Revised Regulation Z, Regulation Z Commentary, Regulation S, Regulation C, and Regulation BB Pamphlets; Slip-Sheet Amendments to Regulations E, O, and CC, Notice 95-92

Agency: Federal Reserve
Date: Sept. 29, 1995
Type: interpretation
Source: fraser.stlouisfed.org/title/district-notices-federal-reserve-bank-dall
Pages: 412
PDF: Original document (PDF)

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F e d e r a l R e s e r v e B a n k OF DALLAS DALLAS, TEXAS 75265-5906 Notice 95-92 TO:

The Chief Executive Officer of each financial institution in the Eleventh Federal Reserve District SUBJECT Revised Regulation Z, Regulation Z Commentary, Regulation S, Regulation C, and Regulation BB Pamphlets; Slip-sheet Amendments to Regulations E, O, and CC DETAILS The Board of Governors of the Federal Reserve System has published revised pamphlets for Regulation Z, effective March 1995, the Official Staff Commentary on Regu lation Z (Truth in Lending), effective April 1995, Regulation S (Reimbursement for Providing Final Records; Recordkeeping Requirements for Certain Financial Records), effective Janu ary 1996, Regulation C (Home Mortgage Disclosure), effective May 1995, and Regulation BB (Community Reinvestment), effective July 1995.

In addition, the Board has issued amendments in slip-sheet form to Regulation E (Electronic Fund Transfers), effective April 1995, Regulation O (Loans to Executive Offi cers, Directors, and Principal Shareholders of Member Banks), For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. R O B E R T D. M c T E E R , J R . P R E S I D E N T A N D C H I E F E X E C U T I V E O F F I C E R September 29, 1995 This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])

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- 2 - ENCLOSURES effective April 1995 and July 1995, and Regulation CC (Availability of Funds and Collection of Checks), effective October 1994.

The revised pamphlets and the amendment slip sheets are enclosed and should be inserted in your Regulations binders.

Regulation Z commentary, Regulation C, or Regulation E, please contact Eugene Coy at (214) 922-6201. For more information regarding Regulation S, please contact James Dean at (214) 922-6237. For more information regarding Regulation BB, please contact Gloria Vasquez Brown at (214) 922-5266. For more information regarding Regulation O, please contact Jane Schmoker at (214) 922-5101. For more information regarding Regulation CC, please contact Terry Campbell, (214) 922-6603, at the Dallas Office; Eloise Guinn, (915) 521-8201, at the El Paso Office; Luke Richards, (713) 652-1544, at the Houston Office; or Herb Barbee, (210) 978-1402, at the San Antonio Office. For additional copies of this Bank’s notice, the revised pamphlets, or the slip sheets, please contact the Public Affairs Department at (214) 922-5254. MORE INFORMATION For more information regarding Regulation Z, Sincerely yours,

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Board of Governors of the Federal Reserve System Regulation Z Truth in Lending 12 CFR 226; as amended effective March 22, 1995

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Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank of the Federal Reserve District in which the inquiry arises. July 1995

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Contents Page Subpart A—General Section 226.1—Authority, purpose, coverage, organization, enforcement and liability.................................................. (a) Authority............................................. (b) Purpose................................................ (c) Coverage............................................. (d) Organization ..................................... (e) Enforcement and liability ............... Section 226.2—Definitions and rules of construction.................................................. (a) Definitions.......................................... (b) Rules of construction....................... Section 226.3—Exempt transactions............. (a) Business, commercial, agricultural, or organizational cred it.................................................. (b) Credit over $25,000 not secured by real property or a dwelling. . . . (c) Public utility credit........................ (d) Securities or commodities accounts............................................. (e) Home fuel budget plan s.................. (f) Student loan program s.................... Section 226.4—Finance charge.................... (a) Definition....................................... (b) Examples of finance charges.......... (c) Charges excluded from the finance charge................................... (d) Insurance......................................... (e) Certain security-interest charges . .

(f) Prohibited offsets.......................... Subpart B—Open-End Credit Section 226.5—General disclosure requirements................................................ (a) Form of disclosures..................... (b) Time of disclosures ..................... (c) Basis of disclosures and use of estimates............................................. (d) Multiple creditors; multiple consumers........................................... (e) Effect of subsequent events............. Section 226.5a—Credit and charge card applications and solicitations.................... (a) General rules...................................... Page (b) Required disclosures.......................... (c) Direct-mail applications and solicitations........................................ 9 (d) Telephone applications and solicitations........................................ 9 (e) Applications and solicitations made available to general public.................................................. 9 (f) Special charge card rule—card issuer and person extending credit not the same person............ (g) Balance-computation methods defined............................................. ^ Section 226.5b—Requirements for ^ home-equity p la n s.................................... (a) Form of disclosures........................ (b) Time of disclosures........................ ^ (c) Duties of third parties..................... (d) Content of disclosures..................... (e) Brochure............................................ ^ (f) Limitations on home-equity plans ................................................ (g) Refund of fees.................................. ^ Section 226.6—Initial disclosure statement .................................................... (a) Finance chaige.................................. ^ (b) Other charges .................................. (c) Security interests............................. (d) Statement of billing rights.............. (e) Home-equity plan information . . . ^ Section 226.7—Periodic statement.

(a) Previous balance ............................. (b) Identification of transactions........... (c) C redits.............................................. (d) Periodic rates.................................... (e) Balance on which finance charge com puted............................ (f) Amount of finance charge.............. (g) Annual percentage ra te ................... (h) Other charges ................................. (i) Closing date of billing cycle; new balance................................... (j) Free-ride period................................ (k) Address for notice of billing errors................................................ Section 226.8—Identification of transactions.................................................

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Contents Page (a) Sale credit......................................... (b) Nonsale credit................................. Section 226.9—Subsequent disclosure requirements............................................. (a) Furnishing statement of billing rights............................................... (b) Disclosures for supplemental credit devices and additional features............................................. (c) Change in terms ............................ (d) Finance charge imposed at time of transaction................................... (e) Disclosures upon renewal of credit or charge c a r d .................... (f) Change in credit card account insurance provider......................... Section 226.10—Prompt crediting of payments .................................................. (a) General rule ................................... (b) Specific requirements for payments.......................................... (c) Adjustment of account.................. Section 226.11—Treatment of credit balances..................................................... Section 226.12—Special credit card provisions.................................................. (a) Issuance of credit cards ............... (b) Liability of cardholder for unauthorized use ............................ (c) Right of cardholder to assert claims or defenses against card issuer............................................... (d) Offsets by card issuer prohibited........................................ (e) Prompt notification of returns and crediting of refunds............... (f) Discounts; tie-in arrangements . . . (g) Relation to Electronic Fund Transfer Act and Regulation E . 2 1 Section 226.13—Billing-eiror resolution (a) Definition of billing erro r............. (b) Billing-error notice......................... (c) Time for resolution; general procedures........................................ (d) Rules pending resolution............... (e) Procedures if billing error occurred as asserted...................... (f) Procedures if different billing error or no billing error occurred........................................... Page (g) Creditor’s rights and duties after resolution........................................ (h) Reassertion of billing erro r............ (i) Relation to Electronic Fund Transfer Act and Regulation E Section 226.14— Determination of annual percentage r a te ............................ (a) General r u le .................................... (b) Annual percentage rate for section 226.5a and 226.5b disclosures, for initial disclosures and for advertising purposes........................................... (c) Annual percentage rate for periodic statements......................... (d) Calculations where daily periodic rate applied...................... Section 226.15—Right of rescission............ (a) Consumer’s right to rescind........... (b) Notice of right to rescind.............. (c) Delay of creditor’s performance (d) Effects of rescission........................ (e) Consumer’s waiver of right to rescind............................................. (0 Exempt transactions........................ Section 226.16—Advertising........................ (a) Actually available term s................ (b) Advertisement of terms that require additional disclosures . . . . (c) Catalogs and multiple-page advertisements................................. (d) Additional requirements for home-equity plans ......................... Subpart C—Closed-End Credit Section 226.17—General disclosure requirements............................................. (a) Form of disclosures........................ (b) Time of disclosures........................ (c) Basis of disclosures and use of estimates........................................... (d) Multiple creditors; multiple consumers........................................ (e) Effect of subsequent events........... (0 Early disclosures............................. (g) Mail or telephone orders—delay in disclosures................................... (h) Series of sales—delay in disclosures........................................ (i) Interim student credit extensions . Section 226.18—Content of disclosures

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Contents Page Page (a) Creditor ........................................ . (d) Catalogs and multiple-page (b) Amount financed......................... . advertisements.............................. (c) Itemization of amount financed .

SubDart D—Miscellaneous (d) Finance charge.............................. . (e) Annual percentage ra te ............... . Section 226.25—Record retention.......... . (f) Variable r a te ................................. . (a) General rule ................................. . (g) Payment schedule......................... . (b) Inspection of records .................. . (h) Total of payments ...................... . Section 226.26—Use of annual (i) Demand feature............................ . percentage rate in oral disclosures . . . . CD Total sale p ric e ............................ . (a) Open-end credit........................... (k) Prepayment................................... . (b) Closed-end credit......................... . (0 Late payment................................. . Section 226.27—Spanish-language (m) Security interest............................ . disclosures................................................ . (n) Insurance ........................................ . Section 226.28—Effect on state laws . . . . (o) Certain security-interest charges .

(a) Inconsistent disclosure (P) Contract reference ...................... . requirements ................................. (q) Assumption policy....................... . (b) Equivalent disclosure (r) Required deposit......................... . requirements ................................. Section 226.19—Certain residential (c) Request for determination.......... . mortgage transactions........................... . (d) Special rule for credit and (a) Time of disclosure...................... . charge cards ................................. . (b) Certain variable-rate transactions .

Section 226.29—State exemptions.......... . Section 226.20—Subsequent disclosure (a) General rule ................................ requirements.......................................... . (b) Civil liability................................ . (a) Refinancings................................. . (c) Applications................................... . (b) Assumptions................................. . Section 226.30—Limitation on rates . . .,. (c) Variable-rate adjustments............. . SubDart E—Soecial Rules for Certain Home Section 226.21—Treatment of credit balances.................................................. . Mortgage Transactions Section 226.22—Determination of Section 226.31—General rules ..............., . annual percentage r a te ......................... . (a) Relation to other subparts.........., . (a) Accuracy of annual percentage (b) Form of disclosure...................... , . rate ................................................ . (c) Timing of disclosure...................., . (b) Computation tools ...................... . (d) Basis of disclosures and use of (c) Single add-on rate transactions. . . , .

(d) Certain transactions involving (e) Multiple creditors; multiple ranges of balances...................... . consumers..................................... . . Section 226.23—Right of rescission .

(f) Effect of subsequent events . . . . . (a) Consumer’s right to rescind .

(g) Accuracy of annual percentage (b) Notice of right to rescind.......... . . .

Section 226.32—Requirements for (d) Effects of rescission.................... . certain closed-end home mortgages . . . (e) Consumer’s waiver of right to (a) Coverage......................................... . rescind........................................... . (b) Definitions................................... . . (f) Exempt transactions.................... . (c) Disclosures................................. . . Section 226.24—Advertising.................... . (d) Limitations ................................. . . (a) Actually available term s............. . (e) Prohibited acts and practices . . . . (b) Advertisement of rate of finance Section 226.33—Requirements for charge............................................. . reverse mortgages .............................. . . (c) Advertisement of terms that (a) Definition................................... . . require additional disclosures . . . . (b) Content of disclosures............... iii

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Contents Page (c) Projected total cost of credit . . . . Appendix A—Effect on state la w s .......... Appendix B—State exemptions.................. Appendix C—Issuance of staff interpretations.......................................... Appendix D—Multiple-advance construction loans ................................... Appendix E—Rules for card issuers that bill on a transaction-bytransaction basis........................................ Appendix F—Annual percentage rate computations for certain open-end credit plans................................................ Appendix G—Open-end model forms and clauses............................................... Appendix H—Closed-end model forms and clauses............................................... Page Appendix I—Federal enforcement agencies..................................................... Appendix J—Annual percentage rate computations for closed-end credit transactions................................................ Appendix K—Total-annual-loan-cost rate computations for reverse-mortgage transactions................................................ Appendix L—Assumed loan periods for computations of total-annual-loan-cost rates............................................................ TRUTH IN LENDING A C T............... 99 COMPETITIVE EQUALITY BANKING ACT SECTION 1204 . .

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Regulation Z Truth in Lending 12 CFR 226; as amended effective March 22, 1995 SUBPART A—GENERAL SECTION 226.1—Authority, Purpose, Coverage, Organization, Enforcement and Liability (a) Authority. This regulation, known as Reg ulation Z, is issued by the Board of Governors of the Federal Reserve System to implement the federal Truth in Lending and Fair Credit Billing Acts, which are contained in title I of the Consumer Credit Protection Act, as amended (15 USC 1601 et seq.). This regula tion also implements title XII, section 1204 of the Competitive Equality Banking Act of 1987 (Pub. L. 100-86, 101 Stat. 552). Informationcollection requirements contained in this regu lation have been approved by the Office of Management and Budget under the provisions of 44 USC 3501 et seq. and have been as signed OMB No. 7100-0199.

(b) Purpose. The purpose of this regulation is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. The regulation also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer’s principal dwelling, regulates certain credit card prac tices, and provides a means for fair and timely resolution of credit billing disputes. The regu lation does not govern charges for consumer credit. The regulation requires a maximum in terest rate to be stated in variable-rate con tracts secured by the consumer’s dwelling. It also imposes limitations on home-equity plans that are subject to the requirements of section 226.5b and mortgages that are subject to the requirements of section 226.32. (c) Coverage.

(1) In general, this regulation applies to each individual or business that offers or extends credit when four conditions are met: (i) the credit is offered or extended to consumers; (ii) the offering or extension of credit is done regularly;' (iii) the credit is subject to a finance charge or is payable by a written agreement in more than four in stallments; and (iv) the credit is primarily for personal, family, or household purposes. (2) If a credit card is involved, however, certain provisions apply even if the credit is not subject to a finance charge, or is not payable by a written agreement in more than four installments, or if the credit card is to be used for business purposes. (3) In addition, certain requirements of sec tion 226.5b apply to persons who are not creditors but who provide applications for home-equity plans to consumers. (d) Organization. The regulation is divided into subparts and appendices as follows: (1) Subpart A contains general information. It sets forth: (i) the authority, purpose, cov erage, and organization of the regulation; (ii) the definitions of basic terms; (iii) the transactions that are exempt from coverage; and (iv) the method of determining the fi nance charge.

(2) Subpart B contains the rules for openend credit. It requires that initial dis closures and periodic statements be pro vided, as well as additional disclosures for credit and charge card applications and so licitations and for home-equity plans subject to the requirements of sections 226.5a and 226.5b, respectively. It also describes spe cial rules that apply to credit card transac tions, treatment of payments and credit bal ances, procedures for resolving credit billing errors, annual percentage rate calcu lations, rescission requirements, and adver tising rules.

(3) Subpart C relates to closed-end credit. It contains rules on disclosures, treatment of credit balances, annual percentage rate cal culations, rescission requirements, and advertising.

(4) Subpart D contains rules on oral disclo sures, Spanish-language disclosure in Puerto The meaning of “regularly” is explained in the defini tion of “creditor” in section 226.2(a).

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§ 226.1 Regulation Z Rico, record retention, effect on state laws, state exemptions, and rate limitations. (5) Subpart E relates to mortgage transac tions covered by section 226.32 and reverse-mortgage transactions. It contains rules on disclosures, fees, and total-annualloan-cost rates.

(6) Several appendices contain information such as the procedures for determinations about state laws, state exemptions and issu ance of staff interpretations, special rules for certain kinds of credit plans, a list of enforcement agencies, and the rules for computing annual percentage rates in closed-end credit transactions and totalannual-loan-cost rates.

(e) Enforcement and liability. Section 108 of the act contains the administrative enforce ment provisions. Sections 112, 113, 130, 131, and 134 contain provisions relating to liability for failure to comply with the requirements of the act and the regulation. Section 1204(c) of title XII of the Competitive Equality Banking Act of 1987, Pub. L. No. 100-86, 101 Stat. 552, incorporates by reference administrative enforcement and civil liability provisions of sections 108 and 130 of the act. SECTION 226.2—Definitions and Rules of Construction (a) Definitions. For puiposes of this regula tion, the following definitions apply: (1) “Act" means the Truth in Lending Act (15 USC 1601 et seq.).

(2) “Advertisement" means a commercial message in any medium that promotes, di rectly or indirectly, a credit transaction. (3) [Reserved] (4) “Billing cycle”

or “cycle" means the interval between the days or dates of regu lar periodic statements. These intervals shall be equal and no longer than a quarter of a year. An interval will be considered equal if the number of days in the cycle does not vary more than four days from the regular day or date of the periodic statement. (5) “Board” means the Board of Governors of the Federal Reserve System. 2 [Footnote reserved] (6) “Business day” means a day on which a creditor’s offices are open to the public for carrying on substantially all of its busi ness functions. However, for purposes of rescission under sections 226.15 and 226.23, the term means all calendar days except Sundays and the legal public holi days specified in 5 USC 6103(a), such as New Year’s Day, Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day. (7) “Card issuer" means a person that is sues a credit card or that person’s agent with respect to the card.

(8) “Cardholder" means a natural person to whom a credit card is issued for con sumer credit purposes, or a natural person who has agreed with the card issuer to pay consumer credit obligations arising from the issuance of a credit card to another natural person. For purposes of section 226.12(a) and (b), the term includes any person to whom a credit card is issued for any pur pose, including business, commercial, or ag ricultural use, or a person who has agreed with the card issuer to pay obligations aris ing from the issuance of such a credit card to another person.

(9) “Cash price” means the price at which a creditor, in the ordinary course of busi ness, offers to sell for cash the property or service that is the subject of the transaction. At the creditor’s option, the term may in clude the price of accessories, services re lated to the sale, service contracts and taxes and fees for license, title, and registration. The term does not include any finance charge.

(10) “Closed-end credit” means consumer credit other than “open-end credit” as de fined in this section.

(11) “Consumer” means a cardholder or a natural person to whom consumer credit is offered or extended. However, for purposes of rescission under sections 226.15 and 226.23, the term also includes a natural per son in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest.

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Regulation Z § 226.2 (12) “Consumer credit” means credit of fered or extended to a consumer primarily for personal, family, or household purposes. (13) “Consummation” means the time that a consumer becomes contractually obligated on a credit transaction.

(14) “Credit” means the right to defer pay ment of debt or to incur debt and defer its payment.

(15) “Credit card” means any card, plate, coupon book, or other single credit device that may be used from time to time to ob tain credit. “Charge card” means a credit card on an account for which no periodic rate is used to compute a finance charge. (16) “Credit sale” means a sale in which the seller is a creditor. The term includes a bailment or lease (unless terminable without penalty at any time by the consumer) under which the consumer— (i) Agrees to pay as compensation for use a sum substantially equivalent to, or in excess of, the total value of the prop erty and services involved; and (ii) Will become (or has the option to become), for no additional consideration or for nominal consideration, the owner of the property upon compliance with the agreement.

(17) “Creditor" means:

(i) A person (A) who regularly extends consumer credit3 that is subject to a fi nance charge or is payable by written agreement in more than four installments (not including a downpayment), and (B) to whom the obligation is initially pay able, either on the face of the note or contract, or by agreement when there is no note or contract.

(ii) For purposes of sections 226.4(c) (8)(Discounts), 226.9(d) (Finance Charge Imposed at Time of Transaction), and A person regularly extends consumer credit only if it extended credit (other than credit subject to the require ments of section 226.32) more than 25 times (or more than 5 times for transactions secured by a dwelling) in the pre ceding calendar year. If a person did not meet these numer ical standards in the preceding calendar year, the numerical standards shall be applied to the current calendar year. A person regularly extends consumer credit if, in any 12month period, the person originates more than one credit extension that is subject to the requirements of section 226.32 or one or more such credit extensions through a mortgage broker.

226.12(e) (Prompt Notification of Returns and Crediting of Refunds), a person that honors a credit card.

(iii) For purposes of subpart B, any card issuer that extends either open-end credit or credit that is not subject to a finance charge and is not payable by written agreement in more than four installments. (iv) For purposes of subpart B (except for the credit and charge card disclosures contained in sections 226.5a and 226.9(e) and (f), the finance-charge disclosures contained in sections 226.6(a) and 226.7(d) through (g) and the right of re scission set forth in section 226.15) and subpart C, any card issuer that extends closed-end credit that is subject to a fi nance charge or is payable by written agreement in more than four installments. (18) “Downpayment” means an amount, in cluding the value of any property used as a trade-in, paid to a seller to reduce the cash price of goods or services purchased in a credit sale transaction. A deferred portion of a downpayment may be treated as part of the downpayment if it is payable not later than the due date of the second other wise regularly scheduled payment and is not subject to a finance charge. (19) “Dwelling" means a residential struc ture that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.

(20) “Open-end credit” means consumer credit extended by a creditor under a plan in which— (i) the creditor reasonably contemplates repeated transactions;

(ii) the creditor may impose a finance charge from time to time on an outstand ing unpaid balance; and (iii) the amount of credit that may be ex tended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

(21) “Periodic rate” means a rate of fi nance charge that is or may be imposed by

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§ 226.2 Regulation Z a creditor on a balance for a day, week, month, or other subdivision of a year. (22) “Person” means a natural person or an organization, including a corporation, partnership, proprietorship, association, co operative, estate, trust, or government unit. (23) “Prepaid finance charge" means any finance charge paid separately in cash or by check before or at consummation of a trans action, or withheld from the proceeds of the credit at any time.

(24) “Residential mortgage transaction” means a transaction in which a mortgage, deed of trust, purchase money security in terest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the con sumer’s principal dwelling to finance the acquisition or initial construction of that dwelling.

(25) “Security interest" means an interest in property that secures performance of a consumer credit obligation and that is rec ognized by state or federal law. It does not include incidental interests such as interests in proceeds, accessions, additions, fixtures, insurance proceeds (whether or not the creditor is a loss payee or beneficiary), pre mium rebates, or interests in after-acquired property. For purposes of disclosure under sections 226.6 and 226.18, the term does not include an interest that arises solely by operation of law. However, for purposes of the right of rescission under sections 226.15 and 226.23, the term does include interests that arise solely by operation of law. (26) “State" means any state, the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States.

(b) Rules o f construction. For purposes of this regulation, the following rules of construction apply:

(1) Where appropriate, the singular form of a word includes the plural form and plural includes singular.

(2) Where the words “obligation” and “transaction” are used in this regulation, they refer to a consumer credit obligation or transaction, depending upon the context. Where the word “credit” is used in this regulation, it means “consumer credit” un less the context clearly indicates otherwise. (3) Unless defined in this regulation, the words used have the meanings given to them by state law or contract. (4) Footnotes have the same legal effect as the text of the regulation. SECTION 226.3—Exempt Transactions This regulation does not apply to the following:4 (a) Business, commercial, agricultural, or or ganizational credit.

(1) An extension of credit primarily for a business, commercial or agricultural purpose.

(2) An extension of credit to other than a natural person, including credit to govern ment agencies or instrumentalities. (b) Credit over $25,000 not secured by real property or a dwelling. An extension of credit not secured by real property, or by personal property used or expected to be used as the principal dwelling of the consumer, in which the amount financed exceeds $25,000 or in which there is an express written commitment to extend credit in excess of $25,000. (c) Public utility credit. An extension of credit that involves public utility services pro vided through pipe, wire, other connected fa cilities, or radio or similar transmission (in cluding extensions of such facilities), if the charges for service, delayed payment, or any discounts for prompt payment are filed with or regulated by any government unit. The fi nancing of durable goods or home improve ments by a public utility is not exempt. (d) Securities or commodities accounts. Trans actions in securities or commodities accounts in which credit is extended by a broker-dealer registered with the Securities and Exchange Commission or the Commodity Futures Trad ing Commission.

‘ The provisions in sections 226.12(a) and (b) governing the issuance of credit cards and the liability for their unau thorized use apply to all credit cards, even if the credit cards are issued for use in connection with extensions of credit that otherwise are exempt under this section.

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Regulation Z § 226.4 (e) Home fuel budget plans. An installment agreement for the purchase of home fuels in which no finance charge is imposed. (f) Student loan programs. Loans made, in sured, or guaranteed pursuant to a program authorized by Title IV of the Higher Educa tion Act of 1965 (20 USC 1070 et seq.). SECTION 226.4— Finance Charge (a) Definition. The finance charge is the cost of consumer credit as a dollar amount. It in cludes any charge payable directly or indi rectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction. (b) Examples o f finance charges. The finance charge includes the following types of charges, except for charges specifically ex cluded by paragraphs (c) through (e) of this section:

(1) Interest, time price differential, and any amount payable under an add-on or dis count system of additional charges. (2) Service, transaction, activity, and carry ing charges, including any charge imposed on a checking or other transaction account to the extent that the charge exceeds the charge for a similar account without a credit feature.

(3) Points, loan fees, assumption fees, finder’s fees, and similar charges. (4) Appraisal, investigation, and credit re port fees.

(5) Premiums or other charges for any guarantee or insurance protecting the credi tor against the consumer’s default or other credit loss.

(6) Charges imposed on a creditor by an other person for purchasing or accepting a consumer’s obligation, if the consumer is required to pay the charges in cash, as an addition to the obligation, or as a deduction from the proceeds of the obligation. (7) Premiums or other charges for credit life, accident, health, or loss-of-income in surance, written in connection with a credit transaction.

(8) Premiums or other charges for insur ance against loss of or damage to property, or against liability arising out of the owner ship or use of property, written in connec tion with a credit transaction. (9) Discounts for the purpose of inducing payment by a means other than the use of credit.

(c) Charges excluded from the finance charge. The following charges are not finance charges: (1) Application fees charged to all appli cants for credit, whether or not credit is ac tually extended.

(2) Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.

(3) Charges imposed by a financial institu tion for paying items that overdraw an ac count, unless the payment of such items and the imposition of the charge were pre viously agreed upon in writing. (4) Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis.

(5) Seller’s points.

(6) Interest forfeited as a result of an inter est reduction required by law on a time de posit used as security for an extension of credit.

(7) The following fees in a transaction se cured by real property or in a residential mortgage transaction, if the fees are bona fide and reasonable in amount: (i) Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.

(ii) Fees for preparing deeds, mortgages, and reconveyance, settlement, and similar documents.

(iii) Notary, appraisal, and credit-report fees.

(iv) Amounts required to be paid into es crow or trustee accounts if the amounts would not otherwise be included in the finance charge.

(8) Discounts offered to induce payment for a purchase by cash, check, or other means, as provided in section 167(b) of the act.

(d) Insurance.

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§ 226.4 Regulation Z (1) Premiums for credit life, accident, health, or loss-of-income insurance may be excluded from the finance charge if the fol lowing conditions are met:

(i) The insurance coverage is not re quired by the creditor, and this fact is disclosed.

(ii) The premium for the initial term of insurance coverage is disclosed. If the term of insurance is less than the term of the transaction, the term of insurance also shall be disclosed. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions by mail or telephone under section 226.17(g), and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage.

(iii) The consumer signs or initials an af firmative written request for the insurance after receiving the disclosures specified in this paragraph. Any consumer in the transaction may sign or initial the request.

(2) Premiums for insurance against loss of or damage to property, or against liability arising out of the ownership or use of prop erty,5 may be excluded from the finance charge if the following conditions are met: (i) The insurance coverage may be ob tained from a person of the consumer’s choice,6 and this fact is disclosed. (ii) If the coverage is obtained from or through the creditor, the premium for the initial term of insurance coverage shall be disclosed. If the term of insurance is less than the term of the transaction, the term of insurance shall also be disclosed. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transac tions by mail or telephone under section 226.17(g), and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebted ness subject to coverage.

’ This includes single interest insurance if the insurer waives all right of subrogation against the consumer. A creditor may reserve the right to refuse to accept, for reasonable cause, an insurer offered by the consumer. (e) Certain security-interest charges. If item ized and disclosed, the following charges may be excluded from the finance charge: (1) Taxes and fees prescribed by law that actually are or will be paid to public offi cials for determining the existence of or for perfecting, releasing, or satisfying a security interest.

(2) The premium for insurance in lieu of perfecting a security interest to the extent that the premium does not exceed the fees described in paragraph (e)(1) of this section that otherwise would be payable. (f) Prohibited offsets. Interest, dividends, or other income received or to be received by the consumer on deposits or investments shall not be deducted in computing the finance charge.

SUBPART B—OPEN-END CREDIT SECTION 226.5—General Disclosure Requirements (a) Form o f disclosures.

(1) The creditor shall make the disclosures required by this subpart clearly and con spicuously in writing,7 in a form that the consumer may keep.8 (2) The terms “finance charge” and “an nual percentage rate,” when required to be disclosed with a corresponding amount or percentage rate, shall be more conspicuous than any other required disclosure.9 (3) Certain disclosures required under sec tion 226.5a for credit and charge card appli 7 The disclosure required by section 226.9(d) when a fi nance charge is imposed at the time of a transaction need not be written.

8 The disclosures required under section 226.5a for credit and charge card applications and solicitations, the homeequity disclosures required under section 226.5b(d), the al ternative summary billing-rights statement provided for in section 226.9(a)(2), the credit and charge card renewal dis closures required under section 226.9(e), and the disclo sures made under section 226.10(b) about payment require ments need not be in a form that the consumer can keep. 9 The terms need not be more conspicuous when used under section 226.5a for credit and charge card applications and solicitations, under section 226.7(d) on periodic state ments, under section 226.9(e) in credit and charge card re newal disclosures, and under section 226.16 in advertisements.

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Regulation Z § 226.5a cations and solicitations must be provided in a tabular format or in a prominent loca tion in accordance with the requirements of that section.

(4) For rules governing the form of disclo sures for home-equity plans, see section 226.5b(a).

(b) Time of disclosures.

(1) Initial disclosures. The creditor shall furnish the initial disclosure statement re quired by section 226.6 before the first transaction is made under the plan. (2) Periodic statements.

(i) The creditor shall mail or deliver a periodic statement as required by section 226.7 for each billing cycle at the end of which an account has a debit or credit balance of more than $1 or on which a finance charge has been imposed. A peri odic statement need not be sent for an account if the creditor deems it uncollect ible, or if delinquency collection proceed ings have been instituted, or if furnishing the statement would violate federal law. (ii) The creditor shall mail or deliver the periodic statement at least 14 days prior to any date or the end of any time period required to be disclosed under section 226.7(j) in order for the consumer to avoid an additional finance or other charge.10 A creditor that fails to meet this requirement shall not collect any finance or other charge imposed as a result of such failure.

(3) Credit and charge card application and solicitation disclosures. The card issuer shall furnish the disclosures for credit and charge card applications and solicitations in accordance with the timing requirements of section 226.5a.

(4) Home-equity plans. Disclosures for home equity plans shall be made in accor dance with the timing requirements of sec tion 226.5b(b).

(c) Basis of disclosures and use o f estimates. Disclosures shall reflect the terms of the legal obligation between the parties. If any informa This timing requirement does not apply if the creditor is unable to meet the requirement because of an act of God, war, civil disorder, natural disaster, or strike. tion necessary for accurate disclosure is un known to the creditor, it shall make the dis closure based on the best information reasonably available and shall state clearly that the disclosure is an estimate. (d) Multiple creditors; multiple consumers. If the credit plan involves more than one credi tor, only one set of disclosures shall be given, and the creditors shall agree among them selves which creditor must comply with the requirements that this regulation imposes on any or all of them. If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the ac count. If the right of rescission under section 226.15 is applicable, however, the disclosures required by sections 226.6 and 226.15(b) shall be made to each consumer having the right to rescind.

(e) Effect o f subsequent events. If a disclosure becomes inaccurate because of an event that occurs after the creditor mails or delivers the disclosures, the resulting inaccuracy is not a violation of this regulation, although new dis closures may be required under section 226.9(c).

SECTION 226.5a—Credit and Charge Card Applications and Solicitations (a) General rules. The card issuer shall pro vide the disclosures required under this sec tion on or with a solicitation or an application to open a credit or charge card account. (1) Definition o f solicitation. For purposes of this section, the term “solicitation” means an offer by the card issuer to open a credit or charge card account that does not require the consumer to complete an application.

(2) Form of disclosures.

(i) The disclosures in paragraph (b)(1) through (7) of this section shall be pro vided in a prominent location on or with an application or a solicitation, or other applicable document, and in the form of a table with headings, content, and for mat substantially similar to any of the applicable tables found in appendix G. (ii) The disclosures in paragraph (b)(8)

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§ 226.5a Regulation Z through (10) of this section shall be pro vided either in the table containing the disclosures in paragraph (b)(1) through (7), or clearly and conspicuously else where on or with the application or solicitation.

(iii) The disclosure required under para graph (b)(5) of this section shall contain the term “grace period.”

(iv) The terminology in the disclosures under paragraph (b) of this section shall be consistent with that to be used in the disclosures under sections 226.6 and 226.7.

(3) Exceptions. This section does not apply to home-equity plans accessible by a credit or charge card that are of the type subject to the requirements of section 226.5b; over draft lines of credit tied to asset accounts accessed by check-guarantee cards or by debit cards; or lines of credit accessed by check-guarantee cards or by debit cards that can be used only at automated teller machines.

(4) Fees based on a percentage. If the amount of any fee required to be disclosed under this section is determined on the ba sis of a percentage of another amount, the percentage used and the identification of the amount against which the percentage is ap plied may be disclosed instead of the amount of the fee.

(5) Certain fees that vary by state. If the amount of any fee referred to in paragraph (b)(8) through (10) of this section varies from state to state, the card issuer may dis close the range of the fees instead of the amount for each state, if the disclosure in cludes a statement that the amount of the fee varies from state to state. (b) Required disclosures. The card issuer shall disclose the items in this paragraph on or with an application or a solicitation in accordance with the requirements of paragraphs (c), (d) or (e) of this section. A credit card issuer shall disclose all applicable items in this paragraph except for paragraph (b)(7) of this section. A charge card issuer shall disclose the applicable items in paragraph (b)(2), (4), and (7) through (10) of this section.

(1) Annual percentage rate. Each periodic rate that may be used to compute the fi nance charge on an outstanding balance for purchases, expressed as an annual percent age rate (as determined by section 226.14(b)). When more than one rate ap plies, the range of balances to which each rate is applicable shall also be disclosed. (i) If the account has a variable rate, the card issuer shall also disclose the fact that the rate may vary and how the rate is determined.

(ii) When variable-rate disclosures are provided under paragraph (c) of this sec tion, an annual percentage rate disclosure is accurate if the rate was in effect within 60 days before mailing the disclosures. When variable-rate disclosures are pro vided under paragraph (e) of this section, an annual percentage rate disclosure is accurate if the rate was in effect within 30 days before printing the disclosures. (2) Fees for issuance or availability. Any annual or other periodic fee, expressed as an annualized amount, or any other fee that may be imposed for the issuance or availa bility of a credit or charge card, including any fee based on account activity or inactivity.

(3) Minimum finance charge. Any mini mum or fixed finance charge that could be imposed during a billing cycle. (4) Transaction charges. Any transaction charge imposed for the use of the card for purchases.

(5) Grace period. The date by which or the period within which any credit extended for purchases may be repaid without incurring a finance charge. If no grace period is pro vided, that fact must be disclosed. If the length of the grace period varies, the card issuer may disclose the range of days, the minimum number of days, or the average number of days in the grace period, if the disclosure is identified as a range, mini mum, or average.

(6) Balance-computation method. The name of the balance-computation method listed in paragraph (g) of this section that is used to determine the balance for purchases on which the finance charge is computed, or an explanation of the method used if it is not listed. The explanation may appear outside

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Regulation Z § 226.5a the table if the table contains a reference to the explanation. In determining which bal ance-computation method to disclose, the card issuer shall assume that credit ex tended for purchases will not be repaid within the grace period, if any. (7) Statement on charge card payments. A statement that charges incurred by use of the charge card are due when the periodic statement is received.

(8) Cash-advance fee. Any fee imposed for an extension of credit in the form of cash. (9) Late-payment fee. Any fee imposed for a late payment.

(10) Over-the-limit fee. Any fee imposed for exceeding a credit limit. (c) Direct-mail applications and solicitations. The card issuer shall disclose the applicable items in paragraph (b) of this section on or with an application or solicitation that is mailed to consumers.

(d) Telephone applications and solicitations. (1) Oral disclosure. The card issuer shall orally disclose the information in paragraph (b)(1) through (7) of this section, to the ex tent applicable, in a telephone application or solicitation initiated by the card issuer. (2) Alternative disclosure. The oral disclo sure under paragraph (d)(1) of this section need not be given if the card issuer either does not impose a fee described in para graph (b)(2) of this section or does not im pose such a fee unless the consumer uses the card, and the card issuer discloses in writing within 30 days after the consumer requests the card (but in no event later than the delivery of the card) the following: (i) The applicable information in para graph (b) of this section; and (ii) The fact that the consumer need not accept the card or pay any fee disclosed unless the consumer uses the card. (e) Applications and solicitations made avail able to general public. The card issuer shall provide disclosures, to the extent applicable, on or with an application or solicitation that is made available to the general public, includ ing one contained in a catalog, magazine, or other generally available publication. The dis closures shall be provided in accordance with paragraph (e)(1), (2) or (3) of this section. (1) Disclosure o f required credit informa tion. The card issuer may disclose in a prominent location on the application or so licitation the following:

(i) The applicable information in para graph (b) of this section;

(ii) The date the required information was printed, including a statement that the required information was accurate as of that date and is subject to change after that date; and (iii) A statement that the consumer should contact the card issuer for any change in the required information since it was printed, and a toll-free telephone number or a mailing address for that purpose.

(2) Inclusion o f certain initial disclosures. The card issuer may disclose on or with the application or solicitation the following: (i) The disclosures required under section 226.6(a) through (c); and (ii) A statement that the consumer should contact the card issuer for any change in the required information, and a toll-free telephone number or a mailing address for that purpose.

(3) No disclosure of credit information. If none of the items in paragraph (b) of this section is provided on or with the applica tion or solicitation, the card issuer may state in a prominent location on the applica tion or solicitation the following: (i) There are costs associated with the use of the card; and (ii) The consumer may contact the card issuer to request specific information about the costs, along with a toll-free telephone number and a mailing address for that purpose.

(4) Prompt response to requests for infor mation. Upon receiving a request for any of the information referred to in this para graph, the card issuer shall promptly and fully disclose the information requested. (f) Special charge card rule—card issuer and person extending credit not the same person. If a cardholder may by use of a charge card access an open-end credit plan that is not

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§ 226.5a Regulation Z maintained by the charge card issuer, the card issuer need not provide the disclosures in paragraphs (c), (d) or (e) of this section for the open-end credit plan if the card issuer states on or with an application or a solicita tion the following:

(1) The card issuer will make an indepen dent decision whether to issue the card; (2) The charge card may arrive before the decision is made about extending credit under the open-end credit plan; and (3) Approval for the charge card does not constitute approval for the open-end credit plan.

(g) Balance-computation methods defined. The following methods may be described by name. Methods that differ due to variations such as the allocation of payments, whether the finance charge begins to accrue on the transaction date or the date of posting the transaction, the existence or length of a grace period, and whether the balance is adjusted by charges such as late fees, annual fees and un paid finance charges do not constitute separate balance-computation methods. (1) (i) Average daily balance (including new purchases). This balance is figured by adding the outstanding balance (in cluding new purchases and deducting payments and credits) for each day in the billing cycle, and then dividing by the number of days in the billing cycle. (ii) Average daily balance (excluding new purchases). This balance is figured by adding the outstanding balance (ex cluding new purchases and deducting payments and credits) for each day in the billing cycle, and then dividing by the number of days in the billing cycle. (2) (i) Two-cycle average daily balance (in cluding new purchases). This balance is the sum of the average daily balances for two billing cycles. The first balance is for the current billing cycle, and is figured by adding the outstanding balance (in cluding new purchases and deducting payments and credits) for each day in the billing cycle, and then dividing by the number of days in the billing cycle. The second balance is for the preceding bill ing cycle.

(ii) Two-cycle average daily balance (ex cluding new purchases). This balance is the sum of the average daily balances for two billing cycles. The first balance is for the current billing cycle, and is figured by adding the outstanding balance (ex cluding new purchases and deducting payments and credits) for each day in the billing cycle, and then dividing by the number of days in the billing cycle. The second balance is for the preceding bill ing cycle.

(3) Adjusted balance. This balance is fig ured by deducting payments and credits made during the billing cycle from the out standing balance at the beginning of the billing cycle.

(4) Previous balance. This balance is the outstanding balance at the beginning of the billing cycle.

SECTION 226.5b— Requirements for Home-Equity Plans The requirements of this section apply to open-end credit plans secured by the con sumer’s dwelling. For purposes of this section, an annual percentage rate is the annual per centage rate corresponding to the periodic rate as determined under section 226.14(b). (a) Form of disclosures.

(1) General. The disclosures required by paragraph (d) of this section shall be made clearly and conspicuously and shall be grouped together and segregated from all unrelated information. The disclosures may be provided on the application form or on a separate form. The disclosure described in paragraph (d)(4)(iii), the itemization of third-party fees described in paragraph (d)(8), and the variable-rate information de scribed in paragraph (d)(12) of this section may be provided separately from the other required disclosures.

(2) Precedence of certain disclosures. The disclosures described in paragraph (d)(1) through (4)(ii) of this section shall precede the other required disclosures. (b) Time o f disclosures. The disclosures and brochure required by paragraphs (d) and (e) of

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Regulation Z § 226.5b this section shall be provided at the time an application is provided to the consumer.10” (c) Duties of third parties. Persons other than the creditor who provide applications to con sumers for home-equity plans must provide the brochure required under paragraph (e) of this section at the time an application is pro vided. If such persons have the disclosures re quired under paragraph (d) of this section for a creditor’s home-equity plan, they also shall provide the disclosures at such time. (d) Content of disclosures. The creditor shall provide the following disclosures, as applicable:

(1) Retention o f information. A statement that the consumer should make or otherwise retain a copy of the disclosures. (2) Conditions for disclosed terms. (i) A statement of the time by which the consumer must submit an application to obtain specific terms disclosed and an identification of any disclosed term that is subject to change prior to opening the plan.

(ii) A statement that, if a disclosed term changes (other than a change due to fluc tuations in the index in a variable-rate plan) prior to opening the plan and the consumer therefore elects not to open the plan, the consumer may receive a refund of all fees paid in connection with the application.

(3) Security interest and risk to home. A statement that the creditor will acquire a se curity interest in the consumer’s dwelling and that loss of the dwelling may occur in the event of default.

(4) Possible actions by creditor. (i) A statement that, under certain condi tions, the creditor may terminate the plan and require payment of the outstanding balance in full in a single payment and impose fees upon termination; prohibit additional extensions of credit or reduce the credit limit; and, as specified in the 10aThe disclosures and the brochure may be delivered or placed in the mail not later than three business days follow ing receipt of a consumer’s application in the case of appli cations contained in magazines or other publications, or when the application is received by telephone or through an intermediary agent or broker. initial agreement, implement certain changes in the plan.

(ii) A statement that the consumer may receive, upon request, information about the conditions under which such actions may occur.

(iii) In lieu of the disclosure required under paragraph (d)(4)(ii) of this section, a statement of such conditions. (5) Payment terms. The payment terms of the plan, including— (i) The length of the draw period and any repayment period.

(ii) An explanation of how the minimum periodic payment will be determined and the timing of the payments. If paying only the minimum periodic payments may not repay any of the principal or may repay less than the outstanding bal ance, a statement of this fact, as well as a statement that a balloon payment may result.101’ (iii) An example, based on a $10,000 outstanding balance and a recent annual percentage rate,100 showing the minimum periodic payment, any balloon payment, and the time it would take to repay the $10,000 outstanding balance if the con sumer made only those payments and ob tained no additional extensions of credit. If different payment terms may apply to the draw and any repayment period, or if dif ferent payment terms may apply within ei ther period, the disclosures shall reflect the different payment terms.

(6) Annual percentage rate. For fixed-rate plans, a recent annual percentage rate im posed under the plan and a statement that the rate does not include costs other than interest.

(7) Fees imposed by creditor. An itemiza tion of any fees imposed by the creditor to 10b A balloon payment results if paying the minimum pe riodic payments does not fully amortize the outstanding balance by a specified date or time, and the consumer must repay the entire outstanding balance at such time. IOc For fixed-rate plans, a recent annual percentage rate is a rate that has been in effect under the plan within the 12 months preceding the date the disclosures are provided to the consumer. For variable-rate plans, a recent annual per centage rate is the most recent rate provided in the histori cal example described in paragraph (d)(12)(xi) of this sec tion or a rate that has been in effect under the plan since the date of the most recent rate in the table.

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§ 226.5b Regulation Z open, use, or maintain the plan, stated as a dollar amount or percentage, and when such fees are payable.

(8) Fees imposed by third parties to open a plan. A good faith estimate, stated as a sin gle dollar amount or range, of any fees that may be imposed by persons other than the creditor to open the plan, as well as a state ment that the consumer may receive, upon request, a good faith itemization of such fees. In lieu of the statement, the itemiza tion of such fees may be provided. (9) Negative amortization. A statement that negative amortization may occur and that negative amortization increases the principal balance and reduces the consumer’s equity in the dwelling.

(10) Transaction requirements. Any limita tions on the number of extensions of credit and the amount of credit that may be ob tained during any time period, as well as any minimum outstanding balance and min imum draw requirements, stated as dollar amounts or percentages.

(11) Tax implications. A statement that the consumer should consult a tax advisor re garding the deductibility of interest and charges under the plan.

(12) Disclosures for variable-rate plans. For a plan in which the annual percentage rate is variable, the following disclosures, as applicable:

(i) The fact that the annual percentage rate, payment, or term may change due to the variable-rate feature. (ii) A statement that the annual percent age rate does not include costs other than interest.

(iii) The index used in making rate ad justments and a source of information about the index.

(iv) An explanation of how the annual percentage rate will be determined, in cluding an explanation of how the index is adjusted, such as by the addition of a margin.

(v) A statement that the consumer should ask about the current index value, mar gin, discount or premium, and annual percentage rate.

(vi) A statement that the initial annual percentage rate is not based on the index and margin used to make later rate ad justments, and the period of time such initial rate will be in effect. (vii) The frequency of changes in the an nual percentage rate.

(viii) Any rules relating to changes in the index value and the annual percentage rate and resulting changes in the payment amount, including, for example, an expla nation of payment limitations and rate carryover.

(ix) A statement of any annual or more frequent periodic limitations on changes in the annual percentage rate (or a state ment that no annual limitation exists), as well as a statement of the maximum an nual percentage rate that may be imposed under each payment option. (x) The minimum periodic payment re quired when the maximum annual per centage rate for each payment option is in effect for a $10,000 outstanding bal ance, and a statement of the earliest date or time the maximum rate may be imposed.

(xi) An historical example, based on a $10,000 extension of credit, illustrating how annual percentage rates and pay ments would have been affected by index-value changes implemented accord ing to the terms of the plan. The historical example shall be based on the most recent 15 years of index values (se lected for the same time period each year) and shall reflect all significant plan terms, such as negative amortization, rate carryover, rate discounts, and rate and payment limitations, that would have been affected by the index movement during the period.

(xii) A statement that rate information will be provided on or with each periodic statement.

(e) Brochure. The home-equity brochure pub lished by the Board or a suitable substitute shall be provided.

(f) Limitations on home-equity plans. No creditor may, by contract or otherwise— (1) change the annual percentage rate unless—

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Regulation Z § 226.5b (i) such change is based on an index that is not under the creditor’s control; and (ii) such index is available to the general public;

(2) terminate a plan and demand repayment of the entire outstanding balance in advance of the original term (except for reversemortgage transactions that are subject to paragraph (f)(4) of this section) unless— (i) there is fraud or material misrepresen tation by the consumer in connection with the plan;

(ii) the consumer fails to meet the repay ment terms of the agreement for any out standing balance;

(iii) any action or inaction by the con sumer adversely affects the creditor’s se curity for the plan, or any right of the creditor in such security; or (iv) federal law dealing with credit ex tended by a depository institution to its executive officers specifically requires that as a condition of the plan the credit shall become due and payable on de mand, provided that the creditor includes such a provision in the initial agreement. (3) change any term, except that a creditor may— (i) provide in the initial agreement that it may prohibit additional extensions of credit or reduce the credit limit during any period in which the maximum annual percentage rate is reached. A creditor also may provide in the initial agreement that specified changes will occur if a specified event takes place (for example, that the annual percentage rate will in crease a specified amount if the consumer leaves the creditor’s employment). (ii) change the index and margin used under the plan if the original index is no longer available, the new index has an historical movement substantially similar to that of the original index, and the new index and margin would have resulted in an annual percentage rate substantially similar to the rate in effect at the time the original index became unavailable. (iii) make a specified change if the con sumer specifically agrees to it in writing at that time.

(iv) make a change that will unequivo cally benefit the consumer throughout the remainder of the plan.

(v) make an insignificant change to terms.

(vi) prohibit additional extensions of credit or reduce the credit limit applica ble to an agreement during any period in which— (A) the value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan; (B) the creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consum er’s financial circumstances;

(D) the creditor is precluded by gov ernment action from imposing the an nual percentage rate provided for in the agreement;

(E) the priority of the creditor’s secur ity interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; or (F) the creditor is notified by its regu latory agency that continued advances constitute an unsafe and unsound practice.

(4) for reverse-mortgage transactions that are subject to section 226.33, terminate a plan and demand repayment of the entire outstanding balance in advance of the orginal term except— (i) in the case of default; (ii) if the consumer transfers title to the property securing the note; (iii) if the consumer ceases using the property securing the note as the primary dwelling; or (iv) upon the consumer’s death. (g) Refund of fees. A creditor shall refund all fees paid by the consumer to anyone in con nection with an application if any term re quired to be disclosed under paragraph (d) of this section changes (other than a change due

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§ 226.5b Regulation Z to fluctuations in the index in a variable-rate plan) before the plan is opened and, as a re sult, the consumer elects not to open the plan. (h) Imposition o f nonrefundable fees. Neither a creditor nor any other person may impose a nonrefundable fee in connection with an appli cation until three business days after the con sumer receives the disclosures and brochure required under this section.10d SECTION 226.6— Initial Disclosure Statement The creditor shall disclose to the consumer, in terminology consistent with that to be used on the periodic statement, each of the following items, to the extent applicable: (a) Finance charge. The circumstances under which a finance charge will be imposed and an explanation of how it will be determined, as follows:

(1) A statement of when finance charges begin to accrue, including an explanation of whether or not any time period exists within which any credit extended may be repaid without incurring a finance charge. If such a time period is provided, a creditor may, at its option and without disclosure, impose no finance charge when payment is received after the time period’s expiration. (2) A disclosure of each periodic rate that may be used to compute the finance charge, the range of balances to which it is applica ble," and the corresponding annual percent age rate.12 When different periodic rates ap ply to different types of transactions, the types of transactions to which the periodic rates apply shall also be disclosed. (3) An explanation of the method used to determine the balance on which the finance charge may be computed.

(4) An explanation of how the amount of 10(1 If the disclosures and brochure are mailed to the con sumer, the consumer is considered to have received them three business days after they are mailed. 11 A creditor is not required to adjust the range of bal ances disclosure to reflect the balance below which only a minimum charge applies.

12 If a creditor is offering a variable-rate plan, the credi tor shall also disclose (1) the circumstances under which the rate(s) may increase; (2) any limitations on the in crease; and (3) the effect(s) of an increase. any finance charge will be determined,13 in cluding a description of how any finance charge other than the periodic rate will be determined.

(b) Other charges. The amount of any charge other than a finance charge that may be im posed as part of the plan, or an explanation of how the charge will be determined. (c) Security interests. The fact that the credi tor has or will acquire a security interest in the property purchased under the plan, or in other property identified by item or type. (d) Statement o f billing rights. A statement that outlines the consumer’s rights and the creditor’s responsibilities under sections 226.12(c) and 226.13 and that is substantially similar to the statement found in appendix G. (e) Home-equity plan information. The fol lowing disclosures described in section 226.5b(d), as applicable:

(1) A statement of the conditions under which the creditor may take certain action, as described in section 226.5b(d)(4)(i), such as terminating the plan or changing the terms.

(2) The payment information described in section 226.5b(d)(5)(i) and (ii) for both the draw period and any repayment period. (3) A statement that negative amortization may occur as described in section 226.5b(d)(9).

(4) A statement of any transaction require ments as described in section 226.5b(d)(10). (5) A statement regarding the tax implica tions as described in section 226.5b(d)(ll). (6) A statement that the annual percentage rate imposed under the plan does not in clude costs other than interest as described in section 226.5b(d)(6) and 226.5b (d)(12)(ii).

(7) The variable-rate disclosures described in section 226.5b(d)(12)(viii), (x), (xi), and (xii), as well as the disclosure described in section 226.5b(d)(5)(iii), unless the disclo sures provided with the application were in a form the consumer could keep and in- If no finance charge is imposed when the outstanding balance is less than a certain amount, no disclosure is re quired of that fact or of the balance below which no fi nance charge will be imposed.

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Regulation Z § 226.8 eluded a representative payment example for the category of payment option chosen by the consumer.

SECTION 226.7— Periodic Statement The creditor shall furnish the consumer with a periodic statement that discloses the following items, to the extent applicable: (a) Previous balance. The account balance outstanding at the beginning of the billing cycle.

(b) Identification of transactions. An identifi cation of each credit transaction in accordance with section 226.8.

(c) Credits. Any credit to the account during the billing cycle, including the amount and the date of crediting. The date need not be pro vided if a delay in crediting does not result in any finance or other charge. (d) Periodic rates. Each periodic rate that may be used to compute the finance charge, the range of balances to which it is applica ble,14 and the corresponding annual percentage rate.15 If different periodic rates apply to dif ferent types of transactions, the types of trans actions to which the periodic rates apply shall also be disclosed.

(e) Balance on which finance charge com puted. The amount of the balance to which a periodic rate was applied and an explanation of how that balance was determined. When a balance is determined without first deducting all credits and payments made during the bill ing cycle, that fact and the amount of the credits and payments shall be disclosed. (f) Amount of finance charge. The amount of any finance charge debited or added to the account during the billing cycle, using the term “finance charge.” The components of the finance charge shall be individually itemized and identified to show the amount(s) due to the application of any periodic rates and the amount(s) of any other type of finance charge. If there is more than one periodic rate, the '“See footnotes 11 and 13.

If a variable-rate plan is involved, the creditor shall disclose the fact that the periodic rate(s) may vary. amount of the finance charge attributable to each rate need not be separately itemized and identified.

(g) Annual percentage rate. When a finance charge is imposed during the billing cycle, the annual percentage rate(s) determined under section 226.14, using the term “annual per centage rate.”

(h) Other charges. The amounts, itemized and identified by type, of any charges other than finance charges debited to the account during the billing cycle.

(i) Closing date o f billing cycle; new balance. The closing date of the billing cycle and the account balance outstanding on that date. (j) Free-ride period. The date by which or the time period within which the new balance or any portion of the new balance must be paid to avoid additional finance charges. If such a time period is provided, a creditor may, at its option and without disclosure, impose no fi nance charge when payment is received after the time period’s expiration. (k) Address for notice of billing errors. The address to be used for notice of billing errors. Alternatively, the address may be provided on the billing rights statement permitted by sec tion 226.9(a)(2).

SECTION 226.8— Identification of Transactions The creditor shall identify credit transactions on or with the first periodic statement that re flects the transaction by furnishing the follow ing information, as applicable.16 (a) Sale credit. For each credit transaction in volving the sale of property or services, the following rules shall apply: Failure to disclose the information required by this sec tion shall not be deemed a failure to comply with the regu lation if (1) the creditor maintains procedures reasonably adapted to obtain and provide the information; and (2) the creditor treats an inquiry for clarification or documentation as a notice of a billing error, including correcting the ac count in accordance with section 226.13(e). This applies to transactions that take place outside a state, as defined in section 226.2(a), whether or not the creditor maintains pro cedures reasonably adapted to obtain the required information.

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§ 226.8 Regulation Z (1) Copy o f credit document provided. When an actual copy of the receipt or other credit document is provided with the first periodic statement reflecting the transaction, the transaction is sufficiently identified if the amount of the transaction and either the date of the transaction or the date of debit ing the transaction to the consumer’s ac count are disclosed on the copy or on the periodic statement.

(2) Copy o f credit document not pro vided—creditor and seller same or related person(s). When the creditor and the seller are the same person or related persons, and an actual copy of the receipt or other credit document is not provided with the periodic statement, the creditor shall disclose the amount and date of the transaction, and a brief identification17 of the property or ser vices purchased.18 (3) Copy o f credit document not pro vided—creditor and seller not same or re lated person(s). When the creditor and seller are not the same person or related persons, and an actual copy of the receipt or other credit document is not provided with the periodic statement, the creditor shall disclose the amount and date of the transaction; the seller’s name; and the city, and state or foreign country where the transaction took place.19 (b) Nonsale credit. A nonsale credit transac tion is sufficiently identified if the first peri odic statement reflecting the transaction dis 17 As an alternative to the brief identification, the creditor may disclose a number or symbol that also appears on the receipt or other credit document given to the consumer, if the number or symbol reasonably identifies that transaction with that creditor, and if the creditor treats an inquiry for clarification or documentation as a notice of a billing error, including correcting the account in accordance with section 226.13(e).

18 An identification of property or services may be re placed by the seller’s name and location of the transaction when: (1) the creditor and the seller are the same person; (2) the creditor’s open-end plan has fewer than 15,000 ac counts; (3) the creditor provides the consumer with point of-sale documentation for that transaction; and (4) the cred itor treats an inquiry for clarification or documentation as a notice of a billing error, including correcting the account in accordance with section 226.13(e). 19 The creditor may omit the address or provide any suit able designation that helps the consumer to identify the transaction when the transaction (1) took place at a location that is not fixed; (2) took place in the consumer’s home; or (3) was a mail or telephone order. closes a brief identification of the transaction;20 the amount of the transaction; and at least one of the following dates: the date of the transaction, the date of debiting the transaction to the consumer’s account, or, if the consumer signed the credit document, the date appearing on the document. If an ac tual copy of the receipt or other credit docu ment is provided and that copy shows the amount and at least one of the specified dates, the brief identification may be omitted. SECTION 226.9— Subsequent Disclosure Requirements (a) Furnishing statement of billing rights. (1) Annual statement. The creditor shall mail or deliver the billing rights statement required by section 226.6(d) at least once per calendar year, at intervals of not less than 6 months nor more than 18 months, either to all consumers or to each consumer entitled to receive a periodic statement under section 226.5(b)(2) for any one bill ing cycle.

(2) Alternative summary statement. As an alternative to paragraph (a)(1) of this sec tion, the creditor may mail or deliver, on or with each periodic statement, a statement substantially similar to that in appendix G. (b) Disclosures for supplemental credit de vices and additional features. (1) If a creditor, within 30 days after mail ing or delivering the initial disclosures under section 226.6(a), adds a credit feature to the consumer’s account or mails or deliv ers to the consumer a credit device for which the finance charge terms are the same as those previously disclosed, no ad ditional disclosures are necessary. After 30 days, if the creditor adds a credit feature or furnishes a credit device (other than as a renewal, resupply, or the original issuance of a credit card) on the same finance charge terms, the creditor shall disclose, before the consumer uses the feature or device for the first time, that it is for use in obtaining credit under the terms previously disclosed. (2) Whenever a credit feature is added or a 20 See footnote 17.

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Regulation Z § 226.9 credit device is mailed or delivered, and the finance charge terms for the feature or de vice differ from disclosures previously given, the disclosures required by section 226.6(a) that are applicable to the added feature or device shall be given before the consumer uses the feature or device for the first time.

(1) Written notice required. Whenever any term required to be disclosed under section 226.6 is changed or the required minimum periodic payment is increased, the creditor shall mail or deliver written notice of the change to each consumer who may be af fected. The notice shall be mailed or deliv ered at least 15 days prior to the effective date of the change. The 15-day timing re quirement does not apply if the change has been agreed to by the consumer, or if a periodic rate or other finance charge is in creased because of the consumer’s delin quency or default; the notice shall be given, however, before the effective date of the change.

(2) Notice not required. No notice under this section is required when the change in volves late-payment charges, charges for documentary evidence, or over-the-limit charges; a reduction of any component of a finance or other charge; suspension of fu ture credit privileges or termination of an account or plan; or when the change results from an agreement involving a court pro ceeding, or from the consumer’s default or delinquency (other than an increase in the periodic rate or other finance charge). (3) Notice for home-equity plans. If a cred itor prohibits additional extensions of credit or reduces the credit limit applicable to a home-equity plan pursuant to section 226.5b(f)(3)(i) or 226.5b(f)(3)(vi), the credi tor shall mail or deliver written notice of the action to each consumer who will be affected. The notice must be provided not later than three business days after the ac tion is taken and shall contain specific rea sons for the action. If the creditor requires the consumer to request reinstatement of credit privileges, the notice also shall state that fact.

(d) Finance charge imposed at time of trans action.

(1) Any person, other than the card issuer, who imposes a finance charge at the time of honoring a consumer’s credit card, shall disclose the amount of that finance charge prior to its imposition.

(2) The card issuer, if other than the person honoring the consumer’s credit card, shall have no responsibility for the disclosure re quired by paragraph (d)(1) of this section, and shall not consider any such charge for purposes of sections 226.5a, 226.6 and 226.7.

(e) Disclosures upon renewal o f credit or charge card.

(1) Notice prior to renewal. Except as pro vided in paragraph (e)(2) of this section, a card issuer that imposes any annual or other periodic fee to renew a credit or charge card account of the type subject to section 226.5a, including any fee based on account activity or inactivity, shall mail or deliver written notice of the renewal to the card holder. The notice shall be provided at least 30 days or one billing cycle, whichever is less, before the mailing or the delivery of the periodic statement on which the renewal fee is initially charged to the account. The notice shall contain the following information:

(i) The disclosures contained in section 226.5a(b)(l) through (7) that would apply if the account were renewed;20” and (ii) How and when the cardholder may terminate credit availability under the ac count to avoid paying the renewal fee. (2) Delayed notice. The disclosures re quired by paragraph (e)(1) of this section may be provided later than the time in paragraph (e)(1) of this section, but no later than the mailing or the delivery of the peri odic statement on which the renewal fee is initially charged to the account, if the card issuer also discloses at that time that— (i) The cardholder has 30 days from the time the periodic statement is mailed or delivered to avoid paying the fee or to have the fee recredited if the cardholder 20a These disclosures need not be provided in tabular for mat or in a prominent location.

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§ 226.9 Regulation Z terminates credit availability under the account; and (ii) The cardholder may use the card dur ing the interim period without having to pay the fee.

(3) Notification on periodic statements. The disclosures required by this paragraph may be made on or with a periodic statement. If any of the disclosures are provided on the back of a periodic statement, the card issuer shall include a reference to those disclo sures on the front of the statement. (f) Change in credit card account insurance provider.

(1) Notice prior to change. If a credit card issuer plans to change the provider of insur ance for repayment of all or part of the out standing balance of an open-end credit card account of the type subject to section 226.5a, the card issuer shall mail or deliver the cardholder written notice of the change not less than 30 days before the change in providers occurs. The notice shall also in clude the following items, to the extent applicable:

(i) Any increase in the rate that will re sult from the change;

(ii) Any substantial decrease in coverage that will result from the change; and (iii) A statement that the cardholder may discontinue the insurance.

(2) Notice when change in provider occurs. If a change described in paragraph (f)(1) of this section occurs, the card issuer shall provide the cardholder with a written notice no later than 30 days after the change, in cluding the following items, to the extent applicable:

(i) The name and address of the new in surance provider;

(ii) A copy of the new policy or group certificate containing the basic terms of the insurance, including the rate to be charged; and (iii) A statement that the cardholder may discontinue the insurance.

(3) Substantial decrease in coverage. For purposes of this paragraph, a substantial de crease in coverage is a decrease in a signifi cant term of coverage that might reasonably be expected to affect the cardholder’s deci sion to continue the insurance. Significant terms of coverage include, for example, the following:

(i) Type of coverage provided; (ii) Age at which coverage terminates or becomes more restrictive;

(iii) Maximum insurable loan balance, maximum periodic benefit payment, max imum number of payments, or other term affecting the dollar amount of coverage or benefits provided;

(iv) Eligibility requirements and number and identity of persons covered; (v) Definition of a key term of coverage such as disability;

(vi) Exclusions from or limitations on coverage; and (vii) Waiting periods and whether cover age is retroactive.

(4) Combined notification. The notices re quired by paragraph (f)(1) and (2) of this section may be combined provided the tim ing requirement of paragraph (f)(1) of this section is met. The notices may be provided on or with a periodic statement. SECTION 226.10—Prompt Crediting of Payments (a) General rule. A creditor shall credit a payment to the consumer’s account as of the date of receipt, except when a delay in credit ing does not result in a finance or other charge or except as provided in paragraph (b) of this section.

(b) Specific requirements for payments. If a creditor specifies, on or with the periodic statement, requirements for the consumer to follow in making payments, but accepts a payment that does not conform to the require ments, the creditor shall credit the payment within five days of receipt. (c) Adjustment o f account. If a creditor fails to credit a payment, as required by paragraphs (a) or (b) of this section, in time to avoid the imposition of finance or other charges, the creditor shall adjust the consumer’s account so that the charges imposed are credited to the consumer’s account during the next billing cycle.

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Regulation Z § 226.12 SECTION 226.11—Treatment of Credit Balances When a credit balance in excess of $1 is cre ated on a credit account (through transmittal of funds to a creditor in excess of the total balance due on an account, through rebates of unearned finance charges or insurance premi ums, or through amounts otherwise owed to or held for the benefit of a consumer), the creditor shall— (a) Credit the amount of the credit balance to the consumer’s account;

(b) Refund any part of the remaining credit balance within seven business days from re ceipt of a written request from the consumer; and (c) Make a good faith effort to refund to the consumer by cash, check, or money order, or credit to a deposit account of the consumer, any part of the credit balance remaining in the account for more than six months. No further action is required if the consumer’s current lo cation is not known to the creditor and cannot be traced through the consumer’s last known address or telephone number. SECTION 226.12— Special Credit Card Provisions (a) Issuance o f credit cards. Regardless of the purpose for which a credit card is to be used, including business, commercial, or agricultural use, no credit card shall be issued to any per son except— (1) In response to an oral or written request or application for the card; or (2) As a renewal of, or substitute for, an accepted credit card.21 (b) Liability o f cardholder for unauthorized use.

(1) Limitation on amount. The liability of a For purposes of this section, “accepted credit card” means any credit card that a cardholder has requested or applied for and received, or has signed, used, or authorized another person to use to obtain credit. Any credit card is sued as a renewal or substitute in accordance with this paragraph becomes an accepted credit card when received by the cardholder.

cardholder for unauthorized use22 of a credit card shall not exceed the lesser of $50 or the amount of money, property, labor, or services obtained by the unauthorized use before notification to the card issuer under paragraph (b)(3) of this section. (2) Conditions o f liability. A cardholder shall be liable for unauthorized use of a credit card only if— (i) The credit card is an accepted credit card;

(ii) The card issuer has provided ade quate notice23 of the cardholder’s maxi mum potential liability and of means by which the card issuer may be notified of loss or theft of the card. The notice shall state that the cardholder’s liability shall not exceed $50 (or any lesser amount) and that the cardholder may give oral or written notification, and shall describe a means of notification (for example, a telephone number, an address, or both); and (iii) The card issuer has provided a means to identify the cardholder on the account or the authorized user of the card.

(3) Notification to card issuer. Notification to a card issuer is given when steps have been taken as may be reasonably required in the ordinary course of business to pro vide the card issuer with the pertinent infor mation about the loss, theft, or possible un authorized use of a credit card, regardless of whether any particular officer, employee, or agent of the card issuer does, in fact, receive the information. Notification may be given, at the option of the person giving it, in person, by telephone, or in writing. Noti fication in writing is considered given at the time of receipt or, whether or not received, at the expiration of the time ordinarily re quired for transmission, whichever is earlier.

22 “Unauthorized use” means the 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 receives no benefit. 23 “Adequate notice” means a printed notice to a card holder that sets forth clearly the pertinent facts so that the cardholder may reasonably be expected to have noticed it and understood its meaning. The notice may be given by any means reasonably assuring receipt by the cardholder.

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§ 226.12 Regulation Z (4) Effect of other applicable law or agree ment. If state law or an agreement between a cardholder and the card issuer imposes lesser liability than that provided in this paragraph, the lesser liability shall govern. (5) Business use of credit cards. If 10 or more credit cards are issued by one card issuer for use by the employees of an or ganization, this section does not prohibit the card issuer and the organization from agree ing to liability for unauthorized use without regard to this section. However, liability for unauthorized use may be imposed on an employee of the organization, by either the card issuer or the organization, only in ac cordance with this section.

(c) Right o f cardholder to assert claims or defenses against card issuer.24 (1) General rule. When a person who hon ors a credit card fails to resolve satisfacto rily a dispute as to property or services pur chased with the credit card in a consumer credit transaction, the cardholder may assert against the card issuer all claims (other than tort claims) and defenses arising out of the transaction and relating to the failure to re solve the dispute. The cardholder may with hold payment up to the amount of credit outstanding for the property or services that gave rise to the dispute and any finance or other charges imposed on that amount.25 (2) Adverse credit reports prohibited. If, in accordance with paragraph (c)(1) of this section, the cardholder withholds payment of the amount of credit outstanding for the disputed transaction, the card issuer shall not report that amount as delinquent until 24 This paragraph does not apply to the use of a checkguarantee card or a debit card in connection with an over draft credit plan, or to a check-guarantee card used in con nection with cash-advance checks. 25 The amount of the claim or defense that the cardholder may assert shall not exceed the amount of credit outstand ing for the disputed transaction at the time the cardholder first notifies the card issuer or the person honoring the credit card of the existence of the claim or defense. To determine the amount of credit outstanding for purposes of this section, payments and other credits shall be applied to: (1) late chaises in the order of entry to the account; then to (2) finance charges in the order of entry to the account; and then to (3) any other debits in the order of entry to the account. If more than one item is included in a single ex tension of credit, credits are to be distributed pro rata ac cording to prices and applicable taxes. the dispute is settled or judgment is rendered.

(3) Limitations. The rights stated in paragraphs (c)(1) and (2) of this section ap ply only if— (i) The cardholder has made a good faith attempt to resolve the dispute with the person honoring the credit card; and (ii) The amount of credit extended to ob tain the property or services that result in the assertion of the claim or defense by the cardholder exceeds $50, and the dis puted transaction occurred in the same state as the cardholder’s current desig nated address or, if not within the same state, within 100 miles from that address.26 (d) Offsets by card issuer prohibited. (1) A card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder’s in debtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer. (2) This paragraph does not alter or affect the right of a card issuer acting under state or federal law to do any of the following with regard to funds of a cardholder held on deposit with the card issuer if the same procedure is constitutionally available to creditors generally: obtain or enforce a con sensual security interest in the funds; attach or otherwise levy upon the funds; or obtain or enforce a court order relating to the funds.

(3) This paragraph does not prohibit a plan, if authorized in writing by the cardholder, under which the card issuer may periodi cally deduct all or part of the cardholder’s credit card debt from a deposit account held with the card issuer (subject to the limita tions in section 226.13(d)(1)). The limitations stated in paragraph (c)(3)(ii) of this section shall not apply when the person honoring the credit card: (1) is the same person as the card issuer; (2) is con trolled by the card issuer directly or indirectly; (3) is under the direct or indirect control of a third person that also directly or indirectly controls the card issuer; (4) controls the card issuer directly or indirectly; (5) is a franchised dealer in the card issuer’s products or services; or (6) has obtained the order for the disputed transaction through a mail solicitation made or participated in by the card issuer.

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Regulation Z § 226.13 (e) Prompt notification o f returns and credit ing o f refunds.

(1) When a creditor other than the card is suer accepts the return of property or for gives a debt for services that is to be re flected as a credit to the consumer’s credit card account, that creditor shall, within seven business days from accepting the re turn or forgiving the debt, transmit a credit statement to the card issuer through the card issuer’s normal channels for credit statements.

(2) The card issuer shall, within three busi ness days from receipt of a credit statement, credit the consumer’s account with the amount of the refund.

(3) If a creditor other than a card issuer routinely gives cash refunds to consumers paying in cash, the creditor shall also give credit or cash refunds to consumers using credit cards, unless it discloses at the time the transaction is consummated that credit or cash refunds for returns are not given. This section does not require refunds for re turns nor does it prohibit refunds in kind. (f) Discounts: tie-in arrangements. No card issuer may, by contract or otherwise— (1) Prohibit any person who honors a credit card from offering a discount to a consumer to induce the consumer to pay by cash, check, or similar means rather than by use of a credit card or its underlying account for the purchase of property or services; or (2) Require any person who honors the card issuer’s credit card to open or maintain any account or obtain any other service not essential to the operation of the credit card plan from the card issuer or any other per son, as a condition of participation in a credit card plan. If maintenance of an ac count for clearing purposes is determined to be essential to the operation of the credit card plan, it may be required only if no service charges or minimum balance re quirements are imposed.

(g) Relation to Electronic Fund Transfer Act and Regulation E. For guidance on whether Regulation Z or Regulation E applies in in stances involving both credit and electronic fund transfer aspects, refer to Regulation E, 12 CFR 205.5(c) regarding issuance and 205.6(d) regarding liability for unauthorized use. On matters other than issuance and liabil ity, this section applies to the credit aspects of combined credit/electronic fund transfer trans actions, as applicable.

SECTION 226.13— Billing-Error Resolution27 (a) Definition of billing error. For purposes of this section, the term “billing error” means: (1) A reflection on or with a periodic state ment of an extension of credit that is not made to the consumer or to a person who has actual, implied, or apparent authority to use the consumer’s credit card or open-end credit plan.

(2) A reflection on or with a periodic state ment of an extension of credit that is not identified in accordance with the require ments of sections 226.7(b) and 226.8. (3) A reflection on or with a periodic state ment of an extension of credit for property or services not accepted by the consumer or the consumer’s designee, or not delivered to the consumer or the consumer’s designee as agreed.

(4) A reflection on a periodic statement of the creditor’s failure to credit properly a payment or other credit issued to the con sumer’s account.

(5) A reflection on a periodic statement of a computational or similar error of an ac counting nature that is made by the creditor.

(6) A reflection on a periodic statement of an extension of credit for which the con sumer requests additional clarification, in cluding documentary evidence. (7) The creditor’s failure to mail or deliver a periodic statement to the consumer’s last known address if that address was received by the creditor, in writing, at least 20 days before the end of the billing cycle for which the statement was required. A creditor shall not accelerate any part of the con sumer’s indebtedness or restrict or close a consumer’s ac count solely because the consumer has exercised in good faith rights provided by this section. A creditor may be subject to the forfeiture penalty under section 161(e) of the act for failure to comply with any of the requirements of this section.

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§ 226.13 Regulation Z (b) Billing-error notice.2* A billing-error no tice is a written notice29 from a consumer that— (1) Is received by a creditor at the address disclosed under section 226.7(k) no later than 60 days after the creditor transmitted the first periodic statement that reflects the alleged billing error;

(2) Enables the creditor to identify the con sumer’s name and account number; and (3) To the extent possible, indicates the consumer’s belief and the reasons for the belief that a billing error exists, and the type, date, and amount of the error. (c) lime for resolution; general procedures. (1) The creditor shall mail or deliver writ ten acknowledgment to the consumer within 30 days of receiving a billing-error notice, unless the creditor has complied with the appropriate resolution procedures of paragraphs (e) and (f) of this section, as applicable, within the 30-day period; and (2) The creditor shall comply with the ap propriate resolution procedures of para graphs (e) and (f) of this section, as appli cable, within two complete billing cycles (but in no event later than 90 days) after receiving a billing-error notice. (d) Rules pending resolution. Until a billing error is resolved under paragraphs (e) or (f) of this section, the following rules apply: (1) Consumer’s right to withhold disputed amount; collection action prohibited. The consumer need not pay (and the creditor may not try to collect) any portion of any required payment that the consumer be lieves is related to the disputed amount (in cluding related finance or other charges).30 The creditor need not comply with the requirements of paragraphs (c) through (g) of this section if the consumer concludes that no billing error occurred and voluntarily withdraws the billing-error notice. 29 The creditor may require that the written notice not be made on the payment medium or other material accompa nying the periodic statement if the creditor so stipulates in the billing rights statement required by sections 226.6(d) and 226.9(a).

30 A creditor is not prohibited from talcing action to col lect any undisputed portion of the item or bill; from de ducting any disputed amount and related finance or other charges from the consumer’s credit limit on the account; or from reflecting a disputed amount and related finance or other charges on a periodic statement, provided that the Continued If the cardholder maintains a deposit ac count with the card issuer and has agreed to pay the credit card indebtedness by periodic deductions from the cardholder’s deposit account, the card issuer shall not deduct any part of the disputed amount or related finance or other charges if a billing error notice is received any time up to three busi ness days before the scheduled payment date.

(2) Adverse credit reports prohibited. The creditor or its agent shall not (directly or indirectly) make or threaten to make an ad verse report to any person about the con sumer’s credit standing, or report that an amount or account is delinquent, because the consumer failed to pay the disputed amount or related finance or other charges. (e) Procedures if billing error occurred as as serted. If a creditor determines that a billing error occurred as asserted, it shall within the time limits in paragraph (c)(2) of this section— (1) Correct the billing error and credit the consumer’s account with any disputed amount and related finance or other charges, as applicable; and (2) Mail or deliver a correction notice to the consumer.

(f) Procedures if different billing error or no billing error occurred. If, after conducting a reasonable investigation,31 a creditor deter mines that no billing error occurred or that a different billing error occurred from that as serted, the creditor shall within the time limits in paragraph (c)(2) of this section— (1) Mail or deliver to the consumer an ex planation that sets forth the reasons for the creditor’s belief that the billing error al- Continued creditor indicates on or with the periodic statement that payment of any disputed amount and related finance or other charges is not required pending the creditor’s compli ance with this section.

If a consumer submits a billing-error notice alleging either the nondelivery of property or services under para graph (a)(3) of this section or that information appearing on a periodic statement is incorrect because a person honoring the consumer’s credit card has made an incorrect report to the card issuer, the creditor shall not deny the assertion unless it conducts a reasonable investigation and determines that the property or services were actually delivered, mailed, or sent as agreed or that the information was correct.

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Regulation Z § 226.14 leged by the consumer is incorrect in whole or in part;

(2) Furnish copies of documentary evidence of the consumer’s indebtedness, if the con sumer so requests; and (3) If a different billing error occurred, cor rect the billing error and credit the con sumer’s account with any disputed amount and related finance or other charges, as applicable.

(g) Creditor’s rights and duties after resolu tion. If a creditor, after complying with all of the requirements of this section, determines that a consumer owes all or part of the dis puted amount and related finance or other charges, the creditor— (1) Shall promptly notify the consumer in writing of the time when payment is due and the portion of the disputed amount and related finance or other charges that the consumer still owes;

(2) Shall allow any time period disclosed under sections 226.6(a)(1) and 226.7(j), dur ing which the consumer can pay the amount due under paragraph (g)(1) of this section without incurring additional finance or other charges;

(3) May report an account or amount as de linquent because the amount due under paragraph (g)(1) of this section remains un paid after the creditor has allowed any time period disclosed under sections 226.6(a)(1) and 226.7(j) or 10 days (whichever is longer) during which the consumer can pay the amount; but (4) May not report that an amount or ac count is delinquent because the amount due under paragraph (g)(1) of the section re mains unpaid, if the creditor receives (within the time allowed for payment in paragraph (g)(3) of this section) further written notice from the consumer that any portion of the billing error is still in dis pute, unless the creditor also— (i) Promptly reports that the amount or account is in dispute;

(ii) Mails or delivers to the consumer (at the same time the report is made) a writ ten notice of the name and address of each person to whom the creditor makes a report; and (iii) Promptly reports any subsequent res olution of the reported delinquency to all persons to whom the creditor has made a report.

(h) Reassertion o f billing error. A creditor that has fully complied with the requirements of this section has no further responsibilities under this section (other than as provided in paragraph (g)(4) of this section) if a consumer reasserts substantially the same billing error. (i) Relation to Electronic Fund Transfer Act and Regulation E. If an extension of credit is incident to an electronic fund transfer, under an agreement between a consumer and a fi nancial institution to extend credit when the consumer’s account is overdrawn or to main tain a specified minimum balance in the con sumer’s account, the creditor shall comply with the requirements of Regulation E, 12 CFR 205.11, governing error resolution rather than those of paragraphs (a), (b), (c), (e), (f), and (h) of this section.

SECTION 226.14— Determination of Annual Percentage Rate (a) General rule. The annual percentage rate is a measure of the cost of credit, expressed as a yearly rate. An annual percentage rate shall be considered accurate if it is not more than Vs of 1 percentage point above or below the annual percentage rate determined in ac cordance with this section.313 (b) Annual percentage rate for section 226.5a and 226.5b disclosures, for initial disclosures and for advertising purposes. Where one or more periodic rates may be used to compute the finance charge, the annual percentage rate(s) to be disclosed for purposes of sections 226.5a, 226.5b, 226.6, and 226.16 shall be computed by multiplying each periodic rate by the number of periods in a year. 3la An error in disclosure of the annual percentage rate or finance charge shall not, in itself, be considered a violation of this regulation if: (1) the error resulted from a corre sponding error in a calculation tool used in good faith by the creditor; and (2) upon discovery of the error, the credi tor promptly discontinues use of that calculation tool for disclosure purposes, and notifies the Board in writing of the error in the calculation tool.

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§ 226.14 Regulation Z (c) Annual percentage rate for periodic state ments. The annual percentage rate(s) to be disclosed for purposes of section 226.7(d) shall be computed by multiplying each peri odic rate by the number of periods in a year and, for purposes of section 226.7(g), shall be determined as follows:

(1) If the finance charge is determined solely by applying one or more periodic rates, at the creditor’s option, either— (i) By multiplying each periodic rate by the number of periods in a year; or (ii) By dividing the total finance charge for the billing cycle by the sum of the balances to which the periodic rates were applied and multiplying the quotient (ex pressed as a percentage) by the number of billing cycles in a year. (2) If the finance charge imposed during the billing cycle is or includes a minimum, fixed, or other charge not due to the appli cation of a periodic rate, other than a charge with respect to any specific transac tion during the billing cycle, by dividing the total finance charge for the billing cycle by the amount of the balance(s) to which it is applicable32 and multiplying the quotient (expressed as a percentage) by the number of billing cycles in a year.33 (3) If the finance charge imposed during the billing cycle is or includes a charge re lating to a 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 appli cation of a periodic rate), by dividing the total finance charge imposed during the bill ing cycle by the total of all balances and other amounts on which a finance charge was imposed during the billing cycle with out duplication, and multiplying the quo tient (expressed as a percentage) by the number of billing cycles in a year,34 except 32 If there is no balance to which the finance charge is applicable, an annual percentage rate cannot be determined under this section.

33 Where the finance chaige imposed during the billing cycle is or includes a loan fee, points, or similar charge that relates to the opening of the account, the amount of such charge shall not be included in the calculation of the annual percentage rate.

34 See appendix F regarding determination of the denomi nator of the fraction under this paragraph. that the annual percentage rate shall not be less than the largest rate determined by multiplying each periodic rate imposed dur ing the billing cycle by the number of peri ods in a year.35 (4) If the finance charge imposed during the billing cycle is or includes a minimum, fixed, or other charge not due to the appli cation of a periodic rate and the total fi nance charge imposed during the billing cy cle does not exceed 50 cents for a monthly or longer billing cycle, or the pro rata part of 50 cents for a billing cycle shorter than monthly, at the creditor’s option, by multi plying each applicable periodic rate by the number of periods in a year, notwithstand ing the provisions of paragraphs (c)(2) and (3) of this section.

(d) Calculations where daily periodic rate ap plied. If the provisions of paragraphs (c)(1) (ii) or (2) of this section apply and all or a portion of the finance charge is determined by the application of one or more daily periodic rates, the annual percentage rate may be deter mined either— (1) By dividing the total finance charge by the average of the daily balances and multi plying the quotient by the number of billing cycles in a year; or (2) By dividing the total finance charge by the sum of the daily balances and multiply ing the quotient by 365.

SECTION 226.15—Right of Rescission (a) Consumer's right to rescind. (1) (i) Except as provided in paragraph (a)(l)(ii) of this section, in a credit plan in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind: each credit extension made under the plan; the plan when the plan is opened; a security interest when added or increased to secure an existing plan; and the increase when a credit limit on the plan is increased.

35 See footnote 33.

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Regulation Z § 226.15 (ii) As provided in section 125(e) of the act, the consumer does not have the right to rescind each credit extension made under the plan if such extension is made in accordance with a previously estab lished credit limit for the plan. (2) To exercise the right to rescind, the consumer shall notify the creditor of the re scission by mail, telegram, or other means of written communication. Notice is consid ered given when mailed, or when filed for telegraphic transmission, or, if sent by other means, when delivered to the creditor’s des ignated place of business.

(3) The consumer may exercise the right to rescind until midnight of the third business day following the occurrence described in paragraph (a)(1) of this section that gave rise to the right of rescission, delivery of the notice required by paragraph (b) of this section, or delivery of all material disclo sures,36 whichever occurs last. If the re quired notice and material disclosures are not delivered, the right to rescind shall ex pire three years after the occurrence giving rise to the right of rescission, or upon trans fer of all of the consumer’s interest in the property, or upon sale of the property, whichever occurs first. In the case of cer tain administrative proceedings, the rescis sion period shall be extended in accordance with section 125(f) of the act. (4) When more than one consumer has the right to rescind, the exercise of the right by one consumer shall be effective as to all consumers.

(b) Notice o f right to rescind. In any transac tion or occurrence subject to rescission, a creditor shall deliver two copies of the notice of the right to rescind to each consumer enti tled to rescind. The notice shall identify the transaction or occurrence and clearly and con spicuously disclose the following: The term “material disclosures” means the information that must be provided to satisfy the requirements in section 226.6 with regard to the method of determining the finance charge and the balance upon which a finance charge will be imposed, the annual percentage rate, the amount or method of determining the amount of any membership or participa tion fee that may be imposed as part of the plan, and the payment information described in section 226.5b(d)(5)(i) and (ii) that is required under section 226.6(e)(2). (1) The retention or acquisition of a secur ity interest in the consumer’s principal dwelling.

(2) The consumer’s right to rescind, as de scribed in paragraph (a)(1) of this section. (3) How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor’s place of business.

(4) The effects of rescission, as described in paragraph (d) of this section. (5) The date the rescission period expires. (c) Delay o f creditor’s performance. Unless a consumer waives the right to rescind under paragraph (e) of this section, no money shall be disbursed other than in escrow, no services shall be performed, and no materials delivered until after the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded. A creditor does not violate this section if a third party with no knowledge of the event activating the rescis sion right does not delay in providing materi als or services, as long as the debt incurred for those materials or services is not secured by the property subject to rescission. (d) Effects of rescission.

(1) When a consumer rescinds a transac tion, the security interest giving rise to the right of rescission becomes void, and the consumer shall not be liable for any amount, including any finance charge. (2) Within 20 calendar days after receipt of a notice of rescission, the creditor shall re turn any money or property that has been given to anyone in connection with the transaction and shall take any action neces sary to reflect the termination of the secu rity interest.

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§ 226.15 Regulation Z money must be made at the creditor’s des ignated place of business. If the creditor does not take possession of the money or property within 20 calendar days after the consumer’s tender, the consumer may keep it without further obligation. (4) The procedures outlined in paragraphs (d)(2) and (3) of this section may be modi fied by court order.

(e) Consumer’s waiver o f right to rescind. (1) The consumer may modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emer gency. To modify or waive the right, the consumer shall give the creditor a dated written statement that describes the emer gency, specifically modifies or waives the right to rescind, and bears the signatures of all the consumers entitled to rescind. Printed forms for this purpose are prohib ited, except as provided in paragraph (2) of this section.

(2) The need of the consumer to obtain funds immediately shall be regarded as a bona fide personal financial emergency pro vided that the dwelling securing the exten sion of credit is located in an area declared during June through September 1993, pur suant to 42 USC 5170, to be a major disas ter area because of severe storms and flood ing in the Midwest.36"

In this instance, creditors may use printed forms for the con sumer to waive the right to rescind. This exemption to paragraph (e)(1) of this sec tion shall expire one year from the date an area was declared a major disaster. (3) The consumer’s need to obtain funds immediately shall be regarded as a bona fide personal financial emergency provided that the dwelling securing the extension of credit is located in an area declared during June through September 1994 to be a major disaster area, pursuant to 42 USC 5170, be cause of severe storms and flooding in the South.36l) In this instance, creditors may use 368 A list of the affected areas will be maintained by the Board. Such areas now include parts of Iowa, Illinois, Min nesota, Missouri, Nebraska, South Dakota, and Wisconsin. 36bA list of the affected areas will be maintained and published by the Board. Such areas now include parts of Alabama, Florida, and Georgia. printed forms for the consumer to waive the right to rescind. This exemption to para graph (e)(1) of this section shall expire one year from the date an area was declared a major disaster.

(4) The consumer’s need to obtain funds immediately shall be regarded as a bona fide personal financial emergency provided that the dwelling securing the extension of credit is located in an area declared during October 1994 to be a major disaster area, pursuant to 42 USC 5170, because of se vere storms and flooding in Texas.3* In this instance, creditors may use printed forms for the consumer to waive the right to rescind. This exemption to paragraph (e)(1) of this section shall expire one year from the date an area was declared a major disaster.

(f) Exempt transactions. The right to rescind does not apply to the following: (1) A residential mortgage transaction. (2) A credit plan in which a state agency is a creditor.

SECTION 226.16— Advertising (a) Actually available terms. If an advertise ment for credit states specific credit terms, it shall state only those terms that actually are or will be arranged or offered by the creditor. (b) Advertisement o f terms that require addi tional disclosures. If any of the terms required to be disclosed under section 226.6 is set forth in an advertisement, the advertisement shall also clearly and conspicuously set forth the following:36*1 (1) Any minimum, fixed, transaction, activ ity or similar charge that could be imposed. (2) Any periodic rate that may be applied 360 A list of the affected areas will be maintained and published by the Board. Such areas now include the follow ing counties in Texas: Angelina, Austin, Bastrop, Brazos, Brazoria, Burleson, Chambers, Fayette, Fort Bend, Galves ton, Grimes, Hardin, Harris, Houston, Jackson, Jasper, Jef ferson, Lee, Liberty, Madison, Matagorda, Montgomery, Nacagdoches, Orange, Polk, San Augustine, San Jacinto, Shelby, Trinity, Victoria, Washington, Waller, Walker, and Wharton.

36dThe disclosures given in accordance with section 226.5a do not constitute advertising terms for purposes of the requirements of this section.

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Regulation Z § 226.17 expressed as an annual percentage rate as determined under section 226.14(b). If the plan provides for a variable periodic rate, that fact shall be disclosed. (3) Any membership or participation fee that could be imposed.

(2) A catalog or multiple-page advertise ment complies with this paragraph if the ta ble or schedule of terms includes all appro priate disclosures for a representative scale of amounts up to the level of the more commonly sold higher-priced property or services offered.

(d) Additional requirements for home-equity plans.

(1) Advertisement o f terms that require ad ditional disclosures. If any of the terms re quired to be disclosed under section 226.6(a) or (b) or the payment terms of the plan are set forth, affirmatively or nega tively, in an advertisement for a home-equity plan subject to the requirements of sec tion 226.5b, the advertisement also shall clearly and conspicuously set forth the following:

(i) Any loan fee that is a percentage of the credit limit under the plan and an es timate of any other fees imposed for opening the plan, stated as a single dollar amount or a reasonable range. (ii) Any periodic rate used to compute the finance charge, expressed as an an nual percentage rate as determined under section 226.14(b).

(iii) The maximum annual percentage rate that may be imposed in a variablerate plan.

(2) Discounted and premium rates. If an advertisement states an initial annual per centage rate that is not based on the index and margin used to make later rate adjust ments in a variable-rate plan, the advertise ment also shall state the period of time such rate will be in effect, and, with equal prominence to the initial rate, a reasonably current annual percentage rate that would have been in effect using the index and margin.

(3) Balloon payment. If an advertisement contains a statement about any minimum periodic payment, the advertisement also shall state, if applicable, that a balloon pay ment may result.366 (4) Tax implications. An advertisement that states that any interest expense incurred under the home-equity plan is or may be tax deductible may not be misleading in this regard.

(5) Misleading terms. An advertisement may not refer to a home-equity plan as “free money” or contain a similarly mis leading term.

SUBPART C—CLOSED-END CREDIT SECTION 226.17—General Disclosure Requirements (a) Form o f disclosures.

(1) The creditor shall make the disclosures required by this subpart clearly and con spicuously in writing, in a form that the consumer may keep. The disclosures shall be grouped together, shall be segregated from everything else, and shall not contain any information not directly related37 to the disclosures required under section 226.18.38 ^ See footnote 10b.

37 The disclosures may include an acknowledgment of re ceipt, the date of the transaction, and the consumer’s name, address, and account number. 38 The following disclosures may be made together or separately from other required disclosures: the creditor’s identity under section 226.18(a), the variable rate example under section 226.18(f)(4), insurance under section 226.18(n), and certain security interest charges under sec tion 226.18(0).

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§ 226.17 Regulation Z The itemization of the amount financed under section 226.18(c)(1) must be separate from the other disclosures under that section.

(2) The terms “finance charge” and “an nual percentage rate,” when required to be disclosed under section 226.18(d) and (e) together with a corresponding amount or percentage rate, shall be more conspicuous than any other disclosure, except the credi tor’s identity under section 226.18(a). (b) Time o f disclosures. The creditor shall make disclosures before consummation of the transaction. In certain residential mortgage transactions, special timing requirements are set forth in section 226.19(a). In certain variable-rate transactions, special timing require ments for variable-rate disclosures are set forth in section 226.19(b) and section 226.20(c). In certain transactions involving mail or telephone orders or a series of sales, the timing of the disclosures may be delayed in accordance with paragraphs (g) and (h) of this section.

(c) Basis of disclosures and use of estimates. (1) The disclosures shall reflect the terms of the legal obligation between the parties. (2) If any information necessary for an ac curate disclosure is unknown to the credi tor, it shall make the disclosure based on the best information reasonably available and shall state that the disclosure is an estimate.

(3) The creditor may disregard the effects of the following in making calculations and disclosures:

(i) That payments must be collected in whole cents.

(ii) That dates of scheduled payments and advances may be changed because the scheduled date is not a business day. (iii) That months have different numbers of days.

(iv) The occurrence of leap year. (4) In making calculations and disclosures, the creditor may disregard any irregularity in the first period that falls within the limits described below and any payment schedule irregularity that results from the irregular first period— (i) For transactions in which the term is less than 1 year, a first period not more than 6 days shorter or 13 days longer than a regular period;

(ii) For transactions in which the term is at least 1 year and less than 10 years, a first period not more than 11 days shorter or 21 days longer than a regular period; and (iii) For transactions in which the term is at least 10 years, a first period shorter than or not more than 32 days longer than a regular period.

(5) If an obligation is payable on demand, the creditor shall make the disclosures based on an assumed maturity of one year. If an alternate maturity date is stated in the legal obligation between the parties, the dis closures shall be based on that date. (6) (i) A series of advances under an agree ment to extend credit up to a certain amount may be considered as one transaction.

(ii) When a multiple-advance loan to fi nance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction.

(d) Multiple creditors; multiple consumers. If a transaction involves more than one creditor, only one set of disclosures shall be given and the creditors shall agree among themselves which creditor must comply with the require ments that this regulation imposes on any or all of them. If there is more than one con sumer, the disclosures may be made to any consumer who is primarily liable on the obli gation. If the transaction is rescindable under section 226.23, however, the disclosures shall be made to each consumer who has the right to rescind.

(e) Effect of subsequent events. If a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation of this regulation, although new disclosures may be required under paragraph (f) of this section, section 226.19, or section 226.20. (f) Early disclosures. If disclosures are given

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Regulation Z § 226.18 before the date of consummation of a transac tion and a subsequent event makes them inac curate, the creditor shall disclose the changed terms before consummation, if the annual per centage rate in the consummated transaction varies from the annual percentage rate dis closed under section 226.18(e) by more than */8 of 1 percentage point in a regular transac tion, or more than lU of 1 percentage point in an irregular transaction, as defined in section 226.22(a).

(g) Mail or telephone orders—delay in disclo sures. If a creditor receives a purchase order or a request for an extension of credit by mail, telephone, or any other written or elec tronic communication without face-to-face or direct telephone solicitation, the creditor may delay the disclosures until the due date of the first payment, if the following information for representative amounts or ranges of credit is made available in written form to the con sumer or to the public before the actual purchase order or request:

(1) The cash price or the principal loan amount.

(2) The total sale price.

(3) The finance charge.

(4) The annual percentage rate, and if the rate may increase after consummation, the following disclosures:

(i) The circumstances under which the rate may increase.

(ii) Any limitations on the increase. (iii) The effect of an increase. (5) The terms of repayment. (h) Series o f sales—delay in disclosures. If a credit sale is one of a series made under an agreement providing that subsequent sales may be added to an outstanding balance, the creditor may delay the required disclosures until the due date of the first payment for the current sale, if the following two conditions are met:

(1) The consumer has approved in writing the annual percentage rate or rates, the range of balances to which they apply, and the method of treating any unearned finance charge on an existing balance. (2) The creditor retains no security interest in any property after the creditor has re ceived payments equal to the cash price and any finance charge attributable to the sale of that property. For purposes of this provi sion, in the case of items purchased on dif ferent dates, the first purchased is deemed the first item paid for; in the case of items purchased on the same date, the lowest priced is deemed the first item paid for. (i) Interim student credit extensions. For each transaction involving an interim credit exten sion under a student credit program, the credi tor need not make the following disclosures: the finance charge under section 226.18(d), the payment schedule under section 226.18(g), the total of payments under section 226.18(h), or the total sale price under section 226.18(j). SECTION 226.18— Content of Disclosures For each transaction, the creditor shall dis close the following information as applicable: (a) Creditor. The identity of the creditor mak ing the disclosures.

(b) Amount financed. The “amount financed,” using that term, and a brief description such as “the amount of credit provided to you or on your behalf.” The amount financed is cal culated by— (1) Determining the principal loan amount or the cash price (subtracting any downpayment);

(2) Adding any other amounts that are fi nanced by the creditor and are not part of the finance charge; and (3) Subtracting any prepaid finance charge. (c) Itemization o f amount financed. (1) A separate written itemization of the amount financed, including:39 (i) The amount of any proceeds distrib uted directly to the consumer. (ii) The amount credited to the con sumer’s account with the creditor. (iii) Any amounts paid to other persons by the creditor on the consumer’s behalf. Good faith estimates of settlement costs provided for transactions subject to the Real Estate Settlement Proce dures Act (12 USC 2601 et seq.) may be substituted for the disclosures required by paragraph (c) of this section.

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§ 226.18 Regulation Z The creditor shall identify those persons.40 (iv) The prepaid finance charge. (2) The creditor need not comply with paragraph (c)(1) of this section if the credi tor provides a statement that the consumer has the right to receive a written itemization of the amount financed, together with a space for the consumer to indicate whether it is desired, and the consumer does not re quest it.

(d) Finance charge. The “finance charge,” using that term, and a brief description such as “the dollar amount the credit will cost you.”41 (e) Annual percentage rate. The “annual per centage rate,” using that term, and a brief description such as “the cost of your credit as a yearly rate.”42 (f) Variable rate.

(1) If the annual percentage rate may in crease after consummation in a transaction not secured by the consumer’s principal dwelling or in a transaction secured by the consumer’s principal dwelling with a term of one year or less, the following disclosures:43 (i) The circumstances under which the rate may increase.

(ii) Any limitations on the increase. (iii) The effect of an increase. (iv) An example of the payment terms that would result from an increase. (2) If the annual percentage rate may in crease after consummation in a transaction secured by the consumer’s principal dwell 40 The following payees may be described using generic or other general terms and need not be further identified: public officials or government agencies, credit reporting agencies, appraisers, and insurance companies. 41 The finance charge shall be considered accurate if it is not more than $5 above or below the exact finance charge in a transaction involving an amount financed of $1,000 or less, or not more than $10 above or below the exact fi nance charge in a transaction involving an amount financed of more than $1,000.

42 For any transaction involving a finance charge of $5 or less on an amount financed of $75 or less, or a finance charge of $7.50 or less on an amount financed of more than $75, the creditor need not disclose the annual percentage rate.

43 Information provided in accordance with sections 226.18(f)(2) and 226.19(b) may be substituted for the dis closures required by paragraph (0(1) of this section. ing with a term greater than one year, the following disclosures:

(i) The fact that the transaction contains a variable-rate feature.

(ii) A statement that variable-rate disclo sures have been provided earlier. (g) Payment schedule. The number, amounts, and timing of payments scheduled to repay the obligation.

(1) In a demand obligation with no alter nate maturity date, the creditor may comply with this paragraph by disclosing the due dates or payment periods of any scheduled interest payments for the first year. (2) In a transaction in which a series of payments varies because a finance charge is applied to the unpaid principal balance, the creditor may comply with this paragraph by disclosing the following information: (i) The dollar amounts of the largest and smallest payments in the series. (ii) A reference to the variations in the other payments in the series. (h) Total of payments. The “total of pay ments,” using that term, and a descriptive ex planation such as “the amount you will have paid when you have made all scheduled payments.”44 (i) Demand feature. If the obligation has a de mand feature, that fact shall be disclosed. When the disclosures are based on an as sumed maturity of one year as provided in section 226.17(c)(5), that fact shall also be disclosed.

(j) Total sale price. In a credit sale, the “total sale price,” using that term, and a descriptive explanation (including the amount of any downpayment) such as “the total price of your purchase on credit, including your down payment of $________ ” The total sale price is the sum of the cash price, the items de scribed in paragraph (b)(2), and the finance charge disclosed under paragraph (d) of this section.

(k) Prepayment.

(1) When an obligation includes a finance charge computed from time to time by ap- In any transaction involving a single payment, the creditor need not disclose the total of payments.

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Regulation Z § 226.19 plication of a rate to the unpaid principal balance, a statement indicating whether or not a penalty may be imposed if the obliga tion is prepaid in full.

(2) When an obligation includes a finance charge other than the finance charge de scribed in paragraph (k)(l) of this section, a statement indicating whether or not the con sumer is entitled to a rebate of any finance charge if the obligation is prepaid in full. (0 Late payment. Any dollar or percentage charge that may be imposed before maturity due to a late payment, other than a deferral or extension charge.

(m) Security interest. The fact that the credi tor has or will acquire a security interest in the property purchased as part of the transac tion, or in other property identified by item or type.

(n) Insurance. The items required by section 226.4(d) in order to exclude certain insurance premiums from the finance charge. (o) Certain security-interest charges. The dis closures required by section 226.4(e) in order to exclude from the finance charge certain fees prescribed by law or certain premiums for insurance in lieu of perfecting a security interest.

(p) Contract reference. A statement that the consumer should refer to the appropriate con tract document for information about nonpay ment, default, the right to accelerate the ma turity of the obligation, and prepayment rebates and penalties. At the creditor’s option, the statement may also include a reference to the contract for further information about se curity interests and, in a residential mortgage transaction, about the creditor’s policy regard ing assumption of the obligation. (q) Assumption policy. In a residential mort gage transaction, a statement whether or not a subsequent purchaser of the dwelling from the consumer may be permitted to assume the re maining obligation on its original terms. (r) Required deposit. If the creditor requires the consumer to maintain a deposit as a con dition of the specific transaction, a statement that the annual percentage rate does not reflect the effect of the required deposit.45 SECTION 226.19— Certain Residential Mortgage Transactions (a) (1) Time o f disclosure. In a residential mortgage transaction subject to the Real Es tate Settlement Procedures Act (12 USC 2601 et seq.) the creditor shall make good faith estimates of the disclosures required by section 226.18 before consummation, or shall deliver or place them in the mail not later than three business days after the cred itor receives the consumer’s written applica tion, whichever is earlier.

(2) Redisclosure required. If the annual per centage rate in the consummated transaction varies from the annual percentage rate dis closed under section 226.18(e) by more than 'h of 1 percentage point in a regular transaction or more than lU of 1 percentage point in an irregular transaction, as defined in section 226.22, the creditor shall disclose the changed terms no later than consumma tion or settlement.

(b) Certain variable-rate transactions.45a If the annual percentage rate may increase after consummation in a transaction secured by the consumer’s principal dwelling with a term greater than one year, the following disclo sures must be provided at the time an applica tion form is provided or before the consumer pays a nonrefundable fee, whichever is earlier:45b (1) The booklet titled Consumer Handbook on Adjustable Rate Mortgages published by the Board and the Federal Home Loan Bank Board, or a suitable substitute. (2) A loan program disclosure for each variable-rate program in which the consumer A required deposit need not include, for example: (1) an escrow account for items such as taxes, insurance or repairs; (2) a deposit that earns not less than 5 percent per year; or (3) payments under a Morris Plan. 45‘ Information provided in accordance with variable-rate regulations of other federal agencies may be substituted for the disclosures required by paragraph (b) of this section. 45b Disclosures may be delivered or placed in the mail not later than three business days following receipt of a con sumer’s application when the application reaches the credi tor by telephone, or through an intermediary agent or broker.

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§ 226.19 Regulation Z expresses an interest. The following disclo sures, as applicable, shall be provided: (i) The fact that the interest rate, pay ment, or term of the loan can change. (ii) The index or formula used in making adjustments, and a source of information about the index or formula. (iii) An explanation of how the interest rate and payment will be determined, in cluding an explanation of how the index is adjusted, such as by the addition of a margin.

(iv) A statement that the consumer should ask about the current margin value and current interest rate. (v) The fact that the interest rate will be discounted, and a statement that the con sumer should ask about the amount of the interest rate discount. (vi) The frequency of interest rate and payment changes.

(vii) Any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance including, for example, an explanation of interest rate or payment limitations, negative amorti zation, and interest rate carryover. (viii) An historical example, based on a $10,000 loan amount, illustrating how payments and the loan balance would have been affected by interest rate changes implemented according to the terms of the loan program. The example shall be based upon index values begin ning in 1977 and be updated annually until a 15-year history is shown. Thereaf ter, the example shall reflect the most re cent 15 years of index values. The exam ple shall reflect all significant loan program terms, such as negative amorti zation, interest rate carryover, interest rate discounts, and interest rate and pay ment limitations, that would have been affected by the index movement during the period.

(ix) An explanation of how the consumer may calculate the payments for the loan amount to be borrowed based on the most recent payment shown in the histor ical example.

(x) The maximum interest rate and pay ment for a $10,000 loan originated at the :nost recent interest rate shown in the historical example assuming the maxi mum periodic increases in rates and pay ments under the program; and the initial interest rate and payment for that loan. (xi) The fact that the loan program con tains a demand feature.

(xii) The type of information that will be provided in notices of adjustments and the timing of such notices. (xiii) A statement that disclosure forms are available for the creditor’s other variable-rate loan programs.

SECTION 226.20— Subsequent Disclosure Requirements (a) Refinancings. A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new ob ligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. The new finance charge shall include any unearned portion of the old finance charge that is not credited to the existing obligation. The following shall not be treated as a refinancing: (1) A renewal of a single payment obliga tion with no change in the original terms. (2) A reduction in the annual percentage rate with a corresponding change in the payment schedule.

(3) An agreement involving a court proceeding.

(4) A change in the payment schedule or a change in collateral requirements as a result of the consumer’s default or delinquency, unless the rate is increased, or the new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance of the types described in section 226.4(d). (5) The renewal of optional insurance pur chased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as re quired by this subpart.

(b) Assumptions. An assumption occurs when a creditor expressly agrees in writing with a subsequent consumer to accept that consumer as a primary obligor on an existing residential

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Regulation Z § 226.22 mortgage transaction. Before the assumption occurs, the creditor shall make new disclo sures to the subsequent consumer, based on the remaining obligation. If the finance charge originally imposed on the existing obligation was an add-on or discount finance charge, the creditor need only disclose: (1) The unpaid balance of the obligation assumed.

(2) The total charges imposed by the credi tor in connection with the assumption. (3) The information required to be dis closed under section 226.18(k), (/), (m), and (n).

(4) The annual percentage rate originally imposed on the obligation.

(5) The payment schedule under section 226.18(g) and the total of payments under section 226.18(h), based on the remaining obligation.

(c) Variable-rate adjustments.45c An adjust ment to the interest rate with or without a corresponding adjustment to the payment in a variable-rate transaction subject to section 226.19(b) is an event requiring new disclo sures to the consumer. At least once each year during which an interest rate adjustment is implemented without an accompanying pay ment change, and at least 25, but no more than 120, calendar days before a payment at a new level is due, the following disclosures, as applicable, must be delivered or placed in the mail:

(1) The current and prior interest rates. (2) The index values upon which the cur rent and prior interest rates are based. (3) The extent to which the creditor has forgone any increase in the interest rate. (4) The contractual effects of the adjust ment, including the payment due after the adjustment is made, and a statement of the loan balance.

(5) The payment, if different from that re ferred to in paragraph (c)(4) of this section, that would be required to fully amortize the loan at the new interest rate over the re mainder of the loan term.

45c Information provided in accordance with variable-rate subsequent-disclosure regulations of other federal agencies may be substituted for the disclosure required by paragraph (c) of this section.

SECTION 226.21—Treatment of Credit Balances When a credit balance in excess of $1 is cre ated in connection with a transaction (through transmittal of funds to a creditor in excess of the total balance due on an account, through rebates of unearned finance charges or insur ance premiums, or through amounts otherwise owed to or held for the benefit of a con sumer), the creditor shall— (a) Credit the amount of the credit balance to the consumer’s account;

(b) Refund any part of the remaining credit balance, upon the written request of the con sumer; and (c) Make a good faith effort to refund to the consumer by cash, check, or money order, or credit to a deposit account of the consumer, any part of the credit balance remaining in the account for more than 6 months, except that no further action is required if the consumer’s current location is not known to the creditor and cannot be traced through the consumer’s last known address or telephone number. SECTION 226.22—Determination of Annual Percentage Rate (a) Accuracy of annual percentage rate. (1) The annual percentage rate is a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made. The annual percentage rate shall be determined in accordance with either the actuarial method or the United States Rule method. Explanations, equations and instructions for determining the annual percentage rate in accordance with the actuarial method are set forth in appendix J to this regulation.4** (2) As a general rule, the annual percentage 45d An error in disclosure of the annual percentage rate or finance charge shall not, in itself, be considered a violation of this regulation if (1) the error resulted from a corre sponding error in a calculation tool used in good faith by the creditor; and (2) upon discovery of the error, the credi tor promptly discontinues use of that calculation tool for disclosure purposes and notifies the Board in writing of the error in the calculation tool.

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§ 226.22 Regulation Z rate shall be considered accurate if it is not more than '/s of 1 percentage point above or below the annual percentage rate deter mined in accordance with paragraph (a)(1) of this section.

(3) In an irregular transaction, the annual percentage rate shall be considered accurate if it is not more than 'U of 1 percentage point above or below the annual percentage rate determined in accordance with para graph (a)(1) of this section.''6 (b) Computation tools.

(1) The Regulation Z Annual Percentage Rate Tables produced by the Board may be used to determine the annual percentage rate, and any rate determined from those ta bles in accordance with the accompanying instructions complies with the requirements of this section. Volume I of the tables ap plies to single-advance transactions involv ing up to 480 monthly payments or 104 weekly payments. It may be used for regu lar transactions and for transactions with any of the following irregularities: an irreg ular first period, an irregular first payment, and an irregular final payment. Volume II of the tables applies to transactions involv ing multiple advances and any type of pay ment or period irregularity. (2) Creditors may use any other computa tion tool in determining the annual percent age rate if the rate so determined equals the rate determined in accordance with appen dix J, within the degree of accuracy set forth in paragraph (a) of this section. (c) Single add-on rate transactions. If a sin gle add-on rate is applied to all transactions with maturities up to 60 months and if all payments are equal in amount and period, a single annual percentage rate may be dis closed for all those transactions, so long as it is the highest annual percentage rate for any such transaction.

(d) Certain transactions involving ranges of balances. For purposes of disclosing the an- For purposes of paragraph (a)(3) of this section, an irregular transaction is one that includes one or more of the following features: multiple advances, irregular payment pe riods, or irregular payment amounts (other than an irregular first period or an irregular first or final payment). nual percentage rate referred to in section 226.17(g)(4)(Mail or Telephone Orders— Delay in Disclosures) and (h)(Series of Sales—Delay in Disclosures), if the same fi nance charge is imposed on all balances within a specified range of balances, the an nual percentage rate computed for the median balance may be disclosed for all the balances. However, if the annual percentage rate com puted for the median balance understates the annual percentage rate computed for the low est balance by more than 8 percent of the lat ter rate, the annual percentage rate shall be computed on whatever lower balance will pro duce an annual percentage rate that does not result in an understatement of more than 8 percent of the rate determined on the lowest balance.

SECTION 226.23—Right of Rescission (a) Consumer’s right to rescind. (1) In a credit transaction in which a secur ity interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, ex cept for transactions described in paragraph (f) of this section.47 (2) To exercise the right to rescind, the consumer shall notify the creditor of the re scission by mail, telegram or other means of written communication. Notice is consid ered given when mailed, when filed for tel egraphic transmission or, if sent by other means, when delivered to the creditor’s des ignated place of business.

(3) The consumer may exercise the right to rescind until midnight of the third business day following consummation, delivery of the notice required by paragraph (b) of this section, or delivery of all material disclo 47 For purposes of this section, the addition to an existing obligation of a security interest in a consumer’s principal dwelling is a transaction. The right of rescission applies only to the addition of the security interest and not the existing obligation. The creditor shall deliver the notice re quired by paragraph (b) of this section but need not deliver new material disclosures. Delivery of the required notice shall begin the rescission period.

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Regulation Z § 226.23 sures,48 whichever occurs last. If the re quired notice or material disclosures are not delivered, the right to rescind shall expire three years after consummation, upon trans fer of all of the consumer’s interest in the property, or upon sale of the property, whichever occurs first. In the case of cer tain administrative proceedings, the rescis sion period shall be extended in accordance with section 125(f) of the act. (4) When more than one consumer in a transaction has the right to rescind, the ex ercise of the right by one consumer shall be effective as to all consumers. (b) Notice of right to rescind. In a transaction subject to rescission, a creditor shall deliver two copies of the notice of the right to rescind to each consumer entitled to rescind. The no tice shall be on a separate document that iden tifies the transaction and shall clearly and con spicuously disclose the following: (1) The retention or acquisition of a secur ity interest in the consumer’s principal dwelling.

(2) The consumer’s right to rescind the transaction.

(3) How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor’s place of business.

(d) Effects of rescission.

(1) When a consumer rescinds a transac tion, the security interest giving rise to the right of rescission becomes void and the ““ The term “material disclosures” means the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total of payments, the pay ment schedule, and the disclosures and limitations referred to in section 226.32(c) and (d). consumer shall not be liable for any amount, including any finance charge. (2) Within 20 calendar days after receipt of a notice of rescission, the creditor shall re turn any money or property that has been given to anyone in connection with the transaction and shall take any action neces sary to reflect the termination of the secur ity interest.

(3) If the creditor has delivered any money or property, the consumer may retain pos session until the creditor has met its obliga tion under paragraph (d)(2) of this section. When the creditor has complied with that paragraph, the consumer shall tender the money or property to the creditor or, where the latter would be impracticable or inequi table, tender its reasonable value. At the consumer’s option, tender of property may be made at the location of the property or at the consumer’s residence. Tender of money must be made at the creditor’s des ignated place of business. If the creditor does not take possession of the money or property within 20 calendar days after the consumer’s tender, the consumer may keep it without further obligation. (4) The procedures outlined in paragraphs (d)(2) and (3) of this section may be modi fied by court order.

(e) Consumer’s waiver of right to rescind. (1) The consumer may modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emer gency. To modify or waive the right, the consumer shall give the creditor a dated written statement that describes the emer gency, specifically modifies or waives the right to rescind, and bears the signature of all of the consumers entitled to rescind. Printed forms for this purpose are prohib ited, except as provided in paragraph (2) of this section.

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§ 226.23 Regulation Z ter area because of severe storms and flood ing in the Midwest.483 In this instance, creditors may use printed forms for the con sumer to waive the right to rescind. This exemption to paragraph (e)(1) of this sec tion shall expire one year from the date an area was declared a major disaster. (3) The consumer’s need to obtain funds immediately shall be regarded as a bona fide personal financial emergency provided that the dwelling securing the extension of credit is located in an area declared during June through September 1994 to be a major disaster area, pursuant to 42 USC 5170, be cause of severe storms and flooding in the South.4Sb In this instance, creditors may use printed forms for the consumer to waive the right to rescind. This exemption to para graph (e)(1) of this section shall expire one year from the date an area was declared a major disaster.

(4) The consumer’s need to obtain funds immediately shall be regarded as a bona fide personal financial emergency provided that the dwelling securing the extension of credit is located in an area declared during October 1994 to be a major disaster area, pursuant to 42 USC 5170, because of se vere storms and flooding in Texas.480 In this instance, creditors may use printed forms for the consumer to waive the right to rescind. This exemption to paragraph (e)(1) of this section shall expire one year from the date an area was declared a major disaster.

(f) Exempt transactions. The right to rescind does not apply to the following: (1) A residential mortgage transaction. (2) A refinancing or consolidation by the 48a A list of the affected areas will be maintained by the Board. Such areas now include parts of Illinois, Iowa, Min nesota, Missouri, Nebraska, South Dakota, and Wisconsin. 486 A list of the affected areas will be maintained and published by the Board. Such areas now include parts of Alabama, Florida, and Georgia. 48cA list of the affected areas will be maintained and published by the Board. Such areas now include the follow ing counties in Texas: Angelina, Austin, Bastrop, Brazos, Brazoria, Burleson, Chambers, Fayette, Fort Bend, Galves ton, Grimes, Hardin, Harris, Houston, Jackson, Jasper, Jef ferson, Lee, Liberty, Madison, Matagorda, Montgomery, Nacagdoches, Orange, Polk, San Augustine, San Jacinto, Shelby, Trinity, Victoria, Washington, Waller, Walker, and Wharton.

same creditor of an extension of credit al ready secured by the consumer’s principal dwelling. The right of rescission shall ap ply, however, to the extent the new amount financed exceeds the unpaid principal bal ance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation.

(3) A transaction in which a state agency is a creditor.

(4) An advance, other than an initial ad vance, in a series of advances or in a series of single-payment obligations that is treated as a single transaction under section 226.17 (c)(6), if the notice required by paragraph (b) of this section and all material disclo sures have been given to the consumer. (5) A renewal of optional insurance premi ums that is not considered a refinancing under section 226.20(a)(5). SECTION 226.24— Advertising (a) Actually available terms. If an advertise ment for credit states specific credit terms, it shall state only those terms that actually are or will be arranged or offered by the creditor. (b) Advertisement of rate of finance charge. If an advertisement states a rate of finance charge, it shall state the rate as an “annual percentage rate,” using that term. If the an nual percentage rate may be increased after consummation, the advertisement shall state that fact. The advertisement shall not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid bal ance may be stated in conjunction with, but not more conspicuously than, the annual per centage rate.

(1) If any of the following terms is set forth in an advertisement, the advertisement shall meet the requirements of paragraph (c)(2) of this section:

(i) The amount or percentage of any downpayment.

(ii) The number of payments or period of repayment.

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Regulation Z § 226.27 (iii) The amount of any payment. (iv) The amount of any finance charge. (2) An advertisement stating any of the terms in paragraph (c)(1) of this section shall state the following term s,49 as applicable:

(i) The amount or percentage of the downpayment.

(ii) The terms of repayment. (iii) The “annual percentage rate,” using that term, and, if the rate may be in creased after consummation, that fact. (d) Catalogs and multiple-page advertise ments.

(1) If a catalog or other multiple-page ad vertisement gives information in a table or schedule in sufficient detail to permit deter mination of the disclosures required by paragraph (c)(2) of this section, it shall be considered a single advertisement if— (i) The table or schedule is clearly set forth; and (ii) Any statement of the credit terms in paragraph (c)(1) of this section appearing anywhere else in the catalog or advertise ment clearly refers to the page on which the table or schedule begins. (2) A catalog or multiple-page advertise ment complies with paragraph (c)(2) of this section if the table or schedule of terms in cludes all appropriate disclosures for a rep resentative scale of amounts up to the level of the more commonly sold higher-priced property or services offered. SUBPART D—MISCELLANEOUS SECTION 226.25—Record Retention (a) General rule. A creditor shall retain evi dence of compliance with this regulation (other than advertising requirements under sections 226.16 and 226.24) for two years af ter the date disclosures are required to be made or action is required to be taken. The administrative agencies responsible for enforc 49 An example of one or more typical extensions of credit with a statement of all the terms applicable to each may be used.

ing the regulation may require creditors under their jurisdictions to retain records for a longer period if necessary to carry out their enforcement responsibilities under section 108 of the act.

(b) Inspection of records. A creditor shall per mit the agency responsible for enforcing this regulation with respect to that creditor to in spect its relevant records for compliance. SECTION 226.26—Use of Annual Percentage Rate in Oral Disclosures (a) Open-end credit. In an oral response to a consumer’s inquiry about the cost of open-end credit, only the annual percentage rate or rates shall be stated, except that the periodic rate or rates also may be stated. If the annual per centage rate cannot be determined in advance because there are finance charges other than a periodic rate, the corresponding annual per centage rate shall be stated, and other cost in formation may be given.

(b) Closed-end credit. In an oral response to a consumer’s inquiry about the cost of closedend credit, only the annual percentage rate shall be stated, except that a simple annual rate or periodic rate also may be stated if it is applied to an unpaid balance. If the annual percentage rate cannot be determined in ad vance, the annual percentage rate for a sample transaction shall be stated, and other cost in formation for the consumer’s specific transac tion may be given.

SECTION 226.27— Spanish-Language Disclosures All disclosures required by this regulation shall be made in the English language, except in the Commonwealth of Puerto Rico, where creditors may, at their option, make disclo sures in the Spanish language. If Spanish dis closures are made, English disclosures shall be provided on the consumer’s request, either in substitution for or in addition to the Span ish disclosures. This requirement for providing English disclosures on request shall not apply to advertisements subject to sections 226.16 and 226.24 of this regulation.

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§ 226.28 Regulation Z SECTION 226.28—Effect on State Laws (a) Inconsistent disclosure requirements. (1) Except as provided in paragraph (d) of this section, state law requirements that are inconsistent with the requirements contained in chapter 1 (General Provisions), chapter 2 (Credit Transactions), or chapter 3 (Credit Advertising) of the act and the implement ing provisions of this regulation are pre empted to the extent of the inconsistency. A state law is inconsistent if it requires a creditor to make disclosures or take actions that contradict the requirements of the fed eral law. A state law is contradictory if it requires the use of the same term to re present a different amount or a different meaning than the federal law, or if it re quires the use of a term different from that required in the federal law to describe the same item. A creditor, state, or other inter ested party may request the Board to deter mine whether a state law requirement is in consistent. After the Board determines that a state law is inconsistent, a creditor may not make disclosures using the inconsistent term or form.

(2) (i) State law requirements are inconsis tent with the requirements contained in sections 161 (Correction of Billing Er rors) or 162 (Regulation of Credit Re ports) of the act and the implementing provisions of this regulation and are pre empted if they provide rights, responsibil ities, or procedures for consumers or creditors that are different from those re quired by the federal law. However, a state law that allows a consumer to in quire about an open-end credit account and imposes on the creditor an obligation to respond to such inquiry after the time allowed in the federal law for the con sumer to submit written notice of a bill ing error shall not be preempted in any situation where the time period for mak ing written notice under this regulation has expired. If a creditor gives written notice of a consumer’s rights under such state law, the notice shall state that reli ance on the longer time period available under state law may result in the loss of important rights that could be preserved by acting more promptly under federal law; it shall also explain that the state law provisions apply only after expiration of the time period for submitting a proper written notice of a billing error under the federal law. If the state disclo sures are made on the same side of a page as the required federal disclosures, the state disclosures shall appear under a demarcation line below the federal dis closures, and the federal disclosures shall be identified by a heading indicating that they are made in compliance with federal law.

(ii) State law requirements are inconsis tent with the requirements contained in chapter 4 (Credit Billing) of the act (other than sections 161 or 162) and the implementing provisions of this regula tion and are preempted if the creditor cannot comply with state law without vi olating federal law.

(iii) A state may request the Board to de termine whether its law is inconsistent with chapter 4 of the act and its imple menting provisions.

(b) Equivalent disclosure requirements. If the Board determines that a disclosure required by state law (other than a requirement relating to the finance charge, annual percentage rate or the disclosures required under section 226.32) is substantially the same in meaning as a dis closure required under the act or this regula tion, creditors in that state may make the state disclosure in lieu of the federal disclosure. A creditor, state, or other interested party may request the Board to determine whether a state disclosure is substantially the same in mean ing as a federal disclosure. (c) Request for determination. The procedures under which a request for a determination may be made under this section are set forth in appendix A.

(d) Special rule for credit and charge cards. State law requirements relating to the disclo sure of credit information in any credit or charge card application or solicitation that is subject to the requirements of section 127(c) of chapter 2 of the act (section 226.5a of the regulation) or in any renewal notice for a

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Regulation Z § 226.31 credit or charge card that is subject to the re quirements of section 127(d) of chapter 2 of the act (section 226.9(e) of the regulation) are preempted. State laws relating to the enforce ment of section 127(c) and (d) of the act are not preempted.

SECTION 226.29— State Exemptions (a) General rule. Any state may apply to the Board to exempt a class of transactions within the state from the requirements of chapter 2 (Credit Transactions) or chapter 4 (Credit Bill ing) of the act and the corresponding provi sions of this regulation. The Board shall grant an exemption if it determines that— (1) the state law is substantially similar to the federal law or, in the case of chapter 4, affords the consumer greater protection than the federal law; and (2) there is adequate provision for enforcement.

(b) Civil liability.

(1) No exemptions granted under this sec tion shall extend to the civil liability provi sions of sections 130 and 131 of the act. (2) If an exemption has been granted, the disclosures required by the applicable state law (except any additional requirements not imposed by federal law) shall constitute the disclosures required by this act. (c) Applications. The procedures under which a state may apply for an exemption under this section are set forth in appendix B. SECTION 226.30—Limitation on Rates A creditor shall include in any consumer credit contract secured by a dwelling and sub ject to the act and this regulation the maxi mum interest rate that may be imposed during the term of the obligation50 when— (a) in the case of closed-end credit, the an nual percentage rate may increase after con summation, or * Compliance with this section will constitute compli ance with the disclosure requirements on limitations on in creases in footnote 12 to section 226.6(a)(2) and section 226.18(f)(2) until October 1, 1988. (b) in the case of open-end credit, the annual percentage rate may increase during the plan. SUBPART E— SPECIAL RULES FOR CERTAIN HOME MORTGAGE TRANSACTIONS SECTION 226.31—General Rules (a) Relation to other subparts in this part. The requirements and limitations of this sub part are in addition to and not in lieu of those contained in other subparts of this part. (b) Form o f disclosure. The creditor shall make the disclosures required by this subpart clearly and conspicuously in writing, in a form that the consumer may keep. (c) Timing o f disclosure.

(1) Disclosures for certain closed-end home mortgages. The creditor shall furnish the disclosures required by section 226.32 at least three business days prior to consum mation of a mortgage transaction covered by section 226.32.

(i) Change in terms. After complying with paragraph (c)(1) of this section and prior to consummation, if the creditor changes any term that makes the disclo sures inaccurate, new disclosures shall be provided in accordance with the require ments of this subpart.

(ii) Telephone disclosures. A creditor may provide new disclosures by tele phone if the consumer initiates the change and if, at consummation— (A) the creditor provides new written disclosures; and (B) the consumer and creditor sign a statement that the new disclosures were provided by telephone at least three days prior to consummation. (iii) Consumer’s waiver o f waiting pe riod before consummation. The consumer may, after receiving the disclosures re quired by paragraph (c)(1) of this section, modify or waive the three-day waiting period between delivery of those disclo sures and consummation if the consumer determines that the extension of credit is

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§ 226.31 Regulation Z needed to meet a bona fide personal fi nancial emergency. To modify or waive the right, the consumer shall give the creditor a dated written statement that de scribes the emergency, specifically modi fies or waives the waiting period, and bears the signature of all the consumers entitled to the waiting period. Printed forms for this purpose are prohibited, ex cept when creditors are permitted to use printed forms pursuant to section 226.23(e)(2).

(2) Disclosures for reverse mortgages. The creditor shall furnish the disclosures re quired by section 226.33 at least three busi ness days prior to— (i) consummation of a closed-end credit transaction; or (ii) the first transaction under an openend credit plan.

(d) Basis o f disclosures and use o f estimates. Disclosures shall reflect the terms of the legal obligation between the parties. If any informa tion necessary for accurate disclosure is un known to the creditor, the creditor shall make the disclosure based on the best information reasonably available and shall state clearly that the disclosure is an estimate. (e) Multiple creditors; multiple consumers. If a transaction involves more than one creditor, only one set of disclosures shall be given and the creditors shall agree among themselves which creditor must comply with the require ments that this part imposes on any or all of them. If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the obligation. If the transaction is rescindable under section 226.15 or section 226.23, however, the disclo sures shall be made to each consumer who has the right to rescind.

(f) Effect of subsequent events. If a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation of Regulation Z (12 CFR 226), although new disclosures may be required for mortgages covered by section 226.32 under paragraph (c) of this section, section 226.9(c), section 226.19, or section 226.20.

(g) Accuracy of annual percentage rate. For purposes of section 226.32, the annual per centage rate shall be considered accurate if it is accurate according to the requirements and within the tolerances set forth in section 226.22.

SECTION 226.32—Requirements for Certain Closed-End Home Mortgages (a) Coverage.

(1) Except as provided in paragraph (a)(2) of this section, the requirements of this sec tion apply to a consumer credit transaction that is secured by the consumer’s principal dwelling, and in which either— (i) the annual percentage rate at consum mation will exceed by more than 10 per centage points the yield on Treasury se curities having comparable periods of maturity to the loan maturity as of the 15 th day of the month immediately pre ceding the month in which the applica tion for the extension of credit is re ceived by the creditor; or (ii) the total points and fees payable by the consumer at or before loan closing will exceed the greater of 8 percent of the total loan amount, or $400; the $400 figure shall be adjusted annually on Janu ary 1 by the annual percentage change in the Consumer Price Index that was re ported on the preceding June 1. (2) This section does not apply to the fol lowing:

(i) a residential mortgage transaction. (ii) a reverse-mortgage transaction sub ject to section 226.33.

(iii) an open-end credit plan subject to subpart B of this part.

(b) Definitions. For purposes of this subpart, the following definitions apply: (1) For purposes of paragraph (a)(l)(ii) of this section, points and fees means— (i) all items required to be disclosed under section 226.4(a) and 226.4(b), ex cept interest or the time-price differential; (ii) all compensation paid to mortgage brokers; and (iii) all items listed in section 226.4(c)(7) (other than amounts held for future pay

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Regulation Z § 226.32 ment of taxes) unless the charge is rea sonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor. (2) Affiliate means any company that con trols, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956 (12 USC 1841 et seq.).

(c) Disclosures. In addition to other disclo sures required by this part, in a mortgage sub ject to this section the creditor shall disclose the following:

(1) Notices. The following statement: “You are not required to complete this agreement merely because you have received these disclosures or have signed a loan applica tion. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obliga tions under the loan.”

(2) Annual percentage rate. The annual percentage rate.

(3) Regular payment. The amount of the regular monthly (or other periodic) pay ment.

(4) Variable rate. For variable-rate transac tions, a statement that the interest rate and monthly payment may increase, and the amount of the single maximum monthly payment, based on the maximum interest rate required to be disclosed under section 226.30.

(d) Limitations. A mortgage transaction sub ject to this section may not provide for the following terms:

(l)(i) Balloon payment. For a loan with a term of less than five years, a payment schedule with regular periodic payments that when aggregated do not fully amor tize the outstanding principal balance. (ii) Exception. The limitations in para graph (d)(l)(i) of this section do not ap ply to loans with maturities of less than one year, if the purpose of the loan is a “bridge” loan connected with the acqui sition or construction of a dwelling in tended to become the consumer’s princi pal dwelling.

(2) Negative amortization. A payment schedule with regular periodic payments that cause the principal balance to increase. (3) Advance payments. A payment schedule that consolidates more than two periodic payments and pays them in advance from the proceeds.

(4) Increased interest rate. An increase in the interest rate after default. (5) Rebates. A refund calculated by a method less favorable than the actuarial method (as defined by section 933(d) of the Housing and Community Development Act of 1992, 15 USC 1615(d)), for rebates of interest arising from a loan acceleration due to default.

(6) Prepayment penalties. Except as al lowed under paragraph (d)(7) of this sec tion, a penalty for paying all or part of the principal before the date on which the prin cipal is due. A prepayment penalty includes computing a refund of unearned interest by a method that is less favorable to the con sumer than the actuarial method, as defined by section 933(d) of the Housing and Com munity Development Act of 1992. (7) Prepayment-penalty exception. A mort gage transaction subject to this section may provide for a prepayment penalty otherwise permitted by law (including a refund calcu lated according to the rule of 78s) if— (i) the penalty can be exercised only for the first five years following consumma tion;

(ii) the source of the prepayment funds is not a refinancing by the creditor or an affiliate of the creditor; and (iii) at consummation, the consumer’s to tal monthly debts (including amounts owed under the mortgage) do not exceed 50 percent of the consumer’s monthly gross income, as verified by the con sumer’s signed financial statement, a credit report, and payment records for employment income.

(e) Prohibited acts and practices. A creditor extending mortgage credit subject to this sec tion may not— (1) Repayment ability. Engage in a pattern or practice of extending such credit to a consumer based on the consumer’s collat

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§ 226.32 Regulation Z eral if, considering the consumer’s current and expected income, current obligations, and employment status, the consumer will be unable to make the scheduled payments to repay the obligation.

(2) Home-improvement contracts. Pay a contractor under a home-improvement con tract from the proceeds of a mortgage cov ered by this section, other than— (i) by an instrument payable to the con sumer or jointly to the consumer and the contractor; or (ii) at the election of the consumer, through a third-party escrow agent in ac cordance with terms established in a writ ten agreement signed by the consumer, the creditor, and the contractor prior to the disbursement.

(3) Notice to assignee. Sell or otherwise as sign a mortgage subject to this section without furnishing the following statement to the purchaser or assignee: “Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchas ers or assignees of this mortgage could be liable for all claims and defenses with re spect to the mortgage that the borrower could assert against the creditor.” SECTION 226.33—Requirements for Reverse Mortgages (a) Definition. For purposes of this subpart, reverse-mortgage transaction means a nonre course consumer credit obligation in which— (1) a mortgage, deed of trust, or equivalent consensual security interest securing one or more advances is created in the consumer’s principal dwelling; and (2) any principal, interest, or shared appre ciation or equity is due and payable (other than in the case of default) only after— (i) the consumer dies;

(ii) the dwelling is transferred; or (iii) the consumer ceases to occupy the dwelling as a principal dwelling. (b) Content o f disclosures. In addition to other disclosures required by this part, in a reverse-mortgage transaction the creditor shall provide the following disclosures in a form substantially similar to the model form found in paragraph (d) of appendix K of this part: (1) Notice. A statement that the consumer is not obligated to complete the reversemortgage transaction merely because the consumer has received the disclosures re quired by this section or has signed an ap plication for a reverse-mortgage loan. (2) Total-annual-loan-cost rates. A good faith projection of the total cost of the credit, determined in accordance with para graph (c) of this section and expressed as a table of “total-annual-loan-cost rates,” us ing that term, in accordance with appendix K of this part.

(3) Itemization o f pertinent information. An itemization of loan terms, charges, the age of the youngest borrower, and the appraised property value.

(4) Explanation o f table. An explanation of the table of total-annual-loan-cost rates as provided in the model form found in para graph (d) of appendix K of this part. (c) Projected total cost o f credit. The pro jected total cost of credit shall reflect the fol lowing factors, as applicable: (1) Costs to consumer. All costs and charges to the consumer, including the costs of any annuity the consumer purchases as part of the reverse-mortgage transaction. (2) Payments to consumer. All advances to and for the benefit of the consumer, includ ing annuity payments that the consumer will receive from an annuity that the con sumer purchases as part of the reversemortgage transaction.

(3) Additional creditor compensation. Any shared appreciation or equity in the dwell ing that the creditor is entitled by contract to receive.

(4) Limitations on consumer liability. Any limitation on the consumer’s liability (such as nonrecourse limits and equity-conservation agreements).

(5) Assumed annual appreciation rates. Each of the following assumed annual ap preciation rates for the dwelling: (i) 0 percent.

(ii) 4 percent.

(iii) 8 percent.

(6) Assumed loan period.

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Regulation Z Appendix B (i) Each of the following assumed loan periods, as provided in appendix L of this part:

(A) Two years.

(B) The actuarial life expectancy of the consumer to become obligated on the reverse-mortgage transaction (as of that consumer’s most recent birthday). In the case of multiple consumers, the period shall be the actuarial life expec tancy of the youngest consumer (as of that consumer’s most recent birthday). (C) The actuarial life expectancy spec ified by paragraph (c)(6)(i)(B) of this section, multiplied by a factor of 1.4 and rounded to the nearest full year. (ii) At the creditor’s option, the actuarial life expectancy specified by paragraph (c)(6)(i)(B) of this section, multiplied by a factor of 0.5 and rounded to the nearest full year.

