Regulation Z - Revised Pamphlet of Amendments and Interpretations, Circular No. 73-290

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Circular No. 73-290 November 15 > 1973 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 REGULATION Z Revised Pamphlet of Amendments and Interpretations To All Banks, Other Creditors and Others Concerned in the Eleventh Federal Reserve District: The Board of Governors of the Federal Reserve System has revised the pamphlet containing the amendments and inter­ pretations of Regulation Z issued during the period September 12, 1969 to August 31, 1973.

A copy of the pamphlet is enclosed. Yours very truly, P. E. Coldwell, President Enclosure This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])

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Board of Governors of the Federal Reserve System TRUTH IN LENDING AMENDMENTS TO TRUTH IN LENDING ACT and AMENDMENTS AND INTERPRETATIONS of REGULATION Z This pamphlet contains the 1970 credit card amendments to the Truth in Lending Act and all amendments and interpretations of Regulation Z issued during the period September 12, 1969 to August 31, 1973.

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TABLE OF CONTENTS A M EN D M E N TS TO TRU TH IN L EN D IN G ACT Page Page I. Provisions Relating to Unsolicited Distri­ bution of Credit Cards and Limits on Liability for Unauthorized Use of Cards A M EN D M E N TS TO REGULATION Z I. Section 226.1— Authority, Scope, Purpose, Etc.

Entire section is amended ......................... II. Section 226.2— Definitions and Rules of Construction § 226.2(u) “Periodic rate” ............................. III. Section 226.5—Determination of Annual Percentage Rate § 226.5(a)(3) General rule— open end credit accounts .................................... IV. Section 226.6—General Disclosure Re­ quirements § 226.6(a) Disclosures; general rule . . . . § 226.6(1) Leap year ..................................... V. Section 226.7—Open End Credit Ac­ counts— Specific Disclosures § 226.7(a)(4) Opening new account . . . . § 226.7(b)(5) Periodic statements required § 226.7(b)(6) Periodic statements required § 226.7(c) Location of disclosures . . . . § 226.7(e) Change in term s...................... VI.

Section 226.8— Credit Other Than Open End— Specific Disclosures § 226.8(b)(7) Disclosures in sale and non­ sale credit................................. § 226.8(p) Agricultural credit— informa­ tion not determinable........... VII. Section 226.9— Right to Rescind Certain Transactions § 226.9(a) Footnote 14 ............................. § 226.9(b) Notice of opportunity to re­ scind

§ 226.9(c) Delay of performance .........

§ 226.9(g)(4) Exceptions to general rule .

VIII. Section 226.10— Advertising Credit Terms § 226.10(c) Advertising of open end credit § 226.10(d) Advertising of credit other than open end ......................... § 226.10(e) Advertising of FHA Section 235 financing ........................... IX. Section 226.12— Exemption of Certain State Regulated Transactions Entire section is am ended............................. X. Section 226.13— Credit Cards—Issuance and Liability Section added effective 1/25/71 and amended as follows effective 12/15/72: § 226.13(a)(4) Supplemental definitions ap­ plicable to this section . . . . § 226.13(b) Issuance of credit cards .. § 226.13(c) Conditions of liability of cardholder ............................. INTERPRETATIONS OF REGULATION Z I. Section 226.1— Authority, Scope, Purpose, § 226.705 Open end credit—change in the Etc.

method of determining the bal- § 226.101 Use of “annual percentage rate” ance on which finance charges in oral communications ........... are computed . . . . . . . . . . . . . . ^ § 226.706 Open end credit— allocation of II. Section 226.3— Exempted Transactions payments ..................

§ 226.302 Credit for business or commer- § 226.707 Disclosures—variable periodic cial purposes—more than rates .............................................. family units .................................. y I Section 226.8— Credit Other Than Open III. Section 226.4—Determination of Finance End—Specific Disclosures Charge § 226.811 Renewals of notes (amended § 226.404 Premiums for vendor’s single 1/28/70) .................................... interest insurance required by § 226.812 Advances under open end real creditor (amended 1/28/70) .. estate mortgages for agricul- § 226.405 (not included in this pamphlet tural purposes ............................. —issued 9/11/69) § 226.813 Disclosures on multiple ad- § 226.406 Seller’s points and discounts unvance loans ................................. der Regulation Z ......................... § 226.814 Premiums for insurance added § 226.407 Charges for membership in open to an existing balance............... end credit plan ........................... § 226.815 Disclosure for demand loans .. „ r „ _ „ , .

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, § 226.816 Mortgages with demand fea- IV. Section 226.5—Determination of Annual tures Percentage Rate § 226.817 Reduction in annual percentage § 226.506 Daily periodic rate; computarate .................................................. tion of the annual percentage § 226.818 Refund of unearned finance rate ................................................. charge; prepayment penalty .. V.

Section 226.7— Open End Credit Ac- § 226.819 Prepaid finance charges; addcounts—Specific Disclosures ■ ons ant^ discounts .................... § 226.702 (Revoked effective 6/1/73) VII. Section 226.9—Right to Rescind Certain § 226.703 Finance charge based on aver- Transactions age daily balance in open § 226.903 Refinancing and increasing— end credit accounts (amended disclosures and effects on the 6/21/72) ...................................... right of rescission (amended § 226.704 (Revoked effective 6/1/73) 1/28/70) .......................................

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TRUTH IN LENDING ACT AMENDMENTS TRUTH IN LENDING AM ENDMENTS TO TRUTH IN LENDING ACT Effective October 26, 1970, the Truth in Lend­ ing Act is amended to include the following additional provisions relating to credit cards: Section 103 of the Truth in Lending A ct (82 Stat. 146) is amended by redesignating subsec­ tions (j), (kj, and (1) as subsections (p), (q), and (r), respectively, and by adding after subsection (i) the following:

(j) The term “adequate notice”, as used in section 133, means a printed notice to a card­ holder which sets forth the pertinent facts clearly and conspicuously so that a person against whom it is to operate could reasonably be expected to have noticed it and understood its meaning. Such notice may be given to a cardholder by printing the notice on any credit card, or on each periodic statement of account, issued to the cardholder, or by any other means reasonably assuring the receipt thereof by the cardholder.

(k) The term “credit card” means any card, plate, coupon book or other credit device ex­ isting for the purpose of obtaining money, property, labor, or services on credit. (1) The term “accepted credit card” means any credit card which the cardholder has re­ quested and received or has signed or has used, or authorized another to use, for the pur­ pose of obtaining money, property, labor, or services on credit.

(m ) The term “cardholder” means any per­ son to whom a credit card is issued or any person who has agreed with the card issuer to pay obligations arising from the issuance of a credit card to another person. (n) The term “card issuer” means any per­ son who issues a credit card, or the agent of such person with respect to such card. (o) The term “unauthorized use”, as used in section 133, means a use of a credit card by a person other than the cardholder who does not have actual, implied, or apparent authority for such use and from which the cardholder re­ ceives no benefit.

The Truth in Lending Act (82 Stat. 146) is amended by adding after section 131 the follow­ ing sections:

§ 132. Issuance of credit cards N o credit card shall be issued except in re­ sponse to a request or application therefor. This prohibition does not apply to the issuance of a credit card in renewal of, or in substitution for, an accepted credit card.

§ 133. Liability of holder of credit card (a) A cardholder shall be liable for the un­ authorized use of a credit card only if the card is an accepted credit card, the liability is not in excess of $50, the card issuer gives adequate notice to the cardholder of the potential liability, the card issuer has provided the cardholder with a self-addressed, prestamped notification to be mailed by the cardholder in the event of the loss or theft of the credit card, and the unauthorized use occurs before the cardholder has notified the card issuer that an unauthorized use of the credit card has occurred or may occur as the result of loss, theft, or otherwise. Notwithstanding the foregoing, no cardholder shall be liable for the unauthorized use of any credit card which was issued on or after the effective date of this section, and, after the expiration of twelve months follow­ ing such effective date, no cardholder shall be liable for the unauthorized use of any credit card regardless of the date of its issuance, unless (1) the conditions of liability specified in the preced­ ing sentence are met, and (2) the card issuer has provided a method whereby the user of such card can be identified as the person authorized to use it. For the purposes of this section, a card­ holder notifies a card issuer by taking such steps as may be reasonably required in the ordinary course of business to provide the card issuer with the pertinent information whether or not any par­ ticular officer, employee, or agent of the card issuer does in fact receive such information. (b) In any action by a card issuer to enforce liability for the use of a credit card, the burden of proof is upon the card issuer to show that the use was authorized or, if the use was unauthor­ ized, then the burden of proof is upon the card issuer to show that the conditions of liability for the unauthorized use of a credit card, as set forth in subsection (a), have been met. (c) Nothing in this section imposes liability upon a cardholder for the unauthorized use of a credit card in excess of his liability for such use under other applicable law or under any agree­ ment with the card issuer.

