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F e d e r a l R e s e r v e Ba n k o f D a lla s DALLAS, TEXAS 75222 Circular Wo. 69-205 August 14, 1969 REGULATION Z TRUTH IN LENDING To Banks, Other Financial Institutions, Trade Associations, and Others Concerned in the Eleventh Federal Reserve District: Effective August 11, 19 6 9 > the Board, of Governors of the Federal Reserve System has amended Section 226.8 (0 ) of its Regulation Z, Truth in Lending, to clarify the provisions relat ing to discounts for prompt payment. A copy of the Board's press statement and a copy of the amendment are enclosed. Yours very truly, P. E. Coldwell President Enclosures (2 ) This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) TITLE 12— BANKS A N D BANKING CHAPTER II— FEDERAL RESERVE SYSTEM SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM [Reg. Z] PART 226—TRUTH IN LENDING Discount for Prompt Payment of Sales Transactions 1. Effective August 11, 1969, § 226.8(o) is amended to read as follows: SECTION 226.8 CREDIT OTHER T H A N OPEN E N D — SPECIFIC DISCLOSURES ber of whole months (but not less than 1) between the first day of the monthly billing cycle in which the transaction is consummated and the first day of the monthly billing cycle in which the obliga tion becomes due.13” (3) In a transaction with multiple discount rates (for example 6 % /1 0 days, 4 % /2 0 days, net 30 days), the largest discount shall be used for pur poses o f disclosing the amount of the finance charge under subparagraph (l)(iv) of this para graph and the annual percentage rate under sub paragraph (l)(v) of this paragraph.1”1 (4) In order to determine the applicability of subparagraph (l)(v) of this paragraph and to fa (o) Discount for prompt payment of sales cilitate disclosure of an annual percentage rate, if transactions.— (1) For the purposes of this para the amount of the discount for prompt payment is graph, a “transaction subject to § 226.8(o)” is a related, pursuant to usual business practice, to credit sale transaction which is not exempt under weight, quantity, or other physical measure (e.g. § 226.3 and which is subject to a discount for pay $1 per ton or l<f per gallon) rather than expressed ment on or before a specified date (e.g. 2% dis as a percentage of discount, that discount may be count if paid within 10 days) or to a charge for converted to an approximate discount rate and, delaying payment after a specified date (e.g. $98 under subparagraph (2) of this paragraph, a rea cash, $100 if paid in 30 days). Both such a dis sonably accurate approximation of the annual per count and such a charge are referred to in this centage rate by using approximate or projected paragraph as a “discount.” In the case o f any prices per physical unit determined on the basis of transaction subject to § 226.8(o), notwithstanding past experience, current information, or projected the provisions of the last sentence of paragraph (a) analysis.130 of this section, the creditor shall disclose on the invoice or other evidence of such sale, as appli (5) If by its terms a transaction subject to cable: § 226.8(o) is payable in a single payment and no (i) The date of the sale or invoice. (ii) The rate of discount, the date by which or period within which the discount may be taken, and the date by which or period within which the full amount of the obliga tion is due and payable. (For example, “2 % /1 0 days, net 30 days”; or “$1 per ton /10 days, net 30 days.”) (iii) The information required under § 226.8(b) (4) and (5). (iv) The amount o f the discount, designated as a “finance charge,” using that term. (v) If the discount shown for prompt payment exceeds 5% o f the obligation to which the discount relates, the “annual percentage rate,” using that term, computed in accord ance with subparagraph (2) of this para graph, but subject to the exceptions pro vided under § 226.8(b) (2). (2) For the purposes o f subparagraph (l)(v) of this paragraph, the annual percentage rate shall be determined by dividing the amount of the finance charge by the least amount payable in satisfaction of the obligation and multiplying the quotient (ex pressed as a percentage) by a fraction in which the numerator is 12, and the denominator is the num finance charge other than a discount is or may be imposed, and such discount is not utilized for the purpose of circumvention or evasion of disclosure requirements, the disclosure required by sub paragraph (1) of this paragraph shall constitute compliance with the requirements of § 226.8 and under § 226.9(a) shall constitute “all other mate rial disclosures required under this Part.” (6) If a transaction subject to § 226.8(o) is debited to an open end credit account, disclosures shall be made as specified in subparagraph (1) of this paragraph and also as specified in § 226.7. The full amount of the obligation including the amount 13a F o r example, a $1,000 purchase o f feed subject to term s o f 6 % /1 0 days net 30 days (o r 6 % /1 0 days, net E .O .M .; or 6% 1 10 days, net 10th of the following m onth; or 6 % f 20 days, net 30 days; o r 6 % /3 0 days, net 30 days; or 6% discount for cash, net 30 days) results in a finance charge of $60, a least am ount payable of $940, a n d an annual percentage r a te of 76.56%, which m ay be rounded t o 76.50% or 16Yi% . Term s of 6 % /2 0 days, net September 29 applied to an A pril purchase, assuming a calendar m onth billing cycle, result in an annual per centage rate of 15.31% (i.e. 6 /9 4 X 1 2 /5 ) which may b e rounded to 15.25% o r 15Yx%. In this exam ple the 29 days in September are ignored and the denom inator (5 ) is determ ined by the num ber of whole m onths in th e period. 13b F o r example, term s of 6 % /1 0 days, 4 % /2 0 days, net 30 days would be treated like term s of 6 % /1 0 days, n e t 30 days, which would represent an annual percentage ra te of 76V£%. 1Sc F o r example, if terms of $3 discount per t o n / 10 days, net 30 days are offered on fertilizer tha t is expected to sell in a range of about $48 to $52 per ton, the annual percentage ra te could be approxim ated fo r preprinting as if it were 6% (i.e. $3 o n $ 5 0 )/1 0 days, net 30 days, th a t is, 761/4% . o f the discount may be debited to the open end credit account, under § 226.7(b)(2), and the amount of any finance charge representing the discount need not be added to any other finance charge for the purpose o f computing and disclosing the total amount of finance charge and the annual percentage rate under § 226.5(a) and § 226.7.