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F ederal Reserve Bank
Da lla s
Circular No. 69-135
May 30, 1969
To Banks, Other Financial Institutions,
Trade Associations, and Others Concerned
in the Eleventh Federal Reserve District:
Attached for your information is a copy of a
press release of the Board of Governors of the Federal
Reserve System dated May 26, 1969, regarding nine inter
pretations, also attached, of Regulation Z, Truth in
Lending, which goes into effect on July 1, 1 96 9.
Yours very truly,
P. E. Coldwell
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
F E D E R A L
For immediate release.
R E S E R V E
May 26, 1969.
The Board of Governors of the Federal Reserve System
announced today the approval of the attached interpretations of
provisions in its Truth in Lending Regulation Z which goes into
effect on July 1.
Security interest--confession of judgment— cognovit notes
Under § 226.2(z) "security interest" is defined to include
confessed liens whether or not recorded and, in general,
to include any
interest in property which secures payment or performance of an obligation.
In certain transactions involving a security interest, under § 226.9 the
customer has a right of rescission.
In some of the states, confession of judgment clauses or
cognovit provisions are lawful and make it possible for the holder of an
obligation containing such clause or provision to record a lien on property
of the obligor simply by recordation entry of judgment; the obligor is afforded
no opportunity to enter a defense against such action prior to entry of the
Since confession of judgment clauses and cognovit provisions
in such states have the effect of depriving the obligor of the right to be
notified of a pending action and to enter a defense in a judicial proceeding
before judgment m ay be entered or recorded against him, such clauses and
provisions in those states are security interests under
the purposes of
§ 226.8(b)(5), and
§ 226.2(z) and for
This is the case
even if the judgment cannot be entered until after a default by the obligor.
Confession of judgment clauses and cognovit provisions which,
by their terms, exclude a lien on all real property which is used or is
expected to be used as the principal residence of the customer, would not
bring a transaction under the provisions of
S 226.203 Open end credit distinguished from other credit
The fundamental qualification for "open end credit"
under § 226.2(r) is that consumer credit be extended on an account
pursuant to a plan under which (1) the creditor may permit the customer
to make purchases or obtain loans from time to time directly or indirectly
from the creditor, as the plan may provide;
(2) the customer has the
privilege of paying the balance in full or in instalments; and (3) a
finance charge may be computed by the creditor from time to time on an
outstanding unpaid balance.
Under an open end credit account plan,
is contemplated that there will or may be repetitive transactions on a
In certain cases, a form of contract or note relating to
a single transaction provides that the finance charge will be computed
from time to time by application of a rate to the unpaid balance and
stipulates required minimum periodic payments.
However, the obligor
has the privilege of making larger and more frequent payments than
stipulated or paying the obligation in full at any time without penalty.
The question arises as to whether the creditor should make disclosures in
such circumstances under § 226.7 for open end credit accounts or under
§ 226.3 for credit other than open end.
Although the terms of such a contract or note meet the
second and third requirements for such a plan,
they do not meet the first
of such requirements nor the basic qualification that consumer credit be
extended on an account pursuant to a plan.
Therefore, disclosures in
this case are required to be made under § 226.8.
(Interprets and applies 15 USC 1602)
5 /2 6 /6 9
S -2 0 8 6 -c
§ 226.301 Agricultural purposes--when exempt from the Regulation
Under § 226.3(a),
the Regulation does not apply to
"Extensions of credit to organizations,
business or commercial purposes, other than agricultural purposes."
The definition of "organization" in § 226.2(s)
includes a corporation,
trust, estate, partnership, cooperative, or association as well as
The question arises as to whether the Regula
tion applies to extensions of credit to organizations,
for agricultural purposes.
Extensions of credit to organizations,
for agricultural purposes are exempt from the Regulation.
(Interprets and applies 15 U.S.C. 1603)
S -2 0 8 6 -d
Annual percentage rate on single add-on rate transactions.
The application of a single add-on rate to transactions
of varying maturities, when converted to an annual percentage rate
determined by the actuarial method, results in minor variations.
annual percentage rate variations on maturities up to sixty months are
so insignificant that separate computations are unwarranted.
The question arises as to whether a creditor may disclose
a single annual percentage rate on all such transactions based upon the
highest rate which will arise from the application of the same single
add-on rate to each of such transactions.
(c) When the same add-on rate is applied to all transactions
within a range of maturities up to 60 months, and provided that all pay
ments on each transaction are equal in amount and due at equal intervals
of time within the limits provided by § 226.5(d),a single annual percentage
rate may be disclosed,
in which case it shall be the highest annual per
centage rate that may be applicable to any such transactions.
(Interprets and applies 15 U.S.C. 1606)
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§ 226.8C5 Series of sales as distinguished from refinancing, consolidating.
The question arises as to the distinction between the
provisions of § 226.8(h), series of sales, and the provisions of § 226.8(j),
refinancing, consolidating, or increasing.
is applicable only when a credit sale is
made pursuant to an agreement which provides for the addition of a current
(or new) sale to an existing outstanding balance. In such cases, and
provided that all of the requirements of § 226.8(h)(1) and (2) are met, the
disclosures may be made at any time not later than the date the first
payment for that sale is due.
If there is no agreement, or if the agreement does not
meet all of the requirements of § 226.8(h), the disclosures required in
connection with any subsequent sale, which is added to a previously out
standing balance shall be made under the provisions of § 226.8(j ) .
example, the fact that an agreement provides a method of computing an un
earned portion of the finance charge in the event of prepayment, but does not
otherwise meet the requirements of § 226.8(h), will not qualify transactions
made pursuant to that agreement for disclosure under the terms of § 226.8(h).
(Interprets and applies 15 U.S.C. 1638)
§ 226.806 Deposit balances applied toward satisfaction of c u s t o m e r ^
Section 226.8(e)(2) provides that required deposit
balances must be deducted under § 226.8(c)(6) and excluded under
in determining the amount financed.
of § 226.8(e)(2) provides an exception in the case of Morris Plan type
transactions in which payments in the transaction are made and accu
mulated in a deposit account which is then wholly applied to satisfy
Unless the deposit balance account is created for the
sole purpose of accumulating payments and then being
toward satisfaction of the customer's obligation in the transaction,
such deposit balance does not fall within the exception provided in
In any case in which a deposit balance qualifies for
this exception, each deposit made into the account shall be considered
the same as a payment on the obligation for the purpose of computations
(Interprets and applies 15 USC 1638
and 15 USC 1639)
5 /2 6 /6 9
S -2 0 8 6 -g
§§ 226.901 Waiver of security interests--effeet on the right of rescission
Section 226.9(a) provides for a right of rescission
case of any [consumer] credit transaction in which a security interest is or
will be retained or acquired in any real property which is used or is expected
to be used as the principal residence of the customer.
security interests include mechanic's and materialmen's liens.
If a creditor
effectively waives his right to retain, or to acquire such a lien, he has not
retained or acquired such security interest
The question arises, however,
of whether waiver of a creditor's lien rights is effective to remove a trans
action from the scope of rescission when lien rights which are not waived
arise in favor of subcontractors, workmen, or others who are not creditors in
The fact that the creditor waives his lien rights does not,
in itself, determine whether or not the transaction is rescindable.
security interests are effectively waived,
On the other hand,
the transaction is not rescindable.
if as a result of the transaction, a security interest is
or will be retained or acquired by a subcontractor, workman, or other person,
the transaction is rescindable.
In the latter case the creditor would be
responsible for delivering the rescission notice as well as other applicable
disclosures, delaying performance as provided under § 226.9(c), and identifying
himself as the creditor on the rescission notice.
The subcontractors, workmen,
and others would not be responsible for delivering rescission notices to the
(Interprets and applies 15 U.S.C. 1635)
5 /2 6 /6 9
§ 226.403 Disclosure of cost of property insurance when not obtainable
from or through the creditor
In many cases a creditor requires insurance against loss
or damage to property or liability arising out j ! its use but such insurance
is not obtainable from or through him. The question arises under § 226.4(a)(6)
as to whether such a creditor must make any disclosures to avoid having to
include the insurance premium in the finance charge.
Irrespective of whether such insurance may be obtained from
or through the creditor,
if the creditor requires property insurance and wishes
to exclude the cost from the finance charge, he is required to state clearly
and conspicuously to the customer that he may choose the person through which
the insurance is to be obtained.
if the insurance is not obtainable
from or through the creditor, he is not required to disclose the cost of that
insurance, unless, of course, the premiums are included in the "amount financed,"
in which case it would have to be disclosed under § 226.8(c)(4) or (d)(1), as
the case may be.
(Interprets and applies 15 U.S.C. 1605)
"Customers1 and joint owners of property under the right of rescission
Section 226.9(f) provides that, for the purposes of the
right of rescission, "customer" shall include two or more customers where
joint ownership is involved.
The question arises of whether this means
that all joint owners of record, regardless of whether or not they are
parties to the transaction, are customers for this purpose, and whether
each of such owners of record (1) must receive disclosures and a notice
of the right of rescission,
(2) may exercise the right of rescission, and
(3) must join in signing a waiver if one is appropriately taken by the
Under § 226.9(f) where there are joint owners,
to receive disclosures and notice of the right of rescission,
the right to
rescind, and the need to sign a waiver of such right, apply only to those
joint owners who are parties to the transaction.
(Interprets and applies 15 U.S.C. 1635).