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F E D E R A L R E S E R V E B A N K OF D A L L A S Station K, Dallas, T e x a s 7 5 2 2 2 C i r c u l a r No. 84-123 December 21, 1984 TO: All member banks and o t h e r s concerned in t he Eleventh Federal Reserve D i s t r i c t ATTENTION: Chief Executive O ff i c e r SUBJECT: Proposed changes to the Official Staff Conmentary on Regulation Z — Truth in Lending SUMMARY: The Board o f Governors o f t he Federal Reserve System has publ i s h ed proposed changes to t he o f f i c i a l s t a f f commentary on i t s Regu l at i on Z. The commentary i s designed t o provide guidance t o c r e d i t o r s in app lyi ng th e regulation to specific transactions. The commentary i s periodically updated to addr es s significant questions t h a t a r i s e , i n c l u d i n g new m a te ri a l and changes in e x i s t i n g m a t e r i a l . This n o t i c e c o n t a i n s t h e proposed fo u r t h general u pda te . I n t e r e s t e d p a r t i e s are i n v i t e d t o submit their comments t o Mr. William W. Wiles, S e c r e t a r y , Board o f Governors o f t h e Federal Reserve System, Washington, D.C., 20551. Comments a r e due by J an u ary 31, 1985, and should r e f e r t o TIL-1. ATTACHMENTS: Board' s p res s r e l e a s e and t h e m a t e ri a l as p u b l i s h e d in the Federal R e g i s t e r MORE INFORMATION: Legal Department, Ext ension 6171 ADDITIONAL COPIES: Public A f f a i r s Department, Ext ension 6289 Banks and others are encouraged to use the follow ing 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) FEDERAL RESERVE press release For immediate r e l e a s e November 29, 1984 The Federal Reserve Board t oday p u b l i s h e d f o r comment proposed changes t o th e o f f i c i a l s t a f f commentary on R eg u l at i o n Z — Truth in Lending. The changes p e r t a i n t o q u e s t i o n s t h a t have a r i s e n about t h e r e g u l a t i o n , and i n c l u d e new i n t e r p r e t a t i o n s and changes t o e x i s t i n g i n t e r p r e t a t i o n s . Janu ar y 31, 1985. The B o a r d ' s n o t i c e i s a t t a c h e d . -0- Attachment Comment i s re q u est e d FEDERAL RESERVE SYSTEM 12 CFR P a r t 226 [Reg. Z; TIL-1] TRUTH IN LENDING Proposed Update t o O f f i c i a l S t a f f Commentary AGENCY: Board o f Governors of t h e Federal Reserve System. ACTION: Proposed o f f i c i a l s t a f f i n t e r p r e t a t i o n . SUMMARY: The Board i s p u b l i s h i n g f o r comment proposed changes t o t h e o f f i c i a l s t a f f commentary t o R e gu la tio n Z (Truth in L end i ng ). The commentary a p p l i e s and i n t e r p r e t s t h e re quirements o f R eg ul ati o n Z and i s a s u b s t i t u t e f o r in d i v i d u a l s t a f f i n t e r p r e t a t i o n s of t h e r e g u l a t i o n . addr es s a v a r i e t y of q u e s ti o n s t h a t The proposed r e v i s i o n s have a r i s e n about t h e r e g u l a t i o n , and i nc lu d e new m a te r ia l and changes in e x i s t i n g m a t e r i a l . DATE: Comments must be re c ei ve d on or b e f o r e J anu ary 31, 1985. ADDRESS: Comments should be mailed t o William W. Wi les, S e c r e t a r y , Board of Governors of t h e Federal Reserve System, Washington, D.C. 20551, or d e l i v e r e d t o Room B-2223, 20th and C S t r e e t s , N.W., Washington, D.C. between 8: 45 a.m. and 5:15 p.m. weekdays. Comments s h ou ld i n c l u d e a r e f e r e n c e t o TIL-1. Comments may be i n s p e c te d in Room B-1122 between 8: 45 a.m. and 5:15 p.m. weekdays. FOR FURTHER INFORMATION: Contact t h e fo l l o w i n g a t t o r n e y s in t h e Di v is i o n o f Consumer and Community A f f a i r s , Board o f Governors of t h e Federal Reserve System, Washington, D.C. 20551, a t (202) 452-2412 or (202) 452-3867: Subpart A - - Lynn Goldfaden, Geral d Hu rs t Subpart B - - Richard Garab edi an, Adrienne Hurt Subpart C - - Rugenia S i l v e r , Susan Werthan - 2 SUPPLEMENTARY INFORMATION: (1) G e n er a l . The Truth i n Lending Act (15 U.S.C. 1601 e t s e q . ) governs consumer c r e d i t t r a n s a c t i o n s and i s implemented by t h e Boar d's Regulation Z (12 CFR P a r t 22 6). E f f e c t i v e October 13, 1981, an o f f i c i a l s t a f f commentary (TIL-1, Supp. I t o 12 CFR P a r t 226) was p u b l i s h e d t o i n t e r p r e t th e r e g u l a t i o n . The commentary i s d esi gned t o p ro vi de guidance t o c r e d i t o r s i n app lying t h e r e g u l a t i o n t o s p e c i f i c t r a n s a c t i o n s . The commentary i s updated p e r i o d i c a l l y t o a ddre ss s i g n i f i c a n t q u e s t i o n s t h a t a r i s e . There have been t h r e e general update s so f a r - - t h e f i r s t