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• 123 BOARD OF GOVERNORS CF" THE FEDERAL RESERVE SYSTEM S-570 WASHINGTON ADDRESS OFFICIAL CORREBPONDENCE .. TO THE BOARD October 15, 191~. Dear Sir: Feder~l The following is a copy of a letter dated today sent to a Reserve Bank regarding Regulation W: "Yo·ur letter of September 15 raises a question under Regulation Wwhich has recently been considered by the Board in connection with credit cards issued by gasoline companies and others. The question relates to the status of a charge account.where the buyer has given the seller a note for the amount due 1md the seller has transferred the note to another Registrnnt. .. ·--' ... -· . .• "The previous inquiries arose: out of a regular course of de:1ling based on contracts between the various independent dealers and the issuer of the credit cards under which the issuer agrees to purchase all accounts receivable arising out of sales made by the dealers to the holders of the credit cards. The accounts are purchased without recourse (except in the case of fraud, etc.) and in the normal course of events the dealer receives his money inunediately and hears nothing further regarding the acco1mt. "The Board took the position that the dealer was the C3eller, and thc1.t consequently he was the 1Reeistrant 1 within the meaning of section 5(b). Consequently, if a customer did not pay his bill for articles purchased through a dealer, he could nevertheless purchase listed articles with his credit card from another dealer, and furthermore the issuer of the credit card would not be prevented by the Regulation from purchasing the account arising from the latter sale . "On the other hand, if the dealer contemplated making further sales of listt;!d articles on credit to the holder of the credit card, he would not be safe in so doing unless he found out from the issuer of the card whether the holder was in default on accolli!t of previous purchases from him • 124 -2"In these cases there was no promissory note·, but the results would be the sarne if there were a promissory note, in view of the definitions of 'charge sale' and 'charge account' in sections 2(f) and 2(g). Consequently, •if the note were not paid (whether because it had been renevved or for any other reason) within the time prescribed in section 5( c), the account would be in default, lmless t . he note had been renewed under such conditions an to constitute a 'cure' under section 5(d). "With respect to your second question., the seller could take a renewal noto v.rithout limitation as to maturity, since he would in effect be merely GXti:mding the time of payment of the account. The account would remain in default pending payment. On the other hand, if the bank accepted a renewal noroo payable to itself, it would in effect be making a loa:.'1 the proceeds o.f which it kr1<.~w would be· used to rc)tire a char2;<0! acc01.mt, and the remn"fal would be subject to tl.e restrictions applicable to 3UCh loans." Very truly 7?-o,rs, -~/h .~a~W .. . S. R. Carpenter, Assistant Secretary . . TO THE PRESID:t'NTS OF ALL FEDERAL RESERVE BANZS • • I
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