The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
F ederal r es er v e Bank o f D allas DALLAS, TEXAS 75222 C i r c u l a r No. 83-151 December 27, 1983 REGULATION Z TRUTH IN LENDING (Proposed Changes t o O f f i c i a l S t a f f Commentary) TO ALL MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of t h e Federal Reserve System has published f o r comment proposed changes t o t he o f f i c i a l s t a f f commentary t o its Regul ati on Z. The p r o pos al s a ddress a v a r i e t y of q u e s t i o n s , such as the proper t r e a t m e n t of c e r t a i n mortgage g ua r a nt ee i ns ur a nc e premiums, f e e s f o r t h e use of c r e d i t cards in shared s ystems, and c e r t a i n types of v a r i a b l e - r a t e transactions. Interested p arties are invited t o submit comments to William W. Wiles, Secretary, Board o f Governors o f t h e Federal Reserve System, Washington, D.C., 20551. Comments should r e f e r t o TIL-1 and must be r e c ei ve d by January 3 i , 1984. Attached i s a copy of the Board' s p r e s s r e l e a s e and t h e m a t e r i a l as submitted to t h e Federal R e g i s t e r . Questions r e g a r di ng t he m a t e r i a l c ont a i ned in t h i s c i r c u l a r should be d i r e c t e d t o the Legal Department, Extension 6171. Addi t i onal copies o f t h i s c i r c u l a r w il l be f u r n i s h e d upon r e q u e s t to t h e Publi c A f f a i r s Department, Extension 6289. Sincerely yours, William H. Wallace F i r s t Vice P r e s i d e n t This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Banks and others are encouraged to use the following incoming W A TS 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. FEDERA^RESERVEpres^^lease For immediate r e l e a s e November 28, 1983 The Federal Reserve Board today publ i s he d an update t o t h e o f f i c i a l s t a f f commentary on Regul ati on Z (Truth in Lending). Three p r i n c i p a l s u b j e c t s of t h e proposed r e v i s i o n a r e s e t f o r t h in e x c e r p t s from t h e t e x t of t h e p r o p o s a l . The Board r eq ue s t e d comment by January 31, 1984. - Attachment 0 - - 5 - FEDERAL RESERVE SYSTEM 12 CFR P a r t 226 [Reg. Z; TIL-1] TRUTH IN LENDING O f f i c i a l S t a f f Commentary Update AGENCY: Board of 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 Regul at i on Z (Truth in Lending), 12 CFR P a r t 226. The commentary a p p l i e s and i n t e r p r e t s t h e requirements of Regul at i on Z with r egard t o consumer c r e d i t t r a n s a c t i o n s and i s a s u b s t i t u t e f o r i n 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 the r e g u l a t i o n . The commentary pr op os al s a ddr e ss a v a r i e t y of 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 , such as t h e proper t r e a t m e n t of c e r t a i n mortgage g u a r a n t e e i n s u r a n c e premiums, c e r t a i n f e e s f o r t h e use of c r e d i t car ds in i n t e r c h a n g e o r shared syst e ms , and c e r t a i n t y p e s of v a r i a b l e rate transactions. DATE: Comments must be r e c ei v e d on or b e fo r e J a n u a r y 31, 1984. ADDRESS: Comments should be mailed t o William W. Wiles, S e c r e t a r y , Board of Governors of t h e Federal Reserve System, Washington, D.C. 20551, o r d e l i v e r e d t o RoomB-2223, 20th and C o n s t i t u t i o n Avenue, N.W., Washington, D.C. between 8:45 a.m. and 5:15 p.m. Comments should 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 t e d in Room B-1122 between 8:45 a.m. and 5:15 p.m. FOR FURTHER INFORMATION: Contact t h e f ol l owi n g a t t o r n e y s in t h e D i v i s i o n of Consumer and Community A f f a i r s , Board of Governors of t h e Federal Reserve System, Washington, D.C. 20551, a t (202) 452-2412 o r (202) 452-3867: Subpart Subpart Subpart Subpart A B C D — — — -- Ruth Amberg, Steven Zeisel Richard Ga r a b e di a n, Lynn Goldfaden Clarence Cain, Susan Werthan Rugenia S i l v e r SUPPLEMENTARY INFORMATION: (1) G e n e r a l . 