Interpretation of provisions in Truth in Lending Regulation Z

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For .immediate release.- Hay 2ft,' 1-969.

The.-Hoard of Governors of - the- Federal Ranerve System artnounccd today the approval of the attached Intel pirpLuUomi of provision!) in-, ito Truth in Lending Regulation Z which go«6 into t:i'foct. on July I.

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-1- 8-a086«n {*226,202 Security in torest--confoBnion of judgment-'*cof;,nov it; no tea (a) Under' § 2.26.2 (r.) "octcurlty interest"- lit defined to include : confessed l i o n s -whotheir or not recorded mid, in- fjonerol, to include miy i n t e r e s t in property which secures pnymont or pt*rEorin«ncu of /in o b l i g a t i o n . In c c r t a i n trmieetctiona involving a s e c u r i t y i n t e r e s t * under $ 226.9 the customer has » r i g h t ot roucinalon, (b) in some of the otatc»» confession of Judgment olauaaa or cognovit; provisions «.£.© lawful and make i t possible for the holder of on o b l i g a t i o n containing auch clause or provision to rccord a liisn on property of the obligor simply by recordation entry of judgment; the obligor "is afforded no opportunity to enter a defstme against such sir.tion prior to entry of tho judgment, (e) Since Confession of'judgment clauaofi and cognovit provisions in such s t a t e s hava the e f f e c t o f - d e p r i v i n g - t h e obligor of Itho r i g h t to be n o t i f i e d of o pending action and to e n t e r a defense in « j u d i c i a l proceeding be fore judgment may be entered or recorded against hint, such cIhusra flnd provisions in tl ^se a t a t a s ftre s e c u r i t y i n t e r e s t s under S 22<ji.2(&) and for tho purpose;?! of § 2 2 6 . 7 ( a ) ( 7 ) , § 226,8(b)(5), mid 5 226,9. I'hiu in the enso even if the judgment, cannot be entered u n t i l n f t o r o d e f a u l t by tho o b l i g o r , (d) Confession' .61 judgment clauses and cognovit provision# which, by t h e i r terms, exclude a l i e n on a l l real property which in used or is expected to be used as the p r i n c i p a l residence of the customer, would not bring a t r a n s a c t i o n under the provisions of 5 226,9.

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8-*006-b § 226,203 Open end credit diatlnHulshfid ftrim ofcHotf. qjcnd^fc (a) Tho fundamental q u a l i f i c a t i o n for "open end creidit'1 under § 226,2(r) is that consumer c r e d i t be extended on an account pursuant to a plan undor which (I) tho creditor nrny permit this customer to umka purchases or obtain loans from time to time d i r e c t l y or Indirectly from the c r e d i t o r , as the plan may'provide; (2) the customer has the privilege' of paying the bnlanee in f u l l or In instalment!*; awl (3) it finance charge may be computed by the creditor from times to tilme on an outstanding unpaid balance, Under an open end c r e d i t account plan, i t in contemplated that there v?itl or may be r e p e t i t i v e transactlona on a revolving basis, (b) In c e r t a i n cases, a form of contract or note r e l a t i n g to a single transaction provides that the flnanco charge will be computed from time to time by application of a rate to tho unpaid balance and s t i p u l a t e s required mimiwum periodic paymento, llowover, tho obligor has the privilege of making larger and more frequent payments then stipulated or paying tho obligation in f u l l nt any tirr.o without penalty, 'the question a r i s e s as to whether tho c r e d i t o r nhould make <J1b cinctures in such circumstances under 5 226,7 for open enl c r e d i t nccounte or under 3 226,8 for c r e d i t other than open end, (c) Although the terms of such a contract or note scot the second and third requirements for such a plan, they do not iM«t the f i r s t of such requirements not the basic qualification that conttutt«ir c r e d i t be extended on an account pursuant to a plan.