in September 1982 (47 FR 41338), t h e second in April 1983 (48 FR 14882), and t h e t h i r d i n April 1984 (49 FR 13482). There was a l s o a l i m i t e d update concerni ng fees f o r t h e use of automated t e l l e r machines, which was adopted in October 1984 (49 FR 40560). t h e proposed f o u r t h general upd at e. This n o t i c e c o n t a i n s I t i s expected t h a t i t w i l l be adopted in f i n a l form in March 1985 with o p t i o n a l compliance u n t i l t h e uniform e f f e c t i v e da te of October 1 f o r mandatory compliance. C e r t a i n conventions have been used t o h i g h l i g h t t h e proposed r e v i s i o n s . New language is shown i n s i d e b o l d -f ac e d arrows, while language t h a t would be d e l e t e d i s s e t o f f with b r a c k e t s . (2) Proposed r e v i s i o n s . Foll owi ng i s a b r i e f d e s c r i p t i o n of t h e proposed r e v i s i o n s t o th e commentary: SUBPART A - General SECTION 226.2 - - D e f i n i t i o n s and Rules of C o n s t r u ct i o n 2( a) D e f i n i t i o n s 2 ( a ) ( 1 5 ) ‘‘C re d it Card11 Comment 2 ( a ) (15)-2 would be re v i s e d t o make c l e a r t h a t c e r t a i n t y p e s of acces s de vices t h a t a re used a t wh o l es al e p etrol eum d i s t r i b u t i o n t e r m i n a l s - whether or not c r e d i t i s involved - - a r e not c o n s i d e re d c r e d i t cards under Regulation Z. - 3 2( a ) ( 1 7) “C r e d i t o r 11 Paragraph 2 ( a ) ( 1 7 ) ( i ) Comment 2 ( a ) ( 1 7 ) ( i ) - 8 would be added t o e x p l a i n how t h e numerical t e s t s f o r de te rmining who i s a " c r e d i t o r " should be a p p l i e d t o loans made by employee savings p l a n s . I t provi d es t h a t t h e numerical t e s t should be a p p l i e d t o th e plan as a whole r a t h e r than t o t h e i n d i v i d u a l acco u n t . 2 ( a ) (20) "Open-End C re d it " Comment 2 ( a ) (20) -5 would be re v i s e d t o c o r r e c t a p o t e n t i a l c o n t r a d i c t i o n caused by the language " s p e c i f i c approval f o r each e x t e n s i o n . " Because " v e r i f i c a t i o n " of c r e d i t infor ma t i o n - - which i s p e r m i s s i b l e under t h e open-end c r e d i t d e f i n i t i o n - - n e c e s s a r i l y i n v o l v e s " ap proval " i f a c r e d i t ex t e n s i o n i s not denied a f t e r v e r i f y i n g t h e c r e d i t i n fo r m a t i o n , t h e " s p e c i f i c ap p rov al " language may be co n fu s in g . The prop os al would, t h e r e f o r e , d e l e t e t h a t langua ge. The comment would c on tin ue t o mean, however, t h a t wh il e c r e d i t o r s may v e r i f y c r e d i t inf o r ma tio n on an open-end c r e d i t p lan b e fo re a u t h o r i z i n g a d d i t i o n a l c r e d i t e x t e n s i o n s , they may not u n d e rt a k e a c t i v i t i e s such as r e q u i r i n g a new a p p l i c a t i o n f o r each a d d i t i o n a l c r e d i t e x t e n s i o n , wi t h o u t j e o p a r d i z i n g a p r og r am ' s s t a t u s as an open-end c r e d i t pl a n . SECTION 226.4 - - Finance Charge 4(a) D e fin itio n The f i r s t sente nc e of comment 4 ( a ) -3 would be re v i s e d t o c l a r i f y which char ges by t h i r d p a r t i e s a r e excl uded from t h e fi n a n c e ch ar g e. The r e v i s i o n makes c l e a r t h a t , in o r d e r t o be ex cl ud ed, t h e charge must be imposed on t h e consumer r a t h e r than th e c r e d i t o r and t h e c r e d i t o r must not r e t a i n t h e char ge. - 4 SUBPART B - Open-End C re d it SECTION 226.7 — P e r i o d i c Statement 7(h) Other Charges Comment 7 ( h )-4 would be added t o make c l e a r t h a t , i n d i s c l o s i n g “o th e r charges" on t h e p e r i o d i c s t a t e m e n t , c r e d i t o r s have t h e f l e x i b i l i t y t o d i s c l o s e them i n d i v i d u a l l y or as a t o t a l , as long as t h e charges are s t i l l item ized and i d e n t i f i e d by t y p e . SECTION 226.9 - - Subsequent D i s c l o s u r e Requirements 9( d) Finance Charge Imposed a t Time of T r a n s a c t i o n Comment 9 ( d ) - l would be t o t a l l y r e w r i t t e n s i n c e t h e ban on c r e d i t car d s ur ch arge s e xp ir e d on February 27, 1984. Revised comment 9 ( d ) - l would make c l e a r t h a t a fi na nc e c harg e, such as a c r e d i t card s u rc h ar g e , imposed by a person o t h e r than th e c ard i s s u e r f o r u s i n g a c r e d i t c a r d , must be d i s c l o s e d t o consumers p r i o r t o t h e i r being committed t o p u r ch as i n g p ro p ert y or s e r v i c e s , in o r d e r t o s a t i s f y t h e § 2 2 6 . 