View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

F ederal

reserve bank of

DALLAS, TEXAS

Dallas

75222

Circular No. 73-221
August 31, 1973

INTERPRETATION OF REGULATION Z
(Add-on and Discount Finance Charges as
Prepaid Finance Charges)

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

The Board of Governors of the Federal Reserve System
issued on August 23, 1973, the attached interpretation of its
Truth in Lending Regulation Z, clarifying the treatment of prepaid
finance charges in credit transactions. The interpretation states
that the typical "add-on" or "discount” charge or other precomputed
finance charge on an instalment contract or other obligation need
not be labeled a "prepaid" finance charge.
Yours very truly,
P. E. Coldwell,
President
Attachment

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

TRUTH IN LENDING
IN T E R PR E T A T IO N OF R E G U L A T IO N Z

SECTION 226.819 — PREPAID
FIN A N C E CHARGES; A DD -O N S
A N D DISCOUNTS
(a) Sections 2 2 6 .8 ( c ) ( 6 ) , 2 2 6 .8 (d )(2 ) and
2 2 6 .8 (e )( 1 ) require that certain finance charges
be disclosed as “prepaid finance charges.” They
also require that such prepaid finance charges be
excluded or deducted from the credit extended in
arriving at the “amount financed.” The question
arises whether add-on, discount or other precom­
puted finance charges which are reflected in the
face amount of the debt instrument as part of
the customer’s obligation, but which are excluded
from the “amount financed,” must be labeled as
“prepaid” finance charges.
(b) The concept of prepaid finance charges
was adopted to insure that the “amount financed”
reflected only that credit of which the customer
had the actual use. Precomputed finance charges

which are included in the face amount of the
obligation are not the type contemplated by the
“prepaid” finance charge disclosure concept. A l­
though such precomputed finance charges are not
to be included in the “amount financed,” they
need not be regarded as finance charges “paid
separately” or “withheld by the creditor from the
proceeds of the credit extended” within the mean­
ing of § 22 6.8(e) to require labeling “prepaid”
under §§ 2 2 6 .8 (c )( 6 ) and 2 2 6 .8 (d )( 2 ). They are
“finance charges”, of course, to be disclosed under
§§ 2 2 6 .8 (c )( 8 ) and 2 2 6 .8 (d )( 3 ).

*

8 /2 3 /7 3

*

*

*

*

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