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Federal R eserve Bank
OF DALLAS
W IL L IA M

H. W ALLACE

FIRST VICE PRESIDENT
AND CHIEF OPERATING OFFICER

DALLAS, T E X A S

75222

November 2, 1988
Circular 88-77

TO:

The Chief Executive Officer of all
member banks, bank holding companies
and others concerned in the
Eleventh Federal Reserve District
SUBJECT

Revised pamphlets on Regulation Q (Interest
on Deposits) and Regulation Z (Truth in Lending)
DETAILS
The Board of Governors of the Federal Reserve
System has published revised pamphlets on Regulations Q
and Z, as amended effective May 1988, and June 1988,
respectively. The new pamphlets should be inserted in
Volume 2 of your Regulations Binders.
ENCLOSURES
Enclosed are revised pamphlets on
Regulations Q and Z.
MORE INFORMATION
For more information, please contact Dean A.
Pankonien at (214) 651-6228.
Sincerely yours,

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks
and others are encouraged to use the following incoming WATS numbers in contacting this Bank (800)
A A O - / i n i r a c t a t o \ a n f i ffW tt 5 9 7 - 9 9 0 0 /in terstate^.

Board of Govemers of the Federal Reserve System

Regulation Q
Interest on Deposits
12 CFR 217; as amended effective April 1, 1986

Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank of the
Federal Reserve District in which the inquiry arises.

Contents

Page
Section 217.1—Authority, purpose, and
scope....................................................
(a) Authority....................................
(b) Purpose......................................
(c) Scope..........................................
Section 217.2—Definitions.....................
Section 217.3—Interest on demand
deposits ..............................................
Section 217.4—Miscellaneous...............
(a) Early withdrawal penalty............
(b) Payment of interest.....................
Section 217.5 [Reserved]
Section 217.6—Advertising of interest on
deposits..............................................

1
1
1
1
1
1
2
2
2

2

Page

(a) Annual rate of simple interest . . .
(b) Percentage yields based on one

2
2

(c) Percentage yields based on
periods in excess of one year ..

(g) Accuracy of advertising.............
(h) Solicitation of deposits for banks .

2
2
2
2
2
2

STATUTORY PROVISIONS...............

3

(d) Time or amount requirements . . .
(e) Penalty for early withdrawals . . .
(f)

Regulation Q
Interest on Deposits
12 CFR 217; as amended effective April 1, 1986

SECTION 217.1—Authority, Purpose,
and Scope
(a) Authority. This regulation is issued under
the authority of section 19 of the Federal Re­
serve Act (12 USC 371, 371a, 371b, 461), sec­
tion 7 of the International Banking Act of
1978 (12 USC 3105), and section 11 of the
Federal Reserve Act (12 USC 248), unless
otherwise noted.
(b) Purpose. This regulation prohibits the
payment of interest on demand deposits by
member banks and other depository institu­
tions within the scope of this regulation and
sets forth requirements concerning the adver­
tisement of interest on deposits by member
banks and these other institutions.
(c) Scope. (1) This regulation applies to
state-chartered banks that are members of
the Federal Reserve under section 9 of the
Federal Reserve Act (12 USC 321 et seq.)
and to all national banks. The regulation
also applies to any federal branch or agency
of a foreign bank and to a state uninsured
branch or agency of a foreign bank in the
same manner and to the same extent as if
the branch or agency were a member bank,
except as may be otherwise provided by the
Board, if—
(i) its parent foreign bank has total
worldwide consolidated bank assets in
excess of $1 billion;
(ii) its parent foreign bank is controlled
by a foreign company which owns or
controls foreign banks that in the aggre­
gate have total worldwide consolidated
bank assets in excess of $1 billion; or
(iii) its parent foreign bank is controlled
by a group of foreign companies that own
or control foreign banks that in the ag­
gregate have total worldwide consolidat­
ed bank assets in excess of $1 billion.
(2) For deposits held by a member bank or
a foreign bank, this regulation does not ap­
ply to “any deposit that is payable only at
an office located outside of the United
States” (i.e., the states of the United States
and the Disrict of Columbia) as defined in
section 204.2(t) of the Board’s Regulation

D, Reserve Requirements of Depository In­
stitutions (12 CFR 204).

SECTION 217.2—Definitions
For purposes of this part, the following defini­
tions apply unless otherwise specified:
(a) “Demand deposit” means any deposit
that is considered to be a “demand deposit”
under section 204.2(b) of the Board’s Regula­
tion D, Reserve Requirements of Depository
Institutions (12 CFR 204).
(b) “Deposit” means any liability of a mem­
ber bank that is considered to be a “deposit”
under section 204.2(a) of the Board’s Regula­
tion D, Reserve Requirements of Depository
Institutions (12 CFR 204).
(c) “Foreign bank” means any bank that is
considered to be a “foreign bank” under sec­
tion 204.2(o) of the Board’s Regulation D,
Reserve Requirements of Depository Institu­
tions (12 CFR 204).
(d) “Interest” means any payment to or for
the account of any depositor as compensation
for the use of funds constituting a deposit. A
member bank’s absorption of expenses inci­
dent to providing a normal banking function
or its forbearance from charging a fee in con­
nection with such a service is not considered a
payment of interest.

SECTION 217.3—Interest on Demand
Deposits
No member bank of the Federal Reserve Sys­
tem shall, directly or indirectly, by any device
whatsoever, pay any interest on any demand
deposit.1
1 A member bank may continue to pay interest on a time
deposit for not more than 10 calendar days (1) where the
member bank has provided in the time deposit contract
that, if the deposit or any portion thereof is withdrawn not
more than 10 calendar days after a maturity date (one busi­
ness day for “IBF time deposits” as defined in section
204.8(a)(2) of Regulation D ), interest will continue to be
paid for such period; or (2) for a period between a maturi­
ty date and the date of renewal of the deposit, provided that
such certificate is renewed within 10 calendar days after
maturity.

1

§217.4

SECTION 217.4—Miscellaneous
(a) Early withdrawal penalty. At the time a
depositor enters into a time deposit contract
with a member bank, the bank shall provide a
written statement of the effect of any early
withdrawal penalty which shall (1) state
clearly that the customer has contracted to
keep the funds on deposit for the stated matu­
rity and (2) describe fully and clearly how
such penalty provisions apply to time deposits
in such bank, in the event the bank, notwith­
standing the contract provisions, permits pay­
ment before maturity. Such statement shall be
expressly called to the attention of the
customer.
(b) Payment o f interest. On each automati­
cally renewable certificate, passbook, or other
document representing a time deposit, the
bank shall have printed or stamped a conspic­
uous statement indicating that the contract
will be renewed automatically upon maturity
and indicating the terms of such renewal.

SECTION 217.5
[Reserved]

SECTION 217.6—Advertising of
Interest on Deposits
Every advertisement, announcement, or solic­
itation relating to the interest paid on deposits
in member banks shall be governed by the fol­
lowing rules:
(a) Annual rate o f simple interest. Interest
rates shall be stated in terms of the annual
rate of simple interest. In no case shall a rate
be advertised that is in excess of the applicable
maximum rate for the particular deposit.
(b) Percentage yields based on one year.
Where a percentage yield achieved by com­
pounding interest during one year is adver­
tised, the annual rate of simple interest shall
be stated with equal prominence, together
with a reference to the basis of compounding.
No member bank shall advertise a percentage

Regulation Q
yield based on the effect of grace periods per­
mitted in section 217.3(d).
(c) Percentage yields based on periods in ex­
cess o f one year. No advertisement shall in­
clude any indication of a total percentage
yield, compounded or simple, based on a peri­
od in excess of a year, or an average annual
percentage yield achieved by compounding
during a period in excess of a year.
(d) Time or amount requirements. If an ad­
vertised rate is payable only on deposits that
meet time or amount requirements, such re­
quirements shall be clearly and conspicuously
stated. Where the time requirement for an ad­
vertised rate is in excess of a year, the required
number of years for the rate to apply shall be
stated with equal prominence, together with
an indication of any lower rate or rates that
will apply if the deposit is withdrawn at an
earlier maturity.
(e) Penalty for early withdrawals. Any adver­
tisement, announcement, or solicitation relat­
ing to interest paid by a member bank on time
deposits shall include clear and conspicuous
notice that the bank is prohibited from allow­
ing payment of a time deposit before maturity
unless substantial interest is forfeited. Such
notice may state that—
“Substantial interest penalty is required for early
withdrawal.”

(f) Profit. The term “profit” shall not be used
in referring to interest paid on deposits.
(g) Accuracy o f advertising. No member bank
shall make any advertisement, announcement,
or solicitation relating to the interest paid on
deposits that is inaccurate or misleading or
that misrepresents its deposit contracts.
(h) Solicitation o f deposits for banks. Any
person or organization that solicits deposits
for a member bank shall be bound by the rules
contained in this section with respect to any
advertisement, announcement, or solicitation
relating to such deposits. No such person or
organization shall advertise a percentage yield
on any deposit it solicits for a member bank
that is not authorized to be paid and adver­
tised by such bank.

Federal Reserve Act
Dispersed throughout 12 USC; ch. 6, 38 Stat. 251 (December 23, 1913)

SECTION 19—Bank Reserves
(a) The Board is authorized for the purposes
of this section to define the terms used in this
section, to determine what shall be deemed a
payment of interest, to determine what types
of obligations, whether issued directly by a
member bank or indirectly by an affiliate of a
member bank or by other means, and, regard­
less of the use of the proceeds, shall be
deemed a deposit, and to prescribe such regu­
lations as it may deem necessary to effectuate
the purposes of this section and to prevent
evasions thereof.
[12 USC 461(a). As amended by acts of June 21, 1917 (40
Stat. 239) (which completely revised this section); Aug.
23, 1935 (49 Stat. 714); Sept. 21, 1966 (80 Stat. 823) (as
amended by acts of Sept. 21, 1967 (81 Stat. 226) and Sept.
21, 1968 (82 Stat. 856)); Dec. 23, 1969 (83 Stat. 374); Oct.
29, 1974 (88 Stat. 1557); and March 31, 1980 (94 Stat.
133, 138). The amendment inserting the words “and, re­
gardless of the use of the proceeds,” made by the act of Oct.
29, 1974, “shall not apply , to any bank holding company
which has filed prior to the date of enactment of this Act an
irrevocable declaration with the Board of Governors of the
Federal Reserve System to divest itself of all of its banks
under section 4 of the Bank Holding Company Act, or to
any debt obligation which is an exempted security under
section 3 (a)(3) of the Securities Act of 1933” (12 USC
461 note).]

*

*

*

*

*

(i) No member bank shall, directly or indi­
rectly, by any device whatsoever, pay any
interest on any deposit which is payable on
demand: Provided, That nothing herein con­
tained shall be construed as prohibiting the
payment of interest in accordance with the
terms of any certificate of deposit or other
contract entered into in good faith which is in
force on the date on which the bank becomes
subject to the provisions of this paragraph;
but no such certificate of deposit or other con­
tract shall be renewed or extended unless it
shall be modified to conform to this para­
graph, and every member bank shall take such
action as may be necessary to conform to this
paragraph as soon as possible consistently
with its contractual obligations: Provided fu r­
ther, That this paragraph shall not apply to
any deposit of such bank which is payable
only at an office thereof located outside of the

States of the United States and the District of
Columbia: Provided further, That until the ex­
piration of two years after the date of enact­
ment of the Banking Act of 1935 this para­
graph shall not apply (1) to any deposit made
by a savings bank as defined in section 12B of
this Act, as amended, or by a mutual savings
bank, or (2) to any deposit of public funds
made by or on behalf of any State, county,
school district, or other subdivision or munici­
pality, or to any deposit of trust funds if the
payment of interest with respect to such de­
posit of public funds or of trust funds is re­
quired by State law. So much of existing law
as requires the payment of interest with re­
spect to any funds deposited by the United
States, by any Territory, District, or posses­
sion thereof (including the Philippine Is­
lands), or by any public instrumentality,
agency, or officer of the foregoing, as is incon­
sistent with the provisions of this section as
amended, is hereby repealed.
[12 USC 371a. As added by act of June 16, 1933 (48 Stat.
181); and amended by acts of Aug. 23, 1935 (49 Stat. 714);
Sept. 21, 1966 (80 Stat. 824) (as amended by acts of Sept.
21, 1967 (81 Stat. 226) and Sept. 21, 1968 (82 Stat. 856));
Dec. 28, 1979 (93 Stat. 1233); and March 31, 1980 (94
Stat. 145). The Banking Act of 1935, referred to in this
paragraph, was approved Aug. 23, 1935. Section 12B was
withdrawn and enacted as a separate act of Sept. 21, 1950;
for definition of “savings bank” under the act, see 12 USC
1813 (g). Presidential Proclamation No. 2695 of July 4,
1946 (60 Stat. 1352; 12 USC 1394 note) recognizes the
independence of the Philippine Islands. Therefore the
words “ (including the Philippine Islands)” have been
omitted from the U.S. Code.
Section 2 of Public Law 93-100 of Aug. 16, 1973 (12
USC 1832) as amended by acts of Feb. 27, 1976 (90 Stat.
197); Nov. 10, 1978 (92 Stat. 3712); Dec. 28, 1979 (93
Stat. 1235); March 31, 1980 (94 Stat. 146); Oct. 15, 1982
(96 Stat. 1540); and Aug. 10, 1987 (101 Stat. 579) pro­
vides as follows:
(a)(1 ) Notwithstanding any other provision of law
but subject to paragraph (2), a depository institution
is authorized to permit the owner of a deposit or ac­
count on which interest or dividends are paid to make
withdrawals by negotiable or transferable instruments
for the purpose of making transfers to third parties.
(2) Paragraph (1) shall apply only with respect to
deposits or accounts which consist solely of funds in
which the entire beneficial interest is held by one or
more individuals or by an organization which is oper­
ated primarily for religious, philanthropic, charitable,
educational, political, or other similar purposes and
which is not operated for profit, and with respect to
deposits of public funds by an officer, employee, or

3

Statutory Provisions
agent of the United States, any State, county, munici­
pality, or political subdivision thereof, the District of
Columbia, the Commonwealth of Puerto Rico, Ameri­
can Samoa, Guam, any territory or possession of the
United States, or any political subdivision thereof.
(b) For purposes of this section, the term “depository
institution” means—
(1) any insured bank as defined in section 3 of the
Federal Deposit Insurance Act;
(2) any State bank as defined in section 3 of the Fed­
eral Deposit Insurance Act;
(3) any mutual savings bank as defined in section 3 of
the Federal Deposit Insurance Act;
(4) any savings bank as defined in section 3 of the
Federal Deposit Insurance Act;
(5) any insured institution as defined in section 401 of
the National Housing Act; and
(6) any building and loan association or savings and
loan association organized and operated according to
the laws of the State in which it is chartered or orga­
nized; and, for purposes of this paragraph, the term
“State” means any State of the United States, the Dis­
trict of Columbia, any territory of the United States,
Puerto Rico, Guam, American Samoa, or the Virgin
Islands.
(c) Any depository institution which violates this sec­
tion shall be fined $1,000 for each violation.]

(j) The Board may from time to time, after
consulting with the Board of Directors of the
Federal Deposit Insurance Corporation and
the Federal Home Loan Bank Board, pre­
scribe rules governing the advertisement of in­

4

Regulation Q
terest on deposits by member banks on time
and savings deposits. The provisions of this
paragraph shall not apply to any deposit
which is payable only at an office of a member
bank located outside of the States of the United States and the District of Columbia. Dur­
ing the period commencing on October 15,
1962, and ending on October 15, 1968, the
provisions of this paragraph shall not apply to
the rate of interest which may be paid by
member banks on time deposits of foreign
governments, monetary and financial authori­
ties of foreign governments when acting as
such, or international financial institutions of
which the United States is a member.
[12 USC 371b. As added by act of June 16, 1933 (48 Stat.
182). Amended by acts of Aug. 23, 1935 (49 Stat. 714);
Oct. 15, 1962 (76 Stat. 953); July 21, 1965 (79 Stat. 244);
Sept. 21, 1966 (80 Stat. 824) (as amended by acts of Sept.
21, 1967 (81 Stat. 226) and Sept. 21, 1968 (82 Stat. 856),
Joint Resolution of Sept. 22, 1969 (83 Stat. 115); Act of
Dec. 23, 1969 (83 Stat 371), Joint Resolution of March 31,
1971 (85 Stat. 13); and act of May 18, 1971 (85 Stat. 38)),
Sept. 21, 1968 (82 Stat. 856); July 6, 1973 (87 Stat. 147);
Aug. 16, 1973 (87 Stat. 342); Oct. 28, 1974 (88 Stat.
1505); Dec. 31, 1975 (89 Stat. 1124); April 19, 1977 (91
Stat. 49); and Nov. 16, 1977 (91 Stat. 1387).]

Board of Governors of the Federal Reserve System

Official Staff Commentary
on Regulation Z
Truth in Lending
As amended effective April 1, 1988

m

Any inquiry relating to Regulation Z should be addressed to the Federal Reserve Bank of the
Federal Reserve District in which the inquiry arises.
June 1988

Contents

Page
Introduction............................................ 1
Subpart A—General
Section 226.1—Authority, purpose,
coverage, organization, enforcement
and liability.......................................... 2
Section 226.2—Definitions and rules of
construction.......................................... 3
Section 226.3—Exempt transactions........ 14
Section 226.4—Finance charge............... 17
Subpart B—Open-End Credit
Section 226.5—General disclosure
requirements........................................
Section 226.6—Initial disclosure
statement..............................................
Section 226.7—Periodic statem ent..........
Section 226.8—Identification of
transactions..........................................
Section 226.9—Subsequent disclosure
requirements........................................
Sectidn 226.10—Prompt crediting of
payments..............................................
Section 226.11—Treatment of credit
balances................................................
Section 226.12—Special credit card
provisions..............................................
Section 226.13—Billing-error resolution..
Section 226.14—Determination of annual
percentage r a te ....................................
Section 226.15—Right of rescission..........
Section 226.16—Advertising...................

25
29
33
38
41
44
45
46
52
57
60
66

Subpart C—Closed-End Credit
Section 226.17—General disclosure
requirements........................................ 67
Section 226.18—Content of disclosures .. 80
Section 226.19—Certain residential
mortgage transactions........................... 92

Page
Section 226.20—Subsequent disclosure
requirements.......................................... 100
Section 226.21—Treatment of credit
balances..................................................104
Section 226.22—Determination of annual
percentage r a te ...................................... 105
Section 226.23—Right of rescission............106
Section 226.24—Advertising..................... 112
Subpart D—Miscellaneous
Section 226.25—Record retention..............115
Section 226.26—Use of annual percentage
rate in oral disclosures...........................116
Section 226.27—Spanish-language
disclosures..............................................116
Section 226.28—Effect on state laws........117
Section 226.29—State exemptions............120
Section 226.30—Limitation on rates........121
Appendix A—Effect on state laws........... 124
Appendix B—State exemptions............... 124
Appendix C—Issuance of staff
interpretations........................................124
Appendix D—Multiple-advance
construction loans................................ 125
Appendix E—Rules for card issuers that
bill on a transaction-by-transaction
basis..................................................... 125
Appendix F—Annual percentage rate
computations for certain open-end
credit p la n s.......................................... 126
Appendix G—Open-end model forms and
clauses..................................................126
Appendix H—Closed-end model forms
and clauses............................................127
Appendix I—Federal enforcement
agencies................................................131
Appendix J—Annual percentage rate
computations for closed-end credit
transactions.......................................... 131

Official Staff Commentary
on Regulation Z
As revised effective April 1, 1988*

INTRODUCTION
1. Official status. This commentary is the ve­
hicle by which the staff of the Division of
Consumer and Community Affairs of the Fed­
eral Reserve Board issues official staff inter­
pretations of Regulation Z. Good faith
compliance with this commentary affords
protection from liability under section 130(0
of the Truth in Lending Act. Section 130(0
(15 USC 1640) protects creditors from civil
liability for any act done or omitted in good
faith in conformity with any interpretation is­
sued by a duly authorized official or employee
of the Federal Reserve System.
2. Procedure for requesting interpretations.
Under appendix C of the regulation, anyone
may request an official staff interpretation. In­
terpretations that are adopted will be incorpo­
rated in this commentary following publica­
tion in the Federal Register. No official staff
interpretations are expected to be issued other
than by means of this commentary.
3. Status o f previous interpretations. All state­
ments and opinions issued by the Federal Re­
serve Board and its staff interpreting previous
Regulation Z remain effective until October 1,
1982 only insofar as they interpret that regu­
lation. When compliance with revised Regula­
tion Z becomes mandatory on October 1,
1982, the Board and staff interpretations of
the previous regulation will be entirely super­
seded by the revised regulation and this com­
mentary except with regard to liability under
the previous regulation.
4. Rules o f construction, (a) Lists that appear
in the commentary may be exhaustive or
illustrative; the appropriate construction
should be clear from the context. In most
cases, illustrative lists are introduced by
phrases such as “including, but not limited
to,” “among other things,” “for example,”
or “such as.”
(b) Throughout the commentary and reg­
* Reliance on the revisions optional until October 1,
1988.

ulation, reference to the regulation should
be construed to refer to revised Regulation
Z, unless the context indicates that a refer­
ence to previous Regulation Z is also
intended.
(c) Throughout the commentary, refer­
ence to “this section” or “this paragraph”
means the section or paragraph in the regu­
lation that is the subject of the comment.
5. Comment designations. Each comment in
the commentary is identified by a number and
the regulatory section or paragraph which it
interprets. The comments are designated with
as much specificity as possible according to
the particular regulatory provision addressed.
For example, some of the comments to section
226.18(b) are futher divided by subpara­
graph, such as comment 18(b)( 1)-1 and
comment 18(b)(2)-l. In other cases, com­
ments have more general application and are
designated, for example, as comment 18-1 or
comment 18(b)-l. This introduction may be
cited as comments 1-1 through 1-7. The ap­
pendixes may be cited as comments app. A-l
through app. J-2.
6. Cross-references. The following cross-refer­
ences to related material appear at the end of
each section of the commentary: (a) “Stat­
ute”—those sections of the Truth in Lending
Act on which the regulatory provision is
based (and any other relevant statutes); (b)
“Other sections”—other provisions in the reg­
ulation necessary to understand that section;
(c) “Previous regulation”—parallel provi­
sions in previous Regulation Z; and (d) “ 1981
changes”—a brief description of the major
changes made by the 1981 revisions to Regu­
lation Z. Where appropriate, a fifth category
(“Other regulations”) provides cross-refer­
ences to other regulations.
7. Transition rules, (a) Though compliance
with the revised regulation is not mandato­
ry until April 1, 1982, creditors may begin
complying as of April 1, 1981. During the
intervening year, a creditor may convert its
entire operation to the new requirements at
1

Regulation Z Commentary

§226.1
one time, or it may convert to the new re­
quirements in stages. In general, however, a
creditor may not mix the regulatory re­
quirements when making disclosures for a
particular closed-end transaction or openend account; all the disclosures for a single
closed-end transaction (or open-end ac­
count) must be made in accordance with
the previous regulation, or all the disclo­
sures must be made in accordance with the
revised regulation. As an exception to the
general rule, the revised rescission rules and
the revised advertising rules may be fol­
lowed even if the disclosures are based on
the previous regulation. For purposes of
this regulation, the creditor is not required
to take any particular action beyond the re­
quirements of the revised regulation to indi­
cate its conversion to the revised regulation.
(b) The revised regulation may be relied
on to determine if any disclosures are re­
quired for a particular transaction or to de­
termine if a person is a “creditor” subject to
Truth in Lending requirements, whether or
not other operations have been converted to
the revised regulation. For example, layaway plans are not subject to the revised
regulation, nor are oral agreements to lend
money if there is no finance charge. These
provisions may be relied on even if the cred­
itor is making other disclosures under the
previous regulation. The new rules govern­
ing whether or not disclosures must be
made for refinancings and assumptions are
also available to a creditor that has not yet
converted its operations to the revised
regulation.
(c) In addition to the above rules, applica­
ble to both open-end and closed-end credit,
the following guidelines are relevant to
open-end credit:
• The creditor need not remake initial dis­
closures that were made under the pre­
vious regulation, even if the revised peri­
odic statements contain terminology
that is inconsistent with those initial
disclosures.
• A creditor may add inserts to its old
open-end forms in order to convert
them to the revised rules until such time
as the old forms are used up.

• No change-in-terms notice is required
for changes resulting from the conver­
sion to the revised regulation.
• The previous billing rights statements
are substantially similar to the revised
billing rights statements and may con­
tinue to be used, except that, if the cred­
itor has an automatic debit program, it
must use the revised automatic debit
provision.
• For those creditors wishing to use the
annual billing rights statement, the
creditor may count from the date on
which it sent its last statement under the
previous regulation in determining
when to give the first statement under
the new regulation. For example, if the
creditor sent a semiannual statement in
June 1981 and converts to the new regu­
lation in October 1981, the creditor
must give the billing rights statement
sometime in 1982, and it must not be
fewer than 6 nor more than 18 months
after the June statement.
• Section 226.11 of the revised regulation
affects only credit balances that are cre­
ated on or after the date the creditor
converts the account to the revised
regulation.

SUBPART A—GENERAL
SECTION 226.1—Authority, Purpose,
Coverage, Organization, Enforcement
and Liability
1(c) Coverage
1. Foreign applicability. Regulation Z applies
to all persons (including branches of foreign
banks and sellers located in the United States)
that extend consumer credit to residents (in­
cluding resident aliens) of any state as defined
in section 226.2. If an account is located in the
United States and credit is extended to a U.S.
resident, the transaction is subject to the regu­
lation. This will be the case whether or not a
particular advance or purchase on the account
takes place in the United States and whether
or not the extender of credit is chartered or

Regulation Z Commentary
based in the United States or a foreign coun­
try. Thus, a U.S. resident’s use in Europe of a
credit card issued by a bank in the consumer’s
home town is covered by the regulation. The
regulation does not apply to a foreign branch
of a U.S. bank when the foreign branch ex­
tends credit to a U.S. citizen residing or visits
ing abroad or to a foreign national abroad.

References
Statute: § 102
Other sections: None
Previous regulation: § 226.1
1981 changes: A discussion of coverage has
been added to section 226.1 so that the reader
will understand from the start what is subject
to the regulation. Language has also been add­
ed to explain the reorganization of the regula­
tion into subparts that group together the pro­
visions relating to general matters, open-end
credit, closed-end credit, and miscellaneous
rules. The provisions on consumer leasing
have been issued by the Board as a separate
regulation, Regulation M (12 CFR 213).

SECTION 226.2—Definitions and Rules
of Construction
2(a) Definitions
2(a)(2) “Advertisement”
1. Coverage. Only commercial messages that
promote consumer credit transactions requir­
ing disclosures are advertisements. Messages
inviting, offering, or otherwise announcing
generally to prospective customers the avail­
ability of credit transactions, whether in visu­
al, oral, or print media, are covered by the
regulation. Examples include:
• Messages in a newspaper, magazine, leaf­
let, promotional flyer, or catalog
• Announcements on radio, television, or
public address sytem
• Direct mail literature or other printed ma­
terial on any exterior or interior sign
• Point-of-sale displays
• Telephone solicitations
• Price tags that contain credit information
• Letters sent to customers as part of an or­

§ 226.2
ganized solicitation of business
• Messages on checking account statements
offering auto loans at a stated annual per­
centage rate
The term does not include:
• Direct personal contacts, such as followup letters, cost estimates for individual
consumers, or oral or written communica­
tion relating to the negotiation of a specific
transaction
• Informational material, for example, inter­
est rate and loan term memos, distributed
only to business entities
• Notices required by federal or state law, if
the law mandates that specific information
be displayed and only the information so
mandated is included in the notice
• News articles the use of which is con­
trolled by the news medium
• Market research or educational materials
that do not solicit business
2. Persons covered. All “persons” must com­
ply with the advertising provisions in sections
226.16 and 226.24, not just those that meet
the definition of creditor in section 226.2(a)(17). Thus, home builders, merchants, and
others who are not themselves creditors must
comply with the advertising provisions of the
regulation if they advertise consumer credit
transactions. However, under section 145 of
the act, the owner and the personnel of the
medium in which an advertisement appears,
or through which it is disseminated, are not
subject to civil liability for violations.
2(a)(4) “Billing Cycle”or “Cycle”
1. Intervals. In open-end credit plans, the bill­
ing cycle determines the intervals for which
periodic disclosure statements are required;
these intervals are also used as measuring
points for other duties of the creditor. Typi­
cally, billing cycles are monthly, but they may
be more frequent or less frequent (but not less
frequent than quarterly).
2. Creditors that do not bill. The term “cycle”
is interchangeable with “billing cycle” for def­
initional purposes, since some creditors’ cycles
do not involve the sending of bills in the tradi­
tional sense but only statements of account ac­

§ 226.2
tivity. This is commonly the case with finan­
cial institutions when periodic payments are
made through payroll deduction or through
automatic debit of the consumer’s asset
account.
3. Equal cycles. Although cycles must be
equal, there is a permissible variance to ac­
count for weekends, holidays, and differences
in the number of days in months. If the actual
date of each statement does not vary by more
than four days from a fixed “day” (for exam­
ple, the third Thursday of each month) or
“date” (for example, the 15th of each month)
that the creditor regularly uses, the intervals
between statements are considered equal. The
requirement that cycles be equal applies even
if the creditor applies a daily periodic rate to
determine the finance charge. The require­
ment that intervals be equal does not apply to
the transitional billing cycle that can occur
when the creditor occasionally changes its
billing cycles so as to establish a new state­
ment day or date. (See the commentary to
section 226.9(c).)
4. Payment reminder. The sending of a regu­
lar payment reminder (rather than a late pay­
ment notice) establishes a cycle for which the
creditor must send periodic statements.

2(a)(6) “Business Day ”
1. Business function test. Activities that indi­
cate that the creditor is open for substantially
all of its business functions include the avail­
ability of personnel to make loan disburse­
ments, to open new accounts, and to handle
credit transaction inquiries. Activities that in­
dicate that the creditor is not open for sub­
stantially all of its business functions include a
retailer’s merely accepting credit cards for
purchases or a bank’s having its customerservice windows open only for limited purpos­
es such as deposits and withdrawals, bill pay­
ing, and related services.
2. Rescission rule. A more precise rule for
what is a business day (all calendar days ex­
cept Sundays and the federal legal holidays
listed in 5 USC 6103(a)) applies when the
right of rescission is involved.
4

Regulation Z Commentary
2(a)(7) “Card Issuer ”
1. Agent. An agent of a card issuer is consid­
ered a card issuer. Because agency relation­
ships are traditionally defined by contract and
by state or other applicable law, the regulation
does not define agent. Merely providing serv­
ices relating to the production of credit cards
or data processing for others, however, does
not make one the agent of the card issuer. In
contrast, a financial institution may become
the agent of the card issuer if an agreement
between the institution and the card issuer
provides that the cardholder may use a line of
credit with the financial institution to pay ob­
ligations incurred by use of the credit card.
2(a)(8) “Cardholder”
1. General rule. A cardholder is a natural per­
son at whose request a card is issued for con­
sumer credit purposes or who is a co-obligor
or guarantor for such a card issued to anoth­
er. The second category does not include an
employee who is a co-obligor or guarantor on
a card issued to the employer for business pur­
poses, nor does it include a person who is
merely the authorized user of a card issued to
another.
2. Limited application o f regulation. For the
limited purposes of the rules on issuance of
credit cards and liability for unauthorized use,
a cardholder includes any person, including
an organization, to whom a card is issued for
any purpose—including a business, agricul­
tural, or commercial purpose.
3. Issuance. See the commentary to section
226.12(a).
4. Dual-purpose cards and dual-card systems.
Some card issuers offer dual-purpose cards
that are for business as well as consumer pur­
poses. If a card is issued to an individual for
consumer purposes, the fact that an organiza­
tion has guaranteed to pay the debt does not
make it business credit. On the other hand, if
a card is issued for business purposes, the fact
that an individual sometimes uses it for con­
sumer purchases does not subject the card is­
suer to the provisions on periodic statements,
billing-error resolution, and other protections
afforded to consumer credit. Some card is­

Regulation Z Commentary
suers offer dual-card systems—that is, they is­
sue two cards to the same individual, one
intended for business use, the other for con­
sumer or personal use. With such a system,
the same person may be a cardholder for gen­
eral purposes when using the card issued for
consumer use, and a cardholder only for the
limited purposes of the restrictions on issu­
ance and liability when using the card issued
for business purposes.
2(a)(9) “Cash Price"
1. Components. This amount is a starting
point in computing the amount financed and
the total sale price under section 226.18 for
credit sales. Any charges imposed equally in
cash and credit transactions may be included
in the cash price, or they may be treated as
other amounts financed under section
226.18(b)(2).
2. Service contracts. Service contracts include
contracts for the repair or the servicing of
goods, such as mechanical breakdown cover­
age, even if such a contract is characterized as
insurance under state law.
3. Rebates. The creditor has complete flexibil­
ity in the way it treats rebates for purposes of
disclosure and calculation. See the commen­
tary to section 226.18(b).
2(a)(10) “Closed-end Credit”
1. General The coverage of this term is de­
fined by exclusion. That is, it includes any
credit arrangement that does not fall within
the definition of open-end credit. Subpart C
contains the disclosure rules for closed-end
credit when the obligation is subject to a fi­
nance charge or is payable by written agree­
ment in more than four installments.
2(a)(11) “Consumer”
1. Scope. Guarantors, endorsers, and sureties
are not generally consumers for purposes of
the regulation, but they may be entitled to re­
scind under certain circumstances and they
may have certain rights if they are obligated
on credit card plans.
2. Rescission rules. For purposes of rescission
under sections 226.15 and 226.23, a consumer

§ 226.2
includes any natural person whose ownership
interest in his or her principal dwelling is sub­
ject to the risk of loss. Thus, if a security inter­
est is taken in A’s ownership interest in a
house and that house is A’s principal dwell­
ing, A is a consumer for purposes of rescis­
sion, even if A is not liable, either primarily or
secondarily, on the underlying consumer
credit transaction. An ownership interest does
not include, for example, leaseholds or incho­
ate rights, such as dower.
3. Land trusts. Credit extended to land trusts,
as described in the commentary to section
226.3(a), is considered to be extended to a
natural person for purposes of the definition
of consumer.
2(a)(12) “Consumer Credit”
1. Primary purpose. There is no precise test
for what constitutes credit offered or extended
for personal, family, or household purposes,
nor for what constitutes the primary purpose.
See, however, the discussion of business pur­
poses in the commentary to section 226.3(a).
2(a)(13) “Consummation ”
1. State law governs. When a contractual obli­
gation on the consumer’s part is created is a
matter to be determined under applicable law;
Regulation Z does not make this determina­
tion. A contractual commitment agreement,
for example, that under applicable law binds
the consumer to the credit terms would be
consummation. Consummation, however,
does not occur merely because the consumer
has made some financial investment in the
transaction (for example, by paying a nonrefundable fee) unless, of course, applicable law
holds otherwise.
2. Credit v. sale. Consummation does not oc­
cur when the consumer becomes contractually
committed to a sale transaction, unless the
consumer also becomes legally obligated to
accept a particular credit arrangement. For
example, when a consumer pays a nonrefundable deposit to purchase an automobile, a pur­
chase contract may be created, but consum­
mation for purposes of the regulation does not
occur unless the consumer also contracts for
financing at that time.

Regulation Z Commentary

§ 226.2
2(a)(14) “Credit”
1. Exclusions. The following situations are
not considered credit for purposes of the
regulation:
• Layaway plans, unless the consumer is
contractually obligated to continue mak­
ing payments. Whether the consumer is so
obligated is a matter to be determined un­
der applicable law. The fact that the con­
sumer is not entitled to a refund of any
amounts paid towards the cash price of the
merchandise does not bring layaways
within the definition of credit.
• Tax liens, tax assessments, court judg­
ments, and court approvals of reaffirma­
tion of debts in bankruptcy. However,
third-party financing of such obligations
(for example, a bank loan obtained to pay
off a tax lien) is credit for purposes of the
regulation.
• Insurance premium plans that involve
payment in installments with each install­
ment representing the payment for insur­
ance coverage for a certain future period
of time, unless the consumer is contractu­
ally obligated to continue making
payments
• Home improvement transactions that in­
volve progress payments, if the consumer
pays, as the work progresses, only for
work completed and has no contractual
obligation to continue making payments
• “Borrowing” against the accrued cash val­
ue of an insurance policy or a pension ac­
count, if there is no independent obligation
to repay
• Letters of credit
• The execution of option contracts. Howev­
er, there may be an extension of credit
when the option is exercised, if there is an
agreement at that time to defer payment of
a debt.
• Investment plans in which the party ex­
tending capital to the consumer risks the
loss of the capital advanced. This includes,
for example, an arrangement with a home
purchaser in which the investor pays a
portion of the downpayment and of the pe­
riodic mortgage payments in return for an
ownership interest in the property, and
6

shares in any gain or loss of property
value.
• Mortgage assistance plans administered by
a government agency in which a portion of
the consumer’s monthly payment amount
is paid by the agency. No finance charge is
imposed on the subsidy amount, and that
amount is due in a lump-sum payment on
a set date or upon the occurrence of cer­
tain events. (If payment is not made when
due, a new note imposing a finance charge
may be written, which may then be subject
to the regulation.)

2(a)(15) “Credit Card”
1. Usable from time to time. A credit card
must be usable from time to time. Since this
involves the possibility of repeated use of a
single device, checks and similar instruments
that can be used only once to obtain a single
credit extension are not credit cards.
2. Examples.
include:

Examples of credit

cards

• A card that guarantees checks or similar
instruments, if the asset account is also
tied to an overdraft line or if the instru­
ment directly accesses a fine of credit
• A card that accesses both a credit and an
asset account (that is, a debit-credit card)
• An identification card that permits the
consumer to defer payment on a purchase
• An identification card indicating loan ap­
proval that is presented to a merchant or
to a lender, whether or not the consumer
signs a separate promissory note for each
credit extension
In contrast, credit card does not include, for
example:
• A check-guarantee or debit card with no
credit feature or agreement, even if the
creditor occasionally honors an inadver­
tent overdraft
• Any card, key, plate, or other device that
is used in order to obtain petroleum prod­
ucts for business purposes from a whole­
sale distribution facility or to gain access
to that facility, and that is required to be
used without regard to payment terms.

Regulation Z Commentary
2(a)(16) "Credit Sale”
1. Special disclosure. If the seller is a creditor
in the transaction, the transaction is a credit
sale and the special credit sale disclosures
(that is, the disclosures under section
226.18(j)) must be given. This applies even if
there is more than one creditor in the transac­
tion and the creditor making the disclosures is
not the seller. See the commentary to section
226.17(d).
2. Sellers who arrange credit. If the seller of
the property or services involved arranged for
financing but is not a creditor as to that sale,
the transaction is not a credit sale. Thus, if a
seller assists the consumer in obtaining a di­
rect loan from a financial institution and the
consumer’s note is payable to the financial in­
stitution, the transaction is a loan and only
the financial institution is a creditor.
3. Refinancings. Generally, when a credit sale
is refinanced within the meaning of section
226.20(a), loan disclosures should be made.
However, if a new sale of goods or services is
also involved, the transaction is a credit sale.
4. Incidental sales. Some lenders “sell” a
product or service—such as credit, property,
or health insurance—as part of a loan transac­
tion. Section 226.4 contains the rules on
whether the cost of credit life, disability or
property insurance is part of the finance
charge. If the insurance is financed, it may be
disclosed as a separate credit sale transaction
or disclosed as part of the primary transac­
tion; if the latter approach is taken, either
loan or credit sale disclosures may be made.
See the commentary to section 226.17(c)(1)
for further discussion of this point.
5. Credit extensions for educational purposes.
A credit extension for educational purposes in
which an educational institution is the credi­
tor may be treated as either a credit sale or a
loan, regardless of whether the funds are giv­
en directly to the student, credited to the stu­
dent’s account, or disbursed to other persons
on the student’s behalf. The disclosure of the
total sale price need not be given if the trans­
action is treated as a loan.

§ 226.2
2(a)(17) “Creditor”
1. General. The definition contains four inde­
pendent tests. If any one of the tests is met,
the person is a creditor for purposes of that
particular test.
Paragraph 2(a)(17)(i)
1. Prerequisites. This test is composed of two
requirements, both of which must be met in
order for a particular credit extension to be
subject to the regulation and for the credit ex­
tension to count towards satisfaction of the
numerical tests mentioned in footnote 3 to
section 226.2(a)(17). First, there must be ei­
ther or both of the following:
• A written (rather than oral) agreement to
pay in more than four installments. A let­
ter that merely confirms an oral agreement
does not constitute a written agreement for
purposes of the definition.
• A finance charge imposed for the credit.
The obligation to pay the finance charge
need not be in writing.
Second, the obligation must be payable to the
person in order for that person to be consid­
ered a creditor. If an obligation is made pay­
able to “bearer,” the creditor is the one who
initially accepts the obligation.
2. Assignees. If an obligation is initially pay­
able to one person, that person is the creditor
even if the obligation by its terms is simulta­
neously assigned to another person. For
example:
• An auto dealer and a bank have a business
relationship in which the bank supplies the
dealer with credit sale contracts that are
initially made payable to the dealer and
provide for the immediate assignment of
the obligation to the bank. The dealer and
purchaser execute the contract only after
the bank approves the creditworthiness of
the purchaser. Because the obligation is
initially payable on its face to the dealer,
the dealer is the only creditor in the
transaction.
3. Numerical tests. The examples below illus­
trate how the numerical tests of footnote 3 are
applied. The examples assume that consumer

§ 226.2
credit with a finance charge or written agree­
ment for more than four installments was ex­
tended in the years in question and that the
person did not extend such credit in 1982.
4. Counting transactions. For purposes of
closed-end credit, the creditor counts each
credit transaction. For open-end credit,
“transactions” means accounts, so that out­
standing accounts are counted instead of
individual credit extensions. Normally the
number of transactions is measured by the
preceding calendar year; if the requisite num­
ber is met, then the person is a creditor for all
transactions in the current year. However, if
the person did not meet the test in the preced­
ing year, the number of transactions is meas­
ured by the current calendar year. For exam­
ple, if the person extends consumer credit 26
times in 1983, it is a creditor for purposes of
the regulation for the last extension of credit
in 1983 and for all extensions of consumer
credit in 1984. On the other hand, if a busi­
ness begins in 1983 and extends consumer
credit 20 times, it is not a creditor for purpos­
es of the regulation in 1983. If it extends con­
sumer credit 75 times in 1984, however, it
becomes a creditor for purposes of the regula­
tion (and must begin making disclosures) af­
ter the 25th extension of credit in that year
and is a creditor for all extensions of consum­
er credit in 1985.
5. Relationship between consumer credit in
general and credit secured by a dwelling. Ex­
tensions of credit secured by a dwelling are
counted towards the 25-extensions test. For
example, if in 1983 a person extends unse­
cured consumer credit 23 times and consumer
credit secured by a dwelling twice, it becomes
a creditor for the succeeding extensions of
credit, whether or not they are secured by a
dwelling. On the other hand, extensions of
consumer credit not secured by a dwelling are
not counted towards the number of credit ex­
tensions secured by a dwelling. For example,
if in 1983 a person extends credit not secured
by a dwelling eight times and credit secured
by a dwelling three times, it is not a creditor.
6. Effect o f satisfying one test. Once one of the
numerical tests is satisfied, the person is also a
creditor for the other type of credit. For ex­

Regulation Z Commentary
ample, in 1983 a person extends consumer
credit secured by a dwelling five times. That
person is a creditor for all succeeding credit
extensions, whether they involve credit se­
cured by a dwelling or not.
7. Trusts. In the case of credit extended by
trusts, each individual trust is considered a
separate entity for purposes of applying the
criteria. For example:
• A bank is the trustee for three trusts. Trust
A makes 15 extensions of consumer credit
annually; Trust B makes 10 extensions of
consumer credit annually; and Trust C
makes 30 extensions of consumer credit
annually. Only Trust C is a creditor for
purposes of the regulation.
8. Loans from employee savings plans. Some
employee savings plans permit participants to
borrow money up to a certain percentage of
their account balances. Unless each partici­
pant’s account is an individual trust, the nu­
merical tests should be applied to the plan as a
whole rather than to the individual accounts,
even if the loan amount is determined by ref­
erence to the balance in an individual account
and the repayments are credited to the indi­
vidual account.
Paragraph 2(a)(17)(iii)
1. Card issuers subject to subpart B. Section
226.2(a) (17) (iii) makes certain card issuers
creditors for purposes of the open-end credit
provisions of the regulation. This includes, for
example, the issuers of so-called travel and en­
tertainment cards that expect repayment at
the first billing and do not impose a finance
charge. Since all disclosures are to be made
only as applicable, such card issuers would
omit finance charge disclosures. Other provi­
sions of the regulation regarding such areas as
scope, definitions, determination of which
charges are finance charges, Spanish language
disclosures, record retention, and use of mod­
el forms, also apply to such card issuers.
Paragraph 2(a)(l 7)(iv)
1. Card issuers subject to subparts B and C.
Section 226.2(a) (17) (iv) includes as credi­
tors card issuers extending closed-end credit

Regulation Z Commentary
in which there is a finance charge or an agree­
ment to pay in more than four installments.
These card issuers are subject to the appropri­
ate provisions of subparts B and C, as well as
to the general provisions.
2(a)(18) “Downpayment”
1. Allocation. If a consumer makes a lump­
sum payment, partially to reduce the cash
price and partially to pay prepaid finance
charges, only the portion attributable to re­
ducing the cash price is part of the downpay­
ment. (See the commentary to section
226.2(a) (23).)
2. Pickup payments. Creditors may treat the
deferred portion of the downpayment, often
referred to as “pickup payments,” in a num­
ber of ways. If the pickup payment is treated
as part of the downpayment:
• It is subtracted in arriving at the amount
financed under section 226.18(b)
• It may, but need not, be reflected in the
payment schedule under section 226.18(g)
If the pickup payment does not meet the defi­
nition (for example, if it is payable after the
second regularly scheduled payment) or if the
creditor chooses not to treat it as part of the
downpayment:
• It must be included in the amount
financed
• It must be shown in the payment schedule
Whichever way the pickup payment is treat­
ed, the total of payments under section
226.18(h) must equal the sum of the pay­
ments disclosed under section 226.18(g).
2(a)(19) “Dwelling”
1. Scope. A dwelling need not be the consum­
er’s principal residence to fit the definition,
and thus a vacation or second home could be
a dwelling. However, for purposes of the defi­
nition of residential mortgage transaction and
the right to rescind, a dwelling must be the
principal residence of the consumer. See the
commentary to sections 226.2(a) (24),
226.15, and 226.23.
2. Use as a residence. Mobile homes, boats,
and trailers are dwellings if they are in fact

§ 226.2
used as residences, just as are c o n d om inium
and cooperative units. Recreational vehicles,
campers, and the like not used as residences
are not dwellings.
3. Relation to exemptions. Any transaction in­
volving a security interest in a consumer’s
principal dwelling (as well as in any real
property) remains subject to the regulation
despite the general exemption in section
226.3(b) for credit extensions over $25,000.
2(a)(20) “Open-End Credit ”
1. General. This definition describes the char­
acteristics of open-end credit (for which the
applicable disclosure and other rules are con­
tained in subpart B), as distinct from closedend credit. Open-end credit is consumer credit
that is extended under a plan and meets all
three criteria set forth in the definition.
2. Existence o f a plan. The definition requires
that there be a plan, which connotes a con­
tractual arrangement between the creditor
and the consumer. Some creditors offer pro­
grams containing a number of different credit
features. The consumer has a single account
with the institution that can be accessed re­
peatedly via a number of subaccounts estab­
lished for the different program features and
rate structures. Some features of the program
might be used repeatedly (for example, an
overdraft line), while others might be used in­
frequently (such as the part of the credit line
available for secured credit). If the program
as a whole is subject to prescribed terms and
otherwise meets the definition of open-end
credit, such a program would be considered a
single, multifeatured plan.
3. Repeated transactions. Under this criterion,
the creditor must reasonably contemplate re­
peated transactions. This means that the cred­
it plan must be usable from time to time and
the creditor must legitimately expect that
there will be repeat business rather than a
one-time credit extension. The creditor must
expect repeated dealings with the consumer
under the credit plan as a whole and need not
believe the consumer will reuse a particular
feature of the plan. A standard based on rea­
sonable belief by a creditor necessarily in­
cludes some margin for judgmental error. The
9

§ 226.2
fact that a particular consumer does not re­
turn for further credit extensions does not pre­
vent a plan from having been properly charac­
terized as open-end. For example, if much of
the customer base of a clothing store makes
repeat purchases, the fact that some consum­
ers use the plan only once would not affect the
characterization of the store’s plan as openend credit. The criterion regarding repeated
transactions is a question of fact to be decided
in the context of the creditor’s type of business
and the creditor’s relationship with the con­
sumer. For example:
• It would be more reasonable for a thrift
institution chartered for the benefit of its
members to contemplate repeated transac­
tions with a member than for a seller of
aluminum siding to make the same as­
sumption about its customers.
• It would be more reasonable for a bank to
make advances from a line of credit for the
purchase of an automobile than for an au­
tomobile dealer to sell a car under an
open-end plan.
4. Finance charge on an outstanding balance.
The requirement that a finance charge may be
computed and imposed from time to time on
the outstanding balance means that there is no
specific amount financed for the plan for
which the finance charge, total of payments,
and payment schedule can be calculated. A
plan may meet the definition of open-end
credit even though a finance charge is not nor­
mally imposed, provided the creditor has the
right, under the plan, to impose a finance
charge from time to time on the outstanding
balance. For example, in some plans, such as
certain “china club” plans, a finance charge is
not imposed if the consumer pays all or a
specified portion of the outstanding balance
within a given time period. Such a plan could
meet the finance-charge criterion, if the credi­
tor has the right to impose a finance charge,
even though the consumer actually pays no
finance charges during the existence of the
plan because the consumer takes advantage of
the option to pay the balance (either in full or
in installments) within the time necessary to
avoid finance charges.
5. Reusable line. The total amount of credit
10

Regulation Z Commentary
that may be extended during the existence of
an open-end plan is unlimited because avail­
able credit is generally replenished as earlier
advances are repaid. A line of credit is self-replenishing even though the plan itself has a
fixed expiration date, as long as during the
plan’s existence the consumer may use the
line, repay, and reuse the credit. The creditor
may verify credit information such as the con­
sumer’s continued income and employment
status or information for security purposes.
This criterion of unlimited credit distinguishes
open-end credit from a series of advances
made pursuant to a closed-end credit loan
commitment. For example:
• Under a closed-end commitment, the cred­
itor might agree to lend a total of $10,000
in a series of advances as needed by the
consumer. When a consumer has bor­
rowed the full $10,000, no more is ad­
vanced under that particular agreement,
even if there has been repayment of a por­
tion of the debt.
This criterion does not mean that the creditor
must establish a specific credit limit for the
line of credit or that the line of credit must
always be replenished to its original amount.
The creditor may reduce a credit limit or re­
fuse to extend new credit in a particular case
due to changes in the economy, the creditor’s
financial condition, or the consumer’s credit­
worthiness. While consumers should have a
reasonable expectation of obtaining credit as
long as they remain current and within any
preset credit limits, further extensions of cred­
it need not be an absolute right in order for
the plan to meet the self-replenishing
criterion.
6. Open-end real estate mortgages. Some cred­
it plans call for negotiated advances under socalled open-end real estate mortgages. Each
such plan must be independently measured
against the definition of “open-end credit,” re­
gardless of the terminology used in the indus­
try to describe the plan. The fact that a partic­
ular plan is called an open-end real estate
mortgage, for example, does not, by itself,
mean that it is open-end credit under the
regulation.