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 was p ub l i s he d t o i n t e r p r e t Reg ul at i on Z (12 CFR P a r t 2 2 6) . The commentary i s designed t o prov i de guidance t o c r e d i t o r s i n a pplying 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 d d r e 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 two updates t o t he commentary so f a r , t h e f i r s t in September 1982 (47 FR 41338) and t h e second i n April 1983 (48 FR 14882). This n o t i c e c o n t a i n s t h e proposed t h i r d u pd a t e . I t i s expected t h a t i t w i l l be adopted in f i n a l form i n March 1984 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 d a t e of October 1 f o r mandatory compliance. - 6 - Following a r e e x c e r p t s from t h e n o t i c e on t h r e e s u b j e c t s of i n t e r e s t : SECTION 226.4 — Finance Charge 4 ( b ) Examples of Finance Charges Comment 4 ( b ) ( 2 ) - 2 would be added t o ex ce pt from t h e f i n a n c e charge c e r t a i n f e e s imposed on c a r d h o l d e r s f o r t h e use of e l e c t r o n i c t e r m i n a l s in i n t e r c h a n g e or s h a r ed s y s t e ms . A companion p r o v i s i o n would be added t o t h e commentary on § 2 26 . 6( b) t o r e t a i n c e r t a i n d i s c l o s u r e r e qui re me nt s f o r t h e s e fees. 4 ( c ) Charges Excluded from t h e Finance Charge Paragraph 4 ( c ) (5) Comment 4 ( c ) ( 5 ) - 2 would be added t o e x p l a i n t h e c o r r e c t t r e a t m e n t of mortgage i n s u r a n c e premiums (and o t h e r charges t h a t a r e normally paid by t h e borrower) when t h e y a r e paid a t or b e f o r e s e t t l e m e n t in a lump sum by t h e n o n c r e d i t o r s e l l e r . This i s most l i k e l y t o a r i s e in t h e case of FHA mortgage i n s u r a n c e premiums, which t h e Department of Housing and Urban Development now c o l l e c t s in a lump sum r a t h e r than p e r i o d i c a l l y . I f t h e s e l l e r makes t h e pay ment, t h e c r e d i t o r should t r e a t t h e amount of t h e payment as s e l l e r ' s p oi nt s and e xcl ude i t from t h e f i n a n c e c ha r ge . A c r e d i t o r who gives d i s c l o s u r e s b e f or e t h e payment has been made should r e l y on t h e e s t i m a t e p r o v i s i o n of § 2 2 6 . 1 7 ( c ) ( 2 ) t o de t e rmi ne t h e c o r r e c t d i s c l o s u r e s . SECTION 226.18 - - Content of D i s c l o s u r e s 1 8 ( f ) V a r ia b l e Rate A paragraph would be added t o t h e commentary t o § 2 2 6 . 1 8 ( f ) t o c l a r i f y the d iscl o su re s fo r 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 . [The f u l l t e x t of t h e n o t i c e i s a v a i l a b l e upon r e q u e s t from t h e Federal Reserve Banks. ] - 7 - FEDERAL RESERVE SYSTEM 12 CFR P a r t 226 [Reg. Z; TIL-1] TRUTH IN LENDING O f f i c i a l S t a f f Commentary Update AGENCY: Board of 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 ub l i s h i n g f o r comment proposed changes t o t he o f f i c i a l s t a f f commentary t o Regul ati on Z (Truth in Lending), 12 CFR P a r t 226. The commentary a p p l i e s and i n t e r p r e t s t he requirements of Regulation Z with regard t o consumer c r e d i t t r a n s a c t i o n s and i s a s u b s t i t u t e f o r i n 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 he r e g u l a t i o n . The commentary pr opos a l s a ddress a v a r i e t y of 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 , such as t h e proper t r e a t m e n t of c e r t a i n mortgage g ua ra nt e e i n s ur a nc e premiums, c e r t a i n f e e s f o r t h e use of c r e d i t cards in i n t er c h an ge or shared systems , and c e r t a i n t ype s of v a r i a b l e rate tran sactio n s. DATE: Comments must be re ce i v e d on or b efore J an u a ry 31, 1984. ADDRESS: Comments should be mailed t o William W. Wiles, 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 RoomB-2223, 20th and C o n s t i t u t i o n Avenue, N.W., Washington, D.C. between 8:45 a.m. and 5:15 p.m. Comments should i nc l u de a r e f e r e n c e t o TIL-1. Comments may be i n s p ec t e d in Room B-1122 between 8:45 a.m. and 5:15 p.m. FOR FURTHER INFORMATION: Contact t h e fo l l owi ng a t t o r n e y s in t h e D i v i s io n of Consumer and Community A f f a i r s , Board of Governors of t h e Federal Reserve System, Washington, D.C. 20551, a t (202) 452-2412 or (202) 452-3867: Subpart Subpart Subpart Subpart A B C D ----- Ruth Amberg, Steven Zeisel Richard Garabedian, Lynn Goldfaden Clarence Cain, Susan Werthan Rugenia S i l v e r SUPPLEMENTARY INFORMATION: (1) G e n e r a l . 