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Federal R eserve Bank
OF DALLAS
ROBERT
D. M C T E E R , J R .
P R E S ID E N T
DALLAS, TEXAS
7 5 2 65 -5 90 6
A N P C H IE F E X E C U T I V E O F F I C E R
October 22,1997
Notice 97-94
TO:
The Chief Executive Officer of
each financial institution in the
Eleventh Federal Reserve District
SUBJECT
Revised Pamphlets for Regulation Y
(Bank Holding Companies and Change in Bank Control)
and the Official Staff Commentary on Regulation Z
(Truth in Lending)
DETAILS
The Board of Governors of the Federal Reserve System
has published revised pamphlets for Regulation Y, effective April
1997, and the Official Staff Commentary on Regulation Z, effective
February 1997.
ENCLOSURES
The revised pamphlets are enclosed. Please insert them
in your Regulations binders.
For additional copies, bankers and others are encouraged to use one o f the following toll-free
numbers in contacting the Federal Reserve Bank o f Dallas: Dallas Office (800) 333-4460;
El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; H ouston Branch Intrastate
(800) 392-4162, Interstate (800) 221-0363; San A ntonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
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2
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MORE INFORMATION
For more information regarding Regulation Y, please
contact Rob Jolley at (214) 922-6071. For more information regard
ing Regulation Z, please contact Eugene Coy at (214)
922-6201.
For additional copies of this Bank’s notice or the revised
pamphlets, contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,
Board of Governors of the Federal Reserve System
Regulation Y
Banking Holding Companies
and Change in Bank Control
12 CFR 225; as amended effective April 21, 1997
Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank of the
Federal Reserve District in which the inquiry arises.
May 1997
Contents
Page
REGULATION Y
R egulation Y— B ank H olding
Com panies and C hange in
B ank C ontrol
Subpart A—General Provisions
Section 225.1— Authority, purpose, and
scope ............................................................ 2
Section 225.2—Definitions .......................... 3
Section 225.3—Administration ................... 6
(a) Delegation of authority ..................... 6
(b) Appropriate Federal Reserve
Bank ..................................................... 7
Section 225.4— Corporate practices ...........7
(a) Bank holding company policy
and operations .................................... 7
(b) Purchase or redemption by a
bank holding company of its
own securities .................................... 7
(c) Deposit insurance .............................. 8
(d) Acting as transfer agent, municipal
securities dealer, or clearing
agent ..................................................... 8
(e) Reporting requirement for credit
secured by certain bank
holding company stock ....................... 8
(f) Suspicious-activity report .................... 9
Section 225.5—Registration, reports,
and inspections ........................................... 9
(a) Registration of bank holding
companies .............................................. 9
(b) Reports of bank holding
companies .............................................. 9
(c) Examinations and inspections ........... 9
Section 225.6—Penalties for violations . . . 9
(a) Criminal and civil penalties ................9
(b) Cease-and-desist proceedings ........... 9
Section 225.7—Exceptions to tying
restrictions ................................................... 9
(a) Purpose ................................................. 9
(b) Exceptions to statute .......................... 9
(c) Limitations on exceptions .............. 10
(d) Extension of statute to electronic
benefit transfer services ................. 10
(e) Definition of bank ........................... 10
Subpart B—Acquisition of Bank
Securities or Assets
Section 225.11—Transactions requiring
Board approval ......................................... 10
(a) Formation of bank holding
company ............................................. 10
(b) Acquisition of subsidiarybank . . . . 10
(c) Acquisition of control of bank or
bank holding companysecurities .. 10
(d) Acquisition of bank assets ............. 11
(e) Merger of bank holding
companies ........................................... 11
(f) Transactions by a foreign banking
organization ...................................... 11
Section 225.12—Transactions not
requiring Board approval ........................ 11
(a) Acquisition of securities in
fiduciary capacity ............................ 11
(b) Acquisition of securities in
satisfaction of debts previously
contracted ........................................... 11
(c) Acquisition of securities by bank
holding company with majority
c o n tro l................................................. 11
(d) Acquisitions involving bank
mergers and internal corporate
reorganizations .................................. 11
(e) Holding securities in escrow ......... 12
(f) Acquisition of a foreign banking
organization ...................................... 12
Section 225.13— Factors considered in
acting on bank acquisition proposals . . 13
(a) Factors requiring denial ................. 13
(b) Other factors .................................... 13
(c) Interstate transactions ..................... 13
(d) Conditional approvals ..................... 13
Section 225.14— Expedited action for
certain bank acquisitions by well-run
bank holding companies ........................ 13
(a) Filing of notice ................................ 13
(b) .............................................................. 14
(c) Criteria for use of expedited
procedure ........................................... 15
(d) Comment by primary banking
supervisor ........................................... 16
(e) Branches and agencies of
foreign banking organizations ........ 17
Contents
Page
Section 225.15—Procedures for other
bank acquisition p ro p o sals..................... 17
(a) Filing application .............................. 17
(b) Notice to primary banking
supervisor ........................................... 17
(c) Accepting application for
processing ........................................... 17
(d) Action on applications ................... 17
Section 225.16— Public notice, comments,
hearings, and other provisions governing
applications and notices .......................... 17
(a) In general ......................................... 17
(b) Public notice ................................... 17
(c) Public comment ............................... 18
(d) Notice to attorney general ............ 18
(e) Hearings ............................................ 18
(f) Approval through failure to act . . . 19
(g) Exceptions to notice and hearing
requirements ...................................... 19
(h) Waiting period .................................. 19
Section 225.17—Notice procedure for
one-bank holding company formations . 19
(a) Transactions that qualify under
this section ......................................... 19
(b) Contents of notice ........................... 20
(c) Acknowledgment of notice ............ 20
(d) Application required upon
objection ............................................. 20
Subpart C— Nonbanking Activities and
Acquisitions by Bank Holding Companies
Section 225.21—Prohibited nonbanking
activities and acquisitions; exempt
bank holding companies ........................
(a) Prohibited nonbanking activities
and acquisitions ................................
(b) Exempt bank holding companies ..
Section 225.22—Exempt nonbanking
activities and acquisitions .....................
(a) Certain de novo activities ..............
(b) Servicing activities .........................
(c) Safe deposit business ....................
(d) Nonbanking acquisitions not
requiring prior Board approval . . . .
(e) Acquisition of securities by
subsidiary banks ..............................
(f) Activities and securities of
new bank holding companies .........
(g) Grandfathered activities and
securities .............................................
21
21
21
21
21
22
22
22
Page
(h) Securities or activities exempt
under Regulation K .......................... 24
Section 225.23—Expedited action for
certain nonbanking proposals by
well-run bank holding companies ......... 24
(a) Filing of notice ................................ 24
(b) .............................................................. 25
(c) Criteria for use of expedited
procedure ........................................... 25
(d) Branches and agencies of foreign
banking organizations ..................... 26
Section 225.24— Procedures for
other nonbanking proposals ................... 26
(a) Notice required for nonbanking
activities ............................................. 26
(b) Notice provided to Board ............... 27
(c) Notice to public ................................ 27
(d) Action on notices ............................ 28
Section 225.25— Hearings, alteration
of activities, and other matters ............. 29
(a) Hearings ............................................. 29
(b) Approval through failure to act . . . 29
(c) Notice to expand or alter
nonbanking activities ........................ 29
(d) Emergency savings association
acquisitions ......................................... 29
Section 225.26—Factors considered
in acting on nonbanking proposals . . . . 29
(a) In general ........................................... 29
(b) Financial and managerial
resources .............................................
(c) Competitive effect of de novo
pro p o sals............................................. 30
(d) Denial for lack of information . . . . 30
(e) Conditional approvals ..................... 30
Section 225.27—Procedures for
determining scope of nonbanking
activities ................................................... 30
(a) Advisory opinions regarding
scope of previously approved
nonbanking activities ........................ 30
(b) Procedure for consideration of new
activities ............................................. 30
Section 225.28—List of permissible
nonbanking activities .............................. 31
23
Subpart D—Control and Divestiture
Proceedings
23
Section 225.31—Control proceedings . . . . 37
(a) Preliminary determination of
control ................................................. 37
24
Contents
Page
(b) Response to preliminary
determination of control ................. 37
|| (c) Hearing and final determination . . . 37
(d) Rebuttable presumptions of
c o n tro l................................................. 38
(e) Presumptions of noncontrol ........... 38
Subpart E—Change in Bank Control
Section 225.41—Transactions
requiring prior notice .............................. 39
(a) Prior-notice requirement ................. 39
(b) Definitions ......................................... 39
(c) Acquisitions requiring prior
notice ................................................. 39
(d) Rebuttable presumption of
concerted action ................................ 39
(e) Acquisitions of loans in default . . . 40
(f) Other transactions ............................40
(g) Rebuttal of presumptions ............... 40
Section 225.42—Transactions not
requiring prior notice ..............................40
(a) Exempt transactions .......................... 40
(b) Prior-notice exemption ................... 41
Section 225.43—Procedures for filing,
processing, publishing, and acting
on notices ................................................. 41
(a) Filing notice .......................................41
(b) Acceptance of notice ........................41
(c) Publication ......................................... 42
(d) Time period for Board action .........42
} (e) Advice to bank supervisory
agencies ............................................. 43
(f) Investigation and report ................. 43
(g) Factors considered in acting
on notices ........................................... 43
(h) Disapproval and hearing ................. 43
Section 225.44—Reporting of stock
loans .......................................................... 44
(a) Requirements .................................... 44
(b) Definitions ......................................... 44
(c) Exceptions ......................................... 44
(d) Report requirements ........................44
(e) Other reporting requirements ......... 45
Subpart F—Limitations on
Nonbank Banks
Section 225.52—Limitation on
overdrafts ................................................. 45
(a) Definitions ......................................... 45
(b) Restriction on overdrafts ................. 45
(c) Permissible overdrafts ..................... 45
Page
(d) Posting by Federal Reserve
Banks ................................................. 46
(e) Posting by nonbank banks and
industrial banks ................................ 46
Subpart G—Appraisal Standards
for Federally Related Transactions
Section 225.61—Authority, purpose,
and scope ................................................. 47
(a) Authority ........................................... 47
(b) Purpose and scope ............................ 47
Section 225.62—Definitions ..................... 48
Section 225.63—Appraisals required;
transactions requiring a state-certified
or -licensed appraiser ..............................49
(a) Appraisals required .......................... 49
(b) Evaluations required ........................ 50
(c) Appraisals to address
safety-and-soundness concerns . . . . 50
(d) Transactions requiring a
state-certified appraiser ................... 50
(e) Transactions requiring either
a state-certified or -licensed
appraiser ............................................. 50
Section 225.64— Minimum appraisal
standards ................................................... 50
Section 225.65—Appraiser independence . 51
(a) Staff appraisers ................................ 51
(b) Fee appraisers .................................. 51
Section 225.66— Professional association
membership; com petency........................ 51
(a) Membership in appraisal
organizations .................................... 51
(b) Competency ...................................... 51
Section 225.67—Enforcement ................... 51
Subpart H— Notice of Addition or
Change of Directors and Senior
Executive Officers
Section 225.71—Definitions .....................
Section 225.72— Director and officer
appointments; prior-notice
requirement ...............................................
(a) Prior notice by regulated
institution ...........................................
(b) Prior notice by individual ...............
Section 225.73— Procedures for filing,
processing, and acting on notices;
standards for disapproval; waiver
of notice ...................................................
51
52
52
52
52
Contents
Page
Page
(a) Filing notice ..................................... 52 Bank Holding Company Act of 1956
(b) Commencement of
service .... 53
Section 2— Definitions ................................
(c) Notice of disapproval .................... 53
Section 3— Acquisition of bank shares
(d) Appeal of a notice
of disapproval . 53
or assets ................................................... 64
(e) Informal hearing ............................. 53
Section 4— Interests in nonbanking
(f) Waiver of notice ............................ 54
organizations ............................................. 69
Appendix A—Capital adequacy guidelines
Section 5—Administration .......................... 83
for bank holding companies:
Section 7—Reservation of rights to
risk-based measure*
States .......................................................... 85
Appendix B— Capital adequacy guidelines
Section 8—Penalties .................................. 85
for bank holding companies and
Section 9—Judicial review
...................... 87
state member banks: leverage
Section 10— Tax p ro v isio n s........................ 87
measure*
Section 11— Saving provision ................... 87
Appendix C— Small bank holding
Section 12— Separability of provisions . . 89
company policy statement
Appendix D—Capital adequacy guidelines
for bank holding companies: tier 1
Bank Holding Company Act
leverage measure*
Amendments of 1970
Appendix E—Capital adequacy guidelines
for bank holding companies:
Section 105— Party in interest ................. 91
market-risk measure*
Section 106— Tie-in arrangements ........... 91
* See the Board pam phlet “ Capital A dequacy G uide-
Regulation Y
Bank Holding Companies and Change in Bank Control
12 CFR 225; as amended effective April 21, 1997
^ ^ S u b p a r t A—General Provisions
Section
225.1
225.2
225.3
225.4
225.5
225.6
225.7
Authority, purpose, and scope
Definitions
Administration
Corporate practices
Registration, reports, and inspections
Penalties for violations
Exceptions to tying provisions
Subpart B—Acquisition of Bank Securities
or Assets
Section
225.11 Transactions requiring Board
approval
225.12 Transactions not requiring Board
approval
225.13 Factors considered in acting on bank
acquisition proposals
225.14 Expedited action for certain bank
acquisitions by well-run bank holding
companies
225.15 Procedures for other bank acquisition
proposals
225.16 Public notice, comments, hearings,
and other provisions governing
applications and notices
•
225.17 Notice procedure for one-bank
holding company formations
Subpart C—Nonbanking Activities and
Acquisitions by Bank Holding Companies
Section
225.21 Prohibited nonbanking activities and
acquisitions; exempt bank holding
companies
225.22 Exempt nonbanking activities and
acquisitions
225.23 Expedited action for nonbanking
proposals by well-run bank holding
companies
225.24 Procedures for other nonbanking
proposals
225.25 Hearings, alteration of activities, and
other matters
225.26 Factors considered in acting on
nonbanking proposals
225.27 Procedures for determining scope of
nonbanking activities
225.28 List of permissible nonbanking
activities
Subpart D— Control and Divestiture
Proceedings
Section
225.31 Control proceedings
Subpart E—Change in Bank Control
Section
225.41 Transactions requiring prior notice
225.42 Transactions not requiring prior
notice
225.43 Procedures for filing, processing,
publishing, and acting on notices
225.44 Reporting of stock loans
Subpart F—Limitations on Nonbank Banks
Section
225.52 Limitation on overdrafts
Subpart G— Appraisal Standards for
Federally Related Transactions
Section
225.61 Authority, purpose, and scope
225.62 Definitions
225.63 Appraisals required; transactions
requiring a state-certified or -licensed
appraiser
225.64 Minimum appraisal standards
225.65 Appraiser independence
225.66 Professional association membership;
competency
225.67 Enforcement
Subpart H—Notice of Addition or Change of
Directors and Senior Executive Officers
Section
225.71 Definitions
225.72 Director and officer appointments;
prior-notice requirement
225.73 Procedures for filing, processing, and
acting on notices; standards for
disapproval; waiver of notice
1
Regulation Y
Appendix A—Capital adequacy guidelines for
bank holding companies: risk-based mea
sure
Appendix B—Capital adequacy guidelines for
bank holding companies and state member
banks: leverage measure
Appendix C— Small bank holding company
policy statement; assessment of financial
and managerial factors
Appendix D—Capital adequacy guidelines for
bank holding companies: tier 1 leverage
measure
Appendix E—Capital adequacy guidelines for
bank holding companies: market-risk mea
sure
SUBPART A— GENERAL PROVISIONS
SECTION 225.1— Authority, Purpose,
and Scope
(a) Authority. This part1 (Regulation Y) is is
sued by the Board of Governors of the Fed
eral Reserve System (Board) under section
5(b) of the Bank Holding Company Act of
1956, as amended (12 USC 1844(b)) (BHC
Act); sections 8 and 13(a) of the International
Banking Act of 1978 (12 USC 3106 and
3108); section 7(j)(13) of the Federal Deposit
Insurance Act, as amended by the Change in
Bank Control Act of 1978 (12 USC
1817(j)(13)) (Bank Control Act); section 8(b)
of the Federal Deposit Insurance Act (12 USC
1818(b)); section 914 of the Financial Institu
tions Reform, Recovery and Enforcement Act
of 1989 (12 USC 183li); section 106 of the
Bank Holding Company Act Amendments of
1970 (12 USC 1972); and the International
Lending Supervision Act of 1983 (Pub. L. 98181, title IX). The BHC Act is codified at 12
USC 1841, et seq.
(b) Purpose. The principal purposes of this
part are to—
(1) regulate the acquisition of control of
banks by companies and individuals;
(2) define and regulate the nonbanking ac
tivities in which bank holding companies
and foreign banking organizations with
United States operations may engage; and
1
225.
2
Code o f Federal Regulations, title 12, chapter II, part
(3) set forth the procedures for securing ap
proval for such transactions and activities.
(c) Scope.
d
(1) Subpart A contains general provision™
and definitions of terms used in this
regulation.
(2) Subpart B governs acquisitions of bank
or bank holding company securities and as
sets by bank holding companies or by any
company that will become a bank holding
company as a result of the acquisition.
(3) Subpart C defines and regulates the
nonbanking activities in which bank holding
companies and foreign banking organiza
tions may engage directly or through a sub
sidiary. The Board’s Regulation K governs,
certain nonbanking activities conducted by
foreign banking organizations and certain
foreign activities conducted by bank holding
companies (12 CFR 211, International Bank
ing Operations).
(4) Subpart D specifies situations in which
a company is presumed to control voting
securities or to have the power to exercise a
controlling influence over the management
or policies of a bank or other company, sets
forth the procedures for making a control
determination, and provides rules governing
the effectiveness of divestitures by bank
holding companies.
(5) Subpart E governs changes in banM
control resulting from the acquisition by in
dividuals or companies (other than bank
holding companies) of voting securities of a
bank holding company or state member
bank of the Federal Reserve System.
(6) Subpart F specifies the limitations that
govern companies that control so-called
nonbank banks and the activities of
nonbank banks.
(7) Subpart G prescribes minimum stan
dards that apply to the performance of real
estate appraisals and identifies transactions
that require state-certified appraisers.
(8) Subpart H identifies the circumstances
when written notice must be provided to the
Board prior to the appointment of a director
or senior officer of a bank holding company
and establishes procedures for obtaining the
required Board approval.
(9) Appendix A to the regulation contains
Regulation Y
§ 225.2
voting authority, or as otherwise ex
empted under section 2(a)(5)(A) of the
BHC Act;
(ii) voting securities acquired and held
only for a reasonable period of time in
connection with the underwriting of se
curities, as provided in section 2(a)(5)(B)
of the BHC Act;
(iii) voting rights to voting securities ac
quired for the sole purpose and in the
course of participating in a proxy solici
tation, as provided in section 2(a)(5)(C)
of the BHC Act;
(iv) voting securities acquired in satisfac
tion of debts previously contracted in
good faith, as provided in section
2(a)(5)(D) of the BHC Act, if the securi
ties are divested within two years of ac
SECTION 225.2— Definitions
quisition (or such later period as the
Except as modified in this section or unless
Board may permit by order); or
the context otherwise requires, the terms used
(v) voting securities of certain institu
in this regulation have the same meanings as
tions owned by a thrift institution or a
set forth in the relevant statutes.
trust company, as provided in sections
2(a)(5)(E) and (F) of the BHC Act.
(a) Affiliate means any company that controls,
(2) Except for the purposes of section
is controlled by, or is under common control
225.4(b) of this subpart and subpart E of
with, another company.
this part, or as otherwise provided in this
(b) (1) Bank means—
part, the term “bank holding company” in
(i)
an insured bank as defined in section
cludes a foreign banking organization. For
3(h) of the Federal Deposit Insurance Act
the purposes of subpart B of this part,
(12 USC 1813(h)); or
“bank holding company” includes a foreign
k
(ii) an institution organized under the
banking organization only if it owns or con
laws of the United States which both—
trols a bank in the United States.
(A) accepts demand deposits or depos
its that the depositor may withdraw by
(d) (1) Company includes any bank, corpora
check or similar means for payment to
tion, general or limited partnership, associa
third parties or others; and
tion or similar organization, business trust,
(B) is engaged in the business of mak
or any other trust unless by its terms it
ing commercial loans.
must terminate either within 25 years, or
(2) “Bank” does not include those institu
within 21 years and 10 months after the
tions qualifying under the exceptions listed
death of individuals living on the effective
in section 2(c)(2) of the BHC Act (12 USC
date of the trust.
1841(c)(2)).
(2) “Company” does not include any orga
(c) (1) Bank holding company means any
nization, the majority of the voting securi
company (including a bank) that has direct
ties of which are owned by the United
or indirect control of a bank, other than
States or any state.
control that results from the ownership or
(3) Testamentary trusts exempt. Unless the
control of—
Board finds that the trust is being operated
as a business trust or company, a trust is
(i) voting securities held in good faith in
presumed not to be a company if the trust—
a fiduciary capacity (other than as pro
(i) terminates within 21 years and 10
vided in paragraphs (e)(2)(ii) and (iii) of
months after the death of grantors or ben
this section) without sole discretionary
the Board’s risk-based capital adequacy
guidelines for bank holding companies.
(10) Appendix B contains the Board’s capi
tal adequacy guidelines for measuring lever
age for bank holding companies and state
member banks.
(11) Appendix C contains the Board’s
policy statement governing small bank
holding companies.
(12) Appendix D contains the Board’s capi
tal adequacy guidelines for measuring tier 1
leverage for bank holding companies.
(13) Appendix E contains the Board’s capi
tal adequacy guidelines for measuring mar
ket risk of bank holding companies.
3
§ 225.2
eficiaries of the trust living on the effec
tive date of the trustor within 25 years;
(ii) is a testamentary or inter vivos trust
established by an individual or individu
als for the benefit of natural persons (or
trusts for the benefit of natural persons)
who are related by blood, marriage, or
adoption;
(iii) contains only assets previously
owned by the individual or individuals
who established the trust;
(iv) is not a Massachusetts business trust;
and
(v) does not issue shares, certificates, or
any other evidence of ownership.
(4) Qualified limited partnerships exempt.
“Company” does not include a qualified
limited partnership, as defined in section
2(o)(10) of the BHC Act.
(e) (1) Control of a bank or other company
means (except for the purposes of subpart E
of this part)—
(i) ownership, control, or power to vote
25 percent or more of the outstanding
shares of any class of voting securities of
the bank or other company, directly or
indirectly or acting through one or more
other persons;
(ii) control in any manner over the elec
tion of a majority of the directors, trust
ees, or general partners (or individuals
exercising similar functions) of the bank
or other company;
(iii) the power to exercise, directly or in
directly, a controlling influence over the
management or policies of the bank or
other company, as determined by the
Board after notice and opportunity for
hearing in accordance with section
225.31 of subpart D of this regulation; or
(iv) conditioning in any manner the
transfer of 25 percent or more of the
outstanding shares of any class of voting
securities of a bank or other company
upon the transfer of 25 percent or more
of the outstanding shares of any class of
voting securities of another bank or other
company.
(2) A bank or other company is deemed to
control voting securities or assets owned,
controlled, or held, directly or indirectly—
Regulation Y
(i) by any subsidiary of the bank or other
company;
(ii) in a fiduciary capacity (including b y ^ _
pension and profit-sharing trusts) for t h ^ ^ B
benefit of the shareholders, members, or
employees (or individuals serving in
similar capacities) of the bank or other
company or of any of its subsidiaries; or
(iii) in a fiduciary capacity for the ben
efit of the bank or other company or any
of its subsidiaries.
(f) Foreign banking organization and qualify
ing foreign banking organization have the
same meanings as provided in section
211.21(n) and section 211.23 of the Board’s
Regulation K (12 CFR 211.21(n) and 211.23).
(g) Insured depository institution includes an
insured bank as defined in section 3(h) of the
Federal Deposit Insurance Act (12 USC
1813(h)) and a savings association.
(h) Lead insured depository institution means
the largest insured depository institution con
trolled by the bank holding company as of the
quarter ending immediately prior to the pro
posed filing, based on a comparison of the
average total risk-weighted assets controlled
during the previous 12-month period by each
insured depository institution subsidiary of the
holding company.
(i) Management official means any officer, di-"
rector (including honorary or advisory direc
tors), partner, or trustee of a bank or other
company, or any employee of the bank or
other company with policy-making functions.
(j) Nonbank bank means any institution that—
(1) became a bank as a result of enactment
of the Competitive Equality Amendments of
1987 (Pub. L. No. 100-86), on the date of
enactment (August 10, 1987); and
(2) was not controlled by a bank holding
company on the day before the enactment
of the Competitive Equality Amendments of
1987 (August 9, 1987).
(k) Outstanding shares means any voting se
curities, but does not include securities owned
by the United States or by a company wholly
owned by the United States.
(/) Person includes an individual, bank, cor-
Regulation Y
poration, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship,
unincorporated organization, or any other form
■ f entity.
•
(m) Savings association means—
(1) any federal savings association or fed
eral savings bank;
(2) any building and loan association, sav
ings and loan association, homestead asso
ciation, or cooperative bank if such associa
tion or cooperative bank is a member of the
Savings Association Insurance Fund; and
(3) any savings bank or cooperative which
is deemed by the director of the Office of
Thrift Supervision to be a savings associa
tion under section 10(7) of the Home Own
ers’ Loan Act.
(n) Shareholder.
(1) Controlling shareholder means a person
that owns or controls, directly or indirectly,
25 percent or more of any class of voting
securities of a bank or other company.
(2) Principal shareholder means a person
that owns or controls, directly or indirectly,
10 percent or more of any class of voting
securities of a bank or other company, or
any person that the Board determines has
the power, directly or indirectly, to exercise
a controlling influence over the manage
ment or policies of a bank or other
company.
•
(o) Subsidiary means a bank or other com
pany that is controlled by another company,
and refers to a direct or indirect subsidiary of
a bank holding company. An indirect subsid
iary is a bank or other company that is con
trolled by a subsidiary of the bank holding
company.
(p) United States means the United States and
includes any state of the United States, the
District of Columbia, any territory of the
United States, Puerto Rico, Guam, American
Samoa, and the Virgin Islands.
(q) (1) Voting securities means shares of com
mon or preferred stock, general or limited
§ 225.2
partnership shares or interests, or similar
interests if the shares or interest, by statute,
charter, or in any manner, entitle the
holder—
(i) to vote for or to select directors, trust
ees, or partners (or persons exercising
similar functions of the issuing com
pany); or
(ii) to vote on or to direct the conduct of
the operations or other significant poli
cies of the issuing company.
(2) Nonvoting shares. Preferred shares, lim
ited partnership shares or interests, or simi
lar interests are not “voting securities” if—
(i) any voting rights associated with the
shares or interest are limited solely to the
type customarily provided by statute with
regard to matters that would significantly
and adversely affect the rights or prefer
ence of the security or other interest,
such as the issuance of additional
amounts or classes of senior securities,
the modification of the terms of the secu
rity or interest, the dissolution of the is
suing company, or the payment of divi
dends by the issuing company when
preferred dividends are in arrears;
(ii) the shares or interest represent an es
sentially passive investment or financing
device and do not otherwise provide the
holder with control over the issuing com
pany; and
(iii) the shares or interest do not entitle
the holder, by statute, charter, or in any
manner, to select or to vote for the selec
tion of directors, trustees, or partners (or
persons exercising similar functions) of
the issuing company.
(3) Class o f voting shares. Shares of stock
issued by a single issuer are deemed to be
the same class of voting shares, regardless
of differences in dividend rights or liquida
tion preference, if the shares are voted to
gether as a single class on all matters for
which the shares have voting rights other
than matters described in paragraph (o)(2)(i)
of this section that affect solely the rights
or preferences of the shares.
(r) Well capitalized.
(1) Bank holding company. In the case of a
5
§ 225.2
bank holding company,2 “ well capitalized”
means that—
(i) on a consolidated basis, the bank hold
ing company maintains a total risk-based
capital ratio of 10.0 percent or greater, as
defined in appendix A of this part;
(ii) on a consolidated basis, the bank
holding company maintains a tier 1 riskbased capital ratio of 6.0 percent or
greater, as defined in appendix A of this
part; and
(iii) the bank holding company is not
subject to any written agreement, order,
capital directive, or prompt-correctiveaction directive issued by the Board to
meet and maintain a specific capital level
for any capital measure.
(2) Insured depository institution. In the
case of an insured depository institution,
“well capitalized” means that the institution
maintains at least the capital levels required
to be well capitalized under the capital ad
equacy regulations or guidelines applicable
to the institution that have been adopted by
the appropriate federal banking agency for
the institution under section 38 of the Fed
eral D eposit Insurance Act (12 USC
1831o).
(3) Foreign banks.
(i) Standards applied. For purposes of
determining whether a foreign banking
organization qualifies under paragraph
(r)(l) of this section—
(A) a foreign banking organization
whose home-country supervisor, as de
fined in section 211.21 of the Board’s
Regulation K (12 CFR 211.21), has
adopted capital standards consistent in
all respects with the Capital Accord of
the Basle Committee on Banking Su
pervision (Basle Accord) may calculate
its capital ratios under the homecountry standard; and
(B) a foreign banking organization
whose home-country supervisor has
not adopted capital standards consistent
2 For purposes o f this subpart and subparts B and C o f
this part, a bank holding com pany with consolidated assets
under $150 million that is subject to the small bank holding
com pany policy statement in appendix C o f this part will
be deemed to be “ well capitalized” if the bank holding
com pany meets the requirements for expedited/w aived pro
cessing in appendix C.
6
Regulation Y
in all respects with the Basle Accord
shall obtain a determination from the
Board that its capital is equivalent to
the capital that would be required of J
U.S. banking organization under para
graph (r)(l) of this section.
(ii) Branches and agencies. For purposes
of determining, under paragraph (r)(l) of
this section, whether a branch or agency
of a foreign banking organization is well
capitalized, the branch or agency shall be
deemed to have the same capital ratios as
the foreign banking organization.
(s) Well managed.
(1) In general. A company, insured deposi
tory institution, or branch or agency of a
foreign banking organization is well man
aged if—
(i) at its most recent inspection or exami
nation or subsequent review by the ap
propriate federal banking agency for the
company or institution, the company or
institution received—
(A) at least a satisfactory composite
rating; and
(B) at least a satisfactory rating for
management and for compliance, if
such a rating is given; or
(ii) in the case of a company or insured
depository institution that has not re
ceived an examination rating, the Boarcl
has determined, after a review of the
managerial and other resources of the
company or depository institution, that
the company or institution qualifies for
the streamlined procedures in this sub
part, and subparts B and C of this part.
(2) Foreign banking organizations. A for
eign banking organization shall qualify un
der this paragraph if the combined opera
tions of the foreign banking organization in
the United States have received at least a
satisfactory composite rating at the most re
cent annual assessment.
SECTION 225.3— Administration
(a) Delegation o f authority. Designated Board
members and officers and the Federal Reserve
Banks are authorized by the Board to exercise
various functions prescribed in this regulation
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and in the Board’s Rules Regarding Delega
tion of Authority (12 CFR 265) and the
^ ^ B o a rd ’s Rules of Procedure (12 CFR 262).
^0R >) Appropriate Federal Reserve Bank. In ad
ministering this regulation, the appropriate
Federal Reserve Bank is as follows:
(1) For a bank holding company (or a com
pany applying to become a bank holding
company): the Reserve Bank of the Federal
Reserve District in which the company’s
banking operations are principally con
ducted, as measured by total domestic de
posits in its subsidiary banks on the date it
became (or will become) a bank holding
company;
(2) For a foreign banking organization that
has no subsidiary bank and is not subject to
paragraph (b)(1) of this section: the Reserve
Bank of the Federal Reserve District in
which the total assets of the organization’s
United States branches, agencies, and com
mercial lending companies are the largest as
of the later of January I, 1980, or the date
it becomes a foreign banking organization;
(3) For an individual or company submit
ting a notice under subpart E of this part:
the Reserve Bank of the Federal Reserve
District in which the banking operations of
the bank holding company or state member
bank to be acquired are principally con
ducted, as measured by total domestic de
posits on the date the notice is filed.
•
SECTION 225.4— Corporate Practices
(a) Bank holding com pany p o licy and
operations.
(1) A bank holding company shall serve as
a source of financial and m anagerial
strength to its subsidiary banks and shall
not conduct its operations in an unsafe or
unsound manner.
(2) Whenever the Board believes an activ
ity of a bank holding company or control of
a nonbank subsidiary (other than a nonbar.k
subsidiary of a bank) constitutes a serious
risk to the financial safety, soundness, or
stability of a subsidiary bank of the bank
holding company and is inconsistent with
sound banking principles or the purposes of
the BHC Act or the Financial Institutions
§ 225.4
Supervisory Act of 1966, as amended (12
USC 1818(b) et seq.), the Board may re
quire the bank holding company to termi
nate the activity or to terminate control of
the subsidiary, as provided in section 5(e)
of the BHC Act.
(b) Purchase or redemption by a bank hold
ing company o f its own securities.
(1) Filing notice. Except as provided in
paragraph (b)(6), a bank holding company
shall give the Board prior written notice
before purchasing or redeeming its equity
securities if the gross consideration for the
purchase or redemption, when aggregated
with the net consideration paid by the com
pany for all such purchases or redemptions
during the preceding 12 months, is equal to
10 percent or more of the company’s con
solidated net worth. For the purposes of this
section, “ net consideration” is the gross
consideration paid by the company for all
of its equity securities purchased or re
deemed during the period minus the gross
consideration received for all of its equity
securities sold during the period.
(2) Contents o f notice. Any notice under
this section shall be filed with the appropri
ate Reserve Bank and shall contain the fol
lowing information:
(i) the purpose of the transaction, a de
scription of the securities to be purchased
or redeemed, the total number of each
class outstanding, the gross consideration
to be paid, and the terms and sources of
funding for the transaction;
(ii) a description of all equity securities
redeem ed within the preceding 12
months, the net consideration paid, and
the terms of any debt incurred in connec
tion with those transactions; and
(iii) (A) if the bank holding company has
consolidated assets of $150 million or
more, consolidated pro forma riskbased capital and leverage ratio calcu
lations for the bank holding company
as of the most recent quarter, and, if
the redemption is to be debt funded, a
parent-only pro forma balance sheet as
of the most recent quarter; or
(B) if the bank holding company has
consolidated assets of less than $150
7
§ 225.4
million, a pro forma parent-only bal
ance sheet as of the most recent quar
ter, and, if the redemption is to be debt
funded, one-year income statement and
cash-flow projections.
(3) Acting on notice. Within 15 calendar
days of receipt of a notice under this sec
tion, the appropriate Reserve Bank shall ei
ther approve the transaction proposed in the
notice or refer the notice to the Board for
decision. If the notice is referred to the
Board for decision, the Board shall act on
the notice within 30 calendar days after the
Reserve Bank receives the notice.
(4) Factors considered in acting on notice.
(i) The Board may disapprove a pro
posed purchase or redemption if it finds
that the proposal would constitute an un
safe or unsound practice, or would vio
late any law, regulation, Board order, di
rective, or any condition imposed by, or
written agreement with, the Board.
(ii) In determining whether a proposal
constitutes an unsafe or unsound practice,
the Board shall consider whether the
bank holding company’s financial condi
tion, after giving effect to the proposed
purchase or redemption, meets the finan
cial standards applied by the Board under
section 3 of the BHC Act, including the
Board’s capital adequacy guidelines (ap
pendix A) and the Board’s policy state
ment for small bank holding companies
(appendix C).
(5) Disapproval and hearing.
(i) The Board shall notify the bank hold
ing company in writing of the reasons for
a decision to disapprove any proposed
purchase or redemption. Within 10 calen
dar days of receipt of a notice of disap
proval by the Board, the bank holding
company may submit a written request
for a hearing.
(ii) The Board shall order a hearing
within 10 calendar days of receipt of the
request if it finds that material facts are
in dispute, or if it otherwise appears ap
propriate. Any hearing conducted under
this paragraph shall be held in accor
dance with the Board’s Rules of Practice
for Formal Hearings (12 CFR 263).
(iii) At the conclusion of the hearing, the
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Board shall by order approve or disap
prove the proposed purchase or redemp
tion on the basis of the record of t h e ^ ^
hearing.
(6) Exception fo r well-capitalized bank
holding companies. A bank holding com
pany is not required to obtain prior Board
approval for the redemption or purchase of
its equity securities under this section
provided—
(i) both before and immediately after the
redemption, the bank holding company is
well capitalized;
(ii) the bank holding company is well
managed; and
(iii) the bank holding company is not the
subject of any unresolved supervisory
issues.
(c) Deposit insurance. Every bank that is a
bank holding company or a subsidiary of a
bank holding company shall obtain Federal
Deposit Insurance and shall remain an “in
sured bank” as defined in section 3(h) of the
Federal Deposit Insurance Act (12 USC
1813(h)).
(d) Acting as transfer agent, municipal securi
ties dealer, or clearing agent. A bank holding
company or any nonbanking subsidiary that is
a “bank,” as defined in section 3(a)(6) of t h ^ ^ ^
Securities Exchange Act of 1934 (15 U S C ^^p
78c(a)(6)), and that is a transfer agent of secu
rities, a municipal securities dealer, a clearing
agency, or a participant in a clearing agency
(as those terms are defined in section 3(a) of
the Securities Exchange Act (12 USC 78c(a)),
shall be subject to section 208.8(f)—(j) of the
Board’s Regulation H (12 CFR 208.8(f)-(j))
as if it were a state member bank.
(e) Reporting requirement fo r credit secured
by certain bank holding company stock. Each
executive officer or director of a bank holding
company the shares of which are not publicly
traded shall report annually to the board of
directors of the bank holding company the
outstanding amount of any credit that was ex
tended to the executive officer or director and
that is secured by shares of the bank holding
company. For purposes of this paragraph, the
terms “executive officer” and “director” shall
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have the meaning given in section 215.2 of
Regulation O (12 CFR 215.2).
1
10 Suspicious-activity report. A bank holding
company or any nonbank subsidiary thereof,
or a foreign bank that is subject to the BHC
Act or any nonbank subsidiary of such foreign
bank operating in the United States, shall file
a suspicious-activity report in accordance with
the provisions of section 208.20 of the
Board’s Regulation H (12 CFR 208.20).
SECTION 225.5— Registration, Reports,
and Inspections
(a) Registration o f bank holding companies.
Each company shall register within 180 days
after becoming a bank holding company by
furnishing information in the manner and form
prescribed by the Board. A company that re
ceives the Board’s prior approval under sub
part B of this regulation to become a bank
holding company may complete this registra
tion requirement through submission of its
first annual report to the Board as required by
paragraph (b) of this section.
(b) Reports o f bank holding companies. Each
bank holding company shall furnish, in the
planner and form prescribed by the Board, an
annual report of the company’s operations for
the fiscal year in which it becomes a bank
holding company, and for each fiscal year dur
ing which it remains a bank holding company.
Additional information and reports shall be
furnished as the Board may require.
(c) Examinations and inspections. The Board
may examine or inspect any bank holding
company and each of its subsidiaries and pre
pare a report of their operations and activities.
With respect to a foreign banking organiza
tion, the Board may also examine any branch
or agency of a foreign bank in any state of
the United States and may examine or inspect
each of the organization’s subsidiaries in the
United States and prepare reports of their op
erations and activities. The Board shall rely,
as far as possible, on the reports of examina
tion made by the primary federal or state su
pervisor of the subsidiary bank of the bank
§ 225.7
holding company or of the branch or agency
of the foreign bank.
SECTION 225.6— Penalties for
Violations
(a) Criminal and civil penalties.
(1) Section 8 of the BHC Act provides
criminal penalties for willful violation, and
civil penalties for violation, by any com
pany or individual, of the BHC Act or any
regulation or order issued under it, or for
making a false entry in any book, report, or
statement of a bank holding company.
(2) Civil money penalty assessments for
violations of the BHC Act shall be made in
accordance with subpart C of the Board’s
Rules of Practice for Hearings (12 CFR
263, subpart C). For any willful violation of
the Bank Control Act or any regulation or
order issued under it, the Board may assess
a civil penalty as provided in 12 USC
18170X15).
(b) Cease-and-desist proceedings. For any
violation of the BHC Act, the Bank Control
Act, this regulation, or any order or notice
issued thereunder, the Board may institute a
cease-and-desist proceeding in accordance
with the Financial Institutions Supervisory Act
of 1966, as amended (12 USC 1818(b) et
seq.).
SECTION 225.7— Exceptions to Tying
Restrictions
(a) Purpose. This section establishes excep
tions to the anti-tying restrictions of section
106 of the Bank Holding Company Act
Amendm ents of 1970 (12 USC 1971,
1972(1)). These exceptions are in addition to
those in section 106. The section also restricts
tying of electronic benefit transfer services by
bank holding companies and their nonbank
subsidiaries.
(b) Exceptions to statute. Subject to the limi
tations of paragraph (c) of this section, a bank
may—
(1) Extension to affiliates o f statutory ex
ceptions preserving traditional banking re
lationships. Extend credit, lease or sell
9
§ 225.7
property of any kind, or furnish any service,
or fix or vary the consideration for any of
the foregoing, on the condition or require
ment that a customer—
(i) obtain a loan, discount, deposit, or
trust service from an affiliate of the bank;
or
(ii) provide to an affiliate of the bank
some additional credit, property, or ser
vice that the bank could require to be
provided to itself pursuant to section
106(b)(1)(C) of the Bank Holding Com
pany Act Amendments of 1970 (12 USC
1972(1X0).
(2) Safe harbor fo r combined-balance dis
counts. Vary the consideration for any prod
uct or package of products based on a cus
tomer’s maintaining a combined minimum
balance in certain products specified by the
bank (eligible products), if—
(i) the bank offers deposits, and all such
deposits are eligible products; and
(ii) balances in deposits count at least as
much as nondeposit products toward the
minimum balance.
(3) Safe harbor fo r foreign transactions.
Engage in any transaction with a customer
if that customer is—
(i) a corporation, business, or other per
son (other than an individual) that—
(A) is incorporated, chartered, or oth
erwise organized outside the United
States; and
(B) has its principal place of business
outside the United States; or
(ii) an individual who is a citizen of a
foreign country and is not resident in the
United States.
(c) Limitations on exceptions. Any exception
granted pursuant to this section shall terminate
upon a finding by the Board that the arrange
ment is resulting in anticompetitive practices.
The eligibility of a bank to operate under any
exception granted pursuant to this section
shall terminate upon a finding by the Board
that its exercise of this authority is resulting
in anticompetitive practices.
(d) Extension o f statute to electronic benefit
transfer services. A bank holding company or
nonbank subsidiary of a bank holding com
pany that provides electronic benefit transfer
10
Regulation Y
services shall be subject to the anti-tying re
strictions applicable to such services set forth
in section 7(i)(ll) of the Food Stamp Act o f
1977 (7 USC 2016(i)(ll)).
(
(e) For purposes of this section, “bank” has
the m eaning given that term in section
106(a) of the Bank Holding Company Act
Amendments of 1970 (12 USC 1971), but
shall also include a United States branch,
agency, or com mercial lending company
subsidiary of a foreign bank that is subject
to section 106 pursuant to section 8(d) of
the International Banking Act of 1978 (12
USC 3106(d)), and any company made sub
ject to section 106 by section 4(f)(9) or 4(h)
of the BHC Act.
SUBPART B— ACQUISITION OF
BANK SECURITIES OR ASSETS
SECTION 225.11— Transactions
Requiring Board Approval
The following transactions require an applica
tion for the Board’s prior approval under sec
tion 3 of the Bank Holding Company Act
except as exempted under section 225.12 or as
otherwise covered by section 225.17 of this
subpart.
(a) Formation o f bank holding company. A n ^
action that causes a bank or other company to
become a bank holding company.
(b) Acquisition o f subsidiary bank. Any action
that causes a bank to become a subsidiary of
a bank holding company.
(c) Acquisition o f control o f bank or bank
holding company securities.
(1) The acquisition by a bank holding com
pany of direct or indirect ownership or con
trol of any voting securities of a bank or
bank holding company, if the acquisition
results in the company’s control of more
than 5 percent of the outstanding shares of
any class of voting securities of the bank or
bank holding company.
(2) An acquisition includes the purchase of
additional securities through the exercise of
preemptive rights, but does not include se
curities received in a stock dividend or
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stock split that does not alter the bank hold
ing company’s proportional share of any
. class of voting securities.
"d) Acquisition o f bank assets. The acquisition
by a bank holding company or by a subsidiary
thereof (other than a bank) of all or substan
tially all of the assets of a bank.
(e) Merger o f bank holding companies. The
merger or consolidation of bank holding com
panies, including a merger through the pur
chase of assets and assumption of liabilities.
(f) Transactions by foreign banking organiza
tion. Any transaction described in paragraphs
(a) through (e) of this section by a foreign
banking organization that involves the acquisi
tion of an interest in a U.S. bank or in a bank
holding company for which application would
be required if the foreign banking organization
were a bank holding company.
SECTION 225.12— Transactions Not
Requiring Board Approval
The following transactions do not require the
Board’s approval under section 225.11 of this
subpart:
^a) Acquisition o f securities in fiduciary ca
pacity. The acquisition by a bank or other
company (other than a trust that is a com
pany) of control of voting securities of a bank
or bank holding company in good faith in a
fiduciary capacity, unless—
(1) the acquiring bank or other company
has sole discretionary authority to vote the
securities and retains the authority for more
than two years; or
(2) the acquisition is for the benefit of the
acquiring bank or other company, or its
shareholders, employees, or subsidiaries.
(b) Acquisition o f securities in satisfaction o f
debts previously contracted. The acquisition by
a bank or other company of control of voting
securities of a bank or bank holding company
in the regular course of securing or collecting a
debt previously contracted in good faith, if the
acquiring bank or other company divests the
securities within two years of acquisition. The
§ 225.12
Board or Reserve Bank may grant requests for
up to three one-year extensions.
(c) Acquisition o f securities by bank holding
company with majority control. The acquisi
tion by a bank holding company of additional
voting securities of a bank or bank holding
company if more than 50 percent of the out
standing voting securities of the bank or bank
holding company is lawfully controlled by the
acquiring bank holding company prior to the
acquisition.
(d) Acquisitions involving bank mergers and
internal corporate reorganizations.
(1) Transactions subject to Bank Merger
Act. The merger or consolidation of a sub
sidiary bank of a bank holding company
with another bank, or the purchase of assets
by the subsidiary bank, or a similar transac
tion involving subsidiary banks of a bank
holding company, if the transaction requires
the prior approval of a federal supervisory
agency under the Bank Merger Act (12
USC 1828(c)) and does not involve the ac
quisition of shares of a bank. This excep
tion does not include—
(i) the merger of a nonsubsidiary bank
and a nonoperating subsidiary bank
formed by a company for the purpose of
acquiring the nonsubsidiary bank; or
(ii) any transaction requiring the Board’s
prior approval under section 225.11(e) of
this subpart.
The Board may require an application under
this subpart if it determines that the merger
or consolidation would have a significant
adverse impact on the financial condition of
the bank holding company, or otherwise re
quires approval under section 3 of the BHC
Act.
(2) Certain acquisitions subject to the Bank
Merger Act. The acquisition by a bank
holding company of shares of a bank or
company controlling a bank or the merger
of a company controlling a bank with the
bank holding company, if the transaction is
part of the merger or consolidation of the
bank with a subsidiary bank (other than a
nonoperating subsidiary bank) of the acquir
ing bank holding company, or is part of the
purchase of substantially all of the assets of
the bank by a subsidiary bank (other than a
11
§ 225.12
nonoperating subsidiary bank) of the acquir
ing bank holding company, and if—
(i) the bank merger, consolidation, or as
set purchase occurs simultaneously with
the acquisition of the shares of the bank
or bank holding company or the merger
of holding companies, and the bank is
not operated by the acquiring bank hold
ing company as a separate entity other
than as the survivor of the merger, con
solidation, or asset purchase;
(ii) the transaction requires the prior ap
proval of a federal supervisory agency
under the Bank Merger Act (12 USC
1828(c));
(iii) the transaction does not involve the
acquisition of any nonbank company that
would require prior approval under sec
tion 4 of the Bank Holding Company Act
(12 USC 1843);
(iv) both before and after the transaction,
the acquiring bank holding company
m eets the B oard’s capital adequacy
guidelines (appendixes A, B, C, D, and E
of this part);
(v) at least 10 days prior to the transac
tion, the acquiring bank holding company
has provided to the Reserve Bank written
notice of the transaction that contains—
(A) a copy of the filing made to the
appropriate federal banking agency un
der the Bank Merger Act; and
(B) a description of the holding com
pany’s involvement in the transaction,
the purchase price, and the source of
funding for the purchase price; and
(vi) prior to expiration of the period pro
vided in paragraph (d)(2)(v) of this sec
tion, the Reserve Bank has not informed
the bank holding company that an appli
cation under section 225.11 is required.
(3) Internal corporate reorganizations.
(i) Subject to paragraph (d)(3)(ii) of this
section, any of the following transactions
performed in the United States by a bank
holding company;
(A) the merger of holding companies
that are subsidiaries of the bank hold
ing company;
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(B) the formation of a subsidiary hold
ing company;1
(C) the transfer of control or owners
ship of a subsidiary bank or a subsidf
iary holding company between one
subsidiary holding company and an
other subsidiary holding company or
the bank holding company.
(ii) A transaction described in paragraph
(d)(3)(i) of this section qualifies for this
exception if—
(A) the transaction represents solely a
corporate reorganization involving
companies and insured depository in
stitutions that, both preceding and fol
lowing the transaction, are lawfully
controlled and operated by the bank
holding company;
(B) the transaction does not involve
the acquisition of additional voting
shares of an insured depository institu
tion that, prior to the transaction, was
less than majority-owned by the bank
holding company;
(C) the bank holding company is not
organized in mutual form; and
(D) both before and after the transac
tion, the bank holding company meets
the Board’s capital adequacy guidelines
(appendixes A, B, C, D, and E of this
part).
^
(e) Holding securities in escrow. The holding
of voting securities of a bank or bank holding
company in an escrow arrangement for the
benefit of an applicant pending the Board’s
action on an application for approval of the
proposed acquisition, if title to the securities
and the voting rights remain with the seller
and payment for the securities has not been
made to the seller.
(f) Acquisition o f foreign banking organiza
tion. The acquisition of a foreign banking or
ganization where the foreign banking organi
zation does not directly or indirectly own or
control a bank in the United States, unless the
acquisition is also by a foreign banking orga1 In the case o f a transaction that results in the formation
or designation o f a new bank holding company, the new
bank holding com pany must com plete the registration re
quirem ents described in section 225.5.
Regulation Y
nization and otherwise subject to section
225.11(f) of this subpart.
SECTION 225.13— Factors Considered
in Acting on Bank Acquisition Proposals
(a) Factors requiring denial. As specified in
section 3(c) of the BHC Act, the Board may
not approve any application under this subpart
if—
(1) the transaction would result in a mo
nopoly or would further any combination or
conspiracy to monopolize, or to attempt to
monopolize, the business of banking in any
part of the United States;
(2) the effect of the transaction may be
substantially to lessen competition in any
section of the country, tend to create a mo
nopoly, or in any other manner be in re
straint of trade, unless the Board finds that
the transaction’s anticompetitive effects are
clearly outweighed by its probable effect in
meeting the convenience and needs of the
community;
(3) the applicant has failed to provide the
Board with adequate assurances that it will
make available such information on its op
erations or activities, and the operations or
activities of any affiliate of the applicant,
that the Board deems appropriate to deter
mine and enforce compliance with the BHC
Act and other applicable federal banking
statutes, and any regulations thereunder; or
(4) in the case of an application involving a
foreign banking organization, the foreign
banking organization is not subject to com
prehensive supervision or regulation on a
consolidated basis by the appropriate au
thorities in its home country, as provided in
section 211.24(c)(l)(ii) of the B oard’s
Regulation K (12 CFR 211.24(c)(l)(ii)).
•
(b) Other factors. In deciding applications un
der this subpart, the Board also considers the
following factors with respect to the applicant,
its subsidiaries, any banks related to the appli
cant through common ownership or manage
ment, and the bank or banks to be acquired:
(1) Financial condition. Their financial
condition and future prospects, including
whether current and projected capital posi
§ 225.14
tions and levels of indebtedness conform to
standards and policies established by the
Board.
(2) Managerial resources. The competence,
experience, and integrity of the officers, di
rectors, and principal shareholders of the
applicant, its subsidiaries and the banks and
bank holding companies concerned; their
record of compliance with laws and regula
tions; and the record of the applicant and
its affiliates of fulfilling any commitments
to, and any conditions imposed by, the
Board in connection with prior applications.
(3) Convenience and needs o f the commu
nity. The convenience and needs of the
communities to be served, including the
record of performance under the Commu
nity Reinvestment Act of 1977 (12 USC
2901 et seq.) and regulations issued there
under, including the Board’s Regulation BB
(12 CFR 228.)
(c) Interstate transactions. The Board may
approve any application or notice under this
subpart by a bank holding company to acquire
control of all or substantially all of the assets
of a bank located in a state other than the
home state of the bank holding company,
without regard to whether the transaction is
prohibited under the law of any state, if the
transaction complies with the requirements of
section 3(d) of the BHC Act (12 USC
1842(d)).
(d) Conditional approvals. The Board may
impose conditions on any approval, including
conditions to address competitive, financial,
m anagerial, safety-and-soundness, convenience-and-needs, compliance or other con
cerns, to ensure that approval is consistent
with the relevant statutory factors and other
provisions of the BHC Act.
SECTION 225.14— Expedited Action for
Certain Bank Acquisitions by Well-Run
Bank Holding Companies
(a) Filing o f notice.
(1) Information required and public notice.
As an alternative to the procedure provided
in section 225.15, a bank holding company
that meets the requirements of paragraph (c)
13
§ 225.14
of this section may satisfy the priorapproval requirements of section 225.11 in
connection with the acquisition of shares,
assets, or control of a bank, or a merger or
consolidation between bank holding compa
nies, by providing the appropriate Reserve
Bank with a written notice containing the
following:
(i) a certification that all of the criteria in
paragraph (c) of this section are met;
(ii) a description of the transaction that
includes identification of the companies
and insured depository institutions in
volved in the transaction2 and identifica
tion of each banking market affected by
the transaction;
(iii) a description of the effect of the
transaction on the convenience and needs
of the communities to be served and of
the actions being taken by the bank hold
ing company to improve the CRA perfor
mance of any insured depository institu
tion subsidiary that does not have at least
a satisfactory CRA performance rating at
the time of the transaction;
(iv) evidence that notice of the proposal
has been published in accordance with
section 225.16(b)(1);
(v) (A) if the bank holding company has
consolidated assets of $150 million or
more, an abbreviated consolidated pro
forma balance sheet as of the most re
cent quarter showing credit and debit
adjustments that reflect the proposed
transaction, consolidated pro forma
risk-based capital ratios for the acquir
ing bank holding company as of the
most recent quarter, and a description
of the purchase price and the terms
and sources of funding for the
transaction;
(B) if the bank holding company has
2 If, in connection with a transaction under this subpart,
any person or group o f persons proposes to acquire control
o f the acquiring bank holding com pany for purposes o f the
Bank Control Act or section 225.41, the person or group of
persons may fulfill the notice requirem ents o f the Bank
Control Act and section 225.43 by providing, as part o f the
subm ission by the acquiring bank holding com pany under
this subpart, identifying and biographical inform ation re
quired in paragraph (6)(A) o f the Bank Control A ct (12
USC 1817(j)(6)(A)), as well as any financial or other infor
m ation requested by the R eserve Bank u nder section
225.43.
14
Regulation Y
consolidated assets of less than $150
million, a pro forma parent-only bal
ance sheet as of the most recent quar-.
ter showing credit and debit adjust^
ments that reflect the proposed
transaction, and a description of the
purchase price, the terms and sources
of funding for the transaction, and the
sources and schedule for retiring any
debt incurred in the transaction;
(vi) if the bank holding company has
consolidated assets of less than $300 mil
lion, a list of and biographical informa
tion regarding any directors or senior ex
ecutive officers of the resulting bank
holding company that are not directors or
senior executive officers of the acquiring
bank holding company or of a company
or institution to be acquired;
(vii) for each insured depository institu
tion whose tier 1 capital, total capital,
total assets or risk-w eighted assets
change as a result of the transaction, the
total risk-weighted assets, total assets, tier
1 capital and total capital of the institu
tion on a pro forma basis; and
(viii) the market indexes for each rel
evant banking market reflecting the pro
forma effect of the transaction.
(2) Waiver o f unnecessary information. The
Reserve Bank may reduce the informatiorrf
requirements in paragraph (a)(l)(v) through’
(viii) as appropriate.
(b)(1) Action on proposals under this sec
tion. The Board or the appropriate Reserve
Bank shall act on a proposal submitted un
der this section or notify the bank holding
company that the transaction is subject to
the procedure in section 225.15 within five
business days after the close of the publiccomment period. The Board and the Re
serve Bank shall not approve any proposal
under this section prior to the third business
day following the close of the publiccomment period, unless an emergency ex
ists that requires expedited or immediate ac
tion. The Board may extend the period for
action under this section for up to five busi
ness days.
(2) Acceptance o f notice in event expedited
procedure not available. In the event that
Regulation Y
the Board or the Reserve Bank determines
after the filing of a notice under this section
that a bank holding company may not use
the procedure in this section and must file
an application under section 225.15, the ap
plication shall be deemed accepted for pur
poses of section 225.15 as of the date that
the notice was filed under this section.
(c) Criteria fo r use o f expedited procedure.
The procedure in this section is available only
if—
(1) Well-capitalized organization.
(i) Bank holding company. Both at the
time of and immediately after the pro
posed transaction, the acquiring bank
holding company is well capitalized;
(ii) Insured depository institutions. Both
at the time of and immediately after the
proposed transaction—
(A) the lead insured depository institu
tion of the acquiring bank holding
company is well capitalized;
(B) well-capitalized insured depository
institutions control at least 80 percent
of the total risk-weighted assets of in
sured depository institutions controlled
by the acquiring bank holding com
pany; and
(C) no insured depository institution
controlled by the acquiring bank hold
ing company is undercapitalized;
(2) Well-managed organization.
(i) Satisfactory examination ratings. At
the time of the transaction, the acquiring
bank holding company, its lead insured
depository institution, and insured deposi
tory institutions that control at least 80
percent of the total risk-weighted assets
of insured depository institutions con
trolled by the holding company are well
managed;
(ii) No poorly managed institutions. No
insured depository institution controlled
by the acquiring bank holding company
has received 1 of the 2 lowest composite
ratings at the later of the institution’s
most recent examination or subsequent
review by the appropriate federal banking
agency for the institution;
(iii) Recently acquired institutions ex
cluded. Any insured depository institution
§ 225.14
that has been acquired by the bank hold
ing company during the 12-month period
preceding the date on which written no
tice is filed under paragraph (a) of this
section may be excluded for purposes of
paragraph (c)(2)(ii) if—
(A) the bank holding company has de
veloped a plan acceptable to the appro
priate federal banking agency for the
institution to restore the capital and
management of the institution; and
(B) All insured depository institutions
excluded under this paragraph repre
sent, in the aggregate, less than 10 per
cent of the aggregate total riskw eighted assets of all insured
depository institutions controlled by
the bank holding company;
(3) Convenience-and-needs criteria.
(i) Effect on the community. The record
indicates that the proposed transaction
would meet the convenience and needs of
the community standard in the BHC Act;
and
(ii) Established CRA performance record.
At the time of the transaction, the lead
insured depository institution of the ac
quiring bank holding company and in
sured depository institutions that control
at least 80 percent of the total riskweighted assets of insured institutions
controlled by the holding company have
received a satisfactory or better compos
ite rating at the most recent examination
under the Community Reinvestment Act;
(4) Public comment. No comment that is
timely and substantive as provided in sec
tion 225.16 is received by the Board or the
appropriate Reserve Bank other than a com
ment that supports approval of the proposal;
(5) Competitive criteria.
(i) Competitive screen. Without regard to
any divestitures proposed by the acquir
ing bank holding company, the acquisi
tion does not cause—
(A) insured depository institutions con
trolled by the acquiring bank holding
company to control in excess of 35
percent of market deposits in any rel
evant banking market; or
(B) the Herfindahl-Hirschman index to
increase by more than 200 points in
15
§ 225.14
any relevant banking market with a
post-acquisition index of at least 1800;
and
(ii) Department o f Justice. The Depart
ment of Justice has not indicated to the
Board that consummation of the transac
tion is likely to have a significantly ad
verse effect on competition in any rel
evant banking market;
(6) Size o f acquisition.
(i) In general.
(A) Limited growth. Except as pro
vided in paragraph (c)(6)(ii), the sum
of the aggregate risk-weighted assets to
be acquired in the proposal and the
aggregate risk-weighted assets acquired
by the acquiring bank holding com
pany in all other qualifying transac
tions does not exceed 35 percent of the
consolidated risk-weighted assets of
the acquiring bank holding company.
For purposes of this paragraph “other
qualifying transactions” means any
transaction approved under this section
or section 225.23 during the 12 months
prior to filing the notice under this sec
tion; and
(B) Individual size limitation. The total
risk-weighted assets to be acquired do
not exceed $7.5 billion;
(ii) Small bank holding companies. Para
graph (c)(6)(i)(A) shall not apply if, im
mediately following consummation of the
proposed transaction, the consolidated
risk-weighted assets of the acquiring
bank holding company are less than $300
million;
(7) Supervisory actions. During the 12month period ending on the date on which
the bank holding company proposes to con
summate the proposed transaction, no for
mal administrative order, including a writ
ten agreem ent, cease-and-desist order,
capital directive, prompt-corrective-action
directive, asset-maintenance agreement, or
other formal enforcement action, is or was
outstanding against the bank holding com
pany or any insured depository institution
subsidiary of the holding company, and no
formal administrative enforcement proceed
ing involving any such enforcement action,
order, or directive is or was pending;
16
Regulation Y
(8) Interstate acquisitions. Board approval
of the transaction is not prohibited under
section 3(d) of the BHC Act;
j
(9) Other supervisory considerations. Boar®
approval of the transaction is not prohibited
under the informational sufficiency or com
prehensive home-country supervision stan
dards set forth in section 3(c)(3) of the
BHC Act; and
(10) Notification. The acquiring bank hold
ing company has not been notified by the
Board, in its discretion, prior to the expira
tion of the period in paragraph (b)(1) of
this section that an application under sec
tion 225.15 is required in order to permit
closer review of any financial, managerial,
com petitive, convenience-and-needs, or
other matter related to the factors that must
be considered under this part.
(d) Comment by primary banking supervisor.
(1) Notice. Upon receipt of a notice under
this section, the appropriate Reserve Bank
shall promptly furnish notice of the pro
posal and a copy of the information filed
pursuant to paragraph (a) of this section to
the primary banking supervisor of the in
sured depository institutions to be acquired.
(2) Comment period. The primary banking
supervisor shall have 30 calendar days (or
such shorter time as agreed to by the p
mary banking supervisor) from the date
the letter giving notice in which to submit
its views and recommendations to the
Board.
(3) Action subject to supervisor’s comment.
Action by the Board or the Reserve Bank
on a proposal under this section is subject
to the condition that the primary banking
supervisor not recommend in writing to the
Board disapproval of the proposal prior to
the expiration of the comment period de
scribed in paragraph (d)(2) of this section.
In such event, any approval given under
this section shall be revoked and, if re
quired by section 3(b) of the BHC Act, the
Board shall order a hearing on the proposal.
(4) Emergencies. Notwithstanding para
graphs (d)(2) and (d)(3) of this section, the
Board may provide the primary banking su
pervisor with 10 calendar days’ notice of a
proposal under this section if the Board
Regulation Y
•
finds that an emergency exists requiring ex
peditious action, and may act during the
notice period or without providing notice to
the primary banking supervisor if the Board
finds that it must act immediately to pre
vent probable failure.
(5) Primary banking supervisor. For pur
poses of this section and section 225.15(b),
the primary banking supervisor for an insti
tution is—
(i) the Office of the Comptroller of the
Currency, in the case of a national bank
ing association or District bank;
(ii) the appropriate supervisory authority
for the state in which the bank is char
tered, in the case of a state bank;
(iii) the director of the Office of Thrift
Supervision, in the case of a savings
association.
§ 225.16
(c) A ccepting application fo r processing.
Within 7 business days after the Reserve Bank
receives an application under this section, the
Reserve Bank shall accept it for processing as
of the date the application was filed or return
the application if it is substantially incom
plete. Upon accepting an application, the Re
serve Bank shall immediately send copies to
the Board. The Reserve Bank or the Board
may request additional information necessary
to complete the record of an application at
any time after accepting the application for
processing.
(d) Action on applications.
(1) Action under delegated authority. The
Reserve Bank shall approve an application
under this section within 30 calendar days
after the acceptance date for the application,
unless the Reserve Bank, upon notice to the
(e)
Branches and agencies o f foreign banking applicant, refers the application to the
Board for decision because action under
organizations. For purposes of this section, a
delegated authority is not appropriate.
U.S. branch or agency of a foreign banking
(2) Board action. The Board shall act on an
organization shall be considered to be an in
application under this subpart that is re
sured depository institution. A U.S. branch or
ferred to it for decision within 60 calendar
agency of a foreign banking organization shall
days after the acceptance date for the appli
be subject to paragraph (c)(3)(ii) of this sec
cation, unless the Board notifies the appli
tion only to the extent it is insured by the
cant that the 60-day period is being ex
Federal Deposit Insurance Corporation in ac
tended for a specified period and states the
cordance with section 6 of the International
reasons for the extension. In no event may
^ | a n k i n g Act of 1978 (12 USC 3104).
the extension exceed the 91-day period pro
vided in section 225.16(f). The Board may,
at any time, request additional information
that it believes is necessary for its decision.
SECTION 225.15— Procedures for Other
Bank Acquisition Proposals
(a) Filing application. Except as provided in
section 225.14, an application for the Board’s
prior approval under this subpart shall be gov
erned by the provisions of this section and
shall be filed with the appropriate Reserve
Bank on the designated form.
(b) Notice to prim ary banking supervisor.
Upon receipt of an application under this sub
part, the Reserve Bank shall promptly furnish
notice and a copy of the application to the
primary banking supervisor of the bank to be
acquired. The primary supervisor shall have
30 calendar days from the date of the letter
giving notice in which to submit its views and
recommendations to the Board.
SECTION 225.16— Public Notice,
Comments, Hearings, and Other
Provisions Governing Applications and
Notices
(a) In general. The provisions of this section
apply to all notices and applications filed un
der section 225.14 and section 225.15.
(b) Public notice.
(1) Newspaper publication.
(i)Location o f publication. In the case of
each notice or application submitted un
der section 225.14 or section 225.15, the
applicant shall publish a notice in a
newspaper of general circulation, in the
17
§ 225.16
form and at the locations specified in
section 262.3 of the Rules of Procedure
(12 CFR 262.3).
(ii) Contents o f notice. A newspaper no
tice under this paragraph shall provide an
opportunity for interested persons to
comment on the proposal for a period of
at least 30 calendar days.
(iii) Timing o f publication. Each newspa
per notice published in connection with a
proposal under this paragraph shall be
published no more than 15 calendar days
before and no later than 7 calendar days
following the date that a notice or appli
cation is filed with the appropriate Re
serve Bank.
(2) Federal Register notice.
(i) Publication by Board. Upon receipt of
a notice or application under section
225.14 or section 225.15, the Board shall
promptly publish notice of the proposal
in the Federal Register and shall provide
an opportunity for interested persons to
comment on the proposal for a period of
no more than 30 days.
(ii) Request fo r advance publication. A
bank holding company may request that,
during the 15-day period prior to filing a
notice or application under section 225.14
or section 225.15, the Board publish no
tice of a proposal in the Federal Regis
ter. A request for advance Federal Regis
ter publication shall be made in writing
to the appropriate Reserve Bank and shall
contain the identifying information pre
scribed by the Board for Federal Register
publication.
(3) Waiver or shortening o f notice. The
Board may waive or shorten the required
notice periods under this section if the
Board determines that an emergency exists
requiring expeditious action on the pro
posal, or if the Board finds that immediate
action is necessary to prevent the probable
failure of an insured depository institution.
(c) Public comment.
(1) Timely comments. Interested persons
may submit information and comments re
garding a proposal filed under this subpart.
A comment shall be considered timely for
purposes of this subpart if the comment,
18
Regulation Y
together with all supplemental information,
is submitted in writing in accordance with
the Board’s Rules of Procedure and re»
ceived by the Board or the appropriate r A
serve Bank prior to the expiration of the
latest public-comment period provided in
paragraph (b) of this section.
(2) Extension o f comment period.
(i) In general. The Board may, in its dis
cretion, extend the public comment pe
riod regarding any proposal submitted
under this subpart.
(ii) Requests in connection with obtain
ing application or notice. In the event
that an interested person has requested a
copy of a notice or application submitted
under this subpart, the Board may, in its
discretion and based on the facts and cir
cumstances, grant such person an exten
sion of the comment period for up to 15
calendar days.
(iii) Joint requests by interested person
and acquiring company. The Board will
grant a joint request by an interested per
son and the acquiring bank holding com
pany for an extension of the comment
period for a reasonable period for a pur
pose related to the statutory factors the
Board must consider under this subpart.
(3) Substantive comment. A comment will
be considered substantive for purposes arf
this subpart unless it involves individual
complaints, or raises frivolous, previously
considered, or wholly unsubstantiated
claims or irrelevant issues.
(d) Notice to attorney general. The Board or
Reserve Bank shall immediately notify the at
torney general of approval of any notice or
application under section 225.14 or section
225.15.
(e) Hearings. As provided in section 3(b) of
the BHC Act, the Board shall order a hearing
on any application or notice under section
225.15 if the Board receives from the primary
supervisor of the bank to be acquired, within
the 30-day period specified in section
225.15(b), a written recommendation of disap
proval of an application. The Board may order
a formal or informal hearing or other proceed
ing on the application or notice, as provided
in section 262.3(i)(2) of the Board’s Rules of
Regulation Y
Procedure. Any request for a hearing (other
than from the primary supervisor) shall com
ity with section 262.3(e) of the Rules of Pro
cure (12 CFR 262.3(e)).
(0 Approval through failure to act.
(1) Ninety-one-day rule. An application or
notice under section 225.14 or section
225.15 shall be deemed approved if the
Board fails to act on the application or no
tice within 91 calendar days after the date
of submission to the Board of the complete
record on the application. For this purpose,
the Board acts when it issues an order stat
ing that the Board has approved or denied
the application or notice, reflecting the
votes of the members of the Board, and
indicating that a statement of the reasons
for the decision will follow promptly.
(2) Complete record. For the purpose of
computing the commencement of the 91day period, the record is complete on the
latest of—
(i) the date of receipt by the Board of an
application that has been accepted by the
Reserve Bank;
(ii) the last day provided in any notice
for receipt of comments and hearing re
quests on the application;
(iii) the date of receipt by the Board of
the last relevant material regarding the
application that is needed for the Board’s
decision, if the material is received from
a source outside of the Federal Reserve
System; or
(iv) the date of completion of any hear
ing or other proceeding.
§ 225.17
Board may act on such an application or
notice without a hearing and may modify or
dispense with the other notice and hearing
requirements of this section.
(h) Waiting period. A transaction approved
under section 225.14 or section 225.15 shall
not be consummated until 30 days after the
date of approval of the application, except that
a transaction may be consummated—
(1) im mediately upon approval, if the
Board has determined under paragraph (g)
of this section that the application or notice
involves a probable bank failure;
(2) on or after the 5th calendar day follow
ing the date of approval, if the Board has
determined under paragraph (g) of this sec
tion that an emergency exists requiring ex
peditious action; or
(3) on or after the 15th calendar day fol
lowing the date of approval, if the Board
has not received any adverse comments
from the United States attorney general re
lating to the competitive factors and the
attorney general has consented to the
shorter waiting period.
SECTION 225.17— Notice Procedure for
One-Bank Holding Company Formations
(a) Transactions that qualify under this sec
tion. An acquisition by a company of control
of a bank may be consummated 30 days after
providing notice to the appropriate Reserve
Bank in accordance with paragraph (b) of this
section, provided that all of the following con
(g) E xceptions to notice and hearing ditions are met:
(1) the shareholder or shareholders who
requirements.
control
at least 67 percent of the shares of
(1) Probable bank failure. If the Board
the
bank
will control, immediately after the
finds it must act immediately on an applica
reorganization, at least 67 percent of the
tion in order to prevent the probable failure
shares of the holding company in substan
of a bank or bank holding company, the
tially the same proportion, except for
Board may modify or dispense with the no
changes in shareholders’ interests resulting
tice and hearing requirem ents of this
from the exercise of dissenting sharehold
section.
ers’ rights under state or federal law;3
(2) Emergency. If the Board finds that, al
though immediate action on an application
3 A shareholder o f a bank in reorganization w ill be con
or notice is not necessary, an emergency sidered to have the sam e proportional interest in the hold
exists requiring expeditious action, the ing com pany if the shareholder interest increases, on a pro
rata basis, as a result o f either the redemption o f shares
Board shall provide the primary supervisor from dissenting shareholders by the bank or bank holding
Continued
10 days to submit its recommendation. The
19
§ 225.17
(2) no shareholder or group of shareholders
acting in concert will, following the reorga
nization, own or control 10 percent or more
of any class of voting shares of the bank
holding company unless that shareholder or
group of shareholders was authorized, after
review under the Change in Bank Control
Act of 1978 (12 USC 1817(j)) by the ap
propriate federal banking agency for the
bank, to own or control 10 percent or more
of any class of voting shares of the bank;4
(3) the bank is adequately capitalized (as
defined in section 38 of the Federal Deposit
Insurance Act (12 USC 1831o));
(4) the bank has received at least a com
posite “ satisfactory” rating at its most re
cent examination, in the event that the bank
was examined;
(5) at the time of the reorganization, neither
the bank nor any of its officers, directors,
or shareholders is involved in any unre
solved supervisory or enforcement matters
with any appropriate federal banking
agency;
(6) the company demonstrates that any debt
that it incurs at the time of the reorganiza
tion, and the proposed means of retiring
this debt, will not place undue burden on
the holding company or its subsidiary on a
pro forma basis;5
(7) the holding company would not, as a
result of the reorganization, acquire control
of any additional bank or engage in any
activities other than those of managing and
controlling banks; and
(8) during this period, neither the appropri
ate Reserve Bank nor the Board objected to
the proposal or required the filing of an
Continued
com pany o r the acquisition o f shares o f dissenting share
holders by the rem aining shareholders.
4 T his procedure is not available in cases in which the
exercise o f dissenting shareholders’ rights w ould cause a
com pany that is not a bank holding com pany (other than
the com pany in form ation) to be required to register as a
bank holding company. This procedure also is not available
for the form ation o f a bank holding com pany organized in
mutual form.
