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F E D E R A L R E S E R V E BANK O F N E W YO RK J" C ircu lar N o. 6 3 8 8 * 1 L A u g u s t 18, 1969 J Amendment to Regulation Z To A ll State M em ber Banks, and Others Concerned, in the Second Federal R eserve D istrict: Following is the text of a statement issued August 11 by the Board of Governors of the Federal Reserve System: The Board of Governors of the Federal Reserve System today issued an amendment to its Truth in Lending Regulation Z to clarify one provision relating to discounts granted by creditors on sales to their customers for prompt payment of bills. The amendment is effective immediately. Under the amendment, creditors offering discounts for prompt payment of single payment trails actions will be required to state the “ annual percentage rate” only if the discount exceeds 5 per cent. They will be required to state the discount in dollars and cents on each particular sale. The amend ment also simplifies the computation of the “ annual percentage rate” when it must be stated. The original provision required creditors to state the “ annual percentage rate” no matter what the discount. Many creditors, for example, offer a 2 per cent discount if a bill that is due in 30 days is paid in full within 10 days. In a case of this kind, the creditor will no longer be required to state an ‘ ‘ annual percentage rate.” It has come to the B oard’s attention since the Truth in Lending law went into effect on July 1 that many creditors have discontinued the use of discounts for prompt payment. This is especially true in agricultural types of credit where there has been special difficulty with compliance. Frequently the amounts of the discount in this area are related to weight, volume, number or other physical meas ure of the products such as 1 cent a gallon or $1 a ton. The prices of these products also vary from week to week and month to month. The B oard’s amendment is designed to alleviate these problems and to make it easier for creditors to continue discounts for prompt payment in this special type transaction. Most discounts of this type do not exceed 5 per cent and the “ annual percentage rate” of those over 5 per cent may now be cal culated more readily. Technically, the amendment will replace Section 226.8 (o) in the original Regulation Z. A t the same time the Board clarified the use of d is c o u n ts on single payment transactions when they are com bined with open end or credit other than open end. Although the amendment is effective immediately, creditors may use until March 1, 1970, any printed forms which were prepared before today in an effort to comply with the original provision. Enclosed is a copy of the amendment; additional copies will be furnished upon request. A lfred H ayes, President. TRUTH IN LENDING AMENDMENT TO REGULATION Z I ssu ed b y t h e B oard o f G overnors Effective A ugust 11, 1969, § 226.8(o ) is amended to read as fo llo w s : § 226.8— C R E D IT O T H E R T H A N O P E N E N D — S P E C IF IC D IS C L O S U R E S • * * (o ) D is c o u n t f o r p r o m p t p a y m e n t o f sales tra n sa ctio n s. (1 ) F o r the purposes o f this para graph, a “ transaction subject to § 226.8( o ) ” is a credit sale transaction which is not exem pt under §226.3 and which is subject to a discount fo r p a y ment on or b efore a specified date (e.g. 2 % discount i f paid within 10 days) or to a charge fo r delaying paym ent after a specified date (e.g. $98 cash, $100 if paid in 30 d a ys). Both such a discount and such a charge are referred to in this paragraph as a “ discount.” In the case o f any transaction subject to § 226.8( o ) , notwithstanding the provisions o f the last sentence o f paragraph (a ) o f this section, the creditor shall disclose on the invoice or other evidence o f such sale, as ap plicab le: (i) The date o f the sale or invoice. (ii) The rate o f discount, the date by which or period within which the discount may be taken, and the date by which or period within which the fu ll amount o f the obligation is due and payable. (F o r example, “ 2 % /1 0 days, net 30 days” ; or “ $1 per ton /1 0 days, net 30 days.” ) (iii) The inform ation § 2 2 6 .8 (b )(4 ) and (5 ). required under (iv ) The amount o f the discount, designated as a “ finance charge,” using that term. (v ) I f the discount shown fo r prom pt p a y ment exceeds 5 % o f the obligation to which the discount relates, the “ annual percentage rate,” using that term, com puted in accordance with subparagraph (2 ) o f this paragraph, but sub ject to the exceptions provided under § 2 2 6.8(b ) (2 ). (2 ) F o r the purposes o f subparagraph (1 ) (v ) o f this paragraph, the annual percentage rate shall be determined by dividing the amount o f the finance charge by the least amount payable in satisfaction of t h e F ederal R eserve S ystem o f the obligation and m ultiplying the quotient (expressed as a percentage) by a fraction in which the numerator is 12, and the denom inator is the uumber o f whole months (bu t not less than 1 ) be tween the first day o f the monthly billing cycle in which the transaction is consummated and the first day o f the monthly billing cycle in which the obli gation becomes due.13a (3 ) In a transaction with multiple discount rates ( fo r example 6 % /1 0 days, 4 % /2 0 days, net 30 da ys), the largest discount shall be used fo r p u r poses o f disclosing the amount o f the finance charge under subparagraph (1 ) (iv ) o f this p ara graph and the annual percentage rate under subparagraph ( l ) ( v ) o f this paragraph .1 1 33 (4 ) In order to determine the ap plicability o f subparagraph ( l ) ( v ) o f this