View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

F ederal Reserve Bank
DALLAS, TEXAS

of

Dallas

75222
Circular No. 72-153
July 21, 1972

PROPOSED AMENDMENTS TO REGULATION Z
(Disclosures on Open-End Credit Billing Statements)

To All Banks, Other Creditors and Others
Concerned in the Eleventh Federal Reserve District:
The Board of Governors has announced that it proposes to
amend its Regulation Z in two respects, dealing with disclosures on
open-end credit billing statements, such as those issued in connection
with bank credit cards and revolving charge accounts.
The amendments would:
(1)

Require disclosure of a prospective nominal annual
percentage rate on billing statements, although no
finance charges are imposed for the billing period
represented by the statement.

(2)

Require disclosure of minimum finance charges on
billing statements.

Interested persons are invited to submit written views
or information to the Secretary, Board of Governors of the Federal
Reserve System, Washington, D. C. 20551?
to "the Federal Reserve
Bank of Dallas, Attention: Regulations Department, for transmittal
to the Board, not later than July 31? 1972.
The text of the Board's proposal is attached.
Very truly yours,
P. E. Coldwell,
President
Attachment

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL RESERVE SYSTEM
[12 CFR PART 226]

[Reg. Z]
TRUTH IN LENDING
Open End Credit
1
.

Pursuant to the authority contained in the Truth in Lending

Act (15 U.S.C. 1601 et. seq.) the Board of Governors proposes to amend
Part 226 (Regulation Z), in the manner and for the reasons set forth
below:
§ 226.5(a)(3) would be amended to read as follows:
§ 226.5--DETERMINATION OF ANNUAL PERCENTAGE RATE
(a)
*

General Rule - open end credit accounts * * *
*

(3)

*

*

*

Where the finance charge imposed during the billing

cycle is or includes
(i)

any minimum, fixed, or other charge not due to the appli­

cation of a periodic rate, other than a charge with respect to any specific
transaction during the billing cycle by dividing the total finance charge
for the billing cycle by the amount of the balance(s) to which applicable
and multiplying the quotient (expressed as a percentage) by the number of
billing cycles In a year; or

-2-

(11)

any charge with respect to any specific transaction

during the billing cycle (even if the total finance charge also includes
any other minimum, fixed, or other charge not due to the application of
a periodic rate), by dividing thetotal finance charge imposed during

the

billing cycle by the total of allbalances and other amounts on which

any

finance charge was imposed during the billing cycle without duplication
and multiplying the quotient (expressed as the percentage) by the number
5
of billing cycles in a year;—& / except that the annual percentage rate shall

not be less than the largest rate determined by multiplying each periodic
rate imposed during the billing cycle by the number of periods in a year.
(iii)

any minimum, fixed, or other charge not due to the appli­

cation of a periodic rate and thetotal finance charge imposed during

the

billing cycle does not exceed 5 * for a monthly or longer billing cycle,
01
or the pro rata part of 5 j for a billing cycle shorter than monthly, by
0£
multiplying each applicable periodic rate by the number of periods in a
year, notwithstanding the provisions of subdivisions (i) and (11) of
this subparagraph.
5a/ In determining the denominator of the fraction under § 226.5(a)(3)(H)
no amount will be used more than once when adding the sum of the balances to
which periodic rates apply to the sum of the amounts financed to which
specific transaction charges apply. In every case the full amount of trans­
actions to which specific transaction charges apply shall be included in the
denominator. Other balances or parts of balances shall be included according
to the manner of determining the balance to which a periodic rate is applied,
as illustrated in the following examples of accounts on monthly billing
cycles:
1
.

Previous balance--none
A specific transaction of $100 occurs on first day of the billing cycle.
The average daily balance is $100. A specific transaction charge of 3% is
NOTE: Footnote 5a continued on page 3
.

-3-

applicable to the specific transactions. The periodic rate is 1-1/2% applicable
to the average daily balance. The numerator is the amount of the finance charge,
which is $4.50. The denominator is the amount of the transaction (which is $100),
plus the amount by which the balance to which the periodic rate applies exceeds
the amount of specific transactions (such excess in this case is 0), totaling
$ 100 .

The annual percentage rate is the quotient (which is 4.5%) multiplied by
12 (the number of months in a year), i.e., 54%.
2
.

Previous balance--$100
A specific transaction of $100 occurs at midpoint of the billing cycle.
The average daily balance is $150. A specific transaction charge of 3% is
applicable to the specific transaction. The periodic rate is 1-1/2% applicable
to the average daily balance. The numerator is the amount of finance charge
which is $5.25. The denominator is the amount of the transaction (which is $100),
plus the amount by which the balance to which the periodic rate applies exceeds
the amounts of specific transactions (such excess in this case is $50), totaling
$150.
As explained in example 1 the annual percentage rate is 3
,
.57. x 12 ■ 42%.
3. If, in example 2 the periodic rate applies only to the previous balance,
,
the numerator is $4.50 and the denominator is $200 (the amount of the trans­
action, $100, plus the balance to which only the periodic rate is applicable,
the $100 previous balance). As explained in example 1 the annual percentage
,
rate is 2.25% x 12 * 27%.
4. If, in example 2 the periodic rate applies only to
,
an adjusted balance
(previous balance less payments and credits) and the customer made
a paymentof
$50 at midpoint of billing cycle, the numerator is $3.75 and the denominator is
$150 (the amount of the transaction, $100, plus the balance to which only the
periodic rate is applicable, the $50 adjusted balance). As explained in
example 1 the annual percentage rate is 2 5 o x 12 = 30%.
,
.7
5
.

Previous balance— $100
A specific transaction (check) of $100 occurs at the midpoint of the
billing cycle. The average daily balance is $150. The specific transaction
charge is 25 cents per check. The periodic rate is 1-1/2% applied to the average
daily balance. The numerator is the amount of the finance charge, which is
$2.50, and includes the 25 cents check charge and the $2.25 resulting from the
application of the periodic rate. The denominator is the full amount of the
specific transaction (which is $100) plus the amount by which the average daily
balance exceeds the amount of the specific transaction (which in this case is
$50), totaling $150. As explained in example 1 the annual percentage rate
,
would be 1-2/3% x 12 * 20%.

-4

§ S 226.7(b)(5), 226.7(b)(6), and 226.7(c) would be amended to
read as follows:
§ 226.7— OPEN END CREDIT ACCOUNTS— SPECIFIC DISCLOSURES
(b) Periodic statements required. * * *
*

i
e

i
e

*

i
e

(
5) Each periodic rate, using the term "periodic rate” (or
"rates"),

thatmay be used to compute the finance charge

applied during the billing cycle), the range of balances

(whether or not
to which it

is

applicable, and the corresponding annual percentage rate determined by
multiplying the periodic rate by the number of periods in a year.

The

words "corresponding annual percentage rate," "corresponding nominal
annual percentage rate," "nominal annual percentage rate" or "annual
percentage rate" (or "rates") may be used to describe the corresponding
annual percentage rate.

The requirements of § 226.6(a) of this Part with

respect to disclosing the term ’annual percentage rate" more conspicuously
’
than other required terminology shall not be applicable to the disclosure
made under this subparagraph, although such term (or words incorporating
such term) may, at the creditor's option, be shown as conspicuously as the
terminology required under subparagraph 6 of this paragraph.

Where a

minimum charge may be applicable to the account, the amount of such minimum
charge shall b . disclosed.2®/
e
9a/ A 'creditor imposing minimum charges is not required to adjust
the disclosure of the range of balances to which each periodic rate
would apply in order to reflect the range of the balances below which
the minimum charge applies. If a creditor does not impose a finance
charge when the outstanding balance is less than a certain amount, the
creditor is not required to disclose that fact or the balance below
which no such charge will be imposed.

5-

(6)

When a finance charge Is imposed during the billing cycle,

the annual percentage rate or rates determined under S 226.5(a) using
the term "annual percentage rate" (or "rates").
*

*

(c)

*

*

Location of disclosures. The disclosures required by

paragraph (b) of this section shall be made on the face of the periodic
statement, except that, at the creditor's option:
(1) Itemization of the amounts and dates of each extension
of credit (or the dates such extensions of credit were debited to the
account) required to be disclosed under paragraph (b)(2) and of the
"credits" disclosed under (3) of this section, and itemization of the
amount of any finance charge required to be disclosed under paragraph (b)(4)
of this

section, may be made on the reverse side

of the periodic statement

or on a

separate accompanying statement(s), provided that the totals of such

respective amounts are disclosed on the face of the periodic statement;
and
(2) The disclosures required under paragraph (b)(5) and (b)(8)
of this

section, except the balance on which the

computed, may be made on the reverse side of the

finance charge was
periodic statementor

on the face of a single supplemental statement which shall accompany the
periodic statement.
(3) If the creditor exercises any of the options provided under
this paragraph, the face of the periodic statement shall contain one of
the following notices, as applicable:

"NOTICE:

See reverse side for

- 6 -

important information" or "NOTICE:

See accompanying statements(s) for

important information" or "NOTICE:

See reverse side and accompanying

statement(s) for important information," and the disclosures shall not be
separated so as to confuse or mislead the customer or obscure or detract
attention from the information required to be disclosed.
2.

These proposals, in part, are a republication of certain

proposals issued for public comment on August 6, 1971.

They have been

modified on the basis of comments received on them and further study.
3.

The amendment to § 226.5(a)(3) relocates the formula for

computing annual percentage rates in the case of finance charges imposed
with respect to specific transactions during the billing cycle--for
example, one time fees on cash advances--to the section dealing with
annual percentage rate computation.

The formula was previously contained

in § 226.7(b)(6) and Board interpretation § 226.704.

This amendment would

also clarify the fact that the Regulation does not require computation of
the annual percentage rate by the quotient method when the total finance
charge, including charges with respect to specific transactions, does not
exceed 50£.
4. A requirement has been added to § 226.7(b)(5) that the
corresponding annual percentage rate for each periodic rate applicable to
the account be thatra on each periodic statement, whether or not a finance
charge is imposed during the billing cycle.

Many creditors have

previously made this disclosure, which was permissible, although not
required, under Regulation Z. A variety of specified wording may be used

-7

to describe these rates under the new proposal.

The permitted use of

optional wording is to allow creditors maximum freedom to choose wording
to distinguish between rates which were actually applied during the
billing cycle (required to be disclosed under § 226.7(b)(6)) and the
prospective nominal rates required to be disclosed by this subparagraph,
where those rates differ.

The optional wording will also minimize the

need for reprinting periodic statements where nominal rate disclosures
have previously been made by the creditor.

Whatever wording is chosen

may, though need not be, used to satisfy the terminology requirements for
the initial disclosures under § 226.7(a)(4) and advertising under
i 226.10(c)(4). Although the "more conspicuous" requirement of i 226.6(a)
for the term "annual percentage rate" will not be applicable to disclosures
under S 226.7(b)(5), it will continue to apply to the term "annual
percentage rate" in opening disclosures under 8 226.7(a) and in advertising
under i 226.10(c), even if the creditor chooses to make disclosures under
8 226.7(a)(4) and i 226.10(c)(4) using optional wording which simply
incorporates this term— e.g.. "corresponding ANNUAL

PERCENTAGE

RATE." No

additional disclosures will be required by the new provisions for many
open end creditors such as those who compute finance charges simply by
the application of one or more periodic rates and who are already supplying
this information.

-8

The new provision also would require disclosure of minimum
charges which

maybe imposed on accounts

with balances below a certain

amount.

newdisclosure requirement

does not compel creditors to

This

disclose the range of balances to which the minimum charge may be
applicable; creditors may continue to disclose ranges of balances to
which periodic rates apply under § 226.7(b)(5) without specifically
designating the portion of any such range to which the minimum charge,
instead of the periodic rate, is applicable.

For example, disclosure

could be made that "a periodic rate of 1-1/2% per month which is an
ANNUAL PERCENTAGE RATE of 18% will be applied to balances from $0 to
$500fwith a minimum charge of 50j£."
5
.

The amendment to 8 226.7(b)(6) consists of the addition of

the opening phrase "when a finance charge is imposed during the billing
cycle."

In addition, the words "and, where there is more than one rate,

the amount of

thebalance to which each rate is applicable" have been

deleted since

theapplicable requirement is already contained in § 226.7

(b)(5) which requires disclosure of the range of balances to which each
rate is applicable.

The amendment is primarily designed to clarify the

fact that the annual percentage rate disclosures under this paragraph
(as determined by § 226.5(a)) are only required when finance charges are
imposed during the billing cycle. Material relating to computation of
the annual percentage rate where transaction charges are imposed during
the billing cycle has been removed from the provision and incorporated
into the new g 226.5(a)(3)(ii),

-9-

(6)

The amendment of 8 226.7(c), which deals with the

location of required disclosures on periodic statements, would simplify
placement of the disclosures in a way in which is expected to be more
meaningful and useful to the customer and minimize confusion.

The

amendment incorporates Board interpretation § 226.702.
If the proposed amendments are adopted, the Board will issue
the amendments in final form with an appropriate prospective date so as
to permit such changes in printed forms and procedures as may be necessary
for compliance in an orderly manner.
This notice is published pursuant to section 553(b) of Title 5,
United States Code, and I 262.2(a) of the Rules of Procedure of the
Board of Governors of the Federal Reserve System (12 CFR 262.2(a)).
To aid in the consideration of these matters by the Board,
interested persons are invited to submit relevant data, views, or
arguments. Any such material should be submitted in writing to the
Secretary, the Board of Governors of the Federal Reserve System,
Washington, D C
. .

20551, or to any Federal Reserve Bank for transmittal

to the Board, to be received at the Board not later than July 31, 1972.
Such material will be made available for inspection and copying upon
request, except as provided in § 261.6(a) of the Board's Rules Regarding
Availability of Information.
By order of the Board of Governors, June 21s, 1972.

Michael A. Greenspan
(SEAL)

Michael A. Greenspan,
Assistant Secretary

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