Regulation Z Commentary
2(a)(21) “Periodic Rate"
1. Basis. The periodic rate may be stated as a
percentage (for example, l-£ percent per
month) or as a decimal equivalent (for exam­
ple, .015 monthly). It may be based on any
portion of a year the creditor chooses. Some
creditors use 1/360 of an annual rate as their
periodic rate. These creditors:
• May disclose a 1/360 rate as a “daily” pe­
riodic rate, without further explanation, if
it is in fact only applied 360 days per year.
But if the creditor applies that rate for 365
days, the creditor must note that fact and,
of course, disclose the true annual percent­
age rate.
• Would have to apply the rate to the bal­
ance to disclose the annual percentage rate
with the degree of accuracy required in the
regulation (that is, within 1/8 of 1 per­
centage point of the rate based on the actu­
al 365 days in the year).
2. Transaction charges. “Periodic rate” does
not include initial one-time transaction
charges, even if the charge is computed as a
percentage of the transaction amount.
2(a) (22) “Person”
1. Joint ventures. A joint venture is an organi­
zation and is therefore a person.
2. Attorneys. An attorney and his or her client
are considered to be the same person for pur­
poses of this regulation when the attorney is
acting within the scope of the attomey-client
relationship with regard to a particular
transaction.
3. Trusts. A trust and its trustee are consid­
ered to be the same person for purposes of this
regulation.
2(a)(23) “Prepaid Finance Charge ”
1. General. Prepaid finance charges must be
taken into account under section 226.18(b) in
computing the disclosed amount financed, and
must be disclosed if the creditor provides an
itemization of the amount financed under sec­
tion 226.18(c).
2. Examples. Common examples of prepaid
finance charges include:

§ 226.2
•
•
•
•
•
•

Buyer’s points
Service fees
Loan fees
Finder’s fees
Loan guarantee insurance
Credit investigation fees

However, in order for these or any other fi­
nance charges to be considered prepaid, they
must be either paid separately in cash or
check or withheld from the proceeds. Prepaid
finance charges include any portion of the fi­
nance charge paid prior to or at closing or
settlement.
3. Exclusions. “Add-on” and “discount” fi­
nance charges are not prepaid finance charges
for purposes of this regulation. Finance
charges are not “prepaid” merely because
they are precomputed, whether or not a por­
tion of the charge will be rebated to the con­
sumer upon prepayment. See the commentary
to section 226.18(b).
4. Allocation o f lump-sum payments. In a
credit sale transaction involving a lump-sum
payment by the consumer and a discount or
other item that is a finance charge under sec­
tion 226.4, the discount or other item is a pre­
paid finance charge to the extent the lump­
sum payment is not applied to the cash price.
For example, a seller sells property to a con­
sumer for $10,000, requires the consumer to
pay $3,000 at the time of the purchase, and
finances the remainder as a closed-end credit
transaction. The cash price of the property is
$9,000. The seller is the creditor in the trans­
action and therefore the $1,000 difference
between the credit and cash prices (the
discount) is a finance charge. (See the com­
mentary to sections 226.4(b)(9) and
226.4(c)(5).) If the creditor applies the en­
tire $3,000 to the cash price and adds the
$1,000 finance charge to the interest on the
$6,000 to arrive at the total finance charge, all
of the $3,000 lump-sum payment is a down­
payment and the discount is not a prepaid fi­
nance charge. However, if the creditor only
applies $2,000 of the lump-sum payment to
the cash price, then $2,000 of the $3,000 is a
downpayment and the $1,000 discount is a
prepaid finance charge.
11

§ 226.2
2(a)(24) “Residential Mortgage Transaction”
1. Relation to other sections. This term is im­
portant in six provisions in the regulation:
• Section 226.4(c) (7)—exclusions from the
finance charge
• Section 226.15(f)—exemption from the
right of rescission
• Section 226.18 (q)—whether or not the
obligation is assumable
• Section 226.19—special timing rules
• Section 226.20(b)—disclosure require­
ments for assumptions
• Section 226.23(0—exemption from the
right of rescission
2. Lien status. The definition is not limited to
first hen transactions. For example, a consum­
er might assume a paid-down first mortgage
(or borrow part of the purchase price) and
borrow the balance of the purchase price from
a creditor who takes a second mortgage. The
second mortgage transaction is a “residential
mortgage transaction” if the dwelling pur­
chased is the consumer’s principal residence.
3. Principal dwelling. A consumer can have
only one principal dwelling at a time. Thus, a
vacation or other second home would not be a
principal dwelling. However, if a consumer
buys or builds a new dwelling that will be­
come the consumer’s principal dwelling with­
in a year or upon the completion of construc­
tion, the new dwelling is considered the
principal dwelling for purposes of applying
this definition to a particular transaction. See
the commentary to sections 226.15(a) and
226.23(a).
4. Construction financing. If a transaction
meets the definition of a residential mortgage
transaction and the creditor chooses to dis­
close it as several transactions under section
226.17(c)(6), each one is considered to be a
residential mortgage transaction, even if dif­
ferent creditors are involved. For example:
• The creditor makes a construction loan to
finance the initial construction of the con­
sumer’s principal dwelling, and the loan
will be disbursed in five advances. The
creditor gives six sets of disclosures (five
for the construction phase and one for the
12

Regulation Z Commentary
permanent phase). Each one is a residen­
tial mortgage transaction.
• One creditor finances the initial construc­
tion of the consumer’s principal dwelling
and another creditor makes a loan to satis­
fy the construction loan and provide per­
manent financing. Both transactions are
residential mortgage transactions.
5. Acquisition. A transaction is not “to fi­
nance the acquisition” of the consumer’s prin­
cipal dwelling (and therefore is not a residen­
tial mortgage transaction) if the consumer
had previously purchased the dwelling and ac­
quired some title to the dwelling, even though
the consumer has not acquired full legal title.
Thus, the following types of transactions are
not residential mortgage transactions:
• The financing of a balloon payment due
under a land sale contract
• An extension of credit made to a joint
owner of property to buy out the other
joint owner’s interest
As a result, in giving the disclosures for these
transactions several provisions of the regula­
tion are not applicable, for example, the ex­
ceptions to the right of rescission (sections
226.23(0(1) and 226.15(0(1)), the early
disclosure requirement (section 226.19(a)),
and the disclosure concerning assumability
(section 226.18(q)). In the following situa­
tion, by contrast, since the transaction is not a
residential mortgage transaction, no disclo­
sures are required by section 226.20(b) and
therefore the right of rescission does not
apply:
• A written agreement between a creditor
holding a seller’s mortgage and the buyer
of the property which allows the buyer to
assume the mortgage, where the buyer
previously purchased the property and
agreed with the seller to make the mort­
gage payments.
2(a)(25) Security Interest”
1. Threshold test. The threshold test is wheth­
er a particular interest in property is recog­
nized as a security interest under applicable
law. The regulation does not determine
whether a particular interest is a security in­

Regulation Z Commentary
terest under applicable law. If the creditor is
unsure whether a particular interest is a secu­
rity interest under applicable law (for exam­
ple, if statutes and case law are either silent or
inconclusive on the issue), the creditor may at
its option consider such interests as security
interests for Truth in Lending purposes. How­
ever, the regulation and the commentary do
exclude specific interests, such as afteracquired property and accessories, from the
scope of the definition regardless of their cate­
gorization under applicable law, and these
named exclusions may not be disclosed as se­
curity interests under the regulation. (But see
the discussion of exclusions elsewhere in the
commentary to section 226.2(a) (25).)
2. Exclusions. The general definition of secu­
rity interest excludes three groups of interests:
incidental interests, interests in after-acquired
property, and interests that arise solely by op­
eration of law. These interests may not be dis­
closed with the disclosures required under
section 226.18, but the creditor is not preclud­
ed from preserving these rights elsewhere in
the contract documents, or invoking and en­
forcing such rights, if it is otherwise lawful to
do so. If the creditor is unsure whether a par­
ticular interest is one of the excluded interests,
the creditor may, at its option, consider such
interests as security interests for Truth in
Lending purposes.
3. Incidental interests. Incidental interests in
property that are not security interests in­
clude, among other things:
•
•
•
•

Assignment of rents
Right to condemnation proceeds
Interests in accessories and replacements
Interests in escrow accounts, such as for
taxes and insurance
• Waiver of homestead or personal property
rights

The notion of an “incidental interest” does
not encompass an explicit security interest in
an insurance policy if that policy is the pri­
mary collateral for the transaction—for exam­
ple, in an insurance premium financing
transaction.
4. Operation o f law. Interests that arise solely
by operation of law are excluded from the

§ 226.2
general definition. Also excluded are interests
arising by operation of law that are merely
repeated or referred to in the contract. How­
ever, if the creditor has an interest that arises
by operation of law, such as a vendor’s hen,
and takes an independent security interest in
the same property, such as a UCC security
interest, the latter interest is a disclosable se­
curity interest unless otherwise provided.
5. Rescission rules. Security interests that
arise solely by operation of law are security
interests for purposes of rescission. Examples
of such interests are mechanics’ and material­
men’s hens.

2(b) Rules of Construction
1. Footnotes. Footnotes are used extensively
in the regulation to provide special exceptions
and more detailed explanations and examples.
Material that appears in a footnote has the
same legal weight as material in the body of
the regulation.

References
Statute: § 103
Other sections: None
Other regulations: Regulation E (12 CFR
205.2(d))
Previous regulation: §§ 226.2, 226.8, and 226.9
1981 changes: Section 226.2 implements
amended section 103 of the act. Separate defi­
nitions for “comparative index of credit cost,”
“discount,” “organization,” “period,” “real
property,” “real property transaction,” “regu­
lar price,” and “surcharge” have been deleted.
The definitions relating specifically to con­
sumer leases are now found in the separate
consumer leasing regulation, Regulation M
(12 CFR 213).
Several terms are now defined elsewhere in
the regulation or commentary rather than in
section 226.2. For example, “finance charge”
is described and explained in section 226.4,
and “agricultural purpose” is discussed in the
commentary to section 226.3. Some terms,
such as “unauthorized use,” are now defined
as part of the substantive sections to which
they apply. Other terms previously defined,
such as “customer” and “organization,” are
merged into new definitions. Section 226.2
13

§ 226.2
contains new definitions for “arranger of cred­
it,” “business day,” “closed-end credit,”
“consumer,” “consummation,” “downpay­
ment,” “prepaid finance charge,” and “resi­
dential mortgage transaction.”
The major changes in the definitions are as
follows:
“Arranger of credit” has a significantly dif­
ferent meaning. It reflects the statutory
amendment that limits “arrangers” to those
who regularly arrange credit extensions for
persons who are not themselves creditors.
This definition was deleted effective October
1, 1982.
“Billing cycle” largely restates the prior
definition, but requires cycles to be regular,
and allows the four-day variance to be meas­
ured from a regular day as well as date. The
definition also incorporates an interpretation
that cycles may be no longer than quarterly.
“Business day” is new in the sense that the
term previously appeared only in a footnote to
the rescission provision, but it is now of gener­
al applicability. The general rule that it is a
day when the creditor is open for business is
new, but the rule for rescission purposes is the
same as in the previous regulation.
“Cash price” now explicitly permits inclu­
sion of various incidental charges imposed
equally in cash and credit transactions.
“Consumer” has a narrower meaning in
that guarantors, sureties, and endorsers are
excluded from the general definition.
“Consumer credit” reflects the new statuto­
ry exemption for agricultural credit.
“Consummation” is a significant departure
from longstanding interpretations of the pre­
vious definition. It now focuses only on the
time the consumer becomes contractually ob­
ligated, rather than the time the consumer
pays a nonrefundable fee or suffers an eco­
nomic penalty for failing to go forward with
the credit transaction.
“Credit” generally parallels the previous
definition, but modifies the previous interpre­
tations of the definition by excluding more
transactions.
“Creditor” reflects the statutory amend­
ments to the act that were intended to elimi­
nate the problem of multiple creditors in a
transaction. The “regularly” standard is still
used, but it is now defined in terms of the
14

Regulation Z Commentary
frequency of the credit extensions. The new
definition also requires that there be a written
agreement to pay in more than four install­
ments if no finance charge is imposed. Finally,
the obligation must be initially payable to a
person for that person to be the creditor.
“Dwelling” reflects the statutory amend­
ment that expanded the scope of the definition
to include any residential structure, whether
or not it is real property under state law.
“Open-end credit” reflects the amended
statutory definition requiring that the creditor
reasonably contemplate repeated transactions.
The new definition no longer requires the con­
sumer to have the privilege of paying either in
installments or in full.
“Periodic rate” combines the previous defi­
nitions of “period” and “periodic rate” with
clarification in the commentary concerning
transaction charges and 360-day-year factors.
“Security interest” is much narrower than
the previous definition. Reflecting the legisla­
tive history of the simplification amendments,
incidental interests are expressly excluded
from the definition. Except for purposes of re­
scission, interests that arise solely by opera­
tion of law are also excluded.

SECTION 226.3—Exempt Transactions
3(a) Business, Commercial,
Agricultural, or Organizational Credit
1. Primary purposes. A creditor must deter­
mine in each case if the transaction is primari­
ly for an exempt purpose. If some question
exists as to the primary purpose for a credit
extension, the creditor is, of course, free to
make the disclosures, and the fact that disclo­
sures are made under such circumstances is
not controlling on the question of whether the
transaction was exempt.
2. Factors. In determining whether credit to
finance an acquisition—such as securities, an­
tiques, or art—is primarily for business or
commercial purposes (as opposed to a con­
sumer purpose), the following factors should
be considered:
• The relationship of the borrower’s primary

Regulation Z Commentary

•

•

•

•

occupation to the acquisition. The more
closely related, the more likely it is to be
business purpose.
The degree to which the borrower will per­
sonally manage the acquisition. The more
personal involvement there is, the more
likely it is to be business purpose.
The ratio of income from the acquisition
to the total income of the borrower. The
higher the ratio, the more likely it is to be
business purpose.
The size of the transaction. The larger the
transaction, the more likely it is to be busi­
ness purpose.
The borrower’s statement of purpose for
the loan.

Examples of business-purpose credit include:
• A loan to expand a business, even if it is
secured by the borrower’s residence or
personal property
• A loan to improve a principal residence by
putting in a business office
• A business account used occasionally for
consumer purposes
Examples of consumer-purpose credit include:
• Credit extensions by a company to its em­
ployees or agents if the loans are used for
personal purposes
• A loan secured by a mechanic’s tools to
pay a child’s tuition
• A personal account used occasionally for
business purposes
3. Non-owner-occupied rental property. Credit
extended to acquire, improve, or maintain
rental property (regardless of the number of
housing units) that is not owner-occupied is
deemed to be for business purposes. This in­
cludes, for example, the acquisition of a ware­
house that will be leased or a single-family
house that will be rented to another person to
live in. If the owner expects to occupy the
property for more than 14 days during the
coming year, the property cannot be consid­
ered non-owner-occupied and this special rule
will not apply. For example, a beach house
that the owner will occupy for a month in the
coming summer and rent out the rest of the
year is owner-occupied and is not governed by
this special rule. See comment 3 (a)-4, howev­

§ 226.3
er, for rules relating to owner-occupied rental
property.
4. Owner-occupied rental property. If credit is
extended to acquire, improve, or maintain
rental property that is or will be owner-occu­
pied within the coming year, different rules
apply:
• Credit extended to acquire the rental prop­
erty is deemed to be for business purposes
if it contains more than two housing units.
• Credit extended to improve or maintain
the rental property is deemed to be for
business purposes if it contains more than
four housing units. Since the amended
statute defines “dwelling” to include one
to four housing units, this rule preserves
the right of rescission for credit extended
for purposes other than acquisition.
Neither of these rules means that an extension
of credit for property containing fewer than
the requisite number of units is necessarily
consumer credit. In such cases, the determina­
tion of whether it is business or consumer
credit should be made by considering the fac­
tors listed in comment 3 (a)-2.
5. Business credit later refinanced. Businesspurpose credit that is exempt from the regula­
tion may later be rewritten for consumer pur­
poses. Such a transaction is consumer credit
requiring disclosures only if the existing obli­
gation is satisfied and replaced by a new obli­
gation made for consumer purposes under­
taken by the same obligor.
6. Agricultural purpose. An “agricultural pur­
pose” includes the planting, propagating, nur­
turing, harvesting, catching, storing, exhibit­
ing, marketing, transporting, processing, or
manufacturing of food, beverages (including
alcoholic beverages), flowers, trees, livestock,
poultry, bees, wildlife, fish, or shellfish by a
natural person engaged in farming, fishing, or
growing crops, flowers, trees, livestock, poul­
try, bees, or wildlife. The exemption also ap­
plies to a transaction involving real property
that includes a dwelling (for example, the
purchase of a farm with a homestead) if the
transaction is primarily for agricultural
purposes.
7. Organizational credit. The exemption for

§ 226.3
transactions in which the borrower is not a
natural person applies, for example, to loans
to corporations, partnerships, associations,
churches, unions, and fraternal organizations.
The exemption applies regardless of the pur­
pose of the credit extension and regardless of
the fact that a natural person may guarantee
or provide security for the credit.
8. Land trusts. Credit extended for consumer
purposes to a land trust is considered to be
credit extended to a natural person rather
than credit extended to an organization. In
some jurisdictions, a financial institution fi­
nancing a residential real estate transaction
for an individual uses a land trust mechanism.
Title to the property is conveyed to the land
trust for which the financial institution itself is
trustee. The underlying installment note is ex­
ecuted by the financial institution in its capac­
ity as trustee and payment is secured by a
trust deed, reflecting title in the financial insti­
tution as trustee. In some instances, the con­
sumer executes a personal guaranty of the
indebtedness. The note provides that it is
payable only out of the property specifically
described in the trust deed and that the trust­
ee has no personal liability on the note. As­
suming the transactions are for personal, fam­
ily, or household purposes, these transactions
are subject to the regulation since in substance
(if not form) consumer credit is being
extended.

3(b) Credit Over $25,000 Not Secured
by Real Property or a Dwelling
1. Coverage. Since a mobile home can be a
dwelling under section 226.2(a) (19), this ex­
emption does not apply to a credit extension
secured by a mobile home used or expected to
be used as the principal dwelling of the con­
sumer, even if the credit exceeds $25,000. A
loan commitment for closed-end credit in ex­
cess of $25,000 is exempt even though the
amounts actually drawn never actually reach
$25,000.
2. Open-end credit. An open-end credit plan
is exempt under section 226.3(b) (unless se­
cured by real property or personal property
used or expected to be used as the consumer’s
16

Regulation Z Commentary
principal dwelling) if either of the following
conditions is met:
• The creditor makes a firm commitment to
lend over $25,000 with no requirement of
additional credit information for any
advances.
• The initial extension of credit on the line
exceeds $25,000.
If a security interest is taken at a later time in
any real property, or in personal property
used or expected to be used as the consumer’s
principal dwelling, the plan would no longer
be exempt. The creditor must comply with all
of the requirements of the regulation, includ­
ing, for example, providing the consumer with
an initial disclosure statement. If the security
interest being added is in the consumer’s prin­
cipal dwelling, the creditor must also give the
consumer the right to rescind the security in­
terest. (See the commentary to section 226.15
concerning the right of rescission.)
3. Closed-end credit—subsequent changes. A
closed-end loan for over $25,000 may later be
rewritten for $25,000 or less, or a security in­
terest in real property or in personal property
used or expected to be used as the consumer’s
principal dwelling may be added to an exten­
sion of credit for over $25,000. Such a trans­
action is consumer credit requiring disclosures
only if the existing obligation is satisfied and
replaced by a new obligation made for con­
sumer purposes undertaken by the same obli­
gor. (See the commentary to section
226.23(a)(1) regarding the right of rescission
when a security interest in a consumer’s prin­
cipal dwelling is added to a previously exempt
transaction.)

3(c) Public Utility Credit
1. Examples. Examples of public utility serv­
ices include:
• Gas, water, or electrical services
• Cable television services
• Installation of new sewer lines, water lines,
conduits, telephone poles, or metering
equipment in an area not already serviced
by the utility
The exemption does not apply to extensions of
credit, for example:

Regulation Z Commentary
• To purchase appliances such as gas or
electric ranges, grills, or telephones
• To finance home improvements such as
new heating or air conditioning systems.

3(d) Securities or Commodities
Accounts
1. Coverage. This exemption does not apply
to a transaction with a broker registered solely
with the state or to a separate credit extension
in which the proceeds are used to purchase
securities.

3(e) Home Fuel Budget Plans
1. Definition. Under a typical home fuel bud­
get plan, the fuel dealer estimates the total
cost of fuel for the season, bills the customer
for an average monthly payment, and makes
an adjustment in the final payment for any
difference between the estimated and the actu­
al cost of the fuel. Fuel is delivered as needed,
no finance charge is assessed, and the custom­
er may withdraw from the plan at any time.
Under these circumstances, the arrangement
is exempt from the regulation, even if a charge
to cover the billing costs is imposed.

3 (0 Student Loan Programs
1. Coverage. This exemption applies to the
Guaranteed Student Loan program (adminis­
tered by the federal government, state and pri­
vate nonprofit agencies), the Auxiliary Loans
to Assist Students (also known as PLUS)
program, and the National Direct Student
Loan program.

References
Statute: §§ 103 (s) and (t) and 104
Other sections: § 226.12(a) and (b)
Previous regulation: § 226.3 and interpreta­
tions §§226.301 and 226.302.
1981 changes: The business credit exemption
has been expanded to include credit for agri­
cultural purposes. The rule of interpretation
section 226.302, concerning credit relating to
structures containing more than four housing
units, has been modified and somewhat ex­
panded by providing more exclusions for
transactions involving rental property.
The exemption for transactions above

§ 226.4
$25,000 secured by real estate has been nar­
rowed; all transactions secured by the con­
sumer’s principal dwelling (even if not con­
sidered real property) are now subject to the
regulation.
The public utility exemption now covers the
financing of the extension of a utility into an
area not earlier served by the utility, in addi­
tion to the financing of services.
The securities credit exemption has been
extended to broker-dealers registered with the
CFTC as well as the SEC.
A new exemption has been created for
home fuel budget plans.

SECTION 226.4— Finance Charge
4(a) Definition
1. Charges in comparable cash transactions.
Charges imposed uniformly in cash and credit
transactions are not finance charges. In deter­
mining whether an item is a finance charge,
the creditor should compare the credit trans­
action in question with a similar cash transac­
tion. A creditor financing the sale of property
or services may compare charges with those
payable in a similar cash transaction by the
seller of the property or service. For example,
the following items are not finance charges:
• Taxes, license fees, or registration fees paid
by both cash and credit customers
• Discounts that are available to cash and
credit customers, such as quantity
discounts
• Discounts available to a particular group
of consumers because they meet certain
criteria, such as being members of an orga­
nization or having accounts at a particular
financial institution. This is the case even if
an individual must pay cash to obtain the
discount, provided credit customers who
are members of the group and don’t quali­
fy for the discount pay no more than the
non-member cash customers.
• Charges for a service policy, auto club
membership, or policy of insurance against
latent defects offered to or required of both
cash and credit customers for the same
price.
17

§ 226.4
In contrast, the following items are finance
charges:
• Inspection and handling fees for the
staged disbursement of construction loan
proceeds
• Fees for preparing a Truth in Lending dis­
closure statement
• Charges for a required maintenance or
service contract imposed only in a credit
transaction
If the charge in a credit transaction exceeds
the charge imposed in a comparable cash
transaction, only the difference is a finance
charge. For example:
• If an escrow agent is used in both cash and
credit sales of real estate and the agent’s
charge is $100 in a cash transaction and
$150 in a credit transaction, only $50 is a
finance charge.
2. Costs o f doing business. Charges absorbed
by the creditor as a cost of doing business are
not finance charges, even though the creditor
may take such costs into consideration in de­
termining the interest rate to be charged or
the cash price of the property or service sold.
However, if the creditor separately imposes a
charge on the consumer to cover certain costs,
the charge is a finance charge if it otherwise
meets the definition. For example:
• A discount imposed on a credit obligation
when it is assigned by a seller-creditor to
another party is not a finance charge as
long as the discount is not separately im­
posed on the consumer. (See section
226.4(b)(6).)
3. Charges by third parties. Charges imposed
on the consumer by someone other than the
creditor for services not required by the credi­
tor are not finance charges as long as the cred­
itor does not retain the charges. For example:
• A fee charged by a loan broker to a con­
sumer, provided the creditor does not re­
quire the use of a broker (even if the credi­
tor knows of the loan broker’s involvement
or compensates the loan broker)
• A tax imposed by a state or other govern­
mental body on the credit transaction that
is payable by the consumer (even if the tax
is collected by the creditor)
18

Regulation Z Commentary
4. Forfeitures o f interest. If the creditor reduc­
es the interest rate it pays or stops paying in­
terest on the consumer’s deposit account or
any portion of it for the term of a credit trans­
action (including, for example, an overdraft
on a checking account or a loan secured by a
certificate of deposit), the interest lost is a fi­
nance charge. (See the commentary to section
226.4(c)(6).) For example:
• A consumer borrows $5,000 for 90 days
and secures it with a $10,000 certificate of
deposit paying 15 percent interest. The
creditor charges the consumer an interest
rate of 6 percent on the loan and stops
paying interest on $5,000 of the $10,000
certificate for the term of the loan. The
interest lost is a finance charge and must
be reflected in the annual percentage rate
on the loan.
However, the consumer must be entitled to
the interest that is not paid in order for the
lost interest to be a finance charge. For
example:
• A consumer wishes to buy from a financial
institution a $10,000 certificate of deposit
paying 15 percent interest but has only
$4,000. The financial institution offers to
lend the consumer $6,000 at an interest
rate of 6 percent but will pay the 15 per­
cent interest only on the amount of the
consumer’s deposit, $4,000. The creditor’s
failure to pay interest on the $6,000 does
not result in an additional finance charge
on the extension of credit, provided the
consumer is entitled by the deposit agree­
ment with the financial institution to inter­
est only on the amount of the consumer’s
deposit.
• A consumer enters into a combined time
deposit/credit agreement with a financial
institution that establishes a time deposit
account and an open-end line of credit.
The line of credit may be used to borrow
against the funds in the time deposit. The
agreement provides for an interest rate on
any credit extension of, for example, 1 per­
cent. In addition, the agreement states that
the creditor will pay 0 percent interest on
the amount of the time deposit that corre­
sponds to the amount of the credit exten­
sion (s). The interest that is not paid on

Regulation Z Commentary
the time deposit by the financial institution
is not a finance charge (and therefore does
not affect the annual percentage rate
computation).
5. Treatment offees for use o f automated tell­
er machines. Any charge imposed on a card­
holder by a card issuer for the use of an auto­
mated teller machine (ATM) to obtain a cash
advance (whether in a proprietary, shared, in­
terchange, or other system) is not a finance
charge to the extent that it does not exceed
the charge imposed by the card issuer on its
cardholders for using the ATM to withdraw
cash from a consumer asset account, such as a
checking or savings account. (See the com­
mentary to section 226.6(b).)

4(b) Examples of Finance Charges
1. Relationship to other provisions. Charges or
fees shown as examples of finance charges in
section 226.4(b) may be excludable under
section 226.4(c), (d), or (e). For example:
• Premiums for credit life insurance, shown
as an example of a finance charge under
section 226.4(b)(7), may be excluded if
the requirements of section 226.4(d)(1)
are met.
• Appraisal fees mentioned in section
226.4(b) (4) are excluded for real proper­
ty or residential mortgage transactions un­
der section 226.4(c)(7).
Paragraph 4(b)(2)
1. Checking account charges. The checking or
transaction account charges discussed in sec­
tion 226.4(b)(2) include, for example, the
following situations:
• An account with an overdraft line of credit
incurs a $4.50 service charge, while an ac­
count without a credit feature has a $2.50
service charge; the $2.00 difference is a fi­
nance charge. If the difference is not relat­
ed to account activity, however, it may be
excludable as a participation fee. (See the
commentary to section 226.4(c)(4).)
• A service charge of $5.00 for each item
that triggers an overdraft credit line is a
finance charge. However, a charge im­
posed uniformly for any item that over­

§ 226.4
draws a checking account, regardless of
whether the items are paid or returned and
whether the account has a credit feature or
not, is not a finance charge.
Paragraph 4(b)(3)
1. Assumption fees. The assumption fees men­
tioned in section 226.4(b)(3) are finance
charges only when the assumption occurs and
the fee is imposed on the new buyer. The as­
sumption fee is a finance charge in the new
buyer’s transaction.
Paragraph 4(b)(5)
1. Credit loss insurance. Common examples
of the insurance against credit loss mentioned
in section 226.4(b)(5) are mortgage-guaranty
insurance, holder-in-due-course insurance,
and repossession insurance. Such prem ium s
must be included in the finance charge only
for the period that the creditor requires the
insurance to be maintained.
2. Residual-value insurance. Where a creditor
requires a consumer to maintain residual-val­
ue insurance or where the creditor is a benefi­
ciary of a residual-value insurance policy writ­
ten in connection with an extension of credit
(as is the case in some forms of automobile
balloon-payment financing, for example), the
premiums for the insurance must be included
in the finance charge for the period that the
insurance is to be maintained. If a creditor
pays for residual-value insurance and absorbs
the payment as a cost of doing business, such
costs are not considered finance charges. (See
comment 4 (a)-2.)
Paragraphs 4(b)(7) and (8)
1. Preexisting insurance policy. The insurance
discussed in section 226.4(b)(7) and (8) does
not include an insurance policy (such as a life
or an automobile collision insurance policy)
that is already owned by the consumer, even if
the policy is assigned to or otherwise made
payable to the creditor to satisfy an insurance
requirement. Such a policy is not “written in
connection with” the transaction, as long as
the insurance was not purchased for use in
19

§ 226.4
that credit extension, since it was previously
owned by the consumer.
2. Insurance written after consummation. In
closed-end credit transactions, insurance sold
after consummation is not “written in connec­
tion with” the credit transaction if the insur­
ance is written because of the consumer’s de­
fault (for example, by failing to obtain or
maintain required property insurance) or be­
cause the consumer requests insurance after
consummation (although credit sale disclo­
sures may be required for the insurance if it is
financed).
3. Substitution o f life insurance. The premium
for a life insurance policy purchased and as­
signed to satisfy a credit life insurance re­
quirement must be included in the finance
charge, but only to the extent of the cost of
the credit life insurance if purchased from the
creditor or the actual cost of the policy (if
that is less than the cost of the insurance
available from the creditor). If the creditor
does not offer the required insurance, the pre­
mium to be included in the finance charge is
the cost of a policy of insurance of the type,
amount, and term required by the creditor.
4. Other insurance. Fees for required insur­
ance not of the types described in section
226.4(b)(7) and (8) are finance charges and
are not excludable. For example:
• The premium for a hospitalization insur­
ance policy, if it is required to be pur­
chased only in a credit transaction, is a
finance charge.
Paragraph 4(b)(9)
1. Discounts for payment by other than credit.
The discounts to induce payment by other
than credit mentioned in section 226.4(b) (9)
include, for example, the following situation:
• The seller of land offers individual tracts
for $10,000 each. If the purchaser pays
cash, the price is $9,000, but if the pur­
chaser finances the tract with the seller the
price is $10,000. The $1,000 difference is a
finance charge for those who buy the tracts
on credit.
2. Exception for cash discounts. Discounts of20

Regulation Z Commentary
fered to induce consumers to pay for property
or services by cash, check, or other means not
involving the use of either an open-end credit
plan or a credit card (whether open-end or
closed-end credit is extended on the card)
may be excluded from the finance charge un­
der section 167(b) of the act (as amended by
Pub. L. 97-25, July 27, 1981). The discount
may be in whatever amount the seller desires,
either as a percentage of the regular price (as
defined in section 103 (z) of the act, as amend­
ed) or a dollar amount. This provision applies
only to transactions involving an open-end
credit plan or a credit card. The merchant
must offer the discount to prospective buyers
whether or not they are cardholders or mem­
bers of the open-end credit plan. The mer­
chant may, however, make other distinctions.
For example:
• The merchant may limit the discount to
payment by cash and not offer it for pay­
ment by check or by use of a debit card.
• The merchant may establish a discount
plan that allows a 15 percent discount for
payment by cash, a 10 percent discount for
payment by check, and a 5 percent dis­
count for payment by a particular credit
card. None of these discounts is a finance
charge.
Section 171(c) of the act excludes section
167(b) discounts from treatment as a finance
charge or other charge for credit under any
state usury or disclosure laws.
3. Determination o f the regular price. The
“regular price” is critical in determining
whether the difference between the price
charged to cash customers and credit custom­
ers is a “discount” or a “surcharge,” as these
terms are defined in amended section 103 of
the act. The “regular price” is defined in sec­
tion 103 of the act as “the tag or posted price
charged for the property or service if a single
price is tagged or posted, or the price charged
for the property or service when payment is
made by use of an open-end credit account or
a credit card if either (1) no price is tagged or
posted, or (2) two prices are tagged or post­
ed. . . . ” For example, in the sale of motor ve­
hicle fuel, the tagged or posted price is the
price displayed at the pump. As a result, the

Regulation Z Commentary
higher price (the open-end credit or credit
card price) must be displayed at the pump,
either alone or along with the cash price. Serv­
ice station operators may designate separate
pumps or separate islands as being for either
cash or credit purchases and display only the
appropriate prices at the various pumps. If a
pump is capable of displaying on its meter ei­
ther a cash or a credit price depending upon
the consumer’s means of payment, both the
cash price and the credit price must be dis­
played at the pump. A service station operator
may display the cash price of fuel by itself on
a curb sign, as long as the sign clearly indi­
cates that the price is limited to cash
purchases.

4(c) Charges Excluded from the Finance
Charge
Paragraph 4(c)(1)
1. Application fees. An application fee that is
excluded from the finance charge is a charge
to recover the costs associated with processing
applications for credit. The fee may cover the
costs of services such as credit reports, credit
investigations, and appraisals. The creditor is
free to impose the fee in only certain of its
loan programs, such as mortgage loans. How­
ever, if the fee is to be excluded from the fi­
nance charge under section 226.4(c)(1), it
must be charged to all applicants, not just to
applicants who are approved or who actually
receive credit.

§ 226.4
each month? If not, the charge may be a
finance charge.
• The practices of the creditor in handling
the accounts. For example, regardless of
the terms of the account, does the creditor
allow consumers to pay the accounts over
a period of time without demanding pay­
ment in full or taking other action to col­
lect? If no effort is made to collect the full
amount due, the charge may be a finance
charge.
Section 226.4(c)(2) applies to late-payment
charges imposed for failure to make payments
as agreed, as well as failure to pay an account
in full when due.
2. Other excluded charges. Charges for “deliquency, default, or a similar occurrence” in­
clude, for example, charges for reinstatement
of credit privileges or for submitting as pay­
ment a check that is later returned unpaid.
Paragraph 4(c)(3)
1. Assessing interest on an overdraft balance.
A charge on an overdraft balance computed
by applying a rate of interest to the amount of
the overdraft is not a finance charge, even
though the consumer agrees to the charge in
the account agreement, unless the financial in­
stitution agrees in writing that it will pay such
items.
Paragraph 4(c)(4)

1. Late-payment charges.
Late-payment
charges can be excluded from the finance
charge under section 226.4(c) (2) whether or
not the person imposing the charge continues
to extend credit on the account or continues
to provide property or services to the consum­
er. In determining whether a charge is for ac­
tual unanticipated late payment on a 30-day
account, for example, factors to be considered
include:

1. Participation fees—periodic basis. The par­
ticipation fees mentioned in section
226.4(c) (4) do not necessarily have to be for­
mal membership fees, nor are they limited to
credit card plans. The provision applies to any
credit plan in which payment of a fee is a con­
dition of access to the plan itself, but it does
not apply to fees imposed separately on indi­
vidual closed-end transactions. The fee may
be charged on a monthly, annual, or other pe­
riodic basis; a one-time, non-recurring fee im­
posed at the time an account is opened is not a
fee that is charged on a periodic basis, and
may not be treated as a participation fee.

• The terms of the account. For example, is
the consumer required by the account
terms to pay the account balance in full

2. Participation fees—exclusions. Minimum
monthly charges, charges for non-use of a
credit card, and other charges based on either

Paragraph 4(c)(2)

21

Regulation Z Commentary

§ 226.4
account activity or the amount of credit avail­
able under the plan are not excluded from the
finance charge by section 226.4(c)(4). Thus,
for example, a fee that is charged and then
refunded to the consumer based on the extent
to which the consumer uses the credit avail­
able would be a finance charge. (See the com­
mentary to section 226.4(b)(2). Also, see
comment 14(c)-7 for treatment of certain
types of fees excluded in determining the an­
nual percentage rate for the periodic
statement.)
Paragraph 4(c)(5)
1. Seller’s points. The seller’s points men­
tioned in section 226.4(c)(5) include any
charges imposed by the creditor upon the
non-creditor seller of property for providing
credit to the buyer or for providing credit on
certain terms. These charges are excluded
from the finance charge even if they are
passed on to the buyer, for example, in the
form of a higher sales price. Seller’s points are
frequently involved in real estate transactions
guaranteed or insured by governmental agen­
cies. A “commitment fee” paid by a noncred­
itor seller (such as a real estate developer) to
the creditor should be treated as seller’s
points. Buyer’s points (that is, points charged
to the buyer by the creditor), however, are
finance charges.
2. Other seller-paid amounts. Mortgage insur­
ance premiums and other charges are some­
times paid at or before consummation or
settlement on the borrower’s behalf by a
noncreditor seller. In such cases, the creditor
should treat the payment made by the seller as
seller’s points and exclude it from the finance
charge. A creditor who gives disclosures be­
fore the payment has been made should base
them on the best information reasonably
available, as called for by the estimate provi­
sions of the regulation.

creditor must reduce the interest rate paid on
the deposit and, as a result, the consumer los­
es some of the interest that would otherwise
have been earned. Under section 226.4(c)(6), such “lost interest” need not be included
in the finance charge. This rule applies only to
an interest reduction imposed because a rate
differential is required by law and a usury lim­
it precludes compliance by any other means.
If the creditor imposes a differential that ex­
ceeds that required, only the lost interest at­
tributable to the excess amount is a finance
charge. (See the commentary to section
226.4(a).)
Paragraph 4(c)(7)
1. Real estate or residential mortgage transac­
tion charges. The list of charges in section
226.4(c) (7) applies both to residential mort­
gage transactions (which may include, for ex­
ample, the purchase of a mobile home) and to
other transactions secured by real estate. The
fees are excluded from the finance charge even
if the services for which the fees are imposed
are performed by the creditor’s employees
rather than by a third party. In addition, cred­
it report fees include not only the cost of the
report itself, but also the cost of verifying in­
formation in the report. If a lump sum is
charged for several services and includes a
charge that is not excludable, a portion of the
total should be allocated to that service and
included in the finance charge. A charge for a
lawyer’s attendance at the closing or a charge
for conducting the closing (for example, by a
title company) is excluded from the finance
charge if the charge is primarily for services
related to items listed in section 226.4(c)(7)
(for example, reviewing or completing docu­
ments), even if other incidental services, such
as explaining various documents or disbursing
funds for the parties, are performed. In all
cases, charges excluded under section
226.4(c)(7) must be bona fide and
reasonable.

Paragraph 4(c)(6)
1. Lost interest. Certain federal and state laws
mandate a percentage differential between the
interest rate paid on a deposit and the rate
charged on a loan secured by that deposit. In
some situations because of usury limits the
22

4(d) Insurance
1. General. Section 226.4(d) permits insur­
ance premiums and charges to be excluded
from the finance charge. The required disclo­
sures must be made in writing. The rules on

Regulation Z Commentary
location of insurance disclosures for closedend transactions are in section 226.17(a).
2. Timing o f disclosures. If disclosures are
given early, for example under section
226.17(f) or section 226.19(a), the creditor
need not redisclose if the actual premium is
different at the time of consummation. If in­
surance disclosures are not given at the time
of early disclosure and insurance is in fact
written in connection with the transaction, the
disclosures under section 226.4(d) must be
made in order to exclude the premiums from
the finance charge.
3. Premium rate increases. The creditor
should disclose the premium amount based on
the rates currently in effect and need not des­
ignate it as an estimate even if the premium
rates may increase. An increase in insurance
rates after consummation of a closed-end
credit transaction or during the life of an
open-end credit plan does not require redis­
closure in order to exclude the additional pre­
mium from treatment as a finance charge.
4. Unit-cost disclosures. One of the transac­
tions for which unit-cost disclosures (such as
50 cents per year for each $100 of the amount
financed) may be used in place of the total
insurance premium involves a particular kind
of insurance plan. For example, a consumer
with a current indebtedness of $8,000 is cov­
ered by a plan of credit life insurance coverage
with a maximum of $10,000. The consumer
requests an additional $4,000 loan to be cov­
ered by the same insurance plan. Since the
$4,000 loan exceeds, in part, the maximum
amount of indebtedness that can be covered
by the plan, the creditor may properly give
the insurance cost disclosures on the $4,000
loan on a unit-cost basis.
5. Required credit life insurance. Credit life,
accident, health, or loss-of-income insurance
must be voluntary in order for the premiums
or charges to be excluded from the finance
charge. Whether the insurance is in fact re­
quired or optional is a factual question. If the
insurance is required, the premiums must be
included in the finance charge, whether the
insurance is purchased from the creditor or
from a third party. If the only option the cred­
itor gives the consumer is to purchase credit

§ 226.4
life insurance from the creditor or to assign an
existing life insurance policy, and the consum­
er purchases the credit life insurance, the pre­
mium must be included in the finance charge.
(If the consumer assigns a preexisting policy
instead, no premium is included in the finance
charge. See the commentary to section
226.4(b)(7) and (8).)
6. Other types o f voluntary insurance. Insur­
ance is not credit life, accident, health, or lossof-income insurance if the creditor or the
credit account of the consumer is not the ben­
eficiary of the insurance coverage. If such in­
surance is not required by the creditor as an
incident to or a condition of credit, it is not
covered by section 226.4.
7. Signatures. If the creditor offers a number
of insurance options under section 226.4(d),
the creditor may provide a means for the con­
sumer to sign or initial for each option, or it
may provide for a single authorizing signature
or initial with the options selected designated
by some other means, such as a check mark.
The insurance authorization may be signed or
initialed by any consumer, as defined in sec­
tion 226.2(a) (11), or by an authorized user
on a credit card account.
8. Property insurance. To exclude property in­
surance premiums or charges from the finance
charge, the creditor must allow the consumer
to choose the insurer and disclose that fact.
This disclosure must be made whether or not
the property insurance is available from or
through the creditor. The requirement that an
option be given does not require that the in­
surance be readily available from other sourc­
es. The premium or charge must be disclosed
only if the consumer elects to purchase the
insurance from the creditor; in such a case,
the creditor must also disclose the term of the
property insurance coverage if it is less than
the term of the obligation.
9. Single-interest insurance. Blanket and spe­
cific single-interest coverage are treated the
same for purposes of the regulation. A charge
for either type of single-interest insurance may
be excluded from the finance charge if:
• The insurer
subrogation

waives

any

right

of
23

§ 226.4
•

The other requirements of section
226.4(d)(2) are met. This includes, of
course, giving the consumer the option of
obtaining the insurance from a person of
the consumer’s choice. The creditor need
not ascertain whether the consumer is able
to purchase the insurance from someone
else.

10. Single-interest insurance defined. The
term “‘single-interest insurance” as used in the
regulation refers only to the types of coverage
traditionally included in the term “vendor’s
single-interest insurance” (or “VSI”), that is,
protection of tangible property against normal
property damage, concealment, confiscation,
conversion, embezzlement, and skip. Some
comprehensive insurance policies may include
a variety of additional coverages, such as re­
possession insurance and holder-in-due-course
insurance. These types of coverage do not
constitute single-interest insurance for pur­
poses of the regulation, and premiums for
them do not qualify for exclusion from the
finance charge under section 226.4(d). If a
policy that is primarily VSI also provides cov­
erages that are not VSI or other property in­
surance, a portion of the premiums must be
allocated to the nonexcludable coverages and
included in the finance charge. However, such
allocation is not required if the total premium
in fact attributable to all of the non-VSI cov­
erages included in the policy is $1.00 or less
(or $5.00 or less in the case of a multiyear
policy).
11. Initial term. The initial term of insurance
coverage determines the period for which a
premium amount must be disclosed. In some
cases the initial term is clear, for example, a
property insurance policy on an automobile
written for one year (even though the term of
the credit transaction is four years) or a credit
life insurance policy for the term of the credit
transaction purchased by paying or financing
a single premium. In other cases, however, it
may not be clear what the initial term of the
insurance is, for example, when the consumer
agrees to pay a premium that is assessed peri­
odically and the consumer is under no obliga­
tion to continue making the payments. In
cases such as this, the cost disclosure may be
made on the basis of a premium for one year
24

Regulation Z Commentary
of insurance coverage. The premium must be
clearly labeled as being for one year.
12. Loss-of-income insurance. The loss-ofincome insurance mentioned in section
226.4(d) includes involuntary unemployment
insurance, which provides that some or all of
the consumer’s payments will be made if the
consumer becomes unemployed involuntarily.

4(e) Certain Security Interest Charges
1. Examples. Examples of charges excludable
from the finance charge under section
226.4(e)(1) include:
• Charges for filing or recording security
agreements, mortgages, continuation state­
ments, termination statements, and similar
documents
• Stamps evidencing payment of taxes on
property if the stamps are required to file a
security agreement on the property
Only sums actually paid to public officials are
excludable under section 226.4(e)(1).
2. Itemization. The various charges described
in section 226.4(e)(1) may be totaled and
disclosed as an aggregate sum, or they may be
itemized by the specific fees and taxes im­
posed. If an aggregate sum is disclosed, a gen­
eral term such as security interest fees or “fil­
ing fees” may be used.
3. Notary fees. In order for a notary fee to be
excluded under section 226.4(e)(1), all of the
following conditions must be met:
• The document to be notarized is one used
to perfect, release, or continue a security
interest.
• The document is required by law to be
notarized.
• A notary is considered a public official un­
der applicable law.
• The amount of the fee is set or authorized
by law.
4. Nonfiling insurance. The exclusion in sec­
tion 226.4(e)(2) is available only if nonfiling
insurance is purchased. If the creditor collects
and simply retains a fee as a sort of “self-insurance” against nonfiling, it may not be ex­
cluded from the finance charge. If the nonfil­
ing insurance premium exceeds the amount of

Regulation Z Commentary
the fees excludable from the finance charge
under section 226.4(e)(1), only the excess is
a finance charge. For example:
• The fee for perfecting a security interest is
$5.00 and the fee for releasing the security
interest is $3.00. The creditor charges
$10.00 for nonfiling insurance. Only $8.00
of the $10.00 is excludable from the fi­
nance charge.

4 (0 Prohibited Offsets
1. Earnings on deposits or investments. The
rule that the creditor shall not deduct any
earnings by the consumer on deposits or in­
vestments applies whether or not the creditor
has a security interest in the property.

References
Statute: §§ 106, 167, and 171(c)
Other sections: §§ 226.9(d) and 226.12
Previous regulation: § 226.4 and interpreta­
tions §§ 226.401 through 226.407.
1981 changes: While generally continuing the
rules under the previous regulation, section
226.4 reflects amendments to section 106 of
the act and makes certain other changes in the
rules for determining the finance charge. For
example, section 226.4(a) expressly excludes
from the finance charge amounts payable in
comparable cash transactions. Section
226.8 (o) of the previous regulation, dealing
with discounts for prompt payment of a credit
sale, was deleted in the revised regulation
since the general test for a finance charge now
focuses on a comparison of cash and credit
transactions. With respect to various exclu­
sions from the finance charge: application fees
imposed on all applicants are no longer fi­
nance charges, continuing to extend credit to
a consumer is no longer a controlling test for
determining whether a late payment charge is
bona fide, seller’s points are not to be included
in the finance charge, and the special exclu­
sions for real estate transactions apply to all
“residential mortgage transactions.”
The simplified rules for excluding insurance
from the finance charge allow unit-cost disclo­
sure in certain closed-end credit transactions,
permit initials as well as signatures on the au­
thorization, permit any consumer to authorize

§ 226.5
insurance for other consumers, and delete the
requirement that the authorization be sepa­
rately dated.

SUBPART B—OPEN-END CREDIT
SECTION 226.5—General Disclosure
Requirements
5(a) Form of Disclosures
Paragraph 5(a)(1)
1. Clear and conspicuous. The “clear and con­
spicuous” standard requires that disclosures
be in a reasonably understandable form. It
does not require that disclosures be segregated
from other material or located in any particu­
lar place on the disclosure statement, or that
numerical amounts or percentages be in any
particular type size. The standard does not
prohibit:
• Pluralizing required terminology (“fi­
nance charge” and “annual percentage
rate”)
• Adding to the required disclosures such
items as contractual provisions, explana­
tions of contract terms, state disclosures,
and translations
• Sending promotional material with the re­
quired disclosures
• Using commonly accepted or readily un­
derstandable abbreviations (such as “mo.”
for “month” or “Tx.” for “Texas”) in
making any required disclosures
• Using codes or symbols such as “APR”
(for annual percentage rate), “FC” (for
finance charge), or “Cr” (for credit bal­
ance), so long as a legend or description of
the code or symbol is provided on the dis­
closure statement
2. Integrated document. The creditor may
make both the initial disclosures (§ 226.6)
and the periodic statement disclosures (§
226.7) on more than one page, and use both
the front and the reverse sides, so long as the
pages constitute an integrated document. An
integrated document would not include dis­
closure pages provided to the consumer at dif25

§ 226.5
ferent times or disclosures interspersed on the
same page with promotional material. An in­
tegrated document would include, for
example:
• Multiple pages provided in the same enve­
lope that cover related material and are
folded together, numbered consecutively,
or clearly labelled to show that they relate
to one another
• A brochure that contains disclosures and
explanatory material about a range of
services the creditor offers, such as credit,
checking account, and electronic fund
transfer features
Paragraph 5(a)(2)
1. When disclosures must be “more conspicu­
ous. ” The terms “finance charge” and “annual
percentage rate”, when required to be used
with a number, must be disclosed more con­
spicuously than other required disclosures, ex­
cept in the two cases provided in footnote 9.
At the creditor’s option, “finance charge” and
“annual percentage rate” may also be dis­
closed more conspicuously than the other re­
quired disclosures even when the regulation
does not so require. The following examples
illustrate these rules:
• In disclosing the annual percentage rate as
required by section 226.6(a)(2), the term
“annual percentage rate” is subject to the
“more conspicuous” rule.
• In disclosing the amount of the finance
charge, required by section 226.7(f), the
term “finance charge” is subject to the
“more conspicuous” rule.
• Although neither “finance charge” nor
“annual percentage rate” need be empha­
sized when used as part of general infor­
mational material or in textual descrip­
tions of other terms, emphasis is permissi­
ble in such cases. For example, when the
terms appear as part of the explanations
required under section 226.6(a)(3) and
(4), they may be equally conspicuous as
the disclosures required under sections
226.6(a)(2) and 226.7(g).
2. Making disclosures more conspicuous. In
disclosing the terms “finance charge” and
“annual percentage rate” more conspicuously,
26

Regulation Z Commentary
only the words “finance charge” and “annual
percentage rate” should be accentuated. For
example, if the term “total finance charge” is
used, only “finance charge” should be empha­
sized. The disclosures may be made more con­
spicuous by, for example:
• Capitalizing the words when other disclo­
sures are printed in lower case
• Putting them in bold print or a contrasting
color
• Underlining them
• Setting them off with asterisks
• Printing them in larger type
3. Disclosure o f figures—exception to “more
conspicuous” rule. The terms “annual percent­
age rate” and “finance charge” need not be
more conspicuous than figures (including, for
example, numbers, percentages, and dollar
signs).

5(b) Time of Disclosures
5(b)(1) Initial disclosures
1. Disclosure before the first transaction. The
rule that the initial disclosure statement must
be furnished “before the first transaction” re­
quires delivery of the initial disclosure state­
ment before the consumer becomes obligated
on the plan. For example, the initial disclo­
sures must be given before the consumer
makes the first purchase, receives the first ad­
vance, or pays any fees or charges under the
plan other than an application fee or refunda­
ble membership fee (see below).
• If the consumer pays a membership fee be­
fore receiving the Truth in Lending disclo­
sures, or the consumer agrees to the impo­
sition of a membership fee at the time of
application and the Truth in Lending dis­
closure statement is not given at that time,
disclosures are timely as long as the con­
sumer, after receiving the disclosures, can
reject the plan. The creditor must refund
the membership fee if it has been paid, or
clear the account if it has been debited to
the consumer’s account.
• If the consumer receives a cash advance
check at the same time the Truth in Lend­
ing disclosures are provided, disclosures
are still timely if the consumer can, after

Regulation Z Commentary

§ 226.5

receiving the disclosures, return the cash
advance check to the creditor without ob­
ligation (for example, without paying fi­
nance charges).
• Initial disclosures need not be given before
the imposition of an application fee under
section 226.4(c)(1).
• If, after receiving the disclosures, the con­
sumer uses the account, pays a fee, or ne­
gotiates a cash advance check, the creditor
may consider the account not rejected for
purposes of this section.

ble. If a new address is provided, however,
within a reasonable time before the credi­
tor must send a statement, the creditor
must resume sending statements. Receiv­
ing the address at least 20 days before the
end of a cycle would be a reasonable
amount of time to prepare the statement
for that cycle. For example, if an address
is received 22 days before the end of the
June cycle, the creditor must send the pe­
riodic statement for the June cycle. (See
section 226.13 (a) (7).)

2. Reactivation o f suspended account. If an ac­
count is temporarily suspended (for example,
because the consumer has exceeded a credit
limit, or because a credit card is reported lost
or stolen) and then is reactivated, no new ini­
tial disclosures are required.

2. Termination o f credit privileges. When an
open-end account is terminated without being
converted to closed-end credit under a written
agreement, the creditor must continue to pro­
vide periodic statements to those consumers
entitled to receive them under section
226.5(b) (2) (i) (for example, when an openend credit plan ends and consumers are pay­
ing off outstanding balances) and must con­
tinue to follow all of the other open-end credit
requirements and procedures in subpart B.

3. Reopening closed account. If an account
has been closed (for example, due to inactivi­
ty, cancellation, or expiration) and then is re­
opened, new initial disclosures are required.
No new initial disclosures are required, how­
ever, when the account is closed merely to as­
sign it a new number (for example, when a
credit card is reported lost or stolen) and the
“new” account then continues on the same
terms.
4. Converting closed-end to open-end credit. If
a closed-end credit transaction is converted to
an . open-end credit account under a written
agreement with the consumer, the initial dis­
closures under section 226.6 must be given be­
fore the consumer becomes obligated on the
open-end credit plan. (See the commentary to
section 226.17 on converting open-end credit
to closed-end credit.)
5(b)(2) Periodic Statements
Paragraph 5(b)(2)(i)
1. Periodic statements not required. Periodic
statements need not be sent in the following
cases:
• If the creditor adjusts an account balance
so that at the end of the cycle the balance
is less than $1—so long as no finance
charge has been imposed on the account
for that cycle
• If a statement was returned as undelivera­

Paragraph 5(b)(2)(ii)
1. 14-day rule. The 14-day rule for mailing or
delivering periodic statements does not apply
if charges (for example, transaction or activi­
ty charges) are imposed regardless of the tim­
ing of a periodic statement. The 14-day rule
does apply, for example:
• If current debits retroactively become sub­
ject to finance charges when the balance is
not paid in full by a specified date
• If charges other than finance charges will
accrue when the consumer does not make
timely payments (for example, late pay­
ment charges or charges for exceeding a
credit limit)
2. Computer malfunction. Footnote 10 does
not extend to the failure to provide a periodic
statement because of computer malfunction.
3. Calling for periodic statements. The credi­
tor may permit consumers to call for their pe­
riodic statements but may not require them to
do so. If the consumer wishes to pick up the
statement and the plan has a free-ride period,
the statement must be made available in ac­
cordance with the 14-day rule.
27

Regulation Z Commentary

§ 226.5

5(c) Basis of Disclosures and Use of
Estimates

5(d) Multiple Creditors; Multiple
Consumers

1. Legal obligation. The disclosures should re­
flect the credit terms to which the parties are
legally bound at the time of giving the
disclosures.

1. Multiple creditors. Under section 226.5(d):

• The legal obligation is determined by ap­
plicable state or other law.
• The fact that a term or contract may later
be deemed unenforceable by a court on the
basis of equity or other grounds does not,
by itself, mean that disclosures based on
that term or contract did not reflect the
legal obligation.
• The legal obligation normally is presumed
to be contained in the contract that evi­
dences the agreement. But this may be re­
butted if another agreement between the
parties legally modifies that contract.
2. Estimates—obtaining information. Disclo­
sures may be estimated when the exact infor­
mation is unknown at the time disclosures are
made. Information is unknown if it is not rea­
sonably available to the creditor at the time
disclosures are made. The “reasonably avail­
able” standard requires that the creditor, act­
ing in good faith, exercise due diligence in ob­
taining information. In using estimates, the
creditor is not required to disclose the basis
for the estimated figures, but may include
such explanations as additional information.
The creditor normally may rely on the repre­
sentations of other parties in obtaining infor­
mation. For example, the creditor might look
to insurance companies for the cost of
insurance.
3. Estimates—redisclosure. If the creditor
makes estimated disclosures, redisclosure is
not required for that consumer, even though
more accurate information becomes available
before the first transaction. For example, in an
open-end plan to be secured by real estate, the
creditor may estimate the appraisal fees to be
charged; such an estimate might reasonably
be based on the prevailing market rates for
similar appraisals. If the exact appraisal fee is
determinable after the estimate is furnished
but before the consumer receives the first ad­
vance under the plan, no new disclosure is
necessary.
28

• Creditors must choose which of them will
make the disclosures
• A single, complete set of disclosures must
be provided, rather than partial disclo­
sures from several creditors
• All disclosures for the open-end credit
plan must be given, even if the disclosing
creditor would not otherwise have been
obligated to make a particular disclosure
2. Multiple consumers. Disclosures may be
made to either obligor on a joint account. Dis­
closure responsibilities are not satisfied by giv­
ing disclosures to only a surety or guarantor
for a principal obligor or to an authorized
user. In rescindable transactions, however,
separate disclosures must be given to each
consumer who has the right to rescind under
section 226.15.

5(e) Effect of Subsequent Events
1. Events causing inaccuracies. Inaccuracies
in disclosures are not violations if attributable
to events occurring after disclosures are made.
For example, when the consumer fails to ful­
fill a prior commitment to keep the collateral
insured and the creditor then provides the
coverage and charges the consumer for it,
such a change does not make the original dis­
closures inaccurate. The creditor may, howev­
er, be required to provide a new disclosure(s)
under section 226.9(c).
2. Use o f inserts. When changes in a creditor’s
plan affect required disclosures, the creditor
may use inserts with outdated disclosure
forms. Any insert:
• Should clearly refer to the disclosure pro­
vision it replaces
• Need not be physically attached or affixed
to the basic disclosure statement
• May be used only until the supply of out­
dated forms is exhausted

References
Statute: §§ 121(a) through (c), 122(a) and
(b), 124, 127(a) and (b), and 163(a)

Regulation Z Commentary

§ 226.6

Other sections: §§ 226.6, 226.7, and 226.9
Previous regulation: §§ 226.6(a) and (c)
through (g), and 226.7(a) through (c)
1981 changes: Section 226.5 implements
amendments to the act and reflects several
simplifying changes to the regulation. The use
of required terminology, except for “finance
charge” and “annual percentage rate,” is no
longer required. Type size requirements have
been deleted. Initial and periodic statement
disclosures may be multipage, so long as they
constitute an integrated statement. New rules
are provided for the basis of disclosures and
for the use of estimates. The rules for credit
plans involving multiple creditors or multiple
consumers now provide that only one creditor
need make the disclosures and that the disclo­
sures need be made to only one primarily lia­
ble consumer.

disclose a specific date. For example, a disclo­
sure that the consumer has 30 days from the
closing date to pay the new balance before fi­
nance charges will accrue on the account
would describe when finance charges begin to
run.

SECTION 226.6—Initial Disclosure
Statement

Paragraph 6(a)(2)

1. Consistent terminology. Language on the
initial and periodic disclosure statements must
be close enough in meaning to enable the con­
sumer to relate the two sets of disclosures;
however, the language need not be identical.
For example, in making the disclosure under
section 226.6(a)(3), the creditor may refer to
the “outstanding balance at the end of the bill­
ing cycle,” while the disclosure for section
226.7 (i) refers to the “ending balance” or
“new balance.”
2. Separate initial disclosures permitted. In a
certain open-end credit program involving
more than one creditor—a card issuer of travel-and-entertainment cards and a financial in­
stitution—the consumer has the option to pay
the card issuer directly or to transfer to the
financial institution all or part of the amount
owing. In this case, the creditors may send
separate initial disclosure statements.

6(a) Finance Charge
Paragraph 6(a)(1)
1. When finance charges accrue. Creditors
may provide a general explanation about fi­
nance charges beginning to run and need not

2. Free-ride periods. In disclosing whether or
not a free-ride period exists, the creditor need
not use “free period,” “free-ride period,” or
any other particular descriptive phrase or
term. For example, a statement that “the fi­
nance charge begins on the date the transac­
tion is posted to your account” adequately
discloses that no free-ride period exists. In the
same fashion, a statement that “finance
charges will be imposed on any new purchases
only if they are not paid in full within 25 days
after the close of the billing cycle” indicates
that a free-ride period exists in the interim.

1. Range o f balances. The range of balances
disclosure is inapplicable:
• If only one periodic rate may be applied to
the entire account balance
• If only one periodic rate may be applied to
the entire balance for a feature (for exam­
ple, cash advances), even though the bal­
ance for another feature (purchases) may
be subject to two rates (a 1.5 percent peri­
odic rate on purchase balances of $0-$500,
while balances above $500 are subject to a
1 percent periodic rate). Of course, the
creditor must give a range of balances dis­
closure for the purchase feature.
2. Variable-rate disclosures—coverage. This
section covers open-end credit plans under
which rate changes are part of the plan and
are tied to an index or formula. A creditor
would use variable-rate disclosures (and thus
be excused from the requirement of giving a
change-in-terms notice when rate increases
occur as disclosed) for plans involving rate
changes such as the following:
• Rate changes that are tied to the rate the
creditor pays on its six-month money mar­
ket certificates
• Rate changes that are tied to Treasury bill
rates
29

§ 226.6
• Rate changes that are tied to changes in
the creditor’s commercial lending rate
In contrast, the creditor’s contract reservation
to increase the rate without reference to such
an index or formula (for example, a plan that
simply provides that the creditor reserves the
right to raise its rates) would not be consid­
ered a variable-rate plan for Truth in Lending
disclosure purposes. Moreover, an open-end
credit plan in which the employee receives a
lower rate contingent upon employment (that
is, with the rate to be increased upon termina­
tion of employment) is not a variable-rate
plan. (With regard to such employee preferential-rate plans, however, see comment 9(c)1, which provides that if the specific change
that would occur is disclosed on the initial
disclosure statement, no notice of a change in
terms need be given when the term later
changes as disclosed.)
3. Variable-rate plan—rate(s) in effect In dis­
closing the rate(s) in effect at the time of the
initial disclosures (as is required by section
226.6(a)(2)), the creditor may use an insert
showing the current rate; may give the rate as
of a specified date and then update the disclo­
sure from time to time, for example, each cal­
endar month; or may disclose an estimated
rate under section 226.5(c).
4. Variable-rate plan—additional disclosures
required. In addition to disclosing the rates in
effect at the time of the initial disclosures, the
disclosures under footnote 12 also must be
made.
5. Variable-rate plan—index. The index to be
used must be clearly identified; the creditor
need not give, however, an explanation of how
the index is determined or provide instruc­
tions for obtaining it.
6. Variable-rate plan— circumstances for in­
crease. Circumstances under which the
rate(s) may increase include, for example:
• An increase in the Treasury bill rate
• An increase in the Federal Reserve dis­
count rate
The creditor must disclose when the increase
will take effect; for example:
• “An increase will take effect on the day
30

Regulation Z Commentary
that the Treasury bill rate increases,” or
• “An increase in the Federal Reserve dis­
count rate will take effect on the first day
of the creditor’s billing cycle.”
7. Variable-rate plan— limitations on increase.
In disclosing any limitations on rate increases,
limitations such as the maximum increase per
year or the maximum increase over the dura­
tion of the plan must be disclosed. When there
are no limitations, the creditor may, but need
not, disclose that fact. (A maximum interest
rate must be included in dwelling-secured
open-end credit plans under which the inter­
est rate may be changed. See section 226.30
and the commentary to that section.) Legal
limits such as usury or rate ceilings under
state or federal statutes or regulations need
not be disclosed. Examples of limitations that
must be disclosed include:
• “The rate on the plan will not exceed 25
percent annual percentage rate.”
• “Not more than \ percent increase in the
annual percentage rate per year will
occur.”
8. Variable-rate plan— effects o f increase. Ex­
amples of effects that must be disclosed
include:
• Any requirement for additional collateral
if the annual percentage rate increases be­
yond a specified rate
• Any increase in the scheduled minimum
periodic payment amount
9. Variable-rate plan—change-in-terms notice
not required. No notice of a change in terms is
required for a rate increase under a variablerate plan as defined in comment 6(a)(2)-2.
10. Discounted variable-rate plans. In some
variable-rate plans, creditors may set an initial
interest rate that is not determined by the in­
dex or formula used to make later interest rate
adjustments. Typically, this initial rate is low­
er than the rate would be if it were calculated
using the index or formula.
• For example, a creditor may calculate in­
terest rates according to a formula using
the six-month Treasury bill rate plus a 2
percent margin. If the current Treasury
bill rate is 10 percent, the creditor may

Regulation Z Commentary
forgo the 2 percent spread and charge only
10 percent for a limited time, instead of
setting an initial rate of 12 percent, or the
creditor may disregard the index or formu­
la and set the initial rate at 9 percent.
• When creditors use an initial rate that is
not calculated using the index or formula
for later rate adjustments, the initial dis­
closure statement should reflect: (1) the
initial rate (expressed as a periodic rate
and a corresponding annual percentage
rate), together with a statement of how
long it will remain in effect; (2) the cur­
rent rate that would have been applied us­
ing the index or formula (also expressed as
a periodic rate and a corresponding annual
percentage rate); and (3) the other vari­
able-rate information required by footnote
12 to section 226.6(a)(2).
• In disclosing the current periodic and an­
nual percentage rates that would be ap­
plied using the index or formula, the credi­
tor may use any of the disclosure options
described in comment 6(a) (2)-3.
Paragraph 6(a)(3)
1. Explanation o f balance computation meth­
od. A shorthand phrase such as “previous bal­
ance method” does not suffice in explaining
the balance computation method. (See appen­
dix G-l for model clauses.)
2. Allocation o f payments. Disclosure about
the allocation of payments and other credits is
not required. For example, the creditor need
not disclose that payments are applied to late
charges, overdue balances, and finance
charges before being applied to the principal
balance; or in a multifeatured plan, that pay­
ments are applied first to finance charges, then
to purchases, and then to cash advances. (See
comment 7-1 for definition of multifeatured
plan.)
Paragraph 6(a)(4)
1. Finance charges. In addition to disclosing
the periodic rate(s) under section 226.6(a)(2), disclosure is required of any other type of
finance charge that may be imposed, such as
minimum, fixed, transaction, and activity
charges; required insurance; or appraisal or

§ 226.6
credit report fees (unless excluded from the
finance charge under section 226.4(c)(7).)

6(b) Other Charges
1. General; examples o f other charges. Under
section 226.6(b), significant charges related to
the plan (that are not finance charges) must
also be disclosed. For example:
• Late payment and over-the-credit-limit
charges
• Fees for providing documentary evidence
of transactions requested under section
226.13 (billing-error resolution)
• Charges imposed in connection with real
estate transactions such as title, appraisal,
and credit-report fees (See section
226.4(c)(7).)
• A tax imposed on the credit transaction by
a state or other governmental body, such
as a documentary stamp tax on cash ad­
vances (See the commentary to section
226.4(a).)
• Membership or participation fees for a
package of services that includes an openend credit feature, unless the fee is re­
quired whether or not the open-end credit
feature is included. For example, a mem­
bership fee to join a credit union would
not be an “other charge,” even if member­
ship is required to apply for credit.
• Automated teller machine (ATM)
charges described in comment 4(a)-5 that
are not finance charges
2. Exclusions. The following are examples of
charges that are not “other charges”:
• Fees charged for documentary evidence of
transactions for income tax purposes
• Amounts payable by a consumer for col­
lection activity after default; attorney’s
fees, whether or not automatically im­
posed; foreclosure costs; post-judgment in­
terest rates imposed by law; and reinstate­
ment or reissuance fees
• Premiums for voluntary credit life or dis­
ability insurance, or for property insur­
ance, that are not part of the finance
charge
• Application fees under section 226.4(c)( 1)
31

Regulation Z Commentary

§ 226.6
• A monthly service charge for a checking
account with overdraft protection that is
applied to all checking accounts, whether
or not a credit feature is attached
• Charges for submitting as payment a
check that is later returned unpaid (see
commentary to section 226.4(c)(2)
• Charges imposed on a cardholder by an
institution other than the card issuer for
the use of the other institution’s ATM in a
shared or interchange system (See also
comment 7(b)-2.)
• Taxes and filing or notary fees excluded
from the finance charge under section
226.4(e)

6(c) Security Interests
1. General. Disclosure is not required about
the type of security interest, or about the cred­
itor’s rights with respect to that collateral. In
other words, the creditor need not expand on
the term “security interest.” Also, since no
specified terminology is required, the creditor
may designate its interests by using, for exam­
ple, “pledge,” “lien,” or “mortgage” (instead
of “security interest”).
2. Identification o f property. Identification of
the collateral by type is satisfied by stating, for
example, “motor vehicle” or “household ap­
pliances.” (Creditors should be aware, howev­
er, that the federal credit practices rules, as
well as some state laws, prohibit certain secu­
rity interests in household goods.) The credi­
tor may, at its option, provide a more specific
identification (for example, a model and serial
number.)
3. Spreader clause. The fact that collateral for
preexisting credit extensions with the institu­
tion is being used to secure the present obliga­
tion constitutes a security interest and must be
disclosed. (Such security interests may be
known as “spreader” or “dragnet” clauses, or
as “cross-collateralization” clauses.) A specif­
ic identification of that collateral is unneces­
sary, but a reminder of the interest arising
from the prior indebtedness is required. This
may be accomplished by using language such
as “collateral securing other loans with us
may also secure this loan.” At the creditor’s
32

option, a more specific description of the
property involved may be given.
4. Additional collateral. If collateral is re­
quired when advances reach a certain amount,
the creditor should disclose the information
available at the time of the initial disclosures.
For example, if the creditor knows that a se­
curity interest will be taken in household
goods if the consumer’s balance exceeds
$1,000, the creditor should disclose accord­
ingly. If the creditor knows that security will
be required if the consumer’s balance exceeds
$1,000, but the creditor does not know what
security will be required, the creditor must
disclose on the inital disclosure statement that
security will be required if the balance exceeds
$1,000, and the creditor must provide a
change-in-terms notice under section 226.9(c)
at the time the security is taken. (See com­
ment 6(c)-2.)
5. Collateral from third party. In certain situ­
ations, the consumer’s obligation may be se­
cured by collateral belonging to a third party.
For example, an open-end credit plan may be
secured by an interest in property owned by
the consumer's parents. In such cases, the se­
curity interest is taken in connection with the
plan and must be disclosed, even though the
property encumbered is owned by someone
other than the consumer.

6(d) Statement of Billing Rights
See the commentary to appendix G-3.

References
Statute: § 127(a)
Other sections: §§ 226.4, 226.5, 226.7, 226.9,
226.14, and appendix G
Previous regulation: § 226.7(a) and interpre­
tation § 226.706
1981 changes: Section 226.6 implements the
amended statute which requires disclosure of
the fact that no free period exists. Disclosures
about the minimum periodic payment and the
Comparative Index of Credit Cost have been
eliminated. The security interest disclosures
have been simplified. “Other charges” no
longer include voluntary credit life or disabili­
ty insurance, required property insurance pre­
miums, default charges, or fees for collection

Regulation Z Commentary
activity. Disclosures for variable rate plans are
now required by the regulation, replacing in­
terpretation section 226.707. The regulation
no longer specifies the exact language to be
used for the billing rights notice; creditors
may use any version “substantially similar” to
the one in appendix G.

SECTION 226.7—Periodic Statement
1. Multifeatured plans. Some plans involve a
number of different features, such as purchas­
es, cash advances, or overdraft checking.
Groups of transactions subject to different fi­
nance charge terms because of the dates on
which the transactions took place are treated
like different features for purposes of disclo­
sures on the periodic statements. The com­
mentary includes some special rules for multi­
featured plans.
2. Separate periodic statements permitted. In a
certain open-end credit program involv­
ing more than one creditor—a card issuer of
travel-and-entertainment cards and a financial
institution—the consumer has the option to
pay the card issuer directly or to transfer to
the financial institution all or part of the
amount owing. In this case, the creditors may
send separate periodic statements that reflect
the separate obligations owed to each.

7 (a) Previous Balance
1. Credit balances. If the previous balance is a
credit balance, it must be disclosed in such a
way so as to inform the consumer that it is a
credit balance, rather than a debit balance.
2. Multifeatured plans. In a multifeatured
plan, the previous balance may be disclosed
either as an aggregate balance for the account
or as separate balances for each feature (for
example, a previous balance for purchases and
a previous balance for cash advances). If sep­
arate balances are disclosed, a total previous
balance is optional.
3. Accrued finance charges allocated from
payments. Some open-end credit plans provide
that the amount of the finance charge that has
accrued since the consumer’s last payment is
directly deducted from each new payment,

§ 226.7
rather than being separately added to each
statement and reflected as an increase in the
obligation. In such a plan, the previous bal­
ance need not reflect finance charges accrued
since the last payment.

7(b) Identification of Transactions
1. Multifeatured plans. In identifying transac­
tions under section 226.7(b) for multifeatured
plans, creditors may, for example, choose to
arrange transactions by feature (such as dis­
closing sale transactions separately from cash
advance transactions) or in some other clear
manner, such as by arranging the transactions
in general chronological order.
2. Automated teller machine (ATM) charges
imposed by other institutions in shared or inter­
change systems. A charge imposed on the
cardholder by an institution other than the
card issuer for the use of the other institu­
tion’s ATM in a shared or interchange system
and included by the terminal-operating insti­
tution in the amount of the transaction need
not be separately disclosed on the periodic
statement.

7(c) Credits
1. Identification—sufficiency. The creditor
need not describe each credit by type (re­
turned merchandise, rebate of finance charge,
etc.)—“credit” would suffice—except if the
creditor is using the periodic statement to sat­
isfy the billing-error correction notice require­
ment. (See the commentary to section
226.13(e) and (0 0
2. Format. A creditor may list credits relating
to credit extensions (payments, rebates, etc.)
together with other types of credits (such as
deposits to a checking account), as long as the
entries are identified so as to inform the con­
sumer which type of credit each entry
represents.
3. Date. If only one date is disclosed (that is,
the crediting date as required by the regula­
tion), no further identification of that date is
necessary. More than one date may be dis­
closed for a single entry, as long as it is clear
which date represents the date on which cred­
it was given.
33

Regulation Z Commentary

§ 226.7
4. Totals. Where the creditor lists the credits
made to the account during the billing cycle,
the creditor need not disclose total figures for
the amounts credited.

7(d) Periodic Rates
1. Disclosure o f periodic rates—whether or not
actually applied. Any periodic rate that may
be used to compute finance charges (and its
corresponding annual percentage rate) must
be disclosed whether or not it is applied dur­
ing the billing cycle. For example:
• If the consumer’s account has both a pur­
chase feature and a cash advance feature,
the creditor must disclose the rate for
each, even if the consumer only makes
purchases on the account during the bill­
ing cycle.
• If the rate varies (such as when it is tied to
a particular index), the creditor must dis­
close each rate in effect during the cycle
for which the statement was issued.
2. Disclosure o f periodic rates required only if
imposition possible. With regard to the period­
ic rate disclosure (and its corresponding an­
nual percentage rate), only rates that could
have been imposed during the billing cycle re­
flected on the periodic statement need to be
disclosed. For example:
• If the creditor is changing rates effective
during the next billing cycle (either be­
cause it is changing terms or because of a
variable-rate plan), the rates required to
be disclosed under section 226.7(d) are
only those in effect during the billing cycle
reflected on the periodic statement. For
example, if the monthly rate applied dur­
ing May was 1.5 percent, but the creditor
will increase the rate to 1.8 percent effec­
tive June 1, 1.5 percent (and its corre­
sponding annual percentage rate) is the
only required disclosure under section
226.7(d) for the periodic statement re­
flecting the May account activity.
• If the consumer has an overdraft line that
might later be expanded upon the consum­
er’s request to include secured advances,
the rates for the secured advance feature
need not be given until such time as the

consumer has requested and received ac­
cess to the additional feature.
• If rates applicable to a particular type of
transaction changed after a certain date
and the old rate is only being applied to
transactions that took place prior to that
date, the creditor need not continue to dis­
close the old rate for those consumers that
have no outstanding balances to which
that rate could be applied.
3. Multiple rates—same transaction. If two or
more periodic rates are applied to the same
balance for the same type of transaction (for
example, if the finance charge consists of a
monthly periodic rate of 1.5 percent applied
to the outstanding balance and a required
credit life insurance component calculated at
0.1 percent per month on the same outstand­
ing balance), the creditor may do either of the
following:
• Disclose each periodic rate, the range of
balances to which it is applicable, and the
corresponding annual percentage rate for
each (for example, 1.5 percent monthly,
18 percent annual percentage rate; 0.1 per­
cent monthly, 1.2 percent annual percent­
age rate)
• Disclose one composite periodic rate (that
is, 1.6 percent per month) along with the
applicable range of balances and corre­
sponding annual percentage rate
4. Corresponding annual percentage rate. In
disclosing the annual percentage rate that cor­
responds to each periodic rate, the creditor
may use “corresponding annual percentage
rate,” “nominal annual percentage rate,”
“corresponding nominal annual percentage
rate,” or similar phrases.
5. Rate same as actual annual percentage
rate. When the corresponding rate is the same
as the actual annual percentage rate (histori­
cal rate) required to be disclosed (§
226.7(g)), the creditor need disclose only one
annual percentage rate, but must use the
phrase “annual percentage rate.”
6. Ranges o f balances. See comment 6(a)( 2 ) 1.

Regulation Z Commentary
7 (e) Balance on W hich Finance Charge
Computed
1. Limitation to periodic rates. Section
226.7(e) only requires disclosure of the bal­
ance^) to which a periodic rate was applied
and does not apply to balances on which other
kinds of finance charges (such as transaction
charges) were imposed. For example, if a con­
sumer obtains a $1,500 cash advance subject
to both a 1 percent transaction fee and a 1
percent monthly periodic rate, the creditor
need only disclose the balance subject to the
monthly rate (which might include portions
of earlier cash advances not paid off in previ­
ous cycles).
2. Split rates applied to balance ranges. If split
rates were applied to a balance because differ­
ent portions of the balance fall within two or
more balance ranges, the creditor need not
separately disclose the portions of the balance
subject to such different rates since the range
of balances to which the rates apply has been
separately disclosed. For example, a creditor
could disclose a balance of $700 for purchases
even though a monthly periodic rate of 1.5
percent applied to the first $500, and a month­
ly periodic rate of 1 percent to the remainder.
This option to disclose a combined balance
does not apply when the finance charge is
computed by applying the split rates to each
day’s balance (in contrast, for example, to ap­
plying the rates to the average daily balance).
In that case, the balances must be disclosed
using any of the options that are available if
two or more daily rates are imposed. (See
comment 7(e)-5.)
3. Monthly rate on average daily balance. If a
creditor computes a finance charge on the av­
erage daily balance by application of a month­
ly periodic rate or rates, the balance is ade­
quately disclosed if the statement gives the
amount of the average daily balance on which
the finance charge was computed and also
states how the balance is determined.
4. Multifeatured plans. In a multifeatured
plan, the creditor must disclose a separate bal­
ance (or balances, as applicable) to which a
periodic rate was applied for each feature or
group of features subject to different periodic
rates or different balance computation meth­

§ 226.7
ods. Separate balances are not required, how­
ever, merely because a “free-ride” period is
available for some features but not others. A
total balance for the entire plan is optional.
This does not affect how many balances the
creditor must disclose—or may disclose—
within each feature. (See, for example, com­
ment 7(e)-5.)
5. Daily rate on daily balance. If the finance
charge is computed on the balance each day
by application of one or more daily periodic
rates, the balance on which the finance charge
was computed may be disclosed in any of the
following ways for each feature:
• If a single daily periodic rate is imposed,
the balance to which it is applicable may
be stated as:
—a balance for each day in the billing
cycle
—a balance for each day in the billing cy­
cle on which the balance in the account
changes
—the sum of the daily balances during the
billing cycle
—the average daily balance during the bill­
ing cycle, in which case the creditor
shall explain that the average daily bal­
ance is or can be multiplied by the num­
ber of days in the billing cycle and the
periodic rate applied to the product to
determine the amount of the finance
charge
• If two or more daily periodic rates may be
imposed, the balances to which the rates
are applicable may be stated as:
—a balance for each day in the billing
cycle
—a balance for each day in the billing cy­
cle on which the balance in the account
changes
—two or more average daily balances,
each applicable to the daily periodic
rates imposed for the time that those
rates were in effect, as long as the credi­
tor explains that the finance charge is or
may be determined by (1) multiplying
each of the average balances by the
number of days in the billing cycle (or if
the daily rate varied during the cycle, by
multiplying by the number of days the
applicable rate was in effect), (2) multi­
35

§ 226.7
plying each of the results by the applica­
ble daily periodic rate, and (3) adding
these products together.
6. Explanation o f balance-computation meth­
od. See the commentary to section
226.6(a)(3).
7. Information to compute balance. In con­
nection with disclosing the finance charge bal­
ance, the creditor need not give the consumer
all of the information necessary to compute
the balance if that information is not other­
wise required to be disclosed. For example, if
current purchases are included from the date
they are posted to the account, the posting
date need not be disclosed.
8. Nondeduction o f credits. The creditor need
not specifically identify the total dollar
amount of credits not deducted in computing
the finance charge balance. Disclosure of the
amount of credits not deducted is accom­
plished by listing the credits (§ 226.7(c)) and
indicating which credits will not be deducted
in determining the balance (for example,
“Credits after the 15th of the month are not
deducted in computing the finance charge.”).
9. Use o f one balance-computation method ex­
planation when multiple balances disclosed.
Sometimes the creditor will disclose more
than one balance to which a periodic rate was
applied, even though each balance was com­
puted using the same balance-computation
method. For example, if a plan involves pur­
chases and cash advances that are subject to
different rates, more than one balance must be
disclosed, even though the same computation
method is used for determining the balance
for each feature. In these cases, one explana­
tion of the balance-computation method is
sufficient. Sometimes the creditor separately
discloses the portions of the balance that are
subject to different rates because different por­
tions of the balance fall within two or more
balance ranges, even when a combined bal­
ance disclosure would be permitted under
comment 7(e)-2. In these cases, one explana­
tion of the balance-computation method is
also sufficient (assuming, of course, that all
portions of the balance were computed using
the same method).
36

Regulation Z Commentary

7(f) Amount of Finance Charge
1. Total. A total finance charge amount for
the plan is not required.
2. Itemization— types o f finance charges. Each
type of finance charge (such as periodic rates,
transaction charges, and minimum charges)
imposed during the cycle must be separately
itemized; for example, disclosure of only a
combined finance charge attributable to both
a minimum charge and transaction charges
would not be permissible. Finance charges of
the same type may be disclosed, however, in­
dividually or as a total. For example, five
transaction charges of $1 may be listed sepa­
rately or as $5.
3. Itemization— different
periodic
rates.
Whether different periodic rates are applicable
to different types of transactions or to differ­
ent balance ranges, the creditor may give the
finance charge attributable to each rate or
may give a total finance charge amount. For
example, if a creditor charges 1.5 percent per
month on the first $500 of a balance and 1
percent per month on amounts over $500, the
creditor may itemize the two components
($7.50 and $1.00) of the $8.50 charge, or may
disclose $8.50.
4. Multifeatured plans. In a multifeatured
plan, in disclosing the amount of the finance
charge attributable to the application of peri­
odic rates no total periodic rate disclosure for
the entire plan need be given.
5. Finance charges not added to account. A
finance charge that is not included in the new
balance because it is payable to a third party
(such as required life insurance) must still be
shown on the periodic statement as a finance
charge.
6. Finance charges other than periodic rates.
See comment 6(a)(4)-l for examples.
7. Accrued finance charges allocated from
payments. Some plans provide that the
amount of the finance charge that has accrued
since the consumer’s last payment is directly
deducted from each new payment, rather than
being separately added to each statement and
therefore reflected as an increase in the obliga­
tion. In such a plan, no disclosure is required

Regulation Z Commentary

§ 226.7

of finance charges that have accrued since the
last payment.

2. Date. The date of imposing or debiting
“other charges” need not be disclosed.

8. Start-up fees. Points, loan fees, and similar
finance charges relating to the opening of the
account that are paid prior to the issuance of
the first periodic statement need not be dis­
closed on the periodic statement. If, however,
these charges are financed as part of the plan,
including charges that are paid out of the first
advance, the charges must be disclosed as part
of the finance charge on the first periodic
statement. However, they need not be fac­
tored into the annual percentage rate. (See
footnote 33 in the regulation.)

3. Total. Disclosure of the total amount of
other charges is optional.

7(g) Annual Percentage Rate
1. Rate same as corresponding annual per­
centage rate. See comment 7(d)-5.
2. Multifeatured plans. In a multifeatured
plan, the actual annual percentage rate that
reflects the finance charge imposed during the
cycle may be separately stated for each feature
or may be described as a composite for the
whole plan.

7 (h) Other Charges
1. Identification. In identifying any “other
charges” actually imposed during the billing
cycle, the type is adequately described as “late
charge” or “membership fee,” for example.
Similarly, “closing costs” or “settlement
costs,” for example, may be used to describe
charges imposed in connection with real estate
transactions that are excluded from the fi­
nance charge under section 226.4(c)(7), if
the same term (such as “closing costs”) was
used in the initial disclosures and if the credi­
tor chose to itemize and individually disclose
the costs included in that term. Even though
the taxes and filing or notary fees excluded
from the finance charge under section
226.4(e) are not required to be disclosed as
“other charges” under section 226.6(b), these
charges may be included in the amount shown
as “closing costs” or “settlement costs” on the
periodic statement, if the charges were item­
ized and disclosed as part of the “closing
costs” or “settlement costs” on the initial dis­
closure statement. (See comment 6(b)-1 for
examples of “other charges.”)

4. Itemization—types o f “other charges”.
Each type of “other charge” (such as late-payment charges, over-the-credit-limit charges,
ATM fees that are not finance charges, and
membership fees) imposed during the cycle
must be separately itemized; for example, dis­
closure of only a total of “other charges” attrib­
utable to both an over-the-credit-limit charge
and a late-payment charge would not be permis­
sible. “Other charges” of the same type may be
disclosed, however, individually or as a total.
For example, three ATM fees of $ 1may be listed
separately or as $3.

7 (i) Closing Date of Billing Cycle; New
Balance
1. Credit balances. See comment 7(a)-l.
2. Multifeatured plans. In a multifeatured
plan, the new balance may be disclosed for
each feature or for the plan as a whole. If sep­
arate new balances are disclosed, a total new
balance is optional.
3. Accrued finance charges allocated from
payments. Some plans provide that the
amount of the finance charge that has accrued
since the consumer’s last payment is directly
deducted from each new payment, rather than
being separately added to each statement and
therefore reflected as an increase in the obliga­
tion. In such a plan, the new balance need not
reflect finance charges accrued since the last
payment.

7(j) Free-Ride Period
1. Wording. Although the creditor is required
to indicate any time period the consumer may
have to pay the balance outstanding without
incurring additional finance charges, no spe­
cific wording is required, so long as the lan­
guage used is consistent with that used on the
initial disclosure statement. For example, “To
avoid additional finance charges, pay the new
balance before_______ ” would suffice.
37

§ 226.7
7 (k ) Address for Notice of Billing Errors
1. Wording. The periodic statement must
contain the address for consumers to use in
asserting billing errors under section 226.13.
Since all disclosures must be “clear,” the
statement should indicate the general purpose
for the address, although no elaborate expla­
nation or particular wording is required.
2. Telephone number. A telephone number
may be included, but the address for billingerror inquiries, which is the required disclo­
sure, must be clear and conspicuous. One way
to ensure that the address is clear and con­
spicuous is to include a precautionary instruc­
tion that telephoning will not preserve the
consumer’s billing-error rights. Both of the
billing rights statements in appendix G con­
tain such a precautionary instruction, so that
a creditor could, by including either of these
statements with each periodic statement, en­
sure that the required address is provided in a
clear and conspicuous manner.

References
Statute: § 127(b)
Previous regulation: § 226.7 (b) (1) and inter­
pretation §§ 226.701, 226.703, 226.706, and
226.707
Other sections: §§ 226.4 through 226.6, 226.8,
226.14, and appendix G
1981 changes: Under § 226.7, required termi­
nology is no longer mandated except for the
terms “finance charge” and “annual percent­
age rate.” The requirement in the previous
regulation about the location of disclosures
has been deleted.
Under the revised section 226.7, disclosure
of credits to the account no longer have to
indicate the type of credit. A short disclosure
for variable-rate plans must be included on
the periodic statement. Disclosures relating to
multifeatured accounts have been clarified.
Section 226.7 now specifically requires a pe­
riodic statement disclosure of “other charges”
(nonfinance charges related to the plan) that
are actually imposed during the billing cycle.
Disclosures about minimum charges that
might be imposed on the account and about
the Comparative Index of Credit Cost have
been deleted.
38

Regulation Z Commentary

SECTION 226.8—Identification of
Transactions
1. Application o f identification rules. Section
226.8 deals with the requirement (imposed by
section 226.7(b)) for identification of each
credit transaction made during the billing cy­
cle. The rules for identifying transactions on
periodic statements vary, depending on
whether:
• The transaction involves sale credit (pur­
chases) or nonsale credit (cash advances,
for example)
• An actual copy of the credit document re­
flecting the transaction accompanies the
statement (this is the distinction between
so-called “country club” and “descriptive”
billing)
• The creditor and seller are the same or re­
lated persons
2. Sale credit The term “sale credit” refers to
a purchase in which the consumer uses a cred­
it card or otherwise directly accesses an openend line of credit (see comment 8-3 if access is
by means of a check) to obtain goods or serv­
ices from a merchant, whether or not the mer­
chant is the card issuer. “Sale credit” even
includes:
• Premiums for voluntary credit life insur­
ance whether sold by the card issuer or
another person
• The purchase of funds-transfer services
(such as telegrams) from an intermediary
3. Nonsale credit. The term “nonsale credit”
refers to any form of loan credit including, for
example:
• Cash advances
• Overdraft checking
• The use of a “supplemental credit device”
in the form of a check or draft or the use
of the overdraft feature of a debit card,
even if such use is in connection with a
purchase of goods or services
• Miscellaneous debits to remedy mispostings, returned checks, and similar entries
4. Actual copy. An actual copy does not in­
clude a recreated document. It includes, for
example, a duplicate, carbon, or photographic
copy, but does not include a so-called “fac­

Regulation Z Commentary
simile draft” in which the required informa­
tion is typed, printed, or otherwise recreated.
If a facsimile draft is used, the creditor must
follow the rules that apply when a copy of the
credit document is not furnished.
5. Same or related persons. For purposes of
identifying transactions, the term “same or re­
lated persons” refers to, for example:
• Franchised or licensed sellers of a credi­
tor’s product or service
• Sellers who assign or sell open-end sales
accounts to a creditor or arrange for such
credit under a plan that allows the con­
sumer to use the credit only in transac­
tions with that seller
A seller is not related to the creditor merely
because the seller and the creditor have an
agreement authorizing the seller to honor the
creditor’s credit card.
6. Transactions resulting from promotional
material. In describing transactions with
third-party sellers resulting from promotional
material mailed by the creditor, creditors may
use the rules either for “related” or for “non­
related” sellers and creditors.
7. Credit insurance offered through the credi­
tor. When credit insurance that is not part of
the finance charge (for example, voluntary
credit life insurance) is offered to the consum­
er through the creditor but is actually provid­
ed by another company, the creditor has the
option of identifying the premiums in one of
two ways on the periodic statement. The cred­
itor may describe the premiums using either
the rule in section 226.8(a)(2) for “related”
sellers and creditors, or the rule in section
226.8(a)(3) for “nonrelated” sellers and
creditors. This means, therefore, that the
creditor may identify the insurance either by
providing, under section 226.8(a)(2), a brief
identification of the services provided (for ex­
ample, “credit life insurance”), or by disclos­
ing, under section 226.8(a)(3), the name and
address of the company providing the insur­
ance (for example, ABC Insurance Company,
New York, New York). In either event, the
creditor would, of course, also provide the
amount and the date of the transaction.
8. Transactions involving creditors and sellers

§ 226.8
with corporate connections. In a credit card
plan established for use primarily with sellers
that have no corporate connection with the
creditor, the creditor may describe all transac­
tions under the plan by using the rules in sec­
tion 226.8(a)(3)—creditor and seller not
same or related persons—including transac­
tions involving a seller that has a corporate
connection with the creditor. In other credit
card plans, the creditor may describe transac­
tions involving a seller that has a corporate
connection with the creditor, such as subsidi­
ary-parent, using the rules in section
226.8(a)(3) where it is unlikely that the con­
sumer would know of the corporate connec­
tion between the creditor and the seller—for
example, where the names of the creditor and
the seller are not similar, and the periodic
statement is issued in the name of the creditor
only.

8(a) Sale Credit
1. Date—disclosure o f only one date. If only
the required date is disclosed for a transac­
tion, the creditor need not identify it as the
“transaction date.” If the creditor discloses
more than one date (for example, the transac­
tion date and the posting date), the creditor
must identify each.
2. Date—disclosure o f month and day only.
The month and day are sufficient disclosure of
the date on which the transaction took place,
unless the posting of the transaction is delayed
so long that the year is needed for a clear dis­
closure to the consumer.
3. When transaction takes place. If the con­
sumer conducts the transaction in person, the
date of the transaction is the calendar date on
which the consumer made the purchase or or­
der, or secured the advance. For transactions
billed to the account on an ongoing basis
(other than installments to pay a precomput­
ed amount), the date of the transaction is the
date on which the amount is debited to the
account. This might include, for example,
monthly insurance premiums. For mail or
telephone orders, a creditor may disclose as
the transaction date either the invoice date,
the debiting date, or the date the order was
placed by telephone.
39

§ 226.8
4. Transactions not billed in fu ll If sale trans­
actions are not billed in full on any single
statement, but are billed periodically in
precomputed installments, the first periodic
statement reflecting the transaction must
show either the full amount of the transaction
together with the date the transaction actually
took place; or the amount of the first install­
ment that was debited to the account together
with the date of the transaction or the date on
which the first installment was debited to the
account. In any event, subsequent periodic
statements should reflect each installment
due, together with either any other identifying
information required by section 226.8(a)
(such as the seller’s name and address in a
three-party situation) or other appropriate
identifying information relating the transac­
tion to the first billing. The debiting date for
the particular installment, or the date the
transaction took place, may be used as the
date of the transaction on these subsequent
statements.

Regulation Z Commentary
ficient—for example, “jewelry,” “sporting
goods.”
2. Property identification— number or symbol.
The “brief identification” may be made by dis­
closing on the periodic statement a number or
symbol that is related to an identification list
printed elsewhere on the statement.
3. Property identification—additional docu­
ment. In making the “brief identification” re­
quired by section 226.8(a)(2), the creditor
may identify the property by describing the
transaction on a document accompanying the
periodic statement (for example, on a facsimi­
le draft). (See also footnote 17.)
4. Small creditors. Under footnote 18, which
provides a further identification alternative to
a creditor with fewer than 15,OCX) accounts,
the creditor need count only its own accounts
and not others serviced by the same data proc­
essor or other shared-service provider.
5. Date o f transaction—foreign transactions.
In a foreign transaction, the debiting date may
be considered the transaction date.

8(a)(1) Copy o f Credit Document Provided
1. Format. The information required by sec­
tion 226.8(a)(1) may appear either on the
copy of the credit document reflecting the
transaction or on the periodic statement.
8(a)(2) Copy o f Credit Document Not
Provided—Creditor and Seller Same or
Related Person(s)
1. Property identification—sufficiency o f de­
scription. The “brief identification” provision
in section 226.8(a)(2) requires a designation
that will enable the consumer to reconcile the
periodic statement with the consumer’s own
records. In determining the sufficiency of the
description, the following rules apply:
• While item-by-item descriptions are not
necessary, reasonable precision is required.
For example, “merchandise,” “miscellane­
ous,” “second-hand goods,” or “promo­
tional items” would not suffice.
• A reference to a department in a sales es­
tablishment that accurately conveys the
identification of the types of property or
services available in the department is suf­
40

8(a)(3) Copy o f Credit Document Not
Provided—Creditor and Seller Not Same or
Related Person(s)
1. Seller's name. The requirement contem­
plates that the seller’s name will appear on the
periodic statement in essentially the same
form as it appears on transaction documents
provided to the consumer at the time of the
sale. The seller’s name may also be disclosed
as, for example:
• A more complete spelling of the name that
was alphabetically abbreviated on the re­
ceipt or other credit document
• An alphabetical abbreviation of the name
on the periodic statement even if the name
appears in a more complete spelling on the
receipt or other credit document. Terms
that merely indicate the form of a business
entity, such as “Inc.,” “Co.,” or “Ltd.,”
may always be omitted.
2. Location o f transaction. The disclosure of
the location where the transaction took place
generally requires an indication of both the
city, and the state or foreign country. If the

Regulation Z Commentary

§ 226.9

seller has multiple stores or branches within. 1981 changes: Section 226.8 has been stream­
that city, the creditor need not identify the lined and reorganized to facilitate its use.
Technical detail has been deleted from the
specific branch at which the sale occurred.
regulation for inclusion in the commentary.
3. No fixed location. When no meaningful ad­
The regulation implements the amended sec­
dress is available because the consumer did
tion 127(b)(2) of the act by providing for
not make the purchase at any fixed location of
protection from civil liability under certain
the seller, the creditor:
circumstances when required information is
• May omit the address
not provided and by reducing disclosure re­
• May provide some other identifying desig­ sponsibilities for certain small creditors. For
nation, such as “aboard plane,” “ABC descriptive billing of nonsale transactions, the
Airways Flight,” “customer’s home,” regulation now permits the use of the debiting
date in all cases.
“telephone order,” or “mail order”
4. Date o f transaction—foreign transactions.
See comment 8(a) (2)-5.

8(b) Nonsale Credit

SECTION 226.9—Subsequent
Disclosure Requirements

1. Date o f transaction. If only one of the re­
quired dates is disclosed for a transaction, the
creditor need not identify it. If the creditor
discloses more than one date (for example,
transaction date and debiting date), the credi­
tor must identify each.

9(a) Furnishing Statement of Billing
Rights

2. Amount o f transaction. If credit is extended
under an overdraft checking account plan or
by means of a debit card with an overdraft
feature, the amount to be disclosed is that of
the credit extension, not the face amount of
the check or the total amount of the debit/
credit transaction.
3. Amount—disclosure on cumulative basis. If
credit is extended under an overdraft checking
account plan or by means of a debit card with
an overdraft feature, the creditor may disclose
the amount of the credit extensions on a cu­
mulative daily basis, rather than the amount
attributable to each check or each use of the
debit/credit card.
4. Identification o f transaction type. The cred­
itor may identify a transaction by describing
the type of advance it represents, such as cash
advance, loan, overdraft loan, or any readily
understandable trade name for the credit
program.

References
Statute: § 127(b)(2)
Previous regulation: § 226.7(k)
Other sections: § 226.7

9(a)(1) Annual Statement
1. General. The creditor may provide the an­
nual billing rights statement:
• By sending it in one billing period per year
to each consumer that gets a periodic
statement for that period or
• By sending a copy to all of its account
holders sometime during the calendar year
but not necessarily all in one billing period
(for example, sending the annual notice in
connection with renewal cards or when
imposing annual membership fees).
2. Substantially similar. See the commentary
to appendix G-3.
9(a)(2) Alternative Summary Statement
1. Changing from long-form to short-form
statement and vice versa. If the creditor has
been sending the long-form annual statement,
and subsequently decides to use the alterna­
tive summary statement, the first summary
statement must be sent no later than 12
months after the last long-form statement was
sent. Conversely, if the creditor wants to
switch to the long-form, the first long-form
statement must be sent no later than 12
months after the last summary statement.
41

§ 226.9
2. Substantially similar. See the commentary
to appendix G-4.

9(b) Disclosures for Supplemental Credit
Devices and Additional Features
1. Credit device—examples. “Credit device”
includes, for example, a blank check, payeedesignated check, blank draft or order, or au­
thorization form for issuance of a check; it
does not include a check issued payable to a
consumer representing loan proceeds or the
disbursement of a cash advance.
2. Credit feature—examples. A new credit
“feature” would include, for example:
• The addition of overdraft checking to an
existing account (although the regular
checks that could trigger the overdraft fea­
ture are not themselves “devices”)
• The option to use an existing credit card to
secure cash advances, when previously the
card could only be used for purchases
Paragraph 9(b)(1)
1. Same finance charge terms. If the new
means of accessing the account is subject to
the same finance charge terms as those previ­
ously disclosed, the creditor:
• Need only provide a reminder that the
new device or feature is covered by the
earlier disclosures (For example, in mail­
ing special checks that directly access the
credit line, the creditor might give a dis­
closure such as “Use this as you would
your XYZ card to obtain a cash advance
from our bank”) or
• May remake the section 226.6(a) finance
charge disclosures.
Paragraph 9(b)(2)
1. Different finance charge terms. If the fi­
nance charge terms are different from those
previously disclosed, the creditor may satisfy
the requirement to give the finance charge
terms either by giving a complete set of new
initial disclosures reflecting the terms of the
added device or feature or by giving only the
finance charge disclosures for the added de­
vice or feature.
42

Regulation Z Commentary

9(c) Change in Terms
1. “Changes” initially disclosed No notice of
a change in terms need be given if the specific
change is set forth initially, such as: rate in­
creases under a properly disclosed variablerate plan, a rate increase that occurs when an
employee has been under a preferential rate
agreement and terminates employment, or an
increase that occurs when the consumer has
been under an agreement to maintain a cer­
tain balance in a savings account in order to
keep a particular rate and the account balance
falls below the specified minimum. In con­
trast, notice must be given if the contract al­
lows the creditor to increase the rate at its
discretion but does not include specific terms
for an increase (for example, when an in­
crease may occur under the creditor’s con­
tract reservation right to increase the periodic
rate.
2. State law issues. Examples of issues not ad­
dressed by section 226.9(c) because they are
controlled by state or other applicable law
include:
• The types of changes a creditor may make
• How changed terms affect existing bal­
ances, such as when a periodic rate is
changed and the consumer does not pay
off the entire existing balance before the
new rate takes effect
3. Change in billing cycle. Whenever the cred­
itor changes the consumer’s billing cycle, it
must give a change-in-terms notice if the
change either affects any of the terms required
to be disclosed under section 226.6 or increas­
es the minimum payment, unless an exception
under section 226.9(c)(2) applies; for exam­
ple, the creditor must give advance notice if
the creditor initially disclosed a 25-day freeride period on purchases and the consumer
will have fewer days during the billing cycle
change.

9(c)(1) Written Notice Required
1. Affected consumers. Change-in-terms no­
tices need only go to those consumers who
may be affected by the change. For example, a
change in the periodic rate for check overdraft

Regulation Z Commentary
credit need not be disclosed to consumers who
do not have that feature on their accounts.
2. Timing—effective date o f change. The rule
that the notice of the change in terms be pro­
vided at least 15 days before the change takes
effect permits midcycle changes when there is
clearly no retroactive effect, such as the impo­
sition of a transaction fee. Any change in the
balance computation method, in contrast,
would need to be disclosed at least 15 days
prior to the billing cycle in which the change
is to be implemented.
3. Timing—advance notice not required. Ad­
vance notice of 15 days is not necessary—that
is, a notice of change in terms is required, but
it may be mailed or delivered as late as the
effective date of the change—in two
circumstances:
• If there is an increased periodic rate or any
other finance charge attributable to the
consumer’s delinquency or default
• If the consumer agrees to the particular
change. This provision is intended for use
in the unusual instance when a consumer
substitutes collateral or when the creditor
can advance additional credit only if a
change relatively unique to that consumer
is made, such as the consumer’s providing
additional security or paying an increased
minimum-payment amount. Therefore,
the following are not “agreements” be­
tween the consumer and the creditor for
purposes of section 226.9(c)(1): the con­
sumer’s general acceptance of the credi­
tor’s contract reservation of the right to
change terms; the consumer’s use of the
account (which might imply acceptance of
its terms under state law); and the con­
sumer’s acceptance of a unilateral term
change that is not particular to that con­
sumer, but rather is of general applicabili­
ty to consumers with that type of account.
4. Form o f change-in-terms notice. A com­
plete new set of the initial disclosures contain­
ing the changed term complies with section
226.9(c) if the change is highlighted in some
way on the disclosure statement, or if the dis­
closure statement is accompanied by a letter
or some other insert that indicates or draws
attention to the term change.

§ 226.9
5. Security interest change—form o f notice. A
copy of the security agreement that describes
the collateral securing the consumer’s account
may be used as the notice, when the term
change is the addition of a security interest or
the addition or substitution of collateral.

9(c)(2) Notice Not Required
1. Changes not requiring notice. The following
are examples of changes that do not require a
change-in-terms notice:
• A change in the consumer’s credit limit
• A change in the name of the credit card or
credit card plan
• The substitution of one insurer for another
• A
termination or suspension of credit
privileges
• Changes arising merely by operation of
law; for example, if the creditor’s security
interest in a consumer’s car automatically
extends to the proceeds when the consum­
er sells the car
2. Skip features. If a credit program allows
consumers to skip or reduce one or more pay­
ments during the year, or involves temporary
reductions in finance charges, no notice of the
change in terms is required either prior to the
reduction or upon resumption of the higher
rates or payments if these features are ex­
plained on the initial disclosure statement (in­
cluding an explanation of the terms upon re­
sumption). For example, a merchant may al­
low consumers to skip the December payment
to encourage holiday shopping, or a teacher’s
credit union may not require payments during
summer vacation. Otherwise, the creditor
must give notice prior to resuming the origi­
nal schedule or rate, even though no notice is
required prior to the reduction. The changein-terms notice may be combined with the no­
tice offering the reduction. For example, the
periodic statement reflecting the reduction or
skip feature may also be used to notify the
consumer of the resumption of the original
schedule or rate, either by stating explicitly
when the higher payment or charges resume
or by indicating the duration of the skip op­
tion. Language such as “You may skip your
October payment,” or “We will waive your
43

§ 226.9
finance charges for January” may serve as the
change-in-terms notice.

9(d) Finance Charge Imposed at Time of
Transaction
1. Disclosure prior to imposition. A person im­
posing a finance charge at the time of honor­
ing a consumer’s credit card must disclose the
amount of the charge, or an explanation of
how the charge will be determined, prior to its
imposition. This must be disclosed before the
consumer becomes obligated for property or
services that may be paid for by use of a credit
card. For example, disclosure must be given
before the consumer has dinner at a restau­
rant, stays overnight at a hotel, or makes a
deposit guaranteeing the purchase of property
or services.

References
Statute: § 127(a)(7)
Other sections: §§ 226.4 through 226.7 and ap­
pendix G
Previous regulation: § 226.7(d) through (f)
and (j) and interpretation §§ 226.705 and
226.708
1981 changes: Section 226.9(a) implements
the statutory change that the long-form state­
ment of billing rights be provided only once a
year. The provision now permits two rather
than one means of providing the long-form
statement to consumers. The verbatim text of
the annual statement is no longer required;
creditors may use any version “substantially
similar” to the one in appendix G. If the cred­
itor elects to use the alternative summary
statement, the new regulation no longer re­
quires that the long-form statement be sent
upon receiving a billing-error notice and at
the consumer’s request. The rules in section
226.708 on switching the type of billing-rights
statement used have been modified.
Under section 226.9(b) disclosure require­
ments have been streamlined when supple­
mental credit devices or new credit features
are added to an existing open-end plan.
Section 226.9(c) substantially changes the
change-in-terms rules. Change-in-terms dis­
closures must now be made 15 days before the
effective date of the change, rather than 15
days before the billing cycle in which the
44

Regulation Z Commentary
change will take effect. The kinds of changes
that will trigger disclosures have been re­
duced: change-in-terms notices are no longer
required for the types of changes described in
section 226.9(c)(2). But the provision revers­
es interpretation section 226.705, which indi­
cated that certain changes in the balance com­
putation method did not require disclosure be­
cause they could result in lowered finance
charges; now, any change in the balance com­
putation method requires disclosure.
When a finance charge is imposed at the
time of a transaction, section 226.9(d) only
requires disclosure of the finance charge at
point-of-sale; the amount financed and annual
percentage rate figured in accordance with the
closed-end credit provisions need no longer be
disclosed. Furthermore, the finance charge
disclosure now may be made orally by the
person honoring the card.

SECTION 226.10—Prompt Crediting of
Payments
10(a) General Rule
1. Crediting date. Section 226.10(a) does not
require the creditor to post the payment to the
consumer’s account on a particular date; the
creditor is only required to credit the payment
as o f the date of receipt.
2. Date o f receipt The “date of receipt” is the
date that the payment instrument or other
means of completing the payment reaches the
creditor. For example:
• Payment by check is received when the
creditor gets it, not when the funds are
collected.
• In a payroll deduction plan in which funds
are deposited to an asset account held by
the creditor, and from which payments are
made periodically to an open-end credit
account, payment is received on the date
when it is debited to the asset account
(rather than on the date of the deposit),
provided the payroll deduction method is
voluntary and the consumer retains use of
the funds until the contractual payment
date.
• If the consumer elects to have payment

Regulation Z Commentary
made by a third-party payor such as a fi­
nancial institution, through a preauthor­
ized payment or telephone bill-payment
arrangement, payment is received when
the creditor gets the third-party payor’s
check or other transfer medium, such as
an electronic fund transfer, as long as the
payment meets the creditor’s requirements
as specified under section 226.10(b).

10(b) Specific Requirements for
Payments
1. Payment requirements. The creditor may
specify requirements for making payments,
such as:
• Requiring that payments be accompanied
by the account number or the payment
stub
• Setting a cut-off hour for payment to be
received, or set different hours for pay­
ment by mail and payments made in
person
• Specifying that only checks or money or­
ders should be sent by mail
• Specifying that payment is to be made in
U.S. dollars
• Specifying one particular address for re­
ceiving payments, such as a post office box
The creditor may be prohibited, however,
from specifying payment for preauthorized
electronic fund transfer. (See section 913 of
the Electronic Fund Transfer Act.)
2. Payment requirements—limitations. Re­
quirements for making payments must be rea­
sonable; it should not be difficult for most
consumers to make conforming payments.
For example, it would not be reasonable to
require that all payments be made in person
between 10 a.m. and 11 a.m., since this would
require consumers to take time off from their
jobs to deliver payments.
3. Acceptance o f nonconforming payments. If
the creditor accepts a nonconforming pay­
ment (for example, payment at a branch of­
fice, when it had specified that payment be
sent to headquarters), finance charges may
accrue for the period between receipt and
crediting of payments.
4. Implied guidelines for payments. In the ab­

§226.11
sence of specified requirements for making
payments (see section 226.10(b)):
• Payments may be made at any location
where the creditor conducts business
• Payments may be made any time during
the creditor’s normal business hours
• Payment may be by cash, money order,
draft, or other similar instrument in prop­
erly negotiable form, or by electronic fund
transfer if the creditor and consumer have
so agreed

References
Statute: § 164
Other sections: § 226.7
Previous regulation: § 226.7(g)
1981 changes: Much of the explanatory detail
of the previous regulation is now in the com­
mentary. The revised regulation gives the
creditor five days in which to credit noncon­
forming payments, whereas the previous regu­
lation required the crediting of such payments
promptly, with an outside limit of five days.
The five days in which to credit are available
whenever the creditor accepts payment that
does not conform to the creditor’s disclosed
specifications, in contrast to the previous reg­
ulation, which only allowed deferred crediting
for payments made at the wrong location.

SECTION 226.11—Treatment of Credit
Balances
1. Timing o f refund. The creditor may also
fulfill its obligations under section 226.11 by:
• Refunding any credit balance to the con­
sumer immediately
• Refunding any credit balance prior to re­
ceiving a written request (under section
226.11(b)) from the consumer
• Making a good faith effort to refund any
credit balance before six months have
passed. If that attempt is unsuccessful, the
creditor need not try again to refund the
credit balance at the end of the six-month
period.
2. Amount o f refund. The phrase “any part of
the credit balance remaining in the account”
in section 226.11(b) and (c) means the
45

Regulation Z Commentary

§226.11
amount of the credit balance at the time the
creditor is required to make the refund. The
creditor may take into consideration interven­
ing purchases or other debits to the consum­
er’s account (including those that have not
yet been reflected on a periodic statement)
that decrease or eliminate the credit balance.

Paragraph 11(b)
1. Written requests—standing orders. The
creditor is not required to honor standing or­
ders requesting refunds of any credit balance
that may be created on the consumer’s
account.

Paragraph 11(c)
1. Good faith effort to refund. The creditor
must take positive steps to return any credit
balance that has remained in the account for
over six months. This includes, if necessary,
attempts to trace the consumer through the
consumer’s last known address or telephone
number, or both.
2. Good faith effort unsuccessful. Section
226.11 imposes no further duties on the credi­
tor if a good faith effort to return the balance
is unsuccessful. The ultimate disposition of
the credit balance (or any credit balance of $1
or less) is to be determined under other appli­
cable law.

References
Statute: §165
Previous regulation: § 226.7(h)
1981 changes: Under the previous regulation,
the creditor’s duty to refund credit balances
applied only to “excess payments”; section
226.11 of the revised regulation implements
the amendments to section 165 of the statute
which impose refunding duties on the creditor
whatever the source of the credit balance. The
revised regulation permits the creditor, in
computing the refund, to take account of in­
tervening debits, not just the difference be­
tween the previous balance and the overpay­
ment as is provided in the previous regulation.
The revised regulation gives the creditor seven
business days in which to make the refund af­
ter receiving the consumer’s written request,
whereas the previous regulation required the
46

creditor to make the refund promptly, with an
outside limit of five business days. This provi­
sion also implements the amended statute by
requiring a good faith effort to refund the
credit balance after six months.

SECTION 226.12—Special Credit Card
Provisions
1. Scope. Sections 226.12(a) and (b) deal
with the issuance and liability rules for credit
cards, whether the card is intended for con­
sumer, business, or any other purposes. Sec­
tions 226.12(a) and (b) are exceptions to the
general rule that the regulation applies only to
consumer credit. (See sections 226.1 and
226.3.)

12(a) Issuance of Credit Cards
Paragraph 12(a)(1)
1. Explicit request. A request or application
for a card must be explicit. For example, a
request for overdraft privileges on a checking
account does not constitute an application for
a credit card with overdraft checking features.
2. Addition o f credit features. If the consumer
has a non-credit card, the addition of credit
features to the card (for example, the granting
of overdraft privileges on a checking account
when the consumer already has a check guar­
antee card) constitutes issuance of a credit
card.
3. Variance o f card from request. The request
or application need not correspond exactly to
the card that is issued. For example:
• The name of the card requested may be
different when issued
• The card may have features in addition to
those reflected in the request or
application
4. Permissible form o f request. The request or
application may be oral (in response to a tele­
phone solicitation by a card issuer, for exam­
ple) or written.
5. Time o f issuance. A credit card may be is­
sued in response to a request made before any
cards are ready for issuance (for example, if a

Regulation Z Commentary

§226.12

new program is established), even if there is
some delay in issuance.

teller machines, or by a similar program
adjustment.

