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FEDERAL RESERVE BANK
OF DALLAS

Dallas, Texas, September 24, 1941

INTERPRETATIONS OF REGULATION W — CONSUMER CREDIT

To all Banking Institutions, and Others Concerned,
in the Eleventh Federal Reserve District:
In our circular letter of September 19, we printed certain interpretations of Regulation W,
issued by the Board of Governors of the Federal Reserve System. Additional interpretations are
printed below:
56. Inquiry has been received whether section 4(c) prohibits sale of automobile with first
monthly instalment of $65 and remaining 17 monthly instalments of $23.
Section 4 (c) is worded in the alternative, and instalments must either be substantially
equal in amount or “ be so arranged that no instalment is substantially greater in
amount than any preceding instalment.” Therefore answer to inquiry is negative.
57. A question has been received regarding the application of Regulation W to a case in
which an automobile salesman sells his demonstrator. The question also relates to the
purchase of the resulting obligation by the dealer-employer of the salesman.
The dealer-employer in such a case, who presumably is a Registrant as described in
section 3 and also familiar with the particular transaction, may not in any event
purchase the obligation unless it complies with the requirements of section 4. This
is true because no Registrant may knowingly purchase any instalment sale obligation
which fails to comply with section 4, regardless of who made the original extension of
credit.
The Regulation does not apply to an isolated extension of credit by a person who is not
“ engaged in the business” as described in section 3(a). However, it is important to note
that, whatever the form in which the arrangement may be set up, an automobile sales­
man’s financial interest in his demonstrator may represent a relationship that is sub­
stantially different from that of the ordinary automobile ownership. It may have the
formal appearance of a purchase of the automobile by the salesman, when actually the
demonstrator is in effect the property of the dealer-employer rather than the salesman.
In such a case the sale of the demonstrator by the salesman should, for the purposes
of the Regulation, be treated like any other sale made by the salesman, i. e. as a sale
made by him as agent for the dealer-employer, and hence should comply with the
requirements of section 4 regardless of whether the obligation is purchased by the
dealer-employer.
58. In view of provisions of section 3(a) (2) (B), bank which discounts an obligation which
is subject to the Regulation is not obliged to ascertain whether the original lender is
a duly licensed Registrant.
59. The classification “ plumbing fixtures designed for household use” does not include
water meters.

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

60. The Board has received the following question relating to Regulation W :
“ A purchaser buying a listed article makes a down payment in excess of
the amount required by the Regulation. May he be permitted later, in pur­
chasing a second listed article, to apply any part of the down payment on
the first article as the required down payment on the purchase of the second
article ?”
He is not permitted to do so.
61. An inquiry which may be stated as follows has been received under Regulation W :
‘‘The X Electric Company purchases substantial numbers of automobiles
for cash and sells them to its salesmen on a monthly payment plan, with pay­
ments spread over 12 to 18 months. The X Electric Company does not make
such sales to anyone except its salesmen. Is the X Electric Company ‘engaged
in the business’ as described in section 3(a) ? Must these extensions of credit
comply with the down payment and other requirements of the Regulation?”
Both parts of the question should be answered in the affirmative.
62. The Board has received the following inquiries:
“ Does the term ‘automobile’ in Group A of Supplement, Regulation W,
include automobile engines purchased separately for installation in a used
car chassis ?”
“ Does term ‘mechanical refrigerator,’ item 1, Group C, Supplement, in­
clude motor unit replacement, if purchased separately?”
These inquiries raise a general question with respect to the treatment of replacement
or repair parts for listed articles. It is to be noted that certain parts are men­
tioned specifically in the list, as for example, motors for power driven boats, heating
units for furnaces, and certain items that are included in Group D(4) and Group E.
The Regulation, however, does not treat replacement or repair parts as being included
in the list merely by reason of the listing of the complete article, with the consequence
that an automobile engine purchased separately would not by inference be classified
as a listed article on the ground that automobiles are listed. On the other hand, if
the Registrant knows or has reason to know that any purchase is a part of a scheme
to acquire a complete listed article by purchasing separate pieces, the Registrant is
required to treat the credit extended as if the piece purchased were a listed article.
63. The following question has been received under Regulation W and has been answered
in the affirmative:
“ Used car has unpaid instalment contract. May dealer pay off unpaid con­
tract, apply the equity in the used car against down payment on new car and
finance the difference (assuming it is not more than 66% per cent of the
cash price) between the equity and the price of the new car over 18 equal
payments?”
64. Inquiries have been received as to applicability of Regulation W to a case where vendor
of a listed article requests a prospective purchaser to allow him to install it in prospec­
tive purchaser’s home “ on trial” or “ on approval” for a 60-day period. The prospective
purchaser agrees and at end of 60-day period decides to purchase the article. At what
time is the sale of the article to be regarded as having been made?
Assuming that the transaction is entered into in good faith and not for the purpose
of evasion, the Board is of the opinion that if the prospective purchaser has the uncon­
ditional right to return the article to the prospective vendor at any time within the
60-day period, and if the prospective purchaser does not make, and is not obligated to
make, a deposit or payment of any kind to the prospective vendor unless and until he
informs the prospective vendor that he has decided to purchase the article, the date
of sale, for the purpose of Regulation W, fnay be regarded as the day on which the
prospective purchaser informs the vendor of his decision to purchase the article.
65. Regulation W does not require a Registrant to obtain down payment or otherwise to
increase amount received through previous payment when a three months credit con­
forming to section 6 (f) is renewed or revised in good faith as described in W-49.

66. Pressure cookers are not included in any of the classifications of listed articles.
67. The classification of “ mechanical refrigerators” does not include an electrically oper­
ated portable unit for cooling and dispensing drinking water.
68. An inquiry has been received regarding an instalment sale contract of a musical instru­
ment, which states a single sum in payment of purchase price of instrument and
lessons in playing thereof, and carrying charge on deferred balance. In such case must
amount allocable to lessons be regarded as being for services rendered in connection
with acquisition of article under section 4 (f) (2) ?
Any sum actually allocated to music lessons is of course not to be regarded as the cost
of services rendered in connection with acquisition of musical instruments.
69. Obligor who has received credit conforming to section 6 (j) and who subsequently
received instalment sale credit on listed article priced at $100 is not required to make
down payment on original purchase. The 6 (j) credit remains a separate transaction.
70. Question has been asked whether section 9(b) of Regulation W permits first instal­
ment to fall due 45 days after date of contract or note, assuming such date is date of
sale, even though the result is that the obligation may show on its face that credit
was extended for 18-1/2 months.
Answer is in the affirmative.
71. A question which may be stated as follows has been received under Regulation W :
“ A Registrant sells a $100 radio, receiving in trade or exchange a used
radio which he has previously sold to the customer and on which the customer
owes the Registrant an unpaid balance. The Registrant allows the customer
$15 for his equity. What is the basic price, the maximum credit value and
the down payment requirement of the new radio? How should the maximum
maturity be calculated for such a transaction ?”
Under Part 2 of the Supplement, the basis price of the new radio would be $85 ($100
minus the $15 equity traded in by the customer). Hence the maximum credit value
would be $68 (80% of $85) and the required down payment would be $17, which
would be in addition to the $15 allowance for the customer’s equity. The maximum
maturity would be 18 months from the date of the sale of the $100 radio, with the
usual option under section 9(b) of making the 15 day adjustment permitted by that
section for calculating the maximum maturity.
72. Inquiries have been received regarding cases in which the original instalment pur­
chaser of an automobile or other listed article arranges the transfer of his equity to
another purchaser, the transfer of the equity being arranged directly between the
parties and not by or through any dealer or other Registrant, and the Registrant
holding the obligation is in effect asked to recognize or approve the transfer.
The Board is of the opinion that such a transfer of the automobile or other listed
article subject to the original debt and lien may be made without restriction under the
Regulation provided the original purchaser (who is not a Registrant) remains liable on
the contract and there is no change in the contract except the addition of the signature
of the new purchaser. However, if the original purchaser is released from his obligation
under the contract, or if the terms of the contract are altered except by including the
subsequent purchaser, or if a new contract is entered into between the Registrant and
the subsequent purchaser, the same requirements would apply as if the Registrant
were making an ordinary instalment sale of the listed article. In such event, if the
listed article involved was, for example, an automobile and the subsequent purchaser
agreed to pay $600 for the automobile, the Registrant could not extend credit to him
in excess of $400.
It may be noted, of course, that under section 8(a) of the Regulation the requirements
stated in the preceding paragraph would not apply to action taken by the Registrant in
good faith (1) with respect to any obligation of a member of the armed forces of the
United States incurred prior to his induction into the service, or (2) for the Regis­
trant’s own protection in connection with any obligation which is in default and the
subject of bona fide collection effort by the Registrant.

73. With reference to classification “ cooking stoves and ranges with less than seven heat­
ing surfaces” a warmer drawer in an electric range is not considered a heating surface.
74. Refrigerators are not “ seasonal goods” within the meaning of section 4(d) or 5(c) (3).
75. Taxes and fees payable as prerequisite to obtaining license plates in name of purchaser
of automobile or motorcycle may be included in purchase price of automobile or
motorcycle under section 4 (f)(2 ) and under parts 2, 3(a), and 3(b) of Supplement.
From time to time, as interpretations are made by the Board, they will be printed in this
form and mailed to you by this bank.

Yours very truly,
R. R. GILBERT
President

ADDITIONAL COPIES OF THIS CIRCULAR WILL BE FURNISHED UPON REQUEST

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