APPENDIX A—Effect on State Laws Request for Determination A request for a determination that a state law is inconsistent or that a state law is substan tially the same as the act and regulation shall be in writing and addressed to the Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. The request shall be made pursuant to the procedures herein and the Board’s Rules of Procedure (12 CFR 262).

Supporting Documents A request for a determination shall include the following items:

(1) The text of the state statute, regulation, or other document that is the subject of the request.

(2) Any other statute, regulation, or judicial or administrative opinion that implements, interprets, or applies the relevant provision. (3) A comparison of the state law with the corresponding provision of the federal law, including a full discussion of the basis for the requesting party’s belief that the state provision is either inconsistent or substan tially the same.

(4) Any other information that the request ing party believes may assist the Board in its determination.

Public Notice o f Determination Notice that the Board intends to make a deter mination (either on request or on its own mo tion) will be published in the Federal Regis ter, with an opportunity for public comment, unless the Board finds that notice and oppor tunity for comment would be impracticable, unnecessary, or contrary to the public interest and publishes its reasons for such decision. Subject to the Board’s Rules Regarding Availability of Information (12 CFR 261), all requests made, including any documents and other material submitted in support of the re quests, will be made available for public in spection and copying.

Notice After Determination Notice of a final determination will be pub lished in the Federal Register and the Board will furnish a copy of such notice to the party who made the request and to the appropriate state official.

Reversal of Determination The Board reserves the right to reverse a de termination for any reason bearing on the cov erage or effect of state or federal law. Notice of reversal of a determination will be published in the Federal Register and a copy furnished to the appropriate state official. APPENDIX B— State Exemptions Application Any state may apply to the Board for a deter mination that a class of transactions subject to state law is exempt from the requirements of the act and this regulation. An application shall be in writing and addressed to the Secre tary, Board of Governors of the Federal Re serve System, Washington, D.C. 20551, and shall be signed by the appropriate state offi cial. The application shall be made pursuant to the procedures herein and the Board’s Rules of Procedure (12 CFR 262).

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Appendix B Regulation Z Supporting Documents An application shall be accompanied by: (1) The text of the state statute or regula tion that is the subject of the application, and any other statute, regulation, or judicial or administrative opinion that implements, interprets, or applies it.

(2) A comparison of the state law with the corresponding provisions of the federal law. (3) The text of the state statute or regula tion that provides for civil and criminal lia bility and administrative enforcement of the state law.

(4) A statement of the provisions for en forcement, including an identification of the state office that administers the relevant law, information on the funding and the number and qualifications of personnel en gaged in enforcement, and a description of the enforcemnt procedures to be followed, including information on examination pro cedures, practices, and policies. If an ex emption application extends to federally chartered institutions, the applicant must furnish evidence that arrangements have been made with the appropriate federal agencies to ensure adequate enforcement of state law in regard to such creditors. (5) A statement of reasons to support the applicant’s claim that an exemption should be granted.

Public Notice o f Application Notice of an application will be published, with an opportunity for public comment, in the Federal Register, unless the Board finds that notice and opportunity for comment would be impracticable, unnecessary, or con trary to the public interest and publishes its reasons for such decision.

Subject to the Board’s Rules Regarding Availability of Information (12 CFR 261), all applications made, including any documents and other material submitted in support of the applications, will be made available for public inspection and copying. A copy of the appli cation also will be made available at the Fed eral Reserve Bank of each District in which the applicant is situated.

Favorable Determination If the Board determines on the basis of the information before it that an exemption should be granted, notice of the exemption will be published in the Federal Register, and a copy furnished to the applicant and to each federal official responsible for administrative enforcement.

The appropriate state official shall inform the Board within 30 days of any change in its relevant law or regulations. The official shall file with the Board such periodic reports as the Board may require.

The Board will inform the appropriate state official of any subsequent amendments to the federal law, regulation, interpretations, or en forcement policies that might require an amendment to state law, regulation, interpreta tions, or enforcement procedures. Adverse Determination If the Board makes an initial determination that an exemption should not be granted, the Board will afford the applicant a reasonable opportunity to demonstrate further that an ex emption is proper. If the Board ultimately finds that an exemption should not be granted, notice of an adverse determination will be published in the Federal Register and a copy furnished to the applicant.

Revocation o f Exemption The Board reserves the right to revoke an ex emption if at any time it determines that the standards required for an exemption are not met.

Before taking such action, the Board will notify the appropriate state official of its in tent, and will afford the official such opportu nity as it deems appropriate in the circum stances to demonstrate that revocation is improper. If the Board ultimately finds that revocation is proper, notice of the Board’s in tention to revoke such exemption will be pub lished in the Federal Register with a reasona ble period of time for interested persons to comment.

Notice of revocation of an exemption will be published in the Federal Register. A copy of such notice will be furnished to the appro

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Regulation Z Appendix D priate state official and to the federal officials responsible for enforcement. Upon revocation of an exemption, creditors in that state shall then be subject to the requirements of the fed eral law.

APPENDIX C—Issuance of Staff Interpretations Official Staff Interpretations Officials in the Board’s Division of Consumer and Community Affairs are authorized to is sue official staff interpretations of this regula tion. These interpretations provide the protec tion afforded under section 130(f) of the act. Except in unusual circumstances, such inter pretations will not be issued separately but will be incorporated in an official commentary to the regulation, which will be amended periodically.

Requests for Issuance o f Official Staff Interpretations A request for an official staff interpretation shall be in writing and addressed to the Direc tor, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. The request shall contain a complete statement of all relevant facts concerning the issue, in cluding copies of all pertinent documents. Scope of Interpretations No staff interpretations will be issued approv ing creditors’ forms, statements, or calculation tools or methods. This restriction does not ap ply to forms, statements, tools, or methods whose use is required or sanctioned by a gov ernment agency.

APPENDIX D—Multiple-Advance Construction Loans Section 226.17(c)(6) permits creditors to treat multiple-advance loans to finance construction of a dwelling that may be permanently fi nanced by the same creditor either as a single transaction or as more than one transaction. If the actual schedule of advances is not known, the following methods may be used to esti mate the interest portion of the finance charge and the annual percentage rate and to make disclosures. If the creditor chooses to disclose the construction phase separately, whether in terest is payable periodically or at the end of construction, part I may be used. If the credi tor chooses to disclose the construction and the permanent financing as one transaction, part II may be used.

Part I—Construction Period Disclosed Separately A. If interest is payable only on the amount actually advanced for the time it is outstanding:

1. Estimated interest—Assume that one-half of the commitment amount is outstanding at the contract interest rate for the entire con struction period.

2. Estimated annual percentage rate— Assume a single-payment loan that matures at the end of the construction period. The finance charge is the sum of the estimated interest and any prepaid finance charge. The amount financed for computation purposes is determined by subtracting any prepaid fi nance charge from one-half of the commit ment amount.

3. Repayment schedule—The number and amounts of any interest payments may be omitted in disclosing the payment schedule under section 226.18(g). The fact that inter est payments are required and the timing of such payments shall be disclosed. 4. Amount financed—The amount financed for disclosure purposes is the entire com mitment amount less any prepaid finance charge.

B. If interest is payable on the entire commit ment amount without regard to the dates or amounts of actual disbursement: 1. Estimated interest—Assume that the en tire commitment amount is outstanding at the contract interest rate for the entire con struction period.

2. Estimated annual percentage rate— Assume a single payment loan that matures at the end of the construction period. The finance charge is the sum of the estimated interest and any prepaid finance charge. The

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Appendix D Regulation Z amount financed for computation purposes is determined by subtracting any prepaid fi nance charge from one-half of the commit ment amount.

3. Repayment schedule—Interest payments shall be disclosed in making the repayment schedule disclosure under section 226.18(g). 4. Amount financed—The amount financed for disclosure purposes is the entire com mitment amount less any prepaid finance charge.

EXAMPLE:

Assume a $50,000 loan commitment at 10.5 percent interest with a five-month construction period and a prepaid finance charge of 2 points. (A) (B) Estimated interest:

$25,000 X .105 v 12 X 5 = $1,093.75 $50,000 X .105 h- 12 X 5 = $2,187.50 Estimated APR:

(1,093.75 + 1,000) X 100 5 X 12 = (2,187.50 + 1,000) X 100 v 5 X 12 = (25,000 - 1,000) 20.94% (25,000 - 1,000) 31.88% Disclosures:

Amount financed $49,000.00 $49,000.00 Prepaid finance charge 1,000.00 1,000.00 FINANCE CHARGE (estimate) 2,093.75 3,187.50 ANNUAL PERCENTAGE RATE (estimate) 20.94% 31.88% Repayment: One payment of princi pal of $50,000 on 12-12-80. Interest on the amount of credit outstanding will be paid monthly.

4 monthly payments of $437.50, be ginning 8-12-80, and a final pay ment of $50,437.50 on 12-12-80. Total of payments (estimate) $51,093.75 $52,187.50 Part II—Construction and permanent financing disclosed as one transaction. A. The creditor shall estimate the interest payable during the construction period to be included in the total finance charge as follows: 1. If interest is payable only on the amount actually advanced for the time it is out standing, assume that one-half of the com mitment amount is outstanding at the con tract interest rate for the entire construction period.

2. If interest is payable on the entire com mitment amount without regard to the dates or amounts of actual disbursement, assume that the entire commitment amount is out standing at the contract rate for the entire construction period.

B. The creditor shall compute the estimated annual percentage rate as follows: 1. Estimated interest payable during the construction period shall be treated for computation purposes as a prepaid finance charge (although it shall not be treated as a prepaid finance charge for disclosure purposes).

2. The number of payments shall not in clude any payments of interest only that are made during the construction period. 3. The first payment period shall consist of one-half of the construction period plus the

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Regulation Z Appendix D period between the end of the construction period and the first amortization payment. C. The creditor shall disclose the repayment schedule as follows:

I. For loans under paragraph A.I. of part II, without reflecting the number or amounts of payments of interest only that are made during the construction period. The fact that interest payments must be made and the timing of such payments shall be disclosed.

2. For loans under paragraph A.2. of part 13, including any payments of interest only that are made during the construction period.

D. The creditor shall disclose the amount fi nanced as the entire commitment amount less any prepaid finance charge. EXAMPLE:

Assume a $50,000 loan commitment at 10.5 percent interest with a five-month construction period and a prepaid finance charge of 2 points, followed by 30-year permanent financing at the same rate with monthly amortization payments of $457.37. Computation of Estimated APR Interest on amount advanced Estimated construction interest: $25,000 X .105 + 12 X 5 = Estimated total finance charge: 360 X $457.37 = $164,653.20 Principal -50,000.00 Interest on permanent financing Construction interest Points 114,653.20 + 1,093.75 + 1,000.00 $116,746.95 Estimated amount financed: Principal Construction interest Points $50,000.00 - 1,093.75 - 1,000.00 $47,906.25 Number of payments Payment amount First payment period (5 -s- 2) + 1 Estimated APR (Actuarial) Estimated APR (Volume I):

$457.37 3$ months 10.75% 11,674,695 47,906.25 = 243.70 = FC/$100 First period adjustment = 3 mo., 15 days = +5.0 Using 365 payment line, the figure closest to 243.70 is 247.00, which corresponds to an APR of Disclosures Amount financed Prepaid finance charge FINANCE CHARGE (estimate) 11% $49,000.00 1,000.00 116,746.95 Interest on entire commitment $1,093.75 $50,000 X .105 + 12 X 5 = $2,187.50 $164,653.20 -50,000.00 114,653.20 + 2,187.50 + 1,000.00 $117,840.70 $50,000.00 - 2,187.50 - 1,000.00 $46,812.50 $457.37 (5 -5- 2) + 1 3^ months 11.03% 11,784,070 46,812.50 = 251.73 = FC/$100 First period adjustment = 3 mo., 15 days = +5.0 Using 365 payment line, the figure closest to 251.73 is 253.93, which corresponds to an APR of 11.25% $49,000.00 1,000.00 117,840.70

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Appendix D Regulation Z Interest on amount advanced Interest on entire commitment ANNUAL PERCENTAGE RATE (estimate) 11% 11.25% Repayment: Interest on the amount of credit outstanding during the construction period will be paid monthly, followed by 360 monthly payments of $457.37, beginning 1-12-81.

Total of payments (estimate) $165,746.95 5 monthly payments of $437.50 beginning 8-12-80, followed by 360 monthly payments of $457.37 beginning 1-12-81.

$166,840.70 APPENDIX E—Rules for Card Issuers That Bill on a Transaction-by- Transaction Basis The following provisions of subpart B apply if credit cards are issued and (1) the card is suer and the seller are the same or related persons; (2) no finance charge is imposed; (3) consumers are billed in full for each use of the card on a transaction-by-transaction basis, by means of an invoice or other statement re flecting each use of the card; and (4) no cu mulative account is maintained which reflects the transactions by each consumer during a period of time, such as a month: Section 226.6(d), and, as applicable, section 226.6(b) and (c). The disclosure required by Section 226.6(b) shall be limited to those charges that are or may be imposed as a result of the deferral of payment by use of the card, such as late payment or delinquency charges. Section 226.7(b) and section 226.7(k). Creditors may comply by placing the required disclosures on the invoice or statement sent to the consumer for each transaction. Section 226.9(a). Creditors may comply by mailing or delivering the statement required by section 226.6(d) (see appendix G-3) to each consumer receiving a transaction invoice during a one-month period chosen by the card issuer or by sending either the statement pre scribed by section 226.6(d) or an alternative billing error rights statement substantially sim ilar to that in appendix G-4, with each invoice sent to a consumer.

Section 226.9(c).

Section 226.10.

Section 226.11. This section applies when a card issuer receives a payment or other credit that exceeds by more than $1 the amount due, as shown on the transaction invoice. The re quirement to credit amounts to an account may be complied with by other reasonable means, such as by a credit memorandum. Since no periodic statement is provided, a no tice of the credit balance shall be sent to the consumer within a reasonable period of time following its occurrence unless a refund of the credit balance is mailed or delivered to the consumer within seven business days of its re ceipt by the card issuer.

Section 226.12 including section 226.12(c) and (d), as applicable. Section 226.12(e) is inapplicable.

Section 226.13, as applicable. All refer ences to “periodic statement” shall be read to indicate the invoice or other statement for the relevant transaction. All actions with regard to correcting and adjusting a consumer’s account may be taken by issuing a refund or a new invoice, or by other appropriate means consis tent with the purposes of the section. Section 226.15, as applicable. APPENDIX F—Annual Percentage Rate Computations for Certain Open-End Credit Plans In determining the denominator of the fraction under section 226.14(c)(3), no amount will be used more than once when adding the sum of the balances1 subject to periodic rates to the sum of the amounts subject to specific trans 1 Where a portion of the finance charge is determined by application of one or more daily periodic rates, the phrase “sum of the balances” shall also mean the “average of daily balances.”

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Regulation Z Appendix F action charges. In every case, the full amount of transactions subject to specific transaction charges shall be included in the denominator. Other balances or parts of balances shall be included according to the manner of determin ing the balance subject to a periodic rate, as illustrated in the following examples of ac counts on monthly billing cycles: 1. Previous balance—none.

A specific transaction of $100 occurs on the first day of the billing cycle. The average daily balance is $100. A specific transaction charge of 3 percent is applicable to the spe cific transaction. The periodic rate is 1 [h per cent 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 subject to the periodic rate exceeds the amount of the specific transactions (such excess in this case is 0), totaling $100.

The annual percentage rate is the quotient (which is 4'/2 percent) multiplied by 12 (the number of months in a year), i.e., 54 percent. 2. Previous balance—$100.

A specific transaction of $100 occurs at the midpoint of the billing cycle. The average daily balance is $150. A specific transaction charge of 3 percent is applicable to the spe cific transaction. The periodic rate is IV2 per cent applicable to the average daily balance. The numerator is the amount of the finance charge which is $5.25. The denominator is the amount of the transaction (which is $100), plus the amount by which the balance subject to the periodic rate exceeds the amount of the specific transaction (such excess in this case is $50), totaling $150. As explained in example 1, the annual percentage rate is 3'/2% X 12 = 42%.

3. If, in example 2, the periodic rate applies only to the previous balance, the numerator is $4.50 and the denominator is $200 (the amount of the transaction, $100, plus the bal ance subject only to the periodic rate, the $100 previous balance). As explained in ex ample 1, the annual percentage rate is 2'/4% 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 consumer made a payment of $50 at the midpoint of the billing cycle, the numerator is $3.75 and the denominator is $150 (the amount of the trans action, $100, plus the balance subject to the periodic rate, the $50 adjusted balance). As explained in example 1, the annual percentage rate is 2'/2% X 12 = 30%.

5. Previous balance—$100.

A specific transaction (check) of $100 occurs at the midpoint of the billing cycle. The aver age daily balance is $150. The specific trans action charge is $.25 per check. The periodic rate is IV2 percent applied to the average daily balance. The numerator is the amount of the finance charge, which is $2.50 and in cludes the $.25 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 bal ance exceeds the amount of the specific trans action (which in this case is $50), totaling $150. As explained in example 1, the annual percentage rate would be 1%% X 12 = 20%. 6. Previous balance—none.

A specific transaction of $100 occurs at the midpoint of the billing cycle. The average daily balance is $50. The specific transaction charge is 3 percent of the transaction amount or $3.00. The periodic rate is l */2 percent per month applied to the average daily balance. The numerator is the amount of the finance charge, which is $3.75, including the $3.00 transaction charge and $.75 resulting from ap plication of the periodic rate. The denominator is the full amount of the specific transaction ($100) plus the amount by which the balance subject to the periodic rate exceeds the amount of the transaction ($0). Where the specific transaction amount exceeds the bal ance subject to the periodic rate, the resulting number is considered to be zero rather than a negative number ($50 — $100 = —$50). The denominator, in this case, is $100. As ex plained in example 1, the annual percentage rate is 33A% X 12 = 45%.

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Appendix G Regulation Z APPENDIX G— Open-End Model Forms and Clauses G -l G-2 G-3 G-4 G-5 G-6 G -l G-8 G-9 G-10 (AHB) G -l 0(C) G -ll G-12 G-13(A) G-13(B) G-14A G-14B G-15 Balance-Computation Methods Model Clauses (§§ 226.6 and 226.7) Liability for Unauthorized Use Model Clause (§ 226.12) Long-Form Billing-Error Rights Model Form (§§ 226.6 and 226.9) Alternative Billing-Error Rights Model Form (§ 226.9) Rescission Model Form (When Opening an Account) (§ 226.15) Rescission Model Form (For Each Transaction) (§ 226.15) Rescission Model Form (When In creasing the Credit Limit) (§§ 226.15) Rescission Model Form (When Adding a Security Interest) (§§ 226.15) Rescission Model Form (When In creasing the Security) (§§ 226.15) Applications and Solicitations Model Forms (Credit Cards) (§§ 226.5a(b)) Applications and Solicitations Model Form (Charge Cards) (§§ 226.5a(b)) Applications and Solicitations Made Available to General Public Model Clauses (§ 226.5a(e)) Charge Card Model Clause (When Access to Plan Offered by Anoth er) (§ 226.5a(f)) Change in Insurance Provider Model Form (Combined Notice) (§ 226.9(f)) Change in Insurance Provider Model Form (§ 226.9(f)(2)) Home Equity Sample Home Equity Sample Home Equity Model Clauses G - l— Balance-Computation Methods Model Clauses (a) Adjusted-balance method We figure [a portion of] the finance charge on your account by applying the periodic rate to the “adjusted balance” of your account. We get the “adjusted balance” by taking the bal ance you owed at the end of the previous bill ing cycle and subtracting [any unpaid finance charges and] any payments and credits re ceived during the present billing cycle. (b) Previous-balance method We figure [a portion of] the finance charge on your account by applying the periodic rate to the amount you owe at the beginning of each billing cycle [minus any unpaid finance charges]. We do not subtract any payments or credits received during the billing cycle. [The amount of payments and credits to your ac count this billing cycle was $________ ] (c) Average-daily-balance method (excluding current transactions) We figure [a portion of] the finance charge on your account by applying the periodic rate to the “average daily balance” of your account (excluding current transactions). To get the “average daily balance” we take the begin ning balance of your account each day and subtract any payments or credits [and any un paid finance charges]. We do not add in any new [purchases/advances/loans]. This gives us the daily balance. Then, we add all the daily balances for the billing cycle together and di vide the total by the number of days in the billing cycle. This gives us the “average daily balance.”

(d) Average-daily-balance method (including current transactions) We figure [a portion of] the finance charge on your account by applying the periodic rate to the “average daily balance” of your account (including current transactions). To get the “average daily balance” we take the begin ning balance of your account each day, add any new [purchases/advances/loans], and sub tract any payments or credits, [and unpaid fi nance charges]. This gives us the daily bal ance. Then, we add up all the daily balances for the billing cycle and divide the total by the number of days in the billing cycle. This gives us the “average daily balance.” (e) Ending-balance method We figure [a portion of] the finance charge on your account by applying the periodic rate to the amount you owe at the end of each billing

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Regulation Z Appendix G cycle (including new purchases and deducting payments and credits made during the billing cycle).

G-2—Liability for Unauthorized Use Model Clause You may be liable for the unauthorized use of your credit card [or other term that describes the credit card]. You will not be liable for unauthorized use that occurs after you notify [name of card issuer or its designee] at [ad dress], orally or in writing, of the loss, theft, or possible unauthorized use. In any case, your liability will not exceed [insert $50 or any lesser amount under agreement with the cardholder].

G-3—Long-Form Billing-Error Rights Model Form YOUR BILLING RIGHTS KEEP THIS NOTICE FOR FUTURE USE This notice contains important information about your rights and our responsibilities under the Fair Credit Billing Act. Notify Us in Case o f Errors or Questions About Your Bill If you think your bill is wrong, or if you need more information about a transaction on your bill, write us [on a separate sheet] at [address] [the address listed on your bill]. Write to us as soon as possible. We must hear from you no later than 60 days after we sent you the first bill on which the error or problem ap peared. You can telephone us, but doing so will not preserve your rights. In your letter, give us the following information:

• Your name and account number. • The dollar amount of the suspected error. • Describe the error and explain, if you can, why you believe there is an error. If you need more information, describe the item you are not sure about.

If you have authorized us to pay your credit card bill automatically from your savings or checking account, you can stop the payment on any amount you think is wrong. To stop the payment your letter must reach us three business days before the automatic payment is scheduled to occur.

Your Rights and Our Responsibilities After We Receive Your Written Notice We must acknowledge your letter within 30 days, unless we have corrected the error by then. Within 90 days, we must either correct the error or explain why we believe the bill was correct.

After we receive your letter, we cannot try to collect any amount you question, or report you as delinquent. We can continue to bill you for the amount you question, including finance charges, and we can apply any unpaid amount against your credit limit. You do not have to pay any questioned amount while we are investigating, but you are still obligated to pay the parts of your bill that are not in question.

If we find that we made a mistake on your bill, you will not have to pay any finance charges related to any questioned amount. If we didn’t make a mistake, you may have to pay finance charges, and you will have to make up any missed payments on the ques tioned amount. In either case, we will send you a statement of the amount you owe and the date that it is due.

If you fail to pay the amount that we think you owe, we may report you as delinquent. However, if our explanation does not satisfy you and you write to us within ten days tell ing us that you still refuse to pay, we must tell anyone we report you to that you have a question about your bill. And, we must tell you the name of anyone we reported you to. We must tell anyone we report you to that the matter has been settled between us when it finally is.

If we don’t follow these rules, we can’t col lect the first $50 of the questioned amount, even if your bill was correct. Special Rule for Credit Card Purchases If you have a problem with the quality of property or services that you purchased with a credit card, and you have tried in good faith

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Appendix G Regulation Z to correct the problem with the merchant, you may have the right not to pay the remaining amount due on the property or services. There are two limitations on this right: (a) You must have made the purchase in your home state or, if not within your home state within 100 miles of your current mailing address; and (b) The purchase price must have been more than $50.

These limitations do not apply if we own or operate the merchant, or if we mailed you the advertisement for the property or services. G-4— Alternative Billing-Error Rights Model Form BILLING RIGHTS SUMMARY In Case o f Errors or Questions About Your Bill If you think your bill is wrong, or if you need more information about a transaction on your bill, write us [on a separate sheet] at [address] [the address shown on your bill] as soon as possible. We must hear from you no later than 60 days after we sent you the first bill on which the error or problem appeared. You can telephone us, but doing so will not preserve your rights.

In your letter, give us the following information:

You do not have to pay any amount in question while we are investigating, but you are still obligated to pay the parts of your bill that are not in question. While we investigate your question, we cannot report you as delin quent or take any action to collect the amount you question.

Special Rule for Credit Card Purchases If you have a problem with the quality of goods or services that you purchased with a credit card, and you have tried in good faith to correct the problem with the merchant, you may not have to pay the remaining amount due on the goods or services. You have this protection only when the purchase price was more than $50 and the purchase was made in your home state or within 100 miles of your mailing address. (If we own or operate the merchant, or if we mailed you the advertise ment for the property or services, all purchases are covered regardless of amount or location of purchase.) G-5—Rescission Model Form (When Opening an Account) NOTICE OF RIGHT TO CANCEL I.

Your Right to Cancel We have agreed to establish an open-end credit account for you, and you have agreed to give us a [mortgage/lien/security interest] [on/in] your home as security for the account. You have a legal right under federal law to cancel the account, without cost, within three business days after the latest of the following events:

(1) the opening date of your account which is

; or (2) the date you received your Truth-in-Lending disclosures; or (3) the date you received this notice of your right to cancel the account. If you cancel the account, the [mortgage/ lien/security interest] [on/in] your home is also cancelled. Within 20 days of receiving your notice, we must take the necessary steps to reflect the fact that the [mortgage/lien/se curity interest] [on/in] your home has been cancelled. We must return to you any money or property you have given to us or to anyone else in connection with the account. You may keep any money or property we have given you until we have done the things mentioned above, but you must then offer to return the money or property. If it is impracti cal or unfair for you to return the property, you must offer its reasonable value. You may offer to return the property at your home or at

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Regulation Z Appendix G the location of the property. Money must be returned to the address shown below. If we do not take possession of the money or property within 20 calendar days of your offer, you may keep it without further obligation. 2. How to Cancel.

If you decide to cancel the account, you may do so by notifying us, in writing, at (creditor's name and business address). You may use any written statement that is signed and dated by you and states your in tention to cancel, or you may use this notice by dating and signing below. Keep one copy of this notice no matter how you notify us because it contains important information about your rights.

If you cancel by mail or telegram, you must send the notice no later than midnight of (date) (or midnight of the third business day follow ing the latest of the three events listed above). If you send or deliver your written notice to cancel some other way, it must be delivered to the above address no later than that time. I WISH TO CANCEL.

Consumer’s Signature Date G-6— Rescission Model Form (For Each Transaction) NOTICE OF RIGHT TO CANCEL 1. Your Right to Cancel We have extended credit to you under your open-end credit account. This extension of credit will increase the amount you owe on your account. We already have a [mortgage/ lien/security interest] [on/in] your home as se curity for your account. You have a legal right under federal law to cancel the extension of credit, without cost, within three business days after the latest of the following events: (1) the date of the additional extension of credit which is _________________ ; or (2) the date you received your Truth-in- Lending disclosures; or (3) the date you received this notice of your right to cancel the additional ex tension of credit.

If you cancel the additional extension of credit, your cancellation will only apply to the additional amount and to any increase in the [mortgage/lien/security interest] that re sulted because of the additional amount. It will not affect the amount you presently owe, and it will not affect the [mortgage/ lien/security interest] we already have [on/ in] your home. Within 20 calendar days af ter we receive your notice of cancellation, we must take the necessary steps to reflect the fact that any increase in the [mortgage/ lien/security interest] [on/in] your home has been cancelled. We must also return to you any money or property you have given to us or to anyone else in connection with this extension of credit.

You may keep any money or property we have given you until we have done the things mentioned above, but you must then offer to return the money or property. If it is impracti cal or unfair for you to return the property, you must offer its reasonable value. You may offer to return the property at your home or at the location of the property. Money must be returned to the address shown below. If we do not take possession of the money or property within 20 calendar days of your offer, you may keep it without further obligation. 2. How to Cancel If you decide to cancel the additional exten sion of credit, you may do so by notifying us, in writing, at (creditor’s name and business address). You may use any written statement that is signed and dated by you and states your in tention to cancel, or you may use this notice by dating and signing below. Keep one copy of this notice no matter how you notify us because it contains important information about your rights.

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Appendix G Regulation Z cancel some other way, it must be delivered to the above address no later than that time. I WISH TO CANCEL.

Consumer’s Signature Date G-7—Rescission Model Form (When Increasing the Credit Limit) NOTICE OF RIGHT TO CANCEL 1.

Your Right to Cancel We have agreed to increase the credit limit on your open-end credit account. We have a [mortgage/lien/security interest] [on/in] your home as security for your account. Increasing the credit limit will increase the amount of the [mortgage/lien/security interest] [on/in] your home. You have a legal right under federal law to cancel the increase in your credit limit, without cost, within three business days after the latest of the following events: (1) the date of the increase in your credit limit which is __________ ; or (2) the date you received your Truth-in- Lending disclosures; or (3) the date you received this notice of your right to cancel the increase in your credit limit.

If you cancel, your cancellation will ap ply only to the increase in your credit limit and to the [mortgage/lien/security interest] that resulted from the increase in your credit limit. It will not affect the amount you presently owe, and it will not affect the [mortgage/lien/security interest] we already have [on/in] your home. Within 20 calendar days after we receive your notice of cancel lation, we must take the necessary steps to reflect the fact that any increase in the [mortgage/lien/security interest] [on/in] your home has been cancelled. We must also re turn to you any money or property you have given to us or to anyone else in con nection with this increase.

You may keep any money or property we have given you until we have done the things mentioned above, but you must then offer to return the money or property. If it is impracti cal or unfair for you to return the property, you must offer its reasonable value. You may offer to return the property at your home or at the location of the property. Money must be returned to the address shown below. If we do not take possession of the money or property within 20 calendar days of your offer, you may keep it without further obligation. 2. How to Cancel If you decide to cancel the increase in your credit limit, you may do so by notifying us, in writing, at (creditor’s name and business address). You may use any written statement that is signed and dated by you and states your in tention to cancel, or you may use this notice by dating and signing below. Keep one copy of this notice no matter how you notify us because it contains important information about your rights.

Consumer’s Signature Date G-8—Rescission Model Form (When Adding a Security Interest) NOTICE OF RIGHT TO CANCEL 1. Your Right to Cancel You have agreed to give us a [mortgage/lien/ security interest] [on/in] your home as security for your existing open-end credit account. You have a legal right under federal law to cancel the [mortgage/lien/security interest], without cost, within three business days after the latest of the following events:

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Regulation Z Appendix G (1) the date of the [mortgage/lien/security in terest] which i s _________________; or (2) the date you received your Truth-in-Lending disclosures; or (3) the date you received this notice of your right to cancel the [mortgage/lien/security interest].

If you cancel the [mortgage/lien/security in terest], your cancellation will apply only to the [mortgage/lien/security interest]. It will not affect the amount you owe on your account. Within 20 calendar days after we receive your notice of cancellation, we must take the nec essary steps to reflect that any [mortgage/lien/ security interest] [on/in] your home has been cancelled. We must also return to you any money or property you have given to us or to anyone else in connection with this increase. You may keep any money or property we have given you until we have done the things mentioned above, but you must then offer to return the money or property. If it is impracti cal or unfair for you to return the property, you must offer its reasonable value. You may make the offer at your home or at the location of the property. Money must be returned to the address shown below. If we do not take possession of the money or property within 20 calendar days of your offer, you may keep it without further obligation.

2. How to Cancel If you decide to cancel the [mortgage/lien/ security interest], you may do so by notifying us, in writing, at (creditor’s name and business address). You may use any written statement that is signed and dated by you and states your in tention to cancel, or you may use this notice by dating and signing below. Keep one copy of this notice no matter how you notify us because it contains important information about your rights.

Consumer’s Signature Date G-9— Rescission Model Form (When Increasing the Security) NOTICE OF RIGHT TO CANCEL 1. Your Right to Cancel You have agreed to increase the amount of the [mortgage/lien/security interest] [on/in] your home that we hold as security for your openend credit account. You have a legal right under federal law to cancel the increase, with out cost, within three business days after the latest of the following events: (1) the date of the increase in the security which is _____________________ ; or (2) the date you received your Truth-in- Lending disclosures; or (3) the date you received this notice of your right to cancel the increase in the security.

If you cancel the increase in the security, your cancellation will apply only to the in crease in the amount of the [mortgage/lien/ security interest]. It will not affect the amount you presently owe on your account, and it will not affect the [mortgage/lien/ security interest] we already have [on/in] your home. Within 20 calendar days after we receive your notice of cancellation, we must take the necessary steps to reflect the fact that any increase in the [mortgage/lien/ security interest] [on/in] your home has been cancelled. We must also return to you any money or property you have given to us or to anyone else in connection with this increase.

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Appendix G Regulation Z the location of the property. Money must be returned to the address shown below. If we do not take possession of the money or property within 20 calendar days of your offer, you may keep it without further obligation. 2. How to Cancel If you decide to cancel the increase in secur ity, you may do so by notifying us, in writing, at (creditor’s name and business address). You may use any written statement that is signed and dated by you and states your in tention to cancel, or you may use this notice by dating and signing below. Keep one copy of this notice no matter how you notify us because it contains important information about your rights.

Consumer’s Signature Date G -l0(A)—Applications and Solicitations Model Form (Credit Cards) Annual percentage rate for purchases % Variable-rate information Your annual percentage rate may vary. The rate is determined by (explanation).

Grace period for repayment of balances for purchases You have [ days] [until ] [not less than days] [between a n d__days] [__ days on average] to repay your balance [for purchases] before a finance charge will be imposed.] [You have no grace period in which to repay your balance for purchases before a finance charge will be imposed ] Method of computing the balance for purchases Annual fees [Annual] [Membership] fee:

$ per year] [{type of fee):

$ per year] [(type of fee):

$ ] Minimum finance charge $ Transaction fee for purchases [$ ] [ % of ] Transaction fee for cash advances, and fees for paying late or exceeding the credit limit Transaction fee for cash advances:

[$ ] [ % nf ] Late-payment tee:

[$ ] [ % nf ] Over-the-credit-limit fee:

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Regulation Z Appendix G G-10(B)— Applications and Solicitations Model Form (Credit Cards) Annual percentage rate for purchases Variable-rate Information Grace period for repayment of the balance for purchases Method of computing the balance for purchases Annual fees Minimum finance charge Transaction fee for purchases % Your annual percentage rate may vary.

The rate is determined by (explanation).

[____ days] [1 Intil ] [Annual fee:

$ [$ [Not less than ___ days] [Between___ a n d ___ days] [___ days on average] [None] [Membership fee: $ per year] {(type of fee):

$___ per year] [(type of fee):

$— J [___ % o f___ ] Transaction fee for cash advances: [$______________________________________________________________________] [__________ Over-the-credit-limit fee: $____ G-10(C)—Applications and Solicitations Model Form (Charge Cards) Annual fees Transaction fee for purchases Transaction fee for cash advances, and fees for paying late or exceeding the credit limit [Annual fee: $ ____per year] [Membership fee: $ ____per year ] [(type of fee): $ ____per year ] [(type of fee): $ ____] [$------1 [____ % o f ____ ] Transaction fee for cash advances:

[$____] [____ % of------] Late-payment fee:

[$____] [____ % of------] Over-the-creditlimit fee:

$ ____ All charges made on this charge card are due and payable when you receive your periodic statement. G -ll—Applications and Solicitations Made Available to General Public Model Clauses (a) Disclosure o f required credit information The information about the costs of the card described in this [application] [solicitation] is accurate as of (month/year). This information may have changed after that date. To find out what may have changed, [call us at (telephone number)] [write to us at (address)]. (b) Disclosure with account opening statement To find out about changes in the information in this [application] [solicitation], [call us at (telephone number)] [write to us at (address)]. (c) No disclosure o f credit information There are costs associated with the use of this card. To obtain information about these costs, call us at (telephone number) or write to us at (address).

G -l 2—Charge Card Model Clause (When Access to Plan Offered by Another) This charge card may allow you to access credit offered by another creditor. Our deci sion about issuing you a charge card will be independent of the other creditor’s decision about allowing you access to a line of credit. Therefore, approval by us to issue you a card does not constitute approval by the other cred itor to grant you credit privileges. If we issue you a charge card, you may receive it before the other creditor decides whether or not to grant you credit privileges.

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Appendix G Regulation Z G-13(A)—Change in Insurance Provider Model Form (Combined Notice) The credit card account you have with us is insured. This is to notify you that we plan to replace your current coverage with insurance coverage from a different insurer. If we obtain insurance for your account from a different insurer, you may cancel the insurance.

[Your premium rate will increase to $____ p e r------ ] [Your coverage will be affected by the following:

□ The elimination of a type of coverage pre viously provided to you. [(explanation)] [See ____ of the attached policy for de tails.] □ A lowering of the age at which your cov erage will terminate or will become more restrictive, [(explanation)] [See____of the attached policy or certificate for details.] □ A decrease in your maximum insurable loan balance, maximum periodic benefit payment, maximum number of payments, or any other decrease in the dollar amount of your coverage or benefits, [(explana tion)] [S ee------of the attached policy or certificate for details.] □ A restriction on the eligibility for benefits for you or others, [(explanation)] [See ------ of the attached policy or certificate for details.] □ A restriction in the definition of “disabili ty” or other key term of coverage, [(expla nation)] [See ____ of the attached policy or certificate for details.] □ The addition of exclusions or limitations that are broader or other than those under the current coverage, [(explanation)] [See ------ of the attached policy or certificate for details.] □ An increase in the elimination (waiting) period or a change to nonretroactive cov erage. [(explanation)] [See____of the at tached policy or certificate for details).] [The name and mailing address of the new insurer providing the coverage for your ac count is (name and address).] G -l 3(B)— Change in Insurance Provider Model Form We have changed the insurer providing the coverage for your account. The new insurer’s name and address are (name and address). A copy of the new policy or certificate is attached.

You may cancel the insurance for your account.

G-14A—Home Equity Sample IMPORTANT TERMS OF OUR HOME EQUITY LINE OF CREDIT This disclosure contains important information about our home equity line of credit. You should read it carefully and keep a copy for your records.

Availability o f terms: To obtain the terms de scribed below, you must submit your applica tion before January 1, 1990. If these terms change (other than the annual percentage rate) and you decide, as a result, not to enter into an agreement with us, you are entitled to a refund of any fees that you have paid to us or anyone else in connection with your application.

Security interest: We will take a mortgage on your home. You could lose your home if you do not meet the obligations in your agreement with us.

Possible actions: Under certain circumstances, we can (1) terminate your line, require you to pay us the entire outstanding balance in one payment, and charge you certain fees; (2 ) re fuse to make additional extensions of credit; and (3) reduce your credit limit. If you ask, we will give you more specific information concerning when we can take these actions.

Minimum-payment requirements: You can ob tain advances of credit for 10 years (the “draw period”). During the draw period, pay ments will be due monthly. Your minimum monthly payment will equal the greater of $100 or l/360th of the outstanding balance plus the finance charges that have accrued on the outstanding balance.

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Regulation Z Appendix G After the draw period ends, you will no longer be able to obtain credit advances and must pay the outstanding balance over 5 years (the “repayment period”). During the repay ment period, payments will be due monthly. Your minimum monthly payment will equal l/60th of the balance that was outstanding at the end of the draw period plus the finance charges that have accrued on the remaining balance.

Minimum-payment example: If you made only the minimum monthly payments and took no other credit advances, it would take 15 years to pay off a credit advance of $10,000 at an ANNUAL PERCENTAGE RATE of 12%. During that period, you would make 120 monthly payments varying between $127.78 and $ 100.00 followed by 60 monthly pay ments varying between $187.06 and $118.08. Fees and charges: To open and maintain a line of credit, you must pay the following fees to us:

• Application fee: $150 (due at application) • Points: 1% of credit limit (due when ac count opened) • Annual maintenance fee: $75 (due each year) You also must pay certain fees to third par ties to open a line. These fees generally total between $500 and $900. If you ask, we will give you an itemization of the fees you will have to pay to third parties. Minimum draw and balance requirements: The minimum credit advance you can receive is $500. You must maintain an outstanding balance of at least $10 0.

Tax deductibility: You should consult a tax ad visor regarding the deductibility of interest and charges for the line.

Variable-rate information: The line has a vari able-rate feature, and the annual percentage rate (corresponding to the periodic rate) and the minimum payment can change as a result. The annual percentage rate includes only interest and not other costs. The annual percentage rate is based on the value of an index. The index is the monthly average prime rate charged by banks and is published in the Federal Reserve Bulletin. To determine the annual percentage rate that will apply to your line, we add a margin to the value of the index.

Ask us for the current index value, margin and annual percentage rate. After you open a credit line, rate information will be provided on periodic statements that we will send you. Rate changes: The annual percentage rate can change each month. The maximum ANNUAL PERCENTAGE RATE that can apply is 18%. Except for this 18% “cap,” there is no limit on the amount by which the rate can change during any one-year period. Maximum-rate and payment examples: If you had an outstanding balance of $10,000 during the draw period, the minimum monthly pay ment at the maximum ANNUAL PERCENT AGE RATE of 18% would be $177.78. This annual percentage rate could be reached dur ing the first month of the draw period. If you had an outstanding balance of $ 10,000 at the beginning of the repayment pe riod, the minimum monthly payment at the maximum ANNUAL PERCENTAGE RATE of 18% would be $316.67. This annual per centage rate could be reached during the first month of the repayment period.

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Appendix G Regulation Z Historical example: The following table shows how the annual percentage rate and the mini mum monthly payments for a single $ 10,000 credit advance would have changed based on changes in the index over the past 15 years. The index values are from September of each year. While only one payment amount per year is shown, payments would have varied during each year.

The table assumes that no additional credit advances were taken, that only the minimum payments were made each month, and that the rate remained constant during each year. It does not necessarily indicate how the index or your payments will change in the future. Year Index (%) Margin* (%) ANNUAL PERCENTAGE RATE (%) Minimum Monthly Payment ($) 12.00 14.00 144.44 7.88 9.88 106.50 7.00 9.00 100.00 7.13 9.13 100.00 Draw 9.41 11.41 105.47 Period 12.90 14.90 126.16 12.23 14.23 117.53 20.08 18.00** 138.07 13.50 15.50 117.89 11.00 13.00 100.00 12.97 14.97 203.81 Repayment 9.50 11.50 170.18 Period 7.50 9.50 149.78 8.70 10.70 141.50 10.00 12.00 130.55 * This is a margin we have used recently. ** This rate reflects the 18% rate cap. G-14B—Home Equity Sample IMPORTANT TERMS OF OUR HOME EQUITY LINE OF CREDIT This disclosure contains important information about our home equity line of credit. You should read it carefully and keep a copy for your records.

Availability o f terms: All of the terms de scribed below are subject to change. If these terms change (other than the annual percentage rate) and you decide, as a result, not to enter into an agreement with us, you are entitled to a refund of any fees you paid to us or anyone else in connection with your application.

Security interest: We will take a mortgage on your home. You could lose your home if you do not meet the obligations in your agreement with us.

Possible actions: We can terminate your line, require you to pay us the entire outstanding balance in one payment, and charge you cer tain fees if:

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Regulation Z Appendix G declines significantly below its appraised value for purposes of the line. • We reasonably believe you will not be able to meet the repayment requirements due to a material change in your financial circum stances.

• You are in default of a material obligation in the agreement.

• Government action prevents us from im posing the annual percentage rate provided for or impairs our security interest such that the value of the interest is less than 12 0 percent of the credit line. • A regulatory agency has notified us that continued advances would constitute an un safe and unsound practice.

• The maximum annual percentage rate is reached.

The initial agreement permits us to make certain changes to the terms of the agreement at specified times or upon the occurrence of specified events.

Minimum-payment requirements: You can ob tain advances of credit for 10 years (the “draw period”). You can choose one of three payment options for the draw period: • Monthly interest-only payments. Under this option, your payments will be due monthly and will equal the finance charges that ac crued on the outstanding balance during the preceding month.

• Quarterly interest-only payments. Under this option, your payments will be due quarterly and will equal the finance charges that accrued on the outstanding balance during the preceding quarter. • 2% of the balance. Under this option, your payments will be due monthly and will equal 2 % of the outstanding balance on your line plus finance charges that accrued on the outstanding balance during the pre ceding month.

If the payment determined under any option is less than $50, the minimum payment will equal $50 or the outstanding balance on your line, whichever is less.

Under both the monthly and quarterly inter est-only payment options, the minimum pay ment will not reduce the principal that is out standing on your line.

After the draw period ends, you will no longer be able to obtain credit advances and must repay the outstanding balance (the “re payment period”). The length of the repay ment period will depend on the balance out standing at the beginning of it. During the repayment period, payments will be due monthly and will equal 3% of the outstanding balance on your line plus finance charges that accrued on the outstanding balance or $50, whichever is greater.

Minimum-payment examples: If you took a single $10,000 advance and the ANNUAL PERCENTAGE RATE was 9.52%:

• Under the monthly interest-only payment option, it would take 18 years and 1 month to pay off the advance if you made only the minimum payments. During that period, you would make 120 payments of $79.33, followed by 96 payments varying between $379.33 and $50 and one final payment of $10.75.

• Under the 2%-of-the-balance payment op tion, it would take 10 years and 8 months to pay off the advance if you made only the minimum payments. During that period, you would make 120 payments varying be tween $279.33 and $50, followed by 7 pay ments of $50 and 1 final payment of $21.53.

Fees and charges: To open and maintain a line of credit, you must pay us the following fees:

• Application fee: $100 (due at application) • Points: 1% of credit limit (due when ac count opened) • Annual maintenance fee: $50 during the first 3 years, $75 thereafter (due each year) You also must pay certain fees to third par ties to open a line. These fees generally total between $500 and $900. If you ask, we will give you an itemization of the fees you will have to pay to third parties. Minimum-draw requirement: The minimum credit advance that you can receive is $200. Tax deductibility: You should consult a tax ad-

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Appendix G Regulation Z visor regarding the deductibility of interest and charges for the line.

Variable-rate feature: The line has a variablerate feature, and the annual percentage rate (corresponding to the periodic rate) and the minimum monthly payment can change as a result.

The annual percentage rate includes only interest and not other costs. The annual percentage rate is based on the value of an index. During the draw period, the index is the monthly average prime rate charged by banks. During the repayment pe riod, the index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year. Information on these in dices is published in the Federal Reserve Bul letin. To determine the annual percentage rate that will apply to your line, we add a margin to the value of the index.

The initial annual percentage rate is “dis counted”—it is not based on the index and margin used for later rate adjustments. The in itial rate will be in effect for the first year your credit line is open.

Ask us for the current index values, margin, discount and annual percentage rate. After you open a credit line, rate information will be provided on periodic statements that we send you.

Rate changes: The annual percentage rate can change monthly. The maximum ANNUAL PERCENTAGE RATE that can apply is 18%. Apart from this rate “cap,” there is no limit on the amount by which the rate can change during any one-year period. Maximum-rate and payment examples: If the ANNUAL PERCENTAGE RATE during the draw period equaled the 18% maximum and you had an outstanding balance of $10,000: • Under the monthly interest-only payment option, the minimum monthly payment would be $150.

• Under the 2%-of-the-balance payment op tion, the minimum monthly payment would be $350.

This annual percentage rate could be reached during the first month of the draw period.

If you had an outstanding balance of $ 10,000 during the repayment period, the min imum monthly payment at the maximum AN NUAL PERCENTAGE RATE of 18% would be $450. This annual percentage rate could be reached during the first month of the repay ment period.

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Regulation Z Appendix G Historical Example: The following table shows how the annual percentage rate and the monthly payments for a single $10,000 credit advance would have changed based on changes in the indices over the past 15 years. For the draw period, the index values for the prime rate are from September of each year. For the repayment period, the index values for the yield on U.S. Treasury securities are from the first week ending in July. While only one payment amount per year is shown, payments under the 2 %-of-the-balance payment option and during the repayment period would have varied during each year. The table assumes that no additional credit advances were taken, that only the minimum payments were made, and that the rate remained constant during each year. It does not necessa rily indicate how the indices or your payments will change in the future. Year Index % Margin* % ANNUAL PERCENTAGE RATE % Monthly Interest- Only Payments $ Monthly 2% of Balance Pay ments ($) 12.00 10.00** 83.33 283.33 7.88 9.88 82.33 221.55 7.00 9.00 75.00 169.34 7.13 9.13 76.08 133.41 Draw 9.41 11.41 95.08 111.89 Period 12.90 14.90 124.17 96.46 12.23 14.23 118.58 74.39 20.08 18.00*** 150.00 64.13 13.50 15.50 129.17 50.00 11.00 13.00 108.33 50.00 12.17 14.17 418.08 50.00 Repayment 7.66 9.66 264.01 Period 6.36 8.36 177.96 6.71 8.71 124.45 7.52 9.52 87.92 ♦This is a margin we have used recently. ♦•This rate reflects a 4% “discount” we have used recently. ♦♦♦This rate reflects the 18% rate cap. G -l5— Home Equity Model Clauses (a) Retention o f information: This disclosure contains important information about our home-equity line of credit. You should read it carefully and keep a copy for your records. (b) Availability o f terms: To obtain the terms described below, you must submit your appli cation before (date). However, the (descrip tion o f terms) are subject to change. [or All of the terms described below are subject to change.

If these terms change [(other than the an nual percentage rate)] and you decide, as a result, not to enter into an agreement with us, you are entitled to a refund of any fees you paid to us or anyone else in connection with your application.

(c) Security interest: We will take a [security interest in/mortgage on] your home. You could lose your home if you do not meet the obligations in your agreement with us. (d) Possible actions: Under certain circum stances, we can ( 1) terminate your line, re quire you to pay us the entire outstanding bal ance in one payment [, and charge you certain fees]; (2 ) refuse to make additional extensions of credit; (3) reduce your credit limit [; and

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Appendix G Regulation Z (4) make specific changes that are set forth in your agreement with us].

If you ask, we will give you more specific information about when we can take these actions.

[or Possible actions: We can terminate your ac count, require you to pay us the entire out standing balance in one payment [, and charge you certain fees] if:

• You engage in fraud or material misrepre sentation in connection with the line. • You do not meet the repayment terms. • Your action or inaction adversely affects the collateral or our rights in the collateral. We can refuse to make additional exten sions of credit or reduce your credit limit if: • The value of the dwelling securing the line declines significantly below its appraised value for purposes of the line. • We reasonably believe you will not be able to meet the repayment requirements due to a material change in your financial circum stances.

• You are in default of a material obligation in the agreement.

• Government action prevents us from im posing the annual percentage rate provided for or impairs our security interest such that the value of the interest is less than 120 percent of the credit line. • A regulatory agency has notified us that continued advances would constitute an un safe and unsound practice.

• The maximum annual percentage rate is reached.

[The initial agreement permits us to make cer tain changes to the terms of the agreement at specified times or upon the occurrence of specified events.] (e) Minimum-payment requirements: The length of the [draw period/repayment period] is (length). Payments will be due (frequency). Your minimum payment will equal (how pay ment determined).

[The minimum payment will not reduce the principal that is outstanding on your line./The minimum payment will not fully repay the principal that is outstanding on your line.] You will then be required to pay the entire balance in a single “balloon” payment. (f) Minimum-payment example: If you made only the minimum payments and took no other credit advances, it would take (length of time) to pay off a credit advance of $10,000 at an ANNUAL PERCENTAGE RATE of (re cent rate). During that period, you would make (number) (frequency) payments of $_______ (g) Fees and charges: To open and maintain a line of credit, you must pay the following fees to us:

(Description o f fee) [$____ /____ % of ------ ] (When payable) (Description o f fee) [$____ I____ % of -------] (When payable) You also must pay certain fees to third parties. These fees generally total [$____/__ _% of /between $____ and [$____]. If you ask, we will give you an itemization of the fees you will have to pay to third parties. (h) Minimum draw and balance requirements: The minimum credit advance you can receive is $________ You must maintain an outstand ing balance of at least $________ (i) Negative amortization: Under some cir cumstances, your payments will not cover the finance charges that accrue and “negative amortization” will occur. Negative amortiza tion will increase the amount that you owe us and reduce your equity in your home. (j) Tax deductibility: You should consult a tax advisor regarding the deductibility of interest and charges for the line.

(k) Other products: If you ask, we will pro vide you with information on our other avail able home-equity lines.

(I) Variable-rate feature: The plan has a vari able-rate feature and the annual percentage rate (corresponding to the periodic rate) and the [minimum payment/term of the line] can change as a result.

The annual percentage rate includes only interest and not other costs. The annual percentage rate is based on the

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Regulation Z Appendix G value of an index. The index is the (identifica tion of index) and is [published in/available from] (source o f information). To determine • the annual percentage rate that will apply to your line, we add a margin to the value of the index.

[The initial annual percentage rate is “dis counted”—it is not based on the index and margin used for later rate adjustments. The in itial rate will be in effect for (period).] Ask us for the current index value, margin, [discount,] and annual percentage rate. After you open a credit line, rate information will be provided on periodic statements that we send you.

(m) Rate changes: The annual percentage rate can change (frequency). [The rate cannot in crease by more th an__ percentage points in any one-year period./There is no limit on the amount by which the rate can change in any one-year period.] [The maximum ANNUAL PERCENTAGE RATE that can apply is ___%./The ANNUAL PERCENTAGE RATE cannot increase by more than — percentage points above the initial rate.] [Ask us for the specific rate limitations that will apply to your credit line.] (n) Maximum-rate and payment examples: If you had an outstanding balance of $ 10,000, the minimum payment at the maximum AN NUAL PERCENTAGE RATE o f __ % would be $___This annual percentage rate could be reached (when maximum rate could be reached).

(o) Historical example: The following table shows how the annual percentage rate and the minimum payments for a single $ 10,000 credit advance would have changed based on changes in the index over the past 15 years. The index values are from (when values are measured). [While only one payment amount per year is shown, payments would have varied during each year.] The table assumes that no additional credit advances were taken, that only the minimum payments were made, and that the rate remained constant during each year. It does not necessa rily indicate how the index or your payments will change in the future. ANNUAL Minimum Index Margin PERCENTAGE RATE Payment Year_____________(%)______________(%)_____________ (%)___________________________ ($)___________

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Appendix H Regulation Z APPENDIX H—Closed-End Model Forms and Clauses H -l Credit Sale Model Form (§ 226.18) H-2 Loan Model Form (§ 226.18) H-3 Amount Financed Itemization Model Form (§ 226.18(c)) H-4(A) Variable-Rate Model Clauses (§ 226.18(f)(1)) H ^(B ) Variable-Rate Model Clauses (§ 226.18(f)(2)) H-4(C) Variable-Rate Model Clauses (§ 226.19(b)) H-^(D) Variable-Rate Model Clauses (§ 226.20(c)) H-5 Demand Feature Model Clauses (§ 226.18(i)) H- 6 Assumption Policy Model Clause (§ 226.18(q)) H-7 Required Deposit Model Clause (§ 226.18(r)) H-8 Rescission Model Form (General) (§ 226.23) H-9 Rescission Model Form (Refinanc ing) (§ 226.23) H-10 Credit Sale Sample H -ll Installment Loan Sample H-12 Refinancing Sample H -l3 Mortgage with Demand Feature Sample H-14 Variable-Rate Mortgage Sample (§ 226.19(b)) H -l5 Graduated-Payment Mortgage Sample H -l6 Mortgage Sample (§ 226.32)

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Regulation Z Appendix H H -l—Credit Sale Model Form A N N U A L FINANCE Amount Total of Total Sale Price PERCENTAGE CH ARG E Financed Payments The total cost of your pur RATE The dollar amount The amount o f credit The amount you will chase on credit, including The cost of your credit the credit will cost provided to you or on have paid after you your downpayment of at a yearly rate.

you.

your behalf.

heve made all payments as scheduled.

$ % $ $ $ $ Y o u have the right to receive at this time an itemization of the Am ount Financed. □ I want an itemization.

□ I do not want an itemization.

Yo ur payment schedule will be:

Number of Payments Am ount of Payments When Payments A re Due Insurance Credit life insurance and credit disability insurance are not required to obtain credit, and will not be provided unless you sign and agree to pay the additional cost.__________ ________________________________________________________________________________ Type Premium Signature Credit Life 1 want credit life insurance.

Signature Credit Disability 1 want credit disability insurance.

Signatur* Credit Life and Disability 1 want credit life and disability insurance.

s u t u r e Y o u may obtain property insurance from anyone you want that is acceptable to (creditor).

If you get the insurance from (creditor), you will pay $ __________________ Security: Y o u are giving a security interest in: □ the goods or property being purchased. D (briaf d escription o f Othar property). Filing fees $ _____________ Non-filing insurance $ ______________ Late Charge: If a payment is late, you will be charged $ ______________ /____________% of the payment. Prepayment: If you pay off early, you C may □ will not have to pay a penalty.

□ may □ will not be entitled to a refund of part of the finance charge. See your contract documents for any additional information about nonpayment, default, any required repayment in full before the scheduled date, and prepayment refunds and penalties. e means an estimate

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Appendix H Regulation Z H-2—Loan Model Form A N N U A L FIN AN CE Amount Total of PERCENTAG E CH ARG E Financed Payments RATE The dollar amount The amount of credit The amount you will The cost of your credit the credit will cost provided to you o r on hewe paid after you as a yearly rate.

you.

your behalf.

have made all payments as scheduled.

% $ $ $ Y o u have the right to receive at this time an itemization of the Am ount Financed. □ I want an itemization.

□ I d o not want an itemization.

Y o u r payment schedule will be: Number of Payments Am ount o f Payments When Payments Are Due Insurance Credit life insurance and credit disability insurance are not required to obtain credit, and will not be provided unless yo u sign and agree to p ay the additional cost.____________________________________________________________________________________________ Type Premium Signature Credit Life 1 want credit life insurance.

Signature Credit Disability 1 want credit disability insurance.

Signature Credit Life and 1 want credit life and Disability disability insurance.

Signature Yew m ay obtain property insurance from anyone you want that is acceptable to (creditor).

If yo u get the insurance from (cr*ditor), you will pay $ __________________ Security: Y o u are giving a security interest in: □ the goods or property being purchased. D (brief description o f other prope rly). Filing fees $ _____________ Non-filing insurance $ ______________ Late Charge: If a paym ent is late, you will be charged $ ______________ /____________% of the payment. Prepayment: If you pay o ff early, you □ m ay □ will not have to pay a penalty.

□ m ay □ will not be entitled to a refund of part of the finance charge. See you r contract docum ents for any additional information about nonpayment, default, any required repayment in full before the scheduled date, and prepayment refunds and penalties. e means an estimate

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Regulation Z Appendix H H-3—Amount Financed Itemization Model Form Itemization of the Amount Financed of $____ $--------------------- Amount given to you directly $--------------------- Amount paid on your account Amount paid to others on your behalf $------------------- to [public officials] [credit bureau] [appraiser] [insurance company] $------------------- to (name of another creditor) $_______________ to (other) $------------------- Prepaid finance charge Example based on a typical transaction [If your loan were for $______________ at _____ % for (term) and the rate increased tO ________ % in (time period), [your regular payments would increase by $------------------------------ ] [you would have to make ________ addi tional payments.] [your final payment would increase by $------------- ]] H-4(B)— Variable-Rate Model Clauses Your loan contains a variable-rate feature. Disclosures about the variable-rate feature have been provided to you earlier. H-4(A)— Variable-Rate Model Clauses The annual percentage rate may increase dur ing the term of this transaction if: [the prime interest rate of (creditor) increases.] [the balance in your deposit account falls below $____________________] [you terminate your employment with (employer) .] [The interest rate will not increase above ________________ %.] [The maximum interest rate increase at one time will be___________________ %.] [The rate will not increase more than once every (time period) .] Any increase will take the form of: [higher payment amounts.] [more payments of the same amount.] [a larger amount due at maturity.] Example based on the specific transaction [If the interest rate increases by ________ % in (time period), [your regular payments will increase to $---------------] [you will have to m ake___________ addi tional payments.] [your final payment will increase to $--------------]] H-4(C)— Variable-Rate Model Clauses This disclosure describes the features of the adjustable-rate mortgage (ARM) program you are considering. Information on other ARM programs is available upon request. How Your Interest Rate and Payment Are Determined • Your interest rate will be based on [an in dex plus a margin] [a formula]. • Your payment will be based on the interest rate, loan balance, and loan term. —[The interest rate will be based on (identification of index) plus our margin. Ask for our current interest rate and margin.] — [The interest rate will be based on (identification of formula). Ask us for our current interest rate.] —Information about the index [formula for rate adjustments] is published [can be found]________ — [The initial interest rate is not based on the (index) (formula) used to make later adjustments. Ask us for the amount of current interest rate discounts.] How Your Interest Rate Can Change • Your interest rate can change (frequency). • [Your interest rate cannot increase or de-

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Appendix H Regulation Z crease more than percentage points at each adjustment.] • Your interest rate cannot increase [or de points over the term of the loan. How Your Payment Can Change • Your payment can change (frequency) based on changes in the interest rate. • [Your payment cannot increase more than (amount or percentage) at each adjustment.] • You will be notified in writing ________ days before the due date of a payment at a new level. This notice will contain infor mation about your interest rates, payment amount, and loan balance.

• [You will be notified once each year during which interest rate adjustments, but no pay ment adjustments, have been made to your loan. This notice will contain information about your interest rates, payment amount, and loan balance.] • For example, on a $10,000 [term] loan with an initial interest rate of ________ (the rate shown in the interest rate column below for the year 19________ ), the maxi mum amount that the interest rate can rise under this program i s ________ percentage points, to ________ %, and the monthly payment can rise from a first-year payment of $________ to a maximum of $_________ in th e ________ year.

crease] more than percentage

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Regulation Z Appendix H Example The example below shows how your payments would have changed under this ARM program based on actual changes in the index from 1977 to 1991. This does not necessarily indicate how your index will change in the future.

The example is based on the following assumptions: Amount of lo a n .......................$10,000 Caps ________ [periodic interest rate cap] T erm .................................................................... ................. lifetime interest rate cap Change date....................................................... ................. [payment cap] Payment adjustm ent............... (frequency) [Interest rate carryover] Interest adjustment..................(frequency) [Negative amortization] [Margin]* .......................................................... [Interest rate discount]** In d ex ...............

(identification of index or formula) Interest Monthly Remaining Index Margin Rate Payment Balance Year (%) (percentage points) (%) ($) ($) To see what your payments would have been during that period, divide your mortgage amount by $10,000; then multiply the monthly payment by that amount. (For example, in 1991 the monthly payment for a mortgage amount of $60,000 taken out in 1977 would be: $60,000 + $10,000 = 6; 6 X = $ per month.) * This is a margin we have used recently, your margin may be different. ** This is the amount of a discount we have provided recently; your loan may be discounted by a different amount.

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Appendix H Regulation Z H-4(D)—Variable-Rate Model Clauses Your new interest rate will be ________ %, which is based on an index value of _______%.

Your previous interest rate was ________ %, which was based on an index value of _______%.

[The new interest rate does not reflect a change of ________ percentage point in the index value which was not added because of -------------] [The new payment will be $________ ] [Your new loan balance is $_________] [Your (new) (existing) payment will not be sufficient to cover the interest due and the dif ference will be added to the loan amount. The payment amount needed to pay your loan in full by the end of the term at the new interest rate is $________ ] [The following interest rate adjustments have been implemented this year without changing your payment: ________ These interest rates were based on the following index values: -------------] H-5—Demand Feature Model Clauses This obligation [is payable on demand.] [has a demand feature.] [All disclosures are based on an assumed ma turity of one year.] H-6— Assumption Policy Model Clause Assumption: Someone buying your house [may, subject to conditions, be allowed to] [cannot] assume the remainder of the mort gage on the original terms. H-7—Required Deposit Model Clause The annual percentage rate does not take into account your required deposit. H-8—Rescission Model Form (General) NOTICE OF RIGHT TO CANCEL Your Right to Cancel You are entering into a transaction that will result in a [mortgage/lien/security interest] [on/in] your home. You have a legal right under federal law to cancel this transaction, without cost, within three business days from whichever of the following events occurs last: ( 1 ) the date of the transaction, which is

; or (2) the date you received your Truth in Lend ing disclosures; or (3) the date you received this notice of your right to cancel.

If you cancel the transaction, the [mortgage/ lien/security interest] is also cancelled. Within 20 calendar days after we receive your notice, we must take the steps necessary to reflect the fact that the [mortgage/lien/security interest] [on/in] your home has been cancelled, and we must return to you any money or property you have given to us or to anyone else in connec tion with this transaction. You may keep any money or property we have given you until we have done the things mentioned above, but you must then offer to return the money or property. If it is impracti cal or unfair for you to return the property, you must offer its reasonable value. You may offer to return the property at your home or at the location of the property. Money must be returned to the address below. If we do not take possession of the money or property within 20 calendar days of your offer, you may keep it without further obligation. How to Cancel If you decide to cancel this transaction, you may do so by notifying us in writing, at (creditor’s name and business address). You may use any written statement that is signed and dated by you and states your in tention to cancel, or you may use this notice by dating and signing below. Keep one copy of this notice because it contains important in formation about your rights.

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Regulation Z Appendix H If you cancel by mail or telegram, you must send the notice no later than midnight of (date) • (or midnight of the third business day follow ing the latest of the three events listed above). If you send or deliver your written notice to cancel some other way, it must be delivered to the above address no later than that time. I WISH TO CANCEL.

Consumer’s Signature Date H-9—Rescission Model Form (Refinancing) NOTICE OF RIGHT TO CANCEL Your Right to Cancel You are entering into a new transaction to in crease the amount of credit provided to you. We acquired a [mortgage/lien/security interest] [on/in] your home under the original transac tion and will retain that [mortgage/lien/secur ity interest] in the new transaction. You have a legal right under federal law to cancel the new transaction, without cost, within three business days from whichever of the follow ing events occurs last:

(1) the date of the new transaction, which is

; or (2) the date you received your new Truth in Lending disclosures; or (3) the date you received this notice of your right to cancel.

If you cancel the new transaction, your can cellation will apply only to the increase in the amount of credit. It will not affect the amount that you presently owe or the [mortgage/lien/ security interest] we already have [on/in] your home. If you cancel, the [mortgage/lien/secur ity interest] as it applies to the increased amount is also cancelled. Within 20 calendar days after we receive your notice of cancella tion of the new transaction, we must take the steps necessary to reflect the fact that our [mortgage/lien/security interest] [on/in] your home no longer applies to the increase of credit. We must also return any money you have given to us or anyone else in connection with the new transaction.

You may keep any money we have given you in the new transaction until we have done the things mentioned above, but you must then offer to return the money at the address below. If we do not take possession of the money within 20 calendar days of your offer, you may keep it without further obligation. How to Cancel If you decide to cancel the new transaction, you may do so by notifying us in writing, at (creditor’s name and business address). You may use any written statement that is signed and dated by you and states your in tention to cancel, or you may use this notice by dating and signing below. Keep one copy of this notice because it contains important in formation about your rights. If you cancel by mail or telegram, you must send the notice no later than midnight of (date) (or midnight of the third business day fol lowing the latest of the three events listed above). If you send or deliver your written notice to cancel some other way, it must be delivered to the above address no later than that time.

I WISH TO CANCEL.

Consumer’s Signature Date

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Appendix H Regulation Z H-10—Credit Sale Sample Big Wheel Auto Alice Green A N N U A L FIN A N C E Amount Total of Total Sale Price PERCENTAG E CH AR G E Financed Payments The total cost of your pur RATE The dollar amount The amount of credit The amount y ou will chase on credit, including The cost of your credit the credit will cost provided to you or on have paid after you yo u r downpayment of as a yearly rate.

you.

your behalf.

have made all payments / £ T sy } as scheduled.

$ _ U i w ------ 14*4 * ‘6107.50 *76o4. 3 0 $ q u . q . 3 o Y o u have the right to receive at this time an itemization of the Am ount Financed. □ I want an itemization.

' J ? I do not want an itemization. Yo ur payment schedule will be:

Number of Payments Am ount of Payments When Payments Are Due 3 ( p < a u . a a M o n + h lu t e q i r \ r i\ r \ q G> - 1 j j j Insurance Credit life insurance and credit disability insurance are not required to obtain credit, and will not be provided unless yo u sign and agree to pay the additional cost._______________ ____________________________________________________________________________ Type Premium Signature A * i .

• Credit Life $ i a o - 1 want credit life insurance.

Signature Credit Disability 1 want credit disability insurance.

Signature Credit Life and 1 want credit life and Disability disability insurance.

Sign atu re Security: Y o u are giving a security interest in: the goods being purchased.

□__________________ Filing fM t $ | f t » 5 Q Non-filing irwur.nct $ .

Late Charge: If a payment is late, yo u will be charged $10. Prepayment: If you pay off early, you ) will not have to | t will not be entitled to a refund of part of the finance charge. □ may □ will not have to pay a penalty.

JtfHiay □ % See your contract documents for any additional information about nonpayment, default, any required repayment in full before the scheduled date, and prepayment refunds and penalties. I have ceceived a copy ofJMt statement. 5 ' I S l Signature Date • means an estimate

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Regulation Z Appendix H H -ll—Installment Loan Sample Friandly Bank & Trust Co.

700 East Street Little Creek, USA Lisa Stone 22-4859-22 300 Maple Avenue Little Creek, USA A N N U A L FIN AN CE Amount Total of PERCENTAG E C H ARG E Financed Payments R ATE The dollar amount The amount nf r.reilit The amount you will The cost of your credit the credit will cost provided to you or on have paid after you as a yearly rate.

you.

your behalf.

have made all payments as scheduled IZ % $ 675.3/ $ 5000 - ’5675.3/ Y o u have the right to receive at this time an itemization of the Am ount Financed. □ I want an itemization.

□ I do not want an itemization.

Y o ur paym ent schedule will be:

Number of Payments Am ount of Payments When Payments Are Due / ^Z6Z.03e 6///8Z Z3 *135.36 Lata Charge: If a payment is late, yo u will be charged $5 or 10 % o f the payment, whichever is less. Prepayment: If y o u p a y o ff early, y o u V m a y □ w ill n o t have to pay a penalty.

Required Deposit: The annual percentage rate does not take into account yo u r required deposit. See your contract docum ents for any additional information about nonpayment, default, any required repayment in full before the scheduled date, and prepayment refunds and penalties. e means an estimate

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Appendix H Regulation Z H -l2—Refinancing Sample Evwyom’s Credit Union I , I W A N N U A L FIN A N C E Amount Total of PERCEN TAG E C H A R G E Financed Payments RAT E The dollar amount The amount of credit The amount you wifi The cost of your credit the credit will cost provided to you or on have paid after you as a yearly rate.

you.

your behalf.

have made all payments as scheduled.

/ 5 % $5 1 7 7 . 7 3 % w .

n Number of Payments Am ount of Payments When Payments Are Oue * m s 3 Stttfttota S '/S / / Insurance Credit life insurance and credit disability insurance are not required to obtain credit, and will not be provided unless you sign Type Premium Signature Credit Life 1 want credit life insurance.

>OT«tur« Credit Disability * 177.73 1 want credit disability insurance.

^ • g r u tu r / S'] Security: Y o u are giving a security interest in: □ the goods or property being purchased. ^

your automobile.

Late Charge: If a payment is late, yo u will be charged 2 0 % of the interest due with a m inim um charge of $.05. Prepayment: If yo u pay off early, you will not have to pay a penalty. See your contract docum ents for any additional information about nonpayment, default, any required repayment in full before the scheduled date, and prepayment refunds and penalties. e means an estimate Itemization of the A m oun t Financed o f $ Si 77.73 $ IOOQ"

Am ount given to you directly A m o un t paid on your account ________________ to public officials,, . .

• SOP- ,0 Ox*Credit Union

Soo to c®- ____/ T 7 . 7 3 to Fan-Galactic. Ins. Co.

________________ for credit report _________Prepaid finance charge

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Regulation Z Appendix H H -l3— Mortgage with Demand Feature Sample M o r t g a g e S a v i n g s a n d L o a n A s s o c . G i e n n J o n e s r.

mo, 700 Oak Drive Date: April 15, 1981 U t t U 0SA A N N U A L FIN A N C E Amount Total of PERCENTAG E C H A R G E Financed Payments RATE The dollar amount The amount o f credit The amount you will The cost of your credit the credit will cost provided to yo u or on have paid after you as a yearly rate.

you.

your behalf.

have made all payments as scheduled.

H - . 8 5 * * 1 5 6 , 5 5 1 .5 4 $ 4 + > 0 5 . 6 6 * 2 0 1 , 1 5 7 . 2 0 Y o u r payment schedule will be:

Number of Payment* Am ount of Payments “55S.77 When Payments A re Due Mgrd~hf«j bf^UmU^ fe/l/81 Th is obligation has a demand feature. Y o u may obtain property insurance from anyone you w ant that is acceptable to Mortgage Savings and Loan Assoc.. If yo u get the insurance from Mortgage Savings and Loan Assoc, yo u will pay $ I S O V y a i r Security: Y o u are giving a security interest in: the goods or property being purchased. □_____________________ Late Charge: If a payment is late, you will be charged $ _ n y h ./_____ 5 ___ % of the payment.

Prepayment: If yo u pay o ff early, yo u m ay have to pay a penalty. Assumption: Som eone buying your house may. subject to conditions, be allowed to assume the remainder of the mortgage on the original terms.

See your contract docum ents for any additional inform ation about nonpayment, default, any required repayment in full before the scheduled date, and prepayment refunds and penalties. e means an estimate

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Appendix H Regulation Z H -14— Variable-Rate Mortgage Sample This disclosure describes the features of the adjustable-rate mortgage (ARM) program you are considering. Information on other ARM programs is available upon request. How Your Interest Rate and Payment Are Determined • Your interest rate will be based on an in dex rate plus a margin.

• Your payment will be based on the interest rate, loan balance, and loan term. —The interest rate will be based on the weekly average yield on United States Treasury securities adjusted to a constant maturity of 1 year (your index), plus our margin. Ask us for our current interest rate and margin. —Information about the index rate is published weekly in the Wall Street Journal.

• Your interest rate will equal the index rate plus our margin unless your interest rate “caps” limit the amount of change in the interest rate.

How Your Interest Rate Can Change • Your interest rate can change yearly. • Your interest rate cannot increase or de crease more than 2 percentage points per year.

• Your interest rate cannot increase or de crease more than 5 percentage points over the term of the loan.

How Your Monthly Payment Can Change • Your monthly payment can change yearly based on changes in the interest rate. • For example, on a $10,000, 30-year loan with an initial interest rate of 9.71 percent (the rate shown in the interest rate column below for the year 1987), the maximum amount that the interest rate can rise under this program is 5 percentage points, to 14.71 percent, and the monthly payment can rise from a first-year payment of $85.62 to a maximum of $123.31 in the fourth year.

• You will be notified in writing 25 days before the annual payment adjustment may be made. This notice will contain informa tion about your interest rates, payment amount, and loan balance.

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Regulation Z Appendix H Example The example below shows how your payments would have changed under this ARM program based on actual changes in the index from 1977 to 1987. This does not necessarily indicate how your index will change in the future. The example is based on the following assumptions. Amount............................ $10,000 Term................................. 30 years Payment adjustment. . . 1 year Interest adjustment . . . 1 year M argin............................ 3 percentage points C ap s.............. 2 percentage points annual interest rate ........... 5 percentage points lifetime interest rate Index.............. Weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year Year Index Margin* Interest Rate Monthly Payment Remaining Balance (as o f 1st week ending in July) (%) (percentage points) (%) ($) ($) 5.72 8.72 78.46 9,927.64 8.34 10.72** 92.89 9,874.67 9.44 12.44 105.67 9,832.70 8.51 11.51 98.79 9,776.04 14.94 13.51** 113.51 9,731.98 14.41 13.72*** 115.07 9,683.39 9.78 12.78 108.25 9,618.21 12.17 13.72*** 114.96 9,554.39 7.66 11.72** 101.08 9,456.03 6.36 9.72** 88.13 9,311.25 6.71 9.71 88.07 9,151.55 ♦This is a margin we have used recently; your margin may be different. **This interest rate reflects a 2 percentage point annual interest rate cap. ***This interest rate reflects a 5 percentage point lifetime interest rate cap. To see what your payments would have been during that period, divide your mortgage amount by $10,000; then multiply the monthly payment by that amount. (For example, in 1987 the monthly payment for a mortgage amount of $60,000 taken out in 1977 would be: $60,000 -s- $10,000 = 6; 6 X $88.07 = $528.42.)

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Appendix H Regulation Z H -l5— Graduated Payment M ortgage Sample Convenient Savings and Loan Account number: 4862-88 Michael Jones 500 Walnut Court, Little Creek USA ANNUAL FINANCE Amount Total of PERCENTAGE CHARGE Financed Payments RATE The dollar amount The amount of credit The am ount y ou will The cost of your credit the credit will cost provided to you or on have paid after you as a yearly rate.

you.

your behalf.

have made all payments as scheduled.

1 5 . 3 7 % $I77; W M $4 3 | T 7 7 $Z Z I , 5 4 1 4 4 Your payment schedule will be:

Number of Payments Am ount of Payments When Payments A re Due 12- * 4-4 6 . 6 1 MenfhtM b&ttwu/w) 4>/«/« 1 * 4 7 1 6 7 (J n ii u IZ * 5 1 5 . 1! ii "

fe/i I n IZ * S 5 3 . 15 t* "

fe /l/H a * 5 ^ 3 , fi •* « fc/l/ffS 3o o *f>X7 . LSt II X ____ * .

u J | • WO ' *<>2.7 . 3 7 Security: You are giving a security interest in the property being purchased. Late Charge: If a payment is late, you will be charged 5% of the payment. Prepayment: If you pay off early, you & may G will not have to pay a penalty.

^ may D will not be entitled to a refund of part of the finance charge. Assumption: Someone buying your home cannot assume the remainder of the mortgage on the original terms. See your contract documents for any additional information about nonpayment, default, any required repayment in full before the scheduled date, and prepayment refunds and penalties. e means an estimate

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Regulation Z Appendix J H -l6—Mortgage Sample You are not required to complete this agree ment merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.

The annual percentage rate on your loan will b e ________%.

Your regular (frequency) payment will be $_____________.

[Your interest rate may increase. Increases in the interest rate could increase your pay ment. The highest amount your payment could increase is to $________ .] APPENDIX I—Federal Enforcement Agencies The following list indicates which federal agency enforces Regulation Z for particular classes of businesses. Any questions concern ing compliance by a particular business should be directed to the appropriate enforcement agency. Terms that are not defined in the Fed eral Deposit Insurance Act (12 USC 1813(s)) shall have the meaning given to them in the International Banking Act of 1978 (12 USC 3101).

National banks and federal branches and fed eral agencies of foreign banks District office of the Office of the Comptroller of the Currency for the district in which the institution is located State member banks, branches and agencies o f foreign banks (other than federal branches, federal agencies, and insured state branches of foreign banks), commercial lending compa nies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act Federal Reserve Bank serving the District in which the institution is located Nonmember insured banks and insured state branches o f foreign banks Federal Deposit Insurance Corporation Re gional director for the region in which the in stitution is located Savings institutions insured under the Savings Association Insurance Fund of the FDIC and federally chartered savings banks insured under the Bank Insurance Fund o f the FDIC (but not including state-chartered savings banks insured under the Bank Insurance Fund).

Office of Thrift Supervision regional director for the region in which the institution is located Federal credit unions Regional office of the National Credit Union Administration serving the area in which the federal credit union is located Air carriers Assistant General Counsel for Aviation Enforcement and Proceedings Department of Transportation 400 Seventh Street, S.W.

Washington, D.C. 20590 Creditors subject to Packers and Stockyards Act Nearest Packers and Stockyards Administra tion area supervisor Federal Land Banks, Federal Land Bank As sociations, Federal Intermediate Credit Banks and Production Credit Associations Farm Credit Administration 490 L’Enfant Plaza, S.W.

Washington, D.C. 20578 Retail, department stores, consumer finance companies, all other creditors, and all non bank credit card issuers (Creditors operating on a local or regional basis should use the address o f the FTC regional office in which they operate.) Division of Credit Practices Bureau of Consumer Protection Federal Trade Commission Washington, D.C. 20580 APPENDIX J—Annual Percentage Rate Computations for Closed-End Credit Transactions (a) Introduction.

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Appendix J Regulation Z (1) Section 226.22(a) of Regulation Z pro vides that the annual percentage rate for other than open-end credit transactions shall be determined in accordance with either the actuarial method or the United States Rule method. This appendix contains an explana tion of the actuarial method as well as equations, instructions and examples of how this method applies to single-advance and multiple-advance transactions. (2) Under the actuarial method, at the end of each unit period (or fractional unit pe riod) the unpaid balance of the amount fi nanced is increased by the finance charge earned during that period and is decreased by the total payment (if any) made at the end of that period. The determination of unit periods and fractional unit periods shall be consistent with the definitions and rules in paragraphs (b)(3), (4) and (5) of this sec tion and the general equation in paragraph (b)(8) of this section.

(3) In contrast, under the United States Rule method, at the end of each payment period, the unpaid balance of the amount financed is increased by the finance charge earned during that payment period and is decreased by the payment made at the end of that payment period. If the payment is less than the finance charge earned, the ad justment of the unpaid balance of the amount financed is postponed until the end of the next payment period. If at that time the sum of the two payments is still less than the total earned finance charge for the two payment periods, the adjustment of the unpaid balance of the amount financed is postponed still another payment period, and so forth.

(b) Instructions and equations for the actua rial method.

(1) General rule. The annual percentage rate shall be the nominal annual percentage rate determined by multiplying the unit-period rate by the number of unit periods in a year.

(2) Term of the transaction. The term of the transaction begins on the date of its consummation, except that if the finance charge or any portion of it is earned begin ning on a later date, the term begins on the later date. The term ends on the date the last payment is due, except that if an ad vance is scheduled after that date, the term ends on the later date. For computation pur poses, the length of the term shall be equal to the time interval between any point in time on the beginning date to the same point in time on the ending date. (3) Definitions of time intervals. (i) A period is the interval of time be tween advances or between payments and includes the interval of time between the date the finance charge begins to be earned and the date of the first advance thereafter or the date of the first payment thereafter, as applicable. (ii) A common period is any period that occurs more than once in a transaction. (iii) A standard interval of time is a day, week, semimonth, month, or a multiple of a week or a month up to, but not ex ceeding, one year.

(iv) All months shall be considered equal. Full months shall be measured from any point in time on a given date of a given month to the same point in time on the same date of another month. If a series of payments (or advances) is scheduled for the last day of each month, months shall be measured from the last day of the given month to the last day of another month. If payments (or advances) are scheduled for the 29th or 30th of each month, the last day of February shall be used when applicable. (4) Unit period.

(i) In all transactions other than a single advance, single-payment transaction, the unit period shall be that common period, not to exceed one year, that occurs most frequently in the transaction, except that— (A) If two or more common periods occur with equal frequency, the smaller of such common periods shall be the unit period; or (B) If there is no common period in the transaction, the unit period shall be that period which is the average of all periods rounded to the nearest whole standard interval of time. If the aver age is equally near two standard inter

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Regulation Z Appendix J vals of time, the lower shall be the unit period.

(ii) In a single-advance, single-payment transaction, the unit period shall be the term of the transaction, but shall not ex ceed one year.

(5) Number of unit periods between two given dates.

(i) The number of days between two dates shall be the number of 24-hour in tervals between any point in time on the first date to the same point in time on the second date.

(ii) If the unit period is a month, the number of full unit periods between two dates shall be the number of months measured back from the later date. The remaining fraction of a unit period shall be the number of days measured forward from the earlier date to the beginning of the first full unit period, divided by 30. If the unit period is a month, there are 12 unit periods per year.

(iii) If the unit period is a semimonth or a multiple of a month not exceeding 11 months, the number of days between two dates shall be 30 times the number of full months measured back from the later date, plus the number of remaining days. The number of full unit periods and the remaining fraction of a unit period shall be determined by dividing such number of days by 15 in the case of a semi monthly unit period or by the appropriate multiple of 30 in the case of a mul timonthly unit period. If the unit period is a semimonth, the number of unit peri ods per year shall be 24. If the number of unit periods is a multiple of a month, the number of unit periods per year shall be 12 divided by the number of months per unit period.

(iv) If the unit period is a day, a week, or a multiple of a week, the number of full unit periods and the remaining frac tions of a unit period shall be determined by dividing the number of days between the two given dates by the number of days per unit period. If the unit period is a day, the number of unit periods per year shall be 365. If the unit period is a week or a multiple of a week, the num ber of unit periods per year shall be 52 divided by the number of weeks per unit period.

(v) If the unit period is a year, the num ber of full unit periods between two dates shall be the number of full years (each equal to 12 months) measured back from the later date. The remaining fraction of a unit period shall be— (A) The remaining number of months divided by 12 if the remaining interval is equal to a whole number of months, or (B) The remaining number of days di vided by 365 if the remaining interval is not equal to a whole number of months.

(vi) In a single-advance, single-payment transaction in which the term is less than a year and is equal to a whole number of months, the number of unit periods in the term shall be one, and the number of unit periods per year shall be 12 divided by the number of months in the term or 365 divided by the number of days in the term.

(vii) In a single-advance, single-payment transaction in which the term is less than a year and is not equal to a whole num ber of months, the number of unit peri ods in the term shall be one, and the number of unit periods per year shall be 365 divided by the number of days in the term.

(6) Percentage rate for a fraction o f a unit period. The percentage rate of finance charge for a fraction (less than one) of a unit period shall be equal to such fraction multiplied by the percentage rate of finance charge per unit period.

(7) Symbols. The symbols used to express the terms of a transaction in the equation set forth in paragraph (b)(8) of this section are defined as follows:

Ak= The amount of the kth advance. qk= The number of full unit periods from the beginning of the term of the transaction to the kth ad vance.

ei= The fraction of a unit period in

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Appendix J Regulation Z the time interval from the begin ning of the term of the transac tion to the kth advance. m = The number of advances. Pj = The amount of the jth payment. tj = The number of full unit periods from the beginning of the term of the transaction to the jth payment. fj= The fraction of a unit period in the time interval from the begin ning of the term of the transac tion to the jth payment. n = The number of payments. i = The percentage rate of finance charge per unit period, expressed as a decimal equivalent. Symbols used in the examples shown in this appendix are defined as follows: axl = The present value of 1 per unit period for x unit periods, first payment due immediately. = 1 + (1 + i) (1 + i)2 +- ( 1 + i)* -l w = The number of unit periods per year.

I = wi X 100 = The nominal annual percentage rate.

(8) General equation. The following equa tion sets forth the relationship among the terms of a transaction: (l+ eii)(l+ i)q i (l+ e 2i)(l+i)<E + ±BL (l+ e mi) ( l+ 0 qm JL (l+fjiX i+Ot, ( i + f2i ) ( i + i)t2 ( l + t t ) ( l + i ) t . (9) Solution of general equation by itera tion process.

(i) The general equation in paragraph (b)(8) of this section, when applied to a simple transaction in which a loan of $1000 is repaid by 36 monthly payments of $33.61 each, takes the special form: 33.61 a A = (1+ i) Step 1:

Let Ii = estimated annual percentage rate = 12.50% Evaluate expression for A, letting i - Ii/(100w) = .010416667 Results (referred to as A') = 1004.674391 Step 2:

Let t = Ii + .1 = 12.60% Evaluate expression for A, letting i = I^lOOw) = .010500000 Result (referred to as A ") = 1003.235366 Step 3:

Interpolate for I (annual percentage rate):

1 - + 1 - 1 1 5 0 + r (looo.oooooo - 1004.674391) 1 ’ [ (1003.235366 - 1004.674391) J = 12.82483042% Step 4:

First iteration, let Ii = 12.82483042% and repeat Steps 1, 2, and 3 obtaining a new I = .82557859% Second iteration, let Ii = 12.82557859% and repeat Steps 1, 2, and 3 obtaining a new I = .82557529% In this case, no further iterations are re quired to obtain the annual percentage rate correct to two decimal places, 12.83%.

(ii) When the iteration approach is used, it is expected that calculators or com-

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Regulation Z Appendix J puters will be programmed to carry all available decimals throughout the calcu lation and that enough iterations will be performed to make virtually certain that the annual percentage rate obtained, when rounded to two decimals, is correct. An nual percentage rates in the examples be low were obtained by using a 10-digit programmable calculator and the iteration procedure described above. (c) Examples for the actuarial method. (1) Single-advance transaction, with or without an odd first period, and otherwise regular. The general equation in paragraph (b)(8) of this section can be put in the fol lowing special form for this type of transaction:

A " ( l + f i ) < l + i ) t ( P 5 ®) Example (i): Monthly payments (regu lar first period) Amount advanced (A) = $5000. Pay ment (P) = $230.

Number of payments (n) = 24. Unit period = 1 month. Unit periods per year (w) = 1 2 .

Advance, 1-10-78. First payment, 2-10-78.

From 1-10-78 through 2-10-78 = 1 unit period, (t = 1 ; f = 0) Annual percentage rate (I) = wi = .0969 = 9.69% Example (ii): Monthly payments (long first period) Amount advanced (A) = $6000. Pay ment (P) = $200.

Number of payments (n) = 36. Unit period = 1 month. Unit periods per year (w) = 1 2 .

Advance, 2-10-78. First payment, 4-1-78.

From 3-1-78 through 4-1-78 = 1 unit period, (t = 1) From 2-10-78 through 3-1-78 = 19 days, (f = 19/30) Annual percentage rate (I) = wi = .1182 = 11.82% Example (iii): Semimonthly payments (short first period) Amount advanced (A) = $5000. Pay ment (P) = $219.17.

Number of payments (n) = 24. Unit period = xh month. Unit periods per year (w) = 24.

Advance, 2-23-78. First payment, 3-1-78. Payments made on 1st and 16th of each month.

From 2-23-78 through 3-1-78 = 6 days, (t = 0; f = 6/15) Annual percentage rate (I) = wi = .1034 = 10.34% Example (iv): Quarterly payments (long first period) Amount advanced (A) = $10,000. Payment (P) = $385.

Number of payments (n) = 40. Unit period = 3 months. Unit periods per year (w) = 4.

Advance, 5-23-78. First payment, 10-1-78.

From 7-1-78 through 10-1-78 = 1 unit period, (t = 1) From 6-1-78 through 7-1-78 = 1 month = 30 days. From 5-23-78 through 6-1-78 = 9 days, (f = 39/ 90) Annual percentage rate (I) = wi = .0897 = 8.97% Example (v): Weekly payments (long first period) Amount advanced (A) = $500. Pay ment (P) = $17.60.

Number of payments (n) = 30. Unit period = 1 week. Unit periods per year (w) = 52.

Advance, 3-20-78. First payment, 4-21-78.

From 3-24-78 through 4-21-78 = 4 unit periods, (t = 4) From 3-20-78 through 3-24-78 = 4 days, (f = 4/7) Annual percentage rate (I) = wi = .1496 = 14.96% (2) Single-advance transaction, with an odd

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Appendix J Regulation Z first payment, with or without an odd first period, and otherwise regular. The general equation in paragraph (b)(8) of this section can be put in the following special form for this type of transaction: A = (i+ fi)(i+ i)* [ Pl + (T + i)] Example (i): Monthly payments (regu lar first period and irregular first payment) Amount advanced (A) $5000. First payment (Pi) = $250.

Regular payment (P) = $230. Number of payments (n) = 24.

Unit period = 1 month. Unit periods per year (w) = 1 2 .

Advance, 1-10-78. First payment, 2-10-78.

From 1-10-78 through 2-10-78 = 1 unit period, (t = 1 ; f = 0) Annual percentage rate (I) = wi = .1008 = 10.08% Example (ii): Payments every four weeks (long first period and irregular first payment) Amount advanced (A) = $400. First payment (Pi) = $39.50. Regular payment (P) = $38.31. Num ber of payments (n) = 1 2 . Unit period = 4 weeks. Unit periods per year (w) = 52/4 = 13. Advance, 3-18-78. First payment, 4-20-78.

From 3-23-78 through 4-20-78 = 1 unit period, (t = 1 ) From 3-18-78 through 3-23-78 = 5 days, (f = 5/28) Annual percentage rate (I) = wi = .2850 = 28.50%. (3) Single-advance transaction, with an odd final payment, with or without an odd first period, and otherwise regular. The general equation in paragraph (b)(8) of this section can be put in the following special form for this type of transaction: A"( i+r,)(i+i)1[Pi5=’ + p» (l+ i)n- ‘J Example (i):

Monthly payments (reg ular first period and irregular final payment) Amount advanced (A) = $5000. Reg ular payment (P) = $230. Final payment (P„) = $280. Number of payments (n) = 24.

Unit period = 1 month. Unit periods per year (w) = 1 2 .

Advance, 1-10-78. First payment, 2-10-78.

From 1-10-78 through 2-10-78 = 1 unit period, (t = 1 ; f = 0) Annual percentage rate (I) = wi = .1050 = 10.50% Example (ii): Payments every two weeks (short first period and irregular final payment) Amount advanced (A) = $200. Regu lar payment (P) = $9.50. Final payment (P„) = $30. Number of payments (n) = 2 0.

Unit period = 2 weeks. Unit periods per year (w) = 52/2 = 26. Advance, 4-3-78. First payment, 4-11-78.

From 4-3-78 through 4-11-78 = 8 days, (t = 0; f = 8/14) Annual percentage rate (I) = wi = .12 2 2 = 1 2 .2 2 % (4) Single-advance transaction, with an odd first payment, odd final payment, with or without an odd first period, and otherwise regular. The general equation in paragraph (b)(8) of this section can be put in the fol lowing special form for this type of transaction:

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Regulation Z Appendix J A p , ____+ (l+ f,)(l+ i)‘ I 1 + (1 + i)+ p„ Example (i): Monthly payments (regular first period, irregular first payment, and irregular final payment) Amount advanced (A) = $5000. First payment (Pi) = $250.

Regular payment (P) = $230. Final pay ment (P„) = $280.

Number of payments (n) = 24. Unit pe riod = 1 month.

Unit periods per year (w) = 12. Advance, 1-10-78. First payment, 2-10-78.

From 1-10-78 through 2-10-78 = 1 unit period, (t = 1 ; f = 0) Annual percentage rate (I) = wi = .1090 = 10.90% Example (ii): Payments every two months (short first period, irregular first payment, and irregular final payment) Amount advanced (A) = $8000. First payment (Pi) = $449.36.

Regular payment (P) = $465. Final pay ment (P„) = $200.

Number of payments (n) = 20. Unit pe riod = 2 months.

Unit periods per year (w) = 12/2 = 6. Advance, 1-10-78. First payment, 3-1-78.

From 2-1-78 through 3-1-78 = 1 month. From 1-10-78 through 2-1-78 = 22 days, (t = 0; f = 52/60) Annual percentage rate (I) = wi = .0730 = 7.30% (5) Single-advance, single-payment transac tion. The general equation in paragraph (b)(8) of this section can be put in the spe cial forms below for single advance, single payment transactions. Forms 1 through 3 are for the direct determination of the an nual percentage rate under special condi tions. Form 4 requires the use of the itera tion procedure of paragraph (b)(9) of this section and can be used for all single-ad vance, single-payment transactions regard less of term.

Form 1—Term less than one year: - ) Form 2—Term more than one year but less than two years:

i = ^ { [ ( i + f) 2 + 4f( £ - ,)]w - (i+‘>! Form 3—Term equal to exactly a year or exact multiple of a year: t = 100 [ ( £ ) “ - , ] Form 4—Special form for iteration proce dure (no restriction on term): A = _____ I _____ (l + fiMl + i) 1 Example (i): Single-advance, single-pay ment (term of less than one year, mea sured in days) Amount advanced (A) = $1000. Pay ment (P) = $1080.

Unit period = 255 days. Unit periods per year (w) = 365/255.

Advance, 1-3-78. Payment, 9-15-78. From 1-3-78 through 9-15-78 = 255 days, (t = 1 ; f = 0) Annual percentage rate (I) = wi = .1145 = 11.45%. (Use form 1 or 4.) Example (ii): Single-advance, single-payment (term of less than one year, mea sured in exact calendar months) Amount advanced (A) = $1000. Pay ment (P) = $1044.

Unit period = 6 months. Unit periods per year (w) = 2 .

Advance, 7-15-78. Payment, 1-15-79. ' - l0°w ( | -

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Appendix J Regulation Z From 7-15-78 through 1-15-79 = 6 mos. (t = 1 ; f = 0) Annual percentage rate (I) = wi = .0880 = 8.80%. (Use form 1 or 4.) Example (iii): Single-advance, single-payment (term of more than one year but less than two years, fraction measured in exact months) Amount advanced (A) = $1000. Pay ment (P) = $1135.19.

Unit period = 1 year. Unit periods per year (w) = 1 .

Advance, 7-17-78. Payment, 1-17-80. From 1-17-79 through 1-17-80 = 1 unit period, (t = 1) From 7-17-78 through 1-17-79 = 6 mos. (f = 6/ 1 2 ) Annual percentage rate (I) = wi = .0876 = 8.76%. (Use form 2 or 4.) Example (iv): Single-advance, single-payment (term of exactly two years) Amount advanced (A) = $1000. Pay ment (P) = $1240.

Unit period = 1 year. Unit periods per year (w) = 1 .

Advance, 1-3-78. Payment, 1-3-80. From 1-3-78 through 1-3-79 = 1 unit period, (t = 2 ; f = 0) Annual percentage rate (I) = wi = .1136 = 11.36%. (Use form 3 or 4.) (6) Complex single-advance transaction. Example (i): Skipped-payment loan (payments every four weeks) A loan of $2135 is advanced on 1-25-78. It is to be repaid by 24 pay ments of $100 each. Payments are due every four weeks beginning 2-20-78. However, in those months in which two payments would be due, only the first of the two payments is made and the following payment is delayed by two weeks to place it in the next month.

Unit period = 4 weeks. Unit periods per year (w) = 52/4 = 13.

First series of payments begins 26 days after 1-25-78. (t, = 0; f, = 26/28) Second series of payments begins nine unit periods plus two weeks after start of first series. (t2 = 10; f2 = 12/28) Third series of payments begins six unit periods plus two weeks after start of second series. (t3 = 16; f3 = 26/28) Last series of payments begins six unit periods plus two weeks after start of third series, (tt = 23; ft = 12/28) The general equation in paragraph (b)(8) of this section can be written in the special form:

100 S 2135 = ---------------------h ( 1 + (26/28)i) 100 ^ (l + (1 2 /2 8 )i)(l+ i)lu 1005a (l + (2 6 /2 8 )i)(H -i)lb 100 S ( l + (1 2 /2 8 )i)(H -i)4i Annual percentage rate (I) = wi = .120 0 = 1 2 .00% Example (ii): Skipped-payment loan plus single payments A loan of $7350 on 3-3-78 is to be re paid by three monthly payments of $1000 each beginning 9-15-78, plus a single payment of $2000 on 3-15-79, plus three more monthly payments of $750 each beginning 9-15-79, plus a final payment of $10 0 0 on 2-1-80. Unit period = 1 month. Unit periods per year (w) = 12 .

First series of payments begins six unit periods plus 12 days after 3-3-78. (ti = 6; f, = 12/30) Second series of payments (single pay ment) occurs 12 unit periods plus 12 days after 3-3-78. (t2 = 12; f2 = 12/30)

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Regulation Z Appendix J Third series of payments begins 18 unit periods plus 12 days after 3-3-78. (t3 = 18; f3 = 12/30) Final payment occurs 22 unit periods plus 29 days after 3-3-78. (U = 22; f4 = 29/30) The general equation in paragraph (b)(8) of this section can be written in the special form:

7350 = (l + (1 2 /3 0 )i)(l+ i)6 + (l + (1 2 /3 0 )i)(l+ i)12+ 750 S (l + (1 2 /3 0 )i)(l+ i)18 + (1 + (2 9 /3 0 )i)(l+ i) 22 Annual percentage rate (I) = wi = .10 2 2 = 10 .2 2 % Year Monthly payment Year Monthly payment 385.03 372.72 384.62 371.18 384.17 369.50 Unit period = 1 month. Unit periods per year (w) = 1 2 .

From 5-1-78 through 6-1-78 = 1 unit period, (t = 1) From 4-10-78 through 5-1-78 = 21 days, (f = 21/30) The general equation in paragraph (b)(8) of this section can be written in the special form:

39,688.56 = (1 + (2 1 /3 0 )0 (1 + 0 [ 300.18 308.78 29181 + (T T o ^ + ( T T o * + 369.50 1 d + o H Example (iii): Mortgage with varying payments A loan of $39,688.56 (net) on 4-10-78 is to be repaid by 360 monthly pay ments beginning 6-1-78. Payments are the same for 12 months at a time as follows:

Year Monthly payment Year Monthly payment $291.81 $383.67 300.18 383.13 308.78 382.54 317.61 381.90 326.65 381.20 335.92 380.43 345.42 379.60 355.15 378.68 365.12 377.69 375.33 376.60 385.76 375.42 385.42 374.13 Annual percentage rate (I) = wi = .0980 = 9.80% (7) Multiple-advance transactions. Example (i): Construction loan Three advances of $20,000 each are made on 4-10-79, 6-12-79, and 9-18-79. Repayment is by 240 month ly payments of $612.36 each begin ning 12-10-79.

Unit period = 1 month. Unit periods per year (w) = 1 2 .

From 4-10-79 through 6-12-79 = (2 + 2/ 30) unit periods.

From 4-10-79 through 9-18-79 = (5 + 8/ 30) unit periods.

From 4-10-79 through 12-10-79 = (8) unit periods.

The general equation in paragraph (b)(8) of this section is changed to the single-

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Appendix J Regulation Z advance mode by treating the second and third advances as negative payments: 612.36a_ 20,000 = ( 1 + 0 240 a_ - 240 = (1 + i) (l + (4/30)i) 7T5 + ( 1 + i ) 2 ( 1 + i ) W + ( 1 + 0 IS 20,000 (1 + (2/30)i) (1 + i) d + i ) 38 (l + (4/30)i) 20,000 (1 + (8 /3 0 )i)(l + i ) 5 Annual percentage rate (I) = wi = .1025 = 10.25% Example (ii): Student loan A student loan consists of eight ad vances: $1800 on 9-5-78, 9-5-79, 9-5-80, and 9-5-81; plus $1000 on 1-5-79, 1-5-80, 1-5-81, and 1-5-82. The borrower is to make 50 monthly payments of $240 each beginning 7-1-78 (prior to first advance). Unit period = 1 month. Unit periods per year (w) - 1 2 .

Zero point is date of first payment since it precedes first advance. From 7-1-78 to 9-5-78 = (2 + 4/30) unit periods.

From 7-1-78 to 9-5-79 = (14 + 4/30) unit periods.

From 7-1-78 to 9-5-80 = (26 + 4/30) unit periods.

From 7-1-78 to 9-5-81 = (38 + 4/30) unit periods.

From 7-1-78 to 1-5-79 = (6 + 4/30) unit periods.

From 7-1-78 to 1-5-80 = (18 + 4/30) unit periods.

From 7-1-78 to 1-5-81 = (30 + 4/30) unit periods.

From 7-1-78 to 1-5-82 = (42 + 4/30) unit periods.

Since the zero point is date of first pay ment, the general equation in paragraph (b)(8) of this section is written in the sin gle-advance form below by treating the first payment as a negative advance and the eight advances as negative payments: ( 1 + i ) 6 + ( 1 + 0 18 ( 1 + i ) 35 ' ( 1 + i) + Annual percentage rate (I) = wi = .3204 = 32.04% APPENDIX K— Total-Annual-Loan-Cost Rate Computations for Reverse- Mortgage Transactions (a) Introduction. Creditors are required to dis close a series of total-annual-loan-cost rates for each reverse-mortgage transaction. This appendix contains the equations creditors must use in computing the total-annual-loan-cost rate for various transactions, as well as in structions, explanations, and examples for va rious transactions. This appendix is modeled after appendix J of this part (Annual Percent age Rates Computations for Closed-End Credit Transactions); creditors should consult appendix J of this part for additional guidance in using the formulas for reverse mortgages. (b) Instructions and equations for the totalannual-loan-cost rate.

(1) General rule. The total-annual-loan-cost rate shall be the nominal total-annual-loancost rate determined by multiplying the unit-period rate by the number of unit peri ods in a year.

(2) Term of the transaction. For purposes of total-annual-loan-cost disclosures, the term of a reverse-mortgage transaction is assumed to begin on the first of the month in which consummation is expected to oc cur. If a loan cost or any portion of a loan cost is initially incurred beginning on a date

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Regulation Z Appendix K later than consummation, the term of the transaction is assumed to begin on the first of the month in which that loan cost is in curred. For purposes of total-annual-loancost disclosures, the term ends on each of the assumed loan periods specified in sec tion 226.33(c)(6).

(3) Definitions o f time intervals. (i) a period is the interval of time be tween advances.

(ii) A common period is any period that occurs more than once in a transaction. (iii) A standard interval of time is a day, week, semimonth, month, or multiple of a week or a month up to, but not exceed ing, one year.

(iv) All months shall be considered to have an equal number of days. (4) Unit period.

(i) In all transactions other than single advance, single-payment transactions, the unit period shall be that common period, not to exceed one year, that occurs most frequently in the transaction, except that— (A) if two or more common periods occur with equal frequency, the smaller of such common periods shall be the unit period; or (B) if there is no common period in the transaction, the unit period shall be that period which is the average of all periods rounded to the nearest whole standard interval of time. If the aver age is equally near two standard inter vals of time, the lower shall be the unit period.

(ii) In a single-advance, single-payment transaction, the unit period shall be the term of the transaction, but shall not ex ceed one year.

(5) Number o f unit periods between two given dates.

(i) The number of days between two dates shall be the number of 24-hour in tervals between any point in time on the first date to the same point in time on the second date.

(ii) If the unit period is a month, the number of full unit periods between two dates shall be the number of months. If the unit period is a month, the number of unit periods per year shall be 1 2 . (iii) If the unit period is a semimonth or a multiple of a month not exceeding 11 months, the number of days between two dates shall be 30 times the number of full months. The number of full unit peri ods shall be determined by dividing the number of days by 15 in the case of a semimonthly unit period or by the appro priate multiple of 30 in the case of a multimonthly unit period. If the unit pe riod is a semimonth, the number of unit periods per year shall be 24. If the num ber of unit periods is a multiple of a month, the number of unit periods per year shall be 12 divided by the number of months per unit period. (iv) If the unit period is a day, a week, or a multiple of a week, the number of full unit periods shall be determined by dividing the number of days between the two given dates by the number of days per unit period. If the unit period is a day, the number of unit periods per year shall be 365. If the unit period is a week or a multiple of a week, the number of unit periods per year shall be 52 divided by the number of weeks per unit period. (v) If the unit period is a year, the num ber of full unit periods between two dates shall be the number of full years (each equal to 12 months).

(6) Symbols. The symbols used to express the terms of a transaction in the equation set forth in paragraph (b)(8) of this appen dix are defined as follows: Aj = The amount of each periodic or lump-sum advance to the con sumer under the reverse-mort gage transaction, i = Percentage rate of the total an nual loan cost per unit period, expressed as a decimal equivalent, j = The number of unit periods un til the jth advance, n = The number of unit periods be tween consummation and re payment of the debt.

Pn = Min (Bal„, Val„). This is the

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Appendix K Regulation Z maximum amount that the creditor can be repaid at the specified loan term.

Baln = Loan balance at time of repay ment, including all costs and fees incurred by the consumer (including any shared apprecia tion or shared equity amount) compounded to time n at the creditor’s contract rate of interest.

Valn = Valo (1 + ct )y, where Valo is the property value at consum mation, ct is the assumed an nual rate of appreciation for the dwelling, and y is the number of years in the assumed term. Val„ must be reduced by the amount of any equity reserved for the consumer by agreement between the parties, or by 7 percent (or the amount or per centage specified in the credit agreement), if the amount re quired to be repaid is limited to the net proceeds of sale.

= The summation operator.

Symbols used in the examples shown in this appendix are defined as follows: FV ji = The future value of 1 per unit period for x unit periods, first advance due immediately (at time = 0, which is consumma tion).

x - l = 2 (1 + i)x~i j = 0 = (1 + i)x + (1 + i)x_1 + (1 + i)1 = (1 + i)n - 1 X (1 + i) w = The number of unit periods per year.

I = wi X 100 = the nominal total-annual-loan-cost rate. (7) General equation. The total-annualloan-cost rate for a reverse-mortgage trans action must be determined by first solving the following formula, which sets forth the relationship between the advances to the consumer and the amount owed to the cred itor under the terms of the reverse-mortgage agreement for the loan-cost rate per unit pe riod (the loan-cost rate per unit period is then multiplied by the number of unit peri ods per year to obtain the total-annual-loancost rate I; that is, I = wi): n—1 A:(l + i)"~i = Pn j = 0 1 (8) Solution of general equation by itera tion process.

(i) The general equation in paragraph (b)(7) of this appendix, when applied to a simple transaction for a reverse-mortgage loan of equal monthly advances of $350 each, and with a total amount owed of $14,313.08 at an assumed repayment pe riod of two years, takes the special form: Pn = 350 FV541 i or P„ = 350 X ( 1 + i)"

1 X (1 + i) i Using the iteration procedures found in steps 1 through 4 of (b)(9)(i) of appendix J of this part, the total-annual-loan-cost rate, correct to two decimals, is 48.53 percent.

(ii) In using these iteration procedures, it is expected that calculators or computers will be programmed to carry all available decimals throughout the calculation and that enough iterations will be performed to make virtually certain that the totalannual-loan-cost rate obtained, when rounded to two decimals, is correct. Total-annual-loan-cost rates in the examples below were obtained by using a 10-digit programmable calculator and the iteration procedure described in appendix J of this part.

(9) Assumption for discretionary cash ad vances. If the consumer controls the timing of advances made after consummation (such

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Regulation Z Appendix K as in a credit-line arrangement), the creditor must use the general formula in paragraph (b)(7) of this appendix. The total-annualloan-cost rate shall be based on the assump tion that 50 percent of the principal loan amount is advanced at closing, or in the case of an open-end transaction, at the time the consumer becomes obligated under the plan. Creditors shall assume the advances are made at the interest rate then in effect and that no further advances are made to, or repayments made by, the consumer dur ing the term of the transaction or plan. (10) Assumption for variable-rate reversemortgage transactions. If the interest rate for a reverse-mortgage transaction may in crease during the loan term and the amount or timing is not known at consummation, creditors shall base the disclosures on the initial interest rate in effect at the time the disclosures are provided.

(11) Assumption for closing costs. In calcu lating the total-annual-loan-cost rate, credi tors shall assume all closing and other con sumer costs are financed by the creditor. (c) Examples o f total-annual-loan-cost rate computations.

(1) Lump-sum advance at consummation. Lump-sum advance to consumer at consum mation: $30,000 Total of consumer’s loan costs financed at consummation: $4,500 Contract interest rate: 11.60% Estimated time of repayment (based on life expectancy of a consumer at age 78): 10 years Appraised value of dwelling at consumma tion: $ 100,000 Assumed annual dwelling appreciation rate: 4% P l20 = Min (109,441.32, 137,662.72) 30,000(1 + i)12°-° + 2 0(1 + i)i20-j j = o = 109,441.32 i = .010843293 Total-annual-loan-cost rate (100(.010843293 X 12)) = 13.01% (2) Monthly advance beginning at consummation.

Monthly advance to consumer, beginning at consummation: $492.51 Total of consumer’s loan costs financed at consummation: $4,500 Contract interest rate: 9.00% Estimated time of repayment (based on life expectancy of a consumer at age 78): 10 years Appraised value of dwelling at consumma tion: $100,000 Assumed annual dwelling appreciation rate: P 120 = Min (107,053.63, 200,780.02) (1 + i) 120 - 1 492.51 X X (1 + i) = 107,053.63 i = .009061140 Total-annual-loan-cost rate (100(.009061140 X 12)) = 10.87% (3) Lump-sum advance at consummation and monthly advances thereafter. Lump-sum advance to consumer at consum mation: $ 10,000 Monthly advance to consumer, beginning at consummation: $725 Total of consumer’s loan costs financed at consummation: $4,500 Contract rate of interest: 8.5% Estimated time of repayment (based on life expectancy of a consumer at age 75): 12 years Appraised value of dwelling at consumma tion: $100,000 Assumed annual dwelling appreciation rate: 8% P 144 = Min (221,818.30, 234,189.82) 10 ,000(1 + i)14°-° + 2 725(1 + i)144-j = 221,818.30 j = 0 i = .007708844 Total-annual-loan-cost rate (100(.007708844 X 12)) = 9.25%

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Appendix K Regulation Z (d) Reverse-mortgage model form and sample form.

(1) Model form.

TOTAL-ANNUAL-LOAN-COST RATE Loan Terms Age of youngest borrower:

Appraised property value:

Interest rate:

Monthly advance:

Initial draw:

Line of credit:

Initial Loan Charges Closing costs:

Mortgage insurance premium:

Annuity cost:

Monthly Loan Charges Servicing fee:

Other Charges Mortgage insurance:

Shared appreciation:

Repayment Limits Assumed Total-Annual-Loan-Cost Rate Annual Appreciation 2-year loan term [1 ]-year loan term] [ ]-year loan term [ ]-year loan term 0% I ] 4% [ ] 8% [ ] The cost of any reverse-mortgage loan depends on how long you keep the loan and how much your house appreciates in value. Generally, the longer you keep a reverse mortgage, the lower the total-annual-loan-cost rate will be.

This table shows the estimated cost of your reverse-mortgage loan, expressed as an annual rate. It illustrates the cost for three [four] loan terms: 2 years, [half of life expectancy for someone your age,] that life expectancy, and 1.4 times that life expectancy. The table also shows the cost of the loan, assuming the value of your home appreciates at three different rates: 0%, 4%, and 8%.

The total-annual-loan-cost rates in this table are based on the total charges associated with this loan. These charges typically include principal, interest, closing costs, mortgage insurance premiums, annuity costs, and servicing costs (but not costs when you sell the home). The rates in this table are estimates. Your actual cost may differ if, for example, the amount of your loan advances varies or the interest rate on your mortgage changes. SIGNING AN APPLICATION OR RECEIVING THESE DISCLOSURES DOES NOT REQUIRE YOU TO COMPLETE THIS LOAN

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Regulation Z Appendix K (2) Sample Form.

TOTAL-ANNUAL-LOAN-COST RATE Loan Terms Monthly Loan Charges Age of youngest borrower:

Servicing fee: None Appraised property value:

$100,000 Interest rate:

9% Other Charges Monthly advance:

$301.80 Mortgage insurance: None Initial draw:

$1,000 Shared appreciation: None Line of credit:

$4,000 Initial Loan Charges Repayment Limits Closing costs:

$5,000 Net proceeds estimated at Mortgage insurance premium:

None 93% of projected home sale Annuity cost:

None Assumed Annual Appreciation Total-Annual-Loan-Cost Rate 2-year loan term [6-year loan term] 12-year loan term 17-year loan term 0% 39.00% [14.94%] 9.86% 3.87% 4% 39.00% [14.94%] 11.03% 10.14% 8% 39.00% [14.94%] 11.03% 10.20% The cost of any reverse-mortgage loan depends on how long you keep the loan and how much your house appreciates in value. Generally, the longer you keep a reverse mortgage, the lower the total-annual-loan-cost rate will be.

The rates in this table are estimates. Your actual cost may differ if, for example, the amount of your loan advances varies or the interest rate on your mortgage changes. SIGNING AN APPLICATION OR RECEIVING THESE DISCLOSURES DOES NOT REQUIRE YOU TO COMPLETE THIS LOAN

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Appendix L Regulation Z APPENDIX L—Assumed Loan Periods for Computations of Total-Annual-Loan- Cost Rates (a) Required tables. In calculating the totalannual-loan-cost rates in accordance with ap pendix K of this part, creditors shall assume three loan periods, as determined by the fol lowing table.

(b) Loan periods.

(1) Loan Period 1 is a two-year loan pe riod.

(2) Loan Period 2 is the life expectancy in years of the youngest borrower to become obligated on the reverse-mortgage loan, as shown in the U.S. Decennial Life Tables for 1979-1981 for females, rounded to the nearest whole year.

(3) Loan Period 3 is the life expectancy figure in Loan Period 3, multiplied by 1.4 and rounded to the nearest full year (life expectancy figures 0.5 have been rounded up to 1 ).

(4) At the creditor’s option, an additional period may be included, which is the lifeexpectancy figure in Loan Period 2, multi plied by 0.5 and rounded to the nearest full year (life expectancy figures at 0.5 have been rounded up to 1).

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Regulation Z Appendix L Age of Youngest Borrower Loan Period I (in Years) [ Optional Loan Period (in Years)] Loan Period 2 (Life Expectancy) (in Years) Loan Period 3 (in Years) [11] [10] [10] [9] [9] [9] [8] [8] [8] [7] [7] [7] [6] [6] [6] [5] [5] [5] [5] [4] [4] [4] [4] [3] [3] [3] [3] [3] [3] [2] [2] [2] [2] 95 and over [2]

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Truth in Lending Act 15 USC 1601 et seq.; 82 Stat. 146; Pub. L. 90-321 (May 29, 1968) Public Law 90-321 (as amended), Title I (Chapters 1 through 4) CHAPTER 1—GENERAL PROVISIONS Section 10 1 Short title 10 2 Findings and declaration of purpose Definitions and rules of construction Exempted transactions Regulations Determination of finance charge Determination of annual percentage rate Administrative enforcement Views of other agencies [Repealed] 1 1 1 Effect on other laws 1 1 2 Criminal liability for willful and knowing violation Effect on governmental agencies Reports by Board and Attorney General [Repealed] SECTION 101—Short Title This title may be cited as the Truth in Lend ing Act.

[15 USC 1601 note.] SECTION 102—Findings and Declaration of Purpose (a) The Congress finds that economic stabili zation would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of con sumer credit would be strengthened by the in formed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this title to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the unin formed use of credit, and to protect the con sumer against inaccurate and unfair credit bill ing and credit card practices. (b) The Congress also finds that there has been a recent trend toward leasing automo biles and other durable goods for consumer use as an alternative to instalment credit sales and that these leases have been offered with out adequate cost disclosures. It is the purpose of this title to assure a meaningful disclosure of the terms of leases of personal property for personal, family, or household purposes so as to enable the lessee to compare more readily the various lease terms available to him, limit balloon payments in consumer leasing, enable comparison of lease terms with credit terms where appropriate, and to assure meaningful and accurate disclosures of lease terms in advertisements.

[15 USC 1601. As amended by acts of Oct. 28, 1974 (88 Stat. 1511); March 23, 1976 (90 Stat. 257); and Dec. 26, 1981 (95 Stat. 1515).] SECTION 103— Definitions and Rules of Construction (a) The definitions and rules of construction set forth in this section are applicable for the purposes of this title.

(b) The term “Board" refers to the Board of Governors of the Federal Reserve System. (c) The term “organization ” means a corpora tion, government or governmental subdivision or agency, trust, estate, partnership, coopera tive, or association.

(d) The term “person” means a natural per son or an organization.

(e) The term “credit" means the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment. (f) The term “creditor” refers only to a per son who both (1) regularly extends, whether in connection with loans, sales of property or

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§ 103 Truth in Lending Act services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and (2 ) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebt edness or, if there is no such evidence of in debtedness, by agreement. Notwithstanding the preceding sentence, in the case of an open-end credit plan involving a credit card, the card issuer and any person who honors the credit card and offers a discount which is a finance charge are creditors. For the purposes of the requirements imposed under chapter 4 and sections 127(a)(5), 127(a)(6), 127(a)(7), 127(b)(1), 127(b) (2), 127(b)(3), 127(b)(8), and 127(b)(10) of chapter 2 of this title, the term “creditor” shall also include card issuers whether or not the amount due is payable by agreement in more than four installments or the payment of a finance charge is or may be required, and the Board shall, by regulation, apply these requirements to such card issuers, to the extent appropriate, even though the re quirements are by their terms applicable only to creditors offering open-end credit plans. Any person who originates 2 or more mort gages referred to in subsection (aa) in any 1 2 month period or any person who originates 1 or more such mortgages through a mortgage broker shall be considered to be a creditor for purposes of this title.

(g) The term “credit sale” refers to any sale in which the seller is a creditor. The term in cludes any contract in the form of a bailment or lease if the bailee or lessee contracts to pay as compensation for use a sum substantially equivalent to or in excess of the aggregate value of the property and services involved and it is agreed that the bailee or lessee will become, or for no other or a nominal consid eration has the option to become, the owner of the property upon full compliance with his obligations under the contract. (h) The adjective "consumer", used with ref erence to a credit transaction, characterizes the transaction as one in which the party to whom credit is offered or extended is a natural per son, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.

(i) The term “open end credit plan” means a plan under which the creditor reasonably con templates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance. A credit plan which is an open end credit plan within the meaning of the preceding sentence is an open end credit plan even if credit information is verified from time to time.

(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 ac count, 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. (0 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 purpose of obtaining money, property, labor, or services on credit.

(m) The term “cardholder” means any person 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 person 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

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Truth in Lending Act § 103 such use and from which the cardholder re ceives no benefit.

(p) The term “discount” as used in section 167 means a reduction made from the regular price. The term “discount” as used in section 167 shall not mean a surcharge. (q) The term “surcharge" as used in section 103 and section 167 means any means of in creasing the regular price to a cardholder which is not imposed upon customers paying by cash, check, or similar means. (r) The term “State” refers to any State, the Commonwealth of Puerto Rico, the District of Columbia, and any territory or possession of the United States.

(s) The term “agricultural purposes" includes the production, harvest, exhibition, marketing, transportation, processing, or manufacture of agricultural products by a natural person who cultivates, plants, propagates, or nurtures those agricultural products, including but not limited to the acquisition of farmland, real property with a farm residence, and personal property and services used primarily in fanning. (t) The term “agricultural products" includes agricultural, horticultural, viticultural, and dairy products, livestock, wildlife, poultry, bees, forest products, fish and shellfish, and any products thereof, including processed and manufactured products, and any and all prod ucts raised or produced on farms and any processed or manufactured products thereof. (u) The term “material disclosures" means the disclosure, as required by this title, of the annual percentage rate, the method of deter mining the finance charge and the balance upon which a finance charge will be imposed, the amount of the finance charge, the amount to be financed, the total of payments, the number and amount of payments, the due dates or periods of payments scheduled to re pay the indebtedness, and the disclosures re quired by section 129(a).

(v) The term “dwelling" means a residential structure or mobile home which contains one to four family housing units, or individual units of condominiums or cooperatives. (w) The term “residential mortgage transac tion” means a transaction in which a mortage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is cre ated or retained against the consumer’s dwell ing to finance the acquisition or initial con struction of such dwelling.

(x) As used in this section and section 167, the term “regular price” means the tag or posted price charged for the property or ser vice if a single price is tagged or posted, or the price charged for the property or service when payment is made by use of an open-end credit plan or a credit card if either (1) no price is tagged or posted, or (2 ) two prices are tagged or posted, one of which is charged when payment is made by use of an open-end credit plan or a credit card and the other when payment is made by use of cash, check, or similar means. For purposes of this definition, payment by check, draft, or other negotiable instrument which may result in the debiting of an open-end credit plan or a credit card holder’s open-end account shall not be consid ered payment made by use of the plan or the account.

(y) Any reference to any requirement imposed under this title or any provision thereof in cludes reference to the regulations of the Board under this title or the provision thereof in question.

(z) The disclosure of an amount or percentage which is greater than the amount or percent age required to be disclosed under this title does not in itself constitute a violation of this title.

(aa)(l) A mortgage referred to in this subsec tion means a consumer credit transaction that is secured by the consumer’s principal dwelling, other than a residential mortgage transaction, a reverse mortgage transaction, or a transaction under an open end credit plan, if— (A) the annual percentage rate at con summation of the transaction will exceed by more than 10 percentage points the yield on Treasury securities having com parable periods of maturity on the fif teenth day of the month immediately pre ceding the month in which the

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§ 103 Truth in Lending Act application for the extension of credit is received by the creditor; or (B) the total points and fees payable by the consumer at or before closing will exceed the greater of— (i) 8 percent of the total loan amount; or (ii) $400.

(2)(A) After the 2-year period beginning on the effective date of the regulations promulgated under section 155 of the Riegle Community Development and Regulatory Improvement Act of 1994, and no more frequently than biennially after the first increase or decrease under this subparagraph, the Board may by reg ulation increase or decrease the number of percentage points specified in para graph (1)(A), if the Board determines that the increase or decrease is— (i) consistent with the consumer pro tections against abusive lending pro vided by the amendments made by subtitle B of title I of the Riegle Com munity Development and Regulatory Improvement Act of 1994; and (ii) warranted by the need for credit. (B) An increase or decrease under subparagraph (A) may not result in the num ber of percentage points referred to in subparagraph (A) being— (i) less that 8 percentage points; or (ii) greater than 12 percentage points. (C) In determining whether to increase or decrease the number of percentage points referred to in subparagraph (A), the Board shall consult with representa tives of consumers, including low-income consumers, and lenders.

(3) The amount specified in paragraph (l)(B)(ii) shall be adjusted annually on Jan uary 1 by the annual percentage change in the Consumer Price Index, as reported on June 1 of the year preceding such adjustment.

(4) For purposes of paragraph (1)(B), points and fees shall include— (A) all items included in the finance charge, except interest or the time-price differential;

(B) all compensation paid to mortgage brokers;

(C) each of the charges listed in section 106(e) (except an escrow for future pay ment of taxes), unless— (i) the charge is reasonable; (ii) the creditor receives no direct or indirect compensation; and (iii) the charge is paid to a third party unaffiliated with the creditor; and (D) such other charges as the Board de termines to be appropriate. (5) This subsection shall not be construed to limit the rate of interest or the finance charge that a person may charge a con sumer for any extension of credit. (bb) The term “ reverse mortgage transac tion” means a nonrecourse transaction in which a mortgage, deed of trust, or equivalent consensual security interest is created against the consumer’s principal dwelling— (1 ) securing one or more advances; and (2 ) with respect to which the payment of any principal, interest, and shared apprecia tion or equity is due and payable (other than in the case of default) only after— (A) the transfer of the dwelling; (B) the consumer ceases to occupy the dwelling as a principal dwelling; or (C) the death of the consumer. [15 USC 1602. As amended by acts of Oct. 26, 1970 (84 Stat. 1126); Oct. 28, 1974 (88 Stat. 1511); Feb. 27, 1976 (90 Stat. 197); July 27, 1981 (95 Stat. 144); Oct. 15, 1982 (96 Stat. 1538); and Sept. 23, 1994 (108 Stat. 2190, 2191, 2196).] SECTION 104— Exempted Transactions This title does not apply to the following: (1) Credit transactions involving extensions of credit primarily for business, commer cial, or agricultural purposes, or to govern ment or governmental agencies or instru mentalities, or to organizations. (2) Transactions in securities or commodi ties accounts by a broker-dealer registered with the Securities and Exchange Commission.

(3) Credit transactions, other than those in which a security interest is or will be ac quired in real property, or in personal prop erty used or expected to be used as the principal dwelling of the consumer, in

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Truth in Lending Act § 105 which the total amount financed exceeds $25,000.

(4) Transactions under public utility tariffs, if the Board determines that a State regula tory body regulates the charges for the pub lic utility services involved, the charges for delayed payment, and any discount allowed for early payment.

(5) [Repealed] (6) Loans made, insured, or guaranteed pursuant to a program authorized by title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.).

[15 USC 1603. As amended by acts of Oct. 28, 1974 (88 Stat. 1517); March 31, 1980 (94 Stat. 169); Dec. 26, 1981 (95 Stat. 1515); and Oct. 15, 1982 (96 Stat. 1538). Section 701 (b) and (c) of the Garn-St Germain Depository Institutions Act of 1982 (20 USC 1099 and 15 USC 1603 note) provides:

(b) Loans made, insured, or guaranteed pursuant to a program authorized by title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) shall not be subject to any disclosure requirements of any State law. (c) The amendment made by subsection (a) and subsection (b) shall be effective with respect to loans made prior to, on, and after the date of enactment of this Act [October 15, 1982].

Subsection (a) added paragraph (6) to section 104 of the Truth in Lending Act.] SECTION 105— Regulations (a) The Board shall prescribe regulations to carry out the purposes of this title. Except in the case of a mortgage referred to in section 103(aa), these regulations may contain such classifications, differentiations, or other provi sions, and may provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of this title, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. (b) The Board shall publish model disclosure forms and clauses for common transactions to facilitate compliance with the disclosure re quirements of this title and to aid the bor rower or lessee in understanding the transac tion by utilizing readily understandable language to simplify the technical nature of the disclosures. In devising such forms, the Board shall consider the use by creditors or lessors of data processing or similar auto mated equipment. Nothing in this title may be construed to require a creditor or lessor to use any such model form or clause prescribed by the Board under this section. A creditor or lessor shall be deemed to be in compliance with the disclosure provisions of this title with respect to other than numerical disclosures if the creditor or lessor (1 ) uses any appropriate model form or clause as published by the Board, or (2) uses any such model form or clause and changes it by (A) deleting any in formation which is not required by this title, or (B) rearranging the format, if in making such deletion or rearranging the format, the creditor or lessor does not affect the sub stance, clarity, or meaningful sequence of the disclosure.

(c) Model disclosure forms and clauses shall be adopted by the Board after notice duly given in the Federal Register and an opportu nity for public comment in accordance with section 553 of title 5, United States Code. (d) Any regulation of the Board, or any amendment or interpretation thereof, requiring any disclosure which differs from the disclo sures previously required by this chapter, chapter 4, or chapter 5, or by any regulation of the Board promulgated thereunder shall have an effective date of that October 1 which follows by at least six months the date of pro mulgation, except that the Board may at its discretion take interim action by regulation, amendment, or interpretation to lengthen the period of time permitted for creditors or les sors to adjust their forms to accommodate new requirements or shorten the length of time for creditors or lessors to make such ad justments when it makes a specific finding that such action is necessary to comply with the findings of a court or to prevent unfair or deceptive disclosure practices. Notwithstand ing the previous sentence, any creditor or les sor may comply with any such newly promul gated disclosure requirements prior to the effective date of the requirements. [15 USC 1604. As amended by acts of March 31, 1980 (94 Stat. 170); Dec. 26, 1981 (95 Stat. 1515); and Sept. 23, 1994 (108 Stat. 2194).]

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§ 106 Truth in Lending Act SECTION 106—Determination of Finance Charge (a) Except as otherwise provided in this sec tion, the amount of the finance charge in con nection with any consumer credit transaction shall be determined as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed di rectly or indirectly by the creditor as an inci dent to the extension of credit. The finance charge does not include charges of a type pay able in a comparable cash transaction. Exam ples of charges which are included in the fi nance charge include any of the following types of charges which are applicable. (1) Interest, time price differential, and any amount payable under a point, discount, or other system of additional charges. (2) Service or carrying charge. (3) Loan fee, finder’s fee, or similar charge. (4) Fee for an investigation or credit report. (5) Premium or other charge for any guar antee or insurance protecting the creditor against the obligor’s default or other credit loss.

(b) Charges or premiums for credit life, acci dent, or health insurance written in connection with any consumer credit transaction shall be included in the finance charge unless ( 1 ) the coverage of the debtor by the insur ance is not a factor in the approval by the creditor of the extension of credit, and this fact is clearly disclosed in writing to the person applying for or obtaining the exten sion of credit; and (2 ) in order to obtain the insurance in con nection with the extension of credit, the person to whom the credit is extended must give specific affirmative written indication of his desire to do so after written disclo sure to him of the cost thereof. (c) Charges or premiums for insurance, writ ten in connection with any consumer credit transaction, against loss of or damage to prop erty or against liability arising out of the own ership or use of property, shall be included in the finance charge unless a clear and specific statement in writing is furnished by the credi tor to the person to whom the credit is ex tended, setting forth the cost of the insurance if obtained from or through the creditor, and stating that the person to whom the credit is extended may choose the person through which the insurance is to be obtained. (d) If any of the following items is itemized and disclosed in accordance with the regula tions of the Board in connection with any transaction, then the creditor need not include that item in the computation of the finance charge with respect to that transaction: (1) Fees and charges prescribed by law which actually are or will be paid to public officials for determining the existence of or for perfecting or releasing or satisfying any security related to the credit transaction. (2) The premium payable for any insurance in lieu of perfecting any security interest otherwise required by the creditor in con nection with the transaction, if the premium does not exceed the fees and charges de scribed in paragraph ( 1) which would other wise be payable.

(e) The following items, when charged in connection with any extension of credit se cured by an interest in real property, shall not be included in the computation of the finance charge with respect to that transaction: (1) Fees or premiums for title examination, title insurance, or similar purposes. (2) Fees for preparation of a deed, settle ment statement, or other documents. (3) Escrows for future payments of taxes and insurance.

(4) Fees for notarizing deeds and other documents.

(5) Appraisal fees.

(6) Credit reports.

[15 USC 1605. As amended by acts of March 31, 1980 (94 Stat. 170) and Dec. 26, 1981 (95 Stat 1515).] SECTION 107— Determination of Annual Percentage Rate (a) The annual percentage rate applicable to any extension of consumer credit shall be de termined, in accordance with the regulations of the Board, (1) in the case of any extension of credit other than under an open end credit plan, as (A) that nominal annual percentage rate

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Truth in Lending Act § 108 which will yield a sum equal to the amount of the finance charge when it is applied to the unpaid balances of the amount financed, calculated according to the actuarial method of allocating pay ments made on a debt between the amount financed and the amount of the finance charge, pursuant to which a pay ment is applied first to the accumulated finance charge and the balance is applied to the unpaid amount financed; or (B) the rate determined by any method prescribed by the Board as a method which materially simplifies computation while retaining reasonable accuracy as compared with the rate determined under subparagraph (A).

(2) in the case of any extension of credit under an open end credit plan, as the quo tient (expressed as a percentage) of the total finance charge for the period to which it relates divided by the amount upon which the finance charge for that period is based, multiplied by the number of such periods in a year.

(b) Where a creditor imposes the same fi nance charge for balances within a specified range, the annual percentage rate shall be computed on the median balance within the range, except that if the Board determines that a rate so computed would not be meaningful, or would be materially misleading, the annual percentage rate shall be computed on such other basis as the Board may by regulation require.

(c) The disclosure of an annual percentage rate is accurate for the purpose of this title if the rate disclosed is within a tolerance not greater than one-eighth of 1 per centum more or less than the actual rate or rounded to the nearest one-fourth of 1 per centum. The Board may allow a greater tolerance to simplify compliance where irregular payments are involved.

(d) The Board may authorize the use of rate tables or charts which may provide for the disclosure of annual percentage rates which vary from the rate determined in accordance with subsection (a)(1)(A) by not more than such tolerances as the Board may allow. The Board may not allow a tolerance greater than 8 per centum of that rate except to simplify compliance where irregular payments are involved.

(e) In the case of creditors determining the annual percentage rate in a manner other than as described in subsection (d), the Board may authorize other reasonable tolerances. [15 USC 1606. As amended by acts of March 31, 1980 (94 Stat. 170) and Dec. 26, 1981 (95 Stat. 1515).] SECTION 108— Administrative Enforcement (a) Compliance with the requirements im posed under this title shall be enforced under (1) section 8 of the Federal Deposit Insur ance Act, in the case of— (A) national banks, and Federal branches and Federal agencies of foreign banks, by the Office of the Comptroller of the Currency;

(B) member banks of the Federal Re serve System (other than national banks), branches and agencies of foreign banks (other than Federal branches, Federal agencies, and insured State branches of foreign banks), commercial lending com panies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act, by the Board; and (C) banks insured by the Federal Deposit Insurance Corporation (other than mem bers of the Federal Reserve System) and insured State branches of foreign banks, by the Board of Directors of the Federal Deposit Insurance Corporation; (2) section 8 of the Federal Deposit Insur ance Act, by the Director of the Office of Thrift Supervision, in the case of a savings association the deposits of which are in sured by the Federal Deposit Insurance Corporation.

(3) the Federal Credit Union Act, by the Administrator of the National Credit Union Administration with respect to any Federal credit union.

(4) the Federal Aviation Act of 1958, by the Secretary of Transportation with respect

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§ 108 Truth in Lending Act to any air carrier or foreign air carrier sub ject to that Act.

(5) the Packers and Stockyards Act, 1921 (except as provided in section 406 of that Act), by the Secretary of Agriculture with respect to any activities subject to that Act. (6) the Farm Credit Act of 1971, by the Farm Credit Administration with respect to any Federal land bank, Federal land bank association, Federal intermediate credit bank, or production credit association. The terms used in paragraph (1) that are not defined in this title or otherwise defined in section 3(s) of the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the mean ing given to them in section 1(b) of the Inter national Banking Act of 1978 (12 U.S.C. 3101).

(b) For the purpose of the exercise by any agency referred to in subsection (a) of its powers under any Act referred to in that sub section, a violation of any requirement im posed under this title shall be deemed to be a violation of a requirement imposed under that Act. In addition to its powers under any pro vision of law specifically referred to in sub section (a), each of the agencies referred to in that subsection may exercise, for the purpose of enforcing compliance with any requirement imposed under this title, any other authority conferred on it by law.