6. Persons to whom cards may be issued. A
card issuer may issue a credit card to the per­
son who requests it and to anyone else for
whom that person requests a card and who
will be an authorized user on the requester’s
account. In other words, cards may be sent to
consumer A on A’s request, and also (on A’s
request) to consumers B and C, who will be
authorized users on A’s account. In these cir­
cumstances, the following rules apply:

8. Unsolicited issuance o f PINs. A card issuer
may issue personal identification numbers
(PINs) to existing credit cardholders without
a specific request from the cardholders, pro­
vided the PINs cannot be used alone to obtain
credit. For example, the PINs may be neces­
sary if consumers wish to use their existing
credit cards at automated teller machines or
at merchant locations with point-of-sale ter­
minals that require PINs.

• The additional cards may be imprinted in
either A’s name or in the names of B and
C.
• No liability for unauthorized use (by per­
sons other than B and C), not even the
$50, may be imposed on B or C since they
are merely users and not “cardholders” as
that term is defined in section 226.2 and
used in section 226.12(b); of course, liabil­
ity of up to $50 for unauthorized use of B’s
and C’s cards may be imposed on A.
• Whether B and C may be held liable for
their own use, or on the account generally,
is a matter of state or other applicable law.

Paragraph 12(a)(2)

7. Issuance o f non-credit cards. The issuance
of an unsolicited device that is not, but may
become, a credit card, is not prohibited
provided:
• the device has some substantive purpose
other than obtaining credit, such as access
to non-credit services offered by the issuer;
• it cannot be used as a credit card when
issued; and
• a credit capability will be added only on
the recipient’s request.
For example, the card issuer could send a
check guarantee card on an unsolicited basis,
but could not add a credit feature to that card
without the consumer’s specific request. The
reencoding of a debit card or other existing
card that had no credit privileges when issued
would be appropriate after the consumer has
specifically requested a card with credit privi­
leges. Similarly, the card issuer may add a
credit feature, for example, by reprogramming
the issuer’s computer program or automated

1. Renewal. “Renewal” generally contem­
plates the regular replacement of existing
cards because of, for example, security rea­
sons or new technology or systems. It also in­
cludes the reissuance of cards that have been
suspended temporarily, but does not include
the opening of a new account after a previous
account was closed.
2. Substitution—examples. “Substitution” en­
compasses the replacement of one card with
another because the underlying account rela­
tionship has changed in some way—such as
when the card issuer has:
• Changed its name
• Changed the name of the card
• Changed the credit or other features avail­
able on the account. For example, the
original card could be used to make pur­
chases and obtain cash advances at teller
windows. The substitute card might be us­
able, in addition, for obtaining cash ad­
vances through automated teller machines.
(If the substitute card constitutes an ac­
cess device, as defined in Regulation E,
then the Regulation E issuance rules
would have to be followed.)
• Substituted a card user’s name on the sub­
stitute card for the cardholder’s name ap­
pearing on the original card
• Changed the merchant base. However, the
new card must be honored by at least one
of the persons that honored the original
card.
3. Substitution—successor card issuer. “Sub­
stitution” also occurs when a successor card

§226.12
issuer replaces the original card issuer (for ex­
ample, when a new card issuer purchases the
accounts of the original issuer and issues its
own card to replace the original one). A per­
missible substitution exists even if the original
issuer retains the existing receivables and the
new card issuer acquires the right only to fu­
ture receivables, provided use of the original
card is cut off when use of the new card be­
comes possible.
4. Substitution—non-credit-card plan. A cred­
it card that replaces a retailer’s open-end cred­
it plan not involving a credit card is not con­
sidered a substitute for the retailer’s plan—
even if the consumer used the retailer’s plan.
A credit card cannot be issued in these cir­
cumstances without a request or application.
5. One-for-one rule. An accepted card may be
replaced by no more than one renewal or sub­
stitute card. For example, the card issuer may
not replace a credit card permitting purchases
and cash advances with two cards, one for the
purchases and another for the cash advances.
6. One-for-one rule—exception. The regula­
tion does not prohibit the card issuer from re­
placing a debit/credit card with a credit card
and another card with only debit functions
(or debit functions plus an associated over­
draft capability), since the latter card could
be issued on an unsolicited basis under Regu­
lation E.
7. Methods o f terminating replaced card. The
card issuer need not physically retrieve the
original card, provided the old card is voided
in some way; for example:
• The issuer includes with the new card a
notification that the existing card is no
longer valid and should be destroyed
immediately.
• The original card contained an expiration
date.
• The card issuer, in order to preclude use of
the card, reprograms computers or issues
instructions to authorization centers.
8. Incomplete replacement. If a consumer has
duplicate credit cards on the same account
(card A—one type of bank credit card, for
example), the card issuer may not replace the
duplicate cards with one card A and one card
48

Regulation Z Commentary
B (card B—another type of bank credit card)
unless the consumer requests card B.

12(b) Liability of Cardholder for
Unauthorized Use
1. Meaning o f “cardholder. ” For purposes of
this provision, “cardholder” includes any per­
son (including organizations) to whom a
credit card is issued for any purpose, includ­
ing business. When a corporation is the card­
holder, required disclosures should be provid­
ed to the corporation (as opposed to an
employee user).
12(b)(1) Limitation on Amount
1. Meaning o f “authority: ” Footnote 22 de­
fines unauthorized use in terms of whether the
user has “actual, implied, or apparent authori­
ty.” Whether such authority exists must be
determined under state or other applicable
law.
2. Liability limits—dollar amounts. As a gen­
eral rule, the cardholder’s liability for a series
of unauthorized uses cannot exceed either $50
or the value obtained through the unautho­
rized use before the card issuer is notified,
whichever is less.
12(b)(2) Conditions o f Liability
1. Issuer's option not to comply. A card issuer
that chooses not to impose any liability on
cardholders for unauthorized use need not
comply with the disclosure and identification
requirements discussed below.
Paragraph 12(b) (2)(ii)
1. Disclosure o f liability and means o f notify­
ing issuer. The disclosures referred to in
section 226.12(b) (2) (ii) may be given, for
example, with the initial disclosures under
section 226.6, on the credit card itself, or on
periodic statements. They may be given at any
time preceding the unauthorized use of the
card.
Paragraph 12(b)(2)(iii)
1. Means o f identifying cardholder or user. To
fulfill the condition set forth in section
226.12(b)(2) (iii), the issuer must provide
some method whereby the cardholder or the

Regulation Z Commentary
authorized user can be identified. This could
include, for example, signature, photograph,
or fingerprint on the card, or electronic or me­
chanical confirmation.
2. Identification by magnetic strip. Unless a
magnetic strip (or similar device not readable
without physical aids) must be used in con­
junction with a secret code or the like, it
would not constitute sufficient means of iden­
tification. Sufficient identification also does
not exist if a “pool” or group card, issued to a
corporation and signed by a corporate agent
who will not be a user of the card, is intended
to be used by another employee for whom no
means of identification is provided.
3. Transactions not involving card The card­
holder may not be held liable under section
226.12(b) when the card itself (or some other
sufficient means of identification of the card­
holder) is not presented. Since the issuer has
not provided a means to identify the user
under these circumstances, the issuer has not
fulfilled one of the conditions for imposing
liability. For example, when merchandise is
ordered by telephone by a person without au­
thority to do so, using a credit card account
number or other number only (which may be
widely available), no liability may be imposed
on the cardholder.
12(b)(3) Notification to Card Issuer
1. How notice must be provided. Notice given
in a normal business manner—for example,
by mail, telephone, or personal visit—is effec­
tive even though it is not given to, or does not
reach, some particular person within the is­
suer’s organization. Notice also may be effec­
tive even though it is not given at the address
or phone number disclosed by the card issuer
under section 226.12(b)(2) (ii).
2. Who must provide notice. Notice of loss,
theft, or possible unauthorized use need not be
initiated by the cardholder. Notice is sufficient
so long as it gives the “pertinent information,”
which would include the name or card num­
ber of the cardholder and an indication that
unauthorized use has or may have occurred.
3. Relationship to section 226.13. The liability
protections afforded to cardholders in section
226.12 do not depend upon the cardholder’s

§226.12
following the error-resolution procedures in
section 226.13. For example, the written-notification and time-limit requirements of section
226.13 do not affect the section 226.12
protections.
12(b)(5) Business Use o f Credit Cards
1. Agreement for higher liability for business
use cards. The card issuer may not rely on
section 226.12(b)(5) if the business is clearly
not in a position to provide 10 or more cards
to employees (for example, if the business has
only 3 employees). On the other hand, the
issuer need not monitor the personnel prac­
tices of the business to make sure that it has at
least 10 employees at all times.
2. Unauthorized use by employee. The protec­
tion afforded to an employee against liability
for unauthorized use in excess of the limits set
in section 226.12(b) applies only to unautho­
rized use by someone other than the employ­
ee. If the employee uses the card in an unau­
thorized manner, the regulation sets no
restriction on the employee’s potential liabili­
ty for such use.

12(c) Right of Cardholder to Assert
Claims or Defenses Against Card Issuer
1. Relationship to section 226.13. The section
226.12(c) credit card “holder in due course”
provision deals with the consumer’s right to
assert against the card issuer a claim or de­
fense concerning property or services pur­
chased with a credit card, if the merchant has
been unwilling to resolve the dispute. Even
though certain merchandise disputes, such as
nondelivery of goods, may also constitute
“billing errors” under section 226.13, that sec­
tion operates independently of section
226.12(c). The cardholder whose asserted
billing error involves undelivered goods may
institute the error-resolution procedures of
section 226.13; but whether or not the card­
holder has done so, the cardholder may assert
claims or defenses under section 226.12(c).
Conversely, the consumer may pay a disputed
balance and thus have no further right to as­
sert claims and defenses, but still may assert a
billing error if notice of that billing error is
given in the proper time and manner. An as­
sertion that a particular transaction resulted
49

Regulation Z Commentary

§226.12
from unauthorized use of the card could also
be both a “defense” and a billing error.
2. Claims and defenses assertible. Section
226.12(c) merely preserves the consumer’s
right to assert against the card issuer any
claims or defenses that can be asserted against
the merchant. It does not determine what
claims or defenses are valid as to the mer­
chant; this determination must be made under
state or other applicable law.
12(c)(1) General Rule
1. Situations excluded and included. The con­
sumer may assert claims or defenses only
when the goods or services are “purchased
with the credit card.” This could include:
• Mail or telephone orders, if the purchase is
charged to the credit card account

only a paper-based debit card. If a card
serves both as an ordinary credit card and
also as check guarantee or debit card, a
transaction will be subject to this rule on
asserting claims and defenses when used as
an ordinary credit card, but not when used
as a check-guarantee or debit card.
12(c)(2) Adverse Credit Reports Prohibited
1. Scope o f prohibition. Although an amount
in dispute may not be reported as delinquent
until the matter is resolved:
• That amount may be reported as disputed.
• Nothing in this provision prohibits the
card issuer from undertaking its normal
collection activities for delinquent
accounts.
12(c)(3) Limitations

But it would exclude:
• Use of a credit card to obtain a cash ad­
vance, even if the consumer then uses the
money to purchase goods or services. Such
a transaction would not involve “property
or services purchased with the credit
card.”
• The purchase of goods or services by use
of a check accessing an overdraft account
and a credit card used solely for identifica­
tion of the consumer. (On the other hand,
if the credit card is used to make partial
payment for the purchase and not merely
for identification, the right to assert claims
or defenses would apply to credit extended
via the credit card, although not to the
credit extended on the overdraft line.)
• Purchases made by use of a check-guarantee card in conjunction with a cash-ad­
vance check (or by cash-advance checks
alone). See footnote 24. A cash-advance
check is a check that, when written, does
not draw on an asset account; instead, it is
charged entirely to an open-end credit
account.
• Purchases effected by use of either a check
guarantee card or a debit card when used
to draw on overdraft credit lines (see foot­
note 24). The debit card exemption ap­
plies whether the card accesses an asset
account via point-of-sale terminals,
automated teller machines, or in any other
way, and whether the card qualifies as an
“access device” under Regulation E or is
50

Paragraph 12(c)(3)(i)
1. Resolution with merchant. The consumer
must have tried to resolve the dispute with the
merchant. This does not require any special
procedures or correspondence between them,
and is a matter for factual determination in
each case. The consumer is not required to
seek satisfaction from the manufacturer of the
goods involved. When the merchant is in
bankruptcy proceedings, the consumer is not
required to file a claim in those proceedings.
Paragraph 12(c)(3)(ii)
1. Geographic limitation. The question of
where a transaction occurs (as in the case of
mail or telephone orders, for example) is to be
determined under state or other applicable
law.
2. Merchant honoring card The exceptions
(stated in footnote 26) to the amount and ge­
ographic limitations do not apply if the mer­
chant merely honors, or indicates through
signs or advertising that it honors, a particular
credit card.

12(d) Offsets by Card Issuer Prohibited
Paragraph 12(d)(1)
1. “Holds” on accounts. “Freezing” or plac­
ing a hold on funds in the cardholder’s deposit
account is the functional equivalent of an off­

§226.12

Regulation Z Commentary
set and would contravene the prohibition in
section 226.12(d)(1), unless done in the con­
text of one of the exceptions specified in sec­
tion 226.12(d)(2). For example, if the terms
of a security agreement permitted the card is­
suer to place a hold on the funds, the hold
would not violate the offset prohibition. Simi­
larly, if an order of a bankruptcy court re­
quired the card issuer to turn over deposit ac­
count funds to the trustee in bankruptcy, the
issuer would not violate the regulation by
placing a hold on the funds in order to comply
with the court order.
2. Funds intended as deposits. If the consumer
tenders funds as a deposit (to a checking ac­
count, for example), the card issuer may not
apply the funds to repay indebtedness on the
consumer’s credit card account.
3. Types o f indebtedness; overdraft accounts.
The offset prohibition applies to any indebted­
ness arising from transactions under a credit
card plan, including accrued finance charges
and other charges on the account. The prohi­
bition also applies to balances arising from
transactions not using the credit card itself
but taking place under plans that involve
credit cards. For example, if the consumer
writes a check that accesses an overdraft line
of credit, the resulting indebtedness is subject
to the offset prohibition since it is incurred
through a credit card plan, even though the
consumer did not use an associated check
guarantee or debit card.

in agreements contract language indicating
that consumers are giving a security interest
in any deposit accounts maintained with the
issuer does not result in a security interest that
falls within the exception in section
226.12(d)(2). For a security interest to qualify
for the exception under section 226.12(d)(2)
the following conditions must be met:
• The consumer must be aware that granting
a security interest is a condition for the
credit card account (or for more favorable
account terms) and must specifically intend
to grant a security interest in a deposit ac­
count. Indicia of the consumer’s awareness
and intent could include, for example:
—Separate signature or initials on the
agreement indicating that a security in­
terest is being given.
—Placement of the security agreement on a
separate page, or otherwise separating
the security interest provisions from oth­
er contract and disclosure provisions.
—Reference to a specific amount of depos­
ited funds or to a specific deposit account
number.
• The security interest must be obtainable
and enforceable by creditors generally. If
other creditors could not obtain a security
interest in the consumer’s deposit accounts
to the same extent as the card issuer, the
security interest is prohibited by section
226.12(d)(2).

2. Security interest—after-acquired property.
As used in section 226.12(d), the term “secu­
4. When prohibition applies in case o f termina­
rity interest” does not exclude (as it does for
tion o f account. The offset prohibition applies ^
other Regulation Z purposes) interests in af­
even after the card issuer terminates the card­
ter-acquired property. Thus, a consensual secu­
holder’s credit card privileges, if the indebted­
rity interest in deposit-account funds, including
ness was incurred prior to termination. If the
funds deposited after the granting of the securi­
indebtedness was incurred after termination,
ty interest, would constitute a permissible ex­
the prohibition does not apply.
ception to the prohibition on offsets.
Paragraph 12(d)(2)
1. Security interest—limitations. In order to
qualify for the exception stated in section
226.12(d)(2), a security interest must be af­
firmatively agreed to by the consumer and
must be disclosed in the issuer’s initial disclo­
sures under section 226.6. The security inter­
est must not be the functional equivalent of a
right of offset; as a result, routinely including

3. Court order. If the card issuer obtains a
judgment against the cardholder, and if state
and other applicable law and the terms of the
judgment do not so prohibit, the card issuer
may offset the indebtedness against the card­
holder’s deposit account.
Paragraph 12(d)(3)
1. Automatic payment plans—scope o f excep51

Regulation Z Commentary

§226.12
tion. With regard to automatic debit plans un­
der section 226.12(d)(3), the following rules
apply:
• The cardholder’s authorization must be in
writing and signed or initialed by the
cardholder.
• The authorizing language need not appear
directly above or next to the cardholder’s
signature or initials, provided it appears on
the same document and that it clearly spells
out the terms of the automatic debit plan.
• If the cardholder has the option to accept
or reject the automatic debit feature (such
option may be required under section 913
of the Electronic Fund Transfer Act), the
fact that the option exists should be clearly
indicated.
2. Automatic payment plans—additional ex­
ceptions. The following practices are not pro­
hibited by section 226.12(d)(1):
• Automatically deducting charges for par­
ticipation in a program of banking services
(one aspect of which may be a credit card
plan)
• Debiting the cardholder’s deposit account
on the cardholder’s specific request rather
than on an automatic periodic basis (for
example, a cardholder might check a box
on the credit card bill stub, requesting the
issuer to debit the cardholder’s account to
pay that bill)

12(e) Prompt Notification of Returns
and Crediting of Refunds
Paragraph 12(e)(1)
1. Normal channels. The term “normal chan­
nel” refers to any network or interchange sys­
tem used for the processing of the original
charge slips (or equivalent information con­
cerning the transactions).

References
Statute: §§ 103(1), 132, 133, 135, 162, 166,
167, 169, and 170
Other sections: § 226.13
Other regulations: Regulation E (12 CFR
205)
Previous regulation: § 226.13
1981 changes: The issuance rules in section
226.12(a) make clear that cards may be sent
to the person making the request and also to
any other person for whom a card is request­
ed, except that no liability for unauthorized
use may be imposed on persons who are only
authorized users.
The principal differences in section
226.12(b) about conditions of liability are as
follows: the requirement that the cardholder
be given a postage-paid, preaddressed card or
envelope for notification of loss or theft has
been deleted (corresponding to an amend­
ment to the act); the required disclosures of
maximum liability and of means of notifica­
tion have been simplified; and the required
provision of a means of identification has been
changed in that the issuer now may provide a
means to identify either the cardholder or the
authorized user. Finally, anyone may provide
the notification to the card issuer, not just the
cardholder.
Section 226.12(d) on offsets clarifies that
the offset prohibition does not apply to con­
sensual security interests. The separate
promptness standard which used to apply in
addition to the seven-business-day and threebusiness-day standards has been deleted from
section 226.12(e) on prompt notification of
returns. Section 226.12(f) now clarifies rules
on clearing accounts.
Section 226.12(g), dealing with the rela­
tionship of the regulation to Regulation E
(Electronic Fund Transfers), has been added.

Paragraph 12(e)(2)

SECTION 226.13—Billing-Error
Resolution

1. Crediting account. The card issuer need not
actually post the refund to the consumer’s ac­
count within three business days after receiv­
ing the credit statement, provided that it cred­
its the account as of a date within that time
period.

1. General prohibitions. Footnote 27 prohibits
a creditor from responding to a consumer’s
billing-error allegation by accelerating the
debt or closing the account, and reflects pro­
tections authorized by section 161(d) of the
Truth in Lending Act and section 701 of the

52

Regulation Z Commentary
Equal Credit Opportunity Act. The footnote
also alerts creditors that failure to comply
with the error resolution procedures may re­
sult in the forfeiture of disputed amounts as
prescribed in section 161(e) of the act. (Any
failure to comply may also be a violation sub­
ject to the liability provisions of section 130 of
the act.)
2. Charges for error resolution. If a billing er­
ror occurred, whether as alleged or in a differ­
ent amount or manner, the creditor may not
impose a charge related to any aspect of the
error-resolution process (including charges
for documentation or investigation) and must
credit the consumer’s account if such a charge
was assessed pending resolution. Since the act
grants the consumer error-resolution rights,
the creditor should avoid any chilling effect
on the good faith assertion of errors that
might result if charges are assessed when no
billing error has occurred.

13(a) Definition of Billing Error
Paragraph 13(a)(1)
1. Actual implied, or apparent authority.
Whether use of a credit card or open-end
credit plan is authorized is determined by
state or other applicable law.
Paragraph 13(a)(3)
1. Coverage. Section 226.13(a)(3) covers dis­
putes about goods or services that are “not
accepted” or “not delivered . . . as agreed”;
for example:
• The appearance on a periodic statement of
a purchase, when the consumer refused to
take delivery of goods because they did not
comply with the contract
• Delivery of property or services different
from that agreed upon
• Delivery of the wrong quantity
• Late delivery
• Delivery to the wrong location
Section 226.13(a)(3) does not apply to a dis­
pute relating to the quality of property or
services that the consumer accepts. Whether
acceptance occurred is determined by state or
other applicable law.

§226.13
Paragraph 13(a)(5)
1. Computational errors. In periodic state­
ments that are combined with other informa­
tion, the error-resolution procedures are
triggered only if the consumer asserts a com­
putational billing error in the credit-related
portion of the periodic statement. For
example:
• If a bank combines a periodic statement
reflecting the consumer’s credit card trans­
actions with the consumer’s monthly
checking statement, a computational error
in the checking account portion of the
combined statement is not a billing error.
Paragraph 13(a)(6)
1. Documentation requests. A request for doc­
umentation such as receipts or sales slips,
unaccompanied by an allegation of an error
under section 226.13(a) or a request for
additional
clarification
under section
226.13(a)(6), does not trigger the errorresolution procedures. For example, a request
for documentation merely for purposes such
as tax preparation or recordkeeping does not
trigger the error-resolution procedures.

13(b) Billing-Error Notice
1. Withdrawal The consumer’s withdrawal
of a billing-error notice may be oral or
written.
Paragraph 13(b)(1)
1. Failure to send periodic statement—timing.
If the creditor has failed to send a periodic
statement, the 60-day period runs from the
time the statement should have been sent.
Once the statement is provided, the consumer
has another 60 days to assert any billing er­
rors reflected on it.
2. Failure to reflect credit—timing. If the peri­
odic statement fails to reflect a credit to the
account, the 60-day period runs from trans­
mittal of the statement on which the credit
should have appeared.
3. Transmittal. If a consumer has arranged
for periodic statements to be held at the finan­
cial institution until called for, the statement

§226.13

Regulation Z Commentary

is “transmitted” when it is first made available
to the consumer.

226.13(a)(7), the disputed amount is the en­
tire balance owing.

Paragraph 13(b)(2)

13(d)(1) Consumer's Right to Withhold
Disputed Amount; Collection Action Prohibited

1. Identity o f the consumer. The billing error
notice need not specify both the name and the
account number if the information supplied
enables the creditor to identify the consumer's
name and account.

13(c) Time for Resolution; General
Procedures
1. Temporary or provisional corrections. A
creditor may temporarily correct the consum­
er’s account in response to a billing-error no­
tice but is not excused from complying with
the remaining error-resolution procedures
within the time limits for resolution.
2. Correction without investigation. A creditor
may correct a billing error in the manner and
amount asserted by the consumer without the
investigation or the determination normally
required. The creditor must comply, however,
with all other applicable provisions. If a credi­
tor follows this procedure, no presumption is
created that a billing error occurred.
Paragraph 13(c)(2)

1. Prohibited collection actions. During the er­
ror-resolution period, the creditor is prohibit­
ed from trying to collect the disputed amount
from the consumer. Prohibited collection ac­
tions include, for example, instituting court
action, taking a lien, or instituting attachment
proceedings.
2. Right to withhold payment. If the creditor
reflects any disputed amount or related fi­
nance or other charges on the periodic state­
ment, and is therefore required to make the
disclosure under footnote 30, the creditor may
comply with that disclosure requirement by
indicating that payment of any disputed
amount is not required pending resolution.
Making a disclosure that only refers to the
disputed amount would, of course, in no way
affect the consumer’s right under section
226.13(d)(1) to withhold related finance and
other changes. The disclosure under footnote
30 need not appear in any specific place on the
periodic statement, need not state the specific
amount that the consumer may withhold, and
may be preprinted on the periodic statement.

3. Imposition o f additional charges on undis­
puted amounts. The consumer’s withholding
of the disputed amount from the total bill can­
not subject undisputed balances (including
new purchases or cash advances made during
the present or subsequent cycles) to the impo­
sition of finance or other charges. For exam­
ple, if on an account with a free-ride period
(that is, an account in which paying the new
balance in full allows the consumer to avoid
the imposition of additional finance charges),
13(d) Rules Pending Resolution
a consumer disputes a $2 item out of a total
1. Disputed amount. “Disputed amount” is bill of $300 and pays $298 within the free-ride
the dollar amount alleged by the consumer to period, the consumer would not lose the freebe in error. When the allegation concerns the ride as to any undisputed amounts, even if the
description or identification of the transaction creditor determines later that no billing error
(such as the date or the seller’s name) rather occurred. Furthermore, finance or other
than a dollar amount, the disputed amount is charges may not be imposed on any new pur­
the amount of the transaction or charge that chases or advances that, absent the unpaid
corresponds to the disputed transaction iden­ disputed balance, would not have finance or
tification. If the consumer alleges a failure to other charges imposed on them. Finance or
send a periodic statement under section other charges that would have been incurred
1. Time for resolution. The phrase “two com­
plete billing cycles” means two actual billing
cycles occurring after receipt of the billing er­
ror notice, not a measure of time equal to two
billing cycles. For example, if a creditor on a
monthly billing cycle receives a billing error
notice mid-cycle, it has the remainder of that
cycle plus the next two full billing cycles to
resolve the error.

54

Regulation Z Commentary
even if the consumer had paid the disputed
amount would not be affected.
4. Automatic payment plans—coverage. The
coverage of this provision is limited to the
card issuer’s intrainstitutional payment plans.
It does not apply to:
• Interinstitutional payment plans that per­
mit a cardholder to pay automatically any
credit card indebtedness from an asset ac­
count not held by the card issuer receiving
payment
• Intrainstitutional automatic payment
plans offered by financial institutions that
are not credit card issuers
5. Automatic payment plans—time o f notice.
While the card issuer does not have to restore
or prevent the debiting of a disputed amount
if the billing-error notice arrives after the
three-business-day cut-off, the card issuer
must, however, prevent the automatic debit of
any part of the disputed amount that is still
outstanding and unresolved at the time of the
next scheduled debit date.
13(d)(2) Adverse Credit Reports Prohibited
1. Report o f dispute. Although the creditor
must not issue an adverse credit report be­
cause the consumer fails to pay the disputed
amount or any related charges, the creditor
may report that the amount or the account is
in dispute. Also, the creditor may report the
account as delinquent if undisputed amounts
remain unpaid.
2. “Person. ” During the error-resolution peri­
od, the creditor is prohibited from making an
adverse credit report about the disputed
amount to any person—including employers,
insurance companies, other creditors, and
credit bureaus.
3. Creditor's agent. Whether an agency rela­
tionship exists between a creditor and an is­
suer of an adverse credit report is determined
by state or other applicable law.

13(e) Procedures if Billing Error
Occurred as Asserted
1. Correction o f error. The phrase “as applica­
ble” means that the necessary corrections

§226.13
vary with the type of billing error that oc­
curred. For example, a misidentified transac­
tion (or a transaction that is identified by one
of the alternative methods in section 226.8) is
cured by properly identifying the transaction
and crediting related finance and any other
charges imposed. The creditor is not required
to cancel the amount of the underlying obliga­
tion incurred by the consumer.
2. Form o f correction notice. The written cor­
rection notice may take a variety of forms. It
may be sent separately, or it may be included
on or with a periodic statement that is mailed
within the time for resolution. If the periodic
statement is used, the amount of the billing
error must be specifically identified. If a sepa­
rate billing-error correction notice is provid­
ed, the accompanying or subsequent periodic
statement reflecting the corrected amount
may simply identify it as “credit.”

13(f) Procedures if Different Billing
Error or No Billing Error Occurred
1. Different billing error. Examples of a “dif­
ferent billing error” include:
• Differences in the amount of an error (for
example, the customer asserts a $55.00 er­
ror but the error was only $53.00)
• Differences in other particulars asserted by
the consumer (such as when a consumer
asserts that a particular transaction never
occurred, but the creditor determines that
only the seller’s name was disclosed
incorrectly)
2. Form o f creditor's explanation. The written
explanation (which also may notify the con­
sumer of corrections to the account) may take
a variety of forms. It may be sent separately,
or it may be included on or with a periodic
statement that is mailed within the time for
resolution. If the creditor uses the periodic
statement for the explanation and correc­
tion (s), the corrections must be specifically
identified. If a separate explanation, including
the correction notice, is provided, the en­
closed or subsequent periodic statement re­
flecting the corrected amount may simply
identify it as a “credit.” The explanation may
be combined with the creditor’s notice to the
consumer of amounts still owing, which is re55

Regulation Z Commentary

§226.13
quired under section 226.13(g)(1), provided
it is sent within the time limit for resolution.
(See commentary to section 226.13(e).)

13(g) Creditor’s Rights and Duties After
Resolution
Paragraph 13(g)(1)
1. Amounts owed by consumer. Amounts the
consumer still owes may include both mini­
mum periodic payments and related finance
and other charges that accrued during the
resolution period. As explained in the com­
mentary to section 226.13(d)(1), even if the
creditor later determines that no billing error
occurred, the creditor may not include finance
or other charges that are imposed on undis­
puted balances solely as a result of a consum­
er’s withholding payment of a disputed
amount.
2. Time o f notice. The creditor need not send
the notice of amount owed within the time
period for resolution, although it is under a
duty to send the notice promptly after resolu­
tion of the alleged error. If the creditor com­
bines the notice of the amount owed with
the explanation required under section
226.13(f)(1), the combined notice must be
provided within the time limit for resolution.
Paragraph 13(g)(2)
1. The creditor need not allow any free-ride
period disclosed under sections 226.6(a)(1)
and 226.7 (j) to pay the amount due under
section 226.13(g)(1) if no error occurred and
the consumer was not entitled to a free-ride
period at the time the consumer asserted the
error.
Paragraph 13(g)(3)
1. Time for payment. The consumer has a
minimum of 10 days to pay (measured from
the time the consumer could reasonably be ex­
pected to have received notice of the amount
owed) before the creditor may issue an ad­
verse credit report; if an initially disclosed
free-ride period allows the consumer a longer
time in which to pay, the consumer has the
benefit of that longer period.
56

Paragraph 13(g)(4)
1. Credit
reporting.
Under
section
226.13(g) (4) (i) and (iii) the creditor’s addi­
tional credit reporting responsibilities must be
accomplished promptly. The creditor need
not establish costly procedures to fulfill this
requirement. For example, a creditor that re­
ports to a credit bureau on scheduled updates
need not transmit corrective information by
an unscheduled computer or magnetic tape; it
may provide the credit bureau with the cor­
rect information by letter or other commer­
cially reasonable means when using the sched­
uled update would not be “prompt.” The
creditor is not responsible for ensuring that
the credit bureau corrects its information
immediately.
2. Adverse report to credit bureau. If a credi­
tor made an adverse report to a credit bureau
that disseminated the information to other
creditors, the creditor fulfills its section
226.13(g) (4) (ii) obligations by providing the
consumer with the name and address of the
credit bureau.

13(i) Relation to Electronic Fund
Transfer Act and Regulation E
1. Coverage. Credit extended directly from a
non-overdraft credit line is governed solely by
Regulation Z, even though a combined credit
card/access device is used to obtain the
extension.
2. Incidental credit under agreement Credit
extended incident to an electronic fund trans­
fer under an agreement between the consumer
and the financial institution is governed by
section 226.13 (i), which provides that certain
error resolution procedures in both this regu­
lation and Regulation E apply. Incidental
credit that is not extended under an agree­
ment between the consumer and the financial
institution is governed solely by the error-reso­
lution procedures in Regulation E. For
example:
• Credit inadvertently extended incident to
an electronic fund transfer is governed
solely by the Regulation E error-resolution
procedures, if the bank and the consumer
do not have an agreement to extend

Regulation Z Commentary
credit when the consumer’s account is
overdrawn.
3. Application to debit/credit transactions—
examples. If a consumer withdraws money at
an automated teller machine and activates an
overdraft credit feature on the checking
account:
• An error asserted with respect to the
transaction is subject, for error-resolution
purposes, to the applicable Regulation E
provisions (such as timing and notice) for
the entire transaction.
• The creditor need not provisionally credit
the consumer’s account, under section
205.11 (c) (2) (i) of Regulation E, for any
portion of the unpaid extension of credit.
• The creditor must credit the consumer’s
account under section 205.11(e) with any
finance or other charges incurred as a re­
sult of the alleged error.
• The provision of section 226.13(d) and
(g) apply only to the credit portion of the
transaction.

References
Statute: §§ 161 and 162
Other sections: §§ 226.6 through 226.8
Other regulations: Regulation E (12 CFR
205)
Previous regulation: §§ 226.2(j) and (cc), and
226.14
1981 changes: Section 226.13 reflects several
substantive changes from the previous regula­
tion and a complete restructuring of the errorresolution provisions. The new organization,
for example, arranges the creditor’s responsi­
bilities in chronological sequence.
Section 226.13(a)(7) implements amended
section 161(b) of the act and provides that
the creditor’s failure to send a periodic state­
ment to the consumer’s current address is a
billing error, unless the creditor received writ­
ten notice of the address change fewer than 20
days (instead of 10 days) before the end of
the billing cycle.
Several provisions regarding the creditor’s
duties after a billing error is alleged have been
revised. The previous regulation immunized a
creditor from liability for inadvertently taking
collection action or making an adverse credit

§226.14
report within two days after receiving a bill­
ing-error notice; these provisions are deleted
from the revised regulation. The revised regu­
lation no longer requires placement “on the
face” of the periodic statement of the disclo­
sure about payment of disputed amounts.
The revised regulation changes the rule in
the previous regulation that a card issuer must
prevent or restore an automatic debit of a dis­
puted amount if it receives a billing-error no­
tice within 16 days after transmitting the peri­
odic statement that reflects the alleged error.
Under the revised regulation, the card issuer
must prevent an automatic debit if it receives
a billing-error notice up to 3 days before the
scheduled payment date (provided that the
notice is received within the 60 days for the
consumer to assert the error).

SECTION 226.14— Determination of
Annual Percentage Rate
14(a) General Rule
1. Tolerance. The tolerance of 4 of 1 percent­
age point above or below the annual percent­
age rate applies to any required disclosure of
the annual percentage rate. The disclosure of
the annual percentage rate is required in sec­
tions 226.6, 226.7, 226.9, 226.15, 226.16, and
226.26.
2. Rounding. The regulation does not require
that the annual percentage rate be calculated
to any particular number of decimal places;
rounding is permissible within the | of 1 per­
cent tolerance. For example, an exact annual
percentage rate of 14.33333 percent may be
stated as 14.33 percent or as 14.3 percent, or
even as 14£ percent; but it could not be stated
as 14.2 percent or 14 percent, since each var­
ies by more than the permitted tolerance.
3. Periodic rates. No explicit tolerance exists
for any periodic rate as such; a disclosed peri­
odic rate may vary from precise accuracy (for
example, due to rounding) only to the extent
that its annualized equivalent is within the tol­
erance permitted by section 226.14(a). Fur­
ther, a periodic rate need not be calculated to
any particular number of decimal places.
4. Finance charges. The regulation does not
57

§ 226.14
prohibit creditors from assessing finance
charges on balances that include prior, unpaid
finance charges; state or other applicable law
may do so, however.
5. Good faith reliance on faulty calculation
tools. Footnote 31a absolves a creditor of lia­
bility for an error in the annual percentage
rate or finance charge that resulted from a
corresponding error in a calculation tool used
in good faith by the creditor. Whether or not
the creditor’s use of the tool was in good faith
must be determined on a case-by-case basis,
but the creditor must in any case have taken
reasonable steps to verify the accuracy of the
tool, including any instructions, before using
it. Generally, the footnote is available only for
errors directly attributable to the calculation
tool itself, including software programs; it is
not intended to absolve a creditor of liability
for its own errors, or for errors arising from
improper use of the tool, from incorrect data
entry, or from misapplication of the law.

14(b) Annual Percentage Rate for Initial
Disclosures and for Advertising Purposes
1. Corresponding annual percentage rate com­
putation. For initial disclosures (under section
226.6) and for advertising (under section
226.16), the annual percentage rate is deter­
mined by multiplying the periodic rate by the
number of periods in the year. This computa­
tion reflects the fact that, in such disclosures,
the rate (known as the corresponding annual
percentage rate) is prospective and does not
involve any particular finance charge or peri­
odic balance. This computation also is used to
determine any annual percentage rate for oral
disclosures under section 226.26(a).

Regulation Z Commentary
the rate actually applied during a particular
cycle (the historical rate); this rate may differ
from the corresponding annual percentage
rate because of the inclusion of fixed, mini­
mum, or transaction charges. Sections
226.14(c)(1) through (c)(4) state the com­
putation rules for the historical rate.
2. Periodic rates. Section 226.14(c)(1) ap­
plies if the only finance charge imposed is due
to the application of a periodic rate to a bal­
ance. The creditor may compute the annual
percentage rate either:
• by multiplying each periodic rate by the
number of periods in the year or
• by the “quotient” method. This method
refers to a composite annual percentage
rate when different periodic rates apply to
different balances. For example, a particu­
lar plan may involve a periodic rate of 1^
percent on balances up to $500, and 1 per­
cent on balances over $500. If, in a given
cycle, the consumer has a balance of $800,
the finance charge would consist of $7.50
(500 x .015) plus $3.00 (300 x .01), for a
total finance charge of $10.50. The annual
percentage rate for this period may be dis­
closed either as 18 percent on $500 and 12
percent on $300, or as 15.75 percent on a
balance of $800 (the quotient of $10.50 di­
vided by $800, multiplied by 12).

14(c) Annual Percentage Rate for
Periodic Statements

3. Charges not based on periodic rates. Section
226.14(c)(2) applies if the finance charge im­
posed includes a charge not due to the appli­
cation of a periodic rate (other than a charge
relating to a specific transaction). For exam­
ple, if the creditor imposes a minimum $1 fi­
nance charge on all balances below $50, and
the consumer’s balance was $40 in a particu­
lar cycle, the creditor would disclose an annu­
al percentage rate of 30 percent (1/40 x 12).

1. General rule. Section 226.14(c) requires
disclosure of the corresponding annual per­
centage rate for each periodic rate (under sec­
tion 226.7(d)). It is figured by multiplying
each periodic rate by the number of periods
per year. This disclosure is like that provided
on the initial disclosure statement. The peri­
odic statement also must reflect (under sec­
tion 226.7(g)) the annualized equivalent of

4. No balance. Footnote 32 to section
226.14(c)(2) would apply not only when
minimum charges are imposed on an account
with no balance, but also to a plan in which a
periodic rate is applied to advances from the
date of the transaction. For example, if on
May 19 the consumer pays the new balance in
full from a statement dated May 1 and has no
further transactions reflected on the June 1

58

Regulation Z Commentary
statement, that statement would reflect a fi­
nance charge with no account balance.
5. Transaction charges. Section 226.14(c)(3)
transaction charges include, for example:
• A loan fee of $10 imposed on a particular
advance
• A charge of 3 percent of the amount of
each transaction
The reference to avoiding duplication in the
computation requires that the amounts of
transactions on which transaction charges
were imposed not be included both in the
amount of total balances and in the “other
amounts on which a finance charge was im­
posed” figure. For further explanation and ex­
amples of how to determine the components
of this formula, see appendix F.
6. Daily rate with specific transaction charge.
Section 226.14(c)(3) sets forth an acceptable
method for calculating the annual percentage
rate if the finance charge results from a charge
relating to a specific transaction and the appli­
cation of a daily periodic rate. This section
includes the requirement that the creditor fol­
low the rules in appendix F in calculating the
annual percentage rate, especially footnote 1
to appendix F, which addresses the daily rate/
transaction charge situation by providing that
the “average of daily balances” shall be used
instead of the “sum of the balances.”
7. Charges related to opening, renewing, or
continuing account. Footnote 33 is applicable
to section 226.14(c)(2) and (c)(3). The
charges involved here do not relate to a specif­
ic transaction or to specific activity on the
account, but relate solely to the opening, re­
newing, or continuing of the account. For ex­
ample, an annual fee to renew an open-end
credit account that is a percentage of the cred­
it limit on the account, or that is charged only
to consumers who have not used their credit
card for a certain dollar amount in transac­
tions during the preceding year, would not be
included in the calculation of the annual per­
centage rate, even though the fee may not be
excluded from the finance charge under sec­
tion 226.4(c)(4). (See comment 4(c) (4)-2).
Inclusion of these charges in the annual per­
centage rate calculation results in significant

§226.14
distortions of the annual percentage rate and
delivery of a possibly misleading disclosure to
consumers. The rule in footnote 33 applies
even if the loan fee, points, or similar charges
are billed on a subsequent periodic statement
or withheld from the proceeds of the first ad­
vance on the account.
8. Classification o f charges. If the finance
charge includes a charge not due to the appli­
cation of a periodic rate, the creditor must de­
termine the proper annual percentage rate
computation method according to the type of
charge imposed. If the charge is tied to a spe­
cific transaction (for example, 3 percent of the
amount of each transaction), then the method
in section 226.14(c)(3) must be used. If a
fixed or minimum charge is applied, that is,
one not tied to any specific transaction, then
the formula in section 226.14(c)(2) is
appropriate.
9. Small finance charges. Section 226.14(c)(4) gives the creditor an alternative to section
226.14(c)(2) and (c)(3) if small finance
charges (50 cents or less) are involved; that
is, if the finance charge includes m inim um or
fixed fees not due to the application of a peri­
odic rate and the total finance charge for the
cycle does not exceed 50 cents. For example,
while a monthly activity fee of 50 cents on a
balance of $20 would produce an annual per­
centage rate of 30 percent under the rule in
section 226.14(c)(2), the creditor may dis­
close an annual percentage rate of 18 percent
if the periodic rate generally applicable to all
balances is 1£ percent per month. This option
is consistent with the provision in footnote 11
to sections 226.6 and 226.7 permitting the
creditor to disregard the effect of m inim um
charges in disclosing the ranges of balances to
which periodic rates apply.

14(d) Calculations Where Daily Periodic
Rate Applied
1. Quotient method. Section 226.14(d) ad­
dresses use of a daily periodic rate(s) to deter­
mine some or all of the finance charge and use
of the quotient method to determine the annu­
al percentage rate. Since the quotient formula
in section 226.14(c) (1) (ii) does not work
when a daily rate is being applied to a series of
59

Regulation Z Commentary

§ 226.14
daily balances, section 226.14(d) gives the
creditor two alternative ways to figure the an­
nual percentage rate—either of which satisfies
the requirement in section 226.7(g).
2. Daily rate with specific transaction charge.
If the finance charge results from a charge re­
lating to a specific transaction and the applica­
tion of a daily periodic rate, see comment
14(c)-6 for guidance on an appropriate calcu­
lation method.

References
Statute: § 107
Other sections: §§ 226.6, 226.7, 226.9, 226.15,
226.16, and 226.26.
Previous regulation: § 226.5(a) and interpre­
tation §§ 226.501 and 226.506.
1981 changes: Section 226.14 reflects the stat­
utory amendment permitting a J of 1 percent
tolerance for annual percentage rates. The re­
vised regulation no longer reflects the provi­
sion dealing with finance charges imposed on
specified ranges or brackets of balances. The
revised regulation includes a footnote provid­
ing that loan fees, points, or similar charges
unrelated to any specific transaction are not
figured into the annual percentage rate
computation.

SECTION 226.15—Right of Rescission
1. Transactions not covered. Credit extensions
that are not subject to the regulation are not
covered by section 226.15 even if the custom­
er’s principal dwelling is the collateral secur­
ing the credit. For this purpose, “credit exten­
sions” also would include the occurrences
listed in comment 15(a) (1)-1. For example,
the right of rescission does not apply to the
opening of a business-purpose credit line, even
though the loan is secured by the customer’s
principal dwelling.

15(a) Consumer’s Right to Rescind
Paragraph 15(a)(1)
1. Occurrences subject to right. Under an
open-end credit plan secured by the consum­
er’s principal dwelling, the right of rescission
60

generally arises with each of the following
occurrences:
•
•
•
•

Opening the account
Each credit extension
Increasing the credit limit
Adding to an existing account a security
interest in the consumer’s principal
dwelling
• Increasing the dollar amount of the securi­
ty interest taken in the dwelling to secure
the plan. For example, a consumer may
open an account with a $10,000 credit lim­
it, $5,000 of which is initially secured by
the consumer’s principal dwelling. The
consumer has the right to rescind at that
time and (except as noted in section
226.15(a) (1) (ii)) with each extension on
the account. Later, if the creditor decides
that it wants the credit line fully secured,
and increases the amount of its interest in
the consumer’s dwelling, the consumer has
the right to rescind the increase.

2. Exceptions. Although the consumer gener­
ally has the right to rescind with each transac­
tion on the account, section 125(e) of the act
provides an exception: the creditor need not
provide the right to rescind at the time of each
credit extension made under an open-end
credit plan secured by the consumer’s princi­
pal dwelling to the extent that the credit ex­
tended is in accordance with a previously es­
tablished credit limit for the plan. This limited
rescission option is available whether or not
the plan existed prior to the effective date of
the act.
3. Security interest arising from transaction.
In order for the right of rescission to apply,
the security interest must be retained as part
of the credit transaction. For example:
• A security interest that is acquired by a
contractor who is also extending the credit
in the transaction
• A mechanic’s or materialman’s lien that is
retained by a subcontractor or supplier of
a contractor-creditor, even when the latter
has waived its own security interest in the
consumer’s home
The security interest is not part of the credit
transaction, and therefore the transaction is

Regulation Z Commentary
not subject to the right of rescission when, for
example:
• A mechanic’s or materialman’s hen is ob­
tained by a contractor who is not a party
to the credit transaction but merely is paid
with the proceeds of the consumer’s cash
advance
• All security interests that may arise in
connection with the credit transaction are
validly waived
• The creditor obtains a hen and completion
bond that in effect satisfies all liens against
the consumer’s principal dwelling as a re­
sult of the credit transaction
Although liens arising by operation of law are
not considered security interests for purposes
of disclosure under section 226.2, that section
specifically includes them in the definition for
purposes of the right of rescission. Thus, even
though an interest in the consumer’s principal
dwelling is not a required disclosure under
section 226.6(c), it may still give rise to the
right of rescission.
4. Consumer. To be a consumer within the
meaning of section 226.2, that person must at
least have an ownership interest in the dwell­
ing that is encumbered by the creditor’s secu­
rity interest, although that person need not be
a signatory to the credit agreement. For exam­
ple, if only one spouse enters into a secured
plan, the other spouse is a consumer if the
ownership interest of that spouse is subject to
the security interest.
5. Principal dwelling. A consumer can only
have one principal dwelling at a time. A vaca­
tion or other second home would not be a
principal dwelling. A transaction secured by a
second home (such as a vacation home) that
is not currently being used as the consumer’s
principal dwelling is not rescindable, even if
the consumer intends to reside there in the
future. When a consumer buys or builds a
new dwelling that will become the consumer’s
principal dwelling within one year or upon
completion of construction, the new dwelling
is considered the principal dwelling when it
secures the open-end credit line. Dwelling, as
defined in section 226.2, includes structures
that are classified as personalty under state
law. For example, a transaction secured by a

§226.15
mobile home, trailer, or houseboat used as the
consumer’s principal dwelling may be
rescindable.
6. Special rule for principal dwelling. When
the consumer is acquiring or constructing a
new principal dwelling, any credit plan or ex­
tension secured by the equity in the consum­
er’s current principal dwelling (for example,
an advance to be used as a bridge loan) is still
subject to the right of rescission.
Paragraph 15(a)(2)
1. Consumer's exercise o f right The consumer
must exercise the right of rescission in writ­
ing, but not necessarily on the notice supplied
under section 226.15(b). Whatever the means
of sending the notification of rescission—mail,
telegram, or other written means—the time
period for the creditor’s performance under
section 226.15(d)(2) does not begin to run
until the notification has been received. The
creditor may designate an agent to receive the
notification so long as the agent’s name and
address appear on the notice provided to the
consumer under section 226.15(b).
Paragraph 15(a)(3)
1. Rescission period. The period within which
the consumer may exercise the right to re­
scind runs for three business days from the
last of three events:
• The occurrence that gives rise to the right
of rescission
• Delivery of all material disclosures that
are relevant to the plan
• Delivery to the consumer of the required
rescission notice
For example, an account is opened on Friday,
June 1, and the disclosures and notice of the
right to rescind were given on Thursday, May
31; the rescission period will expire at mid­
night of the third business day after June 1—
that is, Tuesday, June 5. In another example,
if the disclosures are given and the account is
opened on Friday, June 1, and the rescission
notice is given on Monday, June 4, the rescis­
sion period expires at midnight of the third
business day after June 4—that is, Thursday,
June 7. The consumer must place the rescis61

Regulation Z Commentary

§226.15
sion notice in the mail, file it for telegraphic
transmission, or deliver it to the creditor’s
place of business within that period in order
to exercise the right.
2. Material disclosures. Footnote 36 sets forth
the material disclosures that must be provided
before the rescission period can begin to run.
The creditor must provide sufficient informa­
tion to satisfy the requirements of section
226.6 for these disclosures. A creditor may
satisfy this requirement by giving an initial
disclosure statement that complies with the
regulation. Failure to give the other required
initial disclosures (such as the billing-rights
statement) does not prevent the running of
the rescission period, although that failure
may result in civil liability or administrative
sanctions.
3. Material disclosures—variable-rate pro­
gram. For a variable-rate program, the mate­
rial disclosures also include the disclosures
listed in footnote 12 to section 226.6(a)(2):
the circumstances under which the rate may
increase; the limitations on the increase; and
the effect of an increase.
4. Unexpired right o f rescission. When the
creditor has failed to take the action necessary
to start the three-day rescission period run­
ning, the right to rescind automatically lapses
on the occurrence of the earliest of the follow­
ing three events:
• The expiration of three years after the oc­
currence giving rise to the right of
rescission
• Transfer of all the consumer’s interest in
the property
• Sale of the consumer’s interest in the prop­
erty, including a transaction in which the
consumer sells the dwelling and takes back
a purchase money note and mortgage or
retains legal title through a device such as
an installment sale contract
Transfer of all the consumer’s interest in­
cludes such transfers as bequests and gifts. A
sale or transfer of the property need not be
voluntary to terminate the right to rescind.
For example, a foreclosure sale would termi­
nate an unexpired right to rescind. As provid­
ed in section 125 of the act, the three-year
62

limit may be extended by an administrative
proceeding to enforce the provisions of section
226.15. A partial transfer of the consumer’s
interest, such as a transfer bestowing co-own­
ership on a spouse, does not terminate the
right of rescission.
Paragraph 15(a)(4)
1. Joint owners. When more than one con­
sumer has the right to rescind a transaction,
any one of them may exercise that right and
cancel the transaction on behalf of all. For
example, if both a husband and wife have the
right to rescind a transaction, either spouse
acting alone may exercise the right and both
are bound by the rescission.

15(b) Notice of Right to Rescind
1. Who receives notice. Each consumer enti­
tled to rescind must be given:
• Two copies of the rescission notice
• The material disclosures
In a transaction involving joint owners, both
of whom are entitled to rescind, both must
receive the notice of the right to rescind and
disclosures. For example, if both spouses are
entitled to rescind a transaction, each must
receive two copies of the rescission notice and
one copy of the disclosures.
2. Format. The rescission notice may be phys­
ically separated from the material disclosures
or combined with the material disclosures, so
long as the information required to be includ­
ed on the notice is set forth in a clear and
conspicuous manner. See the model notices in
appendix G.
3. Content. The notice must include all of the
information outlined in section 226.15(b)(1)
through (5). The requirement in section
226.15(b) that the transaction or occurrence
be identified may be met by providing the date
of the transaction or occurrence. The notice
may include additional information related to
the required information, such as:
• A description of the property subject to
the security interest
• A statement that joint owners may have

Regulation Z Commentary

§226.15

the right to rescind and that a rescission
by one is effective for all
• The name and address of an agent of the
creditor to receive notice of rescission
4. Time o f providing notice. The notice re­
quired by section 226.15(b) need not be given
before the occurrence giving rise to the right
of rescission. The creditor may deliver the no­
tice after the occurrence, but the rescission pe­
riod will not begin to run until the notice is
given. For example, if the creditor provides
the notice on May 15, but disclosures were
given and the credit limit was raised on May
10, the three-business-day rescission period
will run from May 15.

15(c) Delay of Creditor’s Performance
1. General rule. Until the rescission period
has expired and the creditor is reasonably sat­
isfied that the consumer has not rescinded, the
creditor must not, either directly or through a
third party:
• Disburse advances to the consumer
• Begin performing services for
consumer
• Deliver materials to the consumer

the

A creditor may, however, continue to allow
transactions under an existing open-end credit
plan during a rescission period that results
solely from the addition of a security interest
in the consumer’s principal dwelling. (See
comment 15(c)-3 for other actions that may
be taken during the delay period.)
2. Escrow. The creditor may disburse ad­
vances during the rescission period in a valid
escrow arrangement. The creditor may not,
however, appoint the consumer as “trustee”
or “escrow agent” and distribute funds to the
consumer in that capacity during the delay
period.
3. Permissible actions. Section 226.15(c) does
not prevent the creditor from taking other
steps during the delay, short of beginning ac­
tual performance. Unless otherwise prohibit­
ed, such as by state law, the creditor may, for
example:
• Prepare the cash advance check
• Perfect the security interest

• Accrue finance charges during the delay
period
4. Performance by third party. The creditor is
relieved from liability for failure to delay per­
formance if a third party with no knowledge
that the rescission right has been activated
provides materials or services, as long as any
debt incurred for materials or services ob­
tained by the consumer during the rescission
period is not secured by the security interest
in the consumer’s dwelling. For example, if a
consumer uses a bank credit card to purchase
materials from a merchant in an amount be­
low the floor limit, the merchant might not
contact the card issuer for authorization and
therefore would not know that materials
should not be provided.
5. Delay beyond rescission period The credi­
tor must wait until it is reasonably satisfied
that the consumer has not rescinded. For ex­
ample, the creditor may satisfy itself by doing
one of the following:
• Waiting a reasonable time after expiration
of the rescission period to allow for deliv­
ery of a mailed notice
• Obtaining a written statement from the
consumer that the right has not been
exercised.
When more than one consumer has the right
to rescind, the creditor cannot reasonably rely
on the assurance of only one consumer, be­
cause other consumers may exercise the right.