5 For a banking organization with consolidated assets, on
a pro form a basis, o f less than $150 million (other than a
banking organization that will control a de novo bank), this
requirement is satisfied if the proposal com plies with the
Board's policy statement on small bank holding com panies
appendix C o f this part.
20
Regulation Y
application under section 225.15 of this
subpart.
(b) Contents o f notice. A notice filed u n (H
this paragraph shall include—
™
(1) certification by the notificant’s board of
directors that the requirements of 12 USC
1842(a)(C) and this section are met by the
proposal;
(2) a list identifying the shareholders of the
bank prior to the reorganization and of the
holding company following the reorganiza
tion, and specifying the percentage of
shares held by each principal shareholder in
the bank and proposed to be held in the
new holding company;
(3) a description of the resulting manage
ment of the proposed bank holding com
pany and its subsidiary bank, including—
(i) biographical information regarding
any senior officers and directors of the
resulting bank holding company who
were not senior officers or directors of
the bank prior to the reorganization; and,
(ii) a detailed history of the involvement
of any officer, director, or principal
shareholder of the resulting bank holding
company in any administrative or crimi
nal proceeding;
(4) pro forma financial statements for the
holding company, and a description of tta |
amount, source and terms of debt, if a r H
that the bank holding company proposes to
incur, and information regarding the sources
and timing for debt service and retirement.
(c) Acknowledgment o f notice. Within seven
calendar days following receipt of a notice
under this section, the Reserve Bank shall
provide the notificant with a written acknowl
edgment of receipt of the notice. This written
acknowledgment shall indicate that the trans
action described in the notice may be consum
mated on the 30th calendar day after the date
of receipt of the notice if the Reserve Bank or
the Board has not objected to the proposal
during that time.
(d) Application required upon objection. The
Reserve Bank or the Board may object to a
proposal during the notice period by providing
the bank holding company with a written ex
planation of the reasons for the objection. In
§ 225.22
Regulation Y
such case, the bank holding company may file
an application for prior approval of the proosal pursuant to section 225.15 of this
rbpart.
#
SUBPART C— NONBANKING
ACTIVITIES AND ACQUISITIONS BY
BANK HOLDING COMPANIES
SECTION 225.21— Prohibited
Nonbanking Activities and Acquisitions;
Exempt Bank Holding Companies
der section 501 of the Internal Revenue
Code (26 USC 501(c)).
(3) Companies granted hardship exemption.
Any bank holding company that has con
trolled only one bank since before July 1,
1968, and that has been granted an exemp
tion by the Board under section 4(d) of the
BHC Act, subject to any conditions im
posed by the Board.
(4) Com panies g ranted exem ption on
other grounds. Any company that ac
quired control of a bank before D ecem
ber 10, 1982, without the B oard’s prior
approval under section 3 of the BHC
Act, on the basis of a narrow interpreta
tion of the term “ demand deposit” or
“ com mercial loan” if the Board has de
term ined that—
(i) coverage of the company as a bank
holding company under this subpart
would be unfair or represent an unreason
able hardship; and
(ii) exclusion of the company from cov
erage under this regulation is consistent
with the purposes of the BHC Act and
section 106 of the Bank Holding Com
pany Act Amendments of 1970 (12 USC
1971, 1972(1)). The provisions of section
225.4 of subpart A of this regulation do
not apply to a company exempt under
this paragraph.
(a) Prohibited nonbanking activities and ac
quisitions. Except as provided in section
225.22 of this subpart, a bank holding com
pany or a subsidiary may not engage in, or
acquire or control, directly or indirectly, vot
ing securities or assets of a company engaged
in, any activity other than—
(1) banking or managing or controlling
banks and other subsidiaries authorized un
der the BHC Act; and
(2) an activity that the Board determines to
be so closely related to banking or manag
ing or controlling banks as to be a proper
incident thereto, including any incidental
activities that are necessary to carry on such
an activity, if the bank holding company
has obtained the prior approval of the
Board for that activity in accordance with
and subject to the requirements of this
SECTION 225.22— Exempt Nonbanking
regulation.
•
(b) Exempt bank holding companies. The fol
lowing bank holding companies are exempt
from the provisions of this subpart:
(1) Family-owned companies. Any com
pany that is a “company covered in 1970,”
as defined in section 2(b) of the BHC Act,
more than 85 percent of the voting securi
ties of which was collectively owned on
June 30, 1968, and continuously thereafter,
by members of the same family (or their
spouses) who are lineal descendants of
common ancestors.
(2) Labor, agricultural, and horticultural
organizations. Any company that was on
January 4, 1977, both a bank holding com
pany and a labor, agricultural, or horticul
tural organization exempt from taxation un
Activities and Acquisitions
(a) Certain de novo activities. A bank holding
company may, either directly or indirectly, en
gage de novo in any nonbanking activity
listed in section 225.28(b) (other than opera
tion of an insured depository institution) with
out obtaining the Board’s prior approval if the
bank holding company—
(1) meets the requirements of paragraphs
(c)(1), (2), and (6) of section 225.23;
(2) conducts the activity in compliance
with all Board orders and regulations gov
erning the activity; and
(3) within 10 business days after commenc
ing the activity, provides written notice to
the appropriate Reserve Bank describing the
activity, identifying the company or compa
21
§ 225.22
nies engaged in the activity, and certifying
that the activity will be conducted in accor
dance with the Board’s orders and regula
tions and that the bank holding company
meets the requirements of paragraphs (c)(1),
(2), and (6) of section 225.23.
(b) Servicing activities. A bank holding com
pany may, without the Board’s prior approval
under this subpart, furnish services to or per
form services for, or establish or acquire a
company that engages solely in furnishing ser
vices to or performing services for—
(1) the bank holding company or its subsid
iaries in connection with their activities as
authorized by law, including services that
are necessary to fulfill commitments entered
into by the subsidiaries with third parties, if
the bank holding company or servicing
company complies with the Board’s pub
lished interpretations and does not act as
principal in dealing with third parties; and
(2) the internal operations of the bank hold
ing company or its subsidiaries. Services
for the internal operations of the bank hold
ing company or its subsidiaries include, but
are not limited to—
(i) accounting, auditing, and appraising;
(ii) advertising and public relations;
(iii) data processing and data transmis
sion services, data bases, or facilities;
(iv) personnel services;
(v) courier services;
(vi) holding or operating property used
wholly or substantially by a subsidiary in
its operations or for its future use;
(vii) liquidating property acquired from a
subsidiary;
(viii) liquidating property acquired from
any sources either prior to May 9, 1956,
or the date on which the company be
came a bank holding company, whichever
is later; and
(ix) selling, purchasing, or underwriting
insurance, such as blanket bond insur
ance, group insurance for employees, and
property and casualty insurance.
(c) Safe deposit business. A bank holding
company or nonbank subsidiary may, without
the Board’s prior approval, conduct a safe de
posit business, or acquire voting securities of
a company that conducts such a business.
22
Regulation Y
(d) Nonbanking acquisitions not requiring
prior Board approval. The Board’s prior ap
proval is not required under this subpart for
the following acquisitions:
M
(1) DPC acquisitions.
^
(i) Voting securities or assets, acquired
by foreclosure or otherwise, in the ordi
nary course of collecting a debt previ
ously contracted (DPC property) in good
faith, if the DPC property is divested
within two years of acquisition.
(ii) The Board may, upon request, ex
tend this two-year period for up to
three additional years. The Board may
perm it additional extensions for up to
5 years (for a total of 10 years), for
shares, real estate or other assets
where the holding company dem on
strates that each extension would not
be detrim ental to the public interest
and either the bank holding company
has made good faith attem pts to dis
pose of such shares, real estate or
other assets or disposal of the shares,
real estate or other assets during the
initial period would have been detri
mental to the company.
(iii) Transfers of DPC property within
the bank holding company system do not
extend any period for divestiture of the
property.
jg
(2) Securities or assets required to be d l
vested by subsidiary. Voting securities or
assets required to be divested by a subsid
iary at the request of an examining federal
or state authority (except by the Board un
der the BHC Act or this regulation), if the
bank holding company divests the securities
or assets within two years from the date
acquired from the subsidiary.
(3) Fiduciary investments. Voting securities
or assets acquired by a bank or other com
pany (other than a trust that is a company)
in good faith in a fiduciary capacity, if the
voting securities or assets are—
(i) held in the ordinary course of busi
ness; and
(ii) not acquired for the benefit of the
company or its shareholders, employees,
or subsidiaries.
(4) Securities eligible fo r investment by na
tional bank. Voting securities of the kinds
Regulation Y
•
•
and amounts explicitly eligible by federal
statute (other than section 4 of the Bank
Service Corporation Act, 12 USC 1864) for
investment by a national bank, and voting
securities acquired prior to June 30, 1971,
in reliance on section 4(c)(5) of the BHC
Act and interpretations of the Comptroller
of the Currency under section 5136 of the
Revised Statutes (12 USC 24(7)).
(5) Securities or property representing 5
percent or less o f a company. Voting securi
ties of a company or property that, in the
aggregate, represent 5 percent or less of the
outstanding shares of any class of voting
securities of a company, or that represent a
5 percent interest or less in the property,
subject to the provisions of 12 CFR
225.137.
(6) Securities o f investment company. Vot
ing securities of an investment company
that is solely engaged in investing in securi
ties and that does not own or control more
than 5 percent of the outstanding shares of
any class of voting securities of any
company.
(7) Assets acquired in ordinary course o f
business. Assets of a company acquired in
the ordinary course of business, subject to
the provisions of 12 CFR 225.132, if the
assets relate to activities in which the acquiring company has previously received
Board approval under this regulation to
engage.
(8) Asset acquisitions by lending company
or industrial bank. Assets of an office(s) of
a company, all or substantially all of which
relate to making, acquiring, or servicing
loans if—
(i) the acquiring company has previously
received Board approval under this regu
lation or is not required to obtain prior
Board approval under this regulation to
engage in lending activities or industrial
banking activities;
(ii) the assets acquired during any 12month period do not represent more than
50 percent of the risk-weighted assets (on
a consolidated basis) of the acquiring
lending company or industrial bank, or
more than $100 m illion, whichever
amount is less;
(iii) the assets acquired do not represent
§ 225.22
more than 50 percent of the selling com
pany’s consolidated assets that are de
voted to lending activities or industrial
banking business;
(iv) the acquiring company notifies the
Reserve Bank of the acquisition within
30 days after the acquisition; and
(v) the acquiring company, after giving
effect to the transaction, meets the
Board’s capital adequacy guidelines (ap
pendix A of this part) and the Board has
not previously notified the acquiring
company that it may not acquire assets
under the exemption in this paragraph.
(e) Acquisition o f securities by subsidiary
banks.
(1) National bank. A national bank or its
subsidiary may, without the Board’s ap
proval under this subpart, acquire or retain
securities on the basis of section 4(c)(5) of
the BHC Act in accordance with the regula
tions of the Comptroller of the Currency.
(2) State bank. A state-chartered bank or its
subsidiary may, insofar as federal law is
concerned, and without the Board’s prior
approval under this subpart—
(i) acquire or retain securities, on the ba
sis of section 4(c)(5) of the BHC Act, of
the kinds and amounts explicitly eligible
by federal statute for investment by a
national bank; or
(ii) acquire or retain all (but, except for
directors’ qualifying shares, not less than
all) of the securities of a company that
engages solely in activities in which the
parent bank may engage, at locations at
which the bank may engage in the activ
ity, and subject to the same limitations as
if the bank were engaging in the activity
directly.
(f) Activities and securities o f new bank hold
ing companies. A company that becomes a
bank holding company may, for a period of
two years, engage in nonbanking activities
and control voting securities or assets of a
nonbank subsidiary, if the bank holding com
pany engaged in such activities or controlled
such voting securities or assets on the date it
became a bank holding company. The Board
may grant requests for up to three one-year
extensions of the two-year period.
23
§ 225.22
(g) Grandfathered activities and securities.
Unless the Board orders divestiture or termi
nation under section 4(a)(2) of the BHC Act,
a “company covered in 1970,” as defined in
section 2(b) of the BHC Act, may—
(1) retain voting securities or assets and en
gage in activities that it has lawfully held
or engaged in continuously since June 30,
1968; and
(2) acquire voting securities of any newly
formed company to engage in such activities.
(h) Securities or activities exempt under
Regulation K. A bank holding company may
acquire voting securities or assets and engage
in activities as authorized in Regulation K (12
CFR 211).
SECTION 225.23— Expedited Action for
Certain Nonbanking Proposals by
Well-Run Bank Holding Companies
(a) Filing o f notice.
(1) Information required. A bank holding
company that meets the requirements of
paragraph (c) of this section may satisfy the
notice requirement of this subpart in con
nection with the acquisition of voting secu
rities or assets of a company engaged in
nonbanking activities that the Board has
permitted by order or regulation (other than
an insured depository institution),1 or a pro
posal to engage de novo, either directly or
indirectly, in a nonbanking activity that the
Board has permitted by order or by regula
tion, by providing the appropriate Reserve
Bank with a written notice containing the
following:
(i) a certification that all of the criteria in
paragraph (c) of this section are met;
(ii) a description of the transaction that
includes identification of the companies
involved in the transaction, the activities
to be conducted, and a commitment to
conduct the proposed activities in confor
mity with the Board’s regulations and or1 A bank holding com pany may acquire voting securities
or assets o f a savings association or other insured deposi
tory institution that is not a bank by using the procedures
in section 225.14 o f subpart B if the bank holding com pany
and the proposal qualify under that section as if the savings
association or other institution were a bank for purposes of
that section.
24
Regulation Y
ders governing the conduct of the pro
posed activity;
(iii) if the proposal involves an acquisi
tion of a going concern:
(A) if the bank holding company has
consolidated assets of $150 million or
more, an abbreviated consolidated pro
forma balance sheet for the acquiring
bank holding company as of the most
recent quarter showing credit and debit
adjustments that reflect the proposed
transaction, consolidated pro forma
risk-based capital ratios for the acquir
ing bank holding company as of the
most recent quarter, a description of
the purchase price and the terms and
sources of funding for the transaction,
and the total revenue and net income
of the company to be acquired;
(B) if the bank holding company has
consolidated assets of less than $150
million, a pro forma parent-only bal
ance sheet as of the most recent quar
ter showing credit and debit adjust
ments that reflect the proposed
transaction, a description of the pur
chase price and the terms and sources
of funding for the transaction and the
sources and schedule for retiring any
debt incurred in the transaction, an<l
the total assets, off-balance-sheet itemsi
revenue, and net income of the com
pany to be acquired;
(C) for each insured depository institu
tion whose tier 1 capital, total capital,
total assets or risk-weighted assets
change as a result of the transaction,
the total risk-weighted assets, total as
sets, tier 1 capital and total capital of
the institution on a pro forma basis;
(iv) identification of the geographic mar
kets in which competition would be af
fected by the proposal, a description of
the effect of the proposal on competition
in the relevant markets, a list of the ma
jor competitors in that market in the pro
posed activity if the affected market is
local in nature, and, if requested, the
market indexes for the relevant market;
and
(v) a description of the public benefits
Regulation Y
•
that can reasonably be expected to result
from the transaction.
(2) Waiver o f unnecessary information. The
Reserve Bank may reduce the information
requirements in paragraphs (l)(iii) and (iv)
as appropriate.
(b) (1) Action on proposals under this section.
The Board or the appropriate Reserve Bank
shall act on a proposal submitted under this
section, or notify the bank holding company
that the transaction is subject to the proce
dure in section 225.24, within 12 business
days following the filing of all of the infor
mation required in paragraph (a) of this
section.
(2) Acceptance o f notice if expedited proce
dure not available. If the Board or the Re
serve Bank determines, after the filing of a
notice under this section, that a bank hold
ing company may not use the procedure in
this section and must file a notice under
section 225.24, the notice shall be deemed
accepted for purposes of section 225.24 as
of the date that the notice was filed under
this section.
(c) Criteria fo r use o f expedited procedure.
The procedure in this section is available only
if—
(1) Well-capitalized organization.
(i) Bank holding company. Both at the
time of and immediately after the pro
posed transaction, the acquiring bank
holding company is well capitalized;
(ii) Insured depository institutions. Both
at the time of and immediately after the
transaction—
(A) the lead insured depository institu
tion of the acquiring bank holding
company is well capitalized;
(B) well-capitalized insured depository
institutions control at least 80 percent
of the total risk-weighted assets of in
sured depository institutions controlled
by the acquiring bank holding com
pany; and
(C) no insured depository institution
controlled by the acquiring bank hold
ing company is undercapitalized;
(2) Well-managed organization.
(i) Satisfactory examination ratings. At
the time of the transaction, the acquiring
•
§ 225.23
bank holding company, its lead insured
depository institution, and insured deposi
tory institutions that control at least 80
percent of the total risk-weighted assets
of insured depository institutions con
trolled by such holding company are well
managed;
(ii) No poorly managed institutions. No
insured depository institution controlled
by the acquiring bank holding company
has received 1 of the 2 lowest composite
ratings at the later of the institution’s
most recent examination or subsequent
review by the appropriate federal banking
agency for the institution;
(iii) Recently acquired institutions ex
cluded. Any insured depository institution
that has been acquired by the bank hold
ing company during the 12-month period
preceding the date on which written no
tice is filed under paragraph (a) of this
section may be excluded for purposes of
paragraph (c)(2)(ii) of this section if—
(A) the bank holding company has de
veloped a plan acceptable to the appro
priate federal banking agency for the
institution to restore the capital and
management of the institution; and
(B) all insured depository institutions
excluded under this paragraph repre
sent, in the aggregate, less than 10 per
cent of the aggregate total riskweighted assets of all insured
depository institutions controlled by
the bank holding company;
(3) Permissible activity.
(i) The Board has determined by regula
tion or order that each activity proposed
to be conducted is so closely related to
banking, or managing or controlling
banks, as to be a proper incident thereto;
and
(ii) The Board has not indicated that pro
posals to engage in the activity are sub
ject to the notice procedure provided in
section 225.24;
(4) Competitive criteria.
(i) Competitive screen. In the case of the
acquisition of a going concern, the acqui
sition, without regard to any divestitures
proposed by the acquiring bank holding
company, does not cause—
25
§ 225.23
(A) the
pany to
of the
market;
Regulation Y
acquiring bank holding com
control in excess of 35 percent
market share in any relevant
or
(B) the Herfindahl-Hirschman index to
increase by more than 200 points in
any relevant m arket with a post
acquisition index of at least 1800; and
(ii) Other competitive factors. The Board
has not indicated that the transaction is
subject to close scrutiny on competitive
grounds;
(5) Size o f acquisition.
(i) In general.
(A) Limited growth. Except as pro
vided in paragraph (c)(5)(ii), the sum
of aggregate risk-weighted assets to be
acquired in the proposal and the aggre
gate risk-weighted assets acquired by
the acquiring bank holding company in
all other qualifying transactions does
not exceed 35 percent of the consoli
dated risk-weighted assets of the ac
quiring bank holding company. For
purposes of this paragraph, “ other
qualifying transactions” means any
transaction approved under this section
or section 225.14 during the 12 months
prior to filing the notice under this
section;
(B) Consideration paid. The gross
consideration to be paid by the acquir
ing bank holding company in the pro
posal does not exceed 15 percent of
the consolidated tier 1 capital of the
acquiring bank holding company; and
(C) Individual size limitation. The total
risk-weighted assets to be acquired do
not exceed $7.5 billion;
(ii) Small bank holding companies. Para
graph (c)(5)(i)(A) shall not apply if, im
mediately following consummation of the
proposed transaction, the consolidated
risk-weighted assets of the acquiring
bank holding company are less than $300
million;
(6) Supervisory actions. During the 12month period ending on the date on which
the bank holding company proposes to con
summate the proposed transaction, no for
26
mal administrative order, including a writ
ten agreement, cease-and-desist order, capi
tal directive, prompt-corrective-action direc
tive, asset-maintenance agreement, or othej
formal enforcement order is or was out
standing against the bank holding company
or any insured depository institution subsid
iary of the holding company, and no formal
administrative enforcement proceeding in
volving any such enforcement action, order,
or directive is or was pending; and
(7) Notification. The bank holding company
has not been notified by the Board, in its
discretion, prior to the expiration of the pe
riod in paragraph (b) that a notice under
section 225.24 is required in order to permit
closer review of any potential adverse effect
or other matter related to the factors that
must be considered under this part.
(d) Branches and agencies o f foreign banking
organizations. For purposes of this section, a
U.S. branch or agency of a foreign banking
organization shall be considered to be an in
sured depository institution.
SECTION 225.24— Procedures for Other
Nonbanking Proposals
(a) Notice required fo r nonbanking activities*
Except as provided in section 225.22 and sedl
tion 225.23, a notice for the Board’s prior
approval under section 225.21(a) to engage in
or acquire a com pany engaged in a
nonbanking activity shall be filed by a bank
holding company (including a company seek
ing to become a bank holding company) with
the appropriate Reserve Bank in accordance
with this section and the Board’s Rules of
Procedure (12 CFR 262.3).
(1) Engaging de novo in listed activities. A
bank holding company seeking to com
mence or to engage de novo, either directly
or through a subsidiary, in a nonbanking
activity listed in section 225.28 shall file a
notice containing a description of the activi
ties to be conducted and the identity of the
company that will conduct the activity.
(2) Acquiring company engaged in listed
activities. A bank holding company seeking
to acquire or control voting securities or
Regulation Y
assets of a company engaged in a
nonbanking activity listed in section 225.28
shall file a notice containing the following:
(i) a description of the proposal, includ
ing a description of each proposed activ
ity, and the effect of the proposal on
competition among entities engaging in
each proposed activity in each relevant
market with relevant market indexes;
(ii) the identity of any entity involved in
the proposal, and if the notificant pro
poses to conduct the activity through an
existing subsidiary, a description of the
existing activities of the subsidiary;
(iii) a statement of the public benefits
that can reasonably be expected to result
from the proposal;
(iv) if the bank holding company has
consolidated assets of $150 million or
more—
(A) parent company and consolidated
pro forma balance sheets for the ac
quiring bank holding company as of
the most recent quarter showing credit
and debit adjustments that reflect the
proposed transaction;
(B) consolidated pro forma risk-based
capital and leverage ratio calculations
for the acquiring bank holding com
pany as of the most recent quarter; and
(C) a description of the purchase price
and the terms and sources of funding
for the transaction;
(v) if the bank holding company has
consolidated assets of less than $150
million—
(A) a pro forma parent-only balance
sheet as of the most recent quarter
showing credit and debit adjustments
that reflect the proposed transaction;
and
(B) a description of the purchase price
and the terms and sources of funding
for the transaction and, if the transac
tion is debt funded, one-year income
statement and cash flow projections for
the parent company, and the sources
and schedule for retiring any debt in
curred in the transaction;
(vi) for each insured depository institu
tion whose tier 1 capital, total capital,
total assets or risk-w eighted assets
§ 225.24
change as a result of the transaction, the
total risk-weighted assets, total assets, tier
1 capital and total capital of the institu
tion on a pro forma basis; and
(vii) a description of the management ex
pertise, internal controls and riskmanagement systems that will be utilized
in the conduct of the proposed activities;
and
(viii) a copy of the purchase agreements,
and balance-sheet and income statements
for the most recent quarter and year-end
for any company to be acquired.
(3) Engaging in or acquiring company to
engage in unlisted activities. A bank hold
ing company seeking to engage de novo in,
or to acquire or control voting securities or
assets of a company engaged in, any activ
ity not listed in section 225.28 shall file a
notice containing the following:
(i) evidence that the proposed activity is
so closely related to banking or managing
or controlling banks as to be a proper
incident thereto, or, if the Board previ
ously determined by order that the activ
ity is permissible for a bank holding
company to conduct, a commitment to
comply with all conditions and limita
tions that have been established by the
Board governing the activity; and
(ii) the information required in para
graphs (a)(1) or (a)(2), as appropriate.
(b) Notice provided to Board. The Reserve
Bank shall immediately send to the Board a
copy of any notice received under paragraphs
(a)(2) or (a)(3) of this section.
(c) Notice to public.
(1) Listed activities and activities approved
by order.
(i) In a case involving an activity listed
in section 225.28 or previously approved
by the Board by order, the Reserve Bank
shall notify the Board for publication in
the Federal Register immediately upon
receipt by the Reserve Bank of—
(A) a notice under this section; or
(B) a written request that notice of a
proposal under this section or section
225.23 be published in the Federal
Register. Such a request may request
that Federal Register publication occur
27
§ 225.24
up to 15 calendar days prior to submis
sion of a notice under this subpart.
(ii) The Federal Register notice pub
lished under this paragraph shall invite
public comment on the proposal, gener
ally for a period of 15 days.
(2) New activities.
(i) In general. In the case of a notice
under this section involving an activity
that is not listed in section 225.28 and
that has not been previously approved by
the Board by order, the Board shall send
notice of the proposal to the Federal
Register for publication, unless the Board
determines that the notificant has not
dem onstrated that the activity is so
closely related to banking or to managing
or controlling banks as to be a proper
incident thereto. The Federal Register
notice shall invite public comment on the
proposal for a reasonable period of time,
generally for 30 days.
(ii) Time fo r publication. The Board shall
send the notice required under this para
graph to the Federal Register within 10
business days of acceptance by the Re
serve Bank. The Board may extend the
10-day period for an additional 30 calen
dar days upon notice to the notificant. In
the event notice of a proposal is not pub
lished for comment, the Board shall in
form the notificant of the reasons for the
decision.
(d) Action on notices.
(1) Reserve Bank action.
(i) In general. Within 30 calendar days
after receipt by the Reserve Bank of a
notice filed pursuant to paragraphs (a)(1)
or (a)(2) of this section, the Reserve
Banks shall—
(A) approve the notice; or
(B) refer the notice to the Board for
decision because action under del
egated authority is not appropriate.
(ii) Return o f incomplete notice. Within
seven calendar days of receipt, the Re
serve Bank may return any notice as
informationally incomplete that does not
contain all of the information required by
this subpart. The return of such a notice
shall be deemed action on the notice.
28
Regulation Y
(iii) Notice o f action. The Reserve Bank
shall promptly notify the bank holding
company of any action or referral under
this paragraph.
d
(iv) Close o f public-comment period. T h r
Reserve Bank shall not approve any no
tice under this paragraph (1) prior to the
third business day after the close of the
public-comment period, unless an emer
gency exists that requires expedited or
immediate action.
(2) Board action.
(i) Internal schedule. The Board seeks to
act on every notice referred to it for deci
sion within 60 days of the date that the
notice is filed with the Reserve Bank. If
the Board is unable to act within this
period, the Board shall notify the
notificant and explain the reasons and the
date by which the Board expects to act.
(ii) Extension o f required period fo r
action.
(A) In general. The Board may extend
the 60-day period required for Board
action under paragraph (d)(2)(i) of this
section for an additional 30 days upon
notice to the notificant.
(B) Unlisted activities. If a notice in
volves a proposal to engage in an ac
tivity that is not listed in sectioi^
225.28, the Board may extend the pe™
riod required for Board action under
paragraph (d)(2)(i) of this section for
an additional 90 days. This 90-day ex
tension is in addition to the 30-day
extension period provided in paragraph
(d)(2)(ii)(A) of this section. The Board
shall notify the notificant that the no
tice period has been extended and ex
plain the reasons for the extension.
(3) Requests fo r additional information.
The Board or the Reserve Bank may
modify the information requirements under
this section or at any time request any addi
tional information that either believes is
needed for a decision on any notice under
this section.
(4) Tolling o f period. The Board or the Re
serve Bank may at any time extend or toll
the time period for action on a notice for
§ 225.26
Regulation Y
any period
notificant.
with
the
consent of the
SECTION 225.25— Hearings, Alteration
of Activities, and Other Matters
(a) Hearings.
(1) Procedure to request hearing. Any re
quest for a hearing on a notice under this
subpart shall comply with the provisions of
12 CFR 262.3(e).
(2) Determination to hold hearing. The
Board may order a formal or informal hear
ing or other proceeding on a notice as pro
vided in 12 CFR 262.3(i)(2). The Board
shall order a hearing only if there are dis
puted issues of material fact that cannot be
resolved in some other manner.
(3) Extension o f period fo r hearing. The
Board may extend the time for action on
any notice for such time as is reasonably
necessary to conduct a hearing and evaluate
the hearing record. Such extension shall not
exceed 91 calendar days after the date of
submission to the Board of the complete
record on the notice. The procedures for
computation of the 91-day rule as set forth
in section 225.16(f) apply to notices under
this subpart that involve hearings.
(b) Approval through failure to act.
(1) Except as provided in paragraph (a) of
this section or section 225.24(d)(4), a notice
under this subpart shall be deemed to be
approved at the conclusion of the period
that begins on the date the complete notice
is received by the Reserve Bank or the
Board and that ends 60 calendar days plus
any applicable extension and tolling period
thereafter.
(2) Complete notice. For purposes of para
graph (b)(1) of this section, a notice shall
be deemed to be complete at such time as it
contains all information required by this
subpart and all other information requested
by the Board or the Reserve Bank.
(c) Notice to expand or alter nonbanking
activities.
(1) De novo expansion. A notice under this
subpart is required to open a new office or
to form a subsidiary to engage in, or to
relocate an existing office engaged in, a
nonbanking activity that the Board has pre
viously approved for the bank holding com
pany under this regulation, only if—
(i) the Board’s prior approval was lim
ited geographically;
(ii) the activity is to be conducted in a
country outside of the United States and
the bank holding company has not previ
ously received prior Board approval un
der this regulation to engage in the activ
ity in that country; or
(iii) the Board or appropriate Reserve
Bank has notified the company that a
notice under this subpart is required.
(2) Activities outside United States. With
respect to activities to be engaged in out
side the United States that require approval
under this subpart, the procedures of this
section apply only to activities to be en
gaged in directly by a bank holding com
pany that is not a qualifying foreign bank
ing organization, or by a nonbank
subsidiary of a bank holding company ap
proved under this subpart. Regulation K (12
CFR 211) governs other international opera
tions of bank holding companies.
(3) Alteration o f nonbanking activity. Un
less otherwise permitted by the Board, a
notice under this subpart is required to alter
a nonbanking activity in any material re
spect from that considered by the Board in
acting on the application or notice to en
gage in the activity.
(d) Emergency savings association acquisi
tions. In the case of a notice to acquire a
savings association, the Board may modify or
dispense with the public-notice and hearing
requirements of this section if the Board finds
that an emergency exists that requires the
Board to act immediately and the primary fed
eral regulator of the institution concurs.
SECTION 225.26— Factors Considered
in Acting on Nonbanking Proposals
(a) In general. In evaluating a notice under
section 225.23 or section 225.24, the Board
29
§ 225.26
shall consider whether the notificant’s perfor
mance of the activities can reasonably be ex
pected to produce benefits to the public (such
as greater convenience, increased competition,
and gains in efficiency) that outweigh possible
adverse effects (such as undue concentration
of resources, decreased or unfair competition,
conflicts of interest, and unsound banking
practices).
(b) Financial and managerial resources. Con
sideration of the factors in paragraph (a) of
this section includes an evaluation of the fi
nancial and m anagerial resources of the
notificant, including its subsidiaries, and any
company to be acquired, and the effect of the
proposed transaction on those resources, and
the management expertise, intemal-control and
risk-management systems, and capital of the
entity conducting the activity.
(c) Competitive effect o f de novo proposals.
Unless the record demonstrates otherwise, the
commencement or expansion of a nonbanking
activity de novo is presumed to result in ben
efits to the public through increased
competition.
(d) Denial fo r lack o f information. The Board
may deny any notice submitted under this
subpart if the notificant neglects, fails, or re
fuses to furnish all information required by
the Board.
(e) Conditional approvals. The Board may
impose conditions on any approval, including
conditions to address permissibility, financial,
managerial, safety-and-soundness, competitive,
compliance, conflicts-of-interest, or other con
cerns to ensure that approval is consistent
with the relevant statutory factors and other
provisions of the BHC Act.
SECTION 225.27— Procedures for
Determining Scope of Nonbanking
Activities
(a) Advisory opinions regarding scope o f pre
viously approved nonbanking activities.
(1) Request fo r advisory opinion. Any per
son may submit a request to the Board for
30
Regulation Y
an advisory opinion regarding the scope of
any permissible nonbanking activity. The
request shall be submitted in writing to tlug
Board and shall identify the proposed p f l
rameters of the activity, or describe the ser
vice or product that will be provided, and
contain an explanation supporting an inter
pretation regarding the scope of the permis
sible nonbanking activity.
(2) Response to request. The Board shall
provide an advisory opinion within 45 days
of receiving a written request under this
paragraph.
(b) Procedure fo r consideration o f new
activities.
(1) Initiation o f proceeding. The Board
may, at any time, on its own initiative or in
response to a written request from a person,
initiate a proceeding to determine whether
any activity is so closely related to banking
or managing or controlling banks as to be a
proper incident thereto.
(2) Requests fo r determination. Any request
for a Board determination that an activity is
so closely related to banking or managing
or controlling banks as to be a proper inci
dent thereto, shall be submitted to the
Board in writing, and shall contain evidence
that the proposed activity is so closely re
lated to banking or managing or controlling
banks as to be a proper incident thereto.
(3) Publication. The Board shall publish in
the Federal Register notice that it is consid
ering the permissibility of a new activity
and invite public comment for a period of
at least 30 calendar days. In the case of a
request submitted under paragraph (b) of
this section, the Board may determine not
to publish notice of the request if the Board
determines that the requester has provided
no reasonable basis for a determination that
the activity is so closely related to banking,
or managing or controlling banks, as to be
a proper incident thereto, and notifies the
requester of the determination.
(4) Comments and hearing requests. Any
comment and any request for a hearing re
garding a proposal under this section shall
comply with the provisions of section
262.3(e) of the Board’s Rules of Procedure
(12 CFR 262.3(e)).
Regulation Y
SECTION 225.28— List of Permissible
Nonbanking Activities
(a) Closely related nonbanking activities. The
activities listed in paragraph (b) of this section
are so closely related to banking or managing
or controlling banks as to be a proper incident
thereto, and may be engaged in by a bank
holding company or its subsidiary in accor
dance with requirements of this regulation.
(b) Activities determined by regulation to be
permissible.
(1) Extending credit and servicing loans.
Making, acquiring, brokering, or servicing
loans or other extensions of credit (includ
ing factoring, issuing letters of credit and
accepting drafts) for the company’s account
or for the account of others.
(2) Activities related to extending credit.
Any activity usual in connection with mak
ing, acquiring, brokering, or servicing loans
or other extensions of credit, as determined
by the Board. The Board has determined
that the following activities are usual in
connection with making, acquiring,
brokering, or servicing loans or other exten
sions of credit:
(i) Real estate and personal property ap
praising. Performing appraisals of real
estate and tangible and intangible per
sonal property, including securities.
(ii) Arranging commercial real estate eq
uity financing. Acting as intermediary for
the financing of commercial or industrial
income-producing real estate by arranging
for the transfer of the title, control, and
risk of such a real estate project to one
or more investors, if the bank holding
company and its affiliates do not have an
interest in, or participate in managing or
developing, a real estate project for
which it arranges equity financing, and
do not promote or sponsor the develop
ment of the property.
(iii) Check-guaranty services. Authoriz
ing a subscribing merchant to accept per
sonal checks tendered by the merchant’s
customers in payment for goods and ser
vices, and purchasing from the merchant
validly authorized checks that are subse
quently dishonored.
§ 225.28
(iv) Collection agency services. Collect
ing overdue accounts receivable, either
retail or commercial.
(v) Credit bureau services. Maintaining
information related to the credit history
of consumers and providing the infor
mation to a credit grantor who is con
sidering a borrow er’s application for
credit or who has extended credit to the
borrower.
(vi) Asset management, servicing, and
collection activities. Engaging under con
tract with a third party in asset manage
ment, servicing, and collection2 of assets
of a type that an insured depository insti
tution may originate and own, if the
company does not engage in real prop
erty management or real estate brokerage
services as part of these services.
(vii) Acquiring debt in default. Acquiring
debt that is in default at the time of ac
quisition, if the company—
(A) divests shares or assets securing
debt in default that are not permissible
investments for bank holding compa
nies, within the time period required
for divestiture of property acquired in
satisfaction of a debt previously con
tracted under section 225.12(b);3
(B) stands only in the position of a
creditor and does not purchase equity
of obligors of debt in default (other
than equity that may be collateral for
such debt); and
(C) does not acquire debt in default
secured by shares of a bank or bank
holding company.
(viii) Real estate settlement servicing.
Providing real estate settlement services.4
(3) Leasing personal or real property.
Leasing personal or real property or acting
as agent, broker, or adviser in leasing such
property if—
2 A sset m anagem ent services include acting as agent in
the liquidation o r sale o f loans and collateral for loans,
including real estate and other assets acquired through fore
closure o r in satisfaction o f debts previously contracted.
3 For this purpose, the divestiture period for property
begins on the date that the debt is acquired, regardless of
when legal title to the property is acquired.
4 For purposes o f this section, real estate settlem ent ser
vices do not include providing title insurance as principal,
agent, o r broker.
31
§ 225.28
(i) the lease is on a nonoperating basis;5
(ii) the initial term of the lease is at least
90 days;
(iii) in the case of leases involving real
property—
(A) at the inception of the initial lease,
the effect of the transaction will yield
a return that will compensate the lessor
for not less than the lessor’s full in
vestment in the property plus the esti
mated total cost of financing the prop
erty over the term of the lease from
rental payments, estimated tax benefits,
and the estimated residual value of the
property at the expiration of the initial
lease; and
(B) the estimated residual value of
property for purposes of paragraph
(b)(3)(iii)(A) of this section shall not
exceed 25 percent of the acquisition
cost of the property to the lessor.
(4) O perating
nonbank
depository
institutions.
(i) Industrial banking. Owning, control
ling, or operating an industrial bank,
Morris Plan bank, or industrial loan com
pany, so long as the institution is not a
bank.
(ii) Operating savings association. Own
ing, controlling, or operating a savings
association, if the savings association en
gages only in deposit-taking activities,
lending, and other activities that are per
missible for bank holding companies un
der this subpart C.
(5) Trust company functions. Performing
functions or activities that may be per
formed by a trust company (including ac-
Regulation Y
tivities of a fiduciary, agency, or custodial
nature), in the manner authorized by federal
or state law, so long as the company is not
a bank for purposes of section 2(c) of the
Bank Holding Company Act.
(6) Financial and investment advisory ac
tivities. Acting as investment or financial
advisor to any person, including (without,
in any way, limiting the foregoing)—
(i) serving as investment adviser (as de
fined in section 2(a)(20) of the Invest
ment Company Act of 1940, 15 USC
80a-2(a)(20)), to an investment company
registered under that act, including spon
soring, organizing, and m anaging a
closed-end investment company;
(ii) furnishing general economic informa
tion and advice, general economic statis
tical forecasting services, and industry
studies;
(iii) providing advice in connection with
mergers, acquisitions, divestitures, invest
ments, joint ventures, leveraged buyouts,
recapitalizations, capital structurings, fi
nancing transactions and similar transac
tions, and conducting financial-feasibility
studies;6
(iv) providing inform ation, statistical
forecasting, and advice with respect to
any transaction in foreign exchange,
swaps, and similar transactions, com
modities, and any forward contract, op
tion, future, option on a future, and simi
lar instruments;
(v) providing educational courses, and
instructional materials to consumers on
individual financial management matters;
and
(vi) providing tax-planning and taxpreparation services to any person.
(7) Agency transactional services fo r cus
tomer investments.
(i) Securities brokerage. Providing secu
rities brokerage services (including secu
rities clearing and/or securities execution
services on an exchange), whether alone
or in combination with investment advi
sory services, and incidental activities
(including related securities credit activi-
5 The requirem ent that the lease be on a nonoperating
basis m eans that the bank holding com pany may not, di
rectly o r indirectly, engage in operating, servicing, m ain
taining, o r repairing leased property during the lease term.
F o r purposes o f the leasing o f automobiles, the requirement
that the lease be on a nonoperating basis means that the
bank holding com pany m ay not, directly or indirectly, (1)
provide servicing, repair, o r m aintenance o f the leased ve
hicle during the lease term; (2) purchase parts and accesso
ries in bulk o r for an individual vehicle after the lessee has
taken delivery o f the vehicle; (3) provide the loan o f an
autom obile during servicing o f the leased vehicle; (4) pur
chase insurance fo r the lessee; o r (5) provide for the re
newal o f the vehicle’s license m erely as a service to the
lessee w here the lessee could renew the license without
authorization from the lessor. The bank holding com pany
6 Feasibility studies do not include assisting managem ent
m ay arrange for a third party to provide these services or
with the planning or m arketing for a given project or pro
products.
viding general operational or m anagem ent advice.
32
Regulation Y
ties and custodial services), if the securi
ties brokerage services are restricted to
buying and selling securities solely as
agent for the account of customers and
do not include securities underwriting or
dealing.
(ii) Riskless-principal transactions. Buy
ing and selling in the secondary market
all types of securities on the order of
customers as a “riskless principal” to the
extent of engaging in a transaction in
which the company, after receiving an
order to buy (or sell) a security from a
customer, purchases (or sells) the security
for its own account to offset a contempo
raneous sale to (or purchase from) the
customer. This does not include—
(A) selling bank-ineligible securities7
at the order of a customer that is the
issuer of the securities, or selling bankineligible securities in any transaction
where the company has a contractual
agreement to place the securities as
agent of the issuer; or
(B) acting as a riskless principal in
any transaction involving a bankineligible security for which the com
pany or any of its affiliates acts as
underwriter (during the period of the
underwriting or for 30 days thereafter)
or dealer.8
(iii) Private-placement services. Acting
as agent for the private placement of se
curities in accordance with the require
ments of the Securities Act of 1933
(1933 act) and the rules of the Securities
and Exchange Commission, if the com
pany engaged in the activity does not
purchase or repurchase for its own ac
count the securities being placed, or hold
7 A bank-ineligible security is any security that a state
m em ber bank is not perm itted to underw rite or deal in
under 12 USC 24 and 335.
8 A com pany or its affiliates may not enter quotes for
specific bank-ineligible securities in any dealer quotation
system in connection with the com pany’s riskless-principal
transactions; except that the com pany o r its affiliates may
enter “ b id ” or “ ask ” quotations, or publish “ offering
w anted” or “ bid w anted” notices on trading systems other
than N A SD A Q or an exchange, if the com pany o r its
affiliate does not enter price quotations on different sides o f
the m arket for a particular security during any two-day
period.
§ 225.28
in inventory unsold portions of issues of
these securities.
(iv) Futures commission merchant. Acting
as a futures commission merchant (FCM)
for unafFiliated persons in the execution,
clearance, or execution and clearance of
any futures contract and option on a fu
tures contract traded on an exchange in
the United States or abroad if—
(A) the activity is conducted through a
separately incorporated subsidiary of
the bank holding company, which may
engage in activities other than FCM
activities (including, but not limited to,
permissible advisory and trading activi
ties); and
(B) the parent bank holding company
does not provide a guarantee or other
wise become liable to the exchange or
clearing association other than for
those trades conducted by the subsid
iary for its own account or for the
account of any affiliate.
(v) Other transactional services. Provid
ing to customers as agent transactional
services with respect to swaps and simi
lar transactions, any transaction described
in paragraph (b)(8) of this section, any
transaction that is permissible for a state
member bank, and any other transaction
involving a forward contract, option, fu
tures, option on a futures or similar con
tract (whether traded on an exchange or
not) relating to a commodity that is
traded on an exchange.
(8) Investment transactions as principal.
(i) Underwriting and dealing in govern
ment obligations and money market in
struments. Underwriting and dealing in
obligations of the United States, general
obligations of states and their political
subdivisions, and other obligations that
state member banks of the Federal Re
serve System may be authorized to un
derwrite and deal in under 12 USC 24
and 335, including banker’s acceptances
and certificates of deposit, under the
same limitations as would be applicable
if the activity were performed by the
bank holding company’s subsidiary mem
ber banks or its subsidiary nonmember
banks as if they were member banks.
33
§ 225.28
(ii) Investing and trading activities. En
gaging as principal in—
(A) foreign exchange;
(B) forward contracts, options, futures,
options on futures, swaps, and similar
contracts, whether traded on exchanges
or not, based on any rate, price, finan
cial asset (including gold, silver, plati
num, palladium, copper, or any other
m etal approved by the Board),
nonfinancial asset, or group of assets,
other than a bank-ineligible security9,
if—
(/) a state member bank is autho
rized to invest in the asset underly
ing the contract;
(2) the contract requires cash settle
ment; or
(3) the contract allows for assign
ment, termination, or offset prior to
delivery or expiration, and the com
pany makes every reasonable effort
to avoid taking or making delivery;
and
(C) forward contracts, options,10 fu
tures, options on futures, swaps, and
similar contracts, whether traded on
exchanges or not, based on an index of
a rate, a price, or the value of any
financial asset, nonfinancial asset, or
group of assets, if the contract requires
cash settlement.
(iii) Buying and selling bullion, and re
lated activities. Buying, selling and storing
bars, rounds, bullion, and coins of gold,
silver, platinum, palladium, copper, and
any other metal approved by the Board,
for the company’s own account and the
account of others, and providing incidental
services such as arranging for storage, safe
custody, assaying, and shipment.
9 A bank-ineligible security is any security that a state
m em ber bank is not perm itted to underw rite or deal in
under 12 U SC 24 and 335.
10 This reference does not include acting as a dealer in
options based on indices o f bank-ineligible securities when
the options are traded on securities exchanges. T hese op
tions are securities for purposes o f the federal securities
laws and bank-ineligible securities for purposes o f section
20 o f the Glass-Steagall Act, 12 USC 337. Similarly, this
reference does not include acting as a dealer in any other
instrum ent that is a bank-ineligible security for purposes of
section 20. A bank holding com pany may deal in these
instrum ents in accordance with the Board’s orders on deal
ing in bank-ineligible securities.
34
Regulation Y
(9) Management consulting and counseling
activities.
(i) Management consulting.
(A) Providing management consulting
advice1'—
(/) on any matter to unaffiliated de
pository institutions, including com
mercial banks, savings and loan as
sociations, savings banks, credit
unions, industrial banks, Morris Plan
banks, cooperative banks, industrial
loan companies, trust companies,
and branches or agencies of foreign
banks;
(2) on any financial, economic, ac
counting, or audit matter to any
other company.
(B) A company conducting manage
ment consulting activities under this
subparagraph and any affiliate of such
company may not—
(1) own or control, directly or indi
rectly, more than 5 percent of the
voting securities of the client institu
tion; and
(2) allow a management official, as
defined in 12 CFR 212.2(h), of the
company or any of its affiliates to
serve as a management official of
the client institution, except where
such interlocking relationship is per
mitted pursuant to an exemption
granted under 12 CFR 212.4(b) or
otherwise permitted by the Board,
(C) A company conducting manage
ment consulting activities may provide
management consulting services to
customers not described in paragraph
(b)(9)(i)(A)(7) of this section or re
garding matters not described in para
graph (b)(9)(i)(A)(2) of this section, if
the total annual revenue derived from
those management consulting services
does not exceed 30 percent of the
company’s total annual revenue derived
from management consulting activities.
11
In perform ing this activity, bank holding com panies
are not authorized to perform tasks o r operations or provide
services to client institutions either on a daily or continuing
basis, except as necessary to instruct the client institution
on how to perform such services for itself. See also the
Board’s interpretation o f bank m anagem ent consulting ad
vice (12 CFR 225.131.).
Regulation Y
(ii) Employee benefits consulting ser
vices. Providing consulting services to
employee benefit, compensation, and in
surance plans, including designing plans,
assisting in the implementation of plans,
providing adm inistrative services to
plans, and developing employee commu
nication programs for plans.
(iii) Career counseling services. Provid
ing career counseling services to—
(A) a financial organization12 and indi
viduals currently employed by, or re
cently displaced from, a financial
organization;
(B) individuals who are seeking em
ployment at a financial organization;
and
(C) individuals who are currently em
ployed in or who seek positions in the
finance, accounting, and audit depart
ments of any company.
(10) Support services.
(i) Courier services. Providing courier
services for—
(A) checks, com m ercial papers,
documents, and written instruments
(excluding currency or bearer-type
negotiable instruments) that are ex
changed among banks and financial
institutions; and
(B) audit and accounting media of a
banking or financial nature and other
business records and documents used
in processing such media.13
(ii) Printing and selling MICR-encoded
items. Printing and selling checks and re
lated documents, including corporate im
age checks, cash tickets, voucher checks,
deposit slips, savings withdrawal pack
ages, and other forms that require mag
netic ink character recognition (MICR)
encoding.
(11) Insurance agency and underwriting.
(i) Credit insurance. Acting as principal,
12 “ Financial organization” refers to insured depository
institution holding com panies and their subsidiaries, other
than nonbanking affiliates o f diversified savings and loan
holding com panies that engage in activities not perm issible
under section 4(c)(8) o f the Bank Holding Com pany Act
(12 U SC 1842(c)(8)).
13 See also the B oard’s interpretation on courier activities
(12 C FR 225.129), which sets forth conditions for bank
holding com pany entry into the activity.
§ 225.28
agent, or broker for insurance (including
home mortgage redemption insurance)
that is—
(A) directly related to an extension of
credit by the bank holding company or
any of its subsidiaries; and
(B) limited to ensuring the repayment
of the outstanding balance due on the
extension of credit14 in the event of
the death, disability, or involuntary un
employment of the debtor.
(ii) Finance company subsidiary. Acting
as agent or broker for insurance directly
related to an extension of credit by a
finance company15 that is a subsidiary of
a bank holding company, if—
(A) the insurance is limited to ensur
ing repayment of the outstanding bal
ance on such extension of credit in the
event of loss or damage to any prop
erty used as collateral for the extension
of credit; and
(B) the extension of credit is not more
than $10,000, or $25,000 if it is to
finance the purchase of a residential
manufactured home16 and the credit is
secured by the home; and
(C) the applicant commits to notify
borrowers in writing that—
(/) they are not required to purchase
such insurance from the applicant;
(2) such insurance does not insure
any interest of the borrower in the
collateral; and
(5) the applicant will accept more
comprehensive property insurance in
place of such single-interest
insurance.
(iii) Insurance in small towns. Engaging
14 “ Extension o f credit” includes direct loans to borrow
ers, loans purchased from other lenders, and leases o f real
or personal property so long as the leases are nonoperating
and full-payout leases that m eet the requirem ents o f para
graph (b)(3) o f this section.
15 “ Finance com pany” includes all non-deposit-taking fi
nancial institutions that engage in a significant degree o f
consum er lending (excluding lending secured by first m ort
gages) and all financial institutions specifically defined by
individual states as finance com panies and that engage in a
significant degree o f consum er lending.
16 These limitations increase at the end o f each calendar
year, beginning with 1982, by the percentage increase in
the C onsum er Price Index fo r U rban Wage Earners and
C le rica l W orkers p u b lish e d by the B ureau o f L a b o r
Statistics.
35
§ 225.28
in any insurance agency activity in a
place where the bank holding company
or a subsidiary of the bank holding com
pany has a lending office and that—
(A) has a population not exceeding
5,000 (as shown in the preceding de
cennial census); or
(B) has inadequate insurance agency fa
cilities, as determined by the Board, af
ter notice and opportunity for hearing.
(iv) Insurance agency activities con
ducted on May I, 1982. Engaging in any
specific insurance agency activity17 if the
bank holding company, or subsidiary con
ducting the specific activity, conducted
such activity on May 1, 1982, or received
Board approval to conduct such activity
on or before May 1, 1982.18 A bank
holding company or subsidiary engaging
in a specific insurance agency activity
under this clause may—
(A) engage in such specific insurance
agency activity only at locations—
(1) in the state in which the bank
holding company has its principal
place of business (as defined in 12
USC 1842(d));
(2) in any state or states immedi
ately adjacent to such state; and
(3) in any state in which the specific
insurance agency activity was con
ducted (or was approved to be con
ducted) by such bank holding com
pany or subsidiary thereof or by any
other subsidiary of such bank holding
company on May 1, 1982; and
(B) provide other insurance coverages
that may become available after May
1, 1982, so long as those coverages
17 Nothing contained in this provision shall preclude a
bank holding com pany subsidiary that is authorized to en
gage in a specific insurance agency activity under this
clause from continuing to engage in the particular activity
after m erger with an affiliate, if the m erger is for legitimate
business purposes and prior notice has been provided to the
Board.
18 For the purposes o f this paragraph, activities engaged
in on M ay 1, 1982, include activities carried on subse
quently as the result o f an application to engage in such
activities pending before the Board on M ay 1, 1982, and
approved subsequently by the Board or as the result o f the
acquisition by such com pany pursuant to a binding w ritten
contract entered into on or before M ay 1, 1982, o f another
com pany engaged in such activities at the time o f the
acquisition.
36
Regulation Y
insure against the types of risks as (or
are otherwise functionally equivalent
to) coverages sold or approved to be
sold on May 1, 1982, by such bank|
holding company or subsidiary.
(v) Supervision o f retail insurance
agents. Supervising on behalf of insur
ance underwriters the activities of retail
insurance agents who sell—
(A) fidelity insurance and property and
casualty insurance on the real and per
sonal property used in the operations
of the bank holding company or its
subsidiaries; and
(B) group insurance that protects the
employees of the bank holding com
pany or its subsidiaries.
(vi) Small bank holding companies. En
gaging in any insurance agency activity if
the bank holding company has total con
solidated assets of $50 million or less. A
bank holding company performing insur
ance agency activities under this para
graph may not engage in the sale of life
insurance or annuities except as provided
in paragraphs (b)( 11 )(i) and (iii) of this
section, and it may not continue to en
gage in insurance agency activities pursu
ant to this provision more than 90 days
after the end of the quarterly reporting
period in which total assets of the hold
ing company and its subsidiaries exceed
$50 million.
(vii) Insurance agency activities con
ducted before 1971. Engaging in any in
surance agency activity performed at any
location in the United States directly or
indirectly by a bank holding company
that was engaged in insurance agency ac
tivities prior to January 1, 1971, as a
consequence of approval by the Board
prior to January 1, 1971.
(12) Community development activities.
(i) Financing and investment activities.
Making equity and debt investments in
corporations or projects designed prima
rily to promote community welfare, such
as the economic rehabilitation and devel
opment of low-income areas by providing
housing, services, or jobs for residents.
(ii) Advisory activities. Providing advi
sory and related services for programs
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designed primarily to promote commu
nity welfare.
(13) M oney orders, savings bonds, and
traveler’s checks. The issuance and sale at
retail of money orders and sim ilar
consumer-type payment instruments; the
sale of U.S. savings bonds; and the issuance
and sale of traveler’s checks.
(14) Data processing.
(i) Providing data processing and data
transmission services, facilities (including
data processing and data transmission
hardware, software, documentation, or
operating personnel), data bases, advice,
and access to such services, facilities, or
data bases by any technological means,
if—
(A) the data to be processed or fur
nished are financial, banking, or eco
nomic; and
(B) The hardware provided in connec
tion therewith is offered only in con
junction with software designed and
marketed for the processing and trans
mission of financial, banking, or eco
nomic data, and where the general pur
pose hardware does not constitute
more than 30 percent of the cost of
any packaged offering.
(ii) A company conducting data process
ing and data transmission activities may
conduct data processing and data trans
mission activities not described in para
graph (b)(14)(i) of this section if the total
annual revenue derived from those activi
ties does not exceed 30 percent of the
company’s total annual revenues derived
from data processing and data transmis
sion activities.
§ 225.31
forth in paragraph (d) of this section is
present; or
(ii) it otherwise appears that a company
has the power to exercise a controlling
influence over the management or poli
cies of a bank or other company.
(2) If the Board makes a preliminary deter
mination of control under this section, the
Board shall send notice to the controlling
company containing a statement of the facts
upon which the preliminary determination is
based.
(b) Response to preliminary determination o f
control. Within 30 calendar days of issuance
by the Board of a preliminary determination
of control or such longer period permitted by
the Board, the company against whom the
determination has been made shall—
(1) submit for the Board’s approval a spe
cific plan for the prompt termination of the
control relationship;
(2) file an application under subpart B or C
of this regulation to retain the control rela
tionship; or
(3) contest the preliminary determination by
filing a response, setting forth the facts and
circumstances in support of its position that
no control exists, and, if desired, requesting
a hearing or other proceeding.
(c) Hearing and final determination.
(1) The Board shall order a formal hearing
or other appropriate proceeding upon the
request of a company that contests a pre
liminary determination that the company
has the power to exercise a controlling in
fluence over the management or policies of
a bank or other company, if the Board finds
that material facts are in dispute. The Board
may also in its discretion order a formal
hearing or other proceeding with respect to
a preliminary determination that the com
SUBPART D— CONTROL AND
pany controls voting securities of the bank
DIVESTITURE PROCEEDINGS
or other company under the presumptions in
paragraph (d)(1) of this section.
SECTION 225.31— Control Proceedings
(2) At a hearing or other proceeding, any
(a) Preliminary determination o f control.
applicable presum ptions established by
paragraph (d) of this section shall be con
(1) The Board may issue a preliminary de
termination of control under the procedures
sidered in accordance with the Federal
Rules of Evidence and the Board’s Rules
set forth in this section in any case in
of Practice for Formal Hearings (12 CFR
which—
263).
(i) any of the presumptions of control set
37
§ 225.31
(3) After considering the submissions of
the company and other evidence, including
the record of any hearing or other proceed
ing, the Board shall issue a final order de
termining whether the company controls
voting securities, or has the power to exer
cise a controlling influence over the man
agement or policies, of the bank or other
company. If a control relationship is found,
the Board may direct the company to termi
nate the control relationship or to file an
application for the Board’s approval to re
tain the control relationship under subpart B
or C of this regulation.
(d) Rebuttable presumptions o f control. The
following rebuttable presumptions shall be
used in any proceeding under this section:
(1) Control o f voting securities.
(i) Securities convertible into voting se
curities. A company that owns, controls,
or holds securities that are immediately
convertible, at the option of the holder or
owner, into voting securities of a bank or
other company, controls the voting
securities.
(ii) Option or restriction on voting secu
rities. A company that enters into an
agreement or understanding under which
the rights of a holder of voting securities
of a bank or other company are restricted
in any manner controls the securities.
This presumption does not apply where
the agreement or understanding—
(A) is a mutual agreement among
shareholders granting to each other a
right of first refusal with respect to
their shares;
(B) is incident to a bona fide loan
transaction; or
(C) relates to restrictions on transfer
ability and continues only for the time
necessary to obtain approval from the
appropriate federal supervisory author
ity with respect to acquisition by the
company of the securities.
(2) Control over company.
(i) Management agreement. A company
that enters into any agreement or under
standing with a bank or other company
(other than an investment advisory agree
ment), such as a management contract,
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under which the first company or any of
its subsidiaries directs or exercises sig
nificant influence over the general man
agement or overall operations of the bank|
or other company controls the bank or
other company.
(ii) Shares controlled by company and
associated individuals. A company that,
together with its management officials or
controlling shareholders (including mem
bers of the immediate families of either),
owns, controls, or holds with power to
vote 25 percent or more of the outstand
ing shares of any class of voting securi
ties of a bank or other company controls
the bank or other company, if the first
company owns, controls, or holds with
power to vote more than 5 percent of the
outstanding shares of any class of voting
securities of the bank or other company.
(iii) Common management officials. A
company that has one or more manage
ment officials in common with a bank or
other company controls the bank or other
company, if the first company owns, con
trols, or holds with power to vote more
than 5 percent of the outstanding shares
of any class of voting securities of the
bank or other company, and no other per
son controls as much as 5 percent of the
outstanding shares of any class of voting
securities of the bank or other company.
(iv) Shares held as fiduciary. The pre
sumptions in paragraphs (d)(2)(ii) and
(iii) of this section do not apply if the
securities are held by the company in a
fiduciary capacity without sole discretion
ary authority to exercise the voting
rights.
(e) Presumptions o f noncontrol.
(1) In any proceeding under this section,
there is a presumption that any company
that directly or indirectly owns, controls, or
has power to vote less than 5 percent of the
outstanding shares of any class of voting
securities of a bank or other company does
not have control over that bank or other
company.
(2) In any proceeding under this section, or
judicial proceeding under the BHC Act,
other than a proceeding in which the Board
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•
has made a preliminary determination that a
company has the power to exercise a controlling influence over the management or
policies of the bank or other company, a
company may not be held to have had con
trol over the bank or other company at any
given time, unless that company, at the time
in question, directly or indirectly owned,
controlled, or had power to vote 5 percent
or more of the outstanding shares of any
class of voting securities of the bank or
other company, or had already been found
to have control on the basis of the existence
of a controlling influence relationship.
SUBPART E— CHANGE IN BANK
CONTROL
SECTION 225.41— Transactions
Requiring Prior Notice
(a) Prior-notice requirement. Any person act
ing directly or indirectly, or through or in
concert with one or more persons, shall give
the Board 60 days’ written notice, as specified
in section 225.43 of this subpart, before ac
quiring control of a state member bank or
bank holding company, unless the acquisition
js exempt under section 225.42.
^b) Definitions. For purposes of this subpart:
(1) Acquisition includes a purchase, assign
ment, transfer, or pledge of voting securi
ties, or an increase in percentage ownership
of a state member bank or a bank holding
company resulting from a redemption of
voting securities.
(2) Acting in concert includes knowing par
ticipation in a joint activity or parallel ac
tion towards a common goal of acquiring
control of a state member bank or bank
holding company whether or not pursuant
to an express agreement.
(3) Immediate fam ily includes a person’s fa
ther, mother, stepfather, stepmother, brother,
sister, stepbrother, stepsister, son, daughter,
stepson, stepdaughter, grandparent, grand
son, granddaughter, father-in-law, mother-inlaw, brother-in-law, sister-in-law, son-in-law,
daughter-in-law, the spouse of any of the
foregoing, and the person’s spouse.
§ 225.41
(c) Acquisitions requiring prior notice.
(1) Acquisition o f control. The acquisition
of voting securities of a state member bank
or bank holding company constitutes the ac
quisition of control under the Bank Control
Act,* requiring prior notice to the Board, if,
immediately after the transaction, the ac
quiring person (or persons acting in con
cert) will own, control, or hold with power
to vote 25 percent or more of any class of
voting securities of the institution.
(2) Rebuttable presumption o f control. The
Board presumes that an acquisition of vot
ing securities of a state member bank or
bank holding company constitutes the ac
quisition of control under the Bank Control
Act, requiring prior notice to the Board, if,
immediately after the transaction, the ac
quiring person (or persons acting in con
cert) will own, control, or hold with power
to vote 10 percent or more of any class of
voting securities of the institution, and if—
(i) the institution has registered securities
under section 12 of the Securities Ex
change Act of 1934 (15 USC 78/); or
(ii) no other person will own, control, or
hold the power to vote a greater percent
age of that class of voting securities im
mediately after the transaction.'
(d) Rebuttable presumption o f concerted ac
tion. The following persons shall be presumed
to be acting in concert for purposes of this
subpart:
(1) a company and any controlling share
holder, partner, trustee, or management offi
cial of the company, if both the company
and the person own voting securities of the
state member bank or bank holding
company;
(2) an individual and the individual’s im
mediate family;
(3) companies under common control;
(4) persons that are parties to any agree
ment, contract, understanding, relationship,
or other arrangement, whether written or
*
The C hange in Bank Control A ct am ended section 7(j)
o f the Federal D eposit Insurance A ct (12 USC 1817(j)).
1 If tw o or m ore persons, not acting in concert, each
propose to acquire sim ultaneously equal percentages o f 10
percent or m ore o f a class o f voting securities o f the state
m em ber bank or bank holding com pany, each person must
file prior notice to the Board.
39
§ 225.41
otherwise, regarding the acquisition, voting,
or transfer of control of voting securities of
a state member bank or bank holding com
pany, other than through a revocable proxy
as described in section 225.42(a)(5) of this
subpart;
(5) persons that have made, or propose to
make, a joint filing under sections 13 or 14
of the Securities Exchange Act of 1934 (15
USC 78m or 78n), and the rules promul
gated thereunder by the Securities and Ex
change Commission; and
(6) a person and any trust for which the
person serves as trustee.
(e) Acquisitions o f loans in default. The
Board presumes an acquisition of a loan in
default that is secured by voting securities of
a state member bank or bank holding com
pany to be an acquisition of the underlying
securities for purposes of this section.
(f) Other transactions. Transactions other than
those set forth in paragraph (c) of this section
resulting in a person’s control of less than 25
percent of a class of voting securities of a
state member bank or bank holding company
are not deemed by the Board to constitute
control for purposes of the Bank Control Act.
(g) Rebuttal o f presumptions. Prior notice to
the Board is not required for any acquisition
of voting securities under the presumption of
control set forth in this section, if the Board
finds that the acquisition will not result in
control. The Board shall afford any person
seeking to rebut a presumption in this section
an opportunity to present views in writing or,
if appropriate, orally before its designated rep
resentatives at an informal conference.
SECTION 225.42— Transactions Not
Requiring Prior Notice
(a) Exempt transactions. The following trans
actions do not require notice to the Board
under this subpart;
(1) Existing control relationships. The ac
quisition of additional voting securities of a
state member bank or bank holding com
pany by a person who—
(i) continuously since March 9, 1979 (or
40
Regulation Y
since the institution commenced business,
if later), held power to vote 25 percent or
more of any class of voting securities
the institution; or
(ii) is p resu m e d , u n d e r se c tio n
225.41(c)(2) of this subpart, to have
controlled the institution continuously
since March 9, 1979, if the aggregate
amount of voting securities held does
not exceed 25 percent or more of any
class of voting securities of the insti
tution or, in other cases, where the
Board determ ines that the person has
controlled the bank continuously since
March 9, 1979;
(2) Increase o f previously authorized acqui
sitions. Unless the Board or the Reserve
Bank otherwise provides in writing, the ac
quisition of additional shares of a class of
voting securities of a state member bank or
bank holding company by any person (or
persons acting in concert) who has lawfully
acquired and maintained control of the in
stitution (for purposes of section 225.41(c)
of this subpart), after complying with the
procedures and receiving approval to ac
quire voting securities of the institution un
der this subpart, or in connection with an
application approved under section 3 of the
BHC Act (12 USC 1842; section 225.11 of
subpart B of this part) or section 18(c) o | ^ ^
the Federal Deposit Insurance Act (B a n l^ ^ r
Merger Act, 12 USC 1828(c));
(3) Acquisitions subject to approval under
BHC Act or Bank Merger Act. Any acquisi
tion of voting securities subject to approval
under section 3 of the BHC Act (section
225.11 of subpart B), or section 18(c) of
the Federal Deposit Insurance Act (Bank
Merger Act, 12 USC 1828(c));
(4) Transactions exempt under BHC Act.
Any transaction described in sections
2(a)(5), 3(a)(A), or 3(a)(B) of the BHC
Act (12 USC 1841(a)(5), 1842(a)(A),
1842(a)(B)), by a person described in those
provisions;
(5) Proxy solicitation. The acquisition of
the power to vote securities of a state mem
ber or bank holding company through re
ceipt of a revocable proxy in connection
with a proxy solicitation for the purposes of
conducting business at a regular or special
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meeting of the institution, if the proxy ter
minates within a reasonable period after the
meeting;
(6) Stock dividends. The receipt of voting
securities of a state member bank or bank
holding company through a stock dividend
or stock split if the proportional interest of
the recipient in the institution remains sub
stantially the same; and.
(7) Acquisition o f foreign banking organiza
tion. The acquisition of voting securities of
a qualifying foreign banking organization.
(This exemption does not extend to the re
ports and information required under para
graphs 9, 10, and 12 of the Bank Control
Act (12 USC 1817(j)(9), (10), and (12)) and
section 225.44 of this subpart.
(b) Prior-notice exemption.
(1) The following acquisitions of voting se
curities of a state member bank or bank
holding company, which would otherwise
require prior notice under this subpart, are
not subject to the prior-notice requirements
if the acquiring person notifies the appropri
ate Reserve Bank within 90 calendar days
after the acquisition and provides any rel
evant information requested by the Reserve
Bank:
(i) acquisition of voting securities
through inheritance;
(ii) acquisition of voting securities as a
bona fide gift; and
(iii) acquisition of voting securities in
satisfaction of a debt previously con
tracted (DPC) in good faith.
(2) The following acquisitions of voting se
curities of a state member bank or bank
holding company, which would otherwise
require prior notice under this subpart, are
not subject to the prior-notice requirements
if the acquiring person does not reasonably
have advance knowledge of the transaction,
and provides the written notice required un
der section 225.43 to the appropriate Re
serve Bank within 90 calendar days after
the transaction occurs:
(i) acquisition of voting securities result
ing from a redemption of voting securi
ties by the issuing bank or bank holding
company; and
(ii) acquisition of voting securities as a
§ 225.43
result of actions (including the sale of
securities) by any third party that is not
within the control of the acquiror.
(3) Nothing in paragraphs (b)(1) or (b)(2)
of this section limits the authority of the
Board to disapprove a notice pursuant to
section 225.43(h) of this subpart.
SECTION 225.43— Procedures for
Filing, Processing, Publishing, and
Acting on Notices
(a) Filing notice.
(1) A notice required under this subpart
shall be filed with the appropriate Reserve
Bank and shall contain all the information
required by paragraph 6 of the Bank Con
trol Act (12 USC 18170X6)), or prescribed
in the designated Board form.
(2) The Board may waive any of the infor
mational requirements of the notice if the
Board determines that it is in the public
interest.
(3) A notificant shall notify the appropriate
Reserve Bank or the Board immediately of
any material changes in a notice submitted
to the Reserve Bank, including changes in
financial or other conditions.
(4) When the acquiring person is an indi
vidual, or group of individuals acting in
concert, the requirement to provide personal
financial data may be satisfied by a current
statement of assets and liabilities and an
income summary, as required in the desig
nated Board form, together with a statement
of any material changes since the date of
the statement or summary. The Reserve
Bank or the Board, nevertheless, may re
quest additional information, if appropriate.
(b) Acceptance o f notice. The 60-day notice
period specified in section 225.41 of this sub
part begins on the date of receipt of a com
plete notice. The Reserve Bank shall notify
the person or persons submitting a notice un
der this subpart in writing of the date the no
tice is or was complete and thereby accepted
for processing. The Reserve Bank or the
Board may request additional relevant infor
mation at any time after the date of
acceptance.
41
§ 225.43
(c) Publication.
(1) Newspaper announcement. Any person(s) filing a notice under this subpart
shall publish, in a form prescribed by the
Board, an announcement soliciting public
comment on the proposed acquisition. The
announcement shall be published in a news
paper of general circulation in the commu
nity in which the head office of the state
member bank to be acquired is located or,
in the case of a proposed acquisition of a
bank holding company, in the community in
which its head office is located and in the
community in which the head office of each
of its subsidiary banks is located. The an
nouncement shall be published no earlier
than 15 calendar days before the filing of
the notice with the appropriate Reserve
Bank and no later than 10 calendar days
after the filing date; and the publisher’s af
fidavit of publication shall be provided to
the appropriate Reserve Bank.
(2) Contents o f newspaper announcement.
The newspaper announcement shall state—
(i) the name of each person identified in
the notice as a proposed acquiror of the
bank or bank holding company;
(ii) the name of the bank or bank hold
ing company to be acquired, including
the name of each of the bank holding
company’s subsidiary banks; and
(iii) a statement that interested persons
may submit comments on the notice to
the Board or the appropriate Reserve
Bank for a period of 20 days, or such
shorter period as may be provided, pursu
ant to paragraph (c)(5) of this section.
(3) Federal Register announcement. The
Board shall, upon filing of a notice under
this subpart, publish announcement in the
Federal Register of receipt of the notice.
The Federal Register announcement shall
contain the information required under para
graphs (c)(2)(i) and (c)(2)(ii) of this section
and a statement that interested persons may
submit comments on the proposed acquisi
tion for a period of 15 calendar days, or
such shorter period as may be provided,
pursuant to paragraph (c)(5) of this section.
The Board may waive publication in the
Federal Register, if the Board determines
that such action is appropriate.
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(4) Delay o f publication. The Board may
permit delay in the publication required un
der paragraphs (c)(1) and (c)(3) if the Board
determines, for good cause shown, that it is(
in the public interest to grant such a delay.
Requests for delay of publication may be
submitted to the appropriate Reserve Bank.
(5) Shortening or waiving notice. The
Board may shorten or waive the publiccom ment or new spaper-publication re
quirements of this paragraph, or act on a
notice before the expiration of a publiccomment period, if it determines in writ
ing that an emergency exists, or that dis
closure of the notice, so licitatio n of
public comment, or delay until expiration
of the public-comment period would seri
ously threaten the safety or soundness of
the bank or bank holding company to be
acquired.
(6) Consideration o f public comments. In
acting upon a notice filed under this sub
part, the Board shall consider all public
comments received in writing within the pe
riod specified in the newspaper or Federal
Register announcement, whichever is later.
At the Board’s option, comments received
after this period may, but need not, be
considered.
(7) Standing. No person (other than the ac
quiring person) who submits comments orj
information on a notice filed under this sub*
part shall thereby become a party to the
proceeding or acquire any standing or right
to participate in the Board’s consideration
of the notice or to appeal or otherwise con
test the notice or the Board’s action regard
ing the notice.
(d) Time period fo r Board action.
(1) Consummation o f acquisition.
(i) The notificants may consummate the
proposed acquisition 60 days after submis
sion to the Reserve Bank of a complete
notice under paragraph (a) of this section,
unless within that period the Board disap
proves the proposed acquisition or extends
the 60-day period, as provided under para
graph (d)(2) of this section.
(ii) The notificant(s) may consummate
the proposed transaction before the expi
ration of the 60-day period if the Board
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notifies the notificant(s) in writing of the
Board’s intention not to disapprove the
acquisition.
(2) Extensions o f time period.
(i) The Board may extend the 60-day pe
riod in paragraph (d)(1) of this section
for an additional 30 days by notifying the
acquiring person(s).
(ii) The Board may further extend the
period during which it may disapprove a
notice for two additional periods of not
more than 45 days each, if the Board
determines that—
(A) any acquiring person has not fur
nished all the information required un
der paragraph (a) of this section;
(B) any material information submitted
is substantially inaccurate;
(C) the Board is unable to complete
the investigation of any acquiring per
son because of inadequate cooperation
or delay by that person; or
(D) additional time is needed to inves
tigate and determine that no acquiring
person has a record of failing to com
ply with the requirements of the Bank
Secrecy Act, subchapter II of chapter
53 of title 31, United States Code.
(iii) If the Board extends the time period
under this paragraph, it shall notify the
acquiring person(s) of the reasons there
for and shall include a statement of the
information, if any, deemed incomplete
or inaccurate.
(e) Advice to bank supervisory agencies.