(c) Except to the extent that enforcement of the requirements imposed under this title is specifically committed to some other Govern ment agency under subsection (a), the Federal Trade Commission shall enforce such require ments. For the purpose of the exercise by the Federal Trade Commission of its functions and powers under the Federal Trade Commis sion Act, a violation of any requirement im posed under this title shall be deemed a viola tion of a requirement imposed under that Act. All of the functions and powers of the Federal Trade Commission under the Federal Trade Commission Act are available to the Commis sion to enforce compliance by any person with the requirements imposed under this title, irrespective of whether that person is engaged in commerce or meets any other jurisdictional tests in the Federal Trade Commission Act. (d) The authority of the Board to issue regu lations under this title does not impair the au thority of any other agency designated in this section to make rules respecting its own pro cedures in enforcing compliance with require ments imposed under this title. (e) (1) In carrying out its enforcement activi ties under this section, each agency referred to in subsection (a) or (c), in cases where an annual percentage rate or finance charge was inaccurately disclosed, shall notify the creditor of such disclosure error and is au thorized in accordance with the provisions of this subsection to require the creditor to make an adjustment to the account of the person to whom credit was extended to as sure that such person will not be required to pay a finance charge in excess of the finance charge actually disclosed or the dol lar equivalent of the annual percentage rate actually disclosed, whichever is lower. For the purposes of this subsection, except where such disclosure error resulted from a willful violation which was intended to mis lead the person to whom credit was ex tended, in determining whether a disclosure error has occurred and in calculating any adjustment, (A) each agency shall apply (i) with respect to the annual percentage rate, a tolerance of one-quarter of 1 percent more or less than the actual rate, determined without regard to section 107(c) of this ti tle, and (ii) with respect to the finance charge, a corresponding numerical tolerance as generated by the tolerance provided under this subsection for the annual per centage rate; except that (B) with respect to transactions consummated after two years following the effective date of section 608 of the Truth in Lending Simplification and Reform Act, each agency shall apply (i) for transactions that have a scheduled amortiza tion of ten years or less, with respect to the annual percentage rate, a tolerance not to exceed one-quarter of 1 percent more or less than the actual rate, determined without regard to section 107(c) of this title, but in no event a tolerance of less than the toler ances allowed under section 107(c), (ii) for transactions that have a scheduled amortiza tion of more than ten years, with respect to

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Truth in Lending Act § 108 the annual percentage rate, only such toler ances as are allowed under section 107(c) of this title, and (iii) for all transactions, with respect to the finance charge, a corre sponding numerical tolerance as generated by the tolerances provided under this sub section for the annual percentage rate. (2) Each agency shall require such an ad justment when it determines that such dis closure error resulted from (A) a clear and consistent pattern or practice of violations, (B) gross negligence, or (C) a willful viola tion which was intended to mislead the per son to whom the credit was extended. Not withstanding the preceding sentence, except where such disclosure error resulted from a willful violation which was intended to mis lead the person to whom credit was ex tended, an agency need not require such an adjustment if it determines that such disclo sure error— (A) resulted from an error involving the disclosure of a fee or charge that would otherwise be excludable in computing the finance charge, including but not limited to violations involving the disclosures de scribed in sections 106(b), (c) and (d) of this title, in which event the agency may require such remedial action as it deter mines to be equitable, except that for transactions consummated after two years after the effective date of section 608 of the Truth in Lending Simplification and Reform Act, such an adjustment shall be ordered for violations of section 106(b); (B) involved a disclosed amount which was 10 per centum or less of the amount that should have been disclosed and (i) in cases where the error involved a dis closed finance charge, the annual percent age rate was disclosed correctly, and (ii) in cases where the error involved a dis closed annual percentage rate, the finance charge was disclosed correctly; in which event the agency may require such ad justment as it determines to be equitable; (C) involved a total failure to disclose ei ther the annual percentage rate or the fi nance charge, in which event the agency may require such adjustment as it deter mines to be equitable; or (D) resulted from any other unique cir cumstance involving clearly technical and nonsubstantive disclosure violations that do not adversely affect information pro vided to the consumer and that have not misled or otherwise deceived the consumer.

In the case of other such disclosure errors, each agency may require such an adjustment.

(3) Notwithstanding paragraph (2), no ad justment shall be ordered (A) if it would have a significantly adverse impact upon the safety or soundness of the creditor, but in any such case, the agency may require a partial adjustment in an amount which does not have such an impact except that with respect to any transaction consummated af ter the effective date of section 608 of the Truth in Lending Simplification and Reform Act, the agency shall require the full adjust ment, but permit the creditor to make the required adjustment in partial payments over an extended period of time which the agency considers to be reasonable, (B) if the amount of the adjustment would be less than $1 , except that if more than one year has elapsed since the date of the violation, the agency may require that such amount be paid into the Treasury of the United States, or (C) except where such disclosure error resulted from a willful violation which was intended to mislead the person to whom credit was extended, in the case of an openend credit plan, more than two years after the violation, or in the case of any other extension of credit, as follows: (i) with respect to creditors that are subject to examination by the agencies referred to in paragraphs (1 ) through (3) of section 108(a) of this title, ex cept in connection with violations aris ing from practices identified in the cur rent examination and only in connection with transactions that are consummated after the date of the im mediately preceding examination, ex cept that where practices giving rise to violations identified in earlier examina tions have not been corrected, adjust ments for those violations shall be re quired in connection with transactions consummated after the date of the ex-

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§ 108 Truth in Lending Act animation in which such practices were first identified;

(ii) with respect to creditors that are not subject to examination by such agencies, except in connection with transactions that are consummated after May 10, 1978; and (iii) in no event after the later of (I) the expiration of the life of the credit extension, or (II) two years after the agreement to extend credit was consummated.

(4) (A) Notwithstanding any other provision of this section, an adjustment under this subsection may be required by an agency referred to in subsection (a) or (c) only by an order issued in accordance with cease and desist procedures provided by the provision of law referred to in such subsections.

(B) In the case of an agency which is not authorized to conduct cease and de sist proceedings, such an order may be issued after an agency hearing on the re cord conducted at least thirty but not more than sixty days after notice of the alleged violation is served on the credi tor. Such a hearing shall be deemed to be a hearing which is subject to the provi sions of section 8(h) of the Federal De posit Insurance Act and shall be subject to judicial review as provided therein. (5) Except as otherwise specifically pro vided in this subsection and notwithstanding any provision of law referred to in subsec tion (a) or (c), no agency referred to in sub section (a) or (c) may require a creditor to make dollar adjustments for errors in any requirements under this title, except with regard to the requirements of section 165. (6) A creditor shall not be subject to an order to make an adjustment, if within sixty days after discovering a disclosure error, whether pursuant to a final written examina tion report or through the creditor’s own procedures, the creditor notifies the person concerned of the error and adjusts the ac count so as to assure that such person will not be required to pay a finance charge in excess of the finance charge actually dis closed or the dollar equivalent of the annual percentage rate actually disclosed, which ever is lower.

(7) Notwithstanding the second sentence of subsection (e)(1), subsection (e)(3) (CXi), and subsection (e)(3)(C)(ii), each agency re ferred to in subsection (a) or (c) shall re quire an adjustment for an annual percent age rate disclosure error that exceeds a tolerance of one quarter of one percent less than the actual rate, determined without re gard to section 107(c) of this title, with re spect to any transaction consummated be tween January 1, 1977, and the effective date of section 608 of the Truth in Lending Simplification and Reform Act. [15 USC 1607. As amended by acts of March 10, 1970 (84 Stat. 49); Oct. 28, 1974 (88 Stat 1517); March 31, 1980 (94 Stat. 171, 173); Oct 4, 1984 (98 Stat 1708); Aug. 9, 1989 (103 Stat. 439); Dec. 19, 1991 (105 Stat 2299); and Oct. 28, 1992 (106 Stat 4082).] SECTION 109— Views of Other Agencies In the exercise of its functions under this title, the Board may obtain upon request the views of any other Federal agency which, in the judgment of the Board, exercises regulatory or supervisory functions with respect to any class of creditors subject to this title. [15 USC 1608. As amended by act of Oct 3, 1984 (98 Stat. 1708). ] SECTION 110— [Repealed] SECTION 111—Effect on Other Laws (a) (1) Except as provided in subsection (e), chapters 1, 2, and 3 do not annul, alter, or affect the laws of any State relating to the disclosure of information in connection with credit transactions, except to the extent that those laws are inconsistent with the provi sions of this title, and then only to the ex tent of the inconsistency. Upon its own mo tion or upon the request of any creditor, State, or other interested party which is submitted in accordance with procedures prescribed in regulations of the Board, the Board shall determine whether any such in

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Truth in Lending Act § 112 consistency exists. If the Board determines that a State-required disclosure is inconsis tent, creditors located in that State may not make disclosures using the inconsistent term or form, and shall incur no liability under the law of that State for failure to use such term or form, notwithstanding that such determination is subsequently amended, rescinded, or determined by judi cial or other authority to be invalid for any reason.

(2) Upon its own motion or upon the re quest of any creditor, State, or other inter ested party which is submitted in accor dance with procedures prescribed in regulations of the Board, the Board shall determine whether any disclosure required under the law of any State is substantially the same in meaning as a disclosure re quired under this title. If the Board deter mines that a State-required disclosure is substantially the same in meaning as a dis closure required by this title, then creditors located in that State may make such disclo sure in compliance with such State law in lieu of the disclosure required by this title, except that the annual percentage rate and finance charge shall be disclosed as re quired by section 122, and such State-re quired disclosure may not be made in lieu of the disclosures applicable to certain mortgages under section 129. (b) Except as provided in section 129, this ti tle does not otherwise annul, alter or affect in any manner the meaning, scope or applicabil ity of the laws of any State, including, but not limited to, laws relating to the types, amounts or rates of charges, or any element or ele ments of charges, permissible under such laws in connection with the extension or use of credit, nor does this title extend the applicabil ity of those laws to any class of persons or transactions to which they would not other wise apply. The provisions of section 129 do not annul, alter, or affect the applicability of the laws of any State or exempt any person subject to the provisions of section 129 from complying with the laws of any State, with respect to the requirements for mortgages re ferred to in section 103(aa), except to the ex tent that those State laws are inconsistent with any provisions of section 129 and then only to the extent of the inconsistency. (c) In any action or proceeding in any court involving a consumer credit sale, the disclo sure of the annual percentage rate as required under this title in connection with that sale may not be received as evidence that the sale was a loan or any type of transaction other than a credit sale.

(d) Except as specified in sections 125, 130, and 166, this title and the regulations issued thereunder do not affect the validity or en forceability of any contract or obligation under State or Federal law.

(e) The provisions of subsection (c) of section 12 2 and subsections (c), (d), (e), and (f) of section 127 shall supersede any provision of the law of any State relating to the disclosure of information in any credit or charge card application or solicitation which is subject to the requirements of section 127(c) or any re newal notice which is subject to the require ments of section 127(d), except that any State may employ or establish State laws for the purpose of enforcing the requirements of such sections.

[15 USC 1610. As amended by acts of Oct. 28, 1974 (88 Stat. 1516); March 31, 1980 (94 Stat. 173); Dec. 26, 1981 (95 Stat. 1515); Nov. 3, 1988 (102 Stat. 2967); and Sept. 23, 1994 (108 Stat. 2194).] SECTION 112—Criminal Liability for Willful and Knowing Violation Whoever willfully and knowingly (1 ) gives false or inaccurate information or fails to provide information which he is re quired to disclose under the provisions of this title or any regulation issued thereunder, (2) uses any chart or table authorized by the Board under section 107 in such a man ner as to consistently understate the annual percentage rate determined under section 107(a)(1)(A), or (3) otherwise fails to comply with any re quirement imposed under this title, shall be fined not more than $5,000 or imprisoned not more than one year, or both. [15 USC 1611.]

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§ 113 Truth in Lending Act SECTION 113—Effect on Governmental Agencies (a) Any department or agency of the United States which administers a credit program in which it extends, insures, or guarantees con sumer credit and in which it provides instru ments to a creditor which contain any disclo sures required by this title shall, prior to the issuance or continued use of such instruments, consult with the Board to assure that such in struments comply with this title. (b) No civil or criminal penalty provided under this title for any violation thereof may be imposed upon the United States or any de partment or agency thereof, or upon any State or political subdivision thereof, or any agency of any State or political subdivision. (c) A creditor participating in a credit pro gram administered, insured, or guaranteed by any department or agency of the United States shall not be held liable for a civil or criminal penalty under this title in any case in which the violation results from the use of an instru ment required by any such department or agency.

(d) A creditor participating in a credit pro gram administered, insured, or guaranteed by any department or agency of the United States shall not be held liable for a civil or criminal penalty under the laws of any State (other than laws determined under section 1 1 1 to be inconsistent with this title) for any technical or procedural failure, such as a failure to use a specific form, to make information available at a specific place on an instrument, or to use a specific typeface, as required by State law, which is caused by the use of an instrument required to be used by such department or agency.

[15 USC 1612. As amended by acts of March 31, 1980 (94 StaL 184) and Dec. 26, 1981 (95 Stat. 1515).] SECTION 114— Reports by Board and Attorney General Each year the Board shall make a report to the Congress concerning the administration of its functions under this title, including such recommendations as the Board deems neces sary or appropriate. In addition, each report of the Board shall include its assessment of the extent to which compliance with the require ments imposed under this title is being achieved.

[15 USC 1613. As amended by acts of March 31, 1980 (94 Stat. 174); Dec. 26, 1981 (95 StaL 1515); and Dec. 21, 1982 (96 Stat. 1825).] SECTION 115— [Repealed] CHAPTER 2—CREDIT TRANSACTIONS Section General requirement of disclosure Form of disclosure; additional information Exemption for State-regulated transactions Effect of subsequent occurrence Right of rescission as to certain transactions [Repealed] Open end consumer credit plans 127 A Disclosure requirements for open end consumer credit plans secured by the consumer’s principal dwelling Consumer credit not under open end credit plans Requirements for certain mortgages Civil liability Liability of assignees Issuance of credit cards Liability of holder of credit card Fraudulent use of credit card Business credit cards Dissemination of annual percentage rates Home equity plans Reverse mortgages SECTION 121—General Requirement of Disclosure (a) Subject to subsection (b), a creditor or les sor shall disclose to the person who is obli

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Truth in Lending Act § 122 gated on a consumer lease or a consumer credit transaction the information required under this title. In a transaction involving more than one obligor, a creditor or lessor, except in a transaction under section 125, need not disclose to more than one of such obligors if the obligor given disclosure is a primary obligor.

(b) If a transaction involves one creditor as defined in section 103(f), or one lessor as de fined in section 181(3), such creditor or lessor shall make the disclosures. If a transaction in volves more than one creditor or lessor, only one creditor or lessor shall be required to make the disclosures. The Board shall by reg ulation specify which creditor or lessor shall make the disclosures.

(c) The Board may provide by regulation that any portion of the information required to be disclosed by this title may be given in the form of estimates where the provider of such information is not in a position to know exact information.

(d) The Board shall determine whether toler ances for numerical disclosures other than the annual percentage rate are necessary to facili tate compliance with this title, and if it deter mines that such tolerances are necessary to fa cilitate compliance, it shall by regulation permit disclosures within such tolerances. The Board shall exercise its authority to permit tolerances for numerical disclosures other than the annual percentage rate so that such toler ances are narrow enough to prevent such tol erances from resulting in misleading disclo sures or disclosures that circumvent the purposes of this title.

[15 USC 1631. As amended by acts of Oct. 28, 1974 (88 Stat. 1516); Jan. 2, 1976 (89 Stat. 1159); March 31, 1980 (94 Stat. 174); and Dec. 26, 1981 (95 Stat. 1515).] SECTION 122—Form of Disclosure; Additional Information (a) Information required by this title shall be disclosed clearly and conspicuously, in accor dance with regulations of the Board. The terms ‘annual percentage rate’ and ‘finance charge’ shall be disclosed more conspicuously than other terms, data, or information pro vided in connection with a transaction, except information relating to the identity of the creditor. Except as provided in subsection (c), regulations of the Board need not require that disclosures pursuant to this title be made in the order set forth in this title and, except as otherwise provided, may permit the use of ter minology different from that employed in this title if it conveys substantially the same meaning.

(b) Any creditor or lessor may supply addi tional information or explanation with any dis closures required under chapters 4 and 5 and, except as provided in sections 127A(b)(3) and 128(b)(1), under this chapter. (c)(1) The information described in paragraphs (1)(A), (3)(B)(i)(I), (4)(A), and (4)(C)(i)(I) of section 127(c) shall be— (A) disclosed in the form and manner which the Board shall prescribe by regu lations; and (B) placed in a conspicuous and promi nent location on or with any written ap plication, solicitation, or other document or paper with respect to which such dis closure is required.

(2) (A) In the regulations prescribed under paragraph (1)(A) of this subsection, the Board shall require that the disclosure of such information shall, to the extent the Board determines to be practicable and appropriate, be in the form of a table which— (i) contains clear and concise headings for each item of such information; and (ii) provides a clear and concise form for stating each item of information re quired to be disclosed under each heading.

(B) In prescribing the form of the table under subparagraph (A), the Board may— (i) list the items required to be in cluded in the table in a different order than the order in which such items are set forth in paragraph (1)(A) or (4)(A) of section 127(c); and (ii) subject to subparagraph (C), em ploy terminology which is different than the terminology which is em ployed in section 127(c) if such termi

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§ 122 Truth in Lending Act nology conveys substantially the same meaning.

(C) Either the heading or the statement under the heading which relates to the time period referred to in section 127(c)( 1)(A)(iii) shall contain the term “grace period” .

[15 USC 1632. As amended by acts of Oct. 28, 1974 (88 Stat. 1516); March 31, 1980 (94 Stat. 174); Dec. 26, 1981 (95 Stat. 1515); Nov. 3, 1988 (102 Stat. 2966); and Nov. 23, 1988 (102 Stat. 4731).] SECTION 123—Exemption for State- Regulated Transactions The Board shall by regulation exempt from the requirements of this chapter any class of credit transactions within any State if it deter mines that under the law of that State that class of transactions is subject to requirements substantially similar to those imposed under this chapter, and that there is adequate provi sion for enforcement.

[15 USC 1633.] SECTION 124— Effect of Subsequent Occurrence If information disclosed in accordance with this chapter is subsequently rendered inaccu rate as the result of any act, occurrence, or agreement subsequent to the delivery of the required disclosures, the inaccuracy resulting therefrom does not constitute a violation of this chapter.

[15 USC 1634.] SECTION 125— Right of Rescission as to Certain Transactions (a) Except as otherwise provided in this sec tion, in the case of any consumer credit trans action (including opening or increasing the credit limit for an open end credit plan) in which a security interest, including any such interest arising by operation of law, is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the de livery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this title, whichever is later, by notifying the creditor, in accordance with reg ulations of the Board, of his intention to do so. The creditor shall clearly and conspicu ously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject to this section the rights of the obligor under this section. The creditor shall also pro vide, in accordance with regulations of the Board, appropriate forms for the obligor to exercise his right to rescind any transaction subject to this section.

(b) When an obligor exercises his right to re scind under subsection (a), he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, be comes void upon such a rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return to the obligor any money or property given as earnest money, downpay ment, or otherwise, and shall take any action necessary or appropriate to reflect the termina tion of any security interest created under the transaction. If the creditor has delivered any property to the obligor, the obligor may retain possession of it. Upon the performance of the creditor’s obligations under this section, the obligor shall tender the property to the credi tor, except that if return of the property in kind would be impracticable or inequitable, the obligor shall tender its reasonable value. Tender shall be made at the location of the property or at the residence of the obligor, at the option of the obligor. If the creditor does not take possession of the property within 20 days after tender by the obligor, ownership of the property vests in the obligor without obli gation on his part to pay for it. The proce dures prescribed by this subsection shall apply except when otherwise ordered by a court. (c) Notwithstanding any rule of evidence, written acknowledgment of receipt of any dis closures required under this title by a person to whom information, forms, and a statement

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Truth in Lending Act § 127 is required to be given pursuant to this section does no more than create a rebuttable pre sumption of delivery thereof. (d) The Board may, if it finds that such action is necessary in order to permit homeowners to meet bona fide personal financial emergencies, prescribe regulations authorizing the modifica tion or waiver of any rights created under this section to the extent and under the circum stances set forth in those regulations. (e) This section does not apply to— (1) a residential mortgage transaction as de fined in section 103(w);

(2) a transaction which constitutes a refi nancing or consolidation (with no new ad vances) of the principal balance then due and any accrued and unpaid finance charges of an existing extension of credit by the same creditor secured by an interest in the same property;

(3) a transaction in which an agency of a State is the creditor; or (4) advances under a preexisting open end credit plan if a security interest has already been retained or acquired and such ad vances are in accordance with a previously established credit limit for such plan. (f) An obligor’s right of rescission shall ex pire three years after the date of consumma tion of the transaction or upon the sale of the property, whichever occurs first, notwithstand ing the fact that the information and forms required under this section or any other dis closures required under this chapter have not been delivered to the obligor, except that if ( 1) any agency empowered to enforce the pro visions of this title institutes a proceeding to enforce the provisions of this section within three years after the date of consummation of the transaction, (2) such agency finds a viola tion of section 125, and (3) the obligor’s right to rescind is based in whole or in part on any matter involved in such proceeding, then the obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the earlier sale of the property, or upon the expiration of one year following the conclusion of the proceeding, or any judicial review or period for judicial re view thereof, whichever is later. (g) In any action in which it is determined that a creditor has violated this section, in ad dition to rescission the court may award relief under section 130 for violations of this title not relating to the right to rescind. [15 USC 1635. As amended by acts of Oct. 28, 1974 (88 Stat. 1517, 1519); March 31, 1980 (94 Stat. 175); Dec. 26, 1981 (95 Stat. 1515); and Oct. 17, 1984 (98 Stat. 2234).] SECTION 126— [Repealed] SECTION 127—Open End Consumer Credit Plans (a) Before opening any account under an open end consumer credit plan, the creditor shall disclose to the person to whom credit is to be extended each of the following items, to the extent applicable;

(1) The conditions under which a finance charge may be imposed, including the time period (if any) within which any credit ex tended may be repaid without incurring a finance charge, except that the creditor may, at his election and without disclosure, im pose no such finance charge if payment is received after the termination of such time period. If no such time period is provided, the creditor shall disclose such fact. (2) The method of determining the balance upon which a finance charge will be imposed.

(3) The method of determining the amount of the finance charge, including any mini mum or fixed amount imposed as a finance charge.

(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 applicable, and the corresponding nomi nal annual percentage rate determined by multiplying the periodic rate by the number of periods in a year.

(5) Identification of other charges which may be imposed as part of the plan, and their method of computation, in accordance with regulations of the Board. (6) In cases where the credit is or will be secured, a statement that a security interest has been or will be taken in (A) the prop

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§ 127 Truth in Lending Act erty purchased as part of the credit transac tion, or (B) property not purchased as part of the credit transaction identified by item or type.

(7) A statement, in a form prescribed by regulations of the Board of the protection provided by sections 161 and 170 to an ob ligor and the creditor’s responsibilities under sections 162 and 170. With respect to one billing cycle per calendar year, at inter vals of not less than six months or more than eighteen months, the creditor shall transmit such statement to each obligor to whom the creditor is required to transmit a statement pursuant to section 127(b) for such billing cycle.

(8) In the case of any account under an open end consumer credit plan which pro vides for any extension of credit which is secured by the consumer’s principal dwell ing, any information which— (A) is required to be disclosed under sec tion 127A(a); and (B) the Board determines is not de scribed in any other paragraph of this subsection.

(b) The creditor of any account under an open end consumer credit plan shall transmit to the obligor, for each billing cycle at the end of which there is an outstanding balance in that account or with respect to which a finance charge is imposed, a statement setting forth each of the following items to the extent applicable:

(1) The outstanding balance in the account at the beginning of the statement period. (2) The amount and date of each extension of credit during the period, and a brief identification, on or accompanying the state ment of each extension of credit in a form prescribed by the Board sufficient to enable the obligor either to identify the transaction or to relate it to copies of sales vouchers or similar instruments previously furnished, except that a creditor’s failure to disclose such information in accordance with this paragraph shall not be deemed a failure to comply with this chapter or this title if (A) the creditor maintains procedures reasona bly adapted to procure and provide such in formation, and (B) the creditor responds to and treats any inquiry for clarification or documentation as a billing error and an er roneously billed amount under section 161. In lieu of complying with the requirements of the previous sentence, in the case of any transaction in which the creditor and seller are the same person, as defined by the Board, and such person’s open end credit plan has fewer than 15,000 accounts, the creditor may elect to provide only the amount and date of each extension of credit during the period and the seller’s name and location where the transaction took place if (A) a brief identification of the transaction has been previously furnished, and (B) the creditor responds to and treats any inquiry for clarification or documentation as a bill ing error and an erroneously billed amount under section 161.

(3) The total amount credited to the ac count during the period.

(4) The amount of any finance charge added to the account during the period, itemized to show the amounts, if any, due to the application of percentage rates and the amount, if any, imposed as a minimum or fixed charge.

(5) 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 applicable, and, unless the annual per centage rate (determined under section 107(a)(2)) is required to be disclosed pursu ant to paragraph (6), the corresponding nominal annual percentage rate determined by multiplying the periodic rate by the number of periods in a year. (6) Where the total finance charge exceeds 50 cents for a monthly or longer billing cy cle, or the pro rata part of 50 cents for a billing cycle shorter than monthly, the total finance charge expressed as an annual per centage rate (determined under section 107(a)(2)), except that if the finance charge is the sum of two or more products of a rate times a portion of the balance, the creditor may, in lieu of disclosing a single rate for total charge, disclose each such rate expressed as an annual percentage rate, and the part of the balance to which it is applicable.

(7) The balance on which the finance

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Truth in Lending Act § 127 charge was computed and a statement of how the balance was determined. If the bal ance is determined without first deducting all credits during the period, that fact and the amount of such payments shall also be disclosed.

(8) The outstanding balance in the account at the end of the period. (9) The date by which or the period (if any) within which payment must be made to avoid additional finance charges, except that the creditor may, at his election and without disclosure, impose no such addi tional finance charge if payment is received after such date or the termination of such period.

(10) The address to be used by the creditor for the purpose of receiving billing inquiries from the obligor.

(c) (1) (A) Any application to open a credit card account for any person under an open end consumer credit plan, or a so licitation to open such an account without requiring an application, that is mailed to consumers shall disclose the following information, subject to subsection (e) and section 12 2 (c):

(i) (I) Each annual percentage rate ap plicable to extensions of credit under such credit plan.

(II) Where an extension of credit is subject to a variable rate, the fact that the rate is variable, the annual percentage rate in effect at the time of the mailing, and how the rate is determined.

(III) Where more than one rate ap plies, the range of balances to which each rate applies.

(ii) (I) Any annual fee, other periodic fee, or membership fee imposed for the issuance or availability of a credit card, including any account maintenance fee or other charge im posed based on activity or inactivity for the account during the billing cycle.

(II) Any minimum finance charge imposed for each period during which any extension of credit which is subject to a finance charge is out standing.

(Ill) Any transaction charge im posed in connection with use of the card to purchase goods or services. (iii) (I) The date by which or the pe riod within which any credit ex tended under such credit plan for purchases of goods or services must be repaid to avoid incurring a fi nance charge, and, if no such period is offered, such fact shall be clearly stated.

(II) If the length of such “grace pe riod” varies, the card issuer may disclose the range of days in the grace period, the minimum number of days in the grace period, or the average age number of days in the grace period, if the disclosure is identified as such.

(iv) (I) The name of the balance calcu lation method used in determining the balance on which the finance charge is computed if the method used has been defined by the Board, or a detailed explanation of the bal ance calculation method used if the method has not been so defined. (II) In prescribing regulations to carry out this clause, the Board shall define and name not more than the 5 balance calculation methods deter mined by the Board to be the most commonly used methods.

(B) In addition to the information re quired to be disclosed under subpara graph (A), each application or solicitation to which such subparagraph applies shall disclose clearly and conspicuously the following information, subject to subsec tions (e) and (f):

(i) Any fee imposed for an extension of credit in the form of cash. (ii) Any fee imposed for a late payment.

(iii) Any fee imposed in connection with an extension of credit in excess of the amount of credit authorized to be extended with respect to such account. (2) (A) In any telephone solicitation to open a credit card account for any person

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§ 127 Truth in Lending Act under an open end consumer credit plan, the person making the solicitation shall orally disclose the information described in paragraph (1)(A).

(B) Subparagraph (A) shall not apply to any telephone solicitation if— (i) the credit card issuer— (I) does not impose any fee de scribed in paragraph (l)(A)(ii)(I); or (II) does not impose any fee in con nection with telephone solicitations unless the consumer signifies accept ance by using the card;

(ii) the card issuer discloses clearly and conspicuously in writing the infor mation described in paragraph ( 1 ) within 30 days after the consumer re quests the card, but in no event later than the date of delivery of the card; and (iii) the card issuer discloses clearly and conspicuously that the consumer is not obligated to accept the card or ac count and the consumer will not be obligated to pay any of the fees or charges disclosed unless the consumer elects to accept the card or account by using the card.

(3) (A) Any application to open a credit card account for any person under an open end consumer credit plan, and any solicitation to open such an account with out requiring an application, that is made available to the public or contained in catalogs, magazines, or other publications shall meet the disclosure requirements of subparagraph (B), (C), or (D). (B) An application or solicitation de scribed in subparagraph (A) meets the re quirement of this subparagraph if such application or solicitation contains — (i) the information— (I) described in paragraph (1 )(A) in the form required under section 1 2 2 (c) of this chapter, subject to subsection (e), and (II) described in paragraph (1)(B) in a clear and conspicuous form, sub ject to subsections (e) and (f); (ii) a statement, in a conspicuous and prominent location on the application or solicitation, that— (I) the information is accurate as of the date the application or solicita tion was printed;

(II) the information contained in the application or solicitation is subject to change after such date; and (III) the applicant should contact the creditor for information on any change in the information contained in the application or solicitation since it was printed;

(iii) a clear and conspicuous disclosure of the date the application or solicita tion was printed; and (iv) a disclosure, in a conspicuous and prominent location on the application or solicitation, of a toll free telephone number or a mailing address at which the applicant may contact the creditor to obtain any change in the informa tion provided in the application or so licitation since it was printed. (C) An application or solicitation de scribed in subparagraph (A) meets the re quirement of this subparagraph if such application or solicitation— (i) contains a statement, in a conspicu ous and prominent location on the ap plication or solicitation, that— (I) there are costs associated with the use of credit cards; and (II) the applicant may contact the creditor to request disclosure of spe cific information of such costs by calling a toll free telephone number or by writing to an address, speci fied in the application; (ii) contains a disclosure, in a conspic uous and prominent location on the ap plication or solicitation, of a toll free telephone number and a mailing ad dress at which the applicant may con tact the creditor to obtain such infor mation; and (iii) does not contain any of the items described in paragraph (1 ). (D) An application or solicitation meets the requirement of this subparagraph if it contains, or is accompanied by— (i) the disclosures required by paragraphs (1 ) through (6) of subsec tion (a);

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Truth in Lending Act § 127 (ii) the disclosures required by subpar agraphs (A) and (B) of paragraph (1) of this subsection included clearly and conspicuously (except that the provi sions of section 1 2 2 (c) shall not ap ply); and (iii) a toll free telephone number or a mailing address at which the applicant may contact the creditor to obtain any change in the information provided. (E) Upon receipt of a request for any of the information referred to in subpara graph (B), (C), or (D), the card issuer or the agent of such issuer shall promptly disclose all of the information described in paragraph (1).

(4) (A) Any application or solicitation to open a charge card account shall disclose clearly and conspicuously the following information in the form required by sec tion 12 2 (c) of this chapter, subject to subsection (e):

(i) Any annual fee, other periodic fee, or membership fee imposed for the is suance or availability of the charge card, including any account mainte nance fee or other charge imposed based on activity or inactivity for the account during the billing cycle. (ii) Any transaction charge imposed in connection with use of the card to purchase goods or services. (iii) A statement that charges incurred by use of the charge card are due and payable upon receipt of a periodic statement rendered for such charge card account.

(B) In addition to the information re quired to be disclosed under subpara graph (A), each written application or so licitation to which such subparagraph applies shall disclose clearly and conspic uously the following information, subject to subsections (e) and (0 : (i) Any fee imposed for an extension of credit in the form of cash. (ii) Any fee imposed for a late payment.

(iii) Any fee imposed in connection with an extension of credit in excess of the amount of credit authorized to be extended with respect to such account. (C) Any application to open a charge card account, and any solicitation to open such an account without requiring an ap plication, that is made available to the public or contained in catalogs, magazines, or other publications shall contain— (i) the information— (I) described in subparagraph (A) in the form required under section 12 2 (c) of this chapter, subject to subsection (e), and (II) described in subparagraph (B) in a clear and conspicuous form, subject to subsections (e) and (f); (ii) a statement, in a conspicuous and prominent location on the application or solicitation, that— (I) the information is accurate as of the date the application or solicita tion was printed;

(II) the information contained in the application or solicitation is subject to change after such date; and (HI) the applicant should contact the creditor for information on any change in the information contained in the application or solicitation since it was printed;

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§ 127 Truth in Lending Act clearly and conspicuously to the con sumer in the application or solicitation that— (i) the charge card issuer will make an independent decision as to whether to issue the card;

(ii) the charge card may arrive before the decision is made with respect to an extension of credit under an open end consumer credit plan; and (iii) approval by the charge card issuer does not constitute approval by the is suer of the extension of credit. The information required to be disclosed under paragraph ( 1) shall be provided to the charge card holder by the creditor which maintains such open end consumer credit plan before the first extension of credit under such plan.

(E) For the purposes of this subsection, the term “charge card” means a card, plate, or other single credit device that may be used from time to time to obtain credit which is not subject to a finance charge.

(5) The Board may, by regulation, require the disclosure of information in addition to that otherwise required by this subsection or subsection (d), and modify any disclosure of information required by this subsection or subsection (d), in any application to open a credit card account for any person under an open end consumer credit plan or any application to open a charge card account for any person, or a solicitation to open any such account without requiring an applica tion, if the Board determines that such ac tion is necessary to carry out the purposes of, or prevent evasions of, any paragraph of this subsection.

(d) (1) Except as provided in paragraph (2), a card issuer that imposes any fee described in subsection (c)(l)(A)(ii)(I) or (c)(4)(A)(i) shall transmit to a consumer at least 30 days prior to the scheduled renewal date of the consumer’s credit or charge card ac count a clear and conspicuous disclosure of— (A) the date by which, the month by which, or the billing period at the close of which, the account will expire if not renewed;

(B) the information described in subsec tion (c)(1)(A) or (c)(4)(A) that would ap ply if the account were renewed, subject to subsection (e); and (C) the method by which the consumer may terminate continued credit availabil ity under the account.

(2) (A) The disclosures required by this subsection may be provided— (i) prior to posting a fee described in subsection (c)(l)(A )(ii)(I) or (c) (4)(A)(i) to the account, or (ii) with the periodic billing statement first disclosing that the fee has been posted to the account.

(B) Disclosures may be provided under subparagraph (A) only if— (i) the consumer is given a 30-day pe riod to avoid payment of the fee or to have the fee recredited to the account in any case where the consumer does not wish to continue the availability of the credit; and (ii) the consumer is permitted to use the card during such period without in curring an obligation to pay such fee. (3) The Board may by regulation provide for fewer disclosures than are required by paragraph (1) in the case of an account which is renewable for a period of less than 6 months.

(e) (1) If the amount of any fee required to be disclosed under subsection (c) or (d) is de termined on the basis of a percentage of another amount, the percentage used in making such determination and the identifi cation of the amount against which such percentage is applied shall be disclosed in lieu of the amount of such fee. (2) If a credit or charge card issuer does not impose any fee required to be disclosed under any provision of subsection (c) or (d), such provision shall not apply with re spect to such issuer.

(f) If the amount of any fee required to be disclosed by a credit or charge card issuer under paragraph (1)(B), (3)(B)(i)(II), (4)(B), or (4)(C)(i)(II) of subsection (c) varies from

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Truth in Lending Act § 127A State to State, the card issuer may disclose the range of such fees for purposes of subsection (c) in lieu of the amount for each applicable State, if such disclosure includes a statement that the amount of such fee varies from State to State.

(g) (1) Whenever a card issuer that offers any guarantee or insurance for repayment of all or part of the outstanding balance of an open end credit card plan proposes to change the person providing that guarantee or insurance, the card issuer shall send each insured consumer written notice of the pro posed change not less than 30 days prior to the change, including notice of any increase in the rate or substantial decrease in cover age or service which will result from such change. Such notice may be included on or with the monthly statement provided to the consumer prior to the month in which the proposed change would take effect. (2) In any case in which a proposed change described in paragraph ( 1) occurs, the in sured consumer shall be given the name and address of the new guarantor or insurer and a copy of the policy or group certificate containing the basic terms and conditions, including the premium rate to be charged. (3) The notices required under paragraphs ( 1) and (2 ) shall each include a statement that the consumer has the option to discon tinue the insurance or guarantee. (4) No provision of this subsection shall be construed as superseding any provision of State law which is applicable to the regula tion of insurance.

(5) The Board shall define, in regulations, what constitutes a “substantial decrease in coverage or service” for purposes of para graph (1).

[15 USC 1637. As amended by acts of Oct. 28, 1974 (88 Stat. 1511, 1519, 1521); March 31, 1980 (94 Stat. 176); Dec. 26, 1981 (95 Stat. 1515); Nov. 3, 1988 (102 Stat. 2960, 2968; and Nov. 23, 1988 (102 Stat. 4729).] SECTION 127 A—Disclosure Requirements for Open End Consumer Credit Plans Secured by the Consumer’s Principal Dwelling (a) In the case of any open end consumer credit plan which provides for any extension of credit which is secured by the consumer’s principal dwelling, the creditor shall make the following disclosures in accordance with sub section (b):

(1) Each annual percentage rate imposed in connection with extensions of credit under the plan and a statement that such rate does not include costs other than interest. (2) In the case of a plan which provides for variable rates of interest on credit extended under the plan— (A) a description of the manner in which such rate will be computed and a state ment that such rate does not include costs other than interest;

(B) a description of the manner in which any changes in the annual percentage rate will be made, including— (i) any negative amortization and in terest rate carryover;

(ii) the timing of any such changes; (iii) any index or margin to which such changes in the rate are related; and (iv) a source of information about any such index;

(C) if an initial annual percentage rate is offered which is not based on an index— (i) a statement of such rate and the pe riod of time such initial rate will be in effect; and (ii) a statement that such rate does not include costs other than interest; (D) a statement that the consumer should ask about the current index value and in terest rate;

(E) a statement of the maximum amount by which the annual percentage rate may change in any 1-year period or a state ment that no such limit exists; (F) a statement of the maximum annual percentage rate that may be imposed at any time under the plan;

(G) subject to subsection (b)(3), a table, based on a $ 10,000 extension of credit,

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§ 127 A Truth in Lending Act showing how the annual percentage rate and the minimum periodic payment amount under each repayment option of the plan would have been affected during the preceding 15-year period by changes in any index used to compute such rate; (H) a statement of— (i) the maximum annual percentage rate which may be imposed under each repayment option of the plan; (ii) the minimum amount of any peri odic payment which may be required, based on a $10,000 outstanding bal ance, under each such option when such maximum annual percentage rate is in effect; and (iii) the earliest date by which such maximum annual interest rate may be imposed; and (I) a statement that interest rate informa tion will be provided on or with each pe riodic statement.

(3) An itemization of any fees imposed by the creditor in connection with the availa bility or use of credit under such plan, in cluding annual fees, application fees, trans action fees, and closing costs (including costs commonly described as “points” ), and the time when such fees are payable. (4) (A) An estimate, based on the creditor’s experience with such plans and stated as a single amount or as a reasonable range, of the aggregate amount of additional fees that may be imposed by third parties (such as governmental authorities, ap praisers, and attorneys) in connection with opening an account under the plan. (B) A statement that the consumer may ask the creditor for a good faith estimate by the creditor of the fees that may be imposed by third parties. (5) A statement that— (A) any extension of credit under the plan is secured by the consumer’s dwell ing; and (B) in the event of any default, the con sumer risks the loss of the dwelling. (6 ) (A) A clear and conspicuous statement— (i) of the time by which an application must be submitted to obtain the terms disclosed; or (ii) if applicable, that the terms are subject to change.

(B) A statement that— (i) the consumer may elect not to enter into an agreement to open an account under the plan if any term changes (other than a change contemplated by a variable feature of the plan) before any such agreement is final; and (ii) if the consumer makes an election described in clause (i), the consumer is entitled to a refund of all fees paid in connection with the application. (C) A statement that the consumer should make or otherwise retain a copy of information disclosed under this subparagraph.

(7) A statement that— (A) under certain conditions, the creditor may terminate any account under the plan and require immediate repayment of any outstanding balance, prohibit any ad ditional extension of credit to the ac count, or reduce the credit limit applica ble to the account; and (B) the consumer may receive, upon re quest, more specific information about the conditions under which the creditor may take any action described in subpar agraph (A).

(8) The repayment options under the plan, including— (A) if applicable, any differences in re payment options with regard to — (i) any period during which additional extensions of credit may be obtained; and (ii) any period during which repay ment is required to be made and no additional extensions of credit may be obtained;

(B) the length of any repayment period, including any differences in the length of any repayment period with regard to the periods described in clauses (i) and (ii) of subparagraph (A); and (C) an explanation of how the amount of any minimum monthly or periodic pay ment will be determined under each such option, including any differences in the determination of any such amount with

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Truth in Lending Act § 127 A regard to the periods described in clauses (i) and (ii) of subparagraph (A). (9) An example, based on a $10,000 out standing balance and the interest rate (other than a rate not based on the index under the plan) which is, or was recently, in effect under such plan, showing the minimum monthly or periodic payment, and the time it would take to repay the entire $ 10,000 if the consumer paid only the minimum peri odic payments and obtained no additional extensions of credit.

(10) If, under any repayment option of the plan, the payment of not more than the minimum periodic payments required under such option over the length of the repay ment period— (A) would not repay any of the principal balance; or (B) would repay less than the outstand ing balance by the end of such period, as the case may be, a statement of such fact, including an explicit statement that at the end of such repayment period a balloon payment (as defined in section 147(f)) would result which would be required to be paid in full at that time. (11) If applicable, a statement that— (A) any limitation in the plan on the amount of any increase in the minimum payments may result in negative amortization;

(B) negative amortization increases the outstanding principal balance of the ac count; and (C) negative amortization reduces the consumer’s equity in the consumer’s dwelling.

(12) (A) Any limitation contained in the plan on the number of extensions of credit and the amount of credit which may be obtained during any month or other defined time period. (B) Any requirement which establishes a minimum amount for— (i) the initial extension of credit to an account under the plan;

(ii) any subsequent extension of credit to an account under the plan; or (iii) any outstanding balance of an ac count under the plan.

(13) A statement that the consumer should consult a tax advisor regarding the deduct ibility of interest and charges under the plan.

(14) Any other term which the Board re quires, in regulations, to be disclosed. (b) (1) (A) The disclosures required under subsection (a) with respect to any open end consumer credit plan which provides for any extension of credit which is se cured by the consumer’s principal dwell ing and the pamphlet required under sub section (e) shall be provided to any consumer at the time the creditor distrib utes an application to establish an ac count under such plan to such consumer. (B) In the case of telephone applications, applications contained in magazines or other publications, or applications pro vided by a third party, the disclosures re quired under subsection (a) and the pam phlet required under subsection (e) shall be provided by the creditor before the end of the 3-day period beginning on the date the creditor receives a completed ap plication from a consumer. (2) (A) Except as provided in paragraph (1)(B), the disclosures required under subsection (a) shall be provided on or with any application to establish an ac count under an open end consumer credit plan which provides for any extension of credit which is secured by the con sumer’s principal dwelling. (B) The disclosures required under sub section (a) shall be conspicuously segre gated from all other terms, data, or addi tional information provided in connection with the application, either by grouping the disclosures separately on the applica tion form or by providing the disclosures on a separate form, in accordance with regulations of the Board. (C) The disclosures required by paragraphs (5), (6), and (7) of subsection (a) shall precede all of the other required disclosures.

(D) Whether or not the disclosures re quired under subsection (a) are provided on the application form, the variable rate information described in subsection (a)(2 ) may be provided separately from the

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§ 127 A Truth in Lending Act other information required to be disclosed.

(3) In preparing the table required under subsection (a)(2)(G), the creditor shall con sistently select one rate of interest for each year and the manner of selecting the rate from year to year shall be consistent with the plan.

(c) In the case of an application to open an account under any open end consumer credit plan described in subsection (a) which is pro vided to a consumer by any person other than the creditor— ( 1) such person shall provide such con sumer with— (A) the disclosures required under sub section (a) with respect to such plan, in accordance with subsection (b); and (B) the pamphlet required under subsec tion (e); or (2) if such person cannot provide specific terms about the plan because specific infor mation about the plan terms is not avail able, no nonrefundable fee may be imposed in connection with such application before the end of the 3-day period beginning on the date the consumer receives the disclo sures required under subsection (a) with re spect to the application.

(d) For purposes of this section and sections 137 and 147, the term “principal dwelling” includes any second or vacation home of the consumer.

(e) In addition to the disclosures required under subsection (a) with respect to an appli cation to open an account under any open end consumer credit plan described in such sub section, the creditor or other person providing such disclosures to the consumer shall provide— (1) a pamphlet published by the Board pur suant to section 4 of the Home Equity Con sumer Protection Act of 1988; or (2) any pamphlet which provides substan tially similar information to the information described in such section, as determined by the Board.

[15 USC 1637a. As added by act of Nov. 23, 1988 (102 Stat. 4725). ] SECTION 128— Consumer Credit Not Under Open End Credit Plans (a) For each consumer credit transaction other than under an open end credit plan, the credi tor shall disclose each of the following items, to the extent applicable:

(1) The identity of the creditor required to make disclosure.

(2) (A) The “amount financed” , using that term, which shall be the amount of credit of which the consumer has actual use. This amount shall be computed as fol lows, but the computations need not be disclosed and shall not be disclosed with the disclosures conspicuously segregated in accordance with subsection (b)(1): (i) take the principal amount of the loan or the cash price less downpay ment and trade-in;

(ii) add any charges which are not part of the finance charge or of the princi pal amount of the loan and which are financed by the consumer, including the cost of any items excluded from the finance charge pursuant to section 106; and (iii) subtract any charges which are part of the finance charge but which will be paid by the consumer before or at the time of the consummation of the transaction, or have been withheld from the proceeds of the credit. (B) In conjunction with the disclosure of the amount financed, a creditor shall pro vide a statement of the consumer’s right to obtain, upon a written request, a writ ten itemization of the amount financed. The statement shall include spaces for a “yes” and “no” indication to be initialed by the consumer to indicate whether the consumer wants a written itemization of the amount financed. Upon receiving an affirmative indication, the creditor shall provide, at the time other disclosures are required to be furnished, a written itemization of the amount financed. For the purposes of this subparagraph, ‘itemization of the amount financed’ means a disclosure of the following items, to the extent applicable:

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Truth in Lending Act § 128 (i) the amount that is or will be paid directly to the consumer;

(ii) the amount that is or will be credited to the consumer’s account to discharge obligations owed to the creditor;

(iii) each amount that is or will be paid to third persons by the creditor on the consumer’s behalf, together with an identification of or reference to the third person; and (iv) the total amount of any charges described in the preceding subpara graph (A)(iii).

(3) The “finance charge”, not itemized, us ing that term.

(4) The finance charge expressed as an “annual percentage rate”, using that term. This shall not be required if the amount fi nanced does not exceed $75 and the finance charge does not exceed $5, or if the amount financed exceeds $75 and the finance charge does not exceed $7.50. (5) The sum of the amount financed and the finance charge, which shall be termed the “total of payments” .

(6) The number, amount, and due dates or period of payments scheduled to repay the total of payments.

(7) In a sale of property or services in which the seller is the creditor required to disclose pursuant to section 1 2 1 (b), the “to tal sale price” , using that term, which shall be the total of the cash price of the prop erty or services, additional charges, and the finance charge.

(8) Descriptive explanations of the terms “amount financed”, “finance charge” , “an nual percentage rate”, “total of payments”, and “total sale price” as specified by the Board. The descriptive explanation of “total sale price” shall include reference to the amount of the downpayment.

(9) Where the credit is secured, a statement that a security interest has been taken in (A) the property which is purchased as part of the credit transaction, or (B) property not purchased as part of the credit transaction identified by item or type. (10) Any dollar charge or percentage amount which may be imposed by a credi tor solely on account of a late payment, other than a deferral or extension charge. (11) A statement indicating whether or not the consumer is entitled to a rebate of any finance charge upon refinancing or prepay ment in full pursuant to acceleration or oth erwise, if the obligation involves a precom puted finance charge. A statement indicating whether or not a penalty will be imposed in those same circumstances if the obligation involves a finance charge computed from time to time by application of a rate to the unpaid principal balance.

(12) A statement that the consumer should refer to the appropriate contract document for any information such document provides about nonpayment, default, the right to ac celerate the maturity of the debt, and pre payment rebates and penalties. (13) In any residential mortgage transac tion, a statement indicating whether a sub sequent purchaser or assignee of the con sumer may assume the debt obligation on its original terms and conditions. (b) (1) Except as otherwise provided in this chapter, the disclosures required under sub section (a) shall be made before the credit is extended. Except for the disclosures re quired by subsection (a)(1) of this section, all disclosures required under subsection (a) and any disclosure provided for in subsec tion (b), (c), or (d) of section 106 shall be conspicuously segregated from all other terms, data, or information provided in con nection with a transaction, including any computations or itemization. (2) In the case of a residential mortgage transaction, as defined in section 103(w), which is also subject to the Real Estate Set tlement Procedures Act, good faith esti mates of the disclosures required under sub section (a) shall be made in accordance with regulations of the Board under section 1 2 1 (c) before the credit is extended, or shall be delivered or placed in the mail not later than three business days after the cred itor receives the consumer’s written applica tion, whichever is earlier. If the disclosure statement furnished within three days of the written application contains an annual per centage rate which is subsequently rendered

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§ 128 Truth in Lending Act inaccurate within the meaning of section 107(c), the creditor shall furnish another statement at the time of settlement or consummation.

(c) (1) If a creditor receives a purchase order by mail or telephone without personal solic itation, and the cash price and the total sale price and the terms of financing, including the annual percentage rate, are set forth in the creditor’s catalog or other printed mate rial distributed to the public, then the dis closures required under subsection (a) may be made at any time not later than the date the first payment is due.

(2) If a creditor receives a request for a loan by mail or telephone without personal solicitation and the terms of financing, in cluding the annual percentage rate for rep resentative amounts of credit, are set forth in the creditor’s printed material distributed to the public, or in the contract of loan or other printed material delivered to the obli gor, then the disclosures required under subsection (a) may be made at any time not later than the date the first payment is due. (d) If a consumer credit sale is one of a series of consumer credit sales transactions made pursuant to an agreement providing for the ad dition of the deferred payment price of that sale to an existing outstanding balance, and the person to whom the credit is extended has approved in writing both the annual percent age rate or rates and the method of computing the finance charge or charges, and the creditor retains no security interest in any property as to which he has received payments aggregat ing the amount of the sales price including any finance charges attributable thereto, then the disclosure required under subsection (a) for the particular sale may be made at any time not later than the date the first payment for that sale is due. For the purposes of this subsection, in the case of items purchased on different dates, the first purchased shall be deemed first paid for, and in the case of items purchased on the same date, the lowest priced shall be deemed first paid for. [15 USC 1638. As amended by acts of March 31, 1980 (94 Stat. 178) and Dec. 26, 1981 (95 Stat. 1515).] SECTION 129—Requirements for Certain Mortgages (a) Disclosures.

(1) In addition to other disclosures required under this title, for each mortgage referred to in section 103(aa), the creditor shall pro vide the following disclosures in conspicu ous type size:

(A) “You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application.”

(B) “If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.” (2) In addition to the disclosures required under paragraph ( 1 ), the creditor shall disclose— (A) in the case of a credit transaction with a fixed rate of interest, the annual percentage rate and the amount of the regular monthly payment; or (B) in the case of any other credit trans action, the annual percentage rate of the loan, the amount of the regular monthly payment, a statement that the interest rate and monthly payment may increase, and the amount of the maximum monthly payment, based on the maximum interest rate allowed pursuant to section 1204 of the Competitive Equality Banking Act of 1987.

(b) Time o f disclosures.

(1) The disclosures required by this section shall be given not less than 3 business days prior to consummation of the transaction. (2) (A) After providing the disclosures re quired by this section, a creditor may not change the terms of the extension of credit if such changes make the disclo sures inaccurate, unless new disclosures are provided that meet the requirements of this section.

(B) A creditor may provide new disclo sures pursuant to subparagraph (A) by telephone, if— (i) the change is initiated by the con sumer; and

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Truth in Lending Act § 129 (ii) at the consummation of the trans action under which the credit is extended— (I) the creditor provides to the con sumer the new disclosures, in writ ing; and (II) the creditor and consumer cer tify in writing that the new disclo sures were provided by telephone, by not later than 3 days prior to the date of consummation of the transaction.

(3) The Board may, if it finds that such ac tion is necessary to permit homeowners to meet bona fide personal financial emergen cies, prescribe regulations authorizing the modification or waiver of rights created under this subsection, to the extent and under the circumstances set forth in those regulations.

(c) No prepayment penalty. (1)(A) A mortgage referred to in section 103(aa) may not contain terms under which a consumer must pay a prepay ment penalty for paying all or part of the principal before the date on which the principal is due.

(B) For purposes of this subsection, any method of computing a refund of unearned scheduled interest is a prepay ment penalty if it is less favorable to the consumer than the actuarial method (as that term is defined in section 933(d) of the Housing and Community Develop ment Act of 1992).

(2) Notwithstanding paragraph (1), a mort gage referred to in section 103(aa) may contain a prepayment penalty (including terms calculating a refund by a method that is not prohibited under section 933(b) of the Housing and Community Development Act of 1992 for the transaction in question) if — (A) at the time the mortgage is consummated— (i) the consumer is not liable for an amount of monthly indebtedness pay ments (including the amount of credit extended or to be extended under the transaction) that is greater than 50 per cent of the monthly gross income of the consumer; and (ii) the income and expenses of the consumer are verified by a financial statement signed by the consumer, by a credit report, and in the case of em ployment income, by payment records or by verification from the employer of the consumer (which verification may be in the form of a copy of a pay stub or other payment record supplied by the consumer);

(B) the penalty applies only to a prepay ment made with amounts obtained by the consumer by means other than a refinanc ing by the creditor under the mortgage, or an affiliate of that creditor; (C) the penalty does not apply after the end of the 5-year period beginning on the date on which the mortgage is consum mated; and (D) the penalty is not prohibited under other applicable law.

(d) Limitations after default. A mortgage re ferred to in section 103(aa) may not provide for an interest rate applicable after default that is higher than the interest rate that applies before default. If the date of maturity of a mortgage referred to in subsection 103(aa) is accelerated due to default and the consumer is entitled to a rebate of interest, that rebate shall be computed by any method that is not less favorable than the actuarial method (as that term is defined in section 933(d) of the Hous ing and Community Development Act of 1992).

(e) No balloon payments. A mortgage referred to in section 103(aa) having a term of less than 5 years may not include terms under which the aggregate amount of the regular pe riodic payments would not fully amortize the outstanding principal balance. (f) No negative amortization. A mortgage re ferred to in section 103(aa) may not include terms under which the outstanding principal balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of in terest due.

(g) No prepaid payments. A mortgage re

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§ 129 Truth in Lending Act ferred to in section 103(aa) may not include terms under which more than 2 periodic pay ments required under the loan are consolidated and paid in advance from the loan proceeds provided to the consumer.

(h) Prohibition on extending credit without re gard to payment ability o f consumer. A credi tor shall not engage in a pattern or practice of extending credit to consumers under mort gages referred to in section 103(aa) based on the consumers’ collateral without regard to the consumers’ repayment ability, including the consumers’ current and expected income, cur rent obligations, and employment. (i) Requirements for payments under home improvement contracts. A creditor shall not make a payment to a contractor under a home improvement contract from amounts extended as credit under a mortgage referred to in sec tion 103(aa), other than— ( 1) in the form of an instrument that is payable to the consumer or jointly to the consumer and the contractor; or (2) at the election of the consumer, by a third party escrow agent in accordance with terms established in a written agreement signed by the consumer, the creditor, and the contractor before the date of payment. (j) Consequence o f failure to comply. Any mortgage that contains a provision prohibited by this section shall be deemed a failure to deliver the material disclosures required under this title, for the purpose of section 125. (k) Definition. For purposes of this section, the term “affiliate" has the same meaning as in section 2(k) of the Bank Holding Company Act of 1956.

(/) Discretionary regulatory authority o f board.

(1) The Board may, by regulation or order, exempt specific mortgage products or cate gories of mortgages from any or all of the prohibitions specified in subsections (c) through (i), if the Board finds that the exemption— (A) is in the interest of the borrowing public; and (B) will apply only to products that maintain and strengthen home ownership and equity protection.

(2) The Board, by regulation or order, shall prohibit acts or practices in connection with— (A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and (B) refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are oth erwise not in the interest of the borrower. [15 USC 1639. As added by act of Sept. 23, 1994 (108 Stat. 2191). ] SECTION 130— Civil Liability* (a) Except as otherwise provided in this sec tion, any creditor who fails to comply with any requirement imposed under this chapter, including any requirement under section 125, or chapter 4 or 5 of this title with respect to any person is liable to such person in an amount equal to the sum of— (1 ) any actual damage sustained by such person as a result of the failure; (2) (A) (i) in the case of an individual ac tion twice the amount of any finance charge in connection with the transaction, or (ii) in the case of an individual action relating to a consumer lease under chap ter 5 of this title, 25 per centum of the total amount of monthly payments under the lease, except that the liability under this subparagraph shall not be less than $10 0 nor greater than $ 1,000; or (B) in the case of a class action, such amount as the court may allow, except that as to each member of the class no minimum recovery shall be applicable, and the total recovery under this subpara graph in any class action or series of class actions arising out of the same fail ure to comply by the same creditor shall not be more than the lesser of $500,000 or 1 per centum of the net worth of the creditor;

* Creditors choosing to comply with the amended statute and implementing regulations prior to October 1, 1982 are subject to the amended civil liability provisions. (Pub. L. 97-25 § 301).

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Truth in Lending Act § 130 (3) in the case of any successful action to enforce the foregoing liability or in any ac tion in which a person is determined to have a right of rescission under section 125, the costs of the action, together with a rea sonable attorney’s fee as determined by the court. In determining the amount of award in any class action, the court shall consider, among other relevant factors, the amount of any actual damages awarded, the frequency and persistence of failures of compliance by the creditor, the resources of the creditor, the number of persons adversely affected, and the extent to which the creditor’s fail ure of compliance was intentional. In con nection with the disclosures referred to in subsections (a) and (b) of section 127, a creditor shall have a liability determined under paragraph (2 ) only for failing to com ply with the requirements of section 125, section 127(a), or of paragraph (4), (5), (6), (7), (8), (9), or (10) of section 127(b) or for failing to comply with disclosure require ments under State law for any term or item which the Board has determined to be sub stantially the same in meaning under sec tion 1 1 1 (a)(2 ) as any of the terms or items referred to in section 127(a) or any of those paragraphs of section 127(b). In connection with the disclosures referred to in subsec tion (c) or (d) of section 127, a card issuer shall have a liability under this section only to a cardholder who pays a fee described in section 127(c)(l)(A )(ii)(I) or section 127(c)(4)(A)(i) or who uses the credit card or charge card. In connection with the dis closures referred to in section 128, a credi tor shall have a liability determined under paragraph (2 ) only for failing to comply with the requirements of section 125 or of paragraph (2 ) (insofar as it requires a dis closure of the ‘amount financed’), (3), (4), (5), (6), or (9) of section 128(a), or for fail ing to comply with disclosure requirements under State law for any term which the Board has determined to be substantially the same in meaning under section 1 1 1 (a)(2 ) as any of the terms referred to in any of those paragraphs of section 128(a). With respect to any failure to make disclo sures required under this chapter or chapter 4 or 5 of this title, liability shall be im posed only upon the creditor required to make disclosure, except as provided in sec tion 131; and (4) in the case of a failure to comply with any requirement under section 129, an amount equal to the sum of all finance charges and fees paid by the consumer, un less the creditor demonstrates that the fail ure to comply is not material. (b) A creditor or assignee has no liability under this section or section 108 or section 1 1 2 for any failure to comply with any re quirement imposed under this chapter or chap ter 5, if within sixty days after discovering an error, whether pursuant to a final written ex amination report or notice issued under sec tion 108(e)(1) or through the creditor’s or as signee’s own procedures, and prior to the institution of an action under this section or the receipt of written notice of the error from the obligor, the creditor or assignee notifies the person concerned of the error and makes whatever adjustments in the appropriate ac count are necessary to assure that the person will not be required to pay an amount in ex cess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower. (c) A creditor or assignee may not be held liable in any action brought under this section or section 125 for a violation of this title if the creditor or assignee shows by a preponder ance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of proce dures reasonably adapted to avoid any such error. Examples of a bona fide error include, but are not limited to, clerical, calculation, computer malfunction and programing, and printing errors, except that an error of legal judgment with respect to a person’s obliga tions under this title is not a bona fide error. (d) When there are multiple obligors in a con sumer credit transaction or consumer lease, there shall be no more than one recovery of damages under subsection (a)(2 ) for a viola tion of this title.

(e) Any action under this section may be brought in any United States district court, or in any other court of competent jurisdiction,

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§ 130 Truth in Lending Act within one year from the date of the occur rence of the violation. This subsection does not bar a person from asserting a violation of this title in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law. An action to enforce a violation of sec tion 129 may also be brought by the appropri ate State attorney general in any appropriate United States district court, or any other court of competent jurisdiction, not later than 3 years after the date on which the violation oc curs. The State attorney general shall provide prior written notice of any such civil action to the Federal agency responsible for enforce ment under section 108 and shall provide the agency with a copy of the complaint. If prior notice is not feasible, the State attorney gen eral shall provide notice to such agency im mediately upon instituting the action. The Federal agency may— ( 1 ) intervene in the action; (2 ) upon intervening— (A) remove the action to the appropriate United States district court, if it was not originally brought there; and (B) be heard on all matters arising in the action; and (3) file a petition for appeal. (0 No provision of this section, section 108(b), section 108(c), section 108(e), or sec tion 1 1 2 imposing any liability shall apply to any act done or omitted in good faith in con formity with any rule, regulation, or interpre tation thereof by the Board or in conformity with any interpretation or approval by an offi cial or employee of the Federal Reserve Sys tem duly authorized by the Board to issue such interpretations or approvals under such procedures as the Board may prescribe there for, notwithstanding that after such act or omission has occurred, such rule, regulation, interpretation, or approval is amended, re scinded, or determined by judicial or other au thority to be invalid for any reason. (g) The multiple failure to disclose to any person any information required under this chapter or chapter 4 or 5 of this title to be disclosed in connection with a single account under an open end consumer credit plan, other single consumer credit sale, consumer loan, consumer lease, or other extension of con sumer credit, shall entitle the person to a sin gle recovery under this section but continued failure to disclose after a recovery has been granted shall give rise to rights to additional recoveries. This subsection does not bar any remedy permitted by section 125. (h) A person may not take any action to off set any amount for which a creditor or as signee is potentially liable to such person under subsection (a)(2) against any amount owed by such person, unless the amount of the creditor’s or assignee’s liability under this title has been determined by judgment of a court of competent jurisdiction in an action of which such person was a party. This subsec tion does not bar a consumer then in default on the obligation from asserting a violation of this title as an original action, or as a defense or counterclaim to an action to collect amounts owed by the consumer brought by a person liable under this title. [15 USC 1640. As amended by acts of Oct. 28, 1974 (88 Stat. 1518); Feb. 27, 1976 (90 Stat. 197); March 23, 1976 (90 Stat. 260); Nov. 3, 1988 (102 Stat. 2966); and Sept. 23, 1994 (108 Stat. 2195).] SECTION 131—Liability of Assignees* (a) Except as otherwise specifically provided in this title, any civil action for a violation of this title or proceeding under section 108 which may be brought against a creditor may be maintained against any assignee of such creditor only if the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement, except where the assignment was involuntary. For the purpose of this section, a violation apparent on the face of the disclosure statement in cludes, but is not limited to ( 1) a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned, or (2 ) * Assignees of creditors choosing to comply with the amended statute and implementing regulations prior to Oc tober 1, 1982 are subject to the amended civil liability pro visions (Pub. L. 97-25 § 301).

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Truth in Lending Act § 133 a disclosure which does not use the terms re quired to be used by this title. (b) Except as provided in section 125(c), in any action or proceeding by or against any subsequent assignee of the original creditor without knowledge to the contrary by the as signee when he acquires the obligation, writ ten acknowledgement of receipt by a person to whom a statement is required to be given pursuant to this title shall be conclusive proof of the delivery thereof and, except as provided in subsection (a), of compliance with this chapter. This section does not affect the rights of the obligor in any action against the origi nal creditor.

(c) Any consumer who has the right to re scind a transaction under section 125 may re scind the transaction as against any assignee of the obligation.

(d) Rights upon assignment o f certain mortgages.

(1) Any person who purchases or is other wise assigned a mortgage referred to in sec tion 103(aa) shall be subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor of the mortgage, unless the pur chaser or assignee demonstrates, by a pre ponderance of the evidence, that a reasona ble person exercising ordinary due diligence, could not determine, based on the documentation required by this title, the itemization of the amount financed, and other disclosure of disbursements that the mortgage was a mortgage referred to in sec tion 103(aa). The preceding sentence does not affect rights of a consumer under sub section (a), (b), or (c) of this section or any other provision of this title. (2) Notwithstanding any other provision of law, relief provided as a result of any ac tion made permissible by paragraph (1) may not exceed— (A) with respect to actions based upon a violation of this title, the amount speci fied in section 130; and (B) with respect to all other causes of action, the sum of— (i) the amount of all remaining indebt edness; and (ii) the total amount paid by the con sumer in connection with the transaction.

(3) The amount of damages that may be awarded under paragraph (2)(B) shall be re duced by the amount of any damages awarded under paragraph (2)(A). (4) Any person who sells or otherwise assignes a mortgage referred to in section 103(aa) shall include a prominent notice of the potential liability under this subsection as determined by the Board. [15 USC 1641. As amended by acts of March 31, 1980 (94 Stat. 182); Dec. 26, 1981 (95 Stat. 1515); and Sept. 23, 1994 (108 Stat. 2195).] SECTION 132— Issuance of Credit Cards No credit card shall be issued except in re sponse to a request or application therefor. This prohibition does not apply to the issu ance of a credit card in renewal of, or in sub stitution for, an accepted credit card. [15 USC 1642. As amended by act of Oct. 26, 1970 (84 Stat. 1126). ] SECTION 133—Liability of Holder of Credit Card (a) (1) A cardholder shall be liable for the un authorized use of a credit card only if— (A) the card is an accepted credit card; (B) the liability is not in excess of $50; (C) the card issuer gives adequate notice to the cardholder of the potential liability; (D) the card issuer has provided the cardholder with a description of a means by which the card issuer may be notified of loss or theft of the card, which description may be provided on the face or reverse side of the statement required by section 127(b) or on a separate notice accompanying such statement; (E) the unauthorized use occurs before the card issuer has been notified that an unauthorized use of the credit card has occurred or may occur as the result of loss, theft, or otherwise; and (F) the card issuer has provided a

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§ 133 Truth in Lending Act method whereby the user of such card can be identified as the person authorized to use it.

(2) For purposes of this section, a card is suer has been notified when such steps as may be reasonably required in the ordinary course of business to provide the card is suer with the pertinent information have been taken, whether or not any particular officer, employee, or agent of the card is suer 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 bur den 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 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 agreement with the card issuer. (d) Except as provided in this section, a card holder incurs no liability from the unautho rized use of a credit card.

[15 USC 1643. As added by act of Oct. 26, 1970 (84 Stat. 1126) and amended by acts of March 31, 1980 (94 Stat. 182) and Dec. 26, 1981 (95 Stat. 1515).] SECTION 134— Fraudulent Use of Credit Card (a) Whoever knowingly in a transaction af fecting interstate or foreign commerce, uses or attempts or conspires to use any counterfeit, fictitious, altered, forged, lost, stolen, or fraud ulently obtained credit card to obtain money, goods, services, or anything else of value which within any one-year period has a value aggregating $1,000 or more; or (b) Whoever, with unlawful or fraudulent in tent, transports or attempts or conspires to transport in interstate or foreign commerce a counterfeit, fictitious, altered, forged, lost, sto len, or fraudulently obtained credit card know ing the same to be counterfeit, fictitious, altered, forged, lost, stolen, or fraudulently obtained; or (c) Whoever, with unlawful or fraudulent in tent, uses any instrumentality of interstate or foreign commerce to sell or transport a coun terfeit, fictitious, altered, forged, lost, stolen, or fraudulently obtained credit card knowing the same to be counterfeit, fictitious, altered, forged, lost, stolen, or fraudulently obtained; or (d) Whoever knowingly receives, conceals, uses, or transports money, goods, services, or anything else of value (except tickets for in terstate or foreign transportation) which (1) within any one-year period has a value aggre gating $ 1,000 or more, (2 ) has moved in or is part of, or which constitutes interstate or for eign commerce, and (3) has been obtained with a counterfeit, fictitious, altered, forged, lost, stolen, or fraudulently obtained credit card; or (e) Whoever knowingly receives, conceals, uses, sells, or transports in interstate or for eign commerce one or more tickets for inter state or foreign transportation, which ( 1 ) within any one-year period have a value ag gregating $500 or more, and (2) have been purchased or obtained with one or more coun terfeit, fictitious, altered, forged, lost, stolen, or fraudulently obtained credit cards; or (f) Whoever in a transaction affecting inter state or foreign commerce furnishes money, property, services, or anything else of value, which within any one-year period has a value aggregating $1,000 or more, through the use of any counterfeit, fictitious, altered, forged, lost, stolen, or fraudulently obtained credit card knowing the same to be counterfeit, ficti tious, altered, forged, lost, stolen, or fraudu lently obtained— shall be fined not more than $10,000 or im prisoned not more than ten years, or both. [15 USC 1644. As amended by acts of Oct. 26, 1970 (84 Stat. 1127) and Oct. 28, 1974 (88 Stat. 1520).] SECTION 135—Business Credit Cards The exemption provided by section 104(1)

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Truth in Lending Act § 137 does not apply to the provisions of sections 132, 133, and 134, except that a card issuer and a business or other organization which provides credit cards issued by the same card issuer to ten or more of its employees may by contract agree as to liability of the business or other organization with respect to unautho rized use of such credit cards without regard to the provisions of section 133, but in no case may such business or other organization or card issuer impose liability upon any em ployee with respect to unauthorized use of such a credit card except in accordance with and subject to the limitations of section 133. [15 u s e 1645. As added by act of Oct. 28, 1974 (88 Stat. 1519). ] SECTION 136— Dissemination of Annual Percentage Rates (a) The Board shall collect, publish, and dis seminate to the public, on a demonstration ba sis in a number of standard metropolitan sta tistical areas to be determined by the Board, the annual percentage rates charged for repre sentative types of nonsale credit by creditors in such areas. For the purpose of this section, the Board is authorized to require creditors in such areas to furnish information necessary for the Board to collect, publish, and dissemi nate such information.

(b)(1) The Board shall collect, on a semian nual basis, credit card price and availability information, including the information re quired to be disclosed under section 127(c) of this chapter, from a broad sample of fi nancial institutions which offer credit card services.

(2) The broad sample of financial institu tions required under paragraph ( 1 ) shall include— (A) the 25 largest issuers of credit cards; and (B) not less than 125 additional financial institutions selected by the Board in a manner that ensures— (i) an equitable geographical distribu tion within the sample; and (ii) the representation of a wide spec trum of institutions within the sample. (3) Each financial institution in the broad sample established pursuant to paragraph (2) shall report the information to the Board in accordance with such regulations or or ders as the Board may prescribe. (4) The Board shall— (A) make the information collected pur suant to this subsection available to the public upon request; and (B) report such information semiannually to Congress.

(c) The Board is authorized to enter into con tracts or other arrangements with appropriate persons, organizations, or State agencies to carry out its functions under subsections (a) and (b) and to furnish financial assistance in support thereof.

[15 USC 1646. As amended by acts of March 31, 1980 (94 Stat 183); Dec. 26, 1981 (95 Stat. 1515); and Nov. 3, 1988 (102 Stat. 2967).] SECTION 137— Home Equity Plans (a) In the case of extensions of credit under an open end consumer credit plan which are subject to a variable rate and are secured by a consumer’s principal dwelling, the index or other rate of interest to which changes in the annual percentage rate are related shall be based on an index or rate of interest which is publicly available and is not under the control of the creditor.

(b) A creditor may not unilaterally terminate any account under an open end consumer credit plan under which extensions of credit are secured by a consumer’s principal dwell ing and require the immediate repayment of any outstanding balance at such time, except in the case of— ( 1) fraud or material misrepresentation on the part of the consumer in connection with the account;

(2 ) failure by the consumer to meet the re payment terms of the agreement for any outstanding balance; or (3) any other action or failure to act by the consumer which adversely affects the credi tor’s security for the account or any right of the creditor in such security.

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§ 137 Truth in Lending Act This subsection does not apply to reverse mortgage transactions.

(c) (1) No open end consumer credit plan under which extensions of credit are se cured by a consumer’s principal dwelling may contain a provision which permits a creditor to change unilaterally any term re quired to be disclosed under section 127A(a) or any other term, except a change in insignificant terms such as the address of the creditor for billing purposes. (2) Notwithstanding the provisions of sub section (1 ), a creditor may make any of the following changes:

(A) Change the index and margin appli cable to extensions of credit under such plan if the index used by the creditor is no longer available and the substitute in dex and margin would result in a sub stantially similar interest rate. (B) Prohibit additional extensions of credit or reduce the credit limit applica ble to an account under the plan during any period in which the value of the con sumer’s principal dwelling which secures any outstanding balance is significantly less than the original appraisal value of the dwelling.

(C) Prohibit additional extensions of credit or reduce the credit limit applica ble to the account during any period in which the creditor has reason to believe that the consumer will be unable to com ply with the repayment requirements of the account due to a material change in the consumer’s financial circumstances. (D) Prohibit additional extensions of credit or reduce the credit limit applica ble to the account during any period in which the consumer is in default with re spect to any material obligation of the consumer under the agreement. (E) Prohibit additional extensions of credit or reduce the credit limit applica ble to the account during any period in which— (i) the creditor is precluded by govern ment action from imposing the annual percentage rate provided for in the ac count agreement; or (ii) any government action is in effect which adversely affects the priority of the creditor’s security interest in the account to the extent that the value of the creditor’s secured interest in the property is less than 120 percent of the amount of the credit limit applicable to the account.

(F) Any change that will benefit the consumer.

(3) Upon the request of the consumer and at the time an agreement is entered into by a consumer to open an account under an open end consumer credit plan under which extensions of credit are secured by the con sumer’s principal dwelling, the consumer shall be given a list of the categories of contract obligations which are deemed by the creditor to be material obligations of the consumer under the agreement for purposes of paragraph (2)(D).

(4) (A) For purposes of paragraph (2)(F), a change shall be deemed to benefit the consumer if the change is unequivocally beneficial to the borrower and the change is beneficial through the entire term of the agreement.

(B) The Board may, by regulation, deter mine categories of changes that benefit the consumer.

(d) If any term or condition described in sec tion 127A(a) which is disclosed to a consumer in connection with an application to open an account under an open end consumer credit plan described in such section (other than a variable feature of the plan) changes before the account is opened, and if, as a result of such change, the consumer elects not to enter into the plan agreement, the creditor shall re fund all fees paid by the consumer in connec tion with such application. (e)(1) No nonrefundable fee may be imposed by a creditor or any other person in connec tion with any application by a consumer to establish an account under any open end consumer credit plan which provides for ex tensions of credit which are secured by a consumer’s principal dwelling before the end of the 3-day period beginning on the date such consumer receives the disclosure required under section 127A(a) and the

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Truth in Lending Act § 141 pamphlet required under section 127A(e) with respect to such application. (2) For purposes of determining when a nonrefundable fee may be imposed in ac cordance with this subsection if the disclo sures and pamphlet referred to in paragraph ( 1) are mailed to the consumer, the date of the receipt of the disclosures by such con sumer shall be deemed to be 3 business days after the date of mailing by the creditor.

[15 USC 1647. As added by act of Nov. 23, 1988 (102 StaL 4731) and amended by act of Sept. 23, 1994 (108 StaL 2197).] SECTION 138— Reverse Mortgages (a) In general. In addition to the disclosures required under this title, for each reverse mortgage, the creditor shall, not less than 3 days prior to consummation of the transaction, disclose to the consumer in conspicuous type a good faith estimate of the projected total cost of the mortgage to the consumer ex pressed as a table of annual interest rates. Each annual interest rate shall be based on a projected total future credit extension balance under a projected appreciation rate for the dwelling and a term for the mortgage. The disclosure shall include— (1) statements of the annual interest rates for not less than 3 projected appreciation rates and not less than 3 credit transaction periods, as determined by the Board, including— (A) a short-term reverse mortgage; (B) a term equaling the actuarial life ex pectancy of the consumer; and (C) such longer term as the Board deems appropriate; and (2 ) a statement that the consumer is not ob ligated to complete the reverse mortgage transaction merely because the consumer has received the disclosure required under this section or has signed an application for the reverse mortgage.

(b) Projected total cost. In determining the projected total cost of the mortgage to be dis closed to the consumer under subsection (a), the creditor shall take into account— (1) any shared appreciation or equity that the lender will, by contract, be entitled to receive;

(2 ) all costs and charges to the consumer, including the costs of any associated annu ity that the consumer elects or is required to purchase as part of the reverse mortgage transaction;

(3) all payments to and for the benefit of the consumer, including, in the case in which an associated annuity is purchased (whether or not required by the lender as a condition of making the reverse mortgage), the annuity payments received by the con sumer and financed from the proceeds of the loan, instead of the proceeds used to finance the annuity; and (4) any limitation on the liability of the consumer under reverse mortgage transac tions (such as nonrecourse limits and equity conservation agreements).

[15 USC 1648. As added by act of Sept. 23, 1994 (108 Stat. 2196). ] CHAPTER 3—CREDIT ADVERTISING Section Catalogs and multiple-page advertisements Advertising of downpayments and installments Advertising of open end credit plans Advertising of credit other than open end plans Nonliability of media Use of annual percentage rate in oral disclosures Advertising of open end consumer credit plans secured by the consumer’s principal dwelling SECTION 141—Catalogs and Multiple- Page Advertisements For the purposes of this chapter, a catalog or other multiple-page advertisement shall be considered a single advertisement if it clearly and conspicuously displays a credit terms ta ble on which the information required to be stated under this chapter is clearly set forth. [15 USC 1661.]

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§ 142 Truth in Lending Act SECTION 142—Advertising of Downpayments and Installments No advertisement to aid, promote, or assist di rectly or indirectly any extension of consumer credit may state (1) that a specific periodic consumer credit amount or installment amount can be ar ranged, unless the creditor usually and cus tomarily arranges credit payments or install ments for that period and in that amount. (2 ) that a specified downpayment is re quired in connection with any extension of consumer credit, unless the creditor usually and customarily arranges downpayments in that amount.

[15 USC 1662.] SECTION 143— Advertising of Open End Credit Plans No advertisement to aid, promote, or assist di rectly or indirectly the extension of consumer credit under an open end credit plan may set forth any of the specific terms of that plan unless it also clearly and conspicuously sets forth all of the following items: (1) Any minimum or fixed amount which could be imposed.

(2) In any case in which periodic rates may be used to compute the finance charge, the periodic rates expressed as annual percent age rates.

(3) Any other term that the Board may by regulation require to be disclosed. [15 USC 1663. As amended by acts of March 31, 1980 (94 Stat. 177) and Dec. 26, 1981 (95 Stat. 1515).] SECTION 144— Advertising of Credit Other Than Open End Plans (a) Except as provided in subsection (b), this section applies to any advertisement to aid, promote, or assist directly or indirectly any consumer credit sale, loan, or other extension of credit subject to the provisions of this title, other than an open end credit plan. (b) The provisions of this section do not ap ply to advertisements of residential real estate except to the extent that the Board may by regulation require.

(c) If any advertisement to which this section applies states the rate of a finance charge, the advertisement shall state the rate of that charge expressed as an annual percentage rate. (d) If any advertisement to which this section applies states the amount of the downpay ment, if any, the amount of any installment payment, the dollar amount of any finance charge, or the number of installments or the period of repayment, then the advertisement shall state all of the following items: (1) The downpayment, if any. (2) The terms of repayment.

(3) The rate of the finance charge ex pressed as an annual percentage rate. [15 USC 1664. As amended by acts of March 31, 1980 (94 Stat. 183) and Dec. 26, 1981 (95 Stat. 1515).] SECTION 145—Nonliability of Media There is no liability under this chapter on the part of any owner or personnel, as such, of any medium in which an advertisement ap pears or through which it is disseminated. [15 USC 1665.] SECTION 146—Use of Annual Percentage Rate in Oral Disclosures In responding orally to any inquiry about the cost of credit, a creditor, regardless of the method used to compute finance charges, shall state rates only in terms of the annual percent age rate, except that in the case of an open end credit plan, the periodic rate also may be stated and, in the case of an other than open end credit plan where a major component of the finance charge consists of interest com puted at a simple annual rate, the simple an nual rate also may be stated. The Board may, by regulation, modify the requirements of this section or provide an exception from this sec tion for a transaction or class of transactions for which the creditor cannot determine in ad vance the applicable annual percentage rate.

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Truth in Lending Act § 161 [15 USC 1665a. As added by act of Oct. 28, 1974 (88 Stat. 1517) and amended by acts of March 31, 1980 (94 Stat. 185) and Dec. 26, 1981 (95 Stat. 1515).] SECTION 147— Advertising of Open End Consumer Credit Plans Secured by the Consumer’s Principal Dwelling (a) If any advertisement to aid, promote, or assist, directly or indirectly, the extension of consumer credit through an open end con sumer credit plan under which extensions of credit are secured by the consumer’s principal dwelling states, affirmatively or negatively, any of the specific terms of the plan, includ ing any periodic payment amount required under such plan, such advertisement shall also clearly and conspicuously set forth the follow ing information, in such form and manner as the Board may require:

(1) Any loan fee the amount of which is determined as a percentage of the credit limit applicable to an account under the plan and an estimate of the aggregate amount of other fees for opening the ac count, based on the creditor’s experience with the plan and stated as a single amount or as a reasonable range.

(2) In any case in which periodic rates may be used to compute the finance charge, the periodic rates expressed as an annual per centage rate.

(3) The highest annual percentage rate which may be imposed under the plan. (4) Any other information the Board may by regulation require.

(b) If any advertisement described in subsec tion (a) contains a statement that any interest expense incurred with respect to the plan is or may be tax deductible, the advertisement shall not be misleading with respect to such deductibility.

(c) No advertisement described in subsection (a) with respect to any home equity account may refer to such loan as “free money” or use other terms determined by the Board by regulation to be misleading. (d) (1) If any advertisement described in sub section (a) includes an initial annual per centage rate that is not determined by the index or formula used to make later interest rate adjustments, the advertisement shall also state with equal prominence the current annual percentage rate that would have been applied using the index or formula if such initial rate had not been offered. (2) The annual percentage rate required to be disclosed under the paragraph ( 1) rate must be current as of a reasonable time given the media involved.

(3) Any advertisement to which paragraph (1 ) applies shall also state the period of time during which the initial annual per centage rate referred to in such paragraph will be in effect.

(e) If any advertisement described in subsec tion (a) contains a statement regarding the minimum monthly payment under the plan, the advertisement shall also disclose, if appli cable, the fact that the plan includes a balloon payment.

(f) For purposes of this section and section 127A, the term “balloon payment” means, with respect to any open end consumer credit plan under which extensions of credit are se cured by the consumer’s principal dwelling, any repayment option under which— (1 ) the account holder is required to repay the entire amount of any outstanding bal ance as of a specified date or at the end of a specified period of time, as determined in accordance with the terms of the agreement pursuant to which such credit is extended, and (2) the aggregate amount of the minimum periodic payments required would not fully amortize such outstanding balance by such date or at the end of such period. [15 USC 1665b. As added by act of Nov. 23, 1988 (102 Stat. 4730). ) CHAPTER 4—CREDIT BILLING Section Correction of billing errors Regulation of credit reports Length of billing period Prompt crediting of payments Treatment of credit balances Prompt notification of returns

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§ 161 Truth in Lending Act Use of cash discounts Prohibition of tie-in services Prohibition of offsets Rights of credit card customers Relation to State laws SECTION 161—Correction of Billing Errors (a) If a creditor, within sixty days after hav ing transmitted to an obligor a statement of the obligor’s account in connection with an extension of consumer credit, receives at the address disclosed under section 127(b)(10) a written notice (other than notice on a payment stub or other payment medium supplied by the creditor if the creditor so stipulates with the disclosure required under section 127(a)(7) from the obligor in which the obligor— (1 ) sets forth or otherwise enables the cred itor to identify the name and account num ber (if any) of the obligor, (2 ) indicates the obligor’s belief that the statement contains a billing error and the amount of such billing error, and (3) sets forth the reasons for the obligor’s belief (to the extent applicable) that the statement contains a billing error, the creditor shall, unless the obligor has, after giving such written notice and before the ex piration of the time limits herein specified, agreed that the statement was correct— (A) not later than thirty days after the re ceipt of the notice, send a written ac knowledgment thereof to the obligor, un less the action required in subparagraph (B) is taken within such thirty-day pe riod, and (B) not later than two complete billing cycles of the creditor (in no event later than ninety days) after the receipt of the notice and prior to taking any action to collect the amount, or any part thereof, indicated by the obligor under paragraph (2 ) either— (i) make appropriate corrections in the account of the obligor, including the crediting of any finance charges on amounts erroneously billed, and trans mit to the obligor a notification of such corrections and the creditor’s ex planation of any change in the amount indicated by the obligor under para graph (2) and, if any such change is made and the obligor so requests, cop ies of documentary evidence of the ob ligor’s indebtedness; or (ii) send a written explanation or clari fication to the obligor, after having conducted an investigation, setting forth to the extent applicable the rea sons why the creditor believes the ac count of the obligor was correctly shown in the statement and, upon re quest of the obligor, provide copies of documentary evidence of the obligor’s indebtedness. In the case of a billing error where the obligor alleges that the creditor’s billing statement reflects goods not delivered to the obligor or his designee in accordance with the agreement made at the time of the transaction, a creditor may not construe such amount to be correctly shown un less he determines that such goods were actually delivered, mailed, or oth erwise sent to the obligor and provides the obligor with a statement of such determination.

After complying with the provisions of this subsection with respect to an alleged billing error, a creditor has no further responsibility under this section if the obligor continues to make substantially the same allegation with respect to such error.

(b) For the purpose of this section, a “billing error” consists of any of the following: (1) A reflection on a statement of an exten sion of credit which was not made to the obligor or, if made, was not in the amount reflected on such statement. (2) A reflection on a statement of an exten sion of credit for which the obligor requests additional clarification including documen tary evidence thereof.

(3) A reflection on a statement of goods or services not accepted by the obligor or his designee or not delivered to the obligor or his designee in accordance with the agree ment made at the time of a transaction. (4) The creditor’s failure to reflect properly

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Truth in Lending Act § 162 on a statement a payment made by the obli gor or a credit issued to the obligor. (5) A computation error or similar error of an accounting nature of the creditor on a statement.

(6) Failure to transmit the statement re quired under section 127(b) of this Act to the last address of the obligor which has been disclosed to the creditor, unless that address was furnished less than twenty days before the end of the billing cycle for which the statement is required. (7) Any other error described in regulations of the Board.

(c) For the purposes of this section, “action to collect the amount, or any part thereof, in dicated by an obligor under paragraph (2 )” does not include the sending of statements of account, which may include finance charges on amounts in dispute, to the obligor follow ing written notice from the obligor as speci fied under subsection (a), if— ( 1) the obligor’s account is not restricted or closed because of the failure of the obligor to pay the amount indicated under para graph (2 ) of subsection (a), and (2) the creditor indicates the payment of such amount is not required pending the creditor’s compliance with this section. Nothing in this section shall be construed to prohibit any action by a creditor to collect any amount which has not been indicated by the obligor to contain a billing error. (d) Pursuant to regulations of the Board, a creditor operating an open end consumer credit plan may not, prior to the sending of the written explanation or clarification re quired under paragraph (B)(ii), restrict or close an account with respect to which the obligor has indicated pursuant to subsection (a) that he believes such account to contain a billing error solely because of the obligor’s failure to pay the amount indicated to be in error. Nothing in this subsection shall be deemed to prohibit a creditor from applying against the credit limit on the obligor’s ac count the amount indicated to be in error. (e) Any creditor who fails to comply with the requirements of this section or section 162 forfeits any right to collect from the obligor the amount indicated by the obligor under paragraph (2 ) of subsection (a) of this section, and any finance charges thereon, except that the amount required to be forfeited under this subsection may not exceed $50. [15 USC 1666. As added by act of Oct. 28, 1974 (88 Stat. 1512) and amended by acts of March 31, 1980 (94 Stat. 177, 184) and Dec. 26, 1981 (95 Stat. 1515).] SECTION 162— Regulation of Credit Reports (a) After receiving a notice from an obligor as provided in section 161(a), a creditor or his agent may not directly or indirectly threaten to report to any person adversely on the obli gor’s credit rating or credit standing because of the obligor’s failure to pay the amount in dicated by the obligor under section 161(a)(2), and such amount may not be reported as de linquent to any third party until the creditor has met the requirements of section 161 and has allowed the obligor the same number of days (not less than ten) thereafter to make payment as is provided under the credit agree ment with the obligor for the payment of un disputed amounts.

(b) If a creditor receives a further written no tice from an obligor that an amount is still in dispute within the time allowed for payment under subsection (a) of this section, a creditor may not report to any third party that the amount of the obligor is delinquent because the obligor has failed to pay an amount which he has indicated under section 161(a)(2), un less the creditor also reports that the amount is in dispute and, at the same time, notifies the obligor of the name and address of each party to whom the creditor is reporting infor mation concerning the delinquency. (c) A creditor shall report any subsequent res olution of any delinquencies reported pursuant to subsection (b) to the parties to whom such delinquencies were initially reported. [15 u s e 1666a. As added by act of Oct. 28, 1974 (88 Stat. 1513). 1

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§ 163 Truth in Lending Act SECTION 163—Length of Billing Period (a) If an open end consumer credit plan pro vides a time period within which an obligor may repay any portion of the credit extended without incurring an additional finance charge, such additional finance charge may not be im posed with respect to such portion of the credit extended for the billing cycle of which such period is a part unless a statement which includes the amount upon which the finance charge for that period is based was mailed at least fourteen days prior to the date specified in the statement by which payment must be made in order to avoid imposition of that fi nance charge.

(b) Subsection (a) does not apply in any case where a creditor has been prevented, delayed, or hindered in making timely mailing or de livery of such periodic statement within the time period specified in such subsection be cause of an act of God, war, natural disaster, strike, or other excusable or justifiable cause, as determined under regulations of the Board. [15 USC 1666b. As added by act of Oct. 28, 1974 (88 Stat. 1514). ] SECTION 164— Prompt Crediting of Payments Payments received from an obligor under an open end consumer credit plan by the creditor shall be posted promptly to the obligor’s ac count as specified in regulations of the Board. Such regulation shall prevent a finance charge from being imposed on any obligor if the creditor has received the obligor’s payment in readily identifiable form in the amount, man ner, location, and time indicated by the credi tor to avoid the imposition thereof. [15 USC 1666c. As added by act of Oct. 28, 1974 (88 Stat. 1514). ] SECTION 165—Treatment of Credit Balances Whenever a credit balance in excess of $1 is created in connection with a consumer credit transaction through (1) transmittal of funds to a creditor in excess of the total balance due on an account, (2) rebates of unearned finance charges or insurance premiums, or (3) amounts otherwise owed to or held for the benefit of an obligor, the creditor shall— (A) credit the amount of the credit balance to the consumer’s account;

(B) refund any part of the amount of the remaining credit balance, upon request of the consumer; and (C) make a good faith effort to refund to the consumer by cash, check, or money or der any part of the amount of the credit balance remaining in the account for more than six months, except that no further ac tion is required in any case in which the consumer’s current location is not known by the creditor and cannot be traced through the consumer’s last known address or telephone number.

[15 USC 1666d. As added by act of Oct. 28, 1974 (88 StaL 1514) and amended by acts of March 31, 1980 (94 Stat 185) and Dec. 26, 1981 (95 Stat 1515).] SECTION 166— Prompt Notification of Returns With respect to any sales transaction where a credit card has been used to obtain credit, where the seller is a person other than the card issuer, and where the seller accepts or allows a return of the goods or forgiveness of a debit for services which were the subject of such sale, the seller shall promptly transmit to the credit card issuer, a credit statement with respect thereto and the credit card issuer shall credit the account of the obligor for the amount of the transaction.

[15 USC 1666e. As added by act of OcL 28, 1974 (88 StaL 1514). ] SECTION 167— Use of Cash Discounts (a) With respect to credit card which may be used for extensions of credit in sales transac tions in which the seller is a person other than the card issuer, the card issuer may not, by contract or otherwise, prohibit any such seller from offering a discount to a cardholder to

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Truth in Lending Act § 170 induce the cardholder to pay by cash, check, or similar means rather than use a credit card. (b) With respect to any sales transaction, any discount from the regular price offered by the seller for the purpose of inducing payment by cash, checks, or other means not involving the use of an open-end credit plan or a credit card shall not constitute a finance charge as deter mined under section 106 if such discount is offered to all prospective buyers and its avail ability is disclosed clearly and conspicuously. [15 USC 1666f. As added by act of Oct 28, 1974 (88 Stat. 1515) and amended by acts of Feb. 17, 1976 (90 Stat. 197) and July 27, 1981 (95 Stat. 144).] SECTION 168—Prohibition of Tie-In Services Notwithstanding any agreement to the con trary, a card issuer may not require a seller, as a condition to participating in a credit card plan, to open an account with or procure any other service from the card issuer or its sub sidiary or agent.

[15 USC 1666g. As added by act of Oct. 28, 1974 (88 Stat. 1515). ] SECTION 169—Prohibition of Offsets (a) A card issuer may not take any action to offset a cardholder’s indebtedness arising in connection with a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer unless— (1) such action was previously authorized in writing by the cardholder in accordance with a credit plan whereby the cardholder agrees periodically to pay debts incurred in his open end credit account by permitting the card issuer periodically to deduct all or a portion of such debt from the cardholder’s deposit account, and (2 ) such action with respect to any out standing disputed amount not be taken by the card issuer upon request of the cardholder.

In the case of any credit card account in exis tence on the effective date of this section, the previous written authorization referred to in clause ( 1) shall not be required until the date (after such effective date) when such account is renewed, but in no case later than one year after such effective date. Such written authori zation shall be deemed to exist if the card issuer has previously notified the cardholder that the use of his credit card account will subject any funds which the card issuer holds in deposit accounts of such cardholder to off set against any amounts due and payable on his credit card account which have not been paid in accordance with the terms of the agreement between the card issuer and the cardholder.

(b) This section does not alter or affect the right under State law of a card issuer to attach or otherwise levy upon funds of a cardholder held on deposit with the card issuer if that remedy is constitutionally available to credi tors generally.

[15 USC 1666h. As added by acts of Oct. 28, 1974 (88 Stat. 1515). ] SECTION 170— Rights of Credit Card Customers (a) Subject to the limitation contained in sub section (b), a card issuer who has issued a credit card to a cardholder pursuant to an open end consumer credit plan shall be sub ject to all claims (other than tort claims) and defenses arising out of any transaction in which the credit card is used as a method of payment or extension of credit if (1) the obli gor has made a good faith attempt to obtain satisfactory resolution of a disagreement or problem relative to the transaction from the person honoring the credit card; (2 ) the amount of the initial transaction exceeds $50; and (3) the place where the initial transaction occurred was in the same State as the mailing address previously provided by the cardholder or was within 100 miles from such address, except that the limitations set forth in clauses (2) and (3) with respect to an obligor’s right to assert claims and defenses against a card issuer shall not be applicable to any transac tion in which the person honoring the credit card (A) is the same person as the card issuer, (B) is controlled by the card issuer, (C) is

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§ 170 Truth in Lending Act under direct or indirect common control with the card issuer, (D) is a franchised dealer in the card issuer’s products or services, or (E) has obtained the order for such transaction through a mail solicitation made by or partici pated in by the card issuer in which the card holder is solicited to enter into such transac tion by using the credit card issued by the card issuer.

(b) the amount of claims or defenses asserted by the cardholder may not exceed the amount of credit outstanding with respect to such transaction at the time the cardholder first no tifies the card issuer or the person honoring the credit card of such claim or defense. For the purpose of determining the amount of credit outstanding in the preceding sentence, payments and credits to the cardholder’s ac count are deemed to have been applied, in the order indicated, to the payment of: (1) late charges in the order of their entry to the ac count; (2 ) finance charges in order of their entry to the account; and (3) debits to the ac count other than those set forth above, in the order in which each debit entry to the account was made.

[15 USC 1666i. As added by act of Oct. 28, 1974 (88 Stat. 1515). ] SECTION 171—Relation to State Laws (a) This chapter does not annul, alter, or af fect, or exempt any person subject to the pro visions of this chapter from complying with the laws of any State with respect to credit billing practices, except to the extent that those laws are inconsistent with any provision of this chapter, and then only to the extent of the inconsistency. The Board is authorized to determine whether such inconsistencies exist. The Board may not determine that any State law is inconsistent with any provision of this chapter if the Board determines that such law gives greater protection to the consumer. (b) The Board shall by regulation exempt from the requirements of this chapter any class of credit transactions within any State if it determines that under the law of the State that class of transactions is subject to require ments substantially similar to those imposed under this chapter or that such law gives greater protection to the consumer, and that there is adequate provision for enforcement. (c) Notwithstanding any other provisions of this title, any discount offered under section 167(b) of this title shall not be considered a finance charge or other charge for credit under the usury laws of any State or under the laws of any State relating to disclosure of informa tion in connection with credit transactions, or relating to the types, amounts or rates of charges, or to any element or elements of charges permissible under such laws in con nection with the extension or use of credit. [15 USC 1666j. As added act of Oct 28, 1974 (88 Stat 1516) and amended by act of Feb. 27, 1976 (90 StaL 198).]

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Competitive Equality Banking Act of 1987 Section 1204 12 USC 3806; 101 Stat. 662; Pub. L. 100-86 (August 10, 1987) SECTION 1204— Adjustable Rate Mortgage Caps (a) Any adjustable rate mortgage loan origi nated by a creditor shall include a limitation on the maximum interest rate that may apply during the term of the mortgage loan. (b) The Board of Governors of the Federal Reserve System shall prescribe regulations to carry out the purposes of this section. (c) Any violation of this section shall be treated as a violation of the Truth in Lending Act and shall be subject to administrative en forcement under section 108 or civil damages under section 130 of such Act, or both. (d) For purpose of this section— ( 1 ) the term “creditor” means a person who regularly extends credit for personal, family, or household purposes; and (2 ) the term “ adjustable rate mortgage loan” means any consumer loan secured by a lien on a one- to four-family dwelling unit, including a condominium unit, cooper ative housing unit, or mobile home, where the loan is made pursuant to an agreement under which the creditor may, from time to time, adjust the rate of interest. (e) This section shall take effect upon the ex piration of 120 days after the date of enact ment of this Act.

(12 USC 3806. As amended by act of Oct. 28, 1992 (106 Stat. 3893). ]

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Board of Governors of the Federal Reserve System I Official Staff Commentary an Regulation Z Truth in Lending Vs revised effective April 1, 1995

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( Any inquiry relating to Regluation Z should be addressed to the Federal Reserve Bank of th Federal Reserve District in which the inquiry arises. July 1995

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Contents Page Introduction ..................................................... Subpart A—General Section 226.1—Authority, purpose, coverage, organization, enforcement and liability.......................................................... Section 226.2—Definitions and rules of construction.................................................. Section 226.3—Exempt transactions.......... Section 226.4—Finance charge................. Subpart B—Open-End Credit Section 226.5—General disclosure requirements............................................. Section 226.5a—Credit and charge card applications and solicitations................. Section 226.5b—Requirements for homeequity plans ............................................. Section 226.6—Initial disclosure statement .................................................. Section 226.7—Periodic statement............ Section 226.8—Identification of transactions............................................... Section 226.9—Subsequent disclosure requirements............................................. Section 226.10—Prompt crediting of payments .................................................. Section 226.11—Treatment of credit balances.................................................... Section 226.12—Special credit card provisions.................................................. Section 226.13—Billing-error resolution Section 226.14— Determination of annual percentage rate ........................................ Section 226.15—Right of rescission.......... Section 226.16—Advertising...................... Subpart C—Closed-End Credit Section 226.17—General disclosure requirements............................................. Section 226.18—Content of disclosures . . 113 Page Section 226.19—Certain residential mortgage transactions..............................124 Section 226.20—Subsequent disclosure requirements.............................................135 Section 226.21—Treatment of credit balances.....................................................139 Section 226.22—Determination of annual percentage r a te ............................140 Section 226.23—Right of rescission..........142 Section 226.24— Advertising.......................148 Subpart D—Miscellaneous Section 226.25—Record retention.............151 Section 226.26—Use of annual percentage rate in oral disclosures . . . . 152 Section 226.27—Spanish-language disclosures..................................................152 Section 226.28—Effect on state laws . . . . 153 Section 226.29—State exemptions.............157 Section 226.30—Limitation on rates . . . . 158 Appendix A—Effect on state laws ..........161 Appendix B—State exemptions..................161 Appendix C—Issuance of staff interpretations.......................................... 162 Appendix D—Multiple-advance construction loans ...................................162 Appendix E—Rules for card issuers that bill on a transaction-bytransaction basis........................................163 Appendix F—Annual percentage rate computations for certain open-end credit plans............................................... 163 Appendix G—Open-end model forms and clauses............................................... 163 Appendix H—Closed-end model forms and clauses............................................... 165 Appendix I—Federal enforcement agencies.................................................... 169 Appendix J—Annual percentage rate computations for closed-end credit transactions............................................... 169

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Official Staff Commentary on Regulation Z As revised effective April 1, 1995* | INTRODUCTION 1. Official status. This commentary is the ve hicle by which the staff of the Division of Consumer and Community Affairs of the Fed eral Reserve Board issues official staff inter pretations of Regulation Z. Good faith compli ance with this commentary affords protection from liability under section 130(f) of the Truth in Lending Act. Section 130(f) (15 USC 1640) protects creditors from civil liability for any act done or omitted in good faith in con formity with any interpretation issued by a duly authorized official or employee of the Federal Reserve System.

2. Procedure for requesting interpretations. Under appendix C of the regulation, anyone may request an official staff interpretation. In terpretations that are adopted will be incorpo rated in this commentary following publica tion in the Federal Register. No official staff interpretations are expected to be issued other than by means of this commentary. 3. Status o f previous interpretations. All state ments and opinions issued by the Federal Re serve Board and its staff interpreting previous Regulation Z remain effective until October 1, 1982 only insofar as they interpret that regula tion. When compliance with revised Regula tion Z becomes mandatory on October 1, 1982, the Board and staff interpretations of the previous regulation will be entirely super seded by the revised regulation and this com mentary except with regard to liability under the previous regulation.

4. Rules o f construction.

(a) Lists that appear in the commentary may be exhaustive or illustrative; the appro priate construction should be clear from the context. In most cases, illustrative lists are introduced by phrases such as “including, but not limited to,” “among other things,” “for example,” or “such as.” (b) Throughout the commentary and regula * Reliance on April 1, 1995, revisions optional until Oc tober 1, 1995.

tion, reference to the regulation should be construed to refer to revised Regulation Z, unless the context indicates that a reference to previous Regulation Z is also intended, (c) Throughout the commentary, reference to “this section” or “this paragraph” means the section or paragraph in the regulation that is the subject of the comment. 5. Comment designations. Each comment in the commentary is identified by a number and the regulatory section or paragraph which it interprets. The comments are designated with as much specificity as possible according to the particular regulatory provision addressed. For example, some of the comments to sec tion 226.18(b) are futher divided by subpara graph, such as comment 18(b)(l)-l and com ment 18(b)(2)-1. In other cases, comments have more general application and are desig nated, for example, as comment 18-1 or com ment 18(b)-l. This introduction may be cited as comments 1-1 through 1-7. The appendixes may be cited as comments app. A-l through app. J-2.

6. Cross-references. The following cross-refer ences to related material appear at the end of each section of the commentary: (a) “Stat ute”—those sections of the Truth in Lending Act on which the regulatory provision is based (and any other relevant statutes); (b) “Other sections”—other provisions in the reg ulation necessary to understand that section; (c) “Previous regulation”—parallel provisions in previous Regulation Z; and (d) “ 1981 changes”—a brief description of the major changes made by the 1981 revisions to Regu lation Z. Where appropriate, a fifth category (“Other regulations” ) provides cross-refer ences to other regulations.

7. Transition rules.

(a) Though compliance with the revised regulation is not mandatory until April 1, 1982, creditors may begin complying as of April 1, 1981. During the intervening year, a creditor may convert its entire operation to the new requirements at one time, or it

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§ 226.1 Regulation Z Commentary may convert to the new requirements in stages. In general, however, a creditor may not mix the regulatory requirements when making disclosures for a particular closedend transaction or open-end account; all the disclosures for a single closed-end transac tion (or open-end account) must be made in accordance with the previous regulation, or all the disclosures must be made in accor dance with the revised regulation. As an ex ception to the general rule, the revised re scission rules and the revised advertising rules may be followed even if the disclo sures are based on the previous regulation. For purposes of this regulation, the creditor is not required to take any particular action beyond the requirements of the revised reg ulation to indicate its conversion to the re vised regulation.

(b) The revised regulation may be relied on to determine if any disclosures are required for a particular transaction or to determine if a person is a “creditor” subject to Truth in Lending requirements, whether or not other operations have been converted to the revised regulation. For example, layaway plans are not subject to the revised regula tion, nor are oral agreements to lend money if there is no finance charge. These provi sions may be relied on even if the creditor is making other disclosures under the previ ous regulation. The new rules governing whether or not disclosures must be made for refinancings and assumptions are also available to a creditor that has not yet con verted its operations to the revised regulation.

(c) In addition to the above rules, applica ble to both open-end and closed-end credit, the following guidelines are relevant to open-end credit:

• The creditor need not remake initial dis closures that were made under the previ ous regulation, even if the revised periodic statements contain terminology that is inconsistent with those initial dis closures.

• A creditor may add inserts to its old open-end forms in order to convert them to the revised rules until such time as the old forms are used up.

• No change-in-terms notice is required for changes resulting from the conversion to the revised regulation.

• The previous billing rights statements are substantially similar to the revised billing rights statements and may continue to be used, except that, if the creditor has an automatic debit program, it must use the revised automatic debit provision. • For those creditors wishing to use the annual billing rights statement, the credi tor may count from the date on which it sent its last statement under the previous regulation in determining when to give the first statement under the new regula tion. For example, if the creditor sent a semiannual statement in June 1981 and converts to the new regulation in Octo ber 1981, the creditor must give the bill ing rights statement sometime in 1982, and it must not be fewer than 6 nor more than 18 months after the June statement.

• Section 226.11 of the revised regulation affects only credit balances that are cre ated on or after the date the creditor converts the account to the revised regu lation.

SUBPART A—GENERAL SECTION 226.1—Authority, Purpose, Coverage, Organization, Enforcement and Liability 1(c) Coverage 1. Foreign applicability. Regulation Z applies to all persons (including branches of foreign banks and sellers located in the United States) that extend consumer credit to residents (in cluding resident aliens) of any state as defined in section 226.2. If an account is located in the United States and credit is extended to a U.S. resident, the transaction is subject to the regulation. This will be the case whether or not a particular advance or purchase on the account takes place in the United States and whether or not the extender of credit is chartered or based in the United States or a foreign country. Thus, a U.S. resident’s use in Europe of a credit card issued by a bank in the consumer’s home town is covered by the

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Regulation Z Commentary § 226.2 regulation. The regulation does not apply to a foreign branch of a U.S. bank when the for eign branch extends credit to a U.S. citizen residing or visiting abroad or to a foreign na tional abroad.

References Statute: § 102 Other sections: None Previous regulation: § 226.1 1981 changes: A discussion of coverage has been added to section 226.1 so that the reader will understand from the start what is subject to the regulation. Language has also been added to explain the reorganization of the reg ulation into subparts that group together the provisions relating to general matters, openend credit, closed-end credit, and miscellane ous rules. The provisions on consumer leasing have been issued by the Board as a separate regulation, Regulation M (12 CFR 213). SECTION 226.2—Definitions and Rules of Construction 2(a) Definitions 2(a)(2) “Advertisement”

1. Coverage. Only commercial messages that promote consumer credit transactions requir ing disclosures are advertisements. Messages inviting, offering, or otherwise announcing generally to prospective customers the availa bility of credit transactions, whether in visual, oral, or print media, are covered by the regu lation. Examples include:

• Messages in a newspaper, magazine, leaf let, promotional flyer, or catalog • Announcements on radio, television, or public address sytem • Direct mail literature or other printed mate rial on any exterior or interior sign • Point-of-sale displays • Telephone solicitations • Price tags that contain credit information • Letters sent to customers as part of an or ganized solicitation of business • Messages on checking account statements offering auto loans at a stated annual per centage rate The term does not include:

• Direct personal contacts, such as followup letters, cost estimates for individual con sumers, or oral or written communication relating to the negotiation of a specific transaction • Informational material, for example, inter est rate and loan term memos, distributed only to business entities • Notices required by federal or state law, if the law mandates that specific information be displayed and only the information so mandated is included in the notice • News articles the use of which is con trolled by the news medium • Market research or educational materials that do not solicit business 2. Persons covered. All “persons” must com ply with the advertising provisions in sections 226.16 and 226.24, not just those that meet the definition of creditor in section 226.2(a)- (17). Thus, home builders, merchants, and others who are not themselves creditors must comply with the advertising provisions of the regulation if they advertise consumer credit transactions. However, under section 145 of the act, the owner and the personnel of the medium in which an advertisement appears, or through which it is disseminated, are not sub ject to civil liability for violations. 2(a)(4) “Billing Cycle" or “Cycle" 1. Intervals. In open-end credit plans, the bill ing cycle determines the intervals for which periodic disclosure statements are required; these intervals are also used as measuring points for other duties of the creditor. Typi cally, billing cycles are monthly, but they may be more frequent or less frequent (but not less frequent than quarterly).

2. Creditors that do not bill. The term “cy cle” is interchangeable with “billing cycle” for definitional purposes, since some creditors’ cycles do not involve the sending of bills in the traditional sense but only statements of ac count activity. This is commonly the case with financial institutions when periodic pay ments are made through payroll deduction or through automatic debit of the consumer’s as set account.

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§ 226.2 Regulation Z Commentary 3. Equal cycles. Although cycles must be equal, there is a permissible variance to ac count for weekends, holidays, and differences in the number of days in months. If the actual date of each statement does not vary by more than four days from a fixed “day” (for exam ple, the third Thursday of each month) or “date” (for example, the 15th of each month) that the creditor regularly uses, the intervals between statements are considered equal. The requirement that cycles be equal applies even if the creditor applies a daily periodic rate to determine the finance charge. The requirement that intervals be equal does not apply to the transitional billing cycle that can occur when the creditor occasionally changes its billing cycles so as to establish a new statement day or date. (See the commentary to section 226.9(c).) 4. Payment reminder. The sending of a regu lar payment reminder (rather than a late pay ment notice) establishes a cycle for which the creditor must send periodic statements. 2(a)(6) “Business Day”

1. Business function test. Activities that indi cate that the creditor is open for substantially all of its business functions include the availa bility of personnel to make loan disburse ments, to open new accounts, and to handle credit transaction inquiries. Activities that in dicate that the creditor is not open for sub stantially all of its business functions include a retailer’s merely accepting credit cards for purchases or a bank’s having its customer-service windows open only for limited purposes such as deposits and withdrawals, bill paying, and related services.

2. Rescission rule. A more precise rule for what is a business day (all calendar days ex cept Sundays and the federal legal holidays listed in 5 USC 6103(a)) applies when the right of rescission is involved. 2(a)(7) “Card Issuer”

1. Agent. An agent of a card issuer is consid ered a card issuer. Because agency relation ships are traditionally defined by contract and by state or other applicable law, the regulation does not define agent. Merely providing services relating to the production of credit cards or data processing for others, however, does not make one the agent of the card issuer. In contrast, a financial institution may become the agent of the card issuer if an agreement between the institution and the card issuer provides that the cardholder may use a line of credit with the financial institution to pay ob ligations incurred by use of the credit card. 2(a)(8) “Cardholder”

1. General rule. A cardholder is a natural per son at whose request a card is issued for con sumer credit purposes or who is a co-obligor or guarantor for such a card issued to another. The second category does not include an em ployee who is a co-obligor or guarantor on a card issued to the employer for business pur poses, nor does it include a person who is merely the authorized user of a card issued to another.

2. Limited application o f regulation. For the limited purposes of the rules on issuance of credit cards and liability for unauthorized use, a cardholder includes any person, including an organization, to whom a card is issued for any purpose—including a business, agricultural, or commercial purpose.

3. Issuance. See the commentary to section 226.12(a).

4. Dual-purpose cards and dual-card systems. Some card issuers offer dual-purpose cards that are for business as well as consumer pur poses. If a card is issued to an individual for consumer purposes, the fact that an organiza tion has guaranteed to pay the debt does not make it business credit. On the other hand, if a card is issued for business purposes, the fact that an individual sometimes uses it for con sumer purchases does not subject the card is suer to the provisions on periodic statements, billing-error resolution, and other protections afforded to consumer credit. Some card issu ers offer dual-card systems—that is, they issue two cards to the same individual, one intended for business use, the other for consumer or personal use. With such a system, the same person may be a cardholder for general pur poses when using the card issued for con sumer use, and a cardholder only for the lim

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Regulation Z Commentary § 226.2 ited purposes of the restrictions on issuance and liability when using the card issued for business purposes.

2(a)(9) “Cash Price”

1. Components. This amount is a starting point in computing the amount financed and the total sale price under section 226.18 for credit sales. Any charges imposed equally in cash and credit transactions may be included in the cash price, or they may be treated as other amounts financed under section 226.18(b)(2).

2. Service contracts. Service contracts include contracts for the repair or the servicing of goods, such as mechanical breakdown cover age, even if such a contract is characterized as insurance under state law.

3. Rebates. The creditor has complete flexibil ity in the way it treats rebates for purposes of disclosure and calculation. See the commen tary to section 226.18(b).

2(a)(10) “Closed-End Credit” 1. General. The coverage of this term is de fined by exclusion. That is, it includes any credit arrangement that does not fall within the definition of open-end credit. Subpart C contains the disclosure rules for closed-end credit when the obligation is subject to a fi nance charge or is payable by written agree ment in more than four installments. 2(a)(ll) “Consumer"

1. Scope. Guarantors, endorsers, and sureties are not generally consumers for purposes of the regulation, but they may be entitled to re scind under certain circumstances and they may have certain rights if they are obligated on credit card plans.

2. Rescission rules. For purposes of rescission under sections 226.15 and 226.23, a consumer includes any natural person whose ownership interest in his or her principal dwelling is sub ject to the risk of loss. Thus, if a security interest is taken in A’s ownership interest in a house and that house is A’s principal dwell ing, A is a consumer for purposes of rescis sion, even if A is not liable, either primarily or secondarily, on the underlying consumer credit transaction. An ownership interest does not include, for example, leaseholds or incho ate rights, such as dower.

3. Land trusts. Credit extended to land trusts, as described in the commentary to section 226.3(a), is considered to be extended to a natural person for purposes of the definition of consumer.

2(a)(12) “Consumer Credit"

1. Primary purpose. There is no precise test for what constitutes credit offered or extended for personal, family, or household purposes, nor for what constitutes the primary purpose. See, however, the discussion of business pur poses in the commentary to section 226.3(a). 2(a)(I3) “Consummation”

1. State law governs. When a contractual ob ligation on the consumer’s part is created is a matter to be determined under applicable law; Regulation Z does not make this determina tion. A contractual commitment agreement, for example, that under applicable law binds the consumer to the credit terms would be consummation. Consummation, however, does not occur merely because the consumer has made some financial investment in the trans action (for example, by paying a nonrefund able fee) unless, of course, applicable law holds otherwise.

2. Credit v. sale. Consummation does not oc cur when the consumer becomes contractually committed to a sale transaction, unless the consumer also becomes legally obligated to accept a particular credit arrangement. For ex ample, when a consumer pays a nonrefund able deposit to purchase an automobile, a purchase contract may be created, but con summation for purposes of the regulation does not occur unless the consumer also contracts for financing at that time.

2(a)(14) “Credit"

1. Exclusions. The following situations are not considered credit for purposes of the regulation:

• Layaway plans, unless the consumer is

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§ 226.2 Regulation Z Commentary contractually obligated to continue making payments. Whether the consumer is so ob ligated is a matter to be determined under applicable law. The fact that the consumer is not entitled to a refund of any amounts paid towards the cash price of the mer chandise does not bring layaways within the definition of credit.

Tax liens, tax assessments, court judg ments, and court approvals of reaffirmation of debts in bankruptcy. However, thirdparty financing of such obligations (for ex ample, a bank loan obtained to pay off a tax lien) is credit for purposes of the regulation.

Insurance premium plans that involve pay ment in installments with each installment representing the payment for insurance coverage for a certain future period of time, unless the consumer is contractually obligated to continue making payments Home improvement transactions that in volve progress payments, if the consumer pays, as the work progresses, only for work completed and has no contractual ob ligation to continue making payments “Borrowing” against the accrued cash value of an insurance policy or a pension account, if there is no independent obliga tion to repay Letters of credit The execution of option contracts. Howev er, there may be an extension of credit when the option is exercised, if there is an agreement at that time to defer payment of a debt.

Investment plans in which the party ex tending capital to the consumer risks the loss of the capital advanced. This includes, for example, an arrangement with a home purchaser in which the investor pays a por tion of the downpayment and of the peri odic mortgage payments in return for an ownership interest in the property, and shares in any gain or loss of property value.

Mortgage assistance plans administered by a government agency in which a portion of the consumer’s monthly payment amount is paid by the agency. No finance charge is imposed on the subsidy amount, and that amount is due in a lump-sum payment on a set date or upon the occurrence of certain events. (If payment is not made when due, a new note imposing a finance charge may be written, which may then be subject to the regulation.) 2(a)(15) ‘‘Credit Card”

1. Usable from time to time. A credit card must be usable from time to time. Since this involves the possibility of repeated use of a single device, checks and similar instruments that can be used only once to obtain a single credit extension are not credit cards. 2. Examples. Examples of credit cards include:

• A card that guarantees checks or similar instruments, if the asset account is also tied to an overdraft line or if the instrument di rectly accesses a line of credit • A card that accesses both a credit and an asset account (that is, a debit-credit card) • An identification card that permits the con sumer to defer payment on a purchase • An identification card indicating loan ap proval that is presented to a merchant or to a lender, whether or not the consumer signs a separate promissory note for each credit extension In contrast, credit card does not include, for example:

• A check-guarantee or debit card with no credit feature or agreement, even if the creditor occasionally honors an inadvertent overdraft • Any card, key, plate, or other device that is used in order to obtain petroleum products for business purposes from a wholesale dis tribution facility or to gain access to that facility, and that is required to be used without regard to payment terms. 3. Charge card. Generally, charge cards are cards used in connection with an account on which outstanding balances cannot be carried from one billing cycle to another and are pay able when a periodic statement is received. Under the regulation, a reference to credit cards generally includes charge cards. The term “charge card” is, however, distinguished from “ credit card” in sections 226.5a,

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Regulation Z Commentary § 226.2 226.9(e), 226.9(f) and 226.28(d), and appen dixes G-10 through G-13. When the term “credit card” is used in those provisions, it refers to credit cards other than charge cards. 2(a)(16) “Credit Sale”

1. Special disclosure. If the seller is a creditor in the transaction, the transaction is a credit sale and the special credit sale disclosures (that is, the disclosures under section 226.18(j)) must be given. This applies even if there is more than one creditor in the transac tion and the creditor making the disclosures is not the seller. See the commentary to section 226.17(d).

2. Sellers who arrange credit. If the seller of the property or services involved arranged for financing but is not a creditor as to that sale, the transaction is not a credit sale. Thus, if a seller assists the consumer in obtaining a di rect loan from a financial institution and the consumer’s note is payable to the financial in stitution, the transaction is a loan and only the financial institution is a creditor. 3. Refinancings. Generally, when a credit sale is refinanced within the meaning of section 226.20(a), loan disclosures should be made. However, if a new sale of goods or services is also involved, the transaction is a credit sale. 4. Incidental sales. Some lenders “sell” a product or service—such as credit, property, or health insurance—as part of a loan transac tion. Section 226.4 contains the rules on whether the cost of credit life, disability or property insurance is part of the finance charge. If the insurance is financed, it may be disclosed as a separate credit sale transaction or disclosed as part of the primary transaction; if the latter approach is taken, either loan or credit sale disclosures may be made. See the commentary to section 226.17(c)(1) for further discussion of this point.

5. Credit extensions for educational purposes. A credit extension for educational purposes in which an educational institution is the creditor may be treated as either a credit sale or a loan, regardless of whether the funds are given directly to the student, credited to the student’s account, or disbursed to other per sons on the student’s behalf. The disclosure of the total sale price need not be given if the transaction is treated as a loan. 2(a)(17) "Creditor"

1. General. The definition contains four inde pendent tests. If any one of the tests is met, the person is a creditor for purposes of that particular test.

Paragraph 2(a)(17)(i) 1. Prerequisites. This test is composed of two requirements, both of which must be met in order for a particular credit extension to be subject to the regulation and for the credit ex tension to count towards satisfaction of the numerical tests mentioned in footnote 3 to section 226.2(a)(17). First, there must be ei ther or both of the following: • A written (rather than oral) agreement to pay in more than four installments. A letter that merely confirms an oral agreement does not constitute a written agreement for purposes of the definition.

• A finance charge imposed for the credit. The obligation to pay the finance charge need not be in writing.

Second, the obligation must be payable to the person in order for that person to be consid ered a creditor. If an obligation is made pay able to “bearer,” the creditor is the one who initially accepts the obligation. 2. Assignees. If an obligation is initially pay able to one person, that person is the creditor even if the obligation by its terms is simulta neously assigned to another person. For example:

• An auto dealer and a bank have a business relationship in which the bank supplies the dealer with credit sale contracts that are in itially made payable to the dealer and pro vide for the immediate assignment of the obligation to the bank. The dealer and pur chaser execute the contract only after the bank approves the creditworthiness of the purchaser. Because the obligation is initial ly payable on its face to the dealer, the dealer is the only creditor in the transaction.

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§ 226.2 Regulation Z Commentary 3. Numerical tests. The examples below illus trate how the numerical tests of footnote 3 are applied. The examples assume that consumer credit with a finance charge or written agree ment for more than four installments was ex tended in the years in question and that the person did not extend such credit in 1982. 4. Counting transactions. For purposes of closed-end credit, the creditor counts each credit transaction. For open-end credit, “trans actions” means accounts, so that outstanding accounts are counted instead of individual credit extensions. Normally the number of transactions is measured by the preceding cal endar year; if the requisite number is met, then the person is a creditor for all transac tions in the current year. However, if the per son did not meet the test in the preceding year, the number of transactions is measured by the current calendar year. For example, if the person extends consumer credit 26 times in 1983, it is a creditor for purposes of the regulation for the last extension of credit in 1983 and for all extensions of consumer credit in 1984. On the other hand, if a business be gins in 1983 and extends consumer credit 20 times, it is not a creditor for purposes of the regulation in 1983. If it extends consumer credit 75 times in 1984, however, it becomes a creditor for purposes of the regulation (and must begin making disclosures) after the 25th extension of credit in that year and is a credi tor for all extensions of consumer credit in 1985.

5. Relationship between consumer credit in general and credit secured by a dwelling. Ex tensions of credit secured by a dwelling are counted towards the 25-extensions test. For example, if in 1983 a person extends un secured consumer credit 23 times and con sumer credit secured by a dwelling twice, it becomes a creditor for the succeeding exten sions of credit, whether or not they are se cured by a dwelling. On the other hand, ex tensions of consumer credit not secured by a dwelling are not counted towards the number of credit extensions secured by a dwelling. For example, if in 1983 a person extends credit not secured by a dwelling eight times and credit secured by a dwelling three times, it is not a creditor.

6. Effect of satisfying one test. Once one of the numerical tests is satisfied, the person is also a creditor for the other type of credit. For example, in 1983 a person extends consumer credit secured by a dwelling five times. That person is a creditor for all succeeding credit extensions, whether they involve credit se cured by a dwelling or not.

7. Trusts. In the case of credit extended by trusts, each individual trust is considered a separate entity for purposes of applying the criteria. For example:

• A bank is the trustee for three trusts. Trust A makes 15 extensions of consumer credit annually; Trust B makes 10 extensions of consumer credit annually; and Trust C makes 30 extensions of consumer credit annually. Only Trust C is a creditor for purposes of the regulation.

8. Loans from employee savings plans. Some employee savings plans permit participants to borrow money up to a certain percentage of their account balances, and use a trust to ad minister the receipt and disbursement of funds. Unless each participant’s account is an individual plan and trust, the creditor should apply the numerical tests to the plan as a whole rather than to the individual account, even if the loan amount is determined by ref erence to the balance in the individual account and the repayments are credited to the individ ual account. The person to whom the obliga tion is originally made payable (whether the plan, the trust, or the trustee) is the creditor for purposes of the act and regulation. Paragraph 2(a)(17)(iii) 1. Card issuers subject to subpart B. Section 226.2(a)(17)(iii) makes certain card issuers creditors for purposes of the open-end credit provisions of the regulation. This includes, for example, the issuers of so-called travel and entertainment cards that expect repayment at the first billing and do not impose a finance charge. Since all disclosures are to be made only as applicable, such card issuers would omit finance charge disclosures. Other provi sions of the regulation regarding such areas as scope, definitions, determination of which charges are finance charges, Spanish language

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Regulation Z Commentary § 226.2 disclosures, record retention, and use of model forms, also apply to such card issuers. Paragraph 2(a)(I7)(iv) 1. Card issuers subject to subparts B and C. Section 226.2(a)(17)(iv) includes as creditors card issuers extending closed-end credit in which there is a finance charge or an agree ment to pay in more than four installments. These card issuers are subject to the appropri ate provisions of subparts B and C, as well as to the general provisions.

2(a)(18) “Downpayment”

1. Allocation. If a consumer makes a lump sum payment, partially to reduce the cash price and partially to pay prepaid finance charges, only the portion attributable to reduc ing the cash price is part of the downpayment. (See the commentary to section 226.2(a)(23).) 2. Pickup payments. Creditors may treat the deferred portion of the downpayment, often referred to as “pickup payments,” in a num ber of ways. If the pickup payment is treated as part of the downpayment:

• It is subtracted in arriving at the amount financed under section 226.18(b) • It may, but need not, be reflected in the payment schedule under section 226.18(g) If the pickup payment does not meet the defi nition (for example, if it is payable after the second regularly scheduled payment) or if the creditor chooses not to treat it as part of the downpayment:

• It must be included in the amount financed • It must be shown in the payment schedule Whichever way the pickup payment is treated, the total of payments under section 226.18(h) must equal the sum of the payments disclosed under section 226.18(g).

2(a)(19) “Dwelling ”

1. Scope. A dwelling need not be the con sumer’s principal residence to fit the defini tion, and thus a vacation or second home could be a dwelling. However, for purposes of the definition of residential mortgage transac tion and the right to rescind, a dwelling must be the principal residence of the consumer. See the commentary to sections 226.2(a)(24), 226.15, and 226.23.

2. Use as a residence. Mobile homes, boats, and trailers are dwellings if they are in fact used as residences, just as are condominium and cooperative units. Recreational vehicles, campers, and the like not used as residences are not dwellings.

3. Relation to exemptions. Any transaction in volving a security interest in a consumer’s principal dwelling (as well as in any real property) remains subject to the regulation de spite the general exemption in section 226.3(b) for credit extensions over $25,000. 2(a)(20) “Open-End Credit”

1. General. This definition describes the char acteristics of open-end credit (for which the applicable disclosure and other rules are con tained in subpart B), as distinct from closedend credit. Open-end credit is consumer credit that is extended under a plan and meets all three criteria set forth in the definition. 2. Existence o f a plan. The definition requires that there be a plan, which connotes a con tractual arrangement between the creditor and the consumer. Some creditors offer programs containing a number of different credit fea tures. The consumer has a single account with the institution that can be accessed repeatedly via a number of subaccounts established for the different program features and rate struc tures. Some features of the program might be used repeatedly (for example, an overdraft line), while others might be used infrequently (such as the part of the credit line available for secured credit). If the program as a whole is subject to prescribed terms and otherwise meets the definition of open-end credit, such a program would be considered a single, mul tifeatured plan.

3. Repeated transactions. Under this criterion, the creditor must reasonably contemplate re peated transactions. This means that the credit plan must be usable from time to time and the creditor must legitimately expect that there will be repeat business rather than a one-time credit extension. The creditor must expect re-

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§ 226.2 Regulation Z Commentary peated dealings with the consumer under the credit plan as a whole and need not believe the consumer will reuse a particular feature of the plan. A standard based on reasonable be lief by a creditor necessarily includes some margin for judgmental error. The fact that a particular consumer does not return for further credit extensions does not prevent a plan from having been properly characterized as openend. For example, if much of the customer base of a clothing store makes repeat purchases, the fact that some consumers use the plan only once would not affect the char acterization of the store’s plan as open-end credit. The criterion regarding repeated trans actions is a question of fact to be decided in the context of the creditor’s type of business and the creditor’s relationship with the con sumer. For example:

• It would be more reasonable for a thrift institution chartered for the benefit of its members to contemplate repeated transac tions with a member than for a seller of aluminum siding to make the same as sumption about its customers. • It would be more reasonable for a bank to make advances from a line of credit for the purchase of an automobile than for an au tomobile dealer to sell a car under an open-end plan.

4. Finance charge on an outstanding balance. The requirement that a finance charge may be computed and imposed from time to time on the outstanding balance means that there is no specific amount financed for the plan for which the finance charge, total of payments, and payment schedule can be calculated. A plan may meet the definition of open-end credit even though a finance charge is not nor mally imposed, provided the creditor has the right, under the plan, to impose a finance charge from time to time on the outstanding balance. For example, in some plans, such as certain “china club” plans, a finance charge is not imposed if the consumer pays all or a specified portion of the outstanding balance within a given time period. Such a plan could meet the finance-charge criterion, if the credi tor has the right to impose a finance charge, even though the consumer actually pays no finance charges during the existence of the plan because the consumer takes advantage of the option to pay the balance (either in full or in installments) within the time necessary to avoid finance charges.

5. Reusable line. The total amount of credit that may be extended during the existence of an open-end plan is unlimited because avail able credit is generally replenished as earlier advances are repaid. A line of credit is self replenishing even though the plan itself has a fixed expiration date, as long as during the plan’s existence the consumer may use the line, repay, and reuse the credit. The creditor may verify credit information such as the con sumer’s continued income and employment status or information for security purposes. This criterion of unlimited credit distinguishes open-end credit from a series of advances made pursuant to a closed-end credit loan commitment. For example:

• Under a closed-end commitment, the credi tor might agree to lend a total of $10,000 in a series of advances as needed by the consumer. When a consumer has borrowed the full $ 10 ,000, no more is advanced under that particular agreement, even if there has been repayment of a portion of the debt.

This criterion does not mean that the creditor must establish a specific credit limit for the line of credit or that the line of credit must always be replenished to its original amount. The creditor may reduce a credit limit or re fuse to extend new credit in a particular case due to changes in the economy, the creditor’s financial condition, or the consum er’s creditworthiness. (The rules in section 226.5b(f), however, limit the ability of a cred itor to suspend credit advances for home-eq uity plans.) While consumers should have a reasonable expectation of obtaining credit as long as they remain current and within any preset credit limits, further extensions of credit need not be an absolute right in order for the plan to meet the self-replenishing criterion.

6. Open-end real estate mortgages. Some credit plans call for negotiated advances under so-called open-end real estate mortgages. Each such plan must be independently measured

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Regulation Z Commentary § 226.2 against the definition of “open-end credit,” regardless of the terminology used in the in dustry to describe the plan. The fact that a particular plan is called an open-end real es tate mortgage, for example, does not, by itself, mean that it is open-end credit under the regulation.

2(a)(21) “Periodic Rate"

1. Basis. The periodic rate may be stated as a percentage (for example, IV2 percent per month) or as a decimal equivalent (for exam ple, .015 monthly). It may be based on any portion of a year the creditor chooses. Some creditors use 1/360 of an annual rate as their periodic rate. These creditors: • May disclose a 1/360 rate as a “daily” pe riodic rate, without further explanation, if it is in fact only applied 360 days per year. But if the creditor applies that rate for 365 days, the creditor must note that fact and, of course, disclose the true annual percent age rate.

• Would have to apply the rate to the balance to disclose the annual percentage rate with the degree of accuracy required in the reg ulation (that is, within 1/8 of 1 percentage point of the rate based on the actual 365 days in the year).

2. Transaction charges. “Periodic rate” does not include initial one-time transaction charges, even if the charge is computed as a percentage of the transaction amount. 2(a)(22) “Person"

1. Joint ventures. A joint venture is an organi zation and is therefore a person. 2. Attorneys. An attorney and his or her client are considered to be the same person for pur poses of this regulation when the attorney is acting within the scope of the attomey-client relationship with regard to a particular transaction.

3. Trusts. A trust and its trustee are consid ered to be the same person for purposes of this regulation.

2(a)(23) “Prepaid Finance Charge” 1. General. Prepaid finance charges must be taken into account under section 226.18(b) in computing the disclosed amount financed, and must be disclosed if the creditor provides an itemization of the amount financed under sec tion 226.18(c).

2. Examples. Common examples of prepaid finance charges include:

• Buyer’s points • Service fees • Loan fees • Finder’s fees • Loan-guarantee insurance • Credit-investigation fees However, in order for these or any other fi nance charges to be considered prepaid, they must be either paid separately in cash or check or withheld from the proceeds. Prepaid finance charges include any portion of the fi nance charge paid prior to or at closing or settlement.

3. Exclusions. “Add-on” and “discount” fi nance charges are not prepaid finance charges for purposes of this regulation. Finance charges are not “prepaid” merely because they are precomputed, whether or not a por tion of the charge will be rebated to the con sumer upon prepayment. See the commentary to section 226.18(b).

4. Allocation o f lump-sum payments. In a credit sale transaction involving a lump-sum payment by the consumer and a discount or other item that is a finance charge under sec tion 226.4, the discount or other item is a pre paid finance charge to the extent the lump sum payment is not applied to the cash price. For example, a seller sells property to a con sumer for $10 ,000, requires the consumer to pay $3,000 at the time of the purchase, and finances the remainder as a closed-end credit transaction. The cash price of the property is $9,000. The seller is the creditor in the trans action and therefore the $ 1,000 difference be tween the credit and cash prices (the discount) is a finance charge. (See the commentary to sections 226.4(b)(9) and 226.4(c)(5).) If the creditor applies the entire $3,000 to the cash price and adds the $1,000 finance charge to

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§ 226.2 Regulation Z Commentary the interest on the $6,000 to arrive at the total finance charge, all of the $3,000 lump-sum payment is a downpayment and the discount is not a prepaid finance charge. However, if the creditor only applies $2,000 of the lump sum payment to the cash price, then $2,000 of the $3,000 is a downpayment and the $1,000 discount is a prepaid finance charge. 2(a)(24) “Residential Mortgage Transaction” 1. Relation to other sections. This term is im portant in six provisions in the regulation: • Section 226.4(c)(7)—exclusions from the finance charge • Section 226.15(f)—exemption from the right of rescission • Section 226.18(q)—whether or not the obli gation is assumable • Section 226.19—special timing rules • Section 226.20(b)—disclosure requirements for assumptions • Section 226.23(f)—exemption from the right of rescission 2. Lien status. The definition is not limited to first lien transactions. For example, a con sumer might assume a paid-down first mort gage (or borrow part of the purchase price) and borrow the balance of the purchase price from a creditor who takes a second mortgage. The second mortgage transaction is a “resi dential mortgage transaction” if the dwelling purchased is the consum er’s principal residence.

3. Principal dwelling. A consumer can have only one principal dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will be come the consumer’s principal dwelling within a year or upon the completion of con struction, the new dwelling is considered the principal dwelling for purposes of applying this definition to a particular transaction. See the commentary to sections 226.15(a) and 226.23(a).