9 (d ) (1 ) requi rement t h a t t h e amount of t h a t f i n a n c e charge be d i s c l o s e d p r i o r t o i t s i m p o s i t i o n . For example, t h e charge must be d i s c l o s e d t o th e consumer p r i o r t o t h e consumer's having d i n n e r a t a r e s t a u r a n t , or s t a y i n g ov e rn ig h t a t a h o t e l . SECTION 226.12 - - Spe cial C re d it Card P r o v i s i o n s 12(a) I s s ua nc e of C r e d it Cards Paragraph 12(a )(1 ) Comment 1 2 ( a ) (1 ) -8 would be added t o makec l e a r t h a t card may i s s u e , without a s p e c i f i c re q u e s t from t h e consumer, ap ers o n al issuers identifica t i o n number (PIN) t o e x i s t i n g c a r d h o l d e r s , provi ded t h e PIN cannot be used by i t s e l f t o o b ta in c r e d i t . This i n t e r p r e t a t i o n d i f f e r s from a proposed i n t e r p r e t a t i o n under R egul a tion E t h a t p r o h i b i t s such PIN i s s u a n c e . The d i f f e r e n t - 5 t r e a tm e n t i s based on t h e d e f i n i t i o n of an access d ev i ce i n R eg ul at i o n E. Under Reg ul a tion E a PIN i s an acces s d evi ce in a l l c a s e s , even when i t cannot be used alone t o i n i t i a t e an EFT; in c o n t r a s t , a PIN i s s u e d t o e x i s t i n g c a r d ho ld e r s t h a t cannot be used by i t s e l f t o o b t a i n c r e d i t i s not a c r e d i t card under Regula tion Z. The r u l e re g a rd i n g acces s d ev ices i s more r e s t r i c t i v e in p a r t because of t h e consumer's p o t e n t i a l l y g r e a t e r r i s k . See Qu est io n 5 - 4 . 5 in th e proposed update t o th e o f f i c i a l s t a f f commentary t o R eg u l at i o n E ( p u bli s he d elsewhe re in t h i s Federal R e g i s t e r i s s u e ) . SECTION 226.15 - - Right of R es ci s s i o n 15(a) Consumer's Right t o Rescind Paragraph 15(a )(1 ) Comment 1 5 ( a ) ( 1 ) -2 would be re v i s e d t o r e f l e c t t h e amendment t o t h e Truth i n Lending Act i n Pub. L. 98-479 which permanently exempts from t h e r i g h t of r e s c i s s i o n i n d iv id u a l t r a n s a c t i o n s made on an open-end l i n e of c r e d i t in accordance with a p re v io u s ly e s t a b l i s h e d c r e d i t l i m i t . Ref erences R eference t o § 205 o f Pub. L. 98-479 would be added t o t h e Ref e re nc e s s e c t i o n t o r e f l e c t t h e permanent exemption from t h e r i g h t of r e s c i s s i o n f o r i n d i v i d u a l c r e d i t e x te n si o n s made on an open-end c r e d i t l i n e . SUBPART C - CLOSED-END CREDIT SECTION 226.17 — General D is c lo s u r e Requirements 17( a) Form o f D is cl os ur e s Paragraph 1 7 (a )( 1 ) The l a s t example in comment 1 7 ( a ) (1 ) -5 re g a rd i n g d u e - o n - s a l e c l a u s e s would be d e l e t e d c o n s i s t e n t with t h e proposed change i n p o s i t i o n in comment 18(q)-l. - 6 SECTION 226.18 - - Content of D is c l o s u re s 18( f ) V ar i ab le Rate Comment 1 8 ( f ) -5 would be re v i s e d t o add r e c en t fe d e r a l a d j u s t a b l e r a t e mortgage r e g u l a t i o n s t o t h e l i s t of v a r i a b l e r a t e r e g u l a t i o n s f o r which f o o t n o t e 43 t o s e c t i o n 2 26 .1 8 (f ) may be us ed . Under t h e p r o p o s a l , c r e d i t o r s making d i s c l o s u r e s in accord with th e r u l e s i s s u e d by t h e Department o f Housing and Urban Development (49 FR 23580) need not make t h e v a r i a b l e r a t e d i s c l o s u r e s r e q u ir e d by s e c t i o n 2 2 6 . 1 8 ( f ) . Comment 1 8 ( f ) - 5 would a l s o be re v i s e d t o r e f l e c t a new c i t a t i o n t o th e v a r i a b l e r a t e r e g u l a t i o n of t h e F ederal Home Loan Bank Board. The r e v i s i o n i s t e c h n i c a l and r e f l e c t s no s u b s t a n t i v e change in t h e comment. Comment 18 ( f )-8 would be r e v i s e d t o c l a r i f y t h e a p p l i c a t i o n of t h e d i s c o u n t e d v a r i a b l e r a t e r u le s t o two t y p es of v a r i a b l e r a t e t r a n s a c t i o n s . F i r s t , a paragra ph would be added t o e x p l a i n t h a t t r a n s a c t i o n s i n which t h e only d i f f e r e n c e between t h e i n i t i a l r a t e and t h e i ndex r a t e a t consummation r e s u l t s from a change in th e index are not d i s co u n t ed t r a n s a c t i o n s . Second, m a t e r i a l would be added t o address p l an s t h a t have a b u i l t - i n delay between index changes and implementation of t h o s e chan ges. In c a l c u l a t i n g a composite annual p erc e nt ag e r a t e f o r t h e s e p l a n s , c r e d i t o r s may use an index v al ue p r i o r t o consummation as long as i t i n c o r p o r a t e s t h e same delay used f o r l a t e r r a t e a d ju s t m e n t s . 