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 was publis hed t o i n t e r p r e t Regulation Z (12 CFR P a r t 226). The commentary i s designed t o provide guidance t o c r e d i t o r s in a pplying t he 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 d d r e 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 two updates t o t he commentary so f a r , t h e f i r s t in September 1982 (47 FR 41338) and t h e second in April 1983 (48 FR 14882). This n o t i c e c o n t a i n s t h e proposed t h i r d update. I t i s expected t h a t i t will be adopted in f i n a l form in March 1984 with op ti on al compliance u n t i l t h e uniform e f f e c t i v e d a t e of October 1 f o r mandatory compliance. - 8 - C e r t a i n convent ions 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 i s shown i n s i d e b o ld - f ac ed 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 . proposed r e v i s i o n s t o t h e commentary: Following i s a b r i e f d e s c r i p t i o n of t h e SUBPART A - GENERAL SECTION 226.2 - - D e f i n i t i o n s and Rules of C o ns t r uc t i on 2 ( a ) (17) " Cr e d it o r" The l a s t sent e nc e of comment 2 ( a ) (17) ( i )- 7 would be d e l e t e d because i t c o n t a i n s a c r o s s - r e f e r e n c e t o t h e commentary d i s c u s s i n g " ar r a n g er of c r e d i t , " which was d e l e t e d in April 1983 (48 FR 14882). The s en t e nc e should have been d e l e t e d a t t h a t t i me . SECTION 226.4 — Finance Charge 4(b) Examples of Finance Charges Comment 4 ( b ) ( 2 ) - 2 would be added t o except from t h e f i na nc e charge c e r t a i n f e es imposed on c a r d h o l d e r s f o r t h e use of e l e c t r o n i c t e r m i n a l s in i n t e r c h a n g e or shar ed systems. A companion p ro v is i o n would be added t o t h e commentary on § 226.6(b) t o r e t a i n c e r t a i n d i s c l o s u r e requirements f o r t h e s e fees. 4(c ) Charges Excluded from t h e Finance Charge Paragraph 4 ( c ) ( 5 ) Comment 4 ( c ) ( 5 ) - 2 would be added t o e x p l a i n t h e c o r r e c t t r e a t m e n t of mortgage i n s u ra n ce premiums (and o t h e r charges t h a t are normally paid by t h e borrower) when t he y a r e paid a t or be f or e s e t t l e m e n t in a lump sum by t h e n o n c r e d i t o r s e l l e r . This i s most l i k e l y t o a r i s e in t h e case of FHA mortgage i ns ur a nc e premiums, which t h e Department of Housing and Urban Development now c o l l e c t s in a lump sum r a t h e r than p e r i o d i c a l l y . I f t h e s e l l e r makes t h e pay ment, t h e c r e d i t o r should t r e a t t h e amount of t h e payment as s e l l e r ' s poi nt s and exclude i t from t h e f i n a n c e c har ge. A c r e d i t o r who gives d i s c l o s u r e s before t h e payment has been made should r e l y on t h e e s t i m a t e p r o v i s i o n of § 2 2 6 . 17 ( c ) ( 2 ) t o determine t h e c o r r e c t d i s c l o s u r e s . SUBPART B - OPEN-END CREDIT SECTION 226.6 - - I n i t i a l D i s c l o s u r e Statement 6(a) Finance Charge A paragraph would be added t o t h e commentary t o § 2 2 6 . 6 ( a ) ( 2 ) t o c l a r i f y t h e d i s c l o s u r e s f o r di s co un t ed v a r i a b l e - r a t e p la n s. - 6( b) 9 - Other Charges If t h e proposal t o except c e r t a i n i n t e r c h a n g e f e e s paid by t h e c ar d h o l de r from t h e f i n a n c e charge i s adopted (see proposed comment 4 ( b ) ( 2 ) - 2 ) , an example would be added t o t h e l i s t of " o t h e r char ges" in comment 6 ( b ) - l , t o c l a r i f y t h a t such f e es must s t i l l be d i s c l o s e d as " o t h e r char ges" under §§ 226. 6(b) and 2 2 6 . 7 ( h ) . In a d d i t i o n t o f e e s a s s e s s e d by i n t e r c h a n g e systems, t h e r e may be f e e s a ss e s s e d by o t h e r system p a r t i c i p a n t s t h a t should be d i s c l o s e d t o c a r d h o l d e r s . An example would be t h e v ar i ou s fe es a s s es s ed by termi na l owners t h a t a r e passed through t o t h e c a r d h o ld e r by t h e card i s s u e r . While card i s s u e r s may not know t h e amounts of t h e v a ri ous charges and, t h e r e f o r e , may not be a bl e t o d i s c l o s e them on t h e i n i t i a l d i s c l o s u r e s t a t e m e n t , such f e e s may be c an d i d a t e s f o r d i s c l o s u r e on t h e p e r i o d i c s t a t e m e n t . Comment i s s o l i c i t e d on t h e t e c h n i c a l a s p e c t s of how t h e s e terminal f e es will be passed through t o card i s s u e r s - - and, s u b s e q u e n t l y , t o c a r d h o l d e r s . (For example, some f e e s may be i ncluded in t h e amount of t h e t r a n s a c t i o n and d i s c l o s e d t o t h e c a r d h o l d e r a t t h e t e r m i n a l , whereas o t h e r s may be s e n t through t h e system s e p a r a t e l y from t h e unde rl yi ng t r a n s a c t i o n . ) Comment i s a l s o s o l i c i t e d on whether t h e r e a r e o p e r a t i o n a l problems in d i s c l o s i n g t h e s e f e e s on t he periodic statement. SECTION 226.12 - - Special C re di t Card P r o v i s i o