15(d) Effects of Rescission
Paragraph 15(d)(1)
1. Termination o f security interest. Any secu­
rity interest giving rise to the right of rescis­
sion becomes void when the consumer exercis­
es the right of rescission. The security interest
is automatically negated, regardless of its
status and whether or not it was recorded or
perfected. Under section 226.15(d)(2), how­
ever, the creditor must take any action neces­
sary to reflect the fact that the security inter­
est no longer exists.
2. Extent o f termination. The creditor’s secu­
rity interest is void only to the extent that it is
related to the occurrence giving rise to the
63

Regulation Z Commentary

§226.15
right of rescission. For example, upon
rescission:
• If the consumer’s right to rescind is acti­
vated by the opening of a plan, any securi­
ty interest in the principal dwelling is void.
• If the right arises due to an increase in the
credit limit, the security interest is void as
to the amount of credit extensions over the
prior limit, but the security interest in
amounts up to the original credit limit is
unaffected.
• If the right arises with each individual
credit extension, then the interest is void
as to that extension, and other extensions
are unaffected.
Paragraph 15(d)(2)
1. Refunds to consumer. The consumer can­
not be required to pay any amount in the form
of money or property either to the creditor or
to a third party as part of the occurrence sub­
ject to the right of rescission. Any amounts of
this nature already paid by the consumer must
be refunded. “Any amount” includes finance
charges already accrued, as well as other
charges such as application and commitment
fees or fees for a title search or appraisal,
whether paid to the creditor, paid directly to a
third party, or passed on from the creditor to
the third party. It is irrelevant that these
amounts may not represent profit to the credi­
tor. For example:
• If the occurrence is the opening of the
plan, the creditor must return any mem­
bership or application fee paid.
• If the occurrence is the increase in a credit
limit or the addition of a security interest,
the creditor must return any fee imposed
for a new credit report or filing fees.
• If the occurrence is a credit extension, the
creditors must return fees such as applica­
tion, title, and appraisal or survey fees, as
well as any finance charges related to the
credit extension.
2. Amounts not refundable to consumer.
Creditors need not return any money given by
the consumer to a third party outside of the
occurrence, such as costs incurred for a build­
ing permit or for a zoning variance. Similarly,
the term “any amount” does not apply to
64

money or property given by the creditor to the
consumer; those amounts must be tendered by
the consumer to the creditor under section
226.15(d)(3).
3. Reflection o f security interest termination.
The creditor must take whatever steps are
necessary to indicate that the security interest
is terminated. Those steps include the cancel­
lation of documents creating the security in­
terest, and the filing of release or termination
statements in the public record. In a transac­
tion involving subcontractors or suppliers that
also hold security interests related to the oc­
currence rescinded by the consumer, the cred­
itor must ensure that the termination of their
security interests is also reflected. The 20-day
period for the creditor’s action refers to the
time within which the creditor must begin the
process. It does not require all necessary steps
to have been completed within that time, but
the creditor is responsible for seeing the pro­
cess through to completion.
Paragraph 15(d)(3)
1. Property exchange. Once the creditor has
fulfilled its obligation under section
226.15(d)(2), the consumer must tender to
the creditor any property or money the credi­
tor has already delivered to the consumer. At
the consumer’s option, property may be ten­
dered at the location of the property. For ex­
ample, if fixtures or furniture have been deliv­
ered to the consumer’s home, the consumer
may tender them to the creditor by making
them available for pick-up at the home, rather
than physically returning them to the credi­
tor’s premises. Money already given to the
consumer must be tendered at the creditor’s
place of business. For purpose of property ex­
change, the following additional rules apply:
• A cash advance is considered money for
purposes of this section even if the creditor
knows what the consumer intends to pur­
chase with the money.
• In a three-party open-end credit plan (that
is, if the creditor and seller are not the
same or related persons), extensions by
the creditor that are used by the consumer
for purchases from third-party sellers are
considered to be the same as cash ad­

Regulation Z Commentary
vances for purposes of tendering value to
the creditor, even though the transaction is
a purchase for other purposes under the
regulation. For example, if a consumer ex­
ercises the unexpired right to rescind after
using a three-party credit card for one
year, the consumer would tender the
amount of the purchase price for the items
charged to the account, rather than ten­
dering the items themselves to the
creditor.
2. Reasonable value. If returning the property
would be extremely burdensome to the con­
sumer, the consumer may offer the creditor its
reasonable value rather than returning the
property itself. For example, if building mate­
rials have already been incorporated into the
consumer’s dwelling, the consumer may pay
their reasonable value.
Paragraph 15(d)(4)
1. Modifications. The procedures outlined in
section 226.15(d)(2) and (d)(3) may be
modified by a court. For example, when a
consumer is in bankruptcy proceedings and
prohibited from returning anything to the
creditor, or when the equities dictate, a modi­
fication might be made.

15(e) Consumer’s Waiver of Right to
Rescind
1. Need for waiver. To waive the right to re­
scind, the consumer must have a bona fide
personal financial emergency that must be met
before the end of the rescission period. The
existence of the consumer’s waiver will not, of
itself, automatically insulate the creditor from
liability for failing to provide the right of
rescission.
2. Procedure. To waive or modify the right to
rescind, the consumer must give a written
statement that specifically waives or modifies
the right, and also includes a brief description
of the emergency. Each consumer entitled to
rescind must sign the waiver statement. In a
transaction involving multiple consumers,
such as a husband and wife using their home
as collateral, the waiver must bear the signa­
tures of both spouses.

§226.15

15(f) Exempt Transactions
1. Residential mortgage transaction. Al­
though residential mortgage transactions
would seldom be made on bona fide open-end
credit plans (under which repeated transac­
tions must be reasonably contemplated), an
advance on an open-end plan could be for a
downpayment for the purchase of a dwelling
that would then secure the remainder of the
line. In such a case, only the particular ad­
vance for the downpayment would be exempt
from the rescission right.
2. State creditors. Cities and other political
subdivisions of states acting as creditors are
not exempt from section 226.15.
3. Spreader clause. When the creditor holds a
mortgage or deed of trust on the consumer’s
principal dwelling and that mortgage or deed
of trust contains a “spreader clause” (also
known as a “dragnet” or cross-collateraliza­
tion clause), subsequent occurrences such as
the opening of a plan or individual credit ex­
tensions are subject to the right of rescission
to the same degree as if the security interest
were taken directly to secure the open-end
plan, unless the creditor effectively waives its
security interest under the spreader clause
with respect to the subsequent open-end credit
extensions.

References
Statute: §§ 113, 125, and 130 and the Housing
and Community Development Technical
Amendments Act of 1984 § 205 (Pub. L. 98479).
Other sections: § 226.2 and appendix G
Previous regulation: § 226.9
1981 changes: Section 226.15 reflects the stat­
utory amendments of 1980, providing for a
limited right of rescission when individual
credit extensions are made in accordance with
a previously established credit limit for an
open-end credit plan. The 1980 amendments
provided that this limited rescission right be
available for a three-year trial period. Howev­
er, Pub. L. 98-479 now permanently exempts
such individual credit extensions from the
right of rescission.
The right to rescind applies not only to real
property used as the consumer’s principal
65

Regulation Z Commentary

§226.15
dwelling, but to personal property as well.
The regulation provides no specific text or for­
mat for the rescission notice.
When a consumer exercises the right to re­
scind, the creditor now has 20 days to return a
consumer’s money or property and take the
necessary action to terminate the security in­
terest. The creditor has 20 days to take posses­
sion of the money or property after the con­
sumer’s tender before the consumer may keep
it without further obligation.
Under the revised regulation, the waiver
provision has been relaxed. The lien status of
the mortgage is irrelevant for purposes of the
residential mortgage transaction exemption.
The exemption for agricultural loans from the
right to rescind has been deleted.

SECTION 226.16—Advertising
1. Clear and conspicuous standard. Section
226.16 is subject to the general “clear and
conspicuous” standard for subpart B (see sec­
tion 226.5(a)(1)) but prescribes no specific
rules for the format of the necessary disclo­
sures. The credit terms need not be printed in
a certain type size nor need they appear in any
particular place in the advertisement.
2. Expressing the annual percentage rate in
abbreviated form. Whenever the annual per­
centage rate is used in an advertisement for
open-end credit, it may be expressed using a
readily understandable abbreviation such as
APR.

16(a) Actually Available Terms
1. General rule. To the extent that an adver­
tisement mentions specific credit terms, it may
state only those terms that the creditor is ac­
tually prepared to offer. For example, a credi­
tor may not advertise a very low annual per­
centage rate that will not in fact be available
at any time. Section 226.16(a) is not intended
to inhibit the promotion of new credit pro­
grams, but to bar the advertising of terms that
are not and will not be available. For example,
a creditor may advertise terms that will be of­
fered for only a limited period, or terms that
will become available at a future date.
2. Specific credit terms.
66

“Specific credit

terms” is not limited to the disclosures re­
quired by the regulation but would include
any specific components of a credit plan, such
as the minimum periodic payment amount or
seller’s points in a plan secured by real estate.

16(b) Advertisement of Terms That
Require Additional Disclosures
1. Terms requiring additional disclosures. In
section 226.16(b) the phrase “the terms re­
quired to be disclosed under section 226.6”
refers to the terms in section 226.6(a) and
226.6(b).
2. Use o f positive terms. An advertisement
must state a credit term as a positive number
in order to trigger additional disclosures. For
example, “no annual membership fee” would
not trigger the additional disclosures required
by section 226.16(b).
3. Implicit terms. Section 226.16(b) applies
even if the triggering term is not stated explic­
itly, but may be readily determined from the
advertisement.
4. Membership fees. A membership fee is not
a triggering term nor need it be disclosed un­
der section 226.16(b)(3) if it is required for
participation in the plan whether or not an
open-end credit feature is attached. (See com­
ment 6(b)-l.)
5. Variable-rate plans. In disclosing the annu­
al percentage rate in an advertisement for a
variable-rate plan, as required by section
226.16(b)(2), the creditor may use an insert
showing the current rate, may give the rate
as of a specified recent date, or may disclose
an estimated rate under section 226.5(c).
The additional requirement in section
226.16(b)(2) to disclose the variable-rate fea­
ture may be satisfied by disclosing that “the
annual percentage rate may vary” or a similar
statement, but the advertisement need not in­
clude the information required by footnote 12
to section 226.6(a)(2).
6. Discounted variable-rate plans—disclosure
o f the annual percentage rates. The advertised
annual percentage rates for discounted vari­
able-rate plans must, in accordance with com­
ment 6(a) (2)-10, include both the initial rate
(with the statement of how long it will remain

Regulation Z Commentary

§226.17

in effect) and the current indexed rate (with
the statement that this second rate may vary).
The options listed in comment 16(b)-4 may
be used in disclosing the current indexed rate.

applied to balances of $500 or less, and a 1
percent rate is applied to balances greater
than $500.

7. Triggering terms. The following are exam­
ples of terms that trigger additional
disclosures:

References

• “Small monthly service charge on the re­
maining balance.”
• “ 12 percent Annual Percentage Rate.”
• “A $15 annual membership fee buys you
$2,000 in credit.”
8. Minimum, fixed, transaction, activity, or
similar charge. The charges to be disclosed
under section 226.16(b) (1) are those that are
considered finance charges under section
226.4.
16(c) Catalogs and Multiple-Page
Advertisements
1. Definition. The multiple-page advertise­
ments to which section 226.16(c) refers are
advertisements consisting of a series of se­
quentially numbered pages—for example, a
supplement to a newspaper. A mailing con­
sisting of several separate flyers or pieces of
promotional material in a single envelope does
not constitute a single multiple-page adver­
tisement for purposes of section 226.16(c).
Paragraph 16(c)(1)
1. General Section 226.16(c)(1) permits
creditors to put credit information together in
one place in a catalog or multiple-page adver­
tisement. The rule applies only if the catalog
or multiple-page advertisement contains one
or more of the triggering terms from section
226.16(b).
Paragraph 16(c)(2)
1. Table or schedule i f credit terms depend on
outstanding balance. If the credit terms of a
plan vary depending on the amount of the bal­
ance outstanding, rather than the amount of
any property purchased, a table or schedule
complies with section 226.16(c)(2) if it in­
cludes the required disclosures for representa­
tive balances. For example, a creditor would
disclose that a periodic rate of 1.5 percent is

Statute: §§ 141 and 143
Previous regulation: § 226.10(a) through (c)
and interpretation § 226.1002
Other sections: §§ 226.2 and 226.6
1981 changes: Section 226.16 reflects the stat­
utory changes to section 143 of the act which
reduce both the number of triggering terms
and the additional disclosures required by the
use of those terms. Membership or participa­
tion fees are included among the additional
disclosures required when a triggering term is
used. The substance of interpretation section
226.1002, requiring disclosure of representa­
tive amounts of credit in catalogs and multi­
ple-page advertisements, has been incorporat­
ed in simplified form in paragraph (c).

SUBPART C—CLOSED-END
CREDIT

SECTION 226.17—General Disclosure
Requirements
17(a) Form of Disclosures
Paragraph 17(a)(1)
1. Clear and conspicuous. This standard re­
quires that disclosures be in a reasonably un­
derstandable form. For example, while the
regulation requires no mathematical progres­
sion or format, the disclosures must be pre­
sented in a way that does not obscure the
relationship of the terms to each other. In ad­
dition, although no minimum type size is
mandated, the disclosures must be legible,
whether typewritten, handwritten, or printed
by computer.
2. Segregation o f disclosures. The disclosures
may be grouped together and segregated from
other information in a variety of ways. For
example, the disclosures may appear on a sep­
arate sheet of paper or may be set off from
67

§226.17
other information on the contract or other
documents:
•
•
•
•

By outlining them in a box
By bold print dividing lines
By a different color background
By a different type style

Regulation Z Commentary
formation that is directly related to those dis­
closures. Directly related information in­
cludes, for example, the following:

• A description of a grace period after which
a late payment charge will be imposed.
For example, the disclosure given under
section 226.18(7) may state that a late
(The general segregation requirement de­
charge will apply to “any payment re­
scribed in this subparagraph does not apply to
ceived more than 15 days after the due
the disclosures required under sections
date.”
226.19(b) and 226.20(c) although the disclo­
• A statement that the transaction is not se­
sures must be clear and conspicuous.)
cured. For example, the creditor may add
a category labelled “unsecured” or “not
3. Location. The regulation imposes no spe­
secured” to the security interest disclo­
cific location requirements on the segregated
sures given under section 226.18 (m).
disclosures. For example:
• The basis for any estimates used in making
• They may appear on a disclosure state­
disclosures. For example, if the maturity
ment separate from all other material.
date of a loan depends solely on the occur­
• They may be placed on the same docu­
rence of a future event, the creditor may
ment with the credit contract or other in­
indicate that the disclosures assume that
formation, so long as they are segregated
event will occur at a certain time.
from that information.
• The conditions under which a demand fea­
• They may be shown on the front or back
ture may be exercised. For example, in a
of a document.
loan subject to demand after five years, the
• They need not begin at the top of a page.
disclosures may state that the loan will be­
• They may be continued from one page to
come payable on demand in five years.
another.
• An explanation of the use of pronouns or
other references to the parties to the trans­
4. Content o f segregated disclosures. Foot­
action. For example, the disclosures may
notes 37 and 38 contain exceptions to the re­
state, “ ‘You’ refers to the customer and
quirement that the disclosures under section
‘we’ refers to the creditor.”
226.18 be segregated from material that is not
directly related to those disclosures. Footnote • Instructions to the creditor or its employ­
ees on the use of a multiple-purpose form.
37 lists the items that may be added to the
For example, the disclosures may state,
segregated disclosures, even though not di­
“Check box if applicable.”
rectly related to those disclosures. Footnote
•
A
statement that the borrower may pay a
38 lists the items required under section
minimum
finance charge upon prepay­
226.18 that may be deleted from the segregat­
ment in a simple-interest transaction. For
ed disclosures and appear elsewhere. Any one
example, when state law prohibits penal­
or more of these additions or deletions may be
ties, but would allow a minimum finance
combined and appear either together with or
charge in the event of prepayment, the
separate from the segregated disclosures. The
creditor may make the section
itemization of the amount financed under sec­
226.18(k)(l) disclosure by stating, “You
tion 226.18(c), however, must be separate
may be charged a minimum finance
from the other segregated disclosures under
charge.”
section 226.18. If a creditor chooses to include
•
A
brief reference to negative amortization
the security-interest charges required to be
in
variable-rate transactions. For example,
itemized under sections 226.4(e) and
in the variable-rate disclosure, the creditor
226.18 (o) in the amount-financed itemiza­
may include a short statement such as
tion, it need not list these charges elsewhere.
“Unpaid interest will be added to princi­
pal.” (See the commentary to section
5. Directly related. The segregated disclosures
226.18(f) (1) (iii).)
may, at the creditor’s option, include any in68

Regulation Z Commentary
• A brief caption identifying the disclosures.
For example, the disclosures may bear a
general title such as “Federal Truth in
Lending Disclosures” or a descriptive title
such as “Real Estate Loan Disclosures.”
• A statement that a due-on-sale clause or
other conditions on assumption are con­
tained in the loan document. For example,
the disclosure given under section
226.18 (q) may state, “Someone buying
your home may, subject to conditions in
the due-on-sale clause contained in the
loan document, assume the remainder of
the mortgage on the original terms.”
• If a state or federal law prohibits prepay­
ment penalties and excludes the charging
of interest after prepayment from coverage
as a penalty, a statement that the borrower
may have to pay interest for some period
after prepayment in full. The disclosure
given under section 226.18(k) may state,
for example, “If you prepay your loan on
other than the regular installment date,
you may be assessed interest charges until
the end of the month.”
• More than one hypothetical example un­
der section 226.18(f)(l)(iv) in transac­
tions with more than one variable-rate fea­
ture. For example, in a variable-rate trans­
action with an option permitting consum­
ers to convert to a fixed-rate transaction,
the disclosures may include an example il­
lustrating the effects on the payment terms
of an increase resulting from conversion in
addition to the example illustrating an in­
crease resulting from changes in the index.
6. Multiple-purpose forms. The creditor may
design a disclosure statement that can be used
for more than one type of transaction, so long
as the required disclosures for individual
transactions are clear and conspicuous. (See
the commentary to appendices G and H for a
discussion of the treatment of disclosures that
do not apply to specific transactions.) Any
disclosure listed in section 226.18 (except the
itemization of the amount financed under sec­
tion 226.18(c)) may be included on a stan­
dard disclosure statement even though not all
of the creditor’s transactions include those
features. For example, the statement may
include:

§226.17
• The variable-rate disclosure under section
226.18(0
• The demand feature disclosure under sec­
tion 226.18(i)
• A reference to the possibility of a security
interest arising from a spreader clause, un­
der section 226.18(m)
• The assumption policy disclosure under
section 226.18 (q)
• The required deposit disclosure under sec­
tion 226.18 (r)
7. Balloon-payment financing with leasing
characteristics. In certain credit sale or loan
transactions, a consumer may reduce the dol­
lar amount of the payments to be made during
the course of the transaction by agreeing to
make, at the end of the loan term, a large final
payment based on the expected residual value
of the property. The consumer may have a
number of options with respect to the final
payment, including, among other things, re­
taining the property and making the final pay­
ment, refinancing the final payment, or trans­
ferring the property to the creditor in lieu of
the final payment. Such transactions may
have some of the characteristics of lease trans­
actions subject to Regulation M, but are con­
sidered credit transactions where the consum­
er assumes the indicia of ownership, including
the risks, burdens and benefits of ownership
upon consummation. These transactions are
governed by the disclosure requirements of
this regulation instead of Regulation M. Cred­
itors should not include in the segregated
Truth in Lending disclosures additional infor­
mation. Thus, disclosures should show the
large final payment in the payment schedule
and should not, for example, reflect the other
options available to the consumer at maturity.
Paragraph 17(a)(2)
1. When disclosures must be more conspicu­
ous. The following rules apply to the require­
ment that the terms “annual percentage rate”
and “finance charge” be shown more
conspicuously:
• The terms must be more conspicuous only
in relation to the other required disclo­
sures under section 226.18. For example,
when the disclosures are included on the
69

Regulation Z Commentary

§226.17
contract document, those two terms need
not be more conspicuous as compared to
the heading on the contract document or
information required by state law.
• The terms need not be more conspicuous
except as part of the finance charge and
annual percentage rate disclosures under
section 226.18(d) and (e), although they
may, at the creditor’s option, be highlight­
ed wherever used in the required disclo­
sures. For example, the terms may, but
need not, be highlighted when used in dis­
closing a prepayment penalty under sec­
tion 226.18 (k) or a required deposit under
section 226.18(r).
• The creditor’s identity under section
226.18(a) may, but need not, be more
prominently displayed than the finance
charge and annual percentage rate.
• The terms need not be more conspicuous
than figures (including, for example, num­
bers, percentages, and dollar signs).
2. Making disclosures more conspicuous. The
terms “finance charge” and “annual percent­
age rate” may be made more conspicuous in
any way that highlights them in relation to
the other required disclosures. For example,
they may be:
• Capitalized when other disclosures are
printed in capital and lower case
• Printed in larger type, bold print or differ­
ent type face
• Printed in a contrasting color
• Underlined
• Set off with asterisks
17(b) Time of Disclosures
1. Consummation. As a general rule, disclo­
sures must be made before “consummation”
of the transaction. The disclosures need not be
given by any particular time before consum­
mation, except in certain mortgage transac­
tions and variable-rate transactions secured by
the consumer’s principal dwelling with a term
greater than one year under section 226.19.
(See the commentary to section 226.2(a) (13)
regarding the definition of consummation.)
2. Converting open-end to closed-end credit. If
an open-end credit account is converted to a
closed-end transaction under a written agree70

ment with the consumer, the creditor must
provide a set of closed-end credit disclosures
before consummation of the closed-end trans­
action. (See the commentary to section
226.19(b) for the timing rules for additional
disclosures required upon the conversion to a
variable-rate transaction secured by a con­
sumer’s principal dwelling with a term greater
than one year.) If consummation of the
closed-end transaction occurs at the same
time as the consumer enters into the open-end
agreement, the closed-end credit disclosures
may be given at the time of conversion. If dis­
closures are delayed until conversion and the
closed-end transaction has a variable-rate fea­
ture, disclosures should be based on the rate
in effect at the time of conversion. (See the
commentary to section 226.5 regarding con­
version of closed-end to open-end credit.)

17(c) Basis of Disclosures and Use of
Estimates
Paragraph 17(c)(1)
1. Legal obligation. The disclosures should re­
flect the credit terms to which the parties are
legally bound at the outset of the transaction.
The legal obligation is determined by applica­
ble state law or other law. (Certain transac­
tions are specifically addressed in this com­
mentary. See, for example, the discussion of
buydown transactions elsewhere in the com­
mentary to section 226.17(c).)
• The fact that a term or contract may later
be deemed unenforceable by a court on the
basis of equity or other grounds does not,
by itself, mean that disclosures based on
that term or contract did not reflect the
legal obligation.
2. Modification o f obligation. The legal obliga­
tion normally is presumed to be contained in
the note or contract that evidences the agree­
ment. But this presumption is rebutted if an­
other agreement between the parties legally
modifies that note or contract. If the parties
informally agree to a modification of the legal
obligation, the modification should not be re­
flected in the disclosures unless it rises to the
level of a change in the terms of the legal obli­
gation. For example:

Regulation Z Commentary
• If the creditor offers a preferential rate,
such as an employee preferred rate the dis­
closures should reflect the terms of the le­
gal obligation. (See the commentary to
section 226.19(b) for an example of a preferred-rate transaction that is a variablerate transaction.
• If the contract provides for a certain
monthly payment schedule but payments
are made on a voluntary payroll deduction
plan or an informal principal-reduction
agreement, the disclosures should reflect
the schedule in the contract.
• If the contract provides for regular month­
ly payments but the creditor informally
permits the consumer to defer payments
from time to time, for instance, to take ac­
count of holiday seasons or seasonal em­
ployment, the disclosures should reflect
the regular monthly payments.
3. Third-party buydowns. In certain transac­
tions, a seller or other third party may pay an
amount, either to the creditor or to the con­
sumer, in order to reduce the consumer’s pay­
ments or buy down the interest rate for all or
a portion of the credit term. For example, a
consumer and a bank agree to a mortgage
with an interest rate of 15 percent and level
payments over 25 years. By a separate agree­
ment, the seller of the property agrees to sub­
sidize the consumer’s payments for the first
two years of the mortgage, giving the consum­
er an effective rate of 12 percent for that
period.
• If the lower rate is reflected in the credit
contract between the consumer and the
bank, the disclosures must take the buy­
down into account. For example, the an­
nual percentage rate must be a composite
rate that takes account of both the lower
initial rate and the higher subsequent rate,
and the payment schedule disclosures
must reflect the two payment levels. How­
ever, the amount paid by the seller would
not be specifically reflected in the disclo­
sures given by the bank, since that amount
constitutes seller’s points and thus is not
part of the finance charge.
• If the lower rate is not reflected in the
credit contract between the consumer and
the bank and the consumer is legally

§226.17
bound to the 15 percent rate from the out­
set, the disclosures given by the bank must
not reflect the seller buydown in any way.
For example, the annual percentage rate
and payment schedule would not take into
account the reduction in the interest rate
and payment level for the first two years
resulting from the buydown.
4. Consumer buydowns. In certain transac­
tions, the consumer may pay an amount to the
creditor to reduce the payments or obtain a
lower interest rate on the transaction. Con­
sumer buydowns must be reflected in the dis­
closures given for that transaction. To illus­
trate, in a mortgage transaction, the creditor
and consumer agree to a note specifying a 14
percent interest rate. However, in a separate
document, the consumer agrees to pay an
amount to the creditor at consummation, in
return for a reduction in the interest rate to 12
percent for a portion of the mortgage term.
The amount paid by the consumer may be de­
posited in an escrow account or may be re­
tained by the creditor. Depending upon the
buydown plan, the consumer’s prepayment of
the obligation may or may not result in a por­
tion of the amount being credited or refunded
to the consumer. In the disclosures given for
the mortgage, the creditor must reflect the
terms of the buydown agreement. For
example:
• The amount paid by the customer is a pre­
paid finance charge (even if deposited in
an escrow account).
• A composite annual percentage rate must
be calculated, taking into account both in­
terest rates, as well as the effect of the pre­
paid finance charge.
• The payment schedule must reflect the
multiple payment levels resulting from the
buydown.
5. Split buydowns. In certain transactions, a
third party (such as a seller) and a consumer
both pay an amount to the creditor to reduce
the interest rate. The creditor must include
the portion paid by the consumer in the fi­
nance charge and disclose the corresponding
multiple payment levels and composite annual
percentage rate. The portion paid by the third
party and the corresponding reduction in in­
terest rate, however, should not be reflected in
71

Regulation Z Commentary

§226.17
the disclosures unless the lower rate is reflect­
ed in the credit contract. (See the discussion
on third-party and consumer buydown trans­
actions elsewhere in the commentary to sec­
tion 226.17(c).)
6. Wraparound financing. Wraparound trans­
actions, usually loans, involve the creditor’s
wrapping the outstanding balance on an exist­
ing loan and advancing additional funds to
the consumer. The preexisting loan, which is
wrapped, may be to the same consumer or to
a different consumer. In either case, the con­
sumer makes a single payment to the new
creditor, who makes the payments on the pre­
existing loan to the original creditor. Wrap­
around loans or sales are considered new sin­
gle-advance transactions, with an amount fi­
nanced equalling the sum of the new funds
advanced by the wrap creditor and the re­
maining principal owed to the original credi­
tor on the preexisting loan. In disclosing the
itemization of the amount financed, the credi­
tor may use a label such as “the amount that
will be paid to creditor X” to describe the re­
maining principal balance on the preexisting
loan. This approach to Truth in Lending cal­
culations has no effect on calculations re­
quired by other statutes, such as state usury
laws.
7. Wraparound financing with balloon pay­
ments. For wraparound transactions involving
a large final payment of the new funds before
the maturity of the preexisting loan, the
amount financed is the sum of the new funds
and the remaining principal on the preexisting
loan. The disclosures should be based on the
shorter term of the wrap loan, with a large
final payment of both the new funds and the
total remaining principal on the preexisting
loan (although only the wrap loan will actual­
ly be paid off at that time.)
8. Basis o f disclosures in variable-rate transac­
tions. The disclosures for a variable-rate trans­
action must be given for the full term of the
transaction and must be based on the terms in
effect at the time of consummation. However,
in a variable-rate transaction with either a
seller buydown that is reflected in the credit
contract or a consumer buydown, disclosures
should not be based solely on the initial terms.
72

In those transactions, the disclosed annual
percentage rate should be a composite rate
based on the lower rate for the buydown peri­
od and the rate that is the basis of the vari­
able-rate feature for the remainder of the
term. (See the commentary to section
226.17(c) for a discussion of buydown trans­
actions and the commentary to section
226.19(a)(2) for a discussion of the redisclo­
sure in certain residential mortgage transac­
tions with a variable-rate feature).
9. Use o f estimates in variable-rate transac­
tions. The variable-rate feature does not, by
itself, make the disclosures estimates.
10. Discounted and premium variable-rate
transactions. In some variable-rate transac­
tions, creditors may set an initial interest rate
that is not determined by the index or formula
used to make later interest rate adjustments.
Typically, this initial rate charged to consum­
ers is lower than the rate would be if it were
calculated using the index or formula. Howev­
er, in some cases the initial rate may be high­
er. In a discounted transaction, for example, a
creditor may calculate interest rates according
to a formula using the six-month Treasury bill
rate plus a 2 percent margin. If the Treasury
bill rate at consummation is 10 percent, the
creditor may forgo the 2 percent spread and
charge only 10 percent for a limited time, in­
stead of setting an initial rate of 12 percent.
•

When creditors use an initial interest rate
that is not calculated using the index or
formula for later rate adjustments, the dis­
closures should reflect a composite annual
percentage rate based on the initial rate for
as long as it is charged and, for the re­
mainder of the term, the rate that would
have been applied using the index or for­
mula at the time of consummation. The
rate at consummation need not be used if a
contract provides for a delay in the imple­
mentation of changes in an index value.
For example, if the contract specifies that
rate changes are based on the index value
in effect 45 days before the change date,
creditors may use the index value in effect
not more than 45 days before consumma­
tion in calculating a composite annual per­
centage rate.

Regulation Z Commentary
• The effect of the multiple rates must also
be reflected in the calculation and disclo­
sure of the finance charge, total of pay­
ments, and payment schedule.
• If a loan contains a rate or payment cap
that would prevent the initial rate or pay­
ment, at the time of the first adjustment,
from changing to the rate determined by
the index or formula at consummation, the
effect of that rate or payment cap should
be reflected in the disclosures.
• Because these transactions involve irregu­
lar payment amounts, an annual percent­
age rate tolerance of \ of 1 percent applies,
in accordance with section 226.22(a)(3)
of the regulation.
• Examples of discounted variable-rate
transactions include—
—A 30-year loan for $100,000 with no
prepaid finance charges and rates deter­
mined by the Treasury bill rate plus 2
percent. Rate and payment adjustments
are made annually. Although the Trea­
sury bill rate at the time of consumma­
tion is 10 percent, the creditor sets the
interest rate for one year at 9 percent,
instead of 12 percent according to the
formula. The disclosures should reflect a
composite annual percentage rate of
11.63 percent based on 9 percent for one
year and 12 percent for 29 years. Re­
flecting those two rate levels, the pay­
ment schedule should show 12 pay­
ments of $804.62 and 348 payments of
$1,025.31. The finance charge should be
$266,463.32 and the total of payments
$366,463.32.
—Same loan as above, except with a 2 per­
cent rate cap on periodic adjustments.
The disclosures should reflect a compos­
ite annual percentage rate of 11.53 per­
cent based on 9 percent for the first
year, 11 percent for the second year, and
12 percent for the remaining 28 years.
Reflecting those three rate levels, the
payment schedule should show 12 pay­
ments of $804.62, 12 payments of
$950.09, and 336 payments of
$1,024.34. The finance charge should be
$265,234.76, and the total of payments
$365,234.76.
—Same loan as above, except with a

§226.17
percent cap on payment adjustments.
The disclosures should reflect a compos­
ite annual percentage rate of 11.64 per­
cent, based on 9 percent for one year
and 12 percent for 29 years. Because of
the payment cap, five levels of payments
should be reflected. The payment sched­
ule should show 12 payments of
$804.62, 12 payments of $864.97, 12
payments of $929.84, 12 payments of
$999.58, and 312 payments of
$1,070.04. The finance charge should be
$277,040.60, and the total of payments
$377,040.60.
This paragraph does not apply to variable-rate
loans in which the initial interest rate is set
according to the index or formula used for
later adjustments but is not set at the value of
the index or formula at consummation. For
example, if a creditor commits to an initial
rate based on the formula on a date prior to
consummation, but the index has moved dur­
ing the period between that time and consum­
mation, a creditor should base its disclosures
on the initial rate.
11. Other variable-rate transactions. Examples
of variable-rate transactions include:
• Renegotiable-rate mortgage instruments
that involve a series of short-term loans
secured by a long-term obligation, where
the lender is obligated to renew the short­
term loans at the consumer’s option. At
the time of renewal, the lender has the op­
tion of increasing the interest rate. Disclo­
sures must be given for the longer term of
the obligation, with all disclosures calcu­
lated on the basis of the rate in effect at the
time of consummation of the transaction.
• “Shared-equity” or “shared-appreciation”
mortgages that have a fixed rate of interest
and an appreciation share based on the
consumer’s equity in the mortgaged prop­
erty. The appreciation share is payable in a
lump sum at a specified time. Disclosures
must be based on the fixed interest rate.
(As discussed in the commentary to sec­
tion 226.2, other types of shared-equity ar­
rangements are not considered “credit”
and are not subject to Regulation Z.)
• Preferred-rate loans where the terms of the
73

Regulation Z Commentary

§226.17
legal obligation provide that the initial un­
derlying rate is fixed but will increase upon
the occurrence of some event, such as an
employee leaving the employ of the credi­
tor, and the note reflects the preferred
rate. The disclosures are to be based on the
preferred rate.
Graduated-payment mortgages and step-rate
transactions without a variable-rate feature
are not considered variable-rate transactions.
12. Graduated-payment adjustable-rate mort­
gages. These mortgages involve both a vari­
able interest rate and scheduled variations in
payment amounts during the loan term. For
example, under these plans, a series of gradu­
ated payments may be scheduled before rate
adjustments affect payment amounts, or the
initial scheduled payment may remain con­
stant for a set period before rate adjustments
affect the payment amount. In any case, the
initial payment amount may be insufficient to
cover the scheduled interest, causing negative
amortization from the outset of the transac­
tion. In these transactions, the disclosures
should treat these features as follows:
• The finance charge includes the amount of
negative amortization based on the as­
sumption that the rate in effect at consum­
mation remains unchanged.
• The amount financed does not include the
amount of negative amortization.
• As in any variable-rate transaction, the an­
nual percentage rate is based on the terms
in effect at consummation.
• The schedule of payments discloses the
amount of any scheduled initial payments
followed by an adjusted level of payments
based on the initial interest rate. Since
some mortgage plans contain limits on the
amount of the payment adjustment, the
payment schedule may require several dif­
ferent levels of payments, even with the as­
sumption that the original interest rate
does not increase.
13. Growth-equity mortgages. Also referred to
as payment-escalated mortgages, these mort­
gage plans involve scheduled payment in­
creases to prematurely amortize the loan. The
initial payment amount is determined as for a
long-term loan with a fixed interest rate. Pay74

ment increases are scheduled periodically,
based on changes in an index. The larger pay­
ments result in accelerated amortization of the
loan. In disclosing these mortgage plans, cred­
itors may either—
• estimate the amount of payment increases,
based on the best information reasonably
available, or
• disclose by analogy to the variable-rate
disclosures in section 226.18(0(1).
(This discussion does not apply to growth-eq­
uity mortgages in which the amount of pay­
ment increases can be accurately determined
at the time of disclosure. For these mortgages,
as for graduated-payment mortgages, disclo­
sures should reflect the scheduled increases in
payments.)
14. Morris Plan transactions. When a deposit
account is created for the sole purpose of ac­
cumulating payments and then is applied to
satisfy entirely the consumer’s obligation in
the transaction, each deposit made into the
account is considered the same as a payment
on a loan for purposes of making disclosures.
15. Number o f transactions. Creditors have
flexibility in handling credit extensions that
may be viewed as multiple transactions. For
example:
• When a creditor finances the credit sale of
a radio and a television on the same day,
the creditor may disclose the sales as ei­
ther one or two credit sale transactions.
• When a creditor finances a loan along with
a credit sale of health insurance, the credi­
tor may disclose in one of several ways: a
single credit sale transaction, a single loan
transaction, or a loan and a credit sale
transaction.
• The separate financing of a downpayment
in a credit sale transaction may, but need
not, be disclosed as two transactions (a
credit sale and a separate transaction for
the financing of the downpayment).
Paragraph 17(c)(2)
1. Basis for estimates. Disclosures may be es­
timated when the exact information is un­
known at the time disclosures are made. In­
formation is unknown if it is not reasonably

§226.17

Regulation Z Commentary
available to the creditor at the time the disclo­
sures are made. The “reasonably available”
standard requires that the creditor, acting in
good faith, exercise due diligence in obtaining
information. For example, the creditor must
at a m inim um utilize generally accepted cal­
culation tools but need not invest in the most
sophisticated computer program to make a
particular type of calculation. The creditor
normally may rely on the representations of
other parties in obtaining information. For ex­
ample, the creditor might look to the consum­
er for the time of consummation, to insurance
companies for the cost of insurance, or to real­
tors for taxes and escrow fees. The creditor
may utilize estimates in making disclosures
even though the creditor knows that more
precise information will be available by the
point of consummation. However, new disclo­
sures may be required under section 226.17(f)
or 226.19.
2. Labelling estimates. Estimates must be des­
ignated as such in the segregated disclosures.
Even though other disclosures are based on
the same assumption on which a specific esti­
mated disclosure was based, the creditor has
some flexibility in labelling the estimates.
Generally, only the particular disclosure for
which the exact information is unknown is la­
belled as an estimate. However, when several
disclosures are affected because of the un­
known information, the creditor has the op­
tion of labelling either every affected disclo­
sure or only the disclosure primarily affected.
For example, when the finance charge is un­
known because the date of consummation is
unknown, the creditor must label the finance
charge as an estimate and may also label as
estimates the total of payments and the pay­
ment schedule. When many disclosures are
estimates, the creditor may use a general
statement, such as “all numerical disclosures
except the late payment disclosure are esti­
mates,” as a method to label those disclosures
as estimates.
3. Simple-interest transactions. If consumers
do not make timely payments in a simpleinterest transaction, some of the amounts cal­
culated for Truth in Lending disclosures will
differ from amounts that consumers will actu­
ally pay over the term of the transaction.

Creditors may label disclosures as estimates in
these transactions. For example, because the
finance charge and total of payments may be
larger than disclosed if consumers make late
payments, creditors may label the finance
charge and total of payments as estimates. On
the other hand, creditors may choose not to
label disclosures as estimates and may base all
disclosures on the assumption that payments
will be made on time, disregarding any possi­
ble inaccuracies resulting from consumers’
payment patterns.
Paragraph 17(c)(3)
1. Minor variations. Section 226.17(c)(3) al­
lows creditors to disregard certain factors in
calculating and making disclosures. For
example:
• Creditors may ignore the effects of collect­
ing payments in whole cents. Because pay­
ments cannot be collected in fractional
cents, it is often difficult to amortize exact­
ly an obligation with equal payments; the
amount of the last payment may require
adjustment to account for the rounding of
the other payments to whole cents.
• Creditors may base their disclosures on
calculation tools that assume that all
months have an equal number of days,
even if their practice is to take account of
the variations in months for purposes of
collecting interest. For example, a creditor
may use a calculation tool based on a 360day year, when it in fact collects interest
by applying a factor of 1/365 of the annual
rate to 365 days. This rule does not, how­
ever, authorize creditors to ignore, for dis­
closure purposes, the effects of applying
1/360 of an annual rate to 365 days.
2. Use o f special rules. A creditor may utilize
the special rules in section 226.17(c)(3) for
purposes of calculating and making all disclo­
sures for a transaction or may, at its option,
use the special rules for some disclosures and
not others.
Paragraph 17(c)(4)
1. Payment schedule irregularities. When one
or more payments in a transaction differ from
the others because of a long or short first peri75

Regulation Z Commentary

§ 226.17
od, the variations may be ignored in disclosing
the payment schedule, finance charge, annual
percentage rate, and other terms. For
example:

the annual percentage rate but taken into ac­
count in calculating and disclosing the finance
charge and payment schedule.

• A 36-month auto loan might be consum­
mated on June 8 with payments due on
July 1 and the first of each succeeding
month. The creditor may base its calcula­
tions on a payment schedule that assumes
36 equal intervals and 36 equal installment
payments, even though a precise computa­
tion would produce slightly different
amounts because of the shorter first
period.
• By contrast, in the same example, if the
first payment were not scheduled until Au­
gust 1, the irregular first period would ex­
ceed the limits in section 226.17(c)(4);
the creditor could not use the special rule
and could not ignore the extra days in the
first period in calculating its disclosures.

Paragraph 17(c)(5)

2. Measuring odd periods. In determining
whether a transaction may take advantage of
the rule in section 226.17(c)(4), the creditor
must measure the variation against a regular
period. For purposes of that rule:
• The first period is the period from the date
on which the finance charge begins to be
earned to the date of the first payment.
• The term is the period from the date on
which the finance charge begins to be
earned to the date of the final payment.
• The regular period is the most common
interval between payments in the
transaction.
In transactions involving regular periods that
are monthly, semimonthly, or multiples of a
month, the length of the irregular and regular
periods may be calculated on the basis of ei­
ther the actual number of days or an assumed
30-day month. In other transactions, the
length of the periods is based on the actual
number of days.
3. Use o f special rules. A creditor may utilize
the special rules in section 226.17(c)(4) for
purposes of calculating and making some dis­
closures but may elect not to do so for all of
the disclosures. For example, the variations
may be ignored in calculating and disclosing
76

1. Demand disclosures. Disclosures for de­
mand obligations are based on an assumed
one-year term, unless an alternate maturity
date is stated in the legal obligation. Whether
an alternate maturity date is stated in the legal
obligation is determined by applicable law. An
alternate maturity date is not inferred from an
informal principal reduction agreement or a
similar understanding between the parties.
However, when the note itself specifies a prin­
cipal reduction schedule (for example, “pay­
able on demand or $2,000 plus interest quar­
terly”), an alternate maturity is stated and the
disclosures must reflect that date.
2. Future event as maturity date. An obliga­
tion whose maturity date is determined solely
by a future event, as for example a loan pay­
able only on the sale of property, is not a de­
mand obligation. Because no demand feature
is contained in the obligation, demand disclo­
sures under section 226.18 (i) are inapplicable.
The disclosures should be based on the credi­
tor’s estimate of the time at which the speci­
fied event will occur, and may indicate the ba­
sis for the creditor’s estimate, as noted in the
commentary to section 226.17(a).
3. Demand after stated period. Most demand
transactions contain a demand feature that
may be exercised at any point during the
term, but certain transactions convert to de­
mand status only after a fixed period. For
example, in states prohibiting due-on-sale
clauses, the Federal National Mortgage Asso­
ciation (FNMA) requires mortgages that it
purchases to include a call option rider that
may be exercised after 7 years. These mort­
gages are generally written as long-term obli­
gations but contain a demand feature that
may be exercised only within a 30-day period
at 7 years. The disclosures for these transac­
tions should be based upon the legally agreedupon maturity date. Thus, if a mortgage con­
taining the 7-year FNMA call option is
written as a 20-year obligation, the disclosures
should be based on the 20-year term, with the

Regulation Z Commentary
demand feature disclosed under section
226.18 (i).
4. Balloon mortgages. Balloon payment mort­
gages, with payments based on a long-term
amortization schedule and a large final pay­
ment due after a shorter term, are not demand
obligations unless a demand feature is specifi­
cally contained in the contract. For example,
a mortgage with a term of 5 years and a pay­
ment schedule based on 20 years would not be
treated as a mortgage with a demand feature,
in the absence of any contractual demand pro­
visions. In this type of mortgage, disclosures
should be based on the 5-year term.
Paragraph 17(c)(6)
1. Series o f advances. Section 226.17(c)(6)(i) deals with a series of advances under
an agreement to extend credit up to a certain
amount. A creditor may treat all of the ad­
vances as a single transaction or disclose each
advance as a separate transaction. If these ad­
vances are treated as one transaction and the
timing and amounts of advances are un­
known, creditors must make disclosures based
on estimates, as provided in section
226.17(c)(2). If the advances are disclosed
separately, disclosures must be provided
before each advance occurs, with the disclo­
sures for the first advance provided by
consummation.
2. Construction loans. Section 226.17(c)(6) (ii) provides a flexible rule for disclosure
of construction loans that may be permanent­
ly financed. These transactions have two dis­
tinct phases, similar to two separate transac­
tions. The construction loan may be for initial
construction or subsequent construction, such
as rehabilitation or remodelling. The con­
struction period usually involves several dis­
bursements of funds at times and in amounts
that are unknown at the beginning of that pe­
riod, with the consumer paying only accrued
interest until construction is completed. Un­
less the obligation is paid at that time, the
loan then converts to permanent financing in
which the loan amount is amortized just as in
a standard mortgage transaction. Section
226.17(c) (6) (ii) permits the creditor to give
either one combined disclosure for both the

§226.17
construction financing and the permanent fi­
nancing, or a separate set of disclosures for
the two phases. This rule is available whether
the consumer is initially obligated to accept
construction financing only or is obligated to
accept both construction and permanent fi­
nancing from the outset. If the consumer is
obligated on both phases and the creditor
chooses to give two sets of disclosures, both
sets must be given to the consumer initially,
because both transactions would be consum­
mated at that time. (Appendix D provides a
method of calculating the annual percentage
rate and other disclosures for construction
loans, which may be used, at the creditor’s
option, in disclosing construction financing.)
3. Multiple-advance construction loans. Sec­
tion 226.17(c) (6) (i) and (ii) are not mutual­
ly exclusive. For example, in a transaction
that finances the construction of a dwelling
that may be permanently financed by the same
creditor, the construction phase may consist
of a series of advances under an agreement to
extend credit up to a certain amount. In these
cases, the creditor may disclose the construc­
tion phase as either one or more than one
transaction and also disclose the permanent
financing as a separate transaction.
4. Residential mortgage transaction. See the
commentary to section 226.2(a) (24) for a
discussion of the effect of section 226.17(c)(6) on the definition of a residential mortgage
transaction.
5. Allocation o f points. When a creditor uti­
lizes the special rule in section 226.17(c)(6)
to disclose credit extensions as multiple trans­
actions, buyer’s points or similar amounts im­
posed on the consumer must be allocated for
purposes of calculating disclosures. While
such amounts should not be taken into ac­
count more than once in making calculations,
they may be allocated between the transac­
tions in any manner the creditor chooses. For
example, if a construction-permanent loan is
subject to five points imposed on the consum­
er and the creditor chooses to disclose the two
phases separately, the five points may be allo­
cated entirely to the construction loan, entire­
ly to the permanent loan, or divided in any
manner between the two. However, the entire
77

§226.17
five points may not be applied twice, that is, to
both the construction and the permanent
phases.

17(d) Multiple Creditors; Multiple
Consumers
1. Multiple creditors. If a credit transaction
involves more than one creditor:
• The creditors must choose which of them
will make the disclosures.
• A single, complete set of disclosures must
be provided, rather than partial disclo­
sures from several creditors.
• All disclosures for the transaction must be
given, even if the disclosing creditor would
not otherwise have been obligated to make
a particular disclosure. For example, if one
of the creditors is the seller, the total sale
price disclosure under section 226.18 (j)
must be made, even though the disclosing
creditor is not the seller.
2. Multiple consumers. When two consumers
are joint obligors with primary liability on an
obligation, the disclosures may be given to ei­
ther one of them. If one consumer is merely a
surety or guarantor, the disclosures must be
given to the principal debtor. In rescindable
transactions, however, separate disclosures
must be given to each consumer who has the
right to rescind under section 226.23, al­
though the disclosures required under section
226.19(b) need only be provided to the con­
sumer who expresses an interest in a variablerate loan program.

17(e) Effect of Subsequent Events
1. Events causing inaccuracies. Inaccuracies
in disclosures are not violations if attributable
to events occurring after the disclosures are
made. For example, when the consumer fails
to fulfill a prior commitment to keep the col­
lateral insured and the creditor then provides
the coverage and charges the consumer for it,
such a change does not make the original dis­
closures inaccurate. The creditor may, howev­
er, be required to make new disclosures under
sections 226.17(f) or 226.19 if the events oc­
curred between disclosure and consummation
or under section 226.20 if the events occurred
after consummation.
78

Regulation Z Commentary

17(f) Early Disclosures
1. Change in rate. No redisclosure is required
for changes that occur between the time dis­
closures are made and consummation, unless
the annual percentage rate in the consummat­
ed transaction exceeds the limits prescribed in
section 226.22(a) (£ of 1 percentage point in
regular transactions and ^ of 1 percentage
point in irregular transactions). To illustrate:
• If disclosures are made in a regular trans­
action on July 1, the transaction is con­
summated on July IS, and the actual an­
nual percentage rate varies by more than £
of 1 percentage point from the disclosed
annual percentage rate, the creditor must
either redisclose the changed terms or fur­
nish a complete set of new disclosures be­
fore consummation. Redisclosure is re­
quired even if the disclosures made on July
1 are based on estimates and marked as
such.
2. Variable rate. The addition of a variablerate feature to the credit terms, after early dis­
closures are given, requires new disclosures.
3. Content o f new disclosures. If redisclosure
is required, the creditor has the option of ei­
ther providing a complete set of new disclo­
sures or providing disclosures of only the
terms that vary from those originally dis­
closed. (See the commentary to section
226.19(a)(2).)
4. Special rules. In residential mortgage trans­
actions subject to section 226.19, the creditor
must redisclose if, between the delivery of the
required early disclosures and consummation,
the annual percentage rate changes by more
than a stated tolerance. When subsequent
events occur after consummation, new disclo­
sures are required only if there is a refinancing
or an assumption within the meaning of sec­
tion 226.20.

17(g) Mail or Telephone Orders—Delay
in Disclosures
1. Conditions for use. When the creditor re­
ceives a mail or telephone request for credit,
the creditor may delay making the disclosures
until the first payment is due if the following
conditions are met:

Regulation Z Commentary
• The credit request is initiated without
face-to-face or direct telephone solicita­
tion. (Creditors may, however, use the
special rule when credit requests are solic­
ited by mail.)
• The creditor has supplied the specified
credit information about its credit terms
either to the individual consumer or to the
public generally. That information may be
distributed through advertisements, cata­
logs, brochures, special mailers, or similar
means.
2. Insurance. The location requirements for
the insurance disclosures under section
226.18 (n) permit them to appear apart from
the other disclosures. Therefore, a creditor
may mail an insurance authorization to the
consumer and then prepare the other disclo­
sures to reflect whether or not the authoriza­
tion is completed by the consumer. Creditors
may also disclose the insurance cost on a unitcost basis, if the transaction meets the require­
ments of section 226.17(g).

17(h) Series of Sales—Delay in
Disclosures
1. Applicability. The creditor may delay the
disclosures for individual credit sales in a se­
ries of such sales until the first payment is due
on the current sale, assuming the two condi­
tions in this paragraph are met. If those condi­
tions are not met, the general timing rules in
section 226.17(b) apply.
2. Basis o f disclosures. Creditors structuring
disclosures for a series of sales under section
226.17(h) may compute the total sale price as
either:
• The cash price for the sale plus that por­
tion of the finance charge and other
charges applicable to that sale; or
• The cash price for the sale, other charges
applicable to the sale, and the total finance
charge and outstanding principal.

17(i) Interim Student Credit Extensions
1. Definition. Student credit plans involve ex­
tensions of credit for education purposes
where the repayment amount and schedule
are not known at the time credit is advanced.

§226.17
These plans include loans made under any
student credit plan, whether government or
private, where the repayment period does not
begin immediately. (Certain student credit
plans that meet this definition are exempt
from Regulation Z. See section 226.3(f).
Creditors in interim student credit extensions
need not disclose the terms set forth in this
paragraph at the time the credit is actually
extended but must make complete disclosures
at the time the creditor and consumer agree
upon the repayment schedule for the total ob­
ligation. At that time, a new set of disclosures
must be made of all applicable items under
section 226.18.
2. Basis o f disclosures. The disclosures given
at the time of execution of the interim note
should reflect two annual percentage rates,
one for the interim period and one for the re­
payment period. The use of section 226.17 (i)
in making disclosures does not, by itself, make
those disclosures estimates. Any portion of
the finance charge, such as statutory interest,
that is attributable to the interim period and is
paid by the student (either as a prepaid fi­
nance charge, periodically during the interim
period, in one payment at the end of the inter­
im period, or capitalized at the beginning of
the repayment period) must be reflected in
the interim annual percentage rate. Interest
subsidies, such as payments made by either a
state or the federal government on an interim
loan, must be excluded in computing the an­
nual percentage rate on the interim obligation,
when the consumer has no contingent liability
for payment of those amounts. Any finance
charges that are paid separately by the student
at the outset or withheld from the proceeds of
the loan are prepaid finance charges. An ex­
ample of this type of charge is the loan guar­
antee fee. The sum of the prepaid finance
charges is deducted from the loan proceeds to
determine the amount financed and included
in the calculation of the finance charge.
3. Consolidation. Consolidation of the interim
student credit extensions through a renewal
note with a set repayment schedule is treated
as a new transaction with disclosures made as
they would be for a refinancing. Any un­
earned portion of the finance charge must be
reflected in the new finance charge and annual
79

Regulation Z Commentary

§226.17
percentage rate, and is not added to the new
amount financed. In itemizing the amount fi­
nanced under section 226.18(c), the creditor
may combine the principal balances remain­
ing on the interim extensions at the time of
consolidation and categorize them as the
amount paid on the consumer’s account.
4. Approved student credit forms. See the
commentary to appendix H regarding disclo­
sure forms approved for use in certain student
credit programs.

References
Statute: §§ 121, 122, 124, and 128, and the
Higher Education Act of 1965 (20 USC
1071) as amended by Public Law 97-35, Au­
gust 13, 1981
Other sections: § 226.2 and appendix H
Previous regulation: §§ 226.6 and 226.8
1981 changes: With few exceptions, the disclo­
sures must now appear apart from all other
information and may not be interspersed with
that information. The disclosures must be
based on the legal obligation between the par­
ties, rather than any side agreement.
The assumed maturity period for demand
loans has been increased from six months to
one year. Any alternate maturity date must be
stated in the legal obligation rather than in­
ferred from the documents, in order to form a
basis for disclosures.
In multiple-advance transactions, a series of
advances up to a certain amount and con­
struction loans that may be permanently fi­
nanced may be disclosed, at the creditor’s op­
tion, as either a single transaction or several
transactions. Appendix D is applicable only to
multiple advances for the construction of a
dwelling, whereas its predecessor, interpreta­
tion section 226.813, could be used for all
multiple-advance transactions.
If disclosures are made before the date of
consummation, the creditor need not provide
updated disclosures at consummation unless
the annual percentage rate has changed be­
yond certain limits or a variable rate feature
has been added.
80

SECTION 226.18—Content of
Disclosures
1. As applicable. The disclosures required by
this section need be made only as applicable.
Any disclosure not relevant to a particular
transaction may be eliminated entirely. For
example:
• In a loan transaction, the creditor may de­
lete disclosure of the total sale price.
• In a credit sale requiring disclosure of the
total sale price under section 226.18 (j),
the creditor may delete any reference to a
downpayment where no downpayment is
involved.
Where the amounts of several numerical dis­
closures are the same, the “as applicable” lan­
guage also permits creditors to combine the
terms, so long as it is done in a clear and con­
spicuous manner. For example:
• In a transaction in which the amount fi­
nanced equals the total of payments, the
creditor may disclose “amount financed/
total of payments,” together with descrip­
tive language, followed by a single
amount.
• However, if the terms are separated on the
disclosure statement and separate space is
provided for each amount, both disclo­
sures must be completed, even though the
same amount is entered in each space.
2. Format. See the commentary to section
226.17 and appendix H for a discussion of the
format to be used in making these disclosures,
as well as acceptable modifications.

18(a) Creditor
1. Identification o f creditor. The creditor
making the disclosures must be identified.
This disclosure may, at the creditor’s option,
appear apart from the other disclosures. Use
of the creditor’s name is sufficient, but the
creditor may also include an address and/or
telephone number. In transactions with multi­
ple creditors, any one of them may make the
disclosures; the one doing so must be
identified.

