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F ed e r a l r e s e r v e Ba n k o f D a lla s


Circular No. 73-288
November 9> 1973

(Use of "Annual Percentage Rate" in Oral Communications)

To All Member Banks and Others Concerned
in the Eleventh Federal Reserve District:
The Board of Governors of the Federal Reserve System
is concerned that some creditors have continued to refer to the
add-on and discount rates in their communication with consumers.
Several recent surveys by consumer groups have shown that some
banks respond to telephoned consumer inquiries about the cost of
credit in terms of the add-on or discount rate, rather than the
"annual percentage rate" as required under Truth-in-Lending.
The Board is concerned about this practice and it
recently issued an interpretation of its Regulation Z dated
June 29? 19735 which provides that the total cost of credit
should generally be quoted in terms of the "annual percentage
rate" only. This interpretation was forwarded to you under our
Circular No. 73-172, dated July 13, 1973.
In order to reemphasize the importance of this inter­
pretation we enclose a copy of Governor Jeffrey M. Bucher's
letter and a copy of the interpretation.
Yours very truly,
P. E. Coldwell,


This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (





M. B U C H E R



October 31, 1973


The Federal Reserve Board is concerned that, despite
the enactment of Truth in Lending, add-on and discount rates are
still being used in answering consumer inquiries about the cost
of credit. As a result the Board has issued an interpretation
to Regulation Z which specifically prohibits such quotations.
The interpretation provides that oral statements to consumers
about the cost of credit should generally be in terms of an
"annual percentage rate" only. A copy of the text of this in­
terpretation, § 226.101--Use of "Annual Percentage Rates" in
Oral Communications, is attached.
I suggest that if you have not already done so, you
take steps to alert your employees to the requirements of this
interpretation. It is particularly important that those employees
who communicate with the public, either by telephone, face to face,
or in writing, observe these provisions. Compliance with the in­
terpretation will be checked periodically by representatives of the
Federal Reserve Bank serving your District.
Similar letters are being sent to banks under the juris­
diction of the Comptroller of the Currency and the Federal Deposit
Insurance Corporation.
Sincerely yours,

B o a rd o f G o v e rn o rs


t h e F e d e r a l R e s e r v e S yste m

R e g u la tio n

§ 226.101


Use of "annual percentage rate" in oral communications.

Under § 226.1(a)(2), a stated purpose of the Truth in Lending
Act and Regulation Z is to assure that every customer who has need for
consumer credit is given meaningful information with respect to the cost
of that credit so that he may readily compare the various credit terms
available to him from different sources and avoid the uninformed use of
credit. Under § 226.6(a), a creditor is required to make disclosures
using certain prescribed terminology, including the "annual percentage
rate." The question arises as to the propriety of a creditor quoting
annual rates other than "annual percentage rate" in response to consumer
inquiries about the cost of credit, where such other rates could not be
used in an advertisement under the proscriptions of § 226.10.
The Truth in Lending Act and Regulation Z are intended to
facilitate "shopping" between competitive credit plans. If a customer
inquires about the cost of credit and the creditor responds by quoting
an add-on or discount rate, he may mislead the customer since the use
of such rates is prohibited in consumer credit advertising and such rates
are significantly lower than the annual percentage rate which must be
shown on the creditor's disclosure statement. The quotation of these
rates can frustrate the stated purpose of the Act and prevent the customer
from making an informed use of credit.
In response to any oral inquiry by a customer about the cost of
credit, a creditor when quoting annual rates should use only those rates
permitted to be used in advertisements under § 226.10. Irrespective of
the method used by the creditor to compute finance charges, the annual
rate of the creditor's total finance charges should be quoted only in
terms of the "annual percentage rate."

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