Interpretation of Regulation Z, Proposed Amendment to Regulation Z, Circular No. 73-112

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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 7 5 2 2 2 Circular No. 73-112 May 1^, 1973 INTERPRETATION OF REGULATION Z PROPOSED AMENDMENT TO REGULATION Z To All Banks, Other Creditors and Others Concerned in the Eleventh Federal Reserve District: Enclosed is an interpretation of Regulation Z specifying that the method of rebate may be identified on a disclosure state­ ment without including a mathematical formula or narrative description.

The Board of Governors also proposes to amend its Regulation Z, "Truth in Lending," to require a creditor to disclose whether his installment contract provides for a rebate of finance charges in the event of prepayment. Attached are the details of the proposal.

Comments on the proposed amendment should be addressed to the Secretary, Board of Governors of the Federal Reserve System, Washington, D. C.

20551, to be received not later than June 15, 1973• Yours very truly, P. E. Coldwell, President Enclosures This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])

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[Reg. Z] TRUTH IN LENDING Credit Other Than Open End--Specific Disclosures 1.

Pursuant to the authority contained in the Truth in Lending Act (15 U.S.C. § 1601 et seq.), the Board of Governors proposes to amend Part 226 (Regulation Z).

The proposed amendment would require creditors to disclose to customers, in advance of their becoming obli* gated on a credit contract, if the contract does not provide for rebates of finance charges upon prepayment of the obligation. The amendment is proposed in the manner and for the reasons set forth below: Amend § 226.8(b)(7) to read as follows: S 226.8— CREDIT OTHER THAN OPEN END— SPECIFIC DISCLOSURES * * * * (b) Disclosures in sale and nonsale credit. * * * (7) Identification of the method of computing any unearned portion of the finance charge in the event of prepayment of an obli­ gation which includes precomputed finance charges and a statement of the amount or method of computation of any charge that may be deducted from the amount of any rebate of such unearned finance charge that will be credited to the obligation or refunded to the customer. If the credit contract does not provide for any rebate of finance charges upon prepayment, this fact shall be disclosed. FEDERAL RESERVE SYSTEM [12 CFR PART 226]

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-2­ 2.

The proposed arci&fidfl&Rt would add a requirement to § 226.8(b)(7) regarding rebates on contracts with precomputed finance charges to the effect that "if the credit contract does not provide for any rebate of finance charges upon prepayment, thi9 fact shall be d i s c l o s e d . P r e s e n t l y creditors are required to make a disclosure regarding finance charge rebates emly in the event that rebates are made.

The proposal would require creditors whose contracts do not ca^l rebates to disclose this fact to their customers. The pro­ vision has been amended to also clarify its application only to obli­ gations which include precomputed finance charges. 3.

Should the Board, adopt the proposed amendment after considering the comments received on it, an effective date would be set far enough in advance to allow for the orderly change of forms where necessary.

This notice is published pursuant to section 553(b) of Title 5 United States Code, and § 262.2(a) of the Rules of Procedure of the Board of Governors of the Federal Reserve System (12 CFR 262.2(a)). To aid in the consideration of these matters by the Board, interested persons are invited to submit relevant data, views, or arguments.

Any such material should be submitted in writing to the Secretary, the Board of Governors of the Federal Reserve System, Washington, D. C.

20551, or to any Federal Reserve Bank for transmittal to the Board, to be received at the Board not later than June 15, 1973. Such material will be made available for i n s p e c t i o n and copying upon

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request, except as provided in § 261.6(a) of the Board's Rules Regarding Availability of Information. By order of the Board of Governors, April 30, 1973. - 3 - (Signed) Tynan Smith Tynan Smith Secretary of the Board

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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TRUTH IN LENDING INTERPRETATION OF REGULATION Z SECTION 226.818 REFUND OF UNEARNED FINANCE CHARGE; PREPAYMENT PENALTY (a) Under §226.8(b) (7) a creditor must pro­ vide an identification of the method of computing any unearned portion of the finance charge in the event of prepayment of an obligation, as well as a statement of the amount or method of computa­ tion of any charge that may be deducted from the amount of any rebate. Section 226.8(b)(6) re­ quires the creditor to provide “a description of any penalty charge that may be imposed by the creditor or his assignee for prepayment of the principal of the obligation . . . ” A question arises whether the computation of certain rebates of unearned finance charges on contracts with precomputed finance charges involves a “prepayment penalty.” A sec­ ond question concerns the disclosures required to identify the method of computing any finance charge rebate.

(b) Section 226.8(b) (6) relates only to charges assessed in connection with obligations which do not involve precomputed finance charges included in the obligation. It applies to transactions in which the finance charge is computed from time to time by application of a rate to the unpaid principal balance. Prepayment penalties which re­ quire disclosure under this section (which prin­ cipally arise in connection with prepayment of real estate mortgages) occur when the obligor in such a transaction is required to pay separately an additional amount for paying all or part of the obligation before maturity. On the other hand, §226.8(b) (7) is designed to encompass the dis­ closures necessary with regard to the prepayment of an obligation involving precomputed finance charges which are included in the face amount of the obligation. Therefore, although in a pre­ computed obligation the finance charge rebate to a customer may be less when calculated according to the “Rule of 78’s,” “sum of the digits,” or other method than if calculated by the actuarial method, such difference does not constitute a penalty charge for prepayment that must be described pursuant to §226.8(b) (6).

(c) Section 226.8(b)(7) requires “identifica­ tion” of the rebate method used on precomputed contracts. Many State statutes provide for rebates of unearned finance charges under methods known as the “Rule of 78’s” or “sum of the digits” or other methods. In view of the fact that such statutory provisions involve complex mathemati­ cal descriptions which generally cannot be con­ densed into simple accurate statements, and which if repeated at length on disclosure forms could detract from other important disclosures, the re­ quirement of rebate “identification” is satisfied simply by reference by name to the “Rule of 78’s” or other method, as applicable. (Interprets and applies 15 U.S.C. 1638 and 15 U.S.C. 1639) * * * * * 4/30/73