18(k) Prepayment Comment 18( k) -2 would be r e v i s e d t o d e l e t e t h e example re g a rd i n g s t u d e n t loans with loan f e e s , in o r d e r t o make t h e comment more c o n s i s t e n t w it h comment 1 8 ( k ) -3 . Comment 18 (k )- 2 i l l u s t r a t e s t r a n s a c t i o n s t h a t may r e q u i r e d i s c l o s u r e s under both s e c t i o n 2 2 6 . 1 8 ( k ) ( 1 ) , r e g a rd i n g p e n a l t i e s f o r prepayment - 7 of s imple i n t e r e s t t r a n s a c t i o n s , and s e c t i o n 2 2 6 . 1 8 ( k ) ( 2 ) , reg a rd i n g r e b a t e s f o r prepayment of precomputed t r a n s a c t i o n s . Comment 1 8 (k )-3 c l a r i f i e s t h a t pr epaid f i n a n c e charges do not r e q u i r e r e b a t e d i s c l o s u r e s . Since loan fe e s in s t u d e n t loans a re normally pre pa i d f i n a n c e c h ar g e s , t h e co n t in u ed use of t h a t type of t r a n s a c t i o n as an example of a loan r e q u i r i n g a re b a t e d i s c l o s u r e i s i n a p p r o p r i a t e and may cause co n fu s i o n . The d e l e t i o n of t h e example i s a t e c h n i c a l r e v i s i o n and does not a f f e c t t h e s u b s t an ce of e i t h e r comment. 18(q) Assumption Poli cy The substan c e of comment 18( q )-1 would be d e l e t e d and re p l a ced by a new p r o v i s i o n which r e v e rs e s th e r u l e on assumption p o l i c y d i s c l o s u r e . When u n c e r t a i n t y e x i s t s as t o the a s s u m a b i l i t y of t h e o b l i g a t i o n , a n e g at i v e r a t h e r than a f f i r m a t i v e d i s c l o s u r e would be r e q u i r e d . I t i s b e l i e v ed t h a t under such c ir c u m s ta n c e s , a ne ga ti ve d i s c l o s u r e would be l e s s m i s l ead i n g t o consumers. Since t h i s change would re v e rs e t h e c u r r e n t p o s i t i o n on assumption d i s c l o s u r e s , i t would be a p p l i e d p r o s p e c t i v e l y . SECTION 226.23 - - Right of R e s c i s s i o n 23(f) Exempt T r a n s a c ti o n s Comment 2 3 ( f ) - 8 would be added t o c l a r i f y t h e a p p l i c a t i o n of t h e r i g h t of r e s c i s s i o n t o c lo se d -e n d c r e d i t t r a n s a c t i o n s a r i s i n g from t h e co nv e r s i o n o f an open-end c r e d i t a cc ount. Where consummation of both t h e c l o s ed -e n d and open-end c r e d i t occurs a t t h e time t h e consumer e n t e r s i n t o t h e open-end agreement, t h e close d-e nd d i s c l o s u r e s may be delayed u n t i l co n v er s i o n , as pr ovided by comment 1 7 ( b ) - 2 . Proposed comment 2 3 ( f )-8 would make c l e a r t h a t , i f t h e c r e d i t o r has pr e v io u s ly complied wit h t h e r e s c i s s i o n requ iremen ts on t h e open-end acc ount, no new r i g h t of r e s c i s s i o n a p p l i e s on t h e co n v ers io n of an account s ec ured by th e consumer's p r i n c i p a l d we l l i n g . - 8 - L i s t of S ubj e c ts in 12 CFR Pa rt 226 A d v e r t i s i n g ; Banks, banking; Consumer p r o t e c t i o n ; C r e d i t ; Federal Reserve System; Financ e; P e n a l t i e s ; Truth i n l e n d i n g . (3) Text o f r e v i s i o n s > The proposed r e v i s i o n s t o t h e commentary (TIL-1, Supplement I t o 12 CFR P a r t 226) read as fo l l o ws : SUPPLEMENT I - O f f i c i a l S t a f f Commentary - TIL-1 SUBPART A - General * * * * * SECTION 226.2 - - D e f i n i t i o n s and Rules of C o n s t ru ct i o n 2( a ) D e f i n i t i o n s * * * * * * * * * * 2( a ) ( 1 5 ) “C re d it Card" 2. ° Examples. Examples of c r e d i t cards i n c l u d e : A car d t h a t gua ra nte es checks o r s i m i l a r i n s t r u m e n t s , i f t h e a s s e t a ccount i s a l s o t i e d t o an o v e r d r a f t l i n e o r i f th e ins tru me nt d i r e c t l y a cc es s es a l i n e of c r e d i t ° A car d t h a t ac c e ss e s both a c r e d i t and an a s s e t accou nt ( t h a t i s , a d e b i t - c r e d i t ca rd ) ° An i d e n t i f i c a t i o n c ard t h a t p e rm i t s t h e consumer t o d e f e r payment on a purcha se ° An i d e n t i f i c a t i o n card i n d i c a t i n g loan approval t h a t i s p r e s e n te d t o a merchant or t o a l e n d e r , whether o r not t h e consumer s ign s a s e p a r a t e promi ss ory n o te f o r each c r e d i t e x te n si o n - 9 In c o n t r a s t , c r e d i t c ard does not i n c l u d e , f o r example [ . a > : ° A 4 check gua rante e or d e b i t card wi th no c r e d i t f e a t u r e or agreement, even i f th e c r e d i t o r o c c a s i o n a l l y honors an inadvertent o v e rd ra ftf .] *° Any card key t h a t must be used in o rd e r t o gain acces s t o a wholesale d i s t r i b u t i o n f a c i l i t y t o o b t a i n p etroleum products f o r bu sine ss purposes , and t h e use of which i s r e q u ir e d w ith out rega rd t o payment t e r m s . 