(d) Except as provided in this section, a card­

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AMENDMENTS TRUTH IN LENDING ACT holder incurs no liability from the unauthorized use of a credit card.

§ 134. Fraudulent use of credit card Whoever, in a transaction affecting interstate or foreign commerce, uses any counterfeit, ficti­ tious, altered, forged, lost, stolen, or fraudulently obtained credit card to obtain goods or services, or both, having a retail value aggregating $5,000 or more, shall be fined not more than $10,000 or imprisoned not more than five years, or both. The table of contents of Chapter 2 of the Truth in Lending Act is amended by adding at the end thereof the following:

132. Issuance of credit cards. 133. Liability of holder of credit card. 134. Fraudulent use of credit card. The amendments to the Truth in Lending Act made by this title become effective as follows: (1) Section 132 of such Act takes effect upon the date of enactment of this title. (2) Section 133 of such Act takes effect upon the expiration of 90 days after such date of enactment.

(3) Section 134 of such Act applies to of­ fenses committed on or after such date of en­ actment.

* * * * * (See corresponding Amendments to Regula­ tion Z (§ 226.13) at page 11.)

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REGULATION Z AMENDMENTS TRUTH IN LENDING AMENDMENTS TO REGULATION Z Effective January 25, 1971, section 226.1 is amended as follows:

SECTION 226.1— AUTHORITY, SCOPE, PURPOSE, ETC.

(a) Authority, scope and purpose. (1) This Part comprises the regulations issued by the Board of Governors of the Federal Reserve System pur­ suant to Title I (Truth in Lending Act) and Title V (General Provisions) of the Consumer Credit Protection Act, as amended (15 U.S.C. § 1601 et seq.). Except as otherwise provided herein, this Part applies to all persons who in the ordinary course of business regularly extend, or offer to extend, or arrange, or offer to arrange, for the extension of consumer credit as defined in para­ graph (k) of § 226.2, and to all persons who issue credit cards.

(2) This Part implements the Act, the purpose of which is to assure that every customer who has need for consumer credit is given meaningful in­ formation with respect to the cost of that credit which, in most cases, must be expressed in the dollar amount of finance charge, and as an annual percentage rate computed on the unpaid balance of the amount financed. Other relevant credit in­ formation must also be disclosed so that the cus­ tomer may readily compare the various credit terms available to him from different sources and avoid the uninformed use of credit. This Part also implements the provision of the Act under which a customer has a right in certain circumstances to cancel a credit transaction which involves a lien on his residence. Advertising of consumer credit terms must comply with specific requirements, and certain credit terms may not be advertised unless the creditor usually and customarily extends such terms. This Part also contains prohibitions against the issuance of unsolicited credit cards and limits on the cardholder’s liability for unauthor­ ized use of a credit card. Neither the Act nor this Part is intended to control charges for consumer credit, or interfere with trade practices except to the extent that such practices may be inconsistent with the purpose of the Act.

(b) Administrative enforcement. (1) As set forth more fully in section 108 of the Act, administra­ tive enforcement of the Act and this Part with respect to certain creditors and credit card issuers is assigned to the Comptroller of the Currency, Board of Directors of the Federal Deposit Insur­ ance Corporation, Federal Home Loan Bank Board (acting directly or through the Federal Savings and Loan Insurance Corporation), Ad­ ministrator of the National Credit Union Admin istration, Interstate Commerce Commission, Civil Aeronautics Board, Secretary of Agriculture, and Board of Governors of the Federal Reserve System.

(2) Except to the extent that administrative enforcement is specifically committed to other authorities, compliance with the requirements im­ posed under the Act and this Part will be en­ forced by the Federal Trade Commission. (c) Penalties and liabilities. Section 112 of the Act provides for criminal liability for willful and knowing failure to comply with any requirement imposed under the Act and this Part, and section 130 of the Act provides for civil liability on the part of any creditor who fails to disclose any in­ formation required under Chapter 2 of the Act and under the corresponding provisions of this Part. Section 134 provides for criminal liability for the fraudulent use of a credit card to obtain goods or services having a retail value aggregating $5,000 or more. Pursuant to section 108 of the Act, violations of the Act or this Part constitute violations of other Federal laws which may pro­ vide further penalties.

Effective November 1, 1973, section 226.2(u) is amended as follows:

SECTION 226.2— DEFINITIONS A N D RULES OF CONSTRUCTION * * * * * (u) “Periodic rate” means a percentage rate of finance charge which is or may be imposed by a creditor against a balance for a period. (See also § 226.5(a)(3).) Effective June 1, 1973, section 226.5(a)(3) is amended as follows:

SECTION 226.5— D ETERM INATIO N OF A N N U A L PERCENTAGE RATE (a) General Rule— open end credit accounts. * * * * * (3) Where the finance charge imposed during the billing cycle is or includes (i) any minimum, fixed, or other charge not due to the application of a periodic rate, other

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AMENDMENTS REGULATION Z 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 percentage) 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 minimum, fixed, or other charge not due to the application of a periodic rate), by dividing the total finance charge imposed during the billing cycle by the total of all balances and other amounts on which any finance charge was im­ posed during the billing cycle without duplica­ tion and multiplying the quotient (expressed as a percentage) by the number of billing cycles in a year,5a except that the annual percentage rate shall not be less than the largest rate deter­ mined by multiplying each periodic rate im­ posed 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 sa In determining the denominator 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 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 determining 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 billing cycle. The average daily balance is $100. A specific transaction charge of 3% is applicable to the specific transactions. The periodic rate is \V2 % 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 transaction (which is $100), plus the amount by which the balance to which the periodic rate applies exceeds the amount of specific 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 billing cycle. The average daily balance is $150. A specific transaction 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 part of 50 cents for a billing cycle shorter than monthly, at the creditor’s option, by multiplying each applicable periodic rate by the number of periods in a year, notwithstanding the provi­ sions of subdivisions (i) and (ii) of this sub­ paragraph.

SECTION 226.6— GENERAL DISCLOSURE REQUIREM ENTS Effective November 1, 1973, section 226.6(a) is amended as follows:

(a) Disclosures: general rule. The disclosures required to be given by this Part shall be made clearly, conspicuously, in meaningful sequence, in accordance with the further requirements of this section, and at the time and in the terminology prescribed in applicable sections. Except with re­ spect to the requirements of § 226.10, where the terms “finance charge” and “annual percentage rate” are required to be used, they shall be printed more conspicuously than other termi­ nology required by this Part and all numerical amounts and percentages shall be stated in fig­ ures and shall be printed in not less than the equivalent of 10 point type, .075 inch computer 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 previous balance, the numerator is $4.50 and the denomi­ nator 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 adjusted 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 ap­ plicable, the $50 adjusted balance). As explained in ex­ ample 1, the annual percentage rate is 2.5% X 12 = 30%.

5. Previous balance— $100 A specific transaction (check) of $100 occurs at the midpoint of the billing cycle. The average daily balance is $150. The specific transaction charge is 25 cents per check. The periodic rate is 1 Vz% 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%.

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REGULATION Z AMENDMENTS type, or elite size typewritten numerals, or shall be legibly handwritten.

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Effective December 31, 1971, section 226.6 is amended by the addition of paragraph (1) as follows:

(1) Leap year. Any variance in the amount of any finance charge, payment, percentage rate, or other term required under this Part to be dis­ closed, or stated in any advertisement, which oc­ curs by reason of the addition of February 29 in each leap year, may be disregarded, and such term may be disclosed or stated without regard to such variance.

Effective June 1, 1973, sections 226.7(a)(4), 226.7(b)(5) and (6), and 226.7(c) are amended as follows:

SECTION 226.7— OPEN E N D CREDIT ACCOUNTS— SPECIFIC DISCLOSURES (a) Opening new account.

