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Federal Reserve Bank of Dallas ROBERT D. McTEER, JR. DALLAS, TEXAS P R E S ID E N T 75265-5906 AN D C H IE F E X E C U T I V E O F F IC E R December 23, 1997 Notice 97-121 TO: The Chief Executive Officer of each financial institution and others concerned in the Eleventh Federal Reserve District SUBJECT Proposed Revisions to the Official Staff Commentary on Regulation Z (Truth in Lending) DETAILS The Board of Governors of the Federal Reserve System has requested public com ment on proposed revisions to the Official Staff Commentary on Regulation Z (Truth in Lend ing). The commentary applies and interprets the requirements of the regulation. The proposed revisions: • address increased rates for credit card accounts triggered by events such as late payments or exceeding credit limits; • provide guidance on “same-as-cash” transactions in open-end plans; • address how creditors may determine whether credit is an open-end plan or a closed-end transaction; and • discuss issues such as the treatment of annuity costs in reverse mortgage transac tions and transaction fees imposed on checking accounts with overdraft protection. The Board must receive comments by January 20, 1998. Please address comments to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551. All comments should refer to Docket No. R-0992. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) ATTACHMENT A copy of the Board’s notice as it appears on pages 64769-75, Vol. 62, No. 236 of the Federal Register dated December 9, 1997, is attached. MORE INFORMATION For more information regarding Regulation Z, please contact Eugene Coy at (214) 922-6201. For additional copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254. Sincerely yours, Federal Register / Vol. 62, No. 236 / Tuesday, D ecem ber 9, 1997 / Proposed Rules p ay m en ts or exceeding cred it lim its. It p ro v id es g u id a n ce o n “ sam e-as-cash ” tran sa ctio n s in o p en -e n d plans. It also ad d resses h o w cred itors m a y d eterm in e w h e th e r cre d it is a n o p en -e n d p la n or a clo sed -en d tran sactio n. In ad d itio n , the p ro p o se d u p d a te d iscu sses issues su ch as th e tre a tm e n t of a n n u ity costs in reverse m ortgage tran sa ctio n s an d tra n sa c tio n fees im p o sed o n checking ac co u n ts w ith overdraft protection. DATES: C om m en ts m u st be rec eiv e d on or b efore Jan uary 20, 1998. ADDRESSES: C om m ents sh o u ld refer to D ocket No. R -0 99 2, a n d m ay b e m a ile d to W illiam W. W iles, Secretary, B oard of G overnors of th e F ed eral Reserve System , 2 0th S treet a n d C o n stitu tio n A v enu e, N.W ., W ash in gton , DC 20551. C om m en ts also m ay be d eliv ered to Room B -2222 of th e Eccles B u ilding b etw e en 8:45 a.m. a n d 5:15 p.m. w eek days, or to th e g uard station in the Eccles B u ilding co u rty a rd o n 20th Street, N.W. (betw een C o n stitu tio n A v en u e a n d C Street) at an y tim e. C om m en ts m ay be in sp e c te d in R oom M P -5 0 0 o f th e M artin B uild in g b e tw e e n 9:00 a.m. a n d 5:00 p.m . w eekdays, except as p ro v id e d in 12 CFR 261.8 of th e B o a rd ’s R ules Regarding A v ailability of Inform ation. FOR FURTHER INFORMATION CONTACT: For S u bparts A an d B (open-end credit), Jane E. A hren s, S enior A ttorney, or O brea O. P o index ter, Staff A ttorney; for S u bparts A, C, an d E (closed-end cred it a n d reverse mortgages), Ms. A h re n s or Jam es A. M ichaels, S enior A ttorney, or M ichael E. H entrel, Staff A ttorney; D ivision of C o n su m er an d C o m m u n ity Affairs, B oard of G overnors of the F ederal Reserve System , at (202) 452 3667 or 4 5 2-24 12 ; for u sers of T elec o m m u n ic atio n s D evice for th e Deaf (TDD) only, D iane Jenkins at (202) 452— 3544. FEDERAL RESERVE SYSTEM 12CFR Part 226 [Regulation Z; Docket No. R -0 99 2 ] Truth in Lending B oard of G overnors of th e F ed eral Reserve System . ACTION: P ro p o se d rule; official staff in terp retatio n . AGENCY: T he B oard is p u b lish in g for c o m m en t p ro p o se d rev isio n s to the official staff co m m en tary to R egulation Z (T ruth in Lending). T he co m m en tary a p p lies a n d in terp re ts th e req u irem en ts of R egulation Z. T h e p ro p o se d u p d a te ad d resses in c re ase d rates for cred it card ac co u n ts triggered by ev en ts su c h as late SUMMARY: SUPPLEMENTARY INFORMATION: I. Background T he p u rp o se of th e T ru th in L ending A ct (TILA; 15 U.S.C. 1601 e t seq.) is to p ro m o te th e in form ed u se of c o n su m e r cred it by p ro v id in g for disclo su res about its term s an d cost. T h e act req u ires credito rs to disclose th e cost of cre d it as a d o llar am o u n t (the finan ce charge) an d as a n a n n u a l p ercentag e rate (the APR). U n iform ity in c re d ito rs’ disclo su res is in te n d e d to assist co n su m ers in co m p ariso n sh o pp in g. T he TILA req u ires a d d itio n a l disclo sures for loans se cu red by a c o n s u m e r’s h o m e a n d p erm its co n su m ers to re sc in d certain tran sa ctio n s th a t in vo lve th e ir p rin c ip a l dw elling. T he act is im p le m e n te d b y th e B o a rd ’s R egulation Z (12 CFR Part 226). 64769 T he B o ard’s official staff com m en tary (12 CFR P art 226 (Supp. I)) interprets th e regulation, a n d p ro v id es gu id an ce to credito rs in ap p ly in g th e regu lation to specific tran saction s. T he com m entary is a su b stitu te for in d iv id u a l staff in terp retatio n s; it is u p d a te d p erio d ica lly to ad dress significant q u estio n s th a t arise. T he B oard expects to a d o p t revisio ns to th e co m m en tary in final form in M arch 1998; to th e extent th e rev isio n s im p o se n e w req u irem en ts on creditors, c o m p lia n ce w o u ld be o p tio n al u n til O ctober 1, 1998, the effective date for m a n d ato ry com pliance. II. Proposed R evisions S u b p a rt A — G eneral S ection 226.2— D efinitions an d Rules of C on stru ction 2(a) D efin itio n s 2(a)(2) A d v e rtis e m e n t C om m en t 2 (a)(2 )-l is revised to add ress co m m u n ic atio n s to co nsu m ers about existing accounts. In resp o n se to req uests for g uid an ce, th e p ro p o sed co m m en t p rov id es exam ples of co m m u n ic atio n s th a t are a n d are n o t adv ertisem ents. 2(a)(18) D o w n p a y m e n t P ro p o sed co m m en t 2(a)(18)-3 gives g u id a n ce o n h o w a creditor discloses th e d o w n p a y m e n t in a cred it sale if a trad e-in is in v o lv ed an d if th e am o u n t of th e existing lien on th e trade-in exceeds its value. T he co m m en t clarifies th a t cred itors sh o u ld d isclose zero an d n o t a negative am ount. 2(a)(20) O p en -en d Credit T he B oard has b een asked b y A ttorn eys G eneral of several states to p ro v id e a d d itio n a l g u id an ce con cerning h o w to d eterm in e w h e th e r cred it is an o p en -en d p la n or a clo sed -en d transaction . T he A ttorneys G eneral are co n c ern e d th a t som e retailers selling big-ticket item s have estab lish ed qu estio n ab le “revolving charge a c c o u n ts” to finance th e p u rch a se of su c h item s, resu ltin g in co nsu m ers m aking m ajor p u rch a ses w ith o u t ad eq u ate info rm ation ab out th e tru e cost of th e tran sactio ns. P ro p o sed co m m ent 2(a)(20)-3 in c lu d e s factors th at creditors, p articu la rly tho se engaged in c red it sales, sh o u ld c o n sid er in d eterm in in g th e difference b etw e en an o p en -e n d p la n a n d a clo sed -en d transactio n. P ro p o sed co m m ent 2(a)(20)-5 clarifies w h e n a lin e of credit is n o t self-replenishing. 