Interpretation of Regulation Z Daily Periodic Rates Imposed on Daily Balances in Open End Credit, Circular No. 75-5
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F e d e r a l R e s e r v e B a n k o f D a l l a s DALLAS, TEXAS 75222 C irc u la r No. 75-5 J a n u a r y 10, 1975 INTERPRETATION OF REGULATION Z Daily Periodic Rates Imposed on Daily Balances In Open End Credit TO ALL BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System has issued a revised interpretation of Section 226.7(b) (8) to clarify the d is closure requirem ents when the finance charge in an open end credit ac count is computed by the imposition of more than one daily periodic rate on a daily balance or balances. For example, some creditors impose one daily periodic rate (corresponding to one annual percentage rate) for balances up to a specified amount, and a lower daily periodic rate (cor responding to a lower annual rate) for that portion of balances above the specified amount.
Printed on the rev erse of this circular is a copy of the interpre tation of Regulation Z; additional copies will be furnished upon request. Sincerely y o u rs, T. W. Plant First Vice President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])
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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TRUTH IN LENDING INTERPRETATION OF REGULATION Z FIN A N C E C H A R G E BASED O N A V ER A GE DAILY BALANCE OR DAILY BALANCES IN OPEN E N D C R ED IT ACCOUNTS § 226.703 Section 2 26.7(b)(8) requires that periodic statements for open end accounts shall disclose, among other things, “The balance on which the finance charge was computed, and a statement of how that balance was determined.” In some instances, creditors compute a finance charge on the average daily balance by application of a monthly periodic rate or rates. In such case, this information is adequately disclosed if the statement gives the amount of the average daily balance on which the finance charge was com puted, and also states how the balance is de termined.
In other instances, the finance charge is com puted on the balance each day by application of one or more daily periodic rates, and the question arises as to how the balance on which the finance charge was computed should be disclosed in such circumstances.
If a single daily periodic rate is imposed, the balance to which it is applicable may be stated in any of the following ways: (i) A balance for each day in the billing cycle; or (ii) A balance for each day in the billing cycle on which the balance in the account changes; or (iv) The average daily balance during the billing cycle, in which case the creditor shall state (on the face of the periodic statement, on its reverse side, or on an enclosed supple ment) wording to the effect that the average daily balance is or can be multiplied by the num ber of days in the billing cycle and the periodic rate applied to the product to de termine the amount of the finance charge. If two or more daily periodic rates may be im posed, the balances to which the rates are ap plicable may be stated in accordance with (i) or (ii) above or as two or more average daily balances, each applicable to the daily periodic rates imposed. For example, if the creditor im poses one daily periodic rate on balances up to $500 and another daily periodic rate on balances over $500, the creditor would show average daily balances of $500 and $200 in an account which had a $700 balance for the entire billing cycle. If the average daily balances are stated, the cred itor shall state (on the face of the periodic state ment, on its reverse side, or on an enclosed supplement) wording to the effect that the finance charge is or may be determined by (1) multiply ing each of the average daily balances by the number of days in the billing cycle, (2) multiply ing each of the results by the applicable daily periodic rate, and (3) adding these products together.
(iii) The sum of the daily balances during the billing cycle; or 12-27-74