* * * * * (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 applica­ ble, and the corresponding annual percentage rate determined by multiplying the periodic rate by the number of periods in a year.fia A creditor imposing minimum charges is not re­ quired to adjust the disclosure of the range of balances to which each periodic rate would apply in order to re­ flect 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 im­ posed.

* * * * * (b) Periodic statements required. * * * * * (5) Each periodic rate, using the term “periodic rate” (or “rates”), that may be used to compute the finance charge (whether or not applied during the billing cycle), the range of balances to which it is applicable, and the corresponding annual per­ centage rate determined by multiplying the peri­ odic rate by the number of periods in a year. The words “corresponding annual percentage rate,” “corresponding nominal annual percentage rate,” “nominal annual percentage rate” or “annual per­ centage rate” (or “rates”) may be used to describe the corresponding annual percentage rate. The re­ quirements of § 226.6(a) of this Part with re­ spect to disclosing the term “annual percentage rate” more conspicuously than other required ter­ minology 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 minimum charge may be applicable to the account, the amount of such minimum charge shall be disclosed.<Ja (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”). •'« 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 im­ posed.

* * * * * (c) Location of disclosures. The disclosures re­ quired by paragraph (b) of this section shall be made on the face of the periodic statement, ex­ cept 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 sec­ tion and itemization of the amount of the “credits” disclosed 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 statement(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 bal­ ance on which the finance charge was computed, may be made on the reverse side of the periodic statement or on the face of a single supplemental 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

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AMENDMENTS REGULATION Z 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.

* * * * * * Effective April 5, 1971, section 226.7(e) is amended as follows:

(e) Change in terms. Not later than 15 days prior to the beginning date of the billing cycle in which any change is to be made in the terms pre­ viously disclosed to the customer of an open end credit account, the creditor shall mail or deliver a written disclosure of such change to each customer required to be furnished a statement under para­ graph (b) of this section. Such disclosure shall be mailed or delivered to each other customer who subsequently activates his account not later than the date of mailing or delivery of the next re­ quired billing statement on his account. However, if the periodic rate or rates, or any minimum, fixed, check service, transaction, activity, or simi­ lar charge is increased, the creditor shall mail or deliver a written disclosure of such increase to each customer at least 15 days prior to the begin­ ning date of the billing cycle in which the increase is imposed on his account. No notice is necessary if the only change is a reduction in the minimum periodic payment, periodic rate or rates, or in any minimum, fixed, check service, transaction, activ­ ity, or similar charge applicable to the account. *Supersedes amendment issued October 23, SECTION 226.8— CREDIT OTHER TH A N OPEN E N D — SPECIFIC DISCLOSURES Effective January 1, 1974, section 226.8(b)(7) is amended as follows:

(b) Disclosures in sale and non-sale credit. ♦ sli J};

s|< (7) Identification of the method of computing any unearned portion of the finance charge in the event of prepayment in full of an obligation which includes precomputed finance charges and a statement of the amount or method of computa­ tion of any charge that may be deducted from the amount of any rebate of such unearned finance charge that will be credited to an obliga­ tion or refunded to the customer. If the credit contract does not provide for any rebate of un­ earned finance charges upon prepayment in full, this fact shall be disclosed.

He * =!= * Hs Effective November 6, 1969, section 226.8 is amended by the addition of paragraph (p) as follows:

(p) Agricultural credit— information not de­ terminable. (1) In any transaction subject to this section, if the amount or date of any advance or payment in connection with an extension of credit for agricultural purposes under a written agree­ ment is to be determined by production, seasonal needs, or similar operational factors, and is not determinable at the time of execution of the agree­ ment, disclosures may be made at the creditor’s option in accordance with this paragraph, pro­ vided the use of this paragraph is not for the purpose of circumvention or evasion of this Part. (2) If a creditor elects to make disclosures un­ der this paragraph, he shall disclose the following items in accordance with § 226.8(a), which shall constitute compliance with the requirements of § 226.8, and under § 226.9(a) shall constitute “all other material disclosures required under this Part”:

(i) The method of computing the amount of the finance charge including an identification of each component thereof in accordance with § 226.4;

(ii) Any item required to be disclosed under § 226.8(b)(3) which is determinable at the time the disclosures are required to be made under this paragraph;

(iii) The disclosures, as applicable, required under § 226.8(b)(4), (5), (6), and (7) and the items described in § 226.8(e)(1) and (2); (iv) The disclosures, as applicable, required under § 226.8(o)(l), (2), (3), (4), (5), (8), and (9).

(3) Disclosures made pursuant to subparagraph (2)(i), (ii), and (iii) of this paragraph need be made only on the agreement or on a separate statement as specified in § 226.8(a). (4) If a creditor making disclosures pursuant to this paragraph transmits a periodic billing state­ ment of the type described in paragraph (n) of

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REGULATION Z AMENDMENTS § 226.8, such statement shall be in a form which the customer may retain and shall set forth the date by which, or the period, if any, within which payment must be made in order to avoid late pay­ ment or delinquency charges.

SECTION 226.9— RIGHT TO RESCIND CERTAIN TRANSACTIONS Effective October 1, 1971, footnote 14 to sec­ tion 226.9(a) is amended as follows: i-i For the purpose of this section, a business day is any calendar day except Sunday and those legal public holidays specified in Section 6103(a) of Title 5 of the United States Code (New Year’s Day, Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day).

ajc >|{ >{c $ Effective April 5, 1971, sections 226.9(b) and 226.9(c) are amended as follows: (b) Notice of opportunity to rescind. Whenever a customer has the right to rescind a transaction under paragraph (a) of this section, the creditor shall give notice of that fact to the customer by furnishing the customer with two copies of the notice set out below, one of which may be used by the customer to cancel the transaction. Such notice shall be printed in capital and lower case letters of not less than 12 point bold-faced type on one side of a separate statement which identifies the trans­ action to which it relates. Such statement shall also set forth the entire paragraph (d) of this section, “Effect of rescission.” If such paragraph appears on the reverse side of the statement, the face of the statement shall state: “See reverse side for important information about your right of rescission.” Before furnishing copies of the notice to the customer, the creditor shall complete both copies with the name of the creditor, the address of the creditor’s place of business, the date of consummation of the transaction, and the date, not earlier than the third business day following the date of the transaction, by which the cus­ tomer may give notice of cancellation. Where the real property on which the security interest may arise does not include a dwelling, the creditor may substitute the words “the property you are purchasing” for “your home,” or “lot” for “home,” where these words appear in the notice. N otice to customer required by Federal law: You have entered into a transaction on (date) which may result in a lien, mortgage, or other security interest on your home. You have a legal right under Federal law to cancel this transaction, if you desire to do so, without any penalty or obligation within three business days from the above date or any later date on which all material disclosures required under the Truth in Lending Act have been given to you. If you so cancel the transaction, any lien, mortgage, or other security interest on your home arising from this transaction is automatically void. You are also entitled to receive a refund of any downpayment or other consideration if you cancel. If you decide to cancel this transaction, you may do so by notifying (Name of creditor) at (Address 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 identifying the trans­ action if it is delivered to the above address not later than that time. This notice may be used for that purpose by dating and signing below. I hereby cancel this transaction. (date) (customer’s signature) (c) Delay of performance. Except as provided in paragraph (e) of this section, the creditor in any transaction subject to this section, other than an extension of credit primarily for agricultural pur­ poses, shall not perform, or cause or permit the performance of, any of the following actions until after the rescission period has expired and he has reasonably satisfied himself that the customer has not exercised his right of rescission: (1) Disburse any money other than in escrow; (2) Make any physical changes in the property of the customer;

(3) Perform any work or service for the cus­ tomer; or (4) Make any deliveries to the residence of the customer if the creditor has retained or will ac­ quire a security interest other than one arising by operation of law.

* * * * * Effective November 6, 1969, section 226.9(g) (4) is amended as follows:

(g) Exceptions to general rule. * * * * * (4) Any advance for agricultural purposes made pursuant to either:

(i) Paragraph (j) of § 226.8 under an open end real estate mortgage or similar lien, pro-

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AMENDMENTS REGULATION Z vided the disclosure required under paragraph (b) of this section was made at the time the security interest was acquired by the creditor or at any time prior to the first advance made on or following the effective date of this Part, or (ii) Paragraph (p) of § 226.8 under a written agreement, provided the disclosure required under paragraph (b) of this section was made at the time the written agreement was executed by the customer.