64770 Federal Register / Vol. 62, No. 236 / Tuesday, Decem ber 9, 1997 / P roposed Rules C o m m en t 2(a)(24)-5 is rev ised for clarity. No su b stan tiv e chan ge is in ten d ed . P ro p o se d co m m en t 2(a)(24)-7 clarifies th a t th e d efin itio n of a resid e n tia l m ortgage tran sa ctio n in c lu d e s a lo an for finan cing th e c o n stru c tio n of a p rim a ry d w ellin g o n la n d alread y o w n e d by the consum er. p u rp o ses of th is reg u la tio n as th e p erio d covered by th e c o n s u m e r’s first p ay m en t. W here th e fee or p re m iu m for th e coverage is assessed p e rio d ica lly a n d th e c o n su m er is u n d e r n o obligation to co n tin u e m ak in g th e paym en ts, credito rs h av e th e o p tio n of p ro v id in g disclo su res on th e basis of o ne y ear of coverage. C reditors also hav e th is o p tio n if th e in itia l term of th e in su ra n c e is n o t clear. S ection 226.4— F in an c e Charge S u b p a rt B— O p en -en d Credit 4(a) D efin itio n S ection 226.5a— C redit a n d Charge Card A p p lic atio n s a n d S olicitations 2(a)(24) R esid en tia l M ortgage T ra nsaction 4(a)(2) S p ec ia l R ule: C losing A g e n t Charges C o m m ent 4(a)(2)—2 is rev ised to a d d re ss charges to c o n d u c t a closing for a real estate-secu red tran sactio n. C reditors m ay ex c lu d e from th e fin ance charge a lu m p -su m se ttle m e n t or closing fee th a t in c lu d e s a charge for co n d u c tin g or atten d in g a closing if th e lu m p -su m fee is p rim a rily for services listed in § 226.4(c)(7), even if th e lu m p -su m fee in c lu d e s in c id e n ta l costs for services th a t are o th e rw ise c o n sid ered finance charges. T he co m m en t clarifies that charges for c o n d u c tin g or a tten d in g th e closing are fin ance charges an d m ay no t be e x c lu d e d from th e finance charge u n le ss th e charge is in c id e n ta l to th e lu m p -su m fee. 4(b) E xa m p le s o f F in a n ce Charges Paragraph 4(b)(2) 5a(b) R eq u ired D isclosures 5a(b)( 1) A n n u a l P ercentage R ate P ro p o se d co m m en t 5 a (b )(l)-7 clarifies th a t if th e APR w ill increase u p o n a stated ev en t (such as th e c o n s u m e r’s m aking a late p ay m e n t or exceeding the cred it lim it), th e card issu er m u st d isclo se th e in c re ase d rate, along w ith th e c o n d itio n for increasin g th e rate. P ro viding o nly a general d e sc rip tio n of th e co n d itio n , su c h as stating th a t the rate w ill increase if th e c o n su m er “ fails to rem a in in good s ta n d in g ,” is n o t an a d eq u ate d escrip tion . 5a(b)(9) L a te-P a ym en t Fee P ro p o sed c o m m e n t 5a(b)(9)-2 ad d re sses cross references to th e APR d isc lo su re req u ired u n d e r § 226.5a(b)(l), w h ere th e APR w ill in crease d u e to a late paym ent. C om m en t 4(b)(2)—1 is revised to clarify th a t a service charge o n a checking or o th er tran sa ctio n acco un t w ith a cre d it feature is a fin ance charge o n ly if th e charge on th e ac co u n t exceeds th e charge for a sim ila r ac co u n t w ith o u t a cred it feature. P ro p o se d co m m en t 5a(b)(10)-2 ad d re sses cross references to th e APR d isc lo su re req u ired u n d e r § 226.5a(b)(l), w h ere th e APR w ill increase if th e cred it lim it is exceeded. 4(d) In su ra n ce Section 226.6— Initial D isclosure S tatem ent C om m ent 4(d)—11 is rev ised for clarification. U n d er § 226.4(d), am o u n ts p a id for in su ra n c e or d eb t can cellatio n coverage m ay b e ex c lu d e d from the fin an ce charge if th e cre d ito r discloses th e fee or p re m iu m for th e in itia l term of coverage, am ong o th e r co nd itio ns. C om m en t 4 ( d ) - l l co n tain s exam ples of w h a t co n stitu tes th e in itia l te rm of coverage, a n d also gives creditors, in ce rtain circu m stan ces, th e o p tio n of p ro v id in g th e cost d isc lo su re for one y ear of coverage if it is clearly labeled as such. T he p ro p o se d rev isio n clarifies th a t th e in itia l term of coverage is b ased on th e p e rio d th a t th e in su re r or cre d ito r is in itia lly ob ligated to provide. It also clarifies th a t th e fact th a t a c o n su m e r is p e rm itte d to cancel th e coverage at any tim e does n o t signify th a t cred ito r m ay treat th e in itial te rm of coverage for 5a(b)(10) O ver-the-L im it Fee 6(a) F in a n ce Charge 6(a)(2) A n n u a l P ercentage R ate P ro po sed co m m en t 6 (a)(2 )-ll clarifies th a t if th e APR w ill in crease u p o n a stated ev en t (such as th e c o n s u m e r’s m aking a late p ay m e n t or ex ceeding the c red it lim it), th e card issu er m u st in c lu d e th e in c re ase d rate in th e d isclo su res req u ired u n d e r § 226.6(a)(2), along w ith th e co n d itio n th a t w ill trigger th e increase. S ection 226.7— P erio dic S tatem ent Som e cred ito rs offer o p en -e n d plan s w ith a deferred p ay m en t feature th a t allow s co n su m ers to avoid finance charges if th e p u rc h a se balan ce is p a id by a certain date. A n ex am p le of th e se “ sam e as c a sh ” features w o u ld p e rm it a c o n su m er p u rch a sin g a $500 item in Janu ary to avo id an y finance charge on th e p u rc h a se if th e $500 b alan ce is p a id by M arch 31. P ro p o sed co m m en t 7-3 gives g u id a n ce on sam e-as-cash transaction s. To ease com p lian ce, three cross-references to th e p ro p o sed co m m en t are a d d e d to p ro v isio n s of § 226.7 ad d re ssin g balan ces to w h ich p erio d ic rates are ap p lied , th e am o u n t of th e finance charge, an d free-ride perio ds. C om m en t is re q u e ste d on w h e th e r to a d d a sim ila r cross-reference u n d e r § 226.5(b)(2), w h ic h ad d resses the tim ing of p erio d ic statem en ts for openen d p la n s offering free-ride periods. Section 226.14— D eterm ination of A n n u a l Percentage Rate 14(c) A n n u a l P ercentage R a te fo r P eriodic S ta tem en ts Revisions to tw o co m m en ts are p rop osed. C om m ent 14(c)—5 addresses th e calcu latio n of th e APRs for m u ltifea tu re d p la n s th a t charge tran sactio n fees in a d d itio n to periodic rates. In resp o n se to req uests for g u id ance, th e co m m en t clarifies that creditors m ay sep arately co n sid er each feature in calcu lating th e denom inator. M ultifeatured p la n s are defined to in c lu d e p la n s w ith features su c h as p u rchases, cash ad vances, or overdraft checking, or p la n s w ith g roups of tran sactio n s w ith different pricing stru ctures. (See co m m en t 7-1). Creditors m ay d isclo se APRs separately for each feature or m ay state a com posite APR for th e w h o le plan. S om e creditors offer cash adv an ces w ith fees that vary if the cash ad v a n ce is o b tain ed by check, at a p ro p rie ta ry ATM , or at a foreign