Interpretation of provisions in Truth in Lending Regulation Z

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For iwmedinte releast.

August l, I960, The Board of Governors of tk' Federal Rejiot vc Myrst <mh fcod/iy issued three interpretaCioos of provisions in i t s Ticufch in Lenditig Regulation Z which wont into affect on July I. A copy a t each Interpret.u: inn i@ attached, - 0 -

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“oRTYLE 125 HARKS AND BANKING

cuneteR oa a FEDERAL RESERVE SYSTEM

SUBCHAPTER. A -= BOARD OF GOVERNORS “OF THE FRDERAL RESERVE | SYST

(Reg, ah PART 226. = oxuTH IN LENDING

NiacelLaneous Interpretations

§ 226.404 Premiums foe Heitor ysning eat. Anaurence: tequired by exe

(a) Under §- 226, 406), éhérgen'6 or premiums for inauronce, written in connection with a credit tronsaction, against Loan of or damage. to property mey be. excluded fron ‘the finance charge it: the creditor makes = the disclosures required under thot subparagraph. Under § 226, Aa) (7s ae premium oy other charge for any other guirimtee or ingurande protecting the creditor against the cugtomar's defoult. or other credit Lowa 1s tneluded tn the finance charge. The qua@ation etides wa. to whether Vendor's Single Interest (V.8.1.) coverage, when reoulred by the creditor to be written in connection with a tranaaction, ts insurence of the typé described in | § 226.4(4#) (6) er in § 226.4(a) (7).

‘(b) V8.1, coverage is written only in connection with a eredit transaction and indemnd fies the creditor against, among other perils, con version, embezzlement, and secretion of the collateral by thd customer; and snounts payable on account of loss are payable only to the creditor; and the amount of any indemnity payable under the policy 1s directly related to the amount of the credit loss, in that such indemnity can naver exceed the amount of the unpaid principal balanee of the debt. The insurer has no liability under a V.8.1. policy unlesa, at the time the poliicy was written,

no payment waa more than a. specified number of days past duu, and a claim

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undsir the policy is not valid unless the customer. ho« defaulted in payment. Additionally,, meny V.8.I-, -policies indemnify the c m l i t o r agAtngt expense incurred in transporting tho coll.ateuil to the creditor from the places »£ repossession( (c) V.S.I, coverage la» .therefore,- insutflnce which protects the creditor against the cuutoincr'n dafault or other credit loo«, And when required by the creditor to be written in connection with nny transaction, the premium therefore is includod in the finance, charge under § 226.4(a)(7) (Interprets And applies 15 U.S.C. 1005)

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§ 226,405 Property insurt>t)cs written in connection with ../a transaction-''' obtained from or through the croditor (a) Footncfce (t to § 226,4(c)(6) specifics that: o policy of insurance against loss or damage to property or liability arising out of lt» ueo is not considered to be "written in connection with" «i transaction when it , w£is not purchased by the customer for the purposie of being used in connection with thst extension of credit." Therefore, whenever such n policy is purchased by the customer for the purpose of bciuig usad in connection with a specific extension of crodit, it is insurance "written in connection with" that transaction.

(b) If such property insurance which in written in connection with a transection ia required by the creditor mid is obtainable from or through him, the cost thereof for the term of the initio! policy or prlicics must be disclosed to the customer, irrespective of whether the cuaton-cr purchases or expects to purchase ouch insurance from the creditor, In order for the premium to bo excluded from the finance ctin (Interprets end fipplioa 15 U.S.C. U>05)

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• • *4- 5 226.811 Renowols of no tog by mil •(«) Undo? paragraph ( j ) of § 2 2 6 . 0 , renewals of noton with now m a t u r i t y d a t e s c o n s t i t u t e r e f i n a n c i n g s and ore conauquontiy new t r a n s a c t i o n s . A common p r a c t i c e i s fat- c r e d i t o r s to p e r m i t ronawfll of such n o t e s by m o i l t In many of such i n a t o n c o a the c r e d i t o r doea not know whether t h e customer w i l l reduce h i s o r i g i n a l o b l i g a t i o n by a payment on p r i n c i p a l o r , If reduced, t h e nmount o f . t h a t r e d u c t i o n .

The q u e s t i o n o r i o o s «B to what d i s c l o s u r e s ithould bo made by moil to the customer in t h e s e circumataricon, (b) i f tho c r e d i t o r known the amount of the p r i n c i p a l payment, n i l d i s c l o s u r e s should bo made on t h e b a s i s of t h e r e s u l t i n g new nmount financed. I f , however, fcho c r e d i t o r does not know whether tho cuotomar w i l l roduce h i s o r i g i n a l o b l i g a t i o n , or i f oo, by how much, ho should dinclotjc on tho nsflumptlon t h a t t h e r e w i l l be no r e d u c t i o n . In such, circuingtancen ho may make one or more a d d i t i o n a l d i s c l o s u r e s based on one or more examples of g r a d u a t e d p r i n c i p a l r e d u c t i o n .

For example, if a single payment n o t e was for $1,000 a t 8?« for 3 mouths, in a d d i t i o n t o t h e o t h e r r e q u i r e d diacloouri.'S, tho c r e d i t o r (should d i s c l o s e an amount financod of $1,000 with a f i n a n c e charge of $?0, and mny, in a d d i t i o n , d i a c l o a e t h a t w i t h a p r i n c i p a l payment of $'H)0 tho amount iinnnccf* would be $700 w i t h e f i n a n c e charge of $16, and w i t h a p r i n c i p a l payment of $!K)Q the amount f i n a n c e d would bo $500 with o f l n a n c c chairp.u of $10. ( I n t e r p r c t o and a p p l i e s 15 l ! . S 1 6 V > ) Dated a t Washington, D. C., tho day of August, 1 *)(>').

By o r d e r of the Hoard of CovornorB.

(Signed) __ Kc.-r.nvth /• (SEAL) Ksnnith A, . > ri y • n , !>« juity IS. c» i t i u y .