SECTION 226.10— ADVERTISING CREDIT TERMS Effective November 1, 1973, sections 226.10(c) and 226.10(d) are amended as follows: * * * # (c) Advertising of open end credit. N o adver­ tisement to aid, promote, or assist directly or indirectly the extension of open end credit may set forth any of the terms described in paragraph (a) of § 226.7, the Comparative Index of Credit Cost, or that a specified downpayment or periodic payment is required (either in dollars or as a percentage), the period of repayment or any of the following items, unless it also clearly and conspicuously sets forth all the following items in terminology prescribed under paragraph (b) of § 226.7:

(1) An explanation of the time period, if any, within which any credit extended may be paid without incurring a finance charge. (2) The method of determining the balance upon which a finance charge may be imposed. (3) The method of determining the amount of the finance charge, including the determination of any minimum, fixed, check service, transaction, activity, or similar charge, which may be imposed as a finance charge.

(4) Where one or more periodic rates may be used to compute the finance charge, each corres­ ponding annual percentage rate determined by multiplying the periodic rate by the number of periods in a year and, where there is more than one corresponding annual percentage rate, the range of balances to which each is applicable.15 is A creditor imposing minimum charges is not required to adjust the disclosure of the range of balances to which each 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 out­ standing balance is less than a certain amount, the credi­ tor is not required to disclose that fact or the balance below which no such charge will be imposed. (d) Advertising of credit other than open end. N o advertisement to aid, promote, or assist di­ rectly or indirectly any credit sale including the sale of residential real estate, loan, or other exten­ sion of credit, other than open end credit, subject to the provisions of this Part, shall state. (1) The rate of the finance charge except as an “annual percentage rate,” using that term. N o other rate of finance charge may be stated, except that:

(1) where the total finance charge includes, as a component, interest computed at a simple an­ nual rate, the simple annual rate may be stated in conjunction with, but not more conspicuously than, the annual percentage rate, or (ii) where the finance charge is computed solely by the application of a periodic rate to an unpaid balance, the periodic rate may be stated in con­ junction with, but not more conspicuously than, the annual percentage rate.

(2) That no downpayment is required, or the amount of the downpayment or of any instalment payment required (either in dollars or as a per­ centage), the dollar amount of any finance charge, the number of instalments or the period of repay­ ment, or that there is no charge for credit, unless it also clearly and conspicuously sets forth all of the following items in terminology prescribed under § 226.8:

(i) the cash price or the amount of the loan, as applicable.

(ii) in a credit sale, the amount of the down­ payment required or that no downpayment is required, as applicable.

(iii) the number, amount, and due dates or period of payments scheduled to repay the in­ debtedness if the credit is extended. (iv) the amount of the finance charge expressed as an annual percentage rate. The exemptions from disclosure of an annual percentage rate permitted in paragraph (b)(2) of § 226.8 shall not apply to this subdivision.

(v) except in the case of the sale of a dwelling or a loan secured by a first lien on a dwelling to purchase that dwelling, the deferred payment price in a credit sale, or the total of payments in a loan or other extension of credit which is not a credit sale, as applicable.

* Sfc * Sfj *

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REGULATION Z AMENDMENTS Effective April 5, 1971, section 226.10(e) is added as follows:

(e) Advertising of FH A Section 235 financing. Any advertisement to aid, promote, or assist di­ rectly or indirectly the sale of residential real estate under Title II, Section 235, of the National Housing Act (12 U.S.C. 1715z) shall clearly iden­ tify those credit terms which apply to the assist­ ance program and, except as provided in this paragraph, comply with the provisions of para­ graph (d) of this section. N o such advertisement shall state:

(1) the amount of any payment scheduled to repay the indebtedness without stating the family size and income level applicable to that amount. (2) any rate of a finance charge, or the amount of the finance charge, expressed as an annual per­ centage rate based on the assistance. The annual percentage rate exclusive of the assistance may be stated, but is not required.

Effective January 25, 1971, section 226.12 is amended as follows:

^SECTION 226.12— EXEMPTION OF CERTAIN STATE R EG ULATED TRANSACTIONS (a) Exemption for State regulated transactions. In accordance with the provisions of Supplements II and IV to Regulation Z, any State may make application to the Board for exemption of any class of transactions within that State from the requirements of Chapter 2 of the Act and the corresponding provisions of this Part: Provided, That (1) Under the law of that State, that class of transactions is subject to requirements substan­ tially similar to those imposed under Chapter 2 of the Act and the corresponding provisions of this Part; and (2) There is adequate provision for enforce­ ment.

(b) Procedures and criteria. The procedures and criteria under which any State may apply for the determination provided for in paragraph (a) of this section are set forth in Supplement II to Regulation Z with respect to disclosure and re­ scission requirements (§§ 121-131 of Chapter 2) and Supplement IV with respect to the prohibition of the issuance of unsolicited credit cards and the liability of the cardholder for unauthorized use of a credit card (§§ 132-133 of Chapter 2). (c) Civil liability. In order to assure that the concurrent jurisdiction of Federal and State courts created in section 130(e) of the Act shall continue to have substantive provisions to which such juris­ diction shall apply, and generally to aid in imple­ menting the Act with respect to any class of trans­ actions exempted pursuant to paragraph (a) of this section and Supplement II, the Board pursu­ ant to sections 105 and 123 hereby prescribes that: (1) N o such exemptions shall be deemed to extend to the civil liability provisions of sections 130 and 131; and (2) After an exemption has been granted, the disclosure requirements of the applicable State law shall constitute the disclosure requirements of this Act, except to the extent that such State law im­ poses disclosure requirements not imposed by this Act. Information required under such State law with the exception of those provisions which im­ pose disclosure requirements not imposed by this Act shall, accordingly, constitute the “information required under this Chapter” (Chapter 2 of the Act) for the purpose of section 130(a). (d) Exemptions granted. Exemptions granted by the Board to particular classes of credit trans­ actions within specified States are set forth in Supplement III to Regulation Z. *Supersedes amendment issued March 12, 1970 Effective January 25, 1971, section 226.13 (as amended effective December 15, 1972) is added as follows:

SECTION 226.13— CREDIT CARDS— ISSUANCE A N D LIABILITY (a) Supplemental definitions applicable to this section. In addition to the definitions set forth in § 226.2, as applicable, the following definitions apply to this section:

(1) “Accepted credit card” means any credit card which the cardholder has requested or ap­ plied for and received, or has signed, or has used, or has authorized another person to use for the purpose of obtaining money, property, labor, or services on credit. Any credit card issued in re­ newal of, or in substitution for, an accepted credit

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AMENDMENTS REGULATION Z card becomes an accepted credit card when re­ ceived by the cardholder whether such card is issued by the same or a successor card issuer. (2) “Adequate notice” means a printed notice to a cardholder which sets forth the pertinent facts clearly and conspicuously so that a person against whom it is to operate could reasonably be expected to have noticed it and understood its meaning.

(3) “Card issuer” means any person who issues a credit card, or the agent of such person with respect to such card.

*(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.

(5) “Credit” means the right to defer payment of debt, incur debt and defer its payment, or to obtain money, property, labor or services and de­ fer payment therefor.

(6) “Credit card” means any card, plate, coupon book, or other single credit device existing for the purpose of being used from time to time upon presentation to obtain money, property, labor, or services on credit.

(7) “Unauthorized use” means the use of a credit card by a person other than the cardholder (i) who does not have actual, implied, or ap­ parent authority for such use, and (ii) from which the cardholder receives no benefit.

*(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, * Amended December 15, 1972.

(1) The credit card is an accepted credit card; (2) Such liability does not exceed the lesser of $50 or the amount of money, property, labor, or services obtained by such use prior to notification of the card issuer pursuant to paragraph (f) of this section;

(3) The card issuer has given adequate notice to the cardholder of his potential liability on the credit card or within two years preceding the unauthorized use; and (4) The card issuer has provided the card­ holder with an addressed notification requiring no postage to be paid by the cardholder which may be mailed by the cardholder in the event of the loss, theft, or possible unauthorized use of the credit card.