finan cial in stitu tio n . T h ey treat each fee stru ctu re as a “ fea tu re .” A p p en d ix F gives in stru c tio n s for calculating the APR w h e n th e finance charge includes in terest a n d tran sa ctio n fees. A p p en d ix F requ ires cred itors to in c lu d e in the den om inator: (1) th e b alance subject to a tran sa ctio n fee, p lu s (2) th e balance subject to p e rio d ic rates, less the am o u n t of th e balance subject to a tran sactio n charge. T he a p p e n d ix is silen t o n calcu lating th e d en o m in ato r w h e n sep arate features are involved. C om m ent 14(c)-5 clarifies that separate features m a y be co n sid ered in calculatin g th e d eno m in ator. The p ro p o sal does n o t a tte m p t to define “fea tu re” for p u rp o ses of th e APR calculation. C om m ent is req u e sted on h o w to reta in flexibility for cred itors in defining features of an o p en -e n d plan w h ile gu arding against d istin ctio n s am ong ac co u n t services that artificially low er th e APR o n a co n s u m e r’s p erio dic statem ent. A n ex am p le of distin ctio n s th a t serve to lo w er th e APR is the situ atio n w h ere th e cred ito r treats as in d iv id u a l features each possible Federal Register / Vol. 62, No. 236 / Tuesday, Decem ber 9, 1997 / Proposed Rules m e th o d of o btain in g a cash advance, even th o u g h there are no real differences in pricin g or o p era tio n a l ch aracteristics. C om m ent is also re q u e ste d o n w h e th e r a cre d ito r sh o u ld se p arate ly d isclo se th e b alan ces related to ea ch feature u n d e r § 226.7(e), if features are trea te d sep arately for p u rp o ses o f calcu lating th e d en o m in ato r in th e APR co m pu tation . C o m m en t 14(c)-10 ad d re sses th e trea tm e n t o f fees im p o sed on tran sa ctio n s th a t occu r late in a billing cycle a n d are im practicab le to p o st u n til th e follow ing billing cycle. T he co m m e n t w o u ld be rev ised to p ro v id e b ro ad e r g u id a n ce for calculatin g the APR w h e n finance charges p o ste d in th e billing cycle in c lu d e charges relating to activity in p rio r cycles, su c h as ad ju stm e n ts relatin g to error resolu tion . It is in te n d e d to p ro v id e u n ifo rm ity an d sim plify co m p lia n ce for th e v ariety of circ u m sta n ce s u n d e r w h ic h ad ju stm en ts m ay occur. For in stan c es in w h ic h ad ju stm e n ts from p rio r cycles w o u ld p ro d u c e a negative APR in th e c u rren t cycle, th e co m m en t in c o rp o rates the ca lc u latio n ru le from § 226.14(c)(3)—the APR sh o u ld nev e r be less th a n th e APR c o rresp o n d in g to th e p erio d ic rate im p o se d on th e account. S u b p a rt C—C lo sed-en d Credit S ection 226.18— C o nten t of D isclosures 18(g) P a y m e n t S c h e d u le P ro p o se d co m m en t 18(g)-4 clarifies th e re q u irem en ts for d isclosing the tim in g of p aym en ts. It ex p lain s th a t cred ito rs m u st in c lu d e th e ca le n d ar date w h e n th e beg in n in g p ay m e n t is d u e and clarifies th a t reference to th e occurrence of a p a rtic u la r event, for exam ple, disclo sin g th a t th e first p ay m en t is d u e “ 30 days after th e c o m p letio n of c o n s tru c tio n ,” is n o t sufficient. If a prec ise d ate is u n k n o w n , th e creditor m u st estim ate a date a n d label th e d isc lo su re as a n estim ate. S u b p art E— S pecial Rules for C ertain H om e M ortgage T ransaction s S ection 226.33—R equ irem en ts for R everse M ortgages 33(c) P rojected T o tal Cost o f C redit 33(c)(1) C osts to C o n su m er U n d er § 226.33, th e d isclo sed cost of a reverse m ortgage tran sa ctio n m u st co n tain all costs a n d charges p a id by the co n su m er, in c lu d in g th e cost of any an n u ity , w h e th e r th e a n n u ity p u rch a se is m a n d ato ry or v o lu n tary or w h e th e r it is m a d e th ro u g h th e cred ito r or a th ird party. In im p lem en tin g th is ru le, the B oard stated its b elief th a t th e Congress in te n d e d a b road ap p lic a tio n of the term s “ costs an d charges.” (60 FR 15468, M arch 24, 1995.) P ro p o sed c o m m en t 3 3 (c)(l)-2 p ro v id es fu rth e r g u id a n ce for d eterm in in g w h e n an a n n u ity is p u rc h a se d as part of a rev erse mortgage transactio n. III. Form o f Comment Letters T he a d d itio n s a n d rev ision s w o u ld read as follows: * List o f Subjects in 12 CFR Part 226 A dvertising, Banks, banking, C on su m er pro tectio n, Credit, F ederal R eserve System , Mortgages, R eporting an d rec o rd k e ep in g req u irem en ts, T ru th in lending. T ex t o f P rop o sed R evisio n s C ertain co n v en tio n s h ave b een u se d to high lig h t th e p ro p o se d revisio ns to th e text of th e staff com m entary. N ew language is sh o w n in sid e bold-faced arrow s, w h ile language th a t w o u ld be d eleted is set off w ith bold-faced brackets. C om m ents are n u m b e re d to co m p ly w ith n e w Federal Register p u b lic a tio n rules. For th e reasons set forth in the pream b le, th e B oard p rop oses to am en d 12 CFR P art 226 as follows: PART 226—TRUTH IN LENDING (REGULATION Z) 1. T he au th o rity citation for p art 226 co n tin u es to read as follows: A u th o rity : 12 U.S.C. 3806; 15 U.S.C. 1604 a n d 1637(c)(5). 2. In S u p p le m e n t I to Part 226, u n d e r S ectio n 226.2— D efin itio n s a n d R u le s o f C onstruction, th e follow ing am en d m e n ts w o u ld be m ade: a. U n d er Paragraph 2(a)(2) A d v e rtise m e n t., p arag rap h 1. w o u ld be revised; b. U n d er Paragraph 2(a)(18) D o w n p a ym en t., a n e w p arag rap h 3. w o u ld b e added; c. U n d er Paragraph 2(a)(20) O p en -en d credit., p arag raph s 3. a n d 5. w o u ld be revised; an d d. U n d er Paragraph (2)(a)(24) R esid en tia l m ortgage transaction., p arag rap h 5. w o u ld be revised an d a n e w p ara g ra p h 7. w o u ld be added. * * * * Supplement I— Official Staff Interpretations * C om m en t letters sh o u ld refer to D ocket No. R -0992, and , w h e n p ossible, sh o u ld use a sta n d ard typeface w ith a ty p e size o f 10 or 12 characters p e r inch. T his w ill en ab le th e B oard to con vert th e text to m a ch in e-read ab le form th ro u g h electro nic scann in g, a n d w ill facilitate au to m ated retriev al of co m m en ts for review . A lso, if a c co m p an ie d by an original d o c u m e n t in p a p e r form, co m m en ts m a y be su b m itte d on 3 V2 in c h or 5V4 in c h co m p u te r d isk ettes in an y IBMco m p atib le D O S-based format. 64771 * * * * Subpart A— General * * * * * § 2 2 6.2 Definitions and Rules of Construction. 