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Circular No. 80-99
M a y 22, 1980


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 (

Q & A —




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?"

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

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

Q & A —



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
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.
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.

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.

The refinancing is regarded as part of a purchase money

Q & A —


Covered Credit —

Page 13

Is a loan to an individual for an investment to be considered business
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
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?


Q & A —



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
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).
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
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 —



The Base -- Page 8

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.

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.