Interpretation of provisions in Truth in Lending Regulation Z

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Poir immnd J a t o r o 1 o n r . o .

Mny 5 , 1 9 6 9 , I h o B o a r d o f G o v e r n o r s o f t h e f e d e r a l R e s e r v e i S y a t ^ n t o n m u m c e a t o t h i y i:lui a p p r o v a l o f A e v e r v l n t c r p r e t « t i o n u o f p r o v i s i o n s I n i t s T r u t h i n L e n d i n g R e g u l a t i o n Z w h i c h g o o a i n t o e f f e c t o n J u l y 1 , A c o p y o f e a q h I n f c t t t p r e t u t C i o n %9 a t t a c h e d .

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§ 226.2oI Lay-Aw.ty Plans ns axt'ongiona of credit;

(a) Mmiy vendors o f f e r Lny-Away Plans under which they retain the merchandise for n customer" u n t i l tho cash pticy ifi pfltd in f u l l and the customor hfta no ecmlnterunl obi l o t i o n to m/iUe payments ?nd may»- nt his option, revoke a purchttSG made under the plfliv ond request,'., and receive prompt, refund of nny nmoimta poi<J toward thfc cash pfico of the merchandise.

(b) A purchase under auch a I,ay-Awny i'lnu shall not bo con» Bider@d an extonaton of credit subject" to the provisions -of Regulation 2. 5/5/69

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-2- § 226,402 Torm of insurance! covera$o (a) Under § 226.4(a)(3) and (0) certain disclosures of Insurance premium costs, if applicable, are required, The question arisua as: to whether such amounts of cost disclosed must include tho cont o£ Insurance for the full term of the tranoactlon.

(b) Under § 226,4(h) the cost of Insurance for l:he lull period of Insurance covaragc which the creditor will re.quiyn ohallL be diecloaed if the coat of the insurance premium Is required to be included in tho finance charge, HowoVftr, if the cost of Insurance is not required to bo included in thfe fiinatteo chargo, the coat to bo diacloacd need only be the cost of premiums for tho term of the initial policy or.pol j.clou written in connection with.-'the transact ion, accompanied by a statement of the typo of Insurance and the term thereof, 5/5/69

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5 226,703 PinrtncQ'oharac .bnaod'on average dally |)nlftt>ca In open ond c r o d i t n^counbB (a) .Section 226 <7 (b)(8) roqulroo that periodic nt a terms tits for open end accounts s h a l l d i s c l o s e , among .other things, "Tho b a l a n c e on which the finance charge was computed, nnd a Btatetront of how that balance v m a determined,"

In some instance#, c r e d i t o r s c o m p u t e a finance charge on the average dully balance by a ppl i c a t i on of a monthly p e r i o d i c r a t e .

In auch catse, thia information i s adequately dinuloaied If the statement", gives the amount of tha average d a l l y balance on which the finance charge was computed, »nd also Btates how the balance l#i d e t e r mined, In other instances, the finance chargo i s computed on the balmier; each day by appli<stttion of a d a i l y periodic rate and auch ehnrisoa are accumulated and debited to the account in a single amount Cor the b i l l i n g cycle.

The question a r i s e s whether the periodic Btatoewmt must show for each day of the b i l l i n g cycle a balance on which a finance charge was computed, (b) If a d a i l y per Iodic r a t e Is unod, the balance to which i t ia applicable s h a l l be s t a t e d as follows: (1) A balance, for each day In the b i l l i n g eye lo; or (2) 'fhe oum of the daily balances during tho b i l l i n g cyclo, or (3) The average d a l l y balance during tho t>iJl 11 rifi cycle in which case tho c r e d i t o r s h a l l s t a t e on itlio face of tho periodic statement, i t s reverse oldc, c»r on an encloaod supplement that tho average dally balance i s multiplied by the number of days in tho b i l l i n g cyclo and tho periodic r a t e applied to the product to determine tho amount of the finance charge.

In each case the annual percentage rato s h a l l be determined nnd disclosed by multiplying the daily periodic rote by 365, 5/5/69

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•* 8 226,704 Annual percentage rate computation whero (jirnniiiacfclon charges aro lwpoaed on open end credit accounts (a) Section 226. 7(b) (6) pt'oeoclbea th^ method by which an annual percentage rnfce is computed whero the creditor oi: tho open end credit account Imposes finance charges with respoot to jipecls'lc trana« actions during tho hilling cycle, (b) In determining the denominator of the freetlon under § 226. 7(b) (6), UP amount will H® uaed more than once whein adding the sum oi; tho balances to which pet iodic rates apply to the sum o£ tho amounts financed to which specific transaction charge apply* In every casG tho full amount ol! transactions to which specific transaction charg<M» apply shall. bo includod in thtt denominator. Other balances or parts of balances shall be Included according to the tnuwncr In which a periodic rate ia applied, as illustrated in the following axaroptes of accounts on monthly billing cyclos:

1, Previous balance - none A specific transaction of $100 occurs on first: day of the billing cycle.

The average daily balance Is $100, A specific transaction charge of %% la applicable to tho opcclClc transactions.

the•periodic rate is 1-1/2% applicable to itha average daily balance, The numerator is tho amount of the finance chargo, which in $4.50,

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• • Tho denominator is the. amount of the transaction (which ie $100), pluo the amount by which r.ha balance to which tho periodic rate applies exceeds the amount of specific transactions (such excess in this crtfio la 0), totaling $100, The annual percentage rate if) tho <;uot icut: (which is 4.5%) multiplied by 12 (the number of months in « y«nr), l«ti. 347,. Previous -balance - $100 A npneii-ic transaction of $100 occura at midpoint of tho hi I ling cycle.

Tho average daily balance i» $150.

A specific transaction charge o£ 3'f, i»- applicable to tin? specific transaction, Thc periodic rote-ia 1-1/2% applicable! to the average daily- balance. The numerator is the amount of finance charge, which 1B $5.25. The denominator is tho amount of the transaction (vhlch is $100), plua the wmount by which tho balance to which (lie periodic irate npplicH exceeds the amounts of specific transactions. (ouch. exceas in itils case is $50), totaling $150. As explained in example I, the annuel-percentage ret® is 3.5% x 12 « 42%.

If, in example 2, the periodic rote applies only to the previous balance, the numerator is $4.50 and tho denominator is $200 (the amount of the transaction, $100, plus the bo1 mice to which only the periodic rote is applicable, the $100 previous balance). As explained in example 1, the annual percont:ep,a rate; ia 2.25% x 12 27%.

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4, If, in example ?, the periodic irnto Applies only to an adjusted beilence (previous balance less payments mid credits) and the customer made n payment of $50 at midpoint of btlltnjj cycle, tho numerator is $3.75 and tho denominator ;ts $150 (the amount. of. the transaction ,.100, plus the- balance to which only the periodic m e Is applicable, the $50 adjusted balance). As explained in example I, the annual percentage rate Is 2.5% x U » 30%, 5. Previous balance - $100 A specific transaction (check) of $100 occurs at the midpoint of: the blllinj; cycle.

The overage daily balance is $150, the specific transaction chorgc is 25 cents per check, the periodic rate \» 1-1/2% applied to the average dnitly balance, the numerator la the amount. of the finnnce chnvge, which is $2,50, nnd includes the 25 cento check charge And•tho $2.25 resulting from the «ippllci<tion of the periodic rate. The denoiiiirtetor is the full amount of the specific, transaction "(which is $100) plus the amount by which tho everAge dally brilmtcc exceeds the emount of the specific transaction (which In this ensie is $50), totaling $150. As explained in example 1, the annual -percentage r^to \«ould be l-i'73'/, « 12 (c) Regardleus of such method of computation, the Annual purcentpge rote to be disclosed.shall be not less th«n - tho periodic rate multiplied by the number of perJoda in n ye«r or the rate ao may otherwlue be determined under § 226,5(e), 5/5/69

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§ 226.8(12 Disclosures on mail or telephone ordera (a) Under <5 226.8(g), disclosures may bo made at uny time not later tlwm .the date the first payment la duo undo* certain eondltlono. Thfc question arises as to when diaeloeures shall be wade on mnll or telephone ordero, where tho Information outlined in § 226.UOOO) and (2) le not avail* able to tho customer or proapective customer, (h) Under the elmimatencea net forth in the nbovo question, the creditor ahull make the disclosures required under Regulation 'A as followo: I, With respect to credit sales, not later than ait this time of delivery o£ the property or first'.performance of service ordered, %. .With reapftot to loans, not later than at the time proceed# of tho loatv are disbursed, 3i .Except Chat if the trananctlon is subject to the provisions of 5 226,9, the disclosures shall be made before the transaction is ftttnaundated.

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. ~ 8 » § 226.803 plflclogufflfl'"when dlscountr apply for prompt payment; (a) Under § 226.8(o), dlscloouven shall bo made on the billing statement whereon under S 226<8(n) dliicloflures ijhftfl be made bo.forc the trnnsoctlon 1b consummated, Thn question arlu'eli am to which ptoviflton prevails.

(b) The provisions of § 226.8(o) prevail under th« conditions sot. fornh In that paragraph unless the transaction la al»o BUbjsct to tho provisions of | 226.9 In.which avent the diactoBurM shall be made before the transaction is consummated. 5/5/69

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• -9- § 226.804 Series of sales-content of agreement: (a) Under § 226.8(h), If a credit oalc in on<> of a ueriefl of trana* actions made under an agreement, providing for the mid It ion of a current a&l© to an existing outstanding balance and the customer haa approved in writing the annual percentage rate or rates and certain other requirements aye mot, .dlaclooutfenmay be made at any time not later thaw the date the flrat payment iror that salts Is due, (b) the question arises m to how the annual percentage rate or ratoa should he shewn in an agreement where, lor example, wn 18?, annual percentage rate applies to the first $500 of balance, a 12% annual percentage rate applies to all balances over $500, and the mix o£ tho two rates on transactions over $500 will produce a gradually decreasing annual percentage rate as the amount of balance over $500 Increases, (e) lit add i t lori to meeting the other requirements of § 226.8(h), l£ two or more antniai percentage ratoa apply to tangos o£ balances, the agreement, need only state each annual percentage rate and tho range of balancea to which Lt appliest However, the difldoouroB which must bo made not Inter than tho dote tho first payment is due must Include th« actual annual percentage rote applicable to that aalo. 5/5/69