n s 1 2 ( b ) ( 3 ) N o t i f i c a t i o n t o Card I s sue r Comment 1 2 ( b ) (3)-3 would be added t o p o i nt out t h a t , under t h e regu l a t i o n , t h e a p p l i c a b i l i t y of t h e l i a b i l i t y l i m i t a t i o n p r o v i s i o n f o r unauthorized use d e t a i l e d in § 226.12 i s not dependent upon whether t h e consumer fol l ows t he e r r o r r e s o l u t i o n procedures of § 226.13. SECTION 226.13 - - Bi11i n g - E r r o r Res olution 1 3 ( d ) ( 1 ) Consumer's Right t o Withhold Disputed Amount; C o l l e c t i o n Action Prohibited Language would be added t o comment 1 3 ( d ) ( 1) - 1 t o c l a r i f y t h a t f i n a nc e or o t h e r charges cannot be imposed on undisputed balances even in subsequent b i l l i n g c y c l e s , merely because t h e consumer wi thholds payment of a d i s p ut e d a m o u n t. Paragraph 13(g) (1) Comment 1 3 ( g ) ( l ) - l would be r e vi s e d t o make c l e a r t h a t , when t h e c r e d i t o r n o t i f i e s t h e consumer of amounts s t i l l owed from t h e r e s o l u t i o n p e r i o d , t h e c r e d i t o r may not inc l ude f i n a n c e or o t h e r charges imposed on t he undisputed amounts s o l e l y because t h e consumer w i thh e l d payment of a d i s p u t e d amount. - 10 - SECTION 226.14 — Deter mination of Annual Pe r c e nt age Rate 14(a) General Rule A comment would be added t o t h e commentary t o § 226. 14(a) t o c l a r i f y t h e c i r c ums ta nc es under which c r e d i t o r s may u t i l i z e f o o t n o t e 31a, r egardi ng faulty calculation tools. SECTION 226.16 — A d v e r ti s i n g 16(b) Advertisement of Terms t h a t Require Additional D i s c l o s u r e s Comment 16( b )-4 would be modified t o d e s c r i b e s eve ra l ways of s a t i s fying t h e r e q u i r e d d i s c l o s u r e of t h e annual pe r c en t a ge r a t e in an a dv er ti s eme nt f o r a v a r i a b l e - r a t e plan. A new comment 16( b )-5 would be added t o e x p l a i n how t o a d v e r t i s e d i s counted v a r i a b l e - r a t e p l a n s . Comments 16 ( b )-5 and 6 would be r e d e s i g n a t e d as comments 16( b )-6 and 7. SUBPART C - CLOSED-END CREDIT SECTION 226.17 - - General D i s c l o s u r e Requirements 17(b) Time of D i s c l o s u r e s Comment 17( b)-2 would be r e v i s e d t o c l a r i f y t h e time of d i s c l o s u r e when an open-end c r e d i t account i s conver ted t o a c l o s e d- e n d t r a n s a c t i o n . Under some s t a t e laws, consummation of t he c l o s e d- e nd t r a n s a c t i o n i s deemed t o occur a t t h e same time as t h e opening of t h e open-end c r e d i t p l a n , even though t h e c onver si on may occur s e v e ra l y e a r s l a t e r . In t h e s e c a s e s , t h e cl o s e d- e nd c r e d i t d i s c l o s u r e s may be given a t t h e time of t he c onv er si on. SECTION 226.18 - - Content of D i s c l o s u r e s 18 (f ) V a ri a bl e Rate A paragraph would be added t o t h e commentary t o § 2 2 6 . 1 8 ( f ) t o c l a r i f y t he d i s c l o s u r e s f o r d i s cou nt ed v a r i a b l e - r a t e t r a n s a c t i o n s . SECTION 226.22 — Deter mination of t h e Annual Percentage Rate 22(a) Accuracy of t h e Annual Percentage Rate A comment would be added t o t h e commentary t o § 2 2 6 . 2 2 ( a ) (1 ) t o c l a r i f y t h e c ir c ums t anc e s under which c r e d i t o r s may u t i l i z e f o o t n o t e 45a, re ga rd i ng f a u l t y c a l c u l a t i o n t o o l s . - 11 - SECTION 226.24 - - A d ve r t i s ing 24(b) Advertisement of Rate of Finance Charge A comment would be added t o § 226.24(b) t o e x p l a i n how t o a d v e r t i s e d is co un t e 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 . The comment would allow c r e d i t o r s t o use t h e a d v e r t i s i n g r u l e s f o r buydowns when a d v e r t i s i n g t h e s e t r a n s a c t i o n s . 24(c) Advertisement of Terms That Require Additional D i s c l o s u r e s Comment 2 4 ( c ) ( 1 ) , r e l a t i n g t o t h e use of downpayments in a d v e r t i s e m e n t s , would be r e v i s e d by t h e d e l e t i o n of t h e second s e n t e n c e , l i m i t i n g t h e a p p l i c a t i o n of § 2 2 6 . 