(1) Upon accepting a notice relating to ac
quisition of securities of a state member
bank, the Reserve Bank shall send a copy
of the notice to the appropriate state bank
supervisor, which shall have 30 calender
days from the date the notice is sent in
which to submit its views and recommenda
tions to the Board. The Reserve Bank also
shall send a copy of any notice to the
Comptroller of the Currency, Federal De
posit Insurance Corporation, and the Office
of Thrift Supervision.
(2) If the Board finds that it must act im
mediately in order to prevent the probable
failure of the bank or bank holding com
pany involved, the Board may dispense
§ 225.43
with or modify the requirements for notice
to the state supervisor.
(0 Investigation and report.
(1) After receiving a notice under this
subpart, the Board or the appropriate Re
serve Bank shall conduct an investigation
of the competence, experience, integrity,
and financial ability of each person by
and for whom an acquisition is to be
made. The Board shall also make an inde
pendent determination of the accuracy and
completeness of any information required
to be contained in a notice under para
graph (a) of this section. In investigating
any notice accepted under this subpart,
the Board or Reserve Bank may solicit
information or views from any person, in
cluding any bank or bank holding com
pany involved in the notice, and any ap
p ro p riate state, fed eral, or foreign
governmental authority.
(2) The Board or the appropriate Reserve
Bank shall prepare a written report of its
investigation, which shall contain, at a
minimum, a summary of the results of the
investigation.
(g) Factors considered in acting on notices.
In reviewing a notice filed under this subpart,
the Board shall consider the information in the
record, the views and recommendations of the
appropriate bank supervisor, and any other rel
evant information obtained during any investi
gation of the notice.
(h) Disapproval and hearing.
(1) Disapproval o f notice. The Board may
disapprove an acquisition if it finds adverse
effects with respect to any of the factors set
forth in paragraph 7 of the Bank Control
Act (12 USC 1817(j)(7)) (i.e., competitive,
financial, managerial, banking, or incom
pleteness of information).
(2) Disapproval notification. Within three
days after its decision to issue a notice of
intent to disapprove any proposed acquisi
tion, the Board shall notify the acquiring per
son in writing of the reasons for the action.
(3) Hearing. Within 10 calendar days of
receipt of the notice of the Board’s intent to
disapprove, the acquiring person may sub
mit a written request for a hearing. Any
43
§ 225.43
hearing conducted under this paragraph
shall be in accordance with the Rules of
Practice for Formal Hearings (12 CFR 263).
At the conclusion of the hearing, the Board
shall, by order, approve or disapprove the
proposed acquisition on the basis of the
record of the hearing. If the acquiring per
son does not request a hearing, the notice
of intent to disapprove becomes final and
unappealable.
SECTION 225.44— Reporting of Stock
Loans
(a) Requirements.
(1) Any foreign bank or affiliate of a for
eign bank that has credit outstanding to any
person or group of persons, in the aggre
gate, which is secured, directly or indirectly,
by 25 percent or more of any class of vot
ing securities of a state member bank, shall
file a consolidated report with the appropri
ate Reserve Bank for the state member
bank.
(2) The foreign bank or its affiliate also
shall file a copy of the report with its ap
propriate federal banking agency.
(3) Any shares of the state member bank
held by the foreign bank or any affiliate of
the foreign bank as principal must be in
cluded in the calculation of the number of
shares in which the foreign bank or its af
filiate has a security interest for purposes of
paragraph (a) of this section.
Regulation Y
of the same insured depository institution,
including an acquisition of shares of the
same depository institution at approxi-,
mately the same time under substantially'
the same terms; or
(ii) have made, or propose to make, a
joint filing under section 13 or 14 of the
Securities Exchange Act of 1934 (15
USC 78m or 78n), and the rules promul
gated thereunder by the Securities and
Exchange Commission regarding owner
ship of the shares of the same insured
depository institution.
(c) Exceptions. Compliance with paragraph
(a) of this section is not required if—
(1) the person or group of persons referred
to in that paragraph has disclosed the
amount borrowed and the security interest
therein to the Board or appropriate Reserve
Bank in connection with a notice filed un
der section 225.41 of this subpart, or an
other application filed with the Board or
Reserve Bank as a substitute for a notice
under section 225.41 of this subpart, includ
ing an application filed under section 3 of
the BHC Act (12 USC 1842) or section
18(c) of the Federal Deposit Insurance Act
(Bank Merger Act, 12 USC 1828(c)), or an
application for membership in the Federal
Reserve System; or
(2) the transaction involves a person or'
group of persons that has been the owner or
owners of record of the stock for a period of
one year or more; or, if the transaction in
volves stock issued by a newly chartered
bank, before the bank is opened for business.
(b) Definitions. For purposes of paragraph (a)
of this section:
(1) Foreign bank shall have the same mean
(d) Report requirements.
ing as in section 1(b) of the International
(1) The consolidated report shall indicate
Banking Act of 1978 (12 USC 3101).
the number and percentage of shares secur
(2) Credit outstanding includes any loan or
ing each applicable extension of credit, the
extension of credit; the issuance of a guar
identity of the borrower, and the number of
antee, acceptance, or letter of credit, includ
shares held as principal by the foreign bank
ing an endorsement or standby letter of
and any affiliate thereof.
credit; and any other type of transaction
(2) A foreign bank, or any affiliate of a
that extends credit or financing to the per
foreign bank, shall file the consolidated re
son or group of persons.
port in writing within 30 days of the date
(3) Group o f persons includes any number
on which the foreign bank or affiliate first
of persons that the foreign bank or any affili
believes that the security for any outstand
ate of a foreign bank has reason to believe—
ing credit consists of 25 percent or more of
(i)
are acting together, in concert, or withany class of voting securities of a state
one another to acquire or control shares
member bank.
44
Regulation Y
(e) Other reporting requirements. A foreign
bank, or any affiliate thereof, that is supervised
b ^ h e System and is required to report credit
^ ^ m n d in g that is secured by the shares of an
irmired depository institution to another federal
banking agency also shall file a copy of the
report with the appropriate Reserve Bank.
SUBPART F— LIMITATIONS ON
NONBANK BANKS
SECTION 225.52— Limitation on
Overdrafts
(a) Definitions. For purposes of this section—
(1) “Account” means a reserve account,
clearing account, or deposit account as de
fined in the Board’s Regulation D (12 CFR
204.2(a)(l)(i)), that is maintained at a Fed
eral Reserve Bank or nonbank bank.
(2) “Cash item” means (i) a check other
than a check classified as a noncash item;
or (ii) any other item payable on demand
and collectible at par that the Federal Re
serve Bank of the District in which the item
is payable is willing to accept as a cash
item.
(3) “ Discount-window loan” means any
credit extended by a Federal Reserve Bank
a nonbank bank or industrial bank pursu1to the provisions of the Board’s Regula
tion A (12 CFR 201).
(4) “ Industrial bank” means an institution
as defined in section 2(c)(2)(H) of the BHC
Act (12 USC 1841(c)(2)(H)).
(5) “Noncash item” means an item handled
by a Reserve Bank as a noncash item under
the Reserve Bank’s “Collection of Noncash
Items Operating Circular” (e.g., a maturing
banker’s acceptance or a maturing security,
or a demand item, such as a check, with
special instructions or an item that has not
been preprinted or postencoded).
(6) “Other nonelectronic transactions” in
clude all other transactions not included as
funds transfers, book-entry securities trans
fers, cash items, noncash items, automated
clearinghouse transactions, net-settlement
entries, and discount-window loans (e.g.,
original issue of securities or redemption of
securities).
•
§ 225.52
(7) An “overdraft” in an account occurs
whenever the Federal Reserve Bank,
nonbank bank, or industrial bank holding an
account posts a transaction to the account
of the nonbank bank, industrial bank, or
affiliate that exceeds the aggregate balance
of the accounts of the nonbank bank, indus
trial bank, or affiliate, as determined by the
posting rules set forth in paragraphs (d) and
(e) of this section and continues until the
aggregate balance of the account is zero or
greater.
(8) “Transfer item” means an item as de
fined in subpart B of Regualtion J (12 CFR
210.25 et seq.).
(b) Restriction on overdrafts.
(1) Affiliates. Neither a nonbank bank nor
an industrial bank shall permit any affiliate
to incur any overdraft in its account with
the nonbank bank or industrial bank.
(2) Nonbank banks or industrial banks.
(i) No nonbank bank or industrial bank
shall incur any overdraft in its account at
a Federal Reserve Bank on behalf of an
affiliate.
(ii) An overdraft by a nonbank bank or
industrial bank in its account at a Federal
Reserve Bank shall be deemed to be on
behalf of an affiliate whenever—
(A) a nonbank bank or industrial bank
holds an account for an affiliate from
which third-party payments can be
made; and
(B) when the posting of an affiliate’s
transaction to the nonbank bank’s or
industrial bank’s account at a Reserve
Bank creates an overdraft in its ac
count at a Federal Reserve Bank or
increases the amount of an existing
overdraft in its account at a Federal
Reserve Bank.
(c) Permissible overdrafts. The following are
permissible overdrafts not subject to paragraph
(b):
(1) Inadvertent error. An overdraft in its
account by a nonbank bank or its affiliate,
or an industrial bank or its affiliate, that
results from an inadvertent computer error
or inadvertent accounting error, that was not
reasonably foreseeable or could not have
45
§ 225.52
been prevented through the maintenance of
procedures reasonably adopted by the
nonbank bank or affiliate to avoid such
overdraft; and
(2) Fully secured primary-dealer affiliate
overdrafts.
(i) An overdraft incurred by an affiliate of
a nonbank bank, which affiliate is recog
nized as a primary dealer by the Federal
Reserve Bank of New York, in the affili
ate’s account at the nonbank bank, or an
overdraft incurred by a nonbank bank on
behalf of its primary-dealer affiliate in the
nonbank bank’s account at a Federal Re
serve Bank; provided the overdraft is fully
secured by bonds, notes, or other obliga
tions which are direct obligations of the
United States or on which the principal
and interest are fully guaranteed by the
United States or by securities and obliga
tions eligible for settlement on the Federal
Reserve book-entry system.
(ii) An overdraft by a nonbank bank in its
account at a Federal Reserve Bank that is
on behalf of a primary-dealer affiliate is
fully secured when that portion of its
overdraft at the Federal Reserve Bank that
corresponds to the transaction posted for
an affiliate that caused or increased the
nonbank bank’s overdraft is fully secured
in accordance with paragraph (c)(2)(iii).
(iii) An overdraft is fully secured under
paragraph (c)(2)(i) when the nonbank
bank can demonstrate that the overdraft
is secured, at all times, by a perfected
security interest in specific, identified ob
ligations described in paragraph (c)(2)(i)
with a market value that, in the judgment
of the Reserve Bank holding the nonbank
bank’s account, is sufficiently in excess
of the amount of the overdraft to provide
a margin of protection in a volatile mar
ket or in the event the securities need to
be liquidated quickly.
(d) Posting by Federal Reserve Banks. For
purposes of determining the balance of an ac
count under this section, payments and trans
fers by nonbank banks and industrial banks
processed by the Federal Reserve Banks shall
be considered posted to their accounts at Fed
eral Reserve Banks as follows;
46
Regulation Y
(1) Funds transfers. Transfer items shall be
posted—
(i) to the transferor’s account at the
the transfer is actually made by
transferor’s Federal Reserve Bank; at
(ii) to the transferee’s account at the time
the transferee’s Reserve Bank sends the
transfer item or sends or telephones the
advice of credit for the item to the trans
feree, whichever occurs first.
(2) Book-entry securities transfers against
payment. A book-entry securities transfer
against payment shall be posted—
(i) to the transferor’s account at the time
the entry is made by the transferor’s Re
serve Bank; and
(ii) to the transferee’s account at the time
the entry is made by the transferee’s Re
serve Bank.
(3) Discount-window loans. Credit for a
discount-window loan shall be posted to the
account of a nonbank bank or industrial
bank at the close of business on the day
that it is made or such earlier time as may
be specifically agreed to by the Federal Re
serve Bank and the nonbank bank under the
terms of the loan. Debit for repayment of a
discount-window loan shall be posted to the
account of the nonbank bank or industrial
bank as of the close of business on the day
of maturity of the loan or such earlier timej
as may be agreed to by the Federal Reserve
Bank and the nonbank bank or required by
the Federal Reserve Bank under the terms
of the loan.
(4) Other transactions. Total aggregate
credits for automated clearinghouse trans
fers, cash items, noncash items, netsettlement entries, and other nonelectronic
transactions shall be posted to the account
of a nonbank bank or industrial bank as of
the opening of business on settlement day.
Total aggregate debits for these transactions
and entries shall be posted to the account of
a nonbank or industrial bank as of the close
of business on settlement day.
(e) Posting by nonbank banks and industrial
banks. For purposes of determining the bal
ance of an affiliate’s account under this sec
tion, payments and transfers through an affili
§ 225.61
Regulation Y
ate’s account at a nonbank bank or industrial
bank shall by posted as follows:
(1) Funds transfers.
(i) Fedw ire transfer items shall be
posted—
(A) to the transferor affiliate’s account
no later than the time the transfer is
actually made by the transferor’s Fed
eral Reserve Bank; and
(B) to the transferee affiliate’s account
no earlier than the time the transferee’s
Reserve Bank sends the transfer item,
or sends or telephones the advice of
credit for the item to the transferee,
whichever occurs first.
(ii) For funds transfers not sent or re
ceived through Federal Reserve Banks,
debits shall be posted to the transferor
affiliate’s account not later than the time
the nonbank bank or industrial bank be
comes obligated on the transfer. Credits
shall not be posted to the transferee af
filiate’s account before the nonbank bank
or industrial bank has received actually
and finally collected funds for the
transfer.
(2) Book-entry securities transfers against
payment.
(i) A book-entry securities transfer
against payment shall be posted—
(A) to the transferor affiliate’s account
not earlier than the time the entry is
made by the transferor’s Reserve Bank;
and
(B) to the transferee affiliate’s ac
count not later than the time the en
try is made by the transferee’s Re
serve Bank.
(ii) For book-entry securities transfers
against payment that are not sent or re
ceived through Federal Reserve Banks,
enteries shall be posted—
(A) to the buyer-afFiliate’s account not
later than the time the nonbank bank
or industrial bank becomes obligated
on the transfer; and
(B) to the seller-affiliate’s account not
before the nonbank bank or industrial
bank has received actually and finally
collected funds for the transfer.
(3) Other transactions.
(i) Credits. Except as otherwise pro
vided in this paragraph, credits for cash
items, noncash items, ACH transfers,
net-settlem ent entries, and all other
n on electro n ic tran sactio n s shall be
posted to an affiliate’s account on the
day of the transaction (i.e., settlement
day for ACH transactions or the day of
credit for check transactions), but no
earlier than the Federal Reserve Bank’s
opening of business on that day. Credit
for cash items that are required by fed
eral or state statute or regulation to be
made available to the depositor for
withdrawal prior to the posting time set
forth in the preceding paragraph shall
be posted as of the required availability
time.
(ii) D ebits. D ebits for cash item s,
noncash item s, ACH transfers, netsettlement entries, and all other non
electronic transactions shall be posted
to an affiliate’s account on the day of
the transaction (e.g., settlement day for
ACH transactions or the day of present
ment for check transactions), but no
later than the Federal Reserve Bank’s
close of business on that day. If a
check drawn on an affiliate’s account
or an ACH debit transfer received by
an affiliate is returned timely by the
nonbank bank or industrial bank in ac
cordance w ith ap p licab le law and
agreements, no entry need be posted to
the affiliate’s account for such item.
SUBPART G— APPRAISAL
STANDARDS FOR FEDERALLY
RELATED TRANSACTIONS
SECTION 225.61— Authority, Purpose,
and Scope
(a) Authority. This subpart is issued by the
Board of Governors of the Federal Reserve
System (the “Board” ) under title XI of the
Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) (Pub. L.
No. 101-73, 103 Stat. 183 (1989)), 12 USC
3310, 3331-3351, and section 5(b) of the Bank
Holding Company Act, 12 USC 1844(b).
(b) Purpose and scope.
47
§ 225.61
(1) Title XI provides protection for federal
financial and public-policy interests in real
estate-related transactions by requiring real
estate appraisals used in connection with
federally related transactions to be per
formed in writing, in accordance with uni
form standards, by appraisers whose compe
tency has been demonstrated and whose
professional conduct will be subject to effec
tive supervision. This subpart implements
the requirements of title XI, and applies to
all federally related transactions entered into
by the Board or by institutions regulated by
the Board (“regulated institutions” ).
(2) This subpart—
(i) identifies which real estate-related fi
nancial transactions require the services
of an appraiser;
(ii) prescribes which categories of feder
ally related transactions shall be ap
praised by a state-certified appraiser and
which by a state-licensed appraiser; and
(iii) prescribes minimum standards for
the performance of real estate appraisals
in connection with federally related trans
actions under the jurisdiction of the
Board.
SECTION 225.62— Definitions
(a) Appraisal means a written statement inde
pendently and impartially prepared by a quali
fied appraiser setting forth an opinion as to
the market value of an adequately described
property as of a specific date(s), supported by
the presentation and analysis of relevant mar
ket information.
(b) Appraisal Foundation means the Appraisal
Foundation established on November 30,
1987, as a not-for-profit corporation under the
laws of Illinois.
(c) Appraisal Subcommittee means the Ap
praisal Subcommittee of the Federal Financial
Institutions Examination Council.
(d) Business loan means a loan or extension
of credit to any corporation, general or limited
partnership, business trust, joint venture, pool,
syndicate, sole proprietorship, or other busi
ness entity.
48
Regulation Y
(e) Complex one- to four-family residential
property appraisal means one in which the
property to be appraised, the form of ownei^
ship, or market conditions are atypical.
fl
(f) Federally related transaction means any
real estate-related financial transaction en
tered into on or after August 9, 1990, that—
(1) the Board or any regulated institution
engages in or contracts for; and
(2) requires the services of an appraiser.
(g) Market value means the most probable
price which a property should bring in a com
petitive and open market under all conditions
requisite to a fair sale, the buyer and seller
each acting prudently and knowledgeably, and
assuming the price is not affected by undue
stimulus. Implicit in this definition is the con
summation of a sale as of a specified date and
the passing of title from seller to buyer under
conditions whereby—
(1) buyer and seller are typically motivated;
(2) both parties are well informed or well
advised, and acting in what they consider
their own best interests;
(3) a reasonable time is allowed for expo
sure in the open market;
(4) payment is made in terms of cash in
U.S. dollars or in terms of financial ar
rangements comparable thereto; and
(5) the price represents the normal consic^
eration for the property sold unaffected b j|
special or creative financing or sales con
cessions granted by anyone associated with
the sale.
(h) Real estate or real property means an
identified parcel or tract of land, with im
provements, and includes easements, rights-ofway, undivided or future interests, or similar
rights in a tract of land, but does not include
mineral rights, timber rights, growing crops,
water rights, or similar interests severable
from the land when the transaction does not
involve the associated parcel or tract of land.
(i) Real estate-related financial transaction
means any transaction involving—
(1) the sale, lease, purchase, investment in
or exchange of real property, including inter
ests in property, or the financing thereof; or
(2) the refinancing of real property or inter
ests in real property; or
Regulation Y
(3)
the use of real property or interests in
property as security for a loan or invest^ m e n t, including mortgage-backed securities.
State-certified appraiser means any indi
vidual who has satisfied the requirements for
certification in a state or territory whose crite
ria for certification as a real estate appraiser
currently meet or exceed the minimum criteria
for certification issued by the Appraiser Quali
fications Board of the Appraisal Foundation.
No individual shall be a state-certified ap
praiser unless such individual has achieved a
passing grade upon a suitable examination ad
ministered by a state or territory that is con
sistent with and equivalent to the Uniform
State Certification Examination issued or en
dorsed by the Appraiser Qualifications Board
of the Appraisal Foundation. In addition, the
Appraisal Subcommittee must not have issued
a finding that the policies, practices, or proce
dures of the state or territory are inconsistent
with title XI of FIRREA. The Board may,
from time to time, impose additional qualifi
cation criteria for certified appraisers perform
ing appraisals in connection with federally re
lated transactions within its jurisdiction.
(k) State-licensed appraiser means any indi
vidual who has satisfied the requirements for
licensing in a state or territory where the li^ ^ ■.'n s in g procedures comply with title XI of
^ T R R E A and where the Appraisal Subcommit
tee has not issued a finding that the policies,
practices, or procedures of the state or terri
tory are inconsistent with title XI. The Board
may, from time to time, impose additional
qualification criteria for licensed appraisers
performing appraisals in connection with fed
erally related transactions within the Board’s
jurisdiction.
(0 Tract development means a project of five
units or more that is constructed or is to be
constructed as a single development.
(m) Transaction value means—
(1) for loans or other extensions of credit,
the amount of the loan or extension of
credit;
(2) for sales, leases, purchases, and invest
ments in or exchanges of real property, the
market value of the real property interest
involved; and
§ 225.63
(3) for the pooling of loans or interests in
real property for resale or purchase, the
amount of the loan or the market value of
the real property calculated with respect to
each such loan or interest in real property.
SECTION 225.63— Appraisals Required;
Transactions Requiring a State-Certified
or -Licensed Appraiser
(a) Appraisals required. An appraisal per
formed by a state-certified or -licensed ap
praiser is required for any real estate-related
financial transaction except those in which-—
(1) the transaction value is $250,000 or
less;
(2) a lien on real estate has been taken as
collateral in an abundance of caution;
(3) the transaction is not secured by real
estate;
(4) a lien on real estate has been taken for
purposes other than the real estate’s value;
(5) the transaction is a business loan that—
(i) has a transaction value of $1 million
or less; and
(ii) is not dependent on the sale of, or
rental income derived from, real estate as
the primary source of repayment;
(6) a lease of real estate is entered into, un
less the lease is the economic equivalent of a
purchase or sale of the leased real estate;
(7) the transaction involves an existing ex
tension of credit at the lending institution,
provided that—
(i) there has been no obvious and mate
rial change in market conditions or physi
cal aspects of the property that threatens
the adequacy of the institution’s real es
tate collateral protection after the transac
tion, even with the advancement of new
monies; or
(ii) there is no advancement of new
monies, other than funds necessary to
cover reasonable closing costs;
(8) the transaction involves the purchase,
sale, investment in, exchange of, or exten
sion of credit secured by, a loan or interest
in a loan, pooled loans, or interests in real
property, including mortgaged-backed secu
rities, and each loan or interest in a loan,
pooled loan, or real property interest met
49
§ 225.63
Board regulatory requirements for appraisals
at the time of origination;
(9) the transaction is wholly or partially in
sured or guaranteed by a United States gov
ernm ent agency
or U nited
States
government-sponsored agency;
(10) the transaction either—
(i) qualifies for sale to a United States
government agency or United States
government-sponsored agency; or
(ii) involves a residential real estate
transaction in which the appraisal con
forms to the Federal National Mortgage
Association or Federal Home Loan Mort
gage Corporation appraisal standards ap
plicable to that category of real estate;
(11) the regulated institution is acting in a
fiduciary capacity and is not required to
obtain an appraisal under other law; or
(12) the Board determines that the services
of an appraiser are not necessary in order to
protect federal financial and public-policy
interests in real estate-related financial
transactions or to protect the safety and
soundness of the institution.
(b) Evaluations required. For a transaction that
does not require the services of a state-certified
or -licensed appraiser under paragraphs (a)(1),
(a)(5), or (a)(7) of this section, the institution
shall obtain an appropriate evaluation of real
property collateral that is consistent with safe
and sound banking practices.
(c) A ppraisals to address safety-andsoundness concerns. The Board reserves the
right to require an appraisal under this subpart
whenever the agency believes it is necessary
to address safety-and-soundness concerns.
(d) Transactions requiring a state-certified
appraiser.
(1) All transactions o f $1,000,000 or more.
All federally related transactions having a
transaction value of $1,000,000 or more
shall require an appraisal prepared by a
state-certified appraiser.
(2) Nonresidential transactions o f $250,000
or more. All federally related transactions
having a transaction value of $250,000 or
more, other than those involving appraisals
of one- to four-family residential properties,
50
Regulation Y
shall require an appraisal prepared by a
state-certified appraiser.
(3) Complex residential transactions <£
$250,000 or more. All complex one- ■
four-family residential property appraisals
rendered in connection with federally re
lated transactions shall require a statecertified appraiser if the transaction value is
$250,000 or more. A regulated institution
may presume that appraisals of one- to
four-family residential properties are not
complex, unless the institution has readily
available information that a given appraisal
will be complex. The regulated institution
shall be responsible for making the final
determination of whether the appraisal is
complex. If during the course of the ap
praisal a licensed appraiser identifies factors
that would result in the property, form of
ownership, or market conditions being con
sidered atypical, then either—
(i) the regulated institution may ask the
licensed appraiser to complete the ap
praisal and have a certified appraiser ap
prove and cosign the appraisal; or
(ii) the institution may engage a certified
appraiser to complete the appraisal.
(e) Transactions requiring either a statecertified or -licensed appraiser. All appraisals
for federally related transactions not requiring
the services of a state-certified appraiser shafl
be prepared by either a state-certified ap
praiser or a state-licensed appraiser.
SECTION 225.64— Minimum Appraisal
Standards
For federally related transactions, all apprais
als shall, at a minimum—
(a) conform to generally accepted appraisal
standards as evidenced by the Uniform Stan
dards of Professional Appraisal Practice pro
mulgated by the Appraisal Standards Board of
the Appraisal Foundation, 1029 Vermont Ave.,
N.W., Washington, D.C. 20005, unless prin
ciples of safe and sound banking require com
pliance with stricter standards;
(b) be written and contain sufficient informa
tion and analysis to support the institution’s
decision to engage in the transaction;
§ 225.71
Regulation Y
(c) analyze and report appropriate deductions
and discounts for proposed construction or
^ g n o v a t i o n , partially leased buildings,
^^K nm arket lease terms, and tract developments
with unsold units;
(d) be based upon the definition of market
value as set forth in this subpart; and
(e) be perform ed by state-licensed or
-certified appraisers in accordance with re
quirements set forth in this subpart.
SECTION 225.65— Appraiser
Independence
(a) Staff appraisers. If an appraisal is pre
pared by a staff appraiser, that appraiser must
be independent of the lending, investment, and
collection functions and not involved, except
as an appraiser, in the federally related trans
action, and have no direct or indirect interest,
financial or otherwise, in the property. If the
only qualified persons available to perform an
appraisal are involved in the lending, invest
ment, or collection functions of the regulated
institution, the regulated institution shall take
appropriate steps to ensure that the appraisers
exercise independent judgment and that the
appraisal is adequate. Such steps include, but
are not limited to, prohibiting an individual
lo m performing appraisals in connection with
Federally related transactions in which the ap
praiser is otherwise involved and prohibiting
directors and officers from participating in any
vote or approval involving assets on which
they performed an appraisal.
•
(b) Fee appraisers.
(1) If an appraisal is prepared by a fee
appraiser, the appraiser shall be engaged di
rectly by the regulated institution or its
agent, and have no direct or indirect inter
est, financial or otherwise, in the property
or transaction.
(2) A regulated institution also may accept
an appraisal that was prepared by an ap
praiser engaged directly by another
financial-services institution if—
(i) the appraiser has no direct or indirect
interest, financial or otherwise, in the
property or the transaction; and
(ii) the regulated institution determines
that the appraisal conforms to the re
quirements of this subpart and is other
wise acceptable.
SECTION 225.66— Professional
Association Membership; Competency
(a) Membership in appraisal organizations. A
state-certified appraiser or a state-licensed ap
praiser may not be excluded from consider
ation for an assignment for a federally related
transaction solely by virtue of membership or
lack of membership in any particular appraisal
organization.
(b) Competency. All staff and fee appraisers
performing appraisals in connection with feder
ally related transactions must be state-certified
or -licensed, as appropriate. However, a statecertified or -licensed appraiser may not be con
sidered competent solely by virtue of being
certified or licensed. Any determination of
competency shall be based upon the individu
al’s experience and educational background as
they relate to the particular appraisal assign
ment for which he or she is being considered.
SECTION 225.67— Enforcement
Institutions and institution-affiliated parties,
including staff appraisers and fee appraisers,
may be subject to removal and/or prohibi
tion orders, cease-and-desist orders, and the
imposition of civil money penalties pursuant
to the Federal Deposit Insurance Act, 12
USC 1811 et seq., as amended, or other
applicable law.
SUBPART H— NOTICE OF ADDITION
OR CHANGE OF DIRECTORS AND
SENIOR EXECUTIVE OFFICERS
SECTION 225.71— Definitions
(a) Director means a person who serves on
the board of directors of a regulated institu
tion, except that this term does not include an
advisory director who—
(1) is not elected by the shareholders of the
regulated institution;
(2) is not authorized to vote on any matters
51
§ 225.71
before the board of directors or any com
mittee thereof;
SECTION 225.72— Director and Officer
Appointments; Prior-Notice Requirement
(3) solely provides general policy advice to
the board of directors and any committee
thereof; and
(a) Prior notice by regulated institution. A
regulated institution shall give the Board
days’ written notice, as specified in section
225.73, before adding or replacing any mem
ber of its board of directors, employing any
person as a senior executive officer of the
institution, or changing the responsibilities of
any senior executive officer so that the person
would assume a different senior executive of
ficer position, if—
(1) the regulated institution is not in com
pliance with all minimum capital require
ments applicable to the institution as deter
mined on the basis of the institution’s most
recent report of condition or report of ex
amination or inspection;
(2) the regulated institution is in troubled
condition; or
(3) the Board determines, in connection
with its review of a capital-restoration plan
required under section 38 of the Federal
Deposit Insurance Act or subpart B of the
Board’s Regulation H, or otherwise, that
such notice is appropriate.
(4) has not been identified by the Board or
Reserve Bank as a person who performs the
functions of a director for purposes of this
subpart.
(b) Regulated institution means a state mem
ber bank or a bank holding company.
(c) Senior executive officer means a person
who holds the title or, without regard to title,
salary, or compensation, performs the function
of one or more of the following positions:
president, chief executive officer, chief operat
ing officer, chief financial officer, chief lend
ing officer, or chief investment officer. Senior
executive officer also includes any other per
son identified by the Board or Reserve Bank,
whether or not hired as an employee, with
significant influence over, or who participates
in, major policymaking decisions of the regu
lated institution.
(d) Troubled condition for a regulated institu
tion means an institution that—
(1) has a composite rating, as determined
in its most recent report of examination or
inspection, of 4 or 5 under the Uniform
Financial Institutions Rating System or un
der the Federal Reserve Bank Holding
Company Rating System;
(2) is subject to a cease-and-desist order
or form al w ritten agreem ent that re
quires action to im prove the financial
condition of the institution, unless oth
erwise inform ed in w riting by the Board
or Reserve Bank; or
(3) is informed in writing by the Board or
Reserve Bank that it is in troubled condi
tion for purposes of the requirements of this
subpart on the basis of the institution’s most
recent report of condition or report of ex
amination or inspection, or other informa
tion available to the Board or Reserve
Bank.
52
Regulation Y
(b) Prior notice by individual. The prior no
tice required by paragraph (a) of this section
may be provided by an individual seeking,
election to the board of directors of a regi*
lated institution.
SECTION 225.73— Procedures for
Filing, Processing, and Acting on
Notices; Standards for Disapproval;
Waiver of Notice
(a) Filing notice.
(1) Content. The notice required in section
225.72 shall be filed with the appropriate
Reserve Bank and shall contain—
(i) the information required by paragraph
6(A) of the Change in Bank Control Act
(12 USC 1817(j)(6)(A)) as may be pre
scribed in the designated Board form;
(ii) additional information consistent with
the Federal Financial Institutions Examina
tion Council’s joint statement of guidelines
on conducting background checks and
Regulation Y
•
change in control investigations, as set
forth in the designated Board form; and
(iii) such other inform ation as may be
required by the B oard or R eserve
Bank.
(2) Modification. The Reserve Bank may
modify or accept other information in place
of the requirements of section 225.73(a)(1)
for a notice filed under this subpart.
(3) Acceptance and processing o f notice.
The 30-day notice period specified in sec
tion 225.72 shall begin on the date all in
formation required to be submitted by the
notificant pursuant to section 225.73(a)(1) is
received by the appropriate Reserve Bank.
The Reserve Bank shall notify the regulated
institution or individual submitting the no
tice of the date on which all required infor
mation is received and the notice is ac
cepted for processing, and of the date on
which the 30-day notice period will expire.
The Board or Reserve Bank may extend the
30-day notice period for an additional pe
riod of not more than 60 days by notifying
the regulated institution or individual filing
the notice that the period has been extended
and stating the reason for not processing the
notice within the 30-day notice period.
(b) Commencement o f service.
(1) A t expiration o f period. A proposed di
rector or senior executive officer may begin
service after the end of the 30-day period
and any extension as provided under para
graph (a)(3) of this section, unless the
Board or Reserve Bank disapproves the no
tice before the end of the period.
(2) Prior to expiration o f period. A pro
posed director or senior executive officer
may begin service before the end of the
30-day period and any extension as pro
vided under paragraph (a)(3) of this section,
if the Board or the Reserve Bank notifies in
writing the regulated institution or indi
vidual submitting the notice of the Board’s
or Reserve Bank’s intention not to disap
prove the notice.
•
(c) Notice o f disapproval. The Board or Re
serve Bank shall disapprove a notice under
section 225.72 if the Board or Reserve Bank
finds that the competence, experience, charac
§ 225.73
ter, or integrity of the individual with respect
to whom the notice is submitted indicates that
it would not be in the best interests of the
depositors of the regulated institution or in the
best interests of the public to permit the indi
vidual to be employed by, or associated with,
the regulated institution. The notice of disap
proval shall contain a statement of the basis
for disapproval and shall be sent to the regu
lated institution and the disapproved
individual.
(d) Appeal o f a notice o f disapproval.
(1) A disapproved individual or a regulated
institution that has submitted a notice that is
disapproved under this section may appeal
the disapproval to the Board within 15 days
of the effective date of the notice of disap
proval. An appeal shall be in writing and
explain the reasons for the appeal and in
clude all facts, documents, and arguments
that the appealing party wishes to be con
sidered in the appeal, and state whether the
appealing party is requesting an informal
hearing.
(2) Written notice of the final decision of
the Board shall be sent to the appealing
party within 60 days of the receipt of an
appeal, unless the appealing party’s request
for an informal hearing is granted.
(3) The disapproved individual may not
serve as a director or senior executive of
ficer of the state member bank or bank hold
ing company while the appeal is pending.
(e) Informal hearing.
(1) An individual or regulated institution
whose notice under this section has been
disapproved may request an informal hear
ing on the notice. A request for an informal
hearing shall be in writing and shall be
submitted within 15 days of a notice of
disapproval. The Board may, in its sole dis
cretion, order an informal hearing if the
Board finds that oral argument is appropri
ate or necessary to resolve disputes regard
ing material issues of fact.
(2) An informal hearing shall be held within
30 days of a request, if granted, unless the
requesting party agrees to a later date.
(3) Written notice of the final decision of
the Board shall be given to the individual
53
§ 225.73
and the regulated institution within 60 days
of the conclusion of any informal hearing
ordered by the Board, unless the requesting
party agrees to a later date.
(f) Waiver o f notice.
(1) Waiver requests. The Board or Reserve
Bank may permit an individual to serve as
a senior executive officer or director before
the notice required under this subpart is
provided, if the Board or Reserve Bank
finds that—
(i) delay would threaten the safety or
soundness of the regulated institution or a
bank controlled by a bank holding
company;
(ii) delay would not be in the public in
terest; or
(iii) other extraordinary circumstances
exist that justify waiver of prior notice.
(2) Automatic waiver. An individual may
serve as a director upon election to the
board of directors of a regulated institution
before the notice required under this subpart
is provided if the individual—
(i) is not proposed by the management of
the regulated institution;
(ii) is elected as a new member of the
board of directors at a meeting of the
regulated institution; and
(iii) provides to the appropriate Reserve
Bank all the information required in sec
tion 225.73(a) within two (2) business
days after the individual’s election.
(3) Effect on disapproval authority. A waiver
shall not affect the authority of the Board or
Reserve Bank to disapprove a notice within
30 days after a waiver is granted under para
graph (f)(1) of this section or the election of
an individual who has filed a notice and is
serving pursuant to an automatic waiver un
der paragraph (f)(2) of this section.
APPENDIX A— Capital Adequacy
Guidelines for Bank Holding Companies:
Risk-Based Measure
See the Board pamphlet “Capital Adequacy
Guidelines.”
54
Regulation Y
APPENDIX B— Capital Adequacy
Guidelines for Bank Holding Companies
and State Member Banks: Leverage
^
Measure
I
See the Board pamphlet “Capital Adequacy
Guidelines.”
APPENDIX C— Small Bank Holding
Company Policy Statement
In acting on applications filed under the
Bank Holding Company Act, the Board has
adopted, and continues to follow, the prin
ciple that bank holding companies should
serve as a source of strength for their sub
sidiary banks. When bank holding compa
nies incur debt and rely upon the earnings
of their subsidiary banks as the means of
repaying such debt, a question arises as to
the probable effect upon the financial condi
tion of the holding company and its subsid
iary bank or banks.
The Board believes that a high level of debt
at the parent holding company impairs the
ability of a bank holding company to provide
financial assistance to its subsidiary bank(s)
and, in some cases, the servicing requirements
on such debt may be a significant drain on the
resources of the bank(s). For these reason^
the Board has not favored the use of acquis™
tion debt in the formation of bank holding
companies or in the acquisition of additional
banks. Nevertheless, the Board has recognized
that the transfer of ownership of small banks
often requires the use of acquisition debt. The
Board, therefore, has permitted the formation
and expansion of small bank holding compa
nies with debt levels higher than would be
permitted for larger holding companies. Ap
proval of these applications has been given on
the condition that small bank holding compa
nies demonstrate the ability to service acquisi
tion debt without straining the capital of their
subsidiary banks and, further, that such com
panies restore their ability to serve as a source
of strength for their subsidiary banks within a
relatively short period of time.
In the interest of continuing its policy of
facilitating the transfer of ownership in banks
without compromising bank safety and sound-
Regulation Y
ness, the Board has, as described below,
adopted the following procedures and standards for the formation and expansion of
Imall bank holding companies subject to this
policy statement.
•
Applicability o f Policy Statement
This policy statement applies only to bank
holding companies with pro forma consoli
dated assets of less than $150 million that (1)
are not engaged in any nonbanking activities
involving significant leverage' and (2) do not
have a significant amount of outstanding debt
that is held by the general public.
While this policy statement primarily ap
plies to the formation of small bank holding
companies, it also applies to existing small
bank holding companies that wish to acquire
an additional bank or company and to transac
tions involving changes in control, stock re
demptions, or other shareholder transactions.2
§ 225.73
bank holding company must also comply with
debt servicing and other requirements imposed
by its creditors.
Capital adequacy. Each insured depository
subsidiary of a small bank holding company is
expected to be well capitalized. Any institu
tion that is not well capitalized is expected to
become well capitalized within a brief period
of time.
Dividend restrictions. A small bank holding
company whose debt-to-equity ratio is greater
than 1.0:1 is not expected to pay corporate
dividends until such time as it reduces its
debt-to-equity ratio to 1.0:1 or less and other
wise meets the criteria set forth in sections
225.14(c)(l)(ii), 225.14(c)(2), and 225.14(c)(7)
of Regulation Y.4
Small bank holding companies formed be
fore the effective date of this policy statement
may switch to a plan that adheres to the intent
of this statement provided they comply with
the requirements set forth above.
Ongoing Requirements
The following guidelines must be followed on
an ongoing basis for all organizations operat
ing under this policy statement.
«
Core Requirements for All Applicants
In assessing applications or notices by orga
nizations subject to this policy statement,
Reduction in parent-company leverage. Small
the Board will continue to take into account
bank holding companies are to reduce their
a full range of financial and other informa
arent-company debt consistent with the retion about the applicant, and its current and
uirement that all debt be retired within 25
proposed subsidiaries, including the recent
years of being incurred. The Board also ex
trend and stability of earnings, past and pro
pects that these bank holding companies reach
spective growth, asset quality, the ability to
a debt-to-equity ratio of .30:1 or less within
12 years of the incurrence of the debt.3 The holding company. Nevertheless, to a limited degree and
1 A parent com pany that is engaged in significant offbalance-sheet activities w ould generally be deem ed to be
engaged in activities that involve significant leverage.
2 T he appropriate Reserve Bank should be contacted to
determ ine the m anner in which a specific situation may
qualify for treatm ent under this policy statement.
3 T he term “ debt,” as used in the ratio o f debt to equity,
means any borrow ed funds (exclusive o f short-term borrow
ings that arise out o f current transactions, the proceeds o f
w hich are used for current transactions), and any securities
issued by, or obligations of, the holding com pany that are
the functional equivalent o f borrow ed funds.
T he term “ equity,” as used in the ratio o f debt to equity,
means the total stockholders’ equity o f the bank holding
com pany as defined in accordance with generally accepted
accounting principles. In determ ining the total am ount o f
stockholders’ equity, the bank holding com pany should ac
count for its investm ents in the com m on stock o f subsidiar
ies by the equity method o f accounting.
O rdinarily the Board does not view redeem able preferred
stock as a substitute for com m on stock in a small bank
under certain circum stances, the Board will consider re
deem able preferred stock as equity in the capital accounts
o f the holding com pany if the follow ing conditions are met:
(1) the preferred stock is redeem able only at the option of
the issuer and (2) the debt-to-equity ratio o f the holding
com pany w ould be at or rem ain below .30:1 following the
redemption or retirem ent o f any preferred stock. Preferred
stock that is convertible into com m on stock o f the holding
com pany may be treated as equity.
4 Dividends may be paid by small bank holding com pa
nies with debt to equity at o r below 1.0:1 and otherw ise
m eeting the req u irem en ts o f section s 2 2 5 .1 4(c)( 1)(ii),
225.14(c)(2), and 225.14(c)(7) if the dividends are reason
able in am ount, do not adversely affect the ability o f the
bank holding com pany to service its debt in an orderly
manner, and do not adversely affect the ability o f the sub
sidiary banks to be w ell capitalized. It is expected that
dividends will be elim inated if the holding com pany is (1)
not reducing its debt consistent with the requirem ent that
the debt-to-equity ratio be reduced to .30:1 w ithin 12 years
o f consum m ation o f the proposal or (2) not m eeting the
requirem ents o f its loan agreement(s).
55
§ 225.73
meet debt-servicing requirem ents without
placing an undue strain on the resources of
the bank(s), and the record and competency
of management. In addition, the Board will
require applicants to meet the following
requirements:
Minimum downpayment. The amount of ac
quisition debt should not exceed 75 percent
of the purchase price of the bank(s) or
company to be acquired. When the own
e rs ) of the holding company incurs debt to
finance the purchase of the bank(s) or
company, such debt will be considered ac
quisition debt even through it does not rep
resent an obligation of the bank holding
company, unless the owner(s) can demon
strate that such debt can be serviced with
out reliance on the resources of the bank(s)
or bank holding company.
• Ability to reduce parent-company leverage.
The bank holding company must clearly be
able to reduce its debt-to-equity ratio and
comply with its loan agreement(s) as set
forth in paragraph 2A above.
Regulation Y
core requirements for all applicants noted
above, and the following requirements are met:
•
•
•
Failure to meet the criteria in this section
would norm ally result in denial of an
application.
Additional Application Requirements for
Expedited/Waived Processing
Expedited notices under sections 225.14 and
225.23 o f Regulation Y. A small bank holding
company proposal will be eligible for the expe
dited processing procedures set forth in sec
tions 225.14 and 225.23 of Regulation Y if the
bank holding company is in compliance with
the ongoing requirements of this policy state
ment, the bank holding company meets the
56
The parent bank holding company has
pro forma debt-to-equity ratio of 1.0:1 o l ^ ^
less.
The bank holding company meets all of
the criteria for expedited action set forth in
sections 225.14 or 225.23 of Regulation Y.
Waiver o f stock-redemption filing. A small
bank holding company will be eligible for the
stock-redemption filing exception for wellcapitalized bank holding companies contained
in section 225.4(b)(6) if the following require
ments are met:
•
•
The parent bank holding company has a
pro forma debt-to-equity ratio of 1.0:1 or
less.
The bank holding company is in compli
ance with the ongoing requirements of this
policy statement and meets the require
ments of sections 2 2 5 .1 4 (c)(l)(ii),
225.14(c)(2), and 225.14(c)(7) of Regula
tion Y.
APPENDIX D— Capital Adequacy
Guidelines for Bank Holding Companies:
Tier 1 Leverage Measure
See the Board pamphlet “Capital Adequacy
Guidelines.”
APPENDIX E— Capital Adequacy
Guidelines for Bank Holding Companies:
Market-Risk Measure
See the Board pamphlet “Capital Adequacy
Guidelines.”
Bank Holding Company Act of 1956
12 USC 1841 et seq.; 70 Stat. 133, Pub. L. 84-511 (May 9, 1956)
Section
2 Definitions
3 Acquisition of bank shares or assets
4 Interests in nonbanking organizations
5 Administration
6 [Repealed]
7 Reservation of rights to States
8 Penalties
9 Judicial review
10 Tax provisions
11 Saving provision
12 Separability of provisions
To define bank holding companies, control
their future expansion, and require divestment
of their nonbanking interests.
Be it enacted by the Senate and House o f
R epresentatives o f the United States o f
America in Congress assembled, That this Act
may be cited as the “Bank Holding Company
Act of 1956.”
>i<
:j«
sj«
2— Definitions (12 USC
ISECTION
1841)
(a) (1) Except as provided in paragraph (5) of
this subsection, “ bank holding company”
means any company which has control over
any bank or over any company that is or
becomes a bank holding company by virtue
of this Act.
(2) Any company has control over a bank
or over any company if—
(A) the company directly or indirectly or
acting through one or more other persons
owns, controls, or has power to vote 25
per centum or more of any class of vot
ing securities of the bank or company;
(B) the company controls in any manner
the election of a majority of the directors
or trustees of the bank or company; or
(C) the Board determines, after notice
and opportunity for hearing, that the
company directly or indirectly exercises a
controlling influence over the manage
ment or policies of the bank or company.
(3) For the purposes of any proceeding un
der paragraph (2)(C) of this subsection,
there is a presumption that any company
which directly or indirectly owns, controls,
or has power to vote less than 5 per centum
of any class of voting securities of a given
bank or company does not have control
over that bank or company.
(4) In any administrative or judicial pro
ceeding under this Act, other than a pro
ceeding under paragraph (2)(C) of this sub
section, a company may not be held to have
had control over any given bank or com
pany at any given time unless that com
pany, at the time in question, directly or
indirectly owned, controlled, or had power
to vote 5 per centum or more of any class
of voting securities of the bank or company,
or had already been found to have control
in a proceeding under paragraph (2)(C).
(5) Notwithstanding any other provision of
this subsection.
(A) No bank and no company owning or
controlling voting shares of a bank is a
bank holding company by virtue of its
ownership or control of shares in a fidu
ciary capacity, except as provided in
paragraphs (2) and (3) of subsection (g)
of this section. For the purpose of the
preceding sentence, bank shares shall not
be deemed to have been acquired in a
fiduciary capacity if the acquiring bank
or company has sole discretionary author
ity to exercise voting rights with respect
thereto; except that this limitation is ap
plicable in the case of a bank or com
pany acquiring such shares prior to the
date of enactment of the Bank Holding
Company Act Amendments of 1970 only
if the bank or company has the right
consistent with its obligations under the
instrument, agreement, or other arrange
ment establishing the fiduciary rela
tionship to divest itself of such voting
rights and fails to exercise that right to
divest within a reasonable period not to
57
Bank Holding Company Act
exceed one year after the date of enact
ment of the Bank Holding Company Act
Amendments of 1970.
(B) No company is a bank holding com
pany by virtue of its ownership or control
of shares acquired by it in connection
with its underwriting of securities if such
shares are held only for such period of
time as will permit the sale thereof on a
reasonable basis.
(C) No company formed for the sole
purpose of participating in a proxy solici
tation is a bank holding company by vir
tue of its control of voting rights of
shares acquired in the course of such
solicitation.
(D) No company is a bank holding com
pany by virtue of its ownership or control
of shares acquired in securing or collect
ing a debt previously contracted in good
faith, until two years after the date of
acquisition. The Board is authorized upon
application by a company to extend, from
time to time for not more than one year
at a time, the two-year period referred to
herein for disposing of any shares ac
quired by a company in the regular
course of securing or collecting a debt
previously contracted in good faith, if, in
the Board’s judgment, such an extension
would not be detrimental to the public
interest, but no such extension shall in
the aggregate exceed three years.
(E) No company is a bank holding com
pany by virtue of its ownership or control
of any State-chartered bank or trust com
pany which—
(i) is wholly owned by thrift institu
tions or savings banks; and
(ii) is restricted to accepting—
(I) deposits from thrift institutions
or savings banks;
(II) deposits arising out of the cor
porate business of the thrift institu
tions or savings banks that own the
bank or trust company; or
(III) deposits of public moneys.
(F) No trust company or mutual savings
bank which is an insured bank under the
Federal Deposit Insurance Act is a bank
holding company by virtue of its direct
or indirect ownership or control of one
bank located in the same State, if (i) such
ownership or control existed on the date
of enactment of the Bank Holding Com
pany Act Amendments of 1970 and ■
specifically authorized by applicable State
law, and (ii) the trust company or mutual
savings bank does not after that date ac
quire an interest in any company that,
together with any other interest it holds
in that company, will exceed 5 per
centum of any class of the voting shares
of that company, except that this limita
tion shall not be applicable to invest
ments of the trust company or mutual
savings bank, direct and indirect, which
are otherwise in accordance with the
limitations applicable to national banks
under section 5136 of the Revised Stat
utes (12 U.S.C. 24).
(6) For the purposes of this Act, any suc
cessor to a bank holding company shall be
deemed to be a bank holding company from
the date on which the predecessor company
became a bank holding company.
(b) “Company” means any corporation, part
nership, business trust, association, or similar
organization, or any other trust unless by its
terms it must terminate within twenty-five
years or not later than twenty-one years and.
ten months after the death of individuals livfl
ing on the effective date of the trust, but shall
not include any corporation the majority of
the shares of which are owned by the United
States or by any State, and shall not include a
qualified family partnership. “Company cov
ered in 1970” means a company which be
comes a bank holding company as a result of
the enactment of the Bank Holding Company
Act Amendments of 1970 and which would
have been a bank holding company on June
30, 1968, if those amendments had been en
acted on that date.
(c) Bank defined* For purposes of this Act—
(1) Except as provided in paragraph (2),
the term “ bank” means any of the
following:
(A) An insured bank as defined in sec* See note at the end o f this section.
Bank Holding Company Act
•
•
tion 3(h) of the Federal Deposit Insur
ance Act.
(B) An institution organized under the
laws of the United States, any State of
the United States, the District of Colum
bia, any territory of the United States,
Puerto Rico, Guam, American Samoa, or
the Virgin Islands which both—
(i) accepts demand deposits or depos
its that the depositor may withdraw by
check or similar means for payment to
third parties or others; and
(ii) is engaged in the business of mak
ing commercial loans.
(2) The term “bank” does not include any
of the following:
(A) A foreign bank which would be a
bank within the meaning of paragraph (1)
solely because such bank has an insured
or uninsured branch in the United States.
(B) An insured institution (as defined in
subsection (j)).
(C) An organization that does not do
business in the United States except as an
incident to its activities outside the
United States.
(D) An institution that functions solely in
a trust or fiduciary capacity, if—
(i) all or substantially all of the depos
its of such institution are in trust funds
and are received in a bona fide fidu
ciary capacity;
(ii) no deposits of such institution
which are insured by the Federal De
posit Insurance Corporation are offered
or marketed by or through an affiliate
of such institution;
(iii) such institution does not accept
demand deposits or deposits that the
depositor may withdraw by check or
similar means for payment to third par
ties or others or make commercial
loans; and
(iv) such institution does not—
(I) obtain payment or payment re
lated services from any Federal Re
serve bank, including any service re
ferred to in section 11A of the
Federal Reserve Act; or
(II) exercise discount or borrowing
privileges pursuant to section
19(b)(7) of the Federal Reserve Act.
(E) A credit union (as described in sec
tion 19(b)(l)(A)(iv) of the Federal Re
serve Act).
(F) an institution, including an institution
that accepts collateral for extensions of
credit by holding deposits under
$100,000, and by other means which—
(i) engages only in credit card
operations;
(ii) does not accept demand deposits
or deposits that the depositor may
withdraw by check or similar means
for payment to third parties or others;
(iii) does not accept any savings or
time deposit of less than $100,000;
(iv) maintains only one office that ac
cepts deposits; and
(v) does not engage in the business of
making commerical loans.
(G) An organization operating under sec
tion 25 or section 25(a) of the Federal
Reserve Act.
(H) an industrial loan company, indus
trial bank, or other similar institution
which is—
(i) an institution organized under the
laws of a State which, on March 5,
1987, had in effect or had under con
sideration in such State’s legislature a
statute which required or would require
such institution to obtain insurance un
der the Federal Deposit Insurance
Act—
(I) which does not accept demand
deposits that the depositor may with
draw by check or similar means for
payment to third parties;
(II) which has total assets of less
than $100,000,000; or
(III) the control of which is not ac
quired by any company after the
date of the enactment of the Com
petitive Equality Amendments of
1987; or
(ii) an institution which does not, di
rectly, indirectly, or through an affili
ate, engage in any activity in which it
was not lawfully engaged as of March
5, 1987,
except that this subparagraph shall cease
to apply to any institution which permits
any overdraft (including any intraday
59
Bank Holding Company Act
overdraft), or which incurs any such
overdraft in such institution’s account at
a Federal Reserve bank, on behalf of an
affiliate if such overdraft is not the result
of an inadvertent computer or accounting
error that is beyond the control of both
the institution and the affiliate.
(I) The Investors Fiduciary Trust Com
pany, located in Kansas City, Missouri,
so long as such institution—
(i) engages only in trust, fiduciary, and
agency activities in which it was law
fully engaged on March 5, 1987;
(ii) engages in such activities only at
the same number of locations at which
such activities were conducted on such
date;
(iii) does not accept demand deposits
other than demand deposits which are
maintained by such institution in—
(I) a trust or fiduciary capacity;
(II) the institution’s capacity as a
custodian or as a paying, transfer,
shareholder servicing, securities
clearing, escrow, or dividend dis
bursing agent; or
(III) any capacity which is inciden
tal to the trust or fiduciary activities
of the institution;
(iv) does not engage in the business of
making commercial loans;
(v) does not exercise discount or bor
rowing privileges pursuant to section
19(b)(7) of the Federal Reserve Act;
and
(vi) is not directly or indirectly con
trolled by any company other than a
company which directly or indirectly
controlled such institution on March 5,
1987.
(J) A savings bank (as defined in section
3(g) of the Federal Deposit Insurance
Act) which—
(i) is an insured bank (as defined in
section 3(h) of such Act);
(ii) is a subsidiary of the Great West
ern Financial Corporation as a result of
an approval in writing by the State
bank supervisor of the State of New
York before June 30, 1987;
(iii) meets or exceeds the investment
requirements which an insured institu
tion must meet in order to be a quali
fied thrift lender under section 408(o)
of the National Housing Act; and
(iv) does not, directly, or through ivM
surance products such savings bank r ^
ceives from or provides to the Great
Western Financial Corporation, engage
in the sale or underw riting of
insurance,
except that this subparagraph shall cease
to apply with respect to such savings
bank or any successor institution if any
deposits of any other subsidiary or affili
ate of the Great Western Financial Corpo
ration which are subject to an assessment
of an insurance premium under subsec
tion (b) or (c) of section 404 of the Na
tional Housing Act are, directly or indi
rectly by any device whatsoever,
transferred to or acquired by such savings
bank or any successor institution which
would have the effect of materially re
ducing such premium assessments. The
exemption provided by this subparagraph
shall cease to apply if Great Western Fi
nancial Corporation uses such savings
bank or any successor institution as a
vehicle to move such Corporation from
Federal Savings and Loan Insurance Cor
poration insurance to Federal Deposit In
surance Corporation insurance.
(3) The term “District bank” means
bank operating under the Code of Law
the District of Columbia.
(d) “Subsidiary”, with respect to a specified
bank holding company, means (1) any com
pany 25 per centum or more of whose voting
shares (excluding shares owned by the United
States or by any company wholly owned by
the United States) is directly or indirectly
owned or controlled by such bank holding
company, or is held by it with power to vote;
(2) any company the election of a majority of
whose directors is controlled in any manner
by such bank holding company; or (3) any
company with respect to the management or
policies of which such bank holding company
has the power, directly or indirectly, to exer
cise a controlling influence, as determined by
the Board, after notice and opportunity for
hearing.
Bank Holding Company Act
(e) The term "successor” shall include any
company which acquires directly or indirectly
from a bank holding company shares of any
^ ^ n n k , when and if the relationship between
^ ^ u c h company and the bank holding company
is such that the transaction effects no substan
tial change in the control of the bank or ben
eficial ownership of such shares of such bank.
The Board may, by regulation, further define
the term “successor” to the extent necessary
to prevent evasion of the purposes of this Act.
(f) “Board” means the Board of Governors of
the Federal Reserve System.
(g) For the purposes of this Act—
(1) shares owned or controlled by any sub
sidiary of a bank holding company shall be
deemed to be indirectly owned or controlled
by such bank holding company; and
(2) shares held or controlled directly or in
directly by trustees for the benefit of (A) a
company, (B) the shareholders or members
of a company, or (C) the em ployees
(whether exclusively or not) of a company,
shall be deemed to be controlled by such
company.
(h)(1) Except as provided by paragraph (2),
the application of this Act and of section
23A of the Federal Reserve Act (12 U.S.C.
371), as amended, shall not be affected by
the fact that a transaction takes place
wholly or partly outside the United States
or that a company is organized or operates
outside the United States.
(2) Except as provided in paragraph (3),
the prohibitions of section 4 of this Act
shall not apply to shares of any company
organized under the laws of a foreign coun
try (or to shares held by such company in
any company engaged in the same general
line of business as the investor company or
in a business related to the business of the
investor company) that is principally en
gaged in business outside the United States
if such shares are held or acquired by a
bank holding company organized under the
laws of a foreign country that is principally
engaged in the banking business outside the
United States. For the purpose of this sub
section, the term “ section 2(h)(2) company”
•
means any company whose shares are held
pursuant to this paragraph.
(3) Nothing in paragraph (2) authorizes a
section 2(h)(2) company to engage in (or
acquire or hold more than 5 percent of the
outstanding shares of any class of voting
securities of a company engaged in) any
banking, securities, insurance, or other fi
nancial activities, as defined by the Board,
in the United States. This paragraph does
not prohibit a section 2(h)(2) company from
holding shares that were lawfully acquired
before the date of enactment of the Com
petitive Equality Banking Act of 1987.
(4) No domestic office or subsidiary of a
bank holding company or subsidiary thereof
holding shares of a section 2(h)(2) company
may extend credit to a domestic office or
subsidiary of such section 2(h)(2) company
on terms more favorable than those af
forded similar borrowers in the United
States.
(5) No domestic banking office or bank
subsidiary of a bank holding company that
controls a section 2(h)(2) company may of
fer or market products or services of such
section 2(h)(2) company, or permit its prod
ucts or services to be offered or marketed
by or through such section 2(h)(2) com
pany, unless such products or services were
being so offered or marketed as of March
5, 1987, and then only in the same manner
in which they were being offered or mar
keted as of that date.
(i) For purposes of this Act, the term “thrift
institution” means—
(1) any domestic building and loan or sav
ings and loan association;
(2) any cooperative bank without capital
stock organized and operated for mutual
purposes and without profit;
(3) any Federal savings bank; and
(4) any State-chartered savings bank the
holding company of which is registered
pursuant to section 408 of the National
Housing Act.
(j) The term “savings association” or “in
sured institution” means—
(1) any Federal savings association or Fed
eral savings bank;
(2) any building and loan association, sav
61
Bank Holding Company Act
ings and loan association, homestead asso
ciation, or cooperative bank if such associa
tion or cooperative bank is a member of the
Deposit Insurance Fund; and
(3) any savings bank or cooperative bank
which is deemed by the Director of the
Office of Thrift Supervision to be a savings
association under section 10(0 of the Home
Owners’ Loan Act.
(k) For purposes of this Act, the term "affili
a te” means any company that controls, is con
trolled by, or is under common control with
another company.
(/) For purposes of this Act, the term "sav
ings bank holding company” means any com
pany which controls one or more qualified
savings banks if the aggregate total assets of
such savings banks constitute, upon formation
of the holding company and at all times there
after, at least 70 percent of the total assets of
such company.
(m) For purposes of this Act, the term "quali
fied savings bank”—
(1) means any savings bank (as defined in
section 3(g) of the Federal Deposit Insur
ance Act) which was organized on or before
March 5, 1987; and
(2) includes any cooperative bank that is an
insured bank (as defined in section 3(h) of
the Federal Deposit Insurance Act) and any
interim savings bank that is established to
facilitate a corporate reorganization, or the
formation of a holding company, involving
a savings bank described in paragraph (1).
(n) Incorporated definitions. For purposes of
this Act, the terms “insured depository institu
tion” , “ appropriate Federal banking agency” ,
“default” , “in danger of default” , and “State
bank supervisor” have the same meanings as
in section 3 of the Federal Deposit Insurance
Act.
(o) For purposes of this Act, the following
definitions shall apply;
(1) (A) With respect to insured depository
institutions, the terms “well capitalized” ,
“ adequately capitalized”, and “ under
c a p ita liz e d have the same meanings as
in section 38(b) of the Federal Deposit
Insurance Act.
62
(B) (i) With respect to a bank holding
company, the term “adequately capi
talized” means a level of capitalization
which meets or exceeds all applicable
Federal regulatory capital standards. ™
(ii) A bank holding company is “well
capitalized” if it meets the required
capital levels for well capitalized bank
holding companies established by the
Board.
(C) The terms “Tier 1” and “riskweighted assets” have the meanings
given those terms in the capital guide
lines or regulations established by the
Board for bank holding companies.
(2) Except as provided in section 11, the
term “antitrust laws”—
(A) has the same meaning as in subsec
tion (a) of the first section of the Clayton
Act; and
(B) includes section 5 of the Federal
Trade Commission Act to the extent that
such section 5 relates to unfair methods
of competition.
(3) The term “branch” means a domestic
branch (as defined in section 3 of the Fed
eral Deposit Insurance Act).
(4) The term “home State” means—
(A) with respect to a national bank, the
State in which the main office of the
bank is located;
^
(B) with respect to a State bank, tM
State by which the bank is chartered; ana
(C) with respect to a bank holding com
pany, the State in which the total deposits
of all banking subsidiaries of such com
pany are the largest on the later of—
(i) July 1, 1966; or
(ii) the date on which the company be
comes a bank holding company under
this Act.
(5) The term “host State” means—
(A) with respect to a bank, a State, other
than the home State of the bank, in
which the bank maintains, or seeks to
establish and maintain, a branch; and
(B) with respect to a bank holding com
pany, a State, other than the home State
of the company, in which the company
controls, or seeks to control, a bank
subsidiary.
(6) The term “out-of-State bank” means,
Bank Holding Company Act
•
with respect to any State, a bank whose
home State is another State.
(7) The term “out-of-State bank holding
company” means, with respect to any State,
a bank holding company whose home State
is another State.
(8) (A) The term “lead insured depository
institution” means the largest insured de
pository institution controlled by the sub
ject bank holding company at any time,
based on a comparison of the average
total risk-weighted assets controlled by
each insured depository institution during
the previous 12-month period.
(B) For purposes of this paragraph and
section 4(j)(4), the term ‘'insured deposi
tory institution” includes any branch or
agency operated in the United States by a
foreign bank.
(9) The term “well managed” means—
(A) in the case of any company or de
pository institution which receives exami
nations, the achievement of—
(i) a CAMEL composite rating of 1 or
2 (or an equivalent rating under an
equivalent rating system) in connection
with the most recent examination or
subsequent review of such company or
institution; and
(ii) at least a satisfactory rating for
management, if such rating is given; or
(B) in the case of a company or deposi
tory institution that has not received an
examination rating, the existence and use
of managerial resources which the Board
determines are satisfactory.
(10) The term “ qualified fam ily partner
ship” means a general or limited partner
ship that the Board determines—
(A) does not directly control any bank,
except through a registered bank holding
company;
(B) does not control more than 1 regis
tered bank holding company;
(C) does not engage in any business ac
tivity, except indirectly through owner
ship of other business entities;
(D) has no investments other than those
permitted for a bank holding company
pursuant to section 4(c);
(E) is not obligated on any debt, either
directly or as a guarantor;
(F) has partners, all of whom are
either—
(i) individuals related to each other by
blood, marriage (including former mar
riage), or adoption; or
(ii) trusts for the primary benefit of
individuals related as described in
clause (i); and
(G) has filed with the Board a statement
that includes—
(i) the basis for the eligibility of the
partnership under subparagraph (F);
(ii) a list of the existing activities and
investments of the partnership;
(iii) a commitment to comply with this
paragraph;
(iv) a commitment to comply with
section 7 of the Federal Deposit Insur
ance Act with respect to any acquisi
tion of control of an insured depository
institution occurring after date of en
actment of this paragraph; and
(v) a commitment to be subject, to the
same extent as if the qualified family
partnership were a bank holding
company—
(I) to examination by the Board to
assure compliance with this para
graph; and
(II) to section 8 of the Federal De
posit Insurance Act.
[12 USC 1841. As am ended by acts o f July 1, 1966 (80
Stat. 236), Dec. 31, 1970 (84 Stat. 1760); Sept. 17, 1978
(92 Stat. 623); Oct. 15, 1982 (96 Stat. 1479, 1504, 1512);
Aug. 10, 1987 (101 Stat. 555, 557, 562, 584); Aug. 9, 1989
(103 Stat. 409); Sept. 29, 1994 (108 Stat. 2341); and Sept.
30, 1996 (110 Stat. 3009-406, 408, 425, 475, 495).] The
date o f enactm ent o f the Bank H olding Com pany Act
A m endm ents o f 1970 referred to in this section is Dec. 31,
1970.
Subsection (h) o f section 101 o f the Com petitive Equal
ity B anking A ct o f 1987 (101 Stat. 554), which am ended
this section, reads as follows:
(h) 1987 amendment transition rule.
(1) Delay in application o f amendment to certain in
stitutions. If—
(A ) on M arch 5, 1987, an institution was not a
bank (as defined in section 2(c) o f the Bank Hold
ing Com pany A ct o f 1956), as in effect on such
date; and
(B) any person which had a controlling interest in
such institution on M arch 5, 1987, m ade a public
announcem ent before such date that the transfer or
other disposition o f such person’s controlling inter
est in such institution was being considered,
the institution shall not become a bank (for purposes
o f the Bank Holding Com pany A ct o f 1956) due to the
am endm ent m ade to such section 2(c) by this section
63
Bank Holding Company Act
before the date on which such institution fails to meet
any requirem ent o f paragraph (2).
(2) Requirements fo r application o f subsection. This
subsection shall not apply with respect to any institu
tion described in paragraph (1) unless—
(A) the transfer or other disposition o f the control
ling interest referred to in such paragraph is co m
pleted, or an agreem ent to make such transfer or
other disposition is in effect (or is subject only to
final approval by the appropriate Federal and State
regulatory agencies), before the end o f the 180-day
period beginning on the date o f the enactm ent o f
this title;
(B) a w ritten notice by the person acquiring a con
trolling interest in such institution (pursuant to the
transfer or other disposition described in subpara
graph (A)) o f such perso n’s intention to operate
such institution as an institution described in section
2(c)(2)(F) o f the Bank H olding Com pany Act o f
1956, as in effect after the enactm ent o f this title is
filed with the Board before the end o f the 7-day
period beginning on the later o f the date o f such
transfer (or other disposition) or the date o f the
enactm ent o f this title; and
(C) the operation o f such institution as an institution
described in such section 2(c)(2)(F) begins before
the end o f the 180-day period beginning on the date
the transfer (or other disposition) described in subparagraph (A ) is com pleted.
(3) Controlling interest. For purposes o f this subsec
tion, a person has a controlling interest in any institu
tion if such person controls—
(A) such institution; or
(B) any com pany which controls such institution,
as determ ined in accordance with the provisions of
subsections (b) and (g) o f section 2 o f the Bank Hold
ing Com pany A ct o f 1956.]
SECTION 3— Acquisition of Bank
Shares or Assets (12 USC 1842)
(a) Prior approval o f Board as necessary; ex
ceptions; subsequent approval or disposition
upon disapproval. It shall be unlawful, except
with the prior approval of the Board,
(1) for any action to be taken that causes
any company to become a bank holding
company;
(2) for any action to be taken that causes a
bank to become a subsidiary of a bank
holding company;
(3) for any bank holding company to ac
quire direct or indirect ownership or control
of any voting shares of any bank if, after
such acquisition, such company will directly
or indirectly own or control more than 5
per centum of the voting shares of such
bank;
(4) for any bank holding company or sub
sidiary thereof, other than a bank, to ac64
quire all or substantially all of the assets of
a bank; or
(5) for any bank holding company to m erM
or consolidate with any other bank holding
company. Notwithstanding the foregoing
this prohibition shall not apply to
(A) shares acquired by a bank,
(i) in good faith in a fiduciary capac
ity, except where such shares are held
under a trust that constitutes a com
pany as defined in section 2(b) and
except as provided in paragraphs (2)
and (3) of section 2(g), or
(ii) in the regular course of securing or
collecting a debt previously contracted
in good faith, but any shares acquired
after the date of enactment of this Act
in securing or collecting any such pre
viously contracted debt shall be dis
posed of within a period of two years
from the date on which they were
acquired;
(B) additional shares acquired by a bank
holding company in a bank in which
such bank holding company owned or
controlled a majority of the voting shares
prior to such acquisition; or
(C) the acquisition, by a company, of
control of a bank in a reorganization in
which a person or group of persons exA
changes their shares of the bank fo™
shares of a newly formed bank holding
company and receives after the reorgani
zation substantially the same proportional
share interest in the holding company as
they held in the bank except for changes
in shareholders’ interests resulting from
the exercise of dissenting shareholders’
rights under State or Federal law if—
(i) im m ediately
follow ing
the
acquisition—
(I) the bank holding company meets
the capital and other financial stan
dards prescribed by the Board by
regulation for such a bank holding
company; and
(II) the bank is adequately capital
ized (as defined in section 38 of the
Federal Deposit Insurance Act);
(ii) the holding company does not en
gage in any activities other than those
Bank Holding Company Act
of managing and controlling banks as a
result of the reorganization;
(iii) the company provides 30 days
prior notice to the Board and the
Board does not object to such transac
tion during such 30-day period; and
(iv) the holding company will not ac
quire control of any additional bank as
a result of the reorganization.
The Board is authorized upon application by a
bank to extend, from time to time for not
more than one year at a time, the two-year
period referred to above for disposing of any
shares acquired by a bank in the regular
course of securing or collecting a debt previ
ously contracted in good faith, if, in the
Board’s judgment, such an extension would
not be detrimental to the public interest, but
no such extension shall in the aggregate ex
ceed three years. For the purpose of the pre
ceding sentence, bank shares acquired after
the date of enactment of the Bank Holding
Company Act Amendments of 1970 [Decem
ber 31, 1970] shall not be deemed to have
been acquired in good faith in a fiduciary
capacity if the acquiring bank or company has
sole discretionary authority to exercise voting
rights with respect thereto, but in such in
stances acquisitions may be made without
prior approval of the Board if the Board, upon
application filed within ninety days after the
lhares are acquired, approves retention or, if
retention is disapproved, the acquiring bank
disposes of the shares or its sole discretionary
voting rights within two years after issuance
of the order of disapproval.
•
(b) Notice and hearing requirements.
(1) Upon receiving from a company any
application for approval under this section,
the Board shall give notice to the Comptrol
ler of the Currency, if the applicant com
pany or any bank the voting shares or as
sets of which are sought to be required is a
national banking association or a District
bank, or to the appropriate supervisory au
thority of the interested State, if the appli
cant company or any bank the voting shares
or assets of which are sought to be acquired
is a State bank, in order to provide for the
submission of the views and recommenda
tions of the Comptroller of the Currency or
the State supervisory authority, as the case
may be. The views and recommendations
shall be submitted within thirty calendar
days of the date on which notice is given,
or within ten calendar days of such date if
the Board advises the Comptroller of the
Currency or the State supervisory authority
that an emergency exists requiring expedi
tious action. If the thirty-day notice period
applies and if the Comptroller of the Cur
rency or the State supervisory authority so
notified by the Board disapproves the appli
cation in writing within this period, the
Board shall forthwith give written notice of
that fact to the applicant. Within three days
after giving such notice to the applicant, the
Board shall notify in writing the applicant
and the disapproving authority of the date
for commencement of a hearing by it on
such application. Any such hearing shall be
commenced not less than ten nor more than
thirty days after the Board has given written
notice to the applicant of the action of the
disapproving authority. The length of any
such hearing shall be determined by the
Board, but it shall afford all interested par
ties a reasonable opportunity to testify at
such hearing. At the conclusion thereof, the
Board shall, by order, grant or deny the
application on the basis of the record made
at such hearing. In the event of the failure
of the Board to act on any application for
approval under this section within the
ninety-one-day period which begins on the
date of submission to the Board of the
complete record on that application, the ap
plication shall be deemed to have been
granted. Notwithstanding any other provi
sion of the subsection, if the Board finds
that it must act immediately on any applica
tion for approval under this section in order
to prevent the probable failure of a bank or
bank holding company involved in a pro
posed acquisition, merger, or consolidation
transaction, the Board may dispose with the
notice requirements of this subsection, and
if notice is given, the Board may request
that the views and recommendations of the
Comptroller of the Currency or the State
supervisory authority, as the case may be,
be submitted immediately in any form or by
any means acceptable to the Board. If the
65
Bank Holding Company Act
Board has found pursuant to this subsection
either that an emergency exists requiring
expeditious action or that it must act imme
diately to prevent probable failure, the
Board may grant or deny any such applica
tion without a hearing notwithstanding any
recommended disapproval by the appropri
ate supervisory authority.
(2) If the Board receives a certification de
scribed in section 13(f)(8)(D) of the Federal
Deposit Insurance Act from the appropriate
Federal or State chartering authority that a
bank is in danger of closing, the Board may
dispense with the notice and hearing re
quirements of paragraph (1) with respect to
any application received by the Board relat
ing to the acquisition of such bank, the
bank holding company which controls such
bank, or any other affiliated bank.
(c) Factors fo r consideration by Board.
(1) The Board shall not approve—
(A) any acquisition or merger or consoli
dation under this section which would re
sult in a monopoly, or which would be in
furtherance of any combination or con
spiracy to monopolize or to attempt to
monopolize the business of banking in
any part of the United States, or
(B) any other proposed acquisition or
merger or consolidation under this section
whose effect in any section of the coun
try may be substantially to lessen compe
tition, or to tend to create a monopoly, or
which in any other manner would be in
restraint of trade, unless it finds that the
anticompetitive effects of the proposed
transactions are clearly outweighed in the
public interest by the probable effect of
the transaction in meeting the conve
nience and needs of the community to be
served.
