal would permit send­ ing the statem ent only to those custom ­ ers who receive a transaction invoice during the chosen months. This proposal would require the card issuer to notify customers of changes in terms (5 226.7(f)). However, since there are no billing cycles or periodic state­ m ents used in such plans, the time pe­ riod for notifying customers of changes in the terms of the plan would be 15 days prior to the date the change is to be instituted, rather than 15 days prior to the first billing cycle in which the change is to take place. Additionally, the interpretation would require ad­ vance notice only of those types of changes in terms which, if undertaken by open end creditors generally, would require notice to all customers prior to imposition of the change on the cus­ tomers’ accounts.

The proposal would exempt such card issuers from complying with the require­ m ents which call for prompt crediting of payments (5 226.7(g)), unless the plan includes the possibility of the im ­ position of a specific charge for late pay­ ment, delinquency, or default. The proposal would apply the provi­ sions regarding crediting and refunding excess payments (5 226.7(h)) to such credit plans. However, compliance with those requirements may be achieved by such credit card issuers by accounting for the amount received in excess of the required payment by a credit memoran­ dum or other reasonable means, rather than by crediting to an account. Since no periodic statem ent is required for such systems, this interpretation would require the card issuer to notify the customer of the existence of an excess payment, unless a refund is sent within 5 business days of its receipt. The card issuer would be required to comply with all relevant portions of 5 226.13, except 5 226.13(k) which is in ­ applicable to two-party credit card sys­ tem s generally.

The proposal would require the card issuer to comply with the error resolu­ tion requirements of the regulation (5 226.14). However, the proposal would also provide that all references therein to a “periodic statem ent” should be read to Indicate the invoice or other billing statem ent for the relevant transaction. All actions referenced in 5 226.14 with regard to correcting and adjusting a customer’s account would be permitted to be taken by issuing a refund or new Invoice to the customer, or by other ap­ propriate means consistent with the pur­ poses of the section. Since there are no accounts to be adjusted, and no periodic statem ent upon which any such adjust­ m ents can be reflected, this change in the regulation’s requirement with re­ spect to this type of credit card is deemed necessary to the purposes of the Act and regulation.

To aid in the consideration of this m aterial by the Board, interested per­ sons are invited to submit relevant data, views, comments, or arguments. Any such m aterial should be submitted in writing to the Secretary, Board of Gov­ ernors of the Federal Reserve System, W ashington, D.C. 20551 to be received not later than May 16, 1977. All m ate­ rials submitted should include the docket number R-0094. Such informa­ tion will be made available for inspec­ tion and copying upon request, except as provided in 5 261.6(a) of the Board’s Rules Regarding Availability of Infor­ m ation (12 CFR 261.6(a) 5. Pursuant to 15 U.S.C. 1602 (f; and 15 U.S.C. 1604, the Board hereby publishes for comment the following proposed in­ terpretation of Regulation Z. § 226.709 Application of lim ited ro­ il iiireiiients to card issuers which bill custom ers on a transaction-hv-|ransaction basis.

<a) It has come t o ‘the Board 's atten­ tion that certain credit cards are issued, the card issuer and the seller being the same person or related persons, in con­ nection with which no finance charge is imposed and customers are billed in full for each use of the card on a trans­ action-by-transaction basis by sending an invoice or other statem ent to the customer. No cumulative account which reflects the transactions by each cus­ tomer during a period of time, such as a month, is maintained.

(b) Section 103(f) of the Act requires all credit card Issuers to comply with certain provisions even though thoee provisions are generally applicable only to creditors of open end credit plans and requires the Board to apply these pro­ visions to all card Issuers “to the extent appropriate.” The question arises as to which of those provisions, as imple­ mented by this Part, appropriately apply to such card Issuers.

(c) Such card issuers may bill cus­ tomers on a transaction-by-transaction basis, and need not m aintain a cumula­ tive account for each customer for which a periodic statem ent must be sent. (d) Prior to the first use of the credit card the card issuer shall provide the customer with a statem ent setting forth the disclosures required by 5 226.7(a) (9) and, as applicable, § 226.7(a) (6) and 5 226.7(a) (7). The disclosure required by 5 226.7(a)(6) shall be limited to those charges that are or may be imposed as a result of the deferral of payment by use of the card, such as late payment or delinquency charges. Such card issuers need not provide the disclosure required by § 226.7(a) (8).

(e) The disclosures required by § 226.7 (b )(1) (i), (iii) and (ix) need not be given by such credit card issuers. The re­ quirements of 5 226.7(b) (1) (ii> and 5 226.7(b) (1) (x) are applicable to such card Issuers and compliance may be achieved by placing the required disclo­ sures on the invoice or statem ent sent to the customer for each transaction. Sec­ tion 226.7(b) (2) does not apply to these credit card issuers.

(f) The provisions of 5 226.7(c), in­ cluding those which permit certain re­ quired disclosures to be made other than on the front of a periodic statement, shall apply. All references to the “peri­ odic statem ent” in § 226.7(c> shall be read to indicate the invoice or other bill - Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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ing document sent to the customer tor each transaction.

(g) The provisions of § 226.71 d * shall apply to such credit card Issuers. Com­ pliance therewith may be achieved <1) by m ailing or delivering the statem ent required by § 226.7(a) (9) to each cus­ tomer who receives a transaction invoice during a one-m onth period chosen by the card issuer which meets the timing requirements of § 226.7(d) (2), (3>, and (4), or (2) by sending either the state­ m ent prescribed by § 226.7(a) (9) or the statem ent prescribed by § 226.7(d) (5) with each invoice sent to a customer. (h) The provisions of § 226.7(f) apply to these credit card issuers, except that (1) notice of the change in terms shall be given at least 15 days prior to the date upon which the change takes effect, rather than 15 days prior to the begin­ ning date of the billing cycle in which it takes effect, and (2) the card issuer need notify cardholders in advance of only those changes in terms which, if under­ taken by creditors of open end credit plans generally, would necessitate notice to all customers prior to imposing the change on their accounts. (i) The provisions of § 226.7(g) shall apply to such credit card issuers if the credit card plan includes the possible im ­ position of a specific charge for late pay­ ment, default, or delinquency. Other­ wise, they do not apply to such credit card issuers.

(J) The provisions of § 226.7(h) shall apply to such credit card Issuers, except that all requirements to credit amounts to an account may be complied with by other reasonable means, such as by a credit memorandum. Since no periodic statem ents are provided or required for the credit card systems subject to this Interpretation, a notice of excess pay­ m ent should be sent to the customer within a reasonable period of tim e fol­ lowing its occurrence unless a refund of the excess payment is mailed or de­ livered to the customer within 5 business days of its receipt by the card issuer. (k) The card issuer shall comply with all the provisions of § 226.13, including § 226.13 (i) and (j) to the extent that they are applicable to the credit card plan, except that § 226.13<k) is in ­ applicable.

(l) The card issuer shall comply with the provisions of $ 226.14, as applicable. All references in § 226.14 to the “periodic statem ent” shall be read to indicate the invoice or other statem ent for the rel­ evant transaction. All actions referenced in § 226.14 with regard to correcting and adjusting a customer’s account may be taken by issuing a refund or a new in­ voice, or by other appropriate means, consistent with the purposes of the section.

By order of the Board of Governors of the Federal Reserve System, April 11, 1977.

G r iffit h L. G arwood. Deputy Secretary of the Board. I PR Doc.77-11349 Piled 4-19-77;8:45 am i Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis