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F ederal Reserve ban k o f Dallas
DALLAS, TEXAS 75222

Circular No. 70-235
November 6, 1970

INTERPRETATION AND PROPOSED AMENDMENTS TO
REGULATION Z
CREDIT CARD AMENDMENTS TO TRUTH IN LENDING ACT

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

The Board of Governors of the Federal Reserve System announced on Octo­
ber 29, 1970, the adoption of one interpretation of its Truth Lending Regulation Z
and the issuance of three proposed amendments to the regulation for public comment.
The Board fixed December 4 as the deadline for receipt of comments on the
three proposed amendments.
The interpretation is printed on the reverse. The Board’s press release and
copies of the proposed amendments are attached.
You are also advised that on October 26, 1970, the President signed into law
P. L. 91-508, Title V of which adds several provisions on the subject of credit cards
to the Truth in Lending Act. A copy of Title V of P. L. 91-508, containing these
credit card provisions, is also included with this circular.

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)

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

INTERPRETATION OF REGULATION Z

§ 226.406 Seller’s points and discounts under
Regulation Z
(a) Section 226.4(a) of Regulation Z includes
in the finance charge any charge “payable directly
or indirectly by the customer, and imposed directly
or indirectly by the creditor as an incident to or as a
condition of the extension of c re d it. . . ” The ques­
tion arises as to the proper treatment of discounts
paid by the seller, including points imposed on the
seller by the lender in connection with a real estate
transaction.
(b) U nder the general rule in § 226.4(a), any
such discount, to the extent it is passed on to the
buyer through an increase in the selling price,
must be included in the finance charge. However,
as a practical matter, it may be difficult to deter­
mine whether or not a discount paid by the seller
in connection with a real estate transaction has
been, in fact, passed along to the customer as a
part of the purchase price of the property. The
same situation may exist in other cases, for ex­
ample, those in which the creditor sells at a dis­
count obligations payable in more than four
instalments.

(c) The Board has concluded that in any such
transaction coming within its administrative en­
forcement authority, where seller’s points or dis­
counts were, in fact, passed along to the customer
or buyer and the amount thereof was not disclosed
as a finance charge, the Board will take such
action as may be appropriate in the circumstances.
However, it will not attempt to prescribe rules
creating a presumption that all discounts or points
are passed on to the customer or buyer and hence
must be included in the finance charge in any par­
ticular class or transaction. On the other hand, the
inclusion of seller’s points or discounts in the fi­
nance charge will be acceptable to the Board as a
correct disclosure under Regulation Z.
(d) This position relates only to the Board’s
administrative enforcement procedures and it is
not intended in any way to restrict or prejudice
the rights of any customer or buyer to bring an
action under sections 130 and 131 of the Act
where he has reason to believe he is or was re­
quired to pay directly or indirectly a finance charge
imposed directly or indirectly by the creditor of
the transaction and the amount of that finance
charge was not disclosed to him.

FEDERAL
press

RESERVE

release

For immediate release

October 29, 1970.

The Board of Governors of the Federal Reserve System
today announced the adoption of one interpretation to its Truth in
Lending Regulation Z and issued three proposed amendments of the
Regulation for public comment.
The interpretation issued by the Board spells out that
all points and discounts paid to a creditor by a seller in con­
nection with a consumer credit transaction must be included in the
finance charge to the extent they are passed on to the customer.
One example is the points paid by the seller to assure an extension
of credit in a real estate transaction.

However,

the Board will

not presume that all points and discounts are passed on to the
b uy e r•
Amendments proposed by the Board would:
1.

Provide that creditors must give 15 days notice to

active customers of any change in terms of an open-end account.
At present, creditors must give 30 days notice of any change in
terms to all customers, whether they have active or inactive
accounts.

Under the proposal, inactive accounts must be notified

when they become active and before any increase in finance charges
is imposed against the account.

Under an amendment issued on

-2October 23, no notice is required if the only change is the
reduction in the periodic rate or rates applicable to the account.
2.

Permit modification of the rescission notice used

in credit sales of vacant lots by substituting the word "homesite"
for “home •1
1
3,

Permit the advertising of meaningful credit terms

applicable under FHA Section 235 financing but prohibit advertis­
ing of payments or annual percentage rate which would be misleading
to most prospective customers.
The Board fixed December 4 as the deadline for receipt
of comments on the three proposed amendments.
Copies of the interpretation and proposed amendments
are attached.

-0 -

FEDERAL RESERVE SYSTEM
[12 CFR Part 226]
[Reg. Z]
TRUTH IN LENDING
Changes in Open End Credit Accounts; Notice of Opportunity to Rescind
Certain Vacant Lot Transactions; Advertising of FHA Section 235 Financing.
Pursuant to the authority contained in the Truth in Lending Act
(15 U.S.C. 1601), the Board of Governors is considering amending Part 226
in the following respects:
la.
§ 226.7

By amending § 226.7(e) to read as follows:

Open End Credit Accounts--Specific Disclosures
* * * * *

(e)

Change in terms.

Not later than 15 days prior to the

beginning date of the billing cycle inwhich any change

is to be made

in the terms previously disclosed to the customer of an open end credit
account, the creditor shall mail or deliver a written disclosure of such
change to each customer required to be furnished a statement under
paragraph (b) of this section.

Such disclosure shall be mailed or

delivered to each other customer not later than the date of mailing or
delivery of the next required billing statement on his account.

However,

if the periodic rate, or any minimum, fixed, check service, transaction,
activity, or similar charge is increased, the increased amount may not be
imposed on cny customer without notice at least 15 days
date of the billing cycle in which the charge is imposed.

prior to

the beginning

No notice is

necessary if the only change is a reduction in the periodic rate or rates
applicable to the account.

-2-

b.

The main purpose of the proposed amendment is to allow

creditors of an open end credit account to modify the terms of the
account without the necessity of notifying inactive as well as active
customers.

The present requirements of Regulation Z necessitate a costly

notification process and have inhibited creditors from making changes
advantageous to consumers.

The proposed amendment would require prior

notice to active accounts, but would cut the period to 15 days to allow
notification to be included with the next previous billing statement.
Accounts inactive at the time of the change would receive a notice when
they became active.

However, if the change involved an increase in the

periodic rate or in any minimum, fixed, check service, transaction,
activity^or similar charge, the increased amount may not be collected
from any customer not receiving notice at least 15 days prior to the
beginning of the billing cycle in which, that increased amount is imposed.
On October 23, 1970, the Board amended § 226.7(e) to permit creditors to
reduce the periodic rate or rates applicable to open end credit accounts
without the necessity of advance notice to the customer.
2a.
§ 226.9

By amending § 226.9(b) to read as follows.

Right to Rescind Certain Transactions
* * * * *

(b)

Notice of opportunity to rescind.

Whenever a customer has

the right to rescind a transaction under paragraph (a) of this section,
the creditor shall give notice of that fact to the customer by furnishing
the customer with two copies of the notice set out below, one of which

-3-

may be used by the customer to cancel the transaction.

Such notice shall

be printed in capital and lower case letters of not less than 12 point
bold-faced type on one side of a separate statement which identifies the
transaction to which it relates.

Such statement shall also set forth the

entire paragraph (d) of this section, "Effect of rescission."

If such

paragraph appears on the reverse side of the statement, the face of
the statement shall state:

"See reverse side for important information

about your right of rescission."

Before furnishing copies of the notice

to the customer, the creditor shall complete both copies with the name of
the creditor, the address of the creditor's place of business, the date
of consummation of the transaction, and the date, not earlier than the
third business day following the date of the transaction, by which the
customer may give notice of cancellation.

Where the real property on

which the security interest may arise does not include a dwelling, the
creditor may substitute the word "homesite" for "home" where that word
appears in the notice.
Notice to customer required by Federal law:
You have entered into a transaction on

(date)_______

which

may result in a lien, mortgage, or other security interest on your home.
You have a legal right under Federal law to cancel this transaction, _if
you desire to do so, without any penalty or obligation within three
business days from the above date or any later date on which all material
disclosures required under the Truth in Lending Act have been given to you.
If you so cancel the transaction, anv lien, mortgage, or other security

-4-

interest on your home arising from this transaction is automatically
void.

You are also entitled to receive a refund of any downpayment or

other consideration if you cancel.

If you decide to cancel this transaction,

you may do so by notifying
______

(Name of creditor)__________________

at (Addressof creditor's place of

business) by mail or telegram sent

not later than midnight of ______ (date)_________ ,

You may also use

any other form of written notice identifying the transaction if it is
delivered to the above, address not later than that time.
be used for

Thisnotice may

thatpurpose by dating and signing below.

I hereby cancel this transaction.

(date)
b.

(customer's signature)
The amendment consists of adding a sentence following the

substantive part of § 226.9(b) and prior to the text of the required
notice.

The purpose of the amendment is to allow creditors in vacant

lot transactions subject to the rescission provisions of the Truth in
Lending Act and Regulation Z to substitute the word "hcmesite" in the
specified notice for the word "home."
3a.
§

226.10

By adding § 226.10(e) to read as follows:

Advertising Credit Terms
* * * * *

(e)

Advertising of FHA Section 235 financing.

No advertisement

to aid, promote, or assist directly or indirectly the sale of residential
real estate under Title II, Section 235, of the National Housing Act

-5 -

(12 U.S.C. 1715z) shall state the amouht of any payment scheduled to
repay the indebtedness in any extension of credit under that program or
the amount of the finance charge expressed as an annual percentage rate.
All other information specified in subparagraph (d)(2) of this section
shall be stated when required by that subparagraph.

Any advertisement

shall clearly identify those credit terms which apply to the FHA
Section 235 assistance program.
b.

The purpose of the proposed amendment is to enable sellers

to advertise the terms which are applicable to most qualified purchasers
under the section 235 Federal assistance program of Title II of the
National Housing Act (such as the downpayment and number of payments)
without having to show a figure for the amount of payments or annual
percentage rate as presently required by § 226.10(d) of Regulation Z.
The purpose of the prohibition against stating any payment amount and annual
percentage rate is to prevent misleading advertisement caused by the wide
variation in actual amounts and rates applicable to individual customers
as a result of variation in the amount of the Federal subsidy.
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, Board of Governors of the Federal Reserve System, Washington,
D.C. 20551, to be received not later than December 4, 1970.

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, October 23, 1970.

(Signed) Kenneth A. Kenyon

Kenneth A, Kenyon
Deputy Secretary
[SEAL]

AMENDMENT TO THE TRUTH IN LENDING ACT

Title V, Public Law 91-508, signed into law on
October 26, 1970, is reproduced below:

such use and from which the cardholder receives
ro benefit.

TITLE V — PROVISIONS RELATING TO
CR ED IT CARDS

Sec. 502. (a) The Truth in Lending Act (82
Stat. 146) is amended by adding after section 131
the following sections:

Sec. 501. Section 103 of the Truth in Lending
Act (82 Stat. 146) is amended by redesignating
subsections (j), (k ), and (1) as subsections (p ),
(q ), and (r), respectively, and by adding after
subsection (i) the following:

(j) The term “adequate notice,” as used in sec­
tion 133, means a printed notice to a cardholder
which sets forth the pertinent facts clearly and
conspicuously so that a person against whom it is
to operate could reasonably be expected to have
noticed it and understood its meaning. Such notice
may be given to a cardholder by printing the notice
on any credit card, or on each periodic statement
of account, issued to the cardholder, or by any
other means reasonably assuring the receipt thereof
by the cardholder.

§ 132. Issuance of credit cards
No credit card shall be issued except in response
to a request or application therefor. This prohibi­
tion does not apply to the issuance of a credit card
in renewal of, or in substitution for, an accepted
credit card.
§ 133. Liability of holder of credit card

(a)
A cardholder shall be liable for the un­
authorized use of a credit card only if the card
is an accepted credit card, the liability is not in ex­
cess of $50, the card issuer gives adequate notice
to the cardholder of the potential liability, the card
issuer has provided the cardholder with a selfaddressed, prestamped notification to be mailed
by the cardholder in the event of the loss or theft
(k) The term “credit card” means any card,
of the credit card, and the unauthorized use occurs
plate, coupon book or other credit device existing
before the cardholder has notified the card issuer
for the purpose of obtaining money, property,
that an unauthorized use of the credit card has
labor, or services on credit.
occurred or may occur as the result of loss, theft,
(1)
The term “accepted credit card” means any or otherwise. Notwithstanding the foregoing, no
cardholder shall be liable for the unauthorized use
credit card which the cardholder has requested
of any credit card which was issued on or after the
and received or has signed or has used, or author­
effective date of this section, and, after the expira­
ized another to use, for the purpose of obtaining
tion of twelve months following such effective
money, property, labor, or services on credit.
date, no cardholder shall be liable for the un­
(m ) The term “cardholder” means any person
authorized use of any credit card regardless of the
to whom a credit card is issued or any person who
date of its issuance, unless (1) the conditions of
has agreed with the card issuer to pay obligations
liability specified in the preceding sentence are
arising from the issuance of a credit card to an­
met, and (2) the card issuer has provided a method
other person.
whereby the user of such card can be identified as
the person authorized to use it. For the purposes
(n) The term “card issuer” means any person
of this section, a cardholder notifies a card issuer
who issues a credit card, or the agent of such per­
by taking such steps as may be reasonably required
son with respect to such card.
in the ordinary course of business to provide the
(o)
The term “unauthorized use,” as used in card issuer with the pertinent information whether
section 133, means a use of a credit card by a
or not any particular officer, employee, or agent
person other than the cardholder who does not
of the card issuer does in fact receive such infor­
have actual, implied, or apparent authority for
mation.

(b) In any action by a card issuer to enforce
liability for the use of a credit card, the burden of
proof is upon the card issuer to show that the use
was authorized or, if the use was unauthorized,
then the burden of proof is upon the card issuer
to show that the conditions of liability for the un­
authorized use of a credit card, as set forth in sub­
section (a ), have been met.
(c) Nothing in this section imposes liability
upon a cardholder for the unauthorized use of a
credit card in excess of his liability for such use
under other applicable law or under any agree­
ment with the card issuer.
(d) Except as provided in this section, a card­
holder incurs no liability from the unauthorized
use of a credit card.
§ 134. Fraudulent use of credit card
Whoever, in a transaction affecting interstate or
foreign commerce, uses any counterfeit, fictitious,
altered, forged, lost, stolen, or fraudulently ob­
tained credit card to obtain goods or services, or

both, having a retail value aggregating $5,000 or
more, shall be fined not more than $10,000 or
imprisoned not more than five years, or both.
(b)
The table of contents of chapter 2 of the
Truth in Lending Act is amended by adding at
the end thereof the following:
132. Issuance of credit cards.
133. Liability of holder of credit card.
134. Fraudulent use of credit card.
S e c . 5 0 3 . The amendments to the Truth in
Lending Act made by this title become effective as
follows:

(1) Section 132 of such Act takes effect upon
the date of enactment of this title.
(2) Section 133 of such Act takes effectupon
the expiration of 90 days after such date of
enactment.
(3) Section 134 of such Act applies to offenses
committed on or after such date of enactment.

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