4. Construction financing. If a transaction meets the definition of a residential mortgage transaction and the creditor chooses to dis close it as several transactions under section 226.17(c)(6), each one is considered to be a residential mortgage transaction, even if dif ferent creditors are involved. For example: • The creditor makes a construction loan to finance the initial construction of the con sumer’s principal dwelling, and the loan will be disbursed in five advances. The creditor gives six sets of disclosures (five for the construction phase and one for the permanent phase). Each one is a residential mortgage transaction.

• One creditor finances the initial construc tion of the consumer’s principal dwelling and another creditor makes a loan to satisfy the construction loan and provide perma nent financing. Both transactions are resi dential mortgage transactions. 5. Acquisition. A transaction is not “to fi nance the acquisition” of the consumer’s prin cipal dwelling (and therefore is not a residen tial mortgage transaction) if the consumer had previously purchased the dwelling and ac quired some title to the dwelling, even though the consumer has not acquired full legal title. Thus, the following types of transactions are not residential mortgage transactions: • The financing of a balloon payment due under a land sale contract • An extension of credit made to a joint owner of property to buy out the other joint owner’s interest As a result, in giving the disclosures for these transactions several provisions of the regula tion are not applicable, for example, the ex ceptions to the right of rescission (sections 226.23(f)(1) and 226.15(f)(1)), the early dis closure requirement (section 226.19(a)), and the disclosure concerning assumability (sec tion 226.18(q)). In the following situation, by contrast, since the transaction is not a residen tial mortgage transaction, no disclosures are required by section 226.20(b) and therefore the right of rescission does not apply: • A written agreement between a creditor holding a seller’s mortgage and the buyer of the property which allows the buyer to assume the mortgage, where the buyer pre viously purchased the property and agreed

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Regulation Z Commentary § 226.2 with the seller to make the mortgage pay ments.

6. Multiple-purpose transactions. A transac tion meets the definition of this section if any part of the loan proceeds will be used to fi nance the acquisition or initial construction of the consumer’s principal dwelling. For exam ple, a transaction to finance the initial con struction of the consumer’s principal dwelling is a residential mortgage transaction even if a portion of the funds will be disbursed directly to the consumer or used to satisfy a loan for the purchase of the land on which the dwell ing will be built.

2(a)(25) “Security Interest"

1. Threshold test. The threshold test is whether a particular interest in property is rec ognized as a security interest under applicable law. The regulation does not determine whether a particular interest is a security inter est under applicable law. If the creditor is un sure whether a particular interest is a security interest under applicable law (for example, if statutes and case law are either silent or in conclusive on the issue), the creditor may at its option consider such interests as security interests for Truth in Lending purposes. How ever, the regulation and the commentary do exclude specific interests, such as after-ac quired property and accessories, from the scope of the definition regardless of their cate gorization under applicable law, and these named exclusions may not be disclosed as se curity interests under the regulation. (But see the discussion of exclusions elsewhere in the commentary to section 226.2(a)(25).) 2. Exclusions. The general definition of secur ity interest excludes three groups of interests: incidental interests, interests in after-acquired property, and interests that arise solely by op eration of law. These interests may not be dis closed with the disclosures required under sec tion 226.18, but the creditor is not precluded from preserving these rights elsewhere in the contract documents, or invoking and enforcing such rights, if it is otherwise lawful to do so. If the creditor is unsure whether a particular interest is one of the excluded interests, the creditor may, at its option, consider such in terests as security interests for Truth in Lend ing purposes.

3. Incidental interests. Incidental interests in property that are not security interests include, among other things:

• Assignment of rents • Right to condemnation proceeds • Interests in accessories and replacements • Interests in escrow accounts, such as for taxes and insurance • Waiver of homestead or personal property rights The notion of an “incidental interest” does not encompass an explicit security interest in an insurance policy if that policy is the pri mary collateral for the transaction—for exam ple, in an insurance premium financing transaction.

4. Operation of law. Interests that arise solely by operation of law are excluded from the general definition. Also excluded are interests arising by operation of law that are merely repeated or referred to in the contract. How ever, if the creditor has an interest that arises by operation of law, such as a vendor’s lien, and takes an independent security interest in the same property, such as a UCC security interest, the latter interest is a disclosable se curity interest unless otherwise provided. 5. Rescission rules. Security interests that arise solely by operation of law are security interests for purposes of rescission. Examples of such interests are mechanics’ and material men’s liens.

6. Specificity o f disclosure. A creditor need not separately disclose multiple security inter ests that it may hold in the same collateral. The creditor need only disclose that the trans action is secured by the collateral, even when security interests from prior transactions re main of record and a new security interest is taken in connection with the transaction. In disclosing the fact that the transaction is se cured by the collateral, the creditor also need not disclose how the security interest arose. For example, in a closed-end credit transac tion, a rescission notice need not specifically state that a new security interest is “acquired” or an existing security interest is “retained”

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§ 226.2 Regulation Z Commentary in the transaction. The acquisition or retention of a security interest in the consumer’s princi pal dwelling instead may be disclosed in a rescission notice with a general statement such as the following: “Your home is the security for the new transaction.” A statement such as this may be used, for example, instead of the second sentence in model form H-9 and could apply both to a refinancing in which a new security interest is taken by the original credi tor to replace a preexisting security interest and one in which an existing security interest is maintained. Of course, because model form H-9 adequately discloses the fact that the home is security for the transaction, it may be used without modification in both a refinanc ing in which a new security interest is taken by the original creditor to replace a preexist ing security interest and one in which an ex isting security interest is retained by that creditor.

2(b) Rules of Construction 1. Footnotes. Footnotes are used extensively in the regulation to provide special exceptions and more detailed explanations and examples. Material that appears in a footnote has the same legal weight as material in the body of the regulation.

References Statute: § 103 Other sections: None Other regulations: Regulation E (12 CFR 205.2(d)) Previous regulation: §§ 226.2, 226.8, and 226.9 1981 changes: Section 226.2 implements amended section 103 of the act. Separate defi nitions for “comparative index of credit cost,” “discount,” “organization,” “period,” “real property,” “real property transaction,” “regu lar price,” and “surcharge” have been de leted. The definitions relating specifically to consumer leases are now found in the separate consumer leasing regulation, Regulation M (12 CFR 213).

Several terms are now defined elsewhere in the regulation or commentary rather than in section 226.2. For example, “finance charge” is described and explained in section 226.4, and “agricultural purpose” is discussed in the commentary to section 226.3. Some terms, such as “unauthorized use,” are now defined as part of the substantive sections to which they apply. Other terms previously defined, such as “customer” and “organization,” are merged into new definitions. Section 226.2 contains new definitions for “arranger of credit,” “business day,” “closed-end credit,” “consumer,” “consummation,” “downpay ment,” “prepaid finance charge,” and “resi dential mortgage transaction.” The major changes in the definitions are as follows:

“Arranger of credit” has a significantly dif ferent meaning. It reflects the statutory amendment that limits “arrangers” to those who regularly arrange credit extensions for persons who are not themselves creditors. This definition was deleted effective October 1, 1982.

“Billing cycle” largely restates the prior definition, but requires cycles to be regular, and allows the four-day variance to be mea sured from a regular day as well as date. The definition also incorporates an interpretation that cycles may be no longer than quarterly. “Business day” is new in the sense that the term previously appeared only in a footnote to the rescission provision, but it is now of gen eral applicability. The general rule that it is a day when the creditor is open for business is new, but the rule for rescission purposes is the same as in the previous regulation. “Cash price” now explicitly permits inclu sion of various incidental charges imposed equally in cash and credit transactions. “Consumer” has a narrower meaning in that guarantors, sureties, and endorsers are ex cluded from the general definition. “Consumer credit” reflects the new statu tory exemption for agricultural credit. “Consummation” is a significant departure from longstanding interpretations of the previ ous definition. It now focuses only on the time the consumer becomes contractually obli gated, rather than the time the consumer pays a nonrefundable fee or suffers an economic penalty for failing to go forward with the credit transaction.

“Credit” generally parallels the previous

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Regulation Z Commentary § 226.3 definition, but modifies the previous interpre tations of the definition by excluding more transactions.

“ Creditor” reflects the statutory amend ments to the act that were intended to elimi nate the problem of multiple creditors in a transaction. The “regularly” standard is still used, but it is now defined in terms of the frequency of the credit extensions. The new definition also requires that there be a written agreement to pay in more than four install ments if no finance charge is imposed. Fi nally, the obligation must be initially payable to a person for that person to be the creditor. “Dwelling” reflects the statutory amend ment that expanded the scope of the definition to include any residential structure, whether or not it is real property under state law. “Open-end credit” reflects the amended statutory definition requiring that the creditor reasonably contemplate repeated transactions. The new definition no longer requires the con sumer to have the privilege of paying either in installments or in full.

“Periodic rate” combines the previous defi nitions of “period” and “periodic rate” with clarification in the commentary concerning transaction charges and 360-day-year factors. “Security interest” is much narrower than the previous definition. Reflecting the legisla tive history of the simplification amendments, incidental interests are expressly excluded from the definition. Except for purposes of re scission, interests that arise solely by opera tion of law are also excluded. SECTION 226.3—Exempt Transactions 3(a) Business, Commercial, Agricultural, or Organizational Credit 1. Primary purposes. A creditor must deter mine in each case if the transaction is prima rily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures, and the fact that disclo sures are made under such circumstances is not controlling on the question of whether the transaction was exempt.

2. Factors. In determining whether credit to finance an acquisition-—such as securities, an tiques, or art—is primarily for business or commercial purposes (as opposed to a con sumer purpose), the following factors should be considered:

• The relationship of the borrower’s primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.

• The degree to which the borrower will per sonally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose. • The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.

• The size of the transaction. The larger the transaction, the more likely it is to be busi ness purpose.

• The borrower’s statement of purpose for the loan.

Examples of business-purpose credit include: • A loan to expand a business, even if it is secured by the borrower’s residence or per sonal property • A loan to improve a principal residence by putting in a business office • A business account used occasionally for consumer purposes Examples of consumer-purpose credit include: • Credit extensions by a company to its em ployees or agents if the loans are used for personal purposes • A loan secured by a mechanic’s tools to pay a child’s tuition • A personal account used occasionally for business purposes 3. Non-owner-occupied rental property. Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. This in cludes, for example, the acquisition of a ware house that will be leased or a single-family house that will be rented to another person to live in. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be consid

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§ 226.3 Regulation Z Commentary ered non-owner-occupied and this special rule will not apply. For example, a beach house that the owner will occupy for a month in the coming summer and rent out the rest of the year is owner-occupied and is not governed by this special rule. See comment 3(a)-4, however, for rules relating to owner-occupied rental property.

4. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occu pied within the coming year, different rules apply:

• Credit extended to acquire the rental prop erty is deemed to be for business purposes if it contains more than two housing units. • Credit extended to improve or maintain the rental property is deemed to be for busi ness purposes if it contains more than four housing units. Since the amended statute defines “dwelling” to include one to four housing units, this rule preserves the right of rescission for credit extended for pur poses other than acquisition. Neither of these rules means that an extension of credit for property containing fewer than the requisite number of units is necessarily consumer credit. In such cases, the determina tion of whether it is business or consumer credit should be made by considering the fac tors listed in comment 3(a)-2. 5. Business credit later refinanced. Business purpose credit that is exempt from the regula tion may later be rewritten for consumer pur poses. Such a transaction is consumer credit requiring disclosures only if the existing obli gation is satisfied and replaced by a new obli gation made for consumer purposes under taken by the same obligor.

6. Agricultural purpose. An “agricultural pur pose” includes the planting, propagating, nur turing, harvesting, catching, storing, exhibit ing, marketing, transporting, processing, or manufacturing of food, beverages (including alcoholic beverages), flowers, trees, livestock, poultry, bees, wildlife, fish, or shellfish by a natural person engaged in farming, fishing, or growing crops, flowers, trees, livestock, poul try, bees, or wildlife. The exemption also applies to a transaction involving real property that includes a dwelling (for example, the purchase of a farm with a homestead) if the transaction is primarily for agricultural purposes.

7. Organizational credit. The exemption for transactions in which the borrower is not a natural person applies, for example, to loans to corporations, partnerships, associations, churches, unions, and fraternal organizations. The exemption applies regardless of the pur pose of the credit extension and regardless of the fact that a natural person may guarantee or provide security for the credit. 8. Land trusts. Credit extended for consumer purposes to a land trust is considered to be credit extended to a natural person rather than credit extended to an organization. In some jurisdictions, a financial institution financing a residential real estate transaction for an indi vidual uses a land trust mechanism. Title to the property is conveyed to the land trust for which the financial institution itself is trustee. The underlying installment note is executed by the financial institution in its capacity as trustee and payment is secured by a trust deed, reflecting title in the financial institution as trustee. In some instances, the consumer executes a personal guaranty of the indebted ness. The note provides that it is payable only out of the property specifically described in the trust deed and that the trustee has no per sonal liability on the note. Assuming the transactions are for personal, family, or house hold purposes, these transactions are subject to the regulation since in substance (if not form) consumer credit is being extended. 3(b) Credit Over $25,000 Not Secured by Real Property or a Dwelling 1. Coverage. Since a mobile home can be a dwelling under section 226.2(a)(19), this ex emption does not apply to a credit extension secured by a mobile home used or expected to be used as the principal dwelling of the con sumer, even if the credit exceeds $25,000. A loan commitment for closed-end credit in ex cess of $25,000 is exempt even though the amounts actually drawn never actually reach $25,000.

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Regulation Z Commentary § 226.3 2. Open-end credit. An open-end credit plan is exempt under section 226.3(b) (unless se cured by real property or personal property used or expected to be used as the consumer’s principal dwelling) if either of the following conditions is met:

• The creditor makes a firm commitment to lend over $25,000 with no requirement of additional credit information for any ad vances.

• The initial extension of credit on the line exceeds $25,000.

If a security interest is taken at a later time in any real property, or in personal property used or expected to be used as the consumer’s principal dwelling, the plan would no longer be exempt. The creditor must comply with all of the requirements of the regulation, includ ing, for example, providing the consumer with an initial disclosure statement. If the security interest being added is in the consumer’s prin cipal dwelling, the creditor must also give the consumer the right to rescind the security in terest. (See the commentary to section 226.15 concerning the right of rescission.) 3. Closed-end credit—subsequent changes. A closed-end loan for over $25,000 may later be rewritten for $25,000 or less, or a security in terest in real property or in personal property used or expected to be used as the consumer’s principal dwelling may be added to an exten sion of credit for over $25,000. Such a trans action is consumer credit requiring disclosures only if the existing obligation is satisfied and replaced by a new obligation made for con sumer purposes undertaken by the same obli gor.

(See the commentary to section 226.23(a)(1) regarding the right of rescission when a security interest in a consumer’s prin cipal dwelling is added to a previously ex empt transaction.) 3(c) Public-Utility Credit 1. Examples. Examples of public utility ser vices include:

• Gas, water, or electrical services • Cable television services • Installation of new sewer lines, water lines, conduits, telephone poles, or metering equipment in an area not already serviced by the utility The exemption does not apply to extensions of credit, for example:

• To purchase appliances such as gas or elec tric ranges, grills, or telephones • To finance home improvements such as new heating or air conditioning systems. 3(d) Securities or Commodities Accounts 1. Coverage. This exemption does not apply to a transaction with a broker registered solely with the state or to a separate credit extension in which the proceeds are used to purchase securities.

3(e) Home Fuel Budget Plans 1. Definition. Under a typical home fuel budget plan, the fuel dealer estimates the total cost of fuel for the season, bills the customer for an average monthly payment, and makes an adjustment in the final payment for any difference between the estimated and the ac tual cost of the fuel. Fuel is delivered as needed, no finance charge is assessed, and the customer may withdraw from the plan at any time. Under these circumstances, the arrange ment is exempt from the regulation, even if a charge to cover the billing costs is imposed. 3(f) Student Loan Programs 1. Coverage. This exemption applies to the Guaranteed Student Loan program (adminis tered by the federal government, state and pri vate nonprofit agencies), the Auxiliary Loans to Assist Students (also known as PLUS) pro gram, and the National Direct Student Loan program.

References Statute: §§ 103(s) and (t) and 104 Other sections: § 226.12(a) and (b) Previous regulation: § 226.3 and interpreta tions §§ 226.301 and 226.302. 1981 changes: The business-credit exemption has been expanded to include credit for agri cultural purposes. The rule of interpretation section 226.302, concerning credit relating to

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§ 226.3 Regulation Z Commentary structures containing more than four housing units, has been modified and somewhat ex panded by providing more exclusions for transactions involving rental property. The exemption for transactions above $25,000 secured by real estate has been nar rowed; all transactions secured by the con sumer’s principal dwelling (even if not con sidered real property) are now subject to the regulation.

The public-utility exemption now covers the financing of the extension of a utility into an area not earlier served by the utility, in addi tion to the financing of services. The securities-credit exemption has been extended to broker-dealers registered with the CFTC as well as the SEC.

A new exemption has been created for home fuel budget plans.

SECTION 226.4— Finance Charge 4(a) Definition 1. Charges in comparable cash transactions. Charges imposed uniformly in cash and credit transactions are not finance charges. In deter mining whether an item is a finance charge, the creditor should compare the credit transac tion in question with a similar cash transac tion. A creditor financing the sale of property or services may compare charges with those payable in a similar cash transaction by the seller of the property or service. i.

For example, the following items are not finance charges:

A. Taxes, license fees, or registration fees paid by both cash and credit customers. B. Discounts that are available to cash and credit customers, such as quantity dis counts.

C. Discounts available to a particular group of consumers because they meet certain criteria, such as being members of an or ganization or having accounts at a particu lar financial institution. This is the case even if an individual must pay cash to ob tain the discount, provided that credit cus tomers who are members of the group and do not qualify for the discount pay no more than the nonmember cash customers. D. Charges for a service policy, auto club membership, or policy of insurance against latent defects offered to or required of both cash and credit customers for the same price.

ii. In contrast, the following items are fi nance charges:

A. Inspection and handling fees for the staged disbursement of construction-loan pro ceeds.

B. Fees for preparing a Truth in Lending dis closure statement, if permitted by law (for example, the Real Estate Settlement Proce dures Act prohibits such charges in certain transactions secured by real property). C. Charges for a required maintenance or ser vice contract imposed only in a credit transaction.

iii. If the charge in a credit transaction ex ceeds the charge imposed in a comparable cash transaction, only the difference is a fi nance charge. For example:

A. If an escrow agent is used in both cash and credit sales of real estate and the agent’s charge is $10 0 in a cash transac tion and $150 in a credit transaction, only $50 is a finance charge.

2. Costs o f doing business. Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in de termining the interest rate to be charged or the cash price of the property or service sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition. For example: • A discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately im posed on the consumer. (See section 226.4(b)(6).) • A tax imposed by a state or other govern mental body on a creditor is not a finance charge if the creditor absorbs the tax as a cost of doing business and does not sepa rately impose the tax on the consumer. (For additional discussion of the treatment

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Regulation Z Commentary § 226.4 of taxes, see other commentary to section 226.4(a).) 3. Charges by third parties. Charges imposed on the consumer by someone other than the creditor are finance charges (unless otherwise excluded) if the creditor requires the use of a third party as a condition of or incident to the extension of credit, even if the consumer can choose the third party, or the creditor retains the charge. For example:

The cost of required mortgage insurance, even if the consumer is allowed to choose the insurer.

ii.

A mortgage broker fee, to the extent that the broker shares the fee with the credi tor.

4. Charges by settlement agents. Charges im posed on the consumer by a settlement agent (such as an attorney, escrow agent, or title company) are finance charges only if the cred itor requires the particular services for which the settlement agent is charging the borrower and the charge for those services is not other wise excluded from the finance charge. For example, a fee for courier service charged by a settlement agent to send a document to the title company or some other party is not a finance charge, provided that the creditor has not required the use of a courier or retained the charge.

5. Forfeitures o f interest. If the creditor reduces the interest rate it pays or stops pay ing interest on the consumer’s deposit account or any portion of it for the term of a credit transaction (including, for example, an over draft on a checking account or a loan secured by a certificate of deposit), the interest lost is a finance charge. (See the commentary to sec tion 226.4(c)(6).) For example: • A consumer borrows $5,000 for 90 days and secures it with a $10,000 certificate of deposit paying 15 percent interest. The creditor charges the consumer an interest rate of 6 percent on the loan and stops paying interest on $5,000 of the $10,000 certificate for the term of the loan. The in terest lost is a finance charge and must be reflected in the annual percentage rate on the loan.

However, the consumer must be entitled to the interest that is not paid in order for the lost interest to be a finance charge. For example:

• A consumer wishes to buy from a financial institution a $10,000 certificate of deposit paying 15 percent interest but has only $4,000. The financial institution offers to lend the consumer $6,000 at an interest rate of 6 percent but will pay the 15 per cent interest only on the amount of the consumer’s deposit, $4,000. The creditor’s failure to pay interest on the $6,000 does not result in an additional finance charge on the extension of credit, provided the consumer is entitled by the deposit agree ment with the financial institution to inter est only on the amount of the consumer’s deposit.

• A consumer enters into a combined time deposit/credit agreement with a financial institution that establishes a time deposit account and an open-end line of credit. The line of credit may be used to borrow against the funds in the time deposit. The agreement provides for an interest rate on any credit extension of, for example, 1 per cent. In addition, the agreement states that the creditor will pay 0 percent interest on the amount of the time deposit that corre sponds to the amount of the credit exten sion^). The interest that is not paid on the time deposit by the financial institution is not a finance charge (and therefore does not affect the annual percentage rate computation).

6. Treatment o f fees for use o f automated teller machines. Any charge imposed on a cardholder by a card issuer for the use of an automated teller machine (ATM) to obtain a cash advance (whether in a proprietary, shared, interchange, or other system) is not a finance charge to the extent that it does not exceed the charge imposed by the card issuer on its cardholders for using the ATM to with draw cash from a consumer asset account, such as a checking or savings account. (See the commentary to section 226.6(b).) 7. Taxes, i. Generally, a tax imposed by a state or other governmental body solely on a

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§ 226.4 Regulation Z Commentary creditor is a finance charge if the creditor sep arately imposes the charge on the consumer. ii. In contrast, a tax is not a finance charge (even if it is collected by the creditor) if ap plicable law imposes the tax: A.

Solely on the consumer;

On the creditor and the consumer jointly; or C.

On the credit transaction, without indicat ing which party is liable for the tax; or D.

On the creditor, if applicable law directs or authorizes the creditor to pass the tax on to the consumer. (For purposes of this section, if applicable law is silent as to passing on the tax, the law is deemed not to authorize passing it on.) iii. For example, a stamp tax, property tax, intangible tax, or any other state or local tax imposed on the consumer, or on the credit transaction, is not a finance charge even if the tax is collected by the creditor. iv. In addition, a tax is not a finance charge if it is excluded from the finance charge by another provision of the regulation or com mentary (for example, if the tax is imposed uniformly in cash and credit transactions). 4(b) Examples of Finance Charges 1. Relationship to other provisions. Charges or fees shown as examples of finance charges in section 226.4(b) may be excludable under section 226.4(c), (d), or (e). For example: • Premiums for credit life insurance, shown as an example of a finance charge under section 226.4(b)(7), may be excluded if the requirements of section 226.4(d)(1) are met.

• Appraisal fees mentioned in section 226.4(b)(4) are excluded for real property or residential mortgage transactions under section 226.4(c)(7).

Paragraph 4(b)(2) 1. Checking account charges. The checking or transaction account charges discussed in sec tion 226.4(b)(2) include, for example, the fol lowing situations:

• An account with an overdraft line of credit incurs a $4.50 service charge, while an ac count without a credit feature has a $2.50 service charge; the $2.00 difference is a fi nance charge. If the difference is not relat ed to account activity, however, it may be excludable as a participation fee. (See the commentary to section 226.4(c)(4).) • A service charge of $5.00 for each item that triggers an overdraft credit line is a finance charge. However, a charge imposed uniformly for any item that overdraws a checking account, regardless of whether the items are paid or returned and whether the account has a credit feature or not, is not a finance charge.

Paragraph 4(b)(3) 1. Assumption fees. The assumption fees men tioned in section 226.4(b)(3) are finance charges only when the assumption occurs and the fee is imposed on the new buyer. The as sumption fee is a finance charge in the new buyer’s transaction.

Paragraph 4(b)(5) 1. Credit loss insurance. Common examples of the insurance against credit loss mentioned in section 226.4(b)(5) are mortgage-guaranty insurance, holder-in-due-course insurance, and repossession insurance. Such premiums must be included in the finance charge only for the period that the creditor requires the insurance to be maintained.

2. Residual-value insurance. Where a creditor requires a consumer to maintain residual-value insurance or where the creditor is a benefici ary of a residual-value insurance policy writ ten in connection with an extension of credit (as is the case in some forms of automobile balloon-payment financing, for example), the premiums for the insurance must be included in the finance charge for the period that the insurance is to be maintained. If a creditor pays for residual-value insurance and absorbs the payment as a cost of doing business, such costs are not considered finance charges. (See comment 4(a)-2.) Paragraphs 4(b)(7) and (8) 1. Preexisting insurance policy. The insurance discussed in section 226.4(b)(7) and (8) does

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Regulation Z Commentary § 226.4 not include an insurance policy (such as a life or an automobile collision insurance policy) that is already owned by the consumer, even if the policy is assigned to or otherwise made payable to the creditor to satisfy an insurance requirement. Such a policy is not “written in connection with” the transaction, as long as the insurance was not purchased for use in that credit extension, since it was previously owned by the consumer.

2. Insurance written in connection with a transaction. Insurance sold after consumma tion in closed-end credit transactions or after the opening of a plan in open-end credit trans actions is not “written in connection with” the credit transaction if the insurance is writ ten because of the consumer’s default (for ex ample, by failing to obtain or maintain re quired property insurance) or because the consumer requests insurance after consumma tion or the opening of a plan (although creditsale disclosures may be required for the insur ance sold after consummation if it is financed).

3. Substitution of life insurance. The premium for a life insurance policy purchased and as signed to satisfy a credit life insurance re quirement must be included in the finance charge, but only to the extent of the cost of the credit life insurance if purchased from the creditor or the actual cost of the policy (if that is less than the cost of the insurance available from the creditor). If the creditor does not of fer the required insurance, the premium to be included in the finance charge is the cost of a policy of insurance of the type, amount, and term required by the creditor. 4. Other insurance. Fees for required insur ance not of the types described in section 226.4(b)(7) and (8) are finance charges and are not excludable. For example: • The premium for a hospitalization insur ance policy, if it is required to be pur chased only in a credit transaction, is a finance charge.

Paragraph 4(b)(9) 1. Discounts for payment by other than credit. The discounts to induce payment by other than credit mentioned in section 226.4(b)(9) include, for example, the following situation: • The seller of land offers individual tracts for $10,000 each. If the purchaser pays cash, the price is $9,000, but if the pur chaser finances the tract with the seller the price is $10,000. The $1,000 difference is a finance charge for those who buy the tracts on credit.

2. Exception for cash discounts. Discounts of fered to induce consumers to pay for property or services by cash, check, or other means not involving the use of either an open-end credit plan or a credit card (whether open-end or closed-end credit is extended on the card) may be excluded from the finance charge under section 167(b) of the act (as amended by Pub. L. 97-25, July 27, 1981). The discount may be in whatever amount the seller desires, ei ther as a percentage of the regular price (as defined in section 103(z) of the act, as amended) or a dollar amount. This provision applies only to transactions involving an openend credit plan or a credit card. The merchant must offer the discount to prospective buyers whether or not they are cardholders or mem bers of the open-end credit plan. The merchant may, however, make other distinc tions. For example:

• The merchant may limit the discount to payment by cash and not offer it for pay ment by check or by use of a debit card. • The merchant may establish a discount plan that allows a 15 percent discount for payment by cash, a 10 percent discount for payment by check, and a 5 percent dis count for payment by a particular credit card. None of these discounts is a finance charge.

Section 171(c) of the act excludes section 167(b) discounts from treatment as a finance charge or other charge for credit under any state usury or disclosure laws. 3. Determination o f the regular price. The “regular price” is critical in determining whether the difference between the price charged to cash customers and credit custom ers is a “discount” or a “surcharge,” as these terms are defined in amended section 103 of

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§ 226.4 Regulation Z Commentary the act. The “regular price” is defined in sec tion 103 of the act as “the tag or posted price charged for the property or service if a single price is tagged or posted, or the price charged for the property or service when payment is made by use of an open-end credit account or a credit card if either (1) no price is tagged or posted, or (2 ) two prices are tagged or posted. . . . ” For example, in the sale of mo tor vehicle fuel, the tagged or posted price is the price displayed at the pump. As a result, the higher price (the open-end credit or credit card price) must be displayed at the pump, either alone or along with the cash price. Ser vice station operators may designate separate pumps or separate islands as being for either cash or credit purchases and display only the appropriate prices at the various pumps. If a pump is capable of displaying on its meter either a cash or a credit price depending upon the consumer’s means of payment, both the cash price and the credit price must be dis played at the pump. A service station operator may display the cash price of fuel by itself on a curb sign, as long as the sign clearly indi cates that the price is limited to cash purchases.

4(c) Charges Excluded from the Finance Charge Paragraph 4(c)(1) 1. Application fees. An application fee that is excluded from the finance charge is a charge to recover the costs associated with processing applications for credit. The fee may cover the costs of services such as credit reports, credit investigations, and appraisals. The creditor is free to impose the fee in only certain of its loan programs, such as mortgage loans. How ever, if the fee is to be excluded from the finance charge under section 226.4(c)(1), it must be charged to all applicants, not just to applicants who are approved or who actually receive credit.

Paragraph 4(c)(2) 1. Late-payment charges.

Late-payment charges can be excluded from the finance charge under section 226.4(c)(2) whether or not the person imposing the charge continues to extend credit on the account or continues to provide property or services to the consumer. In determining whether a charge is for actual unanticipated late payment on a 30-day ac count, for example, factors to be considered include:

• The terms of the account. For example, is the consumer required by the account terms to pay the account balance in full each month? If not, the charge may be a finance charge.

• The practices of the creditor in handling the accounts. For example, regardless of the terms of the account, does the creditor allow consumers to pay the accounts over a period of time without demanding payment in full or taking other action to collect? If no effort is made to collect the full amount due, the charge may be a finance charge. Section 226.4(c)(2) applies to late-payment charges imposed for failure to make payments as agreed, as well as failure to pay an account in full when due.

2. Other excluded charges. Charges for “deliquency, default, or a similar occurrence” in clude, for example, charges for reinstatement of credit privileges or for submitting as pay ment a check that is later returned unpaid. Paragraph 4(c)(3) 1. Assessing interest on an overdraft balance. A charge on an overdraft balance computed by applying a rate of interest to the amount of the overdraft is not a finance charge, even though the consumer agrees to the charge in the account agreement, unless the financial in stitution agrees in writing that it will pay such items.

Paragraph 4(c)(4) 1. Participation fees—periodic basis. The par ticipation fees mentioned in section 226.4(c)(4) do not necessarily have to be for mal membership fees, nor are they limited to credit card plans. The provision applies to any credit plan in which payment of a fee is a condition of access to the plan itself, but it does not apply to fees imposed separately on individual closed-end transactions. The fee

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Regulation Z Commentary § 226.4 may be charged on a monthly, annual, or other periodic basis; a one-time, non-recurring fee imposed at the time an account is opened is not a fee that is charged on a periodic ba sis, and may not be treated as a participation fee.

2. Participation fees—exclusions. Minimum monthly charges, charges for non-use of a credit card, and other charges based on either account activity or the amount of credit avail able under the plan are not excluded from the finance charge by section 226.4(c)(4). Thus, for example, a fee that is charged and then refunded to the consumer based on the extent to which the consumer uses the credit avail able would be a finance charge. (See the com mentary to section 226.4(b)(2). Also, see com ment 14(c)-7 for treatment of certain types of fees excluded in determining the annual per centage rate for the periodic statement.) Paragraph 4(c)(5) 1. Seller’s points. The seller’s points men tioned in section 226.4(c)(5) include any charges imposed by the creditor upon the non creditor seller of property for providing credit to the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price. Seller’s points are fre quently involved in real estate transactions guaranteed or insured by governmental agen cies. A “commitment fee” paid by a non creditor seller (such as a real estate developer) to the creditor should be treated as seller’s points. Buyer’s points (that is, points charged to the buyer by the creditor), however, are fi nance charges.

2. Other seller-paid amounts. Mortgage insur ance premiums and other charges are some times paid at or before consummation or set tlement on the borrower’s behalf by a noncreditor seller. In such cases, the creditor should treat the payment made by the seller as seller’s points and exclude it from the finance charge. A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available, as called for by the estimate provi sions of the regulation.

Paragraph 4(c)(6) 1. Lost interest. Certain federal and state laws mandate a percentage differential between the interest rate paid on a deposit and the rate charged on a loan secured by that deposit. In some situations because of usury limits the creditor must reduce the interest rate paid on the deposit and, as a result, the consumer loses some of the interest that would other wise have been earned. Under section 226.4(c)-(6), such “lost interest” need not be included in the finance charge. This rule ap plies only to an interest reduction imposed be cause a rate differential is required by law and a usury limit precludes compliance by any other means. If the creditor imposes a differ ential that exceeds that required, only the lost interest attributable to the excess amount is a finance charge. (See the commentary to sec tion 226.4(a).) Paragraph 4(c)(7) 1. Real estate or residential mortgage trans action charges. The list of charges in section 226.4(c)(7) applies both to residential mort gage transactions (which may include, for ex ample, the purchase of a mobile home) and to other transactions secured by real estate. The fees are excluded from the finance charge even if the services for which the fees are imposed are performed by the creditor’s em ployees rather than by a third party. In addi tion, the cost of verifying or confirming infor mation connected to the item is also excluded. For example, credit-report fees cover not only the cost of the report but also the cost of veri fying information in the report. In all cases, charges excluded under section 226.4(c)(7) must be bona fide and reasonable. 2. Lump-sum charges. If a lump sum charged for several services includes a charge that is not excludable, a portion of the total should be allocated to that service and included in the finance charge. However, a lump sum charged for conducting or attending a closing (for example, by a lawyer or a title company) is excluded from the finance charge if the

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§ 226.4 Regulation Z Commentary charge is primarily for services related to items listed in section 226.4(c)(7) (for exam ple, reviewing or completing documents), even if other incidental services such as ex plaining various documents or disbursing funds for the parties are performed. The entire charge is excluded even if a fee for the inci dental services would be a finance charge if it were imposed separately.

3. Charges assessed during the loan term. Real estate or residential mortgage transaction charges excluded under section 226.4(c)(7) are those charges imposed solely in connection with the initial decision to grant credit. This would include, for example, a fee to search for tax liens on the property or to determine if flood insurance is required. The exclusion does not apply to fees for services to be per formed periodically during the loan term, re gardless of when the fee is collected. For ex ample, a fee for one or more determinations during the loan term of the current tax-lien status or flood-insurance requirements is a fi nance charge, regardless of whether the fee is imposed at closing, or when the service is performed. If a creditor is uncertain about what portion of a fee to be paid at consumma tion or loan closing is related to the initial decision to grant credit, the entire fee may be treated as a finance charge. 4(d) Insurance 1. General. Section 226.4(d) permits insur ance premiums and charges to be excluded from the finance charge. The required disclo sures must be made in writing. The rules on location of insurance disclosures for closedend transactions are in section 226.17(a). 2. Timing of disclosures. If disclosures are given early, for example under section 226.17(f) or section 226.19(a), the creditor need not redisclose if the actual premium is different at the time of consummation. If in surance disclosures are not given at the time of early disclosure and insurance is in fact written in connection with the transaction, the disclosures under section 226.4(d) must be made in order to exclude the premiums from the finance charge.

3. Premium-rate increases. The creditor should disclose the premium amount based on the rates currently in effect and need not des ignate it as an estimate even if the premium rates may increase. An increase in insurance rates after consummation of a closed-end credit transaction or during the life of an open-end credit plan does not require redis closure in order to exclude the additional pre mium from treatment as a finance charge. 4. Unit-cost disclosures. One of the transac tions for which unit-cost disclosures (such as 50 cents per year for each $100 of the amount financed) may be used in place of the total insurance premium involves a particular kind of insurance plan. For example, a consumer with a current indebtedness of $8,000 is cov ered by a plan of credit life insurance cover age with a maximum of $10,000. The con sumer requests an additional $4,000 loan to be covered by the same insurance plan. Since the $4,000 loan exceeds, in part, the maximum amount of indebtedness that can be covered by the plan, the creditor may properly give the insurance cost disclosures on the $4,000 loan on a unit-cost basis.

5. Required credit life insurance. Credit life, accident, health, or loss-of-income insurance must be voluntary in order for the premiums or charges to be excluded from the finance charge. Whether the insurance is in fact re quired or optional is a factual question. If the insurance is required, the premiums must be included in the finance charge, whether the in surance is purchased from the creditor or from a third party. If the only option the creditor gives the consumer is to purchase credit life insurance from the creditor or to assign an existing life insurance policy, and the con sumer purchases the credit life insurance, the premium must be included in the finance charge. (If the consumer assigns a preexisting policy instead, no premium is included in the finance charge. See the commentary to section 226.4(b)(7) and (8).) 6. Other types of voluntary insurance. Insur ance is not credit life, accident, health, or loss-of-income insurance if the creditor or the credit account of the consumer is not the ben eficiary of the insurance coverage. If such in surance is not required by the creditor as an

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Regulation Z Commentary § 226.4 incident to or a condition of credit, it is not covered by section 226.4.

7. Signatures. If the creditor offers a number of insurance options under section 226.4(d), the creditor may provide a means for the con sumer to sign or initial for each option, or it may provide for a single authorizing signature or initial with the options selected designated by some other means, such as a check mark. The insurance authorization may be signed or initialed by any consumer, as defined in sec tion 226.2(a)(ll), or by an authorized user on a credit card account.

8. Property insurance. To exclude property insurance premiums or charges from the fi nance charge, the creditor must allow the con sumer to choose the insurer and disclose that fact. This disclosure must be made whether or not the property insurance is available from or through the creditor. The requirement that an option be given does not require that the in surance be readily available from other sources. The premium or charge must be dis closed only if the consumer elects to purchase the insurance from the creditor; in such a case, the creditor must also disclose the term of the property insurance coverage if it is less than the term of the obligation. 9. Single-interest insurance. Blanket and spe cific single-interest coverage are treated the same for purposes of the regulation. A charge for either type of single-interest insurance may be excluded from the finance charge if: • The insurer waives any right of subrogation • The other requirements of section 226.4(d)(2) are met. This includes, of course, giving the consumer the option of obtaining the insurance from a person of the consumer’s choice. The creditor need not ascertain whether the consumer is able to purchase the insurance from someone else.

10. Single-interest insurance defined. The term “single-interest insurance” as used in the regulation refers only to the types of coverage traditionally included in the term “vendor’s single-interest insurance” (or “VSI”), that is, protection of tangible property against normal property damage, concealment, confiscation, conversion, embezzlement, and skip. Some comprehensive insurance policies may include a variety of additional coverages, such as re possession insurance and holder-in-due-course insurance. These types of coverage do not constitute single-interest insurance for pur poses of the regulation, and premiums for them do not qualify for exclusion from the finance charge under section 226.4(d). If a policy that is primarily VSI also provides cov erages that are not VSI or other property in surance, a portion of the premiums must be allocated to the nonexcludable coverages and included in the finance charge. However, such allocation is not required if the total premium in fact attributable to all of the non-VSI cov erages included in the policy is $1.00 or less (or $5.00 or less in the case of a multiyear policy).

11. Initial term. The initial term of insurance coverage determines the period for which a premium amount must be disclosed. In some cases the initial term is clear, for example, a property insurance policy on an automobile written for one year (even though the term of the credit transaction is four years) or a credit life insurance policy for the term of the credit transaction purchased by paying or financing a single premium. In other cases, however, it may not be clear what the initial term of the insurance is, for example, when the consumer agrees to pay a premium that is assessed peri odically and the consumer is under no obliga tion to continue making the payments. In cases such as this, the cost disclosure may be made on the basis of a premium for one year of insurance coverage. The premium must be clearly labeled as being for one year. 12. Loss-of-income insurance. The loss-ofincome insurance mentioned in section 226.4(d) includes involuntary unemployment insurance, which provides that some or all of the consumer’s payments will be made if the consumer becomes unemployed involuntarily. 4(e) Certain Security-Interest Charges 1. Examples.

Excludable charges. Sums must be actu ally paid to public officials to be excluded from the finance charge under section

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§ 226.4 Regulation Z Commentary 226.4(e)(1). Examples are charges or other fees required for filing or recording security agreements, mortgages, continuation state ments, termination statements, and similar documents, and intangible property or other taxes imposed by the state solely on the credi tor and payable by the consumer (if the tax must be paid to record a security agreement). ii.

Charges not excludable. If the obligation is between the creditor and a third party (an assignee, for example), charges or other fees for filing or recording security agreements, mortgages, continuation statements, termina tion statements, and similar documents relat ing to that obligation are not excludable from the finance charge under this section. 2. Itemization. The various charges described in section 226.4(e)(1) may be totaled and dis closed as an aggregate sum, or they may be itemized by the specific fees and taxes im posed. If an aggregate sum is disclosed, a general term such as security interest fees or “filing fees” may be used.

3. Notary fees. In order for a notary fee to be excluded under section 226.4(e)(1), all of the following conditions must be met: • The document to be notarized is one used to perfect, release, or continue a security interest.

• The document is required by law to be no tarized.

• A notary is considered a public official under applicable law.

• The amount of the fee is set or authorized by law.

4. Nonfiling insurance. The exclusion in sec tion 226.4(e)(2) is available only if nonfiling insurance is purchased. If the creditor collects and simply retains a fee as a sort of “selfinsurance” against nonfiling, it may not be excluded from the finance charge. If the non filing insurance premium exceeds the amount of the fees excludable from the finance charge under section 226.4(e)(1), only the excess is a finance charge. For example: • The fee for perfecting a security interest is $5.00 and the fee for releasing the security interest is $3.00. The creditor charges $10.00 for nonfiling insurance. Only $8.00 of the $10.00 is excludable from the fi nance charge.

4(f) Prohibited Offsets 1. Earnings on deposits or investments. The rule that the creditor shall not deduct any earnings by the consumer on deposits or in vestments applies whether or not the creditor has a security interest in the property. References Statute: §§ 106, 167, and 171(c) Other sections: §§ 226.9(d) and 226.12 Previous regulation: § 226.4 and interpreta tions § 226.401 through 226.407. 1981 changes: While generally continuing the rules under the previous regulation, section 226.4 reflects amendments to section 106 of the act and makes certain other changes in the rules for determining the finance charge. For example, section 226.4(a) expressly excludes from the finance charge amounts payable in comparable cash transactions. Section 226.8(o) of the previous regulation, dealing with dis counts for prompt payment of a credit sale, was deleted in the revised regulation since the general test for a finance charge now focuses on a comparison of cash and credit transac tions. With respect to various exclusions from the finance charge: application fees imposed on all applicants are no longer finance charges, continuing to extend credit to a con sumer is no longer a controlling test for deter mining whether a late payment charge is bona fide, seller’s points are not to be included in the finance charge, and the special exclusions for real estate transactions apply to all “resi dential mortgage transactions.” The simplified rules for excluding insurance from the finance charge allow unit-cost disclo sure in certain closed-end credit transactions, permit initials as well as signatures on the au thorization, permit any consumer to authorize insurance for other consumers, and delete the requirement that the authorization be sepa rately dated.

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Regulation Z Commentary § 226.5 SUBPART B—OPEN-END CREDIT SECTION 226.5—General Disclosure Requirements 5(a) Form of Disclosures Paragraph 5(a)(1) 1. Clear and conspicuous. The “clear and conspicuous” standard requires that disclo sures be in a reasonably understandable form. It does not require that disclosures be segre gated from other material or located in any particular place on the disclosure statement, or that numerical amounts or percentages be in any particular type size. The standard does not prohibit:

• Pluralizing required terminology (“finance charge” and “annual percentage rate”) • Adding to the required disclosures such items as contractual provisions, explana tions of contract terms, state disclosures, and translations • Sending promotional material with the re quired disclosures • Using commonly accepted or readily un derstandable abbreviations (such as “mo.” for “month” or “Tx.” for “Texas” ) in making any required disclosures • Using codes or symbols such as “APR” (for annual percentage rate), “FC” (for fi nance charge), or “Cr” (for credit balance), so long as a legend or description of the code or symbol is provided on the disclo sure statement 2. Integrated document. The creditor may make both the initial disclosures (§ 226.6) and the periodic-statement disclosures (§ 226.7) on more than one page, and use both the front and the reverse sides, so long as the pages constitute an integrated document. An inte grated document would not include disclosure pages provided to the consumer at different times or disclosures interspersed on the same page with promotional material. An integrated document would include, for example: • Multiple pages provided in the same enve lope that cover related material and are folded together, numbered consecutively, or clearly labelled to show that they relate to one another • A brochure that contains disclosures and explanatory material about a range of ser vices the creditor offers, such as credit, checking account, and electronic fund transfer features Paragraph 5(a)(2) 1. When disclosures must be “more conspicu ous.” The terms “finance charge” and “an nual percentage rate,” when required to be used with a number, must be disclosed more conspicuously than other required disclosures, except in the two cases provided in footnote 9. At the creditor’s option, “finance charge” and “annual percentage rate” may also be disclosed more conspicuously than the other required disclosures even when the regulation does not so require. The following examples illustrate these rules:

• In disclosing the annual percentage rate as required by section 226.6(a)(2), the term “annual percentage rate” is subject to the “more conspicuous” rule.

• In disclosing the amount of the finance charge, required by section 226.7(f), the term “finance charge” is subject to the “more conspicuous” rule.

• Although neither “finance charge” nor “annual percentage rate” need be empha sized when used as part of general infor mational material or in textual descriptions of other terms, emphasis is permissible in such cases. For example, when the terms appear as part of the explanations required under section 226.6(a)(3) and (4), they may be equally conspicuous as the disclosures required under sections 226.6(a)(2) and 226.7(g).

2. Making disclosures more conspicuous. In disclosing the terms “finance charge” and “annual percentage rate” more conspicuously, only the words “finance charge” and “annual percentage rate” should be accentuated. For example, if the term “total finance charge” is used, only “finance charge” should be empha sized. The disclosures may be made more conspicuous by, for example:

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§ 226.5 Regulation Z Commentary • Capitalizing the words when other disclo sures are printed in lower case • Putting them in bold print or a contrasting color • Underlining them • Setting them off with asterisks • Printing them in larger type 3. Disclosure of figures—exception to “more conspicuous” rule. The terms “annual per centage rate” and “finance charge” need not be more conspicuous than figures (including, for example, numbers, percentages, and dollar signs).

5(b) Time of Disclosures 5(b)(1) Initial disclosures 1. Disclosure before the first transaction. The rule that the initial disclosure statement must be furnished “before the first transaction” re quires delivery of the initial disclosure state ment before the consumer becomes obligated on the plan. For example, the initial disclo sures must be given before the consumer makes the first purchase (such as when a con sumer opens a credit plan and makes purchases contemporaneously at a retail store), receives the first advance, or pays any fees or charges under the plan other than an applica tion fee or refundable membership fee (see below). The prohibition on the payment of fees other than application or refundable membership fees before initial disclosures are provided does not apply to home-equity plans subject to section 226.5b. See the commentary to section 226.5b(h) regarding the collection of fees for home-equity plans covered by sec tion 226.5b.

• If the consumer pays a membership fee before receiving the Truth in Lending dis closures, or the consumer agrees to the im position of a membership fee at the time of application and the Truth in Lending dis closure statement is not given at that time, disclosures are timely as long as the con sumer, after receiving the disclosures, can reject the plan. The creditor must refund the membership fee if it has been paid, or clear the account if it has been debited to the consumer’s account.

• If the consumer receives a cash advance check at the same time the Truth in Lend ing disclosures are provided, disclosures are still timely if the consumer can, after receiving the disclosures, return the cash advance check to the creditor without obli gation (for example, without paying finance charges).

• Initial disclosures need not be given before the imposition of an application fee under section 226.4(c)(1).

• If, after receiving the disclosures, the con sumer uses the account, pays a fee, or ne gotiates a cash advance check, the creditor may consider the account not rejected for purposes of this section.

2. Reactivation o f suspended account. If an account is temporarily suspended (for exam ple, because the consumer has exceeded a credit limit, or because a credit card is re ported lost or stolen) and then is reactivated, no new initial disclosures are required. 3. Reopening closed account. If an account has been closed (for example, due to inactiv ity, cancellation, or expiration) and then is re opened, new initial disclosures are required. No new initial disclosures are required, how ever, when the account is closed merely to assign it a new number (for example, when a credit card is reported lost or stolen) and the “new” account then continues on the same terms.

4. Converting closed-end to open-end credit. If a closed-end credit transaction is converted to an open-end credit account under a written agreement with the consumer, the initial dis closures under section 226.6 must be given before the consumer becomes obligated on the open-end credit plan. (See the commentary to section 226.17 on converting open-end credit to closed-end credit.) 5. Balance transfers. A creditor that solicits the transfer by a consumer of outstanding bal ances from an existing account to a new open-end plan must comply with section 226.6 before the balance transfer occurs. Card issuers that are subject to the requirements of section 226.5a may establish procedures that comply with both sections in a single disclo sure statement.

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Regulation Z Commentary § 226.5 5(b)(2) Periodic Statements Paragraph 5(b)(2)(i) 1. Periodic statements not required. Periodic statements need not be sent in the following cases:

• If the creditor adjusts an account balance so that at the end of the cycle the balance is less than $ 1—so long as no finance charge has been imposed on the account for that cycle • If a statement was returned as undeliver able. If a new address is provided, howev er, within a reasonable time before the creditor must send a statement, the creditor must resume sending statements. Receiving the address at least 20 days before the end of a cycle would be a reasonable amount of time to prepare the statement for that cycle. For example, if an address is re ceived 22 days before the end of the June cycle, the creditor must send the periodic statement for the June cycle. (See section 226.13(a)(7).) 2. Termination of credit privileges. When an open-end account is terminated without being converted to closed-end credit under a written agreement, the creditor must continue to pro vide periodic statements to those consumers entitled to receive them under section 226.5(b)(2)(i) (for example, when an open-end credit plan ends and consumers are paying off outstanding balances) and must continue to follow all of the other open-end credit require ments and procedures in subpart B. Paragraph 5(b)(2)(H) 1. 14-day rule. The 14-day rule for mailing or delivering periodic statements does not apply if charges (for example, transaction or activity charges) are imposed regardless of the timing of a periodic statement. The 14-day rule does apply, for example:

• If current debits retroactively become sub ject to finance charges when the balance is not paid in full by a specified date • If charges other than finance charges will accrue when the consumer does not make timely payments (for example, late pay ment charges or charges for exceeding a credit limit) 2. Computer malfunction. Footnote 10 does not extend to the failure to provide a periodic statement because of computer malfunction. 3. Calling for periodic statements. The credi tor may permit consumers to call for their pe riodic statements but may not require them to do so. If the consumer wishes to pick up the statement and the plan has a free-ride period, the statement must be made available in ac cordance with the 14-day rule. 5(c) Basis of Disclosures and Use of Estimates 1. Legal obligation. The disclosures should reflect the credit terms to which the parties are legally bound at the time of giving the disclosures.

• The legal obligation is determined by ap plicable state or other law. • The fact that a term or contract may later be deemed unenforceable by a court on the basis of equity or other grounds does not, by itself, mean that disclosures based on that term or contract did not reflect the le gal obligation.

• The legal obligation normally is presumed to be contained in the contract that evi dences the agreement. But this may be re butted if another agreement between the parties legally modifies that contract. 2. Estimates—obtaining information. Disclo sures may be estimated when the exact infor mation is unknown at the time disclosures are made. Information is unknown if it is not rea sonably available to the creditor at the time disclosures are made. The “reasonably avail able” standard requires that the creditor, act ing in good faith, exercise due diligence in obtaining information. In using estimates, the creditor is not required to disclose the basis for the estimated figures, but may include such explanations as additional information. The creditor normally may rely on the repre sentations of other parties in obtaining infor mation. For example, the creditor might look

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§ 226.5 Regulation Z Commentary to insurance companies for the cost of insurance.

3. Estimates—redisclosure. If the creditor makes estimated disclosures, redisclosure is not required for that consumer, even though more accurate information becomes available before the first transaction. For example, in an open-end plan to be secured by real estate, the creditor may estimate the appraisal fees to be charged; such an estimate might reasonably be based on the prevailing market rates for simi lar appraisals. If the exact appraisal fee is de terminable after the estimate is furnished but before the consumer receives the first advance under the plan, no new disclosure is necessary.

5(d) Multiple Creditors; Multiple Consumers 1. Multiple creditors. Under section 226.5(d): • Creditors must choose which of them will make the disclosures • A single, complete set of disclosures must be provided, rather than partial disclosures from several creditors • All disclosures for the open-end credit plan must be given, even if the disclosing credi tor would not otherwise have been obligat ed to make a particular disclosure 2. Multiple consumers. Disclosures may be made to either obligor on a joint account. Dis closure responsibilities are not satisfied by giving disclosures to only a surety or guaran tor for a principal obligor or to an authorized user. In rescindable transactions, however, separate disclosures must be given to each consumer who has the right to rescind under section 226.15.

5(e) Effect of Subsequent Events 1. Events causing inaccuracies. Inaccuracies in disclosures are not violations if attributable to events occurring after disclosures are made. For example, when the consumer fails to ful fill a prior commitment to keep the collateral insured and the creditor then provides the cov erage and charges the consumer for it, such a change does not make the original disclosures inaccurate. The creditor may, however, be required to provide a new disclosure(s) under section 226.9(c).

2. Use of inserts. When changes in a credi tor’s plan affect required disclosures, the cred itor may use inserts with outdated disclosure forms. Any insert:

• Should clearly refer to the disclosure provi sion it replaces • Need not be physically attached or affixed to the basic disclosure statement • May be used only until the supply of out dated forms is exhausted References Statute: §§ 121(a) through (c), 122(a) and (b), 124, 127(a) and (b), and 163(a) Other sections: §§ 226.6, 226.7, and 226.9 Previous regulation: §§ 226.6(a) and (c) through (g), and 226.7(a) through (c) 1981 changes: Section 226.5 implements amendments to the act and reflects several simplifying changes to the regulation. The use of required terminology, except for “finance charge” and “annual percentage rate,” is no longer required. Type size requirements have been deleted. Initial and periodic statement disclosures may be multipage, so long as they constitute an integrated statement. New rules are provided for the basis of disclosures and for the use of estimates. The rules for credit plans involving multiple creditors or multiple consumers now provide that only one creditor need make the disclosures and that the disclo sures need be made to only one primarily lia ble consumer.

SECTION 226.5a—Credit and Charge Card Applications and Solicitations 1. General. Section 226.5a generally requires that credit disclosures be contained in applica tion forms and preapproved solicitations initi ated by a card issuer to open a credit or charge card account. (See the commentary to section 226.5a(a)(3) and 226.5a(e) for excep tions; see also section 226.2(a)(15) and ac companying commentary for the definition of charge card.) 2. Combining disclosures. The initial disclo

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Regulation Z Commentary § 226.5a sures required by section 226.6 do not substi tute for the disclosures required by section 226.5a; however, a card issuer may establish procedures so that a single disclosure state ment meets the requirements of both sections. For example, if a card issuer in complying with section 226.5a(e)(2) provides all the ap plicable disclosures required under section 226.6, in a form that the consumer may keep and in accordance with the other format and timing requirements for that section, the issuer satisfies the initial disclosure requirements under section 226.6 as well as the disclosure requirements of section 226.5a(e)(2). Or if, in complying with section 226.5a(c) or 226.5a(d)(2), a card issuer provides an inte grated document that the consumer may keep, and provides the section 226.5a disclosures (in a tabular format) along with the additional disclosures required under section 226.6 (pre sented outside of the table), the card issuer satisfies the requirements of both sections 226.5a and 226.6.

5a(a) General Rules 5a(a)(2) Form o f Disclosures 1. Prominent location. Certain of the required disclosures provided on or with an application or solicitation must be prominently lo cated—that is, readily noticeable to the con sumer. There are, however, no requirements that the disclosures be in any particular loca tion or in any particular type size or typeface. 2. Multiple accounts or varying terms. If a tabular format is required to be used, card is suers offering several types of accounts may disclose the various terms for the accounts in a single table or may provide a separate table for each account. Similarly, if rates or other terms vary from state to state, card issuers may list the states and the various disclosures in a single table or in separate tables. 3. Additional information. The table contain ing the disclosures required by section 226.5a should contain only the information required or permitted by this section. (See the com mentary to section 226.5a(b) for guidance on information permitted in the table.) Other credit information may be presented on or with an application or solicitation, provided such information appears outside the required table.

4. Location o f certain disclosures. A card is suer has the option of disclosing any of the fees in section 226.5a(b)(8) through (10) in the required table or outside the table. 5. Terminology.

In general, section 226.5a(a)(2)(iv) requires that the terminology used for the disclosures specified in section 226.5a(b) be consistent with that used in the disclosures under sections 226.6 and 226.7. This standard requires that the section 226.5a(b) disclosures be close in meaning to those under sections 226.6 and 226.7; how ever, the terminology used need not be identi cal. In addition, section 226.5a(a)(2)(i) re quires that the headings, content, and format of the tabular disclosures be substantially sim ilar, but need not be identical, to the tables in appendix G. A special rule applies to the grace-period disclosure, however; the term “grace period” must be used, either in the heading or in the text of the disclosure. 6. Deletion o f inapplicable disclosures. Gen erally, disclosures need only be given as ap plicable. Card issuers may, therefore, delete inapplicable headings and their corresponding boxes in the table. For example, if no transac tion fee is imposed for purchases, the disclo sure form may contain the heading “Transac tion fee for purchases” and a box showing “none,” or the heading and box may be de leted from the table. There is an exception for the grace-period disclosure, however; even if no grace period exists, that fact must be stated.

5a(a)(3) Exceptions 1. Coverage. Certain exceptions to the cover age of section 226.5a are stated in section 226.5a(a)(3); in addition, the requirements of section 226.5a do not apply to the following: • Lines of credit accessed solely by account numbers • Addition of a credit or charge card to an existing open-end plan 2. Noncoverage of “consumer-initiated” re quests. Applications provided to a consumer

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§ 226.5a Regulation Z Commentary upon request are not covered by section 226.5a, even if the request is made in re sponse to the card issuer’s invitation to apply for a card account. To illustrate, if a card is suer invites consumers to call a toll-free num ber or to return a response card to obtain an application, the application sent in response to the consumer’s request need not contain the disclosures required under section 226.5a. Similarly, if the card issuer invites consumers to call and make an oral application on the telephone, section 226.5a does not apply to the application made by the consumer. If, however, the card issuer calls a consumer or initiates a telephone discussion with a con sumer about opening a card account and con temporaneously takes an oral application, such applications are subject to section 226.5a, spe cifically section 226.5a(d). 3. General-purpose applications. The require ments of this section do not apply to generalpurpose applications unless the application, or material accompanying it, indicates that it can be used to open a credit or charge card account.

5a(a)(5) Certain Fees that Vary by State 1. Manner of disclosing range. If the card is suer discloses a range of fees instead of dis closing the amount of the fee imposed in each state, the range may be stated as the lowest authorized fee (zero, if there are one or more states where no fee applies) to the highest au thorized fee.

5a(b) Required Disclosures 5a(b)(l) Annual Percentage Rate 1. Periodic rate. The periodic rate, expressed as such, may be disclosed in the table in addi tion to the required disclosure of the corre sponding annual percentage rate. 2. Variable-rate accounts—definition. For pur poses of section 226.5a(b)(l), a variable-rate account exists when rate changes are part of the plan and are tied to an index or formula. (See the commentary to section 226.6(a)(2) for examples of variable-rate plans.) 3. Variable-rate accounts—rates in effect. For variable-rate disclosures in direct-mail applica tions and solicitations subject to section 226.5a(c), and in applications and solicitations made available to the general public subject to section 226.5a(e), the rules concerning accu racy of the annual percentage rate are stated in section 226.5a(b)(l)(ii). For variable-rate disclosures in telephone applications and so licitations subject to section 226.5a(d), the card issuer must provide an annual percentage rate currently applicable when oral disclosures are provided under section 226.5a(d)(l). For the alternate disclosures under section 226.5a(d)(2), the card issuer must provide the annual percentage rate in effect at the time the disclosures are mailed or delivered. A rate in effect also includes the rate as of a specified date (which rate is then updated from time to time, for example, each calendar month) or an estimated rate provided in accordance with section 226.5(c).

4. Variable-rate accounts—other disclosures. In describing how the applicable rate will be determined, the card issuer must identify the index or formula and disclose any margin or spread added to the index or formula in set ting the rate. The card issuer may disclose the margin or spread as a range of the highest and lowest margins that may be applicable to the account. A disclosure of any applicable limita tions on rate increases or decreases may also be included in the table.

5. Introductory rates—discounted rates. If the initial rate is temporary and is lower than the rate that will apply after the temporary rate expires, the card issuer must disclose the an nual percentage rate that would otherwise ap ply to the account. In a fixed-rate account, the card issuer must disclose the rate that will ap ply after the introductory rate expires. In a variable-rate account, the card issuer must dis close a rate based on the index or formula applicable to the account in accordance with the rules in section 226.5a(b)(l)(ii) and com ment 5a(b)(l)-3. An initial discounted rate may be provided in the table along with the rate required to be disclosed if the card issuer also discloses the time period during which the introductory rate will remain in effect. •6. Introductory rates—premium rates. If the

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Regulation Z Commentary § 226.5a initial rate is temporary and is higher than the permanently applicable rate, the card issuer must disclose the initial rate. The issuer may disclose in the table the rate that would other wise apply if the issuer also discloses the time period during which the initial rate will re main in effect.

5a(b)(2) Fees for Issuance or Availability 1. Membership fees. Membership fees for opening an account must be disclosed under this paragraph. A membership fee to join an organization that provides a credit or charge card as a privilege of membership must be disclosed only if the card is issued automati cally upon membership. Such a fee need not be disclosed if membership results merely in eligibility to apply for an account. 2. Enhancements. Fees for optional services in addition to basic membership privileges in a credit or charge card account (for example, travel insurance or card-registration services) should not be disclosed in the table if the ba sic account may be opened without paying such fees.

3. One-time fees. Disclosure of nonperiodic fees is limited to fees related to opening the account, such as one-time membership fees. The following are examples of fees that should not be disclosed in the table: • Fees for reissuing a lost or stolen card • Statement-reproduction fees • Application fees described in section 226.4(c)(1) 4. Waived or reduced fees. If fees required to be disclosed are waived or reduced for a lim ited time, the introductory fees or the fact of fee waivers may be provided in the table in addition to the required fees if the card issuer also discloses how long the fees or waivers will remain in effect.

5. Fees stated as annual amount. Fees im posed periodically must be stated as an annual total. For example, if a fee is imposed quar terly, the disclosures would state the total amount of the fees for one year. (See, how ever, the commentary to section 226.9(e) with regard to disclosure of such fees in renewal notices.) 5a(b)(4) Transaction Charges 1. Charges imposed by person other than card issuer. Charges imposed by a third party, such as a seller of goods, would not be dis closed under this section; the third party would be responsible for disclosing the charge under section 226.9(d)(1).

5a(b)(5) Grace Period 1. How disclosure is made. The card issuer may, but need not, refer to the beginning or ending point of any grace period and briefly state any conditions on the applicability of the grace period. For example, the grace period disclosure might read “30 days” or “30 days from the date of the periodic statement (pro vided you have paid your previous balance in full by the due date).”

5a(b)(6) Balance-Computation Method 1. Form of disclosure. In cases where the card issuer uses a balance-calculation method that is identified by name in the regulation, the card issuer may only disclose the name of the method in the table. In cases where the card issuer uses a balance-computation method that is not identified by name in the regulation, the disclosure in the table should clearly explain the method in as much detail as set forth in the descriptions of balance methods in section 226.5a(g). The explanation need not be as detailed as that required for the disclosures under section 226.6(a)(3). (See the commentary to section 226.5a(g) for guidance on particular methods.) 2. Determining the method. In determining the appropriate balance-computation method for purchases for disclosure purposes, the card issuer must assume that a purchase balance will exist at the end of any grace period. Thus, for example, if the average-daily-balance method will include new purchases or cover two billing cycles only if purchase bal ances are not paid within the grace period, the card issuer would disclose the name of the average-daily-balance method that includes new purchases or covers two billing cycles, respectively. The card issuer should not as sume the existence of a purchase balance,

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§ 226.5a Regulation Z Commentary however, in making other disclosures under section 226.5a(b).

5a(b)(7) Statement on Charge Card Payments 1. Applicability and content. The disclosure that charges are payable upon receipt of the periodic statement is applicable only to charge card accounts. In making this disclosure, the card issuer may make such modifications as are necessary to more accurately reflect the circumstances of repayment under the account. For example, the disclosure might read, “Charges are due and payable upon receipt of the periodic statement and must be paid no later than 15 days after receipt of such statement.”

5a(b)(8) Cash-Advance Fee 1. Applicability. The card issuer must disclose only those fees it imposes for a cash advance that are finance charges under section 226.4. For example, a charge for a cash advance at an automated teller machine (ATM) would be disclosed under section 226.5a(b)(8) if no similar charge is imposed for ATM transac tions not involving an extension of credit. (See comment 4(a)-5 for a description of such a fee.) 5a(b)(9) Late-Payment Fee 1. Applicability. The disclosure of the fee for a late payment includes only those fees that will be imposed for actual, unanticipated late payments. (See the commentary to section 226.4(c)(2) for additional guidance on latepayment fees.) 5a(b)(10) Over-the-Limit Fee 1. Applicability. The disclosure of fees for ex ceeding a credit limit does not include fees for other types of default or for services re lated to exceeding the limit. For example, no disclosure is required of fees for reinstating credit privileges or fees for the dishonor of checks on an account that, if paid, would cause the credit limit to be exceeded. 5a(c) Direct-Mail Applications and Solicitations 1. Accuracy. In general, disclosures in directmail applications and solicitations must be ac curate as of the time of mailing. (An accurate variable annual percentage rate is one in effect within 60 days before mailing.) 2. Mailed publications. Applications or solici tations contained in generally available publi cations mailed to consumers (such as sub scription magazines) are subject to the requirements applicable to “take-ones” in sec tion 226.5a(e), rather than the direct-mail re quirements of section 226.5a(c). However, if a primary purpose of a card issuer’s mailing is to offer credit or charge card accounts—for example, where a card issuer “prescreens” a list of potential cardholders using credit crite ria, and then mails to the targeted group its catalog containing an application or a solicita tion for a card account—the direct-mail rules apply. In addition, a card issuer may use a single application form as a “take-one” (in racks in public locations, for example) and for direct mailings, if the card issuer complies with the requirements of section 226.5a(c) even when the form is used as a “takeone”—that is, by presenting the required sec tion 226.5a disclosures in a tabular format. When used in a direct mailing, the credit-term disclosures must be accurate as of the mailing date, whether or not the section 226.5a (e)(l)(ii) and (iii) disclosures are included; when used in a take-one, the disclosures must be accurate for as long as the takeone forms remain available to the public if the section 226.5a(e)(l)(ii) and (iii) disclosures are omit ted. (If those disclosures are included in the take-one, the credit term disclosures need only be accurate as of the printing date.) 5a(d) Telephone Applications and Solicitations 1. Coverage. This paragraph applies if: • A telephone conversation between a card issuer and consumer may result in the issu ance of a card as a consequence of an issu er-initiated offer to open an account for which the issuer does not require any ap

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Regulation Z Commentary § 226.5a plication (that is, a “preapproved” tele phone solicitation).

• The card issuer initiates the contact and at the same time takes application information over the telephone.

This paragraph does not apply to: • Telephone applications initiated by the con sumer.

• Situations where no card will be is sued—because, for example, the consumer indicates that he or she does not want the card, or the card issuer decides either dur ing the telephone conversation or later not to issue the card.

5a(e) Applications and Solicitations Made Available to General Public 1. Coverage. Applications and solicitations made available to the general public include what are commonly referred to as “take-one” applications typically found at counters in banks and retail establishments, as well as ap plications contained in catalogs, magazines and other generally available publications. In the case of credit unions, this paragraph ap plies to applications and solicitations to open card accounts made available to those in the general field of membership. 2. Cross-selling. If a card issuer invites a con sumer to apply for a credit or charge card (for example, where the issuer engages in crossselling), an application provided to the con sumer at the consumer’s request is not consid ered an application made available to the gen eral public and therefore is not subject to section 226.5a(e). For example, the following are not covered:

• A consumer applies in person for a car loan at a financial institution and the loan officer invites the consumer to apply for a credit or charge card account; the consumer accepts the invitation.

• An employee of a retail establishment, in the course of processing a sales transaction using a bank credit card, asks a customer if he or she would like to apply for the retail er’s credit or charge card; the customer re sponds affirmatively.

3. Toll-free telephone number. If a card issuer, in complying with any of the disclosure op tions of section 226.5a(e), provides a tele phone number for consumers to call to obtain credit information, the number must be tollfree for nonlocal calls made from an area code other than the one used in the card is suer’s dialing area. Alternatively, a card issuer may provide any telephone number that al lows a consumer to call for information and reverse the telephone charges. 5a(e)(l) Disclosure o f Required Credit Information 1. Date of printing. Disclosure of the month and year fulfills the requirement to disclose the date an application was printed. 2. Form of disclosures. The disclosures speci fied in section 226.5a(e)(l)(ii) and (iii) may appear either in or outside the table containing the required credit disclosures. 5a(e)(2) Inclusion of Certain Initial Disclosures 1. Accuracy of disclosures. The disclosures required by section 226.5a(e)(2) generally must be current as of the time they are made available to the public. Disclosures are consid ered to be made available at the time they are placed in public locations (in the case of “take-ones”) or mailed to consumers (in the case of publications).

2. Accuracy—exception. If a card issuer dis closes all the information required by section 226.5a(e)(l)(ii) on the application or solicita tion, the disclosures under section 226.5a(e)(2) need only be current as of the date of print ing. (A current variable annual percentage rate would be one in effect within 30 days before printing.) 5a(e)(3) No Disclosure of Credit Information 1. When disclosure option available. A card issuer may use this option only if the issuer does not include on or with the application or solicitation any statement that refers to the credit disclosures required by section 226.5a(b). Statements such as “no annual fee,” “low interest rate,” “favorable rates,” and “low costs” are deemed to refer to the

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§ 226.5a Regulation Z Commentary required credit disclosures and, therefore, may not be included on or with the solicitation or application, if the card issuer chooses to use this option.

5a(e)(4) Prompt Response to Requests for Information 1. Prompt disclosure. Information is promptly disclosed if it is given within 30 days of a consumer’s request for information but in no event later than delivery of the credit or charge card.

2. Information disclosed. When a consumer requests credit information, card issuers need not provide all the required credit disclosures in all instances. For example, if disclosures have been provided in accordance with section 226.5a(e)(l) or (2) and a consumer calls or writes a card issuer to obtain information about changes in the disclosures, the issuer need only provide the items of information that have changed from those previously dis closed on or with the application or solicita tion. If a consumer requests information about particular items, the card issuer need only pro vide the requested information. If, however, the card issuer has made disclosures in accor dance with the option in section 226.5a(e)(3) and a consumer calls or writes the card issuer requesting information about costs, all the re quired disclosure information must be given. 3. Manner o f response. A card issuer’s re sponse to a consumer’s request for credit in formation may be provided orally or in writ ing, regardless of the manner in which the consumer’s request is received by the issuer. Furthermore, the card issuer may provide the information listed in either section 226.5a(e)(l) or (2). Information provided in writing need not be in a tabular format. 5a(f) Special Charge Card Rule—Card Issuer and Person Extending Credit Not the Same Person 1. Duties of charge card issuer. Although the charge card issuer is not required to disclose information about the underlying open-end credit plan if the card issuer meets the condi tions set forth in section 226.5a(f), the card issuer must disclose the information relating to the charge card plan itself. 2. Duties o f creditor maintaining open-end plan. Section 226.5a does not impose disclo sure requirements on the creditor that main tains the underlying open-end credit plan. This is the case even though the creditor offering the open-end credit plan may be considered an agent of the charge card issuer. (See comment 2(a)(7)-1.) 3. Form of disclosures. The disclosures re quired by section 226.5a(f) may appear either in or outside the table containing the required credit disclosures in circumstances where a tabular format is required.

5a(g) Balance-Computation Methods Defined 1. Daily-balance method. Card issuers using the daily-balance method may disclose it us ing the name “average daily balance (includ ing new purchases)” or “average daily bal ance (excluding new purchases),”

as appropriate. Alternatively, such card issuers may explain the method. (See comment 7(e)-5 for a discussion of the daily-balance method.) 2. Two-cycle average-daily-balance methods. The “two-cycle average-daily-balance” meth ods described in section 226.5a(g)(2)(i) and (ii) include those methods in which the aver age daily balances for two billing cycles may be added together to compute the finance charge. Such methods also include those in which a periodic rate is applied separately to the balance in each cycle, and the resulting finance charges are added together. The method is a “two-cycle average daily bal ance” even if the finance charge is based on both the current- and prior-cycle balances only under certain circumstances, such as when purchases during a prior cycle were carried over into the current cycle and no finance charge was assessed during the prior cycle. Furthermore, the method is a “two-cycle aver age-daily-balance method” if the balances for both the current and prior cycles are average daily balances, even if those balances are fig ured differently. For example, the name “twocycle average-daily-balance (excluding new purchases)” should be used to describe a

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Regulation Z Commentary § 226.5b method in which the finance charge for the current cycle, figured on an average daily bal ance excluding new purchases, will be added to the finance charge for the prior cycle, fig ured on an average daily balance of only new purchases during that prior cycle. SECTION 226.5b—Requirements for Home-Equity Plans 1. Coverage. This section applies to all openend credit plans secured by the consumer’s “dwelling,” as defined in section 226.2(a)(19), and is not limited to plans secured by the con sumer’s principal dwelling. (See the commen tary to section 226.3(a), which discusses whether transactions are consumer or business-purpose credit, for guidance on whether a home-equity plan is subject to Regulation Z.) 2. Changes to home-equity plans entered into on or after November 7, 1989. Section 226.9(c) applies if, by written agreement under section 226.5b(f)(3)(iii), a creditor changes the terms of a home-equity plan—entered into on or after November 7, 1989—at or before its scheduled expiration, for example, by renewing a plan on different terms. A new plan results, however, if the plan is renewed (with or without changes to the terms) after the scheduled expiration. The new plan is subject to all open-end credit rules, including sections 226.5b, 226.6, and 226.15.

3. Transition rules and renewals o f preexist ing plans. The requirements of this section do not apply to home-equity plans entered into before November 7, 1989. The requirements of this section also do not apply if the original consumer, on or after November 7, 1989, re news a plan entered into prior to that date (with or without changes to the terms). If, on or after November 7, 1989, a security interest in the consumer’s dwelling is added to a line of credit entered into before that date, the sub stantive restrictions of this section apply for the remainder of the plan, but no new disclo sures are required under this section. 4. Disclosure o f repayment phase—applica bility o f requirements. Some plans provide in the initial agreement for a period during which no further draws may be taken and re payment of the amount borrowed is made. All of the applicable disclosures in this section must be given for the repayment phase. Thus, for example, a creditor must provide payment information about the repayment phase as well as about the draw period, as required by sec tion 266.5b(d)(5). If the rate that will apply during the repayment phase is fixed at a known amount, the creditor must provide an annual percentage rate under section 226.5b(d)(6) for that phase. If, however, a creditor uses an index to determine the rate that will apply at the time of conversion to the repayment phase—even if the rate will thereafter be fixed—the creditor must provide the information in section 226.5b(d)(12), as applicable.

5. Payment terms—applicability o f closed-end provisions and substantive rules. All payment terms that are provided for in the initial agree ment are subject to the requirements of sub part B and not subpart C of the regulation. Payment terms that are subsequently added to the agreement may be subject to subpart B or to subpart C, depending on the circumstances. The following examples apply these general rules to different situations: • If the initial agreement provides for a re payment phase or for other payment terms such as options permitting conversion of part or all of the balance to a fixed rate during the draw period, these terms must be disclosed pursuant to sections 226.5b and 226.6, and not under subpart C. Fur thermore, the creditor must continue to provide periodic statements under section 226.7 and comply with other provisions of subpart B (such as the substantive require ments of section 226.5b(f)) throughout the plan, including the repayment phase. • If the consumer and the creditor enter into an agreement during the draw period to re pay all or part of the principal balance on different terms (for example, with a fixed rate of interest) and the amount of avail able credit will be replenished as the prin cipal balance is repaid, the creditor must continue to comply with subpart B. For ex ample, the creditor must continue to pro vide periodic statements and comply with

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§ 226.5b Regulation Z Commentary the substantive requirements of section 226.5b(f) throughout the plan. • If the consumer and creditor enter into an agreement during the draw period to repay all or part of the principal balance and the amount of available credit will not be re plenished as the principal balance is repaid, the creditor must give closed-end credit disclosures pursuant to subpart C for that new agreement. In such cases, subpart B, including the substantive rules, does not apply to the closed-end credit transaction, although it will continue to apply to any remaining open-end credit available under the plan.

6. Spreader clause. When a creditor holds a mortgage or deed of trust on the consumer’s dwelling and that mortgage or deed of trust contains a “spreader clause” (also known as a “dragnet” or cross-collateralization clause), subsequent occurrences such as the opening of an open-end plan are subject to the rules ap plicable to home-equity plans to the same de gree as if a security interest were taken di rectly to secure the plan, unless the creditor effectively waives its security interest under the spreader clause with respect to the subse quent open-end credit extensions. 5b(a) Form of Disclosures 5b(a)(l) General 1. Written disclosures. The disclosures re quired under this section must be clear and conspicuous and in writing, but need not be in a form the consumer can keep. (See the com mentary to section 226.6(e) for special rules when disclosures required under section 226.5b(d) are given in a retainable form.) 2. Disclosure o f annual percentage rate— more-conspicuous requirement. As provided in section 226.5(a)(2), when the term “annual percentage rate” is required to be disclosed with a number, it must be more conspicuous than other required disclosures. 3. Segregation of disclosures. While most of the disclosures must be grouped together and segregated from all unrelated information, the creditor is permitted to include information that explains or expands on the required dis closures, including, for example: • Any prepayment penalty • How a substitute index may be chosen • Actions the creditor may take short of ter minating and accelerating an outstanding balance • Renewal terms • Rebate of fees An example of information that does not ex plain or expand on the required disclosures and thus cannot be included is the creditor’s underwriting criteria, although the creditor could provide such information separately from the required disclosures. 4. Method of providing disclosures. A creditor may provide a single disclosure form for all of its home-equity plans, as long as the dis closure describes all aspects of the plans. For example, if the creditor offers several payment options, all such options must be disclosed. (See, however, the commentary to section 226.5b(d)(5)(iii) and 226.5b(d)(12)(x) and (xi) for disclosure requirements relating to these provisions.) If any aspects of a plan are linked together, the creditor must disclose clearly the relationship of the terms to each other. For example, if the consumer can only obtain a particular payment option in conjunction with a certain variable-rate feature, this fact must be disclosed. A creditor has the option of pro viding separate disclosure forms for multiple options or variations in features. For example, a creditor that offers different payment options for the draw period may prepare separate dis closure forms for the two payment options. A creditor using this alternative, however, must include a statement on each disclosure form that the consumer should ask about the credi tor’s other home-equity programs. (This dis closure is required only for those programs available generally to the public. Thus, if the only other programs available are employee preferred-rate plans, for example, the creditor would not have to provide this statement.) A creditor that receives a request for information about other available programs must provide the additional disclosures as soon as reasona bly possible.

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Regulation Z Commentary § 226.5b 5b(a)(2) Precedence o f Certain Disclosures 1. Precedence rule. The list of conditions pro vided at the creditor’s option under section 226.5b(d)(4)(iii) need not precede the other disclosures.

5b(b) Time of Disclosures 1. Mail and telephone applications. If the creditor sends applications through the mail, the disclosures and a brochure must accom pany the application. If an application is taken over the telephone, the disclosures and bro chure may be delivered or mailed within three business days of taking the application. If an application is mailed to the consumer follow ing a telephone request, however, the creditor also must send the disclosures and a brochure along with the application.

2. General-purpose applications. The disclo sures and a brochure need not be provided when a general-purpose application is given to a consumer unless ( 1 ) the application or materials accompanying it indicate that it can be used to apply for a home-equity plan or (2 ) the application is provided in response to a consumer’s specific inquiry about a home-eq uity plan. On the other hand, if a generalpurpose application is provided in response to a consumer’s specific inquiry only about credit other than a home-equity plan, the dis closures and brochure need not be provided even if the application indicates it can be used for a home-equity plan, unless it is accompa nied by promotional information about homeequity plans.

3. Publicly available applications. Some cred itors make applications for home-equity plans, such as “take-ones,” available without the need for a consumer to request them. These applications must be accompanied by the dis closures and a brochure, such as by attaching the disclosures and brochure to the application form.

4. Response cards. A creditor may solicit con sumers for its home-equity plan by mailing a “response card” which the consumer returns to the creditor to indicate interest in the plan. If the only action taken by the creditor upon receipt of the response card is to send the consumer an application form or to telephone the consumer to discuss the plan, the creditor need not send the disclosures and brochure with the response card.

5. Denial or withdrawal of application. In sit uations where footnote 10a permits the credi tor a three-day delay in providing disclosures and the brochure, if the creditor determines within that period that an application will not be approved, the creditor need not provide the consumer with the disclosures or brochure. Similarly, if the consumer withdraws the ap plication within this three-day period, the creditor need not provide the disclosures or brochure.

6. Intermediary agent or broker. In determin ing whether or not an application involves an “intermediary agent or broker” as discussed in footnote 10a, creditors should consult the provisions in comment 19(b)-3. 5b(c) Duties of Third Parties 1. Disclosure requirements. Although third parties who give applications to consumers for home-equity plans must provide the brochure required under section 226.5b(e) in all cases, such persons need provide the disclosures re quired under section 226.5b(d) only in certain instances. A third party has no duty to obtain disclosures about a creditor’s home-equity plan or to create a set of disclosures based on what it knows about a creditor’s plan. If, however, a creditor provides the third party with disclosures along with its application form, the third party must give the disclosures to the consumer with the application form. The duties under this section are those of the third party; the creditor is not responsible for ensuring that a third party complies with those obligations. If an intermediary agent or broker takes an application over the telephone or re ceives an application contained in a magazine or other publication, footnote 10a permits that person to mail the disclosures and brochure within three business days of receipt of the application. (See the commentary to section 226.5b(h) about imposition of nonrefundable fees.)

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§ 226.5b Regulation Z Commentary 5b(d) Content of Disclosures 1. Disclosures given as applicable. The dis closures required under this section need be made only as applicable. Thus, for example, if negative amortization cannot occur in a homeequity plan, a reference to it need not be made.

2. Duty to respond to requests for informa tion. If the consumer, prior to the opening of a plan, requests information as suggested in the disclosures (such as the current index value or margin), the creditor must provide this information as soon as reasonably possi ble after the request.

5b(d)(l) Retention o f Information 1. When disclosure not required. The creditor need not disclose that the consumer should make or otherwise retain a copy of the disclo sures if they are retainable—for example, if the disclosures are not part of an application that must be returned to the creditor to apply for the plan.

5b(d)(2) Conditions for Disclosed Terms Paragraph 5b(d)(2)(i) 1. Guaranteed terms. The requirement that the creditor disclose the time by which an ap plication must be submitted to obtain the dis closed terms does not require the creditor to guarantee any terms. If a creditor chooses not to guarantee any terms, it must disclose that all of the terms are subject to change prior to opening the plan. The creditor also is permit ted to guarantee some terms and not others, but must indicate which terms are subject to change.

2. Date for obtaining disclosed terms. The creditor may disclose either a specific date or a time period for obtaining the disclosed terms. If the creditor discloses a time period, the consumer must be able to determine from the disclosure the specific date by which an application must be submitted to obtain any guaranteed terms. For example, the disclosure might read, “To obtain the following terms, you must submit your application within 60 days after the date appearing on this disclosure,” provided the disclosure form also shows the date.

Paragraph 5b(d)(2)(ii) 1. Relation to other provisions. Creditors should consult the rules in section 226.5b(g) regarding refund of fees.

5b(d)(4) Possible Actions by Creditor Paragraph 5b(d)(4)(i) 1. Fees imposed upon termination. This dis closure applies only to fees (such as penalty or prepayment fees) that the creditor imposes if it terminates the plan prior to normal expi ration. The disclosure does not apply to fees that are imposed either when the plan expires in accordance with the agreement or if the consumer terminates the plan prior to its scheduled maturity. In addition, the disclosure does not apply to fees associated with collec tion of the debt, such as attorneys’ fees and court costs, or to increases in the annual per centage rate linked to the consumer’s failure to make payments. The actual amount of the fee need not be disclosed.

2. Changes specified in the initial agreement. If changes may occur pursuant to section 226.5b(f)(3)(i), a creditor must state that cer tain changes will be implemented as specified in the initial agreement.

Paragraph 5b(d)(4)(iii) 1. Disclosure o f conditions. In making this disclosure, the creditor may provide a high lighted copy of the document that contains such information, such as the contract or se curity agreement. The relevant items must be distinguished from the other information con tained in the document. For example, the creditor may provide a cover sheet that specif ically points out which contract provisions contain the information, or may mark the rele vant items on the document itself. As an alter native to disclosing the conditions in this manner, the creditor may simply describe the conditions using the language in section 226.5b(0(2)(i)—(iii), 226.5b(f)(3)(i) (regarding freezing the line when the maximum annual percentage rate is reached), and 226.5b

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Regulation Z Commentary § 226.5b (f)(3)(vi) or language that is substantially sim ilar. The condition contained in section 226.5b(f)(2)(iv) need not be stated. In describ ing specified changes that may be imple mented during the plan, the creditor may pro vide a disclosure such as: “Our agreement permits us to make certain changes to the terms of the line at specified time or upon the occurrence of specified events.” 2. Form o f disclosure. The list of conditions under section 226.5b(d)(4)(iii) may appear with the segregated disclosures or apart from them. If the creditor elects to provide the list of conditions with the segregated disclosures, the list need not comply with the precedence rule in section 226.5b(a)(2). 5b(d)(5) Payment Terms Paragraph 5b(d)(5)(i) 1. Length of the plan. The combined length of the draw period and any repayment period need not be stated. If the length of the repay ment phase cannot be determined because, for example, it depends on the balance outstand ing at the beginning of the repayment period, the creditor must state that the length is deter mined by the size of the balance. If the length of the plan is indefinite (for example, because there is no time limit on the period during which the consumer can take advances), the creditor must state that fact. 2. Renewal provisions. If, under the credit agreement, a creditor retains the right to re view a line at the end of the specified draw period and determine whether to renew or ex tend the draw period of the plan, the possibil ity of renewal or extension—regardless of its likelihood—should be ignored for purposes of the disclosures. For example, if an agreement provides that the draw period is five years and that the creditor may renew the draw period for an additional five years, the possibility of renewal should be ignored and the draw pe riod should be considered five years. (See the commentary accompanying section 226.9(c)(1) dealing with change in terms requirements.) Paragraph 5b(d)(5)(ii) 1. Determination o f the minimum periodic payment. This disclosure must reflect how the minimum periodic payment is determined, but need only describe the principal and interest components of the payment. Other charges that may be part of the payment (as well as the balance-computation method) may, but need not, be described under this provision. 2. Fixed-rate and term-payment options dur ing draw period. If the home-equity plan per mits the consumer to repay all or part of the balance during the draw period at a fixed rate (rather than a variable rate) and over a speci fied time period, this feature must be dis closed. To illustrate, a variable-rate plan may permit a consumer to elect during a ten-year draw period to repay all or a portion of the balance over a three-year period at a fixed rate. The creditor must disclose the rules relat ing to this feature including the period during which the option can be selected, the length of time over which repayment can occur, any fees imposed for such a feature, and the spe cific rate or a description of the index and margin that will apply upon exercise of this choice. For example, the index and margin disclosure might state, “If you choose to con vert any portion of your balance to a fixed rate, the rate will be the highest prime rate published in the Wall Street Journal that is in effect at the date of conversion plus a mar gin.” If the fixed rate is to be determined ac cording to an index, it must be one that is outside the creditor’s control and is publicly available in accordance with section 226.5b(f)(l). The effect of exercising the op tion should not be reflected elsewhere in the disclosures, such as in the historical example required in section 226.5b(d)(12)(xi). 3. Balloon payments. In programs where the occurrence of a balloon payment is possible, the creditor must disclose the possibility of a balloon payment even if such a payment is uncertain or unlikely. In such cases, the dis closure might read, “Your minimum payments may not be sufficient to fully repay the princi pal that is outstanding on your line. If they are not, you will be required to pay the entire outstanding balance in a single payment.” In programs where a balloon payment will occur, such as programs with interest-only payments during the draw period and no repayment pe-

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§ 226.5b Regulation Z Commentary riod, the disclosures must state that fact. For example, the disclosure might read, “Your minimum payments will not repay the princi pal that is outstanding on your line. You will be required to pay the entire outstanding bal ance in a single payment.” In making this dis closure, the creditor is not required to use the term “balloon payment.” The creditor also is not required to disclose the amount of the bal loon payment. (See, however, the requirement under section 226.5b(d)(5)(iii).) The balloonpayment disclosure does not apply in cases where repayment of the entire outstanding bal ance would occur only as a result of termina tion and acceleration. The creditor also need not make a disclosure about balloon payments if the final payment could not be more than twice the amount of other minimum payments under the plan.

Paragraph 5b(d)(5)(iii) 1. Minimum-periodic-payment example. In disclosing the payment example, the creditor may assume that the credit limit as well as the outstanding balance is $ 10,000 if such an as sumption is relevant to calculating payments. (If the creditor only offers lines of credit for less than $ 10,000, the creditor may assume an outstanding balance of $5,000 instead of $10,000 in making this disclosure.) The exam ple should reflect the payment comprised only of principal and interest. Creditors may pro vide an additional example reflecting other charges that may be included in the payment, such as credit-insurance premiums. Creditors may assume that all months have an equal number of days, that payments are collected in whole cents, and that payments will fall on a business day even though they may be due on a non-business day. For variable-rate plans, the example must be based on the last rate in the historical example required in section 226.5b(d)(12)(xi), or a more recent rate. In cases where the last rate shown in the histori cal example is different from the index value and margin (for example, due to a rate cap), creditors should calculate the rate by using the index value and margin. A discounted rate may not be considered a more recent rate in calculating this payment example for either variable- or fixed-rate plans. 2. Representative examples. In plans with multiple payment options within the draw pe riod or within any repayment period, the cred itor may provide representative examples as an alternative to providing examples for each payment option. The creditor may elect to provide representative payment examples based on three categories of payment options. The first category consists of plans that permit minimum payment of only accrued finance charges (“interest-only” plans). The second category includes plans in which a fixed per centage or a fixed fraction of the outstanding balance or credit limit (for example, 2 percent of the balance or 1/180th of the balance) is used to determine the minimum payment. The third category includes all other types of mini mum-payment options, such as a specified dollar amount plus any accrued finance charges. Creditors may classify their mini mum-payment arrangements within one of these three categories even if other features exist, such as varying lengths of a draw or repayment period, required payment of pastdue amounts, late charges, and minimum dol lar amounts. The creditor may use a single example within each category to represent the payment options in that category. For exam ple, if a creditor permits minimum payments of 1 percent, 2 percent, 3 percent or 4 percent of the outstanding balance, it may pick one of these four options and provide the example required under section 226.5b(d)(5)(iii) for that option alone. The example used to re present a category must be an option com monly chosen by consumers, or a typical or representative example. (See the commentary to section 226.5b(d)(12)(x) and (xi) for a dis cussion of the use of representative examples for making those disclosures. Creditors using a representative example within each category must use the same example for purposes of the disclosures under section 226.5b(d)(5)(iii) and 226.5b(d)(12)(x) and (xi).) Creditors may use representative examples under section 226.5b(d)(5) only with respect to the payment example required under paragraph (d)(5)(iii). Creditors must provide a full narrative description of all payment options under sec tion 226.5b(d)(5)(i) and (ii). 3. Examples for draw and repayment periods.

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Regulation Z Commentary § 226.5b Separate examples must be given for the draw and repayment periods unless the payments are determined the same way during both pe riods. In setting forth payment examples for any repayment period under this section (and the historical example under section 226.5b(d)(12)(xi)), creditors should assume a $10,000 advance is taken at the beginning of the draw period and is reduced according to the terms of the plan. Creditors should not assume an additional advance is taken at any time, including at the beginning of any repay ment period.

4. Reverse mortgages. Reverse mortgages, also know as reverse-annuity or home-equityconversion mortgages, in addition to permit ting the consumer to obtain advances, may in volve the disbursement of monthly advances to the consumer for a fixed period or until the occurrence of an event such as the consumer’s death. Repayment of the reverse mortgage (generally a single payment of principal and accrued interest) may be required to be made at the end of the disbursements or, for exam ple, upon the death of the consumer. In dis closing these plans, creditors must apply the following rules, as applicable: • If the reverse mortgage has a specified pe riod for advances and disbursements but re payment is due only upon occurrence of a future event such as the death of the con sumer, the creditor must assume that dis bursements will be made until they are scheduled to end. The creditor must as sume repayment will occur when disburse ments end (or within a period following the final disbursement which is not longer than the regular interval between disburse ments). This assumption should be used even though repayment may occur before or after the disbursements are scheduled to end. In such cases, the creditor may in clude a statement such as “The disclosures assume that you will repay the line at the time the draw period and our payments to you end. As provided in your agreement, your repayment may be required at a dif ferent time.” The single payment should be considered the “ minimum periodic pay ment” and consequently would not be treated as a balloon payment. The example of the minimum payment under section 226.5b(d)(5)(iii) should assume a single $ 10,000 draw.

• If the reverse mortgage has neither a speci fied period for advances or disbursements nor a specified repayment date and these terms will be determined solely by refer ence to future events, including the con sumer’s death, the creditor may assume that the draws and disbursements will end upon the consumer’s death (estimated by using actuarial tables, for example) and that repayment will be required at the same time (or within a period following the date of the final disbursement which is not longer than the regular interval for dis bursements). Alternatively, the creditor may base the disclosures upon another fu ture event it estimates will be most likely to occur first. (If terms will be determined by reference to future events which do not include the consumer’s death, the creditor must base the disclosures upon the occur rence of the event estimated to be most likely to occur first.) • In making the disclosures, the creditor must assume that all draws and disburse ments and accrued interest will be paid by the consumer. For example, if the note has a nonrecourse provision providing that the consumer is not obligated for an amount greater than the value of the house, the creditor must nonetheless assume that the full amount to be drawn or disbursed will be repaid. In this case, however, the credi tor may include a statement such as “The disclosures assume full repayment of the amount advanced plus accrued interest, al though the amount you may be required to pay is limited by your agreement.” • Some reverse mortgages provide that some or all of the appreciation in the value of the property will be shared between the consumer and the creditor. The creditor must disclose the appreciation feature, in cluding describing how the creditor’s share will be determined, any limitations, and when the feature may be exercised. 5b(d)(6) Annual Percentage Rate 1. Preferred-rate plans. If a creditor offers a

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§ 226.5b Regulation Z Commentary preferential fixed-rate plan in which the rate will increase a specified amount upon the oc currence of a specified event, the creditor must disclose the specific amount the rate will increase.

5b(d)(7) Fees Imposed by Creditor 1. Applicability. The fees referred to in sec tion 226.5b(d)(7) include items such as appli cation fees, points, annual fees, transaction fees, fees to obtain checks to access the plan, and fees imposed for converting to a repay ment phase that is provided for in the original agreement. This disclosure includes any fees that are imposed by the creditor to use or maintain the plan, whether the fees are kept by the creditor or a third party. For example, if a creditor requires an annual credit report on the consumer and requires the consumer to pay this fee to the creditor or directly to the third party, the fee must be specifically stated. Third-party fees to open the plan that are ini tially paid by the consumer to the creditor may be included in this disclosure or in the disclosure under section 226.5b(d)(8). 2. Manner o f describing fees. Charges may be stated as an estimated dollar amount for each fee, or as a percentage of a typical or repre sentative amount of credit. The creditor may provide a stepped fee schedule in which a fee will increase a specified amount at a specified date. (See the discussion contained in the commentary to section 226.5b(f)(3)(i).) 3. Fees not required to be disclosed. Fees that are not imposed to open, use, or maintain a plan, such as fees for researching an account, photocopying, paying late, stopping payment, having a check returned, exceeding the credit limit, or closing out an account do not have to be disclosed under this section. Credit report and appraisal fees imposed to investigate whether a condition permitting a freeze con tinues to exist—as discussed in the commen tary to section 226.5b(f)(3)(vi)—are not re quired to be disclosed under this section or section 226.5b(d)(8).

4. Rebates o f closing costs. If closing costs are imposed they must be disclosed, regard less of whether such costs may be rebated later (for example, rebated to the extent of any interest paid during the first year of the plan).

5. Terms used in disclosure. Creditors need not use the terms “finance charge” or “other charge” in describing the fees imposed by the creditor under this section or those imposed by third parties under section 226.5b(d)(8). 5b(d)(8) Fees Imposed by Third Parties to Open a Plan 1. Applicability. Section 226.5b(d)(8) applies only to fees imposed by third parties to open the plan. Thus, for example, this section does not require disclosure of a fee imposed by a government agency at the end of a plan to release a security interest. Fees to be disclosed include appraisal, credit report, government agency, and attorneys’ fees. In cases where property insurance is required by the creditor, the creditor either may disclose the amount of the premium or may state that property insur ance is required. For example, the disclosure might state, “You must carry insurance on the property that secures this plan.” 2. Itemization of third-party fees. In all cases creditors must state the total of third-party fees as a single dollar amount or a range ex cept that the total need not include costs for property insurance if the creditor discloses that such insurance is required. A creditor has two options with regard to providing the more detailed information about third-party fees. Creditors may provide a statement that the consumer may request more specific cost in formation about third-party fees from the creditor. As an alternative to including this statement, creditors may provide an itemiza tion of such fees (by type and amount) with the early disclosures. Any itemization pro vided upon the consumer’s request need not include a disclosure about property insurance. 3. Manner o f describing fees. A good faith estimate of the amount of fees must be pro vided. Creditors may provide, based on a typi cal or representative amount of credit, a range for such fees or state the dollar amount of such fees. Fees may be expressed on a unitcost basis, for example, $5 per $1,000 of credit.

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Regulation Z Commentary § 226.5b 4. Rebates o f third-party fees. Even if fees imposed by third parties may be rebated, they must be disclosed. (See the commentary to section 226.5b(d)(7).) 5b(d)(9) Negative Amortization 1. Disclosure required. In transactions where the minimum payment will not or may not be sufficient to cover the interest that accrues on the outstanding balance, the creditor must dis close that negative amortization will or may occur. This disclosure is required whether or not the unpaid interest is added to the out standing balance upon which interest is com puted. A disclosure is not required merely be cause a loan calls for nonamortizing or partially amortizing payments. 5b(d)(10) Transaction Requirements 1. Applicability. A limitation on automated teller machine usage need not be disclosed under this paragraph unless that is the only means by which the consumer can obtain funds.

5b(d)(12) Disclosures for Variable-Rate Plans 1. Variable-rate provisions. Sample forms in appendix G -l4 provide illustrative guidance on the variable-rate rules.

Paragraph 5b(d)(12)(iv) 1. Determination of annual percentage rate. If the creditor adjusts its index through the addi tion of a margin, the disclosure might read, “Your annual percentage rate is based on the index plus a margin.” The creditor is not re quired to disclose a specific value for the margin.

Paragraph 5b(d)(I2)(viii) 1. Preferred-rate provisions. This paragraph requires disclosure of preferred-rate provi sions, where the rate will increase upon the occurrence of some event, such as the borrower-employee leaving the creditor’s employ or the consumer closing an existing deposit account with the creditor.

2. Provisions on conversion to fixed rates. The commentary to section 226.5b(d)(5)(ii) discusses the disclosure requirements for op tions permitting the consumer to convert from a variable rate to a fixed rate. Paragraph 5b(d)(12)(ix) 1. Periodic limitations on increases in rates. The creditor must disclose any annual limita tions on increases in the annual percentage rate. If the creditor bases its rate limitation on 12 monthly billing cycles, such a limitation should be treated as an annual cap. Rate limi tations imposed on less than an annual basis must be stated in terms of a specific amount of time. For example, if the creditor imposes rate limitations on only a semiannual basis, this must be expressed as a rate limitation for a six-month time period. If the creditor does not impose periodic limitations (annual or shorter) on rate increases, the fact that there are no annual rate limitations must be stated. 2. Maximum limitations on increases in rates. The maximum annual percentage rate that may be imposed under each payment option over the term of the plan (including the draw period and any repayment period provided for in the initial agreement) must be provided. The creditor may disclose this rate as a spe cific number (for example, 18 percent) or as a specific amount above the initial rate. For ex ample, this disclosure might read, “The maxi mum annual percentage rate that can apply to your line will be 5 percentage points above your initial rate.” If the creditor states the maximum rate as a specific amount above the initial rate, the creditor must include a state ment that the consumer should inquire about the rate limitations that are currently available. If an initial discount is not taken into account in applying maximum rate limitations, that fact must be disclosed. If separate overall lim itations apply to rate increases resulting from events such as the exercise of a fixed-rate conversion option or leaving the creditor’s employ, those limitations also must be stated. Limitations do not include legal limits in the nature of usury or rate ceilings under state or federal statutes or regulations. 3. Form of disclosures. The creditor need not disclose each periodic or maximum rate limi tation that is currently available. Instead, the

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§ 226.5b Regulation Z Commentary creditor may disclose the range of the lowest and highest periodic and maximum rate limi tations that may be applicable to the creditor’s home-equity plans. Creditors using this alter native must include a statement that the con sumer should inquire about the rate limitations that are currently available. Paragraph 5b(d)(12)(x) 1 . Maximum-rate-payment example. In calcu lating the payment creditors should assume the maximum rate is in effect. Any discounted or premium initial rates or periodic rate limi tations should be ignored for purposes of this disclosure. If a range is used to disclose the maximum cap under section 226.5b(d) ( 12)(ix), the highest rate in the range must be used for the disclosure under this paragraph. As an alternative to making disclosures based on each payment option, the creditor may choose a representative example within the three categories of payment options upon which to base this disclosure. (See the com mentary to section 226.5b(d)(5).) However, separate examples must be provided for the draw period and for any repayment period un less the payment is determined the same way in both periods. Creditors should calculate the example for the repayment period based on an assumed $10,000 balance. (See the commen tary to section 226.5b(d)(5) for a discussion of the circumstances in which a creditor may use a lower outstanding balance.) 2. Time the maximum rate could be reached. In stating the date or time when the maximum rate could be reached, creditors should assume the rate increases as rapidly as possible under the plan. In calculating the date or time, credi tors should factor in any discounted or pre mium initial rates and periodic-rate limita tions. This disclosure must be provided for the draw phase and any repayment phase. Credi tors should assume the index and margin shown in the last year of the historical exam ple (or a more recent rate) is in effect at the beginning of each phase.

Paragraph 5b(d)(12)(xi) 1. Index movement. Index values and annual percentage rates must be shown for the entire 15 years of the historical example and must be based on the most recent 15 years. The example must be updated annually to reflect the most recent 15 years of index values as soon as reasonably possible after the new in dex value becomes available. If the values for an index have not been available for 15 years, a creditor need only go back as far as the values have been available and may start the historical example at the year for which val ues are first available.

2. Selection of index values. The historical ex ample must reflect the method of choosing in dex values for the plan. For example, if an average of index values is used in the plan, averages must be used in the example, but if an index value as of a particular date is used, a single index value must be shown. The creditor is required to assume one date (or one period, if an average is used) within a year on which to base the history of index values. The creditor may choose to use index values as of any date or period as long as the index value as of this date or period is used for each year in the example. Only one index value per year need be shown, even if the plan provides for adjustments to the annual percentage rate or payment more than once in a year. In such cases, the creditor can assume that the index rate remained constant for the full year for the purpose of calculating the an nual percentage rate and payment. 3. Selection of margin. A value for the margin must be assumed in order to prepare the ex ample. A creditor may select a representative margin that it has used with the index during the six months preceding preparation of the disclosures and state that the margin is one that it has used recently. The margin selected may be used until the creditor annually up dates the disclosure form to reflect the most recent 15 years of index values. 4. Amount of discount or premium. In reflect ing any discounted or premium initial rate, the creditor may select a discount or premium that it has used during the six months preceding preparation of the disclosures, and should dis close that the discount or premium is one that the creditor has used recently. The discount or premium should be reflected in the example

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Regulation Z Commentary § 226.5b for as long as it is in effect. The creditor may assume that a discount or premium that would have been in effect for any part of a year was in effect for the full year for purposes of re flecting it in the historical example. 5. Rate limitations. Limitations on both peri odic and maximum rates must be reflected in the historical example. If ranges of rate limita tions are provided under section 226.5b (d)(1 2 )(ix), the highest rates provided in those ranges must be used in the example. Rate lim itations that may apply more often than annu ally should be treated as if they were annual limitations. For example, if a creditor imposes a 1 percent cap every six months, this should be reflected in the example as if it were a 2 percent annual cap.

6. Assumed advances. The creditor should as sume that the $ 10,000 balance is an advance taken at the beginning of the first billing cycle and is reduced according to the terms of the plan, and that the consumer takes no subse quent draws. As discussed in the commentary to section 226.5b(d)(5), creditors should not assume an additional advance is taken at the beginning of any repayment period. If applica ble, the creditor may assume the $10,000 is both the advance and the credit limit. (See the commentary to section 226.5b(d)(5) for a dis cussion of the circumstances in which a credi tor may use a lower outstanding balance.) 7. Representative payment options. The credi tor need not provide an historical example for all of its various payment options, but may select a representative payment option within each of the three categories of payments upon which to base its disclosure. (See the com mentary to section 226.5b(d)(5).) 8. Payment information. The payment figures in the historical example must reflect all sig nificant program terms. For example, features such as rate and payment caps, a discounted initial rate, negative amortization, and rate carryover must be taken into account in calcu lating the payment figures if these would have applied to the plan. The historical example should include payments for as much of the length of the plan as would occur during a 15-year period. For example: • If the draw period is 10 years and the re payment period is 15 years, the example should illustrate the entire 10-year draw pe riod and the first 5 years of the repayment period.

• If the length of the draw period is 15 years and there is a 15-year repayment phase, the historical example must reflect the pay ments for the 15-year draw period and would not show any of the repayment peri od. No additional historical example would be required to reflect payments for the re payment period.

• If the length of the plan is less than 15 years, payments in the historical example need only be shown for the number of years in the term. In such cases, however, the creditor must show the index values, margin and annual percentage rates and continue to reflect all significant plan terms such as rate limitations for the entire 15 years.

A creditor need show only a single payment per year in the example, even though pay ments may vary during a year. The calcula tions should be based on the actual paymentcomputation formula, although the creditor may assume that all months have an equal number of days. The creditor may assume that payments are made on the last day of the bill ing cycle, the billing date or the payment-due date, but must be consistent in the manner in which the period used to illustrate payment information is selected. Information about bal loon payments and remaining balance may, but need not, be reflected in the example. 9. Disclosures for repayment period. The his torical example must reflect all features of the repayment period, including the appropriate index values, margin, rate limitations, length of the repayment period, and payments. For example, if different indices are used during the draw and repayment periods, the index values for that portion of the 15 years that reflect the repayment period must be the val ues for the appropriate index. 10. Reverse mortgages. The historical exam ple for reverse mortgages should reflect 15 years of index values and annual percentage rates, but the payment column should be

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§ 226.5b Regulation Z Commentary blank until the year that the single payment will be made, assuming that payment is esti mated to occur within 15 years. (See the com mentary to section 226.5b(d)(5) for a discus sion of reverse mortgages.) 5b(e) Brochure 1. Substitutes. A brochure is a suitable substi tute for the Board’s home-equity brochure if it is, at a minimum, comparable to the Board’s brochure in substance and comprehensiveness. Creditors are permitted to provide more de tailed information than is contained in the Board’s brochure.

2. Effect of third-party delivery of brochure. If a creditor determines that a third party has provided a consumer with the required bro chure pursuant to section 226.5b(c), the credi tor need not give the consumer a second brochure.

5b(f) Limitations on Home-Equity Plans 1. Coverage. Section 226.5b(f) limits both ac tions that may be taken and language that may be included in contracts, and applies to any assignee or holder as well as to the origi nal creditor. The limitations apply to the draw period and any repayment period, and to any renewal or modification of the original agreement.

Paragraph 5b(f)(l) 1. External index. A creditor may change the annual percentage rate for a plan only if the change is based on an index outside the credi tor’s control. Thus, a creditor may not make rate changes based on its own prime rate or cost of funds and may not reserve a contrac tual right to change rates at its discretion. A creditor is permitted, however, to use a pub lished prime rate, such as that in the Wall Street Journal, even if the bank’s own prime rate is one of several rates used to establish the published rate.

2. Publicly available. The index must be available to the public. A publicly available index need not be published in a newspaper, but it must be one the consumer can independently obtain (by telephone, for example) and use to verify rates imposed under the plan. 3. Provisions not prohibited. This paragraph does not prohibit rate changes that are specifi cally set forth in the agreement. For example, stepped-rate plans, in which specified rates are imposed for specified periods, are permissible. In addition, preferred-rate provisions, in which the rate increases by a specified amount upon the occurrence of a specified event, also are permissible.

Paragraph 5b(f)(2) 1. Limitations on termination and accelera tion. In general, creditors are prohibited from terminating and accelerating payment of the outstanding balance before the scheduled expi ration of a plan. However, creditors may take these actions in the four circumstances speci fied in section 226.5b(f)(2). Creditors are not permitted to specify in their contracts any other events that allow termination and accel eration beyond those permitted by the regula tion. Thus, for example, an agreement may not provide that the balance is payable on de mand nor may it provide that the account will be terminated and the balance accelerated if the rate cap is reached.

2. Other actions permitted. If an event per mitting termination and acceleration occurs, a creditor may instead take actions short of ter minating and accelerating. For example, a creditor could temporarily or permanently sus pend further advances, reduce the credit limit, change the payment terms, or require the con sumer to pay a fee. A creditor also may pro vide in its agreement that a higher rate or higher fees will apply in circumstances under which it would otherwise be permitted to ter minate the plan and accelerate the balance. A creditor that does not immediately terminate an account and accelerate payment or take an other permitted action may take such action at a later time, provided one of the conditions permitting termination and acceleration exists at that time.

Paragraph 5b(f)(2)(i) 1. Fraud or material misrepresentation. A creditor may terminate a plan and accelerate

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Regulation Z Commentary § 226.5b the balance if there has been fraud or material misrepresentation by the consumer in connec tion with the plan. This exception includes fraud or misrepresentation at any time, either during the application process or during the draw period and any repayment period. What constitutes fraud or misrepresentation is deter mined by applicable state law and may in clude acts of omission as well as overt acts, as long as any necessary intent on the part of the consumer exists.

Paragraph 5b(f)(2)(ii) 1. Failure to meet repayment terms. A credi tor may terminate a plan and accelerate the balance when the consumer fails to meet the repayment terms provided for in the agree ment. However, a creditor may terminate and accelerate under this provision only if the con sumer actually fails to make payments. For example, a creditor may not terminate and ac celerate if the consumer, in error, sends a pay ment to the wrong location, such as a branch rather than the main office of the creditor. If a consumer files for or is placed in bankruptcy, the creditor may terminate and accelerate under this provision if the consumer fails to meet the repayment terms of the agreement. This section does not override any state or other law that requires a right to cure notice, or otherwise places a duty on the creditor before it can terminate a plan and accelerate the balance.

Paragraph 5b(f)(2)(iii) 1. Impairment o f security. A creditor may ter minate a plan and accelerate the balance if the consumer’s action or inaction adversely affects the creditor’s security for the plan, or any right of the creditor in that security. Action or inaction by third parties does not, in itself, permit the creditor to terminate and accelerate. 2. Examples. A creditor may terminate and accelerate, for example, if: • the consumer transfers title to the property or sells the property without the permission of the creditor • the consumer fails to maintain required in surance on the dwelling • the consumer fails to pay taxes on the property • the consumer permits the filing of a lien senior to that held by the creditor • the sole consumer obligated on the plan dies ■ the property is taken through eminent do main • a prior lienholder forecloses By contrast, the filing of a judgment against the consumer would permit termination and acceleration only if the amount of the judg ment and collateral subject to the judgment is such that the creditor’s security is adversely affected. If the consumer commits waste or otherwise destructively uses or fails to main tain the property such that the action ad versely affects the security, the plan may be terminated and the balance accelerated. Illegal use of the property by the consumer would permit termination and acceleration if it sub jects the property to seizure. If one of two consumers obligated on a plan dies, the credi tor may terminate the plan and accelerate the balance if the security is adversely affected. If the consumer moves out of the dwelling that secures the plan and that action adversely af fects the security, the creditor may terminate a plan and accelerate the balance. Paragraph 5b(f)(3) 1. Scope o f provision. In general, a creditor may not change the terms of a plan after it is opened. For example, a creditor may not in crease any fee or impose a new fee once the plan has been opened, even if the fee is charged by a third party, such as a credit re porting agency, for a service. The change-ofterms prohibition applies to all features of a plan, not only those required to be disclosed under this section. For example, this provision applies to charges imposed for late payment, although this fee is not required to be dis closed under section 226.5b(d)(7). 2.

Charges not covered. There are three charges not covered by this provision. A cred itor may pass on increases in taxes since such charges are imposed by a governmental body and are beyond the control of the creditor. In addition, a creditor may pass on increases in

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§ 226.5b Regulation Z Commentary premiums for property insurance that are ex cluded from the finance charge under section 226.4(d)(2), since such insurance provides a benefit to the consumer independent of the use of the line and is often maintained notwith standing the line. A creditor also may pass on increases in premiums for credit insurance that are excluded from the finance charge under section 226.4(d)(1), since the insurance is vol untary and provides a benefit to the consumer. Paragraph 5b(f)(3)(i) 1. Changes provided for in agreement. A creditor may provide in the initial agreement that further advances will be prohibited or the credit line reduced during any period in which the maximum annual percentage rate is reached. A creditor also may provide for other specific changes to take place upon the occur rence of specific events. Both the triggering event and the resulting modification must be stated with specificity. For example, in homeequity plans for employees, the agreement could provide that a specified higher rate or margin will apply if the borrower’s employ ment with the creditor ends. A contract could contain a stepped-rate or stepped-fee schedule providing for specified changes in the rate or the fees on certain dates or after a specified period of time. A creditor also may provide in the initial agreement that it will be entitled to a share of the appreciation in the value of the property as long as the specific appreciation share and the specific circumstances which re quire the payment of it are set forth. A con tract may permit a consumer to switch among minimum-payment options during the plan. 2. Prohibited provisions. A creditor may not include a general provision in its agreement permitting changes to any or all of the terms of the plan. For example, creditors may not include boilerplate language in the agreement stating that they reserve the right to change the fees imposed under the plan. In addition, a creditor may not include any “triggering events” or responses that the regulation ex pressly addresses in a manner different from that provided in the regulation. For example, an agreement may not provide that the margin in a variable-rate plan will increase if there is a material change in the consumer’s financial circumstances, because the regulation specifies that temporarily freezing the line or lowering the credit limit is the permissible response to a material change in the consumer’s financial circumstances. Similarly a contract cannot contain a provision allowing the creditor to freeze a line due to an insignificant decline in property value since the regulation allows that response only for a significant decline. Paragraph 5b(f)(3)(ii) 1. Substitution o f index. A creditor may change the index and margin used under the plan if the original index becomes unavaila ble, as long as historical fluctuations in the original and replacement indices were substan tially similar, and as long as the replacement index and margin will produce a rate similar to the rate that was in effect at the time the original index became unavailable. If the re placement index is newly established and therefore does not have any rate history, it may be used if it produces a rate substantially similar to the rate in effect when the original index became unavailable.

Paragraph 5b(f)(3)(iii) 1. Changes by written agreement. A creditor may change the terms of a plan if the con sumer expressly agrees in writing to the change at the time it is made. For example, a consumer and a creditor could agree in writ ing to change the repayment terms from inter est-only payments to payments that reduce the principal balance. The provisions of any such agreement are governed by the limitations in section 226.5b(f). For example, a mutual agreement could not provide for future annual percentage rate changes based on the move ment of an index controlled by the creditor or for termination and acceleration under circum stances other than those specified in the regu lation. By contrast, a consumer could agree to a new credit limit for the plan, although the agreement could not permit the creditor to later change the credit limit except by a sub sequent written agreement or in the circum stances described in section 226.5b(f)(3)(vi). 2. Written agreement. The change must be agreed to in writing by the consumer. Credi

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Regulation Z Commentary § 226.5b tors are not permitted to assume consent be cause the consumer uses an account, even if use of an account would otherwise constitute acceptance of a proposed change under state law.

Paragraph 5b(f)(3)(iv) 1. Beneficial changes. After a plan is opened, a creditor may make changes that unequivo cally benefit the consumer. Under this provi sion, a creditor may offer more options to consumers, as long as existing options remain. For example, a creditor may offer the con sumer the option of making lower monthly payments or could increase the credit limit. Similarly, a creditor wishing to extend the length of the plan on the same terms may do so. Creditors are permitted to temporarily re duce the rate or fees charged during the plan (though a change-in-terms notice may be re quired under section 226.9(c) when the rate or fees are returned to their original level). Cred itors also may offer an additional means of access to the line, even if fees are associated with using the device, provided the consumer retains the ability to use prior access devices on the original terms.

Paragraph 5b(f)(3)(v) 1. Insignificant changes. A creditor is permit ted to make insignificant changes after a plan is opened. This rule accommodates operational and similar problems, such as changing the address of the creditor for purposes of sending payments. It does not permit a creditor to change a term such as a fee charged for late payments.

2. Examples of insignificant changes. Credi tors may make minor changes to features such as the billing cycle date, the payment-due date (as long as the consumer does not have a di minished grace period if one is provided), and the day of the month on which index values are measured to determine changes to the rate for variable-rate plans. A creditor also may change its rounding practice in accordance with the tolerance rules set forth in section 226.14 (for example, stating an exact APR of 14.3333 percent as 14.3 percent, even if it had previously been stated as 14.33 percent). A creditor may change the balance-computation method it uses only if the change produces an insignificant difference in the finance charge paid by the consumer. For example, a creditor may switch from using the average-daily-balance method (including new transactions) to the daily-balance method (including new transactions).

Paragraph 5b(J)(3)(vi) 1. Suspension o f credit or reduction of credit limit. A creditor may prohibit additional ex tensions of credit or reduce the credit limit in the circumstances specified in this section of the regulation. In addition, as discussed under section 226.5b(f)(3)(i), a creditor may contrac tually reserve the right to take such actions when the maximum annual percentage rate is reached. A creditor may not take these actions under other circumstances, unless the creditor would be permitted to terminate the line and accelerate the balance as described in section 226.5b(f)(2). The creditor’s right to reduce the credit limit does not permit reducing the limit below the amount of the outstanding balance if this would require the consumer to make a higher payment.

2. Temporary nature o f suspension or reduc tion. Creditors are permitted to prohibit addi tional extensions of credit or reduce the credit limit only while one of the designated circum stances exists. When the circumstance justify ing the creditor’s action ceases to exist, credit privileges must be reinstated, assuming that no other circumstance permitting such action exists at that time.

3. Imposition o f fees. If not prohibited by state law, a creditor may collect only bona fide and reasonable appraisal and credit-report fees if such fees are actually incurred in in vestigating whether the condition permitting the freeze continues to exist. A creditor may not, in any circumstances, impose a fee to re instate a credit line once the condition has been determined not to exist. 4. Reinstatement o f credit privileges. Creditors are responsible for ensuring that credit privi leges are restored as soon as reasonably possi ble after the condition that permitted the cred itor’s action ceases to exist. One way a

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§ 226.5b Regulation Z Commentary creditor can meet this responsibility is to monitor the line on an ongoing basis to deter mine when the condition ceases to exist. The creditor must investigate the condition fre quently enough to assure itself that the condi tion permitting the freeze continues to exist. The frequency with which the creditor must investigate to determine whether a condition continues to exist depends upon the specific condition permitting the freeze. As an alterna tive to such monitoring, the creditor may shift the duty to the consumer to request reinstate ment of credit privileges by providing a notice in accordance with section 226.9(c)(3). A creditor may require a reinstatement request to be in writing if it notifies the consumer of this requirement on the notice provided under sec tion 226.9(c)(3). Once the consumer requests reinstatement, the creditor must promptly in vestigate to determine whether the condition allowing the freeze continues to exist. Under this alternative, the creditor has a duty to in vestigate only upon the consumer’s request. 5. Suspension o f credit privileges following request by consumer. A creditor may honor a specific request by a consumer to suspend credit privileges. If the consumer later re quests that the creditor reinstate credit privi leges, the creditor must do so provided no other circumstance justifying a suspension ex ists at that time. If two or more consumers are obligated under a plan and each has the abil ity to take advances, the agreement may per mit any of the consumers to direct the creditor not to make further advances. A creditor may require that all persons obligated under a plan request reinstatement.

6. Significant decline defined. What consti tutes a significant decline for purposes of sec tion 226.5b(f)(3)(vi)(A) will vary according to individual circumstances. In any event, if the value of the dwelling declines such that the initial difference between the credit limit and the available equity (based on the property’s appraised value for purposes of the plan) is reduced by 50 percent, this constitutes a sig nificant decline in the value of the dwelling for purposes of section 226.5b(f)(3)(vi)(A). For example, assume that a house with a first mortgage of $50,000 is appraised at $100,000 and the credit limit is $30,000. The difference between the credit limit and the available eq uity is $20,000, half of which is $10,000. The creditor could prohibit further advances or re duce the credit limit if the value of the prop erty declines from $100,000 to $90,000. This provision does not require a creditor to obtain an appraisal before suspending credit privi leges, although a significant decline must oc cur before suspension can occur. 7. Material change in financial circumstances. Two conditions must be met for section 226.5b(f)(3)(vi)(B) to apply. First, there must be a “material change” in the consumer’s fi nancial circumstances, such as a significant decrease in the consumer’s income. Second, as a result of this change, the creditor must have a reasonable belief that the consumer will be unable to fulfill the payment obliga tions of the plan. A creditor may, but does not have to, rely on specific evidence (such as the failure to pay other debts) in concluding that the second part of the test has been met. A creditor may prohibit further advances or re duce the credit limit under this section if a consumer files for or is placed in bankruptcy. 8. Default o f a material obligation. Creditors may specify events that would qualify as a default of a material obligation under section 226.5b(f)(3)(vi)(C). For example, a creditor may provide that default of a material obliga tion will exist if the consumer moves out of the dwelling or permits an intervening lien to be filed that would take priority over future advances made by the creditor. 9. Government limits on the annual percent age rate. Under section 226.5b(f)(3) (vi)(D), a creditor may prohibit further advances or re duce the credit limit if, for example, a state usury law is enacted which prohibits a credi tor from imposing the agreed-upon annual percentage rate.

5b(g) Refund of Fees 1. Refund of fees required. If any disclosed term, including any term provided upon re quest pursuant to section 226.5b(d), changes between the time the early disclosures are pro vided to the consumer and the time the plan is opened, and the consumer as a result decides to not enter into the plan, a creditor must re

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Regulation Z Commentary § 226.6 fund all fees paid by the consumer in connec tion with the application. All fees, including credit-report fees and appraisal fees, must be refunded whether such fees are paid to the creditor or directly to third parties. A con sumer is entitled to a refund of fees under these circumstances whether or not terms are guaranteed by the creditor under section 226.5b(d)(2)(i).

2. Variable-rate plans. The right to a refund of fees does not apply to changes in the an nual percentage rate resulting from fluctua tions in the index value in a variable-rate plan. Also, if the maximum annual percentage rate is expressed as an amount over the initial rate, the right to refund of fees would not ap ply to changes in the cap resulting from fluc tuations in the index value. 3. Changes in terms. If a term, such as the maximum rate, is stated as a range in the early disclosures, and the term ultimately ap plicable to the plan falls within that range, a change does not occur for purposes of this section. If, however, no range is used and the term is changed (for example, a rate cap of 6 rather than 5 percentage points over the initial rate), the change would permit the consumer to obtain a refund of fees. If a fee imposed by the creditor is stated in the early disclosures as an estimate and the fee changes, the con sumer could elect to not enter into the agree ment and would be entitled to a refund of fees. On the other hand, if fees imposed by third parties are disclosed as estimates and those fees change, the consumer is not entitled to a refund of fees paid in connection with the application. Creditors must, however, use the best information reasonably available in pro viding disclosures about such fees. 4. Timing of refunds and relation to other provisions. The refund of fees must be made as soon as reasonably possible after the credi tor is notified that the consumer is not enter ing into the plan because of the changed term, or that the consumer wants a refund of fees. The fact that an application fee may be re funded to some applicants under this provision does not render such fees finance charges under section 226.4(c)(1) of the regulation. 5b(h) Imposition of Nonrefundable Fees 1. Collection o f fees after consumer receives disclosures. A fee may be collected after the consumer receives the disclosures and bro chure and before the expiration of three days, although the fee must be refunded if, within three days of receiving the required informa tion, the consumer decides not to enter into the agreement. In such a case, the consumer must be notified that the fee is refundable for three days. The notice must be clear and con spicuous and in writing, and may be included with the disclosures required under section 226.5b(d) or as an attachment to them. If dis closures and brochure are mailed to the con sumer, footnote lOd of the regulation provides that a nonrefundable fee may not be imposed until six business days after the mailing. 2. Collection o f fees before consumer receives disclosures. An application fee may be col lected before the consumer receives the dis closures and brochure (for example, when an application contained in a magazine is mailed in with an application fee) provided that it re mains refundable until three business days af ter the consumer receives the section 226.5b disclosures. No other fees except a refundable membership fee may be collected until after the consumer receives the disclosures required under section 226.5b.

3. Relation to other provisions. A fee col lected before disclosures are provided may be come nonrefundable except that, under section 226.5b(g), it must be refunded if the consumer elects not to enter into the plan because of a change in terms. (Of course, all fees must be refunded if the consumer later rescinds under section 226.15.) SECTION 226.6— Initial Disclosure Statement 1. Consistent terminology. Language on the initial and periodic disclosure statements must be close enough in meaning to enable the consumer to relate the two sets of disclosures; however, the language need not be identical. For example, in making the disclosure under section 226.6(a)(3), the creditor may refer to the “outstanding balance at the end of the

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§ 226.6 Regulation Z Commentary billing cycle,” while the disclosure for section 226.7(i) refers to the “ending balance” or “new balance.”

2. Separate initial disclosures permitted. In a certain open-end credit program involving more than one creditor—a card issuer of travel-and-entertainment cards and a financial institution—the consumer has the option to pay the card issuer directly or to transfer to the financial institution all or part of the amount owing. In this case, the creditors may send separate initial disclosure statements. 6(a) Finance Charge Paragraph 6(a)(1) 1. When finance charges accrue. Creditors may provide a general explanation about fi nance charges beginning to run and need not disclose a specific date. For example, a disclo sure that the consumer has 30 days from the closing date to pay the new balance before finance charges will accrue on the account would describe when finance charges begin to run.

2. Free-ride periods. In disclosing whether or not a free-ride period exists, the creditor need not use “free period,” “free-ride period,” or any other particular descriptive phrase or term. For example, a statement that “the fi nance charge begins on the date the transac tion is posted to your account” adequately discloses that no free-ride period exists. In the same fashion, a statement that “ finance charges will be imposed on any new purchases only if they are not paid in full within 25 days after the close of the billing cycle” indicates that a free-ride period exists in the interim.

Paragraph 6(a)(2) 1. Range of balances. The range of balances disclosure is inapplicable:

• If only one periodic rate may be applied to the entire account balance • If only one periodic rate may be applied to the entire balance for a feature (for exam ple, cash advances), even though the bal ance for another feature (purchases) may be subject to two rates (a 1.5 percent peri odic rate on purchase balances of $0-$500, while balances above $500 are subject to a 1 percent periodic rate). Of course, the creditor must give a range of balances dis closure for the purchase feature. 2. Variable-rate disclosures—coverage. This section covers open-end credit plans under which rate changes are part of the plan and are tied to an index or formula. A creditor would use variable-rate disclosures (and thus be excused from the requirement of giving a change-in-terms notice when rate increases oc cur as disclosed) for plans involving rate changes such as the following: • Rate changes that are tied to the rate the creditor pays on its six-month money mar ket certificates • Rate changes that are tied to Treasury bill rates • Rate changes that are tied to changes in the creditor’s commercial lending rate In contrast, the creditor’s contract reservation to increase the rate without reference to such an index or formula (for example, a plan that simply provides that the creditor reserves the right to raise its rates) would not be consid ered a variable-rate plan for Truth in Lending disclosure purposes. (See the rule in section 226.5b(f)(l) applicable to home-equity plans, however, which prohibits “rate-reservation” clauses.) Moreover, an open-end credit plan in which the employee receives a lower rate con tingent upon employment (that is, with the rate to be increased upon termination of em ployment) is not a variable-rate plan. (With regard to such employee preferential-rate plans, however, see comment 9(c)-1, which provides that if the specific change that would occur is disclosed on the initial disclosure statement, no notice of a change in terms need be given when the term later changes as disclosed.) 3. Variable-rate plan—rate(s) in effect. In dis closing the rate(s) in effect at the time of the initial disclosures (as is required by section 226.6(a)(2)), the creditor may use an insert showing the current rate; may give the rate as of a specified date and then update the disclo sure from time to time, for example, each cal

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Regulation Z Commentary § 226.6 endar month; or may disclose an estimated rate under section 226.5(c). 4. Variable-rate plan—additional disclosures required. In addition to disclosing the rates in effect at the time of the initial disclosures, the disclosures under footnote 12 also must be made.

5. Variable-rate plan—index. The index to be used must be clearly identified; the creditor need not give, however, an explanation of how the index is determined or provide in structions for obtaining it. 6. Variable-rate plan—circumstances for in crease. Circumstances under which the rate(s) may increase include, for example: • An increase in the Treasury bill rate • An increase in the Federal Reserve dis count rate The creditor must disclose when the increase will take effect; for example: • “An increase will take effect on the day that the Treasury bill rate increases,” or • “An increase in the Federal Reserve dis count rate will take effect on the first day of the creditor’s billing cycle.” 7. Variable-rate plan—limitations on increase. In disclosing any limitations on rate increases, limitations such as the maximum increase per year or the maximum increase over the dura tion of the plan must be disclosed. When there are no limitations, the creditor may, but need not, disclose that fact. (A maximum in terest rate must be included in dwelling-se cured open-end credit plans under which the interest rate may be changed. See section 226.30 and the commentary to that section.) Legal limits such as usury or rate ceilings under state or federal statutes or regulations need not be disclosed. Examples of limitations that must be disclosed include: • “The rate on the plan will not exceed 25 percent annual percentage rate.” • “Not more than '/2 percent increase in the annual percentage rate per year will occur.”

8. Variable-rate plan—effects o f increase. Ex amples of effects that must be disclosed include:

• Any requirement for additional collateral if the annual percentage rate increases beyond a specified rate • Any increase in the scheduled minimum periodic payment amount 9. Variable-rate plan—change-in-terms notice not required. No notice of a change in terms is required for a rate increase under a varia ble-rate plan as defined in comment 6(a)(2 )-2 . 10. Discounted variable-rate plans. In some variable-rate plans, creditors may set an initial interest rate that is not determined by the in dex or formula used to make later interest rate adjustments. Typically, this initial rate is lower than the rate would be if it were calcu lated using the index or formula. • For example, a creditor may calculate in terest rates according to a formula using the six-month Treasury bill rate plus a 2 percent margin. If the current Treasury bill rate is 10 percent, the creditor may forgo the 2 percent spread and charge only 10 percent for a limited time, instead of set ting an initial rate of 12 percent, or the creditor may disregard the index or formula and set the initial rate at 9 percent. • When creditors use an initial rate that is not calculated using the index or formula for later rate adjustments, the initial disclo sure statement should reflect: (1 ) the initial rate (expressed as a periodic rate and a corresponding annual percentage rate), to gether with a statement of how long it will remain in effect; (2) the current rate that would have been applied using the index or formula (also expressed as a periodic rate and a corresponding annual percentage rate); and (3) the other variable-rate infor mation required by footnote 12 to section 226.6(a)(2).

• In disclosing the current periodic and annu al percentage rates that would be applied using the index or formula, the creditor may use any of the disclosure options de scribed in comment 6(a)(2)-3.

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§ 226.6 Regulation Z Commentary Paragraph 6(a)(3) 1. Explanation o f balance-computation method. A shorthand phrase such as “previous-balance method” does not suffice in ex plaining the balance computation method. (See appendix G-l for model clauses.) 2. Allocation o f payments. Disclosure about the allocation of payments and other credits is not required. For example, the creditor need not disclose that payments are applied to late charges, overdue balances, and finance charges before being applied to the principal balance; or in a multifeatured plan, that payments are applied first to finance charges, then to purchases, and then to cash advances. (See comment 7-1 for definition of multifeatured plan.) Paragraph 6(a)(4) 1. Finance charges. In addition to disclosing the periodic rate(s) under section 226.6(a) (2), disclosure is required of any other type of fi nance charge that may be imposed, such as minimum, fixed, transaction, and activity charges; required insurance; or appraisal or credit report fees (unless excluded from the finance charge under section 226.4(c)(7).) 6(b) Other Charges 1. General; examples o f other charges. Under section 226.6(b), significant charges related to the plan (that are not finance charges) must also be disclosed. For example: i.

Late-payment and over-the-credit-limit charges.

ii.

Fees for providing documentary evidence of transactions requested under section 226.13 (Billing-Error Resolution). iii. Charges imposed in connection with real estate transactions such as title, appraisal, and credit-report fees (see section 226.4(c)(7)).

iv. A tax imposed on the credit transaction by a state or other governmental body, such as a documentary stamp tax on cash advances (see the commentary to section 226.4(a)).

A membership or participation fee for a package of services that includes an openend credit feature, unless the fee is re quired whether or not the open-end credit feature is included. For example, a mem bership fee to join a credit union is not an “other charge,” even if membership is required to apply for credit. vi. Automated teller machine (ATM) charges described in comment 4(a)-5 that are not finance charges.

vii. Charges imposed for the termination of an open-end credit plan.

2. Exclusions. The following are examples of charges that are not “other charges”: • Fees charged for documentary evidence of transactions for income tax purposes • Amounts payable by a consumer for collec tion activity after default; attorney’s fees, whether or not automatically imposed; foreclosure costs; post-judgment interest rates imposed by law; and reinstatement or reissuance fees • Premiums for voluntary credit life or disa bility insurance, or for property insurance, that are not part of the finance charge • Application fees under section 226.4(c)(1) • A monthly service charge for a checking account with overdraft protection that is applied to all checking accounts, whether or not a credit feature is attached • Charges for submitting as payment a check that is later returned unpaid (see commen tary to section 226.4(c)(2) • Charges imposed on a cardholder by an in stitution other than the card issuer for the use of the other institution’s ATM in a shared or interchange system (See also comment 7(b)-2.) • Taxes and filing or notary fees excluded from the finance charge under section 226.4(e) 6(c) Security Interests 1. General. Disclosure is not required about the type of security interest, or about the cred itor’s rights with respect to that collateral. In other words, the creditor need not expand on the term “security interest.” Also, since no specified terminology is required, the creditor may designate its interests by using, for exam-

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Regulation Z Commentary § 226.6 pie, “pledge,” “lien,” or “mortgage” (instead of “security interest” ).

2. Identification o f property. Identification of the collateral by type is satisfied by stating, for example, “motor vehicle” or “household appliances.” (Creditors should be aware, how ever, that the federal credit practices rules, as well as some state laws, prohibit certain se curity interests in household goods.) The cred itor may, at its option, provide a more specific identification (for example, a model and serial number.) 3. Spreader clause. The fact that collateral for preexisting credit extensions with the institu tion is being used to secure the present obli gation constitutes a security interest and must be disclosed. (Such security interests may be known as “spreader” or “dragnet” clauses, or as “cross-collateralization” clauses.) A spe cific identification of that collateral is unnec essary, but a reminder of the interest arising from the prior indebtedness is required. This may be accomplished by using language such as “collateral securing other loans with us may also secure this loan.” At the creditor’s option, a more specific description of the property involved may be given. 4. Additional collateral. If collateral is re quired when advances reach a certain amount, the creditor should disclose the information available at the time of the initial disclosures. For example, if the creditor knows that a se curity interest will be taken in household goods if the consumer’s balance exceeds $ 1,000, the creditor should disclose accord ingly. If the creditor knows that security will be required if the consumer’s balance exceeds $ 1,000, but the creditor does not know what security will be required, the creditor must disclose on the inital disclosure statement that security will be required if the balance ex ceeds $1 ,000, and the creditor must provide a change-in-terms notice under section 226.9(c) at the time the security is taken. (See com ment 6(c)-2 .) 5. Collateral from third party. In certain situ ations, the consumer’s obligation may be se cured by collateral belonging to a third party. For example, an open-end credit plan may be secured by an interest in property owned by the consumer’s parents. In such cases, the se curity interest is taken in connection with the plan and must be disclosed, even though the property encumbered is owned by someone other than the consumer.

