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FEDERAL RESERVE BANK OF DALLAS DALLAS. TEXAS 75222 Circular No. 80-99 M a y 22, 1980 ADDITIONAL QUESTIONS AND ANSWERS REGARDING CREDIT RESTRAINT PROGRAM TO ALL BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The staff of the Federal Reserve Board has supplied this additional set of answers to questions concerning the Board's Credit Restraint Program. These questions and answers may be added to those previously supplied, under the headings previously used and continuing previous numbering of questions. Sincerely yours, Robert H. Boykin First Vice President Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Q & A — MANAGED LIABILITIES — 5. 5/9/80 Page 3 For purposes of determining the reduction in a bank's managed liabilities base due to a reduction in foreign loans, are overdrafts in deposit accounts at member banks occurring as a consequence of clearing transactions on behalf of foreign banks to be included as "gross loans to non-United States residents and gross balances due from foreign offices of other institutions?" Answer: Foreign bank overdrafts should not be included as "gross loans to non United States residents and gross balances due from foreign offices of other institutions" for purposes of determining the reduction in the managed liabilities base. If foreign bank overdrafts were considered foreign loans in connection with reducing the base for the managed liabilities program, under the procedures announced on March 14, reductions in foreign bank overdrafts would increase the reserve or special deposit requirement on managed liabilities. An incentive would exist for banks to maintain such overdrafts at the levels occurring in the computation period ending March 12, 1980. Since the Federal Reserve is concerned that high levels of foreign bank overdrafts may constitute exposure to an undue element of risk, it would be inconsistent to require a reduction in a bank's managed liabilities base as a result of reductions in such overdrafts. The Board encourages banks to take steps to reduce over time the total amount of foreign bank overdrafts that they carry. Banks that have reported reductions in foreign loans due to reductions in foreign bank overdrafts should contact their Reserve Bank if they intend to file amended reports. Q & A — 5/6/80 CONSUMER CREDIT Covered Credit -- Page 12 39. A customer assumes an existing consumer credit obligation from the current customer. The creditor remains the same. Does the assumption affect whether the loan is covered credit? Answer: No. If the loan was exempt as to the first customer, it remains exempt. Similarly, covered credit continues to be reported as covered credit after an assumption. However, if the assumption involves the advance of additional funds to the subsequent customer, the creditor must make an independent determination as to whether the new money is covered credit. 40. Does covered credit include overdrafts of checking accounts that are not pursuant to a prearranged plan? Answer: Yes. When a bank pays an overdraft, even if the drawer and the bank have not entered into an overdraft payment agreement, credit is extended. Unless one of the exceptions applies, the amount must be included in the bank's covered credit. 41. What insurance company policy loans are excluded from covered credit? Answer; Loans by an insurance company up to the accrued cash value of the policy are excludable to the extent that the company is obligated under the terms of the policy to lend to the policyholder. 42. A n employee receives a loan from a profit-sharing or pension plan in which the employee participates. Is this covered credit? Answer: A loan to a participant by a pension or profit-sharing plan is not covered credit if the plan is obligated by its terms to lend to the participant an amount up to the amount of the participant's vested interest in the plan. 43. A customer obtains a loan from creditor B to pay off a land contract with creditor A. Both transactions are secured by the property involved. Is the loan with creditor B covered credit? Answer: If the land contract is the equivalent of a "bridge" loan and is intended as short term, interim financing before permanent financing can be arranged, the loan with creditor B is not covered credit. 44. Creditor B provides long-term permanent financing to replace interim financing from creditor A for the purchase of a home. Both loans are secured by the customer's home. Is the refinancing covered credit? Answer: No. transaction. The refinancing is regarded as part of a purchase money Q & A — 5/6/80 CONSUMER CREDIT Covered Credit — Page 13 45. Is a loan to an individual for an investment to be considered business credit? Answer: A loan for investment would be considered consumer credit unless investing of the type for which the loan was made constitutes the borrower's business. However, if the loan is for the purchase or improvement of rental property, it is considered business credit. 46. Creditor A purchases covered credit of creditor B with reservation of a right to assert against B any claims for breach of warranty. Does this constitute "recourse" within the meaning of Subpart A? Answer: No. Recourse involves the sharing of the credit risk. The reservation of a right to assert claims does not constitute recourse. If creditor A assumes the entire credit risk, the transfer is without recourse, and the credit becomes the covered credit of that creditor, despite reservation of any right to assert claims against B. 47. Where creditor A purchases covered credit of creditor B on a less than 100% recourse basis, must the transferred credit be apportioned between the two creditors on the basis of the extent of the recourse? Answer: No. If creditor A has any recourse to creditor B on that transfer of credit, the transfer is with recourse, and the transferred credit therefore would be considered covered credit of creditor B. 48. A guarantor of a loan that constitutes covered credit is required to repay a loan to a creditor when the borrower defaults; as a consequence, the guarantor acquires the loan note from the creditor. Is the loan now covered credit of the guarantor? Answer: No. the definition of "covered credit" under Subpart A is not intended to include obligations acquired by guarantors solely by virtue of their having had to repay debts of third parties arising from their guarantee obligations. 49. While acting as a trustee, a bank makes a loan of the type that would be covered credit to a beneficiary of the trust. Is the bank extending covered credit? Answer: Yes. Q & A — 5/6/80 CONSUMER CREDIT Changes in Terms of Consumer Credit Accounts -- Page 3 7. A creditor wishes to change the terms of its existing open-end accounts to allow imposition of a variable annual percentage rate (APR). Must it provide the notice and o p t i o n s r e q u i r e d by Section 229.6 of Subpart A (Announced 4/2/80) each time the rate varies? Answer: The creditor need not comply with Section 229.6 on all subsequent rate changes if, in disclosing the variable rate APR initially under this rule, the creditor informs the customer of: (1) the fact that the rate is subject to change; (2) the conditions under which the rate may be changed; and (3) any maximum and minimum rates possible. Later changes in the AP R that conform with these disclosures would not require any further notice under Section 229.6. 8. Prior to the effective date of Section 229.6 (which applies to changes where notices were sent after March 1 4 ) ^ creditor with open-end credit accounts imposed a variable annual percentage rate and disclosed that fact to consumers under Interpretation 226.707 of Regulation Z (Truth in Lending). When the APR on the accounts subsequently changes, in accord with the previously-disclosed variable rate provision, must the creditor comply with the change-in-terms rule in Section 229.6? Answer: No. A variation in the APR resulting from a variable rate provision previously disclosed under Interpretation 226.707 does not trigger a change in terms notice under Section 229.6. 9. Sections 226.9(g)(6) and 226.904 of Regulation Z provide certain rules about how a creditor may make changes in open-end consumer credit accounts where debt on those accounts is secured by the type of interest in the consumer's home that gives rise to a right of rescission. How do those sections relate to Section 229.6? Answer: If a creditor desires to make the types of changes specified in Section 229.6(a), the provisions of Section 229.6 should be followed. However, whenever applicable, the right of rescission notice required by sections 226.9(g)(6) and 226.904 of Regulation Z must also be given. The following language or substantially similar language should be added to the notice required by Section 229.6(c): Please remember, your open-end credit account is secured with a lien on your (home, lot). This means that your failure to live up to our agreement could result in the loss of your (home, lot). This language is best added in the portion of the notice immediately following the word "warning." .1/ The April 2 amendments established a uniform national rule for creditors to follow if they make certain changes in account rules if: --Written notice of a change is provided to all affected accountholders at least 30 days before the effective date of the change. --The account holders are given the option to pay off their outstanding debt in accord with the original terms of their contract. Q & A — 5/6/80 CONSUMER CREDIT The Base -- Page 8 22. For purposes of its base report, a creditor has made an estimate of the proportion of its loans in a given category that are covered credit. When payments are received, how should the creditor allocate them in determining the reduction in the amount of covered credit? Answer: A creditor may either maintain records on a loan-by-loan basis or allocate payments in proportion to the share of covered credit in that category as determined on the basis of the preceding month's report. 23. If a sale of all or substantially all of the receivabl a covered creditor is undertaken after March 14, and the selling creditor does not intend to continue to extend further covered credit of the type sold, may the purchaser acquire the proportion of the seller's base attributable to the receivables purchased, if the seller agrees to reduce its base by the same amount? Answer: Yes. The parties should notify their Reserve Banks, and the seller's base will be decreased and the purchaser's base increased by the amount of the receivables purchased.