paragraph and to facilitate disclosure o f an annual percentage rate, i f the amount o f the discount fo r prom pt paym ent is related, pursuant to usual business practice, to weight, quantity, or other physical measure (e.g. $1 per ton or 14 per gallon ) rather than expressed as a percentage o f discount, that discount may be converted to an approxim ate discount rate and, under subparagraph (2 ) o f this paragraph, a reasonably accurate approxim ation o f the annual percentage rate by using approxim ate or projected prices per physical unit determined on the basis o f 13a F or example, a $1,000 purchase o f feed subject to terms o f 6 % /1 0 days net 30 days (or 6% /1 0 days, net E .O .M .; or 6 % /1 0 days, net 10th o f the follow in g m onth; or 6 % /2 0 days, net 30 d a ys; or 6 % /3 0 days, net 30 da ys; or 6 % discount fo r cash, net 30 days) results in a finance charge o f $60, a least amount payable o f $940, and an annual percentage rate o f 76.56% , which may be rounded to 76.50% or 7 6 % % . Terms o f 6 % /2 0 days, net September 29 applied to an A pril purchase, assuming a calendar month billin g cycle, result in an annual percentage rate o f 15.31% (i.e. 6 /9 4 x 1 2 /5 ) which may be rounded to 15.25% or 1 5 % % . In this example the 29 days in Septem ber are ignored and the denominator (5 ) is determined by the number o f whole months in the period. 13b F or example, terms o f 6 % /1 0 days, 4 % /2 0 days, net 30 days would be treated like terms o f 6 % /1 0 days, net 30 days, which would represent an annual percentage rate o f 7 6 % % . P R IN TE D IN N E W YORK past experience, current inform ation, or projected analysis.130 (5 ) I f by its terms a transaction su bject to § 226.8(o ) is payable in a single paym ent and no finance charge other than a discount is or may be im posed, and such discount is not utilized fo r the pu rpose o f circum vention or evasion o f disclosure requirements, the disclosure required by subpara graph (1 ) o f this paragraph shall constitute com pliance with the requirements o f § 226.8 and under § 2 2 6.9(a ) shall constitute “ all other material dis closures required under this P art.” (6 ) I f a transaction subject to § 226.8( o ) is debited to an open end credit account, disclosures shall be made as specified in subparagraph (1 ) o f this paragraph and also as specified in § 226.7. The fu ll amount o f the obligation including the amount o f the discount may be debited to the open end credit account, under § 2 2 6.7(b ) ( 2 ) , and the amount o f any finance charge representing the dis count need not be added to any other finance charge fo r the pu rpose o f com puting and disclosing the total amount o f finance charge and the annual percentage rate under § 2 2 6.5(a ) and § 226.7.13d (7 ) I f a transaction subject to § 2 2 6 .8 (o) is not debited to an open end credit account, but either is subject to an additional finance charge or is p a y 13c F or example, i f terms o f $3 discount per ton /1 0 days, net 30 days are offered on fertilizer that is ex pected to sell in a range o f about $48 to $52 per ton, the annual percentage rate could be approxim ated fo r preprinting as i f it were 6% (i.e. $3 on $ 5 0 )/1 0 days, net 30 days, that is, 7 6 ^ % . 13d F or example, i f a $1,000 sale on terms o f 2 % /1 0 days, net 30 days, is debited to an open end account on which 1 % per month is charged, the periodic state ment under § 2 2 6 .7 (b ) (assum ing no other transac tions in the account) would show a previous balance o f $ 1, 000, a finance charge o f $ 10, and an annual percentage rate o f 12% . able by its terms in m ore than one payment, dis closures shall be made as specified in subpara graph (1 ) o f this paragraph and also as specified in paragraphs (b ) and (c ) o f this section. In such a case, i f the transaction is payable in more than one payment, the amount o f the discount shall be deducted fo r the pu rpose o f com puting and dis closing the cash price under paragraph ( c ) ( 1 ) o f this section and shall be added to any other finance charge fo r the purpose o f com puting and disclos ing the amount o f the finance charge under para graph (c ) (8 ) ( i) o f this section and the annual percentage rate under paragraph ( b ) ( 2 ) o f this section.13e I f the transaction is payable in a single payment, the discount may be disregarded in com puting and disclosing such cash price, finance charge, and annual percentage rate.13f (8 ) Notwithstanding the provisions o f the second sentence o f paragraph (a ) o f this section, the dis closures required under subparagraph (1 ) o f this paragraph made on the invoice or other evidence o f sale may be delivered subsequent to consumma tion o f the transaction. (9 ) Am ended paragraph ( o ) o f § 226.8 shall be come effective A ugust 11, 1969, but until M arch 1, 1970, any creditor may at his option use any printed form s which were prepared before such effective date in accordance with paragraph (o ) o f § 226.8 in effect at the time o f such preparation. 13e F or example, i f a $1,000 sale on terms o f 2 % /1 0 days, net 30 days is subject to an add-on finance charge o f $100 and is payable in instalments, the dis closures under § 2 2 6 .8 (b ) and ( c ) would include a cash price o f $980 and a finance charge o f $120. 13f F or example, i f a $1,000 sale on August 2 not under an open end account is subject to terms o f 2 % /1 0 days, net 30 days, thereafter 8% per annum until December 1, the disclosures under § 2 2 6 .8 (b ) and ( c ) would include a cash price o f $ 1, 000, a finance charge o f $19.95, and an annual percentage rate o f 8.00%.
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