Proposed Changes to the Official Staff Commentary on Regulation E, Electronic Fund Transfer and Regulation Z, Truth in Lending, Circular No. 85-155

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F e d e r a l R e s e r v e B a n k OF DALLAS DALLAS, TEXAS 75222 December 30, 1985 C irc u la r 85-155 TO: The Chief Executive O ffic e r of a l l member banks and oth ers concerned in the Eleventh Federal Reserve D i s t r i c t SUBJECT Proposed changes to the official staff conmentary on Regulation E, Electronic Fund Transfer and Regulation Z, Truth in Lending DETAILS The Board of Governors of the Federal Reserve System has requested public comment to the o f f i c i a l s t a f f commentaries to Regulation E and Regulation Z.

The commentaries apply and i n t e r p r e t the requirements of Regulation E and Regulation Z and are a s u b s t i t u t e for individual s t a f f i n t e r p r e t a t i o n s of the re g u l a ti o n s . Comments on the proposed changes should be submitted in w riti n g to William W. Wiles, S e c re ta ry , Board of Governors of the Federal Reserve System, Washington, D.C., 20551.

Comments on the commentary to Regulation E should include a reference to EFT-2 and comments on the commentary to Regulation Z should include a reference to TIL-1.

All comments must be received by February 7, 1986.

ATTACHMENTS Two Board notices as published in the Federal R egister are attache d. MORE INFORMATION For f u r t h e r information, please co n ta c t Sharon Sweeney regarding Regulation Z and John Rogers regarding Regulation E in t h i s Bank's Legal Department a t (214) 651-6228.

Since rely yours, WILLIAM H. WALLACE FIRST VICE PRE SIDE NT For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800) 527-9200 (interstate).

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])

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FEDERAL RESERVE SYSTEM 12 CFR Part 205 [Reg. E; EFT-2] ELECTRONIC FUND TRANSFERS Proposed Update t o O f fi c i a l S t a f f Commentary AGENCY:.

Board of Governors of the Federal Reserve System. ACTION:

Proposed o f f i c i a l s t a f f i n t e r p r e t a t i o n . SUMMARY: The Board is publishing for comment proposed changes to the o f f i c i a l s t a f f commentary to Regulation E (E l e c tro n i c Fund T r a n s f e r s ) . The commentary applies and i n t e r p r e t s the requirements of Regulation E and is a s u b s t i t u t e fo r individual s t a f f i n t e r p r e t a t i o n s of the re g u la tio n . The proposed r e v isio n s address questions t h a t have a r i se n about the re g u l a ti o n . DATE:

Comments must be received on or before February 7, 1986. ADDRESS:

Comments should be mailed to William W. Wiles, S ecretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, or delivered t o Room B-2223, 20th and C S t r e e t s , N.W., Washington, D.C. between 8:45 a.m. and 5:15 p.m. weekdays.

Comments should include a reference to EFT-2. Comments may be inspected in Room B-1122 between 8:45 a.m. and 5:15 p.m. weekdays. FOR FURTHER INFORMATION:

Contact Gerald P. Hurst or John C. Wood, Senior Attorneys, Division of Consumer and Community A f f a i r s , Board of Governors of the Federal Reserve System, Washington, D.C. 20551, (202) 452-3667 or (202) 452-2412, or Joy W. O'Connell, Telecommunication Device for the Deaf (TDD) a t (202) 452-3224.

SUPPLEMENTARY INFORMATION:

(1) G eneral.

The E lectronic Fund T ransfer Act (15 U.S.C. 1693 et s e q .) governs any t r a n s f e r of funds t h a t is e l e c t r o n i c a l l y i n i t i a t e d and t h a t debits or c r e d i t s a consumer's account. This s t a t u t e is

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implemented by the Board's Regulation E (12 CFR Part 205). E ffe c tiv e September 24, 1981, an o f f i c i a l s t a f f commentary (EFT-2, Supp. II to 12 CFR Part 205) was published to i n t e r p r e t the r e g u la tio n . The commentary is designed to provide guidance to fin a n c ia l i n s t i t u t i o n s in applying the reg u latio n to s p e c i f i c s i t u a t i o n s .

The commentary is updated p e r i o d i c a l l y to address s i g n i f i c a n t questions th a t a r i s e . There have been th re e updates so f a r ; these were published on April 6 , 1983 (48 FR 14880), October 18, 1984 (49 FR 40794), and April 3, 1985 (50 FR 13180).

This notice contains the proposed fourth update.

I t is expected t h a t i t will be adopted in fin a l form in March 1986. (2) Proposed r e v i s i o n s .

Proposed question 3-7.5 responds to several i n q u i r i e s as to whether requiring payment by preauthorized e l e c t r o n i c fund t r a n s f e r s (EFTs) as p a rt of a biweekly mortgage program would v i o l a t e the compulsory use p ro h ib i tio n in § 913 of the E le c tro n ic Fund Transfer Act (15 U.S.C. 1693k( 1 ) ) .

Question 3-7.5 would make c l e a r th a t such a program does not v io l a t e the compulsory use p r o h ib i tio n when the program is not the only c r e d i t option offered by the c r e d i t o r and the program provides a c o s t - r e l a t e d in c e n tiv e for repayment by EFTs.

Proposed question 10-18.75 responds to numerous requests th at the s t a f f f u r t h e r c l a r i f y the s t a t u t o r y and regulatory provisions requiri ng preauthorized EFTs to be "authorized by the consumer only in w riti n g ." (15 U.S.C. § 1693e(a) and 12 CFR § 20 5 .10(b).) S p e c i f i c a l l y , :ne s t a f f has been asked whether the requirement is met by a payee signing a w ritte n a u th o r iz a t io n as the consumer's agent, based on the consumer's oral a u th o r iz a t io n of the preauthorized EFTs during a taped telephone conversation.

Although the s t a f f believes th a t e x i s t in g question 10-18.5 can be viewed as addressing t h i s s i t u a t i o n , question 10-18.75 would be - 3 -

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added to make c l e a r t h a t t h i s procedure does not comply with the requirement t h a t preauthorized EFTs be authorized in w riting by the consumer. L ist of su b je c ts in 12 CFR Part 205 Banks, banking; Consumer p r o te c ti o n ; E lectronic fund t r a n s f e r s ; Federal Reserve System; P e n a l t i e s .

(3) Text of r e v i s i o n s .

The proposed re visions to the O f fi c ia l S ta f f Commentary on Regulation E (EFT-2, Supp. II t o 12 CFR Part 205) read as follows:

SECTION 205.3 — Exemptions 0 3-7.5:

Compulsory use - - biweekly loan programs.

A lender o f f e r s consumers the option of a mortgage loan involving biweekly payments, which r e s u l t s in the repayment of the loan in a s h o r t e r time and in a lower t o t a l finance charge than a loan involving monthly payments.

An in te g ra l p a rt of t h i s option is a requirement t h a t consumers make the biweekly payments by preauthorized e l e c t r o n i c fund t r a n s f e r s .

Does t h i s automatic t r a n s f e r requirement v i o l a t e the a c t ' s p r o h ib i tio n against compulsory use of e l e c t r o n i c fund t r a n s f e r s ? A:

No, i t does not, given th a t the lower finance charge provides a c o s t - r e l a t e d inc en tiv e to consumers.

(§ 20 5 .3 (d )(3 ), § 913) ★ * * ★ * SECTION 205.10 — Preauthorized Transfers Q 10-18.75:

Preauthorized d e b its — a u th o riz a t io n by a g e n t . A telemarketing company ( d i r e c t l y or through an agent) asks consumers to make the monthly payments for t h e i r purchases by preauthorized e l e c t r o n i c fund t r a n s f e r s . If a consumer agrees, the company obtains the consumer's bank account number and completes a w ritte n a u th o riz a tio n based on the telephone conversation (which - 4 -

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the company re c o r d s ) .

The company signs the a u th o r iz a t io n as the consumer's agent, sends the a u t h o riz a t io n to th e consumer's account-holding fin a n cial i n s t i t u t i o n , and sends the consumer a w r itte n confirmation of th e t r a n s a c t i o n . Does t h i s procedure s a t i s f y the requirement of the act and reg u latio n t h a t preauthorized EFTs may be authorized by tl^e consumer only in w riting? I | A:

No.

The requirement th a t preauthoriz^d EFTs may be authorized by the consumer only in w ritin g cannot be met by a payee signing a w ritte n a u t h o r i ­ zatio n on the consumer's behalf, with onl^ an oral a u t h o r iz a t io n from the consumer.

(Nor does the tape recording o^ the telephone conversation c o n s t i t u t e an a u th o riz a tio n by the consumer "in writing" fo r purposes of the requirement.) To allow a payee to complete a w r itt e n a u th o r iz a tio n f o r preauthorized EFTs as the consumer's agent based on a telephone a u th o r iz a t io n would render the s ta t u t o r y and regulatory requirement meaningless. (§ 202.10(b)) * * * * * Board of Governors of the Federal Reserve System, December 5, 1985. (signed) William W. Wiles Wil ham W. Wiles Secretary of the Board - 5 -

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FEDERAL RESERVE SYSTEM 12 CFR Part 226 [Reg. Z; TIL-1] TRUTH IN LENDING Proposed Update to O f f i c i a l S ta f f Commentary AGENCY:

Board of Governors of the Federal Reserve System. ACTION:

Proposed o f f i c i a l s t a f f i n t e r p r e t a t i o n . SUMMARY:

The Board is publishing for comment proposed changes to the o f f i c i a l s t a f f commentary to Regulation Z (Truth in Lending). The commentary applies and i n t e r p r e t s the requirements of Regulation Z and is a s u b s t i t u t e for individual s t a f f i n t e r p r e t a t i o n s of the r e g u la ti o n . The proposed re visions address a v a rie ty of questions t h a t have a rise n about the re g u l a tio n , and include new material and changes in e x i s t i n g m a te ria l. DATE:

Comments must be received on or before February 7, 1986.

ADDRESS:

Comments should be mailed to William W. Wiles, S e c re ta ry , Board of Governors of the Federal Reserve System, Washington, D.C. 20551, or deliv ered to Room B-2223, 2Uth and C S t r e e t s , N.W., Washington, D.C. between 8:45 a.m. and 5:15 p.m. weekdays.

Comments should include a reference to TIL-1. Comments may be inspected in Room B-1122 between 8:45 and 5:15 p.m. weekdays. FOR FURTHER INFORMATION:

Contact the following attorneys in the Division of Consumer and Community A f f a i r s , Board of Governors of the Federal Reserve System, Washington, D.C. 20551, at (20 2 ) 45 2 - 366 7 or (20 2 ) 45 2 -3 8 6 7: Subpart A - - Adrienne Hurt Subpart B — Gerald Hurst, Susan Kraeger Subpart C - - Michael Bylsma, Leonard Chanin, Adrienne Hurt or Joy W. O'Connell, Telecommunication Device for the Deaf (TDD) at (202) 452-3244.

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SUPPLEMENTARY INFORMATION:

(1) General.

The Truth in Lending Act (15 U.S.C.

1601 et s e q .) governs consumer c r e d i t t r a n s a c t i o n s and is implemented by the Board's Regulation Z (12 CFR Part 226). E ffe c tiv e October 13, 1981, an o f f i c i a l s t a f f commentary (TIL-1, Supp. I t o 12 CFR Part 226) was published to i n t e r p r e t the re g u l a ti o n . The commentary is designed to provide guidance t o c r e d i t o r s in applying the reg u latio n to s p e c i f i c t r a n s a c t i o n s . The commen­ ta ry is updated p e r i o d i c a l l y to address s i g n i f i c a n t questions t h a t a r i s e . There have been four general updates so f a r - - th e f i r s t in September 1982 (47 FR 41338), the second in April 1983 (48 FR 14882), the t h i r d in April 1984 (49 FR 13482), and the fourth in April 1985 (50 FR 13181). There was also a limited update concerning fees for the use of automated t e l l e r machines, which was adopted in October 1984 (49 FR 40560). This notice contains the proposed f i f t h general update.

It is expected t h a t i t will be adopted in fin a l form in March 1986 with optional compliance u n ti l the uniform e f f e c t i v e date of October 1 for mandatory compliance. Certain conventions have been used to h ig h l ig h t the proposed r e v i s i o n s .

New language is shown in s id e bold-faced arrows, while language t h a t would be deleted i s se t off with b rack e ts. (2) Proposed r e v i s i o n s .

Following is a b r i e f d e s c r ip t io n of th e proposed revisions to the commentary: SUBPART A - General SECTION 226.4 - - Finance Charge 4(b) Examples of Finance Charges Paragraph 4 ( b ) ( 5 ) Comment 4 ( b ) ( 5 ) - 2 would be added to explain the s i t u a t i o n s in which premiums or other charges for residual value insurance obtained by a c r e d i t o r

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or consumer are includable in the finance charge.

In c e r t a i n c r e d i t t r a n s a c t i o n s , most notably automobile balloon payment financing, such insurance guarantees the estimated residual value of the property purchased based on the term of the agreement; th a t estimated value usually is equivalent to the fin a l balloon payment due.

SUBPART B - OPEN-END CREDIT SECTION 226.7 - - Periodic Statement 7(c) Credits Comment 7(c)-4 would be added to make c l e a r t h a t , where the c r e d i t o r provides the dates and amounts of any c r e d i t s made to the account during the b i l l i n g cy cle, the regu latio n does not require t h a t the c r e d i t o r also d i s c l o s e a t o t a l for each p a r t i c u l a r type of c r e d i t made to the account (for example, payments); nor does the regu latio n require t h a t the c r e d i t o r provide a t o t a l f ig u re for a ll c r e d i t s made to the account during the b i l l i n g cycle. SECTION 226. 8 - - I d e n t i f i c a t i o n of Transactions In comment 8-5 c e r t a i n material would be d e le te d ; the deleted material would be incorporated in new comment 8-8.

Comment 8-8 would be added to c l a r i f y the i d e n t i f i c a t i o n of t r a n s a c tio n requirements for t r a n s a c tio n s in which a c r e d i t o r and a s e l l e r have a corporate connection. Comment 8-8 would make c l e a r th a t in c e r t a i n instances c r e d i t o r s may describe t r a n s a c tio n s i n ­ volving s e l l e r s with whom they have a corporate connection using the i d e n t i f i c a t i o n requirements for unrelated c r e d i t o r s and s e l l e r s (§ 2 2 6 . 8 ( a ) ( 3 ) ) , instead of the i d e n t i f i c a t i o n requirements for r e l a te d c r e d i t o r s and s e l l e r s (§ 2 2 6 .8 ( a ) ( 2 ) ) . Creditors may use the rules in § 226.8(a)(3) when (1) the tr a n s a c tio n s occur under a c r e d i t plan th a t was e s ta b lis h e d prim arily for use with s e l l e r s th a t do not have a corporate connection with the c r e d i t o r , or (2) the t r a n s a c t i o n s - 8 -

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involve a s e l l e r whose connection with the c r e d i t o r would not be known to the consumer (for example, where the c r e d i t o r ' s and s e l l e r ' s names are not s i m i la r , and the p erio d ic statements are issued only in the c r e d i t o r ' s name). The second s i t u a t i o n is c u r r e n t ly addressed by comment 8-5; as indicated above, t h a t material has been deleted from comment 8-5 and incorporated in new comment 8-8.

S ta f f believes t h a t , in the circumstances described in comment 8-8, the information provided to consumers under § 226 .8 (a )(3 ) would be a t l e a s t as useful as th a t provided under § 2 2 6 .8 (a )(2 ). SECTION 226.12 - - Special Credit Card Provisions 12(d) O ffsets by Card Is su e r P rohibited Paragraph 12(d)(2) Comment 1 2 ( d ) ( 2 ) - l would be revised to c l a r i f y the s e c u r i t y i n t e r e s t exception to the p ro h ib i tio n on a c r e d i t card i s s u e r ' s o f f s e t t i n g a c a r d h o ld e r 's indebtedness against funds of the cardholder th a t are on deposit with the card i s s u e r .

The comment would make c l e a r t h a t the exception does not include any s e c u r i t y i n t e r e s t th a t may r e s u l t from a card i s s u e r ' s r o u tin e ly including language in i t s c r e d i t card agreements with consumers providing for such s e c u r i t y i n t e r e s t s .

Comment 1 2 (d ) ( 2 ) -2 would be deleted since i t would be i n c o n s i s t e n t with the requirements of comment 1 2 ( d ) ( 2 ) - l as r e v ise d . Comment 12(d )(2)-3 would be redesignated comment 1 2 ( d ) ( 2 ) -2. SECTION 226.16 - - Advertising 16(b) Advertisement of Terms That Require Additional Disclosures A new comment 16(b )-1 would be added to in d i c a t e t h a t , in an advertisement, the disclo su re s required by § 226. 1 6 ( b ) (1)-(3) need be made only when the advertisement r e f l e c t s one or more of the d is c lo su r e terms contained in § 226.6(a) or 226.6(b).

In li g h t of t h i s new comment, comment

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16(b )-2 would be redesignated comment 16(b )-3 and would be revised to d e l e t e th e example in d i c a t in g t h a t the i m p l i c i t d is c l o s u r e of a s e c u r i t y i n t e r e s t require s t h a t the a d ditiona l a d v e r t i s i n g d is c lo su re s of § 226 . 1 6 ( b ) ( l ) - ( 3 ) be made.

Present comment 16(b )-1 would be redesignated comment 16(b)-2, and comments 16(b)-3 through 16(b )-7 would be redesignated comments 16(b )-4 through 16(b)-8.

SUBPART C - - CLOSED-END CREDIT SECTION 226.17 - - General Disclosure Requirements 17(a) Form of Disclosures Paragraph 17(a)(1) Comment 1 7 ( a ) (1)-4 would be revised to c l a r i f y the d is c l o su re of c e r t a i n s e c u r it y i n t e r e s t charges under se c t io n s §§ 226.4(e) and 226.18(o). Footnote 38 gives c r e d i t o r s the option of making t h i s d is c l o su re e i t h e r with the segregated d is c l o su re s or elsewhere.

The revised comment would make c l e a r th a t i f a c r e d i t o r chooses to l i s t s e c u r it y i n t e r e s t charges in the it em izatio n of the amount financed, no f u r t h e r d is c l o su re of those charges would be necessary.

Comment 17(a )(1)-7 would be added to c l a r i f y the d i s c l o s u r e of balloon payment fina ncing, having some c h a r a c t e r i s t i c s of both a le ase tr a n s a c t io n subject to Regulation M and a c r e d i t tr a n s a c tio n sub jec t to Regulation Z.

Such hybrid types of financing are in c re a s in g ly being o ff e r e d , p a r t i c u l a r l y in the area of automobile fin ancin g. In these t r a n s a c t i o n s where ownership r ig h t s to the property subject to the tr a n s a c ti o n vest in the consumer upon consummation, c r e d i to r s must comply with the d is c l o su r e r e q u i r e ­ ments of t h i s re g u l a t i o n .

Therefore, a d d itiona l information, such as options - 10-

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options t h a t a borrower may choose in lieu of making a large fin a l payment, should not be included in the segregated Truth in Lending d i s c l o s u r e s . Paragraph 17(c)(2) Comment 1 7 ( c ) (2)-3 would be added to c l a r i f y the use of estimated d is c lo su re s in s i m p l e - i n t e r e s t t r a n s a c t i o n s . Creditors should not label d is c l o su r e s as estimates i f the only reason for the designation i s the f a c t t h a t consumers may make payments on o th e r than scheduled due d a t e s . Creditors should assume t h a t all payments will be timely in making t h e i r d is c l o su re c a l c u l a t i o n s .

SECTION 226.18 — Content of Disclosures 18(f) Variable Rate Comment 18 ( f )-2 would be revised to address the basis for fin a l d isc lo su re s in t r a n s a c t i o n s for which c r e d i t o r s must give ea rly d is c l o su r e s thre e days a f t e r a p p l ic a tio n under § 226.19. If c r e d i t o r s choose to r e d isc l o s e at se tt le m e n t, r a t h e r than at consummation, d isc lo su re s may b,e based on the terms in e f f e c t at s e ttle m e n t, ra t h e r than at consummation. Comment 1 8 ( f ) -6 would be expanded to cover mortgages containing an option perm itting consumers to convert an a d j u s t a b l e - r a t e mortgage to a f ix e d - r a t e mortgage.

This type of option is a v a r i a b l e - r a t e f e a t u r e th a t must be d isc lo se d .

Creditors must d is c l o se the lim i ts on an in c rease upon conversion and the e f f e c ts of an in c r e a s e . However, no example of payment terms t h a t could r e s u l t once a consumer ex erc ises the option would be required. 18(k) Prepayment Paragraph 1 8 (k )(l) Comment 18(k)(1)-1 would be revised to c l a r i f y th a t prepayment p e n a lti e s include i n t e r e s t charges assessed for any period of time a f t e r the - 11-

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date prepayment in fu ll is made.

Such charges are assessed s t r i c t l y because prepayment in fu l l has been made at a date e a r l i e r than m a tu rity . For example, under re g u la tio n s of th e Department of Housing and Urban Development (24 CFR Parts 203, 213, 222 and 234), a lender who accepts prepayment in fu ll on a date other than the in s ta llm e n t due date may assess a charge fo r i n t e r e s t to the end of the month.

The rev isio n would make c l e a r t h a t the i n t e r e s t charge assessed from the date of prepayment in f u l l u n ti l the end of the month is a prepayment penalty.

18(m) Security I n t e r e s t Comments 18(m)-l and 18(m)-3 would be amended to c l a r i f y acceptable d e s c rip t io n s of s e c u r i t y i n t e r e s t s fo r t r a n s a c tio n s in which the proceeds, or a portion of t h e proceeds, are used to purchase the c o l l a t e r a l . The revision would make c l e a r t h a t c r e d i t o r s may i d e n ti f y the c o l l a t e r a l genera lly as "the property purchased" or, in ste a d , may i d e n t i f y the c o l l a t e r a l by item or type, in accordance vyith § 226 .18(m) (2).

SECTION 226.23 - - Right of Rescission 23(f) Exempt Transactions Comment 2 3 ( f ) - 8 would be revised to c l a r i f y the a p p l ic a t io n of the rig h t of r e s c is s i o n to an account th a t converts from an open-end to a closed-end t r a n s a c t i o n .

In some cases, c r e d i t o r s delay closed-end d is c l o su re s u n til conversion of an account even i f consummation of the closed-end tr a n s a c t i o n occurs when the account is opened, as permitted by comment 17(b)-2. Comment 23 (f)-8 would be amended to provide t h a t no new rig h t of r e s c i s s io n a r i s e s at conversion, regardless of a c r e d i t o r ' s compliance with r e s c is s i o n provisions at the opening of an account.

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SECTION 226.24 - - Advertising Comments 2 4 (b )-l and 2 4 ( c ) (2)-3 would be amended to permit the abbreviation "APR" to be used inste ad of the term "annual percentage ra t e " in advertisem ents.

This change would make more c o n s is te n t the a d v e r tis in g of annual percentage r a te s for open-end and closed-end c r e d i t . List of Subjects in 12 CFR Part 226 Advertising; Banks, banking; Consumer p r o te c ti o n ; Credit; Federal Reserve System; Finance; P e n a l tie s; Truth in lending. (3) Text of r e v i s i o n s .

The proposed re visions to the commentary (TIL-1, Supplement I to 12 CFR Part 226) read as follows: SUPPLEMENT I - O ffic ia l S ta f f Commentary - TIL-1 SUBPART A - GENERAL * * * * * SECTION 226.4 - - Finance Charge * ★ * * * 4(b) Examples of Finance Charges * * * * * Paragraph 4(b)(5) * * * * * ► 2.

Residual value in su ra n c e .

Where a c r e d i t o r requires a consumer to maintain residual value insurance or where a c r e d i to r is a be n e fic ia ry of such insurance, the premiums must be included in the finance charge for the period t h a t the insurance is to be maintained.*

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SUBPART B - OPEN-END CREDIT * * ★ ★ ★ SECTION 226.7 -- Periodic Statement 7(c) Credits ► 4.

T o t a l s .

Where the c r e d i t o r provides the dates and amounts of c r e d i t s made to the account during the b i l l i n g cycle, the c r e d i t o r need not d is c lo se t o t a l fig u re s fo r the amounts c r e d i t e d . * ★ ★ ★ * * SECTION 226.8 - - I d e n t i f i c a t i o n of Transactions * * ★ * * 5.

Same or re l a t e d p e rso n s.

»For purposes of i d e n tif y i n g t r a n s a c t i o n s , t h e * [The] term "same or r e l a t e d persons" r e f e r s to, for example:

° Franchised or licensed s e l l e r s of a c r e d i t o r ' s product or s e r v ic e o S e l l e r s who assign or s e l l open-end sales accounts to a c r e d i t o r or arrange for such c r e d i t under a plan t h a t allows the consumer to use the c r e d i t only in tr a n s a c ti o n s with th a t s e l l e r [A person is not r e l a te d to the c r e d i t o r merely because, for example: ° The person and the c r e d i t o r have an agreement by which the person is authorized to honor the c r e d i t o r ' s c r e d i t card under the terms sp e c i fi e d in the agreement ° The person and the c r e d i t o r have a corporate connection, such as s u b s i d i a r y - p a r e n t , i f tha t connection is not obvious from the names they use.

For example, i f XYZ card issu e r owns the ABC h o t e l , th e card is s u e r and the hotel are not " r e l a t e d . "] - 14 -

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► A s e l l e r is not r e la te d to the c r e d i t o r when the only connection between the s e l l e r and the c r e d i t o r is an agreement by which the s e l l e r is authorized to honor the c r e d i t o r ' s c r e d i t card under the terms s p e c i fi e d in the agreement.< * * * * * ► 8.

Transactions involving c r e d i t o r s and s e l l e r s with corporate c onnec tions. In a c r e d i t card plan e s ta b lis h e d for use prim arily with s e l l e r s tha t have no corporation connection with the c r e d i t o r , the c r e d i t o r may describe a l l t r a n s a c t io n s under the plan by using the rules in sectio n 226.8(a)(3) - - c r e d i t o r and s e l l e r not same or re l a t e d persons — including t r a n s a c t i o n s involving a s e l l e r th a t has a corporate connection with the c r e d i t o r . In other c r e d i t card plans, the c r e d i t o r may describe t r a n s a c t io n s involving a s e l l e r t h a t has a corporate connection with the c r e d i t o r , such as s u b s i d i a r y - p a r e n t , using the rule s in s e c tio n 226.8(a)(3) i f the circumstances are such t h a t i t is un lik ely th a t the consumer would know of the co rporate connection between the c r e d i t o r and the s e l l e r - - for example, where the names of the c r e d i t o r and the s e l l e r are not s i m i l a r , and the p eriodic statement is issued in the name of the c r e d i t o r o n l y . « ★ * * * * SECTION 226.12 - - Special Credit Card Provisions * * * * * 12(d) Offsets by Card Issuer Prohibited * * * * * Paragraph 12(d)(2) 1.

Security i n t e r e s t — l i m i t a t i o n s .

In order to q u a lify for the exception s ta t e d in se c tio n 226.12(d)(2), a s e c u r it y i n t e r e s t must be a f f ir m a t i v e l y agreed to by the consumer * ( f o r example, by signing a separate s e c u r it y agreement)4, must be dis closed in the i s s u e r ' s i n i t i a l d is c l o su r e s under - 15-

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se c tio n 226.6, ►must be s p e c i f i c in amount,« and must be obtained and enforced only through procedures equally a v a i la b le to other c r e d i t o r s . »An example of a perm issible s e c u r ity i n t e r e s t in deposit account funds would be one in which* [For example,] th e consumer [may o f f e r ] ►o f f e r s * a savings account (as an a l t e r n a t i v e to other personal property, such as an automobile) as s e c u r i t y [ f o r c r e d i t card in d e b te d n e ss.] »in order to q u a lify for a c r e d i t card l i n e . 4 Another example of a perm issible s e c u r ity i n t e r e s t in deposit account funds would be one granted by the consumer in return for an in c e n tiv e offered by the is s u e r (for example, lower r a t e s on the c r e d i t card acc ount). ►Routinely including in agreements contract language th a t in d icates th a t consumers are giving a s e c u r it y i n t e r e s t in any deposit accounts held by the is s u e r does not come within the s e c u r it y i n t e r e s t exception of sectio n 2 2 6 . 1 2 ( d ) ( 2 ) . * [“2.

Security i n t e r e s t - - a f t e r - a c q u i re d p r o p e r t y . As used in s e c tio n 226 .1 2(d), th e term " se c u rit y i n t e r e s t " does not exclude (as i t does for other Regulation Z purposes) i n t e r e s t s in a f t e r - a c q u i re d pro p erty . Thus, a consensual s e c u r i t y i n t e r e s t in deposit-account funds, including funds deposited a f t e r the granting of the s e c u r it y i n t e r e s t , would c o n s t i t u t e a perm issible exception to the p r o h ib itio n on o f f s e t s . ] * * * * ★ Comment 1 2 ( d ) (2)-3 is redesignated 12(d)(2)-2. ★ ★ ★ ★ ★ SECTION 226.16 - - Advertising ★ ★ ★ ★ ★ 16(b) Advertisement of Terms That Require Additional Disclosures ► 1.

Terms requiring additional d i s c l o s u r e s .

In section 226.16(b) the phrase "the terms required to be disclosed under se c tio n 226.6" r e f e r s to the terms in section 226.6(a) and 226. 6 ( b ) .« - 16 -

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★ * * * * Comments 16(b )-1 is redesignated comment 16(b)-2. * * * * * [*2.] >3 .< Im plicit te rm s .

Section 226.16(b) applies even i f the t r i g g e r i n g term is not s ta t e d e x p l i c i t l y , but may be read ily determined from the a d v e r t i s e ­ ment.

[For example, a statement t h a t “the equity in your home becomes spendable with an XYZ l i n e of c r e d i t " i m p l i c i t ly s t a t e s t h a t the c r e d i t o r will take a s e c u r i t y i n t e r e s t in the consumer's home.] * * * * * Comments 16(b)-3 through 16(b )-7 are redesignated comments 16(b )-4 through 16(b)-8.

* * * * * SUBPART C - - CLOSED-END CREDIT SECTION 226.17 -- General Disclosure Requirements 17(a) Form of Disclosures Paragraph 17(a)(1) * * * * * 4.

Content of segregated d i s c l o s u r e s . Footnotes 37 and 38 contain exceptions to the requirement tha t the d isc lo su re s under section 226.18 be segregated from material th a t is not d i r e c t l y re l a t e d to those d i s c l o s u r e s . Footnote 37 l i s t s the items t h a t may be added to the segregated d i s c l o s u r e s , even though not d i r e c t l y re l a te d to those d i s c l o s u r e s . Footnote 38 l i s t s the items required under section 226.18 t h a t may be deleted from the segregated d isc lo su re s and appear elsewhere.

Any one or more of these a d ditions or d e le ti o n s may be combined and appear e i t h e r to ge ther with or separate from - 17-

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the segregated d i s c l o s u r e s .

The item ization of the amount financed under se c tio n 226.18(c), however, must be s ep arate from the other segregated d i s c l o ­ sures under s e c tio n 226.18.

» If a c r e d i t o r chooses to include in the amount financed item ization the s e c u r i t y i n t e r e s t charges required to be itemized under s e c t io n s 226.4(e) and 226.18(o), the c r e d i t o r need not l i s t the se charges elsewhere.< ★ ★ * * * ► 7.

Balloon payment financing with leasing c h a r a c t e r i s t i c s . In c e r t a i n c r e d i t sa le or loan t r a n s a c t i o n s , a consumer may reduce the d o l l a r amount of the payments to be made during the course of the tr a n s a c t i o n by agreeing to make a large fin a l payment based upon the residual value of the property purchased at the end of the loan term.

The consumer may have a number of options with respect to the fina l payment, including, among other th i n g s , r e t a in i n g the property and making the fina l payment, refinancing t h a t payment, or t r a n s f e r r in g the property to the c r e d i t o r in lieu of the fin a l payment. ■■ ■ ■ T i i , ■ u ■ » .

.

■ — .

. . . .

.

. . .

. .

■;

t * Such t r a n s a c t io n s may have some of the c h a r a c t e r i s t i c s of lease t r a n s a c t io n s subjec t to Regulation M, but are considered c r e d i t t r a n s a c t i o n s where t i t l e to the property vests in the consumer upon consummation. These tr a n s a c ti o n s are governed by the d is c l o su r e requirements of t h i s regu latio n instead of Regulation M.

Therefore, c r e d i t o r s should not include in the segregated Truth in Lending d is c l o su re s additional information. Disclosures should show the large fin al payment in the payment s chedule without mentioning, fo r example, other options a v a ila b le to a borrower at m a tu rity .* ★ ★ ★ ★ ★ 17(c) Basis of Disclosures and Use of Estimates

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Paragraph 17(c)(2) * * * * * ► 3.

S im p le -in te re s t t r a n s a c t i o n s . If consumers do not make timely payments in a s i m p l e - i n t e r e s t t r a n s a c t i o n , some of the amounts c a lc u la te d for the d is c l o su r e s will d i f f e r from amounts t h a t consumers will a c t u a l l y pay over the term of the t r a n s a c t i o n .

Creditors should not label d is c l o su re s as estimates in these tr a n s a c tio n s i f the only reason for u n c e rta in t y about the amounts d isclosed i s the fa c t t h a t payments may be l a t e . For example, although the finance charge and t o t a l of payments may be la r g e r than disclose d i f consumers h a b i tu a l ly make l a t e payments, c r e d i t o r s should not label th ese amounts as e s ti m a te s .

All d is c lo su re s should be based on the assumption t h a t payments will be made on t i m e . 4 * * * * * SECTION 226.18 - - Content of Disclosures * * * * * 18(f) Variable Rate * * * * * 2.

Basis fo r d i s c l o s u r e s .

For tr a n s a c ti o n s subject to the requirements of section 22 6 .1 8 (f), the d is c l o su re s must be given for the fu ll term of the tr a n s a c tio n and must be based on the terms in e f f e c t at the time of consummation. However, [ i n ] ► o__ in« a v a r i a b l e - r a t e tr a n s a c tio n with e i t h e r a s e l l e r buydown t h a t is r e f l e c t e d in the c r e d i t co n tra c t or a consumer buydown, d isc lo su re s should not be based so le ly on the i n i t i a l terms. In those t r a n s a c t i o n s , the disclose d annual percentage ra t e should be a composite ra t e based on the lower ra t e fo r the buydown period and the ra te th a t is the basis of the - 19 -

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v a ria b le r a t e fe a tu r e fo r the remainder of the term. (See the commentary t o sectio n 226.17(c) fo r a discussion of buydown t r a n s a c t i o n s . ) ► o In a v a r i a b l e - r a t e t r a n s a c t io n in which a c r e d i t o r r e d isc l o s e s a f t e r giving d is c l o su r e s th re e days a f t e r a p p l i c a t i o n , as required by section 226.19, the fina l d is c l o su r e s need not be based on the terms in e f f e c t at the time of consummation.

I f , as permitted by sectio n 226.19(b), c r e d i t o r s delay re d isc l o s u re u n ti l s e tt le m e n t, c r e d i t o r s may base t h e i r d is c l o su re s on the terms in e f f e c t at s e tt le m e n t, r a t h e r than those in e f f e c t at consummation.« * * * * * 6 .

Examples of v a r i a b l e - r a t e t r a n s a c t i o n s . The following tr a n s a c tio n s c o n s t i t u t e v a ria b le r a t e t r a n s a c t i o n s : *** ► ° V a r ia b l e - r a t e t r a n s a c t i o n s with an option perm itting consumers t convert at a l a t e r time to a f i x e d - r a t e loan. The conversion option i s a v a r i a b l e - r a t e f e a t u r e t h a t should be d is c l o s e d . Creditors should d is c l o s e any li m i ta t io n s on a r a t e inc rease r e s u l t i n g from conversion, along with the e f f e c t s of an in c r e a s e .

An example of an increase r e s u l t i n g from a consumer's ex e rc isin g the conversion f e a tu re need not be in c l u d e d . * * * * * * 18(k) Prepayment * * * * * Paragraph 18(k )(1) 1.

P e n a l ty .

This applies only to those tr a n sa c tio n s in which the i n t e r e s t c a l c u la tio n takes account of a ll scheduled reductions in p r i n c i p a l , as well as t r a n s a c tio n s in which i n t e r e s t c a l c u l a t io n s are made d a i l y . The term "penalty" as used here encompasses only those charges t h a t are assessed s t r i c t l y because of the prepayment in full of a s i m p l e - in t e r e s t o b li g a ti o n , - 20 -

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as an ad d itio n to a ll other amounts.

[Items which are not p e n a l t i e s in c lu d e , for example:

o Loan guarantee fees o Interim i n t e r e s t on a student loan However, a minimum finance charge is a penalty in a s i m p l e - i n t e r e s t t r a n s a c t io n . (See the commentary to s e c tio n 226.17(a)(1) regarding the d is c l o su r e of a minimum finance charge as d i r e c t l y r e l a te d i n f o r m a t i o n .) ] ►Items which are p e n a l ti e s include, for example: o I n t e r e s t charges fo r any period a f t e r prepayment in fu l l is made o A minimum finance charge in a s i m p l e - i n t e r e s t t r a n s a c tio n (See the commentary to section 226.17(a)(1) regarding the d is c l o su re of a minimum finance charge as d i r e c t l y re l a t e d inform ation.) Items which are not p e n a l ti e s inclu de, for example: o Loan guarantee fees o Interim i n t e r e s t on a student l o a n . * *■ * ~ k -k -k 18(m) Security In t e re s t 1.

Purchase money t r a n s a c t i o n s .

When the c o l l a t e r a l is the item purchased as part of, or with the proceeds of, the c r e d i t tr a n s a c t i o n , s e c t io n 226.18(m) requires only a general i d e n t i f i c a t i o n such as "the property purchased in t h i s t r a n s a c t i o n . “ [The] ►However, t h e * c r e d i t o r may [give a more s p e c i f i c i d e n t i f i c a t i o n of the c o l l a t e r a l , although only the abbreviated d is c l o su re is ne c e ssa ry .] ►i d e n t i f y the property by i t em or type, c o n s is te n t with section 226.18(m)(2), instead of id e n tify in g i t as " t he property purchased in t h i s t r a n s a c t i o n . 11* Any tr a n s a c t i o n in which the c r e d i t is being used to purchase the c o l l a t e r a l is considered a purchase money t r a n s a c tio n and the abbreviated - 21 -

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property i d e n t i f i c a t i o n may be used, whether the o b lig a tio n is t r e a t e d as a loan or a c r e d i t s a l e .

* * * * * 3.

Mixed c o l l a t e r a l .

In some t r a n s a c t io n s in which the c r e d i t is used to purchase the c o l l a t e r a l , the c r e d i t o r may also take other property of the consumer as s e c u r i t y .

In those cases, a combined d is c l o s u r e must be provided, c o n s is tin g of the abbreviated property i d e n t i f i c a t i o n »or an i d e n t i f i c a t i o n c o n s is t e n t with s e c tio n 226 .18(m)( 2 ) * fo r the purchase money c o l l a t e r a l [(although more d e t a i l may be given, at the c r e d i t o r ' s o p t i o n ) ] and a [more] s p e c i f i c i d e n t i f i c a t i o n of the other c o l l a t e r a l . * * * * * SECTION 226.23 - - Right of Rescission * * * * * 23(f) Exempt Transactions * * * * * 8.

Converting open-end to closed-end c r e d i t .

Under c e r t a i n s t a t e laws, consummation of a closed-end c r e d i t t r a n s a c tio n may occur at the time a consumer e n te rs in to the i n i t i a l open-end c r e d i t agreement. As provided in th e commentary to section 226.17(b), closed-end c r e d i t d is c l o su re s may be delayed under these circumstances u n til the conversion of the open-end account to a closed-end t r a n s a c t i o n .

In accounts secured by the consumer's p rinc ipal dwelling, no new r ig h t of r e s c is s io n a r i s e s at the time of c o n v e r s i o n s * [ , assuming t h a t the r i g h t of r e s c is s io n was previously provided on the open-end account pursuant to s e c tio n 226.15.] ★ * * * * - 22 -

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SECTION 226.24 - - Advertising * * * * * 24(b) Advertisement of Rate of Finance Charge 1.

Annual percentage r a t e .

Advertised r a t e s must be s t a t e d in terms of an "annual percentage r a t e , " as defined in s e c t io n 226.22. Even though s t a t e or local law permits the use of add-on, d iscount, tim e-p rice d i f f e r e n t i a l , or other methods of s t a t i n g r a t e s , advertisements must s t a t e them as annual percentage r a t e s .

Unlike the tr a n s a c tio n a l d is c lo s u r e of an annual percentage r a t e under s e c t io n 226.18(e), the a d v e rtise d annual percentage ra te need not include a d e s c r i p t i v e explanation of the t e r m [ . ] »and may be expressed using the abbreviation "APR."* The advertisement must s t a t e t h a t the r a t e is sub jec t to increase a f t e r consummation i f t h a t is the case, but the a d v e r t i s e ­ ment need not describe the r a t e in c re a s e , i t s l i m i t s , or how it-would a f f e c t th e payment schedule.

As under section 2 2 6 .1 8 (f), r e l a t i n g to d is c lo su re of a v a ria b le r a t e , the ra te increase d is c l o su re requirement in t h i s provision does not apply to any r a t e increase due to delinquency (inc luding l a t e payment), d e f a u l t , a c c e le r a t i o n , assumption, or t r a n s f e r of c o l l a t e r a l . * * * * * 24(c) Advertisement of Terms That Require Additional Disclosures * * * * * Paragraph 24(c)(2) ★ * * * * 3.

Annual percentage r a t e .

►The advertised annual percentage r a te may be expressed using the abbreviation "APR."* The advertisement must also s t a t e , - 23 -

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i f a p p l ic a b l e , t h a t th e annual percentage r a t e is subject to inc rease a f t e r consummation.

★ ★ ★ ★ * Board of Governors of the Federal Reserve System, December 5 , 1985. (signed) William W. Wiles William W. Wiles S ecretary of the Board - 24 -