(2) In every case, the Board shall take into
consideration the financial and managerial
resources and future prospects of the com
pany or companies and the banks con
cerned, and the convenience and needs of
the community to be served.
(3) The Board shall disapprove any appli
cation under this section by any company
if—
(A) the company fails to provide the
Board with adequate assurances that the
company will make available to the
Board such information on the operations
or activities of the company, and any a f l
filiate of the company, as the Board d e ^
termines to be appropriate to determine
and enforce compliance with this Act; or
(B) in the case of an application involv
ing a foreign bank, the foreign bank is
not subject to comprehensive supervision
or regulation on a consolidated basis by
the appropriate authorities in the bank’s
home country.
(4) Notwithstanding any other provision of
law, the Board shall not follow any practice
or policy in the consideration of any appli
cation for the formation of a one-bank hold
ing company if following such practice or
policy would result in the rejection of such
application solely because the transaction to
form such one-bank holding company in
volves a bank stock loan which is for a
period of not more than twenty-five years.
The previous sentence shall not be con
strued to prohibit the Board from rejecting
any application solely because the other fi
nancial arrangements are considered unsatis
factory. The Board shall consider transac
tions involving bank stock loans for the
formation of a one-bank holding company
having a maturity of twelve years or m o r^
on a case by case basis and no such t r a n n
action shall be approved if the Board be
lieves the safety or soundness of the bank
may be jeopardized.
(5) Consideration of the managerial re
sources of a company or bank under para
graph (2) shall include consideration of the
competence, experience, and integrity of the
officers, directors, and principal sharehold
ers of the company or bank.
(d) Interstate banking.*
(1) (A) The Board may approve an applica
tion under this section by a bank holding
company that is adequately capitalized
and adequately managed to acquire con
trol of, or acquire all or substantially all
of the assets of, a bank located in a State
other than the home State of such bank
* A s am ended effective S eptem ber 23, 1995.
Bank Holding Company Act
holding company, w ithout regard to
whether such transaction is prohibited un
der the law of any State.
(B) (i) N otw ithstanding subparagraph
(A), the Board may not approve an
application pursuant to such subpara
graph that would have the effect of
permitting an out-of-State bank holding
company to acquire a bank in a host
State that has not been in existence for
the minimum period of time, if any,
specified in the statutory law of the
host State.
(ii) Notwithstanding clause (i), the
Board may approve, pursuant to subparagraph (A), the acquisition of a
bank that has been in existence for at
least 5 years without regard to any
longer minimum period of time speci
fied in a statutory law of the host
State.
(C) For purposes of this subsection, a
bank that has been chartered solely for
the purpose of, and does not open for
business prior to, acquiring control of, or
acquiring all or substantially all of the
assets of, an existing bank shall be
deemed to have been in existence for the
same period of time as the bank to be
acquired.
(D) No provision of this subsection shall
be construed as affecting the applicability
of a State law that makes an acquisition
of a bank contingent upon a requirement
to hold a portion of such bank’s assets
available for call by a State-sponsored
housing entity established pursuant to
State law, if—
(i) the State law does not have the ef
fect of discriminating against out-ofState banks, out-of-State bank holding
companies, or subsidiaries of such
banks or bank holding companies;
(ii) that State law was in effect as of
the date of enactment of the RiegleNeal Interstate Banking and Branching
Efficiency Act of 1994;
(iii) the Federal Deposit Insurance
Corporation has not determined that
compliance with such State law would
result in an unacceptable risk to the
appropriate deposit insurance fund; and
(iv) the appropriate Federal banking
agency for such bank has not found
that compliance with such State law
would place the bank in an unsafe or
unsound condition.
(2) (A) The Board may not approve an ap
plication pursuant to paragraph (1)(A) if
the applicant (including all insured de
pository institutions which are affiliates
of the applicant) controls, or upon con
summation of the acquisition for which
such application is filed would control,
more than 10 percent of the total amount
of deposits of insured depository institu
tions in the United States.
(B) The Board may not approve an ap
plication pursuant to paragraph (1)(A)
if—
(i) immediately before the consumma
tion of the acquisition for which such
application is filed, the applicant (in
cluding any insured depository institu
tion affiliate of the applicant) controls
any insured depository institution or
any branch of an insured depository
institution in the home State of any
bank to be acquired or in any host
State in which any such bank main
tains a branch; and
(ii) the applicant (including all insured
depository institutions which are affili
ates of the applicant), upon consumma
tion of the acquisition, would control
30 percent or more of the total amount
of deposits of insured depository insti
tutions in any such State.
(C) No provision of this subsection shall
be construed as affecting the authority of
any State to limit, by statute, regulation,
or order, the percentage of the total
amount of deposits of insured depository
institutions in the State which may be
held or controlled by any bank or bank
holding company (including all insured
depository institutions which are affiliates
of the bank or bank holding company) to
the extent the application of such limita
tion does not discriminate against out-ofState banks, out-of-State bank holding
companies, or subsidiaries of such banks
or holding companies.
(D) The Board may approve an applica
67
Bank Holding Company Act
tion pursuant to paragraph (1)(A) without
regard to the applicability of subpara
graph (B) with respect to any State if—
(i) there is a limitation described in
subparagraph (C) in a State statute,
regulation, or order which has the ef
fect of permitting a bank or bank hold
ing company (including all insured de
pository institutions which are affiliates
of the bank or bank holding company)
to control a greater percentage of total
deposits of all insured depository insti
tutions in the State than the percentage
permitted under subparagraph (B); or
(ii) the acquisition is approved by the
appropriate State bank supervisor of
such State and the standard on which
such approval is based does not have
the effect of discriminating against outof-State banks, out-of-State bank hold
ing companies, or subsidiaries of such
banks or holding companies.
(E) For purposes of this paragraph, the
term “deposit” has the same meaning as
in section 3(1) of the Federal Deposit
Insurance Act.
(3) In determining whether to approve an
application under paragraph (1)(A), the
Board shall—
(A) comply with the responsibilities of
the Board regarding such application un
der section 804 of the Community Rein
vestment Act of 1977; and
(B) take into account the applicant’s
record of compliance with applicable
State community reinvestment laws.
(4) No provision of this subsection shall be
construed as affecting—
(A) the applicability of the antitrust laws;
or
(B) the applicability, if any, of any State
law which is similar to the antitrust laws.
(5) The Board may approve an application
pursuant to paragraph (1)(A) which
involves—
(A) an acquisition of 1 or more banks in
default or in danger of default; or
(B) an acquisition with respect to which
assistance is provided under section 13(c)
of the Federal Deposit Insurance Act;
without regard to subparagraph (B) or (D)
of paragraph (1) or paragraph (2) or (3).
(e) Insured bank. Every bank that is a h o ld u p
company and every bank that is a s u b sid i^ i
of such a company shall become and remain
an insured depository institution as defined in
section 3 of the Federal Deposit Insurance
Act.
(0 Savings bank subsidiaries o f bank holding
companies.
(1) Notwithstanding any other provision of
this Act (other than paragraphs (2) and (3)),
any qualified savings bank which is a sub
sidiary of a bank holding company may
engage, directly or through a subsidiary, in
any activity in which such savings bank
may engage (as a State chartered savings
bank) pursuant to express, incidental, or im
plied powers under any statute or regula
tion, or under any judicial interpretation of
any law, of the State in which such savings
bank is located.
(2) Except as provided in paragraph (3),
any insurance activities of any qualified
savings bank which is a subsidiary of a
bank holding company shall be limited to
insurance activities allowed under section
4(c)(8).
(3) Any qualified savings bank permitted^
as of March 5, 1987, to engage in the s ^ fl
or underwriting of savings bank life in s u ^
ance may sell or underwrite such insurance
after such savings bank is a subsidiary of a
bank holding company if—
(A) the savings bank is located in the
State of Connecticut, Massachusetts, or
New York;
(B) such activity is expressly authorized
by the law of the State in which such
savings bank is located;
(C) the savings bank retains its character
as a savings bank;
(D) such activity is carried out by the
savings bank directly and not by—
(i) any subsidiary or affiliate of the
savings bank; or
(ii) the bank holding company which
controls such savings bank;
(E) such activity is carried out by the
savings bank in accordance with any resi
Bank Holding Company Act
•
•
dency or employment limitations set forth
SECTION 4— Interests in Nonbanking
in the savings bank life insurance statute Organizations (12 USC 1843)
in effect on March 5, 1987, in the State
(a) Ownership or control o f any company not
in which such bank is located; and
a bank; engagement in activities other than
(F) such activity is otherwise carried out banking. Except as otherwise provided in this
in the same manner as savings bank life Act, no bank holding company shall—
insurance activity is carried out in the
(1) after the date of enactment of this Act
State in which such bank is located by
acquire direct or indirect ownership or con
savings banks which are not subsidiaries
trol of any voting shares of any company
of any bank holding company registered
which is not a bank, or
under this Act.
(2) after two years from the date as of
(4) If any company which is not a savings
which it becomes a bank holding company,
bank or a savings bank holding company
or in the case of a company which has been
acquires control of a qualified savings bank,
continuously affiliated since May 15, 1955,
such savings bank shall cease to engage in
with a company which was registered under
any activity authorized under paragraph (1)
the Investment Company Act of 1940, prior
or (3) before the end of the 2-year period
to May 15, 1955, in such a manner as to
beginning on the date such company ac
constitute an affiliated company within the
quires control, unless such activity is other
meaning of that Act, after December 31,
wise authorized pursuant to this Act.
1978, or in the case of any company which
(5) For the sole purpose of determining
becomes, as a result of the enactment of the
whether a qualified savings bank may con
Bank Holding Company Act Amendments
tinue to sell and underwrite savings bank
of 1970, a bank holding company on the
life insurance in accordance with this sub
date of such enactment, after December 31,
section after control of such savings bank is
1980, retain direct or indirect ownership or
acquired by a bank holding company, the
control of any voting shares of any com
assets of any other bank affiliated with, or
pany which is not a bank or bank holding
under contract to affiliate with, such savings
company or engage in any activities other
bank as of March 5, 1987, shall be treated
than (A) those of banking or of managing
as assets of the savings bank in determining
or controlling banks and other subsidiaries
whether such bank holding company is a
authorized under this Act or of furnishing
savings bank holding company.
services to or performing services for its
(g) Mutual bank holding company.
(1) Notwithstanding any provision of Fed
eral law other than this Act, a savings bank
or cooperative bank operating in mutual
form may reorganize so as to form a hold
ing company.
(2) A corporation organized as a holding
company under this subsection shall be
regulated on the same terms and be subject
to the same limitations as any other holding
company which controls a savings bank.
[12 USC 1842. As am ended by acts o f July 1, 1966 (80
Stat. 237); Dec. 31, 1970 (84 Stat. 1763); Nov. 16, 1977
(91 Stat. 1389); M arch 31, 1980 (94 Stat. 190); Oct. 15,
1982 (96 Stat. 1479, 1488, 1512); Aug. 10, 1987 (101 Stat.
561, 579, 628, 635); Aug. 9, 1989 (103 Stat. 409); Dec. 19,
1991 (105 Stat. 2290, 2298); Sept. 23, 1994 (108 Stat.
2224, 2227); and Sept. 29, 1994 (108 Stat. 2339).]
subsidiaries, and (B) those permitted under
paragraph (8) of subsection (c) of this sec
tion subject to all the conditions specified
in such paragraph or in any order or regula
tion issued by the Board under such para
graph: Provided, That a company covered
in 1970 may also engage in those activities
in which directly or through a subsidiary (i)
it was lawfully engaged on June 30, 1968
(or on a date subsequent to June 30, 1968
in the case of activities carried on as the
result of the acquisition by such company
or subsidiary, pursuant to a binding written
contract entered into on or before June 30,
1968, of another company engaged in such
activities at the time of the acquisition), and
(ii) it has been continuously engaged since
June 30, 1968 (or such subsequent date).
The Board by order, after opportunity for
69
Bank Holding Company Act
hearing, may terminate the authority con
ferred by the preceding proviso on any
company to engage directly or through a
subsidiary in an activity otherwise permitted
by that proviso if it determines, having due
regard to the purposes of this Act, that such
action is necessary to prevent undue con
centration of resources, decreased or unfair
competition, conflicts of interest, or un
sound banking practices; and in the case of
any such company controlling a bank hav
ing bank assets in excess of $60,000,000 on
or after the date of enactment of the Bank
Holding Company Act Amendments of
1970 the Board shall determine, within two
years after such date (or, if later, within two
years after the date on which the bank as
sets first exceed $60,000,000), whether the
authority conferred by the preceding pro
viso with respect to such company should
be terminated as provided in this sentence.
Nothing in this paragraph shall be construed
to authorize any bank holding company re
ferred to in the preceding proviso, or any
subsidiary thereof, to engage in activities
authorized by that proviso through the ac
quisition, pursuant to a contract entered into
after June 30, 1968, of any interest in or
the assets of a going concern engaged in
such activities. Any company which is au
thorized to engage in any activity pursuant
to the preceding proviso or subsection (d)
of this section but, as a result of action of
the Board, is required to terminate such ac
tivity may (notwithstanding any otherwise
applicable time limit prescribed in this para
graph) retain the ownership or control of
shares in any company carrying on such
activity for a period of ten years from the
date on which its authority was so termi
nated by the Board.
The Board is authorized, upon application by
a bank holding company, to extend the twoyear period referred to in paragraph (2) above
from time to time as to such bank holding
company for not more than one year at a
time, if, in its judgment, such an extension
would not be detrimental to the public inter
est, but no such extensions shall in the aggre
gate exceed three years. Notwithstanding any
other provision of this Act, the period ending
December 31, 1980, referred to in paragraph
70
(2) above, may be extended by the Board of
Governors to December 31, 1984, but only for
the divestiture by a bank holding company of
real estate or interests in real estate law fi^B
acquired for investment or development.
making its decision whether to grant such ex
tension, the Board shall consider whether the
company has made a good faith effort to di
vest such interests and whether such extension
is necessary to avert substantial loss to the
company. Notwithstanding any other provision
of this paragraph, if any company that became
a bank holding company as a result of the
enactm ent of the Com petitive Equality
Amendments of 1987 acquired, between
March 5, 1987, and the date of the enactment
of such Amendments, an institution that be
came a bank as a result of the enactment of
such Amendments, that company shall, upon
the enactment of such Amendments, immedi
ately come into compliance with the require
ments of this Act.
(b) Statement purporting to represent shares
o f any company except a bank or bank hold
ing company. After two years from the date of
enactment of this Act, no certificate evidenc
ing shares of any bank holding company shall
bear any statement purporting to represent
shares of any other company except a bank or
a bank holding company, nor shall the owner
ship, sale, or transfer of shares of any b a t f
holding company be conditioned in any maWi
ner whatsoever upon the ownership, sale, or
transfer of shares of any other company ex
cept a bank or a bank holding company.
(c) Exemptions. The prohibitions in this sec
tion shall not apply to (i) any company that
was on January 4, 1977, both a bank holding
company and a labor, agricultural, or horticul
tural organization exempt from taxation under
section 501 of the Internal Revenue Code of
1954, or to any labor, agricultural, or horticul
tural organization to which all or substantially
all of the assets of such company are hereafter
transferred, or (ii) a company covered in 1970
more than 85 per centum of the voting stock
of which was collectively owned on June 30,
1968, and continuously thereafter, directly or
indirectly, by or for members of the same
family, or their spouses, who are lineal de
scendants of common ancestors; and such pro
Bank Holding Company Act
hibitions shall not, with respect to any other
bank holding company, apply to—
(1) shares of any company engaged or to
be engaged solely in one or more of the
following activities: (A) holding or operat
ing properties used wholly or substantially
by any banking subsidiary of such bank
holding company in the operations of such
banking subsidiary or acquired for such fu
ture use; or (B) conducting a safe deposit
business; or (C) furnishing services to or
performing services for such bank holding
company or its banking subsidiaries; or (D)
liquidating assets acquired from such bank
holding company or its banking subsidiaries
or acquired from any other source prior to
May 9, 1956, or the date on which such
company became a bank holding company,
whichever is later;
(2) shares acquired by a bank holding com
pany or any of its subsidiaries in satisfac
tion of a debt previously contracted in good
faith, but such shares shall be disposed of
within a period of two years from the date
on which they were acquired, except that
the Board is authorized upon application by
such bank holding company to extend such
period of two years from time to time as
to such holding company, in its judgment,
such an extension would not be detrimental
to the public interest, and, in the case of a
bank holding company which has not
disposed of such shares within 5 years after
the date on which such shares were ac
quired, the Board may, upon the application
of such company, grant additional exemp
tions if, in the judgment of the Board, such
extension would not be detrimental to
the public interest and, either the bank
holding company has made a good faith
attempt to dispose of such shares during
such 5-year period, or the disposal of such
shares during such 5-year period would
have been detrimental to the company, ex
cept that the aggregate duration of such ex
tensions shall not extend beyond 10 years
after the date on which such shares were
acquired;
(3) shares acquired by such bank holding
company from any of its subsidiaries which
subsidiary has been requested to dispose of
such shares by any Federal or State author
•
•
ity having statutory power to examine such
subsidiary, but such bank holding company
shall dispose of such shares within a period
of two years from the date on which they
were acquired;
(4) shares held or acquired by a bank in
good faith in a fiduciary capacity, except
where such shares are held under a trust
that constitutes a company as defined in
section 2(b) and except as provided in para
graphs (2) and (3) of section 2(g);
(5) shares which are of the kinds and
amounts eligible for investment by national
banking associations under the provisions of
section 5136 of the Revised Statutes;
(6) shares of any company which do not
include more than 5 per centum of the out
standing voting shares of such company;
(7) shares of an investment company which
is not a bank holding company and which
is not engaged in any business other than
investing in securities, which securities do
not include more than 5 per centum of the
outstanding voting shares of any company;
(8) shares of any company the activities of
which the Board after due notice (and op
portunity for hearing in the case of an ac
quisition of a savings association) has deter
mined (by order or regulation) to be so
closely related to banking or managing or
controlling banks as to be a proper incident
thereto, but for purposes of this subsection
it is not closely related to banking or man
aging or controlling banks for a bank hold
ing company to provide insurance as a prin
cipal, agent, or broker except (A) where the
insurance is limited to assuring repayment
of the outstanding balance due on a specific
extension of credit by a bank holding com
pany or its subsidiary in the event of the
death, disability, or involuntary unemploy
ment of the debtor; (B) in the case of a
finance company which is a subsidiary of a
bank holding company, where the insurance
is also limited to assuring repayment of the
outstanding balance on an extension of
credit in the event of loss or damage to any
property used as collateral on such exten
sion of credit and, during the period begin
ning on the date of the enactment of this
subparagraph and ending on December 31,
1982, such extension of credit is not more
71
Bank Holding Company Act
than $10,000 ($25,000 in the case of an
extension of credit which is made to fi
nance the purchase of a residential manu
factured home and which is secured by
such residential manufactured home) and
for any given year after 1982, such exten
sion of credit is not more than an amount
equal to $10,000 ($25,000 in the case of an
extension of credit which is made to fi
nance the purchase of a residential manu
factured home and which is secured by
such residential manufactured home) in
creased by the percentage increase in the
Consumer Price Index for Urban Wage
Earners and Clerical Workers published
monthly by the Bureau of Labor Statistics
for the period beginning on January 1,
1982, and ending on December 31 of the
year preceding the year in which such ex
tension of credit is made; (C) any insurance
agency activity in a place that (i) has a
population not exceeding five thousand (as
shown by the last preceding decennial cen
sus), or (ii) the bank holding company, after
notice and opportunity for a hearing, dem
onstrates has inadequate insurance agency
facilities; (D) any insurance agency activity
which was engaged in by the bank holding
company or any of its subsidiaries on May
1, 1982, or which the Board approved for
such company or any of its subsidiaries on
or before May 1, 1982, including (i) sales
of insurance at new locations of the same
bank holding company or the same subsid
iary or subsidiaries with respect to which
insurance was sold on May 1, 1982, or
approved to be sold on or before May 1,
1982, if such new locations are confined to
the State in which the principal place of
business of the bank holding company is
located, any State or States immediately ad
jacent to such State, and any State or States
in which insurance activities were con
ducted by the bank holding company or any
of its subsidiaries on May 1, 1982, or were
approved to be conducted by the bank hold
ing company or any of its subsidiaries on
or before May 1, 1982, and (ii) sales of
insurance coverages which may become
available after May 1, 1982, so long as
those coverages insure against the same
types of risks as, or are otherwise function
ally equivalent to, coverages sold on May
1, 1982, or approved to be sold on or be
fore May 1, 1982 (for purposes of this su b ^ ^
paragraph, activities engaged in or approvl^^^
by the Board on May 1, 1982, shall in c lu a ^ ^
activities carried on subsequent to that date
as the result of an application to engage in
such activities pending on May 1, 1982,
and approved subsequent to that date or of
the acquisition by such company pursuant
to a binding written contract entered into on
or before May 1, 1982, of another company
engaged in such activities at the time of the
acquisition); (E) any insurance activity
where the activity is limited solely to super
vising on behalf of insurance underwriters
the activities of retail insurance agents who
sell (i) fidelity insurance and property and
casualty insurance on the real and personal
property used in the operations of the bank
holding company or any of its subsidiaries,
and (ii) group insurance that protects the
employees of the bank holding company or
any of its subsidiaries; (F) any insurance
agency activity engaged in by a bank hold
ing company, or any of its subsidiaries,
which bank holding company has total as
sets of $50,000,000 or less: Provided, how
ever, That such a bank holding company
and its subsidiaries may not engage in the
sale of life insurance or annuities except
provided in subparagraph (A), (B), or
or (G) where the activity is performed, or
shares of the company involved are owned,
directly or indirectly, by a bank holding
company which is registered with the Board
of Governors of the Federal Reserve Sys
tem and which, prior to January 1, 1971,
was engaged, directly or indirectly, in insur
ance agency activities as a consequence of
approval by the Board prior to January 1,
1971. In determining whether a particular
activity is a proper incident to banking or
managing or controlling banks the Board
shall consider whether its performance by
an affiliate of a holding company can rea
sonably be expected to produce benefits to
the public, such as greater convenience, in
creased competition, or gains in efficiency,
that outweigh possible adverse effects, such
as undue concentration of resources, de
creased or unfair competition, conflicts of
Bank Holding Company Act
interests, or unsound banking practices. In
orders and regulations under this subsection,
the Board may differentiate between activi^ A t i e s commenced de novo and activities
commenced by the acquisition, in whole or
in part, of a going concern. Notwithstanding
any other provision of this Act, if the Board
finds that an emergency exists which re
quires the Board to act immediately on any
application under this subsection involving
a thrift institution, and the primary Federal
regulator of such institution concurs in such
finding, the Board may dispense with the
notice and hearing requirement of this sub
section and the Board may approve or deny
any such application without notice or hear
ing. If an application is filed under this
paragraph in connection with an application
to make an acquisition pursuant to section
13(f) of the Federal Deposit Insurance Act,
the Board may dispense with the notice and
hearing requirement of this paragraph and
the Board may approve or deny the applica
tion under this paragraph without notice or
hearing. If an application described in the
preceding sentence is approved, the Board
shall publish in the Federal Register, not
later than 7 days after such approval is
granted, the order approving the application
and a description of the nonbanking activi
ties involved in the acquisition;
(9) shares held or activities conducted by
any company organized under the laws of a
foreign country the greater part of whose
business is conducted outside the United
States, if the Board by regulation or order
determines that, under the circumstances
and subject to the conditions set forth in the
regulation or order, the exemption would
not be substantially at variance with the
purposes of this Act and would be in the
public interest;
(10) shares lawfully acquired and owned
prior to May 9, 1956, by a bank which is a
bank holding company, or by any of its
wholly owned subsidiaries;
(11) shares owned directly or indirectly by
a company covered in 1970 in a company
which does not engage in any activities
other than those in which the bank holding
company, or its subsidiaries, may engage by
virtue of this section, but nothing in this
paragraph authorizes any bank holding
company, or subsidiary thereof, to acquire
any interest in or the assets of any going
concern (except pursuant to a binding writ
ten contract entered into before June 30,
1968, or pursuant to another provision of
this Act) other than one which was a sub
sidiary on June 30, 1968;
(12) shares retained or acquired, or activi
ties engaged in, by any company which be
comes, as a result of the enactment of the
Bank Holding Company Act Amendments
of 1970, a bank holding company on the
date of such enactment, or by any subsid
iary thereof, if such company—
(A) within the applicable time limits pre
scribed in subsection (a)(2) of this sec
tion (i) ceases to be a bank holding com
pany, or (ii) ceases to retain direct or
indirect ownership or control of those
shares and to engage in those activities
not authorized under this section; and
(B) complies with such other conditions
as the Board may by regulation or order
prescribe;
(13) shares of, or activities conducted by,
any company which does no business in the
United States except as an incident to its
international or foreign business, if the
Board by regulation or order determines
that, under the circumstances and subject to
the conditions set forth in the regulation or
order, the exemption would not be substan
tially at variance with the purposes of this
Act and would be in the public interest; or
(14) shares of any company which is an
export trading company whose acquisition
(including each acquisition of shares) or
formation by a bank holding company has
not been disapproved by the Board pursuant
to this paragraph, except that such invest
ments, whether direct or indirect, in such
shares shall not exceed 5 per centum of the
bank holding company’s consolidated capi
tal and surplus.
(A) (i) No bank holding company shall
invest in an export trading company
under this paragraph unless the Board
has been given sixty days’ prior writ
ten notice of such proposed investment
and within such period has not issued
a notice disapproving the proposed in73
Bank Holding Company Act
vestment or extending for up to an
other thirty days the period during
which such disapproval may be issued.
(ii) The period for disapproval may be
extended for such additional thirty-day
period only if the Board determines
that a bank holding company propos
ing to invest in an export trading com
pany has not furnished all the informa
tion required to be submitted or that in
the Board’s judgment any material in
formation submitted is substantially
inaccurate.
(iii) The notice required to be filed by
a bank holding company shall contain
such relevant information as the Board
shall require by regulation or by spe
cific request in connection with any
particular notice.
(iv) The Board may disapprove any
proposed investment only if—
(I) such disapproval is necessary to
prevent unsafe or unsound banking
practices, undue concentration of re
sources, decreased or unfair compe
tition, or conflicts of interest;
(II) the Board finds that such invest
ment would affect the financial or
managerial resources of a bank hold
ing company to an extent which is
likely to have a materially adverse
effect on the safety and soundness
of any subsidiary bank of such bank
holding company, or
(III) the bank hoding company fails
to furnish the information required
under clause (iii).
(v) The Board may not disapprove any
proposed investment solely on the ba
sis of the anticipated or proposed
asset-to-equity ratio of the export trad
ing company with respect to which
such investment is proposed, unless the
anticipated or proposed annual average
asset-to-equity ratio is greater than
20-to-l.
(vi) Within three days after a decision
to disapprove an investment, the Board
shall notify the bank holding company
in writing of the disapproval and shall
provide a written statement of the basis
for the disapproval.
(vii) A proposed investment may be
made prior to the expiration of the dis
approval period if the Board issuer
written notice of its intent not to d isa fl
prove the investment.
(B) (i) The total amount of extensions of
credit by a bank holding company
which invests in an export trading
company, when combined with all such
extensions of credit by all the subsid
iaries of such bank holding company,
to an export trading company shall not
exceed at any one time 10 per centum
of the bank holding company’s con
solidated capital and surplus. For pur
poses of the preceding sentence, an ex
tension of credit shall not be deemed
to include any amount invested by a
bank holding company in the shares of
an export trading company.
(ii) No provision of any other Federal
law in effect on October 1, 1982, relat
ing specifically to collateral require
ments shall apply with respect to any
such extension of credit.
(iii) No bank holding company or sub
sidiary of such company which invests
in an export trading company may ex
tend credit to such export trading com
pany or to customers of such export
trading company on terms more favojjj
able than those afforded similar b J J
rowers in similar circumstances, and
such extension of credit shall not in
volve more than the normal risk of
repayment or present other unfavorable
features.
(C) For purposes of this paragraph, an
export trading company—
(i) may engage in or hold shares of a
company engaged in the business of
underwriting, selling, or distributing
securities in the United States only to
the extent that any bank holding com
pany which invests in such export trad
ing company may do so under appli
cable Federal and State banking laws
and regulations; and
(ii) may not engage in agricultural
production activities or in manufactur
ing, except for such incidental product
modification including repackaging, re
Bank Holding Company Act
assembling or extracting byproducts, as
is necessary to enable United States
goods or services to conform with re
quirements of a foreign country and to
facilitate their sale in foreign countries.
(D) A bank holding company which in
vests in an export trading company may
be required, by the Board, to terminate
its investment or may be made subject to
such limitations or conditions as may be
imposed by the Board, if the Board de
termines that the export trading company
has taken positions in commodities or
commodity contracts, in securities, or in
foreign exchange, other than as may be
necessary in the course of the export
trading company’s business operations.
(E) Notwithstanding any other provision
of law, an Edge Act corporation, orga
nized under section 25(a) of the Federal
Reserve Act (12 U.S.C. 611- 631), which
is a subsidiary of a bank holding com
pany, or an agreement corporation, oper
ating subject to section 25 of the Federal
Reserve Act (12 U.S.C. 601-604(a)),
which is a subsidiary of a bank holding
company, may invest directly and indi
rectly in the aggregate up to 5 per
centum of its consolidated capital and
surplus (25 per centum in the case of a
corporation not engaged in banking) in
the voting stock or other evidences of
ownership in one or more export trading
companies.
(F) For purposes of this paragraph—
(i) the term “export trading company”
means a company which does business
under the laws of the United States or
any State, which is exclusively en
gaged in activities related to interna
tional trade, and which is organized
and operated principally for purposes
of exporting goods or services pro
duced in the United States or for pur
poses of facilitating the exportation of
goods or services produced in the
United States by unaffiliated persons
by providing one or more export trade
services;
(ii) the term “export trade services”
includes, but is not limited to, consult
ing, international market research, ad
vertising, marketing, insurance (other
than acting as principal, agent or bro
ker in the sale of insurance on risks
resident or located, or activities per
formed, in the United States, except
for insurance covering the transporta
tion of cargo from any point of origin
in the United States to a point of final
destination outside the United States),
product research and design, legal as
sistance, transportation, including trade
documentation and freight forwarding,
communication and processing of for
eign orders to and for exporters and
foreign purchasers, warehousing, for
eign exchange, financing, and taking
title to goods, when provided in order
to facilitate the export of goods or ser
vices produced in the United States;
(iii) the term “bank holding company”
shall include a bank which (I) is orga
nized solely to do business with other
banks and their officers, directors, or
employees; (II) is owned primarily by
the banks with which it does business;
and (III) does not do business with the
general public. No such other bank,
owning stock in a bank described in
this clause that invests in an export
trading company, shall extend credit to
an export trading company in an
amount exceeding at any one time 10
per centum of such other bank’s capital
and surplus; and
(iv) the term “ extension of credit”
shall have the same meaning given
such term in the fourth paragraph of
section 23A of the Federal Reserve
Act.
(G) (i) For purposes of determ ining
whether an export trading company is
operated principally for the purposes
described in subparagraph (F)(i)—
(I) the operations of such company
during the 2-year period beginning
on the date such company com
mences operations shall not be taken
into account in making any such de
termination; and
(II) not less than 4 consecutive
years of operations of such company
(not including any portion of the pe75
Bank Holding Company Act
riod referred to in subclause (I))
shall be taken into account in mak
ing any such determination.
(ii) A company shall not be treated as
operated principally for the purposes
described in subparagraph (F)(i) un
less—
(I) the revenues of such company
from the export, or facilitating the
export, of goods or services pro
duced in the United States exceed
the revenues of such company from
the import, or facilitating the import,
into the United States of goods or
services produced outside the United
States; and
(II) at least 'A of such company’s
total revenues are revenues from the
export, or facilitating the export, of
goods or services produced in the
United States by persons not affili
ated with such company.
(H) (i) The Board may not prescribe by
regulation any maximum dollar' amount
limitation on the value of goods which
an export trading company may main
tain in inventory at any time.
(ii) Notwithstanding clause (i), the
Board may issue an order establishing
a maximum dollar amount limitation
on the value of goods which a particu
lar export trading company may main
tain in inventory at any time (after
such company has been operating for a
reasonable period of time) if the Board
finds that, under the facts and circum
stances, such limitation is necessary to
prevent risks that would affect the fi
nancial or managerial resources of an
investor bank holding company to an
extent which would be likely to have a
materially adverse effect on the safety
and soundness of any subsidiary bank
of such bank holding company.
The Board shall include in its annual report
to the Congress a description and a state
ment of the reasons for approval of each
activity approved by it by order or regula
tion under such paragraph during the period
covered by the report.
(d) Hardship exemption o f company control16
ling one bank prior to July 1, 1968. To the
extent that such action would not be substan
tially at variance with the purposes of this A
and subject to such conditions as it conside
necessary to protect the public interest, the
Board by order, after opportunity for hearing,
may grant exemptions from the provisions of
this section to any bank holding company
which controlled one bank prior to July 1,
1968, and has not thereafter acquired the con
trol of any other bank in order (1) to avoid
disrupting business relationships that have ex
isted over a long period of years without ad
versely affecting the banks or communities in
volved, or (2) to avoid forced sales of small
locally owned banks to purchasers not simi
larly representative of community interests, or
(3) to allow retention of banks that are so
small in relation to the holding company’s
total interests and so small in relation to the
banking market to be served as to minimize
the likelihood that the bank’s powers to grant
or deny credit may be influenced by a desire
to further the holding com pany’s other
interests.
(e) Divestiture o f nonexempt shares. With re
spect to shares which were not subject to the
prohibitions of this section as originally en
acted by reason of any exemption with respect
thereto but which were made subject to sue®
prohibitions by the subsequent repeal of sucP
exemption, no bank holding company shall re
tain direct or indirect ownership or control of
such shares after five years from the date of
the repeal of such exemption, except as pro
vided in paragraph (2) of subsection (a). Any
bank holding company subject to such fiveyear limitation on the retention of nonbanking
assets shall endeavor to divest itself of such
shares promptly and such bank holding com
pany shall report its progress in such divesti
ture to the Board two years after repeal of the
exemption applicable to it and annually
thereafter.
(f) Certain companies not treated as bank
holding companies.
(1) Except as provided in paragraph (9),
any company which—
(A) on March 5, 1987, controlled an in
stitution which became a bank as a result
Bank Holding Company Act
•
•
of the enactment of the Competitive
Equality Amendments of 1987; and
(B) was not a bank holding company on
the day before the date of the enactment
of the Competitive Equality Amendments
of 1987,
shall not be treated as a bank holding com
pany for purposes of this Act solely by
virtue of such company’s control of such
institution.
(2) Paragraph (1) shall cease to apply to
any company described in such paragraph
if—
(A) such
com pany
directly
or
indirectly—
(i) acquires control of an additional
bank or an insured institution (other
than an insured institution described in
paragraph (10) or (12) of this subsec
tion) after March 5, 1987; or
(ii) acquires control of more than 5
percent of the shares or assets of an
additional bank or a savings associa
tion other than—
(I) shares held as a bona fide fidu
ciary (whether with or without the
sole discretion to vote such shares);
(II) shares held by any person as a
bona fide fiduciary solely for the
benefit of employees of either the
company described in paragraph (1)
or any subsidiary of that company
and the beneficiaries of those
employees;
(III) shares held temporarily pursu
ant to an underwriting commitment
in the normal course of an under
writing business;
(IV) shares held in an account
solely for trading purposes;
(V) shares over which no control is
held other than control of voting
rights acquired in the normal course
of a proxy solicitation;
(VI) loans or other accounts receiv
able acquired in the normal course
of business;
(VII) shares or assets acquired in
securing or collecting a debt previ
ously contracted in good faith, dur
ing the 2-year period beginning on
the date of such acquisition or for
such additional time (not exceeding
3 years) as the Board may permit if
the Board determines that such an
extension will not be detrimental to
the public interest;
(VIII) shares or assets of a savings
association described in paragraph
(10) or (12) of this subsection;
(IX) shares of a savings association
held by any insurance company, as
defined in section 2(a)(17) of the In
vestment Company Act of 1940, ex
cept as provided in paragraph (11);
and
(X) shares issued in a qualified
stock issuance under section 10(q)
of the Home Owners’ Loan Act;
except that the aggregate amount of
shares held under this clause (other
than under subclauses (I), (II), (III),
(IV), (V), and (VIII)) may not exceed
15 percent of all outstanding shares or
of the voting power of a savings asso
ciation; or
(B) any bank subsidiary of such com
pany fails to comply with the restrictions
contained in paragraph (3)(B).
(3) (A) The Congress finds that banks con
trolled by companies referred to in para
graph (1) may, because of relationships
with affiliates, be involved in conflicts of
interest, concentration of resources, or
other effects adverse to bank safety and
soundness, and may also be able to com
pete unfairly against banks controlled by
bank holding companies by combining
banking services with financial services
not permissible for bank holding compa
nies. The purpose of this paragraph is to
minimize any such potential adverse ef
fects or inequities by temporarily restrict
ing the activities of banks controlled by
companies referred to in paragraph (1)
until such time as the Congress has en
acted proposals to allow, with appropriate
safeguards, all banks or bank holding
companies to compete on a more equal
basis with banks controlled by companies
referred to in paragraph (1) or, alterna
tively, proposals to permanently restrict
the activities of banks controlled by com
panies referred to in paragraph (1).
77
Bank Holding Company Act
(B) Until such time as the Congress has
taken action pursuant to subparagraph
(A), a bank controlled by a company de
scribed in paragraph (1) shall not—
(i) engage in any activity in which
such bank was not lawfully engaged as
of March 5, 1987;
(ii) offer or market products or ser
vices of an affiliate that are not per
missible for bank holding companies to
provide under subsection (c)(8), or per
mit its products or services to be of
fered or marketed in connection with
products and services of an affiliate,
unless—
(I) the Board, by regulation, has de
termined such products and services
are permissible for bank holding
companies to provide under subsec
tion (c)(8);
(II) such products and services are
described in section 20 of the Bank
ing Act of 1933 and the Board, by
regulation, has permitted bank hold
ing companies to offer or market
such products or services, but has
prohibited bank holding companies
and their affiliates from principally
engaging in the offering or market
ing of such products or services; or
(III) such products or services were
being so offered or marketed as of
March 5, 1987, and then only in the
same manner in which they were be
ing offered or marketed as of that
date; or
(iii) after the date of the enactment of
the Competitive Equality Amendments
of 1987, permit any overdraft (includ
ing an intraday overdraft), or incur any
such overdraft in such bank’s account
at a Federal Reserve bank, on behalf
of an affiliate, other than an overdraft
described in subparagraph (C).
(C) For purposes of subparagraph
(B)(iii), an overdraft is described in this
subparagraph if—
(i) such overdraft results from an inad
vertent computer or accounting error
that is beyond the control of both the
bank and the affiliate; or
(ii) such overdraft—
(I) is permitted or incurred on be
half of an affiliate which is moni
tored by, reports to, and is r e c o ^
nized as a primary dealer by t H
Federal Reserve Bank of New York;
and
(II) is fully secured, as required by
the Board, by bonds, notes, or other
obligations which are direct obliga
tions of the United States or on
which the principal and interest are
fully guaranteed by the U nited
States or by securities and obliga
tions eligible for settlement on the
Federal Reserve book entry system.
(4) If any company described in paragraph
(1) loses the exemption provided under
such paragraph by operation of paragraph
(2), such company shall divest control of
each bank it controls within 180 days after
such company becomes a bank holding
company due to the loss of such exemption.
(5) This subsection shall cease to apply to
any company described in paragraph (1) if
such company—
(A) registers as a bank holding company
under section 5(a) of this Act;
(B) immediately upon such registration,
complies with all of the requirements of
this Act, and regulations prescribed by
the Board pursuant to this Act, including
the nonbanking restrictions of this s e ^
tion; and
(C) does not, at the time of such regis
tration, control banks in more than one
State, the acquisition of which would be
prohibited by section 3(d) of this Act if
an application for such acquisition by
such company were filed under section
3(a) of this Act.
(6) Each company described in paragraph
(1) shall, within 60 days after the date of
enactment of the Competitive Equality
Amendments of 1987, provide the Board
with the name and address of such com
pany, the name and address of each bank
such company controls, and a description of
each such bank’s activities.
(7) The Board may, from time to time, ex
amine a company described in paragraph
(1), or a bank controlled by such company,
or require reports under oath from appropri-
Bank Holding Company Act
ate officers or directors of such company or
bank solely for purposes of assuring com^ ^ p lia n c e with the provisions of this subsec^ B o n and enforcing such compliance.
(8) (A) In addition to any other power of
the Board, the Board may enforce com
pliance with the provisions of this Act
which are applicable to any company de
scribed in paragraph (1), and any bank
controlled by such company, under sec
tion 8 of the Federal Deposit Insurance
Act and such company or bank shall be
subject to such section (for such pur
poses) in the same manner and to the
same extent as if such company or bank
were a State member insured bank.
(B) Any violation of this Act by any
company described in paragraph (1), and
any bank controlled by such company,
may also be treated as a violation of the
Federal Deposit Insurance Act for pur
poses of subparagraph (A).
(C) No provision of this paragraph shall
be construed as limiting any authority of
the Comptroller of the Currency or the
Federal Deposit Insurance Corporation.
(9) A company described in paragraph (1)
shall be—
(A) treated as a bank holding company
for purposes of section 106 of the Bank
Holding Company Act Amendments of
1970 and section 22(h) of the Federal
Reserve Act and any regulation pre
scribed under any such section; and
(B) subject to the restrictions of section
106 of the Bank Holding Company Act
Amendments of 1970, in connection with
any transaction involving the products or
services of such company or affiliate and
those of a bank affiliate, as if such com
pany or affiliate were a bank and such
bank were a subsidiary of a bank holding
company.
(10) For purposes of clauses (i) and
(11)(VIII) of paragraph (2)(A), an insured
institution is described in this paragraph
if—
(A) the insured institution was acquired
(or any shares or assets of such institu
tion were acquired) by a company de
scribed in paragraph (1) in an acquisition
under section 408(m) of the National
•
Housing Act or section 13(k) of the Fed
eral Deposit Insurance Act; and
(B) either—
(i) the insured institution is located in
a State in which such company con
trolled a bank on March 5, 1987; or
(ii) the insured institution has total as
sets of $500,000,000 or more at the
time of such acquisition.
(11) Shares described in clause (ii)(IX) of
paragraph (2)(A) shall not be excluded for
purposes of clause (ii) of such paragraph
if—
(A) all shares held under such clause
(ii)(IX) by all insurance company affili
ates of such savings association in the
aggregate exceed 5 percent of all out
standing shares or of the voting power of
the savings association; or
(B) such shares are acquired or retained
with a view to acquiring, exercising, or
transferring control of the savings
association.
(12) For purposes o f clauses (i) and
(ii)(VIII) of paragraph (2)(A), an insured
institution is described in this paragraph if
the insured institution was acquired (or any
shares or assets of such institution were ac
quired) by a company described in para
graph (1)—
(A) from the Resolution Trust Corpora
tion, the Federal Deposit Insurance Cor
poration, or the Director of the Office of
Thrift Supervision, in any capacity; or
(B) in an acquisition in which the in
sured institution has been found to be in
danger of default (as defined in section 3
of the Federal Deposit Insurance Act by
the appropriate Federal or State authority.
(13) A company described in paragraph (1)
that holds shares issued in a qualified stock
issuance pursuant to section 10(q) of the
Home Owners’ Loan Act by any savings
association or savings and loan holding
company (neither of which is a subsidiary)
shall not be deemed to control such savings
association or savings and loan holding
company solely because such company
holds such shares unless—
(A) the company fails to comply with
any requirement or condition imposed by
paragraph (2)(A)(ii)(X) or section 10(q)
79
Bank Holding Company Act
of the Home Owners’ Loan Act with re
spect to such shares; or
(B) the shares are acquired or retained
with a view to acquiring, exercising, or
transferring control of the savings asso
ciation or savings and loan holding
company.
(g) Limitations on certain banks.
(1) Notwithstanding any other provision of
this section (other than the last sentence of
subsection (a)(2)), a bank holding company
which controls an institution that became a
bank as a result of the enactment of the
Competitive Equality Amendments of 1987
may retain control of such institution if
such institution does not—
(A) engage in any activity after the date
of the enactment of such Amendments
which would have caused such institution
to be a bank (as defined in section 2(c),
as in effect before such date) if such
activities had been engaged in before
such date; or
(B) increase the number of locations
from which such institution conducts
business after March 5, 1987.
(2) The limitations contained in paragraph
(1) shall cease to apply to a bank described
in such paragraph at such time as the acqui
sition of such bank, by the bank holding
company referred to in such paragraph,
would not be prohibited under section 3(d)
of this Act if—
(A) an application for such acquisition
were filed under section 3(a) of this Act;
and
(B) such bank were treated as an addi
tional bank (under section 3(d)).
(h) Tying provisions.
(1) An institution described in subpara
graph (D), (F), (G), (H), (I), or (J) of sec
tion 2(c)(2) shall be treated as a bank, and
a company that controls such an institution
shall be treated as a bank holding company,
for purposes of section 106 of the Bank
Holding Company Act Amendments of
1970 and section 22(h) of the Federal Re
serve Act and any regulation prescribed un
der any such section.
(2) A company that controls an institution
described in subparagraph (D), (F), (G),
(H), (I), or (J) of section 2(c)(2) and any of
such company’s other affiliates, shall be
subject to the tying restrictions of section
106 of the Bank Holding Company A
Amendments of 1970 in connection w iff
any transaction involving the products or
services of such company or affiliate and
those of such institution, as if such com
pany or affiliate were a bank and such insti
tution were a subsidiary of a bank holding
company.
(i) Acquisition o f savings associations.
(I) The Board may approve an application
by any bank holding company under sub
section (c)(8) to acquire any savings asso
ciation in accordance with the requirements
and limitations of this section.
(2) In approving an application by a bank
holding company to acquire a savings asso
ciation, the Board shall not impose any re
striction on transactions between the sav
ings association and its holding company
affiliates, except as required under sections
23A and 23B of the Federal Reserve Act or
any other applicable law.
(3) (A) Notwithstanding any other provision
of this Act, any qualified savings associa
tion which became a federally chartered
stock company in December of 1986 and
which is acquired by any bank h o ld u p
company without Federal financial a s ^ j
tance after June 1, 1991, and before
March 1, 1992, and any subsidiary of any
such association, may after such acquisi
tion continue to engage within the home
State of the qualified savings association
in insurance agency activities in which
any Federal savings association (or any
subsidiary thereof) may engage in accor
dance with the Home Owners’ Loan Act
and regulations pursuant to such Act if
the qualified savings association or sub
sidiary thereof was continuously engaged
in such activity from June 1, 1991, to the
date of the acquisition.
(B) For purposes of this paragraph, the
term “qualified savings association”
means any savings association that—
(i) was chartered or organized as a
savings association before June 1,
1991;
Bank Holding Company Act
(ii) had, immediately before the acqui
sition of such association by the bank
holding company referred to in subparagraph (A), negative tangible capital
and total insured deposits in excess of
$3,000,000,000; and
(iii) will meet all applicable regulatory
capital requirements as a result of such
acquisition.
(4) (A) Upon receiving any application or
notice by a bank holding company to ac
quire, directly or indirectly, a savings as
sociation under subsection (c)(8), the
Board shall solicit comments and recom
mendations from the Director with re
spect to such acquisition.
(B) The comments and recommendations
of the Director under subparagraph (A)
with respect to any acquisition subject to
such subparagraph shall be transmitted to
the Board not later than 30 days after the
receipt by the Director of the notice relat
ing to such acquisition (or such shorter
period as the Board may specify if the
Board advises the Director that an emer
gency exists that requires expeditious
action).
(5) (A) The Board shall consult with the
Director, as appropriate, in establishing
the scope of an examination by the Board
of a bank holding company that directly
or indirectly controls a savings
association.
(B) Upon the request of the Director, the
Board shall furnish the Director with a
copy of any inspection report, additional
examination materials, or supervisory in
formation relating to any bank holding
company that directly or indirectly con
trols a savings association.
(6) The Board and the Director shall coop
erate in any enforcement action against any
bank holding company that controls a sav
ings association, if the relevant conduct in
volves such association.
(7) For purposes of this section, the term
“Director” means the Director of the Office
of Thrift Supervision.
•
(j) N otice procedures fo r nonbanking
activities.
(1) (A) Except as provided in paragraph
(3), no bank holding company may en
gage in any nonbanking activity or ac
quire or retain ownership or control of
the shares of a company engaged in ac
tivities based on subsection (c)(8) or
(a)(2) without providing the Board with
written notice of the proposed transaction
or activity at least 60 days before the
transaction or activity is proposed to oc
cur or commence.
(B) The notice submitted to the Board
shall contain such information as the
Board shall prescribe by regulation or by
specific request in connection with a par
ticular notice.
(C) (i) Any notice filed under this sub
section shall be deemed to be approved
by the Board unless, before the end of
the 60-day period beginning on the
date the Board receives a complete no
tice under subparagraph (A), the Board
issues an order disapproving the trans
action or activity and setting forth the
reasons for disapproval.
(ii) The Board may extend the 60-day
period referred to in clause (i) for an
additional 30 days. The Board may
further extend the period with the
agreement of the bank holding com
pany submitting the notice pursuant to
this subsection.
(iii) In the event a hearing is requested
or the Board determines that a hearing
is warranted, the Board may extend the
notice period provided in this subsec
tion for such time as is reasonably nec
essary to conduct a hearing and to
evaluate the hearing record. Such ex
tension shall not exceed the 91-day pe
riod beginning on the date that the
hearing record is complete.
(D) (i) Any transaction or activity may
commence before the expiration of any
period for disapproval established un
der this paragraph if the Board issues a
written notice of approval.
(ii) The Board may prescribe regula
tions which provide for a shorter no
tice period with respect to particular
activities or transactions.
(E) In the case of any notice to engage
in, or to acquire or retain ownership or
81
Bank Holding Company Act
control of shares of any company en
gaged in, any activity pursuant to subsec
tion (c)(8) or (a)(2) that has not been
previously approved by regulation, the
Board may extend the notice period un
der this subsection for an additional 90
days. The Board may further extend the
period with the agreement of the bank
holding company submitting the notice
pursuant to this subsection.
(2) (A) In connection with a notice under
this subsection, the Board shall consider
whether performance of the activity by a
bank holding company or a subsidiary of
such company can reasonably be ex
pected to produce benefits to the public,
such as greater convenience, increased
competition, or gains in efficiency, that
outweigh possible adverse effects, such
as undue concentration of resources, de
creased or unfair competition, conflicts of
interests, or unsound banking practices.
(B) The Board may deny any proposed
transaction or activity for which notice
has been submitted pursuant to this sub
section if the bank holding company sub
mitting such notice neglects, fails, or re
fuses to furnish the Board all the
information required by the Board.
(C) Nothing in this subsection limits the
authority of the Board to impose condi
tions in connection with an action under
this section.
(3) No notice under paragraph (1) of this
subsection or under subsection (c)(8) or
(a)(2)(B) is required for a proposal by a
bank holding company to engage in any
activity or acquire the shares or assets of
any company, other than an insured deposi
tory institution, if the proposal qualifies un
der paragraph (4).
(4) A proposal qualifies under this para
graph if all of the following criteria are
met:
(A) Both before and immediately after
the proposed transaction—
(i) the acquiring bank holding com
pany is well capitalized;
(ii) the lead insured depository institu
tion of such holding company is well
capitalized;
(iii) well capitalized insured depository
82
institutions control at least 80 percent
of the aggregate total risk-weighted as
sets of insured depository in stitu tio n
controlled by such holding com pa^B
and
(iv) no insured depository institution
controlled by such holding company is
undercapitalized.
(B) (i) At the time of the transaction, the
acquiring bank holding company, its
lead insured depository institution, and
insured depository institutions that con
trol at least 90 percent of the aggregate
total risk-weighted assets of insured
depository institutions controlled by
such holding company are well
managed.
(ii) Except as provided in paragraph
(6), no insured depository institution
controlled by the acquiring bank hold
ing company has received 1 of the 2
lowest composite ratings at the later of
the institution’s most recent examina
tion or subsequent review.
(C) Following consummation of the pro
posal, the bank holding company engages
directly or through a subsidiary solely
in—
(i) activities that are permissible under
subsection (c)(8), as determined by the
Board by regulation or order therein*
der, subject to all of the re s tr ic tio ^
terms, and conditions of such subsec
tion and such regulation or order; and
(ii) such other activities as are other
wise permissible under this section,
subject to the restrictions, terms and
conditions, including any prior notice
or approval requirements, provided in
this section.
(D) (i) The book value of the total assets
to be acquired does not exceed 10 per
cent of the consolidated total riskweighted assets of the acquiring bank
holding company.
(ii) The gross consideration to be paid
for the securities or assets does not
exceed 15 percent of the consolidated
Tier 1 capital of the acquiring bank
holding company.
(E) For proposals described in paragraph
(5)(B), the Board has not, before the con-
Bank Holding Company Act
elusion of the period provided in para
graph (5)(B), advised the bank holding
company that a notice under paragraph
U) is required.
•
(F) During the 12-month period ending
on the date on which the bank holding
company proposes to commence an activ
ity or acquisition, no administrative en
forcement action has been commenced,
and no cease and desist order has been
issued pursuant to section 8 of the Fed
eral Deposit Insurance Act, against the
bank holding company or any depository
institution subsidiary of the holding com
pany, and no such enforcement action,
order, or other administrative enforcement
proceeding is pending as of such date.
(5) (A) A bank holding company that quali
fies under paragraph (4) and that pro
poses to engage de novo, directly or
through a subsidiary, in any activity that
is permissible under subsection (c)(8), as
determined by the Board by regulation,
may commence that activity without prior
notice to the Board and must provide
written notification to the Board not later
than 10 business days after commencing
the activity.
(B) (i) At least 12 business days before
commencing any activity pursuant to
paragraph (3) (other than an activity
described in subparagraph (A) of this
paragraph) or acquiring shares or as
sets of any company pursuant to para
graph (3), the bank holding company
shall provide written notice of the pro
posal to the Board, unless the Board
determines that no notice or a shorter
notice period is appropriate.
(ii) A notification under this subpara
graph shall include a description of the
proposed activities and the terms of
any proposed acquisition.
(6) Any insured depository institution
which has been acquired by a bank holding
company during the 12-month period pre
ceding the date on which the company pro
poses to commence an activity or acquisi
tion pursuant to paragraph (3) may be
excluded for purposes of paragraph
(4)(B)(ii) if—
(A) the bank holding company has de
•
veloped a plan for the institution to re
store the capital and management of the
institution which is acceptable to the ap
propriate Federal banking agency; and
(B) all such insured depository institu
tions represent, in the aggregate, less than
10 percent of the aggregate total riskweighted assets of all insured depository
institutions controlled by the bank hold
ing company.
(7) The Board may, by regulation, adjust
the percentages and the manner in which
the percentages of insured depository insti
tutions are calculated under paragraph
(4)(B)(i), (4)(D), or (6)(B) if the Board de
termines that any such adjustment is consis
tent with safety and soundness and the pur
poses of this Act.
[12 USC 1843. A s am ended by acts o f July 1, 1966 (80
Stat. 238); Dec. 31, 1970 (84 Stat. 1763); Nov. 16, 1977
(91 Stat. 1389); Nov. 10, 1978 (92 Stat. 3671); M arch 31,
1980 (94 Stat. 186); O ct. 8, 1982 (96 Stat. 1236); Oct. 15,
1982 (96 Stat. 1479, 1489, 1527, 1536); Jan. 12, 1983 (96
Stat. 2511); Oct. 22, 1986 (100 Stat. 2095); Aug. 10, 1987
(101 Stat. 557, 558, 628, 635); Aug. 23, 1988 (102 Stat.
1384); Aug. 9, 1989 (103 Stat. 408, 409, 410, 411, 546);
Dec. 19, 1991 (105 Stat. 2384); Sept. 23, 1994 (108 Stat.
2239, 2240); and Sept. 30, 1996 (110 Stat. 3009-404, 406,
413, 425, 476).]
Section 601(b) o f the Financial Institutions Reform, Re
covery, and Enforcem ent A ct o f 1989 (12 U SC 1843 note)
reads as follows:
(b) If the Board o f G overnors o f the Federal Reserve
System , in approving an application by a bank holding
com pany to acquire a savings association, im posed any
restriction that w ould have been prohibited under section
4(i)(2) o f the Bank H olding Com pany A ct o f 1956 (as
added by subsection (a) o f this section) if that section
had been in effect when the application was approved,
the Board shall modify that approval in a m anner consis
tent with that section.]
SECTION 5— Administration (12 USC
1844)
(a) Registration o f bank holding company.
Within one hundred and eighty days after the
date of enactment of this Act, or within one
hundred and eighty days after becoming a
bank holding company, whichever is later,
each bank holding company shall register with
the Board on forms prescribed by the Board,
which shall include such information with re
spect to the financial condition and operations,
management, and intercompany relationships
of the bank holding company and its subsid
83
Bank Holding Company Act
iaries, and related matters, as the Board may
deem necessary or appropriate to carry out the
purposes of this Act. The Board may, in its
discretion, extend the time within which a
bank holding company shall register and file
the requisite information.
(b) Regulations and orders. The Board is au
thorized to issue such regulations and orders
as may be necessary to enable it to administer
and carry out the purposes of this Act and
prevent evasions thereof.
(c) Reports required by Board; examinations;
cost o f examination. The Board from time to
time may require reports under oath to keep it
informed as to whether the provisions of this
Act and such regulations and orders issued
thereunder have been complied with; and the
Board may make examinations of each bank
holding company and each subsidiary thereof,
the cost of which shall be assessed against,
and paid by, such holding company. The
Board shall, as far as possible, use the reports
of examinations made by the Comptroller of
the Currency, the Federal Deposit Insurance
Corporation, or the appropriate State bank su
pervisory authority for the purposes of this
section.
(d) Reports to Congress; recommendations.
Before the expiration of two years following
the date of enactment of this Act, and each
year thereafter in the Board’s annual report to
the Congress, the Board shall report to the
Congress the results of the administration of
this Act, stating what, if any, substantial diffi
culties have been encountered in carrying out
the purposes of this Act, and any recommen
dations as to changes in the law which in the
opinion of the Board would be desirable.
(e) Termination o f activities or ownership or
control o f nonbank subsidiaries constituting
serious risk.
(1) Notwithstanding any other provision of
this Act, the Board may, whenever it has
reasonable cause to believe that the continu
ation by a bank holding company of any
activity or of ownership or control of any
of its nonbank subsidiaries, other than a
nonbank subsidiary of a bank, constitutes a
serious risk to the financial safety, sound
ness, or stability of a bank holding com
84
pany subsidiary bank and is inconsistent
with sound banking principles or with the
purposes of this Act or with th<
Institutions Supervisory Act of 1
the bank holding company or
nonbank subsidiaries, after due notice and
opportunity for hearing, and after consider
ing the views of the bank’s primary super
visor, which shall be the Comptroller of the
Currency in the case of a national bank or
the Federal Deposit Insurance Corporation
and the appropriate State supervisory au
thority in the case of an insured nonmember
bank, to terminate such activities or to ter
minate (within one hundred and twenty
days or such longer period as the Board
may direct in unusual circumstances) its
ownership or control of any such subsidiary
either by sale or by distribution of the
shares of the subsidiary to the shareholders
of the bank holding company. Such distri
bution shall be pro rata with respect to all
of the shareholders of the distributing bank
holding company, and the holding company
shall not make any charge to its sharehold
ers arising out of such a distribution.
(2) The Board may in its discretion apply
to the United States district court within the
jurisdiction of which the principal office of
the holding company is located, for the en
forcement of any effective and outstandj^^
order issued under this section, and
court shall have jurisdiction and power to
order and require compliance therewith, but
except as provided in section 9 of this Act,
no court shall have jurisdiction to affect by
injunction or otherwise the issuance or en
forcement of any notice or order under this
section, or to review, modify, suspend, ter
minate, or set aside any such notice or
order.
(f) Powers o f Board respecting applications,
examinations, or other proceedings. In the
course of or in connection with an application,
examination, investigation or other proceeding
under this Act, the Board, or any member or
designated representative thereof, including
any person designated to conduct any hearing
under this Act, shall have the power to admin
ister oaths and affirmations, to take or cause
to be taken depositions, and to issue, revoke,
Bank Holding Company Act
quash, or modify subpoenas and subpoenas SECTION 7— Reservation of Rights to
duces tecum: and the Board is empowered to States (12 USC 1846)
i r ^ ^ rules and regulations to effectuate the
(a) No provision of this act shall be construed
f^^B ses of this subsection. The attendance of
as preventing any State from exercising such
witnesses and the production of documents
powers and jurisdiction which it now has or
provided for in this subsection may be re
may hereafter have with respect to companies,
quired from any place in any State or in any
banks, bank holding companies, and subsidiar
territory or other place subject to the jurisdic
ies thereof.
tion of the United States at any designated
place where such proceeding is being con
(b) State taxation authority not affected. No
ducted. Any party to proceedings under this provision of this Act shall be construed as
Act may apply to the United States District affecting the authority of any State or political
Court for the District of Columbia, or the subdivision of any State to adopt, apply, or
administer any tax or method of taxation to
United States district court for the judicial dis
any bank, bank holding company, or foreign
trict or the United States court in any territory
in which such proceeding is being conducted bank, or any affiliate of any bank, bank hold
or where the witness resides or carries on ing company, or foreign bank, to the extent
business, for the enforcement of any subpoena that such tax or tax method is otherwise per
or subpoena duces tecum issued pursuant to missible by or under the Constitution of the
United States or other Federal law.
this subsection and such courts shall have ju
risdiction and power to order and require
[12 U SC 1846. As am ended by acts o f Aug. 10, 1987 (101
compliance therewith. Witnesses subpoenaed Stat. 563) and Sept. 29, 1994 (108 Stat. 2341).]
under this subsection shall be paid the same
fees and mileage that are paid witnesses in the
district courts of the United States. Any ser
vice required under this subsection may be
made by registered mail, or in such other SECTION 8— Penalties (12 USC 1847)
manner reasonably calculated to give actual (a) Criminal penalty.
notice as the Board may by regulation or oth
(1) Whoever knowingly violates any provi
erwise provide. Any court having jurisdiction
sion of this Act, or, being a company, vio
y proceeding instituted under this subseclates any regulation or order issued by the
nay allow to any such party such reason
Board under this Act, shall be imprisoned
able expenses and attorneys’ fees as it seems not more than 1 year, fined not more than
just and proper. Any person who willfully
$100,000 per day for each day during
shall fail or refuse to attend and testify or to
which the violation continues, or both.
answer any lawful inquiry or to produce
(2) Whoever, with the intent to deceive, de
books, papers, correspondence, memoranda,
fraud, or profit significantly, knowingly vio
contracts, agreements, or other records, if in
lates any provision of this Act shall be im
such person’s power so to do, in obedience to
prisoned not more than 5 years, fined not
the subpoena of the Board, shall be guilty of a
more than $1,000,000 per day for each day
misdemeanor and, upon conviction, shall be
during which the violation continues, or
subject to a fine of not more than $1,000 or,
both.
to imprisonment for a term of not more than
(3) Every officer, director, agent, and em
one year or both.
ployee of a bank holding company shall be
subject to the same penalties for false en
[12 USC 1844. A s am ended by act o f Nov. 10, 1978 (92
tries in any book, report, or statement of
Stat. 3646).]
such bank holding company as are appli
cable to officers, directors, agents, and em
ployees of member banks for false entries
SECTION 6
in any books, reports, or statements of
member banks under section 1005 of title
[Section 6 was repealed by section 9 o f the act o f July 1,
1966 (80 Stat. 240).]
18, United States Code.
•
85
Bank Holding Company Act
(b) Civil money penalty.
(1) Any company which violates, and any
individual who participates in a violation
of, any provision of this Act, or any regula
tion or order issued pursuant thereto, shall
forfeit and pay a civil penalty of not more
than $25,000 for each day during which
such violation continues.
(2) Any penalty imposed under paragraph
(1) may be assessed and collected by the
Board in the manner provided in subpara
graphs (E), (F), (G), and (I) of section
8(i)(2) of the Federal Deposit Insurance Act
for penalties imposed (under such section)
and any such assessment shall be subject to
the provisions of such section.
(3) The company or other person against
whom any penalty is assessed under this
subsection shall be afforded an agency hear
ing if such association or person submits a
request for such hearing within 20 days af
ter the issuance of the notice of assessment.
Section 8(h) of the Federal Deposit Insur
ance Act shall apply to any proceeding un
der this subsection.
(4) All penalties collected under authority
of this subsection shall be deposited into
the Treasury.
(5) For purposes of this section, the term
“violate” includes any action (alone or with
another or others) for or toward causing,
bringing about, participating in, counseling,
or aiding or abetting a violation.
(6) The Board shall prescribe regulations
establishing such procedures as may be nec
essary to carry out this subsection.
(c) Notice under this section after separation
from service. The resignation, termination of
employment or participation, or separation of
an institution-affiliated party (within the mean
ing of section 3(u) of the Federal Deposit
Insurance Act) with respect to a bank holding
company (including a separation caused by
the deregistration of such a company) shall
not affect the jurisdiction and authority of the
Board to issue any notice and proceed under
this section against any such party, if such
notice is served before the end of the 6-year
period beginning on the date such party
ceased to be such a party with respect to such
holding company (whether such date occurs
86
before, on, or after the date of the enactment
of this subsection).
(d) Penalty fo r failure to make reports.
(1) Any company which—
(A) m aintains procedures reasonably
adapted to avoid any inadvertent error
and, unintentionally and as a result of
such an error—
(i) fails to make, submit, or publish
such reports or information as may be
required under this Act or under regu
lations prescribed by the Board pursu
ant to this Act, within the period of
time specified by the Board; or
(ii) submits or publishes any false or
misleading report or information; or
(B) inadvertently transmits or publishes
any report which is minimally late,
shall be subject to a penalty of not more
than $2,000 for each day during which such
failure continues or such false or misleading
information is not corrected. The company
shall have the burden of proving that an
error was inadvertent and that a report was
inadvertently transmitted or published late.
(2) Any company which—
(A) fails to make, submit, or publish
such reports or information as may be
required under this Act or under regula
tions prescribed by the Board pursuan|^^
this Act, within the period of time s p ^ ^
fied by the Board; or
(B) submits or publishes any false or
misleading report or information, in a
manner not described in paragraph (1)
shall be subject to a penalty of not more
than $20,000 for each day during which
such failure continues or such false or
misleading information is not corrected.
(3) Notwithstanding paragraph (2), if any
company knowingly or with reckless disre
gard for the accuracy of any information or
report described in paragraph (2) submits or
publishes any false or misleading report or
information, the Board may, in its discre
tion, assess a penalty of not more than
$1,000,000 or 1 percent of total assets of
such company, whichever is less, per day
for each day during which such failure con
tinues or such false or misleading informa
tion is not corrected.
Bank Holding Company Act
(4) Any penalty imposed under paragraph
(1), (2), or (3) shall be assessed and col^ rc te d by the Board in the manner provided
^^B ubsection (b) (for penalties imposed unror such subsection) and any such assess
ment (including the determination of the
amount of the penalty) shall be subject to
the provisions of such subsection.
(5) Any company against which any pen
alty is assessed under this subsection shall
be afforded an agency hearing if such com
pany submits a request for such hearing
within 20 days after the issuance of the
notice of assessment. Section 8(h) of the
Federal Deposit Insurance Act shall apply
to any proceeding under this subsection.
[12 USC 1847. A s am ended by acts o f Nov. 10, 1978 (92
Stat. 3647); Oct. 15, 1982 (96 Stat. 1522); and Aug. 9,
1989 (103 Stat. 461, 475, 481).]
SECTION 9— Judicial Review (12 USC
1848)
Any party aggrieved by an order of the Board
under this Act may obtain a review of such
order in the United States Court of Appeals
within any circuit wherein such party has its
principal place of business, or in the Court of
Appeals in the District of Columbia, by filing
in the court, within thirty days after the entry
Board’s order, a petition praying that
tl^Wrder of the Board be set aside. A copy of
such petition shall be forthwith transmitted to
the Board by the clerk of the court, and there
upon the Board shall file in the court the
record made before the Board, as provided in
section 2112 of title 28, United States Code.
Upon the filing of such petition the court shall
have jurisdiction to affirm, set aside, or
modify the order of the Board and to require
the Board to take such action with regard to
the matter under review as the court deems
proper. The findings of the Board as to the
facts, if supported by substantial evidence,
shall be conclusive.
[12 USC 1848. A s am ended by acts o f Aug. 28, 1958 (72
Stat. 951) and July 1, 1966 (80 Stat. 240).]
SECTION 10— Tax Provisions
[S u b se ctio n s
(a) and (b) co n tain
la n g u ag e ad d e d to
subchapter O o f chapter 1 o f the Internal R evenue Code o f
1954 (26 U SC). This language was subsequently incorpo
rated into the Bank H olding Com pany Tax A ct o f 1976,
along with additional language also am ending the Internal
R evenue Code. It w as repealed by act o f Nov. 5, 1990 (104
Stat. 1388.]
SECTION 11— Saving Provision (12
USC 1849)
(a) General rule. Nothing herein contained
shall be interpreted or construed as approving
any act, action, or conduct which is or has
been or may be in violation of existing law,
nor shall anything herein contained constitute
a defense to any action, suit, or proceeding
pending or hereafter instituted on account of
any prohibited antitrust or monopolistic act,
action, or conduct, except as specifically pro
vided in this section.
(b) Antitrust review.
(1) The Board shall immediately notify the
Attorney General of any approval by it pur
suant to section 3 of a proposed acquisition,
merger, or consolidation transaction. If the
Board has found that it must act immedi
ately in order to prevent the probable fail
ure of a bank or bank holding company
involved in any such transaction, the trans
action may be consummated immediately
upon approval by the Board. If the Board
has advised the Comptroller of the Cur
rency or the State supervisory authority, as
the case may be, of the existence of an
emergency requiring expeditious action and
has required the submission of views and
recommendations within ten days, the trans
action may not be consummated before the
fifth calendar day after the date of approval
by the Board. In all other cases, the trans
action may not be consummated before the
thirtieth calendar day after the date of ap
proval by the Board or, if the Board has not
received any adverse comment from the At
torney General of the United States relating
to competitive factors, such shorter period
of time as may be prescribed by the Board
with the concurrence of the Attorney Gen
eral, but in no event less than 15 calendar
days after the date of approval. Any action
brought under the antitrust laws arising out
of an acquisition, merger, or consolidation
87
Bank Holding Company Act
transaction approved under section 3 shall
be commenced prior to the earliest time
under this subsection at which the transac
tion approval under section 3 might be con
summated. The commencement of such an
action shall stay the effectiveness of the
Board’s approval unless the court shall oth
erwise specifically order. In any such ac
tion, the court shall review de novo the
issues presented. In any judicial proceeding
attacking any acquisition, merger, or con
solidation transaction approved pursuant to
section 3 on the ground that such transac
tion alone and of itself constituted a viola
tion of any antitrust laws other than section
2 of the Act of luly 2, 1890 (section 2 of
the Sherman Antitrust Act. 15 U.S.C. 2),
the standards applied by the court shall be
identical with those that the Board is di
rected to apply under section 3 of this Act.
Upon the consummation of an acquisition,
merger, or consolidation transaction ap
proved under section 3 in compliance with
this Act and after the termination of any
antitrust litigation commenced within the
period prescribed in this section, or upon
the termination of such period of no such
litigation is commenced therein, the transac
tion may not thereafter be attached in any
judicial proceeding on the ground that it
alone and of itself constituted a violation of
any antitrust laws other than section 2 of
the Act of July 2, 1890 (section 2 of the
Sherman Antitrust Act, 15 U.S.C. 2), but
nothing in this Act shall exempt any bank
holding company involved in such a trans
action from complying with the antitrust
laws after the consummation of such trans
action.
(2) (A) If—
(i) the Federal Deposit Insurance Cor
poration learns that a bank insured by
such Corporation is in danger of clos
ing; and
(ii) the Corporation is considering as
sisting the acquisition of such bank
and its affiliated banks by another
bank or holding company under sec
tion 13(f) of the Federal Deposit Insur
ance Act and such acquisition is sub
ject to the approval of the Board under
section 3 of this Act,
the Corporation shall immediately notify
the Board of such facts.
(B) Upon receipt of notice from the Fed
eral Deposit Insurance Corporation
subparagraph (A) or at such earlier ^ H e
as deemed appropriate by the Board, the
Board shall immediately notify the Attor
ney General of the United States of the
facts concerning the possible acquisition.
(C) Within 5 days of receiving notice un
der subparagraph (B), the Attorney Gen
eral shall notify the Board in writing of
the Attorney General’s preliminary find
ing as to the consistency of the possible
acquisition with the antitrust laws. •
(D) The Board may reduce or eliminate
the post-approval waiting period estab
lished under paragraph (1) for an acquisi
tion to which this paragraph applies, ex
cept that such period may not be
eliminated or reduced to less than 5 days
without the concurrence of the Attorney
General.
(c) Antitrust proceedings; Board and State
banking agency as party; representation by
counsel. In any action brought under the anti
trust laws arising out of any acquisition,
merger, or consolidation transaction approved
by the Board under section 3 of this Act, the
Board and any State banking supervisory
agency having jurisdiction within the S tat^^ ft
volved, may appear as a party of its
motion and as of right, and be represented by
its counsel.
(d) Treatment o f merger transactions consum
mated prior or subsequent to May 9, 1956,
and not in litigation prior to July 1, 1966.
Any acquisition, merger, or consolidation of
the kind described in section 3(a) of this Act
which was consummated at any time prior or
subsequent to May 9, 1956, and as to which
no litigation was initiated by the Attorney
General prior to the date of enactment of this
amendment, shall be conclusively presumed
not to have been in violation of any antitrust
laws other than section 2 of the Act of July 2,
1890 (section 2 of the Sherman Antitrust Act,
15 U.S.C. 2).
(e) Antitrust litigation; substantive law appli
cable to proceedings pending on or after July
Bank Holding Company Act
1, 1966 with respect to merger transactions.
Any court having pending before it on or after
th ^ Ja te of enactment of this amendment any
li^^ fto n initiated under the antitrust laws by
tm^Rttomey General with respect to any ac
quisition, merger, or consolidation of the kind
described in section 3(a) of this Act shall ap
ply the substantive rule of law set forth in
section 3 of this Act.