4 * * * * * * ★ * ★ * * * 2 ( a ) (17) "C red it or" Paragraph 2 ( a ) ( 1 7 ) ( i ) ►8. * Loans from employee savings p l a n s . * * Some employee s av i n g s p l an s p e rm i t p a r t i c i p a n t s t o borrow money up t o a c e r t a i n p e rce n t a g e of t h e i r account b a la n c e s . In such c a s e s , th e numerical t e s t s should be a p p l i e d t o t h e p l an as a whole r a t h e r tha n t o t h e i n d i v i d u a l a c c o u n t s , even i f t h e loan amount is determined by r e f e r e n c e t o th e b al ance i n an i n d i v i d u a l account and t h e repayments a r e c r e d i t e d t o t h e i n d i v i d u a l a c c o u n t . 4 * * * * * * * * * * 2 ( a ) (20) "Open-End C r e d it " 5. Reusable l i n e . The t o t a l amount of c r e d i t t h a t may be extended d u ri n g t h e e x i s t e n c e of an open-end pla n i s u n l i m i t e d because a v a i l a b l e c r e d i t i s g e n e r a l l y r e p le n is h e d as e a r l i e r advances a re r e p a i d . A l i n e of c r e d i t i s s e l f - r e p l e n i s h i n g even though t h e plan i t s e l f has a fi x e d e x p i r a t i o n d a t e , as long as d u ri n g t h e p l a n ' s e x i s t e n c e th e consumer may use t h e l i n e , rep ay, and reu s e t h e c r e d i t - 10 [ w ith o u t s p e c i f i c approval f o r each e x t e n s i o n (beyond v e r i f i c a t i o n , f o r example, o f j ¥. The c r e d i t o r may v e r i f y * c r e d i t i n fo rm at i o n such as t h e consumer' s continued income and employment s t a t u s o r CofJ i n fo r m at i o n f o r s e c u r i t y purposes [)J. This c r i t e r i o n of u n lim it ed c r e d i t d i s t i n g u i s h e s open-end c r e d i t from a s e r i e s of advances made pursuan t t o a cl o s ed -e n d c r e d i t loan commitment.*** * * * * * SECTION 226.4 - - Finance Charge * * * * * 4( a) D e f i n i t i o n * 3. Charges by t h i r d p a r t i e s . * * * * Charges imposed by someone o t h e r t han t h e c r e d i t o r f o r s e r v i c e s t h a t a re not re q u ir e d by t h e c r e d i t o r a re not fi n a n c e ch arg es * , pr ovided th e charges a re imposed on t h e consumer r a t h e r than on t h e c r e d i t o r by t h e t h i r d p a r t y , and t h e c r e d i t o r does not r e t a i n t h e ch arge*. For example: ° A fe e charged by a loan b ro ker t o a consumer, prov ided t h e creditor does not r e q u i r e t h e use of a b ro ker (even i f t h e c r e d i t o r knows of t h e loan b r o k e r ' s involvement or compensates t h e b ro k er) o A t a x imposed by a s t a t e o r o t h e r governmental body on t h e credit t r a n s a c t i o n t h a t i s payab le by t h e consumer (even i f t h e t a x i s c o l l e c t e d by th e c r e d i t o r ) * * * * * SUBPART B - OPEN-END CREDIT * * * * * * * * SECTION 226.7 - - P e r i o d i c Statement * * - 11 - * * * * * SECTION 226.7 — P e r i o d i c Statement * * * * * * * * * * 7(h) Other Charges ►4 . I te m iz a ti o n - - type s of " o th e r c h a r g e s 11. Each t ype of " o t h e r charge" (such as l a t e payment char ges , o v e r - t h e - c r e d i t - 1 i m i t c h a r g es , ATM fe e s t h a t a r e not f i n a n c e c ha rg e s, and membership f e e s ) imposed d u ri n g t h e cy cl e must be s e p a r a t e l y it em iz ed ; f o r example, d i s c l o s u r e o f only a t o t a l o f " o t h e r char ges " a t t r i b u t a b l e t o both an o v e r - t h e - c r e d i t - 1 i m i t charge and a l a t e payment char ge would not be p e r m i s s i b l e . "Other ch arg es " of t h e same t y p e may be d i s c l o s e d , however, i n d i v i d u a l l y or as a t o t a l . For example, t h r e e ATM fe e s o f $1 may be l i s t e d s e p a r a t e l y or as $3 .« * * * * * SECTION 226.9 - - Subsequent D is cl o s u re Requirements * * * * * 9(d) Finance Charge Imposed a t Time o f T r an s a ct i o n 1. fBan on c r e d i t c ard s u r c h a r g e s . 15 USC 1666f p ro v i d es t h a t u n t i l February 27, 1984, no s e l l e r in any s a l e s t r a n s a c t i o n may impose a s u r c ha r g e on a c a r d h o ld e r who e l e c t s t o use a c r e d i t card i n s t e a d of paying by c as h, check, or s i m i l a r m ea n s . ] ► D i s c l o s u re p r i o r t o i m p o s i t i o n . The requirement t h a t t h e amount of a fi n a n c e charge imposed a t t h e ti me of honoring a c onsumer' s c r e d i t card be d i s c l o s e d p r i o r t o i t s i m p o s i t i o n r e q u i r e s a person imposing such a c r e d i t c ard s u r ch arg e t o d i s c l o s e i t s e x i s t e n c e p r i o r t o th e consumer' s becoming o b l i g a t e d t o purchase p ro p e rt y or s e r v i c e s . 