2 4 ( c ) ( 1 ) t o c r e d i t s a l e s . In t h e s t a f f ' s view, t he removal of t h i s c u r r e n t l i m i t a t i o n would b e t t e r f u l f i l l t h e purpose of t h e a d v e r t i s i n g r u l e s t o provide complete i nf or ma t i on t o p r o s p e c t i v e c r e d i t customer s. SUBPART D - MISCELLANEOUS SECTION 226.28 — Ef f ec t on S t a t e Laws 28(a) I n c o n s i s t e n t D i s c l o s u r e Requirements The commentary t o § 226.28 would be expanded by t h e a d d i t i o n of two new comments, r e f l e c t i n g r e c en t Board d e t e r m i n a t i o n s on t h e e f f e c t of t h e Truth in Lending Act on t h e consumer c r e d i t laws of M i s s i s s i p p i and South Ca r o l i n a . L i s t of Subj e c t s in 12 CFR P a r t 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; Finance; P e n a l t i e s ; Truth in l e n d i n g . (3) Text of 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 (Supplement I t o P a r t 226) read as f o l l o w s : 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 Co ns t r uc t io n 2(a ) D e f i n i t i o n s 12 - - 2 ( a ) (17) " Cr ed i t or " * * * * * * * * * * Paragraph 2 ( a ) ( 1 7 ) ( i ) 7. T r u s t s . In t h e case of c r e d i t extended by t r u s t s , each i n d i v i d u a l t r u s t i s c o n s i d e r e d a s e p a r a t e e n t i t y f o r purposes of a pplying t h e c r i t e r i a . For example: o A bank i s t h e t r u s t e e f o r t h r e e t r u s t s . Trust A makes 15 e x t e n s i o n s of consumer c r e d i t a nn ua l ly; Trust B makes 10 e x t e n s i o n s of consumer c r e d i t a n n u a l l y ; and Trust C makes 30 e x t e n s i o n s of consumer c r e d i t a n n u a l l y . Only Trust C i s a c r e d i t o r f o r purposes of t he r e g u l a t i o n . [With regard t o t h e t r u s t e e ' s s t a t u s , see t h e commentary t o s e c t i o n 2 2 6 . 2 ( a ) ( 3 ) . ] * * * * * SECTION 226.4 — Finance Charge * * * * * 4 ( b ) Examples of Finance Charges ★ ★ ★ ★ * ★ ★ ★ * ★ Paragraph 4 ( b ) ( 2 ) ► 2 . Treatment of f e e s f o r use of e l e c t r o n i c t e r m i n a l s in an i n t e rc h a n g e or sh ar ed s ys t e m. Fees paid by t h e c a r d h ol de r f o r use of e l e c t r o n i c t e r m i n a l s in an i n t er c h an ge or shar ed system a r e not f i n a n c e charges t o t h e e x t e n t t h a t : o The f e e i s a ss e s s e d by someone o t h e r than t h e card i s s u e r (an example of such a f e e i s a network switch fee)~|~ ° The f e e f o r t r a n s a c t i o n s i nv ol v i ng access t o c r e d i t l i n e s i s no g r e a t e r t han t h e f e e t h e c a r d h o l de r would pay f o r t r a n s a c t i o n s i n v o l vi ng access t o a s s e t accounts through t h e same te r mi na l or on t h e same i n t e r c h an ge ; and o Any f e e t h a t i s passed through t o t h e c a r d h o l d e r b.y t he card i s s u e r i s no g r e a t e r t han t h e a ct u a l f e e charged t o t h e card issuer for the tran sactio n . Note, however, t h a t c e r t a i n f e e s t h a t are excepted from t h e f i n a n c e charge under t h i s p r o v i s i o n must be d i s c l o s e d by t h e card i s s u e r as o t h e r charges" under s e c t i o n s 2 26 .6 (b ) and 2 2 6 . 7 ( h ) . (See t h e commentary t o s e c t i o n 2 2 6 . 6 ( b ) . ) 4 13 - * * - * * * * * 4 ( c ) Charges Excluded from t h e Finance Charge * * * Paragraph 4 ( c ) ( 5 ) * * * * * >2. Other s e l l e r - p a i d amounts. Mortgage i ns ur a nc e premiums and o t h e r charges t h a t a r e normally paid b.y t he borrower a r e sometimes paid in a lump sum at~ consummation or s e t t l e m e n t on t h e bor r owe r ' s be h al f by a n o n c r e d i t o r s e l l e r . In such c a s e s , t h e c r e d i t o r should t r e a t t h e payment made by t h e s e l l e r as s e l l e r ' s p o i n t s , and exclude i t from t h e f i n a n c e c h a r g e . 4 SUBPART B - OPEN-END CREDIT * * * * * SECTION 226.6 - - I n i t i a l D i s c l os ur e Statement ★ ★ ★ ★ ★ Paragraph 6 (a) (2) * * * * * ► 1 0 . Discounted v a r i a b l e - r a t e p l a n s . In some v a r i a b l e - r a t e p l a n s , c r e d i t o r s ma.y s e t an i n i t i a l r a t e t h a t i s not t i e d t o t h e index used t o make r a t e a d j u s t ments. T y p i c a l l y , t h i s i n i t i a l r a t e i s lower than t h e r a t e would be i f i t were c a l c u l a t e d using t h e index. 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 t i e d t o t he v a r i a b l e - r a t e index, t h e i n i t i a l d i s c l o s u r e s ta t eme nt should r e f l e c t t he i n i t i a l r a t e (with a s t at eme n t of how long i t wi l l remain in e f f e c t ) , and t h e c u r r e n t indexed r a t e t o g e t h e r with t he o t h e r v a r i a b l e - r a t e i nf or ma t i on re qu ir e d by f o o t n o t e 12 t o s e c t i o n 2 2 6 . 6 ( a ) ( 2 ) . 4 ~ ★ * ★ ★ ★ 6( b) Other Charges 1. General; examples of o t h e r c h a r g e s . Under s e c t i o n 2 2 6 . 