Regulation Z Commentary

§226.18

18(b) Amount Financed

charge under section 226.4. This paragraph
does not include any amounts already ac­
counted for under section 226.18(b)(1), such
as taxes, tag and title fees, or the costs of ac­
cessories or service policies that the creditor
includes in the cash price.

1. Disclosure required. The net amount of
credit extended must be disclosed using the
term “amount financed” and a descriptive ex­
planation similar to the phrase in the
regulation.
2. Rebates and loan premiums. In a loan
transaction, the creditor may offer a premium
in the form of cash or merchandise to pro­
spective borrowers. Similarly, in a credit sale
transaction, a seller’s or manufacturer’s rebate
may be offered to prospective purchasers of
the creditor’s goods or services. At the credi­
tor’s option, these amounts may be either re­
flected in the Truth in Lending disclosures or
disregarded in the disclosures. If the creditor
chooses to reflect them in the section 226.18
disclosures, rather than disregard them, they
may be taken into account in any manner as
part of those disclosures.
Paragraph 18(b)(1)
1. Downpayments. A downpayment is defined
in section 226.2(a) (18) to include, at the
creditor’s option, certain deferred downpay­
ments or pickup payments. A deferred down­
payment that meets the criteria set forth in
the definition may be treated as part of the
downpayment, at the creditor’s option.
• Deferred downpayments that are not
treated as part of the downpayment (ei­
ther because they do not meet the defini­
tion or because the creditor simply chooses
not to treat them as downpayments) are
included in the amount financed.
• Deferred downpayments that are treated
as part of the downpayment are not part
of the amount financed under section
226.18(b)(1).
Paragraph 18(b)(2)
1. Adding other amounts. Fees or other
charges that are not part of the finance charge
and that are financed rather than paid sepa­
rately at consummation of the transaction are
included in the amount financed. Typical ex­
amples are real estate settlement charges and
premiums for voluntary credit life and disabil­
ity insurance excluded from the finance

Paragraph 18(b)(3)
1. Prepaid finance charges. Prepaid finance
charges that are paid separately in cash or by
check should be deducted under section
226.18(b)(3) in calculating the amount fi­
nanced. To illustrate:
• A consumer applies for a loan of $2,500
with a $40 loan fee. The face amount of
the note is $2,500 and the consumer pays
the loan fee separately by cash or check at
closing. The principal loan amount for
purposes of section 226.18 (b) (1) is $2,500
and $40 should be deducted under section
226.18(b)(3), thereby yielding an amount
financed of $2,460.
In some instances, as when loan fees are fi­
nanced by the creditor, finance charges are in­
corporated in the face amount of the note.
Creditors have the option, when the charges
are not add-on or discount charges, of deter­
mining a principal loan amount under section
226.18(b)(1) that either includes or does not
include the amount of the finance charges.
(Thus the principal loan amount may, but
need not, be determined to equal the face
amount of the note.) When the finance
charges are included in the principal loan
amount, they should be deducted as prepaid
finance charges under section 226.18(b)(3).
When the finance charges are not included in
the principal loan amount, they should not be
deducted under section 226.18(b)(3). The
following examples illustrate the application
of section 226.18(b) to this type of transac­
tion. Each example assumes a loan request of
$2,500 with a loan fee of $40; the creditor as­
sesses the loan fee by increasing the face
amount of the note to $2,540.
• If the creditor determines the principal
loan amount under section 226.18(b)(1)
to be $2,540, it has included the loan fee in
the principal loan amount and should de­
duct $40 as a prepaid finance charge under
81

§226.18
section 226.18(b)(3), thereby obtaining
an amount financed of $2,500.
• If the creditor determines the principal
loan amount under section 226.18(b)(1)
to be $2,500, it has not included the loan
fee in the principal loan amount and
should not deduct any amount under sec­
tion 226.18(b)(3), thereby obtaining an
amount financed of $2,500.
The same rules apply when the creditor does
not increase the face amount of the note by
the amount of the charge but collects the
charge by withholding it from the amount ad­
vanced to the consumer. To illustrate, the fol­
lowing examples assume a loan request of
$2,500 with a loan fee of $40; the creditor pre­
pares a note for $2,500 and advances $2,460
to the consumer.
• If the creditor determines the principal
loan amount under section 226.18(b)(1)
to be $2,500, it has included the loan fee in
the principal loan amount and should de­
duct $40 as a preapid finance charge under
section 226.18(b)(3), thereby obtaining
an amount financed of $2,460.
• If the creditor determines the principal
loan amount under section 226.18(b)(1)
to be $2,460, it has not included the loan
fee in the principal loan amount and
should not deduct any amount under sec­
tion 226.18(b)(3), thereby obtaining an
amount financed of $2,460.
Thus in the examples where the creditor de­
rives the net amount of credit by determining
a principal loan amount that does not include
the amount of the finance charge, no subtrac­
tion is appropriate. Creditors should note,
however, that although the charges are not
subtracted as prepaid finance charges in those
examples, they are nonetheless finance
charges and must be treated as such.

Regulation Z Commentary
amount includes finance charges that do not
meet the definition of a prepaid finance
charge, the section 226.18(b)(1) amount
must exclude those finance charges. The fol­
lowing examples illustrate the application of
section 226.18(b) to these types of transac­
tions. Each example assumes a loan request of
$1,000 for one year, subject to a 6 percent pre­
computed interest rate, with a $10 loan fee
paid separately at consummation.
• The creditor assesses add-on interest of
$60 which is added to the $1,000 in loan
proceeds for an obligation with a face
amount of $1,060. The principal for pur­
poses of section 226.18(b)(1) is $1,000,
no amounts are added under section
226.18(b)(2), and the $10 loan fee is a
prepaid finance charge to be deducted un­
der section 226.18(b)(3). The amount fi­
nanced is $990.
• The creditor assesses discount interest of
$60 and distributes $940 to the consumer,
who is liable for an obligation with a face
amount of $1,000. The principal under
section 226.18(b)(1) is $940, which re­
sults in an amount financed of $930, after
deduction of the $10 prepaid finance
charge under section 226.18(b)(3).
• The creditor assesses $60 in discount inter­
est by increasing the face amount of the
obligation to $1,060, with the consumer
receiving $1,000. The principal under sec­
tion 226.18(b)(1) is thus $1,000 and the
amount financed $990, after deducting the
$10 prepaid finance charge under section
226.18(b)(3).

18(c) Itemization of Amount Financed

1. Disclosure required. The creditor has two
alternatives in complying with section
2. Add-on or discount charges. All finance 226.18(c):
charges must be deducted from the amount of
credit in calculating the amount financed. If • The creditor may inform the consumer, on
the segregated disclosures, that a written
the principal loan amount reflects finance
itemization of the amount financed will be
charges that meet the definition of a prepaid
provided on request, furnishing the itemi­
finance charge in section 226.2, those charges
zation only if the customer in fact requests
are included in the section 226.18(b)(1)
it.
amount and deducted under section
226.18(b)(3). However, if the principal loan • The creditor may provide an itemization
82

Regulation Z Commentary
as a matter of course, without notifying
the consumer of the right to receive it or
waiting for a request.
Whether given as a matter of course or only
on request, the itemization must be provided
at the same time as the other disclosures re­
quired by section 226.18, although separate
from those disclosures.
2. Additional information. Section 226.18(c)
establishes only a minimum standard for the
material to be included in the itemization of
the amount financed. Creditors have consider­
able flexibility in revising or supplementing
the information listed in section 226.18(c)
and shown in model form H-3, although no
changes are required. The creditor may, for
example, do one or more of the following:
• Include amounts that reflect payments not
part of the amount financed. For example,
escrow items and certain insurance premi­
ums may be included, as discussed in the
commentary to section 226.18(g).
• Organize the categories in any order. For
example, the creditor may rearrange the
terms in a mathematical progression that
depicts the arithmetic relationship of the
terms.
• Add categories. For example, in a credit
sale, the creditor may include the cash
price and the downpayment.
• Further itemize each category. For exam­
ple, the amount paid directly to the con­
sumer may be subdivided into the amount
given by check and the amount credited to
the consumer’s savings account.
• Label categories with different language
from that shown in section 226.18(c). For
example, an amount paid on the consum­
er’s account may be revised to specifically
identify the account as “your auto loan
with us.”
• Delete, leave blank, mark “N /A ” or oth­
erwise note inapplicable categories in the
itemization. For example, in a credit sale
with no prepaid finance charges or
amounts paid to others, the amount fi­
nanced may consist of only the cash price
less downpayment. In this case, the itemi­
zation may be composed of only a single
category and all other categories may be
eliminated.

§226.18
3. Amounts appropriate to more than one cate­
gory. When an amount may appropriately be
placed in any of several categories and the
creditor does not wish to revise the categories
shown in section 226.18(c), the creditor has
considerable flexibility in determining where
to show the amount. For example:
• In a credit sale, the portion of the pur­
chase price being financed by the creditor
may be viewed as either an amount paid to
the consumer or an amount paid on the
consumer’s account.
4. RESPA transactions. The Real Estate Set­
tlement Procedures Act (RESPA) requires
creditors to provide good faith estimates of
closing costs. Transactions subject to RESPA
are exempt from the requirements of section
226.18(c), when the creditor complies with
the good faith estimates requirement of
RESPA. The itemization of the amount fi­
nanced need not be given, even though the
content and timing of the good faith estimates
under RESPA differ from the section
226.18(c) requirement.

Paragraph 18(c) (l)(i)
1. Amounts paid to consumer. This encom­
passes funds given to the consumer in the
form of cash or a check, including joint pro­
ceeds checks, as well as funds placed in an
asset account. It may include money in an in­
terest-bearing account even if that amount is
considered a required deposit under section
226.18 (r). For example, in a transaction with
total loan proceeds of $500, the consumer re­
ceives a check for $300 and $200 is required
by the creditor to be put into an interest-bear­
ing account. Whether or not the $200 is a re­
quired deposit, it is part of the amount fi­
nanced. At the creditor’s option, it may be
broken out and labelled in the itemization of
the amount financed.

Paragraph 18(c)(l)(ii)
1. Amounts credited to consumer's account.
The term “consumer’s account” refers to an
account in the nature of a debt with that cred­
itor. It may include, for example, an unpaid
83

§226.18
balance on a prior loan, a credit sale balance
or other amounts owing to that creditor. It
does not include asset accounts of the con­
sumer such as savings or checking accounts.
Paragraph 18(c)(l)(iii)
1. Amounts paid to others. This includes, for
example, tag and title fees; amounts paid to
insurance companies for insurance premiums;
security interest fees, and amounts paid to
credit bureaus, appraisers or public officials.
When several types of insurance premiums
are financed, they may, at the creditor’s op­
tion, be combined and listed in one sum, la­
belled “insurance” or similar term. This in­
cludes, but is not limited to, different types of
insurance premiums paid to one company and
different types of insurance premiums paid to
different companies. Except for insurance
companies and other categories noted in foot­
note 40, third parties must be identified by
name.
Paragraph 18(c)(l)(iv)
1. Prepaid finance charge. Prepaid finance
charges that are deducted under section
226.18(b)(3) must be disclosed under this
section. The prepaid finance charges must be
shown as a total amount but may, at the cred­
itor’s option, also be further itemized and de­
scribed. All amounts must be reflected in this
total, even if portions of the prepaid finance
charge are also reflected elsewhere. For exam­
ple, if at consummation the creditor collects
interim interest of $30 and a credit report fee
of $10, a total prepaid finance charge of $40
must be shown. At the creditor’s option, the
credit report fee paid to a third party may also
be shown elsewhere as an amount included in
section 226.18(c) (1) (iii). The creditor may
also further describe the two components of
the prepaid finance charge, although no itemi­
zation of this element is required by section
226.18(c) (l)(iv ).

18(d) Finance Charge
1. Disclosure required. The creditor must dis­
close the finance charge as a dollar amount,
using the term “finance charge,” and must in­
clude a brief description similar to that in sec84

Regulation Z Commentary
tion 226.18(d). The creditor may, but need
not, further modify the descriptor for vari­
able-rate transactions with a phrase such as
“which is subject to change.” The finance
charge must be shown on the disclosures only
as a total amount; the elements of the finance
charge must not be itemized in the segregated
disclosures, although the regulation does not
prohibit their itemization elsewhere.
2. Tolerance. A tolerance for the finance
charge is provided in footnote 41.

18(e) Annual Percentage Rate
1. Disclosure required. The creditor must dis­
close the cost of the credit as an annual rate,
using the term “annual percentage rate,” plus
a brief descriptive phrase comparable to that
used in section 226.18(e). For variable-rate
transactions, the descriptor may be further
modified with a phrase such as “which is sub­
ject to change.” Under section 226.17(a), the
terms “annual percentage rate” and “finance
charge” must be more conspicuous than the
other required disclosures.
2. Exception. Footnote 42 provides an excep­
tion for certain transactions in which no an­
nual percentage rate disclosure is required.

18(f) Variable Rate
1. Coverage. The requirements of section
226.18(f) apply to all transactions in which
the terms of the legal obligation allow the
creditor to increase the rate originally dis­
closed to the consumer. It includes not only
increases in the interest rate but also increases
in other components, such as the rate of re­
quired credit life insurance. The provisions,
however, do not apply to increases resulting
from delinquency (including late payment),
default, assumption, acceleration or transfer
of the collateral. Section 226.18(f)(1) applies
to variable-rate transactions that are not se­
cured by the consumer’s principal dwelling
and to those that are secured by the principal
dwelling but have a term of one year or less.
Section 226.18(f)(2) applies to variable-rate
transactions that are secured by the consum­
er’s principal dwelling and have a term great­
er than one year. Moreover, transactions sub­
ject to section 226.18(f) (2) are subject to the

Regulation Z Commentary

§226.18

special early-disclosure requirements of sec­
tion 226.19(b). (However, “shared-equity” or
“shared-appreciation” mortgages are subject
to the disclosure requirements of section
226.18(f)(1) and not to the requirements of
sections 226.18(0(2) and 226.19(b) regard­
less of the general coverage of those sections.)
Creditors are permitted under footnote 43 to
substitute in any variable-rate transaction the
disclosures required under section 226.19(b)
for those disclosures ordinarily required
under section 226.18(0(1)* Creditors who
provide variable-rate disclosures under section
226.19(b) must comply with all of the
requirements of that section, including
the timing of disclosures, and must also
provide the disclosures required under section
226.18(0(2). Creditors utilizing footnote 43
may, but need not, also provide disclosures
pursuant to section 226.20(c). (Substitution
of disclosures under section 226.18(0(1) in
transactions subject to section 226.19(b) is
not permitted under the footnote.)

2. Conversion feature. In variable-rate trans­
actions with an option permitting consumers
to convert to a fixed-rate transaction, the con­
version option is a variable-rate feature that
must be disclosed. In making disclosures un­
der section 226.18(0(1). creditors should
disclose the fact that the rate may increase
upon conversion; identify the index or formu­
la used to set the fixed rate; and state any limi­
tations on and effects of an increase resulting
from conversion that differ from other vari­
able-rate features. Because section 226.18
(0 (l)(iv ) requires only one hypothetical ex­
ample (such as an example of the effect on
payments resulting from changes in the in­
dex), a second hypothetical example need not
be given.

Paragraph 18(f)(1)

Paragraph 18(f)(l)(ii)

1. Terms used in disclosure. In describing the
variable-rate feature, the creditor need not use
any prescribed terminology. For example,
limitations and hypothetical examples may be
described in terms of interest rates rather than
annual percentage rates. The model forms in
appendix H provide examples of ways in
which the variable-rate disclosures may be
made.

1. Limitations. This includes any maximum
imposed on the amount of an increase in the
rate at any time, as well as any maximum on
the total increase over the life of the transac­
tion. When there are no limitations, the credi­
tor may, but need not, disclose that fact. Limi­
tations do not include legal limits in the
nature of usury or rate ceilings under state or
federal statutes or regulations. (See section
226.30 for the rule requiring that a maximum
interest rate be included in certain variablerate transactions.)

Paragraph 18(f)(l)(i)
1. Circumstances. The circumstances under
which the rate may increase include identifica­
tion of any index to which the rate is tied, as
well as any conditions or events on which the
increase is contingent.
• When no specific index is used, any identi­
fiable factors used to determine whether to
increase the rate must be disclosed.
• When the increase in the rate is purely dis­
cretionary, the fact that any increase is
within the creditor’s discretion must be
disclosed.
• When the index is internally defined (for
example, by that creditor’s prime rate),

the creditor may comply with this require­
ment by either a brief description of that
index or a statement that any increase is in
the discretion of the creditor. An external­
ly defined index, however, must be
identified.

Paragraph 18(f)(l)(iii)
1. Effects. Disclosure of the effect of an in­
crease refers to an increase in the number or
amount of payments or an increase in the final
payment. In addition, the creditor may make
a brief reference to negative amortization that
may result from a rate increase. (See the com­
mentary to section 226.17(a)(1) regarding
directly related information.) If the effect can­
not be determined, the creditor must provide
a statement of the possible effects. For exam­
ple, if the exercise of the variable-rate feature
85

Regulation Z Commentary

§226.18
may result in either more or larger payments,
both possibilities must be noted.
Paragraph 18(f)(l)(iv)
1. Hypothetical example. The example may,
at the creditor’s option, appear apart from the
other disclosures. The creditor may provide
either a standard example that illustrates the
terms and conditions of that type of credit of­
fered by that creditor or an example that di­
rectly reflects the terms and conditions of the
particular transaction. In transactions with
more than one variable-rate feature, only one
hypothetical example need be provided. (See
the commentary to section 226.17(a)(1) re­
garding disclosure of more than one hypothet­
ical example as directly related information.)
2. Hypothetical example not required. The
creditor need not provide a hypothetical ex­
ample in the following transactions with a
variable-rate feature:
• Demand obligations with no alternate ma­
turity date
• Interim student credit extensions
• Multiple-advance construction loans dis­
closed pursuant to appendix D, part I
Paragraph 18(f)(2)
1. Disclosure required. In variable-rate trans­
actions that have a term greater than one year
and are secured by the consumer’s principal
dwelling, the creditor must give special early
disclosures under section 226.19(b) in addi­
tion to the later disclosures required under
section 226.18(f)(2). The disclosures under
section 226.18(f)(2) must state that the
transaction has a variable-rate feature and
that variable-rate disclosures have been pro­
vided earlier.

18(g) Payment Schedule
1. Amounts included in repayment schedule.
The repayment schedule should reflect all
components of the finance charge, not merely
the portion attributable to interest. A prepaid
finance charge, however, should not be shown
in the repayment schedule as a separate pay­
ment. The payments may include amounts be­
yond the amount financed and finance charge.
86

For example, the disclosed payments may, at
the creditor’s option, reflect certain insurance
premiums where the premiums are not part of
either the amount financed or the finance
charge, as well as real estate escrow amounts
such as taxes added to the payment in mort­
gage transactions.
2. Deferred downpayments. As discussed in
the commentary to section 226.2(a) (18), de­
ferred downpayments or pickup payments
that meet the conditions set forth in the defini­
tion of downpayment may be treated as part
of the downpayment. Even if treated as a
downpayment, that amount may nevertheless
be disclosed as part of the payment schedule,
at the creditor’s option.
3. Total number o f payments. In disclosing
the number of payments for transactions with
more than one payment level, creditors may
but need not disclose as a single figure the to­
tal number of payments for all levels. For ex­
ample, in a transaction calling for 108 pay­
ments of $350, 240 payments of $335, and 12
payments of $330, the creditor need not state
that there will be a total of 360 payments.
Paragraph 18(g)(1)
1. Demand obligations. In demand obliga­
tions with no alternate maturity date, the
creditor has the option of disclosing only the
due dates or periods of scheduled interest pay­
ments in the first year (for example, “interest
payable quarterly” or “interest due the first of
each month”). The amounts of the interest
payments need not be shown.
Paragraph 18(g)(2)
1. Abbreviated disclosure. The creditor may
disclose an abbreviated payment schedule
when the amount of each regularly scheduled
payment (other than the first or last pay­
ment) includes an equal amount to be applied
on principal and a finance charge computed
by application of a rate to the decreasing un­
paid balance. This option is also available
when mortgage-guarantee insurance premi­
ums, paid either monthly or annually, cause
variations in the amount of the scheduled pay­
ments, reflecting the continual decrease or in­
crease in the premium due. In addition, in

Regulation Z Commentary
transactions where payments vary because
interest and principal are paid at different in­
tervals, the two series of payments may be dis­
closed separately and the abbreviated pay­
ment schedule may be used for the interest
payments. For example, in transactions with
fixed quarterly principal payments and
monthly interest payments based on the out­
standing principal balance, the amount of the
interest payments will change quarterly as
principal declines. In such cases the creditor
may treat the interest and principal payments
as two separate series of payments, separately
disclosing the number, amount, and due dates
of principal payments, and, using the abbrevi­
ated payment schedule, the number, amount,
and due dates of interest payments. This op­
tion may be used when interest and principal
are scheduled to be paid on the same date of
the month as well as on different dates of the
month. The creditor using this alternative
must disclose the dollar amount of the highest
and lowest payments and make reference to
the variation in payments.
2. Combined payment-schedule disclosures.
Creditors may combine the option in this par­
agraph with the general payment-schedule
requirements in transactions where only a
portion of the payment schedule meets the
conditions of section 226.18(g)(2). For ex­
ample, in a graduated-payment mortgage
where payments rise sharply for five years and
then decline over the next 25 years because of
decreasing mortgage insurance premiums, the
first five years would be disclosed under the
general rule in section 226.18(g) and the next
25 years according to the abbreviated sched­
ule in section 226.18(g)(2).
3. Effect on other disclosures. Section
226.18(g)(2) applies only to the payment
schedule disclosure. The actual amounts of
payments must be taken into account in calcu­
lating and disclosing the finance charge and
the annual percentage rate.

18(h) Total of Payments
1. Disclosure required. The total of payments
must be disclosed using that term, along with
a descriptive phrase similar to the one in the
regulation. The descriptive explanation may

§226.18
be revised to reflect a variable-rate feature
with a brief phrase such as “based on the cur­
rent annual percentage rate which may
change.”
2. Calculation o f total o f payments. The total
of payments is the sum of the payments dis­
closed under section 226.18(g). For example,
if the creditor disclosed a deferred portion of
the downpayment as part of the payment
schedule, that payment must be reflected in
the total disclosed under this paragraph.
3. Exception. Footnote 44 permits creditors
to omit disclosure of the total of payments in
single-payment transactions. This exception
does not apply to a transaction calling for a
single payment of principal combined with pe­
riodic payments of interest.
4. Demand obligations. In demand obliga­
tions with no alternate maturity date, the
creditor may omit disclosure of payment
amounts under section 226.18(g)(1). In
those transactions, the creditor need not dis­
close the total of payments.

18(i) Demand Feature
1. Disclosure requirements. The disclosure re­
quirements of this provision apply not only to
transactions payable on demand from the out­
set, but also to transactions that are not pay­
able on demand at the time of consummation
but convert to a demand status after a stated
period. In demand obligations in which the
disclosures are based on an assumed maturity
of one year under section 226.17(c)(5), that
fact must also be stated. Appendix H contains
model clauses that may be used in making this
disclosure.
2. Covered demand features. The type of de­
mand feature triggering the disclosures re­
quired by section 226.18(i) includes only
those demand features contemplated by the
parties as part of the legal obligation. For ex­
ample, this provision does not apply to trans­
actions that convert to a demand status as a
result of the consumer’s default. A due-onsale clause is not considered a demand
feature.
3. Relationship to payment schedule disclo­
sures. As provided in section 226.18(g)(1), in
87

§226.18
demand obligations with no alternate maturi­
ty date, the creditor need only disclose the due
dates or payment periods of any scheduled in­
terest payments for the first year. If the de­
mand obligation states an alternate maturity,
however, the disclosed payment schedule
must reflect that stated term; the special rule
in section 226.18(g)(1) is not available.

18(j) Total Sale Price
1. Disclosure required. In a credit sale trans­
action, the “total sale price” must be disclosed
using that term, along with a descriptive ex­
planation similar to the one in the regulation.
For variable-rate transactions, the descriptive
phrase may, at the creditor’s option, be modi­
fied to reflect the variable-rate feature. For ex­
ample, the descriptor may read: “The total
cost of your purchase on credit, which is sub­
ject to change, including your downpayment
o f ___” The reference to a downpayment
may be eliminated in transactions calling for
no downpayment.
2. Calculation o f total sale price. The figure to
be disclosed is the sum of the cash price, other
charges added under section 226.18(b)(2),
and the finance charge disclosed under section
226.18(d).

Regulation Z Commentary
2. Rebate-penalty disclosure. A single transac­
tion may involve both a precomputed finance
charge and a finance charge computed by ap­
plication of a rate to the unpaid balance (for
example, mortgages with mortgage-guarantee
insurance). In these cases, disclosures about
both prepayment rebates and penalties are re­
quired. Sample form H-15 in appendix H il­
lustrates a mortgage transaction in which
both rebate and penalty disclosures are
necessary.
3. Prepaid finance charge. The existence of a
prepaid finance charge in a transaction does
not, by itself, require a disclosure under sec­
tion 226.18 (k). A prepaid finance charge is
not considered a penalty under section
226.18(k) (1), nor does it require a disclosure
under section 226.18(k)(2). At its option,
however, a creditor may consider a prepaid
finance charge to be under section
226.18(k)(2). If a disclosure is made under
section 226.18(k)(2) with respect to a pre­
paid finance charge or other finance charge,
the creditor may further identify that finance
charge. For example, the disclosure may state
that the borrower “will not be entitled to a
refund of the prepaid finance charge” or some
other term that describes the finance charge.
Paragraph 18(h)(1)

18(k) Prepayment
1. Disclosure required. The creditor must give
a definitive statement of whether or not a pen­
alty will be imposed or a rebate will be given.
• The fact that no penalty will be imposed
may not simply be inferred from the ab­
sence of a penalty disclosure; the creditor
must indicate that prepayment will not re­
sult in a penalty.
• If a penalty or refund is possible for one
type of prepayment, even though not for
all, a positive disclosure is required. This
applies to any type of prepayment, wheth­
er voluntary or involuntary as in the
case of prepayments resulting from
acceleration.
• Any difference in rebate or penalty policy,
depending on whether prepayment is vol­
untary or not, must not be disclosed with
the segregated disclosures.
88

1. Penalty. This applies only to those transac­
tions in which the interest calculation takes
account of all scheduled reductions in princi­
pal, as well as* transactions in which interest
calculations are made daily. The term “penal­
ty” as used here encompasses only those
charges that are assessed strictly because of
the prepayment in full of a simple-interest ob­
ligation, as an addition to all other amounts.
Items which are penalties include, for
example:
• Interest charges for any period after pre­
payment in full is made. (See the commen­
tary to section 226.17(a)(1) regarding
disclosure of interest charges assessed for
periods after prepayment in full as directly
related information.)
• A minimum finance charge in a simpleinterest transaction. (See the commentary
to section 226.17(a)(1) regarding the dis­

Regulation Z Commentary
closure of a minimum finance charge as
directly related information.)
Items which are not penalties include, for
example:
• Loan-guarantee fees
• Interim interest on a student loan

§226.18
alternative. For example, stating that the
charge in the event of a late payment is 5 per­
cent of the late amount, not to exceed $5.00, is
sufficient. Many creditors also permit a grace
period during which no late charge will be as­
sessed; this fact may be disclosed as directly
related information. (See the commentary to
section 226.17(a).)

Paragraph 18(h)(2)
1. Rebate o f finance charge. This applies to
any finance charges that do not take account
of each reduction in the principal balance of
an obligation. This category includes, for
example:
• Precomputed finance charges such as add­
on charges
• Charges that take account of some but not
all reductions in principal, such as mort­
gage guarantee insurance assessed on the
basis of an annual declining balance, when
the principal is reduced on a monthly basis
No description of the method of computing
earned or unearned finance charges is re­
quired or permitted as part of the segregated
disclosures under this section.
18(/) Late Payment
1. Definition. This paragraph requires a dis­
closure only if charges are added to individual
delinquent installments by a creditor who oth­
erwise considers the transaction ongoing on
its original terms. Late payment charges do
not include:
• The right of acceleration
• Fees imposed for actual collection costs,
such as repossession charges or attorney’s
fees
• Deferral and extension charges
• The continued accrual of simple interest at
the contract rate after the payment due
date. However, an increase in the interest
rate is a late payment charge to the extent
of the increase.
2. Content o f disclosure. Many state laws au­
thorize the calculation of late charges on the
basis of either a percentage or a specified dol­
lar amount and permit imposition of the lesser
or greater of the two charges. The disclosure
made under section 226.18(/) may reflect this

18(m) Security Interest
1. Purchase-money transactions. When the
collateral is the item purchased as part of, or
with the proceeds of, the credit transaction,
section 226.18 (m) requires only a general
identification such as “the property purchased
in this transaction.” However, the creditor
may identify the property by item or type in­
stead of identifying it more generally with a
phrase such as “the property purchased in this
transaction.” For example, a creditor may
identify collateral as “a motor vehicle,” or as
“the property purchased in this transaction.”
Any transaction in which the credit is being
used to purchase the collateral is considered a
purchase-money transaction and the abbrevi­
ated property identification may be used,
whether the obligation is treated as a loan or a
credit sale.
2. Non-purchase-money transactions. In nonpurchase-money transactions, the property
subject to the security interest must be identi­
fied by item or type. This disclosure is satisfied
by a general disclosure of the category of
property subject to the security interest, such
as “motor vehicles,” “securities,” “certain
household items,” or “household goods.”
(Creditors should be aware, however, that the
federal credit practices rules, as well as some
state laws, prohibit certain security interests
in household goods.) At the creditor’s option,
however, a more precise identification of the
property or goods may be provided.
3. Mixed collateral. In some transactions in
which the credit is used to purchase the collat­
eral, the creditor may also take other property
of the consumer as security. In those cases, a
combined disclosure must be provided, con­
sisting of an identification of the purchase
money collateral consistent with comment
18(m)-l and a specific identification of the
89

§226.18
other collateral consistent with comment
18(m)-2.
4. After-acquired property. An after-acquired
property clause is not a security interest to be
disclosed under section 226.18(m).
5. Spreader clause. The fact that collateral for
preexisting credit with the institution is being
used to secure the present obligation consti­
tutes a security interest and must be disclosed.
(Such security interests may be known as
“spreader” or “dragnet” clauses, or as “crosscollateralization” clauses.) A specific identifi­
cation of that collateral is unnecessary but a
reminder of the interest arising from the prior
indebtedness is required. The disclosure may
be made by using language such as “collateral
securing other loans with us may also secure
this loan.” At the creditor’s option, a more
specific description of the property involved
may be given.
6. Terms used in disclosure. No specified ter­
minology is required in disclosing a security
interest. Although the disclosure may, at the
creditor’s option, use the term “security inter­
est,” the creditor may designate its interest by
using, for example, “pledge,” “lien,” or
“mortgage.”
7. Collateral from third party. In certain
transactions, the consumer’s obligation may
be secured by collateral belonging to a third
party. For example, a loan to a student may
be secured by an interest in the property of the
student’s parents. In such cases, the security
interest is taken in connection with the trans­
action and must be disclosed, even though the
property encumbered is owned by someone
other than the consumer.

18(n) Insurance
1. Location. This disclosure may, at the credi­
tor’s option, appear apart from the other dis­
closures. It may appear with any other infor­
mation, including the amount-financed itemi­
zation, any information prescribed by state
law, or other supplementary material. When
this information is disclosed with the other
segregated disclosures, however, no additional
explanatory material may be included.
90

Regulation Z Commentary
18(o) Certain Security Interest Charges
1. Format. No special format is required for
these disclosures; under section 226.4(e), tax­
es and fees paid to government officials with
respect to a security interest may be aggregat­
ed, or may be broken down by individual
charge. For example, the disclosure could be
labelled “filing fees and taxes,” and all funds
disbursed for such purposes may be aggregat­
ed in a single disclosure. This disclosure may
appear, at the creditor’s option, apart from
the other required disclosures. The inclusion
of this information on a statement required
under the Real Estate Settlement Procedures
Act is sufficient disclosure for purposes of
Truth in Lending.
18(p) Contract Reference
1. Content. Creditors may substitute, for the
phrase “appropriate contract document,” a
reference to specific transaction documents in
which the additional information is found,
such as “promissory note” or “retail install­
ment sale contract.” A creditor may, at its
option, delete inapplicable items in the con­
tract reference, as for example when the con­
tract documents contain no information re­
garding the right of acceleration.
18(q) Assumption Policy
1. Policy statement. In many mortgages, the
creditor cannot determine, at the time disclo­
sure must be made, whether a loan may be
assumable at a future date on its original
terms. For example, the assumption clause
commonly used in mortgages sold to the Fed­
eral National Mortgage Association and the
Federal Home Loan Mortgage Corporation
conditions an assumption on a variety of fac­
tors such as the creditworthiness of the subse­
quent borrower, the potential for impairment
of the lender’s security, and execution of an
assumption agreement by the subsequent bor­
rower. In cases where uncertainty exists as
to the future assumability of a mortgage, the
disclosure under section 226.18(q) should re­
flect that fact. In making disclosures in such
cases, the creditor may use phrases such as
“subject to conditions,” “under certain cir­
cumstances,” or “depending on future condi­

Regulation Z Commentary
tions.” The creditor may provide a brief refer­
ence to more specific criteria such as a due-onsale clause, although a complete explanation
of all conditions is not appropriate. For exam­
ple, the disclosure may state, “Someone buy­
ing your home may be allowed to assume the
mortgage on its original terms, subject to cer­
tain conditions, such as payment of an as­
sumption fee.” See comment 17(a)(l)-5 for
an example of a reference to a due-on-sale
clause.
2. Original terms. The phrase “original
terms” for purposes of section 226.18 (q) does
not preclude the imposition of an assumption
fee, but a modification of the basic credit
agreement, such as a change in the contract
interest rate, represents different terms.

18(r) Required Deposit
1. Disclosure required. The creditor must
inform the consumer of the existence of a re­
quired deposit. (Appendix H provides a mod­
el clause that may be used in making that dis­
closure.) Footnote 45 describes three types of
deposits that need not be considered required
deposits. Use of the phrase “need not” per­
mits creditors to include the disclosure even in
cases where there is doubt as to whether the
deposit constitutes a required deposit.
2. Pledged-account mortgages. In these trans­
actions, a consumer pledges as collateral
funds that the consumer deposits in an ac­
count held by the creditor. The creditor with­
draws sums from that account to supplement
the consumer’s periodic payments. Creditors
may treat these pledged accounts as required
deposits or they may treat them as consumer
buydowns in accordance with the commen­
tary to section 226.17(c) (1).
3. Escrow accounts. The escrow exception in
footnote 45 applies, for example, to accounts
for such items as maintenance fees, repairs, or
improvements, whether in a realty or a non­
realty transaction. (See the commentary to
section 226.17(c)(1) regarding the use of es­
crow accounts in consumer buydown
transactions.)
4. Interest-bearing accounts. When a deposit
earns at least 5 percent interest per year, no
disclosure is required under section 226.18

§226.18
(r). This exception applies whether the depos­
it is held by the creditor or by a third party.
5. Morris Plan transactions. A deposit under a
Morris Plan, in which a deposit account is
created for the sole purpose of accumulating
payments and this is applied to satisfy entirely
the consumer’s obligation in the transaction,
is not a required deposit.
6. Examples o f amounts excluded. The fol­
lowing are among the types of deposits that
need not be treated as required deposits:
• Requirement that a borrower be a custom­
er or a member even if that involves a fee
or a minimum balance
• Required property insurance escrow on a
mobile home transaction
• Refund of interest when the obligation is
paid in full
• Deposits that are immediately available to
the consumer
• Funds deposited with the creditor to be
disbursed (for example, for construction)
before the loan proceeds are advanced
• Escrow of condominium fees
• Escrow of loan proceeds to be released
when the repairs are completed

References
Statute: § 128, the Gam-St. Germain Deposi­
tory Institutions Act of 1982 (Pub. L.
97-320) and the Real Estate Settlement Pro­
cedures Act (12 USC 2602)
Other sections: §§ 226.2, 226.17, and appendix
H
Other regulations: 12 CFR 545.6-2(a) and 12
CFR 29
Previous regulation: §§ 226.4 and 226.8
1981 changes: Five of the required disclosures
must be explained to the consumer in a man­
ner similar to the descriptive phrases shown in
the regulation. A written itemization of the
amount financed need not be provided unless
the consumer requests it. The finance charge
must be provided in all transactions, including
real estate transactions, but must be shown
only as a total amount. The disclosed finance
charge is considered accurate if it is within a
specified range.
The variable-rate hypothetical is required in
all variable-rate transactions and may be ei91

§226.18
ther general or transaction-specific. The pen­
alty and rebate disclosures in the event of pre­
payment have been modified and combined.
The requirement of an explanation of how the
rebates or penalties are computed has been
eliminated. The late payment disclosure has
also been narrowed to include only charges
imposed before maturity for late payments.
The information required in the security in­
terest disclosure has been decreased by the de­
letion of the type of security interest and a
reduction in the property description require­
ment. The disclosure of the required deposit is
limited to a statement that the annual percent­
age rate does not reflect the required deposit;
the presence of a required deposit has no effect
on the annual percentage rate.
Two disclosure requirements have been
added: a reference to the contract documents
for additional information and, in a residential
mortgage transaction, a statement of the cred­
itor’s assumption policy.

SECTION 226.19—Certain Residential
Mortgage Transactions
19 (a) (1) Time of Disclosure
1. Coverage. This section requires early dis­
closure of credit terms in residential mortgage
transactions that are also subject to the Real
Estate Settlement Procedures Act (RESPA)
and its implementing Regulation X, adminis­
tered by the Department of Housing and Ur­
ban Development (HUD). To be covered by
this section, a transaction must be both a resi­
dential mortgage transaction under section
226.2(a) and a federally related mortgage
loan under RESPA. “Federally related mort­
gage loan” is defined under RESPA (12
USC 2602) and Regulation X (24 CFR
3500.5(b)), and is subject to any interpreta­
tions by HUD.
2. Timing and use o f estimates. Truth in
Lending disclosures must be given (a) before
consummation or (b) within three business
days after the creditor receives the consumer’s
written application, whichever is earlier. The
three-day period for disclosing credit terms
coincides with the time period within which
creditors subject to RESPA must provide
92

Regulation Z Commentary
good faith estimates of settlement costs. If the
creditor does not know the precise credit
terms, the creditor must base the disclosures
on the best information reasonably available
and indicate that the disclosures are estimates
under section 226.17(c)(2). If many of the
disclosures are estimates, the creditor may in­
clude a statement to that effect (such as “all
numerical disclosures except the late-payment
disclosure are estimates”) instead of separate­
ly labelling each estimate. In the alternative,
the creditor may label as an estimate only the
items primarily affected by unknown informa­
tion. (See the commentary to section
226.17(c)(2).) The creditor may provide ex­
planatory material concerning the estimates
and the contingencies that may affect the ac­
tual terms, in accordance with the commen­
tary to section 226.17(a)(1).)
3. Written application. Creditors may rely on
RESPA and Regulation X (including any in­
terpretations issued by HUD) in deciding
whether a “written application” has been re­
ceived. In general, Regulation X requires dis­
closures “to every person from whom the
Lender receives or for whom it prepares a
written application on an application form or
forms normally used by the Lender for a Fed­
erally Related Mortgage Loan” (24 CFR
3500.6(a)). An application is received when
it reaches the creditor in any of the ways ap­
plications are normally transmitted—by mail,
hand delivery, or through an intermediary
agent or broker. If an application reaches the
creditor through an intermediary agent or
broker, the application is received when it
reaches the creditor, rather than when it
reaches the agent or broker.
4. Exceptions. The creditor may determine
within the three-day period that the applica­
tion will not or cannot be approved on the
terms requested, as, for example, when a con­
sumer applies for a type or amount of credit
that the creditor does not offer, or the con­
sumer’s application cannot be approved for
some other reason. In that case, the creditor
need not make the disclosures under this sec­
tion. If the creditor fails to provide early dis­
closures and the transaction is later consum­
mated on the original terms, the creditor will
be in violation of this provision. If, however,

Regulation Z Commentary

§226.19

the consumer amends the application because
of the creditor’s unwillingness to approve it on
its original terms, no violation occurs for not
providing disclosures based on the original
terms. But the amended application is a new
application subject to this section.

penalty vary from those originally disclosed,
the accurate terms must be disclosed. Howev­
er, no new disclosures are required if the only
inaccuracies involve estimates other than the
annual percentage rate, and no variable rate
feature has been added.

5. Itemization o f amount financed. In many
residential mortgage transactions, the itemiza­
tion of the amount financed required by sec­
tion 226.18(c) will contain items, such as
origination fees or points, that also must be
disclosed as part of the good faith estimates of
settlement costs required under RESPA.
Creditors furnishing the RESPA good faith
estimates need not give consumers any itemi­
zation of the amount financed, either with the
disclosures provided within three days after
application or with the disclosures given at
consummation or settlement.

3. Timing. Redisclosures, when necessary,
must be given no later than “consummation
or settlement.” “Consummation” is defined in
section 226.2(a). “Date of settlement” is de­
fined in Regulation X (24 CFR 3500.2(a))
and is subject to any interpretations issued un­
der RESPA and Regulation X.

19(a)(2 ) Redisclosure Required
1. Conditions for redisclosure. Creditors must
make new disclosures if the annual percentage
rate at consummation differs from the esti­
mate originally disclosed by more than jj of 1
percentage point in regular transactions or \
of 1 percentage point in irregular transactions,
as defined in section 226.22. The creditor
must also redisclose if a variable rate feature is
added to the credit terms after the original
disclosures have been made. The creditor has
the option of redisclosing information under
other circumstances, if it wishes to do so.
2. Content o f new disclosures. If redisclosure
is required, the creditor may provide a com­
plete set of new disclosures, or may redisclose
only the terms that vary from those originally
disclosed. If the creditor chooses to provide a
complete set of new disclosures, the creditor
may but need not highlight the new terms,
provided that the disclosures comply with the
format requirements of section 226.17(a). If
the creditor chooses to disclose only the new
terms, all the new terms must be disclosed.
For example, a different annual percentage
rate will almost always produce a different fi­
nance charge, and often a new schedule of
payments; all of these changes would have to
be disclosed. If, in addition, unrelated terms
such as the amount financed or prepayment

4. Basis o f disclosures. In some cases, a credi­
tor may delay redisclosure until settlement,
which may be at a time later than consumma­
tion. If a creditor chooses to redisclose at set­
tlement, disclosures may be based on the
terms in effect at settlement, rather than at
consummation. For example, in a variablerate transaction, a creditor may choose to
base disclosures on the terms in effect at set­
tlement despite the general rule in the com­
mentary to section 18(0 that variable-rate
disclosures should be based on the terms in
effect at consummation.
19(b) Certain Variable-Rate
Transactions
1. Coverage. Section 226.19(b) applies to all
closed-end variable-rate transactions that are
secured by the consumer’s principal dwelling
and have a term greater than one year. The
requirements of this section apply not only to
transactions financing the initial acquisition of
the consumer’s principal dwelling, but also to
any other closed-end variable-rate transaction
secured by the principal dwelling. Closed-end
variable-rate transactions that are not secured
by the principal dwelling, or are secured by
the principal dwelling but have a term of one
year or less, are subject to the disclosure re­
quirements of section 226.18(0(1) rather
than those of section 226.19(b). (Further­
more, “shared-equity” or “shared-appreciation” mortgages are subject to the disclosure
requirements of section 226.18(0(1) rather
than those of section 226.19(b) regardless of
the general coverage of those sections.) For
purposes of this section, the term of a vari93

§226.19
able-rate demand loan is determined in ac­
cordance with the commentary to section
226.17(c)(5).
2. Timing. A creditor must give the disclo­
sures required under this section at the time
an application form is provided or before the
consumer pays a nonrefundable fee, whichev­
er is earlier. In cases where a creditor receives
a written application through an intermediary
agent or broker, however, footnote 45b pro­
vides a substitute timing rule requiring the
creditor to deliver the disclosures or place
them in the mail not later than three business
days after the creditor receives the consumer’s
written application. This three-day rule also
applies where the creditor takes an application
over the telephone. If, however, the consumer
merely requests an application over the tele­
phone, the creditor must include the early dis­
closures required under this section with the
application that is sent to the consumer. In
cases where the creditor solicits applications
through the mail, the creditor must also send
the disclosures required under this section if
an application form is included with the solic­
itation. In cases where an open-end credit ac­
count will convert to a closed-end transaction
subject to this section under a written agree­
ment with the consumer, disclosures under
this section may be given at the time of con­
version. (See the commentary to section
226.20(a) for information on the timing re­
quirements for 226.19(b)(2) disclosures
when a variable-rate feature is later added to a
transaction.)
3. Other variable-rate regulations. Transac­
tions in which the creditor is required to com­
ply with and has complied with the disclosure
requirements of the variable-rate regulations
of other federal agencies are exempt from the
requirements of section 226.19(b), by virtue
of footnote 45a, and are exempt from the re­
quirements of section 226.20(c), by virtue of
footnote 45c. Those variable-rate regulations
include the regulations issued by the Federal
Home Loan Bank Board and those issued by
the Department of Housing and Urban Devel­
opment. The exception in footnotes 45a and
45c is also available to creditors that are re­
quired by state law to comply with the federal
variable-rate regulations noted above and to
94

Regulation Z Commentary
creditors that are authorized by title VIII of
the Depository Institutions Act of 1982 (12
USC 3801 et seq.) to make loans in accord­
ance with those regulations. Creditors using
this exception should comply with the timing
requirements of those regulations rather than
the timing requirements of Regulation Z in
making the variable-rate disclosures.
4. Examples o f variable-rate transactions. The
following transactions, if they have a term
greater than one year and are secured by the
consumer’s principal dwelling, constitute vari­
able-rate transactions subject to the disclosure
requirements of section 226.19(b).
• Renegotiable-rate mortgage instruments
that involve a series of short-term loans
secured by a long-term obligation, where
the lender is obligated to renew the short­
term loans at the consumer’s option. At
the time of renewal, the lender has the op­
tion of increasing the interest rate.
• Preferred-rate loans where the terms of the
legal obligation provide that the initial un­
derlying rate is fixed but will increase upon
the occurrence of some event, such as an
employee leaving the employ of the credi­
tor, and the note reflects the preferred
rate. The disclosures under section
226.19(b)(1)
and 226.19(b) (2) (v),
(viii), (ix), (x) and (xiii) are not applica­
ble to such loans.
Graduated-payment mortgages and step-rate
transactions without a variable-rate feature
are not considered variable-rate transactions.
Paragraph 19(b)(1)
1. Substitutes. Creditors who wish to use pub­
lications other than the Consumer Handbook
on Adjustable Rate Mortgages must make a
good faith determination that their brochures
are suitable substitutes to the Consumer
Handbook. A substitute is suitable if it is, at a
minimum, comparable to the Consumer
Handbook in substance and comprehensive­
ness. Creditors are permitted to provide more
detailed information than is contained in the
Consumer Handbook
2. Applicability. The Consumer Handbook
need not be given for variable-rate transac­

Regulation Z Commentary
tions subject to this section in which the un­
derlying interest rate is fixed. (See comment
19(b)-4 for an example of a variable-rate
transaction where the underlying interest rate
is fixed.)
Paragraph 19(b)(2)
1. Disclosure for each variable-rate program.
A creditor must provide disclosures to the
consumer that fully and separately describe
each of the creditor’s variable-rate loan pro­
grams in which the consumer expresses an in­
terest. If a program is made available only to
certain customers of an institution, a creditor
need not provide disclosures for that program
to other consumers who express a general in­
terest in a creditor’s ARM programs. These
disclosures must be given at the time an appli­
cation form is provided or before the consum­
er pays a nonrefundable fee, whichever is ear­
lier. If the consumer subsequently expresses
an interest in other available variable-rate
loan programs subject to section 226.19(b)
(2), the creditor must provide disclosures for
such additional programs. The creditor, of
course, is permitted to give the consumer in­
formation about additional programs subject
to section 226.19(b) initially. An individual
program disclosure may consist of more than
one page. For example, a creditor may attach
a separate page containing the historical pay­
ment example for the particular program. In
addition, these disclosures may be inserted or
printed in the Consumer Handbook (or a suit­
able substitute) as long as they are identified
as the creditor’s loan-program disclosures.

§226.19
• The presence or absence of, and the
amount of, rate or payment caps
• The presence of a demand feature
• The possibility of negative amortization
• The possibility of interest rate carryover
• The frequency of interest rate and pay­
ment adjustments
• The presence of a discount feature
In addition, if a loan feature such as the
term of the loan must be taken into account
in preparing the disclosures required by sec­
tion 226.19(b) (2) (viii) and (x), variablerate loans that differ as to that feature con­
stitute separate programs and require sepa­
rate loan-program disclosures under section
226.19(b)(2). If, however, a representative
value may be given for a loan feature or the
feature need not be disclosed under section
226.19(b)(2), variable-rate loans that differ
as to such features do not constitute separate
loan programs. For example, separate pro­
gram disclosures would not be required based
on differences in the following loan features:
• The amount of a discount
• The amount of a margin
3. As applicable. The disclosures required by
this section need only be made as applicable.
Any disclosure not relevant to a particular
transaction may be eliminated. For example,
if the transaction does not contain a demand
feature, the disclosure required under section
226.19(b) (2 )(xi) need not be given. As used
in this section, “payment” refers only to a
payment based on the interest rate, loan bal­
ance, and loan term and does not refer to pay­
ment of other elements such as mortgage in­
surance premiums.

2. Variable-rate loan program defined. If the
identification, the presence or absence, or the
exact value of a loan feature must be disclosed
under this section, variable-rate loans that dif­
fer as to such features constitute separate loan
programs. For example, separate loan-program disclosures would be required based on
differences in any of the following loan
features:

Paragraph 19(b)(2)(i)

• The index or other formula used to calcu­
late interest rate adjustments
• The rules relating to changes in the index
value, interest rate, payments, and loan
balance

1. Change in interest rate, payment, or term.
A creditor must disclose the fact that the
terms of the legal obligation permit the credi­
tor, after consummation of the transaction, to
increase (or decrease) the interest rate, pay-

4. Revisions. A creditor must revise the dis­
closures required under this section once a
year as soon as reasonably possible after the
new index value becomes available. Revisions
to the disclosures also are required when the
loan program changes.

95

§226.19
ment, or term of the loan initially disclosed to
the consumer. For example, the disclosures
for a variable-rate program in which the inter­
est rate and payment (but not loan term) can
change might read, “Your interest rate and
payment can change yearly.” In transactions
where the term of the loan may change due to
rate fluctuations, the creditor must state that
fact.
Paragraph 19(b)(2)(ii)
1. Identification o f index or formula. If a
creditor ties interest rate changes to a particu­
lar index, this fact must be disclosed, along
with a source of information about the index.
For example, if a creditor uses the weekly av­
erage yield on U.S. Treasury securities adjust­
ed to a constant maturity as its index, the dis­
closure might read, “Your index is the weekly
average yield on U.S. Treasury securities ad­
justed to a constant maturity of one year pub­
lished weekly in the Wall Street Journal. ” If
no particular index is used, the creditor must
briefly describe the formula used to calculate
interest rate changes.
2. Changes at creditor's discretion. If interest
rate changes are at the creditor’s discretion,
this fact must be disclosed. If an index is inter­
nally defined, such as by a creditor’s prime
rate, the creditor should either briefly describe
that index or state that interest rate changes
are at the creditor’s discretion.
Paragraph 19(b) (2) (iii)
1. Determination o f interest rate and payment.
This provision requires an explanation of how
the creditor will determine the consumer’s in­
terest rate and payment. In cases where a
creditor bases its interest rate on a specific in­
dex and adjusts the index through the addi­
tion of a margin, for example, the disclosure
might read, “Your interest rate is based on the
index plus a margin, and your payment will be
based on the interest rate, loan balance, and
remaining loan term.” If applicable, the credi­
tor should also disclose that the rate and pay­
ment will be rounded.
Paragraph 19(b)(2)(iv)
1. Current margin value and interest rate. Be­
cause the disclosures can be prepared in ad96

Regulation Z Commentary
vance, the interest rate and margin may be
several months old when the disclosures are
delivered. A statement, therefore, is required
alerting consumers to the fact that they
should inquire about the current margin value
applied to the index and the current interest
rate. For example, the disclosure might state,
“Ask us for our current interest rate and
margin.”
Paragraph 19(b)(2)(v)
1. Discounted and premium interest rate. In
some variable-rate transactions, creditors may
set an initial interest rate that is not deter­
mined by the index or formula used to make
later interest rate adjustments. Typically, this
initial rate charged to consumers is lower than
the rate would be if it were calculated using
the index or formula. However, in some cases
the initial rate may be higher. If the initial
interest rate will be a discount or a premium
rate, creditors must alert the consumer to this
fact. For example, if a creditor discounted a
consumer’s initial rate, the disclosure might
state, “Your initial interest rate is not based
on the index used to make later adjustments.”
(See the commentary to section 226.17(c)(1)
for a further discussion of discounted and pre­
mium variable-rate transactions). In addition,
the disclosure must suggest that consumers
inquire about the amount that the program is
currently discounted. For example, the disclo­
sure might state, “Ask us for the amount our
adjustable-rate mortgages are currently dis­
counted.” (See the commentary to section
226.19(b) (2) (viii) for a discussion of how to
reflect the discount or premium in the histori­
cal example.)
Paragraph 19(b) (2) (vi)
1. Frequency. The frequency of interest rate
and payment adjustments must be disclosed.
If interest rate changes will be imposed more
frequently or at different intervals than pay­
ment changes, a creditor must disclose the fre­
quency and timing of both types of changes.
For example, in a variable-rate transaction
where interest rate changes are made month­
ly, but payment changes occur on an annual
basis, this fact must be disclosed.

Regulation Z Commentary
Paragraph 19(b) (2) (vii)
1. Rate and payment caps. The creditor must
disclose limits on changes (increases or de­
creases) in the interest rate or payment. If an
initial discount is not taken into account in
applying overall or periodic rate limitations,
that fact must be disclosed. If separate overall
or periodic limitations apply to interest rate
increases resulting from other events, such as
the exercise of a fixed-rate conversion option
or leaving the creditor’s employ, those limita­
tions must also be stated. Limitations do not
include legal limits in the nature of usury or
rate ceilings under state or federal statutes or
regulations. (See section 226.30 for the rule
requiring that a maximum interest rate be in­
cluded in certain variable-rate transactions.)
2. Negative amortization and interest rate
carryover. A creditor must disclose, where ap­
plicable, the possibility of negative amortiza­
tion. For example, the disclosure might state,
“If any of your payments is not sufficient to
cover the interest due, the difference will be
added to your loan amount.” In addition, the
creditor must disclose the existence of any in­
terest rate carryover provisions. Interest rate
carryover exists when a change in the index
rate that is not imposed at the time of an ad­
justment because, for example, it exceeds ah
adjustment limitation, is carried over and
incorporated into the calculation of future
rate adjustments. For example, if the index
rises 3 percentage points during the year and
the loan contains a 2 percentage point cap on
annual changes (increases or decreases) in the
interest rate, interest rate carryover exists if
the creditor may impose the additional per­
centage point the following year as an addi­
tion to the rate derived by using the index or
formula. In such cases, the creditor must dis­
close the fact that changes in the index will be
carried over to subsequent interest rate adjust­
ment dates. The disclosure might state,
“Changes in the index not passed on as chang­
es in the interest rate will be carried over
and applied to subsequent interest rate
adjustments.”
3. Conversion option. If a loan program per­
mits consumers to convert their variable-rate
loans to fixed-rate loans, the creditor must

§226.19
disclose that the interest rate may increase if
the consumer converts the loan to a fixed-rate
loan. The creditor must also disclose the rules
relating to the conversion feature, such as the
period during which the loan may be convert­
ed, that fees may be charged at conversion,
and how the fixed rate will be determined.
The creditor should identify any index or oth­
er measure or formula used to determine the
fixed rate and state any margin to be added.
In disclosing the period during which the loan
may be converted and the margin, the creditor
may use information applicable to the conver­
sion feature during the six months preceding
preparation of the disclosures and state that
the information is representative of conver­
sion features recently offered by the creditor.
The information may be used until the pro­
gram disclosures are otherwise revised. Al­
though the rules relating to the conversion op­
tion must be disclosed, the effect of exercising
the option should not be reflected elsewhere in
the disclosures, such as in the historical exam­
ple or in the calculation of the initial and max­
imum interest rate and payments.
4. Preferred-rate loans. Section 226.19(b) ap­
plies to preferred-rate loans, where the rate
will increase upon the occurrence of some
event, such as an employee leaving the credi­
tor’s employ, whether or not the underlying
rate is fixed or variable. In these transactions,
the creditor must disclose the event that
would allow the creditor to increase the rate
such as that the rate may increase if the em­
ployee leaves the creditor’s employ. The credi­
tor must also disclose the rules relating to ter­
mination of the preferred rate, such as that
fees may be charged when the rate is changed
and how the new rate will be determined.
Paragraph 19(b)(2)(viii)
1. Index movement. This section requires a
creditor to provide an historical example,
based on a $10,000 loan amount originating in
1977, showing how interest rate changes im­
plemented according to the terms of the loan
program would have affected payments and
the loan balance at the end of each year dur­
ing a 15-year period. (In all cases, the creditor
need only calculate the payments and loan
balance for the term of the loan. For example,
97

§226.19
in a five-year loan, a creditor would show the
payments and loan balance for the five-year
term, from 1977 to 1981, with a zero loan bal­
ance reflected for 1981. For the remaining ten
years, 1982-1991, the creditor need only show
the remaining index values, margin, and inter­
est rate.) Pursuant to this section, the creditor
must provide a history of index values for the
preceding 15 years. Initially, the disclosures
would give the index values from 1977 to the
present. Each year thereafter, the revised pro­
gram disclosures should include an additional
year’s index value until 15 years of values are
shown. If the values for an index have not
been available for 15 years, a creditor need
only go back as far as the values are available
in giving a history and payment example. In
all cases, only one index value per year need
be shown. Thus, in transactions where interest
rate adjustments are implemented more fre­
quently than once per year, a creditor may
assume that the interest rate and payment re­
sulting from the index value chosen will stay
in effect for the entire year for purposes of
calculating the loan balance as of the end of
the year and for reflecting other loan program
terms. In cases where interest rate changes are
at the creditor’s discretion (see the commen­
tary to section 226.19(b)(2 )(ii)), the credi­
tor must provide a history of the rates im­
posed for the preceding 15 years, beginning
with the rates in 1977. In giving this history,
the creditor need only go back as far as the
creditor’s rates can reasonably be determined.
2. Selection o f index values. The historical ex­
ample must reflect the method by which index
values are determined under the program. If a
creditor uses an average of index values or any
other index formula, the history given should
reflect those values. The creditor should select
one date or, when an average of single values
is used as an index, one period and should
base the example on index values measured as
of that same date or period for each year
shown in the history. A date or period at any
time during the year may be selected, but the
same date or period must be used for each
year in the historical example. For example, a
creditor could use values for the first business
day in July or for the first week ending in July
for each of the 15 years shown in the example.
98

Regulation Z Commentary
3. Selection o f margin. For purposes of
the disclosure required under section
226.19(b)(2)(viii), a creditor may select a
representative margin that has been used dur­
ing the six months preceding preparation of
the disclosures, and should disclose that the
margin is one that the creditor has used re­
cently. The margin selected may be used until
a creditor revises the disclosure form.
4. Amount o f discount or premium. For pur­
poses of the disclosure required under section
226.19(b)(2)(viii), a creditor may select a
discount or premium (amount and term) that
has been used during the six months preced­
ing preparation of the disclosures, and should
disclose that the discount or premium is one
that the creditor has used recently. The dis­
count or premium should be reflected in the
historical example for as long as the discount
or premium is in effect. A creditor may as­
sume that a discount that would have been in
effect for any part of a year was in effect for
the full year for purposes of reflecting it in the
historical example. For example, a 3-month
discount may be treated as being in effect for
the entire first year of the example; a 15month discount may be treated as being in
effect for the first two years of the example. In
illustrating the effect of the discount or premi­
um, creditors should adjust the value of the
interest rate in the historical example, and
should not adjust the margin or index values.
For example, if during the six months preced­
ing preparation of the disclosures the fully in­
dexed rate would have been 10 percent but the
first year’s rate under the program was 8 per­
cent, the creditor would discount the first in­
terest rate in the historical example by 2 per­
centage points.
Paragraph 19(b)(2)(ix)
1. Calculation o f payments. A creditor is re­
quired to include a statement on the disclo­
sure form that explains how a consumer may
calculate his or her actual monthly payments
for a loan amount other than $10,000. The
example should be based upon the most recent
payment shown in the historical example. The
creditor, however, is not required to calculate
the consumer’s payments. (See the model
clauses in appendix H-4(C).)

Regulation Z Commentary
Paragraph 19(b) (2) (x)
1. Initial and maximum interest rate and pay­
ment. The disclosure form must state the ini­
tial and maximum interest rates and payments
for a $10,000 loan originated at the most re­
cent interest rate (index value plus margin)
shown in the historical example. In calculat­
ing the maximum payments under this para­
graph, a creditor should assume that the inter­
est rate increases as rapidly as possible under
the loan program, and the maximum payment
disclosed should reflect the amortization of
the loan during this period. Thus, in a loan
with 2 percentage point annual (and 5 per­
centage point overall) interest rate limitations
or “caps,” the maximum interest rate would
be 5 percentage points higher than the most
recent rate shown in the historical example.
Moreover, the loan would not reach the maxi­
mum interest rate until the fourth year be­
cause of the 2 percentage point annual rate
limitations, and the maximum payment dis­
closed would reflect the amortization of the
loan during this period. If the loan program
includes a discounted or premium initial in­
terest rate, the most recent rate shown in the
historical example should be adjusted by the
amount of the discount or premium reflected
elsewhere in the disclosure for purposes of the
requirements of this paragraph. Furthermore,
this disclosure should state the amount
by which the most recent rate has been
adjusted. (See the commentary to section
226.19(b) (2) (viii) regarding disclosure of
the amount of a discount or premium.) The
creditor may use an interest rate applicable to
the program that is more recent than the lat­
est rate shown in the historical example.

§226.19
close to the consumer the type of information
that will be contained in subsequent notices of
adjustments and when such notices will be
provided. (See the commentary to section
226.20(c) regarding notices of adjustments.)
For example, the disclosure might state, “You
will be notified at least 25, but no more than
120, days before the due date of a payment at
a new level. This notice will contain informa­
tion about the index and interest rates, pay­
ment amount, and loan balance.” In
transactions where there may be interest rate
adjustments without accompanying payment
adjustments in a year, the disclosure might
read, “You will be notified once each year
during which interest rate adjustments, but no
payment adjustments, have been made to your
loan. This notice will contain information
about the index and interest rates, payment
amount, and loan balance.”

Paragraph 19(b)(2)(xiii)
1. Multiple loan programs. A creditor that of­
fers multiple variable-rate loan programs is re­
quired to have disclosures for each variablerate loan program subject to section
226.19(b)(2). Unless disclosures for all of its
variable-rate programs are provided initially,
the creditor must inform the consumer that
other closed-end variable-rate programs exist
and that disclosure forms are available for
these additional loan programs. For example,
the disclosure form might state, “Information
on other adjustable-rate mortgage programs is
available upon request.”

Paragraph 19(b)(2)(xi)

References

1. Demand feature. If a variable-rate loan
subject to section 226.19(b) requirements
contains a demand feature, this fact must be
disclosed. (Pursuant to section 226.18 (i),
creditors would also disclose the demand fea­
ture in the standard disclosures given later.)

Statute: § 128(b)(2) and the Real Estate Set­
tlement Procedures Act (12 USC 2602)
Other sections: §§ 226.2, 226.17, and 226.22
Other regulations: Regulation X (24 CFR
3500.2(a), 3500.5(b), and 3500.6(a))
Previous regulation: None
1981 changes: This section implements section
128(b)(2), a new provision that requires ear­
ly disclosure of credit terms in certain mort­
gage transactions.

Paragraph 19(b)(2)(xii)
1. Adjustment notices. A creditor must dis­

99

Regulation Z Commentary

§ 226.20

SECTION 226.20—Subsequent
Disclosure Requirements
20(a) Refinancings
1. Definition. A refinancing is a new transac­
tion requiring a complete new set of disclo­
sures. Whether a refinancing has occurred is
determined by reference to whether the origi­
nal obligation has been satisfied or extin­
guished and replaced by a new obligation,
based on the parties’ contract and applicable
law. The refinancing may involve the consoli­
dation of several existing obligations, dis­
bursement of new money to the consumer or
on the consumer’s behalf, or the rescheduling
of payments under an existing obligation. In
any form, the new obligation must completely
replace the prior one.
• Changes in the terms of an existing obliga­
tion, such as the deferral of individual in­
stallments, will not constitute a refinanc­
ing unless accomplished by the cancella­
tion of that obligation and the substitution
of a new obligation.
• A substitution of agreements that meets
the refinancing definition will require new
disclosures, even if the substitution does
not substantially alter the prior credit
terms.
2. Exceptions. A transaction is subject to sec­
tion 226.20(a) only if it meets the general def­
inition of a refinancing. Section 226.20(a)(1)
through (5) lists five events that are not treat­
ed as refinancings, even if they are accom­
plished by cancellation of the old obligation
and substitution of a new one.
3. Variable rate. If a variable-rate feature was
properly disclosed under the regulation, a rate
change in accord with those disclosures is not
a refinancing. For example, a renegotiable rate
mortgage that was disclosed as a variable-rate
transaction is not subject to new disclosure re­
quirements when the variable-rate feature is
invoked. However, even if it is not accom­
plished by the cancellation of the old obliga­
tion and substitution of a new one, a new
transaction subject to new disclosures results
if the creditor either:
• Increases the rate based on a variable-rate
100

feature that was not previously disclosed,
or
• Adds a variable-rate feature to the
obligation.
If either of these two events occurs in a trans­
action secured by a principal dwelling with a
term longer than one year, the disclosures re­
quired under section 226.19(b) also must be
given at that time.
4. Unearned finance charge. In a transaction
involving precomputed finance charges, the
creditor must include in the finance charge on
the refinanced obligation any unearned por­
tion of the original finance charge that is not
rebated to the consumer or credited against
the underlying obligation. For example, in a
transaction with an add-on finance charge, a
creditor advances new money to a consumer
in a fashion that extinguishes the original obli­
gation and replaces it with a new one. The
creditor neither refunds the unearned finance
charge on the original obligation to the con­
sumer nor credits it to the remaining balance
on the old obligation. Under these circum­
stances, the unearned finance charge must be
included in the finance charge on the new ob­
ligation and reflected in the annual percentage
rate disclosed on refinancing. Accrued but un­
paid finance charges are included in the
amount financed in the new obligation.
5. Coverage. Section 226.20(a) applies only
to refinancings undertaken by the original
creditor or a holder or servicer of the original
obligation. A “refinancing” by any other per­
son is a new transaction under the regulation,
not a refinancing under this section.
Paragraph 20(a)(1)
1. Renewal. This exception applies both to
obligations with a single payment of principal
and interest and to obligations with periodic
payments of interest and a final payment of
principal. In determining whether a new obli­
gation replacing an old one is a renewal of the
original terms or a refinancing, the creditor
may consider it a renewal even if:
• Accrued unpaid interest is added to the
principal balance
• Changes are made in the terms of renewal

Regulation Z Commentary
resulting from the factors listed in section
226.17(c)(3)
• The principal at renewal is reduced by a
curtailment of the obligation
Paragraph 20(a)(2)
1. Annual-percentage-rate reduction. A reduc­
tion in the annual percentage rate with a cor­
responding change in the payment schedule is
not a refinancing. If the annual percentage
rate is subsequently increased (even though it
remains below its original level) and the
increase is effected in such a way that the old
obligation is satisfied and replaced, new dis­
closures must then be made.
2. Corresponding change. A corresponding
change in the payment schedule to implement
a lower annual percentage rate would be a
shortening of the maturity, or a reduction in
the payment amount or the number of pay­
ments of an obligation. The exception in sec­
tion 226.20(a)(2) does not apply if the matu­
rity is lengthened, or if the payment amount
or number of payments is increased beyond
that remaining on the existing transaction.
Paragraph 20(a)(3)
1. Court agreements. This exception includes,
for example, agreements such as reaffirma­
tions of debts discharged in bankruptcy, set­
tlement agreements, and post-judgment agree­
ments. (See the commentary to section
226.2(a) (14) for a discussion of court-ap­
proved agreements that are not considered
“credit.”)
Paragraph 20(a)(4)
1. Workout agreements. A workout agree­
ment is not a refinancing unless the annual
percentage rate is increased or additional
credit is advanced beyond amounts already
accrued plus insurance premiums.
Paragraph 20(a)(5)
1. Insurance renewal. The renewal of optional
insurance added to an existing credit transac­
tion is not a refinancing, assuming that appro­
priate Truth in Lending disclosures were pro­
vided for the initial purchase of the insurance.

§ 226.20

20(b) Assumptions
1. General definition. An assumption as de­
fined in section 226.20(b) is a new transaction
and new disclosures must be made to the sub­
sequent consumer. An assumption under the
regulation requires the following three
elements:
• A residential mortgage transaction
• An express acceptance of the subsequent
consumer by the creditor
• A written agreement
The assumption of a nonexempt consumer
credit obligation requires no disclosures un­
less all three elements are present. For exam­
ple, an automobile dealer need not provide
Truth in Lending disclosures to a customer
who assumes an existing obligation secured by
an automobile. However, a residential mort­
gage transaction with the elements described
in section 226.20(b) is an assumption that
calls for new disclosures; the disclosures must
be given whether or not the assumption is ac­
companied by changes in the terms of the ob­
ligation. (See comment 2(a) (24)-5 for a
discussion of assumptions that are not consid­
ered residential mortgage transactions.)
2. Existing residential mortgage transaction.
A transaction may be a residential mortgage
transaction as to one consumer and not to the
other consumer. In that case, the creditor
must look to the assuming consumer in deter­
mining whether a residential mortgage trans­
action exists. To illustrate:
• The original consumer obtained a mort­
gage to purchase a home for vacation pur­
poses. The loan was not a residential mort­
gage transaction as to that consumer. The
mortgage is assumed by a consumer who
will use the home as a principal dwelling.
As to that consumer, the loan is a residen­
tial mortgage transaction. For purposes of
section 226.20(b), the assumed loan is an
“existing residential mortgage transac­
tion” requiring disclosures, if the other
criteria for an assumption are met.
3. Express agreement. “Expressly agrees”
means that the creditor’s agreement must re­
late specifically to the new debtor and must
unequivocally accept that debtor as a primary
101

§ 226.20

Regulation Z Commentary

obligor. The following events are not con­
strued to be express agreements between the
creditor and the subsequent consumer:

nance charges as to that consumer, unless
exempt from the finance charge under sec­
tion 226.4.

• Approval of creditworthiness
• Notification of a change in records
• Mailing of a coupon book to the subse­
quent consumer
• Acceptance of payments from the new
consumer

If a transaction involves add-on or discount
finance charges, the creditor may make abbre­
viated disclosures, as outlined in section
226.20(b)(1) through (5). Creditors provid­
ing disclosures pursuant to this section for as­
sumptions of variable-rate transactions se­
cured by the consumer’s principal dwelling
with a term longer than one year need not
provide new disclosures under sections
226.18(f) (2) (ii) or 226.19(b). In such trans­
actions, a creditor may disclose the variablerate feature solely in accordance with section
226.18(f)(1).

4. Retention o f original consumer. The reten­
tion of the original consumer as an obligor in
some capacity does not prevent the change
from being an assumption, provided the new
consumer becomes a primary obligor. But the
mere addition of a guarantor to an obligation
for which the original consumer remains pri­
marily liable does not give rise to an assump­
tion. However, if neither party is designated
as the primary obligor but the creditor accepts
payment from the subsequent consumer, an
assumption exists for purposes of section
226.20(b).
5. Status o f parties. Section 226.20(b) applies
only if the previous debtor was a consumer
and the obligation is assumed by another con­
sumer. It does not apply, for example, when
an individual takes over the obligation of a
corporation.
6. Disclosures. For transactions that are as­
sumptions within this provision, the creditor
must make disclosures based on the “remain­
ing obligation.” For example:
• The amount financed is the remaining
principal balance plus any arrearages or
other accrued charges from the original
transaction.
• If the finance charge is computed from
time to time by application of a percentage
rate to an unpaid balance, in determining
the amount of the finance charge and the
annual percentage rate to be disclosed, the
creditor should disregard any prepaid fi­
nance charges paid by the original obligor
but must include in the finance charge any
prepaid finance charge imposed in connec­
tion with the assumption.
• If the creditor requires the assuming con­
sumer to pay any charges as a condition of
the assumption, those sums are prepaid fi­
102

7. Abbreviated disclosures. The abbreviated
disclosures permitted for assumptions of
transactions involving add-on or discount fi­
nance charges must be made clearly and con­
spicuously in writing in a form that the con­
sumer may keep. However, the creditor need
not comply with the segregation requirement
of section 226.17(a)(1). The terms “annual
percentage rate” and “total of payments,”
when disclosed according to section
226.20(b)(4) and (5), are not subject to the
description requirements of section 226.18(e)
and (h). The term “annual percentage rate”
disclosed under section 226.20(b)(4) need
not be more conspicuous than other
disclosures.

20(c) Variable-Rate Adjustments
1. Timing o f adjustment notices. This section
requires a creditor (or a subsequent holder)
to provide certain disclosures in cases where
an adjustment to the interest rate is made in a
variable-rate transaction subject to section
226.19(b). There are two timing rules, de­
pending on whether payment changes accom­
pany interest rate changes. A creditor is re­
quired to provide at least one notice each year
during which interest rate adjustments have
occurred without accompanying payment ad­
justments. For payment adjustments, a credi­
tor must deliver or place in the mail notices to
borrowers at least 25, but not more than 120,
calendar days before a payment at a new level
is due. The timing rules also apply to the no-

Regulation Z Commentary
tice required to be given in connection with
the adjustment to the rate and payment that
follows conversion of a transaction subject to
section 226.19(b) to a fixed-rate transaction.
(In cases where an open-end account is con­
verted to a closed-end transaction subject to
section 226.19(b), the requirements of this
section do not apply until adjustments are
made following conversion.)
2. Exceptions. Section 226.20(c) does not ap­
ply to “shared-equity” or “shared-appreciation” mortgages.
Paragraph 20(c)(1)
1. Current and prior interest rates. The re­
quirements under this paragraph are satisfied
by disclosing the interest rate used to compute
the new adjusted payment amount (“current
rate”) and the adjusted interest rate that was
disclosed in the last adjustment notice, as well
as all other interest rates applied to the trans­
action in the period since the last notice (“pri­
or rates”). (If there has been no prior adjust­
ment notice, the prior rates are the interest
rate applicable to the transaction at consum­
mation, as well as all other interest rates ap­
plied to the transaction in the period since
consummation.) If no payment adjustment
has been made in a year, the current rate is
the new adjusted interest rate for the transac­
tion, and the prior rates are the adjusted inter­
est rate applicable to the loan at the time of
the last adjustment notice, and all other rates
applied to the transaction in the period be­
tween the current and last adjustment notices.
In disclosing all other rates applied to the
transaction during the period between notices,
a creditor may disclose a range of the highest
and lowest rates applied during that period.
Paragraph 20(c)(2)
1. Current and prior index values. This sec­
tion requires disclosure of the index or formu­
la values used to compute the current and pri­
or interest rates disclosed in section
226.20(c)(1). The creditor need not disclose
the margin used in computing the rates. If the
prior interest rate was not based on an index
or formula value, the creditor also need not
disclose the value of the index that would oth­

§ 226.20
erwise have been used to compute the prior
interest rate.
Paragraph 20(c)(3)
1. Unapplied index increases. The require­
ment that the consumer receive information
about the extent to which the creditor has
foregone any increase in the interest rate is
applicable only to those transactions permit­
ting interest rate carryover. The amount of in­
crease that is foregone at an adjustment is the
amount that, subject to rate caps, can be ap­
plied to future adjustments independently to
increase, or offset decreases in, the rate that is
determined according to the index or formula.
Paragraph 20(c)(4)
1. Contractual effects o f the adjustment. The
contractual effects of an interest rate adjust­
ment must be disclosed including the payment
due after the adjustment is made whether or
not the payment has been adjusted. A con­
tractual effect of a rate adjustment would in­
clude, for example, disclosure of any change
in the term or maturity of the loan if the
change resulted from the rate adjustment. A
statement of the loan balance also is required.
The balance required to be disclosed is the
balance on which the new adjusted payment is
based. If no payment adjustment is disclosed
in the notice, the balance disclosed should be
the loan balance on which the payment dis­
closed under section 226.20(c)(5) is based, if
applicable, or the balance at the time the dis­
closure is prepared.
Paragraph 20(c)(5)
1. Fully amortizing payment. A disclosure is
required if the payment disclosed in section
226.20(c)(4) is not sufficient to pay off the
loan balance (including capitalized interest)
in the remaining term of the loan at the ad­
justed interest rate. In such cases, the adjust­
ment notice must state the payment required
to fully amortize the loan over the remainder
of the term. (This paragraph does not apply if
the new payment disclosed in section
226.20(c)(4) is fully amortizing but the final
payment will be a different amount due to
rounding.)
103

Regulation Z Commentary

§ 226.20

References
Statute: None
Other sections: § 226.2
Previous regulations: § 226.8(j) through (/),
and interpretation §§ 226.807, 226.811,
226.814, and 226.817
1981 changes: While the previous regulation
treated virtually any change in terms as a refi­
nancing requiring new disclosures, this regu­
lation limits refinancings to transactions in
which the entire original obligation is extin­
guished and replaced by a new one. Redis­
closure is no longer required for deferrals or
extensions.
The assumption provision retains the sub­
stance of section 226.8 (k) and interpretation
section 226.807 of the previous regulation, but
limits its scope to residential mortgage
transactions.

SECTION 226.21—Treatment of Credit
Balances
1. Credit balance. A credit balance arises
whenever the creditor receives or holds funds
in an account in excess of the total balance
due from the consumer on that account. A
balance might result, for example, from the
debtor’s paying off a loan by transmitting
funds in excess of the total balance owed on
the account, or from the early payoff of a loan
entitling the consumer to a rebate of insurance
premiums and finance charges. However, sec­
tion 226.21 does not determine whether the
creditor in fact owes or holds sums for the
consumer. For example, if a creditor has no
obligation to rebate any portion of precom­
puted finance charges on prepayment, the
consumer’s early payoff would not create a
credit balance with respect to those charges.
Similarly, nothing in this provision interferes
with any rights the creditor may have under
the contract or under state law with respect to
set-off, cross-collateralization, or similar
provisions.
2. Total balance due. The phrase “total bal­
ance due” refers to the total outstanding bal­
ance. Thus, this provision does not apply
where the consumer has simply paid an
104

amount in excess of the payment due for a
given period.
3. Timing o f refund. The creditor may also
fulfill its obligation under this section by:
• Refunding any credit balance to the con­
sumer immediately
• Refunding any credit balance prior to a
written request from the consumer
• Making a good faith effort to refund any
credit balance before six months have
passed. If that attempt is unsuccessful, the
creditor need not try again to refund the
credit balance at the end of the six-month
period.

Paragraph 21(b)
1. Written requests—standing orders. The
creditor is not required to honor standing or­
ders requesting refunds of any credit balance
that may be created on the consumer’s
account.

Paragraph 21 (c)
1. Good faith effort to refund. The creditor
must take positive steps to return any credit
balance that has remained in the account for
over six months. This includes, if necessary,
attempts to trace the consumer through the
consumer’s last known address or telephone
number, or both.
2. Good faith effort unsuccessful. Section
226.21 imposes no further duties on the credi­
tor if a good faith effort to return the balance
is unsuccessful. The ultimate disposition of
the credit balance (or any credit balance of $1
or less) is to be determined under other appli­
cable law.

References
Statute: § 165
Other sections: None.
Previous regulation: None
1981 changes: This section implements section
165 of the act, which was expanded by the
1980 statutory amendments to apply to
closed-end as well as open-end credit.

Regulation Z Commentary

SECTION 226.22—Determination of the
Annual Percentage Rate
22(a) Accuracy of the Annual
Percentage Rate
Paragraph 22(a)(1)
1. Calculation method. The regulation recog­
nizes both the actuarial method and the Unit­
ed States Rule Method (U.S. Rule) as mea­
sures of an exact annual percentage rate. Both
methods yield the same annual percentage
rate when payment intervals are equal. They
differ in their treatment of unpaid accrued
interest.
2. Actuarial method. When no payment is
made, or when the payment is insufficient to
pay the accumulated finance charge, the actu­
arial method requires that the unpaid finance
charge be added to the amount financed and
thereby capitalized. Interest is computed on
interest since in succeeding periods the inter­
est rate is applied to the unpaid balance in­
cluding the unpaid finance charge. Appendix
J provides instructions and examples for cal­
culating the annual percentage rate using the
actuarial method.
3. U.S. Rule. The U.S. Rule produces no
compounding of interest in that any unpaid
accrued interest is accumulated separately
and is not added to principal. In addition, un­
der the U.S. Rule, no interest calculation is
made until a payment is received.
4. Basis for calculations. When a transaction
involves “step rates” or “split rates”—that is,
different rates applied at different times or to
different portions of the principal balance—a
single composite annual percentage rate must
be calculated and disclosed for the entire
transaction. Assume, for example, a step-rate
transaction in which a $10,000 loan is repaya­
ble in five years at 10 percent interest for the
first two years, 12 percent for years 3 and 4,
and 14 percent for year 5. The monthly pay­
ments are $210.71 during the first two years of
the term, $220.25 for years 3 and 4, and
$222.59 for year 5. The composite annual per­
centage rate, using a calculator with a “dis­
counted cash flow analysis” or “internal rate
of return” function, is 10.75 percent.

§ 226.22
5. Good faith reliance on faulty calculation
tools. Footnote 45a absolves a creditor of lia­
bility for an error in the annual percentage
rate or finance charge that resulted from a
corresponding error in a calculation tool used
in good faith by the creditor. Whether or not
the creditor’s use of the tool was in good faith
must be determined on a case-by-case basis,
but the creditor must in any case have taken
reasonable steps to verify the accuracy of the
tool, including any instructions, before using
it. Generally, the footnote is available only for
errors directly attributable to the calculation
tool itself, including software programs; it is
not intended to absolve a creditor of liability
for its own errors, or for errors arising from
improper use of the tool, from incorrect data
entry, or from misapplication of the law.
Paragraph 22(a)(2)
1. Regular transactions. The annual percent­
age rate for a regular transaction is considered
accurate if it varies in either direction by not
more than £ of 1 percentage point from the
actual annual percentage rate. For example,
when the exact annual percentage rate is de­
termined to be 10£ percent, a disclosed annual
percentage rate from 10 percent to 10$ per­
cent, or the decimal equivalent, is deemed to
comply with the regulation.
Paragraph 22(a)(3)
1. Irregular transactions. The annual percent­
age rate for an irregular transaction is consid­
ered accurate if it varies in either direction by
not more than \ of 1 percentage point from
the actual annual percentage rate. This toler­
ance is intended for more complex transac­
tions that do not call for a single advance and
a regular series of equal payments at equal
intervals. The \ of 1 percentage point toler­
ance may be used, for example, in a construc­
tion loan where advances are made as con­
struction progresses, or in a transaction where
payments vary to reflect the consumer’s sea­
sonal income. It may also be used in transac­
tions with graduated payment schedules
where the contract commits the consumer to
several series of payments in different
amounts. It does not apply, however, to loans
with variable-rate features where the initial
105

Regulation Z Commentary

§ 226.22
disclosures are based on a regular amortiza­
tion schedule over the life of the loan, even
though payments may later change because of
the variable-rate feature.

22(b) Computation Tools
Paragraph 22(b)(1)
1. Board tables. Volumes I and II of the
Board’s Annual Percentage Rate Tables pro­
vide a means of calculating annual percentage
rates for regular and irregular transactions,
respectively. An annual percentage rate com­
puted in accordance with the instructions in
the tables is deemed to comply with the regu­
lation, even where use of the tables produces a
rate that falls outside the general standard of
accuracy. To illustrate:
• Volume I may be used for single-advance
transactions with completely regular pay­
ment schedules or with payment schedules
that are regular except for an odd first pay­
ment, odd first period or odd final pay­
ment. When used for a transaction with a
large final balloon payment, volume I may
produce a rate that is considerably higher
than the exact rate produced using a com­
puter program based directly on appendix
J. However, the volume I rate—produced
using certain adjustments in that vol­
ume—is considered to be in compliance.

• An add-on rate of 10 percent converted to
an annual percentage rate produces the
following actual annual percentage rates at
various maturities: at 3 months, 14.94 per­
cent; at 21 months, 18.18 percent; and at
60 months, 17.27 percent. The creditor
must disclose an annual percentage rate of
18.18 percent (the highest annual percent­
age rate) for any transaction up to five
years, even though that rate is precise only
for a transaction of 21 months.

22(d) Certain Transactions Involving
Ranges of Balances
1. General rule. Creditors applying a fixed
dollar finance charge to all balances within a
specified range of balances may understate the
annual percentage rate by up to 8 percent of
that rate by disclosing for all those balances
the annual percentage rate computed on the
median balance within that range. For
example:
• If a finance charge of $9 applies to all bal­
ances between $91 and $100, an annual
percentage rate of 10 percent (the rate on
the median balance) may be disclosed as
the annual percentage rate for all balances,
even though a $9 finance charge applied to
the lowest balance ($91) would actually
produce an annual percentage rate of 10.7
percent.

Paragraph 22(b)(2)

References

1. Other calculation tools. Creditors need not
use the Board tables in calculating the annual
percentage rates. Any computation tools may
be used, so long as they produce annual per­
centage rates within £ or \ of 1 percentage
point, as applicable, of the precise actuarial or
U.S. Rule annual percentage rate.

Statute: § 107
Other sections: § 226.17(c)(4) and appendix J
Previous regulation: § 226.5(b) through (e)
1981 changes: The section now provides a
larger tolerance (J of 1 percentage point) for
irregular transactions.

22(c) Single Add-On Rate Transactions

SECTION 226.23—Right of Rescission

1. General rule. Creditors applying a single
add-on rate to all transactions up to 60
months in length may disclose the same annu­
al percentage rate for all those transactions,
although the actual annual percentage rate
varies according to the length of the transac­
tion. Creditors utilizing this provision must
show the highest of those rates. For example:

1. Transactions not covered. Credit extensions
that are not subject to the regulation are not
covered by section 226.23 even if a customer’s
principal dwelling is the collateral securing
the credit. For example, the right of rescission
does not apply to a business-purpose loan,
even though the loan is secured by the cus­
tomer’s principal dwelling.

106

Regulation Z Commentary

23(a) Consumer’s Right to Rescind
Paragraph 23(a)(1)
1. Security interest arising from transaction.
In order for the right of rescission to apply,
the security interest must be retained as part
of the credit transaction. For example:
• A security interest that is acquired by a
contractor who is also extending the credit
in the transaction
• A mechanic’s or materialman’s lien that is
retained by a subcontractor or supplier of
the contractor-creditor, even when the lat­
ter has waived its own security interest in
the consumer’s home
The security interest is not part of the credit
transaction and therefore the transaction is
not subject to the right of rescission when, for
example:
• A mechanic’s or materialman’s lien is ob­
tained by a contractor who is not a party
to the credit transaction but is merely paid
with the proceeds of the consumer’s unse­
cured bank loan
• All security interests that may arise in
connection with the credit transaction are
validly waived
• The creditor obtains a hen and completion
bond that in effect satisfies all liens against
the consumer’s principal dwelling as a re­
sult of the credit transaction
Although hens arising by operation of law are
not considered security interests for purposes
of disclosure under section 226.2, that section
specifically includes them in the definition for
purposes of the right of rescission. Thus, even
though an interest in the consumer’s principal
dwelling is not a required disclosure under
section 226.18 (m), it may still give rise to the
right of rescission.
2. Consumer. To be a consumer within the
meaning of section 226.2, that person must at
least have an ownership interest in the dwell­
ing that is encumbered by the creditor’s secu­
rity interest, although that person need not be
a signatory to the credit agreement. For exam­
ple, if only one spouse signs a credit contract,
the other spouse is a consumer if the owner­

§ 226.23
ship interest of that spouse is subject to the
security interest.
3. Principal dwelling. A consumer can only
have one principal dwelling at a time. A vaca­
tion or other second home would not be a
principal dwelling. A transaction secured by a
second home (such as a vacation home) that
is not currently being used as the consumer’s
principal dwelling is not rescindable, even if
the consumer intends to reside there in the
future. When a consumer buys or builds a
new dwelling that will become the consumer’s
principal dwelling within one year or upon
completion of construction, the new dwelling
is considered the principal dwelling when it
secures the acquisition or construction loan.
“Dwelling,” as defined in section 226.2, in­
cludes structures that are classified as person­
alty under state law. For example, a transac­
tion secured by a mobile home, trailer or
houseboat used as the consumer’s principal
dwelling may be rescindable.
4. Special rule for principal dwelling. When
the consumer is acquiring or constructing a
new principal dwelling, any loan secured by
the equity in the consumer’s current principal
dwelling (for example, a bridge loan) is still
subject to the right of rescission regardless of
the purpose of that loan.
5. Addition o f a security interest. Under foot­
note 47, the addition of a security interest in a
consumer’s principal dwelling to an existing
obligation is rescindable even if the existing
obligation is not satisfied and replaced by a
new obligation, and even if the existing obliga­
tion was previously exempt (because it was
credit over $25,000 not secured by real prop­
erty or a consumer’s principal dwelling). The
right of rescission applies only to the added
security interest, however, and not to the orig­
inal obligation. In those situations, only the
section 226.23(b) notice need be delivered,
not new material disclosures; the rescission
period will begin to run from the delivery of
the notice.
Paragraph 23(a)(2)
1. Consumer's exercise o f right. The consumer
must exercise the right of rescission in writing
but not necessarily on the notice supplied un107

Regulation Z Commentary

§ 226.23
der section 226.23(b). Whatever the means of
sending the notification of rescission—mail,
telegram or other written means—the time
period for the creditor’s performance under
section 226.23(d)(2) does not begin to run
until the notification has been received. The
creditor may designate an agent to receive the
notification so long as the agent’s name and
address appear on the notice provided to the
consumer under section 226.23(b).
Paragraph 23(a)(3)
1. Rescission period. The period within which
the consumer may exercise the right to re­
scind runs for three business days from the
last of three events:
• Consummation of the transaction
• Delivery of all material disclosures
• Delivery to the consumer of the required
rescission notice
For example, if a transaction is consummated
on Friday, June 1, and the disclosures and no­
tice of the right to rescind were given on
Thursday, May 31, the rescission period will
expire at midnight of the third business day
after June 1—that is, Tuesday, June 5. In an­
other example, if the disclosures are given and
the transaction consummated on Friday, June
1. and the rescission notice is given on Mon­
day, June 4, the rescission period expires at
midnight of the third business day after June
4—that is, Thursday, June 7. The consumer
must place the rescission notice in the mail,
file it for telegraphic transmission, or deliver it
to the creditor’s place of business within that
period in order to exercise the right.
2. Material disclosures. Footnote 48 sets forth
the material disclosures that must be provided
before the rescission period can begin to run.
Failure to provide information regarding the
annual percentage rate also includes failure to
inform the consumer of the existence of a vari­
able-rate feature. Failure to give the other re­
quired disclosures does not prevent the run­
ning of the rescission period, although that
failure may result in civil liability or adminis­
trative sanctions.
3. Unexpired right o f rescission. When the
creditor has failed to take the action necessary
108

to start the three-business day rescission peri­
od running, the right to rescind automatically
lapses on the occurrence of the earliest of the
following three events:
• The expiration of three years after con­
summation of the transaction
• Transfer of all the consumer’s interest in
the property
• Sale of the consumer’s interest in the prop­
erty, including a transaction in which the
consumer sells the dwelling and takes back
a purchase money note and mortgage or
retains legal title through a device such as
an installment sale contract
Transfer of all the consumer’s interest in­
cludes such transfers as bequests and gifts. A
sale or transfer of the property need not be
voluntary to terminate the right to rescind.
For example, a foresclosure sale would termi­
nate an unexpired right to rescind. As provid­
ed in section 125 of the act, the three-year
limit may be extended by an administrative
proceeding to enforce the provisions of this
section. A partial transfer of the consumer’s
interest, such as a transfer bestowing co-own­
ership on a spouse, does not terminate the
right of rescission.
Paragraph 23(a)(4)
1. Joint owners. When more than one con­
sumer has the right to rescind a transaction,
any one of them may exercise that right and
cancel the transaction on behalf of all. For
example, if both husband and wife have the
right to rescind a transaction, either spouse
acting alone may exercise the right and both
are bound by the rescission.

23(b) Notice of Right to Rescind
1. Who receives notice. Each consumer enti­
tled to rescind must be given:
• Two copies of the rescission notice
• The material disclosures
In a transaction involving joint owners, both
of whom are entitled to rescind, both must
receive the notice of the right to rescind and
disclosures. For example, if both spouses are
entitled to rescind a transaction, each must

Regulation Z Commentary
receive two copies of the rescission notice and
one copy of the disclosures.
2. Format. The notice must be on a separate
piece of paper but may appear with other in­
formation such as the itemization of the
amount financed. The material must be clear
and conspicuous, but no minimum type size
or other technical requirements are imposed.
The notices in appendix H provide models
that creditors may use in giving the notice.
3. Content. The notice must include all of the
information outlined in section 226.23(b)(1)
through (5). The requirement in section
226.23(b) that the transaction be identified
may be met by providing the date of the trans­
action. The creditor may provide a separate
form that the consumer may use to exercise
the right of rescission, or that form may be
combined with the other rescission disclo­
sures, as illustrated in appendix H. The notice
may include additional information related to
the required information, such as:
• A description of the property subject to
the security interest
• A statement that joint owners may have
the right to rescind and that a rescission
by one is effective for all
• The name and address of an agent of the
creditor to receive notice of rescission
4. Time o f providing notice. The notice re­
quired by section 226.23(b) need not be given
before consummation of the transaction. The
creditor may deliver the notice after the trans­
action is consummated, but the rescission pe­
riod will not begin to run until the notice is
given. For example, if the creditor provides
the notice on May 15, but disclosures were
given and the transaction was consummated
on May 10, the three-business day rescission
period will run from May 15.

§ 226.23
• Begin performing services for
consumer
• Deliver materials to the consumer

the

2. Escrow. The creditor may disburse loan
proceeds during the rescission period in a val­
id escrow arrangement. The creditor may not,
however, appoint the consumer as “trustee”
or “escrow agent” and distribute funds to the
consumer in that capacity during the delay
period.
3. Actions during the delay period. Section
226.23(c) does not prevent the creditor from
taking other steps during the delay, short of
beginning actual performance. Unless other­
wise prohibited, such as by state law, the cred­
itor may, for example:
• Prepare the loan check
• Perfect the security interest
• Prepare to discount or assign the contract
to a third party
• Accrue finance charges during the delay
period
4. Delay beyond rescission period. The credi­
tor must wait until it is reasonably satisfied
that the consumer has not rescinded. For ex­
ample, the creditor may satisfy itself by doing
one of the following:
• Waiting a reasonable time after expiration
of the rescission period to allow for deliv­
ery of a mailed notice
• Obtaining a written statement from the
consumer that the right has not been
exercised
When more than one consumer has the right
to rescind, the creditor cannot reasonably rely
on the assurance of only one consumer, be­
cause other consumers may exercise the right.

23(d) Effects of Rescission
23(c) Delay of Creditor’s Performance
1. General rule. Until the rescission period
has expired and the creditor is reasonably sat­
isfied that the consumer has not rescinded, the
creditor must not, either directly or through a
third party:
• Disburse loan proceeds to the consumer

Paragraph 2$ (d)(1)
1. Termination o f security interest. Any secu­
rity interest giving rise to the right of rescis­
sion becomes void when the consumer exercis­
es the right of rescission. The security interest
is automatically negated regardless of its
status and whether or not it was recorded or
perfected. Under section 226.23(d)(2), how109

§ 226.23
ever, the creditor must take any action neces­
sary to reflect the fact that the security inter­
est no longer exists.
Paragraph 23(d)(2)
1. Refunds to consumer. The consumer can­
not be required to pay any amount in the form
of money or property either to the creditor or
to a third party as part of the credit transac­
tion. Any amounts of this nature already paid
by the consumer must be refunded. “Any
amount” includes finance charges already ac­
crued, as well as other charges such as appli­
cation and commitment fees or fees for a title
search or appraisal, whether paid to the credi­
tor, paid directly to a third party, or passed on
from the creditor to the third party. It is irrel­
evant that these amounts may not represent
profit to the creditor.
2. Amounts not refundable to consumer.
Creditors need not return any money given by
the consumer to a third party outside of the
credit transaction, such as costs incurred for a
building permit or for a zoning variance. Simi­
larly, the term “any amount” does not apply
to any money or property given by the credi­
tor to the consumer; those amounts must be
tendered by the consumer to the creditor un­
der section 226.23(d)(3).
3. Reflection o f security interest termination.
The creditor must take whatever steps are
necessary to indicate that the security interest
is terminated. Those steps include the cancel­
lation of documents creating the security in­
terest, and the filing of release or termination
statements in the public record. In a transac­
tion involving subcontractors or suppliers that
also hold security interests related to the cred­
it transaction, the creditor must ensure that
the termination of their security interests is
also reflected. The 20-day period for the credi­
tor’s action refers to the time within which the
creditor must begin the process. It does not
require all necessary steps to have been com­
pleted within that time, but the creditor is re­
sponsible for seeing the process through to
completion.
Paragraph 23(d)(3)
1. Property exchange. Once the creditor has
110

Regulation Z Commentary
fulfilled its obligations under section
226.23(d)(2), the consumer must tender to
the creditor any property or money the credi­
tor has already delivered to the consumer. At
the consumer’s option, property may be ten­
dered at the location of the property. For ex­
ample, if lumber or fixtures have been deliv­
ered to the consumer’s home, the consumer
may tender them to the creditor by making
them available for pick-up at the home, rather
than physically returning them to the credi­
tor’s premises. Money already given to the
consumer must be tendered at the creditor’s
place of business.
2. Reasonable value. If returning the property
would be extremely burdensome to the con­
sumer, the consumer may offer the creditor its
reasonable value rather than returning the
property itself. For example, if building mate­
rials have already been incorporated into the
consumer’s dwelling, the consumer may pay
their reasonable value.
Paragraph 23(d)(4)
1. Modifications. The procedures outlined in
section 226.23(d)(2) and (3) may be modi­
fied by a court. For example, when a consum­
er is in bankruptcy proceedings and prohibit­
ed from returning anything to the creditor, or
when the equities dictate, a modification
might be made.

23(e) Consumer’s Waiver of Right to
Rescind
1. Need for waiver. To waive the right to re­
scind, the consumer must have a bona fide
personal financial emergency that must be met
before the end of the rescission period. The
existence of the consumer’s waiver will not, of
itself, automatically insulate the creditor from
liability for failing to provide the right of
rescission.
2. Procedure. To waive or modify the right to
rescind, the consumer must give a written
statement that specifically waives or modifies
the right and also includes a brief description
of the emergency. Each consumer entitled to
rescind must sign the waiver statement. In a
transaction involving multiple consumers,
such as a husband and wife using their home

Regulation Z Commentary
as collateral, the waiver must bear the signa­
tures of both spouses.

23(f) Exempt Transactions
1. Residential mortgage transaction. Any
transaction to construct or acquire a principal
dwelling, whether considered real or personal
property, is exempt. (See the commentary to
section 226.23(a).) For example, a credit
transaction to acquire a mobile home or
houseboat to be used as the consumer’s princi­
pal dwelling would not be rescindable.
2. Lien status. The lien status of the mortgage
is irrelevant for purposes of the exemption in
section 226.23(f)(1); the fact that a loan has
junior lien status does not by itself preclude
application of this exemption. For example, a
home buyer may assume the existing first
mortgage and create a second mortgage to fi­
nance the balance of the purchase price. Such
a transaction would not be rescindable.
3. Combined-purpose transaction. A loan to
acquire a principal dwelling and make im­
provements to that dwelling is exempt if treat­
ed as one transaction. If, on the other hand,
the loan for the acquisition of the principal
dwelling and the subsequent advances for im­
provements are treated as more than one
transaction, then only the transaction that fi­
nances the acquisition of that dwelling is
exempt.
4. New advances. The exemption in section
226.23(f)(2) applies only to refinancings (in­
cluding consolidations) by the original credi­
tor. If the refinancing involves a new advance
of money, the amount of the new advance is
rescindable. In determining whether there is a
new advance, a creditor may rely on the
amount financed, refinancing costs, and other
figures stated in the latest Truth in Lending
disclosures provided to the consumer and is
not required to use, for example, more precise
information that may only become available
when the loan is closed. For purposes of the
right of rescission, a new advance does not
include amounts attributed solely to the costs
of the refinancing. These amounts would in­
clude section 226.4(c)(7) charges (such as
attorney’s fees and title examination and in­
surance fees, if bona fide and reasonable in

§ 226.23
amount), as well as insurance premiums and
other charges that are not finance charges.
(Finance charges on the new transaction—
points, for example—would not be considered
in determining whether there is a new ad­
vance of money in a refinancing since finance
charges are not part of the amount financed.)
To illustrate, if the sum of the outstanding
principal balance plus the earned unpaid fi­
nance charge is $50,000 and the new amount
financed is $51,000, then the refinancing
would be exempt if the extra $1,000 is attrib­
uted solely to costs financed in connection
with the refinancing that are not finance
charges. Of course, if new advances of money
are made (for example, to pay for home im­
provements) and the consumer exercises the
right of rescission, the consumer must be
placed in the same position as he or she was in
prior to entering into the new credit transac­
tion. Thus, all amounts of money (which
would include all the costs of the refinancing)
already paid by the consumer to the creditor
or to a third party as part of the refinancing
would have to be refunded to the consumer.
(See the commentary to 226.23(d)(2) for a
discussion of refunds to consumers.) A model
rescission notice applicable to transactions in­
volving new advances appears in appendix H.
5. State creditors. Cities and other political
subdivisions of states acting as creditors are
not exempted from this section.
6. Multiple advances. Just as new disclosures
need not be made for subsequent advances
when treated as one transaction, no new re­
scission rights arise so long as the appropriate
notice and disclosures are given at the outset
of the transaction. For example, the creditor
extends credit for home improvements se­
cured by the consumer’s principal dwelling,
with advances made as repairs progress. As
permitted by section 226.17(c)(6), the credi­
tor makes a single set of disclosures at the
beginning of the construction period, rather
than separate disclosures for each advance.
The right of rescission does not arise with
each advance. However, if the advances are
treated as separate transactions, the right of
rescission applies to each advance.
7. Spreader clauses. When the creditor holds
111

§ 226.23
a mortgage or deed of trust on the consumer’s
principal dwelling and that mortgage or deed
of trust contains a “spreader clause,” subse­
quent loans made are separate transactions
and are subject to the right of rescission.
Those loans are rescindable unless the credi­
tor effectively waives its security interest un­
der the spreader clause with respect to the
subsequent transactions.
8. Converting open-end to closed-end credit.
Under certain state laws, consummation of a
closed-end credit transaction may occur at the
time a consumer enters into the initial openend credit agreement. As provided in the
commentary to section 226.17(b), closed-end
credit disclosures may be delayed under these
circumstances until the conversion of the
open-end account to a closed-end transaction.
In accounts secured by the consumer’s princi­
pal dwelling, no new right of rescission arises
at the time of conversion. Rescission rights
under section 226.15 are unaffected.

References
Statute: §§ 113, 125, and 130
Other sections: § 226.2 and appendix H
Previous regulation: § 226.9
1981 changes: The right to rescind applies not
only to real property used as the consumer’s
principal dwelling, but to personal property as
well. The regulation provides no specific text
or format for the notice of the right to rescind.

SECTION 226.24— Advertising
1. Clear and conspicuous standard. This sec­
tion is subject to the general “clear and con­
spicuous” standard for this subpart but pre­
scribes no specific rules for the format of the
necessary disclosures. The credit terms need
not be printed in a certain type size nor need
they appear in any particular place in the ad­
vertisement. For example, a merchandise tag
that is an advertisement under the regulation
complies with this section if the necessary
credit terms are on both sides of the tag, so
long as each side is accessible.

Regulation Z Commentary
tisement mentions specific credit terms, it may
state only those terms that the creditor is ac­
tually prepared to offer. For example, a credi­
tor may not advertise a very low annual per­
centage rate that will not in fact be available
at any time. This provision is not intended to
inhibit the promotion of new credit programs,
but to bar the advertising of terms that are not
and will not be available. For example, a cred­
itor may advertise terms that will be offered
for only a limited period, or terms that will
become available at a future date.

24(b) Advertisement of Rate of Finance
Charge
1. Annual percentage rate. Advertised rates
must be stated in terms of an “annual percent­
age rate,” as defined in section 226.22. Even
though state or local law permits the use of
add-on, discount, time-price differential, or
other methods of stating rates, advertisements
must state them as annual percentage rates.
Unlike the transactional disclosure of the an­
nual percentage rate under section 226.18(e),
the advertised annual percentage rate need
not include a descriptive explanation of the
term and may be expressed using the abbrevi­
ation APR. The advertisement must state that
the rate is subject to increase after consumma­
tion if that is the case, but the advertisement
need not describe the rate increase, its limits,
or how it would affect the payment schedule.
As under section 226.18(f), relating to disclo­
sure of a variable rate, the rate increase disclo­
sure requirement in this provision does not
apply to any rate increase due to delinquency
(including late payment), default, accelera­
tion, assumption, or transfer of collateral.
2. Simple or periodic rates. The advertisement
may not simultaneously state any other rate,
except that a simple annual rate or periodic
rate applicable to an unpaid balance may ap­
pear along with (but not more conspicuously
than) the annual percentage rate. For
example:

24(a) Actually Available Terms

• In an advertisement for real estate, a sim­
ple interest rate may be shown in the same
type size as the annual percentage rate for
the advertised credit.

1. General rule. To the extent that an adver-

3. Buydowns. When a third party (such as a

112

Regulation Z Commentary
seller) or a creditor wishes to promote the
availability of reduced interest rates (consum­
er or seller buydowns), the advertised annual
percentage rate must be determined in accord­
ance with the rules in the commentary to sec­
tion 226.17(c) regarding the basis of transac­
tional disclosures for buydowns. The seller or
creditor may advertise the reduced simple in­
terest rate, provided the advertisement shows
the limited term to which the reduced rate
applies and states the simple interest rate ap­
plicable to the balance of the term. The adver­
tisement may also show the effect of the buy­
down agreement on the payment schedule for
the buydown period without triggering the ad­
ditional disclosures under section 226.24(c)
(2). For example, the advertisement may
state that “with this buydown arrangement,
your monthly payments for the first three
years of the mortgage term will be only $350”
or “this buydown arrangement will reduce
your monthly payments for the first three
years of the mortgage term by $150.”
4. Effective rates. In some transactions the
consumer’s payments may be based upon an
interest rate lower than the rate at which in­
terest is accruing. The lower rate may be re­
ferred to as the effective rate, payment rate, or
qualifying rate. A creditor or seller may ad­
vertise such rates by stating the term of the
reduced payment schedule, the interest rate
upon which the reduced payments are calcu­
lated, the rate at which the interest is in fact
accruing, and the annual percentage rate. The
advertised annual percentage rate that must
accompany this rate must take into account
the interest that will accrue but will not be
paid during this period. For example, an ad­
vertisement may state, “An effective first-year
interest rate of 10 percent. Interest being
earned at 14 percent. Annual percentage rate
15 percent.”
5. Discounted variable-rate transactions. The
advertised annual percentage rate for dis­
counted variable-rate transactions must be de­
termined in accordance with comment
18(f)—8 regarding the basis of transactional
disclosures for such financing. A creditor or
seller may promote the availability of the ini­
tial rate reduction in such transactions by ad­
vertising the reduced initial rate, provided the

§ 226.24
advertisement shows the limited term to
which the reduced rate applies.
• Limits or caps on periodic rate or payment
adjustments need not be stated. To illus­
trate using the second example in com­
ment 18(f)—8, the fact that the rate is pre­
sumed to be 11 percent in the second year
and 12 percent for the remaining 28 years
need not be included in the advertisement.
• The advertisement may also show the ef­
fect of the discount on the payment sched­
ule for the discount period without trigger­
ing the additional disclosures under
section 226.24(c). For example, the adver­
tisement may state that “with this dis­
count, your monthly payments for the first
year of the mortgage term will be only
$577” or “this discount will reduce your
monthly payments for the first year of
mortgage term by $223.”

24(c) Advertisement of Terms That
Require Additional Disclosures
1. General rule. Under section 226.24(c)(1),
whenever certain triggering terms appear in
credit advertisements, the additional credit
terms enumerated in section 226.24(c)(2)
must also appear. These provisions apply even
if the triggering term is not stated explicitly
but may be readily determined from the ad­
vertisement. For example, an advertisement
may state “80 percent financing available,”
which is in fact indicating that a 20 percent
downpayment is required.
Paragraph 24(c)(1)
1. Downpayment. The dollar amount of a
downpayment or a statement of the downpay­
ment as a percentage of the price requires fur­
ther information. By virture of the definition
of “downpayment” in section 226.2, this trig­
gering term is limited to credit sale transac­
tions. It includes such statements as:
• “Only 5 percent down”
• “As low as $100 down”
• “Total move-in costs of $800”
This provision applies only if a downpayment
is actually required; statements such as “no
113

§ 226.24
downpayment” or “no trade-in required” do
not trigger the additional disclosures under
this paragraph.
2. Payment period. The number of payments
required or the total period of repayment in­
cludes such statements as:
• “48-month payment terms”
• “30-year mortgage”
• “Repayment in as many as 36 monthly
installments”
But it does not include such statements as
“pay weekly,” “monthly payment terms ar­
ranged,” or “take years to repay,” since these
statements do not indicate a time period over
which a loan may bfe financed.
3. Payment amount. The dollar amount of
any payment includes statements such as:
• “Payable in installments of $103”
• “$25 weekly”
• “$1,200 balance payable in 10 equal
installments”
In the last example, the amount of each pay­
ment is readily determinable, even though not
explicitly stated. But statements such as
“monthly payments to suit your needs” or
“regular monthly payments” are not covered.
4. Finance charge. The dollar amount of the
finance charge or any portion of it includes
statements such as:
• “$500 total cost of credit”
• “$2 monthly carrying charge”
• “$50,000 mortgages, two points to the
borrower”
In the last example, the $1,000 prepaid fi­
nance charge can be readily determined from
the information given. Statements of the an­
nual percentage rate or statements that there
is no particular charge for credit (such as “no
closing costs”) are not triggering terms under
this paragraph.