“4 (7) If a transaction subject to § 226. 8 (0 ) is not debited to an open end credit account, but either is subject to an additional finance charge or is payable by its terms in more than one payment, disclosures shall be made as specified in subpara graph ( 1) of this paragraph and also as specified in paragraphs (b) and (c) o f this section. In such a case, if the transaction is payable in more than one payment, the amount o f the discount shall be de ducted for the purpose o f computing and disclosing the cash price under paragraph (c)( 1) of this sec tion and shall be added to any other finance charge for the purpose of computing and disclosing the amount o f the finance charge under paragraph (c)( 8 )(i) of this section and the annual percentage rate under paragraph (b)(2) of this section.13' If the transaction is payable in a single payment, the discount may be disregarded in computing and disclosing such cash price, finance charge, and annual percentage rate .131 13d F o r example, if a $1,000 sale o n terms of 2 % /1 0 days, net 30 days, is debited to a n open end account on which 1% per m onth is charged, the periodic statem ent und er § 226.7(b) (assum ing no other transactions in th e account) would show a previous balance of $1,000, a finance charge of $10, and an annual percentage ra te of 12%. i»e F o r example, if a $1,000 sale on term s o f 2 % /1 0 days, net 30 days is subject to an add-on finance charge of $100 and is payable in instalments, th e disclosures under § 226.8(b) and (c ) would include a cash price of $980 and a finance charge of $120. iat F o r example, if a $1,000 sale on August 2 not un d e r an open end account is subject to term s of 2 % /1 0 days, net 30 days, thereafter 8% per annum until D ecem ber 1, the disclosures und er § 226.8(b) and (c ) would include a cash price of $1,000; a finance charge of $19.95, and an annual percentage ra te of 8.00%. ( 8) Notwithstanding the provisions of the sec ond sentence of paragraph (a) of this section, the disclosures required under subparagraph ( 1) of this paragraph made on the invoice or other evi dence of sale may be delivered subsequent to con summation o f the transaction. (9) Amended paragraph (o) o f § 226.8 shall become effective August 11, 1969, but until March 1, 1970, any creditor may at his option use any printed forms which were prepared before such effective date in accordance with paragraph (o) of § 226.8 in effect at the time of such prepara tion. 2a. The purpose of this amendment is to clarify the application o f the Truth in Lending A ct to those cases in which a credit sale transaction is subject to a discount for prompt payment on or before a specified date or to a charge for delaying payment after a specified date. b. The requirements of section 553 o f Title 5, United States Code, with respect to notice, public participation, and deferred effective date were not followed in connection with this revocation. The effect of the amendment in general is to provide relief from a restriction and, in view o f the un necessary hardship on certain creditors in comply ing with the original § 226.8(o), the Board found that following such procedures would result in delay that would be contrary to the public interest. Adopted August 8 , 1969. By order of the Board o f Governors. (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Deputy Secretary. (SEAL) FEDERAL press f^ A L RESERVE release Rt^.• Augu st For i m me diate release. 11, 1969. The Board of G ov ernors of the Feder a l Reserve S ys te m today issued an amendment to its Truth in Lending Regula ti o n Z to clarify one p r o v is i on rel at in g to di s counts granted by creditors on sales to their customers for prompt payment of bills. The amendment is effec tive immediately. Under the amendment, creditors offering d is counts for prompt payment of single payment transactions will be required to state the "annual percentage rate" only if the d iscount exceeds 5 per cent. They w i l l be required each particular sale. to state the discount in dollars and cents on The amendment also simplifies the computation of the "annual percentage rate" w h e n it must be stated. pro vision required creditors matter what The original to state the "annual percentage rate" no the discount. Man y creditors, for example, offer a 2 per cent discount if a bill that is due in 30 days is paid in full w i t h i n 10 days. case of this kind, In a the creditor w i ll no longer be required to state an "annual percen ta g e rate." It has come to the Board's at te n ti on since the Truth in Lend in g law went into effect on July 1 that m a ny creditors have d is c ontinued use of d i sc ounts for prompt payment. cultural types of credit w h e r e the This is especially true in agri there has b e e n special d i ff i cu lt y with -2 - compliance. related F re qu e nt ly the amounts of the discount in this area are to weight, volume, numbe r or other physical measu re of the pro d uc ts such as 1 cent a gall on or $1 a products also v ar y from w e e k to w e e k and ton. The prices of these m o n t h to month. The Board's a me n dment is designed to al le viate these problems and to ma ke it easier for creditors payment in this special to continue d i scounts for prompt type transaction. do not exceed 5 per cent and Most discounts of this type the "annual perce n ta ge rate" of those over 5 per cent m a y now b e calculated more readily. Technically, the amendment wi ll repla ce Section 2 2 6 . 8(o) the original R eg ul at i on Z. in At the same time the Board clarified the use of discounts on single payment transactions w h e n they are combined w i t h open end or credit other than op e n end. A l t h o u g h the a me ndment is effective immediately, use until March creditors may 1, 1970, any printed forms wh i ch w e r e prepared b efore today in a n effort to compl y wit h A copy of the amendment the original provision. is attached.
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