6 ( b ) , s i g n i f i c a n t charges r e l a t e d t o t h e plan ( t h a t a r e not f i n a n c e char g es ) must a l s o be d i s c l o s e d . For example: ° Late payment and o v e r - t h e - c r e d i t - 1 i mi t charges ° Fees f o r provi di ng documentary evidence of t r a n s a c t i o n s r e que s t e d under s e c t i o n 226.13 ( b i 11i n g - e r r o r r e s o l u t i o n ) 14 - - ° Charges imposed in connection with re a l e s t a t e t r a n s a c t i o n s (See s e c t i o n 2 2 6 . 4 ( c ) ( 7 ) . ) o Taxes and f i l i n g or no ta ry f e e s excluded from t h e f i n a n c e charge under s e c t i o n 2 2 6 . 4 ( e ) ° A t a x imposed on t h e c r e d i t t r a n s a c t i o n by a s t a t e or o t h e r governmental body, such as a documentary stamp t a x on cash advances (See t h e commentary t o s e c t i o n 2 2 6 . 4 ( a ) . ) o Membership o r p a r t i c i p a t i o n f e e s f o r a package of s e r v i c e s t h a t i n c l u de s an open-end c r e d i t f e a t u r e , unl e ss t h e f e e is r e q u ir e d whether or not t h e open-end c r e d i t f e a t u r e i s i n c l u d e d . For example, a membership f e e t o j o i n a c r e d i t union would not be an " o t h e r c h a r g e , " even i f membership i s r e q u i r e d t o apply for credit. ► q Fees excepted from t h e f i n a n c e charge t h a t are a ss e s s e d by an i n t e r c h a n g e system and t h a t a r e paid by c a r d h o l d e r s f o r use of e l e c t r o n i c t e r m i n a l s in t h e i n t e rc h a n g e system. (See t h e coIth mentary t o s e c t i o n 2 26. 4 ( b ) ( 2 ) . ) 4 * * * * * SECTION 226.12 - - Special C re di t Card Pr o v i s i o n s ★ ★ ★ ★ 12(b) L i a b i l i t y of Cardholder f o r Unauthorized ★★ ★ Use ★ ★ ★ ★ ★ 1 2 ( b ) ( 3 ) N o t i f i c a t i o n to Card I s s u e r ★ ★ ★ ► 3 . Relationship tosecti on 226.13. While u na ut h or i z e d use may be a s s e r t e d as a bilTTng e r r o r under s e c t i o n s 2 26. 13(a ) and ( b ) . l i m i t a t i o n s on t h e consumer's l i a b i l i t y f o r unaut hori zed use do not depend upon f ol l owi ng t h o s e e r r o r r e s o l u t i o n p r o c ed ur e s . For example, n o t i f i c a t i o n of un a ut hori z e d use need not be given in w r i t i n g nor wi t h in a s p e c i f i e d number of days in o r de r t o l i m i t t h e consumer' s l i a b i l i t y . 4 * * * * * SECTION 226.13 - - Bi11i n g - E r r o r Resolution ★ ★ ★ ★ ★ 1 3 ( d ) ( 1 ) Consumer's Right t o Withhold Disputed Amount; C o l l e c t i o n Action Prohibited * * * * * 15 - - 3. Imposition of a d d i t i o n a l charges on undisputed amounts. The consumer' s w i t h holding of [ t h e ] ► a * d i s p u t e d amount from t h e t o t a l b i l l cannot s u b j e c t [ t h e } undisputed [ p o r t i o n } ► balances ( i n c l u d in g new purchases or cash advances made d ur i n g t h e p r e s en t or subsequent c y c l e s ) 4 t o t h e i mpos it i on of f i n a n c e or o t h e r c ha r ge s . For example, i f on an account with a f r e e - r i d e period ► ( t h a t i s , an account in which paying t h e new balance in f u l l allows t he consumer t o avoi3 t h e i mpo si t i on of a d d i t i o n a l f i n a n c e c h a r g e s ) 4, a consumer d i s p u t e s a $2 item out of a t o t a l b i l l of $300 and pays $298 w i t h i n t h e f r e e - r i d e p e r i o d , t h e consumer would not l o se t h e f r e e - r i d e as t o [ t h e ] ►an.y4 undisputed [ p o r t i o n ] ►amounts4, even i f t h e c r e d i t o r determines l a t e r t h a t no b i l l i n g e r r o r oc cu rr e d. ► Fu r t he r m o re , f i n a n ce charges could not be imposed on any new purchases or advances t h a t , abse nt t h e unpaid d is p u t e d b a l a n c e , would not have f i n a n c e charges imposed on t h em. 4 ★ ★ ★ ★ ★ 13(g) C r e d i t o r ' s Rights and Duties Af t e r Res ol ut i on Paragraph 1 3 ( g ) (1) 1. Amounts owed by consumer. Amounts t h e consumer s t i l l owes may i nc lu de both minimum p e r i o d i c payments and r e l a t e d f i n a n c e and o t h e r charges t h a t accrued dur i ng t h e r e s o l u t i o n p e r i o d . >As noted in t h e commentary t o s e c t i o n 2 2 6 . 1 3 ( d ) ( 1 ) , even i f t h e c r e d i t o r l a t e r determines t h a t no b i l l i n g e r r o r o c c u r r e d , t he c r e d i t o r may not i nc lu de f i n a n c e or o t h e r charges t h a t a r e imposed on undisputed balances s o l e l y as a r e s u l t of a consumer's withholding payment of a d i s p u t e d amount.4 * * * * * SECTION 226.14 - - Determination of Annual Percentage Rate 14(a) General Rule ★ * ★ ★ ★ ► 5 . Good f a i t h r e l i a n c e on f a u l t y c a l c u l a t i o n t o o l . Footnote 31a absol ve s c r e d i t o r s of l i a b i l i t y f o r e r r o r s in t h e annual p ercentage r a t e and f i n a nc e charge t h a t r e s u l t from a c orrespondi ng e r r o r in a c a l c u l a t i o n t o o l . The a v a i l a b i l i t y of t h e f o o t n o t e i s l i m i t e d t o f a u l t y c a l c u l a t i o n t o o l s t h a t are e x t e r n a l l y produced, not t h os e t h a t were i n t e r n a l l y prepared by t h e c r e d i t o r . Moreover, "good f a i t h " as used in f o o t n o t e 31a r e q u i r e s some e f f o r t on t h e p a r t of t h e c r e d i t o r t o i nde pe ndent l y v e r i f y t h e accuracy of t h e c a l c u l a t i o n tool.4 ★ ★ ★ ★ ★ - 16 - SECTION 226.16 — Adve r t i s i n g * * * * * 16(b) Advertisement of Terms That Require Additional D i s cl os u r e s * * * * * 4. V a r i a b l e - r a t e p l a n s . » In d i s c l o s i n g t h e annual pe rc ent a ge r a t e in an a d v e r t i s e m e n t f o r a v a r i a b l e - r a t e p l a n , as r e qu i r e d by s e c t i o n 2 2 6 . 1 6 ( b ) ( 2 ) . t he c r e d i t o r may use an i n s e r t showing t h e c u r r e n t r a t e ; may give t h e r a t e as of a s p e c i f i e d r e c en t da te : o r may d i s c l o s e an e st i ma t ed r a t e under s e c t i o n 2 2 6 . 5 ( c ) . The requirement in s e c t i o n 22 6 . 1 6 ( b) ( 2) t o d i s c l o s e t h e v a r i a b l e - r a t e f e a t u r e may be s a t i s f i e d by d i s c l o s i n g ^ tA n a dv er t i s eme nt f o r a v a r i a b l e - r a t e plan complies with s e c t i o n 2 2 6 . 1 6 ( b ) ( 2 ) i f i t d i s c l o s e s ] t h a t " t he annual p e r c en t a ge r a t e may vary" o r a s i m i l a r s t a t e m e n t , but t h e a d ve r t i s e me nt need not i nc l ude t h e i nf or ma t i on r e qu ir e d by f o o t n o t e 12 t o s e c t i o n 2 2 6 . 6 ( a ) ( 2 ) . ► 5 . Discounted v a r i a b l e - r a t e p l a n s - - d i s c l o s u r e of t h e annual p er c ent a ge r a t e s . The a d v e r t i s e d annual pe rc ent a ge r a t e s f o r di s co unt ed v a r i a b l e - r a t e plans must i n c lu d e both t h e i n i t i a l r a t e and t h e c u r r e n t indexed r a t e , in accordance with comment 6 ( a ) ( 2 ) - 1 0 . 4 Comments 1 6( b ) -5 and 6 a r e r e d e s i g n a t e d 1 6 ( b )-6 and 7, r e s p e c t i v e l y . * * * * * SUBPART C - CLOSED-END CREDIT SECTION 226.17 - - General Di s cl os ur e Requirements * * * * * * * * * * 17(b) Time of D i s cl os u r e s 2. Converting open-end t o close d-e n d c r e d i t . If an open-end c r e d i t account i s converted t o a c lose d-e nd t r a n s a c t i o n under a w r i t t e n agreement with the consumer, t h e c r e d i t o r must provide a s e t of c l os e d- e nd c r e d i t d i s c l o s u r e s b e f o r e consummation of t h e c l o s e d- e nd t r a n s a c t i o n . ► If consummation of t h e c l ose d-e nd t r a n s a c t i o n occurs a t t h e same time as t he consumer e n t e r s i n t o t h e open-end agreement, t h e c lose d-e nd c r e d i t d i s c l o s u r e s may be given aT~ the time of c o n v e r s i o n . 4 (See t he commentary t o s e c t i o n 226.5 r egardi ng c onve r si on of c l o s e d- e nd t o open-end c r e d i t . ) ★ ★ ★ ★ * * ★ SECTION 226.18 - - Content of D i s cl os ur e s * * * - 17 - 1 8 ( f ) V a r ia b l e Rate * * * * * ► 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 r a t e t h a t i s not t i e d t o t h e index used t o make r a t e a d j u s t m e n t s . T y p i c a l l y , t h i s i n i t i a l r a t e i s lower than t h e r a t e would be i f i t were c a l c u l a t e d using t he index. 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 t i e d t o t h e v a r i a b l e - r a t e ind e x , 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 r c en t a ge 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 remains in e f f e c t and t h e indexed r a t e a t t h e time of consummation of t h e t r a n s a c t i o n f o r t h e remainder of t h e term. For example, in a 3 0 - v e a r t r a n s a c t i o n with a r a t e t i e d t o t h e 6-month Treasury b i l l r a t e plus 2 p e r c e n t , a c r e d i t o r may s e t t h e r a t e a t 9 p e r c e n t f o r t h e f i r s t year although t h e Treasury b i l l r a t e a t t h e time of consummation i s 10 p e r c e n t . 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 ent a ge r a t e based on 9 p e r c e n t f o r one y e ar and 12 pe rc en t f o r 29 y e a r s . The payment schedule should r e f l e c t 12 payments a t 9 p e r c e n t and 348 payments a t 12 p e r c e n t . 4 * * * * * SECTION 226.22 — Deter mination of t h e Annual Pe rc en t ag e Rate 2 2( a ) Accuracy of t h e Annual Percentage Rate Paragraph 2 2 ( a ) ( l ) it it it it it ► 5 . Good f a i t h r e l i a n c e on f a u l t y c a l c u l a t i o n t o o l . Footnote 45a absol ve s c r e d i t o r s of l i a b i l i t y f o r e r r o r s in t h e annual pe rc ent a ge r a t e and f i n a nc e charge t h a t r e s u l t from a correspondi ng e r r o r in a c a l c u l a t i o n t o o l . The a v a i l a b i l i t y of t h e f o o t n o t e i s l i m i t e d t o f a u l t y c a l c u l a t i o n t o o l s that" a r e e x t e r n a l l y produced, not t h o s e t h a t were i n t e r n a l l y prepared by t h e c r e d i t o r . Moreover, "good f a i t h " as used in f o o t n o t e 45a r e g u i r e s some e f f o r t on t h e p a r t of t h e c r e d i t o r t o indepe nd ent l y v e r i f y t h e accuracy of the calculation t o o l . 4 * * * * * SECTION 226.24 — A dve r t i s in g * * * * * 24(b) Advertisement of Rate of Finance Charge * * * * * ► 5 . 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 . The a d v e r t i s e d annual pe rc ent a ge .rate f o r d i s c ou nt ed v a r i a b l e - r a t e t r a n s a c t i o n s must be determined in a cc o rd ance with comment 1 8 ( f ) - 8 . To promote t h e a v a i l a b i l i t y of t h e i n i t i a l r a t e - 18 - r e du ct i o n in such t r a n s a c t i o n s , c r e d i t o r s or o t h e r persons may apply t h e r u l e s r e g a r d i ng buydowns in comment 24 (b ) -3 t o show t h e reduced simple i n t e r e s t r a t e and i t s e f f e c t on t h e payment s chedule without t r i g g e r i n g t he a d d i t i o n a l d i s c l o s u r e s under s e c t i o n 2 26. 24f c ) of t h e r e g u l a t i o n . 4 24(c) Advertisement of Terms That Require Additional D i s cl os u r e s * * * * * Paragraph 2 4 ( c ) ( l ) 1. Downpayment. The d o l l a r amount of a downpayment or a s t at e me nt of t h e downpayment as a p e r c en t a ge of t h e p r i c e r e q u i r e s f u r t h e r i n f o r m a t i o n . [By v i r t u e of t h e d e f i n i t i o n of "downpayment" in s e c t i o n 2 26 . 2 , t h i s t r i g g e r i n g term i s l i m i t e d t o c r e d i t s a l e t r a n s a c t i o n s . } I t i n c l u de s such s ta t em e n t s a s : ° "Only 5 p e r c e n t down" ° "As low as $100 down" o "Total move-in c o s t s of $800" This p r o v i s i o n a p p l i e s only i f a downpayment i s a c t u a l l y r e qu ir e d ; statements such as "no downpayment" or "no t r a d e - i n r e qu ir ed " donot t r i g g e r t h e a d d i t i o n a l d i s c l o s u r e s under t h i s paragraph. ★ * ★ ★ ★ SUBPART D - MISCELLANEOUS * * * * * SECTION 226.28 — E f f e c t on S t a t e Laws 28(a) I n c o n s i s t e n t D i s c l o s u r e Requirements ★ ★ ★ ★ ★ ► 1 1 . Preemption d e t e r m i n a t i o n - - M i s s i s s i p p i . E f f e c t i v e October 1 . 1984, t h e Board has determined t h a t t h e fol l owi ng p r o v i s i o n in t h e s t a t e law of M i s s i s s i p p i i s preempted by t h e f e d e r a l law: o Se c t i on 6 3 - 1 9 - 3 2 ( 2 ) ( g ) - Di s c l os ur e of f i n a n c e c h a r ge . This d i s c l o s u r e i s preempted in t h o s e c ases in which t h e term " f i na nc e charge" would be used under s t a t e law t o d e s c r i b e a d i f f e r e n t amount than t h e f i n a n c e charge d i s c l o s e d under f e d e r a l law. 12. Preemption d e t e r mi n a t i o n - - South C a r o l i n a . E f f e c t i v e October 1, 1984, t h e Board has determined t h a t t h e fo ll owi ng p r o v i s i o n in t h e s t a t e law of South Car ol i n a i s preempted by t h e f e d e r a l law: - 19 - o Se c t i on 37-10-102(c) - D is cl os u r e of d u e - o n - s a l e c l a u s e . This p r o v i s i o n i s preempted, but only t o t h e e x t e n t t h a t t h e c r e d i t o r i s r e q u i r e d t o i n c l u d e t h e d i s c l o s u r e with t h e s e gr eg at e d federal disclosures. I f t h e c r e d i t o r may comply with t h e s t a t e law by p la c i ng t h e d u e - o n - s a l e n o t i c e a p a r t from t h e f e d e r a l d i s c l o s u r e s , t h e s t a t e law i s not preempted.4 * * * * * Board of Governors of t h e Federal Reserve System, November 28, 1983. (s igne d) William W. Wiles Wi l l i a m l i . Wiles------S e c r e t a r y of t h e Board
@FedFRASER