6(d) Statement of Billing Rights See the commentary to appendix G-3. 6(e) Home-Equity Plan Information 1. Additional disclosures required. For homeequity plans, creditors must provide several of the disclosures set forth in section 226.5b(d) along with the disclosures required under sec tion 226.6. Creditors also must disclose a list of the conditions that permit the creditor to terminate the plan, freeze or reduce the credit limit, and implement specified modifications to the original terms.

(See comment 5b(d)(4)(iii)-l.) 2. Form o f disclosures. The home-equity dis closures provided under this section must be in a form the consumer can keep, and are governed by section 226.5(a)(1). The segrega tion standard set forth in section 226.5b(a) does not apply to home-equity disclosures provided under section 226.6. 3. Disclosure o f payment and variable-rate examples. The payment-example disclosure in section 226.5b(d)(5)(iii) and the variable-rate information in section 226.5b(d)(12)(viii), (x), (xi), and (xii) need not be provided with the disclosures under section 226.6 if: • The disclosures under section 226.5b(d) were provided in a form the consumer could keep; and • The disclosures of the payment example under section 226.5b(d)(5)(iii), the maximum-payment example under section 226.5b(d)(12)(x) and the historical table under section 226.5b(d)(12)(xi) included a representative payment example for the cat egory of payment options the consumer has chosen.

For example, if a creditor offers three pay ment options (one for each of the categories described in the commentary to section 226.5b(d)(5)), describes all three options in its early disclosures, and provides all of the dis-

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§ 226.6 Regulation Z Commentary closures in a retainable form, that creditor need not provide the section 226.5b(d)(5)(iii) or 226.5b(d)(12) disclosures again when the account is opened. If the creditor showed only one of the three options in the early disclo sures (which would be the case with a sepa rate disclosure form rather than a combined form, as discussed under section 226.5b(a)), the disclosures under section 226.5b(d)(5)(iii) and 226.5b(d)(12)(viii), (x), (xi) and (xii) must be given to any consumer who chooses one of the other two options. If the section 226.5b(d)(5)(iii) and 226.5b(d)(12) disclosures are provided with the second set of disclo sures, they need not be transaction-specific, but may be based on a representative example of the category of payment option chosen. 4. Disclosures for the repayment period. The creditor must provide disclosures about both the draw and repayment phases when giving the disclosures under section 226.6. Specifi cally, the creditor must make the disclosures in section 226.6(e), state the corresponding annual percentage rate (as required in section 226.6(a)(2)), and provide the variable-rate in formation required in footnote 12 for the re payment phase. To the extent the correspond ing annual percentage rate, the information in footnote 1 2 , and any other required disclo sures are the same for the draw and repay ment phase, the creditor need not repeat such information, as long as it is clear that the in formation applies to both phases. References Statute: § 127(a) Other sections: §§ 226.4, 226.5, 226.7, 226.9, 226.14, and appendix G Previous regulation: § 226.7(a) and interpreta tion § 226.706 1981 changes: Section 226.6 implements the amended statute which requires disclosure of the fact that no free period exists. Disclosures about the minimum periodic payment and the Comparative Index of Credit Cost have been eliminated. The security interest disclosures have been simplified. “Other charges” no longer include voluntary credit life or disabil ity insurance, required property insurance pre miums, default charges, or fees for collection activity. Disclosures for variable rate plans are now required by the regulation, replacing in terpretation section 226.707. The regulation no longer specifies the exact language to be used for the billing rights notice; creditors may use any version “substantially similar” to the one in appendix G.

SECTION 226.7—Periodic Statement 1. Multifeatured plans. Some plans involve a number of different features, such as purchases, cash advances, or overdraft check ing. Groups of transactions subject to different finance charge terms because of the dates on which the transactions took place are treated like different features for purposes of disclo sures on the periodic statements. The com mentary includes some special rules for mul tifeatured plans.

2. Separate periodic statements permitted. In a certain open-end credit program involving more than one creditor—a card issuer of travel-and-entertainment cards and a financial institution—the consumer has the option to pay the card issuer directly or to transfer to the financial institution all or part of the amount owing. In this case, the creditors may send separate periodic statements that reflect the separate obligations owed to each. 7(a) Previous Balance 1. Credit balances. If the previous balance is a credit balance, it must be disclosed in such a way so as to inform the consumer that it is a credit balance, rather than a debit balance. 2. Multifeatured plans. In a multifeatured plan, the previous balance may be disclosed either as an aggregate balance for the account or as separate balances for each feature (for example, a previous balance for purchases and a previous balance for cash advances). If sep arate balances are disclosed, a total previous balance is optional.

3. Accrued finance charges allocated from payments. Some open-end credit plans provide that the amount of the finance charge that has accrued since the consumer’s last payment is directly deducted from each new payment, rather than being separately added to each

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Regulation Z Commentary § 226.7 statement and reflected as an increase in the obligation. In such a plan, the previous bal ance need not reflect finance charges accrued since the last payment.

7(b) Identification of Transactions 1. Multifeatured plans. In identifying transac tions under section 226.7(b) for multifeatured plans, creditors may, for example, choose to arrange transactions by feature (such as dis closing sale transactions separately from cash advance transactions) or in some other clear manner, such as by arranging the transactions in general chronological order. 2. Automated teller machine (ATM) charges imposed by other institutions in shared or in terchange systems. A charge imposed on the cardholder by an institution other than the card issuer for the use of the other institu tion’s ATM in a shared or interchange system and included by the terminal-operating institu tion in the amount of the transaction need not be separately disclosed on the periodic statement.

7(c) Credits 1. Identification—sufficiency. The creditor need not describe each credit by type (re turned merchandise, rebate of finance charge, etc.)— “credit” would suffice—except if the creditor is using the periodic statement to sat isfy the billing-error correction notice require ment. (See the commentary to section 226.13(e) and (f).) 2. Format. A creditor may list credits relating to credit extensions (payments, rebates, etc.) together with other types of credits (such as deposits to a checking account), as long as the entries are identified so as to inform the con sumer which type of credit each entry represents.

3. Date. If only one date is disclosed (that is, the crediting date as required by the regula tion), no further identification of that date is necessary. More than one date may be dis closed for a single entry, as long as it is clear which date represents the date on which credit was given.

4. Totals Where the creditor lists the credits made to the account during the billing cycle, the creditor need not disclose total figures for the amounts credited.

7(d) Periodic Rates 1. Disclosure of periodic rates—whether or not actually applied. Any periodic rate that may be used to compute finance charges (and its corresponding annual percentage rate) must be disclosed whether or not it is applied dur ing the billing cycle. For example: • If the consumer’s account has both a purchase feature and a cash advance fea ture, the creditor must disclose the rate for each, even if the consumer only makes purchases on the account during the billing cycle.

• If the rate varies (such as when it is tied to a particular index), the creditor must dis close each rate in effect during the cycle for which the statement was issued. 2. Disclosure o f periodic rates required only if imposition possible. With regard to the peri odic rate disclosure (and its corresponding an nual percentage rate), only rates that could have been imposed during the billing cycle re flected on the periodic statement need to be disclosed. For example:

• If the creditor is changing rates effective during the next billing cycle (either be cause it is changing terms or because of a variable-rate plan), the rates required to be disclosed under section 226.7(d) are only those in effect during the billing cycle re flected on the periodic statement. For ex ample, if the monthly rate applied during May was 1.5 percent, but the creditor will increase the rate to 1.8 percent effective June 1, 1.5 percent (and its corresponding annual percentage rate) is the only required disclosure under section 226.7(d) for the periodic statement reflecting the May ac count activity.

• If the consumer has an overdraft line that might later be expanded upon the consum er’s request to include secured advances, the rates for the secured advance feature need not be given until such time as the consumer has requested and received ac cess to the additional feature.

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§ 226.7 Regulation Z Commentary • If rates applicable to a particular type of transaction changed after a certain date and the old rate is only being applied to trans actions that took place prior to that date, the creditor need not continue to disclose the old rate for those consumers that have no outstanding balances to which that rate could be applied.

3. Multiple rates—same transaction. If two or more periodic rates are applied to the same balance for the same type of transaction (for example, if the finance charge consists of a monthly periodic rate of 1.5 percent applied to the outstanding balance and a required credit life insurance component calculated at 0.1 percent per month on the same outstanding balance), the creditor may do either of the following:

• Disclose each periodic rate, the range of balances to which it is applicable, and the corresponding annual percentage rate for each (for example, 1.5 percent monthly, 18 percent annual percentage rate; 0 .1 percent monthly, 1.2 percent annual percentage rate) • Disclose one composite periodic rate (that is, 1.6 percent per month) along with the applicable range of balances and corre sponding annual percentage rate 4. Corresponding annual percentage rate. In disclosing the annual percentage rate that cor responds to each periodic rate, the creditor may use “corresponding annual percentage rate,” “ nominal annual percentage rate,” “ corresponding nominal annual percentage rate,” or similar phrases.

5. Rate same as actual annual percentage rate. When the corresponding rate is the same as the actual annual percentage rate (historical rate) required to be disclosed (§ 226.7(g)), the creditor need disclose only one annual per centage rate, but must use the phrase “annual percentage rate.”

6. Ranges o f balances. See comment 6(a)(2)- 1.

7(e) Balance on Which Finance Charge Computed 1. Limitation to periodic rates. Section 226.7(e) only requires disclosure of the bal ance^) to which a periodic rate was applied and does not apply to balances on which other kinds of finance charges (such as transaction charges) were imposed. For example, if a con sumer obtains a $1,500 cash advance subject to both a 1 percent transaction fee and a 1 percent monthly periodic rate, the creditor need only disclose the balance subject to the monthly rate (which might include portions of earlier cash advances not paid off in previous cycles).

2. Split rates applied to balance ranges. If split rates were applied to a balance because different portions of the balance fall within two or more balance ranges, the creditor need not separately disclose the portions of the bal ance subject to such different rates since the range of balances to which the rates apply has been separately disclosed. For example, a creditor could disclose a balance of $700 for purchases even though a monthly periodic rate of 1.5 percent applied to the first $500, and a monthly periodic rate of 1 percent to the re mainder. This option to disclose a combined balance does not apply when the finance charge is computed by applying the split rates to each day’s balance (in contrast, for exam ple, to applying the rates to the average daily balance). In that case, the balances must be disclosed using any of the options that are available if two or more daily rates are im posed. (See comment 7(e)-5.) 3. Monthly rate on average daily balance. If a creditor computes a finance charge on the average daily balance by application of a monthly periodic rate or rates, the balance is adequately 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. 4. Multifeatured plans. In a multifeatured plan, the creditor must disclose a separate bal ance (or balances, as applicable) to which a periodic rate was applied for each feature or group of features subject to different periodic rates or different balance computation meth ods. Separate balances are not required, how ever, merely because a “free-ride” period is available for some features but not others. A

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Regulation Z Commentary § 226.7 total balance for the entire plan is optional. This does not affect how many balances the creditor must disclose— or may disclose— within each feature. (See, for example, com ment 7(e)-5.) 5. Daily rate on daily balance. If the finance charge is computed on the balance each day by application of one or more daily periodic rates, the balance on which the finance charge was computed may be disclosed in any of the following ways for each feature: • If a single daily periodic rate is imposed, the balance to which it is applicable may be stated as:

—a balance for each day in the billing cycle —a balance for each day in the billing cycle on which the balance in the account changes —the sum of the daily balances during the billing cycle —the average daily balance during the billing cycle, in which case the creditor shall explain that the average daily balance is or can be multiplied 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 • If two or more daily periodic rates may be imposed, the balances to which the rates are applicable may be stated as: —a balance for each day in the billing cycle —a balance for each day in the billing cycle on which the balance in the account changes —two or more average daily balances, each applicable to the daily periodic rates imposed for the time that those rates were in effect, as long as the creditor explains that the finance charge is or may be determined by ( 1 ) multiplying each of the average balances by the number of days in the billing cycle (or if the daily rate varied during the cycle, by multiplying by the number of days the applicable rate was in effect), (2 ) multiplying each of the results by the applicable daily periodic rate, and (3) adding these products together.

6 . Explanation o f balance-computation method. See the commentary to section 226.6(a)(3).

7. Information to compute balance. In con nection with disclosing the finance charge bal ance, the creditor need not give the consumer all of the information necessary to compute the balance if that information is not other wise required to be disclosed. For example, if current purchases are included from the date they are posted to the account, the posting date need not be disclosed. 8. Nondeduction o f credits. The creditor need not specifically identify the total dollar amount of credits not deducted in computing the finance charge balance. Disclosure of the amount of credits not deducted is accom plished by listing the credits (§ 226.7(c)) and indicating which credits will not be deducted in determining the balance (for example, “Credits after the 15th of the month are not deducted in computing the finance charge.”). 9. Use o f one balance-computation method explanation when multiple balances disclosed. Sometimes the creditor will disclose more than one balance to which a periodic rate was applied, even though each balance was com puted using the same balance-computation method. For example, if a plan involves purchases and cash advances that are subject to different rates, more than one balance must be disclosed, even though the same computa tion method is used for determining the bal ance for each feature. In these cases, one ex planation of the balance-computation method is sufficient. Sometimes the creditor separately discloses the portions of the balance that are subject to different rates because different por tions of the balance fall within two or more balance ranges, even when a combined bal ance disclosure would be permitted under comment 7(e)-2. In these cases, one explana tion of the balance-computation method is also sufficient (assuming, of course, that all portions of the balance were computed using the same method).

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§ 226.7 Regulation Z Commentary 7(f) Amount of Finance Charge 1. Total. A total finance charge amount for the plan is not required.

2. Itemization—types of finance charges. Each type of finance charge (such as periodic rates, transaction charges, and minimum charges) imposed during the cycle must be separately itemized; for example, disclosure of only a combined finance charge attributable to both a minimum charge and transaction charges would not be permissible. Finance charges of the same type may be disclosed, however, in dividually or as a total. For example, five transaction charges of $ 1 may be listed sepa rately or as $5.

3. Itemization—different periodic rates. Whether different periodic rates are applicable to different types of transactions or to differ ent balance ranges, the creditor may give the finance charge attributable to each rate or may give a total finance charge amount. For exam ple, if a creditor charges 1.5 percent per month on the first $500 of a balance and 1 percent per month on amounts over $500, the creditor may itemize the two components ($7.50 and $1.00) of the $8.50 charge, or may disclose $8.50.

4. Multifeatured plans. In a multifeatured plan, in disclosing the amount of the finance charge attributable to the application of peri odic rates no total periodic rate disclosure for the entire plan need be given. 5. Finance charges not added to account. A finance charge that is not included in the new balance because it is payable to a third party (such as required life insurance) must still be shown on the periodic statement as a finance charge.

6. Finance charges other than periodic rates. See comment 6(a)(4)-1 for examples. 7. Accrued finance charges allocated from payments. Some plans provide that the amount of the finance charge that has accrued since the consumer’s last payment is directly de ducted from each new payment, rather than being separately added to each statement and therefore reflected as an increase in the obli gation. In such a plan, no disclosure is required of finance charges that have accrued since the last payment.

8. Start-up fees. Points, loan fees, and similar finance charges relating to the opening of the account that are paid prior to the issuance of the first periodic statement need not be dis closed on the periodic statement. If, however, these charges are financed as part of the plan, including charges that are paid out of the first advance, the charges must be disclosed as part of the finance charge on the first periodic statement. However, they need not be factored into the annual percentage rate. (See footnote 33 in the regulation.) 7(g) Annual Percentage Rate 1. Rate same as corresponding annual per centage rate. See comment 7(d)-5. 2. Multifeatured plans. In a multifeatured plan, the actual annual percentage rate that re flects the finance charge imposed during the cycle may be separately stated for each fea ture or may be described as a composite for the whole plan.

7(h) Other Charges 1. Identification. In identifying any “other charges” actually imposed during the billing cycle, the type is adequately described as “late charge” or “membership fee,” for ex ample. Similarly, “closing costs” or “settle ment costs,” for example, may be used to de scribe charges imposed in connection with real estate transactions that are excluded from the finance charge under section 226.4(c)(7), if the same term (such as “closing costs”) was used in the initial disclosures and if the creditor chose to itemize and individually dis close the costs included in that term. Even though the taxes and filing or notary fees ex cluded from the finance charge under section 226.4(e) are not required to be disclosed as “other charges” under section 226.6(b), these charges may be included in the amount shown as “closing costs” or “settlement costs” on the periodic statement, if the charges were itemized and disclosed as part of the “closing costs” or “settlement costs” on the initial dis closure statement. (See comment 6(b)-1 for examples of “other charges.”)

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Regulation Z Commentary § 226.7 2. Date. The date of imposing or debiting “other charges” need not be disclosed. 3. Total. Disclosure of the total amount of other charges is optional.

4. Itemization—types o f “other charges". Each type of “other charge” (such as latepayment charges, over-the-credit-limit charges, ATM fees that are not finance charges, and membership fees) imposed during the cycle must be separately itemized; for example, dis closure of only a total of “other charges” at tributable to both an over-the-credit-limit charge and a late-payment charge would not be permissible. “Other charges” of the same type may be disclosed, however, individually or as a total. For example, three ATM fees of $1 may be listed separately or as $3. 7(i) Closing Date of Billing Cycle; New Balance 1. Credit balances. See comment 7(a)-1. 2. Multifeatured plans. In a multifeatured plan, the new balance may be disclosed for each feature or for the plan as a whole. If separate new balances are disclosed, a total new balance is optional.

3. Accrued finance charges allocated from payments. Some plans provide that the amount of the finance charge that has accrued since the consumer’s last payment is directly de ducted from each new payment, rather than being separately added to each statement and therefore reflected as an increase in the obli gation. In such a plan, the new balance need not reflect finance charges accrued since the last payment.

7(j) Free-Ride Period 1. Wording. Although the creditor is required to indicate any time period the consumer may have to pay the balance outstanding without incurring additional finance charges, no spe cific wording is required, so long as the lan guage used is consistent with that used on the initial disclosure statement. For example, “To avoid additional finance charges, pay the new balance before ” would suffice.

7(k) Address for Notice of Billing Errors 1. Wording. The periodic statement must con tain the address for consumers to use in as serting billing errors under section 226.13. Since all disclosures must be “clear,” the statement should indicate the general purpose for the address, although no elaborate expla nation or particular wording is required. 2. Telephone number. A telephone number may be included, but the address for billingerror inquiries, which is the required disclo sure, must be clear and conspicuous. One way to ensure that the address is clear and con spicuous is to include a precautionary instruc tion that telephoning will not preserve the consumer’s billing-error rights. Both of the billing rights statements in appendix G contain such a precautionary instruction, so that a creditor could, by including either of these statements with each periodic statement, en sure that the required address is provided in a clear and conspicuous manner. References Statute: § 127(b) Previous regulation: § 226.7(b)(1) and inter pretation § 226.701, 226.703, 226.706, and 226.707 Other sections: §§ 226.4 through 226.6, 226.8, 226.14, and appendix G 1981 changes: Under § 226.7, required termi nology is no longer mandated except for the terms “finance charge” and “annual percent age rate.” The requirement in the previous regulation about the location of disclosures has been deleted.

Under the revised section 226.7, disclosure of credits to the account no longer have to indicate the type of credit. A short disclosure for variable-rate plans must be included on the periodic statement. Disclosures relating to multifeatured accounts have been clarified. Section 226.7 now specifically requires a periodic statement disclosure of “ other charges” (nonfinance charges related to the plan) that are actually imposed during the bill ing cycle.

Disclosures about minimum charges that might be imposed on the account and about

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§ 226.7 Regulation Z Commentary the Comparative Index of Credit Cost have been deleted.

SECTION 226.8—Identification of Transactions 1. Application o f identification rules. Section 226.8 deals with the requirement (imposed by section 226.7(b)) for identification of each credit transaction made during the billing cy cle. The rules for identifying transactions on periodic statements vary, depending on whether:

• The transaction involves sale credit (purchases) or nonsale credit (cash ad vances, for example) • An actual copy of the credit document re flecting the transaction accompanies the statement (this is the distinction between so-called “country club” and “descriptive” billing) • The creditor and seller are the same or re lated persons 2. Sale credit. The term “sale credit” refers to a purchase in which the consumer uses a credit card or otherwise directly accesses an open-end line of credit (see comment 8-3 if access is by means of a check) to obtain goods or services from a merchant, whether or not the merchant is the card issuer. “Sale credit” even includes:

• Premiums for voluntary credit life insur ance whether sold by the card issuer or an other person • The purchase of funds-transfer services (such as telegrams) from an intermediary 3. Nonsale credit. The term “nonsale credit” refers to any form of loan credit including, for example:

• Cash advances • Overdraft checking • The use of a “supplemental credit device” in the form of a check or draft or the use of the overdraft feature of a debit card, even if such use is in connection with a purchase of goods or services • Miscellaneous debits to remedy mispostings, returned checks, and similar entries 4. Actual copy. An actual copy does not in clude a recreated document. It includes, for example, a duplicate, carbon, or photographic copy, but does not include a so-called “fac simile draft” in which the required informa tion is typed, printed, or otherwise recreated. If a facsimile draft is used, the creditor must follow the rules that apply when a copy of the credit document is not furnished. 5. Same or related persons. For purposes of identifying transactions, the term “same or re lated persons” refers to, for example: • Franchised or licensed sellers of a credi tor’s product or service • Sellers who assign or sell open-end sales accounts to a creditor or arrange for such credit under a plan that allows the consum er to use the credit only in transactions with that seller A seller is not related to the creditor merely because the seller and the creditor have an agreement authorizing the seller to honor the creditor’s credit card.

6. Transactions resulting from promotional material. In describing transactions with thirdparty sellers resulting from promotional mate rial mailed by the creditor, creditors may use the rules either for “related” or for “nonre lated” sellers and creditors. 7. Credit insurance offered through the credi tor. When credit insurance that is not part of the finance charge (for example, voluntary credit life insurance) is offered to the con sumer through the creditor but is actually pro vided by another company, the creditor has the option of identifying the premiums in one of two ways on the periodic statement. The creditor may describe the premiums using ei ther the rule in section 226.8(a)(2) for “re lated” sellers and creditors, or the rule in sec tion 226.8(a)(3) for “nonrelated” sellers and creditors. This means, therefore, that the cred itor may identify the insurance either by pro viding, under section 226.8(a)(2), a brief iden tification of the services provided (for example, “credit life insurance”), or by dis closing, under section 226.8(a)(3), the name and address of the company providing the in surance (for example, ABC Insurance Com

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Regulation Z Commentary § 226.8 pany, New York, New York). In either event, the creditor would, of course, also provide the amount and the date of the transaction. 8. Transactions involving creditors and sellers with corporate connections. In a credit card plan established for use primarily with sellers that have no corporate connection with the creditor, the creditor may describe all transac tions under the plan by using the rules in sec tion 226.8(a)(3)—creditor and seller not same or related persons—including transactions in volving a seller that has a corporate connec tion with the creditor. In other credit card plans, the creditor may describe transactions involving a seller that has a corporate connec tion with the creditor, such as subsidiary-par ent, using the rules in section 226.8(a)(3) where it is unlikely that the consumer would know of the corporate connection between the creditor and the seller—for example, where the names of the creditor and the seller are not similar, and the periodic statement is is sued in the name of the creditor only. 8(a) Sale Credit 1. Date—disclosure o f only one date. If only the required date is disclosed for a transaction, the creditor need not identify it as the “trans action date.” If the creditor discloses more than one date (for example, the transaction date and the posting date), the creditor must identify each.

2. Date—disclosure o f month and day only. The month and day are sufficient disclosure of the date on which the transaction took place, unless the posting of the transaction is delayed so long that the year is needed for a clear disclosure to the consumer. 3. When transaction takes place. If the con sumer conducts the transaction in person, the date of the transaction is the calendar date on which the consumer made the purchase or or der, or secured the advance. For transactions billed to the account on an ongoing basis (other than installments to pay a precomputed amount), the date of the transaction is the date on which the amount is debited to the ac count. This might include, for example, monthly insurance premiums. For mail or tele phone orders, a creditor may disclose as the transaction date either the invoice date, the debiting date, or the date the order was placed by telephone.

4. Transactions not billed in full. If sale trans actions are not billed in full on any single statement, but are billed periodically in precomputed installments, the first periodic statement reflecting the transaction must show either the full amount of the transaction to gether with the date the transaction actually took place; or the amount of the first install ment that was debited to the account together with the date of the transaction or the date on which the first installment was debited to the account. In any event, subsequent periodic statements should reflect each installment due, together with either any other identifying in formation required by section 226.8(a) (such as the seller’s name and address in a threeparty situation) or other appropriate identify ing information relating the transaction to the first billing. The debiting date for the particu lar installment, or the date the transaction took place, may be used as the date of the transac tion on these subsequent statements. 8(a)(1) Copy of Credit Document Provided 1. Format. The information required by sec tion 226.8(a)(1) may appear either on the copy of the credit document reflecting the transaction or on the periodic statement. 8(a)(2) Copy of Credit Document Not Provided—Creditor and Seller Same or Related Person(s) 1. Property identification—sufficiency o f description. The “brief identification” provi sion in section 226.8(a)(2) requires a designa tion that will enable the consumer to reconcile the periodic statement with the consumer’s own records. In determining the sufficiency of the description, the following rules apply: • While item-by-item descriptions are not necessary, reasonable precision is required. For example, “merchandise,” “miscellane ous,” “second-hand goods,” or “promo tional items” would not suffice. • A reference to a department in a sales es tablishment that accurately conveys the identification of the types of property or

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§ 226.8 Regulation Z Commentary services available in the department is suf ficient—for example, “jewelry,” “sporting goods.”

2. Property identification—number or symbol. The “brief identification” may be made by disclosing on the periodic statement a number or symbol that is related to an identification list printed elsewhere on the statement. 3. Property identification—additional docu ment. In making the “brief identification” re quired by section 226.8(a)(2), the creditor may identify the property by describing the trans action on a document accompanying the peri odic statement (for example, on a facsimile draft). (See also footnote 17.) 4. Small creditors. Under footnote 18, which provides a further identification alternative to a creditor with fewer than 15,000 accounts, the creditor need count only its own accounts and not others serviced by the same data processor or other shared-service provider. 5. Date o f transaction—foreign transactions. In a foreign transaction, the debiting date may be considered the transaction date. 8(a)(3) Copy o f Credit Document Not Provided—Creditor and Seller Not Same or Related Person(s) 1. Seller’s name. The requirement contem plates that the seller’s name will appear on the periodic statement in essentially the same form as it appears on transaction documents provided to the consumer at the time of the sale. The seller’s name may also be disclosed as, for example:

• A more complete spelling of the name that was alphabetically abbreviated on the re ceipt or other credit document • An alphabetical abbreviation of the name on the periodic statement even if the name appears in a more complete spelling on the receipt or other credit document. Terms that merely indicate the form of a business entity, such as “Inc.,” “Co.,” or “Ltd.,” may always be omitted.

2. Location o f transaction. The disclosure of the location where the transaction took place generally requires an indication of both the city, and the state or foreign country. If the seller has multiple stores or branches within that city, the creditor need not identify the specific branch at which the sale occurred. 3. No fixed location. When no meaningful ad dress is available because the consumer did not make the purchase at any fixed location of the seller, the creditor:

• May omit the address • May provide some other identifying desig nation, such as “aboard plane,” “ABC Airways Flight,” “ customer’s home,” “telephone order,” or “mail order” 4. Date o f transaction—foreign transactions. See comment 8(a)(2)-5.

8(b) Nonsale Credit 1. Date of transaction. If only one of the re quired dates is disclosed for a transaction, the creditor need not identify it. If the creditor discloses more than one date (for example, transaction date and debiting date), the credi tor must identify each.

2. Amount o f transaction. If credit is extended under an overdraft checking account plan or by means of a debit card with an overdraft feature, the amount to be disclosed is that of the credit extension, not the face amount of the check or the total amount of the debit/ credit transaction.

3. Amount—disclosure on cumulative basis. If credit is extended under an overdraft checking account plan or by means of a debit card with an overdraft feature, the creditor may disclose the amount of the credit extensions on a cu mulative daily basis, rather than the amount attributable to each check or each use of the debit/credit card.

4. Identification o f transaction type. The cred itor may identify a transaction by describing the type of advance it represents, such as cash advance, loan, overdraft loan, or any readily understandable trade name for the credit program.

References Statute: § 127(b)(2) Previous regulation: § 226.7(k)

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Regulation Z Commentary § 226.9 Other sections: § 226.7 1981 changes: Section 226.8 has been stream lined and reorganized to facilitate its use. Technical detail has been deleted from the regulation for inclusion in the commentary. The regulation implements the amended sec tion 127(b)(2) of the act by providing for pro tection from civil liability under certain cir cumstances when required information is not provided and by reducing disclosure responsi bilities for certain small creditors. For descrip tive billing of nonsale transactions, the regula tion now permits the use of the debiting date in all cases.

SECTION 226.9— Subsequent Disclosure Requirements 9(a) Furnishing Statement of Billing Rights 9(a)(1) Annual Statement 1. General. The creditor may provide the an nual billing rights statement: • By sending it in one billing period per year to each consumer that gets a periodic state ment for that period or • By sending a copy to all of its account holders sometime during the calendar year but not necessarily all in one billing period (for example, sending the annual notice in connection with renewal cards or when im posing annual membership fees). 2. Substantially similar. See the commentary to appendix G-3.

9(a)(2) Alternative Summary Statement 1. Changing from long-form to short-form statement and vice versa. If the creditor has been sending the long-form annual statement, and subsequently decides to use the alternative summary statement, the first summary state ment must be sent no later than 12 months after the last long-form statement was sent. Conversely, if the creditor wants to switch to the long-form, the first long-form statement must be sent no later than 12 months after the last summary statement.

2. Substantially similar. See the commentary to appendix G-4.

9(b) Disclosures for Supplemental Credit Devices and Additional Features 1. Credit device—examples. “Credit device” includes, for example, a blank check, payeedesignated check, blank draft or order, or au thorization form for issuance of a check; it does not include a check issued payable to a consumer representing loan proceeds or the disbursement of a cash advance. 2. Credit feature—examples. A new credit “feature” would include, for example: • The addition of overdraft checking to an existing account (although the regular checks that could trigger the overdraft fea ture are not themselves “devices”) • The option to use an existing credit card to secure cash advances, when previously the card could only be used for purchases Paragraph 9(b)(1) 1. Same finance charge terms. If the new means of accessing the account is subject to the same finance charge terms as those previ ously disclosed, the creditor: • Need only provide a reminder that the new device or feature is covered by the earlier disclosures (For example, in mailing spe cial checks that directly access the credit line, the creditor might give a disclosure such as “Use this as you would your XYZ card to obtain a cash advance from our bank”) or • May remake the section 226.6(a) finance charge disclosures.

Paragraph 9(b)(2) 1. Different finance charge terms. If the fi nance charge terms are different from those previously disclosed, the creditor may satisfy the requirement to give the finance charge terms either by giving a complete set of new initial disclosures reflecting the terms of the added device or feature or by giving only the finance charge disclosures for the added de vice or feature.

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§ 226.9 Regulation Z Commentary 9(c) Change in Terms 1. “Changes" initially disclosed. No notice of a change in terms need be given if the spe cific change is set forth initially, such as: rate increases under a properly disclosed variablerate plan, a rate increase that occurs when an employee has been under a preferential rate agreement and terminates employment, or an increase that occurs when the consumer has been under an agreement to maintain a certain balance in a savings account in order to keep a particular rate and the account balance falls below the specified minimum. In contrast, no tice must be given if the contract allows the creditor to increase the rate at its discretion but does not include specific terms for an in crease (for example, when an increase may occur under the creditor’s contract reservation right to increase the periodic rate). The rules in section 226.5b(f) relating to home-equity plans, however, limit the ability of a creditor to change the terms of such plans. 2. State law issues. Examples of issues not addressed by section 226.9(c) because they are controlled by state or other applicable law include:

• The types of changes a creditor may make • How changed terms affect existing bal ances, such as when a periodic rate is changed and the consumer does not pay off the entire existing balance before the new rate takes effect 3. Change in billing cycle. Whenever the creditor changes the consumer’s billing cycle, it must give a change-in-terms notice if the change either affects any of the terms required to be disclosed under section 226.6 or in creases the minimum payment, unless an ex ception under section 226.9(c)(2) applies; for example, the creditor must give advance no tice if the creditor initially disclosed a 25-day free-ride period on purchases and the con sumer will have fewer days during the billing cycle change.

9(c)(1) Written Notice Required 1. Affected consumers. Change-in-terms no tices need only go to those consumers who may be affected by the change. For example, a change in the periodic rate for check over draft credit need not be disclosed to consum ers who do not have that feature on their accounts.

2. Timing—effective date o f change. The rule that the notice of the change in terms be pro vided at least 15 days before the change takes effect permits midcycle changes when there is clearly no retroactive effect, such as the impo sition of a transaction fee. Any change in the balance computation method, in contrast, would need to be disclosed at ieast 15 days prior to the billing cycle in which the change is to be implemented.

3. Timing—advance notice not required. Ad vance notice of 15 days is not necessary—that is, a notice of change in terms is required, but it may be mailed or delivered as late as the effective date of the change—in two circumstances:

• If there is an increased periodic rate or any other finance charge attributable to the con sumer’s delinquency or default • If the consumer agrees to the particular change. This provision is intended for use in the unusual instance when a consumer substitutes collateral or when the creditor can advance additional credit only if a change relatively unique to that consumer is made, such as the consumer’s providing additional security or paying an increased minimum-payment amount. Therefore, the following are not “agreements” between the consumer and the creditor for purposes of section 226.9(c)(1): the consumer’s gen eral acceptance of the creditor’s contract reservation of the right to change terms; the consumer’s use of the account (which might imply acceptance of its terms under state law); and the consumer’s acceptance of a unilateral term change that is not par ticular to that consumer, but rather is of general applicability to consumers with that type of account.

4. Form of change-in-terms notice. A com plete new set of the initial disclosures contain ing the changed term complies with section 226.9(c) if the change is highlighted in some way on the disclosure statement, or if the dis closure statement is accompanied by a letter

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Regulation Z Commentary § 226.9 or some other insert that indicates or draws attention to the term change. 5. Security interest change—form o f notice. A copy of the security agreement that describes the collateral securing the consumer’s account may be used as the notice, when the term change is the addition of a security interest or the addition or substitution of collateral. 6. Changes to home-equity plans entered into on or after November 7, 1989. Section 226.9(c) applies when, by written agreement under section 226.5b(f)(3)(iii), a creditor changes the terms of a home equity plan—entered into on or after November 7, 1989—at or before its scheduled expiration, for example, by renewing a plan on terms dif ferent from those of the original plan. In dis closing the change:

• If the index is changed, the maximum an nual percentage rate is increased (to the limited extent permitted by section 226.30), or a variable-rate feature is added to a fixed-rate plan, the creditor must include the disclosures required by section 226.5b(d)(12)(x) and (d)(12)(xi), unless these disclosures are unchanged from those given earlier.

• If the minimum payment requirement is changed, the creditor must include the dis closures required by section 226.5b(d) (5)(iii) (and, in variable-rate plans, the dis closures required by section 226.5b(d) ( 12 )(x) and (d)(1 2 )(xi)) unless the disclo sures given earlier contained representative examples covering the new minimum pay ment requirement. (See the commentary to section 226.5b(d)(5)(iii), (d)(12)(x), and (d)(1 2 )(xi) for a discussion of representa tive examples.) When the terms are changed pursuant to a written agreement as described in section 226.5b(f)(3)(iii), the advance-notice require ment does not apply.

9(c)(2) Notice Not Required 1. Changes not requiring notice. The follow ing are examples of changes that do not re quire a change-in-terms notice: • A change in the consumer’s credit limit • A change in the name of the credit card or credit card plan • The substitution of one insurer for another • A termination or suspension of credit privi leges • Changes arising merely by operation of law; for example, if the creditor’s security interest in a consumer’s car automatically extends to the proceeds when the consumer sells the car 2. Skip features. If a credit program allows consumers to skip or reduce one or more pay ments during the year, or involves temporary reductions in finance charges, no notice of the change in terms is required either prior to the reduction or upon resumption of the higher rates or payments if these features are ex plained on the initial disclosure statement (in cluding an explanation of the terms upon re sumption). For example, a merchant may allow consumers to skip the December pay ment to encourage holiday shopping, or a teacher’s credit union may not require pay ments during summer vacation. Otherwise, the creditor must give notice prior to resuming the original schedule or rate, even though no notice is required prior to the reduction. The change-in-terms notice may be combined with the notice offering the reduction. For example, the periodic statement reflecting the reduction or skip feature may also be used to notify the consumer of the resumption of the original schedule or rate, either by stating explicitly when the higher payment or charges resume or by indicating the duration of the skip op tion. Language such as “You may skip your October payment,” or “We will waive your finance charges for January” may serve as the change-in-terms notice.

9(c)(3) Notice for Home-Equity Plans 1. Written request for reinstatement. If a cred itor requires the request for reinstatement of credit privileges to be in writing, the notice under section 226.9(c)(3) must state that fact. 2. Notice not required. A creditor need not provide a notice under this paragraph if, pur suant to the commentary to section 226.5b(f)(2), a creditor freezes a line or

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§ 226.9 Regulation Z Commentary reduces a credit line rather than terminating a plan and accelerating the balance. 9(d) Finance Charge Imposed at Time of Transaction 1. Disclosure prior to imposition. A person imposing a finance charge at the time of hon oring a consumer’s credit card must disclose the amount of the charge, or an explanation of how the charge will be determined, prior to its imposition. This must be disclosed before the consumer becomes obligated for property or services that may be paid for by use of a credit card. For example, disclosure must be given before the consumer has dinner at a res taurant, stays overnight at a hotel, or makes a deposit guaranteeing the purchase of property or services.

9(e) Disclosures Upon Renewal of Credit or Charge Card 1. Coverage. This paragraph applies to credit and charge card accounts of the type subject to 226.5a. (See section 226.5a(a)(3) and the accompanying commentary for discussion of the types of accounts subject to section 226.5a.) The disclosure requirements are trig gered when a card issuer imposes any annual or other periodic fee on such an account, whether or not the card issuer originally was required to provide the application and solici tation disclosures described in section 226.5a. 2. Form. The disclosures under this paragraph must be clear and conspicuous, but need not appear in a tabular format or in a prominent location. The disclosures need not be in a form the cardholder can retain. 3. Terms at renewal. Renewal notices must reflect the terms actually in effect at the time of renewal. For example, a card issuer that offers a preferential annual percentage rate to employees during their employment must send a renewal notice to employees disclosing the lower rate actually charged to employees (al though the card issuer also may show the rate charged to the general public). 4. Variable rate. If the card issuer cannot de termine the rate that will be in effect if the cardholder chooses to renew a variable-rate account, the card issuer may disclose the rate in effect at the time of mailing or delivery of the renewal notice. Alternatively, the card is suer may use the rate as of a specified date (and then update the rate from time to time, for example, each calendar month) or use an estimated rate under section 226.5(c). 5. Renewals more frequent than annual. If a renewal fee is billed more often than annually, the renewal notice should be provided each time the fee is billed. In this instance, the fee need not be disclosed as an annualized amount. Alternatively, the card issuer may provide the notice no less than once every 12 months if the notice explains the amount and frequency of the fee that will be billed during the time period covered by the disclosure, and also discloses the fee as an annualized amount. The notice under this alternative also must state the consequences of a cardholder’s decision to terminate the account after the renewal-notice period has expired. For example, if a $ 2 fee is billed monthly but the notice is given annually, the notice must inform the cardholder that the monthly charge is $2 , the annualized fee is $24, and $2 will be billed to the account each month for the coming year unless the cardholder notifies the card issuer. If the cardholder is obligated to pay an amount equal to the remaining unpaid monthly charges if the cardholder terminates the account during the coming year but after the first month, the notice must disclose the fact.

6. Terminating credit availability. Card issuers have some flexibility in determining the pro cedures for how and when an account may be terminated. However, the card issuer must clearly disclose the time by which the card holder must act to terminate the account to avoid paying a renewal fee. State and other applicable law govern whether the card issuer may impose requirements such as specifying that the cardholder’s response be in writing or that the outstanding balance be repaid in full upon termination.

7. Timing o f termination by cardholder. When a card issuer provides notice under section 226.9(e)(1), a cardholder must be given at least 30 days or one billing cycle, whichever

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Regulation Z Commentary § 226.9 is less, from the date the notice is mailed or delivered to make a decision whether to termi nate an account. When notice is given under section 226.9(e)(2), a cardholder has 30 days from mailing or delivery to decide to termi nate an account.

8. Timing o f notices. A renewal notice is deemed to be provided when mailed or deliv ered. Similarly, notice of termination is deemed to be given when mailed or delivered. 9. Prompt reversal of renewal fee upon termi nation. In a situation where a cardholder has provided timely notice of termination and a renewal fee has been billed to a cardholder’s account, the card issuer must reverse or other wise withdraw the fee promptly. Once a card holder has terminated an account, no addi tional action by the cardholder may be required.

9(e)(3) Notification on Periodic Statements 1. Combined disclosures. If a single disclo sure is used to comply with both sections 226.9(e) and 226.7, the periodic statement must comply with the rules in section 226.5a and 226.7. For example, the words “grace pe riod” must be used and the name of the balance-calculation method must be identified (if listed in section 226.5a(g)) to comply with the requirements of section 226.5a, even though the use of those terms would not otherwise be required for periodic statements under section 226.7. A card issuer may include some of the renewal disclosures on a periodic statement and others on a separate document so long as there is some reference indicating that they re late to one another. All renewal disclosures must be provided to a cardholder at the same time.

2. Preprinted notices on periodic statements. A card issuer may preprint the required infor mation on its periodic statements. A card is suer that does so, however, using the advancenotice option under section 226.9(e)(1), must make clear on the periodic statement when the preprinted renewal disclosures are applicable. For example, the card issuer could include a special notice (not preprinted) at the appropri ate time that the renewal fee will be billed in the following billing cycle, or could show the renewal date as a regular (preprinted) entry on all periodic statements.

9(f) Change in Credit Card Account Insurance Provider 1. Coverage. This paragraph applies to credit card accounts of the type subject to section 226.5a if credit insurance (typically life, disa bility, and unemployment insurance) is offered on the outstanding balance of such an ac count. (Credit card accounts subject to section 226.9(f) are the same as those subject to sec tion 226.9(e); see comment 9(e)-1.) Charge card accounts are not covered by this para graph. In addition, the disclosure requirements of this paragraph apply only where the card issuer initiates the change in insurance provid ers. For example, if the card issuer’s current insurance provider is merged into or acquired by another company, these disclosures would not be required. Disclosures also need not be given in cases where card issuers pay for credit insurance themselves and do not sepa rately charge the cardholder. 2. No increase in rate or decrease in cover age. The requirement to provide the disclosure arises when the card issuer changes the pro vider of insurance, even if there will be no increase in the premium rate charged the con sumer and no decrease in coverage under the insurance policy.

3. Form of notice. If a substantial decrease in coverage will result from the change in prov iders, the card issuer either must explain the decrease or refer to an accompanying copy of the policy or group certificate for details of the new terms of coverage. (See the commen tary to appendix G -l3.) 4. Discontinuation o f insurance. In addition to stating that the cardholder may cancel the in surance, the card issuer may explain the effect the cancellation would have on the con sumer’s credit card plan.

5. Mailing by third party. Although the card issuer is responsible for the disclosures, the insurance provider or another third party may furnish the disclosures on the card issuer’s behalf.

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§ 226.9 Regulation Z Commentary Paragraph 9(f)(3) Substantial Decrease in Coverage 1. Determination. Whether a substantial de crease in coverage will result from the change in providers is determined by the two-part test in section 226.9(f)(3): first, whether the de crease is in a significant term of coverage; and second, whether the decrease might rea sonably be expected to affect a cardholder’s decision to continue the insurance. If both conditions are met, the decrease must be dis closed in the notice.

References Statute: §1 27(a)(7) Other sections: §§ 226.4 through 226.7 and appendix G Previous regulation: § 226.7(d) through (f) and (j) and interpretation § 226.705 and 226.708 1981 changes: Section 226.9(a) implements the statutory change that the long-form state ment of billing rights be provided only once a year. The provision now permits two rather than one means of providing the long-form statement to consumers. The verbatim text of the annual statement is no longer required; creditors may use any version “substantially similar” to the one in appendix G. If the cred itor elects to use the alternative summary statement, the new regulation no longer re quires that the long-form statement be sent upon receiving a billing-error notice and at the consumer’s request. The rules in section 226.708 on switching the type of billing-rights statement used have been modified. Under section 226.9(b) disclosure require ments have been streamlined when supple mental credit devices or new credit features are added to an existing open-end plan. Section 226.9(c) substantially changes the change-in-terms rules. Change-in-terms disclo sures must now be made 15 days before the effective date of the change, rather than 15 days before the billing cycle in which the change will take effect. The kinds of changes that will trigger disclosures have been re duced: change-in-terms notices are no longer required for the types of changes described in section 226.9(c)(2). But the provision reverses interpretation section 226.705, which indicated that certain changes in the balance computa tion method did not require disclosure because they could result in lowered finance charges; now, any change in the balance computation method requires disclosure. When a finance charge is imposed at the time of a transaction, section 226.9(d) only re quires disclosure of the finance charge at point-of-sale; the amount financed and annual percentage rate figured in accordance with the closed-end credit provisions need no longer be disclosed. Furthermore, the finance charge dis closure now may be made orally by the per son honoring the card.

SECTION 226.10— Prompt Crediting of Payments 10(a) General Rule 1. Crediting date. Section 226.10(a) does not require the creditor to post the payment to the consumer’s account on a particular date; the creditor is only required to credit the payment as o f the date of receipt. 2. Date o f receipt. The “date of receipt” is the date that the payment instrument or other means of completing the payment reaches the creditor. For example:

• Payment by check is received when the creditor gets it, not when the funds are collected.

• In a payroll deduction plan in which funds are deposited to an asset account held by the creditor, and from which payments are made periodically to an open-end credit ac count, payment is received on the date when it is debited to the asset account (rather than on the date of the deposit), provided the payroll deduction method is voluntary and the consumer retains use of the funds until the contractual payment date.

• If the consumer elects to have payment made by a third-party payor such as a fi nancial institution, through a preauthorized payment or telephone bill-payment arrange ment, payment is received when the credi tor gets the third-party payor’s check or other transfer medium, such as an electron

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Regulation Z Commentary § 226.11 ic fund transfer, as long as the payment meets the creditor’s requirements as speci fied under section 226.10(b). 10(b) Specific Requirements for Payments 1. Payment requirements. The creditor may specify requirements for making payments, such as:

• Requiring that payments be accompanied by the account number or the payment stub • Setting a cut-off hour for payment to be received, or set different hours for payment by mail and payments made in person • Specifying that only checks or money or ders should be sent by mail • Specifying that payment is to be made in U.S. dollars • Specifying one particular address for re ceiving payments, such as a post office box The creditor may be prohibited, however, from specifying payment for preauthorized electronic fund transfer. (See section 913 of the Electronic Fund Transfer Act.) 2. Payment requirements—limitations. Re quirements for making payments must be rea sonable; it should not be difficult for most consumers to make conforming payments. For example, it would not be reasonable to require that all payments be made in person between 10 a.m. and 1 1 a.m., since this would require consumers to take time off from their jobs to deliver payments.

3. Acceptance o f nonconforming payments. If the creditor accepts a nonconforming payment (for example, payment at a branch office, when it had specified that payment be sent to headquarters), finance charges may accrue for the period between receipt and crediting of payments.

4. Implied guidelines for payments. In the ab sence of specified requirements for making payments (see section 226.10(b)): • Payments may be made at any location where the creditor conducts business • Payments may be made any time during the creditor’s normal business hours • Payment may be by cash, money order, draft, or other similar instrument in proper ly negotiable form, or by electronic fund transfer if the creditor and consumer have so agreed References Statute: § 164 Other sections: § 226.7 Previous regulation: § 226.7(g) 1981 changes: Much of the explanatory detail of the previous regulation is now in the com mentary. The revised regulation gives the creditor five days in which to credit noncon forming payments, whereas the previous regu lation required the crediting of such payments promptly, with an outside limit of five days. The five days in which to credit are available whenever the creditor accepts payment that does not conform to the creditor’s disclosed specifications, in contrast to the previous regu lation, which only allowed deferred crediting for payments made at the wrong location. SECTION 226.11—Treatment of Credit Balances 1. Timing o f refund. The creditor may also fulfill its obligations under section 226.11 by: • Refunding any credit balance to the con sumer immediately • Refunding any credit balance prior to re ceiving a written request (under section 226.11(b)) from the consumer • Making a good faith effort to refund any credit balance before six months have passed. If that attempt is unsuccessful, the creditor need not try again to refund the credit balance at the end of the six-month period.

2. Amount o f refund. The phrase “any part of the credit balance remaining in the account” in section 226.11(b) and (c) means the amount of the credit balance at the time the creditor is required to make the refund. The creditor may take into consideration intervening purchases or other debits to the consumer’s account (in cluding those that have not yet been reflected on a periodic statement) that decrease or elim inate the credit balance.

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§ 226.11 Regulation Z Commentary Paragraph 11(b) 1. Written requests—standing orders. The creditor is not required to honor standing or ders requesting refunds of any credit balance that may be created on the consumer’s account.

Paragraph 11(c) 1. Good faith effort to refund. The creditor must take positive steps to return any credit balance that has remained in the account for over six months. This includes, if necessary, attempts to trace the consumer through the consumer’s last known address or telephone number, or both.

2. Good faith effort unsuccessful. Section 226.11 imposes no further duties on the credi tor if a good faith effort to return the balance is unsuccessful. The ultimate disposition of the credit balance (or any credit balance of $1 or less) is to be determined under other appli cable law.

References Statute: § 165 Previous regulation: § 226.7(h) 1981 changes: Under the previous regulation, the creditor’s duty to refund credit balances applied only to “excess payments” ; section 226.11 of the revised regulation implements the amendments to section 165 of the statute which impose refunding duties on the creditor whatever the source of the credit balance. The revised regulation permits the creditor, in computing the refund, to take account of in tervening debits, not just the difference be tween the previous balance and the overpay ment as is provided in the previous regulation. The revised regulation gives the creditor seven business days in which to make the refund after receiving the consumer’s written request, whereas the previous regulation required the creditor to make the refund promptly, with an outside limit of five business days. This provi sion also implements the amended statute by requiring a good faith effort to refund the credit balance after six months. SECTION 226.12— Special Credit Card Provisions 1. Scope. Sections 226.12(a) and (b) deal with the issuance and liability rules for credit cards, whether the card is intended for con sumer, business, or any other purposes. Sec tions 226.12(a) and (b) are exceptions to the general rule that the regulation applies only to consumer credit. (See sections 226.1 and 226.3.) 12(a) Issuance of Credit Cards Paragraph 12(a)(1) 1. Explicit request. A request or application for a card must be explicit. For example, a request for overdraft privileges on a checking account does not constitute an application for a credit card with overdraft checking features. 2. Addition o f credit features. If the consumer has a non-credit card, the addition of credit features to the card (for example, the granting of overdraft privileges on a checking account when the consumer already has a check guar antee card) constitutes issuance of a credit card.

3. Variance of card from request. The request or application need not correspond exactly to the card that is issued. For example: • The name of the card requested may be different when issued • The card may have features in addition to those reflected in the request or application 4. Permissible form of request. The request or application may be oral (in response to a tele phone solicitation by a card issuer, for exam ple) or written.

5. Time of issuance. A credit card may be is sued in response to a request made before any cards are ready for issuance (for example, if a new program is established), even if there is some delay in issuance.

6. Persons to whom cards may be issued. A card issuer may issue a credit card to the per son who requests it and to anyone else for whom that person requests a card and who will be an authorized user on the requester’s account. In other words, cards may be sent to

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Regulation Z Commentary § 226.12 consumer A on A’s request, and also (on A’s request) to consumers B and C, who will be authorized users on A’s account. In these cir cumstances, the following rules apply: • The additional cards may be imprinted in either A’s name or in the names of B and C.

• No liability for unauthorized use (by per sons other than B and C), not even the $50, may be imposed on B or C since they are merely users and not “cardholders” as that term is defined in section 226.2 and used in section 226.12(b); of course, liabili ty of up to $50 for unauthorized use of B’s and C’s cards may be imposed on A. • Whether B and C may be held liable for their own use, or on the account generally, is a matter of state or other applicable law. 7. Issuance of non-credit cards. The issuance of an unsolicited device that is not, but may become, a credit card, is not prohibited provided:

• the device has some substantive purpose other than obtaining credit, such as access to non-credit services offered by the issuer; • it cannot be used as a credit card when issued; and • a credit capability will be added only on the recipient’s request.

For example, the card issuer could send a check guarantee card on an unsolicited basis, but could not add a credit feature to that card without the consumer’s specific request. The reencoding of a debit card or other existing card that had no credit privileges when issued would be appropriate after the consumer has specifically requested a card with credit privi leges. Similarly, the card issuer may add a credit feature, for example, by reprogramming the issuer’s computer program or automated teller machines, or by a similar program adjustment.

8. Unsolicited issuance o f PINs. A card issuer may issue personal identification numbers (PINs) to existing credit cardholders without a specific request from the cardholders, provided the PINs cannot be used alone to obtain credit. For example, the PINs may be neces sary if consumers wish to use their existing credit cards at automated teller machines or at merchant locations with point-of-sale termi nals that require PINs.

Paragraph 12(a)(2) 1. Renewal. “Renewal” generally contem plates the regular replacement of existing cards because of, for example, security rea sons or new technology or systems. It also includes the reissuance of cards that have been suspended temporarily, but does not in clude the opening of a new account after a previous account was closed. 2. Substitution—examples. “Substitution” en compasses the replacement of one card with another because the underlying account rela tionship has changed in some way—such as when the card issuer has:

• Changed its name • Changed the name of the card • Changed the credit or other features avail able on the account. For example, the orig inal card could be used to make purchases and obtain cash advances at teller win dows. The substitute card might be usable, in addition, for obtaining cash advances through automated teller machines. (If the substitute card constitutes an access device, as defined in Regulation E, then the Regu lation E issuance rules would have to be followed.) The “substitution” of one card with another on an unsolicited basis is not permissible, however, where in conjunction with the substitution an additional credit card account is opened and the consumer is able to make new purchases or advances under both the original and the new ac count with the new card. For example, if a retail card issuer replaces its credit card with a combined reatiler/bank card, each of the creditors maintains a separate account, and both accounts can be accessed for new transactions by use of the new credit card, the card cannot be provided to a consumer without solicitation.

• Substituted a card user’s name on the sub stitute card for the cardholder’s name ap pearing on the original card • Changed the merchant base. However, the new card must be honored by at least one

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§ 226.12 Regulation Z Commentary of the persons that honored the original card.

3. Substitution—successor card issuer. “Sub stitution” also occurs when a successor card issuer replaces the original card issuer (for ex ample, when a new card issuer purchases the accounts of the original issuer and issues its own card to replace the original one). A per missible substitution exists even if the original issuer retains the existing receivables and the new card issuer acquires the right only to fu ture receivables, provided use of the original card is cut off when use of the new card be comes possible.

4. Substitution—non-credit-card plan. A credit card that replaces a retailer’s open-end credit plan not involving a credit card is not consid ered a substitute for the retailer’s plan—even if the consumer used the retailer’s plan. A credit card cannot be issued in these circum stances without a request or application. 5. One-for-one rule. An accepted card may be replaced by no more than one renewal or sub stitute card. For example, the card issuer may not replace a credit card permitting purchases and cash advances with two cards, one for the purchases and another for the cash advances. 6. One-for-one rule—exception. The regula tion does not prohibit the card issuer from re placing a debit/credit card with a credit card and another card with only debit functions (or debit functions plus an associated overdraft capability), since the latter card could be is sued on an unsolicited basis under Regulation E.

7. Methods o f terminating replaced card. The card issuer need not physically retrieve the original card, provided the old card is voided in some way; for example:

• The issuer includes with the new card a notification that the existing card is no longer valid and should be destroyed immediately.

• The original card contained an expiration date.

• The card issuer, in order to preclude use of the card, reprograms computers or issues instructions to authorization centers. 8. Incomplete replacement. If a consumer has duplicate credit cards on the same account (card A—one type of bank credit card, for ex ample), the card issuer may not replace the duplicate cards with one card A and one card B (card B—another type of bank credit card) unless the consumer requests card B. 9^ Multiple entities. Where multiple entities share responsibilities with respect to a credit card issued by one of them, the entity that issued the card may replace it on an unsolic ited basis, if that entity terminates the original card by voiding it in some way, as described in comment 12(a)(2)-7. The other entity or en tities may not issue a card on an unsolicited basis in these circumstances. 12(b) Liability of Cardholder for Unauthorized Use 1. Meaning o f “cardholder.” For purposes of this provision, “cardholder” includes any per son (including organizations) to whom a credit card is issued for any purpose, including busi ness. When a corporation is the cardholder, required disclosures should be provided to the corporation (as opposed to an employee user). 2. Imposing liability. A card issuer is not re quired to impose liability on a cardholder for the unauthorized use of a credit card; if the card issuer does not seek to impose liability, the issuer need not conduct any investigation of the cardholder’s claim.

3. Reasonable investigation. If a card issuer seeks to impose liability when a claim of un authorized use is made by a cardholder, the card issuer must conduct a reasonable investi gation of the claim. In conducting its investi gation, the card issuer may reasonably request the cardholder’s cooperation. The card issuer may not automatically deny a claim based solely on the cardholder’s failure or refusal to comply with a particular request; however, if the card issuer otherwise has no knowledge of facts confirming the unauthorized use, the lack of information resulting from the cardholder’s failure or refusal to comply with a particular request may lead the card issuer reasonably to terminate the investigation. The procedures in volved in investigating claims may differ, but actions such as the following represent steps

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Regulation Z Commentary § 226.12 that a card issuer may take, as appropriate, in conducting a reasonable investigation: i.

Reviewing the types or amounts of purchases made in relation to the card holder’s previous purchasing pattern. ii.

Reviewing where the purchases were de livered in relation to the cardholder’s res idence or place of business. iii.

Reviewing where the purchases were made in relation to where the cardholder resides or has normally shopped. iv.

Comparing any signature on credit slips for the purchases to the signature of the cardholder or an authorized user in the card issuer’s records, including other credit slips.

Requesting documentation to assist in the verification of the claim.

vi.

Requesting a written, signed statement from the cardholder or authorized user. vii. Requesting a copy of a police report, if one was filed.

viii. Requesting information regarding the cardholder’s knowledge of the person who allegedly used the card or of that person’s authority to do so. 12(b)(1) Limitation on Amount 1. Meaning o f “authority." Footnote 22 de fines unauthorized use in terms of whether the user has “actual, implied, or apparent author ity.” Whether such authority exists must be determined under state or other applicable law.

2. Liability limits—dollar amounts. As a gen eral rule, the cardholder’s liability for a series of unauthorized uses cannot exceed either $50 or the value obtained through the unauthorized use before the card issuer is notified, which ever is less.

12(b)(2) Conditions of Liability 1. Issuer’s option not to comply. A card is suer that chooses not to impose any liability on cardholders for unauthorized use need not comply with the disclosure and identification requirements discussed below. Paragraph 12(b)(2)(ii) 1. Disclosure o f liability and means of notify ing issuer. The disclosures referred to in sec tion 226.12(b)(2)(ii) may be given, for exam ple, with the initial disclosures under section 226.6, on the credit card itself, or on periodic statements. They may be given at any time preceding the unauthorized use of the card. Paragraph 12(b)(2)(iii) 1. Means o f identifying cardholder or user. To fulfill the condition set forth in section 226.12(b)(2)(iii), the issuer must provide some method whereby the cardholder or the author ized user can be identified. This could include, for example, signature, photograph, or finger print on the card, or electronic or mechanical confirmation.

2. Identification by magnetic strip. Unless a magnetic strip (or similar device not readable without physical aids) must be used in con junction with a secret code or the like, it would not constitute sufficient means of iden tification. Sufficient identification also does not exist if a “pool” or group card, issued to a corporation and signed by a corporate agent who will not be a user of the card, is intended to be used by another employee for whom no means of identification is provided. 3. Transactions not involving card. The card holder may not be held liable under section 226.12(b) when the card itself (or some other sufficient means of identification of the card holder) is not presented. Since the issuer has not provided a means to identify the user under these circumstances, the issuer has not fulfilled one of the conditions for imposing li ability. For example, when merchandise is or dered by telephone by a person without au thority to do so, using a credit card account number or other number only (which may be widely available), no liability may be imposed on the cardholder.

12(b)(3) Notification to Card Issuer 1. How notice must be provided. Notice given in a normal business manner—for example, by mail, telephone, or personal visit—is effec tive even though it is not given to, or does

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§ 226.12 Regulation Z Commentary not reach, some particular person within the issuer’s organization. Notice also may be ef fective even though it is not given at the ad dress or phone number disclosed by the card issuer under section 226.12(b)(2)(ii). 2. Who must provide notice. Notice of loss, theft, or possible unauthorized use need not be initiated by the cardholder. Notice is sufficient so long as it gives the “pertinent informa tion,” which would include the name or card number of the cardholder and an indication that unauthorized use has or may have occurred.

3. Relationship to section 226.13. The liability protections afforded to cardholders in section 226.12 do not depend upon the cardholder’s following the error-resolution procedures in section 226.13. For example, the written-notification and time-limit requirements of section 226.13 do not affect the section 226.12 protections.

12(b)(5) Business Use of Credit Cards 1. Agreement for higher liability for business use cards. The card issuer may not rely on section 226.12(b)(5) if the business is clearly not in a position to provide 10 or more cards to employees (for example, if the business has only 3 employees). On the other hand, the is suer need not monitor the personnel practices of the business to make sure that it has at least 10 employees at all times. 2. Unauthorized use by employee. The protec tion afforded to an employee against liability for unauthorized use in excess of the limits set in section 226.12(b) applies only to unau thorized use by someone other than the em ployee. If the employee uses the card in an unauthorized manner, the regulation sets no restriction on the employee’s potential liability for such use.

12(c) Right of Cardholder to Assert Claims or Defenses Against Card Issuer 1. Relationship to section 226.13. The section 226.12(c) credit card “holder in due course” provision deals with the consumer’s right to assert against the card issuer a claim or de fense conseming property or services purchased with a credit card, if the merchant has been unwilling to resolve the dispute. Even though certain merchandise disputes, such as nondelivery of goods, may also constitute “billing errors” under section 226.13, that section operates independently of section 226.12(c). The cardholder whose asserted bill ing error involves undelivered goods may in stitute the error-resolution procedures of sec tion 226.13; but whether or not the cardholder has done so, the cardholder may assert claims or defenses under section 226.12(c). Con versely, the consumer may pay a disputed bal ance and thus have no further right to assert claims and defenses, but still may assert a billing error if notice of that billing error is given in the proper time and manner. An as sertion that a particular transaction resulted from unauthorized use of the card could also be both a “defense” and a billing error. 2. Claims and defenses assertible. Section 226.12(c) merely preserves the consumer’s right to assert against the card issuer any claims or defenses that can be asserted against the merchant. It does not determine what claims or defenses are valid as to the merchant; this determination must be made under state or other applicable law. 12(c)(1) General Rule 1. Situations excluded and included. The con sumer may assert claims or defenses only when the goods or services are “purchased with the credit card.” This could include: • Mail or telephone orders, if the purchase is charged to the credit card account But it would exclude:

• Use of a credit card to obtain a cash ad vance, even if the consumer then uses the money to purchase goods or services. Such a transaction would not involve “property or services purchased with the credit card.” • The purchase of goods or services by use of a check accessing an overdraft account and a credit card used solely for identifica tion of the consumer. (On the other hand, if the credit card is used to make partial payment for the purchase and not merely for identification, the right to assert claims

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Regulation Z Commentary § 226.12 or defenses would apply to credit extended via the credit card, although not to the credit extended on the overdraft line.) • Purchases made by use of a check-guaran tee card in conjunction with a cash-advance check (or by cash-advance checks alone). See footnote 24. A cash-advance check is a check that, when written, does not draw on an asset account; instead, it is charged en tirely to an open-end credit account. • Purchases effected by use of either a check guarantee card or a debit card when used to draw on overdraft credit lines (see foot note 24). The debit card exemption applies whether the card accesses an asset account via point-of-sale terminals, automated teller machines, or in any other way, and wheth er the card qualifies as an “access device” under Regulation E or is only a paperbased debit card. If a card serves both as an ordinary credit card and also as check guarantee or debit card, a transaction will be subject to this rule on asserting claims and defenses when used as an ordinary credit card, but not when used as a checkguarantee or debit card.

12(c)(2) Adverse Credit Reports Prohibited 1. Scope o f prohibition. Although an amount in dispute may not be reported as delinquent until the matter is resolved: • That amount may be reported as disputed. • Nothing in this provision prohibits the card issuer from undertaking its normal collec tion activities for delinquent accounts. 12(c)(3) Limitations Paragraph 12(c)(3)(i) 1. Resolution with merchant. The consumer must have tried to resolve the dispute with the merchant. This does not require any special procedures or correspondence between them, and is a matter for factual determination in each case. The consumer is not required to seek satisfaction from the manufacturer of the goods involved. When the merchant is in bankruptcy proceedings, the consumer is not required to file a claim in those proceedings. Paragraph 12(c)(3)(ii) 1. Geographic limitation. The question of where a transaction occurs (as in the case of mail or telephone orders, for example) is to be determined under state or other applicable law.

2. Merchant honoring card. The exceptions (stated in footnote 26) to the amount and geo graphic limitations do not apply if the merchant merely honors, or indicates through signs or advertising that it honors, a particular credit card.

12(d) Offsets by Card Issuer Prohibited Paragraph 12(d)(1) 1. “Holds” on accounts. “Freezing” or plac ing a hold on funds in the cardholder’s de posit account is the functional equivalent of an offset and would contravene the prohibition in section 226.12(d)(1), unless done in the context of one of the exceptions specified in section 226.12(d)(2). For example, if the terms of a security agreement permitted the card issuer to place a hold on the funds, the hold would not violate the offset prohibition. Similarly, if an order of a bankruptcy court required the card issuer to turn over deposit account funds to the trustee in bankruptcy, the issuer would not violate the regulation by placing a hold on the funds in order to com ply with the court order.

2. Funds intended as deposits. If the con sumer tenders funds as a deposit (to a check ing account, for example), the card issuer may not apply the funds to repay indebtedness on the consumer’s credit card account. 3. Types o f indebtedness; overdraft accounts. The offset prohibition applies to any indebted ness arising from transactions under a credit card plan, including accrued finance charges and other charges on the account. The prohi bition also applies to balances arising from transactions not using the credit card itself but taking place under plans that involve credit cards. For example, if the consumer writes a check that accesses an overdraft line of credit, the resulting indebtedness is subject to the off set prohibition since it is incurred through a

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§ 226.12 Regulation Z Commentary credit card plan, even though the consumer did not use an associated check guarantee or debit card.

4. When prohibition applies in case of termi nation o f account. The offset prohibition ap plies even after the card issuer terminates the cardholder’s credit card privileges, if the in debtedness was incurred prior to termination. If the indebtedness was incurred after termina tion, the prohibition does not apply. Paragraph 12(d)(2) 1. Security interest—limitations. In order to qualify for the exception stated in section 226.12(d)(2), a security interest must be af firmatively agreed to by the consumer and must be disclosed in the issuer’s initial disclo sures under section 226.6. The security inter est must not be the functional equivalent of a right of offset; as a result, routinely including in agreements contract language indicating that consumers are giving a security interest in any deposit accounts maintained with the is suer does not result in a security interest that falls within the exception in section 226.12(d)(2). For a security interest to qualify for the exception under section 226.12(d)(2) the following conditions must be met: • The consumer must be aware that granting a security interest is a condition for the credit card account (or for more favorable account terms) and must specifically intend to grant a security interest in a deposit ac count. Indicia of the consumer’s awareness and intent could include, for example: —Separate signature or initials on the agreement indicating that a security interest is being given.

—Placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions. —Reference to a specific amount of deposited funds or to a specific deposit account number.

• The security interest must be obtainable and enforceable by creditors generally. If other creditors could not obtain a security interest in the consumer’s deposit accounts to the same extent as the card issuer, the security interest is prohibited by section 226.12(d)(2).

2. Security interest—after-acquired property. As used in section 226.12(d), the term “secur ity interest” does not exclude (as it does for other Regulation Z purposes) interests in afteracquired property. Thus, a consensual security interest in deposit-account funds, including funds deposited after the granting of the se curity interest, would constitute a permissible exception to the prohibition on offsets. 3. Court order. If the card issuer obtains a judgment against the cardholder, and if state and other applicable law and the terms of the judgment do not so prohibit, the card issuer may offset the indebtedness against the card holder’s deposit account.

Paragraph 12(d)(3) 1. Automatic payment plans—scope o f excep tion. With regard to automatic debit plans under section 226.12(d)(3), the following rules apply:

• The cardholder’s authorization must be in writing and signed or initialed by the card holder.

• The authorizing language need not appear directly above or next to the cardholder’s signature or initials, provided it appears on the same document and that it clearly spells out the terms of the automatic debit plan.

• If the cardholder has the option to accept or reject the automatic debit feature (such option may be required under section 913 of the Electronic Fund Transfer Act), the fact that the option exists should be clearly indicated.

2. Automatic payment plans—additional ex ceptions. The following practices are not pro hibited by section 226.12(d)(1): • Automatically deducting charges for partic ipation in a program of banking services (one aspect of which may be a credit card plan) • Debiting the cardholder’s deposit account on the cardholder’s specific request rather than on an automatic periodic basis (for example, a cardholder might check a box

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Regulation Z Commentary § 226.13 on the credit card bill stub, requesting the issuer to debit the cardholder’s account to pay that bill) 12(e) Prompt Notification of Returns and Crediting of Refunds Paragraph 12(e)(1) 1. Normal channels. The term “normal chan nel” refers to any network or interchange sys tem used for the processing of the original charge slips (or equivalent information con cerning the transactions).

Paragraph 12(e)(2) 1. Crediting account. The card issuer need not actually post the refund to the consumer’s ac count within three business days after receiv ing the credit statement, provided that it cred its the account as of a date within that time period.

References Statute: §§ 103(1), 132, 133, 135, 162, 166, 167, 169, and 170 Other sections: § 226.13 Other regulations: Regulation E (12 CFR 205) Previous regulation: § 226.13 1981 changes: The issuance rules in section 226.12(a) make clear that cards may be sent to the person making the request and also to any other person for whom a card is re quested, except that no liability for unautho rized use may be imposed on persons who are only authorized users.

The principal differences in section 226.12(b) about conditions of liability are as follows: the requirement that the cardholder be given a postage-paid, preaddressed card or envelope for notification of loss or theft has been deleted (corresponding to an amendment to the act); the required disclosures of maxi mum liability and of means of notification have been simplified; and the required provi sion of a means of identification has been changed in that the issuer now may provide a means to identify either the cardholder or the authorized user. Finally, anyone may provide the notification to the card issuer, not just the cardholder.

Section 226.12(d) on offsets clarifies that the offset prohibition does not apply to con sensual security interests. The separate promptness standard which used to apply in addition to the seven-business-day and threebusiness-day standards has been deleted from section 226.12(e) on prompt notification of re turns. Section 226.12(f) now clarifies rules on clearing accounts.

Section 226.12(g), dealing with the relation ship of the regulation to Regulation E (Elec tronic Fund Transfers), has been added. SECTION 226.13—Billing-Error Resolution 1. General prohibitions. Footnote 27 prohibits a creditor from responding to a consumer’s billing-error allegation by accelerating the debt or closing the account, and reflects pro tections authorized by section 161(d) of the Truth in Lending Act and section 701 of the Equal Credit Opportunity Act. The footnote also alerts creditors that failure to comply with the error-resolution procedures may re sult in the forfeiture of disputed amounts as prescribed in section 161(e) of the act. (Any failure to comply may also be a violation sub ject to the liability provisions of section 130 of the act.) 2. Charges for error resolution. If a billing error occurred, whether as alleged or in a dif ferent amount or manner, the creditor may not impose a charge related to any aspect of the error-resolution process (including charges for documentation or investigation) and must credit the consumer’s account if such a charge was assessed pending resolution. Since the act grants the consumer error-resolution rights, the creditor should avoid any chilling effect on the good faith assertion of errors that might result if charges are assessed when no billing error has occurred.

13(a) Definition of Billing Error Paragraph 13(a)(1) 1. Actual, implied, or apparent authority.

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§ 226.13 Regulation Z Commentary Whether use of a credit card or open-end credit plan is authorized is determined by state or other applicable law.

Paragraph 13(a)(3) 1. Coverage. Section 226.13(a)(3) covers dis putes about goods or services that are “not accepted” or “not delivered . . . as agreed” ; for example:

• The appearance on a periodic statement of a purchase, when the consumer refused to take delivery of goods because they did not comply with the contract • Delivery of property or services different from that agreed upon • Delivery of the wrong quantity • Late delivery • Delivery to the wrong location Section 226.13(a)(3) does not apply to a dis pute relating to the quality of property or ser vices that the consumer accepts. Whether ac ceptance occurred is determined by state or other applicable law.

Paragraph 13(a)(5) 1. Computational errors. In periodic state ments that are combined with other informa tion, the error-resolution procedures are trig gered only if the consumer asserts a com putational billing error in the credit-related portion of the periodic statement. For example:

• If a bank combines a periodic statement re flecting the consumer’s credit card transac tions with the consumer’s monthly checking statement, a computational error in the checking account portion of the combined statement is not a billing error. Paragraph 13(a)(6) 1. Documentation requests. A request for doc umentation such as receipts or sales slips, un accompanied by an allegation of an error under section 226.13(a) or a request for addi tional clarification under section 226.13(a)(6), does not trigger the error-resolution proce dures. For example, a request for documenta tion merely for purposes such as tax preparation or recordkeeping does not trigger the error-resolution procedures. 13(b) Billing-Error Notice 1. Withdrawal. The consumer’s withdrawal of a billing-error notice may be oral or written. Paragraph 13(b)(1) 1. Failure to send periodic statement—timing. If the creditor has failed to send a periodic statement, the 60-day period runs from the time the statement should have been sent. Once the statement is provided, the consumer has another 60 days to assert any billing er rors reflected on it.

2. Failure to reflect credit—timing. If the peri odic statement fails to reflect a credit to the account, the 60-day period runs from transmit tal of the statement on which the credit should have appeared.

3. Transmittal. If a consumer has arranged for periodic statements to be held at the financial institution until called for, the statement is “transmitted” when it is first made available to the consumer.

Paragraph 13(b)(2) 1. Identity o f the consumer. The billing error notice need not specify both the name and the account number if the information supplied enables the creditor to identify the consumer’s name and account.

13(c) Time for Resolution; General Procedures 1. Temporary or provisional corrections. A creditor may temporarily correct the con sumer’s account in response to a billing-error notice but is not excused from complying with the remaining error-resolution procedures within the time limits for resolution. 2. Correction without investigation. A creditor may correct a billing error in the manner and amount asserted by the consumer without the investigation or the determination normally re quired. The creditor must comply, however, with all other applicable provisions. If a credi

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Regulation Z Commentary § 226.13 tor follows this procedure, no presumption is created that a billing error occurred. Paragraph 13(c)(2) 1. Time for resolution. The phrase “two com plete billing cycles” means two actual billing cycles occurring after receipt of the billing er ror notice, not a measure of time equal to two billing cycles. For example, if a creditor on a monthly billing cycle receives a billing error notice mid-cycle, it has the remainder of that cycle plus the next two full billing cycles to resolve the error.

13(d) Rules Pending Resolution 1. Disputed amount. “Disputed amount” is the dollar amount alleged by the consumer to be in error. When the allegation concerns the description or identification of the transaction (such as the date or the seller’s name) rather than a dollar amount, the disputed amount is the amount of the transaction or charge that corresponds to the disputed transaction identi fication. If the consumer alleges a failure to send a periodic statement under section 226.13(a)(7), the disputed amount is the entire balance owing.

13(d)(1) Consumer’s Right to Withhold Disputed Amount; Collection Action Prohibited 1. Prohibited collection actions. During the error-resolution period, the creditor is prohib ited from trying to collect the disputed amount from the consumer. Prohibited collec tion actions include, for example, instituting court action, taking a lien, or instituting at tachment proceedings.

2. Right to withhold payment. If the creditor reflects any disputed amount or related finance or other charges on the periodic statement, and is therefore required to make the disclo sure under footnote 30, the creditor may com ply with that disclosure requirement by indi cating that payment of any disputed amount is not required pending resolution. Making a dis closure that only refers to the disputed amount would, of course, in no way affect the con sumer’s right under section 226.13(d)(1) to withhold related finance and other charges. The disclosure under footnote 30 need not ap pear in any specific place on the periodic statement, need not state the specific amount that the consumer may withhold, and may be preprinted on the periodic statement. 3. Imposition of additional charges on undis puted amounts. The consumer’s withholding of the disputed amount from the total bill can not subject undisputed balances (including new purchases or cash advances made during the present or subsequent cycles) to the impo sition of finance or other charges. For exam ple, if on an account with a free-ride period (that is, an account in which paying the new balance in full allows the consumer to avoid the imposition of additional finance charges), a consumer disputes a $2 item out of a total bill of $300 and pays $298 within the freeride period, the consumer would not lose the free ride as to any undisputed amounts, even if the creditor determines later that no billing error occurred. Furthermore, finance or other charges may not be imposed on any new purchases or advances that, absent the unpaid disputed balance, would not have finance or other charges imposed on them. Finance or other charges that would have been incurred even if the consumer had paid the disputed amount would not be affected. 4. Automatic payment plans—coverage. The coverage of this provision is limited to the card issuer’s intrainstitutional payment plans. It does not apply to:

• Inter-institutional payment plans that permit a cardholder to pay automatically any cred it card indebtedness from an asset account not held by the card issuer receiving pay ment • Intra-institutional automatic payment plans offered by financial institutions that are not credit card issuers 5. Automatic payment plans—time o f notice. While the card issuer does not have to restore or prevent the debiting of a disputed amount if the billing-error notice arrives after the three-business-day cut-off, the card issuer must, however, prevent the automatic debit of any part of the disputed amount that is still outstanding and unresolved at the time of the next scheduled debit date.

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§ 226.13 Regulation Z Commentary 13(d)(2) Adverse Credit Reports Prohibited 1. Report o f dispute. Although the creditor must not issue an adverse credit report be cause the consumer fails to pay the disputed amount or any related charges, the creditor may report that the amount or the account is in dispute. Also, the creditor may report the account as delinquent if undisputed amounts remain unpaid.

2. “Person.” During the error-resolution pe riod, the creditor is prohibited from making an adverse credit report about the disputed amount to any person—including employers, insurance companies, other creditors, and credit bureaus.

3. Creditor’s agent. Whether an agency rela tionship exists between a creditor and an is suer of an adverse credit report is determined by state or other applicable law. 13(e) Procedures if Billing Error Occurred as Asserted 1. Correction o f error. The phrase “as appli cable” means that the necessary corrections vary with the type of billing error that oc curred. For example, a misidentified transac tion (or a transaction that is identified by one of the alternative methods in section 226.8) is cured by properly identifying the transaction and crediting related finance and any other charges imposed. The creditor is not required to cancel the amount of the underlying obliga tion incurred by the consumer. 2. Form o f correction notice. The written cor rection notice may take a variety of forms. It may be sent separately, or it may be included on or with a periodic statement that is mailed within the time for resolution. If the periodic statement is used, the amount of the billing error must be specifically identified. If a sepa rate billing-error correction notice is provided, the accompanying or subsequent periodic statement reflecting the corrected amount may simply identify it as “credit.” 13(f) Procedures if Different Billing Error or No Billing Error Occurred 1. Different billing error.

Examples of a “different billing error” include: • Differences in the amount of an error (for example, the customer asserts a $55.00 er ror but the error was only $53.00) • Differences in other particulars asserted by the consumer (such as when a consumer asserts that a particular transaction never occurred, but the creditor determines that only the seller’s name was disclosed incorrectly) 2. Form o f creditor’s explanation. The written explanation (which also may notify the con sumer of corrections to the account) may take a variety of forms. It may be sent separately, or it may be included on or with a periodic statement that is mailed within the time for resolution. If the creditor uses the periodic statement for the explanation and correc tion^), the corrections must be specifically identified. If a separate explanation, including the correction notice, is provided, the enclosed or subsequent periodic statement reflecting the corrected amount may simply identify it as a “credit.” The explanation may be combined with the creditor’s notice to the consumer of amounts still owing, which is required under section 226.13(g)(1), provided it is sent within the time limit for resolution. (See commentary to section 226.13(e).) 13(g) Creditor’s Rights and Duties After Resolution Paragraph 13(g)(1) 1. Amounts owed by consumer. Amounts the consumer still owes may include both mini mum periodic payments and related finance and other charges that accrued during the res olution period. As explained in the commen tary to section 226.13(d)(1), even if the credi tor later determines that no billing error occurred, the creditor may not include finance or other charges that are imposed on undis puted balances solely as a result of a con sumer’s withholding payment of a disputed amount.

2. Time o f notice. The creditor need not send the notice of amount owed within the time period for resolution, although it is under a duty to send the notice promptly after resolu tion of the alleged error. If the creditor com

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Regulation Z Commentary § 226.13 bines the notice of the amount owed with the explanation required under section 226.13 (f)(1), the combined notice must be provided within the time limit for resolution. Paragraph 13(g)(2) 1. The creditor need not allow any free-ride period disclosed under sections 226.6(a)(1) and 226.7(j) to pay the amount due under sec tion 226.13(g)(1) if no error occurred and the consumer was not entitled to a free-ride pe riod at the time the consumer asserted the error.

Paragraph 13(g)(3) 1. Time for payment. The consumer has a minimum of 10 days to pay (measured from the time the consumer could reasonably be ex pected to have received notice of the amount owed) before the creditor may issue an ad verse credit report; if an initially disclosed free-ride period allows the consumer a longer time in which to pay, the consumer has the benefit of that longer period. Paragraph 13(g)(4) 1. Credit reporting.

Under section 226.13(g)(4)(i) and (iii) the creditor’s addi tional credit reporting responsibilities must be accomplished promptly. The creditor need not establish costly procedures to fulfill this re quirement. For example, a creditor that reports to a credit bureau on scheduled updates need not transmit corrective information by an un scheduled computer or magnetic tape; it may provide the credit bureau with the correct in formation by letter or other commercially rea sonable means when using the scheduled up date would not be “prompt.” The creditor is not responsible for ensuring that the credit bu reau corrects its information immediately. 2. Adverse report to credit bureau. If a credi tor made an adverse report to a credit bureau that disseminated the information to other creditors, the creditor fulfills its section 226.13(g)(4)(ii) obligations by providing the consumer with the name and address of the credit bureau.

13(i) Relation to Electronic Fund Transfer Act and Regulation E 1. Coverage. Credit extended directly from a non-overdraft credit line is governed solely by Regulation Z, even though a combined credit card/access device is used to obtain the extension.

2. Incidental credit under agreement. Credit extended incident to an electronic fund trans fer under an agreement between the consumer and the financial institution is governed by section 226.13(i), which provides that certain error resolution procedures in both this regula tion and Regulation E apply. Incidental credit that is not extended under an agreement be tween the consumer and the financial institu tion is governed solely by the error-resolution procedures in Regulation E. For example: • Credit inadvertently extended incident to an electronic fund transfer is governed solely by the Regulation E error-resolution proce dures, if the bank and the consumer do not have an agreement to extend credit when the consumer’s account is overdrawn. 3. Application to debit/credit transac tions—examples. If a consumer withdraws money at an automated teller machine and ac tivates an overdraft credit feature on the checking account:

• An error asserted with respect to the trans action is subject, for error-resolution pur poses, to the applicable Regulation E provisions (such as timing and notice) for the entire transaction.

• The creditor need not provisionally credit the consumer’s account, under section 205.1 l(c)(2)(i) of Regulation E, for any portion of the unpaid extension of credit. • The creditor must credit the consumer’s ac count under section 205.11(e) with any fi nance or other charges incurred as a result of the alleged error.

• The provision of section 226.13(d) and (g) apply only to the credit portion of the transaction.

References Statute: §§ 161 and 162 Other sections: §§ 226.6 through 226.8

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§ 226.13 Regulation Z Commentary Other regulations: Regulation E (12 CFR 205) Previous regulation: §§ 226.2(j) and (cc), and 226.14 1981 changes: Section 226.13 reflects several substantive changes from the previous regula tion and a complete restructuring of the errorresolution provisions. The new organization, for example, arranges the creditor’s responsi bilities in chronological sequence. Section 226.13(a)(7) implements amended section 161(b) of the act and provides that the creditor’s failure to send a periodic statement to the consumer’s current address is a billing error, unless the creditor received written no tice of the address change fewer than 20 days (instead of 10 days) before the end of the bill ing cycle.

Several provisions regarding the creditor’s duties after a billing error is alleged have been revised. The previous regulation immu nized a creditor from liability for inadvertently taking collection action or making an adverse credit report within two days after receiving a billing-error notice; these provisions are de leted from the revised regulation. The revised regulation no longer requires placement “on the face” of the periodic statement of the dis closure about payment of disputed amounts. The revised regulation changes the rule in the previous regulation that a card issuer must prevent or restore an automatic debit of a dis puted amount if it receives a billing-error no tice within 16 days after transmitting the peri odic statement that reflects the alleged error. Under the revised regulation, the card issuer must prevent an automatic debit if it receives a billing-error notice up to 3 days before the scheduled payment date (provided that the no tice is received within the 60 days for the consumer to assert the error). SECTION 226.14— Determination of Annual Percentage Rate 14(a) General Rule 1. Tolerance. The tolerance of [h of 1 per centage point above or below the annual percentage rate applies to any required disclosure of the annual percentage rate. The disclosure of the annual percentage rate is required in sections 226.6, 226.7, 226.9, 226.15, 226.16, and 226.26.

2. Rounding. The regulation does not require that the annual percentage rate be calculated to any particular number of decimal places; rounding is permissible within the lh of 1 per cent tolerance. For example, an exact annual percentage rate of 14.33333 percent may be stated as 14.33 percent or as 14.3 percent, or even as 14>/4 percent; but it could not be stated as 14.2 percent or 14 percent, since each varies by more than the permitted tolerance.

3. Periodic rates. No explicit tolerance exists for any periodic rate as such; a disclosed peri odic rate may vary from precise accuracy (for example, due to rounding) only to the extent that its annualized equivalent is within the tol erance permitted by section 226.14(a). Further, a periodic rate need not be calculated to any particular number of decimal places. 4. Finance charges. The regulation does not prohibit creditors from assessing finance charges on balances that include prior, unpaid finance charges; state or other applicable law may do so, however.

5. Good faith reliance on faulty calculation tools. Footnote 31a absolves a creditor of lia bility for an error in the annual percentage rate or finance charge that resulted from a cor responding error in a calculation tool used in good faith by the creditor. Whether or not the creditor’s use of the tool was in good faith must be determined on a case-by-case basis, but the creditor must in any case have taken reasonable steps to verify the accuracy of the tool, including any instructions, before using it. Generally, the footnote is available only for errors directly attributable to the calculation tool itself, including software programs; it is not intended to absolve a creditor of liability for its own errors, or for errors arising from improper use of the tool, from incorrect data entry, or from misapplication of the law.

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Regulation Z Commentary § 226.14 14(b) Annual Percentage Rate for Section 226.5a and 226.5b Disclosures, for Initial Disclosures and for Advertising Purposes 1. Corresponding annual percentage rate computation. For purposes of sections 226.5a, 226.5b, 226.6 and 226.16, the annual percent age rate is determined by multiplying the peri odic rate by the number of periods in the year. This computation reflects the fact that, in such disclosures, the rate (known as the corre sponding annual percentage rate) is prospec tive and does not involve any particular fi nance charge or periodic balance. This computation also is used to determine any an nual percentage rate for oral disclosures under section 226.26(a).

14(c) Annual Percentage Rate for Periodic Statements 1. General rule. Section 226.14(c) requires disclosure of the corresponding annual per centage rate for each periodic rate (under sec tion 226.7(d)). It is figured by multiplying each periodic rate by the number of periods per year. This disclosure is like that provided on the initial disclosure statement. The peri odic statement also must reflect (under section 226.7(g)) the annualized equivalent of the rate actually applied during a particular cycle (the historical rate); this rate may differ from the corresponding annual percentage rate because of the inclusion of fixed, minimum, or trans action charges. Sections 226.14(c)(1) through (c)(4) state the computation rules for the his torical rate.

2. Periodic rates. Section 226.14(c)(1) applies if the only finance charge imposed is due to the application of a periodic rate to a balance. The creditor may compute the annual percent age rate either:

• by multiplying each periodic rate by the number of periods in the year or • by the “quotient” method. This method re fers to a composite annual percentage rate when different periodic rates apply to dif ferent balances. For example, a particular plan may involve a periodic rate of l '/2 percent on balances up to $500, and 1 per cent on balances over $500. If, in a given cycle, the consumer has a balance of $800, the finance charge would consist of $7.50 (500 X .015) plus $3.00 (300 X .01), for a total finance charge of $10.50. The annu al percentage rate for this period may be disclosed either as 18 percent on $500 and 12 percent on $300, or as 15.75 percent on a balance of $800 (the quotient of $10.50 divided by $800, multiplied by 12 ). 3. Charges not based on periodic rates. Sec tion 226.14(c)(2) applies if the finance charge imposed includes a charge not due to the ap plication of a periodic rate (other than a charge relating to a specific transaction). For example, if the creditor imposes a minimum $1 finance charge on all balances below $50, and the consumer’s balance was $40 in a par ticular cycle, the creditor would disclose an annual percentage rate of 30 percent (1/40 X 12).

4. No balance. Footnote 32 to section 226.14(c)(2) would apply not only when mini mum charges are imposed on an account with no balance, but also to a plan in which a peri odic rate is applied to advances from the date of the transaction. For example, if on May 19 the consumer pays the new balance in full from a statement dated May 1 and has no fur ther transactions reflected on the June 1 state ment, that statement would reflect a finance charge with no account balance. 5. Transaction charges. Section 226.14(c)(3) transaction charges include, for example: • A loan fee of $10 imposed on a particular advance • A charge of 3 percent of the amount of each transaction The reference to avoiding duplication in the computation requires that the amounts of transactions on which transaction charges were imposed not be included both in the amount of total balances and in the “other amounts on which a finance charge was imposed” fig ure. For further explanation and examples of how to determine the components of this formula, see appendix F.

6. Daily rate with specific transaction charge. Section 226.14(c)(3) sets forth an acceptable method for calculating the annual percentage

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§ 226.14 Regulation Z Commentary rate if the finance charge results from a charge relating to a specific transaction and the appli cation of a daily periodic rate. This section includes the requirement that the creditor fol low the rules in appendix F in calculating the annual percentage rate, especially footnote 1 to appendix F, which addresses the daily rate/ transaction charge situation by providing that the “average of daily balances” shall be used instead of the “sum of the balances.” 7. Charges related to opening, renewing, or continuing account. Footnote 33 is applicable to section 226.14(c)(2) and (c)(3). The charges involved here do not relate to a specific trans action or to specific activity on the account, but relate solely to the opening, renewing, or continuing of the account. For example, an annual fee to renew an open-end credit ac count that is a percentage of the credit limit on the account, or that is charged only to con sumers who have not used their credit card for a certain dollar amount in transactions dur ing the preceding year, would not be included in the calculation of the annual percentage rate, even though the fee may not be excluded from the finance charge under section 226.4(c)(4). (See comment 4(c)(4)-2). Inclu sion of these charges in the annual percentage rate calculation results in significant distor tions of the annual percentage rate and deliv ery of a possibly misleading disclosure to consumers. The rule in footnote 33 applies even if the loan fee, points, or similar charges are billed on a subsequent periodic statement or withheld from the proceeds of the first ad vance on the account.

8. Classification o f charges. If the finance charge includes a charge not due to the appli cation of a periodic rate, the creditor must de termine the proper annual percentage rate computation method according to the type of charge imposed. If the charge is tied to a spe cific transaction (for example, 3 percent of the amount of each transaction), then the method in section 226.14(c)(3) must be used. If a fixed or minimum charge is applied, that is, one not tied to any specific transaction, then the formula in section 226.14(c)(2) is appropriate.

9. Small finance charges. Section 226.14(c) (4) gives the creditor an alternative to section 226.14(c)(2) and (c)(3) if small finance charges (50 cents or less) are involved; that is, if the finance charge includes minimum or fixed fees not due to the application of a peri odic rate and the total finance charge for the cycle does not exceed 50 cents. For example, while a monthly activity fee of 50 cents on a balance of $2 0 would produce an annual per centage rate of 30 percent under the rule in section 226.14(c)(2), the creditor may disclose an annual percentage rate of 18 percent if the periodic rate generally applicable to all bal ances is 1 */2 percent per month. This option is consistent with the provision in footnote 11 to sections 226.6 and 226.7 permitting the credi tor to disregard the effect of minimum charges in disclosing the ranges of balances to which periodic rates apply.

14(d) Calculations Where Daily Periodic Rate Applied 1. Quotient method. Section 226.14(d) ad dresses use of a daily periodic rate(s) to deter mine some or all of the finance charge and use of the quotient method to determine the annual percentage rate. Since the quotient formula in section 226.14(c)(l)(ii) does not work when a daily rate is being applied to a series of daily balances, section 226.14(d) gives the creditor two alternative ways to fig ure the annual percentage rate—either of which satisfies the requirement in section 226.7(g).

2. Daily rate with specific transaction charge. If the finance charge results from a charge re lating to a specific transaction and the applica tion of a daily periodic rate, see comment 14(c)-6 for guidance on an appropriate calcu lation method.

References Statute: § 107 Other sections: §§ 226.6, 226.7, 226.9, 226.15, 226.16, and 226.26.

Previous regulation: § 226.5(a) and interpreta tion §§ 226.501 and 226.506. 1981 changes: Section 226.14 reflects the stat utory amendment permitting a l/z of 1 percent tolerance for annual percentage rates. The re

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Regulation Z Commentary § 226.15 vised regulation no longer reflects the provi sion dealing with finance charges imposed on specified ranges or brackets of balances. The revised regulation includes a footnote provid ing that loan fees, points, or similar charges unrelated to any specific transaction are not figured into the annual percentage rate computation.

SECTION 226.15—Right of Rescission 1. Transactions not covered. Credit extensions that are not subject to the regulation are not covered by section 226.15 even if the cus tomer’s principal dwelling is the collateral se curing the credit. For this purpose, “credit ex tensions” also would include the occurrences listed in comment 15(a)(l)-l. For example, the right of rescission does not apply to the opening of a business-purpose credit line, even though the loan is secured by the cus tomer’s principal dwelling.

15(a) Consumer’s Right to Rescind Paragraph 15(a)(1) 1. Occurrences subject to right. Under an open-end credit plan secured by the con sumer’s principal dwelling, the right of rescis sion generally arises with each of the follow ing occurrences:

• Opening the account • Each credit extension • Increasing the credit limit • Adding to an existing account a security interest in the consumer’s principal dwelling • Increasing the dollar amount of the security interest taken in the dwelling to secure the plan. For example, a consumer may open an account with a $10,000 credit limit, $5,000 of which is initially secured by the consumer’s principal dwelling. The con sumer has the right to rescind at that time and (except as noted in section 226.15(a)( 1 )(ii)) with each extension on the account. Later, if the creditor decides that it wants the credit line fully secured, and increases the amount of its interest in the consumer’s dwelling, the consumer has the right to rescind the increase. 2. Exceptions. Although the consumer gener ally has the right to rescind with each transac tion on the account, section 125(e) of the act provides an exception: the creditor need not provide the right to rescind at the time of each credit extension made under an open-end credit plan secured by the consumer’s princi pal dwelling to the extent that the credit ex tended is in accordance with a previously es tablished credit limit for the plan. This limited rescission option is available whether or not the plan existed prior to the effective date of the act.

3. Security interest arising from transaction. In order for the right of rescission to apply, the security interest must be retained as part of the credit transaction. For example: • A security interest that is acquired by a contractor who is also extending the credit in the transaction • A mechanic’s or materialman’s lien that is retained by a subcontractor or supplier of a contractor-creditor, even when the latter has waived its own security interest in the consumer’s home The security interest is not part of the credit transaction, and therefore the transaction is not subject to the right of rescission when, for example:

• A mechanic’s or materialman’s lien is ob tained by a contractor who is not a party to the credit transaction but merely is paid with the proceeds of the consumer’s cash advance • All security interests that may arise in con nection with the credit transaction are val idly waived • The creditor obtains a lien and completion bond that in effect satisfies all liens against the consumer’s principal dwelling as a re sult of the credit transaction Although liens arising by operation of law are not considered security interests for purposes of disclosure under section 226.2, that section specifically includes them in the definition for purposes of the right of rescission. Thus, even though an interest in the consumer’s principal

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§ 226.15 Regulation Z Commentary dwelling is not a required disclosure under section 226.6(c), it may still give rise to the right of rescission.

4. Consumer. To be a consumer within the meaning of section 226.2, that person must at least have an ownership interest in the dwell ing that is encumbered by the creditor’s secur ity interest, although that person need not be a signatory to the credit agreement. For exam ple, if only one spouse enters into a secured plan, the other spouse is a consumer if the ownership interest of that spouse is subject to the security interest.

5. Principal dwelling. A consumer can only have one principal dwelling at a time. (But see comment 15(a)(l)-6.) A vacation or other second home would not be a principal dwelling. A transaction secured by a second home (such as a vacation home) that is not currently being used as the consumer’s princi pal dwelling is not rescindable, even if the consumer intends to reside there in the future. When a consumer buys or builds a new dwelling that will become the consumer’s principal dwelling within one year or upon completion of construction, the new dwelling is considered the principal dwelling if it secures the open-end credit line. In that case, the transaction secured by the new dwelling is a residential mortgage transaction and is not rescindable. For example, if a consumer whose principal dwelling is currently A builds B, to be occupied by the consumer upon com pletion of construction, an advance on an open-end line to finance B and secured by B is a residential mortgage transaction. Dwell ing, as defined in section 226.2, includes structures that are classified as personalty under state law. For example, a transaction se cured by a mobile home, trailer, or houseboat used as the consumer’s principal dwelling may be rescindable.

6. Special rule for principal dwelling. Not withstanding the general rule that consumers may have only one principal dwelling, when the consumer is acquiring or constructing a new principal dwelling, a credit plan or exten sion that is subject to Regulation Z and is secured by the equity in the consumer’s cur rent principal dwelling is subject to the right of rescission regardless of the purpose of that loan (for example, an advance to be used as a bridge loan). For example, if a consumer whose principal dwelling is currently A builds B, to be occupied by the consumer upon com pletion of construction, a loan to finance B and secured by A is subject to the right of rescission. Moreover, a loan secured by both A and B is, likewise, rescindable. Paragraph 15(a)(2) 1. Consumer’s exercise o f right. The con sumer must exercise the right of rescission in writing, but not necessarily on the notice sup plied under section 226.15(b). Whatever the means of sending the notification of rescis sion— mail, telegram, or other written means—the time period for the creditor’s per formance under section 226.15(d)(2) does not begin to run until the notification has been received. The creditor may designate an agent to receive the notification so long as the agent’s name and address appear on the notice provided to the consumer under section 226.15(b).

Paragraph 15(a)(3) 1. Rescission period. The period within which the consumer may exercise the right to rescind runs for three business days from the last of three events:

• The occurrence that gives rise to the right of rescission • Delivery of all material disclosures that are relevant to the plan • Delivery to the consumer of the required rescission notice For example, an account is opened on Friday, June 1, and the disclosures and notice of the right to rescind were given on Thursday, May 31; the rescission period will expire at mid night of the third business day after June 1—that is, Tuesday, June 5. In another exam ple, if the disclosures are given and the ac count is opened on Friday, June 1, and the rescission notice is given on Monday, June 4, the rescission period expires at midnight of the third business day after June 4— that is, Thursday, June 7. The consumer must place the rescission notice in the mail, file it for

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Regulation Z Commentary § 226.15 telegraphic transmission, or deliver it to the creditor’s place of business within that period in order to exercise the right. • 2. Material disclosures. Footnote 36 sets forth the material disclosures that must be provided before the rescission period can begin to run. The creditor must provide sufficient informa tion to satisfy the requirements of section 226.6 for these disclosures. A creditor may satisfy this requirement by giving an initial disclosure statement that complies with the regulation. Failure to give the other required initial disclosures (such as the billing-rights statement) or the information required under section 226.5b does not prevent the running of the rescission period, although that failure may result in civil liability or administrative sanctions. The payment terms set forth in footnote 36 apply to any repayment phase set forth in the agreement. Thus, the payment terms described in section 226.6(e)(2) for any repayment phase as well as for the draw pe riod are “material disclosures.” 3. Material disclosures—variable-rate pro gram. For a variable-rate program, the mate rial disclosures also include the disclosures listed in footnote 12 to section 226.6(a)(2): the circumstances under which the rate may increase; the limitations on the increase; and the effect of an increase. The disclosures • listed in footnote 12 to section 226.6(a)(2) for any repayment phase also are material disclo sures for variable-rate programs. 4. Unexpired right o f rescission. When the creditor has failed to take the action necessary to start the three-day rescission period run ning, the right to rescind automatically lapses on the occurrence of the earliest of the fol lowing three events:

• The expiration of three years after the oc currence giving rise to the right of rescis sion • Transfer of all the consumer’s interest in the property • Sale of the consumer’s interest in the prop erty, including a transaction in which the consumer sells the dwelling and takes back a purchase money note and mortgage or re tains legal title through a device such as an installment-sale contract Transfer of all the consumer’s interest in cludes such transfers as bequests and gifts. A sale or transfer of the property need not be voluntary to terminate the right to rescind. For example, a foreclosure sale would terminate an unexpired right to rescind. As provided in section 125 of the act, the three-year limit may be extended by an administrative pro ceeding to enforce the provisions of section 226.15. A partial transfer of the consumer’s interest, such as a transfer bestowing co-own ership on a spouse, does not terminate the right of rescission.

Paragraph 15(a)(4) 1. Joint owners. When more than one con sumer has the right to rescind a transaction, any one of them may exercise that right and cancel the transaction on behalf of all. For example, if both a husband and wife have the right to rescind a transaction, either spouse acting alone may exercise the right and both are bound by the rescission. 15(b) Notice of Right to Rescind 1. Who receives notice. Each consumer enti tled to rescind must be given: • Two copies of the rescission notice • The material disclosures In a transaction involving joint owners, both of whom are entitled to rescind, both must receive the notice of the right to rescind and disclosures. For example, if both spouses are entitled to rescind a transaction, each must re ceive two copies of the rescission notice and one copy of the disclosures. 2. Format. The rescission notice may be physically separated from the material disclo sures or combined with the material disclo sures, so long as the information required to be included on the notice is set forth in a clear and conspicuous manner. See the model notices in appendix G.

3. Content. The notice must include all of the information outlined in section 226.15(b)(1) through (5). The requirement in section 226.15(b) that the transaction or occurrence be identified may be met by providing the date of the transaction or occurrence. The notice

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§ 226.15 Regulation Z Commentary may include additional information related to the required information, such as: • A description of the property subject to the security interest • A statement that joint owners may have the right to rescind and that a rescission by one is effective for all • The name and address of an agent of the creditor to receive notice of rescission 4. Time of providing notice. The notice re quired by section 226.15(b) need not be given before the occurrence giving rise to the right of rescission. The creditor may deliver the no tice after the occurrence, but the rescission pe riod will not begin to run until the notice is given. For example, if the creditor provides the notice on May 15, but disclosures were given and the credit limit was raised on May 10 , the three-business-day rescission period will run from May 15.

15(c) Delay of Creditor’s Performance 1. General rule. Until the rescission period has expired and the creditor is reasonably sat isfied that the consumer has not rescinded, the creditor must not, either directly or through a third party:

• Disburse advances to the consumer • Begin performing services for the con sumer • Deliver materials to the consumer A creditor may, however, continue to allow transactions under an existing open-end credit plan during a rescission period that results solely from the addition of a security interest in the consumer’s principal dwelling. (See comment 15(c)-3 for other actions that may be taken during the delay period.) 2. Escrow. The creditor may disburse ad vances during the rescission period in a valid escrow arrangement. The creditor may not, however, appoint the consumer as “trustee” or “escrow agent” and distribute funds to the consumer in that capacity during the delay period.

3. Permissible actions. Section 226.15(c) does not prevent the creditor from taking other steps during the delay, short of beginning actual performance. Unless otherwise prohibited, such as by state law, the creditor may, for example:

• Prepare the cash advance check • Perfect the security interest • Accrue finance charges during the delay period 4. Performance by third party. The creditor is relieved from liability for failure to delay per formance if a third party with no knowledge that the rescission right has been activated provides materials or services, as long as any debt incurred for materials or services ob tained by the consumer during the rescission period is not secured by the security interest in the consumer’s dwelling. For example, if a consumer uses a bank credit card to purchase materials from a merchant in an amount be low the floor limit, the merchant might not contact the card issuer for authorization and therefore would not know that materials should not be provided.

5. Delay beyond rescission period. The credi tor must wait until it is reasonably satisfied that the consumer has not rescinded. For ex ample, the creditor may satisfy itself by doing one of the following:

When more than one consumer has the right to rescind, the creditor cannot reasonably rely on the assurance of only one consumer, be cause other consumers may exercise the right. 15(d) Effects of Rescission Paragraph 15(d)(1) 1. Termination of security interest. Any secur ity interest giving rise to the right of rescis sion becomes void when the consumer exer cises the right of rescission. The security interest is automatically negated, regardless of its status and whether or not it was recorded or perfected. Under section 226.15(d)(2), how ever, the creditor must take any action neces

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Regulation Z Commentary § 226.15 sary to reflect the fact that the security interest no longer exists.

2. Extent o f termination. The creditor’s secur ity interest is void only to the extent that it is related to the occurrence giving rise to the right of rescission. For example, upon rescission:

■ If the consumer’s right to rescind is acti vated by the opening of a plan, any securi ty interest in the principal dwelling is void. • If the right arises due to an increase in the credit limit, the security interest is void as to the amount of credit extensions over the prior limit, but the security interest in amounts up to the original credit limit is unaffected.

• If the right arises with each individual credit extension, then the interest is void as to that extension, and other extensions are unaffected.

Paragraph 15(d)(2) 1. Refunds to consumer. The consumer cannot be required to pay any amount in the form of money or property either to the creditor or to a third party as part of the occurrence subject to the right of rescission. Any amounts of this nature already paid by the consumer must be refunded. “ Any amount” includes finance charges already accrued, as well as other charges such as broker fees, application and commitment fees, or fees for a title search or appraisal, whether paid to the creditor, paid by the consumer directly to a third party, or passed on from the creditor to the third party. It is irrelevant that these amounts may not re present profit to the creditor. For example: • If the occurrence is the opening of the plan, the creditor must return any member ship or application fee paid. • If the occurrence is the increase in a credit limit or the addition of a security interest, the creditor must return any fee imposed for a new credit report or filing fees. • If the occurrence is a credit extension, the creditors must return fees such as applica tion, title, and appraisal or survey fees, as well as any finance charges related to the credit extension.

2. Amounts not refundable to consumer. Cred itors need not return any money given by the consumer to a third party outside of the oc currence, such as costs incurred for a building permit or for a zoning variance. Similarly, the term “any amount” does not apply to money or property given by the creditor to the con sumer; those amounts must be tendered by the consumer to the creditor under section 226.15(d)(3).

3. Reflection o f security-interest termination. The creditor must take whatever steps are nec essary to indicate that the security interest is terminated. Those steps include the cancella tion of documents creating the security inter est, and the filing of release or termination statements in the public record. In a transac tion involving subcontractors or suppliers that also hold security interests related to the oc currence rescinded by the consumer, the credi tor must ensure that the termination of their security interests is also reflected. The 20-day period for the creditor’s action refers to the time within which the creditor must begin the process. It does not require all necessary steps to have been completed within that time, but the creditor is responsible for seeing the pro cess through to completion.

Paragraph 15(d)(3) 1. Property exchange. Once the creditor has fulfilled its obligation under section 226.15(d)(2), the consumer must tender to the creditor any property or money the creditor has already delivered to the consumer. At the consumer’s option, property may be tendered at the location of the property. For example, if fixtures or furniture have been delivered to the consumer’s home, the consumer may tender them to the creditor by making them available for pickup at the home, rather than physically returning them to the creditor’s premises. Money already given to the consumer must be tendered at the creditor’s place of business. For purpose of property exchange, the follow ing additional rules apply:

• A cash advance is considered money for purposes of this section even if the creditor knows what the consumer intends to purchase with the money.

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§ 226.15 Regulation Z Commentary • In a three-party open-end credit plan (that is, if the creditor and seller are not the same or related persons), extensions by the creditor that are used by the consumer for purchases from third-party sellers are con sidered to be the same as cash advances for purposes of tendering value to the cred itor, even though the transaction is a purchase for other purposes under the regu lation. For example, if a consumer exer cises the unexpired right to rescind after using a three-party credit card for one year, the consumer would tender the amount of the purchase price for the items charged to the account, rather than tendering the items themselves to the creditor.

2. Reasonable value. If returning the property would be extremely burdensome to the con sumer, the consumer may offer the creditor its reasonable value rather than returning the property itself. For example, if building mater ials have already been incorporated into the consumer’s dwelling, the consumer may pay their reasonable value.

Paragraph 15(d)(4) 1. Modifications. The procedures outlined in section 226.15(d)(2) and (d)(3) may be modi fied by a court. For example, when a con sumer is in bankruptcy proceedings and pro hibited from returning anything to the creditor, or when the equities dictate, a modi fication might be made.

15(e) Consumer’s Waiver of Right to Rescind 1. Need for waiver. To waive the right to re scind, the consumer must have a bona fide personal financial emergency that must be met before the end of the rescission period. The existence of the consumer’s waiver will not, of itself, automatically insulate the creditor from liability for failing to provide the right of rescission.

2. Procedure. To waive or modify the right to rescind, the consumer must give a written statement that specifically waives or modifies the right, and also includes a brief description of the emergency. Each consumer entitled to rescind must sign the waiver statement. In a transaction involving multiple consumers, such as a husband and wife using their home as collateral, the waiver must bear the signatures of both spouses.

15(f) Exempt Transactions 1. Residential mortgage transaction. Although residential mortgage transactions would sel dom be made on bona fide open-end credit plans (under which repeated transactions must be reasonably contemplated), an advance on an open-end plan could be for a downpayment for the purchase of a dwelling that would then secure the remainder of the line. In such a case, only the particular advance for the downpayment would be exempt from the re scission right.

2. State creditors. Cities and other political subdivisions of states acting as creditors are not exempt from section 226.15. 3. Spreader clause. When the creditor holds a mortgage or deed of trust on the consumer’s principal dwelling and that mortgage or deed of trust contains a “spreader clause” (also known as a “dragnet” or cross-collateralization clause), subsequent occurrences such as the opening of a plan or individual credit ex tensions are subject to the right of rescission to the same degree as if the security interest were taken directly to secure the open-end plan, unless the creditor effectively waives its security interest under the spreader clause with respect to the subsequent open-end credit extensions.

References Statute: §§ 113, 125, and 130 and the Hous ing and Community Development Technical Amendments Act of 1984 § 205 (Pub. L. 98- 479).

Other sections: § 226.2 and appendix G Previous regulation: § 226.9 1981 changes: Section 226.15 reflects the stat utory amendments of 1980, providing for a limited right of rescission when individual credit extensions are made in accordance with a previously established credit limit for an open-end credit plan. The 1980 amendments provided that this limited rescission right be available for a three-year trial period. How-

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Regulation Z Commentary § 226.16 ever, Pub. L. 98-479 now permanently ex empts such individual credit extensions from the right of rescission.

The right to rescind applies not only to real property used as the consumer’s principal dwelling, but to personal property as well. The regulation provides no specific text or format for the rescission notice. When a consumer exercises the right to re scind, the creditor now has 20 days to return a consumer’s money or property and take the necessary action to terminate the security in terest. The creditor has 20 days to take pos session of the money or property after the consumer’s tender before the consumer may keep it without further obligation. Under the revised regulation, the waiver provision has been relaxed. The lien status of the mortgage is irrelevant for purposes of the residential mortgage transaction exemption. The exemption for agricultural loans from the right to rescind has been deleted. SECTION 226.16— Advertising 1. Clear and conspicuous standard. Section 226.16 is subject to the general “clear and conspicuous” standard for subpart B (see sec tion 226.5(a)(1)) but prescribes no specific rules for the format of the necessary disclo sures. The credit terms need not be printed in a certain type size nor need they appear in any particular place in the advertisement. 2. Expressing the annual percentage rate in abbreviated form. Whenever the annual per centage rate is used in an advertisement for open-end credit, it may be expressed using a readily understandable abbreviation such as APR.

16(a) Actually Available Terms 1. General rule. To the extent that an adver tisement mentions specific credit terms, it may state only those terms that the creditor is actu ally prepared to offer. For example, a creditor may not advertise a very low annual percent age rate that will not in fact be available at any time. Section 226.16(a) is not intended to inhibit the promotion of new credit programs, but to bar the advertising of terms that are not and will not be available. For example, a creditor may advertise terms that will be of fered for only a limited period, or terms that will become available at a future date. 2. Specific credit terms. “ Specific credit terms” is not limited to the disclosures re quired by the regulation but would include any specific components of a credit plan, such as the minimum periodic payment amount or seller’s points in a plan secured by real estate. 16(b) Advertisement of Terms That Require Additional Disclosures 1. Terms requiring additional disclosures. In section 226.16(b) the phrase “the terms re quired to be disclosed under section 226.6” refers to the terms in section 226.6(a) and 226.6(b).

2. Use of positive terms. An advertisement must state a credit term as a positive number in order to trigger additional disclosures. For example, “no annual membership fee” would not trigger the additional disclosures required by section 226.16(b). (See, however, the rules in section 226.16(d) relating to advertisements for home-equity plans.) 3. Implicit terms.

Section 226.16(b) applies even if the triggering term is not stated ex plicitly, but may be readily determined from the advertisement.

4. Membership fees. A membership fee is not a triggering term nor need it be disclosed under section 226.16(b)(3) if it is required for participation in the plan whether or not an open-end credit feature is attached. (See com ment 6(b)-1 .) 5. Variable-rate plans. In disclosing the an nual percentage rate in an advertisement for a variable-rate plan, as required by section 226.16(b)(2), the creditor may use an insert showing the current rate, may give the rate as of a specified recent date, or may disclose an estimated rate under section 226.5(c). The ad ditional requirement in section 226.16(b)(2) to disclose the variable-rate feature may be satis fied by disclosing that “the annual percentage rate may vary” or a similar statement, but the advertisement need not include the informa-

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§ 226.16 Regulation Z Commentary tion required by footnote 1 2 to section 226.6(a)(2).

6. Discounted variable-rate plans—disclosure of the annual percentage rates. The advertised annual percentage rates for discounted varia ble-rate plans must, in accordance with com ment 6(a)(2 )-10, include both the initial rate (with the statement of how long it will remain in effect) and the current indexed rate (with the statement that this second rate may vary). The options listed in comment 16(b)-5 may be used in disclosing the current indexed rate. 7. Triggering terms. The following are exam ples of terms that trigger additional disclosures:

• “Small monthly service charge on the re maining balance,” which describes how the amount of a finance charge will be deter mined.

• “ 12 percent Annual Percentage Rate” or “A $15 annual membership fee buys you $2,000 in credit,” which describe required disclosures using positive numbers. 8. Minimum, fixed, transaction, activity, or similar charge. The charges to be disclosed under section 226.16(b)(1) are those that are considered finance charges under section 226.4.

9. Deferred-billing and deferred-payment pro grams. Statements such as “Charge it—you won’t be billed until May” or “You may skip your January payment” are not in themselves triggering terms, since the timing for initial billing or for monthly payments are not terms required to be disclosed under section 226.6. However, a statement such as “No finance charge until May” or any other statement re garding when finance charges begin to accrue is a triggering term, whether appearing alone or in conjunction with a description of a de ferred-billing or deferred-payment program such as the examples above.

16(c) Catalogs and Multiple-Page Advertisements 1. Definition. The multiple-page advertise ments to which section 226.16(c) refers are advertisements consisting of a series of se quentially numbered pages—for example, a supplement to a newspaper. A mailing con sisting of several separate flyers or pieces of promotional material in a single envelope does not constitute a single multiple-page advertise ment for purposes of section 226.16(c). Paragraph 16(c)(1) 1. General. Section 226.16(c)(1) permits cred itors to put credit information together in one place in a catalog or multiple-page advertise ment. The rule applies only if the catalog or multiple-page advertisement contains one or more of the triggering terms from section 226.16(b).

Paragraph 16(c)(2) 1. Table or schedule if credit terms depend on outstanding balance. If the credit terms of a plan vary depending on the amount of the bal ance outstanding, rather than the amount of any property purchased, a table or schedule complies with section 226.16(c)(2) if it in cludes the required disclosures for representa tive balances. For example, a creditor would disclose that a periodic rate of 1.5 percent is applied to balances of $500 or less, and a 1 percent rate is applied to balances greater than $500.

16(d) Additional Requirements for Home-Equity Plans 1. Trigger terms. Negative as well as affirma tive references trigger the requirement for ad ditional information. For example, if a creditor states “no annual fee,” “no points,” or “we waive closing costs” in an advertisement, ad ditional information must be provided. (See comment 16(d)-4 regarding the use of a phrase such as “no closing costs.”) Inclusion of a statement such as “low fees,” however, would not trigger the need to state additional information. References to payment terms in clude references to the draw period or any re payment period, to the length of the plan, to how the minimum payments are determined and to the timing of such payments. 2. Fees to open the plan. Section 226.16 (d)(l)(i) requires a disclosure of any fees im posed by the creditor or a third party to open the plan. In providing the fee information re-

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Regulation Z Commentary § 226.17 quired under this paragraph, the corresponding rules for disclosure of this information apply. For example, fees to open the plan may be • stated as a range. Similarly, if property insur ance is required to open the plan, a creditor either may estimate the cost of the insurance or provide a statement that such insurance is required. (See the commentary to section 226.5b(d)(7) and (8).) 3. Statements of tax deductibility. An adver tisement referring to deductiblity for tax pur poses is not misleading if it includes a state ment such as “consult a tax advisor regarding the deductibility of interest.” 4. Misleading terms prohibited. Under section 226.16(d)(5), advertisements may not refer to home-equity plans as “free money” or use other misleading terms. For example, an ad vertisement could not state “no closing costs” or “we waive closing costs” if consumers may be required to pay any closing costs, such as recordation fees. In the case of prop erty insurance, however, a creditor may state, for example, “no closing costs” even if prop erty insurance may be required, as long as the creditor also provides a statement that such insurance may be required. (See the commen tary to this section regarding fees to open a plan.) • 5. Relation to other sections. Advertisements for home-equity plans must comply with all provisions in section 226.16, not solely the rules in section 226.16(d). If an advertisement contains information (such as the payment terms) that triggers the duty under section 226.16(d) to state the annual percentage rate, the additional disclosures in section 226.16(b) must be provided in the advertisement. While section 226.16(d) does not require a statement of fees to use or maintain the plan (such as membership fees and transaction charges), such fees must be disclosed under section 226.16(b)(1) and (3).

6. Inapplicability of closed-end rules. Adver tisements for home-equity plans are governed solely by the requirements in section 226.16, and not by the closed-end advertising rules in section 226.24. Thus, if a creditor states pay ment information about the repayment phase, this will trigger the duty to provide additional information under section 226.16, but not under section 226.24.

7. Balloon payment. In some programs, a bal loon payment will occur if only the minimum payments under the plan are made. If an ad vertisement for such a program contains any statement about a minimum periodic payment, the advertisement must also state that a bal loon payment will result (not merely that a balloon payment “may” result). (See com ment 5b(d)(5)(ii)-3 for guidance on items not required to be stated in the advertisement, and on situations in which the balloon-payment re quirement does not apply.) References Statute: §§ 141 and 143 Previous regulation: § 226.10(a) through (c) and interpretation § 226.1002 Other sections: §§ 226.2 and 226.6 1981 changes: Section 226.16 reflects the stat utory changes to section 143 of the act which reduce both the number of triggering terms and the additional disclosures required by the use of those terms. Membership or participa tion fees are included among the additional disclosures required when a triggering term is used. The substance of interpretation section 226.1002, requiring disclosure of representa tive amounts of credit in catalogs and multiple-page advertisements, has been incorpo rated in simplified form in paragraph (c). SUBPART C—CLOSED-END CREDIT SECTION 226.17— General Disclosure Requirements 17(a) Form of Disclosures Paragraph 17(a)(1) 1. Clear and conspicuous. This standard re quires that disclosures be in a reasonably un derstandable form. For example, while the regulation requires no mathematical progres sion or format, the disclosures must be pre sented in a way that does not obscure the re lationship of the terms to each other. In addition, although no minimum type size is

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§ 226.17 Regulation Z Commentary mandated, the disclosures must be legible, whether typewritten, handwritten, or printed by computer.

2. Segregation of disclosures. The disclosures may be grouped together and segregated from other information in a variety of ways. For example, the disclosures may appear on a sep arate sheet of paper or may be set off from other information on the contract or other documents:

• By outlining them in a box • By bold print dividing lines • By a different color background • By a different type style (The general segregation requirement de scribed in this subparagraph does not apply to the disclosures required under sections 226.19(b) and 226.20(c) although the disclo sures must be clear and conspicuous.) 3. Location. The regulation imposes no spe cific location requirements on the segregated disclosures. For example:

• They may appear on a disclosure statement separate from all other material. • They may be placed on the same document with the credit contract or other informa tion, so long as they are segregated from that information.

• They may be shown on the front or back of a document.

• They need not begin at the top of a page. • They may be continued from one page to another.

4. Content o f segregated disclosures. Foot notes 37 and 38 contain exceptions to the re quirement that the disclosures under section 226.18 be segregated from material that is not directly related to those disclosures. Footnote 37 lists the items that may be added to the segregated disclosures, even though not di rectly related to those disclosures. Footnote 38 lists the items required under section 226.18 that may be deleted from the segregated dis closures and appear elsewhere. Any one or more of these additions or deletions may be combined and appear either together with or separate from the segregated disclosures. The itemization of the amount financed under sec tion 226.18(c), however, must be separate from the other segregated disclosures under section 226.18. If a creditor chooses to in clude the security-interest charges required to be itemized under sections 226.4(e) and 226.18(o) in the amount-financed itemization, it need not list these charges elsewhere. 5. Directly related. The segregated disclosures may, at the creditor’s option, include any in formation that is directly related to those dis closures. The following is directly related information:

A description of a grace period after which a late-payment charge will be im posed. For example, the disclosure given under section 226.18(0 may state that a late charge will apply to “any payment received more than 15 days after the due date.”

ii.

A statement that the transaction is not se cured. For example, the creditor may add a category labelled “unsecured” or “not secured” to the security-interest disclo sures given under section 226.18(m). iii.

The basis for any estimates used in mak ing disclosures. For example, if the ma turity date of a loan depends solely on the occurrence of a future event, the creditor may indicate that the disclosures assume that event will occur at a certain time.

iv.

The conditions under which a demand feature may be exercised. For example, in a loan subject to demand after five years, the disclosures may state that the loan will become payable on demand in five years.

An explanation of the use of pronouns or other references to the parties to the transaction. For example, the disclosures may state, “ ‘You’ refers to the customer and ‘we’ refers to the creditor.” vi.

Instructions to the creditor or its employ ees on the use of a multiple-purpose form. For example, the disclosures may state, “Check box if applicable.” vii. A statement that the borrower may pay a minimum finance charge upon prepay ment in a simple-interest transaction. For example, when state law prohibits penal ties, but would allow a minimum finance charge in the event of prepayment, the

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Regulation Z Commentary § 226.17 creditor may make the section 226.18(k)(l) disclosure by stating, “You may be charged a minimum finance charge.”

viii. A brief reference to negative amortiza tion in variable-rate transactions. For ex ample, in the variable-rate disclosure, the creditor may include a short statement such as “Unpaid interest will be added to principal.” (See the commentary to section 226.18(f)( 1 )(iii).) ix.

A brief caption identifying the disclo sures. For example, the disclosures may bear a general title such as “Federal Truth in Lending Disclosures” or a de scriptive title such as “Real Estate Loan Disclosures.”

A statement that a due-on-sale clause or other conditions on assumption are con tained in the loan document. For exam ple, the disclosure given under section 226.18(q) may state, “Someone buying your home may, subject to conditions in the due-on-sale clause contained in the loan document, assume the remainder of the mortgage on the original terms.” xi.

If a state or federal law prohibits prepay ment penalties and excludes the charging of interest after prepayment from cover age as a penalty, a statement that the borrower may have to pay interest for some period after prepayment in full. The disclosure given under section 226.18(k) may state, for example, “If you prepay your loan on other than the regular installment date, you may be as sessed interest charges until the end of the month.”

xii. More than one hypothetical example under section 226.18(f)(l)(iv) in transac tions with more than one variable-rate feature. For example, in a variable-rate transaction with an option permitting consumers to convert to a fixed-rate transaction, the disclosures may include an example illustrating the effects on the payment terms of an increase resulting from conversion in addition to the exam ple illustrating an increase resulting from changes in the index.

xiii. The disclosures set forth under section 226.18(f)(1) for variable-rate transactions subject to section 226.18(f)(2). xiv. A statement whether or not a subsequent purchaser of the property securing an ob ligation may be permitted to assume the remaining obligation on its original terms.

xv. A late-payment-fee disclosure under sec tion 226.18(/) on a single-payment loan. 6. Multiple-purpose forms. The creditor may design a disclosure statement that can be used for more than one type of transaction, so long as the required disclosures for individual transactions are clear and conspicuous. (See the commentary to appendices G and H for a discussion of the treatment of disclosures that do not apply to specific transactions.) Any disclosure listed in section 226.18 (except the itemization of the amount financed under sec tion 226.18(c)) may be included on a standard disclosure statement even though not all of the creditor’s transactions include those fea tures. For example, the statement may include: • The variable-rate disclosure under section 226.18(f) • The demand feature disclosure under sec tion 226.18(i) • A reference to the possibility of a security interest arising from a spreader clause, under section 226.18(m) • The assumption policy disclosure under section 226.18(q) • The required deposit disclosure under sec tion 226.18(r) 7. Balloon-payment financing with leasing characteristics. In certain credit sale or loan transactions, a consumer may reduce the dol lar amount of the payments to be made during the course of the transaction by agreeing to make, at the end of the loan term, a large final payment based on the expected residual value of the property. The consumer may have a number of options with respect to the final payment, including, among other things, retaining the property and making the final payment, refinancing the final payment, or transferring the property to the creditor in lieu of the final payment. Such transactions may have some of the characteristics of lease trans actions subject to Regulation M, but are con

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§ 226.17 Regulation Z Commentary sidered credit transactions where the consumer assumes the indicia of ownership, including the risks, burdens and benefits of ownership upon consummation. These transactions are governed by the disclosure requirements of this regulation instead of Regulation M. Cred itors should not include in the segregated Truth in Lending disclosures additional infor mation. Thus, disclosures should show the large final payment in the payment schedule and should not, for example, reflect the other options available to the consumer at maturity. Paragraph 17(a)(2) 1. When disclosures must be more conspicu ous. The following rules apply to the require ment that the terms “annual percentage rate” and “ finance charge” be shown more conspicuously:

• The terms must be more conspicuous only in relation to the other required disclosures under section 226.18. For example, when the disclosures are included on the contract document, those two terms need not be more conspicuous as compared to the head ing on the contract document or informa tion required by state law. • The terms need not be more conspicuous except as part of the finance charge and annual percentage rate disclosures under section 226.18(d) and (e), although they may, at the creditor’s option, be highlight ed wherever used in the required disclo sures. For example, the terms may, but need not, be highlighted when used in dis closing a prepayment penalty under section 226.18(k) or a required deposit under sec tion 226.18(r).

• The creditor’s identity under section 226.18(a) may, but need not, be more prominently displayed than the finance charge and annual percentage rate. • The terms need not be more conspicuous than figures (including, for example, num bers, percentages, and dollar signs). 2. Making disclosures more conspicuous. The terms “finance charge” and “annual percent age rate” may be made more conspicuous in any way that highlights them in relation to the other required disclosures. For example, they may be:

• Capitalized when other disclosures are printed in capital and lower case • Printed in larger type, bold print or differ ent type face • Printed in a contrasting color • Underlined • Set off with asterisks 17(b) Time of Disclosures 1. Consummation. As a general rule, disclo sures must be made before “consummation” of the transaction. The disclosures need not be given by any particular time before consum mation, except in certain mortgage transac tions and variable-rate transactions secured by the consumer’s principal dwelling with a term greater than one year under section 226.19. (See the commentary to section 226.2(a)(13) regarding the definition of consummation.) 2. Converting open-end to closed-end credit. Except for home-equity plans subject to sec tion 226.5b in which the agreement provides for a repayment phase, if an open-end credit account is converted to a closed-end transac tion under a written agreement with the con sumer, the creditor must provide a set of closed-end credit disclosures before consum mation of the closed-end transaction. (See the commentary to section 226.19(b) for the tim ing rules for additional disclosures required upon the conversion to a variable-rate transac tion secured by a consumer’s principal dwell ing with a term greater than one year.) If con summation of the closed-end transaction occurs at the same time as the consumer en ters into the open-end agreement, the closedend credit disclosures may be given at the time of conversion. If disclosures are delayed until conversion and the closed-end transac tion has a variable-rate feature, disclosures should be based on the rate in effect at the time of conversion. (See the commentary to section 226.5 regarding conversion of closedend to open-end credit.)

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Regulation Z Commentary § 226.17 17(c) Basis of Disclosures and Use of Estimates Paragraph 17(c)(1) 1. Legal obligation. The disclosures shall re flect the credit terms to which the parties are legally bound as of the outset of the transac tion. In the case of disclosures required under section 226.20(c), the disclosures shall reflect the credit terms to which the parties are le gally bound when the disclosures are pro vided. The legal obligation is determined by applicable state law or other law. (Certain transactions are specifically addressed in this commentary. See, for example, the discussion of buydown transactions elsewhere in the commentary to section 226.17(c).) • The fact that a term or contract may later be deemed unenforceable by a court on the basis of equity or other grounds does not, by itself, mean that disclosures based on that term or contract did not reflect the le gal obligation.

2. Modification o f obligation. The legal obli gation normally is presumed to be contained in the note or contract that evidences the agreement. But this presumption is rebutted if another agreement between the parties legally modifies that note or contract. If the parties informally agree to a modification of the legal obligation, the modification should not be re flected in the disclosures unless it rises to the level of a change in the terms of the legal obligation. For example:

• If the creditor offers a preferential rate, such as an employee preferred rate the dis closures should reflect the terms of the le gal obligation. (See the commentary to section 226.19(b) for an example of a preferred-rate transaction that is a variable-rate transaction.

• If the contract provides for a certain monthly payment schedule but payments are made on a voluntary payroll deduction plan or an informal principal-reduction agreement, the disclosures should reflect the schedule in the contract. • If the contract provides for regular monthly payments but the creditor informally per mits the consumer to defer payments from time to time, for instance, to take account of holiday seasons or seasonal employment, the disclosures should reflect the regular monthly payments.

3. Third-party buydowns. In certain transac tions, a seller or other third party may pay an amount, either to the creditor or to the con sumer, in order to reduce the consumer’s pay ments or buy down the interest rate for all or a portion of the credit term. For example, a consumer and a bank agree to a mortgage with an interest rate of 15 percent and level payments over 25 years. By a separate agree ment, the seller of the property agrees to sub sidize the consumer’s payments for the first two years of the mortgage, giving the con sumer an effective rate of 12 percent for that period.

• If the lower rate is reflected in the credit contract between the consumer and the bank, the disclosures must take the buydown into account. For example, the annual percentage rate must be a composite rate that takes account of both the lower initial rate and the higher subsequent rate, and the payment schedule disclosures must reflect the two payment levels. However, the amount paid by the seller would not be specifically reflected in the disclosures giv en by the bank, since that amount consti tutes seller’s points and thus is not part of the finance charge.

• If the lower rate is not reflected in the credit contract between the consumer and the bank and the consumer is legally bound to the 15 percent rate from the outset, the disclosures given by the bank must not re flect the seller buydown in any way. For example, the annual percentage rate and payment schedule would not take into ac count the reduction in the interest rate and payment level for the first two years result ing from the buydown.

4. Consumer buydowns. In certain transac tions, the consumer may pay an amount to the creditor to reduce the payments or obtain a lower interest rate on the transaction. Con sumer buydowns must be reflected in the dis closures given for that transaction. To illus trate, in a mortgage transaction, the creditor

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§ 226.17 Regulation Z Commentary and consumer agree to a note specifying a 14 percent interest rate. However, in a separate document, the consumer agrees to pay an amount to the creditor at consummation, in return for a reduction in the interest rate to 12 percent for a portion of the mortgage term. The amount paid by the consumer may be de posited in an escrow account or may be re tained by the creditor. Depending upon the buydown plan, the consumer’s prepayment of the obligation may or may not result in a por tion of the amount being credited or refunded to the consumer. In the disclosures given for the mortgage, the creditor must reflect the terms of the buydown agreement. For example:

• The amount paid by the customer is a pre paid finance charge (even if deposited in an escrow account).

• A composite annual percentage rate must be calculated, taking into account both in terest rates, as well as the effect of the pre paid finance charge.

• The payment schedule must reflect the multiple payment levels resulting from the buydown.

The rules regarding consumer buydowns do not apply to transactions known as “lender buydowns.” In lender buydowns, a creditor pays an amount (either into an account or to the party to whom the obligation is sold) to reduce the consumer’s payments or interest rate for all or a portion of the credit term. Typically, these transactions are structured as a buydown of the interest rate during an ini tial period of the transaction with a higherthan-usual rate for the remainder of the term. The disclosures for lender buydowns should be based on the terms of the legal obligation between the consumer and the creditor. (See comment 17(c)(l)-3 for the analogous rules concering third-party buydowns.) 5. Split buydowns. In certain transactions, a third party (such as a seller) and a consumer both pay an amount to the creditor to reduce the interest rate. The creditor must include the portion paid by the consumer in the finance charge and disclose the corresponding multi ple payment levels and composite annual per centage rate. The portion paid by the third party and the corresponding reduction in inter est rate, however, should not be reflected in the disclosures unless the lower rate is re flected in the credit contract. (See the discus sion on third-party and consumer buydown transactions elsewhere in the commentary to section 226.17(c).) 6. Wraparound financing. Wraparound trans actions, usually loans, involve the creditor’s wrapping the outstanding balance on an ex isting loan and advancing additional funds to the consumer. The preexisting loan, which is wrapped, may be to the same consumer or to a different consumer. In either case, the con sumer makes a single payment to the new creditor, who makes the payments on the pre existing loan to the original creditor. Wrap around loans or sales are considered new single-advance transactions, with an amount financed equalling the sum of the new funds advanced by the wrap creditor and the remain ing principal owed to the original creditor on the preexisting loan. In disclosing the itemiza tion of the amount financed, the creditor may use a label such as “the amount that will be paid to creditor X” to describe the remaining principal balance on the preexisting loan. This approach to Truth in Lending calculations has no effect on calculations required by other statutes, such as state usury laws. 7. Wraparound financing with balloon pay ments. For wraparound transactions involving a large final payment of the new funds before the maturity of the preexisting loan, the amount financed is the sum of the new funds and the remaining principal on the preexisting loan. The disclosures should be based on the shorter term of the wrap loan, with a large final payment of both the new funds and the total remaining principal on the preexisting loan (although only the wrap loan will actu ally be paid off at that time.) 8. Basis o f disclosures in variable-rate trans actions. The disclosures for a variable-rate transaction must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation. Creditors should base the disclosures only on the initial rate and should not assume that this rate will increase. For example, in a loan with

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Regulation Z Commentary § 226.17 an initial rate of 10 percent and a 5 percent age points rate cap, creditors should base the disclosures on the initial rate and should not assume that this rate will increase 5 percent age points. However, in a variable-rate trans action with a seller buydown that is reflected in the credit contract, a consumer buydown, or a discounted or premium rate, disclosures should not be based solely on the initial terms. In those transactions, the disclosed an nual percentage rate should be a composite rate based on the rate in effect during the ini tial period and the rate that is the basis of the variable-rate feature for the remainder of the term. (See the commentary to section 226.17(c) for a discussion of buydown, dis counted, and premium transactions and the commentary to section 226.19(a)(2) for a dis cussion of the redisclosure in certain residen tial mortgage transactions with a variable-rate feature).

9. Use of estimates in variable-rate transac tions. The variable-rate feature does not, by itself, make the disclosures estimates. 10.

Discounted and premium variable-rate transactions. In some variable-rate transac tions, creditors may set an initial interest rate that is not determined by the index or formula used to make later interest rate adjustments. Typically, this initial rate charged to consum ers is lower than the rate would be if it were calculated using the index or formula. How ever, in some cases the initial rate may be higher. In a discounted transaction, for exam ple, a creditor may calculate interest rates ac cording to a formula using the six-month Treasury bill rate plus a 2 percent margin. If the Treasury bill rate at consummation is 10 percent, the creditor may forgo the 2 percent spread and charge only 10 percent for a lim ited time, instead of setting an initial rate of 12 percent.