(f) Definition o f “antitrust laws. ’’ For the pur
poses of this section, the term “antitrust laws”
means the Act of July 2, 1890 (the Sherman
Antitrust Act, 15 U.S.C. 1-7), the Act of Oc
tober 15, 1914 (the Clayton Act, 15 U.S.C.
12-27), and any other Acts in pari materia.
[12 USC 1849. A s am ended by acts o f July 1, 1966 (80
Stat. 240) and Dec. 31, 1970 (84 Stat. 1766) Oct. 2, 1976
(90 Stat. 1503); Nov. 16, 1977 (91 Stat. 1390); Aug. 10,
1987 (101 Stat. 628); and Sept. 23, 1994 (108 Stat. 2226).
T he date o f the am endm ent referred to in paragraphs (d)
and (e) is July 1, 1966.]
SECTION 12— Separability of Provisions
(12 USC 1841 note)
If any provision of this Act, or the application
of such provision to any person or circum
stance, shall be held invalid, the remainder of
the Act, and the application of such provision
to persons or circumstances other than those
to which it is held invalid, shall not be af
fected thereby.
89
Bank Holding Company Act Amendments of 1970
12 USC 1850, 1971 et seq.; 84 Stat. 1766; Pub. L. 91-607 (December 31, 1970)
105— Party in Interest
With respect to any proceeding before the
Federal Reserve Board wherein an applicant
seeks authority to acquire a subsidiary which
is a bank under section 3 of the Bank Holding
Company Act of 1956, to engage directly or
indirectly in a nonbanking activity pursuant to
section 4 of such Act, or to engage in an
activity otherwise prohibited under section
106 of this Act, a party who would become a
competitor of the applicant or subsidiary
thereof by virtue of the applicant’s or its sub
sidiary’s acquisition, entry into the business
involved, or activity, shall have the right to be
a party in interest in the proceeding and, in
the event of an adverse order of the Board,
shall have the right as an aggrieved party to
obtain judicial review thereof as provided in
section 9 of such Act of 1956 or as otherwise
provided by law.
[12 USC 1850.]
SECTION 106— Tie-In Arrangements
(ajmDefinitions. As used in this section, the
t^ ^ V “ bank” , “ bank holding com pany” ,
“subsidiary” , and “Board” have the meaning
ascribed to such terms in section 2 of the
Bank Holding Company Act of 1956. For pur
poses of this section only, the term “com
pany” , as used in section 2 of the Bank Hold
ing Company Act of 1956, means any person,
estate, trust, partnership, corporation, associa
tion, or similar organization, but does not in
clude any corporation the majority of the
shares of which are owned by the United
States or by any State. The term “trust ser
vice” means any service customarily per
formed by a bank trust department.
[12 U SC 1971.]
(b) Certain tie-in arrangements; prohibition;
exceptions.
(1) A bank shall not in any manner extend
credit, lease or sell property of any kind, or
furnish any service, or fix or vary the con
sideration for any of the foregoing, on the
condition or requirement—
(A) that the customer shall obtain some
additional credit, property, or service
from such bank other than a loan, dis
count, deposit, or trust service;
(B) that the customer shall obtain some
additional credit, property, or service
from a bank holding company of such
bank, or from any other subsidiary of
such bank holding company;
(C) that the customer provide some addi
tional credit, property, or service to such
bank, other than those related to and usu
ally provided in connection with a loan,
discount, deposit, or trust service;
(D) that the customer provide some addi
tional credit, property, or service to a
bank holding company of such bank, or
to any other subsidiary of such bank
holding company; or
(E) that the customer shall not obtain
some other credit, property, or service
from a competitor of such bank, a bank
holding company of such bank, or any
subsidiary of such bank holding com
pany, other than a condition or require
ment that such bank shall reasonably im
pose in a credit transaction to assure the
soundness of the credit.
The Board may by regulation or order per
mit such exceptions to the foregoing prohi
bition and the prohibitions of section
4(c)(9) and 4(h)(2) of the Bank Holding
Company Act of 1956 as it considers will
not be contrary to the purposes of this
section.
(2) (A) No bank which maintains a corre
spondent account in the name of another
bank shall make an extension of credit to
an executive officer or director of, or to
any person who directly or indirectly or
acting through or in concert with one or
more persons owns, controls, or has the
power to vote more than 10 per centum
of any class of voting securities of, such
other bank, or to any related interest of
such person, unless such extension of
91
§ 106
credit is made on substantially the same
terms, including interest rates and collat
eral as those prevailing at the time for
comparable transactions with other per
sons and does not involve more than the
normal risk of repayment or present other
unfavorable features.
(B) No bank shall open a correspondent
account at another bank while such bank
has outstanding an extension of credit to
an executive officer or director of, or
other person who directly or indirectly or
acting through or in concert with one or
more persons owns, controls, or has the
power to vote more than 10 per centum
of any class of voting securities of, the
bank desiring to open the account, or to
any related interest of such person, unless
such extension of credit was made on
substantially the same terms, including
interest rates and collateral as those pre
vailing at the time for comparable trans
actions with other persons and does not
involve more than the normal risk of re
payment or present other unfavorable
features.
(C) No bank which maintains a corre
spondent account at another Bank shall
make an extension of credit to an execu
tive officer or director of, or to any per
son who directly or indirectly acting
through or in concert with one or more
persons owns, controls, or has the power
to vote more than 10 per centum of any
class of voting securities of, such other
bank, or to any related interest of such
person, unless such extension of credit is
made on substantially the same terms, in
cluding interest rates and collateral as
those prevailing at the time for compa
rable transactions with other persons and
does not involve more than the normal
risk of repayment or present other unfa
vorable features.
(D) No bank which has outstanding an
extension of credit to an executive officer
or director of, or to any person who di
rectly or indirectly or acting through or
in concert with one or more persons
owns, controls, or has the power to vote
more than 10 per centum of any class of
voting securities of, another bank, or to
92
BHC Act Amendments
any related interest of such person shall
open a correspondent account at such
other bank, unless such extensioiL of
credit was made on substantiall^^Be
same terms, including interest ra te ^ m d
collateral as those prevailing at the time
for comparable transactions with other
persons and does not involve more than
the normal risk of repayment or present
other unfavorable features.
(E) For purposes of this paragraph, the
term “extension of credit” shall have the
meaning prescribed by the Board pursu
ant to section 22(h) of the Federal Re
serve Act (12 U.S.C. 375b), and the term
“executive officer” shall have the same
meaning given it under section 22(g) of
the Federal Reserve Act.
(F) (i) Any bank which, and any
institution-affiliated party (within the
meaning of section 3(u) of the Federal
Deposit Insurance Act) with respect to
such bank who, violates any provision
of this paragraph shall forfeit and pay
a civil penalty of not more than $5,000
for each day during which such viola
tion continues.
(ii) Notwithstanding clause (i), any
bank which, and any institutionaffiliated party (within the meaning of
section 3(u) of the Federal D epo^^fcsurance Act) with respect to such^BHc
who—
(I) (aa) commits any violation de
scribed in clause (i);
(bb) recklessly engages in an un
safe or unsound practice in con
ducting the affairs of such bank;
or
(cc) breaches any fiduciary duty;
(II) which violation, practice, or
breach—
(aa) is part of a pattern of mis
conduct;
(bb) causes or is likely to cause
more than a minimal loss to such
bank; or
(cc) results in pecuniary gain or
other benefit to such party,
shall forfeit and pay a civil penalty of
not more than $25,000 for each day
BHC Act Amendments
•
•
during which such violation, practice,
or breach continues.
(iii) Notwithstanding clauses (i) and
(ii), any bank which, and any
institution-affiliated party (within the
meaning of section 3(u) of the Federal
Deposit Insurance Act) with respect to
such bank who—
(I) knowingly—
(aa) commits any violation de
scribed in clause (i);
(bb) engages in any unsafe or un
sound practice in conducting the
affairs of such bank; or
(cc) breaches any fiduciary duty;
and
(II) knowingly or recklessly causes
a substantial loss to such bank or a
substantial pecuniary gain or other
benefit to such party by reason of
such violation, practice, or breach,
shall forfeit and pay a civil penalty in
an amount not to exceed the applicable
maximum amount determined under
clause (iv) for each day during which
such violation, practice, or breach
continues.
(iv) The maximum daily amount of
any civil penalty which may be as
sessed pursuant to clause (iii) for any
violation, practice, or breach described
in such clause is—
(I) in the case of any person other
than a bank, an amount to not ex
ceed $1,000,000; and
(II) in the case of a bank, an
amount not to exceed the lesser of—
(aa) $1,000,000; or
(bb) 1 percent of the total assets
of such bank.
(v) Any penalty imposed under clause
(i), (ii), or (iii) may be assessed and
collected—
(I) in the case of a national bank,
by the Comptroller of the Currency;
(II) in the case of a State member
bank, by the Board; and
(III) in the case of an insured non
member State bank, by the Federal
Deposit Insurance Corporation,
in the manner provided in subpara
graphs (E), (F), (G), and (I) of section
§ 106
8(i)(2) of the Federal Deposit Insur
ance Act for penalties imposed (under
such section) and any such assessment
shall be subject to the provisions of
such section.
(vi) The bank or other person against
whom any penalty is assessed under
this subparagraph shall be afforded an
agency hearing if such bank or person
submits a request for such hearing
within 20 days after the issuance of the
notice of assessment. Section 8(h) of
the Federal Deposit Insurance Act shall
apply to any proceeding under this
subparagraph.
(vii) All penalties collected under au
thority of this subsection shall be de
posited into the Treasury.
(viii) For purposes of this paragraph,
the term “violate” includes any action
(alone or with another or others) for or
toward causing, bringing about, partici
pating in, counseling, or aiding or
abetting a violation.
(ix) The Comptroller of the Currency,
the Board, and the Federal Deposit In
surance Corporation shall prescribe
regulations establishing such proce
dures as may be necessary to carry out
this subparagraph.
(G) (i) Each executive officer and each
stockholder of record who directly or
indirectly owns, controls, or has the
power to vote more than 10 per
centum of any class of voting securi
ties of an insured bank shall make a
written report to the board of directors
of such bank for any year during
which such executive officer or share
holder has outstanding an extension of
credit from a bank which maintains a
corresponding account in the name of
such bank. Such report shall include
the following information:
(1) the maximum amount of indebt
edness to the bank maintaining the
correspondent account during such
year of (a) such executive officer or
stockholder of record, (b) each com
pany controlled by such executive
officer of stockholder, or (c) each
political or campaign committee the
93
§ 106
funds or services of which will ben
efit such executive officer or stock
holder, or which is controlled
by such executive officer or
stockholder;
(2) the amount of indebtedness to
the bank maintaining the correspon
dent account outstanding as of a
date not more than ten days prior to
the date of filing of such report of
(a) such executive officer or stock
holder of record, (b) each company
controlled by such executive officer
or stockholder, or (c) each political
or campaign committee the funds or
services of which will benefit such
executive officer or stockholder;
(3) the range of interest rates
charged on such indebtedness of
such executive officer or stockholder
of record; and
(4) the terms and conditions of such
indebtedness of such executive of
ficer or stockholder of record.
(ii) The appropriate Federal banking
agencies are authorized to issue rules
and regulations, including definitions
of terms, to require the reporting and
public disclosure of information by any
bank or executive officer or principal
shareholder thereof concerning any ex
tension of credit by a correspondent
bank to the reporting bank’s executive
officers or principal shareholders, or
the related interests of such persons.
(H) For the purpose of this paragraph—
(i) the term “bank” includes a mutual
savings bank, a savings bank, and a
savings association (as those terms are
defined in section 3 of the Federal De
posit Insurance Act);
(ii) the term “related interests of such
persons” includes any company con
trolled by such executive officer, direc
tor, or person, or any political or cam
paign committee the funds or services
of which will benefit such executive
officer, director, or person or which is
controlled by such executive officer,
director, or person; and
(iii) the terms “control of a company”
BHC Act Amendments
and “company” have the same mean
ing as under section 22 (h) of the Fed
eral Reserve Act (12 U.S.C. 375b).
(I) The resignation, termination
ployment or participation, or separation
of an institution-affiliated party (within
the meaning of section 3(u) of the Fed
eral Deposit Insurance Act) with respect
to such a bank (including a separation
caused by the closing of such a bank)
shall not affect the jurisdiction and au
thority of the appropriate Federal banking
agency to issue any notice and proceed
under this section against any such party,
if such notice is served before the end of
the 6-year period beginning on the date
such party ceased to be such a party with
respect to such bank (whether such date
occurs before, on, or after the date of the
enactment of this subparagraph).
[12 U SC 1972. As am ended by acts o f Nov. 10, 1978 (92
Stat. 3690); Oct. 15, 1982 (96 Stat. 1520, 1523, 1526);
A ug. 9, 1989 (103 Stat. 461, 473); Dec. 19, 1991 (105 Stat.
2359); and Sept. 30, 1996 (110 Stat. 3009-413).]
(c) Jurisdiction o f courts; duty o f U.S. attor
neys; equitable proceedings; petition; expedi
tion o f cases; temporary restraining orders;
bringing in additional parties; subpoenas. The
district courts of the United States have J * is diction to prevent and restrain v io la tid ^ B f
subsection (b) of this section and it is the duty
of the United States attorneys, under the di
rection of the Attorney General, to institute
proceedings in equity to prevent and restrain
such violations. The proceedings may be by
way of a petition setting forth the case and
praying that the violation be enjoined or oth
erwise prohibited. When the parties com
plained of have been duly notified of the peti
tion, the court shall proceed, as soon as
possible, to the hearing and determination of
the case. While the petition is pending, and
before final decree, the court may at any time
make such temporary restraining order or pro
hibition as it deems just. Whenever it appears
to the court that the ends of justice require
that other parties be brought before it, the
court may cause them to be summoned
whether or not they reside in the district in
which the court is held, and subpoenas to that
BHC Act Amendments
end may be served in any district by the mar
shal thereof.
1973j
notions by United States; subpoenas fo r
witnesses. In any action brought by or on
behalf of the United States under subsection
(b), subpoenas for witnesses may run into any
district, but no writ of subpoena may issue for
witnesses living out of the district in which
the court is held at a greater distance than one
hundred miles from the place of holding the
same without the prior permission of the trial
court upon proper application and cause
shown.
[12 U SC 1974.]
(e) Civil actions by persons injured; jurisdic
tion and venue; amount o f recovery. Any per
son who is injured in his business or property
by reason of anything forbidden in subsection
(b) may sue therefor in any district court of
the United States in which the defendant re
sides or is found or has an agent, without
regard to the amount in controversy, and shall
be entitled to recover three times the amount
of the damages sustained by him and the cost
of suit, including a reasonable attorney’s fee.
§ 106
(g) Lim itation o f actions; suspension o f
limitations.
(1) Subject to paragraph (2), any action to
enforce any cause of action under this sec
tion shall be forever barred unless com
menced within four years after the cause of
action accrued.
(2) Whenever any enforcement action is in
stituted by or on behalf of the United States
with respect to any matter which is or
could be the subject of a private right of
action under this section, the running of the
statute of limitations in respect of every
private right of action arising under this
section and based in whole or in part on
such matter shall be suspended during the
pendency of the enforcement action so in
stituted and for one year thereafter: Pro
vided, That whenever the running of the
statute of limitations in respect of a cause
of action arising under this section is sus
pended under this paragraph, any action to
enforce such cause of action shall be for
ever barred unless commenced either within
the period of suspension or within the fouryear period referred to in paragraph (1).
[12 USC 1977.]
[12 U SC 1975.]
(f^Jnjunctive relief o f persons against threat'W or damages; equitable proceedings;
pm im inary injunctions. Any person may sue
for and have injunctive relief, in any court of
the United States having jurisdiction over the
parties, against threatened loss or damage by
reason of a violation of subsection (b), under
the same conditions and principles as injunc
tive relief against threatened conduct that will
cause loss or damage is granted by courts of
equity and under the rules governing such
proceedings. Upon the execution of proper
bond against damages for an injunction improvidently granted and a showing that the
danger of irreparable loss or damage is imme
diate, a preliminary injunction may issue.
[12 USC 1976.]
(h) Actions under other Federal or State laws
unaffected; regulations or orders barred as a
defense. Nothing contained in this section
shall be construed as affecting in any manner
the right of the United States or any other
party to bring an action under any other law
of the United States or of any State, including
any right which may exist in addition to spe
cific statutory authority, challenging the legal
ity of any act or practice which may be pro
scribed by this section. No regulation or order
issued by the Board under this section shall in
any manner constitute a defense to such
action.
[12 U SC 1978.]
95
Board of Governors of the Federal Reserve System
Official Staff Commentary
on Regulation Z
Truth in Lending
As revised effective February 28, 1997
Any inquiry relating to Regulation Z should be addressed to the Federal Reserve Bank of the
Federal Reserve District in which the inquiry arises.
August 1997
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......... 15
Section 226.4— Finance charge ................. 18
Subpart B—Open-End Credit
Section 226.5—General disclosure
requirements .............................................
Section 226.5a—Credit and charge card
applications and solicitations .................
Section 226.5b— Requirements for homeequity plans .............................................
Section 226.6—Initial disclosure
statement ...................................................
Section 226.7—Periodic statement ...........
Section 226.8—Identification of
transactions ...............................................
Section 226.9—Subsequent disclosure
requirements .............................................
Section 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 rate ..........................................
Section 226.15—Right of rescissio n .........
Section 226.16—Advertising ......................
27
Page
Section 226.22—Determination of
annual percentage rate .......................... 143
Section 226.23—Right of rescission . . . . 145
Section 226.24— Advertising ................... 151
Subpart D—Miscellaneous
Section 226.25—Record rete n tio n ...........
Section 226.26— Use of annual
percentage rate in oral disclosures . . .
Section 226.27— Spanish-language
disclosures ...............................................
Section 226.28—Effect on state laws . . .
Section 226.29— State exemptions .........
Section 226.30— Limitation on rates . . .
154
155
155
156
160
161
31
Subpart E— Special Rules for Certain
Home Mortgage Transactions
37
Section 226.31— General rules ............... 164
Section 226.32—Requirements for
certain closed-end home mortgages .. 165
Section 226.33—Requirements for
reverse mortgages .................................. 169
54
59
64
67
73
74
75
82
87
90
96
Subpart C—Closed-End Credit
Section 226.17—General disclosure
requirements .............................................. 99
Section 226.18—Content of disclosures . 114
Section 226.19—Certain residential
mortgage transactions............................ 127
Section 226.20—Subsequent disclosure
requirements ........................................... 137
Section 226.21—Treatment of credit
balances ................................................... 142
Appendix A—Effect on state laws .........
Appendix B— State exemptions .............
Appendix C—Issuance of staff
interpretations .........................................
Appendix D—Multiple-advance
construction loans ..................................
Appendix E—Rules for card issuers
that bill on a transaction-bytransaction basis ....................................
Appendix F—Annual percentage rate
computations for certain open-end
credit plans .............................................
Appendix G—Open-end model forms
and clauses .............................................
Appendix H—Closed-end model forms
and clauses .............................................
Appendix I—Federal enforcement
agencies ...................................................
Appendix J—Annual percentage rate
computations for closed-end credit
transactions .............................................
Appendix K—Total-Annual-Loan Cost
Rate Computations for ReverseMortgage Transactions ..........................
170
171
171
171
172
172
173
175
178
178
179
Contents
Page
Appendix L— Assumed Loan Periods
for Computations of Total-AnnualLoan-Cost Rates .................................... 179
Official Staff Commentary
on Regulation Z
As revised effective February 28, 1997*
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 compli
ance with this commentary affords protection
from liability under section 130(f) of the Truth
in Lending Act. Section 130(f) (15 USC 1640)
protects creditors from civil liability for any
act done or omitted in good faith in confor
mity with any interpretation issued by a duly
authorized official or employee of the Federal
Reserve System.
2. Procedure fo r 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 regula
tion. 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 appro
priate 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 regula
* C om pliance with revisions optional until O ctober 1,
1997.
tion, reference to the regulation should be
construed to refer to revised Regulation Z,
unless the context indicates that a reference
to previous Regulation Z is also intended,
(c) Throughout the commentary, reference
to “this section” or “this paragraph” means
the section or paragraph in the regulation
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 sec
tion 226.18(b) are futher divided by subpara
graph, such as comment 18(b)(l)-l and com
ment 18(b)(2)-!. In other cases, comments
have more general application and are desig
nated, for example, as comment 18-1 or com
ment 18(b)-l. This introduction may be cited
as comments 1-1 through 1-7. Comments to
the appendixes may be cited, for example, as
comment app. A-l.
6. Cross-references. The following crossreferences to related material appear at the
end of each section of the commentary: (a)
“ Statute” —those sections of the Truth in
Lending Act on which the regulatory provi
sion is based (and any other relevant statutes);
(b) “Other sections”—other provisions in the
regulation necessary to understand that sec
tion; (c) “Previous regulation”—parallel pro
visions in previous Regulation Z; and (d)
“ 1981 changes”— a brief description of the
major changes made by the 1981 revisions to
Regulation Z. Where appropriate, a fifth cat
egory (“Other regulations” ) provides crossreferences to other regulations.
7. Transition rules.
(a) Though compliance with the revised
regulation is not mandatory 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 one time, or it
I
Regulation Z Commentary
may convert to the new requirements in
stages. In general, however, a creditor may
not mix the regulatory requirements when
making disclosures for a particular closedend transaction or open-end account; all the
disclosures for a single closed-end transac
tion (or open-end account) must be made in
accordance with the previous regulation, or
all the disclosures must be made in accor
dance with the revised regulation. As an
exception to the general rule, the revised
rescission rules and the revised advertising
rules may be followed even if the disclo
sures are based on the previous regulation.
For purposes of this regulation, the creditor
is not required to take any particular action
beyond the requirements of the revised
regulation to indicate its conversion to the
revised regulation.
(b) The revised regulation may be relied on
to determine if any disclosures are required
for a particular transaction or to determine
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 regula
tion, nor are oral agreements to lend money
if there is no finance charge. These provi
sions may be relied on even if the creditor
is making other disclosures under the previ
ous regulation. The new rules governing
whether or not disclosures must be made
for refinancings and assumptions are also
available to a creditor that has not yet con
verted its operations to the revised
regulation.
(c) In addition to the above rules, appli
cable 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 previ
ous 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 conversion to
the revised regulation.
• The previous billing rights statements are
substantially similar to the revised billing
rights statements and may continue to be
used, except that, if the creditor 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 credi
tor 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 regula
tion. For example, if the creditor sent a
semiannual statement in June 1981 and
converts to the new regulation in Octo
ber 1981, the creditor must give the bill
ing 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
regulation. 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 char
tered or based in the United States or a for
eign country. Thus, a U.S. resident’s use in
§ 226.2
Regulation Z Commentary
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 for
eign branch extends credit to a U.S. citizen
residing or visiting abroad or to a foreign
national abroad.
•
The term does not include:
•
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
added to explain the reorganization of the
regulation into subparts that group together
the provisions relating to general matters,
open-end credit, closed-end credit, and miscel
laneous 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 requiring
disclosures are advertisements. Messages in
viting, offering, or otherwise announcing gen
erally to prospective customers the availability
of credit transactions, whether in visual, 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 mate
rial 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
organized solicitation of business
Messages on checking account statements
offering auto loans at a stated annual per
centage rate
•
•
•
•
Direct personal contacts, such as followup
letters, cost estimates for individual con
sumers, or oral or written communication
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 sub
ject 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 definitional purposes, since some
creditors’ cycles do not involve the sending of
bills in the traditional sense but only state
ments of account activity. This is commonly
the case with financial institutions when peri
3
§ 226.2
odic payments are made through payroll de
duction or through automatic debit of the con
sumer’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 ex
ample, 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 requirement
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 statement 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 D ay”
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 pur
poses such as deposits and withdrawals, bill
paying, 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.
2(a)(7) “Card Issuer”
1. Agent. An agent of a card issuer is consid4
Regulation Z Commentary
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 ser
vices 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
consumer credit purposes or who is a co
obligor or guarantor for such a card issued to
another. The second category does not include
an employee who is a co-obligor or guarantor
on a card issued to the employer for business
purposes, 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, agricultural, 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 issu
ers offer dual-card systems—that is, they issue
two cards to the same individual, one intended
for business use, the other for consumer or
§ 226.2
Regulation Z Commentary
personal use. With such a system, the same
person may be a cardholder for general pur
poses when using the card issued for con
sumer use, and a cardholder only for the lim
ited purposes of the restrictions on issuance
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 am ounts 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)(ll) “Consumer”
1. Scope. Guarantors, endorsers, and sureties
are not generally consumers for purposes of
the regulation, but they may be entitled to
rescind 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
includes any natural person whose ownership
interest in his or her principal dwelling is
subject to the risk of loss. Thus, if a security
interest is taken in A’s ownership interest in a
house and that house is A’s principal dwelling,
A is a consumer for purposes of rescission,
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 inchoate
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 ob
ligation 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 con
summation. 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 ex
ample, when a consumer pays a nonrefund
able deposit to purchase an automobile, a pur
chase contract may be created, but
consummation for purposes of the regulation
does not occur unless the consumer also con
tracts for financing at that time.
5
§ 226.2
2(a)(14) “Credit”
Regulation Z Commentary
•
1. Exclusions. The following situations are not
considered credit for purposes of the
regulation:
•
•
•
•
•
•
•
•
Layaway plans, unless the consumer is
contractually obligated to continue making
payments. Whether the consumer is so ob
ligated is a matter to be determined under
applicable law. The fact that the consumer
is not entitled to a refund of any amounts
paid towards the cash price of the mer
chandise does not bring layaways within
the definition of credit.
Tax liens, tax assessments, court judg
ments, and court approvals of reaffirmation
of debts in bankruptcy. However, thirdparty financing of such obligations (for ex
ample, a bank loan obtained to pay off
a tax lien) is credit for purposes of the
regulation.
Insurance premium plans that involve pay
ment in installments with each installment
representing the payment for insurance
coverage for a certain future period of
time, unless the consumer is contractually
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 ob
ligation to continue making payments
“ Borrowing” against the accrued cash
value of an insurance policy or a pension
account, if there is no independent obliga
tion to repay
Letters of credit
The execution of option contracts. How
ever, 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 por
tion of the downpayment and of the peri
odic mortgage payments in return for an
ownership interest in the property, and
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:
•
•
•
•
Exam ples
o f 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 line 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 con
sumer 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 inadvertent
overdraft
Any card, key, plate, or other device that is
used in order to obtain petroleum products
for business purposes from a wholesale
distribution facility or to gain access to
that facility, and that is required to be used
without regard to payment terms.
3. Charge card. Generally, charge cards are
cards used in connection with an account on
which outstanding balances cannot be carried
§ 226.2
Regulation Z Commentary
from one billing cycle to another and are pay
able when a periodic statement is received.
Under the regulation, a reference to credit
cards generally includes charge cards. The
term “charge card” is, however, distinguished
from “ credit card” in sections 226.5a,
226.9(e), 226.9(f) and 226.28(d), and appen
dixes G -10 through G-13. When the term
“credit card” is used in those provisions, it
refers to credit cards other than charge cards.
which an educational institution is the creditor
may be treated as either a credit sale or a
loan, regardless of whether the funds are
given directly to the student, credited to the
student’s account, or disbursed to other per
sons on the student’s behalf. The disclosure of
the total sale price need not be given if the
transaction is treated as a loan.
2(a)(16) “Credit Sale”
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.
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
institution, 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 transaction;
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 fo r educational purposes.
A credit extension for educational purposes in
2(a)(I7) “Creditor”
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
extension 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 letter
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
7
§ 226.2
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
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, “trans
actions” means accounts, so that outstanding
accounts are counted instead of individual cred
it extensions. Normally the number of transac
tions is measured by the preceding calendar
year; if the requisite number 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 preceding year, the num
ber of transactions is measured by the current
calendar year. For example, if the person ex
tends 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 business begins in 1983 and
extends consumer credit 20 times, it is not a
creditor for purposes of the regulation in
1983. If it extends consumer credit 75 times
in 1984, however, it becomes a creditor for
purposes of the regulation (and must begin
making disclosures) after the 25th extension
of credit in that year and is a creditor for all
extensions of consumer 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
Regulation Z Commentary
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
example, 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, and use a trust to ad
minister the receipt and disbursement of
funds. Unless each participant’s account is an
individual plan and trust, the creditor should
apply the numerical tests to the plan as a
whole rather than to the individual account,
even if the loan amount is determined by ref
erence to the balance in the individual account
and the repayments are credited to the indi
vidual account. The person to whom the obli
gation is originally made payable (whether the
plan, the trust, or the trustee) is the creditor
for purposes of the act and regulation.
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
entertainment cards that expect repayment at
the first billing and do not impose a finance
charge. Since all disclosures are to be made
§ 226.2
Regulation Z Commentary
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 model
forms, also apply to such card issuers.
Paragraph 2(a)(17)(iv)
1. Card issuers subject to subparts B and C.
Section 226.2(a)(17)(iv) includes as creditors
card issuers extending closed-end credit 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 reduc
ing the cash price is part of the downpayment.
(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 treated,
the total of payments under section 226.18(h)
must equal the sum of the payments 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
used as residences, just as are condominium
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 de
spite the general exem ption 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 programs
containing a number of different credit fea
tures. The consumer has a single account with
the institution that can be accessed repeatedly
via a number of subaccounts established for
the different program features and rate struc
tures. Some features of the program might be
used repeatedly (for example, an overdraft
line), while others might be used infrequently
(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 re9
§ 226.2
peated transactions. This means that the credit
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 re
peated 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 reasonable be
lief by a creditor necessarily includes some
margin for judgmental error. The fact that a
particular consumer does not return for further
credit extensions does not prevent a plan from
having been properly characterized as openend. For example, if much of the customer
base of a clothing store makes repeat pur
chases, the fact that some consumers use the
plan only once would not affect the character
ization of the store’s plan as open-end 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 consumer.
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
automobile 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
normally 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
10
Regulation Z Commentary
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
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 credi
tor might agree to lend a total of $10,000
in a series of advances as needed by the
consumer. When a consumer has borrowed
the full $10,000, no more is advanced un
der that particular agreement, even if there
has been repayment of a portion 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
refuse to extend new credit in a particular
case due to changes in the economy, the cred
itor’s financial condition, or the consumer’s
creditworthiness. (The rules in section 226.5b
(f), however, limit the ability of a creditor to
suspend credit advances for home-equity
plans.) While consumers should have a rea
sonable expectation of obtaining credit as long
as they remain current and within any preset
credit limits, further extensions of credit need
not be an absolute right in order for the plan
to meet the self-replenishing criterion.
§ 226.2
Regulation Z Commentary
6. Open-end real estate mortgages. Some
credit plans call for negotiated advances under
so-called open-end real estate mortgages. Each
such plan must be independently measured
against the definition of “open-end credit,”
regardless of the terminology used in the in
dustry to describe the plan. The fact that a
particular plan is called an open-end real es
tate mortgage, for example, does not, by itself,
mean that it is open-end credit under the
regulation.
2(a)(21) “Periodic Rate"
1. Basis. The periodic rate may be stated as a
percentage (for example, l'A percent per
month) or as a decimal equivalent (for ex
ample, .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”
periodic 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
percentage 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 percent
age point of the rate based on the actual
365 days in the year).
2. Transaction charges. “Periodic rate” does
not include initial one-tim e 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 w ith 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:
•
•
•
•
•
•
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
prepaid 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 be
tween the credit and cash prices (the discount)
is a finance charge. (See the commentary to
11
§ 226.2
sections 226.4(b)(9) and 226.4(c)(5).) If the
creditor applies the entire $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 downpayment and the discount
is not a prepaid finance 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.
Regulation Z Commentary
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:
•
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 ob
ligation is assumable
Section 226.19—special timing rules
Section 226.20(b)—disclosure requirements
for assumptions
Section 226.23(f)—exemption from the
right of rescission
2. Lien status. The definition is not limited to
first lien transactions. For example, a con
sumer might assume a paid-down first mort
gage (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 “resi
dential mortgage transaction” if the dwelling
purchased is the consum er’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 within
a year or upon the completion of construction,
the new dwelling is considered the principal
dwelling for purposes of applying this defini
tion to a particular transaction. See the com
mentary to sections 226.15(a) and 226.23(a).
4. Construction financing. If a transaction
meets the definition of a residential mortgage
12
•
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
permanent phase). Each one is a residential
mortgage transaction.
One creditor finances the initial construc
tion of the consumer’s principal dwelling
and another creditor makes a loan to sat
isfy 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(f)(1) and 226.15(f)(1)), the early dis
closure requirement (section 226.19(a)), and
the disclosure concerning assumability (section
226.18(q)). In the following situation, by con
trast, since the transaction is not a residential
mortgage transaction, no disclosures are re
quired 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 pre
§ 226.2
Regulation Z Commentary
viously purchased the property and agreed
with the seller to make the mortgage
payments.
ests, the creditor may, at its option, consider
such interests as security interests for Truth in
Lending purposes.
6. Multiple-purpose transactions. A transac
tion meets the definition of this section if any
part of the loan proceeds will be used to fi
nance the acquisition or initial construction of
the consumer’s principal dwelling. For ex
ample, a transaction to finance the initial con
struction of the consumer’s principal dwelling
is a residential mortgage transaction even if a
portion of the funds will be disbursed directly
to the consumer or used to satisfy a loan for
the purchase of the land on which the dwell
ing will be built.
3. Incidental interests. Incidental interests in
property that are not security interests include,
among other things:
2(a)(25) “Security Interest’’
1. Threshold test. The threshold test is
whether a particular interest in property is rec
ognized as a security interest under applicable
law. The regulation does not determine
whether a particular interest is a security inter
est under applicable law. If the creditor is
unsure whether a particular interest is a secu
rity interest under applicable law (for ex
ample, if statutes and case law are either si
lent or inconclusive on the issue), the creditor
may at its option consider such interests as
security interests for Truth in Lending pur
poses. However, the regulation and the com
mentary do exclude specific interests, such as
after-acquired property and accessories, from
the scope of the definition regardless of their
categorization under applicable law, and these
named exclusions may not be disclosed as
security 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
disclosed with the disclosures required under
section 226.18, but the creditor is not pre
cluded from preserving these rights elsewhere
in the contract documents, or invoking and
enforcing such rights, if it is otherwise lawful
to do so. If the creditor is unsure whether a
particular interest is one of the excluded inter
•
•
•
•
•
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 ex
ample, in an insurance premium financing
transaction.
4. Operation o f law. Interests that arise solely
by operation of law are excluded from the
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 lien,
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 liens.
6. Specificity o f disclosure. A creditor need
not separately disclose multiple security inter
ests that it may hold in the same collateral.
The creditor need only disclose that the trans
action is secured by the collateral, even when
security interests from prior transactions re
main of record and a new security interest is
taken in connection with the transaction. In
disclosing the fact that the transaction is se
cured by the collateral, the creditor also need
not disclose how the security interest arose.
For example, in a closed-end credit transac
tion, a rescission notice need not specifically
state that a new security interest is “ acquired”
13
§ 226.2
or an existing security interest is “retained” in
the transaction.
The acquisition or retention of a security
interest in the consumer’s principal dwelling
instead may be disclosed in a rescission notice
with a general statement such as the follow
ing: “Your home is the security for the new
transaction.”
2(b) R ules o f C onstruction
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
contains new definitions for “ arranger of
credit,” “business day,” “closed-end credit,”
“ consumer,” “ consummation,” “ downpayent,” “prepaid finance charge,” and “residen
tial mortgage transaction.”
14
Regulation Z Commentary
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 mea
sured 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 gen
eral 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 ex
cluded from the general definition.
“Consumer credit” reflects the new statu
tory exemption for agricultural credit.
“Consummation” is a significant departure
from longstanding interpretations of the previ
ous definition. It now focuses only on the
time the consumer becomes contractually obli
gated, rather than the time the consumer pays
a nonrefundable fee or suffers an economic
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
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. Fi
§ 226.3
Regulation Z Commentary
nally, 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
rescission, 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 prima
rily 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
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 per
sonal 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
ployees or agents if
personal purposes
• A loan secured by
pay a child’s tuition
• A personal account
business purposes
a company to its em
the loans are used for
a mechanic’s tools to
used occasionally for
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,
however, 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 owner15
§ 226.3
occupied 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 busi
ness 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 pur
poses 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. Business
purpose 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 pur
chase of a farm with a homestead) if the
transaction is prim arily for agricultural
purposes.
7. Organizational credit. The exemption for
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 pur16
Regulation Z Commentary
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 financing a
residential real estate transaction for an indi
vidual 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 executed
by the financial institution in its capacity as
trustee and payment is secured by a trust
deed, reflecting title in the financial institution
as trustee. In some instances, the consumer
executes a personal guaranty of the indebted
ness. The note provides that it is payable only
out of the property specifically described in
the trust deed and that the trustee has no
personal liability on the note. Assuming the
transactions are for personal, family, or house
hold 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
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 inform ation for any
advances.
§ 226.3
Regulation Z Commentary
•
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 prin
cipal dwelling, the plan would no longer be
exempt. The creditor must comply with all of
the requirements of the regulation, including,
for example, providing the consumer with an
initial disclosure statement. If the security in
terest being added is in the consumer’s princi
pal 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
interest in real property or in personal prop
erty used or expected to be used as the con
sumer’s principal dwelling may be added to
an extension of credit for over $25,000. Such
a transaction is consumer credit requiring dis
closures only if the existing obligation is sat
isfied and replaced by a new obligation made
for consumer purposes undertaken by the
same obligor. (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(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 ac
tual cost of the fuel. Fuel is delivered as
needed, no finance charge is assessed, and the
customer may withdraw from the plan at any
time. Under these circumstances, the arrange
ment is exempt from the regulation, even if a
charge to cover the billing costs is imposed.
3(f) 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) pro
gram, and the National Direct Student Loan
program.
References
3(c) Public-Utility Credit
1. Examples. Examples of public utility ser
vices 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:
•
•
To purchase appliances such as gas or
electric ranges, grills, or telephones
To finance home improvements such as
new heating or air conditioning systems.
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
$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 th«
regulation.
r
§ 226.3
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 transac
tion 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.
i. For example, the following items are not
finance charges:
A. Taxes, license fees, or registration fees
paid by both cash and credit customers.
B. Discounts that are available to cash and
credit customers, such as quantity discounts.
C. Discounts available to a particular group
of consumers because they meet certain
criteria, such as being members of an or
ganization or having accounts at a particu
lar financial institution. This is the case
even if an individual must pay cash to
obtain the discount, provided that credit
customers who are members of the group
and do not qualify for the discount pay no
more than the nonmember cash customers.
D. 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.
ii. In contrast, the following items are fi
nance charges:
A. Inspection and handling fees for the staged
disbursem ent
of
construction-loan
proceeds.
18
Regulation Z Commentary
B. Fees for preparing a Truth in Lending dis
closure statement, if permitted by law (for
example, the Real Estate Settlement Proce
dures Act prohibits such charges in certain
transactions secured by real property).
C. Charges for a required maintenance or ser
vice contract imposed only in a credit
transaction.
iii.
If the charge in a credit transaction ex
ceeds the charge imposed in a comparable
cash transaction, only the difference is a fi
nance charge. For example:
A. 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 transac
tion 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).)
A tax imposed by a state or other govern
mental body on a creditor is not a finance
charge if the creditor absorbs the tax as a
cost of doing business and does not sepa
rately impose the tax on the consumer.
(For additional discussion of the treatment
of taxes, see other commentary to section
226.4(a).)
3. Forfeitures o f interest. If the creditor re
duces the interest rate it pays or stops paying
interest on the consumer’s deposit account or
any portion of it for the term of a credit
transaction (including, for example, an over
draft on a checking account or a loan secured
by a certificate of deposit), the interest lost is
§ 226.4
Regulation Z Commentary
a finance charge. (See the commentary to sec
tion 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^). The interest that is not paid on the
time deposit by the financial institution
is not a finance charge (and therefore
does not affect the annual percentage rate
computation).
4. Treatment o f fees fo r use o f automated
teller machines. Any charge imposed on a
cardholder by a card issuer for the use of an
automated teller machine (ATM) to obtain a
cash advance (whether in a proprietary,
shared, interchange, 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 with
draw cash from a consumer asset account,
such as a checking or savings account. (See
the commentary to section 226.6(b).)
5. Taxes, i. Generally, a tax imposed by a
state or other governmental body solely on a
creditor is a finance charge if the creditor
separately im poses the charge on the
consumer.
ii. In contrast, a tax is not a finance charge
(even if it is collected by the creditor) if ap
plicable law imposes the tax:
A. Solely on the consumer;
B. On the creditor and the consumer jointly;
or
C. On the credit transaction, without indicat
ing which party is liable for the tax; or
D. On the creditor, if applicable law directs or
authorizes the creditor to pass the tax on
to the consumer. (For purposes of this sec
tion, if applicable law is silent as to pass
ing on the tax, the law is deemed not to
authorize passing it on.)
iii. For example, a stamp tax, property tax,
intangible tax, or any other state or local tax
imposed on the consumer, or on the credit
transaction, is not a finance charge even if the
tax is collected by the creditor.
iv. In addition, a tax is not a finance charge
if it is excluded from the finance charge by
another provision of the regulation or com
mentary (for example, if the tax is imposed
uniformly in cash and credit transactions).
4(a)(1) Charges by Third Parties
1. Choosing the provider o f a required ser
vice. An example of a third-party charge in
cluded in the finance charge is the cost of
required mortgage insurance, even if the con
sumer is allowed to choose the insurer.
2. Annuities associated with reverse mort
gages. Some creditors offer annuities in con
nection with a reverse-mortgage transaction
IS
§ 226.4
The amount of the premium is a finance
charge if the creditor requires the purchase of
the annuity incident to the credit. Examples
include the following:
i.
The credit documents reflect the purchase
of an annuity from a specific provider or
providers.
ii. The creditor assesses an additional charge
on consumers who do not purchase an
annuity from a specific provider.
iii. The annuity is intended to replace in
whole or in part the creditor’s payments to
the consumer either immediately or at
some future date.
4(a)(2) Special Rule; Closing Agent Charges
1. General. This rule applies to charges by a
third party serving as the closing agent for the
particular loan. An example of a closing agent
charge included in the finance charge is a
courier fee where the creditor requires the use
of a courier.
2. Required closing agent. If the creditor re
quires the use of a closing agent, fees charged
by the closing agent are included in the fi
nance charge only if the creditor requires the
particular service, requires the imposition of
the charge, or retains a portion of the charge.
Fees charged by a third-party closing agent
may be otherwise excluded from the finance
charge under section 226.4. For example, a
fee that would be paid in a comparable cash
transaction may be excluded under section
226.4(a); a lump-sum fee for real estate clos
ing costs may be excluded under section
226.4(c)(7).
4(a)(3) Special Rule; Mortgage Broker Fees
1. General. A fee charged by a mortgage bro
ker is excluded from the finance charge if it is
the type of fee that is also excluded when
charged by the creditor. For example, to ex
clude an application fee from the finance
charge under section 226.4(c)(1), a mortgage
broker must charge the fee to all applicants
for credit, whether or not credit is extended.
Regulation Z Commentary
tion with a consumer credit transaction se
cured by real property or a dwelling.
3. Compensation by lender. The rule requires
all mortgage broker fees to be included in the
finance charge. Creditors sometimes compen
sate mortgage brokers under a separate ar
rangement with those parties. Creditors may
draw on amounts paid by the consumer, such
as points or closing costs, to fund their pay
ment to the broker. Compensation paid by a
creditor to a mortgage broker under an agree
ment is not included as a separate component
of a consumer’s total finance charge (although
this compensation may be reflected in the fi
nance charge if it comes from amounts paid
by the consumer to the creditor that are fi
nance charges, such as points and interest).
4(b) E xam ples o f 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:
•
•
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 fol
lowing situations:
•
•
2. Coverage. This rule applies to charges paid
by consumers to a mortgage broker in connec20
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.
A ppraisal fees m entioned in section
226.4(b)(4) are excluded for real property
or residential mortgage transactions under
section 226.4(c)(7).
An account with an overdraft line of credit
incurs a $4.50 service charge, while an
account without a credit feature has a
$2.50 service charge; the $2.00 difference
is a finance charge. If the difference is not
related 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 imposed
§ 226.4
Regulation Z Commentary
uniformly for any item that overdraws 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
assumption fee is a finance charge in the new
buyer’s transaction.
that credit extension, since it was previously
owned by the consumer.
2. Insurance written in connection with a
transaction. Insurance sold after consumma
tion in closed-end credit transactions or after
the opening of a plan in open-end credit trans
actions is not “ written in connection with” the
credit transaction if the insurance is written
because of the consumer’s default (for ex
ample, by failing to obtain or maintain re
quired property insurance) or because the con
sumer requests insurance after consummation
or the opening of a plan (although credit-sale
disclosures may be required for the insurance
sold after consummation if it is financed).
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 premiums 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-value
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.)
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 premium 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)
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
1. Discounts fo r 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.
21
§ 226.4
2. Exception fo r cash discounts. Discounts of
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 under
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 de
fined in section 103(z) of the act, as amended)
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
posted. . . .” For example, in the sale of mo
tor vehicle fuel, the tagged or posted price is
22
Regulation Z Commentary
the price displayed at the pump. As a result,
the higher price (the open-end credit or credit
card price) must be displayed at the pump,
either alone or along with the cash price. Ser
vice 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
either 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 lim ited to cash
purchases.
4(b)(10) Debt-Cancellation Fees
1. Definition. Debt-cancellation coverage pro
vides for payment or satisfaction of all or part
of a debt when a specified event occurs. The
term includes guaranteed automobile protec
tion, or GAP, agreements, which pay or sat
isfy the remaining debt after property insur
ance benefits are exhausted.
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
finance 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.
Paragraph 4(c)(2)
1. Late-paym ent charges. Late-paym ent
charges can be excluded from the finance
charge under section 226.4(c)(2) whether or
not the person imposing the charge continues
§ 226.4
Regulation Z Commentary
to extend credit on the account or continues to
provide property or services to the consumer.
In determining whether a charge is for actual
unanticipated late payment on a 30-day ac
count, for example, factors to be considered
include:
may be charged on a monthly, annual, or
other periodic basis; a one-time, non-recurring
fee imposed 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 participa
tion fee.
•
2. Participation fees—exclusions. Minimum
monthly charges, charges for non-use of a
credit card, and other charges based on either
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 com
ment 14(c)-7 for treatment of certain types of
fees excluded in determining the annual per
centage rate for the periodic statement.)
•
The terms of the account. For example, is
the consumer required by the account
terms to pay the account balance in full
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. O ther excluded charges. Charges for
“deliquency, default, or a similar occurrence”
include, 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. Participation fees—periodic basis. The par
ticipation fees m entioned 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
condition of access to the plan itself, but it
does not apply to fees imposed separately on
individual closed-end transactions. The fee
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 fre
quently involved in real estate transactions
guaranteed or insured by governmental agen
cies. A “ com m itm ent fee” paid by a
noncreditor seller (such as a real estate devel
oper) to the creditor should be treated as sell
er’s points. Buyer’s points (that is, points
charged to the buyer by the creditor), how
ever, are finance charges.
2. Other seller-paid amounts. Mortgage insur
ance premiums and other finance charges are
sometimes paid at or before consummation or
settlement on the borrower’s behalf by a
noncreditor seller. The creditor should treat
the payment made by the seller as seller’s
points and exclude it from the finance charge
if, based on the seller’s payment, the con
sumer is not legally bound to the creditor for
the charge. A creditor who gives disclosures
before the payment has been made should
23
§ 226.4
base them on the best information reasonably
available.
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
creditor must reduce the interest rate paid on
the deposit and, as a result, the consumer
loses some of the interest that would other
wise have been earned. Under section
226.4(c)-(6), such “lost interest” need not be
included in the finance charge. This rule ap
plies only to an interest reduction imposed
because a rate differential is required by law
and a usury limit precludes compliance by any
other means. If the creditor imposes a differ
ential that exceeds that required, only the lost
interest attributable to the excess amount is a
finance charge. (See the commentary to sec
tion 226.4(a).)
Paragraph 4(c)(7)
1. Real estate or residential mortgage trans
action 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 em
ployees rather than by a third party. In addi
tion, the cost of verifying or confirming infor
mation connected to the item is also excluded.
For example, credit-report fees cover not only
the cost of the report but also the cost of
verifying information in the report. In all
cases, charges excluded under section
226.4(c)(7) must be bona fide and reasonable.
2. Lump-sum charges. If a lump sum charged
for several services includes a charge that is
not excludable, a portion of the total should
be allocated to that service and included in
the finance charge. However, a lump sum
charged for conducting or attending a closing
(for example, by a lawyer or a title company)
is excluded from the finance charge if the
24
Regulation Z Commentary
charge is primarily for services related to
items listed in section 226.4(c)(7) (for ex
ample, reviewing or completing documents),
even if other incidental services such as ex
plaining various documents or disbursing
funds for the parties are performed. The entire
charge is excluded even if a fee for the inci
dental services would be a finance charge if it
were imposed separately.
3. Charges assessed during the loan term.
Real estate or residential mortgage transaction
charges excluded under section 226.4(c)(7) are
those charges imposed solely in connection
with the initial decision to grant credit. This
would include, for example, a fee to search
for tax liens on the property or to determine if
flood insurance is required. The exclusion
does not apply to fees for services to be per
formed periodically during the loan term, re
gardless of when the fee is collected. For ex
ample, a fee for one or more determinations
during the loan term of the current tax-lien
status or flood-insurance requirements is a fi
nance charge, regardless of whether the fee is
imposed at closing, or when the service is
performed. If a creditor is uncertain about
what portion of a fee to be paid at consumma
tion or loan closing is related to the initial
decision to grant credit, the entire fee may be
treated as a finance charge.
4(d) Insurance and Debt-Cancellation
Coverage
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
location of insurance disclosures for closedend transactions are in section 226.17(a).
2. Timing o f disclosures. If disclosures are
given early, for exam ple under section
226.17(0 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.
§ 226.4
Regulation Z Commentary
3. Prem ium -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
redisclosure in order to exclude the additional
premium 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 cover
age with a maximum of $10,000. The con
sumer requests an additional $4,000 loan to be
covered 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 premium 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 consumer is required
to elect one of several options—such as to
purchase credit life insurance, or to assign an
existing life insurance policy, or to pledge se
curity such as a certificate of deposit—and
the consumer purchases the credit life insur
ance policy, the premium must be included in
the finance charge. (If the consumer assigns a
preexisting policy or pledges security instead,
no premium is included in the finance charge.
The security interest would be disclosed under
section 226.6(c) or section 226.18(m). 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
loss-of-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)(ll), or by an authorized user on
a credit card account.
8. Property insurance. To exclude property
insurance premiums or charges from the fi
nance charge, the creditor must allow the con
sumer 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
sources. The premium or charge must be dis
closed 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 waives any right of
subrogation
The other requirem ents 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
25
§ 226.4
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
of insurance coverage. The premium must be
clearly labeled as being for one year.
12. Loss-of-income insurance. The loss-of- in
come insurance mentioned in section 226.4(d)
includes involuntary unemployment insurance,
which provides that some or all of the con
sumer’s payments will be made if the con
sumer becomes unemployed involuntarily.
26
Regulation Z Commentary
4(d)(3) Voluntary Debt-Cancellation Fees
1. General. Fees charged for the specialized
form of debt-cancellation agreement known as
guaranteed autom obile protection (GAP)
agreements must be disclosed according to
section 226.4(d)(3) rather than according to
section 226.4(d)(2) for property insurance.
2. Disclosures. Creditors can comply with
section 226.4(d)(3) by providing a disclosure
that refers to debt-cancellation coverage
whether or not the coverage is considered in
surance. Creditors may use the model credit
insurance disclosures only if the debtcancellation coverage constitutes insurance un
der state law.
4(e) Certain Security-Interest Charges
1. Examples.
i. Excludable charges. Sums must be actu
ally paid to public officials to be excluded
from the finance charge under section
226.4(e)(1) and (3). Examples are charges or
other fees required for filing or recording se
curity agreements, mortgages, continuation
statements, termination statements, and similar
documents, as well as intangible property or
other taxes even when the charges or fees are
imposed by the state solely on the creditor
and charged to the consumer (if the tax must
be paid to record a security agreement). (See
comment 4(a)-5 regarding the treatment of
taxes, generally.)
ii. Charges not excludable. If the obligation
is between the creditor and a third party (an
assignee, for example), charges or other fees
for filing or recording security agreements,
mortgages, continuation statements, termina
tion statements, and similar documents relat
ing to that obligation are not excludable from
the finance charge under this section.
2. Itemization. The various charges described
in section 226.4(e)(1) and (3) may be totaled
and disclosed as an aggregate sum, or they
may be itemized by the specific fees and
taxes imposed. If an aggregate sum is dis
closed, a general term such as security-interest
fees or filing fees may be used.
3. Notary fees. In order for a notary fee to be
§ 226.5
Regulation Z Commentary
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
under 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 nonftling
insurance is purchased. If the creditor collects
and simply retains a fee as a sort of “ selfinsurance” against nonfiling, it may not be
excluded from the finance charge. If the
nonfiling insurance premium exceeds the
amount of the fees excludable from the fi
nance 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(f) 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 dis
counts 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 transac
tions. With respect to various exclusions from
the finance charge: application fees imposed
on all applicants are no longer finance
charges, continuing to extend credit to a con
sumer is no longer a controlling test for deter
mining whether a late payment charge is bona
fide, seller’s points are not to be included in
the finance charge, and the special exclusions
for real estate transactions apply to all “resi
dential 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
authorization, permit any consumer to autho
rize 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
conspicuous” standard requires that disclo
sures be in a reasonably understandable form.
It does not require that disclosures be segre
gated from other material or located in any
particular 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 (“finance
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 un27
§ 226.5
•
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 fi
nance charge), or “ C r” (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 inte
grated document would not include disclosure
pages provided to the consumer at different
times or disclosures interspersed on the same
page with promotional material. An integrated
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 ser
vices 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 “ an
nual percentage rate,” when required to be
used with a number, must be disclosed more
conspicuously than other required disclosures,
except 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:
•
•
28
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
Regulation Z Commentary
•
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 descriptions
of other terms, emphasis is permissible 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 disclo
sures 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,
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
conspicuous 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 (such as when a con
sumer opens a credit plan and makes pur
chases contemporaneously at a retail store),
receives the first advance, or pays any fees or
§ 226.5
Regulation Z Commentary
charges under the plan other than an applica
tion fee or refundable membership fee (see
below). The prohibition on the payment of
fees other than application or refundable
membership fees before initial disclosures are
provided does not apply to home-equity plans
subject to section 226.5b. See the commentary
to section 226.5b(h) regarding the collection
of fees for home-equity plans covered by sec
tion 226.5b.
•
If the consumer pays a membership fee
before receiving the Truth in Lending dis
closures, or the consumer agrees to the
imposition of a membership fee at the time
of application and the Truth in Lending
disclosure statement is not given at that
time, disclosures Me timely as long as the
consumer, after receiving the disclosures,
can reject the plan. The creditor must re
fund 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
receiving the disclosures, return the cash
advance check to the creditor without obli
gation (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.
2. Reactivation o f suspended account. If an
account is temporarily suspended (for ex
ample, because the consumer has exceeded a
credit limit, or because a credit card is re
ported lost or stolen) and then is reactivated,
no new initial disclosures are required.
3. Reopening closed account. If an account
has been closed (for example, due to inactiv
ity, cancellation, or expiration) and then is
reopened, new initial disclosures are required.
No new initial disclosures are required, how
ever, when the account is closed merely to
assign 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
before 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. Balance transfers. A creditor that solicits
the transfer by a consumer of outstanding bal
ances from an existing account to a new
open-end plan must comply with section
226.6 before the balance transfer occurs. Card
issuers that are subject to the requirements of
section 226.5a may establish procedures that
comply with both sections in a single disclo
sure statement.
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 undeliver
able. If a new address is provided, how
ever, within a reasonable time before the
creditor must send a statement, the creditor
must resume sending statements. Receiving
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 re
ceived 22 days before the end of the June
cycle, the creditor must send the periodic
statement for the June cycle. (See section
226.13(a)(7).)
2. Termination o f credit privileges. When an
open-end account is terminated without being
29
§ 226.5
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 open-end
credit plan ends and consumers are paying off
outstanding balances) and must continue to
follow all of the other open-end credit require
ments and procedures in subpart B.
Paragraph 5(b)(2)(H)
1. 14-day rule. The 14-day rule for mailing or
delivering periodic statements does not apply
if charges (for example, transaction or activity
charges) are imposed regardless of the timing
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 fo r periodic statements. The credi
tor may permit consumers to call for their
periodic 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 pe
riod, the statement (including a statement pro
vided by electronic means) must be made
available in accordance with the 14-day rule.
Regulation Z Commentary
•
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
reasonably 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
obtaining 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 com panies 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 simi
lar 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.
5(c) Basis o f Disclosures and Use of
Estimates
1. Legal obligation. The disclosures should
reflect the credit terms to which the parties
are legally bound at the time of giving the
disclosures.
•
•
30
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
5(d) Multiple Creditors; Multiple
Consumers
1. Multiple creditors. Under section 226.5(d):
•
•
•
Creditors must choose which of them will
make the disclosures
A single, complete set of disclosures must
be provided, rather than partial disclosures
from several creditors
All disclosures for the open-end credit plan
must be given, even if the disclosing credi
§ 226.5a
Regulation Z Commentary
tor would not otherwise have been obli
gated to make a particular disclosure
2. Multiple consumers. Disclosures may be
made to either obligor on a joint account.
Disclosure responsibilities are not satisfied by
giving disclosures to only a surety or guaran
tor 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 cov
erage and charges the consumer for it, such a
change does not make the original disclosures
inaccurate. The creditor may, however, be re
quired to provide a new disclosure(s) under
section 226.9(c).
2. Use o f inserts. When changes in a credi
to r’s plan affect required disclosures, the
creditor may use inserts with outdated disclo
sure 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)
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
liable consumer.
SECTION 226.5a— Credit and Charge
Card Applications and Solicitations
1. General. Section 226.5a generally requires
that credit disclosures be contained in applica
tion forms and preapproved solicitations initi
ated by a card issuer to open a credit or
charge card account. (See the commentary to
section 226.5a(a)(3) and 226.5a(e) for excep
tions; see also section 226.2(a)(15) and ac
companying commentary for the definition of
charge card.)
2. Combining disclosures. The initial disclo
sures required by section 226.6 do not substi
tute for the disclosures required by section
226.5a; however, a card issuer may establish
procedures so that a single disclosure state
ment meets the requirements of both sections.
For example, if a card issuer in complying
with section 226.5a(e)(2) provides all the ap
plicable disclosures required under section
226.6, in a form that the consumer may keep
and in accordance with the other format and
timing requirements for that section, the issuer
satisfies the initial disclosure requirements un
der section 226.6 as well as the disclosure
requirements of section 226.5a(e)(2). Or if, in
com plying with section 226.5a(c) or
226.5a(d)(2), a card issuer provides an inte
grated document that the consumer may keep,
and provides the section 226.5a disclosures (in
a tabular format) along with the additional
disclosures required under section 226.6 (pre
sented outside of the table), the card issuer
satisfies the requirements of both sections
226.5a and 226.6.
5a(a) General Rules
5a(a)(2) Form o f Disclosures
1. Prominent location. Certain of the required
31
§ 226.5a
disclosures provided on or with an application
or solicitation must be prominently located—
that is, readily noticeable to the consumer.
There are, however, no requirements that the
disclosures be in any particular location or in
any particular type size or typeface.
2. Multiple accounts or varying terms. If a
tabular format is required to be used, card
issuers offering several types of accounts may
disclose the various terms for the accounts in
a single table or may provide a separate table
for each account. Similarly, if rates or other
terms vary from state to state, card issuers
may list the states and the various disclosures
in a single table or in separate tables.
3. Additional information. The table contain
ing the disclosures required by section 226.5a
should contain only the information required
or permitted by this section. (See the com
mentary to section 226.5a(b) for guidance on
information permitted in the table.) Other
credit information may be presented on or
with an application or solicitation, provided
such information appears outside the required
table.
4. Location o f certain disclosures. A card is
suer has the option of disclosing any of the
fees in section 226.5a(b)(8) through (10) in
the required table or outside the table.
5. Terminology.
In
general,
section
226.5a(a)(2)(iv) requires that the terminology
used for the disclosures specified in section
226.5a(b) be consistent with that used in the
disclosures under sections 226.6 and 226.7.
This standard requires that the section
226.5a(b) disclosures be close in meaning to
those under sections 226.6 and 226.7; how
ever, the terminology used need not be identi
cal. In addition, section 226.5a(a)(2)(i) re
quires that the headings, content, and format
Df the tabular disclosures be substantially
similar, but need not be identical, to the tables
in appendix G. A special rule applies to the
grace-period disclosure, however; the term
“grace period” must be used, either in the
leading or in the text of the disclosure.
5. Deletion o f inapplicable disclosures. Generilly, disclosures need only be given as appli;able. Card issuers may, therefore, delete inap)2
Regulation Z Commentary
plicable headings and their corresponding
boxes in the table. For example, if no transac
tion fee is imposed for purchases, the disclo
sure form may contain the heading “Transac
tion fee for purchases” and a box showing
“none,” or the heading and box may be de
leted from the table. There is an exception for
the grace-period disclosure, however; even if
no grace period exists, that fact must be
stated.
5a(a)(3) Exceptions
1. Coverage. Certain exceptions to the cover
age of section 226.5a are stated in section
226.5a(a)(3); in addition, the requirements of
section 226.5a do not apply to the following:
•
•
Lines of credit accessed solely by account
numbers
Addition of a credit or charge card to an
existing open-end plan
2. Noncoverage o f “consumer-initiated” re
quests. Applications provided to a consumer
upon request are not covered by section
226.5a, even if the request is made in re
sponse to the card issuer’s invitation to apply
for a card account. To illustrate, if a card
issuer invites consumers to call a toll-free
number or to return a response card to obtain
an application, the application sent in response
to the consumer’s request need not contain the
disclosures required under section 226.5a.
Similarly, if the card issuer invites consumers
to call and make an oral application on the
telephone, section 226.5a does not apply to
the application made by the consumer. If,
however, the card issuer calls a consumer or
initiates a telephone discussion with a con
sumer about opening a card account and con
temporaneously takes an oral application, such
applications are subject to section 226.5a, spe
cifically section 226.5a(d).
3. General-purpose applications. The require
ments of this section do not apply to general
purpose applications unless the application, or
material accompanying it, indicates that it can
be used to open a credit or charge card
account.
5a(a)(5) Certain Fees That Vary by State
1. Manner o f disclosing range. If the card
Regulation Z Commentary
issuer discloses a range of fees instead of
disclosing the amount of the fee imposed in
each state, the range may be stated as the
lowest authorized fee (zero, if there are one or
more states where no fee applies) to the high
est authorized fee.
5a(b) Required Disclosures
5a(b)(l) Annual Percentage Rate
1. Periodic rate. The periodic rate, expressed
as such, may be disclosed in the table in
addition to the required disclosure of the cor
responding annual percentage rate.
2. Variable-rate accounts—definition. For pur
poses of section 226.5a(b)(l), a variable-rate
account exists when rate changes are part of
the plan and are tied to an index or formula.
(See the commentary to section 226.6(a)(2)
for examples of variable-rate plans.)
3. Variable-rate accounts— rates in effect. For
variable-rate disclosures in direct-mail applica
tions and solicitations subject to section
226.5a(c), and in applications and solicitations
made available to the general public subject to
section 226.5a(e), the rules concerning accu
racy of the annual percentage rate are stated
in section 226.5a(b)(l)(ii). For variable-rate
disclosures in telephone applications and so
licitations subject to section 226.5a(d), the
card issuer must provide an annual percentage
rate currently applicable when oral disclosures
are provided under section 226.5a(d)(l). For
the alternate disclosures under section
226.5a(d)(2), the card issuer must provide the
annual percentage rate in effect at the time the
disclosures are mailed or delivered. A rate in
effect also includes the rate as of a specified
date (which rate is then updated from time to
time, for example, each calendar month) or an
estimated rate provided in accordance with
section 226.5(c).
4. Variable-rate accounts—other disclosures.
In describing how the applicable rate will be
determined, the card issuer must identify the
index or formula and disclose any margin or
spread added to the index or formula in set
ting the rate. The card issuer may disclose the
margin or spread as a range of the highest and
lowest margins that may be applicable to the
§ 226.5a
account. A disclosure of any applicable limita
tions on rate increases or decreases may also
be included in the table.
5. Introductory rates—discounted rates. If the
initial rate is temporary and is lower than the
rate that will apply after the temporary rate
expires, the card issuer must disclose the an
nual percentage rate that would otherwise ap
ply to the account. In a fixed-rate account, the
card issuer must disclose the rate that will
apply after the introductory rate expires. In a
variable-rate account, the card issuer must dis
close a rate based on the index or formula
applicable to the account in accordance with
the rules in section 226.5a(b)(l)(ii) and com
ment 5a(b)(l)-3. An initial discounted rate
may be provided in the table along with the
rate required to be disclosed if the card issuer
also discloses the time period during which
the introductory rate will remain in effect.
6. Introductory rates—premium rates. If the
initial rate is temporary and is higher than the
permanently applicable rate, the card issuer
must disclose the initial rate. The issuer may
disclose in the table the rate that would other
wise apply if the issuer also discloses the time
period during which the initial rate will re
main in effect.
5a(b)(2) Fees fo r Issuance or Availability
1. Membership fees. Membership fees for
opening an account must be disclosed under
this paragraph. A membership fee to join an
organization that provides a credit or charge
card as a privilege of membership must be
disclosed only if the card is issued automati
cally upon membership. Such a fee need not
be disclosed if membership results merely in
eligibility to apply for an account.
2. Enhancements. Fees for optional services
in addition to basic membership privileges in
a credit or charge card account (for example,
travel insurance or card-registration services)
should not be disclosed in the table if the
basic account may be opened without paying
such fees.
3. One-time fees. Disclosure of nonperiodic
fees is limited to fees related to opening the
account, such as one-time membership fees.
33
§ 226.5a
The following are examples of fees that
should not be disclosed in the table:
•
•
•
Fees for reissuing a lost or stolen card
Statement-reproduction fees
Application fees described in section
226.4(c)(1)
4. Waived or reduced fees. If fees required to
be disclosed are waived or reduced for a
limited time, the introductory fees or the fact
of fee waivers may be provided in the table in
addition to the required fees if the card issuer
also discloses how long the fees or waivers
will remain in effect.
5. Fees stated as annual amount. Fees im
posed periodically must be stated as an annual
total. For example, if a fee is imposed
quarterly, the disclosures would state the total
amount of the fees for one year. (See,
however, the commentary to section 226.9(e)
with regard to disclosure of such fees in
renewal notices.)
5a(b)(4) Transaction Charges
1. Charges imposed by person other than
card issuer. Charges imposed by a third party,
such as a seller of goods, would not be
disclosed under this section; the third party
would be responsible for disclosing the charge
under section 226.9(d)(1).
5a(b)(5) Grace Period
1. How disclosure is made. The card issuer
may, but need not, refer to the beginning or
ending point of any grace period and briefly
state any conditions on the applicability of the
grace period. For example, the grace period
disclosure might read “ 30 days” or “30 days
from the date of the periodic statement
(provided you have paid your previous bal
ance in full by the due date).”
5a(b)(6) Balance-Computation Method
1. Form o f disclosure. In cases where the
card issuer uses a balance-calculation method
that is identified by name in the regulation,
the card issuer may only disclose the name of
the method in the table. In cases where the
card issuer uses a balance-computation
34
Regulation Z Commentary
method that is not identified by name in the
regulation, the disclosure in the table should
clearly explain the method in as much detail
as set forth in the descriptions of balance
methods in section 226.5a(g). The explanation
need not be as detailed as that required for the
disclosures under section 226.6(a)(3). (See the
commentary to section 226.5a(g) for guidance
on particular methods.)
2. Determining the method. In determining
the appropriate balance-computation method
for purchases for disclosure purposes, the card
issuer must assume that a purchase balance
will exist at the end of any grace period.
Thus, for example, if the average-dailybalance method will include new purchases or
cover two billing cycles only if purchase
balances are not paid within the grace period,
the card issuer would disclose the name of the
average-daily-balance method that includes
new purchases or covers two billing cycles,
respectively. The card issuer should not as
sume the existence of a purchase balance,
however, in making other disclosures under
section 226.5a(b).
5a(b)(7) Statement on Charge Card Payments
1. Applicability and content. The disclosure
that charges are payable upon receipt of the
periodic statement is applicable only to charge
card accounts. In making this disclosure, the
card issuer may make such modifications as
are necessary to more accurately reflect the
circumstances of repayment under the account.
For example, the disclosure might read,
“Charges are due and payable upon receipt of
the periodic statement and must be paid no
later than 15 days after receipt of such
statement.”
5a(b)(8) Cash-Advance Fee
1. Applicability. The card issuer must disclose
only those fees it imposes for a cash advance
that are finance charges under section 226.4.
For example, a charge for a cash advance at
an automated teller machine (ATM) would be
disclosed under section 226.5a(b)(8) if no
similar charge is imposed for ATM transac
tions not involving an extension of credit.
§ 226.5a
Regulation Z Commentary
(See comment 4(a)-5 for a description of such
a fee.)
5a(b)(9) Late-Payment Fee
1. Applicability. The disclosure of the fee for
a late payment includes only those fees that
will be imposed for actual, unanticipated late
payments. (See the commentary to section
226.4(c)(2) for additional guidance on latepayment fees.)
5a(b)(10) Over-the-Limit Fee
1. Applicability. The disclosure of fees for ex
ceeding a credit limit does not include fees
for other types of default or for services re
lated to exceeding the limit. For example, no
disclosure is required of fees for reinstating
credit privileges or fees for the dishonor of
checks on an account that, if paid, would
cause the credit limit to be exceeded.
When used in a direct mailing, the credit-term
disclosures must be accurate as of the mailing
date, whether or not the section 226.5a
(e)(l)(ii) and (iii) disclosures are included;
when used in a take-one, the disclosures must
be accurate for as long as the takeone forms
remain available to the public if the section
226.5a(e)(l)(ii) and (iii) disclosures are omit
ted. (If those disclosures are included in the
take-one, the credit term disclosures need only
be accurate as of the printing date.)
5a(d) Telephone Applications and
Solicitations
1. Coverage. This paragraph applies if:
•
A telephone conversation between a card
issuer and consumer may result in the issu
ance of a card as a consequence of an
issuer-initiated offer to open an account for
which the issuer does not require any ap
plication (that is, a “preapproved” tele
phone solicitation).
The card issuer initiates the contact and at
the same time takes application informa
tion over the telephone.
5a(c) Direct-Mail Applications and
Solicitations
•
1. Accuracy. In general, disclosures in directmail applications and solicitations must be ac
curate as of the time of mailing. (An accurate
variable annual percentage rate is one in effect
within 60 days before mailing.)
This paragraph does not apply to:
2. Mailed publications. Applications or solici
tations contained in generally available publi
cations mailed to consumers (such as sub
scription m agazines) are subject to the
requirements applicable to “take-ones” in sec
tion 226.5a(e), rather than the direct-mail re
quirements of section 226.5a(c). However, if a
primary purpose of a card issuer’s mailing is
to offer credit or charge card accounts—for
example, where a card issuer “prescreens” a
list of potential cardholders using credit crite
ria, and then mails to the targeted group its
catalog containing an application or a solicita
tion for a card account—the direct-mail rules
apply. In addition, a card issuer may use a
single application form as a “take-one” (in
racks in public locations, for example) and for
direct mailings, if the card issuer complies
with the requirements of section 226.5a(c)
even when the form is used as a “takeone”— that is, by presenting the required sec
tion 226.5a disclosures in a tabular format.
•
•
Telephone applications initiated by the
consumer.
Situations where no card will be issued—
because, for example, the consumer indi
cates that he or she does not want the card,
or the card issuer decides either during the
telephone conversation or later not to issue
the card.
5a(e) Applications and Solicitations
Made Available to General Public
1. Coverage. Applications and solicitations
made available to the general public include
what are commonly referred to as “take-one”
applications typically found at counters in
banks and retail establishments, as well as
applications contained in catalogs, magazines
and other generally available publications. In
the case of credit unions, this paragraph ap
plies to applications and solicitations to open
card accounts made available to those in the
general field of membership.
2. Cross-selling. If a card issuer invites a con35
§ 226.5a
sumer to apply for a credit or charge card (for
example, where the issuer engages in crossselling), an application provided to the con
sumer at the consumer’s request is not consid
ered an application made available to the
general public and therefore is not subject to
section 226.5a(e). For example, the following
are not covered:
•
•
A consumer applies in person for a car
loan at a financial institution and the loan
officer invites the consumer to apply for a
credit or charge card account; the con
sumer accepts the invitation.
An employee of a retail establishment, in
the course of processing a sales transaction
using a bank credit card, asks a customer
if he or she would like to apply for the
retailer’s credit or charge card; the cus
tomer responds affirmatively.
3. Toll-free telephone number. If a card issuer,
in complying with any of the disclosure op
tions of section 226.5a(e), provides a tele
phone number for consumers to call to obtain
credit information, the number must be tollfree for nonlocal calls made from an area
code other than the one used in the card issu
er’s dialing area. Alternatively, a card issuer
may provide any telephone number that al
lows a consumer to call for information and
reverse the telephone charges.
5a(e)(l) Disclosure o f Required Credit
Information
1. Date o f printing. Disclosure of the month
and year fulfills the requirement to disclose
the date an application was printed.
2. Form o f disclosures. The disclosures speci
fied in section 226.5a(e)(l)(ii) and (iii) may
appear either in or outside the table containing
the required credit disclosures.
5a(e)(2) Inclusion o f Certain Initial
Disclosures
1. Accuracy o f disclosures. The disclosures
required by section 226.5a(e)(2) generally
must be current as of the time they are made
available to the public. Disclosures are consid
ered to be made available at the time they are
placed in public locations (in the case of
36
Regulation Z Commentary
“take-ones” ) or mailed to consumers (in the
case of publications).
2. Accuracy—exception. If a card issuer dis
closes all the information required by section
226.5a(e)(l)(ii) on the application or solicita
tion, the disclosures under section 226.5a(e)(2)
need only be current as of the date of print
ing. (A current variable annual percentage rate
would be one in effect within 30 days before
printing.)
5a(e)(3) No Disclosure o f Credit Information
1. When disclosure option available. A card
issuer may use this option only if the issuer
does not include on or with the application or
solicitation any statement that refers to the
credit disclosures required by section
226.5a(b). Statements such as “ no annual
fee,” “low interest rate,” “favorable rates,”
and “ low costs” are deemed to refer to the
required credit disclosures and, therefore, may
not be included on or with the solicitation or
application, if the card issuer chooses to use
this option.
5a(e)(4) Prompt Response to Requests fo r
Information
1. Prompt disclosure. Information is promptly
disclosed if it is given within 30 days of a
consumer’s request for information but in no
event later than delivery of the credit or
charge card.
