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F ed er a l R eser ve Ba n k
DALLAS, TEXAS

of

Dallas

75222

Circular No. 73-112
May 1^, 1973

INTERPRETATION OF REGULATION Z
PROPOSED AMENDMENT TO REGULATION Z

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

Enclosed is an interpretation of Regulation Z specifying
that the method of rebate may be identified on a disclosure state­
ment without including a mathematical formula or narrative
description.
The Board of Governors also proposes to amend its
Regulation Z, "Truth in Lending," to require a creditor to disclose
whether his installment contract provides for a rebate of finance
charges in the event of prepayment. Attached are the details of
the proposal.
Comments on the proposed amendment should be addressed
to the Secretary, Board of Governors of the Federal Reserve
System, Washington, D. C. 20551, to be received not later than
June 15, 1973•
Yours very truly,
P. E. Coldwell,
President
Enclosures

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

FEDERAL RESERVE SYSTEM
[1 2 CFR PART 226]
[Reg. Z]
TRUTH IN LENDING
Credit Other Than Open End--Specific Disclosures
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).

The proposed amendment would require

creditors to disclose to customers, in advance of their becoming obli*
gated on a credit contract, if the contract does not provide for rebates
of finance charges upon prepayment of the obligation.

The amendment is

proposed in the manner and for the reasons set forth below:
Amend § 226.8(b)(7) to read as follows:
S 226.8— CREDIT OTHER THAN OPEN END— SPECIFIC DISCLOSURES
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(b)

Disclosures in sale and nonsale credit. * * *

(7)

Identification of the method of computing any unearned

portion of the finance charge in the event of prepayment of an obli­
gation which includes precomputed finance charges and a statement of
the amount or method of computation of any charge that may be deducted
from the amount of any rebate of such unearned finance charge that will
be credited to the obligation or refunded to the customer.

If the

credit contract does not provide for any rebate of finance charges upon
prepayment,

this fact shall be disclosed.

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2.

The proposed arci&fidfl&Rt would add a requirement to

§ 226.8(b)(7) regarding rebates on contracts with precomputed finance
charges to the effect that "if the credit contract does not provide
for any rebate of finance charges upon prepayment, thi 9 fact shall
be d i s c l o s e d . P r e s e n t l y creditors are required to make a disclosure
regarding finance charge rebates emly in the event that rebates are
made.
ca^l

The proposal would require creditors whose contracts do not
rebates to disclose this fact to their customers.

The pro­

vision has been amended to also clarify its application only to obli­
gations which include precomputed finance charges.
3.

Should the Board, adopt the proposed amendment after

considering the comments received on it, an effective date would be
set far enough in advance to allow for the orderly change of forms
where necessary.

This notice is published pursuant to section 553(b)

of Title 5 United States Code, and § 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.
Secretary,

Any such material should be submitted in writing to the
the Board of Governors of the Federal Reserve System,

Washington, D. C.
to the Board,

20551, or to any Federal Reserve Bank for transmittal

to be received at the Board not later than June 15, 1973.

Such material will be made available for

in s p e c tio n

and copying upon

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request, except as provided in § 261.6(a) of the Board's Rules
Regarding Availability of Information.
By order of the Board of Governors, April 30, 1973.

(Signed)

Tynan Smith
Tynan Smith
Secretary of the Board

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

TRUTH IN LENDING
IN TER PR ETA TIO N OF R E G U LA TIO N Z

SECTION 226.818 R E F U N D OF U N E A R N E D
FIN A N C E CHARGE; PREPAYM ENT
PENALTY
(a) Under §226.8(b) (7 ) a creditor must pro­
vide an identification of the method of computing
any unearned portion of the finance charge in the
event of prepayment of an obligation, as well as
a statement of the amount or method of computa­
tion of any charge that may be deducted from the
amount of any rebate. Section 2 2 6 .8 (b )(6 ) re­
quires the creditor to provide “a description of any
penalty charge that may be imposed by the creditor
or his assignee for prepayment of the principal of
the obligation . . . ” A question arises whether the
computation of certain rebates of unearned finance
charges on contracts with precomputed finance
charges involves a “prepayment penalty.” A sec­
ond question concerns the disclosures required to
identify the method of computing any finance
charge rebate.
(b) Section 226.8(b ) (6) relates only to charges
assessed in connection with obligations which do
not involve precomputed finance charges included
in the obligation. It applies to transactions in
which the finance charge is computed from time
to time by application of a rate to the unpaid
principal balance. Prepayment penalties which re­
quire disclosure under this section (which prin­
cipally arise in connection with prepayment of
real estate mortgages) occur when the obligor
in such a transaction is required to pay separately
an additional amount for paying all or part of
the obligation before maturity. On the other hand,
§226.8(b) (7 ) is designed to encompass the dis­

closures necessary with regard to the prepayment
of an obligation involving precomputed finance
charges which are included in the face amount
of the obligation. Therefore, although in a pre­
computed obligation the finance charge rebate to
a customer may be less when calculated according
to the “Rule of 78’s,” “sum of the digits,” or other
method than if calculated by the actuarial method,
such difference does not constitute a penalty
charge for prepayment that must be described
pursuant to §226.8(b) ( 6 ).
(c)
Section 2 2 6 .8 (b )(7 ) requires “identifica­
tion” of the rebate method used on precomputed
contracts. Many State statutes provide for rebates
of unearned finance charges under methods known
as the “Rule of 78’s” or “sum of the digits” or
other methods. In view of the fact that such
statutory provisions involve complex mathemati­
cal descriptions which generally cannot be con­
densed into simple accurate statements, and which
if repeated at length on disclosure forms could
detract from other important disclosures, the re­
quirement of rebate “identification” is satisfied
simply by reference by name to the “Rule of 78’s”
or other method, as applicable.
(Interprets and applies 15 U.S.C. 1638 and 15
U.S.C. 1639)

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