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F ederal Reserve Bank
DALLAS, TEXAS

of

Dallas

75222

Circular No. 72-152
July 20, 1972

INTERPRETATIONS OF REGULATION Z
(Basis for Finance Charge and Allocation
of Payments of Open-End Credit Accounts)

To All Banks, Other Creditors and Others
Concerned in the Eleventh Federal Reserve District:

The Board of Governors has published two interpretations
of Regulation Z concerning the determination of the balance that
may be used as the basis for a finance charge in open-end credit
accounts, and the allocation of payments in such accounts.
The interpretations are printed on the reverse of this
circular.

Yours very truly,
P. E. Coldwell,
President

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
INTERPRETATIONS OF REGULATION Z

Interpretation Section 226.703 is amended to
read as follows:

SECTION 226.706 OPEN END CREDIT —
ALLOCATION OF PAYMENTS

SECTION 226.703 FINANCE CHARGE BASED
ON AVERAGE DAILY BALANCE IN
OPEN END CREDIT ACCOUNTS.

Section 226.7(a)(2) provides that before the
first transaction is made on any open end credit
account, the creditor must disclose “the method
of determining the balance upon which a finance
charge may be imposed.” Section 226.7(b)(8)
requires the creditor to disclose on the periodic
statement “the balance on which the finance
charge was computed, and a statement of how
that balance was determined.” The question is
raised whether these provisions require a creditor
to provide a description of the manner in which
payments or other credits are applied to various
portions of the balance or balances on which
finance charges are computed.

Section 226.7(b )(8) requires that periodic
statements for open end accounts shall disclose,
among other things, “The balance on which the
finance charge was computed, and a statement of
how that balance was determined.” In some in­
stances, creditors compute a finance charge on the
average daily balance by application of a monthly
periodic rate. In such case, this information is
adequately disclosed if the statement gives the
amount of the average daily balance on which the
finance charge was computed, and also states how
the balance is determined. In other instances, the
finance charge is computed on the balance each
day by application of a daily periodic rate and
such charges are accumulated and debited to the
account in a single amount for the billing cycle.
The question arises whether the periodic statement
must show for each day of the billing cycle a bal­
ance on which a finance charge was computed.
If a daily periodic rate is used, the balance to
which it is applicable shall be stated as follows:
(1) A balance for each day in the billing cycle;
or
(2) A balance for each day in the billing cycle
on which the balance in the account changes; or
(3) The sum of the daily balances during the
billing cycle; or
(4) The average daily balance during the bill­
ing cycle in which case the creditor shall state on
the face of the periodic statement, its reverse side,
or on an enclosed supplement wording to the effect
that the average daily balance is or can be multi­
plied by the number of days in the billing cycle
and the periodic rate applied to the product to
determine the amount of the finance charge.

In disclosing the method of determining the
balance(s) upon which finance charges are com­
puted, it is not necessary to show the method of
allocating payments or other credits. For example,
explanation of the manner in which payments or
credits may be applied to late charges, overdue
balances, finance charges, insurance premiums or
other portions of balances is not required. Sim­
ilarly, explanation of the method of allocating
such payments between cash advance and purchase
portions of the account is not required. Such ex­
planations in many cases involve lengthy and
complex descriptions which may unduly compli­
cate disclosures.
Explanation of the allocation method may be
made by creditors where it can be done in con­
formity with § 226.6(c) which authorizes addi­
tional information or explanations as long as they
are not stated, utilized, or placed so as to mislead
or confuse the customer or contradict, obscure, or
detract attention from the required disclosures.

6 /2 1 /7 2


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102