Paragraph 24(c)(2)
1. Disclosure o f downpayment. The total
downpayment as a dollar amount or percent­
age must be shown, but the word “downpay114

Regulation Z Commentary
ment” need not be used in making this disclo­
sure. For example, “ 10 percent cash required
from buyer” or “credit terms require mini­
mum $100 trade-in” would suffice.
2. Disclosure o f repayment terms. While the
phrase “terms of repayment” generally has
the same meaning as the “payment schedule”
required to be disclosed under section
226.18(g), section 226.24(c)(2)(H) provides
greater flexibility to creditors in making this
disclosure for advertising purposes. Repay­
ment terms may be expressed in a variety of
ways in addition to an exact repayment sched­
ule; this is particularly true for advertisements
that do not contemplate a single specific trans­
action. For example:
• A creditor may use a unit-cost approach in
making the required disclosure, such as
“48 monthly payments of $27.83 per
$1,000 borrowed.”
• In an advertisement for credit secured by a
dwelling, when any series of payments var­
ies because of a graduated payment feature
or because of the inclusion of mortgage in­
surance premiums, a creditor may state
the number and timing of payments, the
amounts of the largest and smallest of
those payments, and the fact that other
payments will vary between those
amounts.
3. Annual percentage rate. The advertised an­
nual percentage rate may be expressed using
the abbreviation APR. The advertisement
must also state, if applicable, that the annual
percentage rate is subject to increase after
consummation.
4. Use o f examples. Footnote 49 authorizes
the use of illustrative credit transactions to
make the necessary disclosures under section
226.24(c)(2). That is, where a range of possi­
ble combinations of credit terms is offered, the
advertisement may use examples of typical
transactions, so long as each example contains
all of the applicable terms required by section
226.24(c). The examples must be labelled as
such and must reflect representative credit
terms that are made available by the creditor
to present and prospective customers.

Regulation Z Commentary

24(d) Catalogs and Multiple-Page
Advertisements
1. Definition. The multiple-page advertise­
ments to which this section refers are adver­
tisements consisting of a series of sequentially
numbered pages—for example, a supplement
to a newspaper. A mailing consisting of sever­
al separate flyers or pieces of promotional ma­
terial in a single envelope does not constitute a
single multiple-page advertisement for pur­
poses of section 226.24(d).
2. General. Section 226.24(d) permits credi­
tors to put credit information together in one
place in a catalog or multiple-page advertise­
ment. The rule applies only if the catalog or
multiple-page advertisement contains one or
more of the triggering terms from section
226.24(c)(1). A list of different annual per­
centage rates applicable to different balances,
for example, does not trigger further disclo­
sures under section 226.24(c)(2) and so is
not covered by section 226.24(d).
3. Representative examples. The table or
schedule must state all the necessary informa­
tion for a representative sampling of amounts
of credit. This must reflect amounts of credit
the creditor actually offers, up to and includ­
ing the higher-priced items. This does not
mean that the chart must make the disclo­
sures for the single most expensive item the
seller offers, but only that the chart cannot be
limited to information about less expensive
sales when the seller commonly offers a dis­
tinct level of more expensive goods or serv­
ices. The range of transactions shown in the
table or schedule in a particular catalog or
multiple-page advertisement need not exceed
the range of transactions actually offered in
that advertisement.

References
Statute: §§ 141, 142, and 144
Other sections: §§ 226.2, 226.4, and 226.22
Previous regulation: §226.10(a), (b), and (d)
1981 changes: This section retains the adver­
tising rules in a form very similar to the previ­
ous regulation, but with certain changes to
reflect the 1980 statutory amendments. For
example, if triggering terms appear in any
advertisement, the additional disclosures

§ 226.25
required no longer include the cash price. The
special rule for FHA section 235 financing has
been eliminated, as well as the rule for adver­
tising credit payable in more than four install­
ments with no identified finance charge. Inter­
pretation section 226.1002, requiring dis­
closure of representative amounts of credit in
catalogs and multiple-page advertisements,
has been incorporated in simplified form in
section 226.24(d).
Unlike the previous regulation, if the adver­
tised annual percentage rate is subject to in­
crease, that fact must now be disclosed.

SUBPART D—MISCELLANEOUS
SECTION 226.25—Record Retention
25(a) General Rule
1. Evidence o f required actions. The creditor
must retain evidence that it performed the re­
quired actions as well as made the required
disclosures. This includes, for example, evi­
dence that the creditor properly handled ad­
verse credit reports in connection with
amounts subject to a billing dispute under sec­
tion 226.13, and properly handled the refund­
ing of credit balances under sections 226.11
and 226.21.
2. Methods o f retaining evidence. Adequate
evidence of compliance does not necessarily
mean actual paper copies of disclosure state­
ments or other business records. The evidence
may be retained on microfilm, microfiche, or
by any other method that reproduces records
accurately (including computer programs).
The creditor need retain only enough infor­
mation to reconstruct the required disclosures
or other records. Thus, for example, the credi­
tor need not retain each open-end periodic
statement, so long as the specific information
on each statement can be retrieved.

References
Statute: §§ 105 and 108
Other sections: Appendix I
Previous regulation: § 226.6(i)
1981 changes: Section 226.25 substitutes a
uniform two-year record-retention rule for the
115

Regulation Z Commentary

§ 226.25
previous requirement that certain creditors re­
tain records through at least one compliance
examination. It also states more explicitly that
the record-retention requirements apply to ev­
idence of required actions.

SECTION 226.26—Use of Annual
Percentage Rate in Oral Disclosures
1. Application o f rules. The restrictions of sec­
tion 226.26 apply only if the creditor chooses
to respond orally to the consumer’s request
for credit cost information. Nothing in the
regulation requires the creditor to supply rate
information orally. If the creditor volunteers
information (including rate information)
through oral solicitations directed generally to
prospective customers, as through a telephone
solicitation, those communications may be ad­
vertisements subject to the rules in sections
226.16 and 226.24.

26(a) Open-End Credit
1. Information that may be given. The credi­
tor may state periodic rates in addition to the
required annual percentage rate, but it need
not do so. If the annual percentage rate is un­
known because transaction charges, loan fees,
or similar finance charges may be imposed,
the creditor must give the corresponding an­
nual percentage rate (that is, the periodic rate
multiplied by the number of periods in a year,
as described in sections 226.6(a)(2) and
226.7(d)). In such cases, the creditor may,
but need not, also give the consumer informa­
tion about other finance charges and other
charges.

26(b) Closed-End Credit
1. Information that may be given. The credi­
tor may state other annual or periodic rates
that are applied to an unpaid balance, along
with the required annual percentage rate. This
rule permits disclosure of a simple interest
rate, for example, but not an add-on, discount,
or similar rate. If the creditor cannot give a
precise annual percentage rate in its oral re­
sponse because of variables in the transaction,
it must give the annual percentage rate for a
comparable sample transaction; in this case,
116

other cost information may, but need not, be
given. For example, the creditor may be un­
able to state a precise annual percentage rate
for a mortgage loan without knowing the ex­
act amount to be financed, the amount of loan
fees or mortgage insurance premiums, or simi­
lar factors. In this situation, the creditor
should state an annual percentage rate for a
sample transaction; it may also provide infor­
mation about the consumer’s specific case,
such as the contract interest rate, points, other
finance charges, and other charges.

References
Statute: § 146
Other sections: §§ 226.6(a)(2) and 226.7(d)
Previous regulation: Interpretation § 226.101
1981 changes: This section implements
amended section 146 of the act, which added
a provision dealing with oral disclosures, and
incorporates interpretation section 226.101.

SECTION 226.27—Spanish-Language
Disclosures
1. Subsequent disclosures. If a creditor in
Puerto Rico provides initial disclosures in
Spanish, subsequent disclosures need not be in
Spanish. For example, if the creditor gave
Spanish-language initial disclosures, periodic
statements and change-in-terms notices may
be made in English.
2. Permissible uses. If a creditor other than in
Puerto Rico provides translations of the re­
quired disclosures—either because it is re­
quired to do so by state, federal, or local law,
or because it chooses to do so—the transla­
tions are not inconsistent per se with the dis­
closures under this regulation, and they may
be provided as additional information. In both
cases, the English language disclosures re­
quired by this regulation must be clear and
conspicuous, and the closed-end disclosures in
English must be properly segregated in ac­
cordance with section 226.17(a)(1).

References
Statute: None
Other sections: None
Previous regulation: § 226.6(a)

Regulation Z Commentary
1981 changes: No substantive change

SECTION 226.28—Effect on State Laws
28(a) Inconsistent Disclosure
Requirements
1. General There are three sets of preemption
criteria; one applies to the general disclosure
and advertising rules of the regulation, and
two apply to the credit-billing provisions. Sec­
tion 226.28 also provides for Board determi­
nations of preemption.
2. Rules for chapters 1, 2, and 3. The standard
for judging whether state laws that cover the
types of requirements in chapters 1 (General
Provisions), 2 (Credit Transactions), and 3
(Credit Advertising) of the act are inconsist­
ent and therefore preempted, is contradiction
of the federal law. Examples of laws that
would be preempted include:
• A state law that requires use of the term
“finance charge” but defines the term to
include fees that the federal law excludes
or to exclude fees the federal law includes
• A state law that requires a label such as
“nominal annual interest rate” to be used
for what the federal law calls the “annual
percentage rate”
3. Laws not contradictory to chapters 1, 2,
and 3. Generally, state law requirements that
call for the disclosure of items of information
not covered by the federal law, or that require
more detailed disclosures, do not contradict
the federal requirements. Examples of laws
that are not preempted include:
• A state law that requires disclosure of the
minimum periodic payment for open-end
credit, even though not required by section
226.7.
• A state law that requires contracts to con­
tain warnings such as: “Read this contract
before you sign. Do not sign if any spaces
are left blank. You are entitled to a copy of
this contract.”
Similarly, a state law that requires itemization
of the amount financed does not automatically
contradict the permissive itemization under
section 226.18(c). However, a state law re­

§ 226.28
quirement that the itemization appear with
the disclosure of the amount financed in the
segregated closed-end credit disclosures is in­
consistent, and this location requirement
would be preempted.
4. Creditor's options. Before the Board makes
a determination about a specific state law, the
creditor has certain options. Since the prohibi­
tion against giving the state disclosures does
not apply until the Board makes its determi­
nation, the creditor may choose to give state
disclosures until the Board formally deter­
mines that the state law is inconsistent. (The
Board will provide sufficient time for creditors
to revise forms and procedures as necessary to
conform to its determinations.)
• Under this first approach, as in all cases,
the federal disclosures must be clear and
conspicuous, and the closed-end disclo­
sures must be properly segregated in ac­
cordance with section 226.17(a)(1).
• This ability to give state disclosures re­
lieves any uncertainty that the creditor
might have prior to Board determinations
of inconsistency.
As a second option, the creditor may apply
the preemption standards to a state law, con­
clude that it is inconsistent, and choose not to
give the state-required disclosures. However,
nothing in section 226.28(a) provides the
creditor with immunity for violations of state
law if the creditor chooses not to make state
disclosures and the Board later determines
that the state law is not preempted.
5. Rules for correction o f billing errors and
regulation o f credit reports. The preemption
criteria for the fair credit billing provisions set
forth in section 226.28 have two parts. With
respect to the rules on correction of billing
errors and regulation of credit reports (which
are in section 226.13), section 226.28(a)
(2) (i) provides that a state law is inconsistent
and preempted if its requirements are different
from the federal law. An exception is made,
however, for state laws that allow the con­
sumer to inquire about an account and require
the creditor to respond to such inquiries be­
yond the time limits in the federal law. Such a
state law is not preempted with respect to the
extra time period. For example, section 226.13
117

§ 226.28
requires the consumer to submit a written no­
tice of billing error within 60 days after trans­
mittal of the periodic statement showing the
alleged error. If a state law allows the con­
sumer 90 days to submit a notice, the state
law remains in effect to provide the extra 30
days. Any state law disclosures concerning
this extended state time limit must reflect the
qualifications and conform to the format spec­
ified in section 226.28(a) (2) (i). Examples of
laws that would be preempted include:
• A state law that has a narrower or broader
definition of “billing error”
• A state law that requires the creditor to
take different steps to resolve errors
• A state law that provides different timing
rules for error resolution (subject to the
exception discussed above)
6. Rules for other fair credit billing provisions.
The second part of the criteria for fair credit
billing relates to the other rules implementing
chapter 4 of the act (addressed in sections
226.4(c)(8), 226.5(b) (2) (ii), 226.6(d),
226.7(k), 226.9(a), 226.10, 226.11, 226.12(c)
through (f), 226.13, and 226.21). Section
226.28(a) (2) (ii) provides that the test of in­
consistency is whether the creditor can com­
ply with state law without violating federal
law. For example:
• A state law that allows the card issuer to
offset the consumer’s credit-card indebted­
ness against funds held by the card issuer
would be preempted, since section
226.12(d) prohibits such action.
• A state law that requires periodic state­
ments to be sent more than 14 days before
the end of a free-ride period would not be
preempted.
• A state law that permits consumers to as­
sert claims and defenses against the card
issuer without regard to the $50 and 100mile limitations of section 226.12(c)
(3) (ii) would not be preempted.
In the last two cases, compliance with state
law would involve no violation of the federal
law.
7. Who may receive a chapter 4 determination.
Only states (through their authorized offi­
cials) may request and receive determinations
118

Regulation Z Commentary
on inconsistency with respect to the fair credit
billing provisions.
8. Preemption determination—Arizona. Effec­
tive October 1, 1983, the Board has deter­
mined that the following provisions in the
state law of Arizona are preempted by the fed­
eral law:
• Section 44-287 B.5—Disclosure of final
cash price balance. This provision is pre­
empted in those transactions in which the
amount of the final cash price balance is
the same as the federal amount financed,
since in such transactions the state law re­
quires the use of a term different from the
federal term to represent the same
amount.
• Section 44—287 B.6—Disclosure of finance
charge. This provision is preempted in
those transactions in which the amount of
the finance charge is different from the
amount of the federal finance charge, since
in such transactions the state law requires
the use of the same term as the federal law
to represent a different amount.
• Section 44-287 B.7—Disclosure of the
time balance. The time balance disclosure
provision is preempted in those transac­
tions in which the amount is the same as
the amount of the federal total of pay­
ments, since in such transactions the state
law requires the use of a term different
from the federal term to represent the
same amount.
9. Preemption determination—Florida. Effec­
tive October 1, 1983, the Board has deter­
mined that the following provisions in the
state law of Florida are preempted by the fed­
eral law:
• Sections 520.07(2) (f) and 520.34(2) (f)—
Disclosure of amount financed. This dis­
closure is preempted in those transactions
in which the amount is different from the
federal amount financed, since in such
transactions the state law requires the use
of the same term as the federal law to rep­
resent a different amount.
• Sections 520.07(2)(g), 520.34(2)(g), and
520.35(2) (d)—Disclosure of finance
charge and a description of its compo­
nents. The finance charge disclosure is pre-

Regulation Z Commentary
empted in those transactions in which the
amount of the finance charge is different
from the federal amount, since in such
transactions the state law requires the use
of the same term as the federal law to rep­
resent a different amount. The require­
ment to describe or itemize the compo­
nents of the finance charge, which is also
included in these provisions, is not
preempted.
• Sections 520.07(2) (h) and 520.34
(2)(h)—Disclosure of total of payments.
The total of payments disclosure is pre­
empted in those transactions in which the
amount differs from the amount of the fed­
eral total of payments, since in such trans­
actions the state law requires the use of the
same term as the federal law to represent a
different amount from the federal law.
• Sections 520.07(2) (i) and 520.34(2) (i)—
Disclosure of deferred payment price. This
disclosure is preempted in those transac­
tions in which the amount is the same as
the federal total sale price, since in such
transactions the state law requires the use
of a different term from the federal law to
represent the same amount as the federal
law.
10. Preemption determination—Missouri. Ef­
fective October 1, 1983, the Board has deter­
mined that the following provisions in the
state law of Missouri are preempted by the
federal law:
• Sections 365.070-6(9) and 408.2605(6)—Disclosure of principal balance.
This disclosure is preempted in those
transactions in which the amount of the
principal balance is the same as the federal
amount financed, since in such transac­
tions the state law requires the use of a
term different from the federal term to rep­
resent the same amount.
• Sections 365.070-6(10) and 408.2605(7)—Disclosure of time price differential
and time charge, respectively. These dis­
closures are preempted in those transac­
tions in which the amount is the same as
the federal finance charge, since in such
transactions the state law requires the use
of a term different from the federal law to
represent the same amount.

§ 226.28
• Sections 365.070-2 and 408.260-2—Use
of the terms “time price differential” and
“time charge” in certain notices to the
buyer. In those transactions in which the
state disclosure of the time price differen­
tial or time charge is preempted, the use of
the terms in this notice also is preempted.
The notice itself is not preempted.
• Sections 365.070-6(11) and 408.2605(8)—Disclosure of time balance. The
time balance disclosure is preempted in
those transactions in which the amount is
the same as the amount of the federal total
of payments, since in such transactions the
state law requires the use of a different
term from the federal law to represent the
same amount.
• Sections 365.070-6(12) and 408.2605(9)—Disclosure of time sale price. This
disclosure is preempted in those transac­
tions in which the amount is the same as
the federal total sale price, since in such
transactions the state law requires the use
of a different term from the federal law to
represent the same amount.
11. Preemption
determination—Mississippi
Effective October 1, 1984, the Board has de­
termined that the following provision in the
state law of Mississippi is preempted by the
federal law:
• Section 63-19-31 (2) (g)—Disclosure of
finance charge. This disclosure is preempt­
ed in those cases in which the term “fi­
nance charge” would be used under state
law to describe a different amount than the
finance charge disclosed under federal law.
12. Preemption determination—South Caroli­
na. Effective October 1, 1984, the Board has
determined that the following provision in the
state law of South Carolina is preempted by
the federal law:
• Section 37-10-102(c)—Disclosure of dueon-sale clause. This provision is preempt­
ed, but only to the extent that the creditor
is required to include the disclosure with
the segregated federal disclosures. If the
creditor may comply with the state law by
placing the due-on-sale notice apart from
the federal disclosures, the state law is not
preempted.
119

Regulation Z Commentary

§ 226.28
13. Preemption determination—Arizona. Ef­
fective October 1, 1986, the Board has deter­
mined that the following provision in the state
law of Arizona is preempted by the federal
law:

extend to any requirement relating to the fi­
nance charge or annual percentage rate, no
state provision on computation, description,
or disclosure of these terms may be substitut­
ed for the federal provision.

• Section 6-621A.2—Use of the term “the
total sum of $_______ ” in certain notices
provided to borrowers. This term de­
scribes the same item that is disclosed un­
der federal law as the “total of payments.”
Since the state law requires the use of a
different term than federal law to describe
the same item, the state-required term is
preempted. The notice itself is not
preempted.

References

(Note: The state disclosure notice that incor­
porated the above preempted term was
amended on May 4, 1987, to provide that dis­
closures must now be made pursuant to the
federal disclosure provisions.)
14. Preemption determination—Indiana. Ef­
fective October 1, 1988, the Board has deter­
mined that the following provision in the state
law of Indiana is preempted by the federal
law:
• Section 23-2-5-8—Inclusion of the loan
broker’s fees and charges in the calculation
of, among other items, the finance charge
and annual percentage rate disclosed to
potential borrowers. This disclosure is in­
consistent with sections 106(a) and
226.4(a) of the federal statute and regula­
tion, respectively, and is preempted in
those instances where the use of the same
term would disclose a different amount
than that required to be disclosed under
federal law.

Statute: §§111 and 171(a) and (c)
Other sections: Appendix A
Previous regulation: § 226.6(b) and (c), and
interpretation § 226.604
1981 changes: Section 226.28 implements
amended section 111 of the act. The test for
preemption of state laws relating to disclosure
and advertising is now whether the state law
“contradicts” the federal, rather than whether
state requirements are “different.”
The revised regulation contains no counter­
part to section 226.6(c) of the previous regu­
lation concerning placement of inconsistent
disclosures. It also reflects the statutory
amendment providing that once the Board de­
termines that a state-required disclosure is in­
consistent with federal law, the creditor may
not make the state disclosure.

SECTION 226.29—State Exemptions
29(a) General Rule
1. Classes eligible. The state determines the
classes of transactions for which it will request
an exemption and makes its application for
those classes. Classes might be, for example,
all open-end credit transactions, all open-end
and closed-end transactions, or all transac­
tions in which the creditor is a bank.

2. Substantial similarity. The “substantially
similar” standard requires that state statutory
or regulatory provisions and state interpreta­
28(b) Equivalent Disclosure
tions of those provisions be generally the same
Requirements
as the federal act and Regulation Z. This in­
1. General A state disclosure may be substi­ cludes the requirement that state provisions
tuted for a federal disclosure only after the for reimbursement to consumers for over­
Board has made a finding of substantial simi­ charges be at least equivalent to those re­
larity. Thus, the creditor may not unilaterally quired in section 108 of the act. A state will be
choose to make a state disclosure in place of a eligible for an exemption even if its law covers
federal disclosure, even if it believes that the classes of transactions not covered by the fed­
state disclosure is substantially similar. Since eral law. For example, if a state’s law covers
the rule stated in section 226.28(b) does not agricultural credit, this will not prevent the
120

Regulation Z Commentary
Board from granting an exemption for con­
sumer credit, even though agricultural credit
is not covered by the federal law.
3. Adequate enforcement. The standard re­
quiring adequate provision for enforcement
generally means that appropriate state officials
must be authorized to enforce the state law
through procedures and sanctions comparable
to those available to federal enforcement agen­
cies. Furthermore, state law must make ade­
quate provision for enforcement of the reim­
bursement rules.
4. Exemptions granted. Effective October 1,
1982, the Board has granted the following ex­
emptions from portions of the revised Truth
in Lending Act:
• Maine. Credit or lease transactions subject
to the Maine Consumer Credit Code and
its implementing regulations are exempt
from chapters 2, 4 and 5 of the federal act.
(The exemption does not apply to transac­
tions in which a federally chartered insti­
tution is a creditor or lessor.)
• Connecticut. Credit transactions subject to
the Connecticut Truth in Lending Act are
exempt from chapters 2 and 4 of the feder­
al act. (The exemption does not apply to
transactions in which a federally chartered
institution is a creditor.)
• Massachusetts. Credit transactions subject
to the Massachusetts Truth in Lending
Act are exempt from chapters 2 and 4 of
the federal act. (The exemption does not
apply to transactions in which a federally
chartered institution is a creditor.)
• Oklahoma. Credit or lease transactions
subject to the Oklahoma Consumer Credit
Code are exempt from chapters 2 and 5 of
the federal act. (The exemption does not
apply to sections 132 through 135 of the
federal act, nor does it apply to transac­
tions in which a federally chartered insti­
tution is a creditor or lessor.)
• Wyoming. Credit transactions subject to
the Wyoming Consumer Credit Code are
exempt from chapter 2 of the federal act.
(The exemption does not apply to transac­
tions in which a federally chartered insti­
tution is a creditor.)

§ 226.30

29(b) Civil Liability
1. Not eligible for exemption. The provision
that an exemption may not extend to sections
130 and 131 of the act assures that consumers
retain access to both federal and state courts
in seeking damages or civil penalties for viola­
tions, while creditors retain the defenses speci­
fied in those sections.

References
Statute: §§ 108, 123, and 171(b)
Other sections: Appendix B
Previous regulation: § 226.12
1981 changes: The procedures that states must
follow to seek exemptions are now located in
an appendix. Exemptions under the previous
regulation will be automatically revoked on
April 1, 1982, when compliance with the new
regulation is mandatory.

SECTION 226.30—Limitation on Rates
1. Scope o f coverage. The requirement of this
section applies to consumer credit obligations
secured by a dwelling (as “dwelling” is de­
fined in section 226.2(a)(19)) in which the
annual percentage rate may increase after
consummation (or during the term of the
plan, in the case of open-end credit) as a re­
sult of an increase in the interest rate compo­
nent of the finance charge—whether those in­
creases are tied to an index or formula or are
within a creditor’s discretion. The section ap­
plies to credit sales as well as loans. Examples
of credit obligations subject to this section
include:
• Dwelling-secured credit obligations that
require variable-rate disclosures under the
regulation because the interest rate may
increase during the term of the obligation.
• Dwelling-secured open-end credit plans
that are not considered variable-rate obli­
gations for purposes of disclosure under
the regulation but where the creditor re­
serves the contractual right to increase the
interest rate—periodic rate and corre­
sponding annual percentage rate—during
the term of the plan.
In contrast, credit obligations in which there
121

§ 226.30
is no contractual right to increase the interest
rate during the term of the obligation are not
subject to this section. Examples include:
• “Shared-equity” or “shared-appreciation”
mortgage loans that have a fixed rate of
interest and a shared-appreciation feature
based on the consumer’s equity in the
mortgaged property. (The appreciation
share is payable in a lump sum at a speci­
fied time.)
• Dwelling-secured fixed-rate closed-end
balloon-payment mortgage loans and
dwelling-secured fixed-rate open-end plans
with a stated term that the creditor may,
but does not have a legal obligation to, re­
new at maturity. (Contrast with the renegotiable-rate instrument described in com­
ment 17(c) (1)—11.)
• Dwelling-secured fixed-rate closed-end
multiple-advance transactions in which
each advance is disclosed as a separate
transaction.
The requirement of this section does not apply
to credit obligations entered into prior to De­
cember 9, 1987. Consequently, new advances
under open-end credit plans existing prior to
December 9, 1987, are not subject to this
section.
2. Refinanced obligations. On or after Decem­
ber 9, 1987, when a credit obligation is refi­
nanced, as defined in section 226.20(a), the
new obligation is subject to this section if it is
dwelling-secured and allows for increases in
the interest rate.
3. Assumptions. On or after December 9,
1987, when a credit obligation is assumed, as
defined in section 226.20(b), the obligation
becomes subject to this section if its is dwell­
ing-secured and allows for increases in the in­
terest rate.
4. Modifications o f obligations. The modifica­
tion of an obligation, regardless of when the
obligation was entered into, is generally not
covered by this section. For example, increas­
ing the credit limit on a dwelling-secured,
open-end plan with a variable interest rate en­
tered into before the effective date of the rule
does not make the obligation subject to this
section. If, however, a security interest in a
122

Regulation Z Commentary
dwelling is added on or after December 9,
1987, to a credit obligation that allows for in­
terest rate increases, the obligation becomes
subject to this section. Similarly, if a variable-interest rate feature is added to a dwell­
ing-secured credit obligation, the obligation
becomes subject to this section.
5. Land trusts. In some states, a land trust is
used in residential real estate transactions.
(See discussion in comment 3(a)-8).) If a
consumer-purpose loan that allows for inter­
est rate increases is secured by an assignment
of a beneficial interest in a land trust that
holds title to a consumer’s dwelling, that loan
is subject to this section.
6. Relationship to other sections. Unless other­
wise provided for in the commentary to this
section, other provisions of the regulation
such as definitions, exemptions, rules, and in­
terpretations, also apply to this section where
appropriate. To illustrate:
• An adjustable-interest-rate business-pur­
pose loan is not subject to this section even
if the loan is secured by a dwelling because
such credit extensions are not subject to
the regulation. (See generally section
226.3(a).)
• Creditors subject to this section are only
those that fall within the definition of a
creditor in section 226.2(a) (17).
7. Consumer credit contract. Creditors are re­
quired to specify a lifetime maximum interest
rate in their credit contracts—the instrument
that creates personal liability and generally
contains the terms and conditions of the
agreement (for example, a promissory note or
home-equity line of credit agreement). In
some states, the signing of a commitment let­
ter may create a binding obligation, for exam­
ple, constituting “consummation” as defined
in section 226.2(a) (13). The maximum inter­
est rate must be included in the credit con­
tract, but a creditor may include the rate ceil­
ing in the commitment instrument as well.
8. Manner o f stating the maximum interest
rate. The maximum interest rate must be stat­
ed either as a specific amount or in any other
manner that would allow the consumer to eas­
ily ascertain, at the time of entering into the

Regulation Z Commentary
obligation, what the rate ceiling will be over
the term of the obligation. For example, the
following statements would be sufficiently
specific:
• The maximum interest rate will not exceed
X% .
• The interest rate will never be higher than
X percentage points above the initial rate
of Y%.
• The interest rate will not exceed X% , or X
percentage points above [a rate to be de­
termined at some future point in time],
whichever is less.
• The maximum interest rate will not exceed
X%, or the state usury ceiling, whichever
is less.
The following statements would not comply
with this section:
• The interest rate will never be higher than
X percentage points over the prevailing
market rate.
• The interest rate will never be higher than
X percentage points above [a rate to be
determined at some future point in time].
• The interest rate will not exceed the state
usury ceiling, which is currently X%.
A creditor may state the maximum rate in
terms of a maximum annual percentage rate
that may be imposed. Under an open-end
credit plan, this normally would be the corre­
sponding annual percentage rate. (See gener­
ally section 226.6(a)(2).)
9. Multiple interest rate ceilings. Creditors are
not prohibited from setting multiple interest
rate ceilings. For example, on loans with mul­
tiple variable-rate features, creditors may es­
tablish a maximum interest rate for each fea­
ture. To illustrate, in a variable-rate loan that
has an option to convert to a fixed rate, a
creditor may set one maximum interest rate
for the initially imposed index-based variablerate feature and another for the conversion
option. Of course, a creditor may establish
one maximum interest rate applicable to all
features.
10. Interest rate charged after default State
law may allow an interest rate after default
higher than the contract rate in effect at the
time of default; however, the interest rate after

§ 226.30
default is subject to a maximum interest rate
set forth in a credit obligation that is other­
wise subject to this section. This rule applies
only in situations in which a post-default
agreement is still considered part of the origi­
nal obligation.
11. Increasing the maximum interest rate—
general rule. Generally, a creditor may not in­
crease the maximum interest rate originally
set on a credit obligation subject to this sec­
tion unless the consumer and the creditor en­
ter into a new obligation. Therefore, under an
open-end plan, a creditor may not increase the
rate ceiling imposed merely because there is
an increase in the credit limit. If an open-end
plan is closed and another opened, a new rate
ceiling may be imposed. Furthermore, where
an open-end plan has a fixed maturity and a
creditor renews the plan at maturity, or con­
verts the plan to closed-end credit, without
having a legal obligation to renew or convert,
a new maximum interest rate may be set at
that time. If, under the initial agreement, the
creditor is obligated to renew or convert the
plan, the maximum interest rate originally im­
posed cannot be increased upon renewal or
conversion (unless, of course, a new obliga­
tion is entered into). For a closed-end credit
transaction, a new maximum interest rate
may be set only if the transaction is satisfied
and replaced by a new obligation. (The excep­
tions in section 226.20(a) (l)-(5 ) which limit
what transactions are considered refinancings
for purposes of disclosure do not apply with
respect to increasing a rate ceiling that has
been imposed; if a transaction is satisfied and
replaced, the rate ceiling may be increased.)
12. Increasing the maximum interest rate—
assumption o f an obligation. If an obligation
subject to this section is assumed by a new
obligor and the original obligor is released
from liability, the maximum interest rate set
on the obligation may be increased as part of
the assumption agreement. (This rule applies
whether or not the transaction constitutes an
assumption as defined in section 226.20(b).)
13. Transition rules. Under footnote 50, if
creditors properly include the maximum rate
in their credit contracts, creditors need not re­
vise their truth in lending disclosure statement
123

Regulation Z Commentary

§ 226.30
forms to add the disclosures about limitations
on rate increases as part of the variable-rate
disclosures, until October 1, 1988. On or after
that date, creditors must have the maximum
rate set forth in their credit contracts and,
where applicable, as part of their truth in
lending disclosures.

References
Statute: Competitive Equality Banking Act of
1987, Pub. L. No 100-86, 101 Stat. 552
Other sections: §§ 226.6, 226.18, and 226.19
Previous regulation: None
1987 changes: This section implements section
1204 of the Competitive Equality Banking
Act of 1987, Pub. L. No. 100-86, 101 Stat.
552, which provides that, effective December
9, 1987. adjustable-rate mortgages must in­
clude a limitation on the interest rate that
may apply during the term of the mortgage
loan. An adjustable-rate mortgage loan is de­
fined in section 1204 as “any loan secured by a
hen on a one-to-four family dwelling unit, in­
cluding a condominium unit, cooperative
housing unit, or mobile home, where the loan
is made pursuant to an agreement under
which the creditor may, from time to time,
adjust the rate of interest.” The rule in this
section incorporates section 1204 into Regula­
tion Z and limits the scope of section 1204 to
dwelling-secured consumer credit subject to
the Truth in Lending Act, in which a creditor
has the contractual right to increase the inter­
est rate during the term of the credit
obligation.

APPENDIX A—Effect on State Laws
1. Who may make requests. Appendix A sets
forth the procedures for preemption determi­
nations. As discussed in section 226.28, which
contains the standards for preemption, a re­
quest for a determination of whether a state
law is inconsistent with the requirements of
chapters 1, 2, or 3 may be made by creditors,
states, or any interested party. However, only
states may request and receive determinations
in connection with the fair credit billing provi­
sions of chapter 4.
124

References
Statute: §§111 and 171(a)
Other sections: § 226.28
Previous regulation: §§ 226.6(b) and 226.70
(supplement V, § II)
1981 changes: The procedures in appendix A
were largely adapted from supplement V, sec­
tion II of the previous regulation (§ 226.70),
with changes made to streamline the
procedures.

APPENDIX B—State Exemptions
1. General. Appendix B sets forth the proce­
dures for exemption applications. The exemp­
tion standards are found in section 226.29 and
are discussed in the commentary to that
section.

References
Statute: §§ 123 and 171(b)
Other sections: § 226.29
Previous regulation: §§ 226.12, 226.50 (sup­
plement II), 226.60 (supplement IV), and
226.70 (supplement V, § I)
1981 changes: The procedures in appendix B
represent a combination and streamlining of
the procedures set forth in the supplements to
the previous regulation.

APPENDIX C—Issuance of Staff
Interpretations
1. General. This commentary is the vehicle
for providing official staff interpretations. In­
dividual interpretations generally will not be
issued separately from the commentary.

References
Statute: §§ 105 and 130(f)
Other sections: None
Previous regulation: § 226.1(d)
1981 changes: Appendix C reflects the Board’s
intention that this commentary serve as the
vehicle for interpreting the regulation, rather
than individual interpretive letters.

Regulation Z Commentary

APPENDIX D—Multiple-Advance
Construction Loans
1. General rule. Appendix D provides a spe­
cial procedure that creditors may use, at their
option, to estimate and disclose the terms of
multiple-advance construction loans when the
amounts or timing of advances is unknown at
consummation of the transaction. This appen­
dix reflects the approach taken in section
226.17(c)(6) (ii), which permits creditors to
provide separate or combined disclosures for
the construction period and for the permanent
financing, if any; i.e., the construction phase
and the permanent phase may be treated as
one transaction or more than one transaction.
Appendix D may also be used in multiple-ad­
vance transactions other than construction
loans, when the amounts or timing of ad­
vances is unknown at consummation.
2. Variable-rate multiple-advance loans. The
hypothetical disclosure required in most vari­
able-rate transactions by section 226.18(0(4)
is not required for multiple-advance loans dis­
closed pursuant to appendix D, part I.
3. Calculation o f the total o f payments. When
disclosures are made pursuant to appendix D,
the total of payments may reflect either the
sum of the payments or the sum of the
amount financed and the finance charge.
4. Annual percentage rate. Appendix D does
not require the use of volume I of the Board’s
Annual Percentage Rate Tables for calcula­
tion of the annual percentate rate. Creditors
utilizing appendix D in making calculations
and disclosures may use other computation
tools to determine the estimated annual per­
centage rate, based on the finance charge and
payment schedule obtained by use of the
appendix.
5. Interest reserves. In a multiple-advance
construction loan, a creditor may establish an
“interest reserve” to ensure that interest is
paid as it accrues by designating a portion of
the loan to be used for paying the interest that
accrues on the loan. An interest reserve is not
treated as a prepaid finance charge, whether
the interest reserve is the same as or different
from the estimated interest figure calculated
under appendix D.

Appendix E
• If a creditor permits a consumer to make
interest payments as they become due, the
interest reserve should be disregarded in the
disclosures and calculations under appendix
D.
• If a creditor requires the establishment of
an interest reserve and automatically de­
ducts interest payments from the reserve
amount rather than allow the consumer to
make interest payments as they become
due, the fact that interest will accrue on
those interest payments as well as the other
loan proceeds must be reflected in the cal­
culations and disclosures. To reflect the ef­
fects of such compounding, a creditor
should first calculate interest on the com­
mitment amount (exclusive of the interest
reserve) and then add the figure obtained
by assuming that one-half of that interest is
outstanding at the contract interest rate for
the entire construction period. For example,
using the example shown under paragraph
A, part I of appendix D, the estimated in­
terest would be $1,117.68 ($1093.75 plus an
additional $23.93 calculated by assuming
half of $1093.75 is outstanding at the con­
tract interest rate for the entire construction
period), and the estimated annual percent­
age rate would be 21.18 percent.

References
Statute: None
Other sections: §§ 226.17 and 226.22
Previous regulation: Interpretation § 226.813
1981 changes: The use of appendix D is limit­
ed to multiple-advance loans for construction
purposes or analogous types of transactions.

APPENDIX E—Rules for Card Issuers
That Bill on a Transaction-byTransaction Basis
Statute: None
Previous regulation: Interpretation § 226.709
Other sections: §§ 226.6 through 226.13, and
226.15
1981 changes: The rules in this appendix have
been streamlined and clarified to indicate how
certain card issuers that bill on a transaction
basis may comply with the requirements of
subpart B.
125

Appendix F

APPENDIX F—Annual Percentage
Rate Computations for Certain OpenEnd Credit Plans
1. Daily rate with specific transaction charge.
If the finance charge results from a charge re­
lating to a specific transaction and the applica­
tion of a daily periodic rate, see comment
14(c)-6 for guidance on an appropriate calcu­
lation method.

References
Statute: § 107
Previous regulation: § 226.5(a) (3) (ii), foot­
note 5(a)
Other sections: § 226.14
1981 changes: This appendix incorporates a
sixth example in which the transaction
amount exceeds the amount of the balance
subject to the periodic rate.

APPENDIXES G AND H—Open-End
and Closed-End Model Forms and
Clauses
1. Permissible changes. Although use of the
model forms and clauses is not required, cred­
itors using them properly will be deemed to be
in compliance with the regulation with regard
to those disclosures. Creditors may make cer­
tain changes in the format or content of the
forms and clauses and may delete any disclo­
sures that are inapplicable to a transaction or
a plan without losing the act’s protection from
liability. The rearrangement of the model
forms and clauses may not be so extensive as
to affect the substance, clarity, or meaningful
sequence of the forms and clauses. Creditors
making revisions with that effect will lose
their protection from civil liability. Accept­
able changes include, for example:
• Using the first person, instead of the sec­
ond person, in referring to the borrower
• Using “borrower” and “creditor” instead
of pronouns
• Rearranging the sequences of the
disclosures
• Not using bold type for headings
• Incorporating certain state “plain En­
glish” requirements
• Deleting inapplicable disclosures by whit126

Regulation Z Commentary
ing out, blocking out, filling in “N /A ”
(not applicable) or “0,” crossing out, leav­
ing blanks, checking a box for applicable
items, or circling applicable items. (This
should permit use of multipurpose stan­
dard forms.)
• Substituting appropriate references, such
as “bank,” “we,” or a specific name, for
“creditor” in the initial open-end
disclosures
• Using a vertical, rather than a horizontal,
format for the boxes in the closed-end
disclosures

APPENDIX G—Open-End Model
Forms and Clauses
1. Model G-l. The model disclosures in G-l
(different balance computation methods) may
be used in both the initial disclosures under
section 226.6 and the periodic disclosures un­
der section 226.7. As is clear from the models
given, “shorthand” descriptions of the balance
computation methods are not sufficient. The
phrase “a portion o f’ the finance charge
should be included if the total finance charge
includes other amounts, such as transaction
charges, that are not due to the application of
a periodic rate. In addition, if unpaid finance
charges are subtracted in calculating the bal­
ance, that fact must be stated so that the dis­
closure of the computation method is accu­
rate. Only model G -l(b) contains a final
sentence appearing in brackets which reflects
the total dollar amount of payments and cred­
its received during the billing cycle. The other
models do not contain this language because
they reflect plans in which payments and
credits received during the billing cycle are
subtracted. If this is not the case, however, the
language relating to payments and credits
should be changed, and the creditor should
add either the disclosure of the dollar amount
as in model G-l (b) or an indication of which
credits (disclosed elsewhere on the periodic
statement) will not be deducted in determin­
ing the balance. (Such an indication may also
substitute for the bracketed sentence in model
G -l(b).) (See the commentary to section
226.7(e).)
2. Model G-2. This model contains the notice
of liability for unauthorized use of a credit
card.

Regulation Z Commentary
3. Models G-3 and G-4. These set out models
for the long-form billing-error rights state­
ment (for use with the initial disclosures and
as an annual disclosure or, at the creditor’s
option, with each periodic statement) and the
alternative billing-error rights statement (for
use with each periodic statement), respective­
ly. Creditors must provide the billing-error
rights statements in a form substantially simi­
lar to the models in order to comply with the
regulation. The model billing-rights state­
ments may be modified in any of the ways set
forth in the first paragraph to the commentary
on appendixes G and H. The models may, fur­
thermore, be modified by deleting inapplicable
information, such as:
• The paragraph concerning stopping a deb­
it in relation to a disputed amount, if the
creditor does not have the ability to debit
automatically the consumer’s savings or
checking account for payment
• The rights stated in the special rule for
credit card purchases and any limitations
on those rights
The model billing rights statements also con­
tain optional language that creditors may use.
For example, the creditor may:
• Include a statement to the effect that no­
tice of a billing error must be submitted on
something other than the payment ticket
or other material accompanying the peri­
odic disclosures
• Insert its address or refer to the address
that appears elsewhere on the bill
Additional information may be included on
the statements as long as it does not detract
from the required disclosures. For instance,
information concerning the reporting of errors
in connection with a checking account may be
included on a combined statement as long as
the disclosures required by the regulation re­
main clear and conspicuous.
4. Models G-5 through G-9. These models set
out notices of the right to rescind that would
be used at different times in an open-end plan.
The last paragraph of each of the rescission
model forms contains a blank for the date by
which the consumer’s notice of cancellation
must be sent or delivered. A parenthetical is

Appendix H
included to address the situation in which the
consumer’s right to rescind the transaction ex­
ists beyond three business days following the
date of the transaction, for example, when the
notice or material disclosures are delivered
late or when the date of the transaction in
paragraph 1 of the notice is an estimate. The
language of the parenthetical is not optional.

APPENDIX H—Closed-End Model
Forms and Clauses
1. Models H -l and H-2. Creditors may make
several types of changes to closed-end model
forms H-l (credit sale) and H-2 (loan) and
still be deemed to be in compliance with the
regulation, provided that the required disclo­
sures are made clearly and conspicuously.
Permissible changes include the addition of
the information permitted by footnote 37 to
section 226.17 and “directly related” informa­
tion as set forth in the commentary to section
226.17(a).
The creditor may also delete or, on multi­
purpose forms, indicate inapplicable disclo­
sures, such as:
• The itemization of the amount financed
option (See samples H-12 through H -l5.)
• The credit life and disability insurance dis­
closures (See samples H -ll and H-12.)
• The property insurance disclosures (See
samples H-10 through H-12, and H-14.)
• The “filing fees” and “nonfiling insurance”
disclosures (See samples H -ll and H-12.)
• The prepayment penalty or rebate disclo­
sures (See samples H-12 and H-14.)
• The total sale price (See samples H -ll
through H-15.)
Other permissible changes include:
• Adding the creditor’s address or telephone
number (See the commentary to section
226.18(a).)
• Combining required terms where several
numerical disclosures are the same, for in­
stance, if the “total of payments” equals
the “total sale price” (See the commentary
to section 226.18.)
• Rearranging the sequence or location of
the disclosures—for instance, by placing
the descriptive phrases outside the boxes
127

Appendix H

•
•

•
•
•
•
•

containing the corresponding disclosures,
or by grouping the descriptors together as
a glossary of terms in a separate section of
the segregated disclosures; by placing the
payment schedule at the top of the form;
or by changing the order of the disclosures
in the boxes, including the annual percent­
age rate and finance charge boxes.
Using brackets, instead of checkboxes, to
indicate inapplicable disclosures
Using a line for the consumer to initial,
rather than a checkbox, to indicate an
election to receive an itemization of the
amount financed
Deleting captions for disclosures
Using a symbol, such as an asterisk, for
estimated disclosures, instead of an “e”
Adding a signature line to the insurance
disclosures to reflect joint policies
Separately itemizing the filing fees
Revising the late charge disclosure in ac­
cordance with the commentary to section
226.18(7)

2. Model H-3. Creditors have considerable
flexibility in filling out model H-3 (itemiza­
tion of the amount financed). Appropriate re­
visions, such as those set out in the commen­
tary to section 226.18(c), may be made to this
form without loss of protection from civil lia­
bility for proper use of the model forms.
3. Models H-4 through H-7. The model claus­
es are not included in the model forms al­
though they are mandatory for certain trans­
actions. Creditors using the model clauses
when applicable to a transaction are deemed
to be in compliance with the regulation with
regard to that disclosure.
4. Model H-4(A). This model contains the
variable-rate model clauses applicable to
transactions subject to section 226.18(f)(1)
and is intended to give creditors considerable
flexibility in structuring variable-rate disclo­
sures to fit individual plans. The information
about circumstances, limitations, and effects
of an increase may be given in terms of the
contract interest rate or the annual percentage
rate. Clauses are shown for hypothetical ex­
amples based on the specific amount of the
transaction and based on a representative
amount. Creditors may preprint the variable128

Regulation Z Commentary
rate disclosures based on a representative
amount for similar types of transactions, in­
stead of constructing an individualized exam­
ple for each transaction. In both representa­
tive examples and transaction-specific exam­
ples, creditors may refer either to the incre­
mental change in rate, payment amount, or
number of payments, or to the resulting rate,
payment amount, or number of payments.
For example, creditors may state that the rate
will increase by 2 percent, with a correspond­
ing $150 increase in the payment, or creditors
may state that the rate will increase to 16 per­
cent, with a corresponding payment of $850.
5. Model H-4(B). This model clause illus­
trates the variable-rate disclosure required un­
der section 226.18(f)(2), which would alert
consumers to the fact that the transaction
contains a variable-rate feature and that dis­
closures were provided earlier.
6. Model H-4(C). This model clause illus­
trates the early disclosures required generally
under section 226.19(b). It includes informa­
tion on how the consumer’s interest rate is
determined and how it can change over the
term of the loan, and explains changes that
may occur in the borrower’s monthly pay­
ment. The model clause also contains an ex­
ample of how to disclose historical changes in
the index or formula values used to compute
interest rates for the preceding 15 years. In
addition, the model clause illustrates the dis­
closure of the initial and maximum interest
rates and payments for a loan originated at
the most recent rate shown in the historical
example.
7. Model H-4(D). This model clause illus­
trates the adjustment notice required under
section 226.20(c) and provides examples of
payment-change notices and annual notices of
interest rate changes.
8. Model H-5. This contains the demand fea­
ture clause.
9. Model H-6. This contains the assumption
clause.
10. Model H-7. This contains the required-deposit clause.

Regulation Z Commentary
11. Models H-8 and H-9. These models con­
tain the rescission notices for a typical closedend transaction and a refinancing, respective­
ly. The last paragraph of each model form
contains a blank for the date by which the
consumer’s notice of cancellation must be sent
or delivered. A parenthetical is included to
address the situation in which the consumer’s
right to rescind the transaction exists beyond
three business days following the date of the
transaction, for example, where the notice or
material disclosures are delivered late or
where the date of the transaction in paragraph
1 of the notice is an estimate. The language of
the parenthetical is not optional.
12. Sample forms. The sample forms (H-10
through H-15) serve a different purpose than
the model forms. The samples illustrate vari­
ous ways of adapting the model forms to the
individual transactions described in the com­
mentary to appendix H. The deletions and re­
arrangements shown relate only to the specific
transactions described. As a result, the sam­
ples do not provide the general protection
from civil liability provided by the model
forms and clauses.
13. Sample H-10. This sample illustrates an
automobile credit sale. The cash price is
$7,500 with a downpayment of $1,500. There
is an 8 percent add-on interest rate and a term
of three years, with 36 equal monthly pay­
ments. The credit life insurance premium and
the filing fees are financed by the creditor.
There is a $25 credit report fee paid by the
consumer before consummation, which is a
prepaid finance charge.
14. Sample H -ll. This sample illustrates an
installment loan. The amount of the loan is
$5,000. There is a 12 percent simple interest
rate and a term of two years. The date of the
transaction is expected to be April 15, 1981,
with the first payment due on June 1, 1981.
The first payment amount is labelled as an es­
timate since the transaction date is uncertain.
The odd days’ interest ($26.67) is collected
with the first payment. The remaining 23
monthly payments are equal.
15. Sample H-12. This sample illustrates a re­
financing and consolidation loan. The amount

Appendix H
of the loan is $5,000. There is a 15 percent
simple interest rate and a term of three years.
The date of the transaction is April 1, 1981,
with the first payment due on May 1, 1981.
The first 35 monthly payments are equal, with
an odd final payment. The credit disability in­
surance premium is financed. In calculating
the annual percentage rate, the U.S. Rule has
been used. Since an itemization of the amount
financed is included with the disclosures, the
statement regarding the consumer’s option to
receive an itemization is deleted.
16. Samples H -l3 through H-15. These sam­
ples illustrate various mortgage transactions.
They assume that the mortgages are subject to
the Real Estate Settlement Procedures Act
(RESPA). As a result, no option regarding
the itemization of the amount financed has
been included in the samples, because provid­
ing the good faith estimates of settlement
costs required by RESPA satisfies Truth in
Lending’s amount-financed itemization re­
quirement. (See footnote 39 to section
226.18(c).)
17. Sample H -l3. This sample illustrates a
mortgage with a demand feature. The loan
amount is $44,900, payable in 360 monthly
installments at a simple interest rate of 14.75
percent. The 15 days of interim interest
($294.34) is collected as a prepaid finance
charge at the time of consummation of the
loan (April 15, 1981). In calculating the dis­
closure amounts, the minor-irregularities pro­
vision in section 226.17(c)(4) has been used.
The property insurance premiums are not in­
cluded in the payment schedule. This disclo­
sure statement could be used for notes with
the seven-year call option required by the
Federal National Mortgage Association
(FNMA) in states where due-on-sale clauses
are prohibited.
18. Sample H-14. This sample disclosure
form illustrates the disclosures under section
226.19(b) for a variable-rate transaction se­
cured by the consumer’s principal dwelling
with a term greater than one year. The sample
form shows a creditor how to adapt the model
clauses in appendix H-4(C) to the creditor’s
own particular variable-rate program. The
sample disclosure form describes the features
129

Appendix H
of a specific variable-rate mortgage program
and alerts the consumer to the fact that infor­
mation on the creditor’s other closed-end vari­
able-rate programs is available upon request.
It includes information on how the interest
rate is determined and how it can change over
time, and explains how the monthly payment
can change based on a $10,000 loan amount,
payable in 360 monthly installments, based on
historical changes in the values for the weekly
average yield on U.S. Treasury securities ad­
justed to a constant maturity of one year. In­
dex values are measured as of the first week
ending in July for the years 1977 through
1987. This reflects the requirement that the
index history be based on values for the same
date or period each year beginning with index
values for 1977. The sample disclosure also
illustrates the requirement under section
226.19(b) (2) (x) that the initial and the max­
imum interest rates and payments be shown
for a $10,000 loan originated at the most re­
cent rate shown in the historical example. In
the sample, the loan is assumed to have an
initial interest rate of 9.71 percent (which was
the interest rate in 1987 for the example
shown) and to have 2 percentage point annual
(and 5 percentage point overall) interest rate
limitations or caps. Thus, the maximum
amount that the interest rate could rise under
this program is 5 percentage points higher
than the 9.71 percent initial rate to 14.71 per­
cent, and the monthly payment could rise
from $85.62 to a maximum of $123.31. The
loan would not reach the maximum interest
rate until its fourth year because of the 2 per­
centage point annual rate limitations, and the
maximum payment disclosed reflects the am­
ortization of the loan during that period. The
sample form also illustrates how to provide
consumers with a method for calculating their
actual monthly payment for a loan amount
other than $10,000.
19. Sample H-15. This sample illustrates a
graduated payment mortgage with a five-year
graduation period and a 1\ percent yearly in­
crease in payments. The loan amount is
$44,900, payable in 360 monthly installments
at a simple interest rate of 14.75 percent. Two
points ($898), as well as an initial mortgage
guarantee insurance premium of $225.00, are
130

Regulation Z Commentary
included in the prepaid finance charge. The
mortgage-guarantee insurance premiums are
calculated on the basis of J of 1 percent of the
outstanding principal balance under an annu­
al reduction plan. The abbreviated disclosure
permitted under section 226.18(g)(2) is used
for the payment schedule for years 6 through
30. The prepayment disclosure refers to both
penalties and rebates because information
about penalties is required for the simple-in­
terest portion of the obligation and informa­
tion about rebates is required for the mortgage
insurance portion of the obligation.
20. HRSA-500-1 9-82. Pursuant to section
113(a) of the Truth in Lending Act, Form
HRSA-500-1 9-82 issued by the U.S. Depart­
ment of Health and Human Services for cer­
tain student loans has been approved. The
form may be used for all Health Education
Assistance Loans (HEAL) with a variable in­
terest rate that are interim student credit ex­
tensions as defined in Regulation Z.
21. HRSA-500-2 9-82. Pursuant to section
113(a) of the Truth in Lending Act, Form
HRSA-500-2 9-82 issued by the U.S. Depart­
ment of Health and Human Services for cer­
tain student loans has been approved. The
form may be used for all HEAL loans with a
fixed interest rate that are interim student
credit extensions as defined in Regulation Z.
22. HRSA-502-1 9-82. Pursuant to section
113(a) of the Truth in Lending Act, Form
HRSA-502-1 9-82 issued by the U.S. Depart­
ment of Health and Human Services for cer­
tain student loans has been approved. The
form may be used for all HEAL loans with a
variable interest rate in which the borrower
has reached prepayment status and is making
payments of both interest and principal.
23. HRSA-502-2 9-82. Pursuant to section
113(a) of the Truth in Lending Act, Form
HRSA-502-2 9-82 issued by the U.S. Depart­
ment of Health and Human Services for cer­
tain student loans has been approved. The
form may be used for all HEAL loans with a
fixed interest rate in which the borrower has
reached repayment status and is making pay­
ments of both interest and principal.

Regulation Z Commentary

References
Statute: §§ 105 and 130
Other sections: §§ 226.6, 226.7, 226.9, 226.12,
226.15, 226.18, and 226.23
Previous regulation: None
1981 changes: The model forms and clauses
have no counterpart in the previous
regulation.

APPENDIX I—Federal Enforcement
Agencies
Statute: § 108
Other sections: None
Previous regulation: § 226.1(b)
1981 changes: None

Appendix J
2. Relation to Board tables. The Board’s An­
nual Percentage Rate Tables also provide
creditors with a calculation tool that applies
the technical information in appendix J. An
annual percentage rate computed in accord­
ance with the instructions in the tables is
deemed to comply with the regulation. Vol­
ume I of the tables may be used for credit
transactions involving equal payment
amounts and periods, as well as for transac­
tions involving any of the following irregulari­
ties: odd first period, odd first payment and
odd last payment. Volume II of the tables
may be used for transactions that involve any
type of irregularities. These tables may be ob­
tained from any Federal Reserve Bank or
from the Board in Washington, D.C. 20551,
upon request.

References
APPENDIX J—Annual Percentage Rate
Computations for Closed-End Credit
Transactions
1. Use o f appendix J. Appendix J sets forth
the actuarial equations and instructions for
calculating the annual percentage rate in
closed-end credit transactions. While the for­
mulas contained in this appendix may be di­
rectly applied to calculate the annual percent­
age rate for an individual transaction, they
may also be utilized to program calculators
and computers to perform the calculations.

Statute: § 107
Other sections: § 226.22
Previous regulation: § 226.40 (supplement I)
1981 changes: Paragraph (b) (2) has been re­
vised to clarify that the term of the transac­
tion never begins earlier than consummation
of the transaction. Paragraph (b)(5)(vi) has
been revised to permit creditors in all cases
where the transaction term equals a whole
number of months, to use either the 12-month
method or the 365-day method to compute
the number of unit periods per year.