(d) Other conditions of liability. In addition to the conditions of liability in paragraph (c) of this section, no cardholder shall be liable for the un­ authorized use of any credit card which was issued after January 24, 1971, and, regardless of the date of its issuance, after January 24, 1972, no card­ holder shall be liable for the unauthorized use of any credit card, unless the card issuer has pro­ vided a method whereby the user of such card can be identified as the person authorized to use it, such as by signature, photograph, or fingerprint on the credit card or by electronic or mechanical confirmation.

(e) Notice to cardholder. The notice to card­ holder pursuant to paragraph (c ) (3 ) of this sec­ tion may be given by printing the notice on the credit card, or by any other means reasonably assuring the receipt thereof by the cardholder. An acceptable form of notice must state that liability shall not exceed $50 (or any lesser amount), that notice of loss, theft, or possible unauthorized use may be given orally or in writing, and the name and address of the party to receive the notice. It may include any additional information which is not inconsistent with the provisions of this section. An example of an acceptable notice is as follows: “You may be liable for the unauthorized use of your credit card [or other term which describes the credit device]. You will not be liable for unauthorized use which occurs after you notify [name of card issuer or his designee] at [address] orally or in writing of loss, theft, or possible un­ authorized use. In any case liability shall not ex­ ceed [insert $50 or any lesser amount under other applicable law or under any agreement with the cardholder].”

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REGULATION Z AMENDMENTS (f) Notice to card issuer. For the purposes of this section, a cardholder notifies a card issuer by taking such steps as may be reasonably required in the ordinary course of business to provide the card issuer with the pertinent information with re­ spect to loss, theft, or possible unauthorized use of any credit card, whether or not any particular officer, employee, or agent of the card issuer does, in fact, receive such notice or information. Irre­ spective of the form of notice provided under paragraph (c) (4) of this section, at the option of the cardholder, notice may be given to the card issuer or his designee in person or by telephone or by letter, telegram, radiogram, cablegram, or, other written communication which sets forth the perti­ nent information. Notice by mail, telegram, radio­ gram, cablegram, or other written communication shall be considered given at the time of receipt or, whether or not received, at the expiration of the time ordinarily required for transmission, which­ ever is earlier.

(g) Action to enforce liability. In any action by a card issuer to enforce liability for the use of a credit card, the burden of proof is upon the card issuer to show that the use was authorized or, if the use was unauthorized, then the burden of proof is upon the card issuer to show that the conditions of liability for the unauthorized use of a credit card, as set forth in paragraphs (c) and (d) of this section, have been met. (h) Effect on other applicable law or agreement. Nothing in this section imposes liability upon a cardholder for the unauthorized use of a credit card in excess of his liability for such use under other applicable law or under any agreement with the card issuer.

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INTERPRETATIONS REGULATION Z TRUTH IN LENDING SECTION 226.3 INTERPRETATIONS OF REGULATION Z SECTION 226.1 SECTION 226.101— USE OF “A N N U A L PERCENTAGE RATE” IN ORAL COM M UNICATIONS Under § 2 2 6 .1 (a )(2 ), a stated purpose of the Truth in Lending Act and Regulation Z is to assure that every customer who has need for con­ sumer credit is given meaningful information with respect to the cost of that credit so that he may readily compare the various credit terms available to him from different sources and avoid the un­ informed use of credit. Under § 226.6(a), a creditor is required to make disclosures using certain prescribed terminology, including the “annual percentage rate.” The question arises as to the propriety of a creditor quoting annual rates other than “annual percentage rate” in response to consumer inquiries about the cost of credit, where such other rates could not be used in an adver­ tisement under the proscriptions of § 226.10. The Truth in Lending Act and Regulation Z are intended to facilitate “shopping” between competitive credit plans. If a customer inquires about the cost of credit and the creditor responds by quoting an add-on or discount rate, he may mislead the customer since the use of such rates is prohibited in consumer credit advertising and such rates are significantly lower than the annual percentage rate which must be shown on the creditor’s disclosure statement. The quotation of these rates can frustrate the stated purpose of the Act and prevent the customer from making an informed use of credit.

In response to any oral inquiry by a customer about the cost of credit, a creditor when quoting annual rates should use only those rates permitted to be used in advertisements under § 226.10. Ir­ respective of the method used by the creditor to compute finance charges, the annual rate of the creditor’s total finance charges should be quoted only in terms of the “annual percentage rate.” 6/29/73 SECTION 226.302— CREDIT FOR BUSINESS OR COMMERCIAL PURPOSES— MORE TH A N 4 FAM ILY UNITS Under § 226.3(a), extensions of credit for business or commercial purposes, other than agri­ cultural purposes, are not subject to Regulation Z. The question arises as to whether an extension of credit relating to a dwelling (as defined in § 226.2 (p )) which contains more than 4 family housing units is an extension of credit of business or commercial purposes.

Credit extended to an owner of a dwelling con­ taining more than 4 family housing units for the purpose of acquiring, financing, refinancing, im­ proving, or maintaining that dwelling is an exten­ sion of credit for business or commercial pur­ poses.

1 /2 8 /7 0 SECTION 2 2 6 .4 ^SECTION 226.404— PREM IUM S FOR V EN D O R ’S SINGLE INTEREST IN SU R A N C E REQUIRED BY CREDITOR The question arises whether charges or premi­ ums for single interest insurance (Vendor’s Single Interest Insurance) written in connection with a credit transaction may be excluded from the finance charge under § 2 2 6 .4 (a )(6 ) if the insurer waives subrogation.

If the insurer waives all right of subrogation against the customer in a single interest policy of insurance against loss of or damage to property (which may include coverage for skip, conceal­ ment, conversion, and embezzlement) written in connection with a credit transaction, and the cred­ itor complies with the requirements of § 226.4(a) (6 ), charges or premiums for such insurance may be excluded from the amount of the finance charge on that transaction. However, if the in­ surer does not so waive subrogation in such

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REGULATION Z INTERPRETATIONS policy of insurance, the charges or premiums shall be included in the finance charge. 1 /2 8 /7 0 *Supersedes interpretation § 226.404 issued 8 /1 /6 9 SECTION 226.405 (N ot included in this pam­ phlet— issued 9 /1 1 /6 9 .) SECTION 226.406— SELLER’S POINTS A N D DISCOUNTS U N D E R REG ULATIO N Z Section 226.4(a) of Regulation Z includes in the finance charge any charge “payable directly or indirectly by the customer, and imposed directly or indirectly by the creditor as an incident to or as a condition of the extension of credit. . The question arises as to the proper treatment of dis­ counts paid by the seller, including points im­ posed on the seller by the lender in connection with a real estate transaction. Under the general rule in § 226.4(a), any such discount, to the extent it is passed on to the buyer through an increase in the selling price, must be included in the finance charge. However, as a practical matter, it may be difficult to determine whether or not a discount paid by the seller in connection with a real estate transaction has been, in fact, passed along to the customer as a part of the purchase price of the property. The same situation may exist in other cases, for example, those in which the creditor sells at a discount obligations payable in more than four instalments. The Board has concluded that in any such trans­ action coming within its administrative enforce­ ment authority, where seller’s points or discounts were, in fact, passed along to the customer or buyer and the amount thereof was not disclosed as a finance charge, the Board will take such action as may be appropriate in the circumstances. How­ ever, it will not attempt to prescribe rules creating a presumption that all discounts or points are passed on to the customer or buyer and hence must be included in the finance charge in any particular class of transaction. On the other hand, the inclusion of seller’s points or discounts in the finance charge will be acceptable to the Board as a correct disclosure under Regulation Z. This position relates only to the Board’s ad­ ministrative enforcement procedures and it is not intended in any way to restrict or prejudice the rights of any customer or buyer to bring an action under sections 130 and 131 of the Act where he has reason to believe he is or was required to pay directly or indirectly a finance charge imposed directly or indirectly by the creditor of the trans­ action and the amount of that finance charge was not disclosed to him.