'therefore, dlnci«iaMrflfl in this case are required to bo made under 3 226,0, (Intcrprotfl and applies 15 USC 1602) 5/26/69

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eo a @ “3. $+2086~e

§ 226,301 Agricultural purposes--when exempt from the Regulation

(a) Under § 2276.3(a), the Rogulation does not apply to “Extensions of credit to organizations, {neluding goveraments, or for business or commercial purposes, other than agricultural purposes," The definition of "orpantszation in 9 224.2(8) include a corporation, trust, estate, partnership, cooperativa, or assectation mwa vell as governmental entities, The question ar(ses a9 te vhethar the Hegulation applies to extensions of credit to organtzations, fneluttiag governments, for agricultural purpeses.

(b) Extensions of credit ta argantzations, ilichuding governments, for agricultural gurposes are exenpt fread the Regulation.

CGaiterprets and spplfen 15 @.45.€, b4i3)

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•"*"

{}-2086-(l § 226.50?.

Annual...percentage rate on alnftie Add«on rate cganaaetlotia, (a) The application of a single add-on r a t e ifco transactions ot: varying maturities, when converted to an annual percentage r a t e det&rmined by the actuarial method, results In minor variations, Such annual percentage r a t e variations on maturities up to sixty months are bo insignificant that separate computations are unwarranted. (b) The question arises as to whether a creditor may disclose a ft ingle annual percentage r a t e on nil such transactions based upon the •highest rate, which w i l l arise from the Application of the same s i n g l e a d d - o n rate t o each at such transactions, (c) Uheri the same add-on rate Is applied to alll transactions within a range of maturities up to 60 months, and provided that a l l payments on each transaction are equal In amount and due .it ^irjuftl itttefvai# of time within the limits provided by 3 226.5(d),a single annual percentage rate may be disclosed, in which case it shall bo the hifthoat annual percentage rate that may bo applicable to any such transactions. (Interprets and applies 15 U,3,C„ 1606) 5/26/69

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- 5* S-XOf'6-e § 226.8C5 Series of aalen aa dintinflulahed. froir> refinancing, consolidating;, or IncreasInft (a) The question arisen an -to the distinct tart between the provisions of § 226,8(h), series of galea, and tho provisions of § I t 6 . 8 Q ) , . refinancing, consolidating, or Increaaini;, (b) Soction 226.8(h) la applicable only when a credit aale is roadd pursuant to an agreement which-provides' for the add ;Lt I on of a current (or new) sale to an existing outstandingbalancu. In-.such cases, and provided that* all of trie rnquiretncnta o£ $ 226.6(h)(1) awci (2) aire mat* the disclosures may bo mada «t any time not Inter than the duce the Elrat payment for that, salt* is due, (c) If there is no agreement, or if tho :Jigr<temont dona not meet all of the requirements of § 22b, (J(li), the -diucloauiroa required, in connection with any subsequent sale, which la added to a pravlouoly out" standing balance shall bo made under the•• provisions of § 226.8(j). • For eKannple, the fact that an agreement provides a mBthod of computing an unearned portion of the finance eharg# in the evenft of .prepayment, but dooa not otherwise meet the requlremsntfl of | 226,8(h), will not qualify transactions made pursuant to that agreement for disclosure under tho 'terma of 5- 226.8(h), (Interprets and applies 15 U.S.O, 1638) 5/26/69

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• V- " fc-f § 226.806 Deposit: balances applied toward satisfaction of customer18 " f'»'' jr.'1* in t u i m » ' m I 1 . . i y > - r " ' '»?*"'•! «Mri» 1 iiiim.!'i '."lii'ti.'*!»«*• n ' i i l i i r B u V i t r i . T»ltffnnfrfi%i1'i?^!iil fc>» VA;v* obi 1 f(«t Ion (a) Suction 226.3(e)(2) provides that required dopos.lt balances mint bo deducted under 5 226.8(c) (6) and excluded unclej.' 5 226.0(d)(1) in determining the amount financed, Subdivision (11) of § 22$*8(0) (2) provides an exception in- .the. •.case of Morris i'lan type transactions in which pnyiranta in the transaction are mada and acou-* mulated in u deposit Account: which iss then wholly applied Lo s a t i s f y the obligation, (b).. Unless tho deposit balance account ia cmated fox* the sole pur poo c of accumulating paytteviCa and than being applied toward ;satl«£actlon of the customer's obligation in film transaction, auch deposit balance • doe# not f a l l within -the oKccpt.ion provided In subdivision (11) .