• When creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the dis closures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the re mainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The rate at consummation need not be used if a contract provides for a delay in the imple mentation of changes in an index value. For example, if the contract specifies that rate changes are based on the index value in effect 45 days before the change date, creditors may use the index value in effect not more than 45 days before consumma tion in calculating a composite annual per centage rate.

• The effect of the multiple rates must also be reflected in the calculation and disclo sure of the finance charge, total of pay ments, and payment schedule. • If a loan contains a rate or payment cap that would prevent the initial rate or pay ment, at the time of the first adjustment, from changing to the rate determined by the index or formula at consummation, the effect of that rate or payment cap should be reflected in the disclosures. • Because these transactions involve irregular payment amounts, an annual percentage rate tolerance of 'A of 1 percent applies, in accordance with section 226.22(a)(3) of the regulation.

• Examples of discounted variable-rate trans actions include— —A 30-year loan for $100,000 with no prepaid finance charges and rates determined by the Treasury bill rate plus 2 percent. Rate and payment adjustments are made annually. Although the Treasury bill rate at the time of consummation is 10 percent, the creditor sets the interest rate for one year at 9 percent, instead of 12 percent according to the formula. The disclosures should reflect a composite annual percentage rate of 11.63 percent based on 9 percent for one year and 12 percent for 29 years. Reflecting those two rate levels, the payment schedule should show payments of $804.62 and 348 payments of $1,025.31. The finance charge should be $266,463.32 and the total of payments $366,463.32.

—Same loan as above, except with a 2 percent rate cap on periodic adjustments. The disclosures should reflect a composite annual percentage rate of

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§ 226.17 Regulation Z Commentary 11.53 percent based on 9 percent for the first year, 1 1 percent for the second year, and 12 percent for the remaining 28 years. Reflecting those three rate levels, the payment schedule should show 12 payments of $804.62, 12 payments of $950.09, and 336 payments of $1,024.34. The finance charge should be $265,234.76, and the total of payments $365,234.76.

—Same loan as above, except with a 7lh percent cap on payment adjustments. The disclosures should reflect a composite annual percentage rate of 11.64 percent, based on 9 percent for one year and 12 percent for 29 years. Because of the payment cap, five levels of payments should be reflected. The payment schedule should show 12 payments of $804.62, 12 payments of $864.97, 12 payments of $929.84, 12 payments of $999.58, and 312 payments of $1,070.04. The finance charge should be $277,040.60, and the total of payments $377,040.60.

This paragraph does not apply to variable-rate loans in which the initial interest rate is set according to the index or formula used for later adjustments but is not set at the value of the index or formula at consummation. For example, if a creditor commits to an initial rate based on the formula on a date prior to consummation, but the index has moved dur ing the period between that time and consum mation, a creditor should base its disclosures on the initial rate.

11. Examples o f variable-rate transactions. Variable-rate transactions include: • Renewable balloon-payment instruments where the creditor is both unconditionally obligated to renew the balloon-payment loan at the consumer’s option (or is obli gated to renew subject to conditions within the consumer’s control) and has the option of increasing the interest rate at the time of renewal. Disclosures must be based on the payment amortization (unless the specified term of the obligation with renewals is shorter) and on the rate in effect at the time of consummation of the transaction. (Examples of conditions within a consum er’s control include requirements that a consumer be current in payments or contin ue to reside in the mortgaged property. In contrast, setting a limit on the rate at which the creditor would be obligated to renew or reserving the right to change the credit standards at the time of renewal are examples of conditions outside a consum er’s control.) If, however, a creditor is not obligated to renew as described above, dis closures must be based on the term of the balloon-payment loan. Disclosures also must be based on the term of the balloonpayment loan in balloon-payment instru ments in which the legal obligation provides that the loan will be renewed by a “refinancing” of the obligation, as that term is defined by section 226.20(a). If it cannot be determined from the legal obli gation that the loan will be renewed by a “refinancing,” disclosures must be based either on the term of the balloon-payment loan or on the payment amortization, de pending on whether the creditor is uncon ditionally obligated to renew the loan as described above. (This discussion does not apply to construction loans subject to sec tion 226.17(c)(6).) • “Shared-equity” or “shared-appreciation” mortgages that have a fixed rate of interest and an appreciation share based on the consumer’s equity in the mortgaged proper ty. The appreciation share is payable in a lump sum at a specified time. Disclosures must be based on the fixed interest rate. (As discussed in the commentary to section 226.2, other types of shared-equity arrange ments are not considered “credit” and are not subject to Regulation Z.) • Preferred-rate loans where the terms of the legal obligation provide that the initial un derlying rate is fixed but will increase upon the occurrence of some event, such as an employee leaving the employ of the credi tor, and the note reflects the preferred rate. The disclosures are to be based on the pre ferred rate.

• “Price-level-adjusted mortgages” or other indexed mortgages that have a fixed rate of interest but provide for periodic adjust ments to payments and the loan balance to

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Regulation Z Commentary § 226.17 reflect changes in an index measuring prices or inflation. Disclosures are to be based on the fixed interest rate. Graduated-payment mortgages and step-rate transactions without a variable-rate feature are not considered variable-rate transactions. 12. Graduated-payment adjustable-rate mort gages. These mortgages involve both a varia ble interest rate and scheduled variations in payment amounts during the loan term. For example, under these plans, a series of gradu ated payments may be scheduled before rate adjustments affect payment amounts, or the initial scheduled payment may remain con stant for a set period before rate adjustments affect the payment amount. In any case, the initial payment amount may be insufficient to cover the scheduled interest, causing negative amortization from the outset of the transac tion. In these transactions, the disclosures should treat these features as follows: • The finance charge includes the amount of negative amortization based on the assump tion that the rate in effect at consummation remains unchanged.

• The amount financed does not include the amount of negative amortization. • As in any variable-rate transaction, the an nual percentage rate is based on the terms in effect at consummation.

• The schedule of payments discloses the amount of any scheduled initial payments followed by an adjusted level of payments based on the initial interest rate. Since some mortgage plans contain limits on the amount of the payment adjustment, the payment schedule may require several dif ferent levels of payments, even with the as sumption that the original interest rate does not increase.

13. Growth-equity mortgages. Also referred to as payment-escalated mortgages, these mort gage plans involve scheduled payment in creases to prematurely amortize the loan. The initial payment amount is determined as for a long-term loan with a fixed interest rate. Pay ment increases are scheduled periodically, based on changes in an index. The larger pay ments result in accelerated amortization of the loan. In disclosing these mortgage plans, cred itors may either— • estimate the amount of payment increases, based on the best information reasonably available, or • disclose by analogy to the variable-rate dis closures in section 226.18(f)(1). (This discussion does not apply to growth-eq uity mortgages in which the amount of pay ment increases can be accurately determined at the time of disclosure. For these mortgages, as for graduated-payment mortgages, disclo sures should reflect the scheduled increases in payments.) 14. Reverse mortgages. Reverse mortgages, also known as reverse-annuity or home-equity-conversion mortgages, typically involve the disbursement of monthly advances to the consumer for a fixed period or until the occur rence of an event such as the consumer’s death. Repayment of the loan (generally a sin gle payment of principal and accrued interest) may be required to be made at the end of the disbursements or, for example, upon the death of the consumer. In disclosing these transac tions, creditors must apply the following rules, as applicable:

• If the reverse mortgage has a specified pe riod for disbursements but repayment is due only upon the occurrence of a future event such as the death of the consumer, the creditor must assume that disburse ments will be made until they are sched uled to end. The creditor must assume repayment will occur when disbursements end (or within a period following the final disbursement which is not longer than the regular interval between disbursements). This assumption should be used even though repayment may occur before or af ter the disbursements are scheduled to end. In such cases, the creditor may include a statement such as “The disclosures assume that you will repay the loan at the time our payments to you end. As provided in your agreement, your repayment may be re quired at a different time.” • If the reverse mortgage has neither a speci fied period for disbursements nor a speci fied repayment date and these terms will be

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§ 226.17 Regulation Z Commentary determined solely by reference to future events, including the consumer’s death, the creditor may assume that the disbursements will end upon the consumer’s death (esti mated by using actuarial tables, for exam ple) and that repayment will be required at the same time (or within a period follow ing the date of the final disbursement which is not longer than the regular inter val for disbursements). Alternatively, the creditor may base the disclosures upon an other future event it estimates will be most likely to occur first. (If terms will be deter mined by reference to future events which do not include the consumer’s death, the creditor must base the disclosures upon the occurence of the event estimated to be most likely to occur first.) • In making the disclosures, the creditor must assume that all disbursements and ac crued interest will be paid by the consum er. For example, if the note has a nonrecourse provision providing that the consumer is not obligated for an amount greater than the value of the house, the creditor must nonetheless assume that the full amount to be disbursed will be repaid. In this case, however, the creditor may in clude a statement such as “The disclosures assume full repayment of the amount ad vanced plus accrued interest, although the amount you may be required to pay is lim ited by your agreement.”

• Some reverse mortgages provide that some or all of the appreciation in the value of the property will be shared between the consumer and the creditor. Such loans are considered variable-rate mortgages, as de scribed in comment 17(c)(1)—11, and the appreciation feature must be disclosed in accordance with section 226.18(f)(1). If the reverse mortgage has a variable interest rate, is written for a term greater than one year, and is secured by the consumer’s principal dwelling, the shared-appreciation feature must be described under section 226.19(b)(2)(vii).

15. Morris Plan transactions. When a deposit account is created for the sole purpose of ac cumulating payments and then is applied to satisfy entirely the consumer’s obligation in the transaction, each deposit made into the ac count is considered the same as a payment on a loan for purposes of making disclosures. 16. Number o f transactions. Creditors have flexibility in handling credit extensions that may be viewed as multiple transactions. For example:

• When a creditor finances the credit sale of a radio and a television on the same day, the creditor may disclose the sales as either one or two credit sale transactions. • When a creditor finances a loan along with a credit sale of health insurance, the credi tor may disclose in one of several ways: a single credit sale transaction, a single loan transaction, or a loan and a credit sale transaction.

• The separate financing of a downpayment in a credit sale transaction may, but need not, be disclosed as two transactions (a credit sale and a separate transaction for the financing of the downpayment). 17. Special rules for tax refund-anticipation loans. Tax-refund loans, also known as re fund-anticipation loans (RALs), are transac tions in which a creditor will lend up to the amount of a consumer’s expected tax refund. RAL agreements typically require repayment upon demand, but also may provide that re payment is required when the refund is made. The agreements also typically provide that if the amount of the refund is less than the pay ment due, the consumer must pay the differ ence. Repayment often is made by a preauthorized offset to a consumer’s account held with the creditor when the refund has been deposited by electronic transfer. Credi tors may charge fees for RALs in addition to fees for filing the consumer’s tax return elec tronically. In RAL transactions subject to the regulation the following special rules apply: • If, under the terms of the legal obligation, repayment of the loan is required when the refund is received by the consumer (such as by deposit into the consumer’s account), the disclosures should be based on the creditor’s estimate of the time the refund will be delivered even if the loan also con tains a demand clause. The practice of a creditor to demand repayment upon deliv

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Regulation Z Commentary § 226.17 ery of refunds does not determine whether the legal obligation requires that repayment be made at that time; this determination must be made according to applicable state or other law. (See comment 17(c)(5)-1 for the rules regarding disclosures if the loan is payable solely on demand or is payable ei ther on demand or on an alternate maturity date.) • If the consumer is required to repay more than the amount borrowed, the difference is a finance charge unless excluded under sec tion 226.4. In addition, to the extent that any fees charged in connection with the loan (such as for filing the tax return elec tronically) exceed those fees for a compa rable cash transaction (that is, filing the tax return electronically without a loan), the difference must be included in the finance charge.

Paragraph 17(c)(2) 1. Basis for estimates. Disclosures may be es timated when the exact information is un known at the time disclosures are made. Infor mation is unknown if it is not reasonably available to the creditor at the time the disclo sures are made. The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information. For example, the creditor must at a minimum utilize generally accepted calcula tion tools but need not invest in the most so phisticated computer program to make a par ticular type of calculation. The creditor normally may rely on the representations of other parties in obtaining information. For ex ample, the creditor might look to the con sumer for the time of consummation, to insur ance companies for the cost of insurance, or to realtors for taxes and escrow fees. The creditor may utilize estimates in making dis closures even though the creditor knows that more precise information will be available by the point of consummation. However, new disclosures may be required under section 226.17(f) or 226.19.

2. Labelling estimates. Estimates must be des ignated as such in the segregated disclosures. Even though other disclosures are based on the same assumption on which a specific esti mated disclosure was based, the creditor has some flexibility in labelling the estimates. Generally, only the particular disclosure for which the exact information is unknown is la belled as an estimate. However, when several disclosures are affected because of the un known information, the creditor has the option of labelling either every affected disclosure or only the disclosure primarily affected. For ex ample, when the finance charge is unknown because the date of consummation is un known, the creditor must label the finance charge as an estimate and may also label as estimates the total of payments and the pay ment schedule. When many disclosures are es timates, the creditor may use a general state ment, such as “ all numerical disclosures except the late payment disclosure are esti mates,” as a method to label those disclosures as estimates.

3. Simple-interest transactions. If consumers do not make timely payments in a simpleinterest transaction, some of the amounts cal culated for Truth in Lending disclosures will differ from amounts that consumers will actu ally pay over the term of the transaction. Creditors may label disclosures as estimates in these transactions. For example, because the finance charge and total of payments may be larger than disclosed if consumers make late payments, creditors may label the finance charge and total of payments as estimates. On the other hand, creditors may choose not to label disclosures as estimates and may base all disclosures on the assumption that payments will be made on time, disregarding any possi ble inaccuracies resulting from consumers’ payment patterns.

Paragraph 17(c)(3) 1. Minor variations. Section 226.17(c)(3) al lows creditors to disregard certain factors in calculating and making disclosures. For example:

• Creditors may ignore the effects of collect ing payments in whole cents. Because pay ments cannot be collected in fractional cents, it is often difficult to amortize exact ly an obligation with equal payments; the amount of the last payment may require

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§ 226.17 Regulation Z Commentary adjustment to account for the rounding of the other payments to whole cents. • Creditors may base their disclosures on cal culation tools that assume that all months have an equal number of days, even if their practice is to take account of the variations in months for purposes of collecting inter est. For example, a creditor may use a cal culation tool based on a 360-day year, when it in fact collects interest by applying a factor of 1/365 of the annual rate to 365 days. This rule does not, however, autho rize creditors to ignore, for disclosure pur poses, the effects of applying 1/360 of an annual rate to 365 days.

2. Use of special rules. A creditor may utilize the special rules in section 226.17(c)(3) for purposes of calculating and making all disclo sures for a transaction or may, at its option, use the special rules for some disclosures and not others.

Paragraph 17(c)(4) 1. Payment-schedule irregularities. When one or more payments in a transaction differ from the others because of a long or short first pe riod, the variations may be ignored in disclos ing the payment schedule, finance charge, an nual percentage rate, and other terms. For example:

• A 36-month auto loan might be consum mated on June 8 with payments due on Ju ly 1 and the first of each succeeding month. The creditor may base its calcula tions on a payment schedule that assumes 36 equal intervals and 36 equal installment payments, even though a precise computa tion would produce slightly different amounts because of the shorter first period. • By contrast, in the same example, if the first payment were not scheduled until Au gust 1, the irregular first period would ex ceed the limits in section 226.17(c)(4); the creditor could not use the special rule and could not ignore the extra days in the first period in calculating its disclosures. 2. Measuring odd periods. In determining whether a transaction may take advantage of the rule in section 226.17(c)(4), the creditor must measure the variation against a regular period. For purposes of that rule: • The first period is the period from the date on which the finance charge begins to be earned to the date of the first payment. • The term is the period from the date on which the finance charge begins to be earned to the date of the final payment. • The regular period is the most common in terval between payments in the transaction. In transactions involving regular periods that are monthly, semimonthly, or multiples of a month, the length of the irregular and regular periods may be calculated on the basis of ei ther the actual number of days or an assumed 30-day month. In other transactions, the length of the periods is based on the actual number of days.

3. Use o f special rules. A creditor may utilize the special rules in section 226.17(c)(4) for purposes of calculating and making some dis closures but may elect not to do so for all of the disclosures. For example, the variations may be ignored in calculating and disclosing the annual percentage rate but taken into ac count in calculating and disclosing the finance charge and payment schedule. 4. Relation to prepaid finance charges. Pre paid finance charges, including “odd-days” or “per-diem” interest, paid prior to or at closing may not be treated as the first payment on a loan. Thus, creditors may not disregard an ir regularity in disclosing such finance charges. Paragraph 17(c)(5) 1. Demand disclosures. Disclosures for de mand obligations are based on an assumed one-year term, unless an alternate maturity date is stated in the legal obligation. Whether an alternate maturity date is stated in the legal obligation is determined by applicable law. An alternate maturity date is not inferred from an informal principal reduction agreement or a similar understanding between the parties. However, when the note itself specifies a prin cipal reduction schedule (for example, “pay able on demand or $2,000 plus interest quar terly” ), an alternate maturity is stated and the disclosures must reflect that date.

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Regulation Z Commentary § 226.17 2. Future event as maturity date. An obliga tion whose maturity date is determined solely by a future event, as for example a loan pay able only on the sale of property, is not a demand obligation. Because no demand fea ture is contained in the obligation, demand disclosures under section 226.18(i) are inappli cable. The disclosures should be based on the creditor’s estimate of the time at which the specified event will occur, and may indicate the basis for the creditor’s estimate, as noted in the commentary to section 226.17(a). 3. Demand after stated period. Most demand transactions contain a demand feature that may be exercised at any point during the term, but certain transactions convert to de mand status only after a fixed period. For ex ample, in states prohibiting due-on-sale clauses, the Federal National Mortgage Asso ciation (FNMA) requires mortgages that it purchases to include a call option rider that may be exercised after 7 years. These mort gages are generally written as long-term obli gations but contain a demand feature that may be exercised only within a 30-day period at 7 years. The disclosures for these transactions should be based upon the legally agreed-upon maturity date. Thus, if a mortgage containing the 7-year FNMA call option is written as a 20-year obligation, the disclosures should be based on the 20-year term, with the demand feature disclosed under section 226.18(i). 4. Balloon mortgages. Balloon payment mort gages, with payments based on a long-term amortization schedule and a large final pay ment due after a shorter term, are not demand obligations unless a demand feature is specifi cally contained in the contract. For example, a mortgage with a term of 5 years and a pay ment schedule based on 20 years would not be treated as a mortgage with a demand fea ture, in the absence of any contractual demand provisions. In this type of mortgage, disclo sures should be based on the 5-year term. Paragraph 17(c)(6) 1. Series o f advances. Section 226.17(c) (6)(i) deals with a series of advances under an agreement to extend credit up to a certain amount. A creditor may treat all of the ad vances as a single transaction or disclose each advance as a separate transaction. If these ad vances are treated as one transaction and the timing and amounts of advances are unknown, creditors must make disclosures based on esti mates, as provided in section 226.17(c)(2). If the advances are disclosed separately, disclo sures must be provided before each advance occurs, with the disclosures for the first ad vance provided by consummation. 2. Construction loans. Section 226.17(c) (6)(ii) provides a flexible rule for disclosure of construction loans that may be permanently fi nanced. These transactions have two distinct phases, similar to two separate transactions. The construction loan may be for initial con struction or subsequent construction, such as rehabilitation or remodelling. The construction period usually involves several disbursements of funds at times and in amounts that are un known at the beginning of that period, with the consumer paying only accrued interest un til construction is completed. Unless the obli gation is paid at that time, the loan then con verts to permanent financing in which the loan amount is amortized just as in a standard mortgage transaction. Section 226.17(cX6)(ii) permits the creditor to give either one com bined disclosure for both the construction fi nancing and the permanent financing, or a separate set of disclosures for the two phases. This rule is available whether the consumer is initially obligated to accept construction fi nancing only or is obligated to accept both construction and permanent financing from the outset. If the consumer is obligated on both phases and the creditor chooses to give two sets of disclosures, both sets must be given to the consumer initially, because both transac tions would be consummated at that time. (Appendix D provides a method of calculating the annual percentage rate and other disclo sures for construction loans, which may be used, at the creditor’s option, in disclosing construction financing.) 3. Multiple-advance construction loans. Sec tion 226.17(c)(6)(i) and (ii) are not mutually exclusive. For example, in a transaction that finances the construction of a dwelling that may be permanently financed by the same creditor, the construction phase may consist of

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§ 226.17 Regulation Z Commentary a series of advances under an agreement to extend credit up to a certain amount. In these cases, the creditor may disclose the construc tion phase as either one or more than one transaction and also disclose the permanent fi nancing as a separate transaction. 4. Residential mortgage transaction. See the commentary to section 226.2(a)(24) for a dis cussion of the effect of section 226.17(c)(6) on the definition of a residential mortgage transaction.

5. Allocation o f points. When a creditor utilizes the special rule in section 226.17(c)(6) to disclose credit extensions as multiple trans actions, buyer’s points or similar amounts im posed on the consumer must be allocated for purposes of calculating disclosures. While such amounts should not be taken into ac count more than once in making calculations, they may be allocated between the transac tions in any manner the creditor chooses. For example, if a construction-permanent loan is subject to five points imposed on the con sumer and the creditor chooses to disclose the two phases separately, the five points may be allocated entirely to the construction loan, en tirely to the permanent loan, or divided in any manner between the two. However, the entire five points may not be applied twice, that is, to both the construction and the permanent phases.

17(d) M ultiple Creditors; Multiple Consumers 1. Multiple creditors. If a credit transaction involves more than one creditor: • The creditors must choose which of them will make the disclosures.

• A single, complete set of disclosures must be provided, rather than partial disclosures from several creditors.

• All disclosures for the transaction must be given, even if the disclosing creditor would not otherwise have been obligated to make a particular disclosure. For example, if one of the creditors is the seller, the total sale price disclosure under section 226.18(j) must be made, even though the disclosing creditor is not the seller.

2. Multiple consumers. When two consumers are joint obligors with primary liability on an obligation, the disclosures may be given to ei ther one of them. If one consumer is merely a surety or guarantor, the disclosures must be given to the principal debtor. In rescindable transactions, however, separate disclosures must be given to each consumer who has the right to rescind under section 226.23, although the disclosures required under section 226.19(b) need only be provided to the con sumer who expresses an interest in a variablerate loan program.

17(e) Effect of Subsequent Events 1. Events causing inaccuracies. Inaccuracies in disclosures are not violations if attributable to events occurring after the disclosures are made. For example, when the consumer fails to fulfill a prior commitment to keep the col lateral insured and the creditor then provides the coverage and charges the consumer for it, such a change does not make the original dis closures inaccurate. The creditor may, how ever, be required to make new disclosures under sections 226.17(f) or 226.19 if the events occurred between disclosure and con summation or under section 226.20 if the events occurred after consummation. 17(f) Early Disclosures 1. Change in rate or other terms. Redis closure is required for changes that occur be tween the time disclosures are made and con summation if the annual percentage rate in the consummated transaction exceeds the limits prescribed in section 226.22(a) (>/8 of 1 per centage point in regular transactions and 'U of 1 percentage point in irregular transactions). Redisclosure is also required, even if the an nual percentage rate is within the permitted tolerance, if the disclosures were not based on estimates in accordance with section 226.17(c)(2) and labelled as such. To illustrate:

If disclosures are made in a regular trans action on July 1, the transaction is con summated on July 15, and the actual annual percentage rate varies by more than Vs of 1 percentage point from the

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Regulation Z Commentary § 226.17 disclosed annual percentage rate, the creditor must either redisclose the changed terms or furnish a complete set of new disclosures before consummation. Redisclosure is required even if the dis closures made on July 1 are based on es timates and marked as such. ii.

If disclosures are made on July 1, the transaction is consummated on July 15, and the finance charge increased by $35 but the disclosed annual percentage rate is within the permitted tolerance, the creditor must at least redisclose the changed terms that were not marked as estimates. (See section 226.18(d) and footnote 41 of this part.) iii. If early disclosures are marked as esti mates and the disclosed annual percent age rate is within tolerance at consummation, the creditor need not redisclose the changed terms (including the annual percentage rate). 2. Variable rate. The addition of a variablerate feature to the credit terms, after early dis closures are given, requires new disclosures. 3. Content o f new disclosures. If redisclosure is required, the creditor has the option of ei ther providing a complete set of new disclo sures or providing disclosures of only the terms that vary from those originally dis closed. (See the commentary to section 226.19(a)(2).) 4. Special rules. In residential mortgage trans actions subject to section 226.19, the creditor must redisclose if, between the delivery of the required early disclosures and consummation, the annual percentage rate changes by more than a stated tolerance. When subsequent events occur after consummation, new disclo sures are required only if there is a refinanc ing or an assumption within the meaning of section 226.20.

17(g) Mail or Telephone Orders— Delay in Disclosures 1. Conditions for use. When the creditor re ceives a mail or telephone request for credit, the creditor may delay making the disclosures until the first payment is due if the following conditions are met:

• The credit request is initiated without faceto-face or direct telephone solicitation. (Creditors may, however, use the special rule when credit requests are solicited by mail.) • The creditor has supplied the specified credit information about its credit terms ei ther to the individual consumer or to the public generally. That information may be distributed through advertisements, cata logs, brochures, special mailers, or similar means.

2. Insurance. The location requirements for the insurance disclosures under section 226.18(n) permit them to appear apart from the other disclosures. Therefore, a creditor may mail an insurance authorization to the consumer and then prepare the other disclo sures to reflect whether or not the authoriza tion is completed by the consumer. Creditors may also disclose the insurance cost on a unit-cost basis, if the transaction meets the re quirements of section 226.17(g). 17(h) Series of Sales— Delay in Disclosures 1. Applicability. The creditor may delay the disclosures for individual credit sales in a se ries of such sales until the first payment is due on the current sale, assuming the two conditions in this paragraph are met. If those conditions are not met, the general timing rules in section 226.17(b) apply. 2. Basis o f disclosures. Creditors structuring disclosures for a series of sales under section 226.17(h) may compute the total sale price as either:

• The cash price for the sale plus that por tion of the finance charge and other charges applicable to that sale; or • The cash price for the sale, other charges applicable to the sale, and the total finance charge and outstanding principal. 17(i) Interim Student Credit Extensions 1. Definition. Student credit plans involve ex tensions of credit for education purposes

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§ 226.17 Regulation Z Commentary where the repayment amount and schedule are not known at the time credit is advanced. These plans include loans made under any student credit plan, whether government or private, where the repayment period does not begin immediately. (Certain student credit plans that meet this definition are exempt from Regulation Z. See section 226.3(f). Creditors in interim student credit extensions need not disclose the terms set forth in this paragraph at the time the credit is actually ex tended but must make complete disclosures at the time the creditor and consumer agree upon the repayment schedule for the total obliga tion. At that time, a new set of disclosures must be made of all applicable items under section 226.18.

2. Basis o f disclosures. The disclosures given at the time of execution of the interim note should reflect two annual percentage rates, one for the interim period and one for the repayment period. The use of section 226.17(i) in making disclosures does not, by itself, make those disclosures estimates. Any portion of the finance charge, such as statu tory interest, that is attributable to the interim period and is paid by the student (either as a prepaid finance charge, periodically during the interim period, in one payment at the end of the interim period, or capitalized at the begin ning of the repayment period) must be re flected in the interim annual percentage rate. Interest subsidies, such as payments made by either a state or the federal government on an interim loan, must be excluded in computing the annual percentage rate on the interim obli gation, when the consumer has no contingent liability for payment of those amounts. Any finance charges that are paid separately by the student at the outset or withheld from the pro ceeds of the loan are prepaid finance charges. An example of this type of charge is the loan guarantee fee. The sum of the prepaid finance charges is deducted from the loan proceeds to determine the amount financed and included in the calculation of the finance charge. 3. Consolidation. Consolidation of the interim student credit extensions through a renewal note with a set repayment schedule is treated as a new transaction with disclosures made as they would be for a refinancing. Any unearned portion of the finance charge must be reflected in the new finance charge and an nual percentage rate, and is not added to the new amount financed. In itemizing the amount financed under section 226.18(c), the creditor may combine the principal balances remaining on the interim extensions at the time of con solidation and categorize them as the amount paid on the consumer’s account. 4. Approved student credit forms. See the commentary to appendix H regarding disclo sure forms approved for use in certain student credit programs.

References Statute: §§ 121, 122, 124, and 128, and the Higher Education Act of 1965 (20 USC 1071) as amended by Public Law 97-35, August 13, Other sections: § 226.2 and appendix H Previous regulation: §§ 226.6 and 226.8 1981 changes: With few exceptions, the dis closures must now appear apart from all other information and may not be interspersed with that information. The disclosures must be based on the legal obligation between the par ties, rather than any side agreement. The assumed maturity period for demand loans has been increased from six months to one year. Any alternate maturity date must be stated in the legal obligation rather than in ferred from the documents, in order to form a basis for disclosures.

In multiple-advance transactions, a series of advances up to a certain amount and construc tion loans that may be permanently financed may be disclosed, at the creditor’s option, as either a single transaction or several transac tions. Appendix D is applicable only to multi ple advances for the construction of a dwell ing, whereas its predecessor, interpretation section 226.813, could be used for all multiple-advance transactions.

If disclosures are made before the date of consummation, the creditor need not provide updated disclosures at consummation unless the annual percentage rate has changed be yond certain limits or a variable rate feature has been added.

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Regulation Z Commentary § 226.18 SECTION 226.18—Content of Disclosures 1. As applicable. The disclosures required by this section need be made only as applicable. Any disclosure not relevant to a particular transaction may be eliminated entirely. For example:

• In a loan transaction, the creditor may de lete disclosure of the total sale price. • In a credit sale requiring disclosure of the total sale price under section 226.18(j), the creditor may delete any reference to a downpayment where no downpayment is involved.

Where the amounts of several numerical dis closures are the same, the “as applicable” language also permits creditors to combine the terms, so long as it is done in a clear and conspicuous manner. For example: • In a transaction in which the amount fi nanced equals the total of payments, the creditor may disclose “amount financed/ total of payments,” together with descrip tive language, followed by a single amount. • However, if the terms are separated on the disclosure statement and separate space is provided for each amount, both disclosures must be completed, even though the same amount is entered in each space. 2. Format. See the commentary to section 226.17 and appendix H for a discussion of the format to be used in making these disclosures, as well as acceptable modifications. 18(a) Creditor 1. Identification o f creditor. The creditor mak ing the disclosures must be identified. This disclosure may, at the creditor’s option, ap pear apart from the other disclosures. Use of the creditor’s name is sufficient, but the credi tor may also include an address and/or tele phone number. In transactions with multiple creditors, any one of them may make the dis closures; the one doing so must be identified. 18(b) Amount Financed 1. Disclosure required. The net amount of credit extended must be disclosed using the term “amount financed” and a descriptive ex planation sim ilar to the phrase in the regulation.

2. Rebates and loan premiums. In a loan transaction, the creditor may offer a premium in the form of cash or merchandise to pro spective borrowers. Similarly, in a credit sale transaction, a seller’s or manufacturer’s rebate may be offered to prospective purchasers of the creditor’s goods or services. At the credi tor’s option, these amounts may be either re flected in the Truth in Lending disclosures or disregarded in the disclosures. If the creditor chooses to reflect them in the section 226.18 disclosures, rather than disregard them, they may be taken into account in any manner as part of those disclosures.

Paragraph 18(b)(1) 1. Downpayments. A downpayment is defined in section 226.2(a)(18) to include, at the credi tor’s option, certain deferred downpayments or pickup payments. A deferred downpayment that meets the criteria set forth in the defini tion may be treated as part of the downpay ment, at the creditor’s option. • Deferred downpayments that are not treated as part of the downpayment (either because they do not meet the definition or because the creditor simply chooses not to treat them as downpayments) are included in the amount financed.

• Deferred downpayments that are treated as part of the downpayment are not part of the amount financed under section 226.18(b)(1).

Paragraph 18(b)(2) 1. Adding other amounts. Fees or other charges that are not part of the finance charge and that are financed rather than paid sepa rately at consummation of the transaction are included in the amount financed. Typical ex amples are real estate settlement charges and premiums for voluntary credit life and disabil ity insurance excluded from the finance charge under section 226.4. This paragraph does not include any amounts already accounted for under section 226.18(b)(1), such as taxes, tag and title fees, or the costs of accessories or

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§ 226.18 Regulation Z Commentary service policies that the creditor includes in the cash price.

Paragraph 18(b)(3) 1. Prepaid finance charges. Prepaid finance charges that are paid separately in cash or by check should be deducted under section 226.18(b)(3) in calculating the amount fi nanced. To illustrate:

• A consumer applies for a loan of $2,500 with a $40 loan fee. The face amount of the note is $2,500 and the consumer pays the loan fee separately by cash or check at closing. The principal loan amount for pur poses of section 226.18(b)(1) is $2,500 and $40 should be deducted under section 226.18(b)(3), thereby yielding an amount financed of $2,460.

In some instances, as when loan fees are fi nanced by the creditor, finance charges are in corporated in the face amount of the note. Creditors have the option, when the charges are not add-on or discount charges, of deter mining a principal loan amount under section 226.18(b)(1) that either includes or does not include the amount of the finance charges. (Thus the principal loan amount may, but need not, be determined to equal the face amount of the note.) When the finance charges are included in the principal loan amount, they • should be deducted as prepaid finance charges under section 226.18(b)(3). When the finance charges are not included in the principal loan amount, they should not be deducted under section 226.18(b)(3). The fol lowing examples illustrate the application of section 226.18(b) to this type of transaction. Each example assumes a loan request of $2,500 with a loan fee of $40; the creditor assesses the loan fee by increasing the face amount of the note to $2,540. • If the creditor determines the principal loan amount under section 226.18(b)(1) to be $2,540, it has included the loan fee in the principal loan amount and should deduct $40 as a prepaid finance charge under sec tion 226.18(b)(3), thereby obtaining an amount financed of $2,500.

• If the creditor determines the principal loan amount under section 226.18(b)(1) to be $2,500, it has not included the loan fee in the principal loan amount and should not deduct any amount under section 226.18(b)(3), thereby obtaining an amount financed of $2,500.

The same rules apply when the creditor does not increase the face amount of the note by the amount of the charge but collects the charge by withholding it from the amount ad vanced to the consumer. To illustrate, the fol lowing examples assume a loan request of $2,500 with a loan fee of $40; the creditor prepares a note for $2,500 and advances $2,460 to the consumer.

• If the creditor determines the principal loan amount under section 226.18(b)(1) to be $2,500, it has included the loan fee in the principal loan amount and should deduct $40 as a preapid finance charge under sec tion 226.18(b)(3), thereby obtaining an amount financed of $2,460.

• If the creditor determines the principal loan amount under section 226.18(b)(1) to be $2,460, it has not included the loan fee in the principal loan amount and should not deduct any amount under section 226.18 (b)(3), thereby obtaining an amount fi nanced of $2,460.

Thus in the examples where the creditor de rives the net amount of credit by determining a principal loan amount that does not include the amount of the finance charge, no subtrac tion is appropriate. Creditors should note, however, that although the charges are not subtracted as prepaid finance charges in those examples, they are nonetheless finance charges and must be treated as such. 2. Add-on or discount charges. All finance charges must be deducted from the amount of credit in calculating the amount financed. If the principal loan amount reflects finance charges that meet the definition of a prepaid finance charge in section 226.2, those charges are included in the section 226.18(b)(1) amount and deducted under section 226.18(b)(3). However, if the principal loan amount includes finance charges that do not meet the definition of a prepaid finance charge, the section 226.18(b)(1) amount must exclude those finance charges. The following

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Regulation Z Commentary § 226.18 examples illustrate the application of section 226.18(b) to these types of transactions. Each example assumes a loan request of $1,000 for one year, subject to a 6 percent precomputed interest rate, with a $ 1 0 loan fee paid sepa rately at consummation.

• The creditor assesses add-on interest of $60 which is added to the $ 1,000 in loan pro ceeds for an obligation with a face amount of $1,060. The principal for purposes of section 226.18(b)(1) is $ 1,000, no amounts are added under section 226.18(b)(2), and the $ 1 0 loan fee is a prepaid finance charge to be deducted under section 226.18(b)(3). The amount financed is $990. • The creditor assesses discount interest of $60 and distributes $940 to the consumer, who is liable for an obligation with a face amount of $1,000. The principal under sec tion 226.18(b)(1) is $940, which results in an amount financed of $930, after deduc tion of the $ 1 0 prepaid finance charge under section 226.18(b)(3). • The creditor assesses $60 in discount inter est by increasing the face amount of the obligation to $1,060, with the consumer re ceiving $1,000. The principal under section 226.18(b)(1) is thus $ 1,000 and the amount financed $990, after deducting the $10 pre paid finance charge under section 226.18(b)(3).

18(c) Itemization of Amount Financed 1. Disclosure required. The creditor has two alternatives in complying with section 226.18(c):

• The creditor may inform the consumer, on the segregated disclosures, that a written itemization of the amount financed will be provided on request, furnishing the itemiza tion only if the customer in fact requests it. • The creditor may provide an itemization as a matter of course, without notifying the consumer of the right to receive it or wait ing for a request.

Whether given as a matter of course or only on request, the itemization must be provided at the same time as the other disclosures re quired by section 226.18, although separate from those disclosures.

2. Additional information. Section 226.18(c) establishes only a minimum standard for the material to be included in the itemization of the amount financed. Creditors have consider able flexibility in revising or supplementing the information listed in section 226.18(c) and shown in model form H-3, although no changes are required. The creditor may, for example, do one or more of the following: • Include amounts that reflect payments not part of the amount financed. For example, escrow items and certain insurance premi ums may be included, as discussed in the commentary to section 226.18(g). • Organize the categories in any order. For example, the creditor may rearrange the terms in a mathematical progression that depicts the arithmetic relationship of the terms.

• Add categories. For example, in a credit sale, the creditor may include the cash price and the downpayment.

• Further itemize each category. For exam ple, the amount paid directly to the con sumer may be subdivided into the amount given by check and the amount credited to the consumer’s savings account. • Label categories with different language from that shown in section 226.18(c). For example, an amount paid on the consum er’s account may be revised to specifically identify the account as “your auto loan with us.”

• Delete, leave blank, mark “N/A” or other wise note inapplicable categories in the itemization. For example, in a credit sale with no prepaid finance charges or amounts paid to others, the amount financed may consist of only the cash price less down payment. In this case, the itemization may be composed of only a single category and all other categories may be eliminated. 3. Amounts appropriate to more than one cat egory. When an amount may appropriately be placed in any of several categories and the creditor does not wish to revise the categories shown in section 226.18(c), the creditor has considerable flexibility in determining where to show the amount. For example: • In a credit sale, the portion of the purchase

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§ 226.18 Regulation Z Commentary price being financed by the creditor may be viewed as either an amount paid to the consumer or an amount paid on the con sumer’s account.

4. RESPA transactions. The Real Estate Set tlement Procedures Act (RESPA) requires creditors to provide good faith estimates of closing costs. Transactions subject to RESPA are exempt from the requirements of section 226.18(c), when the creditor complies with the good faith estimates requirement of RESPA. The itemization of the amount financed need not be given, even though the content and timing of the good faith estimates under RESPA differ from the section 226.18(c) requirement.

Paragraph 18(c)(l)(i) 1. Amounts paid to consumer. This encom passes funds given to the consumer in the form of cash or a check, including joint pro ceeds checks, as well as funds placed in an asset account. It may include money in an interest-bearing account even if that amount is considered a required deposit under section 226.18(r). For example, in a transaction with total loan proceeds of $500, the consumer re ceives a check for $300 and $200 is required by the creditor to be put into an interest-bear ing account. Whether or not the $200 is a re quired deposit, it is part of the amount fi nanced. At the creditor’s option, it may be broken out and labelled in the itemization of the amount financed.

Paragraph 18(c)(l)(ii) 1. Amounts credited to consumer’s account. The term “consumer’s account” refers to an account in the nature of a debt with that cred itor. It may include, for example, an unpaid balance on a prior loan, a credit sale balance or other amounts owing to that creditor. It does not include asset accounts of the con sumer such as savings or checking accounts. Paragraph 18(c)(l)(iii) 1. Amounts paid to others. This includes, for example, tag and title fees; amounts paid to insurance companies for insurance premiums; security interest fees, and amounts paid to credit bureaus, appraisers or public officials. When several types of insurance premiums are financed, they may, at the creditor’s option, be combined and listed in one sum, labelled “in surance” or similar term. This includes, but is not limited to, different types of insurance premiums paid to one company and different types of insurance premiums paid to different companies. Except for insurance companies and other categories noted in footnote 40, third parties must be identified by name. Paragraph 18(c)(l)(iv) 1. Prepaid finance charge. Prepaid finance charges that are deducted under section 226.18(b)(3) must be disclosed under this sec tion. The prepaid finance charges must be shown as a total amount but may, at the cred itor’s option, also be further itemized and de scribed. All amounts must be reflected in this total, even if portions of the prepaid finance charge are also reflected elsewhere. For exam ple, if at consummation the creditor collects interim interest of $30 and a credit report fee of $10, a total prepaid finance charge of $40 must be shown. At the creditor’s option, the credit report fee paid to a third party may also be shown elsewhere as an amount included in section 226.18(c)( 1 )(iii). The creditor may also further describe the two components of the prepaid finance charge, although no itemization of this element is required by sec tion 226.18(c)(l)(iv).

2. Prepaid mortgage insurance premiums. RESPA requires creditors to give consumers a settlement statement disclosing the costs asso ciated with mortgage loan transactions. In cluded on the settlement statement are mort gage insurance premiums collected at settlement, which are prepaid finance charges. In calculating the total amount of prepaid fi nance charges, creditors should use the amount for mortgage insurance listed on the line for mortgage insurance on the settlement statement (line 1002 on HUD-1 or HUD 1-A), without adjustment, even if the actual amount collected at settlement may vary because of RESPA’s escrow-accounting rules. Figures for mortgage insurance disclosed in conformance with RESPA shall be deemed to be accurate for purposes of Regulation Z.

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Regulation Z Commentary § 226.18 18(d) Finance Charge 1. Disclosure required. The creditor must dis close the finance charge as a dollar amount, using the term “finance charge,” and must in clude a brief description similar to that in sec tion 226.18(d). The creditor may, but need not, further modify the descriptor for variablerate transactions with a phrase such as “which is subject to change.” The finance charge must be shown on the disclosures only as a total amount; the elements of the finance charge must not be itemized in the segregated disclosures, although the regulation does not prohibit their itemization elsewhere. 2. Tolerance. A tolerance for the finance charge is provided in footnote 41 of this part. When a miscalculation of the amount fi nanced, or of some other numerical disclosure for which the regulation provides no specific tolerance, results from an error in a finance charge, the miscalculated amount financed or other numerical disclosure does not violate the act or the regulation if the finance charge dis closed under section 226.18(d) is within the permissible tolerance under footnote 41 of this part.

18(e) Annual Percentage Rate 1. Disclosure required. The creditor must dis close the cost of the credit as an annual rate, using the term “annual percentage rate,” plus a brief descriptive phrase comparable to that used in section 226.18(e). For variable-rate transactions, the descriptor may be further modified with a phrase such as “which is sub ject to change.” Under section 226.17(a), the terms “annual percentage rate” and “finance charge” must be more conspicuous than the other required disclosures.

2. Exception. Footnote 42 provides an excep tion for certain transactions in which no an nual percentage rate disclosure is required. 18(f) Variable Rate 1. Coverage. The requirements of section 226.18(f) apply to all transactions in which the terms of the legal obligation allow the creditor to increase the rate originally dis closed to the consumer. It includes not only increases in the interest rate but also increases in other components, such as the rate of re quired credit life insurance. The provisions, however, do not apply to increases resulting from delinquency (including late payment), default, assumption, acceleration or transfer of the collateral. Section 226.18(f)(1) applies to variable-rate transactions that are not secured by the consumer’s principal dwelling and to those that are secured by the principal dwell ing but have a term of one year or less. Sec tion 226.18(f)(2) applies to variable- rate transactions that are secured by the con sumer’s principal dwelling and have a term greater than one year. Moreover, transactions subject to section 226.18(f)(2) are subject to the special early-disclosure requirements of section 226.19(b). (However, “shared-equity” or “shared-appreciation” mortgages are sub ject to the disclosure requirements of section 226.18(f)(1) and not to the requirements of sections 226.18(f)(2) and 226.19(b) regardless of the general coverage of those sections.) Creditors are permitted under footnote 43 to substitute in any variable-rate transaction the disclosures required under section 226.19(b) for those disclosures ordinarily required under section 226.18(f)(1). Creditors who provide variable-rate disclosures under section 226.19(b) must comply with all of the require ments of that section, including the timing of disclosures, and must also provide the disclo sures required under section 226.18(f)(2). Creditors utilizing footnote 43 may, but need not, also provide disclosures pursuant to sec tion 226.20(c). (Substitution of disclosures under section 226.18(f)(1) in transactions sub ject to section 226.19(b) is not permitted under the footnote.) Paragraph 18(f)(1) 1. Terms used in disclosure. In describing the variable-rate feature, the creditor need not use any prescribed terminology. For example, lim itations and hypothetical examples may be de scribed in terms of interest rates rather than annual percentage rates. The model forms in appendix H provide examples of ways in which the variable-rate disclosures may be made.

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§ 226.18 Regulation Z Commentary Paragraph 18(f)(l)(i) 1. Circumstances. The circumstances under which the rate may increase include identifica tion of any index to which the rate is tied, as well as any conditions or events on which the increase is contingent.

• When no specific index is used, any identi fiable factors used to determine whether to increase the rate must be disclosed. • When the increase in the rate is purely dis cretionary, the fact that any increase is within the creditor’s discretion must be dis closed.

• When the index is internally defined (for example, by that creditor’s prime rate), the creditor may comply with this requirement by either a brief description of that index or a statement that any increase is in the discretion of the creditor. An externally de fined index, however, must be identified. 2. Conversion feature. In variable-rate trans actions with an option permitting consumers to convert to a fixed-rate transaction, the con version option is a variable-rate feature that must be disclosed. In making disclosures under section 226.18(f)(1), creditors should disclose the fact that the rate may increase upon conversion; identify the index or formula used to set the fixed rate; and state any limita tions on and effects of an increase resulting from conversion that differ from other varia ble-rate features. Because section 226.18 (f)(l)(iv) requires only one hypothetical exam ple (such as an example of the effect on pay ments resulting from changes in the index), a second hypothetical example need not be given.

Paragraph 18(f)(l)(ii) 1. Limitations. This includes any maximum imposed on the amount of an increase in the rate at any time, as well as any maximum on the total increase over the life of the transac tion. When there are no limitations, the credi tor may, but need not, disclose that fact. Limi tations do not include legal limits in the nature of usury or rate ceilings under state or federal statutes or regulations. (See section 226.30 for the rule requiring that a maximum interest rate be included in certain variablerate transactions.) Paragraph 18(f)(l)(iii) 1. Effects. Disclosure of the effect of an in crease refers to an increase in the number or amount of payments or an increase in the final payment. In addition, the creditor may make a brief reference to negative amortization that may result from a rate increase. (See the com mentary to section 226.17(a)(1) regarding di rectly related information.) If the effect cannot be determined, the creditor must provide a statement of the possible effects. For example, if the exercise of the variable-rate feature may result in either more or larger payments, both possibilities must be noted. Paragraph 18(f)(l)(iv) 1. Hypothetical example. The example may, at the creditor’s option, appear apart from the other disclosures. The creditor may provide either a standard example that illustrates the terms and conditions of that type of credit of fered by that creditor or an example that di rectly reflects the terms and conditions of the particular transaction. In transactions with more than one variable-rate feature, only one hypothetical example need be provided. (See the commentary to section 226.17(a)(1) re garding disclosure of more than one hypothet ical example as directly related information.) 2. Hypothetical example not required. The creditor need not provide a hypothetical exam ple in the following transactions with a variable-rate feature:

• Demand obligations with no alternate ma turity date • Interim student credit extensions • Multiple-advance construction loans dis closed pursuant to appendix D, part I Paragraph 18(f)(2) 1. Disclosure required. In variable-rate trans actions that have a term greater than one year and are secured by the consumer’s principal dwelling, the creditor must give special early disclosures under section 226.19(b) in addition to the later disclosures required under section

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Regulation Z Commentary § 226.18 226.18(f)(2). The disclosures under section 226.18(f)(2) must state that the transaction has a variable-rate feature and that variable-rate disclosures have been provided earlier. (See the commentary to section 226.17(a)(1) re garding the disclosure of certain directly re lated information in addition to the variablerate disclosures required under section 226.18(f)(2).) 18(g) Payment Schedule 1. Amounts included in repayment schedule. The repayment schedule should reflect all components of the finance charge, not merely the portion attributable to interest. A prepaid finance charge, however, should not be shown in the repayment schedule as a separate pay ment. The payments may include amounts be yond the amount financed and finance charge. For example, the disclosed payments may, at the creditor’s option, reflect certain insurance premiums where the premiums are not part of either the amount financed or the finance charge, as well as real estate escrow amounts such as taxes added to the payment in mort gage transactions.

2. Deferred downpayments. As discussed in the commentary to section 226.2(a)(18), de ferred downpayments or pickup payments that meet the conditions set forth in the definition of downpayment may be treated as part of the downpayment. Even if treated as a downpay ment, that amount may nevertheless be dis closed as part of the payment schedule, at the creditor’s option.

3. Total number o f payments. In disclosing the number of payments for transactions with more than one payment level, creditors may but need not disclose as a single figure the total number of payments for all levels. For example, in a transaction calling for 108 pay ments of $350, 240 payments of $335, and 12 payments of $330, the creditor need not state that there will be a total of 360 payments. Paragraph 18(g)(1) 1. Demand obligations. In demand obligations with no alternate maturity date, the creditor has the option of disclosing only the due dates or periods of scheduled interest payments in the first year (for example, “interest payable quarterly” or “interest due the first of each month”). The amounts of the interest pay ments need not be shown.

Paragraph 18(g)(2) 1. Abbreviated disclosure. The creditor may disclose an abbreviated payment schedule when the amount of each regularly scheduled payment (other than the first or last payment) includes an equal amount to be applied on principal and a finance charge computed by application of a rate to the decreasing unpaid balance. This option is also available when mortgage-guarantee insurance premiums, paid either monthly or annually, cause variations in the amount of the scheduled payments, reflect ing the continual decrease or increase in the premium due. In addition, in transactions where payments vary because interest and principal are paid at different intervals, the two series of payments may be disclosed sep arately and the abbreviated payment schedule may be used for the interest payments. For example, in transactions with fixed quarterly principal payments and monthly interest pay ments based on the outstanding principal bal ance, the amount of the interest payments will change quarterly as principal declines. In such cases the creditor may treat the interest and principal payments as two separate series of payments, separately disclosing the number, amount, and due dates of principal payments, and, using the abbreviated payment schedule, the number, amount, and due dates of interest payments. This option may be used when in terest and principal are scheduled to be paid on the same date of the month as well as on different dates of the month. The creditor us ing this alternative must disclose the dollar amount of the highest and lowest payments and make reference to the variation in payments.

2. Combined payment-schedule disclosures. Creditors may combine the option in this paragraph with the general payment-schedule requirements in transactions where only a por tion of the payment schedule meets the condi tions of section 226.18(g)(2). For example, in a graduated-payment mortgage where pay ments rise sharply for five years and then de

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§ 226.18 Regulation Z Commentary cline over the next 25 years because of de creasing mortgage insurance premiums, the first five years would be disclosed under the general rule in section 226.18(g) and the next 25 years according to the abbreviated schedule in section 226.18(g)(2).

3. Effect on other disclosures. Section 226.18(g)(2) applies only to the payment schedule disclosure. The actual amounts of payments must be taken into account in calcu lating and disclosing the finance charge and the annual percentage rate.

18(h) Total of Payments 1. Disclosure required. The total of payments must be disclosed using that term, along with a descriptive phrase similar to the one in the regulation. The descriptive explanation may be revised to reflect a variable-rate feature with a brief phrase such as “based on the current an nual percentage rate which may change.” 2. Calculation of total of payments. The total of payments is the sum of the payments dis closed under section 226.18(g). For example, if the creditor disclosed a deferred portion of the downpayment as part of the payment schedule, that payment must be reflected in the total disclosed under this paragraph. 3. Exception. Footnote 44 permits creditors to omit disclosure of the total of payments in single-payment transactions. This exception does not apply to a transaction calling for a single payment of principal combined with pe riodic payments of interest. 4. Demand obligations. In demand obligations with no alternate maturity date, the creditor may omit disclosure of payment amounts under section 226.18(g)(1). In those transac tions, the creditor need not disclose the total of payments.

18(i) Demand Feature 1. Disclosure requirements. The disclosure re quirements of this provision apply not only to transactions payable on demand from the out set, but also to transactions that are not pay able on demand at the time of consummation but convert to a demand status after a stated period. In demand obligations in which the disclosures are based on an assumed maturity of one year under section 226.17(c)(5), that fact must also be stated. Appendix H contains model clauses that may be used in making this disclosure.

2. Covered demand features. The type of de mand feature triggering the disclosures re quired by section 226.18(i) includes only those demand features contemplated by the parties as part of the legal obligation. For ex ample, this provision does not apply to trans actions that convert to a demand status as a result of the consumer’s default. A due-onsale clause is not considered a demand fea ture. A creditor may, but need not, treat its contractual right to demand payment of a loan made to its executive officers as a demand feature to the extent that the contractual right is required by Regulation O (12 CFR 215.5) or other federal law.

3. Relationship to payment schedule disclo sures. As provided in section 226.18(g)(1), in demand obligations with no alternate maturity date, the creditor need only disclose the due dates or payment periods of any scheduled in terest payments for the first year. If the de mand obligation states an alternate maturity, however, the disclosed payment schedule must reflect that stated term; the special rule in sec tion 226.18(g)(1) is not available. 18(j) Total Sale Price 1. Disclosure required. In a credit sale trans action, the “total sale price” must be dis closed using that term, along with a descrip tive explanation similar to the one in the regulation. For variable-rate transactions, the descriptive phrase may, at the creditor’s op tion, be modified to reflect the variable-rate feature. For example, the descriptor may read: “The total cost of your purchase on credit, which is subject to change, including your downpayment of . . . .” The reference to a downpayment may be eliminated in transac tions calling for no downpayment. 2. Calculation of total sale price. The figure to be disclosed is the sum of the cash price, other charges added under section

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Regulation Z Commentary § 226.18 226.18(b)(2), and the finance charge disclosed under section 226.18(d).

18(k) Prepayment 1. Disclosure required. The creditor must give a definitive statement of whether or not a pen alty will be imposed or a rebate will be given. • The fact that no penalty will be imposed may not simply be inferred from the ab sence of a penalty disclosure; the creditor must indicate that prepayment will not re sult in a penalty.

• If a penalty or refund is possible for one type of prepayment, even though not for all, a positive disclosure is required. This applies to any type of prepayment, whether voluntary or involuntary as in the case of prepayments resulting from acceleration. • Any difference in rebate or penalty policy, depending on whether prepayment is vol untary or not, must not be disclosed with the segregated disclosures. 2. Rebate-penalty disclosure. A single trans action may involve both a precomputed fi nance charge and a finance charge computed by application of a rate to the unpaid balance (for example, mortgages with mortgage-guarantee insurance). In these cases, disclosures about both prepayment rebates and penalties are required. Sample form H -l5 in appendix H illustrates a mortgage transaction in which both rebate and penalty disclosures are necessary.

3. Prepaid finance charge. The existence of a prepaid finance charge in a transaction does not, by itself, require a disclosure under sec tion 226.18(k). A prepaid finance charge is not considered a penalty under section 226.18(k)(l), nor does it require a disclosure under section 226.18(k)(2). At its option, however, a creditor may consider a prepaid finance charge to be under section 226.18(k)(2). If a disclosure is made under section 226.18(k)(2) with respect to a prepaid finance charge or other finance charge, the creditor may further identify that finance charge. For example, the disclosure may state that the borrower “will not be entitled to a refund of the prepaid finance charge” or some other term that describes the finance charge. Paragraph 18(k)(l) 1. Penalty. This applies only to those transac tions in which the interest calculation takes account of all scheduled reductions in princi pal, as well as transactions in which interest calculations are made daily. The term “pen alty” as used here encompasses only those charges that are assessed strictly because of the prepayment in full of a simple-interest ob ligation, as an addition to all other amounts. Items which are penalties include, for example:

• Interest charges for any period after pre payment in full is made. (See the commen tary to section 226.17(a)(1) regarding disclosure of interest charges assessed for periods after prepayment in full as directly related information.) • A minimum finance charge in a simple-interest transaction. (See the commentary to section 226.17(a)(1) regarding the disclo sure of a minimum finance charge as di rectly related information.) Items which are not penalties include, for example:

• Loan-guarantee fees • Interim interest on a student loan Paragraph 18(k)(2) 1. Rebate o f finance charge. This applies to any finance charges that do not take account of each reduction in the principal balance of an obligation. This category includes, for example:

• Precomputed finance charges such as add on charges • Charges that take account of some but not all reductions in principal, such as mort gage guarantee insurance assessed on the basis of an annual declining balance, when the principal is reduced on a monthly basis No description of the method of computing earned or unearned finance charges is required or permitted as part of the segregated disclo sures under this section.

18(Z) Late Payment 1. Definition. This paragraph requires a dis-

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§ 226.18 Regulation Z Commentary closure only if charges are added to individual delinquent installments by a creditor who oth erwise considers the transaction ongoing on its original terms. Late payment charges do not include:

• The right of acceleration • Fees imposed for actual collection costs, such as repossession charges or attorney’s fees • Deferral and extension charges • The continued accrual of simple interest at the contract rate after the payment due date. However, an increase in the interest rate is a late payment charge to the extent of the increase.

2. Content o f disclosure. Many state laws au thorize the calculation of late charges on the basis of either a percentage or a specified dol lar amount and permit imposition of the lesser or greater of the two charges. The disclosure made under section 226.18(/) may reflect this alternative. For example, stating that the charge in the event of a late payment is 5 percent of the late amount, not to exceed $5.00, is sufficient. Many creditors also permit a grace period during which no late charge will be assessed; this fact may be disclosed as directly related information. (See the commen tary to section 226.17(a).) 18(m) Security Interest 1. Purchase-money transactions. When the collateral is the item purchased as part of, or with the proceeds of, the credit transaction, section 226.18(m) requires only a general identification such as “the property purchased in this transaction.” However, the creditor may identify the property by item or type in stead of identifying it more generally with a phrase such as “the property purchased in this transaction.” For example, a creditor may identify collateral as “a motor vehicle,” or as “the property purchased in this transaction.” Any transaction in which the credit is being used to purchase the collateral is considered a purchase-money transaction and the abbrevi ated property identification may be used, whether the obligation is treated as a loan or a credit sale.

2. Non-purchase-money transactions. In nonpurchase-money transactions, the property subject to the security interest must be identi fied by item or type. This disclosure is satis fied by a general disclosure of the category of property subject to the security interest, such as “motor vehicles,” “securities,” “certain household items,” or “household goods.” (Creditors should be aware, however, that the federal credit practices rules, as well as some state laws, prohibit certain security interests in household goods.) At the creditor’s option, however, a more precise identification of the property or goods may be provided. 3. Mixed collateral. In some transactions in which the credit is used to purchase the col lateral, the creditor may also take other prop erty of the consumer as security. In those cases, a combined disclosure must be pro vided, consisting of an identification of the purchase-money collateral consistent with comment 18(m)-l and a specific identification of the other collateral consistent with com ment 18(m)-2.

4. After-acquired property. An after-acquired property clause is not a security interest to be disclosed under section 226.18(m). 5. Spreader clause. The fact that collateral for preexisting credit with the institution is being used to secure the present obligation consti tutes a security interest and must be disclosed. (Such security interests may be known as “ spreader” or “ dragnet” clauses, or as “cross-collateralization” clauses.) A specific identification of that collateral is unnecessary but a reminder of the interest arising from the prior indebtedness is required. The disclosure may be made by using language such as “col lateral securing other loans with us may also secure this loan.” At the creditor’s option, a more specific description of the property in volved may be given.

6. Terms used in disclosure. No specified ter minology is required in disclosing a security interest. Although the disclosure may, at the creditor’s option, use the term “security inter est,” the creditor may designate its interest by using, for example, “pledge,” “ lien,” or “mortgage.”

7. Collateral from third party. In certain

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Regulation Z Commentary § 226.18 transactions, the consumer’s obligation may be secured by collateral belonging to a third party. For example, a loan to a student may be secured by an interest in the property of the student’s parents. In such cases, the secur ity interest is taken in connection with the transaction and must be disclosed, even though the property encumbered is owned by someone other than the consumer. 18(n) Insurance 1. Location. This disclosure may, at the credi tor’s option, appear apart from the other dis closures. It may appear with any other infor mation, including the amount-financed itemization, any information prescribed by state law, or other supplementary material. When this information is disclosed with the other segregated disclosures, however, no ad ditional explanatory material may be included. 18(o) Certain Security Interest Charges 1. Format. No special format is required for these disclosures; under section 226.4(e), taxes and fees paid to government officials with re spect to a security interest may be aggregated, or may be broken down by individual charge. For example, the disclosure could be labelled “filing fees and taxes,” and all funds dis bursed for such purposes may be aggregated in a single disclosure. This disclosure may ap pear, at the creditor’s option, apart from the other required disclosures. The inclusion of this information on a statement required under the Real Estate Settlement Procedures Act is sufficient disclosure for purposes of Truth in Lending.

18(p) Contract Reference 1. Content. Creditors may substitute, for the phrase “appropriate contract document,” a reference to specific transaction documents in which the additional information is found, such as “promissory note” or “retail install ment sale contract.” A creditor may, at its op tion, delete inapplicable items in the contract reference, as for example when the contract documents contain no information regarding the right of acceleration.

18(q) Assumption Policy 1. Policy statement. In many mortgages, the creditor cannot determine, at the time disclo sure must be made, whether a loan may be assumable at a future date on its original terms. For example, the assumption clause commonly used in mortgages sold to the Fed eral National Mortgage Association and the Federal Home Loan Mortgage Corporation conditions an assumption on a variety of fac tors such as the creditworthiness of the subse quent borrower, the potential for impairment of the lender’s security, and execution of an assumption agreement by the subsequent bor rower. In cases where uncertainty exists as to the future assumability of a mortgage, the dis closure under section 226.18(q) should reflect that fact. In making disclosures in such cases, the creditor may use phrases such as “subject to conditions,” “under certain circumstances,” or “depending on future conditions.” The creditor may provide a brief reference to more specific criteria such as a due-on-sale clause, although a complete explanation of all condi tions is not appropriate. For example, the dis closure may state, “Someone buying your home may be allowed to assume the mortgage on its original terms, subject to certain condi tions, such as payment of an assumption fee.” See comment 17(a)(l)-5 for an example of a reference to a due-on-sale clause. 2. Original terms. The phrase “ original terms” for purposes of section 226.18(q) does not preclude the imposition of an assumption fee, but a modification of the basic credit agreement, such as a change in the contract interest rate, represents different terms. 18(r) Required Deposit 1. Disclosure required. The creditor must in form the consumer of the existence of a re quired deposit. (Appendix H provides a model clause that may be used in making that disclo sure.) Footnote 45 describes three types of de posits that need not be considered required de posits. Use of the phrase “need not” permits creditors to include the disclosure even in cases where there is doubt as to whether the deposit constitutes a required deposit. 2. Pledged-account mortgages. In these trans-

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§ 226.18 Regulation Z Commentary actions, a consumer pledges as collateral funds that the consumer deposits in an ac count held by the creditor. The creditor with draws sums from that account to supplement the consumer’s periodic payments. Creditors may treat these pledged accounts as required deposits or they may treat them as consumer buydowns in accordance with the commentary to section 226.17(c)(1).

3. Escrow accounts. The escrow exception in footnote 45 applies, for example, to accounts for such items as maintenance fees, repairs, or improvements, whether in a realty or a nonrealty transaction. (See the commentary to section 226.17(c)(1) regarding the use of es crow accounts in consumer buydown transactions.) 4. Interest-bearing accounts. When a deposit earns at least 5 percent interest per year, no disclosure is required under section 226.18 (r). This exception applies whether the deposit is held by the creditor or by a third party. 5. Morris Plan transactions. A deposit under a Morris Plan, in which a deposit account is created for the sole purpose of accumulating payments and this is applied to satisfy entirely the consumer’s obligation in the transaction, is not a required deposit.

6. Examples o f amounts excluded. The fol lowing are among the types of deposits that need not be treated as required deposits: • Requirement that a borrower be a customer or a member even if that involves a fee or a minimum balance • Required property insurance escrow on a mobile home transaction • Refund of interest when the obligation is paid in full • Deposits that are immediately available to the consumer • Funds deposited with the creditor to be dis bursed (for example, for construction) before the loan proceeds are advanced • Escrow of condominium fees • Escrow of loan proceeds to be released when the repairs are completed References Statute: § 128, the Gam-St Germain Depository Institutions Act of 1982 (Pub. L. 97-320) and the Real Estate Settlement Procedures Act (12 USC 2602) Other sections: §§ 226.2, 226.17, and appen dix H Other regulations: 12 CFR 545.6-2(a) and 12 CFR 29 Previous regulation: §§ 226.4 and 226.8 1981 changes: Five of the required disclosures must be explained to the consumer in a man ner similar to the descriptive phrases shown in the regulation. A written itemization of the amount financed need not be provided unless the consumer requests it. The finance charge must be provided in all transactions, including real estate transactions, but must be shown only as a total amount. The disclosed finance charge is considered accurate if it is within a specified range.

The variable-rate hypothetical is required in all variable-rate transactions and may be either general or transaction-specific. The penalty and rebate disclosures in the event of prepay ment have been modified and combined. The requirement of an explanation of how the re bates or penalties are computed has been eliminated. The late-payment disclosure has also been narrowed to include only charges imposed before maturity for late payments. The information required in the security in terest disclosure has been decreased by the de letion of the type of security interest and a reduction in the property description require ment. The disclosure of the required deposit is limited to a statement that the annual percent age rate does not reflect the required deposit; the presence of a required deposit has no ef fect on the annual percentage rate. Two disclosure requirements have been added: a reference to the contract documents for additional information and, in a residential mortgage transaction, a statement of the credi tor’s assumption policy.

SECTION 226.19—Certain Residential Mortgage Transactions 19(a)(1) Time of Disclosure 1. Coverage. This section requires early dis closure of credit terms in residential mortgage

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Regulation Z Commentary § 226.19 transactions that are also subject to the Real Estate Settlement Procedures Act (RESPA) and its implementing Regulation X, adminis tered by the Department of Housing and Ur ban Development (HUD). To be covered by this section, a transaction must be both a resi dential mortgage transaction under section 226.2(a) and a federally related mortgage loan under RESPA. “Federally related mortgage loan” is defined under RESPA (12 USC 2602) and Regulation X (24 CFR 3500.5(b)), and is subject to any interpretations by HUD. 2. Timing and use o f estimates. Truth in Lending disclosures must be given (a) before consummation or (b) within three business days after the creditor receives the consumer’s written application, whichever is earlier. The three-day period for disclosing credit terms coincides with the time period within which creditors subject to RESPA must provide good faith estimates of settlement costs. If the cred itor does not know the precise credit terms, the creditor must base the disclosures on the best information reasonably available and in dicate that the disclosures are estimates under section 226.17(c)(2). If many of the disclo sures are estimates, the creditor may include a statement to that effect (such as “all numeri cal disclosures except the late-payment disclo sure are estimates” ) instead of separately la belling each estimate. In the alternative, the creditor may label as an estimate only the items primarily affected by unknown informa tion. (See the commentary to section 226.17(c)(2).) The creditor may provide ex planatory material concerning the estimates and the contingencies that may affect the ac tual terms, in accordance with the commen tary to section 226.17(a)(1).) 3. Written application. Creditors may rely on RESPA and Regulation X (including any in terpretations issued by HUD) in deciding whether a “written application” has been re ceived. In general, Regulation X requires dis closures “to every person from whom the Lender receives or for whom it prepares a written application on an application form or forms normally used by the Lender for a Fed erally Related Mortgage Loan” (24 CFR 3500.6(a)). An application is received when it reaches the creditor in any of the ways ap plications are normally transmitted—by mail, hand delivery, or through an intermediary agent or broker. (See comment 19(b)-3 for guidance in determining whether or not the transaction involves an intermediary agent or broker.) If an application reaches the creditor through an intermediary agent or broker, the application is received when it reaches the creditor, rather than when it reaches the agent or broker.

4. Exceptions. The creditor may determine within the three-day period that the applica tion will not or cannot be approved on the terms requested, as, for example, when a con sumer applies for a type or amount of credit that the creditor does not offer, or the con sumer’s application cannot be approved for some other reason. In that case, the creditor need not make the disclosures under this sec tion. If the creditor fails to provide early dis closures and the transaction is later consum mated on the original terms, the creditor will be in violation of this provision. If, however, the consumer amends the application because of the creditor’s unwillingness to approve it on its original terms, no violation occurs for not providing disclosures based on the original terms. But the amended application is a new application subject to this section. 5. Itemization o f amount financed. In many residential mortgage transactions, the itemiza tion of the amount financed required by sec tion 226.18(c) will contain items, such as origination fees or points, that also must be disclosed as part of the good faith estimates of settlement costs required under RESPA. Creditors furnishing the RESPA good faith es timates need not give consumers any itemiza tion of the amount financed, either with the disclosures provided within three days after application or with the disclosures given at consummation or settlement.

19(a)(2) Redisclosure Required 1. Conditions for redisclosure. Creditors must make new disclosures if the annual percentage rate at consummation differs from the estimate originally disclosed by more than Vs of 1 per centage point in regular transactions or [U of 1 percentage point in irregular transactions, as

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§ 226.19 Regulation Z Commentary defined in section 226.22. The creditor must also redisclose if a variable rate feature is added to the credit terms after the original disclosures have been made. The creditor has the option of redisclosing information under other circumstances, if it wishes to do so. 2. Content of new disclosures. If redisclosure is required, the creditor may provide a com plete set of new disclosures, or may redisclose only the terms that vary from those originally disclosed. If the creditor chooses to provide a complete set of new disclosures, the creditor may but need not highlight the new terms, provided that the disclosures comply with the format requirements of section 226.17(a). If the creditor chooses to disclose only the new terms, all the new terms must be disclosed. For example, a different annual percentage rate will almost always produce a different fi nance charge, and often a new schedule of payments; all of these changes would have to be disclosed. If, in addition, unrelated terms such as the amount financed or prepayment penalty vary from those originally disclosed, the accurate terms must be disclosed. How ever, no new disclosures are required if the only inaccuracies involve estimates other than the annual percentage rate, and no variable rate feature has been added. 3. Timing. Redisclosures, when necessary, must be given no later than “consummation or settlement.” “Consummation” is defined in section 226.2(a). “Date of settlement” is de fined in Regulation X (24 CFR 3500.2(a)) and is subject to any interpretations issued under RESPA and Regulation X.

4. Basis of disclosures. In some cases, a cred itor may delay redisclosure until settlement, which may be at a time later than consumma tion. If a creditor chooses to redisclose at set tlement, disclosures may be based on the terms in effect at settlement, rather than at consummation. For example, in a variable-rate transaction, a creditor may choose to base dis closures on the terms in effect at settlement despite the general rule in the commentary to section 18(f) that variable-rate disclosures should be based on the terms in effect at consummation.

19(b) Certain Variable-Rate Transactions 1. Coverage. Section 226.19(b) applies to all closed-end variable-rate transactions that are secured by the consumer’s principal dwelling and have a term greater than one year. The requirements of this section apply not only to transactions financing the initial acquisition of the consumer’s principal dwelling, but also to any other closed-end variable-rate transaction secured by the principal dwelling. Closed-end variable-rate transactions that are not secured by the principal dwelling, or are secured by the principal dwelling but have a term of one year or less, are subject to the disclosure re quirements of section 226.18(f)(1) rather than those of section 226.19(b). (Furthermore, “ shared-equity” or “ shared-appreciation” mortgages are subject to the disclosure re quirements of section 226.18(f)(1) rather than those of section 226.19(b) regardless of the general coverage of those sections.) For pur poses of this section, the term of a variablerate demand loan is determined in accordance with the commentary to section 226.17(c)(5). In determining whether a construction loan that may be permanently financed by the same creditor is covered under this section, the creditor may treat the construction and the permanent phases as separate transactions with distinct terms to maturity or as a single com bined transaction. For purposes of the disclo sures required under section 226.18, the credi tor may nevertheless treat the two phases either as separate transactions or as a single combined transaction in accordance with sec tion 226.17(c)(6). Finally, in any assumption of a variable-rate transaction secured by the consumer’s principal dwelling with a term greater than one year, disclosures need not be provided under sections 226.18(f)(2)(ii) or 226.19(b).

2. Timing. A creditor must give the disclo sures required under this section at the time an application form is provided or before the consumer pays a nonrefundable fee, whichever is earlier. In cases where a creditor receives a written application through an intermediary agent or broker, however, footnote 45b pro vides a substitute timing rule requiring the creditor to deliver the disclosures or place them in the mail not later than three business

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Regulation Z Commentary § 226.19 days after the creditor receives the consumer’s written application. (See comment 19(b)-3 for guidance in determining whether or not the transaction involves an intermediary agent or broker.) This three-day rule also applies where the creditor takes an application over the tele phone. If, however, the consumer merely re quests an application over the telephone, the creditor must include the early disclosures re quired under this section with the application that is sent to the consumer. In cases where the creditor solicits applications through the mail, the creditor must also send the disclo sures required under this section if an applica tion form is included with the solicitation. In cases where an open-end credit account will convert to a closed-end transaction subject to this section under a written agreement with the consumer, disclosures under this section may be given at the time of conversion. (See the commentary to section 226.20(a) for infor mation on the timing requirements for 226.19(b)(2) disclosures when a variable-rate feature is later added to a transaction.) 3. Intermediary agent or broker. In certain transactions involving an “intermediary agent or broker,” a creditor may delay providing disclosures. A creditor may not delay provid ing disclosures in transactions involving either a legal agent (as determined by applicable law) or any other third party that is not an “intermediary agent or broker.” In determin ing whether or not a transaction involves an “intermediary agent or broker” the following factors should be considered: • The number of applications submitted by the broker to the creditor as compared to the total number of applications received by the creditor. The greater the percentage of total loan applications submitted by the broker in any given period of time, the less likely it is that the broker would be consid ered an “intermediary agent or broker” of the creditor during the next period. • The number of applications submitted by the broker to the creditor as compared to the total number of applications received by the broker. (This factor is applicable on ly if the creditor has such information.) The greater the percentage of total loan ap plications received by the broker that is submitted to a creditor in any given period of time, the less likely it is that the broker would be considered an “intermediary agent or broker” of the creditor during the next period.

• The amount of work (such as document preparation) the creditor expects to be done by the broker on an application based on the creditor’s prior dealings with the broker and on the creditor’s requirements for ac cepting applications, taking into considera tion the customary practice of brokers in a particular area. The more work that the creditor expects the broker to do on an ap plication, in excess of what is usually ex pected of a broker in that area, the less likely it is that the broker would be consid ered an “intermediary agent or broker” of the creditor.

An example of an “intermediary agent or bro ker” is a broker who, customarily within a brief time after receiving an application, in quires about the credit terms of several credi tors with whom the broker does business and submits the application to one of them. The broker is responsible for only a small percent age of the applications received by that credi tor. During the time the broker has the appli cation, it might request a credit report and an appraisal (or even prepare an entire loan pack age if customary in that particular area). 4. Other variable-rate regulations. Transac tions in which the creditor is required to com ply with and has complied with the disclosure requirements of the variable-rate regulations of other federal agencies are exempt from the requirements of section 226.19(b), by virtue of footnote 45a, and are exempt from the re quirements of section 226.20(c), by virtue of footnote 45c. Those variable-rate regulations include the regulations issued by the Federal Home Loan Bank Board and those issued by the Department of Housing and Urban Devel opment. The exception in footnotes 45a and 45c is also available to creditors that are re quired by state law to comply with the federal variable-rate regulations noted above and to creditors that are authorized by title VIII of the Depository Institutions Act of 1982 (12 USC 3801 et seq.) to make loans in accor dance with those regulations. Creditors using

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§ 226.19 Regulation Z Commentary this exception should comply with the timing requirements of those regulations rather than the timing requirements of Regulation Z in making the variable-rate disclosures. 5. Examples o f variable-rate transactions. The following transactions, if they have a term greater than one year and are secured by the consumer’s principal dwelling, constitute variable-rate transactions subject to the disclo sure requirements of section 226.19(b). • Renewable balloon-payment instruments where the creditor is both unconditionally obligated to renew the balloon-payment loan at the consumer’s option (or is obli gated to renew subject to conditions within the consumer’s control) and has the option of increasing the interest rate at the time of renewal. (See comment 17(c)(l)-ll for a discussion of conditions within a consum er’s control in connection with renewable balloon-payment loans.) • Preferred-rate loans where the terms of the legal obligation provide that the initial un derlying rate is fixed but will increase upon the occurrence of some event, such as an employee leaving the employ of the credi tor, and the note reflects the preferred rate. The disclosures under section 226.19(b)(1) and 226.19(b)(2)(v), (viii), (ix), (x) and (xiii) are not applicable to such loans. • “Price-level-adjusted mortgages” or other indexed mortgages that have a fixed rate of interest but provide for periodic adjust ments to payments and the loan balance to reflect changes in an index measuring prices or inflation. The disclosures under section 226.19(b)(1) are not applicable to such loans, nor are the following provi sions to the extent they relate to the deter mination of the interest rate by the addition of a margin, changes in the interest rate, or interest-rate discounts: Section 226.19 (b)(2 )(i), (iii), (iv), (v), (vi), (vii), (viii), (ix), and (x). (See comments 20(c)-2 and 30-1 regarding the inapplicability of varia ble-rate adjustment notices and interest-rate limitations to price-level-adjusted or similar mortgages.) Graduated-payment mortgages and step-rate transactions without a variable-rate feature are not considered variable-rate transactions. Paragraph 19(b)(1) 1. Substitutes. Creditors who wish to use pub lications other than the Consumer Handbook on Adjustable Rate Mortgages must make a good faith determination that their brochures are suitable substitutes to the Consumer Hand book. A substitute is suitable if it is, at a min imum, comparable to the Consumer Handbook in substance and comprehensiveness. Creditors are permitted to provide more detailed infor mation than is contained in the Consumer Handbook.

2. Applicability. The Consumer Handbook need not be given for variable-rate transac tions subject to this section in which the un derlying interest rate is fixed. (See comment 19(b)-4 for an example of a variable-rate transaction where the underlying interest rate is fixed.) Paragraph 19(b)(2) 1. Disclosure for each variable-rate program. A creditor must provide disclosures to the consumer that fully describe each of the credi tor’s variable-rate loan programs in which the consumer expresses an interest If a program is made available only to certain customers of an institution, a creditor need not provide dis closures for that program to other consumers who express a general interest in a creditor’s ARM programs. Disclosures must be given at the time an application form is provided or before the consumer pays a nonrefundable fee, whichever is earlier. If program disclosures cannot be provided because a consumer ex presses an interest in individually negotiating loan terms that are not generally offered, dis closures reflecting those terms may be pro vided as soon as reasonably possible after the terms have been decided upon, but not later than the time a nonrefundable fee is paid. If a consumer who has received program disclo sures subsequently expresses an interest in other available variable-rate programs subject to section 226.19(b)(2), or the creditor and consumer decide on a program for which the consumer has not received disclosures, the

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Regulation Z Commentary § 226.19 creditor must provide appropriate disclosures as soon as reasonably possible. The creditor, of course, is permitted to give the consumer information about additional programs subject to section 226.19(b) initially. 2. Variable-rate loan program defined. If the identification, the presence or absence, or the exact value of a loan feature must be dis closed under this section, variable-rate loans that differ as to such features constitute sepa rate loan programs. For example, separate loan programs would exist based on differ ences in any of the following loan features: • The index or other formula used to calcu late interest rate adjustments • The rules relating to changes in the index value, interest rate, payments, and loan balance • The presence or absence of, and the amount of, rate or payment caps • The presence of a demand feature • The possibility of negative amortization • The possibility of interest rate carryover • The frequency of interest rate and payment adjustments • The presence of a discount feature In addition, if a loan feature must be taken into account in preparing the disclosures re quired by section 226.19(b)(2)(viii) and (x), variable-rate loans that differ as to that feature constitute separate programs under section 226.19(b)(2). If, however, a representative value may be given for a loan feature or the feature need not be disclosed under section 226.19(b)(2), variable-rate loans that differ as to such features do not constitute separate loan programs. For example, separate loan programs would not exist based on differences in the following loan features: • The amount of a discount • The amount of a margin 3. Form of program disclosures. A creditor may provide separate program disclosure forms for each ARM program it offers or a single disclosure form that describes multiple programs. A disclosure form may consist of more than one page. For example, a creditor may attach a separate page containing the his torical payment example for a particular pro gram. A disclosure form describing more than one program need not repeat information ap plicable to each program that is described. For example, a form describing multiple programs may disclose the information applicable to all of the programs in one place with the various program features (such as options permitting conversion to a fixed rate) disclosed sepa rately. The form, however, must state if any program feature that is described is available only in conjunction with certain other program features. Both the separate- and multiple-program disclosures may illustrate more than one loan maturity or payment amortization—for example, by including multiple-payment and loan-balance columns in the historical pay ment example. Disclosures may be inserted or printed in the Consumer Handbook (or a suit able substitute) as long as they are identified as the creditor’s loan-program disclosures. 4. As applicable. The disclosures required by this section need only be made as applicable. Any disclosure not relevant to a particular transaction may be eliminated. For example, if the transaction does not contain a demand fea ture, the disclosure required under section 226.19(b)(2)(xi) need not be given. As used in this section, “payment” refers only to a pay ment based on the interest rate, loan balance, and loan term and does not refer to payment of other elements such as mortgage insurance premiums.

5. Revisions. A creditor must revise the dis closures required under this section once a year as soon as reasonably possible after the new index value becomes available. Revisions to the disclosures also are required when the loan program changes.

Paragraph 19(b)(2)(i) 1. Change in interest rate, payment, or term. A creditor must disclose the fact that the terms of the legal obligation permit the credi tor, after consummation of the transaction, to increase (or decrease) the interest rate, pay ment, or term of the loan initially disclosed to the consumer. For example, the disclosures for a variable-rate program in which the interest rate and payment (but not loan term) can change might read, “Your interest rate and

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§ 226.19 Regulation Z Commentary payment can change yearly.” In transactions where the term of the loan may change due to rate fluctuations, the creditor must state that fact.

Paragraph 19(b)(2)(ii) 1. Identification o f index or formula. If a creditor ties interest rate changes to a particu lar index, this fact must be disclosed, along with a source of information about the index. For example, if a creditor uses the weekly av erage yield on U.S. Treasury securities ad justed to a constant maturity as its index, the disclosure might read, “ Your index is the weekly average yield on U.S. Treasury securi ties adjusted to a constant maturity of one year published weekly in the Wall Street Jour nal. ” If no particular index is used, the credi tor must briefly describe the formula used to calculate interest rate changes. 2. Changes at creditor’s discretion. If interest rate changes are at the creditor’s discretion, this fact must be disclosed. If an index is in ternally defined, such as by a creditor’s prime rate, the creditor should either briefly describe that index or state that interest rate changes are at the creditor’s discretion. Paragraph I9(b)(2)(iii) 1. Determination of interest rate and payment. This provision requires an explanation of how the creditor will determine the consumer’s in terest rate and payment. In cases where a creditor bases its interest rate on a specific index and adjusts the index through the addi tion of a margin, for example, the disclosure might read, “Your interest rate is based on the index plus a margin, and your payment will be based on the interest rate, loan balance, and remaining loan term.” In transactions where paying the periodic payments will not fully amortize the outstanding balance at the end of the loan term and where the final pay ment will equal the periodic payment plus the remaining unpaid balance, the creditor must disclose this fact. For example, the disclosure might read, “Your periodic payments will not fully amortize your loan and you will be re quired to make a single payment of the peri odic payment plus the remaining unpaid balance at the end of the loan term.” The creditor, however, need not reflect any irregu lar final payment in the historical example or in the disclosure of the initial and maximum rates and payments. If applicable, the creditor should also disclose that the rate and payment will be rounded.

Paragraph 19(b)(2)(iv) 1. Current margin value and interest rate. Be cause the disclosures can be prepared in ad vance, the interest rate and margin may be several months old when the disclosures are delivered. A statement, therefore, is required alerting consumers to the fact that they should inquire about the current margin value applied to the index and the current interest rate. For example, the disclosure might state, “Ask us for our current interest rate and margin.” Paragraph 19(b)(2)(v) 1. Discounted and premium interest rate. In some variable-rate transactions, creditors may set an initial interest rate that is not deter mined by the index or formula used to make later interest rate adjustments. Typically, this initial rate charged to consumers is lower than the rate would be if it were calculated using the index or formula. However, in some cases the initial rate may be higher. If the initial interest rate will be a discount or a premium rate, creditors must alert the consumer to this fact. For example, if a creditor discounted a consumer’s initial rate, the disclosure might state, “Your initial interest rate is not based on the index used to make later adjustments.” (See the commentary to section 226.17(c)(1) for a further discussion of discounted and pre mium variable-rate transactions). In addition, the disclosure must suggest that consumers in quire about the amount that the program is currently discounted. For example, the disclo sure might state, “Ask us for the amount our adjustable-rate mortgages are currently dis counted.” In a transaction with a consumer buydown or with a third-party buydown that will be incorporated in the legal obligation, the creditor should disclose the program as a discounted variable-rate transaction, but need not disclose additional information regarding the buydown in its program disclosures. (See

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Regulation Z Commentary § 226.19 the commentary to section 226.19(b)(2)(viii) for a discussion of how to reflect the discount or premium in the historical example.) Paragraph 19(b)(2)(vi) 1. Frequency. The frequency of interest rate and payment adjustments must be disclosed. If interest rate changes will be imposed more frequently or at different intervals than pay ment changes, a creditor must disclose the fre quency and timing of both types of changes. For example, in a variable-rate transaction where interest rate changes are made monthly, but payment changes occur on an annual ba sis, this fact must be disclosed. In certain ARM transactions, the interval between loan closing and the initial adjustment is not known and may be different from the regular interval for adjustments. In such cases, the creditor may disclose the initial adjustment period as a range of the minimum and maxi mum amount of time from consummation or closing. For example, the creditor might state: “The first adjustment to your interest rate and payment will occur no sooner than 6 months and no later than 18 months after closing. Subsequent adjustments may occur once each year after the first adjustment.” (See com ments 19(b)(2)(viii)-7 and 19(b)(2)(x)-4 for guidance on other disclosures when this alter native disclosure rule is used.) Paragraph 19(b)(2)(vii) 1. Rate and payment caps. The creditor must disclose limits on changes (increases or de creases) in the interest rate or payment. If an initial discount is not taken into account in applying overall or periodic rate limitations, that fact must be disclosed. If separate overall or periodic limitations apply to interest rate increases resulting from other events, such as the exercise of a fixed-rate conversion option or leaving the creditor’s employ, those limita tions must also be stated. Limitations do not include legal limits in the nature of usury or rate ceilings under state or federal statutes or regulations. (See section 226.30 for the rule requiring that a maximum interest rate be in cluded in certain variable-rate transactions.) The creditor need not disclose each periodic or overall rate limitation that is currently available. As an alternative, the creditor may disclose the range of the lowest and highest periodic and overall rate limitations that may be applicable to the creditor’s ARM transac tions. For example, the creditor might state: “The limitation on increases to your interest rate at each adjustment will be set at an amount in the following range: between 1 and 2 percentage points at each adjustment. The limitation on increases to your interest rate over the term of the loan will be set at an amount in the following range: between 4 and 7 percentage points above the initial interest rate.” A creditor using this alternative rule must include a statement in its program dis closures suggesting that the consumer ask about the overall rate limitations currently of fered for the creditor’s ARM programs. (See comments 19(b)(2)(viii)-6 and 19(b)(2)(x)-3 for an explanation of the additional require ments for a creditor using this alternative rule for disclosure of periodic and overall rate limitations.) 2. Negative amortization and interest-rate carryover. A creditor must disclose, where ap plicable, the possibility of negative amortiza tion. For example, the disclosure might state, “If any of your payments is not sufficient to cover the interest due, the difference will be added to your loan amount.” Loans that pro vide for more than one way to trigger nega tive amortization are separate variable-rate programs requiring separate disclosures. (See the commentary to section 226.19(b)(2) for a discussion on the definition of a variable-rate loan program and the format for disclosure.) If a consumer is given the option to cap monthly payments that may result in negative amortization, the creditor must fully disclose the rules relating to the option, including the effects of exercising the option (such as nega tive amortization will occur and the principal loan balance will increase); however, the dis closure in section 226.19(b)(2)(viii) need not be provided.

3. Conversion option. If a loan program per mits consumers to convert their variable-rate loans to fixed-rate loans, the creditor must dis close that the interest rate may increase if the consumer converts the loan to a fixed-rate loan. The creditor must also disclose the rules

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§ 226.19 Regulation Z Commentary relating to the conversion feature, such as the period during which the loan may be con verted, that fees may be charged at conver sion, and how the fixed rate will be deter mined. The creditor should identify any index or other measure or formula used to determine the fixed rate and state any margin to be added. In disclosing the period during which the loan may be converted and the margin, the creditor may use information applicable to the conversion feature during the six months pre ceding preparation of the disclosures and state that the information is representative of con version features recently offered by the credi tor. The information may be used until the program disclosures are otherwise revised. Al though the rules relating to the conversion op tion must be disclosed, the effect of exercising the option should not be reflected elsewhere in the disclosures, such as in the historical exam ple or in the calculation of the initial and maximum interest rate and payments. 4. Preferred-rate loans. Section 226.19(b) ap plies to preferred-rate loans, where the rate will increase upon the occurrence of some event, such as an employee leaving the credi tor’s employ, whether or not the underlying rate is fixed or variable. In these transactions, the creditor must disclose the event that would allow the creditor to increase the rate such as that the rate may increase if the em ployee leaves the creditor’s employ. The cred itor must also disclose the rules relating to termination of the preferred rate, such as that fees may be charged when the rate is changed and how the new rate will be determined. Paragraph 19(b)(2)(viii) 1. Index movement. This section requires a creditor to provide an historical example, based on a $10,000 loan amount originating in 1977, showing how interest rate changes im plemented according to the terms of the loan program would have affected payments and the loan balance at the end of each year dur ing a 15-year period. (In all cases, the creditor need only calculate the payments and loan balance for the term of the loan. For example, in a five-year loan, a creditor would show the payments and loan balance for the five-year term, from 1977 to 1981, with a zero loan balance reflected for 1981. For the remaining ten years, 1982-1991, the creditor need only show the remaining index values, margin, and interest rate and must continue to reflect all significant loan-program terms such as rate limitations affecting them.) Pursuant to this section, the creditor must provide a history of index values for the preceding 15 years. Ini tially, the disclosures would give the index values from 1977 to the present. Each year thereafter, the revised program disclosures should include an additional year’s index value until 15 years of values are shown. If the values for an index have not been avail able for 15 years, a creditor need only go back as far as the values are available in giv ing a history and payment example. In all cases, only one index value per year need be shown. Thus, in transactions where interest rate adjustments are implemented more fre quently than once per year, a creditor may assume that the interest rate and payment re sulting from the index value chosen will stay in effect for the entire year for purposes of calculating the loan balance as of the end of the year and for reflecting other loan program terms. In cases where interest rate changes are at the creditor’s discretion (see the commen tary to section 226.19(b)(2)(ii)), the creditor must provide a history of the rates imposed for the preceding 15 years, beginning with the rates in 1977. In giving this history, the credi tor need only go back as far as the creditor’s rates can reasonably be determined. 2. Selection of index values. The historical ex ample must reflect the method by which index values are determined under the program. If a creditor uses an average of index values or any other index formula, the history given should reflect those values. The creditor should select one date or, when an average of single values is used as an index, one period and should base the example on index values measured as of that same date or period for each year shown in the history. A date or pe riod at any time during the year may be se lected, but the same date or period must be used for each year in the historical example. For example, a creditor could use values for the first business day in July or for the first

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Regulation Z Commentary § 226.19 week ending in July for each of the 15 years shown in the example.

3. Selection of margin. For purposes of the disclosure required under section 226.19 (b)(2 )(viii), a creditor may select a representa tive margin that has been used during the six months preceding preparation of the disclo sures, and should disclose that the margin is one that the creditor has used recently. The margin selected may be used until a creditor revises the disclosure form. 4. Amount o f discount or premium. For pur poses of the disclosure required under section 226.19(b)(2)(viii), a creditor may select a dis count or premium (amount and term) that has been used during the six months preceding preparation of the disclosures, and should dis close that the discount or premium is one that the creditor has used recently. The discount or premium should be reflected in the historical example for as long as the discount or pre mium is in effect. A creditor may assume that a discount that would have been in effect for any part of a year was in effect for the full year for purposes of reflecting it in the histori cal example. For example, a 3-month discount may be treated as being in effect for the entire first year of the example; a 15-month discount may be treated as being in effect for the first two years of the example. In illustrating the effect of the discount or premium, creditors should adjust the value of the interest rate in the historical example, and should not adjust the margin or index values. For example, if during the six months preceding preparation of the disclosures the fully indexed rate would have been 10 percent but the first year’s rate under the program was 8 percent, the creditor would discount the first interest rate in the historical example by 2 percentage points. 5. Term o f the loan. In calculating the pay ments and loan balances in the historical ex ample, a creditor need not base the disclosures on each term to maturity or payment amorti zation that it offers. Instead, disclosures for ARMs may be based upon terms to maturity or payment amortizations of 5, 15, and 30 years, as follows: ARMs with terms or amor tizations from over 1 year to 10 years may be based on a 5-year term or amortization; ARMs with terms or amortizations from over 10 years to 20 years may be based on a 15year term or amortization; and ARMs with terms or amortizations over 20 years may be based on a 30-year term or amortization. Thus, disclosures for ARMs offered with any term from over 1 year to 40 years may be based solely on terms of 5, 15, and 30 years. Of course, a creditor may always base the dis closures on the actual terms or amortizations offered. If the creditor bases the disclosures on 5-, 15-, or 30-year terms or payment amor tizations as provided above, the term or pay ment amortization used in making the disclo sure must be stated.

6. Rate caps. A creditor using the alternative rule described in comment 19(b)(2)(vii)-l for disclosure of rate limitations must base the historical example upon the highest periodic and overall rate limitations disclosed under section 226.19(b)(2)(vii). In addition, the cred itor must state the limitations used in the his torical example. (See comment 19(b)(2)(x)-3 for an explanation of the use of the highest rate limitation in other disclosures.) 7. Frequency o f adjustments. In certain trans actions, creditors may use the alternative rule described in comment 19(b)(2)(vi)-l for dis closure of the frequency of rate and payment adjustments. In such cases, the creditor may assume for purposes of the historical example that the first adjustment occurred at the end of the first full year in which the adjustment could occur. For example, in an ARM in which the first adjustment may occur between 6 and 18 months after closing and annually thereafter, the creditor may assume that the first adjustment occurred at the end of the first year in the historical example. (See comment 19(b)(2)(x)-4 for an explanation of how to compute the maximum interest rate and pay ment when the initial adjustment period is not known.) Paragraph 19(b)(2)(ix) 1. Calculation of payments. A creditor is re quired to include a statement on the disclosure form that explains how a consumer may cal culate his or her actual monthly payments for a loan amount other than $10,000. The exam-

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§ 226.19 Regulation Z Commentary pie should be based upon the most recent pay ment shown in the historical example. How ever, in transactions in which the latest payment shown in the historical example is not for the latest year of index values shown (such as in a five-year loan), a creditor may provide additional examples based on the ini tial and maximum payments disclosed under section 226.19(b)(2)(x). The creditor, how ever, is not required to calculate the con sumer’s payments. (See the model clauses in appendix H-4(C).) Paragraph 19(b)(2)(x) 1. Initial and maximum interest rate and pay ment. The disclosure form must state the ini tial and maximum interest rates and payments for a $10,000 loan originated at the most re cent interest rate (index value plus margin) shown in the historical example. In calculating the maximum payments under this paragraph, a creditor should assume that the interest rate increases as rapidly as possible under the loan program, and the maximum payment disclosed should reflect the amortization of the loan dur ing this period. Thus, in a loan with 2 per centage point annual (and 5 percentage point overall) interest rate limitations or “caps,” the maximum interest rate would be 5 percentage points higher than the most recent rate shown in the historical example. Moreover, the loan would not reach the maximum interest rate until the fourth year because of the 2 percent age point annual rate limitations, and the max imum payment disclosed would reflect the amortization of the loan during this period. If the loan program includes a discounted or pre mium initial interest rate, the most recent rate shown in the historical example should be ad justed by the amount of the discount or pre mium reflected elsewhere in the disclosure for purposes of the requirements of this para graph. Furthermore, this disclosure should state the amount by which the most recent rate has been adjusted. (See the commentary to section 226.19(b)(2)(viii) regarding disclo sure of the amount of a discount or premium.) The creditor may use an interest rate applica ble to the program that is more recent than the latest rate shown in the historical example. 2. Term of the loan. In calculating the initial and maximum payments, the creditor need not base the disclosures on each term to maturity or payment amortization offered under the program. Instead, the creditor may follow the rules set out in comment 19(b)(2)(viii)-5. In calculating the initial and maximum payment, the terms to maturity or payment amortiza tions selected for the purpose of making dis closures under section 226.19(b)(2)(viii) must be used. In addition, creditors must state the term or payment amortization used in making the disclosures under this section. 3. Rate caps. A creditor using the alternative rule for disclosure of interest rate limitations described in comment 19(b)(2)(vii)-l must calculate the maximum interest rate and pay ments based upon the highest periodic and overall rate limitations disclosed under section 226.19(b)(2)(vii). In addition, the creditor must state the rate limitations used in calculat ing the maximum interest rate and payment. (See comment 19(b)(2)(viii)-6 for an explana tion of the use of the highest rate limitation in other disclosures.) 4. Frequency of adjustments. In certain trans actions, a creditor may use the alternative rule for disclosure of the frequency of rate and payment adjustments described in comment 19(b)(2)(vi)-l. In such cases, the creditor must base the calculations of the initial and maxi mum rates and payments upon the earliest possible first adjustment disclosed under sec tion 226.19(b)(2)(vi). (See comment 19(b) (2)(viii)-7 for an explanation of how to dis close the historical example when the initial adjustment period is not known.) Paragraph 19(b)(2)(xi) 1. Demand feature. If a variable-rate loan subject to section 226.19(b) requirements con tains a demand feature, as discussed in the commentary to section 226.18(i), this fact must be disclosed. (Pursuant to section 226.18(i), creditors would also disclose the demand feature in the standard disclosures given later.) Paragraph I9(b)(2)(xii) 1. Adjustment notices. A creditor must dis

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Regulation Z Commentary § 226.20 close to the consumer the type of information that will be contained in subsequent notices of adjustments and when such notices will be provided. (See the commentary to section 226.20(c) regarding notices of adjustments.) For example, the disclosure might state, “You will be notified at least 25, but no more than 12 0, days before the due date of a payment at a new level. This notice will contain informa tion about the index and interest rates, pay ment amount, and loan balance.” In transac tions where there may be interest rate adjustments without accompanying payment adjustments in a year, the disclosure might read, “You will be notified once each year during which interest rate adjustments, but no payment adjustments, have been made to your loan. This notice will contain information about the index and interest rates, payment amount, and loan balance.”

Paragraph 19(b)(2)(xiii) 1. Multiple loan programs. A creditor that of fers multiple variable-rate loan programs is re quired to have disclosures for each variablerate loan program subject to section 226.19(b)(2). Unless disclosures for all of its variable-rate programs are provided initially, the creditor must inform the consumer that other closed-end variable-rate programs exist and that disclosure forms are available for these additional loan programs. For example, the disclosure form might state, “Information on other adjustable-rate mortgage programs is available upon request.”

References Statute: § 128(b)(2) and the Real Estate Set tlement Procedures Act (12 USC 2602) Other sections: §§ 226.2, 226.17, and 226.22 Other regulations: Regulation X (24 CFR 3500.2(a), 3500.5(b), and 3500.6(a)) Previous regulation: None 1981 changes: This section implements sec tion 128(b)(2), a new provision that requires early disclosure of credit terms in certain mortgage transactions.

SECTION 226.20— Subsequent Disclosure Requirements 20(a) Refinancings 1. Definition. A refinancing is a new transac tion requiring a complete new set of disclo sures. Whether a refinancing has occurred is determined by reference to whether the origi nal obligation has been satisfied or extin guished and replaced by a new obligation, based on the parties’ contract and applicable law. The refinancing may involve the consoli dation of several existing obligations, dis bursement of new money to the consumer or on the consumer’s behalf, or the rescheduling of payments under an existing obligation. In any form, the new obligation must completely replace the prior one.

• Changes in the terms of an existing obliga tion, such as the deferral of individual in stallments, will not constitute a refinancing unless accomplished by the cancellation of that obligation and the substitution of a new obligation.

• A substitution of agreements that meets the refinancing definition will require new dis closures, even if the substitution does not substantially alter the prior credit terms. 2. Exceptions. A transaction is subject to sec tion 226.20(a) only if it meets the general def inition of a refinancing. Section 226.20(a)(1) through (5) lists five events that are not treated as refinancings, even if they are ac complished by cancellation of the old obliga tion and substitution of a new one. 3. Variable rate. If a variable-rate feature was properly disclosed under the regulation, a rate change in accord with those disclosures is not a refinancing. For example, a renewable bal loon-payment mortgage that was disclosed as a variable-rate transaction is not subject to new disclosure requirements when the variable-rate feature is invoked. However, even if it is not accomplished by the cancellation of the old obligation and substitution of a new one, a new transaction subject to new disclo sures results if the creditor either: • Increases the rate based on a variable-rate

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§ 226.20 Regulation Z Commentary feature that was not previously disclosed, or • Adds a variable-rate feature to the obligation.

If either of these two events occurs in a trans action secured by a principal dwelling with a term longer than one year, the disclosures re quired under section 226.19(b) also must be given at that time.

4. Unearned finance charge. In a transaction involving precomputed finance charges, the creditor must include in the finance charge on the refinanced obligation any unearned portion of the original finance charge that is not re bated to the consumer or credited against the underlying obligation. For example, in a trans action with an add-on finance charge, a credi tor advances new money to a consumer in a fashion that extinguishes the original obliga tion and replaces it with a new one. The cred itor neither refunds the unearned finance charge on the original obligation to the con sumer nor credits it to the remaining balance on the old obligation. Under these circum stances, the unearned finance charge must be included in the finance charge on the new ob ligation and reflected in the annual percentage rate disclosed on refinancing. Accrued but un paid finance charges are included in the amount financed in the new obligation. 5. Coverage. Section 226.20(a) applies only to refinancings undertaken by the original creditor or a holder or servicer of the original obligation. A “refinancing” by any other per son is a new transaction under the regulation, not a refinancing under this section. Paragraph 20(a)(1) 1. Renewal. This exception applies both to obligations with a single payment of principal and interest and to obligations with periodic payments of interest and a final payment of principal. In determining whether a new obli gation replacing an old one is a renewal of the original terms or a refinancing, the credi tor may consider it a renewal even if: • Accrued unpaid interest is added to the principal balance • Changes are made in the terms of renewal resulting from the factors listed in section 226.17(c)(3) • The principal at renewal is reduced by a curtailment of the obligation Paragraph 20(a)(2) 1. Annual-percentage-rate reduction. A reduc tion in the annual percentage rate with a cor responding change in the payment schedule is not a refinancing. If the annual percentage rate is subsequently increased (even though it re mains below its original level) and the in crease is effected in such a way that the old obligation is satisfied and replaced, new dis closures must then be made.

2. Corresponding change. A corresponding change in the payment schedule to implement a lower annual percentage rate would be a shortening of the maturity, or a reduction in the payment amount or the number of pay ments of an obligation. The exception in sec tion 226.20(a)(2) does not apply if the matur ity is lengthened, or if the payment amount or number of payments is increased beyond that remaining on the existing transaction. Paragraph 20(a)(3) 1. Court agreements. This exception includes, for example, agreements such as reaffirma tions of debts discharged in bankruptcy, settle ment agreements, and post-judgment agree ments. (See the commentary to section 226.2(a)(14) for a discussion of court-ap proved agreements that are not considered “credit.”) Paragraph 20(a)(4) 1. Workout agreements. A workout agreement is not a refinancing unless the annual percent age rate is increased or additional credit is ad vanced beyond amounts already accrued plus insurance premiums.

Paragraph 20(a)(5) 1. Insurance renewal. The renewal of optional insurance added to an existing credit transac tion is not a refinancing, assuming that appro priate Truth in Lending disclosures were pro vided for the initial purchase of the insurance.

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Regulation Z Commentary § 226.20 20(b) Assumptions 1. General definition. An assumption as de fined in section 226.20(b) is a new transaction and new disclosures must be made to the sub sequent consumer. An assumption under the regulation requires the following three elements:

• A residential mortgage transaction • An express acceptance of the subsequent consumer by the creditor • A written agreement The assumption of a nonexempt consumer credit obligation requires no disclosures unless all three elements are present. For example, an automobile dealer need not provide Truth in Lending disclosures to a customer who as sumes an existing obligation secured by an automobile. However, a residential mortgage transaction with the elements described in sec tion 226.20(b) is an assumption that calls for new disclosures; the disclosures must be given whether or not the assumption is accompanied by changes in the terms of the obligation. (See comment 2(a)(24)-5 for a discussion of assumptions that are not considered residential mortgage transactions.) 2. Existing residential mortgage transaction. A transaction may be a residential mortgage transaction as to one consumer and not to the other consumer. In that case, the creditor must look to the assuming consumer in determining whether a residential mortgage transaction ex ists. To illustrate:

• The original consumer obtained a mortgage to purchase a home for vacation purposes. The loan was not a residential mortgage transaction as to that consumer. The mort gage is assumed by a consumer who will use the home as a principal dwelling. As to that consumer, the loan is a residential mortgage transaction. For purposes of sec tion 226.20(b), the assumed loan is an “ex isting residential mortgage transaction” requiring disclosures, if the other criteria for an assumption are met.

3. Express agreement. “Expressly agrees” means that the creditor’s agreement must re late specifically to the new debtor and must unequivocally accept that debtor as a primary obligor. The following events are not con strued to be express agreements between the creditor and the subsequent consumer: • Approval of creditworthiness • Notification of a change in records • Mailing of a coupon book to the subse quent consumer • Acceptance of payments from the new con sumer 4. Retention o f original consumer. The reten tion of the original consumer as an obligor in some capacity does not prevent the change from being an assumption, provided the new consumer becomes a primary obligor. But the mere addition of a guarantor to an obligation for which the original consumer remains pri marily liable does not give rise to an assump tion. However, if neither party is designated as the primary obligor but the creditor accepts payment from the subsequent consumer, an assumption exists for purposes of section 226.20(b).

5. Status of parties. Section 226.20(b) applies only if the previous debtor was a consumer and the obligation is assumed by another con sumer. It does not apply, for example, when an individual takes over the obligation of a corporation.

6. Disclosures. For transactions that are as sumptions within this provision, the creditor must make disclosures based on the “remain ing obligation.” For example: • The amount financed is the remaining prin cipal balance plus any arrearages or oth er accrued charges from the original transaction.

• If the finance charge is computed from time to time by application of a percentage rate to an unpaid balance, in determining the amount of the finance charge and the annual percentage rate to be disclosed, the creditor should disregard any prepaid fi nance charges paid by the original obligor but must include in the finance charge any prepaid finance charge imposed in connec tion with the assumption.

• If the creditor requires the assuming con sumer to pay any charges as a condition of the assumption, those sums are prepaid fi

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§ 226.20 Regulation Z Commentary nance charges as to that consumer, unless exempt from the finance charge under sec tion 226.4.

If a transaction involves add-on or discount finance charges, the creditor may make abbre viated disclosures, as outlined in section 226.20(b)(1) through (5). Creditors providing disclosures pursuant to this section for as sumptions of variable-rate transactions secured by the consumer’s principal dwelling with a term longer than one year need not provide new disclosures under sections 226.18(f)(2)(ii) or 226.19(b). In such transactions, a creditor may disclose the variable-rate feature solely in accordance with section 226.18(f)(1). 7. Abbreviated disclosures. The abbreviated disclosures permitted for assumptions of trans actions involving add-on or discount finance charges must be made clearly and conspicu ously in writing in a form that the consumer may keep. However, the creditor need not comply with the segregation requirement of section 226.17(a)(1). The terms “annual per centage rate” and “total of payments,” when disclosed according to section 226.20(b)(4) and (5), are not subject to the description re quirements of section 226.18(e) and (h). The term “annual percentage rate” disclosed under section 226.20(b)(4) need not be more con spicuous than other disclosures. 20(c) Variable-Rate Adjustments 1. Timing of adjustment notices. This section requires a creditor (or a subsequent holder) to provide certain disclosures in cases where an adjustment to the interest rate is made in a variable-rate transaction subject to section 226.19(b). There are two timing rules, de pending on whether payment changes accom pany interest rate changes. A creditor is re quired to provide at least one notice each year during which interest rate adjustments have occurred without accompanying payment ad justments. For payment adjustments, a creditor must deliver or place in the mail notices to borrowers at least 25, but not more than 12 0 , calendar days before a payment at a new level is due. The timing rules also apply to the no tice required to be given in connection with the adjustment to the rate and payment that follows conversion of a transaction subject to section 226.19(b) to a fixed-rate transaction. (In cases where an open-end account is con verted to a closed-end transaction subject to section 226.19(b), the requirements of this section do not apply until adjustments are made following conversion.) 2. Exceptions. Section 226.20(c) does not ap ply to “shared-equity,” “shared-appreciation,” or price-level-adjusted or similar mortgages. 3. Basis o f disclosures. The disclosures re quired under this section shall reflect the terms of the parties’ legal obligation, as re quired under section 226.17(c)(1). Paragraph 20(c)(1) 1. Current and prior interest rates. The re quirements under this paragraph are satisfied by disclosing the interest rate used to compute the new adjusted payment amount (“current rate”) and the adjusted interest rate that was disclosed in the last adjustment notice, as well as all other interest rates applied to the trans action in the period since the last notice (“prior rates”). (If there has been no prior ad justment notice, the prior rates are the interest rate applicable to the transaction at consum mation, as well as all other interest rates ap plied to the transaction in the period since consummation.) If no payment adjustment has been made in a year, the current rate is the new adjusted interest rate for the transaction, and the prior rates are the adjusted interest rate applicable to the loan at the time of the last adjustment notice, and all other rates ap plied to the transaction in the period between the current and last adjustment notices. In dis closing all other rates applied to the transac tion during the period between notices, a cred itor may disclose a range of the highest and lowest rates applied during that period. Paragraph 20(c)(2) 1. Current and prior index values. This sec tion requires disclosure of the index or formula values used to compute the current and prior interest rates disclosed in section 226.20(c)(1). The creditor need not disclose the margin used in computing the rates. If the prior interest rate was not based on an index

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Regulation Z Commentary § 226.21 or formula value, the creditor also need not disclose the value of the index that would oth erwise have been used to compute the prior interest rate.

Paragraph 20(c)(3) 1. Unapplied index increases. The require ment that the consumer receive information about the extent to which the creditor has for gone any increase in the interest rate is appli cable only to those transactions permitting in terest rate carryover. The amount of increase that is forgone at an adjustment is the amount that, subject to rate caps, can be applied to future adjustments independently to increase, or offset decreases in, the rate that is deter mined according to the index or formula. Paragraph 20(c)(4) 1. Contractual effects o f the adjustment. The contractual effects of an interest rate adjust ment must be disclosed including the payment due after the adjustment is made whether or not the payment has been adjusted. In transac tions where paying the periodic payments will not fully amortize the outstanding balance at the end of the loan term and where the final payment will equal the periodic payment plus the remaining unpaid balance, the amount of the adjusted payment must be disclosed if such payment has changed as a result of the rate adjustment. A contractual effect of a rate adjustment would include, for example, dis closure of any change in the term or maturity of the loan if the change resulted from the rate adjustment. A statement of the loan bal ance also is required. The balance required to be disclosed is the balance on which the new adjusted payment is based. If no payment ad justment is disclosed in the notice, the balance disclosed should be the loan balance on which the payment disclosed under section 226.20 (c)(5) is based, if applicable, or the balance at the time the disclosure is prepared. Paragraph 20(c)(5) 1. Fully amortizing payment. This paragraph requires a disclosure only when negative amortization occurs as a result of the adjust ment. A disclosure is not required simply be cause a loan calls for non-amortizing or par tially amortizing payments. For example, in a transaction with a five-year term and pay ments based on a longer amortization sched ule, and where the final payment will equal the periodic payment plus the remaining un paid balance, the creditor would not have to disclose the payment necessary to fully amor tize the loan in the remainder of the five-year term. A disclosure is required, however, if the payment disclosed under section 226.20(c)(4) is not sufficient to prevent negative amortiza tion in the loan. The adjustment notice must state the payment required to prevent negative amortization. (This paragraph does not apply if the payment disclosed in section 226.20(c)(4) is sufficient to prevent negative amortization in the loan but the final payment will be a different amount due to rounding.) References Statute: None Other sections: § 226.2 Previous regulations: § 226.8(j) through (/), and interpretation §§ 226.807, 226.811, 226.814, and 226.817.

1981 changes: While the previous regulation treated virtually any change in terms as a refi nancing requiring new disclosures, this regula tion limits refinancings to transactions in which the entire original obligation is extin guished and replaced by a new one. Redis closure is no longer required for deferrals or extensions.

The assumption provision retains the sub stance of section 226.8(k) and interpretation section 226.807 of the previous regulation, but limits its scope to residential mortgage transactions.

SECTION 226.21—Treatment of Credit Balances 1. Credit balance. A credit balance arises whenever the creditor receives or holds funds in an account in excess of the total balance due from the consumer on that account. A balance might result, for example, from the debtor’s paying off a loan by transmitting funds in excess of the total balance owed on the account, or from the early payoff of a loan

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§ 226.21 Regulation Z Commentary entitling the consumer to a rebate of insurance premiums and finance charges. However, sec tion 226.21 does not determine whether the creditor in fact owes or holds sums for the consumer. For example, if a creditor has no obligation to rebate any portion of precom puted finance charges on prepayment, the con sumer’s early payoff would not create a credit balance with respect to those charges. Simi larly, nothing in this provision interferes with any rights the creditor may have under the contract or under state law with respect to set-off, cross-collateralization, or similar provisions.

2. Total balance due. The phrase “total bal ance due” refers to the total outstanding bal ance. Thus, this provision does not apply where the consumer has simply paid an amount in excess of the payment due for a given period.

3. Timing o f refund. The creditor may also fulfill its obligation under this section by: • Refunding any credit balance to the con sumer immediately • Refunding any credit balance prior to a written request from the consumer • Making a good faith effort to refund any credit balance before six months have passed. If that attempt is unsuccessful, the creditor need not try again to refund the credit balance at the end of the six-month period.

Paragraph 21(b) 1. Written requests—standing orders. The creditor is not required to honor standing or ders requesting refunds of any credit balance that may be created on the consumer’s account.

Paragraph 21(c) 1. Good faith effort to refund. The creditor must take positive steps to return any credit balance that has remained in the account for over six months. This includes, if necessary, attempts to trace the consumer through the consumer’s last known address or telephone number, or both.

2. Good faith effort unsuccessful. Section 226.21 imposes no further duties on the credi tor if a good faith effort to return the balance is unsuccessful. The ultimate disposition of the credit balance (or any credit balance of $1 or less) is to be determined under other appli cable law.

References Statute: § 165 Other sections: None Previous regulation: None 1981 changes: This section implements sec tion 165 of the act, which was expanded by the 1980 statutory amendments to apply to closed-end as well as open-end credit. SECTION 226.22—Determination of the Annual Percentage Rate 22(a) Accuracy of the Annual Percentage Rate Paragraph 22(a)(1) 1. Calculation method. The regulation recog nizes both the actuarial method and the United States Rule Method (U.S. Rule) as measures of an exact annual percentage rate. Both methods yield the same annual percentage rate when payment intervals are equal. They differ in their treatment of unpaid accrued interest. 2. Actuarial method. When no payment is made, or when the payment is insufficient to pay the accumulated finance charge, the actua rial method requires that the unpaid finance charge be added to the amount financed and thereby capitalized. Interest is computed on interest since in succeeding periods the inter est rate is applied to the unpaid balance in cluding the unpaid finance charge. Appendix J provides instructions and examples for calcu lating the annual percentage rate using the ac tuarial method.

3. U.S. Rule. The U.S. Rule produces no compounding of interest in that any unpaid accrued interest is accumulated separately and is not added to principal. In addition, under the U.S. Rule, no interest calculation is made until a payment is received.

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Regulation Z Commentary § 226.22 4. Basis for calculations. When a transaction involves “step rates” or “split rates”—that is, different rates applied at different times or to different portions of the principal balance—a single composite annual percentage rate must be calculated and disclosed for the entire transaction. Assume, for example, a step-rate transaction in which a $10,000 loan is repay able in five years at 10 percent interest for the first two years, 12 percent for years 3 and 4, and 14 percent for year 5. The monthly pay ments are $210.71 during the first two years of the term, $220.25 for years 3 and 4, and $222.59 for year 5. The composite annual per centage rate, using a calculator with a “dis counted cash flow analysis” or “internal rate of return” function, is 10.75 percent. 5. Good faith reliance on faulty calculation tools. Footnote 45d absolves a creditor of lia bility for an error in the annual percentage rate or finance charge that resulted from a cor responding error in a calculation tool used in good faith by the creditor. Whether or not the creditor’s use of the tool was in good faith must be determined on a case-by-case basis, but the creditor must in any case have taken reasonable steps to verify the accuracy of the tool, including any instructions, before using it. Generally, the footnote is available only for errors directly attributable to the calculation tool itself, including software programs; it is not intended to absolve a creditor of liability for its own errors, or for errors arising from improper use of the tool, from incorrect data entry, or from misapplication of the law. Paragraph 22(a)(2) 1. Regular transactions. The annual percent age rate for a regular transaction is considered accurate if it varies in either direction by not more than '/» of 1 percentage point from the actual annual percentage rate. For example, when the exact annual percentage rate is de termined to be 10 ‘/8 percent, a disclosed an nual percentage rate from 10 percent to lO'A percent, or the decimal equivalent, is deemed to comply with the regulation. Paragraph 22(a)(3) 1. Irregular transactions. The annual percent age rate for an irregular transaction is consid ered accurate if it varies in either direction by not more than 'h of 1 percentage point from the actual annual percentage rate. This toler ance is intended for more complex transac tions that do not call for a single advance and a regular series of equal payments at equal intervals. The 'A of 1 percentage point toler ance may be used, for example, in a construc tion loan where advances are made as con struction progresses, or in a transaction where payments vary to reflect the consumer’s sea sonal income. It may also be used in transac tions with graduated payment schedules where the contract commits the consumer to several series of payments in different amounts. It does not apply, however, to loans with varia ble-rate features where the initial disclosures are based on a regular amortization schedule over the life of the loan, even though pay ments may later change because of the variable-rate feature.

22(b) Computation Tools Paragraph 22(b)(1) 1. Board tables. Volumes I and II of the Board’s Annual Percentage Rate Tables pro vide a means of calculating annual percentage rates for regular and irregular transactions, re spectively. An annual percentage rate com puted in accordance with the instructions in the tables is deemed to comply with the regu lation, even where use of the tables produces a rate that falls outside the general standard of accuracy. To illustrate:

• Volume I may be used for single-advance transactions with completely regular pay ment schedules or with payment schedules that are regular except for an odd first pay ment, odd first period or odd final pay ment. When used for a transaction with a large final balloon payment, volume I may produce a rate that is considerably higher than the exact rate produced using a com puter program based directly on appendix I. However, the volume I rate—produced using certain adjustments in that vol ume—is considered to be in compliance.

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§ 226.22 Regulation Z Commentary Paragraph 22(b)(2) 1. Other calculation tools. Creditors need not use the Board tables in calculating the annual percentage rates. Any computation tools may be used, so long as they produce annual per centage rates within >/s or 'A of 1 percentage point, as applicable, of the precise actuarial or U.S. Rule annual percentage rate. 22(c) Single Add-On Rate Transactions 1. General rule. Creditors applying a single add-on rate to all transactions up to 60 months in length may disclose the same an nual percentage rate for all those transactions, although the actual annual percentage rate var ies according to the length of the transaction. Creditors utilizing this provision must show the highest of those rates. For example: • An add-on rate of 10 percent converted to an annual percentage rate produces the fol lowing actual annual percentage rates at various maturities: at 3 months, 14.94 per cent; at 2 1 months, 18.18 percent; and at 60 months, 17.27 percent. The creditor must disclose an annual percentage rate of 18.18 percent (the highest annual percent age rate) for any transaction up to five years, even though that rate is precise only for a transaction of 2 1 months. 22(d) Certain Transactions Involving Ranges of Balances 1. General rule. Creditors applying a fixed dollar finance charge to all balances within a specified range of balances may understate the annual percentage rate by up to 8 percent of that rate by disclosing for all those balances the annual percentage rate computed on the median balance within that range. For example:

• If a finance charge of $9 applies to all bal ances between $91 and $100, an annual percentage rate of 10 percent (the rate on the median balance) may be disclosed as the annual percentage rate for all balances, even though a $9 finance charge applied to the lowest balance ($91) would actually produce an annual percentage rate of 10.7 percent.

References Statute: § 107 Other sections: § 226.17(c)(4) and appendix J Previous regulation: § 226.5(b) through (e) 1981 changes: The section now provides a larger tolerance ('A of 1 percentage point) for irregular transactions.

SECTION 226.23—Right of Rescission 1. Transactions not covered. Credit extensions that are not subject to the regulation are not covered by section 226.23 even if a cus tomer’s principal dwelling is the collateral se curing the credit. For example, the right of rescission does not apply to a business-purpose loan, even though the loan is secured by the customer’s principal dwelling. 23(a) Consumer’s Right to Rescind Paragraph 23(a)(1) 1. Security interest arising from transaction. In order for the right of rescission to apply, the security interest must be retained as part of the credit transaction. For example: • A security interest that is acquired by a contractor who is also extending the credit in the transaction • A mechanic’s or materialman’s lien that is retained by a subcontractor or supplier of the contractor-creditor, even when the latter has waived its own security interest in the consumer’s home The security interest is not part of the credit transaction and therefore the transaction is not subject to the right of rescission when, for example:

• A mechanic’s or materialman’s lien is ob tained by a contractor who is not a party to the credit transaction but is merely paid with the proceeds of the consumer’s un secured bank loan • All security interests that may arise in con nection with the credit transaction are val idly waived • The creditor obtains a lien and completion bond that in effect satisfies all liens against

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Regulation Z Commentary § 226.23 the consumer’s principal dwelling as a re sult of the credit transaction Although liens arising by operation of law are not considered security interests for purposes of disclosure under section 226.2, that section specifically includes them in the definition for purposes of the right of rescission. Thus, even though an interest in the consumer’s principal dwelling is not a required disclosure under section 226.18(m), it may still give rise to the right of rescission.

2. Consumer. To be a consumer within the meaning of section 226.2, that person must at least have an ownership interest in the dwell ing that is encumbered by the creditor’s secur ity interest, although that person need not be a signatory to the credit agreement. For exam ple, if only one spouse signs a credit contract, the other spouse is a consumer if the owner ship interest of that spouse is subject to the security interest.

3. Principal dwelling. A consumer can only have one principal dwelling at a time. (But see comment 23(a)(l)-4.) A vacation or other second home would not be a principal dwell ing. A transaction secured by a second home (such as a vacation home) that is not currently being used as the consumer’s principal dwell ing is not rescindable, even if the consumer intends to reside there in the future. When a consumer buys or builds a new dwelling that will become the consumer’s principal dwelling within one year or upon completion of con struction, the new dwelling is considered the principal dwelling if it secures the acquisition or construction loan. In that case, the transac tion secured by the new dwelling is a residen tial mortgage transaction and is not rescind able. For example, if a consumer whose principal dwelling is currently A builds B, to be occupied by the consumer upon completion of construction, a construction loan to finance B and secured by B is a residential mortgage transaction. “Dwelling,” as defined in section 226.2, includes structures that are classified as personalty under state law. For example, a transaction secured by a mobile home, trailer, or houseboat used as the consumer’s principal dwelling may be rescindable. 4. Special rule for principal dwelling. Not withstanding the general rule that consumers may have only one principal dwelling, when the consumer is acquiring or constructing a new principal dwelling, any loan subject to Regulation Z and secured by the equity in the consumer’s current principal dwelling (for ex ample, a bridge loan) is subject to the right of rescission regardless of the purpose of that loan. For example, if a consumer whose prin cipal dwelling is currently A builds B, to be occupied by the consumer upon completion of construction, a construction loan to finance B and secured by A is subject to the right of rescission. A loan secured by both A and B is, likewise, rescindable.

5. Addition of a security interest. Under foot note 47, the addition of a security interest in a consumer’s principal dwelling to an existing obligation is rescindable even if the existing obligation is not satisfied and replaced by a new obligation, and even if the existing obli gation was previously exempt (because it was credit over $25,000 not secured by real prop erty or a consumer’s principal dwelling). The right of rescission applies only to the added security interest, however, and not to the orig inal obligation. In those situations, only the section 226.23(b) notice need be delivered, not new material disclosures; the rescission period will begin to run from the delivery of the notice.

Paragraph 23(a)(2) 1. Consumer’s exercise o f right. The con sumer must exercise the right of rescission in writing but not necessarily on the notice sup plied under section 226.23(b). Whatever the means of sending the notification of rescis sion— mail, telegram or other written means—the time period for the creditor’s per formance under section 226.23(d)(2) does not begin to run until the notification has been received. The creditor may designate an agent to receive the notification so long as the agent’s name and address appear on the notice provided to the consumer under section 226.23(b).

Paragraph 23(a)(3) 1. Rescission period.

The period within

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§ 226.23 Regulation Z Commentary which the consumer may exercise the right to rescind runs for three business days from the last of three events:

• Consummation of the transaction • Delivery of all material disclosures • Delivery to the consumer of the required rescission notice For example, if a transaction is consummated on Friday, June 1, and the disclosures and no tice of the right to rescind were given on Thursday, May 31, the rescission period will expire at midnight of the third business day after June 1—that is, Tuesday, June 5. In an other example, if the disclosures are given and the transaction consummated on Friday, June 1. and the rescission notice is given on Mon day, June 4, the rescission period expires at midnight of the third business day after June 4— that is, Thursday, June 7. The consumer must place the rescission notice in the mail, file it for telegraphic transmission, or deliver it to the creditor’s place of business within that period in order to exercise the right. 2. Material disclosures. Footnote 48 sets forth the material disclosures that must be provided before the rescission period can begin to run. Failure to provide information regarding the annual percentage rate also includes failure to inform the consumer of the existence of a va riable-rate feature. Failure to give the other required disclosures does not prevent the run ning of the rescission period, although that failure may result in civil liability or adminis trative sanctions.

3. Unexpired right o f rescission. When the creditor has failed to take the action necessary to start the three-business day rescission pe riod running, the right to rescind automatically lapses on the occurrence of the earliest of the following three events:

• The expiration of three years after consum mation of the transaction • Transfer of all the consumer’s interest in the property • Sale of the consumer’s interest in the prop erty, including a transaction in which the consumer sells the dwelling and takes back a purchase money note and mortgage or retains legal title through a device such as an installment sale contract Transfer of all the consumer’s interest in cludes such transfers as bequests and gifts. A sale or transfer of the property need not be voluntary to terminate the right to rescind. For example, a foresclosure sale would terminate an unexpired right to rescind. As provided in section 125 of the act, the three-year limit may be extended by an administrative pro ceeding to enforce the provisions of this sec tion. A partial transfer of the consumer’s in terest, such as a transfer bestowing coownership on a spouse, does not terminate the right of rescission.

Paragraph 23(a)(4) 1. Joint owners. When more than one con sumer has the right to rescind a transaction, any one of them may exercise that right and cancel the transaction on behalf of all. For example, if both husband and wife have the right to rescind a transaction, either spouse acting alone may exercise the right and both are bound by the rescission. 23(b) Notice of Right to Rescind 1. Who receives notice. Each consumer enti tled to rescind must be given: • Two copies of the rescission notice • The material disclosures In a transaction involving joint owners, both of whom are entitled to rescind, both must receive the notice of the right to rescind and disclosures. For example, if both spouses are entitled to rescind a transaction, each must re ceive two copies of the rescission notice and one copy of the disclosures. 2. Format. The notice must be on a separate piece of paper but may appear with other in formation such as the itemization of the amount financed. The material must be clear and conspicuous, but no minimum type size or other technical requirements are imposed. The notices in appendix H provide models that creditors may use in giving the notice. 3. Content. The notice must include all of the information outlined in section 226.23(b)(1)

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Regulation Z Commentary § 226.23 through (5). The requirement in section 226.23(b) that the transaction be identified may be met by providing the date of the transaction. The creditor may provide a sepa rate form that the consumer may use to exer cise the right of rescission, or that form may be combined with the other rescission disclo sures, as illustrated in appendix H. The notice may include additional information related to the required information, such as: • A description of the property subject to the security interest • A statement that joint owners may have the right to rescind and that a rescission by one is effective for all • The name and address of an agent of the creditor to receive notice of rescission 4. Time o f providing notice. The notice re quired by section 226.23(b) need not be given before consummation of the transaction. The creditor may deliver the notice after the trans action is consummated, but the rescission pe riod will not begin to run until the notice is given. For example, if the creditor provides the notice on May 15, but disclosures were given and the transaction was consummated on May 10, the three-business day rescission period will run from May 15. 23(c) Delay of Creditor’s Performance 1. General rule. Until the rescission period has expired and the creditor is reasonably sat isfied that the consumer has not rescinded, the creditor must not, either directly or through a third party:

• Disburse loan proceeds to the consumer • Begin performing services for the con sumer • Deliver materials to the consumer 2. Escrow. The creditor may disburse loan proceeds during the rescission period in a valid escrow arrangement. The creditor may not, however, appoint the consumer as “trus tee” or “escrow agent” and distribute funds to the consumer in that capacity during the delay period.

3. Actions during the delay period. Section 226.23(c) does not prevent the creditor from taking other steps during the delay, short of beginning actual performance. Unless other wise prohibited, such as by state law, the creditor may, for example:

• Prepare the loan check • Perfect the security interest • Prepare to discount or assign the contract to a third party • Accrue finance charges during the delay period 4. Delay beyond rescission period. The credi tor must wait until it is reasonably satisfied that the consumer has not rescinded. For ex ample, the creditor may satisfy itself by doing one of the following:

• Waiting a reasonable time after expiration of the rescission period to allow for deliv ery of a mailed notice • Obtaining a written statement from the consumer that the right has not been exercised When more than one consumer has the right to rescind, the creditor cannot reasonably rely on the assurance of only one consumer, be cause other consumers may exercise the right. 23(d) Effects of Rescission Paragraph 23(d)(1) 1. Termination of security interest. Any secur ity interest giving rise to the right of rescis sion becomes void when the consumer exer cises the right of rescission. The security interest is automatically negated regardless of its status and whether or not it was recorded or perfected. Under section 226.23(d)(2), how ever, the creditor must take any action neces sary to reflect the fact that the security interest no longer exists.

Paragraph 23(d)(2) 1. Refunds to consumer. The consumer cannot be required to pay any amount in the form of money or property either to the creditor or to a third party as part of the credit transaction. Any amounts of this nature already paid by the consumer must be refunded. “ Any amount” includes finance charges already ac crued, as well as other charges, such as broker fees, application and commitment fees, or fees

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§ 226.23 Regulation Z Commentary for a title search or appraisal, whether paid to the creditor, paid directly to a third party, or passed on from the creditor to the third party. It is irrelevant that these amounts may not re present profit to the creditor. 2. Amounts not refundable to consumer. Cred itors need not return any money given by the consumer to a third party outside of the credit transaction, such as costs incurred for a build ing permit or for a zoning variance. Similarly, the term “any amount” does not apply to any money or property given by the creditor to the consumer; those amounts must be tendered by the consumer to the creditor under section 226.23(d)(3).

3. Reflection of security interest termination. The creditor must take whatever steps are nec essary to indicate that the security interest is terminated. Those steps include the cancella tion of documents creating the security inter est, and the filing of release or termination statements in the public record. In a transac tion involving subcontractors or suppliers that also hold security interests related to the credit transaction, the creditor must ensure that the termination of their security interests is also reflected. The 20-day period for the creditor’s action refers to the time within which the creditor must begin the process. It does not require all necessary steps to have been com pleted within that time, but the creditor is re sponsible for seeing the process through to completion.

Paragraph 23(d)(3) 1. Property exchange. Once the creditor has fulfilled its obligations under section 226.23(d)(2), the consumer must tender to the creditor any property or money the creditor has already delivered to the consumer. At the consumer’s option, property may be tendered at the location of the property. For example, if lumber or fixtures have been delivered to the consumer’s home, the consumer may tender them to the creditor by making them available for pick-up at the home, rather than physically returning them to the creditor’s premises. Money already given to the consumer must be tendered at the creditor’s place of business. 2. Reasonable value. If returning the property would be extremely burdensome to the con sumer, the consumer may offer the creditor its reasonable value rather than returning the property itself. For example, if building mater ials have already been incorporated into the consumer’s dwelling, the consumer may pay their reasonable value.

Paragraph 23(d)(4) 1. Modifications. The procedures outlined in section 226.23(d)(2) and (3) may be modified by a court. For example, when a consumer is in bankruptcy proceedings and prohibited from returning anything to the creditor, or when the equities dictate, a modification might be made.

23(e) Consumer’s Waiver of Right to Rescind 1. Need for waiver. To waive the right to re scind, the consumer must have a bona fide personal financial emergency that must be met before the end of the rescission period. The existence of the consumer’s waiver will not, of itself, automatically insulate the creditor from liability for failing to provide the right of rescission.

2. Procedure. To waive or modify the right to rescind, the consumer must give a written statement that specifically waives or modifies the right and also includes a brief description of the emergency. Each consumer entitled to rescind must sign the waiver statement. In a transaction involving multiple consumers, such as a husband and wife using their home as collateral, the waiver must bear the signatures of both spouses.

23(f) Exempt Transactions 1. Residential mortgage transaction. Any transaction to construct or acquire a principal dwelling, whether considered real or personal property, is exempt. (See the commentary to section 226.23(a).) For example, a credit transaction to acquire a mobile home or houseboat to be used as the consumer’s prin cipal dwelling would not be rescindable. 2. Lien status. The lien status of the mortgage is irrelevant for purposes of the exemption in

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Regulation Z Commentary § 226.23 section 226.23(f)(1); the fact that a loan has junior lien status does not by itself preclude application of this exemption. For example, a home buyer may assume the existing first mortgage and create a second mortgage to fi nance the balance of the purchase price. Such a transaction would not be rescindable. 3. Combined-purpose transaction. A loan to acquire a principal dwelling and make im provements to that dwelling is exempt if treated as one transaction. If, on the other hand, the loan for the acquisition of the prin cipal dwelling and the subsequent advances for improvements are treated as more than one transaction, then only the transaction that fi nances the acquisition of that dwelling is exempt.

4. New advances. The exemption in section 226.23(f)(2) applies only to refinancings (in cluding consolidations) by the original credi tor. The original creditor is the creditor to whom the written agreement was initially made payable. In a merger, consolidation, or acquisition, the successor institution is consid ered the original creditor for purposes of the exemption in section 226.23(f)(2). If the refi nancing involves a new advance of money, the amount of the new advance is rescindable. In determining whether there is a new ad vance, a creditor may rely on the amount fi nanced, refinancing costs, and other figures stated in the latest Truth in Lending disclo sures provided to the consumer and is not re quired to use, for example, more precise infor mation that may only become available when the loan is closed. For purposes of the right of rescission, a new advance does not include amounts attributed solely to the costs of the refinancing. These amounts would include sec tion 226.4(c)(7) charges (such as attorney’s fees and title examination and insurance fees, if bona fide and reasonable in amount), as well as insurance premiums and other charges that are not finance charges. (Finance charges on the new transaction—points, for exam ple—would not be considered in determining whether there is a new advance of money in a refinancing since finance charges are not part of the amount financed.) To illustrate, if the sum of the outstanding principal balance plus the earned unpaid finance charge is $50,000 and the new amount financed is $51,000, then the refinancing would be exempt if the extra $ 1,000 is attributed solely to costs financed in connection with the refinancing that are not finance charges. Of course, if new advances of money are made (for example, to pay for home improvements) and the consumer exer cises the right of rescission, the consumer must be placed in the same position as he or she was in prior to entering into the new credit transaction. Thus, all amounts of money (which would include all the costs of the refi nancing) already paid by the consumer to the creditor or to a third party as part of the refi nancing would have to be refunded to the consumer.

(See the commentary to 226.23(d)(2) for a discussion of refunds to consumers.) A model rescission notice appli cable to transactions involving new advances appears in appendix H. The general rescission notice (model form H-8) is the appropriate form for use by creditors not considered origi nal creditors in refinancing transactions. 5. State creditors. Cities and other political subdivisions of states acting as creditors are not exempted from this section. 6. Multiple advances. Just as new disclosures need not be made for subsequent advances when treated as one transaction, no new re scission rights arise so long as the appropriate notice and disclosures are given at the outset of the transaction. For example, the creditor extends credit for home improvements secured by the consumer’s principal dwelling, with ad vances made as repairs progress. As permitted by section 226.17(c)(6), the creditor makes a single set of disclosures at the beginning of the construction period, rather than separate disclosures for each advance. The right of re scission does not arise with each advance. However, if the advances are treated as sepa rate transactions, the right of rescission ap plies to each advance.