1 0 /2 3 /7 0 SECTION 226.407— CHARGES FOR MEMBERSHIP IN OPEN E N D CREDIT PLAN A credit card issuer charges the cardholder an annual fee for membership in the credit plan and for issuance of a credit card for use in conjunc­ tion with the plan. The payment of the fee is required as a condition of membership in the plan, whether or not the cardholder uses his card for the purpose of obtaining credit. The question arises whether these fees are finance charges under § 226.4(a) of Regulation Z. Since such fees are imposed as a qualification of membership in the plan and for the issuance of a credit card, and not as incident to or as a condition of any specific extension of credit, they do not fall within the definition of a “finance charge” under § 226.4(a) of Regulation Z. 8 /1 2 /7 1 SECTION 226.5 SECTION 226.506— DAILY PERIODIC RATE; COM PUTATION OF THE A N N U A L PERCENTAGE RATE Under §§ 226.5(a)(l)(ii), (3)(i), and (3)(ii), the quotient used in computing the annual percent­ age rate in open end credit accounts must be multiplied “by the number of billing cycles in a year”. The question arises as to the method which should be used to compute the annual percent­ age rate under those sections where a daily periodic rate (or rates) is used. In any open end credit account to which the provisions of §§ 226.5(a)(l)(ii) or 226.5(a)(3)(i) apply, where all or a portion of the finance charge is determined by the application of one or

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INTERPRETATIONS REGULATION Z more daily periodic rates, the annual percentage rate may be determined (1) by dividing the total finance charge by the average of daily balances and multiplying the quotient by the number of billing cycles in a year, or alternatively (2) by dividing the total finance charge by the sum of the daily balances and multiplying the quotient by 365.

In any open end credit account to which the provisions of § 226.5(a)(3)(ii) apply, where a portion of the finance charge is determined by application of one or more daily periodic rates, the phrase “sum of the balances” in footnote 5a shall also mean the “average of daily balances”. 6 /1 /7 3 SECTION 226.7 SECTION 226.702 is incorporated into section 226.7(c) effective June 1, 1973, and is revoked effective that date.

* SECTION 226.703— FIN A N C E CHARGE BASED ON A VERAG E DAILY BALANCE IN OPEN E N D CREDIT ACCOUNTS Section 226.7(b)(8) requires that periodic state­ ments for open end accounts shall disclose, among other things, “The balance on which the finance charge was computed, and a statement of how that balance was determined.” In some instances, creditors compute a finance charge on the aver­ age daily balance by application of a monthly periodic rate. In such case, this information is ade­ quately disclosed if the statement gives the amount of the average daily balance on which the finance charge was computed, and also states how the balance is determined. In other instances, the finance charge is computed on the balance each day by application of a daily periodic rate and such charges are accumulated and debited to the account in a single amount for the billing cycle. The question arises whether the periodic statement must show for each day of the billing cycle a bal­ ance on which a finance charge was computed. If a daily periodic rate is used, the balance to which it is applicable shall be stated as follows: (1) A balance for each day in the billing cycle; or (2) A balance for each day in the billing cycle on which the balance in the account changes; or (3) The sum of the daily balances during the billing cycle; or (4) The average daily balance during the billing cycle in which case the creditor shall state on the face of the periodic statement, its reverse side, or on an enclosed supplement wording to the effect that the average daily balance is or can be multi­ plied by the number of days in the billing cycle and the periodic rate applied to the product to determine the amount of the finance charge. 6 /2 1 /7 2 * Supersedes interpretation § 226.703 issued 5 /5 /6 9 .

SECTION 226.704 is incorporated into section 226.5(a)(3) effective June 1, 1973, and is revoked effective that date.

SECTION 226.705— OPEN E N D CREDIT— C H A N G E IN THE M ETHOD OF D ETERM INING THE BALANCE ON W HICH FIN A N C E CHARGES ARE COM PUTED The creditor of an open end credit account plan desires to change his method of determining the balance on which finance charges are computed from a method in which payments and credits made during the billing cycle are not deducted in determining such balance to a method in which such payments and credits are deducted in deter­ mining such balance. This change results in a reduction in finance charges to the customer, where full payment of the account is deferred. The question arises whether notice of such change is required to be sent to customers of open end credit accounts under § 2 26.7(e), since that sec­ tion also provides that prior notice is not required if the only change is a reduction in the “periodic rate or rates, or in any minimum, fixed, check service, transaction, activity, or similar charge applicable to the account.”

Where a creditor changes his method of deter­ mining the balance on which finance charges are computed from a method in which payments and credits made during the billing cycle are not de­ ducted in determining such balance, to a method in which such payments and credits are deducted

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REGULATION Z INTERPRETATIONS in determining such balance, § 226.7(e) requires no prior notice of such change in terms, provided no other changes in terms applicable to the ac­ count are made simultaneously which would re­ quire § 226.7(e) notification. 7 /2 9 /7 1 SECTION 226.706— OPEN E N D CREDIT— ALLOCATION OF PAYM ENTS Section 226.7(a)(2) provides that before the first transaction is made on any open end credit ac­ count, the creditor must disclose “the method of determining the balance upon which a finance charge may be imposed.” Section 226.7(b)(8) re­ quires the creditor to disclose on the periodic statement “the balance on which the finance charge was computed, and a statement of how that balance was determined.” The question is raised whether these provisions require a creditor to provide a description of the manner in which payments or other credits are applied to various portions of the balance or balances on which finance charges are computed.

In disclosing the method of determining the balance(s) upon which finance charges are com­ puted, it is not necessary to show the method of allocating payments or other credits. For example, explanation of the manner in which payments or credits may be applied to late charges, overdue balances, finance charges, insurance premiums or other portions of balances is not required. Sim­ ilarly, explanation of the method of allocating such payments between cash advance and pur­ chase portions of the account is not required. Such explanations in many cases involve lengthy and complex descriptions which may unduly com­ plicate disclosures.

Explanation of the allocation method may be made by creditors where it can be done in con­ formity with § 226.6(c) which authorizes addi­ tional information or explanations as long as they are not stated, utilized, or placed so as to mislead or confuse the customer or contradict, obscure, or detract attention from the required disclosures. 6 /2 1 /7 2 SECTION 226.707— DISCLOSURES— VARIABLE PERIODIC RATES Under the terms of some open end credit plans the periodic rates of finance charges and corre­ sponding 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). § 226.7(b)(6), § 226.7(e) and § 226.10(c)(4) in connection with such plans.

Where any creditor’s open end credit plan pro­ vides 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, provided 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 § 2 2 6 .7 (b )(5 ) and § 226.10 (c ) (4 ) may be complied with by similarly dis­ closing 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 com­ putations as specified in § 226.5(a) (1) (ii), § 226.5(a)(2), § 226.5(a)(3)(i) or § 226.5(a)(3)(H), as applicable, should be used. 1 1 /2 /7 2 SECTION 2 26.8 * SECTION 226.811— RENEW ALS OF NOTES Any renewal of an extension of credit provid­ ing for payment of the full principal sum on a specified date shall not be considered a refinanc­ ing under § 226.8(j), and no disclosures need be made in connection with such renewal, provided: (i) All disclosures required under this Part were made in connection with the original exten­ sion of credit or a prior renewal thereof; (ii) The amount of the renewal does not exceed the amount of the unpaid balance plus any ac­ crued and unpaid finance charge;

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INTERPRETATIONS REGULATION Z (iii) The annual percentage rate (or rates) previously disclosed is not increased; and (iv) The period for which renewal is made does not exceed by more than 4 days the period of the extension of credit for which disclosures were made.

In instances in which disclosures are required to be made and renewal is made by mail, the creditor may not know whether the customer will reduce his obligation by a payment on principal or, if reduced, the amount of that reduction. The question arises as to what disclosures should be made by mail to the customer in these circum­ stances.

If the creditor knows the amount of the prin­ cipal payment, all disclosures should be made on the basis of the resulting new amount financed. If, however, the creditor does not know whether the customer will reduce his original obligation, or if so, by how much, he should disclose on the assumption that there will be no reduction. In such circumstances, at the creditor’s option, he may make one or more additional disclosures based on one or more examples of graduated principal reduction. For example, if a single pay­ ment note for $1,000 at 7% is proposed to be renewed for $1,000 at 8% for 3 months, in addi­ tion to the other required disclosures, the creditor should disclose an amount financed of $1,000 with a finance charge of $20, and may, in addition, disclose that with a principal payment of $300 the amount financed would be $700 with a finance charge of $14, and with a principal payment of $500 the amount financed would be $500 with a finance charge of $10.

1 /2 8 /7 0 * Supersedes interpretation § 226.811 issued 8 /1 /6 9 SECTION 226.812— A DV AN CES U N D E R OPEN E N D REAL ESTATE MORTGAGES FOR A G R ICULTURAL PURPOSES Under § 226.8(p) disclosures are permitted in connection with certain extensions of credit for agricultural purposes which may involve advances under an open end real estate mortgage or simi­ lar lien. Section 226.8(j) in part treats advances for agricultural purposes under an open end real estate mortgage or similar lien. The question arises as to the respective application of these paragraphs to such advances.