(c.) In any cano in which n depontt balance qual if 1cm for this exception, each deposit made into the account shall be considered the same as a payment; on the obt l o t i o n tot the pur poo >; of coniputat i ana and disclosures.

(Interprets and applies 1,5 USC 1631) ami 15 IIKC 1639) 5/26/69

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-7- S-2086-g 5§ 226.901 Waiver of socurIty interest:»--affect on the tlwht of rescission (a) Section 226.9(a) provides for a riyht of rescission ''in the case of any [connumur] credit transaction in which a security interest t8 or will bo retained or acquired In arty real property which is used or is expected to be used as the principal residence of the- customer. ''Under •;! 2;h'ji2(a) security Intcirfifita include mechanic' t) and materialmen's liona. if a creditor effectively waives his right to retain, or to ncquirc suciv a lien, he has not retained or Acquired such occurity Interest The queation arlnes, however» of whether waiver of a creditor'a I,len ri&httt is effective to remove a trans* action from the scope of rescirssion when lien rights which are not' waived arise in favor of subcontractors, workmen, or others who are not creditoro in the transection.

(b) The fact that the creditor waives his lien rights does not, in i t s e l f , determine whether or not the tranilaetion is reao i n d o l e . tC a 11.

(security interests are effectively waived, the transaction''is not reecindable, On the other hand, if as a result of the transaction, a security interest is or will be retained or acquired by a subcontractor, workman, or other peraon, the transaction ia rescindabie.

In the latter caoe the creditor would be responsible for delivering the'.rescission notice a» well as other applicable disclosufeo, delaying performance oo provided under § 226.9(c), nnd idantiiyinp, himself as the creditor on the sesciasion notice. The subcontractors, workman, and others would not be responsible for delivering resciasion notices to the cufttosner.

(Interprets and applies 15 U.SX. 11635) 3/26/69

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"f5- 8-20S6-h S 226,403 Disctoguro of coat of property Insurance when not obtainable from or through the creditor (a) In many cases a creditor requires Iniiuranciji against logs or damage to property or liability arising out Jl Itu use but auch lnaurance Is not obtainable from or through him, The question ftviaos under 5 226.4(a) (6) as to whether auch a creditor must make -any .disclosures to avoid having to include the Insurance premium In the finance .chargo, (b) Irrespective of whether such insurance may bo obtained from or through the creditor, 11 the creditor requires property incurnnce and wlshea •to exclude- the- cost from the finance: -chartie, ho la required to atate clearly and conspicuously to the customer that ho may ehooae the parson through which t'.hci lnaurance la to bu obtained, However, if the lnaurance la not obtainable from or through the creditor, he is') not required to dIsci'Oao the coat of that insurance•, unless, of course, the preraluirs arc included in the "amount financed, in which caue It would have to ho dl adored under (j 226.8(c)('0 or (d)(1), aa the cams may be, (interpretsand applies 15 U.S.C, 1605) 3/26/69

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§ 2?6,902 "Customers" mid Joint owners of.property under. the rlftht of rescission (n) Section 226,9(1!) provides thnt, for the purposes of the tight; of vooclanion, "cuntomer" shall include two or mote customers where' joint ownership 1s involved.

The question nrlttcn of whether thin means thet oil joint owners of record, regardless of whether or noir they ore parties to the transection, are customers for this purpose* «rsti whether eneh of nuch owners of record (I) must receive disclosures mid a notice of the right: of rescission, (?•) moy exorcise the right of rescission,--oiid. (3) must join in signing -n woivar if «ne:i#•appropriately token by the creditor, ••(b) Under § 226.9(f)- where there ore Joint owners, the right to receive.disclosures and notice of -the right of rescission, the right to rescind, and the need to sign a wiiver of such right, apply only to those Joint ownarfc Who nt'e perties to the trmuuict: ion. ;. (Interprets and applies l'j U.S.O, 1635).

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