Interpretation to Truth in Lending Regulation Z adopted and Board seeks public comment on proposed amendments

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For livttK'dinte release Oe Lob (if 20, 1970.

The Board of Governors o£ the Federal Reserve System Uxiny Announced the adoption of one Interprewdtion to it® truth In Lending IU>j>.ulatlon Z and Issued thre© propoeed amendment# ei the Rcj'ulntlon for public comment.

The Interpretation issued by the Board spells out thnt all points and discounts paid to a creditor by a seller in con* motion with b consumer credit transaction must be included in the finance charp,« to the extent they ore passed on to the guatosnBC. Otic example ia the points paid by the seller to assure an extiBrtfiion of credit In a real estate transaction.

However, the Bonrd w:lll not presume thnt, all points and discounts arc pftsfled on to th<s buyer.

Amendments proponed by the Jloord moulds 1.

Provide that creditors must give 15 days notice to active customers of any change in terms o£ an open*end account * At present, creditors must give 30 days notice of any change in ic • terinrf to all customers, whether th«y have active or inactive i * ' (O accounts.

Under the proposal, inactive accounts mmt be notified , -when they boccmifl active and bfifort; nny increase ift finnnco charges • J in imj'OHcd against the account- Unnler mi amendment t«nuu<l on

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» 2-» October 23, no n o t i c e i s required i f the only chance i s the reduction in the periodic r a t e or raises a p p l i c a b l e to tho account. 2.

Permit; m o d i f i c a t i o n of the reBcisoion not leu ufied in c r c d i t s a l e s of vacant l o t s by s u b s t i t u t i n g the word "homusLCe" for "home ,"

3.

Permit the adv&rt:L»ing of meaningful c r e d i t toxins applicable utidp.r PHA Section 235 financing but; p r o h i b i t a d v e r t i s ing of payment*! or annual percentage r a t e which would b« mirtiendtnf to most prospective customers, The Board fixed December 4 nfii the dondliiio f o r r e c e i p t of coranents on the three proposed nnieodiiijents. Copies of the interpretation ond proponed Amendtnenta nri? act 'I'.'lici.

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• • TITLE l2-^BAf)KS AUD BANKING CHAPTER II--FEDERAL RESERVE SYSTEM SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM laoju z j PART 226—TRUTH IN LENDING Sol l o t ' s Points and Discounts under Regulation Z 5 226.400 Sol l e t ' a points and discounts under Regulation Z (a) Section 226.4(a) of Regulation Z includes in tho finance charge any charge "payable d i r e c t l y or i n d i r e c t l y by tlio customer, .mil impojiod d i r e c t l y or i n d i r e c t l y by the c r e d i t o r us nil Incident to or as n condition of the extension of c r e d i t * * »" The question a r i a o a tin to the pro n-r treatment o£ discounts! paid by the s e l l e r , Including points imposed on the s e l l e r by the lender in connection with a real « o fate t r n n a n c i: Ion.

(h) Under the general r u l e in § 226.4(a), any such d i s c o u n t , to the extent it: is passed on to the buyer through mi increase In tho s o i l i n g p r i c e , must be included in tho finance chare,o, However, -iti a p r a c t i c a l mutter, i t may be d i f f i c u l t to determine whether or not a discount paid by the s e l l e r in connection with a real e s t a t e t r a n s a c t i o n has been, in f a c t , passed along to the customer as a p a r t of the purchase price of tho p r o p e r t y .

The same a c t u a t i o n may «xi:it in other e a s e s , for exanple, those in which the c r e d i t o r s e l l a at n discount o b l i g a t i o n # payable in more than four i n s t a l m e n t s , (c) Tho Board haa concluded that in any ouch t r a n s a c t i o n coming within i t s a d m i n i s t r a t i v e enforcement a u t h o r i t y , where s e l l e r ' s point*

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or discounts were, in fact, passed along to the customor or buyer and the amount thereof was not digclosed as a finance charge, the Roard will take such action as may ba appropriate in the circumstances, However, Lt wlll uot attempt to preseribe rulea creating 4 presumption that all discounts or points are passed on to the customer or buyer and heuce murt be (nechuded in the finanee charge fa any particular class of transaction. On the other hand, the Inclusion of seller's points or discounts in the finance charge will be acceptable to: the Board aa a correct disclesure under Regulation 2, (J) ihia position relates only to the Board's administrative enforcement procedures and it is not intended in any way to restrfet or prejudice the rights of any customer or buyer to bring an aceton under sections 130 and 131 of the Act where he haa reanon to believe he ts or was required to pay directly or tndirectly a flrance charge imposed directly or indirectly by the creditor of the tranaaction and the amount of that finance charge was net discloned to hts, (Interprets and applies 15 U,S,€, 1605)

By oxder of the Board of Coverners, October 23, 1970,

(Slaned) Kenneth A, Bes

Kenneth A, senyoo, Deputy Secretary,

(SEAL)

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@ ®

FEDERAL RESERVE BYSTEM (12 CFR Part 226] [Reg. 2)

TRUTH IN LENDING

Changes in Gpen End Credit Accounts; Notice of Opportunity to Reseind Certain Vacant Lot Transactions; Advértiaing of PHA Section 235 Financing,

Pursuant to the authority contained in the Truth in Lending Act (15 U.S.C, 1601), the Board ef Governora ia considering amending Part 226 fn the followlug veapecta:

la. By amending § 226.7(e) to read as follows:

§ 226.7 pen End Credit Accounta~-Specifie Disclosures

Rew eo

(e) Change in terms, Not later than 15 daya prior to the

beyinning date of the billing eyele in which any change {s to be made

in the terms previously diseloged to the customer of an open end credit account, the creditor shall mail or deliver a written disclosure of such change to each customer required to be furnished a statement under paragraph (b) of thie section, Such disclosure shall be malled or delivered to each other customer nev later than the date of mafling or delivery of the next required billing statement on his account. However, if the perlodie rate, or any minimum, fixed, check service, transaction,

activity, o. similar charge isa tnereased, the increased amount may not be

imposed on any customer without notice at least L$ days prier to the begiaaing

‘>

date of the billing cycle in which the charge is imposed. No notice ta necegsary J£ the only change is a reduction in the periodic rate or rates

applicable to the account, .

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•*2» b.

The main purpose of the proponed amendment Is to allow creditors o£ an open end credit account to modify iche terms of the account without the necessity o£ notifying inaetiv® as well -lis- active customers.

The present requirements of Regulation Z necessitate a costly notification process and have Inhibited creditors from making changes advantageous to consumers.

The proposed amendment: would require prior notice t:o active accounts, but would cut rho period to IS days to allow notification to be Included with the next previous billing statement. Accounts inactive at the time of the change would recalve a notice when they became active.

However, if the change Involved an lncrcnao in thu periodic rate or In any minimum, fixed, chock service, transaction, t.ctlvity^or similar charge, th« increascl amount may not be collacted i:rom any customer not recolving notice at least 115 days prior to the beginning of the billing cycle in which that increased amount is Imposed, On October 23, 1970, the Board ontended § 226.7(a) to permit creditors to reduco the periodic rate or rat"« -applicable to op«n end credit accounts without the necessity of advance notice to the customer. 2a, By amending 3 226.9(b) to read as follows, S 22(5,9 Right to Rescind Certain Transactions it 1e ft it ft 0') Notice of opportunity to rescind, Whonovisr a cuatorrci has the right to rescind a transaction undar paragraph (a) o:f this section, the creditor shall give notice of that fact to thu cuntoicor b/ furnishing che customer with two copies of the notice set out below,, one of which

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may bo used by the customer to cancel the t r a n s a c t i o n . Such not tea s h a l l bo printed in c a p i t a l and lower case l e t t e r s of not leas than 12 point bold-faced typo on one side of a separate atatoniont which i d e n t i f i e s the transaction to which i t r e l a t e s , Such statement s h a l l also sot f o r t h the e n t i r e paragraph (d) of t h i s sections " E f f e c t of r e s c i s s i o n , " If such paragraph appear!? on the reverse side of tho (statement, the facts of the statement s h a l l s t a t e :

"See reverse aide f o r important information about yovjir r i g h t of r e s c i s s i o n , " Before furnishing copies of the notice to the customer, the c r e d i t o r s h a l l cotnplcste both copies with tho name of tho c r e d i t o r , the address of the c r e d i t o r ' s place of business, the date of consummation of the t r a n s a c t i o n , and the date, not e a r l i e r than tho third business day following the date of the t r a n s a c t i o n , by which the customer may give notice of c a n c e l l a t i o n , Where tho real property on which the security I n t e r e s t may a r i s e does not include a dwelling, tho creditor moy s u b s t i t u t e the word-"homesite" for "homo" whoro that word appears :in tho notice, Not Leo to customer repotted .by. Federal law:

You have entered into a transaction on (date) whlci may result, in a H e n , mori'-uane, or other security I n t e r e s t on your hon-B, Yi?u have a legal right under Federal law to cancel this t r a n s a c t i o n , if you desire to do so, without any penalty or obi 1 ;;at ion within throe business days from the above; date oif any l a t e r datci on which a l l . nsatcri.i.l AMcloavyea required under the Truth In l.sndlnK Act, have been i»lyt.-n to "tn». If you so cancel f h$ transycti'on, ..any 1 ion, mort,-anise, or other nocurjty

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“hs

interest on your howe arising from, this trangactlon 1a gutomatically

void. You area also entitled to receive a refund of any downpayment or

other consideration Lf you cancel. If you decide to cancel this trananction,

you may ¢o so by notifying

(Name of creditor)

at (Address of creditor's place of buginega) by mail or telegram sent

not later than midnight of venen htt), os You may alyuo use

any other form of written notice idontifying the transaction {if it fe

delivered to the above address not later than that time. This notice may

be used for that purpose by dating and signing beloy,

I_ hereby cancel this transaction.

(date) (custonar's signature)

b. The amendment consists of adding a sentence following the substantive part of § 226,9(b) and prior to the text of che required notice, The purpose of the amendment ts to allow creditors {tn vacant lot transactions subject to the rescission provisions of the Truth in Lending Act and Regulation 2 to oubstitute the word “horesite" in the specified notice for the word "hore,"

Ja. By adding § 226,10(e) to read as follows,

§ 226.10 Advertising Credit Terms

Rowe ewe

(e) Advertiging of FHA Section 235 financing, No advertiseme it

to aid, promote, or assist direetly or indirectly the sule of residentint

real estate under Title II, Section 235, of the National Housing Act

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(12 U,S,C, 17l5z) ahall state the amount of any payment scheduled t.o repay the Indebtedness In any extension of credit under that program or * the amount of the finance charge expressed «a an annual percentage .rate, All other information opacified in subparagraph (d)(2) of this section shall bo stated when required by that subparagraph. Any advertisement shall clearly identify those credit terms which apply to the FllA Section 235 assistance program, b.

The purpose of the pvoposed amendment is to enable Hellers to advertise the terms which are applicable to most qualified purchasers under the section 235 Federal assistance program oi; Tltln 11 of tho National Housing Act (such as the dovmpayment and number of payments) without: having to show a figure for the amount of pnymonto or annual percentage rata as presently required by § 226.10(d) of Regulation 2. The purpose of the prohibition against stating any payment amount and aunual percentage rate Is to prevent misleading advertisement caused by tho wide variation in actual amounts and rates applicable to Individual KuotomorB «H a resulr. of variation in tha amount of the Federal aubaidy. To aid In the consideration of theae nvttertt by the Board, interested persons are invited to submit relevant data, viewn, otr arguments.

Any auch material should be submitted in writing to tha Secretary, Board oi: Governors of the Federal Ueaervo System, Washington, 0.C, 20551, Co be received not later than December 4, 1970, Such iratei 'aI

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oo Gee will be made available for ingpection and copying upon request, except os provided in § 261,6(a) of the Board's Rules Regarding Availability

ef Information,

By order of tla Board of Governors, October 23, 1970,

(Signed) Kenneth A, Kenyon

“Kenneth A, Kenyon Deputy Secretary

[SEAL]