2(a) D efin ition s. 2(a)(2) A d ve rtise m e n t. 1. Coverage. O nly c o m m ercial m essages th a t p ro m o te c o n su m e r c red it tran sac tio n s req u irin g d isc lo su res are a dvertisem ents. M essages inviting, offering, or otherw ise a n n o u n c in g g enerally to pro sp e c tiv e c u sto m e rs th a t availability of cred it tran sac tio n s, w h e th e r in visual, oral, or p rin t m ed ia , are covered b y th e regulation. i. E xam ples include: A. M essages in a n e w sp a p e r, m agazine, leaflet, p ro m o tio n a l flyer, or catalog. B. A n n o u n c e m e n ts on radio, television, or p u b lic a d d ress system . C. D irect m ail lite ratu re or oth er p rin te d m ate ria l on a n y exterior or in te rio r sign. D. P oint-of-sale displays. E. T ele p h o n e solicitations. F. Price tags th a t c o n ta in credit inform ation. G. L etters se n t to c u sto m ers as p a rt o f an o rganized so licitatio n of b u siness. H. M essages on checking a cc o u n t sta te m en ts offering auto loans at a stated a n n u a l p ercentage rate. I. C o m m u n ic atio n s p ro m o tin g a n e w opene n d p la n or clo sed -e n d transaction. ii. T he te rm does n o t in clu d e: A. D irect p e rso n a l contacts, su c h as follow u p letters, cost estim ates for in d iv id u a l co n su m ers, or oral or w ritte n c o m m u n ica tio n relating to th e n e gotiation of a specific transaction. B. Inform ational m aterial, for exam ple, in te re st rate a n d lo an term m em os, d istrib u te d o n ly to b u sin e ss entities. C. N otices re q u ire d by federal or state law , if th e law m an d a tes th a t specific in form ation be d isp lay e d a n d only th e in fo rm a tio n so m a n d a te d is in c lu d e d in th e notice. D. N ew s articles th e u se of w h ic h is c o n tro lled b y th e n e w s m ed iu m . E. M arket research or e d u c a tio n a l m aterials th a t do n o t so licit b u sin ess. ► F . C o m m u n ic atio n s a b o u t an existing a cc o u n t (for exam ple, a p ro m o tio n in c o n n e c tio n w ith a n existing c red it card a c c o u n t)."^ * * * * * * 2(a)(18) D o w n p a ym en t. * * * * ► 3 . E ffect o f e x istin g lien s. In a c re d it sale, th e “ d o w n p a y m e n t” m ay only be u s e d to re d u c e th e c ash price. F or exam ple, w h e n the existing lie n o n a n au to m o b ile to be tra d e d in exceeds the value of th e autom obile, c red ito rs m u st disclose a zero ra th e r th a n a negative n u m b er. To illu strate, assum e a c o n su m e r ow es $10,000 on a n existing a u to m o b ile loan a n d th a t th e trad e -in v alue Federal Register / Vol. 62, No. 236 / Tuesday, Decem ber 9, 1997 / Proposed Rules 64772 o f th e a u to m o b ile is only $8,000, leaving a $2,000 deficit. T h e cred ito r sh o u ld disclose a d o w n p a y m e n t of $0, n o t -$ 2 ,0 0 0 .-^ * * * * * 2(a)(20] O p e n -en d credit. * * * * * 3. R e p e a te d tra nsactio n s. U n d e r this criterion, th e cred ito r m u st re aso n ab ly c o n te m p la te re p e a te d tran sac tio n s. T his m ea n s th a t th e c red it p la n m u st be usable from tim e to tim e a n d th e c re d ito r m u st leg itim a te ly e x p ec t th a t there w ill be re p ea t b u sin e ss ra th e r th a n a o n e-tim e cred it extension. T h e c re d ito r m u st e xpect re p e a te d dealings w ith th e c o n su m e r u n d e r th e cred it p la n as a w h o le a n d n e e d n o t b eliev e th e c o n su m e r w ill re u se a p a rtic u la r feature of th e plan. ► i . Factors. E ach c re d it p la n m ay differ, a n d n o one factor w ill d e te rm in e w h e th e r a c re d ito r re aso n ab ly c o n te m p la tes re p e a te d tran sac tio n s. Som e o f th e factors to be c o n sid e re d in d e te rm in in g w h e th e r a cred ito r c o u ld re aso n ab ly c o n te m p la te re p e a te d tran sac tio n s are: A. W h eth e r th e lin e of c re d it is lim ite d to th e p u rc h a s e of a c ertain p ro d u c t if it is a p ro d u c t th a t c o n su m ers w o u ld n o t likely p u rc h a s e in m u ltip les. T he greater th e variety o f p ro d u c ts available for p u rc h a s e u n d e r the c re d it line, th e m o re lik e ly it is th a t the cred ito r re aso n ab ly c o n te m p la tes re p e a te d tran sac tio n s. Som e c red ito rs m ay n o t offer a v ariety of p ro d u c ts for p u rc h a s e , b u t given th e n a tu re of th e c re d ito r’s p ro d u c ts or services, it is n o n e th e le ss lik ely th a t c o n su m e rs w ill m ake re p e a te d p u rc h a se s— as in th e case of gasoline c o m p a n ies th a t issue c re d it cards. B. W h eth e r th e c re d ito r e stablishes a line of cre d it for th e p u rp o se o f en ab lin g th e c o n su m e r to p u rc h a s e a d e sig n ate d item . It is m ore lik ely th a t a c re d ito r re aso n ab ly c o n te m p la te s re p e a te d tran sac tio n s if a c o n su m e r m ay u se th e c red it to p u rc h a s e any o n e of a n u m b e r of item s. F or exam ple, if a re ta ile r of p ia n o s estab lish e s a lin e o f c red it for th e p u rp o s e of th e c o n su m e r p u rc h asin g a p ian o , it is u n lik e ly th a t th e cred ito r can re aso n ab ly c o n te m p la te re p e a te d tran sac tio n s. C. If th e cred ito r estab lish e s a lin e of cred it to fin an c e th e c o n s u m e r’s p u rc h a s e of a d e sig n ate d item , th e a m o u n t of the tra n s a c tio n re la tiv e to th e c red it m ad e available to th e co n su m er. T h e larger the a m o u n t of th e tran sac tio n , th e less lik ely it is th a t th e cred ito r re aso n ab ly co n te m p la tes re p e a te d tran sac tio n s. For exam ple, if a re ta ile r of satellite d ish e s m akes c re d it of $5,000 available to a c o n su m e r for th e p u rc h a s e of a sa tellite d ish , a n d th e cost of th e satellite d is h is $4,500, it is n o t likely th e c re d ito r c o n te m p la tes re p e a te d transactions. T h e fact th a t th e re ta ile r sells o th er p ro d u c ts th a t are n o m in a l in a m o u n t (co m p ared w ith th e cost of th e m ajor p u rc h ase) is n o t a su ffic ie n t basis to c o n te m p la te re p ea te d tran sac tio n s. D. T he e x te n t to w h ic h a cred ito r re aso n ab ly solicits c u sto m e rs w ith its lin e of c re d it to m ake a d d itio n a l p u rc h a s e s u n d e r th e c re d it line. F or exam ple, if a ho m e im p ro v e m e n t c o n tra cto r issu e s a p riv ate label c re d it c ard w ith a $10,000 lim it to a c o n su m e r p ay in g for ro o f rep airs in the am o u n t. T he cred ito r m ay re d u c e a c red it a m o u n t of $9,000, a n d se n d s m o n th ly lim it or refuse to e x te n d n e w c red it in a solicitatio n s for a lu m in u m siding, the p a rtic u la r case d u e to changes in the c re d ito r does n o t re aso n ab ly c o n te m p la te econom y, th e c re d ito r’s fin an c ial co n d itio n , re p e a te d transactions. E. W h e th e r th e c re d ito r h a s in fo rm a tio n on or th e c o n su m e r’s c red itw o rth in e ss. (The ru les in § 226.5b(f), h o w ev er, lim it th e ability c o n su m ers w ith th e c red it lin e sh o w in g th at of a cred ito r to s u s p e n d c re d it a d v an ces for c o n su m ers h a v e m ad e re p ea t p u rc h ases. The ho m e e q u ity plans.) W h ile c o n su m ers sh o u ld m o re in fo rm a tio n th a t sh o w s th a t c o n su m ers have a re aso n ab le e x p ec tatio n of obtaining h a v e m ad e re p e a t p u rc h ases, th e m ore likely it is th a t th e c re d ito r re aso n ab ly c o n te m p la tes c re d it as long as th e y re m a in c u rre n t a n d w ith in a n y p re se n t c re d it lim its, fu rth er re p e a te d tran sactio n s. ex te n sio n s of c re d it n e e d n o t be a n absolute ii. S t a n d a r d A sta n d a rd b a