2. Information disclosed. When a consumer
requests credit information, card issuers need
not provide all the required credit disclosures
in all instances. For example, if disclosures
have been provided in accordance with section
226.5a(e)(l) or (2) and a consumer calls or
writes a card issuer to obtain information
about changes in the disclosures, the issuer
need only provide the items of information
that have changed from those previously dis
closed on or with the application or solicita
tion. If a consumer requests information about
particular items, the card issuer need only pro
vide the requested information. If, however,
the card issuer has made disclosures in accor
dance with the option in section 226.5a(e)(3)
and a consumer calls or writes the card issuer
Regulation Z Commentary
requesting information about costs, all the re
quired disclosure information must be given.
3. Manner o f response. A card issuer’s re
sponse to a consumer’s request for credit in
formation may be provided orally or in writ
ing, regardless of the manner in which the
consumer’s request is received by the issuer.
Furthermore, the card issuer may provide the
inform ation
listed in either section
226.5a(e)(l) or (2). Information provided in
writing need not be in a tabular format.
5a(f) Special Charge Card Rule— Card
Issuer and Person Extending Credit Not
the Same Person
1. Duties o f charge card issuer. Although the
charge card issuer is not required to disclose
information about the underlying open-end
credit plan if the card issuer meets the condi
tions set forth in section 226.5a(f), the card
issuer must disclose the information relating
to the charge card plan itself.
2. Duties o f creditor maintaining open-end
plan. Section 226.5a does not impose disclo
sure requirements on the creditor that main
tains the underlying open-end credit plan. This
is the case even though the creditor offering
the open-end credit plan may be considered an
agent of the charge card issuer. (See comment
2(a)(7)-1.)
3. Form o f disclosures. The disclosures re
quired by section 226.5a(f) may appear either
in or outside the table containing the required
credit disclosures in circumstances where a
tabular format is required.
5a(g) Balance-Computation Methods
Defined
1. Daily-balance method. Card issuers using
the daily-balance method may disclose it us
ing the name “average daily balance (includ
ing new purchases)” or “average daily bal
ance (excluding new purchases),” as
appropriate. Alternatively, such card issuers
may explain the method. (See comment 7(e)-5
for a discussion of the daily-balance method.)
2. Two-cycle average-daily-balance methods.
The “two-cycle average-daily-balance” meth
ods described in section 226.5a(g)(2)(i) and
§ 226.5b
(ii) include those methods in which the aver
age daily balances for two billing cycles may
be added together to compute the finance
charge. Such methods also include those in
which a periodic rate is applied separately to
the balance in each cycle, and the resulting
finance charges are added together. The
method is a “two-cycle average daily bal
ance” even if the finance charge is based on
both the current- and prior-cycle balances only
under certain circumstances, such as when
purchases during a prior cycle were carried
over into the current cycle and no finance
charge was assessed during the prior cycle.
Furthermore, the method is a “ two-cycle
average-daily-balance method” if the balances
for both the current and prior cycles are aver
age daily balances, even if those balances are
figured differently. For example, the name
“two-cycle average-daily-balance (excluding
new purchases)” should be used to describe a
method in which the finance charge for the
current cycle, figured on an average daily bal
ance excluding new purchases, will be added
to the finance charge for the prior cycle, fig
ured on an average daily balance of only new
purchases during that prior cycle.
SECTION 226.5b— Requirements for
Home-Equity Plans
1. Coverage. This section applies to all openend credit plans secured by the consumer’s
“dwelling,” as defined in section 226.2(a)(19),
and is not limited to plans secured by the
consumer’s principal dwelling. (See the com
mentary to section 226.3(a), which discusses
w hether transactions are consum er or
business-purpose credit, for guidance on
whether a home-equity plan is subject to
Regulation Z.)
2. Changes to home-equity plans entered into
on or after Novem ber 7, 1989. Section
226.9(c) applies if, by written agreement un
der section 226.5b(f)(3)(iii), a creditor changes
the terms of a home-equity plan— entered into
on or after November 7, 1989— at or before
its scheduled expiration, for example, by re
newing a plan on different terms. A new plan
results, however, if the plan is renewed (with
or without changes to the term s) after
37
§ 226.5b
the scheduled expiration. The new plan is sub
ject to all open-end credit rules, including sec
tions 226.5b, 226.6, and 226.15.
3. Transition rules and renewals o f preexist
ing plans. The requirements of this section do
not apply to home-equity plans entered into
before November 7, 1989. The requirements
of this section also do not apply if the original
consumer, on or after November 7, 1989, re
news a plan entered into prior to that date
(with or without changes to the terms). If, on
or after November 7, 1989, a security interest
in the consumer’s dwelling is added to a line
of credit entered into before that date, the
substantive restrictions of this section apply
for the remainder of the plan, but no new
disclosures are required under this section.
4. Disclosure o f repayment phase—applicabil
ity o f requirements. Some plans provide in the
initial agreement for a period during which no
further draws may be taken and repayment of
the amount borrowed is made. All of the ap
plicable disclosures in this section must be
given for the repayment phase. Thus, for ex
ample, a creditor must provide payment infor
mation about the repayment phase as well as
about the draw period, as required by section
266.5b(d)(5). If the rate that will apply during
the repayment phase is fixed at a known
amount, the creditor must provide an annual
percentage rate under section 226.5b(d)(6) for
that phase. If, however, a creditor uses an
index to determine the rate that will apply at
the time of conversion to the repayment
phase—even if the rate will thereafter be
fixed—the creditor must provide the informa
tion in section 226.5b(d)(12), as applicable.
5. Payment terms—applicability o f closed-end
provisions and substantive rules. All payment
terms that are provided for in the initial agree
ment are subject to the requirements of sub
part B and not subpart C of the regulation.
Payment terms that are subsequently added to
the agreement may be subject to subpart B or
to subpart C, depending on the circumstances.
The following examples apply these general
rules to different situations:
38
Regulation Z Commentary
•
If the initial agreement provides for a re
payment phase or for other payment terms
such as options permitting conversion of
part or all of the balance to a fixed rate
during the draw period, these terms must
be disclosed pursuant to sections 226.5b
and 226.6, and not under subpart C. Fur
thermore, the creditor must continue to
provide periodic statements under section
226.7 and comply with other provisions of
subpart B (such as the substantive require
ments of section 226.5b(f» throughout the
plan, including the repayment phase.
• If the consumer and the creditor enter into
an agreement during the draw period to
repay all or part of the principal balance
on different terms (for example, with a
fixed rate of interest) and the amount of
available credit will be replenished as the
principal balance is repaid, the creditor
must continue to comply with subpart B.
For example, the creditor must continue to
provide periodic statements and comply
with the substantive requirements of sec
tion 226.5b(f) throughout the plan.
• If the consumer and creditor enter into an
agreement during the draw period to repay
all or part of the principal balance and the
amount of available credit will not be re
plenished as the principal balance is re
paid, the creditor must give closed-end
credit disclosures pursuant to subpart C for
that new agreement. In such cases, subpart
B, including the substantive rules, does not
apply to the closed-end credit transaction,
although it will continue to apply to any
remaining open-end credit available under
the plan.
6. Spreader clause. When a creditor holds a
mortgage or deed of trust on the consumer’s
dwelling and that mortgage or deed of trust
contains a “spreader clause” (also known as a
“dragnet” or cross-collateralization clause),
subsequent occurrences such as the opening of
an open-end plan are subject to the rules ap
plicable to home-equity plans to the same de
gree as if a security interest were taken di
rectly to secure the plan, unless the creditor
effectively waives its security interest under
the spreader clause with respect to the subse
quent open-end credit extensions.
§ 226.5b
Regulation Z Commentary
5b(a) Form of Disclosures
5b(a)(l) General
1. Written disclosures. The disclosures re
quired under this section must be clear and
conspicuous and in writing, but need not be in
a form the consumer can keep. (See the com
mentary to section 226.6(e) for special rules
when disclosures required under section
226.5b(d) are given in a retainable form.)
2. Disclosure o f annual percentage rate—
more-conspicuous requirement. As provided in
section 226.5(a)(2), when the term “annual
percentage rate” is required to be disclosed
with a number, it must be more conspicuous
than other required disclosures.
3. Segregation o f disclosures. While most of
the disclosures must be grouped together and
segregated from all unrelated information, the
creditor is permitted to include information
that explains or expands on the required dis
closures, including, for example:
•
•
•
•
•
Any prepayment penalty
How a substitute index may be chosen
Actions the creditor may take short of ter
minating and accelerating an outstanding
balance
Renewal terms
Rebate of fees
An example of information that does not ex
plain or expand on the required disclosures
and thus cannot be included is the creditor’s
underwriting criteria, although the creditor
could provide such information separately
from the required disclosures.
4. Method o f providing disclosures. A creditor
may provide a single disclosure form for all
of its home-equity plans, as long as the dis
closure describes all aspects of the plans. For
example, if the creditor offers several payment
options, all such options must be disclosed.
(See, however, the commentary to section
226.5b(d)(5)(iii) and 226.5b(d)(12)(x) and (xi)
for disclosure requirements relating to these
provisions.) If any aspects of a plan are linked
together, the creditor must disclose clearly the
relationship of the terms to each other. For
example, if the consumer can only obtain a
particular payment option in conjunction with
a certain variable-rate feature, this fact must
be disclosed. A creditor has the option of pro
viding separate disclosure forms for multiple
options or variations in features. For example,
a creditor that offers different payment options
for the draw period may prepare separate dis
closure forms for the two payment options. A
creditor using this alternative, however, must
include a statement on each disclosure form
that the consumer should ask about the credi
tor’s other home-equity programs. (This dis
closure is required only for those programs
available generally to the public. Thus, if the
only other programs available are employee
preferred-rate plans, for example, the creditor
would not have to provide this statement.) A
creditor that receives a request for information
about other available programs must provide
the additional disclosures as soon as reason
ably possible.
5b(a)(2) Precedence o f Certain Disclosures
1. Precedence rule. The list of conditions pro
vided at the creditor’s option under section
226.5b(d)(4)(iii) need not precede the other
disclosures.
5b(b) Time of Disclosures
1. Mail and telephone applications. If the
creditor sends applications through the mail,
the disclosures and a brochure must accom
pany the application. If an application is taken
over the telephone, the disclosures and bro
chure may be delivered or mailed within three
business days of taking the application. If an
application is mailed to the consumer follow
ing a telephone request, however, the creditor
also must send the disclosures and a brochure
along with the application.
2. General-purpose applications. The disclo
sures and a brochure need not be provided
when a general-purpose application is given to
a consumer unless (1) the application or mate
rials accompanying it indicate that it can be
used to apply for a home-equity plan or (2)
the application is provided in response to a
consumer’s specific inquiry about a homeequity plan. On the other hand, if a generalpurpose application is provided in response to
a consum er’s specific inquiry only about
39
§ 226.5b
credit other than a home-equity plan, the dis
closures and brochure need not be provided
even if the application indicates it can be used
for a home-equity plan, unless it is accompa
nied by promotional information about homeequity plans.
3. P ublicly available applications. Some
creditors make applications for home-equity
plans, such as “take-ones,” available without
the need for a consumer to request them.
These applications must be accompanied by
the disclosures and a brochure, such as by
attaching the disclosures and brochure to the
application form.
4. Response cards. A creditor may solicit con
sumers for its home-equity plan by mailing a
“response card” which the consumer returns
to the creditor to indicate interest in the plan.
If the only action taken by the creditor upon
receipt of the response card is to send the
consumer an application form or to telephone
the consumer to discuss the plan, the creditor
need not send the disclosures and brochure
with the response card.
5. Denial or withdrawal o f application. In
situations where footnote 10a permits the
creditor a three-day delay in providing disclo
sures and the brochure, if the creditor deter
mines within that period that an application
will not be approved, the creditor need not
provide the consumer with the disclosures or
brochure. Similarly, if the consumer with
draws the application within this three-day pe
riod, the creditor need not provide the disclo
sures or brochure.
6. Intermediary agent or broker. In determin
ing whether or not an application involves an
“ intermediary agent or broker” as discussed
in footnote 10a, creditors should consult the
provisions in comment 19(b)-3.
5b(c) Duties of Third Parties
1. Disclosure requirements. Although third
parties who give applications to consumers for
home-equity plans must provide the brochure
required under section 226.5b(e) in all cases,
such persons need provide the disclosures re
quired under section 226.5b(d) only in certain
instances. A third party has no duty to obtain
40
Regulation Z Commentary
disclosures about a creditor’s home-equity
plan or to create a set of disclosures based on
what it knows about a creditor’s plan. If, how
ever, a creditor provides the third party with
disclosures along with its application form,
the third party must give the disclosures to the
consumer with the application form. The du
ties under this section are those of the third
party; the creditor is not responsible for ensur
ing that a third party complies with those ob
ligations. If an intermediary agent or broker
takes an application over the telephone or re
ceives an application contained in a magazine
or other publication, footnote 10a permits that
person to mail the disclosures and brochure
within three business days of receipt of the
application. (See the commentary to section
226.5b(h) about imposition of nonrefundable
fees.)
5b(d) Content of Disclosures
1. Disclosures given as applicable. The dis
closures required under this section need be
made only as applicable. Thus, for example, if
negative amortization cannot occur in a homeequity plan, a reference to it need not be
made.
2. Duty to respond to requests fo r informa
tion. If the consumer, prior to the opening of
a plan, requests information as suggested in
the disclosures (such as the current index
value or margin), the creditor must provide
this information as soon as reasonably pos
sible after the request.
5b(d)(l) Retention o f Information
1. When disclosure not required. The creditor
need not disclose that the consumer should
make or otherwise retain a copy of the disclo
sures if they are retainable—for example, if
the disclosures are not part of an application
that must be returned to the creditor to apply
for the plan.
5b(d)(2) Conditions fo r Disclosed Terms
Paragraph 5b(d)(2)(i)
1. Guaranteed terms. The requirement that
the creditor disclose the time by which an
application must be submitted to obtain the
§ 226.5b
Regulation Z Commentary
disclosed terms does not require the creditor
to guarantee any terms. If a creditor chooses
not to guarantee any terms, it must disclose
that all of the terms are subject to change
prior to opening the plan. The creditor also is
permitted to guarantee some terms and not
others, but must indicate which terms are sub
ject to change.
2. Date fo r obtaining disclosed terms. The
creditor may disclose either a specific date or
a time period for obtaining the disclosed
terms. If the creditor discloses a time period,
the consumer must be able to determine from
the disclosure the specific date by which an
application must be submitted to obtain any
guaranteed terms. For example, the disclosure
might read, “To obtain the following terms,
you must submit your application within 60
days after the date appearing on this disclo
sure,” provided the disclosure form also
shows the date.
Paragraph 5b(d)(2)(ii)
1. Relation to other provisions. Creditors
should consult the rules in section 226.5b(g)
regarding refund of fees.
5b(d)(4) Possible Actions by Creditor
Paragraph 5b(d)(4)(i)
1. Fees imposed upon termination. This dis
closure applies only to fees (such as penalty
or prepayment fees) that the creditor imposes
if it terminates the plan prior to normal expi
ration. The disclosure does not apply to fees
that are imposed either when the plan expires
in accordance with the agreement or if the
consumer terminates the plan prior to its
scheduled maturity. In addition, the disclosure
does not apply to fees associated with collec
tion of the debt, such as attorneys’ fees and
court costs, or to increases in the annual per
centage rate linked to the consumer’s failure
to make payments. The actual amount of the
fee need not be disclosed.
2. Changes specified in the initial agreement.
If changes may occur pursuant to section
226.5b(f)(3)(i), a creditor must state that cer
tain changes will be implemented as specified
in the initial agreement.
Paragraph 5b(d)(4)(iii)
1. Disclosure o f conditions. In making this
disclosure, the creditor may provide a high
lighted copy of the document that contains
such information, such as the contract or secu
rity agreement. The relevant items must be
distinguished from the other information con
tained in the document. For example, the
creditor may provide a cover sheet that spe
cifically points out which contract provisions
contain the information, or may mark the rel
evant items on the document itself. As an
alternative to disclosing the conditions in this
manner, the creditor may simply describe the
conditions using the language in section
226.5b(f)(2)(i)—(iii), 226.5b(f)(3)(i) (regarding
freezing the line when the maximum annual
percentage rate is reached), and 226.5b
(f)(3)(vi) or language that is substantially
similar. The condition contained in section
226.5b(f)(2)(iv) need not be stated. In describ
ing specified changes that may be imple
mented during the plan, the creditor may pro
vide a disclosure such as: “Our agreement
permits us to make certain changes to the
terms of the line at specified time or upon the
occurrence of specified events.”
2. Form o f disclosure. The list of conditions
under section 226.5b(d)(4)(iii) may appear
with the segregated disclosures or apart from
them. If the creditor elects to provide the list
of conditions with the segregated disclosures,
the list need not comply with the precedence
rule in section 226.5b(a)(2).
5b(d)(5) Payment Terms
Paragraph 5b(d)(5)(i)
1. Length o f the plan. The combined length of
the draw period and any repayment period
need not be stated. If the length of the repay
ment phase cannot be determined because, for
example, it depends on the balance outstand
ing at the beginning of the repayment period,
the creditor must state that the length is deter
mined by the size of the balance. If the length
of the plan is indefinite (for example, because
there is no time limit on the period during
which the consumer can take advances), the
creditor must state that fact.
41
§ 226.5b
2. Renewal provisions. If, under the credit
agreement, a creditor retains the right to re
view a line at the end of the specified draw
period and determine whether to renew or ex
tend the draw period of the plan, the possibil
ity of renewal or extension—regardless of its
likelihood— should be ignored for purposes of
the disclosures. For example, if an agreement
provides that the draw period is five years and
that the creditor may renew the draw period
for an additional five years, the possibility of
renewal should be ignored and the draw pe
riod should be considered five years. (See the
commentary accompanying section 226.9(c)(1)
dealing with change in terms requirements.)
Paragraph 5b(d)(5)(ii)
1. Determination o f the minimum periodic
payment. This disclosure must reflect how the
minimum periodic payment is determined, but
need only describe the principal and interest
components of the payment. Other charges
that may be part of the payment (as well as
the balance-computation method) may, but
need not, be described under this provision.
2. Fixed-rate and term-payment options dur
ing draw period. If the home-equity plan per
mits the consumer to repay all or part of the
balance during the draw period at a fixed rate
(rather than a variable rate) and over a speci
fied time period, this feature must be dis
closed. To illustrate, a variable-rate plan may
permit a consumer to elect during a ten-year
draw period to repay all or a portion of the
balance over a three-year period at a fixed
rate. The creditor must disclose the rules relat
ing to this feature including the period during
which the option can be selected, the length
of time over which repayment can occur, any
fees imposed for such a feature, and the spe
cific rate or a description of the index and
margin that will apply upon exercise of this
choice. For example, the index and margin
disclosure might state, “If you choose to con
vert any portion of your balance to a fixed
rate, the rate will be the highest prime rate
published in the Wall Street Journal that is in
effect at the date of conversion plus a mar
gin.” If the fixed rate is to be determined
according to an index, it must be one that is
outside the creditor’s control and is publicly
42
Regulation Z Commentary
available in accordance with section
226.5b(f)(l). The effect of exercising the op
tion should not be reflected elsewhere in the
disclosures, such as in the historical example
required in section 226.5b(d)(12)(xi).
3. Balloon payments. In programs where the
occurrence of a balloon payment is possible,
the creditor must disclose the possibility of a
balloon payment even if such a payment is
uncertain or unlikely. In such cases, the dis
closure might read, “Your minimum payments
may not be sufficient to fully repay the princi
pal that is outstanding on your line. If they
are not, you will be required to pay the entire
outstanding balance in a single payment.” In
programs where a balloon payment will occur,
such as programs with interest-only payments
during the draw period and no repayment pe
riod, the disclosures must state that fact. For
example, the disclosure might read, “Your
minimum payments will not repay the princi
pal that is outstanding on your line. You will
be required to pay the entire outstanding bal
ance in a single payment.” In making this
disclosure, the creditor is not required to use
the term “balloon payment.” The creditor also
is not required to disclose the amount of the
balloon payment. (See, however, the require
ment under section 226.5b(d)(5)(iii).) The
balloon-payment disclosure does not apply in
cases where repayment of the entire outstand
ing balance would occur only as a result of
termination and acceleration. The creditor also
need not make a disclosure about balloon pay
ments if the final payment could not be more
than twice the amount of other minimum pay
ments under the plan.
Paragraph 5b(d)(5)(iii)
1. M inimum-periodic-payment example. In
disclosing the payment example, the creditor
may assume that the credit limit as well as the
outstanding balance is $10,000 if such an as
sumption is relevant to calculating payments.
(If the creditor only offers lines of credit for
less than $10,000, the creditor may assume an
outstanding balance of $5,000 instead of
$10,000 in making this disclosure.) The ex
ample should reflect the payment comprised
only of principal and interest. Creditors may
provide an additional example reflecting other
§ 226.5b
Regulation Z Commentary
charges that may be included in the payment,
such as credit-insurance premiums. Creditors
may assume that all months have an equal
number of days, that payments are collected
in whole cents, and that payments will fall on
a business day even though they may be due
on a non-business day. For variable-rate plans,
the example must be based on the last rate in
the historical example required in section
226.5b(d)(12)(xi), or a more recent rate. In
cases where the last rate shown in the histori
cal example is different from the index value
and margin (for example, due to a rate cap),
creditors should calculate the rate by using the
index value and margin. A discounted rate
may not be considered a more recent rate in
calculating this payment example for either
variable- or fixed-rate plans.
2. Representative examples. In plans with
multiple payment options within the draw pe
riod or within any repayment period, the
creditor may provide representative examples
as an alternative to providing examples for
each payment option. The creditor may elect
to provide representative payment examples
based on three categories of payment options.
The first category consists of plans that permit
minimum payment of only accrued finance
charges ( “interest-only” plans). The second
category includes plans in which a fixed per
centage or a fixed fraction of the outstanding
balance or credit limit (for example, 2 percent
of the balance or 1/180th of the balance) is
used to determine the minimum payment. The
third category includes all other types of minimum-payment options, such as a specified
dollar amount plus any accrued finance
charges. Creditors may classify their minimumpayment arrangements within one of these
three categories even if other features exist,
such as varying lengths of a draw or repay
ment period, required payment of pastdue
amounts, late charges, and minimum dollar
amounts. The creditor may use a single ex
ample within each category to represent the
payment options in that category. For exam
ple, if a creditor permits minimum payments
of 1 percent, 2 percent, 3 percent or 4 percent
of the outstanding balance, it may pick one of
these four options and provide the example
required under section 226.5b(d)(5)(iii) for
that option alone. The example used to repre
sent a category must be an option commonly
chosen by consumers, or a typical or represen
tative example. (See the commentary to sec
tion 226.5b(d)(12)(x) and (xi) for a discussion
of the use of representative examples for mak
ing those disclosures. Creditors using a repre
sentative example within each category must
use the same example for purposes of the
disclosures under section 226.5b(d)(5)(iii) and
226.5b(d)(12)(x) and (xi).) Creditors may use
representative exam ples under section
226.5b(d)(5) only with respect to the payment
example required under paragraph (d)(5)(iii).
Creditors must provide a full narrative de
scription of all payment options under section
226.5b(d)(5)(i) and (ii).
3. Examples fo r draw and repayment periods.
Separate examples must be given for the draw
and repayment periods unless the payments
are determined the same way during both pe
riods. In setting forth payment examples for
any repayment period under this section (and
the historical exam ple under section
226.5b(d)(12)(xi)), creditors should assume a
$10,000 advance is taken at the beginning of
the draw period and is reduced according to
the terms of the plan. Creditors should not
assume an additional advance is taken at any
time, including at the beginning of any repay
ment period.
4. Reverse mortgages. Reverse mortgages,
also know as reverse-annuity or home-equitycon version mortgages, in addition to permit
ting the consumer to obtain advances, may
involve the disbursement of monthly advances
to the consumer for a fixed period or until the
occurrence of an event such as the consumer’s
death. Repayment of the reverse mortgage
(generally a single payment of principal and
accrued interest) may be required to be made
at the end of the disbursements or, for ex
ample, upon the death of the consumer. In
disclosing these plans, creditors must apply
the following rules, as applicable:
•
If the reverse mortgage has a specified pe
riod for advances and disbursements but
repayment is due only upon occurrence of
a future event such as the death of the
consumer, the creditor must assume that
43
§ 226.5b
disbursements will be made until they are
scheduled to end. The creditor must as
sume repayment will occur when disburse
ments end (or within a period following
the final disbursement which is not longer
than the regular interval between disburse
ments). This assumption should be used
even though repayment may occur before
or after the disbursements are scheduled to
end. In such cases, the creditor may in
clude a statement such as “The disclosures
assume that you will repay the line at the
time the draw period and our payments to
you end. As provided in your agreement,
your repayment may be required at a dif
ferent time.” The single payment should be
considered the “ minimum periodic pay
ment” and consequently would not be
treated as a balloon payment. The example
of the minimum payment under section
226.5b(d)(5)(iii) should assume a single
$10,000 draw.
• If the reverse mortgage has neither a speci
fied period for advances or disbursements
nor a specified repayment date and these
terms will be determined solely by refer
ence to future events, including the con
sumer’s death, the creditor may assume
that the draws and disbursements will end
upon the consumer’s death (estimated by
using actuarial tables, for example) and
that repayment will be required at the same
time (or within a period following the date
of the final disbursement which is not
longer than the regular interval for dis
bursements). Alternatively, the creditor may
base the disclosures upon another future
event it estimates will be most likely to
occur first. (If terms will be determined by
reference to future events which do not
include the consumer’s death, the creditor
must base the disclosures upon the occur
rence of the event estimated to be most
likely to occur first.)
• In making the disclosures, the creditor
must assume that all draws and disburse
ments and accrued interest will be paid by
the consumer. For example, if the note has
a nonrecourse provision providing that the
consumer is not obligated for an amount
greater than the value of the house, the
creditor must nonetheless assume that the
Regulation Z Commentary
•
full amount to be drawn or disbursed will
be repaid. In this case, however, the credi
tor may include a statement such as “The
disclosures assume full repayment of the
amount advanced plus accrued interest, al
though the amount you may be required to
pay is limited by your agreement.”
Some reverse mortgages provide that some
or all of the appreciation in the value of
the property will be shared between the
consumer and the creditor. The creditor
must disclose the appreciation feature, in
cluding describing how the creditor’s share
will be determined, any limitations, and
when the feature may be exercised.
5b(d)(6) Annual Percentage Rate
1. Preferred-rate plans. If a creditor offers a
preferential fixed-rate plan in which the rate
will increase a specified amount upon the oc
currence of a specified event, the creditor
must disclose the specific amount the rate will
increase.
5b(d)(7) Fees Imposed by Creditor
1. Applicability. The fees referred to in sec
tion 226.5b(d)(7) include items such as appli
cation fees, points, annual fees, transaction
fees, fees to obtain checks to access the plan,
and fees imposed for converting to a repay
ment phase that is provided for in the original
agreement. This disclosure includes any fees
that are imposed by the creditor to use or
maintain the plan, whether the fees are kept
by the creditor or a third party. For example,
if a creditor requires an annual credit report
on the consumer and requires the consumer to
pay this fee to the creditor or directly to the
third party, the fee must be specifically stated.
Third-party fees to open the plan that are ini
tially paid by the consumer to the creditor
may be included in this disclosure or in the
disclosure under section 226.5b(d)(8).
2. Manner o f describing fees. Charges may be
stated as an estimated dollar amount for each
fee, or as a percentage of a typical or repre
sentative amount of credit. The creditor may
provide a stepped fee schedule in which a fee
will increase a specified amount at a specified
§ 226.5b
Regulation Z Commentary
date. (See the discussion contained in the
commentary to section 226.5b(f)(3)(i).)
3. Fees not required to be disclosed. Fees that
are not imposed to open, use, or maintain a
plan, such as fees for researching an account,
photocopying, paying late, stopping payment,
having a check returned, exceeding the credit
limit, or closing out an account do not have to
be disclosed under this section. Credit report
and appraisal fees imposed to investigate
whether a condition permitting a freeze con
tinues to exist—as discussed in the commen
tary to section 226.5b(f)(3)(vi)— are not re
quired to be disclosed under this section or
section 226.5b(d)(8).
4. Rebates o f closing costs. If closing costs
are imposed they must be disclosed, regard
less of whether such costs may be rebated
later (for example, rebated to the extent of
any interest paid during the first year of the
plan).
5. Terms used in disclosure. Creditors need
not use the terms “finance charge” or “other
charge” in describing the fees imposed by the
creditor under this section or those imposed
by third parties under section 226.5b(d)(8).
5b(d)(8) Fees Imposed by Third Parties to
Open a Plan
1. Applicability. Section 226.5b(d)(8) applies
only to fees imposed by third parties to open
the plan. Thus, for example, this section does
not require disclosure of a fee imposed by a
government agency at the end of a plan to
release a security interest. Fees to be disclosed
include appraisal, credit report, government
agency, and attorneys’ fees. In cases where
property insurance is required by the creditor,
the creditor either may disclose the amount of
the premium or may state that property insur
ance is required. For example, the disclosure
might state, “ You must carry insurance on the
property that secures this plan.”
2. Itemization o f third-party fees. In all cases
creditors must state the total of third-party
fees as a single dollar amount or a range
except that the total need not include costs for
property insurance if the creditor discloses
that such insurance is required. A creditor has
two options with regard to providing the more
detailed information about third-party fees.
Creditors may provide a statement that the
consumer may request more specific cost in
formation about third-party fees from the
creditor. As an alternative to including this
statement, creditors may provide an itemiza
tion of such fees (by type and amount) with
the early disclosures. Any itemization pro
vided upon the consumer’s request need not
include a disclosure about property insurance.
3. Manner o f describing fees. A good faith
estimate of the amount of fees must be pro
vided. Creditors may provide, based on a typi
cal or representative amount of credit, a range
for such fees or state the dollar amount of
such fees. Fees may be expressed on a unitcost basis, for example, $5 per $1,000 of
credit.
4. Rebates o f third-party fees. Even if fees
imposed by third parties may be rebated, they
must be disclosed. (See the commentary to
section 226.5b(d)(7).)
5b(d)(9) Negative Amortization
1. Disclosure required. In transactions where
the minimum payment will not or may not be
sufficient to cover the interest that accrues on
the outstanding balance, the creditor must dis
close that negative amortization will or may
occur. This disclosure is required whether or
not the unpaid interest is added to the out
standing balance upon which interest is com
puted. A disclosure is not required merely be
cause a loan calls for nonamortizing or
partially amortizing payments.
5b(d)(10) Transaction Requirements
1. Applicability. A limitation on automated
teller machine usage need not be disclosed
under this paragraph unless that is the only
means by which the consumer can obtain
funds.
5b(d)(12) Disclosures fo r Variable-Rate Plans
1. Variable-rate provisions. Sample forms in
appendix G-14 provide illustrative guidance
on the variable-rate rules.
45
§ 226.5b
Paragraph 5b(d)(12)(iv)
1. Determination o f annual percentage rate. If
the creditor adjusts its index through the addi
tion of a margin, the disclosure might read,
“Your annual percentage rate is based on the
index plus a margin.” The creditor is not re
quired to disclose a specific value for the
margin.
Paragraph 5b(d)(12)(viii)
1. Preferred-rate provisions. This paragraph
requires disclosure of preferred-rate provi
sions, where the rate will increase upon the
occurrence of some event, such as the
borrower-employee leaving the creditor’s em
ploy or the consumer closing an existing de
posit account with the creditor.
2. Provisions on conversion to fixed rates.
The commentary to section 226.5b(d)(5)(ii)
discusses the disclosure requirements for op
tions permitting the consumer to convert from
a variable rate to a fixed rate.
Paragraph 5b(d)(12)(ix)
1. Periodic limitations on increases in rates.
The creditor must disclose any annual limita
tions on increases in the annual percentage
rate. If the creditor bases its rate limitation on
12 monthly billing cycles, such a limitation
should be treated as an annual cap. Rate limi
tations imposed on less than an annual basis
must be stated in terms of a specific amount
of time. For example, if the creditor imposes
rate limitations on only a semiannual basis,
this must be expressed as a rate limitation for
a six-month time period. If the creditor does
not impose periodic limitations (annual or
shorter) on rate increases, the fact that there
are no annual rate limitations must be stated.
2. Maximum limitations on increases in rates.
The maximum annual percentage rate that
may be imposed under each payment option
over the term of the plan (including the draw
period and any repayment period provided for
in the initial agreement) must be provided.
The creditor may disclose this rate as a spe
cific number (for example, 18 percent) or as a
specific amount above the initial rate. For ex
ample, this disclosure might read, “The maxi46
Regulation Z Commentary
mum annual percentage rate that can apply to
your line will be 5 percentage points above
your initial rate.” If the creditor states the
maximum rate as a specific amount above the
initial rate, the creditor must include a state
ment that the consumer should inquire about
the rate limitations that are currently available.
If an initial discount is not taken into account
in applying maximum rate limitations, that
fact must be disclosed. If separate overall
limitations apply to rate increases resulting
from events such as the exercise of a fixedrate conversion option or leaving the credi
tor’s employ, those limitations also must be
stated. Limitations do not include legal limits
in the nature of usury or rate ceilings under
state or federal statutes or regulations.
3. Form o f disclosures. The creditor need not
disclose each periodic or maximum rate limi
tation that is currently available. Instead, the
creditor may disclose the range of the lowest
and highest periodic and maximum rate limi
tations that may be applicable to the creditor’s
home-equity plans. Creditors using this alter
native must include a statement that the con
sumer should inquire about the rate limitations
that are currently available.
Paragraph 5b(d)(12)(x)
1. Maximum-rate-payment example. In calcu
lating the payment creditors should assume
the maximum rate is in effect. Any discounted
or premium initial rates or periodic rate limi
tations should be ignored for purposes of this
disclosure. If a range is used to disclose the
maximum cap under section 226.5b(d)
(12)(ix), the highest rate in the range must be
used for the disclosure under this paragraph.
As an alternative to making disclosures based
on each payment option, the creditor may
choose a representative example within the
three categories of payment options upon
which to base this disclosure. (See the com
mentary to section 226.5b(d)(5).) However,
separate examples must be provided for the
draw period and for any repayment period
unless the payment is determined the same
way in both periods. Creditors should calcu
late the example for the repayment period
based on an assumed $10,000 balance. (See
the commentary to section 226.5b(d)(5) for a
Regulation Z Commentary
§ 226.5b
discussion of the circumstances in which a
creditor may use a lower outstanding balance.)
full year for the purpose of calculating the
annual percentage rate and payment.
2. Time the maximum rate could be reached.
In stating the date or time when the maximum
rate could be reached, creditors should assume
the rate increases as rapidly as possible under
the plan. In calculating the date or time, credi
tors should factor in any discounted or pre
mium initial rates and periodic-rate limita
tions. This disclosure must be provided for the
draw phase and any repayment phase. Credi
tors should assume the index and margin
shown in the last year of the historical ex
ample (or a more recent rate) is in effect at
the beginning of each phase.
3. Selection o f margin. A value for the margin
must be assumed in order to prepare the ex
ample. A creditor may select a representative
margin that it has used with the index during
the six months preceding preparation of the
disclosures and state that the margin is one
that it has used recently. The margin selected
may be used until the creditor annually up
dates the disclosure form to reflect the most
recent 15 years of index values.
Paragraph 5b(d)(12)(xi)
1. Index movement. Index values and annual
percentage rates must be shown for the entire
15 years of the historical example and must
be based on the most recent 15 years. The
example must be updated annually to reflect
the most recent 15 years of index values as
soon as reasonably possible after the new in
dex value becomes available. If the values for
an index have not been available for 15 years,
a creditor need only go back as far as the
values have been available and may start the
historical example at the year for which val
ues are first available.
2. Selection o f index values. The historical ex
ample must reflect the method of choosing
index values for the plan. For example, if an
average of index values is used in the plan,
averages must be used in the example, but if
an index value as of a particular date is used,
a single index value must be shown. The
creditor is required to assume one date (or
one period, if an average is used) within a
year on which to base the history of index
values. The creditor may choose to use index
values as of any date or period as long as the
index value as of this date or period is used
for each year in the example. Only one index
value per year need be shown, even if the
plan provides for adjustments to the annual
percentage rate or payment more than once in
a year. In such cases, the creditor can assume
that the index rate remained constant for the
4. Amount o f discount or premium. In reflect
ing any discounted or premium initial rate, the
creditor may select a discount or premium that
it has used during the six months preceding
preparation of the disclosures, and should dis
close that the discount or premium is one that
the creditor has used recently. The discount or
premium should be reflected in the example
for as long as it is in effect. The creditor may
assume that a discount or premium 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.
5. Rate limitations. Limitations on both peri
odic and maximum rates must be reflected in
the historical example. If ranges of rate limita
tions are provided under section 226.5b
(d)(12)(ix), the highest rates provided in those
ranges must be used in the example. Rate
limitations that may apply more often than
annually should be treated as if they were
annual limitations. For example, if a creditor
imposes a 1 percent cap every six months,
this should be reflected in the example as if it
were a 2 percent annual cap.
6. Assumed advances. The creditor should as
sume that the $10,000 balance is an advance
taken at the beginning of the first billing cycle
and is reduced according to the terms of the
plan, and that the consumer takes no subse
quent draws. As discussed in the commentary
to section 226.5b(d)(5), creditors should not
assume an additional advance is taken at the
beginning of any repayment period. If appli
cable, the creditor may assume the $10,000 is
both the advance and the credit limit. (See the
commentary to section 226.5b(d)(5) for a dis47
§ 226.5b
cussion of the circumstances in which a credi
tor may use a lower outstanding balance.)
7. Representative payment options. The credi
tor need not provide an historical example for
all of its various payment options, but may
select a representative payment option within
each of the three categories of payments upon
which to base its disclosure. (See the com
mentary to section 226.5b(d)(5).)
8. Payment information. The payment figures
in the historical example must reflect all sig
nificant program terms. For example, features
such as rate and payment caps, a discounted
initial rate, negative amortization, and rate
carryover must be taken into account in calcu
lating the payment figures if these would have
applied to the plan. The historical example
should include payments for as much of the
length of the plan as would occur during a
15-year period. For example:
•
•
•
If the draw period is 10 years and the
repayment period is 15 years, the example
should illustrate the entire 10-year draw
period and the first 5 years of the repay
ment period.
If the length of the draw period is 15 years
and there is a 15-year repayment phase,
the historical example must reflect the pay
ments for the 15-year draw period and
would not show any of the repayment pe
riod. No additional historical example
would be required to reflect payments for
the repayment period.
If the length of the plan is less than 15
years, payments in the historical example
need only be shown for the number of
years in the term. In such cases, however,
the creditor must show the index values,
margin and annual percentage rates and
continue to reflect all significant plan
terms such as rate limitations for the entire
15 years.
A creditor need show only a single payment
per year in the example, even though pay
ments may vary during a year. The calcula
tions should be based on the actual paymentcomputation formula, although the creditor
may assume that all months have an equal
number of days. The creditor may assume that
payments are made on the last day of the
48
Regulation Z Commentary
billing cycle, the billing date or the paymentdue date, but must be consistent in the manner
in which the period used to illustrate payment
information is selected. Information about bal
loon payments and remaining balance may,
but need not, be reflected in the example.
9. Disclosures fo r repayment period. The his
torical example must reflect all features of the
repayment period, including the appropriate
index values, margin, rate limitations, length
of the repayment period, and payments. For
example, if different indices are used during
the draw and repayment periods, the index
values for that portion of the 15 years that
reflect the repayment period must be the val
ues for the appropriate index.
10. Reverse mortgages. The historical ex
ample for reverse mortgages should reflect 15
years of index values and annual percentage
rates, but the payment column should be
blank until the year that the single payment
will be made, assuming that payment is esti
mated to occur within 15 years. (See the com
mentary to section 226.5b(d)(5) for a discus
sion of reverse mortgages.)
5b(e) Brochure
1. Substitutes. A brochure is a suitable substi
tute for the Board’s home-equity brochure if it
is, at a minimum, comparable to the Board’s
brochure in substance and comprehensiveness.
Creditors are permitted to provide more de
tailed information than is contained in the
Board’s brochure.
2. Effect o f third-party delivery o f brochure. If
a creditor determines that a third party has
provided a consumer with the required bro
chure pursuant to section 226.5b(c), the credi
tor need not give the consumer a second
brochure.
5b(f) Lim itations on H om e-E quity Plans
1. Coverage. Section 226.5b(f) limits both ac
tions that may be taken and language that
may be included in contracts, and applies to
any assignee or holder as well as to the origi
nal creditor. The limitations apply to the draw
period and any repayment period, and to any
§ 226.5b
Regulation Z Commentary
renewal or m odification of the original
agreement.
Paragraph 5b(f)(l)
1. External index. A creditor may change the
annual percentage rate for a plan only if the
change is based on an index outside the credi
tor’s control. Thus, a creditor may not make
rate changes based on its own prime rate or
cost of funds and may not reserve a contrac
tual right to change rates at its discretion. A
creditor is permitted, however, to use a pub
lished prime rate, such as that in the Wall
Street Journal, even if the bank’s own prime
rate is one of several rates used to establish
the published rate.
2. Publicly available. The index must be
available to the public. A publicly available
index need not be published in a newspaper,
but it must be one the consumer can indepen
dently obtain (by telephone, for example) and
use to verify rates imposed under the plan.
3. Provisions not prohibited. This paragraph
does not prohibit rate changes that are specifi
cally set forth in the agreement. For example,
stepped-rate plans, in which specified rates are
imposed for specified periods, are permissible.
In addition, preferred-rate provisions, in which
the rate increases by a specified amount upon
the occurrence of a specified event, also are
permissible.
Paragraph 5b(f)(2)
1. Limitations on termination and accelera
tion. In general, creditors are prohibited from
terminating and accelerating payment of the
outstanding balance before the scheduled expi
ration of a plan. However, creditors may take
these actions in the four circumstances speci
fied in section 226.5b(f)(2). Creditors are not
permitted to specify in their contracts any
other events that allow termination and accel
eration beyond those permitted by the regula
tion. Thus, for example, an agreement may
not provide that the balance is payable on
demand nor may it provide that the account
will be terminated and the balance accelerated
if the rate cap is reached.
2. Other actions permitted. If an event per
mitting termination and acceleration occurs, a
creditor may instead take actions short of ter
minating and accelerating. For example, a
creditor could temporarily or permanently sus
pend further advances, reduce the credit limit,
change the payment terms, or require the con
sumer to pay a fee. A creditor also may pro
vide in its agreement that a higher rate or
higher fees will apply in circumstances under
which it would otherwise be permitted to ter
minate the plan and accelerate the balance. A
creditor that does not immediately terminate
an account and accelerate payment or take
another permitted action may take such action
at a later time, provided one of the conditions
permitting termination and acceleration exists
at that time.
Paragraph 5b(f)(2)(i)
1. Fraud or material misrepresentation. A
creditor may terminate a plan and accelerate
the balance if there has been fraud or material
misrepresentation by the consumer in connec
tion with the plan. This exception includes
fraud or misrepresentation at any time, either
during the application process or during the
draw period and any repayment period. What
constitutes fraud or misrepresentation is deter
mined by applicable state law and may in
clude acts of omission as well as overt acts,
as long as any necessary intent on the part of
the consumer exists.
Paragraph 5b(f)(2)(ii)
1. Failure to meet repayment terms. A credi
tor may terminate a plan and accelerate the
balance when the consumer fails to meet the
repayment terms provided for in the agree
ment. However, a creditor may terminate and
accelerate under this provision only if the con
sumer actually fails to make payments. For
example, a creditor may not terminate and
accelerate if the consumer, in error, sends a
payment to the wrong location, such as a
branch rather than the main office of the
creditor. If a consumer files for or is placed in
bankruptcy, the creditor may terminate and ac
celerate under this provision if the consumer
fails to meet the repayment terms of the
agreement. This section does not override any
state or other law that requires a right to cure
49
§ 226.5b
notice, or otherwise places a duty on the
creditor before it can terminate a plan and
accelerate the balance.
Paragraph 5b(f)(2)(iii)
1. Impairment o f security. A creditor may ter
minate a plan and accelerate the balance if the
consumer’s action or inaction adversely affects
the creditor’s security for the plan, or any
right of the creditor in that security. Action or
inaction by third parties does not, in itself,
permit the creditor to terminate and accelerate.
2. Examples. A creditor may terminate and
accelerate, for example, if:
•
•
•
•
•
•
•
the consumer transfers title to the property
or sells the property without the permission
of the creditor
the consumer fails to maintain required in
surance on the dwelling
the consumer fails to pay taxes on the
property
the consumer permits the filing of a lien
senior to that held by the creditor
the sole consumer obligated on the plan
dies
the property is taken through eminent do
main
a prior lienholder forecloses
By contrast, the filing of a judgment against
the consumer would permit termination and
acceleration only if the amount of the judg
ment and collateral subject to the judgment is
such that the creditor’s security is adversely
affected. If the consumer commits waste or
otherwise destructively uses or fails to main
tain the property such that the action ad
versely affects the security, the plan may be
terminated and the balance accelerated. Illegal
use of the property by the consumer would
permit termination and acceleration if it sub
jects the property to seizure. If one of two
consumers obligated on a plan dies, the credi
tor may terminate the plan and accelerate the
balance if the security is adversely affected. If
the consumer moves out of the dwelling that
secures the plan and that action adversely af
fects the security, the creditor may terminate a
plan and accelerate the balance.
50
Regulation Z Commentary
Paragraph 5b(f)(3)
1. Scope o f provision. In general, a creditor
may not change the terms of a plan after it is
opened. For example, a creditor may not in
crease any fee or impose a new fee once the
plan has been opened, even if the fee is
charged by a third party, such as a credit
reporting agency, for a service. The change-ofterms prohibition applies to all features of a
plan, not only those required to be disclosed
under this section. For example, this provision
applies to charges imposed for late payment,
although this fee is not required to be dis
closed under section 226.5b(d)(7).
2. Charges not covered. There are three
charges not covered by this provision. A
creditor may pass on increases in taxes since
such charges are imposed by a governmental
body and are beyond the control of the credi
tor. In addition, a creditor may pass on in
creases in premiums for property insurance
that are excluded from the finance charge un
der section 226.4(d)(2), since such insurance
provides a benefit to the consumer indepen
dent of the use of the line and is often main
tained notwithstanding the line. A creditor also
may pass on increases in premiums for credit
insurance that are excluded from the finance
charge under section 226.4(d)(1), since the in
surance is voluntary and provides a benefit to
the consumer.
Paragraph 5b(f)(3)(i)
1. Changes provided fo r in agreement. A
creditor may provide in the initial agreement
that further advances will be prohibited or the
credit line reduced during any period in which
the maximum annual percentage rate is
reached. A creditor also may provide for other
specific changes to take place upon the occur
rence of specific events. Both the triggering
event and the resulting modification must be
stated with specificity. For example, in homeequity plans for employees, the agreement
could provide that a specified higher rate or
margin will apply if the borrower’s employ
ment with the creditor ends. A contract could
contain a stepped-rate or stepped-fee schedule
providing for specified changes in the rate or
the fees on certain dates or after a specified
§ 226.5b
Regulation Z Commentary
period of time. A creditor also may provide in
the initial agreement that it will be entitled to
a share of the appreciation in the value of the
property as long as the specific appreciation
share and the specific circumstances which re
quire the payment of it are set forth. A con
tract may permit a consumer to switch among
minimum-payment options during the plan.
2. Prohibited provisions. A creditor may not
include a general provision in its agreement
permitting changes to any or all of the terms
of the plan. For example, creditors may not
include boilerplate language in the agreement
stating that they reserve the right to change
the fees imposed under the plan. In addition, a
creditor may not include any “ triggering
events” or responses that the regulation ex
pressly addresses in a manner different from
that provided in the regulation. For example,
an agreement may not provide that the margin
in a variable-rate plan will increase if there is
a material change in the consumer’s financial
circumstances, because the regulation specifies
that temporarily freezing the line or lowering
the credit limit is the permissible response to
a material change in the consumer’s financial
circumstances. Similarly a contract cannot
contain a provision allowing the creditor to
freeze a line due to an insignificant decline in
property value since the regulation allows that
response only for a significant decline.
Paragraph 5b(f)(3)(ii)
1. Substitution o f index. A creditor may
change the index and margin used under the
plan if the original index becomes unavail
able, as long as historical fluctuations in the
original and replacement indices were substan
tially similar, and as long as the replacement
index and margin will produce a rate similar
to the rate that was in effect at the time the
original index became unavailable. If the re
placement index is newly established and
therefore does not have any rate history, it
may be used if it produces a rate substantially
similar to the rate in effect when the original
index became unavailable.
Paragraph 5b(f)(3)(iii)
1. Changes by written agreement. A creditor
may change the terms of a plan if the con
sumer expressly agrees in writing to the
change at the time it is made. For example, a
consumer and a creditor could agree in writ
ing to change the repayment terms from
interest-only payments to payments that re
duce the principal balance. The provisions of
any such agreement are governed by the limi
tations in section 226.5b(f). For example, a
mutual agreement could not provide for future
annual percentage rate changes based on the
movement of an index controlled by the credi
tor or for termination and acceleration under
circumstances other than those specified in the
regulation. By contrast, a consumer could
agree to a new credit limit for the plan, al
though the agreement could not permit the
creditor to later change the credit limit except
by a subsequent written agreement or in
the circum stances described in section
226.5b(f)(3)(vi).
2. Written agreement. The change must be
agreed to in writing by the consumer. Credi
tors are not permitted to assume consent be
cause the consumer uses an account, even if
use of an account would otherwise constitute
acceptance of a proposed change under state
law.
Paragraph 5b(f)(3)(iv)
1. Beneficial changes. After a plan is opened,
a creditor may make changes that unequivo
cally benefit the consumer. Under this provi
sion, a creditor may offer more options to
consumers, as long as existing options remain.
For example, a creditor may offer the con
sumer the option of making lower monthly
payments or could increase the credit limit.
Similarly, a creditor wishing to extend the
length of the plan on the same terms may do
so. Creditors are permitted to temporarily re
duce the rate or fees charged during the plan
(though a change-in-terms notice may be re
quired under section 226.9(c) when the rate or
fees are returned to their original level).
Creditors also may offer an additional means
of access to the line, even if fees are associ
ated with using the device, provided the con
sumer retains the ability to use prior access
devices on the original terms.
51
§ 226.5b
Paragraph 5b(f)(3)(v)
1. Insignificant changes. A creditor is permit
ted to make insignificant changes after a plan
is opened. This rule accommodates operational
and similar problems, such as changing the
address of the creditor for purposes of sending
payments. It does not permit a creditor to
change a term such as a fee charged for late
payments.
2. Examples o f insignificant changes. Credi
tors may make minor changes to features such
as the billing cycle date, the payment-due date
(as long as the consumer does not have a
diminished grace period if one is provided),
and the day of the month on which index
values are measured to determine changes to
the rate for variable-rate plans. A creditor also
may change its rounding practice in accor
dance with the tolerance rules set forth in
section 226.14 (for example, stating an exact
APR of 14.3333 percent as 14.3 percent, even
if it had previously been stated as 14.33 per
cent). A creditor may change the balancecomputation method it uses only if the change
produces an insignificant difference in the fi
nance charge paid by the consumer. For ex
ample, a creditor may switch from using the
average-daily-balance method (including new
transactions) to the daily-balance method (in
cluding new transactions).
Paragraph 5b(f)(3)(vi)
1. Suspension o f credit or reduction o f credit
limit. A creditor may prohibit additional ex
tensions of credit or reduce the credit limit in
the circumstances specified in this section of
the regulation. In addition, as discussed under
section 226.5b(f)(3)(i), a creditor may contrac
tually reserve the right to take such actions
when the maximum annual percentage rate is
reached. A creditor may not take these actions
under other circumstances, unless the creditor
would be permitted to terminate the line and
accelerate the balance as described in section
226.5b(f)(2). The creditor’s right to reduce the
credit limit does not permit reducing the limit
below the amount of the outstanding balance
if this would require the consumer to make a
higher payment.
2. Temporary nature o f suspension or reduc52
Regulation Z Commentary
tion. Creditors are permitted to prohibit addi
tional extensions of credit or reduce the credit
limit only while one of the designated circum
stances exists. When the circumstance justify
ing the creditor’s action ceases to exist, credit
privileges must be reinstated, assuming that
no other circumstance permitting such action
exists at that time.
3. Imposition o f fees. If not prohibited by
state law, a creditor may collect only bona
fide and reasonable appraisal and credit-report
fees if such fees are actually incurred in in
vestigating whether the condition permitting
the freeze continues to exist. A creditor may
not, in any circumstances, impose a fee to
reinstate a credit line once the condition has
been determined not to exist.
4. Reinstatement o f credit privileges. Creditors
are responsible for ensuring that credit privi
leges are restored as soon as reasonably pos
sible after the condition that permitted the
creditor’s action ceases to exist. One way a
creditor can meet this responsibility is to
monitor the line on an ongoing basis to deter
mine when the condition ceases to exist. The
creditor must investigate the condition fre
quently enough to assure itself that the condi
tion permitting the freeze continues to exist.
The frequency with which the creditor must
investigate to determine whether a condition
continues to exist depends upon the specific
condition permitting the freeze. As an alterna
tive to such monitoring, the creditor may shift
the duty to the consumer to request reinstate
ment of credit privileges by providing a notice
in accordance with section 226.9(c)(3). A
creditor may require a reinstatement request to
be in writing if it notifies the consumer of this
requirement on the notice provided under sec
tion 226.9(c)(3). Once the consumer requests
reinstatement, the creditor must promptly in
vestigate to determine whether the condition
allowing the freeze continues to exist. Under
this alternative, the creditor has a duty to in
vestigate only upon the consumer’s request.
5. Suspension o f credit privileges following
request by consumer. A creditor may honor a
specific request by a consumer to suspend
credit privileges. If the consumer later re
quests that the creditor reinstate credit privi
§ 226.5b
Regulation Z Commentary
leges, the creditor must do so provided no
other circumstance justifying a suspension ex
ists at that time. If two or more consumers are
obligated under a plan and each has the abil
ity to take advances, the agreement may per
mit any of the consumers to direct the creditor
not to make further advances. A creditor may
require that all persons obligated under a plan
request reinstatement.
6. Significant decline defined. What consti
tutes a significant decline for purposes of sec
tion 226.5b(f)(3)(vi)(A) will vary according to
individual circumstances. In any event, if the
value of the dwelling declines such that the
initial difference between the credit limit and
the available equity (based on the property’s
appraised value for purposes of the plan) is
reduced by 50 percent, this constitutes a sig
nificant decline in the value of the dwelling
for purposes of section 226.5b(f)(3)(vi)(A).
For example, assume that a house with a first
mortgage of $50,000 is appraised at $100,000
and the credit limit is $30,000. The difference
between the credit limit and the available eq
uity is $20,000, half of which is $10,000. The
creditor could prohibit further advances or re
duce the credit limit if the value of the prop
erty declines from $100,000 to $90,000. This
provision does not require a creditor to obtain
an appraisal before suspending credit privi
leges, although a significant decline must oc
cur before suspension can occur.
7. Material change in financial circumstances.
Two conditions must be met for section
226.5b(f)(3)(vi)(B) to apply. First, there must
be a “material change” in the consumer’s fi
nancial circumstances, such as a significant
decrease in the consumer’s income. Second,
as a result of this change, the creditor must
have a reasonable belief that the consumer
will be unable to fulfill the payment obliga
tions of the plan. A creditor may, but does not
have to, rely on specific evidence (such as the
failure to pay other debts) in concluding that
the second part of the test has been met. A
creditor may prohibit further advances or re
duce the credit limit under this section if a
consumer files for or is placed in bankruptcy.
8. Default o f a material obligation. Creditors
may specify events that would qualify as a
default of a material obligation under section
226.5b(f)(3)(vi)(C). For example, a creditor
may provide that default of a material obliga
tion will exist if the consumer moves out of
the dwelling or permits an intervening lien to
be filed that would take priority over future
advances made by the creditor.
9. Government limits on the annual percent
age rate. Under section 226.5b(f)(3)(vi)(D), a
creditor may prohibit further advances or re
duce the credit limit if, for example, a state
usury law is enacted which prohibits a credi
tor from imposing the agreed-upon annual
percentage rate.
5b(g) R efund o f Fees
1. Refund o f fees required. If any disclosed
term, including any term provided upon re
quest pursuant to section 226.5b(d), changes
between the time the early disclosures are pro
vided to the consumer and the time the plan is
opened, and the consumer as a result decides
to not enter into the plan, a creditor must
refund all fees paid by the consumer in con
nection with the application. All fees, includ
ing credit-report fees and appraisal fees, must
be refunded whether such fees are paid to the
creditor or directly to third parties. A con
sumer is entitled to a refund of fees under
these circumstances whether or not terms are
guaranteed by the creditor under section
226.5b(d)(2)(i).
2. Variable-rate plans. The right to a refund
of fees does not apply to changes in the an
nual percentage rate resulting from fluctua
tions in the index value in a variable-rate
plan. Also, if the maximum annual percentage
rate is expressed as an amount over the initial
rate, the right to refund of fees would not
apply to changes in the cap resulting from
fluctuations in the index value.
3. Changes in terms. If a term, such as the
maximum rate, is stated as a range in the
early disclosures, and the term ultimately ap
plicable to the plan falls within that range, a
change does not occur for purposes of this
section. If, however, no range is used and the
term is changed (for example, a rate cap of 6
rather than 5 percentage points over the initial
rate), the change would permit the consumer
53
Regulation Z Commentary
§ 226.5b
to obtain a refund of fees. If a fee imposed by
the creditor is stated in the early disclosures
as an estimate and the fee changes, the con
sumer could elect to not enter into the agree
ment and would be entitled to a refund of
fees. On the other hand, if fees imposed by
third parties are disclosed as estimates and
those fees change, the consumer is not entitled
to a refund of fees paid in connection with the
application. Creditors must, however, use the
best information reasonably available in pro
viding disclosures about such fees.
4. Timing o f refunds and relation to other
provisions. The refund of fees must be made
as soon as reasonably possible after the credi
tor is notified that the consumer is not enter
ing into the plan because of the changed term,
or that the consumer wants a refund of fees.
The fact that an application fee may be re
funded to some applicants under this provision
does not render such fees finance charges un
der section 226.4(c)(1) of the regulation.
5b(h) Imposition of Nonrefundable Fees
1. Collection o f fees after consumer receives
disclosures. A fee may be collected after the
consumer receives the disclosures and bro
chure and before the expiration of three days,
although the fee must be refunded if, within
three days of receiving the required informa
tion, the consumer decides not to enter into
the agreement. In such a case, the consumer
must be notified that the fee is refundable for
three days. The notice must be clear and con
spicuous and in writing, and may be included
with the disclosures required under section
226.5b(d) or as an attachment to them. If dis
closures and brochure are mailed to the con
sumer, footnote lOd of the regulation provides
that a nonrefundable fee may not be imposed
until six business days after the mailing.
2. Collection o f fees before consumer receives
disclosures. An application fee may be col
lected before the consumer receives the dis
closures and brochure (for example, when an
application contained in a magazine is mailed
in with an application fee) provided that it
remains refundable until three business days
after the consumer receives the section 226.5b
disclosures. No other fees except a refundable
54
membership fee may be collected until after
the consumer receives the disclosures required
under section 226.5b.
3. Relation to other provisions. A fee col
lected before disclosures are provided may be
come nonrefundable except that, under section
226.5b(g), it must be refunded if the consumer
elects not to enter into the plan because of a
change in terms. (Of course, all fees must be
refunded if the consumer later rescinds under
section 226.15.)
SECTION 226.6— Initial Disclosure
Statement
1. Consistent terminology. Language on the
initial and periodic disclosure statements must
be close enough in meaning to enable the
consumer 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
billing 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
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 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
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
finance charges will accrue on the account
would describe when finance charges begin to
run.
2. Free-ride periods. In disclosing whether or
§ 226.6
Regulation Z Commentary
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 finance
charge begins on the date the transaction 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.
Paragraph 6(a)(2)
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 ex
ample, cash advances), even though the
balance for another feature (purchases)
may be subject to two rates (a 1.5 percent
periodic 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 disclosure 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 oc
cur 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
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. (See the rule in section
226.5b(f)(l) applicable to home-equity plans,
however, which prohibits “rate-reservation”
clauses.) Moreover, an open-end credit plan in
which the employee receives a lower rate con
tingent upon employment (that is, with the
rate to be increased upon termination of em
ployment) 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 dis
closed.)
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
calendar 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 in
structions for obtaining it.
6. Variable-rate plan—circumstances fo r 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
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.”
55
§ 226.6
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 in
terest rate must be included in dwellingsecured open-end credit plans under which the
interest 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 Vi 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
variable-rate 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 lower
than the rate would be if it were calculated
using the index or formula.
•
56
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 forgo
the 2 percent spread and charge only 10
percent for a limited time, instead of set
ting an initial rate of 12 percent, or the
creditor may disregard the index or for
mula and set the initial rate at 9 percent.
Regulation Z Commentary
•
•
When creditors use an initial rate that is
not calculated using the index or formula
for later rate adjustments, the initial disclo
sure statement should reflect: (1) the initial
rate (expressed as a periodic rate and a
corresponding annual percentage rate), to
gether with a statement of how long it will
remain in effect; (2) the current rate that
would have been applied using the index
or formula (also expressed as a periodic
rate and a corresponding annual percentage
rate); and (3) the other variable-rate infor
mation required by footnote 12 to section
226.6(a)(2).
In disclosing the current periodic and an
nual percentage rates that would be applied
using the index or formula, the creditor
may use any of the disclosure options de
scribed in comment 6(a)(2)-3.
Paragraph 6(a)(3)
1. E xplanation o f balance-com putation
method. A shorthand phrase such as
“previous-balance method” does not suffice in
explaining the balance computation method.
(See appendix 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
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
§ 226.6
Regulation Z Commentary
section 226.6(b), significant charges related to
the plan (that are not finance charges) must
also be disclosed. For example:
iii.
iii.
iv.
v.
vi.
vii.
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
advances (see the commentary to section
226.4(a)).
A membership or participation fee 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 is not an
“other charge,” even if membership is re
quired to apply for credit. For example, if
the primary benefit of membership in an
organization is the opportunity to apply
for a credit card, and the other benefits
offered (such as a newsletter or a member
information hotline) are merely incidental
to the credit feature, the membership fee
would be disclosed as an “other charge.”
Automated teller machine (ATM) charges
described in comment 4(a)-5 that are not
finance charges.
Charges imposed for the termination of an
open-end credit plan.
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 insurance,
that are not part of the finance charge
•
•
•
•
•
Application fees under section 226.4(c)(1)
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 commen
tary 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
creditor’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 ex
ample, “pledge,” “lien,” or “mortgage” (in
stead of “ security interest” ).
2. Identification o f property. Identification of
the collateral by type is satisfied by stating,
for example, “motor vehicle” or “household
appliances.” (Creditors should be aware, how
ever, that the federal credit practices rules, as
well as some state laws, prohibit certain secu
rity interests in household goods.) The creditor
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 obli
gation 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 spe
cific identification of that collateral is unnec
essary, 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
57
§ 226.6
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 ex
ceeds $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.
6(e) Home-Equity Plan Information
1. Additional disclosures required. For homeequity plans, creditors must provide several of
the disclosures set forth in section 226.5b(d)
along with the disclosures required under sec
tion 226.6. Creditors also must disclose a list
of the conditions that permit the creditor to
terminate the plan, freeze or reduce the credit
limit, and implement specified modifications
to the original terms. (See comment
5b(d)(4)(iii)-l.)
2. Form o f disclosures. The home-equity dis
closures provided under this section must be
in a form the consumer can keep, and are
governed by section 226.5(a)(1). The segrega58
Regulation Z Commentary
tion standard set forth in section 226.5b(a)
does not apply to home-equity disclosures
provided under section 226.6.
3. Disclosure o f payment and variable-rate
examples. The payment-example disclosure in
section 226.5b(d)(5)(iii) and the variable-rate
information in section 226.5b(d)(12)(viii), (x),
(xi), and (xii) need not be provided with the
disclosures under section 226.6 if:
• The disclosures under section 226.5b(d)
were provided in a form the consumer
could keep; and
• The disclosures of the payment example
under section
226.5b(d)(5)(iii), the
maximum-payment example under section
226.5b(d)(12)(x) and the historical table
under section 226.5b(d)(12)(xi) included a
representative payment example for the
category of payment options the consumer
has chosen.
For example, if a creditor offers three pay
ment options (one for each of the categories
described in the com mentary to section
226.5b(d)(5)), describes all three options in its
early disclosures, and provides all of the dis
closures in a retainable form, that creditor
need not provide the section 226.5b(d)(5)(iii)
or 226.5b(d)(12) disclosures again when the
account is opened. If the creditor showed only
one of the three options in the early disclo
sures (which would be the case with a sepa
rate disclosure form rather than a combined
form, as discussed under section 226.5b(a)),
the disclosures under section 226.5b(d)(5)(iii)
and 226.5b(d)(12)(viii), (x), (xi) and (xii)
must be given to any consumer who chooses
one of the other two options. If the section
226.5b(d)(5)(iii) and 226.5b(d)(12) disclosures
are provided with the second set of disclo
sures, they need not be transaction-specific,
but may be based on a representative example
of the category of payment option chosen.
4. Disclosures fo r the repayment period. The
creditor must provide disclosures about both
the draw and repayment phases when giving
the disclosures under section 226.6. Specifi
cally, the creditor must make the disclosures
in section 226.6(e), state the corresponding
annual percentage rate (as required in section
226.6(a)(2)), and provide the variable-rate in
§ 226.7
Regulation Z Commentary
formation required in footnote 12 for the re
payment phase. To the extent the correspond
ing annual percentage rate, the information in
footnote 12, and any other required disclo
sures are the same for the draw and repay
ment phase, the creditor need not repeat such
information, as long as it is clear that the in
formation applies to both phases.
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 interpreta
tion § 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 disabil
ity insurance, required property insurance pre
miums, default charges, or fees for collection
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 pur
chases, 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
multifeatured plans.
2. Separate periodic statements permitted. In
a certain open-end credit program involving
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. M ultifeatured 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
separate balances are disclosed, a total previ
ous 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,
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 in
terchange 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 institu
tion in the amount of the transaction need not
be separately disclosed on the periodic
statement.
59
§ 226.7
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 com mentary to section
226.13(e) and (f).)
Regulation Z Commentary
have been imposed during the billing cycle
reflected on the periodic statement need to be
disclosed. For example:
•
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 credit
was given.
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 billing 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 peri
odic rate disclosure (and its corresponding an
nual percentage rate), only rates that could
60
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 re
flected on the periodic statement. For ex
ample, if the monthly rate applied during
May was 1.5 percent, but the creditor will
increase the rate to 1.8 percent effective
June 1, 1.5 percent (and its corresponding
annual percentage rate) is the only required
disclosure under section 226.7(d) for the
periodic statement reflecting the May ac
count 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 trans
actions that took place prior to that date,
the creditor need not continue to disclose
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 per
cent per month on the same outstanding bal
ance), 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 percent
monthly, 1.2 percent annual percentage
rate)
Regulation Z Commentary
•
§ 226.7
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,” “cor
responding 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 (historical
rate) required to be disclosed (§ 226.7(g)), the
creditor need disclose only one annual per
centage rate, but must use the phrase “annual
percentage rate.”
6. Ranges
6(a)(2)-1.
of
balances.
See
com ment
7(e) Balance on Which Finance Charge
Computed
1. L im itation to perio dic 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 previous
cycles).
2. Split rates applied to balance ranges. If
split rates were applied to a balance because
different portions of the balance fall within
two or more balance ranges, the creditor need
not separately disclose the portions of the bal
ance 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
monthly periodic rate of 1 percent to the re
mainder. 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 ex
ample, to applying 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 im
posed. (See comment 7(e)-5.)
3. Monthly rate on average daily balance. If
a creditor computes a finance charge on the
average daily balance by application of a
monthly periodic rate or rates, the balance is
adequately 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. M ultifeatured 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
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
cycle on which the balance in the ac
count changes
— the sum of the daily balances during the
billing cycle
— the average daily balance during the
billing cycle, in which case the creditor
shall explain that the average daily bal
ance is or can be multiplied by the
61
§ 226.7
•
number 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
cycle on which the balance in the ac
count 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
creditor explains that the finance charge
is or may be determined by (1) multi
plying 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) multiplying each of the results by
the applicable daily periodic rate, and
(3) adding these products together.
6. Explanation o f balance-com putation
m ethod. See the com m entary 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
explanation when multiple balances disclosed.
62
Regulation Z Commentary
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 suf
ficient. Sometimes the creditor separately dis
closes 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).
7(f) A m ount o f F inance C harge
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. Item ization—different perio dic 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 ex
ample, 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.
Regulation Z Commentary
4. M ultifeatured 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 de
ducted from each new payment, rather than
being separately added to each statement and
therefore reflected as an increase in the obli
gation. In such a plan, no disclosure is re
quired of finance charges that have accrued
since the last payment.
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 factored
into the annual percentage rate. (See footnote
33 in the regulation.)
7(g) Annual Percentage Rate
1. Rate same as corresponding annual per
centage rate. See comment 7(d)-5.
2. M ultifeatured 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 fea
ture or may be described as a composite for
the whole plan.
7(h) Other Charges
1. Identification. In identifying any “ other
§ 226.7
charges” actually imposed during the billing
cycle, the type is adequately described as
“late charge” or “membership fee,” for ex
ample. Similarly, “closing costs” or “ settle
ment costs,” for example, may be used to
describe charges imposed in connection with
real estate transactions that are excluded from
the finance charge under section 226.4(c)(7),
if the same term (such as “ closing costs” )
was used in the initial disclosures and if the
creditor chose to itemize and individually dis
close the costs included in that term. Even
though the taxes and filing or notary fees ex
cluded 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
itemized 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.” )
2. Date. The date of imposing or debiting
“other charges” need not be disclosed.
3. Total. Disclosure of the total amount of
other charges is optional.
4. Item ization— types o f “other charges”.
Each type of “other charge” (such as latepayment 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”
attributable to both an over-the-credit-limit
charge and a late-payment charge would not
be permissible. “Other charges” of the same
type may be disclosed, however, individually
or as a total. For example, three ATM fees of
$1 may be listed separately or as $3.
7(i) Closing Date of Billing Cycle; New
Balance
1. Credit balances. See comment 7(a)-1.
2. M ultifeatured plans. In a multifeatured
plan, the new balance may be disclosed for
each feature or for the plan as a whole. If
separate new balances are disclosed, a total
new balance is optional.
63
§ 226.7
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 de
ducted from each new payment, rather than
being separately added to each statement and
therefore reflected as an increase in the obli
gation. 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 b efo re________ ” would suffice.
7(k) Address for Notice of Billing Errors
1. Wording. The periodic statement must con
tain the address for consumers to use in as
serting 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 contain
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
64
Regulation Z Commentary
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
periodic statem ent disclosure o f “ other
charges” (nonfinance charges related to the
plan) that are actually imposed during the bill
ing cycle.
Disclosures about minimum charges that
might be imposed on the account and about
the Comparative Index of Credit Cost have
been deleted.
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
cycle. The rules for identifying transactions on
periodic statem ents 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
related persons
2. Sale credit. The term “sale credit” refers
to a purchase in which the consumer uses a
credit card or otherwise directly accesses an
open-end line of credit (see comment 8-3 if
access is by means of a check) to obtain
goods or services from a merchant, whether or
§ 226.8
Regulation Z Commentary
not the merchant is the card issuer. “Sale
credit” even includes:
the rules either for “ related”
“nonrelated” 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 con
sumer through the creditor but is actually pro
vided by another company, the creditor has
the option of identifying the premiums in one
of two ways on the periodic statement. The
creditor may describe the premiums using ei
ther the rule in section 226.8(a)(2) for “re
lated” sellers and creditors, or the rule in sec
tion 226.8(a)(3) for “nonrelated” sellers and
creditors. This means, therefore, that the credi
tor may identify the insurance either by pro
viding, under section 226.8(a)(2), a brief iden
tification of the services provided (for
example, “credit life insurance” ), or by dis
closing, under section 226.8(a)(3), the name
and address of the company providing the in
surance (for example, ABC Insurance Com
pany, New York, New York). In either event,
the creditor would, of course, also provide the
amount and the date of the transaction.
•
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
• M iscellaneous 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
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 transactions
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 thirdparty sellers resulting from promotional mate
rial mailed by the creditor, creditors may use
or
for
8. Transactions involving creditors and sellers
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
section 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
subsidiary-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 transaction,
65
§ 226.8
the creditor need not identify it as the “trans
action date.” If the creditor discloses more
than one date (for example, the transaction
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
disclosure 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 precomputed
amount), the date of the transaction is the date
on which the amount is debited to the ac
count. This might include, for example,
monthly insurance premiums. For mail or tele
phone 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.
4. Transactions not billed in full. 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 to
gether 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 in
formation required by section 226.8(a) (such
as the seller’s name and address in a threeparty situation) or other appropriate identify
ing information relating the transaction to the
first billing. The debiting date for the particu
lar installment, or the date the transaction took
place, may be used as the date of the transac
tion on these subsequent statements.
66
Regulation Z Commentary
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,” “ miscella
neous,” “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
ficient— for example, “jewelry,” “sporting
goods.”
2. Property identification—number or symbol.
The “brief identification” may be made by
disclosing 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 trans
action on a document accompanying the peri
odic statement (for example, on a facsimile
draft). (See also footnote 17.)
4. Small creditors. Under footnote 18, which
provides a further identification alternative to
a creditor with fewer than 15,000 accounts,
the creditor need count only its own accounts
and not others serviced by the same data pro
cessor 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.
§ 226.9
Regulation Z Commentary
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
seller has multiple stores or branches within
that city, the creditor need not identify the
specific branch at which the sale occurred.
3. No fixed location. When no meaningful ad
dress is available because the consumer did
not make the purchase at any fixed location of
the seller, the creditor:
•
•
May omit the address
May provide some other identifying desig
nation, such as “ aboard plane,” “ ABC Air
ways Flight,” “customer’s home,” “tele
phone order,” or “mail order”
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
creditor may identify a transaction by describ
ing 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
1981 changes: Section 226.8 has been stream
lined and reorganized to facilitate its use.
Technical detail has been deleted from the
regulation for inclusion in the commentary.
The regulation implements the amended sec
tion 127(b)(2) of the act by providing for pro
tection from civil liability under certain cir
cumstances when required information is not
provided and by reducing disclosure responsi
bilities for certain small creditors. For descrip
tive billing of nonsale transactions, the regula
tion now permits the use of the debiting date
in all cases.
4. Date o f transaction—foreign transactions.
See comment 8(a)(2)-5.
8(b) Nonsale Credit
1. Date o f transaction. If only one of the
required 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.
