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F ederal Reserve Ba nk o f D allas DALLAS, TEXAS 75222 C i r c u l a r No. 75-5 J a n u a r y 10, 1975 INTERPRETATION OF REGULATION Z Daily P e rio dic Rates Imposed on Daily Balances In Open End C r e d it TO ALL BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: T h e B oard of G o v e r n o r s of th e Fe d e ra l R e s e r v e Syste m has is s u e d a r e v i s e d i n t e r p r e t a t i o n of Section 2 2 6 . 7 (b) (8) to c la rify th e d i s c l o s u r e r e q u i r e m e n t s w h e n the fin a n c e c h a r g e in an open e n d c r e d i t a c co u n t is com pu ted by th e imposition of more th a n one d a ily p e r io d ic rate on a d a ily b a la n c e o r b a l a n c e s . For e x a m p le , some c r e d i t o r s impose one d a ily p e r io d ic ra te ( c o r r e s p o n d i n g to one a n n u a l p e r c e n t a g e rate ) for b a la n c e s u p to a s p e c ifie d a m ou n t, a n d a lower d a ily p e r i o d i c ra te ( c o r re s p o n d i n g to a lower a n n u a l rate ) for th a t p o rtio n of b a la n c e s a b o v e the sp e c ifie d a m o un t. P r in te d on th e r e v e r s e of t h is c i r c u l a r is a copy of th e i n t e r p r e ta tion of R egulation Z; ad ditio n al c o p ie s will be f u r n i s h e d u p o n r e q u e s t . Sincerely y o u rs , T . W. P la n t F i r s t Vice P r e s i d e n t This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TRUTH IN LENDING INTERPRETATION OF REGULATION Z F IN A N C E C H A R G E B A SE D O N A V E R A G E D A IL Y B A L A N C E O R D A IL Y B A L A N C E S IN O P E N E N D C R E D IT A C C O U N T S § 226.703 Section 2 2 6 .7 ( b ) ( 8 ) requires that periodic statem ents for open end accounts shall disclose, am ong o ther things, “T h e balance on w hich the finance charge was com puted, and a statem ent of how th at balance was determ ined.” In some instances, creditors co m p ute a finance charge on the average daily balance by application of a m onthly periodic rate or rates. In such case, this inform ation is adequately disclosed if the statem ent gives the am o u nt of the average daily balance on w hich the finance charge was com puted, and also states how the balance is de term ined. In other instances, the finance charge is com puted on the balance each day by application of one o r m ore daily periodic rates, and the question arises as to how the balance on w hich the finance charge was com puted should be disclosed in such circum stances. If a single daily periodic ra te is imposed, the balance to w hich it is applicable m ay be stated in any o f the following ways: (i) A balance fo r each day in the billing cycle; o r (iv) The average daily balance d uring the billing cycle, in w hich case the creditor shall state (o n the face of the periodic statem ent, on its reverse side, o r on an enclosed supple m en t) w ording to the effect th a t the average daily balance is or can be multiplied by the n u m b e r of days in the billing cycle and the periodic rate applied to the p ro d u ct to de term ine the am ou nt of the finance charge. If two or m ore daily periodic rates m ay be im posed, th e balances to w hich the rates are ap plicable m ay be stated in accordance with (i) or (ii) above or as two o r m ore average daily balances, each applicable to the daily periodic rates im posed. F o r example, if the cred ito r im poses one daily periodic rate on balances up to $500 and another daily periodic rate on balances over $500, the creditor w ould show average daily balances of $500 and $200 in an account which had a $700 balance fo r the entire billing cycle. If the average daily balances are stated, the cred itor shall state (on the face of the periodic state ment, on its reverse side, o r on an enclosed supplem ent) w ording to the effect that the finance charge is o r m ay be determ ined by (1 ) m ultiply ing each of the average daily balances by the n um ber of days in the billing cycle, ( 2 ) m ultiply ing each o f the results by the applicable daily periodic rate, and (3 ) adding these products together. (ii) A balance fo r each day in the billing cycle on w hich the balance in the account changes; or (iii) T h e sum of the daily balances during the billing cycle; or 12-27-74
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