If an extension of credit involving multiple ad­ vances, whether or not under an open end mort­ gage, meets the tests of § 226.8(p ), disclosures need only be made prior to consummation of the credit transaction and need not be made at the time of each individual advance, even though such advance for agricultural purposes may not meet the tests in § 226.8(j). Conversely, extensions of credit for agricultural purposes involving advances under an open end real estate mortgage or similar lien which do not meet the tests for disclosure under § 226.8(p) are subject to the relevant pro­ visions of § 226.8(j) dealing with such advances. 1 1 /6 /6 9 SECTION 226.813— DISCLOSURES ON M ULTIPLE A D V A N C E LOANS In connection with construction and other mul­ tiple advance loans under § 226.8 (i), which are payable in a single sum or permanently financed by the same creditor at maturity of the construc­ tion phase with interest only payable up to such maturity, and in which either the amount or date of an advance is not determinable, the question arises whether a method might be utilized to estimate the information to be disclosed under § 226.8(b)(2) and (3) and (d)(3). In such cases, at the creditor’s option, required information may be estimated and disclosed as follows:

(1) The following mathematical equations based upon assumed continuous advances may be utilized in estimating the amount of the interest component of the finance charge and the annual percentage rate by substituting the appropriate numerical amounts for the following symbols in the equations:

(i) Symbols L = Amount of loan commitment, r = Stated annual interest rate expressed as a decimal figure, n = Number of interest payments to be made to maturity, m = Number of interest periods (unitperiods) in 1 year.

P = Total amount of any prepaid finance charge under § 226.8(e).

B = Amount of any required deposit bal­ ance under § 226.8(e).

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REGULATION Z INTERPRETATIONS (ii) If interest is computed from the date of each advance on only the amounts advanced: Estimated annual percentage rate nrL + 2m P n(L 2P - 2B) nrL Estimated interest finance charge = -— 2m (iii) If interest is computed on the full amount of the commitment without regard for the dates of disbursements or actual amounts disbursed: Estimated annual percentage rate = 2nrL + 2mP n(L - 2P - 2B) nrL Estimated interest finance charge = m ( 2 ) If the equations under subdivision (ii) of paragraph (1) are utilized, the amounts of any required interest payments during the construc­ tion phase may be omitted in making the disclo­ sure required under § 2 2 6 .8 (b )(3 ); however, if the equations under subdivision (iii) of para­ graph (1) are utilized, then the amount of each scheduled interest payment shall be disclosed as required under § 2 2 6 .8 (b )(3 ). (3) In the case of a combination construction loan and permanent financing provided by the same creditor:

(i) The amount of interest finance charge to be paid prior to the due date of the first amorti­ zation payment shall be estimated as prescribed under subdivisions (ii) or (iii) of paragraph (1) as the case may be and shall be treated as pre­ paid finance charge for computational purposes; and (ii) Estimation of the annual percentage rate shall be made without regard to the number of interest only payments to be made, assuming the first payment period to be that interval between the date the finance charge begins to accrue and the date the first amortization payment is due. (4) Disclosures made in accordance with this interpretation, when made along with the other disclosures required under § 226.8(b) and (d), shall constitute “all other material disclosures required under this Part”

referred to under § 226.9(a):

Example I A $20,000 construction loan commitment on which the precise dates or amounts of advances are not determinable. The obligation bears a stated 6% interest rate and interest is to be paid monthly on the amounts advanced, and the total of the amounts advanced under the commitment plus any unpaid interest is due and payable at the end of nine months from the date the finance charge begins to accrue. There is a loan fee of 1% ($200), but there is no required deposit bal­ ance. Substituting these terms for the symbols, the equations become:

(9 X .06 X 20,000) + (2 X 12 X 200) 9 X [(20,000 - (2 X 200)] .0884 or 8.84% or 83A % estimated annual percentage rate.

9 X 0b X 20 000 ^50 or $450 estimated interest -------- —-------——:

- — = finance charge component of the finance charge.

If the terms stated in the example were changed so that interest would be computed on the full amount of the commitment from the date the finance charge begins to accrue without regard for the dates of disbursements or actual amounts of funds disbursed, the equations under (iii) above become:

(2 X 9 X .06 X 20,000) + (2 X 12 X 200) _ 9 X [(20,000 - (2 X 200)] .1497 or 14.97% or 15% estimated annual percent­ age rate.

900 or $900 estimated interest finance charge component of the finance charge. This inter­ est would be payable in 9 monthly payments of $100 each.

9 X .06 X 20,000 Example II A $20,000 construction loan followed by per­ manent financing in same amount. Six per cent interest. One point loan fee. Nine months to ma­ turity of construction phase. Nine months pay­ ments of interest only during construction phase. Twenty-year maturity on permanent financing to be amortized in 240 equal monthly payments in­ cluding interest and principal. From mortgage amortization tables: Amortization of a $20,000 6% 20-year loan in 240 equal monthly payments including interest and principal requires each monthly payment to be $143.29.

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INTERPRETATIONS REGULATION Z Total of 240 payments = 240 X $143.29 = $34,389.60 Subtract amount of loan principal $20,000.00 Interest finance charge on permanent financing $14,389.60 Add: Estimated interest finance charge on construction phase (pursuant to sub­ division (ii)) 450.00 Add: Loan fee 1 point 200.00 Estimated finance charge $15,039.60 (If the interest on the construction phase is computed on the full amount of the commitment for the full time to maturity without regard for the dates of disbursements or actual amounts dis­ bursed pursuant to subdivision (iii), the estimated interest finance charge for the construction phase would be $900.00 which would result in a total estimated finance charge of $15,489.60.) Loan fee 1 point prepaid finance charge $ 200.00 For computational purposes con­ sider interest to be paid on con­ struction phase as prepaid (not to be disclosed as prepaid) $ 450.00 Total amount treated as prepaid finance charge for computational purposes $ 650.00 Computational Disclosure Purposes Purposes Amount of loan $20,000 $20,000 Deduct total of esti­ mated finance charge treated as prepaid $ Deduct actual amount of prepaid finance charge $ Estimated amount fi­ nanced for computa­ tional purposes $19,350 Amount financed to be disclosed $19,800 Adjust first payment period (period of con­ struction loan plus period from maturity date of construction loan to due date of first amortization payment) by dividing the period of the construc­ tion loan by 2 and adding the period of time be­ tween the maturity date of the construction loan and the date the first amortization payment is due. 9 months divided by 2 = 4Vi months plus 1 month = SVi months From Appendix A (page A2) of Volume I of the Board’s Annual Percentage Rate Tables, read across to 5 months and on the line below opposite 15 days (Vi month) read + 9 .0. This adjustment should be added to the number of regular amorti­ zation payments to determine the number of pay­ ments in utilizing the Annual Percentage Rate Tables:

240 monthly payments + adjustment 9.0 = 249 Following the directions on page 1 of Volume I: Estimated finance charge $15,039.60 X 100 = $1,503,960 which should be divided by the estimated amount financed for computational purposes:

$1,503,960 19,350 = $77.72 estimated fi­ nance charge per $100 of estimated amount financed for computational purposes. Refer to page 309M of Volume I, read down number of payments column to 249; read across to 78.71 (which is nearest to $77.72 computed above), and read up to 6.25% which is the esti­ mated annual percentage rate to be disclosed. In the example where the interest on the con­ struction phase is computed on the full amount of the commitment without regard for the dates of advances or actual amounts advanced, the esti­ mated finance charge per $100 of amount financed is $81.96. On page 309M of Volume I, read down to the 249th payment line and across to 82.39 which is the nearest amount to $81.96, and read up to 6.50% which is the estimated annual percentage rate to be disclosed. 1 /2 8 /7 0 SECTION 226.814— PREMIUMS FOR IN SU R A N C E A D D E D TO A N EXISTING BALANCE Subsequent to the consummation of a consumer credit transaction the customer may wish to pur­ chase optional insurance in connection with the obligation. Typically, mortgage life and disability insurance may be offered to the customer at some date after consummation under a plan in which the lender will advance the amount of the pre­ mium due and add that amount to the existing unpaid balance of the obligation. Generally, each instalment on the original obligation paid during the period before the next premium is due will be