7. Spreader clauses. When the creditor holds a mortgage or deed of trust on the consumer’s principal dwelling and that mortgage or deed of trust contains a “spreader clause,” subse quent loans made are separate transactions and are subject to the right of rescission. Those loans are rescindable unless the creditor effec

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§ 226.23 Regulation Z Commentary tively waives its security interest under the spreader clause with respect to the subsequent transactions.

8. Converting open-end to closed-end credit. Under certain state laws, consummation of a closed-end credit transaction may occur at the time a consumer enters into the initial openend credit agreement. As provided in the com mentary to section 226.17(b), closed-end credit disclosures may be delayed under these circumstances until the conversion of the open-end account to a closed-end transaction. In accounts secured by the consumer’s princi pal dwelling, no new right of rescission arises at the time of conversion. Rescission rights under section 226.15 are unaffected. References Statute: §§ 113, 125, and 130 Other sections: § 226.2 and appendix H Previous regulation: § 226.9 1981 changes: The right to rescind applies not only to real property used as the consumer’s principal dwelling, but to personal property as well. The regulation provides no specific text or format for the notice of the right to rescind.

SECTION 226.24— Advertising 1. Clear and conspicuous standard. This sec tion is subject to the general “clear and con spicuous” standard for this subpart but prescribes no specific rules for the format of the necessary disclosures. The credit terms need not be printed in a certain type size nor need they appear in any particular place in the advertisement. For example, a merchandise tag that is an advertisement under the regula tion complies with this section if the neces sary credit terms are on both sides of the tag, so long as each side is accessible. 24(a) Actually Available Terms 1. General rule. To the extent that an adver tisement mentions specific credit terms, it may state only those terms that the creditor is actu ally prepared to offer. For example, a creditor may not advertise a very low annual percent age rate that will not in fact be available at any time. This provision is not intended to inhibit the promotion of new credit programs, but to bar the advertising of terms that are not and will not be available. For example, a creditor may advertise terms that will be of fered for only a limited period, or terms that will become available at a future date. 24(b) Advertisement of Rate of Finance Charge 1. Annual percentage rate. Advertised rates must be stated in terms of an “annual percent age rate,” as defined in section 226.22. Even though state or local law permits the use of add-on, discount, time-price differential, or other methods of stating rates, advertisements must state them as annual percentage rates. Unlike the transactional disclosure of the an nual percentage rate under section 226.18(e), the advertised annual percentage rate need not include a descriptive explanation of the term and may be expressed using the abbreviation APR. The advertisement must state that the rate is subject to increase after consummation if that is the case, but the advertisement need not describe the rate increase, its limits, or how it would affect the payment schedule. As under section 226.18(f), relating to disclosure of a variable rate, the rate increase disclosure requirement in this provision does not apply to any rate increase due to delinquency (in cluding late payment), default, acceleration, assumption, or transfer of collateral. 2. Simple or periodic rates. The advertise ment may not simultaneously state any other rate, except that a simple annual rate or peri odic rate applicable to an unpaid balance may appear along with (but not more conspicu ously than) the annual percentage rate. For example:

• In an advertisement for real estate, a sim ple interest rate may be shown in the same type size as the annual percentage rate for the advertised credit.

3. Buydowns. When a third party (such as a seller) or a creditor wishes to promote the availability of reduced interest rates (consumer or seller buydowns), the advertised annual percentage rate must be determined in accor dance with the rules in the commentary to

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Regulation Z Commentary § 226.24 section 226.17(c) regarding the basis of trans actional disclosures for buydowns. The seller or creditor may advertise the reduced simple interest rate, provided the advertisement shows the limited term to which the reduced rate ap plies and states the simple interest rate appli cable to the balance of the term. The adver tisement may also show the effect of the buydown agreement on the payment schedule for the buydown period without triggering the additional disclosures under section 226.24(c) (2). For example, the advertisement may state that “with this buydown arrangement, your monthly payments for the first three years of the mortgage term will be only $350” or “this buydown arrangement will reduce your monthly payments for the first three years of the mortgage term by $150.”

4. Effective rates. In some transactions the consumer’s payments may be based upon an interest rate lower than the rate at which inter est is accruing. The lower rate may be re ferred to as the effective rate, payment rate, or qualifying rate. A creditor or seller may ad vertise such rates by stating the term of the reduced payment schedule, the interest rate upon which the reduced payments are calcu lated, the rate at which the interest is in fact accruing, and the annual percentage rate. The advertised annual percentage rate that must accompany this rate must take into account the interest that will accrue but will not be paid during this period. For example, an ad vertisement may state, “An effective first-year interest rate of 10 percent. Interest being earned at 14 percent. Annual percentage rate 15 percent.”

5. Discounted variable-rate transactions. The advertised annual percentage rate for dis counted variable-rate transactions must be de term ined in accordance with comment 17(c)(1)-10 regarding the basis of transac tional disclosures for such financing. A credi tor or seller may promote the availability of the initial rate reduction in such transactions by advertising the reduced initial rate, pro vided the advertisement shows the limited term to which the reduced rate applies. • Limits or caps on periodic rate or payment adjustments need not be stated. To illustrate using the second example in comment 17(c)(1)-10, the fact that the rate is pre sumed to be 11 percent in the second year and 12 percent for the remaining 28 years need not be included in the advertisement. • The advertisement may also show the ef fect of the discount on the payment sched ule for the discount period without triggering the additional disclosures under section 226.24(c). For example, the adver tisement may state that “with this discount, your monthly payments for the first year of the mortgage term will be only $577” or “this discount will reduce your monthly payments for the first year of mortgage term by $223.”

24(c) Advertisement of Terms That Require Additional Disclosures 1. General rule. Under section 226.24(c)(1), whenever certain triggering terms appear in credit advertisements, the additional credit terms enumerated in section 226.24(c)(2) must also appear. These provisions apply even if the triggering term is not stated explicitly but may be readily determined from the advertise ment. For example, an advertisement may state “80 percent financing available,” which is in fact indicating that a 20 percent down payment is required.

Paragraph 24(c)(1) 1. Downpayment. The dollar amount of a downpayment or a statement of the downpay ment as a percentage of the price requires fur ther information. By virtue of the definition of “downpayment” in section 226.2, this trigger ing term is limited to credit sale transactions. It includes such statements as: • “Only 5 percent down”

• “As low as $100 down”

• “Total move-in costs of $800” This provision applies only if a downpayment is actually required; statements such as “no downpayment” or “no trade-in required” do not trigger the additional disclosures under this paragraph.

2. Payment period. The number of payments

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§ 226.24 Regulation Z Commentary required or the total period of repayment in cludes such statements as:

• “48-month payment terms”

• “30-year mortgage”

• “Repayment in as many as 36 monthly installments”

But it does not include such statements as “pay weekly,” “monthly payment terms ar ranged,” or “take years to repay,” since these statements do not indicate a time period over which a loan may be financed. 3. Payment amount. The dollar amount of any payment includes statements such as: • “Payable in installments of $103” . “$25 weekly”

• “$1,200 balance payable in 10 equal installments”

In the last example, the amount of each pay ment is readily determinable, even though not explicitly stated. But statements such as “monthly payments to suit your needs” or “regular monthly payments” are not covered. 4. Finance charge. The dollar amount of the finance charge or any portion of it includes statements such as:

• “$500 total cost of credit” • “$2 monthly carrying charge” • “$50,000 mortgages, two points to the borrower”

In the last example, the $1,000 prepaid fi nance charge can be readily determined from the information given. Statements of the an nual percentage rate or statements that there is no particular charge for credit (such as “no closing costs”) are not triggering terms under this paragraph.

Paragraph 24(c)(2) 1. Disclosure o f downpayment. The total downpayment as a dollar amount or percent age must be shown, but the word “downpay ment” need not be used in making this disclo sure. For example, “10 percent cash required from buyer” or “credit terms require mini mum $100 trade-in” would suffice. 2. Disclosure o f repayment terms. While the phrase “terms of repayment” generally has the same meaning as the “payment schedule” required to be disclosed under section 226.18(g), section 226.24(c)(2)(ii) provides greater flexibility to creditors in making this disclosure for advertising purposes. Repay ment terms may be expressed in a variety of ways in addition to an exact repayment sched ule; this is particularly true for advertisements that do not contemplate a single specific trans action. For example:

• A creditor may use a unit-cost approach in making the required disclosure, such as “48 monthly payments of $27.83 per $ 1,000 borrowed.”

• In an advertisement for credit secured by a dwelling, when any series of payments var ies because of a graduated payment feature or because of the inclusion of mortgage in surance premiums, a creditor may state the number and timing of payments, the amounts of the largest and smallest of those payments, and the fact that other payments will vary between those amounts. 3. Annual percentage rate. The advertised an nual percentage rate may be expressed using the abbreviation APR. The advertisement must also state, if applicable, that the annual per centage rate is subject to increase after consummation.

4. Use o f examples. Footnote 49 authorizes the use of illustrative credit transactions to make the necessary disclosures under section 226.24(c)(2). That is, where a range of possi ble combinations of credit terms is offered, the advertisement may use examples of typical transactions, so long as each example contains all of the applicable terms required by section 226.24(c). The examples must be labelled as such and must reflect representative credit terms that are made available by the creditor to present and prospective customers. 24(d) Catalogs and Multiple-Page Advertisements 1. Definition. The multiple-page advertise ments to which this section refers are adver tisements consisting of a series of sequentially numbered pages—for example, a supplement to a newspaper. A mailing consisting of sev eral separate flyers or pieces of promotional

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Regulation Z Commentary § 226.25 material in a single envelope does not consti tute a single multiple-page advertisement for purposes of section 226.24(d). 2. General. Section 226.24(d) permits credi tors to put credit information together in one place in a catalog or multiple-page advertise ment. The rule applies only if the catalog or multiple-page advertisement contains one or more of the triggering terms from section 226.24(c)(1). A list of different annual per centage rates applicable to different balances, for example, does not trigger further disclo sures under section 226.24(c)(2) and so is not covered by section 226.24(d). 3. Representative examples. The table or schedule must state all the necessary informa tion for a representative sampling of amounts of credit. This must reflect amounts of credit the creditor actually offers, up to and includ ing the higher-priced items. This does not mean that the chart must make the disclosures for the single most expensive item the seller offers, but only that the chart cannot be lim ited to information about less expensive sales when the seller commonly offers a distinct level of more expensive goods or services. The range of transactions shown in the table or schedule in a particular catalog or multiplepage advertisement need not exceed the range of transactions actually offered in that advertisement.

References Statute: §§ 141, 142, and 144 Other sections: §§ 226.2, 226.4, and 226.22 Previous regulation: § 226.10(a), (b), and (d) 1981 changes: This section retains the adver tising rules in a form very similar to the pre vious regulation, but with certain changes to reflect the 1980 statutory amendments. For ex ample, if triggering terms appear in any ad vertisement, the additional disclosures required no longer include the cash price. The special rule for FHA section 235 financing has been eliminated, as well as the rule for advertising credit payable in more than four installments with no identified finance charge. Interpreta tion section 226.1002, requiring disclosure of representative amounts of credit in catalogs and multiple-page advertisements, has been in corporated in simplified form in section 226.24(d).

Unlike the previous regulation, if the adver tised annual percentage rate is subject to in crease, that fact must now be disclosed. SUBPART D—MISCELLANEOUS SECTION 226.25—Record Retention 25(a) General Rule 1. Evidence o f required actions. The creditor must retain evidence that it performed the re quired actions as well as made the required disclosures. This includes, for example, evi dence that the creditor properly handled ad verse credit reports in connection with amounts subject to a billing dispute under sec tion 226.13, and properly handled the re funding of credit balances under sections 226.11 and 226.21.

2. Methods of retaining evidence. Adequate evidence of compliance does not necessarily mean actual paper copies of disclosure state ments or other business records. The evidence may be retained on microfilm, microfiche, or by any other method that reproduces records accurately (including computer programs). The creditor need retain only enough information to reconstruct the required disclosures or other records. Thus, for example, the creditor need not retain each open-end periodic statement, so long as the specific information on each statement can be retrieved.

3. Certain variable-rate transactions. In vari able-rate transactions that are subject to the disclosure requirements of section 226.19(b), written procedures for compliance with those requirements as well as a sample disclosure form for each loan program represent ade quate evidence of compliance. (See comment 25(a)-2 pertaining to permissible methods of retaining the required disclosures.) 4. Home-equity plans. In home-equity plans that are subject to the requirements of section 226.5b, written procedures for compliance with those requirements as well as a sample disclosure form and contract for each homeequity program represent adequate evidence of

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§ 226.25 Regulation Z Commentary compliance. (See comment 25(a)-2 pertaining to permissible methods of retaining the re quired disclosures.) References Statute: §§ 105 and 108 Other sections: Appendix I Previous regulation: § 226.6(i) 1981 changes: Section 226.25 substitutes a uniform two-year record-retention rule for the previous requirement that certain creditors re tain records through at least one compliance examination. It also states more explicitly that the record-retention requirements apply to evi dence of required actions.

SECTION 226.26—Use of Annual Percentage Rate in Oral Disclosures 1. Application o f rules. The restrictions of section 226.26 apply only if the creditor chooses to respond orally to the consumer’s request for credit cost information. Nothing in the regulation requires the creditor to supply rate information orally. If the creditor volun teers information (including rate information) through oral solicitations directed generally to prospective customers, as through a telephone solicitation, those communications may be ad vertisements subject to the rules in sections 226.16 and 226.24.

26(a) Open-End Credit 1. Information that may be given. The credi tor may state periodic rates in addition to the required annual percentage rate, but it need not do so. If the annual percentage rate is un known because transaction charges, loan fees, or similar finance charges may be imposed, the creditor must give the corresponding an nual percentage rate (that is, the periodic rate multiplied by the number of periods in a year, as described in sections 226.6(a)(2) and 226.7(d)). In such cases, the creditor may, but need not, also give the consumer information about other finance charges and other charges. 26(b) Closed-End Credit 1. Information that may be given. The credi tor may state other annual or periodic rates that are applied to an unpaid balance, along with the required annual percentage rate. This rule permits disclosure of a simple interest rate, for example, but not an add-on, discount, or similar rate. If the creditor cannot give a precise annual percentage rate in its oral re sponse because of variables in the transaction, it must give the annual percentage rate for a comparable sample transaction; in this case, other cost information may, but need not, be given. For example, the creditor may be una ble to state a precise annual percentage rate for a mortgage loan without knowing the ex act amount to be financed, the amount of loan fees or mortgage insurance premiums, or simi lar factors. In this situation, the creditor should state an annual percentage rate for a sample transaction; it may also provide infor mation about the consumer’s specific case, such as the contract interest rate, points, other finance charges, and other charges. References Statute: § 146 Other sections: §§ 226.6(a)(2) and 226.7(d) Previous regulation: Interpretation § 226.101 1981 changes: This section implements amended section 146 of the act, which added a provision dealing with oral disclosures, and incorporates interpretation section 226.101. SECTION 226.27— Spanish-Language Disclosures 1. Subsequent disclosures. If a creditor in Pu erto Rico provides initial disclosures in Span ish, subsequent disclosures need not be in Spanish. For example, if the creditor gave Spanish-language initial disclosures, periodic statements and change-in-terms notices may be made in English.

2. Permissible uses. If a creditor other than in Puerto Rico provides translations of the re quired disclosures—either because it is re quired to do so by state, federal, or local law, or because it chooses to do so—the transla tions are not inconsistent per se with the dis closures under this regulation, and they may be provided as additional information. In both cases, the English language disclosures re-

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Regulation Z Commentary § 226.28 quired by this regulation must be clear and conspicuous, and the closed-end disclosures in English must be properly segregated in accor dance with section 226.17(a)(1). References Statute: None Other sections: None Previous regulation: § 226.6(a) 1981 changes: No substantive change SECTION 226.28—Effect on State Laws 28(a) Inconsistent Disclosure Requirements 1. General. There are three sets of preemption criteria; one applies to the general disclosure and advertising rules of the regulation, and two apply to the credit-billing provisions. Sec tion 226.28 also provides for Board determi nations of preemption.

2. Rules for chapters 1, 2, and 3. The stan dard for judging whether state laws that cover the types of requirements in chapters 1 (Gen eral Provisions), 2 (Credit Transactions), and 3 (Credit Advertising) of the act are inconsistent and therefore preempted, is contradiction of the federal law. Examples of laws that would be preempted include:

• A state law that requires use of the term “finance charge” but defines the term to include fees that the federal law excludes or to exclude fees the federal law includes • A state law that requires a label such as “nominal annual interest rate” to be used for what the federal law calls the “annual percentage rate”

3. Laws not contradictory to chapters 1, 2, and 3. Generally, state law requirements that call for the disclosure of items of information not covered by the federal law, or that require more detailed disclosures, do not contradict the federal requirements. Examples of laws that are not preempted include: • A state law that requires disclosure of the minimum periodic payment for open-end credit, even though not required by section 226.7.

• A state law that requires contracts to con tain warnings such as: “Read this contract before you sign. Do not sign if any spaces are left blank. You are entitled to a copy of this contract.”

Similarly, a state law that requires itemization of the amount financed does not automatically contradict the permissive itemization under section 226.18(c). However, a state law re quirement that the itemization appear with the disclosure of the amount financed in the seg regated closed-end credit disclosures is incon sistent, and this location requirement would be preempted.

4. Creditor’s options. Before the Board makes a determination about a specific state law, the creditor has certain options. Since the prohibi tion against giving the state disclosures does not apply until the Board makes its determina tion, the creditor may choose to give state dis closures until the Board formally determines that the state law is inconsistent. (The Board will provide sufficient time for creditors to re vise forms and procedures as necessary to conform to its determinations.) • Under this first approach, as in all cases, the federal disclosures must be clear and conspicuous, and the closed-end disclosures must be properly segregated in accordance with section 226.17(a)(1).

• This ability to give state disclosures re lieves any uncertainty that the creditor might have prior to Board determinations of inconsistency.

As a second option, the creditor may apply the preemption standards to a state law, con clude that it is inconsistent, and choose not to give the state-required disclosures. However, nothing in section 226.28(a) provides the creditor with immunity for violations of state law if the creditor chooses not to make state disclosures and the Board later determines that the state law is not preempted. 5. Rules for correction of billing errors and regulation of credit reports. The preemption criteria for the fair credit billing provisions set forth in section 226.28 have two parts. With respect to the rules on correction of billing errors and regulation of credit reports (which

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§ 226.28 Regulation Z Commentary are in section 226.13), section 226.28(a)(2)(i) provides that a state law is inconsistent and preempted if its requirements are different from the federal law. An exception is made, however, for state laws that allow the con sumer to inquire about an account and require the creditor to respond to such inquiries be yond the time limits in the federal law. Such a state law is not preempted with respect to the extra time period. For example, section 226.13 requires the consumer to submit a written notice of billing error within 60 days after transmittal of the periodic statement showing the alleged error. If a state law al lows the consumer 90 days to submit a notice, the state law remains in effect to provide the extra 30 days. Any state law disclosures con cerning this extended state time limit must re flect the qualifications and conform to the for mat specified in section 226.28(a)(2)(i). Examples of laws that would be preempted include:

• A state law that has a narrower or broader definition of “billing error” • A state law that requires the creditor to take different steps to resolve errors • A state law that provides different timing rules for error resolution (subject to the ex ception discussed above) 6. Rules for other fair credit billing provi sions. The second part of the criteria for fair credit billing relates to the other rules imple menting chapter 4 of the act (addressed in sections 226.4(c)(8), 226.5(b)(2)(ii), 226.6(d), 226.7(k), 226.9(a), 226.10, 226.11, 226.12(c) through (f), 226.13, and 226.21). Section 226.28(a)(2)(ii) provides that the test of incon sistency is whether the creditor can comply with state law without violating federal law. For example:

• A state law that allows the card issuer to offset the consumer’s credit-card indebted ness against funds held by the card issuer would be preempted, since section 226.12(d) prohibits such action. • A state law that requires periodic state ments to be sent more than 14 days before the end of a free-ride period would not be preempted.

• A state law that permits consumers to assert claims and defenses against the card issuer without regard to the $50 and 100-mile limitations of section 226.12(c) (3)(ii) would not be preempted.

In the last two cases, compliance with state law would involve no violation of the federal law.

7. Who may receive a chapter 4 determina tion. Only states (through their authorized offi cials) may request and receive determinations on inconsistency with respect to the fair credit billing provisions.

8. Preemption determination—Arizona. Effec tive October 1, 1983, the Board has deter mined that the following provisions in the state law of Arizona are preempted by the federal law:

Section 44-287 B.5—Disclosure of final cash price balance. This provision is pre empted in those transactions in which the amount of the final cash price balance is the same as the federal amount financed, since in such transactions the state law re quires the use of a term different from the federal term to represent the same amount. • Section 44-287 B.6—Disclosure of finance charge. This provision is preempted in those transactions in which the amount of the finance charge is different from the amount of the federal finance charge, since in such transactions the state law requires the use of the same term as the federal law to represent a different amount. • Section 44-287 B.7—Disclosure of the time balance. The time balance disclosure provision is preempted in those transactions in which the amount is the same as the amount of the federal total of payments, since in such transactions the state law re quires the use of a term different from the federal term to represent the same amount. 9. Preemption determination—Florida. Effec tive October 1, 1983, the Board has deter mined that the following provisions in the state law of Florida are preempted by the fed eral law:

Sections 520.07(2)(f) and 520.34(2)(f)— Disclosure of amount financed. This disclo sure is preempted in those transactions in

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Regulation Z Commentary § 226.28 which the amount is different from the fed eral amount financed, since in such transac tions the state law requires the use of the same term as the federal law to represent a different amount.

• Sections 520.07(2)(g), 520.34(2)(g), and 520.35(2)(d)—Disclosure of finance charge and a description of its components. The finance charge disclosure is preempted in those transactions in which the amount of the finance charge is different from the fed eral amount, since in such transactions the state law requires the use of the same term as the federal law to represent a different amount. The requirement to describe or itemize the components of the finance charge, which is also included in these pro visions, is not preempted.

• Sections 520.07(2)(h) and 520.34(2)(h)— Disclosure of total of payments. The total of payments disclosure is preempted in those transactions in which the amount dif fers from the amount of the federal total of payments, since in such transactions the state law requires the use of the same term as the federal law to represent a different amount from the federal law. • Sections 520.07(2)(i) and 520.34(2)(i)— Disclosure of deferred payment price. This disclosure is preempted in those transac tions in which the amount is the same as the federal total sale price, since in such transactions the state law requires the use of a different term from the federal law to represent the same amount as the federal law.

10. Preemption determination—Missouri. Ef fective October 1, 1983, the Board has deter mined that the following provisions in the state law of Missouri are preempted by the federal law:

• Sections 365.070-6(9) and 408.260-5(6)— Disclosure of principal balance. This dis closure is preempted in those transactions in which the amount of the principal bal ance is the same as the federal amount fi nanced, since in such transactions the state law requires the use of a term different from the federal term to represent the same amount.

• Sections 365.070-6(10) and 408.260- 5(7)—Disclosure of time price differential and time charge, respectively. These dis closures are preempted in those transac tions in which the amount is the same as the federal finance charge, since in such transactions the state law requires the use of a term different from the federal law to represent the same amount.

• Sections 365.070-2 and 408.260-2—Use of the terms “time price differential” and “time charge” in certain notices to the buyer. In those transactions in which the state disclosure of the time price differen tial or time charge is preempted, the use of the terms in this notice also is preempted. The notice itself is not preempted. • Sections 365.070-6(11) and 408.260- 5(8)—Disclosure of time balance. The time balance disclosure is preempted in those transactions in which the amount is the same as the amount of the federal total of payments, since in such transactions the state law requires the use of a different term from the federal law to represent the same amount.

• Sections 365.070-6(12) and 408.260- 5(9)—Disclosure of time sale price. This disclosure is preempted in those transac tions in which the amount is the same as the federal total sale price, since in such transactions the state law requires the use of a different term from the federal law to represent the same amount.

11. Preemption determination—Mississippi. Effective October 1, 1984, the Board has de termined that the following provision in the state law of Mississippi is preempted by the federal law:

• Section 63-19-31 (2)(g)— Disclosure of fi nance charge. This disclosure is preempted in those cases in which the term “finance charge” would be used under state law to describe a different amount than the fi nance charge disclosed under federal law. 12. Preemption determination—South Caro lina. Effective October 1, 1984, the Board has determined that the following provision in the state law of South Carolina is preempted by the federal law:

• Section 37-10-102(c)—Disclosure of due-

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§ 226.28 Regulation Z Commentary on-sale clause. This provision is preempted, but only to the extent that the creditor is required to include the disclosure with the segregated federal disclosures. If the credi tor may comply with the state law by plac ing the due-on-sale notice apart from the federal disclosures, the state law is not preempted.

13. Preemption determination—Arizona. Ef fective October 1, 1986, the Board has deter mined that the following provision in the state law of Arizona is preempted by the federal law:

• Section 6-621A.2—Use of the term “the total sum of $________ ” in certain notices provided to borrowers. This term describes the same item that is disclosed under feder al law as the “total of payments.” Since the state law requires the use of a different term than federal law to describe the same item, the state-required term is preempted. The notice itself is not preempted. (Note: The state disclosure notice that incor porated the above preempted term was amended on May 4, 1987, to provide that dis closures must now be made pursuant to the federal disclosure provisions.) 14. Preemption determination—Indiana. Ef fective October 1, 1988, the Board has deter mined that the following provision In the state law of Indiana is preempted by the federal law:

• Section 23-2-5-8—Inclusion of the loan broker’s fees and charges in the calculation of, among other items, the finance charge and annual percentage rate disclosed to po tential borrowers. This disclosure is incon sistent with sections 106(a) and 226.4(a) of the federal statute and regulation, respec tively, and is preempted in those instances where the use of the same term would dis close a different amount than that required to be disclosed under federal law. 15. Preemption determination—Wisconsin. Ef fective October 1, 1991, the Board has deter mined that the following provisions in the state law of Wisconsin are preempted by the federal law:

• Section 422.308(1)—The disclosure of the annual percentage rate in cases where the amount of the annual percentage rate dis closed to consumers under the state law differs from the amount that would be dis closed under federal law, since in those cases the state law requires the use of the same term as the federal law to represent a different amount than the federal law. • Section 766.565(5)—The provision permit ting a creditor to include in an open-end home-equity agreement authorization to de clare the account balance due and payable upon receiving notice of termination from a non-obligor spouse, since such provision is inconsistent with the puipose of the federal law.

28(b) Equivalent Disclosure Requirements 1. General. A state disclosure may be substi tuted for a federal disclosure only after the Board has made a finding of substantial simi larity. Thus, the creditor may not unilaterally choose to make a state disclosure in place of a federal disclosure, even if it believes that the state disclosure is substantially similar. Since the rule stated in section 226.28(b) does not extend to any requirement relating to the finance charge or annual percentage rate, no state provision on computation, description, or disclosure of these terms may be substituted for the federal provision.

28(d) Special Rule for Credit and Charge Cards 1. General. The standard that applies to pre emption of state laws as they affect transac tions of the type subject to sections 226.5a and 226.9(e) differs from the preemption stan dards generally applicable under the Truth in Lending Act. The Fair Credit and Charge Card Disclosure Act fully preempts state laws relating to the disclosure of credit information in consumer credit or charge card applications or solicitations. (For purposes of this section, a single credit or charge card application or solicitation that may be used to open either an account for consumer purposes or an account for business purposes is deemed to be a “con sumer credit or charge card application or so

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Regulation Z Commentary § 226.29 licitation.”) For example, a state law requiring disclosure of credit terms in direct-mail solici tations for consumer credit card accounts is preempted. A state law requiring disclosures in telephone applications for consumer credit card accounts also is preempted, even if it ap plies to applications initiated by the consumer rather than the issuer, because the state law relates to the disclosure of credit information in applications or solicitations within the gen eral field of preemption, that is, consumer credit and charge cards.

2. Limitations on field o f preemption. Preemp tion under the Fair Credit and Charge Card Disclosure Act does not extend to state laws applying to types of credit other than openend consumer credit and charge card accounts. Thus, for example, a state law is not pre empted as it applies to disclosures in credit and charge card applications and solicitations solely for business-purpose accounts. On the other hand, state credit disclosure laws will not apply to a single application or solicitation to open either an account for consumer pur poses or an account for business purposes. Such “dual purpose” applications and solicita tions are treated as “consumer credit or charge card applications or solicitations” under this section and state credit disclosure laws applicable to them are preempted. Pre emption under this statute does not extend to state laws applicable to home-equity plans; preemption determinations in this area are based on the Home Equity Loan Consumer Protection Act, as implemented in section 226.5b of the regulation.

3. Laws not preempted. State laws relating to disclosures concerning credit and charge cards other than in applications, solicitations, or re newal notices are not preempted under section 226.28(d). In addition, state laws regulating the terms of credit and charge card accounts are not preempted, nor are laws preempted that regulate the form or content of informa tion unrelated to the information required to be disclosed under sections 226.5a and 226.9(e). Finally, state laws concerning the enforcement of the requirements of sections 226.5a and 226.9(e) and state laws prohibiting unfair or deceptive acts or practices concern ing credit and charge card applications, solici tations and renewals are not preempted. Ex amples of laws that are not preempted include:

• A state law that requires card issuers to offer a grace period or that prohibits cer tain fees in credit and charge card transac tions.

• A state retail-installment-sales law or a state plain-language law, except to the ex tent that it regulates the disclosure of credit information in applications, solicitations, and renewals of accounts of the type sub ject to sections 226.5a and 226.9(e). • A state law requiring notice of a consum er’s rights under antidiscrimination or simi lar laws or a state law requiring notice about credit information available from state authorities.

References Statute: §§ 111 and 171(a) and (c) Other sections: Appendix A Previous regulation: § 226.6(b) and (c), and interpretation § 226.604 1981 changes: Section 226.28 implements amended section 111 of the act. The test for preemption of state laws relating to disclosure and advertising is now whether the state law “contradicts” the federal, rather than whether state requirements are “different.” The revised regulation contains no counter part to section 226.6(c) of the previous regula tion concerning placement of inconsistent dis closures. It also reflects the statutory amendment providing that once the Board de termines that a state-required disclosure is in consistent with federal law, the creditor may not make the state disclosure. SECTION 226.29— State Exemptions 29(a) General Rule 1. Classes eligible. The state determines the classes of transactions for which it will re quest an exemption and makes its application for those classes. Classes might be, for exam ple, all open-end credit transactions, all openend and closed-end transactions, or all trans actions in which the creditor is a bank.

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§ 226.29 Regulation Z Commentary 2. Substantial similarity. The “substantially similar” standard requires that state statutory or regulatory provisions and state interpreta tions of those provisions be generally the same as the federal act and Regulation Z. This includes the requirement that state provisions for reimbursement to consumers for over charges be at least equivalent to those re quired in section 108 of the act. A state will be eligible for an exemption even if its law covers classes of transactions not covered by the federal law. For example, if a state’s law covers agricultural credit, this will not prevent the Board from granting an exemption for consumer credit, even though agricultural credit is not covered by the federal law. 3. Adequate enforcement. The standard requir ing adequate provision for enforcement gener ally means that appropriate state officials must be authorized to enforce the state law through procedures and sanctions comparable to those available to federal enforcement agencies. Fur thermore, state law must make adequate pro vision for enforcement of the reimbursement rules.

4. Exemptions granted. Effective October 1, 1982, the Board has granted the following ex emptions from portions of the revised Truth in Lending Act:

• Maine. Credit or lease transactions subject to the Maine Consumer Credit Code and its implementing regulations are exempt from chapters 2, 4 and 5 of the federal act. (The exemption does not apply to transac tions in which a federally chartered institu tion is a creditor or lessor.) • Connecticut. Credit transactions subject to the Connecticut Truth in Lending Act are exempt from chapters 2 and 4 of the feder al act. (The exemption does not apply to transactions in which a federally chartered institution is a creditor.) • Massachusetts. Credit transactions subject to the Massachusetts Truth in Lending Act are exempt from chapters 2 and 4 of the federal act. (The exemption does not apply to transactions in which a federally chartered institution is a creditor.) • Oklahoma. Credit or lease transactions sub ject to the Oklahoma Consumer Credit Code are exempt from chapters 2 and 5 of the federal act. (The exemption does not apply to sections 132 through 135 of the federal act, nor does it apply to transac tions in which a federally chartered institu tion is a creditor or lessor.) • Wyoming. Credit transactions subject to the Wyoming Consumer Credit Code are ex empt from chapter 2 of the federal act. (The exemption does not apply to transac tions in which a federally chartered institu tion is a creditor.) 29(b) Civil Liability 1. Not eligible for exemption. The provision that an exemption may not extend to sections 130 and 131 of the act assures that consumers retain access to both federal and state courts in seeking damages or civil penalties for vio lations, while creditors retain the defenses specified in those sections. References Statute: §§ 108, 123, and 171(b) Other sections: Appendix B Previous regulation: § 226.12 1981 changes: The procedures that states must follow to seek exemptions are now located in an appendix. Exemptions under the previous regulation will be automatically revoked on April 1, 1982, when compliance with the new regulation is mandatory.

SECTION 226.30—Limitation on Rates 1. Scope of coverage. The requirement of this section applies to consumer credit obligations secured by a dwelling (as “dwelling” is de fined in section 226.2(a)(19)) in which the an nual percentage rate may increase after con summation (or during the term of the plan, in the case of open-end credit) as a result of an increase in the interest rate component of the finance charge—whether those increases are tied to an index or formula or are within a creditor’s discretion. The section applies to credit sales as well as loans. Examples of credit obligations subject to this section include:

• Dwelling-secured credit obligations that re-

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Regulation Z Commentary § 226.30 quire variable-rate disclosures under the regulation because the interest rate may in crease during the term of the obligation. • Dwelling-secured open-end credit plans en tered into before November 7, 1989 (the effective date of the home-equity rules) that are not considered variable-rate obliga tions for purposes of disclosure under the regulation but where the creditor reserves the contractual right to increase the interest rate—periodic rate and corresponding an nual percentage rate—during the term of the plan.

In contrast, credit obligations in which there is no contractual right to increase the interest rate during the term of the obligation are not subject to this section. Examples include: • “Shared-equity” or “shared-appreciation” mortgage loans that have a fixed rate of interest and a shared-appreciation feature based on the consumer’s equity in the mortgaged property. (The appreciation share is payable in a lump sum at a speci fied time.) • Dwelling-secured fixed-rate closed-end balloon-payment mortgage loans and dwelling-secured fixed-rate open-end plans with a stated term that the creditor may renew at maturity. (Contrast with the renewable balloon-payment instrument described in comment 17(c)(l)-ll.) • Dwelling-secured fixed-rate closed-end multiple-advance transactions in which each advance is disclosed as a separate transaction.

• “Price-level-adjusted mortgages” or other indexed mortgages that have a fixed rate of interest but provide for periodic adjust ments to payments and the loan balance to reflect changes in an index measuring prices or inflation.

The requirement of this section does not apply to credit obligations entered into prior to De cember 9, 1987. Consequently, new advances under open-end credit plans existing prior to December 9, 1987, are not subject to this section.

2. Refinanced obligations. On or after Decem ber 9, 1987, when a credit obligation is refi nanced, as defined in section 226.20(a), the new obligation is subject to this section if it is dwelling-secured and allows for increases in the interest rate.

3. Assumptions. On or after December 9, 1987, when a credit obligation is assumed, as defined in section 226.20(b), the obligation becomes subject to this section if its is dwell ing-secured and allows for increases in the in terest rate.

4. Modifications o f obligations. The modifica tion of an obligation, regardless of when the obligation was entered into, is generally not covered by this section. For example, increas ing the credit limit on a dwelling-secured, open-end plan with a variable interest rate en tered into before the effective date of the rule does not make the obligation subject to this section. If, however, a security interest in a dwelling is added on or after December 9, 1987, to a credit obligation that allows for in terest rate increases, the obligation becomes subject to this section. Similarly, if a variable-interest rate feature is added to a dwell ing-secured credit obligation, the obligation becomes subject to this section. 5. Land trusts. In some states, a land trust is used in residential real estate transactions. (See discussion in comment 3(a)-8).) If a consumer-purpose loan that allows for interest rate increases is secured by an assignment of a beneficial interest in a land trust that holds title to a consumer’s dwelling, that loan is subject to this section.

6. Relationship to other sections. Unless oth erwise provided for in the commentary to this section, other provisions of the regulation such as definitions, exemptions, rules, and in terpretations, also apply to this section where appropriate. To illustrate:

• An adjustable-interest-rate business-purpose loan is not subject to this section even if the loan is secured by a dwelling because such credit extensions are not subject to the regulation. (See generally section 226.3(a).) • Creditors subject to this section are only those that fall within the definition of a creditor in section 226.2(a)(17). 7. Consumer credit contract. Creditors are re quired to specify a lifetime maximum interest

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§ 226.30 Regulation Z Commentary rate in their credit contracts—the instrument that creates personal liability and generally contains the terms and conditions of the agreement (for example, a promissory note or home-equity line of credit agreement). In some states, the signing of a commitment let ter may create a binding obligation, for exam ple, constituting “consummation” as defined in section 226.2(a)(13). The maximum interest rate must be included in the credit contract, but a creditor may include the rate ceiling in the commitment instrument as well. 8. Manner o f stating the maximum interest rate. The maximum interest rate must be stated in the credit contract either as a specific amount or in any other manner that would al low the consumer to easily ascertain, at the time of entering into the obligation, what the rate ceiling will be over the term of the obli gation. For example, the following statements would be sufficiently specific: • The maximum interest rate will not exceed X%.

• The interest rate will never be higher than X percentage points above the initial rate of Y%.

• The interest rate will not exceed X%, or X percentage points above [a rate to be deter mined at some future point in time], whichever is less.

• The maximum interest rate will not exceed X%, or the state usury ceiling, whichever is less.

The following statements would not comply with this section:

• The interest rate will never be higher than X percentage points over the prevailing market rate.

• The interest rate will never be higher than X percentage points above [a rate to be de termined at some future point in time], • The interest rate will not exceed the state usury ceiling, which is currently X%. A creditor may state the maximum rate in terms of a maximum annual percentage rate that may be imposed. Under an open-end credit plan, this normally would be the corre sponding annual percentage rate. (See gener ally section 226.6(a)(2).) 9. Multiple interest rate ceilings. Creditors are not prohibited from setting multiple interest rate ceilings. For example, on loans with mul tiple variable-rate features, creditors may es tablish a maximum interest rate for each fea ture. To illustrate, in a variable-rate loan that has an option to convert to a fixed rate, a creditor may set one maximum interest rate for the initially imposed index-based variablerate feature and another for the conversion op tion. Of course, a creditor may establish one maximum interest rate applicable to all features.

10. Interest rate charged after default. State law may allow an interest rate after default higher than the contract rate in effect at the time of default; however, the interest rate after default is subject to a maximum interest rate set forth in a credit obligation that is other wise subject to this section. This rule applies only in situations in which a post-default agreement is still considered part of the origi nal obligation.

11. Increasing the maximum interest rate—general rule. Generally, a creditor may not increase the maximum interest rate origi nally set on a credit obligation subject to this section unless the consumer and the creditor enter into a new obligation. Therefore, under an open-end plan, a creditor may not increase the rate ceiling imposed merely because there is an increase in the credit limit. If an openend plan is closed and another opened, a new rate ceiling may be imposed. Furthermore, where an open-end plan has a fixed maturity and a creditor renews the plan at maturity, or enters into a closed-end credit transaction, a new maximum interest rate may be set at that time. If the open-end plan provides for a re payment phase, the maximum interest rate cannot be increased when the repayment phase begins unless the agreement provided for such an increase. For a closed-end credit transaction, a new maximum interest rate may be set only if the transaction is satisfied and replaced by a new obligation. (The exceptions in section 226.20(a)(l)-(5) which limit what transactions are considered refinancings for purposes of disclosure do not apply with re spect to increasing a rate ceiling that has been

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Regulation Z Commentary Appendix B imposed; if a transaction is satisfied and re placed, the rate ceiling may be increased.) 12. Increasing the maximum interest rate—assumption of an obligation. If an obli gation subject to this section is assumed by a new obligor and the original obligor is re leased from liability, the maximum interest rate set on the obligation may be increased as part of the assumption agreement. (This rule applies whether or not the transaction consti tutes an assumption as defined in section 226.20(b).) 13. Transition rules. Under footnote 50, if creditors properly include the maximum rate in their credit contracts, creditors need not re vise their truth in lending disclosure statement forms to add the disclosures about limitations on rate increases as part of the variable-rate disclosures, until October 1, 1988. On or after that date, creditors must have the maximum rate set forth in their credit contracts and, where applicable, as part of their truth in lending disclosures in the manner prescribed in the applicable sections of the regulation. References Statute: Competitive Equality Banking Act of 1987, Pub. L. No. 100-86, 101 Stat. 552 Other sections: §§ 226.6, 226.18, and 226.19 Previous regulation: None 1987 changes: This section implements sec tion 1204 of the Competitive Equality Bank ing Act of 1987, Pub. L. No. 100-86, 101 Stat. 552, which provides that, effective De cember 9, 1987, adjustable-rate mortgages must include a limitation on the interest rate that may apply during the term of the mort gage loan. An adjustable-rate mortgage loan is defined in section 1204 as “any loan secured by a lien on a one-to-four family dwelling unit, including a condominium unit, coopera tive housing unit, or mobile home, where the loan is made pursuant to an agreement under which the creditor may, from time to time, adjust the rate of interest.” The rule in this section incorporates section 1204 into Regula tion Z and limits the scope of section 1204 to dwelling-secured consumer credit subject to the Truth in Lending Act, in which a creditor has the contractual right to increase the inter est rate during the term of the credit obligation.

APPENDIX A— Effect on State Laws 1. Who may make requests. Appendix A sets forth the procedures for preemption determi nations. As discussed in section 226.28, which contains the standards for preemption, a re quest for a determination of whether a state law is inconsistent with the requirements of chapters 1, 2, or 3 may be made by creditors, states, or any interested party. However, only states may request and receive determinations in connection with the fair credit billing pro visions of chapter 4.

References Statute: §§ 111 and 171(a) Other sections: § 226.28 Previous regulation: §§ 226.6(b) and 226.70 (supplement V, § II) 1981 changes: The procedures in appendix A were largely adapted from supplement V, sec tion II of the previous regulation (§ 226.70), with changes made to streamline the procedures.

APPENDIX B— State Exemptions 1. General. Appendix B sets forth the proce dures for exemption applications. The exemp tion standards are found in section 226.29 and are discussed in the commentary to that section.

References Statute: §§ 123 and 171(b) Other sections: § 226.29 Previous regulation: §§ 226.12, 226.50 (sup plement II), 226.60 (supplement IV), and 226.70 (supplement V, § I) 1981 changes: The procedures in appendix B represent a combination and streamlining of the procedures set forth in the supplements to the previous regulation.

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Appendix C Regulation Z Commentary APPENDIX C—Issuance of Staff Interpretations 1. General. This commentary is the vehicle for providing official staff interpretations. In dividual interpretations generally will not be issued separately from the commentary. References Statute: §§ 105 and 130(f) Other sections: None Previous regulation: § 226.1(d) 1981 changes: Appendix C reflects the Board’s intention that this commentary serve as the vehicle for interpreting the regulation, rather than individual interpretive letters. APPENDIX D—Multiple-Advance Construction Loans 1. General rule. Appendix D provides a spe cial procedure that creditors may use, at their option, to estimate and disclose the terms of multiple-advance construction loans when the amounts or timing of advances is unknown at consummation of the transaction. This appen dix reflects the approach taken in section 226.17(c)(6)(ii), which permits creditors to provide separate or combined disclosures for the construction period and for the permanent financing, if any; i.e., the construction phase and the permanent phase may be treated as one transaction or more than one transaction. Appendix D may also be used in multipleadvance transactions other than construction loans, when the amounts or timing of ad vances is unknown at consummation. 2. Variable-rate multiple-advance loans. The hypothetical disclosure required in variablerate transactions by section 226.18(f)(l)(iv) is not required for multiple-advance loans dis closed pursuant to appendix D, part 1. 3. Calculation of the total of payments. When disclosures are made pursuant to appendix D, the total of payments may reflect either the sum of the payments or the sum of the amount financed and the finance charge. 4. Annual percentage rate. Appendix D does not require the use of volume I of the Board’s Annual Percentage Rate Tables for calculation of the annual percentate rate. Creditors utiliz ing appendix D in making calculations and disclosures may use other computation tools to determine the estimated annual percentage rate, based on the finance charge and payment schedule obtained by use of the appendix. 5. Interest reserves. In a multiple-advance construction loan, a creditor may establish an “interest reserve” to ensure that interest is paid as it accrues by designating a portion of the loan to be used for paying the interest that accrues on the loan. An interest reserve is not treated as a prepaid finance charge, whether the interest reserve is the same as or different from the estimated interest figure calculated under appendix D.

• If a creditor permits a consumer to make interest payments as they become due, the interest reserve should be disregarded in the disclosures and calculations under ap pendix D.

• If a creditor requires the establishment of an interest reserve and automatically de ducts interest payments from the reserve amount rather than allow the consumer to make interest payments as they become due, the fact that interest will accrue on those interest payments as well as the other loan proceeds must be reflected in the cal culations and disclosures. To reflect the ef fects of such compounding, a creditor should first calculate interest on the com mitment amount (exclusive of the interest reserve) and then add the figure obtained by assuming that one-half of that interest is outstanding at the contract interest rate for the entire construction period. For example, using the example shown under paragraph A, part I of appendix D, the estimated in terest would be $1,117.68 ($1093.75 plus an additional $23.93 calculated by assum ing half of $1093.75 is outstanding at the contract interest rate for the entire con struction period), and the estimated annual percentage rate would be 21.18 percent. References Statute: None Other sections: §§ 226.17 and 226.22 Previous regulation: Interpretation § 226.813

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Regulation Z Commentary Appendix G 1981 changes: The use of appendix D is lim ited to multiple-advance loans for construction purposes or analogous types of transactions. APPENDIX E—Rules for Card Issuers That Bill on a Transaction-by- Transaction Basis Statute: None Previous regulation: Interpretation § 226.709 Other sections: §§ 226.6 through 226.13, and 226.15 1981 changes: The rules in this appendix have been streamlined and clarified to indicate how certain card issuers that bill on a transaction basis may comply with the requirements of subpart B.

APPENDIX F—Annual Percentage Rate Computations for Certain Open-End Credit Plans 1. Daily rate with specific transaction charge. If the finance charge results from a charge re lating to a specific transaction and the applica tion of a daily periodic rate, see comment 14(c)-6 for guidance on an appropriate calcu lation method.

References Statute: § 107 Previous regulation: § 226.5(a)(3)(ii), footnote 5(a) Other sections: § 226.14 1981 changes: This appendix incorporates a sixth example in which the transaction amount exceeds the amount of the balance subject to the periodic rate.

APPENDIXES G AND H—Open-End and Closed-End Model Forms and Clauses 1. Permissible changes. Although use of the model forms and clauses is not required, cred itors using them properly will be deemed to be in compliance with the regulation with re gard to those disclosures. Creditors may make certain changes in the format or content of the forms and clauses and may delete any disclo sures that are inapplicable to a transaction or a plan without losing the act’s protection from liability. The rearrangement of the model forms and clauses may not be so extensive as to affect the substance, clarity, or meaningful sequence of the forms and clauses. Creditors making revisions with that effect will lose their protection from civil liability. Acceptable changes include, for example: • Using the first person, instead of the sec ond person, in referring to the borrower • Using “borrower” and “creditor” instead of pronouns • Rearranging the sequences of the disclo sures • Not using bold type for headings • Incorporating certain state “plain English” requirements • Deleting inapplicable disclosures by whit ing out, blocking out, filling in “N/A” (not applicable) or “0,” crossing out, leaving blanks, checking a box for applicable items, or circling applicable items. (This should permit use of multipurpose standard forms.) • Substituting appropriate references, such as “bank,” “we,” or a specific name, for “creditor” in the initial open-end dis closures • Using a vertical, rather than a horizontal, format for the boxes in the closed-end dis closures APPENDIX G—Open-End Model Forms and Clauses 1. Model G-l. The model disclosures in G-l (different balance computation methods) may be used in both the initial disclosures under section 226.6 and the periodic disclosures under section 226.7. As is clear from the models given, “shorthand” descriptions of the balance computation methods are not suffi cient. The phrase “a portion o f ’ the finance charge should be included if the total finance charge includes other amounts, such as trans action charges, that are not due to the applica tion of a periodic rate. In addition, if unpaid finance charges are subtracted in calculating the balance, that fact must be stated so that the disclosure of the computation method is

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Appendix G Regulation Z Commentary accurate. Only model G-l(b) contains a final sentence appearing in brackets which reflects the total dollar amount of payments and cred its received during the billing cycle. The other models do not contain this language because they reflect plans in which payments and cred its received during the billing cycle are sub tracted. If this is not the case, however, the language relating to payments and credits should be changed, and the creditor should add either the disclosure of the dollar amount as in model G-l(b) or an indication of which credits (disclosed elsewhere on the periodic statement) will not be deducted in determining the balance. (Such an indication may also sub stitute for the bracketed sentence in model G- 1(b).) (See the commentary to section 226.7(e).) 2. Model G-2. This model contains the notice of liability for unauthorized use of a credit card.

3. Models G-3 and G-4. These set out mod els for the long-form billing-error rights state ment (for use with the initial disclosures and as an annual disclosure or, at the creditor’s option, with each periodic statement) and the alternative billing-error rights statement (for use with each periodic statement), respec tively. Creditors must provide the billing-error rights statements in a form substantially simi lar to the models in order to comply with the regulation. The model billing-rights statements may be modified in any of the ways set forth in the first paragraph to the commentary on appendixes G and H. The models may, fur thermore, be modified by deleting inapplicable information, such as:

• The paragraph concerning stopping a debit in relation to a disputed amount, if the creditor does not have the ability to debit automatically the consumer’s savings or checking account for payment • The rights stated in the special rule for credit card purchases and any limitations on those rights The model billing rights statements also con tain optional language that creditors may use. For example, the creditor may: • Include a statement to the effect that notice of a billing error must be submitted on something other than the payment ticket or other material accompanying the periodic disclosures • Insert its address or refer to the address that appears elsewhere on the bill Additional information may be included on the statements as long as it does not detract from the required disclosures. For instance, in formation concerning the reporting of errors in connection with a checking account may be included on a combined statement as long as the disclosures required by the regulation re main clear and conspicuous.

4. Models G-5 through G-9. These models set out notices of the right to rescind that would be used at different times in an open-end plan. The last paragraph of each of the rescission model forms contains a blank for the date by which the consumer’s notice of cancellation must be sent or delivered. A parenthetical is included to address the situation in which the consumer’s right to rescind the transaction ex ists beyond three business days following the date of the transaction, for example, when the notice or material disclosures are delivered late or when the date of the transaction in paragraph 1 of the notice is an estimate. The language of the parenthetical is not optional. See the commentary to section 226.2(a)(25) regarding the specificity of the security-inter est disclosure for model form G-7. 5. Models G- 10(A) through G-10(C). Models G-10(A) and G-10(B) illustrate the tabular format for providing the disclosures required under section 226.5a for applications and so licitations for credit cards other than charge cards. Model G-10(A) illustrates the permissi ble inclusion in the tabular format of all of the disclosures. Model G-l0(B) contains only the disclosures required to be included in the table, while the three additional disclosures are shown outside of the table. The two forms also illustrate two different levels of detail in disclosing the grace period, and different ar rangements of the disclosures. Model G-l0(C) illustrates the tabular format disclosure for charge card applications and solicitations and reflects all of the disclosures in the table. Dis closures may be arranged in an order different

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Regulation Z Commentary Appendix H from that in model forms G-l0(A), (B), and (C); may be arranged vertically or horizon tally; need not be highlighted aside from be ing included in the table; and are not required to be in any particular type size. Various fea tures from different model forms may be com bined; for example, the shorter grace-period disclosure in model form G-10(B) may be used in any disclosure. While proper use of the model forms will be deemed in compli ance with the regulation, card issuers are per mitted to use headings and disclosures other than those in the forms (with an exception re lating to the use of “grace period”) if they are clear and concise and are substantially similar to the headings and disclosures con tained in model forms. For further discussion of requirements relating to form, see the com mentary to section 226.5a(a)(2). 6. Models G -ll and G-12. Model G -ll con tains clauses that illustrate the general disclo sures required under section 226.5a(e) in ap plications and solicitations made available to the general public. Model G-12 is a model clause for the disclosure required under sec tion 226.5a(f) when a charge card accesses an open-end plan offered by another creditor. 7. Models G-13(A) and G-13(B). These model forms illustrate the disclosures required under section 226.9(f) when the card issuer changes the entity providing insurance on a credit card account. Model G-l3(A) contains the items set forth in section 226.9(f)(3) as examples of significant terms of coverage that may be af fected by the change in insurance provider. The card issuer may either list all of these potential changes in coverage and place a check mark by the applicable changes, or list only the actual changes in coverage. Under either approach, the card issuer must either explain the changes or refer to an accompany ing copy of the policy or group certificate for details of the new terms of coverage. Model G-l3(A) also illustrates the permissible com bination of the two notices required by section 226.9(f)— the notice required for a planned change in provider and the notice required once a change has occurred. This form may be modified for use in providing only the dis closures required before the change if the card issuer chooses to send two separate notices. Thus, for example, the references to the at tached policy or certificate would not be re quired in a separate notice prior to a change in the insurance provider since the policy or certificate need not be provided at that time. Model G-13(B) illustrates the disclosures re quired under section 226.9(f)(2) when the in surance provider is changed. APPENDIX H—Closed-End Model Forms and Clauses 1. Models H-l and H-2. Creditors may make several types of changes to closed-end model forms H-l (credit sale) and H-2 (loan) and still be deemed to be in compliance with the regulation, provided that the required disclo sures are made clearly and conspicuously. Permissible changes include the addition of the information permitted by footnote 37 to section 226.17 and “directly related” informa tion as set forth in the commentary to section 226.17(a).

The creditor may also delete or, on multi purpose forms, indicate inapplicable disclo sures, such as:

• The itemization of the amount financed op tion (See samples H -l2 through H -l5.) • The credit life and disability insurance dis closures (See samples H -ll and H -l2.) • The property insurance disclosures (See samples H-10 through H-12, and H-14.) • The “filing fees” and “nonfiling insur ance” disclosures (See samples H -ll and H-12.) • The prepayment penalty or rebate disclo sures (See samples H-12 and H-14.) • The total sale price (See samples H -ll through H-15.) Other permissible changes include: • Adding the creditor’s address or telephone number (See the commentary to section 226.18(a).) • Combining required terms where several numerical disclosures are the same, for in stance, if the “total of payments” equals the “total sale price” (See the commentary to section 226.18.) • Rearranging the sequence or location of the disclosures—for instance, by placing the

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Appendix H Regulation Z Commentary descriptive phrases outside the boxes con taining the corresponding disclosures, or by grouping the descriptors together as a glos sary of terms in a separate section of the segregated disclosures; by placing the pay ment schedule at the top of the form; or by changing the order of the disclosures in the boxes, including the annual percentage rate and finance charge boxes • Using brackets, instead of checkboxes, to indicate inapplicable disclosures • Using a line for the consumer to initial, rather than a checkbox, to indicate an elec tion to receive an itemization of the amount financed • Deleting captions for disclosures • Using a symbol, such as an asterisk, for estimated disclosures, instead of an “e” • Adding a signature line to the insurance disclosures to reflect joint policies • Separately itemizing the filing fees • Revising the late charge disclosure in ac cordance with the commentary to section 226.18(/) 2. Model H-3. Creditors have considerable flexibility in filling out model H-3 (itemization of the amount financed). Appropriate revi sions, such as those set out in the commentary to section 226.18(c), may be made to this form without loss of protection from civil lia bility for proper use of the model forms. 3. Models H-4 through H-7. The model clauses are not included in the model forms although they are mandatory for certain trans actions. Creditors using the model clauses when applicable to a transaction are deemed to be in compliance with the regulation with regard to that disclosure.

4. Model H-4(A). This model contains the va riable-rate model clauses applicable to transac tions subject to section 226.18(f)(1) and is in tended to give creditors considerable flexibility in structuring variable-rate disclo sures to fit individual plans. The information about circumstances, limitations, and effects of an increase may be given in terms of the contract interest rate or the annual percentage rate. Clauses are shown for hypothetical ex amples based on the specific amount of the transaction and based on a representative amount. Creditors may preprint the variablerate disclosures based on a representative amount for similar types of transactions, in stead of constructing an individualized exam ple for each transaction. In both representative examples and transaction-specific examples, creditors may refer either to the incremental change in rate, payment amount, or number of payments, or to the resulting rate, payment amount, or number of payments. For example, creditors may state that the rate will increase by 2 percent, with a corresponding $150 in crease in the payment, or creditors may state that the rate will increase to 16 percent, with a corresponding payment of $850. 5. Model H-4(B). This model clause illustrates the variable-rate disclosure required under sec tion 226.18(f)(2), which would alert consum ers to the fact that the transaction contains a variable-rate feature and that disclosures were provided earlier.

6. Model H-4(C). This model clause illus trates the early disclosures required generally under section 226.19(b). It includes informa tion on how the consumer’s interest rate is determined and how it can change over the term of the loan, and explains changes that may occur in the borrower’s monthly pay ment. The model clause also contains an ex ample of how to disclose historical changes in the index or formula values used to compute interest rates for the preceding 15 years. In addition, the model clause illustrates the dis closure of the initial and maximum interest rates and payments for a loan originated at the most recent rate shown in the historical example.

7. Model H-4(D). This model clause illus trates the adjustment notice required under section 226.20(c) and provides examples of payment-change notices and annual notices of interest rate changes.

8. Model H-5. This contains the demand fea ture clause.

9. Model H-6. This contains the assumption clause.

10. Model H-7. This contains the required-deposit clause.

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Regulation Z Commentary Appendix H 11. Models H-8 and H-9. These models con tain the rescission notices for a typical closedend transaction and a refinancing, respectively. The last paragraph of each model form con tains a blank for the date by which the con sumer’s notice of cancellation must be sent or delivered. A parenthetical is included to ad dress the situation in which the consumer’s right to rescind the transaction exists beyond three business days following the date of the transaction, for example, where the notice or material disclosures are delivered late or where the date of the transaction in paragraph 1 of the notice is an estimate. The language of the parenthetical is not optional. See the commentary to section 226.2(a)(25) regarding the specificity of the security-interest disclo sure for model form H-9.

12. Sample forms. The sample forms (H-10 through H -l5) serve a different purpose than the model forms. The samples illustrate vari ous ways of adapting the model forms to the individual transactions described in the com mentary to appendix H. The deletions and rearrangements shown relate only to the spe cific transactions described. As a result, the samples do not provide the general protection from civil liability provided by the model forms and clauses.

13. Sample H-10. This sample illustrates an automobile credit sale. The cash price is $7,500 with a downpayment of $1,500. There is an 8 percent add-on interest rate and a term of three years, with 36 equal monthly pay ments. The credit life insurance premium and the filing fees are financed by the creditor. There is a $25 credit report fee paid by the consumer before consummation, which is a prepaid finance charge.

14. Sample H -ll. This sample illustrates an installment loan. The amount of the loan is $5,000. There is a 12 percent simple interest rate and a term of two years. The date of the transaction is expected to be April 15, 1981, with the first payment due on June 1, 1981. The first payment amount is labelled as an estimate since the transaction date is uncer tain. The odd days’ interest ($26.67) is col lected with the first payment. The remaining 23 monthly payments are equal. 15. Sample H-12. This sample illustrates a refinancing and consolidation loan. The amount of the loan is $5,000. There is a 15 percent simple interest rate and a term of three years. The date of the transaction is April 1, 1981, with the first payment due on May 1, 1981. The first 35 monthly payments are equal, with an odd final payment. The credit disability insurance premium is fi nanced. In calculating the annual percentage rate, the U.S. Rule has been used. Since an itemization of the amount financed is included with the disclosures, the statement regarding the consumer’s option to receive an itemiza tion is deleted.

16. Samples H-13 through H-15. These sam ples illustrate various mortgage transactions. They assume that the mortgages are subject to the Real Estate Settlement Procedures Act (RESPA). As a result, no option regarding the itemization of the amount financed has been included in the samples, because providing the good faith estimates of settlement costs re quired by RESPA satisfies Truth in Lending’s amount-financed itemization requirement. (See footnote 39 to section 226.18(c).) 17. Sample H-13. This sample illustrates a mortgage with a demand feature. The loan amount is $44,900, payable in 360 monthly installments at a simple interest rate of 14.75 percent. The 15 days of interim interest ($294.34) is collected as a prepaid finance charge at the time of consummation of the loan (April 15, 1981). In calculating the dis closure amounts, the minor-irregularities pro vision in section 226.17(c)(4) has been used. The property insurance premiums are not in cluded in the payment schedule. This disclo sure statement could be used for notes with the seven-year call option required by the Federal National Mortgage Association (FNMA) in states where due-on-sale clauses are prohibited.

18. Sample H-14. This sample disclosure form illustrates the disclosures under section 226.19(b) for a variable-rate transaction se cured by the consumer’s principal dwelling with a term greater than one year. The sample form shows a creditor how to adapt the model clauses in appendix H-4(C) to the creditor’s

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Appendix H Regulation Z Commentary own particular variable-rate program. The sample disclosure form describes the features of a specific variable-rate mortgage program and alerts the consumer to the fact that infor mation on the creditor’s other closed-end variable-rate programs is available upon request. It includes information on how the interest rate is determined and how it can change over time, and explains how the monthly payment can change based on a $ 10,000 loan amount, payable in 360 monthly installments, based on historical changes in the values for the weekly average yield on U.S. Treasury securities ad justed to a constant maturity of one year. In dex values are measured as of the first week ending in July for the years 1977 through 1987. This reflects the requirement that the in dex history be based on values for the same date or period each year beginning with index values for 1977. The sample disclosure also illustrates the requirement under section 226.19(b)(2)(x) that the initial and the maxi mum interest rates and payments be shown for a $10,000 loan originated at the most recent rate shown in the historical example. In the sample, the loan is assumed to have an initial interest rate of 9.71 percent (which was the interest rate in 1987 for the example shown) and to have 2 percentage point annual (and 5 percentage point overall) interest rate limita tions or caps. Thus, the maximum amount that the interest rate could rise under this program is 5 percentage points higher than the 9.71 percent initial rate to 14.71 percent, and the monthly payment could rise from $85.62 to a maximum of $123.31. The loan would not reach the maximum interest rate until its fourth year because of the 2 percentage point annual rate limitations, and the maximum pay ment disclosed reflects the amortization of the loan during that period. The sample form also illustrates how to provide consumers with a method for calculating their actual monthly payment for a loan amount other than $10,000.

19. Sample H-15. This sample illustrates a graduated payment mortgage with a five-year graduation period and a 7'/2 percent yearly in crease in payments. The loan amount is $44,900, payable in 360 monthly installments at a simple interest rate of 14.75 percent. Two points ($898), as well as an initial mortgage guarantee insurance premium of $225.00, are included in the prepaid finance charge. The mortgage-guarantee insurance premiums are calculated on the basis of XU of 1 percent of the outstanding principal balance under an an nual reduction plan. The abbreviated disclo sure permitted under section 226.18(g)(2) is used for the payment schedule for years 6 through 30. The prepayment disclosure refers to both penalties and rebates because informa tion about penalties is required for the simpleinterest portion of the obligation and informa tion about rebates is required for the mortgage insurance portion of the obligation. 20.

HRSA-500-1 9-82. Pursuant to section 113(a) of the Truth in Lending Act, Form HRSA-500-1 9-82 issued by the U.S. Depart ment of Health and Human Services for cer tain student loans has been approved. The form may be used for all Health Education Assistance Loans (HEAL) with a variable in terest rate that are interim student credit ex tensions as defined in Regulation Z. 21. HRSA-500-2 9-82. Pursuant to section 113(a) of the Truth in Lending Act, Form HRSA-500-2 9-82 issued by the U.S. Depart ment of Health and Human Services for cer tain student loans has been approved. The form may be used for all HEAL loans with a fixed interest rate that are interim student credit extensions as defined in Regulation Z. 22. HRSA-502-1 9-82. Pursuant to section 113(a) of the Truth in Lending Act, Form HRSA-502-1 9-82 issued by the U.S. Depart ment of Health and Human Services for cer tain student loans has been approved. The form may be used for all HEAL loans with a variable interest rate in which the borrower has reached prepayment status and is making payments of both interest and principal. 23. HRSA-502-2 9-82. Pursuant to section 113(a) of the Truth in Lending Act, Form HRSA-502-2 9-82 issued by the U.S. Depart ment of Health and Human Services for cer tain student loans has been approved. The form may be used for all HEAL loans with a fixed interest rate in which the borrower has reached repayment status and is making pay ments of both interest and principal.

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Regulation Z Commentary Appendix J References Statute: §§ 105 and 130 •

Other sections: §§ 226.6, 226.7, 226.9, 226.12, 226.15, 226.18, and 226.23 Previous regulation: None 1981 changes: The model forms and clauses have no counterpart in the previous regulation. APPENDIX I—Federal Enforcement Agencies Statute: § 108 Other sections: None Previous regulation: § 226.1(b) 1981 changes: None APPENDIX J—Annual Percentage Rate Computations for Closed-End Credit Transactions 1. Use o f appendix J. Appendix J sets forth the actuarial equations and instructions for calculating the annual percentage rate in closed-end credit transactions. While the for mulas contained in this appendix may be di rectly applied to calculate the annual percent age rate for an individual transaction, they may also be utilized to program calculators and computers to perform the calculations. 2. Relation to Board tables. The Board’s An nual Percentage Rate Tables also provide creditors with a calculation tool that applies the technical information in appendix J. An annual percentage rate computed in accor dance with the instructions in the tables is deemed to comply with the regulation. Vol ume I of the tables may be used for credit transactions involving equal payment amounts and periods, as well as for transactions involv ing any of the following irregularities: odd first period, odd first payment and odd last payment. Volume II of the tables may be used for transactions that involve any type of irreg ularities. These tables may be obtained from any Federal Reserve Bank or from the Board in Washington, D.C. 20551, upon request. References Statute: § 107 Other sections: § 226.22 Previous regulation: § 226.40 (supplement I) 1981 changes: Paragraph (b)(2) has been re vised to clarify that the term of the transaction never begins earlier than consummation of the transaction. Paragraph (b)(5)(vi) has been re vised to permit creditors in single-payment transactions in which the term is less than a year and is equal to a whole number of months, to use either the 12-month method or the 365-day method to compute the number of unit periods per year.

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Regulation S Reimbursement for Providing Financial Records;

Recordkeeping Requirements for Certain Financial Records 12 CFR 219, as amended effective January 1, 1996

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Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank of the Federal Reserve District in which the inquiry arises.

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Contents Subpart A—Reimbursement to Financial Institutions for Providing Financial Records Section 219.1—Authority, purpose, and scope................................................... Section 219.2—Definitions..................... (a) Financial institution....................... (b) Financial record............................ (c) Government authority................... (d) Person............................................ (e) Customer........................................ (f) Directly incurred cost................... Section 219.3—Cost reimbursement (a) Search and processing costs......... (b) Reproduction costs............' ............. 2 (c) Transportation costs .......................... 2 Section 219.4-—Exceptions.......................... 2 (a) Security interests, bankruptcy claims, debt collection........................ 2 (b) Government loan programs.............. 2 (c) Nonidentifiable information.............. 2 (d) Financial supervisory agencies.......... 2 (e) Internal revenue summons................ 2 (f) Federally required reports................ 2 (g) Government civil or criminal litigation............................................ 2 (h) Administrative agency subpoenas . . 2 (i) Identity of accounts in limited circumstances..................................... 3 (j) Investigation of a financial institution or its noncustomers.......... 3 (k) General accounting office requests . . 3 (0 Securities and exchange commission requests.......................... 3 Section 219.5—Conditions for payment .. 3 Page (a) Limitations .......................................... (b) Separate consideration of component costs................................... 3 (c) Compliance with legal process, request, or authorization .................... 3 (d) Itemized bill or invoice...................... 3 Section 219.6—Payment procedures............. 3 (a) Notice to submit invoice.................... 3 (b) Special notice ..................................... 3 Section 219.7—Effective d ate...................... 4 Subpart B—Recordkeeping and Reporting Requirements for Funds Transfers and Transmittals of Funds Section 219.21—Authority, purpose, and scope............................................................ 4 Section 219.22—Definitions......................... 4 Section 219.23—Recordkeeping and reporting requirements .............................. 4 (a) Domestic and international funds transfers by insured depository institutions............................................. 4 (b) International transmittals of funds by financial institutions other than insured depository institutions............. 4 Section 219.24—Retention period............... 5 STATUTORY AUTHORITY Right to Financial Privacy Act of 1978 Section 1115—Cost reimbursement . . . . 7 Federal Deposit Insurance Act Section 21—Retention of records by insured depository institutions.............. 7

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Regulation S Reimbursement for Providing Financial Records; Recordkeeping Requirements for Certain Financial Records 12 CFR 219; as amended effective January 1, 1996 SUBPART A—REIMBURSEMENT TO FINANCIAL INSTITUTIONS FOR PROVIDING FINANCIAL RECORDS SECTION 219.1—Authority, Purpose and Scope This subpart of Regulation S is issued by the Board of Governors of the Federal Reserve System (the Board) under section 1115 of the Right to Financial Privacy Act (the act) (12 USC 3415). It establishes the rates and condi tions for reimbursement of reasonably neces sary costs directly incurred by financial insti tutions in assembling or providing customer financial records to a government authority pursuant to the act.

SECTION 219.2—Definitions For the purposes of this subpart, the following definitions shall apply:

(a) “Financial institution” means any office of a bank, savings bank, card issuer as defined in section 103 of the Consumer Credit Protec tion Act (15 USC 1602(n)), industrial loan company, trust company, savings and loan, building and loan, or homestead association (including cooperative banks), credit union, or consumer finance institution, located in any state or territory of the United States, the Dis trict of Columbia, Puerto Rico, Guam, Ameri can Samoa, or the Virgin Islands. (b) "Financial record” means an original of, a copy of, or information known to have been derived from, any record held by a financial institution pertaining to a customer’s relation ship with the financial institution. (c) “Government authority” means any agency or department of the United States, or any officer, employee or agent thereof. (d) “Person” means an individual or a part nership of five or fewer individuals. (e) “Customer” means any person or author ized representative of that person who utilized or is utilizing any service of a financial insti tution, or for whom a financial institution is acting or has acted as a fiduciary, in relation to an account maintained in the person’s name. “Customer” does not include corpora tions or partnerships comprised of more than five persons.

(f) “Directly incurred costs” means costs in curred solely and necessarily as a consequence of searching for, reproducing or transporting books, papers, records, or other data, in order to comply with legal process or a formal writ ten request or a customer’s authorization to produce a customer’s financial records. The term does not include any allocation of fixed costs (overhead, equipment, depreciation, etc.). If a financial institution has financial records that are stored at an independent storage facil ity that charges a fee to search for, reproduce, or transport particular records requested, these costs are considered to be directly incurred by the financial institution.

SECTION 219.3—Cost Reimbursement Except as hereinafter provided, a government authority requiring or requesting access to fi nancial records pertaining to a customer shall pay to the financial institution that assembles or provides the financial records a fee for re imbursement of reasonably necessary costs which have been directly incurred according to the following schedule:

(a) Search and processing costs. (1) Reimbursement of search and process ing costs shall be the total amount of per sonnel direct time incurred in locating and retrieving, reproducing, packaging and pre paring financial records for shipment. (2 ) The rate for search and processing costs is $ 10 per hour per person, computed on the basis of $2.50 per quarter hour or fraction thereof, and is limited to the total amount

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§ 219.3 Regulation S of personnel time spent in locating and re trieving documents or information or repro ducing or packaging and preparing docu ments for shipment where required or requested by a government authority. Spe cific salaries of such persons shall not be included in search costs. In addition, search and processing costs do not include salaries, fees, or similar costs for analysis of mate rial or for managerial or legal advice, ex pertise, research, or time spent for any of these activities. If itemized separately, search and processing costs may include the actual cost of extracting information stored by computer in the format in which it is normally produced, based on computer time and necessary supplies; however, personnel time for computer search may be paid for only at the rate specified in this paragraph. (b) Reproduction costs.

(1) Reimbursement for reproduction costs shall be for costs incurred in making copies of documents required or requested. (2) The rate for reproduction costs for making cop ies of required or requested documents is 15 cents for each page, including copies produced by reader/printer reproduction processes. Photographs, films, and other materials are reimbursed at actual cost. (c) Transportation costs. Reimbursement for transportation costs shall be for (1) necessary costs, directly incurred, to transport personnel to locate and retrieve the information required or requested; and (2) necessary costs, directly incurred solely by the need to convey the re quired or requested material to the place of examination.

SECTION 219.4— Exceptions A financial institution is not entitled to reim bursement under the act for costs incurred in assembling or providing the following finan cial records or information: (a) Security interests, bankruptcy claims, debt collection. Any financial records provided as an incident to perfecting a security interest, proving a claim in bankruptcy, or otherwise collecting on a debt owing either to the finan cial institution itself or in its role as a fiduciary.

(b) Government loan programs. Financial records provided in connection with a govern ment authority’s consideration or administra tion of assistance to a customer in the form of a government loan, loan guaranty, or loan in surance program; or as an incident to process ing an application for assistance to a customer in the form of a government loan, loan guar anty, or loan insurance agreement; or as an incident to processing a default on, or ad ministering, a government-guaranteed or -in sured loan, as necessary to permit a responsi ble government authority to carry out its responsibilities under the loan, loan guaranty, or loan insurance agreement. (c) Nonidentifiable information. Financial records that are not identified with or identifi able as being derived from the financial records of a particular customer. (d) Financial supervisory agencies. Financial records disclosed to a financial supervisory agency in the exercise of its supervisory, reg ulatory, or monetary functions with respect to a financial institution.

(e) Internal Revenue summons. Financial records disclosed in accordance with proce dures authorized by the Internal Revenue Code.

(f) Federally required reports. Financial records required to be reported in accordance with any federal statute or rule promulgated thereunder (such as the Bank Secrecy Act). (g) Government civil or criminal litigation. Financial records sought by a government au thority under the Federal Rules of Civil or Criminal Procedure or comparable rules of other courts in connection with litigation to which the government authority and the cus tomer are parties.

(h) Administrative agency subpoenas. Finan cial records sought by a government authority pursuant to an administrative subpoena issued by an administrative law judge in an adjudica tory proceeding subject to section 554 of title 5, United States Code, and to which the gov-

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Regulation S § 219.6 eminent authority and the customer are parties.

(i) Identity o f accounts in limited circum stances. Financial information sought by a government authority, in accordance with the Right to Financial Privacy Act procedures and for a legitimate law enforcement inquiry, and limited only to the name, address, account number, and type of account of any customer or ascertainable group of customers associated (1) with a financial transaction or class of fi nancial transactions, or (2 ) with a foreign country or subdivision thereof in the case of a government authority exercising financial con trols over foreign accounts in the United States under section 5(b) of the Trading With the Enemy Act (50 USC App. 5(b)); the Inter national Emergency Economic Powers Act (ti tle II, Pub. L. 95-223); or section 5 of the United Nations Participation Act (22 USC 287(c)).

(j) Investigation of a financial institution or its noncustomers. Financial records sought by a government authority in connection with a lawful proceeding, investigation, examination, or inspection directed at the financial institu tion in possession of such records or at a legal entity which is not a customer. (k) General Accounting Office requests. Fi nancial records sought by the General Ac counting Office pursuant to an authorized pro ceeding, investigation, examination or audit directed at a government authority. (/) Securities and Exchange Commission re quests. Until November 10, 1980, financial records sought by the Securities and Exchange Commission.

SECTION 219.5—Conditions for Payment (a) Limitations. Payment for reasonably nec essary, directly incurred costs to financial in stitutions shall be limited to material required or requested.

(b) Separate consideration o f component costs. Payment shall be made only for costs that are both directly incurred and reasonably necessary. In determining whether costs are reasonably necessary, search and processing, reproduction, and transportation costs shall be considered separately.

(c) Compliance with legal process, request, or authorization. No payment shall be made until the financial institution satisfactorily complies with the legal process or formal written re quest, or customer authorization, except that in the case where the legal process or formal written request is withdrawn, or the customer authorization is revoked, or where the cus tomer successfully challenges access by or disclosure to a government authority, the fi nancial institution shall be reimbursed for rea sonably necessary costs directly incurred in assembling financial records required or re quested to be produced prior to the time that the government authority notifies the institu tion that the legal process or request is with drawn or defeated, or that the customer has revoked his or her authorization. (d) Itemized bill or invoice. No payment shall be made unless the financial institution sub mits an itemized bill or invoice showing spe cific details concerning the search and processing, reproduction, and transportation costs.

SECTION 219.6— Payment Procedures (a) Notice to submit invoice. Promptly follow ing a government authority’s service of legal process or request, the government authority shall notify the financial institution that an itemized bill or invoice must be submitted for payment and shall furnish an office address for this purpose.

(b) Special Notice. If a government authority withdraws the legal process or formal written request, or if the customer revokes his or her authorization, or if the legal process or request has been successfully challenged by the cus tomer, the government authority shall promptly notify the financial institution of these facts, and shall also notify the financial institution that the itemized bill or invoice must be submitted for payment of costs in curred prior to the time that the financial insti tution receives this notice.

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§ 219.7 Regulation S SECTION 219.7—Effective Date This regulation shall become effective October 1, 1979.

SUBPART B—RECORDKEEPING AND REPORTING REQUIREMENTS FOR FUNDS TRANSFERS AND TRANSMITTALS OF FUNDS* SECTION 219.21—Authority, Purpose and Scope This subpart of Regulation S is issued by the Board under the authority of section 21(b) of the Federal Deposit Insurance Act (12 USC 1829b), as amended by the Annunzio-Wylie Anti-Money Laundering Act of 1992 (Pub.L. 102-550, title XV), which authorizes the Board and the secretary of the Treasury jointly to prescribe recordkeeping and report ing requirements for domestic wire transfers by insured depository institutions; and which also required the Board and the Treasury jointly to prescribe recordkeeping and report ing requirements for international wire trans fers by insured depository institutions and by nonbank financial institutions. The definitions and recordkeeping and reporting requirements referenced in this subpart are promulgated and administered jointly by the Board and the Treasury and are codified in 31 CFR 103.11 and 103.33(e) and (f). Such recordkeeping and reporting requirements will assist in the prose cution of money-laundering activities and are determined to have a high degree of useful ness in criminal, tax, or regulatory investiga tions or proceedings.

SECTION 219.22—Definitions The following terms are defined in 31 CFR 103.11 [beginning at 3-1700] under the joint authority of the Board and the Treasury: Accept.

Beneficiary.

Beneficiary’s bank.

Established customer.

* Subpart B is effective January 1, 1996. Execution date.

Funds transfer.

Intermediary bank.

Intermediary financial institution. Originator.

Originator’s bank.

Payment date.

Payment order.

Receiving bank.

Receiving financial institution. Recipient.

Recipient’s financial institution. Sender.

Transmittal of funds.

Transmittal order.

Transmittor.

Transmitter's financial institution. SECTION 219.23—Recordkeeping and Reporting Requirements (a) Domestic and international funds transfers by insured depository institutions. The Board and the Treasury are authorized to promulgate jointly recordkeeping and reporting require ments for domestic and international funds transfers by insured depository institutions whenever the agencies determine that the maintenance of such records has a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings. These regula tions are codified at 31 CFR 103.33(e). For the purposes of this subpart, the provisions of 31 CFR 103.33(e) apply only to funds trans fers by insured depository institutions. (b) International transmittals o f funds by fi nancial institutions other than insured deposi tory institutions. The Board and the Treasury are required to promulgate jointly reporting and recordkeeping requirements for interna tional transmittals of funds by financial insti tutions, including brokers and dealers in securities and businesses that provide moneytransmitting services. In prescribing these requirements, the Board and the Treasury take into account the usefulness of these records in criminal, tax, or regulatory investigations or proceedings and the effect the recordkeeping will have on the cost and efficiency of the payment system. These regulations are

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Regulation S § 219.24 codified at 31 CFR 103.33(f). For the purposes of this subpart, the provisions of 31 CFR 103.33(f) apply only to international transmittals of funds.

SECTION 219.24— Retention Period five years. AH these records shall be filed or stored in such a way as to be accessible within a reasonable period of time, taking into consideration the nature of the record and the amount of time that has expired since the re cord was made. Any records required to be retained by this subpart shall be made avail able to the Board upon request. All records that are required to be retained by this subpart shall be retained for a period of

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Statutory Authority for Regulation S iRIGHT TO FINANCIAL PRIVACY ACT OF 1978 SECTION 1115—Cost Reimbursement (a) Except for records obtained pursuant to section 1103(d) or 1113 (a) through (h), or as otherwise provided by law, a Government au thority shall pay to the financial institution as sembling or providing finanial records pertain ing to a customer and in accordance with procedures established by this title a fee for reimbursement for such costs as are reasona bly necessary and which have been directly incurred in searching for, reproducing, or transporting books, papers, records, or other data required or requested to be produced. The Board of Governors of the Federal Re serve System shall, by regulation, establish the rates and conditions under which such pay ment may be made.

(b) This section shall take effect on October 1, 1979.

[12 USC 3415.] FEDERAL DEPOSIT INSURANCE ACT SECTION 21—Retention of Records by Insured Depository Institutions (a) Congressional findings and declaration of purpose.

(1) The Congress finds that adequate records maintained by insured depository institutions have a high degree of usefulness in criminal, tax, and regulatory investiga tions and proceedings. The Congress further finds that microfilm or other reproductions and other records made by banks of checks, as well as records kept by banks of the identity of persons maintaining or author ized to act with respect to accounts therein, have been of particular value in this respect.

(2) It is the purpose of this section to re quire the maintenance of appropriate types of records by insured depository institutions in the United States where such records have a high degree of usefulness in crimi nal, tax, or regulatory investigations or proceedings.

(b) Recordkeeping regulations. (1) Where the Secretary of the Treasury (referred to in this section as the “Secre tary”) determines that the maintenance of appropriate types of records and other evi dence by insured depository institutions has a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, he shall prescribe regulations to carry out the purposes of this section. (2) Whenever the Secretary and the Board of Governors of the Federal Reserve Sys tem (hereafter in this section referred to as the ‘Board’) determine that the maintenance of records, by insured depository institu tions, of payment orders which direct trans fers of funds over wholesale funds transfer systems has a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, the Secretary and the Board shall jointly prescribe regulations to carry out the purposes of this section with respect to the maintenance of such records. (3) (A) The Secretary and the Board shall jointly prescribe, after consultation with State banking supervisors, final regula tions requiring that insured depository in stitutions, businesses that provide check cashing services, money transmitting businesses, and businesses that issue or redeem money orders, travelers’ checks or other similar instruments maintain such records of payment orders which— (i) involve international transactions; and (ii) direct transfers of funds over wholesale funds transfer systems or on the books of any insured depository in stitution, or on the books of any busi ness that provides check cashing ser-

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Statutory Authority Regulation S vices, any money transm itting business, and any business that issues or redeems money orders, travelers’ checks or similar instruments, that will have a high degree of usefulness in criminal, tax, or regulatory investiga tions or proceedings.

(B) In prescribing the regulations re quired under subparagraph (A), the Sec retary and the Board shall consider— (i) the usefulness in criminal, tax, or regulatory investigations or proceed ings of any record required to be main tained pursuant to the proposed regula tions; and (ii) the effect the recordkeeping re quired pursuant to such proposed regu lations will have on the cost and effi ciency of the payment system. (C) Any records required to be main tained pursuant to the regulations pre scribed under subparagraph (A) shall be submitted or made available to the Secre tary or the Board upon request. (c) Identity o f persons having accounts and persons authorized to act with respect to such accounts; exemptions. Subject to the require ments of any regulations prescribed jointly by the Secretary and the Board under paragraph (2) or (3) of subsection (b), each insured de pository institution shall maintain such records and other evidence, in such form as the Secre tary shall require, of the identity of each per son having an account in the United States with the insured depository institution and of each individual authorized to sign checks, make withdrawals, or otherwise act with re spect to any such account. The Secretary may make such exemptions from any requirement otherwise imposed under this subsection as are consistent with the purposes of this section.

(d) Reproduction of checks, drafts, and other instruments; record of transactions; identity of party. Each insured depository institution shall make, to the extent that the regulations of the Secretary so require— ( 1 ) a microfilm or other reproduction of each check, draft, or similar instrument drawn on it and presented to it for pay ment; and (2 ) a record of each check, draft, or similar instrument received by it for deposit or col lection, together with an identification of the party for whose account it is to be de posited or collected, unless the insured d e - ^ ^ pository institution has already made a r e - ^ ^ cord of the party’s identity pursuant to subsection (c) of this section. (e) Identity o f persons making reportable cur rency and foreign transactions. Subject to the requirements of any regulations prescribed jointly by the Secretary and the Board under paragraph (2) or (3) of subsection (b), when ever any individual engages (whether as prin cipal, agent, or bailee) in any transaction with an insured depository institution which is re quired to be reported or recorded under sub chapter II of chapter 53 of Title 31, the in sured depository institution shall require and retain such evidence of the identity of that in dividual as the Secretary may prescribe as ap propriate under the circumstances. (f) Additions to or substitutes for required records. Subject to the requirements of any regulations prescribed jointly by the Secretary and the Board under paragraph (2) or (3) of subsection (b), in addition to or in lieu of the records and evidence otherwise referred to in this section, each insured depository institution shall maintain such records and evidence as the Secretary may prescribe to carry out the ^ purposes of this section.

(g) Retention period. Any type of record or evidence required under this section shall be retained for such period as the Secretary may prescribe for the type in question. Any period so prescribed shall not exceed six years unless the Secretary determines, having regard for the purposes of this section, that a longer pe riod is necessary in the case of a particular type of record or evidence.

(h) Report to Congress by Secretary o f the Treasury. The Secretary shall include in his annual report to the Congress information on his implementation of the authority conferred by this section and any similar authority with respect to recordkeeping or reporting require ments conferred by other provisions of law. (i) Application o f provisions to foreign banks.

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Regulation S Statutory Authority The provisions of this section shall not apply to any foreign bank except with respect to the transactions and records of any insured branch of such a bank.

^ ^ ( j ) Civil penalties. (1) Any insured depository institution and any director, officer, or employee of an in sured depository institution who willfully or through gross negligence violates or any person who willfully causes such a viola tion, any regulation prescribed under sub section (b) of this section shall be liable to the United States for a civil penalty of not more than $ 10,000.

(2) A separate violation of any regulation prescribed under subsection (b) of this sec tion occurs for each day the violation con tinues and at each office, branch, or place of business at which such violation occurs. (3) Any penalty imposed under paragraph ( 1) shall be assessed, mitigated, and col lected in the manner provided in subsec tions (b) and (c) of section 5321 of Title 31.

[12 USC 1829b. As added by act of Oct. 26, 1970 (84 Stat. 1114) and amended by acts of Sept. 17, 1978 (92 Stat. 620); Nov. 18, 1988 (102 Stat. 4356); Aug. 9, 1989 (103 Stat. 187); Oct. 28, 1992 (106 Stat. 4058, 4059, 4066); and Sept. 23, 1994 (108 StaL 2290).]

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Board of Governors of the Federal Reserve System Regulation C Home Mortgage Disclosure 12 CFR 203; as amended effective May 1, 1995

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Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank of the District in which the inquiry arises. July 1995

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Contents Page Section 203.1—Authority, purpose, scope............................................................ (a) Authority.............................................. (b) Purpose................................................ (c) Scope................................................... (d) Loan aggregation and central data depositories................................. Section 203.2—Definitions............................. Section 203.3—Exempt institutions.............. 2 (a) Exemption based on location, asset size, or number of homepurchase loans................................... (b) Exemption based on state law . . . . 2 (c) Loss of exemption............................ 2 Section 203.4—Compilation of loan d a ta .............................................................. 3 (a) Data format and itemization ........... 3 (b) Collection of data on race or national origin, sex, and income . . 3 (c) Optional data...................................... 3 (d) Excluded d a ta .................................... 3 (e) Data reporting under C R A .............. 3 Section 203.5—Disclosure and reporting . . 3 Page (a) Reporting to agency.......................... (b) Public disclosure of statement . . . . 3 (c) Public disclosure of loan application register........................... 4 (d) Availability of data............................ 4 (e) Notice of availability....................... 4 Section 203.6—Enforcement......................... 4 (a) Administrative enforcement............. 4 (b) Bona fide errors................................. 4 Appendix A—Form and instructions for completion of HMDA loan/ application register...................................... 4 Appendix B—Form and instructions for data collection on race or national origin and sex .......................................... STATUTORY PROVISIONS Home Mortgage Disclosure A c t............... Public Law 96-399, Title III, Section 340 ............................................................

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Regulation C Home Mortgage Disclosure 12 CFR 203*; as amended effective May 1, 1995 SECTION 203.1—Authority, Purpose, and Scope (a) Authority. This regulation is issued by the Board of Governors of the Federal Reserve System (“ Board” ) pursuant to the Home Mortgage Disclosure Act (12 USC 2801 et seq.), as amended. The information-collection requirements have been approved by the U.S. Office of Management and Budget under 44 USC 3501 et seq. and have been assigned OMB No. 7100-0247.

(b) Purpose.

(1) This regulation implements the Home Mortgage Disclosure Act, which is intended to provide the public with loan data that can be used— (i) to help determine whether financial institutions are serving the housing needs of their communities;

(ii) to assist public officials in distribut ing public-sector investments so as to at tract private investment to areas where it is needed; and (iii) to assist in identifying possible dis criminatory lending patterns and enforc ing antidiscrimination statutes. (2) Neither the act nor this regulation is in tended to encourage unsound lending prac tices or the allocation of credit. (c) Scope. This regulation applies to certain financial institutions, including banks, saving associations, credit unions, and other mortgage lending institutions, as defined in section 203.2(e). It requires an institution to report data to its supervisory agency about homepurchase and home-improvement loans it originates or purchases, or for which it re ceives applications; and to disclose certain data to the public.

(d) Loan aggregation and central data depos itories. Using the loan data made available by financial institutions, the Federal Financial In stitutions Examination Council will prepare * Code of Federal Regulations, title 12, chapter II, part 203.

disclosure statements and will produce various reports for individual institutions for each metropolitan statistical area (MSA), showing lending patterns by location, age of housing stock, income level, sex, and racial character istics. The disclosure statements and reports will be available to the public at central data depositories located in each MSA. A listing of central data depositories can be obtained from the Federal Financial Institutions Examination Council, Washington, D.C. 20006. SECTION 203.2— Definitions In this regulation— (a) Act means the Home Mortgage Disclosure Act (12 USC 2801 et seq.), as amended. (b) Application means an oral or written re quest for a home-purchase or home-improvement loan that is made in accordance with procedures established by a financial institu tion for the type of credit requested. (c) Branch office means— (1) any office of a bank, savings associa tion, or credit union that is approved as a branch by a federal or state supervisory agency, but excludes free-standing elec tronic terminals such as automated teller machines;

(2 ) any office of a mortgage-lending insti tution (other than a bank, savings associa tion, or credit union) that takes applications from the public for home-purchase or home-improvement loans. A mortgage-lending institution is also deemed to have a branch office in an MSA if, in the preced ing calendar year, it received applications for, originated, or purchased five or more home-purchase or home-improvement loans on property located in that MSA. (d) Dwelling means a residential structure (whether or not it is attached to real property) located in a state of the United States of America, the District of Columbia, or the Commonwealth of Puerto Rico. The term in-

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§ 203.2 Regulation C eludes an individual condominium unit, coop erative unit, or mobile or manufactured home. (e) Financial institution means— (1 ) a bank, savings association, or credit union that originated in the preceding calen dar year a home-purchase loan (other than temporary financing such as a construction loan) including a refinancing of a homepurchase loan, secured by a first lien on a one- to four-family dwelling if— (i) the institution is federally insured or regulated; or (ii) the loan is insured, guaranteed, or supplemented by any federal agency; or (iii) the institution intended to sell the loan to the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation;

(2 ) a for-profit mortgage-lending institution (other than a bank, savings association, or credit union) whose home-purchase loan originations (including refinancings of home-purchase loans) equaled or exceeded 10 percent of its loan-origination volume, measured in dollars, in the preceding calen dar year.

(f) Home-improvement loan means any loan that— (1) is for the purpose, in whole or in part, of repairing, rehabilitating, remodeling or improving a dwelling or the real property on which it is located; and (2) is classified by the financial institution as a home-improvement loan. (g) Home-purchase loan means any loan se cured by and made for the purpose of purchasing a dwelling.

(h) Metropolitan statistical area or MSA means a metropolitan statistical area or a pri mary metropolitan statistical area, as defined by the U.S. Office of Management and Budget.

SECTION 203.3—Exempt Institutions (a) Exemption based on location, asset size, or number o f home-purchase loans. (1) A bank, savings association, or credit union is exempt from the requirements of this regulation for a given calendar year if on the preceding December 31— (i) the institution had neither a home of fice nor a branch office in an MSA; or (ii) the institution’s total assets were $ 10 million or less.

(2) A for-profit mortgage lending institution (other than a bank, savings association, or credit union) is exempt from the require ments of this regulation for a given calen dar year if— (i) the institution had neither a home of fice nor a branch office in an MSA on the preceding December 31; or (ii) the institution’s total assets combined with those of any parent corporation were $10 million or less on the preceding De cember 31, and the institution originated fewer than 100 home-purchase loans in the preceding calendar year. (b) Exemption based on state law. (1) A state-chartered or state-licensed finan cial institution is exempt from the require ments of this regulation if the Board deter mines that the institution is subject to a state disclosure law that contains require ments substantially similar to those imposed by this regulation and contains adequate provisions for enforcement. (2) Any state, state-chartered, or statelicensed financial institution, or association of such institutions may apply to the Board for any exemption under this paragraph. (3) An institution that is exempt under this paragraph shall submit the data required by the state disclosure law to its state supervi sory agency for purposes of aggregation. (c) Loss of exemption.

(1) An institution losing an exemption that was based on the criteria set forth in para graph (a) of this section shall comply with this regulation beginning with the calendar year following the year in which it lost its exemption.

(2) An institution losing an exemption that was based on state law under paragraph (b) of this section shall comply with this regu lation beginning with the calendar year fol lowing the year for which it last reported loan data under the state disclosure law.

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Regulation C § 203.5 SECTION 203.4— Compilation of Loan Data (a) Data format and itemization. A financial institution shall collect data regarding applica tions for, and originations and purchases of, home-purchase and home-improvement loans (including refinancings of both) for each cal endar year. These transactions shall be re corded, within 30 calendar days after the end of each calendar quarter in which final action is taken (such as origination or purchase of a loan, or denial or withdrawal of an applica tion), on a register in the format prescribed in appendix A of this part and shall include the following items:

(1) A number for the loan or loan applica tion, and the date the application was received.

(2) The type and purpose of the loan. (3) The owner-occupancy status of the property to which the loan relates. (4) The amount of the loan or application. (5) The type of action taken, and the date. (6) The location of the property to which the loan relates, by MSA, state, county, and census tract, if the institution has a home or branch office in that MSA.

(7) The race or national origin and sex of the applicant or borrower, and the gross an nual income relied upon in processing the application.

(8) The type of entity purchasing a loan that the institution originates or purchases and then sells within the same calendar year.

(b) Collection of data on race or national or igin, sex, and income.

(1) A financial institution shall collect data about the race or national origin and sex of the applicant or borrower as prescribed in appendix B. If the applicant or borrower chooses not to provide the information, the lender shall note the data on the basis of visual observation or surname, to the extent possible.

(2) Race or national origin, sex, and in come data may but need not be collected for— (i) loans purchased by the financial insti tution; or (ii) applications received or loans origi nated by a bank, savings association, or credit union with assets on the preceding December 31 of $30 million or less. (c) Optional data. A financial institution may report the reasons it denied a loan application. (d) Excluded data. A financial institution shall not report— (1 ) loans originated or purchased by the fi nancial institution acting in a fiduciary ca pacity (such as trustee);

(2 ) loans on unimproved land; (3) temporary financing (such as bridge or construction loans);

(4) the purchase of an interest in a pool of loans (such as mortgage-participation certif icates); or (5) the purchase solely of the right to ser vice loans.

(e) Data reporting under CRA for banks and savings associations with total assets o f $250 million or more and banks and savings as sociations that are subsidiaries o f a holding company whose total banking and thrift assets are $1 billion or more. As required by agency regulations that implement the Community Reinvestment Act, banks and savings associa tions that had total assets of $250 million or more (or are subsidiaries of a holding com pany with total banking and thrift assets of $ 1 billion or more) as of December 31 for each of the immediately preceding two years, shall also collect the location of property located outside the MSAs in which the institution has a home or branch office, or outside any MSAs.

SECTION 203.5—Disclosure and Reporting (a) Reporting to agency. By March 1 follow ing the calendar year for which the loan data are compiled, a financial institution shall send its complete loan application register to the agency office specified in appendix A of this regulation, and shall retain a copy for its records for a period of not less than three years.

(b) Public disclosure of statement. A financial institution shall make its mortgage loan dis

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§ 203.5 Regulation C closure statement (to be prepared by the Fed eral Financial Institutions Examination Coun cil) available to the public at its home office no later than three business days after receiv ing it from the Examination Council. A finan cial institution shall also make its disclosure statement available to the public within ten business days in at least one branch office in each additional MSA where it has offices. The disclosure statement at a branch office need only contain data relating to properties in the MSA where the branch office is located. (c) Public disclosure of loan application reg ister. A financial institution shall make its loan application register available to the pub lic after modifying it in accordance with ap pendix A. An institution shall make its modi fied register available following the calendar year for which the data are compiled, by March 31 for a request received on or before March 1, and within 30 days for a request received after March 1. The modified register made available at a branch office need only contain data relating to properties in the MSA where the branch office is located. (d) Availability of data. A financial institution shall make its modified register available to the public for a period of three years and its disclosure statement available for a period of five years. An institution shall make the data available for inspection and copying during the hours the office is normally open to the public for business. It may impose a reasona ble fee for any cost incurred in providing or reproducing the data.

(e) Notice o f availability. A financial institu tion shall post a general notice about the availability of its HMDA data in the lobbies of its home office and any physical branch offices located in an MSA. Upon request, it shall promptly provide the location of the in stitution’s offices where the statement is avail able. At its option, an institution may include the location in its notice.

SECTION 203.6—Enforcement (a) Administrative enforcement. A violation of the act or this regulation is subject to adminis trative sanctions as provided in section 305 of the act, including the imposition of civil money penalties, where applicable. Compli ance is enforced by the agencies listed in ap pendix A of this regulation. (b) Bona fide errors. An error in compiling or recording loan data is not a violation of the act or this regulation if it was unintentional and occurred despite the maintenance of pro cedures reasonably adopted to avoid such errors.

APPENDIX A—Form and Instructions for Completion of HMDA Loan/ Application Register* Paperwork Reduction Act Notice Public reporting burden for collection of this information is estimated to vary from 10 to 10,000 hours per response, with an average of 200 hours per response, including time to gather and maintain the data needed and to review instructions and complete the informa tion collection. Send comments regarding this burden estimate or any other aspect of this collection of information, including sugges tions for reducing the burden, to Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551; and to the Office of Information and Regulatory Affairs, Office of Management and Budget, Washing ton, D.C. 20503.

I. Who Must File a Report A. Depository institutions. Subject to the ex ception discussed below, banks, savings as sociations, and credit unions must complete a register listing data about loan applications re ceived, loans originated, and loans purchased if on the preceding December 31 an institution— 1 . had assets of more than $ 10 million, and 2 . had a home or a branch office in a * This appendix incorporates the text of amendments published in December 1994. For amendments that impose a new or revised requirement, the text specifies the calendar year (CY) in which compliance becomes mandatory. In other instances, the amendments do not represent a substan tive change but merely clarify an existing rule that institu tions must continue to comply with (in each of these in stances, the text is identified as a “clarification”).

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Regulation C Appendix A “metropolitan statistical area” or a “pri mary metropolitan statistical area” (both are referred to in these instructions by the term “MSA”).

Example: If on December 31 you had a home or a branch office in an MSA and your assets exceeded $ 10 million, you must complete a register that lists the home-purchase and home-improvement loans that you originate or purchase (and also lists applications that did not result in an origination) beginning January 1.

B. Depository institutions—exception. You need not complete a register—even if you meet the tests for asset size and location—if your institution is a bank, savings association, or credit union that made no first-lien homepurchase loans (including refinancings) on one- to four-family dwellings in the preceding calendar year. This exception does not apply in the case of nondepository institutions. C. Other lending institutions. Subject to the exception discussed below, for-profit mortgage lending institutions (other than banks, savings associations, and credit unions) must complete a register listing data about loan applications received, loans originated, and loans pur chased if the institution had a home or branch office in an MSA on the preceding December 31, and— 1 . had assets of more than $ 1 0 million (based on the combined assets of the insti tution and any parent corporation) on the preceding December 31, or 2 . originated 100 or more home-purchase loans (including refinancings of such loans) during the preceding calendar year, regard less of asset size.

D. Other lending institutions—exception. You need not complete a register—even if you meet the tests for location and asset size or number of home-purchase loans—if your in stitution is a for-profit mortgage lender (other than a bank, savings association, or credit union) and the home-purchase loans that you originated in the preceding calendar year (in cluding refinancings) came to less than 10 percent of your total loan-origination volume, measured in dollars.

E. If you are the subsidiary of a bank or sav ings association, you must complete a separate register for your institution. You will submit the register, directly or through your parent, to the agency that supervises your parent. (See paragraph VI.) F. Institutions that are specifically exempted by the Federal Reserve Board from complying with the federal Home Mortgage Disclosure Act because they are covered by a similar state law on mortgage loan disclosures must use the disclosure form required by their state law and submit the data to their state supervi sory agency.

II. Required Format and Reporting Procedures A. C u r r e n t t e x t : Institutions are expected to submit data to their supervisory agencies in an automated, machine-readable form unless 100 or fewer application and loan entries are reported. The format must con form exactly to the form FR HMDA-LAR, including the order of columns, column headings, etc. Contact your federal super visory agency for information regarding procedures and technical specifications for automated data submission. An institution that submits its register in nonautomated form must send two copies that are typed or computer printed. You must use the for mat of the loan/application register, but are not required to use the form itself. Each page must be numbered, and the total number of pages must be given (for exam ple, “Page 1 of 3”).

N e w t e x t (Compliance is optional for CY 1995 data due March 1, 1996. Compliance is mandatory for CY 1996 data due March 1, 1997.): Institutions must submit data to their supervisory agencies in an automated, machine-readable form. The format must conform exactly to that of form FR HMDA-LAR, including the order of col umns, column headings, etc. Contact your federal supervisory agency for information regarding procedures and technical specifi cations for automated data submission; in some cases, agencies also make software for automated data submission available to institutions. The data must be edited before submission, using the edits included

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Appendix A Regulation C in the agency-supplied software or equivalent edits in software available from vendors or developed in-house. (Institu tions that report 25 or fewer entries on their HMDA-LAR may collect and report the data in paper form. An institution that submits its register in nonautomated form must send two copies that are typed or computer printed and must use the format of form FR HMDA-LAR (but need not use the form itself). Each page must be numbered, and the total number of pages must be given (for example, “Page 1 of 3” ).

B. The required data are to be entered in the register for each loan origination, each appli cation acted on, and each loan purchased dur ing the calendar year. Your institution should decide on the procedure it wants to fol low—for example, whether to begin entering the required data when an application is re ceived, or to wait until final action is taken (such as when a loan goes to closing or an application is denied). Keep in mind that an application is to be reported in the calendar year when final action is taken. Report loan originations in the year they go to closing; if an application has been approved but has not yet gone to closing at year-end, report it the following year.

C. Your institution may collect the data on separate registers at different branches, or on separate registers for different loan types (such as for home-purchase or home-improvement loans, or for loans on multifamily dwell ings). But make sure the application or loan numbers (discussed under paragraph V.A.I., below) are unique.

D. Entries need not be grouped on your regis ter by MSA, or chronologically, or by census tract numbers, or in any other particular order. E. N e w t e x t (Compliance is optional through CY 1995 data; compliance is mandatory beginning with CY 1996 data): Applica tions and loans must be recorded on your register within 30 calendar days after the end of the calendar quarter in which final action (such as origination or purchase of a loan, or denial or withdrawal of an appli cation) is taken. The type of purchaser for loans sold need not be included in these quarterly updates.

III. Submission of HMDA-LAR and Public Release of Data A. You must submit the data for your institu tion to the office specified by your supervisory agency no later than March 1 following the calendar year for which the data are com piled. A list of the agencies appears at the end of these instructions.

B . C u r r e n t t e x t : You must submit all re quired data to your supervisory agency in one complete package, with the prescribed transmittal sheet. An officer of your insti tution must certify to the accuracy of the data.

N e w t e x t (Compliance is optional for CY 1994 data due March 1, 1995; compliance is mandatory for CY 1995 data due March 1, 1996.): You must submit all required data to your supervisory agency in one complete package, with the prescribed transmittal sheet. An officer of your insti tution must certify to the accuracy of the data. Any additional data submissions that become necessary (for example, because you discover that data were omitted from the initial submission, or because revisions are called for) also must be accompanied by a transmittal sheet.

C . C u r r e n t t e x t :

Y o u are encouraged to provide in a cover letter an approximate count of the total number of line entries contained in your data submission. If you are a depository institution, you also are asked to include a list of the MSAs where you have a home or branch office. N e w t e x t (Compliance is mandatory for CY 1995 data due March 1, 1996.): The transmittal sheet must state the total num ber of line entries contained in the accom panying data submission. If the data submission involves revisions or deletions of previously submitted data, state the total of all line entries contained in that submis sion, including both those representing re visions or deletions of previously submitted entries, and those that are being resubmitted unchanged or are being sub

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Regulation C Appendix A mitted for the first time. If you are a de pository institution, you also are asked to include a list of the MSAs where you have a home or branch office.

D. Availability o f disclosure statement. The Federal Financial Institutions Examination Council (FFIEC) will prepare a disclosure statement from the date you submit. Your dis closure statement will be returned to the name and address indicated on the transmittal sheet. Within three business days of receiving the disclosure statement, you must make a copy available at your home office for inspection by the public. You also must make the disclo sure statement available, within 10 business days after receiving it from the FFIEC, in at least one branch office in each additional MSA where you have physical offices. For these purposes, a business day is any calendar day other than a Saturday, Sunday, or legal public holiday.

E. Availability of modified loan application register.

1. To protect the privacy of applicants and borrowers, an institution must modify its loan application register by removing the following information before releasing it to the public: the application or loan number, date application received, and date of action taken.

2. A financial institution must make its modified register available following the calendar year for which the data are com piled, by March 31 for a request received on or before March 1, and wthin 30 days for a request received after March 1. F. Location and format of disclosed data. A financial institution must make a complete copy of its disclosure statement and modified register available to the public at its home of fice. Institutions may make these data avail able in hard copy or in automated form (such as by floppy disk or computer tape). Although you are not required to make the modified loan application register available in censustract order, you are strongly encouraged to do so in order to enhance its utility to users. If you have physical branch offices in other MSAs, you must make available, in at least one branch office in each of those MSAs, ei ther a complete copy of the disclosure state ment or the portion of it that relates to proper ties in that MSA. Similarly, a modified register at a branch office need only reflect data concerning properties within the MSA where the branch is located. You are not required to prepare a modified loan application register in advance of receiv ing a request from the public for this informa tion, but must be able to respond to a request within 30 days.

C u r r e n t t e x t : Posters. Your agency can provide you with HMDA posters that you can use to inform the public of the availa bility of your disclosure statement, or you may print your own posters. N e w

t e x t w i t h s u g g e s t e d l a n g u a g e :

Posters. Some of the agencies provide HMDA posters that you can use to inform the public of the availability of your HMDA data, or you may create your own posters. If you print your own, the follow ing language is suggested but is not re quired:

HOME MORTGAGE DISCLOSURE ACT NOTICE The HMDA data about our residential mort gage lending are available for review. The data show geographic distribution of loans and appli cations; race, gender, and income of applicants and borrowers; and information about loan ap provals and denials. Inquire at this office re garding the locations where HMDA data may be inspected.

IV. Types of Loans and Applications Covered and Excluded by HMDA A. Types o f loans and applications to be reported 1. Report the data on home-purchase and home-improvement loans that you origi nated (that is, loans that were closed in your name) and loans that you purchased during the calendar year covered by the re port. Report these data even if the loans were subsequently sold by your institution. Include refinancings of home-purchase and home-improvement loans.

2. Report the data for applications for

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Appendix A Regulation C home-purchase and home-improvement loans that did not result in originations—for example, applications that your institution denied or that the applicant withdrew dur ing the calendar year covered by the report. 3. In the case of brokered loan applications or applications forwarded to you through a correspondent, report as originations loans that you approved and subsequently ac quired according to a preclosing arrange ment (whether or not they closed in your institution’s name). Additionally, report the data for all applications that did not result in originations—for example, applications that your institution denied or that the ap plicant withdrew during the calendar year covered by the report (whether or not they would have closed in your institution’s name). For all of these loans and applica tions, report the race or national origin, sex, and income information, unless your institu tion is a bank, savings association, or credit union with assets of $30 million or less on the preceding December 31.

4. Originations are to be reported only once. If you are the loan broker or corre spondent, do not report as originations loans that you forwarded to another lender for approval prior to closing, and that were approved and subsequently acquired by that lender (whether or not they closed in your name).

5. Report applications that were received in the previous calendar year but were acted upon during the calendar year covered by the current register.

B. Data to be excluded. Do not report loans or applications for loans of the following types:

1. Loans that, although secured by real es tate, are made for purposes other than home purchase, home improvement, or refinanc ing (For example, do not report a loan se cured by residential real property for pur poses of financing college tuition, a vacation, or goods for business inventory.) 2. Loans made in a fiduciary capacity (for example, by your trust department) 3. Loans on unimproved land 4. Construction or bridge loans and other temporary financing 5. The purchase of an interest in a pool of loans (such as mortgage-participation certificates) 6. The purchase solely of the right to ser vice loans V. Instructions for Completion of Loan/ Application Register A.

Application or loan information 1. Application or loan number. Enter an identifying number that can be used later to retrieve the loan or application file. It can be any number of your choosing (not ex ceeding 25 characters). You may use letters, numerals, or a combination of both. Make sure that all numbers are unique within your institution. If your register con tains data for branch offices, for example, you could use a letter or a numerical code to identify the loans or applications of dif ferent branches, or could assign a certain series of numbers to particular branches to avoid duplicate numbers. You are strongly encouraged not to use the applicant’s or borrower’s name or Social Security number, for privacy reasons.

2. Date application received. Enter the date the loan application was received by your institution by month, day, and year, using numerals in the form MM/DD/YY (for ex ample, 01/15/92). If your institution nor mally records the date shown on the appli cation form, you may use that date instead. Enter “NA” for loans purchased by your institution.

3. Type. Indicate the type of loan or appli cation by entering the applicable code from the following:

1—Conventional (any loan other than FHA, VA or FmHA loans) 2—FHA-insured (Federal Housing Ad ministration) 3—VA-guaranteed (Veterans Administra tion) 4— FmHA-insured (Farmers Home Ad ministration) 4. Purpose. Indicate the purpose of the loan or application by entering the applicable code from the following:

1—Home purchase (one- to four-family)

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Regulation C Appendix A 2—Home improvement (one- to fourfamily) 3—Refinancing (home purchase or home improvement, one- to four-family) 4— Multifamily dwelling (home purchase, home improvement, and refinancings) 5. Explanation o f purpose codes Code 1: Home purchase a. This code applies to loans and ap plications made for the purpose of purchasing a residential dwelling for one to four families, if the loan is to be secured by the dwelling being pur chased or by another dwelling. b. At your option, you may use code 1 for loans that are made for home-improvement purposes but are secured by a first lien, if you normally classify such first-lien loans as home-purchase loans.

Code 2: Home improvement a. Code 2 applies to loans and applica tions for loans if (i) a portion of the proceeds is to be used for repairing, rehabilitating, remodeling, or improv ing a one- to four-family residential dwelling, or the real property upon which it is located, and (ii) the loan is classified as a home-improvement loan. b. Report both secured and unsecured loans.

c. C u r r e n t t e x t At your option, you may report data about home-equity lines of credit—even if the credit line is not recorded on your institu tion’s books as a home-improve ment loan. If you choose to do so, you may report a home-equity line of credit as a home-improvement loan if the borrower or applicant in dicates, at the time of application or when the account is opened, that some portion of the proceeds will be used for home improvement. (See paragraph 8. “Loan amount,” below.) If you report originations of home-equity lines of credit, you must also report applications for such loans that did not result in originations.

N e w t e x t (Compliance is optional for CY 1995 data due March 1, 1996; compliance is mandatory be ginning with CY data due March 1, 1997.): At your option, you may re port data about home-equity lines of credit—even if the credit line is not recorded on your institution’s books as a home-improvement loan. If you choose to do so, you may report a home-equity line of credit as a home-improvement loan if the borrower or applicnt indicates, at the time of application or when the account is opened, that some por tion of the proceeds will be used for home improvement. (See para graph 8. “Loan amount,” below.) If you report originations of home-equity lines of credit, you must also report applications for such loans that did not result in originations. Code 3: Refinancings a. C u r r e n t t e x t Use this code for refinancings (and applications for refinancings) of home-purchase or home-improvement loans on one- to four-family residential dwellings. A refinancing involves the satisfaction of an existing obligation that is re placed by a new obligation under taken by the same borrower. But do not report a refinancing if, under the loan agreement, you are uncon ditionally obligated to renew or refinance the obligation, or you are obligated to renew or refinance the obligation subject to conditions within the borrower’s control. N e w t e x t (Compliance is optional for CY 1995 data due March 1, 1996; compliance is mandatory be ginning with CY data due March 1, 1997.): Use this code for refinanc ings (and applications for refinanc ings) of loans secured by one- to four-family residential dwellings. A refinancing involves the satisfaction of an existing obligation that is re placed by a new obligation under taken by the same borrower. But do not report a refinancing if, under the loan agreement, you are uncon

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Appendix A Regulation C ditionally obligated to refinance the obligation, or you are obligated to refinance the obligation subject to conditions within the borrower’s control.

b. Use this code whether or not you were the original creditor on the loan being refinanced, and whether or not the refinancing involves an increase in the outstanding principal. c. C u r r e n t t e x t : Report a refinancing if the amount outstanding on the original loan, plus the amount of new money (if any) that is for home-purchase or home-improve ment purposes, is more than 50 per cent of the total new loan amount. Do not report a refinancing if 50 percent or less of the loan proceeds or the amount applied for is for home purchase or home improvement.

N e w t e x t (Compliance is optional for CY 1995 data due March 1, 1996; compliance is mandatory be ginning with CY 1996 data due March 1, 1997.): You may report all refinancings of loans secured by one- to four-family residential dwellings, regardless of the purpose of or amount outstanding on the original loan, and regardless of the amount of new money (if any) that is for home-purchase or home-improvement purposes.

Code 4: Multifamily dwelling a. Use this code for loans and loan ap plications on dwellings for five or more families, including homepurchase loans, refinancings, and loans for repairing, rehabilitation, and re modeling purposes.

b. Do not use this code for loans on individual condominium or cooperative units; use codes 1, 2, or 3 for such loans, as applicable.

6. Owner occupancy. Indicate whether the property to which the loan or loan applica tion relates is to be owner-occupied as a principal dwelling by entering the applica ble code from the following: 1—Owner-occupied as a principal dwell ing 2—-Not owner-occupied 3—Not applicable 7. Explanation of codes a. Use code 2 for second homes or vaca tion homes, as well as rental properties. b. Use code 2 only for nonoccupant loans, or applications for nonoccupant loans, related to one- to four-family dwellings (including individual condo minium or cooperative units). c. Use code 3 if the property to which the loan relates is a multifamily dwelling; is not located in an MSA; or is located in an MSA in which your institution has neither a home nor a branch office. d. For purchased loans, you may assume that the property will be owner-occupied as a principal dwelling (code 1) unless the loan documents or application contain information to the contrary. 8. Loan amount. Enter the amount of the loan or application. Do not report loans be low $500. Show the amount in thousands, rounding to the nearest thousand ($500 should be rounded up to the next $ 1,000). For example, a loan for $167,300 should be entered as 167 and one for $15,500 as 16. a. For home-purchase loans that you originate, enter the principal amount of the loan as the loan amount. For homepurchase loans that you purchase, enter the unpaid principal balance of the loan at the time of purchase as the loan amount.

b. C u r r e n t t e x t : For home-improve ment loans (both originations and purchases), you may include unpaid finance charges in the loan amount if that is how you record such loans on your books.

N e w t e x t (Compliance is optional for CY 1995 data due March 1, 1996; compliance is mandatory beginning with CY 1996 data due March 1, 1997.): For home-improvement loans (both originations and purchases), you may include unpaid finance charges in the loan amount if that is how you record such loans on your books. For

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Regulation C Appendix A a multiple-purpose loan classified by you as a home-improvement loan be cause it involves a home-improvement purpose, enter the full amount of the loan, not just the amount specified for home improvement.

c. C u r r e n t t e x t : For home-equity lines of credit (if you have chosen to report them), enter as the loan amount only that portion of the line that the appli cant or borrower has indicated, at the time the application is made or when the account is opened, as being for home improvement. Report the loan amount for applications that did not result in originations in the same man ner. Report only in the year the line is established.

N e w t e x t (Compliance is optional for CY 1995 data due March 1, 1996; compliance is mandatory beginning with CY 1996 data due March 1, 1997.): For home-equity lines of credit (if you have chosen to report them), enter as the loan amount only that portion of the line that is for home improvement. Report the loan amount for applications that did not result in originations in the same manner. Re port only in the year the line is established.

d. C u r r e n t t e x t For refinancings that are to be reported, indicate the total amount of the refinancing, including the amount outstanding on the original loan and the amount of new money (if any).

N e w t e x t (Compliance is optional for CY 1995 data due March 1, 1996; compliance is mandatory beginning with CY 1996 data due March 1, 1997.): For refinancings of dwellingsecured loans, indicate the total amount of the refinancing, including the amount outstanding on the original loan and the amount of new money (if any).

e. For a loan application that was denied or withdrawn, enter the amount applied for.

f. C u r r e n t t e x t If you offered to lend less than the applicant applied for, enter the amount of the loan if the offer was accepted by the applicant. If the offer was not accepted, enter the amount that the applicant applied for. N e w t e x t ( c l a r i f i c a t i o n ) : If you make a counteroffer for an amount different from the amount initially ap plied for, and the counteroffer is ac cepted by the applicant, report it as an origination for the amount of the loan actually granted. If the applicant turns down the counteroffer or fails to re spond, report it as a denial for the amount initially requested. B. Action taken 1. Type o f action. Indicate the type of ac tion taken on the application or loan by us ing one of the following codes. Do not re port any loan application still pending at the end of the calendar year. You will re port that application on your register for the year in which final action is taken. 1—Loan originated 2—Application approved but not accepted 3—Application denied 4—Application withdrawn 5—File closed for incompleteness 6—Loan purchased by your institution 2. Explanation o f codes. a. N ew t e x t (c la rif ic a tio n ) : Use code 1 for a loan that is originated, including one resulting from a counteroffer (your offer to the applicant to make the loan on different terms or in a different amount than initially applied for) that the appli cant accepts.

b. (F o r m e r ly a.) Use code 2 when an application is approved but the applicant (or a loan broker or correspondent) fails to respond to your notification of ap proval or your commitment letter within the specified time.

c. N ew t e x t (c la rif ic a tio n ) : Use code 3 when an application is denied. This in cludes the situation when an applicant turns down or fails to respond to your counteroffer. Do not report as a with drawn application or as an application that was approved but not accepted.

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Appendix A Regulation C d. (F o r m erly b.) U se code 4 only w hen an application is expressly w ithdraw n by the applicant before a cred it decision w as m ade.

e. (F o r m e r ly c.) Use code 5 if you sent a written notice of incompleteness under section 202.9(c)(2) of Regulation B (Equal Credit Opportunity) and the appli cant failed to respond to your request for additional information within the period of time specified in your notice. 3. Date o f action. Enter the date by month, day, and year, using numerals in the form MM/DD/YY (for example, 02/22/92). a. For loans originated, enter the settle ment or closing date. For loans pur chased, enter the date of purchase by your institution.

b. For applications denied, applications approved but not accepted by the appli cant, and files closed for incompleteness, enter the date that the action was taken by your institution or the date the notice was sent to the applicant. c. For applications withdrawn, enter the date you received the applicant’s express withdrawal; or you may enter the date shown on the notification from the appli cant, in the case of a written withdrawal. C. Property location. In these columns enter the applicable codes for the MSA, state, county, and census tract for the property to which a loan relates. For home-purchase loans secured by one dwelling, but made for the purpose of purchasing another dwelling, report the property location for the property in which the security interest is to be taken. If the home-purchase loan is secured by more than one property, report the location data for the property being purchased. (See paragraphs 5, 6, and 7 of paragraph V.C. of this appendix for treatment of loans on property outside the MSAs in which you have offices.) 1. MSA. For each loan or loan application, indicate the location of the property by the MSA number. Enter only the MSA number, not the MSA name. MSA boundaries are defined by the U.S. Office of Management and Budget; use the boundaries that were in effect on January 1 of the calendar year for which you are reporting. A listing of MSAs is available from your regional supervisory agency or the FFIEC. (In these instructions, the term MSA refers to both metropolitan statistical area and primary metropolitan statistical area.) 2. State and county. You must use the Fed eral Information Processing Standard (FTPS) two-digit numerical code for the state and the three-digit numerical code for the county. These codes are available from your regional supervisory agency or the FFIEC. Do not use the letter abbreviations used by the U.S. Postal Service. 3. Census tract. Indicate the census tract where the property is located. a. Enter the code “NA” if the property is located in an area not divided into cen sus tracts on the U.S. Census Bureau’s census-tract outline maps (see paragraph 4 below).

b. If the property is located in a county with a population of 30,000 or less in the 1990 census (as determined by the Cen sus Bureau’s 1990 CPH-2 population se ries), enter “NA” (even if the population has increased above 30,000 since 1990), or you may enter the census tract number.

4. Census-tract number. For the censustract number, consult the U.S. Census Bu reau’s Census Tract/Street Index for 1990, and for addresses not listed in the index, consult the Census Bureau’s census-tract outline maps. You must use the maps from the Census Bureau’s 1990 CPH-3 series, or equivalent 1990 census data from the Cen sus Bureau (such as the Census TIGER/ Line File) or from a private publisher. 5. C u r r e n t t e x t Outside MSA. For loans on property located outside the MSAs in which you have a home or branch office (or outside any MSA), you may enter the MSA, state, county, and census tract numbers or you may enter the code “NA” in each of these columns. N e w t e x t ( c l a r i f i c a t i o n ) : Outside MSA. For loans on property located outside the MSAs in which you have a home or branch office (or outside any MSA), you have two options. Under op tion 1, you may enter the MSA, state, and county codes and the census tract

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Regulation C Appendix A number. You may enter “NA” in the MSA or census tract column if no code or number exists for the property. (Codes exist for all states and counties.) If you choose option 1, the codes and tract number must accurately identify the location for the property in question. Under option 2, you may enter “NA” in all four columns, whether or not the codes or number exist for the property. 6. Nondepository lenders. If you are a forprofit mortgage lending institution (other than a bank, savings association, or credit union), and in the preceding calendar year you received applications for, or originated or purchased, loans for home purchase or home improvement adding up to a total of five or more for a given MSA, you are deemed to have a branch office in that MSA, whether or not you have a physical office there. As a result, you will have to enter the MSA, state, county, and censustract numbers for any transactions in that MSA. Because you must keep accurate records about lending within MSAs in the current calendar year in order to report data accurately the following year, to comply with this rule you may find it easier to enter the geographic information routinely for any property located within any MSA. 7. Data reporting under CRA for banks and savings associations with total assets of $250 million or more and banks and sav ings associations that are subsidiaries o f a holding company whose total banking and thrift assets are $1 billion or more. If you are a bank or savings association with total assets of $250 millon or more as of Decem ber 31 for each of the immediately preced ing two years, you must also enter the loca tion of property located outside the MSAs in which you have a home or branch office, or outside any MSA. You must also enter this information if you are a bank or sav ings association that is a subsidiary of a holding company with total banking and thrift assets of $1 billion or more as of De cember 31 for each of the immediately pre ceding two years.

D. Applicant information—race or national origin, sex, and income. Appendix B of Regu lation C contains instructions for the collec tion of data on race or national origin and sex, and also contains a sample form for data collection. The form is substantially similar to the form prescribed by section 202.13 of Reg ulation B (Equal Credit Opportunity) and con tained in appendix B to that regulation. You may use either form.

1. Applicability. You must report this appli cant information for loans that you originate as well as for applications that do not result in an origination.

a. You need not collect or report this in formation for loans purchased. If you choose not to, enter the codes specified in paragraphs 3, 4, and 5 below for “not applicable.”

b. If your institution is a bank, savings association, or credit union that had as sets of $30 million or less on the preced ing December 31, you may—but need not—collect and report these data. If you choose not to, enter the codes specified in paragraphs 3, 4, and 5 below for “not applicable.”

c. If the borrower or applicant is not a natural person (a corporation or partner ship, for example), use the codes speci fied in paragraphs 3, 4, and 5 below for “not applicable.”

2. Mail and telephone applications. Any loan applications mailed to applicants must contain a collection form similar to that shown in appendix B, and you must record on your register the data on race or national origin and sex if the applicant provides it. If the applicant chooses not to provide the data, enter the code for “information not provided by applicant in mail or telephone application” specified in paragraphs 3 and 4 below. If an application is taken entirely by telephone, you need not request this infor mation. (See appendix B for complete in formation on the collection of this data in mail or telephone applications.) 3. Race or national origin o f borrower or applicant. Use the following codes to indi cate the race or national origin of the appli cant or borrower under column “A” and of any co-applicant or co-borrower under col umn “CA.” If there is more than one co applicant, provide this information only for

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Appendix A Regulation C the first co-applicant listed on the applica tion form. If there are no co-applicants or co-borrowers, enter code 8 for “not applica ble” in the co-applicant column. 1—American Indian or Alaskan Native 2—Asian or Pacific Islander 3—Black 4— Hispanic 5—White 6—Other 7—Information not provided by applicant in mail or telephone application 8—Not applicable 4. Sex of borrower or applicant. Use the following codes to indicate the sex of the applicant or borrower under column “A” and of any co-applicant or co-borrower under column “CA.” If there is more than one co-applicant, provide this information only for the first co-applicant listed on the application form. If there are no co-appli cants or co-borrowers, enter code 4 for “not applicable.”

1—Male 2—Female 3—Information not provided by applicant in mail or telephone application 4— Not applicable 5. Income. Enter the gross annual income that your institution relied upon in making the credit decision.

a. Round all dollar amounts to the near est thousand (round $500 up to the next $1 ,000), and show in terms of thousands. For example, $35,500 should be reported as 36.

b. For loans on multifamily dwellings, enter “NA.”

c. C u r r e n t t e x t : If no income informa tion is asked for or relied on in the credit decision (such as in “no in come verification” type loans), enter “NA.”

New t e x t (t e c h n i c a l c h a n g e ): If no income information is asked for or re lied on in the credit decision, enter “NA.”

E. Type o f purchaser 1. Enter the applicable code to indicate whether a loan that your institution origi nated or purchased was then sold to a sec ondary market entity within the same calen dar year:

0—Loan was not originated or was not sold in calendar year covered by reg ister 1—FNMA (Federal National Mortgage Association) 2—GNMA (Government National Mort gage Association) 3—FHLMC (Federal Home Loan Mort gage Corporation) 4— FmHA (Farmers Home Administra tion) 5—Commercial bank 6—Savings bank or savings association 7—Life insurance company 8—Affiliate institution 9—Other type of purchaser 2. Explanation o f codes a. Enter the code 0 for applications that were denied, withdrawn, or approved but not accepted by the applicant; and for files closed for incompleteness. b. If you originated or purchased a loan and did not sell it during that same cal endar year, enter the code 0. If you sell the loan in a succeeding year, you need not report the sale.

c. If you conditionally assign a loan to GNMA in connection with a mortgagebacked security transaction, use code 2 . d. Loans “ swapped” for mortgagebacked securities are to be treated as sales; enter the type of entity receiving the loans that are swapped as the purchaser.

e. Use code 8 for loans sold to an insti tution affiliated with you, such as your subsidiary or a subsidiary of your parent corporation.

F. Reasons for denial 1. You are not required to enter the reasons for the denial of an application. But if you choose to do so, you may indicate up to three reasons by using the following codes: 1—Debt-to-income ratio 2—Employment history 3—Credit history

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Regulation C Appendix A 4— Collateral 5—Insufficient cash (downpayment, clos ing costs) 6—Unverifiable information 7—Credit application incomplete 8—Mortgage insurance denied 9—Other 2. Leave this column blank if the “action taken” on the application is not a denial. For example, do not complete this column if the application was withdrawn or the file was closed for incompleteness. 3. If your institution uses the model form for adverse action contained in the appendix to Regulation B (Form C-l in appendix C, Sample Notification Form, which offers some 20 reasons for denial), the following list shows which codes to enter. a. Code I corresponds to: Income insuf ficient for amount of credit requested, and Excessive obligations in relation to income.

b. Code 2 corresponds to: Temporary or irregular employment, and Length of employment.

c. Code 3 corresponds to: Insufficient number of credit references provided; Unacceptable type of credit references provided; No credit file; Limited credit experience; Poor credit performance with us; Delinquent past or present credit obli gations with others; Garnishment, attach ment, foreclosure, repossession, collection action, or judgment; and Bankruptcy. d. Code 4 corresponds to: Value or type of collateral not sufficient. e. Code 6 corresponds to: Unable to ver ify credit references, Unable to verify employment, Unable to verify income, and Unable to verify residence. f. Code 7 corresponds to: Credit applica tion incomplete.

g. Code 9 corresponds to: Length of res idence, Temporary residence, and Other reasons specified on notice. VI. Federal Supervisory Agencies Send your loan/application register and direct any questions to the office of your federal su pervisory agency as specified below. If you are the nondepository subsidiary of a bank, savings association, or credit union, send the register to the supervisory agency for your parent institution. Terms that are not defined in the Federal Deposit Insurance Act (12 USC 1813(s)) shall have the meaning given to them in the International Banking Act of 1978 (12 USC 3101).

A. National banks and their subsidiaries and federal branches and federal agencies o f for eign banks. District office of the Office of the Comptroller of the Currency for the district in which the institution is located. B. State member banks o f the Federal Re serve System, their subsidiaries, subsidiaries o f bank holding companies, branches and agencies o f foreign banks (other than federal branches, federal agencies, and insured state branches o f foreign banks), commercial lend ing companies owned or controlled by foreign banks, and organizations operating under sec tion 25 or 25A of the Federal Reserve Act. Federal Reserve Bank serving the District in which the state member bank is located; for institutions other than state member banks, the Federal Reserve Bank specified by the Board of Governors.

C. Nonmember insured banks (except for fed eral savings banks) and their subsidiaries and insured state branches o f foreign banks. Re gional director of the Federal Deposit Insur ance Corporation for the region in which the institution is located.

D. Savings institutions insured under the Sav ings Association Insurance Fund o f the FDIC, federally chartered savings banks insured under the Bank Insurance Fund o f the FDIC (but not including state-chartered savings banks insured under the Bank Insurance Fund), their subsidiaries, and subsidiaries of savings institution holding companies. Re gional or other office specified by the Office of Thrift Supervision.

E. Credit unions. National Credit Union Ad ministration, Office of Examination and Insur ance, 1776 G Street, N.W., Washington, D.C. 20456.

F. Other depository institutions. Regional di rector of the Federal Deposit Insurance Corpo

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Appendix A Regulation C ration for the region in which the institution is located.

G. Other mortgage-lending institutions. Assis tant Secretary for Housing, HMDA Report ing—Room 9233, U.S. Department of Hous ing and Urban Development, 451 7th Street, S.W., Washington, D.C. 20410.

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Regulation C Appendix A Form FR HMDA-LAR OMB No. 7100-0247. Approval expires March 31.1997 Hours per response: 10 to 10,000 (200 average) LOAN/APPLICATION REGISTER 7 h i.« po rti.« M r« lb y ta w (1 2 U S C 2 8 0 1 4 8 1 0 -n d 12 C FR20?) TRANSMITTAL SH EET You must complete this trsnsmittal sheet (please type or print) ami attach it to the Loan/Application Register, required by the Home Mortgage Disclosure Act, that you submit to your supervisory agency. Agency Reporter's Identification Number Code Reporter's Tax Identification Number I I » I I I I I l - l I I I » ~ I I I I I I I The Loan/Application Register that is attached covers activity during 19______and contains a total o f ---------pages. Enter the name and address of your institution. The disclosure statement that is produced by the Federal Financial Institutions Examination Council will be mailed to the address you supply below: Name of hsttutioo City. State. ZIP Enter the name and telephone number of a person who may be contacted about questions regarding your register ____________________ ( )_________________ Name Telephone Number if your institution is a subsidiary of another institution or corporation, enter the name of your parent: Address C*y. Stale. ZIP Enter the name and address of your supervisory agency (or your parent's supervisory agency): City. Stale. ZIP An officer of your institution must complete the following section. I certify to the accuracy of the data contained in this register. Name of Officer Signature

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LOAN/APPLICATION REGISTER _— Page __ of ___ Form FR HMDA-LAR Reporter's identification Number Code Name of Reporting Institution City, State, ZIP All columns (except Reasons for Denial) must be completed for each entry. See the instructions for details. a ee ee ee ee ee ee Appiication oF Loan Information Property Location A= Applicant §=CA = Co-Applicant Race or Gross.

Loan ational Origin] = Sex Annual Dete amount Four Income | Type of | Reasons Application a Digit Sox-Digh in Pur | tor ‘Apptication or Received thou MBA Coneus a loal a lca] Me | cheser | Dontet Loan Number (menidiyy) aande ‘Number ‘Tract sande | of Loan | (Opsional) Example of Loan Originated L,|B 254:3)9; pt rrrrrrtprirpay | oes | 2 68 8840 4,2,1,9,.,8,5} 3 | 8| 1 | 4 | 2% 7 Example of Application Denied 012425314186) 7) 87,6 ,814,3,2;1,0) 5 5 4 | ovaom2 | 1 128 0480 01s |0,0,2,1,.,0,0} 8 | 4/2/12] 88 | Oo |418

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Regulation C Appendix B Loan/Application Register Code Sheet Use the following codes to complete the loan/ application register. The instructions to the HMDA-LAR explain the proper use of each code.

Application or Loan Information Type:

1—Home purchase (one- to four-family) 2—Home improvement (one- to four-family) 3—Refinancing (home purchase or home improvement, one- to four-family) 4— Multifamily dwelling (home purchase, home improvement, and refinancings) Owner Occupancy:

1—Owner-occupied as a principal dwelling 2—Not owner-occupied 3—Not applicable Action Taken:

1—Loan originated 2—Application approved but not accepted 3—Application denied by financial institution 4— Application withdrawn by applicant 5—File closed for incompleteness 6—Loan purchased by your institution Applicant Information Race or National Origin:

1—American Indian or Alaskan Native 2—Asian or Pacific Islander 3—Black 4— Hispanic 5—White 6—Other 7—Information not provided by applicant in mail or telephone application 8—Not applicable Sex:

1—Male 2—Female 3—Information not provided by applicant in mail or telephone application 4—Not applicable Type o f Purchaser 0—Loan was not sold in calendar year covered by register 1—FNMA (Federal National Mortgage Association) 2—GNMA (Government National Mortgage Association) 3—FHLMC (Federal Home Loan Mortgage Corporation) 4— FmHA (Farmers Home Administration) 5—Commercial bank 6—Savings bank or savings association 7—Life insurance company 8—Affiliate institution 9—Other type of purchaser Reasons for Denial (optional) 1—Debt-to-income ratio 2—Employment history 3—Credit history 4— Collateral 5—Insufficient cash (downpayment, closing costs) 6—Unverifiable information 7—Credit application incomplete 8—Mortgage insurance denied 9—Other APPENDIX B—Form and Instructions for Data Collection on Race or National Origin and Sex I. Instructions on Collection o f Data on Race or National Origin and Sex A. Format. You may list questions regarding the race or national origin and sex of the ap plicant on your loan application form, or on a separate form that refers to the application. (See the sample form below for recommended language.)

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Appendix B Regulation C B. Procedures 1. You must ask for this information, but cannot require the applicant to provide it. 2. If the applicant chooses not to provide the information for an application taken in person, note this fact on the form and note the data, to the extent possible, on the basis of visual observation or surname. 3. Inform the applicant that the federal government is requesting this information in order to monitor compliance with federal statutes that prohibit lenders from discrimi nating against applicants on these bases. In form the applicant that if the information is not provided where the application is taken in person, you are required to note the data on the basis of visual observation or surname.