4 - 12 SECTION 226.12 - - Special C re d it Card P ro v is io n s * 12(a) Is sua nc e of C r edit Cards * * * * * * * * Paragraph 1 2 ( a ) ( 1 ) * ►8. U n s o l ic i te d is sua nc e of PINs. A card i s s u e r may i s s u e t o e x i s t i n g c r e d i t c a r d h o l d e r s , witho ut a s p e c i f i c r e q u e s t , pers onal i d e n t i f i c a t i o n numbers (PINs), thus allowing consumers t o use t h e i r e x i s t i n g c r e d i t cards a t automated t e l l e r machines, provided th e PINs cannot be used al on e t o o b t a i n c r e d i t . 4 * * * * * SECTION 226.15 - - Right of R e s c i s s i o n * * * * * * * * * 15(a) Consumer's Right t o Rescind Paragraph 1 5 (a )( 1 ) * 2. Ex c e p ti o n s . Although th e consumer g e n e r a l l y has t h e r i g h t t o re s c i n d w i th each t r a n s a c t i o n on t h e ac c oun t , s e c t i o n 125(e) o f t h e a c t p ro v id es an ex c e p t i o n : [ u n t i l September 30, 1985,] th e c r e d i t o r need not p ro v i d e t h e r i g h t t o r e s c i n d a t t h e time of each c r e d i t e x te n s i o n made under an open-end c r e d i t p lan sec u re d by the consumer' s p r i n c i p a l dw el l i n g t o t h e e x t e n t t h a t t h e c r e d i t extended i s i n accordance with a p re v io u s ly e s t a b l i s h e d c r e d i t l i m i t f o r t h e p l a n . This l i m i t e d r e s c i s s i o n optio n i s a v a i l a b l e whether or not t h e p lan e x i s t e d p r i o r t o t h e e f f e c t i v e da te of th e a c t . [The consumer w i l l have t h e r i g h t t o re s c i n d each ex te ns io n made a f t e r September 30, 1985 under such a s ecu red open-end c r e d i t pla n , whether t h a t plan was e s t a b l i s h e d b e fo re or a f t e r t h a t d a t e . J * * * * * - 13 References Statute: §§ 113,125, [a nd]* ^ * 130 ► , and t h e Housing and Community Development Technical Amendments Act o f 1984, (S ec. 205, Pub. L. 98-479)* * 1981 Changes: * * * * Se c tion 226.15 r e f l e c t s t h e s t a t u t o r y amendments o f 1980, p r o vidin g f o r a l i m i t e d r i g h t of r e s c i s s i o n [ f o r a t h r e e - y e a r t r i a l p e r i o d ] when in d iv id u a l c r e d i t e x te n si o n s are made i n accordance wi th a p re v i o u s l y e s t a b l i s h e d ' c r e d i t l i m i t f o r an open-end c r e d i t p l a n . ► T h e 1980 amendments provided t h a t t h i s l i m i t e d r e s c i s s i o n r i g h t be a v a i l a b l e f o r a t h r e e - y e a r t r i a l p e r i o d . However, Pub. L. 98-479 now permanently exempts such i n d i v i d u a l c r e d i t ex t e n s i o n s from th e r i g h t of r e s c i s s i o n . * * * * * * * * * SUBPART C - CLOSED-END CREDIT SECTION 226.17 — General D is c lo s u r e Requirements 17(a) Form of D is cl o s u re * * * * * * * * * * Paragraph 17( a ) (1) 5. Directly r e l a t e d . The s eg r eg a t e d d i s c l o s u r e s may, a t t h e c r e d i t o r ' s o p t i o n , in c lu d e any infor ma tio n t h a t i s d i r e c t l y r e l a t e d t o t h o s e d i s c l o s u r e s . Directly r e l a t e d inf or ma tio n i n c l u d e s , f o r example, t h e fo l l o w i n g : * * * C° A s ta te me n t t h a t a d u e -o n -s a l e c l a u s e i s co n t a i n e d in t h e loan document. For example, th e d i s c l o s u r e given under s e c t i o n 2 26 .1 8(q) may s t a t e , "Someone buying yo u r home may, s u b j e c t t o c o n d i t i o n s in t h e d u e - o n - s a l e c l a u s e conta ined in t h e loan document, assume t h e remainder of t h e mortgage on th e o r i g i n a l t e r m s . " J * * * * * - 14 SECTION 226.18 - - Content o f D is c lo s u r e s * * * * * * * * * * 18 ( f ) Var ia b le Rate 5. Other v a r i a b l e - r a t e r e g u l a t i o n s . T ran s a ct i o n s in which t h e c r e d i t o r i s r e q u ir e d t o comply with and has complied wi th v a r i a b l e - r a t e r e g u l a t i o n s of o t h e r f e d e ra l a ge ncies a re exempt from t h e requ iremen ts of s e c t i o n 2 2 6 . 1 8 ( f ) , by v i r t u e of f o o t n o t e 43. Those v a r i a b l e - r a t e r e g u l a t i o n s i n cl u d e t h e a d j u s t a b l e mortgage loan instrume nt r e g u l a t i o n i s s u ed by t h e Federal Home Loan Bank Board ► ( 1 2 CFR 5 4 5 . 3 3 ) , « [(12 CFR 545. 6 - 2 ( a )) and] t h e a d j u s t a b l e - r a t e mortgage r e g u l a t i o n is sue d by th e Comptrol l er of t h e Currency (12 CFR 29) *and t h e a d j u s t a b l e - r a t e mortgage r e g u l a t i o n s i s s u e d by t h e Department of Housing and Urban Development (24 CFR 203 and 24 CFR 234)4. The ex cep t i o n in f o o t n o t e 43 i s a l s o a v a i l a b l e t o c r e d i t o r s t h a t a re r e q u i r e d by s t a t e law t o comply with th e f e d e r a l v a r i a b l e - r a t e r e g u l a t i o n s noted above and t o c r e d i t o r s t h a t a r e a u t h o r i z e d by t i t l e VIII of the Dep os i t ory I n s t i t u t i o n s Act of 1982 (Pub. L. 97-320) t o make loans in accordance with t h o s e r e g u l a t i o n s . C r e d i t o r s u si n g t h i s excep tion should comply with t h e t i m i n g requ iremen ts of t h o s e r e g u l a t i o n s r a t h e r than th e timi ng requirement s of R egu l at i on Z in making t h e v a r i a b l e - r a t e disclosures. * 8. * * Discounted v a r i a b l e - r a t e t r a n s a c t i o n s . * * In some v a r i a b l e - r a t e t r a n s a c t i o n s , c r e d i t o r s may s e t an i n i t i a l i n t e r e s t r a t e t h a t i s not determined by t h e index or formula used t o make l a t e r i n t e r e s t r a t e a d j u s t m e n t s . initial Typically, th is r a t e i s lower tha n t h e r a t e would be i f i t were c a l c u l a t e d u s i n g t h e index or formula. For example, a c r e d i t o r may c a l c u l a t e i n t e r e s t r a t e s ac c o r d i n g t o a formula usin g t h e six-month T reas ury b i l l r a t e p l us a 2 p e rc en t margin. I f th e c u r r e n t Treasury b i l l r a t e i s 10 p e r c e n t , t h e c r e d i t o r may fo reg o t h e 2 - 15 p e r c ent s pread and charge only 10 p e rc en t f o r a l i m i t e d t i m e, i n s t e a d of s e t t i n g an i n i t i a l r a t e of 12 p e r c e n t . o When c r e d i t o r s use an i n i t i a l r a t e t h a t i s not c a l c u l a t e d u s i n g t h e index or formula f o r l a t e r r a t e ad j u s t m en t s , t h e d i s c l o s u r e s should r e f l e c t a composite annual p e rc en t ag e r a t e based on t h e i n i t i a l r a t e f o r as long as i t i s a pp lie d and, f o r t h e remainder of t h e term, t h e r a t e t h a t would have been a p p li e d u s i n g t h e index o r formula a t t h e time of consummation. H h e r a t e a t consummation need not be used i f a c o n t r a c t pr ovide s f o r a de lay in th e i mplementation of changes i n an index v a l u e . For example, i f t h e c o n t r a c t s p e c i f i e s t h a t payment changes are based on th e index value in e f f e c t 45 days b ef o re t h e change d a t e , c r e d i t o r s may use t h e index value 45 days befo re consummation in c a l c u l a t i n g a composite annual pe rc e nt ag e r a t e . * o The e f f e c t of th e m u l t i p l e r a t e s must a l s o be r e f l e c t e d in t h e c a l c u l a t i o n and d i s c l o s u r e of th e fi na n c e ch arg e, t o t a l of payments, and payment s ch ed ule . ° I f a loan c o n ta in s a r a t e or payment cap t h a t would p rev en t t h e i n i t i a l r a t e or payment, a t t h e time of t h e f i r s t ad j u s t m e n t , from changing t o the r a t e determined by th e index or formula a t consummation, t h e e f f e c t of t h a t r a t e or payment cap should be r e f l e c t e d in t h e d i s c l o s u r e s . ° Because t h e s e t r a n s a c t i o n s i n v o l v e i r r e g u l a r payment amounts, an annual pe r c en ta ge r a t e t o l e r a n c e of 1/4 o f 1 p e r c e n t a p p l i e s , in accordance with s e c t i o n 22 6 .2 2 (a )( 3 ) of the re g u la tio n . ° Examples of di sco un te d v a r i a b l e - r a t e t r a n s a c t i o n s i n cl u d e: - - A 30-ye ar loan f o r $100,000 wi th no p re p a i d f i n a n c e charges and r a t e s determined by t h e Treasury b i l l r a t e p l u s 2 p e r c e n t . adjustments are made a n n u a l l y . Rate and payment Although t h e T reas ury b i l l r a t e a t - 16 t h e time of consummation i s 10 p e r c e n t , t h e c r e d i t o r s e t s t h e r a t e f o r one y e a r a t 9 p e r c e n t , i n s t e a d of 12 p e rc e n t acco rd i n g t o t h e formula. The d i s c l o s u r e s should r e f l e c t a composite annual p e r c e n t a g e r a t e of 11.63 p e rc en t based on 9 p e rc en t f o r one y e a r and 12 p e r c e n t f o r 29 y e a r s . R e f l e c t i n g t h o s e two r a t e l e v e l s , t h e payment s ch e d u l e should show 12 payments of $804.62 and 348 payments of $ 1 , 0 2 5 .3 1 . The fin a nc e charge should be $226,463.32 and t h e t o t a l of payments $366,463.32. - - Same loan as above, except with a 2 p e rc e n t r a t e cap on p e r i o d i c a d ju s t m e n t s . The d i s c l o s u r e s should r e f l e c t a composite annual pe rc e n ta ge r a t e of 11.53 p e rc e n t based on 9 p e rc e n t f o r t h e f i r s t y e a r , 11 p e rc en t f o r t h e second y e a r , and 12 p e rc en t f o r t h e remaining 28 y e a r s . R e f l e c t i n g t h o s e t h r e e r a t e l e v e l s , t h e payment s ch e du le should show 12 payments of $804. 62, 12 payments o f $950. 09, and 336 payments of $1,024 .3 4 . The fi n a n c e charge should be $ 26 5, 2 34 .7 6, and th e t o t a l of payments $365, 23 4. 76 . ► T h i s paragraph does not apply t o v a r i a b l e - r a t e loans in which t h e i n i t i a l r a t e i s s e t ac cording t o th e index o r formula used f o r l a t e r a d j u s t m e n t s , but i s not s e t a t t h e va lue of t h e i ndex o r formula a t consummation. For example, i f a c r e d i t o r commits t o an i n i t i a l r a t e based on t h e formula on a d a te p r i o r t o consummation, but t h e index has moved d u ri n g t h e p er i o d between t h a t time and consummation, a c r e d i t o r may base i t s d i s c l o s u r e s on t h e i n i t i a l rate.* * * * * * * * * * * 18(k) Prepayment - 17 2. Rebate -pe na lty d i s c l o s u r e . A s i n g l e t r a n s a c t i o n may i n v ol v e both a precomputed fi n a n c e charge and a fi n a n c e charge computed by a p p l i c a t i o n of a r a t e t o th e unpaid balance (f or example, [ s i m p l e - i n t e r e s t s t u d e n t loans wi th loan f ee s ancQ mortgages with mort g ag e-g u arant ee i n s u r a n c e ) . In t h e s e c a s e s , d i s c l o s u r e s about both prepayment re b a t e s and p e n a l t i e s a re r e q u i r e d . Sample form H-15 in appendix H i l l u s t r a t e s a mortgage t r a n s a c t i o n i n which both r e b a t e and pe nal ty d i s c l o s u r e s ar e n e c e s s a ry . * * * * * 18(q) Assumption Policy 1. P olicy s t a t e m e n t . [Because a c r e d i t o r ' s assumption p o l i c y may be based on a v a r i e t y of c ircumstanc es not deter m i n ab l e a t t h e time t h e d i s c l o s u r e i s made, t h e c r e d i t o r may use phra ses such as " s u b j e c t t o c o n d i t i o n s " o r "under c e r t a i n ci r cums tance s" in complying with s e c t i o n 2 2 6 . 1 8 ( q ). The p ro v i s i o n r e q u i r e s only t h a t t h e consumer be t o l d whether or not a s ubsequent p u rc h a s e r might be allowed t o assume th e o b l i g a t i o n on i t s o r i g i n a l terms and does not con templ a te any e x p la n a t i on of th e c r i t e r i a o r c o n d i t i o n s f o r a s s u m a b i l i t y . However, t h e c r e d i t o r may s t a t e t h a t a d u e -o n -s a l e c l a u s e i s co n t a i n ed in t h e loan document. (See comment 17(a) ( l ) - 5 re g a rd in g d i r e c t l y r e l a t e d i n fo r m a t i o n . )) ) Mn making th e d i s c l o s u r e r e q u ir e d by t h i s s e c t i o n , i f u n c e r t a i n t y e x i s t s as t o whether a subsequent p u rc h a se r w i l l be allowed t o assume t h e o b l i g a t i o n on i t s o r i g i n a l te r ms , t h e c r e d i t o r should s t a t e t h a t t h e o b l i g a t i o n cannot be assumed on i t s o r i g i n a l te rm s . For example, i f t h e o b l i g a t i o n i s s u b j e c t t o a d u e - o n - s a l e c l a u s e , i t is viewed as being nonassumable f o r purposes of complying wi th t h i s section. However, i f the only u n c e r t a i n t y p e r t a i n s t o a d e t e rm i n a t i o n of t h e c r e d i t w o r t h i n e s s of th e subse quent p u rc h a s e r, t h e o b l i g a t i o n i s viewed as being assumable and an a f f i r m a t i v e d i s c l o s u r e i s a p p r o p r i a t e . 4 - 18 * * * * * SECTION 226.23 - - Right of R e s c is s io n 23( f ) ►8. * * * * * * * * * * Exempt Tran sa cti ons Converting open-end t o cl o s ed -en d c r e d i t . Under c e r t a i n s t a t e laws, consum mation of a c lose d-e nd c r e d i t t r a n s a c t i o n may occur a t t h e time a consumer e n t e r s i n t o th e i n i t i a l open-end c r e d i t agreement . As provi ded in t h e commentary t o s e c t i o n 22 6. 1 7 (b ), c lose d-en d c r e d i t d i s c l o s u r e s may be delayed under t h e s e cir cums tance s u n t i l th e convers io n of t h e open-end account t o a c l o s e d - e n d transaction. In a ccounts se cu red by t h e consumer's p r i n c i p a l d wel l i n g , no new r i g h t of r e s c i s s i o n a r i s e s a t t h e time of co n v er s i o n , assuming t h a t t h e r i g h t of r e s c i s s i o n was p r e v io u s ly provided on t h e open-end account p u rs u an t t o s e c t i o n 226 .1 5.4 * * * * * Board of Governors of t h e Federal Reserve System, November 28, 1984. (s i g n ed ) William W. Wiles Wi1liam W. Wiles S e c r e t a r y of t h e Board
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