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REGULATION Z INTERPRETATIONS increased proportionately to liquidate the amount of the additional advance plus any finance charge. Additional advances are made automatically for renewal premiums as they become due unless the borrower requests discontinuance of the coverage. The question arises as to the required disclosures. In such cases the insurance agreement may be considered a single separate transaction, and the disclosures required under § 226.8, at the credi­ tor’s option, need be made only prior to> the time the agreement is executed and only with respect to the amount of the initial advance. For exam­ ple, a mortgage life and disability insurance plan in which the annual premium advanced was $145 repayable in 12 monthly instalments of $12.61 added to the regular monthly mortgage payments would be disclosed as an “amount financed” of $145, a “finance charge” of $6.32, and a “total of payments” of $151.32. Additional disclosures as applicable under § 226.8 would, of course, be made. If, as in some cases, only a portion of the advance is liquidated during the premium period with the remainder payable at the end of the mortgage contract, the creditor would likewise calculate the amount of finance charge which would accrue on the advance until paid in full. In some cases the advance is secured by a secu­ rity interest in real property which is used or ex­ pected to be used as the principal residence of the customer. In those cases the premium advance agreement is rescindable under § 226.9, and notice of the right of rescission provided in § 226.9(b) need only be given at the time the agreement is executed. Subsequent advances for renewal premiums are not subject to the right of rescission.

1 /2 8 /7 0 SECTION 226.815— DISCLOSURE FOR D E M A N D LOANS Section 226.8(b)(3) requires a creditor to dis­ close the number, amount and due dates or peri­ ods of payments scheduled to repay an extension of credit other than open end and, in appropriate cases, the total of payments. The question arises as to how these requirements should be met in the case of demand loans.

Section 226.4(g) provides that for the purpose of calculating the finance charge and annual per­ centage rate, demand loans are considered to have a one-half year maturity unless the obligation is alternatively payable upon a stated maturity, in which case the stated maturity shall be used. In order to comply with the requirements of § 226.8(b)(3), if no alternative maturity date is specified, the creditor need disclose only the due dates or periods of payments of all scheduled interest payments for the first one-half year. In such cases, the creditor need not disclose the num­ ber, amounts or total of payments or identify any balloon payment. Effective May 1, 1970, creditors shall disclose the fact that the obligation is pay­ able on demand.

If an alternative maturity date is specified, all disclosures required under § 2 2 6 .8 (b )(3 ) shall be made, using that date.

1 /2 8 /7 0 SECTION 226.816— M ORTGAGES WITH D E M A N D FEATURES In some cases real estate mortgages are written for a stated period, for example one year, with the provision that they shall be payable on de­ mand after expiration of that period, provided that until such demand is made the principal and interest shall be paid in scheduled periodic instal­ ments until paid in full. The obligation is thus payable according to a specified amortization schedule subject to the holder’s right to demand payment after the stated period. The question arises whether the creditor may make disclosures based on the specified amortiza­ tion schedule or whether disclosures must be made on the basis of the maturity established by the expiration of the stated period. In such cases the creditor may make disclo­ sures based on the specified amortization sched­ ule, provided he discloses clearly and conspicu­ ously that the obligation is payable on demand after the stated period together with the fact that disclosures are made on the basis of the specified amortization schedule. Otherwise, disclosures shall be based upon the earliest date demand for pay­ ment in full may be made under the terms of the mortgage showing the unpaid balance due at that time as a “balloon payment.”

The disclosure requirements of this interpreta­ tion shall become effective May 1, 1970. 1/28/70

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INTERPRETATIONS REGULATION Z SECTION 226.817— REDUCTION IN A N N U A L PERCENTAGE RATE Section 226.8(j) specifies that if any existing extension of credit is refinanced, such transac­ tion shall be considered a new transaction sub­ ject to the disclosure requirements of Regulation Z. The question arises as to whether a reduction in the annual percentage rate applicable to an existing extension of credit, when no other credit terms are changed, constitutes a refinancing under § 226.80).

When no other credit terms are changed, a reduction in the annual percentage rate applica­ ble to an existing extension of credit does not constitute a refinancing under § 226.8(j), and no disclosures are required.

3 /3 1 /7 0 SECTION 226.818— R E F U N D OF U N E A R N E D FIN A N C E CHARGE; PREPAY M ENT PENALTY Under § 2 2 6 .8 (b )(7 ) a creditor must provide 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 compu­ tation of any charge that may be deducted from the amount of any rebate. Section 2 2 6 .8 (b )(6 ) requires 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 pre­ computed finance charges involves a “prepayment penalty.” A second question concerns the dis­ closures required to identify the method of com­ puting any finance charge rebate. Section 2 2 6 .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, § 2 2 6 .8 (b )(7 ) is designed to encompass the disclosures necessary with regard to the prepay­ ment of an obligation involving precomputed fi­ nance charges which are included in the face amount of the obligation. Therefore, although in a precomputed obligation the finance charge re­ bate 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 con­ stitute a penalty charge for prepayment that must be described pursuant to § 2 2 6 .8 (b )(6 ). Section 2 2 6 .8 (b )(7 ) requires “identification”

of the rebate method used on precomputed con­ tracts. 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 statu­ tory provisions involve complex mathematical descriptions which generally cannot be condensed into simple accurate statements, and which if re­ peated at length on disclosure forms could de­ tract 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. 4 /3 0 /7 3 SECTION 226.819— PREPAID FIN A N C E CHARGES; A DD -O N S A N D DISCOUNTS Sections 2 2 6 .8 (c )(6 ), 2 2 6 .8 (d )(2 ) and 226.8 ( e ) (1 ) require that certain finance charges be disclosed as “prepaid finance charges.” They also require that such prepaid finance charges be ex­ cluded or deducted from the credit extended in arriving at the “amount financed.” The question arises whether add-on, discount or other pre­ computed finance charges which are reflected in the face amount of the debt instrument as part of the customer’s obligation, but which are ex­ cluded from the “amount financed,” must be labeled as “prepaid” finance charges. The concept of prepaid finance charges was adopted to insure that the “amount.financed” re­ flected only that credit of which the customer had the actual use.

Precomputed finance charges which are included in the face amount of the obligation are not the type contemplated by the “prepaid” finance charge disclosure concept. A l­ though such precomputed finance charges are not

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REGULATION Z INTERPRETATIONS to be included in the “amount financed,” they need not be regarded as finance charges “paid separately” or “withheld by the creditor from the proceeds of the credit extended” within the mean­ ing of § 226.8(e) to require labeling “prepaid” under §§ 2 2 6 .8 (c )(6 ) and 2 2 6 .8 (d )(2 ). They are “finance charges,” of course, to be disclosed under §§ 2 2 6 .8 (c )(8 ) and 2 2 6 .8 (d )(3 ). 8 /2 3 /7 3 SECTION 226.9 * SECTION 226.903— REFIN AN CING A ND INCREASING— DISCLOSURES A N D EFFECTS ON THE RIGHT OF RESCISSION In some cases the creditor of an obligation will refinance that obligation at the request of a cus­ tomer by permitting the customer to execute a new note, contract, or other document evidencing the transaction under the terms of which one or more of the original credit terms, including the maturity date of the obligation, are changed. Ex­ cept as provided in § 226.811, such refinancing constitutes a new transaction, and all disclosures required under § 226.8 must be made. The ques­ tion arises as to whether that transaction is sub­ ject to the right of rescission under § 226.9 where the obligation is already secured by a security interest in real property which is used or expected to be used as the principal residence of that customer.

If the amount of such new transaction does not exceed the amount of the unpaid balance plus any accrued and unpaid finance charge on the exisiting obligation, § 226.9 does not apply to the transaction.

If, however, such new transaction is for an increased amount, that is, for an amount in excess of the amount of the unpaid balance plus any accrued and unpaid finance charge on the exist­ ing obligation, § 226.9 applies to the transaction. However, such right of rescission applies only to such excess and does not affect the existing obli­ gation (or related security interest) for the un­ paid balance plus accrued unpaid finance charge. If a transaction is refinanced by a creditor other than the creditor of the existing obligation, the entire transaction is subject to § 226.9. 1 /2 8 /7 0 *Supersedes interpretation § 226.903 issued 6 /2 0 /6 9