se d on right in o rd e r for th e p la n to m e e t th e self re aso n ab le b e lie f by a c re d ito r n e ce ssarily re p le n ish in g criterion. in c lu d e s som e m arg in for ju d g m e n tal error. * * * * * T he fact th a t a p a rtic u la r c o n su m e r does n o t re tu rn for fu rth er c red it e x te n sio n s does n o t 2(a)(24) R esid e n tia l m ortgage transaction. p re v e n t a p la n from h a v in g b e e n p ro p e rly * * * * * c h ara cte riz e d as op en -en d . For e x am p le, if 5. A cq u isitio n . ► ! . A re sid e n tia l m ortgage m u c h of th e c u sto m e r base o f a c lo th in g store tran sac tio n finances th e a cq u isitio n of a m akes re p e a t p u rc h ases, th e fact th a t som e c o n su m e r’s p rin c ip a l d w elling. T he term c o n su m ers use th e p la n o n ly once w o u ld not does n o t in c lu d e a tra n s a c tio n in v o lv in g a affect th e ch ara cte riz a tio n of th e sto re ’s p la n c o n su m e r’s p rin c ip a l d w e llin g if th e as o p e n -en d credit. T he c rite rio n regarding c o n su m e r h a d p re v io u sly p u rc h a s e d a n d re p e a te d tran sac tio n s is a q u e stio n of fact to acq u ired som e title to th e d w elling, even be d e c id e d in th e co n tex t of th e c re d ito r’s th o u g h th e c o n su m er h a d n o t a c q u ire d full ty p e of b u sin e ss a n d th e c re d ito r’s re la tio n s h ip w ith th e co n su m er. F or exam ple: legal title. ii. E xam ples of tran sac tio n s involving a A. It w o u ld b e m ore reaso n ab le for a th rift p re v io u sly a c q u ire d d w e llin g in c lu d e the in stitu tio n c h a rte re d for th e b en efit of its fin an cin g of a b a llo o n p a y m e n t d u e u n d e r a m em bers to c o n te m p la te re p e a te d la n d sale co n tra ct a n d a n e x te n sio n of cred it tran sac tio n s w ith a m em b e r th a n for a seller m a d e to a joint o w n e r o f p ro p e rty to b u y out of a lu m in u m sid in g to m ake th e sam e th e o th er jo in t o w n e r’s interest. In these a ssu m p tio n a b o u t its custom ers. in stan c e s, d isc lo su res are n o t re q u ire d u n d e r B. It w o u ld be m ore re aso n ab le for a b a n k § 226.18(q) or § 226.19(a) (assum ability to m ake a d v an ces from a lin e of c red it for the policies a n d early d isc lo su res for re sid en tial p u rc h a s e of a n a u to m o b ile th a n for an m ortgage transactions). H ow ever, the a u to m o b ile d e ale r to sell a car u n d e r a n re sc issio n ru les of §§ 226.15 a n d 226.23 do o p e n -e n d plan. a p p ly to th ese n e w transactions. * * * * * iii. In o th er cases, th e d isc lo su re a n d 5. R eu sa b le lin e. i. T he total a m o u n t of re sc issio n ru le s do n o t apply. For exam ple, c re d it th a t m ay be e x te n d e d d u rin g th e w h e re a b u y e r e n te rs in to a w ritte n existence of an o p e n -en d p la n is u n lim ite d agreem ent w ith th e cred ito r h o ld in g the b e ca u se available c re d it is g enerally se lle r’s m ortgage allo w in g th e b u y e r to re p le n is h e d as earlier a d v an c es are re p aid . A a ssu m e th e m ortgage w h e re th e b u y e r lin e of cred it is se lf-rep len ish in g e v en th o u g h p re v io u sly p u rc h a s e d th e p ro p e rty a n d th e p la n itself h a s a fixed ex p ira tio n d ate, as agreed w ith th e seller to m ake th e m ortgage long as d u rin g th e p la n ’s e x isten ce the p a y m e n ts, § 226.20(b) does n o t a p p ly c o n su m e r m ay u se th e line, repay, a n d re u se (a ssu m p tio n s involving re sid e n tia l th e credit. ► H o w e v e r , a line o f c red it m ortgages). ^ [A tran sac tio n is n o t “ to g e n era lly is n o t se lf-rep len ish in g w h e re the fin an ce th e a c q u isitio n ” of th e c o n su m e r’s in itia l lin e of c re d it is less th an , or n o t m u c h p rin c ip a l d w ellin g (and therefore is n o t a m o re th an , th e a m o u n t of an ite m p u rc h a s e d re sid e n tia l m ortgage tran sactio n ) if the to o p e n th e c re d it lin e or, b a se d o n the c o n su m e r h a d p re v io u sly p u rc h a s e d the m in im u m m o n th ly p a y m e n ts, th e p rin c ip a l dw e llin g a n d a c q u ire d som e title to th e re d u c tio n is so n o m in a l th a t th e c re d it lin e dw elling, even th o u g h th e c o n su m er has not is n o t re u sa b le for a n e x te n d e d p e rio d o f acq u ired full legal title. T hus, th e follow ing t i m e . ^ T he cred ito r m ay verify c red it types of tran sac tio n s are n o t a re sid en tial in fo rm a tio n s u c h as th e c o n su m e r’s m ortgage transactions: c o n tin u e d in co m e a n d e m p lo y m e n t sta tu s or • T he fin an cin g of a b a llo o n p a y m e n t due in fo rm a tio n for secu rity p u rp o se s. T his u n d e r a la n d sale contract. c rite rio n o f u n lim ite d c red it d istin g u ish es • A n e x te n sio n of c red it m ad e to a joint o p e n -e n d c red it from a series of a d v an ces o w n e r of p ro p e rty to b u y o u t th e o ther joint m ad e p u rs u a n t to a c lo sed -e n d c red it lo an o w n e r’s interest. co m m itm en t. As a resu lt, in giving th e d isclosures for ii. For exam ple: th ese tran sac tio n s several p ro v isio n s of the A. U n d e r a c lo sed -e n d c o m m itm e n t, th e re g u la tio n s are n o t a p plicable, for exam ple, cred ito r m ig h t agree to le n d a total of $10,000 th e e x ce p tio n s to th e rig h t of rescission in a series o f a d v an c es as n e e d e d by th e (§§ 226.23(f)(1) a n d 226.15(f)(1), th e early consum er. W h en a c o n su m e r h a s b o rro w e d disc lo su re re q u ire m e n t (§ 226.19(a)), a n d the th e full $10,000, n o m o re is a d v a n c e d u n d e r d isc lo su re co n ce rn in g assum ability th a t p a rtic u la r agreem ent, even if th ere has (§ 226.18(q)). In th e follow ing situ atio n , by b e e n re p a y m e n t of a p o rtio n of th e debt. c ontrast, since th e tran sac tio n is n o t a iii. T his c rite rio n does n o t m e a n th at th e re sid e n tia l m ortgage tran sactio n , no d isc lo su res are re q u ire d b y § 226.20(b) a n d cred ito r m u st e stab lish a specific c re d it lim it therefore th e right of resc issio n does not for th e line of c re d it or th a t th e lin e o f c red it apply: m u st alw ay s be re p le n is h e d to its original Federal Register / Vol. 62, No. 236 / Tuesday, Decem ber 9, 1997 / P roposed Rules • A w ritte n agreem ent b e tw ee n a cred ito rii. A $5 service charge is im p o s e d for e ac h h o ld in g a se lle r’s m ortgage a n d th e b u y e r of ite m th a t re su lts in an overdraft o n a n T*' th e p ro p e rty w h ic h allow s th e b u y e r to a c c o u n t w ith an overdraft lin e o f credit, a ssu m e th e m ortgage, w h e re th e b u y e r w h ile a $25 service charge is im p o sed for p re v io u sly p u rc h a s e d th e p ro p e rty a n d p a y in g or re tu rn in g th e item on a sim ila r agreed w ith th e se lle r to m ake th e m ortgage a c c o u n t w ith o u t a c re d it feature; th e $5 paym ents. charge is n o t a finance charge. -^ [T h e * * * * * ch eck in g or tran sac tio n a cc o u n t charges d isc u sse d in § 226.4(b)(2) in clu d e , for ► 7 . C o n stru ctio n on p re v io u s ly a c q u ired exam ple, th e follow ing situations: va c a n t la n d . A re sid e n tia l m ortgage • A n a cc o u n t w ith a n overdraft lin e of tran sac tio n in c lu d e s a lo an to finance the c re d it in c u rs a $4.50 service charge, w h ile an c o n stru c tio n of a c o n s u m e r’s p rin c ip a l d w e llin g o n a v a ca n t lot p re v io u sly a cq u ired a cc o u n t w ith o u t a c red it feature h a s a $2.50 by th e c o n s u m e r." ^ service charge; th e $2.00 difference is a * * * * * finance charge. If th e difference is n o t re la ted 3. In S u p p le m e n t I to P art 226, u n d e r to a cc o u n t activity, h o w ev er, it m ay be e x clu d a b le as a p a rtic ip a tio n fee. (See th e S ec tio n 226.4— F in a n ce Charge, the c o m m e n ta ry to § 226.4(c)(4).) follow ing am e n d m e n ts w o u ld be m ade: • A service charge of $5.00 for e ac h ite m a. U n d e r Paragraph 4(a)(2)., th at triggers a n overdraft c red it lin e is a p ara g ra p h 2. w o u ld b e revised; fin an ce charge. H ow ever, a charge im p o s e d b. U n d e r Paragraph 4(b)(2)., u n ifo rm ly for a n y item th a t o v e rd raw s a para g ra p h 1. w o u ld b e revised; an d ch eck in g a cc o u n t, regardless of w h e th e r th e c. U n d e r Paragraph 4(d) In su ra n ce item s are p a id or re tu rn e d a n d w h e th e r th e a n d d eb t ca n cella tio n coverage., a cc o u n t h a s a c re d it feature or not, is n o t a fin an ce charge.] p ara g ra p h 11. w o u ld b e revised; * * * * * para g ra p h 12. w o u ld b e red e sig n ated as p ara g ra p h 13.; a n d a n e w para g ra p h 12. w o u ld b e added. T he rev isio n s a n d a d d itio n s w o u ld rea d as follow s: 4(d) In su ra n ce a n d d e b t ca n cella tio n coverage. * * * * * 11. In itia l term . i. T he in itial term of th e in su ra n c e ► o r debt c a n c e lla tio n -^ coverage d e te rm in e s th e p e rio d for w h ic h a p re m iu m 226.4 Finance Charge. a m o u n t ► o r f e e - ^ m u st be d isclosed, ► u n l e s s th e one-year o p tio n d isc u sse d 4(a) D efin itio n. u n d e r c o m m e n t 4(d)-12 is available. For /_r ' * * * * * p u rp o se s of § 226.4(d), th e in itia l term is th e 4(a)(2) S p e cia l rule: clo sin g ag en t charges. p e rio d for w h ic h th e in su re r or cred ito r is * * * * * obligated to p ro v id e coverage, even th o u g h 2. R e q u ire d clo sin g agent. If th e cred ito r th e c o n su m e r m ay be a llo w e d to c an cel th e re q u ire s th e u se of a closing agent, fees coverage before th at term expires. ch arg ed by th e closing agent are in c lu d e d in ii. F o r exam ple: th e fin an c e charge o n ly if th e cred ito r A. T h e in itia l term of a p ro p e rty in su ra n c e re q u ire s th e p a rtic u la r service, req u ires th e p o lic y o n a n a u to m o b ile th at is w ritte n for im p o s itio n o f th e charge, o r re ta in s a p o rtio n one y e ar is one year even th o u g h m o n th ly of th e charge. Fees c h arg e d by a th ird -p a rty p re m iu m s are p a id a n d th e te rm of th e c red it clo sin g agent m ay be o th erw ise e x c lu d e d tra n s a c tio n is four years. from th e fin an c e charge u n d e r § 226.4. For B. T he in itia l term o f a n in su ra n c e p o lic y ex am p le, a fee th a t w o u ld b e p a id in a is th e full term of th e cred it tra n s a c tio n if th e c o m p a rab le c ash tra n s a c tio n m ay be c o n su m e r p ays or fin an c es a single p re m iu m e x c lu d e d u n d e r § 2 2 6 .4 (a )[;]^ . A charge for in a d v a n c e .-^ [In som e cases th e in itia l term c o n d u c tin g or a tte n d in g a closing is a finance is clear, for e xam ple a p ro p e rty in su ra n c e charge a n d m ay be e x c lu d e d only if the p o lic y o n an a u to m o b ile w ritte n for one year charge is in c lu d e d in a n d in c id e n ta l t o - ^ a (even th o u g h th e term of th e cred it lu m p -s u m fee for re al estate closing costs tra n s a c tio n is four years) or a c redit life [m ay be] e x c lu d e d u n d e r § 226.4(c)(7). in su ra n c e p o lic y for th e term o f th e c red it * * * * * tran sac tio n p u rc h a s e d by p a ying or fin an cin g 4(b) E x a m p le s o f fin a n c e charges. a single p re m iu m . In o th er cases, h o w e v e r, it * * * * * m ay n o t be clear w h a t th e in itial term of the in su ra n c e is, for exam ple, w h e n the P aragraph 4(b)(2). 1. C h e ck in g a c c o u n t charges.^ -A checking co n su m e r agrees to p a y a p re m iu m th a t is assessed p e rio d ic ally a n d the c o n su m e r is or tra n s a c tio n a cc o u n t ch arge im p o s e d in u n d e r no obligation to c o n tin u e m aking th e co n n e c tio n w ith a c re d it featu re is a finance p a y m e n ts. In cases su c h as this, th e cost charge u n d e r § 226.4(b)(2) to th e ex ten t the disc lo su re m ay be m a d e o n th e b asis of a charge exceeds th e charge for a sim ilar p re m iu m for o n e y e ar of in su ra n c e coverage. a cc o u n t w ith o u t a c red it feature. If a charge T he p re m iu m m u st be clearly lab eled as for an a c c o u n t w ith a c re d it feature does n o t b e in g for o n e year.] ex ceed th e charge for a n a cc o u n t w ith o u t a ► 1 2 . In itia l term ; alterna tive, i. A c re d ito r c re d it feature, th e charge is n o t a finance h a s th e o p tio n of p ro v id in g cost d isc lo su res charge u n d e r § 226.4(b)(2). To illustrate: on th e b asis o f o n e y e ar of in su ra n c e or d e b t i. A $5 service charge is im p o s e d on an c an c ellatio n coverage in ste a d of a longer a cc o u n t w ith a n o verdraft lin e o f credit, in itia l term (p ro v id ed th e p re m iu m or fee is w h ile a $3 service charge is im p o s e d on an c learly lab e led as b eing for one year) if: a c c o u n t w ith o u t a c re d it feature; th e $2 A. T he in itia l term is n o t clear, or difference is a fin an ce charge. * * * * * 64773 B. T he c o n su m e r has agreed to p a y a p re m iu m or fee th a t is a ssessed perio d ic ally b u t th e c o n su m e r is u n d e r n o obligation to c o n tin u e th e coverage after m aking th e in itial pay m en t. ii. For exam ple: A. A cred it life in su ra n c e p o lic y pro v id in g coverage for a 30-year m ortgage lo an has an in itial term of 30 years even th o u g h p re m iu m pa y m e n ts are m ad e m o n th ly a n d the co n su m e r is n o t re q u ire d to c o n tin u e the coverage after m ak in g th e in itial paym ent. T h e c red ito r has th e o p tio n of m aking disc lo su res on th e basis of coverage for oney e a r.- ^ * * * * * 4. In S u p p le m e n t I to Part 226, u n d e r S ectio n 226.5a— C redit a n d Charge Card A p p lic a tio n s a n d S o licitatio n s, the follow ing a m en d m e n ts w o u ld be m ade: a. U n d er Paragraph 5 a (b )(l) A n n u a l P ercentage R ate., a n e w parag rap h 7. is added; b. U n d er Paragraph 5a(b)(9) Late P a ym en t Fee., a n e w parag rap h 2. is added; an d c. U n d er Paragraph 5a(b)(10) Overth e-L im it Fee., a n e w parag rap h 2. is added. T he a d d itio n s w o u ld read as follows: * * * * * Subpart B— Open End Credit * * * * * § 226.5a Credit and Charge Card Applications and Solicitations. * * * * * 5a(b) R eq u ire d D isclosures. 5a(b)( 1) A n n u a l P ercentage R ate. * * * * * ► 7 . In crea sed p e n a lty rates. If th e in itial rate w ill in crease u p o n th e oc cu rre n ce o f a sp e c ifie d event su c h as a late p a y m e n t or an e x te n sio n of c red it th a t exceeds th e credit lim it, th e card issu e r m u st disclose along w ith the in itial rate the in cre ased p e n a lty rate th a t w o u ld a pply. T he issu e r m u st also disclose th e specific c o n d itio n or c o n d itio n s for im p o sin g th e in c re a se d rate, su c h as “ 22% APR, if 60 days la te .” T he issu e r m ay d isclo se th e p e rio d for w h ic h th e in cre ased rate w ill re m a in in effect, su c h as “u n til you m ake th ree tim ely p a y m e n ts.” A c red ito r n e e d n o t disclose a n in cre ased rate th at is im p o s e d w h e n c red it privileges are p e rm a n e n tly te rm in a te d .-^ * * * * * 5a(b)(9) Late P a y m e n t Fee. * * * * * ► 2 . In crea sed p e n a lty rates. If th e a n n u a l p ercentage rate w ill in crease as a re su lt of late p a y m e n ts, th e d isc lo su res u n d e r § 226.5a(b)(9) m u st in c lu d e a reference to the d isc lo su res re q u ire d u n d e r § 2 2 6 .5 a(b )(l).-^ 5a(b)(10) O ver-the-L im it Fee. * * * * * ► 2 . In crea sed p e n a lty rates. If th e a n n u a l percentage rate w ill in crease as a re su lt of the c a rd h o ld e r’s exceeding th e c red it lim it, the disc lo su res u n d e r § 226.5a(b)(10) m u st Federal Register / Vol. 62, No. 236 / Tuesday, Decem ber 9, 1997 / P roposed Rules 64774 in c lu d e a re fere n ce to th e d isc lo su res re q u ire d u n d e r § 2 2 6 .5 a (b )(l).-^ * * * * * 5. In S u p p le m e n t I to P art 226, S ectio n 226.6— In itia l D isclosure S ta tem en t, u n d e r Paragraph 6(a)(2)., a n e w p ara g ra p h 11. w o u ld b e a d d e d to read as follows: * * * * * S ectio n 226.6— In itia l D isclosure S ta te m e n t * * * * * * 6(a) F in a n ce charge. * * * * * Paragraph 6(a)(2). * * * * ► l l . In cre a sed p e n a lty rates. If th e a n n u a l p erce n ta g e rate w ill in cre ase u p o n the o c cu rre n ce of a sp e c ifie d ev en t su c h as a late p a y m e n t or a n e x te n sio n o f c re d it th at e x ceed s th e c red it lim it, the c re d ito r m u st d isclo se along w ith th e in itia l rate the in c re a se d p e n a lty rate th a t w o u ld a p p ly . The issu e r m u st also disclose th e specific c o n d itio n for im p o sin g th e in c re a se d rate, su c h as “ 22% APR, if 60 days la te .” T he issu e r m ay d isclo se th e p e rio d for w h ic h the in c re a s e d rate w ill re m a in in effect. A c re d ito r n e e d n o t d isclo se a n in c re a se d rate th a t is im p o sed w h e n c re d it privileges are p e rm a n e n tly te rm in a te d .-^ * * * * * 6. In S u p p le m e n t I to P art 226, u n d e r S ectio n 226.7— P eriodic S ta tem en t, th e follow ing am e n d m e n ts w o u ld be m ade: a. U n d er in tro d u c to ry text, a n ew p ara g ra p h 3. w o u ld b e add ed ; b. U n d er Paragraph 7(e) B a la n ce on w h ich fin a n c e charge co m p u te d ., a n e w p ara g ra p h 10. w o u ld be ad ded; c. U n d er Paragraph 7(f) A m o u n t o f fin a n c e charge., a n e w p ara g ra p h 9. w o u ld be ad d e d ; an d d. U n d e r Paragraph 7(j) Free-ride p erio d ., a n e w p ara g ra p h 2. w o u ld be add ed . T he a d d itio n s w o u ld rea d as follow s: * * § 226.7 * * * * * Periodic Statem ent. * * * ii. A m o u n t o f fin a n c e charge. U n d e r § 226.7(f), c red ito rs m u st d isclo se finance charges im p o s e d d u rin g a billin g cycle. For som e sam e-as-cash p u rc h ases, th e c re d ito r m ay im p o se a finance charge from th e date of p u rc h a s e if th e deferred p a y m e n t b a la n c e ($500 in th is exam ple) is n o t p a id in fu ll by th e d u e date, b u t w ill n o t im p o se fin an ce charges for b illin g cycles b e tw e e n th e date of p u rc h a s e a n d th e p a y m e n t d u e date. P erio d ic sta te m en ts for b illin g cycles p re c e d in g the p a y m e n t d u e date s h o u ld n o t in c lu d e in the fin an c e charge d isc lo sed u n d e r § 226.7(f) the a m o u n ts a c o n su m e r m ay ow e if th e deferred p a y m e n t b alan ce is n o t p a id in full b y the p a y m e n t d u e date. In th is exam ple, th e F eb ru ary p e rio d ic sta te m en t sh o u ld n o t id en tify as fin an ce charges in terest a ttrib u ta b le to th e $500 January p u rc h a s e . At th e c re d ito r’s op tio n , th is a m o u n t m a y be d isc lo sed on p e rio d ic sta te m en ts p ro v id e d it is id e n tifie d b y a te rm o th er th a n “ finance c harge.” iii. F ree-ride p erio d . A ssu m in g m o n th ly b illin g cycles e n d in g at m o n th -e n d a n d a free-ride p e rio d e n d in g on th e 25th o f the follow in g m o n th , here are tw o ex am p les illu stra tin g h o w a cred ito r m ay c o m p ly w ith th e re q u ire m e n t to d isclo se th e free-ride p e rio d a p p lic ab le to a deferred p a y m e n t b a la n c e ($500 in th is exam ple), a n d w ith the 14-day ru le for m ailin g or d e liv e rin g p e rio d ic sta te m en ts before im p o sin g fin an ce charges (see §226.5): A. T h e c re d ito r c o u ld in c lu d e th e $500 p u rc h a s e o n th e p e rio d ic sta te m en t reflecting a cc o u n t a ctiv ity for F eb ru ary a n d se n t on M arch 1 a n d id en tify M arch 31 as the p a y m e n t d u e date for th e $500 p u rc h ase. (The cred ito r c o u ld also id en tify M a rc h 31 as th e p a y m e n t d u e date for any o th er a m o u n ts d u e on M arch 25.) B. T h e c re d ito r c o u ld in c lu d e th e $500 p u rc h a s e o n th e p e rio d ic sta te m en t reflecting activity for M arch a n d se n t o n A p ril 1 a n d id en tify A p ril 25 as th e p a y m e n t d u e date for th e $500 p u rc h ase, p e rm ittin g th e c o n su m e r to a v o id finance charges if th e $500 is p a id in full b y A pril 2 5 .-^ * * * * * 7(e) B a la nce on w h ich fin a n c e charge c o m p u te d . * * * * * ► 3 . S am e-as-ca sh tran sa ctio ns. Som e ► 1 0 . S a m e-a s-cash tra nsa ctio ns. See c red ito rs offer a deferred p a y m e n t feature for co m m e n t 7 - 3 ( i) .- ^ p u rc h a s e s in w h ic h c o n su m e rs a v o id finance 7(f) A m o u n t o f fin a n c e charge. charges if th e p u rc h a s e b a la n c e is p a id in full * * * * * by a c ertain date. For ex am p le, n o finance ► 9 . S a m e-a s-cash tra nsa ctio ns. See charge is im p o s e d o n a $500 p u rc h a s e m ad e co m m e n t 7 -3 (ii).-^ in January if th e $500 b a la n c e is p a id by * * * * * M a rc h 31. i. B a la n ces su b je ct to p e rio d ic rates. U n d e r 7(j) F ree-ride p eriod . * * * * * § 226.7(e), c red ito rs m u st d isclo se the b a la n c es subject to p e rio d ic rates d u rin g a ► 2 . S a m e-a s-ca sh tra n sa ctio n s. See b illin g cycle. T h e deferred p a y m e n t b alan ce com m ent 7 -3 ( i ii ) .