2. Amount o f transaction. If credit is extended
under an overdraft checking account plan or
SECTION 226.9— Subsequent Disclosure
Requirements
9(a) Furnishing Statement of Billing
Rights
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
67
§ 226.9
•
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 im
posing annual membership fees).
Regulation Z Commentary
the same finance charge terms as those previ
ously disclosed, the creditor:
•
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 alternative
summary statement, the first summary state
ment 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.
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
68
Need only provide a reminder that the new
device or feature is covered by the earlier
disclosures (For example, in mailing spe
cial checks that directly access the credit
line, the creditor might give a disclosure
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.
9(c) Change in Terms
1. “Changes” initially disclosed. No notice of
a change in terms need be given if the spe
cific change is set forth initially, such as: rate
increases 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 certain
balance in a savings account in order to keep
a particular rate and the account balance falls
below the specified minimum. In contrast, no
tice must be given if the contract allows the
creditor to increase the rate at its discretion
but does not include specific terms for an
increase (for example, when an increase may
occur under the creditor’s contract reservation
right to increase the periodic rate). The rules
in section 226.5b(f) relating to home-equity
plans, however, limit the ability of a creditor
to change the terms of such plans.
2. State law issues. Examples of issues not
addressed by section 226.9(c) because they
are controlled by state or other applicable law
include:
§ 226.9
Regulation Z Commentary
•
•
3..C hange in billing cycle. Whenever the
creditor 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 in
creases the minimum payment, unless an ex
ception under section 226.9(c)(2) applies; for
example, the creditor must give advance no
tice if the creditor initially disclosed a 25-day
free-ride period on purchases and the con
sumer 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 over
draft credit need not be disclosed to consum
ers 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:
•
•
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” between
the consumer and the creditor for purposes
of section 226.9(c)(1): the consumer’s gen
eral acceptance of the creditor’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 consumer’s acceptance
of a unilateral term change that is not par
ticular to that consumer, but rather is of
general applicability to consumers with
that type of account.
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
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
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
disclosure statement is accompanied by a let
ter or some other insert that indicates or
draws attention to the term change.
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.
6. Changes to home-equity plans entered into
on or a fter N ovem ber 7, 1989. Section
226.9(c) applies when, by written agreement
under section 226.5b(f)(3)(iii), a creditor
changes the terms of a home equity plan—
entered into on or after November 7, 1989—at
or before its scheduled expiration, for ex
ample, by renewing a plan on terms different
from those of the original plan. In disclosing
the change:
•
If the index is changed, the maximum an
nual percentage rate is increased (to the
lim ited extent perm itted by section
226.30), or a variable-rate feature is added
to a fixed-rate plan, the creditor must in
clude the disclosures required by sectior
226.5b(d)(12)(x) and (d)(12)(xi), unless
these disclosures are unchanged from those
given earlier.
6<
§ 226.9
•
If the minimum payment requirement is
changed, the creditor must include the dis
closures required by section 226.5b(d)
(5)(iii) (and, in variable-rate plans, the dis
closures required by section 226.5b(d)
(12)(x) and (d)(12)(xi)) unless the disclo
sures given earlier contained representative
examples covering the new minimum pay
ment requirement. (See the commentary to
section 226.5b(d)(5)(iii), (d)(12)(x), and
(d)(12)(xi) for a discussion of representa
tive examples.)
When the terms are changed pursuant to a
written agreement as described in section
226.5b(f)(3)(iii), the advance-notice require
ment does not apply.
9(c)(2) Notice Not Required
1. Changes not requiring notice. The follow
ing are examples of changes that do not re
quire 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 term ination 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 consumer
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
allow consumers to skip the December pay
ment to encourage holiday shopping, or a
teacher’s credit union may not require pay
ments during summer vacation. Otherwise, the
creditor must give notice prior to resuming the
original schedule or rate, even though no no
tice is required prior to the reduction. The
change-in-terms notice may be combined with
70
Regulation Z Commentary
the notice 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
finance charges for January” may serve as the
change-in-terms notice.
9(c)(3) Notice fo r Home-Equity Plans
1. Written request fo r reinstatement. If a
creditor requires the request for reinstatement
of credit privileges to be in writing, the notice
under section 226.9(c)(3) must state that fact.
2. Notice not required. A creditor need not
provide a notice under this paragraph if, pur
suant to the com mentary to section
226.5b(f)(2), a creditor freezes a line or re
duces a credit line rather than terminating a
plan and accelerating the balance.
9(d) Finance Charge Imposed at Time of
Transaction
1. Disclosure prior to imposition. A person
imposing a finance charge at the time of hon
oring 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
restaurant, stays overnight at a hotel, or makes
a deposit guaranteeing the purchase of prop
erty or services.
9(e) Disclosures Upon Renewal of Credit
or Charge Card
1. Coverage. This paragraph applies to credit
and charge card accounts of the type subject
to 226.5a. (See section 226.5a(a)(3) and the
accompanying commentary for discussion of
the types of accounts subject to section
226.5a.) The disclosure requirements are trig
gered when a card issuer imposes any annual
or other periodic fee on such an account,
Regulation Z Commentary
whether or not the card issuer originally was
required to provide the application and solici
tation disclosures described in section 226.5a.
2. Form. The disclosures under this paragraph
must be clear and conspicuous, but need not
appear in a tabular format or in a prominent
location. The disclosures need not be in a
form the cardholder can retain.
3. Terms at renewal. Renewal notices must
reflect the terms actually in effect at the time
of renewal. For example, a card issuer that
offers a preferential annual percentage rate to
employees during their employment must send
a renewal notice to employees disclosing the
lower rate actually charged to employees (al
though the card issuer also may show the rate
charged to the general public).
4. Variable rate. If the card issuer cannot de
termine the rate that will be in effect if the
cardholder chooses to renew a variable-rate
account, the card issuer may disclose the rate
in effect at the time of mailing or delivery of
the renewal notice. Alternatively, the card is
suer may use the rate as of a specified date
(and then update the rate from time to time,
for example, each calendar month) or use an
estimated rate under section 226.5(c).
5. Renewals more frequent than annual. If a
renewal fee is billed more often than annually,
the renewal notice should be provided each
time the fee is billed. In this instance, the fee
need not be disclosed as an annualized
amount. Alternatively, the card issuer may
provide the notice no less than once every 12
months if the notice explains the amount and
frequency of the fee that will be billed during
the time period covered by the disclosure, and
also discloses the fee as an annualized
amount. The notice under this alternative also
must state the consequences of a cardholder’s
decision to terminate the account after the
renewal-notice period has expired. For ex
ample, if a $2 fee is billed monthly but the
notice is given annually, the notice must in
form the cardholder that the monthly charge is
$2, the annualized fee is $24, and $2 will be
billed to the account each month for the com
ing year unless the cardholder notifies the
card issuer. If the cardholder is obligated to
pay an amount equal to the remaining unpaid
§ 226.9
monthly charges if the cardholder terminates
the account during the coming year but after
the first month, the notice must disclose the
fact.
6. Terminating credit availability. Card issuers
have some flexibility in determining the pro
cedures for how and when an account may be
terminated. However, the card issuer must
clearly disclose the time by which the
cardholder must act to terminate the account
to avoid paying a renewal fee. State and other
applicable law govern whether the card issuer
may impose requirements such as specifying
that the cardholder’s response be in writing or
that the outstanding balance be repaid in full
upon termination.
7. Timing o f termination by cardholder. When
a card issuer provides notice under section
226.9(e)(1), a cardholder must be given at
least 30 days or one billing cycle, whichever
is less, from the date the notice is mailed or
delivered to make a decision whether to termi
nate an account. When notice is given under
section 226.9(e)(2), a cardholder has 30 days
from mailing or delivery to decide to termi
nate an account.
8. Timing o f notices. A renewal notice is
deemed to be provided when mailed or deliv
ered. Similarly, notice o f term ination is
deemed to be given when mailed or delivered.
9. Prompt reversal o f renewal fee upon termi
nation. In a situation where a cardholder has
provided timely notice of termination and a
renewal fee has been billed to a cardholder’s
account, the card issuer must reverse or other
wise withdraw the fee promptly. Once a
cardholder has terminated an account, no ad
ditional action by the cardholder may be
required.
9(e)(3) Notification on Periodic Statements
1. Combined disclosures. If a single disclo
sure is used to comply with both sections
226.9(e) and 226.7, the periodic statement
must comply with the rules in section 226.5a
and 226.7. For example, the words “ grace
period” must be used and the name of the
balance-calculation method must be identified
(if listed in section 226.5a(g)) to comply with
71
Regulation Z Commentary
§ 226.9
the requirements of section 226.5a, even
though the use of those terms would not oth
erwise be required for periodic statements un
der section 226.7. A card issuer may include
some of the renewal disclosures on a periodic
statement and others on a separate document
so long as there is some reference indicating
that they relate to one another. All renewal
disclosures must be provided to a cardholder
at the same time.
2. Preprinted notices on periodic statements.
A card issuer may preprint the required infor
mation on its periodic statements. A card is
suer that does so, however, using the advancenotice option under section 226.9(e)(1), must
make clear on the periodic statement when the
preprinted renewal disclosures are applicable.
For example, the card issuer could include a
special notice (not preprinted) at the appropri
ate time that the renewal fee will be billed in
the following billing cycle, or could show the
renewal date as a regular (preprinted) entry on
all periodic statements.
9(f) Change in Credit Card Account
Insurance Provider
1. Coverage. This paragraph applies to credit
card accounts of the type subject to section
226.5a if credit insurance (typically life, dis
ability, and unemployment insurance) is of
fered on the outstanding balance of such an
account. (Credit card accounts subject to sec
tion 226.9(f) are the same as those subject to
section 226.9(e); see comment 9(e)-1.) Charge
card accounts are not covered by this para
graph. In addition, the disclosure requirements
of this paragraph apply only where the card
issuer initiates the change in insurance provid
ers. For example, if the card issuer’s current
insurance provider is merged into or acquired
by another company, these disclosures would
not be required. Disclosures also need not be
given in cases where card issuers pay for
credit insurance themselves and do not sepa
rately charge the cardholder.
2. No increase in rate or decrease in cover
age. The requirement to provide the disclosure
arises when the card issuer changes the pro
vider of insurance, even if there will be no
increase in the premium rate charged the con72
sumer and no decrease in coverage under the
insurance policy.
3. Form o f notice. If a substantial decrease in
coverage will result from the change in pro
viders, the card issuer either must explain the
decrease or refer to an accompanying copy of
the policy or group certificate for details of
the new terms of coverage. (See the commen
tary to appendix G-13.)
4. Discontinuation o f insurance. In addition to
stating that the cardholder may cancel the in
surance, the card issuer may explain the effect
the cancellation would have on the consum
er’s credit card plan.
5. Mailing by third party. Although the card
issuer is responsible for the disclosures, the
insurance provider or another third party may
furnish the disclosures on the card issuer’s
behalf.
Paragraph 9(f)(3) Substantial Decrease in
Coverage
1. Determination. Whether a substantial de
crease in coverage will result from the change
in providers is determined by the two-part test
in section 226.9(f)(3): first, whether the de
crease is in a significant term of coverage;
and second, whether the decrease might rea
sonably be expected to affect a cardholder’s
decision to continue the insurance. If both
conditions are met, the decrease must be dis
closed in the notice.
References
Statute: §1 27(a)(7)
Other sections: §§ 226.4 through 226.7 and
appendix 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
§ 226.10
Regulation Z Commentary
creditor 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
consum er’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 disclo
sures must now be made 15 days before the
effective date of the change, rather than 15
days before the billing cycle in which the
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 reverses
interpretation section 226.705, which indicated
that certain changes in the balance computa
tion method did not require disclosure because
they could result in lowered finance charges;
now, any change in the balance computation
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 dis
closure now may be made orally by the per
son honoring the card.
•
•
•
10(b) Specific R equirem ents for
Paym ents
1. Payment requirements. The creditor may
specify requirements for making payments,
such as:
•
•
•
SECTION 226.10— Prompt Crediting of
Payments
•
•
10(a) General Rule
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 ac
count, 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
made by a third-party payor such as a fi
nancial institution, through a preauthorized
payment or telephone bill-payment arrange
ment, payment is received when the credi
tor gets the third-party payor’s check or
other transfer medium, such as an elec
tronic fund transfer, as long as the payment
meets the creditor’s requirements as speci
fied under section 226.10(b).
Requiring that payments be accompanied
by the account number or the payment stub
Setting a cutoff hour for payment to be
received, or set different hours for payment
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
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.
The creditor may be prohibited, however,
from specifying payment for preauthorized
electronic fund transfer. (See section 913 of
the Electronic Fund Transfer Act.)
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:
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
73
§ 226.10
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 payment
(for example, payment at a branch office,
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 fo r payments. In the ab
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
regulation, which only allowed deferred cred
iting for paym ents 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:
74
Regulation Z Commentary
•
•
•
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 amount
of the credit balance at the time the creditor is
required to make the refund. The creditor may
take into consideration intervening purchases
or other debits to the consumer’s account (in
cluding 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 consum er’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,
§ 226.12
Regulation Z Commentary
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 inter
vening debits, not just the difference between
the previous balance and the overpayment as
is provided in the previous regulation. The
revised regulation gives the creditor seven
business days in which to make the refund
after receiving the consumer’s written request,
whereas the previous regulation required the
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.)
or application need not correspond exactly to
the card that is issued. For example:
•
•
5. Time o f issuance. A credit card may be
issued in response to a request made before
any cards are ready for issuance (for example,
if a new program is established), even if there
is some delay in issuance.
6. Persons to whom cards may be issued. A
card issuer may issue a credit card to the
person 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:
•
•
Paragraph 12(a)(1)
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
the card requested may be
issued
have features in addition to
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 ex
ample) or written.
12(a) Issuance of Credit Cards
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.
The name of
different when
The card may
those reflected
•
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.
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
75
§ 226.12
•
Regulation Z Commentary
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
teller machines, or by a similar program
adjustment.
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 terminals
that require PINs.
Paragraph 12(a)(2)
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
includes the reissuance of cards that have
been suspended temporarily, but does not in
clude 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.
76
•
•
(If the substitute card constitutes an access
device, as defined in Regulation E, then
the Regulation E issuance rules would
have to be followed.) The “ substitution” of
one card with another on an unsolicited
basis is not permissible, however, where in
conjunction with the substitution an addi
tional credit card account is opened and
the consumer is able to make new pur
chases or advances under both the original
and the new account with the new card.
For example, if a retail card issuer replaces
its credit card with a combined reatiler/
bank card, each of the creditors maintains
a separate account, and both accounts can
be accessed for new transactions by use of
the new credit card, the card cannot
be provided to a consum er without
solicitation.
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
issuer replaces the original card issuer (for
example, when a new card issuer purchases
the accounts of the original issuer and issues
its own card to replace the original one). A
permissible substitution exists even if the
original issuer retains the existing receivables
and the new card issuer acquires the right
only to future receivables, provided use of the
original card is cut off when use of the new
card becomes possible.
4. Substitution—non-credit-card plan. A credit
card that replaces a retailer’s open-end credit
plan not involving a credit card is not consid
ered a substitute for the retailer’s plan— even
if the consumer used the retailer’s plan. A
credit card cannot be issued in these circum
stances 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
Regulation Z Commentary
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
replacing a debit/credit card with a credit card
and another card with only debit functions (or
debit functions plus an associated overdraft
capability), since the latter card could be is
sued on an unsolicited basis under Regulation
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
B (card B—another type of bank credit card)
unless the consumer requests card B.
9. Multiple entities. Where multiple entities
share responsibilities with respect to a credit
card issued by one of them, the entity that
issued the card may replace it on an unsolic
ited basis, if that entity terminates the original
card by voiding it in some way, as described
in comment 12(a)(2)-7. The other entity or
entities may not issue a card on an unsolicited
basis in these circumstances.
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, including busi
ness. When a corporation is the cardholder,
required disclosures should be provided to the
corporation (as opposed to an employee user).
§ 226.12
2. Imposing liability. A card issuer is not re
quired to impose liability on a cardholder for
the unauthorized use of a credit card; if the
card issuer does not seek to impose liability,
the issuer need not conduct any investigation
of the cardholder’s claim.
3. Reasonable investigation. If a card issuer
seeks to impose liability when a claim of un
authorized use is made by a cardholder, the
card issuer must conduct a reasonable investi
gation of the claim. In conducting its investi
gation, the card issuer may reasonably request
the cardholder’s cooperation. The card issuer
may not automatically deny a claim based
solely on the cardholder’s failure or refusal to
comply with a particular request; however, if
the card issuer otherwise has no knowledge of
facts confirming the unauthorized use, the
lack of inform ation resulting from the
cardholder’s failure or refusal to comply with
a particular request may lead the card issuer
reasonably to terminate the investigation. The
procedures involved in investigating claims
may differ, but actions such as the following
represent steps that a card issuer may take, as
appropriate, in conducting a reasonable
investigation:
i.
Reviewing the types or amounts of pur
chases made in relation to the
cardholder’s previous purchasing pattern.
ii. Reviewing where the purchases were de
livered in relation to the cardholder’s
residence or place of business.
iii. Reviewing where the purchases were
made in relation to where the cardholder
resides or has normally shopped.
iv. Comparing any signature on credit slips
for the purchases to the signature of the
cardholder or an authorized user in the
card issuer’s records, including other
credit slips.
v.
Requesting documentation to assist in the
verification of the claim.
vi. Requesting a written, signed statement
from the cardholder or authorized user.
vii. Requesting a copy of a police report, if
one was filed.
viii. Requesting information regarding the
cardholder’s knowledge of the person
77
§ 226.12
who allegedly used the card or of that
person’s authority to do so.
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 author
ity.” 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 unauthorized
use before the card issuer is notified, which
ever 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)(H)
1. Disclosure o f liability and means o f notify
ing issuer. The disclosures referred to in sec
tion 226.12(b)(2)(ii) may be given, for ex
ample, 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 autho
rized user can be identified. This could in
clude, 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
78
Regulation Z Commentary
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
cardholder may not be held liable under sec
tion 226.12(b) when the card itself (or some
other sufficient means of identification of the
cardholder) 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
issuer’s organization. Notice also may be ef
fective 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 informa
tion,” which would include the name or card
number 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
following the error-resolution procedures in
section 226.13. For example, the writtennotification 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 fo r higher liability fo r business
use cards. The card issuer may not rely on
§ 226.12
Regulation Z Commentary
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 unau
thorized use by someone other than the em
ployee. If the employee uses the card in an
unauthorized manner, the regulation sets no
restriction on the employee’s potential liability
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 conseming 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
section operates independently of section
226.12(c). The cardholder whose asserted bill
ing error involves undelivered goods may in
stitute the error-resolution procedures of sec
tion 226.13; but whether or not the cardholder
has done so, the cardholder may assert claims
or defenses under section 226.12(c). Con
versely, the consumer may pay a disputed bal
ance and thus have no further right to assert
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
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
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 checkguarantee card in conjunction with a cashadvance 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 applies
whether the card accesses an asset account
via point-of-sale terminals, automated teller
m achines, or in any other way, and
whether the card qualifies as an “access
device” under Regulation E or is 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 ordi
nary credit card, but not when used as a
check-guarantee or debit card.
79
§ 226.12
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:
1. That amount may be reported as disputed,
ii. Nothing in this provision prohibits the card
issuer from undertaking its normal collec
tion activities for the delinquent and undis
puted portion of the account.
2. Settlement o f dispute. A card issuer may
not consider a dispute settled and report an
amount disputed as delinquent or begin collec
tion of the disputed amount until it has com
pleted a reasonable investigation of the
cardholder’s claim. A reasonable investigation
requires an independent assessment of the
cardholder’s claim based on information ob
tained from both the cardholder and the mer
chant, if possible. In conducting an investiga
tion, the card issuer may request the
cardholder’s reasonable cooperation. The card
issuer may not automatically consider a dis
pute settled if the cardholder fails or refuses
to comply with a particular request. However,
if the card issuer otherwise has no means of
obtaining information necessary to resolve the
dispute, the lack of information resulting from
the cardholder’s failure or refusal to comply
with a particular request may lead the card
issuer
reasonably
to
term inate
the
investigation.
12(c)(3) Limitations
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
80
Regulation Z Commentary
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 geo
graphic 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. “H olds” on accounts. “Freezing” or plac
ing a hold on funds in the cardholder’s de
posit account is the functional equivalent of
an offset and would contravene the prohibition
in section 226.12(d)(1), unless done in the
context of one of the exceptions specified in
section 226.12(d)(2). For example, if the
terms of a security agreement permitted the
card issuer to place a hold on the funds, the
hold would not violate the offset prohibition.
Similarly, if an order of a bankruptcy court
required the card issuer to turn over deposit
account funds to the trustee in bankruptcy, the
issuer would not violate the regulation by
placing a hold on the funds in order to com
ply with the court order.
2. Funds intended as deposits. If the con
sumer tenders funds as a deposit (to a check
ing account, 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 prohibi
tion 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.
4. When prohibition applies in case o f termi
§ 226.12
Regulation Z Commentary
nation o f account. The offset prohibition ap
plies even after the card issuer terminates the
cardholder’s credit card privileges, if the in
debtedness was incurred prior to termination.
If the indebtedness was incurred after termina
tion, the prohibition does not apply.
rity interest” does not exclude (as it does for
other Regulation Z purposes) interests in afteracquired property. Thus, a consensual security
interest in deposit-account funds, including
funds deposited after the granting of the secu
rity interest, would constitute a permissible
exception to the prohibition on offsets.
Paragraph 12(d)(2)
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
cardholder’s deposit account.
1. Security interest—limitations. In order to
qualify for the exception stated in section
226.12(d)(2), a security interest must be affir
matively agreed to by the consumer and must
be disclosed in the issuer’s initial disclosures
under section 226.6. The security interest must
not be the functional equivalent of a right of
offset; as a result, routinely including 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 ex
ception under section 226.12(d)(2) the follow
ing 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
account. Indicia of the consumer’s aware
ness 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
other contract and disclosure provisions.
— Reference to a specific amount of de
posited 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
Paragraph 12(d)(3)
1. Automatic payment plans—scope o f excep
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)
81
§ 226.12
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).
Paragraph 12(e)(2)
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.
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 re
quested, except that no liability for unautho
rized 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 amendment
to the act); the required disclosures of maxi
mum liability and of means of notification
have been simplified; and the required provi
sion 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
82
Regulation Z Commentary
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 relation
ship of the regulation to Regulation E (Elec
tronic Fund Transfers), has been added.
SECTION 226.13— Billing-Error
Resolution
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
Equal Credit Opportunity Act. The footnote
also alerts creditors that failure to comply
with the error-resolution procedures may result
in the forfeiture of disputed amounts as pre
scribed in section 161(e) of the act. (Any fail
ure to comply may also be a violation subject
to the liability provisions of section 130 of the
act.)
2. Charges fo r error resolution. If a billing
error occurred, whether as alleged or in a
different 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
§ 226.13
Regulation Z Commentary
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 ser
vices that the consumer accepts. Whether ac
ceptance occurred is determined by state or
other applicable law.
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 pe
riodic statement fails to reflect a credit to the
account, the 60-day period runs from transmit
tal 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 financial
institution until called for, the statement is
“transmitted” when it is first made available
to the consumer.
Paragraph 13(a)(5)
1. Computational errors. In periodic state
ments that are combined with other informa
tion, the error-resolution procedures are trig
gered only if the consum er asserts a
computational billing error in the creditrelated portion of the periodic statement. For
example:
Paragraph 13(b)(2)
•
13(c) Time for Resolution; General
Procedures
If a bank combines a periodic statement
reflecting the consumer’s credit card trans
actions with the consum er’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
documentation such as receipts or sales slips,
unaccompanied by an allegation of an error
under section 226.13(a) or a request for addi
tional clarification under section 226.13(a)(6),
does not trigger the error-resolution proce
dures. For example, a request for documenta
tion merely for purposes such as tax prepara
tion 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.
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.
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 re
quired. 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. Time fo r resolution. The phrase “two com
plete billing cycles” means two actual billing
cycles occurring after receipt of the billing
error notice, not a measure of time equal to
83
§ 226.13
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.
13(d) Rules Pending Resolution
1. Disputed amount. “ Disputed amount” is
the dollar amount alleged by the consumer to
be in error. When the allegation concerns the
description or identification of the transaction
(such as the date or the seller’s name) rather
than a dollar amount, the disputed amount is
the amount of the transaction or charge that
corresponds to the disputed transaction identi
fication. If the consumer alleges a failure to
send a periodic statem ent under section
226.13(a)(7), the disputed amount is the entire
balance owing.
13(d)(1) Consumer’s Right to Withhold
Disputed Amount; Collection Action
Prohibited
1. Prohibited collection actions. During the
error-resolution period, the creditor is prohib
ited 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 paym ent 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 consum er’s right under section
226.13(d)(1) to withhold related finance and
other charges. The disclosure under footnote
30 need not appear in any specific place on
the periodic statement, need not state the spe
cific 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
84
Regulation Z Commentary
of the disputed amount from the total bill
cannot 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 ex
ample, if on an account with a free-ride pe
riod (that is, an account in which paying the
new balance in full allows the consumer to
avoid the imposition of additional finance
charges), a consumer disputes a $2 item out
of a total bill of $300 and pays $298 within
the free-ride period, the consumer would not
lose the free ride as to any undisputed
amounts, even if the creditor determines later
that no billing error occurred. Furthermore,
finance or other charges may not be imposed
on any new purchases or advances that, absent
the unpaid disputed balance, would not have
finance or other charges imposed on them.
Finance or other charges that would have been
incurred 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:
•
•
Inter-institutional 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
Intra-institutional 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 cutoff, the card issuer must,
however, prevent the automatic debit of any
part of the disputed amount that is still out
standing 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
§ 226.13
Regulation Z Commentary
in dispute. Also, the creditor may report the
account as delinquent if undisputed amounts
remain unpaid.
2. “Person.” During the error-resolution pe
riod, 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 appli
cable” means that the necessary corrections
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 provided,
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^), the corrections must be specifically
identified. If a separate explanation, including
the correction notice, is provided, the enclosed
or subsequent periodic statement reflecting 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 required 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
e r’s w ithholding paym ent 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.
85
§ 226.13
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 fo r payment. The consumer has a
minimum of 10 days to pay (measured from
the time the consumer could reasonably be
expected to have received notice of the
amount owed) before the creditor may issue
an adverse credit report; if an initially dis
closed free-ride period allows the consumer a
longer time in which to pay, the consumer has
the benefit of that longer period.
Paragraph 13(g)(4)
1. Credit
reporting.
U nder
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 re
quirement. For example, a creditor that reports
to a credit bureau on scheduled updates need
not transmit corrective information by an un
scheduled computer or magnetic tape; it may
provide the credit bureau with the correct in
formation by letter or other commercially rea
sonable means when using the scheduled up
date 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
86
Regulation Z Commentary
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 regula
tion and Regulation E apply. Incidental credit
that is not extended under an agreement be
tween the consumer and the financial institu
tion is governed solely by the error-resolution
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 credit
when the consum er’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 trans
action is subject, for error-resolution pur
poses, to the applicable Regulation E pro
visions (such as timing and notice) for the
entire transaction.
The creditor need not provisionally credit
the consum er’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
Regulation Z Commentary
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 statement
to the consumer’s current address is a billing
error, unless the creditor received written no
tice 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 immu
nized a creditor from liability for inadvertently
taking collection action or making an adverse
credit report within two days after receiving a
billing-error notice; these provisions are de
leted from the revised regulation. The revised
regulation no longer requires placement “on
the face” of the periodic statement of the dis
closure 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
disputed amount if it receives a billing-error
notice within 16 days after transmitting the
periodic statement that reflects the alleged er
ror. Under the revised regulation, the card is
suer must prevent an automatic debit if it re
ceives 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 Vs of 1 per
centage point above or below the annual per
centage rate applies to any required disclosure
of the annual percentage rate. The disclosure
of the annual percentage rate is required in
sections 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
§ 226.14
to any particular number of decimal places;
rounding is permissible within the Vs of 1
percent tolerance. For example, an exact an
nual percentage rate of 14.33333 percent may
be stated as 14.33 percent or as 14.3 percent,
or even as 14 '/i percent; but it could not be
stated as 14.2 percent or 14 percent, since
each varies 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
tolerance 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
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 li
ability 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
Section 226.5a and 226.5b Disclosures,
for Initial Disclosures and for
Advertising Purposes
1. Corresponding annual percentage rate
computation. For purposes of sections 226.5a,
226.5b, 226.6 and 226.16, the annual percent
age rate is determined by multiplying the peri
odic rate by the number of periods in the year.
87
§ 226.14
This computation reflects the fact that, in such
disclosures, the rate (known as the corre
sponding annual percentage rate) is prospec
tive and does not involve any particular fi
nance charge or periodic balance. This
computation also is used to determine any an
nual percentage rate for oral disclosures under
section 226.26(a).
14(c) Annual Percentage Rate for
Periodic Statements
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 section
226.7(g)) the annualized equivalent of 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, minimum, or trans
action charges. Sections 226.14(c)(1) through
(c)(4) state the computation rules for the his
torical rate.
Regulation Z Commentary
3. Charges not based on periodic rates. Sec
tion 226.14(c)(2) applies if the finance charge
imposed includes a charge not due to the ap
plication of a periodic rate (other than a
charge relating to a specific transaction). For
example, if the creditor imposes a minimum
$1 finance charge on all balances below $50,
and the consumer’s balance was $40 in a par
ticular cycle, the creditor would disclose an
annual percentage rate of 30 percent (1/40 x
12).
4. No balance. Footnote 32 to section
226.14(c)(2) would apply not only when mini
mum 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
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:
•
•
2. Periodic rates. Section 226.14(c)(1) applies
if the only finance charge imposed is due to
the application of a periodic rate to a balance.
The creditor may compute the annual percent
age rate either:
•
•
by multiplying each periodic rate by the
number of periods in the year or
by the “quotient” method. This method re
fers to a composite annual percentage rate
when different periodic rates apply to dif
ferent balances. For example, a particular
plan may involve a periodic rate of l'/i
percent on balances up to $500, and 1
percent 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 disclosed either as 18 percent on $500
and 12 percent on $300, or as 15.75 per
cent on a balance of $800 (the quotient of
$10.50 divided by $800, multiplied by 12).
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 imposed” fig
ure. For further explanation and examples of
how to determine the components of this for
mula, 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 application of a daily periodic rate. This
section includes the requirement that the
creditor follow the rules in appendix F in cal
culating the annual percentage rate, especially
footnote 1 to appendix F, which addresses the
daily rate/transaction charge situation by pro
viding that the “average of daily balances”
Regulation Z Commentary
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 specific trans
action or to specific activity on the account,
but relate solely to the opening, renewing, or
continuing of the account. For example, an
annual fee to renew an open-end credit ac
count that is a percentage of the credit limit
on the account, or that is charged only to
consumers who have not used their credit card
for a certain dollar amount in transactions dur
ing the preceding year, would not be included
in the calculation of the annual percentage
rate, even though the fee may not be excluded
from the finance charge under section
226.4(c)(4). (See comment 4(c)(4)-2). Inclu
sion of these charges in the annual percentage
rate calculation results in significant distor
tions of the annual percentage rate and deliv
ery of a possibly misleading disclosure to con
sumers. 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
determine the proper annual percentage rate
computation method according to the type of
charge imposed. If the charge is tied to a
specific 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 minimum or
fixed fees not due to the application of a
periodic rate and the total finance charge for
the cycle does not exceed 50 cents. For ex
ample, while a monthly activity fee of 50
§ 226.14
cents on a balance of $20 would produce an
annual percentage rate of 30 percent under the
rule in section 226.14(c)(2), the creditor may
disclose an annual percentage rate of 18 per
cent if the periodic rate generally applicable to
all balances is 1 Vi percent per month. This
option is consistent with the provision in foot
note 11 to sections 226.6 and 226.7 permitting
the creditor to disregard the effect of mini
mum charges in disclosing the ranges of bal
ances to which periodic rates apply.
10. Transactions at end o f billing cycle. The
annual percentage rate reflects transactions
and charges imposed during the billing cycle.
However, it may be impracticable to post a
transaction that occurs at the end of a billing
cycle until the following cycle, such as a cash
advance that occurs on the last day of a bill
ing cycle and is posted to the account in the
following cycle. A card issuer that uses the
date of the transaction to figure finance
charges should calculate the annual percentage
rate as follows for the billing cycle in which
the transaction and charges are posted:
i. The denominator is calculated as if the
transaction occurred on the first day of the
billing cycle; and
11. The numerator includes the amount of the
transaction charge plus all finance charges
derived from the application of the peri
odic rate to the amount of the transaction
(including all charges from a prior cycle).
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
annual percentage rate. Since the quotient for
mula in section 226.14(c)( 1)(ii) does not work
when a daily rate is being applied to a series
of 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
relating to a specific transaction and the appli
cation of a daily periodic rate, see comment
89
§ 226.14
Regulation Z Commentary
14(c)-6 for guidance on an appropriate calcu
lation method.
rity interest taken in the dwelling to secure
the plan. For example, a consumer may
open an account with a $10,000 credit
limit, $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.
References
Statute: § 107
O ther sections: §§ 226.6, 226.7, 226.9,
226.15, 226.16, and 226.26.
Previous regulation: § 226.5(a) and interpreta
tion §§ 226.501 and 226.506.
1981 changes: Section 226.14 reflects the
statutory amendment permitting a !/s of 1 per
cent tolerance for annual percentage rates. The
revised 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 o f 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)(l)-l. 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 cus
tomer’s principal dwelling.
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:
•
•
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
generally arises with each of the following
occurrences:
•
•
•
•
•
90
Opening the account
Each credit extension
Increasing the credit limit
Adding to an existing account a security
interest in the consum er’s principal
dwelling
Increasing the dollar amount of the secu-
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
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 merely is paid
with the proceeds of the consumer’s cash
advance
All security interests that may arise in con
nection with the credit transaction are val
idly waived
§ 226.15
Regulation Z Commentary
•
The creditor obtains a lien 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 ex
ample, if only one spouse enters into a se
cured 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. (But
see comment 15(a)(l)-6.) A vacation or other
second home would not be a principal dwell
ing. A transaction secured by a second home
(such as a vacation home) that is not currently
being used as the consumer’s principal dwell
ing 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 con
struction, the new dwelling is considered the
principal dwelling if it secures the open-end
credit line. In that case, the transaction se
cured by the new dwelling is a residential
mortgage transaction and is not rescindable.
For example, if a consumer whose principal
dwelling is currently A builds B, to be occu
pied by the consumer upon completion of
construction, an advance on an open-end line
to finance B and secured by B is a residential
mortgage transaction. Dwelling, as defined in
section 226.2, includes structures that are clas
sified as personalty under state law. For ex
ample, a transaction secured by a mobile
home, trailer, or houseboat used as the con
sum er’s principal
rescindable.
dw elling
may
be
6. Special rule fo r principal dwelling. Not
withstanding the general rule that consumers
may have only one principal dwelling, when
the consumer is acquiring or constructing a
new principal dwelling, a credit plan or exten
sion that is subject to Regulation Z and is
secured by the equity in the consumer’s cur
rent principal dwelling is subject to the right
of rescission regardless of the purpose of that
loan (for example, an advance to be used as a
bridge loan). For example, if a consumer
whose principal dwelling is currently A builds
B, to be occupied by the consumer upon
completion of construction, a loan to finance
B and secured by A is subject to the right of
rescission. Moreover, a loan secured by both
A and B is, likewise, rescindable.
Paragraph 15(a)(2)
1. Consumer’s exercise o f right. The con
sumer must exercise the right of rescission in
writing, but not necessarily on the notice sup
plied under section 226.15(b). Whatever the
means of sending the notification of rescis
sion— mail, telegram , or other w ritten
means—the time period for the creditor’s per
formance 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 consum er under section
226.15(b).
Paragraph 15(a)(3)
1. Rescission period. The period within which
the consumer may exercise the right to rescind
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
91
§ 226.15
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 ex
ample, 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 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 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) or the information required under
section 226.5b does not prevent the running of
the rescission period, although that failure
may result in civil liability or administrative
sanctions. The payment terms set forth in
footnote 36 apply to any repayment phase set
forth in the agreement. Thus, the payment
terms described in section 226.6(e)(2) for any
repayment phase as well as for the draw pe
riod are “material disclosures.”
3. M aterial 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. The disclosures
listed in footnote 12 to section 226.6(a)(2) for
any repayment phase also are material disclo
sures for variable-rate programs.
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 fol
lowing three events:
92
Regulation Z Commentary
•
•
•
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 terminate
an unexpired right to rescind. As provided in
section 125 of the act, the three-year limit
may be extended by an administrative pro
ceeding to enforce the provisions of section
226.15. A partial transfer of the consumer’s
interest, such as a transfer bestowing coownership 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) N otice o f R ight to R escind
1. Who receives notice. Each consumer en
titled 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
physically separated from the material disclo
§ 226.15
Regulation Z Commentary
sures or combined with the material disclo
sures, so long as the information required to
be included 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 requirem ent 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
security interest
A statement that joint owners may have
right to rescind and that a rescission
one is effective for all
The name and address of an agent of
creditor to receive notice of rescission
the
the
by
the
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
notice after the occurrence, but the rescission
period 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 perform ing 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 prohibited,
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
of the rescission period to allow
ery of a mailed notice
Obtaining a written statement
consumer that the right has
exercised.
expiration
for deliv
from the
not been
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.
93
§ 226.15
15(d) Effects of Rescission
Regulation Z Commentary
•
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 exer
cises 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
right of rescission. For example, upon
rescission:
•
•
•
If the consumer’s right to rescind is acti
vated by the opening of a plan, any secu
rity 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 cannot
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 subject
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 broker fees, application and
commitment fees, or fees for a title search or
appraisal, whether paid to the creditor, paid by
the consumer 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 creditor. For example:
94
•
•
If the occurrence is the opening of the
plan, the creditor must return any member
ship 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. A m ounts 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
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 nec
essary to indicate that the security interest is
terminated. Those steps include the cancella
tion of documents creating the security inter
est, 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 credi
tor 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 creditor
has already delivered to the consumer. At the
consumer’s option, property may be tendered
at the location of the property. For example, if
fixtures or furniture have been delivered to the
Regulation Z Commentary
consumer’s home, the consumer may tender
them to the creditor by making them available
for pickup at the home, rather than physically
returning them to the creditor’s premises.
Money already given to the consumer must be
tendered at the creditor’s place of business.
For purpose of property exchange, the follow
ing 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 con
sidered to be the same as cash advances
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 tendering 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 modi
fied by a court. For example, when a con
sumer is in bankruptcy proceedings and pro
hibited from returning anything to the creditor,
or when the equities dictate, a modification
might be made.
15(e) Consumer’s Waiver of Right to
Rescind
1. Need fo r waiver. To waive the right to re
scind, the consumer must have a bona fide
§ 226.15
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 signatures
of both spouses.
15(f) Exempt Transactions
1. Residential mortgage transaction. Although
residential mortgage transactions would sel
dom be made on bona fide open-end credit
plans (under which repeated transactions 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 advance for the
downpayment would be exempt from the re
scission 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-collateral
ization clause), subsequent occurrences such
as the opening of a plan or individual credit
extensions are subject to the right of rescis
sion 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 openend credit extensions.
References
Statute: §§ 113, 125, and 130 and the Hous95
§ 226.15
ing and Community Development Technical
Amendments Act of 1984 § 205 (Pub. L.
98-479).
Other sections: § 226.2 and appendix G
Previous regulation: § 226.9
1981 changes: Section 226.15 reflects the
statutory 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. How
ever, Pub. L. 98-479 now permanently ex
empts 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
dwelling, but to personal property as well.
The regulation provides no specific text or
format 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 pos
session of the money or property after the
consumer’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
96
Regulation Z Commentary
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 actu
ally prepared to offer. F o r example, a creditor
may not advertise a very low annual percent
age 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 programs,
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. “ 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). (See, however, the rules
in section 226.16(d) relating to advertisements
for home-equity plans.)
3. Implicit terms. Section 226.16(b) applies
even if the triggering term is not stated ex
plicitly, 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)-1.)
§ 226.16
Regulation Z Commentary
5. Variable-rate plans. In disclosing the an
nual 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 ad
ditional requirement in section 226.16(b)(2) to
disclose the variable-rate feature may be satis
fied by disclosing that “the annual percentage
rate may vary” or a similar statement, but the
advertisement need not include the informa
tion 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
variable-rate plans must, in accordance with
comment 6(a)(2)-10, include both the initial
rate (with the statement of how long it will
remain in effect) and the current indexed rate
(with the statement that this second rate may
vary). The options listed in comment 16(b)-5
may be used in disclosing the current indexed
rate.
7. Triggering terms. The following are ex
am ples of terms that trigger additional
disclosures:
• “ Small monthly service charge on the re
maining balance,” which describes how the
amount of a finance charge will be
determined.
• “ 12 percent Annual Percentage Rate” or
“A $15 annual membership fee buys you
$2,000 in credit,” which describe required
disclosures using positive numbers.
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.
9. Deferred-billing and deferred-payment pro
grams. Statements such as “Charge it—you
won’t be billed until May” or “You may skip
your January payment” are not in themselves
triggering terms, since the timing for initial
billing or for monthly payments are not terms
required to be disclosed under section 226.6.
However, a statement such as “No finance
charge until May” or any other statement re
garding when finance charges begin to accrue
is a triggering term, whether appearing alone
or in conjunction with a description of a
deferred-billing or deferred-payment program
such as the examples above.
16(c) Catalogs and M ultiple-Page
A dvertisem ents
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 newspap'er. A mailing consist
ing of several separate flyers or pieces of pro
motional material in a single envelope does
not constitute a single multiple-page advertise
ment 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 if credit terms depend on
outstanding balance. If the credit terms of a
plan vary depending on the amount of the
balance 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
applied to balances of $500 or less, and a 1
percent rate is applied to balances greater than
$500.
16(d) A dditional R equirem ents for
H om e-E quity Plans
1. Trigger terms. Negative as well as affirma
tive references trigger the requirement for ad
ditional information. For example, if a creditor
states “no annual fee,” “no points,” or “ we
waive closing costs” in an advertisement, ad97
§ 226.16
ditional information must be provided. (See
comment 16(d)-4 regarding the use of a
phrase such as “no closing costs.” ) Inclusion
of a statement such as “low fees,” however,
would not trigger the need to state additional
information. References to payment terms in
clude references to the draw period or any
repayment period, to the iength of the plan, to
how the minimum payments are determined
and to the timing of such payments.
2. Fees to open the plan. Section 226.16
(d)(l)(i) requires a disclosure of any fees im
posed by the creditor or a third party to open
the plan. In providing the fee information re
quired under this paragraph, the corresponding
rules for disclosure of this information apply.
For example, fees to open the plan may be
stated as a range. Similarly, if property insur
ance is required to open the plan, a creditor
either may estimate the cost of the insurance
or provide a statement that such insurance is
required. (See the commentary to section
226.5b(d)(7) and (8).)
3. Statements o f tax deductibility. An adver
tisement referring to deductiblity for tax pur
poses is not misleading if it includes a state
ment such as “consult a tax advisor regarding
the deductibility of interest.”
4. Misleading terms prohibited. Under section
226.16(d)(5), advertisements may not refer to
home-equity plans as “free money” or use
other misleading terms. For example, an ad
vertisement could not state “no closing costs”
or “we waive closing costs” if consumers
may be required to pay any closing costs,
such as recordation fees. In the case of prop
erty insurance, however, a creditor may state,
for example, “no closing costs” even if prop
erty insurance may be required, as long as the
creditor also provides a statement that such
insurance may be required. (See the commen
tary to this section regarding fees to open a
plan.)
5. Relation to other sections. Advertisements
for home-equity plans must comply with all
provisions in section 226.16, not solely the
rules in section 226.16(d). If an advertisement
contains information (such as the payment
?8
Regulation Z Commentary
terms) that triggers the duty under section
226.16(d) to state the annual percentage rate,
the additional disclosures in section 226.16(b)
must be provided in the advertisement. While
section 226.16(d) does not require a statement
of fees to use or maintain the plan (such as
membership fees and transaction charges),
such fees must be disclosed under section
226.16(b)(1) and (3).
6. Inapplicability o f closed-end rules. Adver
tisements for home-equity plans are governed
solely by the requirements in section 226.16,
and not by the closed-end advertising rules in
section 226.24. Thus, if a creditor states pay
ment information about the repayment phase,
this will trigger the duty to provide additional
information under section 226.16, but not un
der section 226.24.
7. Balloon payment.In some programs, a bal
loon payment will occur if only the minimum
payments under the plan are made. If an ad
vertisement for such a program contains any
statement about a minimum periodic payment,
the advertisement must also state that a bal
loon payment will result (not merely that a
balloon payment “may” result). (See comment
5b(d)(5)(ii)-3 for guidance on items not re
quired to be stated in the advertisement, and
on situations in which the balloon-payment
requirement does not apply.)
References
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
statutory 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
participation fees are included among the ad
ditional disclosures required when a triggering
term is used. The substance of interpretation
section 226.1002, requiring disclosure of rep
resentative amounts of credit in catalogs and
multiple-page advertisements, has been incor
porated in simplified form in paragraph (c).
Regulation Z Commentary
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
addition, 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
I example, the disclosures may appear on a
! separate sheet of paper or may be set off from
, other information on the contract or other
documents:
•
•
•
•
By
By
By
By
outlining them in a box
bold print dividing lines
a different color background
a different type style
(The general segregation requirement de
scribed in this subparagraph does not apply to
the disclosures required under sections
226.19(b) and 226.20(c) although the disclo
sures must be clear and conspicuous.)
3. Location. The regulation imposes no spe
cific location requirements on the segregated
disclosures. For example:
•
•
•
•
•
They may appear on a disclosure statement
separate from all other material.
They may be placed on the same document
with the credit contract or other informa
tion, so long as they are segregated from
that information.
They may be shown on the front or back
of a document.
They need not begin at the top of a page.
They may be continued from one page to
another.
§ 226.17
4. Content o f segregated disclosures. Foot
notes 37 and 38 contain exceptions to the
requirement that the disclosures under section
226.18 be segregated from material that is not
directly related to those disclosures. Footnote
37 lists the items that may be added to the
segregated disclosures, even though not di
rectly related to those disclosures. Footnote 38
lists the items required under section 226.18
that may be deleted from the segregated dis
closures and appear elsewhere. Any one or
more of these additions or deletions may be
combined and appear either together with or
separate from the segregated disclosures. The
itemization of the amount financed under sec
tion 226.18(c), however, must be separate
from the other segregated disclosures under
section 226.18. If a creditor chooses to in
clude the security-interest charges required to
be itemized under sections 226.4(e) and
226.18(o) in the amount-financed itemization,
it need not list these charges elsewhere.
5. Directly related. The segregated disclosures
may, at the creditor’s option, include any in
formation that is directly related to those dis
closures. The following is directly related
information:
i.
A description of a grace period after
which a late-payment charge will be im
posed. For example, the disclosure given
under section 226.18(0 may state that a
late charge will apply to “any payment
received more than 15 days after the due
date.”
ii. A statement that the transaction is not
secured. For example, the creditor may
add a category labelled “unsecured” or
“not secured” to the security-interest dis
closures given under section 226.18(m).
iii. The basis for My estimates used in mak
ing disclosures. For example, if the ma
turity date of a loan depends solely on
the occurrence of a future event, the
creditor may indicate that the disclosures
assume that event will occur at a certain
time.
iv. The conditions under which a demand
feature may be exercised. For example,
in a loan subject to demand after five
years, the disclosures may state that the
99
§ 226.17
loan will become payable on demand in
five years.
v. An explanation of the use of pronouns or
other references to the parties to the
transaction. For example, the disclosures
may state, “ ‘You’ refers to the customer
and ‘w e’ refers to the creditor.”
vi. Instructions to the creditor or its employ
ees on the use of a multiple-purpose
form. For example, the disclosures may
state, “Check box if applicable.”
vii. A statement that the borrower may pay a
minimum finance charge upon prepay
ment in a simple-interest transaction. For
example, when state law prohibits penal
ties, but would allow a minimum finance
charge in the event of prepayment, the
creditor may make the section
226.18(k)(l) disclosure by stating, “You
may be charged a minimum finance
charge.”
viii. A brief reference to negative amortization
in variable-rate transactions. For ex
ample, in the variable-rate disclosure, the
creditor may include a short statement
such as “Unpaid interest will be added
to principal.” (See the commentary to
section 226.18(f)( 1)(iii).)
ix. A brief caption identifying the disclo
sures. For example, the disclosures may
bear a general title such as “ Federal
Truth in Lending Disclosures” or a de
scriptive title such as “Real Estate Loan
Disclosures.”
x. A statement that a due-on-sale clause or
other conditions on assumption are con
tained in the loan document. For ex
ample, 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.”
xi. If a state or federal law prohibits prepay
ment penalties and excludes the charging
of interest after prepayment from cover
age 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
100
Regulation Z Commentary
regular installment date, you may be as
sessed interest charges until the end of
the month.”
xii. More than one hypothetical example un
der section 226.18(f)(l)(iv) in transac
tions with more than one variable-rate
feature. For example, in a variable-rate
transaction with an option permitting
consumers to convert to a fixed-rate
transaction, the disclosures may include
an example illustrating the effects on the
payment terms of an increase resulting
from conversion in addition to the ex
ample illustrating an increase resulting
from changes in the index.
xiii. The disclosures set forth under section
226.18(f)(1) for variable-rate transactions
subject to section 226.18(f)(2).
xiv. A statement whether or not a subsequent
purchaser of the property securing an ob
ligation may be permitted to assume the
rem aining obligation on its original
terms.
xv. A late-payment-fee disclosure under section 226.18(/) on a single-payment loan.
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 standard
disclosure statement even though not all of the
creditor’s transactions include those features.
For example, the statement may include:
•
The variable-rate disclosure under section
226.18(f)
• 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)
,
\
j
Regulation Z Commentary
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 transac
tions subject to Regulation M, but are consid
ered credit transactions where the consumer
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.
Creditors 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 disclosures
under section 226.18. For example, when
the disclosures are included on the contract
document, those two terms need not be
more conspicuous as compared to the
heading on the contract document or infor
mation 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 high
lighted wherever used in the required dis
closures. For example, the terms may, but
need not, be highlighted when used in dis
§ 226.17
•
•
closing a prepayment penalty under section
226.18(k) or a required deposit under sec
tion 226.18(r).
The cred ito r’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.
Except for home-equity plans subject to sec
tion 226.5b in which the agreement provides
for a repayment phase, if an open-end credit
account is converted to a closed-end transac
tion under a written agreement with the con
sumer, the creditor must provide a set of
closed-end credit disclosures before consum
mation of the closed-end transaction. (See the
commentary to section 226.19(b) for the tim
ing rules for additional disclosures required
upon the conversion to a variable-rate transac
tion secured by a consumer’s principal dwell
ing with a term greater than one year.) If
consummation of the closed-end transaction
101
§ 226.17
occurs at the same time as the consumer en
ters into the open-end agreement, the closedend credit disclosures may be given at the
time of conversion. If disclosures are delayed
until conversion and the closed-end transac
tion has a variable-rate feature, disclosures
should be based on the rate in effect at the
time of conversion. (See the commentary to
section 226.5 regarding conversion of closedend to open-end credit.)
17(c) Basis o f D isclosures and U se o f
Estim ates
Paragraph 17(c)(1)
1. Legal obligation. The disclosures shall re
flect the credit terms to which the parties are
legally bound as of the outset of the transac
tion. In the case of disclosures required under
section 226.20(c), the disclosures shall reflect
the credit terms to which the parties are le
gally bound when the disclosures are pro
vided. The legal obligation is determined by
applicable state law or other law. (Certain
transactions are specifically addressed in this
commentary. See, for example, the discussion
of buydown transactions elsewhere in the
commentary 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 obli
gation normally is presumed to be contained
in the note or contract that evidences the
agreement. But this presumption is rebutted if
another 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
obligation. For example:
•
102
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
Regulation Z Commentary
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 monthly
payments but the creditor informally per
mits the consumer to defer payments from
time to time, for instance, to take account
of holiday seasons or seasonal employ
ment, 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 con
sumer 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 m ust take the
buydown into account. For example, the
annual percentage rate must be a compos
ite 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
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
Regulation Z Commentary
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
deposited in an escrow account or may be
retained by the creditor. Depending upon the
buydown plan, the consumer’s prepayment of
the obligation may or may not result in a
portion of the amount being credited or re
funded to the consumer. In the disclosures
given for the mortgage, the creditor must re
flect 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
prepaid finance charge.
The payment schedule must reflect the
multiple payment levels resulting from the
buydown.
The rules regarding consumer buydowns do
not apply to transactions known as “lender
buydowns.” In lender buydowns, a creditor
pays an amount (either into an account or to
the party to whom the obligation is sold) to
reduce the consumer’s payments or interest
rate for all or a portion of the credit term.
Typically, these transactions are structured as
a buydown of the interest rate during an ini
tial period of the transaction with a higherthan-usual rate for the remainder of the term.
The disclosures for lender buydowns should
be based on the terms of the legal obligation
between the consumer and the creditor. (See
§ 226.17
comment 17(c)(l)-3 for the analogous rules
concering third-party buydowns.)
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 finance
charge and disclose the corresponding multiple
payment levels and composite annual percent
age rate. The portion paid by the third party
and the corresponding reduction in interest
rate, however, should not be reflected in the
disclosures unless the lower rate is reflected in
the credit contract. (See the discussion on
third-party and consumer buydown transac
tions elsewhere in the commentary to section
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
single-advance transactions, with an amount
financed equalling the sum of the new funds
advanced by the wrap creditor and the remain
ing principal owed to the original creditor on
the preexisting loan. In disclosing the itemiza
tion of the amount financed, the creditor may
use a label such as “the amount that will be
paid to creditor X ” to describe the remaining
principal balance on the preexisting loan. This
approach to Truth in Lending calculations has
no effect on calculations required 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
103
§ 226.17
loan (although only the wrap loan will actu
ally be paid off at that time.)
8. Basis o f disclosures in variable-rate trans
actions. The disclosures for a variable-rate
transaction must be given for the full term of
the transaction and must be based on the
terms in effect at the time of consummation.
Creditors should base the disclosures only on
the initial rate and should not assume that this
rate will increase. For example, in a loan with
an initial rate of 10 percent and a 5 percent
age points rate cap, creditors should base the
disclosures on the initial rate and should not
assume that this rate will increase 5 percent
age points. However, in a variable-rate trans
action with a seller buydown that is reflected
in the credit contract, a consumer buydown, or
a discounted or premium rate, disclosures
should not be based solely on the initial
terms. In those transactions, the disclosed an
nual percentage rate should be a composite
rate based on the rate in effect during the
initial period and the rate that is the basis of
the variable-rate feature for the remainder of
the term. (See the commentary to section
226.17(c) for a discussion of buydown, dis
counted, and premium transactions and the
commentary to section 226.19(a)(2) for a dis
cussion of the redisclosure in certain residen
tial mortgage transactions 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. How
ever, in some cases the initial rate may be
higher. In a discounted transaction, for ex
ample, 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 lim10 4
Regulation Z Commentary
ited time, instead of setting an initial rate of
12 percent.
i.
ii.
iii.
iv.
v.
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
remainder 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
implementation of changes in an index
value. For example, if the contract speci
fies that rate changes are based on the
index value in effect 45 days before the
change date, creditors may use any index
value in effect during the 45 days before
consummation in calculating a composite
annual percentage rate.
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 'A of 1 percent ap
plies, in accordance with section
226.22(a)(3) of the regulation.
Exam ples of discounted variable-rate
transactions include:
A. A 30-year loan for $100,000 with no
prepaid finance charges and rates de
termined by the Treasury bill rate plus
2 percent. Rate and payment adjust
ments are made annually. Although the
Treasury bill rate at the time of con
summation is 10 percent, the creditor
sets the interest rate for one year at 9
percent, instead of 12 percent accord
ing to the formula. The disclosures
should reflect a composite annual per
centage rate of 11.63 percent based on
Regulation Z Commentary
9 percent for one year and 12 percent
for 29 years. Reflecting those two rate
levels, the payment schedule should
show 12 payments 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.
B. Same loan as above, except with a 2
/
percent rate cap on periodic adjust
ments. The disclosures should reflect a
composite annual percentage rate of
11.53 percent 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 payments of $804.62, 12 pay
ments 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.
C. Same loan as above, except with a IV 2
percent cap on payment adjustments.
The disclosures should reflect a com
posite annual percentage rate of 11.64
percent, based on 9 percent for one
year and 12 percent for 29 years. Be
cause of the payment cap, five levels
of payments should be reflected. The
payment schedule should show 12 pay
ments of $804.62, 12 payments of
$864.97, 12 payments of $929.84, 12
payments of $999.58, and 312 pay
m ents of $1,070.04. The finance
charge should be $277,040.60, and the
total of payments $377,040.60.
vi. A loan 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 consum
mation. For example, if a creditor com
mits to an initial rate based on the formula
on a date prior to consummation, but the
index has moved during the period be
tween that time and consummation, a
creditor should base its disclosures on the
initial rate.
11. Examples o f variable-rate transactions.
Variable-rate transactions include:
•
Renewable balloon-payment instruments
where the creditor is both unconditionally
§ 226.17
obligated to renew the balloon-payment
loan at the consumer’s option (or is obli
gated to renew subject to conditions within
the consumer’s control) and has the option
of increasing the interest rate at the time of
renewal. Disclosures must be based on the
payment amortization (unless the specified
term of the obligation with renewals is
shorter) and on the rate in effect at the
time of consummation of the transaction.
(Examples of conditions within a consum
er’s control include requirements that a
consumer be current in payments or con
tinue to reside in the mortgaged property.
In contrast, setting a limit on the rate at
which the creditor would be obligated to
renew or reserving the right to change the
credit standards at the time of renewal are
examples of conditions outside a consum
er’s control.) If. however, a creditor is not
obligated to renew as described above, dis
closures must be based on the term of the
balloon-payment loan. Disclosures also
m ust be based on the term of the
balloonpayment loan in balloon-payment
instruments in which the legal obligation
provides that the loan will be renewed by
a “refinancing” of the obligation, as that
term is defined by section 226.20(a). If it
cannot be determined from the legal obli
gation that the loan will be renewed by a
“refinancing,” disclosures must be based
either on the term of the balloon-payment
loan or on the payment amortization, de
pending on whether the creditor is uncon
ditionally obligated to renew the loan as
described above. (This discussion does not
apply to construction loans subject to sec
tion 226.17(c)(6).)
• “ 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 section
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
legal obligation provide that the initial un105
Regulation Z Commentary
§ 226.17
•
derlying rate is fixed but will increase
upon the occurrence of some event, such
as an employee leaving the employ of the
creditor, and the note reflects the preferred
rate. The disclosures are to be based on the
preferred rate.
“Price-level-adjusted mortgages” or other
indexed mortgages that have a fixed rate of
interest but provide for periodic adjust
ments to payments and the loan balance to
reflect changes in an index measuring
prices or inflation. Disclosures are to be
based on the fixed interest 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
assumption that the original interest rate
does not increase.
106
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. Pay
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,
creditors 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(f)(1).
(This discussion does not apply to growthequity 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. Reverse mortgages. Reverse mortgages,
also known as reverse-annuity or homeequity-conversion mortgages, typically involve
the disbursement of monthly advances to the
consumer for a fixed period or until the occur
rence of an event such as the consumer’s
death. Repayment of the loan (generally a
single payment of principal and accrued inter
est) may be required to be made at the end of
the disbursements or, for example, upon the
death of the consumer. In disclosing these
transactions, creditors must apply the follow
ing rules, as applicable:
•
If the reverse mortgage has a specified pe
riod for disbursements but repayment is
due only upon the occurrence of a future
event such as the death of the consumer,
the creditor must assume that disburse
ments will be made until they are sched
uled to end. The creditor must assume re
payment will occur when disbursements
end (or within a period following the final
disbursement which is not longer than the
regular interval between disbursements).
This assumption should be used even
though repayment may occur before or af
ter the disbursements are scheduled to end.
§ 226.17
Regulation Z Commentary
In such cases, the creditor may include a
statement such as “The disclosures assume
that you will repay the loan at the time our
payments to you end. As provided in your
agreement, your repayment may be re
quired at a different time.”
• If the reverse mortgage has neither a speci
fied period for disbursements nor a speci
fied repayment date and these terms will
be determined solely by reference to future
events, including the consumer’s death, the
creditor may assume that the disbursements
will end upon the consumer’s death (esti
mated by using actuarial tables, for ex
ample) and that repayment will be required
at the same time (or within a period fol
lowing the date of the final disbursement
which is not longer than the regular inter
val for disbursements). Alternatively, the
creditor may base the disclosures upon an
other future event it estimates will be most
likely to occur first. (If terms will be deter
mined by reference to future events which
do not include the consumer’s death, the
creditor must base the disclosures upon the
occurence of the event estimated to be
most likely to occur first.)
• In making the disclosures, the creditor
must assume that all disbursements and ac
crued interest will be paid by the con
sumer. For example, if the note has a
nonrecourse provision providing that the
consumer is not obligated for an amount
greater than the value of the house, the
creditor must nonetheless assume that the
full amount to be disbursed will be repaid.
In this case, however, the creditor may in
clude a statement such as “The disclosures
assume full repayment of the amount ad
vanced plus accrued interest, although the
amount you may be required to pay is
limited by your agreement.”
• Some reverse mortgages provide that some
or all of the appreciation in the value of
the property will be shared between the
consumer and the creditor. Such loans are
considered variable-rate mortgages, as de
scribed in comment 17(c)(1)—11, and the
appreciation feature must be disclosed in
accordance with section 226.18(f)(1). If the
reverse mortgage has a variable interest
rate, is written for a term greater than one
year, and is secured by the consumer’s
principal dwelling, the shared-appreciation
feature must be described under section
226.19(b)(2)(vii).
15. 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.
16. 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 either
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).
17. Special rules fo r tax refund-anticipation
loans. Tax-refund loans, also known as
refund-anticipation loans (RALs), are transac
tions in which a creditor will lend up to the
amount of a consumer’s expected tax refund.
RAL agreements typically require repayment
upon demand, but also may provide that re
payment is required when the refund is made.
The agreements also typically provide that if
the amount of the refund is less than the pay
ment due, the consumer must pay the differ
ence. Repaym ent often is made by a
preauthorized offset to a consumer’s account
held with the creditor when the refund has
been deposited by electronic transfer. Credi
tors may charge fees for RALs in addition to
fees for filing the consumer’s tax return elec
tronically. In RAL transactions subject to the
regulation the following special rules apply:
•
If, under the terms of the legal obligation,
107
§ 226.17
•
repayment of the loan is required when the
refund is received by the consumer (such
as by deposit into the consumer’s account),
the disclosures should be based on the
creditor’s estimate of the time the refund
will be delivered even if the loan also con
tains a demand clause. The practice of a
creditor to demand repayment upon deliv
ery of refunds does not determine whether
the legal obligation requires that repayment
be made at that time; this determination
must be made according to applicable state
or other law. (See comment 17(c)(5)-l for
the rules regarding disclosures if the loan
is payable solely on demand or is payable
either on demand or on an alternate matu
rity date.)
If the consumer is required to repay more
than the amount borrowed, the difference
is a finance charge unless excluded under
section 226.4. In addition, to the extent
that any fees charged in connection with
the loan (such as for filing the tax return
electronically) exceed those fees for a
comparable cash transaction (that is, filing
the tax return electronically without a
loan), the difference must be included in
the finance charge.
18. Pawn transactions. When, in connection
with an extension of credit, a consumer
pledges or sells an item to a pawnbroker
creditor in return for a sum of money and
retains the right to redeem the item for a
greater sum (the redemption price) within a
specified period of time, disclosures are re
quired. In addition to other disclosure require
ments that may be applicable under section
226.18, for purposes of pawn transactions:
i.
ii.
108
The amount financed is the initial sum
paid to the consumer. The pawnbroker
creditor need not provide a separate item
ization of the amount financed if that en
tire amount is paid directly to the con
sumer and the disclosed description of the
amount financed is “the amount of cash
given directly to you” or a similar phrase.
The finance charge is the difference be
tween the initial sum paid to the con
sumer and the redemption price plus any
other finance charges paid in connection
with the transaction. (See section 226.4.)
Regulation Z Commentary
iii. The term of the transaction, for calculat
ing the annual percentage rate, is the pe
riod of time agreed to by the pawnbroker
creditor and the consumer. The term of
the transaction does not include a grace
period (including any statutory grace pe
riod) after the agreed redemption date.
Paragraph 17(c)(2)(i)
1. Basis fo r estimates. Disclosures may be es
timated when the exact information is un
known at the time disclosures are made. Infor
mation is unknown if it is not reasonably
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 j
information. For example, the creditor must at
a minimum utilize generally accepted calcula
tion 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 con
sumer for the time of consummation, to insur
ance companies for the cost of insurance, or
to realtors for taxes and escrow fees. The
creditor may utilize estimates in making dis
closures even though the creditor knows that
more precise information will be available by
the point of consummation. However, new
disclosures 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
labelled as an estimate. However, when sev
eral disclosures are affected because of the
unknown 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
§ 226.17
Regulation Z Commentary
estimates the total of payments and the pay
ment schedule. When many disclosures are es
timates, the creditor may use a general state
ment, such as “ all numerical disclosures
except the late payment disclosure are esti
mates,” as a method to label those disclosures
as estimates.
est, a $90 fee is incorrectly omitted from the
finance charge, causing it to be understated by
a total of $290, the finance charge is consid
ered accurate because the $90 fee is within
the tolerance in section 226.18(d)(1).
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 pos
sible inaccuracies resulting from consumers’
payment patterns.
1. Minor variations. Section 226.17(c)(3) al
lows creditors to disregard certain factors in
calculating and making disclosures. For
example:
Paragraph 17(c)(3)
•
•
Paragraph 17(c)(2)(H)
1. Per diem interest. This paragraph applies to
any numerical amount (such as the finance
charge, annual percentage rate, or payment
amount) that is affected by the amount of the
per diem interest charge that will be collected
at consummation. If the amount of per diem
interest used in preparing the disclosures for
consummation is based on the information
known to the creditor at the time the disclo
sure document is prepared, the disclosures are
considered accurate under this rule, and af
fected disclosures are also considered accu
rate, even if the disclosures are not labeled as
estimates. For example, if the amount of per
diem interest used to prepare disclosures is
less than the amount of per diem interest
charged at consummation, and as a result the
finance charge is understated by $200, the dis
closed finance charge is considered accurate
even though the understatement is not within
the $100 tolerance of section 226.18(d)(1),
and the finance charge was not labeled as an
estimate. In this example, if in addition to the
understatement related to the per diem inter
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 ex
actly an obligation with equal payments;
the amount of the last payment may re
quire adjustment to account for the round
ing 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
period, the variations may be ignored in dis
closing the payment schedule, finance charge,
annual percentage rate, and other terms. For
example:
•
A 36-month auto loan might be consum
mated on June 8 with payments due on
109
§ 226.17
•
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.
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 paym ents 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
either the actual number of days or an as
sumed 30-day month. In other transactions,
the length of the periods is based on the ac
tual 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
the annual percentage rate but taken into ac
count in calculating and disclosing the finance
charge and payment schedule.
4. Relation to prepaid finance charges. Pre
paid finance charges, including “odd-days” or
“per diem” interest, paid prior to or at closing
may not be treated as the first payment on a
110
Regulation Z Commentary
loan. Thus, creditors may not disregard an
irregularity in disclosing such finance charges.
Paragraph 17(c)(5)
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
demand obligation. Because no demand fea
ture is contained in the obligation, demand
disclosures under section 226.18(i) are inappli
cable. The disclosures should be based on the
creditor’s estimate of the time at which the
specified event will occur, and may indicate
the basis 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 transactions
should be based upon the legally agreed-upon
maturity date. Thus, if a mortgage containing
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 demand
feature disclosed under section 226.18(i).
Regulation Z Commentary
§ 226.17
k Balloon mortgages. Balloon payment mort;ages, with payments based on a long-term
imortization schedule and a large final paynent due after a shorter term, are not demand
>bligations unless a demand feature is specifi
city contained in the contract. For example, a
nortgage with a term of 5 years and a payuent schedule based on 20 years would not
>e treated as a mortgage with a demand feaure, in the absence of any contractual demand
provisions. In this type of mortgage, disclo;ures should be based on the 5-year term.
initially obligated to accept construction fi
nancing only or is obligated to accept both
construction and permanent financing 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 transac
tions would be consummated at that time.
(Appendix D provides a method of calculating
the annual percentage rate and other disclo
sures for construction loans, which may be
used, at the creditor’s option, in disclosing
construction financing.)
Paragraph 17(c)(6)
3. Multiple-advance construction loans. Sec
tion 226.17(c)(6)(i) and (ii) are not mutually
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.
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 unknown,
creditors must make disclosures based on esti
mates, as provided in section 226.17(c)(2). If
the advances are disclosed separately, disclo
sures must be provided before each advance
occurs, with the disclosures for the first ad
vance provided by consummation.
2. Construction loans. Section 226.17(c)
(6)(ii) provides a flexible rule for disclosure
of construction loans that may be permanently
financed. These transactions have two distinct
phases, similar to two separate transactions.
The construction loan may be for initial con
struction or subsequent construction, such as
rehabilitation or remodelling. The construction
period usually involves several disbursements
of funds at times and in amounts that are
unknown at the beginning of that period, with
the consumer paying only accrued interest un
til construction is completed. Unless the obli
gation is paid at that time, the loan then con
verts 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 com
bined disclosure for both the construction fi
nancing and the permanent financing, or a
separate set of disclosures for the two phases.
This rule is available whether the consumer is
4. Residential mortgage transaction. See the
commentary to section 226.2(a)(24) for a dis
cussion 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 transac
tions, 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 con
sumer and the creditor chooses to disclose the
two phases separately, the five points may be
allocated entirely to the construction loan, en
tirely to the permanent loan, or divided in any
manner between the two. However, the entire
five points may not be applied twice, that is,
to both the construction and the permanent
phases.
Ill
§ 226.17
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 disclosures
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
either 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, although
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
disclosures inaccurate. The creditor may, how
ever, be required to make new disclosures un
der sections 226.17(f) or 226.19 if the events
occurred between disclosure and consumma
tion or under section 226.20 if the events oc
curred after consummation.
17(f) Early Disclosures
1. Change in rate or other terms. Redis112
Regulation Z Commentarj
closure is required for changes that occur be
tween the time disclosures are made and con
summation if the annual percentage rate in the
consummated transaction exceeds the limits
prescribed in this section, even if the initial
disclosures would be considered accurate un
der the tolerances in sections 226.18(d) oi
226.22(a). To illustrate:
i.
\
General.
A. If disclosures are made in a regula;
transaction on July 1, the transaction is
consummated on July 15, and the ac
tual annual percentage rate varies by
more than Vs of 1 percentage point
from the disclosed annual percentage
rate, the creditor must either redisclose
the changed terms or furnish a com
plete set of new disclosures before
consummation. Redisclosure is re
quired even if the disclosures made on
July 1 are based on estimates and
marked as such.
B. In a regular transaction, if early disclo
sures are marked as estimates and the
disclosed annual percentage rate is
within Vs of 1 percentage point of the
rate at consummation, the creditor
need not redisclose the changed terms
(including the annual percentage rate).
ii. Nonmortgage loan. If disclosures are
made on July 1, the transaction is consum
mated on July 15, and the finance charge
increased by $35 but the disclosed annual
percentage rate is within the permitted tol
erance, the creditor must at least
redisclose the changed terms that were not
marked as estim ates. (See section
226.18(d)(2) of this part.)
iii. Mortgage loan. At the time TILA disclo
sures are prepared in July, the loan closing
is scheduled for July 31 and the creditor
does not plan to collect per diem interest
at consummation. Consummation actually
occurs on August 5, and per diem interest
for the remainder of August is collected as
a prepaid finance charge. Assuming there
were no other changes requiring
redisclosure, the creditor may rely on the
disclosures prepared in July that were ac
curate when they were prepared. However,
if the creditor prepares new disclosures in
§ 226.17
Regulation Z Commentary
August that will be provided at consum
mation, the new disclosures must take into
account the amount of the per diem inter
est known to the creditor at that time.
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 com mentary 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 refinanc
ing or an assumption within the meaning of
section 226.20.
Paragraph 17(f)(2)
1. Irregular transactions. For purposes of this
paragraph, a transaction is deemed to be “ir
regular” according to the definition in foot
note 46 of 226.22(a)(3).
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
unit-cost basis, if the transaction meets the
requirements 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
conditions in this paragraph are met. If those
conditions 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:
•
•
17(g) Mail or Telephone Orders— Delay
in Disclosures
1. Conditions fo r 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:
•
•
The credit request is initiated without faceto-face or direct telephone solicitation.
(Creditors may, however, use the special
rule when credit requests are solicited by
mail.)
The creditor has supplied the specified
credit information about its credit terms ei
ther to the individual consumer or to the
public generally. That information may be
distributed through advertisements, cata
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.
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
113
§ 226.17
Regulation Z Commentary
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.
commentary to appendix H regarding disclo
sure forms approved for use in certain student
credit programs.
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
repaym ent 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 statu
tory interest, that is attributable to the interim
period and is paid by the student (either as a
prepaid finance charge, periodically during the
interim period, in one payment at the end of
the interim period, or capitalized at the begin
ning of the repayment period) must be re
flected 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 annual percentage rate on the interim obli
gation, 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 example of this type of charge is
the loan guarantee fee. The sum of the pre
paid finance charges is deducted from the loan
proceeds to determine the amount financed
and included in the calculation of the finance
charge.
Statute: §§ 121, 122, 124, and 128, and the
Higher Education Act of 1965 (20 USC 1071)
as amended by Public Law 97-35, August 13,
1981
Other sections: § 226.2 and appendix H
Previous regulation: §§ 226.6 and 226.8
1981 changes: With few exceptions, the dis
closures 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 construc
tion loans that may be permanently financed
may be disclosed, at the creditor’s option, as
either a single transaction or several transac
tions. Appendix D is applicable only to mul
tiple advances for the construction of a dwell
ing, whereas its predecessor, interpretation
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.
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
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 remaining
on the interim extensions at the time of con
solidation and categorize them as the amount
paid on the consumer’s account.
R eferences
SEC T IO N 226.18— C ontent o f
D isclosures
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:
•
4. Approved student credit forms. See the
114
1
In a loan transaction, the creditor may de
lete disclosure of the total sale price.
I
§ 226.18
Regulation Z Commentary
•
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
conspicuous 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, follow ed by a single
amount.
However, if the terms are separated on the
disclosure statement and separate space is
provided for each amount, both disclosures
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 mak
ing 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 multiple credi
tors, any one of them may make the disclo
sures; the one doing so must be identified.
18(b) Amount Financed
1. Disclosure required. The net amount of
credit extended must be disclosed using the
term “amount financed” and a descriptive ex
planation sim ilar 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 credi
tor’s option, certain deferred downpayments or
pickup payments. A deferred downpayment
that meets the criteria set forth in the defini
tion may be treated as part of the
downpayment, at the creditor’s option.
•
•
Deferred downpaym ents that are not
treated as part of the downpayment (either
because they do not meet the definition 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 am ount 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
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
accessories or service policies that the creditoi
includes in the cash price.
Paragraph 18(b)(3)
1. Prepaid finance charges. Prepaid finance
charges that are paid separately in cash or b)
check should be deducted under sectior
226.18(b)(3) in calculating the amount fi
nanced. To illustrate:
i i;
1
§ 226.18
•
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 pur
poses 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
incorporated 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.) W hen 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 fol
lowing examples illustrate the application of
section 226.18(b) to this type of transaction.
Each example assumes a loan request of
$2,500 with a loan fee of $40; the creditor
assesses 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 deduct
$40 as a prepaid finance charge under sec
tion 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 section
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
:harge by withholding it from the amount ad116
Regulation Z Commentary
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
prepares 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 deduct
$40 as a preapid finance charge under sec
tion 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 section 226.18
(b)(3), thereby obtaining an amount fi
nanced 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
exam ples, they are nonetheless finance
charges and must be treated as such.
2. Add-on or discount charges. All finance
charges must be deducted from the amount of
credit in calculating the amount financed. If
the principal loan amount reflects finance
charges that meet the definition of a prepaid
finance charge in section 226.2, those charges
are included in the section 226.18(b)(1)
amount and deducted under section
226.18(b)(3). However, if the principal loan
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 following
examples illustrate the application of section
226.18(b) to these types of transactions. Each
example assumes a loan request of $1,000 for
one year, subject to a 6 percent precomputed
interest rate, with a $10 loan fee paid sepa
rately 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
§ 226.1
Regulation Z Commentary
•
•
amount of $1,060. The principal for pur
poses of section 226.18(b)(1) is $1,000, no
am ounts 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 sec
tion 226.18(b)(1) is $940, which results in
an amount financed of $930, after deduc
tion of the $10 prepaid finance charge un
der 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 com plying with section
226.18(c):
•
The creditor may inform the consumer, on
the segregated disclosures, that a written
itemization of the amount financed will be
provided on request, furnishing the itemiza
tion only if the customer in fact requests it.
• The creditor may provide an itemization as
a matter of course, without notifying the
consumer of the right to receive it or wait
ing 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, fc
example, do one or more of the following:
•
Include amounts that reflect payments nc
part of the amount financed. For example
escrow items and certain insurance prem:
ums may be included, as discussed in th
commentary to section 226.18(g).
• Organize the categories in any order. Fc
example, the creditor may rearrange th
terms in a mathematical progression th:
depicts the arithmetic relationship of th
terms.
• Add categories. For example, in a cred
sale, the creditor may include the cas
price and the downpayment.
• Further itemize each category. For e)
ample, the amount paid directly to the coi
sumer may be subdivided into the amoui
given by check and the amount credited 1
the consumer’s savings account.
• Label categories with different languaj
from that shown in section 226.18(c). Fi
example, an amount paid on the consul]
er’s account may be revised to specifical
identify the account as “your auto loi
with us.”
• Delete, leave blank, mark “N/A” or othe
wise note inapplicable categories in tl
itemization. For example, in a credit sa
with no prepaid finance charges
amounts paid to others, the amount 1
nanced may consist of only the cash pri
less downpayment. In this case, the itei
ization may be composed of only a sing
category and all other categories may
eliminated.
3. Amounts appropriate to more than one ci
egory. When an amount may appropriately
placed in any of several categories and t
creditor does not wish to revise the categori
shown in section 226.18(c), the creditor h
considerable flexibility in determining whe
to show the amount. For example:
•
In a credit sale, the portion of the purchc
price being financed by the creditor m
be viewed as either an amount paid to t
consumer or an amount paid on the cc
sumer’s account.
4. RESPA transactions. The Real Esta
Settlement Procedures Act (RESPA) requi
§ 226.18
creditors to provide good faith estimates of
closing costs and a settlement statement listing
the amounts paid by the consumer. Transac
tions subject to RESPA are exempt from the
requirements of section 226.18(c) if the credi
tor complies with RESPA’s requirements for a
good faith estimate and settlement statement.
The itemization of the amount financed need
not be given, even though the content and
timing of the good faith estimate and settle
ment statement under RESPA differ from the
requirem ents of sections 226.18(c) and
226.19(a)(2). If a creditor chooses to substi
tute RESPA’s settlement statement for the
itemization when redisclosure is required un
der section 226.19(a)(2), the statement must
be delivered to the consumer at or prior to
consummation. The disclosures required by
sections 226.18(c) and 226.19(a)(2) may ap
pear on the same page or on the same docu
ment as the good faith estimate or the settle
ment statement, so long as the requirements of
section 226.17(a) are met.
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
interest-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 interestbearing account. Whether or not the $200 is a
required deposit, it is part of the amount fi
nanced. At the creditor’s option, it may be
Droken out and labelled in the itemization of
he amount financed.
°aragraph 18(c)(l)(ii)
I. Amounts credited to consumer’s account.
fhe term “consumer’s account” refers to an
iccount in the nature of a debt with that
ireditor. It may include, for example, an un>aid balance on a prior loan, a credit sale
lalance or other amounts owing to that credior. It does not include asset accounts of the
18
Regulation Z Commentary
consumer 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 Eire
financed, they may, at the creditor’s option, be
combined and listed in one sum, labelled “in
surance” or similar term. This includes, 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 footnote 40,
third parties must be identified by name.
2. Charges added to amounts paid to others.
A sum is sometimes added to the amount of a
fee charged to a consumer for a service pro
vided by a third party (such as for an ex
tended warranty or a service contract) that is
payable in the same amount in comparable
cash and credit transactions. In the credit
transaction, the amount is retained by the
creditor. Given the flexibility permitted in
meeting the requirements of the amountfinanced itemization (see the commentary to
section 226.18(c)), the creditor in such cases
may reflect that the creditor has retained a
portion of the amount paid to others. For ex
ample, the creditor could add to the category
“amount paid to others” language such as
“ (we may be retaining a portion of this
amount).”
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 sec
tion. The prepaid finance charges must be
shown as a total amount but may, at the credi
tor’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 ex
ample, if at consummation the creditor col
lects interim interest of $30 and a credit re
§ 226.18
Regulation Z Commentary
port fee of $10, a total prepaid finance charge
of $40 must be shown. At the creditor’s op
tion, the credit report fee paid to a third party
may also be shown elsewhere as an amount
included in section 226.18(c)(l)(iii). The
creditor may also further describe the two
components of the prepaid finance charge, al
though no itemization of this element is re
quired by section 226.18(c)(l)(iv).
2. Prepaid mortgage insurance premiums.
RESPA requires creditors to give consumers a
settlement statement disclosing the costs asso
ciated with mortgage loan transactions. In
cluded on the settlement statement are mort
gage insurance premiums collected at
settlement, which are prepaid finance charges.
In calculating the total amount of prepaid fi
nance charges, creditors should use the
amount for mortgage insurance listed on the
line for mortgage insurance on the settlement
statement (line 1002 on HUD-1 or HUD 1-A),
without adjustment, even if the actual amount
collected at settlement may vary because of
RESPA’s escrow-accounting rules. Figures for
mortgage insurance disclosed in conformance
with RESPA shall be deemed to be accurate
for purposes of Regulation Z.
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
include a brief description similar to that in
section 226.18(d). The creditor may, but need
not, further modify the descriptor for variablerate 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.
18(d)(2) Other Credit
1. Tolerance. When a finance-charge error re
sults in a misstatement of the amount fi
nanced, or some other dollar amount for
which the regulation provides no specific tol
erance, the misstated disclosure does not vio
late the act or the regulation if the finance-
charge error is within the permissible toler
ance under this paragraph.
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
subject to change.” Under section 226.17(a),
the terms “annual percentage rate” and “fi
nance 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 secured
by the consumer’s principal dwelling and to
those that are secured by the principal dwell
ing but have a term of one year or less. Sec
tion 226.18(f)(2) applies to variable-rate trans
actions that are secured by the consumer’s
principal dwelling and have a term greater
than one year. Moreover, transactions subject
to section 226.18(f)(2) are subject to the spe
cial early-disclosure requirements of section
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(f)(2) and 226.19(b) regardless
of the general coverage of those sections.)
Creditors are permitted under footnote 43 to
substitute in any variable-rate transaction the
119
§ 226.18
Regulation Z Commentary
disclosures required under section 226.19(b)
for those disclosures ordinarily required under
section 226.18(f)(1). Creditors who provide
variable-rate disclosures under section
226.19(b) must comply with all of the require
ments of that section, including the timing of
disclosures, and must also provide the disclo
sures required under section 226.18(f)(2).
Creditors utilizing footnote 43 may, but need
not, also provide disclosures pursuant to sec
tion 226.20(c). (Substitution of disclosures un
der section 226.18(f)(1) in transactions subject
to section 226.19(b) is not permitted under the
footnote.)
must be disclosed. In making disclosures un
der section 226.18(f)(1), creditors should dis
close the fact that the rate may increase upon
conversion; identify the index or formula used
to set the fixed rate; and state any limitations
on and effects of an increase resulting from
conversion that differ from other variable-rate
features. Because section 226.18 (f)(l)(iv) re
quires only one hypothetical example (such as
an example of the effect on payments result
ing from changes in the index), a second hy
pothetical example need not be given.
Paragraph 18(f)(1)
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.)
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.
Paragraph 18(f)(l)(ii)
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 iden
tifiable factors used to determine whether
to increase the rate must be disclosed.
When the increase in the rate is purely
discretionary, 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 requirement
by either a brief description of that index
or a statement that any increase is in the
discretion of the creditor. An externally de
fined index, however, must be identified.
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
120
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 amortiza
tion that may result from a rate increase. (See
the commentary to section 226.17(a)(1) re
garding directly related information.) If the
effect cannot be determined, the creditor must
provide a statement of the possible effects.
For example, if the exercise of the variablerate feature 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 ei
ther 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
§ 226.18
Regulation Z Commentary
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) regard
ing disclosure of more than one hypothetical
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 addition
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 provided earlier. (See
the commentary to section 226.17(a)(1) re
garding the disclosure of certain directly re
lated information in addition to the variablerate disclosures required under section
226.18(f)(2).)
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.
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 definition
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
total number of payments for all levels. For
example, 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 obligations
with no alternate maturity date, the creditor
has the option of disclosing only the due dates
or periods of scheduled interest payments in
the first year (for example, “interest payable
quarterly” or “interest due the first of each
month” ). The amounts of the interest pay
ments 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 payment)
includes an equal amount to be applied on
principal and a finance charge computed by
application of a rate to the decreasing unpaid
balance. This option is also available when
mortgage-guarantee insurance premiums, paid
either monthly or annually, cause variations in
the amount of the scheduled payments, re
flecting the continual decrease or increase in
the premium due. In addition, in transactions
where payments vary because interest and
principal are paid at different intervals, the
two series of payments may be disclosed
separately and the abbreviated payment sched
ule may be used for the interest payments. For
example, in transactions with fixed quarterly
principal payments and monthly interest pay121
§ 226.18
ments based on the outstanding principal bal
ance, 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 abbreviated payment schedule,
the number, amount, and due dates of interest
payments. This option may be used when in
terest 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 us
ing 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
paragraph with the general payment-schedule
requirements in transactions where only a por
tion of the payment schedule meets the condi
tions of section 226.18(g)(2). For example, in
a graduated-payment mortgage where pay
ments 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 schedule
in section 226.18(g)(2).
3. E ffect 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 be
revised to reflect a variable-rate feature with a
brief phrase such as “based on the current
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
122
Regulation Z Commentary
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 obligations
with no alternate maturity date, the creditor
may omit disclosure of payment amounts un
der section 226.18(g)(1). In those transactions,
the creditor need not disclose 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
example, this provision does not apply to
transactions that convert to a demand status as
a result of the consumer’s default. A due-onsale clause is not considered a demand fea
ture. A creditor may, but need not, treat its
contractual right to demand payment of a loan
made to its executive officers as a demand
feature to the extent that the contractual right
is required by Regulation O (12 CFR 215.5)
or other federal law.
3. Relationship to payment schedule disclo
sures. As provided in section 226.18(g)(1), in
demand obligations with no alternate maturity
date, the creditor need only disclose the due
dates or payment periods of any scheduled
§ 226.18
Regulation Z Commentary
interest 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 dis
closed using that term, along with a descrip
tive explanation similar to the one in the
regulation. For variable-rate transactions, the
descriptive phrase may, at the creditor’s op
tion, be modified to reflect the variable-rate
feature. For example, the descriptor may read:
“The total cost of your purchase on credit,
which is subject to change, including your
downpayment of . . . .” The reference to a
downpayment may be eliminated in transac
tions 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).
18(k) Prepayment
1. Disclosure required. The creditor must give
a definitive statement of whether or not a
penalty 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, whether
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.
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)(l), nor does it require a disclosure
under section 226.18(k)(2). At its option, how
ever, a creditor may consider a prepaid fi
nance charge to be under section 226.18(k)(2).
If a disclosure is made under section
226.18(k)(2) with respect to a prepaid finance
charge or other finance charge, the creditor
may further identify that finance charge. For
example, the disclosure may state that the bor
rower “will not be entitled to a refund of the
prepaid finance charge” or some other term
that describes the finance charge.
Paragraph 18(k)(l)
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 “pen
alty” 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 dis
closure 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
closure of a minimum finance charge as
directly related information.)
Items which are not penalties include, for
example:
123
§ 226.18
•
•
Loan-guarantee fees
Interim interest on a student loan
Regulation Z Commentary
will be assessed; this fact may be disclosed as
directly related information. (See the commen
tary to section 226.17(a).)
Paragraph 18(k)(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:
•
•
Precom puted 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 required
or permitted as part of the segregated disclo
sures 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
dollar amount and permit imposition of the
lesser or greater of the two charges. The dis
closure made under section 226.18(/) may re
flect this alternative. For example, stating that
the charge in the event of a late payment is 5
percent of the late amount, not to exceed
$5.00, is sufficient. Many creditors also permit
a grace period during which no late charge
124
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
instead 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. N on-purchase-m oney transactions. In
nonpurchase-money transactions, the property
subject to the security interest must be identi
fied by item or type. This disclosure is satis
fied 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 col
lateral, the creditor may also take other prop
erty of the consumer as security. In those
cases, a combined disclosure must be pro
vided, consisting of an identification of the
purchase-money collateral consistent with
comment 18(m)-l and a specific identification
of the other collateral consistent with com
ment 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).
§ 226.1
Regulation Z Commentary
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
“cross-collateralization” clauses.) A specific
identification 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 “col
lateral securing other loans with us may also
secure this loan.” At the creditor’s option, a
more specific description of the property in
volved 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 secu
rity interest is taken in connection with the
transaction and must be disclosed, even
though the property encumbered is owned by
someone other than the consumer.
18(n) Insurance and Debt Cancellation
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
m ation, including the am ount-financed
itemization, any information prescribed by
state law, or other supplementary material.
Wfien this information is disclosed with the
other segregated disclosures, however, no ad
ditional explanatory material may be included.
2. Debt cancellation. Creditors may use the
model credit-insurance disclosures only if the
debt-cancellation coverage constitutes insur
ance under state law. Otherwise, they may
provide a parallel disclosure that refers to
debt-cancellation coverage.
18(o) Certain Security Interest Charges
1. Format. No special format is required f
these disclosures; under section 226.4(e), tax
and fees paid to government officials wi
respect to a security interest may be aggr
gated, or may be broken down by individu
charge. For example, the disclosure could 1
labelled “filing fees and taxes,” and all fun
disbursed for such purposes may be aggi
gated in a single disclosure. This disclosu
may appear, at the creditor’s option, api
from the other required disclosures. The incl
sion of this information on a statement l
quired under the Real Estate Settlement Proc
dures Act is sufficient disclosure for purpos
of Truth in Lending.
18(p) Contract Reference
1. Content. Creditors may substitute, for t
phrase “appropriate contract document,” a ri
erence to specific transaction documents
which the additional information is four
such as “promissory note” or “retail insttment sale contract.” A creditor may, at
option, delete inapplicable items in the cc
tract reference, as for example when the cc
tract documents contain no information
garding the right of acceleration.
18(q) Assumption Policy
1. Policy statement. In many mortgages, I
creditor cannot determine, at the time disc
sure must be made, whether a loan may
assumable at a future date on its origii
terms. For example, the assumption clai
commonly used in mortgages sold to the F(
eral National Mortgage Association and
Federal Home Loan Mortgage Corporati
conditions an assumption on a variety of f
tors such as the creditworthiness of the sub
quent borrower, the potential for impairm
of the lender’s security, and execution of
assumption agreement by the subsequent b
rower. In cases where uncertainty exists as
the future assumability of a mortgage, the c
closure under section 226.18(q) should ref]
that fact. In making disclosures in such cas
the creditor may use phrases such as “subj
to conditions,” “under certain circumstance
or “ depending on future conditions.” 1
§ 226.18
creditor may provide a brief reference to more
specific criteria such as a due-on-sale clause,
although a complete explanation of all condi
tions is not appropriate. For example, the dis
closure may state, “ Someone buying your
home may be allowed to assume the mortgage
on its original terms, subject to certain condi
tions, such as payment of an assumption fee.”
See comment 17(a)(l)-5 for an example of a
reference to a due-on-sale clause.
2. O riginal 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 in
form the consumer of the existence of a re
quired deposit. (Appendix H provides a model
clause that may be used in making that disclo
sure.) 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 commentary
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
nonrealty transaction. (See the commentary to
section 226.17(c)(1) regarding the use of es
crow accounts in consum er 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 (r).
126
Regulation Z Commentary
This exception applies whether the deposit 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 customer
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 Procedures Act
(12 USC 2602)
Other sections: §§226.2, 226.17, and appen
dix 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 either
Regulation Z Commentary
general or transaction-specific. The penalty
and rebate disclosures in the event of prepay
ment have been modified and combined. The
requirement of an explanation of how the re
bates 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
deletion 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 ef
fect 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 credi
tor’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 mortgage
loan” is defined under RESPA (12 USC 2602)
and Regulation X (24 CFR 3500.5(b)), and is
subject to any interpretations 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 good
faith estimates of settlement costs. If the
§ 226.19
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 dis
closures 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 sepa
rately labelling each estimate. In the alterna
tive, the creditor may label as an estimate
only the items primarily affected by unknown
information. (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 or
RESPA and Regulation X (including any inter
pretations 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 £
written application on an application form oi
forms normally used by the Lender for a Fed
erally Related Mortgage Loan” (24 CFR
3500.6(a)). An application is received when i
reaches the creditor in any of the ways appli
cations are normally transmitted—by mail
hand delivery, or through an intermediar)
agent or broker. (See comment 19(b)-3 fo:
guidance in determining whether or not th<
transaction involves an intermediary agent o
broker.) If an application reaches the credito:
through an intermediary agent or broker, th<
application is received when it reaches th<
creditor, rather than when it reaches the agen
or broker.
4. Exceptions. The creditor may determini
within the three-day period that the applica
tion will not or cannot be approved on thi
terms requested, as, for example, when a con
sumer applies for a type or amount of credi
that the creditor does not offer, or the con
sumer’s application cannot be approved fo
some other reason. In that case, the credito
need not make the disclosures under this sec
tion. If the creditor fails to provide early dis
closures and the transaction is later consum
12
§ 226.19
mated on the original terms, the creditor will
be in violation of this provision. If, however,
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.
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 es
timates need not give consumers any itemiza
tion of the amount financed, either with the
disclosures provided within three days after
application or with the disclosures given at
consummation or settlement.
19(a)(2) Redisclosure Required
1. Conditions fo r redisclosure. Creditors must
make new disclosures if the annual percentage
rate at consummation differs from the estimate
originally disclosed by more than Vs of 1 per
centage point in regular transactions or 'A of 1
percentage point in irregular transactions, as
defined in footnote 46 of section 226.22(a)(3).
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 infor
mation 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
finance charge, and often a new schedule of
128
Regulation Z Commentary
payments; all of these changes would have to
be disclosed. If, in addition, unrelated terms
such as the amount financed or prepayment
penalty vary from those originally disclosed,
the accurate terms must be disclosed. How
ever, 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.
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 under
RESPA and Regulation X.
4. Basis o f disclosures. In some cases, a
creditor may delay redisclosure until settle
ment, which may be at a time later than con
summation. If a creditor chooses to redisclose
at settlement, disclosures may be based on the
terms in effect at settlement, rather than at
consummation. For example, in a variable-rate
transaction, a creditor may choose to base dis
closures on the terms in effect at settlement
despite the general rule in the commentary to
section 18(f) 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(f)(1) rather than
those of section 226.19(b). (Furthermore,
“ shared-equity” or “ shared-appreciation”
mortgages are subject to the disclosure re
quirements of section 226.18(f)(1) rather than
those of section 226.19(b) regardless of the
§ 226.19
Regulation Z Commentary
general coverage of those sections.) For pur
poses of this section, the term of a variablerate demand loan is determined in accordance
with the commentary to section 226.17(c)(5).
In determining whether a construction loan
that may be permanently financed by the same
creditor is covered under this section, the
creditor may treat the construction and the
permanent phases as separate transactions with
distinct terms to maturity or as a single com
bined transaction. For purposes of the disclo
sures required under section 226.18, the credi
tor may nevertheless treat the two phases
either as separate transactions or as a single
combined transaction in accordance with sec
tion 226.17(c)(6). Finally, in any assumption
of a variable-rate transaction secured by the
consumer’s principal dwelling with a term
greater than one year, disclosures need not be
provided under sections 226.18(f)(2)(ii) or
226.19(b).
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, whichever
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. (See comment 19(b)-3 for
guidance in determining whether or not the
transaction involves an intermediary agent or
broker.) This three-day rule also applies where
the creditor takes an application over the tele
phone. If, however, the consumer merely re
quests an application over the telephone, the
creditor must include the early disclosures re
quired 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 disclo
sures required under this section if an applica
tion form is included with the solicitation. In
cases where an open-end credit account will
convert to a closed-end transaction subject to
this section under a written agreement with
the consumer, disclosures under this section
may be given at the time of conversion. (See
the commentary to section 226.20(a) for infor
mation on the tim ing requirem ents for
226.19(b)(2) disclosures when a variable-rate
feature is later added to a transaction.)
3. Intermediary agent or broker. In certain
transactions involving an “intermediary agent
or broker,” a creditor may delay providing
disclosures. A creditor may not delay provid
ing disclosures in transactions involving either
a legal agent (as determined by applicable
law) or any other third party that is not an
“intermediary agent or broker.” In determin
ing whether or not a transaction involves an
“intermediary agent or broker” the following
factors should be considered:
•
The number of applications submitted by
the broker to the creditor as compared to
the total number of applications received
by the creditor. The greater the percentage
of total loan applications submitted by the
broker in any given period of time, the less
likely it is that the broker would be con
sidered an “intermediary agent or broker”
of the creditor during the next period.
• The number of applications submitted by
the broker to the creditor as compared to
the total number of applications received
by the broker. (This factor is applicable
only if the creditor has such information.)
The greater the percentage of total loan
applications received by the broker that is
submitted to a creditor in any given period
of time, the less likely it is that the broker
would be considered an “ intermediary
agent or broker” of the creditor during the
next period.
• The amount of work (such as document
preparation) the creditor expects to be done
by the broker on an application based on
the creditor’s prior dealings with the bro
ker and on the creditor’s requirements for
accepting applications, taking into consid
eration the customary practice of brokers
in a particular area. The more work that
the creditor expects the broker to do on an
application, in excess of what is usually
expected of a broker in that area, the less
likely it is that the broker would be con
sidered an “intermediary agent or broker”
of the creditor.
129
§ 226.19
An example of an “intermediary agent or bro
ker” is a broker who, customarily within a
brief time after receiving an application, in
quires about the credit terms of several credi
tors with whom the broker does business and
submits the application to one of them. The
broker is responsible for only a small percent
age of the applications received by that credi
tor. During the time the broker has the appli
cation, it might request a credit report and an
appraisal (or even prepare an entire loan pack
age if customary in that particular area).
4. 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
creditors that are authorized by title VIII of
the Depository Institutions Act of 1982 (12
USC 3801 et seq.) to make loans in accor
dance 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.
5. 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
variable-rate transactions subject to the disclo
sure requirements of section 226.19(b).
•
130
Renewable balloon-payment instruments
where the creditor is both unconditionally
obligated to renew the balloon-payment
loan at the consumer’s option (or is obli
gated to renew subject to conditions within
the consumer’s control) and has the option
of increasing the interest rate at the time of
renewal. (See comment 17(c)(l)-ll for a
Regulation Z Commentary
•
•
discussion of conditions within a consum
er’s control in connection with renewable
balloon-payment loans.)
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
creditor, 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 applicable to
such loans.
“Price-level-adjusted mortgages” or other
indexed mortgages that have a fixed rate of
interest but provide for periodic adjust
ments to payments and the loan balance to
reflect changes in an index measuring
prices or inflation. The disclosures under
section 226.19(b)(1) are not applicable to
such loans, nor are the following provi
sions to the extent they relate to the deter
mination of the interest rate by the addition
of a margin, changes in the interest rate, or
interest-rate discounts: Section 226.19
(b)(2)(i), (iii), (iv), (v), (vi), (vii), (viii),
(ix), and (x). (See comments 20(c)-2 and
30-1 regarding the inapplicability of
variable-rate adjustm ent notices and
interest-rate lim itations to price-leveladjusted or similar mortgages.)
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 Hand
book. A substitute is suitable if it is, at a
minimum, comparable to the Consumer Hand
book in substance and comprehensiveness.
Creditors are permitted to provide more de
tailed information than is contained in the
Consumer Handbook.
2. Applicability. The Consumer Handbook
need not be given for variable-rate transac
tions subject to this section in which the un
Regulation Z Commentary
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 fo r each variable-rate program.
A creditor must provide disclosures to the
consumer that fully describe each of the credi
tor’s variable-rate loan programs in which the
consumer expresses an interest. If a program
is made available only to certain customers of
an institution, a creditor need not provide dis
closures for that program to other consumers
who express a general interest in a creditor’s
ARM programs. Disclosures must be given at
the time an application form is provided or
before the consumer pays a nonrefundable fee,
whichever is earlier. If program disclosures
cannot be provided because a consumer ex
presses an interest in individually negotiating
loan terms that are not generally offered, dis
closures reflecting those terms may be pro
vided as soon as reasonably possible after the
terms have been decided upon, but not later
than the time a nonrefundable fee is paid. If a
consumer who has received program disclo
sures subsequently expresses an interest in
other available variable-rate programs subject
to section 226.19(b)(2), or the creditor and
consumer decide on a program for which the
consumer has not received disclosures, the
creditor must provide appropriate disclosures
as soon as reasonably possible. The creditor,
of course, is permitted to give the consumer
information about additional programs subject
to section 226.19(b) initially.
2. Variable-rate loan program defined. If the
identification, the presence or absence, or the
exact value of a loan feature must be dis
closed under this section, variable-rate loans
that differ as to such features constitute sepa
rate loan programs. For example, separate
loan programs would exist based on differ
ences in any of the following loan features:
•
•
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
§ 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 payment
adjustments
The presence of a discount feature
In addition, if a loan feature must be taken
into account in preparing the disclosures re
quired by section 226.19(b)(2)(viii) and (x),
variable-rate loans that differ as to that feature
constitute separate programs 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 loan
programs would not exist based on differences
in the following loan features:
•
•
The amount of a discount
The amount of a margin
3. Form o f program disclosures. A creditor
may provide separate program disclosure
forms for each ARM program it offers or a
single disclosure form that describes multiple
programs. A disclosure form may consist of
more than one page. For example, a creditor
may attach a separate page containing the his
torical payment example for a particular pro
gram. A disclosure form describing more than
one program need not repeat information ap
plicable to each program that is described. For
example, a form describing multiple programs
may disclose the information applicable to all
of the programs in one place with the various
program features (such as options permitting
conversion to a fixed rate) disclosed sepa
rately. The form, however, must state if any
program feature that is described is available
only in conjunction with certain other program
features. Both the separate- and multipleprogram disclosures may illustrate more than
one loan maturity or payment amortization—
for example, by including multiple-payment
and loan-balance columns in the historical
payment example. Disclosures may be inserted
or printed in the Consumer Handbook (or a
131
§ 226.19
Regulation Z Commentary
suitable substitute) as long as they are identi
fied as the creditor’s loan-program disclosures.
tor must briefly describe the formula used to
calculate interest rate changes.
4. 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 fea
ture, the disclosure required under section
226.19(b)(2)(xi) need not be given. As used in
this section, “payment” refers only to a pay
ment based on the interest rate, loan balance,
and loan term and does not refer to payment
of other elements such as mortgage insurance
premiums.
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
internally 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.
5. 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.
Paragraph 19(b)(2)(i)
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
ment, or term of the loan initially disclosed to
the consumer. For example, the disclosures for
a variable-rate program in which the interest
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
average yield on U.S. Treasury securities ad
justed to a constant maturity as its index, the
disclosure might read, “Your index is the
weekly average yield on U.S. Treasury securi
ties adjusted to a constant maturity of one
year published weekly in the Wall Street Jour
nal. ” If no particular index is used, the credi132
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
index 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.” In transactions
where paying the periodic payments will not
fully amortize the outstanding balance at the
end of the loan term and where the final pay
ment will equal the periodic payment plus the
remaining unpaid balance, the creditor must
disclose this fact. For example, the disclosure
might read, “Your periodic payments will not
fully amortize your loan and you will be re
quired to make a single payment of the peri
odic payment plus the remaining unpaid bal
ance at the end of the loan term.” The
creditor, however, need not reflect any irregu
lar final payment in the historical example or
in the disclosure of the initial and maximum
rates and payments. If applicable, the creditor
should also disclose that the rate and payment
will be rounded.
Paragraph 19(b)(2)(iv)
1. Current margin value and interest rate. Be
cause the disclosures can be prepared in ad
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
§ 226.19
Regulation Z Commentary
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 in
quire 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.” In a transaction with a consumer
buydown or with a third-party buydown that
will be incorporated in the legal obligation,
the creditor should disclose the program as a
discounted variable-rate transaction, but need
not disclose additional information regarding
the buydown in its program disclosures. (See
the commentary to section 226.19(b)(2)(viii)
for a discussion of how to reflect the discount
or premium in the historical 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
frequency and tim ing of both types of
changes. For example, in a variable-rate trans
action where interest rate changes are made
monthly, but payment changes occur on an
annual basis, this fact must be disclosed. In
certain ARM transactions, the interval between
loan closing and the initial adjustment is not
known and may be different from the regular
interval for adjustments. In such cases, the
creditor may disclose the initial adjustment
period as a range of the minimum and maxi
mum amount of time from consummation or
closing. For example, the creditor might state:
“The first adjustment to your interest rate and
payment will occur no sooner than 6 months
and no later than 18 months after closing.
Subsequent adjustments may occur once each
year after the first adjustment.” (See com
ments 19(b)(2)(viii)-7 and 19(b)(2)(x)-4 for
guidance on other disclosures when this alter
native disclosure rule is used.)
Paragraph I9(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.)
The creditor need not disclose each periodic
or overall rate limitation that is currently
available. As an alternative, the creditor may
disclose the range of the lowest and highest
periodic and overall rate limitations that may
be applicable to the creditor’s ARM transac
tions. For example, the creditor might state:
“The limitation on increases to your interest
rate at each adjustment will be set at an
amount in the following range: between 1 and
2 percentage points at each adjustment. The
limitation on increases to your interest rate
over the term of the loan will be set at an
amount in the following range: between 4 and
7 percentage points above the initial interest
rate.” A creditor using this alternative rule
must include a statement in its program dis
closures suggesting that the consumer ask
about the overall rate limitations currently of
133
§ 226.19
Regulation Z Commentary
fered for the creditor’s ARM programs. (See
comments 19(b)(2)(viii)-6 and 19(b)(2)(x)-3
for an explanation of the additional require
ments for a creditor using this alternative rule
for disclosure of periodic and overall rate
limitations.)
option must be disclosed, the effect of exercis
ing the option should not be reflected else
where in the disclosures, such as in the his
torical example or in the calculation of the
initial and maximum interest rate and
payments.
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.” Loans that pro
vide for more than one way to trigger nega
tive amortization are separate variable-rate
programs requiring separate disclosures. (See
the commentary to section 226.19(b)(2) for a
discussion on the definition of a variable-rate
loan program and the format for disclosure.)
If a consumer is given the option to cap
monthly payments that may result in negative
amortization, the creditor must fully disclose
the rules relating to the option, including the
effects of exercising the option (such as nega
tive amortization will occur and the principal
loan balance will increase); however, the dis
closure in section 226.19(b)(2)(viii) need not
be provided.
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 employee
leaves the creditor’s employ. The creditor
must also disclose the rules relating to termi
nation of the preferred rate, such as that fees
may be charged when the rate is changed and
how the new rate will be determined.
3. Conversion option. If a loan program per
mits consumers to convert their variable-rate
loans to fixed-rate loans, the creditor must
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 con
verted, that fees may be charged at conver
sion, and how the fixed rate will be deter
mined. The creditor should identify any index
or other 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
conversion feature during the six months pre
ceding preparation of the disclosures and state
that the information is representative of con
version features recently offered by the credi
tor. The information may be used until the
program disclosures are otherwise revised. Al
though the rules relating to the conversion
134
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
implemented according to the terms of the
loan program would have affected payments
and the loan balance at the end of each year
during 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, 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 balance reflected for 1981. For the
remaining ten years, 1982-1991, the creditor
need only show the remaining index values,
margin, and interest rate and must continue to
reflect all significant loan-program terms such
as rate limitations affecting them.) Pursuant to
this section, the creditor must provide a his
tory 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 program disclo
sures should include an additional year’s in
dex value until 15 years of values are shown.
If the values for an index have not been avail
able for 15 years, a creditor need only go
back as far as the values are available in
Regulation Z Commentary
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 creditor
must provide a history of the rates imposed
for the preceding 15 years, beginning with the
rates in 1977. In giving this history, the credi
tor 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.
3. Selection o f margin. For purposes of the
disclosure required under section 226.19
(b)(2)(viii), a creditor may select a representa
tive margin that has been used during the six
months preceding preparation of the disclo
sures, and should disclose that the margin is
one that the creditor has used recently. 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 dis
count or premium (amount and term) that has
been used during the six months preceding
§ 226.19
preparation of the disclosures, and should dis
close that the discount or premium is one that
the creditor has used recently. The discount or
premium should be reflected in the historical
example for as long as the discount or pre
mium is in effect. A creditor may assume 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 his
torical example. For example, a 3-month dis
count may be treated as being in effect for the
entire first year of the example; a 15-month
discount may be treated as being in effect for
the first two years of the example. In illustrat
ing the effect of the discount or premium,
creditors should adjust the value of the inter
est rate in the historical example, and should
not adjust the margin or index values. For
example, if during the six months preceding
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
percent, the creditor would discount the first
interest rate in the historical example by 2
percentage points.
5. Term o f the loan. In calculating the pay
ments and loan balances in the historical ex
ample, a creditor need not base the disclosures
on each term to maturity or payment amorti
zation that it offers. Instead, disclosures for
ARMs may be based upon terms to maturity
or payment amortizations of 5, 15, and 30
years, as follows: ARMs with terms or amor
tizations from over 1 year to 10 years may be
based on a 5-year term or amortization; ARMs
with terms or amortizations from over 10
years to 20 years may be based on a 15-year
term or amortization; and ARMs with terms or
amortizations over 20 years may be based on
a 30-year term or amortization. Thus, disclo
sures for ARMs offered with any term from
over 1 year to 40 years may be based solely
on terms of 5, 15, and 30 years. Of course, a
creditor may always base the disclosures on
the actual terms or amortizations offered. If
the creditor bases the disclosures on 5-, 15-,
or 30-year terms or payment amortizations as
provided above, the term or payment amorti
zation used in making the disclosure must be
stated.
6. Rate caps. A creditor using the alternative
135
§ 226.19
rule described in comment 19(b)(2)(vii)-l for
disclosure of rate limitations must base the
historical example upon the highest periodic
and overall rate limitations disclosed under
section 226.19(b)(2)(vii). In addition, the
creditor must state the limitations used in the
historical
example.
(See
comment
19(b)(2)(x)-3 for an explanation of the use of
the highest rate lim itation in other
disclosures.)
7. Frequency o f adjustments. In certain trans
actions, creditors may use the alternative rule
described in comment 19(b)(2)(vi)-l for dis
closure of the frequency of rate and payment
adjustments. In such cases, the creditor may
assume for purposes of the historical example
that the first adjustment occurred at the end of
the first full year in which the adjustment
could occur. For example, in an ARM in
which the first adjustment may occur between
6 and 18 months after closing and annually
thereafter, the creditor may assume that the
first adjustment occurred at the end of the
first year in the historical example. (See com
ment 19(b)(2)(x)-4 for an explanation of how
to compute the maximum interest rate and
payment when the initial adjustment period is
not known.)
Paragraph 19(b)(2)(ix)
1. Calculation o f payments. A creditor is re
quired to include a statement on the disclosure
form that explains how a consumer may cal
culate his or her actual monthly payments for
a loan amount other than $10,000. The ex
ample should be based upon the most recent
payment shown in the historical example.
However, in transactions in which the latest
payment shown in the historical example is
not for the latest year of index values shown
(such as in a five-year loan), a creditor may
provide additional examples based on the ini
tial and maximum payments disclosed under
section 226.19(b)(2)(x). The creditor, however,
is not required to calculate the consumer’s
payments. (See the model clauses in appendix
H-4(C).)
Paragraph 19(b)(2)(x)
1. Initial and maximum interest rate and pay136
Regulation Z Commentary
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 calculating
the maximum payments under this paragraph,
a creditor should assume that the interest 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 percentage
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. More
over, the loan would not reach the maximum
interest rate until the fourth year because of
the 2 percentage point annual rate limitations,
and the maximum payment disclosed would
reflect the amortization of the loan during this
period. If the loan program includes a dis
counted or premium initial interest rate, the
most recent rate shown in the historical ex
ample should be adjusted by the amount of
the discount or premium reflected elsewhere
in the disclosure for purposes of the require
ments of this paragraph. Furthermore, this dis
closure should state the amount by which the
most recent rate has been adjusted. (See the
commentary to section 226.19(b)(2)(viii) re
garding 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 latest rate shown in the histori
cal example.
2. Term o f the loan. In calculating the initial
and maximum payments, the creditor need not
base the disclosures on each term to maturity
or payment amortization offered under the
program. Instead, the creditor may follow the
rules set out in comment 19(b)(2)(viii)-5. In
calculating the initial and maximum payment,
the terms to maturity or payment amortiza
tions selected for the purpose of making dis
closures under section 226.19(b)(2)(viii) must
be used. In addition, creditors must state the
term or payment amortization used in making
the disclosures under this section.
3. Rate caps. A creditor using the alternative
rule for disclosure of interest rate limitations
Regulation Z Commentary
described in comment 19(b)(2)(vii)-l must
calculate the maximum interest rate and pay
ments based upon the highest periodic and
overall rate limitations disclosed under section
226.19(b)(2)(vii). In addition, the creditor
must state the rate limitations used in calculat
ing the maximum interest rate and payment.
(See comment 19(b)(2)(viii)-6 for an explana
tion of the use of the highest rate limitation in
other disclosures.)
4. Frequency o f adjustments. In certain trans
actions, a creditor may use the alternative rule
for disclosure of the frequency of rate and
payment adjustments described in comment
19(b)(2)(vi)-l. In such cases, the creditor must
base the calculations of the initial and maxi
mum rates and payments upon the earliest
possible first adjustment disclosed under sec
tion 226.19(b)(2)(vi). (See comment 19(b)
(2)(viii)-7 for an explanation of how to dis
close the historical example when the initial
adjustment period is not known.)
Paragraph 19(b)(2)(xi)
1. Demand feature. If a variable-rate loan
subject to section 226.19(b) requirements con
tains a demand feature, as discussed in the
commentary to section 226.18(i), this fact
m ust be disclosed. (Pursuant to section
226.18(i), creditors would also disclose the
demand feature in the standard disclosures
given later.)
§ 226.20
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
required 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.”
References
Statute: § 128(b)(2) and the Real Estate
Settlement 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 sec
tion 128(b)(2), a new provision that requires
early disclosure of credit terms in certain
mortgage transactions.
Paragraph 19(b)(2)(xii)
1. Adjustment notices. A creditor must dis
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 transac
tions 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
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
137
§ 226.20
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 refinancing
unless accomplished by the cancellation of
that obligation and the substitution of a
new obligation.
A substitution of agreements that meets the
refinancing definition will require new dis
closures, 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
treated as refinancings, even if they are ac
complished by cancellation of the old obliga
tion and substitution of a new one.
3. Variable rate.
i. If a variable-rate feature was properly dis
closed under the regulation, a rate change in
accord with those disclosures is not a refi
nancing. For example, no new disclosures are
required when the variable-rate feature is in
voked on a renewable balloon-payment mort
gage that was previously disclosed as a
variable-rate transaction.
ii. Even if it is not accomplished by the
cancellation of the old obligation and substitu
tion of a new one, a new transaction subject
to new disclosures results if the creditor
either:
A. Increases the rate based on a variable-rate
feature that was not previously disclosed;
or
B. Adds a variable-rate feature to the obliga
tion. A creditor does not add a variablerate feature by changing the index of a
variable-rate transaction to a comparable
index, whether the change replaces the ex
isting index or substitutes an index for
one that no longer exists.
iii. If either of the events in paragraph
20(a)(iii) ii.A. or ii.B. occurs in a transaction
secured by a principal dwelling with a term
longer than one year, the disclosures required
under section 226.19(b) also must be given at
that time.
138
Regulation Z Commentary
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 portion
of the original finance charge that is not re
bated to the consumer or credited against the
underlying obligation. For example, in a trans
action with an add-on finance charge, a credi
tor advances new money to a consumer in a
fashion that extinguishes the original obliga
tion 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
obligation and reflected in the annual percent
age rate disclosed on refinancing. Accrued but
unpaid 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 credi
tor may consider it a renewal even if:
•
•
•
Accrued unpaid interest is added to the
principal balance
Changes are made in the terms of renewal
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
§ 226.2
Regulation Z Commentary
rate is subsequently increased (even though it
remains below its original level) and the in
crease 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, settle
ment agreements, and post-judgment agree
ments. (See the com mentary to section
226.2(a)(14) for a discussion of courtapproved agreements that are not considered
“credit.” )
•
•
The assumption of a nonexempt consumi
credit obligation requires no disclosures unle
all three elements are present. For example, i
automobile dealer need not provide Truth
Lending disclosures to a customer who a
sumes an existing obligation secured by i
automobile. However, a residential mortgaj
transaction with the elements described in se
tion 226.20(b) is an assumption that calls fi
new disclosures; the disclosures must be givs
whether or not the assumption is accompank
by changes in the terms of the obligatio
(See comment 2(a)(24)-5 for a discussion i
assumptions that are not considered residenti
mortgage transactions.)
2. Existing residential mortgage transactio
A transaction may be a residential mortgaj
transaction as to one consumer and not to tl
other consumer. In that case, the creditor mu
look to the assuming consumer in determinii
whether a residential mortgage transaction e:
ists. To illustrate:
•
Paragraph 20(a)(4)
1. Workout agreements. A workout agreement
is not a refinancing unless the annual percent
age 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.
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 follow ing three
elements:
•
A residential mortgage transaction
An express acceptance of the subseque
consumer by the creditor
A written agreement
The original consumer obtained a mortgaj
to purchase a home for vacation purpose
The loan was not a residential mortgaj
transaction as to that consumer. The moi
gage is assumed by a consumer who w:
use the home as a principal dwelling. As
that consumer, the loan is a residenti
mortgage transaction. For purposes of se
tion 226.20(b), the assumed loan is £
“existing residential mortgage transactioi
requiring disclosures, if the other criter
for an assumption are met.
3. Express agreement. “ Expressly agrees
means that the creditor’s agreement must r
late specifically to the new debtor and mu
unequivocally accept that debtor as a prima
obligor. The following events are not co
strued to be express agreements between tl
creditor and the subsequent consumer:
•
•
•
•
Approval of creditworthiness
Notification of a change in records
Mailing of a coupon book to the subs
quent consumer
Acceptance of payments from the ne
consumer
1
§ 226.20
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 prin
cipal 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
nance charges as to that consumer, unless
exempt from the finance charge under sec
tion 226.4.
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 providing
disclosures pursuant to this section for as
sumptions of variable-rate transactions secured
by the consumer’s principal dwelling with a
140
Regulation Z Commentary
term longer than one year need not provide
new disclosures under sections 226.18(f)(2)(ii)
or 226.19(b). In such transactions, a creditor
may disclose the variable-rate feature solely in
accordance with section 226.18(f)(1).
7. Abbreviated disclosures. The abbreviated
disclosures permitted for assumptions of trans
actions involving add-on or discount finance
charges must be made clearly and conspicu
ously in writing in a form that the consumer
may keep. However, the creditor need not
comply with the segregation requirement of
section 226.17(a)(1). The terms “annual per
centage rate” and “total of payments,” when
disclosed according to section 226.20(b)(4)
and (5), are not subject to the description re
quirements of section 226.18(e) and (h). The
term “ annual percentage rate” disclosed under
section 226.20(b)(4) need not be more con
spicuous 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, depend
ing on whether payment changes accompany
interest rate changes. A creditor is required to
provide at least one notice each year during
which interest rate adjustments have occurred
without accompanying payment adjustments.
For payment adjustments, a creditor must de
liver 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 notice re
quired to be given in connection with the ad
justment 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 converted to a
closed-end transaction subject to section
226.19(b), the requirements of this section do
not apply until adjustments are made follow
ing conversion.)
2. Exceptions. Section 226.20(c) does not ap
ply to “ shared-equity,” “shared-appreciation,”
or price-level-adjusted or similar mortgages.
Regulation Z Commentary
3. Basis o f disclosures. The disclosures re
quired under this section shall reflect the
terms of the parties’ legal obligation, as re
quired under section 226.17(c)(1).
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
(“prior rates” ). (If there has been no prior
adjustment notice, the prior rates are the inter
est rate applicable to the transaction at con
summation, as well as all other interest rates
applied 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 transaction,
and the prior rates are the adjusted interest
rate applicable to the loan at the time of the
last adjustment notice, and all other rates ap
plied to the transaction in the period between
the current and last adjustment notices. In dis
closing all other rates applied to the transac
tion 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 for
mula values used to compute the current and
prior 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
otherwise 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
forgone any increase in the interest rate is
§ 226.2'
applicable only to those transactions permit
ting interest rate carryover. The amount c
increase that is forgone at an adjustment is th
amount that, subject to rate caps, can be ap
plied to future adjustments independently t
increase, or offset decreases in, the rate that i
determined according to the index or formuli
Paragraph 20(c)(4)
1. Contractual effects o f the adjustment. Th
contractual effects of an interest rate adjusl
ment must be disclosed including the paymer
due after the adjustment is made whether c
not the payment has been adjusted. In transac
tions where paying the periodic payments wi
not fully amortize the outstanding balance i
the end of the loan term and where the fin;
payment will equal the periodic payment plu
the remaining unpaid balance, the amount c
the adjusted payment must be disclosed i
such payment has changed as a result of th
rate adjustment. A contractual effect of a rat
adjustment would include, for example, dis
closure of any change in the term or maturit
of the loan if the change resulted from th
rate adjustment. A statement of the loan bal
ance also is required. The balance required t
be disclosed is the balance on which the nei
adjusted payment is based. If no payment ac
justment is disclosed in the notice, the balanc
disclosed should be the loan balance on whic
the payment disclosed under section 226.2
(c)(5) is based, if applicable, or the balance i
the time the disclosure is prepared.
Paragraph 20(c)(5)
1. Fully amortizing payment. This paragrap
requires a disclosure only when negative air
ortization occurs as a result of the adjustmen
A disclosure is not required simply because
loan calls for non-amortizing or partially an
ortizing payments. For example, in a transac
tion with a five-year term and payments base
on a longer amortization schedule, and whei
the final payment will equal the periodic pa)
ment plus the remaining unpaid balance, th
creditor would not have to disclose the pa)
ment necessary to fully amortize the loan i
the remainder of the five-year term. A disclc
sure is required, however, if the payment dis
closed under section 226.20(c)(4) is not suff
14
§ 226.20
cient to prevent negative amortization in the
loan. The adjustment notice must state the
payment required to prevent negative amorti
zation. (This paragraph does not apply if the
payment disclosed in section 226.20(c)(4) is
sufficient to prevent negative amortization in
the loan but the final payment will be a differ
ent amount due to rounding.)
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 regula
tion limits refinancings to transactions in
which the entire original obligation is extin
guished and replaced by a new one.
Redisclosure is no longer required for defer
rals or extensions.
The assumption provision retains the sub
stance of section 226.8(k) and interpretation
section 226.807 of the previous regulation, but
lim its 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
precomputed 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
142
Regulation Z Commentary
the contract or under state law with respect to
set-off, cross-collateralization, or sim ilar
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
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.
P aragraph 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 consum er’s
account.
P aragraph 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 fa ith 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
§ 226.22
Regulation Z Commentary
1981 changes: This section implements sec
tion 165 of the act, which was expanded by
the 1980 statutory amendments to apply to
closed-end as well as open-end credit.
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 United
States Rule Method (U.S. Rule) as measures
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 calcu
lating 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, under
the U.S. Rule, no interest calculation is made
until a payment is received.
4. Basis fo r 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 bal
ance— 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 repayable in five years at 10 percent inter
est for the first two years, 12 percent for years
3 and 4, and 14 percent for year 5. The
monthly payments 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 percentage rate, using a calculator with
a “discounted cash flow analysis” or “internal
rate of return” function, is 10.75 percent.
5. Good faith reliance on faulty calculation
tools. Footnote 45d absolves a creditor of li
ability 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 nol
more than Vs of 1 percentage point from the
actual annual percentage rate. For example,
when the exact annual percentage rate is de
termined to be 101/s percent, a disclosed an
nual percentage rate from 10 percent to 10'/
percent, or the decimal equivalent, is deemec
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 b)
not more than 'A of 1 percentage point fron
the actual annual percentage rate. This toler
ance is intended for more complex transac
tions that do not call for a single advance anc
a regular series of equal payments at equa
intervals. The 'A of 1 percentage point toler
ance may be used, for example, in a construe
tion loan where advances are made as con
struction progresses, or in a transaction when
payments vary to reflect the consumer’s sea
14:
§ 226.22
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 disclo
sures are based on a regular amortization
schedule over the life of the loan, even though
payments may later change because of the
variable-rate feature.
Regulation Z Commentary
Board’s Annual Percentage Rate Tables pro
vide a means of calculating annual percentage
rates for regular and irregular transactions, re
spectively. 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:
•
22(a)(4) Mortgage Loans
1. Example. If a creditor improperly omits a
$75 fee from the finance charge on a regular
transaction, the understated finance charge is
considered accurate under section 226.18
(d)(1), and the annual percentage rate corre
sponding to that understated finance charge
also is considered accurate even if it falls
outside the tolerance of Vs of 1 percentage
point provided under section 226.22(a)(2). Be
cause a $75 error was made, an annual per
centage rate corresponding to a $100 under
statement of the finance charge would not be
considered accurate.
22(a)(5) Additional Tolerance fo r Mortgage
Loans
1. Example. This paragraph contains an addi
tional tolerance for a disclosed annual percent
age rate that is incorrect but is closer to the
actual annual percentage rate than the rate that
would be considered accurate under the toler
ance in section 226.22(a)(4). To illustrate: in
an irregular transaction subject to a 'A of 1
percentage point tolerance, if the actual annual
percentage rate is 9.00 percent and a $75
omission from the finance charge corresponds
to a rate of 8.50 percent that is considered
accurate under section 226.22(a)(4), a dis
closed APR of 8.65 percent is within the tol
erance in section 226.22(a)(5). In this example
of an understated finance charge, a disclosed
annual percentage rate below 8.50 or above
9.25 percent will not be considered accurate.
22(b) Computation Tools
Paragraph 22(b)(1)
1. Board tables. Volumes I and II of the
144
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
payment, 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.
Paragraph 22(b)(2)
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 Vs or 'A of 1 percentage
point, as applicable, of the precise actuarial or
U.S. Rule annual percentage rate.
22(c) Single Add-On Rate Transactions
1. General rule. Creditors applying a single
add-on rate to all transactions up to 60
months in length may disclose the same an
nual percentage rate for all those transactions,
although the actual annual percentage rate var
ies according to the length of the transaction.
Creditors utilizing this provision must show
the highest of those rates. For example:
•
An add-on rate of 10 percent converted to
an annual percentage rate produces the fol
lowing 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
§ 226.23
Regulation Z Commentary
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
balances 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.
References
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 ('A of 1 percentage point) for
irregular transactions.
SECTION 226.23— Right of Rescission
1. Transactions not covered. Credit extensions
that are not subject to the regulation are not
covered by section 226.23 even if a custom
er’s principal dwelling is the collateral secur
ing the credit. For example, the right of re
scission does not apply to a business-purpose
loan, even though the loan is secured by the
customer’s principal dwelling.
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 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 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 con
nection with the credit transaction are val
idly waived
The creditor obtains a lien 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 226.18(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 ex
ample, if only one spouse signs a credit con
tract, the other spouse is a consumer if the
ownership interest of that spouse is subject tc
the security interest.
3. Principal dwelling. A consumer can only
have one principal dwelling at a time. (Bui
see comment 23(a)(l)-4.) A vacation or othei
second home would not be a principal dwell
ing. A transaction secured by a second home
(such as a vacation home) that is not currentl)
14;
§ 226.23
being used as the consumer’s principal dwell
ing 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 con
struction, the new dwelling is considered the
principal dwelling if it secures the acquisition
or construction loan. In that case, the transac
tion secured by the new dwelling is a residen
tial m ortgage transaction and is not
rescindable. For example, if a consumer
whose principal dwelling is currently A builds
B, to be occupied by the consumer upon
completion of construction, a construction
loan to finance B and secured by B is a
residential mortgage transaction. “ Dwelling,”
as defined in section 226.2, includes structures
that are classified as personalty under state
law. For example, a transaction secured by a
mobile home, trailer, or houseboat used as the
consum er’s principal dw elling may be
rescindable.
4. Special rule fo r principal dwelling. Not
withstanding the general rule that consumers
may have only one principal dwelling, when
the consumer is acquiring or constructing a
new principal dwelling, any loan subject to
Regulation Z and secured by the equity in the
consumer’s current principal dwelling (for ex
ample, a bridge loan) is subject to the right of
rescission regardless of the purpose of that
loan. For example, if a consumer whose prin
cipal dwelling is currently A builds B, to be
occupied by the consumer upon completion of
construction, a construction loan to finance B
and secured by A is subject to the right of
rescission. A loan secured by both A and B is,
likewise, rescindable.
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 obli
gation 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
original obligation. In those situations, only
146
Regulation Z Commentary
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 con
sumer must exercise the right of rescission in
writing but not necessarily on the notice sup
plied under section 226.23(b). Whatever the
means of sending the notification of rescis
sion—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 re
ceive the notification so long as the agent’s
name and address appear on the notice pro
vided to the consum er under section
226.23(b).
Paragraph 23(a)(3)
1. Rescission period. The period within which
the consumer may exercise the right to rescind
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
notice 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
§ 226.23
Regulation Z Commentary
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
variable-rate feature. Failure to give the other
required 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
to start the three-business day rescission pe
riod running, the right to rescind automatically
lapses on the occurrence of the earliest of the
following three events:
•
•
•
The expiration of three years after consum
mation 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 terminate
an unexpired right to rescind. As provided in
section 125 of the act, the three-year limit
may be extended by an administrative pro
ceeding to enforce the provisions of this sec
tion. A partial transfer of the consumer’s inter
est, such as a transfer bestowing co-ownership
on a spouse, does not terminate the right of
rescission.
23(b) Notice of Right to Rescind
1. Who receives notice. Each consumer en
titled to rescind must be given:
•
•
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 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)(l)(i)
through (v). The requirem ent in section
226.23(b) that the transaction be identified
may be met by providing the date of the
transaction. The creditor may provide a sepa
rate form that the consumer may use to exer
cise 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:
•
•
•
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.
Two copies of the rescission notice
The material disclosures
A description of the property subject to
security interest
A statement that joint owners may have
right to rescind and that a rescission
one is effective for all
The name and address of an agent of
creditor to receive notice of rescission
the
the
by
the
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
147
§ 226.23
Regulation Z Commentary
on May 10, the three-business day rescission
period will run from May 15.
23(d) Effects o f Rescission
Paragraph 23(d)(1)
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
Begin perform ing services for the
consumer
Deliver materials to the consumer
2. Escrow. The creditor may disburse loan
proceeds during the rescission period in a
valid escrow arrangement. The creditor may
not, however, appoint the consum er 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
creditor 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
of the rescission period to allow
ery of a mailed notice
Obtaining a written statement
consumer that the right has
exercised
expiration
for deliv
from the
not been
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.
148
1. Termination o f security interest. Any secu
rity interest giving rise to the right of rescis
sion becomes void when the consumer exer
cises 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), how
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 cannot
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 transaction.
Any amounts of this nature already paid by
the consum er must be refunded. “ Any
amount” includes finance charges already ac
crued, as well as other charges, such as broker
fees, 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 creditor.
2. Am ounts 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.
Similarly, the term “any amount” does not
apply to any money or property given by the
creditor to the consumer; those amounts must
be tendered by the consumer to the creditor
under section 226.23(d)(3).
3. Reflection o f security interest termination.
The creditor must take whatever steps are nec
essary to indicate that the security interest is
terminated. Those steps include the cancella
tion of documents creating the security inter
est, 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 credit
transaction, the creditor must ensure that the
termination of their security interests is also
§ 226.23
Regulation Z Commentary
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 com
pleted within that time, but the creditor is
responsible for seeing the process through to
completion.
Paragraph 23(d)(3)
1. Property exchange. Once the creditor has
fulfilled its obligations under section
226.23(d)(2), the consumer must tender to the
creditor any property or money the creditor
has already delivered to the consumer. At the
consumer’s option, property may be tendered
at the location of the property. For example, if
lumber or fixtures have been delivered 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 creditor’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.
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 signatures
of both spouses.
23(f) Exempt Transactions
1. Residential m ortgage 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 prin
cipal 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
finance the balance of the purchase price.
Such a transaction would not be rescindable.
Paragraph 23(d)(4)
1. Modifications. The procedures outlined in
section 226.23(d)(2) and (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 modification
might be made.
23(e) Consumer’s Waiver of Right to
Rescind
1. Need fo r 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
3. Combined-purpose transaction. A loan to
acquire a principal dwelling and make im
provements to that dwelling is exempt if
treated as one transaction. If, on the other
hand, the loan for the acquisition of the prin
cipal dwelling and the subsequent advances
for improvements 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. The original creditor is the creditor to
whom the written agreement was initially
made payable. In a merger, consolidation, or
acquisition, the successor institution is consid
149
§ 226.23
ered the original creditor for purposes of the
exemption in section 226.23(f)(2). If the refi
nancing involves a new advance of money,
the amount of the new advance is rescindable.
In determining whether there is a new ad
vance, a creditor may rely on the amount fi
nanced, refinancing costs, and other figures
stated in the latest Truth in Lending disclo
sures provided to the consumer and is not re
quired to use, for example, more precise infor
mation 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 include
section 226.4(c)(7) charges (such as attorney’s
fees and title examination and insurance fees,
if bona fide and reasonable in 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 advance 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 finance charge is $50,000
and the new amount financed is $51,000, then
the refinancing would be exempt if the extra
$1,000 is attributed 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 improvements) and the consumer exer
cises 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 transaction. Thus, all amounts of money
(which would include all the costs of the refi
nancing) 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 com m entary
to
226.23(d)(2) for a discussion of refunds to
consumers.) A model rescission notice appli
cable to transactions involving new advances
appears in appendix H. The general rescission
notice (model form H-8) is the appropriate
form for use by creditors not considered origi
nal creditors in refinancing transactions.
5. State creditors. Cities and other political
150
Regulation Z Commentary
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 secured
by the consumer’s principal dwelling, with ad
vances made as repairs progress. As permitted
by section 226.17(c)(6), the creditor makes a
single set of disclosures at the beginning of
the construction period, rather than separate
disclosures for each advance. The right of re
scission does not arise with each advance.
However, if the advances are treated as sepa
rate transactions, the right of rescission ap
plies to each advance.
7. Spreader clauses. 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,” subse
quent loans made are separate transactions and
are subject to the right of rescission. Those
loans are rescindable unless the creditor effec
tively waives its security interest under 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 com
mentary 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.
23(g) Tolerances for Accuracy
23(g)(2) One Percent Tolerance
1. New advance. The phrase “new advance”
has the same meaning as in comment 23(f)-4.
§ 226.24
Regulation Z Commentary
23(h) Special Rules for Foreclosures
1. Rescission. Section 226.23(h) applies only
to transactions that are subject to rescission
under section 226.23(a)(1).
Paragraph 23(h)(l)(i)
1. Mortgage broker fees. A consumer may re
scind a loan in foreclosure if a mortgage bro
ker fee that should have been included in the
finance charge was omitted, without regard to
the dollar amount involved. If the amount of
the mortgage broker fee is included but mis
stated, the rule in section 226.23(h)(2) applies.
23(h)(2) Tolerance fo r Disclosures
1. General. This section is based on the accu
racy of the total finance charge rather than its
component charges.
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.
24(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 actu
ally prepared to offer. For example, a creditor
may not advertise a very low annual percent
age 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
creditor may advertise terms that will be of
fered 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 abbreviation
APR. The advertisement must state that the
rate is subject to increase after consummation
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 disclosure
of a variable rate, the rate increase disclosure
requirement in this provision does not apply
to any rate increase due to delinquency (in
cluding late payment), default, acceleration,
assumption, or transfer of collateral.
2. Simple or periodic rates. The advertise
ment may not simultaneously state any other
rate, except that a simple annual rate or peri
odic rate applicable to an unpaid balance may
appear along with (but not more conspicu
ously than) the annual percentage rate. For
example:
•
In an advertisement for real estate, a
simple interest rate may be shown in the
same type size as the annual percentage
rate for the advertised credit.
3. Buydowns. When a third party (such as a
seller) or a creditor wishes to promote the
availability of reduced interest rates (consumer
or seller buydowns), the advertised annual
151
§ 226.24
percentage rate must be determined in accor
dance with the rules in the commentary to
section 226.17(c) regarding the basis of trans
actional disclosures for buydowns. The seller
or creditor may advertise the reduced simple
interest 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
buydown agreement on the payment schedule
for the buydown period without triggering the
additional 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 arrangem ent 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 inter
est is accruing. The lower rate may be re
ferred to as the effective rate, payment rate, or
qualifying rate. A creditor or seller may adver
tise such rates by stating the term of the re
duced 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 w ith comment
17(c)(1)-10 regarding the basis of transac:ional disclosures for such financing. A credi:or or seller may promote the availability of
:he initial rate reduction in such transactions
~>y advertising the reduced initial rate, pro/ided the advertisement shows the limited
erm to which the reduced rate applies.
152
Regulation Z Commentary
•
•
Limits or caps on periodic rate or payment
adjustments need not be stated. To illus
trate using the second example in comment
17(c)(l)-10, 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 advertisement
may state that “with this discount, your
monthly payments for the first year of the
mortgage term will be only $577” or “this
discount will reduce your monthly pay
ments 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 advertise
ment. 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 statem ent of the
downpayment as a percentage of the price re
quires further information. By virtue of the
definition of “ dow npaym ent” in section
226.2, this triggering term is limited to credit
sale transactions. 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
downpayment” or “no trade-in required” do
not trigger the additional disclosures under
this paragraph.
§ 226.24
Regulation Z Commentary
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 be financed.
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)(ii) 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:
•
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 m ust be shown, but the word
“downpayment” need not be used in making
this disclosure. For example, “ 10 percent cash
required from buyer” or “credit terms require
minimum $100 trade-in” would suffice.
2. Disclosure o f repayment terms. While the
•
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
insurance 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 per
centage 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 pos
sible 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.
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 sev153
§ 226.24
eral separate flyers or pieces of promotional
material in a single envelope does not consti
tute a single multiple-page advertisement for
purposes 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 disclosures
for the single most expensive item the seller
offers, but only that the chart cannot be lim
ited to information about less expensive sales
when the seller commonly offers a distinct
level of more expensive goods or services.
The range of transactions shown in the table
or schedule in a particular catalog or multiplepage 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 pre
vious regulation, but with certain changes to
reflect the 1980 statutory amendments. For
example, if triggering terms appear in any ad
vertisement, the additional disclosures required
no longer include the cash price. The special
rule for FHA section 235 financing has been
eliminated, as well as the rule for advertising
credit payable in more than four installments
with no identified finance charge. Interpreta
tion section 226.1002, requiring disclosure of
representative amounts of credit in catalogs
154
Regulation Z Commentary
and multiple-page advertisements, has been in
corporated 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 information
to reconstruct the required disclosures or other
records. Thus, for example, the creditor need
not retain each open-end periodic statement,
so long as the specific information on each
statement can be retrieved.
3. Certain variable-rate transactions. In
variable-rate transactions that are subject to
the disclosure requirem ents of section
226.19(b), written procedures for compliance
with those requirements as well as a sample
disclosure form for each loan program repre
sent adequate evidence of compliance. (See
comment 25(a)-2 pertaining to permissible
methods of retaining the required disclosures.)
4. Home-equity plans. In home-equity plans
that are subject to the requirements of section
226.5b, written procedures for compliance
with those requirements as well as a sample
disclosure form and contract for each home-
§ 226.27
Regulation Z Commentary
equity program represent adequate evidence of
compliance. (See comment 25(a)-2 pertaining
to permissible methods of retaining the re
quired disclosures.)
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
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 evi
dence of required actions.
SECTION 226.26— Use of Annual
Percentage Rate in Oral Disclosures
1. Application o f rules. The restrictions of
section 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 volun
teers 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 information
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,
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 im plem ents
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
155
§ 226.27
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 accor
dance with section 226.17(a)(1).
Regulation Z Commentary
•
References
Statute: None
Other sections: None
Previous regulation: § 226.6(a)
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 fo r chapters 1, 2, and 3. The stan
dard for judging whether state laws that cover
the types of requirements in chapters 1 (Gen
eral Provisions), 2 (Credit Transactions), and 3
(Credit Advertising) of the act are inconsistent
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
156
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
quirement that the itemization appear with the
disclosure of the amount financed in the seg
regated closed-end credit disclosures is incon
sistent, 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 determina
tion, 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 credi
tors to revise forms and procedures as neces
sary 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 accor
dance 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 fo r 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
§ 226.28
Regulation Z Commentary
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
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
specified 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 fo r other fa ir credit billing provi
sions. The second part of the criteria for fair
credit billing relates to the other rules imple
menting 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 incon
sistency is whether the creditor can comply
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 preem pted, 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
100-mile 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 determina
tion. Only states (through their authorized of
ficials) may request and receive determina
tions 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
federal 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)—
15'
§ 226.28
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
represent 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 components. The
finance charge disclosure is preempted 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 represent a dif
ferent amount. The requirement to describe
or itemize the components 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 preempted in
those transactions in which the amount dif
fers from the amount of the federal total of
payments, since in such transactions 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:
•
158
Sections 365.070-6(9) and 408.260-5(6)—
Disclosure of principal balance. This dis
closure is preempted in those transactions
in which the amount of the principal bal
ance is the same as the federal amount
financed, since in such transactions the
state law requires the use of a term differ
Regulation Z Commentary
•
•
•
•
ent from the federal term to represent the
same amount.
Sections 365.070-6(10) and 408.260-5(7)—
Disclosure of time price differential and
time charge, respectively. These disclosures
are preempted in those transactions in
which the amount is the same as the fed
eral finance charge, since in such transac
tions the state law requires the use of a
term different from the federal law to rep
resent the same amount.
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 408.260-5(8)—
Disclosure of time balance. The time bal
ance 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 408.260-5(9)—
Disclosure of time sale price. This disclo
sure is preempted in those transactions in
which the amount is the same as the fed
eral total sale price, since in such transac
tions the state law requires the use of a
different term from the federal law to rep
resent 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 fi
nance charge. This disclosure is preempted
in those cases in which the term “finance
charge” would be used under state law to
describe a different amount than the fi
nance charge disclosed under federal law.
12. Preemption determination—South Caro
lina. Effective October 1, 1984, the Board has
determined that the following provision in the
§ 226.28
Regulation Z Commentary
state law of South Carolina is preempted by
the federal law:
• Section 37-10-102(c)— Disclosure of dueon-sale clause. This provision
is pre
empted, but only to the extentthat the
creditor is required to include the disclo
sure with the segregated federal disclo
sures. 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.
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:
• Section 6-621A.2—Use of the term “the
total sum of $ ________ ” in certain notices
provided to borrowers. This term describes
the same item that is disclosed under fed
eral 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.
(Note: The state disclosure notice that incor
porated the above preem pted term was
amended on May 4, 1987, to provide that
disclosures 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 po
tential borrowers. This disclosure is incon
sistent with sections 106(a) and 226.4(a) of
the federal statute and regulation, respec
tively, and is preempted in those instances
where the use of the same term would
disclose a different amount than that re
quired to be disclosed under federal law.
15. Preemption determination—Wisconsin. Ef
fective October 1, 1991, the Board has deter
mined that the following provisions in the
state law of Wisconsin are preempted by the
federal law:
•
•
Section 422.308(1)—The disclosure of the
annual percentage rate in cases where the
amount of the annual percentage rate dis
closed to consumers under the state law
differs from the amount that would be dis
closed under federal law, since in those
cases the state law requires the use of the
same term as the federal law to represent a
different amount than the federal law.
Section 766.565(5)—The provision permit
ting a creditor to include in an open-end
home-equity agreement authorization to de
clare the account balance due and payable
upon receiving notice of termination from
a non-obligor spouse, since such provision
is inconsistent with the purpose of the fed
eral law.
28(b) Equivalent Disclosure
Requirements
1. General. A state disclosure may be substi
tuted for a federal disclosure only after the
Board has made a finding of substantial simi
larity. Thus, the creditor may not unilaterally
choose to make a state disclosure in place of
a federal disclosure, even if it believes that
the state disclosure is substantially similar.
Since the rule stated in section 226.28(b) does
not extend to any requirement relating to the
finance charge or annual percentage rate, no
state provision on computation, description, or
disclosure of these terms may be substituted
for the federal provision.
28(d) Special Rule for Credit and Charge
Cards
1. General. The standard that applies to pre
emption of state laws as they affect transac
tions of the type subject to sections 226.5a
and 226.9(e) differs from the preemption stan
dards generally applicable under the Truth in
Lending Act. The Fair Credit and Charge Card
Disclosure Act fully preempts state laws relat
ing to the disclosure of credit information in
consumer credit or charge card applications or
solicitations. (For purposes of this section, a
single credit or charge card application or so159
§ 226.28
licitation that may be used to open either an
account for consumer purposes or an account
for business purposes is deemed to be a “con
sumer credit or charge card application or so
licitation.” ) For example, a state law requiring
disclosure of credit terms in direct-mail solici
tations for consumer credit card accounts is
preempted. A state law requiring disclosures
in telephone applications for consumer credit
card accounts also is preempted, even if it
applies to applications initiated by the con
sumer rather than the issuer, because the state
law relates to the disclosure of credit informa
tion in applications or solicitations within the
general field of preemption, that is, consumer
credit and charge cards.
2. Limitations on field o f preemption. Preemp
tion under the Fair Credit and Charge Card
Disclosure Act does not extend to state laws
applying to types of credit other than openend consumer credit and charge card accounts.
Thus, for example, a state law is not pre
empted as it applies to disclosures in credit
and charge card applications and solicitations
solely for business-purpose accounts. On the
other hand, state credit disclosure laws will
not apply to a single application or solicitation
to open either an account for consumer pur
poses or an account for business purposes.
Such “dual purpose” applications and solicita
tions are treated as “ consumer credit or
charge card applications or solicitations” un
der this section and state credit disclosure
laws applicable to them are preempted. Pre
emption under this statute does not extend to
state laws applicable to home-equity plans;
preemption determinations in this area are
based on the Home Equity Loan Consumer
Protection Act, as implemented in section
226.5b of the regulation.
3. Laws not preempted. State laws relating to
disclosures concerning credit and charge cards
other than in applications, solicitations, or re
newal notices are not preempted under section
226.28(d). In addition, state laws regulating
the terms of credit and charge card accounts
are not preempted, nor are laws preempted
that regulate the form or content of informa
tion unrelated to the information required to
be disclosed under sections 226.5a and
226.9(e). Finally, state laws concerning the en160
Regulation Z Commentary
forcement of the requirements of sections
226.5a and 226.9(e) and state laws prohibiting
unfair or deceptive acts or practices concern
ing credit and charge card applications, solici
tations and renewals are not preempted. Ex
amples of laws that are not preempted
include:
•
A state law that requires card issuers to
offer a grace period or that prohibits cer
tain fees in credit and charge card
transactions.
• A state retail-installment-sales law or a
state plain-language law, except to the ex
tent that it regulates the disclosure of credit
information in applications, solicitations,
and renewals of accounts of the type sub
ject to sections 226.5a and 226.9(e).
• A state law requiring notice of a consum
er’s rights under antidiscrimination or simi
lar laws or a state law requiring notice
about credit information available from
state authorities.
References
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 regula
tion concerning placement of inconsistent dis
closures. 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 re
quest an exemption and makes its application
§ 226.30
Regulation Z Commentary
for those classes. Classes might be, for ex
ample, all open-end credit transactions, all
open-end and closed-end transactions, or all
transactions in which the creditor is a bank.
2. Substantial similarity. The “ substantially
similar” standard requires that state statutory
or regulatory provisions and state interpreta
tions of those provisions be generally the
same as the federal act and Regulation Z. This
includes the requirement that state provisions
for reimbursement to consumers for over
charges be at least equivalent to those re
quired in section 108 of the act. A state will
be eligible for an exemption even if its law
covers classes of transactions not covered by
the federal law. For example, if a state’s law
covers agricultural credit, this will not prevent
the Board from granting an exemption for
consumer credit, even though agricultural
credit is not covered by the federal law.
3. Adequate enforcement. The standard requir
ing adequate provision for enforcement gener
ally means that appropriate state officials must
be authorized to enforce the state law through
procedures and sanctions comparable to those
available to federal enforcement agencies. Fur
thermore, state law must make adequate pro
vision for enforcement of the reimbursement
rules.
4. Exemptions granted. Effective October 1,
1982, the Board has granted the following
exemptions 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 no
@FedFRASER