4. If an application is made entirely by telephone, you need not request this infor mation. And you need not provide the data when you take an application by mail, if the applicant fails to answer these questions on the application form. You should indi cate whether an application was received by mail or telephone, if it is not otherwise evi dent on the face of the application. 5. The “other” block is available only to the applicant who chooses to indicate some other appropriate category for race or na tional origin. If completing the form based on visual observation, do not use this cate gory; use one of the other five categories. Sample Data-Collection Form INFORMATION FOR GOVERNMENT MONITORING PURPOSES The following information is requested by the federal government for certain types of loans related to a dwelling in order to monitor the lender’s compliance with equal credit opportu nity, fair housing, and home mortgage disclo sure laws. You are not required to furnish this information, but are encouraged to do so. The law provides that a lender may not discrimi nate on the basis of this information, or on whether you choose to furnish it. However, if you choose not to furnish the information and you have made this application in person, under federal regulations the lender is required to note race or national origin and sex on the basis of visual observation or surname. If you do not wish to furnish the information, please check below.

APPLICANT:

□ I do not wish to furnish this information. Race or National Origin:

□ American Indian, Alaskan Native □ Asian, Pacific Islander □ Black □ Hispanic □ White □ Other (specify)______________________ Sex:

□ Female □ Male CO-APPLICANT:

□ I do not wish to furnish this information. Race or National Origin:

□ American Indian, Alaskan Native □ Asian, Pacific Islander □ Black □ Hispanic □ White □ Other (specify)______________________ Sex:

□ Female □ Male

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Home Mortgage Disclosure Act 12 USC 2801 et seq.; 89 Stat. 1125; Pub. L. 94-200, Title III (December 31, 1975) Section Short title Findings and purposes Definitions Maintenance of records and public disclosure Enforcement Relation to state laws Research and improved methods Study Effective date Compilation of aggregate data Disclosure by the secretary SECTION 301— Short Title This title may be cited as the “Home Mort gage Disclosure Act of 1975.” [12 USC 2801 note.] SECTION 302—Findings and Purposes (a) The Congress finds that some depository institutions have sometimes contributed to the decline of certain geographic areas by their failure pursuant to their chartering responsibil ities to provide adequate home financing to qualified applicants on reasonable terms and conditions.

(b) The purpose of this title is to provide the citizens and public officials of the United States with sufficient information to enable them to determine whether depository institu tions are filling their obligations to serve the housing needs of the communities and neigh borhoods in which they are located and to as sist public officials in their determination of the distribution of public sector investments in a manner designed to improve the private in vestment environment.

(c) Nothing in this title is intended to, nor shall it be construed to, encourage unsound lending practices or the allocation of credit. [12 use 2801.] SECTION 303—Definitions For purposes of this title— ( 1) the term “mortgage loan” means a loan which is secured by residential real property or a home improvement loan; (2 ) the term “depository institution”— (A) means— (i) any bank (as defined in section 3(a)(1) of the Federal Deposit Insur ance Act);

(ii) any savings association (as defined in section 3(b)(1) of the Federal De posit Insurance Act); and (iii) any credit union, which makes federally related mortgage loans as determined by the Board; and (B) includes any other lending institution (as defined in paragraph (4)) other than any institution described in subparagraph (A);

(3) the term “ completed application” means an application in which the creditor has received the information that is regu larly obtained in evaluating applications for the amount and type of credit requested; (4) the term “other lending institutions” means any person engaged for profit in the business of mortgage lending; (5) the term “Board” means the Board of Governors of the Federal Reserve System; and (6) the term “Secretary” means the Secre tary of Housing and Urban Development. [12 USC 2802. As amended by acts of Feb. 5, 1988 (101 Stat. 1945) and Aug. 9, 1989 (103 Stat. 525).] SECTION 304— Maintenance of Records and Public Disclosure (a) (1) Each depository institution which has a home office or branch office located within a primary metropolitan statistical area, met ropolitan statistical area, or consolidated metropolitan statistical area that is not com prised of designated primary metropolitan statistical areas, as defined by the Depart-

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§ 304 Home Mortgage Disclosure Act ment of Commerce shall compile and make available, in accordance with regulations of the Board, to the public for inspection and copying at the home office, and at least one branch office within each primary metropol itan statistical area, metropolitan statistical area, or consolidated metropolitan statistical area that is not comprised of designated pri mary metropolitan statistical areas in which the depository institution has an office the number and total dollar amount of mortgage loans which were (A) originated (or for which the institution received completed ap plications), or (B) purchased by that institu tion during each fiscal year (beginning with the last full fiscal year of that institution which immediately preceded the effective date of this title.) (2) The information required to be main tained and made available under paragraph (1 ) shall also be itemized in order to clearly and conspicuously disclose the following: (A) The number and dollar amount for each item referred to in paragraph (1), by census tracts for mortgage loans secured by property located within any county with a population of more than 30,000, within that primary metropolitan statisti cal area, metropolitan statistical area, or consolidated metropolitan statistical area that is not comprised of designated pri mary metropolitan statistical areas, other wise, by county, for mortgage loans se cured by property located within any other county within that primary metro politan statistical area, metropolitan sta tistical area, or consolidated metropolitan statistical area that is not comprised of designated primary metropolitan statisti cal areas.

(B) The number and dollar amount for each item referred to in paragraph (1 ) for all such mortgage loans which are se cured by property located outside that primary metropolitan statistical area, met ropolitan statistical area, or consolidated metropolitan statistical area that is not comprised of designated primary metro politan statistical areas.

For the purpose of this paragraph, a deposi tory institution which maintains offices in more than one primary metropolitan statisti cal area, metropolitan statistical area, or consolidated metropolitan statistical area that is not comprised of designated primary metropolitan statistical areas shall be re quired to make the information required by this paragraph available at any such office only to the extent that such information re lates to mortgage loans which were origi nated or purchased (or for which completed applications were received) by an office of that depository institution located in the pri mary metropolitan statistical area, metropol itan statistical area, or consolidated metro politan statistical area that is not comprised of designated primary metropolitan statisti cal areas in which the office making such information available is located. For pur poses of this paragraph, other lending insti tutions shall be deemed to have a home of fice or branch office within a primary metropolitan statistical area, metropolitan statistical area, or consolidated metropolitan statistical area that is not comprised of des ignated primary metropolitan statistical ar eas if such institutions have originated or purchased or ,received completed applica tions for at least 5 mortgage loans in such area in the preceding calendar year. (b) Any item of information relating to mort gage loans required to be maintained under subsection (a) shall be further itemized in or der to disclose for each such item— ( 1) the number and dollar amount of mort gage loans which are insured under title II of the National Housing Act or under title V of the Housing Act of 1949 or which are guaranteed under chapter 37 of title 38, United States Code;

(2) the number and dollar amount of mort gage loans made to mortgagors who did not, at the time of execution of the mort gage, intend to reside in the property secur ing the mortgage loan;

(3) the number and dollar amount of home improvement loans; and (4) the number and dollar amount of mort gage loans and completed applications in volving mortgagors or mortgage applicants grouped according to census tract, income level, racial characteristics, and gender.

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Home Mortgage Disclosure Act § 304 (c) Any information required to be compiled and made available under this section, other than loan application register information under subsection (j), shall be maintained and made available for a period of five years after the close of the first year during which such information is required to be maintained and made available.

(d) Notwithstanding the provisions of subsec tion (a)(1 ), data required to be disclosed under this section for 1980 and thereafter shall be disclosed for each calendar year. Any deposi tory institution which is required to make dis closures under this section but which has been making disclosures on some basis other than a calendar year basis shall make available a sep arate disclosure statement containing data for any period prior to calendar year 1980 which is not covered by the last full year report prior to the 1980 calendar year report. (e) Subject to subsection (h), the Board shall prescribe a standard format for the disclosures required under this section. (f) The Federal Financial Institutions Exami nation Council in consultation with the Secre tary, shall implement a system to facilitate ac cess to data required to be disclosed under this section. Such system shall include ar rangements for a central depository of data in each primary metropolitan statistical area, metropolitan statistical area, or consolidated metropolitan statistical area that is not com prised of designated primary metropolitan sta tistical areas. Disclosure statements shall be made available to the public for inspection and copying at such central depository of data for all depository institutions which are re quired to disclose information under this sec tion (or which are exempted pursuant to sec tion 306(b)) and which have a home office or branch office within such primary metropoli tan statistical area, metropolitan statistical area, or consolidated metropolitan statistical area that is not comprised of designated pri mary metropolitan statistical areas. (g) The requirements of subsections (a) and (b) shall not apply with respect to mortgage loans that are— (1 ) made (or for which completed applica tions are received) by any mortgage bank ing subsidiary of a bank holding company or savings and loan holding company or by any savings and loan service corporation that originates or purchases mortgage loans; and (2) approved (or for which completed ap plications are received) by the secretary for insurance under title I or II of the National Housing Act.

(h) The data required to be disclosed under subsection (b)(4) shall be submitted to the ap propriate agency for each institution reporting under this title. Notwithstanding the require ment of section 304(a)(2)(A) for disclosure by census tract, the Board, in cooperation with other appropriate regulators, including— (1) the Office of the Comptroller of the Currency for national banks and Federal branches and Federal agencies of foreign banks;

(2) the Director of the Office of Thrift Su pervision for savings associations; (3) the Federal Deposit Insurance Corpora tion for banks insured by the Federal De posit Insurance Corporation (other than members of the Federal Reserve System), mutual savings banks, insured State branches of foreign banks, and any other depository institution described in section 303(2)(A) which is not otherwise referred to in this paragraph;

(4) the National Credit Union Administra tion Board for credit unions; and (5) the Secretary of Housing and Urban Development for other lending institutions not regulated by the agencies referred to in paragraphs (1) through (4), shall develop regulations prescribing the for mat for such disclosures, the method for sub mission of the data to the appropriate regula tory agency, and the procedures for disclosing the information to the public. These regula tions shall also require the collection of data required to be disclosed under subsection (b)(4) with respect to loans sold by each insti tution reporting under this title, and, in addi tion, shall require disclosure of the class of

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§ 304 Home Mortgage Disclosure Act the purchaser of such loans. Any reporting in stitution may submit in writing to the appro priate agency such additional data or explana tions as it deems relevant to the decision to originate or purchase mortgage loans. (i) The requirements of subsection (b)(4) shall not apply with respect to any depository insti tution described in section 303(2)(A) which has total assets, as of the most recent full fis cal year of such institution, of $30,000,000 or less.

(j) Loan application register information. (1) In addition to the information required to be disclosed under subsections (a) and (b), any depository institution which is re quired to make disclosures under this sec tion shall make available to the public, upon request, loan application register infor mation (as defined by the Board by regula tion) in the form required under regulations prescribed by the Board.

(2) (A) Subject to subparagraph (B), the loan application register information de scribed in paragraph (1) may be disclosed by a depository institution without editing or compilation and in the format in which such information is maintained by the institution.

(B) The Board shall require, by regula tion, such deletions as the Board may de termine to be appropriate to protect— (i) any privacy interest of any appli cant, including the deletion of the ap plicant’s name and identification num ber, the date of the application, and the date of any determination by the insti tution with respect to such application; and (ii) a depository institution from liabil ity under any Federal or State privacy law.

(C) It is the sense of the Congress that a depository institution should provide loan register information under this section in a format based on the census tract in which the property is located. (3) A depository institution meets the dis closure requirement of paragraph (1) if the institution provides the information required under such paragraph in the form in which the institution maintains such information. (4) Any depository institution which pro vides information under this subsection may impose a reasonable fee for any cost in curred in reproducing such information. (5) The disclosure of the loan application register information described in paragraph ( 1) for any year pursuant to a request under paragraph (1) shall be made— (A) in the case of a request made on or before March 1 of the succeeding year, before April 1 of the succeeding year; and (B) in the case of a request made after March 1 of the succeeding year, before the end of the 30-day period beginning on the date the request is made. (6) Notwithstanding subsection (c), the loan application register information described in paragraph (1) for any year shall be main tained and made available, upon request, for 3 years after the close of the 1st year dur ing which such information is required to be maintained and made available. (7) In prescribing regulations under this subsection, the Board shall make every ef fort to minimize the costs incurred by a de pository institution in complying with this subsection and such regulations. (k) Disclosure o f statements by depository institutions.

(1) In accordance with procedures estab lished by the Board pursuant to this section, any depository institution required to make disclosures under this section— (A) shall make a disclosure statement available, upon request, to the public no later than 3 business days after the insti tution receives the statement from the Federal Financial Institutions Examina tion Council; and (B) may make such statement available on a floppy disc which may be used with a personal computer or in any other me dia which is not prohibited under regula tions prescribed by the Board. (2) Any disclosure statement provided pur suant to paragraph (1) shall be accompanied by a clear and conspicuous notice that the

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Home Mortgage Disclosure Act § 305 statement is subject to final review and re vision, if necessary.

(3) Any depository institution which pro vides a disclosure statement pursuant to paragraph (1) may impose a reasonable fee for any cost incurred in providing or repro ducing such statement.

(I) Prompt disclosures.

(1) Any disclosure of information pursuant to this section or section 310 shall be made as promptly as possible.

(2) (A) Except as provided in subsections (j)(5) and (k)(l) and regulations pre scribed by the Board and subject to subparagraph (B), any information required to be disclosed for any year beginning after December 31, 1992, under— (i) this section shall be made available to the public before September 1 of the succeeding year; and (ii) section 310 shall be made avail able to the public before December 1 of the succeeding year.

(B) With respect to disclosures of infor mation under this section or section 310 for any year beginning after December 31, 1993, every effort shall be made— (i) to make information disclosed under this section or section 310 avail able to the public before July 1 of the succeeding year; and (ii) to make information required to be disclosed under section 310 available to the public before September 1 of the succeeding year.

(3) The Federal Financial Institutions Ex amination Council shall make such changes in the system established pursuant to sub section (f) as may be necessary to carry out the requirements of this subsection. [12 USC 2803. As amended by acts of Oct. 8, 1980 (94 Stat. 1657); Nov. 30, 1983 (97 Stat. 1266); Feb. 5, 1988 (101 Stat. 1945, 1950); Aug. 9, 1989 (103 Stat. 524, 525, 526); Dec. 19, 1991 (105 Stat. 2299); and Oct. 28, 1992 (106 Stat. 3889, 3891).] SECTION 305—Enforcement (a) The Board shall prescribe such regulations as may be necessary to carry out the purposes of this title. These regulations may contain such classifications, differentiations, or other provisions, and may provide for such adjust ments and exceptions for any class of transac tions, as in the judgment of the Board are necessary and proper to effectuate the pur poses of this title, and prevent circumvention or evasion thereof, or to facilitate compliance therewith.

(b) Compliance with the requirements im posed under this title shall be enforced under— (1) section 8 of the Federal Deposit Insur ance Act, in the case of— (A) national banks and Federal branches and Federal agencies of foreign banks, by the Office of Comptroller of the Currency;

(B) member banks of the Federal Re serve System (other than national banks), branches and agencies of foreign banks (other than Federal branches, Federal agencies, and insured State branches of foreign banks), commercial lending com panies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act, by the Board; and (C) banks insured by the Federal Deposit Insurance Corporation (other than mem bers of the Federal Reserve System), mu tual savings banks as defined in section 3(f) of the Federal Deposit Insurance Act (12 U.S.C.

1813(f)), insured State branches of foreign banks, and any other depository institution not referred to in this paragraph or paragraph (2) or (3) of this subsection, by the Board of Directors of the Federal Deposit Insurance Corporation;

(2) section 8 of the Federal Deposit Insur ance Act, by the Director of the Office of Thrift Supervision, in the case of a savings association the deposits of which are in sured by the Federal Deposit Insurance Corporation;

(3) the Federal Credit Union Act, by the Administrator of the National Credit Union Administration with respect to any credit union; and

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§ 305 Home Mortgage Disclosure Act (4) other lending institutions, by the Secre tary of Housing and Urban Development. The terms used in paragraph (1) that are not defined in this title or otherwise defined in section 3(s) of the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the mean ing given to them in section 1(b) of the Inter national Banking Act of 1978 (12 U.S.C. 3101).

(c) For the purpose of the exercise by any agency referred to in subsection (b) of its powers under any Act referred to in that sub section, a violation of any requirement im posed under this title shall be deemed to be a violation of a requirement imposed under that Act. In addition to its powers under any pro vision of law specifically referred to in sub section (b), each of the agencies referred to in that subsection may exercise, for the purpose of enforcing compliance with any requirement imposed under this title, any other authority conferred on it by law.

[12 USC 2804. As amended by acts of Aug. 9, 1989 (103 Stat 440, 526) and Dec. 19, 1991 (105 Stat. 2299).] SECTION 306— Relation to State Laws (a) This title does not annul, alter, or affect, or exempt any State-chartered depository insti tution subject to the provisions of this title from complying with the laws of any state or subdivision thereof with respect to public dis closure and recordkeeping by depository insti tutions, except to the extent that those laws are inconsistent with any provision of this ti tle, and then only to the extent of the incon sistency. The Board is authorized to determine whether such inconsistencies exist. The Board may not determine that any such law is incon sistent with any provision of this title if the Board determines that such law requires the maintenance of records with greater geo graphic or other detail than is required under this title, or that such law otherwise provides greater disclosure than is required under this title.

(b) The Board may by regulation exempt from the requirements of this title any statechartered depository institution within any state or subdivision thereof if it determines that, under the law of such state or subdivi sion, that institution is subject to requirements substantially similar to those imposed under this title, and that such law contains adequate provisions for enforcement. Notwithstanding any other provision of this subsection, compli ance with the requirements imposed under this subsection shall be enforced under— (1) section 8 of the Federal Deposit Insur ance Act in the case of national banks, by the Comptroller of the Currency; and (2) section 8 of the Federal Deposit Insur ance Act, by the Director of the Office of Thrift Supervision in the case of a savings association the deposits of which are in sured by the Federal Deposit Insurance Corporation.

[12 USC 2805. As amended by act of Aug. 9, 1989 (103 Stat. 440). ] SECTION 307—Research and Improved Methods (a)(1) The Director of the Office of Thrift Supervision, with the assistance of the Sec retary, the Director of the Bureau of the Census, the Comptroller of the Currency, the Board of Governors of the Federal Re serve System, the Federal Deposit Insurance Corporation, and such other persons as the Director of the Office of Thrift Supervision deems appropriate, shall develop, or assist in the improvement of, methods of match ing addresses and census tracts to facilitate compliance by depository institutions in as economical a manner as possible with the requirements of this title.

(2) There is authorized to be appropriated such sums as may be necessary to carry out this subsection.

(3) The Director of the Office of Thrift Su pervision is authorized to utilize, contract with, act through, or compensate any person or agency in order to carry out this subsection.

(b) The Director of the Office of Thrift Su pervision shall recommend to the Committee on Banking, Finance and Urban Affairs of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of

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Home Mortgage Disclosure Act § 311 the Senate such additional legislation as the Director of the Office of Thrift Supervision deems appropriate to carry out the purpose of this title.

[12 USC 2806. As amended by H. Res. 5 of Jan. 4, 1977 and acts of Nov. 7, 1988 (102 Stat. 3280) and Aug. 9, 1989 (103 Stat. 440).] SECTION 308—Study The Board, in consultation with the Secretary of Housing and Urban Development, shall re port annually to the Congress on the utility of the requirements of section 304(b)(4). [12 USC 2807. As amended by acts of Nov. 30, 1983 (97 Stat. 1266) and Aug. 9, 1989 (103 Stat. 526).] SECTION 309—Effective Date This title shall take effect on the one hundred and eightieth day beginning after the date of its enactment. Any institution specified in sec tion 303(2)(A) which has total assets as of its last full fiscal year of $ 10,000,000 or less is exempt from the provisions of this title. The Board, in consultation with the Secretary, may exempt institutions described in section 303(2)(B) that are comparable within their re spective industries to institutions that are ex empt under the preceding sentence. [12 USC 2808. As amended by act of Dec. 19, 1991 (105 Stat. 2307). ] SECTION 310—Compilation of Aggregate Data (a) Beginning with data for calendar year 1980, the Federal Financial Institutions Exam ination Council shall compile each year, for each primary metropolitan statistical area, metropolitan statistical area, or consolidated metropolitan statistical area that is not com prised of designated primary metropolitan sta tistical areas, aggregate data by census tract for all depository institutions which are re quired to disclose data under section 304 or which are exempt pursuant to section 306(b). The Council shall also produce tables indicat ing, for each primary metropolitan statistical area, metropolitan statistical area, or consoli dated metropolitan statistical area that is not comprised of designated primary metropolitan statistical areas, aggregate lending patterns for various categories of census tracts grouped ac cording to location, age of housing stock, in come level, and racial characteristics. (b) The Board shall provide staff and data processing resources to the Council to enable it to carry out the provisions of subsection (a). (c) The data and tables required pursuant to subsection (a) shall be made available to the public by no later than December 31 of the year following the calendar year on which the data is based.

[12 USC 2809. As added by act of Oct. 8, 1980 (94 Stat. 1658) and amended by act of Nov. 30, 1983 (97 Stat. 1266).] SECTION 311— Disclosure by the Secretary Beginning with data for calendar year 1980, the Secretary shall make publicly available data in the Secretary’s possession for each mortgagee which is not otherwise subject to the requirements of this title and which is not exempt pursuant to section 306(b) (and for each mortgagee making mortgage loans ex empted under section 304(g)), with respect to mortgage loans approved (or for which com pleted Applications are received) by the Secre tary for insurance under title I or II of the National Housing Act. Such data to be dis closed shall consist of data comparable to the data which would be disclosed if such mortga gee were subject to the requirements of sec tion 304. Disclosure statements containing data for each such mortgage for a primary metropolitan statistical area, metropolitan sta tistical area, or consolidated metropolitan sta tistical area that is not comprised of desig nated primary metropolitan statistical areas shall, at a minimum, be publicly available at the central depository of data established pur suant to section 304(f) for such primary met ropolitan statistical area, metropolitan statisti cal area, or consolidated metropolitan statistical area that is not comprised of desig nated primary metropolitan statistical areas. The Secretary shall also compile and make

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§ 311 Home Mortgage Disclosure Act publicly available aggregate data for such mortgagees by census tract, and tables indicat ing aggregate lending patterns, in a manner comparable to the information required to be made publicly available in accordance with section 310.

[12 USC 2810. As added by act of Oct. 8, 1980 (94 Stat. 1658) and amended by acts of Nov. 30, 1983 (97 Stat. 1266); Feb. 5, 1988 (101 Stat. 1945); and Aug. 9, 1989 (103 Stat. 525).] PUBLIC LAW 96-399, TITLE III SECTION 340 (d) The Federal Financial Institutions Exami nation Council, in consultation with the Ad ministrator of the Small Business Administra tion, shall conduct a study to assess the feasibility and usefulness of requiring deposi tory institutions which make small business loans to compile and publicly disclose infor mation regarding such loans. The Council shall submit a report on the results of such study, together with recommendations, to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Banking, Finance and Urban Affairs of the House of Representatives not later than March 1, 1981.

[12 USC 3305 note.] (e) To promote efficiency and avoid duplica tion to the maximum extent feasible, the Fed eral Financial Institutions Examination Coun cil shall transmit a report to the Congress not later than September 30, 1982, on the feasibil ity and desirability of establishing a unified system for enforcing fair lending laws and regulations, implementing the Community Re investment Act of 1977, and satisfying the public disclosure purposes of the Home Mort gage Disclosure Act of 1975. Such report shall evaluate the status and effectiveness of data collection and analysis systems of such agencies involving fair lending and commu nity reinvestment, and shall outline possible specific timetables for implementing such a unified system.

[12 USC 3305 note ]

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Board of Governors of the Federal Reserve System Regulation BB Community Reinvestment 12 CFR 228; as amended effective July 1, 1995

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Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank of the Federal Reserve District in which the inquiry arises.

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Contents Page Section 228.3—Delineation of community.................................................. Section 228.4—Community Reinvestment Act statement....................... Section 228.5—Files of public comments and recent CRA statements.................................................... Section 228.6—Public notice ........................ 2 Section 228.7—Assessing the record of performance ................................................ 3 Subpart A—General Section 228.11—Authority, purposes, and scope.................................................... 4 (a) Authority................................................ 4 (b) Purposes................................................ 4 (c) Scope.................................................... 4 Section 228.12—Definitions......................... 5 Subpart B—Standards for Assessing Performance Section 228.21—Performance tests, standards, and ratings, in general............. (a) Performance tests and standards . . . . (b) Performance context............................ (c) Assigned ratings................................... (d) Safe and sound operations................. Section 228.22—Lending te s t....................... (a) Scope of test........................................ (b) Performance criteria............................ (c) Affiliate lending................................... (d) Lending by a consortium or a third party............................................. (e) Lending-performance rating............... Section 228.23—Investment te s t .................. (a) Scope of te st........................................ (b) Exclusion ............................................. (c) Affiliate investment.............................. (d) Disposition of branch premises.......... (e) Performance criteria............................ (f) Investment-performance ratin g .......... Section 228.24— Service test......................... (a) Scope of te st........................................ (b) Area(s) benefited................................. (c) Affiliate service................................... Page (d) Performance criteria—retail banking services................................ (e) Performance criteria—community development services......................... (f) Service-performance rating............... Section 228.25—Community development test for wholesale or limited-purpose bank .............................. (a) Scope of test...................................... (b) Designation as a wholesale or limited-purpose bank......................... (c) Performance criteria......................... (d) Indirect activities.............................. (e) Benefit to assessment area(s).......... (f) Community development performance rating........................... Section 228.26—Small-bank performance standards.............................. (a) Performance criteria......................... (b) Small-bank performance rating . . . . Section 228.27—Strategic p la n .................. (a) Alternative election............................ (b) Data reporting................................... (c) Plans in general................................. (d) Public participation in plan development........................................ (e) Submission of plan............................ (f) Plan content........................................ (g) Plan approval...................................... (h) Plan amendment................................. (i) Plan assessment................................. Section 228.28—Assigned ratings............. (a) Ratings in general ............................ (b) Lending, investment, and service te sts..................................................... (c) Effect of evidence of discriminatory or other illegal credit practices................................... Section 228.29—Effect of CRA performance on applications .................. (a) CRA performance............................... (b) Interested parties ............................... (c) Denial or conditional approval of application........................................... (d) Definitions............................................

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Contents Page Subpart C—Records, Reporting, and Disclosure Requirements Section 228.41—Assessment-area delineation.................................................. (a) In general.......................................... (b) Geographic area(s) for wholesale or limited-purpose banks................. (c) Geographic area(s) for other banks.................................................. (d) Adjustments to geographic area(s) . (e) Limitations on the delineation of an assessment area........................... (f) Banks serving military personnel .

(g) Use of assessment area(s)............... Section 228.42—Data collection, reporting, and disclosure......................... (a) Loan information required to be collected and maintained.................. (b) Loan information required to be reported............................................... (c) Optional data collection and maintenance........................................ (d) Data on affiliate lending................. (e) Data on lending by a consortium or a third p arty ................................. (f) Small banks electing evaluation under the lending, investment, and service tests................................. (g) Assessment-area data......................... (h) CRA disclosure statement............... Page (i) Aggregate disclosure statements . . . (j) Central data depositories............... Section 228.43—Content and availability of public file......................... (a) Information available to the public................................................ (b) Additional information available to the public................................... (c) Location of public information . . . . (d) Copies ............................................. (e) Updating........................................... Section 228.44—Public notice by banks . Section 228.45—Publication of planned examination schedule.............................. Subpart D—Transition Rules Section 228.51—Transition rules............... (a) Effective date..................................... (b) Data collection and reporting; strategic plan; performance tests and standards................................... (c) Schedule........................................... Appendix A—R atings................................. Appendix B—CRA notice......................... COMMUNITY REINVESTMENT A C T ........................................................... 27

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Regulation BB Community Reinvestment 12 CFR 228;* as amended effective July 1, 1995t SECTION 228.3— Delineation of Community (a) Each state member bank shall prepare, and at least annually review, a delineation of the local community or communities that .comprise its entire community, without ex cluding low- and moderate-income neighbor hoods. Maps shall be used to portray commu nity delineations. The reasonableness of the delineations will be reviewed by Federal Re serve System examiners.

(b) Except as provided in paragraph (c) of this section, a local community consists of the contiguous areas surrounding each office or group of offices, including any low- and moderate-income neighborhoods in those areas. More than one office of a state member bank may be included in the same local commu nity. Unless the Board determines otherwise, a community delineation need not take account of an off-premises electronic facility that re ceives deposits for more than one depository institution. In preparing its delineation, a bank may use any one of the three bases set forth below.

(1) Existing boundaries such as those of standard metropolitan statistical areas (SMSAs) or counties in which the bank’s office or offices are located may be used to delineate a local community. Where appro priate, portions of adjacent areas should be included. The bank may make adjustments in the case of areas divided by state borders or significant geographic barriers, or areas that are extremely large or of unusual con figuration. In addition, a small bank may delineate those portions of SMSAs or coun ties it reasonably may be expected to serve. (2) A bank may use its effective lending territory, which is defined as that local area or areas around each office or group of of fices where it makes a substantial portion of * The words “this part,” as used herein, mean Regula tion BB (Code of Federal Regulations, title 12, chapter II, part 228).

t See section 228.51(c) for the effective dates of each section.

its loans and all other areas equidistant from its offices as those areas. Adjustments such as those indicated in paragraph (b)(1) of this section may be made. (3) A bank may use any other reasonably delineated local area that meets the pur poses of the Community Reinvestment Act (CRA) and does not exclude low- and mod erate-income neighborhoods. (c) A state member bank whose business predominantly consists of serving persons who are active duty or retired military personnel or their dependents and who are located outside of its local community or communities, may delineate a “military community” for those customers, in addition to its local community or communities. Provisions of this part con cerning local communities shall also apply to military communities, except that military communities shall be delineated by a written description rather than a map. SECTION 228.4— Community Reinvestment Act Statement (a) Within 90 days after the effective date of this part, the board of directors of each state member bank shall adopt a Community Rein vestment Act (CRA) statement for each delin eated local community.

(b) Each CRA statement shall include at least the following:

(1) The delineation of the local community; (2) A list of specific types of credit within certain categories, such as residential loans for one- to four-dwelling units, residential loans for five-dwelling units and over, housing rehabilitation loans, home improve ment loans, small business loans, farm loans, community development loans, com mercial loans, and consumer loans, that the bank is prepared to extend within the local community; and (3) A copy of the Community Reinvest ment Act notice provided for in section 228.6.

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§ 228.4 Regulation BB (c) Each state member bank is encouraged to include the following in each CRA statement: (1) A description of how its current efforts, including special credit-related programs, help to meet community credit needs; (2) A periodic report regarding its record of helping to meet community credit needs; and (3) A description of its efforts to ascertain the credit needs of its community, including efforts to communicate with members of its community regarding credit services. (d) Each state member bank’s board of direc tors shall review each CRA statement at least annually and shall act upon any material change made in the interim at its first regular meeting after the change. Such actions shall be noted in its minutes.

(e) Each current CRA statement shall be read ily available for public inspection: (1) At the head office of the bank; and (2) At each office of the bank in the local community delineated in the statement, except off-premises electronic deposit facilities.

(f) Copies of each current CRA statement shall be provided to the public upon request. A state member bank may charge a reason able fee not to exceed the cost of reproduction and mailing (if applicable). SECTION 228.5—Files of Public Comments and Recent CRA Statements (a) Each state member bank shall maintain files that are readily available for public in spection consisting of:

(1) Any signed, written comments received from the public within the past two years that specifically relate to any CRA state ment or to the bank’s performance in help ing to meet the credit needs of its commu nity or communities;

(2) A copy of the public section of the most recent CRA Performance Evaluation prepared by the appropriate Federal Reserve Bank on behalf of the Board of Governors of the Federal Reserve System (the format and content of the bank’s CRA performance evaluation, as prepared and transmitted to the state member bank by the appropriate Federal Reserve Bank, may not be altered or abridged in any manner). The state mem ber bank must place this copy in the public file within 30 business days after its receipt from the appropriate Federal Reserve Bank. (3) Any response to the comments under paragraph (a)(1) of this section that the bank wishes to make; and (4) Any CRA statements in effect during the past two years.

(b) These files shall not contain any com ments or responses that reflect adversely upon the good name or reputation of any person other than the bank, or publication of which would violate specific provisions of law. (c) These files shall be maintained by each state member bank as follows: (1) All materials at the head office; (2) Materials relating to each local commu nity, at a designated office in that commu nity; and (3) The most recent CRA performance evaluation shall, at a minimum, be available at the head office and at an office in each local community so designated under para graph (c)(2) of this section. The bank may respond to the CRA performance evaluation and may make the response available in the same manner as the CRA performance evaluation.

(d) State member banks shall provide copies of the public section of their most recent CRA performance evaluation to the public upon re quest. A state member bank may charge a rea sonable fee not to exceed the cost of repro duction and mailing (if applicable). SECTION 228.6— Public Notice (a) Each state member bank shall provide, in the public lobby of its offices other than offpremises electronic deposit facilities, the pub lic notice set forth below. Bracketed material shall be used only by banks having more than one local community. The last item shall be included only if the state member bank is a subsidiary of a holding company that is not prevented by statute from acquiring additional banks.

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Regulation BB § 228.7 COMMUNITY REINVESTMENT ACT NOTICE The Federal Community Reinvestment Act (CRA) requires the Federal Reserve Board to evaluate our performance in helping to meet the credit needs of this community, and to take this evaluation into ac count when the Board decides on certain applica tions submitted by us. Your involvement is encouraged.

You should know that:

• You may obtain our current CRA statement for this community in this office. [Current CRA statements for other communities served by us are available at our head office, located at (ad dress).] • You may send signed, written comments about our CRA statements] or our performance in helping to meet community credit needs to (title and address of state member bank official) and to Community Reinvestment Officer, Federal Re serve Bank o f _________ (address). Your letter, together with any response by us, may be made public.

• You may look at a file of all signed, written comments received by us within the past two years, any responses we have made to the com ments, and all CRA statements in effect during the past two years at our office located at (ad dress). [You also may look at the file about this community at (name and address of designated office).] • You may ask to look at any comments received by the Federal Reserve Bank o f __________ • You also may request from the Federal Reserve Bank o f -------------- an announcement of applica tions covered by the CRA filed with the Federal Reserve System.

• We are a subsidiary of (name of holding compa ny), a bank holding company. Applications filed by bank holding companies that are covered by the CRA are included in the Federal Reserve an nouncement of applications referred to in the previous paragraph.

(b) Within 30 business days of receipt of its first publicly available, written CRA perform ance evaluation, each state member bank shall add language to the public CRA notice as follows:

• You may obtain the public section of our most recent CRA performance evaluation, which was prepared by the Federal Reserve Bank of -------------- at (address of head office) [if the state member bank has more than one local community, each office (other than off-premises electronic deposit facilities) in that community shall include the address of the designated office for that community].

SECTION 228.7—Assessing the Record of Performance In connection with its examination of a state member bank, the Board shall assess the re cord of performance of the bank in helping to meet the credit needs of its entire community, including low- and moderate-income neigh borhoods, consistent with safe and sound op eration of the bank. The Board will review the bank’s CRA statement(s) and any signed, written comments retained by the state mem ber bank or the Federal Reserve Bank. In ad dition, the Board will consider the following factors in assessing a bank’s record of performance:

(a) Activities conducted by the state member bank to ascertain the credit needs of its com munity, including the extent of the bank’s ef forts to communicate with members of its community regarding the credit services being provided by the bank;

(b) The extent of the state member bank’s marketing and special credit-related programs to make members of the community aware of the credit services offered by the bank; (c) The extent of participation by the state member bank’s board of directors in formulat ing the bank’s policies and reviewing its per formance with respect to the purposes of the Community Reinvestment Act;

(d) Any practices intended to discourage ap plications for types of credit set forth in the state member bank’s CRA statement(s); (e) The geographic distribution of the state member bank’s credit extensions, credit appli cations, and credit denials; (f) Evidence of prohibited discriminatory or other illegal credit practices; (g) The state member bank’s record of open ing and closing offices and providing services at offices;

(h) The state member bank’s participation, in cluding investments, in local community de velopment and redevelopment projects or programs;

(i) The state member bank’s origination of residential mortgage loans, housing rehabilita-

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§ 228.7 Regulation BB tion loans, home improvement loans, and small business or small farm loans within its community, or the purchase of such loans originated in its community; (j) The state member bank’s participation in govemmentally insured, guaranteed, or subsi dized loan programs for housing, small busi nesses, or small farms;

(k) The state member bank’s ability to meet various community credit needs based on its financial condition and size, and legal impedi ments, local economic conditions, and other factors; and (/) Other factors that, in the Board’s judg ment, reasonably bear upon the extent to which a state member bank is helping to meet the credit needs of its entire community. SUBPART A— GENERAL SECTION 228.11— Authority, Purposes, and Scope (a) Authority. The Board of Governors of the Federal Reserve System (the Board) issues this part to implement the Community Rein vestment Act (12 USC 2901 et seq.) (CRA). The regulations comprising this part are issued under the authority of the CRA and under the provisions of the United States Code authoriz ing the Board— ( 1 ) to conduct examinations of statechartered banks that are members of the Federal Reserve System (12 USC 325); (2) to conduct examinations of bank hold ing companies and their subsidiaries (12 USC 1844); and (3) to consider applications for— (i) domestic branches by state member banks (12 USC 321);

(ii) mergers in which the resulting bank would be a state member bank (12 USC 1828(c));

(iii) formations of, acquisitions of banks by, and mergers of, bank holding compa nies (12 USC 1842); and (iv) the acquisition of savings associa tions by bank holding companies (1 2 USC 1843).

(b) Purposes. In enacting the CRA, the Con gress required each appropriate federal finan cial supervisory agency to assess an institu tion’s record of helping to meet the credit needs of the local communities in which the institution is chartered, consistent with the safe and sound operation of the institution, and to take this record into account in the agency’s evaluation of an application for a de posit facility by the institution. This part is intended to carry out the purposes of the CRA by— (1) establishing the framework and criteria by which the Board assesses a bank’s re cord of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the bank; and (2) providing that the Board takes that re cord into account in considering certain ap plications.

(1) General. This part applies to all banks except as provided in paragraph (c)(3) of this section.

(2) Foreign bank acquisitions. This part also applies to an uninsured state branch (other than a limited branch) of a foreign bank that results from an acquisition de scribed in section 5(a)(8) of the Interna tional Banking Act of 1978 (12 USC 3103(a)(8)). The terms “state branch” and “foreign bank” have the same meanings as in section 1(b) of the International Banking Act of 1978 (12 USC 3101 et seq.); the term “uninsured state branch” means a state branch the deposits of which are not insured by the Federal Deposit Insurance Corporation; the term “limited branch” means a state branch that accepts only de posits that are permissible for a corporation organized under section 25A of the Federal Reserve Act (12 USC 611 et seq.). (3) Certain special-purpose banks. This part does not apply to special-purpose banks that do not perform commercial or retail banking services by granting credit to the public in the ordinary course of busi ness, other than as incident to their special ized operations. These banks include

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Regulation BB § 228.12 banker’s banks, as defined in 12 USC 24 (Seventh), and banks that engage only in one or more of the following activities: pro viding cash-management controlleddisbursement services or serving as corre spondent banks, trust companies, or clearing agents.

SECTION 228.12— Definitions For purposes of this part, the following defini tions apply:

(a) Affiliate means any company that controls, is controlled by, or is under common control with another company. The term “control” has the meaning given to that term in 12 USC 1841(a)(2), and a company is under common control with another company if both compa nies are directly or indirectly controlled by the same company.

(b) Area median income means— (1) the median family income for the MSA, if a person or geography is located in an MSA; or (2) the statewide nonmetropolitan median family income, if a person or geography is located outside an MSA.

(c) Assessment area means a geographic area delineated in accordance with section 228.41. (d) Automated teller machine (ATM) means an automated, unstaffed banking facility owned or operated by, or operated exclusively for, the bank at which deposits are received, cash dispersed, or money lent. (e) Bank means a state member bank as that term is defined in section 3(d)(2) of the Fed eral Deposit Insurance Act (12 USC 1813(d)(2)), except as provided in section 228.11(c)(3), and includes an uninsured state branch (other than a limited branch) of a for eign bank described in section 228.11(c)(2). (f) Branch means a staffed banking facility approved as a branch, whether shared or un shared, including, for example, a minibranch in a grocery store or a branch operated in conjunction with any other local business or nonprofit organization.

(g) CMSA means a consolidated metropolitan statistical area as defined by the director of the Office of Management and Budget. (h) Community development means— (1 ) affordable housing (including multifam ily rental housing) for low- or moderateincome individuals;

(2 ) community services targeted to low- or moderate-income individuals; (3) activities that promote economic devel opment by financing businesses or farms that meet the size eligibility standards of 13 CFR 121.802(a)(2) or have gross annual revenues of $ 1 million or less; or (4) activities that revitalize or stabilize lowor moderate-income geographies. (i) Community development loan means a loan that— (1 ) has as its primary purpose community development; and (2 ) except in the case of a wholesale or limited-purpose bank— (i) has not been reported or collected by the bank or an affiliate for consideration in the bank’s assessment as a home mort gage, small business, small farm, or con sumer loan, unless it is a multifamily dwelling loan (as described in appendix A to part 203 of this chapter); and (ii) benefits the bank’s assessment area(s) or a broader statewide or regional area that includes the bank’s assessment area(s).

(j) Community development service means a service that— (1) has as its primary purpose community development;

(2) is related to the provision of financial services; and (3) has not been considered in the evalua tion of the bank’s retail banking services under section 228.24(d).

(k) Consumer loan means a loan to one or more individuals for household, family, or other personal expenditures. A consumer loan does not include a home mortgage, small bus iness, or small farm loan. Consumer loans in clude the following categories of loans: (1) Motor vehicle loan, which is a con sumer loan extended for the purchase of and secured by a motor vehicle;

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§ 228.12 Regulation BB (2) Credit card loan, which is a line of credit for household, family, or other per sonal expenditures that is accessed by a borrower’s use of a “credit card,” as this term is defined in section 226.2 of this chapter;

(3) Home-equity loan, which is a consumer loan secured by a residence of the bor rower;

(4) Other secured consumer loan, which is a secured consumer loan that is not in cluded in one of the other categories of consumer loans; and (5) Other unsecured consumer loan, which is an unsecured consumer loan that is not included in one of the other categories of consumer loans.

(/) Geography means a census tract or a block numbering area delineated by the United States Bureau of the Census in the most re cent decennial census.

(m) Home mortgage loan means a “homeimprovement loan” or a “home-purchase loan” as defined in section 203.2 of this chapter.

(n) Income level includes:

(1) Low-income, which means an individual income that is less than 50 percent of the area median income, or a median family in come that is less than 50 percent, in the case of a geography.

(2) Moderate-income, which means an indi vidual income that is at least 50 percent and less than 80 percent of the area median income, or a median family income that is at least 50 and less than 80 percent, in the case of a geography.

(3) Middle-income, which means an indi vidual income that is at least 80 percent and less than 120 percent of the area me dian income, or a median family income that is at least 80 and less than 120 percent, in the case of a geography. (4) Upper-income, which means an individ ual income that is 120 percent or more of the area median income, or a median family income that is 120 percent or more, in the case of a geography.

(o) Limited-purpose bank means a bank that offers only a narrow product line (such as credit card or motor vehicle loans) to a re gional or broader market and for which a des ignation as a limited-purpose bank is in effect, in accordance with section 228.25(b). (p) Loan location. A loan is located as follows:

( 1) a consumer loan is located in the geog raphy where the borrower resides; (2 ) a home mortgage loan is located in the geography where the property to which the loan relates is located; and (3) a small-business or small-farm loan is located in the geography where the main business facility or farm is located or where the loan proceeds otherwise will be applied, as indicated by the borrower. (q) Loan production office means a staffed fa cility, other than a branch, that is open to the public and that provides lending-related ser vices, such as loan information and applications.

(r) MSA means a metropolitan statistical area or a primary metropolitan statistical area as defined by the director of the Office of Man agement and Budget.

(s) Qualified investment means a lawful in vestment, deposit, membership share, or grant that has as its primary purpose community development.

(t) Small bank means a bank that, as of De cember 31 of either of the prior two calendar years, had total assets of less than $250 mil lion and was independent or an affiliate of a holding company that, as of December 31 of either of the prior two calendar years, had to tal banking and thrift assets of less than $ 1 billion.

(u) Small-business loan means a loan in cluded in “loans to small businesses” as de fined in the instructions for preparation of the Consolidated Report of Condition and Income. (v) Small-farm loan means a loan included in “loans to small farms” as defined in the in structions for preparation of the Consolidated Report of Condition and Income. (w) Wholesale bank means a bank that is not in the business of extending home mortgage, small-business, small-farm, or consumer loans

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Regulation BB § 228.21 to retail customers, and for which a designa tion as a wholesale bank is in effect, in accor dance with section 228.25(b). SUBPART B— STANDARDS FOR ASSESSING PERFORMANCE SECTION 228.21—Performance Tests, Standards, and Ratings, in General (a) Performance tests and standards. The Board assesses the CRA performance of a bank in an examination as follows: (1) Lending, investment, and service tests. The Board applies the lending, investment, and service tests, as provided in sections 228.22 through 228.24, in evaluating the performance of a bank, except as provided in paragraphs (a)(2), (a)(3), and (a)(4) of this section.

(2) Community development test for whole sale or limited-purpose banks. The Board applies the community development test for a wholesale or limited-purpose bank, as provided in section 228.25, except as pro vided in paragraph (a)(4) of this section. (3) Small-bank performance standards. The Board applies the small-bank performance standards as provided in section 228.26 in evaluating the performance of a small bank or a bank that was a small bank during the prior calendar year, unless the bank elects to be assessed as provided in paragraphs (a)(1), (a)(2), or (a)(4) of this section. The bank may elect to be assessed as provided in paragraph (a)(1 ) of this section only if it collects and reports the data required for other banks under section 228.42. (4) Strategic plan. The Board evaluates the performance of a bank under a strategic plan if the bank submits, and the Board ap proves, a strategic plan as provided in sec tion 228.27.

(b) Performance context. The Board applies the tests and standards in paragraph (a) of this section and also considers whether to approve a proposed strategic plan in the context of— (1) demographic data on median income levels, distribution of household income, nature of housing stock, housing costs, and other relevant data pertaining to a bank’s assessment area(s);

(2 ) any information about lending, invest ment, and service opportunities in the bank’s assessment area(s) maintained by the bank or obtained from community organiza tions, state, local, and tribal governments, economic-development agencies, or other sources;

(3) the bank’s product offerings and busi ness strategy as determined from data pro vided by the bank;

(4) institutional capacity and constraints, in cluding the size and financial condition of the bank, the economic climate (national, regional, and local), safety-and-soundness limitations, and any other factors that sig nificantly affect the bank’s ability to pro vide lending, investments, or services in its assessment area(s);

(5) the bank’s past performance and the performance of similarly situated lenders; (6) the bank’s public file, as described in section 228.43, and any written comments about the bank’s CRA performance submit ted to the bank or the Board; and (7) any other information deemed relevent by the Board.

(c) Assigned ratings. The Board assigns to a bank one of the following four ratings pursu ant to section 228.28 and appendix A of this part: “outstanding” ; “satisfactory” ; “needs to improve” ; or “substantial noncompliance” as provided in 12 USC 2906(b)(2). The rating assigned by the Board reflects the bank’s re cord of helping to meet the credit needs of its entire community, including low- and moder ate-income neighborhoods, consistent with the safe and sound operation of the bank. (d) Safe and sound operations. This part and the CRA do not require a bank to make loans or investments or to provide services that are inconsistent with safe and sound operations. To the contrary, the Board anticipates banks can meet the standards of this part with safe and sound loans, investments, and services on which the banks expect to make a profit. Banks are permitted and encouraged to de velop and apply flexible underwriting stan dards for loans that benefit low- or moderate-

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§ 228.21 Regulation BB income geographies or individuals, only if consistent with safe and sound operations. SECTION 228.22—Lending Test (a) Scope o f test.

(1) The lending test evaluates a bank’s re cord of helping to meet the credit needs of its assessment area(s) through its lending activities by considering a bank’s home mortgage, small-business, small-farm, and community-development lending. If con sumer lending constitutes a substantial ma jority of a bank’s business, the Board will evaluate the bank’s consumer lending in one or more of the following categories: motor vehicle, credit card, home-equity, other secured, and other unsecured loans. In addition, at a bank’s option, the Board will evaluate one or more categories of con sumer lending, if the bank has collected and maintained, as required in section 228.42(c)(1), the data for each category that the bank elects to have the Board evaluate. (2) The Board considers originations and purchases of loans. The Board will also consider any other loan data the bank may choose to provide, including data on loans outstanding, commitments, and letters of credit.

(3) A bank may ask the Board to consider loans originated or purchased by consortia in which the bank participates or by third parties in which the bank has invested only if the loans meet the definition of commu nity development loans and only in accor dance with paragraph (d) of this section. The Board will not consider these loans under any criterion of the lending test ex cept the community development lending criterion.

(b) Performance criteria. The Board evaluates a bank’s lending performance pursuant to the following criteria:

(1) Lending activity. The number and amount of the bank’s home mortgage, small-business, small-farm, and consumer loans, if applicable, in the bank’s assess ment area(s);

(2) Geographic distribution. The geo graphic distribution of the bank’s home mortgage, small-business, small-farm, and consumer loans, if applicable, based on the loan location, including— (i) the proportion of the bank’s lending in the bank’s assessment area(s); (ii) the dispersion of lending in the bank’s assessment area(s); and (iii) the number and amount of loans in low-, moderate-, middle-, and upperincome geographies in the bank’s assess ment area(s);

(3) Borrower characteristics. The distribu tion, particularly in the bank’s assessment area(s), of the bank’s home mortgage, small-business, small-farm, and consumer loans, if applicable, based on borrower characteristics, including the number and amount of— (i) home mortgage loans to low-, moder ate-, middle-, and upper-income individuals;

(ii) small-business and small-farm loans to businesses and farms with gross an nual revenues of $ 1 million or less; (iii) small-business and small-farm loans by loan amount at origination; and (iv) consumer loans, if applicable, to low-, moderate-, middle-, and upperincome individuals;

(4) Community development lending. The bank’s community development lending, in cluding the number and amount of commu nity development loans, and their complex ity and innovativeness; and (5) Innovative or flexible lending practices. The bank’s use of innovative or flexible lending practices in a safe and sound manner to address the credit needs of lowor moderate-income individuals or geographies.

(1) At a bank’s option, the Board will con sider loans by an affiliate of the bank, if the bank provides data on the affiliate’s loans pursuant to section 228.42. (2) The Board considers affiliate lending subject to the following constraints: (i) no affiliate may claim a loan origina tion or loan purchase if another institu tion claims the same loan origination or purchase; and

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Regulation BB § 228.24 (ii) if a bank elects to have the Board consider loans within a particular lending category made by one or more of the bank’s affiliates in a particular assess ment area, the bank shall elect to have the Board consider, in accordance with paragraph (c)(1 ) of this section, all the loans within that lending category in that particular assessment area made by all of the bank’s affiliates.

(3) The Board does not consider affiliate lending in assessing a bank’s performance under paragraph (b)(2)(i) of this section. (d) Lending by a consortium or a third party. Community development loans originated or purchased by a consortium in which the bank participates or by a third party in which the bank has invested— ( 1) will be considered, at the bank’s option, if the bank reports the data pertaining to these loans under section 228.42(b)(2); and (2 ) may be allocated among participants or investors, as they choose, for purposes of the lending test, except that no participant or investor— (i) may claim a loan origination or loan purchase if another participant or investor claims the same loan origination or purchase; or (ii) may claim loans accounting for more than its percentage share (based on the level of its participation or investment) of the total loans originated by the consor tium or third party.

(e) Lending-performance rating. The Board rates a bank’s lending performance as pro vided in appendix A of this part. SECTION 228.23—Investment Test (a) Scope o f test. The investment test evalu ates a bank’s record of helping to meet the credit needs of its assessment area(s) through qualified investments that benefit its assess ment area(s) or a broader statewide or re gional area that includes the bank’s assess ment area(s).

(b) Exclusion. Activities considered under the lending or service tests may not be considered under the investment test.

(c) Affiliate investment. At a bank’s option, the Board will consider, in its assessment of a bank’s investment performance, a qualified in vestment made by an affiliate of the bank, if the qualified investment is not claimed by any other institution.

(d) Disposition o f branch premises. Donating, selling on favorable terms, or making avail able on a rent-free basis a branch of the bank that is located in a predominantly minority neighborhood to a minority depository institu tion or women’s depository institution (as these terms are defined in 12 USC 2907(b)) will be considered as a qualified investment. (e) Performance criteria. The Board evaluates the investment performance of a bank pursu ant to the following criteria: ( 1 ) the dollar amount of qualified investments;

(2 ) the innovativeness or complexity of qualified investments;

(3) the responsiveness of qualified invest ments to credit and community develop ment needs; and (4) the degree to which the qualified invest ments are not routinely provided by private investors.

(f) Investment-performance rating. The Board rates a bank’s investment performance as pro vided in appendix A of this part. SECTION 228.24— Service Test (a) Scope of test. The service test evaluates a bank’s record of helping to meet the credit needs of its assessment area(s) by analyzing both the availability and effectiveness of a bank’s systems for delivering retail banking services and the extent and innovativeness of its community development services. (b) Area(s) benefitted. Community develop ment services must benefit a bank’s assess ment area(s) or a broader statewide or re gional area that includes the bank’s assessment area(s).

(c) Affiliate service. At a bank’s option, the Board will consider, in its assessment of a bank’s service performance, a community de velopment service provided by an affiliate of

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§ 228.24 Regulation BB the bank, if the community development ser vice is not claimed by any other institution. (d) Performance criteria—retail banking ser vices. The Board evaluates the availability and effectiveness of a bank’s systems for deliver ing retail banking services, pursuant to the following criteria:

(1 ) the current distribution of the bank’s branches among low-, moderate-, middle-, and upper-income geographies; (2) in the context of its current distribution of the bank’s branches, the bank’s record of opening and closing branches, particularly branches located in low- or moderateincome geographies or primarily serving low- or moderate-income individuals; (3) the availability and effectiveness of al ternate systems for delivering retail banking services (e.g., ATMs, ATMs not owned or operated by or exclusively for the bank, banking by telephone or computer, loan production offices, and bank-at-work or bank-by-mail programs) in low- and moder ate-income geographies and to low- and moderate-income individuals; and (4) the range of services provided in low-, moderate-, middle-, and upper-income ge ographies and the degree to which the ser vices are tailored to meet the needs of those geographies.

(e) Performance criteria—community develop ment services. The Board evaluates commu nity development services pursuant to the fol lowing criteria:

(1) the extent to which the bank provides community development services; and (2 ) the innovativeness and responsiveness of community development services. (f) Service-performance rating. The Board rates a bank’s service performance as pro vided in appendix A of this part. SECTION 228.25—Community Development Test for Wholesale or Limited-Purpose Bank (a) Scope o f test. The Board assesses a wholesale or limited-purpose bank’s record of helping to meet the credit needs of its assess ment area(s) under the community development test through its community development lending, qualified investments, or community development services.

(b) Designation as a wholesale or limitedpurpose bank. In order to receive a designa tion as a wholesale or limited-purpose bank, a bank shall file a request, in writing, with the Board, at least three months prior to the pro posed effective date of the designation. If the Board approves the designation, it remains in effect until the bank requests revocation of the designation or until one year after the Board notifies the bank that the Board has revoked the designation on its own initiative. (c) Performance criteria. The Board evaluates the community development performance of a wholesale or limited-purpose bank pursuant to the following criteria:

(1 ) the number and amount of community development loans (including originations and purchases of loans and other commu nity development loan data provided by the bank, such as data on loans outstanding, commitments, and letters of credit), quali fied investments, or community develop ment services;

(2 ) the use of innovative or complex quali fied investments, community development loans, or community development services and the extent to which the investments are not routinely provided by private investors; and (3) the bank’s responsiveness to credit and community development needs. (d) Indirect activities. At a bank’s option, the Board will consider in its community develop ment performance assessment: ( 1 ) qualified investments or community de velopment services provided by an affiliate of the bank, if the investments or services are not claimed by any other institution; and (2 ) community development lending by af filiates, consortia and third parties, subject to the requirements and limitations in sec tion 228.22(c) and (d).

(e) Benefit to assessment area(s). (1) Benefit inside assessment area(s). The Board considers all qualified investments, community development loans, and commu

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Regulation BB § 228.27 nity development services that benefit areas within the bank’s assessment area(s) or a broader statewide or regional area that in cludes the bank’s assessment area(s). (2) Benefit outside assessment area(s). The Board considers the qualified investments, community development loans, and commu nity development services that benefit areas outside the bank’s assessment area(s), if the bank has adequately addressed the needs of its assessment area(s).

(f) Community development performance rat ing. The Board rates a bank’s community de velopment performance as provided in appen dix A of this part.

SECTION 228.26— Small-Bank Performance Standards (a) Performance criteria. The Board evaluates the record of a small bank, or a bank that was a small bank during the prior calendar year, of helping to meet the credit needs of its assess ment area(s) pursuant to the following criteria: ( 1 ) the bank’s loan-to-deposit ratio, ad justed for seasonal variation and, as appro priate, other lending-related activities, such as loan originations for sale to the secon dary markets, community development loans, or qualified investments; (2 ) the percentage of loans and, as appro priate, other lending-related activities lo cated in the bank’s assessment area(s); (3) the bank’s record of lending to and, as appropriate, engaging in other lendingrelated activities for borrowers of different income levels and businesses and farms of different sizes;

(4) the geographic distribution of the bank’s loans; and (5) the bank’s record of taking action, if warranted, in response to written complaints about its performance in helping to meet credit needs in its assessment area(s). (b) Small-bank performance rating. The Board rates the performance of a bank evalu ated under this section as provided in appen dix A of this part.

SECTION 228.27— Strategic Plan (a) Alternative election. The Board will assess a bank’s record of helping to meet the credit needs of its assessment area(s) under a strate gic plan if— (1 ) the bank has submitted the plan to the Board as provided for in this section; (2) the Board has approved the plan; (3) the plan is in effect; and (4) the bank has been operating under an approved plan for at least one year. (b) Data reporting. The Board’s approval of a plan does not affect the bank’s obligation, if any, to report data as required by section 228.42.

(1) Term. A plan may have a term of no more than five years, and any multiyear plan must include annual interim measura ble goals under which the Board will evalu ate the bank’s performance. (2) Multiple assessment areas. A bank with more than one assessment area may prepare a single plan for all of its assessment areas or one or more plans for one or more of its assessment areas.

(3) Treatment of affiliates. Affiliated institu tions may prepare a joint plan if the plan provides measurable goals for each institu tion. Activities may be allocated among in stitutions at the institutions’ option, pro vided that the same activities are not considered for more than one institution. (d) Public participation in plan development. Before submitting a plan to the Board for ap proval, a bank shall— (1) informally seek suggestions from mem bers of the public in its assessment area(s) covered by the plan while developing the plan;

(2) once the bank has developed a plan, formally solicit public comment on the plan for at least 30 days by publishing notice in at least one newspaper of general circula tion in each assessment area covered by the plan; and (3) during the period of formal public com ment, make copies of the plan available for review by the public at no cost at all offices of the bank in any assessment area covered

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§ 228.27 Regulation BB by the plan and provide copies of the plan upon request for a reasonable fee to cover copying and mailing, if applicable. (e) Submission of plan. The bank shall submit its plan to the Board at least three months prior to the proposed effective date of the plan. The bank shall also submit with its plan a description of its informal efforts to seek suggestions from members of the public, any written public comment received, and, if the plan was revised in light of the comment re ceived, the initial plan as released for public comment.

(f) Plan content.

(1) Measurable goals.

(i) A bank shall specify in its plan mea surable goals for helping to meet the credit needs of each assessment area cov ered by the plan, particularly the needs of low- and moderate-income geographies and low- and moderate-income individu als, through lending, investment, and ser vices, as appropriate.

(ii) A bank shall address in its plan all three performance categories and, unless the bank has been designated as a whole sale or limited-purpose bank, shall em phasize lending and lending-related activ ities. Nevertheless, a different emphasis, including a focus on one or more per formance categories, may be appropriate if responsive to the characteristics and credit needs of its assessment area(s), considering public comment and the bank’s capacity and constraints, product offerings, and business strategy. (2) Confidential information. A bank may submit additional information to the Board on a confidential basis, but the goals stated in the plan must be sufficiently specific to enable the public and the Board to judge the merits of the plan.

(3) Satisfactory and outstanding goals. A bank shall specify in its plan measurable goals that constitute “satisfactory” perform ance. A plan may specify measurable goals that constitute “outstanding” performance. If a bank submits, and the Board approves, both “satisfactory” and “outstanding” per formance goals, the Board will consider the bank eligible for an “outstanding” perform ance rating.

(4) Election if satisfactory goals not sub stantially met. A bank may elect in its plan that, if the bank fails to meet substantially its plan goals for a satisfactory rating, the Board will evaluate the bank’s performance under the lending, investment, and service tests, the community development test, or the small-bank performance standards, as appropriate.

(g) Plan approval.

(1) Timing. The Board will act upon a plan within 60 calendar days after the Board re ceives the complete plan and other material required under paragraph (d) of this section. If the Board fails to act within this time period, the plan shall be deemed approved unless the Board extends the review period for good cause.

(2) Public participation. In evaluating the plan’s goals, the Board considers the pub lic’s involvement in formulating the plan, written public comment on the plan, and any response by the bank to public com ment on the plan.

(3) Criteria for evaluating plan. The Board evaluates a plan’s measurable goals using the following criteria, as appropriate: (i) the extent and breadth of lending or lending-related activities, including, as appropriate, the distribution of loans among different geographies, businesses and farms of different sizes, and individ uals of different income levels, the extent of community development lending, and the use of innovative or flexible lending practices to address credit needs; (ii) the amount and innovativeness, com plexity, and responsiveness of the bank’s qualified investments; and (iii) the availability and effectiveness of the bank’s systems for delivering retail banking services and the extent and in novativeness of the bank’s community development services.

(h) Plan amendment. During the term of a plan, a bank may request the Board to ap prove an amendment to the plan on grounds that there has been a material change in cir

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Regulation BB § 228.29 cumstances. The bank shall develop an amendment to a previously approved plan in accordance with the public participation re quirements of paragraph (c) of this section. (i) Plan assessment. The Board approves the goals and assesses performance under a plan as provided for in appendix A of this part. SECTION 228.28—Assigned Ratings (a) Ratings in general. Subject to paragraphs (b) and (c) of this section, the Board assigns to a bank a rating of “outstanding,” “satisfac tory,” “needs to improve,” or “substantial noncompliance” based on the bank’s perform ance under the lending, investment, and ser vice tests, the community development test, the small-bank performance standards, or an approved strategic plan, as applicable. (b) Lending, investment, and service tests. The Board assigns a rating for a bank as sessed under the lending, investment, and ser vice tests in accordance with the following principles:

(1) a bank that receives an “outstanding” rating on the lending test receives an as signed rating of at least “satisfactory” ; (2) a bank that receives an “outstanding” rating on both the service test and the in vestment test and a rating of at least “high satisfactory” on the lending test receives an assigned rating of “outstanding” ; and (3) no bank may receive an assigned rating of “ satisfactory” or higher unless it re ceives a rating of at least “low satisfac tory” on the lending test.

(c) Effect o f evidence o f discriminatory or other illegal credit practices. Evidence of dis criminatory or other illegal credit practices ad versely affects the Board’s evaluation of a bank’s performance. In determining the effect on the bank’s assigned rating, the Board con siders the nature and extent of the evidence, the policies and procedures that the bank has in place to prevent discriminatory or other il legal credit practices, any corrective action that the bank has taken or has committed to take, particularly voluntary corrective action resulting from self-assessment, and other rele vant information.

SECTION 228.29—Effect of CRA Performance on Applications (a) CRA performance. Among other factors, the Board takes into account the record of performance under the CRA of— (1 ) each applicant bank for the— (i) establishment of a domestic branch by a state member bank; and (ii) merger, consolidation, acquisition of assets, or assumption of liabilities requir ing approval under the Bank Merger Act (12 USC 1828(c)) if the acquiring, as suming, or resulting bank is to be a state member bank; and (2 ) each insured depository institution (as defined in 12 USC 1813) controlled by an applicant and subsidiary bank or savings as sociation proposed to be controlled by an applicant— (i) to become a bank holding company in a transaction that requires approval under section 3 of the Bank Holding Company Act (12 USC 1842);

(ii) to acquire ownership or control of shares or all or substantially all of the assets of a bank, to cause a bank to be come a subsidiary of a bank holding company, or to merge or consolidate a bank holding company with any other bank holding company in a transaction that requires approval under section 3 of the Bank Holding Company Act (12 USC 1842); and (iii) to own, control, or operate a savings association in a transaction that requires approval under section 4 of the Bank Holding Company Act (12 USC 1843). (b) Interested parties. In considering CRA performance in an application described in paragraph (a) of this section, the Board takes into account any views expressed by inter ested parties that are submitted in accordance with the Board’s Rules of Procedure set forth in part 262 of this chapter. (c) Denial or conditional approval of applica tion. A bank’s record of performance may be the basis for denying or conditioning approval of an application listed in paragraph (a) of this section.

(d) Definitions. For purposes of paragraph

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§ 228.29 Regulation BB (a)(2) of this section, “bank,” “bank holding company,” “subsidiary,” and “savings associ ation” have the meanings given to those terms in section 2 of the Bank Holding Company Act (12 USC 1841).

SUBPART C—RECORDS, REPORTING, AND DISCLOSURE REQUIREMENTS SECTION 228.41— Assessment-Area Delineation (a) In general. A bank shall delineate one or more assessment areas within which the Board evaluates the bank’s record of helping to meet the credit needs of its community. The Board does not evaluate the bank’s delineation of its assessment area(s) as a separate performance criterion, but the Board reviews the delinea tion for compliance with the requirements of this section.

(b) Geographic area(s) for wholesale or limited-purpose banks. The assessment area(s) for a wholesale or limited-purpose bank must consist generally of one or more MSAs (using the MSA boundaries that were in effect as of January 1 of the calendar year in which the delineation is made) or one or more contigu ous political subdivisions, such as counties, cities, or towns, in which the bank has its main office, branches, and deposit-taking ATMs.

(c) Geographic area(s) for other banks. The assessment area(s) for a bank other than a wholesale or limited-purpose bank must— (1) consist generally of one or more MSAs (using the MSA boundaries that were in ef fect as of January 1 of the calendar year in which the delineation is made) or one or more contiguous political subdivisions, such as counties, cities, or towns; and (2 ) include the geographies in which the bank has its main office, its branches, and its deposit-taking ATMs, as well as the sur rounding geographies in which the bank has originated or purchased a substantial portion of its loans (including home mortgage loans, small-business and small-farm loans, and any other loans the bank chooses, such as those consumer loans on which the bank elects to have its performance assessed). (d) Adjustments to geographic area(s). A bank may adjust the boundaries of its assess ment area(s) to include only the portion of a political subdivision that it reasonably can be expected to serve. An adjustment is particu larly appropriate in the case of an assessment area that otherwise would be extremely large, of unusual configuration, or divided by signifi cant geographic barriers.

(e) Limitations on the delineation o f an as sessment area. Each bank’s assessment area(s)— (1) must consist only of whole geographies; (2) may not reflect illegal discrimination; (3) may not arbitrarily exclude low- or moderate-income geographies, taking into account the bank’s size and financial condi tion; and (4) may not extend substantially beyond a CMSA boundary or beyond a state bound ary unless the assessment area is located in a multistate MSA. If a bank serves a geo graphic area that extends substantially be yond a state boundary, the bank shall delin eate separate assessment areas for the areas in each state. If a bank serves a geographic area that extends substantially beyond a CMSA boundary, the bank shall delineate separate assessment areas for the areas in side and outside the CMSA.

(f) Banks serving military personnel. Notwith standing the requirements of this section, a bank whose business predominantly consists of serving the needs of military personnel or their dependents who are not located within a defined geographic area may delineate its en tire deposit-customer base as its assessment area.

(g) Use o f assessment area(s). The Board uses the assessment area(s) delineated by a bank in its evaluation of the bank’s CRA per formance unless the Board determines that the assessment area(s) do not comply with the re quirements of this section.

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Regulation BB § 228.42 SECTION 228.42—Data Collection, Reporting, and Disclosure (a) Loan information required to be collected and maintained. A bank, except a small bank, shall collect, and maintain in machine-reada ble form (as prescribed by the Board) until the completion of its next CRA examination, the following data for each small-business or small-farm loan originated or purchased by the bank:

( 1) a unique number or alphanumeric sym bol that can be used to identify the relevant loan file;

(2) the loan amount at origination; (3) the loan location; and (4) an indicator whether the loan was to a business or farm with gross annual revenues of $ 1 million or less.

(b) Loan information required to be reported. A bank, except a small bank or a bank that was a small bank during the prior calendar year, shall report annually by March 1 to the Board in machine-readable form (as pre scribed by the Board) the following data for the prior calendar year:

(1) Small-business and small-farm loan data. For each geography in which the bank originated or purchased a small-business or small-farm loan, the aggregate number and amount of loans— (i) with an amount at origination of $ 100,000 or less;

(ii) with amount at origination of more than $ 100,000 but less than or equal to $250,000;

(iii) with an amount at origination of more than $250,000; and (iv) to businesses and farms with gross annual revenues of $ 1 million or less (us ing the revenues that the bank considered in making its credit decision); (2) Community development loan data. The aggregate number and aggregate amount of community development loans originated or purchased; and (3) Home mortgage loans. If the bank is subject to reporting under part 203 of this chapter, the location of each home mort gage loan application, origination, or purchase outside the MSAs in which the bank has a home or branch office (or outside any MSA) in accordance with the requirements of part 203 of this chapter. (c) Optional data collection and maintenance. (1) Consumer loans. A bank may collect and maintain in machine-readable form (as prescribed by the Board) data for consumer loans originated or purchased by the bank for consideration under the lending test. A bank may maintain data for one or more of the following categories of consumer loans: motor vehicle, credit card, home-equity, other secured, and other unsecured. If the bank maintains data for loans in a certain category, it shall maintain data for all loans originated or purchased within that cate gory. The bank shall maintain data sepa rately for each category, including for each loan— (i) a unique number or alphanumeric symbol that can be used to identify the relevant loan file;

(ii) the loan amount at origination or purchase;

(iii) the loan location; and (iv) the gross annual income of the bor rower that the bank considered in making its credit decision.

(2) Other loan data. At its option, a bank may provide other information concerning its lending performance, including addi tional loan-distribution data. (d) Data on affiliate lending. A bank that elects to have the Board consider loans by an affiliate, for purposes of the lending or com munity development test or an approved stra tegic plan, shall collect, maintain, and report for those loans the data that the bank would have collected, maintained, and reported pur suant to paragraphs (a), (b), and (c) of this section had the loans been originated or pur chased by the bank. For home mortgage loans, the bank shall also be prepared to identify the home mortgage loans reported under part 203 of this chapter by the affiliate. (e) Data on lending by a consortium or a third party. A bank that elects to have the Board consider community development loans by a consortium or third party, for purposes of the lending or community development tests or an approved strategic plan, shall report for

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§ 228.42 Regulation BB those loans the data that the bank would have reported under paragraph (b)(2 ) of this section had the loans been originated or purchased by the bank.

(f) Small banks electing evaluation under the lending, investment, and service tests. A bank that qualifies for evaluation under the smallbank performance standards but elects evalua tion under the lending, investment, and service tests shall collect, maintain, and report the data required for other banks pursuant to paragraphs (a) and (b) of this section. (g) Assessment-area data. A bank, except a small bank or a bank that was a small bank during the prior calendar year, shall collect and report to the Board by March 1 of each year a list for each assessment area showing the geographies within the area. (h) CRA disclosure statement. The Board prepares annually for each bank that reports data pursuant to this section a CRA disclosure statement that contains, on a state-by-state basis— ( 1) for each county (and for each assess ment area smaller than a county) with a population of 500,000 persons or fewer in which the bank reported a small-business or small-farm loan— (i) the number and amount of small-busi ness and small-farm loans reported as originated or purchased located in low-, moderate-, middle-, and upper-income geographies;

(ii) a list grouping each geography ac cording to whether the geography is low-, moderate-, middle-, or upper-income; (iii) a list showing each geography in which the bank reported a small-business or small-farm loan; and (iv) the number and amount of smallbusiness and small-farm loans to busi nesses and farms with gross annual reve nues of $ 1 million or less; (2) for each county (and for each assess ment area smaller than a county) with a population in excess of 500,000 persons in which the bank reported a small-business or small-farm loan— (i) the number and amount of small-business and small-farm loans reported as originated or purchased located in geog raphies with median income relative to the area median income of less than 10 percent, 10 or more but less than 20 per cent, 20 or more but less than 30 percent, 30 or more but less than 40 percent, 40 or more but less than 50 percent, 50 or more but less than 60 percent, 60 or more but less than 70 percent, 70 or more but less than 80 percent, 80 or more but less than 90 percent, 90 or more but less than 100 percent, 100 or more but less than 110 percent, 110 or more but less than 120 percent, and 120 percent or more;

(ii) a list grouping each geography in the county or assessment area according to whether the median income in the geog raphy relative to the area median income is less than 10 percent, 10 or more but less than 20 percent, 20 or more but less than 30 percent, 30 or more but less than 40 percent, 40 or more but less than 50 percent, 50 or more but less than 60 per cent, 60 or more but less than 70 percent, 70 or more but less than 80 percent, 80 or more but less than 90 percent, 90 or more but less than 100 percent, 100 or more but less than 110 percent, 110 or more but less than 120 percent, 120 per cent or more;

(iii) a list showing each geography in which the bank reported a small-business or small-farm loan; and (iv) the number and amount of smallbusiness and small-farm loans to busi nesses and farms with gross annual reve nues of $ 1 million or less; (3) the number and amount of small-business and small-farm loans located inside each assessment area reported by the bank and the number and amount of small-business and small-farm loans located outside the assessment area(s) reported by the bank; and (4) the number and amount of community development loans reported as originated or purchased.

(i) Aggregate disclosure statements. The Board, in conjunction with the Office of the Comptroller of the Currency, the Federal De

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Regulation BB § 228.43 posit Insurance Corporation, and the Office of Thrift Supervision, prepares annually, for each MSA (including an MSA that crosses a state boundary) and the non-MSA portion of each state, an aggregate disclosure statement of small-business and small-farm lending by all institutions subject to reporting under this part or parts 25, 345, or 563e of this title. These disclosure statements indicate, for each geog raphy, the number and amount of all smallbusiness and small-farm loans originated or purchased by reporting institutions, except that the Board may adjust the form of the disclo sure if necessary, because of special circum stances, to protect the privacy of a borrower or the competitive position of an institution. O') Central data depositories. The Board makes the aggregate disclosure statements, de scribed in paragraph (i) of this section, and the individual bank CRA disclosure state ments, described in paragraph (h) of this sec tion, available to the public at central data de positories. The Board publishes a list of the depositories at which the statements are available.

SECTION 228.43— Content and Availability of Public File (a) Information available to the public. A bank shall maintain a public file that includes the following information:

(1) all written comments received from the public for the current year and each of the prior two calendar years that specifically re late to the bank’s performance in helping to meet community credit needs, and any re sponse to the comments by the bank, if neither the comments nor the responses contain statements that reflect adversely on the good name or reputation of any persons other than the bank or publication of which would violate specific provisions of law; (2 ) a copy of the public section of the bank’s most recent CRA performance eval uation prepared by the Board. The bank shall place this copy in the public file within 30 business days after its receipt from the Board;

(3) a list of the bank’s branches, their street addresses, and geographies; (4) a list of branches opened or closed by the bank during the current year and each of the prior two calendar years, their street addresses, and geographies; (5) a list of services (including hours of op eration, available loan and deposit products, and transaction fees) generally offered at the bank’s branches and descriptions of ma terial differences in the availability or cost of services at particular branches, if any. At its option, a bank may include information regarding the availability of alternative sys tems for delivering retail banking services (e.g., ATMs, ATMs not owned or operated by or exclusively for the bank, banking by telephone or computer, loan production of fices, and bank-at-work or bank-by-mail programs);

(6) a map of each assessment area showing the boundaries of the area and identifying the geographies contained within the area, either on the map or in a separate list; and (7) any other information the bank chooses. (b) Additional information available to the public.

(1) Banks other than small banks. A bank, except a small bank or a bank that was a small bank during the prior calendar year, shall include in its public file the following information pertaining to the bank and its affiliates, if applicable, for each of the prior two calendar years:

(i) if the bank has elected to have one or more categories of its consumer loans considered under the lending test, for each of these categories, the number and amount of loans— (A) to low-, moderate-, middle-, and upper-income individuals;

(B) located in low-, moderate-, mid dle-, and upper-income census tracts; and (C) located inside the bank’s assess ment area(s) and outside the bank’s as sessment area(s); and (ii) the bank’s CRA disclosure statement. The bank shall place the statement in the public file within three business days of its receipt from the Board. (2) Banks required to report Home Mort gage Disclosure Act (HMDA) data. A bank

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§ 228.43 Regulation BB required to report home mortgage loan data pursuant to part 203 of this chapter shall include in its public file a copy of the HMDA disclosure statement provided by the Federal Financial Institutions Examina tion Council pertaining to the bank for each of the prior two calendar years. In addition, a bank that elected to have the Board con sider the mortgage lending of an affiliate for any of these years shall include in its public file the affiliate’s HMDA disclosure statement for those years. The bank shall place the statement(s) in the public file within three business days after its receipt. (3) Small banks. A small bank or a bank that was a small bank during the prior cal endar year shall include in its public file— (i) the bank’s loan-to-deposit ratio for each quarter of the prior calendar year and, at its option, additional data on its loan-to-deposit ratio; and (ii) the information required for other banks by paragraph (b)(1) of this section, if the bank has elected to be evaluated under the lending, investment, and ser vice tests.

(4) Banks with strategic plans. A bank that has been approved to be assessed under a strategic plan shall include in its public file a copy of that plan. A bank need not in clude information submitted to the Board on a confidential basis in conjunction with the plan.

(5) Banks with less than satisfactory rat ings. A bank that received a less than satis factory rating during its most recent exami nation shall include in its public file a description of its current efforts to improve its performance in helping to meet the credit needs of its entire community. The bank shall update the description quarterly. (c) Location o f public information. A bank shall make available to the public for inspec tion upon request and at no cost the informa tion required in this section as follows: (1) at the main office and, if an interstate bank, at one branch office in each state, all information in the public file; and (2) at each branch:

(i) a copy of the public section of the bank’s most recent CRA performance evaluation and a list of services provided by the branch; and (ii) within five calendar days of the re quest, all the information in the public file relating to the assessment area in which the branch is located. (d) Copies. Upon request, a bank shall pro vide copies, either on paper or in another form acceptable to the person making the re quest, of the information in its public file. The bank may charge a reasonable fee not to ex ceed the cost of copying and mailing (if appli cable).

(e) Updating. Except as otherwise provided in this section, a bank shall ensure that the infor mation required by this section is current as of April 1 of each year.

SECTION 228.44—Public Notice by Banks A bank shall provide in the public lobby of its main office and each of its branches the ap propriate public notice set forth in appendix B of this part. Only a branch of a bank having more than one assessment area shall include the bracketed material in the notice for branch offices. Only a bank that is an affiliate of a holding company shall include the next-to-thelast sentence of the notices. A bank shall in clude the last sentence of the notices only if it is an affiliate of a holding company that is not prevented by statute from acquiring additional banks.

SECTION 228.45—Publication of Planned Examination Schedule The Board publishes at least 30 days in ad vance of the beginning of each calendar quar ter a list of banks scheduled for CRA exami nations in that quarter.

SUBPART D—TRANSITION RULES SECTION 228.51— Transition Rules (a) Effective date. Sections of this part be

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Regulation BB Appendix A come applicable over a period of time in ac cordance with the schedule set forth in para graph (c) of this section. (b) Data collection and reporting; strategic plan; performance tests and standards. (1) Data collection and reporting. (i) On January 1, 1996, the data-collection requirements set forth in section 228.42 (except section 228.42(b) and (g)) become applicable.

(ii) On January 1, 1997, the data-reporting requirements set forth in section 228.42(b) and (g) become applicable. (2) Small banks. Beginning January 1, 1996, the Board evaluates banks that qual ify for the small-bank performance stan dards described in section 228.26 under that section.

(3) Strategic plan. Beginning January 1, 1996, a bank that elects to be evaluated under an approved strategic plan pursuant to section 228.27 may submit its strategic plan to the Board for approval. (4) Other performance tests. (i) Beginning January 1, 1996, a bank may elect to be evaluated under the perti nent revised performance tests described in sections 228.22, 228.23, 228.24, and 228.25, if the bank provides the neces sary data to permit evaluation. (ii) Beginning July 1, 1997, the Board evaluates all banks under the pertinent re vised performance tests.

(1) On July 1, 1995, sections 228.11, 228.12, 228.29, and 228.51 become applica ble, and sections 228.1, 228.2, 228.8, and 228.100 expire.

(2) On January 1, 1996, section 228.41 and the pertinent provisions of subpart B of this part will apply to banks that elect to be evaluated under sections 228.22 through 228.25, banks that submit for approval stra tegic plans under section 228.27, and banks that qualify for the small-bank performance standards described in section 228.26. (3) On January 1, 1996, sections 228.42 (except section 228.42(b) and (g)) and 228.45 become applicable. (4) On January 1, 1997, sections 228.41 and 228.42(b) and (g) become applicable. (5) On July 1, 1997, sections 228.21 through 228.28, 228.43, and 228.44 become applicable, and sections 228.3 through 228.7 and 228.51 expire.

APPENDIX A— Ratings (a) Ratings in general.

(1) In assigning a rating, the Board evalu ates a bank’s performance under the appli cable performance criteria in this part, in accordance with section 228.21, and section 228.28, which provides for adjustments on the basis of evidence of discriminatory or other illegal credit practices. (2) A bank’s performance need not fit each aspect of a particular rating profile in order to receive that rating, and exceptionally strong performance with respect to some as pects may compensate for weak perform ance in others. The bank’s overall perform ance, however, must be consistent with safe and sound banking practices and generally with the appropriate rating profile as follows.

(b) Banks evaluated under the lending, invest ment, and service tests.

(1) Lending performance rating. The Board assigns each bank’s lending performance one of the five following ratings. (i) Outstanding. The Board rates a bank’s lending performance “outstand ing” if, in general, it demonstrates— (A) excellent responsiveness to credit needs in its assessment area(s), taking into account the number and amount of home mortgage, small-business, smallfarm, and consumer loans, if applica ble, in its assessment area(s); (B) a substantial majority of its loans are made in its assessment area(s); (C) an excellent geographic distribu tion of loans in its assessment area(s); (D) an excellent distribution, particu larly in its assessment area(s), of loans among individuals of different income levels and businesses (including farms) of different sizes, given the product lines offered by the bank; (E) an excellent record of serving the credit needs of highly economically

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Appendix A Regulation BB disadvantaged areas in its assessment area(s), low-income individuals, or businesses (including farms) with gross annual revenues of $ 1 million or less, consistent with safe and sound operations;

(F) extensive use of innovative or flex ible lending practices in a safe and sound manner to address the credit needs of low- or moderate-income in dividuals or geographies; and (G) it is a leader in making commu nity development loans. (ii) High satisfactory. The Board rates a bank’s lending performance “high satis factory” if, in general, it demonstrates— (A) good responsiveness to credit needs in its assessment area(s), taking into account the number and amount of home mortgage, small-business, smallfarm, and consumer loans, if applica ble, in its assessment area(s); (B) a high percentage of its loans are made in its assessment area(s); (C) a good geographic distribution of loans in its assessment area(s); (D) a good distribution, particularly in its assessment area(s), of loans among individuals of different income levels and businesses (including farms) of different sizes, given the product lines offered by the bank;

(E) a good record of serving the credit needs of highly economically disad vantaged areas in its assessment area(s), low-income individuals, or businesses (including farms) with gross annual revenues of $ 1 million or less, consistent with safe and sound operations;

(F) use of innovative or flexible lend ing practices in a safe and sound man ner to address the credit needs of lowor moderate-income individuals or ge ographies; and (G) it has made a relatively high level of community development loans. (iii) Low satisfactory. The Board rates a bank’s lending performance “low satis factory” if, in general, it demonstrates— (A) adequate responsiveness to credit needs in its assessment area(s), taking into account the number and amount of home mortgage, small-business, smallfarm, and consumer loans, if applica ble, in its assessment area(s); (B) an adequate percentage of its loans are made in its assessment area(s); (C) an adequate geographic distribu tion of loans in its assessment area(s); (D) an adequate distribution, particu larly in its assessment area(s), of loans among individuals of different income levels and businesses (including farms) of different sizes, given the product lines offered by the bank; (E) an adequate record of serving the credit needs of highly economically disadvantaged areas in its assessment area(s), low-income individuals, or businesses (including farms) with gross annual revenues of $ 1 million or less, consistent with safe and sound operations;

(F) limited use of innovative or flexi ble lending practices in a safe and sound manner to address the credit needs of low- or moderate-income in dividuals or geographies; and (G) it has made an adequate level of community development loans. (iv) Needs to improve. The Board rates a bank’s lending performance “needs to improve” if, in general, it demonstrates— (A) poor responsiveness to credit needs in its assessment area(s), taking into account the number and amount of home mortgage, small-business, smallfarm, and consumer loans, if applica ble, in its assessment area(s); (B) a small percentage of its loans are made in its assessment area(s); (C) a poor geographic distribution of loans, particularly to low- or moderateincome geographies, in its assessment area(s);

(D) a poor distribution, particularly in its assessment area(s), of loans among individuals of different income levels and businesses (including farms) of different sizes, given the product lines offered by the bank;

(E) a poor record of serving the credit needs of highly economically disad

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Regulation BB Appendix A vantaged areas in its assessment area(s), low-income individuals, or businesses (including farms) with gross annual revenues of $1 million or less, consistent with safe and sound operations;

(F) little use of innovative or flexible lending practices in a safe and sound manner to address the credit needs of low- or moderate-income individuals or geographies; and (G) it has made a low level of com munity development loans. (v) Substantial noncompliance. The Board rates a bank’s lending performance as being in “substantial noncompliance” if, in general, it demonstrates— (A) a very poor responsiveness to credit needs in its assessment area(s), taking into account the number and amount of home mortgage, small-business, small-farm, and consumer loans, if applicable, in its assessment area(s); (B) a very small percentage of its loans are made in its assessment area(s);

(C) a very poor geographic distribu tion of loans, particularly to low- or moderate-income geographies, in its assessment area(s);

(D) a very poor distribution, particu larly in its assessment area(s), of loans among individuals of different income levels and businesses (including farms) of different sizes, given the product lines offered by the bank; (E) a very poor record of serving the credit needs of highly economically disadvantaged areas in its assessment area(s), low-income individuals, or businesses (including farms) with gross annual revenues of $1 million or less, consistent with safe and sound operations;

(F) no use of innovative or flexible lending practices in a safe and sound manner to address the credit needs of low- or moderate-income individuals or geographies; and (G) it has made few, if any, commu nity development loans. (2) Investment-performance rating. The Board assigns each bank’s investment per formance one of the five following ratings. (i) Outstanding. The Board rates a bank’s investment performance “outstanding” if, in general, it demonstrates— (A) an excellent level of qualified in vestments, particularly those that are not routinely provided by private in vestors, often in a leadership position; (B) extensive use of innovative or complex qualified investments; and (C) excellent responsiveness to credit and community development needs. (ii) High satisfactory. The Board rates a bank’s investment performance “high sat isfactory” if, in general, it demonstrates— (A) a significant level of qualified in vestments, particularly those that are not routinely provided by private in vestors, occasionally in a leadership position;

(B) significant use of innovative or complex qualified investments; and (C) good responsiveness to credit and community development needs. (iii) Low satisfactory. The Board rates a bank’s investment performance “low sat isfactory” if, in general, it demonstrates— (A) an adequate level of qualified in vestments, particularly those that are not routinely provided by private in vestors, although rarely in a leadership position;

(B) occasional use of innovative or complex qualified investments; and (C) adequate responsiveness to credit and community development needs. (iv) Needs to improve. The Board rates a bank’s investment performance “needs to improve” if, in general, it demonstrates— (A) a poor level of qualified invest ments, particularly those that are not routinely provided by private investors; (B) rare use of innovative or complex qualified investments; and (C) poor responsiveness to credit and community development needs. (v) Substantial noncompliance. The Board rates a bank’s investment perform ance as being in “substantial noncompli ance” if, in general, it demonstrates— (A) few, if any, qualified investments,

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Appendix A Regulation BB particularly those that are not routinely provided by private investors; (B) no use of innovative or complex qualified investments; and (C) very poor responsiveness to credit and community development needs. (3) Service-performance rating. The Board assigns each bank’s service performance one of the five following ratings. (i) Outstanding. The Board rates a bank’s service performance “outstanding” if, in general, the bank demonstrates— (A) its service-delivery systems are readily accessible to geographies and individuals of different income levels in its assessment area(s); (B) to the extent changes have been made, its record of opening and clos ing branches has improved the accessi bility of its delivery systems, particu larly in low- or moderate-income geographies or to low- or moderateincome individuals;

(C) its services (including, where ap propriate, business hours) are tailored to the convenience and needs of its as sessment area(s), particularly low- or moderate-income geographies or lowor moderate-income individuals; and (D) it is a leader in providing commu nity development services. (ii) High satisfactory. The Board rates a bank’s service performance “high satis factory”

if, in general, the bank demonstrates— (A) its service-delivery systems are ac cessible to geographies and individuals of different income levels in its assess ment area(s);

(B) to the extent changes have been made, its record of opening and clos ing branches has not adversely affected the accessibility of its delivery sys tems, particularly in low- and moder ate-income geographies and to lowand moderate-income individuals; (C) its services (including, where ap propriate, business hours) do not vary in a way that inconveniences its as sessment area(s), particularly low- and moderate-income geographies and lowand moderate-income individuals; and (D) it provides a relatively high level of community development services. (iii) Low satisfactory. The Board rates a bank’s service performance “low satis factory”

if, in general, the bank demonstrates— (A) its service-delivery systems are reasonably accessible to geographies and individuals of different income levels in its assessment area(s); (B) to the extent changes have been made, its record of opening and clos ing branches has generally not ad versely affected the accessibility of its delivery systems, particularly in lowand moderate-income geographies and to lowand moderate-income individuals;

(C) its services (including, where ap propriate, business hours) do not vary in a way that inconveniences its as sessment area(s), particularly low- and moderate-income geographies and lowand moderate-income individuals; and (D) it provides an adequate level of community development services. (iv) Needs to improve. The Board rates a bank’s service performance “needs to im prove”

if, in general, the bank demonstrates— (A) its service-delivery systems are unreasonably inaccessible to portions of its assessment area(s), particularly to low- or moderate-income geographies or to lowor moderate-income individuals;

(B) to the extent changes have been made, its record of opening and clos ing branches has adversely affected the accessibility of its delivery systems, particularly in low- or moderateincome geographies or to low- or moderate-income individuals; (C) its services (including, where ap propriate, business hours) vary in a way that inconveniences its assessment area(s), particularly low- or moderateincome geographies or low- or moder ate-income individuals; and (D) it provides a limited level of com munity development services. (v) Substantial noncompliance. The

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Regulation BB Appendix A Board rates a bank’s service performance as being in “substantial noncompliance” if, in general, the bank demonstrates— (A) its service-delivery systems are unreasonably inaccessible to significant portions of its assessment area(s), par ticularly to low- or moderate-income geographies or to low- or moderateincome individuals;

(B) to the extent changes have been made, its record of opening and clos ing branches has significantly ad versely affected the accessibility of its delivery systems, particularly in lowor moderate-income geographies or to low- or moderate-income individuals; (C) its services (including, where ap propriate, business hours) vary in a way that significantly inconveniences its assessment area(s), particularly lowor moderate-income geographies or low- or moderate-income individuals; and (D) it provides few, if any, community development services.

(c) Wholesale or limited-purpose banks. The Board assigns each wholesale or limited-pur pose bank’s community development perform ance one of the four following ratings. (1) Outstanding. The Board rates a whole sale or limited-purpose bank’s community development performance “outstanding” if, in general, it demonstrates— (i) a high level of community develop ment loans, community development ser vices, or qualified investments, particu larly investments that are not routinely provided by private investors; (ii) extensive use of innovative or com plex qualified investments, community development loans, or community devel opment services; and (iii) excellent responsiveness to credit and community development needs in its assessment area(s).

(2) Satisfactory. The Board rates a whole sale or limited-purpose bank’s community development performance “satisfactory” if, in general, it demonstrates— (i) an adequate level of community de velopment loans, community develop ment services, or qualified investments, particularly investments that are not rou tinely provided by private investors; (ii) occasional use of innovative or com plex qualified investments, community development loans, or community devel opment services; and (iii) adequate responsiveness to credit and community development needs in its assessment area(s).

(3) Needs to improve. The Board rates a wholesale or limited-purpose bank’s com munity development performance as “needs to improve” if, in general, it demon strates— (i) a poor level of community develop ment loans, community development ser vices, or qualified investments, particu larly investments that are not routinely provided by private investors; (ii) rare use of innovative or complex qualified investments, community devel opment loans, or community development services; and (iii) poor responsiveness to credit and community development needs in its as sessment area(s).

(4) Substantial noncompliance. The Board rates a wholesale or limited-purpose bank’s community development performance in “substantial noncompliance” if, in general, it demonstrates— (i) few, if any, community development loans, community development services, or qualified investments, particularly in vestments that are not routinely provided by private investors;

(ii) no use of innovative or complex qualified investments, community devel opment loans, or community development services; and (iii) very poor responsiveness to credit and community development needs in its assessment area(s).

(d) Banks evaluated under the small-bank performance standards. The Board rates the performance of each bank evaluated under the small-bank performance standards as follows. (1) Eligibility for a satisfactory rating. The Board rates a bank’s performance “satisfac-

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Appendix A Regulation BB tory” if, in general, the bank demon strates— (i) a reasonable loan-to-deposit ratio (considering seasonal variations) given the bank’s size, financial condition, the credit needs of its assessment area(s), and taking into account, as appropriate, lend ing-related activities such as loan origina tions for sale to the secondary markets and community development loans and qualified investments;

(ii) a majority of its loans and, as appro priate, other lending-related activities are in its assessment area(s);

(iii) a distribution of loans to and, as ap propriate, other lending-related activities for individuals of different income levels (including low- and moderate-income in dividuals) and businesses and farms Of different sizes that is reasonable given the demographics of the bank’s assess ment area(s);

(iv) a record of taking appropriate action, as warranted, in response to written com plaints, if any, about the bank’s perform ance in helping to meet the credit needs of its assessment area(s); and (v) a reasonable geographic distribution of loans given the bank’s assessment area(s).

(2) Eligibility for an outstanding rating. A bank that meets each of the standards for a “satisfactory” rating under this paragraph and exceeds some or all of those standards may warrant consideration for an overall rating of “ outstanding.” In assessing whether a bank’s performance is “outstand ing,” the Board considers the extent to which the bank exceeds each of the per formance standards for a “satisfactory” rat ing and its performance in making qualified investments and its performance in provid ing branches and other services and deliv ery systems that enhance credit availability in its assessment area(s).

(3) “Needs to improve” or “substantial noncompliance” ratings. A bank also may receive a rating of “needs to improve” or “substantial noncompliance” depending on the degree to which its performance has failed to meet the standards for a “satisfac tory” rating.

(e) Strategic-plan assessment and rating. (1) Satisfactory goals. The Board approves as “satisfactory” measurable goals that ade quately help to meet the credit needs of the bank’s assessment area(s).

(2) Outstanding goals. If the plan identifies a separate group of measurable goals that substantially exceed the levels approved as “satisfactory,” the Board will approve those goals as “outstanding.”

(3) Rating. The Board assesses the per formance of a bank operating under an ap proved plan to determine if the bank has met its plan goals:

(i) If the bank substantially achieves its plan goals for a satisfactory rating, the Board will rate the bank’s performance under the plan as “satisfactory.” (ii) If the bank exceeds its plan goals for a satisfactory rating and substantially achieves its plan goals for an outstanding rating, the Board will rate the bank’s per formance under the plan as “outstanding.” (iii) If the bank fails to meet substan tially its plan goals for a satisfactory rat ing, the Board will rate the bank as either “needs to improve” or “substantial noncompliance,” depending on the extent to which it falls short of its plan goals, un less the bank elected in its plan to be rated otherwise, as provided in section 228.27(f)(4).

APPENDIX B—CRA Notice (a) Notice for main offices and, if an inter state bank, one branch office in each state. COMMUNITY REINVESTMENT ACT NOTICE Under the Federal Community Reinvestment Act (CRA), the Federal Reserve Board (Board) evalu ates our record of helping to meet the credit needs of this community consistent with safe and sound operations. The Board also takes this record into account when deciding on certain applications sub mitted by us.

Your involvement is encouraged. You are entitled to certain information about our operations and our performance under the CRA, in cluding, for example, information about our branches, such as their location and services pro vided at them; the public section of our most recent

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Regulation BB Appendix B CRA performance evaluation, prepared by the Fed eral Reserve Bank of ________________ (Reserve Bank); and comments received from the public re lating to our performance in helping to meet com munity credit needs, as well as our responses to those comments. You may review this information today.

At least 30 days before the beginning of each quarter, the Federal Reserve System publishes a list of the banks that are scheduled for CRA examina tion by the Reserve Bank in that quarter. This list is available from (title of responsible official), Federal Reserve Bank o f ________________ (address). You may send written comments about our performance in helping to meet community credit needs to (name and address of official at bank) and (title of respon sible official), Federal Reserve Bank of ________________ (address). Your letter, together with any response by us, will be considered by the Federal Reserve System in evaluating our CRA per formance and may be made public. You may ask to look at any comments received by the Reserve Bank. You may also request from the Reserve Bank an announcement of our applica tions covered by the CRA filed with the Reserve Bank. We are an affiliate of (name of holding com pany), a bank holding company. You may request from (title of responsible official), Federal Reserve Bank o f ________________ (address) an announce ment of applications covered by the CRA filed by bank holding companies.

(b) Notice for branch offices. COMMUNITY REINVESTMENT ACT NOTICE Under the Federal Community Reinvestment Act (CRA), the Federal Reserve Board (Board) evalu ates our record of helping to meet the credit needs of this community consistent with safe and sound operations. The Board also takes this record into account when deciding on certain applications sub mitted by us.

Your involvement is encouraged. You are entitled to certain information about our operations and our performance under the CRA. You may review today the public section of our most recent CRA evaluation, prepared by the Fed eral Reserve Bank o f ________________ (address), and a list of services provided at this branch. You may also have access to the following additional information, which we will make available to you at this branch within five calendar days after you make a request to us: (1) a map showing the assessment area containing this branch, which is the area in which the Board evaluates our CRA performance in this community; (2) information about our branches in this assessment area; (3) a list of services we provide at those locations; (4) data on our lending performance in this assessment area; and (5) copies of all written comments received by us that specifi cally relate to our CRA performance in its assess ment area, and any responses we have made to those comments. If we are operating under an ap proved strategic plan, you may also have access to a copy of the plan.

[If you would like to review information about our CRA performance in other communities served by us, the public file for our entire bank is available at (name of office located in state), located at (address).] At least 30 days before the beginning of each quarter, the Federal Reserve System publishes a list of the banks that are scheduled for CRA examina tion by the Reserve Bank in that quarter. This list is available from (title of responsible official), Federal Reserve Bank o f ________________ (address). You may send written comments about our performance in helping to meet community credit needs to (name and address of official at bank) and (title of re sponsible official), Federal Reserve Bank of ________________ (address). Your letter, together with any response by us, will be considered by the Federal Reserve System in evaluating our CRA per formance and may be made public. You may ask to look at any comments received by the Reserve Bank. You may also request from the Reserve Bank an announcement of our applica tions covered by the CRA filed with the Reserve Bank. We are an affiliate of (name of holding com pany), a bank holding company. You may request from (title of responsible official), Federal Reserve Bank o f ________________ (address) an announce ment of applications covered by the CRA filed by bank holding companies.

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Community Reinvestment Act 12 USC 2901; Title VII of Pub. L. 95-128, 91 Stat. 1147 (October 12, 1977) Section Short title Congressional findings and statement of purpose Definitions Financial institutions; evaluation Report to Congress Regulations Written evaluations Operation of branch facilities by minorities and women SECTION 801—Short Title This title may be cited as the “Community Reinvestment Act of 1977”. [12 USC 2901 note.] SECTION 802—Congressional Findings and Statement of Purpose (a) The Congress finds that— (1 ) regulated financial institutions are re quired by law to demonstrate that their de posit facilities serve the convenience and needs of the communities in which they are chartered to do business; (2 ) the convenience and needs of communi ties include the need for credit services as well as deposit services; and (3) regulated financial institutions have continuing and affirmative obligation to help meet the credit needs of the local com munities in which they are chartered. (b) It is the purpose of this title to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such insti tutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.

[12 USC 2901.] SECTION 803—Definitions For the purposes of this title— (1) the term “appropriate Federal financial supervisory agency” means — (A) the Comptroller of the Currency with respect to national banks; (B) the Board of Governors of the Fed eral Reserve System with respect to State chartered banks which are members of the Federal Reserve System and bank holding companies;

(C) the Federal Deposit Insurance Corpo ration with respect to State chartered banks and savings banks which are not members of the Federal Reserve System and the deposits of which are insured by the Corporation; and (D) the Director of the Office of Thrift Supervision, in the case of a savings as sociation (the deposits of which are in sured by the Federal Deposit Insurance Corporation) and a savings and loan holding company;

(2) the term “regulated financial institu tion” means an insured depository institu tion (as defined in section 3 of the Federal Deposit Insurance Act); and (3) the term “application for a deposit fa cility” means an application to the appro priate Federal financial supervisory agency otherwise required under Federal law or regulations thereunder for— (A) a charter for a national bank or Fed eral savings and loan association; (B) deposit insurance in connection with a newly chartered State bank, savings bank, savings and loan association or similar institution;

(C) the establishment of a domestic branch or other facility with the ability to accept deposits of a regulated financial institution;

(D) the relocation of the home office or a branch office of a regulated financial institution;

(E) the merger or consolidation with, or the acquisition of the assets, or the as-

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§ 803 Community Reinvestment Act sumption of the liabilities of a regulated financial institution requiring approval under section 18(c) of the Federal De posit Insurance Act or under regulations issued under the authority of title IV of the National Housing Act; or (F) the acquisition of shares in, or the assets of, a regulated financial institution requiring approval under section 3 of the Bank Holding Company Act of 1956 or section 408(e) of the National Housing Act.

(4) A financial institution whose business predominately consists of serving the needs of military personnel who are not located within a defined geographic area may define its “entire community” to include its entire deposit customer base without regard to ge ographic proximity.

[12 USC 2902. As amended by acts of Nov. 10, 1978 (92 Stat. 3713 and Aug. 9, 1989 (103 Stat. 440, 526).] SECTION 804— Financial Institutions; Evaluation (a) In general. In connection with its exami nation of a financial institution, the appropri ate Federal financial supervisory agency shall— (1 ) assess the institution’s record of meet ing the credit needs of its entire commu nity, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution; and (2 ) take such record into account in its evaluation of an application for a deposit facility by such institution. (b) Majority-owned institutions. In assessing and taking into account, under subsection (a), the record of a nonminority-owned and nonwomen-owned financial institution, the ap propriate Federal financial supervisory agency may consider as a factor capital investment, loan participation, and other ventures under taken by the institution in cooperation with minority- and women-owned financial institu tions and low-income credit unions provided that these activities help meet the credit needs of local communities in which such institu tions and credit unions are chartered. [12 USC 2903. As amended by act of Oct. 28, 1992 (106 Stat. 3874). ] SECTION 805—Report to Congress Each appropriate Federal financial supervisory agency shall include in its annual report to the Congress a section outlining the actions it has taken to carry out its responsibilities under this title.

[12 USC 2904.) SECTION 806—Regulations Regulations to carry out the purposes of this title shall be published by each appropriate Federal financial supervisory agency, and shall take effect no later than 390 days after the date of enactment of this title. [12 USC 2905.] SECTION 807—Written Evaluations (a)(1) Upon the conclusion of each examina tion of an insured depository institution under section 804, the appropriate Federal financial supervisory agency shall prepare a written evaluation of the institution’s record of meeting the credit needs of its entire community, including low- and moderateincome neighborhoods.

(2) Each written evaluation required under paragraph (1) shall have a public section and a confidential section. (b) (1) (A) The public section of the written evaluation shall— (i) state the appropriate Federal finan cial supervisory agency’s conclusions for each assessment factor identified in the regulations prescribed by the Fed eral financial supervisory agencies to implement this Act;

(ii) discuss the facts and data support ing such conclusions; and (iii) contain the institution’s rating and a statement describing the basis for the rating.

(B) The information required by clauses (i) and (ii) of subparagraph (A) shall be

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Community Reinvestment Act § 807 presented separately for each metropoli tan area in which a regulated depository institution maintains one or more domes tic branch offices.

(2) The institution’s rating referred to in paragraph (1)(C) shall be 1 of the following:

(A) “ Outstanding record of meeting community credit needs”.

(B) “Satisfactory record of meeting com munity credit needs”.

(C) “Needs to improve record of meet ing community credit needs”. (D) “Substantial noncompliance in meet ing community credit needs” . Such ratings shall be disclosed to the public on and after July 1, 1990.

(c) (1) The confidential section of the written evaluation shall contain all references that identify any customer of the institution, any employee or officer of the institution, or any person or organization that has pro vided information in confidence to a Fed eral or State financial supervisory agency. (2) The confidential section shall also con tain any statements obtained or made by the appropriate Federal financial supervisory regulatory agency in the course of an exam ination which, in the judgment of the agency, are too sensitive or speculative in nature to disclose to the institution or the public.

(3) The confidential section may be dis closed, in whole or part, to the institution, if the appropriate Federal financial supervi sory agency determines that such disclosure will promote the objectives of this Act. However, disclosure under this paragraph shall not identify a person or organization that has provided information in confidence to a Federal or State financial supervisory agency.

(d) Institutions with interstate branches. (1) In the case of a regulated financial in stitution that maintains domestic branches in 2 or more States, the appropriate Federal financial supervisory agency shall prepare— (A) a written evaluation of the entire in stitution’s record of performance under this title, as required by subsections (a), (b), and (c); and (B) for each State in which the institu tion maintains 1 or more domestic branches, a separate written evaluation of the institution’s record of performance within such State under this title, as re quired by subsections (a), (b), and (c). (2) In the case of a regulated financial in stitution that maintains domestic branches in 2 or more States within a multistate met ropolitan area, the appropriate Federal fi nancial supervisory agency shall prepare a separate written evaluation of the institu tion’s record of performance within such metropolitan area under this title, as re quired by subsections (a), (b), and (c). If the agency prepares a written evaluation pursuant to this paragraph, the scope of the written evaluation required under paragraph (1)(B) shall be adjusted accordingly. (3) A written evaluation prepared pursuant to paragraph (1)(B) shall— (A) present the information required by subparagraphs (A) and (B) of subsection (b)(1) separately for each metropolitan area in which the institution maintains 1 or more domestic branch offices and sep arately for the remainder of the nonmet ropolitan area of the State if the institu tion maintains 1 or more domestic branch offices in such nonmetropolitan area; and (B) describe how the Federal financial supervisory agency has performed the ex amination of the institution, including a list of the individual branches examined. (e) For purposes of this section the following definitions shall apply:

(1) The term “domestic branch" means any branch office or other facility of a regu lated financial institution that accepts depos its, located in any State.

(2) The term “metropolitan area” means any primary metropolitan statistical area, metropolitan statistical area, or consolidated metropolitan statistical area, as defined by the Director of the Office of Management and Budget, with a population of 250,000 or more, and any other area designated as such by the appropriate Federal financial supervisory agency.

(3) The term “State” has the same mean

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§ 807 Community Reinvestment Act ing as in section 3 of the Federal Deposit Insurance Act.

[12 USC 2906. As added by act of Aug. 9, 1989 (103 Stat. 527); and amended by acts of Dec. 19, 1991 (105 Stat. 2306) and Sept. 29, 1994 (108 Stat. 2364).] SECTION 808—Operation of Branch Facilities by Minorities and Women (a) In general. In the case of any depository institution which donates, sells on favorable terms (as determined by the appropriate Fed eral financial supervisory agency), or makes available on a rent-free basis any branch of such institution which is located in any predominantly minority neighborhood to any minority depository institution or women’s de pository institution, the amount of the contri bution or the amount of the loss incurred in connection with such activity may be a factor in determining whether the depository institu tion is meeting the credit needs of the institu tion’s community for purposes of this title. (b) Definitions. For purposes of this section— (1) The term “minority institution” means a depository institution (as defined in sec tion 3(c) of the Federal Deposit Insurance Act)— (A) more than 50 percent of the owner ship or control of which is held by 1 or more minority individuals; and (B) more than 50 percent of the net profit or loss of which accrues to 1 or more minority individuals.

(2) The term “ women’s depository institu tion” means a depository institution (as de fined in section 3(c) of the Federal Deposit Insurance Act)— (A) more than 50 percent of the owner ship or control of which is held by 1 or more women;

(B) more than 50 percent of the net profit or loss of which accrues to 1 or more women; and (C) a significant percentage of senior management positions of which are held by women.

(3) The term “minority” has the meaning given to such term by section 1204(c)(3) of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.* [12 USC 2907. As added by acts of Dec. 12, 1991 (105 Stat. 1775) and Oct. 28, 1992 (106 Stat 3874).] •Section 1204(c)(3) of this act (12 USC 1811 note) reads as follows:

(e) The term “ minority” means any Black American, Native American, Hispanic American, or Asian American.

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Board of Governors of the Federal Reserve System Amendments to Regulation E Electronic Fund Transfers sly 1995* 1. E ffective A pril 24, 1995, section 205.9(a)(4) is amended to read as fo l lows:

(4) A number or code that identifies the consumer initating the transfer, the con sumer’s account(s), or the access device used to initiate the transfer. The number or code need not exceed four digits or letters to comply with the requirements of this paragraph.

2. E ffective M arch 4, 1985, section 205.13(a)(1) is amended by changing “Civil Aeronautics Board" to “secretary o f transportation ”.

3. Effective December 26, 1989, section 205.13(a)(1) is amended by changing “Federal Home Loan Bank Board (acting directly or through the Federal Savings i and Loan Insurance Corporation)’’ to “Office o f Thrift Supervision”. 4. Effective November 15, 1987, section 205.14 is amended by revising paragraphs (a)(2) and (b) to read as follows: (2) Sections 205.7, 205.8, and 205.9 shall require the service-providing institution to provide those disclosures and documenta tion that are within its knowledge and the purview of its relationship with the con sumer. The service-providing institution need not furnish a periodic statement to * A complete Regulation E, as amended effective April 24, 1995, consists of— • the regulation pamphlet dated December 1984 (see in side cover) and • this slip sheet.

Item 1 is new. The other items were included in the June 1994 slip sheet.

the consumer under section 205.9(b) if the service-providing institution— (i) Issues a debit card, to be used by the consumer to initiate electronic fund transfers, that bears the name of the ser vice-providing institution and an address or telephone number that can be used to contact the service-providing institution; (ii) Transmits the applicable transaction-identification information specified by section 205.9(b)(1) to the con sumer’s account-holding institution, in the format prescribed by the automated clearing house system used to clear the fund transfers;

(iii) Discloses to the consumer, in addi tion to the information required by sec tion 205.7, that the service-providing institution (not the account-holding in stitution) is responsible for all elec tronic fund transfers made with the debit card, and that all inquiries and er ror notices related to such transfers should be directed to the service-providing institution; that the service-providing institution will not issue a peri odic statement, and that the consumer should retain all terminal receipts to verify transactions; and that the con sumer must notify the service-providing institution concerning loss or theft of the debit card;

(iv) Provides on or with the receipts required by section 205.9(a) the address and telephone number to be used for inquiries and error notices and for re porting the loss or theft of the debit card; and (v) Extends the time period set forth in section 205.6(b)(1) for notice of loss or theft of a debit card, from two business days to four business days after the con sumer learns of the loss or theft; and ex tends the time periods set forth in sections

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Regulation E 205.6(b)(2) and 205.11(b)(1) for report ing unauthorized transfers or alleged er rors, from 60 days to 90 days following the transmittal of a periodic statement. * * * * * (b) Compliance by account-holding insti tutions. An account-holding institution de scribed in paragraph (a) of this section need not comply with the requirements of the act and this regulation with respect to electronic fund transfers to or from the consumer’s account made by the serviceproviding institution, except that the account-holding institution shall: (1) Comply with section 205.9 by pro viding a periodic statement and describ ing each transaction from the serviceproviding institution that is debited or credited to the consumer’s account in accordance with section 205.9(b);13 but the account-holding institution has no liability for failure to provide this infor mation if the failure is due to its not having received the necessary informa tion from the service-providing institu tion in the prescribed format; and (2) Comply with section 205.11 by promptly providing to the service-pro viding institution, upon its request, in formation or copies of documents re quired for the purpose of investigating alleged errors or for furnishing copies of documents to the consumer; and by honoring debits to the account in accor dance with section 205.11(f)(2). 13 Account-holding institutions shall not be required to furnish the terminal location as part of the transac tion description until July 1, 1990. In addition, ac count-holding institutions with assets of $25 million or less shall not be required to comply with section 205.9(b) until July 1, 1990. 5. Effective February 28, 1994, a new sec tion 205.15 is added as follows: SECTION 205.15— Electronic Fund Transfer of Government Benefits* * Compliance with this section is optional until March 1, 1997, when compliance becomes mandatory.

(a) G overnm ent agency subject to regulation.

(1) A government agency is deemed be a financial institution for purposes the act and regulation if directly or directly it issues an access device to a consumer for use in initiating an elec tronic fund transfer of government ben efits from an account. The agency shall comply with all applicable requirements of the act and regulation, except as pro vided in this section.

(2) For purposes of this section, the term account means an account estab lished by a government agency for dis tributing government benefits to a con sumer electronically, such as through automated teller machines or point-ofsale terminals.

(b) Issuance o f access devices. For pur poses of this section, a consum er is deemed to request an access device when the consumer applies for government ben efits that the agency disburses or will dis burse by means of an electronic fund transfer. The agency shall verify the iden tity of the consumer receiving the device by reasonable means before the device is activated.

(c) Alternative to periodic statement. government agency need not furnish periodic statement required by sect 205.9(b) if the agency makes available to the consumer— (1) the consum er’s account balance, through a readily available telephone line and at a terminal (which may in clude providing balance information at a balance-inquiry terminal or providing it, routinely or upon request, on a ter minal receipt at the time of an elec tronic fund transfer); and (2) A written history of the consumer’s account transactions for at least 60 days preceding the date of a request by the consumer. The account history shall be provided promptly in response to an oral or written request.

(d) Modified requirements. A government agency that does not furnish periodic in-

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Regulation E statements, pursuant to paragraph (c) of this section, shall comply with the follow ing requirements:

(1) Initial disclosures. The agency shall modify the disclosures under section 205.7(a) by providing— (i) Account-balance information. The means by which the consumer may obtain information concerning the ac count balance, including a telephone number. This disclosure may be made by providing a notice substan tially similar to the notice contained in section A(12) of appendix A of this part.

(ii) Written account history. A sum mary of the consumer’s right to re ceive a written account history upon request, in substitution for the periodic-statement disclosure required by section 205.7(a)(6), and a telephone number that can be used to request an account history. This disclosure may be made by providing a notice substantially similar to the notice contained in section A(12) of appen dix A of this part.

(iii) Error-resolution notice. A notice concerning error resolution that is substantially similar to the notice contained in section A(13) of appen dix A of this part, in substitution for the notice required by section 205.7(a)(10).

(2) Annual error-resolution notice. The agency shall provide an annual notice concerning error resolution that is sub stantially similar to the notice contained in section A(13) of appendix A of this part, in substitution for the notice re quired by section 205.8(b). (3) Limitations on liability. For pur poses of section 205.6(b)(2) and (3), in regard to a consumer’s reporting within 60 days any unauthorized transfer that appears on a periodic statement, the 60day period shall begin with the trans mittal of a written account history or other account information provided to the consumer under paragraph (c) of this section.

(4) Error resolution. The agency shall comply with the requirements of sec tion 205.11 in response to an oral or written notice of an error from the con sumer that is received no later than 60 days after the consumer obtains the written account history or other account information, under paragraph (c) of this section, in which the error is first reflected.

6. Effective November 15, 1987, appendix A is amended by revising the introductory language and by adding section A (ll) as follows:

This appendix contains model disclosure clauses for optional use by financial insti tutions to facilitate compliance with the disclosure requirem ents o f sections 205.5(a)(3), (b)(2), and (b)(3); 205.6 (a)(3); 205.7; and 205.14(a)(2) * * * SECTION A (11)— Disclosure from Service-Providing Institution That Does Not Send Periodic Statements (§ 205.14(a)(2)) ALL QUESTIONS ABOUT TRANSAC TIONS MADE WITH YOUR (NAME OF CARD) CARD M UST BE D I RECTED TO US, (NAME OF SERVICE PRO V ID ER), AND NOT TO THE BANK OR OTHER FINANCIAL INSTI TUTION WHERE YOU HAVE YOUR ACCOUNT. We are responsible for the (name of service) service and for resolv ing any errors in transactions made with your (name of card) card. We will not send you a periodic state ment listing transactions that you make using your (name of card) card. The transactions will appear only on the state ment issued by your bank or other finan cial institution. SAVE THE RECEIPTS YOU ARE GIVEN WHEN YOU USE YOUR (NAME OF CARD) CARD, AND CHECK THEM AGAINST THE AC COUNT STATEMENT YOU RECEIVE FROM YOUR BANK OR OTHER FI NANCIAL INSTITUTION. If you have

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Regulation E any questions about one of these transac tions, call or write us at (telephone num ber and address) (the telephone number and address indicated below). IF YOUR (NAME OF CARD) CARD IS LOST OR STOLEN, NOTIFY US AT ONCE by calling or writing to us at (tele phone number and address). 7. Effective February 28, 1994, appendix A is amended by adding new sections A(12) and A(13) as follows:

SECTION A(12)— Disclosure by Government Agencies of Information About Obtaining Account Balances and Account Histories (§ 205.15(d)(l)(i) and (ii)) You may obtain information about the amount of benefits you have remaining by calling [telephone number]. That informa tion is also available [on the receipt you get when you make a transfer with your card at (an ATM) (a POS terminal)] [when you make a balance inquiry at an ATM] [when you make a balance inquiry at specified locations].

You also have the right to receive a written summary of transactions for the 60 days preceding your request by calling [telephone number]. [Optional: Or you may request the summary by contacting your caseworker.] SECTION A(13)— Disclosure of Error-Resolution Procedures for Government Agencies That Do Not Provide Periodic Statements (§ 205.15(d)(l)(iii) and (d)(2)) In Case o f Errors or Questions About Your Electronic Transfers Telephone us at [telephone number] or Write us at [address] as soon as you can, if you think an error has occurred in your [EBT][agency’s name for program] account. We must hear from you no later than 60 days after you learn of the error. You will need to tell us:

• Your name and [case] [file] num ber.^ • Why you believe there is an error, an5 the dollar amount involved. • Approximately when the error took place.

If you tell us orally, we may require that you send us your complaint or ques tion in writing within 10 business days. We will generally complete our investiga tion within 10 business days and correct any error promptly. In some cases, an in vestigation may take longer, but you' will have the use of the funds in question after the 10 business days. If we ask you to put your complaint or question in writing and we do not receive it within 10 business days, we may not credit your account dur ing the investigation.

For errors involving transactions at point-of-sale terminals in food stores, the periods referred to above are 20 business days instead of 10 business days. If we decide that there was no error, we will send you a written explanation within three business days after we finish our investigation. You may ask for copies of the documents that we used in our investigation.

If you need more information about oun error-resolution procedures, call us at [telephone number] [the telephone number shown above].

Effective May 1, 1992, appendix B is amended to read as follows: APPENDIX B— Federal Enforcement Agencies The following list indicates which federal agency enforces Regulation E for particu lar classes of institutions. Any questions concerning compliance by a particular in stitution should be directed to the appro priate enforcing agency. Terms that are not defined in the Federal Deposit Insur ance Act (12 USC 1813(s)) shall have the meaning given to them in the Interna

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Regulation E tional Banking Act of 1978 (12 USC 3101).

National banks, and federal branches and federal agencies o f foreign banks District office of the Office of the Comptroller of the Currency for the dis trict in which the institution is located State member banks, branches and agen cies o f foreign banks (other than federal branches, federal agencies, and insured state branches o f foreign banks), com mercial lending companies owned or controlled by foreign banks, and organi zations operating under section 25 or 25A o f the Federal Reserve Act Federal Reserve Bank serving the Dis trict in which the institution is located Nonmember insured banks and insured state branches o f foreign banks Federal Deposit Insurance Corporation regional director for the region in which the institution is located Savings institutions insured under the Savings Association Insurance Fund o f the FDIC and federally chartered sav ings banks insured under the Bank In surance Fund o f the FDIC (but not including state-chartered savings banks insured under the Bank Insurance Fund). Office of Thrift Supervision for the re gion in which the institution is located Federal credit unions Division of Consumer Affairs National Credit Union Administration 2025 M Street, N.W.

Washington, D.C. 20456 Air carriers Assistant General Counsel for Aviation Enforcement and Proceedings Department of Transportation 400 Seventh Street, S.W. Washington, D.C. 20590 Brokers and dealers Division of Market Regulation Securities and Exchange Commission Washington, D.C. 20549 Retail, department stores, consumer fi nance companies, certain other financial institutions, and all nonbank debit card issuers Federal Trade Commission Electronic Fund Transfers Washington, D.C. 20580 ELECTRONIC FUND TRANSFER ACT 9. Effective December 19, 1991, section 917(a) o f the Electronic Fund Transfer Act is amended by revising paragraph (1) and by adding a sentence following para graph (5) to read as follows: SECTION 917— Administrative Enforcement (a) Compliance with the requirements im posed under this title shall be enforced under— (1) section 8 of the Federal Deposit In surance Act, in the case of— (A) national banks, and Federal branches and Federal agencies of for eign banks, by the Office of the Comptroller of the Currency; (B) member banks of the Federal Reserve System (other than national banks), branches and agencies of for eign banks (other than Federal branches, Federal agencies, and in sured State branches o f foreign banks), commercial lending compa nies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Fed eral Reserve Act, by the Board; and (C) banks insured by the Federal De posit Insurance Corporation (other than members of the Federal Reserve System) and insured State branches of foreign banks, by the Board of Di rectors of the Federal Deposit Insur ance Corporation;

The terms used in paragraph (1) that are not defined in this title or otherwise de fined in section 3(s) of the Federal De posit Insurance Act (12 U.S.C. 1813(s)) shall have the meaning given to them in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).

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Board of Governors of the Federal Reserve System Amendments to Regulation O Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks August 1995* 1. Effective July 19, 1994, section 215.2(d) is amended as follows:

(d) D irector of a com pany or bank means any director of the company or bank, w hether or not receiving compensation. * * * 2. Effective July 1, 1995, in section 215.2(i), the last sentence is amended to read as follows:

* * * A member bank’s unimpaired capi tal and unimpaired surplus equals (1) the bank’s tier 1 and tier 2 capital included in the bank’s risk-based capi tal under the capital guidelines of the appropriate federal banking agency, based on the bank’s most recent con solidated report of condition filed under 12 USC 1817(a)(3); and (2) the balance of the bank’s allowance for loan and lease losses not included in the bank’s tier 2 capital for purposes of the calculation of risk-based capital by the appropriate federal banking agency, based on the bank’s most re cent consolidated report of condition filed under 12 USC 1817(a)(3). 3. E ffective July 19, 1994, section 215.4(d)(1) is amended as follows: (d) Aggregate lending limit. (1) General limit. A mem ber bank * * * outstanding extensions of credit by that bank to all such insiders, * * * * A complete Regulation O, as amended effective July 1, 1995, consists of— • the regulation pamphlet dated June 1994 (see inside front cover) and • this slip sheet.

Items 2 and 6 are new. The other items were included in the November 1994 slip sheet. 4. E ffective July 19, 1994, section 215.4(e)(1) is amended as follows: (e) Overdrafts.

(1) No member bank may pay an over draft of an executive officer or director of the bank or executive officer or di rector of its affiliates3 * * * 3 This prohibition does not apply * * *. This prohi bition also does not apply to the payment by a mem ber bank of an overdraft of a related interest of an executive officer, director, or principal shareholder of the member bank’ or executive officer, director, or principal shareholder of its affiliates. 5. E ffective July 19, 1994, in section 215.5(b), the references to paragraph (c)(3) are changed to read paragraph (c)(4).

6. Effective April 7, 1995, the introductory text to section 215.5(c)(2) is amended to read as follows:

(2) in any amount to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the ex ecutive officer, provided— * * * * * 7. E ffective July 19, 1994, section 215.5(c)(4) is amended by adding the word “unim paired” before the word "capital".

BANK HOLDING COMPANY ACT AMENDMENTS OF 1970 8. Effective December 19, 1991, section 106(E) is amended to read as follows:

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Regulation O (E) For purposes of this paragraph, the term “extension of credit” shall have the meaning prescribed by the Board pursuant to section 22(h) of the Federal Reserve Act (12 U.S.C. 375b), * * * 9. Effective December 19, 1991, section 106(F) is amended to read as follows: (F)(i) Any bank which, and any institu tion-affiliated party (within the meaning of section 3(u) of the Federal Deposit Insurance Act) with respect to such bank who, violates any provision of this paragraph shall forfeit and pay a civil penalty of not more than $5,000 for each day during which such viola tion continues.

(ii) N otwithstanding clause (i), any bank which, and any institution-affili ated party (within the meaning of sec tion 3(u) of the Federal Deposit Insur ance Act) with respect to such bank who— (I)(aa) commits any violation de scribed in clause (i);

(bb) recklessly engages in an un safe or unsound practice in con ducting the affairs of such bank; or (cc) breaches any fiduciary duty; (II) which violation, practice, or breach— (aa) is part of a pattern of misconduct;

(bb) causes or is likely to cause more than a minimal loss to such bank; or (cc) results in pecuniary gain or other benefit to such party, shall forfeit and pay a civil penalty of not more than $25,000 for each day during which such violation, practice, or breach continues.

(iii) Notwithstanding clauses (i) and (ii), any bank which, and any institu tion-affiliated party (within the meaning of section 3(u) of the Federal Deposit Insurance Act) with respect to such bank who— (I) knowingly— (aa) commits any violation de scribed in clause (i);

(bb) engages in any unsafe or un sound practice in conducting the affairs of such bank; or (cc) breaches any fiduciary duty; and (II) knowingly or recklessly causes a substantial loss to such bank or a substantial pecuniary gain or other benefit to such party by reason of such violation, practice, or breach, shall forfeit and pay a civil penalty in an amount not to exceed the applicable maximum amount determined under clause (iv) for each day during which such violation, practice, or breach continues.

(iv) The maximum daily amount of any civil penalty which may be assessed pursuant to clause (iii) for any viola tion, practice, or breach described in such clause is— (I) in the case of any person other than a bank, an amount to not exceed $1,000,000; and (II) in the case of a bank, an amount not to exceed the lesser of— (aa) $1,000,000; or (bb) 1 percent of the total assets of such bank.

(v) Any penalty imposed under clause (i), (ii), or (iii) may be assessed and collected— (I) in the case of a national bank, by the Comptroller of the Currency; (II) in the case of a State member bank, by the Board; and (III) in the case of an insured non member State bank, by the Federal Deposit Insurance Corporation, in the manner provided in subpara graphs (E), (F), (G), and (I) of section 8(i)(2) of the Federal Deposit Insurance Act for penalties imposed (under such section) and any such assessment shall be subject to the provisions of such section.

(vi) The bank or other person against whom any penalty is assessed under this subparagraph shall be afforded an agency hearing if such bank or person

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Regulation O submits a request for such hearing within 20 days after the issuance of the notice of assessment. Section 8(h) of the Federal Deposit Insurance Act shall apply to any proceeding under this subparagraph.

(vii) All penalties collected under au thority of this subsection shall be de posited into the Treasury. (viii) For purposes of this paragraph, the term “violate” includes any action (alone or with another or others) for or toward causing, bringing about, partici pating in, counseling, or aiding or abet ting a violation.

(ix) The Comptroller of the Currency, the Board, and the Federal Deposit In surance Corporation shall prescribe reg ulations establishing such procedures as may be necessary to carry out this subparagraph.

10. Effective December 19, 1991, in section 106(G )(i)(l) and (2), the reference to "each political campaign committee” is changed to read "each political or cam paign committee’’.

11. Effective December 19, 1991, section 106(H)(i) is amended to read as follows: (i) the term “bank” includes a mutual savings bank, a savings bank, and a sav ings association (as those terms are de fined in section 3 of the Federal Deposit Insurance Act);

Page 407

Board of Governors of the Federal Reserve System Amendments to Regulation E Electronic Fund Transfers ily 1995* E ffective A pril 24, 1995, section 205.9(a)(4) is amended to read as fo l lows:

2. E ffective M arch 4, 1985, section 205.13(a)(1) is amended by changing “Civil Aeronautics Board” to “secretary o f transportation ”.

3. Effective December 26, 1989, section 205.13(a)(1) is am ended by changing “Federal Home Loan Bank Board (acting directly or through the Federal Savings and Loan Insurance Corporation)" to “Office o f Thrift Supervision". 4. Effective November 15, 1987, section 205.14 is amended by revising paragraphs (a)(2) and (b) to read as follows: (2) Sections 205.7, 205.8, and 205.9 shall require the service-providing institution to provide those disclosures and documenta tion that are within its knowledge and the purview of its relationship with the con sumer. The service-providing institution need not furnish a periodic statement to * A complete Regulation E, as amended effective April 24, 1995, consists of— • the regulation pamphlet dated December 1984 (see in side cover) and • this slip sheet.

Item 1 is new. The other items were included in the June 1994 slip sheet.

the consumer under section 205.9(b) if the service-providing institution— (i) Issues a debit card, to be used by the consum er to initiate electronic fund transfers, that bears the name of the ser vice-providing institution and an address or telephone number that can be used to contact the service-providing institution; (ii) Transmits the applicable transaction-identification information specified by section 205.9(b)(1) to the con sumer’s account-holding institution, in the format prescribed by the automated clearing house system used to clear the fund transfers;

(iii) Discloses to the consumer, in addi tion to the information required by sec tion 205.7, that the service-providing institution (not the account-holding in stitution) is responsible for all elec tronic fund transfers made with the debit card, and that all inquiries and er ror notices related to such transfers should be directed to the service-pro viding institution; that the service-providing institution will not issue a peri odic statement, and that the consumer should retain all terminal receipts to verify transactions; and that the con sumer must notify the service-providing institution concerning loss or theft of the debit card;

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Regulation E 205.6(b)(2) and 205.11(b)(1) for report ing unauthorized transfers or alleged er rors, from 60 days to 90 days following the transmittal of a periodic statement. * * * * * (b) Compliance by account-holding insti tutions. An account-holding institution de scribed in paragraph (a) of this section need not comply with the requirements of the act and this regulation with respect to electronic fund transfers to or from the consumer’s account made by the serviceproviding institution, except that the ac count-holding institution shall: (1) Comply with section 205.9 by pro viding a periodic statement and describ ing each transaction from the serviceproviding institution that is debited or credited to the consumer’s account in accordance with section 205.9(b);13 but the account-holding institution has no liability for failure to provide this infor mation if the failure is due to its not having received the necessary informa tion from the service-providing institu tion in the prescribed format; and (2) Comply with section 205.11 by promptly providing to the service-providing institution, upon its request, in formation or copies of documents re quired for the purpose of investigating alleged errors or for furnishing copies of documents to the consumer; and by honoring debits to the account in accor dance with section 205.11(0(2). 13 Account-holding institutions shall not be required to furnish the terminal location as part of the transac tion description until July 1, 1990. In addition, ac count-holding institutions with assets of $25 million or less shall not be required to comply with section 205.9(b) until July 1, 1990. 5. Effective February 28, 1994, a new sec tion 205.15 is added as follows: SECTION 205.15—Electronic Fund Transfer of Government Benefits* * Compliance with this section is optional until March 1, 1997, when compliance becomes mandatory. (a) G overnm ent agency subject to regulation.

(c) Alternative to periodic statement. A government agency need not furnish the periodic statement required by section 205.9(b) if the agency makes available to the consumer— (1) the consum er’s account balance, through a readily available telephone line and at a terminal (which may in clude providing balance information at a balance-inquiry terminal or providing it, routinely or upon request, on a ter minal receipt at the time of an elec tronic fund transfer); and (2) A written history of the consumer’s account transactions for at least 60 days preceding the date of a request by the consumer. The account history shall be provided promptly in response to an oral or written request.

(d) Modified requirements. A government agency that does not furnish periodic

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Regulation E statements, pursuant to paragraph (c) of this section, shall comply with the follow ing requirements:

6. Effective November 15, 1987, appendix A is amended by revising the introductory language and by adding section A (ll) as follows:

This appendix contains model disclosure clauses for optional use by financial insti tutions to facilitate compliance with the disclosure requirem ents of sections 205.5(a)(3), (b)(2), and (b)(3); 205.6 (a)(3); 205.7; and 205.14(a)(2) * * * SECTION A (ll)— Disclosure from Service-Providing Institution That Does Not Send Periodic Statements (§ 205.14(a)(2)) ALL QUESTIONS ABOUT TRANSAC TIONS MADE WITH YOUR (NAME OF CARD) CARD M UST BE D I RECTED TO US, (NAME OF SERVICE PRO V ID ER), AND NOT TO THE BANK OR OTHER FINANCIAL INSTI TUTION WHERE YOU HAVE YOUR ACCOUNT. We are responsible for the (name of service) service and for resolv ing any errors in transactions made with your (name of card) card. We will not send you a periodic state ment listing transactions that you make using your (name of card) card. The transactions will appear only on the state ment issued by your bank or other finan cial institution. SAVE THE RECEIPTS YOU ARE GIVEN WHEN YOU USE YOUR (NAME OF CARD) CARD, AND CHECK THEM AGAINST THE AC COUNT STATEMENT YOU RECEIVE FROM YOUR BANK OR OTHER FI NANCIAL INSTITUTION. If you have

Page 410

SECTION A(12)—Disclosure by Government Agencies of Information About Obtaining Account Balances and Account Histories (§ 205.15(d)( 1 )(i) and (ii)) You may obtain information about the amount of benefits you have remaining by calling [telephone number]. That informa tion is also available [on the receipt you get when you make a transfer with your card at (an ATM) (a POS terminal)] [when you make a balance inquiry at an ATM] [when you make a balance inquiry at specified locations].

• Your name and [case] [file] number. • Why you believe there is an error, a n ^ ^ the dollar amount involved. • Approximately when the error took place.

If you need more information about ourf error-resolution procedures, call us at [telephone number] [the telephone number shown above].

Page 411

Regulation E tional Banking Act of 1978 (12 USC 3101).

Washington, D.C. 20456 Air carriers Assistant General Counsel for Aviation Enforcement and Proceedings Department of Transportation 400 Seventh Street, S.W. Washington, D.C. 20590 Brokers and dealers Division of Market Regulation Securities and Exchange Commission Washington, D.C. 20549 Retail, department stores, consumer fi nance companies, certain other financial institutions, and all nonbank debit card issuers Federal Trade Commission Electronic Fund Transfers Washington, D.C. 20580 ELECTRONIC FUND TRANSFER ACT 9. Effective December 19, 1991, section 917(a) o f the Electronic Fund Transfer Act is amended by revising paragraph (1) and by adding a sentence following para graph (5) to read as follows: SECTION 917—Administrative Enforcement (a) Compliance with the requirements im posed under this title shall be enforced under— (1) section 8 of the Federal Deposit In surance Act, in the case of— (A) national banks, and Federal branches and Federal agencies of for eign banks, by the Office of the Comptroller of the Currency; (B) member banks of the Federal Reserve System (other than national banks), branches and agencies of for eign banks (other than Federal branches, Federal agencies, and in sured State branches of foreign banks), commercial lending compa nies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Fed eral Reserve Act, by the Board; and (C) banks insured by the Federal De posit Insurance Corporation (other than members of the Federal Reserve System) and insured State branches of foreign banks, by the Board of Di rectors of the Federal Deposit Insur ance Corporation;

Page 412

Board of Governors of the Federal Reserve System Amendments and Corrections to Regulation CC Availability of Funds and Collection of Checks July 1995* 1. Effective October 11, 1994, in appendix A, under the heading fo r the Second Fed eral Reserve District (Federal Reserve Bank o f New York), the routing numbers formerly assigned to the Buffalo region have been reassigned to the Utica region. * A complete Regulation CC, as amended effective October 11, 1994, consists of— • the regulation pamphlet dated May 1994 (see inside front cover) and • this slip sheet.

2. Effective October 11, 1994, in appendixes A and B-2, under the heading fo r the Sec ond Federal Reserve District (Federal Re serve Bank o f New York), the heading fo r “Cranford Office” has been corrected to read “East Rutherford Office”.