^ ($500 in th is exam ple) is n o t subject to a * * * * * p e rio d ic rate for b illin g cycles b e tw e e n the 7. In S u p p le m e n t I to Part 226, date of p u rc h a s e a n d th e p a y m e n t d u e date. S ectio n 226.14— D eterm in a tio n o f P e rio d ic sta te m en ts se n t for th o se b illin g cycles s h o u ld n o t in c lu d e th e deferred A n n u a l P ercentage Rate, u n d e r p a y m e n t b a la n c e in th e b a la n c e d isc lo sed P aragraph 14(c) A n n u a l p ercen ta g e rate u n d e r § 226.7(e). A t th e c re d ito r’s op tio n , this fo r p erio d ic sta tem en ts., p ara g ra p h 5. a m o u n t m ay be d isc lo se d o n p e rio d ic a n d p arag rap h 10. w o u ld rev ised to read sta te m en ts p ro v id e d it is id e n tifie d by a term as follows: o th e r th a n th e term u s e d to id en tify the * * * * * b a la n c e d isc lo sed u n d e r § 226.7(e). § 2 2 6.1 4 Determ ination of Annual Percentage Rate. * * * * * 14(c) A n n u a l p ercen ta g e rate fo r p e rio d ic sta tem en ts. * * * * * 5. T ra n sa ctio n charges, i. S ection 226.14(c)(3) tra n s a c tio n charges in clu d e , for exam ple: A. A lo a n fee of $10 im p o s e d on a p a rtic u la r advance. B. A charge of 3% o f th e a m o u n t o f each tran sactio n . ii. T he referen ce to av o id in g d u p lic a tio n in th e c o m p u ta tio n re q u ire s th a t th e a m o u n ts of tran sac tio n s o n w h ic h tran sac tio n charges w e re im p o s e d n o t be in c lu d e d b o th in th e a m o u n t o f total ba la n c es a n d in th e “ oth er a m o u n ts o n w h ic h a finance charge w as im p o s e d ” figure. ► I n a m u ltife a tu re d p lan, c red ito rs m ay separately c o n sid e r e ac h bona fide feature in th e calc u la tio n of th e d e n o m in a to r .-^ For fu rth er e x p la n a tio n a n d e x am p les o f h o w to d e te rm in e the c o m p o n e n ts of th is form ula, see a p p e n d ix F. * * * * * 10. Prior-cycle a d ju stm e n ts, i. T he a n n u a l percentage rate reflects th e finance charges im p o s e d d u rin g th e b illin g cycle. H ow ever, fin an ce charges im p o sed durin g th e b illin g cycle m ay relate to activity in a p rio r cycle. E x am p les o f circ u m stan c es w h e n th is m ay o c cu r are: A. A c ash a d v an c e th a t occurs o n th e last d a y of a b illin g cycle on a n a cc o u n t th at u ses th e tra n s a c tio n date to figure finance charges, a n d it is im p ra c tic ab le to p o st th e tran sac tio n u n til th e follow ing cycle. B. A n a d ju s tm e n t to th e finance charge is m ad e follow ing th e re so lu tio n of a billing e rror d isp u te. C. A c o n su m e r fails to p a y th e pu rch ase b alan ce u n d e r a d e ferre d p a y m e n t feature by th e p a y m e n t d u e date, a n d fin ance charges are im p o sed from th e date of p u rch ase. 11. F in a n ce charges re la tin g to a ctiv ity in p rio r cycles s h o u ld b e reflected in th e a n n u al percentage rate for th e b illin g cycle in w h ic h the charges are p osted. If th e cred ito r u se s the q u o tie n t m e th o d to c alc u la te th e a n n u a l p e rcentage rate, th e n u m e ra to r w o u ld in c lu d e th e a m o u n t of a n y tran sac tio n charges p lu s a n y o th er finance charges p o ste d d u rin g the b illin g cycle. B alances re la tin g to th e finance charge a d ju stm e n t m ay be in c lu d e d in the d e n o m in a to r if p e rm itte d by th e legal obligation, th e tran sac tio n w as im practicable to p o st in th e p re v io u s cycle d u e to its tim ing, or th e charge relates to an a d ju stm en t su c h as th e re so lu tio n of a b illin g error d isp u te or an u n in te n tio n a l p o sting error. A n a n n u a l p ercentage rate c a lc u la te d u n d e r this parag rap h shall n o t be less th a n th e hig h est rate d e te rm in e d by m u ltip ly in g each p erio d ic rate im p o s e d d u rin g th e billing cycle b y the n u m b e r of p e rio d s in a y e a r .- ^ [T ransactions at e n d o f b illin g cycle. T h e a n n u a l percentage rate reflects tran sac tio n s a n d charges im p o s e d d u rin g th e b illin g cycle. H ow ever, it m ay be im p ra c tic ab le to p o st a transaction th a t occurs at th e e n d of a b illin g cycle u n til th e follow ing cycle, su c h as a cash advance th at occurs on th e last d a y of a billing cycle a n d is p o ste d to the a cc o u n t in th e follow ing cycle. A card issu e r th at uses th e date of the Federal Register / Vol. 62, No. 236 / Tuesday, Decem ber 9, 1997 / P roposed Rules tra n s a c tio n to figure fin an ce charges s h o u ld calc u la te th e a n n u a l p ercentage ra te as follow s for th e b illin g cycle in w h ic h th e tra n s a c tio n a n d charges are posted: 1. T h e d e n o m in a to r is c a lc u la te d as if th e tra n s a c tio n o c cu rre d on th e first d a y of th e b illin g cycle; a n d ii. T h e n u m e ra to r in c lu d e s th e a m o u n t of th e tra n s a c tio n charge p lu s all finance charges d e riv e d from th e a p p lic a tio n of th e p e rio d ic rate to th e a m o u n t of th e tran sac tio n (in clu d in g all charges from a p rio r cycle).] * * * * * 8. In S u p p le m e n t I to P art 226, S ectio n 226.18— C o n ten t o f D isclosures, u n d e r Paragraph 18(g) P a ym e n t sc h ed u le ., th e 18(g) h e a d in g w o u ld be rev ised, a n d a n e w p ara g ra p h 4. w o u ld be a d d e d to rea d as follow s: * * * * * Subpart C— Closed End Credit * * * * * § 2 2 6.1 8 Content of Disclosures. * * * * * [Paragraph] 18(g) P a y m e n t sch e d u le . * * * * * ► 4 . T im in g o f p a y m e n ts . C reditors m u st d isclo se w h e n p a y m e n ts are due, in c lu d in g th e c ale n d ar date th a t th e b e g in n in g p a y m e n t is due. F or exam ple, a cred ito r m ay disclose th a t p a y m e n ts are d u e “m o n th ly beg in n in g on ]u ly 1, 1998.” A reference to th e o c cu rre n ce of a p a rtic u la r event, for exam ple, d isc lo sin g that th e first p a y m e n t is d u e “ 30 days after the c o m p le tio n of c o n stru c tio n ,” is n o t sufficient. If th e b e g in n in g -p a y m e n t date is u n k n o w n , th e cred ito r m u st u se an e stim a te d date a n d label th e d isc lo su re as an estim a te p u rs u a n t to § 2 2 6 .1 7 (c ) .^ * * * * * 9. In S u p p le m e n t I to Part 226, S ectio n 226.33— R eq u irem en ts fo r R everse M ortgages, u n d e r Paragraph 33(c)(1) Costs to co n su m er, in parag rap h 2., a n e w sen ten ce is a d d e d at th e en d of th e p ara g ra p h to read as follows: * * * * * Subpart E— Special Rules for Certain Home M ortgage Transactions § 226.33 Requirem ents for Reverse M ortgages. * * * * * 33(c) P ro jected to ta l co st o f credit. P aragraph 33(c)(1) C osts to co n su m er. * * * * * 2. A n n u ity costs. * * * ► F o r exam ple, th is in c lu d e s th e costs o f a n a n n u ity th a t a cred ito r offers, arranges, a ssists th e c o n su m er in p u rc h asin g , or th a t th e cred ito r is aw are th e c o n su m er is p u rc h a s in g as a p a rt of the tra n s a c tio n .^ * * * * * By o rder of th e B oard of G overnors of th e F ed eral R eserve System , acting th ro u g h th e Secretary of th e B oard u n d e r delegated a u th o rity , D ecem ber 1, 1997. William W. Wiles, S ecreta ry o f th e B oard. [FR Doc. 9 7 -3 1 8 9 6 F ile d 1 2 -8 -9 7 ; 8:45 am] BILLING CODE 6210 -01 -P 64775
@FedFRASER