8449. Amendment to Interpretation of Regulation Z

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F E D E R A L R ESER VE BANK O F N EW YO R K Circular No. 8449 November 8, 1978 AMENDMENT TO INTERPRETATION OF REGULATION Z Notice of Right of Rescission in Open End Credit Plans To All Member Banks, and Others Concerned, in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System has amended an inter­ pretation of Regulation Z, “Truth in Lending,” to modify a sample notice, regard­ ing a consumer’s right of rescission, that a creditor may use to comply with certain disclosure requirements of the regulation when the creditor proposes a change in the terms of an open end credit plan secured by the consumer’s residence. The amend­ ment modifies a sample notice that was sent to you with our Circular No. 8401, dated August 10, 1978. Use by a creditor of the sample notice as originally suggested will not, however, be a violation of the requirements of Regulation Z. Enclosed is a copy of the amendment to the Regulation Z interpretation. Questions regarding the amendment may be directed to our Consumer Affairs Division (Tel. No. 212-791-5921).

PAUL A. VOLCKER, President.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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Board of Governors of the Federal Reserve System TRUTH IN LENDING AMENDMENT TO INTERPRETATION OF REGULATION Z (effective October 31, 1978) [Reg. Z] PART 226— TRUTH IN LENDING Right of Rescission AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final interpretation. SUMMARY: T he Board hereby adopts an am endm ent to interpretation § 226.904 of regulation Z concerning disclosures which creditors m ay use to satisfy certain requirem ents of the regulation in connection w ith open end credit plans secured by consum er’s residences. Specifically, th e am end­ m ent modifies th e sam ple disclosure which creditors may use to advise con­ sum ers of their rights when a change in the underlying term s of such a credit plan is proposed by a creditor. The am ended disclosure is intended to em phasize these rights of th e consum ­ er. However, use by a creditor of the disclosure as originally prom ulgated by the Board shall not constitute a violation of the regulation. EFFECTIVE DATE: October 31, 1978. FOR FURTHER INFORM ATION CONTACT:

G lenn E. Loney, Section Chief, Divi­ sion of Consum er Affairs, Board of Governors of th e Federal Reserve System, W ashington, D.C.

20551 202-452-3867.

SUPPLEM ENTARY INFORMATION: On August 3, 1978, th e Board pub­ lished (43 FR 34111) an am endm ent to regulation Z, § 226.9(g)(6) of the regu­ lation, creating an exception to the re­ scission provisions of the regulation for individual transactions under cer­ tain open end credit accounts secured by consum ers’ residences. Under the term s of th a t am endm ent, consumers would not have the right to cancel each individual transaction on such ac­ counts, provided th a t the specific re­ quirem ents of th e am endm ent are met.

T he am endm ent provides, among other things, th a t a creditor may not change th e underlying term s of an open end account secured by a custom ­ er’s hom e w ithout affording the cus­ tom er an opportunity to refuse the change in term s. If th e custom er re­ fuses th e proposed change in terms, the creditor need not extend any fu r­ th er credit on th e account; however, the custom er retains th e right to con­ tinue to repay any existing obligation on the account under th e th en exist­ ing term s of th e account. T he am end­ m ent requires th a t a creditor th a t pro­ poses to change th e term s of a custom ­ er’s account disclose these rights to the custom er.

Interpretation § 226.904 of regula­ tion Z, published by th e Board togeth­ er w ith the am endm ent, provides, am ong other things, a sam ple disclo­ sure which creditors may use to satis­ fy, as to form and content, th e am end­ m ent’s disclosure requirem ents in con­ nection w ith a proposed change in term s. For convenient reference, th a t sam ple disclosure is reproduced below: Section 226.9(g)(6)(iii) (Change in Terms) Notice T o Customer R equired B y F ederal Law:

(Name of cred itor)----------- ------------------ Intends to change the terms of your open end credit account which is secured by your home. You have a right to refuse to accept this change in terms. If you refuse this change in terms, we have the right to refuse to extend any further credit on your open end account and may require you to repay any existing obligation on your account under the present terms of the account. You may exercise your right to refuse the change in terms within three business days of (date disclosure delivered to customer) -------------------------by notifying us at (ad­ dress of creditor's place of business) -------------------------by mail or telegram sent not later than midnight of (date) -------------- You may also use any other form of written notice to refuse the change in terms if it is delivered to the above ad­ dress not later than that time. This notice may be used for that purpose by dating and signing below I hereby refuse tin* change in the terms of iny account.

(customer’s signature! It has been suggested to th e Board th at the foregoing disclosure, specifi­ cally th e third sentence thereof, may not sufficiently inform consum ers of the rights which they have in the event of a proposed change in term s of open end credit accounts secured by their homes and, further, th a t th e im ­ pression may be created th a t th e right to pay any existing obligation w ithout the change in term s is, in fact, a penal­ ty to consum ers who refuse such a change.

The Board believes th a t it may bene­ fit consum ers to modify th e disclosure set forth above to fu rth e r em phasize consum ers' rights in connection with changes in the term s of open end ac­ counts secured by th eir hom es and to avoid any im plication th a t these rights constitute a penalty.

However, by am ending the disclosure, th e Board does not intend th a t use of th e disclo­ sure as originally published shall con­ stitute a violation of regulation Z. Inasm uch as the following am end­ m ent to interpretation § 226.904 con­ stitutes an interpretive rule w ithin th e m eaning of 5 U.S.C. §553 (1976), and, further, because th e am endm ent pro­ vides only a sam ple disclosure wrhich creditors may but need not use, th e Board finds th a t publication of th e am endm ent for public com m ent prior to final adoption and & delay in th e ef­ fective date of the am endm ent are u n ­ necessary.

PRINTED IN NEW YORK FROM FEDERAL REGISTER, VOL 43, NO. 211 QEnc. Cir. No. 8449^] (Over) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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Accordingly, pursuant to th e au th o r­ ity granted in 15 U.S.C. 1604 (1976), the Board hereby am ends official Board interpretation of regulation Z, 12 CFR 226.904, effective im m ediately, by deleting the third sentence of the disclosure captioned "Section 226.9(g)(6)(iii) (Change in term s)’’ w hich reads, "If you refuse this change in term s, we have th e right to refuse to extend any fu rth er credit on your account and may require you to repay any existing obligation on your account under the present term s of the account’’ and substituting therefor "If you refuse this change in term s, you have the right to continue to repay your existing obligation under the present term s of th e account. However, we would th en have the right to refuse to extend any fu rth er credit, except pursuant to these new term s”, so th a t the disclosure reads as follows:

Section 226.9(g)(6)(iii) (Change in Terms) Notice To Customer R equired By Federal La w :

(Name of Creditor)--------------------------- ------ Intends to change the terms of your open end credit account which is secured by your home. You have a right to refuse to accept this change in terms. If you refuse this change in terms, you have the right to con­ tinue to repay your existing obligation under the present terms of the account. However, we would then have the right to refuse to extend any further credit, except pursuant to these new terms. You may exer­ cise your right to refuse the change in terms within three business days of (date disclo­ sure delivered to customer) — — -------------- by notifying us at (ad­ dress of creditor’s place of business) -------------------------by mail or telegram sent not later than midnight of (date) ---------------. You may also use any other form of written notice to refuse the change in terms if it is delivered to the above ad­ dress not later than that time. This notice may be used for that purpose by dating and signing below.

I hereby refuse the change in the terms of my account, (date; --------------------------------------------------- (customer’s signature) By order of the Board of Govenors, O ctober 23, 1978.

T h eo d o r e E. A l l is o n . Secretary of the Board, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis