Amendments and Interpretation of Regulation Z (Credit Card Liability and Disclosures Relating to Open-End Credit Accounts), Circular No. 72-260
Page 1
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 Circular No. 72-260 November l6, 1972 AMENDMENTS AND INTERPRETATION OF REGULATION Z (Credit Card Liability and Disclosures Relating to Open-End Credit Accounts) To All Banks, Other Creditors and Others Concerned in the Eleventh Federal Reserve District: The Board of Governors of the Federal Reserve System announced, on November 6, 1972, the adoption of amendments to its Truth in Lending Regula tion Z dealing with credit card liability and disclosures relating to openend credit accounts.
One amendment clarifies that all credit cards— whether they are to be used for personal, family, household, agricultural, business or commercial purposes— are covered by the maximum liability limit of $50 for unauthorized, use, and may be issued only upon the request of a prospective cardholder. This amendment is effective December 15, 1972. Other amendments, effective June 1, 1973, will: 1. Require the disclosure of a nominal annual percentage rate on billing statements in open-end credit accounts even where no finance charges are imposed during the billing cycle. Many creditors are already making this disclosure.
2.
Require disclosure of minimum finance charges on billing statements.
3.
Incorporate into the regulation two earlier interpretations dealing with computation of the annual percentage rate and disclosure of the balance on which it is computed.
These amendments are basically the same as the proposals announced by the Board on June 26 and August b . Technical adjustments in the language were made in the light of public comment received since that time. An effective date of June 1, 1973, for the disclosure amendments will allow time for those lenders and businesses which are affected by the amendments to reprint disclosure statements and change their computer pro gramming, if necessary, to take account of the changes in the regulation. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])
Page 2
At the same time, the Board, issued, an interpretation detailing the application of the regulation to open-end. credit plans with variable rate features. Copies of the amendments and interpretation are attached. Yours very truly, P. E. Coldwell, President Attachments
Page 3
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TRUTH IN LENDING INTERPRETATION OF REGULATION Z SECTION 226.707 DISCLOSURES — VARIABLE PERIODIC RATES (a) Under the terms of some open end credit plans the periodic rates of finance charges and corresponding annual percentage rates are tied to a fluctuating base rate, for example, the “prime rate.” Consequently, both the periodic rates and annual percentage rates may change from time to time with changes in the base rate. The question arises as to the proper disclosure, if any, which should be made under § 226.7 (a)(4 ), § 226.7(b) (5 ), § 2 2 6 .7 (a)(6 ), § 226.7(e) and § 226.10(c) (4) in connection with such plans. (b) Where any creditor’s open end credit plan provides that the account is subject to variations in any periodic rate of finance charge, the creditor need not comply with § 226.7(e) with respect to any prospective change in any periodic rate or corresponding annual percentage rate applicable to the account, p r o v id e d that in connection with the disclosures made pursuant to paragraph 226.7 (a) (4) the creditor has disclosed that such rates are subject to change, the conditions under which such rates may be changed, and, if applicable, the maximum and minimum limits of such rates. The requirements of § 226.7(b)(5) and § 226.10(c) (4) may be complied with by similarly disclosing the method of computing the periodic or annual percentage rates which are subject to variation. In disclosing an annual percentage rate or rates under § 226.7(b)(6) where there have been variations during the billing cycle, the computations as speci fied in § 2 2 6 .5 (a)( 1 ) (ii), § 226.5(a)(2), § 226.5 (a )(3 )(i) or § 226.5(a) (3) (ii), as applicable, should be used.
* * * * * 11/2/72
Page 4
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AMENDMENTS REGULATION Z f Effective December 15, 1972, § § 226.13(a) (4), 13(b) and 13(c) are amended to read as set forth below:
SECTION 226.13 — CREDIT CARDS — ISSUANCE AND LIABILITY (a) Supplemental definitions applicable to this section.
(4) “Cardholder” means any person to whom a credit card is issued for personal, family, house hold, agricultural, business, or commercial pur poses, or any person who has agreed with the card issuer to pay obligations arising from the issuance of a credit card to another person for such pur poses.
(b) Issuance of credit cards. Regardless of whether a credit card is to be used for personal, family, household, agricultural, business or com mercial purposes, no credit card shall be issued to any person except:
(1) In response to a request or application therefor, or (2) As a renewal of, or in substitution for, an accepted credit card whether such card is issued by the same or a successor card issuer. (c) Conditions of liability of cardholder. A cardholder shall be liable for unauthorized use of each credit card issued only if, t For this Regulation to be completed as amended effective December 15, 1972, retain:
1) Printed Pamphlet on Regulation Z containing amendments and inter pretations through September 11, 1969. 2) Printed Pamphlet on Regulation Z containing amendments and interpretataions (September 12, 1969 — October 31, 1971). 3) Amendment (Section 226.9(a)) effective October 1, 1971. 4) Amendment (Section 226.6) effective December 31, 1971. 5) Interpretation effective June 21, 1972. 6) Interpretation effective November 2, 1972. 7) Amendment (Sections 226.5(a)(3), 226.7(a)(4) and 226.7(b)(5) & (6) and 226.7(c)) effective June 1, 1973. 8) This slip sheet.
Page 5
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AMENDMENTS REGULATION Z f Effective June 1, 1973, § § 226.5(a)(3), 226.7 (a )(4 ), 226.7(b)(5) and (6) and 226.7(c) of Regulation Z are amended to read as set forth below, and § 226.702 and § 226.704 are revoked: SECTION 226.5— DETERM INATION OF ANNUAL PERCENTAGE RATE (a) General Rule—open end credit accounts * # * * * (3) Where the finance imposed during the bill ing cycle is or includes (i) any minimum, fixed, or other charge not due to the application of a periodic rate, other than a charge with respect to any specific trans action during the billing cycle, by dividing the total finance charge for the billing cycle by the amount of the balance(s) to which applicable and multiplying the quotient (expressed as a percent age) by the number of billing cycles in a year; or (ii) any charge with respect to any specific transaction during the billing cycle (even if the total finance charge also includes any other mini mum, fixed, or other charge not due to the appli cation of a periodic rate), by dividing the total finance charge imposed during the billing cycle by the total of all balances an other amounts on which any finance charge was imposed during the billing cycle without duplication and multiplying the quotient (expressed as a percentage) by the num ber of billing cycles in a year,5a/ except that the annual percentage rate shall not be less than the largest rate determined by multiplying each peri odic rate imposed during the billing cycle by the number of periods in a year; or (iii) any minimum, fixed, or other charge not due to the application of a periodic rate and the total finance charge imposed during the billing cycle does not exceed 50 cents for a monthly or longer billing cycle, or the pro rata part of 50 cents for a billing cycle shorter than monthly, at the creditors option, by multiplying each appli cable periodic rate by the number of periods in a year, notwithstanding the provisions of subdivi sions (i) and (ii) of this subparagraph. apply to the sum of the amounts financed to which specific transaction charges apply. In every case the full amount of transactions to which specific transaction charges apply shall be included in the denominator. Other balances or parts of balances shall be included according to the manner of deter mining the balance to which a periodic rate is applied, as illustrated in the following examples of accounts on monthly billing cycles:
1. Previous balance—none A specific transaction of $100 occurs on first day of the bill ing cycle. The average daily balance is $100. A specific trans action charge of 3% is applicable to the specific transactions. The periodic rate is \Vi% applicable to the average daily balance. The numerator is the amount of the finance charge, which is $4.50. The denominator is the amount of the trans action (which is $100), plus the amount by which the balance to which the periodic rate applies exceeds the amount of spe cific transactions (such excess in this case is 0), totaling $100. The annual percentage rate is the quotient (which is 4.5% ) multiplied by 12 (the number of months in a year), i.e., 54%. 2. Previous balance— $100 A specific transaction of $100 occurs at midpoint of the bill ing cycle. The average daily balance is $150. A specific trans action charge of 3% is applicable to the specific transaction. The periodic rate is 1 Vi% applicable to the average daily balance. The numerator is the amount of finance charge which is $5.25. The denominator is the amount of the transaction (which is $100), plus the amount by which the balance to which the periodic rate applies exceeds the amounts of specific transactions (such excess in this case is $50), totaling $150. As explained in example 1, the annual percentage rate is 3.5% x 12 = 42%.
3. If, in example 2, the periodic rate applies only to the pre vious balance, the numerator is $4.50 and the denominator is $200 (the amount of the transaction, $100, plus the balance to which only the periodic rate is applicable, the $100 previous balance). As explained in example 1, the annual percentage rate is 2.25% x 12 = 27%.
4. If, in example 2, the periodic rate applies only to an ad justed balance (previous balance less payments and credits) and the customer made a payment of $50 at midpoint of billing cycle, the numerator is $3.75 and the denominator is $150 (the amount of the transaction, $100, plus the balance to which only the periodic rate is applicable, the $50 adjusted balance). As explained in example 1, the annual percentage rate is 2.5% x 12 = 30%.
5. Previous balance—$100 A specific transaction (check) of $100 occurs at the mid point of the billing cycle. The average daily balance is $150. The specific transaction charge is 25 cents per check. The periodic rate is \Yz% applied to the average daily balance. The numerator is the amount of the finance charge, which is $2.50 and includes the 25 cents check charge and the $2.25 resulting from the application of the periodic rate. The denominator is the full amount of the specific transaction (which is $100) plus the amount by which the average daily balance exceeds the amount of the specific transaction (which in this case is $50), totaling $150. As explained in example 1, the annual percentage rate would be 1%% x 12 = 20%.
SECTION 226.7— OPEN END CREDIT ACCOUNTS— SPECIFIC DISCLOSURES 6* In determ ining the denom inator of the fraction under § 226.5(a) ( 3 ) (ii) no amount will be used more than once when adding the sum of the balances to which periodic rates (a) Opening new account, * * * *
Page 6
(4) Where one or more periodic rates may be used to compute the finance charge, each such rate, the range of balances to which it is appli cable, and the corresponding annual percentage rate determined by multiplying the periodic rate by the number of periods in a year.ba/ * * * * * (b) Periodic statements required. * * * * * (5) Each periodic rate, using the term “peri odic rate” (or “rates” ), that may be used to com pute the finance charge (whether or not applied during the billing cycle), the range of balances to which it is applicable, and the corresponding an nual percentage rate determined by multiplying the periodic rate by the number of periods in a year. The words “corresponding annual percent age rate,” “corresponding nominal annual per centage rate” “nominal annual percentage rate” or “annual percentage rate” (or “rates” ) may be used to describe the corresponding annual per centage rate. The requirements of § 226.6(a) of this Part with respect to disclosing the term “annual percentage rate” more conspicuously than other required terminology shall not be applicable to the disclosure made under this subparagraph, although such term (or words incorporating such term) may, at the creditor’s option, be shown as conspicuously as the terminology required under subparagraph 6 of this paragraph. Where a min imum charge may be applicable to the account, the amount of such minimum charge shall be disclosed.90 6* A creditor imposing minimum charges is not required to adjust the disclosure of the range of balances to which each periodic rate would apply in order to reflect the range of the balances below which the minimum charge applies. If a creditor does not impose a finance charge when the outstanding balance is less than a certain amount, the creditor is not required to disclose that fact or the balance below which no such charge will be imposed.
B* A creditor imposing minimum charges is not required to adjust the disclosure of the range of balances to which each periodic rate would apply in order to reflect the range of the balances below which the minimum charge applies. If a creditor does not impose a finance charge when the outstanding balance is less than a certain amount, the creditor is not required to disclose that fact or the balance below which no such charge will be imposed.
(6) When a finance charge is imposed during the billing cycle, the annual percentage rate or rates determined under § 226.5(a) using the term “annual percentage rate” (or “rates” ). * * * * * (c) Location of disclosures. The disclosures required by paragraph (b) of this section shall be made on the face of the periodic statement, except that, at the creditor’s option: (1) Itemization of the amount and date of each extension of credit (or the date such extension of credit was debited to the account) required to be disclosed under paragraph (b) (2) of this section an itemization of the amount of the “credits” dis closed under paragraph (b )(3 ) of this section, and of the amount of any finance charge required to be disclosed under paragraph (b) (4) of this section, may be made on the reverse side of the periodic statement or on a separate accompanying statem ent(s), provided that the totals of such re spective amounts are disclosed on the face of the periodic statement; and (2) The disclosures required under paragraph (b )(5 ) and (b )(8 ) of this section, except the balance on which the finance charge was com puted may be made on the reverse side of the periodic statement or on the face of a single sup plemental statement which shall accompany the periodic statement.
(3) If the creditor exercises any of the options provided under this paragraph, the face of the periodic statement shall contain one of the follow ing notices, as applicable: “NOTICE: See reverse side for important information” or “NOTICE: See accompanying statement(s) for important in formation” or “NOTICE: See reverse side and accompanying statement(s) for important infor mation,” and the disclosures shall not be separated so as to confuse or mislead the customer or ob scure or detract attention from the information required to be disclosed.
* * * * * t For this Regulation to be completed as amended effective June 1, 1973 retain:
1) Printed Pamphlet on Regulation Z containing amendments and inter pretations through September 11, 1969. 2) Printed Pamphlet on Regulation Z containing amendments and inter pretations (September 12, 1969 — October 31, 1971). 3) Amendment (Section 226.9(a)) effective October 1, 1971. 4) Amendment (Section 226.6) effective December 31, 1971. 5) Interpretation effective June 21, 1972. 6) Interpretation effective November 2, 1972. 7) Amendment (Section 226.13 (a)(4) 13(b) & 13(c) ) effective December 15, 1972.
8) This slip sheet.