6406. Interpretations of Regulation Z

FEDERAL RESERVE BANK OF NEW YORK Interpretations of Regulation Z [ C ircular No September - - - - - - in the Second Federal Reserve District: ro. 6406~| 19, 1969 Printed below is an excerpt from the Federal Register of September 18, containing the text of three interpretations, including a technical change in an interpretation issued previ­ ously, by the Board of Governors of the Federal Reserve System of provisions in its Truth in Lending Regulation Z. Additional copies of this circular will be furnished upon request. Alfred Hayes, President. Title 12— BANKS AND BANKING Chapter II— Federal Reserve System SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM [Reg. Z] PART 226— TRUTH IN LENDING Miscellaneous Interpretations Interpretation § 226.405 is amended to read as follows:

§ 226.405 Property insurance written in connection with a transaction----ob­ tained from or through the creditor. (a) Footnote 4 to § 226.4(a) (6) speci­ fies that a policy of insurance against loss or damage to property or liability arising out of its use is not considered to be “ written in connection with” a transaction when it “ * * * was not pur­ chased by the customer for the purpose of being used in connection with that extension of credit.” Therefore, when­ ever such a policy is purchased by the customer for the purpose of being used in connection with a specific extension of credit, it is insurance "written in con­ nection with” that transaction. (b) If the customer elects to purchase such insurance otherwise than from or through the creditor, the creditor is not required to disclose the cost of the insur­ ance or include the premium in the fi­ nance charge. However, if the cost of such insurance is to be financed through the creditor, the premiums must be in­ cluded in the “ amount financed” and dis­ closed under § 226.8 (c) (4) or (d) (1), as the case may be.

(Interprets and applies 15 U.S.C. 1605) § 226.504 Treatment of “ pick-up pay­ ment” in an installment contract. (a) In some instances involving an in­ stallment contract arising from a credit sale, the purchaser may not pay the full amount of the required downpayment at the time he signs the contract or other­ wise enters into the credit transaction. In such cases, the creditor may include in the installment contract or accept a separate obligation for the unpaid por­ tion of the downpayment, commonly called a “ pick-up payment,” the amount of which usually carries no finance charge and it is to be paid on or before a specified date independent of the other scheduled payments.

(b) The question arises whether the “ pick-up paym ent” must be treated as part of the “am ount financed” for pur­ poses of disclosure and determination of the “ annual percentage rate” or whether It may be treated as a deferred portion of the downpayment.

(c) In determining the “ amount fi­ nanced” the creditor may exclude the amount of the “ pick-up payment” pro­ vided th at:

(1) The amount of the finance charge applicable to the transaction does not exceed the amount that would have been imposed had the required downpayment been paid in full upon consummation of the transaction; and (2) The due date of the “pick-up pay­ m ent” is not later than the due date of the second payment otherwise scheduled. (d) In making the disclosures required under § 226.8(b) (3 ), if such “ pick-up paym ent” is more than twice the amount of an otherwise regularly scheduled equal payment, the creditor shall state the con­ ditions, if any, under which such “ pick­ up payment” may be refinanced if not paid when due; and such “ pick-up pay­ ment” may be identified using that term or the term “ balloon payment.” (Interprets and applies 15 U.S.C. 1606) § 226.505 Application of the minor ir­ regularities provisions in determin­ ing the amount o f the finance charge. (a) Some creditors calculate finance charges in a credit transaction on the basis of predetermined percentage rate or rates, e.g., 1 percent per month on the unpaid balances. Determination of the amount of the finance charge is fairly routine for these creditors if the con ­ tracts are written for regular payments at regular intervals.

However, many times the first payment may be irregular either in amount or payment period, or both, especially in those instances where creditors require payments to fall due on fixed dates or those who are paid by means of payroll deductions. The minor irregularities provisions of § 226.5(d) of the Regulation and § 226.503 of the inter­ pretations to Regulation Z, which per­ tain to the determination of the annual percentage rate, also apply to the de­ termination of the finance charge. For convenient reference, the applicable pro­ visions of §§ 226.5(d) and 226.503 as they apply to the determination of the finance charge are set forth below. (b ) In determining the finance charge, a creditor may, at his option, consider the payment irregularities set forth be­ low in subparagraphs (1) and (2) of this paragraph as if they were regular in amount or time, as applicable, provided that the transaction to which they relate is otherwise payable in equal installments scheduled at equal intervals. (1) If the period from the date on which the finance charge begins to ac­ crue and the date the final payment is due is not less than 3 months in the case of weekly payments, 6 months in the case of biweekly or semimonthly pay­ ments, or 1 year in the case of monthly payments either or both of the following: (1) The amount of one payment other than any downpayment is not more than 50 percent greater nor 50 percent less than the amount of a regular payment; or (ii) The interval between the date on which the finance charge begins to ac­ crue and the date the first payment is due is not less than 5 nor more than 12 days for an obligation otherwise payable in weekly installments, not less than 10 nor more than 25 days for an obligation otherwise payable in biweekly or semi­ monthly installments, or not less than 20 nor more than 50 days for an obli­ gation otherwise payable in monthly installments.

(2) If the period from the date on which the finance charge begins to ac­ crue and the date the final payment is due is less than 3 months in the case of weekly payments, 6 months in the case of biweekly or semimonthly payments, or 1 year in the case of monthly payments, either or both of the following: (i) The amount o f one payment other than any downpayment is not more than 25 percent greater nor 25 percent less than the amount of a regular payment; or (ii) The interval between the date on which the finance charge begins to ac­ crue and the date the first payment is due is not less than 6 nor more than 10 days for an obligation otherwise payable in weekly installments, not less than 12 nor more than 21 days for an obligation otherwise payable in biweekly or semi­ monthly installments, or not less than 25 nor more than 42 days for an obliga­ tion otherwise payable in monthly installments.

(e) For the purposes of § 226.8<b) (3) in disclosing the number, amount and due dates or periods of payments sched­ uled to repay the indebtedness and the “ total of payments,” the creditor may treat such irregular payments or pay­ ment periods, or both, as if they were regular. If the creditor so elects, he may indicate the exact amount or payment period involved in the minor irregularity. (Interprets and applies to 15 U.S.C. 1605) Dated at Washington, D.C., the 11th day of September 1969.

By order of the Board of Governors. [seal] R obert P. F orrestal, Assistant Secretary.

[F.R. Doc. 69-11105; Filed, Sept. 17, 1969; 8:45 a.m.] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis